Hewlett Packard Enterprise (HPE) 22Q3 Update

HPE’s 22Q3 GAAP diluted EPS was $0.31 vs. $0.29 in 21Q3 and better than my estimate of $0.26.  Non-GAAP EPS was $0.48, compared with $0.47 last year and my estimate of $0.46.  Net revenue of $6.95 billion exceeded 21Q3’s $6.90 billion, but was below my estimate.  Free cash flow of $587 million, was up 11.6% YOY and reversed 22Q2’s cash burn, but was also below my estimate.

This slightly better-than-expected earnings performance was achieved despite ongoing supply chain challenges and currency headwinds.  Even though the YOY gain was modest, the 3.5% sequential improvement in net revenue demonstrated progress against near-term challenges.

Management expects supply chain challenges to persist through 22Q4 and into fiscal 2023, but they should be less consequential over time.  HPE has addressed component shortages and delivery delays by increasing inventory and shifting where possible to dual source and local suppliers.  Although inventory rose 4.4% sequentially and was up 40.9% YOY to $5.55 billion, management expects that it will decline going forward.

Although some companies have slowed their IT spending amid the increasingly uncertain economic outlook, HPE says that its core “as-a-service” (AAS) offering, centered around its HPE GreenLake platform, still resonates.  AAS orders rose strongly again, by 39% YOY and 86% YTD.

Based upon 22Q3 results, management reaffirmed its full-year guidance.  It expects net revenue growth of 3%-4%, excluding currency, GAAP diluted EPS of $1.20-$1.25, non-GAAP diluted EPS of $1.96-$2.04 and free cash flow of $1.7-$1.9 billion.  My 2022 projections, which are mostly unchanged, are in line with guidance.  For fiscal 2023, I now expect net revenue of $29.7 billion; GAAP diluted EPS of $1.46; non-GAAP diluted EPS of $2.10 and free cash flow of $1.98 billion. HPE has slightly outperformed both the market and peers since early July.  For now, I am maintaining my neutral performance rating and price target of $15.00, which represents a potential 6-12 month total return of 9.6%, including the stock’s dividend yield of 3.5%.

This is a summary of my recent update report on Hewlett Packard Enterprise Company (HPE). To obtain a copy of the report, please reach out to me using the contact information provided below.

September 2, 2022

Stephen P. Percoco
Lark Research
839 Dewitt Street
Linden, New Jersey 07036
(908) 975-0250

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