Hewlett Packard Enterprise (HPE) 23Q3 Update

HPE reported 23Q3 GAAP diluted EPS of $0.35 vs. 22Q2’s $0.31 and my estimate of $0.35.  Non-GAAP EPS of $0.49 was a penny above last year and two pennies above my estimate of $0.47.  Net revenue of $7.00 billion was up 0.7% over 22Q3 and 1.5% above my estimate.

The improvement in profit was driven by HPE’s focus on transitioning toward higher value-added products and services, which carry higher profit margins.  While the overall IT market is still pressured as customers remain cautious in their spending, they continue to prioritize key areas, such as artificial intelligence (AI) and cloud-based, as-a-service (aaS) offerings, such as those available on the HPE Greenlake platform.

Net revenue in HPE’s Intelligent Edge (IE) business surged 50% to $1.4 billion, but this was offset by a 13.3% decline in Compute revenue to $2.6 billion.  IE contributed 20% of HPE’s revenue and 49% of its segment operating profit in 23Q3.  The business is gaining market share and enjoys strong demand for its aaS offerings.  Growth in those offerings contributed to the 48% YOY increase (to $1.3 billion) in the annualized run rate (ARR) of HPE’s aaS revenues.  Demand for its artificial intelligence and supercomputing offerings remains solid, even though its HPC & AI segment still operates at breakeven profitability.

As a result of 23Q3 results, HPE has raised and narrowed its fiscal 2023 non-GAAP earnings guidance from $2.06-$2.14 to $2.11-$2.15.  Its fourth quarter revenue guidance implies that revenues will be up 1.8%-2.8% for the full year, but still within its guidance of 4%-6% growth on a constant currency basis.

HPE will provide fiscal 2024 guidance at its Securities Analyst meeting in October.  At that meeting, it will also discuss its expectations for the anticipated $3.5 billion sale of its equity stake in H3C Technologies. The receipt of proceeds from the H3C sale is important because HPE faces $6.3 billion of debt repayments over the next 25 months, including $1.55 billion of 5.9% Senior Notes due 10/1/24 that were issued in March and June.  I had previously included the H3C sale in my projections for fiscal 2023.  Shifting it now to fiscal 2024, my projections anticipate GAAP diluted EPS of $2.32 and non-GAAP EPS of $2.20.

Since my last report, HPE’s stock has advanced another 13.2%, exceeding the S&P 500’s 4.4% gain and the S&P 500 Info Tech sector’s 5.9% gain.  I am raising my price target to $19, which equals about 8 times my 2024 GAAP EPS estimate of $2.32.  With its rally over the past six weeks, HPE’s upside is now less than 10%; so I am lowering my rating from “2” (Buy) to “3” (Neutral).

This is a summary of my recent report on Hewlett Packard Enterprise Company (HPE), which was published on September 6, 2023. To obtain a copy of the full report, please reach out to me using the contact information provided below.

September 7, 2023

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

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