Hewlett Packard Enterprise (HPE) 23Q2 Update

HPE reported 23Q2 GAAP diluted EPS of $0.32 vs. 22Q2’s $0.19 and my estimate of $0.31.  Non-GAAP EPS of $0.52 increased 18% over last year’s figure and my estimate of $0.45.  Net revenue of $6.97 billion was up 3.9% over 22Q2, but below the low end of $7.1 billion of management’s guidance.

Management said that sales in certain customer segments, such as financial services and manufacturing in North America, have slowed as customers have become more cautious in their spending.  This was especially evident in HPE’s Compute segment.  However, HPE’s Intelligent Edge and HPC & AI segments delivered revenue growth of 50% and 20%, respectively, and the order book remains robust.

The shortfall in revenues (vs. guidance) was more than offset by margin improvement, due to the shift to higher margin products (and services) and cost efficiency initiatives.  23Q2 free cash flow (according to HPE’s definition which excludes acquisition costs) was $288 million, better than my estimate of $37 million.

With the quarter’s performance dynamics, management lowered its 2023 revenue growth guidance from 5%-7% to 4%-6%, but raised its GAAP EPS guidance by another $0.02 to $1.40-$1.48 and its non-GAAP EPS guidance by $0.04 to $2.06-$2.14.  Its free cash flow guidance is unchanged at $1.9-$2.1 billion.

On May 26, HPE agreed to sell its 49% equity interest its Chinese affiliate, H3C Holding Ltd., to a local investor group for $3.5 billion.  The sale should generate a pre-tax gain of about $1.2 billion before transaction costs.  I estimate the gain is worth $0.65 per share on GAAP basis, which is probably conservative.  HPE has not included the sale, which is subject to regulatory approvals and other conditions, in its 2023 guidance.  Yet, this year it issued $1.55 billion of 5.9% Notes due October 2024 and has another $1.0 billion of 1.45% Senior Notes coming due in April.  Proceeds from the sale will likely be used to retire this debt.  My projections assume that the sale takes place at the end of 2023.

Except for the H3C sale, my projections are in line with guidance.  For 2023, I now anticipate GAAP EPS of $2.11 and non-GAAP EPS of $2.12.  For 2024, I project GAAP EPS of $1.61 and non-GAAP EPS of $2.15.

Since my last report, HPE’s stock has advanced 12.1%, exceeding the S&P 500’s 6.0% gain, but lagging the large cap technology sector’s 14.2% gain.  I am maintaining my price target at $17, which equals about 11 times my 2024 GAAP EPS estimate of $1.61.  With its rally over the past six weeks, HPE’s upside is less but still significant at 12%; so I am lowering my rating from “1” (Strong BUY) to “2” (Outperform).

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

June 16, 2023 (Report date is June 11, 2023.)

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

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