HPE reported 24Q3 GAAP diluted EPS of $0.38, above 23Q3’s $0.35. Non-GAAP EPS was $0.50 vs. $0.49 last year. Net revenue of $7.71 billion rose 10.1% vs. the previous year. Results exceeded my estimates of $7.60 billion in revenue, $0.32 for GAAP EPS and $0.47 for non-GAAP EPS. Revenue growth was near the high end of management’s guidance, while both GAAP and non-GAAP EPS exceeded the high end of management’s guidance.
The 10.1% increase in revenue was driven by a 35.1% jump in Server net revenue, as the business has been recovering from declines earlier in the year. HPE converted $1.3 billion in AI systems orders to revenue in the quarter, but revenue from traditional servers also rose at a double-digit rate. The gain in Servers was partially offset by declines of 7.3% in Hybrid Cloud and 23.4% in Intelligent Edge. Segment earnings increased 1.0%, as a 210 bp increase in Server margin was substantially offset by lower margins in Hybrid Cloud and Intelligent Edge. A significant drop in unallocated corporate costs helped boost earnings from operations by 16.1%.
With 24Q3 results, HPE has raised its 2024 earnings guidance. It now expects GAAP EPS of $1.68-$1.73 (up from $1.61-$1.71 previously) and non-GAAP diluted EPS of $1.92-$1.97 (up from$1.85-$1.95). My projections, which are consistent with guidance, call for revenue of $29.9 billion, up 2.7%, GAAP EPS of $1.73 and non-GAAP EPS of $1.95. Included in 2024 GAAP EPS is an estimated pre-tax gain of $600 million from the sale of its 30% stake H3C, which closed on Sept. 4.
Since my last report (June 24), HPE’s stock is down 10%, worse than the S&P 500’s 4.7% gain and the S&P 500 Info Tech sector’s 0.8% decline. The stock underperformed through early August, but then outperformed into 24Q3 earnings before taking another leg down despite better than expected 24Q3 results. The recent declines may be due to the issuance of $1.5 billion of 7.625% Mandatory Convertible Preferred Stock, which is dilutive. With that offering and the subsequent issuance of $9.0 billion of senior unsecured notes, HPE has fully funded its proposed acquisition of Juniper Networks (JNPR), which is expected to close late in calendar 2024 or early 2025.
My revised fiscal 2025 projections incorporate the expected impact of the Juniper acquisition. I now anticipate GAAP EPS of $0.91, down sharply from 2024 due to higher amortization of intangible assets and anticipated restructuring/transformation costs. My 2025 non-GAAP EPS projection of $2.14, is up 9.7% from projected 2024.
Despite the stock’s recent underperformance, I am maintaining my $24 price target which equates to 26.0 times projected fiscal 2025 GAAP EPS of $0.91 and 11.0 times non-GAAP EPS of $2.14. That represents a potential total return of 30% from the current quote. Accordingly, I am raising my performance rating from “2” (Outperform) to “1” (Buy). Given the timing, most of the stock’s anticipated outperformance will probably come later in calendar 2025, as HPE reports the expected positive results from its integration of Juniper.
This is a summary of my recent update 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.
September 28, 2024 (Report published on September 24, 2024.
Stephen P. Percoco
Lark Research
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