The Company Reported Stronger Than Expected 21Q2 Results, But Its Upwardly Revised Guidance Was Somewhat Disappointing.
HPE reported fiscal 2021 second quarter GAAP earnings of $0.19 per share, well above its most recent guidance of $0.02-$0.08 per share and ahead of my estimate of $0.12. Its Non-GAAP earnings of $0.46 also exceeded its guidance of $0.38-$0.44 and my estimate of $0.42. Revenues of $6.7 billion were exactly in line with my projections.
Management categorized the quarter as strong. It said that the overall demand environment is improving and all of HPE’s businesses are benefiting as a result. Orders were up mid-single digits overall, with double-digit gains in HPE GreenLake and its high performance computing business. Management expects continuing improvement in IT spending for the balance of the year. The company also executed well in light of supply chain tightening and increasing cost pressures. It has built inventories to protect against parts shortages in the second half.
Based upon a third straight quarter of better-than-expected results, management has raised its fiscal 2021 guidance for earnings and free cash flow for once again. However, the increase in the full-year GAAP earnings guidance is less than the amount by which 21Q2 GAAP earnings exceeded guidance. This suggests that for the balance of the year, the improvement in non-GAAP earnings will be more than offset by an increase in non-GAAP adjustments, including transformation costs.
As discussed in my previous update (dated May 20), HPE’s stock is trading mostly in line with peers on GAAP earnings, but is very cheap on non-GAAP earnings. That suggests that the stock’s upside may be limited (or at least face headwinds) for a time, if the non-GAAP adjustments persist at the current elevated levels.
One factor that will determine the trajectory of HPE’s share price for the balance of the year and into 2022 will be whether and for how long the recent rebound in IT demand will continue. Management’s guidance suggests that the rebound will continue, but at a measured pace. On the other hand, management may be being conservative in its guidance.
Perhaps reflecting this, HPE’s share price rebounded after an initial sell-off on June 2 (the day following the earnings announcement) to close down just $0.02. The 1.1% decline on June 3 was essentially in line with other declines in technology stocks.
Based upon its 21Q2 performance, I have raised my outlook for HPE’s full year 2021 GAAP earnings per share from $0.66 t0 $0.71; my non-GAAP earnings expectations from $1.80 per share to $1.86 and my free cash flow projection from $1.2 billion to $1.5 billion. I am maintaining my performance rating of 2, “moderately outperform” and price target of $20 on HPE’s stock.
June 5, 2021
Stephen P. Percoco
Lark Research
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