HPE Jumps on Surprise Sales Revival, Cost-Cutting Effort

Nico Grant (Bloomberg) -- Hewlett Packard Enterprise Co. reported a surprise sales revival and projected profit that topped analysts’ estimates, signs the effort to reshape the company is beginning to work as new Chief Executive Officer Antonio Neri takes over.

The revenue gain, optimistic forecast and plans for $7 billion in buybacks and dividend increases sent shares of the information-technology company climbing more than 12 percent in extended trading. Its former corporate companion, HP Inc., which makes printers and personal computers, also reported strong sales in the holiday quarter that topped estimates, sending shares up as much as 9.3 percent.

HPE’s earnings report marks a new era for the company under Neri, who succeeded Meg Whitman on Feb. 1, inheriting lackluster sales and increased competition from cloud-computing providers including Amazon.com Inc., Microsoft Corp. and Alphabet Inc.’s Google. Whitman ran HPE for six years, slashing expenses by eliminating jobs, tapering investments and selling subsidiaries. That did little to address more fundamental market challenges, such as rising supply costs and cooling corporate demand for traditional data-center hardware.

Neri suggested the cost-cutting effort will continue. “I am very committed to the approach Meg has put in place over the last year,” he said in an interview.

Related:Why HPE No Longer Wants to Sell Cheap Servers to Cloud Giants

Neri, 50, started more than two decades ago as a Hewlett Packard customer-service engineer in a call center before climbing to one of the top positions in the enterprise group, which included HPE’s key products and was its largest division before a recent reorganization. He was named president in June and his elevation to the CEO post, announced in November, signaled a return to technology-focused innovation from the operational maneuvering of recent years.

Since the Split

HPE spun off from the former Hewlett-Packard Co. in 2015, to become a high-margin information-technology company led by Whitman, the architect of the split. Since the breakup, HP Inc. -- the consumer-facing business -- has defied expectations and become the more stable performer. The earnings reports on Thursday marked a simultaneous bright spot for both companies.

HP Inc. notched its sixth consecutive quarter of revenue growth, buoyed by holiday sales even while the personal computer industry stagnated. Quarterly profit was 48 cents a share, beating estimates, and the company raised its outlook for the rest of the year.

HP Inc. shares rose as high as $23.38 in extended trading after closing at $21.39 in New York. Shares of HPE reached $19.69 after closing at $16.41.

Related:This Wave of Data Center Consolidation is Different from the First One

Cloud Competition

HPE, which makes most of its money selling hardware, has struggled to adjust to the age of the cloud, in which companies can access computing and storage services from vendors over the internet, rather than setting up their own data centers. HPE has banked its future on a hybrid-cloud landscape with customers putting some data on public clouds and their most sensitive data on their own servers.

Revenue gained 11 percent to $7.67 billion in the three months ended Jan. 31, the Palo Alto, California-based company said Thursday in a statement. Analysts projected $7.06 billion. Profit, excluding some items, was 34 cents a share, compared with analysts’ estimates of 22 cents.

Profit will be 29 cents to 33 cents per share in the current quarter, excluding some items, compared with analysts’ average estimate of 26 cents.

The revenue boost was aided by circumstances that may not persist, including a stronger-than-usual backlog of hardware sales in the first quarter, growth from the acquisition of Nimble Storage and higher prices spurred by increased memory component costs.

Average prices will stabilize, “so we don’t expect that lift on the pricing we saw at the beginning of this year,” Neri said during a conference call.

The company’s newly named Hybrid IT division, which consists of its bedrock storage and server businesses, generated sales of $6.33 billion, a 10 percent increase from the same period a year earlier. Analysts have been concerned about the falling sales and profit margins of the company’s largest unit, but were encouraged by its better-than-expected performance.

“Market demand has improved as customers look to upgrade infrastructure in a better business environment,” said Crawford Del Prete, the chief research officer for IDC. “HPE’s products are stronger, and they are better organized to capture the demand with less layers of overhead.”

About a year ago, HPE agreed to buy Nimble for about $1 billion, extending its reach into flash-storage for data centers. That technology uses memory chips that are much faster than traditional hard disk-based storage, and HPE’s results were helped by sales of these newer products.

Share Buybacks

The tech company said it would return $7 billion to shareholders through the 2019 fiscal year in share buybacks and a 50 percent increase to its dividend beginning in the fiscal third quarter. HPE said its quarterly earnings reported Thursday included a $1.8 billion benefit because of changes to the U.S. tax code, which was offset by a $1 billion expense due to new rules affecting overseas cash.

The tax code changes will reduce the company’s tax rate to 11 percent to 15 percent this year from 20 percent to 22 percent a year ago, Chief Financial Officer Tim Stonesifer said. The company expects to pay 16 to 20 percent in the 2019 fiscal year, he said.