HPE Projects Profit That Tops Estimates on Improved Margins

Nico Grant (Bloomberg) -- Hewlett Packard Enterprise Co., a maker of server computers, gave a profit forecast that topped Wall Street estimates, signaling progress on its efforts to cut costs and reshape its business to higher-margin products.

Adjusted earnings, excluding some items, will be 43 cents to 47 cents a share in the period ending in October, the San Jose, California-based company said Tuesday in a statement. Analysts, on average, projected 43 cents. The company also raised its fiscal year forecast for adjusted earnings to $1.72 to $1.76 a share from its May guidance of $1.62 to $1.72.

Chief Executive Officer Antonio Neri has sought to prepare the hardware maker for a future increasingly defined by cloud-based software. HPE said in June that it would offer its products as a service, with servers, storage hardware, networking gear and software available through subscriptions or pay-per-use models by 2022.

Neri also formed a partnership with Google to help clients adopt a hybrid model and announced a $1.4 billion acquisition of Cray Inc. to bolster HPE in supercomputers. All the while, the CEO has tried to reduce the company’s spending to make it more profitable, especially with inconsistent sales growth due to weakening demand for servers and storage hardware.

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“I would characterize the quarter as strong operational performance in an uneven market, driven by the macroeconomic challenges we’re all facing,” Neri said in an interview. “The trade escalation continues to create uncertainty. Customers take a little bit longer to decide their investment strategy.”

The hardware maker’s operating margin improved by 1.1 percentage points to 10.8% compared with a year earlier, with the biggest gain in the Hybrid IT segment, which includes the company’s servers and storage hardware products.

HPE shares gained about 4% in extended trading after closing at $12.93 in New York. The stock has declined 2.2% this year.

Hardware makers have seen weaker corporate demand for their products, with NetApp Inc.’s disappointing results causing concern for the industry. Analysts expected hardware sales could be hindered by weakening global economies and uncertainty because of the U.S.-China trade war.

HPE’s revenue declined 7% to $7.22 billion in the fiscal third quarter, compared with analysts’ average estimate of $7.28 billion. Revenue fell in most HPE segments in the period ended July 31, with server sales dropping 12% and storage hardware decreasing 5% compared with a year earlier.

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“It’s more competitive out there,” Neri said. “The market feels slower than before and we need to navigate through it.”

HPE’s revenue has contracted on a year-over-year basis in 11 of the past 12 quarters. Neri has been trying to reverse that trend by modernizing the company’s products and services with the moves to subscriptions and edge computing, which lets clients process information closer to their source rather than at far-away data centers. Analysts estimate the effort may begin to pay off by the second half of 2020.