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HPE Returns to Year-Over-Year Growth With Strong Q4
by Daniel Newman | December 1, 2020

The News: Hewlett Packard Enterprise (NYSE: HPE) today announced financial results for its fiscal 2020 fourth quarter, ended October 31, 2021.

Q4 2020 Financial Highlights:

• Revenue: returned to pre-pandemic levels of $7.2 billion, up 6% from the prior quarter and flat from the prior-year period
• Significant acceleration in growth businesses and strong as-a-service momentum
• HPC & MCS revenue: $975 million, up 50% from the prior quarter and 25% from the prior-year period
• Intelligent Edge revenue: $786 million, up 15% from the prior quarter and 6% from the prior-year period
• Annualized revenue run-rate (ARR): $585 million, up 11% from the prior quarter and 30% from the prior-year period • Diluted net earnings per share:
• GAAP of $0.12, above the previously provided outlook of $0.02 to $0.06 per share
• Non-GAAP of $0.37, above the previously provided outlook of $0.32 to $0.36 per share
• Dividend: declared a regular cash dividend of $0.12 per share, payable on January 6, 2021 Outlook: • Fiscal 2021 First quarter: Estimates GAAP diluted net earnings per share to be in the range of $0.02 to $0.06 and non-GAAP diluted net EPS to be in the range of $0.40 to $0.44
• Fiscal 2021 earnings per share: Raises GAAP diluted net earnings per share outlook to $0.38 to $0.56 and non-GAAP diluted net earnings per share outlook to $1.60 to $1.78
• Fiscal 2021 free cash flow1: Reiterates free cash flow guidance of $0.9 to $1.1 billion

Read the full news release on Business Wire.

Analyst Take: 2020 has been a challenging year for large IT OEMs, but Q3 showed signs of a recovery for HPE, setting up a strong finish in Q4, and that is exactly what HPE delivered.

Perhaps the most interesting immediate take away of the HPE result was its announcement of its intent to return its HQ to Houston, Texas. Smart move as its Compaq’s roots were in Houston, and no doubt it provides a friendlier environment for affordable living, talent, and a better tax climate. 

The big question for HPE heading into this last quarter was whether it could return to pre-pandemic sales levels. This has been a big question for all the OEMs, as I sought the same from Dell and Cisco during recent reports. Both had also gotten back on track, and it appears that HPE also delivered. 

This trend across the OEM landscape also indicates a strong recovery in parts of the economy. A company like HPE traditionally drives a large portion of its revenue from large capital expenditures. Covid-19 was a big catalyst for the downturn as cloud and SaaS grew, but capital and infrastructure intensive projects stalled out. One of the company’s continued areas of strength is its current and well-designed transformation to an “Everything as a Service” model, which has proven to be timely and has shown strong results despite the challenging economic landscape. 

This quarter was exactly what HPE needed. For this quarter, I looked for strong signs of improvement with both sequential growth and annual growth over recent periods. Additionally, I sought upward trends in the right areas of the business. HPE came through to finish out a demanding year with a good showing. 

ARR Growth as its Service Model Evolves

As I mentioned above, one key area that I was going to watch out of Q4 earnings was the company’s Annualized Revenue run-rate (ARR). This number hit $585 million this quarter, equating to 11% sequential growth and 30% growth over the prior year. With the company showing significant investment in its GreenLake business along with new software services such as Ezmeral and Aruba Central, the company’s continued growth in ARR is an area that needs to be watched closely. Still, CEO Neri included in his recent securities analyst guidance that the company targets 30-40% compound growth of its ARR. 

Segment Revenue Sees a Big Uptick 

The past few quarters saw retraction in many of the company’s key segments, but this quarter was much more encouraging with some strong growth in key areas while closing the gap on revenue declines in other key business areas.

Intelligent Edge and HPC led the way in terms of growth up 6% and 25% YoY, respectively. Those growth numbers increased to 15% and 50% when looked at sequentially over the last quarter. 

Compute, Storage, Advisory, and Financial Services all saw declines this quarter YoY, but many of them are edging back. 

Compute down 5% YoY

Storage down 3% YoY

Advisory and Pro Services down 9% YoY

Financial Services down 3% YoY

HPC and Intelligent Edge’s strength was enough to see the company return to a slight YoY growth, which is good, but if more of these categories can tick back to growth, the company could return to mid-high single digits next quarter. This would be a great vote of confidence for the company long term. 

Overall Impressions of HPE Earnings

With some “Born on Cloud” type companies showing huge earnings and revenue beats, it is easy to forget that we are recovering from one of the most difficult sets of circumstances that the world has ever faced. HPE has held tough and is showing resolve in a tough situation, and I applaud those efforts.

One of HPE’s benefits is that it is a diverse business, but it’s important to remember, it is also a business and company in transition. Antonio Neri is not only moving the company to Houston, but has been taking bold steps to change the identity away from high volume, low margin, hardware. This won’t happen overnight.

The increases in ARR and the strong growth of GreenLake continue to be encouraging and serve as leading indicators that the transition is working. Also, the operational efficiencies realized will help keep the company profitable AND in a strong cash position, which can be seen by the strong free cash flow generated YoY. Additionally, the dividend has been sustained, and the guidance of $1.60-$1.78 EPS for 2021 is an encouraging yet achievable number. 

The transition to an “Everything as a Service company is still going to take some time, and some investors struggle with that. What I do believe is that the changes are good for customers. And as it is often said, “what is good for customers, is good for business.”

HPE is on the right path, but it is a day, a week, a month, a quarter at a time. But the past few quarters, despite a difficult situation, has shown a more resilient HPE. 

Futurum Research provides industry research and analysis. These columns are for educational purposes only and should not be considered in any way investment advice.

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Image: HPE
Daniel Newman