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HPE Shows Resilience With Much Improved Q3 Results
by Daniel Newman | August 25, 2020

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

Key Q3 Metrics

  • Revenue: $6.8 billion, up 13% sequentially or 14% when adjusted for currency
  • Gross Profit: $2.1 billion, up 8% sequentially
  • Operating Profit: GAAP of $12 million, up 101% sequentially and Non-GAAP of $484 million, up 33% sequentially
  • Annualized revenue run-rate (ARR): $528 million, up 11% from the prior-year period
  • Diluted net earnings per share:
  • GAAP of $0.01 due to the acceleration of transformation program, compared to ($0.02) from the prior-year period
  • Non-GAAP of $0.32, compared to $0.45 from the prior-year period
  • Cash flow from Operations of $1.5 billion, up 23% from the prior-year period
  • Free Cash Flow of $924 million, up 43% from the prior-year period
  • Q4 FY20 dividend of $0.12 a share, payable on October 7, 2020

Read the full news release on Business Wire.

Analyst Take: 2020 has been a tough year, and Q2 was especially tough on HPE, so a strong Q3 wasn’t just important, but almost a necessity for the company.

Given the circumstances, which led to a lot of slashed capital budgets, a company like HPE that traditionally drives a large portion of its revenue from large capital expenditures was an obvious victim of the Covid-19 downturn. However, the company being in the middle of an important and well designed transformation to an “Everything as a Service” model has proven to be timely and this effort serves as a bright spot.

This quarter was exactly what HPE needed. In the space that HPE is in, facing off with the likes of Cisco, IBM and Dell, we are looking for strong signs of improvement and sequential growth over recent periods. Year over year growth, of course, is coveted, but for me analysis, what I wanted to see was a strong improvement over the last quarter with upward trends in the right areas of the business. HPE showed resiliency and delivered.

ARR Growth as its Service Model Evolves

The primary area that I was going to watch out of Q3 earnings was the company’s Annualized Revenue run-rate (ARR). This number hit $528 million this quarter, and did in fact see 11% growth over the past 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.Perhaps the most encouraging number was the 82% growth YoY for GreenLake services–this is the future for HPE.

Segment Revenue Soft YoY, But

Essentially HPE saw mostly high single digit and low double digit declines across most of its business segments, with HPC being the loan growth area rising about 3%.

I feel like these metrics need to be given attention so long as this is how the company measures its business. Growth is always sought after and declines in key areas like storage, compute and networking are going to be met with some negativity.

Having said that, I think the declines were kept largely in check and the operational offsets that kept the company profitable and put both revenue and earnings above analyst expectations had to be the focus for this quarter. That needed to be the target and the target was met. Moving forward, it would be good to see solid YoY growth in major segments to compliment the growth in recurring revenue.

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 is a diverse business, but is also a business and company in transition. Antonio Neri is making bold steps to change the identity away from high volume, low margin, hardware. And this can’t happen overnight.

The increases in ARR and the strong growth of GreenLake are 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.

However, it will take time and sometimes investors struggle with that. The changes are good for customers. And what is good for customers, is good for business. When business is good, investors are almost always rewarded. This is the charter that needs to drive HPE forward as it transitions to be a business equipped for meeting the IT and business needs of customers into the future.

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