HPE Goes Ultra Lean

After its $8.5 billion spin-merger of its Enterprise Service business with Computer Sciences Corp. (CSC) last quarter, HP Enterprise (NYSE: HPE) has just announced an $8.8 billion deal to spin-merge its non-core software assets with Micro Focus. Hybrid cloud will be the focus for the new HP Enterprise while HP Inc. (NYSE: HPQ) continued to struggle with declining printing revenues.

HPE’s Financials

After the first y-o-y growth reported in five years, HPE again saw declining revenues. Third quarter revenues declined 6% over the year to $12.2 billion, missing analyst estimate by $440 million. Non GAAP EPS was $0.49, beating analyst estimate of $0.45. It paid $1.5 billion in dividends and share repurchases to shareholders.

By segment, Enterprise Group revenue declined 8% to $6.5 billion with revenue from servers down 4%, storage down 8% and networking down 22%. Enterprise Services revenue fell 5% to $4.7 billion driven by 4% decline in Application and Business services and 6% decline in Infrastructure Technology Outsourcing revenue. Software revenues fell 18% to $738 million with License revenues falling 28% and professional services falling 8%. Financial Services revenue was up marginally by 1% to $812 million. Intersegment net revenue was $541 million.

For the fourth quarter, HPE expects non GAAP EPS of $0.58-$0.63 and GAAP EPS of $0.44 to $0.49. Analysts expect earnings of $0.60 on revenue of $13.13 billion.

HPE expects to end the year with non GAAP earnings of $1.90-$1.95 per share. The market was looking for earnings of EPS of $1.87 on revenue of $51.21 billion.

HPE’s SGI Acquisition

During the quarter, HPE also announced its plans to acquire data analytics solution provider SGI (NASDAQ: SGI) for $275 million. SGI products and services are used for high-performance computing (HPC) and Big Data analytics in the scientific, technical, business, and government communities to solve challenging data-intensive computing, data management, and virtualization problems. The company has approximately 1,100 employees worldwide, and had revenues of $533 million in fiscal 2016. The deal is expected to close in fiscal year 2017 and act as a catalyst for HPE’s growth in the HPC segment. According to IDC, the $11 billion HPC segment is expected to grow at an estimated 6-8% CAGR over the next three years. But it will face tough competition from the likes of Amazon, Microsoft, and Google.

HPE’s Micro Focus Deal

This month, HPE announced the spin-merge of its Application Delivery Management, Big Data, Enterprise Security, Information Management & Governance and IT Operations Management businesses with UK Tech firm Micro Focus. HPE will get $2.5 billion in cash and its shareholders will own 50.1% of the merged company.

With this move, HPE expects to be a faster-growing, higher-margin, and stronger free cash flow company, well positioned for the future in hybrid cloud. It has already managed to add new customers like Home Depot, Best Buy, Dropbox, and the Rio airport.

The market seems to be impressed with its lean strategy. HPE’s market cap has increased by over $10 billion, or 40%, since the separation from HP Inc. on November 1, 2015. Its stock is trading at $20.92, close to its 52-week high of $22.32. It has a market capitalization of $35.39 billion. It hit a 52-week low of $4.99 in October last year.

HPQ’s Financials

Third quarter revenues declined 4% over the year to $11.9 billion. Non GAAP EPS was $0.48. Analysts expected revenue of $11.5 billion and EPS of $0.44. It paid $269 million in dividends and share repurchases to shareholders.

By segment, revenues from Personal Systems was flat over the year at $7.5 billion. Total unit shipments were up 4% with Notebooks units up 12% and desktops down 6%. Revenues from the Printing segment continued to decline with a 14% year over year decrease to $4.4 billion mainly due to 18% decline in supplies revenue and weak hardware segment performance.

For the fourth quarter, HP estimates non-GAAP EPS to be in the range of $0.34 to $0.37 and GAAP EPS in the range of $0.22 to $0.25. Analysts expect EPS of $0.36 on revenue of $11.84 billion.

For fiscal 2016, HP estimates GAAP diluted net EPS from continuing operations to be in the range of $1.46 to $1.49 and non-GAAP diluted net EPS from continuing operations to be in the range of $1.59 to $1.62. Analysts expect EPS of $1.61 on revenue of $47.54 billion.

HP Inc’s stock is trading at $14.07, close to its 52-week high of $14.82. It has a market capitalization of $24 billion. It hit a 52-week low of $8.91 in early February.

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