HPE reports 3Q23 sales increase, but it's not enough

Hewlett Packard Enterprise has announced financial results for the third quarter ended July 31, 2023. The latest financial report from HPE shows that revenue from high-performance computing and AI was only up 1% from the prior year, despite the company's efforts to increase its market share in the sector. This indicates that the company is struggling to make significant progress in the area of supercomputing and may be facing an uphill battle in the future.

Edge momentum and portfolio mix shift drive its revenue growth and gross margin expansion; reiterating GAAP diluted net EPS and raising non-GAAP diluted net EPS guidance for the full year.

Third Quarter Fiscal 2023 Financial Results                                

• Revenue: $7.0 billion, up 1% from the prior-year period and 3.5% in constant currency   
• Annualized revenue run-rate (“ARR”): $1.3 billion, up 48% from the prior-year period and in constant currency
• Gross margins:
  • GAAP of 35.8%, up 130 basis points from the prior-year period and down 20 basis points sequentially 
  • Non-GAAP of 35.9%, up 120 basis points from the prior-year period and down 30 basis points sequentially
• Diluted net earnings per share (“EPS”):
  • GAAP of $0.35, up 13% from the prior-year period and up 9% sequentially, near the mid-point of our guidance range of $0.34 to $0.38
  • Non-GAAP of $0.49, up 2% from the prior-year period and down 6% sequentially, above our guidance range of $0.44 to $0.48
• Cash flow from operations: $1.5 billion, an increase of $271 million from the prior-year period
• Free cash flow: $955 million, up $368 million from the prior-year period
• Capital returns to shareholders: $341 million in the form of dividends and share repurchases

Outlook

• Revenue: Estimates Q4 fiscal 2023 revenue to be in the range of $7.2 billion to $7.5 billion, and fiscal 2023 revenue growth to be in the range of 4% to 6% in constant currency
• ARR: Reiterates our 2022 HPE Securities Analyst Meeting ARR guidance of 35% to 45% Compounded Annual Growth Rate from fiscal 2022 to fiscal 2025
• Diluted net EPS:
  • Estimates Q4 fiscal 2023 GAAP diluted net EPS to be in the range of $0.36 to $0.40 and non-GAAP diluted net EPS to be in the range of $0.48 to $0.52
  • Reiterates fiscal 2023 GAAP diluted net EPS to be in the range of $1.42 to $1.46 and raises non-GAAP diluted net EPS guidance to be in the range of $2.11 to $2.15
• GAAP operating profit: Estimates fiscal 2023 GAAP operating profit growth to be in the range of 180% to 184%
• Non-GAAP operating profit: Estimates fiscal 2023 non-GAAP operating profit growth to be in the range of 6% to 7%
• Free cash flow: Reiterates guidance of $1.9 billion to $2.1 billion

“HPE delivered another solid quarter in Q3, powered by standout performances in the Intelligent Edge and HPE GreenLake,” said Antonio Neri, president and CEO of Hewlett Packard Enterprise. “Demand improved sequentially across all key business segments, with particular strength in our HPC & AI segment as customers discover HPE’s unique capabilities to power unprecedented levels of performance for AI at scale. Our strategic shift toward edge, hybrid cloud, and AI delivered through our HPE GreenLake platform is working."

“The pivot in our portfolio toward higher-growth, higher-margin markets is visible in our year-over-year expansion of gross margins,” said Jeremy Cox, senior vice president, interim CFO, corporate controller, and chief tax officer of Hewlett Packard Enterprise. “Our differentiated edge-to-cloud strategy is fueling strong results in an uneven market.”

Third Quarter Fiscal 2023 Segment Results

• Intelligent Edge revenue was $1.4 billion, up 50% from the prior-year period in actual dollars and 53% in constant currency⁽, with a 29.7% operating profit margin, compared to 16.5% in the prior-year period.
• High-Performance Computing & Artificial Intelligence (“HPC & AI”) revenue was $836 million, up 1% from the prior-year period in actual dollars and 3% in constant currency, with (0.8)% operating profit margin, compared to 3.4% from the prior-year period.
• Compute revenue was $2.6 billion, down 13% from the prior-year period in actual dollars and 10% in constant currency, with a 10.9% operating profit margin, compared to 13.5% from the prior-year period.
• Storage revenue was $1.1 billion, down 5% from the prior-year period in actual dollars and down 2% in constant currency, with a 10.7% operating profit margin, compared to 14.3% from the prior-year period.
• Financial Services revenue was $873 million, up 7% from the prior-year period in actual dollars and in constant currency, with an 8.4% operating profit margin, compared to 11.8% from the prior-year period. Net portfolio assets of $13.5 billion, up 7.5% from the prior-year period in actual dollars and up 5.2% in constant currency⁽¹⁾. The business delivered a return on equity of 15.8%, down 3.8 points from the prior-year period.

Dividend

The HPE Board of Directors declared a regular cash dividend of $0.12 per share on the company’s common stock, payable on October 13, 2023, to stockholders of record as of the close of business on September 14, 2023.

Fiscal 2023 Fourth Quarter Outlook

HPE estimates revenue to be in the range of $7.2 billion to $7.5 billion. HPE estimates GAAP diluted net EPS to be in the range of $0.36 to $0.40 and non-GAAP diluted net EPS to be in the range of $0.48 to $0.52. Fiscal 2023 fourth quarter non-GAAP diluted net EPS estimates exclude after-tax adjustments of $0.12 per diluted share, primarily related to, stock-based compensation expense, amortization of intangible assets, and acquisition, disposition, and other related charges.

Fiscal 2023 Outlook

HPE estimates fiscal 2023 revenue growth to be in the range of 4% to 6% in constant currency and targets fiscal 2023 GAAP operating profit growth to be in the range of 180% to 184% and non-GAAP operating profit growth to be in the range of 6% to 7%. HPE reiterates GAAP diluted net EPS to be in the range of $1.42 and $1.46 and raises non-GAAP diluted net EPS guidance to be in the range of $2.11 and $2.15. Fiscal 2023 non-GAAP diluted net EPS estimates exclude after-tax adjustments of $0.69 per diluted share, primarily related to stock-based compensation expense, amortization of intangible assets, and transformation costs.