What the HPE and CSC Deal Really Means

Hewlett Packard Enterprise Co. (NYSE: HPE) reported fiscal second-quarter financial results after the markets closed on Tuesday.

There is far larger news here than mere earnings reports, and it may be a full 24 hours before Wall Street and Silicon Valley figure out how to adequately factor in the big news. It could even take far longer than that of course, just when analysts and investors were learning to interpret this breakup.

The company said it had $0.42 in earnings per share (EPS) on $12.71 billion in revenue. This compares to consensus estimates from Thomson Reuters that called for $0.42 in EPS on $12.35 billion in revenue. In the same period of last year, HPE posted $0.44 in EPS on $12.54 billion in revenue.

In terms of guidance for the fiscal third-quarter, the company expects to have EPS in the range of $0.42 to $0.46. Consensus estimates call for $0.48 in EPS on $12.6 billion in revenue for the current quarter.

As far as that larger news outside of earnings, the biggest announcement of this earnings report was that HPE also plans for a tax-free spin-off and merger of its Enterprise Services business with Computer Sciences Corp. (NYSE: CSC).

This move will create a pure-play, global IT services leader. It also aims to unlock a faster-growing, higher-margin and stronger free cash flow enterprise infrastructure and software business. The transaction is of course a bit complicated, and it will take hours, days, weeks or even longer for Wall Street and Main Street to interpret how to view all these new companies.

HPE reported its business segments as follows:

  • Enterprise Group revenue increased 6.9% to $7.01 billion year over year.
  • Enterprise Services revenue decreased 2.1% to $4.72 billion.
  • Software revenue decreased 13.2% to $774 million.
  • Financial services decreased 2.1% to $788 million.

Meg Whitman, president and CEO of HPE, commented:

Today’s results represent our best performance since I joined in 2011. The businesses comprising HPE grew revenue over the prior-year period on an as reported basis for the first time in five years.

We also had strong quarterly performance in every one of our business segments and generated more than $500 million in free cash flow.

On the books, HPE’s cash and cash equivalents totaled $9.01 billion at the end of the quarter, compared to $9.84 billion at the end of the previous fiscal year.

Shares of HPE closed Tuesday up 1.1% at $16.25, with a consensus analyst price target of $17.59 and a 52-week trading range of $11.63 to $18.55. Following the release of the earnings report, the stock was up nearly 9% at $17.70 in the after-hours trading session.