HPE Earnings Report Overshadowed By Spin-Off Merger

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Hewlett Packard Enterprise Co. (NYSE: HPE) reported its fiscal third-quarter financial results after markets closed on Wednesday. However these earnings were overshadowed by the company’s most recent spin-off and merger.

The company said that it had $0.49 in earnings per share (EPS) on $12.2 billion in revenue, versus the consensus estimates from Thomson Reuters that called for $0.45 in EPS on $12.64 billion in revenue.

In terms of the outlook for the fiscal fourth-quarter, HPE expects EPS to be in the range of $0.58 to $0.63. The consensus estimates are calling for $0.60 in EPS on $13.13 billion in revenue.

HPE reported its segment third quarter results as:

  • Enterprise Group revenue was $6.5 billion, down 8% year over year, flat when adjusted for divestitures and currency, with a 12.6% operating margin.
  • Enterprise Services revenue was $4.7 billion, down 5% year over year, down 3% when adjusted for divestitures and currency, with an 8.3% operating margin.
  • Software revenue was $738 million, down 18% year over year, down 3% when adjusted for divestitures and currency, with a 17.8% operating margin.
  • Financial Services revenue was $812 million, up 1% year over year, net portfolio assets were up 7%, and financing volume was down 6%. The business delivered an operating margin of 9.9%.

However, the major news tied to HPE is its plan for a spin-off and merger of its non-core software assets with Micro Focus which are valued at $8.8 billion. As part of the deal, HPE will receive $2.5 billion in cash and its shareholders will own just over 50% of the new company.

What’s being shipped off is HPE’s Application Delivery Management, Big Data, Enterprise Security, Information Management & Governance and IT Operations Management businesses, which combined with Micro Focus’ highly complementary portfolio will create one of the world’s largest pure-play software companies.

Ultimately management believes that this move will enable a standalone HPE to realize its vision of being the industry’s leading provider of hybrid IT. Meg Whitman, President and CEO of HPE, further commented on the spin-off and merger:

Today’s announced spin-merge of our non-core software assets with Micro Focus is another important step in our strategy to unlock a faster growing, higher margin, stronger cash flow company. As we said in the Enterprise Services announcement last quarter, both software and services remain key enablers of our go-forward strategy, and we are focused on building the right portfolio to win in our target markets. We believe the portfolio changes we’ve made over the past year are setting up HPE for long-term success while unlocking tremendous value for our shareholders.

Third quarter cash flow from operations of $1.7 billion. On the books, cash and cash equivalents totaled $10.74 billion at the end of the quarter, versus $9.84 at the end of the previous fiscal year. The company has a market cap of roughly $37 billion.

Shares of HPE closed Wednesday up 1.1% at $22.09, with a consensus analyst price target of $21.42 and a 52-week trading range of $4.99 to $22.32. Following the release of the earnings report, the stock was initially down 1.9% at $21.67 in the after-hours trading session.