HP Enterprise Rises as Results Reassure on Tech Spendingby
Earnings, forecast provide early support for splitting company
Enterprise Group first-quarter sales gain 1% to $7.1 billion
Meg Whitman presented an inaugural earnings report that reassured investors about demand for corporate technology and provided early validation for her move to split up Hewlett-Packard. The shares rallied.
Whitman, chief executive officer of the newly formed Hewlett Packard Enterprise, forecast profit in the current quarter that may exceed some analysts’ estimates. The company on Thursday also reported earnings that topped projections in its first full quarter of results as a standalone entity.
The division in November of one of Silicon Valley’s most storied pioneers left HP Enterprise as the larger of the two new companies based on market valuation. Now, Whitman will need to prove she can build on any momentum with stronger profits and growth even as she competes with Dell Inc., which is set to acquire EMC Corp. in the biggest tech deal of its kind.
“We’re starting to see now the real benefits of focus,” Whitman said in an interview. “What the split has allowed us to do is to accelerate the turnaround of Hewlett Packard Enterprise and focus on a smaller number of things.”
Shares of HP Enterprise rose 14 percent to $15.44 at the close in New York Friday. That brought the stock to a 1.6 percent gain for this year, compared with a 2.2 percent loss for the Standard & Poor’s 500 Index.
The upbeat report added to a handful of others recently that suggest investors’ initial concerns about the slowing global economy and its effect on technology demand may be fading.
In January, Intel Corp., said 2016 is off to a “soft” start as tepid economic growth, particularly in China, is hurting demand for personal computers and the servers that have fueled expansion. But Cisco Systems Inc., whose equipment is the backbone of the Internet, last month predicted sales that might beat some analysts’ estimates and Broadcom Ltd., one of the world’s top-10 chipmakers, said Thursday it’s seeing “pretty broad-based strength” in demand for phone-networking components.
HP Enterprise, which targets corporate customers with high-tech gear, services and software, forecast current quarter profit excluding some items of 39 cents to 43 cents a share. That compares with analysts’ average estimate of 42 cents.
The company will return at least 100 percent of its free cash flow outlook to shareholders in the 2016 fiscal year, Chief Financial Officer Tim Stonesifer said Thursday in a statement. “In addition, when the Tsinghua transaction closes, we plan to use the majority of approximately $2 billion received to repurchase shares.”
HP Enterprise sold a majority stake in its Chinese server, storage and technology assets for $2.3 billion in May to Tsinghua University.
“The focus helps the company kind of tie things together,” said Jayson Noland, an analyst at Robert W. Baird & Co., who has the equivalent of a hold rating on the stock. “At least with HPE now, you’re talking about all enterprise.”
HP Enterprise affirmed its forecast for 2016 fiscal year profit, excluding certain items, saying it will be $1.85 to $1.95 a share. That compares with analysts’ average estimate of $1.86.
Revenue declined 2.5 percent to $12.7 billion in the quarter that ended Jan. 31 from a year earlier, meeting analysts’ estimates. Adjusted earnings were 41 cents a share compared with estimates of 40 cents.
Revenue for the company’s largest unit -- the Enterprise Group -- climbed 1 percent to $7.1 billion. The server and storage businesses posted sales declines while networking revenue gained 54 percent, the company said.
Sales in the Enterprise Services unit, the next biggest division, fell 6 percent to $4.7 billion. Software revenue dropped 10 percent to $780 million and financial services declined 3 percent to $776 million.
The other half of the Hewlett-Packard split, HP Inc., didn’t fare as well in its initial earnings report. The company, which sells personal computers and printers, last week provided an outlook that was generally in line with estimates, but said it would accelerate previously announced job cuts.
HP Enterprise released its results as Dell’s deal for EMC is close to completion -- challenging Whitman’s approach that getting smaller is the way to become more effective. Together, Dell-EMC will have a fuller suite of storage, servers, PCs and printers -- aiming to offer customers a simple one-stop-shop for technology gear.
Whitman said her approach will be better -- and looked forward competing with Dell, in part, by stepping up sales and marketing efforts that could help grab a bigger share of the industry.
“We’re super focused on being fast and nimble for our customers,” she said. “Both strategies may work. I happen to like our plan better than the Dell-EMC hand.”