Morningstar | HP Enterprise Serves Up Higher EPS and Better Short-Term Outlook; FVE Raised to $19.50. See Updated Analyst Note from 29 Aug 2018
HP Enterprise continued its earnings beating streak with its third-quarter results that significantly increased earnings per share for fiscal 2018, based on a better pricing environment and improved profitability. While we still believe this no-moat company has a negative trend in the long run, we are raising our fair value estimate to $19.50 from $18.50 based on an improved earnings outlook, as we believe HP Enterprise will succeed in its shift to its more profitable Edge offerings.Third-quarter net revenue increased 4% year over year to $7.8 billion. Hybrid IT's revenue came in at $6.2 billion, up 3% year over year, driven by compute revenue's 5% year-over-year increase, despite declines from HP Enterprise's Tier 1 exit. Financial services revenue came in at $928 million, up 3% year over year. Intelligent Edge revenue grew 10% year over year to $785 million, based on adoption of its secure cloud offerings.
Operating profits were up for all segments except Intelligent Edge, which was down by 300 basis points from fiscal 2017 to 11.6% in operating profit, given HP Enterprise's continued heavy research and development investment in the segment. Hybrid IT's margins were aided by improved DRAM pricing after a presumed peak.
While EPS of $0.29 was partially a result of a better tax environment, improved operating margins also contributed, and this is expected to continue in the coming quarters as HP Enterprise intentionally de-emphasizes its commoditized server business with Tier 1 data centers.
Management expects fiscal 2018 to result in GAAP diluted EPS of $1.85-$1.90 from its former $1.70-$1.80 range as it increases its focus on more profitable offerings. In other news, CFO Tim Stonesifer announced he will leave HP Enterprise this September, with former Sprint Corp CFO Tarek Robbiati taking his place. We do not expect this to affect the company's financial health.
Hewlett Packard Enterprise is a technology company. The company's segments are: Hybrid IT, which provides a portfolio of infrastructure and solutions including servers, storage, and HPE Pointnext services; Intelligent Edge, which is comprised of cloud solutions that include wireless local area network, campus and data center switching, software-defined wide-area-networking, security, and associated services to enable secure connectivity; Financial Services, which provides investment solutions for customers that facilitate technology deployment models; and Corporate Investments, which includes Communications and Media Solutions, Hewlett Packard Labs and certain business incubation projects.
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