Hewlett Packard Enterprise (HPE): Q2 Earnings Preview

Hewlett Packard Enterprise Company (NYSE:HPE) is set to report second-quarter fiscal 2016 results – the first quarterly results post its split from Hewlett-Packard Company – on May 24. Last quarter, the company posted a positive earnings surprise of 5.13%. Let’s see how things are shaping up for this announcement.

Prior to the split, Hewlett-Packard Company was a leading global provider of computing products, technologies, software and services to individual consumers, SMBs and large enterprises, including those in the public and educational sectors. Products such as PCs and access devices, imaging and printing-related products and services, enterprise IT infrastructure, and multi-vendor customer services including support, maintenance, consulting, integration and outsourcing were offered by the company.

Post the split, Hewlett-Packard Company’s PC and printer business operates under the name HP Inc. (NYSE:HPQ) , while Hewlett-Packard Enterprise offers commercial tech products.

Factors to Consider

We believe that the parent company’s (Hewlett-Packard Company) initiative to split the business has already started benefiting Hewlett-Packard Enterprise. In our opinion, the split allows a customized approach to two different businesses, which might not have been possible as a single entity.

Notably, the company reported better-than-expected results for the first quarter. However, it witnessed a year-over-year decline in the top line and bottom line. In our view, the deterioration was mainly due to the strengthening U.S. dollar, and the ongoing weakness in the Chinese and Brazilian economies.

Nonetheless, it should be noted that the company registered year-over-year revenue growth of 4% on a constant currency basis. Moreover, Hewlett-Packard Enterprise issued a strong earnings guidance for fiscal 2016.

Hewlett-Packard has done considerably well in the enterprise class server and storage markets. The company is focusing on the high-margin software and security markets as well. We believe that the company’s traction in the cloud, security and Big Data segments will drive results in the to-be-reported quarter.

Furthermore, the company is restructuring its IT consulting and services group. In doing so, it has already sold its equity stake in Mphasis Limited, an IT services provider in Bangalore, India and intends to reduce headcount by 25,000 to 30,000 jobs in its enterprise business.

The primary reason for such a massive reduction is to reassure investors regarding Hewlett Packard’s consistent focus on lowering expenses and improving profitability.

We believe that HPE’s current restructuring plan is expected to yield benefits in the near term. These initiatives will foster innovation and result in cost savings as well.

We believe that the successful deployment of the company’s products will boost its revenues, going forward.

However, macroeconomic challenges and tepid IT spending remain near-term concerns. Competition from International Business Machines (NYSE:IBM) and Oracle (NYSE:ORCL) further add to the woes.

Earnings Whispers

Our proven model does not conclusively show that Hewlett-Packard Enterprise is likely to beat earnings estimates this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. This is not the case here, as you will see below.

Zacks ESP: Earnings ESP for Hewlett-Packard Enterprise is 0.00% since the Most Accurate estimate of 42 cents stands in line with the Zacks Consensus Estimate.

Zacks Rank: Hewlett-Packard Enterprise’s Zacks Rank #3, when combined with a 0.00% ESP, makes surprise prediction difficult.

Note that we caution against stocks with a Zacks Rank #4 or 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing a negative estimate revisions momentum.

Stocks to Consider

Here are a couple of stocks that you may want to consider, as our model shows that they have the right combination of elements to post an earnings beat this quarter:

TiVo Inc. (NASDAQ:TIVO) , with an Earnings ESP of +25.00% and a Zacks Rank #1.

Intuit Inc. (NASDAQ:INTU) , with an Earnings ESP of +0.66% and a Zacks Rank #2.