IT businesses HP (NYSE:HPQ) and Hewlett Packard Enterprise (NYSE:HPE), which were founded in 2015 as part of the splitting of the Hewlett-Packard company, reported their quarterly results on Tuesday after market close.
The results reflect a worse-than-expected industry recovery in the PC market with the analysts blaming ongoing elevated channel inventory and the promotional pricing environment to drive sales.
HP Cuts Outlook, Shares Plunge
HP shares moved sharply lower after the PC maker was forced to cut its full-year forecast amid a delay in PC demand recovery. The stock was down 9% in early Wednesday trade as the company suffered from weakness in its Printing unit.
"While we expect another quarter of sequential growth in Q4, the external environment has not improved as quickly as anticipated and we are moderating our expectations as a result," CEO Enrique Lores said.
The company said it now expects full-year EPS at $3.29 (up or down 6 cents), down from the prior forecast for $3.40 in profit per share. Analysts were looking for $3.34, suggesting a mild guidance cut was somewhat expected.
Free cash flow is now expected to be $3 billion, down from the prior $3.25 billion and the consensus of $3.43 billion. The guide lower comes after HP said it sees adjusted EPS for its fourth fiscal third quarter at 91 cents (up or down 6 cents), missing the average analyst estimate of 94 cents.
"We remain confident in our ability to drive long-term growth and value creation as we focus on the things we can control and make continued progress against our Future Ready plan,” Lores added.
As far as the company’s third-quarter results are concerned, HPQ posted a profit per share of 86 cents, somewhat in line with the consensus for earnings of 85 cents per share. Revenue fell nearly 10% year-over-year to $13.20 billion, worse than the expected decline of over 8%.
The company’s largest business unit by revenue – Personal systems – saw its sales drop 11% YoY to $8.93 billion, which was just ahead of the expected $8.79 billion in FQ3 revenue. However, the printing business segment generated just $4.26 billion in FQ3 sales while analysts were looking for $4.57 billion, marking the key driver of the top-line FQ3 underperformance.
The company reported an adjusted operating margin of 8.8%, a compression of 60 basis points YoY and in line with the consensus. HP managed to generate $900 million in free cash flow, worse than the expected $1.07 billion. Hence, the PC maker was forced to lower its full-year FCF forecast.
It spent about $300 million on dividend payments in the third quarter while not allocating any cash to share buybacks amid a difficult macro environment. Overall, the company exited the quarter with $1.7 billion in gross cash.
HPE Boosts Forecast, But Still Not Enough for Shares
HPE shares slipped on Wednesday despite the PC business raising its full-year profit forecast. The company now sees FY adjusted EPS at $2.13, up from the prior forecast of $2.10 and the consensus of $2.11.
Revenue is still expected to grow 5% (up or down 1%), just ahead of the expected 4.9% growth. HPE said it still sees free cash flow at $2 billion (up or down $100 million), in line with the consensus.
For its fourth fiscal quarter, the company guided for a profit per share of 50 cents on revenue of $7.35 billion, which compares to the consensus for earnings of 50 cents per share on revenue of $7.44 billion.
The weaker-than-expected FQ4 forecast for revenue could be another reason for shares failing to rally post-earnings despite the raised profit outlook. However, it could also signal some conservatism on the side of the company’s management given a tough macro environment.
In its third fiscal quarter, HPE posted a profit per share of 49 cents, topping the consensus of 47 cents. Revenue rose 0.7% YoY, in line with what the Street was expecting. Intelligent Edge strength managed to offset a miss in the company’s biggest segment – Compute.
Intelligent Edge saw its sales rise as much as 50% YoY, topping the consensus of $1.34 billion. On the other hand, Compute and HPC & AI delivered lower than expected revenue figures i.e. $2.62 billion and $836 million vs. $2.69 billion and $871 million, respectively. The company’s Storage sales of $1.07 billion were in line with the consensus.
Annualized revenue run-rate (ARR) was $1.3 billion, up 48% YoY. The company maintained its ARR guidance of 35% to 45% compounded annual growth rate (CAGR) from fiscal 2022 to fiscal 2025.
“HPE delivered another solid quarter in Q3, powered by standout performances in the Intelligent Edge and HPE GreenLake. Demand improved sequentially across all key business segments, with particular strength in our HPC & AI segment as customers discover HPE’s unique capabilities to power unprecedented levels of performance for AI at scale,” said Antonio Neri, president and CEO of Hewlett Packard Enterprise.
“Our strategic shift toward edge, hybrid cloud and AI delivered through our HPE GreenLake platform is working."
The adjusted operating margin fell by 20 bps YoY to 10.3% while analysts were looking for a 10-bps expansion on an annual basis. HPE generated $1.5 billion in cash flow from FQ3 operations.
“The pivot in our portfolio toward higher-growth, higher-margin markets is clearly visible in our year-over-year expansion of gross margins. Our differentiated edge-to-cloud strategy is fueling strong results in an uneven market,” added Jeremy Cox, senior vice president and interim CFO.
The company also said it returned approximately 60% of free cash flow to shareholders in dividends and share repurchases.
While HPE management hinted that it has seen strength in AI orders and server partnerships with AI companies, the financial impact has yet to materialize in a meaningful manner. The company sees revenue growing in 2024, fueled by the expected PC demand recovery, as well as strong AI orders.
Summary
HP Inc shares tumbled Wednesday following a FY guidance cut as the company continues to struggle amid the delayed PC demand recovery. On the other hand, HPE raised its profit forecast, although its guidance is still to feel a meaningful boost from strong AI orders.
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Shane Neagle is the EIC of The Tokenist. Check out The Tokenist’s free newsletter, Five Minute Finance, for weekly analysis of the biggest trends in finance and technology.