Hewlett Packard Enterprise's Q1 Marred By Weak Sales At Microsoft

Shares of Hewlett Packard Enterprise Co HPE plunged more than 8 percent following lower-than-expected quarterly sales and FY 2017 EPS outlook cut by $0.12 amid double-digit declines in servers and storage.

Print, In Review

• Hewlett Packard Enterprise reported first-quarter adjusted EPS of $0.45 versus the estimated $0.44.
• Sales came in at $11.4 billion versus the estimated $12.07 billion.
• Hewlett Packard Enterprise sees second-quarter adjusted EPS $0.41–$0.45 versus the estimated $0.47.
• Expects FY 2017 adjusted EPS $1.88–$1.98 versus the estimated $2.10.

Though the company reported an EPS beat for its first quarter, the results were largely a negative for Hewlett Packard Enterprise, with sales down 10 percent versus expectations of a 5 percent decline. Sales in the core enterprise group fell 12 percent, with servers and storage both falling in low double digits.

Hewlett Packard Enterprise attributed weakness in server due to lower demand from its top tier 1 service provider ((i.e., NASDAQ:MSFT)). Excluding Microsoft, server sales would have grown.

Analyst Commentary

“Weaker sales at Microsoft remain a potential headwind long term, as we estimate Microsoft has historically represented 10–15 percent of HPE’s server sales,” Deutsche Bank analyst Sherri Scribner wrote in a note.

Among the few positives, Hewlett Packard Enterprise saw 110bps improvement in its operating margin, driven by the high-margin Technology Services business.

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Scribner maintains his Buy rating on the stock, but cut the price target by $1 to $25 and 2017 EPS view to $1.92 from $2.05.

“While we continue to be positive on HPE's position in HW post the spins of ES and software, this Q's results give us some pause,” Scribner added.

At last check, shares of Hewlett Packard Enterprise fell 7.26 percent to $22.87.