As a tech industry analyst, Hewlett Packard Enterprise is a company I follow very closely on a variety of fronts. One annual event that I always make sure to tune into is HPE’s Securities Analyst Meeting, held in New York City, where the company gets to talk directly to investors about its progress, financials and future opportunities. As such, it’s also an excellent window into the company’s overall strategy and execution. It’s also an environment which has less marketing speak than others, given these types of events are scrutinized more heavily by the SEC and, of course, CFO Tarek Robbiati.
Today I wanted to break down some of the content from this year’s meeting, delivered last month by president and CEO Antonio Neri and CFO Tarek Robbiati. There was a lot to cover and I want to hit the financials and services opportunity. At a future date, I will hit its culture and I have already hit “edge to cloud” numerous times.
While I am an industry, not financial analyst, I thought it was important to hit financials first given that this was the “securities” analyst meeting. Let me start first with HPE’s announcement yesterday.
Yesterday, HPE issued its Q4 and full-year 2019 results. 2019 was exactly as Neri said it would be at the SAM and the company characterized it as a time to “redefine the foundational vision.” While overall company revenue growth in 2019 was down 6% (down 2% netting out hyperscalers and currency), there was profit, cash flow and revenue growth in investment areas like HPC (+15%), HPE GreenLake orders (+39%), HCI (+25%), and Composable Cloud/Synergy (+47%).
Looking to fiscal year 2020, HPE shared that it is expecting revenue growth, adjusted for currency fluctuations. While the enterprise market is tough right now and uncertainty abounds, it’s vitally important that the company show overall growth. Companies like Amazon.com’s AWS and Microsoft are in the same boat and still showing growth and HPE needs to as well. Paramount to this I believe will be HPE’s hybrid cloud offering I wrote about here.
The company predicted a non-GAAP operating profit growth of around 4-6% year-over-year, a non-GAAP tax rate of 12%, a share count of roughly 1.3 billion shares outstanding, and “Other Income & Expense” of roughly $100 million of an expense. Additionally, HPE says it anticipates a non-GAAP diluted net EPS of $1.78 to $1.94, which marks a 7% increase year-over-year at the midpoint. As for its 2020 GAAP diluted net EPS, HPE predicts $1.01- $1.17, a 63% increase year-over-year at the midpoint. The company expects a free cash flow of $1.9-2.1 billion, which marks roughly an 82% hike from fiscal year 2018 at the mid-point. On that note, HPE announced on the call that it intends to return 50-75% of its free cash flow to its shareholders in the coming year, in the form of share repurchases and dividends. HPE also revealed it is increasing its quarterly dividend to $.12 a share.
The company also shared details on its long-term financial model through fiscal year 2022, predicting an overall growth rate of 1-3%. Additionally, it anticipates a 5-7% compounded annual non-GAAP operating profit growth rate, and a non-GAAP diluted net EPS growth rate of 7-9% (with long-term free cash flow). Mirroring this year’s expected return to shareholders, HPE expects to return 50-75% of free cash flow to shareholders over the long term.
Profits are great, but I believe revenue growth will be key to investor reaction in ‘20-21. HPE has made some smart investments the past two years and they need to pay off big-time in this time period.
Services drive opportunity
Looking to strategy and opportunity, HPE stressed its movement towards software-defined and as-a-service solutions. The company reiterated the commitment it made at last June’s Discover 2019 conference (see here) to offer its full portfolio as-a-service by the year 2022, emphasizing HPE’s unique ability to deliver full edge-to-cloud solutions. Antonio Neri says this transition to an everything-as-a-Service model over the next three years will drive “sustainable, profitable growth” for the company, and pay off for shareholders. XaaS is all the rage, and while from a market POV right now there’s more talk than action, I believe in ten years even the enterprise end customer laggards will want to talk services first.
On that note, Antonio Neri also revealed at the event that HPE would be unveiling the next generation of its GreenLake hybrid cloud-as-a-service platform. Delivered via a consumption-based pay-per-use model, HPE says the next generation of GreenLake will give customers one unified experience across public, private and edge workloads. The company says it allow its customers to broker their own right mix of IT services with visibility, access and control, and give businesses a holistic, granular view of their budget, spend and location. I’m looking forward to seeing this in action as the value prop sounds good.
One of the new features coming to the next generation of GreenLake includes the ability to ensure continuous compliance across public and cloud environments—an ability that will be crucial when dealing with complicated regulations like HIPAA in medical settings. Too many tech companies are downplaying the significance on regulation, particularly privacy, so this is good to see.
I had the chance to talk last night to HPE CEO Antonio Neri and challenged him a bit on services. I liked his responses with regards to the “experience-first” and unique IP the company has in this space.Patrick Moorhead
HPE’s “everything as a service by 2022” has sent a few shock waves across the industry, another indication that the company is on the right path. I’m really looking forward to check on the performance in the next six months.
It’s hard to believe how much better positioned HPE is since Neri took the helm. It “feels” like a completely different company on nearly all vectors. While it has exited the scale and volume game, it still has leading market share positions as evidenced above and more importantly, is investing in the future. While it wasn’t always obvious where some of the acquisitions were going, it’s clear to me now.
The company looks to be in a solid financial position heading towards fiscal year 2020. I expect the release of the next generation of GreenLake will further HPE’s progress towards its goal of shifting all of its products and services to an as-a-service model by the year 2022. Furthermore, I expect this transformation of HPE’s business model will continue to drive profits for the company. I’ll continue to watch with interest and will be hitting its culture improvement in another analysis.