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Hewlett Packard Enterprise Provides Spinoff Details, ’17 View


Hewlett Packard Enterprise Co. HPE, in its recent Securities Analyst Meeting, discussed details about the previously announced spinoff of its Enterprise Services (ES) and software business. Moreover, the company provided its fiscal 2017 outlook while reaffirming the fiscal 2016 guidance.

The Split

In September, the company announced its decision to spin off its software business and merge the same with British software firm, Micro Focus International Plc, in a cash-stock deal worth $8.8 billion.

The transaction, which is subject to some regulatory approvals, is anticipated to be tax free for Hewlett Packard Enterprise. Per the agreement, the company will receive $2.5 billion in cash and a 50.1% stake in the merged entity, currently estimated to be valued at $6.3 billion.

Earlier in May, Hewlett Packard Enterprise had announced the spin-off its struggling IT services segment – Enterprise Services – and entered into an agreement to merge the same with Computer Sciences Corporation (CSC). The transaction, which is scheduled to close in Mar 2017, will deliver approximately $8.5 billion to the company’s shareholders on an after-tax basis. This includes $4.5 billion in the form of equity in the combined company, $1.5 billion in cash dividend and $2.5 billion of debt assumption.

HPE’s 2017 Projections

The company provided full year 2017 outlook in three parts, taking into account the spin off-merger of its ES and Software business with Computer Sciences and Micro Focus, respectively.

Hewlett Packard Enterprise expects combined non-GAAP earnings (including contribution from ES and Software business) for full year 2017 in the range of $2.00 to $2.10 per share. Revenues for the same period are expected to be flat to down 1%. Free cash flow is projected to be roughly $3.6 billion to $3.6 billion for full year 2017.

The company provided its non-GAAP earnings guidance (which included partial year contributionsfrom ES and Software business) for full year 2017 in the range of $1.45 to $1.55 per share. Free cash flow is projected to be negative $1.8 billion for full year 2017, mainly due to pension funding payment. The company however anticipates returning $3 billion in fiscal 2017 and anticipates net operating cash balance to be roughly $8 billion.

The company also provided its non-GAAP earnings guidance for full year 2017 on completion of the ESand Software deals (excludingthe contributions from both ES and Software business). Non-GAAP EPS is expected to be in the range of $1.25 to $1.35. Revenues for the same period is expected to grow modestly. Free cash flow is projected to be approximately $2.1 to 2.4 billion for full year 2017.

Fiscal 2016 Outlook Reaffirmed

Hewlett Packard Enterprise reiterated its fiscal 2016 outlook. The company continues to expects non-GAAP earnings per share to be $1.90–$1.95 (mid-point: $1.925). The Zacks Consensus Estimate is pegged lower at $1.88. Revenues for the same period are expected to increase in a range of 1% to 2%.

The company continues to anticipate returning $3 billion in fiscal 2016 and expects to deliver free cash flow of $1.7 to $1.9 billion in 2016.



We believe Hewlett Packard Enterprise can tap opportunities owing to the improving server market in the long run. Hewlett Packard Enterprise’s massive restructuring moves will complement its focus on core businesses and enable it to compete with players like Oracle (ORCL), Cisco (CSCO) and NetApp (NTAP) as well as the new entrant, Dell going forward.

Furthermore, the company has done considerably well in the enterprise class server and storage markets. The company concentrates its resources 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 enhance its growth trajectory, going forward.

Also, its strategic divestments and initiatives to return value to shareholders in the form of dividend and share repurchases bode well.

However, macroeconomic challenges and tepid IT spending remain near-term concerns. Competition from other players in the space adds to its woes.

Currently, Hewlett Packard Enterprise carries a Zacks Rank #2 (Buy).You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here

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