The geopolitical and economic landscape of the world has been tough so far into 2022. Covid-19 lockdowns in China have been impacting the global supply chain immensely, but the Russian invasion of Ukraine has made things worse. The resulting economic landscape has huge peaks named inflation, interest rates, and the wider market turmoil. Currency headwinds have been even harsher as the Fed rolls up its sleeves to battle inflation that is now soaring beyond limits. The threat of a recession remains imminent as the U.S. economy sees interest and inflation crossing limits in over 40 years.
Wall Street executives, Goldman Sachs analysts as well as Wells Fargo, all have joined in on the possibility of a recession being dangerously close. While Nasdaq is in the bear market territory, the S&P 500 composite has veered extremely close to it. Even the wider indicator of the stock market, S&P 500 had a brush down to the bear market in the second half of May when its losses extended beyond 20% temporarily.
However, despite the imminent threat of a recession and deteriorating economic conditions, Hewlett Packard Enterprise Co. (HPE)’s CEO had said he wasn’t seeing it in the tech giant’s business. During the World Economic Forum in Davos, Switzerland, the CEO Antonio Neri shared his optimism about the continued growth of HPE. In contrast to his optimistic views for the company, the latest earnings report disappointed investors very much. The enterprise hardware and services company missed the expectations for Q2 fiscal 2022 and trimmed forecasts for the full year. Consequently, HPE stock plunged by 7.03% in the premarket on June 2, 2022. Thus, the stock is currently priced at a value of $14.67 per share.
HPE’s Q2 Fiscal 2022
Hewlett Packard Enterprise Co. is a tech giant selling a vast range of products and services in cloud storage, high-performance computing, AI, software, and servers. The company boasts 55,000 customers globally and 10 million devices are connected by its edge networking.
The company’s latest earnings report depicted the impacts of supply chain disruptions due to China lockdowns, its exit from Russia, and unfavorable currency movements. The Russia and Belarus exit cost it $129 million in the second quarter after HPE stopped all shipments and sales to the region in February 2022. Combined with the China lockdowns, the total impact was $250 million, according to Mr. Neri.
Bank of America Global Research analyst Wamsi Mohan had predicted the harsh impact of the geopolitical and economic situation well before the earnings. The analyst had downgraded the stock from a Buy to Neutral late in May.
For the quarter ended April 30, 2022, HPE came out with net revenue of $6.7 billion, which rose by just a fraction (0.2%) against the comparable period. This came below the analysts’ expectations of $6.81 billion in sales for the quarter.
A miss on estimates was also the quarterly earnings, which declined 4% YOY to 44 cents a share. The consensus estimate for quarterly earnings was 45 cents per share.
Cash flow from operations went down by $433 million to $379 million, and free cash flow decreased by $579 million to $(211) million.
Orders growth remained robust with an increase of 20% YOY but the company is facing troubles in converting the demand into sales due to component and logistics issues.
The performance of the company’s various business segments in the quarter is as mentioned in the below table:
For the fiscal Q3 2022, the company sees its adjusted earnings to be $0.44-$0.54 per share. Analysts had their earnings expectations pegged at $0.51 per share for the quarter.
For the full year, HPE said it estimates the adjusted diluted earnings to be $1.96-$2.10 per share, and revenues are expected to grow by 3-4% on an adjusted currency basis. Furthermore, the free cash flow was guided to be $1.8-$2.0 billion for the fiscal year.
The company, however, reaffirmed its compound annual growth of 35% to 45% from the fiscal year 2021 to the fiscal year 2024.
While the tech giant HPE was initially seeing not much impact from the macroeconomic turmoil, its latest earnings show a different picture. The geopolitical instability in Europe, China’s Covid lockdowns, and currency changes impacted the quarterly results in a negative way. The company did see great order momentum, but the supply chain constraints translated into difficulties in keeping up with it. Although the company does see some more impediments in the near term, it remains confident about progressing well into the future.