Once factors such as lower tax rates, a strong Intel (INTC) - Get Intel Corporation (INTC) Report server CPU upgrade cycle and an improving IT spending environment are taken into account, HP Enterprise's (HPE) - Get Hewlett Packard Enterprise Co. (HPE) Report big sales/earnings beat and full-year guidance hike look a bit less impressive. And the company's earnings call commentary suggests it's still cautious about future growth in an IT hardware landscape being upended by cloud giants.

But considering this is a company whose shares have tread water during a massive 2-year tech rally, and which 3 months ago tumbled following a disappointing October quarter report, HPE's results and guidance are still a breath of fresh air. As well as an encouraging start for new CEO Antonio Neri, who officially took over from Meg Whitman at the start of this month.

Key Numbers:

HPE reported fiscal first quarter (January quarter) revenue of $7.67 billion (up 11% annually excluding HPE's divested Software and Enterprise Services units) and non-GAAP EPS of $0.34, easily beating consensus analyst estimates of $7.07 billion and $0.22.

April quarter EPS guidance of $0.29 to $0.33 is above a $0.26 consensus. Fiscal 2018 (ends in October) EPS guidance of $1.35 to $1.45 is $0.20 above prior guidance, and also above a $1.18 consensus. Full-year free cash flow (FCF) guidance, pressured by restructuring costs, remains at $1 billion.

Citing tax reform and the improved access to offshore HPE also announced that it now plans to spend $7 billion on dividends and stock buybacks through the end of fiscal 2019. In the July quarter, the quarterly dividend will be hiked by 50% to $0.1125 per share. That spells a 2.5% forward yield.

Shares traded up 10.5% to $18.14 on the day. After adjusting for divestitures, the 52-week high is $19.16.


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    Though it's still early, HPE's report should bolster investor confidence in Neri. Particularly given the bad news that preceded it.

    That said, it's worth keeping in mind how much of a lift is getting from short-term and non-company specific factors. On the earnings call, HPE attributed just "two to three points" of the 11% sales growth recorded last quarter to execution. Four points were attributed to currency swings and acquisitions, and four to five points to better market conditions and the large backlog HPE had entering the quarter. The company also got a $0.03 EPS boost from tax reform, and benefited from $742 million worth of buybacks. And it partly attributed its full-year EPS guidance hike to lower tax rates, higher interest rates and buybacks, with higher employee 401(k) contributions and new "degree-assistance programs" acting as an offset. Notably, HPE is for now reiterating a long-term outlook (issued last October) for just 0% to 1% annual organic revenue growth.

    HPE's compute (server), storage and data center networking revenue respectively grew 11%, 24% and 27% last quarter. Server and storage growth improved sharply from the October quarter's negative 5% and positive 5%. A strong enterprise server upgrade cycle -- driven by an Intel server CPU refresh begun last summer -- is a tailwind for now, as are the early-2017 purchases of mid-range storage array vendor Nimble Storage and hyperconverged infrastructure provider SimpliVity. Storage growth was 11% on an organic basis. Healthy demand for high-performance computing (HPC) systems is also helping, and so might a general improvement in IT spending. HPE's report comes a week after Cisco Systems  posted better-than-expected results, guidance and order data. As last week's Goldman Sachs tech conference, both Cisco CEO Chuck Robbins and Oracle co-CEO Mark Hurd offered upbeat commentary on the IT spending environment.

    The HPC strength is a positive for Nvidia , whose booming server GPU business leans heavily on both AI training and HPC projects. The data center networking growth is a positive for switch vendor Arista Networks , which HPE has a reseller deal with.

    HPE's Intelligent Edge segment, which revolves around its Aruba Networks Wi-Fi and Ethernet hardware/software unit, saw revenue rise 9% to $620 million. Not bad, but a little underwhelming given Aruba has been a strong point in recent quarters. On the call, CFO Tim Stonesifer reported Aruba saw strong campus Ethernet switch sales, but called its Wi-Fi performance was "disappointing."

    HPE's non-GAAP operating margin fell to 7.7% from 9.5% a year ago, even though operating expenses rose by just 2% to $1.59 billion (well below revenue growth of 11%). The culprit: HPE's gross margin fell to 28.4% from 32.1%. On the call, Neri blamed both high DRAM costs and "competitive pricing pressure." Stonesifer said HPE's pricing environment "remains challenging," but added it's "showing signs of improvement with more ability to pass cost increases through to customers."

    Jim Cramer and the AAP team hold a position in Nvidia for their Action Alerts PLUS Charitable Trust Portfolio. Want to be alerted before Cramer buys or sells NVDA? Learn more now.

    The Big Picture

    It would be a mistake to look at HPE's January quarter numbers and assume the company will keep posting double-digit sales growth. Especially since Intel has signaled its recent enterprise server chip strength won't last and the benefit HPE is getting from the timing of the Nimble and SimpliVity acquisitions will soon go away.

    And is the case for a few of its peers, the ongoing shift in IT hardware spending towards public cloud infrastructures remains a major long-term problem for HPE, since the likes of Google, Facebook and Amazon are more partial to using their own server/storage designs than those of traditional IT giants. While Dell has successfully grown its server sales to cloud giants in spite of this challenge, HPE effectively threw in the towel on this market last fall.

    Still, this is a company that's only trading for 13 times the midpoint of its fiscal 2018 EPS guidance. And in the years to follow, EPS should get a lift from both buybacks and exposure to growth areas in HPC, storage and networking. It's best not to get too excited about HPE's latest report, but it does provide reasons to think a lot of the bad news facing the company is priced in at current levels.