Executive Summary

HPE delivered revenue of $12.7B, down 3% y/y as reported (+4% constant currency), and non-GAAP diluted EPS of $0.41 at the top end of prior guidance; GAAP diluted EPS was $0.15, above guidance due primarily to tax indemnification adjustments .
Enterprise Group drove constant currency growth across hardware with standout Networking (+62% cc) and 3PAR all-flash triple-digit growth; ES margins expanded to 5.1% y/y, while Software declined on license/support headwinds .
Free cash flow was seasonally weak (negative), impacted by separation payments and working capital (cash conversion cycle 31 days), but management reaffirmed FY16 FCF of $2.0–$2.2B and raised capital return commitment to at least 100% of FY16 FCF .
Catalysts: capital return uplift (100% of FY16 FCF plus majority of ~$2B Tsinghua proceeds for buybacks), Aruba-driven networking momentum, and hyper-converged product launch; macro/FX and January U.S. hardware softness temper near-term enthusiasm .

What Went Well and What Went Wrong

What Went Well

Enterprise Group constant currency revenue growth (+7% cc), with strong Servers (+5% cc), Storage (+3% cc), and Networking (+62% cc); “record China networking revenue” and Aruba cross-sell improving switching .
ES margin execution: operating margin rose to 5.1% (+210 bps y/y), with TCV up ~30% cc, improving low-cost mix and delivery productivity; “first quarter with constant currency growth since Q3 2012” .
All-flash momentum: “record revenue for 3PAR,” triple-digit all-flash growth; converged storage +17% cc and 3PAR revenue +21% cc, supporting EG mix/margin trajectory .

What Went Wrong

Top-line pressure: GAAP net revenue down 3% y/y; GAAP operating margin fell to 3.0% (from 5.6% y/y); GAAP EPS halved to $0.15, reflecting restructuring, amortization, separation, and FX headwinds .
Cash flow weakness: Free cash flow negative due to seasonality, $300M separation payments, and elongated payables (CCC 31 days); CFO flagged timing-related working capital and expects improvement through FY16 .
Software decline and TS delays: Software revenue down 10% y/y (license/support pressure); TS revenue down 3% cc with China renewals delayed pending Tsinghua close .

Financial Results

Metric	Q1 2015	Q4 2015	Q1 2016
Revenue ($USD Millions)	$13,053	$13,448	$12,724
GAAP Net Earnings ($USD Millions)	$547	$1,385	$267
GAAP Diluted EPS ($USD)	$0.30	$0.75	$0.15
Non-GAAP Net Earnings ($USD Millions)	$859	$1,008	$731
Non-GAAP Diluted EPS ($USD)	$0.47	$0.55	$0.41
GAAP Operating Margin %	6%	1%	3%
Non-GAAP Operating Margin %	9%	10%	8%

Non-GAAP adjustments (Q1 2016): amortization ($218M), restructuring ($311M), separation ($79M), acquisition charges ($37M), tax indemnification (-$15M), tax adjustments (-$166M) .

Actual vs Company Guidance (EPS)

Metric	Guidance (Prior)	Actual	Result
Q1 2016 Non-GAAP EPS ($)	$0.37–$0.41	$0.41	At top end
Q1 2016 GAAP EPS ($)	$0.09–$0.13	$0.15	Above (tax indemnification)

Segment Revenue

Segment ($USD Millions)	Q1 2015	Q4 2015	Q1 2016
Enterprise Group	$6,982	$7,358	$7,051
- Servers	$3,595	$3,772	$3,568
- Technology Services	$1,988	$1,862	$1,810
- Storage	$837	$819	$810
- Networking	$562	$905	$863
Enterprise Services	$4,993	$5,020	$4,688
- ITO	$3,132	$3,068	$2,874
- ABS	$1,861	$1,952	$1,814
Software	$870	$959	$780
Financial Services	$803	$801	$776
Corporate Investments	$4	$1	$1
Intersegment & other	$(599)	$(691)	$(572)
Consolidated Net Revenue	$13,053	$13,448	$12,724

Segment Operating Margin (Q1 2016 only)

Segment	Operating Margin %
Enterprise Group	13.4%
Enterprise Services	5.1%
Software	17.4%
Financial Services	12.9%

KPIs

KPI	Q1 2015	Q4 2015	Q1 2016
Cash from Operations ($USD Millions)	$568	—	$(75)
Free Cash Flow ($USD Millions)	—	—	$(831)
Cash Conversion Cycle (days)	—	mid-20s (exit FY15)	31
Share Repurchases ($USD Millions)	—	—	$1,200
Dividends Paid ($USD Millions)	$10	—	$96
FS Return on Equity %	—	—	18.1%

Note: Dashes indicate not disclosed in cited documents for that period.

Guidance Changes

Metric	Period	Previous Guidance	Current Guidance	Change
Non-GAAP Diluted EPS ($)	Q2 2016	—	$0.39–$0.43	New
GAAP Diluted EPS ($)	Q2 2016	—	$0.13–$0.17	New
Non-GAAP Diluted EPS ($)	FY 2016	$1.85–$1.95	$1.85–$1.95	Maintained
GAAP Diluted EPS ($)	FY 2016	$0.75–$0.85	$0.75–$0.85	Maintained
Free Cash Flow ($B)	FY 2016	$2.0–$2.2	$2.0–$2.2	Maintained
Capital Return Commitment (% of FY16 FCF)	FY 2016	≥50%	≥100%	Raised
Use of Tsinghua Proceeds ($B)	FY 2016	—	Majority of ~$2B for buybacks	New
Operational EPS impact of Tsinghua	FY 2016	—	~+$0.05 when closed near end of May	New

Earnings Call Themes & Trends

Topic	Previous Mentions (Q-2, Q-1)	Current Period (Q1 2016)	Trend
Constant currency growth	“Second consecutive quarter of cc revenue growth” in Q4 2015 (implies Q3 resumed cc growth)	Third consecutive quarter; +3.8% cc, FX ~6-pt headwind y/y	Improving cc momentum; FX headwinds persist
Networking/Aruba	Q4: Aruba driving cross-sell; China networking improved with Tsinghua partnership	+62% cc networking; Aruba normalized double-digit cc; record China networking	Strength accelerating; mix supports margins
Storage/3PAR All-Flash	Q4: 3PAR all-flash triple-digit; converged storage +17% cc	Record 3PAR; all-flash triple-digit; 3PAR revenue +21% cc	Sustained outperformance
ES turnaround	Q4: ES op margin 8.2%; revenue flat ex top-3 runoff	ES op margin 5.1% (+210bps y/y); slight cc revenue growth; TCV up ~30% cc	Margin expansion continues; top-line stabilizing
Macro/US hardware	Q4: Volatile currency; Americas mixed	January U.S. hardware slowdown; oil & gas weak; February linearity normalized	Near-term softness; watch macro
China/Tsinghua	Q4: Anticipated close in Q1 FY16	Closing expected end of May; CSRC approvals outstanding; China networking strong	Timing delay; demand constructive
Hybrid cloud strategy	Q4: Sunset public cloud; Azure preferred partner; Helion OpenStack 2.0	>200 Helion wins post separation; focus on hybrid orchestration; NFV momentum	Execution building
Hyper-converged	Q4: Portfolio integration across EG	New organic hyper-converged launch this month; cost 20% below Nutanix	New product catalyst

Management Commentary

“During our first quarter as an independent company, we saw the progress that comes from being more focused and nimble… third consecutive quarter of year-over-year constant currency revenue growth” — Meg Whitman .
“We expect cash flow to improve as we move through the year, and remain confident in our full year free cash flow outlook of $2 billion to $2.2 billion” — Meg Whitman .
“Networking revenue grew 62% year-over-year in constant currency… Aruba continues to drive growth in wireless and… returning switching to double-digit growth year-over-year” — Tim Stonesifer .
“We are increasing our commitment to return at least 100% of our free cash flow outlook to shareholders in FY16… majority of approximately $2 billion [Tsinghua proceeds] to repurchase shares” — Tim Stonesifer .

Q&A Highlights

EG margins: FX drove most y/y margin pressure; expected stabilization with lift from Storage/Networking mix; ES margins seen improving to 6–7% for FY16 .
Capital allocation: Raised commitment to ≥100% of FY16 FCF; majority of ~$2B Tsinghua proceeds for buybacks; timing dependent on market/U.S. cash .
Free cash flow cadence: Negative in Q1 due to seasonality, separation payments ($300M), and CCC timing; expected quarterly improvements via earnings, CCC normalization to mid-20s, and diminishing separation drag .
Macro/January slowdown: U.S. hardware demand softened in last three weeks of January; oil & gas weakest vertical; February linearity back on track .
Hyper-converged: Organic product debut; target leadership in fast-growing market; some cannibalization expected but accretive margins vs servers .

Estimates Context

Wall Street consensus (S&P Global) for Q1 2016 EPS and revenue was unavailable due to data access limits at the time of this analysis; therefore, comparisons to Street estimates cannot be provided [SPGI data unavailable].
Company guidance comparison indicates non-GAAP EPS at the top end of prior Q1 guidance and GAAP EPS above, driven by tax indemnification adjustments .

Key Takeaways for Investors

Mix shift toward Aruba networking and 3PAR all-flash remains a structural tailwind for EG margins despite FX; watch continued Storage/Networking growth to lift blended EG profitability .
ES turnaround appears durable with margin expansion and improving TCV; management reiterates 6–7% FY16 ES margin and slight cc revenue growth, supporting consolidated margin resilience .
Near-term cash flow weakness is timing-driven; CCC and separation-related cash drag should abate, aligning with reaffirmed FY16 FCF of $2.0–$2.2B and heightened shareholder returns (≥100% of FCF) .
China remains a focal point: strong networking demand offsets TS renewal delays pending Tsinghua close; transaction expected end of May with ~$2B buyback firepower and ~+$0.05 operational EPS impact .
Macro sensitivity is real (January U.S. hardware slowdown, oil & gas weakness); monitor Americas order trends and FX to gauge near-term risk to EG volumes .
Product catalysts (hyper-converged, persistent memory servers) bolster competitive positioning vs peers in converged/hyper-converged markets, with potential share gains amid competitor integration uncertainty (Dell/EMC) .
Without Street estimate context, framing against company guidance shows disciplined execution; any external estimate revisions likely hinge on FX trajectory, ES margin progress, and capital return pace .

Hewlett Packard Enterprise Co (HPE)·Q1 2016 Earnings Summary