@HPE has updated its outlook and announced a new round of cost-cutting and job cuts. Excluding the weak operator market and its various divestments, the company aims for 5 percent sales growth this year and "modest" revenue growth in 2018. Supported by the cost reductions, adjusted EPS is expected to grow from USD 1.00 this year to USD 1.15-1.25 in 2018, and reported EPS should return to the black next year. HPE also pledged to return USD 3 billion in cash to shareholders in the current fiscal year, through USD 2.6 billion of share repurchases and USD 400 million in dividend payments. However, normalized free cash flow is expected to fall from around USD 2 billion this year to USD 1 billion in 2018. This is due to an anticipated USD 200 million in legacy restructuring and severance payments, USD 300 million of payments for tax settlements, and USD 600 million for its new restructuring programme HPE Next. As a result, shareholder returns will fall to an estimated USD 2.5 billion next year, including USD 2 billion for share buybacks and USD 500 million in dividends. However, the company approved a 15 percent increase in its regular cash dividend to USD 0.075 per share and also increased its share repurchase authorization by USD 5 billion. Over time, the company plans to return at least 75 percent of normalized free cash flow to shareholders, up from its prior commitment of 50 percent. More restructuring and job cuts HPE Next is designed to simplify the organizational structure, redesign business processes and prioritize investments in growth areas, following the string of divestments by the company. HPE’s strategy remains focused on three key pillars: to make hybrid IT simple through its data centre technology, systems software, private cloud and public cloud partnerships; to power the intelligent edge through offerings from Aruba in campus and branch networking, and the Industrial Internet of Things with products like Edgeline and the Universal IOT software platform; and to provide advisory, professional and operational Services capabilities, including giving customers financial flexibility through consumption-based models. The HPE Next programme targets gross cost savings of USD 1.5 billion over the next three years. Around USD 700 million of this will be re-invested in the business, in the form of go-to-market, operational and R&D investments in key growth areas. Net cost savings will be approximately USD 800 million on a run rate basis exiting fiscal year 2020. The cost of the restructuring is estimated at a total USD 1.1 billion in cash payments, about two-thirds of which will go towards job cuts. The remainder will be used to upgrade and simplify IT systems, in addition to other non-labor actions. These payments will be partially offset by real estate sales, which should generate approximately USD 300 million in cash over the next three years. Over the long term, HPE said it targets "modest revenue growth of around 0-1 percent organic". The company expects operating profit to grow approximately 4-5 percent annually, driven by an optimized operating model, reduced cost structure and favorable mix shift. EPS is expected to grow at a higher rate of 7-9 percent annually, driven by the reduced number of shares from buybacks. Cash flow is expected to trend towards normalized levels in FY19 and track earnings over time.
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