Following press reports earlier in the day (11/6/19) describing a potential bid from Xerox (XRX, not covered), HPQ released a statement after the close recognizing that it had received a proposal sometime last night, but offered nothing specific about future plans. The company did company mention that it has had prior conversations with XRX about a potential strategic event. The initial reports came less than 24 hours after XRX and FUJIFILM (not covered) agreed on XRX’s sale of multiple joint venture stakes, netting an eventual windfall of >$2bn, subject to Japanese regulatory approval. HPQ closed up 6%, while XRX closed up 4%; at current levels, HPQ’s market cap is $29.0bn, while XRX’s is $8.4bn.
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Following press reports earlier in the day describing a potential bid from Xerox (XRX, not covered), HPQ released a statement after the close recognizing that it had received a proposal sometime last night, but offered nothing specific about future plans. The company did company mention that it has had prior conversations with XRX about a potential strategic event. The initial reports came less than 24 hours after XRX and FUJIFILM (not covered) agreed on XRX’s sale of multiple joint venture stakes, netting an eventual windfall of >$2bn, subject to Japanese regulatory approval. HPQ closed up 6%, while XRX closed up 4%; at current levels, HPQ’s market cap is $29.0bn, while XRX’s is $8.4bn.
ANET reported a 12% 3Q EPS beat yesterday after close, but 4Q revenue guide 21% below our est. on reprisal of cloud volatility narrative—this time longer & larger revenue impact—sent the stock down 24% in the aftermarket. Facebook’s decision to delay server/storage upgrades at least a year was vast majority of $130mn forward revenue miss; tier 2 cloud and service provider represented the balance. At current levels we see limited downside, but see upside from improving ex-cloud end demand as likely not material. Further, formerly nearer-term catalysts—400G ramp in 2H20—have been pushed out. As such, we remain peer perform rated.
AAPL reported F4Q EPS yesterday (10/30/19) after close, posting a 6% beat vs. our model; the stock was up 2% in the aftermarket. Hardware was the source of upside: iPhone and iPad delivered meaningful sequential improvements and Wearables kicked in another blowout quarter. Management guided to December quarter revenue $1bn above our expected range at the midpoint. AAPL turns the page to F20 with accelerating 1H revenue growth to the mid-single digits on easier comps (with potential upside drivers from iPhone/Wearables), but we see the dropdown to earnings momentum largely priced in at these levels.
FLEX reported inline F2Q20 results yesterday after the close. The stock reacted positively—currently up 8% intraday today—on the second consecutive quarter of executing on its F20 replatforming goal of substituting margin (EBIT now 3.7% & expanding) for growth. FLEX provided incremental evidence for the broader narrative around industry discipline, while layering in pockets of profitable growth, especially in IEI. The announcement of its F4Q investor day helps as a near term catalyst, but we expect low optionality for meaningful new material customers wins over the near term given full effort behind current plan.
JNPR reported 3Q19 earnings after the close yesterday, posting a slight EPS beat vs. our model. Expectations were low heading into the print given various signs of weakening comm equipment demand over the past week. Routing did in fact come in light on Service Provider headwinds—(18)% YoY, but big sequential upticks in Switching and Security helped to offset. The stock traded up 5% in the aftermarket. Today’s results likely put more focus on what has setup as more of a 2H20 story. JNPR maintains enough idiosyncratic drivers to merit a re-rating upward, but it needs to pull together more frequent and more consistent proof points of execution.
HPE held its annual investor day yesterday afternoon (10/23/19). Thematically, the company used the day to officially mark the sunsetting of its replatforming phase and look ahead to the plan of steady, profitable growth. AaS pivot underpins this new chapter and the $460mn-$470mn F4Q19 annual run rate was inline with expectations, given prior commentary around Greenlake total contract value ($2.8bn at Discover). Overall we are positive that HPE is taking action to reorient its business model, but also note that transitions are not frictionless; additionally we are taking a cautious approach around the materiality of the change as well as on execution. We see other players in the hardware space with better topline trajectory and more near-term catalysts. Reiterate underperform rating.
Wolfe Research Senior IT Hardware & Networking Analyst, Andrew Vadheim, hosted a webcast with Michael Levin, Partner/Co-Founder of Consumer Intelligence Research Partners.
Broadly positive data points since the 9/12 hardware event have driven the recent runup in the stock, putting it now at a 10% premium to the market multiple for the first time in 8 years. We take our 4Q ests up $0.03 to $2.86 on higher iPhone units, partially offset by lower ASP, as we rollforward our unit model for F20. We see potential for upside from sequentially improving Services and from Wearables, but F4Q results likely will not drive big moves in the stock. Rather, we look for F1Q topline guidance to frame overall potential for the 11 cycle and to commentary around imminent expenses in F20 from Intel modem deal & spend behind new services.
IBM reported 3Q earnings yesterday after the close posting in line (vs. cons) EPS of $2.68, driven by onetime below the line & tax items offsetting revenue and gross margin miss. The stock traded down 5% in the aftermarket. Heading into the print, the setup for the next twelve months was clear: execute into easing 2H CCS (organic) and GTS comps and begin 1H20 in a relatively favored position on RH deferred revenue headwinds. A false positive in GTS backlog and TSS pressures obfuscates the narrative. However, we see limited downside at current levels; meaningful catalysts (incl. z refresh driving profitability) skew more towards 2H20. We remain peer perform rated.
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