During the past year and a half, we’ve made significant progress in strengthening HPE to compete and win well into the future. We are focused on becoming a smaller, nimbler, and financially stronger company that is more committed to customers and partners than ever before.
With this goal in mind, we’ve made a number of strategic decisions, starting with our separation from HPE in November of 2015. Since then, we’ve spun our Enterprise Services business and merged it with CSC to form DXC Technology. Later this summer, we’ll complete the spin-merger of our Software business with Micro Focus. The two spin-merger transactions will deliver more than $20 billion in value based on the current stock prices of DXC and Micro Focus.
We’ve also made a number of strategic acquisitions in key growth segments of the market that are directly aligned with the three pillars of our strategy. Recent acquisitions include SGI, SimpliVity and Nimble Storage.
We’ve made these moves in the face of challenging market conditions, including stiff competition, unfavorable foreign exchange movements and industry-wide commodities constraints.
Despite these challenges, we continued to make progress in Q2, and we delivered non-GAAP net diluted EPS of $0.35, at the mid-point of our previously provided outlook. And just as important, we also saw growth in key areas that are core to HPE’s future.
Pockets of Growth in Core Segments
Total Q2 revenue was $9.9 billion, which includes revenue from both continuing operations – EG, Financial Services and Software – as well as two months of Enterprise Services, which is now accounted for in discontinued operations.
Revenue from continuing operations of $7.4 billion was down 5% year-over-year when adjusted for divestitures and currency, driven mainly by reduced server demand from a single Tier 1 customer, and lower license and professional services sales in software. It is important to note, however, that absent Tier 1 server sales, the future HPE business segments of the Enterprise Group and Financial services delivered revenue growth of approximately 1%, driven by continued strength in key growth segments.
For example, we saw 20% organic growth in High Performance Compute, where we are very well positioned. All-flash storage revenue grew 33% as enterprises move more workloads to flash in order to take advantage of its performance and low-latency benefits. Aruba continued to perform well, driven by 32% growth in wireless solutions. And Technology Services, which includes our new services brand, Pointnext, grew for the fourth consecutive quarter, up 3% YoY when adjusted for divestitures and currency, driven by strong customer demand for our advisory and transform services, as well as flexible capacity and data center care.
And, we overcame most of the execution challenges we discussed on the Q1 call. In particular, core servers stabilized, with revenue down only 1% globally when adjusted for divestitures and currency.
Margins to Improve in 2H
Margins in EG continued to be pressured by DRAM pricing, currency, stranded costs and short-term dilution from recent acquisitions. We also experienced a very competitive pricing environment, which we expect will continue. We believe we experienced the worst of the margin pressure in Q2 and expect the situation will improve as we move through the end of the year, as we work to mitigate the increased commodity prices and eliminate stranded costs from the spin mergers and acquisitions.
And, now that we’ve completed the ES spin-merger, we’re taking a fresh look at the cost structure for the new HPE. As a smaller company, it should be much easier to spot opportunities to optimize the business, streamline processes and reduce cost. We believe we can take out another $200 to $300 million in cost in just the second half of this fiscal year.
Cash Flow & Capital Allocation on Track with FY17 Commitments
As expected, free cash flow was negative this quarter due to separation and restructuring payments. However it was better than expected, at negative $64 million, since we accrued approximately $300 million for Enterprise Services payroll ending March 31st that was paid by DXC and will be repaid by us next quarter.
During the quarter we paid $107 million in dividend payments and repurchased $670 million of outstanding shares. We have now returned $1.5 billion to shareholders in the first half of FY17, aligned to our $3.0 billion full-year commitment.
Maintain FY17 EPS and Cash Flow Outlook
We expect Q3’17 non-GAAP diluted net earnings per share of $0.24 to $0.28. From a GAAP perspective, we expect Q3’17 GAAP diluted net earnings per share of ($0.02) to $0.02.
For the full year, we are holding to our prior FY17 non-GAAP diluted net earnings per share outlook of $1.46 to $1.56. From a GAAP perspective, we expect FY17 GAAP diluted net earnings per share of ($0.03) to $0.07.
We are also holding our full year FY17 free cash flow outlook of negative $1.8 billion.
So, overall, despite some current headwinds, I remain confident in our strategy. We will continue to invest in our three strategic pillars: hybrid IT, Intelligent Edge, and our Pointnext services model. And we will continue to find efficiencies and productivity in the new HPE that will allow us to run the company more profitably with each passing quarter.
Use of non-GAAP financial information
To supplement Hewlett Packard Enterprise’s condensed and consolidated financial statement information presented on a generally accepted accounting principles (GAAP) basis, Hewlett Packard Enterprise provides revenue on a constant currency basis, revenue adjusted for divestitures and currency, as well as non-GAAP operating expense, non-GAAP operating profit, non-GAAP operating margin, non-GAAP income tax rate, non-GAAP net earnings from continuing operations, non-GAAP net (loss) earnings from discontinued operations, non-GAAP diluted net earnings per share from continuing operations, non-GAAP diluted net (loss) earnings per share from discontinued operations, gross cash, free cash flow, normalized free cash flow, net capital expenditures, net debt, net cash, operating company net debt and operating company net cash financial measures. Hewlett Packard Enterprise also provides forecasts of non-GAAP diluted net earnings per share and free cash flow. A reconciliation of adjustments to GAAP financial measures for this quarter and prior periods is provided alongside our earnings materials on our website along with an explanation of the ways in which Hewlett Packard Enterprise’s management uses these non-GAAP measures to evaluate its business, the substance behind Hewlett Packard Enterprise’s decision to use these non-GAAP measures, the material limitations associated with the use of these non-GAAP measures, the manner in which Hewlett Packard Enterprise’s management compensates for those limitations, and the substantive reasons why Hewlett Packard Enterprise’s management believes that these non-GAAP measures provide useful information to investors. This additional non-GAAP financial information is not meant to be considered in isolation or as a substitute for revenue, operating profit, operating margin, net (loss) earnings from continuing operations, net (loss) earnings from discontinued operations, diluted net (loss) earnings per share from continuing operations, diluted net (loss) earnings per share from discontinued operations, cash and cash equivalents, cash flow from operations, investments in property, plant and equipment, or total company debt prepared in accordance with GAAP.
This press release contains forward-looking statements that involve risks, uncertainties and assumptions. If the risks or uncertainties ever materialize or the assumptions prove incorrect, the results of Hewlett Packard Enterprise may differ materially from those expressed or implied by such forward-looking statements and assumptions. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including but not limited to any projections of revenue, margins, expenses, effective tax rates, net earnings, net earnings per share, cash flows, benefit plan funding, share repurchases, currency exchange rates or other financial items; any projections of the amount, timing or impact of cost savings or restructuring charges; any statements of the plans, strategies and objectives of management for future operations, including the pending divestiture transactions, the execution of restructuring plans and any resulting cost savings or revenue or profitability improvements; any statements concerning the expected development, performance, market share or competitive performance relating to products or services; any statements regarding current or future macroeconomic trends or events and the impact of those trends and events on Hewlett Packard Enterprise and its financial performance; any statements regarding pending investigations, claims or disputes; any statements of expectation or belief; and any statements or assumptions underlying any of the foregoing.
Risks, uncertainties and assumptions include the need to address the many challenges facing Hewlett Packard Enterprise’s businesses; the competitive pressures faced by Hewlett Packard Enterprise’s businesses; risks associated with executing Hewlett Packard Enterprise’s strategy; the impact of macroeconomic and geopolitical trends and events; the need to manage third-party suppliers and the distribution of Hewlett Packard Enterprise’s products and the delivery of Hewlett Packard Enterprise’s services effectively; the protection of Hewlett Packard Enterprise’s intellectual property assets, including intellectual property licensed from third parties; risks associated with Hewlett Packard Enterprise’s international operations; the development and transition of new products and services and the enhancement of existing products and services to meet customer needs and respond to emerging technological trends; the execution and performance of contracts by Hewlett Packard Enterprise and its suppliers, customers and partners; the hiring and retention of key employees; integration and other risks associated with business combination and investment transactions; the results of the divestiture transactions or restructuring plans, including estimates and assumptions related to the cost (including any possible disruption of Hewlett Packard Enterprise’s business) and the anticipated benefits of the transactions or of implementing the restructuring plans; the resolution of pending investigations, claims and disputes; and other risks that are described in Hewlett Packard Enterprise’s Annual Report on Form 10-K for the fiscal year ended October 31, 2016 and subsequent Quarterly Reports on Form 10-Q.
As in prior periods, the financial information set forth in this press release, including tax-related items, reflects estimates based on information available at this time. While Hewlett Packard Enterprise believes these estimates to be reasonable, these amounts could differ materially from reported amounts in the Hewlett Packard Enterprise Quarterly Report on Form 10-Q for the quarter ended January 31, 2017. Hewlett Packard Enterprise assumes no obligation and does not intend to update these forward-looking statements.