Hewlett Packard Enterprise Company (NYSE:HPE) Q1 2016 Earnings Conference Call - Preliminary Transcript
Mar 03, 2016 • 05:00 pm ET
We will now begin the question-and-answer session. Our first question will come from Sherri Scribner of Deutsche Bank.
Sherri A. Scribner
Hi. Thank you. Good job on the operating margins. I was hoping you could give us some detail about how you're thinking but margins, particularly in the Enterprise Group as we move through fiscal 2016 and some of the other operating margins? I you've commented on Enterprise Services, but wanted to get your sense about the Enterprise Group in particular with the new products coming out?
Timothy C. Stonesifer
Sure, Sherri. We did see some margin deterioration year-over-year if you look at the margins for EG, in total, they were at 13.4%. Most of that was driven by FX, so keep in mind in the first quarter last year the euro, as an example, was at 124 and the average accounting rates in the first quarter this year was 108. So we still saw significant pressure from a FX perspective when you look at the first quarter. Going out for the rest of the year, we would expect the margins to stabilize and maybe get a little bit of a lift particularly as we continue to grow the storage business as well as the networking business.
So as you know, those businesses have a healthier margin profile so as we continue to grow those, we should see some lift there. And then, the only other major comment I'd make is on the ES business. Again, we saw some great performance there in the first quarter, margins at 5.1%, up 210 basis points year-over-year. So the efforts of the team continues to execute upon as they're transforming that business, and the seasonality in that business. We would expect those margins to improve over the course of the year and settle on average in the range of 6% to 7% as we talked about at the Analyst Meeting in September.
Sherri A. Scribner
Okay. Perfect. And then just thinking about your free cash flow guidance. Now you're planning to spend 100% of your free cash flow, returning that to shareholders. Does that change your acquisition strategy? What are you thinking about acquisitions this year? Thank you.
Margaret C. Whitman
So, we continue to execute a returns based capital allocation strategy, and given where the stock price has been trading, this is one of the best return on investments that we can actually make. And as I said when we were on our road show for the new Hewlett Packard Enterprise, our first choice is, from an innovation perspective is organic innovation. Look at the success of the 3PAR all-flash storage array, internally homegrown, growing three times the rate of the market, and gives that benefit of a common architecture from top to bottom.
The benefit of doing organic innovation is you don't end up with a Frankenstein of architectures. The second choice would be acquisitions that look like 3PAR, 3Com and Aruba. These have been very successful acquisitions for us. They are additional complementary technology that goes through our excellent distribution system. But, again,