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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
For purposes of this Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") section, we use the terms "Hewlett Packard Enterprise", "HPE", the "Company", "we", "us" and "our" to refer to Hewlett Packard Enterprise Company. References in the MD&A section to "former Parent" refer to HP Inc.
We intend the discussion of our financial condition and results of operations that follows to provide information that will assist the reader in understanding our Condensed Consolidated Financial Statements, changes in certain key items in these financial statements from period-to-period and the primary factors that accounted for these changes, as well as how certain accounting principles, policies, and estimates affect our Condensed Consolidated Financial Statements. This discussion should be read in conjunction with our Condensed Consolidated Financial Statements and the related notes that appear elsewhere in this document.
The financial discussion and analysis in the following MD&A compares the three months ended January 31, 2023 to the comparable prior-year period and where appropriate, as of January 31, 2023, unless otherwise noted.
This MD&A is organized as follows:
- Trends and Uncertainties. A discussion of material events and uncertainties known to management, such as the ongoing macroeconomic environment of supply chain constraints, uneven customer demand, and inflationary pressures, and recently enacted tax legislation.
*•*Executive Overview. A discussion of our business and a summary analysis of our financial performance and other highlights, including non-GAAP financial measures, affecting the Company to provide context to the remainder of the MD&A.
-
Results of Operations. A discussion of the results of operations at the consolidated level is followed by a discussion of the results of operations at the segment level.
-
Critical Accounting Policies and Estimates. A discussion of accounting policies and estimates that we believe are important to understanding the assumptions and judgments incorporated in our reported financial results.
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Liquidity and Capital Resources. An analysis of changes in our cash flows, financial condition, liquidity, and cash requirements and commitments.
*•*GAAP to non-GAAP Reconciliations. Each non-GAAP financial measure has been reconciled to the most directly comparable GAAP financial measure therein. This section also includes a discussion of the usefulness of non-GAAP financial measures, and material limitations associated with the use of non-GAAP financial measures.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
TRENDS AND UNCERTAINTIES
The demand environment has slowed during the first quarter of fiscal 2023 with uneven growth across various sectors. At the same time, mild improvements to industry-wide supply constraints have helped to ease certain of the supply chain challenges we encountered in the recent past, including facilitating an initial reduction to the high backlog levels we experienced in fiscal 2022. Nevertheless, we expect supply chain and inflationary pressures to continue to impact our overall costs. Additionally, we expect these pressures, along with possibly uneven demand, to moderate our revenue growth and delay certain unit shipments, resulting in part in an elevated level of order backlog and related inventory at the end of the current period.
To address supply chain challenges, we are taking proactive measures, such as guiding certain customer demand to specific products, enhancing component engineering design, and multi-sourcing with indirect procurement. As previously mentioned, although certain of the supply chain pressures are beginning to ease, we expect the supply chain environment to continue to present challenges in the near term.
Additionally, we are experiencing a challenging foreign exchange environment, which has moderated our revenue and earnings growth. We expect the unfavorable foreign exchange effects and inflationary trend to continue in the longer term. We expect the substantial completion of our HPE Next and cost optimization and prioritization restructuring plans, coupled with related cost reduction measures and operational efficiencies, may moderate the impact of unfavorable foreign exchange effects and inflationary pressures in fiscal 2023.
Recent U.S. Tax Legislation
On August 16, 2022, the U.S. government enacted the Inflation Reduction Act of 2022 (the "Inflation Reduction Act") into law. The Inflation Reduction Act includes a new corporate alternative minimum tax (the "Corporate AMT") of 15% on the adjusted financial statement income ("AFSI) of corporations with average AFSI exceeding $1.0 billion over a three-year period. The Corporate AMT is effective for the Company beginning in fiscal 2024. We are evaluating the Corporate AMT and its potential impact on our future U.S. tax expense, cash taxes, and effective tax rate. Additionally, the Inflation Reduction Act imposes an excise tax of 1% tax on the fair market value of net stock repurchases made after December 31, 2022. The impact of this provision will be dependent on the extent of share repurchases made in future periods.
Other than the previous discussion of the ongoing macroeconomic environment of supply chain constraints, inflationary pressures, and recently enacted tax legislation, management believes that there have been no significant changes to the discussion of "Trends and Uncertainties" in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations", of the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 2022.
EXECUTIVE OVERVIEW
We are a global technology leader focused on developing intelligent solutions that allow customers to capture, analyze, and act upon data seamlessly from edge to cloud. We enable customers to accelerate business outcomes by driving new business models, creating new customer and employee experiences, and increasing operational efficiency today and into the future. Our customers range from small-and-medium size businesses to large global enterprises and governmental entities. Our legacy dates to a partnership founded in 1939 by William R. Hewlett and David Packard, and we strive every day to uphold and enhance that legacy through our dedication to providing innovative technological solutions to our customers.
Our operations are organized into six reportable segments for financial reporting purposes: Compute, High Performance Computing and Artificial Intelligence ("HPC & AI"), Storage, Intelligent Edge, Financial Services ("FS"), and Corporate Investments and Other.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Financial Results
The following table summarizes our condensed consolidated GAAP financial results:
| For the three months ended January 31, | |||||||||||||||||||||||||||||||||||
| 2023 | 2022 | Change | |||||||||||||||||||||||||||||||||
| Dollars in millions, except per share amounts | |||||||||||||||||||||||||||||||||||
| Net revenue | $ | 7,809 | $ | 6,961 | 12.2% | ||||||||||||||||||||||||||||||
| Gross profit | $ | 2,658 | $ | 2,344 | 13.4% | ||||||||||||||||||||||||||||||
| Gross profit margin | 34.0 | % | 33.7 | % | 0.3pts | ||||||||||||||||||||||||||||||
| Earnings from operations | $ | 591 | $ | 448 | 31.9% | ||||||||||||||||||||||||||||||
| Operating profit margin | 7.6 | % | 6.4 | % | 1.2pts | ||||||||||||||||||||||||||||||
| Net earnings | $ | 501 | $ | 513 | (2.3)% | ||||||||||||||||||||||||||||||
| Diluted net earnings per share | $ | 0.38 | $ | 0.39 | $(0.01) | ||||||||||||||||||||||||||||||
| Cash flow used in operations | $ | (829) | $ | (76) | $(753) |
Net revenue of $7.8 billion represented an increase of 12.2% (increased 17.7% on a constant currency basis) due to a high order backlog and an improving supply chain environment. The net revenue increase was moderated by unfavorable currency fluctuations. The net revenue increase resulted primarily from effective pricing management in server products, supply and operational improvements in HPE Cray Supercomputing, and strong demand for our networking products. The gross profit margin of 34.0% (or $2.7 billion) represents an increase of 0.3 percentage points from the prior-year period as the combination of pricing discipline in server and storage products and a mix shift to higher margin software rich offerings was offset by lower support services revenue. The operating profit margin of 7.6% represents an increase of 1.2 percentage points due primarily to strong expense management moderated by higher variable compensation expense including planned investments in research and development.
The following table summarizes our condensed consolidated non-GAAP financial results:
| For the three months ended January 31, | |||||||||||||||||||||||||||||||||||
| 2023 | 2022 | Change | |||||||||||||||||||||||||||||||||
| Dollars in millions, except per share amounts | |||||||||||||||||||||||||||||||||||
| Net revenue adjusted for currency | $ | 8,193 | $ | 6,961 | 17.7% | ||||||||||||||||||||||||||||||
| Non-GAAP gross profit | $ | 2,674 | $ | 2,360 | 13.3% | ||||||||||||||||||||||||||||||
| Non-GAAP gross profit margin | 34.2 | % | 33.9 | % | 0.3pts | ||||||||||||||||||||||||||||||
| Non-GAAP earnings from operations | $ | 918 | $ | 768 | 19.5% | ||||||||||||||||||||||||||||||
| Non-GAAP operating profit margin | 11.8 | % | 11.0 | % | 0.8pts | ||||||||||||||||||||||||||||||
| Non-GAAP net earnings | $ | 828 | $ | 697 | 18.8% | ||||||||||||||||||||||||||||||
| Non-GAAP diluted net earnings per share | $ | 0.63 | $ | 0.53 | $0.10 | ||||||||||||||||||||||||||||||
| Free cash flow | $ | (1,326) | $ | (577) | $(749) |
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Each non-GAAP financial measure has been reconciled to the most directly comparable GAAP financial measure herein. Please refer to the section "GAAP to non-GAAP Reconciliations" included in this MD&A for these reconciliations, a discussion of the usefulness of non-GAAP financial measures and material limitations associated with the use of non-GAAP financial measures.
Annualized Revenue Run-rate ("ARR")
ARR represents the annualized revenue of all net HPE GreenLake edge-to-cloud platform services revenue, related financial services revenue (which includes rental income from operating leases and interest income from finance leases), and software-as-a-service, software consumption revenue, and other as-a-service offerings, recognized during a quarter and multiplied by four. We believe that ARR is a metric that allows management to better understand and highlight the potential future performance of our as-a-service business. We also believe ARR provides investors with greater transparency to our financial information and of the performance metric used in our financial and operational decision making and allows investors to see our results “through the eyes of management.” We use ARR as a performance metric. ARR should be viewed independently of net revenue and is not intended to be combined with it.
ARR does not have any standardized definition and is therefore unlikely to be comparable to similarly titled measures presented by other companies. ARR is not a forecast and the active contracts at the end of a reporting period used in calculating ARR may or may not be extended or renewed by our customers.
The following presents our ARR as of January 31, 2023 and 2022:
| For the three months ended January 31, | |||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||
| Dollars in millions | |||||||||||||||||||||||
| ARR | $ | 1,006 | $ | 798 | |||||||||||||||||||
| Year-over-year growth rate | 26% | 23% |
The 26% increase in ARR was due primarily to growth in our HPE GreenLake edge-to-cloud platform and related financial services moderated by unfavorable currency fluctuations. The growth in the HPE GreenLake edge-to-cloud platform was due to an expanding customer installed base. At the segment level, the growth was led by Intelligent Edge as-a-service activity and Storage as-a-service including Zerto.
Dividends
Returning capital to our shareholders remains an important part of our capital allocation framework, which also consists of strategic investments. During the first quarter of fiscal 2023, we paid a quarterly dividend of $0.12 per share to our shareholders. On March 2, 2023, we declared a regular cash dividend of $0.12 per share on our common stock, payable on April 14, 2023, to our shareholders of record as of the close of business on March 17, 2023. As of January 31, 2023, we had a remaining authorization of $1.3 billion for future share repurchases.
RESULTS OF OPERATIONS
Revenue from our international operations has historically represented, and we expect will continue to represent, a majority of our overall net revenue. As a result, our revenue growth has been impacted, and we expect will continue to be impacted, by fluctuations in foreign currency exchange rates. In order to provide a framework for assessing performance excluding the impact of foreign currency fluctuations, we present the year-over-year percentage change in revenue on a constant currency basis, which assumes no change in foreign currency exchange rates from the prior-year period and does not adjust for any repricing or demand impacts from changes in foreign currency exchange rates. This change in revenue on a constant currency basis is calculated as the quotient of (a) current year revenue converted to U.S. dollars using the prior-year period's foreign currency exchange rates divided by (b) the prior-year period revenue. This information is provided so that revenue can be viewed without the effect of fluctuations in foreign currency exchange rates, which is consistent with how management evaluates our revenue results and trends. This constant currency disclosure is provided in addition to, and not as a substitute for, the year-over-year percentage change in revenue on a GAAP basis. Other companies may calculate and define similarly labeled items differently, which may limit the usefulness of this measure for comparative purposes.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Results of operations in dollars and as a percentage of net revenue were as follows:
| For the three months ended January 31, | |||||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||||||||||||||||||||||||||
| Dollars | % of Revenue | Dollars | % of Revenue | ||||||||||||||||||||||||||||||||||||||||||||
| Dollars in millions | |||||||||||||||||||||||||||||||||||||||||||||||
| Net revenue | $ | 7,809 | 100.0 | % | $ | 6,961 | 100.0 | % | |||||||||||||||||||||||||||||||||||||||
| Cost of sales | 5,151 | 66.0 | 4,617 | 66.3 | |||||||||||||||||||||||||||||||||||||||||||
| Gross profit | 2,658 | 34.0 | 2,344 | 33.7 | |||||||||||||||||||||||||||||||||||||||||||
| Research and development | 623 | 8.0 | 504 | 7.2 | |||||||||||||||||||||||||||||||||||||||||||
| Selling, general and administrative | 1,257 | 16.1 | 1,201 | 17.3 | |||||||||||||||||||||||||||||||||||||||||||
| Amortization of intangible assets | 73 | 0.9 | 73 | 1.1 | |||||||||||||||||||||||||||||||||||||||||||
| Transformation costs | 102 | 1.3 | 111 | 1.6 | |||||||||||||||||||||||||||||||||||||||||||
| Disaster charges (recovery) | 1 | — | (1) | — | |||||||||||||||||||||||||||||||||||||||||||
| Acquisition, disposition and other related charges | 11 | 0.1 | 8 | 0.1 | |||||||||||||||||||||||||||||||||||||||||||
| Earnings from operations | 591 | 7.6 | 448 | 6.4 | |||||||||||||||||||||||||||||||||||||||||||
| Interest and other, net | (25) | (0.3) | (5) | — | |||||||||||||||||||||||||||||||||||||||||||
| Tax indemnification and related adjustments | (1) | — | (17) | (0.2) | |||||||||||||||||||||||||||||||||||||||||||
| Non-service net periodic benefit credit | — | — | 36 | 0.5 | |||||||||||||||||||||||||||||||||||||||||||
| Earnings from equity interests | 58 | 0.7 | 31 | 0.4 | |||||||||||||||||||||||||||||||||||||||||||
| Earnings before (provision) benefit for taxes | 623 | 8.0 | 493 | 7.1 | |||||||||||||||||||||||||||||||||||||||||||
| (Provision) benefit for taxes | (122) | (1.6) | 20 | 0.3 | |||||||||||||||||||||||||||||||||||||||||||
| Net earnings | $ | 501 | 6.4 | % | $ | 513 | 7.4 | % |
Net revenue
Net revenue of $7.8 billion represented an increase of $848 million, or 12.2% (increased 17.7% on a constant currency basis). U.S. net revenue increased by $567 million, or 24.5% to $2.9 billion, and net revenue from outside of the U.S. increased by $281 million, or 6.1%, to $4.9 billion.
From a segment perspective, net revenue increased across most of our segments due to the improved demand environment led by revenue growth of 34%, 25%, 14%, 5% and 4% in HPC & AI, Intelligent Edge, Compute, Storage and Financial Services, respectively, and decreased 10% in Corporate Investments and Other.
The components of the weighted net revenue change by segment were as follows:
| For the three months ended January 31, 2023 | |||||||||||
| Percentage points | |||||||||||
| Compute | 5.9 | ||||||||||
| HPC & AI | 3.8 | ||||||||||
| Storage | 0.8 | ||||||||||
| Intelligent Edge | 3.2 | ||||||||||
| Financial Services | 0.4 | ||||||||||
| Corporate Investments | (0.3) | ||||||||||
| Total Segment | 13.8 | ||||||||||
| Elimination of Intersegment net revenue and Other | (1.6) | ||||||||||
| Total HPE | 12.2 |
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Please refer to the section "Segment Information" further below for a discussion of our results of operations for each reportable segment.
Gross profit
Gross profit margin of 34.0%, represents an increase of 0.3 percentage points as the combination of pricing discipline and strong cost management in server and storage products and a mix shift to higher margin software rich offerings was offset by lower support services revenue and higher variable compensation expense.
Operating expenses
Research and development ("R&D")
R&D expense increased by $119 million, or 24% due primarily to higher employee cost driven by higher variable compensation expense.
Selling, general and administrative ("SG&A")
SG&A expense increased by $56 million, or 5% due primarily to higher software expenditures, increased employee cost driven by higher variable compensation expense and increased travel expense as the economy reopens and COVID-19 restrictions ease, all of which contributed 1.6 percentage points, 1.5 percentage points and 1.1 percentage points, respectively, to the change. Additionally, the overall increase in SG&A expense was moderated across various expense categories by favorable currency fluctuations.
Transformation programs and costs
Our transformation programs consist of the cost optimization and prioritization plan (launched in 2020) and the HPE Next initiative (launched in 2017).
Transformation costs decreased by $9 million, or 8% due to lower charges incurred in the current period as these plans approach completion through fiscal 2023. For a further discussion, refer to Note 3, "Transformation Programs" to the Condensed Consolidated Financial Statements in Item 1 of Part I.
Interest and other, net
Interest and other, net expense increased by $20 million due primarily to the impact of the prior period containing gains from equity investments and from the sale of certain assets, and increased interest expense in the current period. This increase was moderated by favorable currency fluctuations and increased interest income from higher interest rates in the current period.
Tax indemnification and related adjustments
We record changes to certain pre-separation and pre-divestiture tax liabilities and tax receivables for which we remain liable on behalf of the separated or divested business, but which may not be subject to indemnification. We recorded Tax indemnification and related adjustments expense of $1 million and $17 million for the three months ended January 31, 2023 and 2022, respectively.
Non-service net periodic benefit credit
Non-service net periodic benefit credit decreased by $36 million due primarily to increased interest cost resulting from higher discount rates, partially offset by higher expected returns on assets and lower amortized actuarial losses in the current periods.
Earnings from equity interests
Earnings from equity interests primarily represents our 49% interest in H3C Technologies Co. Limited ("H3C") and the amortization of our interest in basis difference. Earnings from equity interests increased by $27 million due primarily to the current period containing higher net income earned by H3C.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
(Provision) benefit for taxes
For the three months ended January 31, 2023 and 2022, we recorded income tax expense of $122 million and income tax benefit of $20 million, respectively, which reflects an effective tax rate of 19.6% and (4.1)%, respectively. Our effective tax rate generally differs from the U.S. federal statutory rate of 21% due to favorable tax rates associated with certain earnings from our operations in lower tax jurisdictions throughout the world but are also impacted by discrete tax adjustments during each fiscal period.
For further discussion, refer to Note 5, "Taxes on Earnings" to the Condensed Consolidated Financial Statements in Item 1 of Part I.
Segment Information
Hewlett Packard Enterprise's organizational structure is based on a number of factors that the Chief Operating Decision Maker, who is the Chief Executive Officer ("CEO"), uses to evaluate, view, and run our business operations, which include, but are not limited to, customer base and homogeneity of products and technology. The segments are based on this organizational structure and information reviewed by Hewlett Packard Enterprise's management to evaluate segment results.
As described in Note 1, "Overview and Summary of Significant Accounting Policies," effective at the beginning of the first quarter of fiscal 2023, HPE implemented an organizational change to align its segment financial reporting more closely with its current business structure resulting in changes to the previously reported segment net revenue and earnings from operations of the Compute and Storage segments. These changes had no impact to HPE’s previously reported consolidated GAAP results. A description of the products and services for each segment, along with other pertinent information related to our segments can be found in Note 2, "Segment Information" to the Condensed Consolidated Financial Statements in Item 1 of Part I.
Segment Results
The following table and ensuing discussion provide an overview of our key financial metrics by segment for the three months ended January 31, 2023, as compared to the prior-year period:
| HPE Consolidated | Compute | HPC & AI | Storage | Intelligent Edge | Financial Services | Corporate Investments | ||||||||||||||||||||||||||||||||||||||
| Dollars in millions | ||||||||||||||||||||||||||||||||||||||||||||
| Net revenue(1) | $ | 7,809 | $ | 3,456 | $ | 1,056 | $ | 1,187 | $ | 1,127 | $ | 873 | $ | 293 | ||||||||||||||||||||||||||||||
| Year-over-year change % | 12.2 | % | 13.5 | % | 33.7 | % | 5.2 | % | 25.1 | % | 3.7 | % | (9.8) | % | ||||||||||||||||||||||||||||||
| Earnings (loss) from operations(2) | $ | 591 | $ | 609 | $ | 1 | $ | 142 | $ | 247 | $ | 82 | $ | (55) | ||||||||||||||||||||||||||||||
| Earnings (loss) from operations as a % of net revenue | 7.6 | % | 17.6 | % | 0.1 | % | 12.0 | % | 21.9 | % | 9.4 | % | (18.8) | % | ||||||||||||||||||||||||||||||
| Year-over-year change percentage points | 1.2 | pts | 3.6 | pts | 1.0 | pts | (1.9) | pts | 4.5 | pts | (3.0) | pts | (15.4) | pts |
(1)HPE consolidated net revenue excludes intersegment net revenue.
(2)Segment earnings from operations exclude certain unallocated corporate costs and eliminations, stock-based compensation expense, amortization of initial direct costs, amortization of intangible assets, transformation costs, acquisition, disposition and other related charges, and disaster charges (recovery).
C****ompute
| For the three months ended January 31, | |||||||||||||||||||||||||||||||||||
| 2023 | 2022 | % Change | |||||||||||||||||||||||||||||||||
| Dollars in millions | |||||||||||||||||||||||||||||||||||
| Net revenue | $ | 3,456 | $ | 3,044 | 13.5 | % | |||||||||||||||||||||||||||||
| Earnings from operations | $ | 609 | $ | 427 | 42.6 | % | |||||||||||||||||||||||||||||
| Earnings from operations as a % of net revenue | 17.6 | % | 14.0 | % |
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Compute net revenue increased by $412 million, or 13.5% (increased 19.4% on a constant currency basis) driven by a high order backlog and improvements in the supply chain environment. Leading the increase was higher average unit prices resulting from a combination of increased sales of server configurations with more complex component architectures and disciplined pricing actions. Moderating this increase was unfavorable currency fluctuations and lower unit shipments.
Product revenue growth was driven by the rack server category. Services net revenue declined primarily due to unfavorable currency fluctuations.
Compute earnings from operations as a percentage of net revenue increased 3.6 percentage points due to decreases in costs of products and services as a percentage of net revenue and operating expense as a percentage of net revenue. The decrease in costs of products and services as a percentage of net revenue was primarily due to pricing discipline and strong cost management partially offset by unfavorable currency fluctuations and higher variable compensation. Operating expenses as a percentage of net revenue decreased primarily due to our optimized expense structure partially offset by higher variable compensation expense.
HPC & AI
| For the three months ended January 31, | |||||||||||||||||||||||||||||||||||
| 2023 | 2022 | % Change | |||||||||||||||||||||||||||||||||
| Dollars in millions | |||||||||||||||||||||||||||||||||||
| Net revenue | $ | 1,056 | $ | 790 | 33.7 | % | |||||||||||||||||||||||||||||
| Earnings (loss) from operations | $ | 1 | $ | (7) | (114.3) | % | |||||||||||||||||||||||||||||
| Earnings (loss) from operations as a % of net revenue | 0.1 | % | (0.9) | % |
HPC & AI net revenue increased by $266 million, or 33.7% (increased 37.2% on a constant currency basis) driven by a high order backlog and improvements in the supply environment. Leading the increase was growth in HPC led by the HPE Cray Supercomputing product portfolio, as operational and supply improvements addressed recent challenges with achieving certain customer acceptance milestones for revenue recognition. We also experienced revenue growth in the Data Solutions product category. These increases were moderated by an uneven demand environment in HPE Apollo products, and lower services revenue due primarily to an unfavorable portfolio mix of service offerings and unfavorable currency fluctuations.
HPC & AI earnings from operations as a percentage of net revenue increased 1.0 percentage points due to a decrease in operating expenses as a percentage of net revenue, partially offset by an increase in cost of products and services as a percentage of net revenue. The increase in cost of products and services as a percentage of net revenue was due primarily to lower revenue from higher-margin services and higher variable compensation expense. The decrease in operating expenses as a percentage of net revenue was primarily due to our optimized expense structure moderated by higher variable compensation expense.
Storage
| For the three months ended January 31, | |||||||||||||||||||||||||||||||||||
| 2023 | 2022 | % Change | |||||||||||||||||||||||||||||||||
| Dollars in millions | |||||||||||||||||||||||||||||||||||
| Net revenue | $ | 1,187 | $ | 1,128 | 5.2 | % | |||||||||||||||||||||||||||||
| Earnings from operations | $ | 142 | $ | 157 | (9.6) | % | |||||||||||||||||||||||||||||
| Earnings from operations as a % of net revenue | 12.0 | % | 13.9 | % |
Storage net revenue increased by $59 million or 5.2% (increased 10.5% on a constant currency basis) as improvements in the supply environment were partially offset by unfavorable currency fluctuations. Net revenue increased in Storage products moderated by a net revenue decrease in Storage services. The increase in Storage products was led by higher revenue from HPE Alletra, Hyperconverged and HPE Primera products, partially offset by lower HPE 3PAR revenue, as we transition to next generation product platforms, such as HPE Alletra. The decrease in Storage services was due to lower support services revenue as certain hardware products approach their end-of-life and product transitions.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Storage earnings from operations as a percentage of net revenue decreased 1.9 percentage points due to increases in cost of products and services as a percentage of net revenue and operating expenses as a percentage of net revenue. The increase in cost of products and services as a percentage of net revenue was due primarily to lower revenue from support services as we continue our transition to more software-rich products, unfavorable currency fluctuations, and higher variable compensation expense. These impacts were partially offset by lower supply chain costs to expedite product delivery and disciplined pricing actions. The increase in operating expenses as a percentage of net revenue was due primarily to higher variable compensation expense.
Intelligent Edge
| For the three months ended January 31, | |||||||||||||||||||||||||||||||||||
| 2023 | 2022 | % Change | |||||||||||||||||||||||||||||||||
| Dollars in millions | |||||||||||||||||||||||||||||||||||
| Net revenue | $ | 1,127 | $ | 901 | 25.1 | % | |||||||||||||||||||||||||||||
| Earnings from operations | $ | 247 | $ | 157 | 57.3 | % | |||||||||||||||||||||||||||||
| Earnings from operations as a % of net revenue | 21.9 | % | 17.4 | % |
Intelligent Edge net revenue increased by $226 million, or 25.1% (increased 31.0% on a constant currency basis) primarily due to strong demand, which was reflected in a high backlog, improved supply chain execution, and disciplined pricing actions. As a result, net revenue increased in both products and services, moderated by unfavorable currency fluctuations. The increase in product revenue was primarily driven by the wireless local area network ("WLAN") and switching businesses, which benefited from improvements in the supply environment while services revenue growth was led by our as-a-service offerings.
Intelligent Edge earnings from operations as a percentage of net revenue increased 4.5 percentage points due primarily to decreases in cost of products and services as a percentage of net revenue and operating expenses as a percentage of net revenue. The decrease in cost of product and services as a percentage of net revenue was primarily due to disciplined cost management and pricing actions, moderated by a lower mix of support services revenue and higher variable compensation expense. Operating expenses as a percentage of net revenue decreased primarily due to our cost containment measures partially offset by higher variable compensation expense.
Financial Services
| For the three months ended January 31, | |||||||||||||||||||||||||||||||||||
| 2023 | 2022 | % Change | |||||||||||||||||||||||||||||||||
| Dollars in millions | |||||||||||||||||||||||||||||||||||
| Net revenue | $ | 873 | $ | 842 | 3.7 | % | |||||||||||||||||||||||||||||
| Earnings from operations | $ | 82 | $ | 104 | (21.2) | % | |||||||||||||||||||||||||||||
| Earnings from operations as a % of net revenue | 9.4 | % | 12.4 | % |
FS net revenue increased by $31 million, or 3.7% (increased 8.1% on a constant currency basis) due primarily to higher rental revenue from higher average operating leases and higher asset management revenue from lease buyouts, partially offset by unfavorable currency fluctuations.
FS earnings from operations as a percentage of net revenue decreased 3.0 percentage points due to an increase in cost of services as a percentage of net revenue, while operating expenses as a percentage of net revenue were relatively flat. The increase to cost of services as a percentage of net revenue resulted primarily from a combination of higher borrowing costs and higher depreciation expense.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Financing Volume
| For the three months ended January 31, | |||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||
| In millions | |||||||||||||||||||||||
| Financing volume | $ | 1,600 | $ | 1,388 |
Financing volume, which represents the amount of financing provided to customers for equipment and related software and services, including intercompany activity, increased by 15.3% due primarily to higher financing of HPE and third-party product sales and services, partially offset by unfavorable currency fluctuations.
Portfolio Assets and Ratios
The portfolio assets and ratios derived from the segment balance sheets for FS were as follows:
| As of | |||||||||||
| January 31, 2023 | October 31, 2022 | ||||||||||
| Dollars in millions | |||||||||||
| Financing receivables, gross | $ | 8,859 | $ | 8,359 | |||||||
| Net equipment under operating leases | 4,267 | 4,103 | |||||||||
| Capitalized profit on intercompany equipment transactions(1) | 259 | 241 | |||||||||
| Intercompany leases(1) | 97 | 97 | |||||||||
| Gross portfolio assets | 13,482 | 12,800 | |||||||||
| Allowance for credit losses(2) | 238 | 222 | |||||||||
| Operating lease equipment reserve | 48 | 44 | |||||||||
| Total reserves | 286 | 266 | |||||||||
| Net portfolio assets | $ | 13,196 | $ | 12,534 | |||||||
| Reserve coverage | 2.1 | % | 2.1 | % | |||||||
| Debt-to-equity ratio(3) | 7.0x | 7.0x |
(1)Intercompany activity is eliminated in consolidation.
(2)Allowance for credit losses for financing receivables includes both the short- and long-term portions.
(3)Debt benefiting FS consists of intercompany equity that is treated as debt for segment reporting purposes, intercompany debt, and borrowing- and funding-related activity associated with FS and its subsidiaries. Debt benefiting FS totaled $12.1 billion and $11.5 billion at January 31, 2023 and October 31, 2022, respectively, and was determined by applying an assumed debt-to-equity ratio, which management believes to be comparable to that of other similar financing companies. FS equity at January 31, 2023 and October 31, 2022 was $1.7 billion and $1.6 billion, respectively.
As of January 31, 2023 and October 31, 2022, FS net cash and cash equivalents balances were approximately $1.0 billion and $0.9 billion, respectively.
Net portfolio assets as of January 31, 2023 increased 5.3% from October 31, 2022. The increase generally resulted from favorable currency fluctuations, along with new financing volume exceeding portfolio runoff during the period.
FS bad debt expense includes charges to general reserves, specific reserves, and write-offs for sales-type, direct-financing, and operating leases. For the three months ended January 31, 2023 and 2022, FS recorded net bad debt expense of $19 million and $23 million, respectively.
As of January 31, 2023, FS experienced an increase in billed finance receivables compared to October 31, 2022, which included a limited impact to collections from customers in Russia. We are currently unable to fully predict the extent to which our exit from Russia and Belarus businesses may adversely impact future collections of our receivables.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Corporate Investments and Other
| For the three months ended January 31, | ||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | % Change | ||||||||||||||||||||||||||||||||||||
| Dollars in millions | ||||||||||||||||||||||||||||||||||||||
| Net revenue | $ | 293 | $ | 325 | (9.8) | % | ||||||||||||||||||||||||||||||||
| Loss from operations | $ | (55) | $ | (11) | (400.0) | % | ||||||||||||||||||||||||||||||||
| Loss from operations as a % of net revenue | (18.8) | % | (3.4) | % |
Corporate Investments and Other net revenue decreased by $32 million, or 9.8% (decreased 1.5% on a constant currency basis) due primarily to unfavorable currency fluctuations.
Corporate Investments and Other loss from operations as a percentage of net revenue increased by 15.4 percentage points due primarily to increases in cost of services as a percentage of net revenue and operating expenses as a percentage of net revenue. The increase in cost of services as a percentage of net revenue was due primarily to the scale of the net revenue decline driven by unfavorable currency fluctuations and higher services delivery costs due to higher variable compensation expense. The increase in operating expenses as a percentage of net revenue was due primarily to higher variable compensation expense.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our Condensed Consolidated Financial Statements are prepared in accordance with U.S. Generally Accepted Accounting Principles ("GAAP"), which requires us to make estimates, judgments, and assumptions that affect the reported amounts of assets, liabilities, net revenue, and expenses, and the disclosure of contingent liabilities. An accounting policy is deemed to be critical if the nature of the estimate or assumption it incorporates is subject to a material level of judgment related to matters that are highly uncertain, and changes in those estimates and assumptions are reasonably likely to materially impact our Condensed Consolidated Financial Statements.
Estimates and judgments are based on historical experience, forecasted events, and various other assumptions that we believe to be reasonable under the circumstances. Estimates and judgments may vary under different assumptions or conditions. We evaluate our estimates and judgments on an ongoing basis. Accounting policies that are critical in the portrayal of our financial condition and results of operations and require management’s most difficult, subjective, or complex judgements include revenue recognition, taxes on earnings, business combinations, impairment assessment of goodwill and intangible assets, and contingencies.
As of January 31, 2023, there have been no significant changes to our critical accounting estimates since our Annual Report on Form 10-K for the fiscal year ended October 31, 2022.
LIQUIDITY AND CAPITAL RESOURCES
Current Overview
We use cash generated by operations as our primary source of liquidity. We believe that internally generated cash flows will be generally sufficient to support our operating businesses, capital expenditures, product development initiatives, acquisitions, and disposal activities including legal settlements, restructuring activities, transformation costs, indemnifications, maturing debt, interest payments, and income tax payments, in addition to any future investments, share repurchases, and shareholder dividend payments. We expect to supplement this short-term liquidity, if necessary, by accessing the capital markets, issuing commercial paper, and borrowing under credit facilities made available by various domestic and foreign financial institutions. However, our access to capital markets may be constrained and our cost of borrowing may increase under certain business, market, and economic conditions. We anticipate that the funds made available and cash generated from operations, along with our access to capital markets, will be sufficient to meet our liquidity requirements for at least the next twelve months and for the foreseeable future thereafter. Our liquidity is subject to various risks including the risks identified in the section entitled "Risk Factors" in Item 1A of Part II and market risks identified in the section entitled "Quantitative and Qualitative Disclosures about Market Risk" in Item 3 of Part I.
Our cash balances are held in numerous locations throughout the world, with a substantial amount held outside the U.S. as of January 31, 2023. We utilize a variety of planning and financing strategies in an effort to ensure that our worldwide cash is available when and where it is needed.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Amounts held outside of the U.S. are generally utilized to support our non-U.S. liquidity needs. Repatriations of amounts held outside the U.S. generally will not be taxable from a U.S. federal tax perspective, but may be subject to state income or foreign withholding tax. Where local restrictions prevent an efficient intercompany transfer of funds, our intent is to keep cash balances outside of the U.S. and to meet liquidity needs through ongoing cash flows, external borrowings, or both. We do not expect restrictions or potential taxes incurred on repatriation of amounts held outside of the U.S. to have a material effect on our overall liquidity, financial condition, or results of operations.
In connection with the share repurchase program previously authorized by our Board of Directors, during the first three months of fiscal 2023, we repurchased and settled an aggregate amount of $73 million. As of January 31, 2023, we had a remaining authorization of $1.3 billion for future share repurchases. For more information on our share repurchase program, refer to the section entitled "Unregistered Sales of Equity Securities and Use of Proceeds" in Item 2 of Part II.
Pursuant to the Shareholders' Agreement among us, Unisplendor International Technology Limited ("UNIS"), and H3C dated as of May 1, 2016, as amended from time to time, and most recently on October 28, 2022, we delivered a notice to UNIS on December 30, 2022, to exercise our right to put to UNIS, for cash consideration, all of the H3C shares held by us, which represent 49% of the total issued share capital of H3C, at a price per share of 15.0 times the last twelve months’ post-tax profit of H3C (measured as of the period ending April 30, 2022) divided by the total number of H3C shares outstanding as of December 30, 2022. The determination of the purchase price remains subject to agreement among the parties, taking into account certain adjustments to the post-tax profit of H3C pursuant to the terms of the Shareholders’ Agreement and the availability of the necessary information to make such determination. Following a determination of the purchase price and the timing of the receipt of proceeds, we intend to consider a range of allocation activities, in line with our practice of pursuing a balanced, returns-based approach for capital allocation decisions, including but not limited to organic and strategic investments, return of capital to shareholders, repayment and/or redemption of outstanding debt, and general corporate purposes. The disposition is also subject to obtaining required regulatory approvals.
Liquidity
Our cash, cash equivalents, restricted cash, total debt, and available borrowing resources were as follows:
| As of | |||||||||||
| January 31, 2023 | October 31, 2022 | ||||||||||
| In millions | |||||||||||
| Cash, cash equivalents and restricted cash | $ | 2,844 | $ | 4,763 | |||||||
| Total debt | 12,926 | 12,465 | |||||||||
| Available borrowing resources | 5,260 | 6,161 | |||||||||
| Commercial paper programs(1) | 4,311 | 5,208 | |||||||||
| Uncommitted lines of credit | $ | 949 | $ | 953 |
(1) The maximum aggregate borrowing amount of the commercial paper programs and revolving credit facility is $5.75 billion.
The following tables represent the way in which management reviews cash flows:
| For the three months ended January 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| In millions | |||||||||||
| Net cash used in operating activities | $ | (829) | $ | (76) | |||||||
| Net cash used in investing activities | (1,237) | (335) | |||||||||
| Net cash provided by financing activities | 9 | 355 | |||||||||
| Effect of exchange rate changes on cash, cash equivalents, and restricted cash | 138 | — | |||||||||
| Net decrease in cash, cash equivalents and restricted cash | $ | (1,919) | $ | (56) | |||||||
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Operating Activities
For the three months ended January 31, 2023, net cash used in operating activities increased by $0.8 billion, as compared to the corresponding period in fiscal 2022. The increase was primarily due to unfavorable working capital resulting from higher vendor payments, an increase in financing receivables, moderated by unfavorable hedging positions and the prior-year period containing higher cash payouts for variable compensation.
Our working capital metrics and cash conversion impacts were as follows:
| As of | As of | ||||||||||||||||||||||||||||||||||||||||
| January 31, 2023 | October 31, 2022 | Change | January 31, 2022 | October 31, 2021 | Change | Y/Y Change | |||||||||||||||||||||||||||||||||||
| Days of sales outstanding in accounts receivable ("DSO") | 48 | 47 | 1 | 44 | 49 | (5) | 4 | ||||||||||||||||||||||||||||||||||
| Days of supply in inventory ("DOS") | 81 | 88 | (7) | 104 | 82 | 22 | (23) | ||||||||||||||||||||||||||||||||||
| Days of purchases outstanding in accounts payable ("DPO") | (114) | (149) | 35 | (128) | (128) | — | 14 | ||||||||||||||||||||||||||||||||||
| Cash conversion cycle | 15 | (14) | 29 | 20 | 3 | 17 | (5) |
The cash conversion cycle is the sum of DSO and DOS less DPO. Items which may cause the cash conversion cycle in a particular period to differ include, but are not limited to, changes in business mix, changes in payment terms (including extended payment terms to customers or from suppliers), early or late invoice payments from customers or to suppliers, the extent of receivables factoring, seasonal trends, the timing of the revenue recognition and inventory purchases within the period, the impact of commodity costs, and acquisition activity.
DSO measures the average number of days our receivables are outstanding. DSO is calculated by dividing ending accounts receivable, net of allowance for doubtful accounts, by a 90-day average of net revenue. Compared to the corresponding three-month period in fiscal 2022, the increase in DSO in the current period was primarily due to unfavorable billings linearity and extended payment terms.
DOS measures the average number of days from procurement to sale of our products. DOS is calculated by dividing ending inventory by a 90-day average of cost of goods sold. Compared to the corresponding three-month period in fiscal 2022, the decrease in DOS in the current period was primarily due to lower levels of inventory resulting from a reduction in our backlog positions, and lower replenishment of materials.
DPO measures the average number of days our accounts payable balances are outstanding. DPO is calculated by dividing ending accounts payable by a 90-day average of cost of goods sold. Compared to the corresponding three-month period in fiscal 2022, the decrease in DPO in the current period was primarily due to higher vendor payments from prior period purchases and lower inventory purchases during the current period.
Investing Activities
For the three months ended January 31, 2023, net cash used in investing activities increased by $0.9 billion, as compared to the corresponding period in fiscal 2022. The increase was primarily due to higher cash utilized in net financial collateral activities of $0.8 billion and higher cash utilized for investment in property, plant and equipment, net of sales proceeds of $0.1 billion, as compared to the prior-year period.
Financing Activities
For the three months ended January 31, 2023, net cash provided by financing activities decreased by $0.3 billion, as compared to the corresponding period in fiscal 2022. This was primarily due to lower proceeds from debt, net of issuance cost moderated by higher cash from short term borrowings, as compared to the prior-year period.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Free Cash Flow
| For the three months ended January 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| In millions | |||||||||||
| Net cash used in operating activities | $ | (829) | $ | (76) | |||||||
| Investment in property, plant and equipment | (794) | (624) | |||||||||
| Proceeds from sale of property, plant and equipment | 159 | 123 | |||||||||
| Effect of exchange rate changes on cash, cash equivalents, and restricted cash | 138 | — | |||||||||
| Free cash flow | $ | (1,326) | $ | (577) |
Free cash flow represents cash flow from operations less net capital expenditures (investments in property, plant and equipment ("PP&E") less proceeds from the sale of PP&E), and adjusted for the effect of exchange rate fluctuations on cash, cash equivalents, and restricted cash. For the three months ended January 31, 2023, free cash flow decreased by $0.7 billion, as compared to the corresponding period in fiscal 2022. The decrease was due to lower cash generated from operations due to unfavorable working capital resulting from higher vendor payments, higher cash utilized for investments in PP&E, net of sales proceeds, moderated by a favorable currency impact on cash, cash equivalents, and restricted cash, as compared to the prior-year period.
For more information on the impact of operating assets and liabilities to our cash flows, see Note 6, "Balance Sheet Details" to the Condensed Consolidated Financial Statements in Item 1 of Part I.
Capital Resources
We maintain debt levels that we establish through consideration of several factors, including cash flow expectations, cash requirements for operations, investment plans (including acquisitions), share repurchase activities, our cost of capital, and targeted capital structure. We maintain a revolving credit facility and two commercial paper programs, "the Parent Programs", and a wholly-owned subsidiary maintains a third program. There have been no changes to our commercial paper programs, revolving credit facility and shelf registration statement since October 31, 2022. For further information on our capital resources, see Note 11, "Borrowings" to the Condensed Consolidated Financial Statements in Item 1 of Part I.
As of January 31, 2023 and October 31, 2021, no borrowings were outstanding under our $4.75 billion revolving credit facility.
As of January 31, 2023, $759 million was outstanding under the Parent Programs. As of October 31, 2022, no borrowings were outstanding under the Parent Programs. As of January 31, 2023 and October 31, 2022, $680 million and $542 million, respectively, were outstanding under our subsidiary’s program. During the first three months of fiscal 2023, we issued $1.9 billion and repaid $1.1 billion of commercial paper.
Cash Requirements and Commitments
Contractual Obligations
Our contractual obligations have not changed materially outside of the normal course of business since October 31, 2022. For further information see "Cash Requirements and Commitments" in Item 7 of Part II of our Annual Report on Form 10-K for the fiscal year ended October 31, 2022.
Retirement Benefit Plan Funding
For the remainder of fiscal 2023, we anticipate making contributions of approximately $122 million to our non-U.S. pension plans. Our policy is to fund our pension plans so that we meet at least the minimum contribution requirements, as established by various authorities including local government and tax authorities.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Restructuring Plans
As of January 31, 2023, we expect to make future cash payments of approximately $420 million in connection with our approved restructuring plans, which includes $280 million expected to be paid through the remainder of fiscal 2023 and $140 million expected to be paid thereafter. For more information on our restructuring activities, see Note 3, "Transformation Programs" to the Condensed Consolidated Financial Statements in Item 1 of Part I.
Uncertain Tax Positions
As of January 31, 2023, we had approximately $320 million of recorded liabilities and related interest and penalties pertaining to uncertain tax positions. These liabilities and related interest and penalties include $36 million expected to be paid within one year. For the remaining amount, we are unable to make a reasonable estimate as to when cash settlement with the tax authorities might occur due to the uncertainties related to these tax matters. Payments of these obligations would result from settlements with taxing authorities. For more information on our uncertain tax positions, see Note 5, "Taxes on Earnings" to the Condensed Consolidated Financial Statements in Item 1 of Part I.
Off-Balance Sheet Arrangements
As part of our ongoing business, we have not participated in transactions that generate material relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
We have third-party revolving short-term financing arrangements intended to facilitate the working capital requirements of certain customers. For more information on our third-party revolving short-term financing arrangements, see Note 6, "Balance Sheet Details", to the Condensed Consolidated Financial Statements in Item 1 of Part I.
GAAP to non-GAAP Reconciliations
The following tables provide a reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure for the periods presented:
Reconciliation of GAAP gross profit and gross profit margin to non-GAAP gross profit and gross profit margin.
| For the three months ended January 31, | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dollars | % of Revenue | Dollars | % of Revenue | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dollars in millions | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| GAAP Net revenue | $ | 7,809 | 100 | % | $ | 6,961 | 100 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||
| GAAP Cost of sales | 5,151 | 66.0 | % | 4,617 | 66.3 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| GAAP Gross profit | 2,658 | 34.0 | % | 2,344 | 33.7 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Non-GAAP adjustments | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Amortization of initial direct costs | — | — | % | 1 | — | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | 16 | 0.2 | % | 15 | 0.2 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Non-GAAP Gross Profit | $ | 2,674 | 34.2 | % | $ | 2,360 | 33.9 | % |
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Reconciliation of GAAP earnings from operations and operating profit margin to non-GAAP earnings from operations and operating profit margin.
| For the three months ended January 31, | |||||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||||||||||||||||||||||||||
| Dollars | % of Revenue | Dollars | % of Revenue | ||||||||||||||||||||||||||||||||||||||||||||
| Dollars in millions | |||||||||||||||||||||||||||||||||||||||||||||||
| GAAP earnings from operations | $ | 591 | 7.6 | % | $ | 448 | 6.4 | % | |||||||||||||||||||||||||||||||||||||||
| Non-GAAP adjustments: | |||||||||||||||||||||||||||||||||||||||||||||||
| Amortization of initial direct costs | — | — | % | 1 | — | % | |||||||||||||||||||||||||||||||||||||||||
| Amortization of intangible assets | 73 | 0.9 | % | 73 | 1.0 | % | |||||||||||||||||||||||||||||||||||||||||
| Transformation costs | 102 | 1.3 | % | 111 | 1.6 | % | |||||||||||||||||||||||||||||||||||||||||
| Disaster charges (recovery) | 1 | — | % | (1) | — | % | |||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | 140 | 1.8 | % | 128 | 1.8 | % | |||||||||||||||||||||||||||||||||||||||||
| Acquisition, disposition and other related charges | 11 | 0.2 | % | 8 | 0.2 | % | |||||||||||||||||||||||||||||||||||||||||
| Non-GAAP earnings from operations | $ | 918 | 11.8 | % | $ | 768 | 11.0 | % |
Reconciliation of GAAP net earnings and diluted net earnings per share to non-GAAP net earnings and diluted net earnings per share.
| For the three months ended January 31, | |||||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||||||||||||||||||||||||||
| Dollars | Diluted net earnings per share | Dollars | Diluted net earnings per share | ||||||||||||||||||||||||||||||||||||||||||||
| Dollars in millions | |||||||||||||||||||||||||||||||||||||||||||||||
| GAAP net earnings | $ | 501 | $ | 0.38 | $ | 513 | $ | 0.39 | |||||||||||||||||||||||||||||||||||||||
| Non-GAAP adjustments: | |||||||||||||||||||||||||||||||||||||||||||||||
| Amortization of initial direct costs | — | — | 1 | — | |||||||||||||||||||||||||||||||||||||||||||
| Amortization of intangible assets | 73 | 0.06 | 73 | 0.06 | |||||||||||||||||||||||||||||||||||||||||||
| Transformation costs | 102 | 0.07 | 111 | 0.08 | |||||||||||||||||||||||||||||||||||||||||||
| Disaster charges (recovery) | 1 | — | (1) | — | |||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | 140 | 0.11 | 128 | 0.10 | |||||||||||||||||||||||||||||||||||||||||||
| Acquisition, disposition and other related charges | 11 | 0.01 | 8 | 0.01 | |||||||||||||||||||||||||||||||||||||||||||
| Tax indemnification and related adjustments | 1 | — | 17 | 0.01 | |||||||||||||||||||||||||||||||||||||||||||
| Non-service net periodic benefit credit | — | — | (36) | (0.03) | |||||||||||||||||||||||||||||||||||||||||||
| Earnings from equity interests(1) | 12 | 0.01 | 17 | 0.01 | |||||||||||||||||||||||||||||||||||||||||||
| Adjustments for taxes | (13) | (0.01) | (134) | (0.10) | |||||||||||||||||||||||||||||||||||||||||||
| Non-GAAP net earnings | $ | 828 | $ | 0.63 | $ | 697 | $ | 0.53 |
(1) Represents the amortization of basis difference adjustments related to H3C. The three months ended January 31, 2023 includes the Company's portion of intangible asset impairment charges from H3C of $8 million.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Reconciliation of net cash used in operating activities to free cash flow.
| For the three months ended January 31, | |||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||
| In millions | |||||||||||||||||||||||
| Net cash used in operating activities | $ | (829) | $ | (76) | |||||||||||||||||||
| Investment in property, plant and equipment | (794) | (624) | |||||||||||||||||||||
| Proceeds from sale of property, plant and equipment | 159 | 123 | |||||||||||||||||||||
| Effect of exchange rate changes on cash, cash equivalents, and restricted cash | 138 | — | |||||||||||||||||||||
| Free cash flow | $ | (1,326) | $ | (577) |
Non-GAAP financial measures
The non-GAAP financial measures presented are net revenue on a constant currency basis, non-GAAP gross profit, non-GAAP gross profit margin, non-GAAP earnings from operations, non-GAAP operating profit margin (non-GAAP earnings from operations as a percentage of net revenue), non-GAAP net earnings, non-GAAP diluted net earnings per share, and free cash flow. These non-GAAP financial measures are used by management for purposes of evaluating our historical and prospective financial performance, as well as evaluating our performance relative to our competitors. These non-GAAP financial measures are not computed in accordance with, or as an alternative to, generally accepted accounting principles in the United States. The GAAP measure most directly comparable to net revenue on a constant currency basis is net revenue. The GAAP measure most directly comparable to non-GAAP gross profit is gross profit. The GAAP measure most directly comparable to non-GAAP gross profit margin is gross profit margin. The GAAP measure most directly comparable to non-GAAP earnings from operations is earnings from operations. The GAAP measure most directly comparable to non-GAAP operating profit margin (non-GAAP earnings from operations as a percentage of net revenue) is operating profit margin (earnings from operations as a percentage of net revenue). The GAAP measure most directly comparable to non-GAAP net earnings is net earnings. The GAAP measure most directly comparable to non-GAAP diluted net earnings per share is diluted net earnings per share. The GAAP measure most directly comparable to free cash flow is cash flow from operations.
Net revenue on a constant currency basis assumes no change in the foreign exchange rate from the prior-year period. Non-GAAP gross profit and non-GAAP gross profit margin are defined to exclude charges related to the amortization of initial direct costs, and stock-based compensation expense. Non-GAAP earnings from operations and non-GAAP operating profit margin (non-GAAP earnings from operations as a percentage of net revenue) consist of earnings from operations excluding any charges related to the amortization of initial direct costs, amortization of intangible assets, transformation costs, stock-based compensation expense, disaster charges (recovery), and acquisition, disposition and other related charges. Non-GAAP net earnings and non-GAAP diluted net earnings per share consist of net earnings or diluted net earnings per share excluding those same charges, as well as items such as tax indemnification and related adjustments, non-service net periodic benefit credit, earnings from equity interests, and adjustments for taxes. The Adjustments for taxes line item includes certain income tax valuation allowances and separation taxes, the impact of tax reform, structural rate adjustment, excess tax benefit from stock-based compensation, and adjustments for additional taxes or tax benefits associated with each non-GAAP item. We believe that excluding the items mentioned above from these non-GAAP financial measures allows management to better understand our consolidated financial performance in relation to the operating results of our segments. Management does not believe that the excluded items are reflective of ongoing operating results, and excluding them facilitates a more meaningful evaluation of our current operating performance in comparison to our peers. The excluded items can be inconsistent in amount and frequency and/or not reflective of the operational performance of the business.
These non-GAAP financial measures have limitations as analytical tools, and these measures should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. Some of the limitations in relying on these non-GAAP financial measures are that they can have a material impact on the equivalent GAAP earnings measures and cash flows, they may be calculated differently by other companies and may not reflect the full economic effect of the loss in value of certain assets.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
We compensate for these limitations on the use of non-GAAP financial measures by relying primarily on our GAAP results and using non-GAAP financial measures only as a supplement. We also provide a reconciliation of each non-GAAP financial measure to its most directly comparable GAAP measure. We believe that providing net revenue on a constant currency basis, non-GAAP gross profit, non-GAAP gross profit margin, non-GAAP earnings from operations, non-GAAP operating profit margin, non-GAAP net earnings, non-GAAP diluted net earnings per share, and free cash flow, in addition to the related GAAP measures provides greater transparency to the information used in our financial and operational decision making and allows the reader of our Condensed Consolidated Financial Statements to see our financial results “through the eyes” of management.
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