Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

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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.

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 and six months ended April 30, 2023 to the comparable prior-year periods and where appropriate, as of April 30, 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 mixed macroeconomic environment of supply chain constraints (though easing), conservative customer spending environment, inflationary trend and foreign exchange 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 use of 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.

  • 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 use, usefulness and economic substance of the non-GAAP financial measures, along with a discussion of material limitations, and compensation for those limitations, associated with the use of non-GAAP financial measures.

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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

TRENDS AND UNCERTAINTIES

The elevated backlog levels we experienced in fiscal 2022 generally declined in fiscal 2023 as supply chain constraints eased. However, our order book in segments such as Intelligent Edge and Compute remain above historically normal levels. At the same time, in the second quarter of fiscal 2023, new order growth declined on a year-over-year basis, due in part to elongated sales cycles as customers adopted a conservative approach to spending in a mixed macroeconomic environment. Operationally, the year-over-year segment performance was strong while the sequential segment performance was mixed. We expect the mixed macroeconomic environment to continue to moderate our revenue growth in the near term. At the same time, improvements to industry-wide supply constraints have helped to ease certain supply chain challenges we encountered in the recent past, including the increased availability of supply and lower material and logistics costs.

Additionally, we are experiencing a challenging foreign exchange environment, which has moderated our revenue and earnings growth. We expect the unfavorable foreign exchange effects along with an inflationary trend to continue in the longer term. We expect the substantial completion of our HPE Next Plan and Cost Optimization and Prioritization Plan, coupled with pricing actions we implemented in response to an inflationary trend, related cost reduction measures and operational efficiencies, may moderate the impact of unfavorable foreign exchange effects 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.

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.

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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 April 30,For the six months ended April 30,
20232022Change20232022Change
Dollars in millions, except per share amounts
Net revenue$6,973$6,7133.9%$14,782$13,6748.1%
Gross profit$2,512$2,17315.6%$5,170$4,51714.5%
Gross profit margin36.0%32.4%3.6pts35.0%33.0%2.0pts
Earnings from operations$520$207151.2%$1,111$65569.6%
Operating profit margin7.5%3.1%4.4pts7.5%4.8%2.7pts
Net earnings$418$25067.2%$919$76320.4%
Diluted net earnings per share$0.32$0.19$0.13$0.70$0.57$0.13
Cash flow provided by operations$889$379$510$60$303$(243)

Three months ended April 30, 2023 compared with the three months ended April 30, 2022

Net revenue of $7.0 billion represented an increase of 3.9% (increased 8.6% on a constant currency basis) primarily due to higher average unit prices (“AUPs”) in the Intelligent Edge segment, moderated by unfavorable currency fluctuations. The gross profit margin of 36.0% (or $2.5 billion) represents an increase of 3.6 percentage points from the prior-year period led by the impact of higher-margin networking revenue, higher AUPs in Compute and Intelligent Edge, lower supply chain and commodity costs, and the impact of charges in the prior period from expected credit losses resulting from our exit from Russia and Belarus. The operating profit margin of 7.5% represents an increase of 4.4 percentage points due primarily to the gross profit margin improvement, lower transformation expense, and lower fixed employee costs.

Six months ended April 30, 2023 compared with the six months ended April 30, 2022

Net revenue of $14.8 billion represented an increase of 8.1% (increased 13.2% on a constant currency basis) primarily due to higher AUPs in the Intelligent Edge segment and higher customer acceptances in the HPC & AI segment, moderated by unfavorable currency fluctuations. The gross profit margin of 35.0% (or $5.2 billion) represents an increase of 2.0 percentage points from the prior-year period due to the impact of higher-margin networking revenue, higher AUPs in Compute and Intelligent Edge, lower supply chain and commodity costs and the impact of charges in the prior period from expected credit losses resulting from our exit from Russia and Belarus. The operating profit margin of 7.5% represents an increase of 2.7 percentage points primarily due to the aforementioned gross margin improvement and lower transformation expenses moderated by higher planned investments in research and development.

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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

The following table summarizes our condensed consolidated non-GAAP financial results:

For the three months ended April 30,For the six months ended April 30,
20232022Change20232022Change
Dollars in millions, except per share amounts
Net revenue in constant currency$7,292$6,7138.6%$15,485$13,67413.2%
Non-GAAP gross profit$2,525$2,29310.1%$5,199$4,65311.7%
Non-GAAP gross profit margin36.2%34.2%2.0pts35.2%34.0%1.2pts
Non-GAAP earnings from operations$799$62727.4%$1,717$1,39523.1%
Non-GAAP operating profit margin11.5%9.3%2.2pts11.6%10.2%1.4pts
Non-GAAP net earnings$685$58317.5%$1,513$1,28018.2%
Non-GAAP diluted net earnings per share$0.52$0.44$0.08$1.15$0.96$0.19
Free cash flow$288$(211)$499$(1,038)$(788)$(250)

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 use, usefulness and economic substance of the non-GAAP financial measures, along with a discussion of material limitations, and compensation for those 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 calculated as of April 30, 2023 and 2022:

As of April 30,
20232022
Dollars in millions
ARR$1,116$829
Year-over-year growth rate35%22%

The 35% year-over year 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 led by 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 second quarter of fiscal 2023, we paid a quarterly dividend of $0.12 per share to our shareholders. On May 30, 2023, we declared a regular cash dividend of $0.12 per share on our common stock, payable on July 14, 2023, to our shareholders of record as of the close of business on June 15, 2023. As of April 30, 2023, we had a remaining authorization of $1.2 billion for future share repurchases.

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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

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.

Results of operations in dollars and as a percentage of net revenue were as follows:

For the three months ended April 30,For the six months ended April 30,
2023202220232022
Dollars% of RevenueDollars% of RevenueDollars% of RevenueDollars% of Revenue
Dollars in millions
Net revenue$6,973100.0%$6,713100.0%$14,782100.0%$13,674100.0%
Cost of sales4,46164.04,54067.69,61265.09,15767.0
Gross profit2,51236.02,17332.45,17035.04,51733.0
Research and development5708.25177.71,1938.11,0217.5
Selling, general and administrative1,26918.21,24918.62,52617.12,45017.9
Amortization of intangible assets710.9741.21441.01471.1
Transformation costs600.9981.41621.12091.5
Disaster charges3—200.34—190.1
Acquisition, disposition and other related charges190.380.1300.2160.1
Earnings from operations5207.52073.11,1117.56554.8
Interest and other, net(54)(0.8)——(79)(0.5)(5)—
Tax indemnification and related adjustments60.1——5—(17)(0.1)
Non-service net periodic benefit credit1—360.51—720.4
Earnings from equity interests490.7330.51070.7640.5
Earnings before provision for taxes5227.52764.11,1457.77695.6
Provision for taxes(104)(1.5)(26)(0.4)(226)(1.5)(6)—
Net earnings$4186.0%$2503.7%$9196.2%$7635.6%

Three and six months ended April 30, 2023 compared with the three and six months ended April 30, 2022

Net revenue

For the three months ended April 30, 2023, total net revenue of $7.0 billion represented an increase of $260 million, or 3.9% (increased 8.6% on a constant currency basis). U.S. net revenue increased by $236 million, or 10.9% to $2.4 billion, and net revenue from outside of the U.S. increased by $24 million, or 0.5%, to $4.6 billion.

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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

For the six months ended April 30, 2023, total net revenue of $14.8 billion represented an increase of $1,108 million, or 8.1% (increased 13.2% on a constant currency basis). U.S. net revenue increased by $804 million, or 18.0% to $5.3 billion, and net revenue from outside of the U.S. increased by $304 million, or 3.3%, to $9.5 billion.

The components of the weighted net revenue change by segment were as follows:

For the three months ended April 30, 2023For the six months ended April 30, 2023
Percentage points
Compute(3.7)1.2
HPC & AI1.92.9
Storage(0.4)0.2
Intelligent Edge6.54.8
Financial Services0.50.5
Corporate Investments and Other(0.5)(0.4)
Total Segment4.39.2
Elimination of Intersegment net revenue and Other(0.4)(1.1)
Total HPE3.98.1

Three months ended April 30, 2023 compared with three months ended April 30, 2022

From a segment perspective, the primary factors contributing to the change in total net revenue are summarized as follows:

  • Compute net revenue decrease of $250 million, or 8.3%, primarily due to a decline in server unit volume and unfavorable currency fluctuations moderated by higher AUPs

  • HPC & AI net revenue increase of $130 million, or 18.3%, primarily due to higher customer acceptance

  • Storage net revenue decrease of $29 million, or 2.7%, primarily due to unfavorable currency fluctuations, partially offset by improvements in the supply environment

  • Intelligent Edge net revenue increase of $437 million, or 50.4%, primarily due to increased AUPs and volume and product mix effect

  • Financial Services net revenue increase of $35 million, or 4.3%, primarily due to higher rental revenue from higher average operating leases and higher finance income on finance leases due to an increasing interest rate environment

  • Corporate Investments and Other net revenue decrease of $31 million, or 9.5%, primarily due to unfavorable currency fluctuations

Six months ended April 30, 2023 compared with six months ended April 30, 2022

From a segment perspective, the primary factors contributing to the change in total net revenue are summarized as follows:

  • Compute net revenue increase of $162 million, or 2.7%, primarily due to higher AUPs moderated by lower server unit volume and unfavorable currency fluctuations

  • HPC & AI net revenue increase of $396 million, or 26.4%, primarily due to higher customer acceptances

  • Storage net revenue increase of $30 million, or 1.4%, primarily due to improvements in the supply environment, partially offset by unfavorable currency fluctuations

  • Intelligent Edge net revenue increase of $663 million, or 37.5%, primarily due to increased AUPs and volume and product mix effect

  • Financial Services net revenue increase of $66 million, or 4.0%, primarily due to higher rental revenue from higher average operating leases and higher finance income on finance leases due to an increasing interest rate environment

  • Corporate Investments and Other net revenue decrease of $63 million, or 9.7%, primarily due to unfavorable currency fluctuations

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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

For the three and six months ended April 30, 2023, the total gross profit margin of 36.0% and 35.0%, respectively, represents an increase of 3.6 and 2.0 percentage points, respectively, as compared to the respective prior year periods. The increase in both periods was due to the impact of higher-margin networking revenue, higher AUPs in Compute and Intelligent Edge, lower supply chain and commodity costs, and the impact of charges in the prior period from expected credit losses resulting from our exit from Russia and Belarus. Additionally, the increase for the six months ended April 30, 2023, was partially offset by lower support services revenue.

Operating expenses

Research and development ("R&D")

For the three months ended April 30, 2023, R&D expense increased by $53 million, or 10.3%, led by Intelligent Edge and Storage. The increase was driven by higher employee costs due to an increase in software engineers to pursue our strategic goals, and incremental operational expenses from recent business acquisitions, which contributed 7.0 percentage points and 1.9 percentage points, respectively, to the change. The increase was partially offset by favorable currency fluctuations which contributed 1.2 percentage points to the change.

For the six months ended April 30, 2023, R&D expense increased by $172 million, or 16.8%, led by Intelligent Edge, HPC & AI and Storage. The increase was driven by higher employee costs due to an increase in software engineers to pursue our strategic goals, and incremental operational expenses from recent business acquisitions, which contributed 12.3 percentage points and 3.8 percentage points, respectively, to the change. The increase was partially offset by favorable currency fluctuations which contributed 1.4 percentage points to the change.

Selling, general and administrative ("SG&A")

For the three months ended April 30, 2023, SG&A expense increased by $20 million, or 1.6%, due primarily to factoring fees and other general expenses, higher travel expenses as the economy opens up, and higher software expenditures, all of which contributed 1.7, 1.6 and 0.6 percentage points, respectively, to the change. The increase was partially offset by a combination of lower employee costs, contractor and consulting costs, which contributed 3.6 percentage points to the change, and favorable currency fluctuations driven by lower field selling costs.

For the six months ended April 30, 2023, SG&A expense increased by $76 million, or 3.1%, due primarily to factoring fees, charitable donations, and other general expenses, higher travel expenses as the economy opens up and higher software expenditures, all of which contributed 1.6, 1.4 and 1.0 percentage points, respectively, to the change. The increase was partially offset by a combination of lower contractor and consulting costs, which contributed 1.4 percentage points to the change, and favorable currency fluctuations driven by lower field selling costs.

Transformation programs and costs

Our transformation programs consist of the Cost Optimization and Prioritization Plan (launched in 2020) and the HPE Next Plan (launched in 2017).

For the three and six months ended April 30, 2023, transformation costs decreased by $38 million, or 38.8%, and $47 million, or 22.5%, respectively 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

For the three months ended April 30, 2023, interest and other, net expense increased by $54 million, due primarily to the impact of the prior period containing both gains from equity investments and the sale of certain assets, and unfavorable currency fluctuations in the current period.

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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

For the six months ended April 30, 2023, interest and other, net expense increased by $74 million, due primarily to the impact of the prior period containing both gains from equity investments and the sale of certain assets. This increase was moderated by favorable currency fluctuations and increased net 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 income of $6 million for the three months ended April 30, 2023 and none for the three months ended April 30, 2022, and tax indemnification income of $5 million and tax indemnification expense of $17 million for the six months ended April 30, 2023 and 2022, respectively.

Non-service net periodic benefit credit

For the three and six months ended April 30, 2023, non-service net periodic benefit credit decreased by $35 million and $72 million, respectively, 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. For the three months ended April 30, 2023, earnings from equity interests increased by $16 million due primarily to lower amortization expense from basis difference.

For the six months ended April 30, 2023, earnings from equity interests increased by $43 million due primarily to lower amortization expense from basis difference and higher net income earned by H3C in the current period.

Provision for taxes

For the three months ended April 30, 2023 and 2022, we recorded income tax expense of $104 million and $26 million, respectively, which reflects an effective tax rate of 19.9% and 9.4%, respectively. For the six months ended April 30, 2023 and 2022, we recorded income tax expense of $226 million and $6 million, respectively, which reflect an effective tax rate of 19.7% and 0.8%, 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.

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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

Segment Results

The following table and ensuing discussion provide an overview of our key financial metrics by segment for the three months ended April 30, 2023, as compared to the prior-year period:

HPE ConsolidatedComputeHPC & AIStorageIntelligent EdgeFinancial ServicesCorporate Investments and Other
Dollars in millions
Net revenue(1)$6,973$2,761$840$1,043$1,304$858$296
Year-over-year change %3.9%(8.3)%18.3%(2.7)%50.4%4.3%(9.5)%
Earnings (loss) from operations(2)$520$420$(2)$82$351$84$(47)
Earnings (loss) from operations as a % of net revenue7.5%15.2%(0.2)%7.9%26.9%9.8%(15.9)%
Year-over-year change percentage points4.4pts1.1pts5.4pts(3.9)pts14.3pts(2.8)pts(8.6)pts

The following table and ensuing discussion provide an overview of our key financial metrics by segment for the six months ended April 30, 2023, as compared to the prior-year period:

HPE ConsolidatedComputeHPC & AIStorageIntelligent EdgeFinancial ServicesCorporate Investments and Other
Dollars in millions
Net revenue(1)$14,782$6,217$1,896$2,230$2,431$1,731$589
Year-over-year change %8.1%2.7%26.4%1.4%37.5%4.0%(9.7)%
Earnings (loss) from operations(2)$1,111$1,029$(1)$224$598$166$(102)
Earnings (loss) from operations as a % of net revenue7.5%16.6%(0.1)%10.0%24.6%9.6%(17.3)%
Year-over-year change percentage points2.7pts2.5pts3.0pts(2.9)pts9.6pts(2.9)pts(11.9)pts

(1)HPE consolidated net revenue excludes intersegment net revenue.

(2)Segment earnings from operations exclude stock-based compensation expense, certain unallocated corporate costs and eliminations, transformation costs, amortization of intangible assets, acquisition, disposition and other related charges, and disaster charges.

Compute

For the three months ended April 30,For the six months ended April 30,
20232022% Change20232022% Change
Dollars in millions
Net revenue$2,761$3,011(8.3)%$6,217$6,0552.7%
Earnings from operations$420$426(1.4)%$1,029$85320.6%
Earnings from operations as a % of net revenue15.2%14.1%16.6%14.1%

Three months ended April 30, 2023 compared with three months ended April 30, 2022

Compute net revenue decreased by $250 million, or 8.3% (decreased 3.2% on a constant currency basis), primarily due to a $258 million, or 11.3%, decrease in product revenue. The decline in product revenue was primarily due to lower server unit volume of $412 million, or 18.0%, and unfavorable currency fluctuations of $121 million. The product revenue decline was moderated by an increase in AUPs of $275 million, or 12.0%, led by higher sales of server configurations with more complex component architectures in our next generation products. Services net revenue increased by $8 million, or 1.1%, due to an increase in contract volume moderated by unfavorable currency fluctuations.

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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

Compute earnings from operations as a percentage of net revenue increased 1.1 percentage points due to a decrease in costs of products and services as a percentage of net revenue while operating expenses as a percentage of net revenue increased. The decrease in costs of products and services as a percentage of net revenue was primarily due to higher AUPs and lower commodity costs moderated by unfavorable currency fluctuations. The increase in operating expenses as a percentage of net revenue was primarily due to the scale of the net revenue decline while total operating expenses remained relatively flat.

Six months ended April 30, 2023 compared with six months ended April 30, 2022

Compute net revenue increased by $162 million, or 2.7% (increased 8.2% on a constant currency basis), primarily due to a $170 million, or 3.7%, increase in product revenue. The product revenue increase was primarily due to an increase in AUPs of $872 million, or 18.9%, led by higher sales of server configurations with more complex component architectures in our next generation products. The product revenue increase was moderated by unfavorable currency fluctuations of $257 million, and lower server unit volume of $445 million, or 9.7%, resulting from an uneven demand environment. Services net revenue remained relatively flat as an increase in services contracts was moderated by unfavorable currency fluctuations.

Compute earnings from operations as a percentage of net revenue increased 2.5 percentage points due to a decrease in costs of products and services as a percentage of net revenue while operating expenses as a percentage of net revenue remained relatively flat. The decrease in costs of products and services as a percentage of net revenue was primarily due to higher AUPs and lower commodity costs, moderated by unfavorable currency fluctuations.

HPC & AI

For the three months ended April 30,For the six months ended April 30,
20232022% Change20232022% Change
Dollars in millions
Net revenue$840$71018.3%$1,896$1,50026.4%
Loss from operations$(2)$(40)(95.0)%$(1)$(47)(97.9)%
Loss from operations as a % of net revenue(0.2)%(5.6)%(0.1)%(3.1)%

Three months ended April 30, 2023 compared with three months ended April 30, 2022

HPC & AI net revenue increased by $130 million, or 18.3% (increased 22.3% on a constant currency basis), primarily due to a $140 million, or 29.4%, increase in product revenue. The product revenue increase was led by the HPE Cray XD (formerly known as HPE Apollo) and HPE Cray Supercomputing product portfolios, as operational and supply improvements addressed recent challenges with achieving certain customer acceptance milestones for revenue recognition. The product revenue increase was led by HPE Cray XD with higher AUPs of $74 million, or 15.2%, and a unit volume increase of $17 million, or 3.6%. HPE Cray Supercomputing product unit and deal volume increased by $194 million, or 39.7%, moderated by a decrease in AUPs of $140 million, or 28.6%. Additionally, HPC & AI experienced unfavorable currency fluctuations of $23 million.

HPC & AI earnings from operations as a percentage of net revenue increased 5.4 percentage points due 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 products and services as a percentage of net revenue was due primarily to a favorable mix of higher-margin products, moderated by unfavorable currency fluctuations. The decrease in operating expenses as a percentage of net revenue was primarily due to the scale of the net revenue increase.

Six months ended April 30, 2023 compared with six months ended April 30, 2022

HPC & AI net revenue increased by $396 million, or 26.4% (increased 30.1% on a constant currency basis), primarily due to a $420 million, or 40.6%, increase in product revenue. The product revenue increase was 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. The product revenue increase was led by HPE Cray Supercomputing with a unit volume increase of $246 million, or 23.3%, and higher AUPs of $172 million, or 16.3%. The increase was moderated by unfavorable currency fluctuations of $43 million and lower services revenue of $24 million, or 5.2%, due primarily to an unfavorable portfolio mix of service offerings.

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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

HPC & AI earnings from operations as a percentage of net revenue increased 3.0% percentage points due to a decrease in operating expenses as a percentage of net revenue, while the cost of products and services as a percentage of net revenue was unchanged from the prior-year period. The decrease in operating expenses as a percentage of net revenue was primarily due to the scale of the net revenue increase, moderated by higher investments in research and development.

Storage

For the three months ended April 30,For the six months ended April 30,
20232022% Change20232022% Change
Dollars in millions
Net revenue$1,043$1,072(2.7)%$2,230$2,2001.4%
Earnings from operations$82$127(35.4)%$224$284(21.1)%
Earnings from operations as a % of net revenue7.9%11.8%10.0%12.9%

Three months ended April 30, 2023 compared with three months ended April 30, 2022

Storage net revenue decreased by $29 million or 2.7% (increased 2.1% on a constant currency basis), primarily due to unfavorable currency fluctuations, partially offset by improvements in the supply environment. Storage product revenue decreased $23 million, or 3.8%, primarily due to unfavorable currency fluctuations of $36 million and a decrease in AUPs of $21 million, or 3.4%. Sales volume increased by $37 million, or 6.1%, led by traditional storage and big data products. Storage services revenue decreased by $6 million, or 1.3%, primarily due to unfavorable currency fluctuations of $15 million, moderated by a sales volume increase of $12 million, or 2.6%. The services sales volume increase was led by higher subscription services as we continue our transition to a more services-intensive, software-rich set of offerings, partially offset by lower Storage support services.

Storage earnings from operations as a percentage of net revenue decreased 3.9 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 primarily due to unfavorable currency fluctuations. These impacts were partially offset by certain reduced operating expenses.

Six months ended April 30, 2023 compared with six months ended April 30, 2022

Storage net revenue increased by $30 million, or 1.4%, (increased 6.4% on a constant currency basis), as improvements in the supply environment were partially offset by unfavorable currency fluctuations. The increase in Storage product revenue of $65 million, or 5.2%, was primarily due to an increase in AUPs of $114 million, or 9.2%, led by traditional storage and HPE Alletra Storage products and a unit volume increase of $52 million or 4.2%, led by hyperconverged, traditional storage and big data products. Moderating factors to the revenue increase were unfavorable currency fluctuations of $82 million and lower revenue from Russia of $20 million. Storage services revenue declined by $35 million, or 3.7%, primarily due to lower AUPs of $58 million, or 6.0%, unfavorable currency fluctuations of $29 million, and lower revenue from Russia of $16 million and lower Storage support services. This decline was moderated by higher sales volume of $67 million, or 7.0%, led by higher subscription service as we continue our transition to more services-intensive, software-rich offerings.

Storage earnings from operations as a percentage of net revenue decreased 2.9% 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 and unfavorable currency fluctuations. These impacts were partially offset by lower supply chain costs to expedite product delivery and favorable mix of higher margin products.

Intelligent Edge

For the three months ended April 30,For the six months ended April 30,
20232022% Change20232022% Change
Dollars in millions
Net revenue$1,304$86750.4%$2,431$1,76837.5%
Earnings from operations$351$109222.0%$598$266124.8%
Earnings from operations as a % of net revenue26.9%12.6%24.6%15.0%

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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

Three months ended April 30, 2023 compared with three months ended April 30, 2022

Intelligent Edge net revenue increased by $437 million, or 50.4% (increased 55.8% on a constant currency basis). Product revenue increased by $403 million, or 57.7%, led by higher AUPs of $358 million, or 51.0%, and a volume and product mix effect of $87 million, or 12.5%, moderated by unfavorable currency fluctuations of $42 million. The product revenue increase was led by wireless local area network (“WLAN”) and Switching products, which benefited from improvements in the supply environment. Services net revenue increased $34 million, or 20.2%, primarily led by our as-a-service offerings.

Intelligent Edge earnings from operations as a percentage of net revenue increased 14.3 percentage points primarily due 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 lower supply chain costs and higher AUPs, moderating the decrease was a lower mix of higher-margin support services revenue. Operating expenses as a percentage of net revenue decreased primarily due to our cost containment measures.

Six months ended April 30, 2023 compared with six months ended April 30, 2022

Intelligent Edge net revenue increased by $663 million, or 37.5% (increased 43.2% on a constant currency basis). Product revenue increased by $611 million, or 42.7%, led by higher AUPs of $573 million, or 40.0%, and a volume and product mix effect of $129 million, or 9.0%, moderated by unfavorable currency fluctuations of $91 million. The product revenue increase was led by WLAN and Switching products, which benefited from improvements in the supply environment. Services net revenue increased $52 million, or 15.4%, primarily led by our as-a-service offerings.

Intelligent Edge earnings from operations as a percentage of net revenue increased 9.6 percentage points primarily due 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 lower supply chain costs and higher AUPs, moderating the decrease was a lower mix of higher-margin support services revenue. Operating expenses as a percentage of net revenue decreased primarily due to our cost containment measures.

Financial Services

For the three months ended April 30,For the six months ended April 30,
20232022% Change20232022% Change
Dollars in millions
Net revenue$858$8234.3%$1,731$1,6654.0%
Earnings from operations$84$104(19.2)%$166$208(20.2)%
Earnings from operations as a % of net revenue9.8%12.6%9.6%12.5%

Three months ended April 30, 2023 compared with three months ended April 30, 2022

FS net revenue increased by $35 million, or 4.3% (increased 6.8% on a constant currency basis) due primarily to higher rental revenue from higher average operating leases and higher finance income on finance leases due to an increasing interest rate environment, partially offset by unfavorable currency fluctuations.

FS earnings from operations as a percentage of net revenue decreased 2.8 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, partially offset by lower bad debt expense.

Six months ended April 30, 2023 compared with six months ended April 30, 2022

FS net revenue increased by $66 million, or 4.0% (increased 7.4% on a constant currency basis) due primarily to higher rental revenue from higher average operating leases and higher finance income on finance leases due to an increasing interest rate environment, along with higher asset management revenue from lease buyouts, partially offset by unfavorable currency fluctuations.

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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

FS earnings from operations as a percentage of net revenue decreased 2.9% 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, partially offset by lower bad debt expense.

Financing Volume

For the three months ended April 30,For the six months ended April 30,
2023202220232022
In millions
Financing volume$1,668$1,473$3,268$2,861

Financing volume, which represents the amount of financing provided to customers for equipment and related software and services, including intercompany activity, increased by 13.2% and 14.2% for the three and six months ended April 30, 2023, respectively, as compared to the corresponding prior-year periods, due primarily to higher financing of HPE 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
April 30, 2023October 31, 2022
Dollars in millions
Financing receivables, gross$8,979$8,359
Net equipment under operating leases4,2724,103
Capitalized profit on intercompany equipment transactions(1)256241
Intercompany leases(1)9497
Gross portfolio assets13,60112,800
Allowance for credit losses(2)237222
Operating lease equipment reserve4744
Total reserves284266
Net portfolio assets$13,317$12,534
Reserve coverage2.1%2.1%
Debt-to-equity ratio(3)7.0x7.0x

(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 $11.7 billion and $11.5 billion at April 30, 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 April 30, 2023 and October 31, 2022 was $1.7 billion and $1.6 billion, respectively.

As of April 30, 2023 and October 31, 2022, FS net cash and cash equivalents balances were approximately $0.8 billion and $0.9 billion, respectively.

Net portfolio assets as of April 30, 2023 increased 6.2% 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 and six months ended April 30, 2023, FS recorded net bad debt expense of $11 million and $30 million, respectively. For the three and six months ended April 30, 2022, Financial Services recorded net bad debt expense of $22 million and $45 million, respectively.

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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

As of April 30, 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.

Corporate Investments and Other

For the three months ended April 30,For the six months ended April 30,
20232022% Change20232022% Change
Dollars in millions
Net revenue$296$327(9.5)%$589$652(9.7)%
Loss from operations$(47)$(24)(95.8)%$(102)$(35)(191.4)%
Loss from operations as a % of net revenue(15.9)%(7.3)%(17.3)%(5.4)%

Three months ended April 30, 2023 compared with three months ended April 30, 2022

Corporate Investments and Other net revenue decreased by $31 million, or 9.5% (decreased 4.0% on a constant currency basis), primarily due to unfavorable currency fluctuations.

Corporate Investments and Other loss from operations as a percentage of net revenue increased by 8.6 percentage points primarily due 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 primarily due to the scale of the net revenue decline driven by unfavorable currency fluctuations and fixed services delivery costs. The increase in operating expenses as a percentage of net revenue was primarily due to the scale of the net revenue decline in the Communications and Media Solutions business.

Six months ended April 30, 2023 compared with six months ended April 30, 2022

Corporate Investments and Other net revenue decreased by $63 million, or 9.7% (decreased 2.8% on a constant currency basis), primarily due to unfavorable currency fluctuations.

Corporate Investments and Other loss from operations as a percentage of net revenue increased by 11.9% 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 primarily due 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 primarily due 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 April 30, 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.

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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

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 April 30, 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.

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 six months of fiscal 2023, we repurchased and settled an aggregate amount of $179 million. As of April 30, 2023, we had a remaining authorization of $1.2 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 our relevant subsidiaries, Unisplendour 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. On May 26, 2023, our relevant subsidiaries entered into a Put Share Purchase Agreement with UNIS, whereby UNIS has agreed to purchase all of the H3C shares held by us, through our subsidiaries, for a total pre-tax cash consideration of $3.5 billion. 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 remains subject to obtaining required regulatory approvals and completion of certain conditions necessary for closing.

Liquidity

Our cash, cash equivalents, restricted cash, total debt, and available borrowing resources were as follows:

As of
April 30, 2023October 31, 2022
In millions
Cash, cash equivalents and restricted cash$2,955$4,763
Total debt13,37612,465
Available borrowing resources5,6976,161
Commercial paper programs(1)4,7225,208
Uncommitted lines of credit$975$953

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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

(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 six months ended April 30,
20232022
In millions
Net cash provided by operating activities$60$303
Net cash used in investing activities(2,170)(827)
Net cash provided by (used in) financing activities163(260)
Effect of exchange rate changes on cash, cash equivalents, and restricted cash139—
Net decrease in cash, cash equivalents and restricted cash$(1,808)$(784)
Free Cash Flow$(1,038)$(788)

Operating Activities

For the six months ended April 30, 2023, net cash provided by operating activities decreased by $0.2 billion, as compared to the corresponding period in fiscal 2022. The decrease was primarily due to unfavorable working capital primarily resulting from higher vendor payments, an increase in financing receivables, moderated by unfavorable hedging positions, the prior-year period containing higher cash payouts for variable compensation, and higher cash generated from earnings.

Our working capital metrics and cash conversion impacts were as follows:

As ofAs of
April 30, 2023October 31, 2022ChangeApril 30, 2022October 31, 2021ChangeY/Y Change
Days of sales outstanding in accounts receivable ("DSO")484714249(7)6
Days of supply in inventory ("DOS")8788(1)1068224(19)
Days of purchases outstanding in accounts payable ("DPO")(111)(149)38(112)(128)161
Cash conversion cycle24(14)3836333(12)

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 increased billings with 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 a 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 lower inventory purchases during the current period.

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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

Investing Activities

For the six months ended April 30, 2023, net cash used in investing activities increased by $1.3 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, higher net payments made in connection with business acquisitions of $0.4 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 six months ended April 30, 2023, net cash provided by financing activities increased by $0.4 billion, as compared to the corresponding period in fiscal 2022. This was primarily due to higher proceeds from debt, net of issuance costs and higher cash from short term borrowings of $1.5 billion, partially offset by higher debt repayments of $1.1 billion, as compared to the prior-year period.

Free Cash Flow

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 six months ended April 30, 2023, free cash flow decreased by $0.3 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 our free cash flow, refer to the section entitled "GAAP to non-GAAP Reconciliations" included in this MD&A.

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 12, "Borrowings" to the Condensed Consolidated Financial Statements in Item 1 of Part I.

In March 2023, we completed an offering of $1.3 billion of 5.9% Senior Notes due October 1, 2024 and $400 million of 6.102% Senior Notes due April 1, 2026. The net proceeds from these offerings will be used to refinance upcoming debt maturities and for general corporate purposes.

In March and April 2023, we issued $643 million of asset-backed debt securities in five tranches at a weighted average price of 99.99% and a weighted average interest rate of 5.593%, payable monthly from April 2023 with a stated final maturity date of April 2028.

In April 2023, we repaid $1.0 billion of 2.25% fixed rate Senior Notes on their original maturity date of April 1, 2023.

In April 2023, we redeemed at par value the outstanding $35 million of asset-backed debt securities on a transaction, with an interest rate of 2.26% and an original maturity date of February 2030. At deal inception, in February 2020, $755 million of asset-backed debt securities were issued, with a weighted average price of 99.99%, a weighted average interest rate of 1.87%, and an original maturity date of February 2030.

As of April 30, 2023 and October 31, 2022, no borrowings were outstanding under our $4.75 billion revolving credit facility.

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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

As of April 30, 2023, $399 million was outstanding under the Parent Programs. As of October 31, 2022, no borrowings were outstanding under the Parent Programs. As of April 30, 2023 and October 31, 2022, $629 million and $542 million, respectively, were outstanding under our subsidiary’s program. During the first six months of fiscal 2023, we issued $4.6 billion and repaid $4.2 billion of commercial paper.

Cash Requirements and Commitments

Contractual Obligations

Other than the previously mentioned issuance and repayment of unsecured senior notes and issuance and redemption of asset-backed debt securities, 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 $90 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.

Restructuring Plans

As of April 30, 2023, we expect to make future cash payments of approximately $370 million in connection with our approved restructuring plans, which includes $220 million expected to be paid through the remainder of fiscal 2023 and $150 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 April 30, 2023, we had approximately $306 million of recorded liabilities and related interest and penalties pertaining to uncertain tax positions. These liabilities and related interest and penalties include $43 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.

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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

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 April 30,For the six months ended April 30,
2023202220232022
Dollars% of RevenueDollars% of RevenueDollars% of RevenueDollars% of Revenue
Dollars in millions
GAAP Net revenue$6,973100%$6,713100%$14,782100%$13,674100%
GAAP Cost of sales4,46164.0%4,54067.6%9,61265.0%9,15767.0%
GAAP Gross profit2,51236.0%2,17332.4%$5,17035.0%4,51733.0%
Non-GAAP adjustments
Amortization of initial direct costs——%1—%——%2—%
Stock-based compensation expense130.2%140.2%290.2%290.2%
Disaster charges(1)——%1051.6%——%1050.8%
Non-GAAP Gross Profit$2,52536.2%$2,29334.2%$5,19935.2%$4,65334.0%

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 April 30,For the six months ended April 30,
2023202220232022
Dollars% of RevenueDollars% of RevenueDollars% of RevenueDollars% of Revenue
Dollars in millions
GAAP earnings from operations$5207.5%$2073.1%$1,1117.5%$6554.8%
Non-GAAP adjustments:
Amortization of initial direct costs——%1—%——%2—%
Amortization of intangible assets711.0%741.1%1441.0%1471.1%
Transformation costs600.9%981.4%1621.1%2091.5%
Disaster charges(1)3—%1251.9%4—%1240.9%
Stock-based compensation expense1261.8%1141.7%2661.8%2421.8%
Acquisition, disposition and other related charges190.3%80.1%300.2%160.1%
Non-GAAP earnings from operations$79911.5%$6279.3%$1,71711.6%$1,39510.2%

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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

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 April 30,For the six months ended April 30,
2023202220232022
DollarsDiluted net earnings per shareDollarsDiluted net earnings per shareDollarsDiluted net earnings per shareDollarsDiluted net earnings per share
Dollars in millions
GAAP net earnings$418$0.32$250$0.19$919$0.70$763$0.57
Non-GAAP adjustments:
Amortization of initial direct costs——1———2—
Amortization of intangible assets710.05740.061440.111470.11
Transformation costs600.05980.071620.122090.16
Disaster charges (1)3—1250.094—1240.09
Stock-based compensation expense1260.101140.092660.212420.18
Acquisition, disposition and other related charges190.0180.01300.02160.01
Tax indemnification and related adjustments(6)———(5)—170.01
Non-service net periodic benefit credit(1)—(36)(0.03)(1)—(72)(0.05)
Earnings from equity interests(2)2—170.01140.01340.03
Adjustments for taxes(7)(0.01)(68)(0.05)(20)(0.02)(202)(0.15)
Non-GAAP net earnings$685$0.52$583$0.44$1,513$1.15$1,280$0.96

(1) The three and six months ended April 30, 2022 include amounts for expected credit loss reserves due to the Company's exit from its Russia and Belarus businesses. Refer to Note 1 "Overview and Summary of Significant Accounting Policies", for further information. During the three and six months ended April 30, 2022, Disaster charges also included a recovery of $1 million and $2 million, respectively, related to COVID-19.

(2) Represents the amortization of basis difference adjustments related to H3C. The six months ended April 30, 2023 includes the Company's portion of intangible asset impairment charges from H3C of $8 million.

Reconciliation of net cash provided by operating activities to free cash flow.

For the three months ended April 30,For the six months ended April 30,
2023202220232022
In millions
Net cash provided by operating activities$889$379$60$303
Investment in property, plant and equipment(688)(725)(1,482)(1,349)
Proceeds from sale of property, plant and equipment86135245258
Effect of exchange rate changes on cash, cash equivalents, and restricted cash1—139—
Free cash flow$288$(211)$(1,038)$(788)

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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

Use of Non-GAAP Financial Measures

The non-GAAP financial measures presented are net revenue on a constant currency basis (including at the business segment level), 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 income tax rate, non-GAAP net earnings, non-GAAP diluted net earnings per share, and free cash flow. 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 income tax rate is income tax rate. 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.

We believe that providing the non-GAAP measures stated above, 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. We further believe that providing this information provides investors with a supplemental view to understand our historical and prospective operating performance and to evaluate the efficacy of the methodology and information used by management to evaluate and measure such performance. Disclosure of these non-GAAP financial measures also facilitates comparisons of our operating performance with the performance of other companies in the same industry that supplement their GAAP results with non-GAAP financial measures that may be calculated in a similar manner.

Economic Substance of non-GAAP Financial Measures

Net revenue on a constant currency basis assumes no change to the foreign exchange rate utilized in the comparable prior-year period. This measure assists investors with evaluating our past and future performance, without the impact of foreign exchange rates, as more than half of our revenue is generated outside of the U.S.

We believe that excluding the items mentioned below from the non-GAAP financial measures provides a supplemental view to management and our investors of our consolidated financial performance and presents the financial results of the business without costs that we do not believe to be reflective of our ongoing operating results. Exclusion of these items can have a material impact on the equivalent GAAP measure and cash flows thus limiting their use as analytic tools. See "Compensation for Limitations With Use of Non-GAAP Financial Measures" section below for further information.

Non-GAAP gross profit and non-GAAP gross profit margin are defined to exclude charges related to the amortization of initial direct costs, stock-based compensation expense, and disaster charges. See below for the reasons management excludes each item:

  • Amortization of initial direct costs represents the portion of lease origination costs incurred in prior fiscal years that do not qualify for capitalization under the new leasing standard. We exclude these costs as we elected the practical expedient under the new leasing standard. As a result, we did not adjust these historical costs to accumulated deficit. We believe that most financing companies did not elect this practical expedient and therefore we exclude these costs. This can have an impact on the equivalent GAAP measures and Financial Services segment results.

  • Stock-based compensation expense consists of equity awards granted based on the estimated fair value of those awards at grant date. Although stock-based compensation is a key incentive offered to our employees, we exclude these charges for the purpose of calculating these non-GAAP measures, primarily because they are non-cash expenses and our internal benchmarking analyses evidence that many industry participants and peers present non-GAAP financial measures excluding stock-based compensation expense.

  • Disaster charges are primarily related to the exit of our businesses in Russia and Belarus, and include credit losses of financing and trade receivables, employee severance and abandoned assets. Disaster charges also include direct costs or recovery of these costs related to COVID-19 as a result of Hewlett Packard Enterprise-hosted, co-hosted, or sponsored event cancellations and subsequent shift to a virtual format. While we present various items as Disaster

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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

charges, we exclude Disaster charges from these non-GAAP measures as the specific charges are non-recurring charges and not indicative of the operational performance of our business.

Non-GAAP earnings from operations and non-GAAP operating profit margin consist of earnings from operations or earnings from operations as a percentage of net revenue excluding the items mentioned above and charges relating to the amortization of intangible assets, transformation costs and acquisition, disposition and other related charges. In addition to the items previously explained above, management excludes these items for the following reasons:

  • We incur charges relating to the amortization of intangible assets and exclude these charges for purposes of calculating these non-GAAP measures. Such charges are significantly impacted by the timing and magnitude of our acquisitions. We exclude these charges for the purpose of calculating these non-GAAP measures, primarily because they are non-cash expenses and our internal benchmarking analyses evidence that many industry participants and peers present non-GAAP financial measures excluding intangible asset amortization. Although this does not directly affect our cash position, the loss in value of intangible assets over time can have a material impact on the equivalent GAAP earnings measure.

  • Transformation costs represent net costs related to the (i) HPE Next Plan and (ii) Cost Optimization and Prioritization Plan and include restructuring charges, program design and execution costs, costs incurred to transform our IT infrastructure, net gains from the sale of real estate and any impairment charges on real estate identified as part of the initiatives. We exclude these costs as they are discrete costs related to two specific transformation programs that were announced in 2017 and 2020, respectively, as multi-year programs necessary to transform the business and IT infrastructure following material divestiture transactions in 2017 and in response to COVID-19 and an evolving product portfolio in fiscal 2020. The HPE Next Plan is substantially complete and we expect the Cost Optimization and Prioritization Plan to be substantially complete by October 31, 2023. The exclusion of the transformation program costs from our non-GAAP financial measures as stated above is to provide a supplemental measure of our operating results that does not include material HPE Next Plan and Cost Optimization and Prioritization Plan costs as we do not believe such costs to be reflective of our ongoing operating cost structure. Further as our transformation costs for these plans have materially fluctuated since 2017, have been materially declining since 2021 and we do not expect to incur material transformation costs related to these programs beyond fiscal 2023, we believe non-GAAP measures excluding these costs are useful to management and investors for comparing operating performance across multiple periods.

  • We incur costs related to our acquisition, disposition and other related charges. The charges are direct expenses, such as professional fees and retention costs, most of which are treated as non-cash or non-capitalized expenses. Charges may also include expenses associated with disposal activities including legal and arbitration settlements in connection with certain dispositions. We exclude these costs as these expenses are inconsistent in amount and frequency and are significantly impacted by the timing and nature of our acquisitions and divestitures. In addition, our internal benchmarking analyses evidence that many industry participants and peers present non-GAAP financial measures excluding these 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 mentioned above, as well as other 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. In addition to the items previously explained, management excludes these items for the following reasons:

  • Tax indemnification and related adjustments are primarily related to 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 exclude these income or charges and the associated tax impact for the purpose of calculating non-GAAP measures to facilitate an evaluation of our current operating performance and comparisons to operating performance in prior periods.

  • Non-service net periodic benefit credit includes certain market-related factors such as (i) interest cost, (ii) expected return on plan assets, (iii) amortization of prior plan amendments, (iv) amortized actuarial gains or losses, (v) the impacts of any plan settlements/curtailments and (vi) impacts from other market-related factors associated with our defined benefit pension and post-retirement benefit plans. These market-driven retirement-related adjustments are primarily due to the change in pension plan assets and liabilities which are tied to financial market performance. We

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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

exclude these adjustments for purposes of calculating non-GAAP measures and consider them to be outside the operational performance of the business.

  • Adjustment to earnings from equity interests includes the amortization of the basis difference in relation to the H3C divestiture and the resulting equity method investment in H3C. In the first fiscal quarter of 2023, this adjustment also included our portion of intangible asset impairment charges from H3C. We believe that eliminating this amount for purposes of calculating non-GAAP measures facilitates the evaluation of our current operating performance and comparisons to operating performance in prior periods.

  • We utilize a structural long-term projected non-GAAP income tax rate in order to provide consistency across the interim reporting periods and to eliminate the effects of items not directly related to our operating structure that can vary in size and frequency. When projecting this long-term rate, we evaluated a three-year financial projection. The projected rate assumes no incremental acquisitions in the three-year projection period and considers other factors including our expected tax structure, our tax positions in various jurisdictions and current impacts from key legislation implemented in major jurisdictions where we operate. For fiscal 2023, we will use a projected non-GAAP income tax rate of 14%, which reflects currently available information as well as other factors and assumptions. The non-GAAP income tax rate could be subject to change for a variety of reasons, including the rapidly evolving global tax environment, significant changes in our geographic earnings mix including due to acquisition activity, or other changes to our strategy or business operations. We will re-evaluate its long-term rate as appropriate. For fiscal 2022, we had a non-GAAP tax rate of 14%. We believe that making these adjustments for purposes of calculating non-GAAP measures, facilitates a supplemental evaluation of our current operating performance and comparisons to past operating results.

FCF is defined as cash flow from operations, less net capital expenditures (investments in 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. FCF does not represent the total increase or decrease in cash for the period. Our management and investors can use FCF for the purpose of determining the amount of cash available for investment in our businesses, repurchasing stock and other purposes as well as evaluating our historical and prospective liquidity.

Compensation for Limitations With Use of Non-GAAP Financial Measures

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 (limiting the usefulness of those measures for comparative purposes) and may not reflect the full economic effect of the loss in value of certain assets.

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 financial measure for this quarter and prior periods, and we encourage investors to review those reconciliations carefully.

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