filings.toolsItem 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 months ended January 31, 2024 to the comparable prior-year period and where appropriate, as of January 31, 2024, unless otherwise noted.
This MD&A is organized as follows:
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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), uneven demand across our portfolio, increased demand for and adoption of new technologies, conservative customer spending environment, inflationary trend and foreign exchange pressures, and recent tax developments.
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Executive Overview. A discussion of our business and a summary of our financial performance and other highlights, including non-GAAP financial measures, affecting the Company in order to provide context to the remainder of the MD&A.
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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.
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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 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.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
TRENDS AND UNCERTAINTIES
The dynamics we have experienced throughout fiscal 2023 continue. We have seen supply chain constraints continue to ease (though challenges still remain) and demand soften unevenly across our portfolio and geographies (as a result of the aforementioned improving supply chain conditions and as customers have been taking longer than anticipated to digest their prior larger orders). We have observed, and expect to continue seeing, customers of various segments and sizes pursue new technologies, such as AI. As noted above, we have continued to see elongated sales cycles, as customers work through prior orders and adopt a more conservative approach to spending in a mixed macroeconomic environment. This has been particularly true of certain of our hardware businesses, as customers have focused investments on modernizing infrastructure, such as migrating to cloud-based offerings, including our own. We expect such mixed macroeconomic environment to continue to limit our revenue growth in the near term.
As referenced above, mild 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. Material cost trends are dependent on the strength or weakness of actual end-user demand and supply dynamics, which will continue to evolve and ultimately impact the translation of the cost environment to our pricing actions and, consequently, our operating results. Logistics costs continued to decrease from previously elevated levels as a result of declines in both expedited shipments and overall rate costs in the freight network.
Additionally, we have a large global presence, with more than half of our revenue generated outside of the U.S. As a result, our financial results can be, and particularly in recent periods have been, impacted by fluctuations in foreign currency exchange rates. Furthermore, inflationary pressures persist, keeping not only material and logistics costs, but also labor costs, somewhat elevated compared to pre-COVID-19 pandemic levels. Also, the impacts of trade protection measures, including increases in tariffs and trade barriers, changes in government policies and international trade arrangements, geopolitical volatility (including ongoing conflict in the Middle East), and global macroeconomic challenges (including the relationship between China and the U.S.), may impact our ability to conduct business in some non-U.S. markets. We expect the unfavorable foreign exchange effects, inflationary trend, and the aforementioned international challenges to continue in the longer term.
Recent Tax Developments
The Organisation for Economic Co-operation and Development (“OECD”), an international association of 38 countries including the United States, has proposed changes to numerous long-standing tax principles, namely, its Pillar Two framework, which imposes a global minimum corporate tax rate of 15%. To date, 29 countries have enacted portions, or all, of the OECD proposal and a further 23 countries have drafted, or have announced an intent to draft, legislation enacting the proposed rules. Where enacted, the rules begin to be effective for us in fiscal 2025. Under US GAAP, the OECD Pillar Two rules are considered an alternative minimum tax and therefore deferred taxes would not be recognized or adjusted for the estimated effects of the future minimum tax. As a result, no impact to our fiscal 2024 results is expected. The adoption and effective dates of these rules may vary by country and could increase tax complexity and uncertainty and may adversely affect our provision for income taxes.
Other Trends and Uncertainties
We have observed market trends and demand gravitating towards AI, hybrid cloud, and edge computing, and data security capabilities, and related offerings. The volume of data at the edge continues to grow, driven by the proliferation of more devices, which has led to the need for enhanced security at the edge, as well. The need for a unified cloud experience everywhere has grown, as well, in order to manage the growth of data at the edge. With the abundance of data, there are opportunities to develop AI tools with powerful computational abilities to extract insights and value from the captured data. We expect these market dynamics and trends to continue in the longer term.
Observing these dynamics, we have accelerated our investment and innovation efforts in these areas that we see as critical to our long-term strategy and growth, including in pivoting our go-to-market motion and sales function. At the same time, we continue to strengthen our core compute and storage-oriented offerings and expand our offerings on the HPE GreenLake edge-to-cloud platform, to deliver our entire portfolio as-a-service (“aaS”) and become the edge-to-cloud company for our customers and partners. Furthermore, as noted elsewhere in this report, effective November 1, 2023, we have realigned our financial reporting segments to align with these key market trends. It is uncertain whether we will successfully execute this shift in strategic focus, realize the anticipated benefits of doing so, or capture the anticipated shares of the AI, hybrid cloud, and edge markets.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
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 five reportable segments for financial reporting purposes: Server, Hybrid Cloud, Intelligent Edge, Financial Services ("FS"), and Corporate Investments and Other.
Financial Results
The following table summarizes our condensed consolidated GAAP financial results:
| For the three months ended January 31, | |||||||||||||||||||||||||||||||||||
| 2024 | 2023 | Change | |||||||||||||||||||||||||||||||||
| Dollars in millions, except per share amounts | |||||||||||||||||||||||||||||||||||
| Net revenue | $ | 6,755 | $ | 7,809 | (13.5)% | ||||||||||||||||||||||||||||||
| Gross profit | $ | 2,457 | $ | 2,658 | (7.6)% | ||||||||||||||||||||||||||||||
| Gross profit margin | 36.4 | % | 34.0 | % | 2.4pts | ||||||||||||||||||||||||||||||
| Earnings from operations | $ | 525 | $ | 591 | (11.2)% | ||||||||||||||||||||||||||||||
| Operating profit margin | 7.8 | % | 7.6 | % | 0.2pts | ||||||||||||||||||||||||||||||
| Net earnings | $ | 387 | $ | 501 | (22.8)% | ||||||||||||||||||||||||||||||
| Diluted net earnings per share | $ | 0.29 | $ | 0.38 | $(0.09) | ||||||||||||||||||||||||||||||
| Cash flow provided by (used in) operations | $ | 64 | $ | (829) | $893 |
Three months ended January 31, 2024 compared with three months ended January 31, 2023
Net revenue of $6.8 billion represented a decrease of 13.5% (decreased 13.8% on a constant currency basis) primarily due to a decline in server unit volume in the Server segment, and lower average unit prices (“AUPs”) in the Server and Hybrid Cloud segments. The gross profit margin of 36.4%, (or $2.5 billion), represents an increase of 2.4 percentage points from the prior-year period due to favorable revenue mix in the Intelligent Edge segment, cost recoveries in connection with our exit from Russia and Belarus, and lower supply chain costs. The increase was moderated by lower AUPs in the Server segment. The operating profit margin of 7.8% remained relatively flat.
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 January 31, | |||||||||||||||||||||||||||||||||||
| 2024 | 2023 | Change | |||||||||||||||||||||||||||||||||
| Dollars in millions, except per share amounts | |||||||||||||||||||||||||||||||||||
| Net revenue in constant currency | $ | 6,728 | $ | 7,809 | (13.8)% | ||||||||||||||||||||||||||||||
| Non-GAAP gross profit | $ | 2,448 | $ | 2,674 | (8.5)% | ||||||||||||||||||||||||||||||
| Non-GAAP gross profit margin | 36.2 | % | 34.2 | % | 2.0pts | ||||||||||||||||||||||||||||||
| Non-GAAP earnings from operations | $ | 775 | $ | 918 | (15.6)% | ||||||||||||||||||||||||||||||
| Non-GAAP operating profit margin | 11.5 | % | 11.8 | % | (0.3)pts | ||||||||||||||||||||||||||||||
| Non-GAAP net earnings | $ | 638 | $ | 828 | (22.9)% | ||||||||||||||||||||||||||||||
| Non-GAAP diluted net earnings per share | $ | 0.48 | $ | 0.63 | $(0.15) | ||||||||||||||||||||||||||||||
| Free cash flow | $ | (482) | $ | (1,326) | $844 |
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 aaS 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 aaS 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 January 31, 2024 and 2023:
| As of January 31, | |||||||||||||||||||||||
| 2024 | 2023 | ||||||||||||||||||||||
| Dollars in millions | |||||||||||||||||||||||
| ARR | $ | 1,426 | $ | 1,006 | |||||||||||||||||||
| Year-over-year growth rate | 42% | 26% |
The 42% year-over year increase in ARR was primarily due to growth in our Hybrid Cloud and Intelligent Edge segments, which was due to an expanding customer installed base, an expanded range of HPE GreenLake Flex Solutions, and Intelligent Edge aaS activity.
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 2024, we paid a quarterly dividend of $0.13 per share to our shareholders. On February 29, 2024, we declared a regular cash dividend of $0.13 per share on our common stock, payable on or about April 12, 2024, to our shareholders of record as of the close of business on March 15, 2024. As of January 31, 2024, we had a remaining authorization of approximately $1.0 billion for future share repurchases.
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 January 31, | |||||||||||||||||||||||||||||||||||||||||||||||
| 2024 | 2023 | ||||||||||||||||||||||||||||||||||||||||||||||
| Dollars | % of Revenue | Dollars | % of Revenue | ||||||||||||||||||||||||||||||||||||||||||||
| Dollars in millions | |||||||||||||||||||||||||||||||||||||||||||||||
| Net revenue | $ | 6,755 | 100.0 | % | $ | 7,809 | 100.0 | % | |||||||||||||||||||||||||||||||||||||||
| Cost of sales | 4,298 | 63.6 | 5,151 | 66.0 | |||||||||||||||||||||||||||||||||||||||||||
| Gross profit | 2,457 | 36.4 | 2,658 | 34.0 | |||||||||||||||||||||||||||||||||||||||||||
| Research and development | 582 | 8.6 | 623 | 8.0 | |||||||||||||||||||||||||||||||||||||||||||
| Selling, general and administrative | 1,216 | 18.0 | 1,257 | 16.1 | |||||||||||||||||||||||||||||||||||||||||||
| Amortization of intangible assets | 71 | 1.1 | 73 | 0.9 | |||||||||||||||||||||||||||||||||||||||||||
| Transformation costs | 20 | 0.3 | 102 | 1.3 | |||||||||||||||||||||||||||||||||||||||||||
| Disaster charges | — | — | 1 | — | |||||||||||||||||||||||||||||||||||||||||||
| Acquisition, disposition and other related charges | 43 | 0.6 | 11 | 0.1 | |||||||||||||||||||||||||||||||||||||||||||
| Earnings from operations | 525 | 7.8 | 591 | 7.6 | |||||||||||||||||||||||||||||||||||||||||||
| Interest and other, net | (88) | (1.3) | (26) | (0.3) | |||||||||||||||||||||||||||||||||||||||||||
| Earnings from equity interests | 46 | 0.7 | 58 | 0.7 | |||||||||||||||||||||||||||||||||||||||||||
| Earnings before provision for taxes | 483 | 7.2 | 623 | 8.0 | |||||||||||||||||||||||||||||||||||||||||||
| Provision for taxes | (96) | (1.5) | (122) | (1.6) | |||||||||||||||||||||||||||||||||||||||||||
| Net earnings | $ | 387 | 5.7 | % | $ | 501 | 6.4 | % |
Three months ended January 31, 2024 compared with the three months ended January 31, 2023
Net revenue
For the three months ended January 31, 2024, total net revenue of $6.8 billion represented a decrease of $1.1 billion, or 13.5% (decreased 13.8% on a constant currency basis). U.S. net revenue decreased by $591 million, or 20.5% to $2.3 billion, and net revenue from outside of the U.S. decreased by $463 million, or 9.4%, to $4.5 billion.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
The components of the weighted net revenue change by segment were as follows:
| For the three months ended January 31, 2024 | |||||||||||
| Percentage Points | |||||||||||
| Server | (12.6) | ||||||||||
| Hybrid Cloud | (1.7) | ||||||||||
| Intelligent Edge | 0.4 | ||||||||||
| Financial Services | — | ||||||||||
| Corporate Investments and Other | 0.1 | ||||||||||
| Total segment | (13.8) | ||||||||||
| Elimination of intersegment net revenue and other | 0.3 | ||||||||||
| Total HPE | (13.5) |
Three months ended January 31, 2024 compared with three months ended January 31, 2023
From a segment perspective, the primary factors contributing to the change in total net revenue are summarized as follows:
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Server net revenue decreased $980 million, or 22.6%, primarily due to a decline in server unit volume and lower AUPs
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Hybrid Cloud net revenue decreased $136 million, or 9.8%, primarily due to lower AUPs
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Intelligent Edge net revenue increased $32 million, or 2.7%, primarily due to higher service revenue
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Financial Services net revenue was flat
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Corporate Investments and Other net revenue was relatively flat
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 months ended January 31, 2024, the total gross profit margin of 36.4% represents an increase of 2.4 percentage points as compared to the prior year period. The increase was due to favorable revenue mix in the Intelligent Edge segment, higher revenue from support services, cost recoveries in connection with our exit from Russia and Belarus, and lower supply chain costs. The increase was moderated by lower AUPs in the Server segment.
Operating expenses
Research and development ("R&D")
For the three months ended January 31, 2024, R&D expense decreased by $41 million, or 6.6%. The decrease was primarily due to lower employee costs which contributed 5.0 percentage points to the change.
Selling, general and administrative ("SG&A")
For the three months ended January 31, 2024, SG&A expense decreased by $41 million, or 3.3%, primarily due to lower employee costs and lower consulting costs which contributed 2.4 and 1.7 percentage points, respectively, to the change. The decrease was partially offset by higher marketing expenses.
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 months ended January 31, 2024, transformation costs decreased by $82 million, or 80.4%, due to lower charges incurred in the current period as the primary elements of these plans have been substantially completed by the end of fiscal 2023. For a further discussion, refer to Note 3, "Transformation Programs" to the Condensed Consolidated Financial Statements in Item 1 of Part I.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Acquisition, disposition and other related charges
For the three months ended January 31, 2024, acquisition, disposition and other related charges increased by $32 million or 290.9%, primarily due to costs incurred in relation to the pending acquisition of Juniper Networks, Inc. (“Juniper Networks”).
Interest and other, net
For the three months ended January 31, 2024, interest and other, net expense increased by $62 million, primarily due to increase in loss on equity investments.
Earnings from equity interests
Earnings from equity interests primarily represents our 49% interest in H3C Technologies Co., Limited ("H3C") and the amortization of our basis difference. For the three months ended January 31, 2024, earnings from equity interests decreased by $12 million primarily due to lower net income earned by H3C partially offset by lower amortization expense from basis difference in the current period.
Provision for taxes
For the three months ended January 31, 2024 and 2023, we recorded income tax expense of $96 million and $122 million, respectively, which reflects an effective tax rate of 19.9% and 19.6%, 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 as of the beginning of the first quarter of fiscal 2024, in order to align the Company’s segment financial reporting more closely with its current business structure, the Company realigned its six reportable segments to five reportable 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, 2024, as compared to the prior-year period:
| HPE Consolidated | Server | Hybrid Cloud | Intelligent Edge | Financial Services | Corporate Investments and Other | |||||||||||||||||||||||||||||||||||||||
| Dollars in millions | ||||||||||||||||||||||||||||||||||||||||||||
| Net revenue(1) | $ | 6,755 | $ | 3,352 | $ | 1,248 | $ | 1,201 | $ | 873 | $ | 238 | ||||||||||||||||||||||||||||||||
| Year-over-year change % | (13.5) | % | (22.6) | % | (9.8) | % | 2.7 | % | — | % | 1.7 | % | ||||||||||||||||||||||||||||||||
| Earnings (loss) from operations(2) | $ | 525 | $ | 383 | $ | 47 | $ | 353 | $ | 74 | $ | (10) | ||||||||||||||||||||||||||||||||
| Earnings (loss) from operations as a % of net revenue | 7.8 | % | 11.4 | % | 3.8 | % | 29.4 | % | 8.5 | % | (4.2) | % | ||||||||||||||||||||||||||||||||
| Year-over-year change percentage points | 0.2 | pts | (4.3) | pts | (2.0) | pts | 10.0 | pts | 1.3 | pts | 5.2 | pts |
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
(1)HPE consolidated net revenue excludes intersegment net revenue. Segment net revenues include intersegment net revenue.
(2)Segment earnings from operations exclude certain unallocated corporate costs and eliminations, stock-based compensation expense, amortization of intangible assets, transformation costs, disaster recovery/charges, and acquisition, disposition and other related charges.
Server
| For the three months ended January 31, | |||||||||||||||||||||||||||||||||||
| 2024 | 2023 | % Change | |||||||||||||||||||||||||||||||||
| Dollars in millions | |||||||||||||||||||||||||||||||||||
| Net revenue | $ | 3,352 | $ | 4,332 | (22.6) | % | |||||||||||||||||||||||||||||
| Earnings from operations | $ | 383 | $ | 678 | (43.5) | % | |||||||||||||||||||||||||||||
| Earnings from operations as a % of net revenue | 11.4 | % | 15.7 | % |
Three months ended January 31, 2024 compared with three months ended January 31, 2023
Server net revenue decreased by $980 million, or 22.6% (decreased 22.7% on a constant currency basis), primarily due to a $961 million, or 27.8%, decrease in product revenue. The decline in product revenue was primarily due to lower server unit volume of $739 million, or 21.3%, as customers absorbed prior orders and decrease in AUPs of $138 million, or 4.0% resulting from competitive pricing measures. Services net revenue decreased by $19 million, or 2.2%, due to lower contract volume.
Server earnings from operations as a percentage of net revenue decreased 4.3 percentage points due to an increase in costs of products and services and operating expenses as a percentage of net revenue. The increase in costs of products and services as a percentage of net revenue was primarily due to lower AUPs partially offset by favorable mix of higher-margin revenues and lower employee costs. The increase in operating expenses as a percentage of net revenue was primarily due to the scale of the net revenue decline relative to the decrease in total operating expenses driven by lower employee costs.
Hybrid Cloud
| For the three months ended January 31, | |||||||||||||||||||||||||||||||||||
| 2024 | 2023 | % Change | |||||||||||||||||||||||||||||||||
| Dollars in millions | |||||||||||||||||||||||||||||||||||
| Net revenue | $ | 1,248 | $ | 1,384 | (9.8) | % | |||||||||||||||||||||||||||||
| Earnings from operations | $ | 47 | $ | 80 | (41.3) | % | |||||||||||||||||||||||||||||
| Earnings from operations as a % of net revenue | 3.8 | % | 5.8 | % |
Three months ended January 31, 2024 compared with three months ended January 31, 2023
Hybrid Cloud net revenue decreased by $136 million, or 9.8% (decreased 10.0% on a constant currency basis), primarily due to a decrease in AUPs, partially offset by an increase in unit volume. Hybrid Cloud product revenue decreased by $173 million, or 20.1%, primarily due to a decrease in AUPs of $154 million, or 18%, led by storage products. Hybrid Cloud services revenue increased by $37 million, or 7.0%, primarily due to a unit volume increase of $60 million, or 11.5%, led by private cloud and infrastructure software-as-a-service (“SaaS”). This increase was partially offset by lower AUPs of $25 million, or 4.7%.
Hybrid Cloud earnings from operations as a percentage of net revenue decreased 2.0 percentage points primarily due to an increase in operating expenses as a percentage of net revenue moderated by a decrease in cost of products and services as a percentage of net revenue. The increase in operating expenses as a percentage of net revenue was primarily due to the scale of net revenue decline and the related impact of fixed overhead costs. The decrease in cost of products and services as a percentage of net revenue was primarily due to higher margin GreenLake Flex Solutions deals, upsides in storage subscription revenue, and upsides to revenue from infrastructure SaaS. This was moderated by a decrease in AUPs for storage products.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Intelligent Edge
| For the three months ended January 31, | |||||||||||||||||||||||||||||||||||
| 2024 | 2023 | % Change | |||||||||||||||||||||||||||||||||
| Dollars in millions | |||||||||||||||||||||||||||||||||||
| Net revenue | $ | 1,201 | $ | 1,169 | 2.7 | % | |||||||||||||||||||||||||||||
| Earnings from operations | $ | 353 | $ | 227 | 55.5 | % | |||||||||||||||||||||||||||||
| Earnings from operations as a % of net revenue | 29.4 | % | 19.4 | % |
Three months ended January 31, 2024 compared with three months ended January 31, 2023
Intelligent Edge net revenue increased by $32 million, or 2.7% (increased 2.3% on a constant currency basis). Services net revenue increased $56 million, or 24.9%, primarily led by attached support service and our aaS offerings. Product revenue decreased by $24 million, or 2.5%, led by lower volume and product mix effect of $132 million, or 14.0%, moderated by higher AUPs of $101 million, or 10.7% and favorable currency fluctuations of $7 million. The product revenue decrease was primarily led by wireless local area network products due to softened demand, partially offset by an increase in switching products.
Intelligent Edge earnings from operations as a percentage of net revenue increased 10.0 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 favorable revenue mix and lower supply chain costs. Operating expenses as a percentage of net revenue decreased primarily due to lower employee costs.
Financial Services
| For the three months ended January 31, | |||||||||||||||||||||||||||||||||||
| 2024 | 2023 | % Change | |||||||||||||||||||||||||||||||||
| Dollars in millions | |||||||||||||||||||||||||||||||||||
| Net revenue | $ | 873 | $ | 873 | — | % | |||||||||||||||||||||||||||||
| Earnings from operations | $ | 74 | $ | 63 | 17.5 | % | |||||||||||||||||||||||||||||
| Earnings from operations as a % of net revenue | 8.5 | % | 7.2 | % |
Three months ended January 31, 2024 compared with three months ended January 31, 2023
FS net revenue was flat (decreased 1.8% on a constant currency basis).
FS earnings from operations as a percentage of net revenue increased 1.3 percentage points largely due to a decrease in operating expenses as a percentage of net revenue while cost of services as a percentage of net revenue was relatively flat. The decrease in operating expenses as a percentage of net revenue was due primarily to lower employee costs.
Financing Volume
| For the three months ended January 31, | |||||||||||||||||||||||
| 2024 | 2023 | ||||||||||||||||||||||
| In millions | |||||||||||||||||||||||
| Financing volume | $ | 1,363 | $ | 1,600 |
Financing volume, which represents the amount of financing provided to customers for equipment and related software and services, including intercompany activity, decreased by 14.8% for the three months ended January 31, 2024, as compared to the prior-year period, primarily due to lower financing of third-party product and HPE product sales and services, partially offset by favorable currency fluctuations.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Portfolio Assets and Ratios
The portfolio assets and ratios derived from the segment balance sheets for FS were as follows:
| As of | |||||||||||
| January 31, 2024 | October 31, 2023 | ||||||||||
| Dollars in millions | |||||||||||
| Financing receivables, gross | $ | 8,961 | $ | 8,814 | |||||||
| Net equipment under operating leases | 4,089 | 4,100 | |||||||||
| Capitalized profit on intercompany equipment transactions(1) | 265 | 263 | |||||||||
| Intercompany leases(1) | 136 | 109 | |||||||||
| Gross portfolio assets | 13,451 | 13,286 | |||||||||
| Allowance for credit losses(2) | 185 | 178 | |||||||||
| Operating lease equipment reserve | 34 | 36 | |||||||||
| Total reserves | 219 | 214 | |||||||||
| Net portfolio assets | $ | 13,232 | $ | 13,072 | |||||||
| Reserve coverage | 1.6 | % | 1.6 | % | |||||||
| 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 $11.7 billion and $11.6 billion as of January 31, 2024 and October 31, 2023, 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 as of both January 31, 2024 and October 31, 2023 was $1.7 billion.
As of January 31, 2024 and October 31, 2023, FS net cash and cash equivalents balances were approximately $772 million and $700 million, respectively.
Net portfolio assets as of January 31, 2024 increased 1.2% from October 31, 2023. The increase generally resulted from favorable currency fluctuations.
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, 2024 and 2023, FS recorded net bad debt expense of $12 million and $19 million, respectively.
Corporate Investments and Other
| For the three months ended January 31, | ||||||||||||||||||||||||||||||||||||||
| 2024 | 2023 | % Change | ||||||||||||||||||||||||||||||||||||
| Dollars in millions | ||||||||||||||||||||||||||||||||||||||
| Net revenue | $ | 238 | $ | 234 | 1.7 | % | ||||||||||||||||||||||||||||||||
| Loss from operations | $ | (10) | $ | (22) | 54.5 | % | ||||||||||||||||||||||||||||||||
| Loss from operations as a % of net revenue | (4.2) | % | (9.4) | % |
Three months ended January 31, 2024 compared with three months ended January 31, 2023
Corporate Investments and Other net revenue remained relatively flat.
Corporate Investments and Other loss from operations as a percentage of net revenue decreased by 5.2 percentage points primarily due to decreases in cost of services as a percentage of net revenue resulting from our cost containment measures while cost of operating expenses as a percentage of net revenue remained relatively flat.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
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, 2024, 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, 2023.
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, 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, including committed debt funding related to the pending merger with Juniper Networks, 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, 2024. 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 three months of fiscal 2024, we settled an aggregate amount of $3 million in relation to shares that were unsettled open market repurchases as of October 31, 2023. We did not repurchase or settle any additional shares during the three months ended January 31, 2024. As of January 31, 2024, we had a remaining authorization of approximately $1.0 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.
On January 9, 2024, we entered into a definitive merger agreement under which HPE will acquire Juniper Networks in an all-cash transaction for $40.00 per share, representing an equity value of approximately $14 billion. The transaction was unanimously approved by the boards of directors of both companies. The transaction is expected to be funded based on financing commitments for $14 billion in term loans. Such financing will ultimately be replaced, in part, with a combination of
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
new debt, mandatory convertible preferred securities, and cash on the balance sheet. The closing of the transaction remains subject to receipt of regulatory approvals, approval of the transaction by Juniper Networks shareholders, and satisfaction of other customary closing conditions.
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 | |||||||||||
| January 31, 2024 | October 31, 2023 | ||||||||||
| In millions | |||||||||||
| Cash, cash equivalents and restricted cash | $ | 3,972 | $ | 4,581 | |||||||
| Total debt | 12,797 | 12,355 | |||||||||
| Available borrowing resources(1) | 6,665 | 6,588 | |||||||||
| Commercial paper programs(2) | 5,076 | 5,071 | |||||||||
| Uncommitted lines of credit(3) | 1,589 | 1,517 | |||||||||
(1) Excludes the financing commitment for the Juniper Networks acquisition. The maximum aggregate commitment under this facility is $14.0 billion, however, no balances were outstanding under this facility as of January 31, 2024.
(2) The maximum aggregate borrowing amount of the commercial paper programs and revolving credit facility is $5.75 billion.
(3) The maximum aggregate capacity under the uncommitted lines of credit is $1.98 billion of which $0.4 billion was primarily utilized towards issuances of bank guarantees.
The following tables represent the way in which management reviews cash flows:
| For the three months ended January 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| In millions | |||||||||||
| Net cash provided by (used in) operating activities | $ | 64 | $ | (829) | |||||||
| Net cash used in investing activities | (740) | (1,237) | |||||||||
| Net cash provided by financing activities | 53 | 9 | |||||||||
| Effect of exchange rate changes on cash, cash equivalents, and restricted cash | 14 | 138 | |||||||||
| Net decrease in cash, cash equivalents and restricted cash | $ | (609) | $ | (1,919) | |||||||
| Free cash flow | $ | (482) | $ | (1,326) | |||||||
Operating Activities
For the three months ended January 31, 2024, net cash provided by operating activities increased by $893 million, as compared to the corresponding period in fiscal 2023. The increase was primarily due to favorable working capital and favorable impacts from financing receivables. The increase was moderated by favorable hedging positions, 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)
Our working capital metrics and cash conversion impacts were as follows:
| As of | As of | ||||||||||||||||||||||||||||||||||||||||
| January 31, 2024 | October 31, 2023 | Change | January 31, 2023 | October 31, 2022 | Change | Y/Y Change | |||||||||||||||||||||||||||||||||||
| Days of sales outstanding in accounts receivable ("DSO") | 50 | 43 | 7 | 48 | 47 | 1 | 2 | ||||||||||||||||||||||||||||||||||
| Days of supply in inventory ("DOS") | 127 | 87 | 40 | 81 | 88 | (7) | 46 | ||||||||||||||||||||||||||||||||||
| Days of purchases outstanding in accounts payable ("DPO") | (170) | (134) | (36) | (114) | (149) | 35 | (56) | ||||||||||||||||||||||||||||||||||
| Cash conversion cycle | 7 | (4) | 11 | 15 | (14) | 29 | (8) |
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 2023, the increase in DSO in the current period was primarily due to unfavorable billings linearity and lower early collections.
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 2023, the increase in DOS in the current period was primarily due to higher inventory levels caused by strategic purchases of key components and higher ending inventory pending customer acceptances.
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 2023, the increase in DPO in the current period was primarily due to higher inventory purchases, and lower vendor payments during the current period.
Investing Activities
For the three months ended January 31, 2024, net cash used in investing activities decreased by $497 million, as compared to the corresponding period in fiscal 2023. The decrease was primarily due to lower cash utilized in net financial collateral activities of $406 million, as compared to the prior-year period.
Financing Activities
For the three months ended January 31, 2024, net cash provided by financing activities increased by $44 million, as compared to the corresponding period in fiscal 2023. This was primarily due to lower repayments of debt of $146 million, lower share repurchases of $70 million, offset by lower proceeds from debt, net of issuance costs and short-term borrowings of $164 million, as compared to the prior-year period.
Free Cash Flow
Free cash flow (“FCF”) 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, 2024, FCF increased by $0.8 billion, as compared to the corresponding period in fiscal 2023. This was primarily due to higher cash provided by operations, as compared to the prior-year period. For more information on our FCF, 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.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
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 and revolving credit facility since October 31, 2023.
In December 2023, we filed a shelf registration statement with the Securities and Exchange Commission that allows us to sell, at any time and from time to time, in one or more offerings, debt securities, preferred stock, common stock, warrants, depository shares, purchase contracts, guarantees or units consisting of any of these securities.
Significant funding and liquidity activities for the three months ended January 31, 2024 were as follows:
Debt Issuances
In January 2024, we issued $796 million of asset-backed debt securities in six tranches with a weighted average interest rate of 5.476% and final maturity date of November 2031.
Cash Requirements and Commitments
Contractual Obligations
Other than the previously mentioned issuance of asset-backed debt securities, our contractual obligations have not changed materially outside of the normal course of business since October 31, 2023. 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, 2023.
Retirement Benefit Plan Funding
For the remainder of fiscal 2024, we anticipate making contributions of approximately $131 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 January 31, 2024, we expect to make future cash payments of approximately $260 million in connection with our approved restructuring plans, which includes $150 million expected to be paid through the remainder of fiscal 2024 and $110 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, 2024, we had approximately $243 million of recorded liabilities and related interest and penalties pertaining to uncertain tax positions. These liabilities and related interest and penalties include $2 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.
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 January 31, | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2024 | 2023 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dollars | % of Revenue | Dollars | % of Revenue | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dollars in millions | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| GAAP net revenue | $ | 6,755 | 100 | % | $ | 7,809 | 100 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||
| GAAP cost of sales | 4,298 | 63.6 | % | 5,151 | 66.0 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| GAAP gross profit | 2,457 | 36.4 | % | 2,658 | 34.0 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Non-GAAP adjustments | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | 16 | 0.2 | % | 16 | 0.2 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Disaster (recovery) charges | (25) | (0.4) | % | — | — | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Non-GAAP gross profit | $ | 2,448 | 36.2 | % | $ | 2,674 | 34.2 | % |
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, | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2024 | 2023 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dollars | % of Revenue | Dollars | % of Revenue | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dollars in millions | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| GAAP earnings from operations | $ | 525 | 7.8 | % | $ | 591 | 7.6 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Non-GAAP Adjustments: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Amortization of intangible assets | 71 | 1.1 | % | 73 | 0.9 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Transformation costs | 20 | 0.3 | % | 102 | 1.3 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Disaster (recovery) charges | (25) | (0.4) | % | 1 | — | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | 141 | 2.1 | % | 140 | 1.8 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Acquisition, disposition and other related charges | 43 | 0.6 | % | 11 | 0.2 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Non-GAAP earnings from operations | $ | 775 | 11.5 | % | $ | 918 | 11.8 | % |
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 January 31, | |||||||||||||||||||||||||||||||||||||||||||||||
| 2024 | 2023 | ||||||||||||||||||||||||||||||||||||||||||||||
| Dollars | Diluted Net Earnings per Share | Dollars | Diluted Net Earnings per Share | ||||||||||||||||||||||||||||||||||||||||||||
| Dollars in millions | |||||||||||||||||||||||||||||||||||||||||||||||
| GAAP net earnings | $ | 387 | $ | 0.29 | $ | 501 | $ | 0.38 | |||||||||||||||||||||||||||||||||||||||
| Non-GAAP Adjustments: | |||||||||||||||||||||||||||||||||||||||||||||||
| Amortization of intangible assets | 71 | 0.05 | 73 | 0.06 | |||||||||||||||||||||||||||||||||||||||||||
| Transformation costs | 20 | 0.02 | 102 | 0.07 | |||||||||||||||||||||||||||||||||||||||||||
| Disaster (recovery) charges | (25) | (0.02) | 1 | — | |||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | 141 | 0.11 | 140 | 0.11 | |||||||||||||||||||||||||||||||||||||||||||
| Acquisition, disposition and other related charges | 43 | 0.03 | 11 | 0.01 | |||||||||||||||||||||||||||||||||||||||||||
| Earnings from equity interests(1) | (46) | (0.03) | 12 | 0.01 | |||||||||||||||||||||||||||||||||||||||||||
| Loss on equity investments, net | 61 | 0.05 | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Other adjustments(2) | 2 | — | 1 | — | |||||||||||||||||||||||||||||||||||||||||||
| Adjustments for taxes | (16) | (0.02) | (13) | (0.01) | |||||||||||||||||||||||||||||||||||||||||||
| Non-GAAP net earnings | $ | 638 | $ | 0.48 | $ | 828 | $ | 0.63 |
(1) For the three months ended January 31, 2024, includes the equity in earnings from H3C equity method investment and both periods include the amortization of the basis difference in our investment.
(2) Other adjustments includes non-service net periodic benefit cost and tax indemnification and other adjustments.
Reconciliation of net cash provided by operating activities to free cash flow.
| For the three months ended January 31, | |||||||||||||||||||||||
| 2024 | 2023 | ||||||||||||||||||||||
| In millions | |||||||||||||||||||||||
| Net cash provided by (used in) operating activities | $ | 64 | $ | (829) | |||||||||||||||||||
| Investment in property, plant and equipment | (656) | (794) | |||||||||||||||||||||
| Proceeds from sale of property, plant and equipment | 96 | 159 | |||||||||||||||||||||
| Effect of exchange rate changes on cash, cash equivalents, and restricted cash | 14 | 138 | |||||||||||||||||||||
| Free cash flow | $ | (482) | $ | (1,326) |
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 FCF. 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 FCF 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 stock-based compensation expense, and disaster (recovery) charges. See below for the reasons management excludes each item:
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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.
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Disaster (recovery) 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. We exclude Disaster (recovery) 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:
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
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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.
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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 and Cost Optimization and Prioritization Plan are substantially complete. 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 these costs to be material. We believe non-GAAP measures excluding these costs are useful to management and investors for comparing operating performance across multiple periods.
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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. For the first quarter of 2024, these charges were driven by costs associated with the pending acquisition of Juniper Networks, in addition to prior acquisitions of Axis and Athonet. For the first quarter of 2023, these charges were driven by acquisitions of Zerto and Determined AI. Charges may also include expenses associated with disposal activities including legal and arbitration settlements in connection with certain dispositions. We consider these acquisitions and divestitures to be discrete events. 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 earnings from equity interests, gain or loss on equity investments, other adjustments, 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:
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For the first fiscal quarter of 2024 and prospectively, the adjustment to earnings from equity interests includes the equity in earnings from the H3C investment. In connection with the planned divestiture of the H3C investment, we stopped reporting H3C earnings in our non-GAAP results as we no longer receive dividends from this investment due to the Put Share Purchase Agreement described in Note 16 “Equity Method Investments” to the Condensed Consolidated Financial Statements in Item 1 of Part I. Both periods presented include the amortization of the basis difference in our investment. For the first fiscal quarter of 2023, this adjustment also included our portion of intangible asset impairment charges from H3C. We believe that eliminating these amounts for purposes of calculating non-GAAP financial measures facilitates the evaluation of our current operating performance.
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We exclude gains and losses (including impairments) on our non-marketable equity investments because we do not believe they are reflective of normal continuing business operations. These adjustments are reflected in Interest and other, net in the Condensed Consolidated Statements of Earnings. We believe eliminating these adjustments for the purposes of calculating non-GAAP measures facilitates the evaluation of our current operating performance.
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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
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
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 2024, we will use a projected non-GAAP income tax rate of 15%, 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 2023, 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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