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 nine months ended July 31, 2024 to the comparable prior-year period and where appropriate, as of July 31, 2024, 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), uneven demand across our portfolio, increased demand for and adoption of new technologies, conservative customer spending environment, persistent inflation, foreign exchange pressures, recent tax developments, and pending merger with Juniper Networks, Inc.

  • 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.

  • 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

During the first nine months of fiscal 2024, the effects of the evolving macroeconomic environment on demand persisted and certain significant developments impacted the environment in which we operate. Such developments, and their impact on our operations, were as follows:

Technological Advancements: We have observed market trends and demand (of customers of various segments and sizes) gravitating towards Artificial Intelligence ("AI"), hybrid cloud, edge computing, data security capabilities, and related offerings. The volume of data at the edge continues to grow, driven by the proliferation of more devices. 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.

Macroeconomic Uncertainty: The effect of the evolving macroeconomic environment continued to impact industry-wide demand, as customers take longer to work through prior orders and have been adopting a more conservative approach to discretionary IT spending. This has resulted in uneven demand across our portfolio and geographies, particularly for certain of our hardware offerings, 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 and possibly limit revenue growth in the near term.

Supply Chain: We have seen supply chain constraints for certain components, including graphics processing units, ease (though challenges still remain). 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. 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. We have experienced, and expect to continue experiencing, rising input component costs, principally driven by inflation. While we have been able to pass on such increased costs to customers, the pricing environment has been, and we believe will continue to remain, competitive, which may impact our financial results. We plan to mitigate the impact of these dynamics through continued disciplined cost management. Furthermore, during fiscal 2024, we have been experiencing higher-than-normal inventory levels, primarily due to longer than anticipated customer acceptance timelines on certain AI-related orders; we expect this trend to continue.

Recurring Revenue and Consumption Models: We continue to strengthen our core server 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. We expect that such flexible consumption model will continue to strengthen our customer relationships and contribute to growth in recurring revenue.

Foreign Currency Exposure: 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. We utilize a comprehensive hedging strategy intended to mitigate the impact of foreign currency volatility over time, and we adjust pricing when possible to further minimize foreign currency impacts.

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, 38 countries have enacted portions, or all, of the OECD proposal and a further 22 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.

The Internal Revenue Service (“IRS”) is conducting audits of our fiscal 2017 through 2022 U.S. federal income tax returns. During the fourth quarter of fiscal 2023, the IRS issued notices of proposed adjustments (“NOPAs”) for 2017, 2018, and 2019 relating to our intercompany transfer pricing. During the first quarter of fiscal 2024, the IRS issued a Revenue Agent Report (“RAR”) finalizing their position on the NOPAs for the same issues and same fiscal years. However, we disagreed with the IRS’ adjustments and believe the positions taken on our tax returns are more likely than not to prevail on technical merits and have continued with settlement discussions with the IRS. During the fiscal quarter, we submitted a formal settlement offer

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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

to the IRS to facilitate the closing of the audit and recorded increased reserves for unrecognized tax benefits of $122 million. The impact of the increase in reserves is almost entirely offset with a valuation allowance release, and the net impact to income tax expense for the three and nine months ended July 31, 2024 was not material. It is reasonably possible that the IRS audit for fiscal 2017 through 2019 may be concluded in the next 12 months, and it is reasonably possible that existing unrecognized tax benefits related to these years may be reduced by an amount up to $358 million within the next 12 months, the majority of which relates to adjustments to foreign tax credits that carry a full valuation allowance or to the timing of intercompany royalty revenue recognition, neither of which affects the Company’s effective tax rate.

Other Trends and Uncertainties: The impacts of trade protection measures, including increases in tariffs and trade barriers, changes in government policies and international trade arrangements, geopolitical volatility (including the ongoing conflict in the Middle East), and global macroeconomic challenges (including the relationship between China and the U.S.), may impact our operations, financial performance, and ability to conduct business in some non-U.S. markets. We monitor and seek to mitigate these risks with adjustments to our manufacturing, supply chain, and distribution networks.

Pending Merger with Juniper Networks, Inc: On January 9, 2024, we entered into a definitive Agreement and Plan of Merger (the “Merger Agreement”) under which we will acquire Juniper Networks, Inc. (“Juniper Networks”) in an all-cash transaction for $40.00 per share (the “Merger”), representing an equity value of approximately $14 billion. 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 new debt, mandatory convertible preferred securities, and cash on the balance sheet. On April 2, 2024, Juniper Networks shareholders approved the transaction. The closing of the transaction remains subject to receipt of regulatory approvals and satisfaction of other customary closing conditions.

For further information about the Merger, refer to Note 8, “Acquisitions” in Item 1 of Part I of this Quarterly Report, and for further discussion about the risks related to the Merger, see the section titled “Risk Factors” in Item 1A of Part II of the Quarterly Report on Form 10-Q for the fiscal quarter ended January 31, 2024.

The foregoing summary of the Merger, the adoption of the Merger Agreement, and the transactions contemplated thereby does not purport to be complete and is subject to, and qualified in its entirety by, the full text of the Merger Agreement, which is filed as Exhibit 2.1 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on January 10, 2024.

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.

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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 July 31,For the nine months ended July 31,
20242023Change20242023Change
Dollars in millions, except per share amounts
Net revenue$7,710$7,00210.1%$21,669$21,784(0.5)%
Gross profit$2,439$2,510(2.8)%$7,272$7,680(5.3)%
Gross profit margin31.6%35.8%(4.2)pts33.6%35.3%(1.7)pts
Earnings from operations$547$47116.1%$1,497$1,582(5.4)%
Operating profit margin7.1%6.7%0.4pts6.9%7.3%(0.4)pts
Net earnings$512$46410.3%$1,213$1,383(12.3)%
Diluted net earnings per share$0.38$0.35$0.03$0.92$1.05$(0.13)
Cash flow provided by operations$1,154$1,525$(371)$2,311$1,585$726

Three months ended July 31, 2024 compared with three months ended July 31, 2023

Net revenue of $7.7 billion represented an increase of 10.1% (increased 10.4% on a constant currency basis) primarily due to higher average unit prices ("AUPs") in the Server segment, moderated by lower volume and product mix effect in the Intelligent Edge segment. The gross profit margin of 31.6% (or $2.4 billion), represents a decrease of 4.2 percentage points from the prior-year period primarily due to a decline in revenue in the Intelligent Edge and Hybrid Cloud segments. The operating profit margin of 7.1% was relatively flat as compared to the prior-year period.

Nine months ended July 31, 2024 compared with nine months ended July 31, 2023

Net revenue of $21.7 billion represented a decrease of 0.5% in actual dollars and constant currency primarily due to lower volume and product mix effect in the Intelligent Edge segment, lower AUPs in the Hybrid Cloud segment, and lower unit volume in the Server segment. This decrease was moderated by an increase in AUPs in the Server segment. The gross profit margin of 33.6% (or $7.3 billion) represents a decrease of 1.7 percentage points from the prior-year period primarily due to higher mix of lower margin products in the Server segment and decline in revenue in the Intelligent Edge segment. The operating profit margin of 6.9% was relatively flat as compared to the prior-year period.

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

For the three months ended July 31,For the nine months ended July 31,
20242023Change20242023Change
Dollars in millions, except per share amounts
Net revenue in constant currency$7,732$7,00210.4%$21,678$21,784(0.5)%
Non-GAAP gross profit$2,450$2,516(2.6)%$7,281$7,715(5.6)%
Non-GAAP gross profit margin31.8%35.9%(4.1)pts33.6%35.4%(1.8)pts
Non-GAAP earnings from operations$771$7187.4%$2,230$2,435(8.4)%
Non-GAAP operating profit margin10.0%10.3%(0.3)pts10.3%11.2%(0.9)pts
Non-GAAP net earnings$661$6393.4%$1,860$2,152(13.6)%
Non-GAAP diluted net earnings per share$0.50$0.49$0.01$1.40$1.63$(0.23)
Free cash flow$669$955($286)$797$(83)$880

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.

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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

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 July 31, 2024 and 2023:

As of July 31,
20242023
Dollars in millions
ARR$1,723$1,272
Year-over-year growth rate35%48%

The 35% year-over year increase in ARR was primarily due to growth in our Hybrid Cloud, Server and Intelligent Edge segments, which was due to an expanding customer installed base, an expanded range of HPE GreenLake Flex Solutions, Server aaS 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 third quarter of fiscal 2024, we paid a quarterly dividend of $0.13 per share to our shareholders. On September 4, 2024, we declared a regular cash dividend of $0.13 per share on our common stock, payable on or about October 18, 2024, to our shareholders of record as of the close of business on September 19, 2024. As of July 31, 2024, we had a remaining authorization of approximately $0.9 billion for future share repurchases.

RESULTS OF OPERATIONS

Revenue from our international operations has historically represented, and we expect will continue to represent, a majority of our overall net revenue. As a result, our revenue growth has been impacted, and we expect will continue to be impacted, by fluctuations in foreign currency exchange rates. In order to provide a framework for assessing performance excluding the impact of foreign currency fluctuations, we present the year-over-year percentage change in revenue on a constant currency basis, which assumes no change in foreign currency exchange rates from the prior-year period and does not adjust for any repricing or demand impacts from changes in foreign currency exchange rates. This change in revenue on a constant currency basis is calculated as the quotient of (a) current year revenue converted to U.S. dollars using the prior-year period's foreign currency exchange rates divided by (b) the prior-year period revenue. This information is provided so that revenue can be viewed without the effect of fluctuations in foreign currency exchange rates, which is consistent with how management evaluates our revenue results and trends. This constant currency disclosure is provided in addition to, and not as a substitute for, the year-over-year percentage change in revenue on a GAAP basis. Other companies may calculate and define similarly labeled items differently, which may limit the usefulness of this measure for comparative purposes.

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

For the three months ended July 31,For the nine months ended July 31,
2024202320242023
Dollars% of RevenueDollars% of RevenueDollars% of RevenueDollars% of Revenue
Dollars in millions
Net revenue$7,710100.0%$7,002100.0%$21,669100.0%$21,784100.0%
Cost of sales5,27168.44,49264.214,39766.414,10464.7
Gross profit2,43931.62,51035.87,27233.67,68035.3
Research and development5477.15788.31,7197.91,7718.1
Selling, general and administrative1,22915.91,30218.63,66016.93,82817.6
Amortization of intangible assets600.8721.01980.92161.0
Transformation costs140.2651.0670.32271.1
Disaster charges50.11—5—5—
Acquisition, disposition and other related charges370.5210.21260.6510.2
Earnings from operations5477.14716.71,4976.91,5827.3
Interest and other, net(12)(0.2)(8)—(122)(0.6)(81)(0.4)
Earnings from equity interests730.9731.01610.71800.8
Earnings before provision for taxes6087.95367.71,5367.11,6817.7
Provision for taxes(96)(1.2)(72)(1.0)(323)(1.5)(298)(1.4)
Net earnings$5126.6%$4646.6%$1,2135.6%$1,3836.3%

Three and nine months ended July 31, 2024 compared with the three and nine months ended July 31, 2023

Net revenue

For the three months ended July 31, 2024, total net revenue of $7.7 billion represented an increase of $708 million, or 10.1% (increased 10.4% on a constant currency basis). U.S. net revenue increased by $449 million, or 18.5%, to $2.9 billion, and net revenue from outside of the U.S. increased by $259 million, or 5.7%, to $4.8 billion.

For the nine months ended July 31, 2024, total net revenue of $21.7 billion represented a decrease of $115 million, or 0.5% in actual dollars and constant currency. U.S. net revenue increased by $47 million, or 0.6%, to $7.8 billion, and net revenue from outside of the U.S. decreased by $162 million, or 1.2%, to $13.9 billion.

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

For the three months ended July 31, 2024For the nine months ended July 31, 2024
Percentage Points
Server15.93.3
Hybrid Cloud(1.4)(1.6)
Intelligent Edge(4.8)(2.6)
Financial Services0.10.1
Corporate Investments and Other0.20.1
Total segment10.0(0.7)
Elimination of intersegment net revenue and other0.10.2
Total HPE10.1(0.5)

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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 July 31, 2024 compared with three months ended July 31, 2023

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

  • Server net revenue increased $1,112 million, or 35.1%, primarily due to higher AUPs

  • Hybrid Cloud net revenue decreased $97 million, or 6.9%, primarily due to lower AUPs

  • Intelligent Edge net revenue decreased $335 million, or 23.0%, primarily due to lower volume and product mix effect

  • Financial Services net revenue increased $6 million, or 0.7%, primarily due to higher finance income

  • Corporate Investments and Other net revenue increased $16 million, or 6.5%, primarily due to revenue growth from Advisory and Professional Services (“A&PS”)

Nine months ended July 31, 2024 compared with nine months ended July 31, 2023

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

  • Server net revenue increased $712 million, or 6.6%, primarily due to higher AUPs

  • Hybrid Cloud net revenue decreased $348 million, or 8.4%, primarily due to lower AUPs

  • Intelligent Edge net revenue decreased $561 million, or 14.1%, primarily due to lower volume and product mix effect

  • Financial Services net revenue increased $15 million, or 0.6%, primarily due to higher finance income

  • Corporate Investments and Other net revenue increased $30 million, or 4.2%, primarily due to revenue growth from A&PS

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 nine months ended July 31, 2024, the total gross profit margin of 31.6% and 33.6%, respectively, represents a decrease of 4.2 and 1.7 percentage points, respectively, as compared to the respective prior year periods. The decrease for the three months ended July 31, 2024, was primarily due to a decline in revenue in the Intelligent Edge and Hybrid Cloud segments. The decrease for the nine months ended July 31, 2024, was primarily due to higher mix of lower margin products in the Server segment and decline in revenue in the Intelligent Edge segment.

Operating expenses

Research and development ("R&D")

For the three months ended July 31, 2024, R&D expense decreased by $31 million, or 5.4%, primarily due to capitalization of software development costs and lower employee costs, which contributed 3.6 and 2.3 percentage points, respectively, to the change.

For the nine months ended July 31, 2024, R&D expense decreased by $52 million, or 2.9%, primarily due to lower employee costs and capitalization of software development costs, which contributed 1.3 and 1.1 percentage points, respectively, to the change.

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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

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

For the three months ended July 31, 2024, SG&A expense decreased by $73 million, or 5.6%, primarily due to lower employee costs, which contributed 4.7 percentage points, lower travel and marketing expenses and consulting costs, both of which contributed 1.6 percentage points to the change.

For the nine months ended July 31, 2024, SG&A expense decreased by $168 million, or 4.4%, primarily due to lower employee costs, which contributed 2.9 percentage points, lower consulting costs and travel and marketing expenses, both of which contributed 1.1 percentage points to the change.

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 nine months ended July 31, 2024, transformation costs decreased by $51 million, or 78.5%, and $160 million, or 70.5%, respectively, 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.

Acquisition, disposition and other related charges

For the three and nine months ended July 31, 2024, acquisition, disposition and other related charges increased by $16 million or 76.2%, and $75 million, or 147.1%, respectively, primarily due to costs incurred in connection with the pending acquisition of Juniper Networks.

Interest and other, net

For the three months ended July 31, 2024, interest and other, net expense was relatively flat as compared to the prior-year period.

For the nine months ended July 31, 2024, interest and other, net expense increased by $41 million, or 50.6%, primarily due to an increase in loss on equity investments and unfavorable currency fluctuations in the current period and the previous year containing tax indemnification income due to an audit settlement. The increase was partially offset by a decrease in net interest expense and higher gains from sale of certain investments in the current period.

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 July 31, 2024, earnings from equity interests remained flat as compared to the prior-year period. For the nine months ended July 31, 2024, earnings from equity interests decreased $19 million, or 10.6%, 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 July 31, 2024 and 2023, we recorded income tax expense of $96 million and $72 million, respectively, which reflects an effective tax rate of 15.8% and 13.4%, respectively. For the nine months ended July 31, 2024 and 2023, we recorded income tax expense of $323 million and $298 million, respectively, which reflects an effective tax rate of 21.0% and 17.7%, respectively. For the three months ended July 31, 2024 and the three and nine months ended July 31, 2023, our effective tax rate differed 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 is 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, uses to evaluate, view, and run our business operations, which include, but are not

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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

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 July 31, 2024, as compared to the prior-year period:

HPE ConsolidatedServerHybrid CloudIntelligent EdgeFinancial ServicesCorporate Investments and Other
Dollars in millions
Net revenue(1)$7,710$4,280$1,300$1,121$879$262
Year-over-year change %10.1%35.1%(6.9)%(23.0)%0.7%6.5%
Earnings (loss) from operations(2)$547$464$66$251$79$(4)
Earnings (loss) from operations as a % of net revenue7.1%10.8%5.1%22.4%9.0%(1.5)%
Year-over-year change percentage points0.4pts0.7pts(0.3)pts(5.2)pts0.8pts6.6pts

The following table and ensuing discussion provide an overview of our key financial metrics by segment for the nine months ended July 31, 2024, as compared to the prior-year period:

HPE ConsolidatedServerHybrid CloudIntelligent EdgeFinancial ServicesCorporate Investments and Other
Dollars in millions
Net revenue(1)$21,669$11,499$3,804$3,408$2,619$752
Year-over-year change %(0.5)%6.6%(8.4)%(14.1)%0.6%4.2%
Earnings (loss) from operations(2)$1,497$1,273$123$841$234$(23)
Earnings (loss) from operations as a % of net revenue6.9%11.1%3.2%24.7%8.9%(3.1)%
Year-over-year change percentage points(0.4)pts(2.5)pts(1.2)pts0.5pts0.8pts5.3pts

(1)HPE consolidated net revenue excludes intersegment net revenue. Segment net revenues include intersegment net revenue.

(2)Segment earnings (loss) 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 July 31,For the nine months ended July 31,
20242023% Change20242023% Change
Dollars in millions
Net revenue$4,280$3,16835.1%$11,499$10,7876.6%
Earnings from operations$464$31945.5%$1,273$1,470(13.4)%
Earnings from operations as a % of net revenue10.8%10.1%11.1%13.6%

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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 July 31, 2024 compared with three months ended July 31, 2023

Server net revenue increased by $1,112 million, or 35.1% (increased 35.2% on a constant currency basis), primarily due to a $1,105 million, or 48.0%, increase in product revenue. The increase in product revenue was primarily due to higher net AUPs of $821 million, or 35.7%, and an increase in net unit volume of $282 million, or 12.3%.

Server earnings from operations as a percentage of net revenue increased 0.7 percentage points due to a decrease in operating expenses as a percentage of net revenue, moderated by an increase in costs of products and services as a percentage of net revenue. The decrease in operating expenses as a percentage of net revenue was primarily due to lower total operating expenses as a result of cost containment measures. The increase in costs of products and services as a percentage of net revenue was primarily due to higher mix of lower margin products.

Nine months ended July 31, 2024 compared with nine months ended July 31, 2023

Server net revenue increased by $712 million, or 6.6% (increased 6.7% on a constant currency basis), primarily due to a $730 million, or 8.9%, increase in product revenue. The increase in product revenue was primarily due to higher net AUPs of $1,038 million, or 12.7%. This increase was partially offset by lower net unit volume of $313 million, or 3.8%.

Server earnings from operations as a percentage of net revenue decreased 2.5 percentage points due to an increase in costs of products and services as a percentage of net revenue, moderated by a decrease in 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 higher mix of lower margin products and competitive pricing pressure. The decrease in operating expenses as a percentage of net revenue was primarily due to lower total operating expenses as a result of cost containment measures.

Hybrid Cloud

For the three months ended July 31,For the nine months ended July 31,
20242023% Change20242023% Change
Dollars in millions
Net revenue$1,300$1,397(6.9)%$3,804$4,152(8.4)%
Earnings from operations$66$75(12.0)%$123$181(32.0)%
Earnings from operations as a % of net revenue5.1%5.4%3.2%4.4%

Three months ended July 31, 2024 compared with three months ended July 31, 2023

Hybrid Cloud net revenue decreased by $97 million, or 6.9% (decreased 6.7% 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 $113 million, or 13.5%, primarily due to a decrease in AUPs of $267 million, or 31.8%, led by private cloud and storage products. This decrease was partially offset by a unit volume increase of $148 million or 17.6%, led by storage and private cloud products. Hybrid Cloud services revenue increased by $16 million, or 2.9%, primarily due to a unit volume increase of $44 million, or 8.0%, led by private cloud. This increase was partially offset by lower AUPs of $25 million, or 4.5%.

Hybrid Cloud earnings from operations as a percentage of net revenue remained relatively flat as compared to the prior-year period.

Table of Content

HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

Nine months ended July 31, 2024 compared with nine months ended July 31, 2023

Hybrid Cloud net revenue decreased by $348 million, or 8.4%, in actual dollars and constant currency primarily due to a decrease in AUPs, partially offset by an increase in unit volume. Hybrid Cloud product revenue decreased by $457 million, or 18.0%, primarily due to a decrease in AUPs of $688 million, or 27.2%, led by storage and private cloud products, partially offset by a unit volume increase of $214 million or 8.5%, led by storage products. Hybrid Cloud services revenue increased by $109 million, or 6.7%, primarily due to a unit volume increase of $176 million, or 10.8%, led by private cloud and infrastructure software-as-a-service ("SaaS"). This increase was partially offset by lower AUPs of $68 million, or 4.2%.

Hybrid Cloud earnings from operations as a percentage of net revenue decreased 1.2 percentage points 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. The decrease in cost of products and services as a percentage of net revenue was primarily due to higher margin GreenLake Flex Solutions deals, increase in storage subscription and infrastructure SaaS revenues. This was moderated by a decrease in AUPs for storage products.

Intelligent Edge

For the three months ended July 31,For the nine months ended July 31,
20242023% Change20242023% Change
Dollars in millions
Net revenue$1,121$1,456(23.0)%$3,408$3,969(14.1)%
Earnings from operations$251$402(37.6)%$841$961(12.5)%
Earnings from operations as a % of net revenue22.4%27.6%24.7%24.2%

Three months ended July 31, 2024 compared with three months ended July 31, 2023

Intelligent Edge net revenue decreased by $335 million, or 23.0% in actual dollars and constant currency. Product revenue decreased by $378 million, or 31.5%, led by lower volume and product mix effect of $324 million, or 27.0%, and lower AUPs of $54 million, or 4.5%. The product revenue decrease was primarily led by switching products and wireless local area network products due to softened demand. Services net revenue increased $43 million, or 16.8%, primarily led by our aaS offerings and attached support service.

Intelligent Edge earnings from operations as a percentage of net revenue decreased 5.2 percentage points primarily due to an increase in operating expenses as a percentage of net revenue, partially offset by a decrease in cost of products and services as a percentage of net revenue. Operating expenses as a percentage of net revenue increased primarily due to scale of net revenue decline, higher employee costs related to acquisitions and investment to enhance Aruba offerings in GreenLake. The decrease in cost of product and services as a percentage of net revenue was primarily due to favorable revenue mix and cost containment measures.

Nine months ended July 31, 2024 compared with nine months ended July 31, 2023

Intelligent Edge net revenue decreased by $561 million, or 14.1% (decreased 14.3% on a constant currency basis). Product revenue decreased by $711 million, or 21.9%, led by lower volume and product mix effect of $715 million, or 22.0%, and lower AUPs of $4 million, or 0.1%, moderated by favorable currency fluctuations of $8 million. The product revenue decrease was primarily led by switching products and wireless local area network products due to softened demand. Services net revenue increased $150 million, or 20.8%, primarily led by attached support service and our aaS offerings.

Intelligent Edge earnings from operations as a percentage of net revenue increased 0.5 percentage points primarily due to decreases in cost of products and services as a percentage of net revenue, partially offset by an increase in 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 cost containment measures. Operating expenses as a percentage of net revenue increased primarily due to scale of net revenue decline, higher employee costs related to acquisitions and investment to enhance Aruba offerings in GreenLake.

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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

Financial Services

For the three months ended July 31,For the nine months ended July 31,
20242023% Change20242023% Change
Dollars in millions
Net revenue$879$8730.7%$2,619$2,6040.6%
Earnings from operations$79$729.7%$234$21110.9%
Earnings from operations as a % of net revenue9.0%8.2%8.9%8.1%

Three months ended July 31, 2024 compared with three months ended July 31, 2023

FS net revenue increased by $6 million, or 0.7% (increased 1.4% on a constant currency basis) due primarily to higher finance income on higher average finance leases in a higher interest rate environment, partially offset by lower rental revenue on lower average operating leases, along with unfavorable currency impact.

FS earnings from operations as a percentage of net revenue increased 0.8 percentage points due to a decrease in cost of services as a percentage of net revenue, while operating expenses as a percentage of net revenue were relatively flat. The decrease in cost of services as a percentage of net revenue resulted primarily from lower depreciation expense, partially offset by higher borrowing costs.

Nine months ended July 31, 2024 compared with nine months ended July 31, 2023

FS net revenue increased by $15 million, or 0.6% (increased 0.2% on a constant currency basis) due primarily to higher finance income on higher average finance leases in a higher interest rate environment.

FS earnings from operations as a percentage of net revenue increased 0.8 percentage points although the cost of services as a percentage of net revenue and operating expenses as a percentage of net revenue were relatively flat.

Financing Volume

For the three months ended July 31,For the nine months ended July 31,
2024202320242023
In millions
Financing volume$1,483$1,655$4,518$4,923

Financing volume, which represents the amount of financing provided to customers for equipment and related software and services, including intercompany activity, decreased 10.4% and 8.2% for the three and nine months ended July 31, 2024, as compared to the prior-year period. The decrease for the three and nine months ended July 31, 2024, was primarily due to lower financing of third-party product and services, partially offset by higher financing of HPE product sales and services.

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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
July 31, 2024October 31, 2023
Dollars in millions
Financing receivables, gross$9,058$8,814
Net equipment under operating leases3,7804,100
Capitalized profit on intercompany equipment transactions(1)414263
Intercompany leases(1)111109
Gross portfolio assets13,36313,286
Allowance for credit losses(2)182178
Operating lease equipment reserve2936
Total reserves211214
Net portfolio assets$13,152$13,072
Reserve coverage1.6%1.6%
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 $11.4 billion and $11.6 billion as of July 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 at July 31, 2024 and October 31, 2023 was $1.6 billion and $1.7 billion, respectively.

As of July 31, 2024 and October 31, 2023, FS net cash and cash equivalents balances were approximately $534 million and $700 million, respectively.

Net portfolio assets as of July 31, 2024 increased 0.6% 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 and nine months ended July 31, 2024, FS recorded net bad debt expense of $14 million and $36 million, respectively. For the three and nine months ended July 31, 2023, FS recorded net bad debt expense of $16 million and $46 million, respectively.

Corporate Investments and Other

For the three months ended July 31,For the nine months ended July 31,
20242023% Change20242023% Change
Dollars in millions
Net revenue$262$2466.5%$752$7224.2%
Loss from operations$(4)$(20)80.0%$(23)$(61)62.3%
Loss from operations as a % of net revenue(1.5)%(8.1)%(3.1)%(8.4)%

Three months ended July 31, 2024 compared with three months ended July 31, 2023

Corporate Investments and Other net revenue increased by $16 million, or 6.5% (increased 9.8% on a constant currency basis), primarily due to revenue growth from A&PS, partially offset by unfavorable currency fluctuations.

Corporate Investments and Other loss from operations as a percentage of net revenue decreased by 6.6 percentage points primarily due to the scale of net revenue growth.

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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

Nine months ended July 31, 2024 compared with nine months ended July 31, 2023

Corporate Investments and Other net revenue increased by $30 million, or 4.2% (increased 6.4% on a constant currency basis), primarily due to revenue growth from A&PS, partially offset by unfavorable currency fluctuations.

Corporate Investments and Other loss from operations as a percentage of net revenue decreased by 5.3 percentage points primarily due to decreases in cost of services as a percentage of net revenue resulting from our cost containment measures, and decreases in operating expenses as a percentage of net revenue due to the scale of net revenue growth while operating expenses remained relatively flat.

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 judgments include revenue recognition, taxes on earnings, impairment assessment of goodwill and intangible assets, and contingencies.

As of July 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 anticipated proceeds from the sale of H3C shares held by us, 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 (including for the payment of consideration to consummate the Juniper Networks transaction) 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 July 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.

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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

In connection with the share repurchase program previously authorized by our Board of Directors, we repurchased and settled an aggregate amount of $100 million, during the first nine months of fiscal 2024. As of July 31, 2024, we had a remaining authorization of approximately $0.9 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 May 23, 2024, we announced plans to divest our Communications Technology Group ("CTG") business to HCLTech. CTG is included in our Communications and Media Solutions business, which is reported in the Corporate Investments and Other segment. This divestiture includes the platform-based software solutions portions of the CTG portfolio, including systems integration, network applications, data intelligence, and the business support systems groups. The disposition is subject to regulatory approvals and satisfaction of other customary closing conditions. As of July 31, 2024, assets and liabilities to be sold have been presented in our Condensed Consolidated Balance Sheet as assets and liabilities held for sale.

On January 9, 2024, we entered into a definitive Agreement and Plan of Merger 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 new debt, mandatory convertible preferred securities, and cash on the balance sheet. On April 2, 2024, Juniper Networks shareholders approved the transaction. The closing of the transaction remains subject to receipt of regulatory approvals 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. On May 24, 2024, our relevant subsidiaries entered into (i) an Amended and Restated Put Share Purchase Agreement with UNIS, whereby our relevant subsidiaries shall sell to UNIS 30% of the total issued share capital of H3C for pre-tax cash consideration of approximately $2.1 billion by August 31, 2024 (the “Sale Transaction”), and (ii) an Agreement on Subsequent Arrangements with UNIS, whereby upon closing of the Sale Transaction, our relevant subsidiary shall have a put option to sell to UNIS and UNIS shall have a call option to purchase from our relevant subsidiary 19% of the total issued share capital of H3C for pre-tax cash consideration of approximately $1.4 billion between the 16th month and until the 36th month after the Sale Transaction. The transactions referenced in clauses (i) and (ii) above, taken together, revise the arrangements governing the aforementioned sale of all of the H3C shares held by us, through our subsidiaries and are subject to certain grace periods and regulatory approvals. On September 4, 2024, pursuant to the Amended and Restated Put Share Purchase Agreement with UNIS, we received $2.1 billion of pre-tax consideration ($2.0 billion post-tax), in connection with the sale to UNIS of 30% of the total issued share capital of H3C.

Liquidity

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

As of
July 31, 2024October 31, 2023
In millions
Cash, cash equivalents and restricted cash$3,905$4,581
Total debt11,80312,355
Available borrowing resources(1)6,1096,588
Commercial paper programs(2)5,1155,071
Uncommitted lines of credit(3)9941,517

(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 July 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 $1.4 billion of which $0.4 billion was primarily utilized towards issuances of bank guarantees.

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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 tables represent the way in which management reviews cash flows:

For the nine months ended July 31,
20242023
In millions
Net cash provided by operating activities$2,311$1,585
Net cash used in investing activities(1,580)(3,186)
Net cash used in financing activities(1,372)(168)
Effect of exchange rate changes on cash, cash equivalents, and restricted cash(35)138
Net decrease in cash, cash equivalents and restricted cash$(676)$(1,631)
Free cash flow$797$(83)

Operating Activities

For the nine months ended July 31, 2024, net cash provided by operating activities increased by $0.7 billion, 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 higher cash payouts for variable compensation and unfavorable impacts from net hedge positions, as compared to the prior-year period.

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

As ofAs of
July 31, 2024October 31, 2023ChangeJuly 31, 2023October 31, 2022ChangeY/Y Change
Days of sales outstanding in accounts receivable ("DSO")454324447(3)1
Days of supply in inventory ("DOS")13187449188340
Days of purchases outstanding in accounts payable ("DPO")(172)(134)(38)(112)(149)37(60)
Cash conversion cycle4(4)823(14)37(19)

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 DSO remained relatively flat.

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 to support growth in AI systems.

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.

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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 nine months ended July 31, 2024, net cash used in investing activities decreased by $1.6 billion, as compared to the corresponding period in fiscal 2023. The decrease was primarily due to lower cash utilized in net financial collateral activities of $0.5 billion, lower investments in property, plant and equipment and software assets, net of sales proceeds of $0.3 billion, and the prior-year period containing net payments made in connection with business acquisitions of $0.8 billion.

Financing Activities

For the nine months ended July 31, 2024, net cash used in financing activities increased by $1.2 billion, as compared to the corresponding period in fiscal 2023. This was primarily due to lower proceeds from debt, net of issuance costs of $1.7 billion, partially offset by lower repayments of debt of $0.3 billion and lower share repurchases of $0.3 billion, 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") and software assets 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 nine months ended July 31, 2024, FCF increased by $0.9 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.

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 nine months ended July 31, 2024 were as follows:

Debt Issuances

*•*In June 2024, we issued $818 million of asset-backed debt securities in six tranches with a weighted average interest rate of 5.593% and final maturity date of April 2032.

  • 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.

Debt Repayments:

  • In April 2024, the Company repaid $1.0 billion of 1.45% Senior Notes on their original maturity date.

*•*During the nine months ended July 31, 2024, we repaid $1.1 billion of the outstanding asset-backed debt securities.

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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

Cash Requirements and Commitments

Contractual Obligations

Other than the previously mentioned 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, 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 $46 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 July 31, 2024, we expect to make future cash payments of approximately $195 million in connection with our approved restructuring plans, which includes $25 million expected to be paid through the remainder of fiscal 2024 and $170 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 July 31, 2024, we had approximately $238 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.

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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 July 31,For the nine months ended July 31,
2024202320242023
Dollars% of RevenueDollars% of RevenueDollars% of RevenueDollars% of Revenue
Dollars in millions
GAAP net revenue$7,710100%$7,002100%$21,669100%$21,784100%
GAAP cost of sales5,27168.4%4,49264.2%14,39766.4%14,10464.7%
GAAP gross profit2,43931.6%2,51035.8%$7,27233.6%7,68035.3%
Non-GAAP adjustments
Stock-based compensation expense90.1%90.1%390.2%380.1%
Disaster recovery(7)—%(3)—%(39)(0.2)%(3)—%
Divestiture related exit costs90.1%——%9—%——%
Non-GAAP gross profit$2,45031.8%$2,51635.9%$7,28133.6%$7,71535.4%

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 July 31,For the nine months ended July 31,
2024202320242023
Dollars% of RevenueDollars% of RevenueDollars% of RevenueDollars% of Revenue
Dollars in millions
GAAP earnings from operations$5477.1%$4716.7%$1,4976.9%$1,5827.3%
Non-GAAP Adjustments:
Amortization of intangible assets600.8%721.0%1980.9%2161.0%
Transformation costs140.2%650.9%670.3%2271.0%
Disaster (recovery) charges(2)—%(2)—%(34)(0.2)%2—%
Stock-based compensation expense801.0%911.3%3411.6%3571.6%
Divestiture related exit costs350.5%——%350.2%——%
Acquisition, disposition and other related charges370.5%210.3%1260.6%510.2%
Non-GAAP earnings from operations$77110.0%$71810.3%$2,23010.3%$2,43511.2%

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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 July 31,For the nine months ended July 31,
2024202320242023
DollarsDiluted Net Earnings per ShareDollarsDiluted Net Earnings per ShareDollarsDiluted Net Earnings per ShareDollarsDiluted Net Earnings per Share
Dollars in millions except per share amounts
GAAP net earnings$512$0.38$464$0.35$1,213$0.92$1,383$1.05
Non-GAAP Adjustments:
Amortization of intangible assets600.05720.051980.152160.16
Transformation costs140.01650.05670.052270.17
Disaster (recovery) charges(2)—(2)—(34)(0.03)2—
Stock-based compensation expense800.06910.073410.263570.28
Divestiture related exit costs350.03——350.03——
Acquisition, disposition and other related charges370.03210.021260.10510.04
Earnings from equity interests(44)(0.04)2—(132)(0.10)160.01
(Gain) Loss on equity investments, net(14)(0.01)——470.03——
Other adjustments(1)4—(42)(0.03)5—(48)(0.04)
Adjustments for taxes(21)(0.01)(32)(0.02)(6)(0.01)(52)(0.04)
Non-GAAP net earnings$661$0.50$639$0.49$1,860$1.40$2,152$1.63

(1) 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 July 31,For the nine months ended July 31,
2024202320242023
In millions
Net cash provided by operating activities$1,154$1,525$2,311$1,585
Investment in property, plant and equipment and software assets(543)(671)(1,759)(2,153)
Proceeds from sale of property, plant and equipment62102280347
Effect of exchange rate changes on cash, cash equivalents, and restricted cash(4)(1)(35)138
Free cash flow$669$955$797$(83)

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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 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, disaster (recovery) charges, and divestiture related exit costs. See below for the reasons management excludes each item:

  • 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 (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. 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.

  • Divestiture related exit costs include expenses associated with certain disposal activities. On May 23, 2024, HPE announced plans to divest the Company’s CTG business. We consider this divestiture to be a discrete event. We exclude these costs as these expenses are non-recurring exit costs to eliminate stranded costs of this business. In addition, our internal benchmarking analyses evidence that many industry participants and peers present non-GAAP financial measures excluding these charges.

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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

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 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.

  • 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 three and nine months ended July 31, 2024, these charges were driven by costs associated with the pending acquisition of Juniper Networks, in addition to prior acquisitions of Axis, Athonet and OpsRamp. For the three and nine months ended July 31, 2023, these charges were driven by acquisitions of Axis, Zerto, OpsRamp and Athonet. 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:

  • During the six months ended April 30, 2024, we stopped reporting H3C earnings in our non-GAAP results due to the planned divestiture of the H3C investment. Per the terms of the original Put Share Purchase Agreement, we weren’t anticipating receiving dividends from this investment prospectively. However, on May 24, 2024, we entered into an Amended and Restated Put Share Purchase Agreement and an Agreement on Subsequent Arrangements, both with UNIS, as described in Note 16 “Equity Method Investments” to the Condensed Consolidated Financial Statements in Item 1 of Part I, which, taken together, revise the arrangements governing the aforementioned sale as previously set forth in the original Put Share Purchase Agreement. For the three months ended July 31, 2024, the adjustment to earnings from equity interests represents our expectation at such time to divest 30% of the total issued share capital of H3C in fiscal 2024. On September 4, 2024, we divested 30% of the total issued share capital of H3C. We continue to possess the option to sell the remaining 19% of the total issued share capital of H3C at a later date. Prospectively, the adjustment to earnings from equity interests will incorporate the completed divestment of 30% of the total issued share capital of H3C. All periods presented include the amortization of the basis difference in our investment. For the nine

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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

months ended July 31, 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.

  • 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.

  • 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 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 and software assets 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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