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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
For purposes of this Management's Discussion and Analysis of Financial Condition
and Results of Operations ("MD&A") section, we use the terms "Hewlett Packard
Enterprise", "HPE", the "Company", "we", "us" and "our" to refer to Hewlett
Packard Enterprise Company . References in the MD&A section to "former Parent"
refer to HP Inc.
We intend the discussion of our financial condition and results of operations
that follows to provide information that will assist the reader in understanding
our Condensed Consolidated Financial Statements, changes in certain key items in
these financial statements from period-to-period and the primary factors that
accounted for these changes, as well as how certain accounting principles,
policies and estimates affect our Condensed Consolidated Financial Statements.
This discussion should be read in conjunction with our Condensed Consolidated
Financial Statements and the related notes that appear elsewhere in this
document.
The financial discussion and analysis in the following MD&A compares the three months ended
This management report is organized as follows:
•Trends and uncertainties. A discussion of significant events and uncertainties known to management, such as an update to our COVID-19 response and other events.
•Executive Overview. A discussion of our business and a summary analysis of our financial performance and other highlights, including non-GAAP financial measures, affecting the Company in order to provide context to the remainder of the MD&A. •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.
•Results of operations. An analysis of operating results at the consolidated level is followed by an analysis of operating results at the segment level.
•Liquidity and capital resources. An analysis of changes in our cash flows and a discussion of our financial position and liquidity.
• Contractual Cash and Other Obligations. An overview of contractual cash obligations, funding of pension and post-employment benefit plans, restructuring plans, uncertain tax positions and off-balance sheet arrangements.
•GAAP to Non-GAAP Reconciliations. Each non-GAAP financial measure has been
reconciled to the most directly comparable GAAP financial measure therein. This
section also includes a discussion of the usefulness of non-GAAP financial
measures, and material limitations associated with the use of non-GAAP financial
measures.
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Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
TRENDS AND UNCERTAINTIES
The overall demand environment continues to improve, but remains impacted by ongoing industry-wide supply chain constraints, which have moderated our revenue growth, increased costs and delayed some unit shipments, resulting in a higher level of order backlog and related inventory at the end of the period. . We expect this trend to continue in the near term.
COVID-19 Update
Our vaccination policy remains in effect; however, there have been modifications to ourU.S. vaccine policy since first announced, as a result of the nationwide temporary injunction prohibiting enforcement of theU.S. Federal Executive Order requiring contractors and subcontractors performing work on or in connection with certain federal contracts to be fully vaccinated against COVID-19. As a result of this injunction, we will not be making vaccination a standard condition of employment in theU.S. at this time. However, vaccination will be required for entering our sites, working at customer and third-party sites, and for travel and events, unless team members have an approved exemption through human resources and undergo routine testing. Outside of theU.S. , we have implemented vaccination/risk strategies where legally permissible and where vaccines are readily available. Such strategies differ from location to location, based on local requirements, and can take the form of mandatory vaccinations and/or testing requirements; vaccine passports or related certificates; government reports indicating vaccination rates of company employees; or other government-mandated risk strategies. At least 12 countries in which we operate have already implemented, or are in the process of implementing, their pandemic risk strategy. After careful analysis of information and guidance provided by public health and government authorities regarding the pandemic, and due to the efforts we have taken to mitigate risk through our workplace vaccination policy, effectiveFebruary 14, 2022 , our sites in theU.S. reopened for employees who are fully vaccinated, with exemptions allowed in certain instances including routine testing as advised. Employees electing to return to the office do so on a voluntary basis and must follow all local health regulations with regards to masking and physical distancing.
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 byWilliam R. Hewlett andDavid Packard , and we strive every day to uphold and enhance that legacy through our dedication to providing innovative technological solutions to our customers.
Our operations are organized into six reportable segments for financial reporting purposes: Compute, High Performance Computing and Artificial Intelligence (“HPC and AI”), Storage, Intelligent Edge,
(“FS”), and Business Investments and Others.
The global pandemic has brought a renewed focus on digital transformation as businesses rethink everything from remote work and collaboration to business continuity and data insights. Businesses are looking ahead, beyond the demands of the pandemic, and treating digital transformation as a strategic imperative. Additionally, the pandemic has accelerated several trends relevant to the company: the exponential increase of data at the edge; the need for a cloud experience everywhere to manage the growth of data at the edge; and the need to quickly extract value from the captured data. Enterprises have embraced multi-cloud strategies for different cloud environments for different types of data and workloads. Increasingly, customers want to digitally transform, while preserving capital and eliminating operating expense, by paying only for the IT they use. In response, we are accelerating in our areas of strategic focus, including the Intelligent Edge and HPC & AI businesses, while at the same time, strengthening our core Compute and Storage businesses, investing in key areas of growth and accelerating our as-a-service pivot to become the edge-to-cloud platform as-a-service choice for our customers and partners with our HPE GreenLake Cloud platform.
Three months completed
Net revenue of$7.0 billion represented an increase of 1.9% (also increased 1.9% on a constant currency basis) due primarily to a combination of strong demand reflected by double-digit revenue growth in networking products, effective pricing management in server products and growth in the Apollo product category. The gross profit margin of 33.7% (or$2.3 billion ) represents an increase of 0.2 percentage points due primarily to pricing discipline coupled with strong cost management in server products, a mix-shift towards higher-margin software offerings, and lower depreciation expense in FS, moderated by the 36
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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
impact of ongoing supply chain constraints. The operating profit margin was
6.4%, up 3.2 percentage points due primarily to a decrease in transformation
costs. We used $76 million of cash flow from operations and $577 million of free
cash flows primarily due to unfavorable net working capital management resulting
in part from the ongoing supply chain constraints.
The following table summarizes our condensed consolidated GAAP financial results
for the periods presented:
For the three months ended January 31,
2022 2021 Change
Dollars in millions, except per share
amounts
Net revenue $ 6,961 $ 6,833 1.9%
Gross profit $ 2,344 $ 2,288 2.4%
Gross profit margin 33.7 % 33.5 % 0.2pts
Earnings from operations $ 448 $ 222 101.8%
Operating profit margin 6.4 % 3.2 % 3.2pts
Net earnings $ 513 $ 223 130.0%
Diluted net earnings per share $ 0.39 $ 0.17 $0.22
Cash flow (used in) from operations $ (76) $ 963 $(1,039)
The following table summarizes our condensed consolidated non-GAAP financial results for the periods presented:
For the three months ended January 31,
2022 2021 Change
Dollars in millions, except per share
amounts
Net revenue adjusted for currency $ 6,964 $ 6,833 1.9%
Non-GAAP gross profit $ 2,360 $ 2,303 2.5%
Non-GAAP gross profit margin 33.9 % 33.7 % 0.2pts
Non-GAAP earnings from operations $ 768 $ 773 (0.6)%
Non-GAAP operating profit margin 11.0 % 11.3 % (0.3)pts
Non-GAAP net earnings $ 697 $ 679 2.7%
Non-GAAP diluted net earnings per share $ 0.53 $ 0.52 $0.01
Free cash flow $ (577) $ 563 $(1,140)
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" at the end of this MD&A for these reconciliations,
along with a discussion of the usefulness of these non-GAAP financial measures,
and material limitations associated with the use of these non-GAAP financial
measures.
Annualized Revenue Execution Rate (“ARR”)
ARR represents the annualized revenue of all net HPE GreenLake services revenue, related financial services revenue (which includes rental income from operating leases and interest income from capital leases) and software-as-a-service, software consumption revenue, and other as-a-service offerings, recognized during a quarter and multiplied by four. We use ARR as a performance metric. ARR should be viewed independently of net revenue and is not intended to be combined with it.
The following outlines our ARR performance for the period:
For the three months ended January 31,
2022 2021
Dollars in millions
ARR $ 798 $ 649
year-over-year growth rate 23 % 27%
The 23% increase in ARR was due to growth across our HPE GreenLake as-a-service
platforms and related financial services due to an expanding customer installed
base. The increase was limited by supply constraints in certain installations.
At
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Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
At the segment level, ARR’s growth was driven by the strength of storage as a service, including
Returning capital to our shareholders remains an important part of our capital allocation framework that consists of capital returns to shareholders and strategic investments. During the first quarter of fiscal 2022, we paid a quarterly dividend of$0.12 per share to our shareholders. OnMarch 1, 2022 , we declared our fiscal 2022 second quarterly dividend of$0.12 per share, payable onApril 8, 2022 , to stockholders of record as of the close of business onMarch 11, 2022 . As ofJanuary 31, 2022 , we had a remaining authorization of$1.8 billion for future share repurchases. We believe our existing balance of cash and cash equivalents, along with commercial paper and other short-term liquidity arrangements, are sufficient to satisfy our working capital needs, capital asset purchases, dividends, debt repayments, and other liquidity requirements associated with our existing operations. As ofJanuary 31, 2022 andOctober 31, 2021 , our cash, cash equivalents and restricted cash were$4.3 billion . InDecember 2021 , we terminated our prior senior unsecured revolving credit facility and entered into a new senior unsecured revolving credit facility with an aggregate lending commitment of$4.75 billion for a period of five years. As ofJanuary 31, 2022 , no borrowings were outstanding under this credit facility.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our Consolidated Financial Statements are prepared in accordance withU.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. Management believes that there have been no significant changes during the three months endedJanuary 31, 2022 , to the items that we disclosed as our "Critical Accounting Policies and Estimates" in Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year endedOctober 31, 2021 . A summary of significant accounting policies and a summary of recent accounting pronouncements applicable to our Condensed Consolidated Financial Statements are included in Note 1, "Overview and Summary of Significant Accounting Policies", to the Condensed Consolidated Financial Statements in Item 1 of Part I.
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 toU.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. 38
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Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Operating results in dollars and as a percentage of net revenues are as follows:
For the three months ended
2022 2021
Dollars % of Revenue Dollars % of Revenue
Dollars in millions
Net revenue $ 6,961 100.0 % $ 6,833 100.0 %
Cost of sales 4,617 66.3 4,545 66.5
Gross profit 2,344 33.7 2,288 33.5
Research and development 504 7.2 468 6.8
Selling, general and administrative 1,201 17.3 1,159 17.0
Amortization of intangible assets 73 1.1 110 1.6
Transformation costs 111 1.6 311 4.6
Acquisition, disposition and other related charges 7 0.1 18 0.3
Earnings from operations 448 6.4 222 3.2
Interest and other, net (5) - (44) (0.7)
Tax indemnification and related adjustments (17) (0.2) (16) (0.2)
Non-service net periodic benefit credit 36 0.5 17 0.3
Earnings from equity interests 31 0.4 26 0.4
Earnings before benefit for taxes 493 7.1 205 3.0
Benefit for taxes 20 0.3 18 0.3
Net earnings $ 513 7.4 % $ 223 3.3 %
Stock-based compensation expense is included in the charges and expenses presented in the table above as follows:
For the three months ended January
31,
2022 2021
In millions
Cost of sales $ 15 $ 13
Research and development 44 37
Selling, general and administrative 69 60
Acquisition, disposition and other related charges - 3
Total $ 128 $ 113
On April 14, 2021 (the "Approval Date"), shareholders of the Company approved
the Hewlett Packard Enterprise Company 2021 Stock Incentive Plan (the "2021
Plan") that replaced the Company's 2015 Stock Incentive Plan (the "2015 Plan").
The 2021 Plan provides for the grant of various types of awards including
restricted stock awards, stock options and performance-based awards. These
awards generally vest over 3 years from the grant date. The maximum number of
shares that may be delivered to the participants under the 2021 Plan shall not
exceed 7 million shares, plus 35.8 million shares that were available for grant
under the 2015 Plan as of the Approval Date and any awards granted under the
2015 Plan prior to the Approval Date that were cash-settled, forfeited,
terminated or lapsed after the Approval Date. As of January 31, 2022 , the
Company had remaining authorization of 23.1 million shares under the 2021 Plan.
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Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Three months completed
Net revenue Total net revenue of$7.0 billion represented an increase of$128 million , or 1.9% (increased 1.9% on a constant currency basis).U.S. net revenue increased by$140 million , or 6.4%, to$2.3 billion , and net revenue from outside of theU.S. decreased by$12 million , or 0.3%, to$4.7 billion . From a segment perspective, net revenue increased across many of our segments due to the improved demand environment led by revenue growth of 11% in Intelligent Edge, 4% in HPC & AI, and 1% in Compute and Corporate Investments and Other. Net revenue declined by 3% and 2% in Storage and Financial Services, respectively. The components of the weighted net revenue change by segment were as follows: For the three months endedJanuary 31, 2022 Percentage points Compute 0.5 HPC & AI 0.4 Storage (0.5) Intelligent Edge 1.3 Financial Services (0.3) Corporate Investments 0.1 Total Segment 1.5 Elimination of Intersegment net revenue and Other 0.4 Total HPE 1.9
Please see the “Segment Information” section below for a discussion of our results of operations for each reportable segment.
Gross profit
Our gross profit margin of 33.7% represents an increase of 0.2 percentage points due primarily to pricing discipline coupled with strong cost management in server products, a mix-shift to higher-margin software offerings, and lower depreciation expense in FS. These increases to gross margin were moderated by the impact of industry-wide ongoing supply chain constraints, such as increased logistics costs. Operating expenses
Research and Development (“R&D”)
R&D expense increased by$36 million , or 8% due primarily to higher employee compensation expense (which included increased headcount) which contributed 6.6 percentage points to the change, as each of our segments focuses on developing an end-to-end cloud-native infrastructure to serve as the foundation for our as-a-service or consumption service delivery models which are integrated into or further enhancing our overall HPE GreenLake platform.
Selling, general and administrative expenses
Selling, general and administrative expenses increased by
Amortization of intangible assets
Amortization of intangible assets decreased by$37 million , or 34% due to higher write-offs of certain intangible assets in the prior-year period and certain intangible assets associated with prior acquisitions reaching the end of their amortization periods. The decrease was moderated by an increase in amortization expense in the current period resulting from recent acquisitions. 40
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Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Transformation programs and costs
Our transformation programs consist of the cost optimization and prioritization plan (launched in 2020) and the HPE Next initiative (launched in 2017).
Transformation costs decreased by$200 million , or 64% due primarily to lower restructuring charges recorded in the current period. For a further discussion, refer to Note 3, "Transformation Programs" to the Condensed Consolidated Financial Statements in Item 1 of Part I.
Interest and other, net
Net interest and other charges decreased by
Tax compensation and related adjustments
We recorded tax indemnification expense of$17 million and$16 million , which included changes in certain pre-divestiture tax liabilities for the three months endedJanuary 31, 2022 and 2021, respectively. For the three months endedJanuary 31, 2021 , the amount also included changes in tax liabilities for which we shared joint and several liability with HP Inc. and for which we were indemnified by HP Inc.
Non-service net periodic benefit credit
Non-service net periodic benefit credit represents the components of net periodic pension benefit credit and costs, other than service cost, for theHewlett Packard Enterprise defined benefit pension and post-retirement benefit plans, such as interest cost, expected return on plan assets, and the amortization of prior plan amendments and actuarial gains or losses. The credit also includes the impact of any plan settlements, curtailments, or special termination benefits. Non-service net periodic benefit credit increased by$19 million due primarily to lower amortized actuarial losses, partially offset by higher interest cost due to higher discount rates.
Result of participations
Earnings from equity interests primarily represents our 49% interest inH3C Technologies and the amortization of our interest in basis difference. Earnings from equity interests increased by$5 million , due primarily to a decrease in amortization expense from basis difference in the current period partially offset by lower net income earned by H3C.
(Provision) tax benefit
For the three months endedJanuary 31, 2022 and 2021, we recorded income tax benefit of$20 million and$18 million , respectively, which reflect an effective tax rate of (4.1)% and (8.8)%, respectively. Our effective tax rate generally differs from theU.S. federal statutory rate of 21% due to favorable tax rates associated with certain earnings from our operations in lower tax jurisdictions throughout the world but are also impacted by discrete tax adjustments during each fiscal period.
For more details, refer to Note 5, “Income taxes” of the summary consolidated financial statements in Item 1 of Part I.
Segment information
Hewlett Packard Enterprise's organizational structure is based on a number of factors that the Chief Operating Decision Maker ("CODM"), who is the Chief Executive Officer ("CEO"), uses to evaluate, view, and run our business operations, which include, but are not limited to, customer base and homogeneity of products and technology. The segments are based on this organizational structure and information reviewed byHewlett Packard Enterprise's management to evaluate segment results. A description of the products and services for each segment, along with other pertinent information related to our segments can be found in Note 2, "Segment Information", to the Condensed Consolidated Financial Statements in Item 1 of Part I. 41
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Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Sector results
The following table and ensuing discussion provide an overview of our key financial metrics by segment for the three months ended
HPE Consolidated Compute HPC & AI Storage Intelligent Edge
Financial services Business investment
Dollars in millions Net revenue(1) (3)$ 6,961 $ 3,016 $ 790 $ 1,156 $ 901 $ 842 $ 325 Year-over-year change % 1.9 % 1.1 % 3.8 % (3.0) % 11.2 % (2.1) % 1.2 % Earnings from operations(2) (3)$ 448 $ 416 $ (7) $ 168 $ 157 $ 104 $ (11) Earnings from operations as a % of net revenue 6.4 % 13.8 % (0.9) % 14.5 % 17.4 % 12.4 % (3.4) % Year-over-year change percentage points 3.2 pts 2.4 pts (6.6) pts (5.1) pts (1.6) pts 2.6 pts 6.3 pts
(1) HPE Consolidated Net Revenue excludes intersegment net revenue.
(2) Segment operating income excludes certain unallocated corporate costs and eliminations, stock-based compensation expense, amortization of initial direct costs, amortization of intangible assets, transformation costs and acquisition, disposal and other related charges.
(3)Effective at the beginning of the first quarter of fiscal 2022, we
implemented minor organizational changes to align our segment financial
reporting more closely with our current business structure resulting in
immaterial changes to certain prior period segment revenue and earnings from
operations amounts. These changes had no impact to HPE's previously reported
consolidated GAAP results.
Compute
For the
three months completed
2022 2021 % Change
Dollars in millions
Net revenue $ 3,016 $ 2,984 1.1 %
Earnings from operations $ 416 $ 341 22.0 %
Earnings from operations as a % of net revenue 13.8 % 11.4 %
Compute net revenue increased by $32 million , or 1.1% (increased 0.5% on a
constant currency basis), due primarily to higher average unit prices resulting
from disciplined pricing actions and favorable currency fluctuations moderated
by lower unit shipments. The decline in unit shipments resulted from continued
material constraints due to a challenging supply chain environment. As a result,
Compute ended the period with a significantly higher level of order backlog.
From a product perspective, Compute saw revenue growth in the rack server category moderated by lower revenue due to some products nearing end of life. Services net revenue decreased due to lower attachment counts and delayed hardware shipments.
Compute earnings from operations as a percentage of net revenue increased 2.4
percentage points due to decreases in costs of products and services as a
percentage of net revenue and operating expense as a percentage of net revenue.
The decrease in costs of products and services as a percentage of net revenue
was primarily due to pricing discipline coupled with strong cost management and
favorable currency fluctuations moderated by a lower mix of higher margin
services. The decrease in operating expense as a percentage of net revenue was
primarily due to lower variable compensation expense.
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Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
HPC and AI
For
the three months have ended
2022 2021 % Change
Dollars in millions
Net revenue $ 790 $ 761 3.8 %
Earnings from operations $ (7) $ 43 (116.3) %
Earnings from operations as a % of net revenue (0.9) % 5.7 %
HPC & AI net revenue increased by $29 million , or 3.8% (increased 3.6% on a
constant currency basis) due primarily to an improved demand environment with
growth in HPC products led by the Apollo and Edge Compute product categories.
This increase was moderated by a decline in net revenue from Cray products as a
result of delays in receiving customer acceptance on certain deals, and a
decline in services revenue due primarily to lower support services as a result
of an unfavorable portfolio mix of lower attachments from end-of-life products.
HPC & AI earnings from operations as a percentage of net revenue decreased 6.6
percentage points due to increases in cost of products and services as a
percentage of net revenue and operating expenses as a percentage of net revenue.
The increase in cost of products and services as a percentage of net revenue was
due primarily to the impact of fixed overhead costs as a result of the shift in
timing of revenue recognition on certain deals, and a lower mix of revenue from
services and higher-margin products. The increase in operating expenses as a
percentage of net revenue was primarily due to higher investments in research
and development that are focused on high-performance computing solutions, both
on-premise and in the cloud, while integrating such portfolio into our HPE
GreenLake platform.
Storage room
For the
three months completed
2022 2021 % Change
Dollars in millions
Net revenue $ 1,156 $ 1,192 (3.0) %
Earnings from operations $ 168 234 (28.2) %
Earnings from operations as a % of net revenue 14.5 % 19.6 %
Storage net revenue decreased by $36 million or 3.0% (decreased 3.4% on a
constant currency basis) due primarily to supply chain constraints, particularly
with our owned intellectual property products, which can contain certain unique
components. Net revenue declined in Storage products moderated by an increase in
Storage services. The decline in Storage products was led by declines in HPE
3PAR, Nimble Storage, and the Hyperconverged product portfolio. The increase in
Storage services was led by Zerto and Nimble Services as we continue our
transition to more services, and software-rich offerings.
Storage earnings from operations as a percentage of net revenue decreased 5.1
percentage point due to increases in cost of products and services as a
percentage of net revenue and operating expenses as a percentage of net revenue.
The increase in cost of products and services as a percentage of net revenue was
due primarily to supply chain constraints which unfavorably impacted our
higher-margin product mix, partially offset by higher margin product from Zerto .
The increase in operating expenses as a percentage of net revenue was due
primarily to higher investments in research and development related as-a-service
offerings.
Intelligent Edge
For
the three months have ended
2022 2021 % Change
Dollars in millions
Net revenue $ 901 $ 810 11.2 %
Earnings from operations $ 157 $ 154 1.9 %
Earnings from operations as a % of net revenue 17.4 % 19.0 %
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Financial Condition and Results of Operations (Continued)
Intelligent Edge net revenue increased by $91 million , or 11.2% (increased 11.4%
on a constant currency basis) from growth in product and services revenue due to
an improving demand environment despite continued supply chain constraints. The
increase in product revenue was led by the Switching and WLAN product
categories. The increase in services revenue was led by attached support
services and our as-a-service offerings.
Intelligent Edge earnings from operations as a percentage of net revenue
decreased 1.6 percentage points due primarily to an increase in cost of products
and services as a percentage of net revenue, partially offset by a decrease in
operating expenses as a percentage of net revenue. The increase in cost of
product and services as a percentage of net revenue was primarily due to higher
supply chain costs. Operating expenses as a percentage of net revenue decreased
primarily due to lower variable compensation expense.
Financial services
For
the three months have ended
2022 2021 % Change
Dollars in millions
Net revenue $ 842 $ 860 (2.1) %
Earnings from operations $ 104 $ 84 23.8 %
Earnings from operations as a % of net revenue 12.4 % 9.8 %
FS net revenue decreased by $18 million , or 2.1% (decreased 0.6% on a constant
currency basis) due primarily to unfavorable currency fluctuations, along with a
decrease in rental revenue due to lower average operating leases, partially
offset by higher asset management revenue from pre-owned equipment sales and
lease buyouts.
FS earnings from operations as a percentage of net revenue increased 2.6
percentage points due primarily to lower cost of services as a percentage of net
revenue. The decrease to cost of services as a percentage of net revenue
resulted primarily from a combination of lower depreciation expense, borrowing
costs, and bad debt expense. Operating expenses as a percentage of net revenue
remained relatively flat.
Financing Volume
For the three months ended January 31,
2022 2021
In millions
Financing volume $ 1,388 $ 1,245
Financing volume, which represents the amount of financing provided to customers
for equipment and related software and services, including intercompany
activity, increased by 11.5% due primarily to higher financing of third-party
product sales and services, partially offset by unfavorable currency
fluctuations.
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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, 2022 October 31, 2021
Dollars in millions
Financing receivables, gross $ 8,981 $ 9,198
Net equipment under operating leases 3,913 4,001
Capitalized profit on intercompany equipment transactions(1) 254 275
Intercompany leases(1) 86 96
Gross portfolio assets 13,234 13,570
Allowance for credit losses(2) 227 228
Operating lease equipment reserve 44 39
Total reserves 271 267
Net portfolio assets $ 12,963 $ 13,303
Reserve coverage 2.0 % 2.0 %
Debt-to-equity ratio(3) 7.0x 7.0x
(1) Intra-group activity is eliminated on consolidation.
(2) Allowance for credit losses for financing receivables includes current 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$11.9 billion at bothJanuary 31, 2022 andOctober 31, 2021 , 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 bothJanuary 31, 2022 andOctober 31, 2021 was$1.7 billion .
From
Net portfolio assets at
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 endedJanuary 31, 2022 and 2021, FS recorded net bad debt expense of$23 million and$28 million , respectively. As ofJanuary 31, 2022 , FS experienced a decrease in billed finance receivables compared toOctober 31, 2021 , which included limited impact to collections from customers as a result of COVID-19. We are currently unable to fully predict the extent to which COVID-19 may adversely impact future collections of our receivables.
Corporate investments
For the three months ended
2022 2021 % Change
Dollars in millions
Net revenue $ 325 $ 321 1.2 %
Loss from operations $ (11) $ (31) 64.5 %
Loss from operations as a % of net revenue (3.4)
% (9.7)%
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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Corporate Investments and Other net revenue increased by $4 million , or 1.2%
(increased 5.6% on a constant currency basis) due primarily 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 6.3 percentage points due to decreases in cost of services as
a percentage of net revenue while operating expenses as a percentage of net
revenue remained relatively unchanged. The decrease in cost of services as a
percentage of net revenue was primarily due to improved service delivery
efficiencies.
CASH AND CAPITAL RESOURCES
Current overview
We use cash generated by operations as our primary source of liquidity. We believe that internally generated cash flows will be generally sufficient to support our operating businesses, capital expenditures, product development initiatives, acquisitions, and disposal activities including legal settlements, restructuring activities, transformation costs, indemnifications, maturing debt, interest payments, and income tax payments, in addition to any future investments, share repurchases, and stockholder dividend payments. We expect to supplement this short-term liquidity, if necessary, by accessing the capital markets, issuing commercial paper, and borrowing under credit facilities made available by various domestic and foreign financial institutions. However, our access to capital markets may be constrained and our cost of borrowing may increase under certain business, market, and economic conditions. We anticipate that the funds made available and cash generated from operations along with our access to capital markets will be sufficient to meet our liquidity requirements for at least the next twelve months and for the foreseeable future thereafter. We continue to monitor the severity and duration of the COVID-19 pandemic and its impact on theU.S. and other global economies, the capital markets, consumer behavior, our businesses, results of operations, financial condition, and cash flows. 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 theU.S. as ofJanuary 31, 2022 . 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 theU.S. are generally utilized to support our non-U.S. liquidity needs. Repatriations of amounts held outside theU.S. generally will not be taxable from aU.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 theU.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 theU.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 2022, we repurchased and settled an aggregate amount of$129 million . As ofJanuary 31, 2022 , we had a remaining authorization of$1.8 billion for future share repurchases. For more information on our share repurchase program, refer to the section entitled "Unregistered Sales ofEquity Securities and Use of Proceeds" in Item 2 of Part II. Liquidity Our cash, cash equivalents, restricted cash, total debt and available borrowing resources were as follows: As ofJanuary 31, 2022 October 31, 2021 In millions
Cash, cash equivalents and restricted cash $4,276
4,332
Total debt $ 14,072 $ 13,448
Available borrowing resources
Commercial paper programs $ 5,057 $ 5,045
Uncommitted lines of credit $ 949 $ 972
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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
The tables below represent how management reviews cash flows:
For the
three months completed
2022 2021
In millions
Net cash (used in) provided by operating activities $ (76) $ 963
Net cash used in investing activities (335) (652)
Net cash provided by (used in) financing activities 355 (459)
Net decrease in cash, cash equivalents and restricted cash $ (56) $ (148)
Operating Activities
For the three months ended January 31, 2022 , net cash from operating activities
decreased by $1.0 billion , as compared to the corresponding period in fiscal
2021. The decrease was primarily due to unfavorable net working capital
management driven by supply chain constraints, as compared to the prior-year
period.
Our working capital metrics and cash conversion impacts were as follows:
As of As of
January 31, 2022 October 31, 2021 Change January 31, 2021 October 31, 2020 Change Y/Y Change
Days of sales outstanding in
accounts receivable ("DSO") 44 49 (5) 39 42 (3) 5
Days of supply in inventory
("DOS") 104 82 22 55 48 7 49
Days of purchases outstanding
in accounts payable ("DPO") (128) (128) - (103) (97) (6) (25)
Cash conversion cycle 20 3 17 (9) (7) (2) 29
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 2021, the increase in DSO in the current period was
primarily due to unfavorable billings linearity.
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
2021, the increase in DOS in the current period was primarily due to higher
levels of inventory resulting from a combination of supply chain constraints,
positioning of inventory to fulfill planned future shipments and strategic
purchases of certain key components.
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 2021, the increase in DPO was primarily due to higher inventory
purchases in the current period for planned future shipments.
Investing activities
For the three months endedJanuary 31, 2022 , net cash used in investing activities decreased by$0.3 billion , as compared to the corresponding period in fiscal 2021. The decrease was primarily due to lower cash utilized in net financial collateral activities of$0.4 billion and higher cash utilized for investment in property, plant and equipment, net of sales proceeds of$0.1 billion , as compared to the prior-year period. 47
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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Fundraising activities
For the three months endedJanuary 31, 2022 , net cash generated from financing activities increased by$0.8 billion , as compared to the corresponding period in fiscal 2021. The increase was primarily due to higher proceeds from debt, net of issuance costs of$1.0 billion and higher cash utilized for share repurchases and stock-based award activities of$0.2 billion , as compared to the prior-year period. Free Cash Flow For the
three months completed
2022 2021
In millions
Net cash (used in) provided by operating activities $ (76) $ 963
Investment in property, plant and equipment (624) (513)
Proceeds from sale of property, plant and equipment 123 113
Free Cash Flow $ (577) $ 563
Free cash flow is defined as cash flow from operations less investments in
property, plant and equipment net of proceeds from the sale of property, plant
and equipment. For the three months ended January 31, 2022 , free cash flow
decreased by $1.1 billion , as compared to the corresponding period in fiscal
2021. The decrease was due to lower cash generated from operations of $1.0
billion and higher cash utilized for investment in property, plant and
equipment, net of sales proceeds of $0.1 billion , as compared to the prior-year
period.
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 a number of 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. InDecember 2021 , we terminated our prior senior unsecured revolving credit facility and entered into a new senior unsecured revolving credit facility with an aggregate commitment of$4.75 billion for a period of five years. There have been no changes to our commercial paper and shelf registration statement sinceOctober 31, 2021 . For further information on our capital resources, see Note 11, "Borrowings" to the Condensed Consolidated Financial Statements in Item 1 of Part I. InJanuary 2022 , we issued$1.0 billion of asset-backed debt securities ("ABS") in six tranches at a weighted average price of 99.99% and a weighted average interest rate of 1.51%, payable monthly fromMarch 2022 with a stated final maturity date ofNovember 2029 .
From
As ofJanuary 31, 2022 andOctober 31, 2021 , no borrowings were outstanding under the Parent Programs, and$693 million and$705 million , respectively, were outstanding under our subsidiary's program. During the first three months of fiscal 2022, we issued$205 million and repaid$194 million of commercial paper. 48
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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
CONTRACTUAL CASH AND OTHER OBLIGATIONS
Contractual obligations
Other than the previously mentioned issuance of ABS inJanuary 2022 , our contractual obligations have not changed materially sinceOctober 31, 2021 . For further information see "Contractual Cash and Other Obligations" in Item 7 of Part II of our Annual Report on Form 10-K for the fiscal year endedOctober 31, 2021 .
Funding of the pension plan
For the remainder of fiscal 2022, we anticipate making contributions of approximately$147 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 ofJanuary 31, 2022 , we expect to make future cash payments of approximately$650 million in connection with our approved restructuring plans, which includes$330 million expected to be paid through the remainder of fiscal 2022 and$320 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 ofJanuary 31, 2022 , we had approximately$330 million of recorded liabilities and related interest and penalties pertaining to uncertain tax positions. These liabilities and related interest and penalties include$30 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 tax authorities might occur due to the uncertainties related to these tax matters. Payments of these obligations would result from settlements with tax 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 day-to-day 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 in the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
We have renewable short-term financing agreements with third parties to facilitate the working capital needs of certain customers. For more information on our revolving short-term financing arrangements with third parties, 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 and 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 completed
2022 2021
% of % of
Dollars Revenue Dollars Revenue
Dollars in millions
GAAP Net revenue $ 6,961 100 % $ 6,833 100 %
GAAP Cost of sales 4,617 66.3 % 4,545 66.5 %
GAAP Gross profit $ 2,344 33.7 % $ 2,288 33.5 %
Non-GAAP adjustments
Amortization of initial direct costs 1 - % 2 - %
Stock-based compensation expense 15 0.2 % 13 0.2 %
Non-GAAP Gross Profit $ 2,360 33.9 % $ 2,303 33.7 %
Reconciliation of GAAP operating profit and operating margin to non-GAAP operating profit and operating margin.
For
the three months have ended
2022 2021
% of % of
Dollars Revenue Dollars Revenue
Dollars in millions
GAAP earnings from operations $ 448 6.4 % $ 222 3.2 %
Non-GAAP adjustments:
Amortization of initial direct costs 1 - % 2 - %
Amortization of intangible assets 73 1.0 % 110 1.6 %
Transformation costs 111 1.6 % 311 4.6 %
Stock-based compensation expense 128 1.8 % 110 1.6 %
Acquisition, disposition and other related charges 7 0.2 % 18 0.3 %
Non-GAAP earnings from operations $ 768 11.0 % $ 773 11.3 %
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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 have ended
2022 2021
Diluted net Diluted net
earnings per earnings per
Dollars share Dollars share
Dollars in millions
GAAP net earnings $ 513 $ 0.39 $ 223 $ 0.17
Non-GAAP adjustments:
Amortization of initial direct costs 1 - 2 -
Amortization of intangible assets 73 0.06 110 0.08
Transformation costs 111 0.08 311 0.23
Stock-based compensation expense 128 0.10 110 0.08
Acquisition, disposition and other related charges 7 0.01 18 0.01
Tax indemnification and related adjustments 17 0.01 16 0.02
Non-service net periodic benefit credit (36) (0.03) (17) (0.01)
Earnings from equity interests(1) 17 0.01 34 0.03
Adjustments for taxes (134) (0.10) (128) (0.09)
Non-GAAP net earnings $ 697 $ 0.53 $ 679 $ 0.52
(1) Represents the amortization of basis difference adjustments related to the sale of H3C.
Reconciliation of net cash (used) provided by operating activities to free cash flow.
For the
three months completed
2022 2021
In millions
Net cash (used in) provided by operating activities $ (76) $ 963
Investment in property, plant and equipment (624) (513)
Proceeds from sale of property, plant and equipment 123 113
Free cash flow $ (577) $ 563
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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 Financial Measures
The non-GAAP financial measures presented are net revenue on a constant currency basis, non-GAAP gross profit, non-GAAP gross profit margin, non-GAAP operating profit margin (non-GAAP earnings from operations as a percentage of net revenue), non-GAAP net earnings, non-GAAP diluted net earnings per share, and free cash flow. These non-GAAP financial measures are used by management for purposes of evaluating our historical and prospective financial performance, as well as evaluating our performance relative to our competitors. These non-GAAP financial measures are not computed in accordance with, or as an alternative to, generally accepted accounting principles inthe United States . The GAAP measure most directly comparable to net revenue on a constant currency basis is net revenue. The GAAP measure most directly comparable to non-GAAP gross profit is gross profit. The GAAP measure most directly comparable to non-GAAP gross profit margin is gross profit margin. The GAAP measure most directly comparable to non-GAAP earnings from operations is earnings from operations. The GAAP measure most directly comparable to non-GAAP operating profit margin (non-GAAP earnings from operations as a percentage of net revenue) is operating profit margin (earnings from operations as a percentage of net revenue). The GAAP measure most directly comparable to non-GAAP net earnings is net earnings. The GAAP measure most directly comparable to non-GAAP diluted net earnings per share is diluted net earnings per share. The GAAP measure most directly comparable to free cash flow is cash flow from operations. Net revenue on a constant currency basis assumes no change in the foreign exchange rate from the prior-year period. Non-GAAP gross profit and non-GAAP gross profit margin are defined to exclude charges related to the amortization of initial direct costs and stock-based compensation expense. Non-GAAP earnings from operations and non-GAAP operating profit margin (non-GAAP earnings from operations as a percentage of net revenue) consist of earnings from operations excluding any charges related to the amortization of initial direct costs, amortization of intangible assets, transformation costs, stock-based compensation expense and acquisition, disposition and other related charges. Non-GAAP net earnings and Non-GAAP diluted net earnings per share consist of net earnings or diluted net earnings per share excluding those same charges, as well as items such as tax indemnification and related adjustments, non-service net periodic benefit credit, earnings from equity interests, certain income tax valuation allowances and separation taxes, the impact ofU.S. tax reform, structural rate adjustment and excess tax benefit from stock-based compensation. In addition, non-GAAP net earnings and non-GAAP diluted net earnings per share are adjusted by the amount of additional taxes or tax benefits associated with each non-GAAP item. We believe that excluding the items mentioned above from these non-GAAP financial measures allows management to better understand our consolidated financial performance in relation to the operating results of our segments. Management does not believe that the excluded items are reflective of ongoing operating results, and excluding them facilitates a more meaningful evaluation of our current operating performance in comparison to our peers. The excluded items can be inconsistent in amount and frequency and/or not reflective of the operational performance of the business. These non-GAAP financial measures have limitations as analytical tools, and these measures should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. Some of the limitations in relying on these non-GAAP financial measures are that they can have a material impact on the equivalent GAAP earnings measures and cash flows, they may be calculated differently by other companies and may not reflect the full economic effect of the loss in value of certain assets. We compensate for these limitations on the use of non-GAAP financial measures by relying primarily on our GAAP results and using non-GAAP financial measures only as a supplement. We also provide a reconciliation of each non-GAAP financial measure to its most directly comparable GAAP measure. We believe that providing net revenue on a constant currency basis, non-GAAP gross profit, non-GAAP gross profit margin, non-GAAP earnings from operations, non-GAAP operating profit margin, non-GAAP net earnings, non-GAAP diluted net earnings per share, and free cash flow, in addition to the related GAAP measures provides greater transparency to the information used in our financial and operational decision making and allows the reader of our Condensed Consolidated Financial Statements to see our financial results "through the eyes" of management. 52
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Contents
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