HEWLETT PACKARD ENTERPRISE CO Management’s Discussion and Analysis of Financial Condition and Results of Operations. (Form 10-Q)

0

[ad_1]

HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

For purposes of this Management's Discussion and Analysis of Financial Condition
and Results of Operations ("MD&A") section, we use the terms "Hewlett Packard
Enterprise", "HPE", the "Company", "we", "us" and "our" to refer to Hewlett
Packard Enterprise Company. References in the MD&A section to "former Parent"
refer to HP Inc.

We intend the discussion of our financial condition and results of operations
that follows to provide information that will assist the reader in understanding
our Condensed Consolidated Financial Statements, changes in certain key items in
these financial statements from period-to-period and the primary factors that
accounted for these changes, as well as how certain accounting principles,
policies and estimates affect our Condensed Consolidated Financial Statements.
This discussion should be read in conjunction with our Condensed Consolidated
Financial Statements and the related notes that appear elsewhere in this
document.

The financial discussion and analysis in the following MD&A compares the three months ended January 31, 2022 to the comparable period of the previous year and, where applicable, to the January 31, 2022unless otherwise stated.

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.
                                       35

————————————————– ——————————

  Table of Content

              HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

                    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 our U.S. vaccine policy since first announced, as a result of the nationwide
temporary injunction prohibiting enforcement of the U.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 the U.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 the U.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, effective
February 14, 2022, our sites in the U.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 by William R.
Hewlett and David Packard, and we strive every day to uphold and enhance that
legacy through our dedication to providing innovative technological solutions to
our customers.

Our operations are organized into six reportable segments for financial reporting purposes: Compute, High Performance Computing and Artificial Intelligence (“HPC and AI”), Storage, Intelligent Edge, HPE Financial Services
(“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 January 31, 2022 compared to the three months ended January 31, 2021

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

————————————————– ——————————

  Table of Content

              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
                                       37

————————————————– ——————————

  Table of Content

              HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

                    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 Zero and the Intelligent Edge as-a-service business.

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. On March 1, 2022, we
declared our fiscal 2022 second quarterly dividend of $0.12 per share, payable
on April 8, 2022, to stockholders of record as of the close of business on March
11, 2022. As of January 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 of January 31, 2022 and October 31, 2021, our cash, cash
equivalents and restricted cash were $4.3 billion. In December 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 of January 31, 2022,
no borrowings were outstanding under this credit facility.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our Consolidated Financial Statements are prepared in accordance with U.S.
Generally Accepted Accounting Principles ("GAAP"), which requires us to make
estimates, judgments, and assumptions that affect the reported amounts of
assets, liabilities, net revenue, and expenses, and the disclosure of contingent
liabilities. An accounting policy is deemed to be critical if the nature of the
estimate or assumption it incorporates is subject to a material level of
judgment related to matters that are highly uncertain, and changes in those
estimates and assumptions are reasonably likely to materially impact our
Condensed Consolidated Financial Statements.

Estimates and judgments are based on historical experience, forecasted events,
and various other assumptions that we believe to be reasonable under the
circumstances. Estimates and judgments may vary under different assumptions or
conditions. We evaluate our estimates and judgments on an ongoing basis.
Accounting policies that are critical in the portrayal of our financial
condition and results of operations and require management's most difficult,
subjective, or complex judgements include revenue recognition, taxes on
earnings, business combinations, impairment assessment of goodwill and
intangible assets and contingencies.

Management believes that there have been no significant changes during the three
months ended January 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 ended October 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 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.
                                       38

————————————————– ——————————

  Table of Content

              HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

                    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 January 31,

                                                                          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.
                                       39

————————————————– ——————————

  Table of Content

              HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

                    Management's Discussion and Analysis of
           Financial Condition and Results of Operations (Continued)

Three months completed January 31, 2022 compared to the three months ended January 31, 2021

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 the
U.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
                                                                           ended January 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 $42 millionor 4% primarily due to higher employee compensation expense, which contributed 3.4 percentage points to the variation.

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

————————————————– ——————————

  Table of Content

              HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

                    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 $39 million primarily due to higher gains on equity investments, lower interest expense on lower average borrowings, and higher gains on the sale of certain assets during the reporting period. The decline was partly mitigated by unfavorable currency movements during the reporting period.

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
ended January 31, 2022 and 2021, respectively. For the three months ended
January 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 the
Hewlett 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 in H3C
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 ended January 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 the U.S. federal statutory rate of 21% due to favorable tax rates
associated with certain earnings from our operations in lower tax jurisdictions
throughout the world but are also impacted by discrete tax adjustments during
each fiscal period.

For 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 by Hewlett 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

————————————————– ——————————

  Table of Content

              HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

                    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 January 31, 2022compared to the period of the previous year:

                                        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 January 31,

                                                              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.
                                       42

————————————————– ——————————

  Table of Content

              HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

                    Management's Discussion and Analysis of
           Financial Condition and Results of Operations (Continued)

HPC and AI

                                                                     For 

the three months have ended January 31,

                                                                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 January 31,

                                                              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 January 31,

                                                                 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  %


                                       43

————————————————– ——————————

  Table of Content

              HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

                    Management's Discussion and Analysis of
           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 January 31,

                                                                 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.
                                       44

————————————————– ——————————

  Table of Content

              HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

                    Management's Discussion and Analysis of
           Financial Condition and Results of Operations (Continued)

Portfolio assets and ratios

The portfolio assets and ratios derived from the segment balance sheets for FS
were as follows:
                                                                                             As of
                                                                           January 31, 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 both January 31, 2022 and October 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 both January 31, 2022 and October 31, 2021 was $1.7
billion.

From January 31, 2022 and October 31, 2021FS’s net cash and cash equivalents balances were approximately $995 million and $898 millionrespectively.

Net portfolio assets at January 31, 2022 decreased by 2.6% compared to October 31, 2021. The decline is generally the result of an outflow of portfolio greater than the volume of new financings during the period, as well as unfavorable fluctuations in currencies.

FS bad debt expense includes charges to general reserves, specific reserves, and
write-offs for sales-type, direct-financing, and operating leases. For the three
months ended January 31, 2022 and 2021, FS recorded net bad debt expense of $23
million and $28 million, respectively.

As of January 31, 2022, FS experienced a decrease in billed finance receivables
compared to October 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 January 31,

                                                                      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)%

                                       45

————————————————– ——————————

  Table of Content

              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 the U.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 the U.S. as of January 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 the U.S. are generally utilized to support our non-U.S.
liquidity needs. Repatriations of amounts held outside the U.S. generally will
not be taxable from a U.S. federal tax perspective, but may be subject to state
income or foreign withholding tax. Where local restrictions prevent an efficient
intercompany transfer of funds, our intent is to keep cash balances outside of
the U.S. and to meet liquidity needs through ongoing cash flows, external
borrowings, or both. We do not expect restrictions or potential taxes incurred
on repatriation of amounts held outside of the U.S. to have a material effect on
our overall liquidity, financial condition, or results of operations.

In connection with the share repurchase program previously authorized by our
Board of Directors, during the first three months of fiscal 2022, we repurchased
and settled an aggregate amount of $129 million. As of January 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 of Equity 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 of
                                              January 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


                                       46

————————————————– ——————————

  Table of Content

              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 January 31,

                                                                       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 ended January 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

————————————————– ——————————

  Table of Content

              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 ended January 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 January 31,

                                                                     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. In December 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 since October 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.

In January 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 from March 2022 with a stated final
maturity date of November 2029.

From January 31, 2022 and October 31, 2021no borrowings were outstanding under our revolving credit facility.

As of January 31, 2022 and October 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

————————————————– ——————————

  Table of Content

              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 in January 2022, our
contractual obligations have not changed materially since October 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 ended October 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 of January 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 of January 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.

                                       49

————————————————– ——————————

  Table of Content

              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 January 31,

                                                                  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 January 31,

                                                                    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  %


                                       50

————————————————– ——————————

  Table of Content

              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 January 31,

                                                                     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 January 31,

                                                                     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


                                       51

————————————————– ——————————

  Table of Content

              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 in the United States. The GAAP measure
most directly comparable to net revenue on a constant currency basis is net
revenue. The GAAP measure most directly comparable to non-GAAP gross profit is
gross profit. The GAAP measure most directly comparable to non-GAAP gross profit
margin is gross profit margin. The GAAP measure most directly comparable to
non-GAAP earnings from operations is earnings from operations. The GAAP measure
most directly comparable to non-GAAP operating profit margin (non-GAAP earnings
from operations as a percentage of net revenue) is operating profit margin
(earnings from operations as a percentage of net revenue). The GAAP measure most
directly comparable to non-GAAP net earnings is net earnings. The GAAP measure
most directly comparable to non-GAAP diluted net earnings per share is diluted
net earnings per share. The GAAP measure most directly comparable to free cash
flow is cash flow from operations.

Net revenue on a constant currency basis assumes no change in the foreign
exchange rate from the prior-year period. Non-GAAP gross profit and non-GAAP
gross profit margin are defined to exclude charges related to the amortization
of initial direct costs and stock-based compensation expense. Non-GAAP earnings
from operations and non-GAAP operating profit margin (non-GAAP earnings from
operations as a percentage of net revenue) consist of earnings from operations
excluding any charges related to the amortization of initial direct costs,
amortization of intangible assets, transformation costs, stock-based
compensation expense 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 of U.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

————————————————– ——————————

Contents

© Edgar Online, source Previews

[ad_2]
Source link

Share.

Comments are closed.