Hewlett Packard Enterprise Company — FY2020 Form 10-K
Reporting period: Fiscal year ended October 31, 2020. This is an annual filing, not a standalone fourth-quarter report. HPE is a global enterprise technology company focused on edge-to-cloud infrastructure, services and consumption-based offerings. The year was materially affected by COVID-19, which disrupted demand, supply chains and customer deployments.
Financial performance
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | $26.982 billion | $29.135 billion |
| Gross profit margin | 31.4% | 32.6% |
| Operating income (loss) | $(329) million | $1.274 billion |
| Net income (loss) | $(322) million | $1.049 billion |
| Diluted EPS | $(0.25) | $0.77 |
| Cash from operations | $2.240 billion | $3.997 billion |
| Cash, cash equivalents and restricted cash at year-end | $4.621 billion | $4.076 billion |
| Total debt at year-end | $15.941 billion | $13.820 billion |
- Revenue fell 7.4% (6.4% in constant currency). Product revenue was $16.264 billion, services revenue $10.249 billion and financing income $469 million.
- Operating cash flow declined by $1.757 billion year over year, principally due to lower operating earnings and unfavorable working capital. Cash used in investing was $2.578 billion; cash provided by financing was $883 million.
- HPE reported non-GAAP net earnings of $1.765 billion and non-GAAP diluted EPS of $1.35. These exclude, among other items, goodwill impairment, transformation costs and intangible amortization; they are supplemental, not GAAP results.
- Current assets were $16.556 billion and current liabilities $18.738 billion at year-end. The filing reports $6.297 billion of available borrowing resources and an undrawn $4.75 billion revolving credit facility; availability includes commercial paper programs and uncommitted lines.
Material changes and segment results
- Compute revenue declined 10.5% to $12.215 billion; operating earnings fell to $893 million from $1.550 billion. HPE cited pricing pressure, capacity constraints and currency effects.
- Storage revenue declined 9.7% to $4.681 billion, including the expiration of a one-time legacy contract. Operating earnings were $719 million, down from $924 million.
- HPC & MCS revenue rose 4.3% to $3.036 billion, mainly reflecting the Cray acquisition; operating earnings declined to $237 million from $320 million.
- Intelligent Edge revenue decreased 2.0% to $2.855 billion, while operating earnings increased to $281 million from $159 million. HPE acquired Silver Peak for approximately $879 million in September 2020.
- Financial Services revenue decreased 6.4% to $3.352 billion. Its net portfolio assets were $13.274 billion; bad-debt expense rose to $93 million from $75 million.
- HPE recorded an $865 million goodwill impairment in HPC & MCS following COVID-related reductions in forecast growth and profitability. At the annual test, that reporting unit had only 7% fair-value headroom over carrying value.
Outlook, management commentary and risks
- HPE provided no clear consolidated revenue or earnings guidance in the supplied filing text. Management said the duration and financial effects of COVID-19 remained uncertain, while identifying demand for as-a-service offerings, secure connectivity, remote work and analytics as opportunities.
- The cost optimization and prioritization plan is expected to run through FY2023. HPE estimates at least $1.0 billion in gross savings and at least $800 million in annualized net run-rate savings by the end of FY2023, relative to its FY2019 exit. Estimated related cash funding is $1.3 billion over three years.
- HPE Next was extended through FY2023. HPE expects further IT and real-estate transformation costs, partly offset by real-estate sale gains. FY2020 transformation costs were $950 million.
- HPE paid dividends of $0.12 per share quarterly during FY2020 and declared the same quarterly dividend for January 2021. It suspended share repurchases in April 2020; FY2020 repurchases totaled $355 million, with $2.1 billion of authorization remaining.
- Key risks include prolonged pandemic effects, weaker IT spending, supply-chain and component constraints, intense price competition, execution of the subscription/as-a-service transition, cybersecurity, foreign-exchange exposure, and potential further goodwill impairment. The transition to subscription offerings may also require incremental investment and pressure near-term cash flow.
- Debt rose year over year. HPE issued senior notes during FY2020, including $2.25 billion in April and $1.75 billion in July; the July proceeds were used primarily to redeem $3.0 billion of notes due in October 2020.
- HPE disclosed ongoing litigation and tax contingencies, including appeals and proceedings involving Oracle, Network-1 and India customs matters. Management stated it had recorded adequate provisions and that, as of October 31, 2020, a material loss beyond recognized amounts was not reasonably possible; outcomes remain uncertain.
Most important facts for investors to verify
- Whether revenue, margins and operating cash flow recover as pandemic-related constraints ease, especially in Compute and Storage.
- Whether the stated FY2023 savings targets are achieved, and how restructuring cash payments and transformation charges affect cash generation.
- HPC & MCS performance and goodwill valuation, given its 7% annual-test headroom after the $865 million impairment.
- Debt maturities, borrowing costs, liquidity availability and the effect of financing operations on consolidated leverage and cash flows.
- Customer collections and credit quality in Financial Services, including the trend in billed receivables, reserves and bad-debt expense.
- Developments in significant litigation, tax matters and indemnification arrangements with HP Inc., DXC and Micro Focus.