Hewlett Packard Enterprise Company — FY2018 Form 10-K
Reporting period: Fiscal year ended October 31, 2018. The filing is an annual report, not a standalone Q4 filing; quarterly figures below refer to the three months ended October 31, 2018. HPE provides enterprise technology across Hybrid IT, Intelligent Edge, Financial Services and Corporate Investments. Its former Enterprise Services and Software businesses are reported as discontinued operations following their 2017 separations.
Financial results and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $30.852 billion | $28.871 billion |
| Gross profit / margin | $9.292 billion / 30.1% | $8.694 billion / 30.1% |
| Earnings from continuing operations before interest, taxes and other listed items | $1.858 billion | $625 million |
| Net earnings from continuing operations | $2.012 billion | $436 million |
| Net earnings, including discontinued operations | $1.908 billion | $344 million |
| Diluted EPS, continuing operations | $1.30 | $0.26 |
| Cash from operating activities | $2.964 billion | $1.335 billion |
| Cash and cash equivalents at year-end | $4.880 billion | $9.579 billion |
| Total debt at year-end | $12.141 billion | $14.032 billion |
- Revenue grew 6.9% year over year, or 5.0% on a constant-currency basis. Products contributed $19.504 billion; services, $10.901 billion; and financing income, $447 million.
- Operating margin improved 3.8 percentage points year over year, with lower restructuring, separation and acquisition-related charges and lower SG&A as a share of revenue. Gross margin was unchanged at 30.1%.
- Operating cash flow improved by $1.629 billion. HPE attributed the increase mainly to higher net earnings and a $1.9 billion pension-funding payment in the prior year; greater working-capital cash use partly offset the improvement.
- Cash and cash equivalents fell by $4.699 billion. Cash uses included $3.568 billion of share repurchases, $570 million of dividends and $4.138 billion of debt payments; debt proceeds were $2.457 billion.
- Available borrowing resources were $5.757 billion. The company reported investment-grade credit ratings and no borrowings under its $4.0 billion revolving credit facility at year-end.
Fiscal fourth quarter
For the quarter ended October 31, 2018, revenue was $7.946 billion. HPE reported a $772 million loss from continuing operations and a $757 million net loss, or diluted loss per share of $0.52. The quarter included an income-tax provision of $1.348 billion and an $88 million goodwill impairment charge.
Segments and changes versus the prior year
- Hybrid IT: Revenue rose 6.0% to $25.033 billion; segment operating earnings increased to $2.654 billion from $2.274 billion. Compute growth reflected higher average selling prices, while Storage benefited partly from the Nimble Storage acquisition. HPE cited lower-margin solution mix and higher variable compensation as gross-margin pressures.
- Intelligent Edge: Revenue grew 13.4% to $2.929 billion, mainly from Aruba campus switching and edge compute. Segment operating earnings declined to $237 million from $253 million; operating margin fell to 8.1% from 9.8%, reflecting mix, R&D, selling costs and variable compensation.
- Financial Services: Revenue increased 1.9% to $3.671 billion, while operating earnings decreased to $290 million from $299 million. Financing volume rose 7.2% to $6.521 billion. Net bad-debt expense increased to $91 million from $45 million.
- Prior-year comparisons reflect the Everett and Seattle separations; historical results of the former businesses are classified as discontinued operations.
- HPE repurchased 222 million shares for $3.6 billion during FY2018. The quarterly dividend was raised from $0.075 to $0.1125 per share effective in Q3; $4.7 billion remained authorized for repurchases at year-end.
Outlook, commentary and risks
- HPE did not provide a clear numerical revenue or earnings forecast in the supplied filing text. Management described a strategy centered on edge-to-cloud offerings, growing Intelligent Edge, profitable Hybrid IT, and greater use of consumption-based models such as GreenLake.
- The HPE Next restructuring and transformation program is expected to run through fiscal 2020. HPE estimated approximately $1.4 billion of aggregate pre-tax charges under the HPE Next Plan, including about $1.2 billion for workforce reductions and $0.2 billion for infrastructure actions. FY2018 transformation costs were $425 million net of real-estate-sale gains.
- FY2018 net earnings were materially affected by tax items. HPE reported a $1.744 billion income-tax benefit and a highly unusual effective tax rate of negative 650.7%; the filing cites settlements of pre-separation tax liabilities, transaction-related matters, stock-compensation tax benefits and Tax Act effects. The Tax Act accounting remained provisional, including a $1.7 billion estimated Transition Tax charge, which HPE said it expected to offset with tax credits without a cash payment.
- Management highlighted cloud migration and weaker demand for some traditional hardware, intense competition and pricing pressure, component supply and cost risks, foreign-exchange exposure, channel and inventory management, cyber and data-security threats, and execution risks from restructuring and business-model changes.
- Contingencies include a DXC arbitration claim alleging roughly $1.0 billion of excess lease-related indemnification above a $250 million threshold; HPE disputes the claim. The filing also describes ongoing tax matters, employment claims, and litigation involving Oracle and other parties. HPE stated it had recorded adequate litigation provisions and that, as of year-end, a material loss beyond recorded amounts was not reasonably possible; outcomes remain uncertain.
Most important facts for investors to verify
- How much of FY2018 earnings and EPS is repeatable after separating operating performance from unusual tax benefits, tax charges and discontinued-operation losses.
- Whether Hybrid IT growth and Intelligent Edge expansion can sustain margins amid hardware mix shifts and competitive pricing.
- The cash requirements and realized savings from HPE Next, including the timing of the estimated $1.4 billion in plan charges.
- Liquidity and capital allocation after the $4.7 billion cash decline, substantial buybacks and dividends, and remaining debt maturities.
- Developments in the DXC lease-indemnification arbitration, tax audits and indemnities, and the other material litigation described in the filing.