Hewlett Packard Enterprise Company — Q3 FY2022 Form 10-Q
Reporting period: Three and nine months ended July 31, 2022. HPE is a global technology company focused on edge-to-cloud solutions, with businesses spanning Compute, HPC & AI, Storage, Intelligent Edge, Financial Services, and Corporate Investments and Other. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial results and liquidity
| Metric | Q3 FY2022 | Q3 FY2021 | Nine months FY2022 | Nine months FY2021 |
|---|---|---|---|---|
| Revenue | $6.951 billion | $6.897 billion | $20.625 billion | $20.430 billion |
| Gross profit / margin | $2.396 billion / 34.5% | $2.382 billion / 34.5% | $6.913 billion / 33.5% | $6.957 billion / 34.1% |
| Operating earnings / margin | $466 million / 6.7% | $282 million / 4.1% | $1.121 billion / 5.4% | $782 million / 3.8% |
| Net earnings | $409 million | $392 million | $1.172 billion | $874 million |
| Diluted EPS | $0.31 | $0.29 | $0.88 | $0.66 |
- Revenue mix and growth: Q3 product revenue was $4.314 billion, services $2.516 billion, and financing income $121 million. Reported revenue rose 0.8% in Q3 and 1.0% year to date; growth at constant currency was 4.3% and 2.6%, respectively.
- Cash flow: Q3 operating cash flow was $1.254 billion versus $1.130 billion a year earlier. For the nine months, operating cash flow fell to $1.557 billion from $2.915 billion; free cash flow was negative $201 million versus positive $1.457 billion. HPE attributed the decline mainly to supply-chain-related working-capital effects and higher capital investment.
- Balance sheet: At July 31, cash and cash equivalents were $3.762 billion; cash, cash equivalents and restricted cash totaled $4.449 billion. Total debt was $13.880 billion, up from $13.448 billion at October 31, 2021. Current assets were $19.521 billion and current liabilities $21.299 billion.
- Working capital: Inventory increased to $5.554 billion from $4.511 billion at October 31, 2021. Days of inventory supply rose to 110 from 82 at that date; HPE cited constrained supply, planned shipments, and strategic component purchases.
- Non-GAAP measures: Q3 non-GAAP operating margin was 10.5% and non-GAAP diluted EPS was $0.48; nine-month figures were 10.3% and $1.44. These measures exclude specified items and should be considered alongside GAAP results.
Material changes and segment performance
- Q3 GAAP operating margin improved 2.6 percentage points, primarily because transformation costs and SG&A were lower. Nine-month operating margin rose 1.6 points, principally reflecting lower transformation costs.
- Q3 gross margin was flat year over year; year-to-date gross margin declined 0.6 points. Supply constraints and associated cost increases pressured HPC & AI, Intelligent Edge, and Storage; pricing discipline and server cost management partly offset the impact.
- Q3 revenue increased in HPC & AI by 12.2% and Intelligent Edge by 8.0%, while Compute declined 3.2%, Storage 2.0%, Financial Services 3.2%, and Corporate Investments and Other 9.6%. HPC & AI revenue growth included the Frontier supercomputer, but its nine-month operating result was a $19 million loss, versus $89 million of earnings in the prior-year period.
- GreenLake-related annualized revenue run-rate was $858 million, up 22% year over year, compared with 34% growth a year earlier. HPE cited customer-base expansion, with currency effects, supply constraints, and installation delays weighing on growth.
Outlook, risks, contingencies, and unusual items
- Outlook: The filing provides no specific consolidated revenue or earnings guidance. Management said demand remained robust but supply constraints, inflation in material and logistics costs, delayed shipments, and elevated backlog and inventory were expected to continue in the near term. HPE stated it expected available cash, operating cash generation, and access to funding to meet liquidity needs for at least the next 12 months.
- Russia and Belarus: HPE suspended new sales and shipments in February 2022 and began an orderly exit in June. It recorded $162 million of nine-month pre-tax charges, principally for expected credit losses, severance, and abandoned assets; Q3 charges were $36 million. HPE warned that further escalation could adversely affect revenue, earnings, and cash flows.
- Goodwill risk: HPC & AI goodwill was approximately $3.7 billion, with 8% fair-value headroom at the prior annual test. Supply and operational challenges, delayed customer acceptance, and contract cost increases could contribute to a potentially material impairment if forecasts weaken. HPE also disclosed possible impairment exposure for its Software reporting unit amid declining market valuations.
- Legal matters: In the Oracle Terix copyright case, a jury awarded Oracle $30 million in compensatory damages; judgment and post-verdict motions, including requests for interest and attorneys’ fees, remained unresolved. HPE said it had recorded adequate provisions for contingencies and did not consider a material additional loss probable based on information available at July 31.
- Tax and debt events: HPE’s effective tax rate was 11.9% in Q3 and 5.0% for the nine months, affected by discrete tax items. The Inflation Reduction Act, enacted August 16, 2022, includes a corporate alternative minimum tax effective for HPE beginning in FY2024 and a 1% excise tax on qualifying net share repurchases after December 31, 2022; HPE was evaluating the effects. After quarter-end, HPE redeemed $1.35 billion of 4.40% senior notes at par on August 15, 2022, with no redemption penalty.
- Capital returns and commitments: HPE repurchased $384 million of shares and paid $467 million of shareholder dividends during the first nine months. The remaining repurchase authorization was $1.5 billion. Unconditional purchase obligations were approximately $1.7 billion; expected restructuring cash payments were approximately $0.5 billion.
Most important facts for investors to verify
- Whether supply-chain constraints, backlog conversion, inventory levels, and inflation-related costs improve or continue to constrain shipments, margins, and cash generation.
- Whether HPC & AI resolves customer-acceptance and contract-cost challenges, and whether the next goodwill test indicates impairment risk.
- Whether GreenLake ARR growth reaccelerates as installation delays and currency headwinds ease.
- How Russia and Belarus exit costs, credit losses, and any further geopolitical developments affect results and collections.
- The cash-flow outlook, capital spending, debt maturities and post-quarter debt redemption, share repurchases, and the potential effects of the new U.S. tax legislation.
- The final outcome and financial exposure in the Oracle Terix litigation and other contingencies.