Hewlett Packard Enterprise Company — Q2 FY2023 Form 10-Q
Reporting period: Three and six months ended April 30, 2023. Unaudited consolidated financial statements; amounts are in U.S. dollars. HPE provides edge-to-cloud technology, infrastructure, networking, storage, and financing solutions.
Financial performance and position
| Metric | Three months ended Apr. 30, 2023 | Year-over-year change | Six months ended Apr. 30, 2023 |
|---|---|---|---|
| Revenue | $6.973 billion | +3.9% reported; +8.6% constant currency | $14.782 billion; +8.1% reported |
| Gross profit / margin | $2.512 billion / 36.0% | Margin +3.6 percentage points | $5.170 billion / 35.0% |
| Operating earnings / margin | $520 million / 7.5% | Margin +4.4 percentage points | $1.111 billion / 7.5% |
| Net earnings | $418 million | +67.2% | $919 million; +20.4% |
| Diluted EPS | $0.32 | Up from $0.19 | $0.70; up from $0.57 |
| Cash flow from operations | $889 million | Up from $379 million | $60 million; down from $303 million |
| Free cash flow | $288 million | Up from negative $211 million | Negative $1.038 billion; prior year negative $788 million |
Q2 non-GAAP operating margin was 11.5%, versus 9.3%; non-GAAP diluted EPS was $0.52, versus $0.44. These measures exclude specified costs and should be considered alongside GAAP results. For the six-month period, cash and restricted cash fell to $2.955 billion from $4.763 billion at October 31, 2022. Total debt rose to $13.376 billion from $12.465 billion. HPE reported $5.697 billion of available borrowing resources and no draws on its $4.75 billion revolving credit facility.
Material changes versus the prior comparable period
- Intelligent Edge was the standout: Q2 revenue rose 50.4% to $1.304 billion and segment operating margin increased to 26.9% from 12.6%.
- Compute Q2 revenue fell 8.3% to $2.761 billion, primarily on lower server unit volume and currency effects, partly offset by higher average selling prices.
- HPC & AI Q2 revenue increased 18.3% to $840 million as customer acceptances improved; the segment remained approximately breakeven in operating earnings.
- Storage Q2 revenue declined 2.7%, while operating margin fell to 7.9% from 11.8%. Financial Services revenue increased 4.3%, but its operating margin declined to 9.8% from 12.6%, reflecting higher borrowing and depreciation costs.
- Higher-margin networking revenue, higher selling prices, lower supply-chain and commodity costs, and the absence of prior-year Russia/Belarus exit credit-loss charges supported gross-margin improvement. Lower transformation costs also benefited operating results.
- Six-month operating cash flow was pressured by working capital, including higher vendor payments and increased financing receivables; accounts payable cash outflows were $3.220 billion.
Outlook, management commentary, risks and unusual items
- Management said easing supply constraints helped availability and reduced material and logistics costs, but new order growth declined year over year in Q2 as customers became more cautious and sales cycles lengthened. HPE expects the mixed macroeconomic environment to moderate near-term revenue growth; foreign-exchange headwinds and inflation are expected to persist.
- Management stated that cash generation, available funds and capital-market access should meet liquidity needs for at least the next 12 months. HPE expects approximately $370 million of future restructuring cash payments, including $220 million in the remainder of FY2023, and approximately $90 million of non-U.S. pension contributions for the rest of the year.
- HPE’s GreenLake-related annualized revenue run-rate was $1.116 billion at April 30, up 35% year over year. HPE cautions this is not a forecast and contracts may not renew.
- On May 26, 2023, after quarter-end, HPE agreed to sell its 49% H3C stake to UNIS for $3.5 billion pretax cash, subject to regulatory approvals and other closing conditions. Proceeds were not yet received at filing. HPE said it would consider investment, shareholder returns, debt repayment and other uses.
- HPE completed the $412 million Axis Security acquisition during the period and acquired OpsRamp for approximately $300 million on May 2, 2023. Acquisition purchase-price allocations were preliminary.
- Goodwill impairment sensitivity warrants attention: at the fiscal 2022 annual test, HPC & AI and Software reporting units had no excess of estimated fair value over carrying value. HPE cited operational, supply-chain, macroeconomic and market risks that could lead to impairment charges.
- Additional disclosed risks include currency movements, customer demand, supply chains, geopolitical conditions, financial-sector volatility and counterparty exposure. HPE reported deposits above insured limits and noted it had experienced business and operating-result impacts from recent bank failures, although no adverse liquidity impact had occurred as of the filing.
- HPE reported ongoing litigation and contingencies, while stating that it had recorded adequate provisions and that a material loss above recorded amounts was not reasonably possible as of April 30. The Oracle Terix matter was settled and closed. The filing also describes legacy and other proceedings, environmental obligations, and uncertain tax positions; unrecognized tax benefits were $708 million.
- The 2022 comparative period included significant Russia/Belarus exit-related credit-loss charges. HPE is winding down those operations; future receivable collections could remain affected. The U.S. Corporate AMT is expected to apply to HPE beginning in FY2024, and a 1% excise tax applies to qualifying net share repurchases after December 31, 2022.
Most important facts for investors to verify
- Whether Intelligent Edge growth and margins can be sustained, and whether Compute demand and server volumes recover.
- Whether HPC & AI customer acceptances, contract execution and supply conditions improve sufficiently to support its goodwill valuation.
- How working-capital movements affect cash conversion and free cash flow, particularly vendor payments, financing receivables and accounts payable.
- Whether the H3C sale closes, when proceeds are received, and how HPE allocates the cash.
- The pace and remaining cash cost of restructuring, as well as the effect of currency, inflation, interest rates and cautious customer spending on future results.
- Developments in tax audits and uncertain tax positions, material litigation or environmental contingencies, and exposure to financial institutions and counterparties.