Hewlett Packard Enterprise Company — Q1 FY2021 Form 10-Q
Reporting period: Three months ended January 31, 2021. HPE is a global technology company focused on edge-to-cloud solutions, including compute, high-performance computing, storage, networking and financial services. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q1 FY2021 | Q1 FY2020 |
|---|---|---|
| Net revenue | $6,833 | $6,949 |
| Gross profit / margin | $2,288 / 33.5% | $2,282 / 32.8% |
| Operating earnings / margin | $222 / 3.2% | $348 / 5.0% |
| Net earnings | $223 | $333 |
| Diluted earnings per share | $0.17 | $0.25 |
| Cash from operations | $963 | $(79) |
| Free cash flow, as defined by HPE | $563 | $(185) |
- Revenue declined 1.7% year over year, or 2.5% on a constant-currency basis. Products contributed $4.138 billion, services $2.573 billion and financing income $122 million.
- GAAP gross margin improved 0.7 percentage points. Non-GAAP operating margin was 11.3%, compared with 10.0%; non-GAAP diluted EPS was $0.52, compared with $0.50. These non-GAAP measures exclude specified costs and adjustments and should be considered alongside GAAP results.
- GAAP operating earnings fell 36%, primarily reflecting transformation costs of $311 million, versus $89 million a year earlier. Net earnings included an $18 million tax benefit; the effective tax rate was negative 8.8%, including $90 million of discrete tax benefits.
- Operating cash flow improved by $1.042 billion year over year, reflecting working-capital and profitability improvements, among other factors. Investing cash outflow was $652 million and financing cash outflow was $459 million.
- At January 31, cash and cash equivalents were $4.165 billion; cash, cash equivalents and restricted cash totaled $4.473 billion. Total debt was $15.690 billion, comprising $3.727 billion of notes payable and short-term borrowings and $11.963 billion of long-term debt.
- Current assets were $16.072 billion and current liabilities $17.931 billion. HPE also had a $4.75 billion committed revolving credit facility with no borrowings outstanding, plus disclosed commercial-paper programs and uncommitted lines.
Changes versus the prior-year quarter
- Intelligent Edge was the main growth area: revenue rose 11.9% to $806 million, with operating margin increasing to 18.9% from 12.1%. Management cited WLAN and switching growth, Silver Peak revenue and improved efficiencies.
- Revenue declined in HPC & MCS (9.2%), Storage (4.7%) and Compute (1.5%). HPC & MCS was affected by delivery timing and customer-acceptance milestones; Storage faced reduced demand and pricing pressure. Financial Services revenue was broadly flat.
- HPE reported a new six-segment structure in FY2021 and retrospectively realigned comparative segment information. The changes did not affect consolidated revenue or earnings.
- Operating cash flow turned positive, while cash and cash equivalents decreased from $4.233 billion at October 31, 2020 to $4.165 billion. Total debt declined from $15.941 billion to $15.690 billion.
Outlook, risks and unusual items
- Management was cautiously optimistic about gradual improvement in customer spending through the rest of FY2021 as economies recovered, while warning that COVID-19, new variants and macroeconomic uncertainty could continue to affect demand, collections, supply chains and results. No specific consolidated revenue or earnings guidance is stated in the provided filing text.
- HPE expects timing of HPC & MCS delivery and acceptance milestones to even out during the remainder of the fiscal year. That segment’s goodwill was $3.6 billion, with estimated fair value only 8% above carrying value; a hypothetical 10% decline in fair value would eliminate that headroom. Further impairment could be material.
- Transformation programs run through FY2023. HPE expected approximately $1.2 billion in future restructuring cash payments, including $350 million through the remainder of FY2021. Q1 transformation costs were $311 million, including $252 million for the cost optimization and prioritization plan and $59 million for HPE Next.
- The share-repurchase program remained suspended because of COVID-19 uncertainty; $2.1 billion of authorization remained. HPE paid a $0.12-per-share quarterly dividend and declared another $0.12 dividend after quarter-end.
- Subsequent events: HPE completed its CloudPhysics acquisition on February 23, 2021 and issued $1.0 billion of asset-backed securities in March at a weighted average interest rate of 0.49%.
- Risks and contingencies include COVID-19-related demand and receivable collection uncertainty, competitive and supply-chain pressures, uncertain tax positions, restructuring obligations, and ongoing litigation. HPE disclosed $2.1 billion of unrecognized tax benefits; it said it was not reasonably possible that material litigation losses had been incurred beyond recognized amounts. Significant proceedings include the India customs matter and Oracle-related litigation involving HPE or former affiliates.
Important facts for investors to verify
- Whether Intelligent Edge growth and margin gains can persist, and whether declines in Compute, Storage and HPC & MCS reverse as demand and delivery schedules normalize.
- How much of the gap between GAAP and non-GAAP earnings reflects recurring transformation or other costs, and the remaining cash cost and expected benefits of the transformation plans.
- Whether cash generation remains strong after working-capital movements, capital spending and restructuring payments; also monitor customer collections and financing-receivable credit quality.
- The sensitivity of HPC & MCS goodwill to forecasts, milestone timing and valuation assumptions, and any future impairment indicators.
- Developments in COVID-19 impacts, material litigation and tax matters, including the timing and potential cash consequences of settlements.