Hewlett Packard Enterprise Company — Q2 FY2018 Form 10-Q
Reporting period: Three and six months ended April 30, 2018. Amounts are in U.S. dollars; financial statement figures are in millions unless otherwise noted. HPE reports Hybrid IT, Intelligent Edge, Financial Services, and Corporate Investments. Enterprise Services and Software divestitures are presented as discontinued operations.
Financial performance
| Metric | Three months ended April 30, 2018 | Six months ended April 30, 2018 | Prior-year comparison |
|---|---|---|---|
| Net revenue | $7.468 billion | $15.142 billion | Up 9.7% and 10.4%, respectively; constant-currency growth was 6.4% and 7.9% |
| Gross margin | 30.4% | 29.4% | Up 0.9 percentage points for the quarter; down 1.4 points for the half year |
| Earnings from continuing operations before taxes | Loss of $116 million | Loss of $773 million | Compared with earnings of $113 million and $448 million |
| Net earnings from continuing operations | $850 million | $2.332 billion | Compared with losses of $478 million and $227 million |
| Net earnings (loss), including discontinued operations | $778 million | $2.214 billion | Compared with losses of $612 million and $345 million |
| Diluted EPS from continuing operations | $0.54 | $1.46 | Compared with losses per share of $0.29 and $0.14 |
| Operating cash flow | Quarterly figure not separately provided | $389 million | Compared with cash use of $451 million |
Quarterly revenue growth was led by Hybrid IT, with additional gains in Intelligent Edge and Financial Services. Product revenue was $4.610 billion, services revenue $2.746 billion, and financing income $112 million for the quarter. HPE attributed growth to higher Compute average selling prices, Nimble Storage contribution, Aruba campus switching, favorable currency movements, and Financial Services asset-management activity.
Segment revenue and operating earnings for the quarter were: Hybrid IT $6.023 billion and $621 million; Intelligent Edge $710 million and $46 million; Financial Services $916 million and $72 million; Corporate Investments operating loss $22 million. Segment results exclude certain corporate costs and other charges.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $6.986 billion at April 30, 2018, down from $9.579 billion at October 31, 2017.
- Current assets were $19.792 billion and current liabilities $19.084 billion. Short-term borrowings and current debt were $3.855 billion; long-term debt was $9.970 billion.
- Six-month investing cash use was $1.269 billion, including $1.362 billion of property, plant and equipment investment. Financing cash use was $1.713 billion; cash declined $2.593 billion.
- HPE repurchased 102 million shares for approximately $1.649 billion during the six months and paid $236 million in dividends. The quarterly dividend was increased from $0.075 to $0.1125 per share, effective in Q3 FY2018. Remaining repurchase authorization was $6.6 billion.
- Available borrowing resources included $4.068 billion under commercial paper programs and $1.306 billion in uncommitted credit lines. HPE also had a $4.0 billion revolving credit facility.
Material changes, outlook and risks
- Tax-driven earnings: The unusually high reported net income reflects large discrete tax benefits, including benefits associated with settling pre-Separation tax liabilities and U.S. tax reform. The six-month tax benefit was $3.105 billion. Tax accounting under the Tax Act remained provisional; HPE said final adjustments could materially affect tax expense and the effective rate.
- Margins and costs: Quarterly gross margin improved, but the six-month margin declined amid product mix, variable compensation, DRAM and other component costs, and competitive pricing. HPE continued to cite hardware pricing pressure.
- HPE Next: The transformation is expected to continue through fiscal 2020. HPE estimated approximately $0.9 billion in aggregate pre-tax restructuring charges, including about $0.7 billion for workforce reductions and $0.2 billion for infrastructure. It incurred $368 million in transformation costs in the first half, net of real estate sale gains, and expected approximately $0.8 billion of future restructuring cash payments under approved plans.
- Management outlook: The filing provides no specific revenue or EPS guidance. Management said cash, expected operating cash generation, and capital-market access should cover near-term cash needs, while noting access and borrowing costs may be affected by market conditions.
- Contingencies: DXC sought indemnification for approximately $1.0 billion related to disputed lease classifications; HPE denied liability and intends to defend the claim. The Oracle/Itanium judgment of approximately $3 billion remained under appeal; any recovery is uncertain and would be shared with HP Inc. under the applicable agreement. Other litigation includes Oracle’s Terix-related claims and India customs proceedings. HPE stated it had recorded adequate provisions and did not believe a material loss above recorded amounts was reasonably possible as of April 30, 2018.
- Other developments: HPE completed its Plexxi acquisition on June 1, 2018, after quarter-end. Revenue-standard adoption was planned for fiscal Q1 2019; HPE expected most revenue recognition to remain largely unchanged but was still assessing specific impacts, including sales commissions.
Investor verification priorities
- Separate operating performance from the substantial, discrete tax benefits; verify final Tax Act accounting and the resolution of pre-Separation tax matters.
- Track whether revenue growth translates into sustained gross-margin recovery despite component-cost and competitive-pricing pressures.
- Assess HPE Next execution, remaining restructuring charges and cash payments, and realized savings or property-sale proceeds.
- Monitor cash conversion, inventory growth, capital expenditure, debt maturities, share repurchases, and dividend commitments.
- Follow the DXC indemnification arbitration and material litigation, including the Oracle appeal; outcomes and potential cash effects remain uncertain.