Hewlett Packard Enterprise Company — Q1 FY2022 10-Q
Reporting period: Three months ended January 31, 2022; comparisons are with the three months ended January 31, 2021. HPE is a global technology company focused on edge-to-cloud solutions, with six reporting segments: Compute, HPC & AI, Storage, Intelligent Edge, Financial Services, and Corporate Investments and Other. Financial statements are unaudited.
Financial performance
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Revenue | $6.961 billion | $6.833 billion | +1.9% |
| Gross profit / margin | $2.344 billion / 33.7% | $2.288 billion / 33.5% | Margin +0.2 percentage points |
| Operating earnings / margin | $448 million / 6.4% | $222 million / 3.2% | Earnings +101.8%; margin +3.2 points |
| Net earnings | $513 million | $223 million | +130.0% |
| Diluted EPS | $0.39 | $0.17 | +$0.22 |
| Operating cash flow | $(76) million | $963 million | Down $1.039 billion |
| Free cash flow | $(577) million | $563 million | Down $1.140 billion |
Non-GAAP results: operating earnings were $768 million versus $773 million, with margin of 11.0% versus 11.3%; net earnings were $697 million versus $679 million and diluted EPS was $0.53 versus $0.52. These measures exclude specified items, including transformation costs, stock compensation, and intangible amortization; they supplement, not replace, GAAP results.
At January 31, 2022, cash, cash equivalents and restricted cash totaled $4.276 billion; total debt was $14.072 billion, up from $13.448 billion at October 31, 2021. Current assets were $19.342 billion and current liabilities $20.473 billion. Inventory rose to $5.321 billion from $4.511 billion. HPE reported $4.75 billion of commitments under its five-year revolving credit facility, with no borrowings outstanding; available commercial paper programs were $5.057 billion.
HPE paid a quarterly dividend of $0.12 per share and repurchased and settled 8.5 million shares for approximately $129 million. The remaining repurchase authorization was $1.8 billion.
Material changes and segment performance
- Revenue increased 1.9% on both a reported and constant-currency basis. Intelligent Edge grew 11.2%, HPC & AI 3.8%, Compute 1.1%, and Corporate Investments and Other 1.2%. Storage declined 3.0% and Financial Services declined 2.1%.
- Intelligent Edge growth reflected stronger networking demand. Compute benefited from pricing and cost management, while constrained component supply reduced shipments and increased backlog. Storage was affected by supply constraints and lower product revenue.
- HPC & AI operating results weakened: segment operating earnings moved to a $7 million loss from $43 million earnings, reflecting deal acceptance timing, mix, and higher R&D investment. Storage operating earnings fell to $168 million from $234 million. Compute earnings increased to $416 million from $341 million.
- Consolidated GAAP operating earnings rose substantially, principally as transformation costs fell to $111 million from $311 million. Non-GAAP operating earnings were slightly lower year over year.
- Operating cash flow and free cash flow turned negative, primarily due to working-capital pressure from supply constraints and higher inventory, alongside increased capital investment. Inventory days of supply were 104 versus 55 a year earlier.
Outlook, risks, and unusual items
- Management said demand was improving but industry-wide supply constraints moderated revenue growth, raised costs, delayed shipments, and contributed to higher backlog and inventory; it expected these effects to continue in the near term. No specific quarterly or full-year earnings or revenue guidance is provided in the supplied filing text.
- HPE reported annualized revenue run-rate (ARR) of $798 million, up 23% year over year, versus 27% growth a year earlier. Management cited expansion in GreenLake and related services, with growth constrained by supply limitations. ARR is a company-defined metric, not GAAP revenue.
- Remaining performance obligations were $6.4 billion; HPE expected to recognize approximately 45% as revenue during the remainder of FY2022. Management said available cash and borrowing resources should meet liquidity needs for at least 12 months and thereafter, subject to risks and market access.
- Q1 included $83 million of net income tax benefits from discrete items, including settlement of U.S. and foreign tax audits. HPE effectively settled its IRS audit for fiscal 2016, reducing unrecognized tax benefits by $1.5 billion, predominantly for timing-related items that do not affect the effective tax rate. The reported tax benefit was $20 million and the effective tax rate was negative 4.1%.
- Transformation programs continue through FY2023. HPE expected approximately $650 million of future restructuring-plan cash payments, including $330 million through the remainder of FY2022.
- Principal disclosed risks include supply-chain and logistics disruption, inflation and freight costs, currency movements, macroeconomic and geopolitical uncertainty, and the Russia-Ukraine conflict and related sanctions. HPE said sanctions could affect order fulfillment, future revenue, and recoverability of financial assets.
- HPE disclosed ongoing litigation and investigations. In the Oracle Itanium matter, Oracle sought U.S. Supreme Court review of a previously paid judgment; HPE said reversal or reduction was remote. The Terix copyright matter was scheduled for trial in May 2022. HPE stated it did not believe a material loss in excess of recorded provisions was reasonably possible as of January 31, 2022, while noting litigation is inherently unpredictable.
- HPE entered a new sustainability-linked $4.75 billion revolving facility; pricing adjustments may depend partly on specified sustainability targets. The agreement includes a minimum consolidated EBITDA-to-net-interest covenant of 3.0 to 1.0.
Investor verification priorities
- Track whether supply constraints ease and backlog converts to shipments, while assessing inventory growth, elevated logistics costs, and cash conversion.
- Reconcile GAAP earnings improvement with lower non-GAAP operating earnings and the substantial year-over-year decline in transformation charges; review the recurring versus discrete tax effects.
- Monitor segment margins, particularly HPC & AI and Storage, and whether Intelligent Edge and GreenLake/ARR growth can be sustained.
- Review debt maturities, asset-backed financing, liquidity availability, and the new credit facility’s covenant and sustainability-linked pricing terms.
- Follow developments in material litigation and tax matters, as well as the potential business and asset impacts of Russia-related sanctions.