Hewlett Packard Enterprise Company (HPE): Q2 FY2021 Form 10-Q
Reporting period: Quarter and six months ended April 30, 2021. HPE is a global technology company focused on edge-to-cloud solutions. Financial figures below are in U.S. dollars; unless stated otherwise, amounts are in millions.
Financial performance
| Metric | Q2 FY2021 | Q2 FY2020 | First six months FY2021 | First six months FY2020 |
|---|---|---|---|---|
| Net revenue | $6,700 | $6,009 | $13,533 | $12,958 |
| GAAP gross margin | 34.1% | 31.9% | 33.8% | 32.4% |
| GAAP operating earnings (loss) | $278 | $(834) | $500 | $(486) |
| GAAP net earnings (loss) | $259 | $(821) | $482 | $(488) |
| Diluted GAAP EPS | $0.19 | $(0.64) | $0.36 | $(0.38) |
| Non-GAAP operating margin | 10.2% | 7.2% | 10.8% | 8.7% |
| Non-GAAP net earnings | $612 | $344 | $1,291 | $1,001 |
| Cash flow from operations | $822 | $100 | $1,785 | $21 |
| Free cash flow | $368 | $(402) | $931 | $(587) |
Q2 revenue increased 11.5% year over year, or 9.0% on a constant-currency basis; first-half revenue increased 4.4%, or 2.8% constant currency. Product revenue rose to $3,997 in Q2 from $3,320; services revenue was nearly flat at $2,579 versus $2,574. Financing income was $124 versus $115.
Management attributed improved gross margins to disciplined pricing, lower supply-chain and commodity costs, transformation savings, and a richer mix of software-intensive offerings. Non-GAAP measures exclude specified items, including transformation costs, stock-based compensation, and intangible amortization; they supplement, not replace, GAAP results.
Segments and material changes
- Q2: Compute revenue grew 12.1% and segment operating margin rose to 11.3% from 5.8%. Intelligent Edge revenue grew 20.2% and margin rose to 15.5% from 12.3%. Storage revenue grew 4.7%; margin was 16.8%. HPC & MCS revenue grew 12.9%, but margin fell to 2.8% from 7.6%. Financial Services revenue was up 0.7% and margin improved to 10.8% from 9.2%.
- First half: Intelligent Edge revenue grew 15.9%; Compute grew 4.9%. Storage declined 0.3%, and HPC & MCS was essentially flat. HPC & MCS operating margin declined to 4.3% from 7.5%.
- GAAP earnings turned positive versus the prior-year loss, largely because Q2 and first-half 2020 included an $865 goodwill impairment charge for HPC & MCS. Q2 2021 still included $209 of transformation costs; first-half transformation costs were $520 versus $289 a year earlier.
- Q2 and first-half improvement also reflected higher demand and less severe supply constraints than a year earlier. First-quarter FY2021 weakness and competitive pressure tempered first-half growth.
Cash, debt, and liquidity
- At April 30, 2021, cash and cash equivalents were $4,625, versus $4,233 at October 31, 2020; cash, cash equivalents, and restricted cash totaled $4,756.
- Total debt was $15,827, including $3,531 of notes payable and short-term borrowings and $12,296 of long-term debt. Total debt was $15,941 at October 31, 2020.
- Current assets were $16,703 and current liabilities were $17,980. HPE reported $18,017 of goodwill and $3,117 of inventory; inventory rose from $2,674 at fiscal year-end.
- First-half operating cash flow of $1,785 was driven in part by stronger earnings and working-capital benefits. Capital investment, net of asset-sale proceeds, was $854, producing reported free cash flow of $931.
- HPE issued $1.0 billion of asset-backed securities at a weighted-average interest rate of 0.49% and repaid $500 of senior notes during the quarter. No borrowings were outstanding on its $4.75 billion committed revolving credit facility.
- HPE paid a quarterly dividend of $0.12 per share. Share repurchases remained suspended; $2.1 billion of authorization remained.
Outlook, risks, and unusual items
- No specific full-year revenue, earnings, or cash-flow guidance is stated in the supplied filing text. Management described demand as improving, cited traction across its portfolio, and remained cautiously optimistic while emphasizing continuing COVID-19 and macroeconomic uncertainty.
- Transformation programs extend through fiscal 2023. HPE expects approximately $1.1 billion of future restructuring cash payments, including $250 through the remainder of FY2021. Further costs are expected, partly offset by potential real-estate sale gains.
- HPC & MCS goodwill is a key sensitivity: the reporting unit had $3.6 billion of goodwill and an estimated fair-value cushion of 8%; a hypothetical 10% fair-value decline would eliminate the cushion. HPE warned further impairment could be material if performance or economic conditions deteriorate.
- Financing receivables totaled $8,918 net, with a $224 credit-loss allowance, up from $154 at October 31, 2020. HPE cited uncertainty about the future effects of COVID-19 on customer collections; first-half Financial Services bad-debt expense was $59 versus $33.
- HPE reported various lawsuits and investigations, but stated it did not believe a material loss beyond recorded provisions was reasonably possible as of April 30, 2021. Notable proceedings include an Oracle appeal involving a judgment in favor of HP Inc. and HPE’s shared recovery rights, and patent litigation facing renewed trial proceedings.
- HPE disclosed that its Russian subsidiary was winding down its relationship with newly sanctioned Positive Technologies. The filing states cash received since designation was $31,687, of which $1,755 was recognized as revenue and $29,932 recorded as deferred revenue; it reports no identifiable net profit directly associated with the relationship.
- Other exposures include $2.1 billion of unrecognized tax benefits, environmental obligations, foreign-exchange movements, supply-chain constraints, and risks to liquidity or customer payments from pandemic and market conditions.
Key facts for investors to verify
- Whether revenue growth and margin gains persist after accounting for currency effects, supply-chain normalization, pricing pressure, and product mix.
- HPC & MCS delivery and customer-acceptance milestones, segment profitability, and the sensitivity of its goodwill valuation.
- Cash conversion and inventory growth, including whether first-half working-capital benefits are sustainable.
- Credit quality and collections in Financial Services, alongside the higher financing-receivable allowance and bad-debt expense.
- Expected restructuring cash outlays, remaining program costs, and whether savings and asset-sale gains offset them.
- Developments in material litigation, tax matters, and the sanctioned-party wind-down, including any effects on revenue or deferred revenue.
- Dividend continuity and the timing or conditions for resuming share repurchases.