Hewlett Packard Enterprise Company (HPE) — Q1 FY2018 Form 10-Q
Reporting period: Three months ended January 31, 2018; comparisons are to the three months ended January 31, 2017. Amounts are in U.S. dollars. HPE’s Enterprise Services and Software businesses had been separated, so prior-period continuing-operations comparisons do not include those businesses.
Financial performance
| Metric | Q1 FY2018 | Q1 FY2017 |
|---|---|---|
| Revenue | $7.674 billion | $6.902 billion |
| Gross profit / margin | $2.183 billion / 28.4% | $2.213 billion / 32.1% |
| Earnings from continuing operations | $261 million | $453 million |
| Continuing-operations net earnings | $1.482 billion | $251 million |
| Net earnings, including discontinued operations | $1.436 billion | $267 million |
| Diluted EPS, continuing operations | $0.92 | $0.15 |
| Operating cash flow | $142 million | $(1.190) billion |
| Capital expenditures, net of asset-sale proceeds | $554 million | $839 million |
Revenue rose 11.2% (9.4% in constant currency). Products revenue was $4.860 billion, services $2.703 billion and financing income $111 million. Net earnings included a large, unusual tax benefit; they should not be read as a measure of recurring operating performance. HPE reported a $657 million pretax loss from continuing operations, including $919 million of tax indemnification adjustments, but recorded a $2.139 billion income-tax benefit.
Segments and changes versus prior year
- Hybrid IT: Revenue $6.331 billion, up 10.0%; operating earnings $608 million versus $733 million. Compute and Storage grew, including $100 million of Nimble Storage revenue. Higher DRAM and other commodity costs, plus competitive pricing, reduced margins; HPE also continued exiting Tier-1 server sales.
- Intelligent Edge: Revenue $620 million, up 8.8%; operating earnings $18 million versus $16 million. Growth was led by campus switching.
- Financial Services: Revenue $888 million, up 7.9%; operating earnings $72 million versus $76 million. Revenue benefited from currency and asset-management activity; a prior-year bad-debt reserve release affected the comparison.
- Consolidated gross margin fell 3.7 percentage points to 28.4%. Transformation costs were $245 million, compared with none in the prior-year quarter. Restructuring charges were $3 million versus $83 million.
- Discontinued operations recorded a $46 million loss versus $16 million of earnings. Prior-year discontinued-operations revenue was $4.505 billion.
Cash, debt and liquidity
- Cash and cash equivalents were $7.673 billion at January 31, down $1.906 billion from October 31, 2017. The quarter’s cash decline reflected, among other items, share repurchases and dividends, capital investment, and net collateral posted for financial instruments.
- Short-term borrowings and current debt were $3.915 billion; long-term debt was $10.040 billion. Current assets were $20.499 billion and current liabilities $19.343 billion.
- Operating cash flow improved by about $1.3 billion year over year, primarily because the prior-year period included $1.9 billion of pension funding related to the Everett transaction. Q1 FY2018 operating cash flow was also affected by working-capital movements, including financing receivables and taxes.
- HPE reported $4.046 billion available under commercial-paper programs and $1.529 billion in uncommitted lines of credit. Management said cash, expected operating cash flows and capital-market access should cover near-term needs.
- Financing Services net portfolio assets were $13.225 billion; its reported debt-to-equity ratio was 7.0x.
Outlook, management commentary, risks and unusual items
- No specific quarterly or full-year revenue or earnings guidance is provided in the supplied filing text. HPE cautions that quarterly results are not necessarily indicative of full-year results.
- The HPE Next transformation is expected to run through fiscal 2020. HPE estimated approximately $0.9 billion of total restructuring charges for the plan, including $0.7 billion for workforce reductions and $0.2 billion for infrastructure; workforce changes were expected to be completed during fiscal 2019. The quarter included $245 million of net HPE Next charges. HPE expected approximately $1.0 billion of future cash payments under approved restructuring plans.
- The Tax Act accounting remained provisional. HPE recorded a $967 million estimated transition-tax liability and a provisional net $1.8 billion benefit from remeasuring U.S. deferred taxes. Management noted that final adjustments could materially affect tax expense and the effective tax rate. The filing also reports $10.4 billion of unrecognized tax benefits and approximately $3.5 billion of recorded liabilities and related interest and penalties for uncertain tax positions.
- HPE repurchased about 50 million shares for $742 million in cash during the quarter. After quarter-end, the board authorized an additional $2.5 billion of repurchases; HPE also announced a quarterly dividend increase from $0.075 to $0.1125 per share, effective in Q3 FY2018.
- HPE disputed DXC’s indemnification demand concerning transferred lease obligations, which DXC estimated exceeded a $250 million threshold by approximately $1.0 billion. HPE said it believed the leases were properly classified and intended to defend its position. The filing also describes tax, employment, customs and other litigation; HPE said it had recorded adequate provisions and did not believe a material loss above recognized amounts was reasonably possible as of January 31.
- Other risks include competitive pricing and input-cost pressures, currency fluctuations, execution of transformation plans, and uncertainty in interpreting and applying the Tax Act. HPE reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- How much of reported earnings came from the provisional tax benefit and tax-indemnification settlement, and how those amounts may change.
- Whether revenue growth can be sustained while recovering gross margin amid DRAM costs and hardware pricing pressure.
- HPE Next’s ultimate costs, cash payments, timing and realized savings relative to the announced plan.
- Operating cash generation excluding prior-year pension-funding effects, and the use of cash for investment, repurchases and dividends.
- Developments in DXC’s approximately $1.0 billion lease-indemnification claim and significant unresolved tax matters.