Hewlett Packard Enterprise Company — Q1 FY2020 Form 10-Q
Reporting period: Three months ended January 31, 2020. HPE is a global technology company focused on edge-to-cloud solutions. Unless otherwise noted, amounts are in U.S. dollars; financial-statement amounts are in millions.
Financial performance and liquidity
| Metric | Q1 FY2020 | Q1 FY2019 / comparison |
|---|---|---|
| Net revenue | $6.949 billion | $7.553 billion; down 8.0% (7.0% at constant currency) |
| Gross profit / margin | $2.282 billion / 32.8% | $2.346 billion / 31.1% |
| Operating earnings / margin | $348 million / 5.0% | $456 million / 6.0% |
| Net earnings | $333 million | $177 million |
| Diluted EPS | $0.25 | $0.13 |
| Operating cash flow | $(79) million | $382 million |
| Cash, cash equivalents and restricted cash | $3.548 billion | $4.076 billion at October 31, 2019 |
| Debt on balance sheet | $13.872 billion: $4.510 billion current and $9.362 billion long-term | $13.820 billion at October 31, 2019 |
Cash used in investing activities was $64 million and cash used in financing activities was $385 million. The quarter-end cash decline was $528 million. Capital expenditures were $568 million, partly offset by $462 million of proceeds from property sales. HPE reported $4.304 billion available under commercial paper programs and $1.149 billion under uncommitted credit lines; its $4.75 billion revolving credit facility had no borrowings outstanding.
Net earnings increased despite lower operating and pretax earnings, principally reflecting a much lower tax provision: the effective tax rate was 11.9%, compared with 73.0% in the prior-year quarter, which was significantly affected by U.S. tax reform-related charges. The filing reports non-GAAP operating earnings of $602 million (8.7% margin), non-GAAP net earnings of $575 million and non-GAAP diluted EPS of $0.44; these measures exclude specified items and should be considered alongside GAAP results.
Material changes and segment results
- Revenue fell primarily because of weaker Compute and Storage demand, commodity and North American manufacturing-capacity constraints, lower average selling prices, and lower Financial Services rental revenue. Management also cited an elongated Compute sales cycle and lower Tier-1 server sales.
- Gross margin improved 1.7 percentage points, supported by lower commodity costs and variable compensation, a more favorable product-and-service mix, and improved service delivery. Operating margin fell 1.0 percentage point, reflecting higher intangible amortization, R&D and SG&A as a share of revenue, partly offset by gross-margin improvement and lower acquisition-related charges.
- Compute revenue was $3.011 billion, down 15.8%; Storage was $1.250 billion, down 7.8%; and Financial Services was $859 million, down 6.5%. HPC & MCS revenue rose 5.6% to $823 million, partly due to Cray, acquired in Q4 FY2019. Intelligent Edge rose 2.1% to $720 million. A & PS was $243 million, up 0.8%.
- Segment reporting was reorganized into seven segments beginning in FY2020; comparative segment information was retrospectively realigned. HPE stated this did not affect previously reported consolidated revenue, net earnings, EPS or total assets.
- Operating cash flow declined by $461 million year over year, which management attributed primarily to less favorable working-capital performance. Inventory days of supply increased to 49 from 40.
Outlook, risks and unusual items
- The filing provides no clear full-year revenue, earnings or EPS guidance. HPE extended its HPE Next initiative into FY2021, citing global developments and evolving economic uncertainty. It expects further streamlining and cost actions, with costs potentially partly offset by real-estate sale gains.
- HPE recorded $89 million of transformation costs in the quarter, including $84 million of restructuring charges, partly offset by a $34 million real-estate gain. Expected future cash payments for approved restructuring plans were approximately $507 million, including $283 million through the remainder of FY2020.
- Management identified the COVID-19 outbreak among risks to international operations, suppliers, customer and partner performance, and results. The filing does not quantify its expected financial impact.
- Other disclosed risks include weak demand and competition, supply and manufacturing constraints, foreign-exchange exposure, cybersecurity and data-protection incidents, systems integration or migration disruption, and legal, tax and environmental contingencies. HPE reported $2.2 billion of unrecognized tax benefits and stated that litigation outcomes could affect results or cash flows, while it did not consider a material loss in excess of recorded amounts reasonably possible as of January 31, 2020.
- HPE repurchased $204 million of shares and paid $156 million in dividends during the quarter; $2.3 billion remained authorized for repurchases. After quarter-end, on February 20, 2020, it issued $755 million of asset-backed debt securities at a weighted-average interest rate of 1.87%.
Most important facts for investors to verify
- Whether weak Compute and Storage demand and manufacturing constraints persist, and whether the company can recover revenue and operating margin.
- How much of reported net-income and EPS improvement reflects tax-rate differences versus recurring operating performance; compare GAAP with non-GAAP reconciliations.
- Whether working-capital trends, particularly inventory, improve and operating cash flow returns to positive levels.
- The costs, timing and realized savings from the extended HPE Next program, plus the impact of COVID-19 and related supply-chain or demand disruptions.
- Debt and liquidity needs, including financing activity and Financial Services portfolio credit quality; quarter-end financing receivables were $8.603 billion net, with $322 million on non-accrual status.
- Developments in significant litigation and tax matters, including the India customs proceedings and tax indemnification arrangements.