Hewlett Packard Enterprise Company — Q1 FY2016 10-Q
Reporting period: Three months ended January 31, 2016. HPE became an independent publicly traded company on November 1, 2015, following its separation from HP Inc. Prior-year figures are combined historical results; standalone costs and operations may not be directly comparable.
Financial performance
- Revenue: $12.724 billion, down 2.5% year over year as reported, but up 3.8% on a constant-currency basis. Products were $5.010 billion; services $7.626 billion; financing income $88 million.
- Profit and margins: Gross profit was $3.612 billion and gross margin improved to 28.4% from 27.7%. Operating earnings fell to $384 million from $732 million; operating margin declined to 3.0% from 5.6%. Net earnings were $267 million versus $547 million; diluted EPS was $0.15 versus $0.30.
- Cash flow: Operating cash flow was negative $75 million, versus positive $568 million a year earlier. Investing cash outflow was $692 million and financing cash outflow was $570 million. Cash decreased $1.337 billion to $8.505 billion.
- Liquidity and debt: Total assets were $77.352 billion and current assets $27.756 billion at quarter-end. Borrowings were approximately $16.1 billion, up from $15.8 billion at October 31, 2015; weighted-average interest rate was 3.0%. HPE reported a $4.0 billion revolving credit facility, plus $4.249 billion of commercial-paper program capacity and $1.672 billion of uncommitted lines.
- Capital returns: HPE repurchased $1.2 billion of stock during the quarter and declared dividends of $0.11 per share. Remaining authorization under its $3.0 billion repurchase program was $1.8 billion at January 31.
Material changes versus the prior-year quarter
- Reported revenue declined, principally reflecting currency headwinds, Enterprise Services contract runoff, lower Technology Services revenue, and Software business transfers and divestitures. Networking growth, including Aruba, partly offset these pressures.
- Enterprise Group revenue rose 1.0%, while Enterprise Services fell 6.1%, Software fell 10.3%, and Financial Services fell 3.4%. Enterprise Services and Financial Services operating margins improved; Enterprise Group and Software margins declined.
- Operating earnings were pressured by restructuring charges of $311 million versus $132 million, higher R&D, separation costs of $79 million versus $44 million, and acquisition-related costs. Interest and other expense also increased.
- Operating cash flow fell by approximately $643 million year over year, with HPE citing weaker earnings and greater working-capital use. The cash conversion cycle increased eight days from October 31 to 31 days.
Outlook, risks and unusual items
- Outlook: The filing provides no specific quarterly or full-year earnings or revenue guidance. Management said internally generated cash flow, cash balances and access to capital markets are expected to support near-term needs, while noting capital-market access and borrowing costs could be affected by business and market conditions.
- Restructuring: The 2015 plan targets approximately 30,000 employee exits by the end of 2018 and approximately $2.6 billion of pre-tax charges through FY2018. HPE estimated about $2.7 billion of future restructuring cash payments, including $0.7 billion during the remainder of FY2016.
- Tax matters: Unrecognized tax benefits were $9.3 billion, up from $4.9 billion at October 31, primarily reflecting joint and several liabilities with former Parent. HPE recorded a $1.0 billion net tax receivable from HP Inc. under the tax agreement; amounts depend on unresolved tax matters. The quarter’s 16.3% effective tax rate included $110 million of discrete tax benefits.
- Other risks and items: HPE cited cloud and SaaS transitions, competitive pricing, macroeconomic weakness, currency exposure and execution of its Enterprise Services turnaround. Goodwill was $27.458 billion; although market capitalization had been below book value, HPE concluded no interim impairment test was required. H3C’s proposed sale was expected to close in FY2016 Q3 subject to approvals; the TippingPoint sale closed in March 2016. Litigation, including India customs proceedings with asserted duties and penalties, and tax and separation-related indemnities remain relevant contingencies.
Investor verification priorities
- Check whether revenue growth on a constant-currency basis translates into sustained reported growth, and monitor segment trends, especially Enterprise Services and Software.
- Assess the drivers and durability of negative operating cash flow, working-capital needs, and the higher cash conversion cycle.
- Track restructuring execution, cash payments and whether projected cost savings offset continuing charges and separation costs.
- Review the resolution and cash consequences of tax audits, the $1.0 billion HP Inc. tax receivable, and related indemnification arrangements.
- Monitor debt, liquidity capacity, share repurchases and dividends against operating cash generation and capital needs.