Hewlett Packard Enterprise Company (HPE) — Q2 FY2022 Form 10-Q
Reporting period: Three and six months ended April 30, 2022. Financial results are unaudited; dollar amounts are in millions unless stated otherwise. HPE supplies enterprise technology and services across six reportable segments.
Financial performance
| Metric | Q2 FY2022 | Q2 FY2021 | Six months FY2022 | Six months FY2021 |
|---|---|---|---|---|
| Net revenue | $6,713 | $6,700 | $13,674 | $13,533 |
| Gross profit / margin | $2,173 / 32.4% | $2,287 / 34.1% | $4,517 / 33.0% | $4,575 / 33.8% |
| Operating earnings / margin | $207 / 3.1% | $278 / 4.1% | $655 / 4.8% | $500 / 3.7% |
| Net earnings | $250 | $259 | $763 | $482 |
| Diluted EPS | $0.19 | $0.19 | $0.57 | $0.36 |
| Operating cash flow | $379 | $822 | $303 | $1,785 |
| Free cash flow (non-GAAP) | $(211) | $368 | $(788) | $931 |
- Q2 revenue was nearly flat year over year (up 1.5% on a constant-currency basis). Six-month revenue rose 1.0% (1.7% constant currency).
- Q2 operating earnings declined 25.5% and gross margin fell 1.7 percentage points. For the six-month period, operating earnings increased 31.0%, largely as transformation costs fell; gross margin declined 0.8 points.
- Q2 non-GAAP operating margin was 9.3%, down from 10.2%; six-month non-GAAP operating margin was 10.2%, down from 10.8%. Non-GAAP diluted EPS was $0.44 for Q2 and $0.96 for six months, versus $0.46 and $0.98, respectively.
Segments and operating trends
- Intelligent Edge: Revenue grew 8% in Q2 and 9.6% year to date, but segment operating margin declined to 12.6% for Q2 and 15.0% for six months, reflecting higher supply-chain and service costs.
- Compute: Revenue grew 0.4% in Q2 and 0.7% year to date; segment operating margin improved to 13.9% and 13.8%, respectively, aided by pricing and cost management.
- HPC & AI: Revenue increased 3.8% in both periods, but the segment recorded operating losses of $40 in Q2 and $47 year to date, amid delayed customer acceptances, supply constraints, cost increases, and higher R&D.
- Storage: Revenue declined 3.3% in Q2 and 3.2% year to date; segment margins fell to 12.6% and 13.6%, respectively, due to constrained supply, product mix, logistics costs, and investment in services.
- Financial Services: Revenue declined 1.9% in Q2 and 2.0% year to date, while segment operating earnings rose to $104 and $208, respectively. Financing volume increased 1.5% and 6.1%.
- Annualized revenue run-rate (ARR), a company-defined metric for as-a-service offerings, was $829, up 22% year over year, compared with 30% growth a year earlier. Management cited GreenLake and related financial services growth, partly limited by supply and installation delays.
Cash, debt, and liquidity
- At April 30, 2022, cash and cash equivalents were $3,027; cash, cash equivalents, and restricted cash totaled $3,548, down from $4,332 at October 31, 2021.
- Total debt was $13,501, compared with $13,448 at fiscal year-end. Current liabilities were $20,190 and current assets $18,172 at quarter-end.
- Six-month operating cash flow of $303 was sharply lower than $1,785 a year earlier. HPE attributed weaker cash generation to supply-related working-capital needs; inventory rose to $5,322 from $4,511, and days of inventory supply increased to 106 from 64 a year earlier.
- Six-month capital investment in property, plant, and equipment was $1,349. HPE reported free cash flow of $(788), versus $931 in the prior-year period.
- HPE had a $4.75 billion five-year revolving credit facility with no borrowings outstanding, as well as commercial-paper programs. Management stated available cash and funding sources were expected to meet liquidity needs for at least the next 12 months.
Material changes, outlook, and risks
- Supply constraints, worsened in the quarter by COVID-related lockdowns in China, and inflationary material and logistics costs moderated revenue, increased costs, delayed shipments, and contributed to higher backlog and inventory. Management expected these conditions to continue in the near term.
- HPE recorded $126 of Q2 pre-tax charges related primarily to expected credit losses associated with the Russia/Ukraine conflict: $99 in financing cost, $6 in cost of services, and $21 in disaster charges. HPE suspended new sales and shipments to Russia and Belarus in February and announced an orderly exit in June. It expected further Q3 charges for a deferred-tax-asset valuation allowance, abandoned assets, and employee severance; amounts were not specified.
- HPE’s fiscal 2021 operations in Russia and Belarus represented approximately 2% of total revenue. Management warned that further escalation could adversely affect revenue, earnings, and cash flows.
- HPE continued its transformation programs through fiscal 2023. Six-month transformation costs fell to $209 from $520 in the prior year. HPE expected restructuring cash payments of approximately $0.6 billion, including $0.2 billion during the remainder of FY2022.
- Remaining performance obligations were $6.3 billion, consisting of deferred revenue; HPE expected to recognize approximately 32% during the remainder of FY2022. This is not a full-year revenue forecast.
- HPC & AI goodwill was $3.7 billion; its fair value exceeded carrying value by 8% at the FY2021 annual test. HPE cautioned that execution, acceptance timing, macroeconomic conditions, or margin deterioration could reduce fair value and potentially trigger an impairment.
- Other risks include foreign-exchange movements, customer collections and credit losses, competition and pricing pressure, geopolitical and trade developments, and legal and environmental matters. HPE stated it did not believe a material loss in excess of recorded provisions was reasonably possible as of April 30, 2022. The Oracle litigation judgment was paid in 2021 and the matter was closed after the U.S. Supreme Court denied review in May 2022; other proceedings remained pending.
Important facts for investors to verify
- Whether supply constraints ease and elevated backlog converts into shipments and revenue without further inventory or margin pressure.
- Whether working-capital trends, inventory levels, and cash conversion improve after the substantial year-over-year decline in operating cash flow and free cash flow.
- The total and timing of Russia/Belarus exit charges, credit losses, and any effects on customer collections or financing receivables.
- Whether HPC & AI customer acceptances and profitability recover, and whether the segment’s goodwill remains recoverable.
- Progress in ARR and GreenLake growth, alongside the margin and cash-flow implications of the as-a-service transition and ongoing transformation spending.