Hewlett Packard Enterprise Co annual report, FY2021

Business context and reporting period

Hewlett Packard Enterprise Company (HPE) filed this Form 10-K for the fiscal year ended October 31, 2021. HPE sells enterprise technology products and services across Compute, High Performance Computing and Artificial Intelligence (HPC & AI), Storage, Intelligent Edge, Financial Services, and Corporate Investments and Other. Its strategy centers on edge-to-cloud solutions and expanding consumption-based offerings through HPE GreenLake. Approximately 68% of fiscal 2021 revenue came from outside the United States.

Financial performance

Revenue increased 3.0% year over year, or 1.0% on a constant-currency basis. Products contributed $17.011 billion, services $10.279 billion, and financing income $494 million. Non-GAAP operating margin was 10.3%, versus 8.5%; non-GAAP diluted EPS was $1.96, versus $1.54. HPE presents these non-GAAP measures as supplemental measures, not substitutes for GAAP results.

Cash from operations included approximately $2.2 billion after tax from the Itanium litigation judgment. Excluding that payment, operating cash flow was $3.699 billion. Free cash flow is presented excluding the judgment’s after-tax cash impact.

Segments

Intelligent Edge had the strongest revenue growth: 15.1% to $3.287 billion, with operating margin increasing to 15.2% from 11.8%. Compute revenue was essentially flat at $12.292 billion, while its segment operating margin rose to 10.8% from 8.2%. HPC & AI revenue increased 2.7% to $3.188 billion, but margin declined to 7.3% from 9.2%. Storage revenue rose 1.7% to $4.763 billion, while margin declined to 16.3% from 17.4%. Financial Services revenue increased 1.5% to $3.401 billion and margin rose to 11.5% from 8.5%.

Liquidity, debt and capital allocation

Cash, cash equivalents and restricted cash were $4.332 billion at year-end, compared with $4.621 billion a year earlier. Total debt declined to $13.448 billion from $15.941 billion; the weighted-average interest rate was 2.9%. HPE had $6.017 billion of available borrowing resources and no borrowings under its $4.75 billion committed revolving credit facility. Management said available funds, operating cash flow and capital-market access should meet liquidity needs for at least the next 12 months.

HPE paid $625 million in shareholder dividends during FY2021 and repurchased 14.7 million shares for approximately $225 million of equity reduction. Remaining repurchase authorization was $1.9 billion. Contractual cash obligations totaled $17.913 billion, including $12.404 billion of long-term debt principal payments. HPE also expected approximately $0.8 billion of restructuring cash payments, including $0.5 billion in FY2022.

Material changes and unusual items

• Gross margin improved by 2.3 percentage points, attributed to pricing discipline, transformation savings, a richer software mix, and favorable currency effects.
• GAAP operating results improved substantially from FY2020, which included an $865 million goodwill impairment charge for HPC & AI. FY2021 also included $930 million of transformation costs.
• FY2021 net earnings included a $2.351 billion pretax gain from Oracle’s satisfaction of the Itanium judgment. Oracle paid $4.66 billion in total, split between HPE and HP Inc.; HPE received approximately $2.35 billion.
• Supply-chain shortages and logistics delays constrained shipments, drove significantly higher hardware backlog, and increased commodity costs, particularly in Compute, Storage, and Intelligent Edge. Inventory rose to $4.511 billion from $2.674 billion; days of inventory supply increased to 82 from 48.
• ARR, HPE’s management-defined annualized measure of GreenLake and other as-a-service revenue, increased 36% to $796 million from $585 million. HPE cautions that ARR is distinct from net revenue.

Outlook, risks and contingencies

HPE provided no specific numerical revenue or earnings guidance in the supplied filing text. Management expected difficult supply-chain conditions to persist in the near term and described continued investment in GreenLake and the as-a-service transition. The company cautioned that this transition may require incremental capital, weigh on near-term cash flow, and change revenue-recognition timing.

Key risks include ongoing component shortages, logistics disruption, inflation and cost pressures; competition and price pressure; shifts of traditional server and storage workloads to cloud-based alternatives; execution of restructuring and the consumption-model transition; cybersecurity and data-protection incidents; foreign-exchange and regulatory exposure; and uncertainty from the pandemic. HPE highlighted HPC & AI goodwill sensitivity: its $3.7 billion goodwill balance had only an 8% fair-value cushion over carrying value at the annual test date, and further impairment could be material.

HPE reported ongoing litigation and tax matters, but management stated it had recorded adequate provisions and that, as of October 31, 2021, a material loss in excess of amounts recognized was not reasonably possible. The Oracle judgment was paid and recorded in FY2021; other disclosed proceedings included the Terix copyright matter, scheduled for trial in May 2022, and an India customs dispute with hearings not yet rescheduled. Unrecognized tax benefits were $2.131 billion; the filing also disclosed $428 million of recorded liabilities and related interest and penalties for uncertain tax positions.

Ernst & Young LLP issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Its critical audit matters included goodwill valuation and estimation of variable consideration.

Important facts for investors to verify

• How much of reported earnings and operating cash flow is attributable to the one-time Itanium judgment, and how recurring profitability compares with non-GAAP results.
• Whether supply constraints ease, backlog converts to shipments, and inventory and working-capital levels normalize.
• Progress and cash requirements of the GreenLake/as-a-service transition, including ARR growth, margins, and free-cash-flow effects.
• HPC & AI performance and goodwill valuation assumptions, given the limited impairment cushion disclosed.
• Debt maturities, restructuring payments, tax exposures, and developments in the remaining legal proceedings.