Hewlett Packard Enterprise Company — FY2016 Form 10-K
Reporting period: Fiscal year ended October 31, 2016. The filing also reports the fourth quarter ended October 31, 2016. HPE became an independent public company on November 1, 2015; pre-separation results include allocated former-parent costs and may not be fully comparable with standalone results.
Financial performance
- Revenue: FY2016 revenue was $50.123 billion, down 3.8% year over year (down 0.5% at constant currency). Products contributed $19.250 billion; services, $30.509 billion; and financing income, $364 million.
- Profit and margins: Gross profit was $14.616 billion and gross margin was 29.2%, up 0.5 percentage points. Operating earnings were $4.150 billion (8.3% margin), versus $1.523 billion (2.9%) in FY2015. Net earnings were $3.161 billion, or $1.82 diluted EPS, compared with $2.461 billion, or $1.34, in FY2015.
- Fourth quarter: Revenue was $12.478 billion, operating earnings $777 million, net earnings $302 million, and diluted EPS $0.18. FY2015 fourth-quarter net earnings were $1.385 billion, including a significant tax benefit.
- Cash flow and liquidity: Operating cash flow was $4.958 billion, up from $3.661 billion. Investing cash flow was positive $419 million, reflecting divestiture proceeds partly offset by capital investment. Cash and cash equivalents were $12.987 billion; cash, cash equivalents and short- and long-term investments totaled approximately $13.0 billion.
- Debt: Total debt was $16.140 billion, including $3.532 billion of short-term debt and $12.608 billion of long-term debt. Weighted-average interest rate was 3.5%. Available borrowing resources were reported as $6.058 billion.
- Balance sheet: Total assets were $79.679 billion and stockholders’ equity was $31.518 billion at year-end. Current assets were $28.917 billion and current liabilities $22.531 billion.
- Capital returns: HPE repurchased $2.7 billion of stock (158 million shares) and paid $373 million in dividends. The board raised the quarterly dividend from $0.055 to $0.065 per share in November 2016.
Material changes and segment trends
- Revenue declined across Enterprise Services (ES), Software and Financial Services; Enterprise Group (EG) revenue also fell. Foreign exchange, divestitures and market pressures were important factors.
- EG: Revenue was $27.219 billion, down 2.5%; operating margin fell to 12.7% from 13.8%. Server, traditional storage and technology-services trends were pressured; networking grew, led by wireless products.
- ES: Revenue was $18.872 billion, down 4.7%, but operating margin improved to 7.7% from 5.1%, primarily due to restructuring-related delivery efficiencies and cost reductions.
- Software: Revenue was $3.195 billion, down 11.8%; operating margin rose to 23.4% from 21.8%, helped in part by lower expenses and a divestiture-related gain. Management cited SaaS transition and sales-execution challenges.
- Financial Services: Revenue was $3.190 billion, down 0.8%; operating margin was 10.5%, versus 10.9%. Net portfolio assets increased 4.6% to $12.818 billion.
Outlook, management commentary and risks
- Management said cash, expected operating cash flow and capital-market access should cover near-term cash needs. The filing provides no clear numerical operating revenue or earnings guidance.
- HPE announced a planned tax-free spin-off and merger of ES with CSC, targeted for around April 1, 2017, and of Software with Micro Focus, targeted by approximately August 31, 2017. At announcement, expected after-tax value to HPE shareholders was approximately $8.5 billion for ES and $8.8 billion for Software; these are transaction estimates, not guaranteed proceeds. Expected separation costs were approximately $900 million and $700 million, respectively.
- For the ES transaction, HPE estimated pension funding of $2.0–$3.0 billion; it made initial payments of $1.9 billion in December 2016. The final amount depends on transaction completion.
- Reported FY2016 operating earnings benefited from $2.420 billion of gains on H3C and MphasiS divestitures. Restructuring charges were $1.236 billion and separation costs were $598 million. The effective tax rate was 22.5%; prior-year earnings included unusually large tax benefits.
- Key risks include declining legacy hardware demand as customers shift to cloud, competitive pricing, SaaS execution, ES contract runoff and regional weakness, foreign-exchange exposure, restructuring execution, and the closing, tax treatment and expected benefits of the proposed transactions. HPE also disclosed material tax uncertainties, including joint-and-several pre-separation tax liabilities; litigation and other contingencies remain subject to uncertain outcomes.
Most important facts for investors to verify
- Whether the ES and Software transactions close on schedule, meet tax-free treatment conditions and deliver the announced estimated value.
- The final ES-related pension funding requirement and its effect on cash, debt and post-transaction liquidity.
- How much of FY2016 operating-profit improvement came from divestiture gains versus recurring operating performance and cost savings.
- Whether revenue declines in Software, ES and legacy EG offerings stabilize, and whether SaaS, strategic services and newer infrastructure products offset them.
- Resolution and cash impact of uncertain tax positions, including pre-separation liabilities and the disclosed potential audit outcomes.
- Debt maturities, refinancing needs and the sustainability of dividends and repurchases after transaction-related funding and separation costs.