Hewlett Packard Enterprise Company (HPE) — Q1 FY2023 Form 10-Q
Reporting period: Three months ended January 31, 2023; comparative period is the three months ended January 31, 2022. Amounts are in U.S. dollars. HPE is a global technology company focused on edge-to-cloud solutions, with reporting segments in Compute, HPC & AI, Storage, Intelligent Edge, Financial Services, and Corporate Investments and Other.
Financial performance and liquidity
| Metric | Q1 FY2023 | Q1 FY2022 |
|---|---|---|
| Net revenue | $7.809 billion | $6.961 billion |
| Gross profit / margin | $2.658 billion / 34.0% | $2.344 billion / 33.7% |
| Operating earnings / margin | $591 million / 7.6% | $448 million / 6.4% |
| Net earnings | $501 million | $513 million |
| Diluted EPS | $0.38 | $0.39 |
| Cash used in operating activities | $829 million | $76 million |
| Free cash flow (company-defined non-GAAP) | $(1.326) billion | $(577) million |
Revenue increased 12.2% reported and 17.7% on a constant-currency basis. Products revenue rose to $5.114 billion from $4.243 billion, while services revenue was $2.572 billion versus $2.596 billion; financing income was $123 million versus $122 million. Management attributed growth principally to backlog conversion, improved supply, server pricing, operational improvement in HPE Cray Supercomputing, and networking demand. Gross margin improved 0.3 percentage points; operating margin increased 1.2 points. GAAP net earnings declined 2.3%, with the comparison affected by a $122 million tax provision versus a $20 million tax benefit in the prior-year quarter.
Segment revenue growth was strongest in HPC & AI (+33.7%) and Intelligent Edge (+25.1%); Compute grew 13.5%, Storage 5.2%, and Financial Services 3.7%. Corporate Investments and Other revenue fell 9.8%. Segment operating margin increased for Compute and Intelligent Edge, but declined for Storage and Financial Services; HPC & AI was near breakeven at 0.1%.
As of January 31, 2023, cash, cash equivalents and restricted cash totaled $2.844 billion, down from $4.763 billion at October 31, 2022. Total debt was $12.926 billion, up from $12.465 billion. Available borrowing resources were reported at $5.260 billion; no borrowings were outstanding under the $4.75 billion revolving credit facility. Current assets were $18.234 billion and current liabilities $21.476 billion. Operating cash outflow reflected working-capital uses, including $2.195 billion of cash used by accounts payable changes and $523 million used by financing receivables; investing cash outflow was $1.237 billion, including $794 million of PP&E investment and net collateral activity. Inventory fell to $4.644 billion from $5.161 billion.
Annualized revenue run-rate for HPE GreenLake and related as-a-service offerings was $1.006 billion, up 26% year over year. HPE states ARR is a management metric, not a forecast, and it is not directly comparable to net revenue.
Material changes and notable items
- Cash used in operations worsened by $753 million year over year, while free cash flow worsened by $749 million. Management cited higher vendor payments, increased financing receivables, and higher PP&E investment, partly offset by currency effects and lower prior-year variable-compensation payments.
- Commercial paper outstanding increased: $759 million under the parent programs and $680 million under the subsidiary program at quarter-end. Short-term borrowings and notes payable were $5.349 billion; long-term debt was $7.577 billion.
- HPE exercised its contractual right to put its 49% H3C stake to UNIS for cash. The purchase price remains subject to agreement and the transaction requires regulatory approvals; timing and proceeds are not established in the filing.
- After quarter-end, HPE announced agreements to acquire Athonet and Axis Security for an expected combined cash price of approximately $490 million, subject to adjustments, with both transactions expected to close in FY2023.
- HPE reported reaching a settlement in the Oracle Terix copyright dispute; the case was dismissed. A separate California employment class settlement had preliminary approval, with final approval hearing scheduled for April 27, 2023.
Outlook, risks and contingencies
The filing provides no specific consolidated revenue or EPS guidance. Management described slower and uneven demand, continuing supply-chain and inflationary pressures, foreign-exchange headwinds, delayed shipments, and elevated backlog and related inventory. It reported some easing in supply constraints and expected restructuring and cost-efficiency measures to help offset cost and currency pressures. Management stated that available funds, operating cash flows and capital-market access should be sufficient for liquidity needs for at least the next 12 months, while noting that market conditions could constrain access or raise borrowing costs.
- HPE expects approximately $420 million of future cash payments under approved restructuring plans: $280 million for the remainder of FY2023 and $140 million thereafter. The cost optimization and prioritization plan and HPE Next were expected to reach substantial completion through FY2023.
- HPC & AI and Software goodwill reporting units had no excess fair value over carrying value at the FY2022 annual impairment test. Weaker demand, lower projected margins, higher discount rates, or market deterioration could lead to impairment charges.
- HPE cited uncertainty around collections associated with its Russia and Belarus business exit, as well as tax audits and uncertain tax positions. Unrecognized tax benefits were $720 million at quarter-end; HPE said up to $44 million could be reduced within 12 months.
- HPE disclosed ongoing litigation and environmental, guarantee and indemnification exposures. It stated that, as of January 31, 2023, a material loss in excess of recorded provisions was not reasonably possible for the matters discussed generally; outcomes remain subject to uncertainty.
- The Inflation Reduction Act’s 15% corporate alternative minimum tax is effective for HPE beginning FY2024 and was under evaluation. A 1% excise tax applies to qualifying net share repurchases after December 31, 2022.
Investor facts to verify
- Whether backlog conversion and supply improvements continue, and whether reported revenue growth translates into improved cash generation.
- The drivers and expected normalization of negative operating and free cash flow, particularly vendor payments, financing receivables, collateral requirements and capital spending.
- Progress and profitability in HPC & AI, Storage and Financial Services, including the potential goodwill impairment sensitivity noted for HPC & AI.
- The agreed price, regulatory approvals, timing and intended use of proceeds for the H3C put; and the closing terms and integration costs for Athonet and Axis Security.
- Developments in tax matters, litigation settlements, restructuring cash payments, and the impact of the Inflation Reduction Act and share-repurchase excise tax.