Hewlett Packard Enterprise Company — Q3 FY2023 Form 10-Q
Reporting period: Three and nine months ended July 31, 2023. Amounts are in U.S. dollars; financial statement figures are unaudited unless otherwise noted.
Business context and results
HPE is a global technology company focused on edge-to-cloud solutions. Its six reportable segments are Compute, HPC & AI, Storage, Intelligent Edge, Financial Services, and Corporate Investments and Other. Segment reporting was realigned in fiscal 2023; comparative segment figures were retrospectively adjusted, with no effect on consolidated results.
| Metric | Q3 FY2023 | Q3 FY2022 | Nine months FY2023 | Nine months FY2022 |
|---|---|---|---|---|
| Revenue | $7.002B | $6.951B | $21.784B | $20.625B |
| Gross profit / margin | $2.510B / 35.8% | $2.396B / 34.5% | $7.680B / 35.3% | $6.913B / 33.5% |
| Operating earnings / margin | $471M / 6.7% | $466M / 6.7% | $1.582B / 7.3% | $1.121B / 5.4% |
| Net earnings | $464M | $409M | $1.383B | $1.172B |
| Diluted EPS | $0.35 | $0.31 | $1.05 | $0.88 |
| Operating cash flow | $1.525B | $1.254B | $1.585B | $1.557B |
| Free cash flow (non-GAAP) | $955M | $587M | $(83)M | $(201)M |
Q3 revenue grew 0.7% reported and 3.5% in constant currency; nine-month revenue grew 5.6% reported and 10.0% in constant currency. Q3 product revenue was $4.231B, services $2.629B, and financing income $142M. Management attributed gross-margin improvement to higher-margin networking sales, higher average selling prices in Intelligent Edge, lower supply-chain and commodity costs, and prior-year Russia/Belarus-related credit-loss charges.
Q3 segment revenue changes included Intelligent Edge +50.4%, Compute −13.3%, Storage −4.9%, HPC & AI +0.7%, and Financial Services +6.9%. Intelligent Edge operating margin rose to 29.7% from 16.5%; Compute margin declined to 10.9% from 13.5%, while HPC & AI reported a $7M operating loss. For the nine months, HPC & AI revenue increased 17.3%, but Compute declined 2.7% and Storage 0.8%.
Financial position and liquidity
- At July 31, cash and cash equivalents were $2.919B and restricted cash was $213M. Total debt was $13.352B, versus $12.465B at October 31, 2022. Current and long-term debt were $4.486B and $8.866B, respectively.
- Current assets were $17.655B and current liabilities $20.170B. Available borrowing resources were reported as $6.118B; no borrowings were outstanding under the $4.75B revolving credit facility.
- Nine-month operating cash flow was $1.585B. Investing used $3.186B, including $2.153B of property, plant and equipment investment, $761M for acquisitions, and net cash use in financial collateral activities. Cash, cash equivalents and restricted cash decreased by $1.631B.
- HPE paid $465M in dividends and repurchased $366M of shares during the nine months. The remaining repurchase authorization was $1.0B; the declared quarterly dividend was $0.12 per share.
- Management stated that cash, operating cash generation and capital-market access should be sufficient for liquidity needs for at least the next 12 months. This is a forward-looking assessment, not a guarantee.
Material changes, outlook and risks
- Management reported easing, but ongoing, supply constraints; declining elevated order-book levels; increased demand and adoption of AI-related technologies; elongated sales cycles; and more cautious customer spending. It expects the mixed macroeconomic environment to moderate near-term revenue growth.
- Foreign-exchange headwinds and inflation, including labor costs, continue to pressure results. HPE expects unfavorable foreign-exchange effects and inflationary trends to persist longer term. Lower logistics and some supply-chain costs provided offsets.
- HPE GreenLake and other as-a-service annualized revenue run-rate (ARR), a company-defined measure and not a forecast, was $1.272B, up 48% year over year. Growth was led by Intelligent Edge and Storage as-a-service activity.
- No specific consolidated revenue or earnings guidance for the next quarter or full year is provided in the filing text. HPE expected its transformation plans to be substantially complete by fiscal year-end 2023 and anticipated approximately $310M of future cash restructuring payments, including $170M through the remainder of FY2023.
- HPE agreed to sell its 49% H3C stake to UNIS for $3.5B pre-tax cash consideration. Closing remains subject to regulatory approvals and other conditions; proceeds are not yet realized. HPE said it would consider investments, shareholder returns, debt reduction and general corporate purposes for capital allocation.
- Five acquisitions were completed during the nine months. The filing highlights OpsRamp and Axis Security; aggregate estimated consideration for acquisitions was $840M, including $591M of goodwill. Purchase-price allocations remained preliminary.
- HPC & AI and Software goodwill reporting units had no excess of estimated fair value over carrying value at the prior annual impairment test. HPE cited supply-chain and customer-acceptance challenges for HPC & AI and market and revenue sensitivity for Software as potential impairment risks.
- Other exposures include tax audits and uncertain tax positions, litigation, environmental obligations, financing-receivable credit risk, foreign exchange, interest rates, geopolitical conditions, and the Russia/Ukraine-related managed exit. The IRS was auditing fiscal 2017–2019 U.S. federal returns; HPE said certain unrecognized tax benefits could decrease by up to $36M within 12 months. HPE stated it had recorded adequate litigation provisions and did not consider a material additional loss reasonably possible as of July 31, 2023.
- The nine-month effective tax rate increased to 17.7% from 5.0%, reflecting period-specific tax items and comparisons against substantial prior-year tax benefits. The U.S. corporate alternative minimum tax is expected to apply to HPE beginning in FY2024; the company was evaluating its impact.
Most important facts for investors to verify
- Whether Intelligent Edge growth and margins can be sustained as high prior-period order books normalize, and whether Compute server-volume weakness continues.
- HPC & AI customer acceptance milestones, contract costs, profitability, and the assumptions supporting goodwill recoverability.
- Cash conversion and working-capital trends: nine-month free cash flow remained negative despite positive operating cash flow; review the effects of capital investment, collateral activity, vendor payments and financing receivables.
- Debt maturities, borrowing costs, and liquidity after the reported increase in total debt; compare available borrowing resources with current liabilities and cash needs.
- Regulatory approval and completion of the H3C sale, expected timing and net proceeds, and management’s eventual use of proceeds.
- Acquisition integration, preliminary purchase accounting, restructuring cash payments, tax-audit outcomes, and developments in material litigation or environmental matters.
- Reconcile GAAP results with management’s non-GAAP measures: exclusions include stock compensation, transformation and acquisition costs, amortization, and other items; HPE cautions that these measures are supplemental and may not be comparable across companies.