Continued progress against strategic priorities in dynamic
environment
Q1 2020 Financial Highlights:
- Revenue: $6.9 billion with growth in areas of
investment, including Intelligent Edge and as-a-Service
offerings
- Annualized revenue run-rate (ARR): $511 million, up 19%
from the prior-year period
- Gross margin: GAAP of 32.8%, up 170 basis points from
the prior-year period and Non-GAAP of 33.2%, up 210 basis points
from the prior-year period
- Diluted net earnings per share:
- GAAP of $0.25, compared to $0.13 and up 92% from the prior-year
period and above the previously provided outlook of $0.20 to $0.24
per share
- Non-GAAP of $0.44, up 5% from the prior-year period and in-line
with the previously provided outlook of $0.42 to $0.46 per
share
FY 2020 Outlook:
- Earnings Per Share: Maintains GAAP diluted net earnings
per share outlook of $1.01 to $1.17 and non-GAAP diluted net
earnings per share outlook of $1.78 to $1.94
- Free Cash Flow1: Revises free cash flow outlook
to $1.6 to $1.8 billion to account for current supply chain
disruption impacting short-term cash conversion cycles
Hewlett Packard Enterprise (NYSE: HPE) today announced financial
results for its fiscal 2020 first quarter, ended Jan. 31, 2020.
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“HPE’s first quarter results demonstrate continued progress
against our strategic priorities to shift our company to
higher-margin and more recurring revenues against a dynamic market
backdrop,” said Antonio Neri, president and CEO of Hewlett Packard
Enterprise. “While our overall revenue declined for the quarter,
primarily due to our Compute business, we grew our ARR by 19
percent and saw profitable growth in key areas of investment,
including Intelligent Edge, High Performance Compute,
Hyperconverged Infrastructure, Big Data Storage and Operational
Services orders.”
“We delivered EPS and gross margin improvement, while making
important investments for future innovation,” Neri continued.
“Faced with continued macro uncertainty, I am confident we are
managing our business with discipline and focus, taking the right
actions, and advancing our pivot to deliver unique edge-to-cloud
experiences as a service. We believe the combination will drive
long-term profitable growth and strong returns on investment.”
First Quarter Fiscal Year 2020 Results
Net revenue of $6.9 billion, down 8% from the prior-year
period and 7% from the prior-year period when adjusted for
currency. Market uncertainty, supply constraints, and North America
manufacturing capacity constraints impacted revenue in Q1,
particularly in Compute.
Annualized revenue run-rate (ARR) of $511 million, up 19%
from the prior-year period. GreenLake services orders finished the
quarter with 48% year over year growth.
GAAP gross margin of 32.8%, up 170 basis points from the
prior-year period and Non-GAAP gross margin of 33.2%, up 210 basis
points from the prior-year period.
GAAP diluted net earnings per share (“EPS”) was $0.25,
compared to $0.13 in the prior-year period and above the previously
provided outlook of $0.20 to $0.24 per share.
Non-GAAP diluted net EPS was $0.44, compared to $0.42 in
the prior-year period and in-line with the previously provided
outlook of $0.42 to $0.46 per share. First quarter non-GAAP net
earnings and non-GAAP diluted net EPS exclude after-tax adjustments
of $242 million and $0.19 per diluted share, respectively,
primarily related to amortization of intangible assets and
transformation costs.
Cash flow from operations of ($79) million compared to
$382 million in the prior-year period.
Free cash flow of ($185) million compared to ($190)
million in the prior-year period.
Segment Results
Hewlett Packard Enterprise brings a broad, differentiated
portfolio of products and services to address digital
transformation, while prioritizing key segments to drive profitable
growth.
Intelligent Edge returned to growth with revenue of $720
million, up 4% year over year when adjusted for currency, with 9.7%
operating margin, up 630 basis points from the prior-year period.
Enhancements to North America sales leadership and go-to-market
segmentation are paying off with double-digit growth in North
America and 13% growth when adjusted for currency in overall WLAN
product.
Compute revenue was $3.0 billion, down 15% year over year
when adjusted for currency, with 9.5% operating margin, flat from
the prior-year period. Revenue was pressured this quarter due to a
more uneven business environment, component supply constraints and
North America manufacturing capacity constraints.
High Performance Compute & Mission Critical Systems (HPC
& MCS) revenue was $823 million, up 6% year over year when
adjusted for currency, with 6.0% operating margin, down 660 basis
points from the prior-year period. HPC business continues to gain
momentum with over $2.0 billion of awarded business expected to be
delivered by FY23.
Storage revenue was $1.3 billion, down 7% year over year
when adjusted for currency, with 18.1% operating margin, down 60
basis points from the prior-year period. Hyperconverged
Infrastructure showing continued momentum, up 6% year over year
when adjusted for currency and Big Data, up 45% year over year when
adjusted for currency.
Advisory & Professional Services (A&PS) revenue
was $243 million, flat year over year when adjusted for currency,
with (0.8%) operating margin, up 12.5 points from the prior-year
period. A&PS is a strategic business that pulls through
significant infrastructure and operational services sales.
Financial Services revenue was $859 million, down 6% year
over year when adjusted for currency, with 8.5% operating margin,
up 10 basis points from the prior-year period. Net portfolio assets
were up 2% year over year when adjusted for currency, and financing
volume was up 2% year over year when adjusted for currency. The
business delivered return on equity of 14.8%, down 90 basis points
from the prior-year period.
Fiscal 2020 Outlook:
Hewlett Packard Enterprise maintains GAAP diluted net EPS
outlook of $1.01 to $1.17 and non-GAAP diluted net EPS outlook of
$1.78 to $1.94. Fiscal 2020 non-GAAP diluted net EPS estimates
exclude after-tax costs of approximately $0.77 per share, primarily
related to transformation costs and the amortization of intangible
assets.
Revises free cash flow1 outlook range from $1.9 to $2.1 billion
to $1.6 to $1.8 billion to account for current supply chain
disruption impacting short-term cash conversion cycles.
1Hewlett Packard Enterprise provides certain guidance on a
non-GAAP basis, as the company cannot predict some elements that
are included in reported GAAP results. Refer to the discussion of
non-GAAP financial measures below for more information.
About Hewlett Packard Enterprise
Hewlett Packard Enterprise is the global edge-to-cloud
platform-as-a-service company that helps organizations accelerate
outcomes by unlocking value from all of their data, everywhere.
Built on decades of reimagining the future and innovating to
advance the way we live and work, HPE delivers unique, open and
intelligent technology solutions, with a consistent experience
across all clouds and edges, to help customers develop new business
models, engage in new ways, and increase operational performance.
For more information, visit: www.hpe.com.
Use of non-GAAP financial information
To supplement Hewlett Packard Enterprise’s condensed
consolidated financial statement information presented on a
generally accepted accounting principles (GAAP) basis, Hewlett
Packard Enterprise provides revenue on a constant currency basis as
well as non-GAAP gross margin, non-GAAP operating expense, non-GAAP
operating profit, non-GAAP operating margin, non-GAAP income tax
rate, non-GAAP net earnings, non-GAAP diluted net earnings per
share, gross cash, free cash flow, net capital expenditures, net
debt, net cash, operating company net debt and operating company
net cash financial measures. Hewlett Packard Enterprise also
provides forecasts of non-GAAP diluted net earnings per share and
free cash flow. A reconciliation of adjustments to GAAP financial
measures for this quarter and prior periods is included in the
tables below or elsewhere in the materials accompanying this news
release. In addition, an explanation of the ways in which Hewlett
Packard Enterprise’s management uses these non-GAAP measures to
evaluate its business, the substance behind Hewlett Packard
Enterprise’s decision to use these non-GAAP measures, the material
limitations associated with the use of these non-GAAP measures, the
manner in which Hewlett Packard Enterprise’s management compensates
for those limitations, and the substantive reasons why Hewlett
Packard Enterprise’s management believes that these non-GAAP
measures provide useful information to investors is included under
“Use of non-GAAP financial measures” further below. This additional
non-GAAP financial information is not meant to be considered in
isolation or as a substitute for revenue, gross margin, operating
profit, operating margin, net earnings, diluted net earnings per
share, cash, cash equivalents and restricted cash, cash flow from
operations, investments in property, plant and equipment, or total
company debt prepared in accordance with GAAP.
Forward-looking statements
This press release contains forward-looking statements that
involve risks, uncertainties and assumptions. If the risks or
uncertainties ever materialize or the assumptions prove incorrect,
the results of Hewlett Packard Enterprise may differ materially
from those expressed or implied by such forward-looking statements
and assumptions. All statements other than statements of historical
fact are statements that could be deemed forward-looking
statements, including but not limited to any projections of
revenue, margins, expenses, effective tax rates, the impact of the
U.S. Tax Cuts and Jobs Act of 2017, net earnings, net earnings per
share, cash flows, benefit plan funding, deferred tax assets, share
repurchases, currency exchange rates or other financial items; any
projections of the amount, timing or impact of cost savings or
restructuring charges; any statements of the plans, strategies and
objectives of management for future operations, as well as the
execution of corporate transactions or contemplated acquisitions,
transformation and restructuring plans and any resulting benefit,
cost savings or restructuring charges, revenue or profitability
improvements; any statements concerning the expected development,
performance, market share or competitive performance relating to
products or services; any statements regarding current or future
macroeconomic trends or events and the impact of those trends and
events on Hewlett Packard Enterprise and its financial performance;
any statements regarding pending investigations, claims or
disputes; any statements of expectation or belief; and any
statements or assumptions underlying any of the foregoing.
Risks, uncertainties and assumptions include the need to address
the many challenges facing Hewlett Packard Enterprise’s businesses;
the competitive pressures faced by Hewlett Packard Enterprise’s
businesses; risks associated with executing Hewlett Packard
Enterprise’s strategy; the impact of macroeconomic and geopolitical
trends and events; the need to manage third-party suppliers and the
distribution of Hewlett Packard Enterprise’s products and the
delivery of Hewlett Packard Enterprise’s services effectively; the
protection of Hewlett Packard Enterprise’s intellectual property
assets, including intellectual property licensed from third parties
and intellectual property shared with its former Parent; risks
associated with Hewlett Packard Enterprise’s international
operations (including pandemics and public health problems, such as
the outbreak of novel coronavirus (COVID-19)); the development and
transition of new products and services and the enhancement of
existing products and services to meet customer needs and respond
to emerging technological trends; the execution and performance of
contracts by Hewlett Packard Enterprise and its suppliers,
customers, clients and partners, including any impact thereon
resulting from events such as the coronavirus; the hiring and
retention of key employees; execution, integration and other risks
associated with business combination and investment transactions;
and the execution, timing and results of any transformation or
restructuring plans, including estimates and assumptions related to
the cost (including any possible disruption of Hewlett Packard
Enterprise's business) and the anticipated benefits of the
transformation and restructuring plans; the effects of the U.S. Tax
Cuts and Jobs Act and related guidance and regulations; the
resolution of pending investigations, claims and disputes; and
other risks that are described in Hewlett Packard Enterprise’s
Annual Report on Form 10-K for the fiscal year ended October 31,
2019.
As in prior periods, the financial information set forth in this
press release, including tax-related items, reflects estimates
based on information available at this time. While Hewlett Packard
Enterprise believes these estimates to be reasonable, these amounts
could differ materially from reported amounts in the Hewlett
Packard Enterprise Quarterly Report on Form 10-Q for the first
quarter ended January 31, 2020. Hewlett Packard Enterprise assumes
no obligation and does not intend to update these forward-looking
statements.
HEWLETT PACKARD ENTERPRISE
COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF
EARNINGS (Unaudited) (In millions, except per share
amounts)
Three months ended
January 31, 2020
October 31, 2019
January 31, 2019
Net revenue
$
6,949
$
7,215
$
7,553
Costs and expenses:
Cost of sales
4,667
4,822
5,207
Research and development
485
438
466
Selling, general and administrative
1,218
1,229
1,211
Amortization of intangible assets
120
68
72
Transformation costs
89
151
78
Acquisition, disposition and other related
charges
22
47
63
Total costs and expenses
6,601
6,755
7,097
Earnings from operations
348
460
456
Interest and other, net
(19
)
(38
)
(51
)
Tax indemnification adjustments(a)
(21
)
288
219
Non-service net periodic benefit
credit
37
14
16
Earnings (loss) from equity interests
33
(1
)
15
Earnings before taxes
378
723
655
Provision for taxes(b)
(45
)
(243
)
(478
)
Net earnings
$
333
$
480
$
177
Net earnings per share:
Basic
$
0.26
$
0.37
$
0.13
Diluted
$
0.25
$
0.36
$
0.13
Cash dividends declared per share
$
0.1200
$
0.1200
$
0.1125
Weighted-average shares used to compute
net earnings per share:
Basic
1,300
1,308
1,401
Diluted
1,315
1,323
1,412
HEWLETT PACKARD ENTERPRISE
COMPANY AND SUBSIDIARIES ADJUSTMENTS TO GAAP NET EARNINGS, EARNINGS
FROM OPERATIONS, OPERATING MARGIN AND DILUTED NET EARNINGS PER
SHARE (Unaudited) (In millions, except percentages and per share
amounts)
Three months
ended January
31, 2020
Diluted net
earnings
per share
Three months
ended October 31,
2019
Diluted net
earnings
per share
Three months
ended January
31, 2019
Diluted net
earnings
per share
GAAP net earnings
$
333
$
0.25
$
480
$
0.36
$
177
$
0.13
Non-GAAP adjustments:
Amortization of initial direct costs
3
—
—
—
—
—
Amortization of intangible assets
120
0.09
68
0.05
72
0.05
Transformation costs
89
0.07
151
0.11
78
0.06
Acquisition, disposition and other related
charges
42
0.03
54
0.04
63
0.04
Tax indemnification adjustments(a)
21
0.02
(288
)
(0.22
)
(219
)
(0.16
)
Non-service net periodic benefit
credit
(37
)
(0.03
)
(14
)
(0.01
)
(16
)
(0.01
)
Loss from equity interests(c)
37
0.03
38
0.03
38
0.03
Adjustments for taxes(b)(d)
(33
)
(0.02
)
155
0.13
397
0.28
Non-GAAP net earnings
$
575
$
0.44
$
644
$
0.49
$
590
$
0.42
GAAP earnings from operations
$
348
$
460
$
456
Non-GAAP adjustments
Amortization of initial direct costs
3
—
—
Amortization of intangible assets
120
68
72
Transformation costs
89
151
78
Acquisition, disposition and other related
charges
42
54
63
Non-GAAP earnings from operations
$
602
$
733
$
669
GAAP operating margin
5
%
6
%
6
%
Non-GAAP adjustments
4
%
4
%
3
%
Non-GAAP operating margin
9
%
10
%
9
%
HEWLETT PACKARD ENTERPRISE
COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) (In millions, except par value)
As of
January 31, 2020
October 31, 2019
ASSETS
Current assets:
Cash and cash equivalents
$
3,171
$
3,753
Accounts receivable, net of
allowance for doubtful accounts
2,864
2,957
Financing receivables, net of
allowance for doubtful accounts
3,591
3,572
Inventory
2,560
2,387
Assets held for sale
12
46
Other current assets
2,553
2,428
Total current assets
14,751
15,143
Property, plant and equipment
5,711
6,054
Long-term financing receivables
and other assets(e)
10,179
8,918
Investments in equity
interests
2,290
2,254
Goodwill and intangible
assets
19,313
19,434
Total assets
$
52,244
$
51,803
LIABILITIES AND STOCKHOLDERS’
EQUITY
Current liabilities:
Notes payable and short-term
borrowings
$
4,510
$
4,425
Accounts payable
5,332
5,595
Employee compensation and benefits
1,009
1,522
Taxes on earnings
173
186
Deferred revenue
3,267
3,234
Accrued restructuring
184
195
Other accrued liabilities(e)
4,279
4,002
Total current liabilities
18,754
19,159
Long-term debt
9,362
9,395
Other non-current liabilities(e)
6,885
6,100
Stockholders’ equity
HPE stockholders’ equity:
Preferred stock, $0.01 par value (300
shares authorized; none issued)
—
—
Common stock, $0.01 par value (9,600
shares authorized; 1,293 and 1,294 shares issued and outstanding at
January 31, 2020 and October 31, 2019, respectively)
13
13
Additional paid-in capital
28,287
28,444
Accumulated deficit(f)
(7,411
)
(7,632
)
Accumulated other comprehensive
loss(f)
(3,700
)
(3,727
)
Total HPE stockholders’ equity
17,189
17,098
Non-controlling interests
54
51
Total stockholders’ equity
17,243
17,149
Total liabilities and stockholders’
equity
$
52,244
$
51,803
HEWLETT PACKARD ENTERPRISE
COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS (Unaudited) (In millions)
Three months ended
January 31, 2020
Three months ended
January 31, 2019
Cash flows from operating activities:
Net earnings
$
333
$
177
Adjustments to reconcile net earnings to
net cash (used in) provided by operating activities:
Depreciation and amortization
690
639
Stock-based compensation expense
93
75
Provision for doubtful accounts and
inventory
41
42
Restructuring charges
84
33
Deferred taxes on earnings
(28
)
370
Earnings from equity interests
(33
)
(15
)
Other, net
(36
)
46
Changes in operating assets and
liabilities, net of acquisitions:
Accounts receivable
82
113
Financing receivables
(104
)
(156
)
Inventory
(204
)
99
Accounts payable
(250
)
(256
)
Taxes on earnings
(27
)
(107
)
Restructuring
(87
)
(110
)
Other assets and liabilities
(633
)
(568
)
Net cash (used in) provided by operating
activities
(79
)
382
Cash flows from investing activities:
Investment in property, plant and
equipment
(568
)
(729
)
Proceeds from sale of property, plant and
equipment
462
157
Purchases of available-for-sale securities
and other investments
(59
)
(5
)
Maturities and sales of available-for-sale
securities and other investments
8
1
Financial collateral posted
(48
)
(245
)
Financial collateral returned
147
281
Payments made in connection with business
acquisitions, net of cash acquired
(6
)
(76
)
Net cash used in investing activities
(64
)
(616
)
Cash flows from financing activities:
Short-term borrowings with original
maturities less than 90 days, net
127
(12
)
Proceeds from debt, net of issuance
costs
340
389
Payment of debt
(450
)
(334
)
Net proceeds related to stock-based award
activities
(43
)
(17
)
Repurchase of common stock
(204
)
(814
)
Contributions from non-controlling
interests
1
—
Cash dividends paid
(156
)
(157
)
Net cash used in financing activities
(385
)
(945
)
Decrease in cash, cash equivalents and
restricted cash
(528
)
(1,179
)
Cash, cash equivalents and restricted cash
at beginning of period
4,076
5,084
Cash, cash equivalents and restricted cash
at end of period
$
3,548
$
3,905
HEWLETT PACKARD ENTERPRISE
COMPANY AND SUBSIDIARIES
SEGMENT INFORMATION
(Unaudited)
(In millions)
Three months ended
January 31, 2020
October 31, 2019
January 31, 2019
Net revenue:(g)
Compute
$
3,011
$
3,349
$
3,575
HPC & MCS
823
777
779
Storage
1,250
1,256
1,356
A & PS
243
269
241
Intelligent Edge
720
742
705
Financial Services
859
878
919
Corporate Investments
121
134
118
Total segment net revenue
7,027
7,405
7,693
Elimination of intersegment net revenue
and other
(78
)
(190
)
(140
)
Total Hewlett Packard Enterprise
consolidated net revenue
$
6,949
$
7,215
$
7,553
Earnings before taxes:(g)
Compute
$
286
$
464
$
340
HPC & MCS
49
79
98
Storage
226
219
254
A & PS
(2
)
1
(32
)
Intelligent Edge
70
46
24
Financial Services
73
74
77
Corporate Investments
(27
)
(26
)
(28
)
Total segment earnings from operations
675
857
733
Unallocated corporate costs and
eliminations
(52
)
(107
)
(50
)
Unallocated stock-based compensation
expense
(21
)
(17
)
(14
)
Amortization of initial direct costs
(3
)
—
—
Amortization of intangible assets
(120
)
(68
)
(72
)
Transformation costs
(89
)
(151
)
(78
)
Acquisition, disposition and other related
charges
(42
)
(54
)
(63
)
Interest and other, net
(19
)
(38
)
(51
)
Tax indemnification adjustments(a)
(21
)
288
219
Non-service net periodic benefit
credit
37
14
16
Earnings (loss) from equity interests
33
(1
)
15
Total Hewlett Packard Enterprise
consolidated earnings before taxes
$
378
$
723
$
655
HEWLETT PACKARD ENTERPRISE
COMPANY AND SUBSIDIARIES SEGMENT INFORMATION (Unaudited) (In
millions, except percentages)
Three months ended
Change (%)
January 31,
2020
October 31,
2019
January 31,
2019
Q/Q
Y/Y
Net revenue:(g)
Compute
$
3,011
$
3,349
$
3,575
(10
%)
(16
%)
HPC & MCS
823
777
779
6
%
6
%
Storage
1,250
1,256
1,356
—
%
(8
%)
A & PS
243
269
241
(10
%)
1
%
Intelligent Edge
720
742
705
(3
%)
2
%
Financial Services
859
878
919
(2
%)
(7
%)
Corporate Investments
121
134
118
(10
%)
3
%
Total segment net revenue
7,027
7,405
7,693
(5
%)
(9
%)
Elimination of intersegment net revenue
and other
(78
)
(190
)
(140
)
(59
%)
(44
%)
Total Hewlett Packard Enterprise
consolidated net revenue
$
6,949
$
7,215
$
7,553
(4
%)
(8
%)
HEWLETT PACKARD ENTERPRISE
COMPANY AND SUBSIDIARIES SEGMENT OPERATING MARGIN SUMMARY DATA
(Unaudited)
Three months ended
Change in Operating Margin
(pts)
January 31, 2020
Q/Q
Y/Y
Segment operating margin:(g)
Compute
9.5
%
-4.4 pts.
0.0 pts.
HPC & MCS
6.0
%
-4.2 pts.
-6.6 pts.
Storage
18.1
%
0.7 pts.
-0.6 pts.
A & PS
(0.8
)%
-1.2 pts.
12.5 pts.
Intelligent Edge
9.7
%
3.5 pts.
6.3 pts.
Financial Services
8.5
%
0.1 pts.
0.1 pts.
Corporate Investments
(22.3
)%
-2.9 pts
1.4 pts.
Total segment operating margin
9.6
%
-2.0 pts
0.1 pts.
HEWLETT PACKARD ENTERPRISE
COMPANY AND SUBSIDIARIES CALCULATION OF DILUTED NET EARNINGS (LOSS)
PER SHARE (Unaudited) (In millions, except per share
amounts)
Three months ended
January 31, 2020
October 31, 2019
January 31, 2019
Numerator:
GAAP net earnings
$
333
$
480
$
177
Non-GAAP net earnings
$
575
$
644
$
590
Denominator:
Weighted-average shares used to compute
basic net earnings per share
1,300
1,308
1,401
Dilutive effect of employee stock
plans(h)
15
15
11
Weighted-average shares used to compute
diluted net earnings per share
1,315
1,323
1,412
GAAP net earnings per share
Basic
$
0.26
$
0.37
$
0.13
Diluted(h)
$
0.25
$
0.36
$
0.13
Non-GAAP net earnings per share
Basic
$
0.44
$
0.49
$
0.42
Diluted(h)
$
0.44
$
0.49
$
0.42
(a)
For the three months ended October 31,
2019, the amount was due primarily to the termination of the Tax
Matters Agreement with HP Inc. For the three months ended January
31, 2019, the amount primarily includes the effects of U.S. tax
reform on tax attributes related to fiscal periods prior to the
Separation.
(b)
The three months ended October 31, 2019
and January 31, 2019, include $123 million and $419 million of net
income tax charges related to changes in U.S. federal and state
valuation allowances as a result of impacts of the Tax Cuts and
Jobs Act of 2017 (the "Tax Act").
(c)
Represents the amortization of basis
difference adjustments related to the H3C divestiture.
(d)
Effective the first quarter of fiscal
2019, the Company uses a structural tax rate based on long-term
non-GAAP financial projections.
(e)
The Company adopted the new accounting
standard for leases in the first quarter of fiscal 2020 which
requires lessees to recognize a lease liability and a right-of-use
(“ROU”) asset for the lease term. The Company elected the modified
retrospective transition method whereby prior comparative periods
are not restated. Adoption of the new lease standard resulted in
the recognition of $1.0 billion of ROU assets and $1.1 billion of
lease liabilities on the Company’s Condensed Consolidated Balance
Sheet.
(f)
The Company adopted an accounting standard
update in the first quarter of fiscal 2020 that allowed it to
reclassify $43 million of stranded tax effects resulting from U.S.
tax reform from accumulated other comprehensive loss into
accumulated deficit.
(g)
Effective at the beginning of the first
quarter of fiscal 2020, Hewlett Packard Enterprise Company ("HPE")
implemented certain organizational changes to align its segment
financial reporting more closely with its current business
structure. As a result of these organizational changes, HPE
replaced the Hybrid IT reportable segment (and the Compute, Storage
and HPE Pointnext business units within it) with four new financial
reporting segments: Compute, High Performance Compute &
Mission-Critical Systems ("HPC & MCS"), Storage, and Advisory
and Profession Services ("A & PS").
In addition, the HPE Aruba Services
business unit of the Intelligent Edge segment now includes the Data
Center Networking ("DC Networking") operational services business
that was previously a part of the Hybrid IT-HPE Pointnext business
unit. The DC Networking business, other than operational services,
had been transferred to the Intelligent Edge segment in a prior
realignment.
The Company reflected these changes to its
segment information retrospectively to the earliest period
presented, which primarily resulted in the transfer of net revenue
and operating profit for each of the businesses as described above.
These changes had no impact on Hewlett Packard Enterprise’s
previously reported consolidated net revenue, net earnings or net
earnings per share ("EPS").
(h)
Diluted net earnings per share reflects
any dilutive effect of restricted stock awards, stock options and
performance-based awards.
Use of non-GAAP financial measures
To supplement Hewlett Packard Enterprise’s condensed
consolidated financial statement information presented on a GAAP
basis, Hewlett Packard Enterprise provides revenue on a constant
currency basis, non-GAAP gross margin, non-GAAP operating expenses,
non-GAAP operating profit, non-GAAP operating margin, non-GAAP
income tax rate, non-GAAP net earnings, non-GAAP diluted net
earnings per share, gross cash, free cash flow, net capital
expenditures, net debt, net cash, operating company net debt and
operating company net cash financial measures. Hewlett Packard
Enterprise also provides forecasts of non-GAAP diluted net earnings
per share and free cash flow.
These non-GAAP financial measures are not computed in accordance
with, or as an alternative to, generally accepted accounting
principles in the United States. The GAAP measure most directly
comparable to revenue on a constant currency basis is revenue. The
GAAP measure most directly comparable to non-GAAP gross margin is
gross margin. The GAAP measure most directly comparable to non-GAAP
operating expense is total costs and expenses. The GAAP measure
most directly comparable to non-GAAP operating profit is earnings.
The GAAP measure most directly comparable to non-GAAP operating
margin is operating margin. The GAAP measure most directly
comparable to non-GAAP income tax rate is income tax rate. The GAAP
measure most directly comparable to non-GAAP net earnings is net
earnings. The GAAP measure most directly comparable to non-GAAP
diluted net earnings per share is diluted net earnings per share.
The GAAP measure most directly comparable to gross cash is cash and
cash equivalents. The GAAP measure most directly comparable to free
cash flow is cash flow from operations. The GAAP measure most
directly comparable to net capital expenditures is investment in
property, plant and equipment. The GAAP measure most directly
comparable to net debt and operating company net debt is total
company debt. The GAAP measure most directly comparable to each of
net cash and operating company net cash is cash and cash
equivalents. Reconciliations of each of these non-GAAP financial
measures to GAAP information are included in the tables above or
elsewhere in the materials accompanying this news release.
Use and economic substance of non-GAAP financial measures
used by Hewlett Packard Enterprise
Revenue on a constant currency basis assumes no change in the
foreign exchange rate from the prior-year period. Non-GAAP gross
margin, non-GAAP operating expenses, non-GAAP operating profit, and
non-GAAP operating margin are defined to exclude any charges
relating to the amortization of intangible assets, amortization of
initial direct costs, transformation costs, and acquisition,
disposition and other related charges. Non-GAAP net earnings and
non-GAAP diluted net earnings per share consist of net earnings or
diluted net earnings per share excluding those same charges, as
well as an adjustment to earnings in equity interests, non-service
net periodic benefit credit, tax indemnification adjustments,
certain income tax valuation allowances and separation taxes, the
impact of U.S. tax reform and excess tax benefit from stock-based
compensation. In addition, non-GAAP net earnings and non-GAAP
diluted net earnings per share are adjusted by the amount of
additional taxes or tax benefits associated with each non-GAAP
item.
Hewlett Packard Enterprise’s management uses these non-GAAP
financial measures for purposes of evaluating Hewlett Packard
Enterprise’s historical and prospective financial performance, as
well as Hewlett Packard Enterprise’s performance relative to its
competitors. Hewlett Packard Enterprise’s management also uses
these non-GAAP measures to further its own understanding of Hewlett
Packard Enterprise’s segment operating performance. Hewlett Packard
Enterprise believes that excluding the items mentioned above from
these non-GAAP financial measures allows Hewlett Packard
Enterprise’s management to better understand Hewlett Packard
Enterprise’s consolidated financial performance in relation to the
operating results of Hewlett Packard Enterprise’s segments, as
Hewlett Packard Enterprise’s management does not believe that the
excluded items are reflective of ongoing operating results. More
specifically, Hewlett Packard Enterprise’s management excludes each
of those items mentioned above for the following reasons:
- Hewlett Packard Enterprise incurs charges relating to the
amortization of intangible assets. Those charges are included in
Hewlett Packard Enterprise’s GAAP earnings, operating margin, net
earnings and diluted net earnings per share. Such charges are
significantly impacted by the timing and magnitude of Hewlett
Packard Enterprise’s acquisitions and any related impairment
charges. Consequently, Hewlett Packard Enterprise excludes these
charges for purposes of calculating these non-GAAP measures to
facilitate a more meaningful evaluation of Hewlett Packard
Enterprise’s current operating performance and comparisons to
Hewlett Packard Enterprise’s operating performance in other
periods.
- Amortization of initial direct costs represents the portion of
lease origination costs incurred in prior fiscal years that do not
quality for capitalization under the new leasing standard. Hewlett
Packard Enterprise excludes these costs as the Company elected the
practical expedient under the new leasing standard. As a result,
the company did not adjust these historical costs to accumulated
deficit. We believe that most financing companies did not elect
this practical expedient and therefore we excluded these costs to
facilitate a more meaningful evaluation of our current operating
performance and comparisons to our peers.
- Transformation costs represent net costs related to the HPE
Next initiative and include restructuring charges, program design
and execution costs, costs incurred to transform Hewlett Packard
Enterprise's IT infrastructure and gains from the sale of
real-estate identified as part of the initiative as well as any
impairment charges on real-estate assets identified as part of the
initiative. Hewlett Packard Enterprise believes that eliminating
such expenses and gains for purposes of calculating these non-GAAP
measures facilitates a more meaningful evaluation of Hewlett
Packard Enterprise’s current operating performance and comparisons
to Hewlett Packard Enterprise’s past operating performance.
- Hewlett Packard Enterprise incurs costs related to its
acquisitions, disposition and other related charges, most of which
are treated as non-cash or non-capitalized expenses. The charges
are direct expenses such as professional fees and retention costs,
as well as non-cash adjustments to the fair value of certain
acquired assets such as inventory. Charges may also include
expenses associated with disposal activities including legal and
arbitration settlements in connection with certain dispositions.
Because non-cash or non-capitalized acquisition-related expenses
are inconsistent in amount and frequency and are significantly
impacted by the timing and nature of Hewlett Packard Enterprise’s
acquisitions and divestitures, Hewlett Packard Enterprise believes
that eliminating such expenses for purposes of calculating these
non-GAAP measures facilitates a more meaningful evaluation of
Hewlett Packard Enterprise’s current operating performance and
comparisons to Hewlett Packard Enterprise’s past operating
performance.
- Adjustment to earnings from equity interests includes the
amortization of the basis difference in relation to the H3C
divestiture and the resulting equity method investment in H3C.
Hewlett Packard Enterprise believes that eliminating this amount
for purposes of calculating non-GAAP operating profit facilitates a
more meaningful evaluation of Hewlett Packard Enterprise’s current
operating performance and comparisons to Hewlett Packard
Enterprise’s operating performance in other periods.
- Non-service net periodic benefit credit includes certain
market-related factors such as (i) interest cost, (ii) expected
return on plan assets, (iii) amortization of prior plan amendments,
(iv) amortized actuarial gains or losses, (v) the impacts of any
plan settlements/curtailments and (vi) impacts from other
market-related factors associated with Hewlett Packard Enterprise's
defined benefit pension and post-retirement benefit plans. These
market-driven retirement-related adjustments are primarily due to
the change in pension plan assets and liabilities which are tied to
financial market performance. Hewlett Packard Enterprise excludes
these adjustments and considers them to be outside the operational
performance of the business.
- Tax indemnification adjustments are related to changes in the
indemnification positions between Hewlett Packard Enterprise and HP
Inc., DXC and Micro Focus that are recorded by Hewlett Packard
Enterprise as pre-tax income or expense and not considered tax
expense. Hewlett Packard Enterprise excludes these income or
charges and the associated tax impact for the purpose of
calculating these non-GAAP measures to facilitate a more meaningful
evaluation of Hewlett Packard Enterprise’s current operating
performance and comparisons to Hewlett Packard Enterprise’s
operating performance in other periods.
- Hewlett Packard Enterprise utilizes a structural long-term
projected non-GAAP tax rate in order to provide better consistency
across the interim reporting periods and eliminates the effects of
items such as changes in tax valuation allowance and tax effects of
acquisitions and disposition related costs and transformation costs
since each of these can vary in size and frequency. When projecting
this long-term rate, Hewlett Packard Enterprise evaluated a
three-year financial projection that excludes the direct impact of
the following non-cash items: amortization of purchased intangibles
and adjustments related to equity method investments. The projected
rate assumes no incremental acquisitions in the three-year
projection period, and considers other factors including Hewlett
Packard Enterprise’s expected tax structure, its tax positions in
various jurisdictions and current impacts from key legislation
implemented in major jurisdictions where Hewlett Packard Enterprise
operates. For fiscal 2020, the Company will use a projected
non-GAAP tax rate of 12%, which reflects currently available
information, including the impact of the Tax Act and
interpretations thereof, as well as other factors and assumptions.
The non-GAAP tax rate could be subject to change for a variety of
reasons, including the rapidly evolving global tax environment,
significant changes in Hewlett Packard Enterprise’s geographic
earnings mix including due to acquisition activity, or other
changes to the Company’s strategy or business operations. The
Company will re-evaluate its long-term rate as appropriate. Hewlett
Packard Enterprise believes that making these adjustments
facilitates a better evaluation of our current operating
performance and comparisons to past operating results.
Material limitations associated with use of non-GAAP
financial measures
These non-GAAP financial measures have limitations as analytical
tools, and these measures should not be considered in isolation or
as a substitute for analysis of Hewlett Packard Enterprise’s
results as reported under GAAP. Some of the limitations in relying
on these non-GAAP financial measures are:
- Amortization of intangible assets, though not directly
affecting Hewlett Packard Enterprise’s cash position, represent the
loss in value of intangible assets over time. The expense
associated with this loss in value is not included in non-GAAP
operating expenses, non-GAAP operating profit, non-GAAP operating
margin, non-GAAP net earnings and non-GAAP diluted net earnings per
share, and therefore does not reflect the full economic effect of
the loss in value of those intangible assets.
- Amortization of initial direct cost is excluded from non-GAAP
gross margin, non-GAAP operating expenses, non-GAAP operating
profit, non-GAAP operating margin, non-GAAP net earnings and
non-GAAP diluted net earnings per share can have an impact on the
equivalent GAAP earnings measure and HPE Financial Services Segment
results.
- Items such as transformation costs, acquisition, and
disposition and other related costs that are excluded from non-GAAP
gross margin, non-GAAP operating expenses, non-GAAP operating
profit, non-GAAP operating margin, non-GAAP net earnings and
non-GAAP diluted net earnings per share can have a material impact
on the equivalent GAAP earnings measure.
- Items such as adjustment to earnings from equity interests and
non-service net periodic benefit credit that are excluded from
non-GAAP net earnings, and non-GAAP diluted net earnings per share
can have a material impact on the equivalent GAAP earnings
measure.
- Items such as tax indemnification adjustments, certain income
tax valuation allowances and separation taxes, the impact of U.S.
tax reform, excess tax benefits from stock-based compensation and
the related tax impacts from other non-GAAP measures that are
excluded from the non-GAAP tax rate, non-GAAP net earnings and
non-GAAP diluted net earnings per share can also have a material
impact on the equivalent GAAP earnings measures.
- Hewlett Packard Enterprise may not be able to immediately
liquidate the short-term and long-term investments included in
gross cash, which may limit the usefulness of gross cash as a
liquidity measure.
- Other companies may calculate revenue on a constant currency
basis, non-GAAP gross margin, non-GAAP operating profit,
non-GAAP operating margin, non-GAAP net earnings and non-GAAP
diluted net earnings per share differently than Hewlett Packard
Enterprise does, limiting the usefulness of those measures for
comparative purposes.
Compensation for limitations associated with use of non-GAAP
financial measures
Hewlett Packard Enterprise compensates for the limitations on
its use of non-GAAP financial measures by relying primarily on its
GAAP results and using non-GAAP financial measures only as a
supplement. Hewlett Packard Enterprise also provides a
reconciliation of each non-GAAP financial measure to its most
directly comparable GAAP measure within this news release and in
other written materials that include these non-GAAP financial
measures, and Hewlett Packard Enterprise encourages investors to
review carefully those reconciliations.
Usefulness of non-GAAP financial measures to
investors
Hewlett Packard Enterprise believes that providing revenue on a
constant currency basis, non-GAAP gross margin, non-GAAP operating
expenses, non-GAAP operating profit, non-GAAP operating margin,
non-GAAP income tax rate, non-GAAP net earnings, non-GAAP diluted
net earnings per share, non-GAAP diluted net earnings per share,
gross cash, free cash flow, net capital expenditures, net debt, net
cash, operating company net debt and operating company net cash
financial measures to investors in addition to the related GAAP
measures provides investors with greater transparency to the
information used by Hewlett Packard Enterprise’s management in its
financial and operational decision making and allows investors to
see Hewlett Packard Enterprise’s results “through the eyes” of
management. Hewlett Packard Enterprise further believes that
providing this information better enables Hewlett Packard
Enterprise’s investors to understand Hewlett Packard Enterprise’s
operating performance and to evaluate the efficacy of the
methodology and information used by Hewlett Packard Enterprise’s
management to evaluate and measure such performance. Disclosure of
these non-GAAP financial measures also facilitates comparisons of
Hewlett Packard Enterprise’s operating performance with the
performance of other companies in Hewlett Packard Enterprise’s
industry that supplement their GAAP results with non-GAAP financial
measures that may be calculated in a similar manner.
View source
version on businesswire.com: https://www.businesswire.com/news/home/20200303005982/en/
Editorial contact Stefanie Notaney
stefanie.notaney@hpe.com
Investor contact Andrew Simanek
investor.relations@hpe.com
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