Financial Overview of Hewlett Packard Enterprise

Hewlett Packard Enterprise (HPE) is a global technology leader focused on developing intelligent solutions that allow customers to capture, analyze and act upon data from edge to cloud. The company organizes its business into seven segments for financial reporting: Compute, High Performance Compute & Mission Critical Systems (HPC & MCS), Storage, Advisory and Professional Services (A&PS), Intelligent Edge, Financial Services (FS), and Corporate Investments.

Financial Performance in Fiscal 2020

In fiscal 2020, HPE’s total net revenue decreased by $2.15 billion or 7.4% (decreased 6.4% on a constant currency basis) compared to fiscal 2019. This decline was primarily due to the impact of the COVID-19 pandemic on the company’s business operations and the worldwide demand environment.

From a segment perspective, the net revenue decrease was led by declines in Compute, Storage, and Financial Services, partially offset by an increase in HPC & MCS. The Compute segment saw a decline due to competitive pricing pressures and manufacturing capacity constraints. Storage revenue was impacted by manufacturing constraints and the expiration of a legacy contract. Financial Services revenue decreased due to lower rental and lease equipment buyout revenue.

HPE’s gross profit margin was 31.4% in fiscal 2020 compared to 32.6% in fiscal 2019. The 1.2 percentage point decrease was driven by competitive pricing pressures, higher supply chain costs from COVID-19, unfavorable currency fluctuations, and the scale of the revenue decline, partially offset by a shift to higher-margin products and services and lower variable compensation expense.

Operating profit margin was (1.2)% in fiscal 2020 compared to 4.4% in fiscal 2019, a decrease of 5.6 percentage points. This was due to the increase in operating expenses as a percentage of revenue, coupled with the decrease in gross profit margin. The increase in operating expenses was primarily from a goodwill impairment charge in the HPC & MCS segment and higher transformation costs, partially offset by lower acquisition and other related charges.

As of October 31, 2020, HPE had $4.6 billion in cash, cash equivalents and restricted cash, representing an increase of $0.5 billion from the prior year. This increase was driven by $2.2 billion in cash provided by operating activities and $1.9 billion in net proceeds from debt issuance, partially offset by $1.7 billion in investments in property, plant and equipment, $1.0 billion in dividend and share repurchase payments, and $0.9 billion in business acquisition activity.

Segment Performance

The Compute segment saw a 10.5% decrease in net revenue in fiscal 2020 due to competitive pricing pressures, manufacturing constraints, and unfavorable currency fluctuations. Earnings from operations as a percentage of revenue decreased 4.1 percentage points due to higher product costs and operating expenses.

HPC & MCS net revenue increased 4.3% driven by the addition of Cray’s revenue. Earnings from operations as a percentage of revenue decreased 3.2 percentage points due to higher operating expenses from the Cray acquisition, partially offset by improved product mix.

Storage net revenue decreased 9.7% due to commodity and manufacturing constraints, as well as the expiration of a legacy contract. Earnings from operations as a percentage of revenue decreased 2.4 percentage points from higher product and operating costs.

A&PS net revenue decreased 6.0% due to service delivery delays. Earnings from operations improved 4.8 percentage points from lower service costs and operating expenses.

Intelligent Edge net revenue decreased 2.0% from competitive pricing pressures and unfavorable currency. Earnings from operations improved 4.3 percentage points due to lower product and operating costs.

Financial Services net revenue decreased 6.4% from lower rental and lease equipment buyout revenue, as well as unfavorable currency. Earnings from operations decreased 0.2 percentage points due to higher operating expenses.

COVID-19 Impact and Response

The COVID-19 pandemic had a significant impact on HPE’s financial performance in fiscal 2020. The company experienced disruptions to its supply chain, manufacturing capacity constraints, and a weak demand environment globally.

In response, HPE took several actions, including:

• Suspending its share repurchase program
• Issuing $4 billion in new debt to enhance liquidity
• Implementing a global work-from-home policy and a new hybrid “Edge-to-Office” work model
• Launching a cost optimization and prioritization plan to realize at least $800 million in annualized net savings by the end of fiscal 2023
• Implementing temporary base salary adjustments and hiring freezes

HPE believes the pandemic has accelerated the need for its edge-to-cloud platform and as-a-service offerings. The company sees opportunities to help customers with their digital transformations as they adapt to the new business environment.

Outlook and Risks

Looking ahead, HPE faces several challenges, including the ongoing impact of COVID-19, dynamic market trends towards cloud and software-defined IT, a changing competitive landscape, and the need to optimize its business model and go-to-market execution.

To address these challenges, HPE is focused on successfully transitioning to its as-a-Service model, improving its cost structure, aligning sales coverage with strategic goals, and strengthening capabilities in key growth areas like the Intelligent Edge and High Performance Compute.

The full extent of the COVID-19 pandemic’s impact on HPE’s operations and financials remains uncertain and will depend on factors like the duration of the crisis, the development of effective treatments and vaccines, and the broader economic recovery. Continued weakness in demand or disruptions to HPE’s supply chain could further negatively impact its results.

Overall, HPE remains focused on navigating the near-term uncertainty while positioning the company to emerge stronger, more agile, and digitally enabled for the post-COVID world. The company’s strong liquidity position and actions taken to optimize costs and transform the business should help it weather the current challenges.