Overview

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’s operations are organized 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

For the three months ended July 31, 2020, HPE’s total net revenue decreased by $401 million, or 5.6% (4.1% on a constant currency basis), compared to the prior-year period. This decline was driven by decreases in the Storage, Intelligent Edge and Financial Services segments, partially offset by an increase in HPC & MCS.

The company’s gross profit margin was 30.3% in Q3 2020, down from 33.9% in the prior-year period. This decrease was due to higher commodity costs, competitive pricing pressures, increased supply chain costs from COVID-19, and the revenue decline leading to higher fixed overhead costs.

Operating profit margin improved to 0.2% in Q3 2020, up from -1.1% in the prior-year period. This was driven by a decrease in operating expenses as a percentage of revenue, partially offset by the decline in gross profit margin.

For the nine months ended July 31, 2020, HPE’s total net revenue decreased by $2.1 billion, or 9.8% (8.5% on a constant currency basis), compared to the prior-year period. The net revenue decline was primarily driven by decreases in the Compute, Storage, Financial Services and Intelligent Edge segments.

Gross margin for the nine-month period was 31.7%, down from 32.4% in the prior-year period. The decrease was due to higher supply chain costs from COVID-19, competitive pricing pressures, and the scale of the revenue decline, partially offset by a shift to higher-margin products and services.

Operating margin for the nine months was -2.4%, down from 3.7% in the prior-year period. This was due to an increase in operating expenses as a percentage of revenue, including a $865 million goodwill impairment charge in the HPC & MCS segment, as well as the decrease in gross margin.

Segment Performance

Compute Compute net revenue was largely unchanged in Q3 2020 compared to the prior-year period, as the impact of unfavorable currency and pricing pressures was offset by improved supply chain execution. Earnings from operations as a percentage of revenue decreased 4.4 percentage points due to higher product costs.

For the nine months, Compute net revenue declined 12.2% due to the weak demand environment from COVID-19, competitive pressures, currency fluctuations and supply chain constraints. Earnings margin decreased 2.9 percentage points.

HPC & MCS HPC & MCS net revenue increased 2.5% in Q3 2020, driven by the addition of revenue from the Cray acquisition, partially offset by COVID-19 related challenges. Earnings margin decreased 2.6 percentage points due to higher operating expenses.

For the nine months, HPC & MCS net revenue declined 3.4% due to COVID-19 impacts, partially offset by Cray. Earnings margin decreased 5.6 percentage points.

Storage Storage net revenue decreased 10.1% in Q3 2020 due to the weak demand environment, supply chain constraints, a legacy contract expiration and currency impacts. Earnings margin declined 3.6 percentage points due to higher product costs and operating expenses.

For the nine months, Storage net revenue declined 11.8% due to similar factors. Earnings margin decreased 3.0 percentage points.

A&PS A&PS net revenue decreased 6.6% in Q3 2020 due to the demand impact of COVID-19. However, earnings margin improved 1.9 percentage points due to lower operating expenses.

For the nine months, A&PS net revenue declined 5.0% but earnings margin improved 6.8 percentage points.

Intelligent Edge Intelligent Edge net revenue decreased 12.4% in Q3 2020 due to lower WLAN and switching product sales from the weak demand environment. Earnings margin improved 1.8 percentage points due to lower operating expenses.

For the nine months, Intelligent Edge net revenue declined 4.7% but earnings margin increased 4.6 percentage points.

Financial Services Financial Services net revenue decreased 8.7% in Q3 2020 due to lower rental revenue and asset management income. Earnings margin declined 0.7 percentage points due to higher operating expenses.

For the nine months, FS net revenue declined 7.4% and earnings margin was flat.

Liquidity and Capital Resources

As of July 31, 2020, HPE had $8.9 billion in cash, cash equivalents and restricted cash, up from $4.1 billion at the end of fiscal 2019. This increase was driven by $5.4 billion in net debt proceeds and $1.5 billion in cash from operations, partially offset by $1.2 billion in capital expenditures and $0.8 billion in dividends and share repurchases.

In response to COVID-19, HPE suspended its share repurchase program in April 2020. The company also issued $4.0 billion in new senior notes in fiscal 2020, with the proceeds used to redeem $3.0 billion in existing notes.

HPE expects its existing cash, cash equivalents, marketable securities, commercial paper program and credit facilities will be sufficient to meet its working capital, capital expenditure, dividend, debt repayment and other liquidity requirements. However, the company acknowledged that COVID-19 has created significant uncertainty and volatility that could impact its profitability, cash flows and access to capital markets.

Outlook and Risks

The COVID-19 pandemic has had a significant impact on HPE’s business, forcing fundamental changes in how companies operate. The company believes the pandemic has increased customer demand for as-a-service offerings, secure connectivity, remote work capabilities and data analytics.

To address the near-term uncertainty, HPE has taken several actions, including a cost optimization and prioritization plan expected to deliver at least $800 million in annualized net savings by the end of fiscal 2022. The company has also suspended share repurchases, implemented temporary salary adjustments, and restricted external hiring and salary increases.

Looking ahead, HPE sees opportunity to help customers drive digital transformations as they adapt to the new business environment. However, the company acknowledged that the extent and duration of the COVID-19 impact remains unclear and could have a material adverse effect on its profitability, cash flows, access to capital and realizability of assets.

Other key risks identified include:

• Continued weak and uncertain global demand environment
• Competitive pricing pressures
• Supply chain disruptions and constraints
• Potential impairment of goodwill and other long-lived assets
• Uncertainty around the timing and collectability of customer payments

Overall, HPE’s financial results in fiscal 2020 have been significantly impacted by the COVID-19 pandemic. The company has taken steps to reduce costs and preserve liquidity, but acknowledged the situation remains highly uncertain and could continue to adversely affect its operations and performance. Navigating the challenges presented by the pandemic will be critical to HPE’s ability to emerge stronger and more digitally enabled in a post-COVID world.