Overview of Financial Performance

Hewlett Packard Enterprise (HPE) reported mixed financial results for the three months ended January 31, 2020 compared to the prior-year period. Total net revenue decreased by 8.0% (7.0% on a constant currency basis) to $6.9 billion, driven primarily by lower revenue in the Compute and Storage segments. However, gross margin increased 1.7 percentage points to 32.8% due to lower commodity costs, reduced variable compensation expense, and a more favorable revenue mix.

Operating margin declined 1.0 percentage point to 5.0%, as higher amortization costs, increased selling and R&D expenses, and the impact of the revenue decline offset the gross margin improvement. Net earnings were $333 million, or $0.25 per diluted share, compared to $177 million, or $0.14 per diluted share, in the prior-year period.

On a non-GAAP basis, which excludes certain one-time charges, earnings from operations were $602 million, or 8.7% of net revenue, and non-GAAP net earnings were $575 million, or $0.44 per diluted share. This represents a decrease in non-GAAP earnings from operations as a percentage of net revenue of 1.0 percentage point compared to the prior-year period.

Segment Performance

The company’s operations are now organized into seven reportable segments: Compute, High Performance Compute & Mission-Critical Systems (HPC & MCS), Storage, Advisory and Professional Services (A&PS), Intelligent Edge, Financial Services (FS), and Corporate Investments.

Compute Compute net revenue decreased 15.8% (14.6% on a constant currency basis) due to commodity and manufacturing constraints, reduced average selling prices, and weak market demand leading to lower unit shipments. Earnings from operations as a percentage of net revenue remained flat at 9.5%.

HPC & MCS HPC & MCS net revenue increased 5.6% (6% on a constant currency basis) driven by the addition of revenue from the Cray acquisition, partially offset by lower revenue from unfavorable large deal timing, weak demand, and lower services attachment. Earnings from operations as a percentage of net revenue decreased 6.6 percentage points to 6.0%.

Storage Storage net revenue decreased 7.8% (6.5% on a constant currency basis) due to weak market demand and commodity constraints. Earnings from operations as a percentage of net revenue decreased 0.6 percentage points to 18.1%.

A&PS A&PS net revenue increased 0.8% (0.4% on a constant currency basis) due to strength in the Asia Pacific Japan region. Loss from operations as a percentage of net revenue improved from (13.3)% to (0.8)%.

Intelligent Edge Intelligent Edge net revenue increased 2.1% (3.5% on a constant currency basis) driven by higher WLAN product revenue and support services. Earnings from operations as a percentage of net revenue increased 6.3 percentage points to 9.7%.

Financial Services (FS) FS net revenue decreased 6.5% (5.8% on a constant currency basis) due to lower rental revenue from decreased average operating lease assets and lower lease equipment buyout revenue. Earnings from operations as a percentage of net revenue increased 0.1 percentage points to 8.5%.

Corporate Investments Corporate Investments net revenue increased 2.5% (2.5% on a constant currency basis) due to higher services revenue from the Communications and Media Solutions business. Loss from operations as a percentage of net revenue decreased 1.4 percentage points to (22.3)%.

Liquidity and Capital Resources

As of January 31, 2020, HPE had $3.6 billion in cash, cash equivalents, and restricted cash and long-term investments, representing a decrease of $0.5 billion from the prior quarter. This decrease was primarily due to $0.4 billion in share repurchases and dividend payments, $0.1 billion in capital expenditures, and $0.1 billion in cash used in operating activities, partially offset by $0.1 billion in net financial collateral received.

HPE maintains a $4.75 billion revolving credit facility and commercial paper programs that provide additional liquidity if needed. As of January 31, 2020, there were no borrowings outstanding under the revolving credit facility or the company’s commercial paper programs.

The company’s cash conversion cycle improved by 5 days year-over-year to (17) days, driven by a 1-day decrease in days sales outstanding and a 9-day increase in days of supply in inventory, partially offset by a 3-day increase in days payables outstanding.

HPE expects to fund its operations, capital expenditures, product development, acquisitions, restructuring activities, pension contributions, and other investing and financing activities from a combination of internally generated funds and access to capital markets. The company believes its cash balances, anticipated cash flow from operations, and access to capital markets will be sufficient to cover its expected near-term cash needs.

Strengths and Weaknesses

Key strengths of HPE’s business include:

• Diversified portfolio of infrastructure, edge computing, and services offerings
• Improving gross margins driven by cost reductions and business mix shift
• Strong liquidity position and access to capital markets
• Ongoing execution of the HPE Next transformation initiative to streamline operations

Weaknesses and challenges include:

• Continued revenue declines in the core Compute and Storage segments due to market headwinds
• Margin pressure from higher operating expenses, including amortization and R&D costs
• Elongated sales cycles and manufacturing constraints impacting certain product lines
• Execution risks associated with the HPE Next transformation program

Outlook and Future Prospects

Looking ahead, HPE faces a mixed outlook. The company continues to execute on its HPE Next initiative to streamline its business and shift investments towards higher-growth, higher-margin solutions and services. This transformation is showing some positive results, with improved gross margins and profitability in certain segments.

However, the company is still navigating challenging market conditions, particularly in its Compute and Storage businesses, which have experienced revenue declines due to weak demand, manufacturing constraints, and pricing pressure. Addressing these headwinds in the core infrastructure business will be critical to HPE’s long-term success.

The acquisition of Cray has strengthened HPE’s position in the high-performance computing and mission-critical systems market, providing a growth opportunity. Additionally, the Intelligent Edge segment has shown resilience, with revenue and profitability improvements.

Overall, HPE’s diversified portfolio, focus on cost optimization, and investments in higher-value solutions provide a path forward, but the company will need to effectively manage the transition in its core infrastructure business to drive sustainable growth and profitability. Continued execution of the HPE Next transformation plan will be key to unlocking the company’s full potential.