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 organizes its business into four segments: Hybrid IT, Intelligent Edge, Financial Services, and Corporate Investments.

In fiscal 2019, HPE’s total net revenue decreased by $1.7 billion or 5.6% (4.3% on a constant currency basis) compared to the prior year. This was driven by lower revenue in the Hybrid IT segment, particularly in the Compute business, as the company continues to exit less profitable product categories and markets. The Intelligent Edge segment also saw a revenue decline due to lower sales of WLAN and switching products. Financial Services revenue decreased due to lower rental revenue.

Gross margin increased 2.7 percentage points to 32.6% in fiscal 2019, driven by improved margins in Hybrid IT from lower commodity costs, cost management initiatives, and a shift to higher-margin products. However, operating margin decreased 1.2 percentage points due to higher acquisition and other charges, as well as increased R&D investments.

As of October 31, 2019, HPE had $4.1 billion in cash, cash equivalents and restricted cash, down from $5.1 billion the prior year. The decrease was due to investments in property, plant and equipment, share repurchases, dividends, and business acquisitions, partially offset by cash provided by operations and debt issuance.

Trends and Uncertainties

HPE faces several key challenges, including the market shift to cloud-based IT infrastructure, increased competition from both traditional and emerging players, and the transition to an as-a-Service business model. To address these issues, the company is executing on its HPE Next transformation initiative, which aims to streamline offerings, optimize costs, and shift investments to high-growth, higher-margin solutions and services.

Specific areas of focus include accelerating growth in the Intelligent Edge segment, delivering profitable growth in Hybrid IT, improving end-to-end operational efficiency, and enhancing sales execution and channel partnerships. HPE must continue to innovate and adapt its product and service portfolio to align with evolving customer needs and industry trends.

Segment Performance

Hybrid IT Hybrid IT net revenue decreased 6.8% (5.7% constant currency) in fiscal 2019, led by a decline in the Compute business due to lower Tier-1 server sales and reduced revenue from China as the company exits less profitable product categories. Weak demand in the enterprise market also led to lower revenue from Industry Standard Servers and HPE Pointnext services.

Hybrid IT gross margin increased 2.1 percentage points, driven by lower commodity costs, cost management initiatives, and a shift to higher-margin products. However, operating margin increased only slightly as higher R&D and acquisition-related expenses offset the gross margin improvement.

Intelligent Edge Intelligent Edge net revenue decreased 2.8% (1.8% constant currency) in fiscal 2019, due to lower sales of WLAN and switching products in the HPE Aruba business, partially offset by growth in HPE Aruba Services. Gross margin increased due to a higher mix of higher-margin products and services, but operating margin declined as the company continued to invest in R&D and the sales organization.

Financial Services Financial Services net revenue decreased 2.5% (0.2% constant currency) in fiscal 2019, primarily due to lower rental revenue, partially offset by higher asset management revenue. Gross and operating margins improved due to higher margins from lease extensions and buyouts, as well as lower bad debt expense.

Corporate Investments Corporate Investments net revenue decreased 6.6% (4.4% constant currency) in fiscal 2019, driven by lower services revenue from the Communications and Media Solutions business. Operating margin declined due to higher R&D expenses and a legal settlement.

Cash Flow and Liquidity

Net cash provided by operating activities increased by $1.0 billion in fiscal 2019, driven by improved working capital management, lower restructuring payments, and the settlement of the Tax Matters Agreement with HP Inc.

HPE’s cash conversion cycle improved slightly to -22 days, with increases in days of inventory and accounts payable offset by flat days sales outstanding. The company ended fiscal 2019 with $4.1 billion in cash, cash equivalents and restricted cash, down from $5.1 billion the prior year.

HPE maintains debt levels that it believes are appropriate based on cash flow expectations, capital requirements, and its targeted capital structure. Total debt increased to $13.8 billion as of October 31, 2019, up from $12.1 billion the prior year, due to new debt issuances partially offset by redemptions. The weighted-average interest rate on HPE’s debt decreased to 4.1% from 4.5% in the prior year.

In addition to its cash balances, HPE has access to $10.4 billion in available borrowing resources through commercial paper programs, uncommitted credit facilities, and a $4.75 billion revolving credit facility. The company continues to have ample liquidity to fund its operations, investments, and other cash needs.

Outlook and Risks

HPE faces several risks and uncertainties that could impact its future performance, including:

• Continued market shift to cloud-based IT infrastructure and consumption models
• Intensifying competition from both traditional and emerging players
• Successful execution of the transition to an as-a-Service business model
• Ability to innovate and adapt its product and service portfolio
• Effective management of global operations and supply chain
• Fluctuations in foreign currency exchange rates

To address these challenges, the company is focused on streamlining its business, optimizing costs, and shifting investments to high-growth, higher-margin solutions. Successful execution of the HPE Next transformation initiative will be critical to the company’s long-term competitiveness and profitability.

Overall, HPE remains in a strong financial position with ample liquidity, though it faces significant market and operational headwinds that will require disciplined management and strategic adaptation to overcome. The company’s ability to navigate the industry transition, enhance its go-to-market execution, and deliver innovative solutions will be key to driving sustainable growth and shareholder value in the years ahead.