Overview

Hewlett Packard Enterprise (HPE) is an industry-leading technology company that enables customers to go further, faster. The company is organized into three segments for financial reporting: the Enterprise Group (EG), Financial Services (FS), and Corporate Investments.

In fiscal 2017, HPE’s total net revenue decreased 4.7% (4.1% on a constant currency basis) compared to the prior year. This was driven primarily by a decline in EG revenue, particularly in Servers and Networking. FS revenue increased 12.9% due to higher rental revenue from operating leases. Gross margin decreased 2.2 percentage points to 30.1% due to higher commodity costs, competitive pressures, and the impact of divestitures. Operating margin decreased 10.7 percentage points to 2.2% due to gains from divestitures in the prior year.

As of October 31, 2017, HPE had $9.6 billion in cash and cash equivalents, down from $13.0 billion the prior year. The decrease was due to debt payments, share repurchases, capital expenditures, and business acquisitions, partially offset by cash dividends received from the Enterprise Services and Software divestitures.

Revenue and Profit Trends

EG net revenue decreased 5.6% (4.9% constant currency) in fiscal 2017 due to declines in Servers and Networking. Servers revenue fell 8% due to lower sales of Tier-1 servers, while Networking revenue declined 11% due to the H3C divestiture. Storage revenue also decreased 3%. EG earnings from operations as a percentage of revenue fell 2.5 percentage points to 10.3% due to lower gross margins and higher operating expenses.

FS net revenue increased 12.9% (13.1% constant currency) in fiscal 2017 due to higher rental revenue from operating leases, including the conversion of capital leases related to the Enterprise Services divestiture. FS earnings from operations as a percentage of revenue decreased 2.1 percentage points to 8.4% due to lower portfolio margins.

Corporate Investments net revenue decreased 99% in fiscal 2017 as the MphasiS product group was divested. The segment’s loss from operations improved 41% due to lower expenses.

Overall, HPE’s net earnings from continuing operations decreased from $3.2 billion in fiscal 2016 to $436 million in fiscal 2017, a decline of 86.5%. This was driven by the decrease in operating margin, partially offset by a lower tax provision.

Strengths and Weaknesses

A key strength of HPE is its diversified portfolio spanning cloud, data center, and intelligent edge technologies. The company has leading positions in areas like servers, storage, and networking. HPE’s Financial Services segment also provides a stable source of revenue and earnings.

However, HPE faces several challenges. The company’s legacy hardware businesses like Servers and Networking are under pressure as customers shift to cloud and software-defined architectures. HPE also faces increasing competition from major rivals expanding their product and service offerings as well as emerging competitors with new technologies.

To address these challenges, HPE launched the “HPE Next” initiative in fiscal 2017 to simplify its operating model, streamline offerings and processes, and shift investments to high-growth, higher-margin solutions and services. This includes consolidating manufacturing, reducing its country footprint, and migrating to a channel-only model in certain regions.

Outlook

Looking ahead, HPE will need to successfully execute on its HPE Next transformation to adapt to changing market dynamics and competitive pressures. The company will also need to continue innovating in areas like cloud, software-defined infrastructure, and high-performance computing to meet evolving customer demands.

HPE’s financial performance will depend on its ability to stabilize and grow its core hardware businesses, expand its higher-margin services and solutions offerings, and drive productivity improvements through the HPE Next initiative. Maintaining a strong balance sheet and cash flow will also be important to fund investments, acquisitions, and returns to shareholders.

Overall, HPE faces a challenging market environment but has a solid foundation of technology leadership and a clear strategic plan to navigate the changes underway. Successful execution of the company’s transformation initiatives will be critical to driving improved financial performance and shareholder value in the years ahead.