10-QPeriod: Q1 FY2018

Hewlett Packard Enterprise Co Quarterly Report for Q1 Ended Jan 31, 2018

Filed March 9, 2018For Securities:HPEHPE-PC

Summary

Hewlett Packard Enterprise (HPE) reported a net revenue of $7.67 billion for the three months ended January 31, 2018, an increase of 11.2% year-over-year, driven by growth in Hybrid IT and Intelligent Edge segments, along with favorable foreign currency fluctuations and increased asset management revenue in Financial Services. Despite revenue growth, gross margin declined by 3.7 percentage points primarily due to higher commodity costs and competitive pricing in the Hybrid IT segment. The company also incurred $245 million in transformation costs related to the HPE Next initiative. Net earnings from continuing operations were $1.48 billion, significantly impacted by a $2.2 billion net income tax benefit, largely due to the Tax Cuts and Jobs Act and settlement of pre-Separation tax liabilities. Operating cash flow improved year-over-year, but the company's cash and cash equivalents decreased by $1.9 billion, largely due to share repurchases and dividend payments.

Financial Highlights

48 data points
Beta

Revenue

$7.67B

28.3% Gross Margin

Net Income

$1.44B

18.7% Net Margin

EPS (Diluted)

$0.89

Total Assets

$61.62B

Cash & Equivalents

$7.67B

Free Cash Flow

$142.00M

Financial Statements
Beta
Revenue$7.67B
Cost of Revenue$5.50B
Gross Profit$2.17B
R&D Expenses$389.00M
SG&A Expenses$1.22B
Operating Expenses$7.45B
Operating Income$228.00M
Net Income$1.44B
EPS (Basic)$0.90
EPS (Diluted)$0.89
Shares Outstanding (Basic)1.59B
Shares Outstanding (Diluted)1.62B

Key Highlights

  • 1Total net revenue increased by 11.2% to $7.67 billion, driven by strong performance in Hybrid IT and Intelligent Edge segments.
  • 2Gross margin decreased by 3.7 percentage points to 28.4% due to higher commodity costs (DRAM) and competitive pricing in Hybrid IT.
  • 3The company incurred $245 million in transformation costs related to the 'HPE Next' initiative.
  • 4Net earnings from continuing operations were $1.48 billion, significantly boosted by a $2.2 billion tax benefit related to the Tax Cuts and Jobs Act and pre-Separation tax liability settlements.
  • 5Operating cash flow improved to $142 million from a negative $1.19 billion in the prior year.
  • 6Cash and cash equivalents decreased by $1.9 billion to $7.7 billion, primarily due to $742 million in share repurchases and $120 million in cash dividends paid.
  • 7The company continues to manage significant litigation and tax contingencies, with a substantial unrecognized tax benefit balance of $10.4 billion.

Frequently Asked Questions

The primary driver of revenue growth was a $772 million, or 11.2% (9.4% on a constant currency basis), increase in total net revenue. This was mainly due to higher revenue in the Hybrid IT segment, driven by compute and storage sales (including the impact of the Nimble Storage acquisition), and increased revenue in the Intelligent Edge segment from campus switching products. The Financial Services segment also contributed positively due to favorable foreign currency fluctuations and higher asset management revenue.

The HPE Next initiative is a transformation program expected to be implemented through fiscal year 2020. For the three months ended January 31, 2018, the company incurred $245 million in net charges related to this initiative, categorized as 'Transformation costs.' These costs include program management, IT upgrades, and restructuring charges. The company expects to incur aggregate pre-tax restructuring charges of approximately $0.9 billion through fiscal 2020 for this initiative.

The Tax Cuts and Jobs Act (Tax Act) enacted in December 2017 significantly impacted HPE's tax provision. For the three months ended January 31, 2018, the company recorded a net income tax benefit of $2.2 billion. This benefit includes approximately $806 million related to the impacts of the Tax Act, primarily from the remeasurement of U.S. deferred tax assets and liabilities due to the reduced U.S. corporate tax rate. The company has also recorded a provisional estimate of $967 million for the one-time Transition Tax on deferred foreign income. The accounting for the full effects of the Tax Act is ongoing.

HPE is actively returning capital to shareholders. In the three months ended January 31, 2018, the company repurchased $742 million of its common stock and paid $120 million in cash dividends. The company announced an increase in its regular quarterly dividend to $0.1125 per share, effective in the third quarter of fiscal 2018, and authorized an additional $2.5 billion for share repurchases, indicating a continued focus on capital return.