HPE Reports Fiscal 2018 Second Quarter Results

May 22, 2018 • Press Release

IN THIS ARTICLE

  • Second quarter net revenue of $7.5 billion, up 10% from the prior-year period, and up 6% when adjusted for currency
  • Second quarter non-GAAP diluted net earnings per share of $0.34, above the previously provided outlook of $0.29 to $0.33 per share
  • Returned $1 billion to shareholders in the form of share repurchases and dividends in line with the previously announced commitment to return $7 billion to shareholders through FY19
  • Raised dividend by 50 percent starting in Q3 FY18 aligned with prior communications
  • Raised fiscal 2018 GAAP diluted net earnings per share outlook to $1.70 to $1.80, and fiscal 2018 non-GAAP diluted net earnings per share outlook to $1.40 to $1.50

HPE Announces its financial results for the second quarter of 2018

PALO ALTO, Calif., May 22, 2018 (GLOBE NEWSWIRE) -- Hewlett Packard Enterprise (NYSE:HPE) today announced financial results for its fiscal 2018 second quarter, ended April 30, 2018.

Second Quarter Fiscal Year 2018 Results
Second quarter net revenue of $7.5 billion was up 10% from the prior year and up 6% when adjusted for currency.

Second quarter GAAP diluted net earnings per share (EPS) from continuing operations was $0.54, up from GAAP diluted net EPS from continuing operations of ($0.29) in the prior-year period. Second quarter non-GAAP diluted net EPS from continuing operations was $0.34, up from non-GAAP diluted net EPS from continuing operations of $0.17 in the prior-year period. Second quarter non-GAAP net earnings from continuing operations and non-GAAP diluted net EPS from continuing operations exclude after-tax adjustments of $314 million and $0.20 per diluted share, respectively, primarily related to the impact of tax indemnification adjustments, U.S. tax reform, transformation costs, amortization of intangible assets, an adjustment to loss in equity interests, separation costs, acquisition and other related charges, restructuring charges, and income tax valuation allowances and separation taxes.

"I am very pleased with our strong performance in Q2", said Antonio Neri, President and CEO, HPE. "We delivered revenue growth in all business segments, expanded overall profitability, completed important milestones in our HPE Next initiative and continued to invest in innovation. Im confident we will deliver on our annual FY18 outlook."

HPE fiscal 2018 second quarter continuing operations financial performance

 

Q2 FY18

Q2 FY17

Y/Y

GAAP net revenue ($B)

$7.5

$6.8

9.7%

GAAP operating margin

5.3%

2.9%

2.4 pts.

GAAP net earnings ($B)

$0.9

($0.5)

NM

GAAP diluted net earnings per share

$0.54

($0.29)

NM

Non-GAAP operating margin

8.6%

5.9%

2.7 pts.

Non-GAAP net earnings ($B)

$0.5

$0.3

86.8%

Non-GAAP diluted net earnings per share

$0.34

$0.17

100.0%

Cash flow from operations ($B)

$0.2

$0.7

($0.5)

Information about HPEs use of non-GAAP financial information is provided under Use of non-GAAP financial information below.

Outlook
For the fiscal 2018 third quarter, Hewlett Packard Enterprise estimates GAAP diluted net EPS to be in the range of $0.19 to $0.23 and non-GAAP diluted net EPS to be in the range of $0.35 to $0.39. Fiscal 2018 third quarter non-GAAP diluted net EPS estimates exclude after-tax costs of approximately $0.16 per diluted share, primarily related to transformation costs and the amortization of intangible assets.

For fiscal 2018, Hewlett Packard Enterprise now estimates GAAP diluted net EPS to be in the range of $1.70 to $1.80 and non-GAAP diluted net EPS to be in the range of $1.40 to $1.50. Fiscal 2018 non-GAAP diluted net EPS estimates exclude after-tax impact of approximately $0.30 per diluted share, primarily related to transformation costs and the amortization of intangible assets, offset by the impact of U.S. tax reform.

Fiscal 2018 second quarter segment results

 

  • Hybrid IT revenue was $6.0 billion, up 7% year over year and up 4% when adjusted for currency, with a 10.3% operating margin. Compute revenue was up 6%, up 2% when adjusted for currency, Storage revenue was up 24%, up 22% when adjusted for currency, DC Networking revenue was up 2%, down 1% when adjusted for currency, and Pointnext revenue was up 1%, down 1% when adjusted for currency.
  • Intelligent Edge revenue was $710 million, up 17% year over year and up 14% when adjusted for currency, with a 6.5% operating margin. HPE Aruba Product revenue was up 18%, up 14% when adjusted for currency, HPE Aruba Services revenue was up 10%, up 11% when adjusted for currency.
  • Financial Services revenue was $916 million, up 5% year over year and up 1% when adjusted for currency, net portfolio assets were up 3%, and financing volume was flat year over year. The business delivered an operating margin of 7.9%.

 

Bond Redemption
HPE intends to redeem on June 29, 2018, $1.6 billion aggregate principal amount of its outstanding 2.850% Senior Notes due 2018, CUSIP Numbers: 42824CAC3, 42824CAU3, U42832AC6, at a price equal to 100% of the principal amount thereof plus a make-whole premium determined pursuant to the terms of the Indenture governing the Notes and accrued and unpaid interest. HPE has instructed The Bank of New York Mellon Trust Company, N.A., as the trustee for the Notes, to distribute a Notice of Redemption to all registered holders of the applicable Notes today. Copies of such Notice of Redemption and additional information relating to the procedure for redemption of the Notes may be obtained from The Bank of New York Mellon Trust Company, N.A.

About Hewlett Packard Enterprise
Hewlett Packard Enterprise is a global technology leader focused on developing intelligent solutions that allow customers to capture, analyze and act upon data seamlessly from edge to cloud. HPE enables customers to accelerate business outcomes by driving new business models, creating new customer and employee experiences, and increasing operational efficiency today and into the future.

Use of non-GAAP financial information
To supplement Hewlett Packard Enterprises condensed consolidated financial statement information presented on a generally accepted accounting principles (GAAP) basis, Hewlett Packard Enterprise provides revenue on a constant currency basis and revenue adjusted for divestitures and currency, as well as non-GAAP operating expense, non-GAAP operating profit, non-GAAP operating margin, non-GAAP income tax rate, non-GAAP net earnings from continuing operations, non-GAAP net (loss) earnings from discontinued operations, non-GAAP diluted net earnings per share from continuing operations, non-GAAP diluted net (loss) earnings per share from discontinued operations, gross cash, free cash flow, net capital expenditures, net debt, net cash, operating company net debt and operating company net cash financial measures. Hewlett Packard Enterprise also provides forecasts of non-GAAP diluted net earnings per share and free cash flow. A reconciliation of adjustments to GAAP financial measures for this quarter and prior periods is included in the tables below or elsewhere in the materials accompanying this news release. In addition, an explanation of the ways in which Hewlett Packard Enterprises management uses these non-GAAP measures to evaluate its business, the substance behind Hewlett Packard Enterprises decision to use these non-GAAP measures, the material limitations associated with the use of these non-GAAP measures, the manner in which Hewlett Packard Enterprises management compensates for those limitations, and the substantive reasons why Hewlett Packard Enterprises management believes that these non-GAAP measures provide useful information to investors is included under "Use of non-GAAP financial measures" further below. This additional non-GAAP financial information is not meant to be considered in isolation or as a substitute for revenue, operating profit, operating margin, net earnings from continuing operations, net (loss) earnings from discontinued operations, diluted net earnings per share from continuing operations, diluted net (loss) earnings per share from discontinued operations, cash and cash equivalents, cash flow from operations, investments in property, plant and equipment, or total company debt prepared in accordance with GAAP.

Forward-looking statements
This press release contains forward-looking statements that involve risks, uncertainties and assumptions. If the risks or uncertainties ever materialize or the assumptions prove incorrect, the results of Hewlett Packard Enterprise may differ materially from those expressed or implied by such forward-looking statements and assumptions. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including but not limited to any projections of revenue, margins, expenses, effective tax rates, net earnings, net earnings per share, cash flows, benefit plan funding, share repurchases, currency exchange rates or other financial items; statements regarding the estimated impact of the changes in U.S. tax law; any projections of the amount, timing or impact of cost savings or restructuring charges; any statements of the plans, strategies and objectives of management for future operations, including the completed separation transactions, the execution of restructuring plans and any resulting cost savings or revenue or profitability improvements; any statements concerning the expected development, performance, market share or competitive performance relating to products or services; any statements regarding current or future macroeconomic trends or events and the impact of those trends and events on Hewlett Packard Enterprise and its financial performance; any statements regarding pending investigations, claims or disputes; any statements of expectation or belief; and any statements or assumptions underlying any of the foregoing.

Risks, uncertainties and assumptions include the need to address the many challenges facing Hewlett Packard Enterprises businesses; the competitive pressures faced by Hewlett Packard Enterprises businesses; risks associated with executing Hewlett Packard Enterprises strategy; the impact of macroeconomic and geopolitical trends and events; the need to manage third-party suppliers and the distribution of Hewlett Packard Enterprises products and the delivery of Hewlett Packard Enterprises services effectively; the protection of Hewlett Packard Enterprises intellectual property assets, including intellectual property licensed from third parties; risks associated with Hewlett Packard Enterprise's international operations; the development and transition of new products and services and the enhancement of existing products and services to meet customer needs and respond to emerging technological trends; the execution and performance of contracts by Hewlett Packard Enterprise and its suppliers, customers and partners; the hiring and retention of key employees; integration and other risks associated with business combination and investment transactions; the execution, timing and results of any transformation or restructuring plans, including estimates and assumptions related to the cost and the anticipated benefits of implementing the transformation and restructuring plans; the effects of the U.S. Tax Cuts and Jobs Act and related guidance and regulations that may be implemented; the resolution of pending investigations, claims and disputes; and other risks that are described in Hewlett Packard Enterprise's Annual Report on Form 10-K for the fiscal year ended October 31, 2017 and subsequent Quarterly Reports on Form 10-Q.

As in prior periods, the financial information set forth in this press release, including tax-related items, reflects estimates based on information available at this time. While Hewlett Packard Enterprise believes these estimates to be reasonable, these amounts could differ materially from reported amounts in the Hewlett Packard Enterprise Quarterly Report on Form 10-Q for the fiscal quarter ended April 30, 2018. Hewlett Packard Enterprise assumes no obligation and does not intend to update these forward-looking statements.

HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)

(In millions, except per share amounts)

 

Three months ended

 

April 30,
2018

January 31,
2018

April 30,
2017

Net revenue

$7,468

$7,674

$6,808

Costs and expenses:

     

Cost of sales

5,196

5,491

4,799

Research and development

402

388

376

Selling, general and administrative

1,227

1,202

1,229

Amortization of intangible assets

72

78

72

Restructuring charges

9

3

69

Transformation costs(a)

123

245

 

Acquisition and other related charges

16

30

50

Separation costs

26

(24)

30

Defined benefit plan settlement charges and remeasurement (benefit)(b)

   

(12)

Total costs and expenses

7,071

7,413

6,613

Earnings from continuing operations

397

261

195

Interest and other, net

(78)

(21)

(86)

Tax indemnification adjustments(c)

(425)

(919)

7

(Loss) earnings from equity interests

(10)

22

(3)

(Loss) earnings from continuing operations before taxes

(116)

(657)

113

Benefit (provision) for taxes(d)

966

2,139

(591)

Net earnings (loss) from continuing operations

850

1,482

(478)

Net loss from discontinued operations

(72)

(46)

(134)

Net earnings (loss)

$778

$1,436

$(612)

Net earnings (loss) per share:

     

Basic

     

Continuing operations

$0.55

$0.93

$(0.29)

Discontinued operations

(0.05)

(0.03)

(0.08)

Total basic net earnings (loss) per share

$0.50

$0.90

$(0.37)

Diluted

     

Continuing operations

$0.54

$0.92

$(0.29)

Discontinued operations

(0.05)

(0.03)

(0.08)

Total diluted net earnings (loss) per share

$0.49

$0.89

$(0.37)

Cash dividends declared per share

$0.1125

$0.1500

$0.0650

Weighted-average shares used to compute net earnings (loss) per share:

     

Basic

1,552

1,591

1,658

Diluted

1,582

1,619

1,658

  1. Represents amounts in connection with the HPE Next initiative and primarily includes costs related to labor and non-labor restructuring, program management and IT charges, partially offset by the gain on sale of real estate.
  2. Represents adjustment to net periodic pension cost resulting from remeasurements of the Hewlett Packard Enterprise pension plans in connection with the spin-off of the enterprise services business, Everett SpinCo, Inc., and the merger of Everett SpinCo, Inc. with Computer Sciences Corporation.
  3. Represents the settlement of certain pre-separation Hewlett-Packard Company income tax liabilities indemnified through the Tax Matters Agreement with HP Inc.
  4. Includes tax amounts in connection with the spin-off of the enterprise services business, Everett SpinCo, Inc. and the software business, Seattle SpinCo, Inc., tax amounts related to the recently enacted U.S. tax reform, tax amounts related to the settlement of certain pre-separation Hewlett-Packard Company income tax liabilities indemnified through the Tax Matters Agreement with HP Inc. and excess tax benefits associated with stock-based compensation.

    In connection with the spin-off of the enterprise services business, Everett SpinCo, Inc, for the three months ended January 31, 2018, this amount includes a $244 million benefit primarily from foreign tax credits and from the release of non U.S. valuation allowances on deferred taxes established in connection with the Everett Transaction, following changes in foreign tax laws. For the three months ended April 30, 2017, this amount primarily includes $593 million of income tax expense from valuation allowances on certain U.S. deferred tax assets and other divestiture related taxes.

    In connection with the settlement of certain pre-separation Hewlett-Packard Company income tax liabilities indemnified through the Tax Matters Agreement with HP Inc, for the three months ended April 30, 2018, this amount primarily includes a $1.1 billion benefit following the closure of pre-separation Hewlett-Packard Company audits for fiscal years 2009 through 2012. For the three months ended January 31, 2018, this amount includes a $920 million benefit following the resolution of certain pre-separation Hewlett-Packard Company income tax liabilities.

    As a result of the recently enacted U.S. tax reform, for the three months ended April 30, 2018, this amount includes $140 million of tax expense. For the three months ended January 31, 2018, this amount includes an estimated tax benefit of $1.8 billion from the provisional application of the new tax rules including a lower federal tax rate to deferred tax assets and liabilities, partially offset by a provisional estimate of $1.0 billion of transition tax expense on accumulated non U.S. earnings, and a $203 million benefit as a result of the liquidation of an insolvent non U.S. subsidiary.

    During the first quarter of fiscal 2018, the Company adopted ASU 2016-09 on a prospective basis, except for the statement of cash flows for which it was retrospectively adopted for the prior comparative periods, which requires the excess tax benefits or tax deficiencies associated with stock-based compensation to be recognized as a component of the provision for income taxes in the Statement of Earnings rather than additional paid-in capital in the Balance Sheet. For the three months ended April 30, 2018 and January 31, 2018, this amount includes $28 million and $14 million, respectively, which represents the net excess tax benefits from stock-based compensation.

 

HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)

(In millions, except per share amounts)

 

Six Months Ended April 30,

 

2018

2017

Net revenue

$15,142

$13,710

Costs and expenses:

   

Cost of sales

10,687

9,488

Research and development

790

732

Selling, general and administrative

2,429

2,433

Amortization of intangible assets

150

138

Restructuring charges

12

152

Transformation costs(a)

368

 

Acquisition and other related charges

46

94

Separation costs

2

41

Defined benefit plan settlement charges and remeasurement (benefit)(b)

 

(16)

Total costs and expenses

14,484

13,062

Earnings from continuing operations

658

648

Interest and other, net

(99)

(164)

Tax indemnification adjustments(c)

(1,344)

(11)

Earnings (loss) from equity interests

12

(25)

(Loss) earnings from continuing operations before taxes

(773)

448

Benefit (provision) for taxes(d)

3,105

(675)

Net earnings (loss) from continuing operations

2,332

(227)

Net loss from discontinued operations

(118)

(118)

Net earnings (loss)

$2,214

$(345)

Net earnings (loss) per share:

   

Basic

   

Continuing operations

$1.48

$(0.14)

Discontinued operations

(0.07)

(0.07)

Total basic net earnings (loss) per share

$1.41

$(0.21)

Diluted

   

Continuing operations

$1.46

$(0.14)

Discontinued operations

(0.08)

(0.07)

Total diluted net earnings (loss) per share

$1.38

$(0.21)

Cash dividends declared per share

$0.2625

$0.1950

Weighted-average shares used to compute net earnings (loss) per share:

   

Basic

1,571

1,664

Diluted

1,601

1,664

  1. Represents amounts in connection with the HPE Next initiative and primarily includes costs related to labor and non-labor restructuring, program management and IT charges, partially offset by the gain on sale of real estate.
  2. Represents adjustment to net periodic pension cost resulting from remeasurements of the Hewlett Packard Enterprise pension plans in connection with the spin-off of the enterprise services business, Everett SpinCo, Inc., and the merger of Everett SpinCo, Inc. with Computer Sciences Corporation.
  3. Represents the settlement of certain pre-separation Hewlett-Packard Company income tax liabilities indemnified through the Tax Matters Agreement with HP Inc.
  4. Includes tax amounts in connection with the spin-off of the enterprise services business, Everett SpinCo, Inc. and the software business, Seattle SpinCo, Inc., tax amounts related to the recently enacted U.S. tax reform, tax amounts related to the settlement of certain pre-separation Hewlett-Packard Company income tax liabilities indemnified through the Tax Matters Agreement with HP Inc. and excess tax benefits associated with stock-based compensation.

    In connection with the spin-off of the enterprise services business, Everett SpinCo, Inc, for the six months ended April 30, 2018, this amount includes a $239 million benefit primarily from foreign tax credits and from the release of non U.S. valuation allowances on deferred taxes established in connection with the Everett Transaction, following changes in foreign tax laws. For the six months ended April 30, 2017, this amount primarily includes $593 million of income tax expense from valuation allowances on certain U.S. deferred tax assets and other divestiture related taxes.

    In connection with the settlement of certain pre-separation Hewlett-Packard Company income tax liabilities indemnified through the Tax Matters Agreement with HP Inc, for the six months ended April 30, 2018, this amount primarily includes a $2.0 billion benefit.

    As a result of the recently enacted U.S. tax reform, for the six months ended April 30, 2018, this amount includes an estimated tax benefit of $1.8 billion from the provisional application of the new tax rules including a lower federal tax rate to deferred tax assets and liabilities, partially offset by a provisional estimate of $1.1 billion of transition tax expense on accumulated non U.S. earnings, and a $203 million benefit as a result of the liquidation of an insolvent non U.S. subsidiary.

    During the first quarter of fiscal 2018, the Company adopted ASU 2016-09 on a prospective basis, except for the statement of cash flows for which it was retrospectively adopted for the prior comparative periods, which requires the excess tax benefits or tax deficiencies associated with stock-based compensation to be recognized as a component of the provision for income taxes in the Statement of Earnings rather than additional paid-in capital in the Balance Sheet. For the six months ended April 30, 2018, this amount includes $42 million, which represents the net excess tax benefits from stock-based compensation.

 

HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES ADJUSTMENTS TO GAAP NET EARNINGS, EARNINGS FROM OPERATIONS, OPERATING MARGIN AND DILUTED NET EARNINGS PER SHARE

(Unaudited)

(In millions, except percentages and per share amounts)

 

Three months
ended
April 30, 2018

Diluted net
earnings
per share

Three months
ended
January 31,
2018

Diluted net
earnings
per share

Three months
ended
April 30, 2017

Diluted net
earnings
per share

GAAP net earnings (loss) from continuing operations

$850

$0.54

$1,482

$0.92

$(478)

$(0.29)

             

Non-GAAP adjustments:

           

Amortization of intangible assets

72

0.05

78

0.05

72

0.04

Restructuring charges

9

0.01

3

 

69

0.04

Transformation costs(a)

123

0.08

245

0.15

   

Acquisition and other related charges

16

0.01

30

0.02

50

0.03

Separation costs

26

0.02

(24)

(0.01)

30

0.02

Defined benefit plan settlement charges and remeasurement (benefit)(b)

       

(12)

(0.01)

Tax indemnification adjustments(c)

425

0.27

919

0.57

(7)

 

Loss from equity interests(d)

38

0.02

37

0.02

38

0.02

Adjustments for taxes(e)

(1,023)

(0.66)

(2,223)

(1.38)

525

0.32

Non-GAAP net earnings from continuing operations

$536

$0.34

$547

$0.34

$287

$0.17

             

GAAP earnings from continuing operations

$397

 

$261

 

$195

 
             

Non-GAAP adjustments related to continuing operations:

           

Amortization of intangible assets

72

 

78

 

72

 

Restructuring charges

9

 

3

 

69

 

Transformation costs(a)

123

 

245

     

Acquisition and other related charges

16

 

30

 

50

 

Separation costs

26

 

(24)

 

30

 

Defined benefit plan settlement charges and remeasurement (benefit)(b)

       

(12)

 

Non-GAAP earnings from continuing operations

$643

 

$593

 

$404

 
             

GAAP operating margin from continuing operations

5%

 

3%

 

3%

 

Non-GAAP adjustments from continuing operations

4%

 

5%

 

3%

 

Non-GAAP operating margin from continuing operations

9%

 

8%

 

6%

 
             

GAAP net loss from discontinued operations

$(72)

$(0.05)

$(46)

$(0.03)

$(134)

$(0.08)

             

Non-GAAP adjustments related to discontinued operations:

           

Amortization of intangible assets

       

36

0.02

Restructuring charges

       

146

0.09

Acquisition and other related charges

       

1

 

Separation costs

   

51

0.03

448

0.27

Defined benefit plan settlement charges and remeasurement (benefit)(b)

       

(4)

 

Tax indemnification adjustments(c)

72

0.05

(4)

     

Adjustments for taxes

   

(1)

 

(193)

(0.12)

Non-GAAP net earnings from discontinued operations

$

$

$

$

$300

$0.18

             

Total GAAP net earnings (loss)

$778

$0.49

$1,436

$0.89

$(612)

$(0.37)

Total Non-GAAP net earnings

$536

$0.34

$547

$0.34

$587

$0.35

  1. Represents amounts in connection with the HPE Next initiative and primarily includes costs related to labor and non-labor restructuring, program management and IT charges, partially offset by the gain on sale of real estate.
  2. Represents adjustment to net periodic pension cost resulting from remeasurements of the Hewlett Packard Enterprise pension plans in connection with the spin-off of the enterprise services business, Everett SpinCo, Inc., and the merger of Everett SpinCo, Inc. with Computer Sciences Corporation.
  3. Represents the settlement of certain pre-separation Hewlett-Packard Company income tax liabilities indemnified through the Tax Matters Agreement with HP Inc.
  4. Represents the amortization of basis difference adjustments related to the H3C divestiture.
  5. Includes tax amounts in connection with the spin-off of the enterprise services business, Everett SpinCo, Inc. and the software business, Seattle SpinCo, Inc., tax amounts related to the recently enacted U.S. tax reform, tax amounts related to the settlement of certain pre-separation Hewlett-Packard Company income tax liabilities indemnified through the Tax Matters Agreement with HP Inc. and excess tax benefits associated with stock-based compensation.

    In connection with the spin-off of the enterprise services business, Everett SpinCo, Inc, for the three months ended January 31, 2018, this amount includes a $244 million benefit primarily from foreign tax credits and from the release of non U.S. valuation allowances on deferred taxes established in connection with the Everett Transaction, following changes in foreign tax laws. For the three months ended April 30, 2017, this amount primarily includes $593 million of income tax expense from valuation allowances on certain U.S. deferred tax assets and other divestiture related taxes.

    In connection with the settlement of certain pre-separation Hewlett-Packard Company income tax liabilities indemnified through the Tax Matters Agreement with HP Inc, for the three months ended April 30, 2018, this amount primarily includes a $1.1 billion benefit following the closure of pre-separation Hewlett-Packard Company audits for fiscal years 2009 through 2012. For the three months ended January 31, 2018, this amount includes a $920 million benefit following the resolution of certain pre-separation Hewlett-Packard Company income tax liabilities.

    As a result of the recently enacted U.S. tax reform, for the three months ended April 30, 2018, this amount includes $140 million of tax expense. For the three months ended January 31, 2018, this amount includes an estimated tax benefit of $1.8 billion from the provisional application of the new tax rules including a lower federal tax rate to deferred tax assets and liabilities, partially offset by a provisional estimate of $1.0 billion of transition tax expense on accumulated non U.S. earnings, and a $203 million benefit as a result of the liquidation of an insolvent non U.S. subsidiary.

    During the first quarter of fiscal 2018, the Company adopted ASU 2016-09 on a prospective basis, except for the statement of cash flows for which it was retrospectively adopted for the prior comparative periods, which requires the excess tax benefits or tax deficiencies associated with stock-based compensation to be recognized as a component of the provision for income taxes in the Statement of Earnings rather than additional paid-in capital in the Balance Sheet. For the three months ended April 30, 2018 and January 31, 2018, this amount includes $28 million and $14 million, respectively, which represents the net excess tax benefits from stock-based compensation.

 

HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES ADJUSTMENTS TO GAAP NET EARNINGS, EARNINGS FROM OPERATIONS, OPERATING MARGIN AND DILUTED NET EARNINGS PER SHARE

(Unaudited)

(In millions, except percentages and per share amounts)

 

Six months
ended
April 30,
2018

Diluted net
earnings per
share

Six months
ended
April 30,
2017

Diluted net
earnings
per share

GAAP net earnings (loss) from continuing operations

$2,332

$1.46

$(227)

$(0.14)

         

Non-GAAP adjustments:

       

Amortization of intangible assets

150

0.09

138

0.08

Restructuring charges

12

0.01

152

0.09

Transformation costs(a)

368

0.23

   

Acquisition and other related charges

46

0.03

94

0.06

Separation costs

2

 

41

0.02

Defined benefit plan settlement charges and remeasurement (benefit)(b)

   

(16)

(0.01)

Tax indemnification adjustments(c)

1,344

0.84

11

0.01

Loss from equity interests(d)

75

0.05

73

0.04

Adjustments for taxes(e)

(3,246)

(2.03)

494

0.30

Non-GAAP net earnings from continuing operations

$1,083

$0.68

$760

$0.45

         

GAAP earnings from continuing operations

$658

 

$648

 
         

Non-GAAP adjustments related to continuing operations:

       

Amortization of intangible assets

150

 

138

 

Restructuring charges

12

 

152

 

Transformation costs(a)

368

     

Acquisition and other related charges

46

 

94

 

Separation costs

2

 

41

 

Defined benefit plan settlement charges and remeasurement (benefit)(b)

   

(16)

 

Non-GAAP earnings from continuing operations

$1,236

 

$1,057

 
         

GAAP operating margin from continuing operations

4%

 

5%

 

Non-GAAP adjustments from continuing operations

4%

 

3%

 

Non-GAAP operating margin from continuing operations

8%

 

8%

 
         

GAAP net loss from discontinued operations

$(118)

$(0.08)

$(118)

$(0.07)

         

Non-GAAP adjustments related to discontinued operations:

       

Amortization of intangible assets

   

71

0.04

Restructuring charges

   

240

0.14

Acquisition and other related charges

   

1

 

Separation costs

51

0.03

713

0.43

Defined benefit plan settlement charges and remeasurement (benefit)(b)

   

(6)

 

Tax indemnification adjustments(c)

68

0.05

   

Adjustments for taxes

(1)

 

(302)

(0.19)

Non-GAAP net earnings from discontinued operations

$

$

$599

$0.35

         

Total GAAP net earnings (loss)

$2,214

$1.38

$(345)

$(0.21)

Total Non-GAAP net earnings

$1,083

$0.68

$1,359

$0.80

  1. Represents amounts in connection with the HPE Next initiative and primarily includes costs related to labor and non-labor restructuring, program management and IT charges, partially offset by the gain on sale of real estate.
  2. Represents adjustment to net periodic pension cost resulting from remeasurements of the Hewlett Packard Enterprise pension plans in connection with the spin-off of the enterprise services business, Everett SpinCo, Inc., and the merger of Everett SpinCo, Inc. with Computer Sciences Corporation.
  3. Represents the settlement of certain pre-separation Hewlett-Packard Company income tax liabilities indemnified through the Tax Matters Agreement with HP Inc.
  4. Represents the amortization of basis difference adjustments related to the H3C divestiture.
  5. Includes tax amounts in connection with the spin-off of the enterprise services business, Everett SpinCo, Inc. and the software business, Seattle SpinCo, Inc., tax amounts related to the recently enacted U.S. tax reform, tax amounts related to the settlement of certain pre-separation Hewlett-Packard Company income tax liabilities indemnified through the Tax Matters Agreement with HP Inc. and excess tax benefits associated with stock-based compensation.

    In connection with the spin-off of the enterprise services business, Everett SpinCo, Inc, for the six months ended April 30, 2018, this amount includes a $239 million benefit primarily from foreign tax credits and from the release of non U.S. valuation allowances on deferred taxes established in connection with the Everett Transaction, following changes in foreign tax laws. For the six months ended April 30, 2017, this amount primarily includes $593 million of income tax expense from valuation allowances on certain U.S. deferred tax assets and other divestiture related taxes.

    In connection with the settlement of certain pre-separation Hewlett-Packard Company income tax liabilities indemnified through the Tax Matters Agreement with HP Inc, for the six months ended April 30, 2018, this amount primarily includes a $2.0 billion benefit.

    As a result of the recently enacted U.S. tax reform, for the six months ended April 30, 2018, this amount includes an estimated tax benefit of $1.8 billion from the provisional application of the new tax rules including a lower federal tax rate to deferred tax assets and liabilities, partially offset by a provisional estimate of $1.1 billion of transition tax expense on accumulated non U.S. earnings, and a $203 million benefit as a result of the liquidation of an insolvent non U.S. subsidiary.

    During the first quarter of fiscal 2018, the Company adopted ASU 2016-09 on a prospective basis, except for the statement of cash flows for which it was retrospectively adopted for the prior comparative periods, which requires the excess tax benefits or tax deficiencies associated with stock-based compensation to be recognized as a component of the provision for income taxes in the Statement of Earnings rather than additional paid-in capital in the Balance Sheet. For the six months ended April 30, 2018, this amount includes $42 million, which represents the net excess tax benefits from stock-based compensation.

 

HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In millions, except par value)

 

As of

 

April 30, 2018

October 31, 2017

ASSETS

   

Current assets:

   

Cash and cash equivalents

$6,986

$9,579

Accounts receivable, net of allowance for doubtful accounts

3,099

3,073

Financing receivables

3,503

3,378

Inventory

2,848

2,315

Assets held for sale(a)

31

14

Other current assets

3,325

3,085

Total current assets

19,792

21,444

Property, plant and equipment

6,208

6,269

Long-term financing receivables and other assets

12,915

12,600

Investments in equity interests

2,517

2,535

Goodwill and intangible assets

18,444

18,558

Total assets

$59,876

$61,406

LIABILITIES AND STOCKHOLDERS EQUITY

   

Current liabilities:

   

Notes payable and short-term borrowings

$3,855

$3,850

Accounts payable

6,242

6,072

Employee compensation and benefits

1,191

1,156

Taxes on earnings

437

429

Deferred revenue

3,163

3,128

Accrued restructuring

286

445

Other accrued liabilities

3,910

3,844

Total current liabilities

19,084

18,924

Long-term debt

9,970

10,182

Other non-current liabilities

6,856

8,795

Stockholders equity

   

HPE stockholders equity:

   

Preferred stock, $0.01 par value (300 shares authorized; none issued and outstanding at April 30, 2018)

   

Common stock, $0.01 par value (9,600 shares authorized; 1,527 and 1,595 shares issued and outstanding at April 30, 2018 and October 31, 2017, respectively)

15

16

Additional paid-in capital

32,205

33,583

Accumulated deficit

(5,306)

(7,238)

Accumulated other comprehensive loss

(2,982)

(2,895)

Total HPE stockholders equity

23,932

23,466

Non-controlling interests

34

39

Total stockholders equity

23,966

23,505

Total liabilities and stockholders equity

$59,876

$61,406

  1. In connection with the HPE Next initiative, the Company determined that certain properties within its real estate portfolio met the criteria to be classified as Assets held for sale. The Company expects these properties to be sold within the next twelve months.

 

HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In millions)

 

Three months ended
April 30, 2018

Six months ended
April 30, 2018

Cash flows from operating activities:

   

Net earnings

$778

$2,214

Adjustments to reconcile net earnings to net cash provided by operating activities:

   

Depreciation and amortization

655

1,290

Stock-based compensation expense

83

186

Provision for doubtful accounts and inventory

40

81

Restructuring charges

94

268

Deferred taxes on earnings

171

(1,164)

Loss (earnings) from equity interests

10

(12)

Dividends received from equity investees

47

47

Other, net

(5)

97

Changes in operating assets and liabilities, net of acquisitions:

   

Accounts receivable

(8)

(42)

Financing receivables

15

(272)

Inventory

(441)

(587)

Accounts payable

284

177

Taxes on earnings

(1,208)

(2,217)

Restructuring

(188)

(414)

Other assets and liabilities

(80)

737

Net cash provided by operating activities

247

389

Cash flows from investing activities:

   

Investment in property, plant and equipment

(693)

(1,362)

Proceeds from sale of property, plant and equipment

177

292

Purchases of available-for-sale securities and other investments

(5)

(8)

Maturities and sales of available-for-sale securities and other investments

85

85

Financial collateral posted

(485)

(1,191)

Financial collateral returned

787

931

Payments made in connection with business acquisitions, net of cash acquired

(29)

(29)

Proceeds from business divestitures, net

13

13

Net cash used in investing activities

(150)

(1,269)

Cash flows from financing activities:

   

Short-term borrowings with original maturities less than 90 days, net

(22)

(25)

Proceeds from debt, net of issuance costs

341

611

Payment of debt

(357)

(610)

Net proceeds related to stock-based award activities(a)

72

89

Repurchase of common stock

(907)

(1,649)

Net transfer of cash and cash equivalents to Everett

(13)

(41)

Net transfer of cash and cash equivalents to Seattle

226

156

Cash dividends paid to non-controlling interests

(8)

(8)

Cash dividends paid

(116)

(236)

Net cash used in financing activities

(784)

(1,713)

Decrease in cash and cash equivalents

(687)

(2,593)

Cash and cash equivalents at beginning of period

7,673

9,579

Cash and cash equivalents at end of period

$6,986

$6,986

  1. During the first quarter of fiscal 2018, the Company adopted ASU 2016-09, as a result of which, excess tax benefits from stock-based compensation is presented as an operating activity, rather than as a financing activity, and the payment of withholding taxes is presented as a financing activity, rather than as an operating activity. The Company adopted the standard retrospectively for the prior comparative periods. As such, prior period amounts have been reclassified to conform to the current presentation.

 

HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES SEGMENT INFORMATION

(Unaudited)

(In millions)

 

Three months ended

 

April 30,
2018

January 31,
2018

April 30,
2017

Net revenue:(a)

     

Hybrid IT

$6,023

$6,331

$5,637

Intelligent Edge

710

620

606

Financial Services

916

888

872

Corporate Investments

 

(1)

 

Total segment net revenue

7,649

7,838

7,115

Elimination of intersegment net revenue and other

(181)

(164)

(307)

Total Hewlett Packard Enterprise consolidated net revenue

$7,468

$7,674

$6,808

       

Earnings from continuing operations before taxes:(a) (b)

     

Hybrid IT

$621

$608

$457

Intelligent Edge

46

18

46

Financial Services

72

72

77

Corporate Investments

(22)

(21)

(28)

Total segment earnings from operations

717

677

552

       

Unallocated corporate costs and eliminations(b)

(54)

(54)

(124)

Unallocated stock-based compensation expense(b)

(20)

(30)

(24)

Amortization of intangible assets

(72)

(78)

(72)

Restructuring charges

(9

(3)

(69)

Transformation costs(c)

(123)

(245)

 

Acquisition and other related charges

(16)

(30)

(50)

Separation costs

(26)

24

(30)

Defined benefit plan settlement charges and remeasurement (benefit)(d)

   

12

Interest and other, net

(78)

(21)

(86)

Tax indemnification adjustments(e)

(425)

(919)

7

(Loss) earnings from equity interests

(10)

22

(3)

Total Hewlett Packard Enterprise consolidated (loss) earnings from
continuing operations before taxes (b)

$(116)

$(657)

$113

  1. Effective at the beginning of the first quarter of fiscal 2018, the Company implemented organizational changes to align its segment financial reporting more closely with its current business structure. These organizational changes primarily include: (i) the transfer of the former Servers and Storage business units, the Pointnext and Communications and Media Solutions ("CMS") businesses within the former Technology Services business unit, and the data center networking business within the former Networking business unit, all of which were previously reported within the former Enterprise Group ("EG") segment, to the newly formed Hybrid IT segment; (ii) the transfer of the remaining networking products businesses, which include wireless LAN, campus and branch switching and edge compute within the former Networking business unit, and Aruba services within the former Technology Services business unit, all of which were previously reported within the former EG segment, to the newly formed Intelligent Edge segment; and (iii) the transfer of cloud-related activities previously reported within Corporate Investments to the Hybrid IT segment.

    The Company reflected these changes to its segment information retrospectively to the earliest period presented, which primarily resulted in: (i) the transfer of net revenue, related eliminations of intersegment revenues and operating profit from the former Servers and Storage business units, the Pointnext and CMS businesses within the former Technology Services business unit and the data center networking business within the former Networking business unit, all of which were previously reported within the former EG segment, to the Hybrid IT segment; (ii) the transfer of net revenue, related eliminations of intersegment revenues and operating profit from the remaining networking products businesses within the former Networking business unit, and Aruba services within the former Technology Services business unit, all of which were previously reported within the former EG segment, to the Intelligent Edge segment; and (iii) the transfer of the operating loss from cloud-related activities previously reported within Corporate Investments to the Hybrid IT segment.

    These changes had no impact on Hewlett Packard Enterprise's previously reported consolidated net revenue, earnings from operations, net earnings or net earnings per share.
  2. Effective at the beginning of the first quarter of fiscal 2018, the Company implemented certain changes to its allocation methodology for stock-based compensation expense and certain corporate costs, which align to its segment financial reporting and are consistent with the manner in which the operating segments will be evaluated for performance on a prospective basis.

    The Company reflected these changes retrospectively to the earliest period presented, which resulted in: (i) the transfer of a portion of stock-based compensation expense, which under the prior allocation methodology was not allocated to the segments, to the Hybrid IT, Intelligent Edge and Financial Services segments; and (ii) the transfer of certain corporate function costs previously allocated to the segments to unallocated corporate costs.

    These changes had no impact on Hewlett Packard Enterprise's previously reported consolidated and combined earnings from operations, net earnings or net earnings per share.
  3. Represents amounts in connection with the HPE Next initiative and primarily includes costs related to labor and non-labor restructuring, program management and IT charges, partially offset by the gain on sale of real estate.
  4. Represents adjustment to net periodic pension cost resulting from remeasurements of the Hewlett Packard Enterprise pension plans in connection with the spin-off of the enterprise services business, Everett SpinCo, Inc., and the merger of Everett SpinCo, Inc. with Computer Sciences Corporation.
  5. Represents the settlement of certain pre-separation Hewlett-Packard Company income tax liabilities indemnified through the Tax Matters Agreement with HP Inc.

 

HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES SEGMENT INFORMATION

(Unaudited)

(In millions)

 

Six Months Ended April 30,

 

2018

2017

Net revenue:(a)

   

Hybrid IT

$12,354

$11,392

Intelligent Edge

1,330

1,176

Financial Services

1,804

1,695

Corporate Investments

(1)

 

Total segment net revenue

15,487

14,263

Elimination of intersegment net revenue and other

(345)

(553)

Total Hewlett Packard Enterprise consolidated net revenue

$15,142

$13,710

     

Earnings from continuing operations before taxes:(a) (b)

   

Hybrid IT

$1,229

$1,190

Intelligent Edge

64

62

Financial Services

144

153

Corporate Investments

(43)

(61)

Total segment earnings from operations

1,394

1,344

     

Unallocated corporate costs and eliminations(b)

(108)

(220)

Unallocated stock-based compensation expense(b)

(50)

(67)

Amortization of intangible assets

(150)

(138)

Restructuring charges

(12)

(152)

Transformation costs(c)

(368)

 

Acquisition and other related charges

(46)

(94)

Separation costs

(2)

(41)

Defined benefit plan settlement charges and remeasurement (benefit)(d)

 

16

Interest and other, net

(99)

(164)

Tax indemnification adjustments(e)

(1,344)

(11)

Earnings (loss) from equity interests

12

(25)

Total Hewlett Packard Enterprise consolidated (loss) earnings from
continuing operations before taxes (b)

$(773)

$448

  1. Effective at the beginning of the first quarter of fiscal 2018, the Company implemented organizational changes to align its segment financial reporting more closely with its current business structure. These organizational changes primarily include: (i) the transfer of the former Servers and Storage business units, the Pointnext and Communications and Media Solutions ("CMS") businesses within the former Technology Services business unit, and the data center networking business within the former Networking business unit, all of which were previously reported within the former Enterprise Group ("EG") segment, to the newly formed Hybrid IT segment; (ii) the transfer of the remaining networking products businesses, which include wireless LAN, campus and branch switching and edge compute within the former Networking business unit, and Aruba services within the former Technology Services business unit, all of which were previously reported within the former EG segment, to the newly formed Intelligent Edge segment; and (iii) the transfer of cloud-related activities previously reported within Corporate Investments to the Hybrid IT segment.

    The Company reflected these changes to its segment information retrospectively to the earliest period presented, which primarily resulted in: (i) the transfer of net revenue, related eliminations of intersegment revenues and operating profit from the former Servers and Storage business units, the Pointnext and CMS businesses within the former Technology Services business unit and the data center networking business within the former Networking business unit, all of which were previously reported within the former EG segment, to the Hybrid IT segment; (ii) the transfer of net revenue, related eliminations of intersegment revenues and operating profit from the remaining networking products businesses within the former Networking business unit, and Aruba services within the former Technology Services business unit, all of which were previously reported within the former EG segment, to the Intelligent Edge segment; and (iii) the transfer of the operating loss from cloud-related activities previously reported within Corporate Investments to the Hybrid IT segment.

    These changes had no impact on Hewlett Packard Enterprise's previously reported consolidated net revenue, earnings from operations, net earnings or net earnings per share.
  2. Effective at the beginning of the first quarter of fiscal 2018, the Company implemented certain changes to its allocation methodology for stock-based compensation expense and certain corporate costs, which align to its segment financial reporting and are consistent with the manner in which the operating segments will be evaluated for performance on a prospective basis.

    The Company reflected these changes retrospectively to the earliest period presented, which resulted in: (i) the transfer of a portion of stock-based compensation expense, which under the prior allocation methodology was not allocated to the segments, to the Hybrid IT, Intelligent Edge and Financial Services segments; and (ii) the transfer of certain corporate function costs previously allocated to the segments to unallocated corporate costs.

    These changes had no impact on Hewlett Packard Enterprise's previously reported consolidated and combined earnings from operations, net earnings or net earnings per share.
  3. Represents amounts in connection with the HPE Next initiative and primarily includes costs related to labor and non-labor restructuring, program management and IT charges, partially offset by the gain on sale of real estate.
  4. Represents adjustment to net periodic pension cost resulting from remeasurements of the Hewlett Packard Enterprise pension plans in connection with the spin-off of the enterprise services business, Everett SpinCo, Inc., and the merger of Everett SpinCo, Inc. with Computer Sciences Corporation.
  5. Represents the settlement of certain pre-separation Hewlett-Packard Company income tax liabilities indemnified through the Tax Matters Agreement with HP Inc.

 

HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES SEGMENT/BUSINESS UNIT INFORMATION

(Unaudited)

(In millions, except percentages)

 

Three months ended

Change (%)

 

April 30,
2018

January 31,
2018

April 30,
2017

Q/Q

Y/Y

Net revenue:(a)

         

Hybrid IT

         

Hybrid IT Product

         

Compute

$3,213

$3,492

$3,033

(8%)

6%

Storage

912

948

734

(4%)

24%

DC Networking

46

62

45

(26%)

2%

Total Hybrid IT Product

4,171

4,502

3,812

(7%)

9%

Pointnext

1,852

1,829

1,825

1%

1%

Total Hybrid IT

6,023

6,331

5,637

(5%)

7%

Intelligent Edge

         

HPE Aruba Product

635

549

538

16%

18%

HPE Aruba Services

75

71

68

6%

10%

Total Intelligent Edge

710

620

606

15%

17%

           

Financial Services

916

888

872

3%

5%

Corporate Investments

 

(1)

 

NM

NM

Total segment net revenue

7,649

7,838

7,115

(2%)

8%

           

Elimination of intersegment net revenue and other

(181)

(164)

(307)

10%

(41%)

Total Hewlett Packard Enterprise consolidated net revenue

$7,468

$7,674

$6,808

(3%)

10%

  1. Effective at the beginning of the first quarter of fiscal 2018, the Company implemented organizational changes to align its segment financial reporting more closely with its current business structure. These organizational changes primarily include: (i) the transfer of the former Servers and Storage business units, the Pointnext and CMS businesses within the former Technology Services business unit, and the data center networking business within the former Networking business unit, all of which were previously reported within the former EG segment, to the newly formed Hybrid IT segment; (ii) the transfer of the remaining networking products businesses, which include wireless LAN, campus and branch switching and edge compute within the former Networking business unit, and Aruba services within the former Technology Services business unit, all of which were previously reported within the former EG segment, to the newly formed Intelligent Edge segment; and (iii) the transfer of cloud-related activities previously reported within Corporate Investments to the Hybrid IT segment.

    The Company reflected these changes to its segment information retrospectively to the earliest period presented, which primarily resulted in: (i) the transfer of net revenue, related eliminations of intersegment revenues and operating profit from the former Servers and Storage business units, the Pointnext and CMS businesses within the former Technology Services business unit and the data center networking business within the former Networking business unit, all of which were previously reported within the former EG segment, to the Hybrid IT segment; (ii) the transfer of net revenue, related eliminations of intersegment revenues and operating profit from the remaining networking products businesses within the former Networking business unit, and Aruba services within the former Technology Services business unit, all of which were previously reported within the former EG segment, to the Intelligent Edge segment; and (iii) the transfer of the operating loss from cloud-related activities previously reported within Corporate Investments to the Hybrid IT segment.

    These changes had no impact on Hewlett Packard Enterprise's previously reported consolidated net revenue, earnings from operations, net earnings or net earnings per share.

 

HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES SEGMENT/BUSINESS UNIT INFORMATION

(Unaudited)

(In millions, except percentages)

 

Six Months Ended April 30,

 

2018

2017

Y/Y

Net revenue:(a)

     

Hybrid IT

     

Hybrid IT Product

     

Compute

$6,705

$6,176

9%

Storage

1,860

1,498

24%

DC Networking

108

94

15%

Total Hybrid IT Product

8,673

7,768

12%

Pointnext

3,681

3,624

2%

Total Hybrid IT

12,354

11,392

8%

Intelligent Edge

     

HPE Aruba Product

1,184

1,041

14%

HPE Aruba Services

146

135

8%

Total Intelligent Edge

1,330

1,176

13%

       

Financial Services

1,804

1,695

6%

Corporate Investments

(1)

 

NM

Total segment net revenue

15,487

14,263

9%

       

Elimination of intersegment net revenue and other

(345)

(553)

(38%)

Total Hewlett Packard Enterprise consolidated net revenue

$15,142

$13,710

10%

  1. Effective at the beginning of the first quarter of fiscal 2018, the Company implemented organizational changes to align its segment financial reporting more closely with its current business structure. These organizational changes primarily include: (i) the transfer of the former Servers and Storage business units, the Pointnext and CMS businesses within the former Technology Services business unit, and the data center networking business within the former Networking business unit, all of which were previously reported within the former EG segment, to the newly formed Hybrid IT segment; (ii) the transfer of the remaining networking products businesses, which include wireless LAN, campus and branch switching and edge compute within the former Networking business unit, and Aruba services within the former Technology Services business unit, all of which were previously reported within the former EG segment, to the newly formed Intelligent Edge segment; and (iii) the transfer of cloud-related activities previously reported within Corporate Investments to the Hybrid IT segment.

    The Company reflected these changes to its segment information retrospectively to the earliest period presented, which primarily resulted in: (i) the transfer of net revenue, related eliminations of intersegment revenues and operating profit from the former Servers and Storage business units, the Pointnext and CMS businesses within the former Technology Services business unit and the data center networking business within the former Networking business unit, all of which were previously reported within the former EG segment, to the Hybrid IT segment; (ii) the transfer of net revenue, related eliminations of intersegment revenues and operating profit from the remaining networking products businesses within the former Networking business unit, and Aruba services within the former Technology Services business unit, all of which were previously reported within the former EG segment, to the Intelligent Edge segment; and (iii) the transfer of the operating loss from cloud-related activities previously reported within Corporate Investments to the Hybrid IT segment.

    These changes had no impact on Hewlett Packard Enterprise's previously reported consolidated net revenue, earnings from operations, net earnings or net earnings per share.

 

HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES SEGMENT OPERATING MARGIN SUMMARY DATA

(Unaudited)

 

Three months ended

Change in Operating
Margin (pts)

 

April 30, 2018

Q/Q

Y/Y

Segment operating margin:(a)

     

Hybrid IT

10.3%

0.7 pts

2.2 pts

Intelligent Edge

6.5%

3.6 pts

(1.1) pts

Financial Services

7.9%

(0.2) pts

(0.9) pts

Corporate Investments(b)

NM

NM

NM

Total segment operating margin

9.4%

0.8 pts

1.6 pts

  1. Effective at the beginning of the first quarter of fiscal 2018, the Company implemented organizational changes to align its segment financial reporting more closely with its current business structure. These organizational changes primarily include: (i) the transfer of the former Servers and Storage business units, the Pointnext and CMS businesses within the former Technology Services business unit, and the data center networking business within the former Networking business unit, all of which were previously reported within the former EG segment, to the newly formed Hybrid IT segment; (ii) the transfer of the remaining networking products businesses, which include wireless LAN, campus and branch switching and edge compute within the former Networking business unit, and Aruba services within the former Technology Services business unit, all of which were previously reported within the former EG segment, to the newly formed Intelligent Edge segment; and (iii) the transfer of cloud-related activities previously reported within Corporate Investments to the Hybrid IT segment.

    The Company reflected these changes to its segment information retrospectively to the earliest period presented, which primarily resulted in: (i) the transfer of net revenue, related eliminations of intersegment revenues and operating profit from the former Servers and Storage business units, the Pointnext and CMS businesses within the former Technology Services business unit and the data center networking business within the former Networking business unit, all of which were previously reported within the former EG segment, to the Hybrid IT segment; (ii) the transfer of net revenue, related eliminations of intersegment revenues and operating profit from the remaining networking products businesses within the former Networking business unit, and Aruba services within the former Technology Services business unit, all of which were previously reported within the former EG segment, to the Intelligent Edge segment; and (iii) the transfer of the operating loss from cloud-related activities previously reported within Corporate Investments to the Hybrid IT segment.

    These changes had no impact on Hewlett Packard Enterprise's previously reported consolidated net revenue, earnings from operations, net earnings or net earnings per share.
  2. NM represents not meaningful.

 

HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES CALCULATION OF DILUTED NET EARNINGS (LOSS) PER SHARE

(Unaudited)

(In millions, except per share amounts)

 

Three months ended

 

April 30,
2018

January 31,
2018

April 30,
2017

Numerator:

     

GAAP net earnings (loss) from continuing operations

$850

$1,482

$(478)

GAAP net loss from discontinued operations

$(72)

$(46)

$(134)

Non-GAAP net earnings from continuing operations

$536

$547

$287

Non-GAAP net earnings from discontinued operations

$

$

$300

       

Denominator:

     

Weighted-average shares used to compute basic net earnings per share
and diluted net earnings (loss) per share

1,552

1,591

1,658

Dilutive effect of employee stock plans(a)

30

28

27

Weighted-average shares used to compute diluted net earnings per share

1,582

1,619

1,685

       

GAAP net earnings (loss) per share from continuing operations

     

Basic

$0.55

$0.93

$(0.29)

Diluted(a)

$0.54

$0.92

$(0.29)

       

GAAP net loss per share from discontinued operations

     

Basic

$(0.05)

$(0.03)

$(0.08)

Diluted(a)

$(0.05)

$(0.03)

$(0.08)

       

Non-GAAP net earnings per share from continuing operations

     

Basic

$0.35

$0.34

$0.17

Diluted(b)

$0.34

$0.34

$0.17

       

Non-GAAP net earnings per share from discontinued operations

     

Basic

$

$

$0.18

Diluted(b)

$

$

$0.18

       

Total Hewlett Packard Enterprise GAAP basic net earnings (loss) per share

$0.50

$0.90

$(0.37)

Total Hewlett Packard Enterprise GAAP diluted net earnings (loss) per share

$0.49

$0.89

$(0.37)

Total Hewlett Packard Enterprise Non-GAAP basic net earnings per share

$0.35

$0.34

$0.35

Total Hewlett Packard Enterprise Non-GAAP diluted net earnings per share

$0.34

$0.34

$0.35

  1. GAAP diluted net earnings per share reflects any dilutive effect of restricted stock awards, stock options and performance-based stock awards, but the effect is excluded when there is a net (loss) from continuing operations and discontinued operations because it would be anti-dilutive.
  2. Non-GAAP diluted net earnings per share reflects any dilutive effect of restricted stock awards, stock options and performance-based awards.

 

HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES CALCULATION OF DILUTED NET EARNINGS (LOSS) PER SHARE

(Unaudited)

(In millions, except per share amounts)

 

Six Months Ended April 30,

 

2018

2017

Numerator:

   

GAAP net earnings (loss) from continuing operations

$2,332

$(227)

GAAP net loss from discontinued operations

$(118)

$(118)

Non-GAAP net earnings from continuing operations

$1,083

$760

Non-GAAP net earnings from discontinued operations

$

$599

     

Denominator:

   

Weighted-average shares used to compute basic net earnings per share
and diluted net earnings (loss) per share

1,571

1,664

Dilutive effect of employee stock plans(a)

30

28

Weighted-average shares used to compute diluted net earnings per share

1,601

1,692

     

GAAP net earnings (loss) per share from continuing operations

   

Basic

$1.48

$(0.14)

Diluted(a)

$1.46

$(0.14)

     

GAAP net loss per share from discontinued operations

   

Basic

$(0.07)

$(0.07)

Diluted(a)

$(0.08)

$(0.07)

     

Non-GAAP net earnings per share from continuing operations

   

Basic

$0.69

$0.46

Diluted(b)

$0.68

$0.45

     

Non-GAAP net earnings per share from discontinued operations

   

Basic

$

$0.36

Diluted(b)

$

$0.35

     

Total Hewlett Packard Enterprise GAAP basic net earnings (loss) per share

$1.41

$(0.21)

Total Hewlett Packard Enterprise GAAP diluted net earnings (loss) per share

$1.38

$(0.21)

Total Hewlett Packard Enterprise Non-GAAP basic net earnings per share

$0.69

$0.82

Total Hewlett Packard Enterprise Non-GAAP diluted net earnings per share

$0.68

$0.80

  1. GAAP diluted net earnings per share reflects any dilutive effect of restricted stock awards, stock options and performance-based stock awards, but the effect is excluded when there is a net (loss) from continuing operations and discontinued operations because it would be anti-dilutive.
  2. Non-GAAP diluted net earnings per share reflects any dilutive effect of restricted stock awards, stock options and performance-based awards.

Use of non-GAAP financial measures
To supplement Hewlett Packard Enterprises condensed consolidated financial statement information presented on a GAAP basis, Hewlett Packard Enterprise provides revenue on a constant currency basis, revenue adjusted for divestitures and currency, non-GAAP operating expenses, non-GAAP operating profit, non-GAAP operating margin, non-GAAP income tax rate, non-GAAP net earnings from continuing operations, non-GAAP net (loss) earnings from discontinued operations, non-GAAP diluted net earnings per share from continuing operations, non-GAAP diluted net (loss) earnings per share from discontinued operations, gross cash, free cash flow, net capital expenditures, net debt, net cash, operating company net debt and operating company net cash financial measures. Hewlett Packard Enterprise also provides forecasts of non-GAAP diluted net earnings per share and free cash flow.

These non-GAAP financial measures are not computed in accordance with, or as an alternative to, generally accepted accounting principles in the United States. The GAAP measure most directly comparable to revenue on a constant currency basis is revenue. The GAAP measure most directly comparable to revenue adjusted for divestitures and currency is revenue. The GAAP measure most directly comparable to non-GAAP operating expense is total costs and expenses. The GAAP measure most directly comparable to non-GAAP operating profit is earnings from operations. The GAAP measure most directly comparable to non-GAAP operating margin is operating margin. The GAAP measure most directly comparable to non-GAAP income tax rate is income tax rate. The GAAP measure most directly comparable to non-GAAP net earnings from continuing operations is net (loss) earnings from continuing operations. The GAAP measure most directly comparable to non-GAAP net (loss) earnings from discontinued operations is net (loss) earnings from discontinued operations. The GAAP measure most directly comparable to non-GAAP diluted net earnings per share from continuing operations is diluted net (loss) earnings per share from continuing operations. The GAAP measure most directly comparable to non-GAAP diluted net (loss) earnings per share from discontinued operations is diluted net (loss) earnings per share from discontinued operations. The GAAP measure most directly comparable to gross cash is cash and cash equivalents. The GAAP measure most directly comparable to free cash flow is cash flow from operations. The GAAP measure most directly comparable to net capital expenditures is investment in property, plant and equipment. The GAAP measure most directly comparable to net debt and operating company net debt is total company debt. The GAAP measure most directly comparable to each of net cash and operating company net cash is cash and cash equivalents. Reconciliations of each of these non-GAAP financial measures to GAAP information are included in the tables above or elsewhere in the materials accompanying this news release.

Use and economic substance of non-GAAP financial measures used by Hewlett Packard Enterprise
Revenue on a constant currency basis assumes no change in the foreign exchange rate from the prior-year period. Revenue adjusted for divestitures and currency excludes revenue resulting from business divestitures in fiscal 2017 and 2016 and also assumes no change in the foreign exchange rate from the prior-year period. Non-GAAP operating expenses, non-GAAP operating profit, and non-GAAP operating margin are defined to exclude any charges relating to the amortization of intangible assets, restructuring charges, charges relating to the separation transactions, transformation costs, acquisition and other related charges and defined benefit plan settlement and remeasurement charges. Non-GAAP net earnings from continuing operations and non-GAAP diluted net earnings per share from continuing operations consist of net (loss) earnings or diluted net (loss) earnings per share excluding those same charges, as well as an adjustment to earnings in equity interests, tax indemnification adjustments, income tax valuation allowances and separation taxes, the impact of U.S. tax reform and excess tax benefit from stock-based compensation. Non-GAAP net (loss) earnings from discontinued operations and non-GAAP diluted net (loss) earnings per share from discontinued operations consist of net (loss) earnings from discontinued operations or diluted net (loss) earnings per share from discontinued operations excluding those same charges, as applicable to discontinued operations. In addition, non-GAAP net earnings from continuing operations, non-GAAP net (loss) earnings from discontinued operations, non-GAAP diluted net earnings per share from continuing operations and non-GAAP diluted net (loss) earnings per share from discontinued operations are adjusted by the amount of additional taxes or tax benefits associated with each non-GAAP item.

Hewlett Packard Enterprises management uses these non-GAAP financial measures for purposes of evaluating Hewlett Packard Enterprises historical and prospective financial performance, as well as Hewlett Packard Enterprises performance relative to its competitors. Hewlett Packard Enterprises management also uses these non-GAAP measures to further its own understanding of Hewlett Packard Enterprises segment operating performance. Hewlett Packard Enterprise believes that excluding the items mentioned above from these non-GAAP financial measures allows Hewlett Packard Enterprises management to better understand Hewlett Packard Enterprises consolidated financial performance in relation to the operating results of Hewlett Packard Enterprises segments, as Hewlett Packard Enterprises management does not believe that the excluded items are reflective of ongoing operating results. More specifically, Hewlett Packard Enterprises management excludes each of those items mentioned above for the following reasons:

 

  • Hewlett Packard Enterprise incurs charges relating to the amortization of intangible assets. Those charges are included in Hewlett Packard Enterprises GAAP earnings from operations, operating margin, net (loss) earnings and diluted net (loss) earnings per share. Such charges are significantly impacted by the timing and magnitude of Hewlett Packard Enterprises acquisitions and any related impairment charges. Consequently, Hewlett Packard Enterprise excludes these charges for purposes of calculating these non-GAAP measures to facilitate a more meaningful evaluation of Hewlett Packard Enterprises current operating performance and comparisons to Hewlett Packard Enterprises operating performance in other periods.
  • Restructuring charges are costs associated with a formal restructuring plan and are primarily related to (i) employee termination costs and benefits (ii) costs to vacate duplicative facilities and (iii) an accelerated employee stock compensation program. Hewlett Packard Enterprise excludes these restructuring costs (and any reversals of charges recorded in prior periods) for purposes of calculating these non-GAAP measures because it believes that these historical costs do not reflect expected future operating expenses and do not contribute to a meaningful evaluation of Hewlett Packard Enterprises current operating performance or comparisons to Hewlett Packard Enterprises operating performance in other periods.
  • Separation costs are expenses associated with HP Inc.'s (formerly known as Hewlett-Packard Company or HP Co.) separation into two independent publicly-traded companies and the spin-off and merger transactions of the Enterprise Services business with CSC ("Everett Transaction") and the Software business with Micro Focus (Seattle Transaction). The charges are primarily related to third-party consulting, contractor fees and other incremental costs incurred to complete the transactions. Hewlett Packard Enterprise excludes these separation costs for purposes of calculating these non-GAAP measures to facilitate a more meaningful evaluation of Hewlett Packard Enterprises current operating performance and comparisons to Hewlett Packard Enterprises operating performance in other periods.
  • Hewlett Packard Enterprise incurs costs related to its acquisitions and divestitures, most of which are treated as non-cash or non-capitalized expenses. The charges are direct expenses such as professional fees and retention costs, as well as non-cash adjustments to the fair value of certain acquired assets such as inventory. Because non-cash or non-capitalized acquisition-related expenses are inconsistent in amount and frequency and are significantly impacted by the timing and nature of Hewlett Packard Enterprises acquisitions and divestitures, Hewlett Packard Enterprise believes that eliminating such expenses for purposes of calculating these non-GAAP measures facilitates a more meaningful evaluation of Hewlett Packard Enterprises current operating performance and comparisons to Hewlett Packard Enterprises past operating performance.
  • Transformation costs represent net costs related to the HPE Next initiative and include restructuring charges, program design and execution costs, costs incurred to transform Hewlett Packard Enterprise's IT infrastructure and gains from the sale of real-estate identified as part of the initiative. Hewlett Packard Enterprise believes that eliminating such expenses and gains for purposes of calculating these non-GAAP measures facilitates a more meaningful evaluation of Hewlett Packard Enterprises current operating performance and comparisons to Hewlett Packard Enterprises past operating performance.
  • Adjustment to loss from equity interests includes the amortization of the basis difference in relation to the H3C divestiture and the resulting equity method investment in H3C. Hewlett Packard Enterprise believes that eliminating this amount for purposes of calculating non-GAAP operating profit facilitates a more meaningful evaluation of Hewlett Packard Enterprises current operating performance and comparisons to Hewlett Packard Enterprises operating performance in other periods.
  • Hewlett Packard Enterprise incurs defined benefit plan settlement and remeasurement charges relating to its defined pension plans. The charges are associated with the net settlement resulting from voluntary lump sum payments offered to certain terminated vested participants and remeasurement of plan assets in connection with the Everett and Seattle Transactions, resulting in a decrease to the net periodic pension expense. Hewlett Packard Enterprise excludes these charges for the purpose of calculating these non- GAAP measures to facilitate a more meaningful evaluation of Hewlett Packard Enterprises current operating performance and comparisons to Hewlett Packard Enterprises operating performance in other periods.
  • Tax indemnification adjustments are related to changes in the indemnification positions between Hewlett Packard Enterprise and HP Inc., DXC and Micro Focus that are recorded by the Company as pre-tax income or expense and not considered tax expense. Hewlett Packard Enterprise excludes these charges and the associated tax impact for the purpose of calculating these non-GAAP measures to facilitate a more meaningful evaluation of Hewlett Packard Enterprises current operating performance and comparisons to Hewlett Packard Enterprises operating performance in other periods.
  • Valuation allowances and separation taxes represent tax amounts in connection with the spin-off of the enterprise services business, Everett SpinCo, Inc., and the software business, Seattle SpinCo, Inc. Since these charges do not represent ongoing expenses, Hewlett Packard Enterprise excludes these charges for the purpose of calculating these non-GAAP measures to facilitate a more meaningful evaluation of Hewlett Packard Enterprises current operating performance and comparisons to Hewlett Packard Enterprises operating performance in other periods.
  • As a result of the recently enacted U.S. tax reform, during the first quarter of fiscal 2018, Hewlett Packard Enterprise recorded an estimated tax benefit from the provisional application of the new tax rules including a lower federal tax rate to deferred tax assets and liabilities, partially offset by a provisional estimate for transition tax expense on accumulated non-U.S. undistributed earnings, and a benefit as a result of the liquidation of an insolvent non U.S. subsidiary. During the current quarter, the Company recorded SAB118 adjustments in connection with U.S. tax reform primarily related to transition tax. Since these adjustments represent a one-time charge and do not represent ongoing expenses, Hewlett Packard Enterprise excludes the charge for the purpose of calculating these non-GAAP measures to facilitate a more meaningful evaluation of the Companys current operating performance and comparisons to Hewlett Packard Enterprises operating performance in other periods.
  • During the first quarter of fiscal 2018, the Company adopted ASU 2016-09 on a prospective basis, except for the statement of cash flows for which the statement was retrospectively adopted for the prior comparative periods. This standard requires excess tax benefits or tax deficiencies associated with stock-based compensation to be recognized as a component of the provision for income taxes in the Statement of Earnings rather than additional paid-in capital in the Balance Sheet. Since the benefit or deficiency is the outcome of Hewlett Packard Enterprises stock price at the time an award is converted to a share of Hewlett Packard Enterprises stock, Hewlett Packard Enterprise excludes these benefits or deficiencies for the purpose of calculating these non-GAAP measures to facilitate a more meaningful evaluation of Hewlett Packard Enterprises current operating performance and comparisons to Hewlett Packard Enterprises operating performance in other periods.

 

Material limitations associated with use of non-GAAP financial measures
These non-GAAP financial measures have limitations as analytical tools, and these measures should not be considered in isolation or as a substitute for analysis of Hewlett Packard Enterprises results as reported under GAAP. Some of the limitations in relying on these non-GAAP financial measures are:

 

  • Items such as amortization of intangible assets, though not directly affecting Hewlett Packard Enterprises cash position, represent the loss in value of intangible assets over time. The expense associated with this loss in value is not included in non-GAAP operating expenses, non-GAAP operating profit, non-GAAP operating margin, non-GAAP net earnings from continuing operations, non-GAAP net (loss) earnings from discontinued operations, non-GAAP diluted net earnings per share from continuing operations and non-GAAP diluted net (loss) earnings per share from discontinued operations, and therefore does not reflect the full economic effect of the loss in value of those intangible assets.
  • Items such as restructuring charges, separation costs and transformation costs that are excluded from non-GAAP operating expenses, non-GAAP operating profit, non-GAAP operating margin, non-GAAP net earnings from continuing operations, non-GAAP net (loss) earnings from discontinued operations, non-GAAP diluted net earnings per share from continuing operations and non-GAAP diluted net (loss) earnings per share from discontinued operations can have a material impact on the equivalent GAAP earnings measure and cash flows.
  • Items such as tax indemnification adjustments, income tax valuation allowances and separation taxes, the impact of U.S. tax reform, excess tax benefits from stock-based compensation and the related tax impacts from other non-GAAP measures that are excluded from the non-GAAP tax rate, non-GAAP net earnings from continuing operations, non-GAAP earnings (loss) from discontinued operations, non-GAAP diluted net earnings per share from continuing operations and non-GAAP diluted net (loss) earnings per share from discontinued operations can have a material impact on the equivalent GAAP earnings measure and cash flows.
  • Hewlett Packard Enterprise may not be able to immediately liquidate the short-term and long-term investments included in gross cash, which may limit the usefulness of gross cash as a liquidity measure.
  • Other companies may calculate revenue on a constant currency basis, non-GAAP operating profit, non-GAAP operating margin, non-GAAP net earnings from continuing operations, non-GAAP net (loss) earnings from discontinued operations, non-GAAP diluted net earnings per share from continuing operations and non-GAAP diluted net (loss) earnings per share from discontinued operations differently than Hewlett Packard Enterprise does, limiting the usefulness of those measures for comparative purposes.

 

Compensation for limitations associated with use of non-GAAP financial measures
Hewlett Packard Enterprise compensates for the limitations on its use of non-GAAP financial measures by relying primarily on its GAAP results and using non-GAAP financial measures only as supplement. Hewlett Packard Enterprise also provides a reconciliation of each non-GAAP financial measure to its most directly comparable GAAP measure within this news release and in other written materials that include these non-GAAP financial measures, and Hewlett Packard Enterprise encourages investors to review carefully those reconciliations.

Usefulness of non-GAAP financial measures to investors
Hewlett Packard Enterprise believes that providing revenue on a constant currency basis, revenue adjusted for divestitures and currency, non-GAAP operating expenses, non-GAAP operating profit, non-GAAP operating margin, non-GAAP income tax rate, non-GAAP net earnings from continuing operations, non-GAAP net (loss) earnings from discontinued operations, non-GAAP diluted net earnings per share from continuing operations and non-GAAP diluted net (loss) earnings per share from discontinued operations, gross cash, free cash flow, net capital expenditures, net debt, net cash, operating company net debt and operating company net cash financial measures to investors in addition to the related GAAP measures provides investors with greater transparency to the information used by Hewlett Packard Enterprises management in its financial and operational decision making and allows investors to see Hewlett Packard Enterprises results through the eyes of management. Hewlett Packard Enterprise further believes that providing this information better enables Hewlett Packard Enterprises investors to understand Hewlett Packard Enterprises operating performance and to evaluate the efficacy of the methodology and information used by Hewlett Packard Enterprises management to evaluate and measure such performance. Disclosure of these non-GAAP financial measures also facilitates comparisons of Hewlett Packard Enterprises operating performance with the performance of other companies in Hewlett Packard Enterprises industry that supplement their GAAP results with non-GAAP financial measures that may be calculated in a similar manner.

Editorial contact
Kate Holderness,
Hewlett Packard Enterprise
corpmediarelations@hpe.com

HPE Investor Relations
Investor.relations@hpe.com

 

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