HPE Delivers Q3 Results

AUGUST 27, 2019 • PRESS RELEASE

Q3 2019 FINANCIAL HIGHLIGHTS:

  • Revenue: $7.2 billion
  • Gross Margins: 33.9%, up 340 basis points from the prior-year period
  • Diluted Net Earnings Per Share:
    • GAAP ($0.02), includes ($0.42) adjustment for a one-time arbitration award to DXC, compared to the previously provided outlook of $0.29 to $0.33 per share
    • Non-GAAP $0.45, up 7% from the prior-year period EPS and above the previously provided outlook of $0.40 to $0.44 per share 
  • Cash Flow from Operations: $1.2 billion, and $2.6 billion year-to-date, up $927 million from the prior-year-to-date period
  • Free Cash Flow: $648 million, and $860 million year-to-date, up $790 million from the prior-year-to-date period


FY 2019 OUTLOOK:

  • Earnings Per Share: Adjusting GAAP diluted net earnings per share outlook to $0.65 to $0.69 due to a one-time arbitration award to DXC and raising non-GAAP diluted net earnings per share outlook to $1.72 to $1.76
  • Free Cash Flow: Reiterating free cash flow guidance of $1.4 to $1.6 billion

HPE announces its financial results for the third quarter of 2019

SAN JOSE, Calif.--(BUSINESS WIRE)-- Hewlett Packard Enterprise (NYSE: HPE) today announced financial results for its fiscal 2019 third quarter, ended July 31, 2019.

“In Q3, we improved both gross and operating margins, delivered strong non-GAAP earnings, and generated a record level of year-to-date free cash flow,” said Antonio Neri, president and CEO of Hewlett Packard Enterprise. “We also invested in important innovation for our customers and announced strategic acquisitions, including Cray, which we now expect to close by the end of fiscal year 2019, earlier than originally planned.”

“Our strong operational performance reflects continued disciplined execution as we deliberately shift and enhance our portfolio to provide customers with higher-value, software-defined offerings, delivered as a Service,” added Neri. “I remain confident in our ability to drive profitable growth as we execute our strategy.”

Third Quarter Fiscal Year 2019

HPE fiscal 2019 third quarter continuing operations financial

performance

 

 

Q3 FY19

 

Q3 FY18

 

Y/Y

GAAP net revenue ($B)

 

$7.2

 

$7.8

 

(7.0%)

GAAP operating margin

 

(1.1%)

 

6.3%

 

(7.4 pts.)

GAAP net earnings ($B)

 

($0.0)

 

$0.5

 

(106%)

GAAP diluted net earnings per share

 

($0.02)

 

$0.29

 

(107%)

Non-GAAP operating margin

 

9.9%

 

9.1%

 

0.8 pts.

Non-GAAP net earnings ($B)

 

$0.6

 

$0.6

 

(5.6%)

Non-GAAP diluted net earnings per share

 

$0.45

 

$0.42

 

7.1%

Cash flow from operations ($B)

 

$1.2

 

$1.2

 

(4.2%)


Information about HPE’s use of non-GAAP financial information is provided under “Use of non-GAAP financial information” below.


Financial Summary


Third quarter net revenue
of $7.2 billion, down 7% from the prior-year period, and down 3% from the prior-year period, excluding Tier 1 server sales and adjusted for currency.


Third quarter gross margins
of 33.9%, up 340 basis points from the prior-year period.


Third quarter GAAP diluted net earnings per share (“EPS”)
from continuing operations was ($0.02), includes ($0.42) adjustment for a one-time arbitration award to DXC, compared to GAAP diluted net EPS from continuing operations of $0.29 in the prior-year period.


Third quarter non-GAAP diluted net EPS
$0.45, up from non-GAAP diluted net EPS of $0.42 in the prior-year period. Third quarter non-GAAP net earnings and non-GAAP diluted net EPS exclude after-tax adjustments of $630 million and $0.47 per diluted share, respectively, primarily related to the impact of acquisition, disposition and other related charges, transformation costs, tax indemnification adjustments, and adjustments for taxes.


Third quarter cash flow from operations
of $1.2 billion, and $2.6 billion year-to-date, up $927 million from the prior-year-to-date period.


Free cash flow
of $648 million, and $860 million year-to-date, up $790 million from the prior-year-to-date period.


Segment Results

  • Intelligent Edge revenue was $762 million, with 4.9% operating margin. HPE Aruba product revenue was down 4% year over year when adjusted for currency and HPE Aruba Services revenue was up 16% year over year when adjusted for currency.
  • Hybrid IT revenue was $5.5 billion, with 12.7% operating margin, up 250 bps year over year. Mix-shift continues towards HPE’s higher-margin value products with revenue from High-Performance Compute up 2% year over year when adjusted for currency, Composable Cloud up 28% year over year when adjusted for currency, and Hyperconverged Infrastructure showing continued momentum, up 4% year over year when adjusted for currency. HPE Nimble Storage was up 21% year over year when adjusted for currency. HPE Pointnext operational services orders and Nimble services orders were up 3% year over year when adjusted for currency.
  • Financial Services revenue was $888 million, with 8.7% operating margin, up 90 bps year over year. Net portfolio assets were up 2% year over year when adjusted for currency, and financing volume was up 5% year over year when adjusted for currency. The business delivered return on equity of 15.8%, up 350 bps from the prior-year period.


FY2019 GAAP Outlook


For the fiscal 2019 fourth quarter, Hewlett Packard Enterprise estimates GAAP diluted net EPS to be in the range of $0.24 to $0.28. For fiscal 2019 full-year Hewlett Packard Enterprise now estimates GAAP diluted net EPS to be in the range of $0.65 to $0.69 due to a one-time arbitration award to DXC.


Raised FY2019 Non-GAAP Outlook


For the fiscal 2019 fourth quarter, Hewlett Packard Enterprise estimates non-GAAP diluted net EPS to be in the range of $0.43 to $0.47. Fiscal 2019 fourth quarter non-GAAP diluted net EPS estimates exclude after-tax costs of approximately $0.19 per diluted share, primarily related to transformation costs and the amortization of intangible assets.


For fiscal 2019 full-year, Hewlett Packard Enterprise now estimates non-GAAP diluted net EPS to be in the range of $1.72 to $1.76. Fiscal 2019 non-GAAP diluted net EPS estimates exclude after-tax costs of approximately $1.07 per diluted share, primarily related to acquisition, disposition, and other related charges, transformation costs, an adjustment to earnings from equity interest, and the amortization of intangible assets.


FY2019 Free Cash Flow Outlook


For fiscal 2019 full-year, Hewlett Packard Enterprise reiterates free cash flow guidance range of $1.4 to $1.6 billion, up over 35% at the mid-point from the prior year.


Hewlett Packard Enterprise provides certain guidance on a non-GAAP basis, as the company cannot predict some elements that are included in reported GAAP results. Refer to the discussion of non-GAAP financial measures below for more information.


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 Enterprise’s condensed consolidated financial statement information presented on a generally accepted accounting principles (GAAP) basis, Hewlett Packard Enterprise provides revenue on a constant currency basis 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 earnings from discontinued operations, non-GAAP diluted net earnings per share from continuing operations, non-GAAP diluted net 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 Enterprise’s management uses these non-GAAP measures to evaluate its business, the substance behind Hewlett Packard Enterprise’s 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 Enterprise’s management compensates for those limitations, and the substantive reasons why Hewlett Packard Enterprise’s 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 earnings from discontinued operations, diluted net earnings per share from continuing operations, diluted net earnings per share from discontinued operations, cash, cash equivalents and restricted cash, 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, the impact of the U.S. Tax Cuts and Jobs Act of 2017, net earnings, net earnings per share, cash flows, benefit plan funding, deferred tax assets, share repurchases, currency exchange rates or other financial items; 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, as well as the execution of corporate transactions or contemplated acquisitions, transformation and restructuring plans and any resulting benefit, cost savings, 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 Enterprise’s businesses; the competitive pressures faced by Hewlett Packard Enterprise’s businesses; risks associated with executing Hewlett Packard Enterprise’s strategy; the impact of macroeconomic and geopolitical trends and events; the need to manage third-party suppliers and the distribution of Hewlett Packard Enterprise’s products and the delivery of Hewlett Packard Enterprise’s services effectively; the protection of Hewlett Packard Enterprise’s intellectual property assets, including intellectual property licensed from third parties and intellectual property shared with its former Parent; 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, clients and partners; the hiring and retention of key employees; execution, integration and other risks associated with business combination and investment transactions; and the execution, timing and results of any transformation or restructuring plans, including estimates and assumptions related to the cost (including any possible disruption of Hewlett Packard Enterprise's business) and the anticipated benefits of the transformation and restructuring plans; the effects of the U.S. Tax Cuts and Jobs Act and related guidance and regulations; 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, 2018.


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 third quarter ended July 31, 2019. 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

 

 

July 31,
2019

 

April 30,
2019

 

July 31,
2018

Net revenue(a)

 

$

7,217

 

 

$

7,150

 

 

$

7,764

 

Costs and expenses:

 

 

 

 

 

 

Cost of sales

 

4,768

 

 

4,845

 

 

5,399

 

Research and development

 

481

 

 

457

 

 

435

 

Selling, general and administrative

 

1,253

 

 

1,214

 

 

1,221

 

Amortization of intangible assets

 

58

 

 

69

 

 

72

 

Restructuring charges

 

 

 

 

 

(1)

 

Transformation costs

 

170

 

 

54

 

 

126

 

Disaster charges

 

 

 

(7)

 

 

 

Acquisition, disposition and other related charges(b)

 

563

 

 

84

 

 

24

 

Separation costs

 

 

 

 

 

(2)

 

Total costs and expenses

 

7,293

 

 

6,716

 

 

7,274

 

(Loss) earnings from continuing operations

 

(76)

 

 

434

 

 

490

 

Interest and other, net

 

(70)

 

 

(18)

 

 

(64)

 

Tax indemnification adjustments(c)

 

(134)

 

 

4

 

 

2

 

Non-service net periodic benefit credit(d)

 

12

 

 

17

 

 

26

 

Earnings from equity interests

 

3

 

 

3

 

 

11

 

(Loss) earnings from continuing operations before taxes

 

(265)

 

 

440

 

 

465

 

Benefit (provision) for taxes(e)

 

238

 

 

(21)

 

 

(13)

 

Net (loss) earnings from continuing operations

 

(27)

 

 

419

 

 

452

 

Net loss from discontinued operations

 

 

 

 

 

(1)

 

Net (loss) earnings

 

$

(27)

 

 

$

419

 

 

$

451

 

Net (loss) earnings per share:

 

 

 

 

 

 

Basic

 

 

 

 

 

 

Continuing operations

 

$

(0.02)

 

 

$

0.31

 

 

$

0.30

 

Discontinued operations

 

 

 

 

 

 

Total basic net (loss) earnings per share

 

$

(0.02)

 

 

$

0.31

 

 

$

0.30

 

Diluted

 

 

 

 

 

 

Continuing operations

 

$

(0.02)

 

 

$

0.30

 

 

$

0.29

 

Discontinued operations

 

 

 

 

 

 

Total diluted net (loss) earnings per share

 

$

(0.02)

 

 

$

0.30

 

 

$

0.29

 

Cash dividends declared per share

 

$

0.1125

 

 

$

0.1125

 

 

$

0.1125

 

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

 

 

 

 

 

 

Basic

 

1,334

 

 

1,367

 

 

1,513

 

Diluted

 

1,334

 

 

1,382

 

 

1,531

 



HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)

(In millions, except per share amounts)

 

 

 

 

 

Nine months ended July 31,

 

 

2019

 

2018

Net revenue(a)

 

$

21,920

 

 

$

22,906

 

Costs and expenses:

 

 

 

 

Cost of sales

 

14,820

 

 

16,114

 

Research and development

 

1,404

 

 

1,227

 

Selling, general and administrative

 

3,678

 

 

3,684

 

Amortization of intangible assets

 

199

 

 

222

 

Restructuring charges

 

 

 

14

 

Transformation costs

 

302

 

 

491

 

Disaster charges

 

(7)

 

 

 

Acquisition, disposition and other related charges(b)

 

710

 

 

70

 

Total costs and expenses

 

21,106

 

 

21,822

 

Earnings from continuing operations

 

814

 

 

1,084

 

Interest and other, net

 

(139)

 

 

(163)

 

Tax indemnification adjustments(c)

 

89

 

 

(1,342)

 

Non-service net periodic benefit credit(d)

 

45

 

 

90

 

Earnings from equity interests

 

21

 

 

23

 

Earnings (loss) from continuing operations before taxes

 

830

 

 

(308)

 

(Provision) benefit for taxes(e)

 

(261)

 

 

3,092

 

Net earnings from continuing operations

 

569

 

 

2,784

 

Net loss from discontinued operations

 

 

 

(119)

 

Net earnings

 

$

569

 

 

$

2,665

 

Net earnings (loss) per share:

 

 

 

 

Basic

 

 

 

 

Continuing operations

 

$

0.42

 

 

$

1.79

 

Discontinued operations

 

 

 

(0.07)

 

Total basic net earnings per share

 

$

0.42

 

 

$

1.72

 

Diluted

 

 

 

 

Continuing operations

 

$

0.41

 

 

$

1.76

 

Discontinued operations

 

 

 

(0.07)

 

Total diluted net earnings per share

 

$

0.41

 

 

$

1.69

 

Cash dividends declared per share

 

$

0.3375

 

 

$

0.3750

 

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

 

 

 

 

Basic

 

1,367

 

 

1,552

 

Diluted

 

1,380

 

 

1,578

 



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 July 31,
2019

 

Diluted net
earnings
per share

 

Three months
ended
April 30, 2019

 

Diluted net
earnings
per share

 

Three months
ended July 31,
2018

 

Diluted net
earnings
per share

GAAP net (loss) earnings from continuing operations

 

$

(27)

 

 

$

(0.02)

 

 

$

419

 

 

$

0.30

 

 

$

452

 

 

$

0.29

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-GAAP adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of intangible assets

 

58

 

 

0.04

 

 

69

 

 

0.05

 

 

72

 

 

0.05

 

Restructuring charges(d)

 

 

 

 

 

 

 

 

 

(1)

 

 

 

Transformation costs(d)

 

170

 

 

0.13

 

 

54

 

 

0.04

 

 

126

 

 

0.08

 

Disaster charges

 

 

 

 

 

(7)

 

 

(0.01)

 

 

 

 

 

Acquisition, disposition and other related charges(b)

 

563

 

 

0.42

 

 

84

 

 

0.06

 

 

24

 

 

0.02

 

Separation costs(d)

 

 

 

 

 

 

 

 

 

(2)

 

 

 

Tax indemnification adjustments(c)

 

134

 

 

0.10

 

 

(4)

 

 

 

 

(2)

 

 

 

Non-service net periodic benefit credit(d)

 

(12)

 

 

(0.01)

 

 

(17)

 

 

(0.01)

 

 

(26)

 

 

(0.02)

 

Loss from equity interests(f)

 

38

 

 

0.03

 

 

38

 

 

0.03

 

 

38

 

 

0.02

 

Adjustments for taxes(e)(g)

 

(321)

 

 

(0.24)

 

 

(57)

 

 

(0.04)

 

 

(42)

 

 

(0.02)

 

Non-GAAP net earnings from continuing operations

 

$

603

 

 

$

0.45

 

 

$

579

 

 

$

0.42

 

 

$

639

 

 

$

0.42

 

 

 

 

 

 

 

 

 

 

 

 

 

 

GAAP (loss) earnings from continuing operations

 

$

(76)

 

 

 

 

$

434

 

 

 

 

$

490

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-GAAP adjustments related to continuing operations:

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of intangible assets

 

58

 

 

 

 

69

 

 

 

 

72

 

 

 

Restructuring charges(d)

 

 

 

 

 

 

 

 

 

(1)

 

 

 

Transformation costs(d)

 

170

 

 

 

 

54

 

 

 

 

126

 

 

 

Disaster charges

 

 

 

 

 

(7)

 

 

 

 

 

 

 

Acquisition, disposition and other related charges(b)

 

563

 

 

 

 

84

 

 

 

 

24

 

 

 

Separation costs(d)

 

 

 

 

 

 

 

 

 

(2)

 

 

 

Non-GAAP earnings from continuing operations

 

$

715

 

 

 

 

$

634

 

 

 

 

$

709

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

GAAP operating margin from continuing operations

 

(1)%

 

 

 

 

6%

 

 

 

 

6%

 

 

 

Non-GAAP adjustments from continuing operations

 

11%

 

 

 

 

3%

 

 

 

 

3%

 

 

 

Non-GAAP operating margin from continuing operations

 

10%

 

 

 

 

9%

 

 

 

 

9%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

GAAP net loss from discontinued operations

 

$

 

 

$

 

 

$

 

 

$

 

 

$

(1)

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-GAAP adjustments related to discontinued operations:

 

 

 

 

 

 

 

 

 

 

 

 

Adjustments for taxes

 

 

 

 

 

 

 

 

 

1

 

 

 

Non-GAAP net earnings from discontinued operations

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total GAAP net (loss) earnings

 

$

(27)

 

 

$

(0.02)

 

 

$

419

 

 

$

0.30

 

 

$

451

 

 

$

0.29

 

Total Non-GAAP net earnings

 

$

603

 

 

$

0.45

 

 

$

579

 

 

$

0.42

 

 

$

639

 

 

$

0.42

 



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)

 

 

 

 

 

 

 

 

 

 

 

Nine months
ended July 31,
2019

 

Diluted net
earnings per
share

 

Nine months
ended July 31,
2018

 

Diluted net
earnings per
share

GAAP net earnings from continuing operations

 

$

569

 

 

$

0.41

 

 

$

2,784

 

 

$

1.76

 

 

 

 

 

 

 

 

 

 

Non-GAAP adjustments:

 

 

 

 

 

 

 

 

Amortization of intangible assets

 

199

 

 

0.14

 

 

222

 

 

0.14

 

Restructuring charges(d)

 

 

 

 

 

14

 

 

0.01

 

Transformation costs(d)

 

302

 

 

0.22

 

 

491

 

 

0.31

 

Disaster charges

 

(7)

 

 

(0.01)

 

 

 

 

 

Acquisition, disposition and other related charges(b)

 

710

 

 

0.51

 

 

70

 

 

0.04

 

Tax indemnification adjustments(c)

 

(89)

 

 

(0.06)

 

 

1,342

 

 

0.86

 

Non-service net periodic benefit credit(d)

 

(45)

 

 

(0.03)

 

 

(90)

 

 

(0.06)

 

Loss from equity interests(f)

 

114

 

 

0.08

 

 

113

 

 

0.07

 

Adjustments for taxes(e)(g)

 

19

 

 

0.02

 

 

(3,281)

 

 

(2.07)

 

Non-GAAP net earnings from continuing operations

 

$

1,772

 

 

$

1.28

 

 

$

1,665

 

 

$

1.06

 

 

 

 

 

 

 

 

 

 

GAAP earnings from continuing operations

 

$

814

 

 

 

 

$

1,084

 

 

 

 

 

 

 

 

 

 

 

 

Non-GAAP adjustments related to continuing operations:

 

 

 

 

 

 

 

 

Amortization of intangible assets

 

199

 

 

 

 

222

 

 

 

Restructuring charges(d)

 

 

 

 

 

14

 

 

 

Transformation costs(d)

 

302

 

 

 

 

491

 

 

 

Disaster charges

 

(7)

 

 

 

 

 

 

 

Acquisition, disposition and other related charges(b)

 

710

 

 

 

 

70

 

 

 

Non-GAAP earnings from continuing operations

 

$

2,018

 

 

 

 

$

1,881

 

 

 

 

 

 

 

 

 

 

 

 

GAAP operating margin from continuing operations

 

4%

 

 

 

 

5%

 

 

 

Non-GAAP adjustments from continuing operations

 

5%

 

 

 

 

3%

 

 

 

Non-GAAP operating margin from continuing operations

 

9%

 

 

 

 

8%

 

 

 

 

 

 

 

 

 

 

 

 

GAAP net loss from discontinued operations

 

$

 

 

$

 

 

$

(119)

 

 

$

(0.07)

 

 

 

 

 

 

 

 

 

 

Non-GAAP adjustments related to discontinued operations:

 

 

 

 

 

 

 

 

Separation costs

 

 

 

 

 

51

 

 

0.03

 

Tax indemnification adjustments(c)

 

 

 

 

 

68

 

 

0.04

 

Non-GAAP net earnings from discontinued operations

 

$

 

 

$

 

 

$

 

 

$

 

 

 

 

 

 

 

 

 

 

Total GAAP net earnings

 

$

569

 

 

$

0.41

 

 

$

2,665

 

 

$

1.69

 

Total Non-GAAP net earnings

 

$

1,772

 

 

$

1.28

 

 

$

1,665

 

 

$

1.06

 



HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In millions, except par value)

 

 

 

 

 

As of

 

 

July 31, 2019

 

October 31, 2018

ASSETS

 

 

 

 

Current assets:

 

 

 

 

Cash and cash equivalents

 

$

3,693

 

 

$

4,880

 

Accounts receivable

 

2,965

 

 

3,263

 

Financing receivables

 

3,567

 

 

3,396

 

Inventory

 

2,216

 

 

2,447

 

Assets held for sale

 

52

 

 

6

 

Other current assets(h)

 

2,624

 

 

3,280

 

Total current assets

 

15,117

 

 

17,272

 

Property, plant and equipment

 

6,000

 

 

6,138

 

Long-term financing receivables and other assets

 

9,092

 

 

11,359

 

Investments in equity interests

 

2,346

 

 

2,398

 

Goodwill and intangible assets

 

18,205

 

 

18,326

 

Total assets

 

$

50,760

 

 

$

55,493

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

Current liabilities:

 

 

 

 

Notes payable and short-term borrowings

 

$

2,207

 

 

$

2,005

 

Accounts payable

 

5,203

 

 

6,092

 

Employee compensation and benefits

 

1,454

 

 

1,412

 

Taxes on earnings

 

160

 

 

378

 

Deferred revenue

 

3,225

 

 

3,177

 

Accrued restructuring

 

223

 

 

294

 

Other accrued liabilities

 

4,686

 

 

3,840

 

Total current liabilities

 

17,158

 

 

17,198

 

Long-term debt

 

10,453

 

 

10,136

 

Other non-current liabilities

 

5,569

 

 

6,885

 

Stockholders’ equity

 

 

 

 

HPE stockholders’ equity:

 

 

 

 

Preferred stock, $0.01 par value (300 shares authorized; none issued and outstanding at July 31, 2019)

 

 

 

 

Common stock, $0.01 par value (9,600 shares authorized; 1,310 and 1,423 shares issued and outstanding at July 31, 2019 and October 31, 2018, respectively)

 

13

 

 

14

 

Additional paid-in capital

 

28,629

 

 

30,342

 

Accumulated deficit(j)

 

(7,959)

 

 

(5,899)

 

Accumulated other comprehensive loss

 

(3,150)

 

 

(3,218)

 

Total HPE stockholders’ equity

 

17,533

 

 

21,239

 

Non-controlling interests

 

47

 

 

35

 

Total stockholders’ equity

 

17,580

 

 

21,274

 

Total liabilities and stockholders’ equity

 

$

50,760

 

 

$

55,493

 



HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In millions)

 

 

Three months ended
July 31, 2019

 

Nine months ended
July 31, 2019

Cash flows from operating activities:

 

 

 

 

Net earnings

 

$

(27)

 

 

$

569

 

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

 

 

 

 

Depreciation and amortization

 

632

 

 

1,919

 

Stock-based compensation expense

 

58

 

 

207

 

Provision for doubtful accounts and inventory

 

63

 

 

181

 

Restructuring charges

 

94

 

 

146

 

Deferred taxes on earnings

 

541

 

 

885

 

Earnings from equity interests

 

(3)

 

 

(21)

 

Dividends received from equity investees

 

71

 

 

71

 

Other, net

 

89

 

 

134

 

Changes in operating assets and liabilities, net of acquisitions:

 

 

 

 

Accounts receivable

 

172

 

 

315

 

Financing receivables

 

(293)

 

 

(325)

 

Inventory

 

(87)

 

 

66

 

Accounts payable

 

(261)

 

 

(826)

 

Taxes on earnings

 

(936)

 

 

(1,121)

 

Restructuring

 

(63)

 

 

(261)

 

Other assets and liabilities

 

1,146

 

 

626

 

Net cash provided by operating activities

 

1,196

 

 

2,565

 

Cash flows from investing activities:

 

 

 

 

Investment in property, plant and equipment

 

(625)

 

 

(2,153)

 

Proceeds from sale of property, plant and equipment

 

77

 

 

448

 

Purchases of available-for-sale securities and other investments

 

(8)

 

 

(33)

 

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

 

10

 

 

12

 

Financial collateral posted

 

(17)

 

 

(332)

 

Financial collateral returned

 

233

 

 

740

 

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

 

(5)

 

 

(81)

 

Net cash used in investing activities

 

(335)

 

 

(1,399)

 

Cash flows from financing activities:

 

 

 

 

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

 

 

 

25

 

Proceeds from debt, net of issuance costs

 

385

 

 

1,010

 

Payment of debt

 

(312)

 

 

(872)

 

Net proceeds related to stock-based award activities

 

15

 

 

24

 

Repurchase of common stock

 

(577)

 

 

(1,965)

 

Cash dividends paid

 

(150)

 

 

(461)

 

Net cash used in financing activities

 

(639)

 

 

(2,239)

 

Increase (decrease) in cash, cash equivalents and restricted cash

 

222

 

 

(1,073)

 

Cash, cash equivalents and restricted cash at beginning of period

 

3,789

 

 

5,084

 

Cash, cash equivalents and restricted cash at end of period(h)

 

$

4,011

 

 

$

4,011

 



HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

SEGMENT INFORMATION

(Unaudited)

(In millions)

 

 

 

 

 

Three months ended

 

 

July 31,
2019

 

April 30,
2019

 

July 31,
2018

Net revenue:(a)(i)

 

 

 

 

 

 

Hybrid IT

 

$

5,549

 

 

$

5,636

 

 

$

6,109

 

Intelligent Edge

 

762

 

 

666

 

 

785

 

Financial Services

 

888

 

 

896

 

 

928

 

Corporate Investments

 

130

 

 

125

 

 

134

 

Total segment net revenue

 

7,329

 

 

7,323

 

 

7,956

 

Elimination of intersegment net revenue and other

 

(112)

 

 

(173)

 

 

(192)

 

Total Hewlett Packard Enterprise consolidated net revenue

 

$

7,217

 

 

$

7,150

 

 

$

7,764

 

 

 

 

 

 

 

 

Earnings from continuing operations before taxes:(d)(i)

 

 

 

 

 

 

Hybrid IT

 

$

704

 

 

$

645

 

 

$

624

 

Intelligent Edge

 

37

 

 

20

 

 

101

 

Financial Services

 

77

 

 

77

 

 

72

 

Corporate Investments

 

(25)

 

 

(29)

 

 

(25)

 

Total segment earnings from operations

 

793

 

 

713

 

 

772

 

 

 

 

 

 

 

 

Unallocated corporate costs and eliminations(d)

 

(65)

 

 

(64)

 

 

(49)

 

Unallocated stock-based compensation expense

 

(13)

 

 

(15)

 

 

(14)

 

Amortization of intangible assets

 

(58)

 

 

(69)

 

 

(72)

 

Restructuring charges(d)

 

 

 

 

 

1

 

Transformation costs(d)

 

(170)

 

 

(54)

 

 

(126)

 

Disaster charges

 

 

 

7

 

 

 

Acquisition, disposition and other related charges(b)

 

(563)

 

 

(84)

 

 

(24)

 

Separation costs(d)

 

 

 

 

 

2

 

Interest and other, net

 

(70)

 

 

(18)

 

 

(64)

 

Tax indemnification adjustments(c)

 

(134)

 

 

4

 

 

2

 

Non-service net periodic benefit credit(d)

 

12

 

 

17

 

 

26

 

Earnings from equity interests

 

3

 

 

3

 

 

11

 

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

 

$

(265)

 

 

$

440

 

 

$

465

 



HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

SEGMENT INFORMATION

(Unaudited)

(In millions)

 

 

 

 

 

Nine months ended July 31,

 

 

2019

 

2018

Net revenue:(a)(i)

 

 

 

 

Hybrid IT

 

$

17,155

 

 

$

18,160

 

Intelligent Edge

 

2,114

 

 

2,147

 

Financial Services

 

2,703

 

 

2,732

 

Corporate Investments

 

373

 

 

404

 

Total segment net revenue

 

22,345

 

 

23,443

 

Elimination of intersegment net revenue and other

 

(425)

 

 

(537)

 

Total Hewlett Packard Enterprise consolidated net revenue

 

$

21,920

 

 

$

22,906

 

 

 

 

 

 

Earnings from continuing operations before taxes:(d)(i)

 

 

 

 

Hybrid IT

 

$

2,024

 

 

$

1,787

 

Intelligent Edge

 

66

 

 

191

 

Financial Services

 

231

 

 

215

 

Corporate Investments

 

(82)

 

 

(79)

 

Total segment earnings from operations

 

2,239

 

 

2,114

 

 

 

 

 

 

Unallocated corporate costs and eliminations(d)

 

(179)

 

 

(169)

 

Unallocated stock-based compensation expense

 

(42)

 

 

(64)

 

Amortization of intangible assets

 

(199)

 

 

(222)

 

Restructuring charges(d)

 

 

 

(14)

 

Transformation costs(d)

 

(302)

 

 

(491)

 

Disaster charges

 

7

 

 

 

Acquisition, disposition and other related charges(b)

 

(710)

 

 

(70)

 

Interest and other, net

 

(139)

 

 

(163)

 

Tax indemnification adjustments(c)

 

89

 

 

(1,342)

 

Non-service net periodic benefit credit(d)

 

45

 

 

90

 

Earnings from equity interests

 

21

 

 

23

 

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

 

$

830

 

 

$

(308)

 



HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

SEGMENT/BUSINESS UNIT INFORMATION

(Unaudited)

(In millions, except percentages)

 

 

 

 

 

 

 

Three months ended

 

Change (%)

 

 

July 31,
2019

 

April 30,
2019

 

July 31,
2018

 

Q/Q

 

Y/Y

Net revenue:(a)(i)

 

 

 

 

 

 

 

 

 

 

Hybrid IT

 

 

 

 

 

 

 

 

 

 

Hybrid IT Product

 

 

 

 

 

 

 

 

 

 

Compute

 

$

3,151

 

 

$

3,093

 

 

$

3,569

 

 

2%

 

 

(12%)

 

Storage

 

844

 

 

942

 

 

887

 

 

(10%)

 

 

(5%)

 

Total Hybrid IT Product

 

3,995

 

 

4,035

 

 

4,456

 

 

(1%)

 

 

(10%)

 

HPE Pointnext

 

1,554

 

 

1,601

 

 

1,653

 

 

(3%)

 

 

(6%)

 

Total Hybrid IT

 

5,549

 

 

5,636

 

 

6,109

 

 

(2%)

 

 

(9%)

 

Intelligent Edge

 

 

 

 

 

 

 

 

 

 

HPE Aruba Product

 

668

 

 

577

 

 

703

 

 

16%

 

 

(5%)

 

HPE Aruba Services

 

94

 

 

89

 

 

82

 

 

6%

 

 

15%

 

Total Intelligent Edge

 

762

 

 

666

 

 

785

 

 

14%

 

 

(3%)

 

Financial Services

 

888

 

 

896

 

 

928

 

 

(1%)

 

 

(4%)

 

Corporate Investments

 

130

 

 

125

 

 

134

 

 

4%

 

 

(3%)

 

Total segment net revenue

 

7,329

 

 

7,323

 

 

7,956

 

 

—%

 

 

(8%)

 

Elimination of intersegment net revenue and other

 

(112)

 

 

(173)

 

 

(192)

 

 

(35%)

 

 

(42%)

 

Total Hewlett Packard Enterprise consolidated net revenue

 

$

7,217

 

 

$

7,150

 

 

$

7,764

 

 

1%

 

 

(7%)

 



HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

SEGMENT/BUSINESS UNIT INFORMATION

(Unaudited)

(In millions, except percentages)

 

 

 

 

 

Nine months ended July 31,

 

 

2019

 

2018

 

Y/Y

Net revenue:(a)(i)

 

 

 

 

 

 

Hybrid IT

 

 

 

 

 

 

Hybrid IT Product

 

 

 

 

 

 

Compute

 

$

9,646

 

 

$

10,350

 

 

(7%)

 

Storage

 

2,761

 

 

2,747

 

 

1%

 

Total Hybrid IT Product

 

12,407

 

 

13,097

 

 

(5%)

 

HPE Pointnext

 

4,748

 

 

5,063

 

 

(6%)

 

Total Hybrid IT

 

17,155

 

 

18,160

 

 

(6%)

 

Intelligent Edge

 

 

 

 

 

 

HPE Aruba Product

 

1,842

 

 

1,914

 

 

(4%)

 

HPE Aruba Services

 

272

 

 

233

 

 

17%

 

Total Intelligent Edge

 

2,114

 

 

2,147

 

 

(2%)

 

Financial Services

 

2,703

 

 

2,732

 

 

(1%)

 

Corporate Investments

 

373

 

 

404

 

 

(8%)

 

Total segment net revenue

 

22,345

 

 

23,443

 

 

(5%)

 

Elimination of intersegment net revenue and other

 

(425)

 

 

(537)

 

 

(21%)

 

Total Hewlett Packard Enterprise consolidated net revenue

 

$

21,920

 

 

$

22,906

 

 

(4%)

 



HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

SEGMENT OPERATING MARGIN SUMMARY DATA

(Unaudited)

 

 

 

 

 

 

 

Three months ended

 

Change in Operating
Margin (pts)

 

 

July 31, 2019

 

Q/Q

 

Y/Y

Segment operating margin:(d)(i)

 

 

 

 

 

 

Hybrid IT

 

12.7%

 

 

1.3 pts

 

2.5 pts

Intelligent Edge

 

4.9%

 

 

1.9 pts

 

(8.0) pts

Financial Services

 

8.7%

 

 

0.1 pts

 

0.9 pts

Corporate Investments

 

(19.2)%

 

 

4.0 pts

 

(0.6) pts

Total segment operating margin

 

10.8%

%

 

1.1 pts

 

1.1 pts



HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

CALCULATION OF DILUTED NET EARNINGS (LOSS) PER SHARE

(Unaudited)

(In millions, except per share amounts)

 

 

Three months ended

 

 

July 31,

 

April 30,

 

July 31,

   

2019

 

2019

 

2018

Numerator:

 

 

 

 

 

 

GAAP net (loss) earnings from continuing operations

 

$

(27)

 

 

$

419

 

 

$

452

 

GAAP net loss from discontinued operations

 

$

 

 

$

 

 

$

(1)

 

Non-GAAP net earnings from continuing operations

 

$

603

 

 

$

579

 

 

$

639

 

Non-GAAP net earnings from discontinued operations

 

$

 

 

$

 

 

$

 

                         

Denominator:

 

 

 

 

 

 

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

 

1,334

 

 

1,367

 

 

1,513

 

Dilutive effect of employee stock plans(k)

 

 

 

15

 

 

18

 

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

 

1,334

 

 

1,382

 

 

1,531

 

                   

GAAP net (loss) earnings per share from continuing operations

 

 

 

 

 

 

Basic

 

$

(0.02)

 

 

$

0.31

 

 

$

0.30

 

Diluted(k)

 

$

(0.02)

 

 

$

0.30

 

 

$

0.29

 

                         

GAAP net loss per share from discontinued operations

 

 

 

 

 

 

Basic

 

$

 

 

$

 

 

$

 

Diluted

 

$

 

 

$

 

 

$

 

                         

Non-GAAP net earnings per share from continuing operations

 

 

 

 

 

 

Basic

 

$

0.45

 

 

$

0.42

 

 

$

0.42

 

Diluted(l)

 

$

0.45

 

 

$

0.42

 

 

$

0.42

 

                         

Non-GAAP net earnings per share from discontinued operations

 

 

 

 

 

 

Basic

 

$

 

 

$

 

 

$

 

Diluted

 

$

 

 

$

 

 

$

 

                         

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

 

$

(0.02)

 

 

$

0.31

 

 

$

0.30

 

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

 

$

(0.02)

 

 

$

0.30

 

 

$

0.29

 

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

 

$

0.45

 

 

$

0.42

 

 

$

0.42

 

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

 

$

0.45

 

 

$

0.42

 

 

$

0.42

 



HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

CALCULATION OF DILUTED NET EARNINGS (LOSS) PER SHARE

(Unaudited)

(In millions, except per share amounts)

 

 

 

 

 

Nine months ended July 31,

 

 

2019

 

2018

Numerator:

 

 

 

 

GAAP net earnings from continuing operations

 

$

569

 

 

$

2,784

 

GAAP net loss from discontinued operations

 

$

 

 

$

(119)

 

Non-GAAP net earnings from continuing operations

 

$

1,772

 

 

$

1,665

 

Non-GAAP net earnings from discontinued operations

 

$

 

 

$

 

 

 

 

 

 

Denominator:

 

 

 

 

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

 

1,367

 

 

1,552

 

Dilutive effect of employee stock plans(k)

 

13

 

 

26

 

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

 

1,380

 

 

1,578

 

 

 

 

 

 

GAAP net earnings per share from continuing operations

 

 

 

 

Basic

 

$

0.42

 

 

$

1.79

 

Diluted(k)

 

$

0.41

 

 

$

1.76

 

 

 

 

 

 

GAAP net loss per share from discontinued operations

 

 

 

 

Basic

 

$

 

 

$

(0.07)

 

Diluted(m)

 

$

 

 

$

(0.07)

 

 

 

 

 

 

Non-GAAP net earnings per share from continuing operations

 

 

 

 

Basic

 

$

1.30

 

 

$

1.07

 

Diluted(l)

 

$

1.28

 

 

$

1.06

 

 

 

 

 

 

Non-GAAP net earnings per share from discontinued operations

 

 

 

 

Basic

 

$

 

 

$

 

Diluted

 

$

 

 

$

 

 

 

 

 

 

Total Hewlett Packard Enterprise GAAP basic net earnings per share

 

$

0.42

 

 

$

1.72

 

Total Hewlett Packard Enterprise GAAP diluted net earnings per share

 

$

0.41

 

 

$

1.69

 

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

 

$

1.30

 

 

$

1.07

 

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

 

$

1.28

 

 

$

1.06

 

 

(a)  

The Company adopted the new revenue recognition accounting standard (ASC 606) on a modified retrospective basis effective the first quarter of fiscal 2019. Fiscal 2019 results are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported under the prior revenue recognition accounting standard (ASC 605).

   

 

(b)  

For the three and nine months ended July 31, 2019, this amount primarily included a charge related to a one-time arbitration settlement.

   

 

(c)  

For the three and nine months ended July 31, 2019, the amount was due primarily from the effective settlement of the U.S. federal income tax audit of fiscal years 2013 through 2015 for HP Inc. The nine month period ended July 31, 2019 also included the effects of U.S. tax reform on tax attributes related to fiscal periods prior to the Separation.

   

 

   

For the nine months ended July 31, 2018 this amount primarily represents the settlement of certain pre-separation Hewlett-Packard Company income tax liabilities indemnified through the Tax Matters Agreement with HP Inc.

   

 

(d)  

Effective at the beginning of the first quarter of fiscal 2019, subsequent to the adoption of the accounting standards update for retirement benefits (Topic 715), the Company reclassified its non-service net periodic benefit credit from operating expense to other income and expense in its Condensed Consolidated Statements of Earnings. The Company reflected these changes retrospectively, by transferring the non-service net periodic benefit credit, a portion of which was previously allocated to the segments, and the remainder of which was reported within Unallocated corporate costs and eliminations, Transformation costs, Restructuring charges and Separation costs, to Non-service net periodic benefit credit as other income and expense for periods in fiscal 2018.

   

 

   

These changes had no impact on Hewlett Packard Enterprise's previously reported condensed consolidated GAAP net earnings, non-GAAP net earnings, GAAP net earnings per share, or non-GAAP net earnings per share.

   

 

(e)  

For the three and nine months ended July 31, 2019, the amounts included $308 million and $264 million, respectively, of income tax benefits related to the change in pre- Separation tax liabilities for which the Company shares joint and several liability with HP Inc. and for which the Company is partially indemnified by HP Inc. under the Tax Matters Agreement. The nine month period also included $365 million of income tax charges, related to changes in U.S. federal and state valuation allowances as a result of impacts of the Tax Act and $75 million of income tax benefits on transformation costs and acquisition, disposition and other related charges.

   

 

   

For the nine months ended July 31, 2018, this amount includes a $2.0 billion benefit in connection with the settlement of certain pre-separation Hewlett-Packard Company income tax liabilities indemnified through the Tax Matters Agreement with HP Inc., a $228 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, a $203 million benefit as a result of the liquidation of an insolvent non U.S. subsidiary, and 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.

   

 

(f)  

Represents the amortization of basis difference adjustments related to the H3C divestiture.

   

 

(g)  

Effective the first quarter of fiscal 2019, the Company uses a structural tax rate based on long-term non-GAAP financial projections.

   

 

(h)  

The Company adopted the guidance for the classification and presentation of restricted cash in the statement of cash flows in the first quarter of fiscal 2019, beginning November 1, 2018, using the retrospective method. As a result of the adoption of this accounting standard update, as of July 31, 2019, the restricted cash balance included in cash, cash equivalents and restricted cash as disclosed in the Statements of Cash Flows above was $318 million, which was included in Other current assets in the Condensed Consolidated Balance Sheets.

   

 

(i)  

Effective at the beginning of the first quarter of fiscal 2019, 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 data center networking ("DC Networking") business, which was previously reported within the Hybrid IT Product business unit in the Hybrid IT segment, to the HPE Aruba Product and HPE Aruba Services business units within the Intelligent Edge segment; (ii) the transfer of the edge compute business, which was previously reported within the HPE Aruba Product business unit in the Intelligent Edge segment, to the Hybrid IT Product business unit within the Hybrid IT segment; and (iii) the transfer of the Communications and Media Solutions ("CMS") business, which was previously reported within the HPE Pointnext business unit in the Hybrid IT segment, to the Corporate Investments segment.

   

 

   

The Company reflected these changes to its segment information retrospectively to the earliest period presented, which primarily resulted in the transfer of net revenue and operating profit for each of the businesses as described above.

   

 

   

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.

   

 

(j)  

The Company adopted the accounting standard update for income taxes related to intra-entity transfers of assets other than inventory, using the modified retrospective method. As a result, the Company recognized $2.3 billion of income taxes as an adjustment to accumulated deficit in the first quarter of fiscal 2019.

   

 

(k)  

GAAP diluted net earnings per share reflects any dilutive effect of restricted stock awards, stock options and performance-based awards, but the effect is excluded when calculating GAAP diluted net loss per share when it would be anti-dilutive.

   

 

(l)  

Non-GAAP diluted net earnings per share reflects any dilutive effect of restricted stock awards, stock options and performance-based awards.

   

 

(m)  

Earnings/loss per share for discontinued operations was calculated by deducting the earnings per share from continuing operations from the total earnings per share.

Use of non-GAAP financial measures

To supplement Hewlett Packard Enterprise’s condensed consolidated financial statement information presented on a GAAP basis, Hewlett Packard Enterprise provides revenue on a constant currency basis, 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 earnings from discontinued operations, non-GAAP diluted net earnings per share from continuing operations, non-GAAP diluted net 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 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 earnings from continuing operations. The GAAP measure most directly comparable to non-GAAP net earnings from discontinued operations is net earnings from discontinued operations. The GAAP measure most directly comparable to non-GAAP diluted net earnings per share from continuing operations is diluted net earnings per share from continuing operations. The GAAP measure most directly comparable to non-GAAP diluted net earnings per share from discontinued operations is diluted net 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. 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, disaster charges and acquisition, disposition and other related charges. Non-GAAP net earnings from continuing operations and non-GAAP diluted net earnings per share from continuing operations consist of net earnings or diluted net earnings per share excluding those same charges, as well as an adjustment to earnings in equity interests, non-service net periodic benefit credit, 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 earnings from discontinued operations and non-GAAP diluted net earnings per share from discontinued operations consist of net earnings from discontinued operations or diluted net 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 earnings from discontinued operations, non-GAAP diluted net earnings per share from continuing operations and non-GAAP diluted net 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 Enterprise’s management uses these non-GAAP financial measures for purposes of evaluating Hewlett Packard Enterprise’s historical and prospective financial performance, as well as Hewlett Packard Enterprise’s performance relative to its competitors. Hewlett Packard Enterprise’s management also uses these non-GAAP measures to further its own understanding of Hewlett Packard Enterprise’s segment operating performance. Hewlett Packard Enterprise believes that excluding the items mentioned above from these non-GAAP financial measures allows Hewlett Packard Enterprise’s management to better understand Hewlett Packard Enterprise’s consolidated financial performance in relation to the operating results of Hewlett Packard Enterprise’s segments, as Hewlett Packard Enterprise’s management does not believe that the excluded items are reflective of ongoing operating results. More specifically, Hewlett Packard Enterprise’s 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 Enterprise’s GAAP earnings from operations, operating margin, net earnings and diluted net earnings per share. Such charges are significantly impacted by the timing and magnitude of Hewlett Packard Enterprise’s 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 Enterprise’s current operating performance and comparisons to Hewlett Packard Enterprise’s 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 Enterprise’s current operating performance or comparisons to Hewlett Packard Enterprise’s 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 Enterprise’s current operating performance and comparisons to Hewlett Packard Enterprise’s operating performance in other periods.
  • 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 as well as any impairment charges on real- estate assets 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 Enterprise’s current operating performance and comparisons to Hewlett Packard Enterprise’s past operating performance.
  • Disaster charges represent costs related to the damages sustained as a result of Hurricane Harvey in Houston, Texas, which includes the deductible related to the Company's insurance program as well as an impairment of the Company's facilities. It also includes final insurance settlements received in connection with the damages sustained. Hewlett Packard Enterprise believes that eliminating these amounts for purposes of calculating non-GAAP operating profit facilitates a more meaningful evaluation of Hewlett Packard Enterprise’s current operating performance and comparisons to Hewlett Packard Enterprise’s operating performance in other periods.
  • Hewlett Packard Enterprise incurs costs related to its acquisitions, disposition and other related charges, 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. Charges may also include expenses associated with disposal activities including legal and arbitration settlements in connection with certain dispositions. 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 Enterprise’s 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 Enterprise’s current operating performance and comparisons to Hewlett Packard Enterprise’s past operating performance.
  • Adjustment to earnings 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 Enterprise’s current operating performance and comparisons to Hewlett Packard Enterprise’s operating performance in other periods.
  • Non-service net periodic benefit credit includes certain market-related factors such as (i) interest cost, (ii) expected return on plan assets, (iii) amortization of prior plan amendments, (iv) amortized actuarial gains or losses, (v) the impacts of any plan settlements/curtailments and (vi) impacts from other market-related factors associated with Hewlett Packard Enterprise's defined benefit pension and post-retirement benefit plans. These market-driven retirement-related adjustments are primarily due to the change in pension plan assets and liabilities which are tied to financial market performance. Hewlett Packard Enterprise excludes these adjustments and considers them to be outside the operational performance of the business.
  • 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 income or charges and the associated tax impact for the purpose of calculating these non-GAAP measures to facilitate a more meaningful evaluation of Hewlett Packard Enterprise’s current operating performance and comparisons to Hewlett Packard Enterprise’s operating performance in other periods.
  • Beginning the first quarter of fiscal 2019, the company utilizes a structural long-term projected non-GAAP tax rate in order to provide better consistency across the interim reporting periods and eliminates the effects of items such as changes in tax valuation allowance and tax effects of acquisitions and disposition related costs and transformation costs since each of these can vary in size and frequency. When projecting this long-term rate, the company evaluated a three-year financial projection that excludes the direct impact of the following non-cash items: amortization of purchased intangibles and adjustments related to equity method investments. The projected rate is not expected to change with the recently announced acquisition of Cray Inc. in fiscal 2020 and also assumes no incremental acquisitions in the three-year projection period, and considers other factors including the company’s expected tax structure, its tax positions in various jurisdictions and current impacts from key legislation implemented in major jurisdictions where the company operates. For fiscal 2019, the company will use a projected non-GAAP tax rate of 12%, which reflects currently available information, including the impact of the Tax Act and interpretations thereof, as well as other factors and assumptions. The non-GAAP tax rate could be subject to change for a variety of reasons, including the rapidly evolving global tax environment, significant changes in the company’s geographic earnings mix including due to acquisition activity, or other changes to the company’s strategy or business operations. The company will re-evaluate its long-term rate as appropriate. The company believes that making these adjustments facilitates a better evaluation of our current operating performance and comparisons to past operating results.
  • For periods presented in fiscal 2018, 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 Enterprise’s current operating performance and comparisons to Hewlett Packard Enterprise’s operating performance in other periods.
  • As a result of the 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 subsequent quarters, the Company recorded adjustments under SAB118 (which was completed in the first quarter of fiscal 2019) in connection with U.S. tax reform primarily related to transition tax and valuation allowances on certain U.S. tax credits. 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 Company’s current operating performance and comparisons to Hewlett Packard Enterprise’s 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 Enterprise’s stock price at the time an award is converted to a share of Hewlett Packard Enterprise’s 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 Enterprise’s current operating performance and comparisons to Hewlett Packard Enterprise’s 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 Enterprise’s results as reported under GAAP. Some of the limitations in relying on these non-GAAP financial measures are:

  • Amortization of intangible assets, though not directly affecting Hewlett Packard Enterprise’s 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 earnings from discontinued operations, non-GAAP diluted net earnings per share from continuing operations and non-GAAP diluted net 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, transformation costs and disaster charges 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 earnings from discontinued operations, non-GAAP diluted net earnings per share from continuing operations and non-GAAP diluted net earnings per share from discontinued operations can have a material impact on the equivalent GAAP earnings measure and cash flows.
  • Items such as adjustment to earnings from equity interests and non-service net periodic benefit credit that are excluded from non-GAAP net earnings from continuing operations, non-GAAP net earnings from discontinued operations, non-GAAP diluted net earnings per share from continuing operations and non-GAAP diluted net 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 from discontinued operations, non-GAAP diluted net earnings per share from continuing operations and non-GAAP diluted net earnings per share from discontinued operations can also have a material impact on the equivalent GAAP earnings measures 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 earnings from discontinued operations, non-GAAP diluted net earnings per share from continuing operations and non-GAAP diluted net 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 a 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, 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 earnings from discontinued operations, non-GAAP diluted net earnings per share from continuing operations, adjusted non-GAAP diluted net earnings per share and non-GAAP diluted net 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 Enterprise’s management in its financial and operational decision making and allows investors to see Hewlett Packard Enterprise’s results “through the eyes” of management. Hewlett Packard Enterprise further believes that providing this information better enables Hewlett Packard Enterprise’s investors to understand Hewlett Packard Enterprise’s operating performance and to evaluate the efficacy of the methodology and information used by Hewlett Packard Enterprise’s management to evaluate and measure such performance. Disclosure of these non-GAAP financial measures also facilitates comparisons of Hewlett Packard Enterprise’s operating performance with the performance of other companies in Hewlett Packard Enterprise’s industry that supplement their GAAP results with non-GAAP financial measures that may be calculated in a similar manner.

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