HPE Reports Q1 Results

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 or restructuring charges, 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 (including pandemics and public health problems, such as the outbreak of novel coronavirus (COVID-19)); 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, including any impact thereon resulting from events such as the coronavirus; 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, 2019.

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 first quarter ended January 31, 2020. 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
	January 31, 2020			October 31, 2019			January 31, 2019
Net revenue	$	6,949		$	7,215		$	7,553
Costs and expenses:
Cost of sales	4,667			4,822			5,207
Research and development	485			438			466
Selling, general and administrative	1,218			1,229			1,211
Amortization of intangible assets	120			68			72
Transformation costs	89			151			78
Acquisition, disposition and other related charges	22			47			63
Total costs and expenses	6,601			6,755			7,097
Earnings from operations	348			460			456
Interest and other, net	(19		)	(38		)	(51		)
Tax indemnification adjustments ^(a)	(21		)	288			219
Non-service net periodic benefit credit	37			14			16
Earnings (loss) from equity interests	33			(1		)	15
Earnings before taxes	378			723			655
Provision for taxes ^(b)	(45		)	(243		)	(478		)
Net earnings	$	333		$	480		$	177
Net earnings per share:
Basic	$	0.26		$	0.37		$	0.13
Diluted	$	0.25		$	0.36		$	0.13
Cash dividends declared per share	$	0.1200		$	0.1200		$	0.1125
Weighted-average shares used to compute net earnings per share:
Basic	1,300			1,308			1,401
Diluted	1,315			1,323			1,412

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 January 31, 2020			Diluted net earnings per share			Three months ended October 31, 2019			Diluted net earnings per share			Three months ended January 31, 2019			Diluted net earnings per share
GAAP net earnings	$	333		$	0.25		$	480		$	0.36		$	177		$	0.13

Non-GAAP adjustments:
Amortization of initial direct costs	3			—			—			—			—			—
Amortization of intangible assets	120			0.09			68			0.05			72			0.05
Transformation costs	89			0.07			151			0.11			78			0.06
Acquisition, disposition and other related charges	42			0.03			54			0.04			63			0.04
Tax indemnification adjustments ^(a)	21			0.02			(288		)	(0.22		)	(219		)	(0.16		)
Non-service net periodic benefit credit	(37		)	(0.03		)	(14		)	(0.01		)	(16		)	(0.01		)
Loss from equity interests ^(c)	37			0.03			38			0.03			38			0.03
Adjustments for taxes ^(b)(d)	(33		)	(0.02		)	155			0.13			397			0.28
Non-GAAP net earnings	$	575		$	0.44		$	644		$	0.49		$	590		$	0.42

GAAP earnings from operations	$	348					$	460					$	456

Non-GAAP adjustments
Amortization of initial direct costs	3						—						—
Amortization of intangible assets	120						68						72
Transformation costs	89						151						78
Acquisition, disposition and other related charges	42						54						63
Non-GAAP earnings from operations	$	602					$	733					$	669

GAAP operating margin	5		%				6		%				6		%
Non-GAAP adjustments	4		%				4		%				3		%
Non-GAAP operating margin	9		%				10		%				9		%

HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (In millions, except par value)

	As of
	January 31, 2020			October 31, 2019
ASSETS
Current assets:
Cash and cash equivalents	$	3,171		$	3,753
Accounts receivable, net of allowance for doubtful accounts	2,864			2,957
Financing receivables, net of allowance for doubtful accounts	3,591			3,572
Inventory	2,560			2,387
Assets held for sale	12			46
Other current assets	2,553			2,428
Total current assets	14,751			15,143
Property, plant and equipment	5,711			6,054
Long-term financing receivables and other assets ^(e)	10,179			8,918
Investments in equity interests	2,290			2,254
Goodwill and intangible assets	19,313			19,434
Total assets	$	52,244		$	51,803
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Notes payable and short-term borrowings	$	4,510		$	4,425
Accounts payable	5,332			5,595
Employee compensation and benefits	1,009			1,522
Taxes on earnings	173			186
Deferred revenue	3,267			3,234
Accrued restructuring	184			195
Other accrued liabilities ^(e)	4,279			4,002
Total current liabilities	18,754			19,159
Long-term debt	9,362			9,395
Other non-current liabilities ^(e)	6,885			6,100
Stockholders’ equity
HPE stockholders’ equity:
Preferred stock, $0.01 par value (300 shares authorized; none issued)	—			—
Common stock, $0.01 par value (9,600 shares authorized; 1,293 and 1,294 shares issued and outstanding at January 31, 2020 and October 31, 2019, respectively)	13			13
Additional paid-in capital	28,287			28,444
Accumulated deficit ^(f)	(7,411		)	(7,632		)
Accumulated other comprehensive loss ^(f)	(3,700		)	(3,727		)
Total HPE stockholders’ equity	17,189			17,098
Non-controlling interests	54			51
Total stockholders’ equity	17,243			17,149
Total liabilities and stockholders’ equity	$	52,244		$	51,803

HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In millions)
	Three months ended January 31, 2020			Three months ended January 31, 2019
Cash flows from operating activities:
Net earnings	$	333		$	177
Adjustments to reconcile net earnings to net cash (used in) provided by operating activities:
Depreciation and amortization	690			639
Stock-based compensation expense	93			75
Provision for doubtful accounts and inventory	41			42
Restructuring charges	84			33
Deferred taxes on earnings	(28		)	370
Earnings from equity interests	(33		)	(15		)
Other, net	(36		)	46
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable	82			113
Financing receivables	(104		)	(156		)
Inventory	(204		)	99
Accounts payable	(250		)	(256		)
Taxes on earnings	(27		)	(107		)
Restructuring	(87		)	(110		)
Other assets and liabilities	(633		)	(568		)
Net cash (used in) provided by operating activities	(79		)	382
Cash flows from investing activities:
Investment in property, plant and equipment	(568		)	(729		)
Proceeds from sale of property, plant and equipment	462			157
Purchases of available-for-sale securities and other investments	(59		)	(5		)
Maturities and sales of available-for-sale securities and other investments	8			1
Financial collateral posted	(48		)	(245		)
Financial collateral returned	147			281
Payments made in connection with business acquisitions, net of cash acquired	(6		)	(76		)
Net cash used in investing activities	(64		)	(616		)
Cash flows from financing activities:
Short-term borrowings with original maturities less than 90 days, net	127			(12		)
Proceeds from debt, net of issuance costs	340			389
Payment of debt	(450		)	(334		)
Net proceeds related to stock-based award activities	(43		)	(17		)
Repurchase of common stock	(204		)	(814		)
Contributions from non-controlling interests	1			—
Cash dividends paid	(156		)	(157		)
Net cash used in financing activities	(385		)	(945		)
Decrease in cash, cash equivalents and restricted cash	(528		)	(1,179		)
Cash, cash equivalents and restricted cash at beginning of period	4,076			5,084
Cash, cash equivalents and restricted cash at end of period	$	3,548		$	3,905

HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES SEGMENT INFORMATION (Unaudited) (In millions)

	Three months ended
	January 31, 2020			October 31, 2019			January 31, 2019
Net revenue: ^(g)
Compute	$	3,011		$	3,349		$	3,575
HPC & MCS	823			777			779
Storage	1,250			1,256			1,356
A & PS	243			269			241
Intelligent Edge	720			742			705
Financial Services	859			878			919
Corporate Investments	121			134			118
Total segment net revenue	7,027			7,405			7,693
Elimination of intersegment net revenue and other	(78		)	(190		)	(140		)
Total Hewlett Packard Enterprise consolidated net revenue	$	6,949		$	7,215		$	7,553

Earnings before taxes: ^(g)
Compute	$	286		$	464		$	340
HPC & MCS	49			79			98
Storage	226			219			254
A & PS	(2		)	1			(32		)
Intelligent Edge	70			46			24
Financial Services	73			74			77
Corporate Investments	(27		)	(26		)	(28		)
Total segment earnings from operations	675			857			733

Unallocated corporate costs and eliminations	(52		)	(107		)	(50		)
Unallocated stock-based compensation expense	(21		)	(17		)	(14		)
Amortization of initial direct costs	(3		)	—			—
Amortization of intangible assets	(120		)	(68		)	(72		)
Transformation costs	(89		)	(151		)	(78		)
Acquisition, disposition and other related charges	(42		)	(54		)	(63		)
Interest and other, net	(19		)	(38		)	(51		)
Tax indemnification adjustments ^(a)	(21		)	288			219
Non-service net periodic benefit credit	37			14			16
Earnings (loss) from equity interests	33			(1		)	15
Total Hewlett Packard Enterprise consolidated earnings before taxes	$	378		$	723		$	655

HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES SEGMENT INFORMATION (Unaudited) (In millions, except percentages)

	Three months ended									Change (%)
	January 31, 2020			October 31, 2019			January 31, 2019			Q/Q		Y/Y
Net revenue: ^(g)
Compute	$	3,011		$	3,349		$	3,575		(10	%)	(16	%)
HPC & MCS	823			777			779			6	%	6	%
Storage	1,250			1,256			1,356			—	%	(8	%)
A & PS	243			269			241			(10	%)	1	%
Intelligent Edge	720			742			705			(3	%)	2	%
Financial Services	859			878			919			(2	%)	(7	%)
Corporate Investments	121			134			118			(10	%)	3	%
Total segment net revenue	7,027			7,405			7,693			(5	%)	(9	%)
Elimination of intersegment net revenue and other	(78		)	(190		)	(140		)	(59	%)	(44	%)
Total Hewlett Packard Enterprise consolidated net revenue	$	6,949		$	7,215		$	7,553		(4	%)	(8	%)

HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES SEGMENT OPERATING MARGIN SUMMARY DATA (Unaudited)

	Three months ended		Change in Operating Margin (pts)
	January 31, 2020		Q/Q	Y/Y
Segment operating margin: ^(g)
Compute	9.5	%	-4.4 pts.	0.0 pts.
HPC & MCS	6.0	%	-4.2 pts.	-6.6 pts.
Storage	18.1	%	0.7 pts.	-0.6 pts.
A & PS	(0.8	)%	-1.2 pts.	12.5 pts.
Intelligent Edge	9.7	%	3.5 pts.	6.3 pts.
Financial Services	8.5	%	0.1 pts.	0.1 pts.
Corporate Investments	(22.3	)%	-2.9 pts	1.4 pts.
Total segment operating margin	9.6	%	-2.0 pts	0.1 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
	January 31, 2020		October 31, 2019		January 31, 2019
Numerator:
GAAP net earnings	$	333	$	480	$	177
Non-GAAP net earnings	$	575	$	644	$	590

Denominator:
Weighted-average shares used to compute basic net earnings per share	1,300		1,308		1,401
Dilutive effect of employee stock plans ^(h)	15		15		11
Weighted-average shares used to compute diluted net earnings per share	1,315		1,323		1,412

GAAP net earnings per share
Basic	$	0.26	$	0.37	$	0.13
Diluted ^(h)	$	0.25	$	0.36	$	0.13

Non-GAAP net earnings per share
Basic	$	0.44	$	0.49	$	0.42
Diluted ^(h)	$	0.44	$	0.49	$	0.42

(a)		For the three months ended October 31, 2019, the amount was due primarily to the termination of the Tax Matters Agreement with HP Inc. For the three months ended January 31, 2019, the amount primarily includes the effects of U.S. tax reform on tax attributes related to fiscal periods prior to the Separation.

(b)		The three months ended October 31, 2019 and January 31, 2019, include $123 million and $419 million of net income tax charges related to changes in U.S. federal and state valuation allowances as a result of impacts of the Tax Cuts and Jobs Act of 2017 (the "Tax Act").

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

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

(e)		The Company adopted the new accounting standard for leases in the first quarter of fiscal 2020 which requires lessees to recognize a lease liability and a right-of-use (“ROU”) asset for the lease term. The Company elected the modified retrospective transition method whereby prior comparative periods are not restated. Adoption of the new lease standard resulted in the recognition of $1.0 billion of ROU assets and $1.1 billion of lease liabilities on the Company’s Condensed Consolidated Balance Sheet.

(f)		The Company adopted an accounting standard update in the first quarter of fiscal 2020 that allowed it to reclassify $43 million of stranded tax effects resulting from U.S. tax reform from accumulated other comprehensive loss into accumulated deficit.

(g)		Effective at the beginning of the first quarter of fiscal 2020, Hewlett Packard Enterprise Company ("HPE") implemented certain organizational changes to align its segment financial reporting more closely with its current business structure. As a result of these organizational changes, HPE replaced the Hybrid IT reportable segment (and the Compute, Storage and HPE Pointnext business units within it) with four new financial reporting segments: Compute, High Performance Compute & Mission-Critical Systems ("HPC & MCS"), Storage, and Advisory and Profession Services ("A & PS").

		In addition, the HPE Aruba Services business unit of the Intelligent Edge segment now includes the Data Center Networking ("DC Networking") operational services business that was previously a part of the Hybrid IT-HPE Pointnext business unit. The DC Networking business, other than operational services, had been transferred to the Intelligent Edge segment in a prior realignment.

		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, net earnings or net earnings per share ("EPS").

(h)		Diluted net earnings per share reflects any dilutive effect of restricted stock awards, stock options and performance-based awards.

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