HPE Delivers Q1 Results & Raises FY19 EPS Outlook

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 transformation and restructuring plans and any resulting 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; 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 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, 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 fiscal quarter ended January 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
January 31,
2019
  October 31,
2018
  January 31,
2018
Net revenue (a) $ 7,553 $ 7,946 $ 7,674
Costs and expenses:
Cost of sales 5,207 5,507 5,505
Research and development 466 440 389
Selling, general and administrative 1,211 1,237 1,218
Amortization of intangible assets 72 72 78
Impairment of goodwill 88
Restructuring charges 5 5
Transformation costs 78 (77 ) 245
Acquisition, disposition and other related charges 63 12 30
Separation costs   9   (24 )
Total costs and expenses 7,097   7,293   7,446  
Earnings from continuing operations 456 653 228
Interest and other, net (51 ) (111 ) (21 )
Tax indemnification adjustments (b) 219 (12 ) (919 )
Non-service net periodic benefit credit (c) 16 31 33
Earnings from equity interests 15   15   22  
Earnings (loss) from continuing operations before taxes 655 576 (657 )
(Provision) benefit for taxes (d) (478 ) (1,348 ) 2,139  
Net earnings (loss) from continuing operations 177 (772 ) 1,482
Net earnings (loss) from discontinued operations   15   (46 )
Net earnings (loss) $ 177   $ (757 ) $ 1,436  
Net earnings (loss) per share:
Basic
Continuing operations $ 0.13 $ (0.53 ) $ 0.93
Discontinued operations   0.01   (0.03 )
Total basic net earnings (loss) per share $ 0.13   $ (0.52 ) $ 0.90  
Diluted
Continuing operations $ 0.13 $ (0.53 ) $ 0.92
Discontinued operations   0.01   (0.03 )
Total diluted net earnings (loss) per share $ 0.13   $ (0.52 ) $ 0.89  
Cash dividends declared per share $ 0.1125 $ 0.1125 $ 0.1500
Weighted-average shares used to compute net earnings (loss) per share:
Basic 1,401 1,459 1,591
Diluted 1,412 1,459 1,619
 

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,
2019

Diluted net
earnings
per share

Three months
ended
October 31,
2018

Diluted net
earnings
per share

Three months
ended
January 31,
2018

Diluted net
earnings
per share

GAAP net earnings (loss) from continuing operations $ 177 $ 0.13 $ (772 ) $ (0.53 ) $ 1,482 $ 0.92
 
Non-GAAP adjustments:
Amortization of intangible assets 72 0.05 72 0.05 78 0.05
Impairment of goodwill 88 0.06
Restructuring charges (c) 5 5
Transformation costs (c) 78 0.06 (57 ) (0.04 ) 245 0.15
Acquisition, disposition and other related charges 63 0.04 12 0.01 30 0.02
Separation costs (c) 9 0.01 (24 ) (0.01 )
Tax indemnification adjustments (b) (219 ) (0.16 ) 12 0.01 919 0.57
Non-service net periodic benefit credit (c) (16 ) (0.01 ) (31 ) (0.02 ) (33 ) (0.02 )
Loss from equity interests (e) 38 0.03 38 0.03 37 0.02
Adjustments for taxes (d)(f) 397   0.28   1,257   0.85   (2,219 ) (1.38 )
Non-GAAP net earnings from continuing operations (c) $ 590   $ 0.42   $ 633   $ 0.43   $ 520   $ 0.32  
 
GAAP earnings from continuing operations $ 456 $ 653 $ 228
 
Non-GAAP adjustments related to continuing operations:
Amortization of intangible assets 72 72 78
Impairment of goodwill 88
Restructuring charges (c) 5 5
Transformation costs (c) 78 (77 ) 245
Acquisition, disposition and other related charges 63 12 30
Separation costs (c) 9 (24 )
Non-GAAP earnings from continuing operations $ 669   $ 762   $ 562  
 
GAAP operating margin from continuing operations 6 % 8 % 3 %
Non-GAAP adjustments from continuing operations 3 % 2 % 4 %
Non-GAAP operating margin from continuing operations 9 % 10 % 7 %
 
GAAP net earnings (loss) from discontinued operations $ $ $ 15 $ 0.01 $ (46 ) $ (0.03 )
 
Non-GAAP adjustments related to discontinued operations:
Separation costs 51 0.03
Tax indemnification adjustments (11 ) (0.01 ) (4 )
Adjustments for taxes     (4 )   (1 )  
Non-GAAP net earnings from discontinued operations $   $   $   $   $

 

 

 

$  
 
Total GAAP net earnings (loss) $ 177   $ 0.13   $ (757 ) $ (0.52 ) $ 1,436   $ 0.89  
Total Non-GAAP net earnings $ 590   $ 0.42   $ 633   $ 0.43   $ 520   $ 0.32  
 

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

 
As of
January 31, 2019   October 31, 2018
ASSETS
Current assets:
Cash and cash equivalents $ 3,781 $ 4,880
Accounts receivable 3,183 3,263
Financing receivables 3,487 3,396
Inventory 2,300 2,447
Assets held for sale 14 6
Other current assets (g) 2,667   3,280  
Total current assets 15,432   17,272  
Property, plant and equipment 6,141 6,138
Long-term financing receivables and other assets 9,438 11,359
Investments in equity interests 2,413 2,398
Goodwill and intangible assets 18,334   18,326  
Total assets $ 51,758   $ 55,493  
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Notes payable and short-term borrowings $ 2,073 $ 2,005
Accounts payable 5,789 6,092
Employee compensation and benefits 1,142 1,412
Taxes on earnings 295 378
Deferred revenue 3,152 3,177
Accrued restructuring 239 294
Other accrued liabilities 3,769   3,840  
Total current liabilities 16,459   17,198  
Long-term debt 10,280 10,136
Other non-current liabilities 6,684 6,885
Stockholders’ equity
HPE stockholders’ equity:
Preferred stock, $0.01 par value (300 shares authorized; none issued and outstanding at January 31, 2019)
Common stock, $0.01 par value (9,600 shares authorized; 1,378 and 1,423 shares issued and outstanding at January 31, 2019 and October 31, 2018, respectively) 14 14
Additional paid-in capital 29,607 30,342
Accumulated deficit (i) (8,034 ) (5,899 )
Accumulated other comprehensive loss (3,294 ) (3,218 )
Total HPE stockholders’ equity 18,293 21,239
Non-controlling interests 42   35  
Total stockholders’ equity 18,335   21,274  
Total liabilities and stockholders’ equity $ 51,758   $ 55,493  
 

HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In millions)

 
  Three Months Ended January 31,
2019   2018
Cash flows from operating activities:
Net earnings $ 177 $ 1,436
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization 639 635
Stock-based compensation expense 75 103
Provision for doubtful accounts and inventory 42 41
Restructuring charges 33 174
Deferred taxes on earnings 370 (1,335 )
Earnings from equity interests (15 ) (22 )
Other, net 46 102
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable 113 (34 )
Financing receivables (156 ) (287 )
Inventory 99 (146 )
Accounts payable (256 ) (107 )
Taxes on earnings (107 ) (1,009 )
Restructuring (110 ) (226 )
Other assets and liabilities (568 ) 817  
Net cash provided by operating activities 382   142  
Cash flows from investing activities:
Investment in property, plant and equipment (729 ) (669 )
Proceeds from sale of property, plant and equipment 157 115
Purchases of available-for-sale securities and other investments (5 ) (3 )
Maturities and sales of available-for-sale securities and other investments 1
Financial collateral posted (245 ) (738 )
Financial collateral returned 281 164
Payments made in connection with business acquisitions, net of cash acquired (76 )  
Net cash used in investing activities (616 ) (1,131 )
Cash flows from financing activities:
Short-term borrowings with original maturities less than 90 days, net (12 ) (3 )
Proceeds from debt, net of issuance costs 389 270
Payment of debt (334 ) (253 )
Net proceeds related to stock-based award activities (17 ) 17
Repurchase of common stock (814 ) (742 )
Net transfer of cash and cash equivalents to Everett (28 )
Net transfer of cash and cash equivalents to Seattle (70 )
Cash dividends paid (157 ) (120 )
Net cash used in financing activities (945 ) (929 )
Decrease in cash, cash equivalents and restricted cash (g) (1,179 ) (1,918 )
Cash, cash equivalents and restricted cash at beginning of period (g) 5,084   9,592  

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

$ 3,905   $ 7,674  
 

HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

SEGMENT INFORMATION

(Unaudited)

(In millions)

 
Three months ended
January 31,
2019
  October 31,
2018
  January 31,
2018
Net revenue: (a)(h)
Hybrid IT $ 5,970 $ 6,338 $ 6,158
Intelligent Edge 686 773 656
Financial Services 919 939 888
Corporate Investments 118   139   136  
Total segment net revenue 7,693 8,189 7,838
Elimination of intersegment net revenue and other (140 ) (243 ) (164 )
Total Hewlett Packard Enterprise consolidated net revenue $ 7,553   $ 7,946   $ 7,674  
 
Earnings from continuing operations before taxes: (c)(h)
Hybrid IT $ 675 $ 716 $ 572
Intelligent Edge 9 86 34
Financial Services 77 71 71
Corporate Investments (28 ) (12 ) (26 )
Total segment earnings from operations (c)(h) 733 861 651
 
Unallocated corporate costs and eliminations (c) (50 ) (90 ) (59 )
Unallocated stock-based compensation expense (14 ) (9 ) (30 )
Amortization of intangible assets (72 ) (72 ) (78 )
Impairment of goodwill (88 )
Restructuring charges (c) (5 ) (5 )
Transformation costs (c) (78 ) 77 (245 )
Acquisition, disposition and other related charges (63 ) (12 ) (30 )
Separation costs (c) (9 ) 24

Interest and other, net

(51 ) (111 ) (21 )
Tax indemnification adjustments (b) 219 (12 ) (919 )
Non-service net periodic benefit credit (c) 16 31 33
Earnings from equity interests 15   15   22  
Total Hewlett Packard Enterprise consolidated earnings (loss) from continuing operations before taxes $ 655   $ 576   $ (657 )
 
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
SEGMENT/BUSINESS UNIT INFORMATION
(Unaudited)
(In millions, except percentages)
   
Three months ended Change (%)

January 31,
2019

 

October 31,
2018

 

January 31,
2018

Q/Q   Y/Y
Net revenue: (a)(h)
Hybrid IT
Hybrid IT Product
Compute $ 3,402 $ 3,707 $ 3,518 (8 %) (3 %)
Storage 975   959   948   2 % 3 %
Total Hybrid IT Product 4,377 4,666 4,466 (6 %) (2 %)
HPE Pointnext 1,593   1,672   1,692   (5 %) (6 %)
Total Hybrid IT 5,970   6,338   6,158   (6 %) (3 %)
Intelligent Edge
HPE Aruba Product 597 685 582 (13 %) 3 %
HPE Aruba Services 89   88   74   1 % 20 %
Total Intelligent Edge 686   773   656   (11 %) 5 %
Financial Services 919   939   888   (2 %) 3 %
Corporate Investments 118   139   136   (15 %) (13 %)
Total segment net revenue 7,693   8,189   7,838   (6 %) (2 %)
Elimination of intersegment net revenue and other (140 ) (243 ) (164 ) (42 %) (15 %)
Total Hewlett Packard Enterprise consolidated net revenue $ 7,553   $ 7,946   $ 7,674   (5 %) (2 %)
 
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
SEGMENT OPERATING MARGIN SUMMARY DATA
(Unaudited)
   
Three months ended Change in Operating
Margin (pts)
January 31, 2019 Q/Q   Y/Y
Segment operating margin: (c)(h)
Hybrid IT

11.3 %

0 pts 2.0 pts
Intelligent Edge

1.3 %

(9.8) pts (3.9) pts
Financial Services

8.4 %

0.8 pts 0.4 pts
Corporate Investments

(23.7)%

(15.1) pts (4.6) pts
Total segment operating margin

9.5 %

(1.0) pts 1.2 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,
2019
  October 31,
2018
  January 31,
2018
Numerator:
GAAP net earnings (loss) from continuing operations $ 177   $ (772 ) $ 1,482  
GAAP net earnings (loss) from discontinued operations $   $ 15   $ (46 )
Non-GAAP net earnings from continuing operations $ 590   $ 633   $ 520  
Non-GAAP net earnings from discontinued operations $   $   $  
 
Denominator:
Weighted-average shares used to compute basic net earnings (loss) per share and diluted net earnings (loss) per share 1,401 1,459 1,591
Dilutive effect of employee stock plans (j) 11   17   28  
Weighted-average shares used to compute diluted net earnings (loss) per share 1,412   1,476   1,619  
 
GAAP net earnings (loss) per share from continuing operations
Basic $ 0.13 $ (0.53 ) $ 0.93
Diluted (j) $ 0.13 $ (0.53 ) $ 0.92
 
GAAP net earnings (loss) per share from discontinued operations
Basic $ $ 0.01 $ (0.03 )
Diluted (j) $ $ 0.01 $ (0.03 )
 
Non-GAAP net earnings per share from continuing operations
Basic $ 0.42 $ 0.43 $ 0.33
Diluted (k) $ 0.42 $ 0.43 $ 0.32
 
Non-GAAP net earnings per share from discontinued operations
Basic $ $ $
Diluted $ $ $
 
Total Hewlett Packard Enterprise GAAP basic net earnings (loss) per share $ 0.13   $ (0.52 ) $ 0.90  
Total Hewlett Packard Enterprise GAAP diluted net earnings (loss) per share $ 0.13   $ (0.52 ) $ 0.89  
Total Hewlett Packard Enterprise Non-GAAP basic net earnings per share $ 0.42   $ 0.43   $ 0.33  
Total Hewlett Packard Enterprise Non-GAAP diluted net earnings per share $ 0.42   $ 0.43   $ 0.32  
 
(a)   The Company adopted the new revenue recognition accounting standard (ASC 606) on a modified retrospective basis effective the first quarter of fiscal 2019. The results for the first quarter of fiscal 2019 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 months ended January 31, 2019, this amount primarily includes the effects of U.S. tax reform on tax attributes related to fiscal periods prior to the Separation with HP Inc.

 
For the three months ended January 31, 2018, this amount represents the settlement of certain pre-separation Hewlett-Packard Company income tax liabilities indemnified through the Tax Matters Agreement with HP Inc.
 
(c) 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 or GAAP net earnings per share.
 
(d) For the three months ended January 31, 2019 and October 31, 2018, these amounts primarily include $419 million and $1.3 billion of tax expense, respectively, as a result of the impact of U.S. tax reform.
 
For the three months ended January 31, 2018 the amount primarily included $920 million of income tax benefits for the effects of the settlement of certain pre-Separation Hewlett-Packard Company income tax liabilities, $806 million of net income tax benefits for impacts related to U.S. tax reform, $203 million of income tax benefits related to the liquidation of an insolvent non-U.S. subsidiary, $244 million of income tax benefits from foreign tax credits and from the release of certain non-U.S. valuation allowances on deferred tax assets and liabilities established in connection with the Everett Transaction following changes in foreign tax laws.
 
(e) Represents the amortization of basis difference adjustments related to the H3C divestiture.
 
(f) Effective the first quarter of fiscal 2019, the Company uses a structural tax rate based on long-term non-GAAP financial projections.
 
(g) 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 January 31, 2019 and October 31, 2018, the restricted cash balance, included in cash, cash equivalents and restricted cash as disclosed in the Statement of Cash Flows above, was $124 million and $204 million respectively, which was included in Other current assets in the Condensed Consolidated Balance Sheets.
 
(h) 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.
 
(i) 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 retained earnings in the first quarter of fiscal 2019.
 
(j) 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.
 
(k) Non-GAAP diluted net earnings per share reflects any dilutive effect of restricted stock awards, stock options and performance-based awards.
 

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