HPE(HPE) - 2024 Q1 - Quarterly Report

Revenue and Earnings - Net revenue for Q1 2024 was $6.755 billion, a decrease from$7.809 billion in Q1 2023[15] - Product revenue declined to $3.956 billion from$5.114 billion year-over-year[15] - Services revenue increased slightly to $2.643 billion from$2.572 billion[15] - Net earnings for Q1 2024 were $387 million, down from$501 million in Q1 2023[15] - Diluted earnings per share decreased to $0.29 from$0.38 year-over-year[15] - Net earnings for the three months ended January 31, 2024, were $387 million, compared to$501 million in the same period last year[24] - Net earnings for the three months ended January 31, 2023 were $501 million[28] - Net revenue decreased by 13.5$6.8 billion in Q1 2024, primarily due to a decline in server unit volume and lower average unit prices (AUPs) in the Server and Hybrid Cloud segments[186][187] - Non-GAAP diluted net earnings per share decreased by $0.15 to$0.48, reflecting a 22.9% decline in non-GAAP net earnings to $638 million[190] - Basic net earnings per share for the three months ended January 31, 2024, were$0.30, compared to $0.39 for the same period in 2023[149] Expenses and Costs - Research and development expenses decreased to$582 million from $623 million[15] - Selling, general and administrative expenses decreased to$1.216 billion from $1.257 billion[15] - Transformation costs significantly reduced to$20 million from $102 million[15] - Transformation costs for Q1 2024 were$20 million, significantly lower than 102 million in Q1 2023[48] - R&D expenses decreased by 41 million (6.6%), primarily due to lower employee costs contributing 5.0 percentage points to the decline[204] - SG&A expenses decreased by $41 million (3.3$82 million (80.4%) as the primary elements of the Cost Optimization and Prioritization Plan and HPE Next Plan were substantially completed by the end of fiscal 2023[205] - Acquisition, disposition, and other related charges increased by $32 million (290.9$62 million, primarily due to higher losses on equity investments[208] Cash Flow and Liquidity - Net cash provided by operating activities was $64 million, a significant improvement from a net cash used of$829 million in the previous year[24] - Cash, cash equivalents, and restricted cash decreased to $3,972 million from$4,581 million, reflecting a net decrease of $609 million[24] - Cash and cash equivalents decreased to$3.758 billion as of January 31, 2024, from $4.270 billion as of October 31, 2023[70] - Cash flow from operations improved significantly to$64 million, compared to a negative $829 million in the prior-year period[186] - The company paid a quarterly dividend of$0.13 per share and has a remaining share repurchase authorization of approximately $1.0 billion[194] Assets and Liabilities - Total assets increased to$58,602 million from $57,153 million, reflecting growth in inventory and financing receivables[21] - Inventory increased significantly to$6,049 million from $4,607 million, indicating higher stock levels[21] - Long-term debt increased to$7,840 million from $7,487 million, indicating higher borrowing[21] - Stockholders' equity increased to$21,468 million from $21,238 million, driven by net earnings and stock-based compensation[27] - Inventory increased to$6.049 billion as of January 31, 2024, compared to $4.607 billion as of October 31, 2023[71] - Property, plant and equipment, net remained stable at$5.997 billion as of January 31, 2024, compared to $5.989 billion as of October 31, 2023[72] - Accounts receivable, net increased to$3.781 billion as of January 31, 2024, from $3.481 billion as of October 31, 2023[75] - Financing receivables, net increased to$8.735 billion as of January 31, 2024, from $8.571 billion as of October 31, 2023[82] - Total gross financing receivables increased to$8,961 million as of January 31, 2024, compared to $8,814 million as of October 31, 2023[89] - Gross financing receivables on non-accrual status decreased slightly to$224 million as of January 31, 2024, from $227 million as of October 31, 2023[89] - Total assets increased to$3,115 million as of January 31, 2024, compared to $3,295 million as of October 31, 2023[109] - The estimated fair value of the company's short-term and long-term debt was$13.0 billion as of January 31, 2024, up from $12.2 billion as of October 31, 2023[110] - Current portion of long-term debt increased to$4.131 billion as of January 31, 2024, compared to $4.022 billion as of October 31, 2023[134] - Total notes payable and short-term borrowings increased to$4.957 billion as of January 31, 2024, compared to $4.868 billion as of October 31, 2023[134] - Long-term debt increased to$7.840 billion as of January 31, 2024, compared to $7.487 billion as of October 31, 2023[134] - Total debt increased to$12.797 billion as of January 31, 2024, compared to $12.355 billion as of October 31, 2023[134] Comprehensive Income and Other Financial Metrics - Comprehensive income for Q1 2024 was$363 million, up from $343 million in Q1 2023[18] - The company reported a net unrealized loss on cash flow hedges of$204 million[18] - Comprehensive income for the period was $367 million, including net earnings and other comprehensive loss[27] - Other comprehensive loss for the same period was$(158) million[28] - Comprehensive income for the three months ended January 31, 2023 totaled $350 million[28] - Stock-based compensation expense was$140 million for the period[28] - Cash dividends declared were $0.12 per share, totaling$(156) million[28] - Total equity attributable to the company as of January 31, 2023 was $20,011 million[28] - Supplier financing arrangements liabilities were$387 million as of January 31, 2024[35] - The company recorded income tax expense of $96 million for Q1 2024, with an effective tax rate of 19.9$674 million, with $372 million potentially affecting the effective tax rate[64] - The IRS is seeking to increase taxable income by$904 million for fiscal years 2017-2019, which the company disputes[65] - Total expected costs for transformation programs as of January 31, 2024 are $820 million for Cost Optimization and$1.267 billion for HPE Next Plan[59] - Net periodic benefit cost for retirement plans was $13 million for Q1 2024, consistent with Q1 2023[60] - Current restructuring liability related to transformation programs was$121 million as of January 31, 2024[59] - Deferred tax assets increased to $2.328 billion as of January 31, 2024, compared to$2.264 billion as of October 31, 2023[67] - The company sold $0.8 billion of trade receivables for the three months ended January 31, 2024, and$4.1 billion for the fiscal year ended October 31, 2023[77] - Deferred revenue totaled $7.1 billion as of January 31, 2024, with 45$23 million of financing receivables for the three months ended January 31, 2024, and $237 million for the fiscal year ended October 31, 2023[83] - The allowance for credit losses decreased to$226 million as of January 31, 2024, from $243 million as of October 31, 2023[88] - Total lease income increased to$755 million for the three months ended January 31, 2024, compared to $712 million for the same period in 2023[92] - Financing receivables and leased equipment transferred via securitization through the SPE were$0.6 billion and $0.3 billion, respectively, for the three months ended January 31, 2024[95] - The company recognized a$7 million unrealized net loss on equity investments for the three months ended January 31, 2024[112] - The carrying amount of non-marketable equity investments accounted for under the fair value option was $81 million as of January 31, 2024, down from$135 million as of October 31, 2023[120] - The company recorded an unrealized loss of $54 million on non-marketable equity investments for the three months ended January 31, 2024[120] - The carrying amount of non-marketable equity investments accounted for under the measurement alternative was$154 million as of January 31, 2024, up from $145 million as of October 31, 2023[121] - The company recognized a$7 million unrealized net loss on measurement alternative equity investments for the three months ended January 31, 2024[121] - Total cash equivalents and available-for-sale debt investments were $2,789 million as of January 31, 2024, compared to$2,696 million as of October 31, 2023[115] - The fair value of available-for-sale debt investments due in more than five years was $118 million as of January 31, 2024[117] - The gross notional and fair value of derivative instruments were disclosed as of January 31, 2024 and October 31, 2023[121] - Total derivatives designated as hedging instruments amounted to$12.709 billion, with interest rate contracts at $2.5 billion, foreign currency contracts at$8.305 billion, and net investment hedges at $1.904 billion[122] - Derivatives not designated as hedging instruments totaled$4.588 billion, with foreign currency contracts at $4.447 billion and other derivatives at$141 million[122] - The company's derivative assets and liabilities were $245 million and$333 million respectively as of January 31, 2024, with net amounts after offsetting collateral at $20 million and$45 million[125] - As of January 31, 2024, the company posted $118 million in collateral, with$108 million in cash and $10 million through the re-use of counterparty collateral[125] - Long-term debt carrying amount as of January 31, 2024, was$2.393 billion, with a cumulative hedging adjustment of $104 million[127] - Losses recognized in comprehensive income for derivatives in cash flow hedging relationships were$204 million for foreign exchange contracts and $39 million for net investment hedging relationships[128] - The company expects to reclassify an estimated net accumulated other comprehensive loss of$8 million to earnings in the next twelve months[131] - Total net revenue and interest and other, net, amounted to $6.755 billion, with losses on derivatives in fair value hedging relationships at$47 million[132] - Gains (losses) on derivatives in cash flow hedging relationships reclassified from accumulated other comprehensive income into income were $24 million[132] - Total gains (losses) on derivatives not designated as hedging instruments were$178 million, primarily from foreign exchange contracts[132] - The company issued $796 million of asset-backed debt securities in January 2024 with a weighted average interest rate of 5.476$4.75 billion senior unsecured revolving credit facility, with no borrowings outstanding as of January 31, 2024[139] - The company obtained a $14 billion senior unsecured delayed draw term loan facility in connection with the acquisition of Juniper Networks, with no borrowings outstanding as of January 31, 2024[141] - The company had a remaining authorization of approximately$1.0 billion for future share repurchases as of January 31, 2024[147] Segment Performance - The company realigned its reportable segments into Server, Hybrid Cloud, Intelligent Edge, Financial Services, and Corporate Investments and Other[33] - Hybrid Cloud segment includes storage, private cloud, and infrastructure software-as-a-service offerings[41] - Intelligent Edge segment offers wired and wireless local area networks, network security, and associated services[42] - Total consolidated net revenue for Q1 2024 was $6.755 billion, a decrease from$7.809 billion in Q1 2023[48] - Segment earnings from operations for Q1 2024 were $847 million, down from$1.026 billion in Q1 2023[47] - Americas region net revenue for Q1 2024 was $2.801 billion, a decrease from$3.454 billion in Q1 2023[51] - Server segment revenue decreased by 22.6% to $980 million, primarily due to lower server unit volume and AUPs[202] - Hybrid Cloud segment revenue decreased by 9.8$136 million, primarily due to lower AUPs[202] - Intelligent Edge segment revenue increased by 2.7% to $32 million, driven by higher service revenue[202] - Gross profit margin increased to 36.4$1.426 billion, driven by growth in the Hybrid Cloud and Intelligent Edge segments[193] - Operating profit margin remained relatively flat at 7.8%, with earnings from operations decreasing by 11.2% to $525 million[186][187] Legal and Regulatory Matters - ECT imposed a five-year suspension on HP Brazil's right to bid and contract due to alleged improprieties in bidding processes, later reduced to two years[156] - HP Brazil filed a civil action against ECT and obtained a ruling staying enforcement of sanctions until a final ruling on the merits[156] - A class action lawsuit alleging age discrimination against HP Inc. and HPE was conditionally certified, with a settlement preliminary approved and a fairness hearing scheduled for March 28, 2024[157] - Q3 Networking LLC filed patent infringement complaints against HPE, with the ITC ruling in favor of HPE, but Q3 Networking appealed the decision[158] - R2 Semiconductor won an injunction in Germany against HPE, preventing the sale of products with infringing Intel processors, with HPE appealing the decision[159] - Intel is indemnifying HPE in the R2 Semiconductor case, but HPE cannot estimate potential losses due to the case's procedural posture[160] - HPE agreed to sell its 49$3.5 billion, pending regulatory approvals and closing conditions[169] Market and Operational Challenges - Supply chain constraints have eased, but demand remains uneven across HPE's portfolio, with customers adopting a conservative spending approach[177] - HPE's financial results are impacted by foreign currency exchange rate fluctuations, with over half of its revenue generated outside the U.S.[179] - Inflationary pressures and geopolitical volatility, including U.S.-China relations, continue to pose challenges for HPE's international operations[179] - The Compute reporting unit faces challenges due to lower server demand, competitive pricing, and higher supply chain costs, with a 4% excess of fair value over carrying value[100] - The HPC & AI reporting unit continues to face supply chain constraints and operational challenges, with a 4% excess of fair value over carrying value[101] Acquisitions and Investments - The company entered into a definitive merger agreement to acquire Juniper Networks, Inc. for $40.00 per share, representing an equity value of approximately$14 billion[96] - Goodwill for the Server segment was $10,220 million as of January 31, 2024, with the Compute reporting unit holding$8.2 billion of that amount[99][100] - The HPC & AI reporting unit has goodwill of $2.0 billion as of January 31, 2024, with an excess of fair value over carrying value of 4%[101] - The company's risk of loss related to securitized receivables and leased equipment is limited to the amount by which the company's right to receive collections exceeds the amount required to pay interest, principal, and fees[94]