Hewlett Packard Enterprise Reports Fiscal 2023 Third Quarter Results

Edge momentum and portfolio mix shift drive revenue growth and gross margin expansion; reiterating GAAP diluted net EPS and raising non-GAAP diluted net EPS guidance for the full-year

Third Quarter Fiscal 2023 Financial Results                                

• Revenue: $7.0 billion, up 1% from the prior-year period and 3.5% in constant currency⁽¹⁾   
• Annualized revenue run-rate (“ARR”)⁽²⁾: $1.3 billion, up 48% from the prior-year period and in constant currency⁽¹⁾
• Gross margins:
  • GAAP of 35.8%, up 130 basis points from the prior-year period and down 20 basis points sequentially 
  • Non-GAAP of 35.9%, up 120 basis points from the prior-year period and down 30 basis points sequentially
• Diluted net earnings per share (“EPS”):
  • GAAP of $0.35, up 13% from the prior-year period and up 9% sequentially, near the mid-point of our guidance range of $0.34 to $0.38
  • Non-GAAP of $0.49, up 2% from the prior-year period and down 6% sequentially, above our guidance range of $0.44 to $0.48
• Cash flow from operations: $1.5 billion, an increase of $271 million from the prior-year period
• Free cash flow⁽³⁾: $955 million, up $368 million from the prior-year period
• Capital returns to shareholders: $341 million in the form of dividends and share repurchases

Outlook

• Revenue: Estimates Q4 fiscal 2023 revenue to be in the range of $7.2 billion to $7.5 billion, and fiscal 2023 revenue growth to be in the range of 4% to 6% in constant currency⁽¹⁾
• ARR⁽²⁾: Reiterates our 2022 HPE Securities Analyst Meeting ARR guidance of 35% to 45% Compounded Annual Growth Rate from fiscal 2022 to fiscal 2025
• Diluted net EPS:
  • Estimates Q4 fiscal 2023 GAAP diluted net EPS to be in the range of $0.36 to $0.40 and non-GAAP diluted net EPS to be in the range of $0.48 to $0.52
  • Reiterates fiscal 2023 GAAP diluted net EPS to be in the range of $1.42 to $1.46 and raises non-GAAP diluted net EPS guidance to be in the range of $2.11 to $2.15
• GAAP operating profit: Estimates fiscal 2023 GAAP operating profit growth to be in the range of 180% to 184%
• Non-GAAP operating profit⁽⁴⁾: Estimates fiscal 2023 non-GAAP operating profit growth to be in the range of 6% to 7%
• Free cash flow⁽³⁾⁽⁵⁾: Reiterates guidance of $1.9 billion to $2.1 billion

Hewlett Packard Enterprise (NYSE: HPE) today announced financial results for the third quarter ended July 31, 2023.

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“HPE delivered another solid quarter in Q3, powered by standout performances in the Intelligent Edge and HPE GreenLake,” said Antonio Neri, president and CEO of Hewlett Packard Enterprise. “Demand improved sequentially across all key business segments, with particular strength in our HPC & AI segment as customers discover HPE’s unique capabilities to power unprecedented levels of performance for AI at scale. Our strategic shift toward edge, hybrid cloud and AI delivered through our HPE GreenLake platform is working."

“The pivot in our portfolio toward higher-growth, higher-margin markets is clearly visible in our year-over-year expansion of gross margins,” said Jeremy Cox, senior vice president, interim CFO, corporate controller and chief tax officer of Hewlett Packard Enterprise. “Our differentiated edge-to-cloud strategy is fueling strong results in an uneven market.”

Third Quarter Fiscal 2023 Segment Results

• Intelligent Edge revenue was $1.4 billion, up 50% from the prior-year period in actual dollars and 53% in constant currency⁽¹⁾, with 29.7% operating profit margin, compared to 16.5% in the prior-year period.
• High Performance Computing & Artificial Intelligence (“HPC & AI”) revenue was $836 million, up 1% from the prior-year period in actual dollars and 3% in constant currency⁽¹⁾, with (0.8)% operating profit margin, compared to 3.4% from the prior-year period.
• Compute revenue was $2.6 billion, down 13% from the prior-year period in actual dollars and 10% in constant currency⁽¹⁾, with 10.9% operating profit margin, compared to 13.5% from the prior-year period.
• Storage revenue was $1.1 billion, down 5% from the prior-year period in actual dollars and down 2% in constant currency⁽¹⁾, with 10.7% operating profit margin, compared to 14.3% from the prior-year period.
• Financial Services revenue was $873 million, up 7% from the prior-year period in actual dollars and in constant currency⁽¹⁾, with 8.4% operating profit margin, compared to 11.8% from the prior-year period. Net portfolio assets of $13.5 billion, up 7.5% from the prior-year period in actual dollars and up 5.2% in constant currency⁽¹⁾. The business delivered return on equity of 15.8%, down 3.8 points from the prior-year period.

Dividend

The HPE Board of Directors declared a regular cash dividend of $0.12 per share on the company’s common stock, payable on October 13, 2023, to stockholders of record as of the close of business on September 14, 2023.

Fiscal 2023 Fourth Quarter Outlook

HPE estimates revenue to be in the range of $7.2 billion to $7.5 billion. HPE estimates GAAP diluted net EPS to be in the range of $0.36 to $0.40 and non-GAAP diluted net EPS to be in the range of $0.48 to $0.52. Fiscal 2023 fourth quarter non-GAAP diluted net EPS estimates exclude after-tax adjustments of $0.12 per diluted share, primarily related to, stock-based compensation expense, amortization of intangible assets, and acquisition, disposition and other related charges.

Fiscal 2023 Outlook

HPE estimates fiscal 2023 revenue growth to be in the range of 4% to 6% in constant currency⁽¹⁾, and targets fiscal 2023 GAAP operating profit growth to be in the range of 180% to 184% and non-GAAP operating profit⁽⁴⁾ growth to be in the range of 6% to 7%. HPE reiterates GAAP diluted net EPS to be in the range of $1.42 and $1.46 and raises non-GAAP diluted net EPS guidance to be in the range of $2.11 and $2.15. Fiscal 2023 non-GAAP diluted net EPS estimates exclude after-tax adjustments of $0.69 per diluted share, primarily related to stock-based compensation expense, amortization of intangible assets and transformation costs.

Fiscal 2023 Free Cash Flow ⁽³⁾⁽⁵⁾

Reiterates guidance of $1.9 billion to $2.1 billion.

Fiscal 2023 Capital Returns to Shareholders

Returning approximately 60% of free cash flow to shareholders in dividends and share repurchases.

¹ A description of HPE’s use of non-GAAP financial information is provided below under “Use of non-GAAP financial information and key performance metrics.”

² Annualized Revenue Run-Rate (“ARR”) is a financial metric used to assess the growth of the Consumption Services offerings. ARR represents the annualized revenue of all net HPE GreenLake edge-to-cloud platform services revenue, related financial services revenue (which includes rental income from operating leases and interest income from finance leases), and software-as-a-Service, software consumption revenue, and other as-a-Service offerings, recognized during a quarter and multiplied by four. We use ARR as a performance metric. ARR should be viewed independently of net revenue and is not intended to be combined with it.

³ Free cash flow represents cash flow from operations, less net capital expenditures (investments in property, plant & equipment (“PP&E”) less proceeds from the sale of PP&E) and adjusted for the effect of exchange rate fluctuations on cash, cash equivalents, and restricted cash.

⁴ Non-GAAP operating profit excludes costs of approximately $1.0 billion primarily related to stock-based compensation, amortization of intangible assets and transformation costs.

⁵ Hewlett Packard Enterprise provides certain guidance on a non-GAAP basis. In reliance on the exception provided by Item 10(e)(1)(i)(B) of Regulation S-K, Hewlett Packard Enterprise is unable to provide a reconciliation to the most directly comparable GAAP financial measure without unreasonable efforts, as the Company cannot predict some elements that are included in such directly comparable GAAP financial measure. These elements could have a material impact on the Company’s reported GAAP results for the guidance period. Refer to the discussion of non-GAAP financial measures below for more information.

About Hewlett Packard Enterprise

Hewlett Packard Enterprise (NYSE: HPE) is the global edge-to-cloud company that helps organizations accelerate outcomes by unlocking value from all of their data, everywhere. Built on decades of reimagining the future and innovating to advance the way people live and work, HPE delivers unique, open and intelligent technology solutions as a service. With offerings spanning Cloud Services, Compute, High Performance Computing & AI, Intelligent Edge, Software, and Storage, HPE provides a consistent experience across all clouds and edges, helping customers develop new business models, engage in new ways, and increase operational performance. For more information, visit: www.hpe.com.

Use of non-GAAP financial information and key performance metrics

To supplement Hewlett Packard Enterprise’s condensed consolidated financial statement information presented on a generally accepted accounting principles (“GAAP”) basis, Hewlett Packard Enterprise provides financial measures, including revenue on a constant currency basis (including at the business segment level), non-GAAP gross profit, non-GAAP gross profit margin, non-GAAP operating profit (non-GAAP earnings from operations), non-GAAP operating profit margin (non-GAAP earnings from operations as a percentage of net revenue), non-GAAP income tax rate, non-GAAP net earnings, non-GAAP diluted net earnings per share and free cash flow. Hewlett Packard Enterprise also provides forecasts of revenue growth on a constant currency basis, non-GAAP diluted net earnings per share, non-GAAP operating profit growth, and free cash flow. Reconciliations of each of these non-GAAP financial measures to their most directly comparable GAAP measures for this quarter and prior periods are 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 supplemental useful information to investors is included further below. This additional non-GAAP financial information is not meant to be considered in isolation or as a substitute for revenue, gross profit, gross profit margin, operating profit (earnings from operations), operating profit margin (earnings from operations as a percentage of net revenue), net earnings, diluted net earnings per share, and cash flow from operations prepared in accordance with GAAP.

In addition to the supplemental non-GAAP financial information, Hewlett Packard Enterprise also presents annualized revenue run-rate ("ARR") and as-a-Service ("AAS") orders as performance metrics. ARR is a financial metric used to assess the growth of the Consumption Services offerings. ARR represents the annualized revenue of all net HPE GreenLake edge-to-cloud platform services revenue, related financial services revenue (which includes rental income for operating leases and interest income from finance leases), and Software-as-a-Service ("SaaS"), software consumption revenue, and other as-a-Service offerings recognized during a quarter and multiplied by four. AAS orders are an overlay across all business segments contributing to HPE's consumption-based services (both recurring and non-recurring revenues), and includes hardware, as well as HPE GreenLake as-a-Service, Aruba SaaS, Storage SaaS, and other Software assets. ARR & AAS orders should be viewed independently of net revenue and deferred revenue and are not intended to be combined with any of these items.

Forward-looking statements

This press release contains forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements involve risks, uncertainties, and assumptions. If the risks or uncertainties ever materialize or the assumptions prove incorrect, the results of Hewlett Packard Enterprise Company and its consolidated subsidiaries ("Hewlett Packard Enterprise") may differ materially from those expressed or implied by such forward-looking statements and assumptions. The words "believe", "expect", "anticipate", "optimistic", "intend", "guides", "will", "estimates", "may", "could", "should", and similar expressions are intended to identify such forward-looking statements. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including but not limited to any projections or expectations of revenue, margins, expenses, investments, net earnings, net earnings per share, cash flows, liquidity and capital resources, inventory, order book, share repurchases, dividends, currency exchange rates, amortization of intangible assets, or other financial items; any projections of the amount, execution, timing, and results of any transformation or impact of cost savings or restructuring plans, including estimates and assumptions related to the anticipated benefits, cost savings, or charges of implementing such transformation and restructuring plans; any statements of the plans, strategies, and objectives of management for future operations, as well as the execution and consummation of corporate transactions or contemplated acquisitions and dispositions (including but not limited to the disposition of H3C shares and the receipt of proceeds therefrom), research and development expenditures, and any resulting benefit, cost savings, charges, or revenue or profitability improvements; any statements concerning the expected development, performance, market share, or competitive performance relating to products or services; any statements concerning technological and market trends, the pace of technological innovation, and adoption of new technologies, including products and services offered by Hewlett Packard Enterprise; any statements regarding current or future macroeconomic trends or events and the impact of those trends and events on Hewlett Packard Enterprise and our financial performance, including but not limited to demand for our products and services; any statements of expectation or belief, including those relating to future guidance and the financial performance of Hewlett Packard Enterprise; and any statements of 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, including but not limited to financial sector volatility, supply chain constraints, the inflationary environment, the ongoing conflict between Russia and Ukraine, and the relationship between China and the U.S.; the need to effectively manage third-party suppliers and distribute Hewlett Packard Enterprise's products and services; 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 public health problems and geopolitical events, such as those mentioned above); the development of and transition to 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 macroeconomic or geopolitical events, such as, but not limited to, those mentioned above; the hiring and retention of key employees; the execution, integration, and other risks associated with business combination and investment transactions; the impact of changes to privacy, cybersecurity, environmental, global trade, and other governmental regulations; changes in our product, lease, intellectual property, or real estate portfolio; the payment or non-payment of a dividend for any period; the efficacy of using non-GAAP, rather than GAAP, financial measures in business projections and planning; the judgments required in connection with determining revenue recognition; impact of company policies and related compliance; utility of segment realignments; allowances for recovery of receivables and warranty obligations; provisions for, and resolution of, pending investigations, claims, and disputes; the impacts of the Inflation Reduction Act of 2022 and related guidance or regulations; and other risks that are described herein, including but not limited to the risks described in Hewlett Packard Enterprise’s Annual Report on Form 10-K for the fiscal year ended October 31, 2022, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and in other filings made by Hewlett Packard Enterprise from time to time with the Securities and Exchange Commission.

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 July 31, 2023. Hewlett Packard Enterprise assumes no obligation and does not intend to update these forward-looking statements, except as required by applicable law.