Portfolio mix shift drives revenue, margin and ARR growth; raising operating profit and EPS guidance for the full year

Second Quarter Fiscal 2023 Financial Results

• Revenue: $7.0 billion, up 4% from the prior-year period and 9% in constant currency⁽¹⁾
• Annualized revenue run-rate (“ARR”)⁽²⁾: $1.1 billion, up 35% from the prior-year period and 38% in constant currency⁽¹⁾
• Gross margins:
  • GAAP of 36.0%, an all-time record for the company, up 360 basis points from the prior-year period and up 200 basis points sequentially
  • Non-GAAP of 36.2%, also an all-time record, up 200 basis points from the prior-year period and sequentially
• Diluted net earnings per share (“EPS”):
  • GAAP of $0.32, up 68% from the prior-year period and down 16% sequentially, above the midpoint of our guidance range of $0.27 to $0.35
  • Non-GAAP of $0.52, up 18% from the prior-year period and down 17% sequentially, at the top of our guidance range of $0.44-$0.52
• Cash flow from operations: $889 million, an increase of $510 million from the prior-year period
• Free cash flow⁽³⁾: $288 million, up $499 million from the prior-year period
• Capital returns to shareholders: $261 million in the form of dividends and share repurchases

Outlook

• Revenue: Estimates Q3 fiscal 2023 revenue to be in the range of $6.7 billion to $7.2 billion, and fiscal 2023 revenue growth to be in the range of 4%-6% in constant currency⁽¹⁾
• ARR⁽²⁾: Reiterates our 2022 HPE Securities Analyst Meeting ARR guidance of 35%-45% Compounded Annual Growth Rate from fiscal 2022 to fiscal 2025
• Diluted net EPS:
  • Estimates Q3 fiscal 2023 GAAP diluted net EPS to be in the range of $0.34 to $0.38 and non-GAAP diluted net EPS to be in the range of $0.44 to $0.48
  • Raises guidance for fiscal 2023 GAAP diluted net EPS to be in the range of $1.42 to $1.50 and non-GAAP diluted net EPS to be in the range of $2.06 to $2.14
• GAAP operating profit: Targets fiscal 2023 GAAP operating profit growth to be in the range of 180%-184%
• Non-GAAP operating profit⁽⁴⁾: Raises fiscal 2023 non-GAAP operating profit growth to be in the range of 6%-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 second quarter ended April 30, 2023.

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“Building on a great start to the fiscal year, HPE grew revenue, increased the contribution of recurring revenue through the HPE GreenLake edge-to-cloud platform, and delivered exceptional profitability to generate a strong second quarter performance,” said Antonio Neri, president and CEO of Hewlett Packard Enterprise. “Our shift to a higher-margin portfolio mix led by the Intelligent Edge segment, and the strong demand for our AI offering, further strengthen the investment opportunity for our shareholders.”

“We are very pleased that the progress we are making against our strategy continues to deliver on both the top and bottom lines,” said Tarek Robbiati, executive vice president and CFO of Hewlett Packard Enterprise. “These results demonstrate that our strategy to pivot our portfolio to higher-growth, higher-margin areas is working – and that we are operating with discipline.”

Second Quarter Fiscal 2023 Segment Results

• Intelligent Edge revenue was $1.3 billion, up 50% from the prior-year period in actual dollars and 56% in constant currency⁽¹⁾, with 26.9% operating profit margin, compared to 12.6% in the prior-year period. The business exceeded the Rule of 40 for a second consecutive quarter.
• High Performance Computing & Artificial Intelligence (“HPC & AI”) revenue was $840 million, up 18% from the prior-year period in actual dollars and 22% in constant currency⁽¹⁾, with (0.2)% operating profit margin, compared to (5.6)% from the prior-year period.
• Compute revenue was $2.8 billion, down 8% from the prior-year period in actual dollars and 3% in constant currency⁽¹⁾, with 15.2% operating profit margin, compared to 14.1% from the prior-year period.
• Storage revenue was $1.0 billion, down 3% from the prior-year period in actual dollars and up 2% in constant currency⁽¹⁾, with 7.9% operating profit margin, compared to 11.8% from the prior-year period. HPE Alletra revenue grew triple digits from the prior-year period.
• Financial Services revenue was $858 million, up 4% from the prior-year period in actual dollars and up 7% in constant currency⁽¹⁾, with 9.8% operating profit margin, compared to 12.6% from the prior-year period. Net portfolio assets of $13.3 billion, up 5% from the prior-year period in actual dollars and in constant currency⁽¹⁾. The business delivered return on equity of 16.5%, down 3.9 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 July 14, 2023, to stockholders of record as of the close of business on June 15, 2023.

Fiscal 2023 Third Quarter Outlook

HPE estimates revenue to be in the range of $6.7 billion to $7.2 billion. HPE estimates GAAP diluted net EPS to be in the range of $0.34 to $0.38 and non-GAAP diluted net EPS to be in the range of $0.44 to $0.48. Fiscal 2023 third quarter non-GAAP diluted net EPS estimates exclude after-tax adjustments of $0.10 per diluted share, primarily related to, stock-based compensation expense, transformation costs and amortization of intangible assets.

Fiscal 2023 Outlook

HPE estimates fiscal 2023 revenue growth to be in the range of 4%-6% in constant currency⁽¹⁾, and targets fiscal 2023 GAAP operating profit growth to be in the range of 180%-184% and non-GAAP operating profit⁽⁴⁾ growth to be in the range of 6%-7%. HPE raises GAAP diluted net EPS to be in the range of $1.42 and $1.50 and non-GAAP diluted net EPS to be in the range of $2.06 and $2.14. Fiscal 2023 non-GAAP diluted net EPS estimates exclude after-tax adjustments of $0.64 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.

H3C Technologies Co., Limited Update

HPE, through its relevant subsidiaries, has entered into a Put Share Purchase Agreement with Unisplendour International Technology Limited (“UNIS”) governing the sale of shares of H3C Technologies Co., Limited (“H3C”) held by HPE, through its relevant subsidiaries, which represent 49% of the total issued share capital of H3C. This follows HPE’s decision in December 2022 to exercise an option to put its holdings in H3C to UNIS. Under the Put Share Purchase Agreement, UNIS will purchase all of HPE’s shares in H3C for a total of U.S. $3.5 billion in cash. The disposition remains subject to obtaining required regulatory approvals and completion of certain conditions necessary for closing. The parties anticipate that the transaction will close in the next 6 months to 12 months, however this timeline could be extended pursuant to the terms of the Put Share Purchase Agreement.

In addition, HPE has negotiated the terms of a new go-forward Strategic Sales Agreement to be entered into with H3C that covers direct sales, service and reseller arrangements between the companies. HPE is firmly committed to serving customers and continuing to do business in China through both direct sales and our partner H3C.

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 (“CS”) 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, 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 (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, 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 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 April 30, 2023. Hewlett Packard Enterprise assumes no obligation and does not intend to update these forward-looking statements, except as required by applicable law.