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HPE Hit with $821M Loss

May 25, 2020

Hewlett Packard Enterprise reported financial results for its fiscal 2020 second quarter, ended April 30, 2020.

HPE had a loss of $821 million, or 64 cents a share, on revenue of $6.01 billion, down 16% from $7.15 billion last year. After an $865 million impairment charge, the firm noted earnings of 22 cents a share, down from adjusted earnings of 42 cents a share a year ago.

HPE offered no guidance for the current quarter or fiscal year. Wall Street was looking for adjusted earnings of 30 cents a share on sales of $6.33 billion.

 

“The global economic lockdowns since February significantly impacted our fiscal Q2 financial performance,” said Antonio Neri, president and CEO of HPE. “We exited Q2 with $1.5 billion dollars in orders across the portfolio, representing two times the average historical backlog1.”

“Despite challenging circumstances, HPE GreenLake, our as-a-service offering, gained traction with 17% ARR growth and our Intelligent Edge business grew 12% in North America outperforming the market while expanding margins,” added Neri.

“We are taking decisive steps to navigate the near term uncertainty, while ensuring we align resources to priority growth areas so that we are well positioned to accelerate our edge-to-cloud strategy and address the needs of our customers in a post-COVID-19 world,” Neri said.

Second Quarter Fiscal Year 2020 Results

Net revenue of $6.0 billion, down 16% from the prior-year period and 15% from the prior-year period when adjusted for currency, driven primarily by supply chain constraints and delays in customer acceptance, which resulted in significantly higher levels of backlog, particularly in Compute, HPC & MCS, and Storage.

Annualized revenue run-rate (ARR) of $520 million, up 17% from the prior-year period. We are reiterating our 2019 Securities Analyst Meeting ARR guidance of 30-40% Compounded Annual Growth Rate from fiscal year 2019 to fiscal year 2022.

GAAP gross profit margin of 31.9%, compared to 32.2% from the prior-year period and Non-GAAP gross profit margin of 32.0%, compared to 32.2% from the prior-year period.

GAAP operating profit margin of (13.9%), compared to 6.1% from the prior-year period and Non-GAAP operating profit margin of 6.1%, compared to 8.9% from the prior-year period.

GAAP diluted net earnings per share (“EPS”) was ($0.64), compared to $0.30 in the prior-year period, includes non-cash write-down of legacy goodwill impacting GAAP EPS by $0.67.

Non-GAAP diluted net EPS was $0.22, compared to $0.42 in the prior-year period. Second quarter non-GAAP net earnings and non-GAAP diluted net EPS exclude after-tax adjustments of $1.1 billion and $0.86 per diluted earnings per share, respectively, primarily related to impairment of goodwill, transformation costs and amortization of purchased intangible assets.

Cash flow from operations of $100 million, compared to $987 million in the prior-year period.

Free cash flow of ($402) million, compared to $402 million in the prior-year period.

Segment Results

Intelligent Edge revenue was $665 million, down 2% year over year when adjusted for currency, with 11.0% operating profit margin, compared to 5.3% from the prior-year period. Enhancements to North America sales leadership and go-to-market segmentation are paying off with 12% year over year growth in North America. Despite the challenging business environment, we are gaining market share in both campus switching and WLAN markets, while significantly improving profit margins.

Compute revenue was $2.6 billion, down 19% year over year when adjusted for currency, with 4.7% operating profit margin, compared to 9.3% from the prior-year period. Revenue in the quarter was pressured primarily by component shortages and supply chain disruptions related to the COVID-19 pandemic that impacted our ability to fulfill customer demand.

High Performance Compute & Mission Critical Systems (HPC & MCS) revenue was $589 million, down 18% year over year when adjusted for currency, with 5.6% operating profit margin, compared to 12.8% from the prior-year period. Revenue was impacted by COVID-19-related delays in installations and customer acceptance resulting in elevated backlog that should flow into the second half of the year. Our HPC business has been actively involved in COVID-19-related research activity and is providing COVID-19 researchers worldwide with access to the world’s most powerful HPC resources to advance the pace of scientific discovery in the fight to stop the virus.

Storage revenue was $1.1 billion, down 16% year over year when adjusted for currency, with 13.4% operating profit margin, compared to 18.5% from the prior-year period. Revenue in the quarter was pressured primarily by component shortages and supply chain disruptions related to the COVID-19 pandemic that impacted our ability to fulfill customer demand. Big Data showed continued momentum, up 61% year over year when adjusted for currency and Nimble Services revenue grew 20% year over year with services intensity at record highs as customers added high-margin value-added services.

Advisory & Professional Services (A&PS) revenue was $237 million, down 8% year over year when adjusted for currency, with 0.8% operating profit margin, compared to (5.4%) from the prior-year period. A&PS is a strategic business that pulls through significant infrastructure and operational services sales.

Financial Services revenue was $833 million, down 5% year over year when adjusted for currency, with 9.0% operating profit margin, compared to 8.6% from the prior-year period. Net portfolio assets were up 4% year over year when adjusted for currency, and financing volume was up 10% year over year when adjusted for currency, despite the impact of COVID-19. The business delivered return on equity of 15.3%, down 30 basis points from the prior-year period.

Immediate Actions to Reduce Operating Expenses

In response to the impact and uncertainty caused by the COVID-19 pandemic, on May 19, 2020, the Board of Directors of HPE approved certain base salary adjustments for the period beginning on July 1, 2020 through the remainder of fiscal year 2020, as follows: the base salaries of the Chief Executive Officer, and of each executive officer at the Executive Vice President level, will be reduced by 25%, and the base salary of each executive officer at the Senior Vice President level will be reduced by 20%. The Board also agreed to reduce by 25% the portion of the annual $100,000 cash retainer to which each director is entitled for the period beginning on July 1, 2020 through the remainder of fiscal 2020.


Cost Optimization and Prioritization Plan

On May 19, 2020, the Board of Directors also approved a cost optimization and prioritization plan in order to focus HPE’s investments and realign the workforce to areas of growth, including measures to simplify and evolve its product portfolio strategy, go-to-market configurations, supply chain structures, digital customer support model and marketing experiences, and real estate strategies. HPE expects that the plan will be implemented through fiscal year 2022 and estimates it will include gross savings as a result of changes to the company’s workforce, real estate model and business process improvements of at least $1.0 billion, with the plan expected to deliver annualized net run-rate savings of at least $800 million by fiscal year 2022-end, in both cases relative to HPE’s fiscal year 2019 exit.

In order to achieve this level of cost savings, HPE estimates cash funding payments between $1.0 billion to $1.3 billion over the next three years.

Fiscal Year 2020 Outlook

On April 6, 2020, HPE filed an 8K to withdraw fiscal year 2020 guidance due to increased level of uncertainty in which the global COVID-19 pandemic may adversely impact business operations, financial performance and results of operations. Consistent with that filing, HPE will not be providing fiscal year 2020 third quarter or full year guidance.

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