What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-06-03 compared with 2022-03-03 · 334 added, 201 removed, 382 unchanged (58% of the section changed)

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This discussion should be read in conjunction with our Condensed Consolidated Financial Statements and the related notes that appear elsewhere in this document.

The financial discussion and analysis in the following MD&A compares the three months ended January 31, 2022 to the comparable prior-year period and where appropriate, as of January 31, 2022, unless otherwise noted.

The financial discussion and analysis in the following MD&A compares the three and six months ended April 30, 2022 to the comparable prior-year periods and where appropriate, as of April 30, 2022, unless otherwise noted.

This MD&A is organized as follows:

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TRENDS AND UNCERTAINTIES

The overall demand environment continues to improve but remains impacted by ongoing industry-wide supply chain constraints, which moderated our revenue growth, elevated costs, and delayed certain unit shipments, resulting in a higher level of backlog and related inventory at the end of the period.

The overall demand environment continues to improve but remains impacted by industry-wide supply constraints which have contributed to a challenging supply chain environment, which in the second quarter of fiscal 2022 was exacerbated by pandemic related lockdowns in China and increasing inflationary pressures, which are driving up material and logistic costs.

These supply chain constraints have moderated our revenue growth, elevated costs, and delayed certain unit shipments, resulting in a higher level of backlog and related inventory at the end of the period.

We expect this trend to continue in the near term.

Russia/Ukraine Conflict

The conflict between Russia and Ukraine and the related sanctions imposed by the U.S., European Union (E.U.) and other countries in response have negatively impacted our operations in both countries and increased economic and political uncertainty across the world.

We have approximately 500 team members in Russia and a smaller contingent workforce in Ukraine, whose safety and well-being remains our highest priority.

We are offering emergency assistance and support to our impacted teams, including the families of Ukrainian nationals.

In response to the sanctions imposed, in February 2022, we suspended all new sales and shipments to Russia and Belarus and implemented compliance measures to address the continuously changing regulatory landscape.

Based on a further assessment of business risks and needs, in June 2022, we determined that it is no longer tenable to maintain operations in Russia and Belarus, and are proceeding with an orderly, managed exit of our remaining business in these countries.

In fiscal 2021, our operations in Russia and Belarus accounted for approximately 2% of our total net revenues.

In the second quarter of fiscal 2022, we recorded total pre-tax charges of $126 million primarily related to expected credit losses of financing and trade receivables, $99 million of which was included in Financing cost, $6 million in Cost of services and $21 million in Disaster charges in the Condensed Consolidated Statements of Earnings.

These charges were excluded from our segment operating results.

Due to the decision to exit Russia and Belarus, we expect to incur additional charges related to a deferred tax asset valuation allowance, abandoned assets and employee severance in the third quarter of fiscal 2022.

We will continue monitoring the social, political, regulatory and economic environment in Russia and Ukraine, and will consider further actions as appropriate.

More broadly, there could be additional adverse impacts to our net revenues, earnings and cash flows should the situation escalate beyond its current scope, including, among other potential impacts, economic recessions in certain neighboring countries or globally due to inflationary pressures and supply chain cost increases or the geographic proximity of the war relative to the rest of Europe.

COVID-19 Update

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at this time.

However, vaccination will be required for entering our sites, working at customer and third-party sites, and for travel and events, unless team members have an approved exemption through human resources and undergo routine testing.

Outside of the U.S., we have implemented vaccination/risk strategies where legally permissible and where vaccines are readily available.

Such strategies differ from location to location, based on local requirements, and can take the form of mandatory vaccinations and/or testing requirements;

However, vaccination is required for entering our sites, working at customer and third-party sites, and for travel and events, unless team members have an approved exemption through human resources and undergo routine testing.

Outside of the U.S., we have implemented vaccination/risk strategies where they have been determined to be necessary by local leadership and/or to comply with government requirements.

Such strategies differ from location to location, and can take the form of mandatory vaccinations and/or testing requirements;

vaccine passports or related certificates;

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or other government-mandated risk strategies.

At least 12 countries in which we operate have already implemented, or are in the process of implementing, their pandemic risk strategy.

After careful analysis of information and guidance provided by public health and government authorities regarding the pandemic, and due to the efforts we have taken to mitigate risk through our workplace vaccination policy, effective February 14, 2022, our sites in the U.S.

reopened for employees who are fully vaccinated, with exemptions allowed in certain instances including routine testing as advised.

Employees electing to return to the office do so on a voluntary basis and must follow all local health regulations with regards to masking and physical distancing.

Outside of the U.S., sites are open at varying capacities based on local pandemic conditions and risk mitigation strategies enacted by country leadership.

We maintain compliance with all local laws and regulations with respect to office attendance and safety protocols.

EXECUTIVE OVERVIEW

We are a global technology leader focused on developing intelligent solutions that allow customers to capture, analyze, and act upon data seamlessly from edge to cloud.

We enable customers to accelerate business outcomes by driving new business models, creating new customer and employee experiences, and increasing operational efficiency today and into the future.

We enable customers to accelerate business outcomes by driving new

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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

business models, creating new customer and employee experiences, and increasing operational efficiency today and into the future.

Our customers range from small-and-medium size businesses to large global enterprises and governmental entities.

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Increasingly, customers want to digitally transform, while preserving capital and eliminating operating expense, by paying only for the IT they use.

In response, we are accelerating in our areas of strategic focus, including the Intelligent Edge and HPC & AI businesses, while at the same time, strengthening our core Compute and Storage businesses, investing in key areas of growth and accelerating our as-a-service pivot to become the edge-to-cloud platform as-a-service choice for our customers and partners with our HPE GreenLake Cloud platform.

Three months ended January 31, 2022 compared with the three months ended January 31, 2021

Net revenue of $7.0 billion represented an increase of 1.9% (also increased 1.9% on a constant currency basis) due primarily to a combination of strong demand reflected by double-digit revenue growth in networking products, effective pricing management in server products and growth in the Apollo product category.

The gross profit margin of 33.7% (or $2.3 billion) represents an increase of 0.2 percentage points due primarily to pricing discipline coupled with strong cost management in server products, a mix-shift towards higher-margin software offerings, and lower depreciation expense in FS, moderated by the

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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

impact of ongoing supply chain constraints.

The operating profit margin was 6.4%, up 3.2 percentage points due primarily to a decrease in transformation costs.

We used $76 million of cash flow from operations and $577 million of free cash flows primarily due to unfavorable net working capital management resulting in part from the ongoing supply chain constraints.

In response, we are accelerating in our areas of strategic focus, including the Intelligent Edge and HPC & AI businesses, while at the same time, strengthening our core Compute and Storage businesses, investing in key areas of growth and accelerating our as-a-service pivot to become the edge-to-cloud company for our customers and partners with our HPE GreenLake edge-to-cloud platform.

On March 22, 2022, we announced significant advancements to our HPE GreenLake edge-to-cloud platform, our flagship hybrid offering that enables organizations to modernize all their applications and data, from edge to cloud.

The platform advancements include a unified operating experience with one view of all services edge to cloud along with convergence with the Aruba Central cloud service, twelve new cloud services including network as-a-service, data services, high performance computing functions, and compute operations management, and availability of HPE GreenLake platform in the online marketplaces of several leading distributors.

These updates strengthen the HPE GreenLake platform and help customers drive their data modernization needs.

The following table summarizes our condensed consolidated GAAP financial results for the periods presented:

For the three months ended January 31,

2022 2021 Change

Dollars in millions, except per share amounts

For the three months ended April 30, For the six months ended April 30,

2022 2021 Change 2022 2021 Change

Dollars in millions, except per share amounts Dollars in millions, except per share amounts

Net revenue $ 6,713 $ 6,700 0.2% $ 13,674 $ 13,533 1.0%

Gross profit $ 2,173 $ 2,287 (5.0)% $ 4,517 $ 4,575 (1.3)%

Gross profit margin 33.7 % 33.5 % 0.2pts

Gross profit margin 32.4 % 34.1 % (1.7)pts 33.0 % 33.8 % (0.8)pts

Earnings from operations $ 207 $ 278 (25.5)% $ 655 $ 500 31.0%

Operating profit margin 6.4 % 3.2 % 3.2pts

Operating profit margin 3.1 % 4.1 % (1.0)pts 4.8 % 3.7 % 1.1pts

Net earnings $ 250 $ 259 (3.5)% $ 763 $ 482 58.3%

Diluted net earnings per share $ 0.19 $ 0.19 $— $ 0.57 $ 0.36 $0.21

Cash flow (used in) from operations $ (76) $ 963 $(1,039)

Cash flow from operations $ 379 $ 822 $(443) $ 303 $ 1,785 $(1,482)

Three months ended April 30, 2022 compared with the three months ended April 30, 2021

Net revenue of $6.7 billion represented an increase of 0.2% (increased 1.5% on a constant currency basis) as revenue growth resulting from a strong beginning order backlog was moderated by a combination of ongoing supply chain constraints, exacerbated by recent pandemic related lockdowns in China, unfavorable currency fluctuations and lower revenue from Russia.

The net revenue increase was led by strong demand for our networking products, certain customer acceptances in the current period in HPC & AI , and effective pricing management in server products.

The gross profit margin of 32.4% (or $2.2 billion) represents a decrease of 1.7 percentage points and was primarily driven by expected credit losses due to the Russia/Ukraine conflict , increased costs with continued delayed customer acceptances in HPC & AI, and ongoing supply chain constraints.

Moderating the gross profit margin decrease was pricing discipline and strong cost management in server products.

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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

operating profit margin was 3.1%, down 1.0 percentage points due primarily to the gross profit margin decline and higher selling, general & administrative expense, the negative impact of both factors was moderated by lower transformation costs.

Six months ended April 30, 2022 compared with the six months ended April 30, 2021

Net revenue of $13.7 billion represented an increase of 1.0% (increased 1.7% on a constant currency basis) as revenue growth resulting from a strong beginning order backlog was moderated by ongoing supply chain constraints.

As a result, we experienced double-digit revenue growth in networking products, growth in the Apollo product category and effective pricing management in server products.

Moderating the revenue increase was ongoing supply chain constraints, lower revenue in Russia, a nd unfavorable currency fluctuations.

The gross profit margin of 33.0% (or $4.5 billion) represents a decrease of 0.8 percentage points due primar ily to increased costs with continued delayed customer acceptances in HPC & AI, expected credit losses due to the Russia/Ukraine conflict and ongoing supply chain constraints.

Moderating the gross profit decrease was pricing discipline and strong cost management in server products.

The operating profit margin was 4.8%, up 1.1 percentage points due primarily to a decrease in transformation costs.

For the six months ended April 30, 2022, we generated $303 million of cash flow from operations and used $788 million free cash flows primarily due to the impact of supply chain constraints on working capital, which moderated cash generation, and increased capital investments.

The following table summarizes our condensed consolidated non-GAAP financial results for the periods presented:

For the three months ended January 31,

2022 2021 Change

Dollars in millions, except per share amounts

For the three months ended April 30, For the six months ended April 30,

2022 2021 Change 2022 2021 Change

Dollars in millions, except per share amounts Dollars in millions, except per share amounts

Net revenue adjusted for currency $ 6,799 $ 6,700 1.5% $ 13,763 $ 13,533 1.7%

Non-GAAP gross profit $ 2,293 $ 2,300 (0.3)% $ 4,653 $ 4,603 1.1%

Non-GAAP gross profit margin 33.9 % 33.7 % 0.2pts

Non-GAAP gross profit margin 34.2 % 34.3 % (0.1)pts 34.0 % 34.0 % —pts

Non-GAAP earnings from operations $ 627 $ 685 (8.5)% $ 1,395 $ 1,458 (4.3)%

Non-GAAP operating profit margin 11.0 % 11.3 % (0.3)pts

Non-GAAP operating profit margin 9.3 % 10.2 % (0.9)pts 10.2 % 10.8 % (0.6)pts

Non-GAAP net earnings $ 583 $ 612 (4.7)% $ 1,280 $ 1,291 (0.9)%

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Annualized revenue run-rate ("ARR")

ARR represents the annualized revenue of all net HPE GreenLake services revenue, related financial services revenue (which includes rental income from operating leases and interest income from capital leases) and software-as-a-service, software consumption revenue, and other as-a-service offerings, recognized during a quarter and multiplied by four.

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 capital 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.

The following presents our ARR performance for the period:

For the three months ended January 31,

Dollars in millions

year-over-year growth rate

The 23% increase in ARR was due to growth across our HPE GreenLake as-a-service platforms and related financial services due to an expanding customer installed base.

The increase was limited by supply constraints in certain installations.

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Financial Condition and Results of Operations (Continued)

the segment level, ARR growth was led by strength in Storage as-a-service including Zerto and Intelligent Edge as-a-service activity.

The following presents our ARR performance for the periods presented:

For the three months ended April 30,

Dollars in millions

year-over-year growth rate

The 22% increase in ARR was due to growth in our HPE GreenLake edge-to-cloud platform and related financial services due to an expanding customer installed base.

The increase was limited by supply chain constraints and related installation delays.

At the segment level, ARR growth was led by strength in Storage as-a-service including Zerto and Intelligent Edge as-a-service activity.

Returning capital to our shareholders remains an important part of our capital allocation framework that consists of capital returns to shareholders and strategic investments.

During the first quarter of fiscal 2022, we paid a quarterly dividend of $0.12 per share to our shareholders.

On March 1, 2022, we declared our fiscal 2022 second quarterly dividend of $0.12 per share, payable on April 8, 2022, to stockholders of record as of the close of business on March 11, 2022.

As of January 31, 2022, we had a remaining authorization of $1.8 billion for future share repurchases.

During the second quarter of fiscal 2022, we paid a quarterly dividend of $0.12 per share to our shareholders.

On June 1, 2022, we declared our fiscal 2022 third quarterly dividend of $0.12 per share, payable on July 8, 2022, to stockholders of record as of the close of business on June 13, 2022.

During the first six months of fiscal 2022, we repurchased and settled an aggregate amount of $187 million in connection with our share repurchase program.

As of April 30, 2022, we had a remaining authorization of $1.7 billion for future share repurchases.

We believe our existing balance of cash and cash equivalents, along with commercial paper and other short-term liquidity arrangements, are sufficient to satisfy our working capital needs, capital asset purchases, dividends, debt repayments, and other liquidity requirements associated with our existing operations.

As of January 31, 2022 and October 31, 2021, our cash, cash equivalents and restricted cash were $4.3 billion.

As of April 30, 2022 and October 31, 2021, our cash, cash equivalents and restricted cash were $3.5 billion and $4.3 billion, respectively.

In December 2021, we terminated our prior senior unsecured revolving credit facility and entered into a new senior unsecured revolving credit facility with an aggregate lending commitment of $4.75 billion for a period of five years.

As of January 31, 2022, no borrowings were outstanding under this credit facility.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our Consolidated Financial Statements are prepared in accordance with U.S.

Generally Accepted Accounting Principles ("GAAP"), which requires us to make estimates, judgments, and assumptions that affect the reported amounts of assets, liabilities, net revenue, and expenses, and the disclosure of contingent liabilities.

An accounting policy is deemed to be critical if the nature of the estimate or assumption it incorporates is subject to a material level of judgment related to matters that are highly uncertain, and changes in those estimates and assumptions are reasonably likely to materially impact our Condensed Consolidated Financial Statements.

Estimates and judgments are based on historical experience, forecasted events, and various other assumptions that we believe to be reasonable under the circumstances.

Estimates and judgments may vary under different assumptions or conditions.

We evaluate our estimates and judgments on an ongoing basis.

Accounting policies that are critical in the portrayal of our financial condition and results of operations and require management’s most difficult, subjective, or complex judgements include revenue recognition, taxes on earnings, business combinations, impairment assessment of goodwill and intangible assets and contingencies.

Management believes that there have been no significant changes during the three months ended January 31, 2022, to the items that we disclosed as our "Critical Accounting Policies and Estimates" in Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended October 31, 2021.

A summary of significant accounting policies and a summary of recent accounting pronouncements applicable to our Condensed Consolidated Financial Statements are included in Note 1, "Overview and Summary of Significant Accounting Policies", to the Condensed Consolidated Financial Statements in Item 1 of Part I.

As of April 30, 2022, no borrowings were outstanding under this credit facility.

RESULTS OF OPERATIONS

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Results of operations in dollars and as a percentage of net revenue were as follows:

For the three months ended January 31,

Dollars % of Revenue Dollars % of Revenue

For the three months ended April 30, For the six months ended April 30,

2022 2021 2022 2021

Dollars % of Revenue Dollars % of Revenue Dollars % of

Revenue Dollars % of

Dollars in millions

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Transformation costs 98 1.4 209 3.1 209 1.5 520 3.9

Disaster charges 20 0.3 1 — 19 0.1 1 —

Acquisition, disposition and other related charges 8 0.1 13 0.2 16 0.1 31 0.2

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Earnings from equity interests 33 0.5 4 0.1 64 0.5 30 0.2

Earnings before benefit for taxes 493 7.1 205 3.0

Benefit for taxes 20 0.3 18 0.3

Earnings before provision for taxes 276 4.1 288 4.3 769 5.6 493 3.6

Provision for taxes (26) (0.4) (29) (0.4) (6) — (11) —

Net earnings $ 250 3.7 % $ 259 3.9 % $ 763 5.6 % $ 482 3.6 %

Stock-based compensation expense is included within costs and expenses presented in the table above as follows:

For the three months ended January 31,

For the three months ended April 30, For the six months ended April 30,

2022 2021 2022 2021

Cost of sales $ 14 $ 11 $ 29 $ 24

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Total $ 114 $ 105 $ 242 $ 218

On April 14, 2021 (the "Approval Date"), shareholders of the Company approved the Hewlett Packard Enterprise Company 2021 Stock Incentive Plan (the "2021 Plan") that replaced the Company’s 2015 Stock Incentive Plan (the “2015 Plan”).

The 2021 Plan provides for the grant of various types of awards including restricted stock awards, stock options and performance-based awards.

These awards generally vest over 3 years from the grant date.

The maximum number of shares that may be delivered to the participants under the 2021 Plan shall not exceed 7 million shares, plus 35.8 million shares that were available for grant under the 2015 Plan as of the Approval Date and any awards granted under the 2015 Plan prior to the Approval Date that were cash-settled, forfeited, terminated or lapsed after the Approval Date.

As of January 31, 2022, the Company had remaining authorization of 23.1 million shares under the 2021 Plan.

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Financial Condition and Results of Operations (Continued)

Three months ended January 31, 2022 compared with the three months ended January 31, 2021

Total net revenue of $7.0 billion represented an increase of $128 million, or 1.9% (increased 1.9% on a constant currency basis).

The 2021 Plan provides for the grant of various types of awards including restricted stock awards, stock options and performance-based awards.

These awards generally vest over 3 years from the grant date.

The maximum number of shares as of the Approval Date that may be delivered to the participants under the 2021 Plan shall not exceed 7 million shares, plus 35.8 million shares that were available for grant under the 2015 Plan and any awards granted under the 2015 Plan prior to the Approval Date that were cash-settled, forfeited, terminated, or lapsed after the Approval Date.

On April 5, 2022, shareholders of the Company approved an amendment to the 2021 Plan thereby increasing the overall number of shares available for issuance by 15 million shares.

As of April 30, 2022, the Company had remaining authorization of 38.3 million shares under the 2021 Plan.

Three and six months ended April 30, 2022 compared with the three and six months ended April 30, 2021

For the three months ended April 30, 2022, total net revenue of $6.7 billion represented an increase of $13 million, or 0.2% (increased 1.5% on a constant currency basis).

net revenue increased by $141 million, or 7.0% to $2.2 billion, and net revenue from outside of the U.S.

decreased by $128 million, or 2.7%, to $4.5 billion.

From a segment perspective, net revenue increased across many of our segments due to the improved demand environment led by revenue growth of 11% in Intelligent Edge, 4% in HPC & AI, and 1% in Compute and Corporate Investments and Other.

Net revenue declined by 3% and 2% in Storage and Financial Services, respectively.

For the six months ended April 30, 2022, total net revenue of $13.7 billion represented an increase of $141 million, or 1.0% (increased 1.7% on a constant currency basis).

net revenue increased by $280 million, or 6.7% to $4.5 billion, and net revenue from outside of the U.S.

decreased by $139 million, or 1.5%, to $9.2 billion.

From a segment perspective, for the three months ended April 30, 2022, net revenue increased 8%, 4%, and 0.4% in Intelligent Edge, HPC & AI, and Compute, respectively, and decreased 7%, 3%, and 2% in Corporate Investments and Other, Storage and Financial Services, respectively.

For the six months ended April 30, 2022, net revenue increased 10%, 4%, and 1% in Intelligent Edge, HPC & AI, and Compute, respectively, and decreased 3%, 3%, and 2% in Corporate Investments and Other, Storage, and Financial Services, respectively.

The components of the weighted net revenue change by segment were as follows:

For the three months ended January 31, 2022

For the three months ended April 30, 2022 For the six months ended April 30, 2022

Percentage points

Compute 0.2 0.3

HPC & AI 0.4 0.4

Storage (0.6) (0.5)

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Please refer to the section "Segment Information" further below for a discussion of our results of operations for each reportable segment.

Our gross profit margin of 33.7% represents an increase of 0.2 percentage points due primarily to pricing discipline coupled with strong cost management in server products, a mix-shift to higher-margin software offerings, and lower depreciation expense in FS.

These increases to gross margin were moderated by the impact of industry-wide ongoing supply chain constraints, such as increased logistics costs.

Operating expenses

Research and development ("R&D")

R&D expense increased by $36 million, or 8% due primarily to higher employee compensation expense (which included increased headcount) which contributed 6.6 percentage points to the change, as each of our segments focuses on developing an end-to-end cloud-native infrastructure to serve as the foundation for our as-a-service or consumption service delivery models which are integrated into or further enhancing our overall HPE GreenLake platform .

Selling, general and administrative

Selling, general and administrative expense increased by $42 million, or 4% due primarily to higher employee compensation ex pense which contributed 3.4 percentage points to the change.

Amortization of intangible assets

Amortization of intangible assets decreased by $37 million, or 34% due to higher write-offs of certain intangible assets in the prior-year period and certain intangible assets associated with prior acquisitions reaching the end of their amortization periods.

The decrease was moderated by an increase in amortization expense in the current period resulting from recent acquisitions.

For the three and six months ended April 30, 2022, total gross profit margin of 32.4% and 33.0%, represents a decrease of 1.7 and 0.8 percentage points, respectively, compared to the respective prior year periods.

The decrease in both periods was due to a combination of costs from expected credit losses due to the Russia/Ukraine conflict, increased costs with continued delayed customer acceptances in HPC & AI, and ongoing supply chain constraints.

Moderating the gross profit decrease in both periods were pricing discipline and strong cost management in server products.

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Financial Condition and Results of Operations (Continued)

Operating expenses

Research and development ("R&D")

For the three and six months ended April 30, 2022, R&D expense increased by $14 million, or 3%, and by $50 million, or 5%, respectively, due primarily to higher employee compensation expense from additional headcount, which contributed 3.4 percentage points and 4.9 percentage points to the change, respectively, as each of our segments focused on developing an end-to-end cloud-native infrastructure foundation for our as-a-service or consumption service delivery models which are integrated into our overall HPE GreenLake platform .

Selling, general and administrative

For the three months ended April 30, 2022, selling, general and administrative expense increased by $50 million, or 4% due primarily to a combination of higher software expenditures, which contributed 1.3 percentage points to the change, higher travel and marketing expenses as the economy reopens and COVID-19 restrictions ease, which contributed 1.2 and 1.0 percentage points to the change, respectively, and higher employee compensation ex pense from increased headcount, which contributed 0.5 percentage points to the change.

For the six months ended April 30, 2022, selling, general and administrative expense increased by $92 million, or 4% due primarily to a combination of higher employee compensation ex pense driven by increased headcount which contributed 1.3 percentage points to the change, and higher software expenditures, travel and marketing, each of which contributed 1.0 percentage points to the change.

Amortization of intangible assets

For the three and six months ended April 30, 2022 , amortization of intangible assets decreased by $10 million, or 12% and $47 million, or 24%, respectively, due to certain intangible assets associated with prior acquisitions reaching the end of their amortization periods and write-offs of certain intangible assets in the prior- year periods.

The decrease was moderated by an increase in amortization expense in the current periods resulting from recent acquisitions.

Transformation programs and costs

Our transformation programs consist of the cost optimization and prioritization plan (launched in 2020) and the HPE Next initiative (launched in 2017).

Transformation costs decreased by $200 million, or 64% due primarily to lower restructuring charges recorded in the current period.

For the three and six months ended April 30, 2022, transformation costs dec reased by $111 million, or 53% and $311 million, or 60%, respectively, due primarily to lower restructuring charges recorded in the current per iods.

For a further discussion, refer to Note 3, "Transformation Programs" to the Condensed Consolidated Financial Statements in Item 1 of Part I.

Interest and other, net

Interest and other, net expense decreased by $39 million due primarily to higher gains from equity investments, lower interest expense from lower average borrowings, and higher gains on the sale of certain assets in the current period.

The decrease was partially moderated by unfavorable currency fluctuations in the current period.

For the three months ended April 30, 2022, interest and other, net expense decreased by $11 million due primarily to a combination of favorable currency fluctuations, lower interest expense from lower average borrowings, and higher gains from the sale of certain assets in the current period.

The decrease was partially moderated by lower gains from equity investments in the current period.

For the six months ended April 30, 2022, interest and other, net expense decreased by $50 million due primarily to lower interest expense from lower average borrowings, higher gains from the sale of certain assets and higher gains from equity investments in the current period.

Tax indemnification and related adjustments

We recorded tax indemnification expense of $17 million and $16 million, which included changes in certain pre-divestiture tax liabilities for the three months ended January 31, 2022 and 2021, respectively.

For the three months ended January 31, 2021, the amount also included changes in tax liabilities for which we shared joint and several liability with HP Inc.

For the six months ended April 30, 2022 and 2021, we recorded tax indemnification expense of $17 million and $16 million, respectively, which included changes in certain pre-divestiture tax liabilities.

For the six months ended April 30, 2021, the amount also included changes in tax liabilities for which we shared joint and several liability with HP Inc.

and for which we were indemnified by HP Inc.

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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

Non-service net periodic benefit credit

Non-service net periodic benefit credit represents the components of net periodic pension benefit credit and costs, other than service cost, for the Hewlett Packard Enterprise defined benefit pension and post-retirement benefit plans, such as interest cost, expected return on plan assets, and the amortization of prior plan amendments and actuarial gains or losses.

The credit also includes the impact of any plan settlements, curtailments, or special termination benefits.

Non-service net periodic benefit credit increased by $19 million due primarily to lower amortized actuarial losses, partially offset by higher interest cost due to higher discount rates.

For the three and six months ended April 30, 2022, non-service net periodic benefit credit increased by $19 million and $38 million, respectively, due primarily to lower amortized actuarial losses, partially offset by higher interest cost due to higher discount rates in the current periods.

Earnings from equity interests

Earnings from equity interests primarily represents our 49% interest in H3C Technologies and the amortization of our interest in basis difference.

Earnings from equity interests increased by $5 million, due primarily to a decrease in amortization expense from basis difference in the current period partially offset by lower net income earned by H3C.

(Provision) benefit for taxes

For the three months ended January 31, 2022 and 2021, we recorded income tax benefit of $20 million and $18 million, respectively, which reflect an effective tax rate of (4.1)% and (8.8)%, respectively.

For the three and six months ended April 30, 2022, earnings from equi ty interests increased by $29 million and $34 million, respectively, due primarily to lower amortization expense from basis difference and higher net income earned by H3C in the current periods.

Provision for taxes

For the three months ended April 30, 2022 and 2021, we recorded income tax provision of $26 million and $29 million, respectively, which reflect an effective tax rate of 9.4% and 10.1%, respectively.

For the six months ended April 30, 2022 and 2021, we recorded income tax provision of $6 million and $11 million, respectively, which reflect an effective tax rate of 0.8% and 2.2%, respectively.

Our effective tax rate generally differs from the U.S.

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For further discussion, refer to Note 5, "Taxes on Earnings" to the Condensed Consolidated Financial Statements in Item 1 of Part I.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our Consolidated Financial Statements are prepared in accordance with U.S.

Estimates and judgments are based on historical experience, forecasted events, and various other assumptions that we believe to be reasonable under the circumstances.

Estimates and judgments may vary under different assumptions or conditions.

We evaluate our estimates and judgments on an ongoing basis.

There have been no significant changes during the six months ended April 30, 2022, to the items that we disclosed as our "Critical Accounting Policies and Estimates" in Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended October 31, 2021.

Segment Information

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Segment Results

The following table and ensuing discussion provide an overview of our key financial metrics by segment for the three months ended January 31, 2022, as compared to the prior-year period:

The following table and ensuing discussion provide an overview of our key financial metrics by segment for the three months ended April 30, 2022, as compared to the prior-year period:

HPE Consolidated Compute HPC & AI Storage Intelligent Edge Financial Services Corporate Investments

7 unchanged sentences

Year-over-year change percentage points (1.0) pts 2.7 pts (8.2) pts (4.2) pts (3.1) pts 1.8 pts (0.2) pts

(1) HPE consolidated net revenue excludes intersegment net revenue.

(2) Segment earnings from operations exclude certain unallocated corporate costs and eliminations, stock-based compensation expense, amortization of initial direct costs, amortization of intangible assets, transformation costs and acquisition, disposition and other related charges.

(3) Effective at the beginning of the first quarter of fiscal 2022, we implemented minor organizational changes to align our segment financial reporting more closely with our current business structure resulting in immaterial changes to certain prior period segment revenue and earnings from operations amounts.

These changes had no impact to HPE’s previously reported consolidated GAAP results.

For the three months ended January 31,

2022 2021 % Change

The following table and ensuing discussion provide an overview of our key financial metrics by segment for the six months ended April 30, 2022, as compared to the prior-year period:

HPE Consolidated Compute HPC & AI Storage Intelligent Edge Financial Services Corporate Investments

Dollars in millions

Net revenue (1)

$ 13,674 $ 6,001 $ 1,500 $ 2,254 $ 1,768 $ 1,665 $ 652

Year-over-year change % 1.0 % 0.7 % 3.8 % (3.2) % 9.6 % (2.0) % (2.8) %

Earnings from operations (2)

$ 655 $ 831 $ (47) $ 306 $ 266 $ 208 $ (35)

Earnings from operations as a % of net revenue 4.8 % 13.8 % (3.1) % 13.6 % 15.0 % 12.5 % (5.4) %

Compute net revenue increased by $32 million, or 1.1% (increased 0.5% on a constant currency basis), due primarily to higher average unit prices resulting from disciplined pricing actions and favorable currency fluctuations moderated by lower unit shipments.

The decline in unit shipments resulted from continued material constraints due to a challenging supply chain environment.

As a result, Compute ended the period with a significantly higher level of order backlog.

From a product perspective, Compute experienced revenue growth in the rack server category moderated by a revenue decline due to certain products approaching their end-of-life.

Services net revenue declined due to lower unit attachments and delayed hardware shipments.

Compute earnings from operations as a percentage of net revenue increased 2.4 percentage points due to decreases in costs of products and services as a percentage of net revenue and operating expense as a percentage of net revenue.

The decrease in costs of products and services as a percentage of net revenue was primarily due to pricing discipline coupled with strong cost management and favorable currency fluctuations moderated by a lower mix of higher margin services.

The decrease in operating expense as a percentage of net revenue was primarily due to lower variable compensation expense.

Year-over-year change percentage points 1.1 pts 2.5 pts (7.3) pts (4.7) pts (2.4) pts 2.2 pts 2.9 pts

(1) HPE consolidated net revenue excludes intersegment net revenue.

(2) Segment earnings from operations exclude certain unallocated corporate costs and eliminations, stock-based compensation expense, amortization of initial direct costs, amortization of intangible assets, transformation costs, disaster charges and acquisition, disposition and other related charges.

For the three months ended April 30, For the six months ended April 30,

2022 2021 % Change 2022 2021 % Change

Dollars in millions Dollars in millions

Net revenue $ 2,985 $ 2,974 0.4 % $ 6,001 $ 5,958 0.7 %

Earnings from operations $ 415 $ 334 24.3 % $ 831 $ 675 23.1 %

Earnings from operations as a % of net revenue 13.9 % 11.2 % 13.8 % 11.3 %

Three months ended April 30, 2022 compared with three months ended April 30, 2021

Compute net revenue increased by $11 million, or 0.4% (increased 1.2% on a constant currency basis), due primarily to higher average unit prices resulting from a combination of disciplined pricing actions and higher sales of server configurations with more complex component architectures in our next generation products.

The net revenue increase was moderated by lower unit shipments and unfavorable currency fluctuations.

The decline in unit shipments resulted from supply constraints due to the challenging supply chain environment.

As a result, Compute exited the quarter with a significantly high level of order backlog.

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Financial Condition and Results of Operations (Continued)

For the three months ended January 31,

2022 2021 % Change

Dollars in millions

From a product perspective, Compute experienced revenue growth in the rack server category moderated by a revenue decline due to certain products approaching their end-of-life.

Services net revenue declined primarily due to lower revenue from Russia and the impact of delayed hardware shipments on services contracts.

Compute earnings from operations as a percentage of net revenue increased 2.7 percentage points due to decreases in costs of products and services as a percentage of net revenue and operating expense as a percentage of net revenue.

The decrease in costs of products and services as a percentage of net revenue was primarily due to pricing discipline and strong cost management.

The decrease in operating expense as a percentage of net revenue was primarily due to lower variable compensation expense.

Six months ended April 30, 2022 compared with six months ended April 30, 2021

Compute net revenue increased by $43 million, or 0.7% (increased 0.8% on a constant currency basis), due primarily to higher average unit prices resulting from disciplined pricing actions and higher sales of server configurations with more complex component architectures in our next generation products.

The net revenue increase was moderated by lower unit shipments resulting from supply constraints due to the challenging supply chain environment.

From a product perspective, Compute experienced revenue growth in the rack server category moderated by a revenue decline due to certain products approaching their end-of-life.

Services net revenue declined primarily due to lower revenue from Russia and the impact of delayed hardware shipments on services contracts.

Compute earnings from operations as a percentage of net revenue increased 2.5 percentage points due to decreases in costs of products and services as a percentage of net revenue and operating expense as a percentage of net revenue.

The decrease in costs of products and services as a percentage of net revenue was primarily due to pricing discipline and strong cost management and favorable currency fluctuations moderated by a lower mix of higher margin services.

The decrease in operating expense as a percentage of net revenue was primarily due to lower variable compensation expense.

For the three months ended April 30, For the six months ended April 30,

2022 2021 % Change 2022 2021 % Change

Dollars in millions Dollars in millions

Net revenue $ 710 $ 684 3.8 % $ 1,500 $ 1,445 3.8 %

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Earnings from operations as a % of net revenue (5.6) % 2.6 % (3.1) % 4.2 %

HPC & AI net revenue increased by $29 million, or 3.8% (increased 3.6% on a constant currency basis) due primarily to an improved demand environment with growth in HPC products led by the Apollo and Edge Compute product categories.

This increase was moderated by a decline in net revenue from Cray products as a result of delays in receiving customer acceptance on certain deals, and a decline in services revenue due primarily to lower support services as a result of an unfavorable portfolio mix of lower attachments from end-of-life products.

Three months ended April 30, 2022 compared with three months ended April 30, 2021

HPC & AI net revenue increased by $26 million, or 3.8% (increased 4.7% on a constant currency basis) as a result of strong demand, led by higher revenue from HPE Cray driven by certain customer acceptances in the period.

The increase was moderated by continued delayed customer acceptances and challenges with the HPE Apollo and Edge Compute product categories as a result of supply chain constraints and lower services revenue due primarily to an unfavorable portfolio mix of service offerings.

HPC & AI earnings from operations as a percentage of net revenue decreased 8.2 percentage points due to increases in cost of products and services as a percentage of net revenue and operating expenses as a percentage of net revenue.

The increase in cost of products and services as a percentage of net revenue was due primarily to the impact of fixed overhead costs as a result of the shift in timing of revenue recognition on certain deals, and a lower mix of revenue from services and higher-margin products.

The increase in operating expenses as a percentage of net revenue was primarily due to higher investments in research and development that are focused on high-performance computing solutions, both on-premise and in the cloud, while integrating such portfolio into our HPE GreenLake platform.

For the three months ended January 31,

2022 2021 % Change

Dollars in millions

The increase in cost of products and services as a percentage of net revenue was due primarily to continued delayed customer acceptances, supply chain constraints and related cost increases, lower revenue from higher-margin products and a lower mix of revenue from services.

The increase in operating expenses as a percentage of net revenue was primarily due to higher investments in research and development to focus on high-performance computing and AI solutions, including integrating such solutions into our HPE GreenLake platform.

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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

Six months ended April 30, 2022 compared with six months ended April 30, 2021

HPC & AI net revenue increased by $55 million, or 3.8% (increased 4.1% on a constant currency basis) as a result of strong demand with growth in HPC products led by the HPE Apollo and Edge Compute product categories and in Data Solutions.

This increase was moderated by a decline in net revenue from HPE Cray products due to supply chain constraints and continued delayed customer acceptances, and a decline in services revenue due primarily to an unfavorable portfolio mix of service offerings.

HPC & AI earnings from operations as a percentage of net revenue decreased 7.3 percentage points due to increases in cost of products and services as a percentage of net revenue and operating expenses as a percentage of net revenue.

For the three months ended April 30, For the six months ended April 30,

2022 2021 % Change 2022 2021 % Change

Dollars in millions Dollars in millions

Net revenue $ 1,098 $ 1,136 (3.3) % $ 2,254 $ 2,328 (3.2) %

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Earnings from operations as a % of net revenue 12.6 % 16.8 % 13.6 % 18.3 %

Storage net revenue decreased by $36 million or 3.0% (decreased 3.4% on a constant currency basis) due primarily to supply chain constraints, particularly with our owned intellectual property products, which can contain certain unique components.

Three months ended April 30, 2022 compared with three months ended April 30, 2021

Storage net revenue decreased by $38 million or 3.3% (decreased 2.5% on a constant currency basis) due primarily to supply chain constraints, particularly with our owned intellectual property products, which contain certain unique components and are hence subject to tighter supply constraints, and unfavorable currency fluctuations.

Net revenue declined in Storage products moderated by an increase in Storage services.

The decline in Storage products was led by declines in HPE 3PAR, Nimble Storage, and the Hyperconverged product portfolio.

The increase in Storage services was led by Zerto and Nimble Services as we continue our transition to more services, and software-rich offerings.

The decrease in Storage products was led by declines in HPE 3PAR, as we transition to next generation product platforms such as HPE Alletra, and in the traditional storage product portfolio, partially offset by higher revenue from the Hyperconverged and Big Data product portfolios.

The increase in Storage services was led by Zerto as we continue our transition to more services, and software-rich offerings.

As a result of strong demand and the challenging supply chain environment, Storage exited the quarter with a high order backlog.

Storage earnings from operations as a percentage of net revenue decreased 4.2 percentage points due to increases in cost of products and services as a percentage of net revenue and operating expenses as a percentage of net revenue.

The increase in cost of products and services as a percentage of net revenue was due primarily to supply chain constraints which unfavorably impacted our higher-margin product mix and higher logistic costs, partially offset by the sale of higher margin Zerto products.

The increase in operating expenses as a percentage of net revenue was due primarily to higher investments in research and development focused on as-a-service offerings and higher field selling costs.

Six months ended April 30, 2022 compared with six months ended April 30, 2021

Storage net revenue decreased by $74 million or 3.2% (decreased 3.0% on a constant currency basis) due primarily to supply chain constraints, particularly with our owned intellectual property products, which contain certain unique components.

Net revenue declined in Storage products moderated by an increase in Storage services.

The decline in Storage products was led by declines in HPE 3PAR, as we transition to its next generation product platforms such as HPE Alletra, partially offset by an increase in Big Data products.

The increase in Storage services was led by Zerto and HPE Nimble Storage Services as we continue our transition to more services, and software-rich offerings.

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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

Storage earnings from operations as a percentage of net revenue decreased 4.7 percentage point due to increases in cost of products and services as a percentage of net revenue and operating expenses as a percentage of net revenue.

The increase in cost of products and services as a percentage of net revenue was due primarily to supply chain constraints which unfavorably impacted our higher-margin product mix, partially offset by higher margin product from Zerto.

The incre ase in operating expenses as a percentage of net revenue was due primarily to higher investments in research and development related as-a-service offerings.

The increase in cost of products and services as a percentage of net revenue was due primarily to supply chain constraints which unfavorably impacted our higher-margin product mix and logistic costs, partially offset by the sale of higher margin Zerto products.

The increase in operating expenses as a percentage of net revenue was due primarily to higher investments in research and development focused on as-a-service offerings.

Intelligent Edge

For the three months ended January 31,

2022 2021 % Change

Dollars in millions

For the three months ended April 30, For the six months ended April 30,

2022 2021 % Change 2022 2021 % Change

Dollars in millions Dollars in millions

Net revenue $ 867 $ 803 8.0 % $ 1,768 $ 1,613 9.6 %

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Earnings from operations as a % of net revenue 12.6 % 15.7 % 15.0 % 17.4 %

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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

Intelligent Edge net revenue increased by $91 million, or 11.2% (increased 11.4% on a constant currency basis) from growth in product and services revenue due to an improving demand environment despite continued supply chain constraints.

The increase in product revenue was led by the Switching and WLAN product categories.

The increase in services revenue was led by attached support services and our as-a-service offerings.

Three months ended April 30, 2022 compared with three months ended April 30, 2021

Intelligent Edge net revenue increased by $64 million, or 8.0% (increased 9.3% on a constant currency basis) as a robust demand environment, reflected in a historically high backlog, continues to be impacted by supply constraints resulting from a challenging supply chain environment.

Net revenue increased in both Intelligent Edge products and services.

The increase in product revenue was driven by the WLAN business and Silver Peak.

The higher services revenue was led by attached support services and our as-a-service offerings.

Intelligent Edge earnings from operations as a percentage of net revenue decreased 3.1 percentage points due primarily to an increase in cost of products and services as a percentage of net revenue, partially offset by a decrease in operating expenses as a percentage of net revenue.

The increase in cost of product and s ervices as a percentage of net revenue was primarily due to higher supply chain costs.

The increase in cost of product and services as a percentage of net revenue was primarily due to higher supply chain costs and higher costs associated with our Services business.

Operating expenses as a percentage of net revenue decreased primarily due to lower variable compensation expense.

Six months ended April 30, 2022 compared with six months ended April 30, 2021

Intelligent Edge net revenue increased by $155 million, or 9.6% (increased 10.4% on a constant currency basis) as a robust demand environment, reflected in a historically high backlog, continues to be impacted by supply constraints resulting from a challenging supply chain environment.

Net revenue increased in both Intelligent Edge products and services.

The increase in product revenue was driven by the WLAN business.

The higher services revenue was led by attached support services and our as-a-service offerings.

Intelligent Edge earnings from operations as a percentage of net revenue decreased 2.4 percentage points due primarily to an increase in cost of products and services as a percentage of net revenue, partially offset by a decrease in operating expenses as a percentage of net revenue.

The increase in cost of product and services as a percentage of net revenue was primarily due to higher supply chain costs and higher costs associated with our Services business.

Operating expenses as a percentage of net revenue decreased primarily due to lower variable compensation expense.

Financial Services

For the three months ended January 31,

2022 2021 % Change

Dollars in millions

For the three months ended April 30, For the six months ended April 30,

2022 2021 % Change 2022 2021 % Change

Dollars in millions Dollars in millions

Net revenue $ 823 $ 839 (1.9) % $ 1,665 $ 1,699 (2.0) %

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Earnings from operations as a % of net revenue 12.6 % 10.8 % 12.5 % 10.3 %

FS net revenue decreased by $18 million, or 2.1% (decreased 0.6% on a constant currency basis) due primarily to unfavorable currency fluctuations, along with a decrease in rental revenue due to lower average operating leases, partially offset by higher asset management revenue from pre-owned equipment sales and lease buyouts.

FS earnings from operations as a percentage of net revenue increase d 2.6 percen tage points due primarily to lower cost of services as a percentage of net revenue.

The decrease to cost of services as a percentage of net revenue resulted primarily from a combination of lower depreciation expense, borrowing costs, and bad debt expense.

Operating expenses as a percentage of net revenue remained relatively flat.

Financing Volume

For the three months ended January 31,

Financing volume $ 1,388 $ 1,245

Financing volume, which represents the amount of financing provided to customers for equipment and related software and services, including intercompany activity, increased by 11.5% due primarily to higher financing of third-party product sales and services, partially offset by unfavorable currency fluctuations.

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Financial Condition and Results of Operations (Continued)

Three months ended April 30, 2022 compared with three months ended April 30, 2021

Financial Services net revenue decreased by $16 million, or 1.9% (increased 0.2% on a constant currency basis) due primarily to unfavorable currency fluctuations, along with a decrease in rental revenue due primarily to lower average operating leases, partially offset by higher revenue from equipment remarketing sales.

Financial Services earnings from operations as a percentage of net revenue increased 1.8 percentage points due primarily to lower cost of services as a percentage of net revenue.

The decrease to cost of services as a percentage of net revenue resulted primarily from a combination of lower depreciation expense, bad debt expense, and borrowing costs.

The decrease in operating expenses as a percentage of net revenue was due primarily to lower compensation expense.

The increase in the provision for expected credit losses related to the Russia/Ukraine conflict during the current quarter was excluded from segment operating results.

Six months ended April 30, 2022 compared with six months ended April 30, 2021

Financial Services net revenue decreased by $34 million, or 2.0% (decreased 0.2% on a constant currency basis) due primarily to unfavorable currency fluctuations, along with a decrease in rental revenue due to lower average operating leases, partially offset by higher asset management revenue from remarketing and pre-owned equipment sales.

Financial Services earnings from operations as a percentage of net revenue increased 2.2 percentage points due primarily to lower cost of services as a percentage of net revenue.

The decrease to cost of services as a percentage of net revenue resulted primarily from a combination of lower depreciation expense, borrowing costs, and bad debt expense.

The decrease in operating expenses as a percentage of net revenue was due primarily to lower compensation expense.

Financing Volume

For the three months ended April 30, For the six months ended April 30,

2022 2021 2022 2021

Financing volume $ 1,473 $ 1,451 $ 2,861 $ 2,696

Financing volume, which represents the amount of financing provided to customers for equipment and related software and services, including intercompany activity, increased by 1.5% and 6.1% for the three and six months ended April 30, 2022, respectively, as compared to the prior-year periods, due primarily to higher financing of third-party product sales and services, partially offset by unfavorable currency fluctuations.

Portfolio Assets and Ratios

The portfolio assets and ratios derived from the segment balance sheets for FS were as follows:

January 31, 2022 October 31, 2021

April 30, 2022 October 31, 2021

Dollars in millions

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(1) Intercompany activity is eliminated in consolidation.

(2) Allowance for credit losses f o r financing receivables includes both the short- and long-term portions.

(3) Debt benefiting FS consists of intercompany equity that is treated as debt for segment reporting purposes, intercompany debt, and borrowing- and funding-related activity associated with FS and its subsidiaries.

Debt benefiting FS totaled $11.9 billion at both January 31, 2022 and October 31, 2021, and was determined by applying an assumed debt-to-equity ratio, which management believes to be comparable to that of other similar financing companies.

FS equity at both January 31, 2022 and October 31, 2021 was $1.7 billion.

As of January 31, 2022 and October 31, 2021, FS net cash and cash equivalents balances were approximately $995 million and $898 million, respectively.

Net portfolio assets as of January 31, 2022 decreased 2.6% from October 31, 2021.

The decrease generally resulted from portfolio runoff exceeding new financing volume during the period, along with unfavorable currency fluctuations.

FS bad debt expense includes charges to general reserves, specific reserves, and write-offs for sales-type, direct-financing, and operating leases.

For the three months ended January 31, 2022 and 2021, FS recorded net bad debt expense of $23 million and $28 million, respectively.

As of January 31, 2022, FS experienced a decrease in billed finance receivables compared to October 31, 2021, which included limited impact to collections from customers as a result of COVID-19.

We are currently unable to fully predict the extent to which COVID-19 may adversely impact future collections of our receivables.

Corporate Investments

For the three months ended January 31,

2022 2021 % Change

Dollars in millions

Table of Content

HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

(2) Allowance for credit losses for financing receivables includes both the short- and long-term portions.

(3) Debt benefiting Financial Services consists of intercompany equity that is treated as debt for segment reporting purposes, intercompany debt, and borrowing- and funding-related activity associated with Financial Services and its subsidiaries.

Debt benefiting Financial Services totaled $11.6 billion and $11.9 billion at both April 30, 2022 and October 31, 2021, respectively, and was determined by applying an assumed debt-to-equity ratio, which management believes to be comparable to that of other similar financing companies.

Financial Services equity at both April 30, 2022 and October 31, 2021 was $1.7 billion.

As of April 30, 2022 and October 31, 2021, Financial Services net cash and cash equivalents balances were approximately $879 million and $898 million, respectively.

Net portfolio assets as of April 30, 2022 decreased 4.9% from October 31, 2021.

The decrease generally resulted from unfavorable currency fluctuations, along with portfolio runoff exceeding new financing volume during the period.

Financial Services bad debt expense includes charges to general reserves, specific reserves, and write-offs for sales-type, direct-financing, and operating leases.

For the three and six months ended April 30, 2022, Financial Services recorded net bad debt expense of $22 million and $45 million, respectively.

For the three and six months ended April 30, 2021, Financial Services recorded net bad debt expense of $31 million and $59 million, respectively.

As of April 30, 2022, Financial Services experienced a decrease in billed finance receivables compared to October 31, 2021, which included a limited impact to collections from customers as a result of the pandemic, and customers from Russia.

We are currently unable to fully predict the extent to which the pandemic and the Russia/Ukraine conflict may adversely impact future collections of our receivables.

Corporate Investments and Other

For the three months ended April 30, For the six months ended April 30,

2022 2021 % Change 2022 2021 % Change

Dollars in millions Dollars in millions

Net revenue $ 327 $ 350 (6.6) % $ 652 $ 671 (2.8) %

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Loss from operations as a % of net revenue (7.3) % (7.1) % (5.4) % (8.3) %

Three months ended April 30, 2022 compared with three months ended April 30, 2021

Corporate Investments and Other net revenue decreased by $23 million, or 6.6% (decreased 2.0% on a constant currency basis) due primarily to unfavorable currency fluctuations, lower HPE Ezmeral revenue, and lower revenue from Russia in A & PS.

Corporate Investments and Other loss from operations as a percentage of net revenue increased 0.2 percentage points due to the scale of the net revenue decline.

Six months ended April 30, 2022 compared with six months ended April 30, 2021

Corporate Investments and Other net revenue decreased by $19 million, or 2.8% (increased 1.6% on a constant currency basis) due primarily to unfavorable currency fluctuations.

Corporate Investments and Other loss from operations as a percentage of net revenue decreased 2.9 percentage points due primarily to decreases in cost of services as a percentage of net revenue while operating expenses as a percentage of net revenue remained relatively unchanged.

The decrease in cost of services as a percentage of net revenue was primarily due to improved service delivery efficiencies in A & PS.

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Financial Condition and Results of Operations (Continued)

Corporate Investments and Other net revenue increased by $4 million, or 1.2% (increased 5.6% on a constant currency basis) due primarily to revenue growth from A & PS partially offset by unfavorable currency fluctuations.

Corporate Investments and Other loss from operations as a percentage of net revenue decreased 6.3 percentage points due to decreases in cost of services as a percentage of net revenue while operating expenses as a percentage of net revenue remained relatively unchanged.

The decrease in cost of services as a percentage of net revenue was primarily due to improved service delivery efficiencies.

LIQUIDITY AND CAPITAL RESOURCES

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Our cash balances are held in numerous locations throughout the world, with a substantial amount held outside the U.S.

as of January 31, 2022.

as of April 30, 2022.

We utilize a variety of planning and financing strategies in an effort to ensure that our worldwide cash is available when and where it is needed.

9 unchanged sentences

to have a material effect on our overall liquidity, financial condition, or results of operations.

In connection with the share repurchase program previously authorized by our Board of Directors, during the first three months of fiscal 2022, we repurchased and settled an aggregate amount of $129 million.

As of January 31, 2022, we had a remaining authorization of $1.8 billion for future share repurchases.

In connection with the share repurchase program previously authorized by our Board of Directors, during the first six months of fiscal 2022, we repurchased and settled an aggregate amount of $187 million.

As of April 30, 2022, we had a remaining authorization of $1.7 billion for future share repurchases.

For more information on our share repurchase program, refer to the section entitled "Unregistered Sales of Equity Securities and Use of Proceeds" in Item 2 of Part II.

On April 22, 2022, we entered into an amendment with Unisplendour Corporation (“UNIS”) and H3C Technologies Co.

Limited (“H3C”) to the Shareholder Agreement previously entered into between the parties as of May 21, 2015.

The amendment extends to October 31, 2022, the latest date upon which we may put to UNIS all or part of the H3C shares held by us, at a price of 15.0 times the last twelve months net income of H3C.

Our cash, cash equivalents, restricted cash, total debt and available borrowing resources were as follows:

January 31, 2022 October 31, 2021

April 30, 2022 October 31, 2021

Cash, cash equivalents and restricted cash $ 3,548 $ 4,332

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Financial Condition and Results of Operations (Continued)

The tables below represent the way in which management reviews cash flows:

For the three months ended January 31,

Net cash (used in) provided by operating activities $ (76) $ 963

The following tables represent the way in which management reviews cash flows:

For the six months ended April 30,

Net cash provided by operating activities $ 303 $ 1,785

Net cash used in investing activities (827) (1,231)

Net cash provided by (used in) financing activities 355 (459)

Net decrease in cash, cash equivalents and restricted cash $ (56) $ (148)

Net cash used in financing activities (260) (419)

Net (decrease) increase in cash, cash equivalents and restricted cash $ (784) $ 135

Operating Activities

For the three months ended January 31, 2022, net cash from operating activities decreased by $1.0 billion, as compared to the corresponding period in fiscal 2021.

The decrease was primarily due to unfavorable net working capital management driven by supply chain constraints, as compared to the prior-year period.

For the six months ended April 30, 2022, net cash from operating activities decreased by $1.5 billion, as compared to the corresponding period in fiscal 2021.

The decrease was primarily due to the impact of supply chain constraints on working capital, as compared to prior-year period.

Our working capital metrics and cash conversion impacts were as follows:

January 31, 2022 October 31, 2021 Change January 31, 2021 October 31, 2020 Change Y/Y Change

April 30, 2022 October 31, 2021 Change April 30, 2021 October 31, 2020 Change Y/Y Change

Days of sales outstanding in accounts receivable ("DSO") 42 49 (7) 39 42 (3) 3

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DSO is calculated by dividing ending accounts receivable, net of allowance for doubtful accounts, by a 90-day average of net revenue.

Compared to the corresponding three month period in fiscal 2021, the increase in DSO in the current period was primarily due to unfavorable billings linearity.

Compared to the corresponding three month period in fiscal 2021, the increase in DSO in the current period was primarily due to lower customer participation in early payment programs and lower receivables factoring.

DOS measures the average number of days from procurement to sale of our products.

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DPO is calculated by dividing ending accounts payable by a 90-day average of cost of goods sold.

Compared to the corresponding three month period in fiscal 2021, the increase in DPO was primarily due to higher inventory purchases in the current period for planned future shipments.

Compared to the corresponding three month period in fiscal 2021, DPO was relatively unchanged.

Investing Activities

For the three months ended January 31, 2022, net cash used in investing activities decreased by $0.3 billion, as compared to the corresponding period in fiscal 2021.

For the six months ended April 30, 2022, net cash used in investing activities decreased by $0.4 billion, as compared to the corresponding period in fiscal 2021.

The decrease was primarily due to lower cash utilized in net financial collateral activities of $0.6 billion and higher cash utilized for investment in property, plant and equipment, net of sales proceeds of $0.2 billion, as compared to the prior-year period.

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Financing Activities

For the three months ended January 31, 2022, net cash generated from financing activities increased by $0.8 billion, as compared to the corresponding period in fiscal 2021.

The increase was primarily due to higher proceeds from debt, net of issuance costs of $1.0 billion and higher cash utilized for share repurchases and stock-based award activities of $0.2 billion, as compared to the prior-year period.

For the six months ended April 30, 2022, net cash used in financing activities decreased by $0.2 billion, as compared to the corresponding period in fiscal 2021.

The decrease was primarily due to lower debt repayments of $0.4 billion and higher cash utilized for share repurchases and stock-based award activities of $0.2 billion, as compared to the prior-year period.

Free Cash Flow

For the three months ended January 31,

Net cash (used in) provided by operating activities $ (76) $ 963

For the six months ended April 30,

Net cash provided by operating activities $ 303 $ 1,785

Investment in property, plant and equipment (1,349) (1,048)

Proceeds from sale of property, plant and equipment 258 194

Free Cash Flow $ (577) $ 563

Total $ (788) $ 931

Free cash flow is defined as cash flow from operations less investments in property, plant and equipment net of proceeds from the sale of property, plant and equipment.

For the three months ended January 31, 2022, free cash flow decreased by $1.1 billion, as compared to the corresponding period in fiscal 2021.

The decrease was due to lower cash generated from operations of $1.0 billion and higher cash utilized for investment in property, plant and equipment, net of sales proceeds of $0.1 billion, as compared to the prior-year period.

For the six months ended April 30, 2022, free cash flow decreased by $1.7 billion, as compared to the corresponding period in fiscal 2021.

The decrease was due to lower cash generated from operations of $1.5 billion due to the impact of supply chain constraints on working capital and higher cash utilized for investments in property, plant and equipment, net of sales proceeds of $0.2 billion, as compared to the prior-year period.

For more information on the impact of operating assets and liabilities to our cash flows, see Note 6, "Balance Sheet Details", to the Condensed Consolidated Financial Statements in Item 1 of Part I.

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For further information on our capital resources, see Note 11, "Borrowings" to the Condensed Consolidated Financial Statements in Item 1 of Part I.

In January 2022, we issued $1.0 billion of asset-backed debt securities ("ABS") in six tranches at a weighted average price of 99.99% and a weighted average interest rate of 1.51%, payable monthly from March 2022 with a stated final maturity date of November 2029.

As of January 31, 2022 and October 31, 2021, no borrowings were outstanding under our revolving credit facility.

As of January 31, 2022 and October 31, 2021, no borrowings were outstanding under the Parent Programs, and $693 million and $705 million, respectively, were outstanding under our subsidiary’s program.

During the first three months of fiscal 2022, we issued $205 million and repaid $194 million of commercial paper.

In May 2022, we issued $747 million of asset-backed debt securities in six tranches at a weighted average price of 99.99% and a weighted average interest rate of 3.68%, payable monthly from July 2022 with a stated final maturity date of March 2030.

In January 2022, we issued $1.0 billion of asset-backed debt securities in six tranches at a weighted average price of 99.99% and a weighted average interest rate of 1.51%, payable monthly from March 2022 with a stated final maturity date of November 2029.

As of April 30, 2022 and October 31, 2021, no borrowings were outstanding under our revolving credit facility.

As of April 30, 2022 and October 31, 2021, no borrowings were outstanding under the Parent Programs, and $630 million and $705 million, respectively, were outstanding under our subsidiary’s program.

During the first six months of fiscal 2022, we issued $473 million and repaid $485 million of commercial paper.

Table of Content

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Contractual Obligations

Other than the previously mentioned issuance of ABS in January 2022, our contractual obligations have not changed materially since October 31, 2021.

Other than the previously mentioned issuance of asset-backed debt securities, our contractual obligations have not changed materially since October 31, 2021.

For further information see "Contractual Cash and Other Obligations" in Item 7 of Part II of our Annual Report on Form 10-K for the fiscal year ended October 31, 2021.

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Restructuring Plans

As of January 31, 2022, we expect to make future cash payments of approximately $650 million in connection with our approved restructuring plans, which includes $330 million expected to be paid through the remainder of fiscal 2022 and $320 million expected to be paid thereafter.

As of April 30, 2022, we expect to make future cash payments of approximately $0.6 billion in connection with our approved restructuring plans, which includes $0.2 billion expected to be paid through the remainder of fiscal 2022 and $0.4 billion expected to be paid thereafter.

For more information on our restructuring activities, see Note 3, "Transformation Programs" to the Condensed Consolidated Financial Statements in Item 1 of Part I.

Uncertain Tax Positions

As of January 31, 2022, we had approximately $330 million of recorded liabilities and related interest and penalties pertaining to uncertain tax positions.

As of April 30, 2022, we had approximately $340 million of recorded liabilities and related interest and penalties pertaining to uncertain tax positions.

These liabilities and related interest and penalties include $32 million expected to be paid within one year.

For the remaining amount, we are unable to make a reasonable estimate as to when cash settlement with tax authorities might occur due to the uncertainties related to these tax matters.

Payments of these obligations would result from settlements with tax authorities.

For the remaining amount, we are unable to make a reasonable estimate as to when cash settlement with the tax authorities might occur due to the uncertainties related to these tax matters.

Payments of these obligations would result from settlements with taxing authorities.

For more information on our uncertain tax positions, see Note 5, "Taxes on Earnings" to the Condensed Consolidated Financial Statements in Item 1 of Part I.

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Reconciliation of GAAP gross profit and gross profit margin to non-GAAP gross profit and gross profit margin.

For the three months ended January 31,

For the three months ended April 30, For the six months ended April 30,

2022 2021 2022 2021

Revenue Dollars % of

Dollars in millions

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Stock-based compensation expense 14 0.2 % 11 0.2 % 29 0.2 % 24 0.2 %

Disaster charges (1)

105 1.6 % — — % 105 0.8 % — — %

Non-GAAP Gross Profit $ 2,293 34.2 % $ 2,300 34.3 % $ 4,653 34.0 % $ 4,603 34.0 %

Reconciliation of GAAP earnings from operations and operating profit margin to non-GAAP earnings from operations and operating profit margin.

For the three months ended January 31,

For the three months ended April 30, For the six months ended April 30,

2022 2021 2022 2021

Revenue Dollars % of

Dollars in millions

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Transformation costs 98 1.4 % 209 3.1 % 209 1.5 % 520 3.9 %

Disaster charges (1)

125 1.9 % 1 — % 124 0.9 % 1 — %

Stock-based compensation expense 114 1.7 % 98 1.5 % 242 1.8 % 208 1.6 %

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Reconciliation of GAAP net earnings and diluted net earnings per share to non-GAAP net earnings and diluted net earnings per share.

For the three months ended January 31,

Dollars Diluted net earnings per share Dollars Diluted net earnings per share

For the three months ended April 30, For the six months ended April 30,

2022 2021 2022 2021

Dollars Diluted net earnings per share Dollars Diluted net earnings per share Dollars Diluted net earnings per share Dollars Diluted net earnings per share

Dollars in millions

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Transformation costs 98 0.07 209 0.15 209 0.16 520 0.40

Disaster charges (1)

125 0.09 1 — 124 0.09 1 —

Stock-based compensation expense 114 0.09 98 0.08 242 0.18 208 0.16

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Non-GAAP net earnings $ 583 $ 0.44 $ 612 $ 0.46 $ 1,280 $ 0.96 $ 1,291 $ 0.98

(1) In the second quarter of fiscal 2022, the Company recorded total pre-tax charges of $126 million primarily related to expected credit losses of financing and trade receivables, $99 million of which was included in Financing cost, $6 million in Cost of services and $21 million in Disaster charges in the Condensed Consolidated Statements of Earnings.

Refer to Note 1, "Overview and Summary of Significant Accounting Policies", for further information.

During the three and six months ended April 30, 2022, Disaster charges also included a recovery of $1 million and $2 million, respectively, related to COVID-19.

(2) Represents the amortization of basis difference adjustments related to the H3C divestiture.

Reconciliation of net cash (used in) provided by operating activities to free cash flow.

For the three months ended January 31,

Net cash (used in) provided by operating activities $ (76) $ 963

Reconciliation of net cash provided by operating activities to free cash flow.

For the three months ended April 30, For the six months ended April 30,

2022 2021 2022 2021

Net cash provided by operating activities $ 379 $ 822 $ 303 $ 1,785

Investment in property, plant and equipment (725) (535) (1,349) (1,048)

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Non-GAAP financial measures

The non-GAAP financial measures presented are net revenue on a constant currency basis, non-GAAP gross profit, non-GAAP gross profit margin, non-GAAP operating profit margin (non-GAAP earnings from operations as a percentage of net revenue), non-GAAP net earnings, non-GAAP diluted net earnings per share, and free cash flow.

The non-GAAP financial measures presented are net revenue on a constant currency basis, non-GAAP gross profit, non-GAAP gross profit margin, non-GAAP earnings from operations, non-GAAP operating profit margin (non-GAAP earnings from operations as a percentage of net revenue), non-GAAP net earnings, non-GAAP diluted net earnings per share, and free cash flow.

These non-GAAP financial measures are used by management for purposes of evaluating our historical and prospective financial performance, as well as evaluating our performance relative to our competitors.

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Net revenue on a constant currency basis assumes no change in the foreign exchange rate from the prior-year period.

Non-GAAP gross profit and non-GAAP gross profit margin are defined to exclude charges related to the amortization of initial direct costs and stock-based compensation expense.

Non-GAAP earnings from operations and non-GAAP operating profit margin (non-GAAP earnings from operations as a percentage of net revenue) consist of earnings from operations excluding any charges related to the amortization of initial direct costs, amortization of intangible assets, transformation costs, stock-based compensation expense and acquisition, disposition and other related charges.

Non-GAAP gross profit and non-GAAP gross profit margin are defined to exclude charges related to the amortization of initial direct costs, stock-based compensation expense and disaster charges.

Non-GAAP earnings from operations and non-GAAP operating profit margin (non-GAAP earnings from operations as a percentage of net revenue) consist of earnings from operations excluding any charges related to the amortization of initial direct costs, amortization of intangible assets, transformation costs, stock-based compensation expense, disaster charges and acquisition, disposition and other related charges.

Non-GAAP net earnings and Non-GAAP diluted net earnings per share consist of net earnings or diluted net earnings per share excluding those same charges, as well as items such as tax indemnification and related adjustments, non-service net periodic benefit credit, earnings from equity interests, certain income tax valuation allowances and separation taxes, the impact of U.S.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis