What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-09-01 compared with 2022-06-03 · 230 added, 217 removed, 499 unchanged (47% 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 and six months ended April 30, 2022 to the comparable prior-year periods and where appropriate, as of April 30, 2022, unless otherwise noted.

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

This MD&A is organized as follows:

• Trends and Uncertainties .

A discussion of material events and uncertainties known to management, such as an update to our COVID-19 response and other events.

A discussion of material events and uncertainties known to management, such as an update to our COVID-19 response, our managed exit from Russia and Belarus, and other events.

• Executive Overview.

A discussion of our business and a summary analysis of our financial performance and other highlights, including non-GAAP financial measures, affecting the Company in order to provide context to the remainder of the MD&A.

A discussion of our business and a summary analysis of our financial performance and other highlights, including non-GAAP financial measures, affecting the Company to provide context to the remainder of the MD&A.

• Critical Accounting Policies and Estimates.

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TRENDS AND UNCERTAINTIES

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.

The overall demand environment continues to improve but remains impacted by industry-wide supply constraints which have contributed to a challenging supply chain environment, even as the impact of recent pandemic-related lockdowns in China alleviated somewhat in the current quarter, which along with inflationary pressures are driving up material and logistic costs.

The challenging supply chain environment has 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.

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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.

In response to the sanctions imposed, in February 2022, we suspended all new sales and shipments to Russia and Belarus and implem ented 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.

During the three months ended July 31, 2022, we recorded total pre-tax charges of $36 million primarily related to employee severance and abandoned assets, $6 million of which was included in Cost of services and $30 million in Disaster charges in the Condensed Consolidated Statement of Earnings.

We also recorded $16 million of net income tax charges, primarily as a result of recording a valuation allowance on deferred taxes, in the Provision for taxes in the Condensed Consolidated Statement of Earnings in connection with these charges.

During the nine months ended July 31, 2022, we recorded total pre-tax charges of $162 million primarily related to expected credit losses of financing and trade receivables, employee severance and abandoned assets, $99 million of which was included in Financing cost, $12 million in Cost of services and $51 million in Disaster charges in the Condensed Consolidated Statements of Earnings.

We recorded $9 million of net income tax benefit in the Provision for taxes in the Condensed Consolidated Statement of Earnings related to these charges.

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.

Tax Legislation

On August 16, 2022, the U.S.

government enacted the Inflation Reduction Act of 2022 (the “Inflation Reduction Act”) into law.

The Inflation Reduction Act includes a new corporate alternative minimum tax (the “Corporate AMT”) of 15% on the adjusted financial statement income (“AFSI”) of corporations with average AFSI exceeding $1.0 billion over a three-year period.

The Corporate AMT is effective for the Company beginning in fiscal 2024.

We are evaluating the Corporate AMT and its potential impact on our future U.S.

tax expense, cash taxes, and effective tax rate.

Additionally, the Inflation Reduction Act imposes an excise tax of 1% tax on the fair market value of net stock repurchases made after December 31, 2022.

The impact of this provision will be dependent on the extent of share repurchases made in future periods.

COVID-19 Update

Our vaccination policy remains in effect;

however, there have been modifications to our U.S.

vaccine policy since first announced, as a result of the nationwide temporary injunction prohibiting enforcement of the U.S.

Federal Executive Order requiring contractors and subcontractors performing work on or in connection with certain federal contracts to be fully vaccinated against COVID-19.

As a result of this injunction, we will not be making vaccination a standard condition of employment in the U.S.

at this time.

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;

government reports indicating vaccination rates of company employees;

or other government-mandated risk strategies.

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.

Given the effectiveness and broad access of vaccines along with their acceptance by a high percentage of our U.S.

workforce, as of September 6, 2022, we will lift our vaccination requirement for access to sites, travel, and events in the U.S.

However, any team member or contingent worker working at or visiting customer or third-party sites must continue to comply with those parties' rules and provide proof of vaccination or a negative test.

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

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Financial Condition and Results of Operations (Continued)

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

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.

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

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and the need to quickly extract value from the captured data.

Enterprises have embraced multi-cloud strategies for different cloud environments for different types of data and workloads.

Enterprises have embraced multi-cloud strategies, employing different cloud environments for different types of data and workloads.

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 company for our customers and partners with our HPE GreenLake edge-to-cloud platform.

In response, we are accelerating our development and innovation efforts in areas of strategic focus, including the Intelligent Edge and HPC & AI businesses, while at the same time, strengthening our core Compute and Storage businesses, by 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.

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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 April 30, For the six months ended April 30,

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

For the three months ended July 31, For the nine months ended July 31,

2022 2021 Change 2022 2021 Change

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Cash flow from operations $ 1,254 $ 1,130 $124 $ 1,557 $ 2,915 $(1,358)

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.

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

Net revenue of $7.0 billion represented an increase of 0.8% (increased 4.3% on a constant currency basis) as robust demand reflected by a high beginning order backlog was moderated by a combination of unfavorable currency fluctuations, ongoing supply chain constraints, and lower revenue from Russia.

The net revenue increase was driven by the introduction of the Frontier supercomputer from HPE Cray and strong demand for our networking products.

The gross profit margin of 34.5%

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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.

(or $2.4 billion) was unchanged from the prior-year period as the combination of pricing discipline in server and storage products and a mix shift to higher margin software rich offerings was offset by supply chain constraints and related cost increases in HPC & AI and Intelligent Edge.

The operating profit margin was 6.7%, up 2.6 percentage points due primarily to lower transformation costs and lower selling, general & administrative expense, the positive impact of which was moderated by expenses related to exiting our Russia and Belarus businesses.

Nine months ended July 31, 2022 compared with the nine months ended July 31, 2021

Net revenue of $20.6 billion represented an increase of 1.0% (increased 2.6% on a constant currency basis) as robust demand reflected by a high beginning order backlog was moderated by a combination of ongoing supply chain constraints, lower revenue from Russia, and unfavorable currency fluctuations.

The net revenue increase was led by strong demand for networking products, the introduction of the Frontier supercomputer from HPE Cray and effective pricing management in server products.

The gross profit margin of 33.5% (or $6.9 billion) represents a decrease of 0.6 percentage points due primarily to supply chain constraints and related cost increases in HPC & AI, Intelligent Edge, and Storage, with expected credit losses related to exiting our Russia and Belarus businesses adding to the overall decline.

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

The operating profit margin was 5.4%, up 1.6 percentage points due primarily to lower transformation costs.

For the nine months ended July 31, 2022, we generated $1.6 billion of cash flow from operations and used $201 million of 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 April 30, For the six months ended April 30,

For the three months ended July 31, For the nine months ended July 31,

2022 2021 Change 2022 2021 Change

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The following presents our ARR performance for the periods presented:

For the three months ended April 30,

For the three months ended July 31,

Dollars in millions

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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.

The increase was adversely impacted by unfavorable currency fluctuations, 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 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.

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

On August 30, 2022, we declared our fiscal 2022 fourth quarterly dividend of $0.12 per share, payable on October 7, 2022, to stockholders of record as of the close of business on September 12, 2022.

During the first nine months of fiscal 2022, we repurchased and settled an aggregate amount of $384 million in connection with our share repurchase program.

As of July 31, 2022, we had a remaining authorization of $1.5 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 April 30, 2022 and October 31, 2021, our cash, cash equivalents and restricted cash were $3.5 billion and $4.3 billion, respectively.

As of July 31, 2022 and October 31, 2021, our cash, cash equivalents and restricted cash were $4.4 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 April 30, 2022, no borrowings were outstanding under this credit facility.

As of July 31, 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 April 30, For the six months ended April 30,

For the three months ended July 31, For the nine months ended July 31,

2022 2021 2022 2021

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

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

For the three months ended July 31, For the nine months ended July 31,

2022 2021 2022 2021

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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).

As of July 31, 2022, the Company had remaining authorization of 38.6 million shares under the 2021 Plan.

Three and nine months ended July 31, 2022 compared with the three and nine months ended July 31, 2021

For the three months ended July 31, 2022, total net revenue of $7.0 billion represented an increase of $54 million, or 0.8% (increased 4.3% on a constant currency basis).

net revenue increased by $24 million, or 1.1% to $2.3 billion, and net revenue from outside of the U.S.

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

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).

increased by $30 million, or 0.6%, to $4.7 billion.

For the nine months ended July 31, 2022, total net revenue of $20.6 billion represented an increase of $195 million, or 1.0% (increased 2.6% on a constant currency basis).

net revenue increased by $304 million, or 4.7% to $6.7 billion, and net revenue from outside of the U.S.

decreased by $109 million, or 0.8%, to $13.9 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.

From a segment perspective, for the three months ended July 31, 2022, net revenu e increased 12% and 8% in HPC & AI and Intelligent Edge, respectively, and decreased 10%, 3%, 3%, and 2% in Corporate Investments and Other, Financial Services, Compute, and Storage, respectively.

For the nine months ended July 31, 2022, net revenue increased 9% and 7% in Intelligent Edge and HPC & AI, respectively, and decreased 5%, 3%, 2%, and 1% in Corporate Investments and Other, Storage, Financial Services, and Compute, respectively.

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

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

For the three months ended July 31, 2022 For the nine months ended July 31, 2022

Percentage points

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Total HPE 0.8 1.0

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

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)

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

For the three months ended July 31, 2022, the total gross profit margin of 34.5% remained unchanged compared to the prior year period as the combination of pricing discipline in server and storage products and a mix shift to higher margin software-rich offerings was offset by supply chain constraints and related cost increases in HPC & AI and Intelligent Edge.

For the nine months ended July 31, 2022, the total gross profit margin of 33.5%, represents a decrease of 0.6 percentage points compared to the prior year period.

The decrease was primarily driven by supply chain constraints and related cost increases across many of our segments, with costs from expected credit losses related to exiting our Russia and Belarus businesses adding to the overall decline.

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

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 .

For the three months ended July 31, 2022, R &D expense increased by $3 million, or 1% due primarily to higher IT and software expenditures, mostly offset by lower employee cost driven by lower variable compensation expense.

For the nine months ended July 31, 2022, R&D expense increased by $53 million, o r 4% due primarily to higher overall employee compensation expense, which contributed 1.9 percentage points to the change and a combination of higher facilities, training and travel expenses, which in total contributed 1.1 percentage points to the change.

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.

For the three months ended July 31, 2022, selling, general and administrative expense decreased by $62 million , or 5% due primarily to a combination of lower employee cost driven by lower variable compensation expense, which contributed 2.9 percentage points to the change, and continued cost savings resulting from our transformation programs, which contributed 2.4 percent points to the change.

For the nine months ended July 31, 2022, selling, general and administrative expense increased by $30 million, or 1% due primarily to higher travel expense as the economy reopens and COVID-19 restrictions ease, which contributed 1.4 percentage points to the change, partially offset by a combination of lower employee cost driven by lower variable compensation expense and continued cost savings from our transformation programs, which in total contributed 0.5 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.

For the three and nine months ended July 31, 2022, amortization of intangible assets decreased by $9 million, or 11% and $56 million, or 20%, respectively, due to certain intangible assets associated with prior acquisitions reaching the end of their amortization periods moderated by an increase in amortization expense in the current periods resulting from recent acquisitions.

Additionally, the decrease for the nine-month period was due to certain write-offs taken in the prior period.

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).

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 the three and nine months ended July 31, 2022, transformation costs decreased by $133 million, or 62% and $444 million, or 61%, respectively, due primarily to lower restructuring charges recorded in the current periods as restructuring actions related to employee severance, infrastructure and other under the HPE Next program are substantially complete.

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

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

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.

For the three months ended July 31, 2022, interest and other, net expense increased by $24 million due primarily to a combination of unfavorable currency fluctuations, the prior period containing interest income from the recovery of social contribution taxes in Brazil, and losses on equity investments in the current period.

The increase was moderated by increased

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Financial Condition and Results of Operations (Continued)

interest income from higher interest rates, lower interest expense from lower average borrowings, and higher gains from the sale of certain assets in the current period.

For the nine months ended July 31, 2022, interest and other, net expense decreased by $26 million due primarily to lower interest expense from lower average borrowings and increased interest income from higher interest rates.

The decrease was moderated by unfavorable currency fluctuations.

Tax indemnification and related adjustments

We recorded tax indemnification expense of $30 million and tax indemnification income of $76 million for the three months ended July 31, 2022 and 2021, respectively, and tax indemnification expense of $47 million and tax indemnification income of $60 million for the nine months ended July 31, 2022 and 2021, respectively.

For the three months ended July 31, 2022, the amount primarily 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.

The nine months ended July 31, 2022 also included changes to certain pre-divestiture tax liabilities and tax receivables.

For the three months ended July 31, 2021, the amount primarily included the impacts of a Brazilian Supreme Court decision received regarding the base on which social contribution taxes are imposed.

The nine months ended July 31, 2021 also included changes in tax liabilities for which we shared joint and several liability with HP Inc., for which we were indemnified by HP Inc., and changes to certain pre-divestiture tax liabilities and tax receivables.

Non-service net periodic benefit credit

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.

For the three and nine months ended July 31, 2022, non-service net periodic benefit credit increased by $15 million and $53 million, respectively, due primarily to lower amortized actuarial losses, partially offset by higher interest cost due to higher discount rates and lower expected returns on assets 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.

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.

For the three months ended July 31, 2022, earnings from equity interests decreased by $11 million due primarily to gains from certain venture investments in the prior period partially offset by lower amortization expense from basis difference and higher net income earned by H3C in the current period.

For the nine months ended July 31, 2022, earnings from equity interests increased by $23 million due primarily to lower amortization expense from basis difference and higher net income earned by H3C in the current period partially offset by gains from certain venture investments in the prior period.

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.

For the three months ended July 31, 2022 and 2021, we recorded income tax expense of $55 million and $14 million, respectively, which reflects an effective tax rate of 11.9% and 3.4%, respectively.

For the nine months ended July 31, 2022 and 2021, we recorded income tax expense of $61 million and $25 million, respectively, which reflects an effective tax rate of 5.0% and 2.8%, respectively.

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

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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.

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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

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

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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.

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.

There ha ve been no significant changes during the nine months ended July 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.

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A description of the products and services for each segment, along with other pertinent information related to our segments can be found in Note 2, "Segment Information", to the Condensed Consolidated Financial Statements in Item 1 of Part I.

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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

Segment Results

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:

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

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

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Year-over-year change percentage points 2.6 pts 2.1 pts (0.4) pts (0.4) pts 0.4 pts 0.7 pts (1.9) pts

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:

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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

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

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

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(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,

For the three months ended July 31, For the nine months ended July 31

2022 2021 % Change 2022 2021 % Change

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Earnings from operations as a % of net revenue 13.3 % 11.2 % 13.7 % 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.

Three months ended July 31, 2022 compared with three months ended July 31, 2021

Compute net revenue decreased by $98 million, or 3.2% (decreased 0.5% on a constant currency basis), primarily due to unfavorable currency fluctuations and a decline in unit shipments resulting from supply constraints due to the challenging supply chain environment.

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

The net revenue decline was moderated by 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.

From a product perspective, Compute experienced revenue growth in the rack server category moderated by a revenue decline across our other product categories resulting from supply constraints.

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 2.1 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 partially offset by supply chain constraints and related costs and unfavorable currency fluctuations.

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

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Financial Condition and Results of Operations (Continued)

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.

Nine months ended July 31, 2022 compared with nine months ended July 31, 2021

Compute net revenue decreased by $55 million, or 0.6% (increased 0.4% on a constant currency basis), primarily due to unfavorable currency fluctuations and 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.

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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 and strong cost management and favorable currency fluctuations moderated by a lower mix of higher margin services.

The decrease in costs of products and services as a percentage of net revenue was primarily due to pricing discipline and strong cost management partially offset by supply chain constraints and related costs.

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,

For the three months ended July 31, For the nine months ended July 31,

2022 2021 % Change 2022 2021 % Change

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Earnings from operations as a % of net revenue 3.4 % 3.8 % (0.8) % 4.1 %

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 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.

Three months ended July 31, 2022 compared with three months ended July 31, 2021

HPC & AI net revenue increased by $90 million, or 12.2% (increased 14.9% on a constant currency basis) as a result of strong demand, led by the introduct ion of the Frontier supercomputer from HPE Cr ay and growth in Data Solutions.

The increase was moderated by supply chain constraints, delayed customer acceptances, challenges with HPE Apollo products, and lower services revenue due primarily to unfavorable currency fluctuations.

HPC & AI earnings from operations as a percentage of net revenue decreased 0.4 percentage points due to increases 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 products and services as a percentage of net revenue was due primarily to the impact of 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 decrease in operating expenses as a percentage of net revenue was primarily due to lower variable compensation expense.

Nine months ended July 31, 2022 compared with nine months ended July 31, 2021

HPC & AI net revenue increased by $145 million, or 6.6% (increased 7.7% on a constant currency basis) as a result of strong demand, led by the introduct ion of the Frontier supercomputer from HPE Cr ay and growth in Data Solutions.

The increase was moderated by supply chain constraints, delayed customer acceptances, and lower services revenue due primarily to an unfavorable portfolio mix of service offerings and unfavorable currency fluctuations.

HPC & AI earnings from operations as a percentage of net revenue decreased 4.9 percentage points due to increases 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 products and services as a percentage of net revenue was due primarily to lower revenue from higher-margin products, a lower mix of revenue from services, supply chain constraints and related cost increases, and the impact of delayed customer acceptances.

The decrease in operating expenses as a percentage of net revenue was primarily due to lower variable compensation expense, partially offset by higher investments in research and development to focus on high-performance computing and AI solutions, including integrating such solutions into our HPE GreenLake edge-to-cloud platform.

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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,

For the three months ended July 31, For the nine months ended July 31,

2022 2021 % Change 2022 2021 % Change

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Earnings from operations as a % of net revenue 14.7 % 15.1 % 13.9 % 17.2 %

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 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.

Three months ended July 31, 2022 compared with three months ended July 31, 2021

Storage net revenue decreased by $23 million or 2.0% (increased 1.2% on a constant currency basis) due primarily to unfavorable currency fluctuations, lower revenue from Russia, and supply chain constraints.

Net revenue declined in Storage products while Storage services was largely unchanged from the prior-year period.

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

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.

Storage earnings from operations as a percentage of net revenue decreased 0.4 percentage points due to an increase in operating expenses as a percentage of net revenue, partially offset by a decrease in cost of products and services as a percentage of net revenue.

The decrease in cost of products and services as a percentage of net revenue was due primarily to a favorable mix of higher-margin products and pricing actions, the effects of which were partially offset by supply chain constraints and related costs.

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, partially offset by lower variable compensation expense.

Nine months ended July 31, 2022 compared with nine months ended July 31, 2021

Storage net revenue decreased by $97 million or 2.8% (decreased 1.6% on a constant currency basis) due primarily to supply chain 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, 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)

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 and Primera products, and lower traditional storage revenue.

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

Storage earnings from operations as a percentage of net revenue decreased 3.3 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 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.

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

Intelligent Edge

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

For the three months ended July 31, For the nine months ended July 31,

2022 2021 % Change 2022 2021 % Change

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Earnings from operations as a % of net revenue 16.5 % 16.1 % 15.5 % 16.9 %

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

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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

Three months ended July 31, 2022 compared with three months ended July 31, 2021

Intelligent Edge net revenue increased by $70 million, or 8.0% (increased 12.2% on a constant currency basis) as a robust demand environment, reflected in a high beginning 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 but was moderated by unfavorable currency fluctuations.

The increase in product revenue was primarily driven by the WLAN business, partially offset by declines in the Switching business due to material constraints.

Growth in 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 increased 0.4 percentage points due primarily to a decrease in operating expenses as a percentage of net revenue partially offset by an increase in cost of products and services as a percentage of net revenue.

The increase in cost of product and services as a percentage of net revenue was primarily due to supply chain constraints and related costs, and unfavorable currency fluctuations.

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.

Nine months ended July 31, 2022 compared with nine months ended July 31, 2021

Intelligent Edge net revenue increased by $225 million, or 9.1% (increased 11.0% on a constant currency basis) as a robust demand environment, reflected in a high beginning 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.

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

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

Intelligent Edge earnings from operations as a percentage of net revenue decreased 1.4 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.

The increase in cost of product and services as a percentage of net revenue was primarily due to supply chain constraints and related costs.

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

Financial Services

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

For the three months ended July 31, For the nine months ended July 31,

2022 2021 % Change 2022 2021 % Change

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Earnings from operations as a % of net revenue 11.8 % 11.1 % 12.2 % 10.6 %

Three months ended July 31, 2022 compared with three months ended July 31, 2021

Financial Services net revenue decreased by $27 million, or 3.2% (increased 1.4% on a constant currency basis) due primarily to unfavorable currency fluctuations 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 0.7 percentage points due to decreases in cost of services as a percentage of net revenue and operating expenses 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 and bad debt expense, partially offset by higher borrowing costs.

The decrease in operating expenses as a percentage of net revenue was due primarily to lower employee cost driven by lower variable compensation expense.

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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.

Nine months ended July 31, 2022 compared with nine months ended July 31, 2021

Financial Services net revenue decreased by $61 million, or 2.4% (increased 0.4% on a constant currency basis) due primarily to unfavorable currency fluctuations and 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 1.6 percentage points due to decreases in cost of services as a percentage of net revenue and operating expenses 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.

The decrease in operating expenses as a percentage of net revenue was due primarily to lower employee cost driven by lower variable compensation expens e .

The provision for expected credit losses due to the Company's exit from its Russia and Belarus businesses for the nine months ended July 31, 2022, was excluded from segment operating results.

Financing Volume

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

For the three months ended July 31, For the nine months ended July 31,

2022 2021 2022 2021

Financing volume $ 1,559 $ 1,575 $ 4,420 $ 4,271

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.

Financing volume, which represents the amount of financing provided to customers for equipment and related software and services, including intercompany activity, decreased by 1.0% and increased by 3.5% for the three and nine months ended July 31, 2022, respectively, as compared to the prior-year periods.

For the three months ended July 31, 2022, the decrease was primarily driven by unfavorable currency fluctuations.

For the nine months ended July 31, 2022, the increase was primarily related 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:

April 30, 2022 October 31, 2021

July 31, 2022 October 31, 2021

Dollars in millions

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(1) Intercompany activity is eliminated in consolidation.

(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 $11.7 billion and $11.9 billion at both July 31, 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 July 31, 2022 and October 31, 2021 was $1.7 billion.

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Financial Condition and Results of Operations (Continued)

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

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.

As of July 31, 2022 and October 31, 2021, Financial Services net cash and cash equivalents balances were approximately $984 million and $898 million, respectively.

Net portfolio assets as of July 31, 2022 decreased 5.5% 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.

For the three and nine months ended July 31, 2022, Financial Services recorded net bad debt expense of $17 million and $62 million, respectively.

For the three and nine months ended July 31, 2021, Financial Services recorded net bad debt expense of $30 million and $89 million, respectively.

As of July 31, 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 our exit from Russia and Belarus businesses 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,

For the three months ended July 31, For the nine months ended July 31,

2022 2021 % Change 2022 2021 % Change

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Loss from operations as a % of net revenue (10.3) % (8.4) % (6.9) % (8.4) %

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

Three months ended July 31, 2022 compared with three months ended July 31, 2021

Corporate Investments and Other net revenue decreased by $32 million, or 9.6% (decreased 0.9% on a constant currency basis) due primarily to unfavorable currency fluctuations.

Corporate Investments and Other loss from operations as a percentage of net revenue increased by 1.9 percentage points due primarily to an increase in cost of services as a percentage of net revenue moderated by a decrease in operating expenses as a percentage of net revenue.

The increase in cost of services as a percentage of net revenue was primarily due to the scale of the net revenue decline and the related impact of fixed overhead costs, and a lower mix of higher margin license revenue in Software.

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

Nine months ended July 31, 2022 compared with nine months ended July 31, 2021

Corporate Investments and Other net revenue decreased by $51 million, or 5.1% (increased 0.8% 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.

Corporate Investments and Other loss from operations as a percentage of net revenue decreased 1.5 percentage points due primarily to lower cost of services as a percentage of net revenue and a decrease in operating expenses as a percentage of net revenue .

The decrease in cost of services as a percentage of net revenue was primarily due to improved service delivery efficiencies in A & PS which includes lower variable compensation expense.

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

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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 April 30, 2022.

as of July 31, 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.

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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 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.

In connection with the share repurchase program previously authorized by our Board of Directors, during the first nine months of fiscal 2022, we repurchased and settled an aggregate amount of $384 million.

As of July 31, 2022, we had a remaining authorization of $1.5 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.

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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.

The amendment extends the Shareholder Agreement 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:

April 30, 2022 October 31, 2021

July 31, 2022 October 31, 2021

Cash, cash equivalents and restricted cash $ 4,449 $ 4,332

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Commercial paper programs (1)

$ 5,115 $ 5,045

Uncommitted lines of credit $ 948 $ 972

(1) The maximum aggregate borrowing amount of the commercial paper programs and revolving credit facility is $5.75 billion.

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

For the six months ended April 30,

For the nine months ended July 31,

Net cash provided by operating activities $ 1,557 $ 2,915

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Net cash used in financing activities (216) (167)

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

Net increase in cash, cash equivalents and restricted cash $ 117 $ 1,031

Operating Activities

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.

For the nine months ended July 31, 2022, net cash from operating activities decreased by $1.4 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, lower cash generated from earnings, and lower variable compensation accruals as compared to the prior-year period.

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

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

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

Days of sales outstanding in accounts receivable ("DSO") 44 49 (5) 43 42 1 1

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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 lower customer participation in early payment programs and lower receivables factoring.

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, partially offset by higher early collections and 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, DPO was relatively unchanged.

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

Investing Activities

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.

For the nine months ended July 31, 2022, net cash used in investing activities decreased by $0.5 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 $0.4 billion, higher proceeds from the sale of investments, net of purchases of $0.3 billion, lower payments made in connection with business acquisitions of $0.1 billion, and higher cash utilized for investment in property, plant and equipment, net of sales proceeds of $0.3 billion, as compared to the prior-year period.

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Financing Activities

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.

For the nine months ended July 31, 2022, net cash used in financing activities was unchanged, as compared to the corresponding period in fiscal 2021.

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

Free Cash Flow

For the six months ended April 30,

For the nine months ended July 31,

Net cash provided by operating activities $ 1,557 $ 2,915

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

For the nine months ended July 31, 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 $1.4 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 $0.3 billion, as compared to the prior-year period.

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Capital Resources

We maintain debt levels that we establish through consideration of a number of factors, including cash flow expectations, cash requirements for operations, investment plans (including acquisitions), share repurchase activities, our cost of capital, and targeted capital structure.

We maintain debt levels that we establish through consideration of several factors, including cash flow expectations, cash requirements for operations, investment plans (including acquisitions), share repurchase activities, our cost of capital, and targeted capital structure.

We maintain a revolving credit facility and two commercial paper programs, "the Parent Programs", and a wholly-owned subsidiary maintains a third program.

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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.

On August 15, 2022, we redeemed $1.35 billion of 4.40% Senior Notes with an original maturity date of October 15, 2022, utilizing the par call option on the debt which enabled net interest expense savings, with no redemption penalties.

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.

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

As of July 31, 2022 and October 31, 2021, no borrowings were outstanding under the Parent Programs, and $635 million and $705 million, respectively, were outstanding under our subsidiary’s program.

During the first nine months of fiscal 2022, we issued $616 million and repaid $601 million of commercial paper.

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Contractual Obligations

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.

In addition to the previously mentioned early redemption of unsecured senior notes and issuance of asset-backed debt securities, our unconditional purchase obligations increased by $0.9 billion to $1.7 billion since October 31, 2021.

For further information see Note 15, "Commitments", to the Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q, and "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.

Retirement Benefit Plan Funding

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Restructuring Plans

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.

As of July 31, 2022, we expect to make future cash payments of approximately $0.5 billion in connection with our approved restructuring plans, which includes $0.1 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 April 30, 2022, we had approximately $340 million of recorded liabilities and related interest and penalties pertaining to uncertain tax positions.

As of July 31, 2022, we had approximately $299 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.

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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 April 30, For the six months ended April 30,

For the three months ended July 31, For the nine months ended July 31,

2022 2021 2022 2021

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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 April 30, For the six months ended April 30,

For the three months ended July 31, For the nine months ended July 31,

2022 2021 2022 2021

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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 April 30, For the six months ended April 30,

For the three months ended July 31, For the nine months ended July 31,

2022 2021 2022 2021

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Non-GAAP net earnings $ 629 $ 0.48 $ 623 $ 0.47 $ 1,909 $ 1.44 $ 1,914 $ 1.44

(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.

(1) During the three and nine months ended July 31, 2022, the Company recorded total pre-tax charges of $36 million and $162 million, respectively, primarily related to the Company's exit from its Russia and Belarus businesses.

During the nine months ended July 31, 2022, Disaster charges also included a recovery of $2 million, related to COVID-19.

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 provided by operating activities to free cash flow.

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

For the three months ended July 31, For the nine months ended July 31,

2022 2021 2022 2021

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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