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Item 2. Management’s Discussion and Analysis

2023-06-02 compared with 2023-03-07 · 403 added, 219 removed, 343 unchanged (64% of the section changed)

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For purposes of this Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") section, we use the terms "Hewlett Packard Enterprise", "HPE", the "Company", "we", "us" and "our" to refer to Hewlett Packard Enterprise Company.

References in the MD&A section to "former Parent" refer to HP Inc.

We intend the discussion of our financial condition and results of operations that follows to provide information that will assist the reader in understanding our Condensed Consolidated Financial Statements, changes in certain key items in these financial statements from period-to-period and the primary factors that accounted for these changes, as well as how certain accounting principles, policies, and estimates affect our Condensed Consolidated Financial Statements.

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

The financial discussion and analysis in the following MD&A compares the three months ended January 31, 2023 to the comparable prior-year period and where appropriate, as of January 31, 2023, unless otherwise noted.

The financial discussion and analysis in the following MD&A compares the three and six months ended April 30, 2023 to the comparable prior-year periods and where appropriate, as of April 30, 2023, 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 the ongoing macroeconomic environment of supply chain constraints, uneven customer demand, and inflationary pressures, and recently enacted tax legislation.

A discussion of material events and uncertainties known to management, such as the mixed macroeconomic environment of supply chain constraints (though easing), conservative customer spending environment, inflationary trend and foreign exchange pressures, and recently enacted tax legislation.

• 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 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 use of non-GAAP financial measures, affecting the Company to provide context to the remainder of the MD&A.

• Results of Operations.

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Each non-GAAP financial measure has been reconciled to the most directly comparable GAAP financial measure therein.

This section also includes a discussion of the usefulness of non-GAAP financial measures, and material limitations associated with the use of non-GAAP financial measures.

This section also includes a discussion of the use, usefulness and economic substance of the non-GAAP financial measures, along with a discussion of material limitations, and compensation for those limitations, associated with the use of non-GAAP financial measures.

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TRENDS AND UNCERTAINTIES

The demand environment has slowed during the first quarter of fiscal 2023 with uneven growth across various sectors.

At the same time, mild improvements to industry-wide supply constraints have helped to ease certain of the supply chain challenges we encountered in the recent past, including facilitating an initial reduction to the high backlog levels we experienced in fiscal 2022.

Nevertheless, we expect supply chain and inflationary pressures to continue to impact our overall costs.

Additionally, we expect these pressures, along with possibly uneven demand, to moderate our revenue growth and delay certain unit shipments, resulting in part in an elevated level of order backlog and related inventory at the end of the current period.

To address supply chain challenges, we are taking proactive measures, such as guiding certain customer demand to specific products, enhancing component engineering design, and multi-sourcing with indirect procurement.

As previously mentioned, although certain of the supply chain pressures are beginning to ease, we expect the supply chain environment to continue to present challenges in the near term.

The elevated backlog levels we experienced in fiscal 2022 generally declined in fiscal 2023 as supply chain constraints eased.

However, our order book in segments such as Intelligent Edge and Compute remain above historically normal levels.

At the same time, in the second quarter of fiscal 2023, new order growth declined on a year-over-year basis, due in part to elongated sales cycles as customers adopted a conservative approach to spending in a mixed macroeconomic environment.

Operationally, the year-over-year segment performance was strong while the sequential segment performance was mixed.

We expect the mixed macroeconomic environment to continue to moderate our revenue growth in the near term.

At the same time, improvements to industry-wide supply constraints have helped to ease certain supply chain challenges we encountered in the recent past, including the increased availability of supply and lower material and logistics costs.

Additionally, we are experiencing a challenging foreign exchange environment, which has moderated our revenue and earnings growth.

We expect the unfavorable foreign exchange effects and inflationary trend to continue in the longer term.

We expect the substantial completion of our HPE Next and cost optimization and prioritization restructuring plans, coupled with related cost reduction measures and operational efficiencies, may moderate the impact of unfavorable foreign exchange effects and inflationary pressures in fiscal 2023.

We expect the unfavorable foreign exchange effects along with an inflationary trend to continue in the longer term.

We expect the substantial completion of our HPE Next Plan and Cost Optimization and Prioritization Plan, coupled with pricing actions we implemented in response to an inflationary trend, related cost reduction measures and operational efficiencies, may moderate the impact of unfavorable foreign exchange effects in fiscal 2023.

Tax Legislation

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

Other than the previous discussion of the ongoing macroeconomic environment of supply chain constraint s, inflationary pressures, and recently enacted tax legislation, man agement believes that there have been no significant changes to the discussion of "Trends and Uncertainties" in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations", of the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 2022.

EXECUTIVE OVERVIEW

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The following table summarizes our condensed consolidated GAAP financial results:

For the three months ended January 31,

2023 2022 Change

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

2023 2022 Change 2023 2022 Change

Dollars in millions, except per share amounts

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Gross profit $ 2,512 $ 2,173 15.6% $ 5,170 $ 4,517 14.5%

Gross profit margin 34.0 % 33.7 % 0.3pts

Gross profit margin 36.0 % 32.4 % 3.6pts 35.0 % 33.0 % 2.0pts

Earnings from operations $ 520 $ 207 151.2% $ 1,111 $ 655 69.6%

Operating profit margin 7.6 % 6.4 % 1.2pts

Operating profit margin 7.5 % 3.1 % 4.4pts 7.5 % 4.8 % 2.7pts

Net earnings $ 418 $ 250 67.2% $ 919 $ 763 20.4%

Diluted net earnings per share $ 0.32 $ 0.19 $0.13 $ 0.70 $ 0.57 $0.13

Cash flow used in operations $ (829) $ (76) $(753)

N et revenue of $7.8 billion represented an increase of 12.2% (increased 17.7% on a constant currency basis) due to a high order backlog and an improving supply chain environment.

The net revenue increase was moderated by unfavorable currency fluctuations.

The net revenue increase resulted primarily from effective pricing management in server products, supply and operational improvements in HPE Cray Supercomputing, and strong demand for our networking products.

The gross profit margin of 34.0% (or $2.7 billion) represents an increase of 0.3 percentage points 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 lower support services revenue.

The operating profit margin of 7.6% represents an increase of 1.2 percentage points due primarily to strong expense management moderated by higher variable compensation expense including planned investments in research and development.

Cash flow provided by operations $ 889 $ 379 $510 $ 60 $ 303 $(243)

Three months ended April 30, 2023 compared with the three months ended April 30, 2022

Net revenue of $7.0 billion represented an increase of 3.9% (increased 8.6% on a constant currency basis) primarily due to higher average unit prices (“AUPs”) in the Intelligent Edge segment, moderated by unfavorable currency fluctuations.

The gross profit margin of 36.0% (or $2.5 billion) represents an increase of 3.6 percentage points from the prior-year period led by the impact of higher-margin networking revenue, higher AUPs in Compute and Intelligent Edge, lower supply chain and commodity costs, and the impact of charges in the prior period from expected credit losses resulting from our exit from Russia and Belarus.

The operating profit margin of 7.5% represents an increase of 4.4 percentage points due primarily to the gross profit margin improvement, lower transformation expense, and lower fixed employee costs.

Six months ended April 30, 2023 compared with the six months ended April 30, 2022

Net revenue of $14.8 billion represented an increase of 8.1% (increased 13.2% on a constant currency basis) primarily due to higher AUPs in the Intelligent Edge segment and higher customer acceptances in the HPC & AI segment, moderated by unfavorable currency fluctuations.

The gross profit margin of 35.0% (or $5.2 billion) represents an increase of 2.0 percentage points from the prior-year period due to the impact of higher-margin networking revenue, higher AUPs in Compute and Intelligent Edge, lower supply chain and commodity costs and the impact of charges in the prior period from expected credit losses resulting from our exit from Russia and Belarus.

The operating profit margin of 7.5% represents an increase of 2.7 percentage points primarily due to the aforementioned gross margin improvement and lower transformation expenses moderated by higher planned investments in research and development.

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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 summarizes our condensed consolidated non-GAAP financial results:

For the three months ended January 31,

2023 2022 Change

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

2023 2022 Change 2023 2022 Change

Dollars in millions, except per share amounts

Net revenue adjusted for currency $ 8,193 $ 6,961 17.7%

Net revenue in constant currency $ 7,292 $ 6,713 8.6% $ 15,485 $ 13,674 13.2%

Non-GAAP gross profit $ 2,525 $ 2,293 10.1% $ 5,199 $ 4,653 11.7%

Non-GAAP gross profit margin 34.2 % 33.9 % 0.3pts

Non-GAAP gross profit margin 36.2 % 34.2 % 2.0pts 35.2 % 34.0 % 1.2pts

Non-GAAP earnings from operations $ 799 $ 627 27.4% $ 1,717 $ 1,395 23.1%

Non-GAAP operating profit margin 11.8 % 11.0 % 0.8pts

Non-GAAP operating profit margin 11.5 % 9.3 % 2.2pts 11.6 % 10.2 % 1.4pts

Non-GAAP net earnings $ 685 $ 583 17.5% $ 1,513 $ 1,280 18.2%

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Free cash flow $ 288 $ (211) $499 $ (1,038) $ (788) $(250)

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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

Each non-GAAP financial measure has been reconciled to the most directly comparable GAAP financial measure herein.

Please refer to the section "GAAP to non-GAAP Reconciliations" included in this MD&A for these reconciliations, a discussion of the usefulness of non-GAAP financial measures and material limitations associated with the use of non-GAAP financial measures.

Please refer to the section "GAAP to non-GAAP Reconciliations" included in this MD&A for these reconciliations, a discussion of the use, usefulness and economic substance of the non-GAAP financial measures, along with a discussion of material limitations, and compensation for those limitations, associated with the use of non-GAAP financial measures.

Annualized Revenue Run-rate ("ARR")

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ARR is not a forecast and the active contracts at the end of a reporting period used in calculating ARR may or may not be extended or renewed by our customers.

The following presents our ARR as of January 31, 2023 and 2022:

For the three months ended January 31,

The following presents our ARR calculated as of April 30, 2023 and 2022:

As of April 30,

Dollars in millions

Year-over-year growth rate

T he 26% increase in ARR was due primarily to growth in our HPE GreenLake edge-to-cloud platform and related financial services moderated by unfavorable currency fluctuations.

The growth in the HPE GreenLake edge-to-cloud platform was due to an expanding customer installed base.

The 35% year-over year increase in ARR was due primarily to growth in our HPE GreenLake edge-to-cloud platform and related financial services moderated by unfavorable currency fluctuations.

The growth in the HPE GreenLake edge-to-cloud platform was led by an expanding customer installed base.

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

Returning capital to our shareholders remains an important part of our capital allocation framework, which also consists of strategic investments.

During the first quarter of fiscal 2023, we paid a quarterly dividend of $0.12 per share to our shareholders.

On March 2, 2023, we declared a regular cash dividend of $0.12 per share on our common stock, payable on April 14, 2023, to our shareholders of record as of the close of business on March 17, 2023.

As of January 31, 2023, we had a remaining authorization of $1.3 billion for future share repurchases.

During the second quarter of fiscal 2023, we paid a quarterly dividend of $0.12 per share to our shareholders.

On May 30, 2023, we declared a regular cash dividend of $0.12 per share on our common stock, payable on July 14, 2023, to our shareholders of record as of the close of business on June 15, 2023.

As of April 30, 2023, we had a remaining authorization of $1.2 billion for future share repurchases.

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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

RESULTS OF OPERATIONS

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Other companies may calculate and define similarly labeled items differently, which may limit the usefulness of this measure for comparative purposes.

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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

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

For the three months ended January 31,

Dollars % of Revenue Dollars % of Revenue

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

2023 2022 2023 2022

Dollars % of Revenue Dollars % of Revenue Dollars % of

Revenue Dollars % of

Dollars in millions

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Transformation costs 60 0.9 98 1.4 162 1.1 209 1.5

Disaster charges (recovery) 1 — (1) —

Disaster charges 3 — 20 0.3 4 — 19 0.1

Acquisition, disposition and other related charges 19 0.3 8 0.1 30 0.2 16 0.1

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Earnings from equity interests 49 0.7 33 0.5 107 0.7 64 0.5

Earnings before (provision) benefit for taxes 623 8.0 493 7.1

(Provision) benefit for taxes (122) (1.6) 20 0.3

Earnings before provision for taxes 522 7.5 276 4.1 1,145 7.7 769 5.6

Provision for taxes (104) (1.5) (26) (0.4) (226) (1.5) (6) —

Net earnings $ 418 6.0 % $ 250 3.7 % $ 919 6.2 % $ 763 5.6 %

Net revenue of $7.8 billion represented an increase of $848 million, or 12.2% (increased 17.7% on a constant currency basis).

Three and six months ended April 30, 2023 compared with the three and six months ended April 30, 2022

For the three months ended April 30, 2023, total net revenue of $7.0 billion represented an increase of $260 million, or 3.9% (increased 8.6% on a constant currency basis).

net revenue increased by $236 million, or 10.9% to $2.4 billion, and net revenue from outside of the U.S.

increased by $24 million, or 0.5%, to $4.6 billion.

From a segment perspective, net revenu e increased across most of our segments due to the improved demand environment led by revenue growth of 34%, 25%, 14%, 5% and 4% in HPC & AI, Intelligent Edge, Compute, Storage and Financial Services, respectively, and decreased 10% in Corporate Investments and Other.

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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

For the six months ended April 30, 2023, total net revenue of $14.8 billion represented an increase of $1,108 million, or 8.1% (increased 13.2% on a constant currency basis).

net revenue increased by $804 million, or 18.0% to $5.3 billion, and net revenue from outside of the U.S.

increased by $304 million, or 3.3%, to $9.5 billion.

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

For the three months ended January 31, 2023

For the three months ended April 30, 2023 For the six months ended April 30, 2023

Percentage points

Compute (3.7) 1.2

HPC & AI 1.9 2.9

Storage (0.4) 0.2

Intelligent Edge 6.5 4.8

Financial Services 0.5 0.5

Corporate Investments (0.3)

Corporate Investments and Other (0.5) (0.4)

Total Segment 4.3 9.2

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Total HPE 3.9 8.1

Three months ended April 30, 2023 compared with three months ended April 30, 2022

From a segment perspective, the primary factors contributing to the change in total net revenue are summarized as follows:

• Compute net revenue decrease of $250 million, or 8.3%, primarily due to a decline in server unit volume and unfavorable currency fluctuations moderated by higher AUPs

• HPC & AI net revenue increase of $130 million, or 18.3%, primarily due to higher customer acceptance

• Storage net revenue decrease of $29 million, or 2.7%, primarily due to unfavorable currency fluctuations, partially offset by improvements in the supply environment

• Intelligent Edge net revenue increase of $437 million, or 50.4%, primarily due to increased AUPs and volume and product mix effect

• Financial Services net revenue increase of $35 million, or 4.3%, primarily due to higher rental revenue from higher average operating leases and higher finance income on finance leases due to an increasing interest rate environment

• Corporate Investments and Other net revenue decrease of $31 million, or 9.5%, primarily due to unfavorable currency fluctuations

Six months ended April 30, 2023 compared with six months ended April 30, 2022

From a segment perspective, the primary factors contributing to the change in total net revenue are summarized as follows:

• Compute net revenue increase of $162 million, or 2.7%, primarily due to higher AUPs moderated by lower server unit volume and unfavorable currency fluctuations

• HPC & AI net revenue increase of $396 million, or 26.4%, primarily due to higher customer acceptances

• Storage net revenue increase of $30 million, or 1.4%, primarily due to improvements in the supply environment, partially offset by unfavorable currency fluctuations

• Intelligent Edge net revenue increase of $663 million, or 37.5%, primarily due to increased AUPs and volume and product mix effect

• Financial Services net revenue increase of $66 million, or 4.0%, primarily due to higher rental revenue from higher average operating leases and higher finance income on finance leases due to an increasing interest rate environment

• Corporate Investments and Other net revenue decrease of $63 million, or 9.7%, primarily due to unfavorable currency fluctuations

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

Gross profit margin of 34.0%, represents an increase of 0.3 percentage points as the combination of pricing discipline and strong cost management in server and storage products and a mix shift to higher margin software rich offerings was offset by lower support services revenue and higher variable compensation expense.

For the three and six months ended April 30, 2023, the total gross profit margin of 36.0% and 35.0%, respectively, represents an increase of 3.6 and 2.0 percentage points, respectively, as compared to the respective prior year periods.

The increase in both periods was due to the impact of higher-margin networking revenue, higher AUPs in Compute and Intelligent Edge, lower supply chain and commodity costs, and the impact of charges in the prior period from expected credit losses resulting from our exit from Russia and Belarus.

Additionally, the increase for the six months ended April 30, 2023, was partially offset by lower support services revenue.

Operating expenses

Research and development ("R&D")

R&D expense increased by $119 million, or 24% due primarily to higher employee cost driven by higher variable compensation expense.

For the three months ended April 30, 2023, R&D expense increased by $53 million, or 10.3%, led by Intelligent Edge and Storage.

The increase was driven by higher employee costs due to an increase in software engineers to pursue our strategic goals, and incremental operational expenses from recent business acquisitions, which contributed 7.0 percentage points and 1.9 percentage points, respectively, to the change.

The increase was partially offset by favorable currency fluctuations which contributed 1.2 percentage points to the change.

For the six months ended April 30, 2023, R&D expense increased by $172 million, or 16.8%, led by Intelligent Edge, HPC & AI and Storage.

The increase was driven by higher employee costs due to an increase in software engineers to pursue our strategic goals, and incremental operational expenses from recent business acquisitions, which contributed 12.3 percentage points and 3.8 percentage points, respectively, to the change.

The increase was partially offset by favorable currency fluctuations which contributed 1.4 percentage points to the change.

Selling, general and administrative ("SG&A")

SG&A expense increased by $56 million, or 5% due primarily to higher software expenditures, increased employee cost driven by higher variable compensation expense and increased travel expense as the economy reopens and COVID-19 restrictions ease, all of which contributed 1.6 percentage points, 1.5 percentage points and 1.1 percentage points, respectively, to the change.

Additionally, the overall increase in SG&A expense was moderated across various expense categories by favorable currency fluctuations.

For the three months ended April 30, 2023, SG&A expense increased by $20 million, or 1.6%, due primarily to factoring fees and other general expenses, higher travel expenses as the economy opens up, and higher software expenditures, all of which contributed 1.7, 1.6 and 0.6 percentage points, respectively, to the change.

The increase was partially offset by a combination of lower employee costs, contractor and consulting costs, which contributed 3.6 percentage points to the change, and favorable currency fluctuations driven by lower field selling costs.

For the six months ended April 30, 2023, SG&A expense increased by $76 million, or 3.1%, due primarily to factoring fees, charitable donations, and other general expenses, higher travel expenses as the economy opens up and higher software expenditures, all of which contributed 1.6, 1.4 and 1.0 percentage points, respectively, to the change.

The increase was partially offset by a combination of lower contractor and consulting costs, which contributed 1.4 percentage points to the change, and favorable currency fluctuations driven by lower field selling costs.

Transformation programs and costs

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

Transformation costs decreased by $9 million, or 8% due to lower charges incurred in the current period as these plans approach completion through fiscal 2023.

Our transformation programs consist of the Cost Optimization and Prioritization Plan (launched in 2020) and the HPE Next Plan (launched in 2017).

For the three and six months ended April 30, 2023, transformation costs decreased by $38 million, or 38.8%, and $47 million, or 22.5%, respectively due to lower charges incurred in the current period as these plans approach completion through fiscal 2023.

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

Interest and other, net

Interest and other, net expense increased by $20 million due primarily to the impact of the prior period containing gains from equity investments and from the sale of certain assets, and increased interest expense in the current period.

This increase was moderated by favorable currency fluctuations and increased interest income from higher interest rates in the current period.

Tax indemnification and related adjustments

We record changes to certain pre-separation and pre-divestiture tax liabilities and tax receivables for which we remain liable on behalf of the separated or divested business, but which may not be subject to indemnification.

We recorded Tax indemnification and related adjustments expense of $1 million and $17 million for the three months ended January 31, 2023 and 2022, respectively.

Non-service net periodic benefit credit

Non-service net periodic benefit credit decreased by $36 million due primarily to increased interest cost resulting from higher discount rates, partially offset by higher expected returns on assets and lower amortized actuarial losses in the current periods.

Earnings from equity interests

Earnings from equity interests primarily represents our 49% interest in H3C Technologies Co.

Limited ("H3C") and the amortization of our interest in basis difference.

Earnings from equity interests increased by $27 million due primarily to the current period containing higher net income earned by H3C.

For the three months ended April 30, 2023, interest and other, net expense increased by $54 million, due primarily to the impact of the prior period containing both gains from equity investments and the sale of certain assets, and unfavorable currency fluctuations in the current period.

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Financial Condition and Results of Operations (Continued)

(Provision) benefit for taxes

For the three months ended January 31, 2023 and 2022, we recorded income tax expense of $122 million and income tax benefit of $20 million, respectively, which reflects an effective tax rate of 19.6% and (4.1)%, respectively.

For the six months ended April 30, 2023, interest and other, net expense increased by $74 million, due primarily to the impact of the prior period containing both gains from equity investments and the sale of certain assets.

This increase was moderated by favorable currency fluctuations and increased net interest income from higher interest rates in the current period.

Tax indemnification and related adjustments

We recorded tax indemnification and related adjustments income of $6 million for the three months ended April 30, 2023 and none for the three months ended April 30, 2022, and tax indemnification income of $5 million and tax indemnification expense of $17 million for the six months ended April 30, 2023 and 2022, respectively.

Non-service net periodic benefit credit

For the three and six months ended April 30, 2023, non-service net periodic benefit credit decreased by $35 million and $72 million, respectively, due primarily to increased interest cost resulting from higher discount rates, partially offset by higher expected returns on assets and lower amortized actuarial losses in the current periods.

Earnings from equity interests

Earnings from equity interests primarily represents our 49% interest in H3C Technologies Co., Limited ("H3C") and the amortization of our interest in basis difference.

For the three months ended April 30, 2023, earnings from equity interests increased by $16 million due primarily to lower amortization expense from basis difference.

For the six months ended April 30, 2023, earnings from equity interests increased by $43 million due primarily to lower amortization expense from basis difference and higher net income earned by H3C in the current period.

Provision for taxes

For the three months ended April 30, 2023 and 2022, we recorded income tax expense of $104 million and $26 million, respectively, which reflects an effective tax rate of 19.9% and 9.4%, respectively.

For the six months ended April 30, 2023 and 2022, we recorded income tax expense of $226 million and $6 million, respectively, which reflect an effective tax rate of 19.7% and 0.8%, respectively.

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

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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 January 31, 2023, as compared to the prior-year period:

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

The following table and ensuing discussion provide an overview of our key financial metrics by segment for the three months ended April 30, 2023, as compared to the prior-year period:

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

Dollars in millions

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Year-over-year change percentage points 4.4 pts 1.1 pts 5.4 pts (3.9) pts 14.3 pts (2.8) pts (8.6) pts

The following table and ensuing discussion provide an overview of our key financial metrics by segment for the six months ended April 30, 2023, as compared to the prior-year period:

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

Dollars in millions

Net revenue (1)

$ 14,782 $ 6,217 $ 1,896 $ 2,230 $ 2,431 $ 1,731 $ 589

Year-over-year change % 8.1 % 2.7 % 26.4 % 1.4 % 37.5 % 4.0 % (9.7) %

Earnings (loss) from operations (2)

$ 1,111 $ 1,029 $ (1) $ 224 $ 598 $ 166 $ (102)

Earnings (loss) from operations as a % of net revenue 7.5 % 16.6 % (0.1) % 10.0 % 24.6 % 9.6 % (17.3) %

Year-over-year change percentage points 2.7 pts 2.5 pts 3.0 pts (2.9) pts 9.6 pts (2.9) pts (11.9) pts

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

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

For the three months ended January 31,

2023 2022 % Change

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

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

2023 2022 % Change 2023 2022 % Change

Dollars in millions

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Earnings from operations as a % of net revenue 15.2 % 14.1 % 16.6 % 14.1 %

Three months ended April 30, 2023 compared with three months ended April 30, 2022

Compute net revenue decreased by $250 million , or 8.3% (decreased 3.2% on a constant currency basis), primarily due to a $258 million, or 11.3%, decrease in product revenue.

The decline in product revenue was primarily due to lower server unit volume of $412 million, or 18.0%, and unfavorable currency fluctuations of $121 million.

The product revenue decline was moderated by an increase in AUPs of $275 million, or 12.0%, led by higher sales of server configurations with more complex component architectures in our next generation products.

Services net revenue increased by $8 million, or 1.1%, due to an increase in contract volume moderated by unfavorable currency fluctuations.

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Financial Condition and Results of Operations (Continued)

Compute net revenue increased by $412 million , or 13.5% (increased 19.4% on a constant currency basis) driven by a high order backlog and improvements in the supply chain environment.

Leading the increase was higher average unit prices resulting from a combination of increased sales of server configurations with more complex component architectures and disciplined pricing actions.

Moderating this increase was unfavorable currency fluctuations and lower unit shipments.

Product revenue growth was driven by the rack server category.

Services net revenue declined primarily due to unfavorable currency fluctuations.

Compute earnings from operations as a percentage of net revenue increased 3.6 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 partially offset by unfavorable currency fluctuations and higher variable compensation.

Operating expenses as a percentage of net revenue decreased primarily due to our optimized expense structure partially offset by higher variable compensation expense.

For the three months ended January 31,

2023 2022 % Change

Dollars in millions

Net revenue $ 1,056 $ 790 33.7 %

Earnings (loss) from operations $ 1 $ (7) (114.3) %

Earnings (loss) from operations as a % of net revenue 0.1 % (0.9) %

HPC & AI net revenue increased by $266 million, or 33.7% (increased 37.2% on a constant currency basis) driven by a high order backlog and improvements in the supply environment.

Leading the increase was growth in HPC led by the HPE Cray Supercomputing product portfolio, as operational and supply improvements addressed recent challenges with achieving certain customer acceptance milestones for revenue recognition.

We also experienced revenue growth in the Data Solutions product category.

These increases were moderated by an uneven demand environment in HPE Apollo products, 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 increased 1.0 percentage points due 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 products and services as a percentage of net revenue was due primarily to lower revenue from higher-margin services and higher variable compensation expense.

The decrease in operating expenses as a percentage of net revenue was primarily due to our optimized expense structure moderated by higher variable compensation expense.

For the three months ended January 31,

2023 2022 % Change

Compute earnings from operations as a percentage of net revenue increased 1.1 percentage points due to a decrease in costs of products and services as a percentage of net revenue while operating expenses as a percentage of net revenue increased.

The decrease in costs of products and services as a percentage of net revenue was primarily due to higher AUPs and lower commodity costs moderated by unfavorable currency fluctuations.

The increase in operating expenses as a percentage of net revenue was primarily due to the scale of the net revenue decline while total operating expenses remained relatively flat.

Six months ended April 30, 2023 compared with six months ended April 30, 2022

Compute net revenue increased by $162 million, or 2.7% (increased 8.2% on a constant currency basis), primarily due to a $170 million, or 3.7%, increase in product revenue.

The product revenue increase was primarily due to an increase in AUPs of $872 million, or 18.9%, led by higher sales of server configurations with more complex component architectures in our next generation products.

The product revenue increase was moderated by unfavorable currency fluctuations of $257 million, and lower server unit volume of $445 million, or 9.7%, resulting from an uneven demand environment.

Services net revenue remained relatively flat as an increase in services contracts was moderated by unfavorable currency fluctuations.

Compute earnings from operations as a percentage of net revenue increased 2.5 percentage points due to a decrease in costs of products and services as a percentage of net revenue while operating expenses as a percentage of net revenue remained relatively flat.

The decrease in costs of products and services as a percentage of net revenue was primarily due to higher AUPs and lower commodity costs, moderated by unfavorable currency fluctuations.

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

2023 2022 % Change 2023 2022 % Change

Dollars in millions

Net revenue $ 840 $ 710 18.3 % $ 1,896 $ 1,500 26.4 %

Earnings from operations $ 142 $ 157 (9.6) %

Earnings from operations as a % of net revenue 12.0 % 13.9 %

Storage net revenue increased by $59 million or 5.2% (increased 10.5% on a constant currency bas is) as improvements in the supply environment were partially offset by unfavorable currency fluctuations.

Net revenue increased in Storage products moderated by a net revenue decrease in Storage services.

The increase in Storage products was led by higher revenue from HPE Alletra, Hyperconverged and HPE Primera products, partially offset by lower HPE 3PAR revenue, as we transition to next generation product platforms, such as HPE Alletra.

The decrease in Storage services was due to lower support services revenue as certain hardware products approach their end-of-life and product transitions.

Loss from operations $ (2) $ (40) (95.0) % $ (1) $ (47) (97.9) %

Loss from operations as a % of net revenue (0.2) % (5.6) % (0.1) % (3.1) %

Three months ended April 30, 2023 compared with three months ended April 30, 2022

HPC & AI net revenue increased by $130 million, or 18.3% (increased 22.3% on a constant currency basis), primarily due to a $140 million, or 29.4%, increase in product revenue.

The produ ct revenue increase w as led by the HPE Cray XD (formerly known as HPE Apollo) and HPE Cray Supercomputing product portfolios, as operational and supply improvements addressed recent challenges with achieving certain customer acceptance milestones for revenue recognition.

The product revenue increase was led by HPE Cray XD with higher AUPs of $74 million, or 15.2%, and a unit volume increase of $17 million, or 3.6%.

HPE Cray Supercomputing product unit and deal volume increased by $194 million, or 39.7%, moderated by a decrease in AUPs of $140 million, or 28.6%.

Additionally, HPC & AI experienced unfavorable currency fluctuations of $23 million.

HPC & AI earnings from operations as a percentage of net revenue increased 5.4 percentage points due to decreases in cost of products and services as a percentage of net revenue and operating expenses 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, moderated by unfavorable currency fluctuations.

The decrease in operating expenses as a percentage of net revenue was primarily due to the scale of the net revenue increase.

Six months ended April 30, 2023 compared with six months ended April 30, 2022

HPC & AI net revenue increased by $396 million, or 26.4% (increased 30.1% on a constant currency basis), primarily due to a $420 million, or 40.6%, increase in product revenue.

The product revenue increase was led by the HPE Cray Supercomputing product portfolio, as operational and supply improvements addressed recent challenges with achieving certain customer acceptance milestones for revenue recognition.

The product revenue increase was led by HPE Cray Supercomputing with a unit volume increase of $246 million, or 23.3%, and higher AUPs of $172 million, or 16.3%.

The increase was moderated by unfavorable currency fluctuations of $43 million and lower services revenue of $24 million, or 5.2%, due primarily to an unfavorable portfolio mix of service offerings.

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2 unchanged sentences

Financial Condition and Results of Operations (Continued)

HPC & AI earnings from operations as a percentage of net revenue increased 3.0% percentage points due to a decrease in operating expenses as a percentage of net revenue, while the cost of products and services as a percentage of net revenue was unchanged from the prior-year period.

The decrease in operating expenses as a percentage of net revenue was primarily due to the scale of the net revenue increase, moderated by higher investments in research and development.

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

2023 2022 % Change 2023 2022 % Change

Dollars in millions

Net revenue $ 1,043 $ 1,072 (2.7) % $ 2,230 $ 2,200 1.4 %

Earnings from operations $ 82 $ 127 (35.4) % $ 224 $ 284 (21.1) %

Earnings from operations as a % of net revenue 7.9 % 11.8 % 10.0 % 12.9 %

Three months ended April 30, 2023 compared with three months ended April 30, 2022

Storage ne t revenue decreased by $29 million or 2.7% (increased 2.1% on a constant currency basis), primarily due to unfavorable currency fluctuations, partially offset by improvements in the supply environment.

Storage product revenue decreased $23 million, or 3.8%, primarily due to unfavorable currency fluctuations of $36 million and a decrease in AUPs of $21 million, or 3.4%.

Sales volume increased by $37 million, or 6.1%, led by traditional storage and big data products.

Storage services revenue decreased by $6 million, or 1.3%, primarily due to unfavorable currency fluctuations of $15 million, moderated by a sales volume increase of $12 million, or 2.6%.

The services sales volume increase was led by higher subscription services as we continue our transition to a more services-intensive, software-rich set of offerings, partially offset by lower Storage support services.

Storage earnings from operations as a percentage of net revenue decreased 3.9 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 lower revenue from support services as we continue our transition to more software-rich products, unfavorable currency fluctuations, and higher variable compensation expense.

These impacts were partially offset by lower supply chain costs to expedite product delivery and disciplined pricing actions.

The increase in operating expenses as a percentage of net revenue was due primar ily to higher variable compensation expense.

The increase in cost of products and services as a percentage of net revenue was primarily due to unfavorable currency fluctuations.

These impacts were partially offset by certain reduced operating expenses.

Six months ended April 30, 2023 compared with six months ended April 30, 2022

Storage net revenue increased by $30 million, or 1.4%, (increased 6.4% on a constant currency basis), as improvements in the supply environment were partially offset by unfavorable currency fluctuations.

The increase in Storage product revenue of $65 million, or 5.2%, was primarily due to an increase in AUPs of $114 million, or 9.2%, led by traditional storage and HPE Alletra Storage products and a unit volume increase of $52 million or 4.2%, led by hyperconverged, traditional storage and big data products.

Moderating factors to the revenue increase were unfavorable currency fluctuations of $82 million and lower revenue from Russia of $20 million.

Storage services revenue declined by $35 million, or 3.7%, primarily due to lower AUPs of $58 million, or 6.0%, unfavorable currency fluctuations of $29 million, and lower revenue from Russia of $16 million and lower Storage support services.

This decline was moderated by higher sales volume of $67 million, or 7.0%, led by higher subscription service as we continue our transition to more services-intensive, software-rich offerings.

Storage earnings from operations as a percentage of net revenue decreased 2.9% 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.

These impacts were partially offset by lower supply chain costs to expedite product delivery and favorable mix of higher margin products.

Intelligent Edge

For the three months ended January 31,

2023 2022 % Change

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

2023 2022 % Change 2023 2022 % Change

Dollars in millions

2 unchanged sentences

Earnings from operations as a % of net revenue 26.9 % 12.6 % 24.6 % 15.0 %

Intelligent Edge net revenue increased by $226 million, or 25.1% (increased 31.0% on a constant currency basis) primarily due to strong demand, which was reflected in a high backlog, improved supply chain execution, and disciplined pricing actions.

As a result, net revenue increased in both products and services, moderated by unfavorable currency fluctuations.

The increase in product revenue was primarily driven by the wireless local area network ("WLAN") and switching businesses, which benefited from improvements in the supply environment while services revenue growth was led by our as-a-service offerings.

Intelligent Edge earnings from operations as a percentage of net revenue increased 4.5 percentage points due primarily to decreases in cost of products and services as a percentage of net revenue and operating expenses as a percentage of net revenue.

T he decrease in cost of product and services as a percentage of net revenue was primarily due to disciplined cost management and pricing actions, moderated by a lower mix of support services revenue and higher variable compensation expense.

Operating expenses as a percentage of net revenue decreased primarily due to our cost containment measures partially offset by higher variable compensation expense.

Table of Content

HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

Three months ended April 30, 2023 compared with three months ended April 30, 2022

Intelligent Edge net revenue increased by $437 million, or 50.4% (increased 55.8% on a constant currency basis).

Product revenue increased by $403 million, or 57.7%, led by higher AUPs of $358 million, or 51.0%, and a volume and product mix effect of $87 million, or 12.5%, moderated by unfavorable currency fluctuations of $42 million.

The product revenue increase was led by wireless local area network (“WLAN”) and Switching products, which benefited from improvements in the supply environment.

Services net revenue increased $34 million, or 20.2%, primarily led by our as-a-service offerings.

Intelligent Edge earnings from operations as a percentage of net revenue increased 14.3 percentage points primarily due to decreases in cost of products and services as a percentage of net revenue and operating expenses as a percentage of net revenue.

The decrease in cost of product and services as a percentage of net revenue was primarily due to lower supply chain costs and higher AUPs, moderating the decrease was a lower mix of higher-margin support services revenue.

Operating expenses as a percentage of net revenue decreased primarily due to our cost containment measures.

Six months ended April 30, 2023 compared with six months ended April 30, 2022

Intelligent Edge net revenue increased by $663 million, or 37.5% (increased 43.2% on a constant currency basis).

Product revenue increased by $611 million, or 42.7%, led by higher AUPs of $573 million, or 40.0%, and a volume and product mix effect of $129 million, or 9.0%, moderated by unfavorable currency fluctuations of $91 million.

The product revenue increase was led by WLAN and Switching products, which benefited from improvements in the supply environment.

Services net revenue increased $52 million, or 15.4%, primarily led by our as-a-service offerings.

Intelligent Edge earnings from operations as a percentage of net revenue increased 9.6 percentage points primarily due to decreases in cost of products and services as a percentage of net revenue and operating expenses as a percentage of net revenue.

Operating expenses as a percentage of net revenue decreased primarily due to our cost containment measures.

Financial Services

For the three months ended January 31,

2023 2022 % Change

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

2023 2022 % Change 2023 2022 % Change

Dollars in millions

2 unchanged sentences

Earnings from operations as a % of net revenue 9.8 % 12.6 % 9.6 % 12.5 %

FS net revenue increased by $31 million, or 3.7% (increased 8.1% on a constant currency basis) due primarily to high er rental revenue from higher average operating leases an d higher asset management revenue from lease buyouts, partially offset by unfavorable currency fluctuations.

Three months ended April 30, 2023 compared with three months ended April 30, 2022

FS net revenue increased by $35 million, or 4.3% (increased 6.8% on a constant currency basis) due primarily to higher rental revenue from higher average operating leases and higher finance income on finance leases due to an increasing interest rate environment, partially offset by unfavorable currency fluctuations.

FS earnings from operations as a percentage of net revenue decreased 2.8 percentage points due to an increase in cost of services as a percentage of net revenue, while operating expenses as a percentage of net revenue were relatively flat.

The increase to cost of services as a percentage of net revenue resulted primarily from a combination of higher borrowing costs and higher depreciation expense.

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

Six months ended April 30, 2023 compared with six months ended April 30, 2022

FS net revenue increased by $66 million, or 4.0% (increased 7.4% on a constant currency basis) due primarily to higher rental revenue from higher average operating leases and higher finance income on finance leases due to an increasing interest rate environment, along with higher asset management revenue from lease buyouts, partially offset by unfavorable currency fluctuations.

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2 unchanged sentences

Financial Condition and Results of Operations (Continued)

FS earnings from operations as a percentage of net revenue decreased 2.9% percentage points due to an increase in cost of services as a percentage of net revenue, while operating expenses as a percentage of net revenue were relatively flat.

Financing Volume

For the three months ended January 31,

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

2023 2022 2023 2022

Financing volume $ 1,668 $ 1,473 $ 3,268 $ 2,861

Financing volume, which represents the amount of financing provided to customers for equipment and related software and services, including intercompany activity, increased by 15.3% due primarily to higher financing of HPE and 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, increased by 13.2% and 14.2% for the three and six months ended April 30, 2023, respectively, as compared to the corresponding prior-year periods, due primarily to higher financing of HPE product sales and services, partially offset by unfavorable currency fluctuations.

Portfolio Assets and Ratios

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

January 31, 2023 October 31, 2022

April 30, 2023 October 31, 2022

Dollars in millions

13 unchanged sentences

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

Debt benefiting FS totaled $12.1 billion and $11.5 billion at January 31, 2023 and October 31, 2022, 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.

FS equity at January 31, 2023 and October 31, 2022 was $1.7 billion and $1.6 billion, respectively.

As of January 31, 2023 and October 31, 2022, FS net cash and cash equivalents balances were approximately $1.0 billion and $0.9 billion, respectively.

Net portfolio assets as of January 31, 2023 increased 5.3% from October 31, 2022.

Debt benefiting FS totaled $11.7 billion and $11.5 billion at April 30, 2023 and October 31, 2022, 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.

FS equity at April 30, 2023 and October 31, 2022 was $1.7 billion and $1.6 billion, respectively.

As of April 30, 2023 and October 31, 2022, FS net cash and cash equivalents balances were approximately $0.8 billion and $0.9 billion, respectively.

Net portfolio assets as of April 30, 2023 increased 6.2% from October 31, 2022.

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

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

For the three months ended January 31, 2023 and 2022, FS recorded net bad debt expense of $19 million and $23 million, respectively.

As of January 31, 2023, FS experienced an increase in billed finance receivables compared to October 31, 2022, which included a limited impact to collections from customers in Russia.

We are currently unable to fully predict the extent to which our exit from Russia and Belarus businesses may adversely impact future collections of our receivables.

For the three and six months ended April 30, 2023, FS recorded net bad debt expense of $11 million and $30 million, respectively.

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

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2 unchanged sentences

Financial Condition and Results of Operations (Continued)

As of April 30, 2023, FS experienced an increase in billed finance receivables compared to October 31, 2022, which included a limited impact to collections from customers in Russia.

We are currently unable to fully predict the extent to which our exit from Russia and Belarus businesses may adversely impact future collections of our receivables.

Corporate Investments and Other

For the three months ended January 31,

2023 2022 % Change

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

2023 2022 % Change 2023 2022 % Change

Dollars in millions

2 unchanged sentences

Loss from operations as a % of net revenue (15.9) % (7.3) % (17.3) % (5.4) %

Corporate Investments and Other net revenue decreased by $32 million, or 9.8% (decreased 1.5% on a constant currency basis) due primarily to unfavorable currency fluctuations.

Three months ended April 30, 2023 compared with three months ended April 30, 2022

Corporate Investments and Other net revenue decreased by $31 million, or 9.5% (decreased 4.0% on a constant currency basis), primarily due to unfavorable currency fluctuations.

Corporate Investments and Other loss from operations as a percentage of net revenue increased by 8.6 percentage points primarily due to increases in cost of services as a percentage of net revenue and 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 driven by unfavorable currency fluctuations and fixed services delivery costs.

The increase in operating expenses as a percentage of net revenue was primarily due to the scale of the net revenue decline in the Communications and Media Solutions business.

Six months ended April 30, 2023 compared with six months ended April 30, 2022

Corporate Investments and Other net revenue decreased by $63 million, or 9.7% (decreased 2.8% on a constant currency basis), primarily due to unfavorable currency fluctuations.

Corporate Investments and Other loss from operations as a percentage of net revenue increased by 11.9% percentage points due primarily to increases in cost of services as a percentage of net revenue and operating expenses as a percentage of net revenue.

The increase in cost of services as a percentage of net revenue was due primarily to the scale of the net revenue decline driven by unfavorable currency fluctuations and higher services delivery costs due to higher variable compensation expense.

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

The increase in cost of services as a percentage of net revenue was primarily due to the scale of the net revenue decline driven by unfavorable currency fluctuations and higher services delivery costs due to higher variable compensation expense.

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

6 unchanged sentences

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.

As of January 31, 2023, there have been no significant changes to our critical accounting estimates since our Annual Report on Form 10-K for the fiscal year ended October 31, 2022.

As of April 30, 2023, there have been no significant changes to our critical accounting estimates since our Annual Report on Form 10-K for the fiscal year ended October 31, 2022.

Table of Content

HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

LIQUIDITY AND CAPITAL RESOURCES

7 unchanged sentences

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

as of January 31, 2023.

as of April 30, 2023.

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.

Table of Content

HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

Amounts held outside of the U.S.

8 unchanged sentences

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

In connection with the share repurchase program previously authorized by our Board of Directors, during the first three months of fiscal 2023, we repurchased and settled an aggregate amount of $73 million.

As of January 31, 2023, we had a remaining authorization of $1.3 billion for future share repurchases.

In connection with the share repurchase program previously authorized by our Board of Directors, during the first six months of fiscal 2023, we repurchased and settled an aggregate amount of $179 million.

As of April 30, 2023, we had a remaining authorization of $1.2 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.

Pursuant to the Shareholders' Agreement among us, Unisplendor International Technology Limited ("UNIS"), and H3C dated as of May 1, 2016, as amended from time to time, and most recently on October 28, 2022, we delivered a notice to UNIS on December 30, 2022, to exercise our right to put to UNIS, for cash consideration, all of the H3C shares held by us, which represent 49% of the total issued share capital of H3C, at a price per share of 15.0 times the last twelve months’ post-tax profit of H3C (measured as of the period ending April 30, 2022) divided by the total number of H3C shares outstanding as of December 30, 2022.

The determination of the purchase price remains subject to agreement among the parties, taking into account certain adjustments to the post-tax profit of H3C pursuant to the terms of the Shareholders’ Agreement and the availability of the necessary information to make such determination.

Following a determination of the purchase price and the timing of the receipt of proceeds, we intend to consider a range of allocation activities, in line with our practice of pursuing a balanced, returns-based approach for capital allocation decisions, including but not limited to organic and strategic investments, return of capital to shareholders, repayment and/or redemption of outstanding debt, and general corporate purposes.

The disposition is also subject to obtaining required regulatory approvals.

Pursuant to the Shareholders' Agreement among our relevant subsidiaries, Unisplendour International Technology Limited ("UNIS"), and H3C dated as of May 1, 2016, as amended from time to time, and most recently on October 28, 2022, we delivered a notice to UNIS on December 30, 2022, to exercise our right to put to UNIS, for cash consideration, all of the H3C shares held by us, which represent 49% of the total issued share capital of H3C.

On May 26, 2023, our relevant subsidiaries entered into a Put Share Purchase Agreement with UNIS, whereby UNIS has agreed to purchase all of the H3C shares held by us, through our subsidiaries, for a total pre-tax cash consideration of $3.5 billion.

We intend to consider a range of allocation activities, in line with our practice of pursuing a balanced, returns-based approach for capital allocation decisions, including but not limited to organic and strategic investments, return of capital to shareholders, repayment and/or redemption of outstanding debt, and general corporate purposes.

The disposition remains subject to obtaining required regulatory approvals and completion of certain conditions necessary for closing.

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

January 31, 2023 October 31, 2022

April 30, 2023 October 31, 2022

Cash, cash equivalents and restricted cash $ 2,955 $ 4,763

3 unchanged sentences

Uncommitted lines of credit $ 975 $ 953

Table of Content

HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

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

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

For the three months ended January 31,

Net cash used in operating activities $ (829) $ (76)

For the six months ended April 30,

Net cash provided by operating activities $ 60 $ 303

Net cash used in investing activities (2,170) (827)

Net cash provided by financing activities 9 355

Net cash provided by (used in) financing activities 163 (260)

Effect of exchange rate changes on cash, cash equivalents, and restricted cash 139 —

Net decrease in cash, cash equivalents and restricted cash $ (1,808) $ (784)

Table of Content

HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

Free Cash Flow $ (1,038) $ (788)

Operating Activities

For the three months ended January 31, 2023, net cash used in operating activities increased by $0.8 billion, as compared to the corresponding period in fiscal 2022.

The increase was primarily due to unfavorable working capital resulting from higher vendor payments, an increase in financing receivables, moderated by unfavorable hedging positions and the prior-year period containing higher cash payouts for va riable compensation.

For the six months ended April 30, 2023, net cash provided by operating activities decreased by $0.2 billion, as compared to the corresponding period in fiscal 2022.

The decrease was primarily due to unfavorable working capital primarily resulting from higher vendor payments, an increase in financing receivables, moderated by unfavorable hedging positions, the prior-year period containing higher cash payouts for variable compensation, and higher cash generated from earnings.

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

January 31, 2023 October 31, 2022 Change January 31, 2022 October 31, 2021 Change Y/Y Change

April 30, 2023 October 31, 2022 Change April 30, 2022 October 31, 2021 Change Y/Y Change

Days of sales outstanding in accounts receivable ("DSO") 48 47 1 42 49 (7) 6

6 unchanged sentences

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 2022, the increase in DSO in the current period was primarily due to unfavorable billings linearity and extended payment terms.

Compared to the corresponding three-month period in fiscal 2022, the increase in DSO in the current period was primarily due to unfavorable billings linearity and increased billings with extended payment terms.

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

DOS is calculated by dividing ending inventory by a 90-day average of cost of goods sold.

Compared to the corresponding three-month period in fiscal 2022, the decrease in DOS in the current period was primarily due to lower levels of inventory resulting from a reduction in our backlog positions, and lower replenishment of materials.

DPO measures the average number of days our accounts payable balances are outstanding.

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 2022, the decrease in DPO in the current period was primarily due to higher vendor payments from prior period purchases and lower inventory purchases during the current period.

Investing Activities

For the three months ended January 31, 2023, net cash used in investing activities increased by $0.9 billion, as compared to the corresponding period in fiscal 2022.

The increase was primarily due to higher cash utilized in net financial collateral activities of $0.8 billion and higher cash utilized for investment in property, plant and equipment, net of sales proceeds of $0.1 billion, as compared to the prior-year period.

Financing Activities

For the three months ended January 31, 2023, net cash provided by financing activities decreased by $0.3 billion, as compared to the corresponding period in fiscal 2022.

This was primarily due to lower proceeds from debt, net of issuance cost moderated by higher cash from short term borrowings, as compared to the prior-year period.

Compared to the corresponding three-month period in fiscal 2022, the decrease in DPO in the current period was primarily due to lower inventory purchases during the current period.

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2 unchanged sentences

Financial Condition and Results of Operations (Continued)

Free Cash Flow

For the three months ended January 31,

Net cash used in operating activities $ (829) $ (76)

Investment in property, plant and equipment (794) (624)

Proceeds from sale of property, plant and equipment 159 123

Effect of exchange rate changes on cash, cash equivalents, and restricted cash 138 —

Investing Activities

For the six months ended April 30, 2023, net cash used in investing activities increased by $1.3 billion, as compared to the corresponding period in fiscal 2022.

The increase was primarily due to higher cash utilized in net financial collateral activities of $0.8 billion, higher net payments made in connection with business acquisitions of $0.4 billion, and higher cash utilized for investment in property, plant and equipment, net of sales proceeds of $0.1 billion, as compared to the prior-year period.

Financing Activities

For the six months ended April 30, 2023, net cash provided by financing activities increased by $0.4 billion, as compared to the corresponding period in fiscal 2022.

This was primarily due to higher proceeds from debt, net of issuance costs and higher cash from short term borrowings of $1.5 billion, partially offset by higher debt repayments of $1.1 billion, as compared to the prior-year period.

Free Cash Flow

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

For the three months ended January 31, 2023, free cash flow decreased by $0.7 billion, as compared to the corresponding period in fiscal 2022.

For the six months ended April 30, 2023, free cash flow decreased by $0.3 billion, as compared to the corresponding period in fiscal 2022.

The decrease was due to lower cash generated from operations due to unfavorable working capital resulting from higher vendor payments, higher cash utilized for investments in PP&E, net of sales proceeds, moderated by a favorable currency impact on cash, cash equivalents, and restricted cash, as compared to the prior-year period.

For more information on our free cash flow, refer to the section entitled "GAAP to non-GAAP Reconciliations" included in this MD&A.

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

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For further information on our capital resources, see Note 12, "Borrowings" to the Condensed Consolidated Financial Statements in Item 1 of Part I.

As of January 31, 2023 and October 31, 2021, no borrowings were outstanding under our $4.75 billion revolving credit facility.

As of January 31, 2023, $759 million was outstanding under the Parent Programs.

In March 2023, we completed an offering of $1.3 billion of 5.9% Senior Notes due October 1, 2024 and $400 million of 6.102% Senior Notes due April 1, 2026.

The net proceeds from these offerings will be used to refinance upcoming debt maturities and for general corporate purposes.

In March and April 2023, we issued $643 million of asset-backed debt securities in five tranches at a weighted average price of 99.99% and a weighted average interest rate of 5.593%, payable monthly from April 2023 with a stated final maturity date of April 2028.

In April 2023, we repaid $1.0 billion of 2.25% fixed rate Senior Notes on their original maturity date of April 1, 2023.

In April 2023, we redeemed at par value the outstanding $35 million of asset-backed debt securities on a transaction, with an interest rate of 2.26% and an original maturity date of February 2030.

At deal inception, in February 2020, $755 million of asset-backed debt securities were issued, with a weighted average price of 99.99%, a weighted average interest rate of 1.87%, and an original maturity date of February 2030.

As of April 30, 2023 and October 31, 2022, no borrowings were outstanding under our $4.75 billion revolving credit facility.

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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

As of April 30, 2023, $399 million was outstanding under the Parent Programs.

As of October 31, 2022, no borrowings were outstanding under the Parent Programs.

As of January 31, 2023 and October 31, 2022, $680 million and $542 million, respectively, were outstanding under our subsidiary’s program.

During the first three months of fiscal 2023, we issued $1.9 billion and repaid $1.1 billion of commercial paper.

As of April 30, 2023 and October 31, 2022, $629 million and $542 million, respectively, were outstanding under our subsidiary’s program.

During the first six months of fiscal 2023, we issued $4.6 billion and repaid $4.2 billion of commercial paper.

Cash Requirements and Commitments

Contractual Obligations

Our contractual obligations have not changed materially outside of the normal course of business since October 31, 2022.

Other than the previously mentioned issuance and repayment of unsecured senior notes and issuance and redemption of asset-backed debt securities, our contractual obligations have not changed materially outside of the normal course of business since October 31, 2022.

For further information see "Cash Requirements and Commitments" in Item 7 of Part II of our Annual Report on Form 10-K for the fiscal year ended October 31, 2022.

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Our policy is to fund our pension plans so that we meet at least the minimum contribution requirements, as established by various authorities including local government and tax authorities.

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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

Restructuring Plans

As of January 31, 2023, we expect to make future cash payments of approximately $420 million in connection with our approved restructuring plans, which includes $280 million expected to be paid through the remainder of fiscal 2023 and $140 million expected to be paid thereafter.

As of April 30, 2023, we expect to make future cash payments of approximately $370 million in connection with our approved restructuring plans, which includes $220 million expected to be paid through the remainder of fiscal 2023 and $150 million expected to be paid thereafter.

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

Uncertain Tax Positions

As of January 31, 2023, we had approximately $320 million of recorded liabilities and related interest and penalties pertaining to uncertain tax positions.

As of April 30, 2023, we had approximately $306 million of recorded liabilities and related interest and penalties pertaining to uncertain tax positions.

These liabilities and related interest and penalties include $43 million expected to be paid within one year.

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For more information on our third-party revolving short-term financing arrangements, see Note 6, "Balance Sheet Details", 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)

GAAP to non-GAAP Reconciliations

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

For the three months ended January 31,

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

2023 2022 2023 2022

Revenue Dollars % of

Dollars in millions

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Stock-based compensation expense 13 0.2 % 14 0.2 % 29 0.2 % 29 0.2 %

Disaster charges (1)

— — % 105 1.6 % — — % 105 0.8 %

Non-GAAP Gross Profit $ 2,525 36.2 % $ 2,293 34.2 % $ 5,199 35.2 % $ 4,653 34.0 %

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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

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

For the three months ended January 31,

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

2023 2022 2023 2022

Revenue Dollars % of

Dollars in millions

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Transformation costs 60 0.9 % 98 1.4 % 162 1.1 % 209 1.5 %

Disaster charges (recovery) 1 — % (1) — %

Disaster charges (1)

3 — % 125 1.9 % 4 — % 124 0.9 %

Stock-based compensation expense 126 1.8 % 114 1.7 % 266 1.8 % 242 1.8 %

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Non-GAAP earnings from operations $ 799 11.5 % $ 627 9.3 % $ 1,717 11.6 % $ 1,395 10.2 %

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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

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

For the three months ended January 31,

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

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

2023 2022 2023 2022

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

Dollars in millions

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Transformation costs 60 0.05 98 0.07 162 0.12 209 0.16

Disaster charges (recovery) 1 — (1) —

Disaster charges (1)

3 — 125 0.09 4 — 124 0.09

Stock-based compensation expense 126 0.10 114 0.09 266 0.21 242 0.18

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Non-GAAP net earnings $ 685 $ 0.52 $ 583 $ 0.44 $ 1,513 $ 1.15 $ 1,280 $ 0.96

(1) The three and six months ended April 30, 2022 include amounts for expected credit loss reserves due to the Company's exit from its Russia and Belarus businesses.

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 H3C.

The three months ended January 31, 2023 includes the Company's portion of intangible asset impairment charges from H3C of $8 million.

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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

Reconciliation of net cash used in operating activities to free cash flow.

For the three months ended January 31,

Net cash used in operating activities $ (829) $ (76)

The six months ended April 30, 2023 includes the Company's portion of intangible asset impairment charges from H3C of $8 million.

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,

2023 2022 2023 2022

Net cash provided by operating activities $ 889 $ 379 $ 60 $ 303

Investment in property, plant and equipment (688) (725) (1,482) (1,349)

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Free cash flow $ 288 $ (211) $ (1,038) $ (788)

Non-GAAP financial measures

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

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

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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

Use of Non-GAAP Financial Measures

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

These non-GAAP financial measures are not computed in accordance with, or as an alternative to, generally accepted accounting principles in the United States.

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The GAAP measure most directly comparable to non-GAAP operating profit margin (non-GAAP earnings from operations as a percentage of net revenue) is operating profit margin (earnings from operations as a percentage of net revenue).

The GAAP measure most directly comparable to non-GAAP income tax rate is income tax rate.

The GAAP measure most directly comparable to non-GAAP net earnings is net earnings.

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The GAAP measure most directly comparable to free cash flow is cash flow from operations.

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

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

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

Non-GAAP net earnings and non-GAAP diluted net earnings per share consist of net earnings or diluted net earnings per share excluding those same charges, as well as items such as tax indemnification and related adjustments, non-service net periodic benefit credit, earnings from equity interests, and adjustments for taxes.

We believe that providing the non-GAAP measures stated above, in addition to the related GAAP measures provides greater transparency to the information used in our financial and operational decision making and allows the reader of our Condensed Consolidated Financial Statements to see our financial results “through the eyes” of management.

We further believe that providing this information provides investors with a supplemental view to understand our historical and prospective operating performance and to evaluate the efficacy of the methodology and information used by management to evaluate and measure such performance.

Disclosure of these non-GAAP financial measures also facilitates comparisons of our operating performance with the performance of other companies in the same industry that supplement their GAAP results with non-GAAP financial measures that may be calculated in a similar manner.

Economic Substance of non-GAAP Financial Measures

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

This measure assists investors with evaluating our past and future performance, without the impact of foreign exchange rates, as more than half of our revenue is generated outside of the U.S.

We believe that excluding the items mentioned below from the non-GAAP financial measures provides a supplemental view to management and our investors of our consolidated financial performance and presents the financial results of the business without costs that we do not believe to be reflective of our ongoing operating results.

Exclusion of these items can have a material impact on the equivalent GAAP measure and cash flows thus limiting their use as analytic tools.

See "Compensation for Limitations With Use of Non-GAAP Financial Measures" section below for further information.

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

See below for the reasons management excludes each item:

• Amortization of initial direct costs represents the portion of lease origination costs incurred in prior fiscal years that do not qualify for capitalization under the new leasing standard.

We exclude these costs as we elected the practical expedient under the new leasing standard.

As a result, we did not adjust these historical costs to accumulated deficit.

We believe that most financing companies did not elect this practical expedient and therefore we exclude these costs.

This can have an impact on the equivalent GAAP measures and Financial Services segment results.

• Stock-based compensation expense consists of equity awards granted based on the estimated fair value of those awards at grant date.

Although stock-based compensation is a key incentive offered to our employees, we exclude these charges for the purpose of calculating these non-GAAP measures, primarily because they are non-cash expenses and our internal benchmarking analyses evidence that many industry participants and peers present non-GAAP financial measures excluding stock-based compensation expense.

• Disaster charges are primarily related to the exit of our businesses in Russia and Belarus, and include credit losses of financing and trade receivables, employee severance and abandoned assets.

Disaster charges also include direct costs or recovery of these costs related to COVID-19 as a result of Hewlett Packard Enterprise-hosted, co-hosted, or sponsored event cancellations and subsequent shift to a virtual format.

While we present various items as Disaster

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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

charges, we exclude Disaster charges from these non-GAAP measures as the specific charges are non-recurring charges and not indicative of the operational performance of our business.

Non-GAAP earnings from operations and non-GAAP operating profit margin consist of earnings from operations or earnings from operations as a percentage of net revenue excluding the items mentioned above and charges relating to the amortization of intangible assets, transformation costs and acquisition, disposition and other related charges.

In addition to the items previously explained above, management excludes these items for the following reasons:

• We incur charges relating to the amortization of intangible assets and exclude these charges for purposes of calculating these non-GAAP measures.

Such charges are significantly impacted by the timing and magnitude of our acquisitions.

We exclude these charges for the purpose of calculating these non-GAAP measures, primarily because they are non-cash expenses and our internal benchmarking analyses evidence that many industry participants and peers present non-GAAP financial measures excluding intangible asset amortization.

Although this does not directly affect our cash position, the loss in value of intangible assets over time can have a material impact on the equivalent GAAP earnings measure.

• Transformation costs represent net costs related to the (i) HPE Next Plan and (ii) Cost Optimization and Prioritization Plan and include restructuring charges, program design and execution costs, costs incurred to transform our IT infrastructure, net gains from the sale of real estate and any impairment charges on real estate identified as part of the initiatives.

We exclude these costs as they are discrete costs related to two specific transformation programs that were announced in 2017 and 2020, respectively, as multi-year programs necessary to transform the business and IT infrastructure following material divestiture transactions in 2017 and in response to COVID-19 and an evolving product portfolio in fiscal 2020.

The HPE Next Plan is substantially complete and we expect the Cost Optimization and Prioritization Plan to be substantially complete by October 31, 2023.

The exclusion of the transformation program costs from our non-GAAP financial measures as stated above is to provide a supplemental measure of our operating results that does not include material HPE Next Plan and Cost Optimization and Prioritization Plan costs as we do not believe such costs to be reflective of our ongoing operating cost structure.

Further as our transformation costs for these plans have materially fluctuated since 2017, have been materially declining since 2021 and we do not expect to incur material transformation costs related to these programs beyond fiscal 2023, we believe non-GAAP measures excluding these costs are useful to management and investors for comparing operating performance across multiple periods.

• We incur costs related to our acquisition, disposition and other related charges.

The charges are direct expenses, such as professional fees and retention costs, most of which are treated as non-cash or non-capitalized expenses.

Charges may also include expenses associated with disposal activities including legal and arbitration settlements in connection with certain dispositions.

We exclude these costs as these expenses are inconsistent in amount and frequency and are significantly impacted by the timing and nature of our acquisitions and divestitures.

In addition, our internal benchmarking analyses evidence that many industry participants and peers present non-GAAP financial measures excluding these charges.

Non-GAAP net earnings and non-GAAP diluted net earnings per share consist of net earnings or diluted net earnings per share excluding those same charges mentioned above, as well as other items such as tax indemnification and related adjustments, non-service net periodic benefit credit, earnings from equity interests, and adjustments for taxes.

The Adjustments for taxes line item includes certain income tax valuation allowances and separation taxes, the impact of tax reform, structural rate adjustment, excess tax benefit from stock-based compensation, and adjustments for additional taxes or tax benefits associated with each non-GAAP item.

We believe that excluding the items mentioned above from these non-GAAP financial measures allows management to better understand our consolidated financial performance in relation to the operating results of our segments.

Management does not believe that the excluded items are reflective of ongoing operating results, and excluding them facilitates a more meaningful evaluation of our current operating performance in comparison to our peers.

The excluded items can be inconsistent in amount and frequency and/or not reflective of the operational performance of the business.

These non-GAAP financial measures have limitations as analytical tools, and these measures should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP.

Some of the limitations in relying on these non-GAAP financial measures are that they can have a material impact on the equivalent GAAP earnings measures and cash flows, they may be calculated differently by other companies and may not reflect the full economic effect of the loss in value of certain assets.

In addition to the items previously explained, management excludes these items for the following reasons:

• Tax indemnification and related adjustments are primarily related to changes to certain pre-separation and pre-divestiture tax liabilities and tax receivables for which we remain liable on behalf of the separated or divested business, but which may not be subject to indemnification.

We exclude these income or charges and the associated tax impact for the purpose of calculating non-GAAP measures to facilitate an evaluation of our current operating performance and comparisons to operating performance in prior periods.

• Non-service net periodic benefit credit includes certain market-related factors such as (i) interest cost, (ii) expected return on plan assets, (iii) amortization of prior plan amendments, (iv) amortized actuarial gains or losses, (v) the impacts of any plan settlements/curtailments and (vi) impacts from other market-related factors associated with our defined benefit pension and post-retirement benefit plans.

These market-driven retirement-related adjustments are primarily due to the change in pension plan assets and liabilities which are tied to financial market performance.

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Financial Condition and Results of Operations (Continued)

exclude these adjustments for purposes of calculating non-GAAP measures and consider them to be outside the operational performance of the business.

• Adjustment to earnings from equity interests includes the amortization of the basis difference in relation to the H3C divestiture and the resulting equity method investment in H3C.

In the first fiscal quarter of 2023, this adjustment also included our portion of intangible asset impairment charges from H3C.

We believe that eliminating this amount for purposes of calculating non-GAAP measures facilitates the evaluation of our current operating performance and comparisons to operating performance in prior periods.

• We utilize a structural long-term projected non-GAAP income tax rate in order to provide consistency across the interim reporting periods and to eliminate the effects of items not directly related to our operating structure that can vary in size and frequency.

When projecting this long-term rate, we evaluated a three-year financial projection.

The projected rate assumes no incremental acquisitions in the three-year projection period and considers other factors including our expected tax structure, our tax positions in various jurisdictions and current impacts from key legislation implemented in major jurisdictions where we operate.

For fiscal 2023, we will use a projected non-GAAP income tax rate of 14%, which reflects currently available information as well as other factors and assumptions.

The non-GAAP income tax rate could be subject to change for a variety of reasons, including the rapidly evolving global tax environment, significant changes in our geographic earnings mix including due to acquisition activity, or other changes to our strategy or business operations.

We will re-evaluate its long-term rate as appropriate.

For fiscal 2022, we had a non-GAAP tax rate of 14%.

We believe that making these adjustments for purposes of calculating non-GAAP measures, facilitates a supplemental evaluation of our current operating performance and comparisons to past operating results.

FCF is defined as cash flow from operations, less net capital expenditures (investments in PP&E less proceeds from the sale of PP&E) and adjusted for the effect of exchange rate fluctuations on cash, cash equivalents, and restricted cash.

FCF does not represent the total increase or decrease in cash for the period.

Our management and investors can use FCF for the purpose of determining the amount of cash available for investment in our businesses, repurchasing stock and other purposes as well as evaluating our historical and prospective liquidity.

Compensation for Limitations With Use of Non-GAAP Financial Measures

These non-GAAP financial measures have limitations as analytical tools, and these measures should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP.

Some of the limitations in relying on these non-GAAP financial measures are that they can have a material impact on the equivalent GAAP earnings measures and cash flows, they may be calculated differently by other companies (limiting the usefulness of those measures for comparative purposes) and may not reflect the full economic effect of the loss in value of certain assets.

We compensate for these limitations on the use of non-GAAP financial measures by relying primarily on our GAAP results and using non-GAAP financial measures only as a supplement.

We also provide a reconciliation of each non-GAAP financial measure to its most directly comparable GAAP measure.

We believe that providing net revenue on a constant currency basis, non-GAAP gross profit, non-GAAP gross profit margin, non-GAAP earnings from operations, non-GAAP operating profit margin, non-GAAP net earnings, non-GAAP diluted net earnings per share, and free cash flow, in addition to the related GAAP measures provides greater transparency to the information used in our financial and operational decision making and allows the reader of our Condensed Consolidated Financial Statements to see our financial results “through the eyes” of management.

We also provide a reconciliation of each non-GAAP financial measure to its most directly comparable GAAP financial measure for this quarter and prior periods, and we encourage investors to review those reconciliations carefully.

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