Correspondence 0001645590-23-000039 from Hewlett Packard Enterprise Co (HPE)
Hewlett Packard Enterprise Co
Date: April 6, 2023 · CIK: 0001645590 · Accession: 0001645590-23-000039
AI Filing Summary & Sentiment
File numbers found in text: 001-37483
Referenced dates: March 15, 2023
Letter
VIA EDGAR Submission Attention: Robert Shapiro Re: Hewlett Packard Enterprise Company Form 10-K for Fiscal Year Ended October 31, 2022 Filed December 8, 2022 File No. 001-37483
Dear Messrs. Shapiro and Shenk:
Hewlett Packard Enterprise Company (“HPE,” the “Company” or “we”) hereby sets forth the following information in response to the comments contained in the correspondence of the staff (the “Staff”) of the U.S. Securities and Exchange Commission (the “Commission”), dated March 15, 2023 (the “Comment Letter”), relating to the above-referenced Form 10-K of HPE for the fiscal year ended October 31, 2022 (the “2022 Form 10-K”).
For the Staff’s convenience, the text of the Staff’s numbered comment from the Comment Letter is set forth below in bold, with the Company’s response thereto immediately following each comment.
Form 10-K for Fiscal Year Ended October 31, 2022
Management's Discussion and Analysis of Financial Condition and Results of Operations
Fiscal Year 2022 Compared to Fiscal Year 2021
Segment Information, page 45
1.Please quantify the extent to which changes in net revenue and income from operations are attributable to changes in prices or to changes in the volume or amount of goods or services being sold, or to the introduction of new products or services. Please also revise to quantify factors to which changes are attributed. For example, we note your disclosure that sales were impacted by higher prices, offset by unfavorable currency fluctuations and lower shipments. Refer to Item 303(b)(2)(iii) of Regulation S-K.
RESPONSE: We respectfully acknowledge the Staff’s comment. We do not manage our operating segments based solely on volume and price. For several of our segments, several variables, including the year over year changes to our product and services mix, the tailoring of our solutions sold to customers and the related pricing, and fluctuations in foreign currency exchange rates complicate attributing our year over year fluctuations in revenue solely to volume and price changes or new products or services. However, the following
‘Planned Future Filing MD&A Revisions’ section presents how we plan to revise our future disclosures, including incremental disclosure, of our 2022 Form 10-K Consolidated net revenue, Compute, and Intelligent Edge disclosures in the Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”).
We also respectfully advise that we do not anticipate revising our MD&A disclosures for the HPC & AI, Storage, Financial Services, and Corporate Investments and Other segments for the following reasons:
HPC & AI
Revenues and earnings for HPC & AI are derived from selling complex solutions that are often tailored for specific customer requirements. The demand for HPC & AI products is primarily driven by the growing need for supercomputing to process expanding volumes of data and rapidly growing artificial intelligence capabilities. Our current MD&A disclosures describe our net revenue trends for material changes in major product lines, and we do not believe Item 303(b)(2)(iii) is applicable as price and volume are not the primary driver of changes in revenue. As an example, this segment built and sold the world’s first exascale supercomputer (known as Frontier), but other exascale systems may not be recognized in revenue in other comparative periods. The customer contracts for our unique solutions are very specific to the type of solution required by specific customers and the products ultimately sold are engineered to meet certain processing speed, storage or other requirements of the customer. Given pricing and product volume in this solution driven business is largely unique by customer, revising our disclosures to focus on price and volume is not practical nor would it be informative as it may inadvertently imply that price has a stronger influence on demand versus the overall macroeconomic trends related to super computing and artificial intelligence, as well as the unique solution requirements set forth by our customer base. As an example, if our MD&A disclosures focused on price and volume to compare a period with lower sales volume of more complex, higher priced solutions (i.e., exascale supercomputers) to a period with higher volume of less complex, lower priced solutions, an investor may develop price per unit trend expectations that are not in line with our pricing strategy or macroeconomic demand trends for the technologies managed in this segment.
Storage
Revenues and earnings for our Storage segment are derived from selling a multitude of storage products and services in a market with evolving technology moving toward more software rich product and service offerings. As our technology offerings vary meaningfully in this space, the identification of a specific product unit that is applicable to all technology types is not practical. As an example, product offering units range as follows:
•Block storage: fixed-size blocks of storage, which can result in a higher per unit count for a single solution. Fixed-sized blocks are not all equal product units as the accessibility and performance capabilities of blocks can vary meaningfully.
•Hyperconverged storage: storage embedded in product offerings that combines varying enterprise technologies, including storage capacity, into a virtualized system, which can lead to a lower unit count measured by system (versus fixed-sized block). As with block storage, performance capabilities also vary by system.
•Software: as we transition to more software-based service offerings, we sell more licenses, which typically result in a higher unit count versus more traditional products such as hyperconverged storage.
•Tape: air-gapped security of tape-based backups, which is generally the lowest cost, least efficient technology that can be purchased in high volumes depending on amount of customer storage demand.
In total, the Storage segment has over 85 product offerings due to the level of differentiated technology, performance capabilities and capacity offerings. Further, these product offerings can generally be customized to meet specific customer solution requirements and pricing is specifically negotiated with customers. These factors significantly complicate obtaining “apples to apples” product volume and price comparisons. While there is not a consistent unit measure for all product offerings, product pricing also ranges from approximately $500 to $250,000+ per unit due to the differentiated technology, accessibility, performance capabilities and capacity offerings. These disparities create challenges of attributing revenue movements specifically to price and volume assumptions versus our current approach on providing commentary on the product lines driving our material revenue fluctuations. As such, we do not believe Item 303(b)(2)(iii) is applicable as we do not believe the material revenue fluctuations of the storage business can be directly attributed to price and volume.
Financial Services & Corporate Investments and Other
We do not anticipate revising these segment MD&A disclosures as the changes in revenue were not material and we disclosed the quantitative impact of the most significant change, foreign currency.
Planned Future Filing MD&A Revisions:
Consolidated net revenue
Net revenue
In fiscal 2022, total net revenue of $28.5 billion, increased by $0.7 billion, or 2.6% (increased 5.1% on a constant currency basis). U.S. net revenue increased by $0.6 billion or 6.5% to $9.4 billion, while net revenue from outside of the U.S. increased by $0.1 billion or 0.7% to $19.1 billion.
From a segment perspective, net revenue increased across many of our segments due to the improved demand environment led by revenue growth. Intelligent Edge increased 11.3% due to a robust demand environment, reflected in a high backlog. Compute increased 3.7% due to higher average unit prices. HPC & AI increased 0.3% due to growth in HPC product lines. These increases in net revenue were moderated by decreases in the Corporate Investments and Other, Financial Services, and Storage segments of 7.4%, 1.8%, 1.0%, respectively. See the full discussion of segment results including an analysis on price and volume fluctuations in the “Segment Results” section.
Compute
Compute net revenue increased by $458 million, or 3.7% (increased 6.0% on a constant currency basis) primarily due to a 6.1% increase in products revenue. The products revenue
increase was primarily due to average unit prices increasing 16.6% led by a combination of increased sales of server configurations with more complex component architectures in our next generation products. The product revenue increase was moderated by unfavorable currency fluctuations and lower unit shipments of 8.5% resulting from supply constraints due to the challenging supply chain environment. As a result, we ended the period with a high level of order backlog.
Services net revenue declined by 4.4% primarily due to unfavorable currency fluctuations, lower revenue from Russia and the impact of delayed hardware shipments on services contracts.
Compute earnings from operations as a percentage of net revenue increased 3.2 percentage points due to decreases in costs of products and services as a percentage of net revenue and operating expenses as a percentage of net revenue. The decrease in costs of products and services as a percentage of net revenue was primarily due to higher average unit prices and strong cost management partially offset by unfavorable currency fluctuations and the impact of supply chain constraints and related costs. The decrease in operating expenses as a percentage of net revenue was primarily due to cost reduction measures and lower variable compensation expense.
Intelligent Edge
Intelligent Edge net revenue increased by $372 million, or 11.3% (increased 14.0% on a constant currency basis) primarily due to a robust demand environment, reflected in a high backlog, which continues to be impacted by supply constraints resulting from a challenging supply chain environment. Net revenue increased in both Intelligent Edge products and services but was moderated by unfavorable currency fluctuations. Product revenue increased by 10.9% primarily driven by the wireless local area network ("WLAN") products, partially offset by declines in Switching products due to material constraints. The product revenue increase was primarily due to increases of average unit prices of 9.6% and volume and product mix effect of 4.3%, which was moderated by unfavorable currency fluctuations. Services net revenue increased 12.9% primarily due to higher attached support services and our as-a-service offerings.
Intelligent Edge earnings from operations as a percentage of net revenue decreased 0.5 percentage points primarily due to an increase in cost of products and services as a percentage of net revenue, partially offset by a decrease in operating expenses as a percentage of net revenue. The increase in cost of product and services as a percentage of net revenue was primarily due to supply chain constraints and related costs and unfavorable currency fluctuations. Operating expenses as a percentage of net revenue decreased primarily due to lower variable compensation expense and an increase in the scale of net revenue.
GAAP to Non-GAAP Reconciliations
Reconciliation of GAAP earnings from operations and operating profit margin to non-GAAP earnings from operations and operating profit margin, page 54
2.Refer to your reconciliations of non-GAAP earnings from operations and net earnings. Please explain why it is appropriate to adjust for transformation costs. We note from
your disclosure in footnote 3 to the financial statements that you have incurred transformation costs in each of the last three fiscal years. We note from your Form 10-K for the year ended October 31, 2019 that you also incurred such costs in each of the preceding three years as well. In this regard, these costs appear to be normal, recurring operating expenses for your business. Refer to Question 100.01 of the Compliance and Disclosure Interpretations on Non-GAAP Financial Measures.
RESPONSE: The Company respectfully acknowledges that the reconciliations of our non-GAAP earnings from operations and net earnings measures do include transformation costs for multiple periods and that the Company’s fiscal 2023 is the final year in which material charges are expected to be incurred. These transformation program costs are limited to two discrete and uniquely independent transformation programs, which were specifically disclosed in Form 8-Ks filed on October 19, 2017, and May 21, 2020. Further, we have a non-GAAP policy to document how non-GAAP financial measures are defined, calculated and presented and the transformation program costs are in accordance with the policy. The transformation program costs are also subject to our internal controls over financial reporting through review with the disclosure review committee and as part of our Transformation Programs footnote tie out control. The below paragraphs detail the background of these programs and how the adjustment for these costs are consistent with the guidance in Question 100.01 of the Compliance and Disclosure Interpretations on Non-GAAP Financial Measures.
As filed in Form 8-K, on October 19, 2017, after the 2017 spin-offs of our Enterprise Services and Software business segments, the Company’s Board of Directors approved a multi-year restructuring program (“HPE Next”) in connection with the Company’s initiative to clean-sheet the operating model, simplify the organizational structure, redesign business processes and prioritize investments. This plan had a net cash budget of $800 million and our initial disclosures stated we expected the program to be substantially completed by fiscal year 2020. To execute this program, we incurred specific costs for targeted workforce reductions, real property and leased asset impairments, gains on the sale of real estate, and IT and program management costs. The workforce reduction, real property and lease asset impairments and real estate gains generally related to right-sizing the business following the spin-off transactions. The IT and program management costs related to standing up new IT systems following the significant changes from the spin-off transactions. Our 2022 Form 10-K filing discloses that the workforce reductions were substantially completed as of October 31, 2020 and the other components of the plan were substantially completed as of October 31, 2022. As such, our future filings will not include any material charges related to the HPE Next.
The Form 8-K filed on May 21, 2020 included disclosures for our transformation program known as “The Cost Optimization and Prioritization Plan”, which was a multi-year transformation program approved by our Board of Directors as a response to the COVID-19 pandemic and to prepare the Company to operate in a post-pandemic environment. This plan had a cash budget of $1 billion to $1.3 billion and was initially disclosed to require three years to complete. The Cost Optimization and Prioritization Plan was initiated to realign our workforce to areas of growth and implement new IT systems to support our evolving product portfolio strategy and growing financial services business. We have disclosed in our 2022 Form 10-K filing that we expect this program to be substantially complete by October 31, 2023, and accordingly would not expect material transformation costs to be incurred beyond that date.
We acknow
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Hewlett Packard Enterprise Company
1701 East Mossy Oaks Rd.
Spring, TX 77389
April 6, 2023
VIA EDGAR Submission
U.S. Securities and Exchange Commission
Division of Corporation Finance
Office of Trade & Services
100 F Street, N.E.
Washington, D.C. 20549
Attention: Robert Shapiro
Lyn Shenk
Re: Hewlett Packard Enterprise Company
Form 10-K for Fiscal Year Ended October 31, 2022
Filed December 8, 2022
File No. 001-37483
Dear Messrs. Shapiro and Shenk:
Hewlett Packard Enterprise Company (“HPE,” the “Company” or “we”) hereby sets forth the following information in response to the comments contained in the correspondence of the staff (the “Staff”) of the U.S. Securities and Exchange Commission (the “Commission”), dated March 15, 2023 (the “Comment Letter”), relating to the above-referenced Form 10-K of HPE for the fiscal year ended October 31, 2022 (the “2022 Form 10-K”).
For the Staff’s convenience, the text of the Staff’s numbered comment from the Comment Letter is set forth below in bold, with the Company’s response thereto immediately following each comment.
Form 10-K for Fiscal Year Ended October 31, 2022
Management's Discussion and Analysis of Financial Condition and Results of Operations
Fiscal Year 2022 Compared to Fiscal Year 2021
Segment Information, page 45
1.Please quantify the extent to which changes in net revenue and income from operations are attributable to changes in prices or to changes in the volume or amount of goods or services being sold, or to the introduction of new products or services. Please also revise to quantify factors to which changes are attributed. For example, we note your disclosure that sales were impacted by higher prices, offset by unfavorable currency fluctuations and lower shipments. Refer to Item 303(b)(2)(iii) of Regulation S-K.
RESPONSE: We respectfully acknowledge the Staff’s comment. We do not manage our operating segments based solely on volume and price. For several of our segments, several variables, including the year over year changes to our product and services mix, the tailoring of our solutions sold to customers and the related pricing, and fluctuations in foreign currency exchange rates complicate attributing our year over year fluctuations in revenue solely to volume and price changes or new products or services. However, the following
‘Planned Future Filing MD&A Revisions’ section presents how we plan to revise our future disclosures, including incremental disclosure, of our 2022 Form 10-K Consolidated net revenue, Compute, and Intelligent Edge disclosures in the Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”).
We also respectfully advise that we do not anticipate revising our MD&A disclosures for the HPC & AI, Storage, Financial Services, and Corporate Investments and Other segments for the following reasons:
HPC & AI
Revenues and earnings for HPC & AI are derived from selling complex solutions that are often tailored for specific customer requirements. The demand for HPC & AI products is primarily driven by the growing need for supercomputing to process expanding volumes of data and rapidly growing artificial intelligence capabilities. Our current MD&A disclosures describe our net revenue trends for material changes in major product lines, and we do not believe Item 303(b)(2)(iii) is applicable as price and volume are not the primary driver of changes in revenue. As an example, this segment built and sold the world’s first exascale supercomputer (known as Frontier), but other exascale systems may not be recognized in revenue in other comparative periods. The customer contracts for our unique solutions are very specific to the type of solution required by specific customers and the products ultimately sold are engineered to meet certain processing speed, storage or other requirements of the customer. Given pricing and product volume in this solution driven business is largely unique by customer, revising our disclosures to focus on price and volume is not practical nor would it be informative as it may inadvertently imply that price has a stronger influence on demand versus the overall macroeconomic trends related to super computing and artificial intelligence, as well as the unique solution requirements set forth by our customer base. As an example, if our MD&A disclosures focused on price and volume to compare a period with lower sales volume of more complex, higher priced solutions (i.e., exascale supercomputers) to a period with higher volume of less complex, lower priced solutions, an investor may develop price per unit trend expectations that are not in line with our pricing strategy or macroeconomic demand trends for the technologies managed in this segment.
Storage
Revenues and earnings for our Storage segment are derived from selling a multitude of storage products and services in a market with evolving technology moving toward more software rich product and service offerings. As our technology offerings vary meaningfully in this space, the identification of a specific product unit that is applicable to all technology types is not practical. As an example, product offering units range as follows:
•Block storage: fixed-size blocks of storage, which can result in a higher per unit count for a single solution. Fixed-sized blocks are not all equal product units as the accessibility and performance capabilities of blocks can vary meaningfully.
•Hyperconverged storage: storage embedded in product offerings that combines varying enterprise technologies, including storage capacity, into a virtualized system, which can lead to a lower unit count measured by system (versus fixed-sized block). As with block storage, performance capabilities also vary by system.
•Software: as we transition to more software-based service offerings, we sell more licenses, which typically result in a higher unit count versus more traditional products such as hyperconverged storage.
•Tape: air-gapped security of tape-based backups, which is generally the lowest cost, least efficient technology that can be purchased in high volumes depending on amount of customer storage demand.
In total, the Storage segment has over 85 product offerings due to the level of differentiated technology, performance capabilities and capacity offerings. Further, these product offerings can generally be customized to meet specific customer solution requirements and pricing is specifically negotiated with customers. These factors significantly complicate obtaining “apples to apples” product volume and price comparisons. While there is not a consistent unit measure for all product offerings, product pricing also ranges from approximately $500 to $250,000+ per unit due to the differentiated technology, accessibility, performance capabilities and capacity offerings. These disparities create challenges of attributing revenue movements specifically to price and volume assumptions versus our current approach on providing commentary on the product lines driving our material revenue fluctuations. As such, we do not believe Item 303(b)(2)(iii) is applicable as we do not believe the material revenue fluctuations of the storage business can be directly attributed to price and volume.
Financial Services & Corporate Investments and Other
We do not anticipate revising these segment MD&A disclosures as the changes in revenue were not material and we disclosed the quantitative impact of the most significant change, foreign currency.
Planned Future Filing MD&A Revisions:
Consolidated net revenue
Net revenue
In fiscal 2022, total net revenue of $28.5 billion, increased by $0.7 billion, or 2.6% (increased 5.1% on a constant currency basis). U.S. net revenue increased by $0.6 billion or 6.5% to $9.4 billion, while net revenue from outside of the U.S. increased by $0.1 billion or 0.7% to $19.1 billion.
From a segment perspective, net revenue increased across many of our segments due to the improved demand environment led by revenue growth. Intelligent Edge increased 11.3% due to a robust demand environment, reflected in a high backlog. Compute increased 3.7% due to higher average unit prices. HPC & AI increased 0.3% due to growth in HPC product lines. These increases in net revenue were moderated by decreases in the Corporate Investments and Other, Financial Services, and Storage segments of 7.4%, 1.8%, 1.0%, respectively. See the full discussion of segment results including an analysis on price and volume fluctuations in the “Segment Results” section.
Compute
Compute net revenue increased by $458 million, or 3.7% (increased 6.0% on a constant currency basis) primarily due to a 6.1% increase in products revenue. The products revenue
increase was primarily due to average unit prices increasing 16.6% led by a combination of increased sales of server configurations with more complex component architectures in our next generation products. The product revenue increase was moderated by unfavorable currency fluctuations and lower unit shipments of 8.5% resulting from supply constraints due to the challenging supply chain environment. As a result, we ended the period with a high level of order backlog.
Services net revenue declined by 4.4% primarily due to unfavorable currency fluctuations, lower revenue from Russia and the impact of delayed hardware shipments on services contracts.
Compute earnings from operations as a percentage of net revenue increased 3.2 percentage points due to decreases in costs of products and services as a percentage of net revenue and operating expenses as a percentage of net revenue. The decrease in costs of products and services as a percentage of net revenue was primarily due to higher average unit prices and strong cost management partially offset by unfavorable currency fluctuations and the impact of supply chain constraints and related costs. The decrease in operating expenses as a percentage of net revenue was primarily due to cost reduction measures and lower variable compensation expense.
Intelligent Edge
Intelligent Edge net revenue increased by $372 million, or 11.3% (increased 14.0% on a constant currency basis) primarily due to a robust demand environment, reflected in a high backlog, which continues to be impacted by supply constraints resulting from a challenging supply chain environment. Net revenue increased in both Intelligent Edge products and services but was moderated by unfavorable currency fluctuations. Product revenue increased by 10.9% primarily driven by the wireless local area network ("WLAN") products, partially offset by declines in Switching products due to material constraints. The product revenue increase was primarily due to increases of average unit prices of 9.6% and volume and product mix effect of 4.3%, which was moderated by unfavorable currency fluctuations. Services net revenue increased 12.9% primarily due to higher attached support services and our as-a-service offerings.
Intelligent Edge earnings from operations as a percentage of net revenue decreased 0.5 percentage points primarily due to an increase in cost of products and services as a percentage of net revenue, partially offset by a decrease in operating expenses as a percentage of net revenue. The increase in cost of product and services as a percentage of net revenue was primarily due to supply chain constraints and related costs and unfavorable currency fluctuations. Operating expenses as a percentage of net revenue decreased primarily due to lower variable compensation expense and an increase in the scale of net revenue.
GAAP to Non-GAAP Reconciliations
Reconciliation of GAAP earnings from operations and operating profit margin to non-GAAP earnings from operations and operating profit margin, page 54
2.Refer to your reconciliations of non-GAAP earnings from operations and net earnings. Please explain why it is appropriate to adjust for transformation costs. We note from
your disclosure in footnote 3 to the financial statements that you have incurred transformation costs in each of the last three fiscal years. We note from your Form 10-K for the year ended October 31, 2019 that you also incurred such costs in each of the preceding three years as well. In this regard, these costs appear to be normal, recurring operating expenses for your business. Refer to Question 100.01 of the Compliance and Disclosure Interpretations on Non-GAAP Financial Measures.
RESPONSE: The Company respectfully acknowledges that the reconciliations of our non-GAAP earnings from operations and net earnings measures do include transformation costs for multiple periods and that the Company’s fiscal 2023 is the final year in which material charges are expected to be incurred. These transformation program costs are limited to two discrete and uniquely independent transformation programs, which were specifically disclosed in Form 8-Ks filed on October 19, 2017, and May 21, 2020. Further, we have a non-GAAP policy to document how non-GAAP financial measures are defined, calculated and presented and the transformation program costs are in accordance with the policy. The transformation program costs are also subject to our internal controls over financial reporting through review with the disclosure review committee and as part of our Transformation Programs footnote tie out control. The below paragraphs detail the background of these programs and how the adjustment for these costs are consistent with the guidance in Question 100.01 of the Compliance and Disclosure Interpretations on Non-GAAP Financial Measures.
As filed in Form 8-K, on October 19, 2017, after the 2017 spin-offs of our Enterprise Services and Software business segments, the Company’s Board of Directors approved a multi-year restructuring program (“HPE Next”) in connection with the Company’s initiative to clean-sheet the operating model, simplify the organizational structure, redesign business processes and prioritize investments. This plan had a net cash budget of $800 million and our initial disclosures stated we expected the program to be substantially completed by fiscal year 2020. To execute this program, we incurred specific costs for targeted workforce reductions, real property and leased asset impairments, gains on the sale of real estate, and IT and program management costs. The workforce reduction, real property and lease asset impairments and real estate gains generally related to right-sizing the business following the spin-off transactions. The IT and program management costs related to standing up new IT systems following the significant changes from the spin-off transactions. Our 2022 Form 10-K filing discloses that the workforce reductions were substantially completed as of October 31, 2020 and the other components of the plan were substantially completed as of October 31, 2022. As such, our future filings will not include any material charges related to the HPE Next.
The Form 8-K filed on May 21, 2020 included disclosures for our transformation program known as “The Cost Optimization and Prioritization Plan”, which was a multi-year transformation program approved by our Board of Directors as a response to the COVID-19 pandemic and to prepare the Company to operate in a post-pandemic environment. This plan had a cash budget of $1 billion to $1.3 billion and was initially disclosed to require three years to complete. The Cost Optimization and Prioritization Plan was initiated to realign our workforce to areas of growth and implement new IT systems to support our evolving product portfolio strategy and growing financial services business. We have disclosed in our 2022 Form 10-K filing that we expect this program to be substantially complete by October 31, 2023, and accordingly would not expect material transformation costs to be incurred beyond that date.
We acknow