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ITEM 1A. Risk Factors.
You should carefully consider the following risks and other information in this Form 10-K in evaluating Hewlett Packard Enterprise and its common stock. Any of the following risks could materially and adversely affect our results of operations or financial condition. The following risk factors should be read in conjunction with Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operation and the Consolidated Financial Statements and related notes in Part II, Item 8, Financial Statements and Supplementary Data of this Form 10-K.
Risk Factors Summary
The following is a summary of the principal risks that could adversely affect our business, operations, and financial results.
Business and Operational Risks
If we cannot successfully execute our go-to-market strategy, including offering our ongoing transitentire portfolio as-a-Service, our business, operating results, and financial performance may suffer.
We depend on third-party suppliers, and our financial results could suffer if we fail to manage our supplier relationships properly.
System security risks, data protection incidents, cyberattacks and systems integration to an aaS consumptissues could disrupt our internal operations or IT services provided to customers, and any such disruption could reduce our revenue, increase our expenses, damage our reputation-based , and adversely affect our stock price.
Business disruptions could seriously harm our future revenue and financial condition and increase our costs and expenses.
Failure to complete the Merger with Juniper Networks may adversely affect our business model, and our stock price.
Failure to realize the benefits expected from the Merger with Juniper Networks could adversely affect our business, ope or our stock price.
Any failure by us to identify, manage, and complete acquisitions and subsequent integrating resulons, divestitures, and other significant transactions successfully could harm our financial results, business and financiaprospects.
If we cannot continue to produce quality products and services, our reputation, business, and financial performance may suffer.
Our long-term st
In order to be successful, we must attract, retain, train, motivate, develop, and transition key employees, and failure to do so could seriously harm us.
If we fail to manage the distribution of our products and services properly, our business and financial performance could suffer.
Issues in the development and use of artificial intelligence may result in reputational harm, liability or impact to our results of operategions.
Changes in the macroeconomic environment have, at times, impacted and may in the future negatively is focused on levmpact our results of operations.
Failure to meet responsible and sustainable business expectations or standards or achieve our Living Progress goals could adversely affect our business, results of operaging otions, financial condition, or stock price.
Risks arising from climate change and the transition to a lower-carbon economy may impact our portfolio of hardwarbusiness.
Industry Risks
We operate in an intensely competitive industry, and competitive pressures could harm our business and financial performance.
International Risks
Due to the international nature of our business, political or economic changes and the laws and regulatory regimes applying to international transactions or other factors could harm our future revenue, softcosts and expenses, and financial condition.
We are exposed to fluctuations in foreign currency exchange rates.
Intellectual Property Risks
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Our financial performance may suffer if ware, and se cannot continue to develop, license, or enforce the intellectual property rights on which our businesses depend.
Our products and services as we deliver global edge-to-cloudepend in part on intellectual property and technology licensed from third parties.
Third-party claims of intellectual property infringement, including patent infringement, are commonplace in our industry and successful third-party claims may limit or disrupt our ability to sell our products and services.
Financial Risks
Adverse developments affecting our liquidity, capital position, borrowing costs, and access to capital markets could adversely impact our business, financial condition, and results of operations or those of the third platform as-a-service to help customers accelerate outcomes by unlocking value from all of their data, earties with whom we do business.
Our debt obligations may adversely affect our business and our ability to meet our obligations and pay dividends.
The revenue and profitability of our operations have historically varied, which makes our future financial results less predictable.
Our uneven sales cycle and supply chain disruptions make planning and inventory management difficult and future financial results less predictable.
We make estimates and assumptions in connection with the preparation of our Consolidated Financial Statements and any changes to those estimates and assumptions could adversely affect our results of operations.
Declaration, payment and amounts of dividends, if any, to holders of our shares will be uncertain.
Regulatory and Government Risks
Our business is subject to various federal, state, local and foreign laws and regulations that could result in costs or other sanctions that adversely affect our business and results of operations.
Contracts with federal, state, provincial, and local governments are subject to a number of challenges and risks that may adversely impact our business.
Unanticipated changes in our tax provisions, the adoption of new tax legislation or exposure to additional tax liabilities could affect our financial performance.
Risks Related to Prior Separations
The stock distribution in either or both of the completed separations of our former Enterprise Services business and our former Software segment could result in significant tax liability, and DXC Technology Company or Micro Focus International plc (as applicable) may in certain cases be obligated to indemnify us for any such tax liability imposed on us.
We continue to face a number of risks related to our separation from HP Inc., our former parent, including those associated with ongoing indemnification obligations, which could adverywhere. We csely affect our financial condition and results of operations, and shared use of certain intellectual property rights, which could in the future adversely impact our reputation.
General Risks
Our stock price has fluctuated and may continue our transito fluctuate, which may make future prices of our stock difficult to predict.
For a more complete discussion of the material risks facing our business, see below.
Business and Operation to an aaS company, to provide oal Risks
If we cannot successfully execute our go-to-market strategy, including offering our entire portfolio as-a-Service, our business, operating results, and financial performance may suffer.
Our long-term strategy is focused on leveraging our portfolio of hardware, software, and services as we deliver global edge-to-cloud platform as-a-service to help customers accelerate outcomes by unlocking value from all of their data, everywhere. We provide our entire portfolio through a range of subscription and consumption-based, pay-per-use, and aaS offerings. We will also continue to provide our hardware and software in a capital expenditure and license-based model, giving our customers choices in consuming HPE products and services. Furthermore, subject to our anticipated consummation of the acquisition of Juniper Networks, Inc. (Juniper Networks) (the Merger), we will seek to offer secure, unified cloud- and AI-native networking to enhance innovation across edge to cloud. To successfully execute thison these strategy and transitionic pillars, we must continue to improve cost structures, align sales coverage with strategic goals, improve channel execution, and strengthen our capabilities in our areas of strategic focus, while continuing to pursue new product innovation that builds on our strategic
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capabilities in areas such as edge computing, hybrid cloud, artificial intelligence, data center networking, network security, and high-performance compute. We must make sufficient long-term investments in strategic growth areas, such as developing, obtaining, and protecting appropriate intellectual property, and committing or transition significant RD and other resources before knowing whether our projections will reasonably reflect customer demand for our solutions. Should such efforts fail to produce actionable insights, or our offerings not perform as designed or promised, we may be unable to manage or complete the transition successfully or in a timely manner, not realize all of the anticipated benefits of the transition (even if we complete it), and our buour business results and financial condition may be adversely affected. Furthermore, such incremental capital requirements may negatively impact cash flows in the near term, and may require us to dedicate additional resources, including sales and marketing costs.
The process of improving our HPE GreenLake edge-to-cloud platforms aaS solutions andofferings, enhancing existing hardware, software, and cloud-based solutions is co, and developing and improving the systems necessary for new and evolving data-intensive artificial intelligence-based workloads are all complex, costly, and uncertain, and any failure by us to anticipate customers changing needs and emerging technological trends accurately, to invest sufficiently in strategic growth areas, or to otherwise successfully execute this strategy could significantly harm our market share, results of operations, and financial performance.
Having developed a cloud platform product in HPE GreenLake and the hardware capabilities to support artificial intelligence computing, we must be able to continue to sintegrating new features that are relevant to our customers and to scale quickly, while also managing costs and preserving margins, which means accurately forecasting volumes, mixes of products, and configurations that meet customer requirements, which we may not succeed at doing. Our HPE GreenLake edge-to-cloud platformThese offerings faces competition from peer companies with their own cloud platform and artificial intelligence computing offerings, and any delay in the development, production, or marketing of a new product, service, or solution, including new features of the HPE GreenLake edge-to-cloud platform, could result in our o could result in our offerings being late to reach the market, which could harm our competitive position. In addition, should we successfully consummate the Merger, the process of integrating and streamlining our offerings (including integrating Juniper Networks offerings bewith ours) or developing late to reach the new solutions based on our respective technological portfolios market, which could further harm our competitive positiony be complex, costly, time-consuming, and uncertain, and failure by us to successfully do so could adversely impact our future results of operations and financial performance. Furthermore, we anticipate needing to continually aadapt our go-to-market structure from time to time with new sales and marketing approaches, to better align with the softwaaaS business models and to capture consumption-based business modelunique market opportunities, such as in hybrid cloud and artificial intelligence. Changing our go-to-market structure may affect employee compensation models and ultimately our ability to retain employees. There is no assurance that we will be able to successfully implement these adjustments in a timely or cost-effective manner, or that we will be able to realize all or any of the expected benefits from them.
ThesOur HPE GreenLake solutions generally are multiyear agreements, which result in recurring revenue streams over the term of the arrangement. As customer demand for our software consumption-basedaaS offerings increases, we have experienced, and will econtinue to experience, differences in the timing of revenue recognition between our traditional offerings (for which revenue is generally recognized at the time of delivery) and our aaS offerings (for which revenue is generally recognized ratably over the term of the arrangement). As such, our financial results and growth depend, in part, on customers continuing to purchase our services and solutions over the contract life on the agreed terms. Additionally, transition toimplementing this business model also means that our historical results, especially those from before the transition, may not be indicative of future results, which may adversely affect our ability to accurately forecast our future operating results. Further, these contracts allow customers to take actions, such as requesting rate reductions, reducing the use of our services and solutions or terminating a contract early, which may adversely affect our recurring revenue and profitability. Further, our software consumption offeringsOur aaS offerings also could subject us to increased risk of liability related to the provision of services as well as operational, technical, legal or o, regulatory, or other costs.
We depend on third-party suppliers, and our financial results could suffer if we fail to manage our supplier relationships properly.
Our operations depend on our ability to anticipate our needs for components, products, and services, as well as our suppliers abilities to deliver sufficient quantities of quality components, products, and services at reasonable prices and in time for us to meet critical schedules for the delivery of our own products and services. Given the wide variety of solutions that we
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offer, the large and diverse distribution of our suppliers and contract manufacturers, and the long lead times required to manufacture, assemble, and deliver certain solutions, problems have, from time to time in the past, arisen, and could in the future arise, in production, planning, and inventory management that could harm our business. In addition, our ongoing efforts to optimize the efficiency of our supply chain could cause supply disruptions and be more expensive, time-consuming, and resource-intensive than expected. Furthermore, certain of our suppliers have at times decided, and may in the future decide, to discontinue conducting business with us. Other supplier problems that we have faced, and could again face in the future, include component shortages, excess supply, and contractual, relational, and labor risks, each of which is described below.
Component shortages. We have been in the past experienced, and may experiencing e again in the future, delays and shortages of certain components as a result of strong demand and capacity c, supplier transitionstraints caused by insufficient, raw material or capacity to meet unanticipated demand from emerging markeconstraints, and other problems experienced by suppliers or problems faced during the transition to new suppliers. Though we have seen easin certain geographies and markets, resulting ofin industry-widesufficient supply constraints, we expect discreet constraints to continue, the duration of which rto meet total market demains uncertainnd. In the past, we have experienced shortages or delays, which led to higher prices of certain components and exposure to quality issues and delivery delays, which may occur again in the future. We may not be able to secure enough components at reasonable prices, of acceptable quality, or at all, to build products or provide services in a timely manner in the quantities needed or according to our specifications. Accordingly, our business and financial performance could suffer from a loss of time-sensitive sales, additional freight costs incurred, or the inability to pass
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on price increases to our customers. If we cannot adequately address supply issues, we may have to reengineer some product or service offerings, which could result in further costs and delays.
Excess supply. In order to secure components for our products or services, at times we may make advance payments to suppliers or enter into long term agreements, non-cancellable commitments, or other inventory management arrangements with vendors. In addition, we may purchase components strategically in advance of demand to take advantage of favorable pricing or to address concerns about the availability of future components. If we fail to anticipate customer demand properly, a temporary oversupply couldan result in excess or obsolete componentss (which has happened at times in the past), which has at times adversely impacted and could in the future adversely impact our business and financial performance.
Contractual terms. As a result of binding long-term price or purchase commitments with vendors, we may be obligated to purchase components or services at prices that are higher than those available in the current market and be limited in our ability to respond to changing market conditions. If we commit to purchasing components or services for prices in excess of the then-current market price, we may be at a disadvantage to competitors who have access to components or services at lower prices, our gross margin could suffer, and we could incur charges relating to inventory obsolescence.
Contingent workers. We also rely on third-party suppliers for the provision of contingent workers, and our failure to manage our use of such workers effectively could adversely affect our results of operations. We have been exposed to various legal claims relating to the status of contingent workers in the past and could face similar claims in the future. We may be subject to shortages, oversupply or fixed contractual terms relating to contingent workers. Our ability to manage the size and cost of our contingent workforce may be subject to additional constraints imposed by local laws.
Single-source suppliers. We obtain certain components from single-source suppliers due to technology, availability, price, quality, scale, or customization needs. Certain of such suppliers have, in the past decided, and may in the future decide, to discontinue manufacturing components used in our products, which may cause us to discontinue certain products, incur additional costs to redesign our products so as not to incorporate such discontinued components, or incur time and expense to find replacement suppliers. Replacing a single-source supplier has at times delayed, and could delay, production of some products as replacement suppliers may initially be unable to meet demand or be subject to other output limitations. For some components, such as customized components, alternative sources either may not exist or may be unable to produce the quantities of those components necessary to satisfy our production requirements. In addition, we sometimes purchase components from single-source suppliers under short-term agreements that contain favorable pricing and other terms but that may be unilaterally modified or terminated by the supplier with limited notice and with little or no penalty. The performance of such single-source suppliers under those agreements (and the renewal or extension of those agreements upon similar terms) may affect the quality, quantity, and price of our components. The loss of a single-source supplier, the deterioration of our relationship with a single-source supplier, or any unilateral modification to the contractual terms under which we are supplied components by a single-source supplier could adversely affect our business and financial performance.
System security risks, data protection incidents, cyberattacks and systems integration issues could disrupt our internal operations or IT services provided to customers, and any such disruption could reduce our revenue, increase our expenses, damage our reputation, and adversely affect our stock price.
As a leading technology firm, we are exposed to attacks from criminals, nation state actors, malicious insiders, and activist hackers (collectively, malicious parties) who have at times been able to circumvent or bypass our cyber security measures. Although some of these attacks have caused disruptions or exposure of information, so far, these attacks have not resulted in material inegative impacts to HPE, nor have any of HPEs consumers, customers, or employees informed HPE that these
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attacks resulted in material harm to them. While we investigate and remediate incidents, there can be no assurance that we will do so comprehensively or that the threat actor will not identify alternative means of intrusion or opportunities to otherwise utilize the information it accessed to adversely affect our business or results of operations. It is also possible that incidents may embolden other malicious actors to perpetrate future attacks that may result in material misappropriation, system disruptions or shutdowns, malicious alteration, or destruction of our confidential or personal information or that of third parties. Further, there has been an increase in the frequency and sophistication of such attacks, and we expect these activities to continue to increase. M, including malicious actors parties also otentially leveraging AI to develop malicious code or sophisticated phishing attempts. Malicious parties may also be able to otherwise develop and deploy viruses, worms, ransomware, and other malicious software programs that attack our products or otherwise exploit any security vulnerabilities of our products, including within our cloud-based environments and offerings, such that we may be unable to anticipate such malicious parties techniques, implement adequate preventative measures, or remediate any intrusion on a timely or effective basis even if our security measures are appropriate, reasonable, and comply with applicable legal requirements. Further, cyber-attacks or incidents have in the past gone, and could in the future go, undetected in our environments for a period of time. , and we may discover additional impacts of earlier incidents that we believe were remediated. For example, as previously disclosed in our Form 8-K filed with the Securities and Exchange Commission on January 24, 2024, we learned in December 2023 that, beginning in May 2023, a nation-state-
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associated threat actor gained unauthorized access to and exfiltrated data from HPEs cloud-based email and SharePoint environments. While this incident has been investigated and remediated with no material impact experienced by HPE to date, this may have nevertheless resulted in harm to our reputation and customer relationships (and may do so in the future, as well), and there can be no assurance that the threat actor will not utilize the information accessed to adversely affect our business or results of operations. Given our broad and diverse network environment, resource limitations, and operational constraints, we have in the past failed, and may in the future fail, to patch certain security vulnerabilities in time to prevent successful disruptions of our infrastructure or expose ure of information.
Malicious parties may compromise our manufacturing supply chain and the systems or networks of other third parties on whom we rely, and as such, may embed malicious software or hardware in our products, thereby compromising our customers. Geopolitical tensions or conflicts, such as the ongoing conflicts between Russia and Ukraine or Israel and Hamas in the Middle East, may create a heightened the risk of such cyberattacks or exacerbate system vulnerabilities, considering our continued hybrid work environmentt and our globally dispersed operations, employees, contractors, suppliers, developers, partners, and other third parties. In addition, sophisticated hardware and operating system software and applications that we produce or , procure or integrate from third parties ma, including those of companies we have acquired, may contain defects in design or manufactureing, including flaws that could unexpectedly interfere with the operation of the system. The costs associated with cybersecurity tools and infrastructure and fierce ccompetition for scarce ccybersecurity and IT talent have at times limited, and may in the future limit, our ability to eand the ability of third parties on whom we rely to efficiently identify, eliminate, or remediate cyber or other security vulnerabilities or problems or enact changes to minimize the attack surface of our network. Furthermore, our efforts to a, and the efforts of third parties on whom we rely, to address these problems may n, at times, have not been, and may in the future not be successful and could result in interruptions, delays, cessation of service, ancompromise of sensitive information, and loss of existing or potential customers that, any of which may impede our sales, manufacturing, distribution or other critical functions. Additional impacts from cybersecurity incidents could include remeimbursement of remediation costs to our customers, suppliers, or distributors, such as liability for stolen assets or information, repairs of system damage, and incentives for continued business; lost revenue resulting from the unauthorized use of proprietary information or the failure to retain or attract business partners following an incident; increased insurance premiums; and damage to our competitiveness, stock price, and long-term shareholder value. Further, it may be difficult to determine the best way to investigate, mitigate, contain, and remediate any harm caused by a cybersecurity incident. Such efforts may not be successful, and we may make errors or fail to take necessary actions. It may take considerable time for us to investigate and evaluate the full impact of incidents, particularly for sophisticated attacks. These factors may inhibit our ability to provide prompt, full, and reliable information about the incident to our customers, partners, regulators, and the public. Additionally, to the extent we carry insurance coverage for such possibilities, we cannot be certain that any such coverage will be adequate or otherwise protect us with respect to claims, expenses, fines, penalties, business loss, data loss, litigation, regulatory actions, or other impacts arising from security breaches or incidents, or that such coverage will continue to be available on acceptable terms or at all.
We manage and store various proprietary information, intellectual property, and sensitive or confidential data relating to our business. In addition, our business may process, store, and transmit customer data, including commercially sensitive and, government-related, and/or personal data, subject to the European General Data Protection Regulation, the California Consumer PUnited Kingdom General Data Protection Regulation, and various U.S. state and foreign data security and privacy Act, and otherlaws, which give new data privacy laws rights to their residents and regulimpose significant obligations related to the handling of personal data. Compliance with data security and privacy laws is complex and costly. With our business increasingly providing aaS offerings, malicious parties could target such services, potentially resulting in an increased risk of compromise of customer or employee data and resulting in regulatory exposure. Incidents involving our cyber or physical security measures or the accidental loss, inadvertent disclosure, or unapproved dissemination of proprietary information, intellectual property, or sensitive, confidential, or personal data about us, our clients, or our customers, including the potential loss or disclosure of such data as a result of fraud, trickery, or other forms of deception, could expose us, our customers, or the individuals affected to a risk of loss or misuse of this information; result in regulatory fines, litigation, and potential liability for us; damage our brand and reputation; or otherwise harm our business. We also could lose existing or potential customers of services or other IT solutions or incur significant expenses in connection with our customers system failures or any actual or perceived security vulnerabilities in our products and services. In addition, the cost and operational consequences of managing an incident and implementing further data protection measures could be significant.
Additionally, we have at times experienced, and may experience, other security issues that are nott the results of any action or attack from malicious parties, whether due to employee or insider error or malfeasance, system errors or vulnerabilities in our or other parties systems. Portions of our IT infrastructure also have experienced, and may experience, interruptions, delays, or cessations of service or produce errors in connection with systems integration or migration work that takes place from time to time. We may not As our IT environment continues to evolve, we have, at times, been unsuccessful, and may in the future be unsuccessful, in iadopting or implementing new systems and transitioning data, which could cause business disruptions and be more expensive, time-consuming, disruptive, and resource intensive. Furthermore, our data centers depend on predictable and reliable energy and networking capabilities, the cost or availability of which could be adversely affected or
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disrupted by a variety of factors, including but not limited to the effects of climate change. Such disruptions could adversely impact our ability to fulfill orders and respond to customer requests and interrupt other processes. Delayed sales, lower margins, or lost customers resulting from these events could reduce our revenue, increase our expenses, and adversely affect our reputation and stock price.
While we seek to identify and remediate vulnerabilities in our products, services, IT systems, controls, and software that could be exploited by any malicious parties, we may not be aware of all such vulnerabilities, and we have at times failed, and may fail, to anticipate, detect, identify, and/or remediate such vulnerabilities before they are exploited. There or such vulnerabilities may persist after issuing security patches because system software updates may occur asynchronously across our customer base. Additionally, we have acquired and may continue to acquire companies with cybersecurity vulnerabilities or different security standards, which exposes us to related cybersecurity, operational, and financial risks. Further, as our products and services in some instances are integrated with our customers' systems and processes, even if we are successful in identifying vulnerabilities, a successful attack on us could compromise customers IT systems and sensitive data, despite active monitoring and development of tools designed to identify and remediate such vulnerabilities. There is no guarantee that a series of issues may not be determined to be material in the aggregate at a future date even if they may not be material individually at the time of their occurrence.
Business disruptions could seriously harm our future revenue and financial condition and increase our costs and expenses.
Our worldwide operations and supply chain could be disrupted by natural or human-induced disasters including, but not limited to, earthquakes; tsunamis; floods; hurricanes, cyclones or typhoons; fires; other extreme weather conditions; power or
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water shortages; telecommunications failures; materials scarcity and price volatility; terrorist acts, civil unrest, conflicts or wars; and health epidemics or pandemics. The impacts and frequency of any of the above could be further exacerbated by climate change, particularly in countries where we operate that have limited infrastructure and disaster recovery resources. While we are predominantly self-insured to mitigate the impact of most catastrophic events, the occurrence of business disruptions could, among other impacts, harm our revenue, profitability, and financial condition; adversely affect our competitive position; increase our costs and expenses; make it difficult or impossible to provide our offerings to our customers or to receive components from our suppliers; create delays and inefficiencies in our supply chain; or require substantial expenditures and recovery time in order to fully resume operations.
Public health crises, such as the COVID-19 pandemic, and the measures taken in response to such events have in the past negatively impacted, and may again in the future negatively impact, our operations and workforce, as well as those of our partners, customers and suppliers. Additionally, concerns over the economic impact of such events have, from time to time, caused increased volatility in financial and other capital markets, adversely impacting our stock price, our ability to access the capital markets, and our ability to fund liquidity needs, and may do so again in the future. The negative impacts of any such events on business operations and demand for our offerings will depend on future developments and actions taken in response to such events, which may be outside our control, highly uncertain, and cannot be predicted at this time.
The manufacture of product components, the final assembly of our products and other critical operations are concentrated in certain geographic locations, including the United States, Puerto Rico, Costa Rica, Czech Republic, Malaysia, Mexico, China, Malaysia, Taiwan, South Korea, and Singapore. We also rely on major logistics hubs, which are strategically located near manufacturing facilities in the major regions and in proximity to HPEs distribution channels and customers. Other critical business operations and some of our suppliers are located in California and Asia, near major earthquake faults known for seismic activity. Our operations could be adversely affected if manufacturing, logistics, or other operations in these locations are disrupted for any reason, including those enumerated above, as they have been in the past by natural disasters and public health issues in the United States, Puerto Rico, and China. To the extent such disruptions adversely affect our business, results of operations, financial condition, and stock price, they may also have the effect of heightening many of the other risks described in this Item 1A of Part I of this Form 10-K.
Any f
Failure by us to identify, manage and completto complete the Merger with Juniper Networks may adversely affect our business and our stock price.
In January 2024, we entered into a definitive agreement to acquisitions andre Juniper Networks, Inc., a leader in AI-native networks. Consummation of the Merger is subsequent integraject to the satisfaction or waiver of certain conditions, divestituresincluding but not limited to (i) the adoption of the Agreement and oPlan of Merger (ther significant transac Merger Agreement), by and among Juniper Networks, HPE and Jasmine Acquisitions successfully could harm our financial results, business and prospects.
As part Sub, Inc., a Delaware corporation and a wholly owned subsidiary of HPE (Merger Sub), by Juniper Networks stockholders (which was completed on April 2, 2024); (ii) the absence of any injunction, order or law preventing, prohibiting or making illegal the consummation of the Merger; (iii) the expiration or termination of the waiting period (or extension thereof) under the Hart-Scott-Rodino Antitrust Improvement Act of our strategy, we may ac1976, as amended, and the receipt of all other require businesses, dived approvals, consents or clearances under specified foreign antitrust businesses or assets, enterlaws and foreign investment laws without imposition of a Burdensome Condition (as defined into strategic alliances the Merger Agreement); and (iv) in the case of the obligations of HPE and joint ventures, and make investmentMerger Sub to effect the Merger, the absence of a material adverse effect with respect to Juniper Networks to furhat is continuing as of the closing. There can be no assurance that these or our buther closiness (collectively, businesg conditions will be satisfied in a timely manner or at all. Any delay in completing the Merger could cause us not to realize some or all of the anticipated benefits when expected, if at all.
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If the Merger is not combinapleted, our stock price could be impacted to the extent it reflects an assumption athat we will complete the Merger, and investment transacadditionally, we may suffer other consequences that could adversely affect our business, results of operations), and also handle any post-closing issustock price, including incurring significant acquisition costs that we would be unable to recover, negative publicity, and a negative impression of us in the investment community. Furthermore, under certain specified circumstances, such as integration. For example, among other acquisiincluding the termination of the Merger Agreement by either us or Juniper Networks because certain required regulatory clearances are not obtained or the terms of the Merger Agreement are materially breached by us, upon terminations and subs we would be requent integrations, inired to pay Juniper Networks a termination fee of $815 million.
Failure to realize the benefits expected from the Merger with June 2023, we acquired Athonet, a private cellular neiper Networks could adversely affect our business or our stock price.
There can be no assurance that we will realize any of the significant benefits that we expect to result from the Merger, or realize them within the anticipated timeframe. Achieving these benefits will depend, in part, on our ability to integrate Juniper Network technology provider, in May 2023, we acquired OpsRamp, Inc., an IT operatis business successfully and efficiently. The challenges involved in this integration, which will be complex and time-consuming, include the following:
preserving customer and other important relationships of Juniper Networks and attracting new business and operational relationships;
integrating financial forecasting and controls, procedures and reporting cycles;
cons managementolidating and integrating companrporate, information technology, in March 2023, we acquired Axis Security, a cloud securityfinance and administrative infrastructures;
coordinating sales and marketing efforts to effectively position our capabilities;
coordinating and integrating operations, including in countries in which we have not provider, in September 2020, we acquired Silver Peak Systems, Inc., an SD-WAN industry leadereviously operated; and
integrating employees and related human capital management systems and benefits, maintaining employee morale and retaining key employees.
If we do not successfully manage these issues and the other challenges inherent in integrating and in September 2019, we acquired CrayInc., a global supercompu acquired business, then we may not achieve the anticipated benefits of the Merger on our anticipated timeframe or at all, and our revenue, expenses, operating results, financial condition and stock price could be mater leader. In April 2017 and September 2017, we spuially adversely affected. The successful integration of Juniper Networks will require significant management attention both before and after the completion off our Enterprise Services the Merger with Juniper Networks, and may divert the attention of management from our business and Softwaoperational issues.
Any failure businessey us to identify, manage, and complete acquisitions and subsequent integrations, divestiturespectively. See also the risk factors below under the heading Risks Related to Prior Sepa, and other significant transactions successfully could harm our financial results, business and prospects.
As part of our strategy, we may acquire businesses, divest businesses or assets, enter into strategic alliances and joint ventures, and make investments to further our business (collectively, business combination and investment transactions), and also handle any post-closing issues, such as integrations.
. Risks associated with business combination and investment transactions include the following, any of which could adversely affect our financial results, including our effective tax rate:
We may not successfully combine product or service offerings or fully realize all of the anticipated benefits of any particular business combination and investment transaction, which may result in (1) failure to retain emploexecute on our business strategy; (2) failure to coordinate sales and marketing efforts to effectively position our capabilities; (3) failure to retain employees, customers, distributors, and suppliers or attract new business and operational relationships; (24) increase in unanticipated delays or failure to meet contractual obligations which may cause financial results to differ from expectations; and (3) significant increase in costs and expenses, including those related to severance pa5) pay, early retirement costs, employee benefit costs, charges from the elimination of duplicative facilities and contracts, inventory adjustments, assumed litigation and other liabilities, legal, accounting and financial advisory fees, and required payments to executive officers and key employees under retention plans.
We may fail to successfully and efficiently (1) integrate financial forecasting and controls, procedures and reporting cycles; (2) consolidate and integrate corporate, information technology, finance and administrative infrastructures; (3) coordinate and integrate operations, including in countries in which we have not previously operated; (4) integrate employees and related human capital management systems and benefits; or (5) address redundant processes and functions in an adequate manner (thereby impacting our ability to achieve all or any of the anticipated synergies)
Our ability to conduct due diligence with respect to business combination and investment transactions, and our ability to evaluate the results of such due diligence, is dependent upon the veracity and completeness of statements and disclosures made or actions taken by third parties or their representatives. We may fail to identify significant issues with the acquired companys product quality, financial disclosures, accworkplace culture, accounting practices or internal control deficiencies or all of the factors necessary to estimate reasonably accurate costs, timing and other matters.
In order to complete a business combination and investment transaction, we may issue common stock, potentially creating dilution for our existing stockholders or we may enter into financing arrangements, which could affect our liquidity and financial condition.
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For an acquisition or other combination, the acquisition partner may have differing or inadequate cybersecurity and data protection controls, which could impact our exposure to data security incidents and potentially increase anticipated costs or time to integrate the business.
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Business combination and investment transactions may lead to litigation, which could impact our financial condition and results of operations.
We have incurred and will incur additional depreciation and amortization expense over the useful lives of certain assets acquired in connection with business combination and investment transactions and, to the extent that the value of goodwill or intangible assets acquired in connection with a business combination and investment transaction becomes impaired, we may be required to incur additional material charges relating to the impairment of those assets.
For a divestiture, we may encounter difficulty in finding buyers or alternative exit strategies on acceptable terms in a timely manner, or we may dispose of a business at a price or on terms that are less desirable than we had anticipated.
The impact of divestitures on our revenue growth may be larger than projected, as we may experience greater dis-synergies than expected. If we do not satisfy pre-closing conditions and necessary regulatory and governmental approvals on acceptable terms, it may prevent us from completing the transaction. Dispositions may also involve continued financial involvement in the divested business, such as through continuing equity ownership, guarantees, indemnities or other financial obligations. Under these arrangements, performance by the divested businesses or other conditions outside of our control could affect our future financial results.
Our certificate of incorporation and bylaws could make it difficult or discourage an acquisition of Hewlett Packard Enterprise if our Board of Directors deems it to be undesirable. Provisions such as indemnification, meeting requirements, and blank check stock authorizations could deter or delay hostile takeovers, proxy contests, or changes in control or management of Hewlett Packard Enterprise.
Managements attention or other resources may be diverted during business combination and investment transactions and may be further impacted if we fail to successfully complete or integrate business combination and investment transactions that further our strategic objectives.
If we fail to manageSee also the risk factors below under the distribuheading Risks Related to Prior Separation of our s.
If we cannot continue to produce quality products and services properly, our reputation, business, and financial performance couldmay suffer.
We uIn the course a variety of distribution methods to sell oconducting our business, we must adequately address quality issues associated with our products and, services arou, and the world, including both direct and indirect sales to end-users. Successfully managing the interaction of our dsolutions (whether developed by us or by a company we acquirect and indirect channel efforts to reach various potential customer segments for our), including defects in our engineering, design, and manufacturing productcesses and services is a complex process. Moreover, sinunsatisfactory performance under service each distribution method hcontracts, as well as distinct risks and gross margins, our failure to implement the most advantageous balance in the delivery model forefects in third-party components included in our products and services could adversely affect our runsatisfactory performance or evenue and gross margins and malicious acts by therefore our profitability.
Our financial results could be materially adversely affected due to distribution channel conflicts or if the financial conditions of oird-party contractors or subcontractors or their employees. In order to address quality issues, we work extensively with our channel partners were to weaken. Our results of operations may be adversely affected byustomers and suppliers and engage in product testing to determine the causes of problems any conflicts that mighd to develop and implement arise between our various distribution channels orppropriate solutions. However, the loss or deterioration of any alliance or distribproducts, services, and solution arrangement. Moreover, some ofs that we offer are complex, and our wholesale distributors may have insufficient financial resources and regular testing and quality control efforts may not be able to withstand changeseffective in business conditions, includtrolling economic weakness, industry consolidation, and market trends. Considerable trade receivables that are not covered bor detecting all quality issues or errors, particularly with respect to faulty collateral or credit insurance are outstanding with our distribution channel mponents manufactured by third partneries. Revenue from indirect sales could suffer, aIf we are unable to determine the cause, find we could experience disruptions in distriban appropriate solution, if our distributors or offer a temporary financial conditions, abix (or patch) to address qualitiy issues to borrow funds in the credit markets or operationswith our products, weaken.
Our inventory managem may delay shipment is complex, as weto customers, which continue to sell a siuld delay revenue recognificant mixtion and receipt of products through distributors. We must manage both ownecustomer payments and could and channel inventory edversely affectively, particularly with respect to sales to distributors, which involves forecasting demand and our revenue, cash flows, and profitability. In addition, after pricing challenges. Distributors have in the past adjusted orders during periods of oducts are delivered, quality issues may require us to repair or replace such product shortages,s. Addressing quality issues can be expensive and may do so in the future,result in addition to cancelling orders if their inval warranty, repair, replacementory is too high or delay, and other costs, adversely affecting orders in anticipation our financial performance. If new products. Dor existributors also may adjing cust their ordomers in response to the supplhave difficulty of our products and theperating our products of our competitors and seasonal fluctur are dissations in end-user demand. Osfied with our reliance upon indirect distribservices or solution methods may reduce s, our visibility into demand and pricing trends and issues, and therefore make forecasting more difficult. If we have excess or obsolete inventory,results of operations could be adversely affected, and we could face possible claims if we may have fail to reducemeet our prices and write down inventory. Moreover, our use ofcustomers' expectations. In addition, quality issues, indirect distribution channels may limit ocluding the actual or perceived security or reliability of our willofferingness or ability to adjust prices quickly and otherwise to respond to pricddress other data security concerns, can impair our relationships with new or existing changes. We also may have limited ability to estimate future product rebate redemptustomers and adversely affect our brand and reputations in order to price , which could adversely affect our producresults effectively. of operations.
In order to be successful, we must attract, retain, train, motivate, develop, and transition key employees, and failure to do so could seriously harm us.
In order to be successful, we must attract, retain, train, motivate, develop, and transition qualified executives and other key employees, including those in managerial, technical, development, sales, marketing, and IT support popositions. In order to attract and retain executives and other key employees in a competitive marketplace, we must provide a competitive compensation package, including cash and equity-based compensation. These are particularly important considering our recent segment realignment, as we shift our growth strategy to capture the market opportunityies presented by networking, hybrid cloud, and AI. Certain equity-based incentive awards for certain executives contain conditions relating to our stock price performance and our long-
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term financial performance that make the future value of those awards uncertain. If the anticipated value of such equity-based incentive awards does not materialize, if our equity-based compensation otherwise ceases to be viewed as a valuable benefit, if our total compensation package is not
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viewed as being competitive, or if we do not obtain the stockholder approval needed to continue granting equity-based incentive awards in the amounts we believe are necessary, our ability to attract, retain, and motivate executives and key employees could be weakened.
Our failure to successfully hire executives and key employees or the loss of any executives and key employees could have a significant impact on our operations and our ability to execute our strategy. Further, changes in our management team may be disruptive to our business, and any failure to successfully transition and assimilate key new hires or promoted employees could adversely affect our business and results of operations. As competition for highly skilled employees in our industry has grown increasingly intense, we have e in the past experienced, and may in the future experience, higher than anticipated levels of employee attrition, which has resulted in increased costs to hire new employees with the desired skills and may do so again in the future. In addition, significant or prolonged turnover or revised hiring priorities may negatively impact our operations and culture, as well as our ability to successfully maintain our processes and procedures, including due to the loss of historical, technical, and other expertise. These risks to attracting and retaining the necessary talent may be exacerbated by recent labor constraintslabor constraints, such as immigration policies which may impair the ability to recruit technical and professional talent, and inflationary pressures on, which impact employee wages and benefits.
Failure to meet ESG expectFurther, integrations or st of employees andards o businesses as a result of our achieve our ESG goals cquisitions, including the Merger, may present challenges, which could adversenegatively affect our business, results of operations, financial condition, or stock prability to retain and recruit personnel who are essential to our future success.
If we fail to manage the distribution of our products and service.
There has beens properly, our business an increased focus from regulatord financial performance could suffer.
We use a variety of distribution methods to sell our products and stakeholders on ESG matters. Given our commitment ervices around the world, including both direct and indirect sales to ESG, we activeend-users. Successfully manageing these issues and have established and publicly announced certain goals, commit interaction of our direct and indirect channel efforts to reach various potential customer segments, for our products and targets which we may refine or even expand further in the future. These goals, commitments,services is a complex process. Moreover, since each distribution method has distinct risks and gross margins, our failure to implement the most advantageous balance in the delivery model for our products and targets reflservices could adversely affect our current plans and aspirations, are based on available data and estimates, and are not guarantees that we will be ablrevenue and gross margins and therefore our profitability.
Our financial results could be materially adversely affected due to distribution channel conflicts or if the financial conditions of our channel partners were to achieve them. Moreover, acweaken. Our results of operations or statemenmay be adversely affected by any conflicts that we may tak might arise based on expectations, assumpetween our various distributions, channels or third-party informe loss or deterioration that we currof any alliance or distribution arrangemently believe to be reasonab. Moreover, some of our wholesale distributors may subsequhave insufficiently be determined to financial resources and may not be erroneous or be subject to misinterpretable to withstand changes in business conditions, including economic weakness, industry consolidation. Initiativ, and market trends. Considerable trade receivables to address such ESG issues may be costly hat are not covered by collateral or credit insurance are outstand may not have the desired effing with our distribution channel partners. Revenue from indirect. Evolving stakeholder sales could suffer, and we could expectatrience disruptions and in distribution, if our efforts anddistributors financial conditions, abilityies to manageborrow funds in these issues and accomplish our goals, commitm credit markets, or operations weaken.
Our invents, and targets present numerous operational, regulaory management is complex, as we continue to sell a significant mix of products through distributory, reputational, financial, legal, and other risks, any ofs. We must manage both owned and channel inventory effectively, particularly with respect to sales to distributors, which may be outside of our control or could involves forecasting demand and pricing challenges. Distributors have advin the past adjusted orderse impact during periods on our businesf product shortages, including on our stock price. Furand may do so in ther, there is uncertainty around future, in addition to cancelling orders if the accounting standards and climate-related disclosureir inventory is too high or delaying orders in anticipation of new products. Distributors associated with emerging laws and reporting requiremenlso may adjust their orders in response to the supply of our products and the related cosproducts to of our comply with the emerging reguletitors and seasonal fluctuations.
Our failure in end-user demand. If we have excess or perceived failurobsolete inventory, we may have to achievreduce our ESG goals, maintain ESG practices, or comply with emerging ESG regulationsprices and write down inventory, and have done so from time to time in that meet evolving regulatory or stakeholder expectations could harme past. Moreover, our use of indirect distribution channels may limit our reputation, adversely impact ouwillingness or ability to attract and retain customers and talent,djust prices quickly and expootherwise usto respond to increased scrutiny from pricing changes.
Issues in the investdevelopment community and enforcement authorities. Our use of artificial intelligence may result in reputation also may be harmed byal harm, liability or impact to our results of operations.
We believe the perceproliferations that of AI, especially as it relates to our stakeholders products and solutions that enable AI workloads, will have about our significant impacti on or inaction on certain ESG-related issues, or because they may disagree withcustomer preferences and market dynamics in our industry, and our ability to effectively compete in this space will be critical to our goals and initiatives. Damage financial performance. We currently incorporate AI capabilities into our reputation and loss of brcertain offerings and equity may reducmanufacture hardware demand for our productssigned to support AI capabilities, and services our research into and thus have an adverse effect on our fucontinued development of such capabilities and manufacture financial performance, as well as require additionaling processes remain ongoing. We have invested, and expect to continue to invest, significant resources to rebuild our reputation.
Issues in and support the development and uof these of artificial intelligencecapabilities and may result in reputational harm or liability.
We currently incorporate AI capabilities into certain of our nufacturing processes, and if our AI-related offerings fail to operate as anticipated or as well as competing offerings or otherwise do not meet customer needs or if we are unable to bring AI-related offerings, and to market as effectively as our research incompetitors, we may fail to and continued development of such capabilities remain ongoing. recoup our investments in AI, our competitive position may be harmed, and our business and reputation may be adversely impacted.
As with many innovations, AI presents risks, challenges, and unintended consequences that could affect its adoption, and therefore our business. and our overall strategy. While we review proposed implementations and use cases ahead of deployment, we may not always identify the risks or deficiencies of an AI algoritcapability or offering and the market may respond differently than we anticipate, potentially impacting our results of operations. AI algorithms and training methodologies may be flawed. Ineffective or inadequate AI development or deployment practices by us or others could result in incidents that impair the
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acceptance of AI solutions or cause harm to individuals or society. These deficiencies and other failures of AI systems could subject us to competitive harm, regulatory action, legal liability, and brand or reputational harm. If we enable or offer AI solutions that are controversial because of their impact on human rights, privacy, employment, or other social, economic, or political issues, we may experience competitive, brand, or reputational harm or legal and/or regulatory action. Further, incorporating AI gives rise to litigation risk and risk of non-compliance and unknown cost of compliance, as AI is an emerging technology for which the legal and regulatory landscape is not fully developed and which may vary from jurisdiction to jurisdiction, creating complex compliance issues (including potential liability for breaching intellectual property or privacy rights or laws or for the misuse of personal data). While new AI initiatives, laws, and regulations are emerging and evolving, what they ultimately will look like remains uncertain, and our obligation to comply with them could entail significant costs, negatively affect our business, or entirely limit our ability to incorporate certain AI capabilities into our offerings. The resulting impact of such regulations on our customers desire for AI capabilities and demand for our offerings more generally could negatively impact our results of operations.
Additionally, leveraging AI capabilities to potentially improve internal functions and operations presents further risks and challenges. While we aim to use AI ethically and attempt to identify and mitigate ethical or legal issues presented by its use, we may nevertheless be unsuccessful in identifying or resolving issues before they arise. The use of AI to support business operations carries inherent risks related to data privacy and security, such as intended, unintended, or inadvertent transmission of proprietary or sensitive information, as well as challenges related to implementing and maintaining AI tools, such as developing and maintaining appropriate datasets for such support. Further, dependence on AI without adequate safeguards to make certain
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business decisions may introduce additional operational vulnerabilities by impacting our relationships with customers, partners, and suppliers; by producing inaccurate outcomes based on flaws in the underlying data; or other unintended results.
Risks arising from climate change and the transitio
Changes in the macroeconomic environment have, at times, impacted and may in to a lower-carbon economy may he future negatively impact our business
Climate change serves as a risk multiplier tharesults of operations.
Changes in macroeconomic conditions have, at times, affected and may in the future affect could increase both the frequencynsumer and enterprise spending, and severity of natural disastas a result, our customers that may affect our worldwide business operations and thohave postponed or cancelled, and may also in the future postpone or cancel, spending in response of suppliers and customers. Our corporate headquarters is located in Spring, Texato numerous reasons, including but not limited to volatility in credit and equity markets, negative financial news and/or declines in income or asset values, all of which suffers from floods, hurricanes, and otmay have an adverse effect on the demand for our products and/or result in changes in our product prices. Other extreme weatherfactors that have had, and a portion of our researchcould again in the future have, and development activ adverse effect on demand for our products, financial condities are locatedon and results of operations include in California, which suffers from droughtflation, slower economic growth or economic recession, conditions and catastrophic wildfires, each affecting thein the labor market, health and safety of our employees. In California, to mitigate wildfire risk, electric utilities care costs, access to credit, consumer confidence, and other macroeconomic factors affecting consumer and business spending behave, at timior. These changes periodically deployed,could happen rapidly and we may in the future, periodicalnot be able to react quickly deploy public safety power shutoffs, whicto prevent or limit our losses or exposures. Additionally, other macroeconomic developments, such affect electricity relis efforts of governments to stimulate or stability to our facilities and our communities. Certain sites locatedze the economy, international conflicts, trade disputes, sanctions, increased tariffs internationally, in tcluding between the United States, Middle East, and China, and India experience exposure to extreme heaton imports into the United States from various countries, have at times impacted, and water strmay in the future impact our business in an adverse manner, which could potentially jeopardize ether directly or indirectly, such as through their impacts on the financial positions and operations of our customers, suppliers, and othe healr third parties with andwhom well-being of our employees, do business or on whom we rely, and as a consequently impacting our operce, their ability to perform their obligations. While we seek to miti under their agreements with us. Persistent inflation has negate theively affected our business risks associated with climate change through site selection, infrastructure technologicalin recent quarters and could do so again in the future, as well. A general weakening of, and related declining corporate confidence investments and robust enviro, the global economy or the curtailment in governmental programs, this may require us or corporate spending have at times caused current or potential customers to incur substantial costreduce their IT budgets or be unable to fund data storage products, and we may be unsuccessful in dowhich have led them to delay, decrease or cancel purchases of our products or to not pay us or to delay paying so as there are inherent climate-related risks whereverus for previously purchased products and services, all of which may occur again in the future.
Failure to meet responsible and sustainable business is conducted. Furthermore, climate change may reduce the availability or increase the costexpectations or standards or achieve our Living Progress goals could adversely affect our business, results of insuroperations, finance fial condition, or these negative impacts of natural disasters by contributingstock price.
There has been an increased focus from regulators and stakeholders on sustainability and corporate responsibility matters. Given our commitment to an increase in the incidence and severity of such natural disasters.
The increasing concern over climate change could sustainable and responsible business, we actively manage these issues through our Living Progress Strategy and have established and publicly announced certain goals, which we may refine or even expand further in the future. These goalso result in transiflect our current plans and aspiration risks, are based on available data and estimates, such as shifting customer preferences or compliance risks from changing regulatory and legal rand are not guarantees that we will be able to achieve them. Moreover, actions or statements that we may take based on expectations, assumptions, or third-party information that we currently believe to be reasonable may subsequirements. Changing customer preferences may result in increased demands forently be determined to be erroneous or be subject to misinterpretation. Initiatives to address sustainable solutions, products, and services, whichility and corporate responsibility issues may be costly and may cause us to incur addinot have the desired effect. Evolving stakeholder expectational costs, invest more in RD, ors and our efforts and ability to make other changes to othernage these issues and accomplish our goals present numerous operations toal, regulatory, respond to such demputational, financial, legal, and other risks, any of which comay be outside of our control or could ahave adversely affect o impacts on our financial results. We mabusiness, including on our stock price. Further, there is uncertainty also confront higher electricity pricround the accounting standards and climate-related disclosures as the grid decarbonizes,ssociated with emerging laws and reporting requirements and higherthe related costs for sto comply with the emerging regulations.
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Oupplies or comr failure or perceived failure to achieve our Living Progress goals, maintain responents thatsible and sustainable business practices, or comply with ceremerging sustain environmentalability regulations that meet evolving regulatory thresholds, potentialor stakeholder expectations could harm our reputation, adversely impacting our margins or the pricing of our offeringability to attract and retain customers and talent, and expose us to increased scrutiny from the investment community and enforcement authorities. If we fail tOur reputation also manage y be harmed by these and other transi perceptions that our stakeholders have about our action or inaction risks inon certain sustainability- an effective manner, customer demad corporate responsibility-related issues, or because they may disagree with our goals and foinitiatives, either our solf which may cause us to face scrutions, producny, lawsuits, and services could diminish, and oor other market access restrictions from certain parties related to our profitability could suffer.
If we cannot continue to produce qualaction or inaction on such issues. Damage to our reputation and loss of brand equity may reduce demand for our products and services, our reputation, business, and thus have and f adverse effect on our future financial performance may suffer.
In the c, as well as require additional resourse of conductingces to rebuild our business, we must adequately address quality issues associated withreputation.
Risks arising from climate change and the transition to a lower-carbon economy may impact our products, business.
Climate change services, and solutions, including defects in our enginees as a risk multiplier that could increase both the frequency and severing, design, andty of natural disasters that manufacturing processey affect our worldwide business operations and those of suppliers and unsatisfactory performance under service contracts, as well as defects in third-party components includcustomers. Our corporate headquarters is located in Spring, Texas, which suffers from floods, hurricanes, and other extreme weather, and a portion of our research and development activities are located in our productCalifornia, which suffers from drought conditions and unsatisfactory performance or even malicious acts by third-party contractors or subcontractors or their emcatastrophic wildfires, each affecting the health and safety of our employees. In California, to mitigate wildfire risk, electric utilities have, at times periodically deployees. In order to address qualid, and may in the future, periodically deploy public safety issuepower shutoffs, we work extensively withhich affect electricity reliability to our customerfacilities and suppliers and engageour communities. Certain sites located in product testing to determine the causes of problems and to developthe United States, Middle East, China, and India experience exposure to extreme heat and water stress, which could potentially jeopardize the health and iwell-being of our emplement appropriate soluoyees, consequently impacting our operations. However, the products, services, and soluWhile we seek to mitigate business risks, including those associated with climate change, through site selections that we offer are, infrastructure technological investments, business complexntinuity planning, and our regular testing and quality control efforts robust environmental programs, this may require us to incur substantial costs, and we may not be effectiveunsuccessful in controlldoing or detecting all quality issues or errors, particularly with respect to faulso as there are inherent climate-related risks wherever business is conducted. Furthermore, climate change may reduce the availability components manufactured byor increase the cost of insurance for third parties. If we are unable to deese negative impacts of natural disastermine the cause, finds by contributing to an increase in the incidence an appropriate solution or offd severity of such natural disasters.
The increasing concern over a temporary fix (or patch) to addclimate change could also ress quality issues with our productult in transition risks, we may delay shipment tsuch as efforts and expenditures related to customers, which could delay revenue recognition and receipt of customer payarbon abatement, shifting customer preferences, or compliance risks from changing regulatory and legal requirements and could adversely affect our revenue, cash flows, . We have already observed changing customer preferences resulting in increased demand profitability. In addis for sustainable solution, after s, products are delivered, quality issues may require u, and services. While we have been integrating such trends into our business and sales strategies to repair or replace hus far, we may not be able to such products. Addressing qcessfully do so in the future. Further, continuality issues can be expensive andly changing customer preferences may resultcause us to incur additional warranty, repair,costs, invest more in RD, or make other changes to other operations to replacement, and other costs,spond to such demands, which may not be carried out successfully, and if so, could adversely affecting our financial performance. If new or existing customers have difficulresults. We may also confront higher electricity operating our products or are dissatisfied with our services or solutions, our resultprices as the grid decarbonizes, and higher costs for supplies of operations could be adversely affected, and we could face possible claims if we fail to meetr components that comply with certain environmental regulatory thresholds, potentially impacting our margins or the pricing of our customers' expectationofferings. In addition, quality issues can impair our relaf we fail to manage these and other transitionships with new or existing risks in an effective manner, customers demand adversely affect our brandfor our solutions, products, and reputation, whichservices could adversely affectdiminish, and our results of operations. profitability could suffer.
Industry Risks
We operate in an intensely competitive industry, and competitive pressures could harm our business and financial performance.
Our ability to implement solutions for our customers, anticipate and respond to rapid and continuing changes in technology (such as cloud-, AI-, and security-related offerings, which are continually evolving), and develop new service offerings or incorporate technological improvements into our offerings that meet current and prospective customers needs, as well as evolving industry standards, is critical to our competitiveness and success. We encounter aggressive competition from numerous and varied competitors in all areas of our business, and our competitors have targeted and are expected to continue targeting our key market segments. We compete primarily on the basis of our technology, innovation, performance, price, quality, reliability, brand, reputation, distribution, portfoliorange of products and services, ease of use of our products, account relationships, customer training, service and support, security, and securthe availability of our IT infrastructure offerings. If our products, services, support, and cost structure do not enable us to compete successfully based on any of those criteria, our results of operations and business prospects could be harmed.
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We have a large portfolio of products and services and must allocate our financial, personnel, and other resources across all of our products and services while competing with companies that have smaller portfolios or specialize in one or more of our product or service lines. As a result, we may invest less in certain areas of our business than our competitors do, and our competitors may have greater financial, technical, and marketing resources available to them compared to the resources allocated to our products and services that compete against theirs. If we do not sufficiently invest in new technologies, successfully adapt to industry developments and changing demand, and evolve and expand our business at sufficient speed and scale to keep pace with the demands of the markets we serve, we may be unable to develop and maintain a competitive advantage and execute on our growth strategy, which would adversely affect our business, results of operations, and financial condition. Industry consolidation may also affect competition by creating larger, more homogeneous, and potentially stronger
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competitors in the markets in which we operate. Additionally, our competitors may affect our business by entering into exclusive arrangements with our existing or potential customers or suppliers.
Companies with whom we have vertical relationships in certain areas may be or become our competitors in other areas. In addition, companies with whom we have vertical relationships also may acquire or form relationships with our competitors, which could reduce their business with us. If we are unable to effectively manage these complicated relationships with vertical partners, our business and results of operations could be adversely affected.
We face aggressive price competition and may continue to do so. As a consequence of inflation and higher supply chain and manufacturing costs, we have in the past increased the prices of many of our products and services to maintain or improve our revenue and gross margin, and may do so again in the future. In addition, competitors who have a greater presence in some of the lower-cost markets in which we compete, or who can obtain better pricing, more favorable contractual terms and conditions, or more favorable allocations of products and components during periods of limited supply may be able to offer lower prices than we are able to offer. Our cash flows, results of operations, and financial condition may be adversely affected by these and other industry-wide pricing pressures.
Because our business model is based on providing innovative and high-quality products and services, we may spend a proportionately greater amount of our revenues on RD than some of our competitors. If we cannot proportionately decrease our cost structure (apart from RD expenses) on a timely basis in response to competitive price pressures, our profitability could be adversely affected. In addition, if our pricing and other facets of our offerings are not sufficiently competitive, or if there is an adverse reaction to our product decisions, we may lose market share in certain areas, which could adversely affect our financial performance and business prospects.
Even if we are able to maintain or increase market share for a particular product, its financial performance could decline because the product is in a maturing industry or market segment or contains technology that is becoming obsolete. For example, our Storage business unit is experiencing the effects of a market transition towards software defined and public cloud, which has led to a decline in demand for our traditional storage products. Financial pinancial performance could decline due to increased competition from other types of products. that perform similar functions as our offerings.
International Risks
Due to the international nature of our business, political or economic changes and the laws and regulatory regimes applying to international transactions or other factors could harm our future revenue, costs and expenses, and financial condition.
Our business and financial performance depend significantly on worldwide economic conditions and the demand for technology hardware, software, and services in, and continued access to, the markets in which we compete. Economic weakness and uncertainty and the volatile inflationary environment have constrained spending on network and enterprise infrastructure have. This has in the past adversely affected the demand for our products, services, and solutions, which has impacted our financial condition and results of operations, all of which we may experience again in the future. These have , at times in the past, resulted in increased expenses due to higher allowances for doubtful accounts and potential goodwill and asset impairment charges (among other financial impacts), and made it more difficult for us to manage inventory and make accurate forecasts of revenue, gross margin, cash flows, and expenses, and may have such effects again in the future. Such factors, including how long such conditions may persist, among others, may negatively impact the evenness or volume of demand for our products and services, potentially resulting in impacts similar to those mentioned above, though the precise extent of such impacts cannot be accurately predicted.
Economic weakness and uncertainty could cause our expenses to vary materially from our expectations. Any financial turmoil affecting the banking system and financial markets, or any significant financial services institution failures could negatively impact our treasury operations, as the financial condition of such parties may deteriorate rapidly and without notice in times of market volatility and disruption. Interest and other expenses have varied, and could continue to vary, materially from expectations depending on changes in interest rates, borrowing costs, currency exchange rates, costs of hedging activities, and the fair value of derivative instruments. For example, in response to increasing inflation, the U.S. Federal Reserve, along with central banks around the world, have been raising interest rates, signaled expectations of additional rate increases, and have indicated these rates may remain higher for longer. It is difficult to predict the impact of such events on us, our third-party partners, our customers, or economic markets more broadly, which have been and will continue to be highly dependent upon the actions of governments and businesses in response to macroeconomic events, and the effectiveness of those actions. Such
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actions have impacted, and may further impact our ability, desire, or the timing of seeking funding for various investment opportunities. Economic downturns also may lead to restructuring actions and associated expenses. Further, reduced U.S. federal government spending may limit demand for our products, services, and solutions from organizations that receive funding from the U.S. government, and could negatively affect macroeconomic conditions in the United States, which could further reduce demand for our products, services, and solutions.
Our business and financial performance also could be adversely affected by changes in U.S. trade policy, U.S. export controls and sanctions, and U.S. regulations concerning imports, as well as international laws and regulations relating to global trade. Current U.S. government trade policy includes the imposition of tariffs on certain foreign goods, including information and communication technology products. These measures have materially increased costs for certain goods imported into the United States. As a result, our business has in the past been impacted by forced material price increases, which in turn resulted
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in price increases for our offerings, which subsequently limited demand or reduced margins for our offerings, all of which may impact us again from time to time in the future. Additionally, U.S. trading partners may adopt their own trade policies making it more difficult or costly for us to export our products to those countries. Similarly, changes in regulations relating to ecertain exports cou, including economic sanctions, have led to export delays and prevented us, and could in the future prevent us, from exporting products to certain locations or customers entirely, which have in some instances impacted, and could in the future impact, our financial performance. In addition, changes in requirements relating to making foreign direct investments could increase our cost of doing business in certain jurisdictions, prevent us from shipping products to particular countries or markets, affect our ability to obtain favorable terms for components, increase our operating costs, or lead to penalties or restrictions. While we have policies and procedures designed to facilitate compliance with global trade laws and regimes around the world, such measures may not guarantee compliance.
Sales outside the United States constituted approximately 64% of our net revenue in fiscal 20234. As such, our future business and financial performance could suffer due to a variety of international factors in addition to those otherwise already disclosed, including:
ongoing uncertainties as a result of instability or changes in geopolitical conditions, including military or political conflicts, such as those caused by the ongoing conflicts between Russia and Ukraine or Israel and Hamasin the Middle East (the potential escalation or geographic expansion of which could heighten other risks identified in this report), or the relationship between China and the U.S. (which could, among other things, impact the enforceability of certain contracts or the timing and form of certain payments);
inflationary pressures, suwhich as those have in the market is currently experiencing, which have incpast increased, and may continue toin the future increase, costs for materials, supplies, and services; , including those of third parties with whom we do business;
adverse or uncertain macroeconomic conditions, including a rischanging interest rate environment and fears of a potential global economic downturn or recession, which have at times in the past slowed customer demand for our products and services, and may do so again in the future;
network security, privacy, and data sovereignty concerns, which could make foreign customers reluctant to purchase products and services from U.S.-based technology companies;
longer collection cycles and financial instability among customers, which could impact our ability to collect on accounts receivable and consequently recognize revenue;
local labor conditions and regulations, including local labor issues faced by specific suppliers and OEMs, or changes to immigration and labor law policies which may adversely impact our access to technical and professional talent;
managing our geographically dispersed workforce, which has necessitated, and may in the future require, incurring costs to promote seamless workforce connectivity and to comply with changing laws, regulations and workers rights councils across multiple jurisdictions;
differing technology standards or customer requirements, which have required us to incur additional development and production costs to modify or adapt our offerings, and may do so again in the future;
local content and manufacturing requirements, which have impacted, and could further impact, our ability to sell into those markets;
difficulties associated with repatriating earnings in restricted countries, and changes in tax laws, which introduces uncertainty to our results of operations and financial performance; and
fluctuations in freight costs, limitations on shipping and receiving capacity, and other disruptions in the transportation and shipping infrastructure at important geographic points of exit and entry for our products and shipments, which have from time to time adversely impacted, and any of which could in the future adversely impact, our results of operations and ability to meet customer demand.
Certain of the factors described above have, in the past, disrupted the operations of, and adversely impacted our product and component manufacturing and key suppliers, customers, or vendors located outside of the United States, and could do so again in the future. For example, we rely on suppliers in Asia for product assembly and manufacture, the operations of whom are subject to local labor laws and other requirements. Any loss of or limitations on their output or their inability to operate
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could have an adverse effect on our ability to timely deliver our products and services, which would in turn negatively impact our financial performance.
Further, the ongoing conflict between Russia and Ukraine and the trade sanctions imposed by the U.S., the European Union (the EU), and other countries in response have negatively impacted business and financial performance in that region. HPE is proceeding withcontinuing to execute on the exit of our remaining business in Russia and Belarus as planned; however, we cannot provide any assurance that such exit will be efficient or uninterrupted, which may negatively impact our operational expenses.
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We implement policies, procedures, and training designed to facilitate compliance with anti-corruption laws around the world, including the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act. But in many foreiHowever, such measures may not guarantee compliance, and our employees and third parties with whom we work may take actions in violation of such policies or such anti-corruption laws. Furthermore, in many foreign countries, particularly in those with developing economies, people may engage in business practices prohibited by anti-corruption laws. Our employees and third parties we work with Violations of such laws may take actions in violaresult in severe criminal or civil sanction of our polics and penalties, and t we may be subject to those actions nd other liabilities that could have an adverse effect on our business and, reputsults of operation. s, and financial condition.
We are exposed to fluctuations in foreign currency exchange rates.
Cuonducting business in currencies other than the U.S. dollar, including the euro, the Japanese yen, and British pound haves, from time to time, adversely impacted, and could in the future, have an adverse impact on our results as expressed in U.S. dollars. Currency volatility contributes to variations in our sales of products and services in impacted jurisdictions. Fluctuations in foreign currency exchange rates have, from time to time, adversely affected, and could in future periods adversely affect our revenue recognition and our revenue growth. In addition, currency variations can adversely affect our ability to implement price increases, margins on sales of our products in countries outside of the United States and margins on sales of products that include components obtained from suppliers located outside of the United States.
From time to time, we use forward contracts and options designated as cash flow hedges to protect against foreign currency exchange rate risks, and may continue to do so in the future. The effectiveness of our hedges depends on our ability to accurately forecast future cash flows, which is particularly difficult during periods of uncertain demand for our products and services and highly volatile exchange rates. We may incur significant losses from our hedging activities due to factors such as volatility and currency variations. In addition, certain or all of our hedging activities may be ineffective, may expire and not be renewed or may not offset any or more than a portion of the adverse financial impact resulting from currency variations. Losses associated with hedging activities also may impact our revenue and to a lesser extent our cost of sales and financial condition.
Intellectual Property Risks
Our financial performance may suffer if we cannot continue to develop, license, or enforce the intellectual property rights on which our businesses depend.
We rely upon patent, copyright, trademark, trade secret, and other intellectual property laws in the United States, similar laws in other countries, and agreements with our employees, customers, suppliers, and other parties, to establish and maintain intellectual property rights in the products and services we sell, provide, or otherwise use in our operations. However, from time to time our intellectual property rights have been challenged, infringed, or circumvented, and any of such rights could be further challenged, invalidated, infringed, or circumvented or such intellectual property rights may not be sufficient to permit us to take advantage of current market trends or to otherwise provide competitive advantages. Further, the laws of certain countries do not protect proprietary rights to the same extent as the laws of the United States. Therefore, in certain jurisdictions we may be unable to protect our proprietary technology adequately against unauthorized third-party copying or use; this, too, could adversely affect our ability to sell products or services and our competitive position.
Furthermore, changes in intellectual property laws or their interpretation may impact our ability to protect and assert our intellectual property rights, increase costs and uncertainties in the prosecution of patent applications or related enforcement actions, and diminish the value and competitive advantage conferred by our intellectual property assets.
Monitoring and detecting any unauthorized access, use or disclosure of our intellectual property is complex, and we cannot be certain that the protective measures we have implemented will completely prevent misuse. Our ability to enforce our intellectual products perty rights is subject to litigation risks and uncertainty as to the protection and services depend in part on intenforceability of those rights in some countries. If we seek to enforce our intellectual property rights, we may be subject to claims that those rights are invalid or unenforceable, and others may seek counterclaims against us, which could have a negative impact on our business. Effective protection of intellectual property rights is expensive and difficult to maintain, both in terms of application and maintenance costs, as well as the costs of defending and enforcing those rights.
Our products and services depend in part on intellectual property and technology licensed from third parties.
Much of our business and many of our products rely on key technologies developed or licensed by third parties. For example, many of our software offerings are developed using software components or other intellectual property licensed from third parties, including through both proprietary and open -source licenses. These third-party software components may become obsolete, defective, or incompatible with future versions of our products, our relationship with the third party may deteriorate or cease, or our agreements with the third party may expire or be terminated. We may face legal or business disputes with licensors that may threaten or lead to the disruption of inbound licensing relationships. In order to remain in compliance with the terms of our licenses, we must carefully monitor and manage our use of third-party software components, including both proprietary and open source license terms that may require the licensing or public disclosure of our intellectual property without compensation or on undesirable terms. Additionally, some of these licenses may not be available to us in the future on terms that are acceptable or that allow our product offerings to remain competitive. Our inability to obtain licenses or rights on favorable terms could have a material effect on our business, including our financial condition and results of operations. In
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addition, it is possible that as a consequence of a merger or acquisition, twe may acquire intellectual property subject to licensing obligations to third parties , other third parties may obtain licenses to some of our intellectual property rights or our business may be subject to certain restrictions that were not in place prior to such transaction. Because the availability and cost of licenses from third parties depends upon the willingness of third parties to deal with us on the terms we request, there is a risk that third parties who license to our competitors will either refuse to license us at all, or
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refuse to license us on terms equally favorable to those granted to our competitors. Consequently, we may lose a competitive advantage with respect to these intellectual property rights or we may be required to enter into costly arrangements in order to terminate or limit these rights.
Third-party claims of intellectual property infringement, including patent infringement, are commonplace in our industry and successful third-party claims may limit or disrupt our ability to sell our products and services.
Third parties may claim that we or customers indemnified by us are infringing upon or otherwise violating their intellectual property rights. Patent assertion entities frequently purchase intellectual property assets for the purpose of extracting infringement settlements. Furthermore, our exposure to these risks associated with the use of intellectual property may be increased as a result of acquisitions; not only do we have a lower level of visibility into the development process with respect to such technology or the care taken to safeguard against infringement risks, but also third parties may make infringement and similar claims only after we have acquired technology that had not been asserted prior to our acquisition. If we cannot license, or replace, allegedly infringed intellectual property on reasonable terms, our operations could be adversely affected. In addition, there is uncertainty around the validity and enforceability of intellectual property rights related to our use, development, and deployment of AI and AI systems and solutions. Our use of AI technologies, whether created by us for internal or customer use cases or otherwise incorporated from external sources into our offerings, could lead to violation of third-party intellectual property rights, and could require us to incur significant expenses to modify our solutions and processes or otherwise engage in efforts to remain in compliance with the law. Even if we believe that intellectual property claims are without merit, they can be time-consuming and costly to defend against and may divert management's attention and resources away from our business. Claims of intellectual property infringement also might require us to redesign affected products, discontinue certain product offerings, enter into costly settlement or license agreements, pay costly damage awards, or face a temporary or permanent injunction prohibiting us from importing, marketing, or selling certain of our products. Even if we have an agreement to indemnify us against such costs, the indemnifying party may be unable or unwilling to uphold its contractual obligations to us.
Financial Risks
Adverse developments affecting our liquidity, capital position, borrowing costs, and access to capital markets could adversely impact our business, financial condition, and results of operations. or those of the third parties with whom we do business.
We currently maintain investment grade credit ratings with Moody's Investors Service, Standard Poor's Ratings Services, and Fitch Ratings Services. Despite these investment grade credit ratings, any future down at this time, we may experience downgrades in our credit ratings for various reasons, including but not limited to for reasons in connection with the substantial amount of debt we have incurred and expect to assume in connection with the Merger. Any such downgrades could increase the cost of borrowing under any indebtedness we may incur, redujeopardize our ability to incur debt on terms acceptable to us, reduce market capacity for our commercial paper, or require the posting of additional collateral under our derivative contracts. Additionally, increased borrowing costs, including those arising from a credit rating downgrade, can potentially reduce the competitiveness of our financing business. There can be no assurance that we will be able to maintain our credit ratings, and any additional actual or anticipated changes or downgrades in our credit ratings, including any announcement that our ratings are under review for a downgrade, may have a negative impact on our liquidity, capital position, and access to capital markets.
In addition, volatility and disruption in the financial sector and capital markets and other events negatively affecting macroeconomic conditions or contributing to the instability or volatility thereof, such as rischanging interest rates, have from time to time in the past impacted, and may in the future impact, our liquidity, capital position, and access to capital markets. Our total liquidity depends in part on the availability of funds under the revolving credit facility and our other financing agreements. The failure of any lender's ability to fund future draws on our revolving credit facility or our other financing arrangements could reduce the amount of cash we have available for operations and additional capital for future needs. The future effects of such events are unknown and difficult to predict at this time, and could adversely affect us, our customers, financial institutions, transactional counterparties, or others with which we do business, which may in turn have adverse impacts on our current and/or projected business operations, financial condition, and our results of operations.
Our obligation to consummate the Merger is not subject to a financing condition, and as such, may be subject to events beyond our control, such as the timing of receipt of regulatory approvals. Further, portions of our recently issued debt contain special mandatory redemption provisions, and if we do not consummate the Merger before October 2025, we may be required to redeem certain series of such debt, which would result in less flexibility to address other funding needs.
Our debt obligations may adversely affect our business and our ability to meet our obligations and pay dividends.
In addition to our current total carrying debt, we may also incur additional indebtedness in the future. In order to consummate the Merger, we have incurred a substantial amount of debt, and plan to incur further debt, as well. This collective
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amount of debt could have important adverse consequences to us and our investors, including requiring a substantial portion of our cash flow from operations to make principal and interest payments; making it more difficult to satisfy other obligations; increasing the risk of a future credit ratings downgrade of our debt, which could increase future debt costs and limit the future availability of debt financing; increasing our vulnerability to general adverse economic and industry conditions; reducing the cash flows available to fund capital expenditures and other corporate purposes and to grow our business; limiting our flexibility in planning for, or reacting to, changes in our business and industry; and limiting our ability to borrow additional funds as needed or take advantage of business opportunities as they arise, pay cash dividends or repurchase our common stock.
Recent quantitative tigh
While the U.S. Federal Reserve has begun lowering interest rates and signaled its intening by the U.S. Federal Reserve, along with othertion to keep doing so, macroeconomic circumstances may change, resulting in delays or reversal of such actions, including by central banks around the world, have affected, and may continue to awhich may result in a prolonged high interest rate environment and affect, our short-term ability to incur debt at reasonable prices, or our desire to incur further debt at all. To the extent that we incur additional indebtedness, the risks described above could increase, including requiring additional expected cash flows from operations to service our debt. In addition, our actual cash requirements in to operate our business in the future may be greater than expected. Our cash flow from operations may not be sufficient to service our outstanding debt or to repay our outstanding debt as it becomes due, and we may not be able to borrow money, sell assets, or otherwise raise funds on acceptable terms, or at all, to service or refinance our debt.
The revenue and profitability of our operations have historically varied, which makes our future financial results less predictable.
Our revenue, gross margin, and profit vary among our diverse products and services, customer groups, and geographic markets and therefore, will likely be different in future periods than our historical results. Our revenue depends on the overall demand for our products and services, which is difficult to accurately predict, varies from time to time, and may be uneven
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across our portfolio of offerings, and is subject to industry-wide or broader macroeconomic market dynamics, all of which have in the past adversely impacted, and may again in the future adversely impact, our business and financial condition. Additionally, the varying sizes of customer accecontracts or orders, variations in customer acceptances of delivered orders , the timing thereof, and the timcancellations and/or de-bookings of such orders (due to various reasons, including thereof can be ubut not limited to failure to satisfy terms and compliance matters, whether initiated by us or the customer) can be uneven across our portfolio and can ihave at times impacted, and in the future could impact, our apipeline, bookings and our ability to recognize revenue, if at all (particularly with respect to contracts and orders involving our AI offerings). Such variables have in the past negatively impacted our financial performance, and may do so again in the future. Delays or reductions in discretionary IT spending by our customers or potential customers have had, and in the future could have a material adverse effect on demand for our products and services, which could result in a significant decline in revenue. For example, we have seen demand soften unevenly across our portfolio and geographies, which may continue, as certain customers and sectors have been taking longer than anticipated to digest prior large orders. In addition, revenue declines in some of our businesses may affect revenue in our other businesses as we may lose cross-selling opportunities. Overall gross margins and profitability in any given period are dependent partially on the product, service, customer, and geographic mix reflected in that period's net revenue.
Furthermore, the relationship between China and the U.S., and any subsequent action that may be taken by either country, may significantly vary the results our operations and financial performance from that region. There could be additional uncertainty surrounding the enforceability of contract obligations, as well as the timing and form of payments from China.
Competition, lawsuits, investigations, increases in component and manufacturing costs that we are unable to pass on to our customers, component supply disruptions, and other risks affecting our businesses may have a significant impact on our overall gross margin and profitability. Variations in our fixed cost structure and gross margins across business units and product portfolios, have from time to time led to, and may lead to significant operating profit volatility on a quarterly or annual basis in the future. In addition, newer geographic market opportunities may be relatively less profitable due to our investments associated with entering those markets and local pricing pressures, and we may have difficulty establishing and maintaining the operating infrastructure necessary to support the high growth rate associated with some of those markets. Market trends, industry shifts, competitive pressures, commoditization of products, increased component or shipping costs, regulatory impacts, and other factors have from time to time resulted in, and may in the future result in, reductions in revenue or pressure on gross margins of certain segments in a given period, which may lead to adjustments to our operations. Moreover, our efforts to address the challenges facing our business could increase the level of variability in our financial results because the rate at which we are able to realize the benefits from those efforts may vary from period to period.
Our uneven sales cycle and supply chain disruptions make planning and inventory management difficult and future financial results less predictable.
In some of our businesses, our quarterly sales have periodically reflected a pattern in which a disproportionate percentage of each quarter's total sales occurs towards the end of the quarter. This uneven sales pattern makes predicting revenue, earnings, cash flow from operations, and working capital for each financial period difficult, increases the risk of unanticipated variations in our quarterly results and financial condition, and places pressure on our inventory management and logistics systems. If predicted demand is substantially greater than orders, there may be excess inventory; and alternatively, if
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orders substantially exceed predicted demand, we may not be able to fulfill all of the orders received in each quarter and such orders may be canceled, all of which we experienced from time to time in the past and may do so again in the future. Depending on when they occur in a quarter, developments such as a systems failure, component pricing movements, component shortages, or global logistics disruptions, have in the past adversely impacted, and could in the future adversely impact, our inventory levels and results of operations in a manner that is disproportionate to the number of days in the quarter affected. We experience some seasonal trends in the sale of our products that also have produced, and may in the future produce, variations in our quarterly results and financial condition. Many of the factors that create and affect seasonal trends are beyond our control.
Separately, periodic supply chain shortages and constraints have, in some instances, resulted in, and may result in, increases to the costs of production of our hardware products that we have, at times, not been able to, and may, in the future, not be able to pass on to our customers. We have, in some instances, responded to such constraints by committing to higher inventory purchases and balances relative to our historical positions in order to secure manufacturing capacity, components to fulfill orders, or both. While these measures have been taken to shorten lead times to deliver products to customers, they may also result in excess or obsolete components in the future if the demand for our products is less than we anticipate or orders are cancelled, which could adversely affect our business and financial performance.
We make estimates and assumptions in connection with the preparation of our Consolidated Financial Statements and any changes to those estimates and assumptions could adversely affect our results of operations.
In connection with the preparation of our Consolidated Financial Statements, we use certain estimates and assumptions based on historical experience and other factors. Our most critical accounting estimates are described in the section entitled Management's Discussion and Analysis of Financial Condition and Results of Operations. In addition, as discussed in Note 1, Overview and Summary of Significant Accounting PoliciesUse of Estimates and Note 17, Litigation and, Contingencies, tand Commitments to our Consolidated Financial Statements in Item8 of Part II, we make certain estimates, including decisions related to provisions for legal proceedings and other contingencies. While we believe that these estimates and assumptions are reasonable under the circumstances, they are subject to significant uncertainties, some of which are beyond our control. Should any of these estimates and assumptions change or prove to have been incorrect, it could adversely affect our results of operations.
Declaration, payment and amounts of dividends, if any, to holders of our shares will be uncertain.
Our board of directors will have the discretion to determine whether any dividends on our common stock will be declared, when dividends, if any, are declared, and the amount of such dividends. We expect that such determination would be based on a number of considerations, including our results of operations and capital management plans, availability of funds, our access to capital markets, as well as industry practice, and other factors deemed relevant by our board of directors.
In addition, on September 13, 2024, we issued 30,000,000 shares of 7.625% Series C Mandatory Convertible Preferred Stock with a dividend rate of 7.625% per annum on the liquidation preference of $50 per share (the Preferred Stock). The Preferred Stock ranks senior to our common stock with respect to the payment of dividends. As long as any share of Preferred Stock is outstanding, unless all accumulated and unpaid dividends on the Preferred Stock for all preceding dividend periods have been declared and paid in full or declared and set apart for payment, we may not declare, pay or set apart for payment any dividends on our common stock or any other class or series of stock that ranks junior to the Preferred Stock. Dividends on the Preferred Stock are discretionary and cumulative. Holders of Preferred Stock will only receive dividends on their shares when, as and if declared by our board of directors. If dividends on the Preferred Stock have not been declared and paid for the equivalent of six or more quarterly dividend periods, whether or not consecutive, holders of Preferred Stock, together as a class with holders of any other series of parity stock with like voting rights, will be entitled to vote for the election of two additional directors to our board of directors. This right to elect additional directors to our board of directors will dilute the representation of our stockholders on our board of directors and may adversely affect the market price of our common stock. When quarterly dividends have been declared and set apart for payment in full, the right of the holders of Preferred Stock to elect these two additional directors will cease, the terms of office of these two directors will forthwith terminate and the number of directors constituting our board of directors will be reduced accordingly. Additional risks related to the Preferred Stock are contained in the prospectus supplement dated September 10, 2024.
Regulatory and Government Risks
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Our business is subject to various federal, state, local and foreign laws and regulations that could result in costs or other sanctions that adversely affect our business and results of operations.
We are subject to various US (federal, state, and local), and foreign laws and regulations. Laws and regulations may change in ways that will require us to modify our business model and objectives or affect our returns on investments by restricting existing activities and products, subjecting them to escalating costs or prohibiting them outright. For example, as a result of laws and regulations concerning the environmentresponsible and sustainable business practices, we face increasing complexity related to product design, safety and compliance; the use of regulated, hazardous, and scarce materials; the management, movement and disposal of hazardous substances and waste; the associated energy consumption and efficiency related to operations and the
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use of products, services, and solutions; the discharge of pollutants into the air and water; the trantransportation and shipping of products and other materials; supply chain due diligence, and; climate change, e adaptation and mitigation; greenhouse gas emissions and ; sustainability-related regulations and reporting requirements; the use of AI capabilities in our offerings; an and the reuse, recycling and/or disposal of products and their components at end-of-use or useful life and associated operational or financial responsibility, as we adjust to new and future requirements relating to our transition to a more circular economy. A significant portion of our hardware revenues come from international sales. Any changes to current environmental legal requirements, such as the EU's Restriction of Hazardous Substances Directive, the EU's Waste Electrical and Electronic Equipment Directive, China's Administrative Measure on the Control of Pollution Caused by Electronic Information Products, the EU's Ecodesign Directive and product-specific implementing measures (including Lot 9 on servers and online data storage products), the evolving EU and US right to repair legal landscape, and India's regulation on e-waste collection and recycling, among others, may increase our cost o may increase our cost of doing business internationally and impact our hardware revenues from the EU, U.S., China, India and/or other countries proposing or adopting similar environmental legal requirements. In addition, other ESGsustainability reporting-related laws, regulations, treaties, and similar initiatives and programs are being proposed, adopted, and implemented throughout the world (including, but not limited to the EU Corporate Sustainability Reporting Directive, the EU Taxonomy, and the proposed EU Corporate Sustainability Due Diligence Directive). If we were to violate or become liable under environmental or certain ESGsustainability-related laws or if our products become non-compliant with such laws or market access requirements, it could result in loss of market access or limit offerings in those markets or our customers may refuse to purchase our products, and we could incur costs or face other sanctions, such as restrictions on our products entering certain jurisdictions, fines, and/or civil or criminal sanctions. Environmental regulations may also impact the availability and cost of energy or emissions related to energy consumption which may increase our cost of manufacturing and/or the cost of powering and cooling owned IT infrastructures.
In addition, our business is subject to an ever-growing number of laws adnd regulations addressing privacy and information security, including the use of AI. In particular, we face an increasingly complex global regulatory environment as we adjust to new and futurend patchwork of state laws in the U.S., increasing the risks addressing these regulatory requirements relatand in responding to thepotential security of our offeringand data incidents. The increase in aaS offerings may also be impacted by data localization and international data transfer requirements under various privacy laws, including those arising frome European Unions General Data Protection Regulation. Given our significant employee and operational presence in India, the Digital Personal Data Protection Act (which was approved in August 2023) has imposed, and may continue to impose, additional restrictions and compliance costs on us. Furthermore, the rapid development and deployment of tools that leverage AI is also causing governments to consider and implement regulation of AI, even for AI the Schrems II ruling in Europeat does not pertain to personal data, which is impacting and may further impact the use and incorporation of AI capabilities in our offerings and in our customers demand for such offerings. We have received inquiries, and may be subject to demands, claims, lawsuits, regulatory investigations, and additional inquiries (including those from U.S. or foreign governmental authorities), relating to AI use cybersecurity and data incidents that we have experienced or may in the future experience. If we were to violate or become liable under laws or regulations associated with privacy or security or the use of AI, we could incur substantial costs or be exposed to potential regulatory fines, civil or criminal sanctions, third-party claims, and reputational damage. Our actual or perceived failure to comply with applicable laws and regulations or other obligations relating to these topics could subject us to liability to our customers, data subjects, suppliers, business partners, employees, and others, give rise to legal and/or regulatory action, could damage our reputation or could otherwise materially harm our business, any of which could have an adverse effect on our business, operating results, and financial condition.
Jurisdictions in which we have significant operations and assets, such as the U.S., China, India, and the E.U., each have exercised and continue to exercise significant influence over many aspects of their domestic economies including, but not limited to fair competition, tax practices, anti-corruption, anti-trust, price responsible sourcing and human rights (including the use of conflict minerals), price controls and international trade, which have had and may continue to have an adverse effect on our business operations and financial condition.
Contracts with federal, state, provincial, and local governments are subject to a number of challenges and risks that may adversely impact our business.
Our contracts with federal, state, provincial, and local governmental customers are subject to various government procurement laws and regulations, required contract provisions, and other requirements relating to contract formation, administration, and performance, as well as local content, manufacturing, aninformation security and security requirements. Any violation of government contracting laws and regulations or contract terms could result in the imposition of various civil and criminal penalties, which may include termination of contracts, forfeiture of profits, suspension of payments and fines, treble damages, and suspension from future government contracting. Additionally, changes in underlying regulatory requirements that vary across the geographies in which we operate could increase compliance costs and risks. Such failures could also cause reputational damage to our business. In addition, in the US, we will continue to be subject to qui tam litigation brought by private individuals on behalf of the government relating to our government contracts. If we are suspended or disbarred from government work or if our ability to compete for new government contracts is adversely affected, our financial performance could suffer.
Government contracts impose additional challenges and risks to our sales efforts. Government demand and payment for our products and services may be impacted by public sector budgetary cycles and funding authorizations, including in connection with an extended federal government shutdown, with funding reductions, or delays adversely affecting public sector demand for our products and services. Such developments could result in material payment delays, payment reductions, or contract terminations by our governmental customers, which in turn may impact our results of operations and financial condition. These may also adversely impact the results of operations and financial condition of government contractors with whom we
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conduct business. This may cause those government contractors to become unable to meet their obligations under contracts with us.
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Unanticipated changes in our tax provisions, the adoption of new tax legislation or exposure to additional tax liabilities could affect our financial performance.
We are subject to income and other taxes in the United States and numerous foreign jurisdictions. Our tax liabilities are affected by the amounts we charge in intercompany transactions for inventory, services, licenses, funding, and other items. We are subject to ongoing tax audits in various jurisdictions. Tax authorities may disagree with our intercompany charges, cross-jurisdictional transfer pricing or other matters, and may assess additional taxes as a result. There can be no assurance that we will accurately predict the outcomes of these audits, and the amounts ultimately paid upon resolution of audits could be materially different from the amounts previously included in our income tax expense and therefore could have a material impact on our tax provision, net income and cash flows. In addition, our effective tax rate in the future could be adversely affected by cacquisitions, changes to our operating structure, changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, changes in tax laws, and the discovery of new information in the course of our tax return preparation process. The carrying value of our deferred tax assets is dependent on our ability to generate future taxable income.
The Organiszation for Economic Co-operation and Development (OECD), an international association of 38 countries including the United States, has proposed changes to numerous long-standing tax principles, namely, its Pillar Two framework, which imposes a global minimum corporate tax rate of 15%. In December 2022, the EU member states adopted a directive that implements the Pillar Two framework, which is expected to be e To date, 43 countries have enacted into the natportional lawss, or all, of the EU member states by DecembOECD proposal and a further 31, 2023. Certain 22 countries in which we operate have drafted, or have enactannounced legislation to adopan intent the Pillar Two framework (e.g., United Kingdom and Korea), and several other countries are also considering changes to their tax laws to implement this framework. The first component ofo draft, legislation enacting the proposed rules. Where enacted, the Pillar Two framework is expectedrules begin to be effective for us in fiscal 2025 with a second component expected to be effective in fiscal 2026. When and how this framework i. Under US GAAP, the OECD Pillar Two rules adopted or enacted by the various countries in which we do business could increasere considered an alternative minimum tax complexity , and uncertainty and may adversely affect our provision for incometherefore deferred taxes in the U.S. anwould non-U.S. jurisdictions.
On Augt be recognized or adjust 16, 2022,ed for the U.S. government enacestimated the Inflation Reduction Acteffects of 2022 (the Inflation Reduction Act) into law, which includefuture minimum tax. As a new corporate alternative minimum tax (the Corporate AMT), beginning inresult, there was no impact to our fiscal 2024, of 15% on t results. The adjusted financial statement income (AFSI)option and effective dates of corporations with average AFSI exceeding $1.0 billion over a three-year period. We expect U.S. cashthese rules may vary by country and could increase tax to increase in the short term as a result of the Corporate AMT butcomplexity and uncertainty and may adversely affect our provision for income taxes. We currently do not expect the effective tax rate to bea material impacted as the Corporate AMT is expected to be recovered as a credit in future years. to our fiscal 2025 results.
During fiscal 2019, we executed a Termination and Mutual Release Agreement which terminated our Tax Matters Agreement with HP Inc. Because we now have limited indemnity rights from HP Inc., we potentially bear more economic risk for certain potential unfavorable tax assessments.
Risks Related to Prior Separations
The stock distribution in either or both of the completed separations of our former Enterprise Services business and our former Software segment could result in significant tax liability, and DXC Technology Company or Micro Focus International plc (as applicable) may in certain cases be obligated to indemnify us for any such tax liability imposed on us.
The completed separations and mergers of our former Enterprise Services business with DXC Technology Company (DXC) (the Everett Transaction or Everett) and our Software Segment with Micro Focus International plc (Micro Focus) (the Seattle Transaction or Seattle) were conditioned upon the receipt of an opinion from outside counsel regarding the qualification of (i) the relevant distribution and related transactions as a reorganization within the meaning of Sections 368(a), 361 and 355 of the Internal Revenue Code of 1986 (the Code) and (ii) the relevant merger as a reorganization within the meaning of Section 368(a) of the Code. While the Seattle Transaction generally qualified for tax-free treatment for us, Seattle SpinCo and Micro Focus, the acquisition of Seattle SpinCo by Micro Focus resulted in the recognition of gain (but not loss) for U.S. persons who received Micro Focus American Depositary Shares in the Software separation.
Each opinion of outside counsel was based upon and relied on, among other things, certain facts and assumptions, as well as certain representations, statements and undertakings of us, Everett SpinCo and CSC, or us, Seattle SpinCo and Micro Focus, as applicable. If any of these representations, statements or undertakings are, or become, inaccurate or incomplete, or if any party breaches any of its covenants in the relevant separation documents, the relevant opinion of counsel may be invalid and the conclusions reached therein could be jeopardized. Notwithstanding the opinions of counsel, the Internal Revenue Service (the IRS) could determine that either or both of the distributions should be treated as a taxable transaction if it determines that any of the facts, assumptions, representations, statements or undertakings upon which the relevant opinion of counsel was based are false or have been violated, or if it disagrees with the conclusions in the opinion of counsel. An opinion of counsel is not binding on the IRS and there can be no assurance that the IRS will not assert a contrary position.
If the distribution of Everett SpinCo or Seattle SpinCo, as applicable, together with certain related transactions, failed to qualify as a transaction that is generally tax-free, for U.S. federal income tax purposes, under Sections 355 and 368(a)(1)(D) of
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the Code, in general, we would recognize taxable gain as if we had sold the stock of Everett SpinCo or Seattle SpinCo, as applicable, in a taxable sale for its fair market value, and our stockholders who receive Everett SpinCo shares or Seattle SpinCo shares in the relevant distribution would be subject to tax as if they had received a taxable distribution equal to the fair market value of such shares.
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We obtained private letter rulings from the IRS regarding certain U.S. federal income tax matters relating to the separation of our Enterprise Services business and Software Segment. Those rulings concluded that certain transactions in those separations are generally tax-free for U.S. federal income tax purposes. The conclusions of the IRS private letter rulings were based, among other things, on various factual assumptions we have authorized and representations we have made to the IRS. If any of these assumptions or representations are, or become, inaccurate or incomplete, the validity of the IRS private letter rulings may be affected. Notwithstanding the foregoing, we incurred certain tax costs in connection with the completed separation of our former Enterprise Services business and Software Segment, including non-U.S. tax expenses resulting from the completed separation of our former Enterprise Services business and Software Segment in multiple non-U.S. jurisdictions that do not legally provide for tax-free separations, which may be material. If the completed separation of our former Enterprise Services business or Software Segment (including certain internal transactions undertaken in anticipation of those separations) are determined to be taxable for U.S. federal income tax purposes, we, our stockholders that are subject to U.S. federal income tax and/or DXC and/or Micro Focus could incur significant U.S. federal income tax liabilities.
Under the tax matters agreements entered into by us with Everett SpinCo and CSC, and with Seattle SpinCo and Micro Focus, Everett SpinCo and Seattle SpinCo generally would be required to indemnify us for any taxes resulting from the relevant separation (and any related costs and other damages) to the extent such amounts resulted from (i) certain actions taken by, or acquisitions of capital stock of, Everett SpinCo or Seattle SpinCo, as applicable (excluding actions required by the documents governing the relevant separation), or (ii) any breach of certain representations and covenants made by Everett SpinCo or Seattle SpinCo, as applicable. Any such indemnity obligations could be material.
We continue to face a number of risks related to our separation from HP Inc., our former parent, including those associated with ongoing indemnification obligations, which could adversely affect our financial condition and results of operations, and shared use of certain intellectual property rights, which could in the future adversely impact our reputation.
In connection with our separation from HP Inc. on November 1, 2015 (the Separation), Hewlett Packard Enterprise and HP Inc. entered into several agreements that determine the allocation of assets and liabilities between the companies following the Separation and include any necessary indemnifications related to liabilities and obligations. In these agreements, HP Inc. agreed to indemnify us for certain liabilities, and we agreed to indemnify HP Inc. for certain liabilities, including cross-indemnities that are designed and intended to place financial responsibility for the obligations and liabilities of our business with us, and financial responsibility for the obligations and liabilities of HP Inc.'s business with HP Inc. We may be obligated to fully indemnify HP Inc. for certain liabilities under the Separation agreements or HP Inc. may not be able to fully cover their indemnification obligations to us under the same Separation agreements. Each of these risks could negatively affect our business, financial position, results of operations, and cash flows.
In addition, the terms of the Separation also include licenses and other arrangements to provide for certain ongoing use of intellectual property in the operations of both businesses. For example, through a joint brand holding structure, both Hewlett Packard Enterprise and HP Inc. retain the ability to make ongoing use of certain variations of the legacy Hewlett-Packard and HP branding, respectively. As a result of this continuing shared use of the legacy branding there is a risk that conduct or events adversely affecting the reputation of HP Inc. could also adversely affect our reputation.
General Risks
Our stock price has fluctuated and may continue to fluctuate, which may make future prices of our stock difficult to predict.
Investors should not rely on recent or historical trends to predict future stock prices, financial condition, results of operations, or cash flows. Our stock price, like that of other technology companies, can be volatile and can be affected by, among other things, speculation, coverage, or sentiment in the media or the investment community; the announcement and anticipated timing of new, planned or contemplated products, services, technological innovations, acquisitions, divestitures, or other significant transactions by us or our competitors; developments in our transformationas-a-service business model; our perceived programs oress in in our transition to an as-a-service business modeltegrating acquired companies; our quarterly financial results and comparisons to estimates by the investment community or financial outlook provided by us; the financial results and business strategies of our competitors; inflation; market volatility or downturns caused by outbreaks, epidemics, pandemics, geopolitical tensions or conflicts, or other macroeconomic dynamics; developments relating to pending investigations, claims, and disputes; or the timing and amount of our share repurchases. General or industry specific market conditions or stock market performance or domestic or international macroeconomic and geopolitical factors unrelated to our performance also may affect the price of our stock. Volatility in the price of our securities could result in the filing of securities class action litigation matters, which could result in substantial costs and the diversion of management time and resources.
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