Stock-Based Compensation

Prior to the Separation, certain of the Company's employees participated in stock-based compensation plans sponsored by former Parent. Former Parent's stock-based compensation plans included incentive compensation plans ("former Parent's Plans") and an employee stock purchase plan ("former Parent's ESPP"). All awards granted under the plans were based on former Parent's common shares and, as such, the award activity is not reflected in the Company's Consolidated and Combined Financial Statements. For the fiscal year ended October 31, 2015, stock-based compensation expense includes expense attributable to the Company based on the awards and terms previously granted under the incentive compensation plan to the Company's employees and an allocation of former Parent's corporate and shared functional employee expenses. Accordingly, the amounts presented for fiscal 2015 are not necessarily indicative of future awards and do not necessarily reflect the results that the Company would have experienced as an independent, publicly-traded company. The share and per share data for fiscal 2015 presented in this note has not been adjusted to reflect the impact of the Separation.

In conjunction with the Separation, the Company adopted the Hewlett Packard Enterprise Company 2015 Stock Incentive Plan (the "Plan"). The Plan became effective on November 1, 2015. The total number of shares of the Company’s common stock authorized under the Plan was 260 million. On January 25, 2017, the Company amended the Plan and reduced the authorized shares of common stock to 210 million shares. In connection with the Everett and Seattle Transactions, the number of shares of the Company's common stock authorized for issuance under the Plan increased by 67 million. The Plan provides for the grant of various types of awards including restricted stock awards, stock options, and performance-based awards. These awards generally vest over three years from the grant date. The Company's stock-based incentive compensation program also includes various equity plans assumed through acquisitions under which stock-based awards are outstanding.

In connection with the Separation, the Company granted one-time retention stock awards, with a total grant date fair value of approximately $137 million, to certain executives in the first quarter of fiscal 2016. These awards generally vest over three years from the grant date.

Stock-Based Compensation Expense

Stock-based compensation expense and the resulting tax benefits were as follows:



	Fiscal years ended October 31,
	2017			2016			2015
	In millions
Stock-based compensation expense from continuing operations	$	454		$	408		$	362
Income tax benefit	(159		)	(131		)	(106		)
Stock-based compensation expense from continuing operations, net of tax	$	295		$	277		$	256
Stock-based compensation expense from discontinued operations	$	166		$	189		$	203

In May 2016, in connection with the announcement of the Everett Transaction, the Company modified its stock-based compensation program such that certain unvested equity awards outstanding on May 24, 2016 would vest upon the earlier of: (i) the termination of an employee’s employment with HPE as a direct result of an announced sale, divestiture or spin-off of a subsidiary, division or other business; (ii) the termination of an employee’s employment with HPE without cause; or (iii) June 1, 2018. This modification also included changes to the performance and market conditions of certain performance-based awards. The incremental expense arising from this modification was not material. Additionally, as a result of the accelerated vesting related to this modification, the Company incurred stock-based compensation expense of $126 million during fiscal 2017, of which $92 million was recorded in Net loss from discontinued operations in the Consolidated Statement of Earnings for the fiscal year ended October 31, 2017. The remaining $34 million arising from the modification for fiscal 2017 has been recorded within Separation costs in the Consolidated Statement of Earnings.

Additionally, as permitted by the Plan, in connection with the Everett and Seattle Transactions and in accordance with the respective Employee Matters Agreements, HPE made certain post-spin adjustments to the exercise price and number of stock-based compensation awards with the intention of preserving the intrinsic value of the outstanding awards prior to the close of the transactions. The incremental expense incurred by the Company related to the Everett and Seattle Transactions was not material.

For the fiscal year ended October 31, 2017, stock-based compensation expense from continuing operations in the table above includes pre-tax expense of $41 million, which has been recorded within Separation costs, $33 million related to workforce reductions, which has been recorded within Restructuring charges, and $23 million related to the acquisitions of Silicon Graphics International Corp. ("SGI") and Nimble Storage, Inc. ("Nimble Storage"), which has been recorded within Acquisition and other related charges in the Consolidated Statement of Earnings.

For the fiscal year ended October 31, 2016, stock-based compensation expense from continuing operations in the table above includes pre-tax expense of $33 million, which has been recorded within Separation costs, and $8 million, related to workforce reductions, which has been recorded within Restructuring charges, in the Consolidated Statement of Earnings.

In connection with the Separation, former Parent's Board of Directors approved amendments to certain outstanding long-term incentive awards on July 29, 2015. The amendments provided for the accelerated vesting on September 17, 2015 of certain stock-based awards that were otherwise scheduled to vest between September 18, 2015 and December 31, 2015. The incremental pre-tax stock-based compensation expense due to the acceleration was approximately $61 million in fiscal 2015.

Stock-based compensation expense in the table above includes an allocation of former Parent's corporate and shared functional employee expenses of $151 million in fiscal 2015.

Restricted Stock Units

Restricted stock units have forfeitable dividend equivalent rights equal to the dividend paid on common stock. Restricted stock units do not have the voting rights of common stock, and the shares underlying restricted stock units are not considered issued and outstanding upon grant. The fair value of the restricted stock units is the closing price of the Company's common stock on the grant date of the award. The Company expenses the fair value of restricted stock units ratably over the period during which the restrictions lapse.

For fiscal 2017 and 2016, the activity summarized in the table below is related to restricted stock units held by Company employees under the Plan. For fiscal 2015, the activity summarized in the table below is related to restricted stock units held by Company employees under former Parent's Plans.



	Fiscal years ended October 31,
	2017				2016				2015
	Shares		Weighted- Average Grant Date Fair Value Per Share		Shares		Weighted- Average Grant Date Fair Value Per Share		Shares		Weighted- Average Grant Date Fair Value Per Share
	In thousands				In thousands				In thousands
Outstanding at beginning of year	57,321		$	15	—		$	—	24,496		$	24
Converted from former Parent's Plans	—		$	—	42,012		$	15	—		$	—
Granted and assumed through acquisition⁽¹⁾	23,980		$	21	32,752		$	15	19,601		$	35
Additional shares granted due to post-spin adjustments⁽²⁾	25,543		$	9	—		$	—	—		$	—
Vested⁽³⁾	(51,976	)	$	16	(12,747	)	$	15	(21,860	)	$	26
Forfeited/canceled⁽⁴⁾	(6,351	)	$	16	(4,696	)	$	15	(1,819	)	$	30
Employee transition⁽⁵⁾	—		$	—	—		$	—	3,982		$	33,000,000
Outstanding at end of year	48,517		$	14	57,321		$	15	24,400		$	32

(1)

For fiscal 2017, includes approximately 11 million restricted stock units assumed by the Company through acquisition with a weighted-average grant date fair value of $18 per share. For fiscal 2016, includes a one-time restricted stock unit retention grant of approximately 5 million shares in fiscal 2016. For fiscal 2015, includes approximately 8 million shares of restricted stock units assumed through acquisition with a weighted-average grant date fair value of $33 per share.


(2)	Additional shares granted as a result of the post-spin exercise price adjustments made related to the Everett and Seattle Transactions, as permitted by the Plan, in order to preserve the intrinsic value of outstanding awards prior to the close of the transactions.


(3)	For fiscal 2017, includes approximately 14 million restricted stock units, with a weighted-average grant date fair value of $17 per share, which were accelerated as part of the Everett and Seattle Transactions.


(4)	For fiscal 2017, includes approximately 0.3 million restricted stock units, with a weighted-average grant date fair value of $18 per share, related to the former ES and Software segments, which were canceled by HPE and assumed by DXC and Micro Focus in connection with the Everett and Seattle Transactions, and in accordance with the respective Employee Matters Agreements.


(5)	Employee transition amounts consist of restricted stock unit activity for employees transitioning between the Company and former Parent.

The total grant date fair value of restricted stock awards vested for Company employees in fiscal 2017, 2016 and 2015 was $472 million, $130 million and $451 million, respectively, net of taxes. As of October 31, 2017, there was $301 million of unrecognized pre-tax stock-based compensation expense related to unvested restricted stock units, which the Company expects to recognize over the remaining weighted-average vesting period of 1.2 years.

Stock Options

Stock options granted under the Plan are generally non-qualified stock options, but the Plan permits some options granted to qualify as incentive stock options under the U.S. Internal Revenue Code. The exercise price of a stock option is equal to the closing price of the Company's common stock on the option grant date. The majority of the stock options issued by the Company contain only service vesting conditions. The Company also issued performance-contingent stock options that vest only on the satisfaction of both service and market conditions.

The Company and former Parent utilize the Black-Scholes-Merton option pricing formula to estimate the fair value of stock options subject to service-based vesting conditions. The Company and former Parent estimate the fair value of stock options subject to performance-contingent vesting conditions using a combination of a Monte Carlo simulation model and a lattice model, as these awards contain market conditions. The weighted-average fair value and the assumptions used to measure fair value were as follows:



	Fiscal years ended October 31,
	2017			2016			2015
Weighted-average fair value⁽¹⁾	$	6		$	4		$	8
Expected volatility⁽²⁾	25.7		%	31.1		%	26.8		%
Risk-free interest rate⁽³⁾	2.0		%	1.7		%	1.7		%
Expected dividend yield⁽⁴⁾	1.0		%	1.5		%	1.8		%
Expected term in years⁽⁵⁾	6.1			5.4			5.9


(1)	For fiscal 2017 and 2016, the weighted-average fair value was based on the fair value of stock options granted under the Plan during the respective periods. For fiscal 2015, the weighted-average fair value was based on the fair value of stock options granted under former Parent's Plans during the period.


(2)	For options granted in fiscal 2017 and 2016, expected volatility was estimated using the average historical volatility of selected peer companies. For options granted in fiscal 2015, expected volatility was estimated using the implied volatility derived from options traded on former Parent's common stock.


(3)	The risk-free interest rate was estimated based on the yield on U.S. Treasury zero-coupon issues.


(4)	The expected dividend yield represents a constant dividend yield applied for the duration of the expected term of the option.

(5)

For options granted in fiscal 2017 and 2016 subject to service-based vesting, the expected term was estimated using the simplified method detailed in SEC Staff Accounting Bulletin No. 110. For options granted in fiscal 2015 subject to service-based vesting, the expected term was estimated using historical exercise and post-vesting termination patterns. For performance-contingent options, the expected term represents an output from the lattice model.

For fiscal 2017 and 2016, the activity summarized in the table below is related to stock options held by Company employees under the Plan. For fiscal 2015, the activity summarized in the table below is related to stock options held by Company employees under former Parent's Plans.



	Fiscal years ended October 31,
	2017							2016							2015
	Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term	Aggregate Intrinsic Value		Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term	Aggregate Intrinsic Value		Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term	Aggregate Intrinsic Value
	In thousands				In years	In millions		In thousands				In years	In millions		In thousands				In years	In millions
Outstanding at beginning of year	57,498		$	15				—		$	—				24,472		$	27
Converted from former Parent's Plans	—		$	—				42,579		$	15				—		$	—
Granted and assumed through acquisition⁽¹⁾	6,074		$	23				25,390		$	15				3,147		$	37
Additional shares granted due to post-spin adjustments⁽²⁾	24,523		$	11				—		$	—				—		$	—
Exercised	(29,492	)	$	12				(7,845	)	$	11				(5,716	)	$	18
Forfeited/canceled/expired⁽³⁾	(9,329	)	$	16				(2,626	)	$	20				(7,116	)	$	40
Employee transition⁽⁴⁾	—		$	—				—		$	—				11,391		$	26
Outstanding at end of year⁽⁵⁾	49,274		$	10	4.6	$	207	57,498		$	15	5.4	$	437	26,178		$	26	5.2	$	115
Vested and expected to vest at end of year⁽⁵⁾	48,566		$	10	4.6	$	205	55,716		$	15	5.3	$	425	25,309		$	26	5.2	$	115
Exercisable at end of year⁽⁵⁾	24,736		$	9	3.0	$	123	26,204		$	13	3.8	$	241	18,767		$	23	4.7	$	109


(1)	For fiscal 2016, includes one-time stock option retention grant of approximately 16 million shares.


(2)	Additional shares granted as a result of the post-spin exercise price adjustments made related to the Everett and Seattle Transactions, as permitted by the Plan, in order to preserve the intrinsic value of the awards prior to the close of the transaction.


(3)	For fiscal 2017, includes approximately 8 million stock options, with a weighted-average exercise price of $16 per share, related to the former ES and Software segments, which were canceled by HPE in connection with the Everett and Seattle Transactions, and in accordance with the respective Employee Matters Agreements.


(4)	Employee transition amounts consist of option activity for employees transitioning between the Company and former Parent.


(5)	The weighted average exercise price reflects the impact of the post-spin adjustments to the exercise price related to the Everett and Seattle Transactions.

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value that option holders would have realized had all option holders exercised their options on the last trading day of fiscal 2017, 2016 and 2015. For fiscal 2017 and 2016, the aggregate intrinsic value is the difference between the Company's closing common stock price on the last trading day of the respective fiscal year and the exercise price, multiplied by the number of in-the-money options. For fiscal 2015, the aggregate intrinsic value is the difference between former Parent's closing stock price on the last trading day of the fiscal year and the exercise price, multiplied by the number of in-the-money options. The total intrinsic value of options exercised in fiscal 2017, 2016 and 2015 was $218 million, $62 million and $94 million, respectively. The total grant date fair value of options granted which vested in fiscal 2017, 2016 and 2015 was $94 million, $18 million and $38 million, respectively, net of taxes.

The following table summarizes significant ranges of outstanding and exercisable stock options:



	As of October 31, 2017
	Options Outstanding				Options Exercisable
Range of Exercise Prices	Shares Outstanding	Weighted- Average Remaining Contractual Term	Weighted- Average Exercise Price		Shares Exercisable	Weighted- Average Exercise Price
	In thousands	In years			In thousands
$0-$9.99	33,168	4.4	$	8	19,198	$	8
$10-$19.99	16,024	5.1	$	13	5,456	$	13
$20-$29.99	82	2.2	$	25	82	$	25
	49,274	4.6	$	10	24,736	$	9

As of October 31, 2017, there was $25 million of unrecognized pre-tax stock-based compensation expense related to stock options, which the Company expects to recognize over the remaining weighted-average vesting period of 1.2 years.

Employee Stock Purchase Plan

Effective November 1, 2015, the Company adopted the Hewlett Packard Enterprise Company 2015 Employee Stock Purchase Plan ("ESPP"). The total number of shares of Company's common stock authorized under the ESPP was 80 million. The ESPP allows eligible employees to contribute up to 10% of their eligible compensation to purchase Hewlett Packard Enterprise's common stock. The ESPP provides for a discount not to exceed 15% and an offering period up to 24 months. The Company currently offers 6-month offering periods during which employees have the ability to purchase shares at 95% of the closing market price on the purchase date. No stock-based compensation expense was recorded in connection with those purchases, as the criteria of a non-compensatory plan were met.

Prior to the Separation, under former Parent's ESPP, employees could contribute up to 10% of their eligible compensation, subject to certain income limits, to purchase shares of former Parent's common stock. Pursuant to the terms of former Parent's ESPP, employees purchased stock under the ESPP at a price equal to 95% of former Parent's closing stock price on the purchase date. No stock-based compensation expense was recorded in connection with those purchases because the criteria of a non-compensatory plan were met.

Cash received from option exercises and purchases under the Company's ESPP was $411 million and $119 million in fiscal 2017 and 2016, respectively. The benefit realized for the tax deduction from option exercises in fiscal 2017 and 2016 was $69 million and $21 million, respectively. Cash received from option exercises and purchases by Company employees under former Parent's ESPP was $165 million in fiscal 2015. The benefit realized for the tax deduction from option exercises in fiscal 2015 was $45 million.