Hewlett Packard Enterprise Company

Good morning, afternoon, and evening, and welcome to the first quarter 2020 Hewlett-Packard Enterprise Earnings Conference Call. My name is Sean, and I'll be your conference moderator for today's call. At this time, all participants will be in a listen-only mode. We will be facilitating a question and answer session towards the end of the conference. Should you need assistance during the call, please signal a conference specialist by pressing the star key followed by zero. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Andrew Simonik, Head of Investor Relations. Please proceed.

Good afternoon. I'm Andy Simonik, Head of Investor Relations for Hewlett Packard Enterprise. I'd like to welcome you to our fiscal 2020 first quarter earnings conference call with Antonio Neri, HPE's President and Chief Executive Officer, and Tarek Robyadi, HPE's Executive Vice President and Chief Financial Officer. Before handing the call over to Antonio, let me remind you that this call is being webcast. A replay of the webcast will be made available shortly after the call for approximately one year. We posted the press release and the slide presentation accompanying today's earnings release on our HPE Investor Relations webpage at investors.hpe.com. As always, elements of this presentation are forward-looking and are based on our best view of the world and our businesses as we see them today. For more detailed information, please see the disclaimers on the earnings materials relating to forward-looking statements that involve risks, uncertainties, and assumptions. For a discussion of some of these risks, uncertainties, and assumptions, please refer to HPE's filings with the SEC, including its most recent form, 10-K. HPE assumes no obligation and does not intend to update any such forward-looking statements. We also note that the financial information discussed on this call reflects estimates based on information available at this time and could differ materially from the amounts ultimately reported in HPE's quarterly report on Form 10-Q for the fiscal quarter ended January 31, 2020. Also, for financial information that has been expressed on a non-GAAP basis, we have provided reconciliations to the comparable gap information on our website. Please refer to the tables and slide presentation accompanying today's earnings release on our website for details. Throughout this conference call, all revenue growth rates, unless noted otherwise, are presented on a year-over-year basis and are adjusted to exclude the impact of currency. Finally, please note that after Antonio provides his high-level remarks... Tarek will be referencing the slides in our earnings presentation throughout his prepared remarks. As mentioned, the earnings presentation can be found posted to our website and is also embedded within the webcast player for this earnings call. With that, let me turn it over to Antonio.

Thanks, Andy. Good afternoon, everyone. Thank you for joining us today. HPE's first quarter results demonstrate continued progress against our strategic priorities to shift our company to higher margin and more recurrent revenues against a dynamic market backdrop. I am disappointed that our overall revenue of $6.9 billion reflects a 7% decline for the quarter, primarily due to declines in our compute business. However, I am pleased with the results in several key areas of our business aligned to our strategy. Our pivot to as a service is gaining momentum. Our annualized revenue run rate grew 19% year-over-year. We started reporting this new metric last quarter to provide more transparency into the recurring and higher margin benefits of shifting to our as-a-service model. We grew HP GreenLake services orders 48% year-over-year. HP GreenLake gained 65 new logos in Q1 and has surpassed 800 total customers. We returned to growth in our Intelligent Edge business, with revenue up 4% year over year. And we continue to see profitable growth in areas of investment, including high-performance compute, hyper-converged infrastructure, big data storage, and operational services orders, with continued improvements in our services attach intensity. Our Q1 revenues were impacted by a number of factors. First, like many of our peers, we continue to see uneven and unpredictable demand due to micro uncertainty. This has resulted in longer sell cycles and delayed customer decisions. Second, commodity supply constraints disrupted our ability to meet our customers' demand this quarter, particularly in our compute and high-performance compute businesses. Additionally, the outbreak of the coronavirus at the end of January impacted component manufacturing, resulting in higher quarter end backlogs. In both of these cases, we have established specific mitigation and recovery plans with each of our suppliers. Finally, we encountered a challenge in consolidating a manufacturing site in North America. We have a plan in place to address the Q1 issue and are confident that our efforts will result in increased efficiency and agility as we move forward. It is important to note that even with the revenue shortfall, we improved our non-GAAP gross margin by 210 basis points year-over-year to 33.2%. We dropped non-GAAP earnings per share of 44 cents, up 5% year-over-year and in line with our outlook, while also investing for future innovation. And we delivered improved free cash flow compared to last year's level and in line with Q1 normal seasonality. While market uncertainty continues and new global developments like the coronavirus have emerged, we are taking the right actions to mitigate against these evolving dynamics. Some of these actions include further cost takeout in our back-end operations as a part of our HP Next program, which has been a key enabler of our gross and operating margin improvement. We are extending the program through fiscal year 2021 and expect incremental savings while maintaining the original net cash impact. As Tarek will cover in more detail, because of the actions we are taking to address the uncertainty and the expected recovery of supply chain constraints over time, we are comfortable maintaining our fiscal year 20 non-GAAP EPS outlook. But there are too many unknowns at this point to provide second-quarter guidance. Also, we do feel it is prudent to revise our fiscal year 20 free cash flow outlook from $1.9 to $2.1 billion this to $1.6 to $1.8 billion, given that we expect some impact on cash commercial cycles driven by the ongoing recovery from supply constraints and the impact of the coronavirus. These are the right pragmatic actions to take, and I am confident in our ability to deliver and in our strategy. Our customers continue to reaffirm their need for hybrid capabilities to advise their digital transformations and harness the power of their data wherever it lives. in the cloud, on and off premises, and increasingly at the edge. As the edge to cloud platform as a service company, HP is uniquely positioned to capitalize on these trends and help our customers transform. Before Tarek provides more specifics about the quarter, let me highlight a few of our business and segment results. First, our intelligent edge business outperformed competitors across the industry. We grew in all geographies, posting double-digit growth in North America, despite the challenging microenvironment. And we delivered double-digit growth in our Aruba-branded products. Over the last two quarters, we have been actively enhancing our source coverage model in North America, and I am proud of the team hard work and our momentum. We declared the opportunity at Intelligent Edge early, and we continue to invest in bringing a cloud experience to the edge where data is increasingly created. At the core of this strategy is HPE Aruba Central, the only cloud-native and simple-to-use platform that unifies network management, AI power insights, and IoT device security for wire, wireless, and one networks, and soon 5G and edge computing. More than 58,000 unique customers are using Aruba Central. In Q1, Aruba, which pioneered the software-defined branch solution for deployment and management of large retail networks, further enhanced our solution by integrating Aruba branch gateways with Aruba Central. By providing a single point of control for SD-WAN, wire, and wireless networking, Aruba can help customers achieve secure, simplified branch connectivity at scale. Our customers continue to recognize our innovation at the edge. For instance, in the first quarter, the Office of Information Technology at Princeton University turned to Aruba AOSCX to support its WIRE initiative and seamlessly integrate with Aruba Wireless with the goal of creating a complete Bobo First campus of the future. TopZero, a leading luxury appliance maker, updated its wired with wireless infrastructure through Aruba AOSCX and instant wireless to support IoT in high-end appliances. Both our Aruba AOSCX and Wi-Fi 6 solutions continue to gain traction in the market. The customer examples I share are a testament of our differentiated innovation. I am excited about how our market leadership is helping customers redefine experiences at the edge. We will continue to enhance our portfolio with the integration of 5G and mobile edge computing to capitalize on this significant opportunity. Turning to hybrid IT, as we announced at our securities analyst meeting last fall, we are providing revenue and operating profit disclosures in four business segments. High-performance computer mission-critical systems, storage, and advisor and professional services aligned to customer demands and market trends. Tarek will walk you through the financial results in greater detail, but let me share a few high-level observations. As I noted earlier, our compute revenue was impacted by a combination of factors and came in lower than anticipated for the quarter. However, we did see an acceleration in unit volumes, which were up mid-single digits year over year, excluding Tier 1 in China. Our high-performance computer mission critical system segment includes the first full quarter of Cray. We are excited about the combination of HP and Cray and the growing time. We have been awarded more than $2 billion in HPC business, expected to be delivered in the next three years. Programs include the U.S. Department of Energy's El Capitan system at the Lawrence Livermore National Laboratory and Frontier Supercomputer at Oak Ridge National Laboratory, among others. Our new segmentation provides greater insights into the size, strength, and attractive financial profile of our HP storage business, which is a $5 billion business with an operating margin of 18%. We gain momentum in key areas during the quarter and expect to gain share in external disk. Big data storage grew 45% year-over-year and demonstrates early success with our MapR acquisition. Hyper-converged infrastructure also continued to grow, up 6%. HP InfoSight, our cloud-based AI operations platform, gained momentum across both storage and compute. I am proud of our focused efforts and innovation that have created one of the most comprehensive intelligent data platforms in the industry, which will continue to provide customers with superior simplicity and performance. Our advisor and professional services business provides strategy, technology planning, and consultant services that help customers navigate their digital transformation from edge to cloud. With increased focus and simplification of this business, we draw demand across the HPE portfolio and significantly expanded operating margins this quarter, up 12.5 points year over year. Our customer wins demonstrate the strength of our strategy and breadth of our portfolio. For example, HPE was recently selected by Zenuity, a joint venture between Volvo Cars and Vioneer, to help make next-generation autonomous driving cars a reality. HPE will provide the crucial AI and high-performance computing required to gather, store, organize, and analyze data from its global network test vehicles and software development centers. The end-to-end solution will be delivered as a service through HPE GreenLake. Roth & Schwartz, a global electronics company, wanted to reduce storage complexity and reclaim management time. Already relying on three-part for business-critical applications, the company chose Nimble Storage to help manage a 20% year-over-year growth in data. This new combination has improved performance three-fold. Volkswagen Group selected HPE to deliver state-of-the-art compute and mission-critical servers to run its apps and solutions like SAP HANA, virtual desktop infrastructure, and others focused on big data analytics, AI, and autonomous driving. Our offerings such as HPE SuperDOM Flex, HPE ProLiant Genton servers, and HPE PointX support services will power the data and apps for the Volkswagen Group's 12 global brands. In Q1, we continue to accelerate innovation. We achieved a major milestone in our Pivot 2 as a service with the launch of HP GreenLake Central platform. HP GreenLake Central is an advanced cloud platform that provides customers with a consistent cloud experience for all their application and data wherever they live through an operational console that runs, manages, and optimizes their entire hybrid estate. We launched RHP Container Platform, which is the first enterprise-grade Kubernetes-based container solution. It leverages HPE's acquisition of BlueData and Mopar, together with 100% open-source Kubernetes software. This platform provides customers with a common and faster path to run legacy and cloud-native applications with persistent storage connectivity. And we acquired Sightel, an innovative software company focused on service authentication. The SCITEL team are the founding contributors to two open source projects that are positioned to become the de facto standard for identifying and securing enterprise workloads, both on and off premises. Our SCITEL acquisition is consistent with our targeted approach to M&A. It brings critical talent and complementary technologies to HPE. We look for a creative value enhancing acquisitions that improve our competitive positioning and accelerate our strategy. Finally, our HP Financial Services business continues to provide us with a critical competitive advantage. In Q1, overall financing volume increased 2%. GreenLake represented more than 40% of our HP leasing volume. HPFS uses multiple levers to help customers accelerate their digital transformations while contributing to the circular economy. Through asset upcycling and accelerated migration, HPFS free up well over $500 million in our customers' budgets over the last two years. This business helps our customers capture value from older assets, achieve their sustainability goals, and invest in new technologies as a service. As we advance our business objectives to meet our customer needs and deliver for our shareholders, we continue to be guided by a very strong purpose. I am tremendously proud of our environmental stewardship, our investments in our people, and our culture of integrity and inclusion. HPE was just recognized as one of the most ethical companies by Ethics Fair Institute. We were also proud to be named to Bloomberg's Gender Equality Index. These are very important measures of how HPE delivers for our team members, customers, shareholders, and our global communities. In summary, in Q1, we faced continued micro uncertainty, which combined with supply and manufacturing constraints impacted our revenue, particularly in compute. Despite these issues and the current market backdrop, we continued to execute with discipline and made progress against our strategic priorities. We outperformed the market in critical areas like the intelligent edge. We gained traction in high performance compute with acquisition of Cray. We advanced our pivot to as a service, all while delivering EPS and gross margin expansion. While we make progress in these important areas, we know we have work to do to improve in others. We are living in an uncertain time, but what is certain is our commitment to continue to manage our business with focus and discipline. I believe in our sound strategy, in our talented team, and in our differentiated technology. This combination will enable us to execute our pivot to provide our customers and partners unique edge-to-cloud experiences delivered as a service. By doing so, we expect to deliver long-term profitable growth and generate stakeholder value. With that, let me turn it over to Tarek to provide more details about the quarter.