Hewlett Packard Enterprise Company

Good afternoon and welcome to the third quarter 2020 Hewlett Packard Enterprise earnings conference call. My name is Cole and I'll be your conference moderator for today's call. At this time, all participants will be in listening mode. We'll be facilitating a question and answer session towards the end of the conference. Should you need assistance during the call, please signal 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, Ms. Sonali Parekh. Senior Vice President, Corporate Development and Investor Relations. Please proceed.

Thank you, Operator, and good afternoon. This is Sonali Parekh, SVP of Corporate Development and Investor Relations for Hewlett Packard Enterprise. I would like to welcome you to our fiscal 2020 third 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 amount ultimately reported in HPE's quarterly report on form 10Q for the fiscal year quarter ended July 31st, 2020. Also, for financial information that has been expressed on a non-GAAP basis, we have provided reconciliations to the comparable GAAP 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-on-year basis and adjusted to exclude the impact of currency. Finally, please note that Antonio provides his high-level remarks. Tarek will be referencing the slides and 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, Annalie, and good afternoon, everyone. Thank you for joining us today, and I hope everyone is staying safe and healthy. Overall, I am pleased with our Q3 performance. We executed well to enable strong sequential growth across our businesses. We gained momentum in key areas of differentiation, driven by customer demand aligned to our strategy. And we began to take decisive and prudent actions to strengthen our core financial foundation while we continue to align resources to critical areas of growth. COVID-19 has forced fundamental changes in businesses and communities. These changes have further validated our strategy. Navigating through the pandemic and planning for a post-COVID world has increased customer needs for other service offerings, secure connectivity, remote work capabilities, and analytics to unlock insights from data. Our solutions are aligned to these needs, and we see a tremendous opportunity to help our customers transform and digitize their businesses as they continue to adapt and operate in our new world. Let me review a few highlights from the quarter. Total net revenue of $6.8 billion was up 14% quarter over quarter, and non-GAAP operating profit was up 33% quarter over quarter. Compute, HPC and MCS, storage and intelligent edge business segments also grew sequentially. Moving forward, we expect continued gradual performance improvements. We made significant improvements in our supply chain execution, reducing our backlog by more than $500 million from our Q2 historical high exit levels, which contributed to our results. In our HPC business, COVID-related impacts continue to affect our customers' ability to accept delivery of our products. We expect to return to a normalized level of backlog by the end of Q4 through continued improvements in both supply chain execution and customer acceptances. Our pivot to as-a-service continue its strong momentum in the quarter. Our annualized revenue run rate of $528 million grew 11% year-over-year. GreenLake services orders grew a record 82% year-over-year. We believe this is faster than the orders growth of public cloud vendors, and it is a validation of our hybrid strategy and competitive differentiation. We are focused on delivering one seamless cloud experience for all applications and data, no matter where they exist, at the edge, in a data center, in a co-location, or in a public cloud estate. While others are now publicly declaring plans to offer everything as a service, we have been focused on this for several years and have made significant organic and inorganic investments to deliver a differentiated experience for our customers. Our Q3 free cash flow of $924 million was up $276 million year over year, driven by a record cash flow from operations as a result of our improved execution this quarter. Importantly, we also declare our Q4 dividend today. Dividends remain an important part of our capital allocation framework that consists of capital return to shareholders and strategic investments that together drive long-term shareholder value. Our customers are managing through the pandemic with even greater needs for the capabilities HP can uniquely provide. In June, we put our strategy in the spotlight at our Discover Virtual Experience event, where we introduced new breakthrough innovation on a global virtual stage. The new solutions we introduced support our position that cloud is an experience, not a destination. and they're already getting traction with our customers. We launched our next generation of HP GreenLake cloud services. These new cloud services span machine learning operations, container management, virtualization, infrastructure as a service, data protection, and connectivity as a service. Now our customers can access all of our HP GreenLake cloud services via a soft service point and click catalog on our HP GreenLake central cloud portal. Notably, in Q3, we signed several of our largest HPE GreenLake cloud services deals in history, including Lionel Bissell, one of the largest plastics, chemicals, and refining companies in the world who signed a $27 million HPE GreenLake deal to drive their digital transformation and environmental efficiency. Underpinning our customer cloud experience is the need for software. That is why we introduced our new HPE Ezmeral software portfolio. Our new portfolio includes a container platform that deploys Kubernetes at scale for a wide range of use cases on bare metal and virtual machines. A data fabric that delivers enterprise-wide global access to data from edge to cloud with best-in-class reliability, security, and performance. and machine learning operation solution that increases speed and agility for machine learning ops by operationalizing end-to-end processes from pilot to production, as well as IT operations and automation to improve productivity and mitigate risk of service disruption. In addition, it enables our customers to control cost and compliance across their hybrid cloud estate through our managed cloud controls capabilities built into the portfolio. HPE Ezmeral can be consumed as a license or as a part of our HPE GreenLake cloud services offering. And just a few weeks ago, as a strong endorsement of our strategy and capabilities, we announced plans to partner with SAP to deliver the customer edition of SAP HANA Enterprise Cloud with HPE GreenLake cloud services. This new joint solution will help customers leverage our cloud capabilities while keeping their SAP workloads and data on-premises. At the same time, we continue to strengthen our core capabilities in storage and compute, which are essential resources to store and process customers' data. Every 60 seconds, we ship 46 terabytes of storage and four servers. Despite the challenging market that impacted our storage performance overall, in Q3, we saw sequential improvement of 4%. And importantly, we gained traction and grew in key areas of investment. Big data storage, which is built on unique intellectual property from our MAPAR acquisition to enable real-time analytics for mission-critical big data workloads, grew revenues 31% year over year. Nimble Distributed HCI, our new hyper-converged solution for business-critical applications and mixed workloads at scale, grew revenue at 112% year-over-year. And a great example of our organic innovation is HP Primera. Our most intelligent storage platform grew revenues 114% year-over-year. HP Primera gained 104 new logos this quarter. with nearly a quarter of those being new to HP storage. We saw strong sequential momentum with HPC and mission-critical systems that grew 10%, including a 10-year deal of $125 million with the University of Edinburgh in Scotland, who chose HP to power the Edinburgh International Data Facility with our industry-leading HPC and AI solutions. And finally, we had a very solid quarter in compute, with 29% quarter-over-quarter growth, driven by the reduction in backlog and customer demand in VDI or virtual desktop infrastructure solutions. For example, Erasmus University Medical Center in the Netherlands wanted to upgrade its VDI environment for lifecycle management needs and to prepare for future waves of COVID-19. We introduced a complete composable hyper-converged infrastructure solution based on HP synergy, along with HP Primera to meet their needs. Our intelligent edge business performed in line with the market in Q3. We continue to see the edge as a significant opportunity over the long term. The explosion of data devices and application will drive demand for secure multi-protocol connectivity, analytics, and cloud computing capabilities at the edge, especially in the post-COVID world. We are now entering the age of insights, driven by the amount of data we are generating and the utilization of new analytic tools, such machine learning and artificial intelligence technologies. Customers are looking to power a new breed of applications and workloads that work in concert with cloud, but analyze and process data at the edge. To enable these new customer needs, we introduced the Aruba Edge Services Platform, or Aruba ESP. The industry-first AI-powered cloud platform designed to unify, automate, and secure the edge. The Aruba ESP combines AIOps, Aruba Zero Frost security, and a unified infrastructure with financial and consumption flexibility. And we are seeing early customer adoption. Noble Hospitality, a luxury lifestyle brand, is standardizing on Aruba Edge Services platform as their Edge Cloud Foundation for the hotel chain. The ability to generate actionable analytics where the data is created and deliver new on-property experiences for guests was critical to the decision. We also announced our plans to acquire SD-1 Leader Silver Peak. Silver Peak's advanced SD-WAN offerings strengthen our Aruba ESP and complements Aruba's existing work-from-home and branch office solutions to deliver one of the industry's most comprehensive portfolios designed to securely connect any edge to any cloud. The combination, which is expected to close in Q4 of this fiscal year, will allow enterprise customers to simplify their branch office and wind deployment to empower remote workforces, enable cloud-native deployments, and transform business operations without compromising quality or reliability. This is a great example of accelerating our strategy while maintaining a disciplined approach to capital allocation. Building on our 5G core stack launched in March, we introduced a new telco edge orchestrator solution for telecom operators. This new solution provides revenue opportunities for telecoms in the enterprise market with one-click deployment of applications at the edge of the new 5G networks. We are receiving positive feedback on our 5G offerings. For example, we announced an innovative technical demonstration of an automated virtual 5G network conducted with the French telecom operator Orange and telco infrastructure solutions provider Casa Systems. The demo highlights the expanding use cases and service agility needed to support 5G business applications, including location-based telemetry, IoT, edge computing, and more that will require low latency. Our ability to innovate for our customers is made possible by strong financial management that strengthens our core financial foundation and allows us to align resources to the most critical areas. As we exit the Q2, you will recall that we took a number of decisive and prudent actions to manage our business through the evolving impacts of COVID-19. This included several short-term initiatives to reduce operating expenses and drive deficiencies, as well as the introduction of a long-term cost optimization and prioritization plan designed to accelerate sustainable profitable growth. We remain on track to deliver the annualized net run rate savings of at least $800 million by the end of fiscal year 22, driven by optimizing our workplace site strategy, simplifying our product portfolio, and introducing new digital customer engagement models. This effort, backed by our diversified portfolio, robust balance sheet, and investment grade credit rating, will allow us to continue to invest in key growth areas. In closing, I am proud of our Q3 performance, and I am proud of our HPE team. Our team members have been steadfast partners for our customers through an unprecedented period. They have moved quickly to address rapidly evolving market conditions. They have innovated with our customers in mind. They have made personal sacrifices to invest in our company's future. They have passionately committed to help HPE play a role in shaping a more equitable and inclusive society. and they have done all of this while managing the challenges of living through a global pandemic. Put it more simply, my HP colleagues have represented our values, lived our culture, and delivered on our purpose to advance the way people live and work. As a result of their efforts, HP is stronger and better able to serve our customers, partners, and communities in a world that's forever changed. While we continue to navigate through the global pandemic and macro uncertainty, We are cautiously optimistic that we will see gradual quarter-over-quarter performance improvement going forward. This is why we are providing guidance for our fiscal year 20 non-GAAP EPS, which Tarek will discuss. We look forward to seeing you virtually at our security analyst meeting on October 15, where we will provide more details about our long-term plans. And with that, let me turn it over to Tarek to review the quarter's results.