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spk10: Good day and welcome to the first quarter 2021 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 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. And 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 Simonak, Vice President of Investor Relations. Please proceed.
spk04: Great. Thank you. Good afternoon, everyone. I'm Andy Simonak of Investor Relations for Hewlett Packard Enterprise. I'd like to welcome you to our fiscal 2021 first quarter earnings conference call with Antonio Neri, HPE's President and Chief Executive Officer, and Tarek Robiadi, 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 discussion of some of these risks, uncertainty, and assumptions, please refer to HPE's filings with the SEC, including its most recent Form 10-K and Form 10-Q. 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, 2021. Also, for financial information that has been expressed on a non-GATT basis, we have provided reconciliations to the comparable GATT 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 adjusted to exclude the impact of currency. Also, please refer to our recently filed Form 8K for detailed information on our realigned financial results for fiscal year 19 and fiscal year 20 to account for changes to our reporting structure in fiscal year 21 that better align to market trends and more accurately reflect how we are managing the business today. Finally, after 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.
spk01: Well, thanks, Andy, and good afternoon, everyone. Thank you for joining us today, and I hope you and your families continue to be safe and healthy. It is hard to comprehend everything that has transpired around the world over the last year. The world we knew pre-pandemic has changed forever, and the need to use innovative technologies to advance the way people live and business operate has never been greater. Improving the health of our communities from educating our children to digitizing our economy and enabling its recovery creates an enormous opportunity. I believe we are entering a new era. the age of insight, fueled by the amount of data around us. The arrival of safe and effective COVID-19 vaccines is a marvel of innovation and good news for us all, bringing hope and optimism for what lies ahead. I am personally very excited about the future of innovation and the impact it will have. I am very pleased with HPE's Q1 results. Our revenue exceeded our outlook and represents a stronger than normal sequential seasonality. We significantly expanded our gross and operating margins, driving strong profitability across our businesses ahead of pre-pandemic levels. Our non-GAAP earnings per share exceeded the high end of our guidance, and free cash flow was a record Q1 performance. These results give us confidence to raise our fiscal year 21 EPS and free cash flow outlook, which we will address in more detail later on the call. The global pandemic has brought a renewed focus on digital transformation as businesses are rethinking everything from remote work and collaboration to business continuity and data insights. As the world recovers, our customers are looking for the agility and simplicity of the cloud-native world with the flexibility and control of a hybrid business model. This is where we have unique and differentiated value proposition. HPE acted intentionally and quickly last year to become a more agile organization and enable our ability to innovate faster. Our Q1 results demonstrate our progress in enhancing our position to accelerate what comes next for our customers. I am very grateful for our dedicated, passionate, and resilient team members. They have been laser-focused on delivering for our customers and executing our strategy to drive long-term, sustainable, profitable growth for our shareholders. We are strengthening our core businesses, doubling down in key areas of growth, and accelerating our as-a-service pivot to become the edge-to-cloud platform as a service choice for our customers and partners. Our total revenue of $6.8 billion was down 3% from the prior year. When normalized for the backlog from last quarter, this is better than expected sequential seasonality. We saw solid order linearity intake across all of our businesses throughout the quarter. We are executing on multiple growth opportunities, and we are particularly pleased with strong revenue growth in our intelligent edge business and growth in our other service orders and revenue. Going forward, we expect to see gradual improvement in customer spending as we progress through fiscal year 21, giving us the confidence in our ability to deliver on long-term revenue growth guidance. Importantly, our non-GAAP gross margin of 33.7% is up 30 basis points year-over-year and 300 basis points sequentially. Our non-GAAP operating profit of 11.3% is up 130 basis points year-over-year. And our non-GAAP EPS of 52 cents is up 4% year-over-year and significantly above the high end of our outlook. We generate a record Q1 free cash flow of $563 million, the highest achieved in the first fiscal quarter in the history of Hewlett Packard Enterprise. These are impressive results made possible through disciplined execution, strong expense management, and critical investment prioritization. Based on the strong start to fiscal year 21, we are raising our fiscal year 21 non-GAAP EPS outlook to $1.70 to $1.88, and free cash flow to $1.1 to $1.4 billion. Tarek will discuss the financial results and outlook in greater detail But let me first give you some additional context around our business segment performance and innovation highlights for the quarter. To emerge and recover from the global pandemic, enterprises required secure connectivity, data insight, and a cloud experience to accelerate their digital transformation, all of which further reinforces the significance of HPE's differentiated edge-to-cloud platform as a service vision. In our prioritized areas of growth, our Intelligent Edge business had an outstanding quarter, with revenue of $806 million up 11% year-over-year. We again expect to take market share in both campus switching and wireless LAN segments of the market. We are seeing continued traction from our investment at the Edge, including rich software capabilities like Araruba ClearPass Security, our cloud native Aruba Central, and most recently Aruba ESP, our edge services platform. Our Aruba SaaS revenue grew triple digits year over year. The first full quarter following our Silver Peak acquisition reinforces that we are on track to grow high margin recurring revenue with technology that accelerates our ability to capture the high growth SD1 market opportunity. Our Silver Peak SaaS offering provides customers the ability to connect all their edges and all their clouds in a fully automated and autonomous way. We launched new SB1 capabilities to centrally monitor, manage, and automate connectivity from branch location to AWS, adding support for the AWS Transit Gateway Connect solution. And early today, you may have seen our announcement introducing new solutions from deeper integration between our Aruba ESP and Microsoft Azure, which will simplify IoT device connectivity and bring Aruba Central to Microsoft Azure. Finally, we introduced a new class of cloud-native and fully automated data center switching products, specifically designed for the edge cloud data centers. which represents a $12 billion TAM expansion opportunity for Hewlett Packard Enterprise. These new offerings also enable us to accelerate the delivery of workload-optimized solutions for our HPE GreenLake cloud services offerings. Aruba's innovations is why customers like Santander, Skechers USA, and L3Harris are choosing Aruba. We have multi-growth drivers in our Intelligent Edge business, and we believe we are well-positioned to outgrow the market. High-performance computing emission-critical solution is inherently a lumpy business due to the timing of deals and customer sentences, because we can only recognize revenues once customer workloads are in production. In Q1, revenue was down 9% from the prior year. We remain very confident in this high-growth segment based on our backlog of awarded business, which now exceeds well over $2 billion of exascale contracts and a robust pipeline of multimillion-dollar-sized deals. We are on track to deliver the 8% to 12% annual growth rate communicated at our security analyst meeting last fall. We have a market-leading and differentiated portfolio of technologies that will power the new age of Insight. We recently introduced HP GreenLake Cloud Services for HPC to accelerate enterprise mainstream adoption of high performance computing targeting a $3 to $4 billion TAM. Enterprises are running analytics on increasingly large data sets and are adopting new techniques such artificial intelligence, deep learning, and machine learning. And then now we have access to HPC technologies that were historically out of reach. In Q1, we won two major HPC awards, one with the National Center of Atmospheric Research, a contract worth $35 million to build a supercomputer for extreme weather research, and another that expands NASA's H.P. Aitken supercomputer. We also completed the installation of the Daman 7 supercomputer for Saudi Aramco, which immediately became one of the top 10 supercomputers in the world. Finally, on February 20th, you may have seen that HPC Spaceborne Computer 2 was launched into orbit for use on the International Space Station. This system is enabling real-time data processing with advanced commercial edge computing in space for the first time as NASA prepares for future missions. Today, I want to share the news that Pete Ungaro has decided to leave the company in April. Pete joined HP with Craig, with a credit acquisition and ensure the successful integration of the two companies. He has made significant contribution and has grown the business, despite the complications and backlog brought by the global pandemic last year. Pete will stay on with the company in a consulting capacity for six months, and I'm really grateful to him for his leadership. I am pleased to announce that Justin Hotard, a seasoned HPE leader, will take over the leadership of the HPC MCS business and also Hewlett Packard Labs reporting to me. Justin has brought an extensive experience across the company that includes leading our HPE compute business, where he transformed the x86 compute portfolio and delivered revenue growth, profitability, and market share expansion. I'm excited about what Justin will bring to the business. In the core businesses of compute and storage, our strategy to grow in profitable segments and pivot to more as-a-service solutions is paying off. We draw strong profitability and cash flow in both businesses. In compute, our operating margins of 11.5% increased 80 basis points year over year and 490 basis points quarter over quarter. Our revenue declined 2% from the prior year, but was up low single digits sequentially when normalized for the backlog in Q4. We are encouraged by the sequential growth in new orders intake, taking into account our normal Q2 seasonality. Just last week, we launched our new HPE 5G Open RAN solution stack for telecommunications companies to accelerate the commercial adoption of Open RAN in 5G network deployment. This is a transformative technology, featuring the industry's first server-optimized for 5G Open RAN workloads with our HPE ProLiant servers. This complements the HPE 5G core stack unveiled last year in March. Orange, one of the world's largest mobile network operators, is currently working with HPE to test a full 5G core stack in preparation for broader commercial deployment. In storage, revenue was down 6% from the prior year with operating margins of 19.7%, which is above the target profitability range we discussed at SAM. We continue to see strong revenue growth in our own IP software-defined portfolio where we have been invested. Our HPE Primera business grew triple digits year over year and soon will be bigger than our three-part business. This is the fastest revenue ramp ever achieved in our HP storage portfolio. Our overall HP all-flash array portfolio grew 5%, driven by both HP Primera and HP Nimble storage. Our hyper-converged strategy continued to gain traction. Our HP Nimble DHCI next-generation technology, powered with artificial intelligence, gives customers a cloud-native experience in their own data centers. where they also have the ability to control costs while maintaining data compliance and security. Our focus on our own IP software-defined portfolio also improves our ability to attach rich services to our product offerings. Our storage operational services attach intensity is up double digits year over year. We're also integrating cloud-native software technology to empower our field and accelerate sales velocity. Just last week, we completed the acquisition of Cloud Physics. This deal provides us with a SaaS-based tool that analyzes IT environments to provide a quick return on investment recommendations for cloud migrations, application modernization, and infrastructure. I am very excited about this new addition to our set of capabilities, which we will expand across our entire HPE portfolio. Our Pivot2 as a service continues strong momentum. Our annualized revenue run rate of $649 million was up 27% year over year. And we had our highest first quarter ever with HPE GreenLake Cloud Services. Customer adoption continued to be very strong. In Q1, we gained more than 70 new HPE GreenLake Cloud Services logos. Linnaeus, Europe's largest private rail freight operator, selected HPE GreenLake Cloud Services to support its transformation from a conventional freight company into a high-performing, efficient, and sustainable transport system for the European logistic industry. We remain very confident in our unique approach and differentiated portfolio to capitalize on the rapidly growing on-premises as-a-service market. Our new HPE Ezmeral software portfolio and our HPE GreenLake managed services offerings enable a true consumption-based experience. Our HPE Greenlight Cloud Services customer retention rates are above 95%, and the average customer usage of our cloud services is currently running at 120% of original commitment, driven by customer expansion in their capacity utilization. We are excited about this long-term opportunity and are very confident in our 30% to 40% CAGR target by fiscal year 22. HP continues to benefit from capabilities and services that enable growth in our core business segments. HP Point X operational services had a solid quarter. Order trends are improving and revenue has stabilized to flat year-over-year with expanded operating profit margins. HP Financial Services provides significant value to our customers as they rebuild and rethink their IT transformation requirements. Q1 revenue stabilized with improved collections to deliver a return on equity of 16.5%. Overall, I'm pleased with how we start the fiscal year 21. Because of our strong start, we are raising our outlook for both EPS and free cash flow. I talk to customers and partners almost every day. And while there continues to be some level of uncertainty, one thing is clear. customers are looking to accelerate their transformations and need a partner with the right technology, expertise, and financial flexibility. Our distinctive and industry-leading portfolio of edge-to-class solutions and unique capabilities is resonating with customers. And I believe our team is one of the best in the industry. I'm impressed with our team members' commitment to make bold moves and ensuring we stay true to our purpose. For the third year in a row, HP has been named one of the world's most ethical companies by the Ethics Fair Institute, and just last week, HP received the Thomson Reuters Foundation's Top Slavery Enterprise Award for our leadership in limiting the risk of slavery in our supply chain and operations. With this unstoppable team and our portfolio of leading solutions, we are well positioned to capture the tremendous opportunity ahead in fiscal year 21 and beyond. With that, let me turn it over to Tarek to review the quarter results. Tarek.
spk07: Thank you very much, Antonio. I'll start with a summary of our financial results for the first quarter of fiscal year 21. As usual, I'll be referencing the slides from our earnings presentation to guide you through our performance in the court. Antonio discussed the key highlights for this quarter on slide one, And now let me discuss our financial performance and KPIs, starting with slide two. I am delighted to report that our Q1 results were marked by continued momentum in revenue, substantial gross and operating margin expansion, and robust cash generation. We delivered Q1 revenues of $6.8 billion, down 3% from a prior year period, but better than our typical historical sequential seasonality when normalizing for Q4 backlog. I am particularly proud of the fact that our non-GAAP gross margin returned to above pre-pandemic levels and was up 30 basis points from the prior year period and up 300 basis points sequentially. This was driven by strong pricing discipline, the absence of backlog-related headwinds, cost takeout, and an ongoing favorable mix shift towards higher margin, software-rich offerings. Our operating expenses decreased year-over-year thanks to our ongoing structural efficiency measures, as well as some timing-related benefits related to hiring in key selected areas, which have been pushed out. Our non-GAAP operating margin was 11.3%, up 130 basis points from the prior year, which translates to an 11% year-over-year increase in operating profit. As a result of our strong execution, we ended the quarter with non-GAAP EPS of $0.52, which was up 4% from the prior year and significantly above the higher end of our outlook range. Q1 cash flow from operations was close to $1 billion driven by better profitability and strong operational discipline as well as working capital timing benefits. The one Cree cash flow was $563 million, which was up approximately $750 million from the prior year and a record level for any first HPE first quarter. Finally, we paid $155 million of dividends in the quarter and are declaring a Q2 dividend today of 12 cents per share payable in April 2021. Now let's turn to our segment highlights on slide three. In Intelligent Edge, we accelerated our momentum with rich software capabilities, delivering 11% year-over-year growth, our third consecutive quarter of sequential growth. Switching was up 5% year-over-year, with double-digit growth in North America, and Wireless LAN was up 11% year-over-year, with double-digit growth in both North America and APJ. Additionally, the Aruba SaaS offering was up triple digits year over year and is now a significant contributor to HPE overall ARR. Based on our solid performance, we expect to take share again this quarter in both campus switching and wireless LAN. We're also seeing the significant operating profit potential of this business with operating margins in Q1 of 18.9%, up 680 basis points year over year as we drove greater productivity from past investments and operational leverage benefits kick in. Finally, I am pleased to say we recognized our first full quarter of revenue from the acquisition of Silver Peak, the premium growth SD-WAN leader, which contributed approximately 500 basis points to the Intelligent Edge top-line growth. In HPC MCS, revenue declined 9% year-over-year, primarily due to the inherent lumpiness of the business, which is linked to the timing of deals and customer acceptance milestones. We remain very confident in the near-term and longer-term outlook for this business and are reaffirming our full-year and three-year revenue growth CAGR target of 8% to 12%, respectively, as highlighted at SAMP. We have an extremely strong order book of over $2 billion worth of awarded Exascale contracts with another $5 plus billion of market opportunity over the next three years. Finally, we announced the launch of our HPC as a service offer, which we expect to gain traction later this year and become a further contributor to our overall growing ARR profile. In compute, revenue stabilized to a 2% year-over-year decline, but was up low single digits sequentially when normalizing for Q4 backlog, which attests of a strong order momentum in the quarter. Gross and operating margins were up meaningfully quarter over quarter due to the absence of any backlog-related margin impact, improved supply chain execution, and the right sizing of the cost structure of the segment. We ended the quarter with an operating profit margin of 11.5%, up 80 basis points from a prior year period, and at the high end of our long-term margin guidance for this segment provided at SAM. Within storage, revenue declined 6% year-over-year driven by difficult prior year compare, but with strong growth in software-defined offerings. We are extremely well positioned in storage with Primera and Nimble DHCI, our most software-rich platforms. They are both growing triple digits year-over-year. They are absolute winners in the market and Primera is on track to surpass three par sales as early as next quarter. We also saw a notable strength in overall nimble up 31% year over year and total all flash arrays were up 5% year over year. The next shift towards our more software rich platforms help drive storage operating profit margins to 19.7% well above our long-term outlook for this segment presented at SAM last October. With respect to Pointnext operational services, including Nimble services, revenue stabilized and was flat year-over-year driven by the increased focus of our BU segments on selling product and services as bundles, improved services intensity, and our growing as-a-service business, which I remind you involves service attach rates of 100%. This is very important to note because all of our OS revenue is recurring with three-year average contract length and OS remains the highest operating margin contributor to our segments. Within HPE Financial Services, revenue stabilized and was slightly down 1% year-over-year. As expected, we are seeing sequential improvements in our bad debt loss ratios ending this quarter at approximately 0.9%, which continues to be best in class within the industry. We have also seen strong cash collections well above pre-COVID levels. As a result, our non-GAAP operating margin was 9.8%, up 110 basis points on the prior year, and our return on equity is back to a pre-pandemic high teens level of 16.5%. Slide four highlights key metrics of our growing as a service business. Similar to last quarter, we are making great strides in our as a service offering this quarter with over 17 new GreenLake logos added in Q1. I am very pleased to report that our Q1 21 ARR came in at $649 million, representing 27% year-over-year reported growth. Total as a service orders were up 26% year over year, driven by very strong performance in Europe and Japan. Our HPE Aruba Central SaaS platform also contributed to grow revenue strong triple digits year over year. Based on strong customer demand and recent wins, I am very happy with how this business is executing and progressing towards achieving its ARR growth targets of 30% to 40% CAGR from fiscal year 20 to fiscal year 23, which I am reiterating today. Slide 5 highlights our revenue and EPS performance to date, where you can clearly see the strong rebound from our Q2 trough. Revenue returned back to near pre-pandemic levels last quarter, and with the operational execution of our cost optimization and resource allocation program, we have nearly doubled EPS from the trough and are now growing year over year. Turning to slide six, we delivered a non-GAAP gross margin rate in Q1 of 33.7% of revenues, which was up 300 basis points sequentially and 30 basis points from the prior year period. This was driven by strong pricing discipline, the absence of backlog-related headwinds we had in the second half of last year, operational services, margin expansion from cost takeout and automation, and a positive makeshift towards high-margin, software-rich businesses like the Intelligent Edge and Storage. Moving to slide seven, you can also see we have expanded non-GAAP operating profit margins, which is up 280 basis points sequentially and 130 basis points on a prior year period. We have done this by driving further productivity benefits while simultaneously maintaining our investment levels in R&D and field selling costs, which are critical to fuel our innovation engine and revenue growth targets. Q1 operating expenses also benefited from delayed hiring and a push out of select investments that we will be making to drive further growth. Turning to slide eight, we generated record levels of first quarter cash flows. Cash flow from operations was approximately $1 billion, and free cash flow was $563 million for the quarter, up approximately $750 million from the prior year period. This was primarily driven by the increased profitability, strong operational discipline, and some working capital and in-year timing-related benefits. Now, moving on to slide 9, let me remind everyone about the strength of our diversified balance sheet, liquidity position, which are a competitive advantage in the current environment. As of our January 31st quarter end, we had approximately $4.2 billion of cash on hand. Together with an undrawn revolving credit facility of $4.75 billion at our disposal, we currently have approximately $9 billion of liquidity. Finally, I would like to reiterate that we remain committed to maintaining our investment-grade credit rating, which was recently reaffirmed by the rating agencies. Bottom line, our improved free cash flow outlook and cash position ensures we have ample liquidity to run our operations, continue to invest in our business to drive growth, and execute on our strategy. Now turning to outlook on slide 10. At our October 2020 securities analyst meeting, we provided our outlook for fiscal year 21, which we raised by $0.03 at the midpoint to $1.60 to $1.78 in our last earnings release. Today, I'm pleased to announce that we are raising our fiscal year guidance for fiscal year 21 once again to reflect our strong operational performance to date and confidence in our outlook. We now expect to grow our fiscal year 21 non-GAAP operating profit by over 20% and expect to deliver fiscal year 21 non-GAAP diluted net earnings per share between $1.70 to $1.88, which is a 10 cents per share improvement on the midpoint of our prior EPS guidance of $1.60 to $1.78. From a top line perspective, we are pleased with the momentum we saw in Q1 And whilst we continue to see gradual improvement, we remain prudent as we and the rest of the world continue to navigate the pandemic and related macro uncertainties. More specifically for Q2 21, we expect revenue to be slightly better than in line with our normal sequential seasonality of down mid-singular digits from Q1. This still represents double-digit year-over-year growth from the $6 billion trough of Q2 of fiscal year 20. Now, with respect to supply chain, I would like to remind everyone that we exited Q4 of fiscal year 20 with higher levels of inventory to protect against the risk of a short-term supply squeeze and address improved customer demand. With these actions and other proactive steps that we've taken in Q1, we do not expect any meaningful impacts on our supply chain in the near term. We're now turning our attention to working on strengthening our inventory supply for the second half of fiscal year 21 as we see improved levels of demand, recognizing also that we have entered an inflationary environment for memory components. For Q2 21, we expect GAAP diluted net EPS of 2 to 8 cents and non-GAAP diluted net EPS of 38 to 44 cents. Additionally, given our record levels of cash flow this quarter and raised earnings outlook, I am very pleased to announce that we are also raising fiscal year 21 free cash flow guidance from our SAM guidance of $900 million to a billion one to a revised outlook of a billion one to a billion four, a $250 million increase at the midpoint. So overall, Antonio and I are proud of these results. We have navigated well through unprecedented challenges in the last fiscal year and have started the new fiscal year strong out of the gate. We saw significant acceleration and customer demand in our intelligent edge business and the order pipeline in our HPC MCS business remains robust. Our core business of compute and storage revenues are stabilizing with improved margins and our as a service ARR continues to show strong momentum aligned to our outlook. As a result of our cost optimization and resource allocation program, we are emerging from an unprecedented crisis as a different company, one that is much leaner, better resourced and positioned to capitalize on the gradual economic recovery currently at play. We are already seeing the benefits of our actions in our improved margin profile and free cash flow outlook. Now with that, let's open it up for questions. Andy?
spk04: Great, thanks, Derek. First question, please. Thank you.
spk10: Certainly. We will now begin the question and answer session. To ask a question, you may press star then one on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. We also request that you please only ask one question. Our first question today will come from Shannon Cross with Cross Research. Please go ahead.
spk11: Thank you very much for taking my question. I'm curious, everyone is talking about digital transformations and they seem to really gain traction, you know, early in COVID with the need for remote work. But now could you talk a bit about how customer priorities and purchase decisions are changing as we're moving past COVID? And I'm wondering if it's an opportunity for more consultative sales and higher ASPs margin. If you could talk about it maybe by segment, that would be helpful because I assume it may vary across your business line. Thank you.
spk01: Well, thanks, Shannon. Yeah, I will take that. Well, we definitely still see the tailwind of what we saw in 2020. Obviously, we work in a much more distributed environment. We talk about this all the time, about the fact that many employees will never return to the office and they need access to data and services in a very connected way. And so that's why we believe our Aruba business It is a digital transformation engine for our customers. It is not just about access to a Wi-Fi port, but it's also the fact that provide that edge to cloud connectivity for all the apps and data, whatever they list. So what we see though is an acceleration for definitely the access to data, the analytic side. We see AI machine learning taking hold in every segment of the market because data insights is necessary to compete in this new digital economy. We see obviously the need to improve IT resiliency based on the learnings we had in 2020. We see also the need to deploy cloud everywhere. And remember, our definition of the cloud is an experience, not a destination, and that's why we are very bullish about our IHP GreenLake cloud services. The pipeline, the size of the deal, the need to engage in a consultative, application-driven conversation is increasing, and that's where we have aligned our advisor and professional services to that part of the business. So I think there is gonna be a mix of things, Shannon, but ultimately digital transformation is no longer a priority, it is a strategic imperative. And those who move fast around the data insights and digitizing everything will be the winners, no question.
spk04: Perfect, great, thank you, Shannon. Operator, can we go to the next question, please?
spk10: And our next question will come from Wamsi Mohon with Bank of America, please go ahead.
spk05: Yes, thank you, and congrats on the nice execution and especially the strong cash flow performance. Antonio, you noted some solid order linearity. I was wondering if you can talk about any meaningful changes that you're seeing in your customer conversations around recovery and enterprise demand, and what are some of the key assumptions around the upside to the EPS and cash flow guide? Thank you.
spk01: Well, maybe I'll start, and then I would like Tarek to talk about the EPS upside. You know, listen, I spend more than 50% of my time talking to customers and partners, and I see a renewed focus on, you know, making sure the businesses are positioned for success. You know, definitely there is a need to modernize their infrastructure and deploy these new technologies across the board. Our order linearity take, once it was very solid, every single week of the quarter. There was no one week that was higher than others. Honestly, I was very pleasant to surprise about that. The way I manage the business with my team, a quarter has 13 weeks because when you go into a quarter, you already have a week of backlog and then you drive your linearity from there. It was very consistent. It was across all businesses. As Tarek said, Our compute business, so sequential growth in our data intake. The same in our areas of the storage portfolio where we are pivoting, particularly everything that's software-defined. Aruba was very strong out of the gate, and we see the momentum going through 2021. GreenLake, the same thing. But ultimately, that vision of edge to cloud is paying off. Because ultimately, customers need an architecture and a set of services that they can deliver of what they need in this digital transformation. So I feel very confident about that. And that's why we are confident in raising the outlook, which Tarek gave you the insights about the EPS upside. So maybe, Tarek, you want to talk about that?
spk07: Sure, Antonio and Wamsi. Thanks for the question. We feel very good about our guidance for the second quarter and the full year 21. We did express in our scripts that we see our non-GAAP operating profit growing by over 20% year-over-year and our guidance reflect that. Now, when you look at our margins for this quarter and the need to proceed with select investments, We feel that the guidance that we have on an EPS level is achievable, particularly when you look at the improvement quarter over quarter in Q2 and for the rest of the year as Q3 and Q4 are usually strong quarters for our businesses such as the Intelligent Edge and also storage. With respect to cash flow, our guidance has improved by $250 million at the midpoint, and it's a reflection of the improved outlook on operating profit. I am very pleased to put forward a guidance of a billion one to a billion four on free cash flow, and we'll see as the year progresses how this guidance will translate in actual results.
spk04: Great. Thanks, Swanze. Can we go to the next question, please?
spk10: And our next question will come from Aaron Rakers with Wells Fargo. Please go ahead.
spk09: Yeah, thanks for taking the question and also congrats on the quarter for me as well. I want to ask about the margin profile. Tarek, when you think about the performance that we've seen this last quarter and you think about the mix of the business going forward, I guess how do you think about the continued upward levers on gross margin and And can you just remind us of where we stand on the 800 million net savings initiatives from an OPEX perspective, where we stand at now and what's left in terms of, you know, that target by the end of fiscal 22? Thank you.
spk07: Sure, Aaron. Thank you for the question. So let's pick up gross margin first, and then we'll talk about our cost optimization and resource allocation program. On gross margin, we feel very good that now that we've put behind us all the effects from backlog in Q3, Q4 of last year, we're now operating the business in the context where we have normal business flows between orders and supply chain delivery. We do acknowledge, like we said before, that there is an inflationary environment on some commodities such as DRAM. but we feel that we have the right levers around pricing and also purchases to navigate the upcoming quarters. We feel very good about our supply chain position in terms of inventory levels for the short term. As a reminder, at the end of last year we stocked up in anticipation of two things, a resurgence in customer demand which we saw happening and also a potential squeeze in some commodities that we were anticipating back then, which is proving true now. But we are very well positioned to drive that. So we will navigate the short-term supply-demand equation reasonably well, pulling on pricing levers as needed in our core. In addition to this, you have a mixed effect from software-rich revenues. These are coming from storage and, of course, the intelligent edge. Aruba is performing extremely well. It's a very high gross margin business. We see continued growth in Aruba. We've demonstrated three quarters of consecutive growth. This is set to continue. The products are in very hot demand everywhere globally. and the mixed effect will also play on the cross margin front. I think I've given you sufficient color there so maybe it's time we turn to the cost optimization and resource allocation program. The bottom line on this one is we're on track and the reason why you see our operating margins up to the levels that you've seen north of 11% overall for the company is because of that program. What's very, very important for us is that we keep that expense discipline to sustain this level of operating profit growth moving forward and drive productivity, meaning having higher revenue over the same cost base to continue to drive operating profit growth and therefore translating into free cash flow growth moving forward. The 800 million net run rate benefits, as a reminder, would be felt for the most part in fiscal year 21. You started seeing some of that. We're incurring restructuring costs to that effect, and the program will be over by fiscal year 22. We're well on track and very pleased with how it's tracking as we speak.
spk01: My other comment on what Tarek said, what we announced last year in K2 was the right thing to do. We have enough experience in this company to tell us to take actions immediately and now proven to be very, very fruitful for us. As Tarek said in his remark, we are becoming a different company, more leaner, more agile, and allows us to prioritize investment indicators of growth. So I'm very pleased that we took that action at the time.
spk04: Good point, Antonio. Thanks, Aaron, for the question. Operator, can we go to the next one, please?
spk10: And our next question will come from Katie Huberty with Morgan Stanley. Please go ahead.
spk02: Thank you, Mike. Congrats on the quarter as well. Question for Tarek. You beat the first quarter by about 11 cents versus consensus. you guided up the full year by 10 cents. So the guidance implies that you don't operationally, you know, beat the next three quarters. Is that just prudence as we await full visibility into the pace of demand recovery? Or is that tied to some of the delayed OPEX investments that you mentioned? And maybe if you can detail what some of those investments are, just so that we can understand, you know, what those are. Thank you.
spk07: Sure, so we pretty much, Katie passed on to the full year guidance the entire beat in Q1. A couple of points on the investment front. You could see from some of the slides that we put forward our investment in R&D and FSC. This has to continue and we'll find adequate sources to fund investments in FSCs and R&D because we have to continue to fuel growth and this is part of our story which is to We think our cost structure in terms of back office and front of house to drive growth and innovation by way of software. So I feel pretty good about that. With respect to also your modeling of EPS on a full year basis, I want to take the opportunity to highlight what's going on at the OINE level. OINE was a positive contributor to EPS in this quarter. This is just simply due to timing, particularly the contribution of economic interest from H3C. For the full year, we still see overall in OINE a $100 million expense. And this is why you may think that the guidance is flat, H1 on H2, but don't forget the effect of OINE coming in in the second half of the year as an expense.
spk04: Great. Thanks, Kenny, for the question. Can we go to the next one, please?
spk10: And our next question will come from Amit Daryani with Evercore. Please go ahead.
spk08: Thanks for taking my question, and I'll extend my congratulations as well. You know, I wanted to talk a little bit on Aruba, fairly strong double-digit growth over here. And, you know, I think that's fairly impressive given peers like Cisco and Juniper are probably seeing low to mid-single-digit growth. I know Silver Peak has some element to this, but I'd love to get a sense from a share gain perspective, you know, where are you seeing these share gains on the product and what it looks like, some color that would be helpful, and then the durability of this growth would be helpful to understand as well.
spk01: Well, thanks, Amit. Well, listen, we believe Aruba is a winner. Simply put, it is a software asset that delivers mobile first, cloud first experience that provides ubiquitous security connectivity in a platform-oriented approach. So for us, it's not a surprise to see the momentum in that business, which is not just revenue. As Tarek said, three consecutive quarters of growth, but also five quarters of growth and margin expansion. in that business. As we commented early on, our SaaS revenue, which is the subscription to the platform, is up three triple digits on that part of the business. We expect to gain both shares in campus switching and wireless LAN. We'll see how the market does, but some of our competitors don't disclose numbers, so it's hard to understand what was down versus up, but I think the market was not as positive as people portray, but we outperformed the market quite significantly. So whether it's 100 basis points, 200 basis points, we'll see soon. But I remain very bullish. I remain very bullish about this business. This business will continue to grow for the balance of the year, also because now we have Silver Peak in our portfolio, which is a completely differentiated experience for the SD1, And remember what I said early on. In an edge-to-cloud architecture, you have to connect all your edges and all your cloud. And the only way to do it at scale is through software. And Silver Peak brings a SaaS solution and also a non-prem solution that allows customers to connect all their edges on the cloud in a fully automated and autonomous way. And that's a big opportunity for us. And that's why I'm really bullish because ultimately we are integrating that solution into the same platform And then there are multiple drivers of growth as we think about the next 12, 24, 36 months, which include edge computing and 5G. So that's why I'm very, very confident in our ability to deliver against that market.
spk04: Great, thank you. Thanks, Amit, for the question. Can we go to the next one, please?
spk10: And our next question will come from Simon Leopold with Raymond James. Please go ahead. Thanks for taking the question.
spk06: I wanted to see if maybe you could help us understand where you see your market in terms of enterprises coming out of the pandemic or recovery. And really the root of this question is Intelligent Edge looks like it's recovered with the year-over-year growth, whereas the other segments, maybe we can expect more of a recovery pattern later this year. So I'm looking for maybe a bridge between what's execution and what's kind of macro recovery by segment. Thank you.
spk01: Yeah, I mean, I think the market in general is recovering. As I said early on, Simon, my point about the order linearity was steady and consistent throughout the quarter, which gives us the confidence that we will see gradual continued improvement in that demand. And it's not one business. I think it's across all businesses. And I think, you know, it's a combination of our execution because of our strategy and the emphasis on the innovation that we bring to the market. And obviously, as the market gets better, we should take advantage of that. But remember, we have a unique value proposition. We are a company that has a unique portfolio from edge to cloud. Our competitors don't have all of that. Some have in one area. Some have in another area. And what customers want is an integrated experience more and more. And obviously, the shift to a consumption-driven model is in our favor because once we land a customer in GreenLake, basically they get what they want, whether it's at the edge or whether it's in the core or whether it's in a managed services for the hybrid model that they're all adopting. So I think, you know, compute. I think, you know, there are new technologies coming online with NVMe and more options that can be attached. Storage, obviously, is all the software defined that Tarek talked about it. You know, data is exploding. And HPC, I'm very bullish about HPC because ultimately, you know, the data sets we see in customer sites continue to grow and they all need AI machine learning at the one point in time. not just few customers. So whether it's large public sector, education also is going to be very good because we expect our children to get back to school at some point in time. Obviously, transportation with autonomous vehicles and 5G deployment. So I see multiple growth going forward and obviously it's in our hand to innovate and deliver against that opportunity.
spk07: Antonio, if I can add color to the compute business, I think it's important we let everyone on the call know that when you look at the underlying performance of compute, and particularly when you normalize for Q4 backlog impacts, both AUP and units were up sequentially. So there is a real recovery in compute if you strip out the impact of backlogging Q4. AUP was up high single digits, and units were up approximately 10% quarter on quarter once you do that normalization. It's very hard for analysts outside the company to do the normalization, but that's why I wanted to make the point. So hopefully that will resonate with the analyst community on this earnings announcement.
spk04: Thanks, Tarek. And thank you, Simon, for the question. So we're just about at the top of the hour now. Operator, can we have the last question, please?
spk10: And our last question today will come from Paul Koster with JP Morgan. Please go ahead.
spk00: Not a very exciting question to finish up on, but it looks like you're pushing the upper boundary of your expected operating margin range for the core businesses. And it sounds like they could get better yet. So Are you going to change the range of expectations around operating margins or is this just sort of unsustainable what we're seeing at the moment?
spk07: Paul, this is a very exciting question. It's a very exciting question for me. It's essential. So don't be shy about it. I would simply say, look, we have to keep the expense discipline and drive productivity consistent. we feel that the upper boundary has yet to be tested. And I would say that this is always, in a company like this, not a short-term endeavor, but something that has to be done on a sustainable business, on a sustainable basis moving forward. But remember also that what drives the operating margin is the continuous expansion into software, margin risk software offerings, and our ARR will start to shine as it continues to accelerate into fiscal year 21 and 22.
spk04: Great. Thanks, Paul, for the question. Antonio, maybe I'll turn it over to you for any final comments you have before we close the call.
spk01: Well, thank you, Tarek, and thank you, everyone, for joining us today. I know there are more questions, but I know Tarek and the team will get offline with you in the one-on-one follow-up calls. No, I mean, I just want to reiterate, this is a very solid start for our company, for Fiscal Year 2021. Obviously, we remain committed to drive and show all the value. I'm particularly pleased with our results in profitability, in free cash flow, which was record-breaking. The fact that we are confident in demand recovery and our own execution that allows us to raise guidance for the full year in both non-GAAP EPS and free cash flow. We see tremendous momentum in our areas of innovations and focus, intelligent edge, and even HPC business. Remember with our lumpiness of the business, confident to deliver that 8% to 12% growth. And then the pivot to us as a service. So because all of that, we believe this is going to be a good year in balance. And obviously, we're all watching the trends with the COVID. But I think customers realize that this is the year they need to make the investments to digitize everything in the company. So again, thank you for joining us today, and I hope you continue to stay safe and healthy. Talk to you next quarter. Thank you.
spk10: And ladies and gentlemen, this concludes our call for today. Thank you, and at this time, you may now disconnect.
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