Hewlett Packard Enterprise Company

Good afternoon and welcome to the second quarter 2021 Hewlett Packard Enterprise earning conference call. My name is Matt and I'll be your conference moderator for today's call. At this time, all participants will be in 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 Semenak, Vice President of Investor Relations. Please proceed.

Good afternoon. I'm Andrew Semenak, Head of Investor Relations for Hewlett Packard Enterprise. I'd like to welcome you to our fiscal 2021 second 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 and Form 10-Q. HPE assumes no obligation and does not intend to update any such forward-looking statement. We also note that the financial information discussed on this card reflects estimates based on information available at this time and can differ materially from the amounts ultimately reported in HPE's quarterly report on Form 10Q for the fiscal quarter ended April 30, 2021. 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-over-year basis and adjusted to exclude the impact of currency. 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 and 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, and good afternoon, everyone. Thank you for joining us today. While great progress is made in the fight against COVID, it's also clear that it's still a global challenge. I want to take a moment to acknowledge the suffering occurring in India and elsewhere as communities confront devastating COVID surges. We will continue to do everything we can to support our team members, customers, and communities through this very challenging time. Chile Packard Enterprise had a strong second quarter. I'm very pleased with our results and that they are marked by revenue growth, strong profitability, and free cash flow. The overall demand environment is improving, and we are seeing traction across our portfolios. We saw solid sequential improvement in total HPE orders growth that was up mid-single digits, with double-digit growth in HPE GreenLake and HPC business segments. We expect to continue to see improvement in customer IT spending throughout 2021. Our disciplined execution on our strategic priorities aligned at the security analyst meeting last fall is positively impacted both top and bottom line performance. We are strengthening our core businesses, doubling down in key areas of growth and accelerating our as-a-service pivot while advancing our cloud-first innovation agenda to become the edge to cloud platform as-a-service choice for our customers and partners. We have also executed well throughout the industry-wide tightening and cost inflationary trends with minimal impact to our first half. We have taken proactive inventory buffering measures to position as well for the second half. We will continue to take additional inventory actions as appropriate in alignment to the market demand by leveraging great engineering capabilities and our long-term agreements with our suppliers. Our continuous strong performance give us the confidence to raise our fiscal year 21 EPS and free cash flow outlook for the third time since our security analyst meeting. We will provide more details about this new guidance later in the call. First, let me review some key Q2 highlights. Revenue of $6.7 billion was up 9% year-over-year, with better than normal sequential seasonality. I'm particularly pleased with the double-digit revenue growth in both our HPC and Intelligent Edge businesses, that together now represents 22% of our HP folder revenue. Our as-a-service annual recurring revenue growth was an impressive 30% year-over-year, which underscores our momentum in enabling consumption-based IT. This is an important long-term growth driver for our company. We made significant improvements in both gross and operating margins. Our non-GAAP gross margin of 34.3% is at record level and up 210 basis points year-over-year. Our non-GAAP operating profit of 10.2% is up 300 basis points year-over-year. And our non-GAAP EPS of 46 cents is up 70% year-over-year and above the high end of our outlook range. These results contribute to Q2 free cash flow of $368 million, which is up $770 million year-over-year, bringing our first half fiscally at 21 free cash flow to a record $931 million. Tarek will discuss the financial results and outlook in greater detail. Before he does that, I want to provide additional comments on our business segment performance and highlight some of the innovative solutions and experiences we introduced during the quarter. HP has been a driving transformation in our businesses to deliver a modern, secure cloud experience everywhere to help our customers with their digital transformations. Our Intelligent Edge business accelerated its momentum with an outstanding quarter across all metrics. Revenue of $799 million grew 17% year-over-year, and operating profit expanded 320 basis points year-over-year. This is the third consecutive quarter of year-over-year revenue growth and the sixth consecutive quarter of operating profit expansion. As a service offerings, we are up triple digits year over year, and now a meaningful contributor to HPE's overall AIR. Extended to the edge has never been more critical for enterprises. At Aruba Atmosphere, our signature event for Aruba customers and partners, we announced an expanded set of cross-portfolio H2 Cloud security integrations, for Aruba Edge Services Platform, or ESP, including SD-WAN technology from our recent Silver Peak acquisition. Today, our Aruba Edge Services Platform already supports well over 100,000 customers, with 150 new customers added every day, connecting over 1 million active devices. Aruba building identity network security is unique in the market and provides the ideal foundation for building a zero-trust and secure access service edge. Our comprehensive portfolio and AI power cloud-driven platforms like Aruba ESP and Aruba Central will continue to accelerate WAN and security deployments, advanced cloud and IoT adoption, and fast-track digital transformations. Customers like Walgreens, Boots Alliance, and Mercado Libre chose Aruba and Q2 for these reasons. I am tremendously pleased with Aruba's impressive performance, and it is against this successful backdrop that I want to share that Aruba founder Kirti Melkote has made the decision to retire from HPE. We acquired Aruba in 2015 when we saw the edge as the next frontier. Aruba and Kirti have been instrumental in accelerating this business to the $3 billion business it is today. I'm incredibly grateful for his leadership, and I have personally benefited from his counsel, knowledge, and friendship. Kirti will remain as an advisor to me for the remainder of 2021. I am pleased to announce that, effective today, Phil Motra will take over the leadership of Ararumba Intelligent Edge business. Phil is a results-driven leader with extensive experience implementing growth strategies and leading transformation initiatives. He joined HPE in 2018 and most recently assumed the role as the general manager of our communication technology group, leading a team of more than 5,000 team members who drive $500 million in CTG-specific revenue and $3.5 billion in total revenue for HPE. I'm excited to welcome Phil into this new role and believe he's the perfect fit to ensure we maintain our leadership position and firm momentum in the markets. In our high-performance computing and mission-critical solutions business, revenue of $685 billion was up 11% year-over-year. We are the undisputed market leader with an industry-leading portfolio in AI and deep learning solutions for the new age of insights. We continue to execute on over $2 billion in awarded contracts, and we are pursuing a robust pipeline of another $5 billion in market opportunity over the next three years. In Q2, we announced several new HPC system deals and collaborations. These include building new supercomputers to advise scientific research for the Swiss National Supercomputer Center, the United States Department of Energy Los Alamos National Laboratory, and the National Supercomputing Center in Singapore. As we have noted on previous calls, this is an inherently lengthy business due to the lead times between order and revenue recognition, but we remain on track to deliver a target of 8% to 12% annual growth in this business this year. Our compute and storage businesses perform very well in the quarter. Our strategy to grow in profitable segments of the market and people to more as-a-service solutions is paying off. In compute, revenue of $3 billion was up 10% year over year. We draw strong operational performance, expanding operating margins by 550 basis points. We expanded our portfolio with the latest AMD EPYC and Intel Xeon scalable processors, which include the launch in three new HP ProLion solutions, targeting 5G deployments in Telco, virtual desktop infrastructure, and storage-optimized solutions for database workloads in enterprises. Its storage revenue of $1.1 billion was up 3% year-over-year, with a strong operating profit of 16.8%, up 110 basis points year-over-year. We continue to see strength in key software-defined solutions, which drive our ability to attach rich services to our product offerings. HP Primera and Nimble DHCI both grew triple digits. RHP's all-flash array portfolio grew 20%. On May 4th, we introduced a new portfolio of cloud-native data infrastructure called HPE Aletra. This portfolio delivers workload-optimized systems and provides customers with architectural flexibility to run any application without compromise from edge to cloud with a cloud operational experience. These innovations are propelling our storage business into a cloud-native, software-defined data services business. Our payable-to-asset service continued a strong momentum. Our annualized revenue run rate of $678 million was up 30% year-over-year. We saw strong total asset service order growth of 41%. Over 900 go-to-market partners are now actively selling HP GreenLake as a part of their own marketplace. And we averaged a 95% renewal rate with billions from those customers at 124% usage of the regional contract commitments. We have an unmatched portfolio of hybrid cloud services that spans all aspects of networking, compute, storage, VMs, containers, MLOps, HPC, and more. On the innovation front, we announced a transformative new data storage services platform that brings a cloud operation model to wherever data lives by unifying data operations. The platform will be available through HP GreenLake Central and includes a new data services cloud console and a suite of software subscription services that simplifies and automates global infrastructure at scale. Our industry-leading HP GreenLake cloud services experience enabled us to gain more than 90 new customers during the quarter. CareStream is a great recent customer example. In a three-year multi-million dollar deal, CareStream selected HP GreenLake Cloud Services with HP Ezmeral software and HP PointX services to power a transformative new healthcare initiative based on artificial intelligence as a service. We will continue to invest aggressively in HP GreenLake Cloud Services to provide a true cloud experience and operating model, whether at the edge, on-premises, or across multiple clouds. HPE's businesses that provide services and capabilities our customers easily transform also perform well in Q2. HPE Point X operational services had another solid quarter with revenue growing year over year as reported. We expect to see growth for the full fiscal year driven by our growing services intensity and other service momentum. HPE Financial Services continues to play an important role in helping our customers as they rebuild and rethink their IT transformation requirements. Cash collections continue to improve, and HPE FS delivers a return on equity of 18.3%, well above pre-pandemic levels. This business continues to perform very well. Over the past year, our global communities have faced a catastrophic health crisis and significant business disruptions. At HPE, we accelerated our strategy to be the H2Cloud platform as a service company to support our customers' rapidly changing needs. Throughout this time, our 60,000 team members demonstrated amazing agility and perseverance, and I am tremendously proud of our team members' response during this unprecedented time and want to thank them for their commitment and passion that has made HPE stronger and better positioned in a world that is forever changed. As businesses emerge from the pandemic and move beyond the immediate means of COVID, digital transformation is at the forefront of their strategic initiatives. At our discovery event on June 22nd, you will hear more about how HPE is at the center of this turbocharged digital economy. At H2 Cloud, architecture, software, and solutions all deliver as a service, will continue to help our customers transform their businesses, optimize their applications, and make our customers increasingly distributed work. and be future-ready today. I'm excited about our momentum, and I believe that HPE represents a strong investment opportunity for our shareholders. With that, let me turn it over to Tarek to review the quarter's results.