Hewlett Packard Enterprise Company

Good afternoon and welcome to the third quarter fiscal 2021 Hewlett Packard Enterprise earnings 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 a listen only mode. We will be facilitating a question and answer session toward 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, Vice President of Investor Relations. Please proceed.

Good afternoon. Mandy Simonik, Head of Investor Relations for Hewlett Packard Enterprise. I'd like to welcome you to our fiscal 2021 third quarter earnings conference call with Antonio Neri, HPE's President and Chief Executive Officer, and Tarek Robiotti, 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 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 July 31st, 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, we will be referencing the slides and our earnings presentation throughout our 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 our call today. I am amazed by the resilience of our customers, partners, and team members, and I'm incredibly proud of the way Hewlett Packard Enterprise continues to serve the needs of our global communities during such an unusual and evolving circumstances. We delivered a very impressive third quarter at HPE with strong orders growth, expanded margins, and record free cash flows. Overall, I am pleased to see how our differentiated portfolio is resonating with the market and our edge to cloud strategies driving improved momentum across our businesses. Based on the strength of our Q3 performance and our confidence about our momentum in the market, we are again raising our fiscal year 2021 EPS and free cash flow outlook. And we're also resuming stock repurchases. Revenue in Q3 was $6.9 billion, in line with our outlook and normal sequential seasonality. Our Q3 orders were up strong double digits year over year, and our year-to-date order volume has increased 11%, showing the strength of our edge-to-cloud offerings. We significantly expanded our non-gap gross and operating margins, driving our year-to-date non-gap operating profit and earnings per share up 28% and 27% year-over-year, respectively. We generated a record year-to-date free cash flow of $1.5 billion, up $1.1 billion year-over-year, putting us well ahead of the original outlook we announced last October. I am particularly pleased that we were able to deliver these results while mitigating against industry-wide supply constraints by taking proactive inventory measures working closely with our suppliers, and deploy our best-in-class engineering capabilities to establish specific response plans. The impact of the pandemic continued to accelerate the shift we predicted years ago to an age-centric cloud-enabled and data-driven world. Now, more than ever, there is a greater need for secure connectivity, faster insights from data, and a cloud experience everywhere. We expect these trends to continue. Digital transformation is no longer a priority, but a strategic imperative. To help our customers transform their businesses and be future-ready today, we have been focused on doubling down in key areas that are resonating strongly in the market. We have a record number of orders in both our intelligent edge business and high-performance computing and mission-critical solutions business. Due to strong demand and execution, these growth businesses now make up nearly 25% of our total company revenue. Our Intelligent Edge business accelerated its momentum again in Q3, with 23% year-over-year revenue growth, driven by a record number of new orders. Strong customer demand for secure connectivity has generated a backlog five times greater than at the close of Q3 last year. As customers, increasingly look for solutions to collect, connect, analyze, and act on data at the edge. We are leaning into this demand and continue to invest and innovate at the edge. In June, we announced new AIOps, IoT, and security features for our Aruba Edge Services Platform, or ESP, designed to streamline network operations, maximize IT efficiency, and more easily extend the network from the edge to the cloud. Our Aruba ESP continues to gain traction with customers in different verticals. In the third quarter, customers including Save-A-Lot, Monument Health, and Circa Resorts and Casinos all standardized their networks on Aruba ESP. In our high-performance computing emission-critical solutions business, revenue was up 9% year-over-year, driven by a record number of new orders. We also generate a record-order book, which now exceeds $2.5 billion. The exponential growth in data, along with AI and big data analytics, are all driving an increased need for high-performance computing and mission-critical capabilities in enterprises of all sizes. To meet these demands, we bolster our artificial intelligence capabilities With the acquisition of Determine AI, a startup that delivers a powerful software stack to train AI models faster at any scale using its open source machine learning platform. We also continue to see an increasing number of customers accessing our high performance computer solutions as a service through HPE GreenLake. With our HPE GreenLake cloud services for HPC, customers gain powerful, specialized computing and AI capabilities with a sustainable cloud experience. For example, in Q3, HPE was awarded a $2 billion contract to be realized over a 10-year period with the National Security Agency to deliver high-performance computing solutions through the HPE GreenLake platform. The service will help the National Security Agency efficiently process data and unlock new insights in sustainable new ways. Our core businesses generate a robust year-over-year orders growth as well as strong profitability and free cash flow in the quarter. Year-to-date, computer storage orders are up mid-single digits, with Q3 operating margins of 11.2% and 15.1% respectively. We continue to offer more of our core capabilities as a service. In Q3, we introduce unified compute operations as a service through our HP GreenLake H2 Cloud Platform. This new cloud-based management service simplifies provisioning and automates the management of compute infrastructure wherever it resides. Our storage business is transforming into a cloud-native software-defined data services business through organic innovation and targeted acquisitions. In May, we introduced our new cloud data services available through HP GreenLake, as well as a new HP Elettra cloud-native data infrastructure. And just this week, we closed the acquisition of Zerto, an industry leader in cloud data management and protection, and ransomware data recovery services, which will be soon available as a service through HPE GreenLake. This acquisition immediately positions HPE GreenLake in a high-growth data protection market with a proven, scaled solution. HP was the first to market four years ago in delivering an Azure Service Cloud experience on-premises in a co-location or at the edge with HP GreenLake. Today, our HP GreenLake Edge-to-Cloud platform has more than 1,100 customers. Our annualized revenue run rate this quarter was $705 million, up 33% year-over-year, driven by strong Azure Service Orbit growth, up 46% year-over-year. Organizations across sectors including retail, healthcare, financial services, and public sector are turning to HP GreenLake. For instance, we helped Liberty Mutual shift from a traditional CapEx IT spend to a new pay-as-you-go model, creating a cloud experience on-premises to provide transparency into consumption while improving their speed in adapting to capacity demands. They standardized critical workloads on HP Synergy delivered to HP GreenLake, resulting in a reduced data center footprint and significant cost savings, including a monthly unit rate well below public cloud alternatives. We also see the power of the full HPE H2Cloud portfolio as customers are tuning to HPE for integrated solutions that combine secure connectivity data inside capabilities and cloud experiences. Woolworths, Group Australia and New Zealand's largest retailer, selected HP GreenLake to power its new WPay payment platform. They needed a solution that combined a powerful mission-critical architecture with ability to scale and also provide a better cost efficiency back to WPay and its merchant partners. Delivered through HP GreenLake, their solution leverages our full edge-to-cloud portfolio, including HP Aruba, HP NonStop, HP Primera, and HP Synergy. HPE Point Next Services also provided expertise to accelerate the company's digital transformation. I believe this is a great example of the power of our HPE Edge to Cloud portfolio. To extend our leadership position in cloud services and further accelerate our pivot to Azure service, we are relentlessly innovating. We made several compelling announcements at HPE Discovery in June. I am particularly excited about our new HPE GreenLake Lighthouse offering. a secure cloud-native stack built with HP SML software to autonomously optimize different workloads across hybrid estates, reducing time to deployment and operating costs. We also introduced Project Aurora to secure the enterprise. Embedded in our HP GreenLake H2 Cloud Platform, Project Aurora automatically and continuously verifies and attests the integrity of the hardware, firmware, operating systems, platforms, and workloads, while also detecting advanced threats. And finally, demonstrating our continued commitment to acquiring assets that complement our own capabilities, we acquired data platform developer Ampol. Ampol will accelerate the HPE Ezmeral Analytics runtime to deliver high-performance analytics for engineers and business analysts. I am proud of HP's performance in Q3 and year-to-date, and the significant progress we have made in becoming the H2 Cloud company. The momentum we have in the market compels us to move even further and faster, and our ability to transform with increasing speed is imperative. This transformation is my number one priority. At this pivotal moment, our purpose to advance the way people live and work has never been more important. Our vision to become the edge-to-cloud company is proving its tremendous relevance, and our portfolio is winning in the marketplace. Fueled by our purpose, vision, and portfolio, we have the opportunity to build a more digitally enabled, inclusive world. We have a mandate to imagine new digital transformation strategies that support our own ESG goals and those of our customers, leading to better business outcomes and societal impact. We will never waver from our commitment to being a force for good and a strategic partner for our customers. We will continue to bring bold new innovation to our customers, and we will continue to create value for our shareholders. And I'm grateful for the incredible team, and I'm confident in and excited about the future. I hope you will join us for our virtual security meeting on October 28th to hear more about our position in the market our priorities, and our outlook for the year ahead. I will now turn it over to Tarek.