Hewlett Packard Enterprise Company

Good afternoon and welcome to the first quarter fiscal 2024 Hewlett Packard Enterprise earnings conference call. My name is Gary 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, Ms. Shannon Cross, Senior Vice President and Chief Strategy Officer at Investor Relations. Please proceed.

Good afternoon. I'd like to welcome you to our fiscal 2024 first quarter earnings conference call with Antonio Neri, HPE's president and chief executive officer, and Marie Myers, HPE's chief financial officer. After 25 years on Wall Street and over 20 years covering HP, I'm very excited to join HPE as chief strategy officer. I look forward to working with Jeff Paul and the rest of the IR team, and I look forward to seeing many of you in the months ahead. Before handing the call to Antonio, let me remind you that this call is being webcast. A replay of the webcast will be available shortly after the call concludes. We have posted the press release and the slide presentation accompanying the release on our HPE Investor Relations webpage. Elements of the financial information referenced on this call are forward-looking and are based on our best view of the world and our businesses as we see them today. 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 31st, 2024. For more detailed information, please see the disclaimers on the earnings materials relating to forward-looking statements that involve risks, uncertainties, and assumptions. Please refer to HPE's filings with the SEC for a discussion of these risks. For financial information we have 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 otherwise noted, are presented on a year-over-year basis and adjusted to exclude the impact of currency. Finally, Antonio and Marie will reference our earnings presentation and their prepared comments. Before handing the call to Antonio, Let me remind you that this call is being webcast. A replay of the webcast will be available shortly after the call concludes. We have posted the press release and the slide presentation accompanying the release on our HPE Investor Relations webpage. With that, let me turn it over to Antonio.

Thank you, Shannon. Good afternoon, and thank you for joining us today. In the first quarter, we are proud to have outpaced our profitability expectations while advancing our long-term strategy. We also continue to scale our recurring revenue, achieving the second-highest year-over-year growth rate since we started tracking AIR in late 2019. This is a promising indicator for our ongoing portfolio shift to higher margin revenues. But overall, Q1 revenue performance did not meet our expectations. During this call, I will address three key points. First, I will touch on our revenue, which was lower than expected, in large part because network and demand softened industry-wide and because the timing of several large GPU acceptances shifted. Additionally, we did not have the GPU supply we wanted, curtailing our revenue upside. Second, I will address how we are streamlining our reporting segments, accelerating our new specialized sales model, managing our spending, and reinforcing execution discipline. Third, and most importantly, I will discuss the progress we are making in executing a long-term strategy which we remain confident in. Let me first address revenue in the quarter. Similar to peers in the market, we saw campus networking product demand weaken, and the decline later in the quarter was greater than expected. This was a large hit queen relative to our expectations. Customers have taken longer to digest prior orders than we had anticipated, which partially offset the benefit of our backlog entering the quarter. And Europe and Asia were areas of relative softness. We expect weakness in the networking market to persist, which is likely to impact revenue through fiscal year 2024. That said, we anticipate some improvement late in fiscal year 2024 as inventory clears and we ramp into the purchasing season for state and local education customers in the United States. AI server demand remains very strong, evidenced by our growing cumulative order book. However, GPU availability remains tight and our delivery timing has also been affected by the increasing length of time customers required to set up the data center space, power, and cooling requirements needed to run these systems. As a result, overall AI server orders conversion was below our expectations. However, the AI contribution to AIR is increasing. We continue to prioritize profitability. I am pleased that we have delivered non-GAAP gross margin of 36.2%, which is a fiscal year 2018. This performance helped our Q1 non-GAAP diluted net earnings per share grow to 48 cents, which was above the midpoint of our guidance range, despite lower than expected revenue, illustrating the positive impact of our pivot to higher growth, higher margin revenue. We know that the current environment will require continued discipline in how we execute. We are accelerating a new specialized sales motions to maximize opportunities and improve order linearity across our portfolio. Improved cost management will remain an important competency for us in fiscal year 2024. We also found opportunity to streamline our reporting segments. We have now combined the compute and HPC and AI segments into a single server segment that integrates general-purpose computing, high-performance computing, supercomputing, and AI systems. This will enable us to maximize the opportunities across the entire AI lifecycle, from training to tuning to inferencing, and execute with agility. And as previously discussed, we have simplified our hybrid cloud strategy by putting all related products, software, and services into one business unit. Our new hybrid cloud segment will further accelerate customer adoption of the HPE GreenLake hybrid cloud platform. Turning to our strategy, while we are experiencing cyclicality in some markets, I am more confident than ever in our long-term strategy that is aligned to key market megatrends. In Edge, over the last several quarters, we have gained share in the campus networking markets and our strategic investments have paid off. Most recently, we have seen strong growth in SASE, an offering bolstered by our acquisition of Silver Peak in 2020 and Access Security in 2023. Our sales pipeline for our private 5G offering is also growing rapidly following our acquisition of Ethernet in 2023. In hybrid cloud, HPE GreenLake continues to resonate in the marketplace and was the primary driver of the highest Q1 year-over-year rise in AIR over the four plus years we have been reporting it. Our AIR grew 41% year-over-year to more than $1.4 billion in Q1. And we continue to expect AIR growth of 35% to 45% as we look ahead. We're also capitalizing on cross-selling opportunities when customers come to us for our AI solutions and realize we can meet their storage needs as well. In AI, we are capturing the explosion in demand for AI systems. Our cumulative accelerated processing unit orders rose to $4 billion in the quarter, driven by demand across HPE Cray EX and XT solutions, as well as HPE ProLiant Gen11 AI optimized servers. AP orders represent nearly 25% of our total server orders since the first quarter of Fisker 2023. Our pipeline is large and growing across the entire AI lifecycle, from training to tuning to inferencing. We are starting to see AI demand pull through for other solutions, including storage. We expect our server and hybrid cloud segments to grow sequentially through the fiscal year. Server revenue stands to benefit from AI system demand, improving GPU supply, and our continued makeshift to HPE ProLiant Gen 11. Hybrid cloud will benefit from continued HPE GreenLake storage demand and the rising productivity of our specialized sales force. Our customers continue to validate our value proposition. As one example, we are building for Eni, one of the world's largest energy providers, a new HPE Cray EX supercomputer that will reach more than half an exaflop performance. The system will be one of the most powerful in the world for enterprise use and will accelerate AI-driven scientific discovery to advance efforts in energy. We also have been awarded the deal for Poland's most powerful supercomputing system, located at the Academic Computer Center Cyphernet of the AGH University of Science and Technology. Based on the HPE Cray EX supercomputer and HPE Slingshot interconnect fabric with NVIDIA Grace Hopper GPUs, The system will be used to support modeling, simulation, and AI-driven scientific research needs, including training and tuning of large language models. We're also seeing growth in AI inferencing. For example, Kohl's Supermarkets, a leading Australian retailer, implemented an HPE ProLiant Gen11 AI inferencing solution in Q1, which helps with video imaging to reduce store stock loss to theft and incorrect scanning at the checkout. In the quarter, we expanded our strategic collaboration with NVIDIA, targeting the enterprise segment of the market. We introduced a pre-configured solution for enterprise customers to fine-tune AI large language models with the private data to accelerate inferencing. Our HPE machine learning development environment software and unique HPE supercomputing IP are critical parts of the solution, alongside NVIDIA AI enterprise software. We have built a strong and growing sales pipeline for this new offering. We also continue to build out our HPE GreenLake hybrid cloud platform services. Earlier this quarter, we announced an expanded HPE GreenLake for file storage that is designed for generative AI. This solution is highly differentiated through a high-performance file system solution specifically designed for AI applications. We believe it better positions us to take market share in storage by addressing the previously underserved segment of the file market. Innovation like this continue to attract customers to HPE GreenLake platform, which connects 3.8 million network devices and supports more than 31,000 customer organizations. up approximately 8% from last quarter. One new HP GreenLake customer is the U.S. Navy Fleet Numerical Meteorology and Oceanography Center, which produces critical models of weather and ocean conditions for U.S. and coalition forces worldwide. They turn to HP GreenLake to improve predictability, accuracy, and speed of their modeling while reducing costs. This week, I attended Mobile World Congress, where AI and Private 5G were the key topics among telcos and service providers alike. With our pending acquisition of Juniper Networks, HP's portfolio will expand to better serve these unique customers from the edge of the network to Core 5G to cloud. Customers were very interested in our integration of Ethernet Private 5G capabilities into our Intelligent Edge portfolio, as well as in our cloud Open RAN and vRAN solutions. They were also very eager to explore the massive new market opportunity AI inferencing presents at the edge of the network. That is one of the reasons why we are so excited about our pending Juniper Networks acquisition. Combining our complementary portfolios will supercharge HPE's edge-to-cloud strategy, accelerating our entire portfolio with AI-enabled innovation. When our proposed acquisition closes, we will create a new networking innovator with a comprehensive portfolio for customers and partners. The transaction is expected to double the size of our networking business, which will be the core foundation of HPE, covering the anticipated $180 billion market opportunity with our combined IP. From a financial perspective, this transaction is also compelling for our shareholders. In the first year post-close, we expect accretion to non-GAAP earnings per share, and in the long term, higher non-GAAP gross and operating margins. We are working to secure regulatory approvals in several jurisdictions. We are hopeful that regulators will recognize that this acquisition is centered around driving further innovation for our customers. We continue to expect that the transaction will close later this calendar year or in early calendar 2025. In summary, Q1 2024 was a mixed quarter for HPE. We achieved strong profitability and dropped near-record AIR growth with overall revenue short of expectations, given the softening networking market, GPU deal timing, and to some extent GPU availability. We are focused on execution as we navigate the fluctuations in demand we see in certain areas of the market. Marie will take you through our adjusted guidance, which reflects our latest thinking about the year ahead. This quarter is a moment in time and does not at all dampen our confidence in the future ahead of us. We are taking the right actions to maximize value for our shareholders. The work we are doing now, combined with our technological edge and a strategy that has never been more relevant, will position us to convert on the long-term opportunities in front of us across edge, hybrid cloud, and AI. Before we transition, I'm delighted to welcome Marine Myers as our new CFO. Having worked with her at the HP before the separation, it is a pleasure to partner with her again. I admire her passion for and skill at fueling innovation and performance. I am confident that Marie is a great fit for this role and expect she will help drive the next phase of growth and shareholder return for HPE. I will now turn the call over to her for details about our segments and our outlook.