Hewlett Packard Enterprise Company

Good afternoon and welcome to the third 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, Paul Glazer, Head of Investor Relations. Please proceed.

Good afternoon. I'm Paul Glaser, Head of Investor Relations for Hewlett Packard Enterprise. I would like to welcome you to our fiscal 2024 Third Quarter Earnings Conference Call with Antonio Neri, HPE's President and Chief Executive Officer, and Marie Myers, HPE's Chief Financial Officer. 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 July 31, 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 in their prepared remarks. With that, let me turn it over to Antonio.

Thank you, Paul, and welcome to your new role leading investor relations at HPE. And thank you all for joining us today. HPE delivered a strong third quarter performance. We generated impressive revenue growth with notable acceleration of AI systems revenue conversion, as well as higher operating margin from the prior quarter. Net revenue was $7.7 billion, up 10% year over year and at the high end of our guidance. Non-GAAP diluted net earnings per share rose one cent from a year ago to 50 cents in Q3, two cents above the high end of our guidance. We generate a free cash flow of more than $660 million and will pay a dividend of 30 cents per share. Based on our year-to-date performance, we are raising our full-year GAAP and non-GAAP earnings per share guidance. Marie will provide further details in her remarks. Lastly, we are also pleased to have received the first payment of $2.1 billion in proceeds from the sale of part of our equity position in H3C. Overall, the demand environment this quarter has improved. We saw sequential and year-over-year orders growth, but with some geographic variation. Demand was strong in North America, Asia Pacific, Japan, and India, while Europe and the Middle East lagged. We are aggressively going after the opportunities presented by better market conditions and are well positioned in a competitive and dynamic environment as we close our fiscal year. I am very proud of the progress we have made in delivering on our edge to cloud vision over the last several years, which is generating this performance momentum. We have accelerated innovation across all pillars of our strategy. Networking, hybrid cloud and AI delivered through a unified cloud native and AI driven experience as a part of our HP GreenLake Cloud Platform. Today, almost 37,000 unique customers use our HP GreenLake Cloud to manage their hybrid IT estate, which drives our annualized revenue run rate subscription growth. In Intelligent Edge, we have invested in building an industry-leading AI-driven networking portfolio. HP Aruba Networking is a recognized market leader in the campus and branch segment. The AI market requires a modern, high-performing networking fabric as a core foundation to deliver a more efficient data center cloud infrastructure as the world transitions to accelerated computing. We are excited to significantly expand our networking business with the pending acquisition of Juniper Networks. The acquisition of this high-margin business will accelerate our edge-to-cloud vision with a full networking IP stack, from silicon to infrastructure to the operating system to security to software and services in a cloud-native and AI-driven approach. We expect our compelling value proposition will begin to deliver returns to our shareholders in the year post-close. In hybrid cloud, we redefined the cloud space by delivering an experience that is hybrid by design, with HP GreenLake at the core of our strategy. We have transitioned our HP Server and HP Storage products to cloud-native and software-defined solutions, while adding unique software and services to our HP GreenLake Cloud Platform. Our innovation gives customer choice and flexibility across all world types while managing their public on-prem colors and ages in one unified hybrid cloud operations experience. Our AI business is built on decades of large scale infrastructure expertise, including technologies that like direct liquid cooling, that they're powering our largest AI systems for large language model builders, service providers, and supercomputing users. We have rapidly expanded our AI portfolio, including the introduction of HP Private Cloud AI, specifically engineered for enterprise customers, with the expectation of significant market expansion as we are still in the early stages of adoption. Pursuing this strategy has diversified the HP portfolio to parts of the market with higher margins. Our differentiation not only makes us highly relevant to customers and partners, but also drives profitable growth for our shareholders. I have few observations about Q3 performance in our key segments that I will share, and then I will let Marie fully review more detailed results. Our server segment, again, outperformed expectations in Q3, thanks to an acceleration in converting AI system orders to revenue. We converted about $1.3 billion in AI systems revenue this quarter, a 39% increase from Q2. Revenue from our traditional server business also climbed, with a double-digit increase in product orders, both sequentially and year-over-year, reflecting an improvement in the market from traditional compute. We continue to pursue profitable deals within our target server margin range, underscoring stability in our operating profit profile. In AI, our momentum is very clear. Customer demand for HPE AI systems rose sequentially, with opportunities increasing in both enterprise and sovereign AI clouds as customers explore more use cases. AI system orders climbed $1.6 billion in the quarter to a cumulative $6.2 billion since Q1 2023, an increase of approximately $3.5 billion over the last year. Customers are exploring new ways to use AI, adding to our already robust pipeline and creating even more runway for our broad AI offerings. Enterprise interest in generative AI is high, and while adoption is still in the initial stages, it is accelerating. Customers tell us that they see the possibilities and are building the business cases. We see use cases across multiple verticals, from healthcare to financial services to manufacturing. As the use cases mature, they need expertise to help guide the implementation across their enterprise business, not just IT. Direct liquid cooling continues to be a key differentiator and demand driver with large-scale AI customers. The expertise and IP required to build and run large direct liquid cool systems creates a significant margin-rich services opportunity for day zero, day one, and day two operations. HPE has one of the largest water cooling manufacturing and services footprint in the world. In the sovereign space, just recently the U.S. Department of Energy National Renewable Energy Laboratory announced that its HPE-built Kestrel supercomputer came fully online over the summer. Kestrel will be five times more powerful than NRL's previous supercomputer, Eagle, and is 100% direct liquid-cooled. This system will enable research, advancing energy efficiency, sustainable transportation, renewable energy, and energy system integration, including by leveraging the latest innovation in AI large language modeling and simulation. You saw at HPE Discover that HPE is deepening our strong partnership with NVIDIA. In June, we jointly announced NVIDIA AI Computing by HPE, a portfolio of co-developed AI solutions and joint go-to-market integrations that enable enterprises to accelerate adoption of generative AI. One of those solutions, HPE Private Cloud AI, which just became generally available yesterday, is a turnkey solution that makes it easy for enterprises of all sizes to gain an energy-efficient, fast, and flexible option for sustainably developing and deploying generative AI applications. To its adoption, HPE Private Cloud AI will be available in four modular configurations. These start with small for small model inferencing needs on NVIDIA L40 and scale up to extra large on NVIDIA Grasshopper 200s for a configuration that allows for multiple use cases running inferencing retrieval augmentation generation and large language model fine-tuning. We are offering customers two important choice points, self-managed or fully managed service with ability to purchase as a service through an operating expenditure model or as a capital expense. With three clicks and less than 30 seconds to deploy, HPE Private Cloud AI dramatically simplifies DevOps, ITOps, and FinOps for enterprise customers, allowing them to easily establish and meter their environments, monitor and observe their infrastructure and applications, and lifecycle manage all aspects of the Private Cloud AI system. And just last week, we further expanded our NVIDIA partnership by adding NVIDIA NIM agent blueprints to HP Private Cloud AI for multiple generative AI use cases. These include a digital human workflow for customer service, a generative virtual screening workflow for computer-aided drug discovery, and a PDF data extraction workflow for enterprise RAG that uses vast quantity of business data for more accurate responses. Integrating this catalog of pre-trained customizable AI workflows into our HPE Private Cloud AI stack enables customers to easily deploy key AI use cases to accelerate time to value. With a series of announcements about HPE Private Cloud AI, we are well positioned to serve our enterprise customer needs. Since the announcement less than three months ago, we have seen very high customer interest with requests for proof of concept demos exceeding our expectations. We are increasing sales resources and enabling our partner ecosystem to meet the high demands for demos. We believe HPE Private Cloud AI is going to be an important growth driver for our hybrid cloud business, and we are filing numerous patents to ensure our leadership is recognized and protected. This innovation and customer interest positions hybrid cloud well as AI is an accelerator for hybrid cloud solutions. We are on a positive trajectory with orders and we're beginning to realize returns from an ongoing investment in both our product portfolio and our specialized sales motions. There is more work to do, but we are pleased that our revenue and profitability both improved quarter over quarter. Customers require new data protocols in file and object to store and manage data to train AI applications. We expect that extending our HPE Alletra Storage software-defined offerings to these new data protocols will lead to a higher proportion of software and related services in our portfolio. We are seeing double-digit orders growth in HPE Alletra Storage and in HPE GreenLake Hybrid Cloud SaaS offerings. In just the last three months, almost 3,000 new customers begin using our HP GreenLake Cloud, and we added almost 10,000 more customers in the last year. We are pleased with the momentum we are seeing with customers who are turning to HP GreenLake. We are proud to announce a new agreement with Deloitte to utilize the HP GreenLake Cloud to help transform and centralize Deloitte's IT infrastructure, which includes AI computing. We continue to introduce new hybrid cloud offerings by adding more profitable software and services, which is clearly reflected in our AIR mix, now at 71%. For example, at the end of August, we closed our acquisition of Morpheus Data. We believe this acquisition solidifies HP's leadership position as the first vendor with a full suite of software capabilities across the hybrid cloud stack. We look forward to integrated Morpheus data, multi-cloud automation, and orchestration capabilities into our HP Greenlight Cloud Platform to complement the AI-driven multi-cloud and multi-vendor observability from HP's OpsRamp acquisition and our own organic innovation. In Intelligent Edge, we believe we are beginning a market recovery as customers finish digesting previous orders post-COVID. Revenue improved sequentially on gains in services and SASE. Momentum is building, and we saw sequential orders increase in all regions with particular strength in North America. On the products front, orders growth was led by wireless LAN, SASE, and data center networking products. Conversely, campus switching products orders have been slower to recover. Last month, we reinforced HPE Aruba Networking cyber defenses with a new AI power network detection and response and campus-based zero-trust network access. The solution leverages telemetry from HPE Aruba Networking Center's data lake to train and deploy AI models to monitor and detect unusual activity in vulnerable IoT devices, helping to support mission-critical business processes. Our security solutions are attracted to customers like Nobu Hotels, which is leveraging a secure AI power network combining the HPE Aruba Networking Central Platform and HPE Aruba Networking ClearPass to implement a zero-trust strategy. This installation will help provide secure, seamless, and hyper-personalized guest experiences, including an AI concierge, across Nobu's global footprint of luxury hotels. We are excited for what comes next with our pending Juniper networks acquisition and the comprehensive networking profile we will create. As I have said before, we expect that Juniper will be accreted to our margin profile and non-GAAP EPS in year one. The deal recently received regulatory approvals in the European Union, UK, India and several other jurisdictions and we remain on track to close in late calendar year 2024, early calendar year 2025. Plans are well underway to ensure successful integration post-close. To conclude, I am very pleased with our third quarter performance. Our impressive revenue growth reflects the strength of our portfolio and the growing excitement customers have for our newest innovations across AI network and hybrid cloud. HPE is playing a crucial role in helping customers adopt this transformative technology across their business. As we innovate, we also continue to stay disciplined in the way we manage our business and cost structure. In Q3, we deliver profitable growth for our shareholders in a competitive and dynamic environment. Next month, we look forward to hosting some of you at our incredible Wisconsin manufacturing facility, where we will build many of our industry-leading direct liquid-cooled AI systems. The work we do there plays a key role in driving the transition to direct liquid-cooled systems and the successful AI revenue conversion we saw this quarter. it will take advantage of this opportunity to experience this. Now I will hand it over to Marie to go through the segment results in greater detail. Marie?