Hewlett Packard Enterprise Company

Good afternoon and welcome to the first quarter fiscal 2025 Hewlett Packard Enterprise earnings conference 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. 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 go ahead, sir.

Good afternoon. I am Paul Glazer, Head of Investor Relations for Hewlett Packard Enterprise. I would like to welcome you to our fiscal 2025 first 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 business 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 31, 2025. 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 noted otherwise, 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 comments. With that, let me turn it over to Antonio.

Thank you, Paul. Good afternoon, everyone. Before I share my comments on our Q1 performance, I would like to start by addressing the recent decision of the Department of Justice to file a lawsuit seeking to block a proposed acquisition of Juniper Networks. The DOJ's analysis of the market is fundamentally flawed. We strongly believe this transaction will positively change the dynamics in the networking market by enhancing competition. HPE and Juniper remain fully committed to the transaction. which we expect will deliver at least $450 million in gross annual run rate synergies to shareholders within three years of the deal closing. The court has set a trial date of July 9th. We believe we have a compelling case and expect to be able to close the transaction before the end of fiscal 2025. As you know, the US administration enacted tariffs on imports from Mexico and Canada with increased tariffs on imports from China beginning March 4th. In anticipation of this decision, we have been evaluating numerous scenarios and mitigation strategies since December to assess the potential net impact. We intend to leverage our global supply chain to mitigate aspects of the expected impact with pricing adjustments also expected. pending further announcement from the U.S. administration, our outlook for the balance of the year reflects our best estimate of the net impact from this tariff policy. Marie will provide more details shortly. Turning to our Q1 performance, we delivered against our commitments for the quarter, including achieving strong double-digit year-over-year revenue growth. However, we could have executed better. While our Q1 operating profit outlook anticipated increased pressure on our server operating margins, three factors impacted our profitability more than expected. Near the end of the quarter, we saw that our traditional server pricing did not adequately account for the valuation of our inventory, which resulted in incremental server margin pressure. Higher discounts due to aggressive pricing competition in the market compounded this issue. And finally, our server margins were further pressured by the higher than normal AI inventory caused by the rapid transition of demand to next generation GPUs and related components. We have already implemented aggressive actions to address these issues and are already seeing the positive effects of doing so. However, we do expect to see continued pressure over the next one to two quarters before we realize the full benefit of these measures, including expected higher AI revenue conversion. Looking ahead, we see additional opportunities to take incremental corporate cost actions to further strengthen our financial profile. We plan to reduce our employee base 5% over the next 12 to 18 months through the reduction of approximately 2,500 positions and expected attrition. Doing so will better align our cost structure to our business mix and long-term strategy. These are not easy decisions to make as they directly affect the life of our team members. We will treat all those transitions with the highest level of care and compassion. I will touch on a few highlights from the quarter and Marie will go through each segment in greater financial detail. At the company level, we delivered revenue and diluted net earnings per share consistent with our outlook. Q1 revenue growth of 17%, a near record, was in line with our mid-teens growth expectations. This was the fourth consecutive quarter of improved year-over-year top-line growth. driven by our server business, which grew revenue 30% year over year, and hybrid cloud, which was up 11% year over year. Non-GAAP operating profit dollars in the quarter were flat year over year. That resulted in Non-GAAP diluted net earnings per share of 49 cents, consistent with our Q1 outlook range. We are pleased by the performance of Intelligent Edge, which recorded 2% quarter over quarter revenue growth the third consecutive quarter of sequential revenue growth for the segment. With the market continuing its positive path to recovery, we delivered double-digit year-over-year orders growth across all key geographies and key products, including campus switching. During the quarter, HP Aruba Networking attracted new large enterprise logos, underscoring the confidence our customers in our strategy, product portfolio, and roadmap. Hybrid cloud grew 11% year-over-year, although down sequentially, following an exceptional Q4. The growth shows our storage and Greenlight cloud product strategies are working. Demand for our Alletra storage MP was up triple digits year-over-year and now represents greater than 50% of our IP block product orders. GreenLake remains a key differentiator, enabling HP to capture new enterprise hybrid cloud and AI workloads and data. We finished Q1 with more than 41,000 enterprises using HP GreenLake Cloud. And AIR surpassed $2 billion for the first time, up 46% year over year. In AI, we continue to see strong demand from other builders and service providers. We booked $1.6 billion in new AI system orders in the quarter, bringing our cumulative AI system orders to $8.3 billion. The Blackwell GPU generation of products represented approximately 70% of our new order intake in Q1. We exited the quarter with $3.1 billion in AI systems backlog, up 29% quarter over quarter, and our pipeline remains multiples of our backlog. On the revenue front, we delivered $900 million in AI systems revenue in Q1. As we have said before, the AI systems business tends to be lumpy as large deals take time to convert. We expect significantly higher AI revenue conversion in the second half of 2025, driven by the transition to Blackwell GBUs. We're proud to have achieved a new milestone three weeks ago when we announced the shipment of our first NVIDIA GB200 systems. In the enterprise AI market, we saw an accelerated adoption of a variety of AI models, including agentic AI approaches in specific market verticals and workflows. In Q1, our enterprise AI orders increased 40% year over year, driven by higher conversion from the proof of concept phase. An example is KDDI, who in partnership with HPE designed and implemented a platform which will be used both internally and externally to develop, to train and tune Japanese generative AI models for domain specific use cases. Our enterprise AI pipeline continue to grow with customers continue to validate their use cases on our private cloud AI solution powered by GreenLake Cloud. we see broad and increased interest from sovereign customers globally. Sovereign customers are deploying both AI systems for the development of sovereign generative AI large language models and supercomputing systems for simulation and modeling using AI. Recently, the Leibniz Supercomputer Center at the Bavarian Academy of Sciences Humanities selected HPE to build their new supercomputer called Blue Lion. It features HP innovations, including our industry-first 100% fanless direct liquid cooling infrastructure with our Slingshot networking fabric. Lastly, HP and Accenture are collaborating on a new agentic AI solution for procurement, powered by Accenture AI Refinery with our Private Cloud AI offering. This new solution will be deployed across HPE's category and sourcing strategies, spend management, strategic relationship analysis, and contract obligation management. Shifting to the innovation front, I am proud of our new and differentiated products and services we continue to bring to market to fuel the success of our customers and growth of our business. For example, in Intelligent Edge, we announced new vertical solutions for retailers to accelerate security-first AI-driven networks. These solutions provide Intelligent Edge processing for IoT data in real time, improving security, operational efficiencies, and customer experiences for retailers. In hybrid cloud, last November, we introduced a new KVM-based HPE VM Essential software offerings. Hybrid cloud orchestration and on-premises infrastructure virtualizations are tremendous growth opportunities for HPE. Our new VM Essentials enables customers to deploy a more cost-effective virtualization solution than VMware with full hybrid cloud orchestration. Since its launch, we have had hundreds of customers in trials demonstrating strong market interest and excitement. We are in the process of integrating our VM essentials into our private cloud offerings. We also continue to offer it as a standalone software on HPE and multi-vendor infrastructure. In storage, we are very pleased with our triple digits year over year orders growth in our Aletra MP portfolio. This validates our strategy to provide customers a disaggregated data infrastructure with subscription-based hybrid cloud native services. Aletra MP now offers block and fast objects, supporting a variety of data workloads, including AI. This reduces customers' need for multiple infrastructure purchases and management. And finally, in our server business, two weeks ago, we launched a new ProLiant Gen12 server platform with our next generation of ILO, Quantum Resistance Security Enclave, and direct liquid cooling support. This latest generation offers the most sustainable and secure cost per computing core performance. One Gen 12 server can replace up to 26 Gen 9 servers and up to 14 Gen 10 servers. This reduces power consumption by at least 65%. In closing, in Q1, we saw continuous strong demand across the portfolio, driven by our new impressive innovations and customers' continued enthusiasm for our offerings. However, we could have executed better, particularly in our server segment. HP has a proven execution track record and we are committed to doing what is needed. We have already taken steps to improve our execution performance, and we expect our efforts will contribute to improvements in the back half of fiscal year 2025. We have made great strides at HPE in accelerating our strategy and aligning our product portfolio to market inflection points and customer needs. We will continue to make bold moves to enhance our portfolio and attract new customers in ways that accelerate value for our shareholders. Now, let me turn the call over to Marie, who will provide more details on the quarter. Marie?