Hewlett Packard Enterprise Company

Good afternoon and welcome to the fiscal 2025 third quarter Hewlett Packard Enterprise earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your touch-tone phone. To withdraw your question, please press star, then two. Please note that today's event is being recorded. I would now like to turn the conference over to 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 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, 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 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. Antonio and Marie will reference our earnings presentation in their prepared comments. Finally, I would like to clarify that in the discussion today, any mention of HPE Intelligent Edge will refer to HPE's prior business segment, and networking will refer to the combination of Intelligent Edge and Juniper Networks. With that, let me turn it over to Antonio.

Thank you, Paul. Good afternoon, everyone. In Q3, we delivered solid results and completed a major milestone, closing our acquisition of Juniper Networks. Together with Juniper, we will accelerate our momentum across our three strategic business pillars, networking, cloud, and AI, building a stronger, leaner, and more profitable HPE. In Q3, HPE achieved record-breaking revenue with and without Juniper. Revenue was $9.1 billion, up 18% year-over-year, fueled by strong momentum across AI, networking, and hybrid cloud. We grew revenues year-over-year across our three largest business segments. Demand was broad-based across our products and services. We increased sequential operating profit dollars in server, hybrid cloud, and both Intelligent Edge and the new combined networking segment. We also grew operating profit dollars in financial services on a year-over-year basis. The new combined networking segment accounted for nearly 50% of HPE's non-GAAP consolidated operating profit. We also improved sequential operating profit margins in server and hybrid cloud. Our improved profitability flowed through to non-GAAP diluted net earnings per share of 44 cents. Free cash flow was $790 million as we significantly lowered our inventory, driven by higher AI backlog conversion to revenue and strong supply chain execution. We continue to transform our business through Catalyst, the structural cost-saving program we announced last quarter, including enhancing operational efficiency, simplifying our portfolio, adopting AI, and optimizing our workforce. In Q3, customers continued to demonstrate strong demand for our AI portfolio. We nearly doubled our AI orders sequentially, driven by sovereign opportunities up approximately 250%. Cumulative orders since Q1 2023 for sovereign and enterprise now account for more than 50% of total AI systems net orders. We exited the quarter with record AI backlog at $3.7 billion. Marie will provide more details on the quarter and our Q4 fiscal year 2025 guide, but first I would like to provide key Q3 highlights across our business segments. I am incredibly pleased that we closed the Juniper acquisition in July. Integration is progressing well. I have been spending time with Rami and the new combined networking leadership team, which is world-class. Going forward, we will refer to the combination of our HPE Intelligent Edge segment and Juniper as our new HPE networking segment. Our vision for this segment is clear, to build the best networking business, providing customers with a modern, secure, and AI-driven networking portfolio. Rami and I will discuss our networking strategy in more detail at our upcoming securities analyst meeting in October. On the demand front, the networking market recovery continues. In enterprise, we continue to see robust demand in campus and branch, driven by the wire and wireless refresh, SASE, and data center switching. Wi-Fi 7 demand is ramping with orders up triple digits sequentially. In cloud, we see strong demand for networking for AI, particularly in data center switching and Juniper PTX routing. Revenue of $1.7 billion increased 54% year over year, driven by strong performances in both Intelligent Edge and Juniper. Intelligent Edge revenue increased 11% year over year and 8% quarter over quarter. We generated double-digit, year-over-year revenue growth in campus and branch, data center switching, automated WAN, and services. We also grew SASE and security revenue. These strong results contributed to sustained momentum in networking SaaS and support services. Operating profit for the networking segment was $360 million, up 43% year-over-year. benefiting from one month of Juniper results and operating profit dollars expansion in Intelligent Edge. Networking innovation is accelerating across the entire networking portfolio. Just last week, we introduced a new MIST agentic AI native innovations for campus and branch data center switching and automated one. These complement the new agentic AI mesh technology from our HPE Aruba networking portfolio that we announced alongside GreenLake Intelligence at the HP Discover in June. Our innovation is being noticed by the market. HPE and Juniper Networks were both recognized again as leaders in the latest 2025 Gartner Magic Quadrant for enterprise wire and wireless LAN infrastructure. Customers are already taking advantage of the power of our full HPE portfolio with inclusion of HPE Juniper Networking solutions. For example, early this year, HPE won a multi-million dollar deal with Spar Austria Group, a leading retailer in Central Europe. Spar is building out a digital business services platform underpinned by GreenLake. The full IT stack solution is designed and implemented by HPE Professional Services. It will be fully managed by HPE Managed Services and includes Aruba Switches, Juniper Firewalls, Alletra MP Storage, plus HPE Clouds Ops software, including Zerto, OpsRamp, and Morpheus. The solution will enable a cloud-native and AI-driven platform experience. Finally, with respect to integration synergies, we are reiterating at least $600 million in cost synergies over the next three years. In the server segment, market demand is robust across our portfolio. Revenue of $4.9 billion was an all-time high, increased 16% year-over-year and 21% quarter-over-quarter, driven by strong conversion of AI orders and solid demand for traditional servers. AI systems revenue of $1.6 billion was also an all-time high as we completed the delivery of a large GB200 system. Server operating margin improved sequentially, benefiting from the changes we made in pricing and discounting early in the year, which returned traditional server product margins to historical levels. This was partially offset by higher AI mix, including a large deal. As we enter Q4, we continue to expect total server operating margin to be around 10% for the quarter. AI systems orders increased nearly 100% quarter over quarter, including Middle East sovereign wins and continued traction in enterprise. We have grown enterprise AI orders year over year every quarter since the beginning of fiscal 2024. From an innovation perspective, we continue to keep pace with new accelerators technology and time-to-market customer demands. Last month, we launched HPE servers with the new NVIDIA RTX Pro 6000 Blackwell and NVIDIA Blackwell ultra-accelerated computing platforms. In traditional servers, customers are continuing to refresh aged infrastructure with more powerful, richly configured servers. As a result, revenue increased double digits year over year on mixed shift to HPE Gen 11 and Gen 12 servers. During the quarter, we expanded the Gen 12 compute portfolio to include the latest AMD fifth generation EPYC processors. The new servers include support for HP compute ops management with AI driven lifecycle management. We expect the Gen 12 adoption to accelerate through 2026. In Q3, we also released a next generation HP nonstop compute solutions for mission critical workloads. We doubled the memory capacity and doubled the system interconnect bandwidth. Finally, hybrid cloud performance was solid. Revenue of $1.5 billion increased year over year for the fourth consecutive quarter. In addition, operating profit margins were up 70 basis points and operating profit dollars increased 26% year over year. AIR increased 75% compared to Q3 2024 with inclusion of one month of Juniper results. On an organic basis, AIR increased 40% in line with our guidance of 35 to 45% CAGR. In storage, we saw robust growth in our IP product portfolio. HPE Alletra MP storage revenue increased triple digits year over year. We have now shipped more than 5,000 Alletra MP arrays to date. We continue to successfully migrate our customer install base while gaining new customer logos, resulting in a one point share gain in the most recently released IDC market share report. In Private Cloud, we continue to ramp sales of our enterprise AI factory solutions. During Q3, we added twice the number of new Private Cloud AI customers compared to Q2, with particular interest in our developer configuration. Software is a core differentiator for our GreenLake Cloud and for our Private Cloud portfolio, which is a key contributor to our AIR growth. In June, we announced our new HPE hybrid cloud ops suite software, bringing together Morpheus, VM Essentials, OpsRamp and Zerto to assist customers from hybrid cloud orchestration, virtualization and observability to continuous data protection. Our cloud software revenue in the quarter increased strong double digits year over year. At Discover Las Vegas, we unveiled GreenLake Intelligence, our framework for deploying AI agents across cloud and infrastructure to simplify customers' hybrid IT operations. We also expanded our agentic AI capabilities in OpsRamp, networking, and storage. Innovations like these continue to attract new customers to our GreenLake Cloud. In Q3, we added approximately 2,000 new customers, bringing our Greenlight Cloud customer count to approximately 44,000. In closing, as we look ahead, I am excited for HP's next chapter, the completion of our Juniper acquisition, positioned us to win in networking as the market enters a new era of IT and business transformation where AI, cloud, and networking converge. We launched a new brand for HP to reflect this potential. The brand is modern, expresses what our technology and talent make possible, and reinforces our relevance with our customers. Our vision for the company is clear, to lead in the AI era through a modern, secure, cloud-native, and AI-driven networking portfolio that accelerates our profitable growth. We are focused on executing with precision to capitalize on the growing opportunities in the market to deliver strong value to our customers and our shareholders. I look forward to providing more details about our strategy and long-term value creation framework at our securities analyst meeting on October 15 at the New York Stock Exchange. I would like now to turn it over to Marie to provide more insights into our quarterly results and full fiscal year guide. Marie.