Q3 2020 Hewlett Packard Enterprise Co Earnings Call
[music].
Good afternoon, and welcome to the third quarter 2020, Hewlett Packard enterprise.
My name is cold and I'll be your cropping moderator for today's call at this time, all participants will be.
It.
We'll be facilitating a question and answer session towards the end of the conference since you need assistance during the call. Please signal copper, especially if the person that starkey followed by zero.
As a reminder, this conference is being recorded for replay purposes.
Now I turn the presentation over to your host for today's call suddenly correct Senior Vice President corporate development and Investor Relations. Please proceed.
Thank you operator, and good afternoon, basically seven we track SPP corporate development and Investor Relations for Hewlett Packard Enterprise I.
I would like to lucky to our fiscal Twentytwenty third quarter earnings conference call with Antonio Neri, H.P., President and Chief Executive Officer, and Tarek, Robbiati, H.B. Executive Vice President and Chief Financial Officer.
Before handing the call over to Antonio Let me remind you that they've called is being webcast. A replay of the webcast will be made available shortly after the call approximately one year.
We posted a press release in the slide presentation accompanying today's earnings release on our H.P. Investor Relations Web page and investors Dot HP Dot com.
As always elements of his 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 assumptions for a discussion of some of these risks uncertainties and assumption. Please refer to agencies filings with the FCC, including his most recent form 10-K.
He 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 as could differ materially on me about ultimately recorded an H.B. quarterly reports on form 10-Q for the fiscal year quarter ended July 30.
First Twentytwenty also for financial information that had been expressed on a non-GAAP basis, we have provided reconciliations.
It's a comparable GAAP information on our website. Please refer to the table on slide presentation accompanying todays earnings release on our website for details throughout this conference call. All revenue growth rates unless noted otherwise are presented on a year on year basis and adjusted to exclude the impact of currency. Finally, please note that Antonio.
Provides entitled remarks, tariff will be referencing the slides and our earnings presentation throughout his 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 anybody.
[laughter], Thanks Ali and good afternoon, everyone. Thank you for joining us today and I hope everyone is staying safe and healthy.
Although I am pleased with our Q3 performance, we executed well to enable strong sequential growth across our businesses.
We gained momentum in key areas of differentiation that even by customer demand aligned to our strategy.
And we began to take decisive actions to strengthen our core financial foundation, while we continue to align resources to critical areas of growth [laughter] carbon 19 has forced fundamental changes in businesses and communities.
These changes for the validated our strategy.
Navigating through the pandemic and planning for a post covered ward has increased customer needs for also sort of us offerings secure connectivity or more work up abilities and I'm only takes to unlock insights from data.
Our solutions are aligned to these needs and we see a tremendous opportunities to help our customers transform and digitize their businesses as they continue to adopt and opened eight you know when you walk.
Let me review a few highlights from the fourth.
Total net revenue of $6.8 billion was up 14% quarter over quarter and non-GAAP operating profit was up 33% quarter over quarter.
Compute H.B.C.N. Mcs storage and intelligent edge business segments also grew sequentially.
Moving forward, we expect continued gradual performance improvement.
We made significant improvements in our supply chain execution, reducing our backlog by more than $500 million from our Q2 historical high EXL levels, which contributed to our results.
You know H.B.C. business cobbett related impacts compared to affect our customers' ability to accept the liberty of our products.
We expect to return to normalized level of backlog by the end of Q4 through continued improvements in both supply chain execution and customer acceptances.
Our people to US a service continues its strong momentum in the quarter.
Our annualized run rate revenue run rate of $520 million grew 11% year over here.
[noise] Green like services orders grew at a record of 82% year over here.
We believe this is faster than the older growth, hoping to cloud vendors and if there's a validation of a hyper strategy and competitive differentiation.
We are focused on delivering one seamless cloud experience for all applications and data no mother when they exist at the edge you know they the center in a co location or public cloud this state.
Well the older stuff now publicly the cladding plans to offer everything as a service we have been focus on this for several years and have made significant organic and inorganic investments to deliver a differentiated experience for our customers.
Our Q3 free cash flow of $924 million was up $276 million year over year.
Three of them by a record of cash flow from operations as a result of how to improve execution this quarter.
Importantly, we also declared our Q4 Q4 dividend today.
Dividends remain an important part of our capital allocation framework that consists of copper to return to shareholders and strategic investments that together to drive long term shareholder value.
Our customers out of managing through the pandemic with even greater needs for the capabilities H.B. couldn't unique can provide.
In June we put our strategy in the fall in light of dogs discover virtual expediency event, where we introduced new breakthrough innovation on a global virtual stage.
The new solutions, we introduce some for the physician that cloud isn't expedience, not the destination and that already getting traction with our customers.
We launched our next generation of H.B. Green light cloud services.
This new cloud services fund machine learning operations competitor management virtualization infrastructure as a service data protection and connectivity of service.
Now our customers can access all of our H.B. getting like cloud services via assault sort of his point and click catalog or not a H.B. getting leg central Clough portal.
Notably in Q3, we signed several of our largest H.B. getting like cloud services deals in history, including Lyondellbasell, one of the largest plastics chemicals and refining companies in the war, who sign up $27 million H.B. agree make deal to drive their digital transformation and environmental Afib.
Currency.
I'm not opinion, our customers club experience is the need for software.
That is why we introduce a new H.B.S. middle software portfolio.
Our new portfolio includes a container platform that deploys Cooper meet this a scale for a wide range of use cases on better missile and virtual machines.
Our data fabric that delivers enterprise wide global access to data from age coupled with best in class of reliability security and performance.
And machine learning operation solution that increase the speed and agility for machine learning off by open rationalizing and two in processes from pilot to production.
As well as I see operations and automation seemed pretty productivity and mitigate risk of service disruption.
You know they show it enables our customers to control cost and compliance across their hybrid cloud the state through our managed cloud controls capabilities built into the portfolio.
H.B. as middle can be consumed as a license or parts of our H.B. Greenlight cloud services offerings.
And just few weeks ago as a strong endorsement of our strategy and capabilities, we announced plans to product, where they say P to deliver the customer addition of Sep Hana enterprise cloud with H.B. Greenlight cloud services.
These new should these new joint solution will help customers leverage our cloud capabilities, while keeping the asap workloads and data on premises.
At the same time, we continue to strengthen our core capabilities, new storage and compute which are essential to resources to store and process customers data.
Every 60 seconds, we ship 46, terabyte, so storage and for servers.
Despite the challenging market that impacted our storage performance overall in Q3, we saw sequential improvement of 4%.
And importantly, we gained traction and grew in key areas of investment.
Big data storage, which is built on unique intellectual property for a matter of my part acquisition to enable real time analytics for mission critical Big data one of those.
We do revenues, 31% year over here.
Nimble distributed H.C. I knew hyper converged solution for business critical applications and mix were loads of scale grew revenue at 112% year over here.
In a great example of out organic innovation is H.B. prime into our most intelligent store. This platform grew revenues, 114% year over here.
H.B., but I made a gain hundred four new logos this quarter, we merely a quarter of those are being new to H.B. storage.
We saw strong sequential amenta with H.B.C. a mission critical systems that grew 10%, including a 10 year deal of $125 million with University of and the birth in Scotland.
Who chose H.B. to power the and the board International data facility without industry, leading HPC Nei solutions.
And finally, we had a very solid quarter in compute with 29% quarter over quarter growth.
Driven by the reduction in backlog and customer demand in video virtual desktop infrastructure solutions.
For example, at Asmussen University Medical Center in the Netherlands wanted to upgrade is VDI and vitamin for lifecycle management needs and to prepare for future waves or call. The 19.
We introduced a company Composable hyper converged infrastructure solution base on the H.B. synergy along with H.B. permit us to meet their needs.
Our intelligent edge business perform in line with a market in Q3, we continue to see the edge as a significant opportunity over the long term.
The explosion of data devices and application will drive demand for secure multiprotocol connectivity analytics and cloud computing capabilities at the edge, especially in the past coffee to work.
We have enough. We are now entering the age of insights driven by the amount of data we are generating and the utilization a few analytic tools such machine learning and artificial intelligence technologies.
Customers look into Paul what our new breed of applications and workloads that work in concert with cloud.
Analyze it crosses data at the edge.
To enable this new customer needs, we introduced the Aruba edge services platform or robot SP. The industry first AI power cloud platform designed for to unify ultamate insecurity edge.
The other about E S being combines AI ups I do about zero prosecutor D and a unified infrastructure with financial and consumption flexibility.
And we're seeing early customer adoption.
Noble hospitality I'll look certainly lifestyle brand is standardizing on Aruba edge services platform as the age class Foundation for the hotel chain.
The ability to generate actionable analytics, whether they taste created and deliver a new on property experiences for gas was critical to their position.
We also announced our plans to acquire a SD Wan neither silver peak.
Silver peaks advanced is the one offerings strengthened our robot SP and complements our robust existing work from home and branch office solutions deliver one of the Industrys. Most comprehensive portfolio is designed to securely connect any edge to any cloud.
The combination which is expected to close in Q4 of this fiscal year will allow enterprise customers to simplify their branch office and one deployments to empower emotive workforces and able cloud native deployments and transform business operations without compromising quality auto liability.
This is a great example of accelerating our strategy, while maintaining a disciplined approach to capital allocation.
Building on on our Fiveg core stack launched in March we introduced a new telco edge Orchestrator solution for telecom operator.
These new solution provides revenue opportunities for telecom in the enterprise market with Wunderlich deployment of applications or the edge of the new Fiveg networks.
We obviously have been positive feedback on our Fiveg offerings. For example, we announce any novitas technical demonstration of an ultimatum virtual Fiveg network conductive with the French telecom operator Orange.
And telco infrastructure solutions provider cows assistant.
The Devil highlights the expand the use cases and service agility needed to support Fiveg business applications, including location based telemetry.
Aiotv edge computing and more than what is quite low latency.
Our ability to innovate for our customers is made possible by strong financial management that strengthen our core financial foundation and allows us to align resources to the most critical areas.
As we exited Q2, you will recall that we took a number of decisive and for that actions to manage our business through the evolving impacts of coffee 19.
These include the several short term initiatives to reduce operating expenses and drive efficiencies as well as the introduction of a long term cost optimization and prioritization plan designed to us a very sustainable profitable growth.
We remain on track to deliver the annualized net run rate savings of at least $800 million by the end of fiscal year 22.
Even by optimizing our workplace site strategy, simplifying our product portfolio and introducing new digital customer engagement models.
These efforts backed by our diversified portfolio robust balance sheets and investment grade credit rating will allow us to continue to invest in key growth areas.
In closing I am proud of our Q3 performance and I am proud of our HBT. Our team members have been steadfast partners for our customers through an unprecedented period.
They have moved quickly to other is rapidly evolving market conditions.
They have innovated with our customers in mind.
They have made personal sacrifices to invest in our company's future.
They have passionately committed to help HB play a role in shaping up more equitable and inclusive society.
And they have done all of this while managing the challenges of living through a global pandemic.
Furthermore, simply my entropy colleagues have us represented our values leave our culture and deliver on our purpose to advance the way people live and work.
As a result of the airports H.B. stronger and better able to serve our customers partners and communities in a world that's for ever have changed.
While we continue to navigate through the global pandemic, a macro uncertainty we are cautiously optimistic that we'll see gradual quarter over quarter performance improvement going forward.
This is why we are providing guidance for fiscal year 20, non-GAAP EPS with tadic will discuss.
Well look forward to senior virtually other security analysts meeting on October 15, where we will provide more details about our long term plans and with that let me turn it over to tadic sort of view the quarter's results.
Thank you very much Antonio I'll start with a summary of our financial results for the third quarter of fiscal year 2020.
As usual I'll be referencing the slides from our earnings presentation.
Highlight our performance in the quarter.
Oh, So let me remind you that since the start of the fiscal year. We are reporting results. According to our new segmentation.
I'm talking to discuss the key highlights for this quarter on slide four.
Now, let me discuss our financial performance starting with slide five.
Q3 was characterized by strong execution driving sequential growth.
We delivered Q3 revenues of $6.8 billion up 14% sequentially and down 4% from prior year period.
I'm, especially pleased to report that we have made significant progress in clearing our backlog by more than $500 million during the quarter.
We expect a return to normalized backlog levels as we exit Q4 twentytwenty.
As a result, we have grown non-GAAP gross profit by 8% sequentially to $2.1 billion in Q3.
Non-GAAP gross margins or 30.4% this quarter.
160 basis points sequentially, driven by a higher mix of compute as we executed against our backlog from prior quarters.
Normalizing for the effect of backlog, both our compute and storage business segments grew gross margin on a sequential basis.
Our non-GAAP operating profit was up 33% sequentially, resulting in a 7.1% operating margin.
And our non-GAAP EPS of 32 cents was up 45% sequentially.
Our GAAP EPS was one cents.
As we accelerated our transformation program and incurred restructuring costs.
Q3 cash flow from operations was approximately $1.5 billion driven by strong operational execution.
Free cash flow was $924 million up $276 million from the prior year period, driven primarily by favorable working capital movements that I will detail later.
Finally, we paid $154 million of dividends in the quarter and our declaring a Q4 dividend today of 12 cents per share payable October seven twentytwenty.
Let's move to slide six which shows our performance in the quarter by segment.
Here are the highlights.
In the intelligent edge segment, we grew revenues, 3% quarter over quarter inline with the market.
While wireless Lan decline single digit sequentially, we grew the camper switching business, 12% quarter over quarter.
In North America, our largest geo revenue grew 4% quarter over quarter, demonstrating our continued momentum.
Operating margin in Q3 was 8.6%.
Down 240 basis points quarter over quarter impacted primarily by higher logistics and duties costs in this current environment.
In compute revenue grew 29% quarter over quarter, as we executed against the backlog and improved our supply chain execution.
Not only did units grow strong double digits sequentially.
Uhhuh P. grew 3% quarter quarter as well.
The increased operating leverage in this segment resulted in an operating profit margin of 8.5% up 380 basis points quarter over quarter.
In high performance compute and mission critical systems revenue grew 10% quarter over quarter, driven by strong performance in edge compute HPC, Apollo and Mcs up sequentially, 82%, 16% and 2% respectively.
We expect to see sequential momentum next quarter, driven by increased customer acceptance for HPC, Mcs and Cray as we execute against the order book or across the portfolio.
Most importantly, Cray remains on track to deliver both on his F. why 20 revenue targets and triple digit run rate synergies by the end of fiscal year 21.
Within storage, we grew revenue, 4% quarter over quarter, driven by strong operational execution across the segment portfolio of products and reduction of backlog to normalized levels.
With respect to point next operational services, which is included across our compute HPC Mcs and storage segments total revenue was down 2%, while orders grew 1% on a sequential basis.
Additionally, our services intensity, which is the ratio of attach revenue per hardware units sold continued to be strong with solid double digit growth on a sequential basis across all segments compute storage and HPC Mcs.
This demonstrates that the underlying profitability over the units, we sell and the attach rates continue to be robust.
In advisory and professional services revenue was down 4% sequentially as scope it impacted consulting activity and the charger busy levels of our stuff.
This business is strategically important for us as it helps customers navigate through their digital transformation and also pull through significant infrastructure and operational services orders.
Within each be financial services financing volume was up 1% quarter over quarter. Despite the impact of covert 19, and our net portfolio of assets was up 4% this quarter driven primarily by FX movements.
We maintained a solid return on equity of approximately 13% this quarter.
Our bad debt loss ratio this quarter was 74 basis points.
Which was slightly higher than previous quarters is still best in class within this industry.
I'm, particularly pleased by the collection performance in H., BFS, which attests to the quality of the book and the H. PFS franchise overall.
I will come back to that later on.
Our communications and media solutions business that is included in our corporate investment segment is strategically important to us providing software and services capabilities to telco service providers.
Revenue was down 4% sequentially due to first half slowdown in services bookings.
However, due to our improved cost of delivery, we're able to expand operating margins by 30 basis points quarter over quarter.
We continue to make good progress in our Fiveg core strategy that provides multivendor integration and true cloud native telco networks functions.
Slide seven shows our growing air our profile, which I introduced at our Securities Analyst meeting in October 2019.
I am very pleased to report that our Q3 20 air our came in at $528 million, representing 11% year over year growth.
Green like service orders were up 82% year over year in constant currency driven by outstanding performance in North America, which delivered five ex year over year growth.
Oh, HP Aruba Central SaaS platform continue to grow revenues strong double digits year over year as well.
Based on strong customer demand I am confident to reiterate our air our growth guidance of 30% to 40% CAGR from fiscal year 19 to fiscal year 22.
Slide eight highlights our EPS performance to date.
Non-GAAP diluted net earnings per share was 32 cents in Q3 up 45% sequentially from Q2, driven by improved operating leverage cost control and lower Oh I any expenses.
We now expect fiscal year, 20, or I need to be significantly less than our 100 million dollar expense guidance provided at Sam 2019, driven by higher earnings from equity interest in HPC and better cost of debt, resulting from our balance sheet funding diversification strategy that I will elaborate.
Great further on.
Turning to gross margin on slide nine and as I mentioned previously non-GAAP gross profit was up 8% sequentially due to improved operating leverage.
At 30.4% our revenues our gross margin was down 160 basis points quarter over quarter, driven by higher mix of compute as we executed against our elevated backlog from the prior quarter.
Most importantly, and normalizing for the effect of backlog, both compute and storage business segments grew gross margins on a sequential basis.
Moving to slide 10, non-GAAP operating margin was 7.1% in Q3, our fiscal year 20, and non-GAAP operating income of $484 million was up 33% quarter over quarter.
A combination of improved operating leverage and disciplined cost controls enabled us to improve profitability on a sequential basis.
Last quarter, let me say this will refresh and by proactively announcing ahead of other industry players a cost optimization and privatization plan that would deliver annualized net run rate savings of at least $800 million by the end of fiscal year 22.
We are making excellent progress there and are very much on track to emerge stronger in the postcode world.
The actions, we outlined as part of that plan to transform our core by optimizing our cost structure and aligning our resources through deep segmentation to key growth areas are now clearly starting to bear fruit.
Turning to slide 11, we generated cash flow from operations of approximately $1.5 billion.
This is the highest level for the past 11 quarters as we improved our operational execution.
Free cash flow was $924 million for the quarter driven by timing of working capital movements that resulted in favorability in Q3.
Overall, we saw an improvement in our cash conversion cycle from minus five days in the prior quarter to minus 10 days this quarter.
For Q4, we expect free cash flow to be sequentially lower mainly due to two reasons.
Number one working capital will be use of cash and number two higher restructuring payments related to our core transformation plan, we announced in Q2.
As you recall during the lock down we discussed our company exposure by industry vertical and company size and explained in detail that our business is highly resilient.
As a proof point I would like to highlight the performance of our credit collection teams in both our operating company and in H. PFS.
Thanks to their contribution during the quarter the level of our a are that is current.
Is that a record high of 99.5%, which a test of the strength of the HP business and the quality of our franchise.
Now moving onto slide 12, I want to spend a moment to talk about the strength of our diversified balance sheet and liquidity position and provide some insight on the puts and takes on forthcoming adjustments to our cash and debt positions.
As a far 31st off July quarter end, we had approximately $8.5 billion off cash and cash equivalents, having successfully raised $1.75 billion in senior notes in July 2020 at the low cost of debt.
Post the quarter end, we redeem $3 billion of bonds maturing in October 2020.
Together with an undrawn revolving credit facility, our 4.75 billion at our disposal. We currently have approximately $10.3 billion of liquidity. After the redemption of the notes maturing in October 2020.
Additionally, we expect to pay $925 million cash when we complete the proposed acquisition of silver peak, which is expected to close in Q4, our fiscal year 20.
Adjusted for these known changes are Apco gross debt would be lower by 3 billion to approximately $4.4 billion and our Opco cash will also be lower by 3.9 billion to approximately $4 billion, resulting in an opco net debt of approximately $400 million.
Separately, we have securitize, some financial services related debt through the ABS market in the U.S. and as of July 31st quarter end, we have approximately $2.1 billion in outstanding ABS issuances.
The refinancing of higher cost.
Unsecured debt with ABS financing allows us to boost access to financing markets at cheaper cost of capital, which helps diversify our balance sheet and lower interest expense payments in the future.
Finally, I would like to reiterate that we remain committed to maintaining our investment grade credit rating, which was reaffirmed by the rating agencies in July 2020.
Bottom line, we have a strong cash position and ample liquidity available to run our operations continue to invest in our business and execute on our strategy.
Now turning to outlook on slide 13.
Given the progress made in our operations. We are now in a position to provide guidance on fiscal year 20 bps.
We expect you're finished fiscal year 20, with non-GAAP diluted net earnings per share offer dollarsthirty two or $1.34.
And we expect our fiscal year 20, GAAP diluted net loss per share to be between 35 and 31 cents.
Let me recap our key takeaways for this quarter on slide 14.
We delivered strong sequential improvement in top and bottom line and significantly improved operational and supply chain execution.
We also accelerated our as a service pivot with very strong momentum and they are our and and records green like services order growth.
We're taking actions to strengthen our financial foundation and align resources to critical areas to transform our core and drive sustainable profitable growth.
At this stage given all of this we expect gradual sequential performance improvement moving forward.
In Q3, we paid $154 million in dividends to shareholders. We recognize the dividends are an important part of our capital allocation framework and returns to shareholders and today, we're very pleased to declare Q4 dividend of 12 cents per share.
Mobile on October 720, 20.
On a personal note I'd like to Echo Antonius comments, we are both very proud of the way our company and team members quickly and decisively responded to the unprecedented challenges at the global covert 19 pandemic has caused.
As Antonio mentioned, we look forward to having you join us at our virtual Securities Analyst meeting on October 15th where we will provide an update on our strategy financial outlook and capital management policy.
Now with that let's open it up for questions. Thank you.
We will now all right. Thank you Scott actually specialists.
Yes. Good question you May Press Star then one in your telephone keypad.
Anything and speakerphone, please pick up your hands at the corporate indicates.
It was draw your question. Please press Star then too.
We also request the earlier one question and one follow up question.
My first question today will come from Shannon Cross with Cross Research. Please go ahead.
Okay.
Thank you very much.
And Tony can you talk a bit about what customers are telling you maybe on a geographic basis or looking at your segments.
About.
What they're looking to invest in how they're feeling about I T budget and clearly somebody other large cap that company has come under pressure.
I'm I'm curious is too.
Sort of the spending that that you're hearing from from customers in the channel.
To the next couple of quarters, and then I've a follow up thank you.
Yes, Thank you Shannon.
So I spent a probably 50% of my time talking to customers and partners. So I have a pretty good inside of what we see in the market.
What we see it right now first of all and I made this comment in my remarks, we stated amount and obviously they are areas, which are stronger than others, but the general sense is as follows first of all.
They are looking to strengthen their operations and that affordable ITD plays a huge role with that and IP resiliency is more important never saw anything that comes with security and enables them to digitize. The processes is is is is on the on on the growth side.
Second is obviously they have a lot of data and the need to get inside from the data and we see an acceleration of solutions related to AI and machine learning and that's why our big data storage. So another great solid performance.
But obviously ml ops and that's why we introduce an offer without each beginning late cloud services around machine learning operations is a high demand.
Obviously as we link will look cut the the workforce and you know I think they are.
Permanent a lasting changes to how we're going to work in the future.
Remote connectivity is essential.
Thats why im so excited about the Acquisitional silver peak, because together with the robot services platform give us now the ability to provide connectivity for all the edges and the edge now is your home office right I concealed that that Michael branch to any clouds, and obviously there are multiple clouds, because as a hybrid.
Strategy, and then anything up reserves.
You know capex.
It is also high demand and thus, while we see significant momentum without HB agree Lake cloud services, because that's a through.
Conceived as a service offering.
And so obviously you know that's a that's in transition what I would see what were season is a transition period, but I'll say the enterprise has been steady obviously SMB is is a challenge from the customer segmentation perspective is a challenge when I look at the verticals I think the.
Financial sector.
Where do you play is still very solid.
And the manufacturing side as well indication, obviously now is going to be very for them and then the public sector. The public sector is very strong and obviously, we have a unique portfolio there with our HPC Nei solutions, but also around storage as well so that's the general theme.
China, we see on this for the time.
In terms of by Jets, obviously.
You know they are assessing what the happens in context of.
They're on revenues and profit from what I will say the enterprise, which is where we participate the most is fairly steady and that's why tadic meant we have a very diversify and resilient portfolio, both by customer segment and by solution.
Okay. That's helpful. And then maybe just looking at compute obviously, you had benefit from the backlog, but underlying all of that.
Pricing competition component costs, I think you said that revenue without even net of the backlogs. That's element. So if you just talk a bit about some of the underlying trends you're seeing there. Thank you.
Sure.
The computer business perform really well 29%.
Sequentially, and 1% euros here and the within a very good job in reducing the backlog there's still some but that's why we feel very confident that weekend.
Totally get back to the historical levels by the end of Q4, we grew sequentially double digits is units and ERP, 3%. If you recall commodity costs has been inflationary.
In the first part to the year and we took 'em quite significant actions on pricey.
And that's why are you piece went up because of pricing, but also because of the structural changes we continue to see.
In the up in that type of products, you know I mentioned in how we ship 46 terabyte self storage and that's not just storage in a traditional storage platform. It goes with it compute right and for servers.
Think of so think about going forward, obviously, we'll continue to be but a disciplined pricing.
In terms of commodity costs, but in particular deal Rob we start seeing some declines honestly the curve is pointing downwards.
But as I've said before and we live this in 2018 right when prices go up.
Well cost goes up prices go up faster than when they come with the costs go down it takes longer but ultimately the next generation compute platform will drive even more richer configurations, because there will be more.
You know more per gigabyte per unit that will be attached to it and so thats why we felt we filled a you know good about where we are today, but that's what we're seeing computerized filled very competitive theres no question about it.
The demand is shifting out between enterprise for the sector and obviously the service provider segment.
Our next question will come from Wamsi Mohan with Bank of America. Please go ahead.
Yes. Thank you Antonio Thanks for those comments around or on compute but I was also wondering.
You know clearly backlog.
Conversion was helped by a great deal within within the quarter's performance on on compute but you also showed.
Growth in computed on a year on year basis. After effort, we're a long time.
How are you thinking about assist sustainability, not just sort of going one quarter out, but just more sustainability across the next several quarters in terms of compute growth and if you could also comment on the deterioration and growth in edge that would be helpful and I've a follow up for Tarek.
Sure I mean.
No as I said before everything in a life computes, which means compute is embedded everywhere not just in a server.
And a lot of our sort us platform is basically a compute platform with a with softer right big data storage is a great example of that.
It is on Apollo platform that runs our our AI softer or on it.
You know you know, it's hard to predict exactly what's going to happen there, but we saw stated amount again, we obviously have relocated resources, particularly in our go to market will we see the growth opportunity.
As well and we'll continue to drive what are the focus is in no particular, Nato's like VDI, which is in essence is a computer products.
With a bunch of software.
For additional compute for say you know in general purpose a warlords those a you know those are obviously have been.
Kind of weaken it overtime at been declining, but overall I think a combination of Oh piece pricing, obviously action and Richard configuration, we should maintain a level of stability at this point in time consume the 2002 enables fairly depressed overall internal the edge.
We believe we grew in line with the market you know if I look at.
Our competitors, what they announced you know I think is in line with a market.
But we saw strength aesthetic said in switching which was up sequentially, 12%, obviously, but continues to seize quite the b the strength in our subscription based model with a robust platform and also we so quite will be the strength as well on the.
The the solutions around we provide particular multiple work solutions that are more connectivity.
Enough for US this is a business that the long term future. The pieces is totally intact. The superior acquisition will obviously arcelor right the growth of.
Robot going forward as well.
Okay. Thanks, Antonio and Tarek you noted in your comments the seasonality in Q4 and free cash flow that it wouldn't be up seasonally it would be down can you help us think true where in working capital you see the headwinds in fourq use it on the inventory side, we significantly improved here in the clinic.
Water and and what sort of magnitude of restructuring we should expect in Fourq you as well. Thank you.
Okay. All thank you obviously for the question. So let me start by answering that.
Latter part of your question on the magnitude of the restructuring its a pretty much in line with the guidance. We gave you in Q2 for fiscal year $23 million to $400 million is a cost we would incur further restructuring.
Now back to the.
The.
First part of your question with respect to free cash flow.
Free cash flow was exceptionally strong in.
Q3, as we work through the backlog right. So this has been very very solid.
And particularly we were able to.
Work through the backlog and improve the cash conversion cycle.
Also we benefited from temporary favorable timing of working capital.
And that component will reverse in Q4.
And so in Q4 like I mentioned in my script expects free cash flow to be lower than Q3, as a result of too.
Components, one is the restructuring costs.
And number two the working capital changes and specifically.
If you want.
Little bit more guidance as to where in working capital. The change will calm is predominantly in payables that you will see a change that will be adverse to the generation of free cash flow.
I think theres another piece of this onesy, maybe tell you want to comment about the inventories side of the house because we believe that is a lot of flu the fluid the liquidity there. It's very fluid and also they are some opportunities you know Shannon asked that question.
So we're going to play a market based on what we'll see.
Opportunity for us.
And therefore this in the end is comes out until really timing. The bottom line is timing yeah. That's absolutely right. So one of the reasons why you May Wonder why we don't guide on free cash flow as though we guide on MPS is because we do see opportunities that are available to us.
To take advantage off from an inventory position standpoint, and we want to retain the flexibility to be able to capitalize on those having said that.
We do expect positive cash flow in Q4 lower than Q3 for the reasons that I mentioned.
Our next question will come from Kate.
Next question will come from Katy Huberty with Morgan Stanley. Please go ahead.
Thank you. Good afternoon can you put context around that 500 million of backlog worked down this quarter as it relates to the overall size of excess backlog exiting April and then as a as a follow up you talked about the they're really strong gross and in Green Lake.
And customers shifting to Opex models, but a our our growth did decelerate.
Maybe talk through the factors that will get you back to that 30, 40% to 40% growth target and what the timeline looks like in terms of.
Hitting that growth profile. Thank you.
Sure. So thank you Kt and I I'm sure you will all be normalizing.
For backlog on every aspect of our business. So I want to take the opportunity to clarify this and leaving no shadows for doubt. So as you recall in Q2, we said, we exited with executable backlog in excess of $1.5 billion, which was too.
Ex the level that we would normally see in our operations.
So essentially 750 million above the level that we normally have in our business.
We reduced that 750 million by 500 million in Q3. The rest we believe we can reduce by Q4.
So even if you normalize for the $500 million I'll, let you do all those calculations.
You will see that the underlying revenue performance Q3 on Q2 is better.
And also if you really ask where did that backlog.
Ah gets reduced in which segment in particular, it was mainly compute and a tiny bit in storage, that's where the 500 million come from and even if you look at compute back onto Wamsi questions before and you normalize for the reduction in backlog.
There you will observe that came viewed was growing sequentially. Even after the normalization. We also want to underscore the fact that the backlog reduction or hides a little bit what happens at the gross margin level right. It's very difficult for you to see this at your end, but we did both of us.
Reiterate the fact that with the pricing actions, we have taken and once you normalize for backlog, both compute and storage so their underlying gross margins going up and this is partly the reason why we've done so while I in growing our gross profit 8% sequentially.
In the year, so that hopefully answers the backlog question or part of your question on Green Lake, It's true that you're saying that.
Q on Q, the A.R.R. decelerated, but the practical reality is where you look at the lead indicators that make the R.R. is the order growth.
The order growth that we've had in Q3, it's the record.
I record levels, we didnt experienced an 82% order growth in Green Lake and we feel very good about this order growth because we're seeing bigger deals with larger companies and the companies that Antonio quoted are not small companies are typically start a with a little spend that is.
Arguable on their infrastructure. These are bigger companies that are considering as a service consumption as a new way to handle their expenditures San Antonio maybe we'd like to add to that no actually I will say a couple of things to that comment on the backlog Katy I mean.
This is product shipped right.
Not all that product was totally recognizable in the quarter, particularly in HPC because if you know if you remember right in the HPC segment, we got to ship. It we have to install it we'd have to turn of on and we have to run the test and only and only when the customer.
Signs up for the acceptance than we can recognize revenue and that's why we're still have.
Quite an interesting opportunity in Q4 with HPC particular, but in compute once you're shipping you'll recognize it.
So overall very pleased with that but even when you factor the backlog out.
We actually grew.
Sequentially on net new orders and the net new orders two topics point came at a higher margins because all of our pricing actions. The problem as the backlog was kind of dilutive to the margins because we price protect our customers, obviously and we stand on that commitment and also the channel right on there.
Getting Lake I mean, this is an amazing performance.
As I said in my commentary I think is we believe I believe is faster growth in any cloud out there and the and it has a really comes down to the ability to provide a hybrid experience.
Our customers, telling us they don't want to be in the wrong cyber house anymore, but they understand they have to have ups and later everywhere, 70% of the ups and data still on Prem by the way and more ups and data are moving to the edge, but ultimately even into have ups and maintenance public cloud. They liked degree late because it provides them there.
Cost control the manage aspect of it and we can parameter for them in a truly hybrid approach and when they keep the ups and later on Prem we give them the exact same consumption model or whether they move at the edge and our value proposition is resonating more and more.
Because the war this hybrid cloud isn't experience and obviously our software capabilities. They are playing a huge roll together with our innovation on the business model side and obviously the financing. So that's what we see and they will take care of itself. Because obviously, there's puts and takes because remember that is a consumption driven metric.
And as we go forward, we're very very confident to hit the 30% to 40%.
Next question will come from Tony Second argue with Bernstein. Please go ahead.
Yes. Thank you I just wanted to revisit this question of demand trends and how backlog can impact. It. So the way that I think of it is last quarter you built backlog. So you didnt ship $500 million worth of stuff that you should have shipped and so if I had.
Just for that last quarter should have been $500 million higher and this quarter or you actually shipped and recognized 500 million and so this quarter.
Adjusting for backlog should be $500 million lower so if I look at that year over year revenue ex the 500 million boost in backlog is down 13%, but more importantly sequentially. If I make those two adjustments revenue was actually down about 3% sequentially what should be a reflection of.
Orders, if I make the backlog adjustment and that's below normal seasonal and so a is that incorrect that analysis and be I'd like to understand.
Why that wouldn't point to the fact that the order rate actually might be getting a little worse, rather than getting a little better and I have a follow up place.
Yes, certainly highest sorry care. So your math is is right, but operationally things are slightly different and meaning.
If you normalized Q3 performance for the 500 million, yes, you get to $6.3 billion, but it's not entirely operationally correct to add the 500 million into Q2, because as part of the backlog you do have orders that ship in quarter, but are not invoiced you do have all sorts of different effects that come into play that.
Store that picture. So there is a limits to the normalization math that we can give the simple point is it's all about timing look if it's all about timing. This revenue should have materialized in fiscal year 28 is materializing in fiscal year 20, and we're back to normalized levels of backlog by the end of fiscal year 20.
We have taken $500 million of backlog down there is another you've done the math to 50 to go. There is also another aspect that Antonio underscored before in HPC Mcs is very very important for all of your to understand and is a following you know in specifically for that segment, it's slightly different than other segments because.
As these systems are super sophisticated and even if we shipped and land the system on customer premise as before we can actually invoice the customer there is a a technical acceptance process that takes place that delays our ability to invoice the customer and so that is also fundamentally changing.
The trajectory of HPC Mcs, and we see very very strong order demand in the public sector, which underpins the HPC MCR segment, and you will see the fruits of that in the foreseeable quarters. The conclusion of it is.
Whatever happens in on backlog isn't that provide 20 phenomenon driven by coated.
And they were essentially in Q1, the fact that we had a you remember component shortages or the whole industry experience. Those this translated into Q2 into manufacturing closures were manufacturing was not at the full level and then you know now this issue has morphed into being.
Specifically for each BCMC asset customer acceptance issue. So all in all what matters is that the revenue of fiscal year 20 is actually the same if you factor into the equation. The fact that we will reduce the backlog we generated and we saw elevated at the end of Q2 will turn.
That into revenue by the end of Q4 infill.
Yeah, I think Tommy there the other parties that will reduce the backlog by 500 million, but now all of that translated in Q3, because again the HPC side of this as it takes sometimes take weeks. Some Texan month, you know we have installations, which are very large it takes many many weeks and other.
This is a global and then make the carve it is not allowing us to have a lower people on side for cable and all that as well and even if we ship and in many cases, depending on the timing on the kind of more than normal type of products. We may have a shift and those invoice, which basically up from the supply chain it will stay.
Taking care of but enough from they had revenue of recognition perspective that type of situation gets resolved generally speaking with and a handful of weeks on HPC it depends customer by customer, but the point on HPC is very strong and obviously, we have a go forward with about a month of business, which is very soon.
Sizable for us and that's a that's very good.
So thank you for that if I could just quickly follow up so if if order rates are steady and you still have 250 million plus in backlog given HPC should we be modeling normal seasonality, which is up maybe a couple of hundred million sequentially, plus 250 to 300 million from backlog pushout us that isn't it.
The little literal interpretation of what you're suggesting.
And then just on a.
On the compute margins they were down 440 basis points year over year. Despite.
Flat volumes is that is that really the impact of the rising component prices and should we expect that to reverse pretty sharply as a result over the next couple of quarters as you pass through price increases. Thank you.
Okay. So I'd say in in simple terms that you want them. All this with a seasonality factors that you've outlined that is.
Potentially correct the only major shifts here is this.
The to the tide has come down across the industry.
And it's not just for us, but overall the level of demand is not going to be very quickly resuming through the levels. We witness in fiscal year 19. So the year over year compares that you're seeing are less and less meaningful and what matters more is what happens on a sequential basis. This is why we are accentuating, where we are.
Our recovering from Q2 into Q3, and our Q4 with the dynamics that Antonio mentioned, a with respect to HPC Mcs and customer acceptances, Tony I apologize would you repeat the second part of your question I'm not sure I remember it I think it just compute margins year over year down for 40 and does that imply.
So for US as you pass along to ramp pricing.
Yes. The answer is yes, Tony that is correct, we've taken pricing actions and as Antonio said in this situation. We've lived those before in 2018.
As we raise prices the margin expands and the commodity cost take longer to normalize or to revert back into a position when margins are deteriorating and so we do believe that at least in the short term if the DRAM pressure continues we will see margin expansion and can view and they all do you guys had told me too.
Throughout the first part is that we feel confident that we'll continue to see.
You know performance improvement as we go forward on a sequential basis question is by how much but the reality is about timing is about all this things that we just cover you know converts in orders and ultimately be able to recognize revenue, but at this time.
My earlier comments, what we expect continued sequential performance improvement as we move forward.
And our next question will come from Rod Hall with Goldman Sachs.
[music].
Yes. Thanks for the question I'll make a quick because you're done into the Albert Your I wanted to out back on compute I think Carrick you'd said to use are up 3% sequentially could you say what that is year over year on used for compute.
And then I'll just give you my follow up now so you don't have to come back to it did you just comment maybe Antonio work, Eric on visibility that you got right now on demand.
Given your little bit better commentary on demand than what we've heard from some other big airport price players. Thanks.
Sure. Thanks for the question, so I'll say in computes units grew 36% quarter on quarter.
Our 80 you'd be a upi grew 3% quarter on quarter I know you want to you'd be on a year over year basis, I don't that have that handy with you I can follow up and let you know what the answer is and the IR team will do that.
And the second part of your question is if certain parts of the question is about the demand visibility.
Hi, this is adding all depends by customer segment depend by offer ultimately what I see at this point in time is being steady.
But the reality is that they are it is a stronger and the other there's a weaker but I think a points the diversification of our portfolio. We have a unique portfolio and that's why we have a unique strategy to become the up on page four to cloud and I think you know as I think about that obviously there is a lot of opportunities, particularly as we continue to.
People the company with a more software and services oriented type of offers and you can see even in Q3 some of the strength with big data storage you know our primary which is a softer in essence is softer offering based on infosight up over 100%. So these are the things that will continue to drive growth and if we can sustain.
During the question was asking about the compute momentum then you get it done that continued improvement, which we believe will be the case, but HPC plays a huge role for us.
Let me be clear about HPC I am very bullish about that business.
And Rob let me follow up on the a upi questions on a year over year basis on a year over year basis units grew 3% and a new fee was down 2% that is the answer your we're looking for and visibility look in simple terms, it's better than in Q2 and that's the reason why we provide guidance if we didnt have a.
A confidence we wouldn't be providing guidance, if visibility or to be too low or too uncertain for us to do so.
Your final question Jay will come from.
Serianni with Evercore. Please go ahead.
Thanks, guys.
Correct.
Talk or a fairly impressive I think 100 basis points op margin uptick you guys saw sequentially when it kind of break it up it looks like gross margins were down 170 basis point and maybe more than made up for that and as Steve R&D curtailment, whose maybe talk about forced on gross margin decline was that all mix over the other fee.
Factors involved in it that would be helpful. And then the Opex run rate you have today is this a steady state number we could think about as we go forward or was there more one off things that help you curtail it. Thank you.
Hi, Thank you I made for the question. So yes. Your observation is right at the gross margin went down 160 basis points.
As highlighted in our announcement and we more than made that.
I'd Ob margin level, where the op margin at 7.1%.
So what's driving that on the gross add the gross margin level is purely to mix, we add more compute revenue at lower margin. It's a mix issue. We did also articulate the fact that if you normalize for backlog, which did have an impact on gross margins both in compute and storage our gross margins would be up.
But also what you can see at LP margin is the fact that we are starting to take cost out and we are incurring restructuring cost as a result of this I want to take the opportunity to remind everyone about our cost optimization and privatization plan that we announced in Q2, we took.
Proactive steps to sanction our financial profile, we're I would say I'm I think.
Pride about this one because we were precedent and we did it ontime being hit very hard in a full quarter. After you do that was disrupted by go ahead.
And we are on track with that program to generate net annualized run rate savings run rate savings off at least $800 million by the end of fiscal year 22 relative to this fiscal year 19 exit level and we as most of those saving.
Things achieved at the end of fiscal year 21, so hopefully that should give you some comfort with respect to also the visibility point. That's why we're saying we expect gradual performance improvements going forward knowing that we have taken actions with this core transformation program that.
It's about prioritizing and reducing costs, where we can find opportunities to do so.
Yeah, I will say just to wrap that up another levels that last question. The resolve is quite interesting and significant opportunities.
Remember that the HP next was a very successful program for us and for our shareholders and this is the next iteration, but most importantly, this is all about executing our strategy in a line of sources to where we live within the the growth. This and continue to make this company even more efficient on a foundational work within the last three years.
Yes. So that's why we're very very confident about that and we have a very strong discipline and track record to be honest with you.
Well as until we focus on innovation. So I know, we went a little bit longer but we felt that there was important to give you as much clarity and a insight as possible again I will wrap up by say in a very pleased with Q3. This was a a quarter marked by strong execution and honestly very strong sequential.
Growth.
While much of the uncertainty still there in the market than the global pandemic still with US we actually are cautiously optimistic and we will see quarter over quarter improvements going forward a across our businesses.
And are the same time when investing into the future, which is essential for us and but I'm very pleased with our execution in the people to US a service you can see the momentum there.
Hopefully, we'll see you in October the virtual event for the security on the summit in thank you for your time and hope to talk to you. So.
And ladies and gentlemen, this concludes our call today. Thank you for attending and you may now disconnect your lines.