Q4 2020 Hewlett Packard Enterprise Co Earnings Call
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Good day and welcome to the fourth quarter 2014, Hewlett Packard Enterprise earnings Conference call. My name is coal and I'll be your conference moderator for today's call. At this time, all participants will be in listen only mode. We'll be facilitating the 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.
The ROE and as a reminder of this conference call is being recorded for replay purposes, I would now like to turn the presentation over to your host for today's call Mr., Andrew Steinerman ex Vice President of Investor Relations. Please proceed.
Great. Thanks, Carl Good afternoon, everyone and Andy Simon I kind of Investor Relations for Hewlett Packard Enterprise and like the welcome you to our fiscal 2024th quarter earnings conference call with them, Tony or nearing its Pease, President and Chief Executive Officer, and Tarek Robbiati H.B.. He was executive Vice President and Chief Financial Officer for.
Before handing the call over to Antonio Let me remind you that this call is being webcast a replay of the webcast will be made available shortly after the call for approximately one year.
We posted the press release and the slide presentation accompanying todays earnings release on our HP Investor Relations webpage and investors Dot H.B. dotcom that's.
As always elements of this 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 the disclaimers on the earnings materials relating to forward looking statements that involve risks uncertainties and assumptions for discussion of some of these risks uncertainties and assumptions. Please refer to each piece filings with the FCC, including in its most recent and form 10-K and form 10-Q.
And 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 and could differ materially from the amounts ultimately reported and Hps annual report on form 10-K for the for.
Fiscal year ended October 31, 2020 also.
Also for financial information that has been 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 todays earnings release on our website for details throughout this conference call all revenue growth rates and unless noted otherwise are presented on a year over year basis and adjusted to exclude the impact of currency. Finally, please note that after and Tony provides its high level of remarks, Terry will be referencing the slides.
And our earnings presentation throughout his prepared remarks as mentioned the earnings presentation can be found posted to our web site and has also embedded within the webcast player for this earnings call with that let me turn it over to Antonio.
Well, thanks, Andy and good afternoon, everyone. Thank you for joining us today and the hope everyone is staying safe and healthy.
Sure the pack and enterprise finished the year with the very strong performance in Q4, we saw another for rebound in out of overall revenue with particular us and a ratio of the key growth and is of our business.
As we review the of the last month Securities Analyst meeting we of focus on the set of strategic priorities to drive long term sustainable profitable growth.
And also the rating and parts of sustained profitable growth. These include stuff innovation of our core businesses doubling down in Adas for growth and that's the rate and our people to us and sort of is well taken decisive action to strengthen our financial foundation and become a more of a job of company.
We execute the would position on the strategic priorities and I'm proud of the results and what has been a very challenging piece kind of the 20.
Limit of you a few of Q for highlights.
First I told the revenue of $7.2 billion returned to pre pandemic levels up 5% sequentially and flat on a year over year basis.
We saw increased and you all of this momentum across all business segments of the company.
As I stated in our Q3 earnings we expect continual gradual performance improvement we fall.
I'd expect that with the turn of backlog to normalized levels this quarter income.
And compute revenue declined 7% sequentially, but was up low single digits when normalized for backlog over the last two quarters we are.
I'd encourage by new orders and take the point to stabilization of this business taking into account the the typical Q1 seasonality.
Most importantly, if you look of the combined sort of view across compute and HPC Mcs distances, which.
Which is how the market track server performance. Our total net revenue in the server market will be up 3% sequentially and up 1% year over the years.
The result, we believe we gained share in told the server for the second consecutive quarter.
And storage revenue grew 7% sequentially to $1.2 billion. We also expanded our operating profit to 16.7% and improvement of 380 basis points sequentially and within the topic of profitability. The range of 16 to 18 per said, we discuss a sub.
The bulk of compute and storage, we throw a higher level of of professional services intensity consistent with probably the corporate performance.
In Q4, we accelerated our business performance in key growth businesses.
And intelligent edge revenue rebounded to $786 million up 14% sequentially and 5% year over the year.
This business performed exceptionally well against the market backdrop.
High performance compute the mission critical systems have than the outstanding quarter recording revenue of $975 million. This business grew 50% sequentially and 25% year over the year.
Our people to us the service continued its strong momentum.
Our annualized revenue run rate of $585 million was up 11% sequentially and 30% year of it here the.
The on premises that's the severance market is growing rapidly, especially in the hybrid environment and remains a significant long term value driver for us and our shareholders.
Through strong operational execution, we delivered non-GAAP earnings per share of 37 cents up 16% sequentially and above the high end of the guidance.
Free cash flow of $223 million was in line with our Q3 and some guidance.
Additionally, we declared our Q1 day, even in today, which will be paid on January six.
As we have say the in the past dividends remain an important part of the thought of copy the location framework. The consist of copy of the returns to shareholders and strategic investments that together and drive long term shareholder value.
Based on the strong finish to fiscal year 20, and increased confidence in profitability going into Q1, we are raising our fiscal year of 21, non-GAAP EPS guidance by three cents at the midpoint.
Topic of will review, our financial performance and outlook in greater detail, but.
But I will first provide some context around the other execution and customer reactions to what approach and offerings.
The global pandemic has force businesses to rethink everything for the remote and work and collaboration of the business continuity and data insight.
Over the last several months, we have seen growing momentum in our businesses of customers increasingly turn to H.B.E. for capabilities from age the club are.
Our unique set of capabilities help our customers and power of their workforces deployed new zillion, I'd solutions and extract insights from critical data, while leveraging and consume and the solutions more flexibly as the service.
We continue to strengthen our code of businesses and compute and storage, which provides critical capabilities to customers and are foundational to our age the club platform as the service strategy.
And compute the team did an outstanding job of driving supply chain efficiencies and cleaning the historical levels the backlog.
We will continue our focus and streamlining processes to enhance productivity in these high volume business.
We are a market leader and compute and we have been deliberate focus on gaining market share and profitable market segments. This quarter. We became the first company to embed silicon based security into our industry standard servers, the manufacturing through out of H.B. Trust the supply chain in the United States.
The security is critical to a growing number of U.S. customers the across federal public banking and finance and healthcare verticals.
We also launched a new HB input and solution on the HP pull and service in conjunction with Red hat and Nvidia to us and her and machine learning directed at the end of <unk> and container its market.
And storage and we have been on the multiyear journey to create the intelligent data platform from age the cloud and people to softer as the service data storage solutions, which enable higher level of operational services attach and margin expansion.
And our strategy is getting traction our portfolio is well positioned and high growth areas like all flash array, which grew 29% year over the year big.
The big data storage Weve had it for six consecutive quarter of growth of 41% year over the year and hyper converged infrastructure were nimble dhcr <unk>, a new hyper converged solution continued momentum and gain share of growing 280% year over year.
We also committed to doubling down and growth businesses and investing to fuel future growth.
The intelligent edge is a critical segment, where we declared the opportunity early on and off the increasingly differentiated.
And the edge customers need secure seamless connectivity to bridge, the digital and physical worlds.
And the ability to generate actionable analytics, whether the data is created this.
This is why I robot is seen traction and gaining market share with the leading high and the highly differentiated the portfolio of solutions such out of cloud Native I do buy edge services platform, which also contributes to a or our growth for.
For example, the Pentagon is modernized and both its classified and and plus the fight networks and support tens of thousands of devices daily use in Aruba SP base architecture.
Comcast also chose auto body of speed to power these new Comcast business Telework and VPN.
The service support and secures multiple and the points in automotive worksite, including laptops desktops voice over IP phones, and printers and partners can centrally managed the remote workers and all of its infrastructure and from a single out of about SP cloud console.
This quarter, we expect to take share in both campus switching and wireless Lan with our best in class portfolio, which was just recognized as the leader for the 15 year in the margin Gartner Magic quadrant for wire and wireless Lan infrastructure.
Finally toward the end of Q4, we closed the acquisition of Super peak.
Which will also the right October as the one growth in an attractive market growing over 20%.
And the enable our age the cloud platform as the sort of his vision is the.
The peak brings industry, leading and technology and was named a leader in the government 2020 magic quadrant for one edge infrastructure.
We believe the explosion of devices applications and data of the edge of will continue to drive demand for secure connectivity cloud computing capabilities and analytics, especially in a post scope of work.
Another high growth segment, where we are extremely well positioned in high performance computing and.
In Q4, we performed exceptionally well across the portfolio with growth in credit products mission critical systems operational support services and HP Apollo.
The team did an outstanding job and converting the existing backlog and new orders to drive the record quarter, breaking nearly <unk> billion dollar revenue.
Q4 marked our first full quarter of Cray operational activity integrated into H.B. systems.
And the combination of Cray and H.B. is driving increased revenue and cost synergies.
We signed several large customers deals during the quarter include the pre ex the school system design wins that will use the H.P.E. Cray ex supercomputers the.
These wins include and 34 million contract with the Posey supercomputer centre in Australia, and day hundred 60 million of contract, where they do appear and high performance and joint undertaking the initiative to deliver one of the worlds fast the supercomputers that will be used by 10 European countries.
We extended our number one market position and HPC with 37% of market share of the calendar Q2 data, which is 10 points above the next closest competitor.
According to the list of the top 500 supercomputers released two weeks ago, HP and Cray systems make 39 of the top of hundreds systems more than any other company.
In addition, our HP Apollo systems has had its highest revenue quarter ever.
As an example of the traction we are seeing with the Apollo, but without the Apollo value proposition Mercedes Benz Grand Prix construct of of the Marcellus AMC Patronize Formula One team signed a deal for the new Apollo system modeling and simulations out about gaining a competitive advantage on the truck not H.B. technology is critical to this team's range.
Strategy.
Going forward and we're working to bring high performance computing power to every day enterprise and vitamin D.
The tune for more announcement on these from in the coming few weeks.
Consumer consumption based solutions provide and attractive alternative for customers and looking to drive innovation and modernizing for structure without the capital and operational expenses tied to over the provisioning and.
Got a leader in on premises as the service and have been investing in our HB and non HP software platform and each be Green Lake managed services offerings to enable a true consumption of base experience that is unique.
Customers are recognizing our differentiated products and services, which can be seen in our other service order growth of 20% year over the year.
This quarter, we continue to expand our offerings and interviews HP Green Lake VDI cloud services.
Building on the success of our ready to go virtual desktop infrastructure solutions launched early in the year to help customers with the immediate connectivity the need this new solution provides the configurations the optimized for each type of the remote worker.
Customers can easily scale usage up and now.
With the is a compelling and critical capability in today's environment.
By leveraging and expand the partnership with Citrix and your tactics and video being aware and Wipro, we can offer comprehensive solutions to and expand the customer base.
Our advanced capabilities of driving strong customer demand across diverse markets and industry. We recently announced several new customers. Nokia software is used and HP Greenlight cloud services to embed further cost the and energy savings interest data storage portfolio.
Michael Jan and leading position medicine, and Biotechnology company selected the HP Green Lake to modernize its ideal operations to analyze large scale medical data on premises.
Why F life insurance, our fast growing Fintech company based in Hong Kong also select HPQ relate to strengthen its online sales platform applications and fin techs and for systems.
The momentum we are realizing in each of these areas is possible because of our focus strategy and disciplined execution.
By innovating and investing in the most impactful areas and optimize and how we manage our own business. We of ensuring we are in the best possible position to help our customers manage theirs.
Early in the pandemic would recognize there was no going back to what used to be only preparing for and build and what comes next day.
This is one of the reason we have made the recent decision to relocate hps headquarters to Houston.
We have listened into of team members preferences about the future of work and the margin of real estate site to optimize and improve how both physical and virtual office. The office spaces are the used in this new area excuse.
Houston has long been HPC largest us employment habit and we're currently constructing a state of the art New campus.
Obviously, we intend to maintain our innovation and tech hub in San Jose, California are are the Ruger headquarters will be housed within our digital enable samples the site.
So storage and softer there.
There will be no lay off associated with this move and consolidation we are committed to both markets of critical parts of of talent and real estate strategy and our post pandemic ward.
As we have been transforming how we work we have also recognize that we have an enormous opportunity for customers transform and digitize the business to adapt and operate in and your work.
Business continuity and success depends on solutions, and advanced IP, resiliency and power and water Workforces securely extend connectivity reinvigorate customer engagement and enamel business model evolution.
Against this backdrop HP has delivered despite the challenges challenging circumstances we.
We have brought new capabilities and experiences to our customers to meet the emerging needs. We have invested in both organic innovation and M&A, the strengthen and differentiate our position in the market.
We have acted quickly to protect the financial foundation and become become a more agile company.
And we have remained committed to our culture, we have ask a lot to our team this year and I am personally immensely proud of the grateful for the significant courageous contribution.
The there's no question that is more work to be done.
For our customers have validated our vision and we have demonstrated in Q4 and throughout 2020 that we have the right team and the right strategies in place to execute on the vision.
While the remains continued uncertainty in the world the results of great deal of promise and optimism.
HP, we create the five years ago has an important role to play and the words of recovery from an unprecedented pandemic the.
Presents an opportunity for our company and for our investors I'm confident we will continue to rise the the location and deliberate in bold new ways.
With that let me turn it over to Patrick to review the quarter's results.
Thank you very much and Tonya I'll start with a summary of our financial results for the fourth quarter of fiscal year 2020 and.
As usual I'll be referencing the slides from our earnings presentation to highlight our performance in the quarter.
I'm going to discuss the key highlights for this quarter on slide for so now let me discuss our financial performance starting with slide five.
I am very pleased to report the Q for marked a return of revenue to pre pandemic levels.
We delivered Q4 revenues of $7.2 billion up 5% sequentially and flat from the prior year period, as our growth businesses of intelligent edge and HPC Mcs executed strongly.
We also cleared our backlog by a further 250 million during the quarter, which has now returned to normalized levels as we exited Q4.
As the result of the improved revenue performance, we have grown non-GAAP gross profit by 7% sequentially to $2.2 billion in Q4 non.
Non-GAAP gross margins of 30.6% were also up sequentially driven by positive mix shift towards intelligent edge storage and HPC Mcs all of which reported strong sequential revenue growth.
Our non-GAAP operating profit was up 15% sequentially, resulting in a 7.7 per cent operating margin and our non-GAAP EPS of 37 cents was up 16% sequentially.
Q4 cash flow from operations was $747 million.
Driven by strong operational execution free.
Free cash flow was $223 million and that was in line with our guidance as we saw the expected reversal in the favorable working capital movements from elevated backlog and Q3.
Finally, we paid $154 million of dividends in the quarter and are declaring a Q1, David and today of 12 cents per share payable in January Twentytwenty one.
Now, let's turn to our segment highlights in slide six and seven.
As you can see we're doing exactly what we said we would do and Sam in October.
We're doubling down on our growth businesses of intelligent edge and HPC Mcs why the stabilizing our core business segments of compute and storage.
Any tangent edge, we continued our momentum with 14% quarter over quarter, and 5% year over year growth.
We also expect to take share in both campus switching and wireless Lan and with our best in class portfolio, which was just recognized as the leader for the 15th year in the Gartner Magic quadrant for wired and wireless Lan access infrastructure.
We're also beginning to see the operating profit potential of this business, we'd operating margin in Q4 of 10.1% up 150 basis points quarter over quarter, and 390 basis points year over year as we drove greater productivity from price investments in this business.
Finally, we closed the silver peak acquisition on September 21st So it had a minimal contribution in Q4, but obviously silver peak will be more meaningful going forward.
In HPC and Mcs right.
The revenue reached record levels near $1 billion growing 50% sequentially and 25% year over year, driven by strong performance and Cray HPC Apollo and Mcs.
We executed well against our existing order book with increased customer acceptances and grew orders further with a healthy pipeline.
As you know this business can be lumpy, where the revenue recognition and profitability link to completion of critical customer milestones.
Why do we do expect to see a normal seasonal decline in Q1 21, we are well on our way to delivering our age to 12% three year revenue CAGR outlined at SAP.
In computing revenue declined 7% sequentially, but was up low single digits, when normalizing Q3, and Q4 results for backlog conversion.
Gross and operating margin Israel also pressured by clearing the backlog as we had to fulfill orders at cost levels higher than originally quoted.
We are pleased to report that backlog has now returned to normalized levels. Thanks to continued improvements in our supply chain execution.
Within storage, we grew revenue of 7% quarter over quarter, driven by strong operational execution reduced backlog and improve the order momentum in key areas of the portfolio.
We saw notable strength and big data up 27% sequentially driven by increased customer focus on AI and machine learning related applications.
All flash array storage up 19% sequentially.
The increased driven by increased adoption of primarily all flash and Dhcr, which grew double digits sequentially.
We also expanded operating margins this quarter, which was up 380 basis points quarter on quarter, ending at 16.7% of revenue and already aligned to our Sam fiscal year 23 targets.
With respect to point next operational services, which is included across our compute HPC Mcs and storage segment total revenue was up 2%, while order were down 1% on the sequential basis.
Additionally, our services intensity, which is the ratio of for tax revenue for hardware units sold continue to be strong, we're north of our strength and compute and storage, excluding nimble, which were up low single digits growth on a sequential basis.
And advisory and professional services revenue was up 6% sequentially, even as co of it impacted consulting activity and the charge of 18 levels of our staff.
Within HP financial services financing volume was up 6% and revenue was up 2% quarter over quarter. Despite the impact of COVID-19.
We maintained a solid return on equity of approximately 13% this quarter.
Our bad that loss ratio this quarter was 1.06%, which was slightly higher than previous quarters is still the best in class and well within our comfort zone as cash collections have already returned back to pre coded levels.
In our communications I mean your solutions business that is included in our corporate investment segments orders were up 18% and revenue was up 6% sequentially driven by strong double digit orders and revenue growth in Americas and.
Additionally, due to our improved cost of delivery, we were able to expand operating margins by 240 basis points quarter over quarter.
We continue to make good progress in our Fiveg core strategy that provides multi vendor integration and true cloud native telco network functions.
Slide eight shows key metrics of our growing as a service business, which I elaborated on during our recent securities analyst meeting.
We're making great strides in our EPS offering.
I am pleased to report that our Q for 20, EMR came in at $585 million, representing 11% quarter over quarter, and 30% year over year reported growth.
Total as a service orders were up 20% year over year, driven by outstanding performance in North America and the PJ.
Our HP Aruba Central SaaS platform also continued to grow revenue strong double digits year over year.
Based on strong customer demand and recent wins I am very happy with how this business is delivering and progressing towards its air our growth targets of 30% to 40% CAGR from fiscal year 22 fiscal year 23 sets out our 2019, Sam and reiterated our Twentytwenty Sam meeting.
Slide nine highlights our revenue and EPS performance to date, where you can clearly see Q2 was the trough.
Strong operational execution has driven sequential revenue growth from a low of 6 billion and Q2, all the way back to 7.2 billion in Q4.
Turning to slide 10, the rebound and revenue has resulted in a 15% improvement in non-GAAP gross profit from the Q2 trough, which was up to $2.2 billion in Q4.
Also the gross margin rate in Q4 of 30.6% of revenues was up 20 basis points sequentially, driven by a higher mix of intelligent edge storage and HPC Mcs, which are higher margin businesses offset by continued execution of elevated compute backlog, which was a headwind but is now behind us.
Moving to slide 11, you can see how the improvement in gross profit combined with progress on our cost optimization plan has delivered 53% gross and operating profit from the Q2 trough, while still investing for growth.
As mentioned at Sam, we're making excellent progress and our cost optimization of privatization plan, which will strengthen our financial foundation, while aligning resources to critical growth areas.
As of the end of this quarter, we are on track to deliver annualized net run rate savings for at least $800 million from the F.Y. 19 baseline by the end of fiscal year 22, with most of the savings being realized by the end of fiscal year 21.
Obviously, we will keep you updated on our progress in the upcoming quarters.
Turning to slide 12, we generated cash flow from operations of $747 million and free cash flow was $223 million for the quarter driven by timing of working capital movements from clearing backlog that resulted in favorability and Q3, but a headwind we flag for in Q4.
We ended fiscal year 20, with free cash flow of 560 million in line with our outlook provided and Sam 2020.
Looking to 21, we expect free cash flow to grow over 75% at the midpoint of our outlook of 900 million to $1.1 billion.
Please remember our normal cash flow seasonality, where the second half is the stronger generator of cash flow and the first half.
Now moving on to Slide 13, let me remind everyone and by the strength of our diversified balance sheet and liquidity position.
Which is a competitive advantage in the current environment.
As our October 31st quarter end, we had approximately $4.2 billion of cash after successfully redeeming the $3 billion of bonds maturing or told for 2020 and paying approximately $853 million net of cash.
Excuse me $853 million of net cash for closing the sale the peak transaction.
Together with an undrawn revolving credit facility of 4.75 billion at our disposal. We currently have approximately $9 billion of liquidity.
Finally, I would like to reiterate that we remain committed to maintaining our investment grade credit rating, which was recently reaffirmed by the rating agencies for.
Bottom line, we have a strong cash position and ample liquidity available to run our operation continued to invest in our business and execute on our strategy.
Now turning to outlook on slide 14.
And our recent securities Analyst meeting, we provided our outlook for fiscal year 21, and I would encourage you to review of my presentation for a more detailed discussion of that outlook.
Having said that let me drill down on a few key areas.
We continue to expect to grow our fiscal year 21, non-GAAP operating profit by 15% to 20%.
And now expect F Y 21, non-GAAP diluted net earnings per share to be between $1.60 to $1.78. As a result of increased confidence in margin improvement.
This is a three cents per share improvement on the midpoint of our prior guidance of $1.56 to $1.76 and EPS.
From the topline perspective, we are pleased with the rebound we saw in Q4 and continue to see gradual improvement, but want to remain somewhat cautious due to the uncertain and pace of recovery from the COVID-19 pandemic.
More specifically for Q1 21 after normalizing for excess backlog reduction in Q4 20 of $250 million. We expect Q1 21 revenue to be in line with our normal sequential seasonality of down mid single digits from Q4.
For fiscal year 21, we expect total revenue to be in line with our long term financial targets of a CAGR of 1% to 3% presented our recent securities analyst meeting.
For Q1, 21, we expect GAAP diluted net EPS of two to six cents and non-GAAP diluted net EPS of 40 to 44 cents.
So overall I'm very pleased with the performance in the quarter and execution against our strategy and financial priorities outlined that Sam.
We have navigated well through unprecedented challenges this fiscal year and had a very strong finish Q4 was marked by a strong rebound and revenue as we reduce backlog to normalized levels and saw increased order momentum across all business segments, we saw significant acceleration and customer demand in our growth businesses of intelligent edge.
And HPC MTS.
Our core business of compute and storage is pointing to signs of stabilization.
And our as a service EMR continues to show strong momentum and aligned to our outlook.
We have been proactive and strengthening our financial foundation and aligning resources to critical areas to transform our core.
This will ultimately drive sustainable profitable growth and shareholder returns for the long run.
Let me close by reiterating that I'm very proud of what we have accomplished as the team during very challenging and uncertain times and.
And we look for it to fiscal year 21.
Now with that let's open it up for questions. Thank you.
We will now begin the question and answer session to ask the question you May Press Star then one on your Touchtone phone if.
If you are using the speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two we also request the only ask one question.
The first question today will come from Aaron Rakers with Wells Fargo. Please go ahead.
Yes, thanks for taking the question I guess I wanted to go into the compute segment a little bit more first of all can you can you talk a little bit about the demand linearity you saw it throughout the day. This October quarter and just as we move forward how do I think about the operating profitability, if I look back and.
In fiscal 19, I think the average operating margin of summer and 11.5% range. This quarter was sick.
Average of about 7% this last fiscal year. So I'm just trying to understand what is the kind of normalized operating margin profile of that compute the thank you.
Alright topic.
All right. So look if you look at.
Total revenue and compute as Antonio said I think I reiterated to revenue was up low single digits. When you normalize for Q3 and Q4 for backlog conversion right. So.
So considering where we were at the end of Q2 of the team did an outstanding job of driving supply chain efficiencies and clearing that backlog. The backlog is no more of problem, it's back to normalized levels.
Specifically with respect to order trends and momentum ordered.
Order trends were encouraging and then this is pointing to further stabilization and this business.
And most importantly, if you look on a combined view of.
For servers across compute and HPC Mcs, which is how the market track service performance. Our total net revenue in the servers would be up low single digits sequentially and up low double digit sequentially. If you exclude the impact of backlog and Q3 and Q4.
So we feel we gained revenue market share and total servers for the second consecutive quarter.
Now when you look at margins in that context, gross and operating margins were pressurised by clearing backlog as we had to fulfill orders in Q4 at cost levels higher than they were originally quoted.
Having said that we are pleased to report now again, the the backlog has returned to normalized levels and we co.
Continue to improve our supply chain execution.
As we continue to stabilize this business, we expect gross margins to expand now that backlog is no longer and issue and mix shift to more profitable market segments.
We also continue to optimize R&D and sales investments and expect to achieve and operating profit margin of 10% to 12%. This is what we told you as part of our long term outlook provided at Sir.
So just want to emphasize a couple of points that I hope that it did in the last through Tadic said commentary here, because we provide a lot of inside our orders in compute.
With our China, because as you know we have a difference the top was up 2% quarter over quarter.
Our new orders.
And then as we think about the total sort of of category, which is compute the plus HBC and plus Mcs.
You combine all of that and basically when you normalize for the backlog, we would have been up KWE.
Why the bit sequentially and up low single digits year over year and.
And that's why we believe we have gained share in total the server revenue.
Hi, there. Thanks for your question and operator can we go to the next one please.
And our next question will come from Simon Leopold with Raymond James. Please go ahead.
Thanks for taking the question I wanted to see if you could drill down on what's occurring in the intelligent edge business in particular, we see a couple of cross currents or maybe.
Maybe macro recovery would be helpful. But this could be offset by increased work from home. So there's this debate about how this business may trend and at times that I have the impression that you expect to gain market share.
From some of your larger competitors I Wonder if you could help us understand how you weigh these various cross current when you look out over calendar 21 opportunities for the intelligent edge. Thank you.
Yeah. Thank you for the question I mean, we committed to all doubling down on the edge of two years ago, where I went on to say that the intelligent edge is the next big frontier of.
And when you think about digital transformation of all starts with the a connectivity.
And the in order to participate in the digital transformation you need the connectivity and the security and then ultimately you need to bring the cloud computing for the day Thats created and we have now seen the the vast majority of the data is created outside the data center outside of the big cloud and more and more where we live and work.
Obviously, the part of that make has validated what I said two years ago. The of the enterprise for the future of will be edge centric cloud enable and data driven.
And the one I think about our Q4 performance and I'm going to speak organically because the silver Pic acquisition was just for five weeks in our numbers, we grew year over the year versus our competitors in the traditional space, whether the Cisco or orders declined.
And that's where we believe we are gone and gain share and the reason why we believe the momentum will continue it's not just because of the transformation on the we see and customers, particularly as we have and will be in a much more distributed for the enterprise where connectivity has to be ubiquitous is because we have a cloud native solution and this.
And for the under the Street the understand our Aruba edge services platform is a software company.
And for all of its cloud connectivity connectivity from the cloud with security analytics, AI and all the things that you need and this environment a massive scale and has the design for devices people and things and that's why we have in the platform today more than 65000 customers and.
We are adding 14 towels and new devices every single day.
And the momentum is all about the experience we can provide and this is why we saw the the the 14% growth sequentially and also we sold the for the 5% year over year growth, but what is interesting and as it is a softer us the service growth because ultimately that contributes to our IR.
And by the way our switching was up sequentially a high single digits versus our competition for the Bell and our wireless Lan was up 20% quarter over quarter.
So we believe we have something special and unique here right and the middle of what the customer. The man is other metallic if you want to.
The any commentary and that's that's absolutely right until you know if there's one thing I can add from a financial standpoint is we do for Jack that the edge is going to outgrow the market given the strong differentiation that the Aruba and services platform provides an index and Tony described and we see revenue growing at a 6% to 10% CAGR over the next three years from now for.
22 of our 23.
And this will come with enhanced profitability. We ended Q4 with the 10.1% Opie margin of 150 basis points longer term, we expect operating margin to progress upwards through the teams with more scale and richer gross margin is from higher software content.
Such as the Aruba services platform, including the contribution from silver B and I think you should walk away with three key trends. So that you can put out of and contacts one is.
Why for secure for more workers solutions why five six refresh which is is the pull through for switching because of the architecture and obviously the acceleration on the us a for as the one.
Which obviously sort of a peak plays a huge for all and last but nonetheless, we see and increased demand in NAV, which is network as the service, which obviously is the is a component of our HPV like offering.
Great. Thanks for the question Simon and operator can we go to the next one please.
And our next question will come from Wamsi Mohan with Bank of America. Please go ahead.
Hi, yes. Thank you congrats on the strong execution and solid quarter.
And Tony the your back of pre pandemic revenue levels for overall revenue and share growth segments are performing impressively do you see this as a sign that enterprise spending is coming back stronger than you thought 90 days ago and Tarek. If I could can you just give us an update on the roughly $2 billion of.
Payment that are potentially coming your way from Oracle and and how you would deploy that if you got that over the next year. Thank you.
Yes. Thanks, once the I. I mean, I will say, we are very encouraged by the over the momentum we have obviously the still quite.
Quite a bit of for the uncertainty out there we're still subscribe to our tces the topic and I discuss and Q2 of which is a U shaped recovery.
But what I'm really pleased is the or the momentum and the sequential growth of we continue to see and the demand, particularly in the growth areas, but also very pleased with the world. What is pointed to the stub monetization of the core business.
Of the fact that the our compute the orders grew sequentially 2%.
As of very very good we also so all the sequential growth in storage and the orders.
And I think is appointed to different solutions. Once the you know obviously, we see in our containers that we see but mental applications, we see and everything thats workload optimized.
The data recovery is one aspect of it VDI is another aspect of it I think that is a shift in not just buying infrastructural for that type of infrastructure of which is way more optimized and the one of the things. We see obviously is green Lake Green Lake is a driving force for pulling through our portfolio and why.
And you pulled out the the portfolio true compute and storage win and that's where we'll discuss the Somme, a novelty with and we need to focus on the stabilization and by the transformation of the business to be called more software and silicone oriented which in of the exact example of that is we introduce our silicon for with the Thrace version 2.0 of which is the most.
Of secure platform on the planet.
But what is interesting if you listen to some of our competitors, including two that they say the 96% of the spend the still and prep. This.
As non my words.
Is the big cloud providers, who said that and that transition is the is an important position for us to capture and that's where we went ahead with our.
On premise solutions as the service. So that's why the no I think that is definitely the stub innovation and the man there is increased demand and sort of the navy associated with connectivity AI data, we see more workload optimized solution, we see more 18, resiliency needed and respond and time and that's where the.
As we enter Q1 winter with a very strong momentum on the orders and that's where we were confident without stick to raise our guidance for the year.
[noise] Oracle.
The wamsi. So the question on the Ark also yes, we have not forgotten about that one of course, and let me remind everybody where we stand.
There was a 3 billion dollar roughly jury verdict and hps favor in the eye Tanium matter for that matter remains on appeal as the.
And your judgment and now stands at $3.8 billion and told with the interest accruing at 10% since May 2019, so and interesting interest rate here and.
The appeal has been fully briefed and we are awaiting of the California Court of appeal to share Joel oral arguments. Although we are hopeful that we will receive a ruling from the California quarter of appealing 2021, obviously the timing of this is out of our control.
We remain confident that the outcome on appeal will be favorable to H.B. and also I want to remind you all that we would have to share any sort of payment with our.
Cousins at HP Inc. correct.
Thanks, a lot of say great.
Thanks, Wamsi could get to next question. Please.
Our next question will come from the reality with Evercore ISI. Please go ahead.
Hi, Thanks, This is ervin lue dialing in for on it.
I wanted to get an update on your HPC and Mcs business. During the recent analyst day, you alluded to this business. In addition to intelligent edge being contributors to growth and clearly this quarter puts an emphasis on the viewpoint.
Can you, perhaps highlight some of the underlying demand vectors for of business. That's been historically is lumpy and nature, perhaps the durability of this global growth looking forward and perhaps you know progress on reaching customers beyond crazed historically public sector customer base. Thanks.
Yeah.
Well, that's that's part of the thesis why we we combine cray with a the organic portfolio H.B. hat you know you need to look of the segmentation of the business obviously, the Cray place on the top end of the supercomputer market with the unique set of technologies, both in softer and silicon that's very important to understand.
Cray brought to us a fully vertical of stock from the silicone, particularly in the interconnect fabric two of the entire softer to manage the is very specialized for loads, which is the significant point of differentiation for us and then the HP Apollo which is is the platform I actually introduce when I was one of the compute business in 2015.
Place more and the main range and the law and in the density optimized.
And all of the type of workloads, the combination drives tremendous synergies across the entire segment.
And you know it's true this lumpy and no question about it but it's lumpy because of the way the mechanics works in terms of revenue recognition. So in this business. You. Obviously you take the older. Then you have the time to build it it takes sometimes months. The built one of the systems you have to ship and you have to.
Install it you have to run the workload and only when the customer and give us the substance weak and recognized revenue.
But remember what we show you a sum is the fact that we have more than $2 billion in backlog, meaning award the business that we expect to share between 21 and 22.
And that business is is what are the one okay and some of those the include the excess ex us scale systems, which obviously we share the data with you of which we won five out of the six but since I'm, a we want and new deals and I quote the sum of those it in my opening remarks like the post the deal and.
The European Union deal and these are the typical and the reason why we win is because we have a very set the specialized technology and the need to co locate data and compute is is unique and that's why and not normally we continue to grow the business of the pace. You saw also we own of 39 of the top.
Five of the supercomputers and we own 37% of the share. So we are very pleased with his business. The outpaces his comment true and the reason is because of data data is exploding and.
It is now a democratize tool in many ways you need high performance could be the capabilities to limit.
And by the way, we see now the momentum of margins too right. Because now we are more of that stock.
Great. Thanks, very much I appreciate the question operator next one please.
Our next question will come from share and cross with Cross research. Please go ahead.
Hi, Thank you very much I was wondering Oh, and Tony and if you can talk a bit about your thoughts behind the headquarters of news and you know any petition potential cost savings not from.
Layoffs, but perhaps the lower taxes and that and then I don't know Tarek. If you can just confirm that the cost of the new building was included within your free cash flow estimates. Thank you.
[noise] sure listen as we look into the future you know our business needs the opportunities for cost savings simplifying our footprint and also remember we learn quite the best shot on about the the team preferences about the future of work.
All together, we made the decision to Relook at the headquarters.
Let me be clear art of technological hub for the innovation, particularly in Aruba softer for storage.
It is and Silicon Valley and basically what we are doing the is consolidating of Silicon valley footprint in the state of the of San Jose headquarters that we opened last year. This is our technological hub for.
Now for non technical hub and as jobs, we have decided to move of the headquarters to Texas, because you have access to diverse talent and ability to attract and retain is is is unique and differentiated. So we'll we'll create any of these two very strong hubs with clear mandate.
And each of them from the taxes perspective that is non because we are incorporated in Delaware to begin with no different than the our savings associated with the real estate because of your rationalize the the area footprint you expect savings the cost of that the the new site and Houston was already included in our numbers.
Because we already the we're building that since 2000 and beginning of 2020 that was already in the in the plan you know we're not changing anything so we just relocating that and ER and what we are doing it for the unique job functions that we believe are better suited to be in Houston, we are offering the voluntary.
And I'll move to the employees and there will be no jobs impact in California.
So that's pretty much it and we're creating and again two very strong and helps for for our company and rationalize the footprint the will drive cost savings over the time, which by the way there are parts of project accelerate as we go along.
Hey, Thank you.
Great. Thank you Shannon and operator next question. Please.
And our next question will come from Katy Huberty with Morgan Stanley. Please go ahead Sir.
Thanks, Good afternoon of what should be seen in Europe as markets have some of those markets have shut down and do you view that as the path to what you might see and the U.S.
For the next few months and then just as it relates to the demand in the October quarter any any.
Any difference and trends between the commercial enterprise and and public sector.
[noise] yeah, Okay. The I mean Youtube of strong for US I mean, I you know honestly you know the locked down and is happening as we speak maybe in the last two to three weeks in some markets, but I have to say no real impact at this point in time that we can see we again exited October with.
The momentum and a good order book going from Q1, the momentum and is being cutting in November but again, there's still a lot of uncertainty out there I'm not sure yet what real impact of this I also will say the customers are now kind of accustomed to deal with the this way too.
Work you know obviously, we have been now 910 months in this situation and so business continues.
There may be certain things and maybe slowed down overtime, because you need the access to certain facilities, but overall I haven't seen anything in particular right now commercial you know seems to be improving and then and the public sector of side, obviously, we participate particular with HBC and and that continues to be better.
Better strong I will say.
Great. Thanks, Kerry operator next question please.
The next question will come from Jeffrey along with Deutsche Bank. Please go ahead.
Thank you so much for squeezing me and revenues it and I see this revenue try and kind of get back to that flat year on year range, but but if I really look at the the gross and operating margin, there's still deltas on a year on year basis I understand the the normalization of backlog may have and you do the math.
Following up this but I guess going forward.
And Oh for.
For cap and the fiscal 21 and.
And the prospects for our margin normalization back into those fiscal 19 thinkers. Thanks.
Hi, Joel Thanks for the question so issue.
Refer back to our outlook on revenue that we provided that Sam.
And that was a 1% to 3% CAGR growth of revenue and.
That we reiterated today as we issued our guidance for fiscal year 21.
We also said that we expect operating profit to grow 15% to 20%.
Over the next year and so when you take the combination of the revenue growth, which is outpaced by the operating profit growth yeah surely they will be operating.
Operating margin expansion and the what's fueling out of expansion is the the cost optimization and privatization program.
Which is well on track and most of the benefits of the program will be attained towards the end of fiscal year 21.
And I want to remind everybody that we are foreseeing $800 million of net run rate savings of the fiscal year 19 baseline and so you can do you know.
And for from this where the margins would be by the end of fiscal year, 21 seating and fiscal year funny too [noise].
Perfect. Thanks, Jerry on the operator, and we've got time for just one last question. Please.
And that question will come from Rod Hall with Goldman Sachs. Please go ahead.
Yes, thanks for fitting in and I wanted to come back to the financial services business and particularly the.
Write off percentage and the increase there and just your I know, there's a little bit of the seasonality there Terry but it seems like thats up a little bit I'm. Just curious if you could say a word about I know you said, it's a healthy absolute level, but a word about what it tells us about the end market and whether you would expect that to decline in the January quarter, and and I assume the return on the.
Equity there is still relatively low because you guys are for giving payments, but could you just update us on that payment forgiveness plan and is that over are you still doing it just kind of give us an update on where that stands as well. Thanks.
Thank you Rod it's a really good question. So when you look at the financial services business. The bad debt loss ratio is just over 1%, it's up modestly I'm very comfortable personally with that level and given what happened in the pandemic and you know we we are absolutely satisfied with the way the the business unit has performed.
And the team has worked incredibly hard to get payment holidays to some customers who needed. It. This is why year over year, you see the revenue dropping but the profitability hasn't dropped dramatically at all and that is the testing of the way. The management team has performed this year and it's actually what that translates into his and extreme.
The strong position for the future because what happened is that you had contract extended as the result of those payment holidays quote unquote and when those contracts extend the that over time leads to higher returns as you.
No in the in the leasing space and so on the whole I feel very very positive about the performance of H.B. of fast I want to reiterate cash collections have already returned to pre covert levels, which is good economically. It's a sound position also for the economy, we're now collecting cash and deferrals granted earlier in the year.
And that that level of deferral of was granted to a small subset of the customers and we do expect the return on equity to trend back to the 15% plus levels over the next couple of years.
All right. Thanks, Tarek I know there may be some more questions and the but I know you and Todd will do some cold box as well and so that will be the opportunity for those of who were not able to for the question made too and so the question in any case.
I just want to finish by saying that Q4 was marked by a very strong rebound and on total company revenue. We are pleased with the results while much uncertainty still exists and then went on the market I am confident in our teams ability to execute the strategic priorities, we share with you but to go out of the system.
Which we believe will position us to drive future sort of for profitable growth and again. Thank you for joining the call today, joining us today on the call and I Hope you continue to stay safe and healthy happy holidays to you and your families.
Ladies and gentlemen, this concludes our call today and thank you and at this time you may now disconnect.
[noise].