Q1 2021 Hewlett Packard Enterprise Co Earnings Call
[music].
Good day and welcome to the first quarter 2021, Hewlett Packard Enterprise Earnings Conference call. My name is cole and I'll be your conference moderator for today's call. At this time, all participants will be in a listen only mode. It will be facilitating a question and answer session towards the end of the conference should you need assistance during the call. Please signal a conference, especially.
Is it I personally the Starkey followed by the ROE and as a reminder of this conference is being recorded for replay purposes I would now like to turn the presentation over to your host for today's call Mr. Andrew Simon ex Vice President of Investor Relations. Please proceed.
Great. Thank you good afternoon, everyone on Andy Simon It head of Investor Relations for Hewlett Packard Enterprise like the welcome you to our fiscal 2020, One first quarter earnings conference call with Antonio Neri, Hpe's, President and Chief Executive Officer, and tariff of <unk>, Hpe's Executive Vice President and Chief Financial Officer.
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 today's earnings release on our HPE Investor Relations webpage at investors that H P Dot com.
It is 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 disclaimers on the earnings materials relating to forward looking statements that involve risks uncertainties and assumptions for a discussion of some of these risks uncertainties and assumptions. Please.
Refer it to Hpe's filings with the SEC, including in its most recent form 10-K and form 10-Q, HP assumes no obligation and does not intend to update any such forward looking statements.
Also note that the financial information discussed on this call. It reflects estimates based on information available at this time and could differ materially from the amounts ultimately reported in Hpe's quarterly report on form 10-Q for the fiscal quarter ended January 31 2021 of.
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 today's earnings release on our website for details.
Throughout this conference call all revenue growth rates unless noted otherwise are presented on a year over year basis and adjusted to exclude the impact of currency also please refer to our recently filed form 8-K for detailed information on our realigned financial results for fiscal year 19 in fiscal year 'twenty two it took count for changes too.
Our reporting structure in fiscal year, 'twenty, one that better aligned to market trends and more accurately reflect how we are managing the business today.
After Antonio provides his high level 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 it is 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 I Hope you and your families continue to be safe and healthy it.
It it is hard to comprehend everything that has to transpire around the world over the last year the what.
When you paint on day May has changed forever and the need to use innovative technologies to advance the way people live in business. The open eight has never been greater.
Improving the health of our communities from a new catering of chilled into digitizing all the economy and enable the eats the recovery.
Now the most opportunity.
I believe we are entering a new era, the age of insight fueled by the amount of data around the house.
The arrival of safe and effective COVID-19 vaccines is a marvel of innovation and good news for us all bringing hope and optimism.
For what lies ahead I am personally very excited about the future of innovation and the impact it will have.
I am very pleased with the Hps Q1 results our revenue exceeded our outlook and represents a stronger than normal sequential seasonality.
We significantly expanded our growth and operating margins, probably strong profitability across our businesses ahead of pre pandemic levels.
Our non-GAAP earnings per share exceeded the high end of how the guidance and free cash flow was the record Q1 performance the.
These results give us confidence to raise our fiscal year 'twenty, one EPS and free cash flow outlook, which we will address in more detail later on the call.
The global upon them. It has brought a renewed focus on digital transformation of businesses are rethinking everything from remote work and collaboration to business continuity and data insights.
It was the world recovers our customers are looking for the agility and simplicity of the cloud native world with the flexibility and control of our hybrid business model.
This is where we have a unique and differentiated value proposition.
HP E acted intentionally and quickly last year to become a more agile organization and enable our ability to innovate faster.
Q1 results demonstrate our progress in enhancing our position to us of the rate what comes next for our customers.
I am very grateful for all the dedicated passionate and resilient team members that have been laser focused on delivering for our customers and executing our strategy to drive long term sustainable profitable growth for our shareholders.
We are strengthening our core businesses doubling down in key areas of growth and also the rating are also sort of its day, but to become the age of the cloud platform as the sort of of choice for our customers and partners.
Of total revenue of $6 8 billion was down 3% from the prior year when normalized for the backlog from last quarter. This is better than expect the sequential seasonality.
We saw solid all of it in linearity intake across all of our businesses throughout the quarter.
We are executing of multiple growth opportunities and we are particularly pleased with strong revenue growth in our intelligent edge business and growth in all of the service orders and revenue.
Going forward, we expect to see gradual improvement in customer spending as we progress through fiscal year 'twenty, one given us the confidence in our ability to deliver on the long term revenue growth guidance.
Importantly, our non-GAAP gross margin of 33, 7% is up 30 basis points year over the year and 300 basis points sequentially.
Our non-GAAP operating profit of 11, 3% is up 130 basis points year over the year.
And now of non-GAAP EPS of <unk> 52 cents is up 40% year over the year and significantly above the high end of our outlook.
We generate a record Q1 free cash flow of $563 million the highest achieved in the first fiscal quarter in the history of Hewlett Packard Enterprise.
These are impressive results made possible through disciplined execution strong expense management and critical investment prioritization.
Based on the strong start to fiscal year 'twenty. One we are raising our fiscal year 'twenty, one non-GAAP the EPS outlook to $1 70 to $1 88 and.
And free cash flow to one one to $1 4 billion.
Patrick will discuss the financial results and outlook in greater detail, but let me first give you some additional context around our business segment performance and innovation highlights for the quarter.
To emerge and recover from the global pandemic enterprises required secure connectivity data insight and our cloud the expedient to us at a rate the digital transformation all of which put the reinforces the significance of hp's differentiated edge to cloud platform as it sort of his vision.
In our prioritized the areas of growth our intelligent edge business had an outstanding quarter with revenue of $806 million up 11% ear of it here.
We again expect to take market share in both campus switching and wireless loan segments of the market.
We are seeing continued traction from out of investment of the edge, including of rich software capabilities.
Auto robot clear of POS security, our cloud native Aruba central It most recently Aruba, ESP or edge services platform.
Although robust SaaS revenue grew triple digits year over year.
The first full quarter. The following our silver peak acquisition reinforces that we are on track to grow high margin recurring revenue with technology that accelerates our ability to capture of the high growth is the one market opportunity.
Our silver peak SaaS offerings provide customers the ability to connect all of the ages and all of the clouds in the.
Fully automated and autonomous way.
We launched new SD Wan capabilities to centrally monitor manage and automate connectivity from branch location to AWS, adding support for the AWS transact gateway connect solution.
In early two that you may have seen other announcements introducing new solutions from deeper integration between our Aruba, ESP and Microsoft Azure, which will simplify Iot device connectivity and bring the Aruba central to Microsoft Azure.
Finally, we introduced a new class of cloud native and fully automated data center switching products, specifically designed for the age of cloud data centers, which represents a $12 billion Tam expansion opportunity for Hewlett Packard enterprise.
These new offerings also enable us to accelerate the delivery of workload optimized solutions for our HP Greenlit cloud services offerings.
Aruba innovations is why customer like something the Skechers USA and ultra the hirings of choosing a robot we have multi growth drivers in our intelligent edge business and we believe we are well positioned to outgrow the market.
High performance computing of mission critical solution is inherently lumpy business due to the the timing of deals and customer of sentences because.
Cause we can only recognize revenues once customer workloads are in production.
In Q1 revenue was down 9% from the prior year, we remain very confident in this high growth segment based on our backlog of a wall of the business, which now exceeds well over $2 billion of extra scale contracts and a robust pipeline of multi million dollar size deals.
We are on track to deliver the 8% to 12% annual growth rate communicated other security analyst meeting last fall.
We have of market, leading and differentiate the portfolio of technologies that will power of the new age of insight.
We've recently introduced HP Greenlight cloud services for the HBC to accelerate enterprise. It means III adoption of high performance computing targeting a $3 billion to $4 billion Tam.
Enterprises are running analytics on increasingly large datasets and other adopt the new techniques such artificial intelligence deep learning and machine learning and then now will have access to HBC technologies that were historically out of the reach.
The Q1, we won two major HBC awards, one with the National Center of other months fed it from search a contract worth $35 million to build a supercomputer for the extreme weather It research and I know the debt expense NASA HP <unk> supercomputer.
We also completed the installation of the dominant seven supercomputer for Saudi Aramco, which immediately became one of the top 10 supercomputers in the world.
Finally on February 20th you may have seen that HBC.
Baseborn computer too with the launch into orbit for use on the international space station.
The system is enabling real time data processing with the advanced commercial edge computing space for the first time as NASA prepares for future missions.
Today I want to share the news that <unk> has decided to leave the company in April Pete John HP with Cray with the <unk> acquisition and ensure the successful integration of the two companies.
He has made significant contribution it has grown the business despite the complications and backlog growth by the global pandemic last year.
Peter will stay on with the company in a consulting capacity for six months and I'm really grateful for him for it to him for his leadership.
I am pleased to announce that just in Qatar, a seasonal nature of the Leer will take over the leadership of the HBC Mcs business and also Hewlett Packard of labs reporting to me.
Justin has broad and extensive experience across the company that includes leading our HP HP compute business.
Were he transformed the ex 86 compute portfolio and deliver revenue growth profitability and market share expansion I am excited about what Justin will bring to the business.
In the core businesses of compute and storage our strategy to grow and profit profitable segments and people to more as the service solutions is paying off.
We drove strong profitability and cash flow in both businesses.
And compute other operating margins of 11, 5% increased 80 basis points year over year, and 490 basis points quarter over quarter.
Our revenue declined 2% from the prior year, but it was up low single digits sequentially when normalized for the backlog in Q4.
We are encouraged by the sequential growth in new orders intake thickening of the into account of normal Q2 seasonality.
Just last week, we launch of new HPE <unk> opened brand solution stack from telecommunications companies to accelerate the commercial adoption of open Brian in <unk> network deployment.
This is the transformative technology feature of the industry's first set of it optimized for <unk> opened run workloads without HP per lie on servers.
This complements the HP <unk> unveiled us year in March.
Orange one of the world's largest mobile network operators is currently working with HP to test the full <unk> cost stack in preparation for a broader commercial deployment.
The storage revenue was down 6% from the prior year with operating margins of 19, 7%, which is above the target profitability range, we discussed Assam.
We continue to see strong revenue growth in our own IP software defined portfolio of where we have been investing.
Our HPE Primera business grew triple digits year over the year and soon will be bigger than our three part of business.
This is the fastest revenue of ramp ever achieved in our HP storage portfolio.
Our overall HP all flash array of portfolio grew 5% driven by book HPE Primera and HP nimble storage.
Our hybrid converged strategy continued to gain traction of.
HP nimble day HCI next generation technology powered with artificial intelligence gives customer a cloud native experience in their own data centers, where they also have the ability to control costs, while maintaining the data compliance and security.
Our focus on our own IP software defined portfolio also improves our ability to attach reached services to our product offerings.
Our storage operational services attach intensity is up double digits year over the year.
We are also integrating cloud native software technology to empower our field and accelerating sales velocity just last week, we completed the acquisition of cloud physics.
This deal provides us with a SaaS based tool that analyzes it environment to provide a quick return on investment recommendations for cloud migrations application modernization and infrastructure.
I am very excited about this new addition to our set of capabilities, which we will expand across our entire HP portfolio.
Our pivot towards the service continuing strong momentum our annualized of revenue run rate of $649 million was up 27% year over the year.
And we had our highest first quarter ever with HP <unk> cloud services.
The customer adoption continues to be very strong in Q1, we gained more than 70, new HP Greenlight cloud services logos.
<unk> Europe's largest private rail freight operator selected HPE <unk> cloud services to support the <unk> transformation from a conventional freight company into a high performing efficient and sustainable transport system for the European logistics industry.
We remain very confident in our unique approach and differentiate the portfolio to capitalize on the rapidly evolving on premises as the service market.
Our new HPE estimate of software portfolio, and our HP <unk> managed services offerings enable of true consumption base experience.
Our HP <unk> cloud services customer retention rates are above 95% and the average customer usage of our cloud services correlate to of rounding at the 120% of our regional commitment driven.
Driven by customer expansion in the capacity utilization.
We're excited about this long term opportunity and are very confident in our 30% to 40% CAGR target by fiscal year 'twenty two.
HP continues to benefit from capabilities and services that enable growth in our core business segments.
<unk> operational services had a solid quarter all the trends are improving and revenue has stabilized the flat year over year with expanded operating profit margins.
HP financial services provide significant value to our customers of the rebuilt and we think there it it transformation of requirements.
Q1 revenue stabilized with improved collections to deliver a return on equity of 16, 5%.
Overall I am pleased with how we start the fiscal year 'twenty one.
Because of our strong start we are raising our outlook for both EPS and free cash flow.
I talked to customers and partners almost every day and while there continue to be some level of uncertainty one thing is clear.
Customers are looking to accelerate the transformations in need of partnering with the right technology expertise and financial flexibility.
Our distinctive and industry, leading portfolio of edge to cloud solutions and unique capabilities is resonating with customers and I believe our team of one of the best in the industry I'm impressed with our team members' commitment to make bold moves and ensuring we stay true to our purpose.
For the third year in a row HP has it been named one of the world's most ethical companies by the $80 per Institute and just last week HP received the pumps of Reuters Foundation stop Liberty Enterprise Award for our leadership in limiting the risk of delivery in our supply chain and operations.
With this unstoppable team and a portfolio of leading solutions, we are well positioned to capture the tremendous opportunity ahead in fiscal year 'twenty, one and beyond.
With that let me turn it over to <unk> to review of the quarter results Derrick.
Thank you very much Antonio.
I'll start with the summary of our financial results for the first quarter of fiscal year 'twenty one.
As usual I'll be referencing the slides from our earnings presentation to guide you through our performance in the quarter.
Antonio will discuss the key highlights for this quarter on slide one and now let me discuss our financial performance and Kpis, starting with slide two.
I am delighted to report that our Q1 results were marked by continued momentum in revenue substantial gross and operating margin expansion and robust cash generation.
We delivered Q1 revenues of $6 8 billion down 3% from the prior year period, but better than our typical historical sequential seasonality when normalizing for Q4 backlog.
I am, particularly proud of the fact that our non-GAAP gross margin returned to above pre pandemic levels and was up 30 basis points from the prior year period, and up 300 basis points sequentially.
This was driven by strong pricing discipline, the absence of backlog related headwinds.
Cost takeouts and an ongoing favorable mix shift towards higher margin software rich offerings.
Our operating expenses decreased year over year, thanks to our ongoing structural efficiency measures as well as some timing related benefits related to hiring in key selected areas, which have been pushed out.
Our non-GAAP operating margin was 11, 3% up 130 basis points from the prior year, which translates to an 11% year over year increase in operating profit.
As a result of our strong execution, we ended the quarter with non-GAAP EPS of <unk> 52.
Which was up 4% from the prior year and significantly above the higher end of our outlook range.
Q1 cash flow from operations. It was close to $1 billion, driven by better profitability and strong operational discipline as well as working capital timing benefits.
Q1 free cash flow it was $563 million, which was up approximately $750 million from the prior year and a record level for any first HPE per quarter.
Finally, we paid $155 million of dividends in the quarter and are declaring a Q2 of dividend today of <unk> 12 per share payable in April 2021.
Now, let's turn to our segment highlights on slide three.
In the intelligent edge, we accelerated our momentum with rich software capabilities, delivering 11% year over year growth, our third consecutive quarter of sequential growth.
Switching was up 5% year over year with double digit growth in North America, and wireless Lan was up 11% year over year with double digit growth in both North America and a P. J.
Additionally, the Aruba SaaS offering was up triple digits year over year and is now a significant contributor to HPE overall <unk>.
Based on our solid performance, we expect to take share again this quarter in both campus switching and wireless Lan where.
We're also seeing the significant operating profit potential of this business with operating margins in Q1 of 18, 9% up 680 basis points year over year, as we drove greater productivity from past investments and operational leverage benefits kick in.
Finally, I am pleased to say, we recognized our first full quarter of revenue from the acquisition of silver peak.
It is a premium growth SD Wan leader, which contributed approximately 500 basis points to the intelligent edge top line growth.
In HPT Mcs revenue declined 9% year over year, primarily due to the inherent lumpiness of the business, which is linked to the timing of deals and customer acceptance milestones.
We remain very confident in the near term and longer term outlook for this business and are reaffirming our full year and three year revenue growth CAGR target up to age of the 12% respectively.
<unk> highlighted at Sam.
We have an extremely strong order book of over $2 billion worth of awarded exit scale of contracts with another five plus billion dollars of market opportunity over the next three years.
Finally, we announced the launch of our HBC as a service software, which we expect to gain traction later this year and become a further contributor to our overall growing our profile.
In compute revenue stabilize to a 2% year over year decline, but it was up low single digits sequentially when normalizing for Q4 backlog.
Which of tests of our strong order momentum in the quarter.
Gross and operating margins were up meaningfully quarter over quarter due to the absence of any backlog related margin impact improved supply chain execution and the right sizing of the cost structure of the segments.
We ended the quarter with an operating profit margin of 11, 5% up 80 basis points from prior year periods.
And at the high end of our long term margin guidance, where the segment provided at Sam.
Within the storage revenue declined 6% year over year, driven by a difficult prior year compare but with strong growth in software defined offerings.
We are extremely well positioned in storage with prime mirror and nimble the hei, our most software rich platforms. They are both growing triple digits year over year.
They are absolute winners in the market and primarily is on track to surpass three par sales as early as next quarter.
We also saw a notable strength in overall nimble up 31% year over year and total all flash arrays were up 5% year over year the <unk>.
Shift towards our more software rich platforms helped drive storage operating profit margins to 19, 7% well above our long term outlook for the segment presented at some loss of October.
With respect to your point next operational services, including nimble services revenue stabilized and was flat year over year, driven by the increased focus of our Bu sandwich on selling product and services as bundles improve services intensity and are growing as a service business and which I remind you.
You in a bowl of service attach rates of 100%.
This is very important to note because all of our services all of it.
Our <unk> revenue is recurring with three year average contract lengths and O S remains the highest operating margin contributor to our segments.
Within HPE financial services revenue stabilized and was slightly down 1% year over year.
As expected we are seeing sequential improvements in our bad debt loss ratios ending this quarter at approximately 0.9%, which continues to be best in class within the industry.
We have also seen strong cash collections, well above pre COVID-19 levels.
As a result, our non-GAAP operating margin was nine 8% up 110 basis points on the prior year and our return on equity is back to a pre pandemic high teens level of 16, 5%.
Slide four highlights key metrics of our growing as a service business.
Similar to last quarter, we are making great strides in our as a service offering this quarter with over 70, New Green Lake logos added in Q1.
I am very pleased to report that our Q1 'twenty one <unk> it came in at $649 million, representing 27% year over year reported growth.
Total is the service orders were up 26% year over year, driven by very strong performance in Europe and Japan.
Our HPE Aruba central of SaaS platform also contributed to grow revenues strong triple digits year over year.
Based on strong customer demand and recent wins I am very happy with how this business is executing and progressing towards achieving its era of growth targets of 30% to 40% CAGR from fiscal year 'twenty to fiscal year, 'twenty, three which I am reiterating today.
Slide five highlights our revenue and EPS performance to date, where you can clearly see the strong rebound from our Q2 trough.
The revenue returned back to near pre pandemic levels last quarter and with the operational execution of our cost optimization and resource allocation program. We have nearly doubled EPS from the trough and are now growing year over year.
Turning to slide six we delivered a non-GAAP gross margin rate of Q1 in Q1 of 33, 7% of revenues, which was up 300 basis points sequentially and 30 basis points from the prior year period.
This was driven by strong pricing discipline, the absence of backlog related headwinds we had in the second half of last year operational services margin expansion from cost takeout and optimize automation.
And of positive mix shift towards high margin software of rich businesses like the intelligent edge and storage.
Moving to slide seven you can also see we have expanded non-GAAP operating profit margins, which is up 280 basis points sequentially and 130 basis points from the prior year period.
We have done this by driving further productivity benefits, which while simultaneously maintaining our investment levels in R&D and field selling costs, which are critical to fuel our innovation engine and revenue growth targets.
Q1 operating expenses also benefited from delayed hiring and the push out of select investments that we will be making to drive further growth.
Turning to slide eight we generated record levels of first quarter cash flows.
Cash flow from operations was approximately $1 billion and free cash flow. It was 563 million for the quarter up approximately $750 million from the prior year period.
This was primarily driven by the increased profitability strong operational discipline, and some working capital and in year timing related benefits.
Now moving on to slide nine let me remind everyone about the strength of our diversified balance sheet liquidity position.
Which are a competitive advantage in the current environment.
As of January 31st quarter end, we had approximately $4 $2 billion of cash on hand.
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.
Bottom line, our improved free cash flow outlook and cash position ensures we have ample liquidity to run our operations continue to investing in our business to drive growth and execute on our strategy.
Now turning to outlook on slide 10.
At our October 2020 Securities Analyst meeting, we provided our outlook for fiscal year, 'twenty, one, which we raised by three cents at the midpoint of $2 60 to $1 78 in our last earnings release.
Today I am pleased to announce that we are raising our fiscal year guidance for fiscal year 'twenty. One once again to reflect our strong operational performance to date and confidence in our outlook.
We now expect to grow our fiscal year 'twenty, one non-GAAP operating profit by over 20% and expect to deliver of fiscal year 'twenty. One non-GAAP diluted net earnings per share between $1 70 to $1 88, which is of 10 cents per share improvement on the midpoint of our prior EPS guidance of $1 60 to $1 70.
It.
From a top line perspective, we are pleased with the momentum we saw in Q1 and whilst we continue to see gradual improvement we remain prudent as we and the rest of the world continues to navigate the pandemic and related macro uncertainties.
More specifically for Q2 'twenty, one we expect revenue to be slightly better than in line with our normal sequential seasonality of down mid single digits from Q1.
This still represents double digit year over year growth from the $6 billion trough of Q2 of fiscal year 'twenty.
Now with respect to supply chain I would like to remind everyone that we exited Q4 of our fiscal year 'twenty with higher levels of inventory to protect against the risk of of short term supply squeeze and address improve customer demand.
With these actions and other proactive steps that we've taken in Q1.
We do not expect any meaningful impacts on our supply chain in the near term.
We're now turning our attention to working on strengthening our inventory supply for the second half of fiscal year 'twenty. One as we see improved levels of demand recognizing also that we have entered an inflationary environment for memory components.
For Q2, 'twenty, one we expect GAAP diluted net EPS of two to eight cents and non-GAAP diluted net EPS of 38 to $2.44.
Additionally, given our record levels of cash flow this quarter and raised earnings outlook I am very pleased to announce that we are also raising fiscal year 'twenty, one free cash flow guidance from our Sam guidance of $900 million to 1 billion won to a revised outlook of 1 billion 121 billion for a 250.
The increase at the midpoint.
So overall I'm talking it and I are proud of these results we have navigated well through unprecedented challenges in the last fiscal year and have started the new fiscal year of strong out of the gate.
We saw significant acceleration in customer and customer demand in our intelligent edge business and the order pipeline in our HBC Mcs business remains robust.
Our core business of compute and storage revenues.
Our stabilizing with improved margins and our as a services <unk> continues to show strong momentum aligned to our outlook.
As a result of our cost optimization and resource allocation program. We are emerging from an unprecedented crisis as a different company.
One it is much leaner better resource in position to capitalize on the gradual economic recovery currently at play.
We're already seeing the benefits of our actions in our improved margin profile and free cash flow outlook.
Now with that let's open it up for questions Andy.
Great. Thanks.
Well first of all first question. Please thank you.
Certainly we will now begin the question and answer session to ask the question you May Press Star then one on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two we also request that you. Please only ask one question.
The first question today will come from Shannon Cross with Cross Research. Please go ahead.
Thank you very much for taking my question.
I'm curious everyone is talking about digital transformation and they seem to really gain traction.
Early and kind of it with the need for remote work, but now could you talk a bit about how customer priorities and purchase decisions are changing as we're moving past COVID-19 and I'm wondering if it is an opportunity from our consultative sales and higher asps at the margin. It if you could talk about it maybe by segment that would be helpful. Because I assume it may vary across your business line.
Thank you.
Well, Thanks, Scott Bob here.
Yeah, I'll take that in the.
Well, we definitely still see the tailwind of what we saw in 2020, obviously, we work in a much more distributor the environment. You know we talk about this all the time about the fact of many employees will never it turned to the office and they need access to.
The data and services.
Very connected way and so that's why we believe our other of our business. It is of digital transformation engine for our customers. It is not just about.
Access to our Wi Fi port, but it is also the fact that provide that AIDS. The cloud connectivity for all of the apps and data of whatever the liffe.
So what we see though it is an acceleration of four definitely the access to data the analytics side, we see AI and machine learning taken holding every segment of the market because data insights it's necessary to compete in this new digital economy.
We see obviously the need to improve it resiliency based on the learnings we had in 2020.
We see also the need to deploy cloud everywhere it.
Remember all of the finish of the cloud is an experience not the destination and Thats why we are very bullish about the IHT of Green Lake Cloud services.
The the pipeline the size of the deal the the.
The need to engage in a consultative application driven conversation is increasing and thats, where we have.
Our line.
Advisor and professional services to to that part of the other business.
So I think that it is gonna be a mix of thanks, Shannon, but ultimately the digital transformation. It is no longer the priority. It is of strategic competitive and those of who move fast around the data insights and digitizing everything will be the winners no question.
Perfect Great. Thank you Shannon operator can we go to the next question. Please.
The next question will come from <unk> Mohan with Bank of America. Please go ahead.
Hi, yes, thank you and congrats on the nice execution in the especially the strong cash flow performance.
Antonio you noted some solid order linearity I was wondering if you can talk about any meaningful changes that youre seeing in your customer conversations around the recovery in enterprise demand in it what are some of the key assumptions around the.
The upside to the EPS and cash flow guide. Thank you.
Well, maybe I'll start and then I would like to talk about the EPS upside.
Listen I spend more than 50% of my time talking to customers and partners and I see a renewed focus on.
Making sure of the business out of position for success.
Definitely the range that needs to modernize their infrastructure and deploy these new technologies across the board.
Our order linearity it can take once it was very solid evidence single week of the quarter. There was no. One week there was higher and then others honestly I was very pleasant surprise about that the way of managing the business with my team of quarter. There has 13 weeks because when you go into a quarter that you already have a week of backlog and.
Then you'll drive yearly and the additive from there and it was very consistent it was across all businesses Athletic said.
Of our compute business so sequential growth in all of it it can take the Sammy now the areas of the storage portfolio, where we have pivoted in particular of everything thats soft of the falling.
Auto levels very strong out of the gate and we see that momentum of going through 2021 Green Lake the same thing, but ultimately the other vision of the H. The cloud is pay enough because of the many customers need that architecture and a set of services that the can deliver of what they need in this digital transformation. So it Phil.
It comfort it about that and Thats why you know we.
We are accompanying the raising the outlook, which does it give you the insights about the EPS upside so maybe it Todd if you want to talk about that.
Okay.
Sure Antonio Angie Thanks for the question we.
We feel very good about our guidance for the second quarter and the full year 'twenty one we.
We did express scripts that we see our non-GAAP operating profit growing by over 20% year over year.
And our guidance reflect that now when you look at our margins for this quarter.
And the need to proceed with the select investments we feel that the guidance that we have on an EPS level is achievable.
Particularly when you look at the improvement quarter over quarter in Q2 and for the rest of the year as Q3, and Q4 are usually strong quarters for <unk>.
Our businesses, such as the intelligent edge and and also storage.
With respect to cash flow our guidance has improved by $250 million at the midpoint and is the reflection of the.
The improved outlook on operating profit.
I am very pleased to put forward the guidance of 1 billion, one 2 billion for free cash flow and we will see as the year progresses of how this guidance will translate the actual results.
Great. Thanks, Romsey can we go to the next question. Please.
And our next question will come from Aaron Rakers with Wells Fargo. Please go ahead.
Yeah. Thanks for taking the question. It also congrats on the quarter from me as well.
I wanted to ask about the margin profile. When you think about the performance that we've seen this last quarter do you think about the mix of the business going forward I guess, how do you think about the the continued upward levers on gross margin and can you just remind us of where we stand of the 800 million net savings initiatives.
From a from an Opex perspective about where we stand it up now and what's left in terms of that target by the ex the fiscal 'twenty two thank you.
Sure and thank you for the question so let's pick up the gross margin first and then it will talk about our cost optimization and resource allocation program.
On gross margin, we feel very good that now that we've put behind us all the effects from backlog in Q3 Q4 of last year, we're now operating the business.
In the context, where we have normal business flows between orders and supply chain delivery and we do acknowledge like we said before that there is a inflationary environment of some commodity such as.
DRAM, but we feel that we have the right levers around pricing and also purchases to navigate the upcoming quarters, we feel very good about our supply chain position in terms of inventory levels for the short term.
As a reminder, at the end of last year, we stocked up.
In anticipation of two things a resurgence in the customer demand, which we saw happening and also a potential squeezing some commodities that we were anticipating back then which is proving true now, but we are of very well positioned to drive that so we will navigate the.
The.
Short term supply demand equation reasonably well pulling on pricing levers as needed in our core it.
In addition to this you have it mix effect from software rich revenues. These are coming from storage and of course, the intelligent edge Aruba is performing extremely well it is a very high gross margin business.
We see continued growth in Aruba, we've demonstrated three quarters of consecutive growth. This is set to continue the products in very hot demand everywhere globally and the mix effect will also play on the gross margin front I think I've given you sufficient color. There. So maybe it's time, we turn to the cost optimization and <unk>.
So it should allocation program.
One of them line on this one as we are on track and the reason why you see our operating margins up to the levels that you've seen of north of 11% overall for the company is because of that program and so what's very very important for us is that we keep that expense discipline to sustain this level of operating profit growth moving forward.
And drive productivity, meaning having higher revenue over the same cost base to continue to drive operating profit growth and therefore, it translating into a free cash flow growth moving forward the.
The 800 million net run rate benefits as a reminder would be.
Felt.
For the most part in fiscal year 'twenty, one you started.
Seeing some of that we're incurring restructuring costs to that effect.
And the program will be over by fiscal year 'twenty two.
And we are well on track and very pleased with how it is tracking.
As we speak.
Margaret.
On the.
I'm sorry it.
It might not comment on what product set what we announced last year in Q2 was the right thing to do.
We have enough experience in this company to tell us to.
To take actions immediately and it now proven to be very very fruitful for us.
As <unk> said in his remarks right. We are we are.
Becoming a different company more leaner more agile and allows us to prioritize the investment indicators of growth.
So very pleased though it took that action of the time.
Okay. Good good point Antonio Thanks, Thanks, Sharon for the question operator can we get it the next one please.
And our next question will come from Katy Huberty with Morgan Stanley. Please go ahead.
Thank you Mike Congrats on the quarter as well question for Tarek you beat the first quarter by about 11 cents versus consensus you got it up the full year by 10 cents. So the guidance implies that you don't operationally beat the the next three quarters is that just.
Prudent says, we await full visibility into the pace of demand recovery or is that tied to some of the delayed opex investments the.
You mentioned it maybe if you can detail what some of those investments are just that we can understand them.
Those are thank you.
Sure it so.
We pretty much Katie passed on to the full year guidance of the entire beat in Q1.
A couple of points on the <unk>.
The investment front, you could see from some of the slides that we put forward our investment in R&D and FSC theirs has to continue and we will find the.
Adequate.
Sources to fund investments in <unk> and R&D, because we have to continue to fuel growth and this is part of our story, which is two <unk>.
We think our cost structure in terms of back office and front of house to drive growth and innovation by way of software. So I feel pretty good about that.
With respect your also your modeling of EPS on a full year basis I want to take the opportunity to highlight of what's going on at the Oi and the level.
Or any.
It was a.
The positive contributor to EPS in this quarter. This is just simply due to timing, particularly the contribution of <unk>.
Economic interests from HCC.
For the full year, we still see overall.
100 million dollar of expense and this is why you may think that the guidance is flat.
One on <unk>, but don't forget the effect of <unk> coming in in the second half of the year as an expense.
Great. Thanks, Kevin for the question can we go to the next one please.
And the next question will come from Amit <unk> with Evercore. Please go ahead.
Yeah. Thanks for taking my question and I'll extend my congratulations as well.
I wanted to talk a little bit on the Aruba fairly strong double digit growth over here and I think the Chilean peso the bin.
It was like Cisco and Juniper, probably seen low to mid single digit growth I know so it will pick up some element of it.
Love to get a sense from a share gain perspective, we're all using the share gains on the product of what it could provide some color there would be helpful. And then the durability of this growth it would be helpful to understand as well.
Well thanks Amit.
Listen we believe it always the winner simply put it is the software assets that deliver a mobile first cloud first experience that provides ubiquitous secures connectivity in a in a platform oriented approach.
So for us it's not the surprise to see the momentum in that business, which is not just revenue.
<unk> said three consecutive quarters of growth, but also five quarters of growth and margin expansion.
In the business and as we come into the early on all of the SaaS revenue, which is the subscription to the platform. It is up three three triple digits right on on the bulk of the business.
We expect the gains bulk shares in campus switching and wireless Lan whether it is we'll see how the market the us but.
Some of our competitors. It is don't disclose numbers. So it is hard to understand you know what it was down the versus up but I think the market.
It was not as positive as the people from trade, but we outperformed the market quite significantly so whether it is of 100 basis points of 100 basis points overseas soon.
But I remain very bullish I remain very bullish about the business. This business will continue the growth for the balance of the year.
Because now we have set of a peak in our portfolio, which is a complete the finish of that experience for the as the one and remember what I said early on in an edge to cloud architecture, you have to connect all your edge is in all of your cloud and the only way to do it the scale is true software.
And silver Silver peak brings a SaaS solution and also unknown prep solution that allows customers to connect all of it I just all of the cloud in a fully automated and autonomous way.
And that's a big opportunity for us and Thats why im really bullish because ultimately we have to integrate the industrial auction into the same platform and then there are multiple drivers of growth as we think about the next 12 24 36 months, which includes the edge computing and <unk>.
That's why a bit of other confidence in our ability to deliver against that market.
Great. Thank you. Thanks, Thomas for the question because the other 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 maybe you could help us understand where you see your market in terms of enterprise is coming out of the pandemic or a recovery and really the the root of this question is intelligent edge. It looks like it it's recovered with the year over year growth, whereas the other segments.
Maybe we can expect more of a recovery pattern later this year. So I'm looking for maybe a bridge between what the execution and what kind of macro recovery by segment. Thank you.
Yeah I mean.
I think mark of the in general is recovery of recovering as the.
It said early on.
Some of it is my my point about the order linearity will steady and consistent throughout the quarter, which gave us the confidence that we will see gradual continued improvement in the demand.
And it is no one business. So I think it's across all businesses.
And I think it's a combination of all the execution because of our strategy and the emphasis on the innovation that we're bringing to the market and obviously as the market gets better we should take advantage of that but remember we have a unique value proposition. We are a company that has unique portfolio of from edge the clouds.
Our competitors don't have all of that some have in one area of some have been another area where customers want it is integral to the experience more and more and obviously the shift to a consumption driven model is in our favor because once we land the customer in Green Lake basically they get what they want whether it is the.
At the edge of what is in the core of whether it is an amount of services for the hybrid model that they all adopted so I think.
The compute I think the new technologies coming online with the nvme and more of options that can be attached.
Storage, obviously it is all of the software defined that Patrick talked about it.
Data is exploding.
And the HBC I'm very bullish about the HBC because ultimately the.
The data sets, we're seeing customer sites continue to growth and they all need the AI and machine learning of the one point in time.
Not just a few customers so whether it is logical in the sector education also it is going to be a very good because we expect you know.
Of children to get back to school at some point in time.
Obviously, the transportation with it.
With the autonomous vehicles, and <unk> deployment, so I see multiple growth going forward and obviously it isn't out of hand to innovate and deliver against that opportunity.
I'm, sorry, if I can add the two color to the compute business I think it's important we let everyone on the call know that when you look at the underlying performance of compute and particularly when you normalize for Q4 backlog of impacts.
Both <unk> and units were up.
Sequentially.
So there is a real recovery in compute if you strip out the impact of backlog in Q4, <unk> was up high single digits and of units were up approximately 10%.
Quarter on quarter. Once you do that normalization of it's very hard for analyst outside of the company to do it the normalization, but that's why I wanted to make the point, so hopefully that will resonate with the analyst community.
On this earnings announcement.
Yes, thanks to Eric.
And thanks. Thank you Simon for the question. So we're just about at the top of the hour now operator can we have the last question. Please.
The last question today, it will come from Paul Coster with Jpmorgan. Please go ahead.
No it very exciting question to finish off of them, but yes.
It looks like you're pushing the upper boundary. If you expect to adult protein margin range for the core businesses and I'm wondering it it sounds like you know they could get better yet so.
What are you going to change the range of expectations around the operating margins or is this just sort of unsustainable what we're seeing at the moment.
Yeah.
It is this a very exciting question. It's a very exciting question for me is essential.
So it don't be shy about it I would simply say it look.
We have to keep the expense discipline and drive productivity, we feel that the.
The the upper boundary has yet to be test it and.
I would say that this is always in the company like that it's not a short term.
Endeavor, but something that has to be done on the sustainable business.
On the sustainable basis, moving forward, but remember also that what drives the operating margin is the continuous expansion into software margin risk software offerings.
And our <unk> will start to shine as it continues to accelerate into fiscal year, 'twenty, one and 'twenty two.
Great. Thanks, Thanks, Paul for the question Antonio maybe I'll turn it over to you for any final comments you had before we close the call Paul.
Well. Thank you taught it and thank you everyone for joining us today I know there are more questions, but I know it paddock and the team will get the offline with you and they wanted one follow up calls.
I mean, I just wanted to it right.
It is a very solid start for a company of his kind of 21, obviously, we'll remain committed to drive of shareholder value I'm, particularly pleased with our results in profitability and free cash flow, which was record breaking the fact that where the confidence in the amount of recovery and not all of execution that allows us to waste.
<unk> for the full year, non-GAAP, EPS and free cash flow, we see tremendous momentum in other areas of innovation and focus intelligent edge and even the HBC business remember, where the lumpiness of the business confidence of the name of the 8% to 12% growth and then the pivot towards the service so because of all of that.
We believe it is gonna be a good the air ambulance and obviously, we're all watching the the trends where the carve it but I think customers.
But realize that this is the they need to make the investments to digitize everything that the company.
Again, thank you for joining us today and I hope it continues to stay safe and healthy talk to you next quarter.
Okay.
Okay.
Ladies and gentlemen, this concludes our call for today. Thank you and at the time you may now disconnect.
Yeah.
Yes.
Yes.
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