Q2 2021 Hewlett Packard Enterprise Co Earnings Call
[music].
Good afternoon, and welcome to the second quarter 'twenty 'twenty, 1 Hewlett Packard Enterprise earnings Conference call. My name is Matt and I'll be your conference moderator for today's call. At this time, all participants will be in listen only mode. We will be facilitating a question and answer session towards the end of the conference should you need assistance during the call.
Please signal a conference specialist by pressing the star key followed by zero as a reminder, this conference is being recorded for replay purposes I would now like to turn the presentation over to your host for today's call Mr. Mr. Andrew Seminar Vice President of Investor Relations. Please proceed.
Good afternoon of anti Semitic head of Investor Relations for Hewlett Packard Enterprise like the welcome you to our fiscal 2021 second quarter earnings Conference call with Antonio Neri, Hpe's, President and Chief Executive Officer, and Eric <unk> 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 1 year, we posted the press release and the slide presentation accompanying today's earnings release on our HPE Investor Relations webpage at investors that HP dotcom.
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 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 to the hpe's filings with the SEC, including its most recent form 10-K and form 10-Q.
<unk> 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 of ultimately reported in Hpe's quarterly report on form 10-Q for the fiscal quarter ended April 32021 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.
The way 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 and posted to our website and is also embedded within the webcast player for this earnings call with that let me turn it over to Scott.
Thanks, Andy and good afternoon, everyone. Thank you for joining us today.
While the great progress is made in the fight against Covid. It's also clear that it's still a global challenge.
I want to take a moment to acknowledge the software and of course into India and elsewhere as communities confirms they must state in the Covid surges.
We will continue to do everything we can to support of the team members customers and communities through this very challenging time.
Hewlett Packard Enterprise had a strong second quarter.
I'm very pleased with the results and they are marked by revenue growth strong profitability and free cash flow.
The overall demand environment is improving and we are seeing traction across our portfolio.
We saw solid sequential improvement in total H B E orders growth that was up mid single digits with double digit growth in HP Green Lake and HBC business segments.
We expect the continued the improvement in customer spending throughout 2021.
Of disciplined execution on our strategic but I all of it is a line of the secured at the end of this meeting last fall.
This positively impacted both top and bottom line for 4 months.
We are strengthening our core businesses doubling down in key areas of growth and accelerating our office of the spirit, while advancing our cloud first the innovation agenda to become the edge the cloud platform of the service choice for our customers and partners.
We have also execute the world throughout the industry wide tightening and cost inflationary trends with minimal impact to our first half we have taken proactive inventory buffer the measures to position us well from the second half.
We will continue to take additional inventory actions as appropriate in the alignment to the market demand by leveraging great engineering capabilities, and our long term agreements with our suppliers.
Our continuous strong performance give us the confidence to raise our fiscal year 'twenty, 1 EPS and free cash flow outlook for the third time since our security analyst meeting.
We will provide more details about this new guidance later in the call.
First let me review some key Q2 highlights.
Revenue of $6.7 billion was up 9% yield of it here.
The better the normal sequential seasonality.
I'm, particularly pleased with the double digit revenue growth in both our HBC and intelligent edge businesses. The 2.
Together now represents 222% over the HP told the revenue.
Our other services honor of equivalent revenue growth was an impressive 30% year over the year, which underscores our momentum in the enabling consumption base I T.
This is an important long term growth driver for our company.
We made significant improvements in both gross and operating margins.
Non-GAAP gross margin of 34, 3% is at record level and up 210 basis points year over year.
Our non-GAAP operating profit of 10, 2% is up 300 basis points year over here.
And our non-GAAP EPS of <unk> 46 cents is up 17% year over year and above the high end of our outlook range.
These results contributed to Q2 free cash flow of $368 million, which is up $717 million year over year, bringing the first half fiscal year 'twenty, 1 free cash flow to a record of $931 million.
Tarek will discuss the financial results and outlook in greater detail.
Before he does that I want to provide additional comments on the business segment performance and highlight some of the novel solutions and experiences.
The corner.
HP has been of driving transformation in our businesses to deliver the modern secure cloud the experience everywhere to help our customers with the digital transformations.
The intelligent edge business accelerated this momentum with an outstanding quarter across the old metrics.
Revenue of $799 million grew 17% year over year and operating profit the expanded 320 basis points over the year.
This is the third consecutive quarter of year over year of revenue growth and sixth consecutive quarter of operating profit expansion.
Edge.
As a service offerings were up triple digits year over year, and now a meaningful contributor contributor of 2 Hpe's overall a R.
Extended to the edge has never been more critical for enterprises.
The roomba atmosphere, our signature event for that group of customers and partners, we announced an expansive set of cross portfolio H. The cloud security integrations for the Aruba edge services platform of our ESP, including the SD Wan technology from our recent silver peak acquisition.
Good day.
H services platform already supports well over 100000 customers with 150, new customers added every day connecting over 1 billion active devices.
Although we are building and then identity network security is unique in the market and provides the ideal foundation for building of Zero Trust and secure access service edge.
Our comprehensive portfolio and AI powered cloud driven platforms like the robot ESP in the room of Central will continue to accelerate Wan and security deployment advanced cloud and Iot adoption and fast track digital transformation.
Customers like Walgreens Boots Alliance in Macau, the Libra chose the ruble in Q2 from these reasons.
I am tremendously pleased with the Roomba is in place of performance and it is against the successful backdrop that I want to share of the Aruba found the key theme of coffee.
The decision from the Thai from HPE.
We have quite a whole day in 2015, when we saw the edge of the next frontier Aruba and keeps the has been instrumental in accelerating the business through the $3 billion of business. It is today.
I'm incredibly grateful for his leadership and I have personally the benefits from his counsel knowledge and friendships keeps it will remain as an advisor to me for the remainder of 2021.
I am pleased to announce that effective today still multi will take over the leadership of our roomba intelligent edge business.
Phil is a results driven leader with extensive experience implementing growth strategies and leading transformation initiatives.
He joined HP in 2019 of most recently assumed the role as the general manager of our Communications Technology group using.
Even the team of more than 5000 team members, who drive $500 million in CPG specific revenue and $3.5 billion in total revenue of 4 HPE.
I'm excited to welcome 2 into this new role and believe he is the perfect fit to ensure we maintain our leadership position from momentum in the market.
In our high performance computing of mission critical solutions business revenue of $685 million was up 11% year over year.
We are the undisputed market leader with an industry, leading portfolio in AI and deep learning solutions for the new age of insight.
We continue to execute on over 2 billion of Daus and the award the contract.
And we are pursuing a robust pipeline of another $5 billion in market opportunity over the next few years.
In Q2, we announced several new HBC system deals and collaborations. These include building new supercomputer 2 of my scientific research for the Swiss National Supercomputing Center, the United States Department of Energy, Los Alamos National Laboratory, and the National Supercomputing Center Supercomputing Center in Singapore.
As we have noted on previous calls this is admittedly lumpy business due to the lead times between the origin of revenue recognition.
We remain on track to deliver the target the 8% to 12% annual growth in this business this year.
Our compute the startup businesses performed very well in the quarter our strategy to grow in profit in the segments of the market and people to more of as a service solutions is paying off in compute the revenue of $3 billion was up 10% year over year.
We drove strong operational performance expanded operating margins by 550 basis points.
We expanded our portfolio with the latest a M. The epic and Intel Xeon scalable processors, which include the launching 3 new HP <unk> solutions targeting the <unk> deployments in telco virtual desktop infrastructure and storage optimized solutions for database workloads in the enterprise.
Historic revenue of $1.1 billion of Moelis was up 3% year over year with a strong operating profit of 16, 8% of 110 basis points year over the year.
We continue to see strength in key software defined solutions, which drive our ability to attach rich services to our product offerings.
But I would mirror and nimble DHT I, both grew triple digits.
<unk> all flash array of portfolio grew 20%.
On May 4th we introduced a new portfolio of cloud native they think infrastructural called HPE of lesser.
This portfolio of delivers workload optimized systems and provides customers with architectural flexibility to run any application application without compromise from.
The cloud with a cloud of operational experience.
These innovations are propelling our storage business into a cloud native software defined data services business.
Our pivot to us of services continued its strong momentum our annualized revenue run rate of $678 million was up 30% year over year. We saw strong total out of sort of its order of growth of 41%.
Over 900, <unk> go to market pardon the Sun now actively funding HP to remake of the parts of the non marketplace.
And we average of 95% renewal rate with billings from those of customers at 124% usage of the regional contract commitments.
We have an unmatched portfolio of hybrid cloud services, that's the pumps all aspects of the networking compute storage Vms containers, the MLR HBC and more.
On the innovation from we announced a transformative new data store the services platform that brings the cloud operational Margaret to whatever base of lives by unifying the state's operations.
The platform will be available through HP Green makes simple and includes a new bank of services cloud console and the strength of software subscription services, the simplify and automate global infrastructure of scale.
Our interest in moving HBV and the cloud services experience enable us to gain more than 90, new customers during the quarter.
Christine is of Great recent customer of example.
3 years multimillion dollars of yield curves.
Select of HBV and the cloud services with HP as middle of software and HP next services to power the transformative new healthcare initiatives based on artificial intelligence necessary base.
We will continue to invest aggressively in HP Green Lake cloud services to provide the true cloud the experience and operating model whether at the edge on premises across multiple clouds.
HP businesses that provide services and capability of our customers. We see the transform also performed well in Q2.
HPE next operational services had another solid quarter with revenue growing year over the year of as reported.
We expect to see growth for the full fiscal year driven by our growth in services intensity in August of this momentum.
HPE financial services continue to play an important role in helping our customers of the rebuild and we think that I think transformation of requirements.
Cash collections continue to improve and HPE Fs delivered a return on equity of 18, 3% well above pre funding levels.
This business continued to perform very well.
Over the past year of global communities of things a couple of profit health crisis of significant business disruption.
Ah the HPE, we're sort of right that our strategy to be the edge. The cloud platform of the service company to support our customers' rapidly changing needs.
Throughout this time, our 60000 team members of demonstrate the amazing agility and perseverance and I am tremendously proud of our team members of responsibility with unprecedented the time I want to thank them for the commitment and passion that has made HP stronger and better position in the work that has forever changed.
As businesses emerge from the pandemic of move beyond the immediate needs of Covid digital transformation is at the forefront of their strategic initiatives.
Are the corporate event on June 22nd we will have more about how age feeds of the center of the supercharged digital economy.
And I use the cloud architecture software and solutions all delivered at the service will continue the help of customers transform the businesses optimize the applications and data outside of increasingly distributor in the world and the future of R&D today.
I am excited about our momentum and I believe the HP Eagle represents a strong investment opportunity for our shareholders with that let me turn on of all of its the product to review the quarter's results.
Yes.
Thank you very much on Ghana.
Start with the summary of our financial results for the second quarter of fiscal year 'twenty 1.
As usual I'll be referencing the slides from our earnings presentation to guide you through our performance in the quarter.
And third I'll discuss the key highlights for this quarter on slide 1 and now let me discuss our financial performance starting with slide 2.
I am very pleased to report that our Q2 results reflect continued momentum in revenue strong gross and operating margin expansion and robust cash flow generation.
We delivered Q2 revenues of $6.7 billion up 9% from the prior year period, the level better than our normal sequential seasonality.
I am, particularly proud of the fact that hour of non-GAAP gross margin is at the record level of 34, 3%.
200 of 10 basis points from the prior year period, and up 60 basis points sequentially.
This was driven by strong pricing discipline cost take outs and an ongoing favorable mix shift towards higher margin software rich offerings.
Our non-GAAP operating expense increased in the quarter I read previously indicated due to the planned hiring increases along with R&D and go to market investments. This offset by our continued progress delivering on the savings from our cost optimization plan, which is on track.
Even with our investments our non-GAAP operating margin was 10, 2% that is up 300 basis points from the prior year, which translates to a 15, 9% year over year increase in operating profit.
Within other income and expense, we benefited from onetime gains related to increased valuations in our cohesion.
And I on Q investments within our profile of our venture portfolio.
As a result, we now expect other income and expense for the full year in fiscal year 'twenty, 1 to be an expense of approximately $15 million.
With strong execution across the business, we ended the quarter with non-GAAP EPS of <unk> 46 cents up 17% from the prior year and meaningfully above the higher end of our outlook range from Q2.
Q2 cash flow from operations was $822 million and free cash flow was $368 million.
$770 million from the prior year, driven by better profitability and strong operational discipline as well as working capital benefits.
This puts us at a record level of free cash flow from the first half at $931 million.
Finally, we paid $156 million of dividends in the quarter and are declaring a Q3 the dividend today of <unk> 12 per share payable in July.
Now, let's turn to our segment highlights on slide 3.
In the intelligent edge, we accelerated our momentum where the rich software capabilities to meet the robust customer demand delivering 17% year over year revenue growth across the portfolio.
Switching was up 17% year over year and wireless Lan was up 16%.
Additionally, the edge of the service offerings were up triple digits year over year, and now represent a meaningful contribution to hpe's overall a R. R.
We also continue to see strong operating margins at 15, 5% in Q2 of 320 basis points year over year, which of the 6 consecutive quarter of year over year operating margin expansion.
Yeah.
<unk> continues to perform well leveraging the high growth as you went market opportunity and contributed about 5 points to the intelligent edge top line growth.
In HBC MTS revenue grew 11% year over year as we continue to achieve more customer acceptance milestones and deliver on our more than $2 billion of awarded contracts.
We remain on track to the labor on our full year and 3 year revenue growth CAGR target of 8% to 12%.
In compute revenue grew 10% year over year and was down just 1% sequentially, reflecting much stronger than normal sequential seasonality.
Operating margins were up meaningfully year over year due to the disciplined pricing and the right sizing of the cost structure in the segment.
We ended the quarter with an operating profit margin of 11, 3% of 550 basis points from our prior year period and towards the upper range of our long term margin guidance for the segments provided at Sam.
Within the storage revenue grew 3% year over year, driven by strong growth in software defined offerings.
Nimble grew 17% with ongoing strong DHEA momentum growing triple digits.
Flash arrays grew 20% year over year led by primary that was up triple digits and is expected to surpass 3 of our sales next quarter.
The mix shift towards our more software average platforms and operational execution helped drive storage operating profit margin to 16, 8% up 110 basis points year over year.
With respect to park next operational services, including nimble services revenue grew for the second consecutive quarter of year over year as reported with further growth expected for the full year of fiscal year 'twenty 1.
This has been driven by the increased focus of our Bu segments on selling product and service bundles improve service intensity and our growing as the service business, which I remind you Ingalls services attach rates of 100%.
This is very very important to note because all of our of our highest revenue is recurring where 3 of average contract length and O. S is the highest operating margin contributor to our segments.
Within the HPE financial services revenue was down 3% year over year as the pandemic did not materially impact this business until later in 2020.
As expected we are seeing continued sequential improvements in our bad debt loss ratios ending this quarter at just 75 basis points, which continues to be best in class within the industry.
We have also seen improved cash collections of well above pre COVID-19 levels.
Our operating margin in the segment was 10, 8% of 160 basis points from the prior year and our return on equity at 18, 3% is well above pre pandemic levels and the 18% plus target that we set of time.
Slide 4 highlights key metrics of our growing as a service business.
Or to the past couple of quarters, we are making great strides in our as the service offering with over 90, new enterprise being like customers added.
That is in Q2, bringing the total to well over 1000.
I am pleased to report that our Q2 of 21 of <unk> was $678 million, which was up 30% year over year as reported.
So as a service orders were up 41% year over year, driven by strong performance in North America and Central Europe.
Our edge of the service offerings also continue to grow revenue strong triple digits year over year.
Based on strong customer demand and the recent wins I am very happy with how this business is executing and progressing towards achieving our growth targets of 30% to 40% of CAGR.
CAGR from FY 'twenty, 2 FY 'twenty 3.
Slide 5 highlights our revenue and EPS performance to date, where you can clearly see the strong rebound of momentum from our Q2 'twenty trough.
For the past 2 quarters revenue has exceeded our normal sequential seasonality, reflecting the improving demand environment and where the operational execution execution of our cost optimization and resource allocation program. We have increased non-GAAP EPS in Q2 by 17% year over year.
Turning to slide 6 we delivered a record non-GAAP gross margin range in Q2 of 34, 3% of revenues, which was up 60 basis points sequentially and up 210 basis points from the prior year.
This was driven by strong pricing discipline operational services margin expansion from cost takeout on automation and a positive mix shift towards high margin software range businesses like the intelligent edge and next generation of storage offering.
We have also benefited from the new segmentation, we implemented the beginning of fiscal year 'twenty that has giving us much better visibility into each business unit and enabled better operational discipline.
Moving to slide 7 you can also see we have expanded non-GAAP operating profit margin substantially from the pandemic lows of.
210, 2%, which is up 300 basis points from the prior year period.
We have done this by driving further productivity benefits and delivering the expected savings from our cost optimization plan, while simultaneously, increasing our investment levels in R&D and field selling cost, which are critical to fuel our long term innovation engine and revenue growth targets.
Q2 operating expenses also included planned increased hiring and spending on select investments to drive further growth.
Turning to slide 8 we generated a record first half levels of cash flow with the $1.8 billion of cash flow from operations and $931 million of free cash flow, which is up $1.5 billion year over year.
This was primarily driven by the increased profitability strong operational discipline and some in the or timing related benefits.
I would like to underscore that this year, our free cash flow profile of seasonality will be different as a result of our backend loaded restructuring cost and investment in inventory for our supply chain to cater for rising demand and chip shortages as the economic recovery accelerates.
Now moving on to slide 9 let me remind everyone about the strength of our diversified balance sheet.
As of April 30 of this quarter and we have improved the operating company into a net cash neutral position with our strong free cash flow.
Furthermore, we have made good progress securitizing, some financial services related adapt through the ABS market and expect to have close to all of the U S portfolio of securitized by year end.
The refinancing of higher cost unsecured debt with 8 yes financing allows us to boost access to financing markets at a cheaper cost of debt capital as well as diversifying and segregating our balance sheet between our operating company and our financial services business.
Bottom line, our improved free cash flow outlook and cash position ensures we have ample liquidity available to run our operations continue to investing our business drive growth and execute on our strategy.
Now turning to our outlook on slide 10.
I'm very pleased to announce area. We are once again, raising our full year guidance to reflect the continuing the momentum in the demand environment and our strong operational performance to date.
This will be our third guidance increase in salmon of Dover in 2020.
We now expect to grow non-GAAP operating profit by 25% to 35% and deliver fiscal year 'twenty, 1 non-GAAP diluted net earnings per share between $1.82, and the dollar 94.
This is the 9 cents per share improvement at the midpoint of our prior EPS guidance of $1.17 to $1.88 and.
And a 22 per share of improvements at the midpoint since the Sam.
With respect of supply chain, we have executed well to date with minimal impacts and continue to take proactive inventory measures where possible.
We do see further industry wide tightening and inflation persisting in the near term, which has been factored in our outlook from both the revenue and cost perspective, but overall demand remains strong.
From a topline perspective, we are pleased with the momentum we saw in the first half and why we continue to see further demand improvement we remain prudent of certain geographies continued to navigate the pandemic and we continue to observe uncertainties in the supply of commodity.
More specifically for Q3 'twenty, 1 we expect revenue to be in line with our normal sequential seasonality of up low single digits from Q2.
For Q3, 'twenty, 1 we expect GAAP diluted net EPS of 4.2 cents for the 10 cents.
And non-GAAP diluted net EPS of <unk> 38 to 44.
Additionally, given our record levels of cash flow in the first half and raised earnings outlook I am very pleased to announce that we are also raising FY 'twenty 1 of the free cash flow guidance to 1.2 to $1.5 billion that is a $350 million increase at the midpoint from our original guidance.
Yeah.
So overall.
And Don and I are very proud of the progress we have made in the first half we have navigated well through the pandemic and are exiting the first half with improved revenue momentum strong profitability and robust cash flow.
Our growth businesses, and the intelligent edge and APC Mcs have accelerated top line performance of.
Our core business of compute and storage revenues are growing with improved margins.
Our ASIC services <unk> is accelerating.
We also continue to execute well against our cost optimization of our resource allocation program, which has made us leaner better resource and positioned to capitalize on the economic recovery currently at play.
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 1 on your Touchtone phone if youre using a speakerphone. Please pick up of your handset before pressing the keys to withdraw your question. Please press Star then 2 we also request that you only ask 1 question.
The first question comes from one's email him with Bank of America. Please go ahead.
Yes, Thank you and congrats on another beat and fully of free cash flow raise.
I was wondering if you can dig a little bit more into into the guidance dynamics in the you're guiding to the Q a little bit below the street <unk> slightly higher can you maybe address what the visibility you have into <unk> is and and how much of supply chain impact are you baking in the into into the <unk> is that both of the demand in.
And the cost level. Thank you.
Yeah, sometimes the hi, sorry here, so let me try and dissect the guidance, we gave for Q3 and also the full year.
So.
Putting things in perspective. The first you know we are raising our FY 'twenty, 1 EPS outlook by <unk> at the midpoint to $1.82 to $1.94 based on our Q2 of our performance and we feel very confident for the rest of the year.
This reflects what we see is continued improvement in customer spending.
But also we want to remain prudent given the remaining pandemic and supply chain of uncertainty.
Specifically for Q3, it's important to note that we do expect revenue growth in line with normal FY 18, FY 19 sequential seasonality of all.
The low single digits, we anchor you on FY, 18, and 19 and not last year because of the disruption we suffered in the supply chain last year. So it's better to look at it from an FY 18 of financing viewpoint.
You should expect that gross margins of roughly flat.
Relative to our H, 1 levels near just under 34%.
Opex should be up somewhat as we continue to make select investments in lines of our strategy and key growth areas and this is partially offset by further efficiencies we fine.
But most importantly.
It is important that you note that Brian you will flip to an expense overall in the full year and therefore in the second half.
Or any in Q1 was the positive income in Q2 was the positive income.
And now we are expecting for the full year, 'twenty, 1 and $15 million of expense, hence the guidance that we're giving you overall for Q3.
You can expect that the tax rates will be unchanged at 14% of like you said at Sam.
And then that's of all of this is that we expect our Q3 non-GAAP EPS to be in the range of 38 to 44.
And we feel pretty comfortable about it.
Perfect. Thanks, Bob can we go to the next question. Please.
Our next question will come from Matt Sheerin with Stifel. Please go ahead.
Yes. Thank you.
Just wanted to ask them the.
Your take on the forward guidance.
Implies.
Low single digit sequential growth following the above seasonal quarter in the April quarter, and it sounds like a backlog continues to be strong.
So are there particular pockets of areas, where you're seeing a slowdown in maybe more cautious outlook for from customers because of the scope.
Dealing with the.
Pandemic issues.
Maybe I'll start I know the timing has any comments I mean, we see strong demand momentum right now we quoted saying all of the markets that were up mid single digits.
And therefore, we can translate that conversion into revenue.
But obviously part of the.
The improvement could come from the HBC acceptances remember that on the HBC orders to revenue is a little bit more lumpy because of the time between quarters and the revenue takes longer.
But overall you know what we are confident is the fact that we see obviously the math the proven but I'm really pleased with all the innovation and the ability to execute against that of the innovation. The innovation we have across the portfolio is perfect for the time, what we see in today's environment, We live in a much more distributors of the enterprise.
Obviously, the digital transformation is essential to operating this digital economy, and the first type of connectivity and.
I have to tell you the.
The intelligent edge business is absolutely incredible strong.
So in the in actual dollars almost 20% and we expect to continue to be Super strong for the balance of the year is from 'twenty 2 honestly.
And that's because we have of business of scale do you have a massive business of scale and to give them. The point of reference we only have 100000 customers on the platform. We have the 150 customers every day, we manage more than $1.1 of many.
1 of the devices.
And honestly, we actually manage data of 1 billion plus per hour data points that comes through our cloud.
And so we expect that to continue to be very strong I think the code of business of definitely stabilized and.
And we see pockets of improvement of people with storage.
And then they also services will continue to stay strong again.
Our cautious about the supply chain aspects of the place.
But we positioned ourselves well for the second half and that was all factored in our guidance absolute low price of them like all of them until its where we would make the guidance.
Perfect. Thanks, Matt for the question from go to the next 1 please.
Our next question will come from Katy Huberty with Morgan Stanley. Please go ahead.
Thank you good afternoon, and my congrats on the quarter as well I wanted to come back to just reconciling the improving growth trajectory in all of your of segments with the second half EPS guidance that assumes well below normal seasonality or about 40% of EPS coming in the back half versus past years, you typically have.
Have low to mid 50%.
Second half EPS mix, I think I heard you mentioned supply chain constraints, and and and being cautious around that and Covid and general cost inflation investments, you're making and then Oh why any dynamics can you just rank those well first did I forget any and then can you just rank those factors in terms of.
Which are having the most impact on your on your back half EPS guidance. Thank you.
Yeah. Thank you David.
So let me try and out of a little bit more color to what we said already so first of all remember our cost of.
Amortization of the allocation of program.
We exited FY 'twenty the lean and this has driven a very strong performance in Q1 and 52 cents per share.
This is the level of earnings is that whereas actually benefiting from the fact that we have.
A very strong run rate entering into Q1 and.
In Q2, you saw the momentum continuing.
The EPS that we posted at the 46 day per chair.
<unk>.
Very comfortable with the level of investments that we're making in this is.
Also showing in the gross and operating margin expansion that we've demonstrated.
So far.
So now when you also look at how this translates into free cash flow. Obviously, we had a lot of free cash flow benefits into Q1 Q2, as a result of the earning strength and which translate into free cash flow, but moving forward or what you have to factor into the guidance on <unk> on our earnings is the fact that.
There is some degree of uncertainty on supply chain, although as Antonio said the demand is very strong across the board. The demand is very strong in Aruba and demand is very strong in compute and you can see that with units going up year over year and also in HBC. FCS are we're seeing the revenue trending in the range that we guided at Sam.
This is all good.
He said that.
We have also to reckon 2 out of dynamics aside from the cost optimization program and the demand. The other dynamic is oi of knee, which FX EPS in Q3, and Q4 Q1 Q2, we add the 2 income quarters as far as R&D is concerned the slip into an expense of 15.
For the full year gives you an order of magnitude of what would be the EPS for each 1 of Q3 Q4, and then on free cash flow of the other final element that drives. It is we have to deal with supply chain and we continue to buffer of inventory to be ready for the demand in fiscal year 'twenty 1 for the second half, but also of fiscal year 'twenty 2 we do.
Not expect that the situation on inventory is going to be all of the southern studying up across the world and across the industries and we've taken steps and we'll continue to do so so overall, we're managing I would say that.
Resurgence of demand environment, very well aware of lean from an organization standpoint, our earnings power is shown by the margins were posting and also you can see that while we're doing our free cash flow, we're doing very very well. So hopefully that gives you a color to your questions with the rankings of the values of Factset play.
You know Kathy this Antonio I, just want to reinforce a couple of things. So I understand you know the normal sequential seasonality people trying to get into it but the fact of the mandates we are delivering record breaking gross margin.
We are raising of EPS guidance, despite the supply chain uncertainty.
And of our business is in the huge the math and it's not just the demand is the fact that we have unique portfolio of edge to cloud that's meeting the customer needs of today and future ready for tomorrow.
So I think you know you know the.
The fact is that when you look at the full year right. We have raised guidance now 3 times and the 2 products points you know, it's more of a 25% from the beginning of the year.
That's a testament of the momentum we have in the business. Then obviously every quarter has the ups and downs because of the unique things like <unk> or maybe more inventory buildup of.
At the end of the takeaway is that we are racing against the EPS for the full year and free cash flow.
Great. Thanks, Katy can we go the.
Next question please.
Our next question will come from Kyle Mcnealy with Jefferies. Please go ahead.
Hi, Thanks, very much for the question I wanted to see if you could give us a sense for the position of your compute installed base. We saw F..5 had stronger than expected upgrade activity to hardware systems coming out of the worst days of the Covid impact.
For you guys. How high is the average age of your compute installed base versus normal levels and are you seeing any upgrade activity start to come through now for on premise hardware after COVID-19 related delays last year.
Well sure obviously, we are.
1 of the market leaders today, you know sort of of whenever you look at revenue of market share, but but obviously out of <unk>.
Portfolio, which is through alliance.
He is on the 23 years in the making and not even the full basis inclusive of large you know the average is probably between 4 of 5 years. Kyle at this point in time definitely is the pent up demand to modernize the infrastructure, but it's not just replacing hard enough on the same kind of place in Harper is to really bring the cloud the experience to the computer.
Of course, and more and more be able to consume the elastically odds of services and that's the unique value proposition, we have which is not only just the best infrastructure with volume of the franchise, but the fact that we have provision of the lifecycle management and you just stay tuned for more of announced with you shortly but also the be able to.
That installed base the more of consumption base over time, and then more and more of a workload optimized solutions.
And remember these platforms co mostly nothing from a structure in the sense that you have more options and more technologies built into the platform and so for US is the it's a big opportunity and I think enough of the right of that physician is all agree like business is.
It's not just the replacing the old infrastructure of lots of topics, but be able to bring in repos with lots of crime. What it makes sense all actually the whole lots of on Prem because now we can deliver a true cloud the experience in a consumption model.
Yeah, Let me add to this kind of there was also the other aspect as we see the pent up demand.
And really.
We need the need to modernize the infrastructure in the way of the infrastructure is used.
But also if the decision to actually modernize the infrastructure and moving to consumption isn't made it's not bad for us because we benefit from extended the leasing with our financial services portfolio has been doing extremely well with the asset management business as people tend to use the infrastructure more.
Absent the decision or a availability of supply for the equipment day. They don't want to use so it's good for us on all fronts and we're very happy with our performance on both the core compute business <unk> PFS and the.
The last 1 of at least let's not forget just the hub of is the operational services that come with it because everybody up.
Upgrade cycle, whether the instead of the traditional way all of the service all of the just the services even better because it comes out of 100% attach of point next all of us.
We have seen a bunch of configurations and high of services attach and that's why part of the gross margin expansion you saw in Q2 and computers, which was 550 basis points comes also from the fact, we're touching more services to our infrastructure.
Great. Thanks for the question kind of to get out of the excellent. Please.
Our next question will come from Aaron Rakers with Wells Fargo. Please go ahead.
Yeah. Thanks for taking the question and congratulations on the quarter in the raised guidance.
All right.
1 of the things that comes up obviously as your asset H 3 see I'm just curious any updated thoughts on how you.
<unk> are thinking about that put optionality, which I believe is the.
It expires in early 'twenty 2.
And how are you thinking about kind of of the use of capital you know any kind of thoughts on <unk>.
More flexibility on the M&A or any strategic thought from that front. Thank you.
Well I will start and then by the who will comment listen we still have roughly a year of who makes the decision.
To put the expired in may of 2022.
Let me remind everybody that obviously, the China is the second largest <unk> market.
And growing and off the top of these unique is unique in many ways 2 to fulfill the needs of a market like China.
And I think that the joint venture where the farmer has been incredibly successful.
Driving shareholder values.
The level and also through us right because of obviously, we collect dividends from that joint venture.
But he is a way to reach of market, that's very hard to compete so.
We will continue to lag what is the best use of our capital.
In the context of participants in China, and we decided to take action of what to do without copies of but right. Now we have not decided 1 way or the old. The 1 we continue to explore what is the best return for shareholders and also to position the company for growth.
As we think about the future of an upside of give you of any comments you sound very well Tanya we have time to make the decision to put the expires in April of 2020 twos and the other.
The less than a year.
And that is to sell all of a part of our support of 9% stake of munis. We feel that this is a stake that continues to creating value just to put things in perspective for everyone on the call in fiscal year 'twenty alone the.
The equity interest contribution from HPE grew over 20% to $212 million for fiscal year 'twenty, we expect of that growth to continue and therefore the value of our stake to continue to accrete.
Great. Thanks for the question of Aaron's can we go to the next 1 please.
Our next question will come from Shannon Cross with Cross Research. Please go ahead.
Thank you very much.
Ask about acquisitions in general and your M&A thoughts, it's been about a year since silver peak of.
A couple of years and snap or just I know you've made some small acquisitions in the interim but I'm wondering you know with the liquidity position you have the cash flow in and you know you're.
Your approach to growth.
Where you're at and what you might think of some holes in your portfolio. Thank you.
Yeah.
Yes, I don't think of obviously M&A is an important component of our strategy and.
As we have gone at least I have gone now probably 19 of them relative to being about obviously very stringent return on invested capital.
The disciplined approach.
But as all of us about opening in intellectual property and talent to us on the rate of edge to cloud platform vision.
Some of the Big was completed in September of last year, and now fully integrated into the business and now we start seeing the momentum of internal.
Tonnage from edge business.
And although once we're doing along the way.
People around you know.
Data and software define assets and so forth so.
Again, we continue to have of late what is available there notwithstanding the fact that we have to be incredible discipline.
As you know evolution seems to be of labor too high.
For some of the assets.
But again you know.
There is something out there that makes sense, we will level the wages and we will take the right action, but again is an important component of our strategy going forward and all of US talk about the Aruba like types of things but.
We have of light type of thing whenever these are you know.
The relevance for our strategy on the upside of compute ovens coming from that side of it I mean.
It's very important to make.
Maintain discipline and focus and the content in the context, where the.
The <unk> in some cases, particularly for some class of asked the deliberate exuberant, but you know if we can find 2 to 3 silver peak type of acquisitions I don't think of that Tony and I will hesitate a second to just go out the rest of us.
Great. Thanks, Shannon for the question. The next 1 please.
Our next question will come from met the area Nani with Evercore. Please go ahead.
Good afternoon, and thanks for taking my question I guess I was just hoping if you could talk more about the intelligent edge performance.
The 17% growth I think is more impressive of better than what most of the appears of hot on the networking side other than Arista, maybe so maybe you can just talk about what is driving the inflection of growth over here and 1 of the durability of the double digit growth through the as we go into the back half of them beyond that would be really helpful. And then if I could ask you. The clarify just because I may have missed the completely.
Why is <unk>, Oh, I'm flipping from positive in the first half to negative in such a big win in the back half.
Yeah.
Sure I'll start the impact would talk talk about the OID I mean.
Obviously, if you look about the way we operate and the the.
Growth in Iot and and the need for connectivity.
Obviously as continues to growth.
It's interesting of 3 years ago, I said that the enterprise of the future will be ensign edge centric cloud enabled and data driven.
And he's played.
<unk> of that way unfilled.
Unfortunately through the Covid pandemic, we saw that acceleration, but when you think about digital transformation right.
We live in the digital economy.
And the first step is to be connected if youre not connect the and not participate in that kind of activity is not just any more users of devices things.
Everything is connected to the network everything confuse everything generates data.
And so connectivity is of the forefront of the digital transformation.
And obviously remote working is requiring of the need for Wi Fi connectivity to a level of we haven't seen before.
But that's that's an example of what's happening out there, but I will say on innovation with a true cloud native platform at massive scale.
And again you know the fact that we don't really half of 100000 customers and where I didn't come to the 50 customers. Every day. The tells you the value proposition of original Nathan we can from Asia.
1 point of lump ore to the Wi Fi falls on the BLA on particularly of whatever is the multiple article from the cloud and we're able to do that in an intelligent and autonomous way because ultimately it's about the data you collect and what the experiences you can provide.
And so we believe this is absolutely doable.
We are very bullish about this business. We expect this business the continued to grow double digits.
For the balance of the year and as we add more functionality bulk power plant from particular with edge computing and 5 of Gee, we're going to us of the right the momentum and when you talk to customers of apartments. The law of the Aruba expedience of.
Absolutely the love the simplicity the.
All of the fact that the you prove the experience for their own business and then powers. This new way to work. So that's why we are pretty excited and the other thing is that the.
The platform the roomba around the cloud is not the platform from the rest of the company when.
When we deploy now 1 of the days of services to the new announcements we've made the May force.
We deploy compute.
Although we deploy a lot of the optimized is running on the same by hand, that's the robot was originally created and that's why we have of true age. The cloud platform and then we lay on top of that the odds of sort of his model, whether the subscription and software, which is growing triple digits of them everywhere.
Whether the the us.
The service model with Green Lake and that's the unique differentiation, we have in the marketplace and so that's why we feel very good about the growth prospects of this business.
Clinical new items, yes, Thank you Antonio.
On the R&D front, thanks for asking the question as to why we expect on each of flip into the expenses in the second half.
Many of you out of effectively 3.
The effects of the first 1 is the HP see economic.
Contribution and the timing of which shifts between quarters.
Like we said before they are happy with Hec and the <unk>.
Economic interest that we have 2 of them.
And the cash day, we turned to us on a regular basis. So there's a timing element of their for each received the there's also interest expense that is a the second enforcing the O N E. A line and then the.
Third force is the.
<unk> signed a portfolio of our venture portfolio, which has been doing extremely well in the first half.
We did flag. This in my script, we said we had the benefits.
Benefits from revaluations of our investment in <unk> and I on Q.
In the first quarter of.
16 million of income in the second quarter, a 27 million income adjusted on an aggregate basis across the 3 forces. So for the first half $43 million of Oi any income and we're guiding for the full year for an expense of $50 million. So that's a 90 million swing.
And that 90 million swing, if you turn it into a EPS number you're right.
As you do the math yourself is about 7 to 8 pennies of EPS for the full year right. That's the thing you have to reckon. When you compute your Q3 or Q4, EPS forecasts that show the swing factor there. It does not change the fact that our operating performance remains very very solid the swing factor out of your eye.
The level is explaining a little bit more hopefully the guidance for all of you on the call.
And I would say again, despite all of that we have raised the guidance.
Just to take care of lifestyle great. Thanks. Thanks for the question Amit. So I think we're ahead of time for 1 last question. Please.
Yes, our final question will come from Sidney Ho with Deutsche Bank. Please go ahead.
Thanks for taking my questions and congrats on the solid result in the cash flow out of my question is on the H P. C dishes I had expected that business the growth sequentially, especially after a slow down in the Q1, maybe you can just normal seasonality, but understand the businesses could be lumpy are there any trends that you can draw from the last 2 quarters what are the deal.
I'm thinking along with the close or being accepted by customers and more broadly what gives you confidence that you can take the age of 12% growth growth target. Maybe maybe you can talk about what's the normal seasonality for that business in fiscal Q3 and fiscal Q4.
Let me start I'm going to talk more for the market product and talk more of them in the financial side.
Listen I'm the bookings momentum is incredibly strong in this business. So you have to look at the booking side and then you have to look of the revenue side. The bulk of its continued to be just amazing and I of course of some of the deals. We want these are multi million dollar deals.
As of now that the this business as of really play out the wells because the fact of the matter is that you have these large systems that needs of goods.
<unk> shipped.
Shipped install you have to run the World and then only then when the customer of subs the system, where the world..1 of these you can recognize revenue.
And that time, Kimberly you know it can be as quick as 3 months as long as the year in some cases, especially you know when you deploy this massive excess consistence, which we're going to do.
Our team and of the year and then next year in 2022.
And sometimes you know you spoke on the wall of for a month, but we're installing the system from the fact the room on the floor and sometimes it can take up to <unk>.
The 60 days.
So you know is the size of a football field.
So I would not think about the seasonality I think about the long term growth of the business, we feel pretty good and confident about the CAGR, but even this year. We believe we're going to deliver the 8% to 12% growth just the CN in 2021 right.
So this is about keeping the core of this book momentum short term the lifecycle of the AR.
Our supply chain and install and acceptance of as much as we can.
And then this business the level of software that gets built around the system itself. So that's why we are bullish about the system. This business and I remember, it's all on the back of the day. So that's why we talk about AI and deep learning technologies.
Data continues to grow exponentially and you need of more compute that's the fact of the level you haven't seen before.
Maybe 1 comment on the yeah.
Did I hear you said at the very well until the I'll simply say look the order momentum remains very very strong and was up double digits in Q2.
We have a large awarded order book with over $2 billion of contracts. The pipeline that we are having in mind includes another $5 billion of ex that scale opportunity to be awarded over the next 3 years the win rates that we observe our very high we went 5 out of 6 contracts and the exit of scale space.
It's an inherently lumpy business. So I think if you look at the edge on a quarterly basis is probably not the best picture you have sort of getting on a multiyear basis and we feel very confident that we can achieve the age of 12% CAGR per year, including starting this year.
Fiscal year, 'twenty, 1 and because of the Lumpiness of the revenue you also have lumpiness in profitability.
As a result of the revenue profile of the products product mix. It doesn't worry us at all it's the nature of the Beast. So to speak we feel that <unk> is extremely well positioned as the business segment to continue to be a very strong tractor of growth for HP overall.
And that the growth will continue which you know as I said earlier right today, the HBC of the agile, but net of a per cent of 22% of the company's revenue and as we go forward with both businesses to grow in double digits, the 22% book the bigger.
At the different margins of the core rights itself.
Anyway, I know, we're running all the time just to close I'm very pleased with the HP Q2 results that again, the marked by strong revenue momentum profitability and free cash flow.
The overall demand is improving but on execution of innovation is perfectly timed to the customer needs that we see in the marketplace and despite the supply chain uncertainty around specific commodities, we factored all of that in you know the ability to execute from the back house and that's why we of racing once.
Again for the third time in the year.
EPS and free cash flow and I believe the future of this age the cloud and he's going to be consumed the consumption base. What I think you know HP has unique value proposition and the set of offerings and Thats why I believe this is a very exciting time for the HPE, who have worked really hard despite the pandemic of team has been incredible.
Williams and this company has the clear purpose to of months of where people live work and despite the challenges we continue to support the communities.
So again think of them for joining the call today and I Hope you continue to stay safe and healthy and talk to you soon.
Thanks, everyone. Operator, I think we can go ahead of them of course off the call.
Ladies and gentlemen, this concludes our call for today. Thank you.