Q3 2021 Hewlett Packard Enterprise Co Earnings Call
Performance in our confidence about our momentum in the market. We are again, raising our fiscal year 2021 EPS and free cash flow outlook, and we also resuming stock repurchases.
Revenue in Q3 was $15.0 billion in line with our outlook and normal sequential seasonality.
Our Q through Q3 orders were up strong double digits year over year and our year to date order volume has increased 11% showing the strength of our edge to cloud offerings.
We significantly expanded our non-GAAP gross and operating margins driving our year to date non-GAAP operating profit and earnings per share up 28% and 27% year over year, respectively.
We generated a record year to date free cash flow of $6.0 billion.
Up one $1 billion year over year, putting us well ahead of the original outlook, we announced last October.
I am, particularly pleased that we were able to deliver these results while mitigating against industry wide supply constraints by taking proactive inventory measures working closely with our suppliers and deploy our best in class engineering capabilities to establish a specific response plans.
The impact of the pandemic continued to accelerate the shift we predicted years ago to an edge centric cloud enabled and data driven world now more than ever there is a greater need for secure connectivity faster insights from data in a cloud experience everywhere.
We expect these trends to continue digital transformation is no longer a priority, but a strategic imperative.
To help our customers transform their synthesis and the future already today, we have been focused on doubling down in key areas that are resonating strongly in the market.
We had a record number of orders in both our intelligent edge business and high performance compute and mission critical solutions business.
Due to strong demand and execution. These growth businesses now make up nearly 25% of our total company revenue.
Our intelligent edge business accelerated its momentum again in Q3 with 23% year over year revenue growth driven by a record number of new orders.
Strong customer demand for secure connectivity has generated a backlog five times greater than at the close of Q3 last year as customers increasingly look for solutions to collect connect analyze and act on data at the edge.
We are leaning into this demand and continue to invest and innovate at the edge in June we announced new AI ops Iot and security features for our Aruba edge services platform or ESP designed to streamline network operations maximize efficiency and more easily extend the network from the <unk>.
Edge to the cloud.
Auto robot ESP continues to gain traction with customers in different verticals in the third quarter customers, including save a lot monument health and silica resorts and casinos all standardized their networks or not all of our ESP.
In our high performance compute and mission critical solutions business revenue was up 9% year over year.
Driven by a record number of new orders, we also generate a record order book, which now exceed $7.0 billion.
The exponential growth in data along with the AI and big data analytics are all driving an increased need for high performance computing and mission critical capabilities in enterprises of all sizes.
To meet this demand.
Both of our artificial intelligence capabilities with the acquisition of determining AI start up that delivers a powerful software stack. The two train AI models faster.
Any scale using its open source machine learning platform.
We also continue to see an increasing number of customers accessing our high performance compute solutions as a service through HPE <unk> Lake.
Without HPE <unk> cloud services for HBC customers gain powerful specialized computed NII capabilities with a sustainable cloud experience.
For example in Q3 <unk> was awarded a $2 billion contract to be realized over a 10 year period with the National Security agency to deliver high performance computing solutions through the <unk> platform.
The service will help with the National Security agency efficiency process data and unlock new insights in sustainable new ways.
Our core businesses generate a robust year over year orders growth as well as strong profitability and free cash flow in the quarter.
Year to date computer storage orders are up mid single digits with Q3 operating margins of 11, 2% and 15, 1% respectively.
We continue to offer more of our core capabilities as a service.
In Q3, we introduced unified compute operation Social service through our HB Green Lake H the cloud platform.
This new cloud based management service simplifies provisioning and optimize the management of compute infrastructure wherever it resides.
Our storage business is transforming into a cloud native software defined data services business through organic innovation and targeted acquisitions.
In May we introduced our new cloud data services available through HB Green Lake as well as our new HB later, a cloud native data infrastructure.
And just this week, we closed the acquisition of <unk>, an industry leader in cloud data management and protection and run some way of data recovery services, which will be soon available as a service through HP Green Lake.
This acquisition immediately positions HPE Green Lake in the high growth data protection market with a proven scaled solution.
HP was the first to market 40 years ago in delivering announced service cloud experience on premises in a colocation or at the edge with HP Green Lake today, our HP Green Lake Issaquah platform has more than 1100 customers our annualized revenue run rate this quarter was 705 million.
Up 33% year over year.
Driven by strong as a service all of this growth up 46% year over year.
Organizations across sectors, including retail healthcare financial services and public sector are turning to HP Green Lake.
For instance, we helped liberty mutual shift from a traditional capex spend to a new pay as you go model, creating a cloud experience on premises to provide transparency into consumption, while improving their speed and adapting to capacity demands.
They standardized critical workloads on HPE synergy deliver towards the lake, resulting in a reduced data center footprint and significant cost savings, including our monthly unit rate well below public cloud alternatives.
We're also seeing the power of the full HPE H the cloud portfolio as customers are turning to HP for integrated solutions that combine secure connectivity data insight capabilities and cloud experiences.
Woolworths Group, Australia, and New Zealand's largest retailer selected HP relate to power its new W pay payment platform.
They needed a solution that combine a powerful mission critical architecture with the ability to scale and also provide a better cost efficiency back to Dolby you pay and its merchants partners.
Delivered through HPE getting lake their solution Leverages, our full edge to cloud portfolio, including HP, Aruba, HP nonstop HPE Primera and HPE synergy.
Three next services also provided expertise to us over the company's digital transformation I.
I believe this is a great example of the power of our HPE <unk> cloud portfolio.
To extend our leadership position in cloud services and further accelerate our pivot towards the service.
<unk> never anything.
We made several compelling announcements at HP discover in June.
I am, particularly excited about our new HP <unk> lighthouse offering a secure cloud native stack built with HB ethanol software to autonomously optimize different workloads across hybrid it states, reducing time to deployment and operating costs.
We also introduced project Aurora to secure the enterprise.
Embedded in our HB Green Lake is the cloud platform project Aurora automatically and continuously verifies NFS the integrity of the hardware framework operating systems platforms and world, while also detecting advanced threat.
And finally, demonstrating our continued commitment to acquire assets that complement our own capabilities, we acquired data platform developer Cole.
Paul will accelerate the HB S mineral analytics runtime deliver high performance analytics for engineers and business analysts.
I am proud of Hp's performance in Q3 and year to date and the significant progress we have made in becoming the edge to cloud company.
Momentum, we have in the market compel us to move even further and faster.
And our ability to transform with increase in speed is imperative.
This transformation is my number one priority.
At this pivotal moment, our purpose to advance the way people live and work has never been more important.
<unk> to become the edge to cloud company is Permian is tremendous relevance and our portfolio is winning in the marketplace.
Fueled by our purpose vision and portfolio, we have the opportunity to build a more digitally enabled inclusive work.
We have a mandate to imagine new digital transformation strategies.
Fourth our own ESG goals, and those of our customers leading to better business outcomes and societal impact.
We will never waver from our commitment to being a force for good and a strategic partner for our customers.
We will continue to bring bold new innovation to our customers and we will continue to create value for our shareholders and I'm grateful for the incredible team and I'm confident in and excited about the future.
I Hope you would join us for our virtual security analyst meeting on October 28 to hear more about our positioning in the market our priorities and our outlook for the year ahead.
I will now turn it over to <unk>.
Thank you very much Antonio I'll start with a summary of our financial results for the third quarter of fiscal year 2021.
As usual I'll be referencing the slides from our earnings presentation to guide you through our performance in the quarter.
And Tony will discuss the key highlights on slides one and two.
So now let me discuss our Q2 performance starting with slide three.
I am pleased to report that we are experiencing very strong demand across all of our businesses.
Q3 was marked by accelerating order growth strong gross and operating margin expansion and robust cash flow generation.
Building on the strength from the last quarter, we delivered Q3 revenues of $15.0 billion up 3% from the prior quarter and in line with normal sequential seasonality also in line with our outlook that factored in summer of expected supply chain constraints, we flagged.
We are working to ensure disruption is minimal by taking proactive measures and coordinating with our world class suppliers to establish tailored recovery plans.
I am, particularly proud of our non-GAAP gross margin that hit another record level of 34, 7%.
Up 40 basis points sequentially and up 420 basis points from the prior year period.
This is driven by our deliberate actions to shift towards higher margin software rich offerings strong pricing discipline and cost takeout.
As previously indicated we continue to invest in high growth margin rich areas of our portfolio both in R&D and go to market, particularly in Aruba software and as a service, which increased our non-GAAP operating expenses in the quarter.
We also.
Booked two one time charges totally $28 million for a legal settlement and bad debt associated with likely fraud involving a channel partner in a P. J.
Even with these investments and one time charges, our non-GAAP operating margin was nine 8% up 190 basis points from prior year, which translates to a 25% year over year increase in operating profit.
We continue to be focused on driving further efficiencies in the business.
Within other income and expense, we benefited from stronger operational performance in HCC and strong gains related to increased valuations in our pathfinder venture portfolio.
As a result, we now expect other income and expense for fiscal year 'twenty, one to be an income of approximately $15 million.
With strong execution across the business and despite two unanticipated onetime charges. We ended the quarter with non-GAAP EPS of <unk> 47.
Up 31% from the prior year and above the higher end of our outlook range for Q3.
Q3 cash flow from operations was $2.0 billion and free cash flow was $526 million.
This puts us at a record one 5 billion of year to date free cash flow up $2.0 billion from the prior year, driven primarily by an increase in operating profit.
Finally, the strength of our business has positioned us to contribute substantial capital to our shareholders, we paid $157 million of dividends in the quarter and are declaring a Q4 dividend today of <unk> <unk> per share payable in October.
We are also announcing today the resumption of share buybacks as a result of greater free cash flow generation and visibility.
Come back to capital allocation more broadly when we discuss the outlook.
Now, let's turn to our segment highlights on slide four.
Our growth businesses, which now represent nearly 25% of our total company revenue are executing strongly and experiencing record order levels.
In the intelligent edge, we accelerated our top line momentum with record levels of orders and 23% year over year revenue growth.
Switching was up over 20% year over year, whereas wireless Lan experience more acute supply constraints and was up mid single digits.
Additionally, the Azure as a service offerings were up triple digits year over year, which reflects enabling software platforms as well as network as a service.
We also continue to see strong operating margins at 15, 8% in Q3 up 540 basis points year over year, which included a $17 million onetime legal settlement that impacted margins by two points.
<unk> continues to perform strongly and contributed seven points to the intelligent edge growth.
In addition, we started generating meaningful revenue synergies by cross selling the Aruba portfolio, which reinforces the merits of the silver peak deal.
In HBC and Mcs demand strengthened even further with a record order level.
Revenue grew 9% year over year as we continue to achieve more customer acceptance milestones and deliver on more than $7.0 billion of awarded contracts, including the contract that Antonio mentioned with the NSA worth $2 billion over 10 years.
We remain on track to deliver on our full year and three year revenue growth CAGR target of 8% to 12%.
In compute revenue grew 4% quarter over quarter, reflecting normal sequential seasonality. Despite previously anticipated supply chain tightness.
Operating margins of 11, 2% were up 190 basis points from the prior year due to disciplined pricing and the right sizing of the cost structure in this segment.
Within storage revenue grew 1% year over year, and 3% quarter over quarter ahead of normal sequential seasonality driven by strong growth in software defined offerings.
<unk> grew 10% year over year with ongoing strong the ACI momentum growing double digits year over year.
All flash arrays grew by over 30% year over year led by Prime era.
The mix shift towards more software rich platform helped drive storage operating margins.
215, 1% up 10 basis points year over year offset by continued investments in our cloud data services.
With respect to point next operational services, including nimble services revenue grew for the third consecutive quarter year over year as reported with both order and revenue growth expected for fiscal year 'twenty one.
Within HPE financial services revenue was flat year over year and sequentially, while our bad debt loss ratio did increase slightly to 94 basis points. This quarter. It was entirely due to a onetime $11 million reserve charge related to the already mentioned likely fraud in APG by a channel partner.
Absent this one off event or bad debt loss ratio would have improved to just 61 basis points aligned to pre pandemic levels.
More importantly, we continue to see improved cash collections above pre pandemic levels. Our operating margin was 11, 1% up 300 basis points from the prior year and our return on equity at 18, 3% is well above the 15% plus target set at Sam.
Slide five highlights the key metrics of our growing as a service business. We have made significant progress since our analyst day last October by adding over 200, new enterprise screen the customers to over 1100 today.
And increasing our <unk> by over $1 billion to our current lifetime TCE of well over $5 billion.
For Q3, specifically, our <unk> was $705 million, which was up 33% year over year as reported and total as a service orders were up 46% year over year.
It is also important to note that the mix of our <unk> is becoming more and more software rich as we build out our greenlight cloud platform, which is improving our margin profile.
We look forward to providing more disclosure around our software and services mix at our analyst day later, this fall, which I believe reinforces a significant value add of Green Lake.
Overall based on strong customer demand and recent wins I am very happy with how this business is executing and progressing towards achieving our growth target of 30% to 40% CAGR from FY 'twenty two FY 'twenty three.
Slide six highlights our revenue and EPS performance to date, where you can clearly see the strong rebound from last year and sustained momentum for the last three quarters. The demand environment continues to strengthen and with the operational execution of our cost optimization and resource allocation program, we have increased non-GAAP EPS in Q.
<unk> by 31% year over year.
So turning to slide seven we delivered another record non-GAAP gross margin rate in Q3 of 34, 7% of revenues, which was up 40 basis points sequentially and up 420 basis points on the prior year.
This was driven by strong pricing discipline, and a positive mix shift towards high margin software rich businesses like the intelligent edge and next generation storage offerings.
We have also benefited from our new segmentation, we implemented beginning of fiscal year 2020 that gives us much better visibility into each business unit and enables a better resource allocation and discipline to drive operating leverage.
Moving to slide eight you can also see we have expanded non-GAAP operating profit margin substantially from pandemic close to nine 8%, which is up 190 basis points from the prior year period.
We are 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 costs, which are critical to fuel our long term innovation engine and revenue growth targets.
As mentioned previously Q3 operating expenses also included one time charges not included in our guidance totaling $28 million for a legal settlement and the likely fraud scheme involving a partner.
Excluding these one off charges, our operating margin would have been 10, 2%.
Turning to slide nine we generated a record year to date levels of cash flow with $11.0 billion of cash flow from operations and $6.0 billion, our free cash flow.
It was up $2.0 billion year over year.
This was primarily driven by increased operating profit.
I would like also to underscore that this year, our free cash flow seasonality will be different than in prior years. We expect increased financial services volume that include more than $150 million in Q4 financing for a very large deal that is predominantly green Lake and will benefit our margins for you.
To come.
We also have further restructuring payments and growing working capital needs as we continue to buffer our inventory levels in the light of the disruption in the global supply chain.
Now moving on to Slide 10, let me remind everyone about the strength of our diversified balance sheet.
As of July 31, the operating company net cash balance turned positive due to our strong free cash flow.
Furthermore, we made additional progress during the quarter securitizing over $750 million of financial services related depth through the ABS market.
The refinancing of higher cost unsecured debt with ABS financing allows us to boost access to financing market at a cheaper cost of debt capital as well as diversify and segregate our balance sheet between our operating company in our financial services business.
Bottom line, our improved free cash flow outlook and cash position ensure we have ample liquidity to run our operations.
To invest in our business to drive growth and return capital to shareholders.
Now turning to our outlook on slide 11.
I'm very pleased to announce that we are once again, raising our full year guidance to reflect the continued momentum in the demand environment and our strong execution.
This would be the fourth guidance increase since Sam in October 2020.
We now expect to deliver our fiscal year 'twenty, one non-GAAP diluted net earnings per share between $89.0, and $97.0
With respect to supply chain as indicated last quarter industry wide tightening somewhat constrained our supply as expected.
We continue to take proactive inventory measures, where possible and you can see our efforts and inventory balances that increased $4.0 billion year to date that also reflects the strengthening demand environment and a substantial order book, we have across the business.
We expect that challenge supply chain conditions to persist until at least the middle of calendar year 2022, and have factor these into our revenues cost and cash flow outlook.
From a topline perspective, although we remain prudent given the challenged supply chain environment. We are very pleased with the accelerating Q3 order momentum across all segments of the business.
More specifically for Q4 'twenty, one we expect revenue to be above our normal sequential seasonality from Q3 and are comfortable with current consensus levels.
For Q4, 'twenty, one we expect GAAP diluted net EPS of 14% to 22.
And non-GAAP diluted net EPS of <unk> 44 to <unk> 52.
Additionally, given our record levels, our free cash flow year to date and confidence in our raised outlook I'm very pleased to announce that we are also raising fiscal year 'twenty, one free cash flow guidance to one 5% to $8.0 billion.
That is a $600 million increase at the midpoint from our original Sam guidance with the top end of this free cash flow guidance range at the peak levels attained in fiscal year 19.
As you recall at the end of the first half of fiscal year 2020, we suspended our share buybacks to preserve liquidity in the context of the global pandemic disruption.
Although we continue to operate in a challenging supply environment, our order momentum and improved cash flow generation visibility give us confidence to reinstate our share repurchase program.
We are targeting up to $250 million of share repurchases in Q4 of fiscal year 'twenty, one and we will update investors on our capital management policy for fiscal year 'twenty two at Sam in October.
As a reminder, we always follow a disciplined return based capital allocation framework to maximize long term shareholder value.
Our number one priority remains delivering sustainable profitable growth through both organic and inorganic M&A investments, while remaining committed to paying dividends to our shareholders.
In addition, we will consider opportunistic share buybacks.
When do we see a favorable return for doing so.
So overall and to conclude I am very proud of the progress we have made year to date in fiscal year 'twenty one it's.
It's clear that our edge to cloud strategy is resonating with customers and driving improved momentum across all of our businesses.
Our growth businesses, and the intelligent edge and HBC Mcs have accelerated top line performance with record levels of orders are.
Our core business of compute and storage is demonstrating momentum with robust orders and improved margins and our as a service <unk> is accelerating all of this translates to improving revenue momentum strong profitability growth and record levels of free cash flow.
We look forward to closing out our fiscal year much leaner better resource in position to capitalize on the strong demand environment.
Lastly, as Antonio mentioned, we look forward to having you join us for our virtual Securities Analyst meeting in late October where we will provide an update on our strategy business insights and financial outlook now with that let's open it up for questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
Youre using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
Also request that you only ask one question.
The first question will come from Amit <unk> with Evercore. Please go ahead.
Okay.
Afternoon, and thanks for taking my question I guess the question is really around the free cash flow generation.
Thank you.
Flying based on the way free cash flow guide that we'll do around $100 million pre tax in Q4 that.
That I think would be one of the softest usage of seats, maybe just quantify some of the dynamics at play that's driving that product that you talked about a few of them, but just quantify the headwind there and then secondly, the focus chemicals has always been getting to this $2 billion faster.
Cash remember lagerfeld, maybe touch on what are the key levers to get to the $2 billion number.
And how much of that is self help versus revenue driven thank you.
Sure. Thank you Amit for the question so.
Yes.
Free cash flow for Q4 is north of 100 windows actually implied in our guidance is about $150 million in Q4.
And this figure reflects a different seasonal profile that we have had this year in terms of our revenue and expense profile, but also a couple of our very important dynamics that I would like to underscore first of all we have to continue to make investments in our inventory level to withstand the supply chain constraints that we.
Flags for several quarters now.
Second in Q4 of fiscal year 'twenty one in my script I described it a very very large green lake deal that will impact free cash flow in Q4, but that will generate substantial revenue in subsequent quarters. This is a deal in several hundred millions of dollars that.
We have not announced yet but it is already something that we're financing and this is affecting therefore free cash flow already as of Q4 of fiscal year 'twenty one.
Thirdly, we are still peaking on restructuring costs in fiscal year 'twenty, one and we feel very positive about our cost optimization and resource allocation program, which will wind down at the end of fiscal year 'twenty two and so this is a nice segue to tell you about our guidance towards officially at $24.0 billion target.
We have we continue to expect revenue growth.
In fiscal year 'twenty, two with the momentum that carries out of fiscal year 'twenty, one and also the restructuring cost program winding down will be a key determinant of our generation of free cash flow in fiscal year 'twenty. Two so hopefully I gave you color that Antonio will have something no. The only thing I will say I mandates that lets enthetic made this call.
And in his remarks is the fact of the matter on the high end on the top end of that guidance. We gave you of one 7 billion is almost the same number we achieved in 2000.22019, and therefore in many ways. We are almost a year ahead of our commitment because if you recall, we said we're going to return to normalized free cash flow in 2020.
Two.
And the reality.
Even when you finance these large deals that I mentioned that we're going to communicate it has nothing to do with NSA deal.
We are already almost.
Same number so that's why we are so pleased on the momentum that we have that is a momentum based on the order growth in all they actually have taken and the deliberate shift in our portfolio to higher margins and that's what you see in our numbers in Q3 right.
Record breaking gross margin of 34, 7%.
Perfect. Thanks, Amit for the question operator can we go to the next one.
The next question will come from Simon Leopold with Raymond James. Please go ahead.
Thank you for taking the question.
Wanted to see if you could discuss what you've done and what you plan to do in regards to price increases and help us understand how this affects your sales growth and margins. Thank you.
Yeah. Thanks, Amit for the question I'll start and then I'll, let Alex comment, let's say, we take pricing actions all the time.
In fact, we probably are the first to take pricing action in that industry.
I will say.
We continue to assess what is the right strategy by segment.
And making sure that we take those actions where appropriate.
The fact of the matter is that we have increased pricing.
That's a fact.
And we do that in a context of obviously supply availability, Steven demand and the right portfolio and obviously inflation on the cost associated with some of the commodities at the same time remember there is also new innovation against built in our products, which have structural impact in the in the sense that.
When you look at our infrastructure right New technologies drive two thirds of the pricing in many ways.
But we could take those actions all the time Simon and we will continue to do so and that's part of the reason also why we see you know record breaking margins, but in addition to the fact that we are seeing the demand in the right place and driving that mix shift that we talked before so product I know you want to get more specific.
Thank you Antonio and thank you Simon for the question.
We have in this context, where you have a constrained supply environment to be very careful around managing pricing right and.
And we have taken.
Action that is translating in this record level of gross margin at 34, 7%.
Some of our competitors didn't take that action and it's down to them and up to them, but we feel that the current environment is calling for a disciplined approach to pricing and we see an encouraged balanced pricing behavior across the market so more specifically.
With respect to our units in <unk> and compute.
Sure someone will ask a question A&P was up mid to high single digits quarter on quarter, reflecting.
Pass through of commodity cost and Richard configurations, as always configurations that are Richard play a big role in the A&P, but also pricing in this case and units were flat quarter over quarter, given some expected supply chain constraints. So we feel pretty good about performance in compute in that regard, it's still a business that we have to.
<unk>.
Very very carefully on a day to day basis, because of the supply environment being volatile forces us to do so, but we still see scope for continuous gross margin improvement across the board and in compute as well.
Perfect. Thanks for the question Simon Operator can we go to the next one.
Next question will come from Aaron Rakers with Wells Fargo. Please go ahead.
Yeah. Thanks for taking the question.
I'm going to ask for one clarification real quick just how would you define normal seasonality in fiscal <unk> and then.
Kind of a longer term question would be it.
You've done a phenomenal job of driving gross margin leverage in the company.
Love to hear your thoughts on as you think about the mix of business going forward.
Where do you think ultimately gross margin can actually go what's the what's a normalized gross margin in your in your mind, given the mix that hp's driving.
Sure.
So let me pick up the first question on the normalized seasonality typically what you observe in terms of sequential quarter over quarter growth.
I would say, it's somewhere in the low single digits around the 1% to 2%.
Range between Q3, and Q4, so Q4 and Q3 growth is about that level like I said in my script.
Comfortable with the current consensus on revenue for Q4.
And we feel pretty good about this the order book is very very solid Antonio I underscored this across the board. Our order book is Super solid now. The question is how much of that can be really accelerating in terms of conversion in Q4, and it's every day is another day. So we're working through that.
And this obviously has an impact on gross margins right because of the more you wait for fulfilling in order. The more you can have an adverse impact on gross margins, but we feel fairly comfortable with us managing this dynamic and particularly leveraging or pulling the levers across the board that we have such as our revenue mix I want to highlight to you there.
Continuous growth in Aruba this level of growth in <unk>, our intelligent edge business of 23% comes with very high calorie revenue and we feel very very comfortable and pleased with that trend also our growth in storage, which comes with very high calorie gross margin revenue.
It's pleasing at 3% we took share from some of our main competitors and this gives you an idea that we have a few.
The strings in our boat so to speak to actually continue to drive gross margins to better levels.
Perfect. Thanks, Aaron can we go to next question. Please operator.
Next question will come from <unk> Mohan with Bank of America. Please go ahead.
Yes. Thank you you sound very bullish on order momentum and it seems like you can't capitalize on the strong demand given some of the supply chain impacts.
Is there any way to quantify the magnitude of sort of what is this.
The revenue impact, perhaps in the quarter and what you're expecting for maybe the next few quarters and and how confident are you that these orders will be won't be canceled or lost to other lenders.
Well, we are we are very confident in defense.
We have taken proactive actions, we continue to stay proactive actions that can imagine a person involved with some of this conversation with suppliers.
If you look at all of the buffering.
So the inventory buffering, we took right on inventories up $4.0 billion.
And at the same time right.
We have I think one of the best in class engineering team that they can swap things as we go along the way.
That said as I look at these order book.
So much potential upside here.
It's all about the daily conversion and so far the one thing we have not seen any cancellations just to be clear when people ask me. This is punishable no I can tell you the answer is definitely no.
I think it's because also customers realize it's not just the supply constraint, but need to provision more compute.
And data insight capabilities.
And then as I said earlier, even despite the fact that Audi intelligent edge business.
Accident with a five times back log on the unique segment of the market, we still delivered 23% in constant currency of 27% growth.
And that's why what Tarek said, we expect revenue to continue to grow and in particular 2002, and and then to the question that was asking about margin the margin should show some strengthening over time because of the mix shift and that Aruba is very important to us.
But fundamentally I think our edge to cloud vision and strategy is absolutely resonating in the market because customers need three things they.
They need secure connectivity in the hardware world they need a cloud experience everywhere and then they need data insights yesterday in my view and then need to be able to consume as a service in an elastic way we have all the four ingredients and Thats why we are going to oscillate further and foster the strategy because it's working.
And wanted to see if I can add to antonio's comments.
Yeah.
But in my mind, there is no point crying over spilt milk, if we could have converted more we would have considered more but it doesn't really matter. The order momentum in the order book remains strong and while we didn't convert in Q3.
Converted in Q4 and subsequent quarters.
To specifically give you an idea of where we would have ended in Q3 will probably would have ended above seasonal trends that we see between Q2 and Q3 by <unk>.
Low single digit percentage number but the momentum is very strong in Q4 and also for 'twenty. Two that's the interesting bit in the environment that we're operating in the demand is very solid.
And the supply constraints, we don't see them ending before the first half of calendar year 'twenty. Two so we just have to navigate this.
As as the capacity of all our manufacturing partners is not back to pre pandemic levels and that will still take the goods.
Two to three quarters.
Great. Thank you Andre for the question operator can we go to the next one please.
Our next question will come from Sidney Ho with Deutsche Bank. Please go ahead.
Great and congrats on solid progress on the AOR site and our cash flow.
My question is on the <unk>.
HBC Secondly, you suggested this full year <unk> revenue will grow within your target range of 8% to 12%.
Is that on a revenue basis or order basis, and this revenue did with.
It would imply.
The implied fiscal Q4, we will see at least 50% growth am I doing the math correctly.
With strategies such coach I understand revenue could be quite lumpy.
Yes, let me start at Enthetic is welcome to listen as you said right. This business is lumpy because of the time it takes to book the orders to build the ship and install it and then most importantly customer acceptance, meaning that workload.
<unk> intended to run on it.
<unk> is active is in production.
And we normally see this trend accelerates in the back half of the year because of the way the acceptances work. So we absolutely expect.
A significant uptick here and that's why we are very confident in our ability to deliver for the year 2021.
8% to 12% growth that we committed.
Since the beginning actually in 2021, and we have a number of deals that all have now running.
What we call the testing.
Cycles and.
Totally confident about the customer acceptances, which would allow us to recognize revenue. This has nothing to do with supply availability in many ways. Because obviously those are systems in any way has already shipped and they're already deployed it's just getting through the cycle for the customer to get the performance that they need and that is quite a bit of tuna.
When the systems are deployed.
But to <unk> point, the demand is unbelievable strong.
Put aside the $2 billion.
Award that we got yesterday, we announced yesterday.
We continue to win multiple.
Multimillion dollar deals in many aspect and you can see some of those as we announced throughout the quarter and that's the power of the portfolio. We have in high performance computing and specifically tuned for these AI and deep learning capabilities.
And by the way, we have $7.0 billion.
Award of the business, which I don't consider it a backlog is business that will be delivered over the next 12 to 18 months, particularly with the large excess scale systems, which are an amazing.
It's a technology that was safe.
Mhm.
Great. Thanks, Tony for the question can we go to the next one please.
The next question will come from Shannon Cross with Cross Research. Please go ahead.
Thank you very much I was wondering if you can quantify how the shift to a green.
Green like in recurring revenue and as a service is impacting revenue if theres any way to sort of quantify where you would have been if you hadn't.
Made this shift at this point and I'm also curious with regard to green like how are your customer conversations going.
I'm not sure how many quarters ago. You said you know we're shifting everything to at least have an option as you know from the script subscription standpoint, So I'm just wondering if it's.
Still kind of a push to customers or is there more of a pull from them as they they look at alternatives to cloud. Thank you.
Well, thank you Sean.
We are incredibly bullish about this business I think we have a competitive advantage and the competitive advantage come from many aspects of the software.
Software that makes this consumption model it through consumption model. Unlike some of the other ones that we're trying to catch up which is more of a financial engineering in many ways understand everybody is getting into this space, but we have years of leadership here.
And the compensation goes as simple as this I wanted to cloud experience on brand and at the edge and we can bring that through Green Lake because this is a true cloud experience.
You can consume elastically on a per unit measure that we can measure all the way to core.
Levels.
And be able to automate the whole experience through our software stack.
Which obviously H B S models now, it's becoming a very important component of that and Thats why <unk> made the comment earlier as we go through the <unk>.
Some end of October we're going to get a little better disclosure of that because the software content continues to increase although over by definition channel is already all software right.
He said that three three triple digit growth is happening in that business. Because you are subscribing to get connectivity and our platform as a cloud platform at scale, because we manage now more than $6.0 million of devices, but it's more of a pool I will say when customers are becoming more sophisticated about that.
But at this stage, where the shoe hosted data and where the sugar on the windows They realize that the vast majority.
On premise and many of them will stay on premise. It's just the economics and physics and we can deliver the same experience on prem and still give them a hybrid experience by managing the workloads and data sits outside the four walls and Green Lake is absolutely resonate and that's why you see us catering everything to Green Lake.
Whether it's connectivity whether its data services, whether it is elastic computing.
And more workload optimized services as we go along and Thats why I said earlier. This is all about acceleration on that between now and March youre going to see a massive asset duration and that's why my number one priority and by the way as the revenue is accretive from a gross margin perspective, synthetic and I wanted to talk about that.
So.
And what I would say is if you refer back to slide five of our Investor presentation. We show you the.
Stack.
Revenue that composes, our Ah right. So our green Lake revenue is across all segments or compute <unk> storage Aruba and also <unk> as you can infer from that slide and.
The more we drive.
Lake by way of software the more accretive it is to the overall gross margin of the company. That's a key lever to drive gross margin moving forward, we're driving gross margin across every single swim lane sort of the revenue mix and across also that revenue mix horizontally by way of pivoting the company to be coming in.
As a service company so far what I can tell you is that the greenlight gross margin is substantially higher than the average gross margin of the company that we posted today.
We look forward I'm, telling you and I to update you and every other member of the analyst community at our virtual Sam event in October highlighting to you, where we see the <unk> growing and its mix by segment moving forward any composition, how much of it is software and how much of it comes from other types of.
Our revenue streams, such as <unk>, which are very important to the profitability of the company.
Great. Thanks, Shannon next question. Please operator.
Next question will come from Katy Huberty with Morgan Stanley. Please go ahead.
Yes. Thank you speaking of Green like the 2 billion MSA contract is a great success story for that business should we assume that the 2 billion of revenue is recognized ratably over the 10 year contract or will there still be lumpiness like you've seen in HBC. Historically, and then also when does that start to impact.
The financial model, then I have a follow up.
Yeah, I think it will be definitely recognize over time, there will be periods will be a little more lumpy because of the infrastructure, but we started recognizing here in 2022.
In fact, we're expecting here in the first of all that is happening now and start shipping soon.
But obviously the one thing you need to understand about this deal is not just about selling infrastructure.
And.
Consumer loans are serviced through HP Green Lake is a true as a service model and managing it at the same time. So we are operating in the whole environment.
Is that a different than it used to be in the past.
Thanks can you guys I know you had a follow up what would catch you. After the call operator can we go to the next question. Please.
Our next question will come from Matt Sheerin with Stifel. Please go ahead.
Pardon me Mr. Sharon your line might be muted.
Yes, no problem operator can we just go ahead and the next one yes. Our next question will come from Kyle Mcnealy with Jefferies. Please go ahead.
Hi, Thanks, a lot for the question and congrats on the strong results in our intelligent edge, but I'm curious on where you think we can go from here.
It's been growing at faster than what the market has typically grown out in the past.
Realize that Wi Fi six adoption curve is helping that but how sustainable do you think this 20% plus growth rate is that we're seeing now and should we expect some deceleration in there or is there potential for continuing momentum acceleration with Wifi six upgrade.
Listen I expect this business to continue to grow double digits right.
And we are very confident with that with that forecast.
And honestly, maintaining or improving even the level of profitability because of <unk>.
Earlier right.
This quarter was impacted by a settlement on a legal matter that has been going on for a decade and so I'm pleased that that finally has completed.
Which was $17 million that we booked for this and it has nothing to do with that orebody just happened way before that over for that model.
So the reason why I'm confident is because we have a unique value proposition.
The proposition of Aruba is a mobile first cloud first which is based on three layers. One is the unification of the network for whatever type of connectivity you need which is Wi Fi to appoint Wi Fi six if not been adopted and we are.
I think the largest vendor shipping Wi Fi access points.
One is obviously line third is one and that's why these acquisitions will be has been incredible well received by our customers and very timely because its integrated now in the same control plane and going forward, we're going to integrate more solutions like <unk> and edge computing and that's why these edge to cloud platform, it's so essential but the.
<unk> edge platform is what allows us to deliver the entire rates the cloud platform because now that the platform also serves as the back end to deliver.
I ask for customers on Prem and at the edge for computers photos to include data services, a workload optimized solutions. So a super pleased and remember what I said, we exit Q3 2021 with a five times backlog.
Our non mobile content.
In Aruba, and the bookings were very very strong super strong.
Great. Thanks, Karl for the question and I think that takes us about time, so that'll be our final question Antonio why don't I turn it over to you for <unk>.
Any final remarks, because yeah. So again, thank you for making the time today again.
We are very pleased with our Q3 results.
Chicken was model by the strong momentum in line revenue.
Expectations, but most importantly, a strong improvement in gross and operating margin and ROIC.
To date orders and free cash flow and.
That'll give us the confidence to once again for the fourth time in the year to raise EPS and free cash flow and enter 2022 with a.
Good visibility about what we think is going to happen on particularly bullish about the IP spend cycle.
People ask me what do you think the Delta that is going to do is going to do nothing on demand I can tell you that now.
They have some impact on supply availability, but nothing on the Matt Let me be clear about that and the reason why is because customers need to digitize their business they need to create a more.
Environment and honestly the need to extract insights from the data at the pace that we've never seen before in our edge to cloud platform strategy is resonating. So thank you for making the time to be with us today and hope to catch up.
The end of October unsecured note at this meeting.
Perfect. Thank you operator, I think we can go ahead and close out the cole.
Ladies and gentlemen, this concludes our call for today. Thank you.