Q1 2022 Hewlett Packard Enterprise Co Earnings Call
We will be referencing the slides and our earnings presentation throughout his prepared remarks as mentioned the earnings presentation can be found posted to our website and is also embedded within the webcast player for this earnings call with that let me turn it over to Antonio.
Thanks, Andy and good afternoon, everyone. Thank you for joining us today.
Before I discuss our results I would like to address the evolving situation in Ukraine, and how we are responding.
Our first priority in the region is the safety of our team members, our contingent workers and their immediate families.
We are conducting regular proactive outreach to our workforce and Ukraine to offer emergency emergency assistance, making a security team available 24 by seven to help.
The HB Foundation has established a special giving campaign for our team members to support humanitarian efforts in Ukraine, which has already raised $150000 and just over 24 hours and.
And we are expanding the time off we offer team members to volunteer so those in the regions can care for their families and participate and humanitarian relief activities.
From the business perspective, we have suspended all shipments into Russia. At this time, and we will continue to adhere to all relevant sanctions and export controls.
Now, let me review our results for the first quarter of fiscal 2022.
Hewlett Packard enterprise delivered a solid performance.
There was characterized by robust customer demand and profitability demonstrating the strength of our differentiated edge to cloud strategy and our portfolio of innovation.
Our business pivot is further strengthening our gross and operating margins.
As a result of our overall performance this quarter, we are increasing our outlook for non-GAAP diluted net earnings per share for the full.
For the full fiscal year of 2022.
In Q1, we saw order growth of 20% from the prior year period, including 136% rise in other service orders.
We increased total revenue by 2% year over year to $7 billion.
Despite continued industry wide supply constraints, which slowed our ability to convert orders and record breaking backlog to revenue.
We generated non-GAAP gross profit margins of 33, 9% higher than the prior quarter and prior year.
I'm, particularly pleased that we delivered 11% non-GAAP operating margin.
Free cash flow was a negative $577 million in the quarter, reflecting normal seasonality and proactive actions. We continue to take to further buffer inventories in order to meet robust customer demand and forward looking growth.
The performance of <unk>.
We delivered this quarter was noteworthy in a macro environment that continues to be defined industrywide by supply shortages and overloaded logistics channels.
Our global operations team is mitigating the impact by prudently build inventory, where appropriate and leaning on our long standing supplier relationships.
We continue to utilize our world class supply chain engineering capabilities to adjust the type of components, we use shifting to those that are more readily available.
We have not seen any noticeable order cancellations from customers due to elevated delivery times and we'll continue to take pricing actions in this inflationary environment.
As we discussed previously we expect supply constraints will likely last well into the second half of calendar year 2022.
Demand for our differentiated edge to cloud products and solutions continues to be very strong with Q1, marking the third consecutive quarter, we have generated year over year order growth above 20%.
This was also the second conservative quarter of that also service orders more than doubled year over year.
Customers are turning to HP for a differentiated portfolio adopting our solutions to drive their transformation at a faster and faster pace.
Several key technology trends that are shaping the industry are either align directly with our strategy to become the cloud company throughout HP Green Lake platform offering.
The edge is creating new sources of data our customers need secure connectivity to poverty emerging distributed enterprises with remote workforces, while delivering new digital experience to their shareholders.
The World is hybrid cloud is an experience that customers increasingly expect to have whatever that were lots of leads.
The result is a growing demand for multi cloud experiences, including cloud that live on premises at the edge and co locations or in a public cloud.
Yeah.
We have entered the age of insight and data is the most precious asset digital transformation is creating new possibilities for enterprises and customer need solution to extract insights from the data to accelerate business outcomes.
And when customers tell us they want to address these market shifts they are increasingly looking to do so through a flexible as a service consumption model that enables them to pay only for the us.
Customers seeking to capitalize on these market trends opportunities are turning to HP Green Lake as the platform of choice.
As always product will provide details about the business results for each of our segments.
Now a few highlights that underscore our performance this quarter as well as our innovation and traction with customers.
Customer's requirement for our unified operating experience across edge to cloud and the desire to consume it in a flexible way is fueling the tremendous order those growth of our HP Green Lake edge to cloud platform, which saw record demand in Q1 with also service orders up 136% year over year.
During the quarter, we added more than 100, new HB relate customers, bringing the total count to more than now.
1350 customers, who have adopted the HB Green Lake platform.
<unk> of its compelling value proposition.
Among the new HB Gorilla customers, we announced in Q1 was Barclays, which is using <unk> to deliver its private cloud platform as a part of the bank's hybrid multi cloud strategy and digital transformation across its global banking businesses.
The traction we are seeing in the market for <unk> is driving us to further accelerate the transformation of HB Intranets the cloud company.
On March 22nd we will unveil significant new innovations and enhancements to our <unk> platform to help customers manage the hybrid clouds more easily protect and get more value from their data and securely to securely connect at the edge.
Our other service transformation is my number one priority and it is already delivering results for our shareholders ever.
Evidenced in our Q1 performance and increased non-GAAP diluted net earnings per share guidance for the full fiscal year 2022.
Our other service fee that is accelerating our momentum in key growth businesses.
Our intelligent edge business segment grew revenues, 11% year over year and for the fourth consecutive quarter, so year over year orders growth of over 35% driven.
Driven by the very strong demand and secure connectivity from edge to cloud.
I don't know about edge cloud offerings continued to garner new customers.
The Aruba Central cloud native platform that manages more than 120000 customers and more than one point.
$1 9 million network devices.
In Q1, we announced that the level of our cloud managed branch offering is being adopted by Brazil, and Corey one of the largest privately held construction companies in the United States.
The company is using our networking portfolio to elevate their construction site innovation with impressive tools like virtual reality views of projects before they're built.
Also in the quarter, we introduced the Aruba edge connect micro branch and industry, leading home office cloud based networking solution.
Personnel work seamlessly and securely wherever they are located.
Our high performance computing and AI business also generates a noteworthy product order growth of more than 20% year over year.
Which has increased our total order book to a record of approximately $2 7 billion.
During the quarter, we announced a win with the United States Department of energy National Renewable Energy laboratory to build a new supercomputer that will advance R&D for some models clean energy systems.
Our computer storage businesses experienced robust order growth and outstanding profitability in.
In Q1, nearly 10% of compute storage orders were sold as a service.
Compute generated more than 20% order growth year over year expanded gross margins and attractive operating margins up 240 basis points year over year, driven by strong pricing discipline.
So what else drove product order growth of more than 15% year over year for the fourth consecutive quarter.
Innovation is unrelenting.
Transfer of this segment into data services business for example in Q1, our venture arm Hewlett Packard Pathfinder invested in Big IV.
This is a leading data intelligent platform to help organizations realized detailing sites in their sensitive personal and critical data and then act on it.
Our HPE <unk> services team is helping customers navigate through their multi generational 80 drove any while modernizing building and running the new hybrid atheist states.
In Q1, HPE <unk> services orders increased mid single digits year over year.
Turning to our workforce will reopen all of our United States offices last month to those who wish to return after careful analysis of all the information and guidance from public health officials.
Very pleased to meet team members in person at our new cutting edge Houston headquarters.
You may have caught a glimpse of our Houston campus innovation in the video the ramp before this call. We look forward to the official Grand opening in April .
Alongside advancing a rewarding workplace also believe HP has a responsibility to become a more climate resilient company.
We know it is a priority for our customers and shareholders HP.
HP financial services plays an important role in our sustainability strategy, providing asset upcycling to customers, which means we use of millions of technology assets, while freeing up capital for customer to reinvest in their businesses.
Customers are choosing HPE impart because of our portfolio sustainability attributes in fact in fiscal year fiscal year 2021.
We drove nearly $900 million in revenue from sustainability related customers engagements.
I am proud of our team members not just for bringing breakthrough customer centric innovation, but for how they are bringing it to market.
Making bold moves to maximize what we can do for our customers and shareholders.
It is this type of collaboration and engagement is propelling our business transformation.
It is clear from strong customer feedback and momentum across our businesses that HP is increasingly well positioned to capitalize on the edge to cloud mega trends that define our industry.
HP Green Lake is at the center of our strategy to pivot the company and it is generating record breaking demand with impressive profitability across our business.
This continues to be uncertain times as we monitor the dynamic global stage I am more confident than ever about our future and our ability to drive long term sustainable profitable growth for our shareholders because of our strategy and differentiated innovation.
Now I would like to product to talk you through the quarter's performance in detail Patrick.
Sure.
Okay.
Thank you very much Antonio.
I will start with a summary of our financial results for the first quarter of fiscal year 2022.
As usual I'll be referencing the slides from our earnings presentation to guide you through our performance.
And Tony will discuss the key highlights on slide one so now let me discuss our Q1 performance details starting with slide two.
We are off to a good start delivering against our commitments for fiscal year 'twenty, two with strong momentum continuing to build across the business.
The demand continues to be robust for our differentiated edge to cloud portfolio with order growth up 20% year over year, marking our third quarter in a row with order growth at or above 20% year over year.
This bolsters our confidence in achieving both our fiscal year 'twenty, two revenue outlook of 3% to 4% adjusted for currency.
Our longer term, 2% to 4% revenue CAGR outlook provided at our 2021 Securities analyst meeting.
We delivered Q1 revenues of $7 billion up 2% year over year and in line with our outlook off of normal sequential seasonality, despite a continuously challenging supply environment.
As a result, our backlog further increased to record levels with a firm order book that shows no signs of double ordering or any noticeable cancellations.
We were particularly pleased with the quality of our earnings including the resiliency of our gross margins. Despite the ongoing supply constraints that are driving up material and logistics costs.
We delivered non-GAAP gross margin of 33, 9% up 90 basis points sequentially, and 20 basis points year over year, driven primarily by strong pricing discipline and our continued mix shift towards higher margin software rich offerings.
non-GAAP operating margin has also been resilient at 11% slightly down 30 basis points year over year, but up 130 basis points sequentially.
We're achieving all of the expected savings from our cost actions announced made pandemic, while continuing to make investments in our high growth margin rich areas of our portfolio to fuel further revenue and profitability.
Within other income and expense we benefited from further strong gains related to increased valuations in our investment portfolio and robust operational performance in HCC.
As a result, we now expect non-GAAP other income and expense for fiscal year 'twenty two to be an income of approximately $25 million versus prior guidance of a 20% to $40 million expense.
As a result of our strength in margins that more than offset the continued supply challenges, we delivered non-GAAP EPS of <unk> 53.
Well above the high end of our outlook range of 42 to 54 Q1.
As previously indicated we expected free cash flow to be in line with our typical seasonality that is lowest in Q1 with a use of cash of $577 million for this quarter.
We also continue to take strategic inventory actions to navigate the current supply environment.
Our inventory is now up to $5 billion year over year to $5 $3 billion in support of the substantial order book that we have.
This will better position us to convert orders into future revenue and cash flow.
Finally, we continued to return substantial capital to our shareholders, we paid $155 million of dividends in the current quarter and are declaring a Q2 dividend today of <unk> 12 per share payable in April .
We also repurchased $129 million in shares during Q1, reflecting our confidence in future cash flow generation.
Slide three highlights key metrics of our growing as a service business.
We made meaningful progress during Q1.
We added more than 100 customers and well over $500 million of total contract value that brings the current total TCE to more than $6 $5 billion.
Total as a service orders were up 136% year over year as a proof point of our as a service pivot momentum as a service order growth has accelerated every quarter going back to Q1 of last year.
Our <unk> was up 23% year over year to $798 million with supply constraints limiting some installations.
While our IRR growth might be somewhat volatile in the current supply environment. The strong accelerated accelerating order growth over the last several quarters is the best indicator of long term health of this business.
This gives us confidence in delivering our 35% to 45% CAGR target from fiscal year 'twenty, one to fiscal year 'twenty four with increasing margins as our mix of software and services continue to increase to 64% in Q1 up more than four points year over year.
Now, let's turn to our segment highlights on slide four.
Our growth businesses, continuing to show improving top line momentum and record levels of backlog fueled by strong demand.
In the intelligent edge demand for our secure connectivity solutions continued unabated with orders growing more than 35% year over year, the fourth consecutive quarter.
Despite increasing supply constraints revenue grew 11% year over year with strength across the portfolio.
Both wired switching and wireless Lan grew approximately 10% with Aruba services up even stronger driven by our edge as a service offerings up strong double digits.
We also delivered strong operating margins of 17, 4%. This is a 650 basis points sequential improvement despite higher component in logistics costs, demonstrating that our pricing actions are sticking.
In Hps CNI demand remains robust with product order growth of more than 20% year over year driving our awarded contracts total to another record level of approximately $2 7 billion.
Revenue grew 4% year over year, but was impacted by two large customer acceptance delays that impacted growth by more than 10 points in Q1 and are now on track to be delivered in Q2.
Our Q1 operating profit was obviously also impacted by these push outs and we expect operating margins to return to more in range with historical levels going forward.
In compute order growth was up over 20% year over year for the third consecutive quarter, while revenue growth was flat, reflecting the difficult supply environment.
We have been very focused on executing a dynamic pricing strategy that has been effective in managing the increased supply and logistic costs.
The results are showing up in our operating margin performance at 13, 8% up 240 basis points year over year, and 440 basis points sequentially, well above our long term target of 11% to 13%.
Within storage product order growth was up in the high teens year over year. This was the fourth quarter in a row of 15% or better year over year product order growth revenue was down 3%, reflecting increasing supply constraints, particularly for our owned IP products.
As a result, we had an unfavorable revenue mix that pressured our margins this quarter.
We expect both our revenue growth rates and margins to improve over the next few quarters as we continue to shift our portfolio towards higher margin products and supply constraints ease.
With respect to point next operational services, including storage services.
Orders grew mid single digits year over year as reported similar to levels for total fiscal year 'twenty one.
As you know this is a very important for the long term health of our most profitable business.
Within HPE financial services volume increased 11% year over year and revenue was down 1%.
Our write offs as a percentage of assets, excluding the impact of <unk> in the UK and Asia Pacific was 47 basis points, which is below pre pandemic levels.
Our profitability also continues to benefit from higher residual values realization and lower borrowing costs as we continue to securitize, our U S portfolio via the ABS market.
Our operating margin was 12, 4% up 260 basis points from the prior year and our return on equity at 19, 7% remains well above the 18 plus percent target set at some 2021.
Slide five highlights our revenue and EPS performance, where you can clearly see the strong rebound from last year and sustained momentum entering fiscal year 'twenty two and this despite a more supply constrained environment versus a year ago.
We're also delivering a better quality of earnings with our portfolio mix continuing to shift to our higher growth and higher margin businesses as we execute our edge to cloud strategy.
Turning to slide six we delivered non-GAAP gross margins in Q1 of 33, 9% both year over year and sequentially. Despite all of the increased component and logistic costs.
This was driven by both strong pricing discipline and a favorable mix shift we've been driving towards edge and our as a service business.
Moving to slide seven you can see our non-GAAP operating margin this quarter of 11% representing a 130 basis points sequential increase we also delivered roughly the same operating profit versus last year. Despite a more challenging supply environment, while continuing to invest significantly more in both R&D and our go to.
Market for the future.
Thanks to a much better quality of earnings and gross margins.
Turning to slide eight our free cash flow was a use of cash of $577 million. This is more aligned to our typical pre pandemic seasonality. If you look at Q1 in fiscal year 'twenty or the prior years.
Cash flow in Q1 of this year has also been uniquely impacted by the supply chain environment as we have strategically continued building inventory levels.
This will better position us to begin converting orders and generate healthy amounts of cash in the back half of the year, reflecting also our typical seasonality.
We therefore continue to expect to deliver fiscal year 'twenty, two free cash flow of one $8 billion to $2 billion.
Now turning to our outlook on slide nine.
Given our strong performance in Q1 and building momentum across the business I am pleased to announce that we are raising our full year non-GAAP diluted net EPS outlook range for fiscal year 'twenty two by seven cents at the midpoint to $2 <unk> to.
To $2 17.
From a topline perspective, we were very pleased with the continued strength in orders and growing backlog that gives us confidence in future revenue growth in fiscal year 'twenty two and beyond.
We do also want to remain prudent in the short term given the ongoing supply challenges that we continue to believe will likely last well into the second half of the calendar year.
As a result, we still have strong confidence in our fiscal year 'twenty two revenue outlook of growth of 3% to 4% and expect to end the year with elevated levels of backlog, which bodes well for fiscal year 'twenty three.
More specifically for Q2 2022, we expect revenue to be in line with our normal sequential seasonality of down low to mid single digits and are comfortable with current consensus.
As a result for Q2 'twenty two we expect GAAP diluted net EPS of 18 to 26.
And non-GAAP diluted net EPS of <unk> 41 to 49.
So overall I am very pleased with our first quarter of fiscal year 'twenty two.
Our edge to cloud strategy is resonating with customers and driving strong demand across our portfolio.
This enabled us to deliver a good start to the fiscal year with increasing momentum and our raised outlook.
We are very well positioned to capitalize on the ongoing opportunity and delivery against.
All of our financial commitments set at some 2021.
Now with that let's open it up for questions. Thank you.
We will now begin the question and answer session.
To ask a question you May press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys and to withdraw your question. Please press Star then two.
We also request that you only ask one question.
And our first question will come from Shannon Cross with Cross Research. Please go ahead.
Thank you very much I wanted to maybe dig a little bit more in Q.
Linearity during the quarter and what Youre hearing from customers in terms of demand given all the geopolitical challenges.
<unk> talked about backlog increasing to record levels.
Wondering how much of that do you think our customers planning ahead or thinking about longer lead times versus.
Near term demand, it's not just being able to be Matt right now and I don't know just what are you hearing because our customers sort of shifting the way that they think about how they are buying at this point in time and I guess just a final question within that is.
How does this benefit or does it benefit your green link in your as a service strategy. Thank you.
Well thanks Shannon.
So as you can imagine I spend a lot of time talking to customers in fact, 50% of my time with customers and partners and the one consistent theme is that.
I always said in a quarter has 13 weeks.
And every week has been super strong.
We put specific goals for our sales force every week that we track very closely.
Product lines are very tight process on that.
And we have always exceeded every two weeks forecast and the feedback is driven by the following number one obviously, we know digital transformation is getting stronger and stronger out there and it's driven by the fact that you've got to digitize the process to be competitive number two data continues to explode every.
And that means that they need more capacity to store the data, but most importantly process that data at the pace, we haven't seen before and Thats a combination of AI analytics.
Learning at scale, and obviously, a lower compute power.
The therapies, obviously as I said in my remarks is that the edge continue to grow very very rapidly and in order to transform in a digital environment you need connectivity without being connected you don't have the on ramp into this digital transformation of.
Of course customers are concerned about the inflationary cost going forward, then monitor what's happening out there.
But in the end I think all of this.
When you balance the demand for these trends and I'll talk about the trends right and the Mega trends.
And then the fact that customers want to consume more flexibly. They don't want to put all of that Capex to work Great Lake is getting significant attention and that's why I said when you think about the future of this company. The problem is HPV Lake everything gets delivered to HBV Lake whether there is a connectivity to a subscription model whether its computer storage.
You can consume elastically with data services running on top of it.
Whether it is the services to operate in a hybrid world HP Lake is becoming a platform of choice for many customers because offers the flexibility and in an architecture that's edge to cloud.
That's inclusive by the way of the public cloud and Thats why when you see the innovation, we're going to bring in the next three weeks. It includes the public cloud and the way we manage that so overall I will say great execution by our team customers need more IP now more than ever and obviously, we are doing a good job.
Say in the quality of earnings pricing elasticity and everything we have done which is the results of the profitability you saw in Q1.
Great. Thank you Shannon I appreciate the question operator can we have the next one please.
The next question will come from Onesie, My hand with Bank of America. Please go ahead.
Yes. Thank you congrats on a really solid gross margin performance in a very tough environment, where others are really seeing.
A lot of pressure on their GP dollars and gross margins.
I was hoping you can talk about the sustainability of these gross margins through the rest of the year, especially in light of the increasing DRAM and NAND cost and it seems as though some of the logistics.
Or really not letting up so far and.
Maybe you can share some color on your ability to take incremental price actions and maybe share some color on what you've already been able to pass through in terms of pricing. Thank you.
Thank you for the questions as indeed, very pleased with our gross margin performance.
This quarter.
We outperformed our competitors pretty obvious when you look at what they have reported.
The.
The resiliency of our gross margin is there for everyone to see and this despite the ongoing supply constraints that everyone has.
Been facing with.
So we feel that this performance can be sustained but you.
You have to adopt different pricing strategies across different segments. So we have to be incredibly dynamic in our computer segment that we have been and this translates into significant operating profit margins at 13, 8%, which is even higher than the.
Long term outlook that we put forward for that segment at 2021 and in the rest of our portfolio, we have significant differentiation at the edge in storage.
Also in HP financial services and HBC so there.
Pricing strategy is different we take a harder look at how much value can extract given that our portfolio. There is is more differentiated but it's everyone is contributing here to making sure that the gross margins are sustainable finally, I want to highlight to you that as a service contributes and will.
Continue to contribute in the long run to enhance gross margins.
Why we highlighted to you all.
In the.
A slide presentation the mix shift in the composition of the <unk>.
The more we continue to drive as a service growth the better it is for.
Gross margins ultimately, but it's a dynamic environment and to your point you will see some pressure on some commodities.
We feel we are well equipped with our inventory levels to withstand the pressure from these commodities and this is why we buffered up inventory to the levels that we reported knowing that this is obviously to meet a substantial order book that is much higher than what we have experienced in prior years.
As Antonio said the demand in the quarter has been extremely strong every week and it continues to surprise us from a from its strength and resiliency standpoint.
Great. Thank you Andrew for the question operator can we have the next one please.
The next question will come from Tim long with Barclays. Please go ahead.
Thank you.
I was hoping to just follow up on some of the as a service business deals you mentioned.
Getting some large deals and more more backlog building there could you talk a little bit about kind of the complexion of what you're seeing.
From a solution set or customer base driving that.
And maybe a little bit on kind of what you see.
From pipeline on some of the customers looking to more peak on the as a service.
Type of offering as opposed to just kind of the standard building by thanks.
Sure well one of the marquee customers is actually your bank Barclays.
Kind of interesting.
They needed a partner to take them to these hybrid Germany and in their case, they have tens and tens of thousands of Vms. So in their case, they wanted flexibility to scale up and down in a private cloud environment and yet integrated public cloud of the go forward. So they felt that obviously with <unk>.
They get the best of both worlds.
And experience in a cost on brand.
That's very competitive and the ability to move Vms back and forth they need.
But the reality is that it is driven by many factors number one let's start with the edge right. So obviously a lot of the as a service now the edge is building a subscription model you subscribe to the robust cloud platform now inside Green Lake and then basically you can provision connectivity with few clicks.
But now we are seeing growth in what we call the NASS environment the network as a service where customers don't just want the.
The subscription, but they want the full consumption, including the hardware and services in our managed services approach. They don't want to be in what I call. The day two of the run part so that comes with a lull services and that's why Tarek mentioned.
The combination of software and services is increasing.
If you look at the Colocation or the edge, where the cloud is moving as well or data Center. Obviously private club is one aspect is that infrastructure as a service component, but a lot is also workload optimized solutions.
Whether it is.
Those like VDI or whether it is.
As a service.
Sure.
<unk> learning.
As a sort of us so we see existing workloads and <unk> also being consumed as a service in these locations.
So those are the type of deals we're seeing and remember it's not just the hardware and software is the services that comes with it because what we're seeing our customers and we talked about some of the previous customers as well the one HB to run there.
Solution.
And to add which the managed services piece come as well with it. So it's a combination of infrastructure as a service of connectivity and then as well these will load optimization with more and more to management as well as the hybrid state which includes.
The public cloud and last but not least obviously you think about data data is a major component data Hasnt gravitational force.
And at the same time they want to apply these new techniques. That's why we see a lot of growth in the AI and machine learning space.
In the enterprise space and our scale through HBC and.
And that's why on the <unk> side, we are very very pleased with the momentum as we now have that business becomes a little bit lumpy because of the customer acceptances.
But this year, we're going to deliver some of the most amazing systems you can imagine at massive scale, where you know cut.
Customers can process data, we have not the margin before so it's a combination of all things that's what resulted in a 136% growth.
And Thats why we are very excited about the momentum, but what excites me. The most honestly is the innovation, we're going to continue to bring in their platform call HB Green Lake and to the question that Shannon asked me earlier, that's why it is my priority number one because it's working is driving more growth in the bookings and better profit.
Ability.
Great. Thanks, Tim for the question operator next one please.
The next question will come from meta Marshall with Morgan Stanley . Please go ahead.
Great. Thanks, I wanted to dig into the intelligent edge upside.
He noted that order growth was still.
<unk> then the revenue growth that you guys were able to post and so.
Kind of two parts of that question Jess.
Some of the order growth that you're seeing still kind of returned to office plans are we really starting to kind of move past.
This return to offense.
And then growth and then on the second piece just on the revenue upside that you were able to post is that some kind of loosening of availability for networking chips or is there anything that led to kind of outperformance in that segment.
The supply chain in that segment. Thanks.
Sure well. Thank you for the question I'll start and <unk> can add on if you go back to 2018, when I became CEO I said.
The edge is an excellent year and we will invest in innovation over the next four years. We have now seen the result of the investment because we have a unique value proposition in as a service model that actually accelerated our momentum there and you saw the numbers, but 35% growth.
For the fourth consecutive quarter. This is not just a data point in the charts. There's four of them in the data in the chart that we are driving strong demand I think the pandemic has accelerated the need for the distributed connectivity in fact, this quarter, we announced a new offer the edge connect offer which basically gives the customer the ability to manage.
The workforce wherever they are in a seamless secure integrated the way provision that connectivity whatever they are but listen the scale of the platform. We have I think is is in <unk>.
Much we already have more than 120000 customers, which are consuming more and more services that may start with Wi Fi.
<unk> now, they're rather than one that's why we made the acquisition of silver peak more than 15 months ago.
And so we're going to add <unk> to <unk>.
So in my view.
This is just a build up momentum and the architecture of that business is about the unification of the connectivity, which makes it simpler to run.
The operations that network operations wherever that connectivity is the security layer, which obviously is super important and then the analytics because ultimately what customers like about our offer is the ability to use the data that we actually can provide through the network performance and characteristics that allows them.
To deliver a better experience and when you have almost 2 million devices. These are all data points in fact, so you know.
The scale every hour, we process almost 2 billion data points.
And thats done around the globe in 13 different.
Geos and that gives the ability for customers to provide these unique experiences.
But again that comes also with an improvement in operating margins, which is 74%.
Is actually sequentially at 650 basis points I think on the supply.
Obviously, we have been working for some time I can tell you. We are we continue to place orders a least four if not five quarters ahead of demand.
We are so confident about this business to continue to grow.
And we have to work it through sometimes we get a little bit better much into what we have some time.
We may leave some more of those unconverted, but on a long term. This is going to continue to be a shiny story for us.
Great. Thank you for the question can we go to the next one please operator.
The next question will come from Sidney Ho with Deutsche Bank go.
Go ahead.
Thanks for taking my question.
Couple of questions on the <unk> side.
<unk> grill and sequential basis for the first time in a while I know you talked about supply challenges limiting somebody installations is there a seasonality element to the army.
Question number one and secondly green.
Green Lake services growth continued to accelerate more than double.
The second consecutive quarter can you walk us through how long it takes for Greenock orders to flow into the <unk> calculation I assume it's different for every every business segment.
Yeah.
So let me start and then I'm sure. The last part of the question Patrick will answer you know how long it takes.
No I don't think Theres any seasonality this is up to the right.
Just a matter of getting those installations completed sometime is the supply sometimes the customer readiness in some cases, but the reality is all driven by the availability of the system for us to install.
So that's the answer on that.
Again because of the momentum we have there.
We're very confident on the 35% to 45% CAGR that we committed.
And obviously overtime. This takes care of itself. So that's on that part of the question.
An issue at all.
The services piece I think you just mentioned I mentioned that before right.
With Green Lake the one important part is comfortable with 100% attach rates of <unk> services.
And as we go forward, obviously dove momentum continued to build a bigger kind of defer aspect of it.
And at the same time, we also add in the managed services piece of it because many of the new deals we have been engaging there was a question earlier about the pipeline the pipeline looks amazingly strong.
And some very large marquee deals and to make it but with that said the managed services piece is an additive to the attach because customers don't want to be in the wrong time.
Anymore. So the other rely on the Green Lake as a platform plus the services under needs to run their operations. So maybe with that if you wanted to talk about the conversion into <unk> I think it is right. Yes. So I mean, the simple answer to your question on how long does it take to see an order flow into the IRR in revenue terms is this.
Our Green Lake model as an appliance driven mall, where effectively you have a complete stack from.
Standard hardware platforms with services and software on top and so to the extent that we have to deliver the complete stack solution.
It takes obviously, it's important that we deliver the right hardware to be able to start to recognize revenue by the moment we deliver.
The appliance and the revenue flows based on the contract duration.
And we have flagged to you and possibly two.
Prior occasions.
The services revenue, which makes the bulk of the <unk> with the software is recognized over time over the duration of the contract and the contract duration varies between 36 and up to $55 58 month in some cases 60 months and so this is why it takes time to dialup the IRR, but.
The really important thing to note is the size of the total contract value that we have on the balance sheet. So if you really look at the.
Contract value that we have on the balance sheet, we increased it by $500 million in this quarter, taking the total to $6 $5 billion of revenue that will unwind.
In the upcoming <unk>.
60 months at the worst right. So that's the dynamic that you have here in terms of orders versus revenue recognition, which is a great question because obviously if you look at it.
Sure.
Again $800 million this quarter and our total contract value of $6 5 billion and more than 64% now in software and services over time, you will see the impact that has on our results Bob.
Quality of the revenue mix and quality of the earnings because of the product set obviously everything we do is accretive and so thats why we are excited about the momentum we have on Green Lake.
Great. Thanks, Andy for the question operator next one please.
The next question will come from Aaron Rakers with Wells Fargo. Please go ahead.
Yes, thanks for taking the question.
And congrats on the results I guess I wanted to kind of frame, how youre thinking about the full year revenue guidance of 3% to 4% relative to the backlog build so if I look at the revenue guidance at the midpoint. It would seem to suggest you expect a stronger second half relative to what we've seen over the past.
To your second half versus first half so I guess I guess my question is.
Whats your assumptions around backlog build and when maybe we see that peaking you start to ship against that backlog is that was that factored into your revenue growth expectations for this year.
Great question and I think if you think about it in Q1 right. So we grew orders 20% in revenue 2%. It means that we're growing orders 10 times faster than the revenue and so that's the simple message there, but the reality is that obviously.
<unk>.
We said that the supply will challenges that we see and by the way logistics right, which obviously comes with other issues. We'll go we'll be well into the second half of 2022 . So this is a matter of timing more than anything else.
And definitely we said we feel very good about the 3% to 4% revenue.
But it's going to depend to that ability to get the supply that we need in the right time and the right mix of remember we have a very.
Large portfolio.
All of those are created equal to the point of attack met earlier and then we see in obviously.
As we go through we're going to assess worlds.
May happen, there, but definitely it's just a timing issue at this point in time more than anything else.
And we expect that to get better as we go along but the message that you would imply that second half will be higher absolutely. There is no question about it.
The question is how high the dependent on the ability to convert the backlog I will say the backlog right now Q1 is bigger than Q4.
Tarek and I believe the backlog has not peaked.
And also remember on the backlog, we have a lot of HBC systems, which in some cases by the way have already been built and deliver but it takes several months to get it.
Running.
Basically until you run the payload and they will know that some of them need to go what I call. The top 100.
It's <unk>.
HBO kind of testing you are now going to get acceptance. So thats why maybe a quarter that you're going to have a huge.
Symptoms in this it will happen that will happen is the acceptance of some of the system and third I'll talk about two systems that slipped from Q1 into Q2. So you've got all these dynamics, but definitely second half other.
Weather and then hopefully kevin's on until 'twenty, three because of the demand still super strong.
And if I can add to antonio's answer.
When we gave guidance at Sam we.
Told you all that.
We are targeting 3% to 4% revenue growth in fiscal year 'twenty two.
With the second half of the year accounting for more than the first half of the year nothing has changed that picture.
If anything.
The order strength is greater than what we anticipated at Sam and it's it surprised us somewhat in Q1.
Because.
And I just want to remind you what Antonio said in his first answer to the first question orders have been strong for 13 weeks in Q1.
And so when you really look at whats happening on two fronts first on our inventory levels. We are acquiring substantial amounts of inventory to cater for the strength of the order demand and so if you also look at what the Delta is between order growth and revenue growth as Antonio said, we are clearly not at peak back.
Alright that is that is going to continue it bodes well for fiscal year 'twenty, two and for fiscal year 'twenty three as well finally, the thing I want to highlight to you is the impact of foreign exchange rates.
When we were together at Sam in October we mentioned that we were expecting 50 basis points of headwind due to foreign exchange rates.
Now obviously the situation is slightly different the dollar is stronger and we expect a four point headwind not 50 basis points, but yet we are comfortable reiterating the 3% to 4% topline revenue growth because of the strength of the order book. So hopefully you can see the link between orders.
In.
Orders backlog inventory buildup and ultimate revenue guidance that we gave on a constant currency basis.
Great. Thanks, guys I appreciate the question operator next one please.
The next question will come from Amit <unk> with Evercore. Please go ahead.
Thanks for taking my question I guess I'll have to ask a free cash flow question now.
And I guess Tarek down 600 million free cash flow or thereabouts, it's somewhat more severe than what I would think normal seasonality should be so maybe you can just flesh out how much of the shooting is seasonal versus perhaps things driven by working capital inefficiencies.
There's a big spike in our drop in this other assets and liabilities. Maybe you can just talk about what happened there as well.
And then.
And as I go through the year do I think about April being somewhat more muted and free cash flow as well and in the back half being better or what does that cadence look like.
Okay.
<unk> okay.
So.
Couple of things on to answer your question first of all the negative 577 million free cash flow.
He is mainly driven by working capital if you really look at the buildup in inventory, we now have $5 $3 billion of inventory. This has had an adverse impact on the cash flow conversion cycle.
So our cash flow conversion cycle is positive 20 days, which is an increase of 17 days relative to the prior quarter because were stocking up inventory given the order demand in the order book that we have so that's the main driver is it.
Seasonal relative to the prior year's yes, but not in fiscal year 'twenty. One you have to go back to the first quarter of fiscal year 'twenty in prior years to determine and free cash flow seasonality moving forward, but we feel good about.
Our ability to generate free cash flow as we work through the backlog and reduced inventory levels and this is why we reaffirmed the free cash flow guide of $1 82 billion for fiscal year 'twenty two and there was another part of your question, which.
I forgot I think you were talking about the movement in other assets and liabilities Andy would you want to take that one. Please yes, so thats generally related to our comp plans, where we pay out our bonus.
First quarter. So that's one of the reasons why if you look at our typical seasonality as Terry said going back to fiscal year 'twenty year before you'll generally see Q1 is always a use of cash.
Okay, great well. Thank you all I appreciate the question I think operator, we have time for one more please.
Our final question will come from Kyle Mcnealy with.
With Jefferies. Please go ahead.
Hi, Thanks, a lot for squeezing me in.
Great job on the results.
In such a difficult environment for everyone else.
We have some recent survey work that we did that shows enterprises are expecting a higher than normal level of refresh activity in the coming year, specifically for servers and storage, we assume that some of that might be catch up.
On upgrading aging infrastructure coming out of the pandemic, but are you seeing that type of activity come through and helping the results in.
Would be your expectation for refresh and upgrade activity for the balance of the year 2022.
Sure.
Yes of course customers are now thinking about what else they need to succeed in this new environment.
Definitely the pandemic put a halt on the expenses because obviously at the beginning of the pandemic everybody was in preservation mode.
On liquidity, but at the same time I think there is a component of modernization, which I call it better than refresh.
And also the need to deploy these new technologies is not anymore about a cloud mandate is about what theyre going to do with that data because cloud is just a means to the end right is all about accelerating speed and agility.
Our customers are looking also is what type of things they need to do with that data. So it's a combination of data exploding connectivity require.
The award and the fact that you need to stay up to these new ways to deliver it.
While the transition this journey to the multi generational IP because many of these customers have a lower complexity.
Legacy assets that they have all data with applications or not really.
Re platform.
They cannot re platform. They are all they're ones that honestly, they need to what I call cloud defy, but most importantly need to deploy these new technologies around data. So thats why our vision to become the edge to cloud platform company is so small it all because it is aligned to those are mega trends are connectivity cloud and data that you can consume as a service.
And Thats why the future of the company long term is the Green Lake is a product that drags the rest of the portfolio with higher margins and obviously more recurring revenues.
For us and for our shareholders.
Oh, great. Thank you Carl for the question and everybody else for participating Antonio maybe I'll turn it back to you for some close yes.
Obviously.
Very pleased with the.
Q1 performance solid start again at the quarter was characterized by the customer demand right better robust customer demand and very strong profitability.
I think it's showing the strength of our strategy and differentiated portfolio innovation.
I think we're very well positioned against these trends kind of just ask at the end.
But obviously, we live in interesting times, right, so and right now.
We have to be vigilant about that our priority is to continue to execute on our commitments and also make sure. We can contribute to the society as a whole because this company has unique value and culture. So proud of not only what we deliver on how we deliver.
I hope you stay safe and well and.
Hope to speak to you soon thank you for your time today.
Ladies and gentlemen, this concludes our call for today.
Thank you.