Q2 2022 Hewlett Packard Enterprise Co Earnings Call
[music].
Good day and welcome to the second quarter of fiscal 2022, Hewlett Packard Enterprise Earnings Conference call. My name is Chuck and I'll be your conference moderator for today's call. At this time, all participants will be in a listen only mode. We will be facilitating a question and answer session towards the end of the conference.
So do you need any assistance during the call. Please press.
The signal a conference specialist by pressing the star key followed by zero as a reminder, this conference call is being recorded for replay purposes, I would now like to turn the.
Presentation over to your host for today's call Mr. Andrew Simon <unk>, Vice President of Investor Relations. Please proceed sir.
Great. Thank you good afternoon, everyone I'm, Andy <unk> head of Investor Relations for Hewlett Packard Enterprise I'd like to welcome you to our fiscal 2022 second quarter earnings Conference call with Antonio Neri, Hpe's, President and Chief Executive Officer, and tariff will be Audi Hpe's Executive Vice President and Chief Financial Officer.
We're handing the call over to Antonio Let me remind you that this call is being webcast a replay of the webcast will be made available shortly after the call for approximately one year, we posted the press release and the slide presentation accompanying today's earnings release on our HPE Investor Relations webpage at investors HPE Dot com.
As always elements of this presentation are forward looking and are based on our best view of the world and our businesses as we see them today for more detailed information. Please see the disclaimers on the earnings materials relating to forward looking statements that involve risks uncertainties and assumptions for a discussion of some of these risks uncertainties and assumptions. Please.
<unk> to Hpe's filings with the SEC, including in its most recent Form 10-K and Form 10-Q, HPE assumes no obligation and does not intend to update any such forward looking statements. We also note that the financial information discussed on this call reflects estimates based on information available at this time and could differ materially from the <unk>.
Ultimately reported in Hpe's quarterly report on Form 10-Q for the fiscal quarter ended April 32022.
Also for financial information that has been expressed on a non-GAAP basis, we have provided reconciliations to the comparable GAAP information on our website.
Please refer to the tables and slide presentation accompanying today's earnings release on our website for details throughout this conference call. All revenue growth rates unless noted otherwise are presented on a year over year basis, and adjusted to exclude the impact of currency.
Finally, after Antonio provides his high level remarks, Terry will be referencing the slides and our earnings presentation throughout his prepared remarks as mentioned the earnings presentation can be found posted to our website and is also embedded within the webcast player for this earnings call.
Let me turn it over to Antonio.
Well, thank you Andy and good afternoon, everyone. Thanks for joining today's earnings call HB.
<unk> second quarter results reflect significant customer traction for our differentiated portfolio and underscore our progress in becoming the edge to cloud company.
The microeconomic environment of the last few months has presented enterprises around the world with strategic challenges.
Now confronted all of one.
The market shifts have certainly created a dynamic backdrop for our global customers and have made it harder for them to realize their goals in the short term.
More than ever organizations need technology partners to help them weather challenges, while successfully digitizing and transforming their businesses in order to increase their market competitiveness.
<unk> ability to address these customer needs was key to our performance in the second quarter.
Once again, HP generate a significant or this growth steady revenue and sustained profitability, even as tight supply conditions continue across global industries.
We have seen persistent demands from our customers underscoring both their it spending prioritization and their attraction to a compelling portfolio.
Very strong customer demand in the second quarter drove all of this growth rising 20% year over year, which makes this the fourth quarter in a row that HP has logged year over year orders growth of 20% or better.
Our HB Green Lake edge to cloud platform contributed to us the service orders doubling year over year.
The third straight quarter of triple digit growth.
We continue to see a great deal of customer interest in our platform, which is evident in our sales pipeline.
Our orders backlog across the business is high quality and we are now and we are seeing particular strength in our intelligent edge and compute segments with orders climbing, 45% and 23% respectively.
HBC NII orders grew more than 18%, bringing backlog there to an impressive record of approximately $3 billion.
Total HP revenue rose, one 5% year over year to $6 7 billion against our record breaking backlog of orders in the midst of industry supply constraints.
Climbed 25%.
We have momentum across the portfolio without us a service model differentiating us this quarter.
Order, though to a combination of supply constraints limited our ability to fulfill orders as well as some areas, where we could have executed better we did not fully translated strong customer orders into higher revenue growth.
I am confident that we have identified where we can strengthen and expect continued improvement as we move into the back half of the year.
Importantly, the corpus biggest found out even if we were somewhat limited by supply chain is that we maintained our non-GAAP gross margins of 34%, thanks to disciplined execution and timely pricing actions.
non-GAAP diluted net earnings per share was <unk> 44.
Which together with our Q1 results makes the first half of 2022, the second strongest EPS healthier performance at HPE on a continuing operations basis.
I'll start with the tail for you we are reaffirming our full year outlook of revenue growth of 3% to 4% and our long term 2024 revenue CAGR outlook. We are also reaffirming our full fiscal year free cash flow guidance of $1 $8 billion to $2 billion.
As announced.
Hey, Barry we suspended all shipments to himself in Russia, and Belarus, We have now determined that is no longer tenable for us to maintain operations in these countries.
Today, we are announcing the closing of our operations in both companies and we will proceed with an orderly managed exit.
Our business in these countries represent less than 2% of Hp's total revenue in fiscal year 'twenty one.
We have booked $126 million pre tax charges related to the impact of Russia to our business, which is included in our second quarter GAAP earnings per share results, we expect less significant additional charges in the third quarter related to winding down these operations.
Partially to reflect these necessary action and partially to unfavorable foreign exchange movement. We are updating our fiscal full fiscal year non-GAAP diluted net earnings per share to between $1 96 to $2 to $2 10.
Which is the guidance we provided other security analyst meeting last October .
In the short term, but recognize the supply and logistics constraints rising inflation and evolving economic and geopolitical conditions.
All contributed to a dynamic environment, However, enterprise demand continues to persist across our entire portfolio.
We are focused on translate into demand that we see in the market and a high quality backlog into profitable growth, while continuing to closely manage our inventory position.
When even the supply of low value components can be hard to secure in todays environment. We will continue to be disciplined and prudent in our position making to deliver on our commitments.
As we look to the future we are strengthening the scale and resilience of our supply chain, including opening a new factory in the Czech Republic for next generation HBC and AI technologies.
Which will help us address that very solid demand we have for this specialized solutions.
There is no question that we have positioned <unk> well to help our customers double down on digital transformation <unk> is at the center of our strategy to deliver edge to cloud solutions to enable customers data first modernization strategies I.
I hope many of you will join US later this month to see firsthand, how our strategy comes to life. When we host the HP discover life in Las Vegas for the first time in three years.
We will have a lot to show you as it has been an exciting few months for our customers and for HPE.
In March we announced features on HPV related delivered greater choice and simplicity, we added 12, new cloud Native services, we know more than top then total 50 cloud new services available through the platform.
We also continued to expand our partner ecosystem, increasing the number of partners actively selling HB Green Lake this quarter by more than 50% from the same period last year.
In addition partners who have sold multiple HPV related deals in the quarter increased by two five times year over year.
At the edge our capabilities, our high demand as organization need to securely connect distributed workforces and create engaging experiences. We are focused on delivering cloud native services that can more easily embed intra automate the networks to.
Evolving networking configurations.
And with the convergence of Aruba, Central and HB Green Lake more than 120000, Aruba customers now have access to the HB could elect buffer.
As customers adopt a hybrid multi cloud solutions, we know that you also need a secure and flexible on premises cloud solution.
We were recently selected as the preferred provider for Google's cloud distributed hosted solution.
<unk> will enable Google to deliver a non premises cloud experience for organization with strict data residency security and privacy requirements.
Our hybrid cloud offerings have attracted nearly 150, new customers in Q2 <unk>.
Including BMW group, who is using <unk> to streamline and unify the company's data management across its global locations in the cloud and online the world's fourth largest payment provider, who chose HPE greenlight to implement a major performance upgrades to its payment platform as it continues to deliver against that cashless.
Economy vision HP.
HP financial services had a unique hand in the war line of breakthrough HBV Lake without asset a newer program funding approximately 25% of the refresh.
From a data perspective, we continue to make meaningful enhancement that allow customers to extract more insights from the data to us are the right business outcomes.
For instance, we are creating sophisticated AI models to generate and sharing sites in distributed environments. In April we introduced HP swarm learning, which enables users to share learnings through <unk> mobile at the edge and from distinct sites without compromising data privacy.
One universities in Germany is already using hp's form learning to more accurately diagnose colon cancer by applying AI learnings that can predict cancers genetic alterations.
And early this week from peer on HB designed and built system became the world's first and fastest extra scale supercomputer, taking the number one ranking on the world's top 500 list of supercomputers exceeding the one extra flopped performance threshold for the first time.
To put this in perspective. This performance is three times faster with the number two supercomputers.
HP has deployed four of the top 10 supercomputers and ranks first second third and fourth on the Green 500 list of the most energy efficient supercomputers in the world.
Our service pivot is also innovative in the way it helps our customers meet their sustainability goals.
Relay help customers reduce their carbon footprint by more than 30% versus traditional models Les.
Later this month when we released our living progress report, we will share more about our efforts to support our customers' goals, while pushing ourselves and the industry to improve our own.
Few of us could have predicted that the challenges of the last several years would've acquired enterprises to adopt so dramatically.
Spend at least 50% of my time with customers around the world and I can tell you that when they think about how they are going to re imagine the futures. They CHP is an even more relevant in the social partner than ever before.
As I reflect on Q2 and look ahead to the future I am confident in our ability to deliver on our commitments. We have the right strategy to capitalize on market trends with an expensive edge to cloud portfolio, that's connected through our market leading <unk> platform.
Have significant momentum with our customers and perhaps most importantly, we have been we have a truly stellar team I am proud of the 60000 team members, who make our results possible and who help us deliver on our purpose as a company. This team will continue to innovate and execute in ways that will further set us apart and continue to creep.
Good value for our shareholders.
With that let me turn it over to <unk> to walk you through the details of our business segment results and overall performance.
Thank you very much Antonio.
I'll start with a summary of our financial results for the second 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 to discuss the key highlights on slide one and two so now let me discuss our Q2 performance details starting with slide three.
We continue to see robust demand across our differentiated edge to cloud portfolio with order growth up 20% year over year, the same as last quarter.
This marks our fourth quarter in a row with order growth of 20% or better year over year.
This maintains our confidence in achieving both our fiscal year 'twenty two revenue outlook of 3% to 4% growth adjusted for currency.
And our longer term, 2% to 4% revenue CAGR outlook provided at our 2021 Securities analyst meeting.
We delivered Q2 revenues of $6 7 billion up one 5% year over year and in line with our outlook of normal sequential seasonality, despite a more challenging supply environment that limited upside.
The unexpected COVID-19 related shutdowns in China, and seizing the support of Russia services contracts impacted our revenue by more than $250 million in the quarter. Our total operating margins by more than one point and EPS by approximately six <unk>.
Given the delta between our order and revenue growth rates, our backlog further increased to new record levels and yet remains very high quality.
The order book is firm and most importantly has been priced to preserve gross margins.
We are particularly pleased with the resiliency of our non-GAAP gross margins, despite the inflationary environment and ongoing supply chain disruptions that are driving up material and logistics costs.
We delivered non-GAAP gross margin of 34, 2% up 30 basis points sequentially and down just 10 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 margins were nine 3%, reflecting the revenue impact from incremental supply constraints and our exit from Russia that reduced operating leverage.
We expect operating margins to expand in the short term as we drive more leverage from revenue growth and benefit from investments in the high growth margin rich areas of our portfolio.
Within other income and expense, we benefited from robust operational performance and HTC and further gains related to increased valuations in our pathfinder investment portfolio.
As a result, we now expect non-GAAP other income and expense for fiscal year 'twenty two.
To be an income of approximately $75 million versus prior guidance of an approximately $25 million income.
Given our strength in gross margin and despite the approximately <unk> <unk> impact from China, and Russia, We delivered non-GAAP diluted net earnings per share are <unk> 44 cents near the midpoint of our outlook range of 41 to 49 for Q2.
We also delivered GAAP earnings per share of <unk> 19.
This includes $126 million of disaster charges related to Russia, primarily consisting of an increased reserve for financing lease assets with.
With the decision to exit Russia that we have announced today, we expect to record an additional unless significant GAAP only charge in Q3 that has been factored into our updated outlook already.
As previously indicated we expected free cash flow to be in line with our normal seasonality that is a use of cash in the first half.
Q2 was a use of cash of $211 million.
We have made significant investments in working capital during the first half, reflecting our strategic inventory actions to navigate the current supply environment.
This will better position us to convert orders into future revenue and cash flow, while working capital is expected to become a tailwind in the second half.
Finally, we continue to return substantial capital to our shareholders, we paid $156 million of dividends in the current quarter and are declaring a Q2 dividend today of <unk> 12 per share payable in July .
We also repurchased $58 million in shares, bringing our year to date total capital returns to $498 million, reflecting our confidence in future cash flow generation.
Slide four highlights key metrics of our growing as a service business. We continue to see very strong momentum across our as a service portfolio, where we introduced 12, new cloud services this quarter and converged Aruba central with the HPE Green Lake platform to create a unified operational experience for all.
Users.
Total as a service orders were up 107% year over year, marking the third quarter in a row with orders more than doubling.
Our IRR was up 25% year over year to $829 million with supply constraints continuing to limit some installations.
While our IRR growth is somewhat volatile in the current supply environment. The strong order growth over the last several quarters is the best indicator of the 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 both software and services continues to increase to 64% in Q2 up more than five points year over year, with our expanding cloud and SaaS offerings.
Let's now turn to our segment highlights on slide five.
Our growth businesses continue 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 accelerated with orders growing 45% year over year, the fifth consecutive quarter with growth of more than 35%.
Despite increased supply disruptions in China revenue grew 9% year over year outperforming the competition and demonstrating particular strength in silver peak and our edge as a service offerings, both up strong double digits.
We delivered operating margins of 12, 6%, reflecting higher component in logistics cost, resulting in lower operating leverage.
We expect margins to improve next quarter with higher levels of revenue that also benefit from previous price actions that are sticky.
In Hps CNI demand remains robust with order growth of 18% year over year driving our awarded contracts total to another record level of just under $3 billion.
Revenue grew 5% year over year and was impacted by one large customer acceptance delay that impacted growth by more than six points and has now been delivered in Q3.
Importantly, our Q2 operating profit was impacted by the ramping project cost for a couple of Mega deals expected to close by the end of the year that will return operating margins to more in range with historical levels.
In compute order growth remained robust and was up over 20% year over year for the fourth consecutive quarter, while revenue growth was up 1%, reflecting a more difficult supply environment.
We continue to be very focused on executing a dynamic pricing strategy that has been effective in managing the increased supply and logistics cost and gives us a very high quality backlog.
The results are showing up in our operating margin performance at 13, 9% up 270 basis points year over year, and 10 basis points sequentially, well above our long term target set at some 2021 of 11% to 13%.
Within storage, we achieved another record level of product backlog that is skewed towards our owned IP margin rich products.
Revenue was down 2%, reflecting supply constraints for our own IP products. As a result, we continue to have 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 work through our favorable backlog mix and steer more demand towards our new Electra and block storage offerings.
With respect to point <unk> operational services, including storage services orders again grew mid single digits year over year as reported similar to levels for total fiscal year 'twenty. One as you know this is very important for the long term health of our most profitable business.
Within HPE financial services volume increased 2% year over year with strong performance in Green Lake and revenue was flat or.
Our profitability continues to benefit from higher residual value realization as customers tend to extend the use of their systems in a supply constrained environment our.
Our operating margin was 12, 6% up 180 basis points from the prior year and our return on equity at 24% remains well above the 18 plus percent target set at Sam 2021.
Slide six highlights our revenue and EPS performance, where you can see we have maintained relatively constant levels from last year, despite incremental supply constraints in particular from the China shutdowns and also our seizing to supports services contracts in Russia.
As a reminder, these combine for more than a $250 million impact to revenue and a one point impact to total operating margins.
And in an approximately <unk> <unk> impact to EPS in Q2.
In spite of these headwinds we delivered a better quality of earnings across our portfolio as we continue to execute our edge to cloud strategy.
The improved quality of earnings can be seen on slide seven where we delivered non-GAAP gross margins in Q2 of 34, 2% showing their resilience in spite of the increased component and logistics costs.
This was driven by both our strategic pricing actions and a favorable mix shift we've been driving towards edge and our as a service business.
Moving to slide eight you can see our non-GAAP operating margin this quarter of nine 3%, reflecting the reduced operating leverage from supply challenges and our exit from Russia. However, we are achieving much better efficiency in our sales and opex investments when measuring productivity on an orders basis.
Given our high quality backlog, we are also continuing to invest more in both R&D and our go to market for future growth.
On slide nine let's spend some time reminding everyone about our unique setup in China through <unk>.
As disclosed in an 8-K in late April we have extended our existing put option that is struck at 15 times trailing 12 months earnings through to October 31, 2022.
We did this to enable the new investors at the unit group level to complete a restructuring which is proceeding as planned before determining our longer term path forward for our stake.
We value our presence in China, the second largest and fastest growing it market, although we will balance prior to execution of any extension the strategic and financial benefits of our continuous involvement in China with rising risks, including geopolitical risk.
<unk> makes up a significant portion of our P&L and cash flow and you can see that we are generating growing value to shareholders with our unique setup.
Our equity interest rose, 21% in fiscal year, 'twenty, one and has grown 32% in this Q2 of fiscal year 'twenty two.
We will keep you up to date as we arrive at a longer term solution for this valuable asset.
Turning to slide 10, our free cash flow was a use of cash of $211 million. This is aligned to our normal pre pandemic seasonality with the first half being a use of cash followed by strong generation of free cash flow in the second half.
The first half of this year has also been uniquely impacted by the supply chain environment as we strategically build inventory levels in Q1 that were flat in Q2.
We are taking further strategic actions to improve supply chain visibility and obtain operational and financial benefits.
This will put us in a better position to begin converting orders and generate healthy amounts of cash as working capital will turn into a tailwind in the back half of the year.
We will need to demonstrate strong execution in the second half, but we have a path forward and expect to deliver fiscal year 'twenty two free cash flow of one $8 billion to $2 billion.
Now turning to our outlook on slide 11, we are revising our fiscal year 'twenty, two and non-GAAP outlook range back to our original outlook provided at Sam of $1 96 to $2 10.
This reflects the impacts of a more unfavorable currency movements since last October the exit of the business in Russia. The Covid related disruptions in China to this date offset by the other income and expense benefit we've received in the first half.
From a topline perspective, we are 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 want to remain prudent in the short term given the ongoing supply challenges that we believe will likely last well into next year.
Currency is also expected to now be a two point headwind to revenue for the full year as opposed to the 50 basis points at the start of our fiscal year.
As a result, we still have strong confidence in our fiscal year 'twenty two revenue growth outlook of 3% to 4% adjusted for currency and expect to end the year with elevated levels of backlog, which bodes well for fiscal year 'twenty three.
More specifically for Q3 'twenty two we expect revenue to be up low single digits sequentially. This is slightly below our normal seasonality to reflect our expectations that the China shutdowns will have a lingering impact in the short term.
As a result for Q3 'twenty two we expect GAAP diluted net EPS of <unk> 22 to 32.
And non-GAAP diluted net EPS of <unk> 44 to 54.
So overall I am pleased with how we are executing in a strong demand, but challenging supply environment. During the first half of fiscal year 'twenty two.
With our high quality backlog, we are very well positioned to capitalize on the ongoing edge to cloud opportunity and deliver against all of our financial commitments set at some 2021 now.
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.
We will pause momentarily, while we sandbar roster.
And the first question will come from Aaron Rakers with Wells Fargo. Please go ahead.
Got it.
Either.
I am sorry about that guys can you hear me, yes, we got you okay.
Okay, Yes, sorry, sorry about that so I'll start with just the question on the backlog.
As you kind of thought about the guidance for the full year and obviously, some moving parts around FX in China et cetera.
But how has your assumptions changed at all with regard to the backlog build are you assuming any kind of backlog reduction through the course of this fiscal year and if not what's your current views on kind of peaking levels of backlog at this point. Thank you.
Yes, good afternoon, Kyle Thank you.
Aaron Good afternoon for the question and thank you for the question.
In regards to our backlog I would say our backlog has not peaked yet.
You have four consecutive quarters of 20% growth and the delta between the backlog growth.
Order growth and the revenue being what it is backlog has not peaked and will probably peak towards the end of this fiscal year.
Our assumptions on.
Converting that backlog into revenue are contained in the guidance that we gave for this fiscal year or 34% revenue growth adjusted for currency I want to reiterate to you that the.
FX impacts in it.
In that guidance.
Is a 2% headwind as opposed to a 50 basis point headwind that we originally forecast.
I will say add on.
We're going to enter 2023, with an elevated backlog, which bodes us well for the future revenue growth of the company as I said in my remarks, we continue to be very confident in our CAGR outlook that we provided.
For the next three years, but obviously as we go forward.
The backlog will will be reduced supply and other issues.
Olivier and you think about the 3% to 4% guidance for the year, which is the guidance we put out some versus the one 5%, which is reported obviously there will be low single digit growth sequentially on that revenue.
Yes.
Great. Thanks for the question Eric.
Can we go to the next one please.
Yes, Sir the next question will come from Simon Leopold with Raymond James. Please go ahead.
Thanks for taking the question I wanted to see if you could help me get a little bit better insight into what allowed you to.
Basically do better on gross margin than we expected.
Given the input costs and foreign exchange.
What im looking Brent in this question, it's an understanding of how much of this is about mix how much of it is about your ability to raise prices and pass that onto customers and how are you thinking about the outlook for.
For the gross margin given what you've done so far in terms of price increases and what youre thinking about on foreign exchange.
Sure. So let me try and unpack. This for you so first of all when.
And you really look at our business across the various segments.
Aruba is continuing to do extremely well and we we outperformed the competition specifically Cisco in the second quarter and the order book in Aruba is absolutely substantial as.
As you can observe aruba growth.
And you know a robot comes with higher gross margin.
Has a favorable impact on the mix.
The second thing I would point out to you is with respect to compute.
Disciplined pricing actions that we've taken now for several quarters with compute continue to bear fruit.
Compute.
Operating profit margins.
At well above 13% well above our long term guidance have also been better than what our main competitor in that space <unk> has delivered before their total ISG margins that include compute storage and networking. So computers is performing much much better than the rest.
Of the industry.
Third when you really look at the gross margin mix again across the other segments.
Particularly storage and HBC they are two different stories there.
With respect to storage you have a mix between our own IP products and third party product that has been unfavorable to us meaning they were more.
Third party product revenues and <unk>.
One IP revenue and you can see therefore that this has had a detrimental impact to gross margins for storage.
Finally, HBC. The story there is a story that is we always been saying, it's a lumpy business and it's a matter of revenue scale. We had one slippage of a deal that has affected growth by six points in the quarter that deal has closed into Q3.
And really the fundamental question for HBC is the delivery of substantial Mega deals that we have planned for the second half and so if you take all of this into account.
You look at overall gross margins for the company.
The story is different by segment, but the it is the result of a number of actions that we have taken in Aruba and compute.
Offset by product mix shifts in storage and a revenue delays in HBC on the whole very pleased to have our gross margins, where they are at 34, 2% up sequentially and better than last year and finally, let me add to this the performance of <unk>. The performance of H BFS is outstanding.
You can see that while there is not much revenue growth and this is not a gross margin business. It's a business that delivers substantial amounts of profit by way of operating profit margins and the return on equity there in <unk> is very very strong north of 20%, which is better than <unk>.
Our long term outlook of 18 plus percent that we gave you at some 2021. So I hope. This gave you color and unpack things for you the way you wanted.
Simon but if not.
Welcome to take the conversation offline with you again.
Thanks, Greg.
Alright sounds good thanks, Tim I appreciate it operator can we have the next one please.
The next question will come from Cemig Chatterji with Jpmorgan. Please go ahead.
Yeah, Hi, Thanks for taking my question I guess I just wanted to ask more on the demand side here and you had another quarter of strong or those maybe if you can give us a bit more color on what you're seeing on a geographic basis, particularly I think investors have been concerned about the momentum in enterprise in euro.
And extra share if you can give any color of what you're seeing in that region and also I don't know if you.
Sort of pointed out what the.
Impact on the order number was from Delos shakes. It does thank you.
Yes. Thank you. Thank you for the question as I said the motto marks we continue to see ongoing persistent demand from our customers.
I think it's a combination of them prioritize and spend and honestly the attraction to our portfolio.
We have a very comprehensive portfolio from edge to cloud that is resonating in the market and product just talk a little bit about the strength of the edge.
Which grew now in excess of 40% for four consecutive quarters, that's simply remarkable.
<unk>.
And yet we just delivered 9% revenue growth. So that tells you the strength of the demand as you think about this distributed enterprise, there's just no way to work.
The other area, obviously as customers continue to assess their hybrid multi cloud journeys, which is now here to stay they see HP Green Lake as a very solid alternative too.
What I would call flexibility choice and control and the fact that one of the major clouds is leveraging PHP green leg to basically deliver there. They're managed hosted distribute the cloud is a testament of that differentiation.
The other thing obviously anything related to data is simply.
Very strong I think the demand for big data analytics, AI and machine learning will continue to growth and that's because customers is to extract insights.
From from the data, which I think is the most valuable thing to have obviously cyber security Aruba with our SD Wan and our SaaS approach also provides an alternative to that so I think as you look forward.
I personally believe in being at the World Economic Forum for the last week of lessening I think the potential slowdown as more of a consumer issue more than the enterprise issue and the reason why I say that is because every customer I talk to they are prioritizing digitizing the digitized in there.
Businesses modernizing their businesses deploy cloud.
As an experience in this multi cloud approach because it's all about speed and agility and obviously as I said before.
Every bit of insights from the data and that's our strategy against the trends, we see with HP Green Lake, which is a data first modernization approach.
Our demand is super strong, 20% four consecutive quarters.
For HP is remarkable and our order backlog as we said early on is high quality, which means is order. The order book. It's firm, we don't see any major cancellation that would concern us at all and last but not least to tax point.
We price in our backlog.
To preserve gross margins.
And Thats why it gave us the confidence not only to grow revenue by continuing to deliver our operating margins commitments and ultimately EPS commitments.
The impact of Russia.
<unk> and <unk> because you have to combine these two is less than 2% of our revenue on a continuous basis. If you look at 2021.
In term of EPS paddock explain it in a package for you, which we were able to kind of offset in many ways with the over performance in Q1 synthetic any commentary, yes. So let me add on.
The last part of your question.
So the impact from Russia on orders was negligible.
It was not something that has affected our orders.
China, and Russia, together, obviously with Belarus impacted our revenue by $250 million the majority of that impact relates to China.
<unk>.
The Russia impact specifically is related to the fact that we cannot operate anymore in the country and serve existing customers with our services contracts and therefore this has been factored into the impact of described that totals for China, and Russia, 1% impact on total operating profit margins.
And <unk> on the EPS overall, but again the majority of these impacts were driven by the China disruptions on the supply side of the equation.
And yes, I agree with Antonio on the totally agree on the.
Resiliency of the demand.
I think if you want to add the fact that.
Even though there could be a slowdown in the EU.
<unk>.
European governments are ramping up a number of initiatives that are all in our favor in the digital space, which gives us confidence for the medium to long term.
And I will say our diversification of our overall coverage around the globe also has a good positive thing.
Okay.
Great. Thanks for the question Eric can we go to the next one please.
The next question will come from <unk> Mohan with Bank of America. Please go ahead.
Yes. Thank you.
I hear your comments about the confidence around.
The demand trajectory.
And that orders continue to be very strong.
But as you look into the second half can you talk about.
How those demand trends are breaking out across regions, if you're seeing any any variability from from 90 days ago and.
You also sort of maintained your free cash flow guide.
The EPS you alluded to some of these impacts the success that you alluded to Tarek.
But you're maintaining your free cash flow what are some of the offsets that are allowing you to do that and when you look at the second half free cash flow.
That needs to come in extremely strong. So can you talk about what levers.
We should expect within those free cash flow moving pieces that get you to your guide across the second half. Thank you.
Yes, let me start and I would like Todd to talk about the free cash flow onesie.
Listen so far so fast and I can only talk so far I have not seen any any major deviation from 90 days ago on demand.
Continue to be very strong and Thats why we use the word persistent.
Our system is.
Is there right.
And then.
I think it depends on what happens here in the back half of the year with some of the other policies Tarek mentioned some of them in Europe , but obviously as we think about inflation interest rates and whatnot that may or may not have an impact, but as I said earlier <unk> I think it's mostly on the consumer side the enterprise side if anything.
Will argue it will have a positive impact to our green Lake because customers want to may be preserved some capex and they're going to use more of the as a service model and still deal with the reality that this is a hybrid multi cloud journey and therefore for those award loads of data that cannot move outside.
Their premises or a co location or even moving from the edge for them. Other Green Lake is perfectly suited for that and Thats why its a combination of our solutions now 50 plus.
<unk> cloud native services.
Fact that Google is going to use our solution.
Very strong endorsement.
But I think we are positioned to capture either way.
And I think our backlog give us a very strong foundation to build from there as we look forward Todd if you want to talk about the free cash flow question, yes sure. So.
First one.
If you want a rough rule of thumb when youre looking at.
EPS changes in how these EPS dollars translate or sense translates into free cash flow.
Every.
<unk> <unk> of EPS is essentially $13 million to $15 million right. So when you look at the lowering of our guidance.
Is.
Very much contained in the guidance, we gave at the free cash flow levels. So the lowering of our guidance back to the <unk> 2021 guide is very much contained in the free cash flow guide that we gave you and the reason why we gave you. This free cash flow guide was because of the working capital.
Assumptions that we had made at the beginning of our fiscal year. So I feel comfortable that we are within the free cash flow guide now the second part of your question.
Is what makes you confident that in the second half we can generate.
<unk>.
Quantity of free cash flow, given where you are at the end of the first half.
I would simply say to you that we expect first and foremost working capital to become a tailwind in the second half as opposed to the first where it was a headwind because of the inventory actions that we've taken and by the way we've done this before in fiscal year 19, I'll remind everybody.
We generated in the first half $200 million of free cash flow and in the second half, we generated $2 $2 billion so more than.
10 times more than what we generated in the first half. This was offset by a 666 million that we had to pay for an arbitration case that we lost at the time in fiscal year 19, and we had very little time to turnaround and offset.
The impact of that arbitration case, and yet we came into our guide that we gave at the time.
And really look also at the trends on operating free cash flow that we highlighted to you as part of this call you will observe that our seasonality is very much in line with fiscal year 19 in fiscal year 'twenty fiscal year 'twenty, one was a different story because in fiscal year 'twenty one.
The impact of restructuring costs are affecting free cash flow and if you will observe.
The detail of our press release with the tables that we provided you you will see that our restructuring costs are coming down overall relative to fiscal year 'twenty. One so lots of put and takes there, but we are happy to reaffirm the free cash flow guide of one $8 billion to $2 billion.
This way.
<unk> for me to say is that we are exactly where we.
We were the October security Analyst meeting, where we got the 3% to 4% revenue growth. The EPS guidance. We just provided today, which is 196 to 210.
And our free cash flow of one $8 billion to $2 billion.
And knowing the seasonality of our business, we say all the time this year will be a normal seasonality business as you take the two years of carve it out of the way.
We are very confident to deliver that number is exactly without et cetera is the working capital is going to turn favorable to us and as we continue to drive that backlog down over time that will help us as well. So the early correlation to free cash flow is the same we provided us.
And in terms of restructuring just to be clear on that one we're very pleased with the progress we've made which obviously will say what we feel the time reallocating resources to the areas of growth you can see the areas of growth being in HBC.
AI edge and Green Lake, obviously, which are paying off to us.
And on track to deliver the $100 million.
Net savings that we committed all the time.
Great. Thanks for the question I appreciate it can we go to the next one please.
Yes. The next question will come from Rod Hall with Goldman Sachs. Please go ahead.
Yeah, Hi, guys. Thanks for the question.
I guess in the ongoing spirit of trying to make sensitive an incredibly complicated supply situation I wanted to come back and kind of maybe juxtapose. Your performance here against a couple other companies. So if I look at Cisco. They I would say objectively peripheral quite a bit worse on supply than you guys did.
You had some sort of a middle of the road impact not too bad of an impact from what I can tell in the numbers and then if I look at Dell They had almost no impact although Dell did call out some looking forward issues with server supply. So I just wonder if you could dig into that a little bit for us and kind of help us understand some of the puts and takes around supply maybe why those difference.
The performance emerged and then I have a follow up.
Sure.
Im going to stop but I think I don't think you can look quarter by quarter, but honestly you have to look at the half and then the second half. If you look at our performance in Q1, we did very well and on a balance I think we are.
Please for the first half.
Listen and then there is a lot of puts and takes here because factor locations plays a role.
<unk>.
Sometime here in the right side of the relocation sometimes you're not.
And obviously for us the impact of <unk> and <unk>.
In Shanghai was there in April and product quantified that for you.
Impacted not just the compute business every line of business because of other products coming from that side. Some of our vendors made did not have the same impact.
So thats why as an important and the other one is that you make strategic choices about components two to three years ago.
And there are some suppliers more impacted than other ones and therefore, you need to go into the details of the product itself and configurations and whatnot and last panel list. When you look at our performance, let's remind ourselves we have a unique setup in China.
And Thats. It basically says we cannot consolidate the China revenue that are.
Partner today delivers.
And when you look at the China growth I can tell you is <unk> business is performing exceptionally well in China. However, the only thing were recognized on that is the dividend that we collect but not the revenue.
And then when you look at the segment call. It the server category. It is compute plus HBC plus eight <unk>.
As the way market share gets reported.
That's why I look at this from a half performance.
We made it better in Q1, maybe a little bit less so in Q2 against some of our competitors, namely Dell, Let's just said on some aspects, but on a balanced not that far off against Cisco definitely well on every metric.
You want to look at it and but in the end we are focused on the full year to deliver that guidance of 3% to 4% and obviously.
Exit the year with still quite a large backlog, which bodes well for 'twenty three.
Yes, I wanted to add also rod that in the.
And what you said to be important to look at what happens at the bottom line and at the margin level.
And when you really look at how we've outperformed Dell on a margin level Q1, and Q2, considering it simply the compute margins alone compared to the ISG margin is very telling.
Yes, I think.
On that note I mean, delivering 13, 9% on what people refer to as a commoditized business.
Compared to a 10, 2%, which includes server storage and networking I think it's pretty remarkable but I think also shows our strategy to drive profitable revenue growth not just revenue for the sake of revenue.
Great. Okay, guys, so I'm going to leave it there. Thank you very much for the answers sure. Thanks Rod next question. Please.
The next question will come from Irvin Liu with Evercore ISI. Please go ahead.
Alright, Thank you for the question.
So the large delta between your orders growth in revenue trajectory suggests that there still remains a large amount of unfulfilled demand given this dynamic you envision a scenario where customers begin to perhaps re architect their infrastructure, so that a larger mix of their it workloads, whether thats compute storage network.
King HBC are delivered via cloud need a green Lake as a service models.
That's a great question, and we see that more and more.
Obviously I think what customers are battling is the fact theyre going through a multi generational 80 joining here.
That they have to modernize the fact that data has gravity and obviously some industry are more regulated than others than.
When you talk about latency NXP is really modest cost obviously is another big component because that scale they need to comprehend the cost aspect of it and <unk>.
An amazing platform, we have developed over the years to give them access flexibility and control against the needs in a way they are moving away from branding to more innovating it and Thats why this data first modernization approach is so relevant.
And that's why we already have more than $6 billion in the balance sheet related to the HP Green Lake business, which again grew 107% in Q2 and obviously.
That.
Those are bookings eventually will unwind from the balance sheet.
And through the P&L and the other important fact here is the <unk> show in one of the slides is the fact that our mix of Green acres is shifting every single quarter to more software and services, which obviously comes with a significant higher margin that just the hardware.
So thats why.
About the order momentum Super strong the marquee type of customers across every <unk> Super strong.
Fact that will keep adding capabilities that mix is shifting and that totally accretive to our gross margin as we go forward.
And this is one of the key moments of our company transforming and draw a relevant platform the customer can use as they go through this journey that we just you just highlighted.
Great. Thanks, Stephen for the question operator, let's go to the last one please.
Our last question will come from Kyle Mcnealy with Jefferies. Please go ahead.
Hi, Thanks very much for the question can you give us a sense for the deferred revenue position and HBC NII with the business you already have lined up and scheduled to deliver.
You already have one that was reached acceptance in Q3 already.
And maybe give us a sense for the operating margin level that that revenue is expected to come in and do you expect I mean, given the project costs at times are taken in advance of revenue recognition, how much catch up profitability might you get.
And what's the margin profile look like a business that is expected for the back half of the year.
Thanks.
Sure Les.
<unk> continues to be incredible bullish about this business.
Supercomputing is necessary to advance AI and deep learning solutions to solve some of the biggest societal challenges and honestly climate.
Another.
As I think about.
The current situation we are in we have almost $3 billion in backlog.
A couple of two quarters ago, we were talking about $2, five and maybe a year $1 billion billion.
And a half so we have been continued to grow.
The momentum with customers by the way is all over the world. If you look at the wins.
Included in the number of AI supercomputer.
Computer called Lumi, that's in Europe .
We have also supercomputers in France, and Germany, and so forth. So we are clearly the market leader. However, this business.
It is lumpy as we said right from the time you book the order to timing of recognized revenue it can be several quarters and the reason that's the case is because they are large installations and customers need to go through their own process to validate the workload.
And over time, right, we're going to have a quarter youre going to see a massive growth in revenue which is not.
Linear in many ways as many of those customers systems get accepted.
But in thermal margins I will let <unk> comment on this obviously you have to look at our long term not just quarter by quarter, because that's not how this business works, yes, that's right you said very well Antonio.
I too.
The margin part of the question you're saying.
Our Q2 operating profit margin was affected by the ramp in project related costs and they were recognized ahead of revenue for a couple of very large mega deals are we expecting to close by year end.
And therefore as a result of that we expect operating margins to return to more in range with historical levels on this business and we feel pretty good about these prospects.
Great. Thanks, Karl for the last question Antonio I'll turn it over to you for some closing remarks, thanks, everyone.
<unk> lot going on and all are in use today to cover but I appreciate you, making the time again.
Walk away from this this.
This quarter feel good about the momentum we have with the persistent demand that we see in the market with an amazing set of solutions that are attracting customers. A testament of that is 20% again bookings.
With a backlog that gives us the confidence to deliver on our commitments and honestly I'm optimistic about the future about the opportunity to innovate for our customers and to deliver value to our shareholders.
So again, thanks for your time today and now there will be follow up calls.
After this call and.
I appreciate you, making the time.
Thanks, everyone.
Ladies and gentlemen, this concludes our call for today.
Thank you.
Yeah.
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Okay.
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