Q1 2023 Hewlett Packard Enterprise Co Earnings Call

Speaker 1: And.

Speaker 2: Good afternoon and welcome to the first quarter 2023 Hewlett Packard Enterprise Earning Conference call. My name is Anthony and I'll be your conference moderator for today's call.

Speaker 2: At this time, all participants will be in listen only mode.

Speaker 2: We will be facilitating a question and answer session towards the end of the conference.

Speaker 2: Should you need assistance during the call, please signal a conference specialist for professional Starkey followed by zero.

Speaker 2: As a reminder, this conference is being recorded for replay purposes.

Speaker 2: I would like to turn the presentation over to your host for today's call, Jeff Cavall, Senior Director of Investor Relations. Please proceed.

Speaker 3: Thank you, Anthony, and a good afternoon. Good evening, everyone. I'm Jeff Qual, and I'm head of the Investor Relations team for Hewlett-Packard Enterprise. I'd like to welcome you to our fiscal 2023 First Quarter Earnings Conference call with Antonio Nieri, HPE's President and Chief Executive Officer, and Tarar Grubiati, HPE's Executive Vice President and Chief Financial Officer.

Speaker 3: Let me remind you that this call is being webcast. A replay of the webcast will be available shortly after the call concludes. We have posted the press release and the slide presentation accompanying the release on our HPE IR webpage. Element of the financial information referenced on the call are forward looking and are based on our best.

Speaker 3: materially from the amounts ultimately reported in HPE's quarterly report on form 10Q for the fiscal quarter and January 31st, 2023. For more detailed information, please see the Disclaimers on the earnings materials related to forward-looking statements that involve risks, uncertainties, and assumptions.

Speaker 3: Please refer to HPE's filings with the SEC for discussion of these risks.

Speaker 3: For financial information, we have expressed on a non-GAP basis. We have provided reconciliation to the comparable GAP information on our website. Please refer to the tables and slide presentation accompanying today's earnings release on our website for details.

Speaker 3: Throughout this conference call, all revenue growth rates, unless otherwise noted, are presented on a year-over-year basis and are adjusted to exclude the impact of currency.

Speaker 3: Finally, after Antonio provides high-level remarks, Tarik will be referencing the slides and our earnings presentation throughout his prepared remarks. And with that, let me turn it to you, Antonio.

Speaker 4: Well, thanks, Jeff, and good afternoon, everyone. And take you for joining our early call.

Speaker 4: We begin our fiscal year 2023 from a position of great strength after delivering a now standard 2022 for quarter.

Speaker 4: I am extremely pleased with how we leverage that strength to achieve impressive results in Q1.

Speaker 4: HP posted a record set in first quarter performance, extending a track record of consistency fulfilling

Speaker 4: We generated our highest first quarter review since 2016 and our best ever non-GAF operative process started early.

Speaker 4: Our focus on growth opportunities and price and discipline produced are highest ever known gap the little net earnings per share.

Speaker 4: Powered by a good, by our marketing lead in hybrid cloud platform, HP GreenLake, we unlocked an impressive $1 billion in annualized revenue run rate or AIR for the first time.

Speaker 4: Our results show the relevance of our strategy that addresses mega trends around age, cloud and AI reshaping our industry, the transformation of our industry-leading portfolio and the outstanding execution of our team.

Speaker 4: In the first quarter total HUE revenue climbed 18% to $7.8 billion, significantly above the high end of our outlook. We once again expand the non-GAB-operative margin this time to a record 11.8% up 80 basis points vamos agreg? ????? ????? ? download or download the écrit?

Speaker 4: Nonga, the Lutheran Methodist Presaire, increased 19% year-over-year to 63 cents.

Speaker 4: Pre-cash flow was negative $1.3 billion, reflecting working capital needs in a quarter where we typically see use of cash.

Speaker 4: Arquewon performance in the size of our order book, Position as well for Fiscalia 2023.

Speaker 4: Our quarterly results, combined with confidence in our strategy and execution, have led us to raise our revenue and EPS guidance for the full fiscal year.

Speaker 4: Tareg will provide more details in the details of the remarks.

Speaker 4: From a macro perspective, the supply chain challenges we faced during several quarters continue to ease. The supply chain challenges we faced during several quarters continue to ease.

Speaker 4: And we expect more of that throughout fiscal year 2023.

Speaker 4: As we mentioned at the close of fiscal year 2022, we do not anticipate all supply shortages come into an end, but we do expect supply availability to continue to improve.

Speaker 4: Our order book at the start of Q1 was larger than it was a year ago. And as we exit the corner, it is more than twice the size of normalized historical levels.

Speaker 4: Our intelligent edge, HPC and AI and other service or other books, continue to stand at the extreme lengths to elevate the levels.

Speaker 4: Against today's microeconomic backdrop, demand for our solutions continue.

Speaker 4: though it is uneven across our portfolio.

Speaker 4: We also see more elongated cell cycles, specifically in compute.

Speaker 4: that we have seen in recent quarters.

Speaker 4: We are responding decisively to demand in the market, working to win deals across all geographies and all parts of our portfolio.

Speaker 4: The traction of our portfolio is the result of our winning strategy, aligned to major market trends around the edge, cloud and AI.

Speaker 4: We continue to anticipate what comes next for our customers and invest in innovation to address their Delta-first organization needs with an unmatched set of age-to-class solutions.

Speaker 4: In addition to driving impressive organic innovation across Oporfolio, we continue to be opportunistic in considering strategic acquisitions and partnerships that enhance what we can offer to our customers.

Speaker 4: Today we announce our agreement to acquire class security provided provider access security.

Speaker 4: which will help fortify netal security and strengthen our secure access service edge or SACI solutions. As we anticipate further customer demand for enhanced connectivity to our HPE, Aruva, Intelligent Solution.

Speaker 4: Last week, we also announced our purchase of Ethernet, which strengthens our private networking capabilities to help enterprises and tentacles accelerate 5G deployments.

Speaker 4: Through this acquisition, we are creating one of the most complete cloud portfolios in private 5G and wireless connectivity, areas we have identified for growth in coming years.

Speaker 4: These new private 5G capabilities will be integrated into our H-peakering-like platform, enabling customers to combine their Wi-Fi and private 5G into one subscription they can scale according to the amount.

Speaker 4: Earlier in the first quarter we also purchased technology from two companies that enhanced our cloud computing and AI offerings.

Speaker 4: Next quarter we will begin selling scalable compute software technologies from TidalScale, introducing additional choice points for customers to meet their compute and data-intensive workloads needs.

Speaker 4: We will also integrate the packet that is reproducible AI software with our supercomputing and AI solutions.

Speaker 4: to further expand our AI-askeled capabilities.

Speaker 4: We will continue to assess organic and inorganic investments that improve our competitive position in growth markets while driving higher level of recurring revenue and profitability.

Speaker 4: As always, we follow a discipline return based framework to build on our track record of creating sustainable long-term value for shareholders.

Speaker 4: Since we began the transformation of our business in 2019 to become the H2Clark company, we have consistently grown our other service business underpinned by the HP Greenleck platform.

Speaker 4: The relevance of HP GreenLeg with customers, combined with our discipline execution, has propelled both AIR and our other service-total contra-value higher.

Speaker 4: Over the last two years we have more than double our other service total contract value reaching nearly $10 billion through the end of this quarter.

Speaker 4: These milestones prove the momentum in our transformation.

Speaker 4: During the first quarter, we once again increase our new HP green logos, growing our customer base by 7%. While other services of the Discord have declined 20% year over year, it is important to keep in mind that the order figure is compared to prior year growth of a record of 136%. One HP green leg customer we recently highlighted is the

Speaker 4: country enhancing the spectacular experience and engagement.

Speaker 4: We have continued our investment in HP Green Lake and expanding our cloud services portfolio and partner ecosystem.

Speaker 4: In December , at our HP Discover Frankfurt Customary event in Germany, we announce our latest enhancements at the new Cloud Platform Services capabilities in the data analytics, developer and sustainability areas.

Speaker 4: RHB Greening platform continued to attract business and right performance across the portfolio. In every one of our key segments during the first quarter, we produce more revenues as well as positive operating profit.

Speaker 4: Let me provide you a few highlights. In our Intelligent Edge segment, revenue increased 31% year over year.

Speaker 4: We continue to see customers switch to our HP Aruba technology for motor vendors.

Speaker 4: We provide a single AI Dreaming Cloud Management experience, which is now part of HP Green Lake Platform with easier views and proven cost benefits.

Speaker 4: Year-over-year revenue growth was even higher in our HPC and AI segment, up 37% as we both revenue associated with frontier, the world's first access scale system. HPE is the clear market leader and has significant growth opportunities as enterprises scale AI models.

Speaker 4: AI will transform the IT landscape in the coming years and is a generational technology shift like web, mobile and cloud that have the potential to disrupt existing business models.

Speaker 4: Supercomputing will be essential to enabling this disruption. For example, building a viable generative large language model for search would require a supercomputer to run the model continuously to stay current and improve accuracy.

Speaker 4: Our HPC and AI business has strong IP and decades of experience that give HP a competitive advantage in building large computing systems.

Speaker 4: which are required to increase commercial adoption of AI models globally.

Speaker 4: We recognize AI will become the dominant supercomputing workload when we acquire the market leader Cray in 2019.

Speaker 4: And we continue to invest in key technology innovations that will enable these AI models as well. Key examples are our acquisition of the Termine AI in 2021 and Parkidur early this year. Well, I, then, unique and differentiated software to help our customers train AI models.

Speaker 4: and automate data pipelines.

Speaker 4: Customs recognize this leadership. For example, Alfa, a German startup building a commercial, large language model has turned to HPE. We're also working with customers across interested verticals such as light sciences, aerospace to enable new breakthroughs with AR.

Speaker 4: In the quarters ahead, we anticipate sharing more news on how we are scaling in this market and attracting new customers.

Speaker 4: I'm also pleased with the strong and steady performance of HPE financial services, which grew revenue 8% and financing volumes 21% year-over-year.

Speaker 4: Last month we announced the retirement of our long-standing leader of this business, Earth Rothman, and the promotion of Jerry Gold to take the helm and further accelerate the business momentum.

Speaker 4: Jerry and her team recently launched a special financial program for customers who score high in ESG and we are seeing great customer and partner response already.

Speaker 4: I am very proud of how the RHPT members have executed to achieve these quarters exceptional performance, especially given the uneven macro environment.

Speaker 4: We have kicked off fiscal year 2023 with another set of standout results given us the confidence to raise a revenue and non-GAP earning special guidance for the full fiscal year

Our customers are responded to the hybrid cloud value proposition, we uniquely provide as they seek better ways to drive value from data from a cloud.

We are attracting more customers and executing with discipline.

As we look forward, we remain laser focused on executing our winning strategy, which is delivering unmatched innovation and significant results for our customers and shareholders.

We are confident in our strategy and execution for the long term.

Let me now start to give details on our business segments and greater visibility into our updated financial outlook. So, Tarik, over to you.

Thank you very much, Antonio. If you won 23, was, as Antonio said, a record quarter for HBE.

As usual, I will reference slides from earnings presentation to guide you through our performance.

I'm going to discuss key highlights for Q1-23 on slide 4. Let me discuss our Q1 performance details starting with slide 5.

We are very pleased that the execution of our strategy has driven record quarterly results in terms of revenue, non-gap gross margin, non-gap operating margin, and non-gap EPS for first quarter of a financial year. These and other records I reference are primarily since we reset our strategy with our 2,000 records.

We have very strong momentum thanks to our substantial order book and our investments are bearing fruit. And we are gaining share in specific market segments.

In short, our strategy is working and working really well.

Having said so, while we are optimistic about our fiscal year 23, we're also realistic.

Overall, we have experienced above trend demand through much of the past two years as attested by our growing order book over the fiscal year 2020-22 period.

And now market demand has shifted from being steady across our portfolio to being uneven over the course of Q1'23.

More specifically, deal velocity for compute as slowed as customers digest the investments of the past two years, though demand for our storage and HPCI solutions is holding, and demand for our edge solutions remains healthy.

In that context, we are taking action to maintain our momentum for the second half of 23 and fiscal year 24.

We intend to further our investments in software and services in all our business units, including in our HPE Green Lake Edge to Cloud Platform, HPE CAI, storage and Edge, to extend our share gains across our segments all while retaining our cost discipline and productivity focused.

We delivered Q1 revenue of $7.8 billion, which equates to robust 12% year-over-year growth and 18% in constant currency despite our exit from Russia and Belarus in Q2 2022.

We did not experience the typical seasonal decline between Q4 and Q1, thanks to excellent supply chain execution on our large order book.

Each of our segments, excluding only our corporate segment, grew revenue at least 8% in Concentre Currency. This revenue performance was well above a prior guidance for Q1 of $7.2 to $7.6 billion and represented a record Q1 revenue level. We benefited from improvements in the supply environment, particularly in our compute segment.

This allowed us to execute against our order book which our customers greatly appreciated.

The delivery times of our products and services across our portfolio are now almost back to pre-pandemic levels. Yet we continue to have more progress to make in supply chain productivity as our order book entering to 223 is more than twice normal level across our company.

The combination of our large order book and improved supply environment gives us confidence that we can grow revenues well above the previously communicated guidance of 2-4% revenue growth in constant currency for fiscal year 23.

More on that later. As a result, we also remain confidence in the longer term to 4% revenue-kigger outlook over the fiscal year 22 to fiscal year 25 period we provided at our 2022 securities analysis meeting last October . Our non-Gabbros margin reached a Q1 record of 34% revenue-kigger outlook over the fiscal year 24.

For the long term, our margin structure will continue to benefit as we continue to shift our mix of business to higher margin, software intensive as a service offerings. Our non-gap operating margins reached a record high 11.8%. This is 80 basis points ahead of Q122 and 30 basis points higher than Q422. Q122.

While strong revenue growth and gross margin performance are key drivers, this result would not have been possible without the strategic actions, and Tonya and I took in fiscal year to reallocate resources and optimize our cost structure.

As mentioned during our last earnings goal, Antonia and I remain determined to maintain our focus on productivity. Our top line and margin-strengthing Q1 translated to gap diluted net EPS of 38 cents and non-gap diluted net EPS of 63 cents. Non-gap diluted net EPS easily exceeded our guidance range of 50%

$1.9 and $2.1 billion in free cash flow in fiscal year 23.

Finally, we are continuing to return substantial capital to our shareholders. We paid $156 million in dividend discordr.

and repurchase 73 million dollars in stock.

We intend to buy back at least $500 million worth of shares in fiscal year 23, just like we did in fiscal year 22.

Turning on to our as a service business performance, we are very pleased to announce our AR surpassed one billion dollars in Q123.

This is an important milestone for our business that reflects that our as a service strategy is working. The supply change challenges have slowed our AR growth in prior quarters.

The benefits of easing supply challenges are beginning to appear in our results as ARR growth in constant currency accelerated from 25% in Q422 to 31% in Q123.

We expect further acceleration through fiscal year 23 as in blueving supply allows us to expedite delivery of other service solutions to our customers.

Our ILO service order decline of 20% in Q1 is a function of a difficult compare to Q1 22, in which orders grew 136% on strength from several large deals including a large public cloud customer.

We are comfortable with our robust pipeline of Azure Service Business.

We base this confidence on our 68% order growth in fiscal year 22, the number of deals currently pending acceptance, and our current view of the sales funnel. We therefore retain our 3 year ARR target of 35-45% CAGR from fiscal year 22 to fiscal year 25.

Most importantly, we continue to make our as a service business more valuable with a growing mix of higher margin, software and services recurring revenue.

In Q1 23, our mix of software and services increased another 150 basis points year over year to 65% thanks to our cloud and SaaS offerings particularly in edge and storage.

Let's not turn to our segment highlights on the next slide. I would like to remind you that all revenue growth rates on this slide are in constant currency.

In the Intelligent Edge, we delivered a second consecutive record revenue quarter and surpassed the $1 billion revenue milestone for the first time.

We grew our revenues 31% year over year. We are outgoing our main competitors and are taking share with our combination of wireless land, enterprise switching and SD-WAN solutions, including in some of the largest enterprise customers.

Customers are increasingly adopting our software centric solutions, such as our Edge Service platform and Automation Suite.

Our operating margin of 21.9% was up 450 basis points annually and 860 basis points sequentially.

We are benefiting from scale and our prior price increases have worked through our order book. We are very, very pleased that our edge business has exceeded the rule of 40 this quarter and feel very optimistic about the prospects of our Aruba business in fiscal year 23 and beyond, given its substantial order book underpinned by its superior platform-based SaaS offerings.

We retain confidence in our long-term targets of mid-teens revenue growth and mid-20% opening margins.

In HPC and AI revenue grew 37% year over year.

We successfully closed the balance of the frontier deal in q1 which contributed to the strength of this business in q1 23

While the segment is also now benefiting from easing supply chain, the lumpiness and long lead times of this business mean that operating margins will continue to fluctuate.

As Antonio mentioned, we have been thinking strategically about an investing behind artificial intelligence for many years.

This is true both organically and inorganically.

The emergence of large language models such as chat GPT and bard and generative AI some of which run on our systems has prompted many questions from our customer base.

We believe AI at scale is a high-growth market and that the building and refinement of AI models will require unique computational capabilities that our Cray supercomputers and HPI solutions are extremely well positioned to enable.

We intend to invest organically and inorganically as attested by our acquisition of Paciderm to fully grasp this opportunity.

With regards to storage, we are pleased to report 10% annual growth, where we are bolstering our portfolio to grow market share.

HPE Alletra remains one of our fastest growing new products introductions ever and grew well above triple digits in Q1.

HPE Electra contributed to double digit growth in our own IP products which is driving a mix shift to higher margin, software intensive as a service revenue.

We continue to invest in R&D for our own IP products in this business unit, and as a result, our Q1 operating margin of 12% is down 190 basis points year over year.

Compute revenues grew 19% year-over-year to $3.5 billion. The segment benefited from the multi-sourcing and demand-steering initiatives we have discussed in prior calls, as well as steadily improving supply availability.

Our dynamic pricing strategy has helped us navigate a volatile supply climate while driving industry-leading gross margins.

Our compute operating margin of 17.6% exceeded our long-term outlook of 11 to 13% for the fifth consecutive quarter, which attests to our best-in-class performance.

We do believe our compute operating margins are peaking and should gradually return to our target range of 11-13%.

While we are seeing commodities costs decreasing, leading to increased competitive price pressure, we have for the first time, three concurrent and differentiated platforms being sold in the market.

Gen10, Gen10+, and Gen11, which would allow a gradual management of pricing and margins over time.

In our Pointnext Operational Services business combined with Storage Services, orders declined, mid to high single digits, and revenues were flat year over year driven by uneven demand. As you know, this is a key component of Recurring Revenues and Profits for each of our segments.

Finally, HPE financial services revenues rose 8% year over year and financing volume of $9.6 billion grew 21% in constant currency.

Our operating margins fell 300 basis points year over year due to the higher interest rate climate that we will gradually offset over time through pricing.

Time and time again, our HPFS business has proven resilient in a downturn thanks to the quality of the underwriting of the book of business.

Throughout the pandemic, I'd like to remind you our annual loss ratio never exceeded 1%.

Our loss ratio is back to pre-pandemic levels of approximately 50 basis points.

Slide 8 highlights our revenue and non-GAAP diluted net EPS performance.

We are very pleased that the progress we are making against our Edge to Cloud strategy is evident in the financial results we have delivered on both the top and bottom lines.

We have grown both our revenue and non-GAAP diluted net EPS to record or near record levels in Q1-23.

This illustrates not only the commercial success of our products in the marketplace, but also our ability to generate healthy modules. I am particularly pleased to see that our focus on supply chain execution has enabled the attainment of record revenues despite a substantially over year headwind from foreign exchange rates that impacted revenue growth by 550 basis points.

in Q1-23. Slide nine illustrates the progress we have made in our gross margin structure. Our Q1-23 non-gap gross margin is up 30 basis points year over year.

We generated 2.7 billion dollars in gross profit in Q1 23, which is yet another quarterly record

Our gross profit and margin are a testament to the success of our strategic pricing actions through the period of supply challenges in fiscal year 2020 to fiscal year 2022.

It is also illustrative of the long-term favorable mix shift we are driving. Despite a strong compute quarter, our revenue mix of compute at 44% was flat year over year.

This illustrates that we have a larger revenue base as our higher margin segments are growing rapidly and our as-a-service strategy is gaining momentum.

Slide 10 illustrates our non-GAAP operating margins progress, which reached 11.8% in Q1-23.

This is up 30 basis points sequentially and 80 basis points a year over a year. It is also a record-coryly non-gap operating margin for the company. Our very strong Q1 revenue performance and our resilient gross margins are the leading contributors to the operating margin expansion.

Unlike many tech companies that have announced layoffs recently, we have strong momentum at HPE with a combination of our improved cost structure, substantial order book, and outstanding execution delivering profitable growth that is increasingly recurring at higher margins as our as-a-service transformation continues to unfold.

Again, let me reiterate that Antonio and I are determined to maintain this focus on profitable growth and productivity for the future. Let's now turn to discuss H3C. As you know, we have chosen to exercise our put options on our shares in H3C.

We took this decision after carefully weighing the financial implications of remaining in the joint venture with the risk-reward profile of exercising the put. We are confident that we have made the decision that is in the best interest of our shareholders. HPE and our partner UniSplendor continue to have...

constructive discussions to reach agreement on the determination of the final purchase price of HPE shares in H3C and enter into a share purchase agreement.

We will keep you updated. Please keep in mind that our decision to exercise the put is distinct from the commercial agreements with H3C. We intend to continue to do business in China through both our direct sales and through H3C and we remain committed to serving our customers in China.

I would like to remind you that we will continue to recognize the value of the dividends we receive from HVC in our financials until the transaction is complete and am happy to report HVC results remains healthy despite uncertainty in the Chinese economy. Our first fiscal year from a casual perspective is to...

payments, and continued investments in inventory, which has driven our cash flow conversion cycle from a negative 14 days in Q4 to a positive 15 days in Q123.

More specifically, our accounts payable balance was reduced by $2.2 billion quarter over quarter and was the main driver for negative operating cash flow and affected our cash flow conversion cycle. Also, we have made significant investment in HBFS volumes to drive future growth in subsequent quarters.

We expect to generate significant free cash flow in the remainder of fiscal year 23 and reiterate our guidance of 1.9 to $2.1 billion in free cash flow for the full year. Now let's turn to our outlook slide on slide 13. As we have mentioned,

demand for our products and services was more uneven in Q123 across our business than it was in Q422. Having said that, we also believe our portfolio differentiation will continue to drive market share gains and are entering Q223 with a substantial order book relative to pre-pandemic levels.

We had strong momentum in Q1 23, and we are now turning our focus to invest in sustaining that momentum in the second half of 23 and fiscal year 24 in a context of continuous macroeconomic uncertainty. Let me reiterate that our guidance incorporates our current thinking on the macroeconomic picture, inflationary pressure and how wisdom, moving forward is one universities at the largest of the drawer given by stateALL powerfully Quite morg"? Thanks for watching, we hope you'll keep watching for more Q1 technology and I'll see you soon,

our exit from Russia and Belarus in 22, and foreign exchange risk. I would like to remind you that approximately 50% of our revenue is generated in foreign currencies. For Q2-23, we expect revenues in the range of 7.1 to 7.5 billion dollars. At the midpoint of the range, this represents 9% of our key over year growth in...

of our order book.

To sum it up, I am very pleased with our Q1 results and guidance for Q2. We also understand some of our end markets are likely to remain uneven in the near term.

We had indicated at our last earnings announcements that our financial performance in fiscal year 23 is likely to be more weight.

more weight to the first half of the year than is typical. Given the strong Q1 performance, momentum, and substantial order book we continue to have, we are lifting our full year guidance accordingly. We are now targeting five to 7% revenue growth adjusted for currency, which is at the midpoint.

Twice our prior revenue growth guidance non-gap operating profit growth of five to six percent Gap diluted net EPS of a dollar forty to a dollar forty eight Non gap diluted net EPS of two dollar or two to two dollar ten and free cash flow of one point nine to two point one billion dollars

Specifically for INE, we benefited in Q123 from one-off foreign exchange gains that accounted for 2-3 cents per share.

These are unlikely to repeat in the rest of the fiscal year.

Given the high interest rate environment is expected to remain unchanged, we expect to acquire a need to be an expense of 20 to 40 million dollars on a full year basis.

This explains our fiscal year 23 EPS guidance range of $202 to $10, which incorporates six of the 9 cents beat in Q1 23.

In terms of capital returns, we will return approximately 60% of free cash flow to shareholders via dividends and repurchases.

We are maintaining our dividend and expect to repurchase at least $500 million worth of shares in fiscal year 23.

So, to conclude, our results speak for themselves and we continue to execute.

better than the competition. While many tech companies are playing defense with layoffs, we see fiscal year 23 as an opportunity to accelerate the execution of our strategy.

Antonio and I look forward to continuing our execution momentum through fiscal year 23 and beyond. Now with that, let's open it up for questions. Thank you. Once again this is Alok travelling throughXMCC.

We will now begin the question and answer session. To answer a question, you may press star, then one on your touchstone phone.

If you're using a speakerphone, please pick up your headset before pressing the keys.

To withdraw your question, please press star then 2. We also request that you only ask one question.

Our first question will come from Aaron Reakers with Wells Fargo.

Rakers with Wells Fargo. You may now go ahead.

Yeah, thanks for taking the question and congrats on the solid performance. I guess I wanted to ask a question more strategically and kind of thinking about the product portfolio. You guys and many others obviously talking a lot about chat GTP, GPT and in-general to AI. And the conversation on today's call, you alluded to the fact that you're well positioned with some of your HPC and your-

meaningful deployments of accelerated compute. Thank you.

Well thank you Aaron. Obviously AI is now front and center in the IT community because of what we saw in the last couple of months and as I said you know has the potential to disrupt every industry.

We cannot talk about what specific cloud, that is one specific cloud, they use our specific curators systems.

But I will say we have a bigger opportunity than that because when I think about the deployment of these large language models, they require supercomputing capacity. And at that point when you think about what we did with Frontier is how we make that accessible to every enterprise of every size.

And so we as a company have a unique opportunity that happens every so often where there is a massive inflection point like AI and LLM, the large language model, with a unique differentiation in RIP, which is a combination of organic assets that we built over a number of years in the acquisition of Craig. So I'll start accepting his remarks.

we are assessing what is the type of business model we can deploy as a part of our other service model by offering what I call a cloud supercomputing IaaS layer with a platform as a service that ultimately developers can develop.

train and deploy these large models at scale. So that's why we said early on, we will talk more about that in the subsequent quarters, but we are very well positioned and we have a very large pipeline of customers. Last week I was in Europe and I was amazed to see the large pipeline of customers that they are demanding that.

and I mentioned one specific customer, Aleph Alpha, which is already coming to us to do that. Thank you, Anthony. Or, I'm just going to say... Adder, Adder. Next question, Anthony, please. Our next question will come from Metta Marshall with Morgan Stanley .

You may now go ahead. Great, thanks. You know you noted obviously seeing some weakness kind of in the environment. Just wanted to get a sense of either customer type or vertical or just kind of segment that you expect to kind of see.

be the source of that kind of weakness throughout the year? And are you seeing more people kind of opt for GreenLake subscription offerings as a result of kind of more macro-sensitivity? Thanks.

Sure, I mean, I don't think there is one specific geography or one specific segment. You know, I will say, as we said in the earlier remarks, right, the compute business, obviously we see a little bit more unevenness, if you will, with longer...

because also they are digesting all what they acquired last year because of the supply chain and the cost rising. But when you look at the rest of the segments, as Tarek said and I said, the Intelligent Edge business, the connectivity business is very, very solid.

And we exited once again a Q1 with an extremely elevated book of orders. HPC, we just talked about it, right? We see an amazing pipeline in front of us. We have only deployed one exascale system and we have few to go because we are delivering all of them to the Department of Energy. And then as I said earlier, we have an opportunity to grow that business through an as-a-service model.

where data, data compliance and cost plays a big role. And that's why we see the moment we have. The fact that we doubled.

the total contract value from Q1 21 to Q1 23 from 5 billion to 10 billion, it tells you the momentum. What I'm really pleased is the fact that two thirds of that momentum is in software and services, which means we will be more resilient as we go forward to weather some of these challenges because it's a recorded revenue.

And we count in that, just to be clear, through softer as a service description and consumption, which is exactly the way it's supposed to be. And that's why we are very bullish about our GreenLake. And the fact that we cross $1 billion AIR, it's just a testament that we have a winning strategy.

Thank you, Rita. Next question, please. Our next question will come from Samik Chatterjee with JP Morgan. You may now go ahead. Yep, hi. Thanks for taking the question and congrats on the execution here. I guess my question was more on the full year guide and I understand some of the headwinds.

in certain segments that you're calling out, but the revenue guide goes up by about 300 basis points for the year. The operating profit growth sort of goes up by 100 basis points, and while I understand some of the headwinds, what maybe I can use some help on is really understand the mixed implications of how you're thinking about it, given the more lower flow through that we're seeing to operating profit.

which is double what we gave previously.

And in giving that guide, we factor in a number of elements. First of all, the macro environment, second of all foreign exchange rates, and third of all, our desire to continue to invest to perpetrate the momentum that we have in the second half and in fiscal year 24. Because there's always...

something else that we have to think about for the end of the year and we're not done yet. I also want to flag that we believe that commodity costs are coming down in particular areas which should effectively come with added pricing pressure in compute.

And this is also something that we have factored into our guidance. But if you really think about our non-GAAP operating profit growth, the prior guide was at 4 to 5% growth, and now we're guiding 5 to 6% growth, and we feel comfortable with the information we have on the macro, foreign exchange rates, etc.

that our guide is appropriate. Thank you, Sonic. Next question. Our next question will come from Kyle McNeely with Jeffries.

You may not go ahead.

Great, thanks for the question. It was a great quarter for Intelligent Edge. Can you help us understand how we should think about big quarter here in Q1? Is that level sustainable going forward? Or was there some big deals or particular activity that you would call out that isn't likely to repeat? Your guidance implies it decelerates from here, but can you give us a sense for how we should model this going forward?

how frequently you might see growth ahead of your mid-teens growth guidance. Thanks. Thanks, Kyle. No, that was not a unique deal. This is the continuous momentum we have had now for a number of quarters. The book of business in this particular business segment continues to be extremely elevated. As Tarek said, we continue to gain share.

And I think it's because we have unique value proposition, which is a cloud-native offer for all aspect of connectivity. We announce now the acquisition of Affinette, which we will integrate the Provify gene for the same control plane. And today we announce the acquisition of Access Security, which is the Secure Access Secure Edge at the top. And so when we think about the Booker Business, we will announce the acquisition of Affinette, which is the Secure Access Secure Edge at the top.

The incredible pipeline we have ahead of us, the execution of the team, the easier of the supply, although in this particular business there is a little bit more constrained on the supply compared to the other businesses. You know, we talk about the rule of 40 and this was the rule of 50 something, I guess. But the fact of the matter is that, I thought I said, we expect to grow double digits, right? And then the mid-20s on operative profit. This business is now humming.

and it's gonna be one of the most important growth engines we go in the future. And as Tarek said, it's also allowing us to be less reliant on the rest of the portfolio, which is very, very critical. And this comes with a high cross margin obviously. I would simply add to what Antonio said. Look, the edge of broken the $1 billion revenue bar, I think now we are entering a phase.

with all the additions that we're making to the portfolio. We're entering the face of a new watermark level. We have built at the edge with Antonio and the management team one of the most comprehensive portfolios of the entire industry and it is really, really winning shares even in the largest customer segments thanks to the...

edge to cloud platform that Aruba has built and that powers GreenLake in everything we do. And I hope the market will take notice of that and give us a little bit of recognition about the work we have done in this particular segment. Thank you, Kyle. Next question, please. Our next question will come from Simon Leopold with Raymond James. You may now go ahead.

Thanks for taking the question. I know this is kind of be a bit of a tricky one, but I want to see if you could help us understand why your views sound more optimistic than your other IT exposed peers, whether it's around in particular the compute side of business as a storage. I get intelligent edge.

So I'm not really pushing there, but just the contrast in your outlook on storage and compute versus some of your peers. Can you help us understand that?

Sure, thank you Simon. Well first of all let me start by saying we have a unique strategy and a very diversified portfolio. Some of our competitors don't have the breadth and depth of our portfolio. Some of them are just playing compute and storage, some of them play just in storage, some of them only play in forking. And by the way, let's remind ourselves that one third of our recruiting revenues come from service.

is a winning strategy for us because it's very hard to do. One thing is to offer just a subscription model on some sort of solution. But when you leverage in a true as a service model across all line of businesses.

Let me remind you, architecturally, I drove a vision with the team that everything we do, whether you consume it as a service or you consume it in a traditional way, that the entire experience is delivered now to HP GreenLake. Whether you deploy a compute node somewhere, whether in the call or premise or at the edge, you need a subscription to that compute node.

whether it's the storage business, now you asked about the storage. This Proloc HP Alletra, and Tarek mentioned this, is the fastest Proloc in the history of the company. It has grown triple digits on a consistent basis.

And you will see more announcements about this platform going forward. But it was conceived to be a SAS-led offer.

So that's why it's fueling also the recurrent revenue as we go forward. And I think the combination of that gives their customers a unique experience. Instead of buying three different things from people, they can consume it all through one integrated experience. And that's why we are confident. Now on the compute side,

Obviously that compute business go through their own processes and cycles, right? Because we have CPUs that come on and off at different time of the year or years. But Tarek said we have three concurrent platforms going on that gives us a lot of flexibility to attack specific customer segments with different config and pricing.

and generation 11 is unique because we address three specific needs. The hybrid cloud need, the security need and the workload optimization. And it comes with unique technologies that actually lift the UP app because now it's more structural because we are adding DDR5 memory which basically means more content.

in through the server. And that's why we believe we can manage through this transition. But I mean if you look at the performance of that business it was best in class. You know, 90% year of Raven growth and an amazing 17.6% operating profit. And when you look at some of our competitors, as a combined business they can come to the same number we delivered just on compute.

Simon, thanks very much. Let's move to the next question, please. Our next question will come from Amit Dhariani with Evercore. You may now go ahead. Thanks for the question and congrats on the quarter. I was wondering if you could just talk about what's the timing for the H3C transaction from here and then how do you think about the usage of the proceeds that you get from

the put as you recall towards the end of the calendar year of 2022. And we are right now in the process of agreeing the value of our stake with our partners of Uni Group. And this process is going to take a few months and it's going to...

we expect it to complete towards the end of calendar year 23. And we feel reasonably good about the prospects. For the meantime, we continue to consolidate H3C and benefits from the dividends that we receive from the company. And we are not de-consolidating H3C.

at this stage. It's most likely going to be the case of the end of fiscal year 23 when that will happen. At that point we will advise both on the impact of dilution from deconsolidation and also the use of proceeds once we receive them.

I would like to also emphasize that we continue to have commercial agreements with HVC, notwithstanding the exercise of the put. Those commercial agreements are distinct from the exercise of the put and we will continue to generate value through those commercial agreements that we have with HVC.

Yeah, and as always, I mean, listen, we're going to apply the same discipline for returning capital to shareholders and continue to invest in the business at appropriate time. But until we finish this process, right, it's just hypothesizing, we have to go through the process and complete the agreement. Ahmed, thank you. Next question, please.

compared to your peer who just down ticked earlier today. But if I look at the midpoint, take the midpoint of your fiscal second quarter guidance, it would assume the second half of the year will be down slightly from the first half, which is kind of unseasonal, right? It's normal seasonality is up, I call it 5%. Can you talk about what's embedded in your second half revenue guidance? Is that all driven by your view on the macro side? Any one time item that we should be thinking about in the future?

the midpoint is six which is double what we originally anticipated. That is because of all the puts and takes in our portfolio and the way we see supply easing on one side also demand continuing unevenly although across our portfolio. And if you really look at our EPS guide

One thing I would like to emphasize for everyone on the call is that we did beat the midpoint of our guide by nine cents. And three cents of that beat pertain to OINE and had to do with foreign exchange gains that are not operational.

We continue to view our INE on the full year basis being an expense of 20 to 40 million US dollars due to elevated interest Expenses

and there is also in our guidance the potential impact from FX volatility. And so what is baked into our guidance is just that our current view to the best of our knowledge of the macro environment, the impact of interest rates.

and also the impact of foreign exchange rates that we see at this stage, knowing that things can evolve. It's also important to note that this is our first quarter. We still have nine months to go, and we want to make sure that we remain prudent in the current circumstance where the macro-environment doesn't influenza tablets a big help.

remains uncertain. Sydney, thanks very much, and we'll take two more questions. Anthony? Our next question will come from Wenzi Moha with Bank of America. You may now go ahead. Yes, thank you. Can you talk a little bit about how much...

incremental orders in your backlog you were able to satisfy versus what you had anticipated going into the quarter given the fact that some of these supply chain improvements came through the course of the quarter and can you also maybe help us think through what you're expecting from an FX headwind now in fiscal 23 relative to your SAM guide of a 30 cent headwind to EPS. Thank you.

Thanks, Juanji. I will answer the first part and the second part. I mean, not enough. I mean, the fact of the matter is that we made some progress, but not enough progress against that very strong order book. And that's why we exit Q1 with 2x normal historical levels.

Now we expect that to continue to improve obviously throughout the years as supply continues to ease.

But again, we have a good pipeline in front of us, and so the goal is to continue to fill the order book. But when you ask me about how much progress we made in Kewa, not enough. If you look at that intelligent business, it's extremely elevated. Our HPC business, when I look about the future.

Deliverance we have to live is always very, very strong. Storage is good and compute is still there. So we have work to do, more work to do. And then on FX, I think it was. Oh yes, thank you Antonio and thank you Wamsi. This gives me the opportunity to remind everybody that at SAM last October we flagged.

we anticipated. We still feel that we can attain our new guide on revenue growth and EPS, notwithstanding the current FX headwinds, but you know things can always evolve and this is why we remain prudent in our full year guide.

with regards to revenue and EPS growth. So that 30 plus percent EPS impact from FX has risen, but we are managing it and factoring it into our new guide. I mean on that point, I think it's simply remarkable because we have to cover all of that 30 cents started right, operationally. Yep. And the fact that we are raising a midpoint from the $2, which included a 30.

from our vantage point, we are doing all the right things and we are confident in that guidance where we just provide it to you. Thanks very much, Wanzi. And Anthony, our last question, please. Our final question will come from Amanda Barua with Loop Capital.

You may now go ahead. Hey, good afternoon guys. Really appreciate it. Antonio, would love to get any context you could provide going back to the AI and large language model conversation. Is there any useful way for us to think about the required resources?

sort of difference in what you're seeing for those applications relative to, you know, kind of typical high performance compute application resources? And then are you also seeing for those AI type projects,

Are you also seeing any impact to the storage attached? Is there any networking attached impact there as well? We'll just love context on those things. Thanks a lot. No, thank you.

Well, we have been in the AI business now for many years, right? And we have been in the specific AI at scale business. One of the key differentiations we have in that business, actually several, right? Number one is the, what you refer to as networking, I call it interconnect fabric. The ability to connect.

40,000 GPUs at scale requires a unique differentiated fabric. That's what the Frontier System is all about.

And as I think about the next generation of this, we can easily double to 80,000 GPUs because our software and our silicon scales to those levels. And so that's unique value proposition that you don't get in the traditional commoditized cloud environment.

The other key differentiation we have is the programming environment we acquire to the Cray acquisition because when you develop these AI models you have to deploy it and you have to manage it at scale to take advantage of that massive set of capabilities. That also is a unique software value proposition that is very hard to do.

compliance and all of that. And that's why our acquisitions like Determine AI and Pachyderm in particular now allows us to automate to that data pipeline. But we are not stopping there. We continue to move up and build what I call the platform as a service for developers so they can take advantage of these automation for the data, train the models and then deploy the model.

And if they need a super computing type of capabilities, we will be there for them. So that's why I said early on, we are a unique point in time where an inflection in the market intersects a unique set of capabilities, which we intend to fully capitalize top to bottom, not just on the hardware level but all the way to the software level.

and you will hear more about that as we come to the next months and quarters. And I'm really excited about that opportunity because we already have customers coming to us. We need that and they are generally enterprise customers that deploy this large scale model that they don't want to spend hundreds of millions of dollars but they want to use it as a service.

Okay, well thank you everyone. I always appreciate you making the time to talk to us. I know today was an incredible busy day with all the earnings being posted. But let me remind you a couple of things. I mean, first of all, today's results are not a coincidence. It's a combination of many things we have done over a longer period of time.

It is the fact that we have a unique strategy, we have been consistently executing with discipline at all levels, driving cost discipline, productivity, investing organically and inorganically to bolster our unique portfolio aligned to those trends we discussed today.

We generate the record setting performance in the first quarter for our shareholders. It was the highest revenue quarter since 2016. We deliver the best non-GAAP operating profit and the highest ever EPS, net diluted net per share. And I believe we are very well positioned to navigate this uneven market. As always, there is always more work to do. No question about that.

But I think we have a world-class team, a unique culture, and customers want us to be there for them through this transition. So thank you very much, and I look forward to see you at the next call or in one of the conference calls we do with you.

Ladies and gentlemen, this concludes our call for today. Thank you.