Q3 2023 Hewlett Packard Enterprise Co Earnings Call
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Good afternoon, and welcome to the third quarter fiscal 'twenty twenty-three Hewlett Packard Enterprise earnings Conference call My.
My name is Gary and I'll be your conference moderator for today's call. At this time, all participants will be in listen only mode. We will be facilitating a question and answer session towards the end of the conference should you need assistance during the call. Please signal a conference specialist by pressing the star key followed by zero.
As a reminder, this conference is being recorded for replay purposes.
I would now let's turn the presentation over to your host for today's call Mr. Jeff call head of Investor Relations. Please go ahead.
Good afternoon, everyone I'd like to welcome you to our fiscal 2023 third quarter earnings Conference call with Antonio Neri, Hpe's, President and Chief Executive Officer, and Jeremy Cox Hpe's interim Chief Financial Officer before handing the call to Antonio Let me remind you that this call is being webcast a replay.
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 Investor Relations webpage.
Elements of the financial information referenced on this call are forward looking and are based on our best view of the world and our businesses as we see them today.
<unk> assumes no obligation and does not intend to update such forward looking statements.
You also note that the financial information discussed on the call reflects estimates based on information available at this time and could differ materially from the amounts ultimately reported in Hpe's quarterly report on Form 10-Q for the fiscal quarter ending July 31 2023.
For more detailed information please see the disclaimers on the earnings materials relating to forward looking statements that involve risks uncertainties and assumptions. Please refer to hpe's filings with the SEC for a discussion of these risks.
For financial information, we are 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.
This conference call all revenue growth rates, unless otherwise noted are presented on a year over year basis, and adjusted to exclude the impact of currency.
Finally, after Antonio provides us marks Jeremy will reference our earnings presentation throughout his prepared comments.
With that let me turn to you Antonio Alright, Thank you, Jeff and good afternoon. Thank you to everyone for joining today.
H B delivered another solid quarter, we again increased our revenue gross margin and earnings per share year over here and deliver strong free cash flow.
Our results are being driven by an intentional ongoing mix shift to higher growth higher margin parts of our portfolio.
Critical priorities to customers.
Our success in shifting the portfolio delivered a 120 basis points year over year non-GAAP gross margin expansion.
Even by exceptional performance in areas like the intelligent edge, where revenue has set its fifth consecutive record quarter NH be green Lake, which continue to accelerate our strategic pivot.
Generating higher recruiting revenue and gross profit across our four product segments, driven by the increased mix of high margin software and services.
In Q3, our intelligent edge business contributed 20% of our total company revenue.
It is now the largest source of hps operating profit at 49% of our total segment operating profit.
RH bakery like hybrid cloud platform is also the rating or other served with fitbit.
Delivering an annualized revenue run rate or a or a $1 $3 billion up 48% increase year over year.
Our strategic shift towards the edge hybrid cloud and AI to deliver throughout HP can you like cloud platform is working and we are delivering on our financial commitments.
Because of our momentum and strong execution throughout this fiscal year and once again, we are raising our full year non-GAAP diluted net earnings per share guidance.
For full year diluted net earnings per share guidance will remain unchanged.
For non-GAAP diluted net earnings per share, we're increasing to $2.30 at the midpoint, while maintaining both our full year constant currency revenue growth guidance of 4% to 6% and full year free cash flow guidance of one nine to $2 $1 billion.
We will provide more details later in our call today, including on a GAAP basis.
Our view of the micro environment remains unchanged from recent months.
Customers continue to prioritize their data first digital transformation. Despite some reservations about the macroeconomic environment for the future.
While the broader market is still pressure demand for our products and services grew sequentially in the third quarter across all key segments of our business.
Driven by high growth areas like AI and HB Green Lake.
We continue to see strong interest in our AI and supercomputing offerings for enterprise customers, who are incorporating artificial intelligence into their businesses.
This is translated into significantly higher demand for our <unk> business segment as customers discover hps unique capabilities to power unprecedented level of performance for AI at scale, including using our market, leading supercomputers built with sustainability in mind to train and to the AI.
Models.
Total HBO revenue during the third quarter increased three 5% year over year to $7 billion, which exceeded the midpoint of our guidance.
non-GAAP gross margin was 120 basis points of year over year to 35, 9% very close to the record level, we achieved in the second quarter.
Higher profitability in the third quarter compared to last year also corresponded to an increase in non-GAAP diluted net earnings per share, which was <unk> 49.
Up 2% year over year.
And we generate the $955 million in free cash flow, an increase of nearly $370 million.
The HB really cloud platform is a key driver of financial performance with our hybrid cloud offerings through the platform continue to attract new customers and compare to the existing customers to expand their contracts.
HP Green Lake orders rose, 122% year over year, resulting in a nearly $1 5 billion increase also service total contract value since last quarter.
Our cumulative booked total contract value now stands at just under $12 billion.
The scale and the strength of HB could elect is evident.
<unk> 27000 unique customer logos and $3 4 million connected devices and more than 1100 partners sell HP Green Lake one of the largest partner ecosystems selling as a service offerings in the industry.
As we grow our AI, our we're also increasing the share of high margin software and services.
Software and services increased two percentage points sequentially to 68% of the total mix compared to 66% in the second quarter with ongoing contributions from SaaS offerings tied to other HPE as mental software storage and HP Aruba networking our operational services.
All through our recent acquisition.
We are well positioned to continue to grow the software and services mix within our AAR.
For example, we saw a double digit increase in demand with HP operational services, this quarter, which will contribute to future recurring revenues.
<unk> gross margin and also service recurrent revenues helped lift our already strong overall company gross margin this quarter.
These results demonstrate the relevance of our differentiated <unk> value proposition of providing one unified hybrid cloud experience to empower our customers to access analyze and extract value from their data no matter, where they live at the edge in the calls or data center and in the public clouds.
Now I would like to highlight a few important takeaways in our business segment results.
First as I said earlier Hp's performance in intelligent edge segment was particularly noteworthy in the quarter.
Intelligent edge revenue increased 53% year over year and operating profit more than doubled.
In another exceptional quarter for this business segment.
Particularly pleased that our intelligent edge SaaS revenues continued to decline double digits.
We are gaining share benefiting from improved availability of supply high shipment volume and a strong response to our SaaS edge offerings in terms of both demand and revenue.
Mentally intelligent edge was consistent around the globe with revenue increasing by double digits in all regions in the third quarter.
One example is the University of Maryland, which wanted a stronger cloud based policy driven wired and wireless network that could provide improved automation better device visibility and easier and more secure access for students faculty and staff as they return to campus.
The University selected HP Aruba networking for a campus wide refresh to enhance the flexibility visibility and security of its network through HPE Aruba clearer path, our SaaS platform to onboard new devices.
Granville Island.
Access levels and keep network secure.
The <unk> business segments saw a wave of demand deceleration in the quarter as we converted on AI deal opportunities and shipped orders that leverage our unique end to end AI value proposition.
Training to tune into influence.
As a result, we exited the quarter with the largest HBC NII order book, we have ever had.
Our momentum also helped grow our total HB order book.
<unk> is now at more than two times pre pandemic levels drill.
Driven by exceptional customer demand for our AI solutions and sequential demand improvements across our four product segments.
All HB can combine our unique AI software on slingshot networking fabric HP services offerings and market, leading sustainable supercomputers.
Our open ecosystem of AI suppliers is also an advantage for customers who are turning to us for a full spectrum of enterprise AI workloads and use cases.
On a large scale mobile development training tuna and interesting.
Through the Uk's GW for alliance or for U K research universities HBU won a contract from the UK research and innovation to develop is about three a supercomputer that leverages. The latest HP Cray XC supercomputers, HP slingshot interconnect and Nvidia Grace CPU.
GPU Super Chip.
The system will provide researchers engineers and data scientists purpose built capabilities to train AI models, and accelerate research and clean energy drug discovery medical diagnosis and astrophysics.
We were selected by Tokyo Institute of Technology, Global Scientific information and computer center to build its next generation supercomputer.
Which is called so Bob me for no, which includes AMD Cpus and Nvidia Gpus to accelerate AI, driven scientific discovery medicine material science and climate research.
<unk> Pharmaceuticals is a leading public picked by a company that uses advancement in AI to accelerate an industrialized the discovery of new drugs.
Ill turn to Hps AI software to scale its foundational model efforts significantly speedy speed up trading across its more than 25, petabytes of biological and chemical data and improved team collaboration.
We are seeing AI project generate exciting results on our supercomputers for example, the looming supercomputer built by HP with AMD Cpus and Gpus is the fastest system in Europe in the third fastest in the world.
It has enabled generative AI projects, such as creating the worlds largest finished language model and that has helped researchers apply AI for early detection of the agnosis of breast and prostate cancers.
We continue to make progress in ocean in the area of <unk> supercomputer, which enables unprecedented scale and performance for larger AI models, such as generative AI.
This quarter HP in collaboration with the Lawrence Livermore National Laboratory started to build and test El Capitan.
One of the largest upcoming exoskeleton supercomputers El Capitan, which you use is AMD Cpus and Gpus is expected to reach two extra floor for big performance.
We will allow researchers to apply AI to advance U S National security and breakthroughs in medical and drug research initiatives.
We are seeing demand improvement in both our storage and compute segments storage demand was solid year over year with a cloud native HBA lateral portfolio reportedly in triple digit revenue growth.
Storage SaaS revenue also increased double digits as we continue to intentionally drive more of Hps are later, our own IP through HB Green Lake.
Computer performed well considering the sector ongoing cyclicality, we saw sequential unit demand the increase in the quarter.
One area, where we anticipate demand picking up in the coming quarters as customers seeking a solution to run AI inference workloads.
Our new HB Prolia on Gen 11 serve versus optimized for AI workloads are well positioned for this growing customer need.
During the third quarter, we start shipping the servers, which boost AI inference performance by more than five times over previous models.
And just last week, we expanded our portfolio for enterprise tuning in infant solutions with Nvidia and Vmware to a seller that customers generative AI deployments.
To round out our major segments in HPE financial services revenue climbed 7% year over year and financing volume picked up 6%.
<unk> financial services continue to be strategically important to us we continue to ramp up our auto service volumes through H Vickery Lake.
We continue to strengthen our innovation from edge to cloud position HB well for the future.
In June we hosted more than 10000 customers and partners other annual HP discovery event, where we unveiled exciting new edge hybrid cloud and AI solutions to help customers achieve their business goals and gain competitive advantage.
At HP discover we announced we have entered the AI public cloud market with HP Green Lake for large language models avail.
Available at the end of this calendar year, the offering will enable a wide variety of enterprise customers to private to train in tune of data using our industry, leading AI sustainable supercomputer infrastructural and software.
We also extended our hybrid cloud leadership at HP discover it with new HP getting like hybrid cloud services, including our new SaaS based IP operations management solution from our recent acquisition of ups ramp.
And to drive faster easier and more sustainable ways to deploy our HB green hybrid cloud solutions outside of the datacenter, we expanded our partnership with Colo market leader, Equinix, which enable customers to go from quarter production in days by using our HPE <unk> for primary cloud enterprise stack.
Two new HB relate for private cloud enterprise customers, a global logistics solutions leader Swiss log in global media.
Mobile company Media House Swiss law chose hps relay for private cloud enterprise to help us at a rate that automation of its warehouse centers with a cutting edge on premise private cloud that could provide rapid secure and control service delivery.
Our house, which owns more than 30 different news brands in Europe , one in a modern on premise private cloud to accelerate its digital transformation and better leverage data to attract and retain subscribers with a more personalized customer experience.
H Big relate will help the company achieve operational agility, and mitigate risk and address and address it skills gap and advance its digital priorities.
Are the HP discover we expanded our each frequently private cloud portfolio with HBV DNA for private cloud business edition, a new offering that allows customers to spin up virtual machine across hybrid clouds on demand.
This new offer is an extension of our hyper converged portfolio without automation and hybrid cloud software built into the private cloud solution.
Early in the quarter, we previewed our new sustainability dashboard on <unk> platform alongside a comprehensive portfolio of sustainability services designed to help organizations reduce the carbon footprint associated with a hybrid atheist states Custer.
Customers understand that the hybrid state can be one of the biggest sources of operational emissions and have made measuring and reducing their carbon footprint a business imperative.
Driving the steady drumbeat of innovation strengthen our HB relay hybrid cloud value proposition for customers to extend our industry leadership expand our total addressable market and position us well to accelerate our momentum across edge hybrid cloud and AI in the future.
We have been advancing our strategy for the last several years and even a very dynamic market environment. It is clear that our strategy combined with strong execution and a terrific team set us apart.
Our third quarter performance demonstrates the progress we have made to shift our portfolio to higher growth higher margin areas that they are the most critical to customers of this continued to transform.
Our pivot to software and services rich businesses has led to new customer logos greater equivalent revenue margin and earnings per share and free cash flow. This.
This is why we are once again, raising our non-GAAP diluted net earnings per share guidance.
Despite a slowdown in some parts of the industry. Our HPE team has executed our strategy, bringing differentiated innovation and our diverse portfolio to customers around the globe. This position us to continue to win in the market and deliver for our shareholders.
I'm very pleased to pursue these priorities more closely with Jeremy Cox, who I appointed as our interim Chief Financial Officer earlier this month.
Jeremy is an experienced finance leader, who is a customer centric approach institutional knowledge and track record of operational excellence set him up well to serve in this role while we conduct an internal and external search for a permanent CFO Jeremy.
<unk> will now discuss our cash.
The financial results in greater detail, so Jeremy welcome over to you.
Thank you very much Antonio.
I'm honored to take on the responsibility of interim CFO as we go through the process.
I'll start with a summary of our financial results for the third quarter of FY 2023.
Antonio discuss key highlights on slide four.
Let me begin with slide five financial highlights.
We are actively diversifying our business mix towards our higher growth higher margin portfolio of intelligent edge, HBC, and AI and HPE Green like solutions.
Pivot is clearly visible in the 120 basis points year over year expansion of non-GAAP gross margins.
We delivered a solid quarter with an in market is still under some pressure side.
Cycle times remain elongated and digestion of prior orders will continue to have some near term near term impact.
This has been particularly true in compute and to a lesser extent in storage.
Despite these challenges we delivered three 5% year over year revenue growth in constant currency to 7 billion, which exceeded the midpoint of our Q3 revenue guidance. This figure included a modest amount of AI revenue we.
We do see several promising indicators that suggest stabilization Antonio mentioned, the sequential improvement in demand across our four product segments.
Starting to see indicators that our largest customers are returning to the market.
Intelligent edge continues to increase revenues rapidly both on a year over year and sequential basis and robust AI demand is evident in our as a service orders.
Our non-GAAP gross margin rose 120 basis points year over year to 35, 9%. This is all just 30 basis points from our high watermark of 36, 2% last quarter.
Our margin structure reflects the pivot of our business mix to higher margin software intensive recurring revenue such as intelligent edge.
The edge mix was up 450 basis points year over year.
Our Q3 23, non-GAAP operating margin reached 10, 3% this.
This is down 120 basis points sequentially, and 20 basis points year over year sequentially. The driver was largely return of compute operating margins to just below long term target range of 11% to 13% after six consecutive quarters above the range.
We expect the impact of compute operating margin cyclicality on Hpe's operating margins to decline over time.
As our revenue mix shifts towards our higher growth higher margin businesses, our intelligent edge business reached a record high 29, 7% operating margin we remain focused on productivity and continue to expect revenue growth to outpace opex growth overtime.
Our solid Q3 and margin revenue and margin performance led GAAP diluted net EPS to <unk> 35.
And non-GAAP diluted net EPS to <unk> 49.
Which was up <unk> <unk> year over year, despite compute cyclicality.
There was also once in above the high end of our Q3 guidance range of 44 to 48.
Our Q3 free cash flow was $955 million, we continued to return substantial capital to our shareholders paying $154 million in dividends and repurchasing $187 million in stock this quarter.
We have now returned $831 million in capital to shareholders. This year.
Moving to slide six.
Our as a service revenue continues to show strong momentum.
<unk> reached $1 3 billion in Q3 dollars 23.
The benefits of as a service deals we won in prior quarters are now appearing in our results, though the large AI as a service deals booked in Q3 have yet to reach revenues.
Year over year growth in constant currency has accelerated from 25% in Q4, 22% to 31%, 38% and now 48% in Q3 23.
48% growth is above our long term, 35% to 45% target and should be viewed as an indicator of our long term momentum rather than as a new growth trajectory.
The fastest growing components within our year over year, our storage and edge.
We continue to lift HPE Green lakes value proposition with an increasing mix of higher margin recurring software and services revenue.
Tony mentioned that in Q3, our software and services mix rose to 68% and should continue to increase.
While this mix of traditionally tilted to services software is now half of the total in.
In the future, we expect software growth to exceed services growth and for as a service margins to rise over time.
To slide seven.
Our Q3 as a service order growth was robust were.
We're pleased to have delivered 122% year over year order growth.
Which has raised our cumulative ASIC service <unk> to nearly $12 billion.
Driving factor was AI demand.
A significant percentage of our AI orders have come under the as a service model and the strength. This quarter should also provide confidence in our long term, 35% to 45% AOR growth outlook.
Order growth will fluctuate given the volatility of large as a service deals.
Now, let's turn to our segment highlights on the next slide and remember all revenue growth rates on this slide are in constant currency.
In intelligent edge, we grew revenues, 53% year over year, and 8% sequentially delivering record revenues for our fifth consecutive quarter.
Customers are increasingly adopting our software centric solutions, such as edge connect SD Wan software and our Aruba Central management platform.
We've expanded the access security and SaaS funnel to six times since the acquisition.
Our operating margin of 29, 7% was up more than 300 basis points year over year, and 280 basis points sequentially.
We're benefiting from revenue scale and prior pricing actions, which are helping us build visibility into the durability of our mid 20% margin target over time.
While we're making progress on our order book, we expect to carry an above normal order book into FY 'twenty four.
And <unk> revenue grew 3% year over year customer discussions on large language models and generative AI that began in Q1 Q1 turned to wins in Q2 and are now showing up as as a service orders in Q3.
AI the predominant driver of our 122% year over year growth and as a service dollars has also driven sequential growth in our corporate total order book, which I'll discuss in a moment.
We expect AI deals to provide gross margin rates above historical levels.
We believe building and operating large AI models requires unique computational capabilities, including including Silicon and software that our HPE Cray supercomputers and HBC and AI solutions are extremely well positioned to enable.
As for operating margin, our Q3 performance was just below breakeven.
Early stage of the AI market tightness in certain key components and long lead times in this segment operating margins in <unk> and AI will continue to fluctuate we will discuss.
Our outlook for revenue growth investment and margin improvement at our securities Analyst meeting.
Storage fell 2% year over year, but rose 3% sequentially.
HPE lesser revenue grew triple digits in Q3 for the fifth consecutive quarter is now one of our higher revenue products and thus growth rates may normalize. This product is shifting our mix within storage to higher margin software intensive revenue and is a key driver of our <unk> growth.
We will continue to invest in R&D and our owned IP products in this business unit.
As our new file as a service and HPE Electra MP offerings.
Q3, 23 operating margin of 10, 7% is down 360 basis points year over year, as we transitioned to HPE electric.
HP a lesser includes a meaningful component of ratable revenue, which pushes revenue recognition out into future periods.
Compute revenue was down 10% year over year to $2 6 billion and down 5% sequentially.
<unk> elongation challenges we've discussed previously we're most prevalent in the computer business as some customers digest prior investments.
Declining <unk>.
From a record high in Q1 'twenty three was also a significant driver.
But as previously noted we did see sequential demand improvement.
And after six quarters of above plan operating margins in compute this quarter's 10, 9% was a shade below our long term margin target of 11% to 13%.
HPE financial services revenues rose, 7% year over year and financing volume of $1 7 billion grew 6% in constant currency driven by HPE Greenlight.
Our operating margins were down 340 basis points year over year, reflecting rapid interest sites and higher cost of funds that will gradually offset over time through pricing as well as lower asset management margins as supply challenges.
Time, and time again <unk> has proven resilient in a downturn thanks to the quality underwriting of our book of business throughout the pandemic, our annual loss ratio never exceeded 1% and our Q3 loss ratio of four 8% with even lower than it was in the full year 2019 pre pandemic.
Slide nine highlights our revenue and non-GAAP diluted net EPS performance.
The progress, we're making against our edge to cloud strategy is evident in the financial results, we delivered on both the top and bottom lines with.
We've held our revenue steady this quarter and expanded non-GAAP diluted net EPS year over year, despite an uneven spending environment, our transition towards a recurring revenue model and FX rates remaining a significant headwind.
FX was a 280 basis point headwind to revenue growth in Q3.
On slide 10, we've included a new depiction of our portfolio shift, which illustrates just how significant the intelligent edge business has become for HPE.
Three years ago intelligent edge constituted just 10% of revenue in this quarter it represents 20%.
Operating profit trajectory is even more dramatic edge contributed just over 10% of operating profit three years ago and is now 49% of total segment operating profit.
We will offer our forward looking view at our security analyst meeting.
Slide 11 illustrates the progress we've made on our gross margin structure.
Our Q3 non-GAAP gross margin is up 120 basis points year over year, Despite FX headwinds our year over year non-GAAP gross profit and margin growth show the success of our strategic portfolio pivot and the pricing actions HPE has taken.
Slide 12 illustrates our non-GAAP operating margin, which was 10, 3% in Q3. This was down 20 basis points year over year also inclusive of FX headwinds and 120 basis points sequentially.
While the primary driver of the sequential decline was the return of compute operating margins to near our target range. We also made certain targeted investments in the quarter to further enable our pivot.
Our deliberate portfolio mix shift pricing strategies and productivity focus put us on track to increase operating margin in FY2023.
On slide 13, as previously announced we exercise the put option on our shares in <unk> and signed a put share purchase agreement the values of our 49% <unk> stake at $3 5 billion U S dollars.
The next step in the process is to obtain the necessary regulatory approvals and to conclude certain conditions necessary for closing.
We expect to conclude this process in the first half of calendar year 2024, although this timeline could be further extended pursuant to the terms of our agreement.
We intend to update our plans for the use of proceeds once the transaction closes you can assume that we will use the same disciplined returns based framework for evaluating investments capital returns and maintaining an investment grade credit rating that we've outlined in the past.
Finally, we continue to benefit from HCC dividends in FY2023.
We'll offer an update on our go forward expectations.
And dividend at Sam in October .
Now to slide 14.
We generated $1 5 billion in cash flow from operations and $955 million in free cash flow, our Q3 free cash flow improved by approximately $670 million sequentially and nearly $370 million year over year.
Similar to our Q4 'twenty two performance, we expect to generate significant free cash flow in the remainder of FY2023 and are reiterating our guidance of one nine to $2 1 billion in free cash flow in FY2023.
Timing of receipts and payments plus inventory investments have held cash conversion cycle steady sequentially at 23 days, we expect to exit the year with a neutral cash conversion cycle.
Now, let's turn to outlook on slide 15.
As we've mentioned the broader it market is still pressured.
Macro uncertainty is affecting some of our end markets customer investment is rising and others, such as edge and <unk> we.
We believe our portfolio differentiation will continue to drive share gains in key markets.
We are also entering Q4 with an order book that is more than two times pre pandemic levels. Our order book has increased from more than one five times pre pandemic levels entering Q3, primarily on the strength of AI orders.
The assumptions in our guidance, which incorporate our current thinking on the macroeconomic picture demand inflationary pressure supply and FX rates remain relatively unchanged. We've indicated throughout the fiscal year that our financial performance is likely to be weighted to the first half of the year. We continue to view this as the proper framework.
For FY2023.
For Q4, we expect revenues in the range of $7 2 billion to $7 5 billion.
We expect GAAP diluted net EPS between 36 and <unk> 40.
non-GAAP diluted net EPS between <unk> 48 and 52.
We're reiterating our prior fiscal year 2023 guidance of 4% to 6% revenue growth in constant currency.
We expect FX to be a 300 basis point revenue headwind from our previously communicated 250 to 300 basis point headwind in.
In parallel we also reiterate our expectation that margin strength from our portfolio mix shifts will deliver non-GAAP operating growth of 6% to 7%.
We are reiterating our GAAP diluted net EPS guidance of between $1 42, and $1.46 due to tax rate differences and additional amortization of intangibles from our recent acquisitions.
We are raising our non-GAAP diluted net EPS guidance from between $2 <unk> to $2 14.
So between $2 11 and $2.15.
We reiterate our guidance for free cash flow of between one nine and $2 1 billion.
For <unk>, we benefited this year from higher interest income and FX hedging costs lower than we originally forecasted.
The combination of these and other anticipated benefits in the second half of this fiscal year leads us to expect <unk> to be a positive 50 million to $70 million on a full year basis.
We had previously expected <unk> to be neutral for the full year.
In terms of capital returns, we are maintaining our dividend and expect to return approximately 60% of free cash flow to shareholders via dividends and repurchases.
So to conclude the uneven end market demand thus far in FY2023 is an opportunity for HPE to showcase our differentiated portfolio led by HPE Green Lake hybrid cloud intelligent edge and <unk> and.
And we will continue to take the steps required to further accelerate the pivot of our product portfolio and our company towards faster growth higher margin recurring revenues.
We look forward to updating you with hpe's outlets beyond FY2023 at our Securities Analyst meeting in October.
Now, let's open it up for questions.
We will now begin the question and answer session.
To ask a question you May Press Star then one on your Touchtone phone.
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To withdraw your question. Please press Star then two.
We also request that you only ask one question.
The first question is from Simon Leopold with Raymond James. Please go ahead.
Great. Thanks for taking the question I wanted to see if you could.
Put the AI wins in the same terms you did at the analyst session. You had in June when you told US you had $1 6 billion in.
In awards that was a combination of capex and recurring deal that would be spread out over a number of years. So what I'm looking for is an update on that and how much of the AI are you expecting in that fourth quarter and sort of what's the timeframe foreseen the benefits. Thank you.
Thanks Simon.
All of those are deals we've talked through came through.
They were booked at.
And the pipeline continue to be Super strong in fact, I will say that pipeline, we can add and we exit is pretty much. The same so that means through out of the quarter. We book those deals as we exit pretty much with the same pipeline. We came in so clearly the momentum of the business is significant but as you can see.
Our progress is.
<unk> now been ASO or ASO service, which you saw the 122% as a result of the growth.
Is very significant and that fuel our order book to be now more than two times than pre pandemic levels and we exited the HBC NII.
A quarter with the largest ever order book, we ever had now we started now ship in some of those orders those are wins.
But as long ways to go and remember that Theres two components related to that number one is availability supply, which obviously in the AI space is constrained number two is the fact that when you deployed these deals you are.
Have to install it and then drive acceptances, which means elongated times for revenue recognition.
And then maybe in a specific window too they are older conditions related to the contractual agreements. So the net of this is that while we discuss at the end of Q2, and then do it in the HP discover came all through and and then what I'm really pleased of is the quality of it.
The deals we're getting and I would just reference are half a dozen or so in my opening remarks to give a sense.
Of the type of customers, we're winning to make sure that you understand the proof points are associated with that.
So as we go forward, we expect this momentum to us of the rate, but the revenue recognition will be different than.
What I call the demand.
Bookings in our in our systems, because obviously that takes time in any case. The only thing I will say is that one of the reasons why customers are coming to US is because we have a complete lifecycle of solutions from training to tuning to influencing so on training side. Obviously these are <unk>.
As they develop their own language models, whether it's thought perhaps a large unique customers on the two new side, which I believe will be one of the biggest opportunity will be when customers use. These foundational models that you can get in the market and we're going to offer over time five unique of them in our AI public Cloud instance, so they can tune.
Those are models with their data in a private secure a responsible way and then number three which I'm really excited because it will be an accelerated above compute and edge is going to be the AI inferencing and so all of those three will move concurrently and so you have to look at this not just the next quarter, but.
On a mid to long term basis call. It two four and then eight quarters.
Thank you Simon Gary could we have next question. Please. Your next question is from Aaron Rakers with Wells Fargo. Please go ahead.
Yeah. Thanks for taking my question and congrats on the results I guess I wanted to build on Simon's question a little bit.
I think in the context of last quarter and what you had disclosed at the analyst event. You had also alluded to within that pipeline large hyperscale cloud opportunity I'm curious.
What are you seeing in that vertical should we expect that to further expand just kind of any context around the positioning within cloud were HP enterprise Hasnt really historically had a material footprint why are you winning in that in those opportunities if they are expanding.
Yeah. So one of the opportunities that we won in Q3 was a large hyper scaler, we haven't even started building and shipping. So that tells you the size of it.
And we have further opportunities down.
So look in 'twenty for the reason why they come to US is number one is because we have a unique amount of intellectual property to think about it as an open ecosystem without networking fabric, which obviously supports Nvidia will have a fantastic relationship with video, but also supports other type of vessels.
Leaders and dependent of AI world. It can be a mix and match. If you hear my comments right. In some cases, we have Nvidia gpus with potentially AMD Cpus and some cases <unk> in some cases in the case for example of.
The Aurora system.
Regarding our laboratory is actually all Intel so that provides flexibility for customers, whether it is performance driven or supply driven over time and the other one is because we have unique expertise in AI remember we have been in AI for the Kate.
We have done it for unique discrete customers.
That we are building this system on our purpose base, but now this is why we entered the public cloud to democratize AI for every enterprise and that's why we saw the growth in the <unk> as a service AI bookings because they cannot build that themselves.
And the other piece of this is the ability to consume this in a sustainable way I think sustainability is becoming a key component because customers as deploy I want to make sure of the control of the carnival footprint with it and then the data center services, which are essential to run these massive scale AI solutions.
And then for the large language model companies one of the things that attract them to US is not just all of the things I. Just said is the fact that working with us they can get access to our route to market. So they can reach enterprises in ways potentially they could it by themselves. So it is a combination of multiple things.
That they are all coming our way I will say.
But ultimately our strategy is a software less strategy using our supercomputer.
Cloud kind of experience and then wrapping around all the services and the software needed to provide that level of capability.
Thank you Erin Gary could we have next question. Please. Your next question is from meta Marshall with Morgan Stanley . Please go ahead.
Okay, great. Thanks.
Maybe taking the second on the intelligent edge business can you just kind of give a sense of what is the biggest forward driver that you're seeing I think people understand kind of the catch up spend in the backlog release that has been done, but just what youre kind of seeing an ongoing kind of orders.
Today and is that why <unk> is it still kind of returned to work what are the biggest drivers that youre seeing to kind of help.
The growth of that business. Thanks.
Well thank you for the question.
Im incredibly proud of the work we have done in the intelligent edge business segment. This is the opportunity to highlight in 2018.
What I said, we will invest over the next four years to build the right solutions that ultimately will allow customers to drive what I call a data first.
<unk> transformation. So it's a combination of things number of water turned to work obviously you need to have the right connectivity number two in order to process. The data you need to connect devices and things that are essential right in order to provide the right cloud experience on those types of workloads and obligations.
But our portfolio is unique because we provide the edge to cloud networking capabilities. Our strength, obviously has been always in the campus and branch, we see that two transitions to Wi Fi six in fact, we shipped more than $30 million ports, so far with Wi Fi six.
By number of access points imports. We are one of the largest if not the largest I will say and also now that drags the 26 million ports, we drove in the switching side.
Which was the thesis when iron quarter Aruba in 2015 over time, we have made this all cloud native.
And we have added to it and so as we look forward. What I'm excited is that we are delivering more capabilities and expanding our time with the same experience. So we added software defined wide area network. Three four years ago was a niche market now has a very large market more than $5 billion in the Tam.
That's why we did the acquisition of Silver peak now that's integrated in the same control plane with HB Green Lake as a part of the Aruba experience.
And now we just completed the acquisition of Axis Securities. So it take access security and silver peak now we're going to offer the most comprehensive SSC framework at the edge.
And then also we are integrating <unk>, which provide both core <unk> software defined solutions and private <unk> at the edge. All of this comes under a cloud native model in a subscription based model, which will continue to fuel the growth as we think about 24% and 20.
5% bottom line. It is one of the most comprehensive portfolio out in the market and no surprise, obviously with the growth that we have obviously, we are converting more of our order book, but we exited Q3, we expect to exit Q4 with a significant elevated order book.
And as we enter 2004 and you can see the results right now represent 20% of company revenue in the almost half of the company profit and so that mix shift has really worked for us in this particular parts of the portfolio as it is now with good evening as well.
Thank you Mr. Gary.
The next question is from <unk> merchant with Citi. Please go ahead.
Great. Thank you for taking my question.
Yeah, It's George.
<unk>, which was a positive.
Seems like the HPE electronics getting traction.
Think about this fourth quarter the fiscal fourth quarter. If you can provide some guidelines on how you're thinking about your storage portfolio.
On the top line as well as you know when you think margins kind of get back to I think the target margins that carry much higher than where they are right now.
So let me start and I'll pass it to Jeremy.
The team and I drove an intentional strategy to pivot the portfolio, which it was.
A conglomerate to a different offering that were built over 15 years to sell to one consistent architecture that allows customers to consume data services, both primary and secondary in a cloud native way in a subscription based model. So HPA Alantra ASR primary storage.
That now covers pretty much all the price segment. So the price bonds. If you will of the traditional storage from general purpose to business critical to mission critical and we address block and file and in the future. We also are going to address the object piece. So as a customer you cannot have subscribed to HB Green Lake.
Deploy one consistent backend infrastructure, whether it's in our Colo the edge or in the in your own data center and consume hybrid cloud data services and you can put block type of solutions or file and then eventually.
Object, which is a significant capex reduction for customers because they don't have to buy three different ways to deploy it and then opex reduction because obviously, it's very efficient to manage.
Cloud type of experience and so this business went from zero to in excess of $1 billion very very quickly and it's amazing that is one of the fastest growing products in our portfolio growing triple digits, but what I'm really pleased is that it comes with a significant subscription which is growing double digits.
So maybe Jeremy you want to take the second part of the question on how we see this evolve in particular from a margin perspective, sure and that's where I'll pick up Antonio is on <unk> I think we've previously talked to you guys about how this how this product is really a combination now of a higher software.
Ponant in that software component does have an element of taking what was prior product revenue and now deferring that onto the balance sheet about 14%.
Is deferred onto the balance sheet and so as we see that work off over time as that product is deployed out we will start seeing an inflection point and that should positively impact revenue as we look forward, particularly into FY 'twenty four and that also has an impact on the margin line too.
As that deferral is deferring software based revenue that has a higher margin concentration to it. So we would expect to see our operating margin start to recover back to kind of historical levels as well as we look forward to 'twenty four and as Jeremy said right. So there is a specific component is ratable here.
So we are going through that transition, but for two consecutive quarters, we saw demand improving.
Q1 to Q2, and Q2 to Q3 and Thats very positive and we expect that to show up as we go forward as we transition those orders into revenues.
Thank you Gary.
The next question is from summit strategy with J P. Morgan. Please go ahead.
Oh, hi, Thanks for taking my question I guess, you mentioned a couple of times in your prepared remarks about the cyclicality and the compute business, which is a little headwind.
Maybe if you can outline your thoughts on where we are in the cycle is there more downside to revenue and margins as we move into fiscal fourth quarter or you did reference a demand improvement so I'm just.
Sort of curious does it imply physical <unk> is sort of the neutral draw for you.
Well in the business and more broadly if I can lastly questions that investors are asking us today is how much of the demand improvement that you're seeing going into fiscal 'twenty. Four helps you offset the tailwind that you have to steal from backlog and still enable you to grow in fiscal 'twenty fully if you could shed any early thoughts on that thank you.
Sure.
So first of all I think it's important to recognize that.
Traditional general purpose compute business goes through these cycles right last year, we obviously got a significant demand uptick because of the supply chain challenges customers are absorbing that in some cases didn't need to deploy some of those products and the like but we saw signs of stabilization and we.
So demand improvement at the unit level, which is super Super important because demand in the unit level also drives attach and as I referenced in my remarks that unit demand.
Whether we're the storage demand and obviously acceleration we saw.
In HB Green Lake drove double digit growth in operational services, which obviously is important as we think about ratable revenue and profit as we look into the future.
Now we have this unique civic patient that company because in the past we wanted to give you visibility of what is general purpose computing what is HBC in supercomputers, but when you combine the two is what I referred to the server category because in the end.
That is a suitable component associated with that and there is different IP you bundle dependent it is general purpose, a supercomputer and the combination of <unk>.
General purpose compute as you refer and HBC and supercomputers demand clearly improve very nicely quarter over quarter.
I think as I think about 2024 as a service category.
Think youre going to see the continued improvement in demand on HBC NII.
I think the AI inference related to compute will be a master their ratio for compute and then we have to see now the evolution of price in the commodity space, which you will expect some time in 2000 and for that curve will bend up again, because as demand stabilize and improve.
<unk> cost of commodity will start going up.
We also have a transition in the making from what I call. Gen 10, and Gen 10, and a half to Gen. <unk> and Gen 11 also comes with a higher.
Call it product intensity, so as more options and the options come with larger memory and larger type of storage and obviously more GPU embedded in the traditional compute will drive over time.
Piece up I don't know if Germany, you have anything to add maybe I'll pick up on the margin side of the Antonio obviously in these cycle times, we've I think we've proven that.
In down cycles, where commodities are declining causing declines in <unk>, we've been able to hold pricing too to drive margin and then as it and flex back in turns back up we've been able to be leading.
Market leaders on pricing to make sure that we're catching it appropriate on that so our expectation is as that changes throughout this process on top of the point and Antonio made about Gen 11, really driving in premium for us, which can also be an impact we still expect that 11% to 13% operating profit structural range.
To be.
<unk> of what our longer term expectations are but let me reinforce one important point because.
If you go back two years or three years whatever was the cyclicality of the time, we will have a different dynamic in our total company revenue and profit.
To reemphasize that because of our mix shift to edge higher.
Hybrid cloud and now AI as we go forward, which always expect margins to improve this strong performance, we had in that mix shift.
More than offset the cyclicality, we saw in compute which is very evident in our Q3 results because our margins improved again 120 basis points. If you go back two years ago, our margins at the company level within the 30 threes.
In 2022 were in the 30 fours and in 2023, we are in the high 30 fives and so that tells you the structurally our business composition has shifted and we intend to continue to drive the mix shift and that's why software and services with intelligent edge.
And hybrid cloud and now AI with our software led strategy will continue to sustain that and we will be able to manage the cyclicality computed much much better.
Thank you Gary could we make this our last question. Please and our final question will come from <unk> Mohan with Bank of America. Please go ahead.
Yes. Thank you.
And here you are exiting this year with.
High single digit decline in revenues and edge clearly is doing extremely well and some benefit from backlog.
How confident are you that HPE and grow revenues in fiscal 'twenty for given the current exit trajectory of the business. You also noted some stabilization. So curious to get just some high level thoughts not not explicit guidance, maybe just some directional commentary on how you see that playing out.
I think your comment as it related to Q4 right.
So obviously, we are going to lap a very high quarter because last year in Q4, we were able to convert more of that order book.
Related to the fact that supply start to improve in Q4 and you saw that in Q1. So to me. It's just the lapping of the numbers.
But that said.
We're going to talk to you. So the security analyst meeting, we expect revenue to continue to improve in fiscal year 'twenty four we're going to tell you exactly.
What that will look like.
But I will say that while revenue will improve year over year and remember in Q1. We're also going to have a big lap because Q1 revenue was $7 8 billion.
Fact of the matter on a yearly basis right. This year, we're growing 4% to 6% and Jeremy talked about the headwind we saw in the FX, which is now 300 basis points.
So we are growing faster than what we guided you at the beginning of the year, which was 2% to 4%. We are now growing 4% to 6% and we expect.
Our revenue to continue to improve because of this momentum we have in the businesses, but we'll get you a specific percentage.
At the security analyst meeting.
But the other important part is that the mix of our revenue is changing and the gross margin mix is changing and also the way we generate free cash flow is changing and so more to come when we talked at the security analyst meeting.
Okay.
I know that unfortunately, you have to cover a lot of companies today and I understand <unk> is about to start the call I Hope you can see from this quarter results. How our strategy is working we are delivering on our commitments, we always do what we say.
We are shifting successfully our portfolio and so despite some aspects of the market being a little bit more challenged there others will continue to grow revenue, we continue to expand margins and will continue to improve our.
<unk>.
Our net earnings per share on a non-GAAP basis. So I'm looking forward to see you at the security analyst meeting in October we're going to have it in New York, So it's a little bit more accessible.
So I hope to see you soon.
And if you have any questions. We will follow up with you offline. Thank you for your time today.
Ladies and gentlemen, this concludes our call for today. Thank you for attending you may now disconnect.
Yeah.
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