Q4 2023 Hewlett Packard Enterprise Co Earnings Call
[music].
Speaker 1: Good afternoon and welcome to the 4th quarter 2023 Hula Packard Enterprise earnings conference call.
Good afternoon, and welcome to the fourth quarter 'twenty twenty-three Hewlett Packard Enterprise earnings Conference call.
Speaker 1: My name is Gary and I'll be your conference moderator for today's call. At this time, all participants will be in a listen-only mode.
My name is Gary and I'll be your conference moderator for today's call at this time, all participants will be in a listen only mode.
Speaker 1: We will be facilitating a question and answer session towards the end of the comment.
We will be facilitating a question and answer session towards the end of the conference should you need assistance during the call. Please signal our conference specialist by pressing the star key followed by zero.
Speaker 1: should you need assistance during the call, please signal a conference specialist by pressing the star key followed by zero.
Speaker 1: As a reminder, this conference is being recorded for replay perp.
As a reminder, this conference is being recorded for replay purposes.
Speaker 1: I would now like to turn the presentation over to your host for today's call, Jeff Qual, Senior Director, Investor Relations. Please proceed.
I would now like to turn the presentation over to your host for today's call, Jeff <unk> Senior director of Investor Relations. Please proceed.
Speaker 2: Thanks, Gary. Good afternoon, everyone. I'm Jeff Qual. I'd like to welcome you to our fiscal 2023 fourth quarter earnings conference call with Antonio Nieri, HPE's president and chief executive officer and Jeremy Cox, HPE's senior vice president, a controller and interim chief financial officer.
Thanks, Gary and good afternoon, everyone I'm, Jeff well.
To welcome you to our fiscal 2023 fourth quarter earnings Conference call with Antonio Neri, Hpe's, President and Chief Executive Officer, and Jeremy Cox, HPE Senior Vice President controller, and interim Chief Financial Officer.
Speaker 2: Before handing the calls to Antonio, 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 Industrial Relations webpage.
Before handing the call to Antonio 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 Investor Relations webpage elements of the financial information referenced on this call are forward looking and are based on our <unk>.
Speaker 2: Element 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 HPE seems new obligation and does not intend to update any such forward looking statement
<unk> view of the world and our businesses as we see them today.
<unk> assumes no obligation and does not intend to update any such forward looking statements. We 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 Hp's annual Form 10-K for the fiscal year ended October 31 2023.
Speaker 2: We also note that the financial information discussed on the call reflects estimates based on the information available at this time and could differ materially from the amounts ultimately reported in HPE's annual form 10k for the fiscal year ended October 31st, 2023.
Speaker 2: For more detailed information, please see the disclaimers on the earnings materials relating to forward-looking statements that involve risks on certain decent assumptions. Please refer to HPE's filings with the SEC for a discussion of these risks.
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.
Speaker 2: For financial information, we have expressed on a non-GAAP basis. We have provided a 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. Throughout this conference call, all revenue growth rates and muscle noted otherwise are presented on a year-over-year basis and adjusted to exclude the impact of currency.
For financial information, we are expressed on a non-GAAP basis, we have provided a reconciliation to the comparable GAAP information on our website. Please refer to the tables and slide presentation accompanying today's earnings release on our website for details throughout this conference call. All revenue growth rates unless noted otherwise are presented on a year over year basis and adjusted to.
Excluding the impact of currency.
Speaker 2: Finally, Antonio and Jeremy will reference our earnings presentation in their prepared comments. And with that, let me turn it to you, Antonio.
Finally, Antonio and Jeremy will reference our earnings presentation in their prepared comments.
With that let me turn it to you Antonio.
Thanks, Jeff and good afternoon, and thank you for joining us today.
Speaker 3: Thanks, Jess, and good afternoon and thank you for joining us today.
Okay.
Speaker 1: Hard meetings of the Comfort chopper, the speakers line has appears to have dropped. Please remain on the line while we rejoin them.
Pardon me. This is the conference operator, the speaker's line has appears to have dropped please remain on the line, while we rejoined them. Thank you.
Speaker 3: Eric, can you hear us? Yes, sir, we can hear you now. Thank you. All right, thank you. Well, thanks, Jeff. Good afternoon, and thank you for joining us today. In fiscal year 2023, HP delivered record performance against non-gaft financial metrics by capitalizing a strong momentum across our portfolio.
Yes, it can hit US yes, we can hear you now. Thank you alright. Thank you well, thanks, Jeff and good afternoon, and thank you for joining us today in fiscal year 'twenty to 'twenty three HPE delivered record performance again, non-GAAP financial metrics by capitalizing on strong momentum across our portfolio.
Speaker 3: Our steady execution has resulted in a higher revenue further gross margin expansion, larger operating profit, and record breaking non-gab diluted netters per share and free-cast load.
Our steady execution has resulted in higher revenue further gross margin expansion larger operating profit and record breaking non-GAAP diluted net earnings per share and free cash flow.
Speaker 3: A growth engine in intelligent edge and HPC and AI, as well as our HP green-like platform, are helping to accelerate our revenue and profit diversification.
Our growth engines, intelligent edge and HBC NII as well as our HVAC platform are helping to slow the rate of revenue and profit diversification.
Speaker 3: Importantly, HB has achieved the most of the success this year in our ongoing portfolio pivot to higher growth, higher margin areas, aligned to the key market mega trends driving customer demand.
Importantly, <unk> has achieved multiple success this year in our ongoing portfolio pivot to higher growth higher margin areas aligned to the key market mega trends driving customer demand.
Speaker 3: I will focus my comment today on our full year fiscal year 2023 results and allow Jeremy to expand on the fourth quarter and segment results.
I will focus my commentary today on our full year fiscal year 2023 results and allowed Jeremy to expand on the fourth quarter and segment results.
Speaker 3: I'm very proud of all that HP delivered in fiscal year 2023 for our shareholders, our customers and our team members. Our performance demonstrates the relevance of our strategy, our portfolio differentiation and our strong execution.
I'm very proud of all that HP delivered in fiscal year 2023, what our shareholders our customers and our team members.
Our performance demonstrate the relevance of our strategy our portfolio differentiation and our strong execution.
Speaker 3: We delivered extraordinary innovation to customers, resulting in share gains in key markets, and profitable growth for our company.
We delivered extraordinary innovation to customers, resulting in share gains in key markets and profitable growth for our company.
Speaker 3: HP generated our highest gross margin and a highest operative profit since I became CEO and our highest annual revenue in four years.
<unk> generated our highest gross margin and our highest operating profit since I became CEO and our highest annual Rev.
In four years.
Speaker 3: Nungap, Dalutian Net Ernest Persier, and Fika Slow, where the largest ever in our company is his.
non-GAAP diluted net earnings per share and free cash flow, we're the largest in our company's.
Companies yesterday.
Speaker 3: We saw healthy sustained growth in revenue at $29.1 billion for the full year, an increase of 5.5% year-over-year income ten currency, a third straight year of revenue.
We saw healthy sustained growth in revenue of $29 $1 billion for the full year, an increase of five 5% year over year in constant currency.
<unk> straight year of Red.
<unk>.
Speaker 3: of our full fiscal year 2023 guidance of 5%. Gross margins,
Good point of our full fiscal year 2020 guidance of 5%.
Gross margins exceeded 35%.
Speaker 3: We also added substantially to our annualized revenue run rate, closing fiscal year 2023 with more than $1.3 billion in AR.
We also added substantially to our annualized revenue run rate closed in fiscal year 2023 with more than one 3 billion.
Ah.
Speaker 3: That represents a nearly $370 million increase from this time last year.
That represents a nearly $370 million increase from this time last year.
Speaker 3: Nongap operating profit margin was up 20 basis points year over year to end the year at 10.8%.
non-GAAP operating profit margin was up 20 basis points year over year to end the year at 10, 8%.
Speaker 3: We have executed well on our addressable market opportunities and exercise prudence with our expenses and obligations.
We have executed well on our addressable market opportunity and exercise prudence with our expenses and obligations.
Speaker 3: Now gap EPS increased 6.4% year-over-year to do $2.60.
non-GAAP EPS increased six 4% year over year to $2.15.
Speaker 3: Deprived profitability also means that we have significantly boosted free cash flow, which rose by about $400 million this year to $2.2 billion, and nearly 25% year-over-year increase.
Improved profitability also means that we have significantly boosted boost that free cash flow, which rose by about $400 million this year up to $2 billion and nearly 25% year over year increase.
Speaker 3: Both Nongap EPS and Tricast Flow results are record breaking and well above our fiscal year 2022 sum guidance.
non-GAAP EPS and free cash flow results, our record breaking and well above our fiscal year 2022, some guidance.
Speaker 3: In summary, HPE delivered an impressive set of results in fiscal year 2023. With the progress we have made this year and our confidence in generating further value for our shareholders, we are raising our dividend in 2024.
And somebody HPE delivered an impressive set of results in fiscal year 2020, and today with the progress we have made this year and our confidence in generating further value for our shareholders. We are raising our dividend in 2024.
Speaker 3: HPE is more relevant than ever to our customers. We have deliberately aligned our strategy over the last few years to significant trends in the market around edge, hybrid cloud and AI.
HP is more relevant than ever to our customers. We have deliberately aligned our strategy over the last three years to significant trends in the market around edge hybrid cloud and AI.
Speaker 3: These growth engines align to our customers interest and where they are targeting their IT spend.
These growth engines aligned to our customers' interests and where they are targeting there.
Yes.
Speaker 3: Even against an uncertain micro-economy backdrop, we saw continued though uneven demand across RHP portfolio with a significant acceleration in AI order.
Even again.
Certain microeconomic backdrop, we saw continued.
Uneven demand across at HB portfolio with a significant acceleration in orders.
Speaker 3: The man in our AI solutions is exploding. We saw a significant not take in custody of the man in recent quarters for of the man??ty.
Demand.
Our AI solutions is exploding.
We saw a significant uptick in customer demand in recent quarters for us at a rate of compute compute and infrastructure and services.
In Q4 orders for servers that include accelerated processing units or <unk> represented 32% of our cobalt server or the mix up more than 250% from the beginning of fiscal year 2023.
Speaker 3: APUs, which includes GPU-based servers orders across our business, represented 25% of our total server or the mix in fiscal year 2023.
<unk>, which includes GPU based servers all of this across our business.
That 25% of our total sort of or the mix in fiscal year 2023.
Speaker 3: RHBC NAI segment revenue group 25% year over the year in fiscal year 2023.
Our HBC NII segment revenue grew 25% year over year in fiscal year 2023.
Speaker 3: We ended this fiscal year with the largest HPC and I order book on record, driven by $3.6 billion in company-wide APU order.
Ended this fiscal year with the largest HBC and our order book on record driven by $3 $6 billion in companywide Apu orders.
Speaker 3: This tops what has been unhistoricly large or the book in the third quarter as demand accelerated for our supercomputing and AI solution.
This stops what has been done historically large order book in the third quarter.
Demand accelerating for our supercomputing and AI solutions.
We anticipate demand next fiscal year will remain very strong.
We likely have a large order backlog on the GPU supply is less constrained.
Two weeks ago.
Supercomputing conference, we expanded our collaboration with Nvidia to announce a turnkey print configured supercomputing solution for generative AI to streamline the model development process.
The new solution speeds up the trading and fine tuning of AI models, using probably been datasets.
Zion for large enterprises research institution and government organizations and comprises the HPE AI software our industry lead in supercomputing and storage solutions, our HB slingshot interconnect fabric and HPE <unk> services and the Quad Nvidia Grateful for G. H 200 Super Chip.
Later this week at HP discover bustle logo will further expand the RMB their partnership with new solutions created for enterprise customers.
Also this month.
The University of Bristol announced that HP has been selected to deliver the UK fastest supercomputer. Thanks to our UK government investment of 225 million British pounds intended to make the nation awarded leader in AI.
National Institute of information and Communications Technology recently turned to HP Cray XC supercomputers to develop an AI based multilingual communication tool to process translate and interpret text and images for 17 languages.
And we just announced a partnership with dark bite a provider of next generation of high performance computing Green Datacenters to power its AI cloud service with HP create supercomputers and our purpose built machine learning software suite.
With HB build supercomputers consistently rank among our monthly top 10 within the top 500, most powerful and sustainable supercomputers, our clear leadership in this space continues to position us well in the OE market.
Our intelligent edge segment was the largest driver of our revenue and profit growth in fiscal year, 2023, making up 18% of our overall revenue and 39% of the segment operating profit.
Please go ahead of 2020 three revenue in the segment increased by 45% to $5 2 billion, while operating margins expanded more than 200 basis points year over year to 2027, 3%.
Constraint and the relevance of our offering and to pay off all of our investments over time.
Critical part of our intelligent edge portfolio in the edge to cloud portfolio is to continue will continue to contribute meaningfully to profitable growth for our shareholders.
The compute segment is going through a cyclical period, where customers are consuming prior investments, making this a price competitive market for now.
We'll be prepared to capture a greater share of AI linked inferencing opportunities. We saw overall demand improved moderately in the second half and are encouraged in our outlook for this segment.
Customer interest in service with Apu's is growing we.
We are investing in specialized salt resources that can enhance future growth. We also know we must keep our focus on capturing every unit in this business, while keeping balance in our operating margin performance.
The overall storage market has been sluggish this year.
On our even our uneven performance in this segment is in line with most of our peers. However.
However, we are encouraged with three quarters of stable demand.
We saw sequential improvement in storage revenue in the fourth quarter.
We continue to invest in ourselves execution capabilities. We recently deployed a large specialized store sales force, including a team devoted to growing our storage IP product mix, we expect our subscription based offerings and differentiated IP products like HBO later will continue to be sources of strong growth.
The profitability of this business in the head.
We remain focused on advancing our position in hybrid cloud we ended the year with 29000 customers on our HB Greenlight cloud platform Custer.
Customer required a hydro by design idea state.
They are attracted to our cloud platform because of its experience flexibility and call.
In the fourth quarter, we closed our largest HVAC green Lake for private cloud enterprise deal to date.
In addition, we saw more customer demand.
Around our HB Green Lake SaaS offerings across data protection officer mobility and sustainability services.
Finally, our HPE financial services segment continues to deliver strategic sustainable solutions for customers.
Alright, and our strategy and helping to expand earnings for our shareholders.
Financing volumes rose year over year with a major contribution from efforts to boost our other service volumes through HP Green Lake.
Fiscal year 2023 was an important year for the HB, one we advanced our strategy and delivered record financial performance for our shareholders through focused execution and operating discipline.
I am confident in our ability to continue to deliver for our shareholders in fiscal year 2024 and beyond for three main reasons.
First what do we have done over the last several years to innovate and invest in the right Places places, where we have the expertise and the ability to scale as <unk>.
Given us a portfolio that I believe stands apart from any other <unk>.
We have whether it's cyclical dynamics well.
While orders have had much more severe shift to make we have been able to stay the course and bring in our strategy to life, because we have made operational improvements and have managed expenses.
And finally, we have been bold in undertaken transformation across the company.
So we have made to our operating model to strengthen capabilities and a growth segment focus on our roadmaps across the portfolio create new customer experiences reach them in new ways, we need to pay off next year and beyond.
We are set up very well to navigate the current climate with and for our customers and to add significantly to the long term profitability and value we create for our shareholders.
While headwinds remain in certain segments of the market HPE is positioned very well to continue our momentum we are laser focused in the areas, where we know we can do more to improve our performance I hope you share my optimism and what HP can achieve in the year ahead.
Let me now invite Jeremy to discuss the fourth quarter and specific suddenly result, so gentlemen over to you.
Thank you very much Antonio.
We closed FY2023 with another solid performance.
Q4 results reflect our strategic focus to diversify our business towards higher growth higher margin areas of the market.
The company's transformation, we are undertaking several years ago to pivot to edge and cloud is paying off.
And with AI exploding in 2023, we see several promising indicators as we look further in 2024, despite some unevenness in some areas of the market where we participate.
Q4 performance was highlighted by healthy revenues and gross margins.
Revenue grew 5% sequentially in constant currency to seven 4 billion hitting the midpoint of our Q4 revenue guidance range.
Year over year revenue, however was down 6% on a difficult compare to Q4 'twenty to <unk>.
With significant order book consumption boosting our results.
Q4, non-GAAP gross margin was 34, 8%, which was up 170 basis points year over year, largely due to the increasing contribution of our intelligent edge segment.
Let me remind you of the deliberate targeted investment decisions. We made in Q4 that I flagged as Sam which were funded with the better than expected <unk> performance in the same period.
The impact of this investment along with the strong seasonal growth in HBC and AI resulted in a Q4 non-GAAP operating margin of nine 7%. This is down 60 basis points sequentially and 180 basis points year over year, we expect non-GAAP operating margins to quickly recover in Q1 24.
This led to GAAP diluted net EPS to <unk> 49.
And non-GAAP diluted net EPS to <unk> 52.
Which was at the high end of our Q4 guidance range of 48 to 52.
Our Q4 free cash flow of $2 3 billion with record breaking for the company.
HPE also delivered an impressive full year performance in FY2023.
We delivered revenue growth of five 5% in constant currency, which was at the upper end of our guidance range of 4% to 6% currency was a 330 basis point headwind for the year.
non-GAAP diluted net EPS of $2 15.
Was also at the high end of our prior guidance and well above our initial guidance from Sam 2022 of $1 96 to $2.04.
FY2023 free cash flow of $2 2 billion was well above our guidance of one nine to $2 1 billion.
Let's now turn to our segment results.
As a reminder, all revenue growth rates on this slide are in constant currency and I will discuss the segments in our prior structure the.
The company is now operating according to our new structure and as communicated at Sam We plan to file restated historical financials for the new segments well before we report our Q1 'twenty four results.
In intelligent edge, we grew revenues, 40% year over year in Q4.
Demand in our core product was down sequentially on customer digestion, but grew in our software centric solutions, such as our HP Aruba Central Cloud management software and in our new Tam opportunities such as our SaaS security software suite.
Our operating margin of 29, 5% was up four to 600 basis points year over year.
While very pleased with this performance we continue to expect a mid 20% operating margin over time as communicated at <unk> 2023.
Finally, we're making progress on our order book and expect to be back close to historical normal levels by mid year 2024.
In HBC and AI Q4 revenue grew 38% year over year and 41% sequentially.
Q4 revenue results included only a modest amount of AI revenue.
On a sequential basis, the continued strength in AI demand lifted our order book in the <unk> segment to more than 3 billion. Despite our significant revenue growth in the quarter.
We continue to expect double digit revenue growth in the segment over the next three years and we are increasingly confident we will be above trend in FY 'twenty four with Gp's supply our gating factor.
Our Q4 operating margin was four 7% up 120 basis points year over year, and 550 basis points sequentially.
While we have much more progress to make this does illustrate the positive benefits of scale.
The early stage of the AI market tightness in certain key accelerators and long lead times in this segment mean that the HBC and AI margins will fluctuate.
George revenues fell 12% year over year on a difficult compare but rose 3% sequentially.
George demand has now been flat to up for three straight quarters HP electric revenue grew over 50% year over year.
And it will remain a robust growth contributor in FY 'twenty, four supported by growth and file and object storage.
HPE luxury of shifting our mix within storage to higher margin software subscription revenue, which is a key driver of our AOR growth.
Q4 storage operating margin of eight 1% was down 730 basis points year over year.
Headwinds included the deferred revenue impact of the HP electro subscription software accelerated investment outpacing year over year revenue performance and a high mix of third party products this quarter.
Our investments in product portfolio gives us confidence storage will make progress through FY 'twenty four toward our long term operating profit margin target communicated assume 2023 of mid teens.
Compute revenue was down 30% year over year on a difficult compare and down 1% sequentially.
Deal elongation and customer digestion, we discussed previously continue to be most prevalent in compute.
Declining <unk> from a record high in Q1 'twenty three was also a meaningful driver.
However, two straight quarters of sequential improvement in demand, which is further confidence to our FY 'twenty outlook.
Our full year operating margin of 13, 7% exceeded our target range of 11% to 13%.
But the operating margin of nine 8% in Q4 was temporarily below the range.
Given gross margins remained largely flat sequentially and a sequential demand increases we continue to expect operating margins to be in the target range for FY 'twenty four.
HPE financial services revenues were flat year over year and financing volume was $1 5 billion.
Our operating margin of eight 9% was down 220 basis points year over year, reflecting rapid interest hikes that were offsetting to pricing as well as asset management margins returning to normal supply challenges each.
Our Q4 loss ratio remained steady at 5%.
Let's double click on our portfolio pivot to higher growth higher margin recurring revenue and in particular, two intelligent edge.
Three years ago, the intelligent edge segment constituted just 10% of segment revenue this year it represented 18%.
The operating profit trajectory is even more talent.
Intelligent edge segment contributed approximately 14% of the segment's operating profit three years ago. It was nearly 40% in FY2023.
In FY 'twenty four we intend to give you a similar view combining our growth pillars of HBC Nai hybrid cloud and intelligent edge segments within that we expect the intelligent edge segment growth to moderate in the HBC in AI segment growth to accelerate.
Robust demand in our hybrid cloud and as a service offerings illustrates the durability of our portfolio shift.
<unk> exceeded one 3 billion in Q4.
This represented 37% year over year growth, which is in line with our long term CAGR target of 35% to 45%.
Storage and intelligent edge software and services are the fastest growing components of <unk>.
We continue to lift HPE Green lakes value proposition with an increasing mix of higher margin recurring software and services revenue.
Our software and services mix was 68% in the quarter. We expect this mix to increase into the upper 70% range by FY 'twenty six.
This expansion is driven by the growth of subscription based software with our products and the increased attach of our HPE operational services, which rose double digits in Q4.
The rising software and services mix is expanding our as a service margins.
Our as a service orders grew 11% year over year in Q4 and finished the year up a solid 23% after 68% growth in FY 'twenty two.
Our cumulative as a service <unk> has now increased to nearly $13 billion.
As <unk> is now on a clear path to meaningful scale, we will simplify our ASIC service disclosure from air our as a service orders and TCE to only <unk> in FY 'twenty four.
The explosion in AI demand is driving robust growth in our Apu orders.
Total AP orders, which include <unk>, and our compute <unk> and create XD businesses totaled $3 6 billion in FY 'twenty, three which is up from the over $3 billion, we disclosed at <unk> 2023.
<unk> XD Apu orders accelerated in Q3 and in Q4, reaching $2 4 billion for the year.
The impressive Apu server demand is also evident in our total server demand.
<unk> represented 25% of total server order dollars in FY2023 up from 10% in the prior year.
We will continue to disclose Apu orders.
<unk> orders can be easily north of $100 million. Each therefore orders may be lumpy.
But the key point is that we are capturing AI demand now and are well positioned for coming demand across the entire AI lifecycle from training to tuning to inferencing.
Our strategy is delivering topline growth and gross margin expansion.
Despite the challenging macro ongoing product digestion and currency headwinds, we still produced one of our highest quarterly revenue figures since 2018, while sustaining our expanding gross margin profile.
Q4, non-GAAP gross margin rose 170 basis points year over year to 34, 8% and our full year non-GAAP gross margin rose 140 basis points to 35, 3%.
That's more than 500 basis point improvement from FY 2018.
Moving to free cash flow in Q4, we generated $2 8 billion in cash flow from operations and $2 $3 billion of free cash flow.
Our $2 2 billion in free cash flow in FY2023 was above the high end of our guidance and up meaningfully from $1 8 billion in FY 'twenty, two primarily on improved earnings and net income conversion.
We exited FY2023 with the cash conversion cycle of negative four days, which exceeded our expectation for neutral we communicated at Sam.
Strong working capital management in Q4, and reduce transformation costs in FY2023 drove an improvement in our conversion of non-GAAP net earnings to free cash flow to approximately 80% in FY2023.
Continued progress in FY 'twenty, four and beyond leads us to expect to reach 90% by FY 'twenty six.
We reiterate our FY 'twenty for free cash flow guidance from Sam of one 9% to $2 1 billion.
And we returned over $1 billion in capital to shareholders in FY, 'twenty, three including $421 million in share repurchases.
While certain price and volume parameters of our trading program limited us to below our $500 million target in FY2023 we reiterate our goal of returning 65% to 75% of free cash flow to shareholders between FY 'twenty, four and FY 'twenty six.
Before we dive into our outlook, let me remind you that we will exclude HTC earnings and gain on sale from our non-GAAP results in FY 'twenty four as we noted at Sam.
We continue to expect the process to conclude in the receipt of the cash proceeds in the first half of calendar 2024.
For Q1, we expect revenues in the range of $6 9 billion to $7 3 billion. This.
This incorporates historical seasonality in our overall business, including in the <unk> segment. After a strong Q4.
We expect AI revenue acceleration to drive sequential growth in HBC Nai and total HPE revenue in Q2 24.
We expect GAAP diluted net EPS between 24 and 32.
And non-GAAP net non-GAAP diluted net EPS between 42 and <unk>.
We're reiterating our prior year 2024 guidance of 2% to 4% revenue growth in constant currency.
We expect Hawaii, which as noted excludes HCC going forward to be a headwind of approximately $300 million and our non-GAAP structural tax rate to be 15%.
Our full year GAAP diluted net EPS guidance of $1 81 to $2 <unk> is <unk> lower than our prior view as a bit of transformation costs slipped into FY 'twenty four.
We are reiterating our full year non-GAAP diluted net EPS guidance of $1 82 to $2 <unk>.
We also reiterate free cash flow guidance of between one nine and $2 1 billion.
We continue to believe our FY 'twenty four performance will be weighted to the second half of the year as GPU supply improves.
We are increasing our dividend by 8% in FY 'twenty, four and intend to returned 65% to 75% of free cash flow to shareholders. This year.
So to conclude.
While there continues to be unevenness in some areas of the market.
Our investment in growing areas of our portfolio is paying off.
We are confident in our ability to continue to capture the AI explosion in demand.
AI also opens broader customer discussions about the benefits of AI inferencing at the edge and the need to be hybrid by design.
Our HPE Greenlight cloud platform, our AI native portfolio and our services expertise are perfectly aligned to the needs of our customers that we believe will turn into profitable growth for our shareholders.
Now, let's open it up for questions.
We will now begin the question and answer session to.
To ask a question you May Press Star then one on your Touchtone phone.
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We also request that you only ask one question.
The first question is from Mike <unk> with Goldman Sachs. Please go ahead.
Hey, good afternoon. Thank you very much for the question.
One on the Apu orders of $3 6 billion I was wondering if you could talk a little bit about the mix between compute supercomputing and Cray XD.
And if you could offer any color on the type of customers that are making this order is this your typical enterprise customer is it more of a.
Tier two or AI CSP.
Any thoughts there would be great. Thank you.
Well thanks, Mike This is Antonio.
So pretty much all the orders are in the HBC NII segment, the vast majority we.
We saw now in Q4, some uptick in demand in the what I call. The traditional compute but what you have to think about it as AI lifecycle right training and inferencing.
And the products, we talk here, whether it's HPE Cray XD or ex.
<unk> really added in the training side and the two new site.
And so when you think about the type of customer. So I think about the model builders right. So these are unique customers that in the past. We generally will talk about it think about companies like a caution that pharmaceutical Caruso energy, obviously large language models like Ali fault.
Tiger data or northern data G research and the like these are big mobile builders and then a large amount of computational power now when we start seeing it.
As an uptake in the tooling side with enterprises, because generally they don't intend to build models that tend to leverage foundational models.
In the open source of some of these companies to provide and then the tune those models with their data, but they want to do it in a private secure and all of this is sustainable way and Thats why we have made announcements with Nvidia and youre going to see further announcements later in the week and then AI Inferencing I'd call. It you know who are using us.
Fourth analogy the singles and doubles right. So these are maybe a server with a gpus or also the rates of our salt where they start deploying these models that have been trained attuned intra production and think about where in all of their real client processing data happen where business transformation takes.
Or maybe doing some sort of POC or pre training experiments and so that we start seeing that increasing.
But the vast majority of compute CPU centric.
And we saw some uptick in the Gpus, but the vast majority of all the apu's that we've talked about it on the traditional high density for training in Q&A, and that's where our HB Cray said the platforms plays a big role and obviously they also find its way to supercomputing.
A large scale that.
We have talked to.
<unk> capital.
And in all rolled out <unk> and Maersk and alike.
Anything you want to add the only thing I would just add to that is the supercomputing piece specific to your question is less than 10% in the total Apu orders in FY2023 the other interesting point to add on to the journey towards enforcing that Antonio mentioned is within computes although against a very small base we did see.
Non tier one customer.
Customer.
Orders around GPU or Apu for compute increased about 100% in the quarter, So again against a small base but.
An interesting point to see the focus start moving towards towards that realm.
Yes, Thanks, and again only 10.
Percent of the appeals, where consumers supercomputer the reservoirs are only now.
Okay.
Thanks, Mike Gary can we have the next question. Please. The next question is from <unk> Mohan with Bank of America. Please go ahead.
Yeah. Thank you so much Antonio we've seen some networking companies talk about a slowdown in some inventory digestion.
Still delivering very strong growth in edge high thirties, I know you called out a more front end loaded performance for edge, but curious how you're thinking about the rate and pace of that business trajectory. Both on revenue and margin terms or you go through the course of the year.
Yes. Thanks, one thing I would talk about demand and then Jeremy can talk about revenue margin, which we were very clear that right what to expect.
Obviously, we have drove a significant growth over the last two years I think it was the 12th consecutive quarter of year over year revenue growth.
That's very impressive we added $2 billion of revenue in the last two years and obviously that came with an expanded set of gross margins because of our software and subscription based models that we have been driving.
Traditionally if you think about that has been in the campus and branch.
We're in our switching or Wi Fi, but more and more lately, obviously is all software driven and as well as expansion into the new times will discuss at the security analyst meeting, including SD Wan and security to create the SSC framework of <unk>.
Furthermore, we've talked about it and going forward. We also are going to add the projects <unk>, which we'll discuss and let's not forget we have been also good.
<unk> momentum in the data center without offers which are an extension of our switching portfolio in the data center. So definitely was.
A quarter over quarter slight decline in orders for.
Demand for our products in the campus and branch, but we saw strong demand in the software and the security space and that's why you're going to.
The analyst meeting with Phil we've talked about this multiple ads adjacency, we have add to the platform.
And they are all incorporated into the HP Aruba Central platform, which is part of HP incurring Blake. So again, we are committed to growth revenues next year on the higher base that we created again on the $5 $2 billion with just the liver.
You should not expect a 40% growth obviously and that's why I wanted to ask Jeremy to talk about what we are affirming here in terms of revenue and as well as margins right. Yeah. We as Antonio mentioned, we did at Sam mentioned, a slight growth, we're expecting year over year on a full year basis for edge.
<unk>.
I think about that I'd I'd almost break that down into two halves. The first half as we mentioned, we do still benefit from our backlog position or an order book position that will go into the first half and help support that revenue performance in the second half will be more dependent on on demand improvements and in the areas and Antonio mentioned and.
The investment areas that were helping drive that expectation from an operating margin perspective, I would say that.
I would expect the first half to still benefit from higher operating margins as again the order book consumption has been at higher priced with lower cost.
So that has helped drive our operating margin performance, which again this quarter.
At 29, 5% is exceptional.
But we would expect over time, probably more in the second half Youll start seeing that operating margin rate get more back towards the mid tier mid Twenty's that we had mentioned at Sam is our expectation for the long term in this business.
Thanks, very much onesie, Gary could be the next question.
Question is from Toni <unk> with Bernstein. Please go ahead.
Yes. Thank you.
Look at your take the midpoint of your first quarter revenue guide and I run out normal seasonality I got revenues down about 5% for the year.
You've just stated that.
The.
Yes that business is going to be.
Weaker in the second half so below normal seasonality, so clearly youre expecting a huge ramp.
In HBC.
NII over the course of the year and I'm wondering.
If you can dimension that or are you expecting greater than normal seasonality in the <unk> in the traditional server business and why would that be.
And then finally can you just comment on total backlog for HBC Nai exiting the quarter. You said it was 3 billion exiting last quarter were greater than 3 billion what is it today. Thank you.
Tony This is Jeremy I'll take those two for you.
So you're spot on as we think about next year.
We will have a seasonal drop in <unk>, that's largely as Q4 really benefited from.
A meaningful amount of Cray X acceptance Susan as you know the time between order and acceptance can be a long period of time in Q4 saw a larger number of acceptances, which helped drive the revenue performance, we will see a bit of a dip back down in Q1, and then Q2 in the second half really benefiting from the acceleration in AI as.
Well as some additional supercomputing big.
Business and so you'll see a pretty significant ramp as we go from Q1 to Q2, and then sustaining at or ramping beyond that in the second half of the year and <unk> will be a big part of the revenue growth story for FY 'twenty four.
Your question on the order on the order book total.
Land it at just over $3 2 billion, which was slightly above where we landed in Q3 and that really came off the backfill of Q4 revenue performance in HBC NII up about $350 million on a quarter over quarter basis, and so what happened is you had a run that run off of the order book from revenue performance.
In Q4, and then had a rebuild of that order book coming largely from AI demand in Q4 that took it back up to its historical high level of just over $3 2 billion.
Thanks, very much Tony Gerry.
The next question is from stomach strategy with J P. Morgan. Please go ahead.
Hi, Thanks for taking my question I guess.
In your prepared remarks, you did make it a point to highlight the uneven demand backdrop that you're seeing I was wondering if you can flesh that out a bit more in terms of what what are you seeing between the different product groups in particular, when I look at that in contrast to the strong demand you're seeing what do you really sort of see some of the AI demand from enterprises.
<unk> spend towards the other product groups or is the uneven demand more of an inventory correction. Thank you.
Yes, sure I mean.
No question, we see an explosion in demand in AI, Jeremy just comment on that and I will say of that order book that Jed just talked about in Q4, only very little was converted in AI and to the point he made.
The growth we had in Q4 was driven by the the supercomputer and acceptances, but we have a very very large pipeline in front of us which is very exciting.
But it was always going to come down to time to revenue based on the GPU availability.
But I will say that business is going to continue to be super strong and clearly when I speak to customers, which I do more than 50% of my time, there is huge amount of interest in AI and how to accelerate the deployment of AI across the enterprise understanding their challenges whether it is.
Sustainability challenges, where there are data center capacity power and cooling and others and that's why HPE.
When bold on that on the upfront last June to basically make the announcement when offer supercomputer in.
As a public cloud instance, so customers can use as a virtual private clouds. So that we feel very good about it.
Great Lakes continues to be very strong.
Just to be of a context, we added $1 billion in PCB quarter over quarter, we added 2000 customers and <unk>. Obviously is a function of the deferred revenue that we might realize over time, but where customers really love about our experiences is hybrid by design. They can consume anything from edge to cloud to H b.
Like what they pay capex or opex, it doesn't really matter and then that they really loved the experience and that's why we are building the AI components into the same platform. So those are two very strong edge, obviously had tremendous momentum I think we're going to have the typical adjustments.
But that's why we spend a lot of energy and time on adding more capabilities to the edge platform security SD Wan private five G data center networking, which adds to the momentum understand that there will be potentially some digestion on the campus and branch, but as Jeremy said.
We have very well covered for the first half of 2024.
So we have to see that and then compute right as a typical business goes through this cyclicality right. So last year. Obviously, you had a huge amount of orders we converted the order faster than people expected.
In the back half of this year, we sell sequential demand improvement in units and stable.
And now we start seeing upticks in the mix with.
AI Inferencing, which has these accelerators, but Q3 demand was higher than Q2, and Q4 was higher than Q3. So I think it's fair to say we are stabilized and we are improving I would not call. It a recovery and then on storage.
I believe we're going to see some improvements over time because of AI demand, which required file and object and we have a great portfolio with <unk> and we intend to capitalize on that but for three consecutive quarters now we have seen stability and improvements in in Q4, we saw revenue improvements on a C.
<unk> basis, so customers are.
Advertising spend where it makes sense, but it doesn't mean, we have a portfolio that can meet their needs wherever they are and HP can lake is the way we deliver all of this which isn't right for shareholders drive higher margin and higher recurring revenues and profit.
Sorry.
Cannibalization, but cannibalization sort of Jefferies reminds me economies.
We have no evidence of that yet I think that will become clear when the traditional compute CPU driven returned to normal levels.
But remember not every customer has deploy cloud across their enterprise sale.
Quite a bit of a journey to go and they are clearly customers assessing what is the best place to deploy that whether it's in the public cloud or what the results have been portrayed in on Prem because of the cost of because of data I think AI is a huge driver of repatriation in my mind, because if you have data distributed across multi.
The state is very hard to really train and fine tune the models.
When you have data everywhere and our focus there is really providing them and automate the data pipeline without unified analytics platform.
So fundamentally early to say, but so far in the traditional compute business, we have not seen evidence of cannibalization at this point in time.
Thank you Gary.
The next question is from Simon Leopold with Raymond James. Please go ahead.
Thanks for taking the question I wanted to see if you could talk a bit about the trends youre seeing in compute for the non accelerated platforms and.
Really the.
I'm trying to tease out here.
Is sort of this issue.
Ah projects pulling budget are sucking oxygen out of the room versus organizations buying up compute platforms to prepare for AI inferencing and embracing.
AI inferencing.
Inferencing element not just training thanks a lot.
Yes, Thanks Simon.
Dan.
Maybe I will elaborate a little more to the comments I made before so we saw Q4 over Q3 and Q3 over Q2 improvement in demand in units and a lot of that will CPU driven although there is a small base of AI accelerated kind of AP use if you will.
That we saw an increase in Q4.
But I will say the unit growth in Q4 was not driven by the Apu's. It was driven by a combination of Cpus the vast majority and some apu's because the base is still very very small so definitely customers are preparing for that again, they all assessing what is the.
Best place to deploy this models, that's why I do believe the inferencing side will accelerate over time, whether it's to do some pre trading or POC or really deploying in production and I think many customers also will accelerate deployments of tuning solutions on prem because of the data.
Aspects of talked before.
No question they are still digesting what about last time on the CPU side.
The house, but again, we saw some improvements in demand sequentially in units and then let's remind ourselves that we also for us in the industry. We are going to the transition of Sapphire Rapids, and ultimately we called out the Gen 11 platform.
That became now what Jeremy 25% of the mix, which 53% of orders in Q4, 53% of the orders in Q4, 25% of their revenue mix and so that's good for us because obviously it.
Drives higher density and obviously, we can attach more options to the same platform.
And customers like the sustainability piece of that and the hybrid by design nature of that which is actually workload optimized and Gen 11 by the way was conceived to accept any type of processing unit, whether it's CPU or whether it's an apu, including arm based solutions or <unk>.
<unk> based solutions.
Whether it is intel or AMD on the X 86, so that gives us tremendous amount of flexibility, but ultimately it's not just about the service the software that comes with it and this is why we spend a lot of time building the partnerships and relationship with Nvidia. So now you can deploy a tuning or influencing with Nvidia stock in our software as well.
Our population we are going to like.
Thank you very much Simon Gary.
The next question is from Tim long with Barclays. Please go ahead.
Thank you.
Can you just touch on the storage business a little bit.
It's been kind of challenged like some of the other.
Businesses on macro could you talk a little bit about the outlook for a recovery there.
And also if you could just touch on the third party.
Business, there that's kind of impacted.
Gross margin profitability, how does that look to be trending as we look out over the next year or two thank you.
Sure I can take that particularly port towards the latter part of that I think Antonio already hit on some of the demand dynamics again, where we've seen three quarters of flat to increasing demand and so so some positive trends from that perspective, I think from a from a operating.
Margin perspective, certainly we saw.
Reduction in Q4 that was driven off a combination of several things, including a higher third party mix that you that you mentioned as well as the fact that we see we saw some incremental opex in this segment and that Opex as a comparison to the revenue performance in the quarter also put pressure on to that operating margin.
However, we do expect a pretty quick recovery there.
We as we look into Q1 in particular revenue is not expected to accelerate meaningfully, but we think the mix will improve as far as towards our IP product.
And the.
We should see some opex moderation and favorability as we go into the quarter coming out of Q4 and some of the investments that we made there and so I expect to see that get back into a low double digit kind of area and then as we worked through the quarter and that IP mix starts to improve more.
On demand acceleration, then we should start seeing us working back towards our mid teens target that we that we identified a sand for this segment.
I will say also.
If you look at our HB led to a problem because the fastest ramp we've ever had in the history of the company.
This quarter. This past quarter grew another 50%, but also there is some short term impact because a portion of that revenue gets deferred because of the subscription software on the platform.
And so that was an intentional strategy because ultimately the infrastructure is one piece of it but the operating system and the cloud services that comes with it I'd actually a subscription to H b three legs. So while we're growing 50% we're not realizing the full revenue because a portion of that gets defer at least.
Over three years and that's good because my concern significant higher margins for us.
Our strategy is to.
Dramatically improved that makes to IP and you will see more announcements this week in the storage portfolio all geared to the AI opportunity with file and object and that will accelerate some of the momentum we have in the storage IP portfolio.
Thanks, Tim Gary.
Next question is from Sidney Ho with Deutsche Bank. Please go ahead.
Thank you for the question.
I wanted to ask about <unk> and it was flat quarter over quarter, but still up there very strongly 39%.
Year over year can you walk us through the dynamics of why it didn't change in the quarter can you just talk about Green Lake being very strong.
At multiple times.
Some negatives maybe some cancellations offsetting drove or was it more of a pause after two very very strong quarters and lastly, we're seeing much contribution from AI servers and the N number.
But at this point.
Yes, Thank you I'll take that.
So just on the last point no there wasn't any meaningful AI impact, but we do expect that to be an accelerator, particularly in FY 'twenty four as we go into Q2 and towards the second half that will be a big part of our story and we expect that to be an accelerator for us in FY 'twenty for on a quarter over quarter.
This business similar to what I mentioned on the Supercomputing area does have some time between order to.
So revenue recognition in this case when <unk> begins to be reported and so I think the sequential story was more about early in the year, we had seen more as the backlog had been burning down and some of those deals that had been waiting in the pipeline turning into <unk>.
And converting that helped drive an accelerating through the first three quarters, we saw a little bit less of that in Q4, but I don't take that at all as an indication of a slowdown in this in this space in fact beaten.
Between the 35% to 45% kind of CAGR annual growth I expect us in FY 'twenty four to see the higher end of that range.
So these are as well.
Although we could we can talk through but thank you.
Gary.
Should be our last question I think.
And our final question will be from meta Marshall with Morgan Stanley. Please go ahead.
Hi, This is Mary on for meta Marshall I just had a question on demand trends can you speak to linearity within the quarter and while there are pockets of weakness you saw during the quarter.
<unk> as the quarter went on.
Yeah, I think overall it was more back ended I will say in the quarter. We saw strengthening as we went through the weeks has always said that now we have 13 weeks in the quarter and we saw stronger momentum as we built along the way.
And remember what we said the fab right. So our SAB, we said NII.
Year to date to October 19, I think was the same date.
$3 billion in cumulative orders booked between supercomputing and AI specifically.
And we ended the year at three six so in the last 12 days, we booked $600 million in incremental AI orders that tells you. The strong it was true also for compute and storage by the way. The last few weeks call. It 345 weeks were stronger than the beginning of the quarter.
So I will not make much out of that sometimes customers.
Take the time, we still actually live and elongated sales cycles, that's for sure customers, taking more time to make those positions.
Another issue.
But what really is give me the competencies. The strong pipeline. We have ahead of us that's obvious and clear and AI is significant stronger than we ever imagine and the only challenge. We have there then as Jeremy said right. So it's time to revenue.
We really recognize very little revenue on NII in Q4, that's why we expect the acceleration starting in Q2 and beyond as lead times improve.
And some of the supercomputing also get accepted but the reality 2024 will be the year of AI in revenue growth and then in the edge, obviously, we have the.
Momentum that we talked about in the subscription the scale of our software and the incremental engines that we have so overall it was a typical quarter by stronger on the back versus the front.
Yes, I think we have time for one more.
Thanks, Gary.
Just one more question and see where the final question will be from Aaron Rakers with Wells Fargo. Please go ahead.
Yes. Thank you guys. This is Michael on behalf of their I just wanted to ask around AI software can you just help us appreciate or understand how your own AI software solutions that you guys talked about at Sam compared to.
And videos own AI software suite.
I'm just trying to understand it yourself for complementary or is it more of a substitute just how to think about that overall. Thank you yeah no great.
Great question, and I will say overall, there is a lot of complementary and there are some places overlap obviously, but with the.
Johnson and the team we have a clear.
Joined plan to win together.
In different segments of the market, but let me break it out because we're talking about software in general terms, but let's start first of infrastructure level.
<unk> unique software that allows us to run these supercomputers and AI system, which are cloud native.
Native by nature at massive scale think about when you run a model you need to start and complete the mobile training and you have to have unique technologies for checkpoints and making sure that all the compute power is acting as a unified system.
Because unlike the public clouds or the cloud as we know it you're on multiple workloads.
On multiple nodes in this case Youll run one one node.
Multiple nodes and that parallel computing as we know it and ultimately you need the software to run these at scale.
Magic around that is that checkpoint and then the second piece of that is our networking interconnect fabric, which allows us to really connect every accelerated unit to every accelerated unit in a cohesive approach and thats, our slingshot contingent fabric as we know it.
Then on top of that we have our machine learning development environment. This is where developers and the like use our machine learning and development services to prepare the models to automate the data pipeline one of the biggest challenges customer half.
To prepare the data data is everywhere, but automotive is bringing in some sort of one place. So you can use that data to train our models and then with Nvidia we use their AI enterprise software, including some of the foundational models that they provide in order to provide a complete solution and obviously, we leveraged there.
Apu is call it Gpus, whether it's H 140 140.
<unk> hundred is in the past and then going forward as the announcement we made.
Supercomputing.
2023 and in Denver.
We are leveraging the grasshopper H 200, so it's a combination dependent on the use case.
And we feel pretty good about what we're doing and stay tuned because Thursday, we're going to make further announcements about our partnership with Nvidia is our IP and that I think that makes us together unique and differentiated in the AI space.
Okay well.
Thank you everyone.
Over time, I know you Vincent covered in all the earnings, but I will say just to wrap in fiscal year 2023, clearly, we demonstrated our strategic investments and the extraordinary innovation across the growth areas of edge hybrid cloud and AI and even competed for that matter.
Really resonating with customers and is helping us revenue.
Revenue growth and profit diversification, that's why you see the growth in gross margin and profit and I believe we will continue to capitalize on this growing in market opportunities and I'm confident to continue to increase the returns to our shareholders and that's why we are raising the dividend for 2024. So thank you for your time.
Today, I wish all of them.
Phil and end of the calendar year, and a special holiday season and talk to you soon.
Ladies and gentlemen, this concludes our call for today. Thank you for attending our presentation you may now disconnect.
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