Q2 2024 Hewlett Packard Enterprise Co Earnings Call
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Gary: Good afternoon, and welcome to the second quarter fiscal 2024 Hewlett Packard Enterprise earnings conference call. 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 like to turn the presentation over to your host for today's call, Jeff Kvaal, Head of Investor Relations. Please proceed.
Good afternoon, and welcome to the second quarter of fiscal 'twenty 'twenty for Hewlett Packard Enterprise earnings Conference call.
Gary: My name is Gary and I'll be your conference moderator for today's call.
Gary: At this time, all participants will be in listen only mode.
Gary: We will be facilitating a question and answer session towards the end of the conference.
Gary: Should you need assistance during the call. Please signal a conference specialist by pressing the star key followed by zero.
Gary: As a reminder, this conference is being recorded for replay purposes.
Speaker Change: I would now like to turn the presentation over to your host for today's call Jessica <unk> head of Investor Relations. Please proceed.
Jeffrey Thomas Kvaal: Good afternoon. Welcome to our second quarter fiscal 2024 earnings conference call with Antonio Neri, HPE's President and CEO, and Marie Myers, HPE's CFO. Let me remind you that this call is being webcast. A replay of the webcast will be available shortly after the call concludes.
Speaker Change: Good afternoon, welcome to our second quarter fiscal 2024 earnings conference call with Antonio Neri, Hpe's, President and CEO and Marie Myers H P. He's CFO.
Speaker Change: 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 Investor Relations webpage.
Jeffrey Thomas Kvaal: We have posted the press release and the slide presentation accompanying the release on our 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. HPE assumes no obligation and does not intend to update any such forward-looking statement.
Speaker Change: Elements of the financial information referenced on this call are forward looking and are based on our best view of the world our businesses as we see them today.
Speaker Change: <unk> assumes no obligation and does not intend to update any such forward looking statements.
Jeffrey Thomas Kvaal: We also note that the financial information discussed on this call reflects estimates based on the 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 ended April 30, 2024. For more detailed information, please see the disclaimers in the earnings materials relating to forward-looking statements that involve risks, uncertainties, and assumptions; please refer to HPE's SEC filings for a discussion of these risks.
Speaker Change: We also note that the financial information discussed on this call reflects estimates based on information available at this time and could differ materially from the amounts ultimately reported an H b each quarterly report on Form 10-Q for the fiscal quarter ended April 30th 'twenty 'twenty four.
Speaker Change: For more detailed information.
Speaker Change: Please see the disclaimers on the earnings materials relating to forward looking statements that involve risks uncertainties and assumptions. Please.
Speaker Change: Please refer to Hpe's SEC filings for a discussion of these risks.
Jeffrey Thomas Kvaal: For financial information we have 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 presentations accompanying today's earnings release on our website for details. Throughout the call, all revenue growth rates are presented on a year-over-year basis and adjusted to exclude the impact of currency unless otherwise noted. Finally, Antonio Neri will reference our earnings presentation in his prepared remarks. With that, Antonio.
Speaker Change: For financial information, we are expressed on a non-GAAP basis, we have provided reconciliations to the comparable GAAP information on our website.
Speaker Change: Please refer to the tables and slide presentation accompanying today's earnings release on our website for details.
Speaker Change: Throughout the call all revenue growth rates are presented on a year over year basis, and adjusted to exclude the impact of currency unless otherwise noted.
Speaker Change: Finally, Antonio Marie will reference our earnings presentation in their prepared remarks.
Speaker Change: That Antonio.
Antonio Fabio Neri: Good afternoon, and thank you for joining us today. HPE delivered a very solid performance in the second quarter, with revenue and non-GAAP diluted net earnings per share exceeding our outlook range. Driven by AI systems, revenue more than doubled from our first quarter. I am very optimistic about where we're headed.
Antonio: Good afternoon, and thank you for joining us today.
Marie E. Myers: H B deliver a very solid performance in the second quarter with revenue and non-GAAP diluted net earnings per share exceeding our outlook range driven by AI assistance revenue more than doubling from our first quarter.
Marie E. Myers: I am very optimistic about where we are headed.
Antonio Fabio Neri: AI demand continues to accelerate, with cumulative AI system orders reaching $4.6 billion this quarter. We have a robust pipeline in this business, though large AI orders can cause fluctuations during the quarter. We anticipate continued revenue growth driven by increased AI system demand, continued adoption of HP GreenLake, and ongoing improvement in the traditional infrastructure market, including servers, storage, and networking. Due to our confidence in the second half of fiscal year 2024, we are raising our full year revenue and non-GAAP earnings per share guidance and reiterating free cash flow guidance.
Speaker Change: Yeah demand continuous to us at rate with community the AI assistance orders, reaching $4 $6 billion this quarter.
Speaker Change: We have a robust pipeline in this business no large orders can cause fluctuations during the quarter.
Speaker Change: We anticipate continued revenue growth driven by increased AI assistance demand continue adoption of H B getting lake and ongoing improvement in the traditional infrastructure market, including servers storage and networking.
Speaker Change: Due to our confidence in the second half of fiscal year 'twenty 'twenty four we are raising our full year revenue and non-GAAP earnings per share guidance and reiterating free cash flow guidance.
Antonio Fabio Neri: Marie will provide more specifics in her remarks. While we focus on translating strong AI customer demand into revenue growth, we continue to drive cost discipline to operate more efficiently and to preserve the ability to make targeted investments, which will sustain our growth into the future. We are being prudent with our spending and have reduced operating expenses in the first half as compared to the prior year period.
Speaker Change: He will provide more specifics in her remarks.
Speaker Change: Well, we focus on translating strong customer demand to revenue growth, we continue to drive cost discipline to operate more efficiently and to preserve the ability to make targeted investments, which will sustain our growth into the future.
Speaker Change: We are being prudent with our spending and reduce operating expenses in the first half as compared to the prior year period.
Antonio Fabio Neri: We are also driving business process simplification across the company, including through digitization and automation with AI. Demand for HPE's AI systems is accelerating at a faster pace, and our solid execution enabled us to more than double our AI systems revenue sequentially to over $900 million, helped by supply chain transformation through improved GPU availability. Our lead time to deliver NVIDIA H100 solutions is now between 6 and 12 weeks, depending on order size and complexity.
Speaker Change: We're also driving business process simplification across the company, including through Digitization and automation with AI.
Speaker Change: Demand for H B, He's AI systems is accelerating at a faster pace and our solid execution enabled us to more than double our AI assistant revenue sequentially to over $900 million.
Speaker Change: By supply chain conversion through improved GPU availability.
Speaker Change: I'll lead time to deliberate N V. The H 100 solutions is now between six and 12 weeks, depending on the size and complexity.
Antonio Fabio Neri: We expect this will provide a lift to our revenues in the second half of the year. Enterprise customer interest in AI is rapidly growing, and our sellers are seeing a higher level of engagement. Enterprise orders now comprise more than 15% of our cumulative AI systems orders, with a number of enterprise AI customers nearly tripling year over year. As these engagements continue to progress from the exploration and discovery phase, we anticipate additional acceleration in enterprise AI systems orders through the end of the fiscal year. We're winning in AI for several reasons.
Speaker Change: We expect this will provide a lift to our revenues in the second half of the year.
Speaker Change: Enterprise customer interest in AI is rapidly growing and our sellers I've seen a higher level of engagement.
Speaker Change: Enterprise orders now comprise more than 15% of our cumulative AI assistance orders with a number of enterprise customers nearly tripling year over here.
Speaker Change: As these engagements continue to progress from exploration and discovery phase, we anticipate additional acceleration in enterprise AI assistance over there through the end of the fiscal year.
Speaker Change: We are winning and AI for several reasons.
Antonio Fabio Neri: Our leadership in AI at scale and across the entire AI lifecycle, from training to fine-tuning to inferencing, continues to attract new customers. These customers range from new generative AI model builders, to broader service providers, to sovereign states, to traditional enterprise customers, to large hyperscalers. For example, in partnership with Microsoft, we're extending the Azure AI platform to HPE infrastructure, which provides Microsoft with additional capacity to serve even more customers, including OpenAI. HP has decades of experience in the design, manufacture, and management of air and liquid cool systems, including the data center infrastructure, to reliably deliver the highest levels of computing performance. Customers appreciate our AI at scale expertise and intellectual property as well as unique liquid cooling manufacturing and services capabilities. As accelerated computing silicon innovation advances, higher power density demands direct liquid cooling technology.
Speaker Change: Leadership in AI at scale and across the entire lifecycle on training to fine tune it to infancy continues to attract new customers.
Speaker Change: These customers range for new generative model builders to borrow their service providers to sovereign states to traditional enterprise customers the large hyperscale.
Speaker Change: For example in partnership with Microsoft, we're extending the Azure AI platform to H B E infrastructure, which provides Microsoft with additional capacity to serve even more customers, including open AI.
Speaker Change: H B has the cadence of experience in the design manufacture and management of air and liquid cooled systems, including the data center infrastructure to reliably deliver the highest levels of computing performance.
Speaker Change: Customers appreciate our AI, our scale expertise and intellectual property as well as unique liquid cooling the manufacturing and services capabilities.
Speaker Change: As I said earlier, the computing silicon innovation advances.
Speaker Change: Power density the amount of direct liquid cooling technologies.
Antonio Fabio Neri: Building direct liquid cooling AI systems is complex and requires manufacturing expertise and infrastructure, including power, cooling, and water. With more than 300 HPE patents in direct liquid cooling, proven expertise, and significant manufacturing capacity for these kinds of systems, HPE is well positioned to help customers meet the power demands for current and future accelerated compute silicon designs. Our leadership in AI was once again validated in May when the latest Top 500 list of the world's most powerful supercomputers was released.
Speaker Change: Building direct liquid cooling that assistance is complex and requires manufacturing expertise and infrastructure, including power cooling and water.
With more than 300, H B E patents indirect liquid cooling proven expertise and significant manufacturing capacity for these kinds of systems H B is well positioned to help customers meet the power demands for current and future accelerated computing silicon designs.
Speaker Change: Our leadership in AI was once again validated in may when the latest top 500 list of the world's most powerful supercomputers was relief.
Antonio Fabio Neri: HPE now has four of the world's fastest supercomputers, all of which are directly liquid cooled. Two of these systems are exascale supercomputers, with Frontier still the world's fastest, and Aurora now breaking the exascale barrier. I'm also proud that we have built seven of the world's top 10 energy efficient systems, according to the latest Green 500 list.
Speaker Change: H B now has four of the top 10 world's fastest supercomputers all of which are direct liquid cooled.
Speaker Change: Two of the systems are extra scale supercomputers with frontier still the worlds fastest and Aurora now breaking the extra scaled barrier.
Speaker Change: I'm also proud that we have built seven of the world's top 10 energy efficient systems. According to the latest green five under lift.
Antonio Fabio Neri: This experience makes HPE an attractive partner to sovereign states and governments pursuing AI strategies. HPE benefits from a strong ecosystem of AI partners, including NVIDIA. We introduced co-engineered enterprise solutions with NVIDIA last year to streamline the model development process, as well as to enable enterprises to fine-tune large-language models with their private data to accelerate inference.
Speaker Change: This experience makes us an attractive partner to sovereign states and government pursuing AI strategies.
Speaker Change: H b benefits from a strong ecosystem of partners, including Nvidia.
Speaker Change: We introduced co engineered enterprise solutions with Nvidia last year to streamline the mobile development process as well as to enable enterprises to fine tune large language models with a private data to us or the rates infancy.
Antonio Fabio Neri: I'm excited that NVIDIA CEO Jensen Huang will join me at HP Discover Las Vegas in just a week. Together, we will unveil new, exciting, and differentiated innovations that will simplify and accelerate enterprise AI adoption and deployment. Enterprise customers are already responding to our unique AI portfolio. For example, Qbox, a facial and image recognition company in Korea, is developing new generative AI models using HPE AI systems to enhance identity verifications at locations such as Incheon International Airport in South Korea. J.T.
Speaker Change: I'm excited that N V D. C. L. Johnson, one will join me at H B discover Las Vegas in just two weeks.
Speaker Change: Together, we will unveil new exciting and differentiated innovations.
Speaker Change: We will simplify and accelerate enterprise AI adoption and deployment.
Speaker Change: Anthropologie customers are already responded to our unique AI portfolio.
Speaker Change: For example, Q box of facial and image recognition company in Korea is developing new generation models, using H B AI assistance to enhance identity verifications locations, such as the interim International Airport in South Korea.
Antonio Fabio Neri: The Group, based in Japan, operates a pharmaceutical business and is planning to use our HPE AI systems to support AI model training and simulations to accelerate drug discovery. And we just announced that we will power Scaleways AI cloud service offering using our HPE AI system. The new service will make powerful computing accessible to companies to support their various AI workloads and use cases. As we capitalize on the AI growth opportunity, we also see indications of a market recovery in traditional and cloud infrastructure markets. Orders for traditional service have been consequently and year over year driven by enterprise, public sector, and SMB customers in North America and Europe.
Speaker Change: JT group based in Japan operates a pharmaceutical business and is planning to use our H B E systems to support the AI model training and simulations to accelerate drug discovery.
Speaker Change: And we just announced that we will power scale ways AI cloud service offering using our H B AI systems.
Speaker Change: The new service will make powerful computing accessible to companies to support their various I will love and use cases.
Speaker Change: As we capitalize on the growth opportunity. We also see indications of the market recovery in traditional and cloud infrastructure markets.
Speaker Change: Orders for traditional service can sequentially and year over year, driven by enterprise public sector, and SMB customers in North America and Europe.
Antonio Fabio Neri: We are seeing no indication of cannibalization from accelerated computing demand, and revenue grew sequentially as customers transitioned to higher AUP HPE ProLiant Gen11 servers. Differentiate the customer-centric innovation positions as well to capture this market recovery. For example, our leading HP GreenLake hybrid cloud is attracting new customers. In the second quarter of fiscal 2024, the number of customer organizations using HP GreenLake increased sequentially by almost 9% to 34,000. And our as-a-service lifetime total contract value grew to more than $15 billion in Q2, with our annualized revenue run rate, or AIR, growing 39% year-over-year.
Speaker Change: We have seen no indication of cannibalization from accelerated computing demand.
Speaker Change: Our revenue grew sequentially as customers transition to higher a L. P. H b Pearl I N. Gen 11 servers.
Speaker Change: Differentiate the customer centric innovation positions us well to capture this market recovery.
Speaker Change: For example, a leading H figuring like hybrid cloud is attracting new customers.
Speaker Change: In the second quarter of fiscal 2024, the number of customer organizations using H B getting lake increased sequentially by almost 9% to 34000.
And our as a service lifetime total contract value grew to more than $15 billion in Q2.
Speaker Change: With our annualized revenue run rate or AI or growing 39% year over year.
Antonio Fabio Neri: Demand is increasing for our HP GreenLake on-premise private cloud solutions. The Defense Information Systems Agency, a combat support agency of the United States Department of Defense, selected HPE to develop a distributed hybrid multi-cloud platform prototype on HPE GreenLake as part of an effort to simplify the organization's management of disparate IT infrastructure and resources across public and private clouds. In storage, we accelerated the transition of our portfolio in Q2 to meet the needs of hybrid cloud and AI.
Speaker Change: Demand is increasing for our H B Green Lake on premise private cloud solutions.
Speaker Change: The defense information systems agency at Kumba support agency of the United States Department of Defense.
Speaker Change: Selected HPE to develop at the stupid in a hybrid multi cloud platform prototype on H B Green Lake as part of an effort to simplify the organization and management of this but I T infrastructure and resources across public and private clouds.
Speaker Change: In storage, we accelerated the transition of our portfolio in Q2 to meet the needs of hybrid cloud and AI.
Antonio Fabio Neri: Several weeks ago, HPE introduced significant new functionality to our HPE Alletra storage offering. We rounded out our block offering by extending the hybrid capabilities of HP Electra Block Storage to AWS, doubling its capacity to address more customers and enhancing its automation capabilities with generative AI. Earlier this quarter, we introduced new HPE GreenLake for file storage capabilities with options specifically targeting the unstructured data demands of AI.
Speaker Change: Several weeks ago, H B E introduced significant new functionality to our H B, a later storage offerings.
Speaker Change: We rounded out our block offering by extending the hybrid capabilities of H B O later, a block storage to AWS.
Speaker Change: And its capacity to address more customers and enhancing its automation capabilities with generative AI.
Speaker Change: Earlier this quarter, we introduced new H B Green Lake for file storage capabilities with options, specifically targeting the unstructured data the amounts of AI.
Antonio Fabio Neri: We have also added significant specialist sales capacity in recent months. While it takes time to activate new sellers and bring them to full productivity in a market with long selling cycles, we expect increased order to revenue conversion in the future. The enhancement to our winning portfolio, complemented by a more focused sales force, positions HP to strengthen the already robust customer adoption of HP Electric. More than 1,000 new HP Elettra MP systems have been deployed to date, which is the fastest product ramp in the history of our company. In networking, the market remained in transition during the quarter as customers continued to work through their current inventory.
Speaker Change: We have also added significant specially self capacity in recent months.
Speaker Change: While it takes time to activate new sellers and bring them to full productivity in a market with a long sales cycles, we expect increased order to revenue conversion in the future.
Speaker Change: The enhancement to our winning portfolio complemented by a more focused sales force position H b to strengthen the already robust customer adoption of H B a letter.
Speaker Change: More than 1000, new H B L. M. P systems have been deployed to date, which is the fastest ramp in the history of our company.
Speaker Change: And it's working the market remains in transition during the quarter as customers continue to work through their current inventory.
Antonio Fabio Neri: As demand in this segment gradually returns, we believe our broad portfolio positions as well. We expect modest sequential network and demand improvement driven by the state and local purchasing season in the United States. We announced significant new innovations during the quarter to align with HPE's broader AI strategy. These solutions include Generative AI capabilities to improve AI operations and Wi-Fi 7 access points that capture edge data for AI inference. In addition, last month, we launched new security and AI observability tools to help fight AI cyber risk.
Speaker Change: As demand in this segment gradually returns, we believe our broad portfolio positions us well.
Speaker Change: We expect modest sequential networking demand improvement driven by the state and local purchasing season in the United States.
Speaker Change: We announced significant new innovations during the quarter to align with the Hps brother AI strategy.
Speaker Change: These solutions include equal agenda.
Speaker Change: Abilities to improve AI ops, and Wi Fi seven axis points that capture AIDS data for AI inferencing.
Speaker Change: And are they show last month, we launched new security N I observed mobility tools to help fight cyber risks.
Antonio Fabio Neri: And just yesterday, we expanded the most complete private 5G and Wi-Fi portfolio in the market with the launch of HP Aruba Networking Enterprise Private 5G. All of this will be delivered through our HP GreenLake Cloud Platform. Customers are responding to our network and innovation. In the last few months, customers ranging from Houston Airports to Batista Health Group to Mercedes-Benz Stadium to the University of Maryland have turned to HPE to enhance the experience for their visitors, residents, and employees.
Speaker Change: And just yesterday, we expanded the most complete private five G and Wi Fi portfolio in the market with the launch of HP Aruba networking enterprise private five G.
Speaker Change: All of this will be delivered through our H b.
Speaker Change: Our platform.
Customers are responding to our network and innovation in the last few months customer range from Houston airports too, but that's the health group to Mercedes Benz Stadium.
Speaker Change: University of Maryland have turned to H b to enhance the experience for the visitors residents and employees.
Antonio Fabio Neri: As we look to our future in networking, we continue to be very enthusiastic about the proposed acquisition of Juniper Network. We're currently in the regulatory process for this transaction and expect it to close by the end of 2024 or early 2025. As I mentioned earlier, we continue to invest in innovation while we drive operational and cost discipline to continue to improve our cost structure. We are focused on reducing complexity in our business processes as well as implementing automation and AI across the company to enhance customer service, R&D, productivity, and the overall team member experience. I also want to note that we recently announced that we have restructured the sale of our stake in H3C. Since the transaction is large and complex, the required regulatory approvals will take longer than previously anticipated.
Speaker Change: As we look to our future in networking, we continue to be very enthusiastic about the proposed acquisition of Juniper networks.
Speaker Change: We are currently in the regulatory process for this transaction and expect to close by the end of 'twenty 'twenty four or early 2025.
Speaker Change: As I mentioned earlier, we continue to invest in innovation, while we drive operational and cost discipline to continue to improve our cost structure.
Speaker Change: We are focused on reducing complexity in our business processes as well as implementing automation and AI across the company to enhance customer service R&D productivity and team member overall experience.
Speaker Change: I also want to note that we recently announced we have restructured the sale of our stake initially see.
Speaker Change: Since the transaction is large and complex the required regulatory approvals, we have taken longer than previously anticipated.
Antonio Fabio Neri: So, we agreed to restructure the cell with units. The updated agreement provides HPE with the opportunity to sell a significant portion of the shares in the coming months. The new payment structure has no impact on the pending Juniper Networks transaction, as the structure of the deal financing does not rely on any of the H3C proceeds.
Speaker Change: So we agreed to restructure of the felt with units.
Speaker Change: The updated agreement provides H b with the opportunity to sell a significant portion of the shares in the coming months.
The new payment structure has no impact on the pending juniper networks transaction as the structure of the deal financing does not rely on any of the ACC proceeds.
Antonio Fabio Neri: Finally, you probably saw that we announced in May that we have agreed to divest our communications technology group to enhance our strategic focus in high growth, high margin parts of the market, including the service provider and enterprise market. In closing, I want to reiterate that I'm proud of the very solid performance in Q2. It shows the alignment of our strategy and innovation to major market opportunities. We have greater optimism about the second half of the year, leading us to raise our full-year revenue and non-GAAP earnings per share guidance.
Speaker Change: Finally, you likely saw that we announced in May that we have agreed to divest our communications technology group to enhance our strategic focus in high growth high margin parts of the market, including the service provider and enterprise markets.
Speaker Change: In closing I want to reiterate that I'm proud of the very solid performance in Q2. It shows the alignment of our strategy and innovation to major market opportunities.
We have greater optimism about the second half of the year, leading us to raise our full year revenue and non-GAAP earnings per share guidance.
Antonio Fabio Neri: AI is creating growing demand across our portfolio, and we see significant opportunities across customer and business segments. Our competitive advantages, from deep expertise in standing up AI systems to our differentiated HP GreenLake cloud, to our networking and storage offerings, position us as well. We have an excellent team, and I'm confident in our ability to continue executing with discipline to take advantage of the incredible opportunities presented by this era of innovation. I am looking forward to sharing with you our latest breakthrough innovation and partnerships across AI, hybrid cloud, and networking later this month at HP Discover Las Vegas.
Speaker Change: Yeah, it's great and growing demand across our portfolio, we see significant opportunities across customer and business segments.
Speaker Change: Our competitive advantages from deep expertise in standing up AI systems to our differentiated that H, beginning like cloud networking and storage offerings.
Speaker Change: <unk> as well.
We have an excellent team and I'm confident in our ability to continue executing with discipline to take advantage of incredible opportunities presented by this era of innovation.
Speaker Change: I am looking forward to sharing with you our latest breakthrough innovation and partnerships across the AI hybrid cloud. The networking later this month at H B discover Las Vegas.
Antonio Fabio Neri: We are very excited to be the first corporate keynote at Sphere, and I hope to see many of you there. I would like now to hand it over to Marie, who will talk about the details of our segments and our outlook. Marie, over to you. Thank you, Antonio, and good afternoon.
Speaker Change: We are very excited to be the first corporate keynote a sphere and I hope to see many of you there.
I would like now to hand, it over to somebody who will talk about the details of our segments and our outlook Murray over to you.
Marie E. Myers: Thank you, Antonio, and good afternoon, everyone. It's a pleasure to be here with all of you after my first full quarter as HPE's CFO. Over the past three months, I have become even more excited about our opportunities across AI, hybrid cloud, and networking. We remain in the very early days of AI, yet it is already driving strong interest, pipeline, orders, and revenue across our portfolio from services to storage to services to financing.
Murray: Thank you Antonio and good afternoon, everyone. It's a pleasure to be here with all of you. After my first full quarter as H P. E. P. S O.
Murray: Over the past three months I have become even more tried it about how opportunities across AI hybrid cloud and networking.
Murray: We remain in the very early days of AI is already driving strong interest pipeline orders and revenue across our portfolio and she says is storage.
Murray: You can find it.
Marie E. Myers: Our AI system revenue inflected positively in Q2. We are winning deals in the AI market now and are well positioned for additional demand from enterprises and sovereigns in the future. The differentiation includes decades of liquid cooling expertise and is a pillar of our strategy to pursue higher growth, higher margin revenues. We are very pleased that we have exceeded our expectations in Q2 across key metrics. We exceeded the midpoint of our revenue guidance by $400 million.
Murray: Our AI system revenue inflected positively in Hickey.
Murray: We are winning deals and the AI market now and are well positioned for additional demand from enterprises brings in the future.
Murray: I differentiation includes decades with liquid cooling expertise.
Actual results and the pillar of that strategy to pursue higher growth higher margin revenues.
Murray: We are very pleased that we have exceeded our expectations in Q2 across key metrics.
Murray: We exceeded the midpoint of our revenue guidance by $400 million.
Marie E. Myers: Non-GAAP diluted net EPS was above the high end of our range, and free cash flow exceeded $600 million. Improving enterprise demand for traditional servers on top of the expected sharp ramp in AI servers drove the outperformance. Our AI orders are healthy.
Murray: non-GAAP diluted net EPS was above the high end of our range and free cash flow exceeded $600 million.
Murray: Improving enterprise demand for traditional set is on top of the expected shop rent and AI said it drove the outperformance.
Speaker Change: Oh, Hey, I O. There's a healthy intelligent edge is set to grow.
Marie E. Myers: The Intelligent Edge is set to grow sequentially beyond Q2 as expected, and AI emerged as a driver of healthy HPE GreenLake momentum. We are seeing rapid growth in AI system revenue. Overall, I am very pleased with our performance in Q2 and am excited about our continued progress through Fiscal 24. Let's take a closer look at the details of the quarter.
Speaker Change: Quaintly beyond keep you as expected and AI alerts to as a driver of a healthy H P E Green Lake momentum.
Speaker Change: We are seeing rapid growth in AI system revenue.
Speaker Change: Overall I'm very pleased with the outperformance in Q2 and are excited about our continued progress to fiscal 'twenty four.
Speaker Change: Let's take a closer look at the details of the quarter.
Marie E. Myers: Revenue grew 4% year-over-year and 7% quarter-over-quarter in constant currency to $7.2 billion. This exceeded the midpoint of our prior guidance by approximately $400 million. We have strong momentum in HPE GreenLake.
Speaker Change: Revenue grew 4% year over year, and 7% quarter over quarter in constant currency to $7.2 billion.
Speaker Change: This exceeded the midpoint of our prior guidance by approximately $400 million, we have strong momentum in H T E.
Marie E. Myers: The number of customers that have adopted HPE GreenLake rose 9% sequentially. ARR grew 39% year over year to above $1.5 billion in Q2. Storage and networking are typically the fastest growing elements of ARR, and both retain robust growth rates.
Speaker Change: The number of customers that have adopted H P Green Lake Rose, 9% sequentially.
Speaker Change: A R grew 39% year over year to above $1.5 billion in Q2 storage and networking I typically the fastest good elements of a R and both mccain robust growth rate.
Marie E. Myers: This quarter, AI was the fastest growing component of AAR. Our software and services mix rose approximately 200 basis points year-over-year to 67%. AAR is the best indicator of our model transformation to our as-a-service offerings.
Speaker Change: This quarter.
Speaker Change: With the fastest growth components of AAR.
Speaker Change: Oh software and services makes rose approximately 200 basis points year over year.
Speaker Change: 7%.
Speaker Change: A R is the best indicator of our model transformation two out.
Speaker Change: Offering.
Marie E. Myers: This growth validates what our customers are telling us, that HPE GreenLake is a key differentiator. We expect HPE GreenLake's value proposition to key customers, including enterprises and sovereigns, to sharpen with the advent of AI. Our Q2 non-gap gross margin was 33.1%, which was down 310 basis points sequentially and year over year, driven by a mixed shift from higher-margin intelligent edge revenue to server revenue, plus an unfavorable mix within hybrid cloud.
This growth validates what our customers are telling us that.
Speaker Change: HPE Green Lake is a key differentiator.
Speaker Change: We expect H B E Green lakes value proposition to key customers, including enterprise and suffering to shopping with the advent of the AI.
Speaker Change: Our Q2 non-GAAP gross margin was 33, 1%, which was down 310 basis points sequentially and year over year, driven by a mix shift from our higher margin intelligent edge revenue just says it revenue plus and unfavorable mix within hybrid cloud.
Marie E. Myers: Our Q2 non-gap operating expenses fell 1.6% year-over-year despite our revenue growth of 4%. Our OPEX discipline partially offset lower non-GAAP gross margins and held the non-GAAP operating margin decline to 200 basis points sequentially and year-over-year to 9.5%. The OPEX discipline plus higher revenue drove GAP diluted net EPS of 24 cents and non-GAP diluted net EPS of 42 cents. The latter exceeded the high end of the guidance range due to strong revenue and cost discipline. A non-GAAP diluted net earnings per share excludes $247 million in net costs, primarily from stock-based compensation expense, amortization of intangibles and acquisitions, and other related charges.
Speaker Change: Our Q2, non-GAAP operating expenses fell one 6% year over year, despite a revenue growth of 4%.
Speaker Change: Oh, opex discipline, partially offset lower non-GAAP gross margins and healthy non-GAAP operating margin declined to 200 basis points sequentially and year over year to nine 5%.
Speaker Change: Opex discipline, plus higher revenue drove GAAP diluted net EPS of 24 cents and non-GAAP diluted net EPS of 42 cents.
Speaker Change: The latter exceeded the high end of the guidance range on strong revenue and cost discipline.
Speaker Change: Our non-GAAP diluted net earnings per share exclude $247 million and net cost primarily from stock based compensation expense amortization of intangibles and acquisition and other related charges.
Marie E. Myers: We are managing the business with focus and discipline and evolving into a simpler, more agile company. We are also investing to capitalize on growth from the interrelated inflection points in AI, hybrid cloud, and networking and to drive structurally higher profitability over time. Let's turn to our segment results. Server revenues were $3.9 billion in the quarter.
Speaker Change: We are managing the business with focus and discipline and evolving into a simpler more agile company.
Speaker Change: We are also investing to capitalize on growth from the interrelated infection point in AI hybrid cloud and networking and to drive structurally higher profitability over time.
Speaker Change: Let's turn to our segment results.
Speaker Change: Revenues were $3 $9 billion in the quarter.
Marie E. Myers: This was up 16% sequentially and up 18% year over year. Strengths in both AI systems and traditional servers drove the healthy revenue growth. Our cumulative AI system product and service orders since Q1 2023 rose approximately 600 million dollars sequentially to 4.6 billion dollars. I am very pleased with our AI system product revenue, which more than doubled sequentially to over 900 million dollars. This strong revenue growth allowed us to make progress against our backlog, which is now 3.1 billion.
Speaker Change: This was up 16% sequentially and up 18% year over year.
Speaker Change: Strength in both AI assistance and traditional service drove the healthy whether you agree.
Speaker Change: Oh cumulative AI system product instead this Q.
Speaker Change: Q1, 'twenty, three where it was approximately $600 million sequentially to $4 $6 billion.
Speaker Change: I'm very pleased without AI system product revenue more than doubled sequentially to over $900 million.
Speaker Change: Strong revenue growth allowed us to make progress against our backlog, which is now $3 1 billion.
Marie E. Myers: Given the growing importance of our services business, we have updated our AI disclosures for this quarter to include services. Services are a small portion of our AI system's metrics at present, though we expect them to become more meaningful over time.
Speaker Change: Given the growing importance of that services business, we have updated our AI disclosure this quarter to include Saturdays.
Speaker Change: So it's a small portion of the AI assisted kinetics at present.
Speaker Change: We expect it to become more meaningful over time.
Marie E. Myers: Our differentiation with liquid cooling, software, HPE GreenLake, and increasingly services is responding in the market. We have seen a threefold increase in our enterprise AI customer base in the past year. Revenue from our traditional server business increased sequentially, and we expect this trend to continue. Demand is improving as enterprises digest prior purchases and gain more comfort with the macro outlook. The structural makeshift to higher AUP Gen11 servers is ahead of our expectations, and we are able to pass through rising input costs.
Speaker Change: Our differentiation with liquid cooling software H P Green Lake and increasingly services is resonating in the market.
Speaker Change: We have seen a three fold increase in our enterprise AI customer base in the past year.
Speaker Change: Revenue from our traditional survey business increased sequentially. We expect this trend to continue demand is improving as enterprises digest prior purchases and gain more comfort with the macro outlook.
Speaker Change: The structural mix shift to higher AEP. Gen. 11 said it is ahead of expectations and we are able to pass through rising input costs.
Marie E. Myers: We are encouraged that our Gen11 pipeline is starting to include AI inferencing activity and enterprise applications, and we see more evidence of adoption in the enterprise in Q2. Our Q2 operating margin was 11%. This was down 40 basis points sequentially and was in line with the expectations we made last quarter for our operating margins near the lower end of our long-term 11 to 13 percent range. While pricing remains aggressive in the server market, particularly in AI systems, we remain disciplined in cost and price as we pursue profitable growth.
Speaker Change: We are encouraged that our gen. I live in pipeline is starting to include AI inferencing activity and enterprise applications and we see more evidence of adoption in the enterprise in Q2.
Speaker Change: Our Q2 operating margin was 11%. This is down 40 basis points sequentially and was in line with the expectations, we laid out last quarter for our operating margins near the low end of our long 10, 11% to 13% range.
Speaker Change: While pricing remains aggressive and it shows the market, particularly in AI assistant we remain disciplined in cost and price as we pursue profitable growth.
Marie E. Myers: Hybrid cloud revenues of $1.3 billion were up 1% sequentially and down 9% year over year. We are already seeing some cross-selling benefits of integrating the majority of our HPE GreenLake offering into a single business unit. I mentioned the 39% growth in ARR this quarter. Our traditional storage business was down year over year. The business is managing two long-term transitions at once. We talked about our migration to the more software-intensive Elect
Speaker Change: Hybrid cloud revenues of $1.3 billion were up 1% sequentially and down 9% year over year.
Speaker Change: We are already seeing some cross selling benefits of integrating the majority of our H B E. We make offering into a single business unit I've mentioned, a 39% growth in our this quarter.
Speaker Change: Our traditional storage business was down year over year.
Speaker Change: The business is managing two longtime transitions at once we talked about our migration to the more software intensive electric platform. This is reducing current period revenue growth, they're locking in future recurring revenue.
Marie E. Myers: This is reducing current period revenue growth, so locking in future recurring revenue. Storage AAR growth of over 50% year over year offers early confidence in the migration. The second transition is from block storage to file storage, driven by AI.
Speaker Change: A growth of 50% year over year office.
Speaker Change: The confidence into the migration.
Speaker Change: The second transaction is from block storage to file storage driven by AI.
Marie E. Myers: While early, this is also on the right trajectory. Our new file offerings, plus the Salesforce investment Antonio mentioned, tripled our pipeline of file storage deals sequentially in Q2. Our operating margin was 0.8%, which was down 300 basis points sequentially and 110 basis points year over year. Reduced revenue scale and an unfavorable mix of third-party products and traditional storage were the largest drivers of the sequential change. Intelli Edge revenues were $1.1 billion. However, revenues fell 9% sequentially and 19% year over year.
Speaker Change: Early [laughter] also on the right trajectory.
Speaker Change: You saw offerings plus the sales force investment and Tony had mentioned tripled our pipeline a file storage deals sequentially in Q2.
Speaker Change: Our operating margin was two 8%, which was down 300 basis points sequentially and 110 basis points year over year.
Speaker Change: Revenue scale and an unfavorable mix of third party product in traditional storage was the largest driver of the sequential change.
Speaker Change: Intelligent edge revenues were $1 $1 billion revenue fell 9% sequentially and 19% year over year.
Marie E. Myers: Backlog consumption created difficult comparisons with both prior periods. However, our backlog is now at normal levels. The demand environment remains soft, and large enterprises have yet to return to the market in force. However, we do see some green shoots that give us confidence. Our channel inventory remains within the normal range. Wi-Fi has grown sequentially for two consecutive quarters, and growth remains strong in software and services. Attach rates and renewals for Aruba Central, SASE, and our AIOps software remain strong.
Speaker Change: Backlog consumption created difficult compares with the prior period.
Speaker Change: Our backlog is now at normal levels.
Speaker Change: The demand environment remains soft in large enterprises have yet to come into the market in force. However, we do see some green shoots that give us confidence networking will transition to modest sequential growth beyond Q2, as we had expected.
Speaker Change: Channel inventory remained within the normal range Wi Fi has grown sequentially for two consecutive quarters.
Speaker Change: Growth remained strong in software and services.
Speaker Change: That's right and when you read the central Safi and L. A I up software remained strong.
Marie E. Myers: The Intelligent Edge portfolio of subscription revenue grew above 50% year over year. The segment operating margin of 21.8% was down 760 basis points sequentially and 290 basis points year over year. As expected, lower revenues, a reduced mix of switching business, and less revenue from backlog were the primary drivers.
Speaker Change: The intelligent edge portfolio.
Speaker Change: Revenue grew about 50% year over year.
Speaker Change: The segment operating margin of 21, 8% was down 760 basis points sequentially and 290 basis points year over year.
Speaker Change: As expected the lower revenues reduced mix of switching business and less revenue from backlog were the primary drivers.
Marie E. Myers: As we indicated last quarter, we have reset our OPEX plan for the year to account for lower revenue and expect the Intelligent Edge operating margin to be back in the mid 20% range by Q4. Our HPE financial service revenue was up 1% year-over-year, and financing volume was $1.7 billion. Our operating margin of 9.3% was up 80 basis points sequentially and 40 basis points year-over-year. Our Q2 loss ratio remained steady below 0.5%.
Speaker Change: As we indicated last quarter, we have reset our opex plans for the year to account for lower revenue and expect the intelligent edge operating margin to be back in the mid 20% range by Q4.
Oh H P E financial services revenue was up 1% year over year and financing volume was $1 $7 billion.
Speaker Change: Our operating margin of 9.3% was up 80 basis points sequentially, and 40 basis points year over year Q.
Speaker Change: Q2 loss ratio remained steady at a low 0.5%.
Marie E. Myers: These results are what we have come to expect from this high-quality, predictable business. However, underneath these steady results, FS is already adapting to drive AI growth across the business. Year-to-date, nearly half a billion dollars, about $3 billion in financing volume, went to AI wins with both cloud and enterprise customers. This illustrates our prior point that AI is driving demand for every one of our businesses.
These results of what we have come to expect from this high quality predictable.
Speaker Change: However, underneath these steady results.
Speaker Change: It's already adapting to drive AI growth across the business.
Speaker Change: Year to date nearly half a billion dollars 3 billion in financing volume went to AI wins with both cloud and enterprise customers.
Speaker Change: It illustrates a prior point that AI is driving demand to everyone all the others.
Marie E. Myers: Turning now to cash flow and capital allocation. We generated $1.1 billion in cash flow from operations and $610 million in free cash flow this quarter. HPE typically consumes significant amounts of cash in the first half of the year and then generates cash in the second half of the year. We are ahead of traditional free cash flow expectations thus far in fiscal 24, given higher than expected net income in Q2, prepayments for AI systems, and timing of working capital payments. Our cash conversion cycle was negative four days, which is a reduction of 28 days from Q2-23.
Speaker Change: Turning now to cash flow and capital allocation, we generated $1 $1 billion in cash flow from operations and $610 million in free cash flow this quarter.
Speaker Change: HPE, particularly can see significant amounts of cash in the first half of the year and then generates cash in the second half we.
Speaker Change: We are head of traditional free cash flow pattern, thus far in fiscal 'twenty four given higher than expected net income in Q2 prepayments the AI assistance and timing of working capital payments.
Speaker Change: Our cash conversion cycle was negative four days, which is a reduction of 28 days in Q2 23 days of inventory and days payable what does hired to support our expected growth in AI system revenue in the second half.
Marie E. Myers: Our days of inventory and days payable were both higher to support our expected growth in AI system revenue in the second half. We returned $240 million in capital to shareholders in Q2, including $169 million in dividends and $45 million in share repurchases. Our year-to-date capital return is $386 million. Now, let's turn now to our forward view.
Speaker Change: We returned $240 million in capital to shareholders in Q2, including a 159 million in dividends and 45 million and share repurchases.
Speaker Change: Year to date capital return is 386 million.
Speaker Change: Let's turn now to our forward view.
Marie E. Myers: We expect a materially stronger second half, led by AI systems, traditional servers, and storage, networking, and HPE GreenLake. Let me recap the key drivers that factor into our expectations for Q3 and the full year. For servers, we expect improving GPU supply for AI systems and improving demand for traditional servers to drive sequential revenue increases through fiscal year 24. While the rising AI systems mix is a gross margin headwind, we are balancing this with higher-margin services revenue, improving scale, and cost discipline. We expect the segment operating margin to be approximately 11% for the fiscal year. For hybrid cloud, we expect slight sequential revenue increases throughout the year. HPE GreenLake growth should continue, and traditional storage should improve slightly.
Speaker Change: We expect a materially stronger second half led by AI systems traditional servers and storage networking and H P Green Lake.
Speaker Change: Let me recap the key drivers that factor into our expectations for Q3 and the full year.
Speaker Change: Together, we expect improving GPU supply for AI system that improving demand for traditional service to drive sequential revenue increases for fiscal year 'twenty four.
Speaker Change: While the rising AI system. The snakes is a gross margin headwind we are balancing this with higher margin.
Speaker Change: In U S.
Speaker Change: Creating scale and cost discipline.
Speaker Change: We expect this segment's operating margin to be approximately 11% for the fiscal year.
Speaker Change: The hybrid cloud, we expect slight sequential revenue increases throughout the year HPE green like growth should continue and traditional storage should improve slightly.
Marie E. Myers: We expect operating margin to improve modestly to the mid-single-digit range through the year as HPE GreenLake deals mature, new products ramp, and our Salesforce optimization gathers momentum. For Intelligent Edge, we anticipate slight sequential growth in Q3 and Q4, driven primarily by seasonal education spending rather than improving markets. We continue to expect our cost reduction efforts to materialize in the second half and our full-year operating margin to be in the mid-20% range. With that in mind, let me now turn to our art look.
Speaker Change: We expect operating margin to improve modestly to the mid single digit range through the year as H P. Green Lake deals mature new product ramps and our sales force optimization gathers momentum.
For intelligent edge, we anticipate slight sequential growth in Q3, and Q4 different primarily by seasonal education spending rather than improving market.
Speaker Change: We continue to expect our cost reduction efforts to materialize in the second half and our full year operating margin to be in the mid 20% range.
With that context, let me now turn to our outlook for Q3, we expect revenues in the range of 7.4.
Marie E. Myers: For Q3, we expect revenues in the range of $7.4 to $7.8 billion. We expect GAAP diluted net EPS to be between $0.29 and $0.34, and non-GAAP diluted net EPS between $0.43 and $0.48. For fiscal year 24, we now expect constant currency revenue growth of 1 to 3 percent, which is up from our prior 0 to 2 percent range. We reiterate our non-GAAP operating profit growth guidance of 0 to 2%. We are reducing our GAAP diluted net EPS guidance by $0.20 to $1.61 to $1.71 to incorporate the recent updates to our H3C proceeds.
Speaker Change: Seven $8 billion.
Speaker Change: We expect GAAP diluted net EPS to be between 29 cents and 34 cents and non-GAAP diluted net EPS between <unk> 43, and 48 cents.
Speaker Change: For fiscal year 'twenty four we now expect constant currency revenue growth of one 3%, which is up for that part zero to 2% range.
Speaker Change: We reiterate our non-GAAP operating profit growth guidance.
Speaker Change: We are reducing our GAAP diluted net EPS guidance by 20 to $1.61 to one dollar and 71 cents to incorporate the recent updates to our H three feet per seat.
Marie E. Myers: We are raising our Non-Gap Diluted Net EPS guidance up 3 cents to $1.85 to $1.95. This incremental $0.03 or $0.06 annualized reflects the contribution from the retained portion of our H3C standard. We are also increasingly comfortable with the high end of the non-GAAP diluted net EPS range given our OINE and operational improvements. We are excluding from our non-GAAP results the gain on sale from our H3C and CTG divestments.
Speaker Change: We are raising our non-GAAP diluted net EPS guidance of three cents to $1.85 to one dollar and 95.
Speaker Change: This incremental three cents or six cents annualized reflects the contribution from the retained portion of our heat treating stake.
Speaker Change: We are also increasingly comfortable with the high end of the non-GAAP diluted that EPS range, given Oh, I N E and operational improvement we.
Speaker Change: We are excluding from our non-GAAP results the gain on sale from H C D and C. T T divestments.
Marie E. Myers: This year's mixed shift from networking to AI systems should weigh on our gross margins. We expect the fiscal 24 non-gap gross margin to be below our full year expectation of 35% from our analyst day. To balance the makeshift, we are driving further simplicity and efficiency across the business.
Speaker Change: This is mix shift from networking to AI system should weigh on our gross margins. We expect the fiscal 'twenty four non-GAAP gross margin to be below our full year expectation of 35% from analyst day.
Speaker Change: The balance mix shift we are driving further simplicity and efficiency across the business. We are accelerating our degenerative AI capabilities, such as implementing H P. E specific large language models and chat bot right sales and service Representatives.
Marie E. Myers: We are accelerating our generative AI capabilities, such as implementing HPE-specific large-language models and chatbots for our sales and service representatives. As I mentioned last quarter, prudent cost management, simplified processes, and disciplined execution across cycles are key tenets of our long-term journey toward higher margins. These cost actions will be evident in financial results in the second half of fiscal 24. We now expect FY24 OPEX to be down modestly from FY23 OPEX. Our prior view was flat to down.
Speaker Change: As I mentioned last quarter.
Speaker Change: <unk> cost management simplified purchases and disciplined execution across cycles are key tenants of our long term journey towards higher margins.
Speaker Change: These cost actions will be evident in financial results in the second half of fiscal 'twenty four.
Speaker Change: We now expect fiscal year 'twenty for Opex to be down modestly from fiscal 'twenty three opex all prior deal with flat to down.
Marie E. Myers: This includes a sequential increase in Q3 for marketing before a sequentially lower Q4, which will serve us well heading into fiscal 25. We expect our fiscal 24 operating margin to be flattish year over year. We now expect OI&E to be less of a headwind this year. We anticipate a $150 million headwind versus our prior expectation of a $200 to $250 million headwind given a one-time benefit in Q2 and the retained portion of a H3C stay. We expect the effect of currency to be immaterial.
Speaker Change: This includes a sequential increase in Q3 for marketing before a sequentially lower Q4, which will serve us well heading into fiscal 'twenty five.
Speaker Change: We expect our fiscal 'twenty four operating margin to be flattish year over year. We now expect a whiny can be less of a headwind this year.
Speaker Change: We anticipate 150 million dollar headwind versus our prior expectation of $200 million to $250 million headwind given a one time benefit in Q2, and then retain portion of a hateful stake.
Speaker Change: We expect the effect of currency to be immaterial.
Marie E. Myers: Our strong first-half free cash flow increases our confidence that we will deliver at least $1.9 billion in fiscal year 24. We expect significantly stronger free cash flow in the second half of the year, led by higher earnings given our ramp in AI systems. This does not include the $2.1 billion that we expect to receive from Unisplendor this fiscal year as a result of our recently restructured agreements to sell our stake in H3C. We expect working capital to be neutral to free cash flow, as we expect declines in inventory to balance declines in accounts payable.
Speaker Change: Our strong first half free cash flow increases our confidence that we will deliver at least $1.9 billion in fiscal year 'twenty four.
Speaker Change: We expect significantly stronger free cash flow in the second half of the year led by higher earnings given our rent and AI assistance.
This does not include the $2 $1 billion that we expect to receive from unit splendor. This fiscal year as a result of that we shouldn't be restructured agreements to sell our stake in H C C.
Speaker Change: We expect working capital to be neutral to free cash flow as we expect declines in inventory balance declines in accounts payable.
Marie E. Myers: We remain committed in the long term to our balanced capital allocation framework, including our target of returning 65 to 75 percent of free cash flow to shareholders. In the near term, we expect to continue share repurchases at a pace in line with Q2 as we prudently manage our balance sheet ahead of the anticipated receipt of the H3C proceeds and the Juniper transaction closing. The proposed Juniper deal remains on track to close in late 2024 or early 2025, as planned.
Speaker Change: We remain committed in the long term to a balanced capital allocation framework, including a target of returning 65% to 75% of free cash flow to shareholders in the near term, we expect to continue share repurchases at a pace in line with Q2 as we prudently manage our balance sheet ahead of the anticipated receipt of the H C C.
Speaker Change: And then the transaction closing.
Speaker Change: The proposed deal remains on track to close in late 'twenty 'twenty four or early 'twenty five as planned.
Marie E. Myers: We remain committed to our dividend and to our investment grade rates. To conclude, our solid Q2 results illustrate how comprehensively AI is affecting our portfolio. We are capturing profitable growth opportunities in the AI market. We are excited for Discover and look forward to seeing many of you at our IR Summit. I'll open it up now for your questions.
Speaker Change: We remain committed to a dividend and to our investment grade rating.
Speaker Change: To conclude.
Speaker Change: Our solid Q2 results illustrate how comprehensive the AI is affecting our portfolio.
Speaker Change: We are capturing profitable growth opportunities.
Speaker Change: AI market.
Speaker Change: We are excited for discover and look forward to seeing many of you at our IR summit.
Speaker Change: I'll open it up now for your questions.
Operator: We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the key. To withdraw your question, please press star, then 2. We also request that you only ask one question. The first question is from Amit Daryanani with Evercore.
Speaker Change: We will now begin the question and answer session.
Speaker Change: To ask a question you May Press Star then one on your Touchtone phone.
Speaker Change: If you were using a speakerphone please pick up your handset before pressing the keys.
Speaker Change: To withdraw your question. Please press Star then two.
Speaker Change: We also request that you only ask one question.
Speaker Change: The first question is from Amit <unk> with Evercore. Please go ahead.
Amit Jawaharlaz Daryanani: Thanks a lot and congrats on a nice Yeah, I guess my question is really on the AI system side. You folks obviously have some really good revenue performance here. I think business pretty much doubled sequentially. I'm hoping you could spend some time talking about how we should think about margins on the AI side versus maybe segment averages, because your margins appear to be holding up a lot better versus what they have done at Dell or Supermicro, for example.
Thanks, a lot and congrats on a nice branch.
Speaker Change: Question for you on the AI system side.
Amit Jawaharlaz Daryanani: Really good revenue performance here, I think business pretty much doubled sequentially.
Speaker Change: You did spend some time talking about how should we think about margins on the AI side versus maybe segment averages because your margins appear to be holding up a lot better or since you have done a Dallas Supermicro for example, but love to just understand how do we think of it as just the margins with this corporate averages and if you just touch on what do you think differentiates your AI solutions versus companies like supermicro.
Amit Jawaharlaz Daryanani: I'd love to just understand how we think about AI system margins versus corporate averages. And if you could just touch on what you think differentiates your AI solutions versus companies like Supermicro or Dell, that would be super helpful. Thank you.
Speaker Change: They'll all be Super helpful. Thank you.
Marie E. Myers: Hey, Amit, good afternoon. It's Marie, and I'm happy to take the question.
Marie E. Myers: And look, honestly, you know, we shipped 900 million in AI revenue in the quarter. And I think, as you saw, our margin rate on our service segment from an operating profit perspective was 11%. So look, honestly, as a CFO, I'm very pleased.
Murray: Hey, good afternoon, it's Murray and are happy to take the question and look honestly, we shipped 900 million of AI revenue in the quarter and I think as you saw.
Speaker Change: And right on our service segment from an operating profit perspective was 11%. So the condensation CFO very pleased with what we guided and that's what we achieved and that's what we've guided for the second half of the year in terms of you know what the puts and takes and the headwinds and tailwind. So let me give you some color around it so from a headwinds perspective, obviously, we're dealing with.
Marie E. Myers: That's what we guided them to do, and that's what we achieved. And that's what we've guided for the second half of the year. In terms of, you know, what the puts and takes are and the headwinds and tailwinds, let me give you some color around that. So from a headwinds perspective, obviously, we're dealing with a tougher inflationary commodity market, particularly in the second half. And we also see, as you saw in the quarter, a greater mix of AI servers in our overall server mix.
Speaker Change: A tougher inflationary commodity market, particularly even in the second half and we also see as you saw in the quarter, a greater mix of AI servers actually in our overall seven Nixon as you know and you've heard it's a pretty competitive market out there I might add too, but clearly we're managing it very well and I'd say, what's benefiting us is.
Amit: A couple of really important tailwind one is what we're seeing in terms of the Gen 11 transition you know that part of the business brings a higher AUR P. And then also frankly, Amit. It's the work we're doing around cost. So as a result, you know I think this really illustrates that we are very disciplined around both price and cost.
Marie E. Myers: And as you know, and you've heard, it's a pretty competitive market out there, I might add, too. But, clearly, we're managing it very well. And I'd say what's benefiting us is a couple of really important tailwinds. One is what we're seeing in terms of the Gen 11 transition; that part of the business brings a higher AUP. And then also, frankly, it's the work we're doing around costs. So as a result, I think this really illustrates that, you know, we are very disciplined around both price and cost. And frankly, it's part of our strategy to drive profitable growth. We are so pleased with the results. And that's how we're guiding the second half of the year.
Amit: And frankly, it's part of our strategy to drive profitable growth. So pleased with the results and that's how we're guiding the back half of the year on it.
Antonio Fabio Neri: So Amit, on the differentiation, I will summarize it in four key elements. One is our ability to deliver and run systems at scale, so AI systems scale. That's a unique expertise, and we have decades of experience. Number two is our infrastructure cooling intellectual property. You know, we actually have all the IP necessary to cool systems in three different ways for them. Another example, our manufacturing footprint, which is very unique. We have one of the largest water-cooled manufacturing footprints in the world, with two very important locations in the US and in Europe, which are close to customers.
Amit: So on.
Amit: The differentiation I will summarize on four key elements.
Amit: One is our ability to deliver and run systems upscale so yeah system scale, that's the unique expertise and we have decades of experience.
Amit: Two is our infrastructural cooling intellectual property you know, we actually have all their P necessary to cool systems in three different ways for the mother.
Our manufacturing footprint, which is very unique we have one of the largest water cool manufacturing footprints in the world.
Amit: With two very important locations in the U S and in Europe, which are close to customers.
Antonio Fabio Neri: And then last but not least, services. I think people are going to realize that running the system at scale requires unique services capabilities. And that's why, with Marie, we start showing you what the services pull through is, which is also, over time, a lever to improve the gross margin in this business. And we cover all aspects from day zero, which is consulting, to day one, which is advisory and professional services design, and then, and builds, and then day two, which is the running part with our, you know, operational services side, and deep expertise when it comes down to this system All those four key elements are a big differentiation for us.
Amit: And then last one on the list the services, what I think people have come to realize that run in the system a scale a scale.
Amit: What's unique services capabilities and that's why it with money we started showing you what the services pull through is which is also over time a lever to improve.
Amit: The gross margin.
Amit: In this business and we cover all aspects from day zero, which consulting today, one which is advisory and professional services design, and then and bills and then day, two which is a running partner with our operational services side and deep expertise when it comes down to the system of scale include indirect liquid cooling.
Amit: All of those are four key elements are a big differentiation for us.
Operator: Thank you, Amit. Dary, maybe the next question?
Speaker Change: Thank you all have any theory, maybe the next question and the next question is from Aaron Rakers with Wells Fargo. Please go ahead.
Operator: And the next question is from Aaron Rakers with Wells Fargo. Please go ahead.
Aaron Christopher Rakers: Yeah, thanks for taking the question. I guess sticking on the AI topic, if I could first ask, you know, when you reference the AI enterprise customers starting to show up, and I think the comment in the conference call was, it's now north of 15% of your AI orders. Can you give a little bit more context to that? What has that been like over the last couple of quarters? I'm just trying to think about the trajectory of that.
Aaron Christopher Rakers: Yeah. Thanks for taking the question.
Aaron Christopher Rakers: I guess sticking on the AI topic, if I could first as you know when you.
Speaker Change: You referenced the AI enterprise customers starting to show up and I think the comment on the conference call. It is now north of 15% of your AI or AI orders.
Speaker Change: Can you give a little bit more context to that what what has that been over the last couple of quarters I'm just trying to think about the trajectory of that and then Antonio on the on the liquid cooling side.
Aaron Christopher Rakers: And Antonio, on the liquid cooling side, you know, as we and investors think about the Blackwell product cycle from NVIDIA, I'm curious, you know, can you be a little bit more specific about exactly where, from a technology perspective, you differentiate in liquid cooling? Is there something unique that HP does within the 300 patents that you would, you know, want to highlight for us as sustainably differentiated? Thank you.
Speaker Change: As we and investors think about Blackwell product cycle from Nvidia I'm curious are you know can you be a little bit more specific of exactly where from a technology perspective, you differentiate.
Speaker Change: At liquid cooling it or is there something unique that HP does within the 300 patents that you would want to highlight for us.
Speaker Change: Sustainably differentiate it thank you.
Antonio Fabio Neri: Yeah, thanks, Aaron. I think it's fair to say that enterprise demand for cloud services started to pick up in Q1 and really accelerate in Q2. Early on, if you go back to Q1 2023, all the way to call it calendar 2023, a lot of demand came from the model builders, the service providers, and hyperscalers. And you see the reference to our partner, Microsoft. But as I think about that, I think about three segments of the market. The first segment is that segment, which is driving a lot of demand for a lot of GPUs and accelerated computing in general. The second segment is Sovereign Clouds, and that is starting to pick up now.
Speaker Change: Yeah. Thanks, I don't I think it's fair to say that the enterprise demand has started to pick in Q1 and really accelerates in Q2 early on if you go back to the Q1 2023, all the way too.
Call It calendar 2023 although demand came from the mobile builders the service providers and Hyperscale is and you'll see the reference to our partner Microsoft but.
Speaker Change: Ah as you think about that I think pretty segments of the market I think about das segment, which is driving a lot of demand for a lot of Gpus and accelerated computing in general the second segment is sovereign clouds and that starts to pick up now.
Antonio Fabio Neri: And that, think about tens of customers around the globe, you know, because obviously, our countries. And then there are enterprise customers, which will be thousands of customers over time. So today, we are very pleased with the momentum in enterprise AI. A lot of conversations are happening. I was in Europe the last two weeks, and I was in London, I was in Paris, I was in Madrid.
Speaker Change: And that's think about tens of customers around the globe you know because all of us are countries.
Speaker Change: And then there is the enterprise customers will be thousands of customers over time. So today, we are very pleased with the momentum in the enterprise AI a lot of the conversations that are happening I was in Europe are the last two weeks and I was in London I was in Paris, and Madrid all of them.
Antonio Fabio Neri: All of them want to adopt AI, and I think they are attracted to HPE because of the trust, the quality, and the ability to deliver a simplified experience on our HPE GreenLake platform. As for the differentiation, you know, HP has three different ways to cool systems. So one is the traditional way, which is called liquid to air cooling. Think about that, you know, basically running a water supply in chill locations where it basically, you know, cools the air around the systems. Everybody has done that for a long time.
Speaker Change: Want to adopt AI and I think they are attracted to H b E because of the troughs the quality and the ability to deliver a simplified experience to our H bakery leg platform.
Antonio Fabio Neri: The second is what most of the industry is doing today, which is what I call 70% direct liquid cooling or hybrid liquid cooling. You know, those companies still use fans to cool aspects of the systems. Some of our competitors will talk about direct liquid cooling, but that's exactly what they're doing. They are doing only a hybrid direct liquid cooling. And HPE has unique, and by the way, in that environment, we have 10 systems already in the market today that we are shipping and configuring for customers.
As for the differentiation you know HP has three different ways to cool systems. So one is the traditional way, which is called the liquid cooling and think about that you know are basically running a water supply.
Speaker Change: Until until locations, where basically you know of course to add around the systems everybody has done that for a long time. The second is what most of the industry is doing today, which is what I call, 70% direct liquid cooling or hybrids are liquid cooling.
Speaker Change: You know those are companies still use fans to cool aspects of the systems. Some of our competitors talk about their liquid cooling, but that's exactly what it would do it and they are doing only a hybrid direct liquid cooling.
Speaker Change: H B E House.
Speaker Change: And by the way in that environment, we have 10 systems already in the market today that we are shipping and configure them for customers and then we have what I call, 100% already liquid cooling and this is a unique differentiation HD has because we have been doing 100% direct liquid cooling.
Antonio Fabio Neri: And then we have what I call 100% direct liquid cooling. And this is a unique differentiation HP has because we have been doing 100% direct liquid cooling for a long time. And today, there are six systems in deployment, and three of them are for generative AI.
Speaker Change: For a long time and today they are six systems in deployment at three and three of them are for degenerative AI and as we go to the next generation.
Antonio Fabio Neri: And as we go to the next generation of silicon, and you talk about Blackwell, when you go to the B200, that will require 100% direct liquid cooling. And that's a unique opportunity for us because you need not only the IP and the capabilities to cool the infrastructure, but also the manufacturing side. And that's why I said early on in the previous call that HP has one of the largest water-cooled manufacturing capabilities.
Speaker Change: The Silicon and you talk about Blackwell, a when you go to the B 200 that would require 100% direct liquid cooling and that's unique opportunity for us because you need not only the IP and the capabilities are to cool the infrastructure, but also the manufacturing side and that's why I said early on to.
Speaker Change: The previous call.
Speaker Change: That's H B has one of the largest water cool manufacturing capabilities. So that's what really differentiate us and even on the hybrid.
Antonio Fabio Neri: So that's what really differentiates us. And even on the hybrid, you know, a way to cool the system, HP is not using an off-the-shelf solution. We use what we call an ARC, which stands for Adaptive Rack Cooling System, which is a unique design. And the good news is that we can actually co-locate in the same data center and in the same aisle direct liquid cooling and air cooling systems, which is unique because customers don't want to retrofit data centers. So that's the opportunity.
Speaker Change: A way to cool the system H B is not using off the shelf solution. We use what we call an L C, which stands for about the Iraq cooling system is a unique design and the good news is that we can actually co located in the same data center and in the same aisle direct liquid cooling and air.
Speaker Change: Cool systems, which is unique because customers don't want the retrofits data center. So that's the opportunity.
Operator: Aaron, thank you very much. Gary. The next question is from Meta Marshall with Morgan Stanley. Please go ahead. Hi, this is Mary on Formida.
Speaker Change: Aaron Thank you very much scary.
Operator: The next question is from Meta Marshall with Morgan Stanley. Please go ahead.
Speaker Change: The next question is from meta Marshall with Morgan Stanley. Please go ahead.
Mary: Hi, This is Mary on for me to I just had a question for you on intelligent edge, where are you in the intelligent edge inventory digestion and when do you expect to emerge from it.
Marie E. Myers: Yes, good afternoon. And in terms of where we are at Intelligent Edge, I think, as I commented in my prepared remarks, you know, we saw Q2 as being the trough period, and we've been transitioning through that throughout the quarter. And if you look at the market and where it's at right now, I'd say that our channel inventory right now is in really good shape. And we did mention in the guide that we do expect a modest sequential improvement in networking in the back half of the year.
Speaker Change: Yes, good afternoon, and in terms of where we're at in intelligent edge I think as I commented in my prepared remarks, we saw Q2 as being the trough period, and we've been transitioning to that throughout the quarter and if you look at the market and where it's at right now I'd say that our channel inventory right now isn't really.
Speaker Change: Good shape and we did mentioned in the guide that we do expect a modest sequential improvement in networking in the back half of the year.
Antonio Fabio Neri: Yeah, and I will say, in addition to what Marie said, what I'm really excited about is that we see interesting areas of growth happening now. If you go back to Mobile World Congress, and you see even announcements like we made yesterday, the enterprise private 5G is picking up significant momentum. Of the almost 40 meetings I had in Barcelona, more than half were about enterprise private 5G. And so yesterday, we announced the most complete enterprise private 5G on the back of the Alternate Acquisition.
Speaker Change: Yeah, and I would say are in addition to what he said what I'm really excited is that we see interesting areas of growth happening now if you'll go back to mobile World Congress and you see even announcements we made yesterday the enterprise private if I G is picking up significant momentum.
Speaker Change: All of my almost 40 meetings I had in Barcelona more than half were about enterprise private five G and so yesterday, we announced the most complete enterprise private five G on the back of the Hudson It acquisition.
Operator: Thanks very much, Mary. Gary?
Speaker Change: Thanks, very much Mary Gary.
Operator: The next question is from Tony Sakonagi with Bernstein. Please go ahead.
Speaker Change: The next question is from Toni second hockey with Bernstein. Please go ahead.
Tony Sakonaghi: Yes, good afternoon, and thank you for taking my question. I just wanted to follow up on the guidance. You talked about enthusiasm for the second half, but you beat revenues this quarter relative to your expectations by 400 million. And by guiding up an additional percent, you're actually only guiding up the full year by 300 million. So I'm wondering, are you just being conservative given the commentary around enthusiasm and forces at work in the second half?
Speaker Change: Yes, good afternoon, and thank you for taking my question.
Speaker Change: I just wanted to follow.
Follow up on the guidance you talked about enthusiasm for the second half, but you beat revenues this quarter relative to your expectations by 400 million by guiding up an additional percent you're actually only guiding up the full year by 300 million. So I'm wondering are you just being conservative.
Speaker Change: Given the commentary around enthusiasm and forces at work in the second half or how do we reconcile that discrepancy and then also just on the a.
Tony Sakonaghi: Or how do we reconcile that discrepancy? And then also just on AI servers for the second half, I think you talked about six to 12 weeks of lead time. So if you have 3 billion in backlog and lead times of six to 12 weeks, why can't you deliver 3 billion in AI systems next quarter or certainly in the second half? Thank you.
Speaker Change: AI servers for the second half I think he talked about six to 12 week lead times. So if you have 3 billion of backlog and lead times are six to 12 weeks why can't you deliver 3 billion NII systems like next quarter or certainly in the second half. Thank you.
Marie E. Myers: Yeah, hi Tony. Good afternoon. So, this is Marie.
Maria: Yeah, Hi, Tony Good afternoon. So this is Maria I'm going to take the first question just on the guide. So let me just clarify the guidance and in terms of how we put it together. So we raised the guide from a $1 85 to 195 and that actually was the pass through on that 19% stake in Haiti three C. So we.
Marie E. Myers: I'm going to take the first question just on the guide. So, let me just clarify the guide in terms of how we put it together. So we raised the guide from 185 to 195. And that actually was the pass through on that 19% stake in H3C. So we actually put 3 cents related to the 19% stake. What I did point out, though, Tony, is I pointed to the higher end of the range.
Maria: We actually put three cents related to the 19% stake at.
Maria: What I did point to though Tony as I pointed to the higher end of the range. So that's really what's giving us confidence you know based on the increase that we made on revenue so you're seeing that higher top line and then also the covenants I got about just the cost discipline. So you've seen that just in the last couple of quarters, where we've had a really strong scrutiny and focus about opex.
Marie E. Myers: So that's really what's giving us confidence, based on the increase that we made in revenue. So you're seeing that higher top line. And also, the confidence I got around just the cost discipline. So you've seen that in the last couple of quarters, where we've had really strong scrutiny and focus around OPEX. And plus, we did have some favorability in OI&E this quarter, but LB, that was actually just a one-timer.
Maria: And plus we did have some favorability in Oh I need this quarter, but L. Beef that was actually just a one time there. So just wanted to make that point of clarification. So overall, Tony keeping the guide at 185 to 195, but really pointing to the higher end of the guide in terms of just the confidence that you articulated so I'll turn it over to Antonio to cover this is Tony.
Marie E. Myers: So I just want to make that point of clarification. Overall, Tony, keeping the guide at 185 to 195, but really pointing to the higher end of the guide in terms of just the confidence that you articulated. Now I'll turn it over to Antonio to cover the second part.
Antonio Fabio Neri: Yeah, Tony, I think there is an opportunity to potentially exceed that. I think the limiting factor is not the supply, to be honest with you, but the availability of data center space. I made this comment in Q1, if you recall, data center space, power, and cooling. And so we're working with the customers to time everything correctly, six to 12 weeks. Think about it, maybe less than a quarter, but then you have to go and install it.
Antonio: I think there is an opportunity to potentially exceed that Ah I think the limiting factor is not the supply to be honest with you is the availability of data center space I I made this comment in Q1, if you recall data center space and power and cooling and so you know we're working with the customer.
Antonio: Two time everything correctly, you know six to 12 weeks think about it you know.
Antonio: Maybe less than a quarter, but then you have to go and install it and you know there is a nice percentage of our deals in general.
Antonio: Which I'll actually agree lake and so while we can't recognize the revenue upfront we are deferring all their services piece of it. So it really is going to come down to the timing of the data center and the power and cooling and is that all of our lines correctly. Then we may have an opportunity to do better but we.
Antonio Fabio Neri: And there is a nice percentage of our deals in generative AI, which are all actually green lake. And so while we can recognize the revenue upfront, we are deferring all the services piece of it. So it really is going to come down to the timing of the data center and the power and cooling. And if that also aligns correctly, then we may have an opportunity to do better. But we felt prudent at this point in time to keep it the way it is and raise it by 1%.
Antonio: Felt prudent at this point in time to keep it the way it is and racing by 1%.
Operator: Tony, thanks very much. Gary. The next question is from Samik Chatterjee with J.P. Morgan. Please go ahead. Hey, thanks for the question. This is Joe Cardoso on First Somic. So maybe just following up on the AI questions, you know, you're seeing a sequential
Tony: Tony Thanks, very much Gary.
Operator: The next question is from Samik Chatterjee with JP Morgan. Please go ahead.
The next question is from stomach chatterji with J P. Morgan. Please go ahead.
Tony: Hey, Thanks for the question. This is Joe Cardoso on for Sonic.
Joe Cardoso: So maybe just following up on the AI questions, you now and you're seeing a sequential decline in backlog this quarter admittedly off of a very robust revenue quarter, but maybe you could just discuss the pipeline you're seeing them.
Speaker Change: Sitting here like what are some of the puts and takes that investors should be considering when seeing the sequential decline in backlog. Despite what appears to be a strong underlying demand environment overall. Thanks.
Speaker Change: Sure. Thank you, yes, our backlog was slightly down quarter over quarter also it was based on the demand we took in and also the fact that we've converted more I think you have to realize some of these deals, particularly the larger deals take time and a little bit of a lumpy some of that.
Samik Chatterjee: demand we took in and also the fact that we converted more. I think you have to realize some of these deals, particularly large deals, take time and are a little bit lumpy. Some of them have to go through the financing side. And so we feel good about where we are today.
Speaker Change: Has to go through the financing side and so we feel good about what we are today, but in term of the pipelines think about multiples of the current backlog multiples of the corner backlog. So as we go through the next weeks and quarters here, we feel very confident in our ability to capture that.
Antonio Fabio Neri: But in terms of the pipelines, think about multiples of the current backlog. So as we go through the next weeks and quarters here, we feel very confident in our ability to capture that AI for all the reasons I described before, and also the ability to close these deals, as some of them may include, by the way, the need to provide data center space as well, because we are not just building the system. And these are all generative AI systems, by the way, all of them that we also need to run for customers.
Speaker Change: They are for all the reasons I've described before and also the ability to close these deals some of them may include by the way the Ah they need to provide data center space as well because we are not just building the system and these are all generative AI assistance by the way all of them that we also need to run it for customers.
Antonio Fabio Neri: Thanks very much, Joe and Gary. The next question is from Simon Leopold with Raymond James. Please go ahead. Hi, this is Victor Chui on behalf of Simon. Regarding...
Speaker Change: Thanks, very much Joe Gary.
Operator: The next question is from Simon Leopold with Raymond James. Please go ahead.
Speaker Change: The next question is from Simon Leopold with Raymond James. Please go ahead.
Speaker Change: Hi, This is Victor Chu in for Simon.
Speaker Change: Regarding the doubling the AI systems revenues pretty a sharp inflection this quarter can you just tell us how much of the increase was driven by allocation improvement versus our ability to ship orders and you kind of just help us understand the dynamic there a little bit.
Operator: No, I don't think it has to do anything with allocation. I've read all these things about allocation.
Speaker Change: No I don't think it has to do anything with that location I read all this thing about location, we have fantastic partnership with Nvidia is about lead times in the general you know H 100, which obviously Nvidia made significant improvements on their own and then obviously, how we started ramping our manufacturing processes.
Antonio Fabio Neri: We have a fantastic partnership with NVIDIA. It's about lead times in the general, you know, H100, which obviously NVIDIA made significant improvements on their own. And then obviously, as we start ramping our manufacturing processes, we actually become better and better at that revenue conversion, you know, and I want to say, I want to thank my team because my team did a fantastic job. And we feel good about it as we go forward.
Speaker Change: We actually become better and better about the revenue conversion, you know and I want to say I want to thank my team because my team did a fantastic job and we feel good about as we go forward.
Antonio Fabio Neri: So it's a combination of multiple things, better lead times on supply. We feel pretty good about the ability to deliver systems in six to 12 weeks, to Tony's question. And some of them are straightforward, it's just shipments, and some are with our HP GreenLake offering wrapped around them.
Speaker Change: So it's a combination of multiple things are better lead times on supply we.
Speaker Change: We feel pretty good about the ability to deliver system six to 12 weeks to Tony's question and some of them are straightforward is just shipments and some of it with the RH be getting like offering wrapped around.
Operator: Thanks very much, Victor.
Victor Chu: Thanks, very much Victor.
Speaker Change: Gary.
Operator: The next question is from Rufu Bhattacharya with Bank of America. Please go ahead. All right, thanks.
Speaker Change: Question is from roof Lou <unk> with Bank of America. Please go ahead.
Operator: All right. Thanks for taking my questions.
Speaker Change: Thanks for taking my questions.
And for ones eat today.
Operator: That's what we're filling in for Wamsi today. Can you talk about how much of the GreenLake revenue and ARR growth came from AI? And Antonio, do you think that having GreenLake is helping you sell AI systems? And I also wanted to clarify. Antonio, you talked about sovereign AI. Can you talk about what innings you're in, and are there specific requirements of sovereign AI where you think HP is well-positioned to satisfy?
Speaker Change: Can you talk about how much of the Green Lake revenue.
Speaker Change: Growth came from the eye and then 'twenty do you think that having green Lake is helping you sell a systems and also wanted to clarify Antonio you talked about so many I can you talk about what innings you are in and are there specific requirements are so but any idea where you think H P is a it's been a position.
Speaker Change: That is fine.
Marie E. Myers: Hey Rupa, it's Marie. Look forward to seeing you tomorrow.
Speaker Change: And we look forward to seeing you tomorrow. So in terms of your question around just a AR and VR.
Marie E. Myers: So in terms of your question around just AI and machine learning, actually, you know, it was the fastest growing element of AI and Q2, followed by storage and networking. So I think, as I said in my prepared remarks, we're starting to see AI just sort of, you know, move through our entire portfolio. So pleased with the progress that we had this quarter. I'll turn it over, Antonio, to add some more context.
Speaker Change: And AI are actually you know it was the fastest growth element. They are in Q2, followed by storage and networking. So I think as I said in my prepared remarks, we're starting to see AI just sort of missed your anti portfolio. So pleased with the progress that we had this quarter and I'll turn it over and tell you to add some more context yeah.
Antonio Fabio Neri: Yeah, you know, on the second part of the question, you know, I think we are early at this point in time, you know. I think there is more to be seen, and I want to make sure I captured exactly what you said. Can you repeat the last part, because we were a little bit breaking?
Speaker Change: Yeah, you know on the second part of the question you know I think we are early and at this point in time, you know I think there is more to be seen and I wanted to make sure I captured exactly what you said can you repeat the last part because we were little bit braking.
Operator: Yeah, I just wanted to ask about Sovrin AI, you know, and are there specific requirements that you can try to solve?
Speaker Change: Yeah, I just wanted to ask about the 12 in the eye.
Speaker Change: Oh yeah.
Speaker Change: And so are there specific requirements that you can satisfy.
Antonio Fabio Neri: Yeah, so on Sovereign AI, I said it's early, early on. I think there are a lot of engagements right now happening at the country level. The good news is that we have very good reach across the board. And it's a combination of both.
Speaker Change: Yeah, so on sovereign.
Speaker Change: I said it is early early on a I think there is a lot of engagements right now.
Speaker Change: Happening at the country level. The good news, we have very good reach across the board and it's a combination of both there is a combination of providing what I call general I locations, where customers enterprise customers can get access to to a sovereign cloud that the governor may be helping funding.
Antonio Fabio Neri: There is a combination of providing what I call generative AI locations where customers, enterprise customers, can get access to a sovereign cloud that the government may be helping fund at the same time. And the other one is what I call supercomputing power, right? And so the two are very well aligned to the sovereign AI opportunities. And that's why I'm excited because HPE already provides supercomputing to a lot of these sovereign governments.
Speaker Change: At the same time and the other one is what I call a supercomputing power right itself and so the two are very well aligned to the sovereign AI opportunities and that's why I'm excited because H B already provides you know to all all of these sovereign governments supercomputers. So now we can extend it.
Speaker Change: Generally if you think about the example of the UK Bristol is a generative AI.
Antonio Fabio Neri: So now we can see that the UK is funding it as part of Bristol University, that the venture is going to be open to startups and enterprises in the UK to either train models or do other types of research. And that's what we see.
Speaker Change: That the U K is funded as a part of the Bristol University that the venture is gonna be open to startups and enterprises in the U K, so either train models or do other type of research and that's what we see.
Operator: Okay, thanks very much. We're blue.
Okay. Thanks, very much for Blue Gary we have two more questions. Please.
Operator: And the next question is from Ananda Barua with Loop Capital. Please go ahead.
Operator: Gary, we have two more questions, please. And the next question is from Ananda Barua with Loop Capital. Please go ahead. Hey, yeah, good afternoon, guys. Really appreciate you taking the question. Just a quick clarification and a quick question, Antonio. Did you say that last?
Speaker Change: The next question is from Ananda Baruah with loop capital. Please go ahead.
Ananda Baruah: Hey, Yeah. Good afternoon, guys I really appreciate you taking the question.
Ananda Baruah: Just a quick clarification and then a quick question Antonio.
Antonio: You say that.
Antonio: In the last 12 months AI growth is driven by service providers and was it mobile you said and then the question is yes.
Speaker Change: What's the what's a good way to think about cloud you get AI cloud scale opportunity Hyperscale isn't tier twos.
Speaker Change: Going forward, Thanks, a lot.
Antonio Fabio Neri: Yeah, no, thank you. I said that, you know, the segment where we have seen, obviously, the vast majority of action and demand is from the model model builders. Those are the big companies that build large and small language models. Obviously, you saw comments about partnering with Microsoft and an extension of their capacity to open AI. That's an example of a model builder. But there are other service providers, and, in fact, in my remarks, I mentioned Scaleway, which is a French service provider that provides the capacity for local French model builders.
Speaker Change: Yeah no. Thank you I said that you know the the segment, where we have seen obviously the vast majority of action and the amount is the model model builders. Those are the big companies that build large and small language models.
Speaker Change: Obviously, you saw the comments about a partner with Microsoft and the extension of their capacity to open AI. That's an example of a mobile builder.
Speaker Change: But also there are other service providers and in fact in my remarks, I mentioned scale way, which is a French service provider that provides the capacity for the local French model builders. In fact, there is a lot of it was a very vibrant ecosystem in France about building AI models that will.
Antonio Fabio Neri: In fact, there is a very vibrant ecosystem in France for building AI models that will use that capacity to train the models. That's what I'm referring to at this point in time. And that's what we see, and that's what we see now. So, we are very interested in not just the model builders, but Tier 2, Tier 3, which also is going to be a big driver, but understanding that enterprise, ultimately, where the action is going to happen in terms of fine-tuning and deploying these AI models over time.
Speaker Change: Use that capacity to train the models, that's what I refer to at this point in time and that's what we see and that's what we see now. So we are very interested in not just the modal builders, but tier two or tier three which also is it going to be a big driver, but understanding the enterprise ultimately where the action is going to happen in terms of fine tuning.
Speaker Change: And deploying these AI models overtime.
Speaker Change: Okay. Thank you very much Amanda and last question Gary.
Operator: And the last question is from Louis Miscioscia with Diyawa. Please go ahead.
Operator: Okay, thank you very much, Ananda. And the last question is from Louis Miscioscia with Diyawa, please go ahead. Hey, thanks for getting me in. So my question is really about a GPU or accelerated diversification.
Speaker Change: Last question is from Lou Miss Yoshio with DIY. Please go ahead.
Speaker Change: Hey, Thanks for getting me in.
Speaker Change: My question is really about GPU or accelerated diversification, obviously, our A&D and Intel and others are starting to come out. So as you think about calendar 2024, what do you think that your system will be for this and what do you think demand will be and then maybe continue that into 2025.
Antonio Fabio Neri: Yeah, I mean, listen, I'm very pragmatic about these things. Today, in generative AI, the market leader is NVIDIA. And that's where we have aligned our strategy. That's where we have aligned our offerings. And as I made my remark earlier, we have 10 systems already in the mixed cooling environment and six systems, six offers, also in the direct liquid cooling environment.
Speaker Change: Yeah, I mean listen I'm I'm, a very pragmatic about this things today engineers at the valley.
Speaker Change: The market leader is Nvidia.
Speaker Change: And that's where we have a line of strategy, that's where we have a line of our offerings and as I've I've made my remark earlier, we have 10 systems already in the mixed cooling environment and and six systems. They'll six offers also in the direct liquid cooling environment. So we are aligning with Nvidia today.
Antonio Fabio Neri: So we are aligning with NVIDIA today, and that's why you're going to see a discover discoverer, Jensen, coming on stage with me to talk about what we're doing together. Now, when you go into the sovereign space where there may be some components of supercomputing down the road, obviously, you know, they design their own systems with our help, and that will be a mixed environment. But just in the last month or so, we opened a new system at the Los Alamos Laboratory, which was actually an immediate system with HPE, and it's directly liquid-cooled, so we are clear about that.
Speaker Change: And that's why you're going to see a discover jensen comment on stage with me to talk about what we're doing together.
Speaker Change: Now when you go into the sovereign space, where there may be some components of supercomputing down the road.
Speaker Change: Obviously, you know they design their own systems with our help and that will be a mix environment, but just in the last month or so we open a new system.
Speaker Change: Los Alamos laboratory, which was exited in immediate system with HPE and it's direct liquid cooled. So we're clear about that.
Speaker Change: But then they all of those are systems that will come in 2025 that may have a different type of accelerators over time, we're gonna be time to market, but right now we are aligned to Nvidia and that's what we'll do it.
Antonio Fabio Neri: But then there are also systems that will come in 2025 that may have different types of accelerators. Over time, we're going to be time to market, but right now, we are aligned to NVIDIA, and that's what we're doing. And that's why I think it will be a great opportunity for you to join us at HP Discover because you can see everything we talked about today on the floor. Every system I just referred to in my slides, every comment I made in my answers to the questions, you can come and see it.
Speaker Change: And that's why I think it would be a great opportunity for you.
Speaker Change: So join us H b discover because you can see everything we talked today on the floor.
Speaker Change: Every system I, just referred to my slides.
Speaker Change: The comment I made in my answers to the questions you can come and see it these are.
Antonio Fabio Neri: These are systems and IP that we are shipping today, and you're going to see our time to market with this silicon in addition to all the services in HP GreenLake. So it's going to be an amazing opportunity. Also, because we are doing the keynote at Sphere, we're probably going to have more than 17,000 customers and partners joining us. So, I know we don't have a lot of time for questions. You know, as a recap, the quarter was very solid.
Speaker Change: Systems, and IP that we are shipping today, and youre going to see our time to market with the Silicon. In addition to all the services and it should be like so it's gonna be an amazing opportunity.
Speaker Change: And also because we are doing the keynote at the sphere, we're gonna have probably inside this fear more than 17000 customers and.
Speaker Change: And partners joining us so no we don't have a lot of the no more time for question, but I will say thank you for joining today you know as a recap the quarter. There was very solid our AI system revenue more than doubled to $900 million.
Antonio Fabio Neri: Our AI system revenue more than doubled to $900 million, allowing us to obviously exceed our revenue and ungap earnings per share guidance. Because the demand for AI is strong, we have a multiple of the backlog in our pipeline, and some aspects of the traditional infrastructure market are recovering, plus our disciplined execution on pricing and cost. We are raising both the revenue and EPS guidance. And on revenue, there could be something more, obviously, but it's depending on some of the timing.
Speaker Change: Allowing us to obviously exceed our revenue and non-GAAP earnings per share guidance.
Speaker Change: Because the demand is strong we have a multiple of the backlog in our pipeline and some aspects of that traditional.
Murray: Infrastructure market as recovery, plus our disciplined execution on pricing and costs, we are raising both our revenue and EPS guidance I know the revenue there could be something more obviously, but is dependent on some of the timing and then obviously on the P. S. We're comfortable with higher end of the range as Murray said so again.
Antonio Fabio Neri: And then, obviously, on the EPS, we are comfortable with a higher end of the range, as Marie said. So, again, we're very pleased. We feel the second half is going to set up really well. And then, obviously, we are looking forward to seeing many of you at HP Discover in just less than two weeks. Thank you for your time today.
Speaker Change: Were very please we feel the second half is going to set up really well and then obviously, we're looking forward to see many of you are the HP discover and just listened to weeks. Thank you for your time today.
Operator: Ladies and gentlemen, this concludes our call for today. Thank you.
Speaker Change: Ladies and gentlemen, this concludes our call for today. Thank you.
Speaker Change: [music].
Speaker Change: Hmm.
Speaker Change: [music].
Speaker Change: Okay.