Q4 2024 Hewlett Packard Enterprise Co Earnings Call
Good afternoon, and welcome to the fourth quarter fiscal 'twenty 'twenty for Hewlett Packard Enterprise earnings Conference call.
At this time, all participants will be in a listen only mode. We will be facilitating a question and answer session towards the end of the conference should you need assistance during the call. Please signal a conference specialist by pressing the Starkey 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 Paul Glaser head of Investor Relations. Please go ahead Sir.
Yes.
Good afternoon, I am Paul Glazer head of Investor Relations for Hewlett Packard Enterprise I would like to welcome you to our fiscal 'twenty 'twenty four fourth quarter earnings conference call with Antonio Neri, Hpe's, President and Chief Executive Officer, and Marie Myers, Hp's Chief Financial Officer.
Before handing the call to Antonio Let me remind you that this call is being webcast a replay of the webcast will be available. Shortly after the call concludes we have posted the press release and the slide presentation accompanying the release on our HPE Investor Relations webpage.
Elements of the financial information referenced on this call are forward looking and are based on our best view of the world and our businesses as we see them today H.
HPE assumes no obligation and does not intend to update any such forward looking statements. We also note that the financial information discussed on this call reflects estimates based on information available at this time and could differ materially from the amounts ultimately reported in Hpe's quarterly report.
On Form 10-K for the fiscal year ended October 31st 2024.
For more detailed information please see the disclaimers on the earnings materials relating to forward looking statements that involve risks uncertainties and assumptions. Please.
Please refer to Hpe's filings with the SEC for a discussion of these risks.
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 presentation accompanying today's earnings release on our website for details.
This conference call all revenue growth rates unless noted otherwise are presented on a year over year basis, and adjusted to exclude the impact of currency.
Finally, Antonio and Marie will reference our earnings presentation in their prepared comments.
Antonio Neri: With that let me turn it over to Antonio.
Antonio Neri: Thank you Paul and thank you all for joining us today.
Antonio Neri: Before I share my comments on a quarterly and yearly performance I would like to provide an update on the juniper networks acquisition.
Antonio Neri: We have received approvals from key geographies around the world, including the European Union.
Antonio Neri: K, India, South Korea, and Australia, which have given unconditional clearance and see the competitive benefits of the transaction.
And the United States, we are engaged with the department of Justice and we expect that review will continue into the new calendar year.
We anticipate the deal will close in the early part of 'twenty twenty-five within the previously stated timeframe.
Speaker Change: Well the H B, a juniper continues to believe the transaction will enable us to provide a complete portfolio of modern secure networking solutions that both are essential foundations for both hybrid cloud and AI.
The combined companies and has the ability to compete and innovate will fundamentally improve the networking industry.
This transaction will also fund the U S national security interests by the months in the Hps position as a strong U S innovator among global technology companies.
Speaker Change: Turning to results, we had an exceptional fourth quarter to cap off a strong year.
Speaker Change: In actual dollar terms, we generated a record quarterly revenue of $8 $5 billion up 15% year over year exceeding $8 billion for the first time in our history.
Speaker Change: Our results reflect the continued adoption of H b, the lake and the acceleration of our revenue growth in AI.
Speaker Change: Q4, and fiscal year 'twenty four results exceeded our expectations for revenue diluted net earnings per share and free cash flow.
Speaker Change: We drove sequential revenue growth across each of our segments a continuation of the positive momentum we saw building throughout the year across our business.
Q4 constitutes the third consecutive quarter of improved year over year growth rates and revenue non-GAAP operating profit non-GAAP diluted net earnings per share.
Speaker Change: [laughter] contributed significantly to our performance was record server revenue of $4.7 billion up 31% year over year, a third consecutive quarter of double digit growth.
Speaker Change: Sequentially AI assistance revenue was up 16% to $1.5 billion exited in fiscal year 'twenty four with $6 $7 billion in cumulative orders since Q1 of fiscal year 'twenty three.
Speaker Change: After the close of Q4, I am pleased to share that our AI assistance demand remains strong and we have received new orders bring in AI assistance backlog to over $3.5 billion.
Speaker Change: Our traditional server business also continued to reflect the improved market dynamics as we drove our third consecutive quarter of year over year double digit orders growth.
Speaker Change: Hybrid cloud revenue grew 18% year over year, and 21% sequentially, resulting in revenue of $1.6 billion with increase in revenue for H B private cloud and continued growth in H b storage.
Speaker Change: We're seeing customers like Lupin limited a large India pharmaceutical company repatriate workloads from the public cloud to enhance their data security have meet regulatory and compliance requirements.
Speaker Change: Customer adoption of our H, B O, let or storage or be solutions continues to rise and accelerate the pace.
Speaker Change: Since launch we have sold approximately 3000 systems Miami Dade County, the seventh most populous county in the United States implemented H B, a literal storage MP could consolidate and existing storage footprint to lower PCL and improve performance and sustainability.
Speaker Change: Our intelligent edge business achieved its third consecutive quarter of orders growth, reflecting our expectations for an improving demand environment. We are particularly pleased with the double digit year over year orders growth that we saw in data center networking and important growth market for our H B Aruba networking business.
Speaker Change: Yeah.
Speaker Change: H B financial services financing volumes of $2 $1 billion rose to an all time high this quarter driven by strong demand for H, B Green Lake and AIG financing.
Speaker Change: It is clear customers need more investment capacity, whether to deploy AI or two also the rate the adoption of hybrid cloud.
Speaker Change: Our record breaking revenue performance in Q4 resulted in record profitability with non-GAAP operating profit of $938 million.
Speaker Change: That translated to non-GAAP operating margin of more than 11%, a 110 basis points increase sequentially.
Speaker Change: As a result of our exceptional Q4 performance fiscal year 'twenty for revenue growth top 3% year over year exceeding $30 billion as we added more than 9000, new customers across the portfolio <unk>.
Speaker Change: Combined with our disciplined operating expense management, which also did it in the back half of the year, we generated a record breaking $2 $3 billion and free cash flow exceeding our guidance of at least $1.9 billion for the year.
Speaker Change: We closed the year on a strong note exceeding our full year commitments for revenue diluted net earnings per share and free cash flow.
Speaker Change: We are very pleased with our results and excited about the opportunities ahead for H B E.
Speaker Change: It is clear our strategy is working we have a tremendous set of assets include an extensive solutions for major cloud, enabling us to meet our customer needs across AI networking and hybrid cloud, providing a full stack of products and services clearly differentiates us versus our competition and also the value for our shareholders.
Speaker Change: In Q4, we continued our investment in innovation, which further enhance our product portfolio and position us to capture additional market share.
Speaker Change: AI is clearly transformative for our customers and HP is positioned to lead in the next wave of innovation.
Speaker Change: At our recent day, a day, we announced the industry's first 100 per cent fabulous direct liquid cooling architecture, a critical capability for customers to leverage the next generation of direct liquid cooled Gpus and Cpus, while facilitating pick for four months as they manage increase energy densities.
Speaker Change: This industry first architecture is unique to H b and results from the case of experience in liquid cooling technologies.
Speaker Change: Two weeks ago at S. C 24, we announced our newest 400, Gigabits H B slingshot direct liquid cooled networking fabric products engineered to support both generative AI cluster warlords and extra skilled supercomputer.
Speaker Change: These innovations are enhancing the performance of our AI assistance and supercomputing pro lines differentiating us from the competition.
Speaker Change: Are they see 24, we also announced that HP has delivered the fastest verified supercomputer in the world to the U S Department of Energy's Lawrence Livermore National Laboratory.
Speaker Change: Got it done is not only the world's fastest supercomputer at more than 1.7 extra flow. It is also among the most energy efficient in the world.
Speaker Change: H B now has deployed seven of the top 10 fastest supercomputers in the world, including numbers, one two and three on the list.
Speaker Change: We also continue to innovate to help accelerate enterprise adoption of AI since launching H B private cloud AI, we have expanded our collaboration with Deloitte to help businesses of all sizes to deploy AI solutions tailored for their industry specific use cases, such as C suite to AI and many others.
In addition, we introduced the unleash AI partner program to grow our ecosystem and expand the customer's ability to address there are use cases, where the HB private cloud they are.
Speaker Change: While we are still in early days interest is strong with hundreds of customers in the pipeline with many compelling proof of concept on their way we closed our first deals during Q4, including our W. E. A leading company in the field of renewable energy, which selected HPE private cloud AI to unlock insights from weather data.
Speaker Change: Customers are also asking us to help them simplify their vmware private clouds and optimize their virtualization costs.
It should be the scope of Barcelona, two weeks ago, we launched H B E via essentials, which enables customers to manage their virtualization and states across H b be aware and many others.
Speaker Change: We have built on our recent acquisitions of Morpheus data and op, thrump, giving customers operational flexibility and allowing them to no longer be locked into a single virtualization vendor.
Speaker Change: With H B V M essentials, they can achieve up to five times lower T C L.
Speaker Change: As a part of our H B V. M. Essentials, we also provide an enterprise grade open source KVM virtualization solution.
Speaker Change: This allows customers to dramatically reduce costs, while increasing their flexibility to innovate across our full suite of hybrid cloud operations capabilities and an on premises multi stock and the multi cloud the public environment.
Speaker Change: In storage, we continue to invest in our multi protocol H B L. A thorough jumpy platform as we transition our storage portfolio to them AI, driven cloud native and disaggregated architecture.
Speaker Change: Our new H B O later, our storage M. P. X 10000 is a revolutionary new high performance object storage designed for AI exabyte scale and optimized for high speed unstructured data lakes, where rapid restore for backup and recovery.
Speaker Change: Our AWS three compatible object storage interface and deduplication supports up to 20 times data reduction and streamlines integration with any available backup solution in the market.
Speaker Change: With H B L. S storage M. P X 10000 customers can achieve up to six times faster object storage performance compared to competitive solutions in the market.
Finally, our innovation and the intelligent edge are helping us to advance H B O Ruben network in central with AI ops co pilot capabilities built into our each be getting like cloud.
Speaker Change: During the quarter, we announced two new solutions to it has the network operators experience and security for our customers.
Speaker Change: The first is the integration with the H B ops ramped to monitor third party devices.
Speaker Change: We also introduced a behavioral analytical based network detection and response capability, where we are leveraging network and telling me they to train AI models to monitor customer Iot devices.
Speaker Change: We have an important place in the market as the leading technology innovator.
Speaker Change: I am proud that H b team members around the globe bring our innovations to customers every day to help them modernize their it infrastructure and transform for the better.
Speaker Change: I am very pleased with our exceptional fourth quarter results and the resulting outperformance in several of our full year commitments to our shareholders.
Speaker Change: Our strategy is well aligned to the Mega trends reshaping networking hybrid cloud and AI and our unique product portfolio is well positioned to capture new customers and ancillary value for our shareholders.
Speaker Change: We expect the pending acquisition of Juniper networks to further enhance our portfolio, providing customers with complete edge to cloud solutions.
Speaker Change: I am extremely excited about the significant opportunity we have in the coming fiscal year to drive increased value for our shareholders.
Speaker Change: I am optimistic about what we can achieve and look forward to the year ahead.
Speaker Change: Now, let me turn the call over to muddy who will provide more details about our Q4 results and guide for the first quarter Murray.
Speaker Change: Thank you Antonio and good afternoon, we ended fiscal 2020 full on solid footing and exceeded what we said we would do we.
Murray: We achieved record quarterly revenue delivered solid profitability and generated free cash flow above our guidance.
Murray: We executed well in a dynamic environment and growing revenue sequentially in each segment.
Murray: Investments in AI are leading to infrastructure refreshes.
Murray: In Q4, we also maintained disciplined cost management and improved non-GAAP operating profit a.
A few highlights from that 'twenty 'twenty four results.
Murray: We grew AI systems revenue more than 150% to $4.1 billion and met our server non-GAAP operating margin target. We continued our part transition within storage and ended the year with Electra N P accounting for a meaningful portion of total storage orders.
Murray: Transition to more software defined storage will drive a greater mix of higher margin recurring revenue over the long turn lastly, intelligent edge, we rightsize that cost structure as we navigated a digestion period.
Murray: We grew fiscal 'twenty 'twenty, four revenue, 3% to $30.1 billion exceeding the high end of the outlook range. We provided in September.
Murray: non-GAAP diluted net EPS of $1 99, and free cash flow of $2 $3 billion. Both came in above our revised outlook ranges.
Murray: In total we returned $826 million to shareholders via dividends and share repurchases.
Murray: Overall, our results reflect focused execution and improving demand as customers implement AI strategies.
Murray: Let me dive into the details of the quarter.
Murray: We delivered record quarterly revenue and our second highest non-GAAP diluted net EPS, both of which came in above the high end of guidance.
Murray: Total revenue grew 15% year over year, and 9% quarter over quarter to a record $8.5 billion.
Murray: Gross in the quarter was led by strong conversion of AI systems backlog refreshes and traditional compute better than expected performance within hybrid cloud and a continued recovery in networking.
Murray: We are pleased to report non-GAAP diluted net EPS of <unk> 58 cents above the high end of guidance. Despite dilution from the issuance of our convertible preferred securities in September which was not factored into our outlook.
Murray: Our <unk> grew 48% year over year to $1.9 billion nearly doubling since Q1, 2023 primarily driven by HPE Green Lake. We added approximately 2000 U H P E Green Lake customers during the quarter ending the year with approximately 39000.
Murray: Unique customers.
Murray: I am happy to report continued demand for our differentiated AI system offerings, which resulted in strong double digit sequential revenue growth to $1.5 billion.
Murray: This record contribution from AI systems revenue combined with lower mix of intelligent edge drove gross margin down 390 basis points year over year, and 90 basis points quarter over quarter to 39%.
Murray: non-GAAP operating expenses decreased 9% year over year as reported and were down $5 million quarter over quarter as we focused on streamlining our cost structure and are closely managing discretionary expenses.
Murray: non-GAAP operating margin was 11, 1% up 140 basis points year over year, and up 110 basis points sequentially.
Murray: Strong profitability roll through to free cash flow, which exceeded our expectations and totaled $1.5 billion fiscal 'twenty to 'twenty four free cash flow was $2 $3 billion, our highest ever for the full year.
Murray: GAAP diluted EPS of 99 cents and non-GAAP diluted net EPS at 58 sets were both above guidance benefiting from better than expected, Hawaii and expense management.
Murray: GAAP EPS benefited primarily from a lower than previously expected tax expense on an aggregated H three see dispositions.
Murray: non-GAAP diluted net EPS excludes the gain we recognized in the partial sale of I hate suites investment at $162 million of net costs, primarily from stock based compensation expense acquisition and other related charges amortization of intangibles.
Murray: Now, let's turn to the segment results.
Murray: Oh, so the business is a key driver of record quarterly revenue and grew double digits year over year for the third consecutive quarter Sofia revenue achieved an all time high of $4 $7 billion up 31% year over year and up 9% quarter over quarter with sequential growth in AI assistance and Judy.
Murray: She will serve as the traditional compute business continued its momentum during the quarter and grew sequentially for the fourth consecutive quarter driven by ongoing refreshes to N. Gen 11 separate products, which carry high au piece.
Murray: Adoption has been strongest in North America, and Europe as customers are investing in new workloads in.
In the fourth quarter, and Jan 11 accounted for more than two thirds of our core compute revenue and contributed to a U P growth.
Murray: AI assistants, we continue to grow the business to new highs AI systems orders during the quarter were in line with our expectations at approximately $1.2 billion. However, we had an order book in Q4, leaving our net orders for the quarter at approximately $500 billion.
Murray: Subsequent to the end of the quota we have received orders that bring our current backlog to over $3 $5 billion.
Murray: As we have mentioned before AI systems orders can be lumpy and this is an example of that.
Murray: Fourth quarter operating margin was 11, 6% up 150 basis points year over year, and up 80 basis points quarter over quarter.
Murray: Moving to hybrid cloud, we grew revenue, 18% year over year, and 21% quarter over quarter to $1 $6 billion materially exceeding our guidance of a slight revenue increase.
Murray: Revenue growth was led by private cloud and the continued ramp of electric N P.
Murray: During the quarter, we received our first orders for private cloud AI as we target a growing pipeline that includes corporations across verticals and regions.
Just as strong and manufacturing education and financial services.
Murray: We have also deployed private cloud AI intently and they didn't use cases from the public cloud due to better cost performance and compliance.
Murray: In storage, we are balancing investments in owned IP products against market trends.
Murray: N. P remains ahead of our expectations and is the fastest ramping storage product in our company's history.
Murray: Keep in mind. These sales carry a higher portion of deferred software and services revenue, which takes longer to translate to the P&L, but benefits margins long term high.
Murray: Hybrid cloud operating margin was 7.7% up 390 basis points year over year, and up 260 basis points sequentially predominantly due to better opex controls.
Murray: Now onto the intelligent edge, we believe the business remains at a positive recovery and customers have largely digested excess inventories.
Murray: Total intelligent edge revenue was $1.1 billion down 20% year over year, and essentially flat quarter over quarter.
Murray: Sequentially, we saw growth in services W lab products and software, partially offset by declines in switching and campus.
Murray: Importantly, we are seeing more large deals in our pipeline, giving us confidence that demand is improving.
Murray: Keep in mind, we were still benefiting from the drawdown of networking backlog in Q1 of fiscal 2020 four.
Murray: Operating margin of 24, 4% was down 270 basis points year over year, but up 200 basis points quarter over quarter due to lower opex in line with expectations.
Murray: Lastly financial services.
Our financial services business generated $893 million of revenue up 2% year over year, and up 1% quarter over quarter financing volumes increased 41% year over year to a new all time high of $2.1 billion.
Murray: Our Q4 loss ratio remains steady near 0.5% and return on equity totaled 17%.
Murray: Operating margin was nine 2% up 120 basis points year over year, and up 20 basis points quarter over quarter.
Murray: Moving to cash flow and capital allocation, we generated strong operating cash flow of $2 billion and free cash flow of $1.5 billion in the quarter, both of which exceeded our expectations due to higher revenue and increased collections for.
Murray: For the full year free cash flow was a record $2 $3 billion above that guidance of $1 $9 billion.
Murray: Q4 cash conversion cycle was a negative 12 days down eight days from Q4 'twenty three are down 16 days from last quarter inventory ended the year at $7.8 billion up 2% quarter over quarter due to the nature of our AI assistance business, we have focused on reducing inventory during fiscal 'twenty to 'twenty five.
Murray: As we convert AI systems backlog and grow our storage business.
Murray: During Q4, we returned $169 million via dividends and $50 million via share repurchases to common shareholders, respectively. We returned a total of $826 million during the full year.
Murray: Moving to our outlook for fiscal Q1, 'twenty 'twenty five.
Speaker Change: As Antonio said, we expect to close the transaction in early twenties 25 at which time, we will provide combined company guidance for fiscal 'twenty twenty-five. However, let me provide some high level thoughts as to how we are thinking about the upcoming year.
Speaker Change: Overall customer conversations indicate higher spending in 2025 with multiple tail winds that should contribute to revenue growth.
Speaker Change: We expect continued recovery in traditional compute and growing adoption of AI assistance by enterprises and sub brands, Although we expect orders to remain competitive and lumpy. It hybrid cloud we are beginning to see customers accelerate digital transformation projects in order to execute on AI strategies at <unk>.
Speaker Change: Working we expect demand will modestly recover throughout the year.
Speaker Change: For the first quarter, we expect year over year revenue growth to be in the mid teens on sequential basis. This is in line with normal seasonality.
Speaker Change: We expect service revenue to be down quarter over quarter.
We expect flat to modest growth sequentially interdigital confused and lower AI assistance contribution following a very strong quarter.
Speaker Change: The operating margin will be closer to 10% to 11% as customers navigate the transition to next Gen Gpus.
Speaker Change: And hybrid cloud, we expect a sequential decline in the first quarter due to stronger than seasonal growth in Q4 with operating margin in the mid single digit range.
In networking, we are still managing prolonged sales cycles I would expect the business to be around historical seasonality a flattish sequential growth.
Speaker Change: We expect intelligent edge operating margin to be in the low 20% range due to mix.
Speaker Change: Gross margin will benefit from a more favorable revenue mix and we expect a modest sequential decrease in opex.
Speaker Change: Hawaii is expected to positively contribute to the bottom line with higher net interest income more than offsetting two cents of headwinds associated with the cost of that juniper financing.
Speaker Change: Overall, we estimate Q1, GAAP diluted net EPS to be between 31 cents and 36 cents and non-GAAP diluted net EPS to be between 47 cents and 52 cents based on 1.4 billion diluted weighted average shares outstanding including $76 million of dilution.
Speaker Change: And for the convertible preferred securities for free cash flow, we typically consume cash in the first quarter, we intend to procure components needed to meet current and future AI systems demand, while continuing to manage inventory to Q1, we intend to buy back shares of common stock at a similar pace to Q4, we remain committed.
Speaker Change: In the long term to a balanced capital allocation framework, our dividend and our investment grade rating in summary, we delivered strong Q4 results and entered fiscal 'twenty 25, well positioned to drive profitable growth and generate free cash flow that we can reinvest into the business while also.
Speaker Change: Returning capital to shareholders.
Speaker Change: With that I'll turn it over to Q&A.
Speaker Change: Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
If you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
Speaker Change: We also request that you ask only one question, we will now pause for just a moment to assemble our roster.
Speaker Change: And your first question today will come from Wamsley Mohan with Bank of America. Please go ahead.
Wamsley Mohan: Hi, yes. Thank you so much and congrats on the strong quarter and guide, especially given the dilution from the preferred stock.
Wamsley Mohan: As we as we look at your AI business. The can you maybe give us some sense of how your pipeline is shaping up given that the backlog levels kind of dipped in the quarter and I know you made some comments about how its backup intra quarter, but can you give us some sense of how the pipeline looks and what the comps.
Speaker Change: Sure enough that could be thank you.
Antonio Neri: Yeah. Thanks, Juan said this Antonio and good afternoon, the pipeline as a multiple of the current backlog, which we're sure as of a day ago, which is basically more than $3 $5 billion and inside the pipeline, obviously remember that its four key segments of the market.
Antonio Neri: Obviously, the biggest driver continues to be what I call segment, one or more of a build a hyper scaler AR as well as now the tier two tier three though they are in the business to provide.
Antonio Neri: <unk> capacity on the man on a per hour basis.
Antonio Neri: So they continue to be the two biggest driver, but what I'm really pleased and Marie and I made those comments in our remarks is the fact that we see now the enterprise pipeline continue to grow steadily.
Antonio Neri: You know there are hundreds of customers on the pipeline the size of the deal will vary obviously, because there's not the same size of the deal of the other two segments.
Antonio Neri: But there are some very interesting large sized deals in the pipeline and they are doing proof of concept, but the positive news is that remember that we made the announcement of the offer that core engineer Solutia with Nvidia in June and we made it available only in scepter on September nine so really we had seven weeks Oh.
Antonio Neri: To be able to collect orders, we already collected orders in enterprise AI and we already closed deals and enterprise AI and two weeks ago, we made additional enhancements to that offer but I think of it with a partner ecosystem, including the Lloyd So very pleased there's going to be a growth driver in 2025 as we go forward.
Antonio Neri: And then you know on the first assortment of all this is a transition that we said to the latest Gpus that will happen over the course over the next few quarters.
Okay. Thank you Z next question please.
Speaker Change: And your next question today will come from meta Marshall with Morgan Stanley. Please go ahead.
Meta Marshall: Congrats on the quarter.
Meta Marshall: Maybe.
It integrates margins can you just talk about some of the puts and takes on maybe particularly server margins this quarter and just as a way of.
Meta Marshall: Some of the X gene servers versus El Capitan recognition or just some of the dynamics that play on gross margins would be helpful. Thank you.
Speaker Change: I made a good afternoon, it's Murray and first of all I'll just start off by saying as you know, we typically don't get into gross margin at the at the segment level, but let me give you some color around how we think about op margins. Yeah. That's what I would say look from our services segment perspective really pleased with the performance in the quarter.
Speaker Change: Yeah, we were at 11, six and if you think about it we actually had our highest ever.
Speaker Change: Hi server rather deal one five so I think you can see just the performance there in terms of the color and how to think about it Oh hypertonic saline was included in the quarter. So we did actually get the final acceptances.
Speaker Change: A couple of points to note.
Speaker Change: If you look at the mix inside server, we see traditional compute and particularly Gen 11, where about two thirds of the mix of thought to date and that particularly it has higher configurations and as a result, it's driving richer au piece and obviously higher structural margins and also frankly, we've been really successful.
Speaker Change: About parsing out the commodity costs and if you look at both the Gpus servers. It is competitive but you can see the revenue scale is helping us out there and then finally I think neither we've been really prudent with our cost controls and all of that's playing off in terms of Opex discipline. So that's how we're thinking about civil margins.
Meta Marshall: But in addition to what Murray said meta is a you know this was the third consecutive quarter of double digit year over year orders growth in the traditional server.
Meta Marshall: When I think about the opportunities ahead of US there are just for H b.
Meta Marshall: Half a million units in the installed base. The most be refreshed for several reasons number one they are doing very little work and consuming a lot of energy number two is because they have reaching or they are reaching their depreciation cycle.
Meta Marshall: One enterprise customer think about deployment of all they are they need to free up space power and cooling to absorb this new system. So this is a big opportunity for us both from a units perspective.
Speaker Change: And other CE Gen 11 comes with a different configuration as Murray said and then the services such that comes with it.
Thank you Peter next question please.
And your next question today will come from Tim long with Barclays. Please go ahead.
Tim Long: Thank you.
Tim Long: Can I ask a two parter on the AI service first can you just clarify that the D book comment there that came in and it sounds like $700 million are the bulk of backlog was that a competitive loss or someone had double ordered or something else that was going on there and then the second part.
Speaker Change: Following on the gross margin can you talk a little bit about.
You know when Youre looking at AI business, what are the metrics youre looking at or are you do you have thresholds for gross margin or cash flow or something else that prohibits you from growing at certain deals where you know maybe Oems are lower gross margin.
Speaker Change: Oems would go thank you.
Speaker Change: Sure and thank you for the question you know as we said before you know orders during the quarter were in line with our expectations. In fact, we booked $1 $2 billion of new orders in Q4. However.
However, with the booked a large order, which will save $100 million during the same quarter, because we had concern with a specific customer.
And you know, we pride ourself off a very strong control environment and we continue to be very vigilant about how we engage and making sure we manage the risk and we felt that they carry a lower risk and therefore, we felt it was very prudent to the book it and and focus on other areas of the business and that's why.
Speaker Change: You know as we keep going throughout the next few weeks up to yesterday, we ended up with a backlog now which is more of a over the $3 $5 billion. So so that's what happened. It has nothing to do with a competitor that has nothing to do with everyday health. We had the concern with that specific customer and we decided it was prudent to the book it.
Yeah, and Tim just to add on how we think about margin structure and AI systems. I think we've said this in the past, but look you know we have a framework that we use for our pricing and it's absolutely our intention to remain disciplined both on cost and price as we pursue profitable growth I think that has been our mantra.
Speaker Change: But obviously then you were out there balancing those gross margin pressures with cost controls statistic buys and you've seen that intense about pricing discipline and I would add I think Antonio made this comment earlier that we do see over time, you know improving profitability as the market moves more to I think the two sectors that Antonio referred to both in.
Speaker Change: In terms of sovereign and enterprise, where we see yeah. So this is attaching et cetera. So just use that as the way to think about the longer term sort of margin structure as well.
Speaker Change: Thank you Tim next question please.
Your next question today will come from Amit <unk> with Evercore. Please go ahead.
Yeah. Good afternoon, thanks for taking my questions.
Speaker Change: If I just look at a at the corporate level, you've had a couple of quarters, the gross margin that being down a fair bit of year over year.
Speaker Change: He was on a 390 basis points this quarter.
Speaker Change: You still got like a what's driving this gross margin degradation for you folks, but it clearly looks like able to offset all of this with some really good opex control because we were just talking about you know what's driving the gross margin decline and then.
Speaker Change: How low can you take opex at this point given your expectations for revenue growth in the.
Speaker Change: The next fiscal year. Thank you.
Speaker Change: Yeah, no worries on that good afternoon, it's Maria so why don't I take that one on gross margin. So if the Q4, if you're right and you said it was at 30.9 that were down both on a year on year and Q on Q basis, If you step back and look at the overall revenue mix, perhaps one of the largest drivers is really just the lowest contractor.
Speaker Change: Contribution of the intelligent edge revenue and in fact in Q4 and it was actually the lowest for the entire year and obviously, we had a higher contribution inside of servers of AI systems revenue and product mix. So that obviously impacted our gross margin, but what I would say is despite that headwind we actually grew.
Speaker Change: Gross profit dollars, both year on year and Q on Q now going forward I think I said in my prepared remarks that we do actually expect to see gross margin will be up modestly it tends to be improved business mix them predominantly that's driven by the intelligent edge mix, but for the longer term perspective, there's two things to keep in mind first of all.
Speaker Change: Obviously, what we called Juniper, you know that is going to be a big driver. It has a very positive impact on both gross and operating we expect about 50% of operating profit going forward will come from Juniper and secondly, as I mentioned earlier I think when I answer Tim's question, we do expect.
Speaker Change: In the AI space, there's higher margin opportunities as we move more into seeing the adoption of southern and enterprise on the cost side of the house really pleased with the work we've done so far to date, we've been really focused on discretionary costs throughout 'twenty four we're moving more into areas and productivity as we look at 25, we're actually using jet AI.
Speaker Change: Inside the company using it and finance to help drive productivity. So we see opportunities like that throughout the company and I would just say at a company as large as HPE, there's plenty of opportunity of it.
Speaker Change: Thank you Amit next question please.
Speaker Change: And your next question today will come from Simon Leopold with Raymond James. Please go ahead.
Simon Leopold: Great. Thank you for taking the question I think in your commentary on the outlook you indicated that traditional servers would be flattish to even slightly up sequentially in the January quarter, which which I think defies seasonality.
Simon Leopold: So I just wanted to verify if I got that correct.
Simon Leopold: Maybe if you could unpack what what's happening in that part of the business. Thank you.
Yeah. So this is Murray here's Aman. So yes, you did get that correct in terms of service and I think I did mention in my prepared remarks that we did see a lower AI a mix intensive set of systems in Q1, I think as we've said in the past. This business is lumpy. So just bear that in mind as you think about it in terms of today.
Simon Leopold: <unk> service and the outlook on the business really.
Simon Leopold: Nothing's changed we continue to see the momentum in that business I think I can tell you described it very well earlier when he mentioned you know two thirds of the mixes already at 10 11 in traditional service and we see that continuing so don't expect that to change fundamentally, but just remember, it's a pretty competitive environment out there both for both traditional servers and AI systems right now in the market.
Simon Leopold: So that's the way I sort of think about it. So that's why we felt it was prudent given the current backlog. We've got to guide you know 10 to 11 right now.
Simon Leopold: So some of them you know obviously in addition to the traditional seasonality you know now we have gone back to the normal seasonality. We used to have few years ago. When you know you're just for that call. They didn't recover to that happened after that.
Speaker Change: On the AI side.
Speaker Change: You know one third more than one third of our backlog is blackwater related and so you need to consider that you know the trajectory of that the more than $3 $5 billion being blocked correlated you need time to convert that into revenue. That's why Marie mentioned of the Lumpiness of revenue conversion sometimes.
Speaker Change: Well the orders intake, but notwithstanding we are very pleased with the revenue. We had in Q4, we're confident about the continued growth in 2025 as we transition the gpus to the to this new type of silicon.
Simon Leopold: Thank you Simon next question please.
Speaker Change: Your next question today will come from Aaron Rakers with Wells Fargo. Please go ahead.
Aaron Rakers: Yeah. Thanks for taking the question.
Speaker Change: And Tony you kind of building off of that last comment I'm curious as we think about the Blackwell platform cycle ahead of us and your comment on the backlog build that Youre seeing can you just update us where I think a lot of that initial demand seems to be centered around the GBP 200, NGL that rack scale system, where does HPE.
Speaker Change: And on that platform shipping those system configuration. When do you think that those won't ship in volume for each be thank you.
Speaker Change: Yeah, I think you're right I don't know I think again in our in the segmentation I like to operate within this segment wanted to call. It service provider Harper scale as some other builders they tend to lead with the latest technology and that transition is going to happen over 25.
Speaker Change: And so obviously, we are working with the customers and Nvidia as they become available and we will be shipping in volume are in.
Speaker Change: In the in 2025, and so you think about calendar year right I will say in the first half of 2025 is when you start seeing growth in that platform.
In the sovereign space I don't think that's the case I think it's a mix of multiple configurations. Because there are different types of workloads and then in enterprise I argue it will be in N minus one or two because the enterprise is less about you know black oil or Grace Blackwell.
Speaker Change: It's more about the simplicity of the deployment and the time to value and that's why when you look at today are H.
Speaker Change: H B private cloud AI is all now based on H 100, and so and that's plenty for what they do whether it's dragging a model of fine tuning tomorrow, although influencing so that's why you can generalize thing here, but it's fair to say people in the business to build and train models will live with the latest technology and they will transition.
Speaker Change: The protocol for <unk>, 2020 five and then the enterprise, we'll say one or two generations behind because obviously you don't need all the computing power.
Thank you Aaron next question please.
Speaker Change: And your next question today will come from Toni <unk> with Bernstein. Please go ahead.
Speaker Change: Yes. Thank you I'm not sure if you said it but perhaps you can just confirm did your AI pipeline grow sequentially.
Speaker Change: And then on the hybrid cloud side. It was a huge jump sequentially dramatically higher than your guidance as well and the biggest sequential increase we've ever seen was there any unusually large deal in there I know you closed Morpheus also.
Speaker Change: But I don't think that was really material can.
Speaker Change: Can you add any color about whether there was anything unusual did you pull forward deals and hence you think next quarter is going to be seasonally weaker than usual, but again, there was an enormous differentiation relative to normal history in your own guidance. Thank you.
Speaker Change: Yeah, but if you wanted to take it out.
Speaker Change: The address hybrid cloud and look first of all I'd start out and say look we're really pleased with the performance of hybrid cod in the court and as you mentioned you know revenue was up almost 18% year on year and 22% quarter on quarter. So really strong growth. It was really driven by both private cloud and frankly, just the ongoing adoption of HPE.
Speaker Change: Electra empty storage. So I think both of those were just great drivers of contribution I think you can see in the deck from the investor deck, we have 39000 customers in Green Lake and all M. P. Storage I think is one of the fastest adoptions ever in the history of the company. So I think you're starting to see those benefits pass through and in fact, a hours up 40.
8% as well so overall really good on the topline and frankly pleased with the trajectory from a margin perspective as well as you rightly said, we're continuing to scale the business manage our cost structure all of that is paying off and the Q1 guide actually does continue some of them are met up on the margin, we expect that to be relatively sequentially flat.
Antonio Neri: And given the strong Q4, we do expect to have a modest decrease in revenue, which is more in line with the sequential or the hybrid cloud. So overall I think you know very pleased and want that trajectory to continue to tell me I'll turn it over to Antonio just the other couple of things they will coordinate and before I answer the question. So first.
Speaker Change: Paul.
Speaker Change: The we now see the result of many many quarters of hard work in hybrid cloud. They remember hybrid cloud is led by the gorilla platform plus storage plus all the ancillary services.
Speaker Change: And I'll, let Brett M. P storage today is the fastest ever in the history of the company already on our $1 billion of annualized basis.
Speaker Change: I remember that platform actually it could be higher but remember a portion of that revenue gets deferred because it's a subscription with a softer to the infrastructure.
Speaker Change: And that's why I'm, so excited with the focus of our plan for including the latest introduction with a thorough.
Speaker Change: M. P X 10000, because that addresses the AI needs at scale particular exabyte scale for unstructured data. The second thing is I'm really proud and by the way on my left from P. With solar already 3000, new systems on the Gray like obviously the platform of 39000 customers through all that.
Here, we added more than 9000, new logos to HPE and now with Morpheus data and ops rump that.
That though on this the bounds of where protection plus the greening up the fin ops people realize that Green Lake is through hybrid are by design and is core to how we deliver infrastructure and the software that comes with it. So that's what's driving the growth in the in the in the public cloud space and more to come there.
Because also Aruba has a huge component of subscription through they're gonna be like platform.
Speaker Change: And then on the AI, yes, the pipeline grew quarter over quarter and as I said is a multiple of our current backlog at more than three and a half million dollars, but also the composition of the pipeline keep shifting and my my my what I'm really pleased with how the enterprise side has grown very rapidly on the back of the offer that melts Ava.
Speaker Change: Both for ordering for customers.
Speaker Change: Thank you Tony.
Speaker Change: Next question please.
Speaker Change: And your next question today will come from Cemig Chatterji with J P. Morgan. Please go ahead.
Cemig Chatterji: Hi, Thanks for taking my question, if I can change gears here a bit in intelligent edge you talked about the strong order patterns, but when I look at the revenue performance in the quarter I know you were.
Modestly, but it did seem like overall from at least some of the peers that have reported a sequential growth was a bit more.
Cemig Chatterji: Relative to sort of quarter over quarter increases, even though I mean is there.
Cemig Chatterji: Are you thinking about sort of the.
Next year, playing out and when you look at order trends are they coming in as expected or are you seeing a bit more weakness than what you would've expected, maybe 90 days ago and within that portfolio. How are you thinking about where.
Cemig Chatterji: Enterprises are willing to spend more.
Cemig Chatterji: What are you hearing from them in terms of priorities within that portfolio.
Speaker Change: Absolutely and thank you for the question. So as I said in my remarks, we had the third consecutive order growth in intelligent edge.
Speaker Change: But you don't see yet fully translated into revenue, which looks like more flattish and in fact, that's the case what do you have in Q1 is because the growth areas that offer the rates that are very much subscription based so this is SD Wan.
Speaker Change: With S. S C. A call at the surface for our work had a very nice quarter and the second is the subscription services to H B Green Lake Aruba, Central which is very important in the way you manage that infrastructure, but we're now seeing is also customers placing orders for future.
Speaker Change: Orders are related to Wi Fi seven and as we look at that what I'm really excited is that when you upgrade your access points.
Speaker Change: Some points you also need to upgrade your campus switching and the reason why it's necessary because the access points are power over Ethernet from the switching port.
Speaker Change: But today I will say the one area has not yet fully returned to what we want to see is the campus switching itself and then last one analyst data center networking using more intelligent features that our CNS platform brings to table has had double digit growth again and so that's why.
I'm excited about the combination with juniper networks, because brink complementarity to the portfolio.
Speaker Change: And when I look at the AI I see three unique opportunities number one the interconnectivity with within data center to data center that requires basically a big router and obviously juniper already has a leading platform with 100 gig once you're inside the data center.
Speaker Change: Need a high performance fabric you need to laid the pipes inside the data center to be able to connect rock to rock and roll to ROE and then inside the rock itself you need a high performance connectivity. This is why the HPE slingshot.
Speaker Change: 400 gig that we just announced two weeks ago is playing a massive role, especially as customers will consider all of the type of silicon in that environment and they need an open architecture and that's where there's this really.
Speaker Change: Bring salt, but you know I I believe the market is on a recovery three data points already three quarters of growth and this is what I believe in the context of what Maria just said early on on the question of margins and contribution of each of the businesses. I argued in networking is the biggest upside HB will have in 'twenty five 'twenty six.
Speaker Change: Okay.
Speaker Change: Thank you stomach next question please.
Speaker Change: And your next question today will come from David <unk> with UBS. Please go ahead.
Speaker Change: Okay.
Speaker Change: Great guys. Thank you for the.
Speaker Change: Can you can you dig in a little bit into the platforming of the orders you mentioned risk, but can you get into specifics in terms of what was the definition of risk and how do you think about hey, we're just going forward I know, it's lumpy, but just trying to get a sense sense for what was particularly risky about that orders and how should we think about that going forward. Thank you.
Speaker Change: Yeah.
Speaker Change: I mean listen we look at the customers from a variety of angles, obviously, you know the ability to verify and user ability to honestly.
Speaker Change: Phil the payment of the orders in and risk associated with Oh locate the components and the like and we felt that particularly all they had a lot of risk and we decided not to.
Speaker Change: Fulfill it.
Speaker Change: Because of our stringent controls and my view is that this was the right thing to do.
Speaker Change: Yeah, and I'd just add look HP has a very strong controls around that as we said before our orders and backlog are subject to the booking push outs and cancellations part of Rev. Rec. So are we.
Speaker Change: We maintained tight control.
Speaker Change: Okay. Thank you next question please.
Speaker Change: Your next question today will come from Matt nickname with Deutsche Bank. Please go ahead.
Speaker Change: Hey, thanks, so much for taking the question.
You sounded fairly constructive around extending particularly heading into 'twenty five. So I'm. Just wondering you know what's changed if anything over the last three months, mainly in terms of macro backdrop and I guess more specifically have you seen any pick up or change in behavior post election.
Speaker Change: Ah well first of all Mark welcome welcome to the community are pleased to have you here. So the microenvironment versus a year ago has improved no question whatsoever. Obviously, they are unique areas, where the customers are paying more attention.
Speaker Change: <unk> focus on AI clearly is very high on the agenda focused on implementing a more flexible hybrid model because they are the core is a hybrid world loads and they think that they will definitely that's another big area and both of those are spaces H B has the right to play and win with our unique focus.
Speaker Change: And innovation.
Speaker Change: I think all of us the Ciber continued to be very important. But then also is it by geography, maybe varies a little bit.
Speaker Change: But as I said earlier in server, we are on the cycle for modernization and improve efficiency of footprint cost per load.
Speaker Change: I talk about the TCR per load and as well as the power consumption a lot of focus on sustainability. This was very obvious to me math when I was two weeks ago in Barcelona.
Speaker Change: We had the biggest conference ever in Europe with more than 4500 customers all very keen to understand our solutions in the context of sustainability.
Speaker Change: And then you know one of the areas again, I would reinforce what I said earlier networking needs to catch up to the demands of AI.
Speaker Change: And that's why we believe the combination of HP and Juniper is so important to drive the next wave of innovation, but networking clearly is going to be a topic for 25 and beyond.
Speaker Change: So that's what we see you know when I speak to customers, which I do more than 50% of the time.
Speaker Change: AI is pretty much focused the enterprise side is very much focus about business productivity and time to value add.
Speaker Change: And even in our case, we have many many many many use cases, which many already deployed in production.
Speaker Change: Which allows us to do some other things that Mary talked early on an efficiency and cost reduction.
Speaker Change: But we're still early and that's the excitement which means the opportunities are yet to come at much bigger scale and if I want to wrap up my commentary about why we have the liver and the performance. We have delivered in Q4 I will use only one word innovation.
Speaker Change: Our strategy is an innovation driven strategy that makes us more relevant that eventually customers buy more from us.
Speaker Change: Increases value for shareholders. So for me is a testament of the strategy's working and also look at these mega trends and customer needs. We are uniquely position, even with the pending juniper acquisition to address those needs.
Speaker Change: Okay. Thank you.
Speaker Change: Operator, one more question please.
Speaker Change: So of course and your final question today will come from US your merchant with Citigroup. Please go ahead.
Speaker Change: Great. Thank you for squeezing me in you know the enterprise services on the AI side of things you know it looks like you continue to book a service is there on your orders just if you can double click on that relative to where you were last quarter what kinds of services is that a growing percentage of your orders.
Speaker Change: Revenues and where is H b, winning as you look at those services pipeline as well. Thank you.
Speaker Change: Well. Thank you for the question our services orders related to the AR went up quarter over quarter, So and the type of services customers are looking for is you can use two different ways to think about it the day zero day, one and day to day.
Speaker Change: Zero is where you help customers define the use cases are the <unk>.
Speaker Change: The return on investment and the like that.
Speaker Change: The day, one is whether your design and implement and then de tourists to run it and HP is uniquely positioned in all these three days if you will and therefore, we see quite a bit of engagement upfront, but also the partnerships with companies like the Lloyd and I mentioned that are so important to reach customers to bring more of a.
Speaker Change: Business process oriented approach is a central they also focus on on additional AI.
Speaker Change: Practices.
Speaker Change: And we have many other conversations by the way you will hear more about that in the next few weeks few announcements there.
Speaker Change: And then obviously on designing implementing and running H B has all the capabilities that we need but on the designing and implementing this.
Speaker Change: This unique approach with a private cloud AI has proven to be the right value proposition because.
Many of these enterprises don't have the time don't have the expertise and they want a partner that can help them do that and then on the wrong time. Many of these instances we're not alone in their own data center will land into what are called co locations and H B already has three a disposition.
Speaker Change: Enterprise stocks with our private cloud AI, so that they can turn it on when they're ready to deploy those use cases and that's why now we should expect continued improvement on the services side, which was almost as a source for gross margin as we go forward.
Speaker Change: Very good that was our last question Antonio.
Speaker Change: Right on time, and I want to thank everyone for participating today are again very very pleased with our results in Q4 capping off a very strong here you can see the momentum our revenue our operating profit dollars.
Speaker Change: We did what we said I mean, that's fundamentally the bottom line and we had a record number of metrics there, but I'm excited about 2025, I think we have an amazing set of assets that will continue to drive profitable growth.
Speaker Change: And drive shareholder value and dependent Juniper acquisition as I said in my remarks, we're working through the process. We're confident this will close in the early part of 2025, and we're working very very collaborative with the Doj. So nothing gives me pause that will not happen. So if I can speak to you happy holidays.
Speaker Change: You and your family and we will reconvene in early 2025.
Speaker Change: Oh Vince has now concluded. Thank you for attending today's presentation you may now disconnect.
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