Jeff 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. We have posted the press release and the slide presentation accompanying the release on our investor relations web page. 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 statements. 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 on 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. 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 and Marie will reference our earnings presentation in their prepared remarks. With that, Antonio.

sovereign states:

HPE 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 technologies. 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 this kind 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. HPE now has four of the top 10 world's fastest supercomputers, all of which are direct liquid cooled. Two of these systems are exascale supercomputers, with frontier still the world's fastest and [Aruba] (ph) 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. This experience makes us an attractive partner to sovereign states and government 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 inferencing. I'm excited that NVIDIA CEO, Jensen Huang will Join me at HPE Discover Las Vegas in just two weeks. 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] (ph), 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 the Incheon International Airport in South Korea. JT 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 Scaleway’s AI cloud service offering using our HPE AI systems. 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 the market recovery in traditional and cloud infrastructure markets, orders for traditional service grew sequentially, and year-over-year, driven by enterprise public sector and SMB customers in North America and Europe. 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. Differentiated customer-centric innovation positions as well to capture this market recovery. For example, our leading HPE GreenLake hybrid cloud is attracting new customers. In the second quarter of fiscal 2024, the number of customer organizations using HPE 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 ARR growing 39% year-over-year. Demand is increasing for our HPE 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. Several weeks ago, HPE introduced significant new functionality to our HPE Alletra storage offerings. We rounded out our block offering by extending the hybrid capabilities of HPE Alletra block storage to AWS, doubling its capacity to address more customers and enhancing its automation capabilities with generative AI. Early this quarter, we introduced new HPE GreenLake for file storage capabilities with options specifically targeting the unstructured data demands of AI. 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 sell cycles. We expect increased order-to-revenue conversion in the future. The enhancement to our winning portfolio complemented by a more focused sales force positioned HPE to strengthen the already robust customer adoption of HPE Alletra. More than 1,000 new HPE Alletra 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. As demand in this segment gradually returns, we believe our broad portfolio positions as well. We expect modest sequential networking 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 Generated AI capabilities to improve AI Ops and WiFi 7 access points that capture edge data for AI inferencing. In addition, last month we launched new security and AI observability tools to help fight AI cyber risks. And just yesterday, we expanded the most complete private 5G and Wi-Fi portfolio in the market with the launch of HPE Aruba Networking Enterprise Private 5G. All of this will be delivered through our HPE GreenLake cloud platform. Customers are responding to our networking innovation. In the last few months, customers ranging from Houston Airport to [Baptist] (ph) Health Group to Mercedes-Benz Stadium to the University of Maryland have turned to HPE to enhance the experience for the visitors, residents, and employees. As we look to our future in networking, we continue to be very enthusiastic about the proposed acquisition of Juniper networks. We're currently in the regulatory process for this transaction and expect 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 team member overall experience. I also want to note that we recently announced we have restructured the sale of our stake in H3C. Since the transaction is large and complex, the required regulatory approvals were taken longer than previously anticipated. So, we agreed to restructure the sale 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. 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. 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. 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 HPE GreenLake Cloud to our networking storage offerings position 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. I am looking forward to sharing with you our latest breakthrough innovation and partnerships across AI, hybrid cloud and networking later this month at HPE Discover Las Vegas. 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.

Operator:

We will now begin the question-and-answer session. [Operator Instructions] The first question is from Amit Daryanani with Evercore. Please go ahead.

Marie Myers:

Hi Amit, good afternoon. it's Marie, and happy to take the question. And look, obviously, we shipped $900 million of 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 the CFO, very pleased that's 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 what's the puts and takes and the headwinds and tailwinds, let me give you some color around it. So from a headwind perspective, obviously we're dealing with 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 server mix. 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 are seeing in terms of the Gen11 transition. That part of the business brings a higher AUP. And then also frankly, Amit it's the work we're doing around cost. So as a result, I think this really illustrates that we are very disciplined around both price and cost and frankly, it's part of our strategy to drive profitable growth. So pleased with the results, and that's how we are guiding the back half of the year, Amit.

Jeff Kvaal :

Thank you Amit. We move to the next question.

Aaron Rakers:

Yes. Thanks for taking my question. I guess sticking on the AI topic, if I could first ask, when you referenced the AI enterprise customers starting to show up, and I think the comment on the conference call was, it's now north of 15% of your AI orders. Can you give a little bit of more context of that? 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 liquid cooling side, as we and investors think about Blackwell product cycle from NVIDIA, I'm curious of, can you be a little bit more specific of exactly where, from a technology perspective, you differentiate at liquid cooling? Is there something unique that HPE does within the 300 patents that you would want to highlight for us, as sustainably differentiated. Thank you.

Jeff Kvaal:

Aaron, thank you very much, Gary.

Mary Lenox:

Hi, this is Mary on for Meta. 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?

Antonio Neri:

Yes. And I will say in addition to what Marie said, what I'm really excited 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 my 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 Athonet acquisition.

Operator:

The next question is from Toni Sacconaghi with Bernstein. Please go ahead.

Marie Myers:

Yes. Hi Toni, good afternoon. So this is Marie. I'm going to take the first question just on the guide. So let me just clarify the guidance in terms of how we put it together. So we raised the guide from -- to $1.85 to $1.95, and that actually was the pass-through on that 19% stake in H3C. So we actually put $0.03 related to the 19% stake. What I did point to though, Toni, is I pointed to the higher end of the range, so that's really what's giving us confidence based on the increase that we made on revenue. So you're seeing that higher top-line and then also the confidence I got around 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 around OpEx. And plus we did have some favorability in OI&E this quarter, that [beats] (ph) – that was actually just a onetime. So I just want to make that point of clarification. So overall, Toni, keeping the guide at $1.85 to $1.95 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 the second question.

Jeff Kvaal:

Toni, thanks very much, Gary.

Joseph Cardoso:

Hi, thanks for the question. This is Joe Cardoso on for Samik. So maybe just following up on the AI questions. You're seeing a sequential decline in AI backlog this quarter, admittedly off of a very robust revenue quarter. But maybe you can just discuss the pipeline you're seeing. And 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.

Jeff Kvaal:

Thanks very much Joe, Gary.

Victor Chiu:

This is Victor Chiu in for Simon. The doubling the AI system's revenue is a pretty sharp inflection this quarter. Can you just tell us how much of the increase was driven by allocation improvement versus ability to ship orders? And kind of just help us understand the dynamic there a little bit.

Jeff Kvaal:

Thanks very much Victor, Gary.

Ruplu Bhattacharya:

Hi, thanks for taking questions. It's Ruplu filling in for Wamsi today. Can you talk about how much of the GreenLake revenue and ARR growth came from AI? And then 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 HPE is well positioned to satisfy?

Antonio Neri:

Yes. On the second part of the question, I think we are early at this point in time. 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 you were a little bit breaking.

Antonio Neri:

Yes. So on sovereign AI, I said it's early, early on. I think there is a lot of engagements right now 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 generative AI locations where customers, enterprise customers can get access to -- to a sovereign cloud that the government may be helping funding at the same time. And the other one is what I call 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 HPE already provides to a lot of the sovereign governments supercomputing. So now we can extend into generative AI. If you think about the example of the UK Bristol is a generative AI system that the UK is funding as a part of the Bristol University, that the venture is going to be open to start-ups and enterprises in the UK, to either train models or do other type of research. And that's what we see.

Operator:

And the next question is from Ananda Baruah with Loop Capital. Please go ahead.

Antonio Neri:

Yes. No, thank you. I said that the segment where we have seen, obviously the vast majority of action and demand is the model builders. Those are the big companies that build large and small language models. Obviously, you saw our comments about our partner with Microsoft and the extension of their capacity to OpenAI. That's an example of a model builder. But also 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 the local French model builders. In fact, there is a lot -- there is a very vibrant ecosystem in France about building AI models that will use that capacity to train the models. That's what I referred to at this point in time. And that's what we see and that's what we've seen. 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 what the action is going to happen in terms of fine-tuning and deploying these AI models over time.

Operator:

And the last question is from Lou Miscioscia with Daiwa. Please go ahead.

Antonio Neri:

Yes. 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 remarks earlier, we have 10 systems already in the mixed cooling environment and six systems or six offers also in the direct liquid cooling environment. So we are aligning with NVIDIA today, and that's why you are going to see at Discover, 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, they designed 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 in the Los Alamos laboratory, which was actually an NVIDIA system with HPE and is direct liquid cooled, so we are clear about that. But then there are also systems that will come in 2025 that may have different type of accelerators. Over time, we are going to be time to market. But right now, we have 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 HPE Discover because you can see everything we talked today on the floor. Every system I just referred to my slides, every comment I made in my answers to the questions, you can come and see it. 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 HPE GreenLake. So it's going to be an amazing opportunity also because we are doing the keynote at Sphere, we're going to have probably inside, The Sphere more than 17,000 customers and partners joining us. So I know we don't have a lot of -- the normal time for questions, but I will say thank you for joining today. As a recap, the quarter was very solid. Our AI system revenue more than doubled to $900 million, allowing us to obviously exceed our revenue and non-GAAP earnings per share guidance. Because the demand in AI is strong, we have a multiple of -- in the backlog, in our pipeline and some aspects of the traditional infrastructure market is recovering, plus our disciplined execution on pricing and cost, we are raising both the revenue and EPS guidance. And on the revenue, there could be something more obviously, but it's depending on some of the timing. And then obviously on the EPS, we are comfortable with the higher end of the range, as Marie said. So again, we are very pleased. We feel the second half is going to set up really well. And then obviously, we are looking forward to see many of you at HPE Discover in just less than two weeks. Thank you for your time today.

Shannon Cross:

Good afternoon. I'd like to welcome you to our fiscal 2024 first quarter earnings conference call with Antonio Neri, HPE's President and Chief Executive Officer; and Marie Myers, HPE's Chief Financial Officer. After 25 years on Wall Street and over 20 years covering HP, I'm very excited to join HPE as Chief Strategy Officer. I look forward to working with Jeff Kvaal and the rest of the IR team, and I look forward to seeing many of you in the months ahead. 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 web page. 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 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-Q for the fiscal quarter ended January 31, 2024. For a more detailed information, please see the disclaimers on the earnings materials relating to forward-looking statements that involve risks, uncertainties and assumptions. Please refer to HPE's filings with the SEC for a discussion of these risks. For financial information we 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. Throughout this conference call, all revenue growth rates, unless otherwise noted, are presented on a year-over-year basis and adjusted to exclude the impact of currency. Finally, Antonio and Marie will reference our earnings presentation and their prepared comments. 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 web page. With that, let me turn it over to Antonio.

Marie Myers :

Thank you, Antonio. I'm pleased to be with you today on my first earnings call as HPE's CFO. I've long admired HPE's impressive transformation, and there has never been a more exciting time to be part of this company. We have a growing addressable market, a proven strategy and a differentiated portfolio that is levered to long-term market trends around networking, hybrid cloud and AI. I believe we have a significant opportunity ahead of us. I'm excited to partner with Antonio and the rest of the outstanding HPE team to capitalize on this opportunity and drive value for our shareholders. And as Antonio mentioned, we have much to be proud of. Financial highlights in the quarter included record gross margins and expense discipline, which helped lift non-GAAP EPS to the high end of our guidance range. Demand for our traditional server and storage products has stabilized. Demand for our HPE GreenLake offerings was evident in a healthy ARR growth and demand for our AI systems remains robust. However, demand in Intelligent Edge did soften due to customer digestion of strong product shipments in fiscal year '23, which is lasting longer than we initially anticipated and is the primary reason Q1 revenue came in below our expectations. GPU availability and deal timing also contributed. We are taking swift action to address these headwinds by curtailing costs and driving efficiencies across the business. With that, let's take a closer look at the details of the quarter. Revenue fell 14% year-over-year in constant currency to $6.8 billion. Please recall, we had significant backlog consumption in Q1 '23, particularly in traditional servers and storage. Backlog has now largely normalized across our business with the exception of our APU products. We have strong momentum in HPE GreenLake. ARR exceeded $1.4 billion in Q1. Storage and networking software and services are the fastest growth elements of ARR. Our software and services mix rose 400 basis points year-over-year to 69%. ARR is the best indicator of our model transformation to our as-a-service offerings. This growth validates what our customers are telling us, that HPE GreenLake is a differentiated value proposition in the market. Our Q1 non-GAAP gross margin was 36.2%. It rose 200 basis points year-over-year, driven by a mix shift to Intelligent Edge and favorable input cost management. We are pleased that our non-GAAP gross margin is up 600 basis points from fiscal year '18 to a company record. This illustrates the ongoing pivot to higher growth, higher margin revenue across our portfolio. Given the current networking market dynamics, we are taking this moment to streamline and simplify our operations. We are focused on controlling the things we can control. Prudent cost management and disciplined execution are important regardless of the macro environment and are even more critical at times like these. The benefits of our focus are already evident in our Q1 non-GAAP operating expenses, which declined 4.7% year-over-year at 9.5% sequentially to $1.7 billion. The strong Q1 non-GAAP gross margins and OpEx discipline led to Q1 non-GAAP operating margins of 11.5%, which is down only 30 basis points year-over-year despite less revenue scale. Favorable timing on some corporate expenses was a tailwind to Q1 operating expense and will appear in Q2. GAAP EPS of $0.29 and non-GAAP EPS of $0.48 exceeded the midpoint of our guidance range. Our diluted share count was approximately 1.3 billion, and non-GAAP diluted net earnings per share exclude $251 million in costs primarily from stock-based compensation expense, amortization of intangibles and noncash loss on investments. As we manage the business with focus and discipline, we will also invest to capitalize on the sizable opportunities associated with moving through the interrelated inflection points in networking, hybrid cloud, and AI all at the same time. HPE is evolving into a more simple, more agile company that is even better positioned to pursue our growth opportunities and to evolve our mix of products, services and software and to drive structural higher profitability. Turning to our segment results. In addition to the new segments we discussed at SAM, we also created a new service segment that combines our prior compute and HPC and AI segment under one streamlined segment that offers solutions for our customers' training, tuning, and inferencing AI needs across the AI life cycle. Server revenues were $3.4 billion in the quarter, which was down 23% year-over-year. This new segment had a difficult year-over-year compare as in Q1 '23, the business made significant progress against its backlog and benefit from HPE Cray EX revenue for Frontier. We are capturing the robust growth in AI demand. Our cumulative APU orders since Q1 '23, which include APU attached products and services in our HPE Cray EX XD and ProLiant Systems, rose approximately sequentially to now $4 billion. Our pipeline is robust and GPU supply, while still constrained, is improving. Our APU product revenue increased sequentially to well over $400 million. We are now converting our APU orders into revenues, and yet very strong demand means our APU backlog is over $3 billion. Our pipeline is well above that. AI revenue in the quarter included our first revenues from AI cloud offering and from our HPE GreenLake win with a large hyperscale customer. Our traditional high-performance computing and supercomputing revenue fell seasonally, sequentially following a strong Q4. Revenue from our traditional server business increased sequentially. We expect this trend to continue, given a structural mix shift to higher AUP Gen11 and rising input costs. General servers nearly doubled sequentially to 30% of the mix in Q1. Including HPE, Cray XD takes the mix of next-generation servers to 44%. We are encouraged that our Gen11 pipeline is starting to include AI inferencing activity and enterprise applications. We expect AI inferencing to gather momentum in fiscal year '24. As a reminder, our Gen11 services come with an attached subscription to our compute ops management software, which lifts our margin structure. Our Q1 operating margin was 11.4%. While up sequentially, the margin was down 430 basis points year-over-year, given declining revenues. Intelligent Edge revenues were $1.2 billion or up 2% year-over-year. Demand for our campus switching and Wi-Fi products eased materially, particularly in Europe and Asia, and was the largest contributor to our Q1 revenue gap. We continue to see mid-single-digit growth benefits from our existing backlog but expect it to normalize going forward as we are now approaching our typical range. Our total channel inventory is within the normal range overall, inclusive of a pocket in the SMB business. We also continue to make progress in our new TAMs of data center networking, private 5G and SASE. The Intelligent Edge portfolio of subscription revenue grew well above 50% as we are benefiting from growing attach from our strong fiscal year '23 revenue growth. We are pleased with our 29.4% operating margin, which was up 1,000 basis points year-over-year. The new hybrid cloud segment includes our storage businesses and now the HPE GreenLake portion of our server business. Revenues of $1.2 billion were down 10% year-over-year. Our traditional storage business was down year-over-year on difficult compares, given backlog consumption in Q1 '23. Total Electro subscription revenue grew over 100% year-over-year and is an illustration of our long-term transition to an as-a-service model across our businesses. We are starting to see AI server demand pull through interest in our file storage portfolio. We are also already seeing some cross-selling benefits of integrating the majority of our HPE GreenLake offering into a single business unit. Our operating margin was 3.8%, which was down 200 basis points year-over-year. Lower revenues and a high mix of third-party product impacted margins in the traditional storage business. Our HPE Financial Services revenue was down 2% year-over-year and financing volume was $1.4 billion. Our operating margin of 8.5% was up 130 basis points year-over-year. We are successfully passing through interest rate increases, and our asset management margins are returning to normal. Our Q1 loss ratio remained steady at 0.5%. Turning now to cash flow and capital allocation. We generated $64 million in cash flow from operations and consumed $482 million in free cash flow this quarter. HPE typically consumes cash in the first half of the year and generates cash in the second half. Our first quarter free cash flow benefited from some prepayments associated with pending HPE GreenLake deals at HPE Cray XD shipments. Our cash conversion cycle was seven days, which is a reduction of eight days from Q1 '23. Our days payable and days of inventory were both higher, given the lower revenue and strong demand for APUs. We returned $172 million in capital to shareholders in Q1, primarily through our dividend. Before I discuss our outlook, let me first recap the key drivers that factor into our expectations for Q2 and the full year. For server, we expect improving GPU supply to drive sequential revenue increases through fiscal year '24. Given improving supply and the timing of installations, we expect segment revenue and therefore, corporate revenue to be heavily weighted to the second half of the year. We expect the blended margin of the new segment to be flattish for the remainder of the fiscal year. For Intelligent Edge, we expect the market to remain soft throughout the year. Our cost reduction efforts will take time to show their benefits, which will result in margin pressure in Q2. Later in our fiscal year, we expect our normal channel inventory position and seasonal strength in the education market to be a modest revenue tailwind. We expect the full year margin to be in the mid-20% range. For hybrid cloud, we expect sequential increases through the year as our traditional storage business improves and HPE GreenLake momentum continues. We expect meaningful progress through the year. With that context, let me turn to our outlook. For Q2, we expect revenues in the range of $6.6 billion to $7 billion or up slightly sequentially at the midpoint. We expect GAAP diluted net EPS to be between $0.20 and $0.25 and our non-GAAP diluted net EPS between $0.36 and $0.41. In part, given the higher prepayments in Q1, we expect negative free cash flow in Q2. Let me remind you that we have two drivers of potential lumpiness in our business. One is the timing and customer acceptances of large Cray wins, including Cray XD wins, which should ramp beginning in Q2. The second is the start of certain large HPE GreenLake deals. For some of these large deals, our segments recognize the related hardware on installation. In our consolidated results, we eliminate the segment revenue and recognize it over time. Both large deals and higher eliminations are indicators of our confidence in the second half of the fiscal year. For fiscal year '24, we are revising our outlook, primarily given the current networking market headwinds. Let me remind you that we are excluding the H3C earnings and gain on sale from our non-GAAP results beginning in fiscal year '24. We now expect revised ranges for constant currency revenue and non-GAAP operating profit growth of zero to 2%. GAAP diluted net EPS of $1.81 to $1.91 and non-GAAP diluted net EPS of $1.82 to $1.92. The mix shift from Intelligent Edge to server should also weigh on our gross margins. We now expect the full year non-GAAP gross margin to be slightly down from our prior full year expectation of 35%. We expect the impact of the cost actions we have initiated to materialize in the second half and leave fiscal year '24 OpEx to be flat to down from fiscal '23 OpEx. We expect our operating margin to be flattish year-over-year. We now expect OI&E to be $200 million to $250 million headwind versus our prior $300 million expectation, given better Q1 free cash flow and more favorable interest rate assumptions. We expect the effect on currency to be immaterial. We expect free cash flow to be 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 improvements in inventories as AI service shipments ramp. We reiterate our commitment to our dividend, which was raised 8% from fiscal year '23 to fiscal year '24. Debt repayment to maintain an investment-grade credit rating, and in long term, returning capital to shareholders through share repurchases. To conclude, we executed well in Q1 amidst a challenging market backdrop. We are pleased with our margin and EPS results while understanding our slower networking product demand and GPU availability and timing impacted our revenue performance. We have taken prompt action to further reduce our costs and continue to manage our expenses prudently while we advance our long-term strategy. AI server demand is strong. Demand has stabilized for our traditional server and storage products, and our HPE GreenLake momentum is robust. We will continue to invest in IT inflections, networking, hybrid cloud and AI to drive our pivot to higher growth, higher margin revenue. I look forward to engaging with you in the months ahead, as does our new Chief Strategy Officer, Shannon Cross, who has joined us following a distinguished career as a Wall Street analyst and now has oversight of our IR function. We will appreciate your input and questions along the way, and we can get started with that right now. I'll open it up now for your questions about the quarter.

Meta Marshall :

Great, thanks. Maybe on the GPU available -- GPU delays that you're seeing and far as acceptance. Just what are you seeing in terms of -- you identified that power and some of these things were conditions for what the delays were. But just what are you seeing in terms of how long those delays are going to take and how long the delays and the acceptances are going to be?

Shannon Cross:

Great, thank you very much, Meta. Gary, can we have the next question?

Amit Daryanani :

Thanks for taking my question. I guess, Antonio, maybe just talk about, if I look at the revenue shortfall in Jan quarter, how much of that do you think is because your customers are pushing out their delivery schedules, they don't have power versus you just didn't have enough GPUs? If you were to think about those two buckets. And then as you think about the full year guide, perhaps I didn't appreciate this, but can you just talk about what are you expecting for the networking segment, Intelligent Edge to do in the zero to 2% guide right now? Thank you.

Shannon Cross:

Great, Gary. Thank you, Amit. Can we have the next question?

Simon Leopold :

Thanks for taking the question. I wanted to see if we could drill down a little bit in terms of understanding what's changed in the Intelligent Edge versus 90 days ago. And two elements are crossing my mind. One is really around the pending Juniper deal, whether that's influencing customers to maybe hold off purchases because of the uncertainties that might be affecting their decision-making as to what happens after you're combined. And the other part is just wondering if there's inventory that's been sitting in the channel, why didn't you know about it or why didn't you see it? Just trying to get an understanding of sort of what you've learned over these last 90 days. Thank you.

Marie Myers :

And maybe, Simon, just to add to Antonio's comments, the only place where we saw a slightly elevated pocket of inventory was in SMB, which is a pretty small part of our business.

Shannon Cross:

Thank you, Simon. Gary, can we have the next question?

Toni Sacconaghi :

Yes, thank you. Sorry, I just have one clarification and a question. Marie, on the [Indiscernible] that the backlog dropdown has contributed, I think, mid-single digits to the Intelligent Edge or something more broad than that? So can you just comment or clarify exactly what the backlog contribution was? And I suppose there's none going forward. And then just on my question, you sound pretty excited about sequential growth over the course of the year, both in servers and storage. Maybe you can just elaborate on why you see that. Is servers -- do you see sequential growth in traditional servers, non-accelerated [indiscernible]. Thank you.

Antonio Neri :

Yeah, Toni. Thank you for the question. So on the server and server side, obviously, we see signs of stabilization now, has been now a couple of quarters with sequential order improvement. But the reality is that, as we said in our opening remarks, we continue to see the mix shift in the traditional servers, as you call it, to Gen11. By the end of the year, we should be approximately 60% of the way there. Obviously, those services come with a different set of structural configurations and pricing, which obviously is higher. At the same time, we're going to see cost inflation. We believe that's going to be the case, and therefore, we have to eventually pass those as well. But the number of units have been very stable or slightly improving. And that's an important indicator because ultimately, that also drives our attach rate of our Operational Services, which in the quarter was very, very good. So that's why we are confident that sequential improvement from here on. And then on the storage side, obviously, AI is going to be a pull-through demand for us. We introduced a new offer now specifically for file. And remember that HP Electra continue to grow from here on. And a portion of that HP Electra revenue is also in the ARR because remember that software now is completely disaggregated from the solution itself, which means you have the CapEx portion of the revenue recognized in quarter and the subscription part of the software amortized over the period of the contract. So that's why ARR is growing because of the subscription in networking, which was up significantly, the storage and obviously, AI now also contributing to the ARR as well.

Operator:

The next question is from Aaron Rakers with Wells Fargo. Please go ahead.

Antonio Neri :

Yeah, sure. I think I covered the larger part of that question with Toni's question about sequential improvement in the traditional server, which is still very CPU-centric. On a combined server, right, now 25% of the total volume is APUs, which obviously GPU is the biggest portion of it. So we expect that sequential improvement driven by recovery in demand in units and then obviously, the shift to Gen11, which is important in this transition. On the GPU lead times, they have come down but it's still elevated. We're talking about 20-plus weeks at least lead time. And so -- and then it's going to be a combination of multiple type of GPUs, right, because there is still demand for the prior generation to H100. Obviously, the majority of the demand today is on H100. And going forward, we're going to have the Grace Hopper H200 and others, right, including MI 300x and the like. And the difference for us is that because we have a unique network in interconnect fabric, we can support all of them. So that's an important differentiation that I think everyone needs to remind because while a lot of the volume today is NVIDIA and then on the supercomputing, which is also an AI business, by the way, we support all three of them. And so that, for us, gives us the optionality to convert the orders that we have and future orders we see in the pipeline with a little bit more flexibility, I will say.

Operator:

The next question is from Wamsi Mohan with Bank of America. Please go ahead.

Antonio Neri :

Yeah, Wamsi. I can start and Marie, feel free to add. I mean, the fact of the matter is that when you look at that $4 billion cumulative orders, a significant portion is going to go through the HPE GreenLake. If you recall last year, I announced that a hyperscaler placed an order with us, and that order is going through the GreenLake platform. And so that's why you see a breakdown over time of the AI GPU orders going through the ARR, which is fine. Ultimately, they give us the ability to attach other services, which is important to remember here, because remember, when it goes to the HPE GreenLake, in many cases, we are actually running those systems for the customer. It's not just shipping the system to the customer. We actually put it in a location, whereas our data center footprint with our cooling and power, and then we attach our services, which are the run time plus other things we do. And why it's important also the growth in ARR because that drives margin expansion and accretion over time. So that's what's going on in addition to the fact that, obviously, now we crossed 31,000 customers on HPE GreenLake platform. To put it in context, Wamsi, that's almost 3,000 customers in one quarter. I mean, 8% up quarter-over-quarter, 3,000 customers. And everything we do from the software perspective, it now is a subscription whether you sell HPE ProLiant Gen11, let's say, an AI-optimized server, the software to connect the server actually runs to GreenLake. Obviously, software runs through the GreenLake. A lot of the Aruba software, including Aruba Central, a subscription and now you have AI as well.

Shannon Cross:

Thank you, Wamsi. Gary, can we have the next question?

Samik Chatterjee :

Hi, thanks for taking my question. I guess, Antonio, you referenced the increase in demand on AI that you see related to inferencing workloads on the enterprise side. Can you maybe talk a bit in terms of how these deployments are looking different to what you've been doing on the AI training side and maybe with some hyperscalers? And given the lead times, is this demand going to more materialize in relation to revenue more in fiscal '25 or is that just a fair estimate about, given the lead times? Thank you.

Shannon Cross:

Thank you, Samik. Gary, can we have the next question?

Tim Long :

Thank you. Just on the -- another one on the AI server side. Can you talk a little bit about how you guys are thinking about profitability for the businesses as we get more accelerated compute in your servers? And if you can also kind of break that down between maybe the Cray businesses and the standard compute? Is there going to be more of a margin gap in those two businesses when looking at more traditional going to accelerated? Thank you.

Shannon Cross:

Thank you, Tim. Gary, we'll take one final question.

Louis Miscioscia :

Hey, thank you for taking my question. Antonio, I guess the question I have is since you're talking a lot about data centers, I'm wondering what's going to happen is that the vast majority of x86 applications going to start to shift over to really be accelerated with GPUs due to the concern of more coming to end? And what I'm asking is not really inference and it's not training. These are just normal applications, sort of like the same way architectures shifted from IBM mainframes or PA years and years ago to x86 eventually to that and cloud. Do you think that, that's going to shift over to running on GPUs?

Shannon Cross:

Thank you, Lou. Let me now turn it back to Antonio for concluding remarks.

Operator:

Ladies and gentlemen, this concludes our call for today. Thank you. You may now disconnect.

Jeff Kvaal:

Thanks, Gary, and good afternoon, everyone. I'm Jeff Kvaal, I'd like to welcome you to our fiscal 2023 fourth quarter earnings conference call with Antonio Neri, HPE's President and Chief Executive Officer; and Jeremy Cox, HPE's Senior Vice President, Controller and Interim 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. HPE seems no obligation and does not intend to update any such forward-looking statements. We also note that the financial information discussed on the call reflects estimates based on the information available at this time and could differ materially from the amounts ultimately reported in HPE's annual Form 10-K for the fiscal year ended October 31, 2023. For more detailed information, please see the disclaimers on the earnings materials relating to forward-looking statements that involve risks, uncertainties, and assumptions. Please refer to HPE's filings with the SEC for a discussion of these risks. For financial information, we have expressed on a non-GAAP basis. We have provided a reconciliation to the comparable GAAP information on our website. Please refer to the tables and slide presentation accompanying today's earnings release on our website for details. Throughout this conference call, all revenue growth rates, unless noted otherwise, are presented on a year-over-year basis and adjusted to exclude the impact of currency. Finally, Antonio and Jeremy will reference our earnings presentation in their prepared comments. And with that, let me turn it to you, Antonio.

Operator:

Pardon me, this is the conference operator. The speaker's line has appears to have dropped. Please remain on the line while we rejoin them. Thank you.

Operator:

Yes sir, we can hear you now. Thank you.

Jeremy Cox:

Thank you very much, Antonio. We closed FY '23 with another solid performance. Our Q4 results reflect our strategic focus to diversify our business towards higher growth, higher margin areas of the market. The company's transformation we have undertaken several years ago to pivot to edge and cloud is paying off. And with AI exploding in 2023, we see several promising indicators as we look further in 2024 and despite some unevenness in some areas of the IT market where we participate. Q4 performance was highlighted by healthy revenues and gross margins. Revenue grew 5% sequentially in constant currency to $7.4 billion. hitting the midpoint of our Q4 revenue guidance range. Year-over-year revenue, however, was down 6% on a difficult compare to Q4 '22, during which significant order book consumption boosted our results. Q4 non-GAAP gross margin was 34.8%, which was up 170 basis points year-over-year, largely due to the increasing contribution of our Intelligent Edge segment. Let me remind you of the deliberate targeted investment decisions we made in Q4 that I flagged to SAM, which were funded with the better-than-expected OIE performance in the same period. The impact of this investment, along with the strong seasonal growth in HPC and AI resulted in a Q4 non-GAAP operating margin of 9.7%. This is down 60 basis points sequentially and 180 basis points year-over-year. We expect non-GAAP operating margins to quickly be over in Q1 '24. This led to GAAP diluted net EPS to $0.49 and non-GAAP diluted net EPS to $0.52, which was at the high end of our Q4 guidance range of $0.48 to $0.52. Our Q4 free cash flow of $2.3 billion was record-breaking for the company. HPE also delivered an impressive full year performance in FY '23. We delivered revenue growth of 5.5% in constant currency which was at the upper end of our guidance range of 4% to 6%. Currency was a 330 basis point headwind for the year. Non-GAAP diluted net EPS of $2.15 and was also at the high end of our prior guidance and well above our initial guidance from SAM 2022 $1.96 to $2.04. FY '23 free cash flow of $2.2 billion was well above our guidance of $1.9 billion to $2.1 billion. Let's now turn to our segment results. As a reminder, all revenue growth rates on this slide are in constant currency and I will discuss the segments in our prior structure. The company is now operating according to our new structure. And as communicated at SAM, we plan to file restated historical financials for the new segments well before we report our Q1 '24 results. In Intelligent Edge, we grew revenue 40% year-over-year in Q4. Demand in our core product was down sequentially on customer digestion, but grew in our software-centric solutions such as our HP Aruba Central cloud management software and in our new TAM opportunities such as our SASE security software suite. Our operating margin of 29.5% was up more than 1,600 basis points year-over-year. While very pleased with this performance, we continue to expect a mid-20% operating margin over time as communicated at SAM 2023. And finally, we're making progress on our order book and expect to be back close to historical normal levels by midyear 2024. In HPC & AI, Q4 revenue grew 38% year-over-year and 41% sequentially. Q4 revenue results included only a modest amount of AI revenue. On a sequential basis, the continued strength in AI demand lifted our order book in the HPC & AI segment to more than $3 billion, despite our significant revenue growth in the quarter. We continue to expect double-digit revenue growth in the segment over the next three years, and we are increasingly confident we will be above trend in FY '24 with GPU supply or gating factor. Our Q4 operating margin was 4.7%, up 120 basis points year-over-year and 550 basis points sequentially. While we have much more progress to make, this does illustrate the positive benefits of scale. The early stage of the AI market, tightness in certain key accelerators and long lead times in this segment means that the HPC & AI margins will fluctuate. Storage revenues fell 12% year-over-year on a difficult compare, but rose 3% sequentially. Storage demand has now been flat to up for three straight quarters. HPE Electra revenue grew over 50% year-over-year and it will remain a robust growth contributor in FY '24, supported by growth in file and object storage. HPE Electra is shifting our mix within storage to higher-margin software subscription revenue, which is a key driver of our ARR growth. Q4 storage operating margin of 8.1% was down 730 basis points year-over-year. Headwinds included the deferred revenue impact of the HP Electro subscription software, accelerated investment outpacing year-over-year revenue performance and a high mix of third-party products this quarter. Our investments in product portfolio give us confidence storage will make progress through FY '24 toward our long-term operating profit margin target communicated at SAM 2023 of mid-teens. Compute revenue was down 30% year-over-year on a difficult compare and down 1% sequentially. De elongation and customer digestion, we discussed previously continued to be most prevalent in compute. Declining AUPs from a record high in Q1 '23 was also a meaningful driver. However, two straight quarters of sequential improvement in demand lends further confidence to our FY '24 outlook. Our full-year operating margin of 13.7% exceeded our target range of 11% to 13%, but the operating margin of 9.8% in Q4 was temporarily below the range. Given gross margins remain largely flat sequentially and the sequential demand increases, we continue to expect operating margins to be in the target range for FY '24. HPE Financial Services revenues were flat year-over-year and financing volume was $1.5 billion. Our operating margin of 8.9% was down 220 basis points year-over-year reflecting rapid intra sites that we are offsetting through pricing as well as asset management margins returning to normal as supply challenges ease. Our Q4 loss ratio remained steady at 0.5%. Let's double-click on our portfolio pivot to higher growth, higher margin recurring revenue and in particular, to Intelligent Edge. Even three years ago, the Intelligent Edge segment constituted just 10% of segment revenue. This year, it represented 18%. The operating profit trajectory is even more telling. The Intelligent Edge segment contributed approximately 14% of the segment's operating profit three years ago and was nearly 40% in FY '23. In FY '24, we intend to give you a similar view combining our growth pillars of HPC and AI, hybrid cloud and intelligent edge segments. Within that, we expect the Intelligent Edge segment growth to moderate in the HPC & AI segment growth to accelerate. Robust demand in our hybrid cloud and as-a-service offerings illustrates the durability of our portfolio shift. ARR exceeded $1.3 billion in Q4. This represented 37% year-over-year growth, which is in line with our long-term CAGR target of 35% to 45%. Storage and Intelligent Edge software and services are the fastest-growing components of ARR. We continue to lift HPE GreenLake's value proposition with an increasing mix of higher-margin recurring software and services revenue. Our software and services mix was 68% in the quarter. We expect this mix to increase into the upper 70% range by FY '26. This expansion is driven by the growth of subscription-based software with our products and the increased attach of our HPE operational services, which rose double-digits in Q4. The rising software and services mix is expanding our as-a-service margins. Our as-a-service orders grew 11% year-over-year in Q4 and finished the year up a solid 23% after 68% growth in FY '22. Our cumulative as-a-service TCV has now increased to nearly $13 billion. As ARR is now on a clear path to meaningful scale, we will simplify our as-a-service disclosure from ARR as-a-service orders in TCV to only ARR in FY ‘24. The explosion in AI demand is driving robust growth in our APU orders. Total APU orders, which include APUs in our compute, Cray EX and Cray XD businesses totaled $3.6 billion in FY '23, which is up from the over $3 billion we disclosed at SAM 2023. HPE Cray XD APU orders accelerated in Q3 and in Q4, reaching $2.4 billion for the year. The impressive APU server demand is also evident in our total server demand. APUs represented 25% of total server order dollars in FY '23, up from 10% in the prior year. We will continue to disclose APU orders. However, orders can be easily north of $100 million each, therefore, orders may be lumpy. But the key point is that we are capturing AI demand now and are well positioned for coming demand across the entire AI life cycle from training to tuning to inferencing. Our strategy is delivering top line growth and gross margin expansion. Despite the challenging macro ongoing product digestion and currency headwinds, we still produced one of our highest quarterly revenue figures since 2018, while sustaining our expanded gross margin profile. Our Q4 non-GAAP gross margin rose 170 basis points year-over-year to 34.8%. And our full year non-GAAP gross margin rose 140 basis points to 35.3%. That's a more than 500 basis point improvement from FY '18. Moving to free cash flow. In Q4, we generated $2.8 billion in cash flow from operations and $2.3 billion in free cash flow. Our $2.2 billion in free cash flow in FY '23 was above the high end of our guidance and up meaningfully from $1.8 billion in FY '22, primarily on improved earnings and net income conversion. We exited FY '23 with a cash conversion cycle of negative four days, which exceeded our expectation for neutral we communicated at SAM. Strong working capital management in Q4 and reduced transformation costs in FY '23 drove an improvement in our conversion of non-GAAP net earnings to free cash flow to approximately 80% in FY '23. Continued progress in FY ‘24 and beyond leads us to expect to reach 90% by FY '26. We reiterate our FY ‘24 free cash flow guidance from SAM of $1.9 billion to $2.1 billion. And we returned over $1 billion in capital to shareholders in FY ‘23, including $421 million in share repurchases. While certain price and volume parameters of our trading program limited us to below our $500 million target in FY ‘23, we reiterate our goal of returning 65% to 75% of free cash flow to shareholders between FY '24 and FY '26. Before we dive into our outlook, let me remind you that we will exclude H3C earnings and gain on sale from our non-GAAP results in FY '24 as we noted at SAM. We continue to expect the process to conclude and the receipt of the cash proceeds in the first-half of calendar 2024. For Q1, we expect revenues in the range of $6.9 billion to $7.3 billion. This incorporates historical seasonality in our overall business, including in the HPC & AI segment after its strong Q4. We expect AI revenue acceleration to drive sequential growth in HPC & AI and total HPE revenue in Q2 '24. We expect GAAP diluted net EPS between $0.24 and $0.32 and non-GAAP diluted net EPS between $0.42 and $0.50. We're reiterating our prior year 2024 guidance of 2% to 4% revenue growth in constant currency. We expect OI&E, which as noted, excludes HCC going forward to be a headwind of approximately $300 million and our non-GAAP structural tax rate to be 15%. Our full-year GAAP diluted net EPS guidance of $1.81 to $2.01 is $0.02 lower than our prior view as a bit of transformation costs slipped into FY '24. We are reiterating our full-year non-GAAP diluted net EPS guidance of $1.82 to $2.02. We also reiterate free cash flow guidance of between $1.9 billion and $2.1 billion. We continue to believe our FY '24 performance will be weighted to the second-half of the year as GPU supply improves. We are increasing our dividend by 8% in FY '24 and intend to return 65% to 75% of free cash flow to shareholders this year. So to conclude, while there continues to be unevenness in some areas of the IT market, our investment in growing areas of our portfolio is paying off. We are confident in our ability to continue to capture the AI explosion in demand. AI also opens broader customer discussions about the benefits of AI inferencing at the edge and the need to be hybrid by design. Our HPE GreenLake Cloud platform, our AI native portfolio, and our services expertise are perfectly aligned to the needs of our customers that we believe will turn into profitable growth for our shareholders. Now let's open it up for questions.

Mike Ng:

Hey, good afternoon. Thank you very much for the question. I just have one on the APU orders of $3.6 billion. I was wondering if you could talk a little bit about the mix between compute, supercomputing and Cray XD. And if you could offer any color on the type of customers that are making this order? Is this your typical enterprise customer? Is it more of a Tier 2 or AI CSP? Any thoughts there would be great.

Jeremy Cox:

The only thing I would just add to that is the supercomputing piece, specific to your question, is less than 10% in the total APU orders in FY '23. The other interesting point to add on to the journey towards inferencing that Antonio mentioned is within compute, although against a very small base, we did see non-Tier 1 customer orders around GPU or APUs for compute increased about 100% in the quarter. So again, against a small base, but an interesting point to see the focus start moving towards that realm.

Jeffrey Kvaal:

Thanks, Mike. Gary, the next question please?

Wamsi Mohan:

Yes, thank you so much. Antonio, we've seen some networking companies talk about a slowdown and some inventory digestion. You're still delivering very strong growth in edge high 30s. I know you called out a more front-end loaded performance for Edge. But curious how you're thinking about the weight and pace of that business trajectory both on revenue and margin terms as you go through the course of the year?

Jeremy Cox:

Right. Yes. We -- as Antonio mentioned, we did, as Sam mentioned, a slight growth we're expecting year-over-year on a full year basis for Edge. As I think about that, I'd almost break that down into two halves. The first-half, as we mentioned, we do still benefit from a backlog position or an order book position that will go into the first half and help support that revenue performance. And then the second half will be more dependent on demand improvements. and in the areas that Antonio mentioned and the investment areas that were helping drive that expectation. From an operating margin perspective, I would say that I would expect the first half to still benefit from higher operating margins as again, the order book consumption has been at higher price with lower cost. So that's helped drive our operating margin performance, which again this quarter at 29.5% is exceptional. But we would expect to probably more in the second-half, you'll start seeing that operating margin rate get more back towards the mid-20s that we had mentioned at SAM is our expectation for the long-term in this business.

Operator:

The next question is from Toni Sacconaghi with Bernstein. Please go ahead.

Jeremy Cox:

Toni, this is Jeremy. I'll take those two for you. So you're spot on as we think about next year, we will have a seasonal drop in HPC and AI. That's largely as Q4 really benefited from a meaningful amount of Cray Ex acceptances. And as you know, the time between order and acceptance can be a long period of time and Q4 saw a larger number of acceptances, which helped drive the revenue performance. We'll see a bit of a dip back down in Q1 and then Q2 and the second-half really benefiting from the acceleration in AI, as well as some additional supercomputing business. And so you'll see a pretty significant ramp as we go from Q1 to Q2 and then sustaining at or ramping beyond that in the second-half of the year. And HPC and AI will be a big part of the revenue growth story for FY '24. Your question on the order book total, it landed at just over $3.2 billion, which was slightly above where we landed in Q3. And that really came off the back, though of Q4 revenue performance in HPC & AI up about $350 million on a quarter-over-quarter basis. And so what happened is you had a runoff of order book from revenue performance in Q4 and then how to rebuild of that order book coming largely from AI demand in Q4 that took it back up to its historical high level of just over $3.2 billion.

Operator:

The next question is from Samik Chatterjee with JPMorgan. Please go ahead.

Antonio Neri:

Yes, sure. I mean no question, we see an explosion in demand in AI. Jeremy just comment on that. And I will say, of that order book that Jeremy just talked about in Q4, [Indiscernible] little was converted in AI. And to the point he made the growth we had in Q4 was driven by the supercomputer acceptances. But we have a very, very large pipeline in front of us, which is very exciting but ultimately it's going to come down to time to revenue based on the GPU availability. But I will say that business is going to continue to be super strong. And clearly, when I speak to customers, which I do more than 50% of my time there is a huge amount of interest in AI and how to accelerate the deployment of a higher cost enterprise, understand that there are challenges, whether it's sustainability challenges, where there are data center capacity, power and cooling and others. And that's why HPE went bold on that front last June to basically make the announcement we're going to offer supercomputing as a public cloud instance so customers can use it as a virtual private cloud. So that we feel very good about it. Green Lake continued to be very strong. Just to be in a context, we added $1 billion in TCV quarter-over-quarter. We added 2,000 customers, and ARR obviously, is a function of the deferred revenue that we materialize over time, but what customers really love about our experience is that it's hybrid by design. They can consume anything from Edge to cloud to HPE GreenLake, where they pay CapEx or OpEx, it doesn't really matter in the end. But they really love the experience. And that's why we're building the AI components into the same platform. So those are two very strong. Edge obviously had tremendous momentum. I think we're going to have the typical adjustments, but that's why we spend a lot of energy and time on adding more capabilities to the edge platform security as one private 5G data center networking, which adds to the momentum, understanding there will be potentially some digestion in the campus and branch. But as Jeremy said, we have very well covered for the first half of 2024. So we have to see that. And then compute, right, is a typical business that goes through this cyclicality, right? So last year, obviously, we had a huge amount of orders we converted the order faster than people expected. And in the back half of this year, we saw sequential demand improvements in units and stable AUPs. And now we start seeing upticks in the mix with AI inferencing, which has these accelerators. But Q3 demand was higher than Q2 and Q4 was higher than Q3. So I think it's fair to say we are stabilized, and we are improving. I would not call it yet a recovery. And on storage, I believe we're going to see some improvements over time because of AI demand, which require file and object and we have a great portfolio with HPE Eletra, and we intend to capitalize on that. But for three consecutive quarters now, we have seen stability and improvement. And in Q4, we saw revenue improvements on a sequential basis. So customers are prioritizing the spend where it makes sense, but ultimately we have a portfolio that can meet their needs, wherever they are and HPE GreenLake is the way we deliver all of this which ultimately for shareholders drives higher margins and higher reported revenues and profit. Sorry?

Antonio Neri:

Cannibalization. Sorry, Jeff, remind me, cannibalization. We have no evidence of that yet. I think that will become clear when the traditional compute CPU-driven returned to some normal levels. But remember, not every customer has deployed cloud across that enterprise. Still quite a bit of journey to go. And there are clear customers assessing what is the best place to deploy that, whether it's in a power cloud or whether it's repatriating on-prem because of the cost or because of data. I think AI is a huge driver of repatriation in my mind because if you have data distributed across multiple states, it's very hard to really train and fine-tune the models when you have data everywhere. And our focus there is really providing them an automated data pipeline with our unified analytics platform. So fundamentally, it's early to say. But so far, in the traditional compute business, we have not seen evidence of cannibalization at this point in time.

Operator:

The next question is from Simon Leopold with Raymond James. Please go ahead.

Antonio Neri:

Yes. Thanks, Simon. Again, maybe I will elaborate a little more to the comments I made before. So we saw Q4 over Q3 and Q3 over Q2 improvement in demand in units. And a lot of that was CPU-driven. Although there is a small base of AI accelerated kind of APUs, if you will, that we saw an increase in Q4. But I will say the unit growth in Q4 was not driven by the APUs, it was driven by a combination of CPUs, the vast majority and some APUs because the base is still very, very small. So definitely, customers are preparing for that. Again, they are all assessing what is the best place to deploy this model. That's why I do believe the inferencing side will accelerate over time, where we have to do some pre-training or POCs or really deploying in production. And I think many customers also will accelerate deployments of tuning solutions on-prem because of the data aspect I talked before. No question is still digesting what they bought last time on the CPU side of the house. But again, we saw some improvements in demand sequentially in units. And then let's remind ourselves that we also, for us, in the industry. We are going to the transition of Sapphire Rapids. And ultimately, we call that the Gen 11 platform. That became now, what, Jeremy? 25% of the mix which...

Antonio Neri:

53% of the orders in Q4, 25% of the revenue mix. And so that's good for us because, obviously, it drives higher density and obviously, we can attach more options to the same platform. And customers like the sustainability piece of that and the hybrid by design nature of that, which is actually well optimized. And Gen 11, by the way, was conceived to accept any type of processing unit, whether it's a CPU, but it's an APU, including ARM-based solutions or GPU-based solutions. Whether it's in tail on the X86. So that gives us tremendous amount of flexibility. But ultimately, it's not just about the server. It's the software that comes with it. And this is where we spend a lot of time building the partnerships and relationships with NVIDIA. So now you can deploy a tuning or inferencing with the NVIDIA stack and our software as well, all part of HPE GreenLake.

Operator:

The next question is from Tim Long with Barclays. Please go ahead.

Jeremy Cox:

Sure. I can take that particularly towards the latter part of that. I think Antonio already hit on some of the demand dynamics, again, where we've seen three quarters of flat to increasing demand, and so some positive trends from that perspective. I think from an operating margin perspective, certainly, we saw a reduction in Q4. That was driven off a combination of several things, including a higher third-party mix that you mentioned. As well as the fact that we see -- we saw some incremental OpEx in this segment and that OpEx as a comparison to the revenue performance in the quarter also put pressure onto that operating margin. However, we do expect a pretty quick recovery there. We -- as we look into Q1, in particular, revenue is not expected to accelerate meaningfully, but we think the mix will improve as far as towards our IP product. And the -- we should see some OpEx moderation and favorability as we go into the quarter coming out of Q4 and some of the investments that we made there. And so I expect to see that get back into a low double-digit kind of area. And then as we work through the quarter, and that IP mix starts to improve more on demand acceleration, then we should start seeing us working back towards our mid-teen target that we identified at SAM for this segment.

Operator:

The next question is from Sidney Ho with Deutsche Bank. Please go ahead.

Jeremy Cox:

I'll take that. So just on the last point, no, there wasn't any meaningful AI impact, but we do expect that to be an accelerator, particularly in FY '24 as we go to Q2 and towards the second half. That will be a big part of our ARR story, and we expect that to be an accelerator for us in FY '24. On the quarter-over-quarter, this business, similar to what I mentioned on the supercomputing area does have some time between order to revenue recognition. In this case, when ARR begins to be reported. And so I think the sequential story was more about. Early in the year, we had seen more as the backlog had been burning down and some of those deals that have been waiting in the pipeline turning into -- and converting that helped drive and accelerate the ARR through the first 3 quarters. We saw a little bit less of that in Q4. But I don't think that it all as an indication of a slowdown in this space. In fact, between the 35% and 45% kind of CAGR or annual growth, I expect us in FY '24 to see the higher end of that range.

Operator:

And our final question will be from Meta Marshall with Morgan Stanley. Please go ahead.

Antonio Neri:

Yes. I think overall it was more back ended, I would say, in the quarter, we saw strengthening as we went through the weeks. As always said, we have 13 weeks in the quarter, and we saw stronger momentum as we built along the way. And remember what we said the same, right? So as SAM as said year-to-date to October '19, I think, was the sun date. We had $3 billion in cumulative orders both between supercomputer and AI specifically and we ended the year at 3.6%. So in the last 12 days with $600 million in incremental AI orders. That tells you the strong. It was through also for compute and storage. By the way, the last few weeks, call it, three, four, five weeks were stronger than the beginning of the quarter. So I would not make much out of that. Sometimes customers take the time. We still actually live in elongated flow cycles. That's for sure. Customers taking more time to make those decisions. and ultimately issue the POs. But what really is giving me the confidence is the strong pipeline we have ahead of us. That's obvious. And clearly, in AI is significantly stronger than we ever imagined. And the only challenge we have there, then as Jeremy said, right, so it's time to revenue. We really recognize very little revenue in AI in Q4. That's why we expect the acceleration starting in Q2 and beyond as lead times improve and some of the supercomputing also gets accepted. But the reality, 2024 will be the year of AI revenue growth. And then in the edge, obviously, we have the momentum that we talked about in the subscription, the scale of our software and the incremental engines that we have. So overall, it was a typical quarter, but stronger on the back versus the front. Yes. I think we have time for one more.

Operator:

Thanks for the final question. will be from Aaron Rakers with Wells Fargo. Please go ahead.

Antonio Neri:

No, great question. And I will say, overall, there is a lot of complementary and there are some places overlap, obviously. But with Jens and the team, we have a clear joint plan to win together in different segments of the market. But let me break it out because we talk about software in general terms, but let's start first at the infrastructure level. we have unique software that allows us to run these supercomputers and AI system, which are cloud native by nature at massive scale. Think about when you run a model you need to start and complete the mobile training. And you have to have unique technologies for checkpoints and making sure that all the compute power is acting as unified system because unlike the public cloud or the cloud, as we know it, you are multiple loads on multiple nodes. In this case, you run one world nodes on multiple nodes. And that's parallel computing as we know it. And ultimately, you need the software to run this at scale. The magic around that is that checkpoint. And then the second piece of that is our networking interconnect fabric which allows us to really connect every accelerated unit to every accelerated unit in a cohesive approach. And that's our Slingshot contingent fabric as we know it. And then on top of that, we have our machine learning development environment. This is where developers and the like use our machine learning development services. to prepare the models to automate the data pipeline. One of the biggest challenges customers have is to prepare the data, data is everywhere, but ultimate bringing in terms sort of one place so you can use data to train the models. And then with NVIDIA, we use their AI enterprise software, including some of the foundation models that they provide order to provide a complete solution. And obviously, we leverage their APUs, call it, GPUs, whether it's H-100-L40-OL4S, A100s in the past and going forward as the announcement we made a supercomputing 2023 in Denver, we are leveraging the grace over Edge 200. So it's a combination, depending on the use case. And we feel pretty good about what we're doing and stay tuned because Thursday, we're going to make further announcements about our partnership with NVIDIA. But it's RAP and IP that makes us together unique and differentiated in the AI space. Okay. Well, thank you, everyone. I will appreciate always the time. I know you're busy cover in all the earnings, but I will say just to wrap in fiscal year 2023. Clearly, we demonstrated our strategic investments and the extraordinary innovation across the growth areas of edge, hybrid cloud and even compute for the matter are really resonating with customers. and is helping us tolerate revenue growth and profit diversification. That's why you see the growth in gross margin and profit. And I believe we will continue to capitalize on this growing market opportunities. And I'm confident to continue to increase the returns to our shareholders. And that's why we are raising the dividend for 2024. So thank you for your time today. I wish you all fulfilling end of the calendar year and a special holiday season. Talk to you soon.

Jeff Kvaal:

Good afternoon, everyone. I'd like to welcome you to our fiscal 2023 third quarter earnings conference call with Antonio Neri, HPE's President and Chief Executive Officer; and Jeremy Cox, HPE's Interim Chief Financial Officer. Before handing the call to Antonio, let me remind you that this call is being webcast. A replay 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. HPE assumes no obligation and does not intend to update such forward-looking statements. We also note that the financial information discussed on the call reflects estimates based on the information available at this time and could differ materially from the amounts ultimately reported in HPE's quarterly report on Form 10-Q for the fiscal quarter ending July 31, 2023. For more detailed information, please see the disclaimers on the earnings materials relating to forward-looking statements that involve risks, uncertainties and assumptions. Please refer to HPE's filings with the SEC for a discussion of these risks. For financial information, we 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. Throughout this conference call, all revenue growth rates, unless otherwise noted, are presented on a year-over-year basis and adjusted to exclude the impact of currency. Finally, after Antonio provides his remarks, Jeremy will reference our earnings presentation throughout his prepared comments. Now with that, let me turn it to you, Antonio.

Jeremy Cox:

Thank you very much, Antonio. I'm honored to take on the responsibility of Interim CFO as we go through the process. I'll start with a summary of our financial results for the third quarter of FY 2023. Antonio discussed key highlights on Slide 4. Let me begin with Slide 5, financial highlights. We're actively diversifying our business mix towards our higher-growth, higher-margin portfolio of Intelligent Edge, HPC & AI and HPE GreenLake solutions. This pivot is clearly visible in the 120 basis-point year-over-year expansion of non-GAAP gross margins. We delivered a solid quarter within an IT market still under some pressure. Cycle times remain elongated and digestion of prior orders will continue to have some near-term impact. This has been particularly true in Compute and, to a lesser extent, in Storage. Despite these challenges, we delivered 3.5% year-over-year revenue growth in constant currency to $7 billion, which exceeded the midpoint of our Q3 revenue guidance. This figure included a modest amount of AI revenue. We do see several promising indicators that suggest stabilization. Antonio mentioned the sequential improvement in demand across our four product segments. We're starting to see indicators that our largest customers are returning to the market. Intelligent Edge continues to increase revenues rapidly, both on a year-over-year and sequential basis and robust AI demand is evident in our as-a-service orders. Our non-GAAP gross margin rose 120 basis points year-over-year to 35.9%. This is off just 30 basis points from our high watermark of 36.2% last quarter. Our margin structure reflects the pivot of our business mix to higher margin, software-intensive recurring revenue, such as Intelligent Edge. The edge mix was up 450 basis points year-over-year. Our Q3 '23 non-GAAP operating margin reached 10.3%, this is down 120 basis points sequentially and 20 basis points year-over-year. Sequentially, the driver was largely return of Compute operating margins to just below long-term target range of 11% to 13% after six consecutive quarters above the range. We expect the impact of Compute operating margin cyclicality on HPE's operating margins to decline over time, as our revenue mix shifts towards our higher-growth, higher-margin businesses. Our Intelligent Edge business reached a record-high 29.7% operating margin. We remain focused on productivity and continue to expect revenue growth to outpace OpEx growth over time. Our solid Q3 and margin -- revenue and margin performance led GAAP diluted net EPS to $0.35 and non-GAAP diluted net EPS to $0.49, which was up $0.01 year-over-year despite Compute cyclicality. It was also $0.01 above the high end of our Q3 guidance range of $0.44 to $0.48. Our Q3 free cash flow was $955 million. We continue to return substantial capital to our shareholders, paying $154 million in dividends and repurchasing $187 million in stock this quarter. We have now returned $831 million in capital to shareholders this year. Moving to Slide 6. Our as-a-service revenue pivot continues to show strong momentum. ARR reached $1.3 billion in Q3 '23. The benefits of as-a-service deals we won in prior quarters are now appearing in our results, though, the large AI-as-a-service deals booked in Q3 have yet to reach revenues. Year-over-year ARR growth in constant currency has accelerated from 25% in Q4 '22 to 31% -- 38% and now 48% in Q3 '23. The 48% growth is above our long-term 35% to 45% target and should be viewed as an indicator of our long-term momentum rather than as a new growth trajectory. The fastest-growing components within ARR year-over-year are Storage and Edge. We continue to lift HPE GreenLake's value proposition with an increasing mix of higher-margin, recurring software and services revenue. Antonio mentioned that in Q3, our software and services mix rose to 68% and should continue to increase. While this mix has traditionally tilted to services, software is now half of the total. In the future, we expect software growth to exceed services growth and for as-a-service margins to rise over time. To Slide 7. Our Q3 as-a-service order growth was robust. We're pleased to have delivered 122% year-over-year order growth which has raised our cumulative as-a-service TCV to nearly $12 billion. The driving factor was AI demand. A significant percentage of our AI orders have come under the as-a-service model and the strength this quarter should also provide confidence in our long-term 35% to 45% ARR growth outlook. Order growth will fluctuate given the volatility of large as-a-service deals. Now let's turn to our segment highlights on the next slide. And remember, all revenue growth rates on this slide are in constant currency. In Intelligent Edge, we grew revenues 53% year-over-year and 8% sequentially, delivering record revenues for a fifth consecutive quarter. Customers are increasingly adopting our software-centric solutions such as Edge Connect SD-WAN software and our Aruba Central management platform. We've expanded the Axis Security and SASE funnel to 6 times since the acquisition. Our operating margin of 29.7% was up more than 1,300 basis points year-over-year and 280 basis points sequentially. We're benefiting from revenue scale and prior pricing actions, which are helping us build visibility into the durability of our mid-20% margin target over time. While we're making progress on our order book, we expect to carry an above-normal order book into FY '24. In HPC & AI, revenue grew 3% year-over-year. Customer discussions on large language models and generative AI that began in Q1 turned to wins in Q2 and are now showing up as as-a-service orders in Q3. AI, the predominant driver of our 122% year-over-year growth in as-a-service dollars has also driven sequential growth in our corporate total order book, which I'll discuss in a moment. We expect AI deals to provide gross margin rates above historical levels. We believe building and operating large AI models requires unique computational capabilities, including silicon and software that our HPE Cray supercomputers and HPC & AI solutions are extremely well positioned to enable. As for operating margin, our Q3 performance was just below breakeven. The early stage of the AI market, tightness in certain key components and long lead times in this segment mean that operating margins in HPC & AI will continue to fluctuate. We'll discuss our outlook for revenue growth, investment and margin improvement at our Securities Analyst Meeting. Storage fell 2% year-over-year but rose 3% sequentially. HPE Alletra revenue grew triple digits in Q3 for the fifth consecutive quarter. It is now one of our higher revenue products and thus growth rates may normalize. This product is shifting our mix within Storage to higher-margin, software-intensive revenue and is a key driver of our ARR growth. We'll continue to invest in R&D and our owned IP products in this business unit, such as our new file-as-a-service and HPE Alletra MP offerings. Q3 '23 operating margin of 10.7% is down 360 basis points year-over-year as we transition to HPE Alletra. HP Alletra includes a meaningful component of ratable revenue, which pushes revenue recognition out into future periods. Compute revenue was down 10% year-over-year to $2.6 billion and down 5% sequentially. Deal elongation challenges we've discussed previously were most prevalent in the Compute business as some customers digest prior investments. Declining AUPs from a record high in Q1 '23 was also a significant driver. But, as previously noted, we did see sequential demand improvement. And after six quarters of above plan operating margins in Compute, this quarter's 10.9% was a shade below our long-term margin target of 11% to 13%. HPE Financial Services revenues rose 7% year-over-year and financing volume of $1.7 billion grew 6% in constant currency, driven by HPE GreenLake. Our operating margins were down 340 basis points year-over-year, reflecting rapid interest hikes and higher cost of funds that will gradually offset over time through pricing, as well as lower asset management margins as supply challenges ease. Time and time again, HPE FS has proven resilient in a downturn, thanks to the quality underwriting of our book of business. Throughout the pandemic, our annual loss ratio never exceeded 1%, and our Q3 loss ratio of 0.48% was even lower than it was in the full year 2019 pre-pandemic. Slide 9 highlights our revenue and non-GAAP diluted net EPS performance. The progress we're making against our edge-to-cloud strategy is evident in the financial results we delivered on both the top and bottom lines. We've held our revenue steady this quarter and expanded non-GAAP diluted net EPS year-over-year despite an uneven spending environment, our transition towards a recurring revenue model and FX rates remaining a significant headwind. FX was a 280 basis point headwind to revenue growth in Q3. On Slide 10, we've included a new depiction of our portfolio shift, which illustrates just how significant the Intelligent Edge business has become for HPE. Even three years ago, Intelligent Edge constituted just 10% of revenue, and this quarter, it represents 20%. Operating profit trajectory is even more dramatic. Edge contributed just over 10% of operating profit three years ago and is now 49% of total segment operating profit. We will offer our forward-looking view at our Security Analyst Meeting. Slide 11 illustrates the progress we've made on our gross margin structure. Our Q3 non-GAAP gross margin is up 120 basis points year-over-year despite FX headwinds. Our year-over-year non-GAAP gross profit and margin growth show the success of our strategic portfolio pivot and the pricing actions HPE has taken. Slide 12 illustrates our non-GAAP operating margin, which was 10.3% in Q3. This is down 20 basis points year-over-year, also inclusive of FX headwinds, and 120 basis points sequentially. While the primary driver of the sequential decline was the return of Compute operating margins to near our target range, we also made certain targeted investments in the quarter to further enable our pivot. Our deliberate portfolio mix shift, pricing strategies and productivity focus put us on track to increase operating margin in FY '23. On Slide 13, as previously announced, we exercised the put option on our shares in H3C and signed a put share purchase agreement that values our 49% H3C stake at US$3.5 billion. The next step in the process is to obtain the necessary regulatory approvals and to conclude certain conditions necessary for closing. We expect to conclude this process in the first half of calendar year 2024; although this time line could be further extended pursuant to the terms of our agreement. We intend to update our plans for the use of proceeds once the transaction closes. You can assume that we will use the same disciplined returns-based framework for evaluating investments, capital returns and maintaining an investment-grade credit rating that we've outlined in the past. Finally, we continue to benefit from H3C dividends in FY '23. We'll offer an update on our go-forward expectations for H3C dividend at SAM in October. Now to Slide 14. We generated $1.5 billion in cash flow from operations and $955 million in free cash flow. Our Q3 free cash flow improved by approximately $670 million sequentially and nearly $370 million year-over-year. Similar to our Q4 '22 performance, we expect to generate significant free cash flow in the remainder of FY '23 and are reiterating our guidance of $1.9 billion to $2.1 billion in free cash flow in FY '23. The timing of receipts and payments plus inventory investments have held cash conversion cycle steady sequentially at 23 days. We expect to exit the year with a neutral cash conversion cycle. Now let's turn to outlook on Slide 15. As we've mentioned, the broader IT market is still pressured. Macro uncertainty is affecting some of our end markets, yet customer investment is rising in others, such as Edge and HPC & AI. We believe our portfolio differentiation will continue to drive share gains in key markets. We are also entering Q4 with an order book that is more than 2 times pre-pandemic levels. Our order book has increased from more than 1.5 times pre-pandemic levels entering Q3, primarily on the strength of AI orders. The assumptions in our guidance, which incorporate our current thinking on the macroeconomic picture, demand, inflationary pressure, supply and FX rates remain relatively unchanged. We've indicated throughout the fiscal year that our financial performance is likely to be weighted to the first half of the year. We continue to view this as the proper framework for FY '23. For Q4, we expect revenues in the range of $7.2 billion to $7.5 billion. We expect GAAP diluted net EPS between $0.36 and $0.40 and non-GAAP diluted net EPS between $0.48 and $0.52. We're reiterating our prior fiscal year 2023 guidance of 4% to 6% revenue growth in constant currency. We expect FX to be a 300 basis-point revenue headwind from our previously communicated 250 to 300 basis-point headwind. In parallel, we also reiterate our expectation that margin strength from our portfolio mix shift will deliver non-GAAP operating growth of 6% to 7%. We're reiterating our GAAP diluted net EPS guidance of between $1.42 and $1.46 due to tax rate differences and additional amortization of intangibles from our recent acquisitions. We're raising our non-GAAP diluted net EPS guidance from between $2.06 to $2.14 to between $2.11 and $2.15. We reiterate our guidance for free cash flow of between $1.9 billion and $2.1 billion. For OI&E, we benefited this year from higher interest income and FX hedging costs lower than we originally forecasted. The combination of these and other anticipated benefits in the second half of this fiscal year leads us to expect OI&E to be a positive $50 million to $70 million on a full year basis. We had previously expected OI&E to be neutral for the full year. In terms of capital returns, we are maintaining our dividend and expect to return approximately 60% of free cash flow to shareholders via dividends and repurchases. So to conclude, the uneven end market demand thus far in FY '23 is an opportunity for HPE to showcase our differentiated portfolio led by HPE GreenLake Hybrid Cloud, Intelligent Edge and HPC & AI, and we'll continue to take the steps required to further accelerate the pivot of our product portfolio and our company towards faster growth, higher margin recurring revenues. We look forward to updating you with HPE's outlook beyond FY '23 at our Securities Analyst Meeting in October. Now let's open it up for questions.

Simon Leopold:

Great. Thanks for taking the question. I wanted to see if you could put the AI wins in the same terms you did at the analyst section you had in June when you told us you had $1.6 billion in awards. That was a combination of CapEx and recurring deals that would be spread out over a number of years. So, what I'm looking for is an update on that and how much of the AI are you expecting in that fourth quarter? And sort of what's the timeframe for seeing the benefits? Thank you.

Jeff Kvaal:

Thank you, Simon. Gary, could we have the next question, please?

Aaron Rakers:

Yes. Thanks for taking the question, and congrats on the results. I guess I wanted to build on Simon's question a little bit. I think in the context of last quarter and what you had disclosed at the analyst event, you had also alluded to within that pipeline, large hyperscale cloud opportunities. I'm curious what are you seeing in that vertical? Should we expect that to further expand? Just kind of any context around the positioning within cloud where HPE Enterprise hasn't really historically had a material footprint. Why are you winning in that -- in those opportunities if they're expanding?

Jeff Kvaal:

Thank you, Aaron. Gary, could we have the next question, please?

Meta Marshall:

Great. Thanks. Maybe taking a second on the Intelligent Edge business. Can you just kind of give a sense of what is the biggest forward driver that you're seeing? I think people understand kind of the catch-up spend and the backlog release that has been done, but just what you're kind of seeing in ongoing kind of orders today? And is that Wi-Fi 6? Is it still kind of return to work? Just what are the biggest drivers that you're seeing to kind of help continue the growth of that business? Thanks.

Jeff Kvaal:

Thank you, Meta. Gary?

Asiya Merchant:

Great. Thank you for taking my questions. If you can -- storage was up sequentially, which was a positive and it seems like the HPE Alletra is getting traction. As you think about the fourth quarter -- the fiscal fourth quarter, if you can provide some guidelines on how you're thinking about your storage portfolio, both on the top-line as well as when you think margins kind of get back to, I think, the target margins, which are much higher than where they are right now? Thank you.

Jeremy Cox:

Sure. And that's where I'll pick up, Antonio, it was on Alletra. I think we've previously talked to you guys about how this product is really a combination now of a higher software component and that software component does have an element of taking what was prior product revenue and now deferring that onto the balance sheet, about 14% is deferred onto the balance sheet. And so, as we see that work off over time as that product is deployed out, we'll start seeing an inflection point, and that should positively impact revenue as we look forward, particularly into FY '24. And that also has an impact on the margin line, too, as that deferral is deferring software-based revenue that has a higher margin concentration to it. So we would expect to see our operating margins start to recover back to kind of historical levels as well as we look forward to '24.

Jeff Kvaal:

Asiya, thank you. Gary?

Samik Chatterjee:

Hi, thanks for taking my question. I guess you mentioned a couple of times in your prepared remarks about the cyclicality in the Compute business, which is a headwind. Maybe if you can outline your thoughts on where we are in the cycle? Is there more downside to revenue and margins as we move into fiscal fourth quarter? Or -- you did reference a demand improvement. So I'm just sort of curious, does it imply fiscal 3Q is sort of the near-term trough here in the business. And more broadly, if I can ask like questions that investors are asking us today is how much of the demand improvement that you're seeing going into fiscal '24 helps you offset the tailwind that you have this year from backlog and still enable you to grow in fiscal '24? If you can share any early thoughts on that? Thank you.

Jeremy Cox:

Maybe I'll pick up on the margin side of it, Antonio. Obviously, in these cycle times, we've -- I think we've proven that in down cycles where commodities are declining, causing declines in AUP. We've been able to hold pricing to drive margin. And then as it inflects back and turns back up, we've been able to be leading market leaders on pricing to make sure that we're catching it appropriately on that. So our expectation is as that changes throughout this process, on top of the point that Antonio made about Gen 11 really driving an AUP premium for us, which can also be an impact. We still expect that 11% to 13% operating profit, structural range to be reflective of what our longer-term expectations are.

Jeff Kvaal:

Thank you, Samik. Gary, could we make this our last question, please?

Wamsi Mohan:

Yes, thank you. Antonio, you're exiting this year with a high single-digit decline in revenues and Edge clearly is doing extremely well and some benefit from backlog. How confident are you that HPE can grow revenues in fiscal '24, given the current exit trajectory of the business? You also noted some stabilization. So curious to get just some high-level thoughts, not explicit guidance, maybe, but just some directional commentary on how you could see that playing out.

Operator:

Ladies and gentlemen, this concludes our call for today. Thank you for attending. You may now disconnect.

Kirt Karros:

Thank you, Chuck and good afternoon, good evening everyone. I’m Kirt Karros, Senior Vice President, Treasurer, and Investor Relations for Hewlett Packard Enterprise. I like to welcome you to our fiscal 2023 second quarter earnings conference call with Antonio Neri, HPE’s President and Chief Executive Officer; and Tarek Robbiati, HPE’s Executive Vice President and 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 web page. Elements of the financial information referenced on the 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 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-Q for the fiscal quarter ended April 30, 2023. For more detailed information, please see the disclaimers on the earnings materials related to forward-looking statements that involve risks, uncertainties, and assumptions. Please refer to HPE's filings with the SEC for a discussion of these risks. For financial information, we've 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. Throughout this conference call, all revenue growth rates, unless otherwise noted, are presented on a year-over-year basis and adjusted to exclude the impact of currency. Finally, after Antonio provides his high-level remarks, Tarek will be referencing the slides and our earnings presentation throughout his prepared remarks. With that, let me turn it over to you, Antonio.

Tarek Robbiati:

Thank you very much, Antonio. I will start with a summary of our financial results for the second quarter of fiscal year 2023. As usual, I will reference slides from our earnings presentation to guide you through our performance. Antonio discussed key highlights for Q2 2023 on Slide 4. Let me discuss our Q2 performance details, starting with Slide 5. I would characterize this quarter as solid overall despite the uneven demand indicators across our portfolio, particularly in Compute, with continued demand and outstanding performance in our Intelligent Edge business as a standout. We are very pleased that we are successfully driving further diversification of our business mix towards our higher-growth, higher-margin portfolio of Intelligent Edge, HPC & AI, and HPE GreenLake solutions. During the quarter, net revenues grew 56% year-over-year in Edge, 22% year-over-year in HPC & AI, and the HPE GreenLake ARR grew 38% year-over-year, all in constant currency. The pivot of our portfolio towards higher-growth, higher-margin markets is clearly visible in the expansion of gross margins and our strategy is working. While we remain confident about our fiscal year 2023 and beyond, we are also realistic. Demand through much of the past two years has been above trend as attested by our growing order book over the fiscal year 2020 to 2022 period throughout our business, including Compute, which is very cyclical in nature. Demand shifted from fiscal year 2022 and to uneven in Q1 and was even more uneven in Q2 across our portfolio. While Q2 revenue of $7 billion equates to a healthy 4% year-over-year growth and 9% year-over-year growth in constant currency, revenues were below our prior guidance range of $7.1 billion to $7.5 billion. Deal velocity has slowed, particularly in North America and in Compute, and to a lesser extent in Storage. Deal cycles have elongated as customers primarily are larger compute customers digest their investments over the past two years. This trend has been particularly pronounced for compute in the manufacturing and financial services verticals in North America, in part as a result of the loss of confidence in the banking sector. In addition, HPC & AI was affected by several customer acceptances that slipped out of Q2. Despite this, we see several promising indicators. Demand in Q2 grew sequentially, led by HPC & AI and our Intelligent Edge business, Aruba. Aruba continues to grow revenues, both on a year-over-year and on a sequential basis. Overall demand in Compute in the mid-market is stable, including direct enterprise and the channel. Our overall order book at the start of Q3 remains elevated at more than 1.5x normalized historical levels, and we expect a strong momentum in Intelligent Edge to continue. And finally, AI demand is very solid, as you heard from Antonio, and materializing in our pipeline and our order book with several very large deals. More on that later. We also continue to take action to strengthen the portfolio mix shift inorganically across our businesses. We have closed the acquisitions of Axis Security and OpsRamp and are already winning deals with these assets as part of a broader HPE. I am particularly proud that we have finalized an agreement with our partners at UNIS for the sale of our 49% stake through the exercise of our put option for an amount of $3.5 billion. More on that later. In recognition of the Compute weakness, we are adjusting our previously communicated guidance of 5% to 7% revenue growth to 4% to 6% in constant currency. Nevertheless, the combination of our order book, ongoing strength and momentum in Edge and HPC & AI gives us confidence that we will deliver solid FY 2023 revenue growth and remain confident in the 2% to 4% revenue CAGR outlook over the FY 2022 to FY 2025 period that we provided at our 2022 Securities Analyst Meeting in October. Our non-GAAP gross margin reached a high watermark of 36.2%. This is up 200 basis points both year-over-year and sequentially. Our margin structure reflects the pivot of our business mix to higher-margin and software-intensive recurring revenue. Our Intelligent Edge business, Aruba was 19% of total revenue in Q2, up 580 basis points year-over-year. And with Q2 sequential revenue growth in Aruba at 15%, we expect Aruba to represent a larger portion of the company's gross and operating profits by the end of fiscal year 2023. As a result, our Q2 2023 non-GAAP operating margin reached 11.5%. This is 220 basis points ahead of Q2 2022 and down just (ph) from a record performance in Q1 2023. In addition to the portfolio mix shift towards high-margin businesses, we remain focused on cost control and productivity. Antonio and I remain determined to maintain this focus and to grow revenues faster than OpEx over time. Our Q2 margin strength drove GAAP diluted net EPS to $0.32 and non-GAAP diluted net EPS to $0.52, at the high-end of our guidance range of $0.44 to $0.52. Q2 2023 free cash flow was positive $288 million, an improvement of nearly $500 million over Q2 2022 and $1.6 billion over Q1 2023. We will discuss cash flow in more details later. Having said that, we remain on track to generate between $1.9 billion and $2.1 billion in free cash flow this fiscal year. Finally, we are continuing to return substantial capital to our shareholders. We paid $155 million in dividends and repurchased $106 million in stock this quarter and are on track to buy back at least $500 million worth of shares in fiscal year 2023. Our year-to-date total capital returns are (ph), which reflects our confidence in future cash flow generation. Moving to Slide 6. We are very pleased to announce our pivot to as-a-service revenue continues to show strong momentum as ARR surpassed $1.1 billion in Q2 2023. The benefits of easing supply challenges are appearing in our results as ARR growth in constant currency accelerated from 25% in Q4 2022 to 31% in Q1 2023 and now 38% in Q2 2023. Our edge and storage SaaS offerings are the fastest growth components of our as-a-service portfolio. Our as-a-service order decline of 8% in Q2 2023 is a function of a tough compare to Q2 2022, in which orders grew 107% on strength of several large deals. We are comfortable with our robust pipeline, which includes very large enterprise AI wins we recently closed and reiterate our three-year ARR target of a 35% to 45% CAGR from fiscal year 2022 to fiscal year 2025. Most importantly, we continue to make our as-a-service business more valuable with a growing mix of higher-margin software and services recurring revenue. In Q2 2023, our mix of software and services increased another 220 basis points year-over-year to 66%. And we have attained a total TCV well in excess of $10 billion. Let's now turn to our segment highlights on the next slide. I would like to remind you that all revenue growth rates on this slide are in constant currency. In the Intelligent Edge, we grew our revenue 56% year-over-year and exceeded the Rule of 40 for a second consecutive quarter. Most importantly, we grew revenues 15% sequentially and delivered record revenues for a fourth consecutive quarter. We are outgrowing our main competitors and are taking share in some of the largest enterprise customers who are increasingly adopting our software-centric solutions such as Edge Connect SD-WAN software and our Aruba Central management platform. We have now closed our acquisition of Axis Security and are already generating SD-WAN and SASE wins in combination. Our acquisition of private 5G player Athonet is still pending, but already contributing to our pipeline of business. Our operating margin of 26.9% was up more than 1,400 basis points year-over-year and 500 basis points sequentially. We're benefiting from scale and a solid order book that continues to grow. And as a result, we are optimistic about the prospects of our Intelligent Edge business in fiscal year 2023 and beyond. In HPC & AI, revenue grew 22% year-over-year. The emergence of large language models and generative AI has prompted many inquiries from our customer base during the past quarter, which are turning into pipeline and orders. In the past few months, we have multiple large enterprise AI wins totaling more than $800 million and counting. This includes large AI as-a-service deals under the GreenLake model. We believe building and operating large AI models requires unique computational capabilities, including silicon and software that our great supercomputers and HPC & AI solutions are extremely well positioned to enable. We expect the AI demand to drive healthy revenue growth in the future and intend to invest organically and inorganically to fully grasp this opportunity as our acquisitions of Determined AI and Pachyderm attest. The early stage of the AI market, tightness in certain key components and non-linked times in this business means that operating margins in the business unit will continue to fluctuate. Storage revenue grew 2% year-over-year. HPE Alletra revenue grew triple digits in Q2 for the fourth consecutive quarter, lifting our total all-flash array growth to 20% year-over-year. HPE Alletra is driving a long-term mix shift to higher-margin, software-intensive as-a-service revenue. We will continue to invest in R&D for our own IP products in this business unit such as our new file-as-a-service and Alletra MP offerings. Our Q2 2023 operating margin of 7.9% is down 390 basis points year-over-year as we navigate uneven demand and migrate to our software-defined HPE Alletra, which includes a significant component of SaaS ratable revenue. Compute revenue was down 3% year-over-year to $2.8 billion and down 20% sequentially. The and demand softness I discussed previously was most prevalent in the Compute business as our large customers, particularly in manufacturing and financial services in North America, digest the investments they have made in recent years. Our Compute operating margin of 15.2% exceeded our long-term outlook of 11% to 13% for the sixth consecutive quarter, which attests to the quality of our historical book of business. While we are seeing decreasing commodities costs leading to increased competitive price pressure, we are selling three differentiated platforms in the market, Gen10, Gen10+, and Gen11, which should allow a gradual management of margins over time. In HPE Services, which is within our Compute, HPC & AI and Storage segments and excluding HPE GreenLake, orders were down low single digits and revenues were flat year-over-year. HPE Financial Services revenues rose 7% year-over-year and financing volume of $1.7 billion grew 17% in constant currency, driven by HPE GreenLake. Our operating margins were down 280 basis points year-over-year, reflecting rapid interest rate hikes and higher cost of funds that we will gradually offset over time through pricing. Time and time again, this business has proven resilient in a downturn, thanks to the quality of the underlying of the book of business. Throughout the pandemic, our annual loss ratio never exceeded 1%. Our Q2 loss ratio of 50 basis points was below full-year 2019 or pre-pandemic levels. Slide 8 highlights our revenue and non-GAAP diluted net EPS performance. We are very pleased with the progress we are making against our edge-to-cloud strategy is evident in the financial results we have delivered on both the top and bottom lines. We have again grown both our revenue and non-GAAP diluted net EPS in Q2 2023 year-over-year, despite our transition towards a recurring revenue model, an uneven spending environment and FX rates remaining a significant headwind that impacted revenue growth by 480 basis points in Q2 2023. Slide 9 illustrates the progress we have made in our gross margin structure. Our Q2 2023 non-GAAP gross margin is up 200 basis points year-over-year. Our growing gross profit and margin are a testament to the success of the strategic pivot of our portfolio and the pricing actions we have taken. With 56% year-over-year growth in constant currency, our Intelligent Edge business was a standout and is now representing 19% of total sales in Q2 2023, up 580 basis points from a year ago. Slide 10 illustrates our non-GAAP operating margin progress, which reached 11.5% in Q2 2023. This is up 220 basis points year-over-year, and it also represents a high watermark for non-GAAP operating profit margin for a Q2 in any year. Again, our portfolio mix shift, pricing strategies, and productivity focus are the primary drivers of our operating margin expansion. The Intelligent Edge business not only represented 19% of revenue in the quarter but did so with a record 26.9% operating margin. Turning to the next slide. As you know, we have chosen to exercise our put options on our shares in H3C. We are pleased to have announced earlier that we and our partner, Unisplendour, have come to an agreement and signed a put share purchase agreement that values our 49% stake in H3C at USD 3.5 billion. The next step in the process is to obtain the necessary regulatory approvals and to complete certain conditions necessary for closing. We anticipate that the process to close will require a further 6 to 12 months to complete. However, this time line could be further extended pursuant to the terms of our agreement. We intend to update our plans for the use of proceeds once the transaction closes. You can assume that we will use the same disciplined return-based framework for evaluating investments, capital returns, and maintaining an investment-grade credit rating we have outlined in the past. As part of this framework, we may consider a range of allocation activities, including but not limited to, both organic and strategic investments, return of capital to shareholders, repayment and/or redemption of outstanding debt and general corporate purposes. We have also negotiated the terms of a new go-forward strategic sale agreement to be entered into with H3C that covers the commercial sales, service, and reseller arrangements between the companies. We're firmly committed to serving our customers and to continuing to do business in China through both direct sales and our partner, H3C. Finally, as you see on this slide, we are continuing to benefit from H3C dividends in fiscal year 2023 and we'll provide a more detailed update at SAM in October 2023 as to our go-forward expectations in this area. In Q2 2023, we are pleased to have generated a positive $889 million in cash flow from operations and $288 million in free cash flow. Our free cash flow improved by $1.6 billion sequentially from a seasonally low Q1 2023 and was also nearly $500 million above our Q2 2022 free cash flow. We expect to generate significant free cash flow in the remainder of fiscal year 2023 and reiterate our guidance of $1.9 billion to $2.1 billion. Net income was the primary driver of our positive free cash flow. Working capital continued to be a use of cash in the quarter. The timing of receipts and payments plus continuing inventory investments have lifted our cash conversion cycle to a positive 24 days in Q2 2023. We expect to exit the year with a neutral cash conversion cycle. Also, please remember we have made significant CapEx investments in HPFS volumes to drive future revenue growth in subsequent quarters. Now, let's turn to our outlook on Slide 13. As we have mentioned, demand for our products and services was more uneven in Q2 2023 across our business than it was in Q1 2023. Macro uncertainty is affecting some of our end markets, yet customer investment is rising in other end markets such as Edge and HPC & AI. We believe our portfolio differentiation will continue to drive market share gains in key markets. We're also entering Q3 2023 still carrying a substantial order book relative to pre-pandemic levels. Let me reiterate that our guidance incorporates our current thinking on the macroeconomic picture, inflationary pressure, and FX risk, which represented a 480 basis point headwind to revenue growth in Q2 2023. I would like to remind you that approximately 50% of our revenue is generated in foreign currencies. We had indicated at our last earnings announcement that our financial performance in fiscal year 2023 is likely to be more weighted to the first half of the year than is typical. We continue to view that as the proper lens for fiscal year 2023. For Q3 2023, we expect revenues in the range of $6.7 billion to $7.2 billion. At the midpoint of the range, this represents revenues that are stable year-over-year and most importantly, flat sequentially in reported dollars. We expect GAAP diluted net EPS of $0.34 to $0.38 and non-GAAP diluted net EPS of $0.44 to $0.48. This outlook assumes the current levels of demand we have been experiencing remain relatively unchanged, that we continue to make progress on the delivery of our order book and no further deterioration from FX rates. Given the weakness in Compute demand, we are adjusting our previously communicated fiscal year 2023 guidance of 5% to 7% revenue growth to 4% to 6% in constant currency and expect FX to be a 250 basis point to 300 basis point revenue headwind. In parallel, we also expect our margin strength from portfolio mix shift to deliver non-GAAP operating profit growth of 6% to 7%, which is up from our prior 5% to 6% view. We are lifting our GAAP diluted net EPS guidance from $1.40 to $1.48 to a new range of $1.42 to $1.50 and raising our non-GAAP diluted net EPS guidance from $2.02 to $2.10 to a new range of $2.06 to $2.14. We reiterate our guidance for free cash flow of $1.9 billion to $2.1 billion. For I&E, we have benefited in the first half 2023 from FX hedging costs lower than we originally forecasted. The combination of this plus other anticipated benefits in the second half of 2023 now leads us to expect to why I need to be neutral on a full year basis versus our prior expectation of a $20 million to $40 million expense. In terms of capital returns, we expect to return approximately 60% of free cash flow to shareholders via dividends and repurchases. And we are maintaining our dividend and expect to repurchase at least $500 million worth of shares in fiscal year 2023. So to conclude, we see the uneven end market demand in FY 2023 as an opportunity for HPE to accelerate our portfolio pivot to faster growth, higher-margin recurring revenues. Antonio and I look forward to continuing our execution momentum through fiscal year 2023 and beyond. Now with that, let's open it up for questions.

Shannon Cross:

Thank you very much. Antonio, can you dig a bit more into the significant outperformance you continue to see in Intelligent Edge? You're gaining share. The market remains strong. I know there's some backlog but it seems as if end demand is also remaining pretty solid. So, as you look at this business, how should we think about seasonality over the coming quarters because it's been so strong in the first half? How do you think about a more normalized growth rate in the business? And just any more color you can give because it has been such a strong performer. Thank you.

Shannon Cross :

Great. Thank you.

Operator:

The next question will come from Samik Chatterjee with JPMorgan. Please go ahead.

Antonio Neri:

Thank you. Obviously, what have been experienced in AI is simply amazing, breathtaking in some cases. I consider AI a massive inflection point, no different than Web 1.0 or mobile in different decades. But obviously, the potential to disrupt every industry, to advance many of the challenges we all face every day through data insights, it's just astonishing. And HPE has a unique opportunity in that market because ultimately, you need a what I call a hybrid AI strategy. You need strong inference at the edge. And that really comped by being able to connect and process data, whatever is created with very efficient and low carbon footprint, meaning sustainable solutions with lower power consumption. And then on the other side, you need a training environment where you take some part of the data, where you can train for different needs, different models for different type of used cases. And HPE has a unique portfolio from the inference side all the way to the training side. So, our HPE ProLiant has already some very powerful cost-efficient solutions at the inference. The amount of computational power, now we can put in one of these, what I call, (ph) servers. It's simply amazing. And there are different types of configurations that we need to go through to accelerate the GPUs and the like and sometimes, CPUs, by the way. And on the other side, obviously on the training side, you need a scale type of models with very specialized stacks, and that's where HPE, through organic and inorganic acquisition, really excel because delivering this large amount of GPUs as a coherent system requires enormous expertise. And that's where HPE has unique differentiation in delivering AI at scale through supercomputing. Think about the old tech become the new tech in many ways. Second is unique IP and you named HPE Slingshot. HPE Slingshot is the true Ethernet fabric that's very efficient from both cost and power consumption to chain up to, in this case, like Aurora, 60,000 GPUs. And by the way, it's open because we can support any type of GPUs. Obviously, NVIDIA right now is a hot commodity, but think about Frontier, it was all AMD. And in the case of Aurora, it's all Intel. And we are building a lot of NVIDIA systems in partnership with NVIDIA. So, we can support that in an open environment. The other piece of this is the fact that HP has unique software. In order to present the system in a coherent way, you need software to manage contention of resources because the most important metric for developers is the starting and the completion of the model. And many developers we have been working with, not the traditional run type, but people are developing these large language models are telling us, ‘sometimes, we try systems in an open cloud environment, it doesn't start for us. Sometimes we can't complete the model.’ Is that's the unique expertise that we bring, because we now have to do that at scale. And then last, but not least, it's very important. Our aspiration is not just AI in the system infrastructure level. We already have, through the acquisition of HPE Cray today, a lot of software that actually provides the packages to train these models. And then in addition to the acquisition of Pachyderm and Determined AI, where we focus on the simplicity to prepare the data, to automate the data pipeline and eventually to train that data. And I think you will hear more about this in a couple of weeks when we go to HPE Discovery in Las Vegas. So, I would recommend you follow us because you will see some breakthrough announcements in the way we provide this AI solution from edge or inference all the way to the training model in a way that every type of customer can get access to our HPE GreenLake platform.

Kirt Karros:

Thank you, Samik. We’ll take our next question please.

Simon Leopold:

Thanks for taking the question. I wanted to just get a better understanding about how you're thinking about the server cycle. And what I'm pondering here is, some of the third-party market researchers are predicting a rebound in server sales in calendar 2024, particularly coming from enterprise and telco operators. And that's been, I think, strong verticals for you. How are you thinking about how this cycle that you're – you highlighted the demand absorption that's occurring now, how do you see this playing out over multiple quarters?

Simon Leopold:

Thank you.

Operator:

The next question will come from Amit Daryanani with Evercore. Please go ahead.

Antonio Neri:

Well, thank you for the question. I hope you will be writing about this because to your point, right, we are not getting credit for the stellar performance. And honestly, a story in the making for a number of quarters, right? So, this was the 11th consecutive quarters of growth for that business, which is very impressive in my mind. And I think Tarek had a little bit of challenge saying 1,400 basis points. I mean, normally, 100-plus or 200-plus, but 1,400, it was a little bit awkward to say it. And I think it's because A, we have that unique differentiation and the software that makes the portfolio so special in many ways, and that's what customers are attracted to. Now, as I think about what is driving, I think it's basically demand rolling through that very large order book. And as I said in my remarks, the order book for both the Intelligent Edge and AI remains very, very large, and that demand improved sequentially, as Tarek said. And so, we keep trying to work that order book, but we keep feeding our order book with sequential growth in that demand. We don't believe the demand is poised to go down significantly from here. In fact, we believe it's going to be somewhat steady. But that's why we need to keep innovating and keep adding functionalities and capability to that portfolio. As Tarek said, 19%, almost of the revenue now is coming from this portfolio. And this portfolio enable us to build scale, also and allows us to build the as-a-service model because a lot of what we have done with GreenLake came from the extraction of the cloud coming from this business that we expanded in the rest of the portfolio in hybrid cloud and AI. So, it's a very important critical business. I think the market is starting to see a sizing increase before they give us credit, but I think now everybody has to take notice of that.

Antonio Neri:

And I would say, you asked a question, how you consider unlocking the value? I mean, as you can expect, I mean, we really review with our Board strategy to maximize value for our shareholder. But we believe the edge is critical to our strategy because it's aligned to the customer need. You need the connectivity to drive the digital transformation. Without that is incomplete. At the same time, I know I talked about the leverage of the edge portfolio and the cloud for the rest of the company. And also, let's remind ourselves, we have cross-selling opportunities because once we land the customer on HPE GreenLake, whether it's through the edge or through the hybrid cloud and now through the AI as we go forward, you will see the opportunity to cross-sell, which benefit Aruba and the Intelligent Edge as a whole and the rest of the company as well.

Operator:

The next question will come from Wamsi Mohan with Bank of America. Please go ahead.

Antonio Neri:

Thanks, Wamsi. I think Tarek mentioned that we assume in our guidance current level of demand and no further deterioration. Demand on Compute was slightly down from the previous quarter, compared to everything else that was up sequentially. And so from our vantage point, we believe we have covered this in the guidance. I think from the deterioration, I think it was clear when the financial crisis started sometime in March. We saw a deceleration and that was very evident in the financial sector, right, so the financial vertical, I will say. But that said, it is the most uneven parts of the portfolio, as we commented. I think it's driven by the digestion of our customers' order last year. The fact that today, they are maybe prioritizing investments in the edge or prioritizing investment in AI, which clearly we are a benefactor of it from that perspective. I think customers are looking for resilience as well, considering everything that's happening around the globe. And then also understanding what's happening with the cost of the commodities as we go to this transition. And ultimately, at some point, right, we see what the consumer market is going to do because the consumer is a driver of data as well. And so, we need to understand those trends. But I will say from that vantage point, I think clearly the Compute market as a whole, and this is important we segment this because sometimes people refer to Compute as servers. We don't refer that as servers. We refer that as a specific general purpose compute. The servers include, obviously, high-performance computing and other form factors. But in that space, clearly, is the most uneven at this time.

Operator:

Our final question will come from Toni Sacconaghi with Bernstein. Please go ahead.

Antonio Neri:

Sure. So, a couple of things I'll correct. So, last quarter, right, we exited with an order book that was 2x historical levels, and we refer to historical levels to pre-pandemic, Toni. And then this quarter, we're exiting 1.5x. What is different is that the mix of that order book is different, right? Because obviously, the growth we have in Intelligent Edge and AI is substantial, obviously. But the 800 million, I want to clarify that for you, Toni. The 800 million was just in the AI space. And every segment grew sequentially orders, except Compute, which was very (ph) single-digits demand decline. And so clearly, when you want to isolate, it's Compute, it's Compute particularly in North America, it's Compute particularly in these two segments we described, financial services and manufacturing. But the mix of the order book has shifted because now the larger of the book is actually in the Intelligent Edge and it is in AI. And the 800 million I described earlier are all 100% orders that we got in the AI space because we saw a significant uptick, and that came from Fortune 500 companies, some of these digital-native large language models companies and a large cloud provider. But ultimately, that's what's happening. And the Compute – that's why we are readjusting that guidance on revenue because of the unevenness in Compute. But overall, we are, as a total company, 1.5x where normally we should be.

Antonio Neri:

Yes. Well, thank you for all your comments, and we appreciate you attending today the call. I mean, I will leave with a simple message, right. So, I think overall, HPE had a very solid quarter. Obviously, we were not at the total revenue consensus as people put out there. But the fact of the matter, we grew revenues. We significantly grew our recurring revenues, and we had an exceptional profitability for the quarter. And this was driven by our pivot, and you can see the pivot and the meaningful impact that Intelligent Edge and AI is having to our business. We didn't spoke a lot about Storage, but Storage grew 2%. And at the same time, the Alletra platform, which is a software-defined platform, grew in excess of 100% and a big portion of that revenue is actually deferred. So, I think in the short-term, we're going to navigate this uneven demand in Compute, but we are very pleased about the momentum we have in hybrid cloud with GreenLake, AI and which is a massive, massive opportunity for the company with a unique differentiation and obviously, the Intelligent Edge, which is delivering a standout performance this quarter after quarter after quarter. So, with that, I hope to see you at HPE Discovery in Vegas in three weeks because we have some amazing announcements that we want to share with you that will continue to drive momentum in our business. So, thank you very much.

Jeff Kvaal:

Thank you, Anthony and good afternoon, good evening everyone. I’m Jeff Kvaal, and I’m Head of Investor Relations for Hewlett Packard Enterprise. I’d like to welcome you to our fiscal 2022 first quarter earnings conference call with Antonio Neri, HPE’s President and Chief Executive Officer; and Tarek Robbiati, HPE’s Executive Vice President and Chief Financial Officer. Let me remind you that this call is being webcast. A replay of the webcast will be available shortly after the call concludes. We posted the press release and the slide presentation accompanying the release on our HPE IR web page. Elements of the financial information referenced on the 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 such forward-looking statements. 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 January 31, 2023. For more detailed information, please see the disclaimers on the earnings materials related to forward-looking statements that involve risks, uncertainties and assumptions. Please refer to HPE's filings with the SEC for a discussion of these risks. For financial information, we've 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. Throughout this conference call, all revenue growth rates, unless otherwise noted, are presented on a year-over-year basis and are adjusted to exclude the impact of currency. Finally, after Antonio provides high-level remarks, Tarek will be referencing the slides and our earnings presentation throughout his prepared remarks. And with that, let me turn it to you, Antonio.

Tarek Robbiati:

Thank you very much, Antonio. Q1 2023 was, as Antonio said, a record quarter for HPE. As usual, I will reference slides some earnings presentation to guide you through our performance. Antonio discussed key highlights for Q1 2023 on slide 4. Let me discuss our Q1 performance details, starting with slide 5. We are very pleased that the execution of our strategy has driven record quarterly results in terms of revenue, non-GAAP gross margin, non-GAAP operating margin and non-GAAP EPS for a first quarter of a financial year. These and other records I referenced are primarily since we reset our strategy with our 2017 spin-off transactions. Notably, revenues grew year-over-year across all our business segments, Save for corporate in Q1 2023, as we benefited from improvements in the supply environment. Our supply chain execution is solid, we have very strong momentum, thanks to our substantial order book and our investments are bearing fruit, and we are gaining share in specific at segments. In short, our strategy is working and working really well. Having said so, while we are optimistic about our fiscal year 2023, we're all realistic. Overall, we have experienced above-trend demand through much of the past two years as attested by our growing order book over the fiscal year 2022 period. And now market demand has shifted from being steady across our portfolio to being uneven over the course of Q1 2023. More specifically, deal velocity for Compute has slowed as customers digest the investments of the past two years, though demand for our storage and HPCI solutions is holding and demand for our edge solutions remains healthy. In that context, we are taking action to maintain our momentum for the second half of 2023 and fiscal year 2024. We intend to further our investments in software and services in all our business units including in our HPE GreenLake edge-to-cloud platform, HPC AI, storage and edge to extend our share gains across our segments, all while retaining our cost discipline and productivity focused. We delivered Q1 revenue of $7.8 billion, which equates to a robust 12% year-over-year growth and 18% in constant currency despite our exit from Russia and Belarus in Q2 2022. We did not experience a typical seasonal decline between Q4 and Q1, thanks to excellent supply chain execution on our large order book. Each of our segments excluding only our corporate segment grew revenue at least 8% in constant currency. This revenue performance was well above our prior guidance for Q1 of $7.2 billion to $7.6 billion and represented a record Q1 revenue level. We benefited from improvements in the supply environment, particularly in our Compute segment. This allowed us to execute against our order book, which our customers greatly appreciated. The delivery times of our products and services across our portfolio are now almost back to pre-pandemic levels. Yet we continue to have more progress to make in supply chain productivity as our order book entering Q2 2023 is more than twice normal level across our company. The combination of our large order book and improved supply environment gives us confidence that we can grow revenues well above the previously communicated guidance of 2% to 4% revenue growth in constant currency for fiscal year 2023. More on that later. As a result, we also a confidence in the longer term 2% to 4% revenue CAGR outlook over the fiscal year 2022 to fiscal year 2025 period, we provided at our 2022 Securities Analyst Meeting last October. Our non-GAAP gross margin reached a Q1 record of 34.2%. This is up 30 basis points year-over-year and 110 basis points sequentially. Our margin structure has benefited from pricing actions we have taken over the course of the pandemic, combined with the beginnings of declines in commodities and logistics costs Over the long-term, our margin structure will continue to benefit as we continue to shift our mix of business to higher margin software-intensive as-a-Service offerings. Our non-GAAP operating margins reached a record high 11.8%. This is 80 basis points ahead of Q1 2022 and 30 basis points higher than Q4 2022. While strong revenue growth and gross margin performance are key drivers, this result would not have been possible without the strategic actions. Antonio and I took in fiscal year 2020 to reallocate resources and optimize our cost structure. As mentioned during our last earnings call, Antonio and I remain determined to maintain our focus on productivity. Our top line and margin strength in Q1 translated to GAAP diluted net EPS of $0.38 and non-GAAP diluted net EPS of $0.63. Non-GAAP diluted net EPS easily exceeded our guidance range of $0.50 to $0.58 and was another company record. Our Q1 2023 free cash flow was negative $1.3 billion. We typically have seasonal outflows in our Q1. We will discuss cash flow in more detail in a moment. But having said that, we remain on track to generate between $1.9 billion and $2.1 billion in free cash flow in fiscal year 2023. Finally, we are continuing to return substantial capital to our shareholders. We paid $156 million in dividend this quarter and repurchased $73 million in stock. We intend to buy back at least $500 million worth of shares in fiscal year 2023, just like we did in fiscal year 2022. Turning on to our as-a-Service business performance. We are very pleased to announce our ARR surpassed $1 billion in Q1 2023. This is an important milestone for our business that reflects that our as-a-service strategy is working. The supply chain challenges have slowed our ARR growth in prior quarters. The benefits of easing supply challenges are beginning to appear in our results as ARR growth in constant currency accelerated from 25% in Q4 2022 to 31% in Q1 2023. We expect further acceleration through fiscal year 2023 as improving supply allows us to expedite delivery of as-a-service solutions to our customers. Our as-a-service order decline of 20% in Q1 is a function of a difficult compare to Q1 2022, in which orders grew 136% on strength from several large deals, including a large public cloud customer. We are comfortable with our robust pipeline of as-a-Service business. We base this confidence on our 68% order growth in fiscal year 2022, the number of deals currently pending acceptance and our current view of the sales funnel. We, therefore, retain our three-year ARR target of 35% to 45% CAGR from fiscal year 2022 to fiscal year 2025. Most importantly, we continue to make our as-a-Service business more valuable with a growing mix of higher-margin software and services recurring revenue. In Q1 2023, our mix of software and services increased another 150 basis points year-over-year to 65%, thanks to our cloud and SaaS offerings, particularly in edge and storage. Let's now turn to our segment highlights on the next slide. I would like to remind you that, all revenue growth rates on this slide are in constant currency. In the Intelligent Edge, we delivered a second consecutive record revenue quarter and surpassed the $1 billion revenue milestone for the first time. We grew our revenue 31% year-over-year. We are outgrowing our main competitors and are taking share with our combination of wireless LAN, enterprise switching and SD-WAN solutions, including in some of the largest enterprise customers. Customers are increasingly adopting our software-centric solutions such as our edge service platform, automation suite. Our operating margin of 21.9% was up 450 basis points annually and 860 basis points sequentially. We're benefiting from scale and our prior price increases have worked through our order book. We are very, very pleased that our edge business has exceeded the rule of 40 this quarter and feel very optimistic about the prospects of our Aruba business in fiscal year 2023 and beyond, given its substantial order book underpinned by a superior platform-based SaaS offerings. We retain confidence in our long-term targets of mid-teens revenue growth and mid-20% operating margins. In HPC and AI, revenue grew 37% year-over-year. We successfully closed the balance of the Frontier deal in Q1, which contributed to the strength of this business in Q1 2023. While the segment is also now benefiting from easing supply chain, the lumpiness and long lead times of this business mean that operating margins will continue to fluctuate. As Antonio mentioned, we have been thinking strategically about and investing behind Artificial Intelligence for many years. This is true both organically and inorganically. The emergence of large language models such as ChatGPT and BART and generative AI, some of which run on our systems has prompted many questions from our customer base. We believe AI at scale is a high-growth market and then the building and refinement of AI models will require unique computational capabilities that our Cray supercomputers and HPI solutions are extremely well positioned to enable. We intend to invest organically and inorganically as listed by our acquisition of Pachyderm to fully grasp this opportunity. With regards to storage, we are pleased to report 10% annual growth, where we are bolstering our portfolio to grow market share. HPE Alletra remains one of our fastest-growing new product introductions ever, and grew well above triple-digits in Q1. HPE Alletra contributed to double-digit growth in our own IP products, which is driving a mix shift to higher-margin, software-intensive as-a-Service revenue. We continue to invest in R&D for our own IP products in this business unit. And as a result, our Q1 operating margin of 12% is down 190 basis points year-over-year. Compute revenues grew 19% year-over-year to $3.5 billion. The segment benefited from the multi-sourcing and demand steaming initiatives we have discussed in prior calls as well as steadily improving supply availability. Our dynamic pricing strategy has helped us navigate a volatile supply climate while driving industry-leading gross margins. Our Compute operating margin of 17.6% exceeded our long-term outlook of 11% to 13% for the fifth consecutive quarter, which attests to our best-in-class performance. We do believe our Compute operating margins are peaking and should gradually return to our target range of 11% to 13%. While we are seeing commodities costs decreasing, leading to increased competitive price pressure, we have for the first time three concurrent and differentiated platforms being sold in the market, Gen10, Gen10 Plus and Gen11, which would allow a gradual management of pricing and margins over time. In our Pointnext Operational Services business, combined with Storage services, orders declined mid- to high single-digits and revenues were flat year-over-year, driven by uneven demand. As you know, this is a key component of recurring revenues and profit for each of our segments. Finally, HPE Financial Services revenues rose 8% year-over-year and financing volume of $1.6 billion grew 21% in constant currency. Our operating margins fell 300 basis points year-over-year due to the higher interest rate climate that we will gradually offset over time through pricing. Time and time again, our HPFS business has proven resilience in downturn, thanks to the quality of the underwriting of the book of business. Throughout the pandemic, I'd like to remind you, our annual loss ratio never exceeded 1%. Our loss ratio is back to pre-pandemic levels of approximately 50 basis points. Slide 8 highlights our revenue and non-GAAP diluted net EPS performance. We are very pleased that the progress we are making again our edge-to-cloud strategy is evidence in the financial results we have delivered on both the top and bottom lines. We have grown both our revenue and non-GAAP diluted net EPS to record or near-record levels in Q1 2023. This illustrates not only the commercial success of our products in the marketplace, but also our ability to generate healthy margins. I am particularly pleased to see that our focus on supply chain execution has enabled the attainment of record revenues despite a substantial year-over-year headwind from foreign exchange rates that impacted revenue growth by 550 basis points in Q1 2023. Slide 9 illustrates the progress we have made in our gross margin structure. Our Q1 2023 non-GAAP gross margin is up 30 basis points year-over-year. We generated $2.7 billion in gross profit in Q1 2023, which is yet another quarterly record. Our gross profit and margin are a testament to the success of our strategic pricing actions through the period of supply challenges in fiscal year 2020 to fiscal year 2022. It is also illustrative of the long-term favorable mix shift we are driving. Despite a strong compute quarter, our revenue mix of computing at 44% was flat year-over-year. This illustrates that we have a larger revenue base as our higher-margin segments are growing rapidly, and our as-a-service strategy is gaining momentum. Slide 10 illustrates our non-GAAP operating margins for which reached 11.8% in Q1 '23. This is up 30 basis points sequentially and 80 basis points year-over-year. It is also a record quarterly non-GAAP operating margin for the company. Our very strong Q1 revenue performance and our resilient gross margins are the leading contributors to the operating margin expansion. Unlike many tech companies that have announced layoffs recently, we have strong momentum at HPE with a combination of our improved cost structure, substantial order book and outstanding execution, delivering profitable growth that is increasingly recurring at higher margins as our as-a-service transformation continues to unfold. Again, let me reiterate that Antonio and I are determined to maintain this focus on profitable growth and productivity for the future. Let's now turn to discuss H3C. As you know, we've chosen to exercise our put options on our shares in H3C. We took this decision to carefully weigh the financial implications of remaining in the joint venture with the risk-reward profile of exercising the put. We are confident that we have made the decision that is in the best interest of our shareholders. HPE and our partner, Unisplendour continue to have strive discussions to reach agreement on the determination of the final purchase price of HPE shares in HPC and enter into a share purchase agreement. We will keep you updated – please keep in mind that, our decision to exercise the put is distinct from the commercial agreements with H3C. We intend to continue to do business in China through both our direct sales and through H3C and we remain committed to serving our customers in China. I would like to remind you that, we will continue to recognize the value of the dividends we received from H3C in our financials until the transaction is complete and I'm happy to report H3C results remains healthy despite uncertainty in the Chinese economy. Our first fiscal year from a cash flow perspective is typically a down quarter for cash flow. In Q1 2023, we had outflows of $800 million in cash flow from operations. And $1.3 billion in free cash flow. Working capital was a use of cash due to timing of receipts, payments, and continue investments in inventory, which has driven our cash flow conversion cycle from negative 14 days in Q4 to positive 15 days in Q1 2023. More specifically, our accounts payable balance was reduced by $2.2 billion quarter-over-quarter and was the main driver for negative operating cash flow and affected our cash flow conversion cycle. Also we have made significant investment in HPEFS volumes to drive future growth in subsequent quarters. We expect to generate significant free cash flow in the remainder of fiscal year 2023 and reiterate our guidance of $1.9 billion to $2.1 billion in free cash flow for the full year. Now let's turn to our outlook slide on Slide 13. As we have mentioned, demand for our products and services was more uneven in Q1 2023 across our business than it was in Q4 2022. Having said that, we also believe our portfolio differentiation will continue to drive market share gains and are entering Q2 2023 with a substantial order book relative to pre-pandemic levels. We have strong momentum in Q1 2023 and we are now turning our focus to invest in sustaining that momentum in the second half of 2023 and fiscal year 2024 in a context of continuous macroeconomic uncertainty. Let me reiterate that our guidance incorporates our current thinking on the macroeconomic picture, inflationary pressure, or exit from Russia and Belarus in 2022 and foreign exchange risk. I would like to remind you that approximately 50% of our revenue is generated in foreign currencies. For Q2 2023, we expect revenues in the range of $7.1 billion to $7.5 billion at every point of the range. This represents 9% year-over-year growth in reported dollars. We expect GAAP diluted net EPS of $0.27 to $0.35 and non-GAAP diluted net EPS of $0.44 to $0.52. This outlook assumes the current level of demand we have been experiencing remain unchanged. And then we continue to make progress on the delivery of our order book. To sum it up, I am very pleased with our Q1 results and guidance for Q2. We also understand some of our end markets are likely to remain uneven in the near-term. We had indicated at our last earnings announcement that our financial performance in fiscal year 2023 is likely to be more weighted – more weighted to the first half of the year than is typical. Given the strong Q1 performance, momentum and substantial order book we continue to have, we are lifting our full year guidance accordingly. We are now targeting 5% to 7% revenue growth adjusted for currency, which is at the midpoint, twice our prior revenue growth guidance, non-GAAP operating profit growth of 5% to 6%, GAAP diluted net EPS of $1.40 to $1.48. Non-GAAP diluted net EPS of $2.02 to $2.10 and free cash flow of $1.9 billion to $2.1 billion. Specifically for OI&E, we benefited in Q1 2023 from one-off foreign exchange gains that accounted for $0.02 to $0.03 per share. These are unlikely to repeat in the rest of the fiscal year. Given the high interest rate environment is expected to remain unchanged, we expect OI&E to be an expense of $20 million to $40 million on a full year basis. This explains our fiscal year 2023 EPS guidance range of $2.02 to $2.10, which incorporates $0.06 of the $0.09 beat in Q1 2023. In terms of capital returns, we will return approximately 60% of free cash flow to shareholders via dividends and repurchases. We are maintaining our dividend and expect to repurchase at least $500 million worth of shares in fiscal year 2023. So to conclude, our results speak for themselves, and we continue to execute better than the competition. While many tech companies are playing defense with layoffs, we see fiscal year 2023 as an opportunity to accelerate the execution of our strategy. Antonio and I look forward to continuing our execution momentum through fiscal year 2023 and beyond. Now with that, let's open it up for questions. Thank you.

Aaron Rakers:

Yeah. Thanks for taking the question. And congrats on the solid performance. I guess, I wanted to ask a question more strategically in kind of thinking about the product portfolio. You guys and many others, obviously talking a lot about ChatGPT, GTP and Generative AI. In the conversation on today's call, you alluded to the fact that you're well positioned with some of your HPC and your high-performance compute platforms. And I want to make sure I understood what you're saying a little bit correct. Are you participating in some of the infrastructure in some of the cloud opportunities, or how do you see yourself participating in kind of these AI investments that really seem to be driving this narrative around meaningful deployments of accelerated compute? Thank you.

Jeff Kvaal:

Thank you, Anthony – thank you, Aaron. Next question, Anthony, please.

Meta Marshall:

Great. Thanks. You noted, obviously, seeing some weakness kind of in the environment. Just wanted to get a sense of either customer type or vertical or just kind of segment that you've got to kind of see be the source that kind of weakness throughout the year? And are you seeing more people kind of opt for GreenLake subscription offerings as a result of kind of more macro sensitivity? Thanks.

Jeff Kvaal:

Thank you, Meta. Next question, please.

Samik Chatterjee:

Yes. Hi, thanks for taking the question. Congrats on the execution here. I guess my question was more on the full year guide, and I understand some of the headwinds in certain segments that you're calling out, but the revenue guide goes up by about sort of 300 basis points for the year. The operating profit growth sort of goes up by 100 basis points. And while I understand some of the headwinds, what maybe I can use some help on is really understand the mix implications of how you're thinking about it, just given the more lower sort of flow-through that we're seeing to operating profit growth for the full year guide? Thank you.

Jeff Kvaal:

Thank you, Samik. Next question.

Kyle McNealy:

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

Tarek Robbiati:

I would simply add to what Antonio said, look, the edge have broken the $1 billion revenue bar. I think now we are entering a phase with all the additions that we're making to the portfolio. We're entering a phase of a new watermark level. We have built at the edge with Antonio and the management team, one of the most comprehensive portfolio of the entire industry. And it is really, really winning shares even in the largest customer segments, thanks to the Edge-to-Cloud platform that Aruba has built and that powers GreenLake in everything we do.

Jeff Kvaal:

Thank you, Kyle. Next question please.

Simon Leopold:

Thanks for taking the question. I know this is going to be a bit of a tricky one, but I want to see if you could help us understand why your view sound more optimistic than your other IT-exposed peers, whether it's around, in particular, the Compute side of the business as a storage. I get Intelligent Edge, so I'm not really pushing there. But just the contrast in your outlook on storage and compute versus some of your peers. Can you help us understand that?

Jeff Kvaal:

Simon, thanks very much. Let’s move to the next question, please.

Amit Daryanani:

Thanks for the question and congrats on the quarter. I was wondering if you could just talk about what's the timing for the H3C transaction from here? And then how do you think about the usage of the proceeds that you get from here? Because, I think, if you sell the stake you have, it would be dilutive by about $0.17 to $0.18 of EPS line. So I'm just wondering, how do you think about using the proceeds and offsetting the dilution potentially? Thank you.

Antonio Neri:

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

Operator:

Our next question will come from Sidney Ho with Deutsche Bank. You may now go ahead.

Tarek Robbiati:

Okay. A lot of questions into one question, but I will try my best. So first and foremost, the revenue growth that we are targeting for the full year is 5% to 7%, which at the midpoint is 6%, which is double what we originally anticipated. And that is because of all the puts and takes in our portfolio and the way we see supply easing on one side, also demand continuing unevenly although across our portfolio. And if you really look at our EPS guide, one thing I would like to emphasize for everyone on the call is that we did beat the midpoint of our guide by $0.09 and $0.03 of that beat pertained to OI&E and had to do with foreign exchange gains that are not operational. We continue to view OI&E on the full year basis being an expense of US$20 million to US$40 million due to elevated interest expenses. And there is also in our guidance, the potential impact from FX volatility. And so what is baked into our guidance is just that our current view to the best of our knowledge, of the macro environment, the impact of interest rates and also the impact of foreign exchange rates that we see at this stage, knowing that things can evolve. It's also important to note that this is our first quarter. We still have nine months to go, and we want to make sure that we remain prudent in the current circumstance where the macro environment remains uncertain.

Operator:

Our next question will come from Wamsi Mohan with Bank of America. You may now go ahead.

Antonio Neri:

Thanks, Wamsi. I will answer the first part and Tarek, on the second part. I mean not enough. I mean, the fact of the matter is that we made some progress, but not enough progress against that very strong order book. And that's why we exit Q1 with 2x normal historical levels. Now, we expect that to continue to improve, obviously, throughout the years as supply continue to ease. But again, we have a good pipeline in front of us. And so the goal is to continue to fill the order book. But when you ask me about how much progress we made in Q1, not enough. If you look at our Intelligent Edge business is extremely elevated. Our HPC business, when I look about the future deliveries we have to live is always very, very strong. Storage is good, and Compute is still there. So we have work to do, more work to do. And then on FX, I think --

Antonio Neri:

I mean, on that point, I think it's simply remarkable because we have to cover all of that $0.30 started right operationally.

Antonio Neri:

The fact that, we are raising the midpoint from the $2, which included a $0.30 headwind now $2.06. It shows you that the mix of the business is going in the right direction, the expansion of the margins and the productivity we continue to drive. Despite the fact the FX actually got worse at the time. And the 550 basis point is pretty significant. So I think from our vantage point, we are doing all the right things and we're confident in that guidance we just provided to you.

Operator:

Our final question will come from Ananda Baruah with Loop Capital. You may now go ahead.

Antonio Neri:

No, thank you. Well, we have been in the AI business now for many years, right? So -- and we have been in the specific AI a scale business. One of the key differentiations we have in that business, actually several, right? Number one is the -- what you refer to as networking, I call it interconnect fabric. The ability to connect 40,000 GPUs at scale requires a unique differentiated fabric. That's what the Frontier system is all about. And as I think about the next generation of this, we can easily double to 80,000 GPUs because our software and our silicon scales to those levels. And so that's a unique value proposition that you don't get in the traditional commoditized cloud environment. The other key differentiation we have is the programming environment we acquired to the Cray acquisition because when you develop these AI models, you have to deploy and you have to manage it at scale to take advantage of the massive set of capabilities. That also is a unique software value proposition that's very hard to duplicate. And then last but not least, to be able to leverage all these wonderful capabilities, you have to be able to prepare the data. And the data pipeline requires a lot of work upfront because it has to be clean and compliance and all of that. And that's why our acquisitions like Determined AI and Pachyderm in particular, now allows us to automate that data pipeline. But we are not stopping there. We continue to move up and build what I call the platform as a service for developers, so they can take advantage of this automation for the data, train the models and then deploy the model. And if they need a supercomputing type of capabilities, we will be there for them. So that's why I said early on, we are a unique point in time, where an inflection in the market intersects a unique set of capabilities, which we intend to fully capitalize top to bottom. Not just on the hardware level, but all the way to the software level. And you will hear more about that as we come to the next months and quarters. And I'm really excited about that opportunity because we already have customers coming to us we need that, and they are generally enterprise customers that deploy these large case model that they don't want to spend hundreds of millions of dollars, but they want to use it as-a-Service. Okay. Well, thank you, everyone. I always appreciate, you making the time to talk to us. I know today was an incredible busy day about all the earnings being posted. But let me remind you a couple of things. I mean, first of all, today, results is not a coincidence. It's a combination of many things we have done over a longer period of time. It is the fact that we have a unique strategy, we have been consistently executing with discipline at all levels, driving cost discipline, productivity, investing organically, and inorganically to bolster our unique portfolio aligned to those trends we discussed today. We generated a record performance in the first quarter for our shareholders. It was the highest revenue quarter since 2016. We delivered the best non-GAAP operating profit and the highest ever EPS net diluted earnings per share. And I believe we are very well-positioned to navigate this uneven market. As always, there is always more work to do, no question about that. But I think we have a world-class team; a unique culture and customers want us to be there for them through this tradition. So, thank you very much, and all forward to see you at the next call or in one of the conference calls we do with you.

Jeff Kvaal:

Good afternoon and thank you Chuck. I'm Jeff Kvaal, Head of Investor Relations for Hewlett Packard Enterprise. I'd like to welcome you to our fiscal 2022 fourth quarter earnings conference call with Antonio Neri, HPE's President and Chief Executive Officer; and Tarek Robbiati, HPE's Executive Vice President and Chief Financial Officer. Before handing the call over to Antonio, let me remind you that this call is being webcast. A replay of the webcast will be made available shortly after the call for approximately one year. We posted the press release and the slide presentation accompanying today's earnings release on our HPE Investor Relations webpage at investors.hpe.com. Elements of this presentation are forward-looking and are based on our best view of the world and our businesses as we see them today. For more detailed information, please see the disclaimers on the earnings materials relating to forward-looking statements that involve risks, uncertainties and assumptions. For a discussion of some of these risks, uncertainties and assumptions, please refer to HPE's filings with the SEC, including its most recent Form 10-K and Form 10-Q. HPE assumes no obligation and does not intend to update 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 annual report on Form 10-K for the fiscal quarter ended October 31, 2022. For financial information that has been 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. Throughout this call, all revenue growth rates, unless noted otherwise, are presented on a year-over-year basis and are adjusted to exclude the impact of currency. Finally, after Antonio provides his high-level remarks, Tarek will be referencing the slides and our earnings presentation throughout his prepared remarks. The earnings presentation is also embedded within the webcast player on our website for this earnings call. With that, let me turn it over to you, Antonio.

Tarek Robbiati:

Thank you very much, Antonio. Q4 was, no question, an outstanding quarter for HPE. As usual, I will reference slides from our earnings presentation to guide you through our performance. Antonio discussed key highlights for Q4 '22 and fiscal year '22 on slides 4 and 5. Let me discuss our Q4 performance details, starting with slide 6. Sustained demand continues to be a core attribute of our differentiated edge-to-cloud portfolio, which is translated to record or near-record results. As expected, year-over-year order growth continued to moderate in Q4 '22 to down 16% year-over-year as we lap challenging compares. Having said that, our sequential order growth was flat relative to Q3 '22, which illustrates that demand for our products and services is steady. The key takeaway here is that we are entering fiscal year '23 with an order book that is even higher than the order book we entered fiscal year '22 with, which attests to our momentum for fiscal year 2023. Now that we have closed fiscal year '22, we will again turn our attention to focus on revenues rather than orders as we have been flagging. This is because of timing differences, orders and backlog are not traditionally good indicators of quarterly revenue in normal times. We will continue to disclose orders for our as-a-service and HPE Pointnext OS business. While the supply environment is improving, it is not quite back to pre-pandemic levels. Our large order book contributes to our confidence in our fiscal year '23 revenue outlook of 2% to 4% growth adjusted for currency, and the longer term 2% to 4% revenue CAGR outlook over the fiscal year '22 to '25 period we provided at our 2022 Securities Analyst Meeting in Houston last October. We delivered Q4 revenue of $7.9 billion, which is up 12% annually and 15% sequentially adjusted for currency. This is the second highest revenue figure since our separation transactions in 2017. It would easily have been the highest had revenue recognition from the Frontier deal not slipped into fiscal year '23. The Q4 sequential revenue growth is well above our prior outlook for at least 5% sequential growth. We have had healthy demand throughout the past two years. We now also have improving supply as supply capacity in the consumer electronics markets is redirected towards enterprise markets where demand for digital transformation continues unabated. We closed fiscal year '22 with full year revenue growth of 3% as reported. Currency and our exit from Russia and Belarus represented a 300 basis points headwind to revenue for the full year, which means we ended the year solidly above our initial guidance for 3% to 4% revenue growth adjusted for currency. Our non-GAAP gross margins remain resilient, thanks to the pricing actions we have taken. Our 33.1% non-GAAP gross margin in Q4 is up 10 basis points year-over-year, reflecting a very strong Compute quarter and higher logistics costs in the Edge business. We retain our pricing discipline and continue to shift our mix of business towards higher-margin, software-intensive as-a-service offerings. Non-GAAP operating margins reached a record 11.5%, which represented a 100 basis points increase sequentially and a 180 basis points increase year-over-year. This result would not have been possible without the strategic actions we have taken back in fiscal year '20 to reallocate resources and optimize our cost structure. These actions have put us in the position to benefit from an enhanced operating leverage for several quarters over the past three years, and this will continue in fiscal year '23 and beyond as Antonio and I remain determined to maintain our focus on productivity. Our cost optimization and resource allocation program announced during the pandemic of 2020 and which is now substantially finished, has achieved annual savings of $875 million, well above our initial target of $800 million. As a result, we are now rightsized and we are entering a very different phase of the Company, one where the combination of our enhanced cost structure and substantial order book is expected to deliver profitable growth that is increasingly recurring at higher margins as our as-a-service transformation continues to unfold. Thanks to revenue growth above our guidance, we delivered Q4 non-GAAP diluted net earnings per share of $0.57, which exceeded the midpoint of our guidance range. This is the highest quarterly non-GAAP net diluted EPS figure since our 2017 separations. Our full year non-GAAP net diluted EPS of $2.02 was at the upper end of our guidance range of $1.96 to $2.04 post Russia and FX and near the midpoint of our SAM 2021 guidance. Again, we estimate FX impacts and our Russia exit combined for a $0.17 EPS headwind in fiscal year '22. Our GAAP P&L reflects a noncash write-down of goodwill in our HPC, AI and software businesses. Macro trends, including contracting market multiples and higher discount rates used in our impairment test for HPC, AI and software, respectively, significantly impacted this outcome. We continue, nonetheless, to be bullish on the HPC, AI segment given our clear number one position in the market, and our outlook for this segment is consistent with what we said at SAM 2022, and software remains a critical component of our HPE GreenLake strategy. I am particularly pleased with our free cash flow performance in Q4 '22, where we generated $3 billion in cash flow from operations and free cash flow of $2 billion as we work through our substantial orders and reduce our inventory. As Antonio mentioned, this brought our full year free cash flow to $1.8 billion. This is triple our free cash flow in 2020. For the year, free cash flow met the midpoint of our guidance. In fact, our full year free cash flow met our initial pre-Russia and FX guidance from SAM 2021. Finally, we are continuing to return substantial capital to our shareholders. We returned over $1.1 billion in capital to shareholders this year, which represents over 60% of our free cash flow. We paid $154 million in dividends this quarter and repurchased $128 million in stock. That brought our buyback plan to $512 million for the year, above our $500 million target. Our as-a-Service business momentum remains strong and this business is lifting our mix of higher margin recurring revenue. Total as-a-service orders remain robust. Orders grew 33% in Q4 despite lapping 104% growth in Q4 '21. On a constant currency basis, orders grew 43% in Q4 and our full year as-a-service orders grew 68%. This indicates the long-term health of our as-a-service portfolio and further strengthens our confidence in our three-year ARR target of a 35% to 45% CAGR from fiscal year '22 to fiscal year '25. Our ARR of $936 million represented 17% growth as reported and 25% growth in constant currency. For much of fiscal year '22, the industry supply constraints have limited shipments and weighed on our growth rate. We expect the improved supply environment to accelerate our ARR growth moving forward. We also continue to expand our as-a-service’s margin as our mix of software and services increased to 66% in Q4, up 4 points year-over-year, thanks to our cloud and SaaS offerings, particularly in Edge and Storage. As a result, the gross margins in our as-a-service business remain meaningfully above our corporate gross margins. Let's now turn to our segment highlights on the next slide. All revenue growth rates on this slide are in constant currency. In the Intelligent Edge, we delivered a record quarterly revenue number. We grew our revenues 23% year-over-year. We are outgrowing our main competitors and are taking share across wireless LAN, enterprise switching and SD-WAN including in some of the largest enterprise customers. Customers are increasingly adopting our Edge services platform and automation software suite. Our operating margin of 13.3% was up 2.4% annually, though down 3.2% sequentially with FX being the biggest contributor to the sequential decline. We continue to expect our Edge business to grow and perform like a Rule of 40 business moving forward. In HPC & AI, revenue fell 11% year-over-year, solely as a result of the Frontier deal slipping into fiscal year '23, which also impacted our operating margin in this segment. We are on track to close that deal in Q1 and have factored that into our guidance. We continue to have orders for HPC & AI solutions of about $3 billion to be delivered in upcoming quarters. Compute revenues grew 22% year-over-year to a near record of $3.7 billion. The segment benefited from the multi-sourcing and demand steering initiatives we have discussed in prior calls, as well as steadily improving supply availability. We have clearly outperformed the competition in fiscal year '22 and our dynamic pricing strategy has helped us navigate a volatile supply climate while maintaining a healthy margin profile. Our Compute operating margin of 14.7% remains well above our long-term outlook for 11% to 13%, which attest of the best-in-class performance delivered by our Compute business. In Storage, we are very pleased to report 6% revenue growth led by all-flash array and HCI. Alletra is one of our fastest ramping new products ever and grew revenue 100% sequentially. In total, revenue from our own IP, margin-rich products rose strong double digits in Q4 and contributed to an annual operating margin of 15.9%, which represents a year-over-year gain of 210 basis points and a sequential gain of 120 basis points. Our storage transformation is now in full swing, as you can see. And we expect our storage business to deliver revenue growth in line with market with our own IP products growing above market. With respect to Pointnext operational services, combined with storage services, orders grew sequentially and for the year rose mid-single digits in constant currency despite the exit of our Russia and Belarus business. Finally, HPE Financial Services expanded its financial volume 3% year-over-year, and revenue rose 6%. Our operating margins fell 3 percentage points year-over-year as we adjust our prices for a higher interest rate climate. It is worth reiterating that our leasing profit dollars are well insulated from a higher rate environment over time as we price on a spread and that our business is resilient in a downturn. Throughout the pandemic, our annual loss ratio never exceeded 1%. Our loss ratio is currently nearing pre-pandemic levels of approximately 0.5%. As a result, our fiscal year '22 HPEFS return on equity remained well above the 18% target we reiterated at SAM 2022. Slide 9 highlights our revenue and non-GAAP net diluted EPS performance. Antonio and I are very pleased that our strategic focus on both the top and bottom lines is evident in these results. Our revenue and EPS continue to grow despite the volatile supply environment, the exit from our Russia and Belarus businesses and increasing headwinds from currency. As mentioned earlier, during fiscal year '22, we experienced a headwind of $0.12 from currency and $0.05 from exiting Russia and Belarus. In spite of these headwinds, we met our SAM '21 non-GAAP guidance for fiscal year '22 and delivered a better mix of higher-margin earnings across our portfolio as we continue to execute our Edge-to-Cloud strategy. This improvement can be seen on slide 10, where we delivered non-GAAP gross margins in Q4 of 33.1%. This is a 10 basis points year-over-year improvement despite a significant revenue mix shift to Compute this quarter. Our growing gross profit and margin are a testament to the success of our strategic pricing actions through the supply challenges and the favorable mix shift we are driving towards higher-margin products across our portfolio. Moving to slide 11, you can observe that we have delivered an 11.5% non-GAAP operating margin for the Company. This is not only up 180 basis points year-over-year and 100 basis points sequentially, but it is the highest operating margin in the history of the Company since our 2017 separations. Our very strong Q4 revenue performance and our resilient gross margins are certainly leading contributors to the operating margin expansion. And again, as I mentioned at SAM, this performance would not have been possible without the foundation provided by our resource allocation and cost optimization plan that we launched at the start of the 2020 pandemic. On slide 12, let's discuss our setup in China through H3C. As disclosed at SAM, we have extended our existing put option that is struck at 15 time trailing 12-month earnings through to December 31, 2022. We did this to allow our partners time to finalize their engagement with their stakeholders and make our final decision regarding our stake in H3C. Through our commercial contracts and equity interest, H3C has contributed a substantial amount to our EPS and free cash flow and our shareholder value in fiscal year '22. We will balance the strategic and financial benefits of a continuous involvement in China with rising risks, including geopolitical risk. We will keep you up to date as we arrive at a longer-term solution for this asset. Our cash flow story on slide 13, a test of our outstanding execution. Our Q4 cash flow from operations and free cash flow were $3 billion and $2 billion, respectively. This is aligned to our normal pre-pandemic seasonality and our expectations of working capital tailwinds in the second half. We have been strategically building inventory ahead of the competition throughout fiscal year '21 and fiscal year '22 to navigate the supply chain environment. Our inventory balances have now peaked and are beginning to decline as we enter fiscal year '23 and deliver on our substantial order book. Our strong Q4 cash flow brought full year '22 cash flow from operations to $4.6 billion and our free cash flow to $1.8 billion. The $1.8 billion is triple what we delivered in fiscal year '20. It is also at the midpoint of our guidance range of $1.7 billion to $1.9 billion, despite the negative impact of Russia and FX that we estimate to be approximately $250 million. Now turning to our outlook on slide 14. As we discussed, demand for our products and services portfolio remained steady in Q4 relative to Q3. Our view remains one of enduring market demand given the mega trends of digital transformation and the explosion of data. We also believe our own portfolio differentiation will allow market share gains. Let me reiterate that our guidance incorporates our current thinking on the macroeconomic picture, inflationary pressure and FX risk. I would like to remind all of you that approximately 55% of our revenue is generated in foreign currencies. For Q1 '23, we expect revenue to be in the range of $7.2 billion to $7.6 billion, which at the midpoint, implies a mid-single-digit seasonal decline that we typically experience in Q1 relative to Q4 of each year. We expect GAAP diluted net EPS of $0.32 to $0.40 and non-GAAP diluted EPS of $0.50 to $0.58. While we are pleased with our Q1 outlook, we are cognizant given the macroeconomic environment and FX headwinds that it is too early at this stage to rethink our fiscal year '23 guidance. Given the points above, we consider it prudent to assume our year may be more weighted to the first half than is typical. We are, therefore, reiterating our full year '23 guidance. This includes revenue growth of 2% to 4% adjusted for currency, non-GAAP operating profit growth of 4% to 5%, GAAP diluted net EPS of $1.38 to $1.46, non-GAAP diluted net EPS of $1.96 to $2.04, and free cash flow of $1.9 billion to $2.1 billion. In terms of capital returns, we are maintaining our dividends and expect to buy back at least $500 million worth of shares in fiscal year '23, just like we did in fiscal year '22. So to conclude, our results speak for themselves and a test of our outstanding execution in a quarter that can be characterized by enduring demand for our differentiated portfolio of products and services. We look forward to continuing our execution momentum in fiscal year '23. Now with that, let's open it up for questions.

Wamsi Mohan:

Yes. Thank you. And congrats on good results. I was wondering if you can comment a little bit about what the demand trends look like by region? It seems like a lot of companies are citing more of a slowdown, like NetApp just now and Dell last week. I'm curious to get your thoughts on how IT budgets are shaping up for calendar '23? Most companies we're speaking with are more cautious about the near term, maybe the first half of '23 and optimistic more of a recovery in '23. And I think, Tarek, you just said that for you, you're expecting, if I heard that right, like more confidence in sort of the first half. So, any color there would be helpful. Thank you so much.

Operator:

The next question will come from Kyle McNealy with Jefferies. Please go ahead.

Tarek Robbiati:

Yes. Kyle, thanks. I think you understand the trends in our Compute business really well. So, let me reiterate. We ended the year with record quarterly revenues of $3.7 billion. This is a 22% year-over-year growth at constant currency. Unit growth was 4% and AUP was an increase in the high-teens as you foreshadowed. And what's driving the demand for our Compute solutions is richer configs. Customers of all sizes are selecting our Compute solutions to run their private clouds and to power multitude of workloads, data types and applications. And Compute remains and will continue to remain a critical component of our customer transition towards modern edge-to-cloud architectures. And you're right in saying that with these results and the unit increase, our order book in Compute remains strong as we enter fiscal year '23. So, moving forward, trend-wise, what you can expect is, obviously, this level of AUP growth to come down as we'll have to pass on to our customers the benefit of ease -- pricing of commodity easing, but we feel very good about the prospects of Compute in fiscal year '23, given the order book, the fact that our products are more and more differentiated and the need for customers to continue to opt for greater configs.

Operator:

The next question will come from Shannon Cross with Credit Suisse. Please go ahead.

Antonio Neri:

Yes. Thank you, Shannon. I think a couple of things. So first of all, we ended the year with a 68% year-over-year growth in our bookings. Today, we have now $8.3 billion in total contract value. As you know, those are contracts -- can vary between 3 to 5 years. So, as you can imagine, that gives us a tremendous confidence that we will grow that ARR in the 35% to 45%. We actually closed 2022 with twice as many new HPE logos that we entered now into the 2022 year. And then the important fact is why the mix is shifting is because the Aruba business is all a subscription business. And Tarek made a comment about the automation suite, obviously, software-defined wide area network, and also the subscription to wireless or switching comes through the platform, but also the growth that we've seen in storage. Storage had a great quarter, particularly on our own IP product. That's all software defined, and that's all subscription-based. And what excites Tarek and me is the fact that in 2023, you're going to see an acceleration of that portfolio to HPE Alletra, which -- HPE Alletra had 100% growth sequential. And obviously, that comes also with an incredible attach of Pointnext OS. And also, as we drive that data protection strategy, the incremental value comes from backup and recovery and disaster recovery and ransomware offers. We have now those offers integrated into HPE GreenLake. And so that combination is what's driving the mix shift to more software and services rich offers.

Simon Leopold:

I wanted to see if we could dig into what you're seeing in terms of trends for the Compute business. In particular, what's catching my attention is after this very, very strong result for the quarter, it sounds like you're confident in the outlook. And that stands in contrast to your biggest competitor in servers, which seems to be expecting a decline in calendar '23. So, if you could maybe do a little bit of compare and contrast as to why you might be seeing the world differently than they are if I'm interpreting your outlook correctly?

Simon Leopold:

Yes. I'm specifically looking at servers and Compute. So...

Antonio Neri:

So I will add, Simon, that the demand has been enduring and steady throughout the years -- throughout the four quarters in 2022. We exit the year with a significant larger order book. When I think about our differentiation, I think our Compute is differentiated because of HPE GreenLake. It's because of the experience we provide to our Compute platform. And the fact also, if you recall, two years ago, we said we are diversifying our go-to-market as well to attack profitable growth in segments where we did not participated as much, particularly more in the commercial to mid-market space. And one of the areas we saw great growth was through our channel ecosystem. And then, you couple all of that with our pricing discipline and then you get the results of unit growth and revenue growth with amazing profitability. So, I think we have that tailwind. What Tarek covered is all about the revenue side. But on the demand side, it comes to those factors. And I think Gen11 is another step in that direction, which actually gives us tremendous differentiation.

Samik Chatterjee:

Congrats on the strong results here. I guess I just wanted to see if you could talk about backlog or the order book in context of the segments of it and how to think about the supply improvement, particularly if you can shed some color on where backlog or order book remains most elevated related to sort of normal exiting the year and as supply improves next year as you outlined, where can we see the most likelihood of sort of digesting that backlog down to a bit more closer to normal levels? And it seems like you're expecting supply to remain sort of a constraint. So, backlog probably doesn't come back to normal by the end of next year, but any thoughts on that also would be appreciated. Thank you.

Operator:

The next question will come from Toni Sacconaghi with Bernstein. Please go ahead.

Antonio Neri:

Yes. Thanks, Toni. Let me start, and I will give it to Tarek. As we said, we gave the revenue guidance $7.2 billion to $7.6 billion. I'm not sure it's double digit, but maybe high single digit compared to Q1 2022. But in any case, that guidance includes the recognition of the remaining part of Frontier, which obviously is an important aspect of the HPC. And then the ongoing ability to convert the order book as it comes in, plus the larger order book we already have. And then maintaining a certain level of margin, obviously, which we are confident based on our pricing and operating leverage actions we have taken. So, that's where we stand, and that's where we gave the guidance. As we go through the quarter -- through the year, sorry, we felt prudent at this point in time to maintain it because of the FX uncertainty. Obviously, FX stabilizes or slightly improve, that full year guidance implies there is some potential upside. But also, it's going to come down to the supply availability, as I just made the comments early on. In terms of the free cash flow and the working capital, I will pass it to Tarek.

Operator:

The next question will come from Aaron Rakers with Wells Fargo. Please go ahead.

Tarek Robbiati:

Yes. So, thanks for asking the question, Aaron. You know that we have posted in Q4 an operating profit margin in Compute at 14.7%, which is the highest it's ever been, and it's higher than the outlook we guided you all at SAM, long-term OP margin in Compute of 11% to 13%. And the reason why we have that difference is that we believe as supply continues to ease, there will be the need for us to adjust our pricing down to continue to grow the business moving forward. So, the level of -- at which the AUPs are at today will come down as we pass on the reduction in costs from commodities, DRAMs in particular. We're starting to see some of this, but it's early days. And what's a very, very important Compute on the way up, just like on the way down, is to be extremely reactive and dynamic with our pricing. And we have now the ability to do so globally to push changes in our list prices through our ERP system over a weekend, it needs to be to react to changes in commodity prices and what we're seeing in the competitive environment. So, we remain with our business unit of Compute and the management team there extremely focused on competitive pricing dynamics because for us, it's really critical as we foreshadowed to you that we maintain scale in Compute and continue to capture the lion share of the value in the industry, which we are doing today.

Jeff Kvaal:

Thanks, Aaron. And Chuck, why don’t we make this the last question?

Amit Daryanani:

I guess, my question is really around the Intelligent Edge business and maybe two parts. One, if you could just talk about the 23% growth here is fairly impressive. Any details you can give on kind of what is driving that from a product basis or even backlog versus end demand would be really helpful to understand. And then, Tarek, if I remember, at SAM, you talked about mid-20% operating margins in Intelligent Edge over time. As you look at the path from 13.3% to mid-20%. What do you need to get there? Is there a revenue number or something else just helpful to understand the margin expansion bridge from here? Thank you.

Tarek Robbiati:

Yes. So, let me elaborate on what Antonio said with regard to your portion of the question that pertains to operating margins. Our operating margin for the Edge was 13.3% in the quarter. It was up annually by 2.4%, right? It was down sequentially 3.2%, but it was up annually 2.4%. I think here, you have a mix effect that is at play between as-a-service offerings and NaaS offerings that play a role in the way the margin fares in the short term. It obviously -- if we're entering the NaaS market, that is because we expect to see the margins -- the gross margins of NaaS to improve over time. So that is one factor. The other factor that has affected the margins very short term, very tactically in Q4 is logistics costs. And I flagged that in my script, logistics cost in Aruba were higher than we would have liked. But that, again, is changing. And so, we expect Aruba to perform as a Rule of 40 company moving forward. And that's the ambition that we have in the medium to long term, which is to maintain high-double-digit growth in Aruba and operating profit margins in the mid-20s range. We're comfortable with that outlook that we announced at SAM.

Operator:

Ladies and gentlemen, this concludes our call for today. Thank you, and have a great night.

Andrew Simanek:

Great. Thank you. Good afternoon, everyone. I'm Andy Simanek, Head of Investor Relations for Hewlett Packard Enterprise. I'd like to welcome you to our fiscal 2022 third quarter earnings conference call with Antonio Neri, HPE's President and Chief Executive Officer; and Tarek Robbiati, HPE's Executive Vice President and Chief Financial Officer. Before handing the call over to Antonio, let me remind you that this call is being webcast. A replay of the webcast will be made available shortly after the call for approximately one year. We posted the press release and the slide presentation accompanying today's earnings release on our HPE Investor Relations webpage at investors.hpe.com. As always, elements of this presentation are forward-looking and are based on our best view of the world and our businesses as we see them today. For more detailed information, please see the disclaimers on the earnings materials relating to forward-looking statements that involve risks, uncertainties and assumptions. For a discussion of some of these risks, uncertainties and assumptions, please refer to HPE's filings with the SEC, including its most recent Form 10-K and Form 10-Q. 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-Q for the fiscal quarter ended July 31, 2022. Also, for financial information that has been 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. Throughout 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, after Antonio provides his high-level remarks, Tarek will be referencing the slides and our earnings presentation throughout his prepared remarks. As mentioned, the earnings presentation can be found posted to our website and is also embedded within the webcast player for this earnings call. With that, let me turn it over to Antonio.

Tarek Robbiati:

Thank you very much, Antonio. I'll start with a summary of our financial results for the third quarter of fiscal year 2022. As usual, I'll be referencing the slides from our earnings presentation to guide you through our performance. Antonio discussed the key highlights on Slide 1. So, now let me discuss our Q3 performance details, starting with Slide 2. We continue to see healthy demand across our differentiated edge-to-cloud portfolio. As expected, year-over-year order growth rates moderated to down 9% this quarter as we begin to lap challenging compares. As a reminder, orders were up 29% year-over-year in Q3 of fiscal year 2021. We continued to grow our backlog sequentially this quarter to a new record level that is up 96% year-over-year. Our backlog is also expected to be roughly flat next quarter and remains firm with no meaningful cancellations. This maintains our confidence in achieving both our fiscal year 2022 revenue outlook of 3% to 4% growth adjusted for currency and our longer term 2% to 4% revenue CAGR outlook provided at our 2021 Securities Analyst Meeting. In Q3, we delivered revenue of $7 billion, up 4% year-over-year and above our outlook of up low-single-digits sequentially despite an ongoing challenging supply environment and greater currency headwinds. Based on current rates, we now expect currency to be a 2.5-point headwind to revenue for the full year as opposed to the 50 basis points expected at the start of our fiscal year. We continue to be very pleased with the resiliency and expansion of our non-GAAP gross margins, despite the inflationary environment and ongoing supply chain disruptions that are driving up material and logistics costs. We delivered non-GAAP gross margin of 34.7%, up 50 basis points sequentially and flat year-over-year, driven primarily by strong pricing discipline and our continued mix shift towards higher-margin software-rich offerings. Non-GAAP operating margins were 10.5%, up 120 basis points sequentially and 70 basis points year-over-year, reflecting operating leverage from strong gross margin and OpEx savings from our cost optimization actions taken during the pandemic. We expect to gain further operating leverage in the short term, as we drive more revenue growth and benefit from investments in the high-growth, margin rich areas of our portfolio. With our better-than-guided revenue growth, we delivered non-GAAP diluted net earnings per share of $0.48, up 9% sequentially despite elevated input costs from the ongoing industry-wide supply constraints and foreign exchange impact. As previously indicated, cash flow from operations is following our normal seasonality this year, and working capital has also turned into a tailwind in the second half. In Q3, we generated $1.3 billion of cash flow from operations and free cash flow of $587 million. We continue to make further investments in strategic inventory to navigate the current supply environment, and we are now at peak inventory levels. We will begin to work our inventory balance down next quarter and into the following year, and I'll touch more on that shortly in our outlook. Finally, we continue to return substantial capital to our shareholders. We paid $156 million of dividends in the current quarter and are declaring a Q4 dividend today of $0.12 per share payable in October. We also repurchased $197 million in shares, on track towards our goal of at least $500 million of share buybacks executed this fiscal year and bringing our year-to-date total capital returns to $851 million, reflecting our confidence in future cash flow generation. Slide three highlights key metrics demonstrating our progress in our as-a-service business, with more recurring revenue at higher margins. Total as-a-service orders remained robust, up 39% year-over-year as we begin to lap more challenging compares. Our year-to-date as-a-service orders are up 86%, which is the best indicator of the long-term health of this business and supports our confidence in achieving our three-year ARR CAGR target of 35% to 45% from fiscal year 2021 to fiscal year 2024. Our ARR growth rate improved from last quarter and was up 28% year-over-year to $858 million, but still face supply constraints continuing to limit some installations. We also continue to expand our as-a-service margins as our mix of both software and services continues to increase to 64% in Q3, up 6 points year-over-year, with our expanding cloud and SaaS offerings, particularly in Edge and Storage. Let's now turn to our segment highlights on slide four. Our growth businesses continue to show improving top line momentum and record levels of backlog fueled by strong demand. In the Intelligent Edge, we achieved both a record level of orders and revenue in the quarter. We grew orders double digits for the seventh consecutive quarter and have roughly 20 times our normal levels of backlog. Revenue growth accelerated to 12% year-over-year, outperforming the competition and demonstrating particular strength in Silver Peak, and our Edge-as-a-Service offerings, both up strong double digits. We delivered operating margins of 16.5%, up 390 basis points sequentially and 40 basis points year-over-year, reflecting the improving operating leverage in this business and this despite higher component and logistics costs. In HPC and AI, revenue grew 15% year-over-year and backlog of awarded contracts remained robust at just under $3 billion. Our Q3 operating profit margin was 3.4%, up 9 points sequentially and is expected to increase further next quarter, with the recognition of large deals. In compute, demand remained robust with backlog growing sequentially to another record and is now at five times normal levels. Revenue was down 1%, reflecting a continued difficult supply environment with some improvement expected next quarter with new multi-sourcing options for certain components and demand steering towards new solutions. We also continue to be very focused on executing our dynamic pricing strategy that has been effective in managing the increased supply and logistic costs and gives us a very high-quality backlog. The results are showing up in our operating margin performance at 13.3%, up 210 basis points year-over-year and still well above our long-term target set at SAM 2021 of 11% to 13%. Within Storage, we achieved another record level of backlog and revenue was up 1%. We continue to emphasize our own IP margin reach products that were up double digits, including nimble and hyper-converged. Our as a service offerings within storage like Block are also leading order and ARR growth among our business segments. With the favorable mix shift, our operating margins improved to 14.7%, up 210 basis points sequentially. With respect to Pointnext operational services, combined with storage services, orders grew again and are up year-to-date mid-single digits in constant currency, similar to levels for total fiscal year '21 despite the exit of our Russia business. As you know, this is a key component of recurring revenue and profits for each of our segments. Within HPE Financial Services, volume increased 4% year-over-year in constant currency with strong performance in GreenLake and revenue rose 1%. It's worth noting that our leasing business is well insulating from rising interest rates over time, as we price based on a spread and customers often choose to extend their leases during uncertain macroeconomic conditions. Our profitability also continues to benefit from higher residual value realization and bad debt write-offs have returned to pre-COVID levels. Our operating margin was 11.8%, up 70 basis points from the prior year, and our return on equity at 19.5% remains well above the 18% plus target set at SAM 2021. Slide 5 highlights our revenue and EPS performance, where you can see our revenue and EPS continue to grow despite the difficult supply environment, the exit from our Russia business and increasing headwinds from currency. Year-to-date through Q3, we have already experienced a headwind of $0.05 from currency and $0.03 from exiting Russia. In spite of these headwinds, we delivered a better mix of higher-margin earnings across our portfolio as we continue to execute our edge to cloud strategy. This improvement can be seen on Slide 6, where we delivered non-GAAP gross margins in Q3 of 34.7%, up 50 basis points sequentially, and flat year-over-year, showing their resilience in spite of the increased component and logistics costs. This was driven by both our strategic pricing actions and the favorable mix shift we have been driving to edge on IP storage and our as a Service business. Moving to Slide 7. You can see our non-GAAP operating margins this quarter of 10.5%, up 1.2 points sequentially and up 70 basis points year-over-year. This reflects revenue growth combined with both gross margin expansion and OpEx savings to give us strong operating leverage across the business. This has also been achieved while continuing to invest more in both R&D and our go-to-market in strategic areas of the business for future growth. On Slide 8, let's spend some time reminding everyone about the status of our unique setup in China through H3C. As disclosed in late April, we have extended our existing put option that is stuck at 15 times trailing 12-month earnings through to October 31, 2022. We did this to enable the new investors at the Unigroup level to complete their restructuring and are now determining the longer-term path forward for our stake. We value our presence in China, the second largest and fastest-growing IT market, although prior to the execution of any extension, we will balance the strategic and financial benefits of a continuous involvement in China with rising risks, including geopolitical risk. H3C makes up a significant portion of our P&L and cash flow, and you can see that we are generating growing value to shareholders with our unique setup. Our equity interest rose 21% in fiscal year 2021 and has grown another 9% in this Q3. Needless to say, we will keep you up to date as we arrive at a longer-term solution for this valuable asset. Turning to Slide 9. Our cash flow from operations was $1.3 billion in Q3. This is aligned to our normal pre-pandemic seasonality and our expectations of working capital tailwinds in the second half. We have been strategically building inventory throughout this year to navigate the supply chain environment. While we still expect to start working down inventory levels in Q4, it will take longer than expected and into fiscal year 2023, but still puts us in a better position to convert the continued order demand into revenue and cash in future quarters. Now turning to our outlook on Slide 10. As discussed, Antonio and I are very pleased with the continued demand strength and growing backlog that gives us confidence in achieving our original SAM revenue guidance in fiscal year 2022 for growth of 3% to 4% adjusted for currency that now includes a 2.5-point headwind from foreign exchange rates on a full year basis. More specifically for Q4 2022, we expect revenue to be up at least 5% sequentially as reported, which includes the larger currency headwind. This is still above our normal seasonality to reflect some improvements in supply due to the full resumption of factories activity in China and our actions to multi-source, more components and steer the demand. From an EPS perspective, we are tightening our fiscal year 2022 non-GAAP outlook range as we move towards the end of the year to $1.96 to $2.04. This reflects the impact from the supply environment, which we expect to sustain into Q4, and further appreciation of the U.S. dollar since last quarter. As a result, this implies that for Q4 2022, we expect GAAP diluted net EPS of $0.32 to $0.40 and non-GAAP diluted net EPS of $0.52 to $0.60. Furthermore, our free cash flow is also being impacted by exiting our Russia business as well as headwinds from unfavorable currency movements that were previously absorbed in our prior outlook. As a result, we now expect to deliver fiscal year 2022 free cash flow of $1.7 billion to $1.9 billion. So overall, I am very pleased with our results in the quarter that can be characterized by sustained demand and very solid execution, navigated a continued challenging supply environment. With record levels of high-quality backlog, we are very well positioned to capitalize on the ongoing edge-to-cloud opportunity and close out a strong fiscal year 2022. We look forward to seeing you at our next Securities Analyst Meeting in October to provide our outlook for the fiscal year and beyond. Now with that, let's open it up for questions.

Shannon Cross:

Thank you very much. I wanted to talk a bit about the relative strength in your guidance and how you're thinking about your backlog and that, obviously, contrasting that with your competitor that reported last week, who had much more conservative or dire outlook on demand, frankly. So I'm curious, how have you stress tested the backlog? I mean what gives you confidence in coming out and effectively taking up guidance because there's more of a currency hit now. So just any color you can give us maybe even on a geographic basis or a vertical basis in terms of what you're hearing and seeing? Thank you.

Tarek Robbiati :

Yes. Shannon, if I can add on a couple of comments. What we're doing is we are engineering new solutions that are less dependent on components that are experiencing shortages. We're steering demand toward those solutions, and this is across every facet of our portfolio. We are also multi-sourcing the most constrained components, and this is helping working through the backlog. But as Antonio said, this will remain a challenged environment into next year. And that is actually for us an opportunity to continue to drive revenue with high-quality margins into fiscal year 2023. I do want to pick up on your point that you made very rightly about the guidance and having absorbed 200 basis points incremental in foreign exchange terms. This is a very important point. 200 extra basis points of headwind is about $580 million of revenue. You multiply this by the OP margin, and you can really look at what impact would that have had on EPS. So we are very pleased with the performance of our business. And the fact that in spite of substantial foreign exchange headwinds, we are able to maintain the revenue guide of 3% to 4% in constant currency, and therefore, our EPS guide as a result. So thanks for pointing that out.

Shannon Cross:

Thank you.

Operator:

The next question will come from Meta Marshall with Morgan Stanley. Please go ahead.

Tarek Robbiati:

Of course, Meta. Thanks for asking the question. So FX is, obviously, a headwind to revenue because 55% of our revenue in the company is denominated in non-US dollar currencies. But it's -- as you point out, a tailwind to OpEx to some degree. Some of the cost that we incur is therefore lower on a dollar basis. Net-net FX is a headwind to operating profit and EPS. And so we started our cost containment in the middle of the pandemic, as you may recall, in April, May 2020. And we stay disciplined on OpEx moving forward. And this is shown to you by our gross and operating margin performance. We feel comfortable about our gross margin trend, and we believe per my script, that there is further opportunity to extract operating leverage in Q4 and beyond, thanks to the growth in high margin areas of our portfolio such as the edge. I feel pretty comfortable about the situation. If you look at our gross margins, to add more color, they're up 50 basis points sequentially and flat year-on-year. And this is in spite of an inflationary environment that would put a lot of pressure on supply chain, logistics costs and material costs, obviously, but also on labor costs. So on the whole, look for our margins and where they stand relative to those headwinds that we just discussed.

Andrew Simanek:

Great. Thanks Meta for the question. Operator, can we go to the next one, please?

Toni Sacconaghi:

Yes. Thank you for taking the question. I'm wondering, if you could just comment on linearity throughout the quarter in terms of orders and whether you saw any degradation. And then I was hoping you could just maybe help quantify the aggregate backlog because, as you noted, your order compares are very difficult going forward, 20% plus for the last four quarters. So if orders end up being down 10% a year for the next three or four quarters, that's $2.8 billion less in orders. My sense is, you may have $3 billion or $4 billion in incrementally higher backlog than normal. So that would still suggest reported revenue growth could grow. But I'm wondering if you can also just sort of talk to that dynamic of, the tough order comps and likely facing negative order growth and whether the backlog ultimately measures up according to the math that I outlined that should make everyone feel good about continued revenue growth. Thank you.

Antonio Neri:

I will say, Toni, just to add on that, we use the word steady, because, obviously, you can't use the word growth in the context of the compares here. But steady. Steady, and then within the steadiness, we have growth in some unique segments that continue. And Tarek talked about the Edge, we have a 20 times backlog in that business. And even on Compute, we still have 5 times. So -- and the other thing to remember here is that GreenLake is an accelerator of orders intake, because that creates us momentum in renewing and expanding and cross-selling across the business. So I think the original guidance we gave us at SAM last year, which was 2% to 4% over the long-term period, still absolutely true. And then when we get together at SAM here at the end of October, we're going to tell you what we're going to do specifically for 2023. But I sit here today and I feel pretty good about the momentum we have, because demand is steady, and our strategy is resonating with the pivot to as-a-service.

Andrew Simanek:

Perfect. Thanks, Toni. Next question, please.

Tim Long:

Thank you. Yes, I wanted to get back to the kind of as-a-service and ARR businesses. You guys are sticking to the longer-term guide here, its a little acceleration from what we've seen this past quarter. Could you just kind of dig into that a little bit? What are you seeing that's going to sustain that level of high growth over multiple years of the new programs or new products that are going to maybe transition the model so that we can keep that 25 to – I'm sorry, 35% to 45% growth rate for ARR? Thank you.

Tarek Robbiati:

I think you said very well, Antonio, we simply emphasize one thing strategically is, clearly, the word is now hybrid. Our customers have spoken, the market has spoken, the world is hybrid. For us to scale an as-a-service business in a hybrid world for any player to do so, you need to build a platform. Without the platform, you cannot scale, durably scale and take advantage of the hybrid world. And when you really look at what that means, it translates into higher margins in this business over time. The margins of this business are getting richer and richer as we add more services onto the platform and more software content onto the offerings. And we've made meaningful progress increasing our software and services mix by six point's year-over-year to the current level of about 64%. And we are targeting over 75% by fiscal year 2024 as we add more and more software content with storage data services such as Zerto, we add more softer content with networking services such as Silver Peak and new workloads. So we believe that our ARR is already well above corporate average gross margins, and we are driving it to even higher levels by adding more and more software, high-value content.

Andrew Simanek:

Thanks for the question, Tim. Next one, please.

Amit Daryanani:

Thanks for taking my question. I guess, I was hoping you could talk a little bit about the October quarter guide and what you're implying here. I think the implication is margins are going to be up about 100 basis points, if not more sequentially. And Tarek, I know you talked about better mix potentially there. But maybe you can just help us understand how do you think revenues could look like sequentially versus historical seasonality in October? And then as you think about this 100 basis plus margin expansion, on the operating line sequentially, what are the big enablers of that? If you kind of call this out, that would be helpful.

Amit Daryanani:

Perfect. Thank you for running the whole model to what we have here.

Operator:

Next question will come from Aaron Rakers with Wells Fargo. Please go ahead.

Antonio Neri:

Yeah. Maybe I'll start and then I'll give it to Tarek. Thank you for the question. I mean, obviously, we are managing our -- the Compute business very different than our competition. And you see that in our operating margin performance, right, 13.3%, which is over 200 basis points year-over-year up. But we always guided you and the rest of the Street on an 11% to 13%. So we expect that over time to return to those levels, somewhere in that range. But at the same time, we continue to be incredible discipline in pricing. And that backlog that we have, which is now five times historical levels has been priced with that in mind, with that pricing discipline. And so that's why it gives us the confidence that as we go through the next handful of quarters here, we continue to see solid performance. But in the end, we will see, obviously, the balance between units and AUPs, because particularly, memory pricing will start taking effect. But at the same time, we are focusing also on profitable growth units in different segments of the market. And one strategy to do so is our GreenLake platform, because we are able to reach different customers with different configs with a margin that's more accretive, particularly because all the GreenLake's deals comes with the attach of Pointnext XOS. And one area you're going to see us also shifting is the software that comes with our compute platform, will be delivered also as a SaaS offering on the GreenLake platform as we have now entered or soon to be entered GEN-11. So, there is that dynamic of unit pricing and then offer configuration with us that we're going to drive through the next generation here. But that 11% to 13% is more reasonable in our mind. And clearly, we are doing so by managing our backlog and new orders intake. Tarek, do you have any comments on that?

Aaron Rakers:

Yes. Thank you.

Operator:

Your next question will come from Wamsi Mohan with Bank of America. Please go ahead.

Tarek Robbiati:

Yes. So, it's hard to really parse out what is structural by way of configs and/or pricing related with respect to what drives our overall AUP in the compute business. And the reason for it is, our own actions. We have started to steer the demand towards new configs where we do have the supply and particularly the Gen10 plus servers are very successful in the market today. And these are, by definition, higher config relative to the Gen10. And so, I would say a large chunk of the success that we have there is driven by our own engineering and the steering of the demand to be able to fulfill the orders that we have in the backlog. And then specifically for cash flow, overall, at the company level, the dynamic that you all need to take into account is starting from the revenue growth that we flagged, which would be at least 5% on a revenue basis, reported basis, applying the margins commentary that we discussed, you're going to have a certain amount of cash earnings growth in Q4 sequentially relative to Q3. But the most important driver of free cash flow in Q4 is our cash flow conversion cycle. We already started to see in Q3 as foreshadowed the working capital becoming a tailwind. And in Q4, as we turn through our backlog, and we drive, therefore, higher revenues, we're also going to drive inventory levels down. And our overall cash conversion cycle will move from a positive 18 today to a negative figure, which is favorable to free cash flow generation in Q4. That's the key dynamic that I want you to take away as we work through the inventory, the inventory has peaked in Q3, it will take longer than expected to work through that. But overall, our focus is on managing our cash flow conversion cycle, taking it back down to a negative number, which is good for free cash flow and we're going to start doing so with our team immediately in Q4, and we'll keep it there for the upcoming quarters.

Andrew Simanek:

Great. Thanks for the question, Wamsi. Operator, I think we have time for one more, please.

Rod Hall:

Hi guys. Thanks for the question. Thanks for squeezing me in. I guess most of my questions have been answered. I thought maybe I would ask about financial services. That number has been down the last three quarters. Just curious, whether you guys are seeing anything within that from an origination point of view or anything else that might give us some hint as to what is going on with different -- various parts of that business. We know there are businesses outside of your own that are in there. For comparison, by the way, Dell said, they saw increased originations there because of what they're seeing in the broader macro. And I just wondered kind of whether you had any more color on that.

Rod Hall:

That’s great. Thanks a lot, Tarek. Appreciate it.

Operator:

Ladies and gentlemen, this concludes our call for today. Thank you for your participation. You may now disconnect.

Andrew Simanek:

Great, thank you. Good afternoon everyone. I’m Andy Simanek, Head of Investor Relations for Hewlett Packard Enterprise. I’d like to welcome you to our fiscal 2022 second quarter earnings conference call, with Antonio Neri, HPE’s President and Chief Executive Officer; and Tarek Robbiati, HPE’s Executive Vice President and Chief Financial Officer. Before handing the call over to Antonio, let me remind you that this call is being webcast. A replay of the webcast will be made available shortly after the call for approximately one year. We posted the press release and the slide presentation accompanying today’s earnings release on our HPE Investor Relations web page at investors.hpe.com. As always, elements of this presentation are forward-looking and are based on our best view of the world and our businesses as we see them today. For more detailed information, please see the disclaimers on the earnings materials relating to forward-looking statements that involve risks, uncertainties, and assumptions. For a discussion of some of these risks, uncertainties, and assumptions, please refer to HPE’s filings with the SEC, including its most recent Form 10-K and Form 10-Q. 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-Q for the fiscal quarter ended April 30th, 2022. Also, for financial information that has been 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. Throughout 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, after Antonio provides his high-level remarks, Tarek will be referencing the slides in our earnings presentation throughout his prepared remarks. As mentioned, the earnings presentation can be found posted to our website and is also embedded within the webcast player for this earnings call. With that, let me turn it over to Antonio.

Tarek Robbiati:

Thank you very much, Antonio. I'll start with a summary of our financial results for the second quarter of fiscal year 2022. As usual, I'll be referencing the slides from our earnings presentation to guide you through our performance. Antonio discussed the key highlights on Slide 1 and 2. So now let me discuss our Q2 performance details, starting with Slide 3. We continue to see robust demand across our differentiated edge-to-cloud portfolio with order growth up 20% year-over-year, the same as last quarter. This marks our fourth quarter in a row with order growth of 20% or better year-over-year. This maintains our confidence in achieving both our fiscal year 2022 revenue outlook of 3% to 4% growth adjusted for currency and our longer term 2% to 4% revenue CAGR outlook provided at our 2021 Securities Analyst Meeting. We delivered Q2 revenues of $6.7 billion, up 1.5% year-over-year and in line with our outlook of normal sequential seasonality and despite a more challenging supply environment that limited upside. The unexpected COVID-related shutdowns in China and seizing the support of Russia services contracts impacted our revenue by more than $250 million in the quarter, our total operating margins by more than one point and EPS by approximately $0.06. Given the delta between our order and revenue growth rates, our backlog further increased to new record levels and yet remains very high quality. The order book is firm and most importantly, has been priced to preserve gross margins. We are particularly pleased with the resiliency of our non-GAAP gross margins despite the inflationary environment and ongoing supply chain disruptions that are driving up material and logistics costs. We delivered non-GAAP gross margin of 34.2%, up 30 basis points sequentially and down just 10 basis points year-over-year, driven primarily by strong pricing discipline and our continued mix shift towards higher-margin software-rich offerings. Non-GAAP operating margins were 9.3%, reflecting the revenue impact from incremental supply constraints and our exit from Russia that reduced operating leverage. We expect operating margins to expand in the short term as we drive more leverage from revenue growth and benefit from investments in the high-growth, margin-rich areas of our portfolio. Within other income and expense, we benefited from robust operational performance in H3C and further gains related to increased valuations in our Pathfinder investment portfolio. As a result, we now expect non-GAAP other income and expense for fiscal year 2022 to be an income of approximately $75 million versus prior guidance of an approximately $25 million income. Given our strength in gross margin and despite the approximately $0.06 impact from China and Russia, we delivered non-GAAP diluted net earnings per share of $0.44, near the midpoint of our outlook range of $0.41 to $0.49 for Q2. We also delivered GAAP earnings per share of $0.19. This includes $126 million of disaster charges related to Russia, primarily consisting of an increased reserve for financing lease assets. With the decision to already exit Russia that we have announced today, we expect to record and less significant GAAP-only charge in Q3 that has been factored into our updated outlook already. As previously indicated, we expected free cash flow to be in line with our normal seasonality that is a use of cash in the first half and Q2 was a use of cash of $211 million. We have made significant investments in working capital during the first half, reflecting our strategic inventory actions to navigate the current supply environment. This will better position us to convert orders into future revenue and cash flow, while working capital is expected to become a tailwind in the second half. Finally, we continue to return substantial capital to our shareholders. We paid $156 million of dividends in the current quarter and are declaring a Q2 dividend today of $0.12 per share payable in July. We also repurchased $58 million in shares, bringing our year-to-date total capital returns to $498 million, reflecting our confidence in future cash flow generation. Slide four highlights key metrics of our growing as-a-service business. We continue to see very strong momentum across our as-a-service portfolio, where we introduced 12 new cloud services this quarter and converge Aruba Central with the HPE GreenLake platform to create a unified operational experience for all users. Total as-a-service orders were up 107% year-over-year, marking the third quarter in a row with orders more than doubling. Our ARR was up 25% year-over-year to $829 million, with supply constraints continuing to limit some installations. While our ARR growth is somewhat volatile in the current supply environment, the strong order growth over the last several quarters is the best indicator of the long-term health of this business. This gives us confidence in delivering our 35% to 45% CAGR target from fiscal year 2021 to fiscal year 2024, with increasing margins as our mix of both software and services continues to increase to 64% in Q2, up more than 5 points year-over-year with our expanding cloud and SaaS offerings. Let's now turn to our segment highlights on Slide 5. Our growth businesses continue to show improving top line momentum and record levels of backlog fueled by strong demand. In the Intelligent Edge, demand for our secure connectivity solutions accelerated with orders growing 45% year-over-year, the fifth consecutive quarter with growth of more than 35%. Despite increased supply disruptions in China, revenue grew 9% year-over-year, outperforming the competition and demonstrating particular strength in Silver Peak and our Edge-as-a-Service offerings, both up strong double-digits. We delivered operating margins of 12.6%, reflecting higher component and logistics costs, resulting in lower operating leverage. We expect margins to improve next quarter with higher levels of revenue that also benefit from previous price actions that are sticking. In HPC and AI, demand remains robust with order growth of 18% year-over-year, driving our awarded contracts total to another record level of just under $3 billion. Revenue grew 5% year-over-year and was impacted by one large customer acceptance delay that impacted growth by more than six points and has now been delivered in Q3. Importantly, our Q2 operating profit was impacted by the ramp in project costs for a couple of mega deals expected to close by the end of the year that will return operating margins to more in range with historical levels. In Compute, order growth remained robust and was up over 20% year-over-year for the fourth consecutive quarter, while revenue growth was up 1%, reflecting a more difficult supply environment. We continue to be very focused on executing a dynamic pricing strategy that has been effective in managing the increased supply and logistics cost and gives us a very high-quality backlog. The results are showing up in our operating margin performance at 13.9%, up 270 basis points year-over-year and 10 basis points sequentially, well above our long-term target set at SAM 2021 of 11% to 13%. Within Storage, we achieved another record level of product backlog that is skewed towards our owned IP margin-rich products. Revenue was down 2%, reflecting supply constraints for our own IP products. As a result, we continue to have unfavorable revenue mix that pressured our margins this quarter. We expect both our revenue growth rates and margins to improve over the next few quarters as we work through our favorable backlog mix and steer more demand towards our new Electra and Block Storage offerings. With respect to Pointnext operational services, including storage services, orders again grew mid-single digits year-over-year as reported, similar to levels for total fiscal year 2021. As you know, this is very important for the long-term health of our most profitable business. Within HPE Financial Services, volume increased 2% year-over-year with strong performance in GreenLake and revenue was flat. Our profitability continues to benefit from higher residual value realization as customers tend to extend the use of their systems in a supply-constrained environment. Our operating margin was 12.6%, up 180 basis points from the prior year, and our return on equity at 20.4% remains well above the 18%-plus target set at SAM 2021. Slide six highlights our revenue and EPS performance where you can see we've maintained relatively constant levels from last year despite incremental supply constraints, in particular, from the China shutdowns and also are seizing to support services contracts in Russia. As a reminder, this combines for more than a $250 million impact to revenue and a one point impact to total operating margins and an approximately $0.06 impact to EPS in Q2. In spite of these headwinds, we delivered a better quality of earnings across our portfolio as we continue to execute our Edge to Cloud strategy. The improved quality of earnings can be seen on slide seven, where we delivered non-GAAP gross margins in Q2 of 34.2% showing their resilience in spite of the increased component and logistics costs. This was driven by both our strategic pricing actions and the favorable mix shift we've been driving towards edge and our as-a-service business. Moving to slide eight, you can see our non-GAAP operating margin this quarter of 9.3%, reflecting the reduced operating leverage from supply challenges and our exit from Russia. However, we are achieving much better efficiency in our sales and office investments when measuring productivity on an orders basis. Given our high-quality backlog, we are also continuing to invest more in both R&D and our go-to-market for future growth. On slide nine, let's spend some time reminding everyone about our unique setup in China through H3C. As disclosed in an 8-K in late April, we have extended our existing food option that is struck at 15 times trading 12-month earnings through to October 31st, 2022. We did this to enable the new investors at the Unigroup level to complete their restructuring, which is proceeding as planned before determining a longer term path forward for our stake. We value our presence in China, the second largest and fastest-growing IT market, although we will balance prior to execution of any extension, the strategic and financial benefits of a continuous involvement in China with rising risks, including geopolitical risk. H3C makes up a significant portion of our P&L and cash flow and you can see that we are generating growing value to shareholders with our unique setup. Our equity interest rose 21% in fiscal year 2021 and has grown 32% in this Q2 of fiscal year 2022. We will keep you up to date as we arrive at a longer term solution for this valuable asset. Turning to slide 10, our free cash flow was a use of cash of $211 million. This is aligned to our normal pre-pandemic seasonality with the first half being a use of cash followed by strong generation of free cash flow in the second half. The first half of this year has also been uniquely impacted by the supply chain environment as we strategically built inventory levels in Q1 that were flat in Q2. We are taking further strategic actions to improve supply chain visibility and attain operational and financial benefits. This will put us in a better position to begin converting orders and generate healthy amounts of cash as working capital will turn into a tailwind in the back half of the year. We will need to demonstrate strong execution in the second half, but we have a path forward and expect to deliver fiscal year 2022 free cash flow of $1.8 billion to $2 billion. Now turning to our outlook on Slide 11. We are revising our fiscal year 2022 non-GAAP outlook range back to our original outlook provided at SAM of $1.96 to $2.10. This reflects the impacts of a more unfavorable currency movements since last October, the exit of the business in Russia, the COVID-related disruptions in China to this date, offset by the other income and expense benefit we've received in the first half. From a top line perspective, we are very pleased with the continued strength in orders and growing backlog that gives us confidence in future revenue growth in fiscal year 2022 and beyond. We do want to remain prudent in the short term, given the ongoing supply challenges that we believe will likely last well into next year. Currency is also expected to now be a two-point headwind to revenue for the full year as opposed to the 50 basis points at the start of our fiscal year. As a result, we still have strong confidence in our fiscal year 2022 revenue growth outlook of 3% to 4% adjusted for currency and expect to end the year with elevated levels of backlog, which bodes well for fiscal year 2023. More specifically, for Q3 2022, we expect revenue to be up low single-digits sequentially. This is slightly below our normal seasonality to reflect our expectations that the China shutdowns will have a lingering impact in the short term. As a result, for Q3 2022, we expect GAAP diluted net EPS of $0.22 to $0.32 and non-GAAP diluted net EPS of $0.44 to $0.54. So overall, I'm pleased with how we are executing in a strong demand but challenging supply environment during the first half of fiscal year 2022. With our high-quality backlog, we are very well positioned to capitalize on the ongoing Edge to Cloud opportunity and deliver against all of our financial commitments set at SAM 2021. Now with that, let's open it up for questions. Thank you.

Aaron Rakers:

Sorry about that, guys. Can you hear me?

Antonio Neri:

We can.

Tarek Robbiati:

Yes, good afternoon Charles, thank you for the -- Aaron, good afternoon for the question -- thank you for the question with regard to our backlog. I would say our backlog has not peaked yet. When you have four consecutive quarters of 20% growth and the delta between the backlog growth, order growth and the revenue being what it is, the backlog has not peaked and will probably peak towards the end of this fiscal year. Our assumptions on converting that backlog into revenue are contained in the guidance that we gave for this fiscal year of 3% to 4% revenue growth adjusted for currency. I want to reiterate to you that the FX impact in that guidance is a 2% headwind as opposed to a 50 basis point headwind that we originally forecast.

Aaron Rakers:

Thank you.

Operator:

Yes sir. The next question will come from Simon Leopold with Raymond James. Please go ahead.

Tarek Robbiati:

Sure. So, let me try and unpack this for you. So, first of all, when you really look at our business across the various segments, Aruba is continuing to do extremely well and we outperformed the competition, specifically Cisco in the second quarter. And the order book in Aruba is absolutely substantial. As you can observe, Aruba growth -- and you know Aruba comes with higher gross margin, has a favorable impact on the mix. The second thing I would point out to you is with respect to compute, the disciplined pricing actions that we've taken now for several quarters with compute continue to bear fruit. Compute operating profit margins at well above 13%, well above our long-term guidance, have also been better than what our main competitor in that space, Dell, has delivered for their total ISG margins that include compute, storage, and networking. So, compute is performing much, much better than the rest of the industry. Third, when you really look at the gross margin mix again across the other segments, particularly Storage and HPC, there are two different stories there. With respect to storage, you have a mix between our own IP product and third-party product that has been unfavorable to us, meaning that there were more third-party product revenues and on IP revenue. And you can see, therefore, that this has had a detrimental impact to gross margins for storage. Finally, HPC, the story there is a story that is we've always been saying, it's a lumpy business, and it's a matter of revenue scale. We had one slippage of a deal that has affected growth by six points in the quarter. That deal has closed into Q3. And really, the fundamental question for HPC is the delivery of substantial mega deals that we have planned for the second half. And so if you take all of this into account and you look at overall gross margins for the company, the story is different by segment. But it is the result of a number of actions that we have taken in Aruba and in Compute, offset by product mix shift in storage and revenue delays in HPC. On the whole, very pleased to have our gross margins where they are at 34.2%, up sequentially and better than last year. And finally, let me add to this, the performance of HPFS. The performance of HPFS is outstanding. You can see that while there is not much revenue growth. And this is not a gross margin business, it's a business that delivers substantial amounts of profit by way of operating profit margins. And the return on equity there in HPFS is very, very strong, north of 20%, which is better than our long-term outlook of 18-plus percent that we gave you at SAM 2021. So I hope this gave you color and I up back things f or you the way you want it, Simon. But if not, we're welcome to take the conversation offline with you again.

Antonio Neri:

Thanks, Simon. Appreciate it. Operator, can we have the next one please?

Samik Chatterjee:

Hi. Thanks for taking my question. I guess I just wanted to ask more on the demand side here and you had another quarter of strong orders, maybe if you can give us a bit more color on what you're seeing on a geographic basis, particularly, I think investors have been concerned about the momentum in enterprise in Europe and ex-Russia, if you can give any color on what you're seeing in that region? And also, I don't know if you sort of pointed out what the order impact on the order number was from the Russia exit as well? Thank you.

Tarek Robbiati:

Yes. So, let me add on the last part of your question. So, the impact from Russia on orders was negligible. This was not something that has affected our orders. China and Russia together, obviously, with Belarus, impacted our revenue by $250 million, the majority of that impact relates to China. And the Russia impact specifically is related to the fact that we cannot operate any more in the country and serve existing customers with our services contracts, and therefore, this has been factored into the impact. I've described that totals for China and Russia, 1% impact on total operating profit margins and $0.06 on EPS overall. But again, the majority of these impacts were driven by the China disruptions on the supply side of the equation. And yes, I agree with Antonio on the -- totally agree on the resiliency of the demand. I simply want to add the fact that even though there could be a slowdown in the EU, the European governments are ramping up a number of initiatives that are all in our favor in the digital space, which gives us confidence for the medium to long-term.

Andrew Simanek:

Great. Thanks for that Samik. Can we get the next one please?

Wamsi Mohan:

Yes, thank you. I hear your comments about the confidence around the demand trajectory and that orders continue to be very strong. But as you look into the second half, can you talk about how those demand trends are breaking out across regions, if you're seeing any variability from 90 days ago? And you also sort of maintained your free cash flow guide, but EPS, you alluded to some of these impacts, the $0.06 that you alluded to, Tarek, but you're maintaining your free cash flow. What are some of the offsets that are allowing you to do that? And when you look at the second half free cash flow that needs to come in extremely strong, so can you talk about what levers we should expect within those free cash flow moving pieces that get you to your guide across the second half? Thank you.

Tarek Robbiati:

Yes, sure. So first Wamsi, if you want a rough rule of thumb when you're looking at EPS changes and how these EPS dollars translate or sense translates into free cash flow, every cent of EPS is essentially $13 million to $15 million, right? So when you look at the lowering of our guidance is very much contained in the guidance we gave at the free cash flow level. So the lowering of our guidance back to the SAM 2021 guide is very much contained in the free cash flow guide that we gave you. And the reason why we gave you this free cash flow guide was because of the working capital assumptions that we had made at the beginning of our fiscal year. So I feel comfortable that we are within the free cash flow guide. Now the second part of your question is what makes you confident that in the second half, you can generate this quantity of free cash flow given where you are at the end of the first half. I would simply say to you that we expect, first and foremost, working capital to become a tailwind in the second half as opposed to the first, where it was a headwind because of the inventory actions that we've taken. And by the way, we've done this before. In fiscal year 2019, I want to remind everybody, we generated in the first half, $200 million of free cash flow and in the second half, we generated $2.2 billion. So, more than -- 10 times more than what we generated in the first half. This was offset by $666 million that we had to pay for an arbitration case that we lost at the time in fiscal year 2019. And we had very little time to turn around and offset the impact of that arbitration case, and yet we came into our guide that we gave at the time. And really look also at the trends on operating free cash flow that we highlighted to you as part of this call, you will observe that our seasonality is very much in line with fiscal year 2019 and fiscal year 2020. Fiscal year 2021 was a different story because in fiscal year 2021, you add the impact of restructuring costs that were affecting free cash flow. And if you will observe the detail of our press release with the tables that we provided you, you will see that our restructuring costs are coming down overall relative to fiscal year 2021. So, lots of puts and takes there, but we are happy to reaffirm the free cash flow guide of $1.8 billion to $2 billion.

Andrew Simanek:

Great. Thanks, Wamsi, for the question. Appreciate it. Can we go to the next one please, Chuck?

Rod Hall:

Yes, hi guys. thanks for the question. I guess in the ongoing spirit of trying to make sense of an incredibly complicated supply situation, I wanted to come back and kind of maybe juxtapose your performance here against a couple of other companies. So, if I look at Cisco, they, I would say, objectively performed quite a bit worse on supply than you guys did. You had some sort of a middle of the road impact, not too bad of an impact from what I can tell in the numbers. And then if I look at Dell, they had almost no impact. Although Dell did call out some looking forward issues with server supply. So, I just wonder if you could dig into that a little bit for us and kind of help us understand some of the puts and takes around supply, maybe why those differences of performance emerged? And then I have a follow-up.

Tarek Robbiati:

Yes. I want to add also, Rod, that the -- in what you said, it's really important to look at what happens at the bottom line and at the margin level. And when you really look at how we've outperformed Dell on the margin level, Q1 and Q2, considering it simply the compute margins alone compared to the ISG margins is very telling.

Rod Hall:

Great. Okay, guys. So I am going to leave it there. Thank you very much for the answers.

Operator:

The next question will come from Irvin Liu with Evercore ISI. Please go ahead.

Antonio Neri:

That's a great question. We see that more and more. Obviously, I think what customers are battling is the fact they are going through a multigenerational IT journey here. That they have to modernize. The fact that data has gravity and obviously, some industry are more regulated than others. Then you talk about latency and experience that really matters. Cost, obviously, is another big component because at scale, they need to comprehend the cost aspect of it. And GreenLake is an amazing platform we have developed over the years to give them access, flexibility, and control against all the needs. In a way, they are moving away from running IT to more innovating on IT and that's why this data-first modernization approach is so relevant. And that's why we already have more than $6 billion in the balance sheet related to the HPE GreenLake business, which again grew 107% in Q2. And obviously, that -- those bookings eventually will unwind from the balance sheet and through the P&L. And the other important fact here that Tarek show in one of his slides, is the fact that our mix of GreenLake is shifting every single quarter to more software and services, which obviously comes with a significant higher margin than just the hardware. So, that's why I think about the order momentum is super strong, the marquee type of customers across events is super strong. The fact that we keep adding capabilities, the mix is shifting and that's totally accretive to our gross margin as we go forward. And this is one of the key moments of our company, transforming into a relevant platform that customers can use as they go through this journey that we just -- that you just highlighted.

Operator:

Our last question will come from Kyle McNealy with Jefferies. Please go ahead.

Antonio Neri:

Sure. Listen, I'm continuing to be incredibly bullish about this business. Supercomputing is necessary to advance AI and deep learning solutions to solve some of the biggest societal challenges and honestly, climate and other. As I think about the current situation we are in, we have almost $3 billion in backlog. A couple of two quarters ago, we were talking about $2.5 billion and maybe a year, $1 billion, $1.5 billion. So, we have been continuing to grow the momentum with customers. By the way, it's all over the world. If you look at the wins, including the number three supercomputer called Lumi, that's in Europe. We have also supercomputers in France, in Germany and so forth. So, we are clearly the market leader there. However, this business is lumpy, as we said, right, from the time you book the order to time you recognize revenue, it can be several quarters. And the reason that's the case is because there are large installations and customers need to go through their own process to validate the world load. And over time, right, we're going to have a quarter, you're going to see a massive growth in revenue, which is not linear in many ways as many of those customer systems gets accepted. So, -- but in terms of margins, I will let Tarek comment on this. Obviously, have to look at long-term, not just quarter-by-quarter because that's not how this business works.

Andrew Simanek:

Great. Thanks, Kyle, for the last question. Antonio, I'll turn it over to you for some closing remarks.

Andrew Simanek:

Thanks, everyone.

Andrew Simanek :

Thank you. Good afternoon. I'm Andy Simanek at Investor Relations for Hewlett Packard Enterprise. I'd like to welcome you to our fiscal 2022 first quarter earnings conference Call with Antonio Neri, HPE’s President and Chief Executive Officer and Tarek Robbiati HPE’s Executive Vice President and Chief Financial Officer. Before handing the call over to Antonio, let me remind you that this call is being webcast. A replay of the webcast will be made available shortly after the call for approximately one year. We posted the press release in the slide presentation accompanying today's earnings release on our HPE investor relations webpage at investors.hpe.com. As always, elements of this presentation are forward-looking and are based on our best view of the world and our businesses as we see them today. For more detailed information, please see the disclaimers on the earnings materials relating to forward-looking statements that involve risks, uncertainties and assumptions. For a discussion of some of these risks, uncertainties and assumptions. Please refer to HPE’s filings with the SEC including its most recent form 10-K and Form 10-Q. 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 quarterly report on Form 10-Q for the fiscal quarter ended January 31, 2022. Also for financial information that has been 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. Throughout 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, after Antonio provides his high level remarks, Tarek will be referencing the slides in our earnings presentation throughout his prepared remarks. As mentioned, the earnings presentation can be found posted to our website and is also embedded within the webcast player for this earnings call. With that, let me turn it over to Antonio.

Tarek Robbiati :

Thank you very much, Antonio. I'll start with a summary of our financial results for the first quarter of fiscal year 2022. As usual, I'll be referencing the slides from our earnings presentation to guide you through our performance. Antonio discussed the key highlights on slide one. So now let me discuss our Q1 performance details starting with Slide 2. We're off to a good start delivering against our commitments for fiscal year ’22 with strong momentum continuing to build across the business. The demand continues to be robust for our differentiated edge-to-cloud portfolio with order growth up 20% year-over-year, marking our third quarter in a row with order growth at or above 20% year-over-year. This bolsters our confidence in achieving both our fiscal year ‘22 revenue outlook of 3% to 4% adjusted for currency and our longer term 2% to 4% revenue CAGR outlook provided at our 2021 securities analyst meeting. We delivered Q1 revenues of $7 billion, up 2% year-over-year and in-line with our outlook of normal sequential seasonality, despite a continuously challenging supply environment. As a result, our backlog further increased to record levels with a firm order book that shows no signs of double ordering, or any noticeable cancellations. We were particularly pleased with the quality of our earnings including the resiliency of our gross margins, despite the ongoing supply constraints that are driving up material and logistics costs. We delivered non-GAAP gross margin of 33.9%, up 90 basis points sequentially and 20 basis points year-over-year, driven primarily by strong pricing discipline and our continued mix shift towards higher-margin, software-rich offerings. Non-GAAP operating margin has also been resilient at 11%, slightly down 30 basis points year-over-year, but up 130 basis points sequentially. We're achieving all of the expected savings from our cost actions announced mid-pandemic while continuing to make investments in our high growth, margin rich areas of our portfolio to fuel further revenue and profitability. Within other income and expense, we benefited from further strong gains related to increased valuations in our investment portfolio and robust operational performance in HPC. As a result, we now expect non-GAAP other income and expense for fiscal year '22 to be an income of approximately $25 million versus prior guidance of a $20 million to $40 million expense. As a result of our strength in margins that more than offset the continued supply challenges, we delivered non-GAAP EPS of $0.53, well above the high-end of our outlook range of $0.42 to $0.50 for Q1. As previously indicated, we expect the free cash flow to be in-line with our typical seasonality that is lowest in Q1, with a use of cash of $577 million for this quarter. We also continue to take strategic inventory actions to navigate the current supply environment. Our inventory is now up $2.5 billion year-over-year to $5.3 billion in support of the substantial order book that we have. This will better position us to convert orders into future revenue and cash flow. Finally, we continued to return substantial capital to our shareholders. We paid $155 million of dividends in the current quarter and are declaring a Q2 dividend today of $0.12 per share payable in April. We also repurchased $129 million in shares during Q1, reflecting our confidence in future cash flow generation. Slide 3 highlights key metrics of our growing as-a-service business. We made meaningful progress during Q1. We added more than 100 customers and well over $500 million of total contract value that brings the current total TCV to more than $6.5 billion. Total as-a-service orders were up 136% year-over-year. As a proof point of our as-a-service pivot momentum as a service order growth has accelerated every quarter going back to Q1 of last year. Our ARR was up 23% year-over-year to $798 million with supply constraints limiting some installations. While our ARR growth might be somewhat volatile in the current supply environment, the strong rate accelerated -- accelerating order growth over the last several quarters is the best indicator of long-term health of this business. This gives us confidence in delivering our 35% to 45% CAGR target from fiscal year '21 to fiscal year '24, with increasing margins as our mix of both software and services continue to increase to 64% in Q1, up more than 4 points year-over-year. Now let's turn to our segment highlights on Slide 4. Our growth businesses continue to show improving top line momentum and record levels of backlog fueled by strong demand. In the Intelligent Edge, demand for our secure connectivity solutions continued unabated with orders growing more than 35% year-over-year, the fourth consecutive quarter. Despite increasing supply constraints, revenue grew 11% year-over-year with strength across the portfolio. Both wired switching and wireless LAN grew approximately 10% with Aruba Services up even stronger driven by our Edge-as-a-Service offerings up strong double digits. We also delivered strong operating margins of 17.4%, this is a 650 basis point sequential improvement despite higher component and logistics costs, demonstrating that our price actions are sticking. In HPC and AI, demand remains robust with product order growth of more than 20% year-over-year, driving our awarded contracts total to another record level of approximately $2.7 billion. Revenue grew 4% year-over-year, but was impacted by two large customer acceptance delays that impacted growth by more than 10 points in Q1 and are now on track to be delivered in Q2. Our Q1 operating profit was obviously also impacted by these pushouts, and we expect operating margins to return to more in range with historical levels going forward. In compute, order growth was up over 20% year-over-year for the third consecutive quarter, while revenue growth was flat, reflecting the difficult supply environment. We have been very focused on executing a dynamic pricing strategy that has been effective in managing the increased supply and logistic costs. The results are showing up in our operating margin performance at 13.8%, up 240 basis points year-over-year and 440 basis points sequentially, well above our long-term target of 11% to 13%. Within storage, product order growth was up in the high teens year-over-year. This was the fourth quarter in a row of 15% or better year-over-year product order growth. Revenue was down 3%, reflecting increasing supply constraints, particularly for our owned IP products. As a result, we had an unfavorable revenue mix that pressured our margins this quarter. We expect both our revenue growth rates and margins to improve over the next few quarters as we continue to shift our portfolio towards higher-margin products and supply constraints ease. With respect to Pointnext Operational Services, including storage services, orders grew mid-single digits year-over-year as reported similar to levels for total fiscal year '21. As you know, this is a very important for the long-term health of our most profitable business. Within HPE Financial Services, volume increased 11% year-over-year, and revenue was down 1%. Our write-offs as a percentage of assets, excluding the impact of two frauds in the UK and Asia Pacific was 47 basis points, which is below pre-pandemic levels. Our profitability also continues to benefit from higher residual value's realization and lower borrowing costs as we continue to securitize our U.S. portfolio via the ABS market. Our operating margin was 12.4%, up 260 basis points from the prior year, and our return on equity at 19.7% remains well above the 18% plus target set at SAM 2021. Slide 5 highlights our revenue and EPS performance where you can clearly see the strong rebound from last year and sustained momentum entering fiscal year '22, and this despite a more supply-constrained environment versus a year ago. We are also delivering a better quality of earnings with our portfolio mix continuing to shift to our higher growth and higher margin execute our edge-to-cloud strategy. Turning to Slide 6. We delivered non-GAAP gross margins in Q1 of 33.9%, up both year-over-year and sequentially despite all of the increased component and logistic costs. This was driven by both strong pricing discipline and the favorable mix shift we've been driving towards edge and our as-a-service business. Moving to Slide 7. You can see our non-GAAP operating margin this quarter of 11%, representing a 130 basis point sequential increase. We also delivered roughly the same operating profit versus last year despite a more challenging supply environment while continuing to invest significantly more in both R&D and our go-to-market for the future, thanks to a much better quality of earnings and gross margins. Turning to Slide 8. Our free cash flow was a use of cash of $577 million. This is more aligned to our typical pre-pandemic seasonality if you look at Q1 in fiscal year '20 or the prior years. Cash flow in Q1 of this year has also been uniquely impacted by the supply chain environment as we have strategically continued building inventory levels. This will better position us to begin converting orders and generate healthy amounts of cash in the back half of the year, reflecting also our typical seasonality. We, therefore, continue to expect to deliver fiscal year '22 free cash flow of $1.8 billion to $2 billion. Now turning to our outlook on Slide 9. Given our strong performance in Q1 and building momentum across the business, I am pleased to announce that we are raising our full year non-GAAP diluted net EPS outlook range for fiscal year '22 by $0.07 at the midpoint to $2.03 to $2.17. From a top-line perspective, we were very pleased with the continued strength in orders and growing backlog that gives us confidence in future revenue growth in fiscal year '22 and beyond. We do also want to remain prudent in the short term given the ongoing supply challenges that we continue to believe will likely last well into the second half of the calendar year. As a result, we still have strong confidence in our fiscal year '22 revenue outlook of growth of 3% to 4% and expect to end the year with elevated levels of backlog, which bodes well for fiscal year '23. More specifically, for Q2 2022, we expect revenue to be in-line with our normal sequential seasonality of down low to mid-single digits and are comfortable with current consensus. As a result, for Q2 '22, we expect GAAP diluted net EPS of $0.18 to $0.26 and non-GAAP diluted net EPS of $0.41 to $0.49. So overall, I am very pleased with our first quarter of fiscal year '22. Our edge-to-cloud strategy is resonating with customers and driving strong demand across our portfolio. This enabled us to deliver a good start to the fiscal year with increasing momentum and a raised outlook. We are very well positioned to capitalize on the ongoing opportunity and deliver against all of our financial commitments set at SAM 2021. Now with that, let's open it up for questions. Thank you.

Shannon Cross :

Thank you very much. I wanted to maybe dig a little bit more into linearity during the quarter and what you're hearing from customers in terms of demand given all the geopolitical challenges. You talked about backlog increasing to record levels. I'm wondering, how much of that do you think our customers planning ahead? Or thinking about longer lead times versus near-term demand that's not just being able to be met right now? And I don't know, just what are you hearing because are customers sort of shifting the way that they think about how they're buying at this point in time? And I guess just the final sort of question within that is, how does this benefit or does it benefit your GreenLink and your as-a-service strategy? Thank you.

Andrew Simanek :

Great. Thank you, Shannon. Appreciate the question. Operator, can we have the next one, please?

Wamsi Mohan :

Yes, thank you. Congrats on the really solid gross margin performance in a very tough environment where others are really seeing a lot of pressure on their GP dollars and gross margins. I was hoping you can talk about the sustainability of these gross margins through the rest of the year, especially in light of the increasing DRAM and NAND cost? And it seems as though some of the logistics are really not letting up so far? And maybe you can share some color on your ability to take incremental price actions and maybe share some color on what you've already been able to pass through in terms of pricing? Thank you.

Andrew Simanek :

Great. Thank you Wamsi for the question. Operator, can we have the next one, please?

Tim Long :

Thank you. Yeah, I was hoping to just follow up on some of the as-a-service business and deals. You mentioned getting some large deals and more backlog building there. Could you talk a little bit about kind of the complexion of what you're seeing from a solution set or a customer base driving that? And maybe a little bit on kind of what you see from pipeline on some of the customers looking to more take on the as-a-service type of offering as opposed to just kind of the standard of the build and buy? Thank you.

Andrew Simanek :

Great. Thanks, Tim for the question. Operator, next one, please?

Meta Marshall:

Great. I wanted to dig into the intelligent edge upside. You noted that order growth was still stronger than the revenue growth that you guys were able to post. And so kind of two parts of the question are just is some of the order growth that you're seeing still kind of return to office plans? Are we really starting to kind of move past this return to office-driven growth? And then on the second piece, just on the revenue upside that you were able to post, is that some kind of loosening of availability for networking chips? Or is there anything that led to kind of outperformance in that segment or losing the supply chain in that segment more than others? Thanks.

Andrew Simanek :

Great. Thank you for the question, Meta. Can we go to the next one, please, operator?

Sidney Ho :

Thanks for taking my question. I have a couple of questions on the ARR side, ARR didn't grow on a sequential basis for the first time in a while. I know you talked about supply challenges, limiting some of the installations. Is there a seasonality element to the ARR growth? That's question number one. And secondly, GreenLake Services growth continued to accelerate more than double for the second consecutive quarter. Can you walk us through how long it takes for GreenLake orders to flow into the ARR calculation? I assume it's different for every business segment. Thanks.

Tarek Robbiati :

Yeah. So I mean, the simple answer to your question on how long does it take to see an order flow into the ARR and revenue terms is this. Our GreenLake model is an appliance-driven model, where effectively you have a complete stack from standard hardware platforms with services and software on top. And so to the extent that we have to deliver that complete stack solution, it takes -- obviously, it's important that we deliver the right hardware to be able to start to recognize the revenue. By the moment we deliver the appliance and the revenue flows based on the contract duration, and we have flagged to you and possibly to -- in prior occasions that the services revenue, which makes the bulk of the ARR with the software is recognized overtime over the duration of the contract. And the contract duration varies between 36 and up to 55-58 months, in some cases, 60 months. And so this is why it takes time to develop the ARR. But the really important thing to note is the size of the total contract value that we have on the balance sheet. So if you really look at the contract value that we have on the balance sheet, we increased it by $500 million in this quarter, taking the total to $6.5 that will unwind in the upcoming, say, 60 months at the worst. So that's the dynamic that you have here in terms of orders versus revenue and ARR recognition.

Andrew Simanek :

Great. Thanks, Sidney for the question. Operator, next one please?

Aaron Rakers :

Yeah, thanks for taking the question. And congrats on the results. I guess I wanted to kind of frame you -- how you're thinking about the full year revenue of guidance at 3% to 4% relative to the backlog build. So if I look at the revenue guidance at the midpoint, it would seem to suggest you expect a stronger second half relative to what we've seen over the past few years, second half versus first half. So I guess my question is what's your assumptions around backlog build? And when maybe we see that peak and you start to ship against that backlog, is that factored into your revenue growth expectation from this year?

Tarek Robbiati :

Yeah. Aaron, if I can add to Antonio's answer. When we gave guidance at SAM, we told you all that we are targeting 3% to 4% revenue growth in fiscal year '22 with the second half of the year counting for more than the first half of the year. Nothing has changed to that picture. If anything, the order strength is greater than what we anticipated at SAM, and it surprised us somewhat in because -- and I just want to remind you what Antonio said in his first answer to the first question, orders have been strong for 13 weeks in Q1. And so when you really look at what's happening on two fronts

Operator:

The next question will come from Amit Daryanani with Evercore. Please go ahead.

Antonio Neri :

Okay. So Tarek?

Andrew Simanek :

Yeah, so that's generally related to our comp plans where we pay out our bonus in the first quarter. So that's one of the reasons why if you look at our typical seasonality. As Tarek said, going back to fiscal year ’20, a year before, you'll generally see Q1 is always a use of cash. Great. Well, thank you, Amit. I appreciate the question. I think operator, we have time for one more, please.

Kyle McNealy:

Hi, thanks for squeezing me in. Great job on the results in such a difficult environment for everyone else. We have some recent survey work that we did that shows enterprises are expecting a higher-than-normal level of refresh activity in the coming year, specifically for servers and storage. We assume that some of that might be catch-up on upgrading aging infrastructure coming out of the pandemic. But are you seeing that type of activity come through in helping the results? And what would be your expectation for refresh and upgrade activity for the balance of the year 2022?

Andrew Simanek:

Well, great. Thank you, Kyle for the question and everybody else participating. Antonio maybe I’ll turn it back to you for some closing remarks.

Operator:

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

Jeff Kvaal:

Good afternoon, everyone. I'm actually Jeff Kvaal of Investor Relations. I'm filling in for Andy today. I'd like to welcome you to our fiscal 2021 fourth quarter earnings conference call with Antonio Neri, HPE’s President and Chief Executive Officer; and Tarek Robbiati, HPE’s Executive Vice President and Chief Financial Officer. Before handing the call over to Antonio, let me remind you that, this call is being webcast. A replay of the webcast will be made available shortly after the call for approximately one year. We posted the press release and the slide presentation accompanying today’s earnings release on our HPE Investor Relations web page at investors.hpe.com. As always, elements of this presentation are forward-looking and are based on our best view of the world and our businesses as we see them today. For more detailed information, please see the disclaimers on the earnings materials relating to forward-looking statements that involve risks, uncertainties, and assumptions. For a discussion of some of these risks, uncertainties, and assumptions, please refer to HPE's filings with the SEC, including its most recent Forms 10-K and Form 10-Q. 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-Q for the fiscal quarter ended January 31, 2021. Also, for financial information that has been 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. Throughout this conference call, all revenue growth rates, unless otherwise noted, are presented on a year-over-year basis and are adjusted to exclude the impact of currency. Finally, we will be referencing the slides and our earnings presentation throughout our prepared remarks. As mentioned, the earnings presentation can be found posted to our website and is also embedded within the webcast player for this earnings call. With that, let me turn it over to you, Antonio.

Tarek Robbiati:

Thank you very much, Antonio. I'll start with a summary of our financial results for the fourth quarter of fiscal year 2021. And as usual, I'll be referencing the slides from our earnings presentation to guide you through our performance in the quarter. Antonio discussed the key fiscal year 2021 highlights on Slides 1 and 2, so now let me discuss our Q4 performance, starting with Slide 3. I am very pleased to report that we continue to see unprecedented demand across all our businesses with robust order growth, up 28% year-over-year. Building on the strength from the last quarter, we delivered Q4 revenues of $7.4 billion, up 7% from the prior quarter above normal sequential seasonality and this despite increased supply chain challenges that we foreshadowed at SAM last month. It's also worth highlighting that $7.4 billion of revenue represents the highest level since Q1 of fiscal year 2019, well before the pandemic. Our non-GAAP gross margin was 33%, which was up 230 basis points from the prior year. And this was driven by our deliberate actions to shift towards higher-margin software-rich offerings, strong pricing discipline and cost takeout. As previously indicated, gross margins were pressured from prior quarter levels due to an increasing industry-wide shortages of certain components that have resulted in extended lead times and higher commodity costs underpinning backlogged orders. We continue to take proactive inventory measures and display healthy price discipline to minimize the impact of recent disruptions. We expect this dynamic supply chain situation to last well into calendar year 2022. We also continue to invest in high gross margin-rich areas of our portfolio. We've made investments in our overall go-to-market to accelerate our growth and our shift to an as-a-Service model. Even with these investments, our non-GAAP operating margin was 9.7%, up 120 basis points from the prior year, which translates to a 16% year-over-year increase in operating profit. Within other income and expense, we benefited from further strong gains related to increased valuations in our Pathfinder venture portfolio, an outstanding operational performance in HPC that I will address in more detail later. With strong execution across the business, we ended the quarter with non-GAAP EPS of $0.52, up 27% from the prior year and at the high end of our outlook range for Q4. Excluding $2.2 billion of after-tax proceeds received from Oracle satisfaction of the judgment in the Itanium litigation, Q4 cash flow from operations was $784 million, and free cash flow was $94 million. For fiscal year 2021, this brings our total cash flow from operations to $3.7 billion, up $1.5 billion from the prior year, and our free cash flow to $1.6 billion, up $1 billion from the prior year driven primarily by an increase in earnings. Our strong execution and cost optimization and resource allocation program has effectively put us one year ahead of schedule with respect to delivering our previous free cash flow targets. Finally, the strength of our cash flow has positioned us to return substantial capital to our shareholders. We paid $157 million of dividends in the current quarter and are declaring a Q1 dividend today of $0.12 per share payable in January. We also reinstated our share repurchase program in Q4 buying $213 million in shares, reflecting our confidence in future cash flow generation and our view that the stock is undervalued. Slide 4 highlights key metrics of our accelerating as-a-Service business. We have made significant progress over the last year by adding over 300 new enterprise GreenLake customers to over 1,250 today and increasing our TCV by over $1.5 billion to our current lifetime TCV of over $5.7 billion. For Q4 specifically, our ARR was $796 million, which was up 36% year-over-year as reported and total as-a-Service orders were up 114% year-over-year, which represents an acceleration from Q3, demonstrating the strong momentum we are experiencing in this business. It's also important to remember the incremental disclosure we provided at SAM 2021, highlighting the significant proportion of software and services in our offerings that together make up more than 60% of the ARR mix today. We expect this mix percentage to expand to more than 75% by fiscal year 2024 as we add more software capabilities driving further gross margin improvement. Overall, based on strong momentum this year, I'm very happy with how this business is progressing, which gives us confidence to increase our ARR growth targets by 5 points to a 35% to 45% CAGR from fiscal year 2021 to fiscal year 2024. Let's now turn to our segment highlights on Slide 5. Our growth businesses, which now represent nearly 25% of our total company revenue, generated record levels of orders, up strong double-digits. In the Intelligent Edge, revenue grew 2% year-over-year in Q4 and for fiscal year 2021 was up 13%. Demand continued unabated in Q4 with order growth up over 50% year-over-year, but the component shortages we foreshadowed at SAM were more pronounced in our Aruba business. Additionally, our Edge-as-a-Service offerings were up trip triple digits year-over-year, significantly contributing to our ARR. We delivered a multimillion-dollar NaaS, Network-as-a-Service deal in Q4 for a large US customer, which represented more than 800 basis points headwind in the short-term to Aruba revenue in Q4, but will help our long-term financial profile in the business. Aruba Services also continued to grow strongly, up high single digits. Looking forward, we expect it will take some time for supply chain challenges to ease, but we finished fiscal year 2021 with over $4 billion in orders which will give us strong momentum through fiscal year 2022. In HPC & AI, demand strengthened even further with another record level of orders. Revenue grew 35% sequentially and was flat year-over-year with a difficult compare. We did have customer acceptances of some large contracts get pushed out into fiscal year 2022. And we now have $2.7 billion of awarded contracts in addition to the $2 billion contract awarded by the NSA, giving us confidence for next year and beyond. We expect robust revenue growth in fiscal year 2022 to get us back within the range of our original long term 8% to 12% CAGR outlook. In Compute, order growth was up strong double digits. Revenue grew 4% quarter-over-quarter, reflecting above normal sequential seasonality and was up double digits year-over-year when normalizing for the Q4 FY 2020 backlog. Operating margins of 9.4% were up 280 basis points from prior year due to disciplined pricing and the rightsizing of the cost structure in this segment. Within Storage, order growth accelerated and was up double digits year-over-year. Revenue grew 2% year-over-year and 7% quarter-over-quarter ahead of normal sequential seasonality, driven by strong growth in software-defined offerings. All-flash arrays grew 7% year-over-year, led by Primera, up strong double digits. Nimble grew 4% year-over-year, with ongoing strong dHCI momentum, growing double digits year-over-year. Storage operating profit margin was 13.8%, reflecting OpEx investments to continue driving product mix shift towards more software-rich platforms, including our cloud data services. With respect to Pointnext operational services, including Nimble services, orders accelerated and were up high single digits in Q4 and up mid-single digits for fiscal year 2021. Most importantly, revenue also grew as reported overall for fiscal year 2021, the first time in several years. This is, again, very important, as we enter fiscal year 2022 with strong momentum in our most profitable business. Within HPE Financial Services, volume increased 18% year-over-year, driven by strong double-digit growth in GreenLake. Revenue was up 3% sequentially and flat year-over-year. Our profitability is also benefiting from higher residual values realization and lower borrowing costs, as we continue to securitize our U.S. portfolio via the ABS market. Our operating margin was 14.1%, up 630 basis points from the prior year, and our return on equity at 23.8% is well above the 18% plus target set at SAM 2021. Slide 6 highlights our revenue and EPS performance, where you can clearly see the strong rebound from last year and sustained momentum throughout fiscal year 2021. As mentioned previously, Q4 revenue of $7.4 billion is the highest level we've delivered since Q1 2019. With a strong demand environment, our strategic business mix shift and execution of our cost optimization and resource allocation program, we increased our Q4 non-GAAP EPS to $0.52, up 27% year-over-year. Turning to Slide 7. We delivered non-GAAP gross margins in Q4 of 33%. While rates were impacted as expected sequentially from the supply chain challenges previously discussed, we expanded gross margins up 230 basis points from the prior year. This was driven by strong pricing discipline and a positive mix shift towards high-margin software-rich businesses. In total, in fiscal year 2021, we delivered nearly $900 million of incremental gross profit. Moving forward, we will face lingering supply chain challenges in the near term, but longer term, structural gross margins will improve from continuous mix shift towards the intelligent edge or IP storage Green Lake and all of our as-a-Service offerings. Moving to Slide 8. You can see we have utilized some of the incremental gross profit to make targeted growth investments while simultaneously expanding non-GAAP operating profit margins. We have increased our investment levels in R&D to fuel our long-term innovation engine and still selling costs to accelerate our growth and higher shift to our as-a-Service pivot. Even with these investments to drive long-term growth, we delivered operating margins in Q4 of 9.7%, up 120 basis points from the prior year. On Slide 9, we want to highlight our unique setup in China through our investment in HPC that has and continues to generate tremendous value for our shareholders. Our investment and commercial agreement gives us a route-to-market in the second largest, fastest-growing IT market in the world. As you know, we do not consolidate revenue and operating profit from HPC, but recognize our 49% share of HPC's earnings through the equity interest statement line on our P&L as part of other income and expense. HPC has delivered outstanding operational performance throughout the year and generated $257 million of equity interest in fiscal year '21, which was up 21% from the prior year. This makes our business in China a very large contributor to our P&L, one that no other multinational has been able to replicate. Turning to Slide 10. We finished fiscal year '21 generating $3.7 billion of cash flow from operations and $1.6 billion of free cash flow, and this excluding, obviously, the $2.2 billion of after-tax, cash received from Oracle satisfaction of the Itanium litigation. Free cash flow was up $1 billion year-over-year and is $600 million more than the midpoint of our outlook at the start of fiscal year '20, primarily driven by increased earnings. Our cash flow profile is becoming more predictable and aligned to profitability as our restructuring costs diminish, and we grow our as-a-Service business beginning to recognize more deferred revenues from software and services. Moving on to Slide 11. We have made further progress enhancing our balance sheet strength with a strong free cash flow and payment from Oracle. Following the receipt of the cash from the Itanium litigation, we redeemed early, our $1 billion 4.65% coupon outstanding 2024 notes and this in a positive NPV transaction that is net debt-neutral. The premium paid was a GAAP-only expense in Q4, and we will realize meaningful interest expense savings over the next three years. We are now in an operating company net cash position of $1.8 billion. Bottom line, our improved free cash flow outlook and cash position ensure we have ample liquidity available to balance long-term growth investments with consistent return of capital to our shareholders. Now, turning to our outlook on Slide 12. At our Securities Analyst Meeting last month, we provided our outlook for fiscal year '22, and I would like to encourage you to review my presentation for a more detailed discussion of that outlook. Having said that, let me reiterate the drill down into a few key components. We expect fiscal year '22 revenue growth in constant currency of 3% to 4%. As discussed, the supply chain environment remains very dynamic, and we expect component shortages with increased commodity costs, expedite and shipping fees to last for the next few quarters impacting near-term revenue and gross margins. In a nutshell, we expect to have more of a back-end loaded year in fiscal year '22 with the supply chain risk that we discussed reflected in our fiscal year '22 guidance. We expect non-GAAP EPS to be $1.96 to $2.10 and free cash flow to be $1.8 billion to $2 billion. We expect free cash flow to be more in line with historical seasonality where the second half is a stronger generator of cash than the first half. Now specific to Q1 revenue, given the very strong backlog balanced by supply chain constraints, we expect revenue to be in line with normal sequential seasonality of down mid-single digits from Q4 of fiscal year 2021 and are comfortable with current consensus levels. We also expect gross margins to be pressured in the short-term given supply chain. As a result, for Q1 2022, we expect GAAP diluted net EPS of $0.19 to $0.27 and non-GAAP diluted net EPS of $0.42 to $0.50. So overall, I'm very proud of our progress throughout our strong fiscal year 2021. As Antonio said, we exceeded all our key financial targets in fiscal year 2021, often by a significant margin. The demand environment has been incredibly strong across our business with acceleration in the second half of fiscal year 2021; demonstrating that our edge-to-cloud strategy is working well and that we are entering fiscal year 2022 with strong momentum. We are now well-positioned to capitalize on the opportunity in front of us and deliver against our fiscal year 2022 outlook. Now with that, let's open it up for questions.

Shannon Cross:

Thank you very much. I wanted to dig a little bit more into the as-a-Service performance. Obviously, orders are extremely strong during the quarter. How much of that was from the one-time - not one-time, but from the large contract signed, how should we think about the longer-term growth potential, how it flows through the model as we look to the next year or two? And I don't know maybe if you can give a little bit more on the composition of the as-a-Service, is there any one product, or service that's really driving that business at this point in time? Thank you.

Tarek Robbiati:

So yes, Sharon, I mean, Antonio said already quite a few things. So first and foremost is one - the first - this first and largest network as-a-Service contract contributed to orders in Q4 substantially, but did not contribute to the ARR because the revenue will be recognized over time. But notwithstanding that, the ARR, if you really look at our ARR progression quarter-after-quarter in fiscal year 2021, it's outstanding. We did $649 million in Q1 of ARR, grew that to $678 million in Q2, $705 million in Q3 and now approaching $800 million, $796 million to be precise in Q4. So the momentum in this business is extremely strong, and there isn't a particular business unit that is contributing. We're executing an integrated strategy that is about edge, cloud and data. Right now, the main contributors are the various parts of the organization that fit these three pillars. Aruba is one of them. The Storage business unit is another one. We will also continue to expand our as-a-Service offerings in HPC and AI because we see a tremendous opportunity there. And the future will tell us how big that opportunity will be for us. But we firmly believe in it.

Operator:

The next question is from Wamsi Mohan with Bank of America Merrill Lynch. Please go ahead.

Antonio Neri:

Sure. Well, I mean, if you look at our results, right, once - right, so we grew orders. Total company orders 16% year-over-year, but our revenue in actual dollars was up 3%. Obviously, there is a big divergence there between 16% and 3%, right? And that's driven by the supply availability. Despite the fact that we continue, I think, do a great job navigating through the challenge. And the one area I'm really particularly pleased, one say is the fact that linearity in the business in the way we approach customers that book orders is now more front end and back end in the quarter itself. I always talk about quarters having 13 weeks and what is amazing to me in the last couple of quarters, the bookings have been more on the front end than the back end, which allows us, actually. It's a little bit counterintuitive if you think about it. The more orders are - bring early on, the more I can convert despite the supply chain challenges because I have more time and more velocity, if you will. So listen, as Tarek said, and I said in my remarks, short-term, we're going continue to navigate. This is an industry-wide challenge. But we're very confident with the actions we are taking ourselves. And the fact of the matter is that that backlog is very durable. People asked me early on, have you seen cancellation? I can tell you right now, zero, no cancellations whatsoever. And the orders coming in every day, every week is incredibly strong. So, we have to navigate the next quarter or two. And then based on our understanding and the work we have done with our suppliers, the second half will be better. And then also remember, we have, I think, world-class capabilities, both on the supply chain operations and our engineering capabilities to be able to adjust components based on the bump. And then also, remember, a big chunk of the backlog is related to acceptances in the customer base with HPC, which is already built and shipped. But as you know, we cannot recognize revenue until fully accepted. This quarter, we recognized a customer, which had a large order in HPC. But remember, in 2022, we have the large exascale deals and one of them is going to be very important for us as we think about the back half of the year. So, that's why Tarek and I are very confident in that 3% to 4% guidance. And let's remind ourselves in the 3% to 4% guidance, we have 1 to 1.5 points of headwind because of the transition towards as a service, right, which is great, is durable is long-term growth. And so you normalize for that, it's more like 5% to 5.5%, if you will. And then on top of that, you have to add the currency, which obviously is a headwind in the sense that the 3% to 4% is constant currency. So, if you are all of that, we are more than like in the 7% to 8% growth. And remember that Q4 was a $7.4 billion, the largest quarter despite the supply chain going all the way back to 2019.

Operator:

The next question is from Simon Leopold with Raymond James. Please go ahead.

Antonio Neri:

Well, glad you call it massive because we agree with you. It's a strong momentum and clearly was stronger in Q3 and Q4 than the first half of the year. I think it's a combination, Simon. I think that obviously, there is a market demand out there driven by the recovery in the economy. I think customers also worry about the impact of the supply that we'll have in the short, mid-term. But on the same time, we should not underestimate the power of our portfolio because I got this question earlier on, you take this double-bookings? Perhaps in the commodity space, but not on the value space. We believe Aruba is unique and differentiated. This is not something you can swap by somebody else. And that business, it's a true mobile-first cloud-native approach, which drives a unique experience at the edge. And that's - the momentum has happened for a number of quarters now despite the short-term challenge of supply. HPC, we are the clear number one leader with 35% market share and 14 points advantage against the second competitor. And then the supercomputer, I don't think there's anybody that can match us. 35% of the top 100 supercomputers are all back and enterprise, and we're going to deliver the extra scale in 2022. And GreenLake, again, the question about GreenLake is a true hybrid differentiated offerings from edge to cloud. And I think that has been in the making now for a number of years, and the pipeline is just amazing to me. And now we are getting better and better in closing deals faster and deploying the solution, which, remember, it's not just deploying it, it's also driving usage. And so it's a combination of growth in the current installed base and new logos, which I commented 300 new logos. So we believe there may be some in the commodity space, but the rest is because of our edge-to-cloud offering, which is resonating in the market, and we believe that's going to accelerate in 2022.

Kyle McNealy:

Thanks for the question. I was wondering if you could drill down a bit more in the areas that are driving your Compute segment results? They were a bit higher than we expected and certainly the consensus, I get that there's some FX in there. You quantified that. But are there segments of the market that have been stronger for you that you can contextualize? And can you give us a sense for unit growth for Compute? And maybe a split of how much ASP growth comes from memory versus product mix versus general price increases? Thanks.

Tarek Robbiati:

Sure, Kyle. So in terms of customer segments, the demand remains very strong across the board and large enterprise customers, SaaS companies, telcos, and we see very robust demand from all these customers. With respect to unit growth, units have been roughly flat quarter-on-quarter, but the right comparison is a normalized year-over-year comparison. If you normalize for Q4 2020 units that were sold, but for orders that were generated in Q1 and Q2, you remember the dynamics of fiscal year 2020, units have grown 13% Q4 2021 over normalized Q4 2020. Which is an excellent result for us. We're very pleased with it. And this comes together with very strong disciplines from our management team there in the compute space. We've executed a number of price increases ahead of price hikes of commodities and logistics costs coming up by way of expedite fees and container costs that have been rising quite dramatically, as you know. The AUP have risen overall at about 3%. When you think about this on a normalized basis, and we feel pretty good about our performance in Compute, both on the P, the price and the quantity. We feel that there is still strong demand moving forward, particularly in fiscal year 2022 with the order book that we have been able to generate and the backlog that we have in that segment. But that comment that I just made is true and very true for Aruba where we feel a very strong order demand in Aruba and also in storage. So we feel pretty good about fiscal year 2022, as Antonio commented a moment ago.

Operator:

The next question is from Katy Huberty with Morgan Stanley. Please go ahead.

Antonio Neri:

Yes, I'll let Tarek start, and then I will add a few comments.

Antonio Neri:

Yes. Katy, I think in addition to what Tarek, first of all, I don't see the demand abating anytime soon. I actually see that continue to accelerate. And what is amazing to me is that in the areas where we place a particular focus, we see amazing growth. And what excites me is that I - knowing what I know about our new offerings and acceleration of innovation particularly in the first calendar quarter, we believe that's going to be a turbocharge. Now as you can imagine, I spend a lot of time with our global supply team - driving the day-to-day operations with Tarek here. And obviously, we have to move at the first two quarters of the year. But I feel pretty good about accelerating that in the back half, a combination of supply availability and customer acceptances. But again, when you normalize the growth for everything I said earlier to Wamsi, which is including the as-a-Service pivot, you should think about not three to four, but more like six to seven because that's the way we should think about it. And then in that, remember, the growth of the ARR is going to continue to accelerate 35% to 45%. And hopefully, in 2022, we're going to get the credit for the transformation we drive in this business.

Amit Daryanani:

I guess, maybe I want to talk a little bit on the Intelligent Edge side. And Tarek, maybe you could just talk about what's driving out just the revenue deceleration, but also the margin declines over there. The margin drop seemed fairly material. So I would love to understand kind of what's happening there. How do you see that business ramp up through fiscal 2022? And then, Antonio, I want to touch this with you, which is you've talked a fair bit about the conviction in the orders that you have and how good they are and I think you've said about a lack of cancellation being a pretty big driver for it, therefore your confidence. I would imagine cancellations will only happen when supply chain issues alleviate versus right now. Is that fair? If so, are there other things you're looking at in your business that gives you confidence that these orders will convert?

Tarek Robbiati:

Yes, yes. So let me take that, Antonio. Thank you. So Amit, as we shared in our scripts, we signed a very substantial Network-as-a-Service contract for the first time with a large US retailer. And this had a headwind on revenue growth in Aruba of about 800 basis points and a headwind on operating margins of about 500 basis points. So if you were to normalize for it, you still realize - you would realize that the double-digit growth in Aruba and high-teens margins are still there. And we're very comfortable they're there for us. Aruba is at 40% business meaning we do see the top-line growth to be in the high-teens and the margins to be in the high-teens as well, approaching a sum of 40% overall. Nothing has changed. We feel very comfortable, particularly knowing that the order book remains very strong. If anything, there was one part of our company that suffered a little bit more of supply chain constraints in Q4, it is Aruba. But it's just simply deferring revenue that could have been realized in Q4 into Q1 and Q2 of fiscal year 2022. The order story remains incredibly strong, and the demand there is super solid. So we're very confident about the prospects of Aruba for fiscal year 2022.

Operator:

And our final question will be from Samik Chatterjee with JPMorgan. Please go ahead.

Antonio Neri:

Yes. Well, Tarek and I felt it was important to share with you how H3C contributes to our financial performance. You saw that slide that shows the equity interest of 49% and what value drives for our shareholders, which is pretty significant. And H3C is an independent entity, which operates in China, obviously. And they manage the business day-to-day. And they have done a remarkable job. I mean they continue to grow their business in China. They are positioned extremely well, in the, what they call the ICT business, the support telco, the support enterprise customers and SMB. They have a unique value proposition and set of products, which are very well received. And we expect that business to continue to grow double-digits. And the report is incredibly accretive to what we do. But also, at the same time, as Tarek said, is a unique setup, which no other multinational really has been able to achieve in a country, obviously, which is going to a lot of changes here. And it's the second largest market on the planet, okay? So if you believe that market will continue to grow, and they are very well positioned, this will continue to accrete to our shareholders. Now as we said in previous quarters, are put expire at the May timeframe.

Antonio Neri:

And as always, we will do what is the right thing for our shareholders, what is the best return for our shareholders. And we will make that decision at the right time.

Antonio Neri:

Okay. Well, thank you, everyone. Thank you, Jeff. We appreciate you making the time to talk to us today. I hope you walk away with a clear view of how we are performing. I'm particularly pleased with the momentum we have as we enter 2022. Our strategy could not be more on point. I think the demand is strong, not only because of the market, but because of our solutions. And I'm very excited about the ability to create and accelerate our shareholder value in 2022. And then we have some amazing things coming down the pipeline in terms of innovation that's going to differentiate us even further. And so I'm looking forward to 2022, while we navigate this short-term challenge of supply, but we are very confident on the current guidance and the consensus out there. And we hope to exceed that as we execute in the next quarter. If I don't speak to you in the next month or so, thank you very much. Be well. Happy Holidays to everyone and to prosper 2022. Thank you very much.

Andrew Simanek:

Good afternoon. Manny Simanek, Head of Investor relations for Hewlett Packard Enterprise. I'd like to welcome you to our fiscal 2021 Third Quarter earnings conference call with Antonio Neri, HPE 's President and Chief Executive Officer, and Tarek Robbiati, HPE's Executive Vice President and Chief Financial Officer. Before handing the call over to Antonio, let me remind you that this call is being webcast. A replay of the webcast will be made available shortly after the call for approximately one year. We posted the press release and the slide presentation accompanying today's earnings release on our HPE investor relations web page at investors.hpe.com. As always, elements of this presentation are forward-looking and are based on our best view of the world and our businesses as we see them today. For more detailed information, please see the disclaimers on the earnings materials relating to forward-looking statements that involve risks, uncertainties, and assumptions. For a discussion of some of these risks, uncertainties, and assumptions, please refer to HPE 's filings with the SEC, including its most recent Form 10-K and Form 10-Q. 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 HPEs quarterly report on Form 10-Q for the fiscal quarter ended July 31st, 2021. Also, for financial information that has been expressed on a non-GAAP basis, we 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. Throughout 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, we will be referencing the slides in our earnings presentation throughout our prepared remarks. As mentioned, the earnings presentation can be found posted to our website and is also embedded within the webcast player for this earnings call. With that, let me turn it over to Antonio.

Tarek Robbiati:

Thank you very much, Antonio. I'll start with a summary of our financial results for the third quarter of the fiscal year 2021. As usual, I'll be referencing the slides from our earnings presentation to guide you through our performance in the quarter. Antonio discussed the key highlights on Slides 1 and 2. So now, let me discuss our Q3 performance starting with Slide 3. I'm pleased to report that we are experiencing very strong demand across all of our businesses. Q3 was marked by accelerating order growth, strong gross and operating margin expansion, and robust cash flow generation. Building on the strength from the last quarter, we delivered Q3 revenues of $6.9 billion, up 3% from the prior quarter. And in line with normal sequential seasonality. Also, in line with our outlook that factored in summer off of the expected supply chain constraints we flagged. We are working to ensure disruption is minimal by taking proactive measures and coordinating with our world-class suppliers to establish tailored recovery plans. I am particularly proud of our non-GAAP gross margin that hit another record level of 34.7%, up 40 basis points sequentially, and up 420 basis points from the prior-year period. This is driven by our deliberate actions to shift towards the higher-margin, software-rich offerings, strong pricing discipline, and cost takeout. As previously indicated, we continue to invest in high-growth, margin-rich areas of our portfolio, both in R&D and go-to-market, particularly in Aruba software and as-a-Service, which increased our non-GAAP operating expenses in the quarter. We also booked two one-time charges in total $28 million for a legal settlement and bad debt associated with likely fraud, involving a channel partner in APJ. Even with these investments and one-time charges, our non-GAAP operating margin was 9.8%, up 190 basis points from the prior year, which translates to a 25% year-over-year increase in operating profit. We continue to be focused on driving further efficiencies in the business. Within other income and expenses, we benefited from stronger operational performance in HPC and strong gains related to increasing valuations in our Pathfinder venture portfolio. As a result, we now expect other income and expenses for fiscal year '21 to be an income of approximately 50 million. With strong execution across the business and despite 2 unanticipated one-time charges, we ended the quarter with non-GAAP EPS of $0.47, up 31% from the prior year and above the higher end of our outlook range for Q3. Q3 cash flow from operations was $1.1 billion and free cash flow was $526 million. This puts us at the record $1.5 billion of year-to-date free cash flow, up 1.1 billion from the prior year, driven primarily by an increase in operating profit. Finally, the strength of our business has positioned us to contribute substantial capital to our shareholders. We paid $157 million of dividends in the quarter, and are declaring a Q4 dividend today of $0.12 per share payable in October. We are also announcing today the resumption of share buybacks as a result of greater free cash flow generation and visibility. I'll come back to capital allocation more broadly when we discuss the outlook. Now let's turn to our segment highlights on Slide 4. Our growth businesses, which now represent nearly 25% of our total Company revenue, are executing strongly and experiencing record order levels. In the Intelligent Edge, we accelerated our topline momentum with record levels of orders, and 23% year-over-year revenue growth. Switching was up over 20% year-over-year, whereas wireless LAN experienced more acute supply constraints and was up mid-single-digits. Additionally, the Edge as a Service offering was up triple-digits year-over-year, which reflects enabling software platforms, as well as network-as-a-service. We also continue to see strong operating margins at 15.8% in Q3, up 540 basis points year-over-year, which included 17 million one-time legal settlements that impacted margins by 2 points. continues to perform strongly and contributed 7 points to the Intelligent Edge growth. In addition, we started generating meaningful revenue synergies by cross-selling the Aruba portfolio, which reinforces the merits of the Silver Peak deal. In HPC & MCS, demand strengthened even further with a record order level. Revenue grew 9% year-over-year as we continue to achieve more customer accepting milestones and deliver on more than $2.5 billion of awarded contracts, including the contract that Antonio mentioned with the NSA worth $2 billion over 10 years. We remain on track to deliver on our full-year and three-year revenue growth CAGR target of 8% to 12%. In Compute, revenue grew 4% quarter-over-quarter, reflecting normal sequential seasonality despite previously anticipated supply chain tightness. operating margins of 11.2% were up 190 basis points from the prior year, due to disciplined pricing and the rightsizing of the cost structure in this segment. Within storage, revenue grew 1% year-over-year and 3% quarter-over-quarter ahead of normal sequential seasonality, driven by strong growth and software-defined offerings. Nimble grew 10% year-over-year with ongoing strong dHCI momentum, growing double-digits year-over-year. All-flash Arrays grew by over 30% year-over-year, led by Primera. The mix shift towards more software-rich platforms helped to drive storage operating margins to 15.1%, up 10 basis points year-over-year, offset by continued investments in our cloud data services. With respect to Pointnext operational services, including Nimble services, revenue grew for the third consecutive quarter, year-over-year as reported with both order and revenue growth expected for fiscal year '21. Within HPE Financial Services, revenue was flat year-over-year and sequentially, while our bad net loss ratio did increase slightly to 94 basis points this quarter, it was entirely due to a one-time 11 million reserve charge related to the already mentioned likely fraud in APJ by a channel partner. Optioned for this one-off event, our bad debt loss ratio would have improved to just 61 basis points, aligned to pre-pandemic levels. More importantly, we continue to see improved cash collections above pre-pandemic levels. Our operating margin was 11.1% up 300 basis points from the prior year, and our Return on Equity at 18.3%, is well above the 15% plus target set at SAM. Slide 5 highlights the key metrics of our growing as-a-service business. We have made significant progress since our Analyst Day last October by adding over 200 new enterprises, Greenlake customers, to over 1,100 today. And increasing our TCV by over $1 billion to our current lifetime TCV of well over $5 billion. For Q3, specifically, our ARR was $705 million, which was up 33% year-over-year, as reported and total as-a-Service orders were up 46% year-over-year. It is also important to note that the mix of our ARR is becoming more and more software-rich, as we build out our Greenlake cloud platform, which is improving our margin profile. We look forward to providing more disclosure around our software and services mix at our Analyst Day later this fall, which I believe reinforces a significant value-add of Greenlake. Overall, based on strong customer demand and recent wins, I am very happy with how this business is executing and progressing towards achieving our ARR growth target of 30% to 40% CAGR from FY20 to FY23. Slide 6 highlights our revenue and EPS performance to date, where you can clearly see the strong rebound from last year, and sustained momentum for the last 3 quarters. The demand environment continues to strengthen, and with the operational execution of our cost optimization and resource allocation program, we have increased non-GAAP EPS in Q3 by 31% year-over-year. Turning to Slide 7, we delivered another record, non-GAAP gross margin rate in Q3 of 34.7% of revenues, which was up 40 basis points sequentially, and up 420 basis points on the prior year. This was driven by strong pricing discipline and a positive mix shift towards high-margin software-rich businesses like the Intelligent Edge and next-generation storage offerings. We have also benefited from the new segmentation we implemented beginning of the fiscal year 2020. That gives us much better visibility into each business unit and enables a better resource allocation and discipline to drive operating leverage. Moving to Slide 8, you can also see we have expanded non-GAAP operating profit margins substantially from pandemic lows to 9.8%, which is up 190 basis points from the prior-year period. We are driving further productivity benefits, and delivering the expected savings from our cost optimization plan, while simultaneously increasing our investment levels in R&D and field selling costs, which are critical to fueling our long-term innovation engine and revenue growth targets. As mentioned previously, Q3 operating expenses also included one-time charges not included in our guidance, totaling $28 million for a legal settlement, and the likely fraud scheme involving a partner. Excluding these one-off charges, our operating margin would have been 10.2%. Turning to slide 9, we generated record year-to-date levels of cash flow with $2.9 billion of cash flow from operations and $1.5 billion of free cash flow, which is up to $1.1 billion year-over-year. This was primarily driven by increased operating profit. I would like also to underscore that this year, our free cash flow seasonality will be different than in prior years. We expect increased financial services volume that includes more than $150 million in Q4 financing for a very large deal that is predominantly Greenlake and will benefit our ARR and margins for years to come. We also have further restructured payments, and growing working capital needs as we continue to buffer our inventory levels in the light of the disruption in the global IT supply chain. Now moving on to Slide 10, let me remind everyone about the strength of our diversified Balance Sheet. As of July 31st, the Operating Company's net cash balance turned positive due to our strong free cash flow. Furthermore, we made additional progress during the quarter securitizing over $750 million of financial services-related debt through the ABS market. The refinancing of higher costs unsecured debt with ABS financing, allows us to boost access to the financing market at a cheaper cost of debt capital, as well as diversify and segregate our Balance Sheet between our operating Company and our financial services business. Bottom line, our improved free cash flow outlook and cash position ensure we have ample liquidity to our operations, continuing to invest in our business to drive growth and return capital to shareholders. Now, turning to our outlook on Slide 11, I'm very pleased to announce that we are once again raising our full-year guidance to reflect the continued momentum in a demanding environment and our strong execution. This will be the fourth guidance increase since SAM in October 2020, we now expect to deliver fiscal year '21 non-GAAP diluted net earnings per share between $1.88 and $1.96. With respect to supply chain, as indicated last quarter, industry-wide tightening somewhat constrained our supply as expected. We continue to take proactive inventory measures where possible. And you can see our efforts in inventory balances that increased $1.3 billion year-to-date, which also reflects the strengthening demand environment and a substantial order book we have across the business. We expect the challenge supply chain conditions to persist until at least the middle of the calendar year 2022, and have factored these into our revenues, costs, and cash flow outlook. From a top-line perspective, although we remain prudent, given the chance supply chain environment, we are very pleased with the accelerating Q3 order momentum across all segments of the business. More specifically, for Q4 '21, we expect revenue to be above our normal sequential seasonality from Q3 and are comfortable with current consensus levels. For Q4 '21, we expect GAAP diluted net EPS of $0.14 to $0.22 and non-GAAP diluted net EPS of $0.44 to $0.52. Additionally, given our record levels, our free cash flow year-to-date, and confidence in our raised outlook, I'm very pleased to announce that we are also raising fiscal year '21 free cash flow guidance from $1.5 billion to $1.7 billion. That is a $600 million increase at the midpoint from our original sand guidance with the top end of this free cash flow guidance range at the peak levels attained in fiscal year '19. As you recall, at the end of the first half of the fiscal year 2020, we suspended our share buybacks to preserve liquidity in the context of the global pandemic disruption. Although we continue to operate in a challenging supply environment, our order momentum and improved cash flow generation visibility give us the confidence to reinstate our share repurchase program. We are targeting up to $250 million of share repurchases in Q4 of fiscal year '21 and will update investors on our capital management policy for fiscal year '22 at SAM in October. As a reminder, we always follow a disciplined return-based capital allocation framework to maximize long-term shareholder value. Our number one priority remains to deliver sustainable, profitable growth, through both organic and inorganic M&A investments while remaining committed to paying dividends to our shareholders. In addition, we will consider opportunistic share buybacks when we see a favorable return for doing so. So overall, and to conclude, I am very proud of the progress we have made year-to-date in fiscal year 21. It's clear that our Edge-to-Cloud strategy is resonating with customers, and driving improved momentum across all of our businesses. Our growth businesses in the Intelligent Edge and HPC MCS have accelerated top-line performance with record levels of orders. Our core business of Compute and storage is demonstrating momentum with robust orders and improved margins, and our as-a-Service ARR is accelerating. All of this translates to improving revenue momentum, strong profitability growth, and record levels of free cash flow. We look forward to closing out our fiscal year much leaner, better resourced, and positioned to capitalize on the strong demand environment. Lastly, as Antonio mentioned, we look forward to having you join us for our virtual Securities Analyst Meeting in late October, where we will provide an update on our strategy, business insights, and financial outlook. Now with that, let's open it up for questions.

Amit Daryanani:

Good afternoon, and thanks for taking my question. I guess the questions really around the free cash flow generation. I think you're implying based on the rates free cash flow guide, that we'll do around a 100 million or so free cash flow in Q4, which I think will be one of the softest . Maybe just quantify some of the dynamics that are at play that's driving that power, have you talked about a few of them, but just quantify the headwind there. And secondly, the focus to this $2 billion in cash number longer-term. Maybe touches on what are the key levers to get to the $2 billion number, and how much of that is self-help versus revenue-driven? Thank you.

Antonio Neri:

No, the only thing I will say maybe is that listen, Tarek made this comment in his remarks, is the fact of the matter on the high-end -- on the top end of that balance we give you 1.7 billion, is almost the same number we achieved in 2020 -- 2019. And therefore, in many ways, we are almost a year ahead of our commitment because if you'll recall, we said we're going to return to normalized free cash flow in 2022. In the reality, even when you finance these large deals that eventually we're going to communicate has nothing to do with the NSA deal. We are already almost at the same number, so that's why we are so pleased with the momentum that we have. But it's a momentum based on the order growth, and all the actions we have taken, and the deliberate shift in our portfolio to higher margins. And that's what you see in our numbers in Q3, right? It's a record-breaking gross margin of 34.7%.

Operator:

The next question will come from Simon Leopold with Raymond James, please go ahead.

Antonio Neri:

Yeah, thanks, Simon, for the question. I will start, and then I will let Tarek comment. Listen, we take pricing actions all the time. In fact, we probably have the first to take pricing action in our industry, I will say. We continue to assess what is the right strategy by segment and making sure that we take those actions where appropriate. The fact of the matter is that we have increased pricing even concrete. That's a fact. And we do that in a context of, obviously, supply availability, steep in demand in the right portfolio, and obviously, inflationary costs associated with some of the commodities. At the same time, remember there is also new innovation against building our products, which has a structural impact in the sense that when you look at our infrastructure, new technologies drive two-thirds of the pricing in many ways in AOPs, but we could take close the actions all the time, Simon, and we will continue to do so. And that's part of the reason also while we see record-breaking margins but in addition to the fact that we're still in the demand in the right place and driving that mix shift that we talked about before. So Tarek, I know you want to get more specific, probably.

Tarek Robbiati:

AUP was up to mid to high single-digits quarter-on-quarter reflecting pass-through of commodity costs and richer configurations. As always, configurations that are richer play a big rolling in the AUP, but also, pricing in this case. And units were flat quarter-over-quarter, given some expected supply chain constraints. So we feel pretty good about performance in computing. In that regard, it's still a business that we have to manage very, very carefully on a day-to-day basis because the supply environment being volatile forces us to do so. But we still see scope for continuous gross margin improvement across the board and in Compute as well.

Operator:

The next question will come from Aaron Rakers with Wells Fargo. Please, go ahead.

Tarek Robbiati:

So, let me pick up the first question on the normalized seasonality. Typically, what you observe in terms of sequential quarter-over-quarter growth, I would say it's somewhere in the low single-digits around the 1% to 2% range between Q3 and Q4. So Q4 and Q3 growth are about that level. Like I said in my script, I'm comfortable with the current consensus on revenue for Q4, and we feel pretty good about this. The order book is very, very solid. Antonio underscored this. Across the board, our order book is super solid. Now the question is, how much of that can be really accelerated in terms of conversion in Q4? And it's, every day is another day, so we're working through that. And this obviously has an impact on gross margins, right? Because the more you wait for fulfilling an order, the more you can have an adverse impact on gross margins. But we feel fairly comfortable with us managing this dynamic and particularly leveraging or pulling the levers across the board that we have such as our revenue mix. I want to highlight to you the continuous growth in Aruba. This level of growth in Aruba on our Intelligent Edge business of 23% comes with very high-calorie revenue, and we feel very, very comfortable and pleased with that trend. Also, our growth in storage, which comes with very high-calorie gross margin revenue, is pleasing at 3%. We took share from some of our main competitors, and this gives you an idea that we have a few strings in our bow, so to speak, to actually continue to drive gross margins to better levels.

Operator:

Our next question will come from Wamsi Mohan with Bank of America. Please go ahead.

Antonio Neri:

Well, we are very confident in the sense that we have taken proactive actions. We continue to take proactive actions that can imagine a person evolve with some of this conversation with suppliers. But if you look at our order buffering -- sorry, inventory buffering we talked about, right? Our inventory is up 1.3 billion. And at the same time, we have, I think, one of the best-in-class engineering teams that they can swap things as we go along the way. That said, as a look at this order book, there is so much potential upside here. Is all about that daily conversion. And so far, once we -- we have not seen any cancellations. Just to be clear, when people ask me, hey, this is perishable? No, I can tell you, the answer is definitely, no. I think it's because also customers realize it's not just a supply constraint, but a need to provision more Compute and data insight capabilities. And then, as I said earlier, even despite the fact that our Intelligent Edge business exited with a 5 times backlog on that unique segment of the market, we still delivered 23% in constant currency, 27% growth. And that's why what Tarek said, we expect revenue to continue to grow, and in particular '22. And then to the question that was asked earlier about margin, the margin should strengthen over time because of the mix shift, and that Aruba is very important to us. But fundamentally, I think our edge-to-cloud vision and strategy is absolutely resonating in the market because customers need three things. They need secured connectivity in this hybrid world. They need a cloud experience everywhere. And then, they need data insights yesterday, in my view. And then, we need to be able to consume it as-a-service in an elastic way. We have all the forward ingredients, and that's why we're going to accelerate further and faster with this strategy because it's working.

Andrew Simanek:

Great. Thank you Wamsi for the question. Operator, can we go to the next one, please?

Sidney Ho:

Great, and congrats on solid progress on the ARR side and in the cash flow. My question is on the HPC segment. You suggested the full-year HPC revenue will grow within your target range of 8% to 12%. Is that on a revenue basis or order basis? And in this revenue, it would imply fiscal Q2 will see at least 50% growth. Am I doing the math correctly? If so, what's driving such growth? I understand revenue could be quite lumpy in this business. Thanks.

Andrew Simanek:

Great, thanks Sidney for the question. Can we go to the next one, please?

Shannon Cross:

Thank you very much. I was wondering if you can quantify how the shift to Greenlake and recurring revenue in as-a-Service is impacting revenue. If there's any way to sort of quantifying where you would have been if you hadn't sort of made the shift at this point. And I'm also curious with regard to Greenlake, how are your customer conversations going? Not sure how many quarters ago you said we're shifting everything to at least have an option from a subscription standpoint. So I'm just wondering if it's still kind of a push to customers or is there more of a pull from them as they look at alternatives to the cloud? Thank you.

Tarek Robbiati:

Yeah, absolutely. So, Shannon, what I would say is, if you refer back to Slide 5 of our investor presentation, we showed the stack of revenue that composes our AUR, right? So our Greenlake revenue is across all segments, our Compute HPC MCS, storage, Aruba, and also HPFS as you can infer from that slide. And the more we drive Greenlake by way of software, the more accretive it is to the overall gross margin of the Company. That's a key lever to drive gross margin moving forward. We're driving gross margin across every single stream lane through the revenue mix, and across also that revenue mix horizontally by way of pivoting the Company to become an as-a-Service Company. So far, what I can tell you is that the Greenlake gross margin is substantially higher than the average gross margin of the Company that we posted today. And we look forward, Antonio and I to update you and every other member of the analyst's community at our virtual SAM event in October highlighting to you where we see the ARR growing. And it's mixed by segment moving forward. And in composition, how much of it is software and how much of it comes from other types of revenue streams such as point NExOS, which are very important to the profitability of the Company.

Operator:

Our next question will come from Katy Huberty with Morgan Stanley. Please go ahead.

Antonio Neri:

I think it will be definitely recognized over time. There will be periods that will be a little bit lumpier because of the infrastructure, but start recognizing here in 2022 immediately. In fact, we're expecting here the first order to happen now and start shipping soon. But obviously, the one thing you need to understand about this deal, it's not just about selling infrastructure and consumer-as-a-Service through HPE GreenLake is the true as-a-Service model and management at the same time. We are operating the whole environment, which is very different from then used to be in the past.

Operator:

Our next question will come from Matt Sheerin with Stifel. Please go ahead. Pardon me, Mr. Sheerin, your line might be muted.

Operator:

Yes. Our next question will come from Kyle Mcnealy with Jefferies. Please go ahead.

Antonio Neri:

Listen, I expect this business to continue to grow double-digits, right? We're very confident with that forecast. And honestly, maintaining or improve it even, the level of profitability because as Tarek made the comment earlier, right? This quarter was impacted by a settlement on a legal matter that has been going on for a decade. And so, I'm pleased that that finally has completed, which was $17 million that we booked for this and has nothing to do with Aruba. It just happened way before Aruba for that matter. And so, the reason why I'm confident is that we have a unique value proposition. The value proposition of Aruba is mobile-first cloud-first, which is based on three layers. One is the unification of the network for whatever type of connectivity you need, which is Wi-Fi and to the point, Wi-Fi 6 is now been adopted, and we are, I think, the largest vendor shipping Wi-Fi access points, second is obviously LAN, third is WAN, and that's why this acquisition has been incredibly well-received by our customers. And very timely because it's integrated now in the same control plane. And going forward, we're going to integrate more solutions like 5G and Edge computing, and that's why this Edge-to-Cloud platform is essential. But the Aruba Edge platform is what allows us to deliver the entire Edge-to-Cloud platform because now that platform also serves as the backend to deliver iAS for customer’s on-prem and at the Edge for computer installers too, including data services or workload-optimized solutions. So super pleased. And remember what I said, we exit Q3 2021 with a five times backlog on a normal run rate in that Aruba, and the bookings were very, very strong, super strong.

Antonio Neri:

Yes. So again, thank you for taking the time today. Again, we are very pleased with our Q3 result, which again was marked by the older strong momentum in line with revenue expectations, but most importantly, strong improvement in gross and operating margin, and record year-to-date orders and free cash flow. And that gives us the confidence to, once again, for the fourth time in the year, raise EPS and free cash flow and enter 2022 with good visibility about what we think is going to happen. I'm particularly bullish about the IT spends cycle. People ask me, what do you think the Delta virus is going to do? It is going to do nothing on demand. I can tell you that now. It may have some impact on supply availability, but nothing on-demand, let me be clear about that. And the reason why is because customers need to digitize their business, they need to create a more IT environment, and honestly, they need to extract insight from the data at a pace we've never seen before, and our Edge-to-Cloud platform strategy is resonating. So thank you for taking the time to be with us today, and hope to catch up at the end of October at the Securities Analyst Meeting.

Operator:

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

Andrew Simanek:

Good afternoon. I am Andy Simanek, Head of Investor Relations for Hewlett Packard Enterprise. I would like to welcome you to our fiscal 2021 second quarter earnings conference call with Antonio Neri, HPE’s President and Chief Executive Officer; and Tarek Robbiati, HPE’s Executive Vice President and Chief Financial Officer. Before handing the call over to Antonio, let me remind you that this call is being webcast. A replay of the webcast will be made available shortly after the call for approximately one year. We posted the press release and the slide presentation accompanying today’s earnings release on our HPE Investor Relations webpage at investors.hpe.com. As always, elements of this presentation are forward-looking and are based on our best view of the world and our businesses as we see them today. For more detailed information, please see the disclaimers on the earnings materials relating to forward-looking statements that involve risks, uncertainties and assumptions. For a discussion of some of these risks, uncertainties and assumptions please refer to HPE’s filings with the SEC, including its most recent Form 10-K and Form 10-Q. 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-Q for the fiscal quarter ended April 30, 2021. Also, for financial information that has been 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. Throughout 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, after Antonio provides his high-level remarks, Tarek will be referencing the slides and our earnings presentation throughout his prepared remarks. As mentioned, the earnings presentation can be found and posted to our website and is also embedded within the webcast player for this earnings call. With that, let me turn it over to Antonio.

Tarek Robbiati:

Thank you very much, Antonio. I’ll start with a summary of our financial results for the second quarter of fiscal year ‘21. As usual, I’ll be referencing the slides from our earnings presentation to guide you through our performance in the quarter. Antonio discussed the key highlights for this quarter on slide 1, and now, let me discuss our financial performance, starting with slide 2. I am very pleased to report that our Q2 results reflect continued momentum in revenue, strong gross and operating margin expansion, and robust cash flow generation. We delivered Q2 revenues of $6.7 billion, up 9% from the prior year period, a level better than our normal sequential seasonality. I am particularly proud of the fact that our non-GAAP gross margin is at the record level of 34.3%, up 210 basis points from the prior year period and up 60 basis points sequentially. This was driven by strong pricing discipline, cost takeouts and an ongoing favorable mix shift towards higher margin software-rich offering. Our non-GAAP operating expenses increased in the quarter, as we previously indicated, due to the planned hiring increases along with R&D and go-to-market investments. This offset by our continued progress delivering on the savings from our cost optimization plan, which is on track. Even with our investments, our non-GAAP operating margin was 10.2%. That is up 300 basis points from the prior year, which translates to a 59% year-over-year increase in operating profit. Within other income and expense, we benefited from onetime gains related to increased valuations in our Cohesity and IonQ investments within our Pathfinder venture portfolio. As a result, we now expect other income and expense for the full year in fiscal year ‘21 to be an expense of approximately $50 million. With strong execution across the business, we ended the quarter with non-GAAP EPS of $0.46, up 70% from the prior year and meaningfully above the higher end of our outlook range for Q2. Q2 cash flow from operations was $822 million and free cash flow was $368 million, up $770 million from the prior year, driven by better profitability and strong operational discipline as well as working capital benefits. This puts us at a record level of free cash flow for the first half at $931 million. Finally, we paid $156 million of dividends in the quarter and are declaring a Q3 dividend today of $0.12 per share, payable in July. Now, let’s turn to our segment highlights on slide 3. In Intelligent Edge, we accelerated our momentum with rich software capabilities to meet robust customer demand, delivering 17% year-over-year revenue growth across the portfolio. Switching was up 17% year-over-year, and wireless LAN was up 16%. Additionally, the Edge-as-a-Service offerings were up triple digits year-over-year and now represent a meaningful contribution to HPE’s overall ARR. We also continued to see strong operating margins at 15.5% in Q2, up 320 basis points year-over-year, which is the sixth consecutive quarter of year-over-year operating margin expansion. Silver Peak continues to perform well, leveraging the high-growth SD-WAN market opportunity and contributed about 5 points to the Intelligent Edge top line growth. In HPC-MCS, revenue grew 11% year-over-year as we continue to achieve more customer acceptance milestones and deliver on our more than $2 billion of awarded contracts. We remain on track to deliver on our full year and three-year revenue growth CAGR target of 8% to 12%. In compute, revenue grew 10% year-over-year and was down just 1% sequentially, reflecting much stronger than normal sequential seasonality. Operating margins were up meaningfully year-over-year due to disciplined pricing and the rightsizing of the cost structure in this segment. We ended the quarter with an operating profit margin of 11.3%, up 550 basis points from the prior year period and towards the upper range of our long-term margin guidance for these segments provided at SAM. Within storage, revenue grew 3% year-over-year, driven by strong growth in software-defined offerings. Nimble grew 17% with ongoing strong dHCI momentum growing triple digits. All-flash arrays grew 20% year-over-year, led by Primera that was up triple digits and is expected to surpass 3PAR sales next quarter. The mix shift towards our more software-rich platforms and operational execution helped drive storage operating profit margin to 16.8%, up 110 basis points year-over-year. With respect to Pointnext operational services, including Nimble services, revenue grew for the second consecutive quarter year-over-year as reported with further growth expected for the full year of fiscal year ‘21. This has been driven by the increased focus of our BU segments on selling product and service bundles, improved service intensity and our growing as-a-service business, which I’ll remind you, involves service attach rates of 100%. This is very, very important to note because all of our OS revenue is recurring with three-year average contract length, and OS is the highest operating margin contributor to our segments. Within HPE Financial Services, revenue was down 3% year-over-year as the pandemic did not materially impact this business until later in 2020. As expected, we are seeing continued sequential improvements in our bad debt loss ratios ending this quarter at just 75 basis points, which continues to be best-in-class within the industry. We have also seen improved cash collections well above pre-COVID levels. Our operating margin in this segment was 10.8%, up 160 basis points from the prior year and our return on equity at 18.3% is well above pre-pandemic levels and the 15%-plus target that we set at SAM. Slide 4 highlights key metrics of our growing as-a-service business. Similar to the past couple of quarters, we are making great strides in our as-a-service offering with over 90 new enterprise GreenLake customers added. That is in Q2, bringing the total to well over 1,000. I am pleased to report that our Q2 ‘21 ARR was $678 million, which was up 30% year-over-year, as reported. Total as-a-service orders were up 41% year-over-year, driven by strong performance in North America and Central Europe. Our Edge-as-a-Service offerings also continued to grow revenue strong triple digits year-over-year. Based on strong customer demand and recent wins, I am very happy with how this business is executing and progressing towards achieving our ARR growth targets of 30% to 40%, a CAGR from FY20 to FY23. Slide 5 highlights our revenue and EPS performance to date where you can clearly see the strong rebound and momentum from our Q2 ‘20 trough. For the past two quarters, revenue has exceeded our normal sequential seasonality, reflecting the improving demand environment. And with the operational execution of our cost optimization and resource allocation program, we have increased non-GAAP EPS in Q2 by 70% year-over-year. Turning to slide 6. We delivered a record non-GAAP gross margin rate in Q2 of 34.3% of revenues, which was up 60 basis points sequentially and up 210 basis points from the prior year. This was driven by strong pricing discipline, operational services margin expansion from cost takeout and automation, and a positive mix shift towards high-margin software-rich businesses, like the Intelligent Edge and next-generation storage offering. We have also benefited from the new segmentation we implemented beginning of fiscal year ‘20 that has given us much better visibility into each business unit and enabled better operational discipline. Moving to slide 7. You can also see we have expanded non-GAAP operating profit margin substantially from pandemic lows of -- to 10.2%, which is up 300 basis points from the prior year period. We have done this by driving further productivity benefits and delivering the expected savings from our cost optimization plan while simultaneously increasing our investment levels in R&D and field selling costs, which are critical to fuel our long-term innovation engine and revenue growth targets. Q2 operating expenses also included planned increased hiring and spending on select investment to drive further growth. Turning to slide 8. We generated record first half levels of cash flow with $1.8 billion of cash flow from operations and $931 million of free cash flow, which is up $1.5 billion year-over-year. This was primarily driven by the increased profitability, strong operational discipline and some in year timing-related benefits. I would like to underscore that this year, our free cash flow profile seasonality will be different as a result of our backend-loaded restructuring costs and investment in inventory for our supply chain to cater for rising demand and chip shortages as the economic recovery accelerates. Now, moving on to slide 9, let me remind everyone about the strength of our diversified balance sheet. As of April 30th quarter end, we have improved the operating company to a net cash neutral position with our strong free cash flow. Furthermore, we have made good progress securitizing some financial services-related debt through the ABS market and expect to have close to all of the U.S. portfolio securitized by year-end. The refinancing of higher cost unsecured debt with ABS financing allows us to boost access to financing markets at a cheaper cost of debt capital as well as diversifying and segregating our balance sheet between our operating company and our financial services business. Bottom line, our improved free cash flow outlook and cash position ensures we have ample liquidity available to run our operations, continue to invest in our business, drive growth and execute on our strategy. Now, turning to our outlook on slide 10. I am very pleased to announce that we are once again raising our full year guidance to reflect the continued momentum in the demand environment and our strong operational performance to date. This will be our third guidance increase in SAM in October 2020. We now expect to grow non-GAAP operating profit by 25% to 35% and deliver fiscal year ‘21 non-GAAP diluted net earnings per share between $1.82 and $1.94. This is a $0.09 per share improvement at the midpoint of our prior EPS guidance of $1.70 to $1.88 and a $0.22 per share improvement at the midpoint since SAM. With respect to supply chain, we have executed well to date with minimal impact, and continue to take proactive inventory measures where possible. We do see further industry-wide tightening and inflation persisting in the near term, which has been factored in our outlook from both a revenue and cost perspective, but overall demand remains strong. From a top line perspective, we are pleased with the momentum we saw in the first half. And while we continue to see further demand improvement, we remain prudent as certain geographies continue to navigate the pandemic, and we continue to observe uncertainties in the supply of commodity. More specifically for Q3 ‘21, we expect revenue to be in line with our normal sequential seasonality of up low single digits from Q2. For Q3 ‘21, we expect GAAP diluted net EPS of $0.04 to $0.10 and non-GAAP diluted net EPS of $0.38 to $0.44. Additionally, given our record levels of cash flow in the first half and raised earnings outlook, I am very pleased to announce that we are also raising FY21 free cash flow guidance to $1.2 billion to $1.5 billion. That is a $350 million increase at the midpoint from our original SAM guidance. So overall, Antonio and I are very proud of the progress we have made in the first half. We have navigated well through the pandemic and are exiting the first half with improved revenue momentum, strong profitability and robust cash flow. Our growth businesses in the Intelligent Edge and HPC-MCS have accelerated top line performance, our core business of compute and storage revenues are growing with improved margins, and our as-a-service ARR is accelerating. We also continue to execute well against our cost optimization and resource allocation program, which has made us leaner, better resourced and positioned to capitalize on the economic recovery currently at play. Now, with that, let’s open it up for questions. Thank you.

Wamsi Mohan:

Yes. Thank you. And congrats on another beat and full year free cash flow raise. I was wondering if you can dig a little bit more into the guidance dynamics. You’re guiding 3Q a little bit below The Street, 4Q slightly higher. Can you maybe address what the visibility you have into 4Q is? And how much of supply chain impact are you baking in into 3Q, 4Q? Is that both the demand and the cost level? Thank you.

Operator:

Our next question will come from Matt Sheerin with Stifel. Please go ahead.

Antonio Neri:

Maybe I’ll start. I know Tarek has many comments. I mean, we see strong demand momentum right now. We quoted in our remarks that we’re up mid-single-digits. And therefore, we translate that conversion into revenue. But obviously, part of the improvement could come from the HPC acceptances. Remember that on HPC, our order to revenue is a little bit more lumpy because of the time between orders and revenue takes longer. But overall, what we are confident is the fact that we see obviously IT demand improving. But I’m really pleased with our innovation and our ability to execute against that innovation. The innovation we have across the portfolio is perfectly timed what we see in today’s environment. We live in a much more distributed enterprise. Obviously, digital transformation is essential to operate in this digital economy, and the first step is connectivity. And I have to tell you, the Intelligent Edge business is absolutely incredibly strong. You saw in actual dollars, almost 20%. And we expect to continue to be super strong for the balance of the year into 2022, honestly. And that’s because we have a business scale. We have a massive business scale. And to give a point of reference, we already have 100,000 customers on that platform. We have 150 customers every day. We manage more than 1.1 million devices. And honestly, we actually manage data of 1 billion plus per hour, data points that comes through our cloud. And so, we expect that to continue to be very strong. I think, the core business has definitely stabilized. And we see pockets of improvement, particularly with storage. And then, the as-a-service will continue to stay strong. Again, we are cautious about the supply chain aspect of this. But, we position ourselves well for the second half, and that was all factored in our guidance, absolutely well factored in our guidance. So, it’s why we raised the guidance.

Katy Huberty:

Thank you. Good afternoon. My congrats on the quarter as well. I want to come back, Tarek, to just reconciling the improving growth trajectory in all of your segments with the second half EPS guidance that assumes well below normal seasonality or about 40% of EPS coming in the back half versus past years. You typically have low to mid-50% second half EPS mix. I think, I heard you mention supply chain constraints and being cautious around that and COVID and general cost inflation, investments you’re making and then OI&E dynamics. Can you just rank those -- well, first, did I forget any? And then, can you just rank those factors in terms of which are having the most impact on your back half EPS guidance? Thank you.

Antonio Neri:

Katy, this is Antonio. I just want to reinforce a couple of things. I understand the normal sequential seasonality, people trying to get into it. But the fact of the matter is, we are delivering record-breaking gross margin. We are raising our EPS guidance despite the supply chain uncertainty. And our business is in huge demand. And it’s not just the IT demand, it’s the fact that we have unique portfolio, edge-to-cloud, that’s meeting the customer needs of today and future ready for tomorrow. And so, I think the fact is that when you look at the full year, right, we have raised guidance now 3 times. And to Tarek’s point, it’s more than 25% from the beginning of the year. And that’s a testament of the momentum we have in the business. Then obviously, every quarter has ups and downs because of unique things like OI&E or maybe more inventory buildout. But in the end, the takeaway is that we are raising again the EPS for the full year and free cash flow.

Kyle McNealy:

I wanted to see if you could give us a sense for the position of your compute installed base. We saw F5 had stronger than expected upgrade activity to hardware systems coming out of the worst days of COVID impact. For you guys, how high is the average age of your compute installed base versus normal levels? And are you seeing any upgrade activity start to come through now for on-premise hardware after COVID-related delays last year?

Tarek Robbiati:

And let me add to this, Kyle. There’s also another aspect that we see the pent-up demand and really the need to modernize the infrastructure and the way the infrastructure is used. But also, if the decision to actually modernize the infrastructure and moving to consumption isn’t made, it’s not bad for us, because we benefit from extended leasing with our financial services portfolio, which has been doing extremely well with our asset management business as people tend to use the infrastructure more, absent a decision or an availability of supply for the equipment they want to use. So, it’s good for us on all fronts. And we’re very happy with that performance on both, the core compute business and HPFS.

Operator:

Our next question will come from Aaron Rakers with Wells Fargo. Please go ahead.

Antonio Neri:

Well, I will start and then Tarek will comment. Listen, we still have roughly a year to make the decision. The put expire in May 2022. Let me remind everybody that obviously China is the second largest IT market and growing. And our setup is unique, is unique in many ways to fulfill the needs of a unique market like China. And I think that joint venture with the partner has been incredibly successful driving shareholder values through H3C level and also through us, right, because obviously, we collect dividends from that joint venture. But it’s a way to reach a market that’s very hard to compete. So, we will continue to relate what is the best use of that capital in the context of participating in China, and we decided to take action what to do with our capital. But right now, we have not decided one way or the other one. We continue to explore what is the best return for shareholders and also to position the Company for growth as we think about the future. I don’t know, Tarek, if you have any comments?

Operator:

Our next question will come from Shannon Cross with Cross Research. Please go ahead.

Antonio Neri:

Yes. No, thank you. Obviously, M&A is an important component of our strategy. And as we have done, at least I have done now probably 19 of them, has always has been about, obviously, very stringent return on invested capital, very disciplined in that approach. But it’s always about bringing intellectual property and talent to accelerate our edge-to-cloud platform vision. Silver Peak was completed in September last year and now fully integrated into our business and now we start seeing the momentum in our Intelligent Edge business, and all the ones we are doing along the way, particularly around data and software-defined assets and so forth. So, again, we continue to evaluate what is available there, notwithstanding the fact that we have to be incredibly disciplined. As you know, valuation seems to be a little bit too high for some of the assets. But again, if there is something out there that makes sense, we will evaluate it, and we will take the right action. But again, it’s an important component of our strategy going forward. And I always we talk about the Aruba-like type of things. But we evaluate everything, whatever is relevant for our strategy. I don’t know, Tarek, if you have any comments on that.

Operator:

Our next question will come from Amit Daryanani with Evercore. Please go ahead.

Antonio Neri:

Sure. I will start, and Tarek will talk about the OI&E. I mean, obviously, if you look about the way we operate and the growth in IoT and the need for connectivity, obviously, is continuing to grow. Interesting enough, three years ago, I said that the enterprise of the future will be edge-centric, cloud-enabled and data-driven. And it’s played exactly that way. Unfortunately, through the COVID pandemic, we saw that acceleration. But, when you think about digital transformation, right, obviously, we live in a digital economy. And the first step is to be connected. If you’re not connected, you’re not participating. That connectivity is not just any more users and devices as things -- everything is connected to the network, everything computes, everything generates data. And so, connectivity is at the forefront of the digital transformation. And obviously, remote working is requiring the need for Wi-Fi connectivity to a level we haven’t seen before. But, that’s an example of what’s happening out there. But, I will say, our innovation with a true cloud-native platform at massive scale. And again, the fact that we already have 100,000 customers, and we’re adding 150 customers every day, that tells you the value proposition resonated. We can provision a WAN port, a LAN port or a Wi-Fi port or a BLE or Zigbee, whatever is the amount protocol from the cloud. And we’re able to do that in an intelligent and autonomous way. Because ultimately, it’s about the data you collect and what experiences you can provide. And so, we believe this is absolutely durable. We are very bullish about this business. We expect this business to continue to grow double digits for the balance of the year. And as we add more functionality by cloud platform, particularly with edge computing and 5G, we are going to accelerate that momentum. And when you talk to customers and partners, they love the Aruba experience, absolutely love the simplicity, they love the fact that you improve their experience for their own business, and then powers this new way to work. So, that’s why we are pretty excited. And the other thing is that the platform that Aruba runs the cloud is not the platform we run the rest of the Company. When we deploy now one of the data services through the new announcements we made on May 4th, or where we deploy compute or we deploy a workload-optimized is running on the same backend that Aruba was originally created. And that’s why we have a true edge-to-cloud platform. And then, we lay on top of that the as-a-service model, whether it’s subscription and software, which is growing triple digit in Aruba or whether it’s the as-a-service model with GreenLake. And that’s the unique differentiation we have in the marketplace. And that’s why we feel very good about the growth prospect of this business. Tarek, on the OI&E?

Antonio Neri:

And I will say again, despite all of that, we have raised the guidance.

Sidney Ho:

Thanks for taking my questions, and congrats on solid results and cash flow. My question is on the HPC business. I had expected that that business to grow sequentially, especially after a slowdown in Q1. Maybe it’s just normal seasonality, but understand the businesses could be lumpy. Are there any trends that you can draw from the last two quarters? Whether deals are taking longer to close or being accepted by customers? And more broadly, what gives you confidence that you can hit your 8% to 12% growth target? Maybe you can talk about what’s the normal seasonality for that business in fiscal Q3 and fiscal Q4. Thanks.

Tarek Robbiati:

Yes. You said it very well, Antonio. We simply say, look, the order momentum remains very, very strong. It was up double digits in Q2. We have a large awarded order book with over $2 billion of contracts. The pipeline that we are having in mind includes another $5 billion of exascale opportunity to be awarded over the next three years. The win rates that we observe are very high. We win five out of six contracts in the exascale space. It’s an inherently lumpy business. So, I think if you look at it on a quarterly basis, probably not the best picture. You have to look at it on a multiyear basis. And we feel very confident that we can achieve the 8% to 12% CAGR per year, including starting this year fiscal year ‘21. And because of the lumpiness of the revenue, you also have lumpiness in profitability as a result of the revenue profile and the product mix that doesn’t worry us at all. It’s the nature of the beast, so to speak. We feel that HPC-MCS is extremely well positioned as a business segment, to continue to be a very strong tractor of growth for HPE overall.

Andrew Simanek:

Thanks, everyone, operator. I think we can go ahead and close out the call.

Andrew Simanek:

Great. Thank you. Good afternoon, everyone. I am Andy Simanek, Head of Investor Relations for Hewlett Packard Enterprise. I would like to welcome you to our fiscal 2021 first quarter earnings conference call with Antonio Neri, HPE’s President and Chief Executive Officer and Tarek Robbiati, HPE’s Executive Vice President and Chief Financial Officer.

Tarek Robbiati:

Thank you very much, Antonio. I will start with a summary of our financial results for the first quarter of fiscal year ‘21. As usual, I will be referencing the slides from our earnings presentation to guide you through our performance in the quarter. Antonio discussed the key highlights for this quarter on Slide 1 and now let me discuss our financial performance and KPIs, starting with Slide 2. I am delighted to report that our Q1 results were marked by continued momentum in revenue, substantial gross and operating margin expansion and robust cash generation. We delivered Q1 revenues of $6.8 billion, down 3% from the prior year period, but better than our typical historical sequential seasonality when normalizing for Q4 backlog. I am particularly proud of the fact that our non-GAAP gross margin returned to above pre-pandemic levels and was up 30 basis points from the prior year period and up 300 basis points sequentially. This was driven by strong pricing discipline, the absence of backlog-related headwinds, cost takeouts and an ongoing favorable mix shift towards higher-margin software-rich offerings. Our operating expenses decreased year-over-year, thanks to our ongoing structural efficiency measures as well as some timing-related benefits related to hiring in key selected areas, which have been pushed out. Our non-GAAP operating margin was 11.3%, up 130 basis points from the prior year, which translates to an 11% year-over-year increase in operating profit. As a result of our strong execution, we ended the quarter with non-GAAP EPS of $0.52, which was up 4% from the prior year and significantly above the higher end of our outlook range. Q1 cash flow from operations was close to $1 billion, driven by better profitability and strong operational discipline as well as working capital timing benefits. Q1 free cash flow was $563 million, which was up approximately $750 million from the prior year and a record level for any first HPE first quarter. Finally, we paid $155 million of dividends in the quarter and are declaring a Q2 dividend today of $0.12 per share payable in April 2021. Now let’s turn to our segment highlights on Slide 3. In Intelligent Edge, we accelerated our momentum with rich software capabilities, delivering 11% year-over-year growth, our third consecutive quarter of sequential growth. Switching was up 5% year-over-year with double-digit growth in North America. And wireless LAN was up 11% year-over-year with double-digit growth in both North America and APJ. Additionally, the Aruba SaaS offering was up triple digits year-over-year and is now a significant contributor to HPE overall ARR. Based on our solid performance, we expect to take share again this quarter in both campus switching and wireless LAN. We are also seeing the significant operating profit potential of this business with operating margins in Q1 of 18.9%, up 680 basis points year-over-year as we drove greater productivity from past investments and operational leverage benefits kick in. Finally, I am pleased to say we recognized our first full quarter of revenue from the acquisition of Silver Peak, the premium growth SD-WAN leader, which contributed approximately 500 basis points to the Intelligent Edge top line growth. In HPC and MCS, revenue declined 9% year-over-year, primarily due to the inherent lumpiness of the business, which is linked to the timing of deals and customer acceptance milestones. We remain very confident in the near-term and longer-term outlook for this business and are reaffirming our full year and 3-year revenue growth CAGR target of 8% to 12%, respectively, as highlighted at SAM. We have an extremely strong order book of over $2 billion worth of awarded exascale contracts with another $5-plus billion of market opportunity over the next 3 years. Finally, we announced the launch of our HPC as-a-Service offer, which we expect to gain traction later this year and become a further contributor to our overall growing ARR profile. In Compute, revenue stabilized to a 2% year-over-year decline, but was up low single digits sequentially when normalizing for Q4 backlog, which attest of a strong order momentum in the quarter. Gross and operating margins were up meaningfully quarter-over-quarter due to the absence of any backlog-related margin impact, improved supply chain execution and the rightsizing of the cost structure of this segment. We ended the quarter with an operating profit margin of 11.5%, up 80 basis points from prior year period and at the high end of our long-term margin guidance for this segment provided at SAM. Within Storage, revenue declined 6% year-over-year, driven by difficult prior year compare, but with strong growth in software-defined offerings. We are extremely well positioned in Storage with Primera and Nimble dHCI. Our most software rich platforms, they are both growing triple digits year-over-year. They are absolute winners in the market, and Primera is on track to surpass 3PAR sales as early as next quarter. We also saw notable strength in overall Nimble, up 31% year-over-year, and total all-flash arrays were up 5% year-over-year. The mix shift towards our more software-rich platforms helped drive storage operating profit margins to 19.7%, well above our long-term outlook for this segment presented at SAM last October. With respect to Pointnext operational services, including Nimble services, revenue stabilized and was flat year-over-year, driven by the increased focus of our BU segments on selling products and services as bundles, improved services intensity and are growing as-a-service business, which I remind you, involves service attach rates of 100%. This is very important to note because all of our services – all of our OS revenue is recurring with 3-year average contract length, and OS remains the highest operating margin contributor to our segments. Within HPE Financial Services, revenue stabilized and was slightly down 1% year-over-year. As expected, we are seeing sequential improvements in our bad debt loss ratios, ending this quarter at approximately 0.9%, which continues to be best-in-class within the industry. We have also seen strong cash collections well above pre-COVID levels. As a result, our non-GAAP operating margin was 9.8%, up 110 basis points on the prior year. And our return on equity is back to a pre-pandemic high-teens level of 16.5%. Slide 4 highlights key metrics of our growing as-a-service business. Similar to last quarter, we are making great strides in our as-a-service offering this quarter with over 70 new GreenLake logos added in Q1. I am very pleased to report that our Q1 21 ARR came in at $649 million, representing 27% year-over-year reported growth. Total as-a-service orders were up 26% year-over-year, driven by very strong performance in Europe and Japan. Our HPE Aruba Central SaaS platform also contributed to grow revenues strong triple digits year-over-year. Based on strong customer demand and recent wins, I am very happy with how this business is executing and progressing towards achieving its ARR growth targets of 30% to 40% CAGR from fiscal year ‘20 to fiscal year ‘23, which I am reiterating today. Slide 5 highlights our revenue and EPS performance to date, where you can clearly see the strong rebound from our Q2 trough. Revenue returned back to near pre-pandemic levels last quarter. And with the operational execution of our cost optimization and resource allocation program, we have nearly doubled EPS from the trough and are now growing year-over-year. Turning to Slide 6, we delivered a non-GAAP gross margin rate in Q1 of 33.7% of revenues, which was up 300 basis points sequentially and 30 basis points from the prior year period. This was driven by strong pricing discipline, the absence of backlog-related headwinds we had in the second half of last year, operational services, margin expansion from cost takeout and automation and a positive mix shift towards high-margin software-rich businesses like the Intelligent Edge and Storage. Moving to Slide 7, you can also see we have expanded non-GAAP operating profit margins, which is up 280 basis points sequentially and 130 basis points from the prior year period. We have done this by driving further productivity benefits while simultaneously maintaining our investment levels in R&D and field selling costs, which are critical to fuel our innovation engine and revenue growth targets. Q1 operating expenses also benefited from delayed hiring and a push-out of select investments that we will be making to drive further growth. Turning to Slide 8, we generated record levels of first quarter cash flows. Cash flow from operations was approximately $1 billion, and free cash flow was $563 million for the quarter, up approximately $750 million from the prior year period. This was primarily driven by the increased profitability, strong operational discipline and some working capital in year timing related benefits. Now moving on to Slide 9, let me remind everyone about the strength of our diversified balance sheet, liquidity position, which are a competitive advantage in the current environment. As of our January 31 quarter end, we had approximately $4.2 billion of cash on hand. Together with an undrawn revolving credit facility of $4.75 billion at our disposal, we currently have approximately $9 billion of liquidity. Finally, I would like to reiterate that we remain committed to maintaining our investment-grade credit rating, which was recently reaffirmed by the rating agencies. Bottom line, our improved free cash flow outlook and cash position ensures we have ample liquidity to run our operations, continue to invest in our business to drive growth and execute on our strategy. Now turning to outlook on Slide 10, at our October 2020 Securities Analyst Meeting, we provided our outlook for fiscal year ‘21, which we raised by $0.03 at the midpoint to $1.60 to $1.78 in our last earnings release. Today, I’m pleased to announce that we are raising our fiscal year guidance for fiscal year ‘21 once again to reflect our strong operational performance to date and confidence in our outlook. We now expect to grow our fiscal year ‘21 non-GAAP operating profit by over 20% and expect to deliver fiscal year ‘21 non-GAAP diluted net earnings per share between $1.70 to $1.88, which is a $0.10 per share improvement on the midpoint of our prior EPS guidance of $1.60 to $1.78. From a top line perspective, we are pleased with the momentum we saw in Q1. And whilst we continue to see gradual improvement, we remain prudent as we and the rest of the world continue to navigate the pandemic and related macro uncertainties. More specifically for Q2 ‘21, we expect revenue to be slightly better than in line with our normal sequential seasonality of down mid-single digits from Q1. This still represents double-digit year-over-year growth from the $6 billion trough of Q2 of fiscal year ‘20. Now with respect to supply chain, I would like to remind everyone that we exited Q4 of fiscal year ‘20 with higher levels of inventory to protect against the risk of a short-term supply squeeze and address improved customer demand. With these actions and other proactive steps that we’ve taken in Q1, we do not expect any meaningful impacts on our supply chain in the near-term. We are now turning our attention to working on strengthening our inventory supply for the second half of fiscal year ‘21 as we see improved levels of demand, recognizing also that we have entered an inflationary environment for memory components. For Q2 ‘21, we expect GAAP diluted net EPS of $0.02 to $0.08 and non-GAAP diluted net EPS of $0.38 to $0.44. Additionally, given our record levels of cash flow this quarter and raised earnings outlook, I am very pleased to announce that we are also raising fiscal year ‘21 free cash flow guidance from our SAM guidance of $900 million to $1.1 billion to a revised outlook of $1.1 billion to $1.4 billion, a $250 million increase at the midpoint. So overall, Antonio and I are proud of these results. We have navigated well through unprecedented challenges in the last fiscal year and have started the new fiscal year strong out of the gate. We saw significant acceleration and customer demand in our Intelligent Edge business and the order pipeline in our HPC MCS business remains robust. Our core business of Compute and Storage revenues are stabilizing with improved margins, and our as-a-service ARR continues to show strong momentum aligned to our outlook. As a result of our cost optimization and resource allocation program, we are emerging from an unprecedented crisis as a different company, one that is much leaner, better-resourced and positioned to capitalize on the gradual economic recovery currently at play. We are already seeing the benefits of our actions in our improved margin profile and free cash flow outlook. Now, with that, let’s open it up for questions. Andy?

Operator:

Certainly. Our first question today will come from Shannon Cross with Cross Research. Please go ahead.

Andrew Simanek:

Thanks, Shannon. Yes.

Andrew Simanek:

Perfect. Great, thank you, Shannon. Operator, can we go to the question, please?

Wamsi Mohan:

Hi. Yes, thank you and congrats on the nice execution, and especially the strong cash flow performance. Antonio, you noted some solid order linearity. I was wondering if you can talk about any meaningful changes that you’re seeing in your customer conversations around recovery and enterprise demand. And what are some of the key assumptions around the upside to the EPS and cash flow guide? Thank you.

Tarek Robbiati:

Sure, Antonio. Wamsi, thanks for the question. We feel very good about our guidance for the second quarter and the full year ‘21. We did express in our scripts that we see our non-GAAP operating profit growing by over 20% year-over-year, and our guidance reflect that. Now when you look at our margins for this quarter and the need to proceed with select investments, we feel that the guidance that we have on an EPS level is achievable, particularly when you look at the improvement quarter-over-quarter in Q2 and for the rest of the year, as Q3 and Q4 are usually strong quarters for our businesses such as the Intelligent Edge and also Storage. With respect to cash flow, our guidance has improved by $250 million at the midpoint, and it’s a reflection of the improved outlook on operating profit. I am very pleased to put forward the guidance of $1.1 billion to $1.4 billion in free cash flow and we will see as the year progresses, how this guidance will translate in actual results.

Operator:

And our next question will come from Aaron Rakers with Wells Fargo. Please go ahead.

Tarek Robbiati:

Sure, Aaron. Thank you for the question. So let’s pick up gross margin first, and then we’ll talk about our cost optimization, resource allocation program. On gross margin, we feel very good that now that we’ve put behind us all the effects from backlog in Q3, Q4 of last year. We’re now operating the business in the context where we have normal business flows between orders and supply chain delivery. And we do acknowledge, like we said before, that there is an inflationary environment on some commodities such as DRAM. But we feel that we have the right levers around pricing and also purchases to navigate the upcoming quarters. We feel very good about our supply chain position in terms of inventory levels for the short-term. As a reminder, at the end of last year, we stocked up in anticipation of two things a resurgence in customer demand, which we saw happening; and also a potential squeeze in some commodities that we were anticipating back then, which is proving true now. But we are very well positioned to drive that. So we will navigate the short-term supply-demand equation reasonably well, pulling on pricing levers as needed in our core. In addition to this, you have a mix effect from software rich revenues. These are coming from storage and of course, the Intelligent Edge. Aruba is performing extremely well. It’s a very high gross margin business. We see continued growth in Aruba. We’ve demonstrated three quarters of consecutive growth. This is set to continue. The products are in very hot demand everywhere globally. And the mix effect will also play on the gross margin front. I think I’ve given you sufficient color there. So maybe it’s time we turn to the cost optimization and resource allocation program. The bottom line on this one is we’re on track and the reason why you see our operating margins up to the levels that you’ve seen north of 11% overall for the company is because of that program. And so what’s very, very important for us is that we keep that expense discipline to sustain this level of operating profit growth moving forward and drive productivity, meaning having higher revenue over the same cost base to continue to drive operating profit growth and, therefore, translating into free cash flow growth moving forward. The $800 million net run rate benefits, as a reminder, would be felt for the most part in fiscal year ‘21. You started seeing some of that. We’re incurring restructuring costs to that effect. And the program will be over by fiscal year ‘22. And we’re well on track, and I’m very pleased with how it’s tracking as we speak.

Antonio Neri:

My other comment on the – sorry, Andy, my comment on what Tarek said, what we announced last year in Q2 was the right thing to do. It gave – we have enough experience in this company to tell us to take actions immediately and now proven to be very, very fruitful for us. As Tarek said in his remarks, right, we are becoming a different company, more leaner, more agile and allows us to prioritize investment in the areas of growth. So very pleased that we took that action at the time.

Operator:

And our next question will come from Katy Huberty with Morgan Stanley. Please go ahead.

Tarek Robbiati:

Sure. So, we pretty much, Katy, passed on to the full year guidance the entire beat in Q1. A couple of points on the investment front, you could see from some of the slides that we put forward, our investment in R&D and FSC, this has to continue, and we’ll find adequate sources to fund investments in FSCs and R&D because we have to continue to fuel growth. And this is part of our story, which is to rethink our cost structure in terms of back-office and front-of-house to drive growth and innovation by way of software. So I feel pretty good about that. With respect to also your modeling of EPS on a full year basis, I want to take the opportunity to highlight what’s going on at the OI&E level. OI&E was a positive contributor to EPS in this quarter. This is just simply due to timing, particularly the contribution of economic interest from HPC. For the full year, we still see overall in OI&E $100 million expense. And this is why you may think that the guidance is flat H1 on H2. But don’t forget the effect of OI&E coming in, in the second half of the year as an expense.

Operator:

And our next question will come from Amit Daryanani with Evercore. Please go ahead.

Antonio Neri:

Well, thanks, Amit. Well, listen, we believe Aruba is a winner, simply put. It is a software asset that delivers mobile-first class first experience that provides ubiquitous secure connectivity in a platform-oriented approach. So for us, it’s not a surprise to see the momentum in that business, which is not just revenue as Tarek said three consecutive quarters of growth, but also five quarters of growth and margin expansion in that business. And as we commented early on, our SaaS revenue, which is the subscription to the platform is up three triple-digits, right, on that part of the business. We expect to gain both shares in campus switching and wireless LAN, whether is – we’ll see how the market does. But some of our competitors don’t disclose numbers. So it’s hard to understand what was down versus up. But I think the market was not as positive as people portray, but we outperformed that market quite significantly. So whether it’s 100 basis points, 200 basis points, all we see soon. But I’ve remained very bullish. I remain very bullish about the business. This business will continue to grow for the balance of the year, also because now we have Silver Peak in our portfolio, which is a completely differentiated experience for the SD-WAN. And remember what I said early on, in an edge-to-cloud architecture, you have to connect all your edges and all your cloud. And the only way to do it at scale is through software. And Silver Peak brings a SaaS solution and also an on-prem solution that allows customers to connect all their edges on the cloud in a fully automated and autonomous way. And that’s a big opportunity for us. And that’s why I’m really bullish because ultimately, we are integrating that solution into the same platform. And then there are multiple drivers of growth as we think about the next 12, 24, 36 months, which includes edge computing and 5G. So that’s why I’m very, very confident in our ability to deliver against that market.

Operator:

And our next question will come from Simon Leopold with Raymond James. Please go ahead.

Antonio Neri:

Yes. I mean, I think the market, in general, is recovering. As I said early on, Simon, is my point about the order linearity was steady and consistent throughout the quarter, which give us the confidence that we will see gradual continued improvement in that demand. And it’s not one business. I think it’s across all businesses. And I think it’s a combination of our execution because of our strategy and the emphasis on the innovation that we bring to the market. And obviously, as the market gets better, we should take advantage of that, but remember, we have a unique value proposition. We are a company that has unique portfolio from edge-to-cloud. Our competitors don’t have all of that. Some have in one area, some have in another area. And what customers want is an integrated experience more and more. And obviously, the shift to a consumption-driven model is in our favor because once we land a customer in GreenLake, basically, they get what they want, whether it’s at the edge or what is in the core or whether it’s in the managed services for the hybrid model that they are all adopting. So I think Compute, I think there are new technologies coming online with NVMe and more options that can be attached. Storage, obviously, is all the software-defined that Tarek talked about it. Data is exploding. And HPC, I’m very bullish about HPC because ultimately, the data sets we see in customer sites continue to grow. And they all need AI machine learning at one point in time. Not just few customers. So whether it’s large public sector, education also is going to be very good because we expect our children to get back to school at some point in time, obviously, transportation with autonomous vehicles and 5G deployments. So I see multiple growth going forward and obviously, it’s in our hand to innovate and deliver against that opportunity.

Andrew Simanek:

Yes. Thanks, Tarek and thank you, Simon for the question. So we are just about at the top of the hour now. Operator, can we have the last questions, please?