Good afternoon, and welcome to the Second Quarter 2016 Hewlett Packard Enterprise’s Earnings Conference Call. My name is Annie and I’ll be your conference moderator for today’s call. At this time, all participants will be in listen-only mode. We will be facilitating a question-and-answer session towards the end of the conference. [Operator Instructions]. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today’s call, Mr. Andrew Simanek, Head of Investor Relations. Please proceed.

Good afternoon. I’m Andy Simanek, Head of Investor Relations for Hewlett Packard Enterprise. And I’d like to welcome you to our Fiscal 2016 second quarter earnings conference call with Meg Whitman, HPE’s President and Chief Executive Officer; Tim Stonesifer, HPE’s Executive Vice President and Chief Financial Officer; and joining later Mike Lawrie, Chairman and Chief Executive Officer of CSC. Before handing the call over to Meg, 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 releases and the slide presentations accompanying today’s earnings release on our HPE Investor Relations webpage at www.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 and transaction materials relating to forward-looking statements that involve risks, uncertainties and assumptions. For a discussion of some of these of risks, uncertainties and assumptions, please refer to HPE’s SEC reports, including its most recent Form 10-K. 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, 2016. Finally, for financial information that has been expressed on a non-GAAP basis, we have included reconciliations to the comparable GAAP information. Please refer to the tables and slide presentation accompanying today’s earnings release. With that, let me turn it over to Meg.

Thanks, Andy. And thank you to everyone on the call for joining us today. Hewlett Packard Enterprise completed our second full quarter as an independent company, and I have to say that we have delivered the best performance since I joined. In Q2, we saw our first quarter of as reported year-over-year revenue growth since 2011 for the Hewlett Packard Enterprise businesses. We also saw our fourth consecutive quarter of year-over-year constant currency revenue growth. We delivered revenue of $12.7 billion, up more than 1% as reported and 5% in constant currency, driven by excellent performance in servers, storage, networking and converged infrastructure, as well as outstanding performance in enterprise services. Enterprise Group had a fabulous quarter, delivering 7% revenue growth on an as reported basis and 10% in constant currency. In fact, we grew on an as reported basis in every one of EG’s hardware business units and in every region. ES grew revenue year-over-year in constant currency for the second consecutive quarter and expanded operating margins more than three points over the prior year. That’s the eighth consecutive quarter of year-over-year margin expansion. Our Software business also delivered a strong quarter. When adjusted for divestitures and acquisitions, Software delivered its third consecutive quarter of constant currency growth. And in Financial Services, we saw double digit volume growth over the prior year. So, with strong performance across every one of our business segments, HPE delivered non-GAAP EPS of $0.42, at the high end of our previously provided outlook. Free cash flow improved in the second quarter to $511 million due to careful management of our working capital. Tim will walk through the drivers of our cash flow and outlook shortly. And we are seeing the benefits of our increased R&D and more focused product roadmaps as we take share…

Thanks, Meg. Overall, we had a great quarter. We grew revenue as reported and in constant currency, generated healthy cash flow, and delivered non-GAAP diluted net EPS at the high end of our guided range. Revenue of $12.7 billion was up 1.3% year-over-year and grew 4.9% in constant currency, our fourth consecutive quarter of constant currency growth. And as Meg mentioned, HPE businesses reported absolute revenue growth for the first time in five years. We saw revenue growth in constant currency in every region and outright growth in the Americas and APJ. Our Americas performance continues to support cautious optimism for the remainder of the year, amongst an uneven macroeconomic environment. In EMEA, we were still significantly impacted by currency. However, we’re seeing encouraging momentum in enterprise hardware. And in APJ, China networking drove strong performance. The top-line currency impact to revenue was 4 points year-over-year, primarily due to hedging gains from the prior year. Going forward, we expect the currency impact to significantly moderate throughout the second half of the year. And we continue to anticipate an impact to revenue of approximately 3 points for the full year, as rates are now roughly in line with where they were when we originally guided the year. Margins were largely stable in the quarter with gross margin of 28.7%, up 10 basis points year-over-year and 30 basis points sequentially. And non-GAAP operating profit margin was 7.9%, down 50 basis points year-over-year and 20 basis points sequentially. Total non-GAAP operating expenses of $2.6 billion were up 4.7% year-over-year, primarily due to increased FSC [ph] and R&D investments. We delivered non-GAAP diluted net earnings per share of $0.42, at the high end of our guided range. This primarily excludes $201 million for amortization of intangible assets, a $161 million for restructuring, and $91…

Thanks Tim. Now, I’d like to go into more detail on the deal we announced today with CSC, which I think will be very beneficial to customers, employees and shareholders of both companies. As today’s results confirm, Enterprise Services is a stronger and more robust business than has been in many years. As a result of customer diversification efforts and other improvements, ES delivered stable constant currency revenue for the first two quarters of fiscal 2016, which were the first quarters of year-over-year constant currency revenue growth since fiscal 2012. Overall, ES is on track to achieve its long-term goal of a market competitive cost structure and operating margins. So, by bringing together the best of these two organizations, we will create a pure-play services leader ready to compete and win against all the current players. The new company will have greater agility, focus, and the ability to drive faster outcome for our customers. It will also have a top notch management team, quite literally the best in the business, and that management will be a 100% focused on ensuring a smooth transition with no disruption for ES and CSC customers. With that, let me turn it over to Mike Lawrie. Mike and I’ve gotten to know each other quite well, and I can tell you he is a world class CEO with incredible talent and unbridled passion for his business. Once the deal closes, I look forward to working with him to build our new company. Mike?

Thank you, Meg. I’m excited about the great potential this merger brings to our people, to our clients, to our partners, and investors, both at CSC and HPE’s Enterprise Services division. And let me tell you why. Over the past few years, our two organizations have been embarked on critical turnarounds and broad-based transformations. Not everyone is aware of this but Meg and I joined our respective companies within about six months of each other. And I’m pleased to be able to say that recent years, both our organizations have been on upward trajectories with significant improvements in financial performance and in client satisfaction scores, and the progress has been real and it has been measurable. Both of our companies separated last year, within a month of one another into more client-focused pure-play entities, aimed at specific markets and core industries. And today’s announcement, the coming together of these two organizations is the next logical step, building on their progress to-date and significantly accelerating their transformation. The new company will be a global top three leader in IT services, one that’s uniquely positioned to lead clients in their digital transformations. Our organizations are highly complementary. HPE Enterprise Services has a proud legacy and brings focus and agility and the ability to drive faster outcomes for clients, along with the first rate sales organization. The CSC brings deep industry expertise, innovation and next generation technologies and an exceptional partner network among other strengths. And together, as an agile, technology independent services pure-play, we will be better positioned to innovate and compete and win against both emerging and established players. We will have substantial scale to serve customers more efficiently and effectively worldwide. We will have a highly competitive cost structure to take advantage of our distinct growth opportunities, resulting in the…

Thank you, Mike. I look forward to a close relationship and what I believe will be a game changing new company in the global IT services market. Mike will stay with us during the Q&A portion of the call. Now, I’ll open it up to questions.

We will now begin the question-and-answer session. [Operator Instructions] Our first question is from Maynard Um at Wells Fargo.

Meg, Can you just talk about the remaining portions of your business? It seems it’s definitely more transactional. Do you anticipate that we should think about more transactions happening here, whether it’s accelerated M&A or spinoffs or sale; how should we think about that? And then I have a follow-up.

Well, thanks, Maynard. So, we are actually very excited about what would become a standalone Hewlett Packard Enterprise. Our focus is going to be on next gen software defined infrastructure with a world class portfolio of servers, storage, networking, converged infrastructure, hyper-converged, Helion -- our Helion cloud platform and our software assets. And you probably have guessed by now that I am now a devotee [ph] of focus. And this is going to be a laser light focused company that as I think you know is higher growth, higher margin with more robust free cash flows. And it’s going to be well-capitalized. So, we don’t necessarily think there is a need for acquisitions. But, if we find the right companies, we certainly will move. And let me just recap the kind of acquisitions that have worked well for this company in the past. Complimentary technologies that we can put through our excellent distribution and support system, so think 3PAR; 3Com; Aruba, all three of those acquisitions have been fantastic for Hewlett Packard Enterprise. And so, we will keep our eyes out for those kinds of acquisitions. Unfortunately there aren’t a lot of those around, but to the extent we see them, we won’t hesitate to move. And as Tim said, remember, our capital allocation strategy is returns based. Right now, we really think there is incredible value in our stock price. And Tim announced, we’re going to be buying back -- using a 100% of our free cash flow, in addition to half of the H3C proceeds. And we just got an increase and authorization of share buyback from our Board.

And then, just on the margin outlook for ES and servers, how should we be thinking -- should we be thinking more along the lines of 7% to 9% margins now for the ES business and low teens digits on the server side? Thank you. Sorry, the EG Group. Thanks.

Yes, sure. I would say on ES, as we talked about, we feel much more comfortable at the 7% range for this year. Again, we have a lot of momentum in that business, a lot of the activities that the team has done through the transformation are starting to see through to the P&L. So, 7% and 9% is what we would have; it may be conservative. But again, we need to get some, continue to execute and there is more work to do there. So, we’re prudent at the 7% to 9%. On the EG front, margins were down about 240 basis points. That’s primarily driven by foreign exchange, some Tier 1 mix and to a lesser degree the R&D investments we’ve made. We are a little bit heavy in Tier 1 right now. If you recall, we launched the cloud line, product line where we’re seeing a lot of momentum; we launched that in the second half of last year. So, we’re a little bit heavier weighted in Tier 1; we expect that to normalize in the second half. I think margins there will be stable in the near term. And if you look longer term, we may even see some expansion or we would expect to see some expansion, as you think about further growth in Aruba, converged storage and those types of areas.

And then, Maynard, don’t forget about when we get to March 31st of 2017, the combined company of CSC and our Enterprise Services division, we announced $1.5 billion of synergies in -- on an ongoing basis, and we are really confident of that. And Mike, I might just ask you to comment on what you think in terms of the synergies of the new company.

Yes. We’ve taken a pretty deep look at this and have categorized this. So, we feel that we really have got a very actionable plan that we could begin to execute, once we close the transaction at the end of the March. So Meg, I think that number is a very strong number.

The next question is from Toni Sacconaghi at Bernstein

Yes, thank you. I have a couple of questions related to services and transaction. I guess the first question is why now Meg. The business has a lot of momentum in terms of profit improvement. I understand the $8.5 billion consideration, but this business is going to earn over a $1 billion in net income this year, could be closer to a $1.3 billion a $1.4 billion going forward. So, you are ascribing a value of 6.5 to 8 times to that business when operating profit under your previous plan would have been growing pretty healthily. So, I guess the question is why now, when you are kind of at the cusp of improvement, and arguably could have gotten paid for that in your stock price and how did you determine the value? And I have a follow-up please.

Yes, sure. So, we are actually very pleased with the turnaround that we have executed in Enterprise Services. And I would say the time is right now, because we believe this industry actually will consolidate. And it’s better to be on the front end of the consolidation play than the bank end of the consolidation play. And while there is more margin expansion here, we actually think the ability to accelerate the turnaround of ES will happen in the combined entity of CSC and ES. And recall that our shareholders will own 50% of this new entity, so they will be party to that 50% of the synergies, 50% of the operational improvements, 50% of the synergy improvement. So, in some ways, the shareholders get the best of both worlds. They get to maintain a position in Hewlett Packard Enterprise in a more focused software defined data center and edge strategy, and they get to ride the upside, half the upside that they would have gotten had it stayed with us. And my view is the upside will be bigger with CSC and ES together. And I guess the other reason is why now is the business in a good position, two years ago, we were struggling in this business; we’ve diversified the revenue; we’ve taken cost out; revenue has stabilize; we’ve developed some new product lines. And I think combined with CSC, it’s going to be a powerhouse IT services company.

And just a follow-up along those lines, Meg. So, I’m trying to understand what would really be incremental from the merger. So, you would outline 30,000-person headcount reduction as part of your original ES plan and gross savings of $2.7 billion. And so, I’d like to understand when the deal is consummated, how much of that will have been captured. And then is the $1.5 billion you’re talking about just the continuation of what was already in the plan or is it truly incremental? Because at least by my math, a lot of it doesn’t feel like it’s incremental, because I don’t think you’re going to be done with your original restructuring plan by March 31, 2017?

So, we will not be done with the entire restructuring plan, but will be done with a big chunk of it, basically probably, I would say 60% of it, maybe almost 70% of it. And that $1.5 billion of synergy is incremental. And if things like -- between the two companies 95 datacenters. Okay, we definitely do not need 95 datacenters. Multiple offshore locations and delivery centers; we will be able to consolidate delivery centers and leverage our position in India and China and Costa Rica and other places. We will be able to leverage our selling teams that will be able to I think do more in the context of this combined entity. So, our estimate is this $1.5 billion of synergies is completely incremental and we’re probably 60% to 70% of the way through the transformation and the cost reduction.

The next question is from Sherri Scribner at Deutsche Bank.

Hi, thanks. I was hoping a little more detail on the impact of the H3C divestiture on the second half results. Primarily is it going to show up in terms of lower revenue in the networking number or should we also see an impact to servers and storage from that divestiture?

Yes, sure. You’ll see that in the second half. It’s about $0.05. We’re estimating most of that is from operating profit. There is some standard costs that we need to take out now that the deal is close. You will see most of that show up in the networking and a little bit in TS as well.

Okay. But on the revenue side will mostly be on the networking?

Correct.

And then…

Will be much impact at all to servers or storage or converged infrastructure or the Helion cloud platform or our software or frankly ES.

Okay, perfect. And then thinking about the divestiture of the services business, how will you structure your private cloud solutions going forward; will they sit on the HPE side; will they sit on the new business side; and how will you offer those solutions to your customers?

Yes. So, the Helion cloud platform as whole will sit on the Hewlett Packard Enterprise side. So for example, private cloud, we’re the world’s leader in private cloud in our Helion cloud system platform that is built on open stack. And then of course the software business around CSA and other products in terms of one point of [indiscernible] to manage a multi-cloud environment, will sit with Hewlett Packard Enterprise. However, virtual private cloud and managed private cloud is today delivered by ES and in the future will be delivered by CSC ES. And we’re going to be working very closely together to make sure that there is a seamless offering in the marketplace when someone wants a private cloud plus VPC or MPC. And then obviously, we have a relationship with Azure, and CSC has relationship with AWS. So, the new company will be able to offer both to customers, which I think is going to be a real benefit. Mike, do you want add anything to that?

I think that’s the real benefit as we’re going to be able to provide to our clients a wide range of solutions. I’m anxious to be able to get access to some of the investments that Meg, you and the Company have made over the last couple of years, because you’ve got some leading solutions and that all can be brought now to our customers through the sales force and the delivery forces that we have as a result of the combined companies.

The next question is from Katy Huberty at Morgan Stanley.

Tim, can you just clarify the free cash flow guidance for this year; should subtract the $300 million from the $2 billion to $2.2 billion range or do you expect to offset some of that $300 million hit? And then, what is the normalized free cash flow with all the divestitures in comparison to that $3.7 billion number that you talked about at the Analyst Day? And I have a follow-up.

Yes, sure. So, we are reducing the guide from 2 to 2.2, down to 1.7 to 1.9, so that is a new guide for the year. And if you think about that, it’s really three components. There is $200 million of pressure from the H3C divestiture, so that does not show up in our free cash flow. There is about $300 million that are related to the separation cost now for the ES transaction. And then those will be partially offset by working capital improvement. So, we continue to see a momentum, particularly if you look at extended payment terms, if you look at just being a little bit more disciplined around payment exceptions and things of that nature. So, net-net, we will reduce the guide by $300 million. I think about it as primarily driven by the H3C divestiture. From a normalized perspective, I would say normalized would probably be around maybe 3.5, north of 3.5, 3.8, something like that.

And then, Meg, one of the reasons HP originally purchased EDS [ph] was the potential of revenue synergies as that business pulled more HP systems and software. As you look to separate those businesses, are there revenue dissynergies that we should now think about? Thanks.

We don’t believe that that will be the case. You are right, one of the predicates of the EDS acquisitions was pull through of our infrastructure business as well as our software business. And by the way that has been realized. So, we’ve got a commercial agreement with the new company CSC ES that will keep those level of pull-through the same for three years. Now, we hope we will actually be able to do more with CSC because we haven’t really had access to their book of business, and they’ve got a very strong business. And as Mike said, they are interested in our products and software, and we have to go in and earn that business. But that’s one of the things that we intend to do. So, at a very minimum, base line will be maintained and there is an upside in terms of earning more business with CSC.

The next question is from Brian Alexander of Raymond James.

Could you just clarify whether you are still expecting constant currency revenue growth for all of fiscal ‘16, adjusting for the H3C divestiture? And if so, how do you think the second half will compare to the first half? Thanks.

Sure, yes. We do still expect to see revenue growth for the total year in constant currency. The one thing that I would say is that the growth rates will be a little bit more normalized, if you will; in the second half, there would be less FX pressure as an example. Because again, if you look at the second quarter, most of that FX pressure was driven by the hedge gains that we received in the second quarter of last year that didn’t repeat this year. So that will tend to normalize. So, we expect to grow, but it would be a little bit more muted I would say versus the first half because again the compares get a little bit tougher too as well in the second half.

The next question is from Kulbinder Garcha at Credit Suisse.

My question is for Meg. Meg, you mentioned early on that you are devotee I think of focus, and we’ve seen HP go from being a $100 billion business to a $50 billion business, now a $33 billion business. My question would be then why would the remaining assets, do they really belong together, have any thought been given around optimizing the remaining portfolio further? For example, I think most people would understand that you have a reasonably sub scale software business; does that really belong with HP Enterprise. Have you thought about tuning even further going forward or do you think this is really the asset base and technology base at HP Enterprise required to thrive long-term?

Yes. So, we are happy with the performance of the overall portfolio. You saw the growth in EG, Software grew in constant currency when you normalize for M&A. And when you think about the software defined datacenter, I’m really quite happy with the performance of the assets. So, obviously over time, we continue to ensure that we’ve got the right set of assets. Someone earlier on the call asked whether we would do M&A or some divestiture. So, we are going to continue to optimize the set of assets that we have but we are really happy with the current portfolio.

The next question is from Rod Hall with J.P. Morgan.

I guess I have two. One, I wanted to see if you guys could walk us through that -- you said 4.5 billion of equity values, I think for 50% in the new entity. Can you just walk us through your contemplation on that; how you’re getting there? And then the second question, I wanted to go back to the synergies question. And whether you think there will be any revenue dissynergy, is there overlap in revenues that would create some dissynergy there that we should be netting against the $1.5 billion incremental? Thank you.

Yes. So, I’ll get Mike Lawrie to address the revenue dissynergies. I mean, he mentioned that -- we have a very small overlap of customers, only 15%, but he might talk about that.

Yes, we just don’t see that much dissynergy here with the -- when we went through the top 200 accounts with less than 15% overlap. So, it’s really two different customers. And so when we think about it, it makes a lot of sense because many of our losses were HPE gains and vice versa, was mostly losses on our side. So, when you think about it, it really is truly a new market opportunity for us, and that’s why we don’t think there will be many revenue dissynergies and why there is such an opportunity to expand the business that we’re doing together.

And then, let me walk you through at a high level the deal mechanics, and then I’ll ask Chris Hsu who is our Chief Operating Officer, who helped negotiated this deal, to give a bit more detail. So, we started out with what is the value of the enterprise services asset. And as you saw from the release, the headline value there is $8.5 billion. Now, we wanted to make sure that we did a 50-50 merger of equals tax-free spin merge of Enterprise Services into this new entity. And so, obviously, we made some -- we negotiated some adjustments to that. So first of all, the new company, and I’m sort of calling it for short hand CSCES, will pay Hewlett Packard Enterprise, the future standalone Hewlett Packard Enterprise $1.5 billion of cash, after the deal closes, and will assume $2.5 billion of liability, pension liability as well as old EDS [ph] $300 million bond. And then ES or Hewlett Packard Enterprise will actually subsidize some of that pension liability with offshore cash. So, Chris, do you want to add any more detail to that?

Sure, Meg. Meg you hit the most of the high point. We started with negotiating, like Meg said, $8.5 billion. And at the time that we did the value, the equity value of CSC was about $4.6 billion, and we then developed in order to get the 50-50 merger of equals to make this tax free spin under an RMT [p] structure. We then developed a set of upfront considerations that Meg went through, with the cash dividend and then some transfer of liabilities. So that was roughly $3.9 billion. So, the two components of $3.9 billion of upfront consideration, plus $4.6 billion of equity considerations in CSC stock, essentially makes up the $8.5 billion in total valuation. Now the equity considerations that CSC will essentially issue stock at the time of the transaction and that stock will essentially result in the company being 50-50. And price or the total value at the time of the close will depend on where CSC is trading at that point in time.

The next question is from Steve Milunovich at UBS.

I wanted to go back to this question about the pull-through. I’d think that ES -- well some of it’s very independent, would have pulled through a fair amount of your EG business, particularly as we move more to cloud. And I’d like you to talk a bit more about the commitments that you have. Are you the favorite hardware supplier for the new company? And I guess part of the point of being a pure services company is that they are fairly agnostic. And so, do you lose that over time? So, it’s not obvious to me that you absolutely maintain what you have and it’s just a question if it gets better. I’m a little worried obviously about whether it could get worse. And then, conversely, what is getting rid of the services business or half of it, do for you on the HPE side, what can you do now that you weren’t able to do previously?

Sure. So, actually, we’re very -- this was a very important part of the deal because the last thing I wanted to do was combine CSC with ES and then lose the infrastructure pull-through. That would not have been a value to Hewlett Packard Enterprise. So, we’ve negotiated a deal that I think is very fair. It allows CSC to continue to work with people they’ve worked with in the past, but we’ve also got a commitment from them for the next three years. Beyond that, I am very confident that the work we will do in Hewlett Packard Enterprise will earn our way to that commitment. I mean think about our server lineup, our storage lineup, our networking lineup, our wired, wireless LAN lineup, our converged infrastructure, hyper converged and Helion cloud platform, but we do have, if you will, a safety net for the next three years. But, I also -- one of the benefits of a pure-play services company is to be able to work with best of breed. And I know Mike wants to continue to do that. So, I think we’ve struck a good thing that protects us in the near term but gives Mike the flexibility he needs to do solutions that are right for his customers. On the other side of it is, we do business today with some of ES’s competitors, think about Deloitte or Accenture or Capgemini or the Indian players, and we want to continue to grow that. And they are just like -- for Mike, there is a benefit to being a pure play that will be benefit for us in terms of being, primarily a software-defined infrastructure company and software company. So, we imagine growing the business with those players as well. And by the way, this interestingly happened with the HPE, HP Inc. split. When HP Inc. became a separate company, all of a sudden, a lot of competitors who used to think they were competitors to some degree with our company, all of a sudden were very interested in the HP Inc. offering. So, we think that could happen to us as well.

The next question is from Amit Daryanani at RBC Capital Markets.

I guess, Meg, the biggest question we’re getting right now is what drove the transaction at this point for you guys. And really broadly as you look at HPE post this transaction and after March 31st, what do you think your revenue growth and EPS targets would look like relative to IT spend over time?

Yes. So, listen, I mean part of the benefit of this transaction is focused on a smaller number of businesses that I think play into a sweet spot in IT spend. So, the objective of standalone HPE will be all about helping customers optimize and modernize their traditional IT spend, which by the way is still 88% of the spend in the marketplace, and transition to a multi-cloud environment and also deploy obviously the software assets. So, we are not giving revenue guidance and EPS guidance for the standalone company; I’m certain we will closer to March 31st. But, we expect to go at or above the market rate, as we did this quarter. I think it’s important to look at our results this quarter for Enterprise Group and Software I think they are the best indication that we’ve got a winning company here. We outgrew the market, we outgrew every single competitor, gained share in every single one of our -- against our infrastructure competitors. And I think what you have now is the Enterprise Group and Software on a roll. And the investments that we have made in R&D, the investments we’ve made in a fire in the belly sales force. I mean we have done a transformation of our sales force around not only our channel but also direct selling. And then, if you think about how we’ve optimized marketing spend over the last couple of years, we’re doing better in demand [indiscernible] digital marketing than we’ve ever done. So I think you’ve got a little power house in software defined infrastructure and software.

The next question is from Ittai Kidron at Oppenheimer.

This is Ittai, a question for Tim. Tim, I wanted to drill down a little bit into your third quarter guidance, especially on the EPS, which is below the Street, by about $0.04. How much of this is the H3C transaction? I think you talked about a $0.05 loss and is that also the reason you’re looking for very fourth quarter weighted EPS upside; can you walk us through some of the elements for that variability?

Sure. So, if you take our third quarter guide, we’re at the midpoint about $0.44. The primary delta versus consensus right now is really driven by the H3C transaction to your point. That’s probably about say $0.03 or $0.04. So that implies a ramp in the fourth quarter. And that’s really think about it in three ways, one, it’s typical seasonality. So, when you look at our ES business and our Software business, those businesses tend to be back-end loaded, so that will drive a lot of the improvement. The second component is around the H3C transaction from stranded cost perspective. So now that the deal is closed, there is some overhead costs that we need to take out of the system that generally takes a little bit of time, not too dissimilar to the dissynergy story we had around the separation. And then the third component is driven by the share repurchases. So, there is more of an impact in Q4 versus Q3 on the share repurchase front. So, those are really the key drivers to the ramp in the fourth quarter. But we’ve got clear plan. For sure, we need to go out and execute, but we feel good about the total year, and that’s why we held our total year guide of $1.85 to $1.95.

That’s great. And as a follow-up on EG margins, for two quarters in a row now, they’re down on a year-over-year basis. And I understand that FX is a part of that. But how do we think about the timeline by which we go back towards the 15% range; is that even possible given the mix of solutions? And maybe you can kind of walk us through that and when does TS start contributing for this from a growth standpoint, revenue, not just margin?

Sure. I would say from a margin perspective, for sure, FX has had a factor, has been a factor, particularly if you look at the first half of the year. And that will tend to have less of an impact going forward. We do have a heavy mix of Tier 1 right now. Again, we launched cloud line in the second half of last year. So right now, when you look at our total mix from a Tier 1 perspective, it’s a little bit heavy. Again, that will tend to normalize. So, I would expect the margins in EG to be stable. And I’m not going to give margin guidance here. But again, as we continue to grow Aruba, as we continue to grow storage, that’s going to help the margin front. On the TS front, that business will also stabilize. So, we had -- we were down in revenue 1% in constant currency when you adjust for HPI transaction. But we do expect revenue growth in the latter part of the year. And the way to think about that is obviously that’s an annuity type business given the contracts. So, what we’re going to start seeing in the second half is that those negative growth orders that we had in ‘14; that’s replaced by positive growth that we saw in ‘15, that’s sees our 2016 revenue. So, we do expect TS revenue to be flat on a year-over-year basis for the total year and that will also help from a margin perspective as well.

The next question is from Jim Suva at Citi.

Thank you and congratulations on a lot of work and the big surprise. Regarding the divestiture of H3C, aside just from the pure mechanics of selling 51% and what goes on and what the equity transactions and how accounts and financing. From a pure sales perspective, was there an impact in this quarter and impact in the next quarter as far as transactions whether there will be accelerated or deferred or anything we should think about as far as closing the transactions around the H3C transaction?

I wouldn’t think so, if I’m understanding your question correctly. Remember now, H3C is 51% -- in China, it’s 51% owned by Unisplendour, a subsidiary of Tsinghua. So, the CEO is a great guy by the name of Tony Yu, who is running the business -- or we have the Chairman and the CFO. But, it’s really going to depend on the momentum in that H3C business in the China market. And what I will tell you is the momentum is really good. We had a very good second quarter there, even though the transaction hadn’t closed. And I was just in China two weeks ago, and I will tell you Tsinghua is incredibly committed to this. The management team is fired up. They feel like they control their own destiny in China. And so, I can’t predict what the revenue will do there, but I’m feeling really good about our 49% ownership of business that I think there is a lot of commitment on behalf of Tsinghua and the management team to make successful.

And as a follow-up, regarding the pull-through of the -- I think you mentioned a three-year agreements with CSC. Is that just on the HP services that goes to CSC or CSC also with their other existing businesses can have in a agreement to refer HP for their products?

It’s really around -- so, we sell a certain amount. The Enterprise Group and Software, mostly the Enterprise Group sells a lot of their products to Enterprise Services in an intercompany transfer today. And we want to make sure that that business stays for the next three years, and we have a chance to earn more business. So, think about it as servers, storage, networking, converged infrastructure, the Helion cloud platform and TS, as well as Software. So that is how the agreement is structured. Does that answer your question?

Yes, it does. Thank you very much.

The other thing I would add is they are playing in a $2.5 billion ITO market today that we do not participate in. So, it may will be a growth opportunity for HPE.

The next question is from Wamsi Mohan at Bank of America Merrill Lynch.

Apart from the separation cost associated with this ES transaction, can you talk about any potential cost dissynergies or stranded costs associated with this deal? And I have a follow-up.

Yes, sure. So, the overall separation cost will be $900 million, again $300 million of that will be incurred in 2016 and $600 million of that will be incurred -- roughly $600 million will be incurred in 2017. Again, there is no incremental onetime cash cost associated with this. We will reduce the 2015 restructuring plan by about $1 billion and that will offset the cost for here. As far as the stranded cost number, we will work those costs out through the system. I think the good news is what we’ve learned in the last separation was how to do this and do it efficiently. So, I would just say on the stranded cost piece, if I look at project planning and what have you, we have that much more clearly defined. We know who owns it and we know how that’s going to come out at the system and when that comes out of the system.

Yes. I’ll also add, I think there is a real benefit to having done one separation. The first time you do it you get the best advice you can and you learn how to do it. This time we have this thing down to a science. And so, I think a number of the same people are going to work on this separation, and I’m highly confident we are going to be able to work off the stranded cost probably faster than we did in the version 1.0.

Okay, great. As my follow-up, Tim, on normalized free cash flow, given the higher transactional nature of the business post ES, I’m a little surprised, you have a fairly tight range of 3.5 to 3.8 if I heard you right. How should we think about the volatility of that number, and then just longer term, normalized CapEx spend for HPE in a post ES world? Thanks.

Yes, let me just clarify. The 3.5 to 3.8; that was ‘16 with ES. And so, if you are looking to pull ES out from a normalized perspective, that’s not what I was talking about. I was talking about sort of our current guide with current separation, current restructuring, what have you. In general, if you strip out ES, I think about obviously ES has more CapEx than the other businesses from a normalized CapEx perspective. I think you could see our CapEx go down by $500 million or $600 million. That’s what we typically use for ES. So, that’s sort of how I think about it from a normalized perspective. Again, we’ll give some more color when we do SAM in October, but I think CapEx is the big driver.

As I said, I think what we are doing by the announcements we made today is unlocking the value of these two companies. And remember EG, plus Software, plus our Financial Services business is a faster growing higher margin more robust free cash flow business. And I think now that with a super focused mission, we’re going to see some real benefits there. And then, obviously by consolidating CSC with ES, I think we are going to get real cost synergies there.

The next question is from Simona Jankowski at Goldman Sachs.

Thank you very much, maybe just the last question then on the fundamentals that you’re seeing out there. It sounded like you attribute the strong performance in EG mostly to share gains, but can you also comment on the demand environment? And then, just relative to those share gains, you touched a little bit on what drove that such as retooling the sales force et cetera. Can you just comment in a little bit more detail on any other factors driving your success there, whether it’s related to solution selling or pricing or products, anything of that nature? Thank you.

Sure. So, listen, it is an uneven macroeconomic environment, I think Tim said that out first. And so, different countries sort of go up and down, different regions. But overall, I think we feel very comfortable with our position in the traditional IT market and then in our ability to provide solutions in a multi-cloud environment. So, I think demand can go up and down but our objective is in whatever the market is doing, we want to make sure we at least hold our gain share and we did that in the last quarter. And I don’t think there is anything new to add as to why. First of all, I think the R&D investments that we’ve made over the last four years are paying off. So, the development cycle in servers, storage, networking, those kind of things, hyper converge, these are long term investments. What you started three years ago actually comes to market now or even next year. So, that investment in R&D is paying off. And I would tell you, a dollar spent on internal R&D is the best dollar we spend at HP, it’s fantastic. Second is, when you retool a sales force that takes some time as well. And I would say, we’re much farther along that we have been, and there is more work to do. And then, as I said, marketing, we’ve retooled on our entire demand generation, we’ve retooled -- and by the way, the launch of Hewlett Packard Enterprise gave us a chance to tell people the story of the enterprise side of this business, because prior to that if you had asked man on the street what is HP, they’d say printing and PC company. So, I think that’s actually been beneficial. And then, turn around could take five years; it’s that when I started and we’re rounding the bend into the end of the fifth year. And so it’s gratifying that we saw as reported growth for the first time in five years.

Great. Thank you, Simona. I think that wraps up today’s call.

Thank you very much.

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