Good morning, afternoon, and evening and welcome to the First Quarter 2020 Hewlett Packard Enterprise Earnings Conference Call. My name is Sean, and I will be your conference moderator for today's call. At this time all participants will be in a listen-only mode. We will be facilitating a question-and-answer session towards the end of the conference. [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. I'd like to welcome you to our Fiscal 2020 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 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. HPE assumes no obligations 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, 2020. 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 are adjusted to exclude the impact of currency. Finally, please note that 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 it is also embedded within the webcast player for this earnings call. With that, let me turn it over to Antonio.

Thanks, Andy. Good afternoon everyone. Thank you for joining us today. HPE’s first quarter results demonstrate continued progress against our strategic priorities to shift our company to higher margin and more recurring revenues against a dynamic market backdrop. I am disappointed that our overall revenue is $6.9 billion, reflects a 7% decline for the quarter, primarily due to declines in our compute business. However, I am pleased with the results in several key areas of our business aligned to our strategy. Our pivot to as-a-service is gaining momentum. Our annualized revenue run rate grew 19% year-over-year. We started reporting this new metric last quarter to provide more transparency into the recurring and higher margin benefits of shifting to our as-a-service model. We grew HPE GreenLake services’ orders 48% year-over-year. HPE GreenLake gained 65 new logos in Q1 and has surpassed 800 total customers. We returned to growth in our Intelligent Edge business with revenue up 4% year-over-year and we continue to see profitable growth in areas of investment including High Performance Compute, Hyperconverged Infrastructure, Big Data Storage and Operational Services orders with continued improvements in our services attach intensity. Our Q1 revenues were impacted by a number of factors. First, like many of our peers, we continue to see uneven and unpredictable demand due to macro uncertainty. This has resulted in longer sales cycles and delayed customer decisions. Second, commodity supply constraints disrupted our ability to meet our customer's demand this quarter, particularly in our compute and high performance compute businesses. Additionally, the outbreak of the coronavirus at the end of January impacted component manufacturing resulting in higher quarter and backlogs. In both of these cases, we have established specific mitigation and recovering plans with each of our suppliers. Finally, we encountered a challenge in consolidating a manufacturing site in…

Thank you very much Antonio. Now let me provide more detail on our financial results for the first quarter of fiscal year 2020. As I have done before, I'd be referencing the slides from our earnings presentation to highlight our performance in the quarter. Also, please note that we are now reporting results according to our new segmentation. This will provide more granular detail on the financial performance of our businesses and our progress towards becoming the edge-to-cloud platform-as-a-service company. Please refer to our recently filed Form 8-K for more detailed information, which includes historical reconciliation tables for the last two years. Antonio already discussed the high-level points for the quarter, but I want to briefly reiterate the main takeaway. We are continuing to execute on our transition to higher margin and more recurring revenue areas in a challenging business environment. We also remain confident that we have the right strategy in place and are taking the right actions to lay a foundation for sustainable, profitable growth in the future. Turning to Slide 2, with the financial highlights for the quarter, despite the top line challenges from uneven demand and component supply and manufacturing constraints that I'll provide more detail on shortly, we continued to expand non-GAAP gross margins which improved by 210 basis points this year, driven primarily by portfolio mix shift, cost of services, efficiencies and commodity cost tailwinds. This gross margin expansion combined with other income and expense benefits that included record equity interest contributed from our ownership in HPC and share buybacks resulted in diluted non-GAAP EPS of $0.44 which is up 5% year-over-year and in line with our original outlook for the quarter. On the cash front, free cash flow was a use of $185 million, which was in line with the prior year and…

[Operator Instructions] Our first question will come from Katy Huberty with Morgan Stanley. Please go ahead.

Thank you. Good afternoon. Tarek, how much do you think that temporary factors like component constraints, the supply chain disruption can coronavirus and the factory consolidation in North America had on total revenue. And then as a follow-up, Antonio, given how important revenue growth is for stock price performance and valuation, can you talk about the investments you're making and the timeline investors should think about to return the company to growth and how dependent is that path on M&A. Thank you.

Okay. Good afternoon Katy. Thank you for the question. With respect to how much those short term disruptions have accounted for our revenue performance, I would say quite a lot. There are three things that affected our revenue performance. These are the macro environment softness. The second thing is supply chain constraints. And the third one is also the manufacturing north consolidation in North America. We've taken steps to address what's under our control. Nonetheless, coronavirus has effected the tail end of the quarter and injected a new degree of uncertainty. And when you look at the revenue performance of the company, most of the decline came in the Compute category that we referred to in our new segmentation and that decline has a lot to do with what you referred to from a supply chain standpoint.

Yes. Good afternoon Katy. And thanks for the question and just will add to Tarek that we felt pretty good about the recovery in the north consolidation that's under our control. All the other factors Tarek explained very well. In term of, when think about investment long term, we have been very clear where we want to invest. Investment obviously is in Intelligent Edge. We see that as a next frontier, big opportunity for us. We continue to do so. And I have to say I'm incredibly pleased with the Q1 performance because we said that business would return to growth and we show, we demonstrated that’s the case. We outperformed the market and every single competitor there and we are very, very pleased with the differentiation we have with our portfolio with higher margin. So for us, that's one area of investment, much of that growth has happened organically. But we always look for what it makes sense for us in term of accretive addition in term of intellectual property and talent, right, that we want to continue to expand that set of experience we deliver at the edge. And as I said in my opening remarks, we are on a journey to integrate 5G and mobile edge computing on a very robust cloud based solution called HPE Aruba Central, which is all subscription base and obviously we can deliver that through GreenLake. Obviously the other piece of this is what I call intellectual property to make our core business stronger. And that's all softer decline on the core with some additional call it intellectual property in the Silicon space. That's what the core of the Cray acquisition was all about. The Cray acquisition is all about software in a cloud native environment to run these big data intensive workloads. And silicone was all about that. And as I think about the pivot as-a-service also we looking for software that will make our as-a-service experience unique and differentiated in a true age to cloud platform. And as I announced in my remarks, we introduced two key platforms. One is HPE GreenLake Central, which is the console, the control point for managing and deploying workloads at the edge in the core on off premises. So we add that managed services layer on top of that and then the container platform, which is a true cloud native environment, where you can run both legacy and cloud based workloads. So those are the things we are doing, but I just want to emphasize, we have a very stringent and rigorous process here on return on invested capital. And I see as in M&A as one of the three levels to drive innovation. Organic is one aspect, partnership is the other one and inorganic. And I say that the last 15 acquisition I had been part of it has been always in that vein and that's our goal.

Thank you.

Thank you. Katy. Can we go to the next question please?

Our next question will come from Jeriel Ong with Deutsche Bank. Please go ahead.

Awesome. Thank you, so much. I appreciate you giving me a chance to ask a question. To start off, is there any guidance for revenue for the year and focusing on the quarter itself, could you quantify or for the guided quarter, could you quantify maybe how much below seasonal you think the these coronavirus impacts and supply chain constraints could impact the next quarter?

Okay. So let me start by the second part of your question, which is how much of an impact will the coronavirus have on our business? Well, first as we already flagged the health and safety of our employees, customers and partners is our priority and out of abundance of caution for them, we've made the decision to cancel or postpone most of the HPE sponsors events through April. And unfortunately, this is also closing supply and demand disruptions and effecting our revenue profile. The outbreak at the end of January, started to impact the component manufacturing and resulted in constrained supply and higher quarter-end backlog worldwide. And we have been in constant contact with our suppliers and are establishing specific mitigation and recovery plans. So, this is affecting our revenue profile for the full year. And this is why we're not guiding in the short term and relative to what we said at SAM where we were experiencing – we were thinking we would be returning to growth in fiscal year 2020. I don't think that it is likely at this stage that we were going fiscal year 2020 as a whole for the fiscal year, but we do anticipate recovery of those supply chain constraints over time and face easier comps during the course of the year.

I would like to add a couple of comments. One is on the coronavirus. Obviously, this is very fluid at this point in time there is uncertainty. We have a daily process with each of our suppliers that we manage very, very tightly and some of those, the suppliers are dependant on other suppliers. Because as you can imagine that supply chain is a little bit longer with the tier two, tier three suppliers that provide what I call low-level components to build what I call the printed circuit board. So the PCIs or the PCBIs and that's a challenge we see today. And we see recovery, but obviously it's going to take time and that's why Tarek said, we cannot provide right now a definite guidance. I think would be not appropriate and that's why we prefer not to provide Q2, but because of the recovery is going to happen through the year, that we felt comfortable reaffirming the 2020 guidance. If you remember when we went to the Security Analyst Meeting in October, we said that we expect to grow the company on a three years basis, long term plan or 1% to 3%. I think that this is still complete and intact because as you can see, as we pivot the portfolio to higher value and higher margins at the same time, the pivot as-a-service, which is going extremely well, and then obviously Intelligent Edge business growing. That's how we think about the long term growth in the right margin profile. Obviously the Compute at this point in time was the challenge short term. I don't think it was off compared to some of our peers. In fact, in some cases we did better than our peers, but that was a disappointment and obviously we need to stabilize it and manage it through the supply chain recovery.

Thank you. Can we go to the next question please?

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

Yes, thank you. I have a question and a follow-up. First I was wondering if you could provide book-to-bill information or backlog information for the Compute business for this year relative to the end of Q1 last year. I think that would provide incremental confidence and insight into how much of this is component in your inability to fulfill versus how much of this is kind of a demand issue. So, a book-to-bill for Compute this year versus last year and/or backlog for Compute this year versus last year. And I have a follow-up please.

Sure Toni. Good afternoon and thanks for the question. I don't have the book-to-bill but I can tell you we entered Q2 which is the quarter we're in with higher backlog than we anticipated and definitely it is more on the elevated side. And so that's true for Compute and as well a carryover for high performance compute, which are the core of that product. Toni is the legacy HPE Apollo. So we enter Q2 with a higher elevated backlog than we have seen. I don't see yet let me qualify this outside China. I haven't seen yet a significant impact on demand so far. Definitely in China, as you know we have a different setup with our H3C partnership there. And you should expect a short term impact in China. But right now they are working it through it. But I will say right now we haven't seen a significant impact. If anything actually creates short term opportunities. I can tell you because of the coronavirus we see customers coming to us and say, can you ship this product to take care of the fact that my employees are not going to be at work. We see some demand in specific areas of our workload optimized solutions. And as I said in my opening remarks, we do have as an awarded business, which obviously we have to build and ship more than $2 billion in HPC business that we have to ship over the next several quarters in the next two years. And that business is doing very well from my vantage point, but it is obviously segregate in two different segments, compute and on the other hand, HPC and Mission Critical.

Okay. Thank you. If I could just follow-up I'd love to get your impression of the stock. It's obviously very beaten down and I'd like your view on that. And you've talked about your openness to doing acquisitions. And I'm wondering if you could clarify whether there's a size limit or whether you would go to 10 billion, but also are there other structural moves that you would consider? So would you consider taking on debt and aggressively repurchasing your own shares given the valuation right now like HPQ has done. And would you consider other portfolio moves such as divesting businesses like, just for example, because it's small and orphaned A&PS or other businesses. So how – what do you think of the stock? How big the acquisition size? Would you think about debt repurchase? And how about divestment? Thank you..

And I'm going to start then I'm going to give it to Tarek. Let me talk about the stock. Listen, I think it is a point in, kind of situation in my view, we are heavily discounted. There's no question about it. But think about the last nine quarters, Toni, and think about the gross margin expansion and the EPS expansion we have had. It is pretty remarkable. I mean, the last two years we expanded the margins every single quarter and we have expanded EPS every single quarter. So my vantage point, we have done the right things. We have made the company leaner, meaner, and at the same time we have taken big, big, big challenges. And we have managed it through. So, I think for us is to continue to focus on the areas where we see the opportunity to compete and win in higher margins. But obviously the stock also thinking about long term growth and I understand that and obviously a big component of that is our Compute business, but in the end, I think the stock is heavily discounted. I'm disappointed with that. On the M&A, we have been very clear since day one that we look at assets that they are accessible that generally they are accretive or we can manage the dilution very quickly, but ultimately is, has to have strategic fit. In the context of our strategy, obviously, whether it is the edge-to-cloud architecture and pivot to know as-a-service I think the assets we have acquired makes complete sense from that vantage point and we have delivered strong results. Size is important, but I will say it's more strategic effect and obviously the return on that investment capital, which we have incredible strong discipline and where we have demonstrated at over the last two years. And so, maybe I will pass it now to Tarek because you asked the question about taking debt and buying stock and so forth.

Yes. So, Toni, I would say, Antonio answered the question on the stock. I would simply point to you at the performance of the values part of our business, the Intelligent Edge, which has outperformed the sector quite substantially this quarter. What's the value of that? If you look at our storage business, which has done better than most of the players in the market and is of the same size as a very large pure-play listed company, what's the value of that? And if you look at our HPC and MCS business and the $2 billion of backlog contracted revenues that would come in, what's the value of that? And then you have to look at other players in the sector and compare our compute business to them and see that also for those players that compute business is valued negatively from an equity standpoint, but it does generate cash and we have to figure that out. Finally, let me finish by saying HPC, the production was the value of that. It's a listed company and it's pretty substantial. So I'll let you conclude whether the stock is beaten down or not and how much is beaten down and probably in your own question you have the answer. Well, expected acquisitions – sorry, go ahead.

No, I was just going to say, you basically said I think it's really beaten down, especially on some of the parts. So then are you or why wouldn't you consider much more aggressively repurchasing your own shares at these levels?

So the thing that we – let me just finish up answering the other part and I'll come back to your question on buying share. With respect to acquisitions, Antonio answered very, very clearly. We remain disciplined in that field when we're not going to look at acquisitions that don't fit our investment criteria from an accretion dilutions standpoint. It's very, very important. We do that. A&PS, specifically for A&PS, it's a very strategic business that pulls a lot of revenue and profits in other parts of the organization and it's essential for enabling the as-a-service pivot. Now coming back on to your question with respect to aggressive buybacks, we did in the past two years execute a $7 billion capital return program to shareholders. We returned 2.9 billion by way of dividends and 4.1 by way of buybacks. And what we did flag at SAM is the fact that we are going to continue to return capital to shareholders in line with our free cash flow generation capacity. We're not going to deviate from this because it's important that we continue to think about the long-term value of those businesses and each one of those businesses has its own investment profile and needs to be therefore catered for.

Thank you.

Thank you.

Thanks, Toni.

Thanks, Toni.

Can we go to the next question please?

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

Thank you very much for taking the question. I wanted to look more at your cost cutting actions. I think you talked about taking actions during the current quarter, which maybe curtailing travel, which obviously would save money, but more importantly how are you thinking about the expansion of Next? Is this sort of a reevaluation of your cost base? Or is it more sort of a continuation of your usual productivity actions? And then I have a follow-up. Thank you.

Sure. So thank you Shannon for this question. When first and foremost you may recall when I joined HPE 14 months ago, I use the expression that SAM in 2018 that looking at our cost structure was akin to a fitness exercise. And it's always important that we look at our cost structure based on the revenue profile that we have and it's no different right now. Specifically to HPE Next, we are continuing the implementation of the program in that context where we have to align our cost structure to the new business climate that exists. We're not announcing a new restructuring plan. And what is happening is that through the implementation of the new segmentation, we have identified new savings opportunities in each of the businesses and we'll continue to streamline our operations in that context.

I would say Shannon a couple of things. So I think that what we have done in the last two years give us insights on how we can streamline our operations and be even more agile in focus on everything we do. And as you recall, the HPE Next was really transformative from the process standpoint as well as from the IT perspective. And I will say for the vast majority of everything was executed flawlessly and we have delivered the results with a gross margin expansion you see. As we implemented this new segmentation, now we can see through even better visibility on what else we can go and do. And as Tarek just said it right, the reality is you never stop focusing on improving your operations and because the HPE Next actually at the quarter was a cultural transformation, it give us the ability now to take further actions, which are actually I will argue timely considering the uncertainty we live in, but it's to do the hard things now as these things recovered to come on the other end even stronger than before. On the short-term actions, I think first we have to protect our employees. First and foremost, I think, it’s important. And that was the first step. And then obviously that comes with the benefits and the savings, but I want to be clear, this is all about protecting our employees to make sure they don't get exposed for things they don't need to.

Thank you. And then can you talk a little bit about what you've seen just in the last couple of weeks in terms of production capability or capacity and things coming online. I'm just curious because some of the other companies in the space have started to mention that they're seeing some improvement in the supply chain. Again, this is more on the China side, but just in terms of availability of components in that and when we talk to is even indicated that almost on a daily basis things were getting better. So I'm just curious as if you can talk at all about near-term trends.

Yes, no, that's correct. We see kind of the same thing. Obviously, some company has been aligned for some time and they have been recovering on a daily basis, the output of their facilities or their capacity. Obviously, the biggest constraint they had at the time was labor because obviously depending on the region within China, but eventually it became the entire China for the most part is the health measures and certifications that they have to go through. But in general, I will say, it progressed every single day and whether it is people coming online or people improving the output or what we’re already doing. And so that's progressing. And so you have to take it day by day. And obviously, what we're doing is, because we have a global supply chain here is – China is one aspect, but also how we manage inventory and how we manage the distribution of those orders in a way we can maximize the return while these things gets back to normal. That's how we are managing it. And to be honest, we have a very stringent process with war rooms and talking to suppliers every single day. I personally have talked to at least 50 of them, myself and I have direct contact with each of them.

Great, thank you.

Thank you.

Thank you, Shannon. Can we go to the next question please?

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

Yes. Thank you. Your free cash flow guidance came down but EPS did not. I was wondering, are you still expecting the same operating profit dollars? Or are there other items, some benefits below the line that that are contemplated within your guidance and have a follow up?

Yes, thank you, Wamsi. So you remember last year, this time of the year, we did say that from a free cash flow standpoint, working capital would be a contributor to cash. And that is what happened last year. This year, we have attained the point where our cash conversion cycle is negative. And whilst we do deliver the EPS guide and we confirmed it per Antonio, the drop in revenue will inevitably have a drag on the free cash flow generation. That is because we have a negative free cash flow cycle. So the way cash tracks earnings is a combination of what happens in the P&L at EPS level, but also the working capital components that comes with a P&L and the revenue from the accounts receivable side and also the fact that we need to build inventory to be able to cater for the supply chain shortages that we explained. That is what is behind the difference between the P&L EPS performance and the free cash flow guide that we put forward.

And I will say in 2020 obviously it's a timing issue as we recover the supply chain and that is a timing from the – when we can build and ship these products obviously and also the fact that we have to rebuild some of the inventory because as the operations in China and other parts of the world maybe were impacted. We had to manage that inventory and now we have to build it back over time.

Okay. Thank you. Antonio, you commented on sort of the uncertainty surrounding 2Q, but you're also seen to be confident on the fiscal year guide. I understand HPE Next is under your control. But what gives you confidence that this demand comes back? It's clear that things in China are improving, but when you sort of think about the demand environment globally, what gives you confidence that the demand is going to come back in the second half because that's what it seems implicitly what is embedded in your full year guide? Thank you.

Yes, I mean, first, let's start with some of the businesses I have reported earlier and Tarek provided detail. Obviously, the Intelligent Edge, we see continued momentum. That is continuing right now as we speak. We feel pretty good about that. Much of the supply chain is not gated in China for the Intelligent Edge, so that's a positive news. Then obviously on high performance computing, the demand continues to be solid. And we have a very interesting pipeline ahead of us with a unique differentiated portfolio. So the need for processing data through AI, machine learning, big data intensive loads continue to be very high. That's not stopping. As we think about these new storage platforms, particularly what I call intelligent data platform, the data growth requires that that data gets stored and gets managed and ultimately insights are extracted from it, so that's positive as well. Right now, as I said earlier, as we went through Q2, we enter with a sizable backlog because we couldn't ship it, in Q1 everything we wanted. And at the same time, we haven't seen yet outside China a significant impact, but obviously as we think about the second back of the year here, obviously we expect to things to return to a level of normalcy that eventually will allows us to continue to progress against that. That's how I see it right now. And because of everything we do both from a mix perspective with the pivot obviously as-a-service, which is a long-term opportunity and growing and the fact we're taking our own actions here with HPE Next and other ones. And that's why at this point in time, we felt comfortable in affirming the original guidance that we provided here on EPS. So we felt prudent to adjust the cash flow for the dynamics Tarek explained earlier.

Perfect. Okay. Thank you.

Perfect. Thank you, Wamsi. I think we have time for one last question please.

Our final question will come from Simon Leopold with Raymond James. Please go ahead.

Thanks for taking the question. I've got two. One is probably really simple, so I'll ask that one first and then the follow-up. What are your expectations for the full year's net CapEx? If you could answer that and then I've got a follow up.

Look, net CapEx for this year is not a particularly large number. In this first half of the year, we have benefited from in plan sales that have reduced our overall CapEx consumption. And we think that from a CapEx standpoint we’re in line with prior years. I don't see beyond the first quarter performance, a significant uptick in CapEx this year.

We don't have any specific CapEx expenditures that they are extraordinary from what we had seen before.

Okay. And then the other one I wanted to see if you could give us some better insight is to understand how much money you would be able to borrow say for acquisitions or other purposes yet still maintain your investment grade credit rating. I believe that's important to you. So just I want to get a better understanding of what the sort of maximum borrowing could be. Thank you.

Well, it really depends on what you borrow the money for to some extent, right. And that's a question. But if you really want to look at how do we maintain our investment grade rating and what would be our borrowing capacity maintaining than the investment grade rating, it's probably around the $5 billion mark.

But I want to make sure that one thing is clear, right. We are committed to maintain our credit rating.

Thank you very much.

Great. Thank you, Simon. I think with that we can close down the call.

All right, thank you.

Thank you everyone for joining us.

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