Good afternoon, and welcome to the Second Quarter 2020 Hewlett Packard Enterprise Earnings Conference Call. My name is Eily, 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, Ms. Sonalee Parekh, Senior Vice President of Corporate Development and Investor Relations. Please proceed.

Thank you. And good afternoon, everyone. This is Sonalee Parekh, SVP of Corporate development and Investor Relations for Hewlett Packard Enterprise. I would like to welcome you to our fiscal 2020 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. 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 April 30, 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 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.

Thanks, Sonalee. Good afternoon, everyone. Thank you for joining us today. I hope everyone is safe and healthy. [Technical Difficulty]

Pardon me. Ladies and gentlemen, we seem to be experiencing some technical difficulties. Antonio, your line may be on mute.

Yes. Thank you. Sorry. I had the problem with my phone. So, thanks Sonalee. Good afternoon, everyone. Thank you for joining us today. And I hope everyone is safe and healthy. Our fiscal Q2 results represent a full quarter of operating during the coronavirus-19 crisis. This pandemic is unlike any other crisis we faced. And it has brought significant economic disruption. Businesses and communities are struggling, supply chain productivity continues to be significantly constrained, and the demand environment is uneven. The market for capabilities like remote connectivity and virtual desktop solutions is stronger than pre-crisis in certain segments, and we are well-positioned in those areas. But overall, customers are understandably cautious, given so much uncertainty. These dynamics had a significant impact on our financial performance this quarter, given economic lockdowns since February. Our overall Q2 revenue declined by 15% to $6 billion, which led to a 42% decline in our non-GAAP operating profit. This was a tough quarter by every measure, and I'm of course disappointed in the results. But, I do not view our Q2 performance as a reflection of our capabilities nor of the opportunity ahead of us. Through this unsettling time, I have been really proud of our response that is aligned to our purpose to advance the way people live and work. We consider it our responsibility to help the world navigate this pandemic. We have prioritized protecting the health and safety of our team members and supporting our customers and partners as we weather the storm together. At the outset, we moved quickly to mobilize crisis management teams around the world. We took decisive steps to ensure our team members’ safety and wellbeing. We closed all of our sites and rapidly moved team members to work-from-home except for those are performing mission critical roles. We…

Thank you very much, Antonio. Hope you can all hear me and are all safe and well. I’ll start with a summary of our financial results for the second quarter of fiscal year 2020. As I've done before, I'll be referencing the slides from our earnings presentation to highlight our performance in the quarter. Also, please note since last quarter, we're now reporting results according to our new segmentation. Antonio discussed some of the key highlights of this quarter on slide one. Now, let me discuss our financial performance, starting slide two. Our Q2 results were heavily impacted by the global COVID-19 crisis. As Antonia mentioned, our Q2 represented a full quarter of operating under COVID-19. Our revenues of $6 billion were down 15% year-over-year, primarily driven by supply chain disruption, which resulted in significantly higher levels of backlog, particularly in Compute, HPC MCS and Storage. We also saw uneven demand with customers pushing out business activity as they navigated through the current economic crisis and lockdown. At the edge, the market for capabilities like remote cloud connectivity, and virtual desktop solutions was stronger than pre-crisis in certain segments. And we're well-positioned in those areas, offsetting the decline in campus switching that resulted from lower business activity. Despite the challenging backdrop, we managed to maintain relatively stable non-GAAP gross margins, which were down by 20 basis points year-over-year. Our non-GAAP operating profit however was down 42% year-over-year to 6.1% in operating margin terms, and then our non-GAAP EPS of $0.22 was down 48% year-over-year. Our GAAP EPS was a loss of $0.64, primarily due to $865 million non-cash goodwill impairment charge associated with legacy goodwill allocated to the HPC and MCS business segment, which impacted GAAP net EPS by $0.67. This impairment was not driven by the Cray business, which…

So, thank you, Tarek. And I know Nancy is going to operate this. So, Nancy, why we don’t get started?

[Operator Instructions] Our first question comes from Katy Huberty with Morgan Stanley.

Thank you. Good afternoon. The color on backlog is helpful, but I wonder whether you could also give some color on how orders trended through the fiscal second quarter, and what you've seen from an order perspective in the month of May. And then, just related to that, you specifically said that the HPC business and conversion rates would tick up in the second half, but you stopped short of giving a similar timeline for Compute and Storage. So, just any color as to when you think orders will begin to convert in those two segments as well.

Yes. Hi, Katy. Thanks for the question. So, the order intake or what I referred as the order linearity was fairly steady, I have to say. We normally plan a quarter in 13 weeks. The first week is the previous backlog from the previous quarter -- the backlog from the previous quarter and then 12 weeks. Right? And we plan the linearity early on. And I will say, we hit or exceeded our order linearity intake every week of the quarter. And so, these really came down to our ability to convert the order book into revenue. And in the case of HPC, High Performance Computing, let me remind everyone that in order for us to convert that order into revenue, we have to build it, obviously, we have to ship it, but we have to install it and we have to turn it on. And once the customer accepts that installation, which in many cases is fairly large installations, you're talking about number of clusters, that's when only we can recognize revenue. And so, the impact on HPC was two-fold, was not being able to go to customer sites because customers were locked down like we are and not being able to install and deliver and turn it on. And obviously, the same challenge we have in Compute and Storage with supply chain constraints and capacity because of social distances, and obviously, in the components level that we saw obviously a major disruption. And as a reminder, we ship pretty much three servers every minute. So, when that supply chain stops, it’s pretty significant. So, in terms of going forward, our priority one, two, and three continues to be clear the backlog, and that's how I think about it. Throughout Q2, we made progress in the recovery. I’ll say China is pretty much back to normal, but obviously they are clean in the backlog themselves. Because they had to first recover the labor and then obviously, they depend also on sub-suppliers for the components, think about cables, connectors, transistors, you name it. And so, for us, the majority backlog right now is in the bucket. And then, in the regional factories, for the vast majority, all are performing at capacity except one or two, where, the rules and the regulations or the shelter-in-place are demanding that there is a stringent process on social distancing, which obviously impact the capacity in the factory lines, but the factories are all up and running. So, I am optimistic about the weeks to come. So, I take this a week at a time. Obviously, we continue to focus on the order intake, I cannot comment in May because we think you asked the question on May, because we're in Q3 right now. But in Q2, the order linearity was fairly steady. And we expect, not just HPC but Compute and Storage to continue to make progress. And that's why Q3 will be different than Q2.

Our next question comes from Wamsi Mohan with Bank of America Merrill Lynch.

Yes. Thank you. Antonio, you commented on rightsizing the cost structure to a new normal. A few years ago, HPE Next was supposed to be the last restructuring program. And I know no one could have anticipated COVID-19. But, is it your view that you will not get back to pre-COVID levels because of secular end-market challenges, or is there a different interpretation to that?

Yes. Thanks, Wamsi. Great question. So, since you mentioned HPE Next, let me start with that. I mean, I was the architect of HPE Next in the 2017 year. As you know, we launched it in the fall of 2017. And I will say HPE Next was a great success story, because it allowed us to re-architect the Company in the key areas in terms of simplification of processes, streamlining our go-to-market model. Remember, we went from a worldwide geo to country to more a geo model, where we removed layers. And honestly, it allowed us to reinvest back in innovation. And that's where I announced the investment of $4 billion at the edge. And now, we start seeing the results of that, with great numbers, despite the challenges. So, that was a success. And remember, we committed to deliver a $800 million in net savings and which we did and we did ahead of schedule. Now, to your point, this is a crisis unlike anyone we have faced. And I will say, in 2017, I said, listen, we don't envision another cost optimization plan, but this is a cost optimization driven by the pandemic. But honestly, I see an opportunity to go faster in our pivot to our strategy, which is to offer everything as-a-service. It is very unfortunate that we have this pandemic just causing tremendous economic disruption and obviously a huge impact to communities. But, from a business perspective, we are more [convinced] [ph] than ever in our strategy. And we see it. The demand for pervasive ubiquity connectivity. That's why access points are very strong for us. All cloud -- the cloud experience deployed everywhere from the edge to cloud and the ability to consumer as-a-service. And this is where we see tremendous momentum with HPE…

Okay. Thanks, Antonio. And the negative operating leverage on Compute was quite significant in the quarter. How much of that would you say was a supply-driven issue versus demand-driven issue? And how do you think investors should think about the trajectory of that, given that you also have the significant cost actions starting to kick in? Thank you.

Sure. It definitely was a supply chain-driven, although demand continued to be uneven, as we discussed before, particularly in Compute. And I will say -- you have to look at it this way. The shortfall on the revenue is pretty much all supply chain-driven. Because I made the comment early on that our linearity in the order intake was pretty steady. But, in the order linearity, you have to look at the customer segments. Obviously, when you sell to, I call it cloud companies, which are more software companies that deliver their value through the cloud, those are continuing to be steady. If you think about enterprise, I will say those were pretty steady. SMB obviously was the biggest challenge in the transactional business. Because fundamentally, that segment of the market was significantly disruptive. As I think about the future, right, obviously, we already were under a macro situation. But, let's remind ourselves that the Compute platform go through an innovation cycle themselves, even though it's commoditized. And as I think about the Gen10, if you remember the Gen10, we actually told everyone that we said that two thirds of the structural change was permanent because of the ability to attach richer configuration. As we go to what we call Gen10.5 and Gen11, which is happening in the next 18 months, you're going to see more in that. You're going to see, again the same cycle where the density of these products, the amount of memory and storage, you can put inside this Compute platform will continue to increase. And that's good for us because obviously it drives AUP. But right now, our focus is really around, clear the backlog, both on the Compute side and on the HPC side, both finish installation and obviously clear the backlog there as well.

Our next question comes from Toni Sacconaghi with Bernstein.

I have two questions as well. First, it sounds like you're saying there was really a de minimis impact from coronavirus on demand and this was largely supply chain driven. And if you have the supply and you kept backlog at normal levels, you would have done $700 million more in revenue in Q2. And it sounds like if production is up and running, if you are able to bring down your backlog to normal levels, such should boost Q3 revenues $700 million relative to normal seasonality. So, am I thinking about that correctly? And how much progress do you think you can make on bringing your backlog down to normal levels over the course of Q3? And then, I have a follow-up.

Yes. Thanks, Toni. Hope all is well. Yes. I think, you're thinking in the right parameters. The only thing I will say is that definitely the vast majority was supply chain. And as I said in my early comment in the previous question, there was some demand obviously, but particularly in SMB and some elements of the mid market where enterprise was a little more steady. And we saw uptick in demand for example, that consumes Compute for example solutions like VDI, which was in high demand or even big data storage, which at the end, Toni is a Compute platform with a level of hard disk attached to it or SSDs attached to it. So, in that context, you are asking absolutely the right question, and this is what I’m maniacally focused with the team and which as I said, my priority one, two and three is clear the backlog. And as I said earlier, we focus the quarter in 13 weeks, where we enter the backlog, which was the $1.5 billion on May 1st and where we're going to exit on July 31st as the new orders come in. Because fundamentally, we expect the orders to come in. And we have an linearity plan associated with that recovery. So, I feel pretty optimistic about it. But however, it's going to come down to our ability to get the supply in the right place and the ability to execute in the cycle times that we need. And obviously, as you know, we have a very global diversified supply chain, and we have made some series of moves to move products built around the globe, even if they are for other regions. So, we can accelerate that backlog. And so, this is going to be the name of the game. But generally, as I think about the last four weeks, and I think about the next four weeks and then the next four weeks after that, we continue to see progress. But, there's a lot of things, who knows, there is a restart of coronavirus. I'm more concerned right now, Toni, to be honest with you, if something happened in one of these locations where we have the factory and you go into resheltering of the social distancing, that could have an impact. In terms of the velocity behind with components from China, I will say that’s where the vast majority is going absolutely in the right direction. And obviously, the logistics side, as we reopen countries and flights across the globe, that will help as well.

Okay. Thank you for that. Maybe you could -- I mean, is it unrealistic to think you could close, you could get backlog to normal levels? And then, my second question is, if you're really saying that this was largely the supply, not demand disruption, I'm still a little -- I'm having difficulty reconciling the new -- sort of HPE Next too, because on your Q4 call, you were pretty unequivocal there wouldn't be another HPE Next. You felt you were in the right place on cost. You said last quarter, you were doing a little bit more on cost, but it wasn't structural, it wasn’t another HPE Next. And now, you are undertaking a significant multiyear structural change. And A, that doesn't feel consistent with the statement that this was really a supply issue; and B, it makes me wonder like, are you more worried about your competitive position, or are you worried that the IT environment is going to be weaker for a while?

Yes. Thanks, Toni. So, my remarks about what happened in Q2 was about the supply chain and lesser so on the demand. I cannot forecast right now what the demand is on the back end. And this is where in our remarks we said we are looking at the pipeline, we're looking at the economic indicators, which obviously all of you provide, and others. And so, I will not make any further comment because on the demand in -- I don’t know in October or November, I don't know what that will look like. But, I'm just replying to your question about what happened in Q2 definitely was based on the order intake we had. It was -- the vast majority was the supply chain problem. And there were pockets of uneven demand, which obviously were accentuated in SMB space, which was quite significant. But remember, we serve global customers, we serve large enterprise, mid-market and SMB, and in that a lower vertical. So, we have to look at this from multiple perspectives. But definitely in Q2 was -- the vast majority was a definitely a supply chain, and in that demand, we saw pockets of growth, despite the dynamic of the coronavirus, which Aruba definitely was -- despite the 2% decline year-over-year, we saw bright spots in wireless LAN up 7%, North America, the geo 12%, the remote access points we couldn't ship enough of it. I mean, we didn't have all of it. VDI was another one. So, I think that was Q2. As I think about Q3, it’s all about cleaning the backlog. And in a reasonable way, I feel more confident in Q3 and obviously in the results in Q2 because we should expect continuous improvement. As for the demand, I don't know what to tell…

Our next question comes from Shannon Cross with Cross Research.

Thank you very much for taking my questions. My first one is, I realize you're not giving guidance, but can you provide some parameters for us to consider thinking about OpEx, how much is variable, how material do you think the salary reductions will be relative to sort of the overall base run-rate of OpEx? And, is there a significant amount of revenue that’s sort of just sitting out there waiting to be recognized as soon as customers come back and can be trained and can accept? And I don't know maybe something about backlog in terms of your confidence level that you're not going to lose those orders to competitors or that they are pretty firm orders? Just anything you can kind of give us to have some idea of how to think about it? Was this the trough quarter for instance? Thank you.

Sure. Let me start, and then, I will ask Tarek talk about more the first part of your question. Obviously, again, it goes back to Toni's question, the confidence to clear the backlog. And this is where again we are focusing. I feel better about it than six weeks ago. But, as I said earlier, right, we're taking it day by day, week by week. It looks promising. And we continue to make progress every day, every week. In terms of what is the size of revenue? I cannot give you a right now, but I will tell you, remember, HPC deals are normally multimillion dollar deals, sometimes mid-double-digit deals. And those are all waiting to be deployed and installed. And they are all over the world. And so, obviously, we have a fantastic services organization ready to go as soon as the customer let us in. So, those are the things you need to think about it. But, I hope everybody appreciates, we’ve given you complete direction of what was the backlog and what we are doing about it. I think, I'm going to give it back to Tarek to talk about the first part of the question. So, Tarek?

Thank you, Antonio. It's quite difficult to call the bottom or trough quarter, given the level of uncertainty that is currently visible. There's one thing that we know is that the uncertainty is high. And it's everyone's guess what the shape of the recovery will be. So, please bear that in mind. And most people and economists we talk to and spend a lot of time talking to many experts, as I'm sure you did, are not thinking in terms of a V-shape recovery, more in terms of a U-shape recovery. And that's what we are modeling. And this is why we have come up with the cost prioritization plan that Antonio mentioned. And as he said, we need to take every day as it comes. So, in terms of cost take out, there is -- as part of our plan, the goal is to achieve the vast majority of the $800 million net run rate savings by fiscal year ‘21, although we said this number will be visible by fiscal year ‘22. And the reason why we said this is because of this level of uncertainty that exists in the shape of the economic recovery that I was referring to you before. So what we are doing is we’re supplementing run rate reductions with temporary pay cuts and actions that we can take otherwise to protect the financial profile of the company and enhance our liquidity moving forward.

Our next question comes from Jeriel Ong from Deutsche Bank.

Thanks for letting me ask a question. And, I guess, first of all, I’d like to ask a little about GreenLake. Obviously, it was nice that the business still grew, year-on-year. But I'm wondering why you’re confident in an acceleration in that growth. It seems like as the business gets bigger, it'd be hard seeing growth rate, but it seems like you're kind of back ending more of that growth to get to that 30% to 40% compound annual growth rate.

Sure. Thank you, Jeriel. I think, we have a unique differentiated value proposition with the HPE GreenLake. And with the introduction of the HPE GreenLake Central, which is a true cloud native platform where you can deploy the right mix from edge to cloud and consumer as-a-service and deliver the workload optimized solutions in a standardized way, it is a true differentiation for us. And what we have seen in the last several months is a continuous growth in a pipeline and the ability to convert the pipeline into larger deals, larger deals. Some of these deal, in particular two or three, which are triple digits, to give a sense. And so, for us -- and also, they are multiyear, right? So, for us, that's an exciting, because remember, we said many times, when we sign a GreenLake deal, we work with a customer in a multiyear deal. And the pull-through for infrastructure that goes with it and services attached is higher. The services attached through Pointnext operational service is 100% by the way, attach. And the margins are higher. So, fundamentally, we are confident in reaffirming the annualized run rate revenue of 30% to 40% that Tarek talked earlier, because it's a function of getting these continuous momentum and larger deals for many large cap companies. So, I think that's what we feel. And now, we are tailored more for the mid-market as well for SMB. And what the customers are looking for is the ability to scale up and down based on their needs, and also more and more have someone else run it for them. They don't want to be in the run side, they want to be more in the innovation side.

I appreciate that. And just one more for me. I think, I get a sense from the cash spend for the realignment that fiscal year ‘21 is going to be -- seems like the bulk of the spending. But, I guess, I'd like to get an idea for whether it's going to be cost of goods sold or OpEx-driven, if it is going to represent the general mix on your costs generally, or if it's going to be weighted one way or another. Thanks.

I'm going to give that to Tarek.

Yes. Thank you, Antonio. With respect to cash and cash flow and I'd like also to ask you a question for clarification purposes. With respect to cash flow, what has driven our cash flow performance in Q2, is the increase in inventory levels and the change in the cash conversion cycle. We've stocked up a lot of inventory. And the backlog is also a reflection of the fact that we stocked up a lot of inventory. And our cash flow conversion cycle, which was a favorable minus 17 days, dropped to less favorable minus five days because of our stocking up in inventory terms. Could you please, for my benefit, repeat your question on costs and what you were trying to get to here? I did not quite understand it. Thank you.

Yes. So, in terms of your annualized net run rate savings, what areas of your business are those going to come from?

Okay. So, by and large, we're going to leave no stone unturned. That's the message. But, effectively, if you look at what the plan is about, it’s fundamentally around realigning resources to the segments that we started to report back in the first quarter and areas of growth that we see driving better productivity levels across those segments, changing fundamentally the way we engage with customers from a marketing and sales standpoint, rethinking our supply chain to create it in such a way that is more resilient than before, yet agile and efficient, rethinking also our workforce management practices. Because quite frankly, I don't know what your situation is like, but we've been working very effectively from home for the past three months almost. And so, this is pointing to us the need to think about this new normal and what does it mean from a workforce management standpoint, and our real estate footprint. So, you can rethink your real estate footprint now that the world is much more distributed and connected than ever before. So, I hope I have provided sufficient color to answer your question. Back to you, Antonio.

Yes. Thanks, Antonio. Next question? I know, we got into the top of the hour where we are 5 minutes over. Do we have any more questions on the line operator?

Our next question comes from Aaron Rakers with Wells Fargo.

Hi. This is Jake on for Aaron. I was wondering if you could go into a little bit about how we should think about portfolio simplification in regard to the cost optimization plan.

Yes. So, obviously, from the portfolio optimization, I think about the work we have done under HPE Next and continue that work to streamline number of platforms and options, we have done a phenomenal job there. But to Tarek’s point, it’s all about where we build these products and fundamentally, where we also design these products. So, there is an opportunity to continue to drive that optimization. And fundamentally, I think about our portfolio as a way to accelerate that as-a-service model. Obviously, on one end, at the edge, we have a fantastic cloud platform called HP Aruba that we continue to invest -- Aruba Central, that we continue to invest and it’s this 100% software, right, with access points and switching that comes with it, think that way, and obviously through the subscription model. The other thing is, obviously in the core business is how we drive the best workload optimized solutions that they are fully automated and provision from the cloud using HPE GreenLake Central. So, that's another component of that. So, that's how we think about it. And obviously, there is a lot of the work we do even in the core businesses. While people may think it’s hardware -- and I want to give an example. The recent introduction of a distributed hyperconverged infrastructure is actually all software. It's 100% software in many ways. And as I think about the future, how the world will evolve, we're going to live in a more distributed model. Today, it's very centralized in the sense you have your mobile phone or your mobile device connected to some sort of cloud, that cloud can be your datacenter, can be somebody else's cloud. But fundamentally, the cloud experience will extend -- will be extended all the way to the edge. And that's why we have plan in that portfolio to continue to invest in the Aruba Central with integration of 5G and the integration of edge computers. So, it's a combination of freeing up resources in the traditional businesses, reallocate those resources in those areas that will drive the long-term sustainable, profitable growth, based on the work we have done in HPE Next and also continue to digitize everything we have and we can. Okay. So, next question, please?

Our next question comes from Simon Leopold with Raymond James.

Thanks for taking the question. My sense is, is that the quarter you just reported was primarily supply and the uncertainty you're expressing about the outlook maybe reflects more of a shift towards demand. So, I thought it would be helpful, if you could give us a better understanding of what your customer verticals typically look like? In other words, how much is federal government, how much is the SMB market, how much is Financial Services? Because I think even if we can’t make predictions, I think all of us have some sense of which verticals are healthier than others. I appreciate it. Thank you.

Sure. Thanks, Simon. I think, I will say -- let me start with the bad. SMB obviously has been a significant challenge, we all witness every day. That's what has driven a big chunk of the unemployment that we see here in the United States. So, obviously, that will take time to recover. And generally, that market gets served through what we call a transactional engine, and it’s a high velocity engine. In the enterprise, if you take it by vertical, I think telco has been fairly steady. Tarek talked about a portfolio that we have called Communications & Media Solutions. You heard some of the numbers, in some areas growing 40% and 70%. It's all software and services, and obviously drags infrastructure because eventually has to virtualize, whatever infrastructure put there. Financial Services actually was fairly steady and strong. We have a very large footprint. And this is where the diversification of our geo and verticals actually is helping us a little bit. Generally, FSI and telco are very large for us, where retail not so much, and I think retail obviously was more impacted. But I will say, telco or communications, media and entertainment, Financial Services was strong. Obviously, oil and gas not so much, because we know the pricing of the oil. And then, as I think about transportation, obviously impacted as well. But, I will say the number of deals and the size of the deals were generally the same. The elongated sales cycles were consistent. But we align our plans based on the linearity I talked earlier. And Q2 was fairly steady so far. So, whether the first half was supply chain and the second half is demand is to be seen. Again, Tarek talked early on about the shape of the recovery. And I agree with Tarek, I totally subscribe to the U recovery. The question is how far the two sides of the U are and how deep the U is. But right now, it feels steady in those areas. And as I said earlier, our focus is the backlog. Okay. Next question? I think, this is the last -- one more question. I think, this is the last question. I think we have another question on the line.

Our final question comes from Amit Daryanani with Evercore ISI.

Thanks. Hi. This is Irvin Liu dialing in for Amit. As I look at your cost optimization and prioritization plan that was announced today, that will result in a $1 billion to $1.3 billion total cash payment through fiscal 2022. Now, is it fair to say that the cost savings plan will essentially push back the timing related to the achievement of your normalized free cash flow target of $2 billion by let's say another two to three years?

Yes. Thanks for the question. I'm going to pass it to Tarek.

Thank you, Antonio. So, the most important thing in our costs optimization and privatization plan is to achieve those $800 million of net run rate savings and hold them as long as possible in the cost structure, so that we can effectively see more margins in our business. With respect to free flow last year, if it were not for a legal settlement that we paid, we would have exceeded $2 billion free cash flow Mark. So, that was what that business was capable back then with a certain revenue base. And, what you've heard from Antonio is that we are rightsizing the business to what is potentially a new revenue base. And it's too early to tell whether that new revenue base will come back to the pre-pandemic revenue levels, moving forward. But, what's very important right now is our focus is to ensure that we right size our business and deliver those run rate savings, so that we can emerge stronger after this crisis subsides. Thank you.

Yes. Thanks, Tarek. And again, I just want to -- last year was a unique year in the sense that we were pretty much on track. And actually, I would argue, we delivered the normalized free cash flow because we were able to take care of unique circumstances with the settlement in arbitration. So, when you add it all up, it was in excess of $2 billion. And again, it comes down to our ability to drive the operating cash, the cash from operations which general tends to be very strong. Obviously, this quarter, because we couldn't convert, we couldn't deliver that. But, let me remind again that the cost optimization and prioritization is not just about resizing, but it's about shifting investments to the strategy, which I answered earlier to Toni, I think is the opportunity we have now and therefore, making that happen in the lower part of this, whatever the lower is, is the right strategy, so you become stronger on the other end. So, to wrap it up, thanks again for joining us today and for your questions. Let me make a few comments to wrap the call. As I said earlier, these are unprecedented and challenging times for all of us, not just the business, but obviously the economy and the communities. Technology and digital transformation, in my view, are more critical than ever, to enable what I think is going to be new world, the new distributed world where workforces would be located in different ways. And honestly, there will be new ways to run businesses. I think, our strategy to deliver a cloud experience from the edge to the cloud is more relevant than ever. And at the core of that is to securely connect people and things as we see more than 50 million devices being connected to the network every single day. But, at the same time, we need to analyze data faster and to accelerate the business outcomes for our customers. I think, the measure we announced today will allow us to protect not only our balance sheet and continue to preserve the liquidity, which as you saw, in one of the slides, we have a very robust balance sheet with capacity up to $10 billion. So, that's not the issue. But fundamentally, my goal is to adapt the organization to be more agile, to align our resources to the critical core business areas of growth, and ultimately to accelerate the strategy, which I'm very convicted which will result in a long-term sustainable, profitable growth. And I want you to take away that this work is being done with sense of urgency. Whether we are the first to announce it than other people, doesn't matter, we believe that this is the right thing to do, and the time is important. So, again, thank you for joining us, the call today. And I hope you stay safe with you and your family. And we'll talk soon. Take care.

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