Good day and welcome to the First Quarter 2021 Hewlett Packard Enterprise Earnings Conference Call. My name is Cole and I will be your conference moderator for today’s call. And 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, Vice President of Investor Relations. Please proceed.

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

Well, thanks, Andy, and good afternoon, everyone. Thank you for joining us today, and I hope you and your families continue to be safe and healthy. It is hard to comprehend everything that has transpired around the world over the last year. The world we knew pre-pandemic has changed forever, and the need to use innovative technologies to advance the way people live and business operate has never been greater. Improving the health of our communities from educating our children to digitizing our economy and enable its recovery creates an enormous opportunity. I believe we are entering a new year, the age of insight, fueled by the amount of data around us. The arrival of safe and effective COVID-19 vaccines is a marvel of innovation and good news for us all, bringing hope and optimism for what lies ahead. I am personally very excited about the future of innovation and the impact it will have.

Thank you very much, Antonio. I will start with a summary of our financial results for the first quarter of fiscal year ‘21. As usual, I will be referencing the slides from our earnings presentation to guide you through our performance in the quarter. Antonio discussed the key highlights for this quarter on Slide 1 and now let me discuss our financial performance and KPIs, starting with Slide 2. I am delighted to report that our Q1 results were marked by continued momentum in revenue, substantial gross and operating margin expansion and robust cash generation. We delivered Q1 revenues of $6.8 billion, down 3% from the prior year period, but better than our typical historical sequential seasonality when normalizing for Q4 backlog. I am particularly proud of the fact that our non-GAAP gross margin returned to above pre-pandemic levels and was up 30 basis points from the prior year period and up 300 basis points sequentially. This was driven by strong pricing discipline, the absence of backlog-related headwinds, cost takeouts and an ongoing favorable mix shift towards higher-margin software-rich offerings. Our operating expenses decreased year-over-year, thanks to our ongoing structural efficiency measures as well as some timing-related benefits related to hiring in key selected areas, which have been pushed out. Our non-GAAP operating margin was 11.3%, up 130 basis points from the prior year, which translates to an 11% year-over-year increase in operating profit. As a result of our strong execution, we ended the quarter with non-GAAP EPS of $0.52, which was up 4% from the prior year and significantly above the higher end of our outlook range. Q1 cash flow from operations was close to $1 billion, driven by better profitability and strong operational discipline as well as working capital timing benefits. Q1 free cash flow was $563 million,…

Great. Thanks, Tarek. First question, please. Thank you.

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

Thank you very much for taking my question. I’m curious, everyone is talking about digital transformations, and they seem to have really gained traction early in COVID with the need for remote work. But now could you talk a bit about how customer priorities and purchase decisions are changing as we’re moving past COVID? And I’m wondering if it’s an opportunity for more consultative sales and higher ASPs margin. If you could talk about it maybe by segment, that would be helpful because I assume it may vary across your business lines? Thank you.

Thanks, Shannon. Yes.

Well, thanks, Shannon. Yes. I will take that, Andy. Well, we definitely still see the tailwind of what we saw in 2020. Obviously, we work in a much more distributed environment. We talked about this all the time about the fact that many employees will never return to the office, and they need access to data and services in a very connected way. And so that’s why we believe our Aruba business, it is a digital transformation engine for our customers. It is not just about access to a Wi-Fi port, but it’s also the fact that provides that edge-to-cloud connectivity for all the apps and data, wherever they live. So what we see though is an acceleration for definitely the access to data, the analytics side. We see AI machine learning taking holding every segment of the market because data insights is necessary to compete in this new digital economy. We see, obviously, the need to improve IT resiliency based on the learnings we had in 2020. We see also the need to deploy cloud everywhere. And remember, our definition of the cloud is an experience, not a destination. And that’s why we are very bullish about our HPE GreenLake cloud services. The pipeline, the size of the deal, the need to engage in a consultative application-driven conversation is increasing. And that’s where we have aligned our advisory and professional services to that part of the business. So I think there is going to be a mix of things, Shannon. But ultimately, digital transformation is no longer a priority. It is a strategic imperative. And those who move fast around the data insights and digitizing everything will be the winners. No question.

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

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

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

Well, maybe I’ll start, and then I would like Tarek to talk about the EPS upside. Listen, I spent more than 50% of my time talking to customers and partners, and I see a renewed focus on making sure the businesses are positioned for success. Definitely, there is a need to modernize their infrastructure and deploy these new technologies across the board. Our order linear intake, Wamsi, it was very solid every single week of the quarter. There was no one week that was higher than others. Honestly, I was very pleasantly surprised about that. The way I manage the business with my team, a quarter has 13 weeks because when you go into a quarter, you already have a week of backlog and then you drive your linearity from there. And it was very consistent. It was across all businesses. As Tarek said, our Compute business saw sequential growth in our order intake, the same in our areas of the Storage portfolio, where we are pivoting, particularly everything that’s software-defined. Aruba was very strong out of the gate, and we see the momentum going through 2021. GreenLake the same thing, but ultimately, their vision of edge-to-cloud is paying off because ultimately, customers need that architecture and a set of services that they can deliver what they need in this digital transformation. So we feel very confident about that. And that’s why we are confident in raising the outlook, which Tarek gave you the insights about the EPS upside. So maybe, Tarek, you want to talk about that?

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

Great. Thanks, Wamsi. Can you go to the next question, please?

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

Yes, thanks for taking the question and also congrats on the quarter from me as well. I want to ask about the margin profile. Tarek, when you think about the performance that we’ve seen this last quarter and you think about the mix of the business going forward, I guess, how do you think about the continued upward levers on gross margin? And can you just remind us of where we stand on the $800 million net savings initiatives from an OpEx perspective? Where we stand at now and what’s left in terms of that target by the exit of fiscal ‘22? Thank you.

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

Great. Thank you.

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

Yes, good point, Antonio. Thanks, Aaron, for the question. Operator, can we go to the next one please?

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

Thank you. My congrats on the quarter as well. Question for Tarek, you beat the first quarter by about $0.11 versus consensus, you guided up the full year by $0.10. So the guidance implies that you don’t operationally beat the next three quarters. Is that just prudence as we await full visibility into the pace of demand recovery? Or is that tied to some of the delayed OpEx investments that you mentioned? And maybe if you can detail what some of those investments are just so that we can understand what those are? Thank you.

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

Great. Thanks, Katy for the question. Can we go to the next one, please?

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

Thanks for taking my question. And I’ll extend my congratulations as well. I wanted to talk a little bit on Aruba, fairly strong double-digit growth over here. And I think that’s fairly impressive given peers like Cisco and Juniper are probably seeing low to mid single-digit growth. I know Silver Peak got some element to this. But I’d love to get a sense from a share gain perspective, where are you seeing the share gains on the products and vertical side? Some color there would be helpful. And then the durability of this growth, that would be helpful to understand as well.

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

Great, thank you. Thanks, Amit for the question. Can we go to the next one, please?

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

Thanks for taking the question. I wanted to see if maybe you could help us understand where you see your market in terms of enterprises coming out of the pandemic or recovery? And really, the root of this question is Intelligent Edge looks like it’s recovered with the year-over-year growth, whereas the other segments, maybe we can expect more of a recovery pattern later this year. So I’m looking for maybe a bridge between what’s execution and what’s kind of macro recovery by segment. Thank you.

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

Antonio, if I can add color to compute business, I think it’s important we let everyone on the call know, that when you look at the underlying performance of compute and particularly when you normalize for Q4 backlog impacts, both AUP and units were up sequentially. So there is a real recovery in Compute if you strip out the impact of backlog in Q4. AUP was up high single digits, and units were up approximately 10% quarter-on-quarter once you do that normalization. It’s very hard for analysts outside the company to do the normalization, but that’s why I wanted to make the point. So hopefully, that will resonate with the analyst community on this earnings announcement.

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

And our last question today will come from Paul Coster with JPMorgan. Please go ahead.

Not a very exciting question to finish up on, but it looks like you’re pushing the upper boundary of your expected operating margin range for the core businesses. And I’m wondering – and it sounds like they could get better yet. So are you going to change the range of expectations around operating margins or is this just sort of unsustainable what we’re seeing at the moment?

Tarek, you want to take that?

Yes, I will take it. Paul, this is a very exciting question. It’s a very exciting question for me. It’s essential. So don’t be shy about it. I would simply say, look, we have to keep the expense discipline and drive productivity. We feel that the upper boundary has yet to be tested. And I would say that this is always, in a company like this, not a short-term endeavor, but something that has to be done on the sustainable business – on a sustainable basis moving forward. But remember also that what drives the operating margin is the continuous expansion into software. Margin risk software offerings and our ARR will start to shine as it continues to accelerate into fiscal year ‘21 and ‘22.

Great. Thanks, Paul, for the question. Antonio, maybe I’ll turn it over to you for any final comments you have before we close the call.

Well, thank you, Tarek, and thank you, everyone, for joining us today. I know there are more questions, but I know Tarek and the team will get off-line with you on the one-on-one follow-up calls. Now, I mean, I just want to reiterate this is a very solid start for our company for fiscal year ‘21. Obviously, we remain committed to driving shareholder value. I’m particularly pleased with our results in profitability, in free cash flow, which was record-breaking. The fact that we are confident in the demand recovery and our own execution that allows us to raise guidance for the full year in both non-GAAP EPS and free cash flow, we see tremendous momentum in our areas of innovations and focus, Intelligent Edge and even HPC business, remember with our lumpiness of the business, confident to deliver that 8% to 12% growth and in the pivot to as-a-service. So because all of that, we believe this is going to be a good year in balance. And obviously, we’re all watching the trends with the COVID. But I think customers realize that this is the year they need to make the investments to digitize everything in the company. So again, thank you for joining us today and I hope you continue to stay safe and healthy. Talk to you next quarter. Thank you.

And ladies and gentlemen, this concludes our call for today. Thank you. And at this time, you may now disconnect.