Good day, and welcome to the Fourth Quarter Fiscal 2022 Hewlett Packard Enterprise Earnings Conference Call. My name is Chuck, and I'll 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 our conference. [Operator Instructions] As a reminder, this conference call is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Jeff Kvaal, Vice President of Investor Relations. Please go ahead, sir.

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

Well, thank you, Jeff, and good afternoon and thank you for joining our call today. HPE had an impressive fourth quarter, delivering outstanding performance across our key performance metrics. Q4 was HPE's most profitable quarter on a non-GAAP continuing operations basis since 2017, with our second highest quarterly revenue and record quarterly free cash flow. In 2018, we introduced a clear strategy to deliver sustainable long-term value for shareholders. And in 2019, we began our pivot to prioritize recurring revenue through our HPE GreenLake edge-to-cloud platform. We have refocused our portfolio and our customer value proposition to a high growth and higher gross margin solutions. We also improved our operating leverage across the Company. We are now seeing these strategic actions paying off. In Q4, orders remained steady, showing continued interest in our differentiated edge-to-cloud solutions across industries from enterprises, large and small. Demand over the course of the year was enduring and proved to be better than we anticipated. We closed this fiscal year with a significantly larger order book that we had at the start of the year. I am very proud of our performance in the quarter and in fiscal year 2022. Faced with ongoing macroeconomic challenges, supply constraints and adverse foreign exchange, HPE executed exceptionally well. During the fourth quarter, total HPE revenue climbed 4% year-over-year on a constant currency basis to almost $8 billion, which was above our sequential outlook as we started to see a slight improvement to ongoing supply constraints. Our Compute and Intelligent Edge businesses had particularly strong revenue growth, each rising more than 20%. Even on these higher revenue base, we grew our non-GAAP operating margin. Non-GAAP operating margin rose to 11.5%, up 180 basis points year-over-year, one of the highest quarterly levels in HPE's history. Non-GAAP gross margin was just…

Thank you very much, Antonio. Q4 was, no question, an outstanding quarter for HPE. As usual, I will reference slides from our earnings presentation to guide you through our performance. Antonio discussed key highlights for Q4 '22 and fiscal year '22 on slides 4 and 5. Let me discuss our Q4 performance details, starting with slide 6. Sustained demand continues to be a core attribute of our differentiated edge-to-cloud portfolio, which is translated to record or near-record results. As expected, year-over-year order growth continued to moderate in Q4 '22 to down 16% year-over-year as we lap challenging compares. Having said that, our sequential order growth was flat relative to Q3 '22, which illustrates that demand for our products and services is steady. The key takeaway here is that we are entering fiscal year '23 with an order book that is even higher than the order book we entered fiscal year '22 with, which attests to our momentum for fiscal year 2023. Now that we have closed fiscal year '22, we will again turn our attention to focus on revenues rather than orders as we have been flagging. This is because of timing differences, orders and backlog are not traditionally good indicators of quarterly revenue in normal times. We will continue to disclose orders for our as-a-service and HPE Pointnext OS business. While the supply environment is improving, it is not quite back to pre-pandemic levels. Our large order book contributes to our confidence in our fiscal year '23 revenue outlook of 2% to 4% growth adjusted for currency, and the longer term 2% to 4% revenue CAGR outlook over the fiscal year '22 to '25 period we provided at our 2022 Securities Analyst Meeting in Houston last October. We delivered Q4 revenue of $7.9 billion, which is up 12% annually…

[Operator Instructions] And the first question will come from Wamsi Mohan with Bank of America. Please go ahead.

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

Yes. Thanks, Wamsi, for the question. As we said in our commentary, we exited 2022 with a significant larger book than we entered 2022. And that demand was enduring, honestly, was better than we anticipated and remains steady, because when you look at the quarter-over-quarter, Tarek mentioned, was flat. But I think we have a point of differentiation compared to others. I think it's important to recognize. First, we have a diversity of portfolio from edge-to-cloud. And you can see some of the results in the Edge, which obviously are outstanding. I think our HPE GreenLake is unique because it delivers a true hybrid experience that you can consume as-a-service, and that's also dragging the entire portfolio. And when I talk about customers, what we see, customers continue to prioritize digital transformations. And a lot of that is driven by the need to automate, simplify, be more efficient in everything they do and also prioritize that data. The data insights to me, are an important aspect of what customers are looking for. And so, I think demand is there. I think in our case, probably it’s better balanced. You asked a question about the geos. I think the performance of the geo has been even, I mean, even across all the 10 geos that we have, and across the segments. I got this question early on, if this is just an enterprise or a small business? No, it is the 10 geos and all the segments from large to small, medium business. In terms of budget, just a month or so ago, we hosted what we call the Board of Advisory, and we have 25 customers that represent multiple industries. And the sentiment there is that they need to continue to digitize and they need to continue to ensure technology plays a vital role. And again, these are technologies in the edge, connectivity being one important aspect. The other one is obviously cloud, but cloud as an experience, not just putting data in one place is a true hybrid approach. And then these data, data-driven insights. And so we are, I think, very uniquely positioned to capture that opportunity.

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

This one is for the Compute business. We assume a big part of it was driven by the supply improvement that you talked about, but units were only up 4% year-over-year. So, there may not have been an incredible amount of backlog consumption. So, can we talk a bit more about the AUPs? They're still growing at about teens year-over-year. It was high-teens this quarter based on the pace of your price increases and the momentum of richer configs that you called out. How long do you think that this growth will continue? And what does the durability of the AUP trajectory look like for you guys?

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

And I will say, Kyle, we just introduced the Gen11 platform. And one of the key differentiation we have -- actually, we have several -- number one is our hybrid design. It was designed with hybrid in mind, meaning the solution gets deployed and managed from HPE GreenLake, whatever you deploy that. Number 2 is continued enhancement on the security side, which is a point of differentiation. And one that really is coming up is sustainability. In our new offer, we actually provide customers with ability to optimize the Compute platform based on carbon footprint and consumption, and we get them also a carbon footprint report. So that allowed them to maximize the usage of the platform while they reduce that carbon footprint. So overall, we continue to see good momentum, and we are bringing new innovation into the platform itself.

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

I wanted to dig a little bit more into your as-a-service business. Just looking at the like absolute dollars. You had a stair step up to $936 million annualized run rate during the quarter. And it looks like there was a significant uptick in the percent -- well, at least 200 basis uptick in the percent of revenue coming from software services. So, I'm wondering what's behind that and what trends you're seeing as you sign more and more of these contracts with your customers on a ratable basis? Thank you.

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

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

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

Okay. Sure, Simon. So I would say, if you refer to our prime competitor, I think some of their comments are referring to the consumer side of their operation as much as referred to their enterprise side.

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

Yes. I think overall, so when you look at their results, they were, I would say, not too bad, we did much better than they did. And that is a function of many steps that we have taken in Compute. So there is Gen11 being one of our key solutions now are gaining traction in the market as customers need bigger and richer configs moving forward. Our customers knew that Gen11 was coming and they held their orders firm. So, we had no orders cancellations that are meaningful throughout fiscal year '22. And we finally got the supply that was there to be able to bring our customers to the next-generation compute environment. So, we feel very good about where we are. And to the extent that supply is there, we have a contrasting view relative to our -- what our competitors are signaling with respect to their service business.

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

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

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

Well, as Tarek said in his comments, going forward, we're going to move away from all of these backlog orders and the like to focus on the revenue. That's why we gave the revenue guidance in Q1 because I think it's a better indicator of what we're going to see. I will say, in Q4, what we were able to incrementally convert from the backlog was mid-single-digits, or order book, as we call it now, is very, very large. And in fact, in such segments, particularly in the Edge business, the order book is now bigger at the end of Q4 than it was at the end of Q3. So, the bottom line is that we see that enduring steady demand and we'll take up the entire 2023. And honestly, I'm not sure we will ever exit 2023 to back to historical level. I don't think that will be the case. Because as good as we are trying to convert some incremental aspects of the order book as we go forward to some easing of the supply, the demand continues to be there. So, I think it's going to take a little bit of time. And I think that the order book will return to normal, I would say, historical level, once the incremental capacity comes on line. Because when we saw in this particular quarter some easing, it was because some reallocation of substrate came at the expense of the consumer business, which obviously is down but the incremental capacity is not yet on line, particularly in those older technology nodes, call it, 28, 40 and 65 nanometers, which is where the constraint is.

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

Your guidance for Q1 implies double-digit revenue growth on a year-over-year basis. For the full year, you're at 2% to 4%. So, is what you're seeing in Q1 really a reflection of confidence in backlog drawdown, or are you implicitly seeing demand slow over the course of the year? And then related to that, your free cash flow guidance is well below your net income for fiscal '23, despite the fact that you believe you can dry down the inventory further. Maybe you can help us with the bridge there. Thank you.

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

Yes. Well, thank you, Antonio, and thank you, Toni. So, our free cash flow for fiscal year '23 is going to be driven, obviously, by our earnings, but also reduction in restructuring expense, and you will observe already between '21 and '22 when you have a chance to look at our 8-K filing that restructuring expense is dropping quite considerably. And that trend will continue in FY23 relative to FY22. And the third variable to our free cash flow calculation is working capital, right? So far, inventory levels have reduced between Q4 and Q3 in the amount of approximately $400 million. We believe that inventory levels have peaked and we're going to work through our order book to continue to deliver on these orders and therefore, this will reduce our inventory levels. At the same time, if the demand remains as steady as we're seeing it, we'll probably need to continue purchases moving forward. So, I feel comfortable at this stage with the guidance we gave you on free cash flow of $1.9 billion to $2.1 billion, $2 billion at the midpoint. Let's see how the year plays out, and we will think about giving you more color on how much free cash flow we can generate within that guidance or possibly more.

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

Yes. Thanks for taking the question. Can you hear me?

Sorry, guys. I appreciate taking the questions. Congratulations on the solid results. I want to go back to kind of the Compute side of the business. As we look at the backlog dynamics and the commentary that you've already given. I'm curious of how you guys see component price deflation factoring into your expectations as we move forward. Put another way, is there -- how do you -- how does the Company operate as far as passing through if it's memory cost deflation and so on and so forth. How do we think about the progression of that as you think about the Compute business going through fiscal '23?

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

And in 2022, we have shown that we are the best -- are executing that strategy. No question.

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

Yes, sir. Our final question will come from Amit Daryanani with Evercore. Please go ahead.

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

Yes. Let me start, and then Tarek can talk about the margins. I want to be clear, the Edge, 100% demand-driven. Has nothing to do with backlog or any of that. The order book continued to grow in this business. And we are winning. We are taking share. And the reason why we are taking share is because we have a true differentiated value proposition that’s built on three particular layers of the architecture. One is the unification of the connectivity layer with wireless LAN switching and one SD-WAN capabilities. These are both organic and inorganic investments we make over time. Remember, we did the Silver Peak acquisition. We have unique differentiation through our security layer with SASE through both organic and partnerships. And then we have a best-in-class AIOps. That's delivering tremendous value for customers to drive new experiences, to automate everything they do across the enterprise and is 100% driven by the demand at this point in time.

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

Well, thank you for all the questions and thank you for making the time today. I want to close with a couple of more additional thoughts. Obviously, we had an outstanding quarter, an exceptionally well-executed quarter for us with record-breaking results across key performance metrics. But when you reflect back, and this is my 20th quarter as the CEO reporting earnings, this is a combination of many things we have done over the last few years. It's not just a onetime thing. When I think about that, first and foremost, we have a clear strategy. We have been executing and accelerating and is winning in the market and is winning with customers. When you have twice a month of logos that we had at the beginning of the year, that tells you customers are entrusting their transformation to HPE. Second is, we are executing better. No question about it, and Q4 was a great example of that. Third is that the demand for our solutions remains steady. And I understand the question about, well, your competitors may have or other vendors have different views. I cannot comment on their views. I'm just telling you, after 20 quarters is what I see, and what we say we do. So in the end, we probably have to take at the face value of what we tell you, and we deliver against that. And then last but not least, in 2020, Tarek and I on Q2 2020, when the pandemic started, we came here, to the call, and we told you we're going to enact a program to reallocate resources to high-growth, high-margin areas and rightsize the Company. We believe we are rightsized going forward. And those actions are paying off, not only because we delivered $175 million net savings to shareholders but because we have now different talent in different locations that give us the confidence that we can execute the strategy. So, it's a combination of four different things we have done over and over and over. In Q4, obviously, with a little bit of easing on supply, we're able to translate all the hard work into record-breaking results, and most importantly, give us the confidence that we entered 2023 with an amazing momentum, and that's why we give the guidance that we give you. And we're going to see every quarter where we stand, but we feel pretty good about our ability to deliver and potentially even exceed those numbers we give for the full year. So, with that, thank you very much. If I don't speak to you before the end of the year, I wish you a happy holidays, to you and your families. So, thank you for your time today.

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