Good afternoon and welcome to the First Quarter 2023 Hewlett Packard Enterprise Earnings Conference Call. My name is Anthony, 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 the 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, Senior Director of Investor Relations. Please proceed.

Thank you, Anthony and good afternoon, good evening everyone. I’m Jeff Kvaal, and I’m Head of Investor Relations for Hewlett Packard Enterprise. I’d like to welcome you to our fiscal 2022 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. Let me remind you that this call is being webcast. A replay of the webcast will be available shortly after the call concludes. We posted the press release and the slide presentation accompanying the release on our HPE IR web page. Elements of the financial information referenced on the call are forward-looking and are based on our best view of the world and our businesses as we see them today. 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 the 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, 2023. For more detailed information, please see the disclaimers on the earnings materials related to forward-looking statements that involve risks, uncertainties and assumptions. Please refer to HPE's filings with the SEC for a discussion of these risks. For financial information, we've 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 otherwise noted, are presented on a year-over-year basis and are adjusted to exclude the impact of currency. Finally, after Antonio provides high-level remarks, Tarek will be referencing the slides and our earnings presentation throughout his prepared remarks. And with that, let me turn it to you, Antonio.

Well, thanks, Jeff, and good afternoon, everyone. Thank you for joining our earnings call. We began our fiscal year 2023 from a position of great strength after delivering an outstanding 2022 fourth quarter. I am extremely pleased with how we leverage that strength to achieve impressive results in Q1. HPE posted a record set in first quarter performance, extending our track record of consistency fulfilling our financial commitments. We generated our highest first quarter revenue since 2016 and our best ever non-GAAP operating profit margin. Our focus on growth opportunities and pricing discipline produced our highest ever non-GAAP diluted net earnings per share. Powered by our market-leading hybrid cloud platform, HPE GreenLake, we unlocked an impressive $1 billion in annualized revenue run rate or ARR for the first time. Our results show the relevance of our strategy that addresses megatrends around edge, cloud and AI reshaping our industry, the transformation of our industry leading portfolio and the outstanding execution of our team. In the first quarter, total HPE revenue climbed 18% to $7.8 billion, significantly above the high end of our outlook. We once again expanded non-GAAP operating margin this time to a record 11.8%, up 80 basis points year-over-year. Non-GAAP diluted net earnings per share increased 19% year-over-year to $0.63. Free cash flow was negative $1.3 billion, reflecting working capital needs in a quarter where we typically see use of cash. Our Q1 performance and the size of our order book position us well for fiscal year 2023. Our quarterly results, combined with confidence in our strategy and execution have led us to raise our revenue and EPS guidance for the full fiscal year. Tarek will provide more details in his remarks. From a macro perspective, the supply chain challenges we faced during several quarters continue to ease, and…

Thank you very much, Antonio. Q1 2023 was, as Antonio said, a record quarter for HPE. As usual, I will reference slides some earnings presentation to guide you through our performance. Antonio discussed key highlights for Q1 2023 on slide 4. Let me discuss our Q1 performance details, starting with slide 5. We are very pleased that the execution of our strategy has driven record quarterly results in terms of revenue, non-GAAP gross margin, non-GAAP operating margin and non-GAAP EPS for a first quarter of a financial year. These and other records I referenced are primarily since we reset our strategy with our 2017 spin-off transactions. Notably, revenues grew year-over-year across all our business segments, Save for corporate in Q1 2023, as we benefited from improvements in the supply environment. Our supply chain execution is solid, we have very strong momentum, thanks to our substantial order book and our investments are bearing fruit, and we are gaining share in specific at segments. In short, our strategy is working and working really well. Having said so, while we are optimistic about our fiscal year 2023, we're all realistic. Overall, we have experienced above-trend demand through much of the past two years as attested by our growing order book over the fiscal year 2022 period. And now market demand has shifted from being steady across our portfolio to being uneven over the course of Q1 2023. More specifically, deal velocity for Compute has slowed as customers digest the investments of the past two years, though demand for our storage and HPCI solutions is holding and demand for our edge solutions remains healthy. In that context, we are taking action to maintain our momentum for the second half of 2023 and fiscal year 2024. We intend to further our investments in software and…

We will now begin the question-and-answer session. [Operator Instructions] Our first question will come from Aaron Rakers with Wells Fargo. You may now go ahead.

Yeah. Thanks for taking the question. And congrats on the solid performance. I guess, I wanted to ask a question more strategically in kind of thinking about the product portfolio. You guys and many others, obviously talking a lot about ChatGPT, GTP and Generative AI. In the conversation on today's call, you alluded to the fact that you're well positioned with some of your HPC and your high-performance compute platforms. And I want to make sure I understood what you're saying a little bit correct. Are you participating in some of the infrastructure in some of the cloud opportunities, or how do you see yourself participating in kind of these AI investments that really seem to be driving this narrative around meaningful deployments of accelerated compute? Thank you.

Well, thank you, Aaron. Obviously, AI is now front and center in the IT community, because of what we saw in the last couple of months. And as I said, has the potential to disrupt every industry. We cannot talk about what specific cloud, that is one specific cloud they use our specific Cray systems. But I will say, we have a bigger opportunity than that because when I think about the deployment of these large language models that require supercomputing capacity. And at that point, when you think about what we did with Frontier is how we make that accessible to every enterprise of every size. And so we, as a company, have a unique opportunity that happens every softer where there is a massive inflection point like AI and LLM, right, the large language model with a unique differentiation in our IP, which is a combination of organic assets that we built over a number of years and the acquisition of Cray. So as Tarek started sending his remarks, we are assessing what is the type of business model we can deploy as a part of our as-a-service model. By offering, what I call a cloud supercomputing IS layer with a platform-as-a-service that ultimate developers can develop, train and deploy these large models at scale. So that's why we said early on, we will talk more about that in the subsequent quarters. But we are very well positioned, and we have a very large pipeline of customers. Last week, I was in Europe, and I was amazed to see the large pipeline customers that they are demanding that. And I mentioned one specific customer, Aleph Alpha which is already coming to us to do that.

Thank you, Anthony – thank you, Aaron. Next question, Anthony, please.

Our next question will come from Meta Marshall with Morgan Stanley. You may now go ahead.

Great. Thanks. You noted, obviously, seeing some weakness kind of in the environment. Just wanted to get a sense of either customer type or vertical or just kind of segment that you've got to kind of see be the source that kind of weakness throughout the year? And are you seeing more people kind of opt for GreenLake subscription offerings as a result of kind of more macro sensitivity? Thanks.

Sure. I mean, I don't think there is one specific geography or one specific segment. I will say, as we said in the early remarks, right, the Compute business, obviously, we see a little bit more unevenness, if you will, with longer sales cycles because also they are digested all what they acquired last year, because of the supply chain and the cost rising. But when you look at the rest of the segments, as Tarek said and I said, the Intelligent Edge business, the Connectivity business, is very, very solid. And we exited once again in Q1 with an extremely elevated book of orders. HPC, we just talked about it, right? We see an amazing pipeline in front of us. We have only deployed one exascale system, and we have few to go because we are delivering all of them to the Department of Energy. And then as I said earlier, right, we have an opportunity to grow that business through an as-a-Service model. But that said, what customers are telling me is that they need a hybrid cloud experience. And we see, in some cases, repatriation of workloads on-prem, but they want the same cloud experience with the same consumption model, and that's what GreenLake does extremely well. It's a true hybrid cloud experience for low-dose overloads, where data, data compliance and cost plays a big role, and that's why we see the momentum we have. The fact that we doubled the total contract value from Q1 2021 to Q1 2023 from $5 billion to $10 billion, it tells you the momentum. What I'm really pleased is the fact that two-third of that momentum is in software and services, which means we will be more resilient as we go forward to weather some of these challenges because it's a recurring revenue. And we count in that, just to be clear, through Software-as-a-Service subscription and consumption, which is exactly the way it's supposed to be. And that's why we are very bullish about our GreenLake and the fact that we crossed $1 billion ARR, it's just a testament that we have a winning strategy.

Thank you, Meta. Next question, please.

Our next question will come from Samik Chatterjee with JPMorgan. You may now go ahead.

Yes. Hi, thanks for taking the question. Congrats on the execution here. I guess my question was more on the full year guide, and I understand some of the headwinds in certain segments that you're calling out, but the revenue guide goes up by about sort of 300 basis points for the year. The operating profit growth sort of goes up by 100 basis points. And while I understand some of the headwinds, what maybe I can use some help on is really understand the mix implications of how you're thinking about it, just given the more lower sort of flow-through that we're seeing to operating profit growth for the full year guide? Thank you.

Sure. So thank you for remarking that our revenue guide at the midpoint is effectively doubling from the prior guide that we gave. The prior guide that we gave was 2% to 4%. We're now guiding 5% to 7%. So at the midpoint, it is 6%, which is double what we gave previously. And in giving that guide, we factor in a number of elements. First of all, the macro environment, second of all foreign exchange rates; and third of all, our desire to continue to invest to perpetrate the momentum that we have in the second half and in fiscal year 2024 because there's always something else that we have to think about for the end of the year, and we're not done yet. I also want to flag that we believe that commodity costs are coming down in particular areas, which should effectively come with added pricing pressure in compute, and this is also something that we have factored into our guidance. But if you really think about our non-GAAP operating profit growth. The prior guide was at 4% to 5% growth, and now we're guiding 5% to 6% growth, and we feel comfortable with the information we have on the macro, foreign exchange cetera, that our guide is appropriate.

Thank you, Samik. Next question.

Our next question will come from Kyle McNealy with Jefferies. You may now go ahead.

Great. Thanks for the question. It was a great quarter for Intelligent Edge. Can you help us understand how we should think about a big quarter here in Q1? Is that level sustainable going forward, or was there some big deals or particular activity that you would call out that isn't likely to repeat. Your guidance implies it decelerates from here, but -- can you give us a sense for how we should model this going forward and how frequently you might see growth ahead of your mid-teens growth guidance? Thanks.

Yes. Thanks, Kyle. No, there was not a unique deal. This is the continuous momentum we have had now for a number of quarters. The book of business in this particular business segment continue to be extremely renovated. As Tarek said, we continue to gain share. And I think it's because we have a unique value proposition, which is a cloud native offer for all aspects of connectivity. We announced now the acquisition of Athonet, which we will integrate the private 5G into the same control plane. And today, we announced the acquisition of Access Security, which is the secure access secure edge at the top. And so when we think about the book of business, the incredible pipeline we have ahead of us, the execution of the team, the easing of the supply, although in this particular business, there is a little bit more constrained on the supply compared to the other businesses. We talk about a Rule of 40, and this was the Rule of 50 something, I guess. But the fact of the matter is that, as Tarek said, we expect to grow double-digits, right? And in the mid-20s on operating profit. This business is now humming and it's going to be one of the most important growth engine as we go in the future. And as Tarek said, it's also allowing us to be less reliant on the rest of the portfolio, which is very, very critical. And this comes with a high gross margin, obviously.

I would simply add to what Antonio said, look, the edge have broken the $1 billion revenue bar. I think now we are entering a phase with all the additions that we're making to the portfolio. We're entering a phase of a new watermark level. We have built at the edge with Antonio and the management team, one of the most comprehensive portfolio of the entire industry. And it is really, really winning shares even in the largest customer segments, thanks to the Edge-to-Cloud platform that Aruba has built and that powers GreenLake in everything we do.

And I hope the market will take notice of that and give us a little bit of recognition about the work we have done in this particular segment.

Thank you, Kyle. Next question please.

Our next question will come from Simon Leopold with Raymond James. You may now go ahead.

Thanks for taking the question. I know this is going to be a bit of a tricky one, but I want to see if you could help us understand why your view sound more optimistic than your other IT-exposed peers, whether it's around, in particular, the Compute side of the business as a storage. I get Intelligent Edge, so I'm not really pushing there. But just the contrast in your outlook on storage and compute versus some of your peers. Can you help us understand that?

Sure. Thank you, Simon. Well, first of all, let me start by saying, we have a unique strategy and a very diversified portfolio. Some of our competitors don't have the breadth and depth of our portfolio. Some of them are just playing compute and storage, some of them play just in storage, some of them only play in networking. And by the way, let's remind ourselves that one-third of our recurring revenues come from services, which is unique in our space. So we have a unique portfolio, which is incredibly relevant in the mega trends we see in the market. But we have done really well, I will say, Simon, is we brought all that unique portfolio in an integrated solution and experience through HPE GreenLake. And now the HPE GreenLake is a winning strategy for us, because it's very hard to do. One thing is to offer just a subscription model on some sort of solution. But when you leverage a true as-a-service model across all line of businesses, let me remind you, architecturally, I drove a vision with the team that everything we do, whether you consume it as a service or you consume it in a traditional way, that entire experience is delivered now to HPE GreenLake. Whether you deploy a compute node somewhere, whether in the cloud or premise or at the edge, you need a subscription to that compute node. Whether it's the storage business. Now you asked about the storage. This product, HPE Alletra and Tarek mentioned this, is the fastest product in the history of the company, has grown triple digits on a consistent basis. And you will see more announcement about this platform going forward, but it was conceived to be a SaaS-led offer. And so that's why it's fueling also the…

Simon, thanks very much. Let’s move to the next question, please.

Our next question will come from Amit Daryanani with Evercore. You may now go ahead.

Thanks for the question and congrats on the quarter. I was wondering if you could just talk about what's the timing for the H3C transaction from here? And then how do you think about the usage of the proceeds that you get from here? Because, I think, if you sell the stake you have, it would be dilutive by about $0.17 to $0.18 of EPS line. So I'm just wondering, how do you think about using the proceeds and offsetting the dilution potentially? Thank you.

Yes. So thank you, Amit, for the question on H3C. We exercised the put, as you recall, towards the end of the calendar year of 2022. And we are right now in the process of agreeing the value of our stake with our partners of Unigroup. And this process is going to take a few month and it's going to -- we expect it to complete towards the end of calendar year 2023, and we feel reasonably good about the prospects. For the meantime, we continue to consolidate H3C and benefit from the dividends that we received from the company. And we are not deconsolidating H3C at this stage. It's most likely going to be the case of the end of fiscal year 2023 when that will happen. And at that point, we will advise both on the impact of dilution from deconsolidation and also the use of proceeds once we receive them. I would like to also emphasize that we continue to have commercial agreements with H3C, notwithstanding, the exercise of the put, those commercial agreements are distinct from the exercise of the put, and we will continue to generate value through those commercial agreements that we have with H3C.

Yeah. And as always, I mean, listen, we're going to apply the same discipline for returning capital to shareholders and continue to invest in the business at the appropriate time. But until we finish this process, right, it's just emphasizing. We have to go through the process and complete the agreement.

Amit, thank you. Next question please.

Our next question will come from Sidney Ho with Deutsche Bank. You may now go ahead.

Great. Thanks for taking my question, and congrats on the strong results. So I also have a question on the full year guide being up 3% to 6% -- I think it's 5% to 7%. And, obviously, impressive compared to our peer, who just downtake earlier today. But if I look at the midpoint, take a midpoint of your fiscal second quarter guidance, it would assume the second half of the year will be down slightly from the first half, which is kind of unseasonal, right? It's normal seasonality is up, call it, 5%. Can you talk about what's embedded in your second half revenue guidance? Is that all driven by your view on the macro side, any one-time item that we should be thinking about in the first half? And maybe how we should think about the backlog helping -- delivering from your backlog offset some of the demand weakness from half-over-half basis at the standpoint? Thanks.

Okay. A lot of questions into one question, but I will try my best. So first and foremost, the revenue growth that we are targeting for the full year is 5% to 7%, which at the midpoint is 6%, which is double what we originally anticipated. And that is because of all the puts and takes in our portfolio and the way we see supply easing on one side, also demand continuing unevenly although across our portfolio. And if you really look at our EPS guide, one thing I would like to emphasize for everyone on the call is that we did beat the midpoint of our guide by $0.09 and $0.03 of that beat pertained to OI&E and had to do with foreign exchange gains that are not operational. We continue to view OI&E on the full year basis being an expense of US$20 million to US$40 million due to elevated interest expenses. And there is also in our guidance, the potential impact from FX volatility. And so what is baked into our guidance is just that our current view to the best of our knowledge, of the macro environment, the impact of interest rates and also the impact of foreign exchange rates that we see at this stage, knowing that things can evolve. It's also important to note that this is our first quarter. We still have nine months to go, and we want to make sure that we remain prudent in the current circumstance where the macro environment remains uncertain.

Sidney, thanks very much, and we'll take two more questions, Anthony?

Our next question will come from Wamsi Mohan with Bank of America. You may now go ahead.

Yes. Thank you. Can you talk a little bit about how much incremental order's in your backlog you were able to satisfy versus what you had anticipated going into the quarter given the fact that some of these supply chain improvements came through the course of the quarter? And can you also maybe help us think through what you're expecting from an FX headwind now in fiscal 2023 relative to your SAM guide of a $0.30 headwind to EPS. Thank you.

Thanks, Wamsi. I will answer the first part and Tarek, on the second part. I mean not enough. I mean, the fact of the matter is that we made some progress, but not enough progress against that very strong order book. And that's why we exit Q1 with 2x normal historical levels. Now, we expect that to continue to improve, obviously, throughout the years as supply continue to ease. But again, we have a good pipeline in front of us. And so the goal is to continue to fill the order book. But when you ask me about how much progress we made in Q1, not enough. If you look at our Intelligent Edge business is extremely elevated. Our HPC business, when I look about the future deliveries we have to live is always very, very strong. Storage is good, and Compute is still there. So we have work to do, more work to do. And then on FX, I think --

Oh, yes. Thank you, Antonio, and thank you, Wamsi. This gives me the opportunity to remind everybody that at SAM in last October, we flagged at least a $0.30 headwind from foreign exchange this fiscal year. Quite honestly, the headwind we have experienced in this quarter of 550 basis points is above what we anticipated. We still feel that we can attain our new guide on revenue growth and EPS, notwithstanding the current FX headwinds and but things can always evolve and this is why we remain prudent in our full year guide, with regards to revenue and EPS growth. So that 30-plus percent EPS impact from FX has risen, but we are managing it and factoring it into our new guide.

I mean, on that point, I think it's simply remarkable because we have to cover all of that $0.30 started right operationally.

Yes.

The fact that, we are raising the midpoint from the $2, which included a $0.30 headwind now $2.06. It shows you that the mix of the business is going in the right direction, the expansion of the margins and the productivity we continue to drive. Despite the fact the FX actually got worse at the time. And the 550 basis point is pretty significant. So I think from our vantage point, we are doing all the right things and we're confident in that guidance we just provided to you.

Thanks very much, Wamsi. And Anthony, last question, please.

Our final question will come from Ananda Baruah with Loop Capital. You may now go ahead.

Hey, good afternoon, guys. Really appreciate it. Antonio, I would love to get any context you can provide going back to the AI and large language model conversation. Is there any useful way for us to think about the required resources sort of difference and what you're seeing for those applications relative to kind of typical high-performance Compute application resources? And then are you also seeing for those AI type projects. Are you also seeing any impact to the storage attach? And then is there any networking attach impact there as well? Would just love context on those rates. Thanks a lot.

No, thank you. Well, we have been in the AI business now for many years, right? So -- and we have been in the specific AI a scale business. One of the key differentiations we have in that business, actually several, right? Number one is the -- what you refer to as networking, I call it interconnect fabric. The ability to connect 40,000 GPUs at scale requires a unique differentiated fabric. That's what the Frontier system is all about. And as I think about the next generation of this, we can easily double to 80,000 GPUs because our software and our silicon scales to those levels. And so that's a unique value proposition that you don't get in the traditional commoditized cloud environment. The other key differentiation we have is the programming environment we acquired to the Cray acquisition because when you develop these AI models, you have to deploy and you have to manage it at scale to take advantage of the massive set of capabilities. That also is a unique software value proposition that's very hard to duplicate. And then last but not least, to be able to leverage all these wonderful capabilities, you have to be able to prepare the data. And the data pipeline requires a lot of work upfront because it has to be clean and compliance and all of that. And that's why our acquisitions like Determined AI and Pachyderm in particular, now allows us to automate that data pipeline. But we are not stopping there. We continue to move up and build what I call the platform as a service for developers, so they can take advantage of this automation for the data, train the models and then deploy the model. And if they need a supercomputing type of capabilities, we will be…

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