Good evening and welcome to the Second Quarter Fiscal 2023 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 the conference. As a reminder, this conference is being recorded for replay purposes. I would like to turn the conference over to your host for today’s call, Mr. Kirt Karros, Senior Vice President, Treasurer, and Investor Relations. Please proceed, sir.

Thank you, Chuck and good afternoon, good evening everyone. I’m Kirt Karros, Senior Vice President, Treasurer, and Investor Relations for Hewlett Packard Enterprise. I like to welcome you to our fiscal 2023 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 to Antonio, let me remind you that this call is being webcast. A replay of the webcast will be available shortly after the call concludes. We have posted the press release and the slide presentation accompanying the release on our HPE investor relations 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 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, 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 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. With that, let me turn it over to you, Antonio.

Well, thanks, Kirt, and good afternoon. Thank you everyone for joining today. In the second quarter, HPE increased total revenues, drove larger contributions from recurring revenues, and expanded overall profitability. I attribute this two primary factors: First, our strategy to build our portfolio to higher growth, higher margin areas is working. And second, we are operating with strong discipline. In a market that continues to be dynamic, we grew our revenue 9% year-over-year to $7 billion. Our annualized revenue run rate or ARR increased 38% year-over-year to $1.1 billion. We grew year-over-year revenue across our key segments except in compute. With our Intelligent Edge and High Performance Computing and AI segments delivering particularly standout growth even though the potential in our HPC and AI segment was somewhat impacted by customer acceptance of certain large deals. HPE achieved exceptional profitability in the second quarter, increasing our non-GAAP gross margins a full 200 basis points to 36.2%, a new record. Our deliberate portfolio mix shift strategy supported by our operating discipline helped us generate a non-GAAP operating margin of 11.5%, up 220 basis points from a year ago. Non-GAAP diluted net earnings per share rose 18% year-over-year to $0.52 at the high-end of our second quarter outlook. Free cash flow generated in the quarter was nearly $290 million, an increase of about $500 million from the prior year. As a result of our second quarter performance and our expectations of profitability will increase this fiscal year, we are raising our full-year GAAP and non-GAAP diluted net earnings per share guidance. Tarek will share further details about our full-year updated guidance, including operating profit expectations later in our call. Our portfolio diversification is a clear strength in winning the business of customers who are taking a data first approach to modernize their IT…

Thank you very much, Antonio. I will start with a summary of our financial results for the second quarter of fiscal year 2023. As usual, I will reference slides from our earnings presentation to guide you through our performance. Antonio discussed key highlights for Q2 2023 on Slide 4. Let me discuss our Q2 performance details, starting with Slide 5. I would characterize this quarter as solid overall despite the uneven demand indicators across our portfolio, particularly in Compute, with continued demand and outstanding performance in our Intelligent Edge business as a standout. We are very pleased that we are successfully driving further diversification of our business mix towards our higher-growth, higher-margin portfolio of Intelligent Edge, HPC & AI, and HPE GreenLake solutions. During the quarter, net revenues grew 56% year-over-year in Edge, 22% year-over-year in HPC & AI, and the HPE GreenLake ARR grew 38% year-over-year, all in constant currency. The pivot of our portfolio towards higher-growth, higher-margin markets is clearly visible in the expansion of gross margins and our strategy is working. While we remain confident about our fiscal year 2023 and beyond, we are also realistic. Demand through much of the past two years has been above trend as attested by our growing order book over the fiscal year 2020 to 2022 period throughout our business, including Compute, which is very cyclical in nature. Demand shifted from fiscal year 2022 and to uneven in Q1 and was even more uneven in Q2 across our portfolio. While Q2 revenue of $7 billion equates to a healthy 4% year-over-year growth and 9% year-over-year growth in constant currency, revenues were below our prior guidance range of $7.1 billion to $7.5 billion. Deal velocity has slowed, particularly in North America and in Compute, and to a lesser extent in Storage. Deal…

And our first question will come from Shannon Cross with Credit Suisse. Please go ahead.

Thank you very much. Antonio, can you dig a bit more into the significant outperformance you continue to see in Intelligent Edge? You're gaining share. The market remains strong. I know there's some backlog but it seems as if end demand is also remaining pretty solid. So, as you look at this business, how should we think about seasonality over the coming quarters because it's been so strong in the first half? How do you think about a more normalized growth rate in the business? And just any more color you can give because it has been such a strong performer. Thank you.

Well, thank you, Shannon. We are incredibly pleased about the performance of Intelligent Edge. If you recall, this has been a story in the making since the acquisition of Aruba in 2015, which I completed. And then in 2018, I committed to invest $4 billion over the next four years. And the result of this growth is a combination of many things: number one, a very differentiated portfolio, which is cloud driven; a lot of what we do is SaaS subscription, which drives a lot of infrastructure in the campus and branch, but now more and more at the edge of the data center. Second is the fact that our team has executed extremely well in targeting growth areas in the market by customer segment and verticals and used cases. And then after that, I will say, the cloud AI experience that we built in the portfolio with the simplicity of use is one of the reasons why customers prefer the HPE Intelligent Edge now delivered to HPE GreenLake offering. And over time, we have added more and more functionality, both organic and inorganically. I think organically, the AIOps is a point of differentiation for us. We talk about AI these days, but we embedded AI in our HPE Aruba Central, now part of the GreenLake several years ago. We added, obviously, the SD-WAN component of our portfolio through the acquisition of Silver Peak. And now as Tarek said, we have closed the Axis Security. And think about it this way, for every $1 of SD-WAN, it should be $1 of SASE attached to it. That's why it was fundamental for us to bolster that type of capability. And then we are very bullish about the opportunity to provide private 5G as an extension of the connectivity layer with Wi-Fi,…

Great. Thank you.

Thank you Shannon. We’ll take our next question please.

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

Hi, thanks for taking my question. Maybe I can ask you on the AI pipeline that you discussed a few times on the call. How are you thinking about the land and expand opportunities as you sort of engage with these customers? I know you referenced a $800 million pipeline that you booked recently. And any insights into how competitive are these deals versus some of your sort of traditional supercomputer wins that you have, sort of completed for wins around? And just finally a quick follow-up, Slingshot and interconnect technology, how do you see that sort of evolving as becoming maybe a secondary, sort of source to NVIDIA in sort of the interconnect technology? Thank you.

Thank you. Obviously, what have been experienced in AI is simply amazing, breathtaking in some cases. I consider AI a massive inflection point, no different than Web 1.0 or mobile in different decades. But obviously, the potential to disrupt every industry, to advance many of the challenges we all face every day through data insights, it's just astonishing. And HPE has a unique opportunity in that market because ultimately, you need a what I call a hybrid AI strategy. You need strong inference at the edge. And that really comped by being able to connect and process data, whatever is created with very efficient and low carbon footprint, meaning sustainable solutions with lower power consumption. And then on the other side, you need a training environment where you take some part of the data, where you can train for different needs, different models for different type of used cases. And HPE has a unique portfolio from the inference side all the way to the training side. So, our HPE ProLiant has already some very powerful cost-efficient solutions at the inference. The amount of computational power, now we can put in one of these, what I call, (ph) servers. It's simply amazing. And there are different types of configurations that we need to go through to accelerate the GPUs and the like and sometimes, CPUs, by the way. And on the other side, obviously on the training side, you need a scale type of models with very specialized stacks, and that's where HPE, through organic and inorganic acquisition, really excel because delivering this large amount of GPUs as a coherent system requires enormous expertise. And that's where HPE has unique differentiation in delivering AI at scale through supercomputing. Think about the old tech become the new tech in many ways. Second…

Thank you.

Thank you, Samik. We’ll take our next question please.

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

Thanks for taking the question. I wanted to just get a better understanding about how you're thinking about the server cycle. And what I'm pondering here is, some of the third-party market researchers are predicting a rebound in server sales in calendar 2024, particularly coming from enterprise and telco operators. And that's been, I think, strong verticals for you. How are you thinking about how this cycle that you're – you highlighted the demand absorption that's occurring now, how do you see this playing out over multiple quarters?

Well, Simon, we will be there. I mean, obviously, we have a large footprint. We participate in many of the verticals you described. In the short-term, obviously, we see a significant challenge in Financial Services. Tarek talked about that, called it the crisis of the Financial Services where the large deals that normally happen are now elongated or waiting to get longer approvals and the like. But there is also a lot of digestion and deflationary that's taking place on the commodity space as well, but there is no supply chain challenges. So, maybe just in time, orders works fine because now we can deliver servers in what I call pre-pandemic SLAs, right? So, that's a positive news. Now, it's hard to predict, to be honest with you. We commented that Europe and Asia and mid-market, things seems to be holding up. I agree with you the telco should be a growing opportunity. And listen, we have a very optimized compute platform for virtualization and round deployments. We have very strong partnerships with the equipment providers. We have a platform called HPE ProLiant 110 that's really very specialized for the virtualization of the brand. And as 5G deployments take hold, we expect to capture a size of that. But right now, it's a little bit blurry, and that's why with Tarek, we felt prudent and pragmatic, in many ways, to readjust that guidance for the short term. Ultimately, I think, I believe long term, there is a growth opportunity driven by the growth of data we see in the market. That data needs to be processed. The world is hybrid, so the balance between the public cloud and on-prem of colocations and now the edge continues to be there. I think form factors are evolving at the same time. But I think it comes down to the unit growth and the unit growth of what average unit price. These systems are becoming well more dense and more intelligent in any way. But at the same time, think about units and then attach rates and then what happened with the cost of commodity. So, there will be unit growth. I think there will be segments that will drive unit growth, but we have to see a little bit more before we can call that growth at this point in time.

Thank you.

Thank you, Simon. We’ll take our next question please.

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

Thanks for taking my question. I wanted to go back to the Intelligent Edge discussion, if I may. And I think your growth and margin are both obviously very impressive here. I think the growth rate is higher than what Arista is doing. So, maybe just spend a little bit of time on you. How much of this growth is really end demand-driven versus perhaps backlog liquidation-driven? Just anything on the backlog and what's happening over there would be helpful? And then I guess, Antonio, as you think about Intelligent Edge, your stock price clearly is not reflecting all the value that this segment is creating for your customers. So, I'm wondering, have you looked at a thought about different ways to unlock the potential value over time? Thank you.

Well, thank you for the question. I hope you will be writing about this because to your point, right, we are not getting credit for the stellar performance. And honestly, a story in the making for a number of quarters, right? So, this was the 11th consecutive quarters of growth for that business, which is very impressive in my mind. And I think Tarek had a little bit of challenge saying 1,400 basis points. I mean, normally, 100-plus or 200-plus, but 1,400, it was a little bit awkward to say it. And I think it's because A, we have that unique differentiation and the software that makes the portfolio so special in many ways, and that's what customers are attracted to. Now, as I think about what is driving, I think it's basically demand rolling through that very large order book. And as I said in my remarks, the order book for both the Intelligent Edge and AI remains very, very large, and that demand improved sequentially, as Tarek said. And so, we keep trying to work that order book, but we keep feeding our order book with sequential growth in that demand. We don't believe the demand is poised to go down significantly from here. In fact, we believe it's going to be somewhat steady. But that's why we need to keep innovating and keep adding functionalities and capability to that portfolio. As Tarek said, 19%, almost of the revenue now is coming from this portfolio. And this portfolio enable us to build scale, also and allows us to build the as-a-service model because a lot of what we have done with GreenLake came from the extraction of the cloud coming from this business that we expanded in the rest of the portfolio in hybrid cloud and AI. So, it's a very important critical business. I think the market is starting to see a sizing increase before they give us credit, but I think now everybody has to take notice of that.

And Amit, if I can add to what Antonio said. I mean, this market is healthy, and it will continue to grow in the upper single digits for several years to come. We're very comfortable with this. We're also investing in adjacent TAMs. Antonio spoke about SASE, private 5G, but also data center networking, for us is a massive opportunity that we're going after. We're generating already a lot of revenues in there. Aruba today represented 19% of total revenues in Q2. If you really look at where we were at the end of fiscal year 2022, to put things in perspective, we were only at 13% of total revenues. So, we believe we now will be stably in the high teens as a percentage of revenues for the whole of the company. And then I'll let you do the math with regards to how much Aruba will represent as a percentage of total operating profit of the company. So, Aruba is absolutely core. And you know that when we pass the 15% mark of total revenue, the stock market should take notice about that. And by way of comparison, if you compare Aruba in size to its next competitor, Juniper, it has roughly the same revenue at the end of the second quarter, but Juniper has 14% operating profit margin and Aruba is at 26.9%. That speaks volumes about the performance of Aruba.

And I would say, you asked a question, how you consider unlocking the value? I mean, as you can expect, I mean, we really review with our Board strategy to maximize value for our shareholder. But we believe the edge is critical to our strategy because it's aligned to the customer need. You need the connectivity to drive the digital transformation. Without that is incomplete. At the same time, I know I talked about the leverage of the edge portfolio and the cloud for the rest of the company. And also, let's remind ourselves, we have cross-selling opportunities because once we land the customer on HPE GreenLake, whether it's through the edge or through the hybrid cloud and now through the AI as we go forward, you will see the opportunity to cross-sell, which benefit Aruba and the Intelligent Edge as a whole and the rest of the company as well.

Thank you, Amit. We’ll take our next question please.

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

Yes, thank you. I was wondering if you could maybe share some color on your comments regarding deal velocity slowdown both in Compute and Storage, and you noted manufacturing and financial services verticals, in particular for Compute. Can you share some color on how linearity was in the quarter? And are you baking in an increased deceleration in other verticals as you look at your back half of the year? Thank you.

Thanks, Wamsi. I think Tarek mentioned that we assume in our guidance current level of demand and no further deterioration. Demand on Compute was slightly down from the previous quarter, compared to everything else that was up sequentially. And so from our vantage point, we believe we have covered this in the guidance. I think from the deterioration, I think it was clear when the financial crisis started sometime in March. We saw a deceleration and that was very evident in the financial sector, right, so the financial vertical, I will say. But that said, it is the most uneven parts of the portfolio, as we commented. I think it's driven by the digestion of our customers' order last year. The fact that today, they are maybe prioritizing investments in the edge or prioritizing investment in AI, which clearly we are a benefactor of it from that perspective. I think customers are looking for resilience as well, considering everything that's happening around the globe. And then also understanding what's happening with the cost of the commodities as we go to this transition. And ultimately, at some point, right, we see what the consumer market is going to do because the consumer is a driver of data as well. And so, we need to understand those trends. But I will say from that vantage point, I think clearly the Compute market as a whole, and this is important we segment this because sometimes people refer to Compute as servers. We don't refer that as servers. We refer that as a specific general purpose compute. The servers include, obviously, high-performance computing and other form factors. But in that space, clearly, is the most uneven at this time.

Thank you, Wamsi. And operator, we have time for one more question, please.

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

Yes, thank you for taking my question. I'm just wondering if you can just help triangulate some of the numbers around backlog that were highlighted on the call. So, I think backlog exiting last quarter was 2x normal. Exiting this quarter was 1.5x normal so it came down quite a bit, but you added $800 million in orders in the Intelligent Edge business. So that would suggest there was like really dramatic drawdown, like $1 billion-plus of backlog, in other businesses. So is that the right way to think about it or am I triangulating it incorrectly? And also how do – you keep saying that demand improved this quarter versus last quarter, but revenue was down and you drew down a lot of backlog. So, I'm also just trying to reconcile that. Thank you.

Sure. So, a couple of things I'll correct. So, last quarter, right, we exited with an order book that was 2x historical levels, and we refer to historical levels to pre-pandemic, Toni. And then this quarter, we're exiting 1.5x. What is different is that the mix of that order book is different, right? Because obviously, the growth we have in Intelligent Edge and AI is substantial, obviously. But the 800 million, I want to clarify that for you, Toni. The 800 million was just in the AI space. And every segment grew sequentially orders, except Compute, which was very (ph) single-digits demand decline. And so clearly, when you want to isolate, it's Compute, it's Compute particularly in North America, it's Compute particularly in these two segments we described, financial services and manufacturing. But the mix of the order book has shifted because now the larger of the book is actually in the Intelligent Edge and it is in AI. And the 800 million I described earlier are all 100% orders that we got in the AI space because we saw a significant uptick, and that came from Fortune 500 companies, some of these digital-native large language models companies and a large cloud provider. But ultimately, that's what's happening. And the Compute – that's why we are readjusting that guidance on revenue because of the unevenness in Compute. But overall, we are, as a total company, 1.5x where normally we should be.

Thank you.

Yes. Well, thank you for all your comments, and we appreciate you attending today the call. I mean, I will leave with a simple message, right. So, I think overall, HPE had a very solid quarter. Obviously, we were not at the total revenue consensus as people put out there. But the fact of the matter, we grew revenues. We significantly grew our recurring revenues, and we had an exceptional profitability for the quarter. And this was driven by our pivot, and you can see the pivot and the meaningful impact that Intelligent Edge and AI is having to our business. We didn't spoke a lot about Storage, but Storage grew 2%. And at the same time, the Alletra platform, which is a software-defined platform, grew in excess of 100% and a big portion of that revenue is actually deferred. So, I think in the short-term, we're going to navigate this uneven demand in Compute, but we are very pleased about the momentum we have in hybrid cloud with GreenLake, AI and which is a massive, massive opportunity for the company with a unique differentiation and obviously, the Intelligent Edge, which is delivering a standout performance this quarter after quarter after quarter. So, with that, I hope to see you at HPE Discovery in Vegas in three weeks because we have some amazing announcements that we want to share with you that will continue to drive momentum in our business. So, thank you very much.

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