Good afternoon, and welcome to the Third Quarter Fiscal 2023 Hewlett Packard Enterprise Earnings Conference Call. My name is Gary, and I'll be your conference moderator for today's call. At this time, all participants will be in listen-only mode. We will be facilitating a question-and-answer session towards the end of the conference. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Jeff Kvaal, Head of Investor Relations. Please go ahead.

Good afternoon, everyone. I'd like to welcome you to our fiscal 2023 third quarter earnings conference call with Antonio Neri, HPE's President and Chief Executive Officer; and Jeremy Cox, HPE's Interim 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 webpage. Elements of the financial information referenced on this 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 the 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 ending July 31, 2023. For more detailed information, please see the disclaimers on the earnings materials relating 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 have 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 remarks, Jeremy will reference our earnings presentation throughout his prepared comments. Now with that, let me turn it to you, Antonio.

All right. Thank you, Jeff, and good afternoon. Thank you, everyone, for joining today. HPE delivered another solid quarter. We again increased our revenue, gross margin and earnings per share year-over-year and delivered strong free cash flow. Our results are being driven by our intentional ongoing mix shift to higher growth, higher margin parts of our portfolio that are critical priorities to customers. Our success in shifting the portfolio delivered a 120 basis points year-over-year non-GAAP gross margin expansion, driven by exceptional performance in areas like the Intelligent Edge, where revenue has set its fifth consecutive record quarter, and HPE GreenLake, which continue to accelerate our strategic pivot, generating higher recurring revenue and gross profit across our four product segments, driven by the increased mix of high margin software and services. In Q3, our Intelligent Edge business contributed 20% of our total company revenue. It is now the largest source of HPE's operating profit at 49% of our total segment operating profit. Our HPE GreenLake hybrid cloud platform is accelerating our other service pivots, delivering an annualized revenue run rate, or ARR, of $1.3 billion, a 48% increase year-over-year. Our strategic shift towards edge, hybrid cloud and AI delivered through our HPE GreenLake cloud platform is working, and we are delivering on our financial commitments. Because of our momentum and strong execution throughout this fiscal year, and once again, we are raising our full year non-GAAP diluted net earnings per share guidance. GAAP for full year diluted net earnings per share guidance will remain unchanged. For non-GAAP, diluted net earnings per share we are increasing to $2.30 at the midpoint, while maintaining both our full year constant currency revenue growth guidance of 4% to 6% and full year free cash flow guidance of $1.9 billion to $2.1 billion. We will…

Thank you very much, Antonio. I'm honored to take on the responsibility of Interim CFO as we go through the process. I'll start with a summary of our financial results for the third quarter of FY 2023. Antonio discussed key highlights on Slide 4. Let me begin with Slide 5, financial highlights. We're actively diversifying our business mix towards our higher-growth, higher-margin portfolio of Intelligent Edge, HPC & AI and HPE GreenLake solutions. This pivot is clearly visible in the 120 basis-point year-over-year expansion of non-GAAP gross margins. We delivered a solid quarter within an IT market still under some pressure. Cycle times remain elongated and digestion of prior orders will continue to have some near-term impact. This has been particularly true in Compute and, to a lesser extent, in Storage. Despite these challenges, we delivered 3.5% year-over-year revenue growth in constant currency to $7 billion, which exceeded the midpoint of our Q3 revenue guidance. This figure included a modest amount of AI revenue. We do see several promising indicators that suggest stabilization. Antonio mentioned the sequential improvement in demand across our four product segments. We're starting to see indicators that our largest customers are returning to the market. Intelligent Edge continues to increase revenues rapidly, both on a year-over-year and sequential basis and robust AI demand is evident in our as-a-service orders. Our non-GAAP gross margin rose 120 basis points year-over-year to 35.9%. This is off just 30 basis points from our high watermark of 36.2% last quarter. Our margin structure reflects the pivot of our business mix to higher margin, software-intensive recurring revenue, such as Intelligent Edge. The edge mix was up 450 basis points year-over-year. Our Q3 '23 non-GAAP operating margin reached 10.3%, this is down 120 basis points sequentially and 20 basis points year-over-year. Sequentially, the…

We will now begin the question-and-answer session. [Operator Instructions] The first question is from Simon Leopold with Raymond James. Please go ahead.

Great. Thanks for taking the question. I wanted to see if you could put the AI wins in the same terms you did at the analyst section you had in June when you told us you had $1.6 billion in awards. That was a combination of CapEx and recurring deals that would be spread out over a number of years. So, what I'm looking for is an update on that and how much of the AI are you expecting in that fourth quarter? And sort of what's the timeframe for seeing the benefits? Thank you.

Thanks, Simon. Well, all those deals we talked through came through. They were booked and the pipeline continues to be super strong. In fact, I will say the pipeline we came in, we exit is pretty much the same. So that means throughout the quarter, we booked those deals and we exit pretty much with the same pipeline we came in. So clearly, the momentum in the business is significant. But as you can see, our progress is showing up in as-a-service, which you saw the 122% as-a-service order growth, which is very significant, and that fuels our order book to be now more than 2 time than pre-pandemic levels, and we exit the HPC & AI quarter with the largest ever order book we ever had. Now we start now shipping some of those orders, those wins, but it's long ways to go. And remember that there's two components related to that. Number one is availability supply, which obviously in the AI space is constrained. Number two is the fact that when you deploy these deals, you have to install it and then drive acceptances, which means elongated times for revenue recognition. And then maybe in a specific win or two, there are other conditions related to the contractual agreements. So the net of this is that what we discussed at the end of Q2 and then during the HPE Discover came all through and then what I'm really pleased of is the quality of the deals we are getting. And I just referenced a half a dozen or so in my opening remarks to give a sense of the type of customers we're winning to make sure you understand the proof points associated with that. And so, as we go forward, we expect this momentum to accelerate, but…

Thank you, Simon. Gary, could we have the next question, please?

The next question is from Aaron Rakers with Wells Fargo.

Yes. Thanks for taking the question, and congrats on the results. I guess I wanted to build on Simon's question a little bit. I think in the context of last quarter and what you had disclosed at the analyst event, you had also alluded to within that pipeline, large hyperscale cloud opportunities. I'm curious what are you seeing in that vertical? Should we expect that to further expand? Just kind of any context around the positioning within cloud where HPE Enterprise hasn't really historically had a material footprint. Why are you winning in that -- in those opportunities if they're expanding?

Yes, Aaron. So one of the opportunities we won in Q3 was a large hyperscaler. We haven't even started building and shipping that. So that tells you the size of it. And we have further opportunities down as I look at '24. The reason why they come to us is, number one, it's because we have a unique amount of intellectual property. Think about it as an open ecosystem with our networking fabric, which obviously supports NVIDIA. We have a fantastic relationship with NVIDIA, but also supports other type of accelerators. And depending on the AI workload, it can be a mix and match. If you hear my comments, right, in some cases, we have NVIDIA GPUs with potentially AMD CPUs. In some cases, all NVIDIA, in some cases -- in the case, for example, of the Aurora system, the Argonne Laboratory is actually all Intel. So that provides flexibility for customers whether it's performance driven or supply driven over time. And the other one is because we have unique expertise in AI. Remember, we have been in AI for a decade. It's just we have done it for unique discrete customers. That we're building this system on a purpose base. But now this is why we entered the AI public cloud to democratize the AI for every enterprise -- and that's why we saw the growth in the HPE GreenLake as-a-service AI bookings, because they cannot build that themselves. And the other piece of this is the ability to consume this in a sustainable way. I think sustainability is becoming a key component because customers deploy AI want to make sure they control the carbon footprint with it. And then the data center services, which are essential to run this massive at-scale AI solutions. And then for the large language model companies, one of the things that attract them to us it's not just all of the things I just said, it is the fact that working with us, they can get access to our route to market, so they can reach enterprises in ways potentially they couldn't by themselves. So it's a combination of multiple things. That they are all coming our way, I will say. But ultimately, our strategy is a software-led strategy using our supercomputer as a cloud kind of experience and then wrapping around all the services and the software needed to provide that level of capability.

Thank you, Aaron. Gary, could we have the next question, please?

The next question is from Meta Marshall with Morgan Stanley. Please go ahead.

Great. Thanks. Maybe taking a second on the Intelligent Edge business. Can you just kind of give a sense of what is the biggest forward driver that you're seeing? I think people understand kind of the catch-up spend and the backlog release that has been done, but just what you're kind of seeing in ongoing kind of orders today? And is that Wi-Fi 6? Is it still kind of return to work? Just what are the biggest drivers that you're seeing to kind of help continue the growth of that business? Thanks.

Well, thank you for the question. I'm incredibly proud of the work we have done in the Intelligent Edge business segment. This is the opportunity I highlighted in 2018, where I said we will invest over the next four years to build the right solutions that ultimately will allow customers to drive what I call a data-first digital transformation. So, it's a combination of things: number one, return to work, obviously, you need to have the right connectivity; number two, in order to process the data, you need to connect devices and things that are essential, right, in order to provide the right cloud experience on those types of workloads and applications. But our portfolio is unique because we provide edge to cloud networking capabilities. Our strength obviously has been always in the campus and branch. We see that to transition to Wi-Fi 6. In fact, we shipped more than $30 million ports so far with Wi-Fi 6. By number of access points and ports, we are one of the largest, if not the largest, I will say. And also now that drives the 26 million ports we drove in the switching side, which was the thesis when I acquired Aruba in 2015. Over time, we have made these all cloud native and we have added to it. And so, as we look forward, what I'm excited is that we are delivering more capabilities and expanding our time with the same experience. So, we added Software-Defined Wide Area Network. Three, four years ago was a niche market, now is a very large market more than $5 billion in the TAM, and that's why we did the acquisition of Silver Peak. Now that's integrating the same control plane with HPE GreenLake as a part of the Aruba experience. And now we just completed the acquisition of Axis Security. So it takes Axis Security and Silver Peak. Now we're going to offer the most comprehensive SSE framework at the edge. And then also we are integrating Athonet, which provide both core 5G software-defined solutions and private 5G at the edge. All of this comes under a cloud native model in a subscription based model, which will continue to fuel the growth as we think about '24 and '25. Bottom line, it is one of the most comprehensive portfolio out in the market and no surprise obviously with the growth we have, obviously, we are converting more of our order book. But we exited Q3 and we expect to exit Q4 with a significant elevated order book in -- as we enter '24. And you can see the results right now represent 20% of the company revenue and almost half of the company profit. And so, the mix shift had really worked for us in this particular part of the portfolio as it is now with GreenLake as well.

Thank you, Meta. Gary?

The next question is from Asiya Merchant with Citi. Please go ahead.

Great. Thank you for taking my questions. If you can -- storage was up sequentially, which was a positive and it seems like the HPE Alletra is getting traction. As you think about the fourth quarter -- the fiscal fourth quarter, if you can provide some guidelines on how you're thinking about your storage portfolio, both on the top-line as well as when you think margins kind of get back to, I think, the target margins, which are much higher than where they are right now? Thank you.

So, let me start and I will pass it to Jeremy. The team and I drove an intentional strategy to pivot that portfolio, which was a conglomerate of different offerings that we built over 15 years or so to one consistent architecture that allows customers to consume data services, both primary and secondary in a cloud-native way and a subscription-based model. So, HPE Alletra is our primary storage that now covers pretty much all the price segments of the price bands, if you will, of the traditional storage from general purpose to business critical to mission-critical. And we address block and file. And in the future, we're also going to address the object piece. So as a customer, you can now subscribe to HPE GreenLake, deploy one consistent back-end infrastructure, whether it's in a colo, or the edge, or in your own data center and consume hybrid cloud data services. And you can put block type of solutions or file and then eventually object, which is a significant CapEx reduction for customers because they don't have to buy three different ways to deploy it. And an OpEx reduction because obviously, it's very efficient to manage in a cloud type of experience. And so, this business went from zero to in excess of $1 billion very, very quickly. And it's amazing that it's one of the fastest-growing products in our portfolio, growing triple digits. But what I'm really pleased is that it comes with a significant subscription, which is growing double digits. So maybe, Jeremy, you want to take the second part of the question, how we see this evolve, in particular from a margin perspective.

Sure. And that's where I'll pick up, Antonio, it was on Alletra. I think we've previously talked to you guys about how this product is really a combination now of a higher software component and that software component does have an element of taking what was prior product revenue and now deferring that onto the balance sheet, about 14% is deferred onto the balance sheet. And so, as we see that work off over time as that product is deployed out, we'll start seeing an inflection point, and that should positively impact revenue as we look forward, particularly into FY '24. And that also has an impact on the margin line, too, as that deferral is deferring software-based revenue that has a higher margin concentration to it. So we would expect to see our operating margins start to recover back to kind of historical levels as well as we look forward to '24.

And as Jeremy said, right, so there is a specific component is ratable here. So, we are going through that transition. But for two consecutive quarters, we saw demand improving, Q1 to Q2 and Q2 to Q3, and that's very positive. And we expect that to show up as we go forward as we transition those orders into revenues.

Asiya, thank you. Gary?

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

Hi, thanks for taking my question. I guess you mentioned a couple of times in your prepared remarks about the cyclicality in the Compute business, which is a headwind. Maybe if you can outline your thoughts on where we are in the cycle? Is there more downside to revenue and margins as we move into fiscal fourth quarter? Or -- you did reference a demand improvement. So I'm just sort of curious, does it imply fiscal 3Q is sort of the near-term trough here in the business. And more broadly, if I can ask like questions that investors are asking us today is how much of the demand improvement that you're seeing going into fiscal '24 helps you offset the tailwind that you have this year from backlog and still enable you to grow in fiscal '24? If you can share any early thoughts on that? Thank you.

Sure. So first of all, I think it's important to recognize that the traditional general-purpose Compute business goes through these cycles, right? Last year, we obviously have got a significant demand uptick because of the supply chain challenges. Customers are absorbing that, in some cases, we still need to deploy some of those products and the like. But we saw signs of stabilization and we saw demand improvement at the unit level, which is super, super important because demand in the unit level also drives attach. And as I referenced in my remarks, that unit demand together with the storage demand and obviously, the acceleration we saw in HPE GreenLake drove double-digit growth in operational services, which obviously is important as we think about ratable revenue and profit as we look into the future. Now we have this unique expectation of the company because in the past, we wanted to give you visibility of what is general-purpose compute and what is HPC and supercomputers. But when you combine the two is what I refer to the server category. Because in the end, there is a server component associated with that. And there is different IP you bundle depending it's a general purpose or a supercomputer. And the combination of general-purpose compute, as you refer, and HPC and supercomputers demand clearly improved very nicely quarter-over-quarter. I think as I think about 2024 as a server category, I think you're going to see the continued improvement in demand on HPC & AI. I think the AI inference related to Compute will be announced to the rate for Compute. And then we have to see the evolution of price in the commodity space, which you will expect some time in '24. That curve will end up again because as demand stabilize and improves, cost of commodity will start going up. And remember, we also have a tradition in the making from what I call Gen 10 and Gen 10.5 to Gen 11. And Gen 11 also comes with a higher, we call it, product intensity. So as more options and the options come with larger memory and larger type of storage and obviously more GPU embedded in the traditional compute will drive, over time, AUPs up. I don't know if Jeremy, do you have anything to add.

Maybe I'll pick up on the margin side of it, Antonio. Obviously, in these cycle times, we've -- I think we've proven that in down cycles where commodities are declining, causing declines in AUP. We've been able to hold pricing to drive margin. And then as it inflects back and turns back up, we've been able to be leading market leaders on pricing to make sure that we're catching it appropriately on that. So our expectation is as that changes throughout this process, on top of the point that Antonio made about Gen 11 really driving an AUP premium for us, which can also be an impact. We still expect that 11% to 13% operating profit, structural range to be reflective of what our longer-term expectations are.

But let me reinforce one important point because if you go back two years or three years, whatever was the cyclicality at the time, we will have a different dynamic in our total company revenue and profit. I want to reemphasize that because of our mix shift to edge, hybrid cloud and now AI as we go forward, which always expect margins to improve. The strong performance we had in that mix shift more than offsets the cyclicality we saw in Compute, which is very evident in our Q3 results because our margins improved again, 120 basis points. If you go back two years ago, our margins at the company level were in the 33%-s, in 2022, we're in the 34%-s, and in 2023, we are in the high 35%-s. And so that tells you that structurally, our business composition is shifting, and we intend to continue to drive that mix shift. And that's why software and services with Intelligent Edge and hybrid cloud and now AI with our software-led strategy, we'll continue to sustain that. And we will be able to manage the cyclical Compute much, much better.

Thank you, Samik. Gary, could we make this our last question, please?

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

Yes, thank you. Antonio, you're exiting this year with a high single-digit decline in revenues and Edge clearly is doing extremely well and some benefit from backlog. How confident are you that HPE can grow revenues in fiscal '24, given the current exit trajectory of the business? You also noted some stabilization. So curious to get just some high-level thoughts, not explicit guidance, maybe, but just some directional commentary on how you could see that playing out.

I think your comment is related to Q4, right? So obviously, we are going to lap a very high quarter because last year in Q4, we were able to convert more of that order book related to the fact that supply started improving in Q4, and you saw that in Q1. So to me, it's just a lapping of the numbers. But that said, we're going to talk to this at the Security Analyst Meeting, we expect revenue to continue to improve in fiscal year '24. We're going to tell you exactly what that will look like. But I will say that while revenue will improve year-over-year, and remember, in Q1, we're also going to have a big lap because Q1 revenue was $7.8 billion, the fact of the matter on a yearly basis, right, this year, we are growing 4% to 6%. And Jeremy talked about the headwind we saw in the FX, which is now 300 basis points. So, we are growing faster than what we guided you at the beginning of the year, which was 2% to 4%. We are now growing 4% to 6%. And we expect our revenue to continue to improve because of these momentum we have in the businesses, but we'll guide you a specific percentage at the Security Analyst Meeting. But the other important part is that the mix of our revenue is changing, and the gross margin mix is changing, and also the way we generate free cash flow is changing. And so, more to come when we talk at the Security Analyst Meeting, okay? I know that, unfortunately, you have to cover a lot of companies today, and I understand HP Inc. is about to start the call. I hope you can see from this quarter results how our strategy is working. We are delivering on our commitments. We always do what we say. And we are shifting successfully our portfolio. And so, despite some aspects of the market, being a little bit more challenged than others, we continue to grow revenue, we continue to expand margins, and we'll continue to improve our net earnings per share on a non-GAAP basis. So, I'm looking forward to see you at the Security Analyst Meeting in October. We're going to have it in New York, so it's a little bit more accessible. So, I hope to see you soon. And if you have any questions, we'll follow up with you offline. Thank you for your time today.

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