Good afternoon, and welcome to the Fourth Quarter 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 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 is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Jeff Kvaal, Senior Director, Investor Relations. Please proceed.

Thanks, Gary, and good afternoon, everyone. I'm Jeff Kvaal, I'd like to welcome you to our fiscal 2023 fourth quarter earnings conference call with Antonio Neri, HPE's President and Chief Executive Officer; and Jeremy Cox, HPE's Senior Vice President, Controller and 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 seems no obligation and does not intend to update any 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 annual Form 10-K for the fiscal year ended October 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 a reconciliation 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 noted otherwise, are presented on a year-over-year basis and adjusted to exclude the impact of currency. Finally, Antonio and Jeremy will reference our earnings presentation in their prepared comments. And with that, let me turn it to you, Antonio.

Thanks, Jeff and good afternoon, and thank you for joining us today. In fiscal year…

Pardon me, this is the conference operator. The speaker's line has appears to have dropped. Please remain on the line while we rejoin them. Thank you.

Eddie, can you hear us?

Yes sir, we can hear you now. Thank you.

All right, thank you. Well thanks Jeff and good afternoon and thank you for joining us today. In fiscal year 2023, HPE delivered record performance against non-GAAP financial metrics by capitalizing on strong momentum across our portfolio. Our steady execution has resulted in higher revenue, further gross margin expansion, larger operating profit, and record-breaking non-GAAP diluted net earnings per share and free cash flow. Our growth engines in Intelligent Edge and HPC and AI, as well as our HPE GreenLake platform, are helping to accelerate our revenue and profit diversification. Importantly, HPE has achieved demonstrable success this year in our ongoing portfolio pivot to higher growth, higher margin areas aligned to the key market megatrends driving customer demand. I will focus my commentary today on our full-year fiscal year 2023 results and allow Jeremy to expand on the fourth quarter and segment results. I'm very proud of all that HPE delivered in fiscal year 2023 for our shareholders, our customers, and our team members. Our performance demonstrates the relevance of our strategy, our portfolio differentiation, and our strong execution. We delivered extraordinary innovation to customers, resulting in share gains in key markets and profitable growth for our company. HPE generated our highest gross margin and highest operating profits since I became CEO, and our highest annual revenue in four years. Non-GAAP diluted net earnings per share and free cash flow were the largest ever in our company's history. We saw healthy, sustained growth in revenue at $29.1 billion for the full-year, an increase of 5.5% year-over-year in constant currency, a third straight year of revenue [Technical Difficulty] point of our full fiscal year 2023 guidance of 5%. Gross margins exceeded 35%. We also added substantially to our annualized revenue run rate closing fiscal year 2023 with more than $1.3 billion…

Thank you very much, Antonio. We closed FY '23 with another solid performance. Our Q4 results reflect our strategic focus to diversify our business towards higher growth, higher margin areas of the market. The company's transformation we have undertaken several years ago to pivot to edge and cloud is paying off. And with AI exploding in 2023, we see several promising indicators as we look further in 2024 and despite some unevenness in some areas of the IT market where we participate. Q4 performance was highlighted by healthy revenues and gross margins. Revenue grew 5% sequentially in constant currency to $7.4 billion. hitting the midpoint of our Q4 revenue guidance range. Year-over-year revenue, however, was down 6% on a difficult compare to Q4 '22, during which significant order book consumption boosted our results. Q4 non-GAAP gross margin was 34.8%, which was up 170 basis points year-over-year, largely due to the increasing contribution of our Intelligent Edge segment. Let me remind you of the deliberate targeted investment decisions we made in Q4 that I flagged to SAM, which were funded with the better-than-expected OIE performance in the same period. The impact of this investment, along with the strong seasonal growth in HPC and AI resulted in a Q4 non-GAAP operating margin of 9.7%. This is down 60 basis points sequentially and 180 basis points year-over-year. We expect non-GAAP operating margins to quickly be over in Q1 '24. This led to GAAP diluted net EPS to $0.49 and non-GAAP diluted net EPS to $0.52, which was at the high end of our Q4 guidance range of $0.48 to $0.52. Our Q4 free cash flow of $2.3 billion was record-breaking for the company. HPE also delivered an impressive full year performance in FY '23. We delivered revenue growth of 5.5% in constant currency…

We will now begin the question-and-answer session. [Operator Instructions] The first question is from Mike Ng with Goldman Sachs. Please go ahead.

Hey, good afternoon. Thank you very much for the question. I just have one on the APU orders of $3.6 billion. I was wondering if you could talk a little bit about the mix between compute, supercomputing and Cray XD. And if you could offer any color on the type of customers that are making this order? Is this your typical enterprise customer? Is it more of a Tier 2 or AI CSP? Any thoughts there would be great.

Well, thanks, Mike. This is Antonio. So pretty much all the orders are in the HPC and AI segment, the vast majority. We saw now in Q4 some uptick in demand in the what I call the traditional compute. But what you have to think about it is AI is a life cycle, right? training to tuning to inferencing. And the products we talk here, whether it's HPE Cray, XD or EX really are on the training side and the tuning side. And so when I think about the type of customers, I think about the model builders, right? So these are unique customers that in the past with generally, we have talk about it. Think about companies like Recussion, Pharmaceutical, Cruso energy, obviously, large language models like Aleph Alpha, Tiger Data or Northern Data, Geo Research and the like. These are big mobile builders, and they need a large amount of computational power. Now when we start seeing as an uptick in the tuning side with enterprises, because generally, they don't tend to build models. They tend to leverage foundation models in the open source or some of these companies provide and then they tune those models with their data, but they want to do it in a private secure and obviously sustainable way. And that's why we have made announcements with NVIDIA, and you can see further announcements later in the week. And then AI inferencing, I call it for using a sport analogy, singles and the doubles, right? So these are maybe a server with eight GPUs or accelerated resorts where they start deploying these models, they have been trained attuned into production and think about where their real-time processing data happen where business transformation takes place or maybe doing some sort of POC or pretraining experiments. And so now we start seeing that increasing. But the vast majority of compute is still CPU centric, and we saw some uptick in the GPUs. But the vast majority of all the APUs that we talked about are in the traditional high density for training and tuning, and that's where our HPE Cray set of platforms plays a big role. And obviously, they also find its way to supercomputing at large scale that we have talked about from TRL Capital and in Aurora, [Indiscernible] and Norsk and the like. Anything you want to add?

The only thing I would just add to that is the supercomputing piece, specific to your question, is less than 10% in the total APU orders in FY '23. The other interesting point to add on to the journey towards inferencing that Antonio mentioned is within compute, although against a very small base, we did see non-Tier 1 customer orders around GPU or APUs for compute increased about 100% in the quarter. So again, against a small base, but an interesting point to see the focus start moving towards that realm.

Yes. Thanks, Jeremy. And again, only 10% of the POs were consumed in Supercompute rest was all in AI. Okay, thank you, Mike.

Thanks, Mike. Gary, the next question please?

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

Yes, thank you so much. Antonio, we've seen some networking companies talk about a slowdown and some inventory digestion. You're still delivering very strong growth in edge high 30s. I know you called out a more front-end loaded performance for Edge. But curious how you're thinking about the weight and pace of that business trajectory both on revenue and margin terms as you go through the course of the year?

Yes. Thanks, Wamsi. I'm going to talk about demand and then Jeremy can talk about revenue margin, which we were very clear that right, what to expect. Obviously, we have driven a significant growth over the last two years. I think it was the 12th consecutive quarter of year-over-year revenue growth. That's very impressive, we added $2 billion of revenue in the last 2 years. And obviously, that came with an expanded set of gross margins because of our software and subscription-based models that we have been driving. Traditionally, we think about that has been in the campus and branch, where in our switching or Wi-Fi. But more and more lately, obviously, it's all software-driven and as well as expansion into the new times we discussed at the Security Analyst Meeting, including SD1 and security to create the SSC framework or the SASE framework we talked about it. And going forward, we are also going to add the private 5G, which we discussed. And let's not forget, we have been also gaining momentum in the data center with our offers, which are an extension of our switching portfolio in the data center. So definitely was a quarter-over-quarter slight decline in orders for demand for products in the campus and branch, but we saw strong demand in the software in the security space. And that's why at the securities and analyst meeting with Phil, we talked about this multiple ad adjacency we have add to the platform, and they are all incorporated into the HPE Aruba Central platform, which is part of HPE GreenLake. So again, we are committed to grow revenues next year on the higher pace that we created, again, on the $5.2 billion we just delivered. Albeit you should not expect a 40% growth, obviously. And that's why I want to have Jeremy talk about what we are affirming here in terms of revenue and as well as margins.

Right. Yes. We -- as Antonio mentioned, we did, as Sam mentioned, a slight growth we're expecting year-over-year on a full year basis for Edge. As I think about that, I'd almost break that down into two halves. The first-half, as we mentioned, we do still benefit from a backlog position or an order book position that will go into the first half and help support that revenue performance. And then the second half will be more dependent on demand improvements. and in the areas that Antonio mentioned and the investment areas that were helping drive that expectation. From an operating margin perspective, I would say that I would expect the first half to still benefit from higher operating margins as again, the order book consumption has been at higher price with lower cost. So that's helped drive our operating margin performance, which again this quarter at 29.5% is exceptional. But we would expect to probably more in the second-half, you'll start seeing that operating margin rate get more back towards the mid-20s that we had mentioned at SAM is our expectation for the long-term in this business.

Thanks very much, Wamsi. Gary, could we have the next question.

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

Yes. Thank you. If I look at your -- take the midpoint of your first quarter revenue guide, and I run out normal seasonality I get revenues down about 5% for the year. You've just stated that the edge business is going to be weaker in the second-half, so below normal seasonality. So clearly, you're expecting a huge ramp in HPC in AI over the course of the year? And I'm wondering if you can dimension that or -- are you expecting greater than normal seasonality in the traditional server business? And why would that be? And then finally, can you just comment on total backlog for HPC and AI exiting the quarter, you said it was $3 billion exiting last quarter or greater than $3 billion. What is it today? Thank you.

Toni, this is Jeremy. I'll take those two for you. So you're spot on as we think about next year, we will have a seasonal drop in HPC and AI. That's largely as Q4 really benefited from a meaningful amount of Cray Ex acceptances. And as you know, the time between order and acceptance can be a long period of time and Q4 saw a larger number of acceptances, which helped drive the revenue performance. We'll see a bit of a dip back down in Q1 and then Q2 and the second-half really benefiting from the acceleration in AI, as well as some additional supercomputing business. And so you'll see a pretty significant ramp as we go from Q1 to Q2 and then sustaining at or ramping beyond that in the second-half of the year. And HPC and AI will be a big part of the revenue growth story for FY '24. Your question on the order book total, it landed at just over $3.2 billion, which was slightly above where we landed in Q3. And that really came off the back, though of Q4 revenue performance in HPC & AI up about $350 million on a quarter-over-quarter basis. And so what happened is you had a runoff of order book from revenue performance in Q4 and then how to rebuild of that order book coming largely from AI demand in Q4 that took it back up to its historical high level of just over $3.2 billion.

Thanks very much, Toni. Gary?

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

Hi, thanks for taking my question. I guess in your prepared remarks, you did make it a point to highlight the uneven demand backdrop that you're seeing. I was wondering if you can flesh that out a bit more in terms of what you're seeing between the different product groups. And particularly when I look at that in contrast to the strong AI demand you're seeing, would you really sort of then see some of the AI demand from enterprises cannibalizing their own spend towards the other product groups? Or is the uneven demand more of inventory correction? Thank you.

Yes, sure. I mean no question, we see an explosion in demand in AI. Jeremy just comment on that. And I will say, of that order book that Jeremy just talked about in Q4, [Indiscernible] little was converted in AI. And to the point he made the growth we had in Q4 was driven by the supercomputer acceptances. But we have a very, very large pipeline in front of us, which is very exciting but ultimately it's going to come down to time to revenue based on the GPU availability. But I will say that business is going to continue to be super strong. And clearly, when I speak to customers, which I do more than 50% of my time there is a huge amount of interest in AI and how to accelerate the deployment of a higher cost enterprise, understand that there are challenges, whether it's sustainability challenges, where there are data center capacity, power and cooling and others. And that's why HPE went bold on that front last June to basically make the announcement we're going to offer supercomputing as a public cloud instance so customers can use it as a virtual private cloud. So that we feel very good about it. Green Lake continued to be very strong. Just to be in a context, we added $1 billion in TCV quarter-over-quarter. We added 2,000 customers, and ARR obviously, is a function of the deferred revenue that we materialize over time, but what customers really love about our experience is that it's hybrid by design. They can consume anything from Edge to cloud to HPE GreenLake, where they pay CapEx or OpEx, it doesn't really matter in the end. But they really love the experience. And that's why we're building the AI components into the same platform. So…

Cannibalization.

Cannibalization. Sorry, Jeff, remind me, cannibalization. We have no evidence of that yet. I think that will become clear when the traditional compute CPU-driven returned to some normal levels. But remember, not every customer has deployed cloud across that enterprise. Still quite a bit of journey to go. And there are clear customers assessing what is the best place to deploy that, whether it's in a power cloud or whether it's repatriating on-prem because of the cost or because of data. I think AI is a huge driver of repatriation in my mind because if you have data distributed across multiple states, it's very hard to really train and fine-tune the models when you have data everywhere. And our focus there is really providing them an automated data pipeline with our unified analytics platform. So fundamentally, it's early to say. But so far, in the traditional compute business, we have not seen evidence of cannibalization at this point in time.

Samik, thank you, Gary.

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

Thanks for taking the question. I wanted to see if you could talk a bit about the trends you're seeing in compute for the non-accelerated platforms. And really, the thing I'm trying to tease out here is sort of this issue of a projects, pulling budget or sucking oxygen on the room versus organizations buying up compute platforms to prepare for AI inferencing and embracing AI as an inferencing element, not just training?

Yes. Thanks, Simon. Again, maybe I will elaborate a little more to the comments I made before. So we saw Q4 over Q3 and Q3 over Q2 improvement in demand in units. And a lot of that was CPU-driven. Although there is a small base of AI accelerated kind of APUs, if you will, that we saw an increase in Q4. But I will say the unit growth in Q4 was not driven by the APUs, it was driven by a combination of CPUs, the vast majority and some APUs because the base is still very, very small. So definitely, customers are preparing for that. Again, they are all assessing what is the best place to deploy this model. That's why I do believe the inferencing side will accelerate over time, where we have to do some pre-training or POCs or really deploying in production. And I think many customers also will accelerate deployments of tuning solutions on-prem because of the data aspect I talked before. No question is still digesting what they bought last time on the CPU side of the house. But again, we saw some improvements in demand sequentially in units. And then let's remind ourselves that we also, for us, in the industry. We are going to the transition of Sapphire Rapids. And ultimately, we call that the Gen 11 platform. That became now, what, Jeremy? 25% of the mix which...

53% of orders in Q4.

53% of the orders in Q4, 25% of the revenue mix. And so that's good for us because, obviously, it drives higher density and obviously, we can attach more options to the same platform. And customers like the sustainability piece of that and the hybrid by design nature of that, which is actually well optimized. And Gen 11, by the way, was conceived to accept any type of processing unit, whether it's a CPU, but it's an APU, including ARM-based solutions or GPU-based solutions. Whether it's in tail on the X86. So that gives us tremendous amount of flexibility. But ultimately, it's not just about the server. It's the software that comes with it. And this is where we spend a lot of time building the partnerships and relationships with NVIDIA. So now you can deploy a tuning or inferencing with the NVIDIA stack and our software as well, all part of HPE GreenLake.

Thank you very much, Simon. Gary?

The next question is from Tim Long with Barclays. Please go ahead.

Thank you. Can you just touch on the storage business a little bit. It's been kind of challenged like some of the other businesses on macro. Could you talk a little bit about the outlook for recovery there? And also, if you could just touch on the third-party business there that's kind of impacted gross margin profitability, how does that look to be trending as we look out over the next year or two? Thank you.

Sure. I can take that particularly towards the latter part of that. I think Antonio already hit on some of the demand dynamics, again, where we've seen three quarters of flat to increasing demand, and so some positive trends from that perspective. I think from an operating margin perspective, certainly, we saw a reduction in Q4. That was driven off a combination of several things, including a higher third-party mix that you mentioned. As well as the fact that we see -- we saw some incremental OpEx in this segment and that OpEx as a comparison to the revenue performance in the quarter also put pressure onto that operating margin. However, we do expect a pretty quick recovery there. We -- as we look into Q1, in particular, revenue is not expected to accelerate meaningfully, but we think the mix will improve as far as towards our IP product. And the -- we should see some OpEx moderation and favorability as we go into the quarter coming out of Q4 and some of the investments that we made there. And so I expect to see that get back into a low double-digit kind of area. And then as we work through the quarter, and that IP mix starts to improve more on demand acceleration, then we should start seeing us working back towards our mid-teen target that we identified at SAM for this segment.

I will say also, if you look at our HP Electra product, it's the fastest ramp we ever had in the history of the company. This quarter, this past quarter grew another 50%. But also there is some short-term impact because a portion of that revenue gets deferred because the subscription is softer on the platform. And so that was an intentional strategy because ultimately, the infrastructure is one piece of it, but the operating system and the cloud services that comes with it are actually a subscription to HPE GreenLake. So while we're growing 50%, we are not materializing the full revenue because a portion of that gets deferred at least to over three years. And that's good because ultimately it comes to a significant higher margins for us. But our strategy is to dramatically improve the mix to IT. And you will see more announcement this week in the storage portfolio, all geared to the AI opportunity. We file an object and that will accelerate some of the momentum we have in the storage portfolio.

The next question is from Sidney Ho with Deutsche Bank. Please go ahead.

I want to ask about ARR, and it was flat quarter-over-quarter, but still up very strongly, 39% year-over-year. Can you walk us through the dynamics why it didn't change in the quarter? You just talked about GreenLake being very strong multiple times. Are there some negatives maybe some cancellations offsetting the growth? Or is that more a pause of the two very, very strong quarters? And lastly, was there much contribution from AI servers in the AR number at this point?

I'll take that. So just on the last point, no, there wasn't any meaningful AI impact, but we do expect that to be an accelerator, particularly in FY '24 as we go to Q2 and towards the second half. That will be a big part of our ARR story, and we expect that to be an accelerator for us in FY '24. On the quarter-over-quarter, this business, similar to what I mentioned on the supercomputing area does have some time between order to revenue recognition. In this case, when ARR begins to be reported. And so I think the sequential story was more about. Early in the year, we had seen more as the backlog had been burning down and some of those deals that have been waiting in the pipeline turning into -- and converting that helped drive and accelerate the ARR through the first 3 quarters. We saw a little bit less of that in Q4. But I don't think that it all as an indication of a slowdown in this space. In fact, between the 35% and 45% kind of CAGR or annual growth, I expect us in FY '24 to see the higher end of that range.

Sidney, there's some rounding in there that we can talk through. But thank you. Gary, this should be our last question, I think.

And our final question will be from Meta Marshall with Morgan Stanley. Please go ahead.

Hi, this is Mary on for Meta Marshall. I just had a question on demand trends. Can you speak to linearity within the quarter and whether pockets of weakness you saw during the quarter changed as the quarter went on?

Yes. I think overall it was more back ended, I would say, in the quarter, we saw strengthening as we went through the weeks. As always said, we have 13 weeks in the quarter, and we saw stronger momentum as we built along the way. And remember what we said the same, right? So as SAM as said year-to-date to October '19, I think, was the sun date. We had $3 billion in cumulative orders both between supercomputer and AI specifically and we ended the year at 3.6%. So in the last 12 days with $600 million in incremental AI orders. That tells you the strong. It was through also for compute and storage. By the way, the last few weeks, call it, three, four, five weeks were stronger than the beginning of the quarter. So I would not make much out of that. Sometimes customers take the time. We still actually live in elongated flow cycles. That's for sure. Customers taking more time to make those decisions. and ultimately issue the POs. But what really is giving me the confidence is the strong pipeline we have ahead of us. That's obvious. And clearly, in AI is significantly stronger than we ever imagined. And the only challenge we have there, then as Jeremy said, right, so it's time to revenue. We really recognize very little revenue in AI in Q4. That's why we expect the acceleration starting in Q2 and beyond as lead times improve and some of the supercomputing also gets accepted. But the reality, 2024 will be the year of AI revenue growth. And then in the edge, obviously, we have the momentum that we talked about in the subscription, the scale of our software and the incremental engines that we have. So overall, it was a typical quarter, but stronger on the back versus the front. Yes. I think we have time for one more.

Let's do one more. Thanks Gary, please. Maybe just one more question.

Thanks for the final question. will be from Aaron Rakers with Wells Fargo. Please go ahead.

Yes, thank you guys. This is Michael on behalf of Aaron I just want to ask around AI software. Can you just help us appreciate or understand how your own AI software solutions that you guys talked about at SAM compared to NVIDIA's own AI software suite. I'm just trying to understand is yourself for a complementary or is it more of a substitute? Just how to think about that overall. Thank you.

No, great question. And I will say, overall, there is a lot of complementary and there are some places overlap, obviously. But with Jens and the team, we have a clear joint plan to win together in different segments of the market. But let me break it out because we talk about software in general terms, but let's start first at the infrastructure level. we have unique software that allows us to run these supercomputers and AI system, which are cloud native by nature at massive scale. Think about when you run a model you need to start and complete the mobile training. And you have to have unique technologies for checkpoints and making sure that all the compute power is acting as unified system because unlike the public cloud or the cloud, as we know it, you are multiple loads on multiple nodes. In this case, you run one world nodes on multiple nodes. And that's parallel computing as we know it. And ultimately, you need the software to run this at scale. The magic around that is that checkpoint. And then the second piece of that is our networking interconnect fabric which allows us to really connect every accelerated unit to every accelerated unit in a cohesive approach. And that's our Slingshot contingent fabric as we know it. And then on top of that, we have our machine learning development environment. This is where developers and the like use our machine learning development services. to prepare the models to automate the data pipeline. One of the biggest challenges customers have is to prepare the data, data is everywhere, but ultimate bringing in terms sort of one place so you can use data to train the models. And then with NVIDIA, we use their AI enterprise software, including some…

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