Good afternoon and welcome to the Second Quarter Fiscal 2024 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, Jeff Kvaal, Head of Investor Relations. Please proceed.

Good afternoon. Welcome to our Second Quarter Fiscal 2024 Earnings Conference Call with Antonio Neri, HPE's President and CEO, and Marie Myers, HPE's CFO. 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 investor relations web page. 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 any 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 April 30, 2024. 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 SEC filings 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 presentations accompanying today's earnings release on our website for details. Throughout the call, all revenue growth rates are presented on a year-over-year basis and adjusted to exclude the impact of currency, unless otherwise noted. Finally, Antonio and Marie will reference our earnings presentation in their prepared remarks. With that, Antonio.

Good afternoon, And thank you for joining us today. HPE delivered a very solid performance in the second quarter, with revenue and non-GAAP diluted net earnings per share exceeding our outlook range, driven by AI systems revenue more than doubling from our first quarter. I am very optimistic about where we're headed. AI demand continues to accelerate with cumulative AI systems orders reaching $4.6 billion this quarter. We have a robust pipeline in this business, though large AI orders can cause fluctuations during the quarter. We anticipate continued revenue growth driven by increased AI systems demand, continued adoption of HPE GreenLake, and ongoing improvement in the traditional infrastructure market, including servers, storage, and networking. Due to our confidence in the second half of fiscal year 2024, we are raising our full-year revenue and non-GAAP earnings per share guidance and reiterating free cash flow guidance. Marie will provide more specifics in her remarks. While we focus on translating strong AI customer demand to revenue growth. We continue to drive cost discipline to operate more efficiently and to preserve the ability to make targeted investments, which will sustain our growth into the future. We are being prudent with our spending and reduce operating expenses in the first half, as compared to the prior year period. We're also driving business process simplification across the company, including through digitization and automation with AI. Demand for HPE's AI systems is accelerating at a faster pace, and our solid execution enabled us to more than double our AI systems' revenue sequentially to over $900 million, helped by supply chain conversion through improved GPU availability. Our lead time to deliver NVIDIA H100 solutions is now between six and 12 weeks, depending on order size and complexity. We expect this will provide a lift to our revenues in…

Thank you, Antonio, and good afternoon, everyone. It's a pleasure to be here with all of you after my first full quarter as HPE's CFO. Over the past three months, I have become even more excited about our opportunities across AI, hybrid cloud, and networking. We remain in the very early days of AI, yet it is already driving strong interest, pipeline, orders, and revenue across our portfolio from service to storage to services to financing. Our AI system revenue inflected positively in Q2. We are winning deals in the AI market now and are well positioned for additional demand from enterprises and software into the future. Our differentiation includes decades of liquid cooling expertise, which we expect to become even more in demand with future iterations of chips, including NVIDIAs. In short, we see AI as a long-term driver of our financial results and as a pillar of our strategy to pursue higher growth, higher margin revenues. We are very pleased that we have exceeded our expectations in Q2 across key metrics. We exceeded the midpoint of our revenue guidance by $400 million. Non-GAAP diluted net EPS was above the high end of our range, and free cash flow exceeded $600 million. Improving Enterprise demand for traditional servers on top of the expected sharp ramp in AI servers drove the outperformance. Our AI orders, a healthy, intelligent edge, is set to grow sequentially beyond Q2 as expected, and AI emerged as a driver of a healthy HPE GreenLake momentum. We are seeing rapid growth in AI system revenue. Overall, I am very pleased with our performance in Q2 and am excited about our continued progress through Fiscal 2024. Let's take a closer look at the details of the quarter. Revenue grew 4% year-over-year and 7% quarter-over-quarter in constant currency…

We will now begin the question-and-answer session. [Operator Instructions] The first question is from Amit Daryanani with Evercore. Please go ahead.

Thanks a lot. And congrats on a nice sprint. I guess my question is really on the AI system side. You folks obviously had some really good revenue performance here. I think business pretty much doubled sequentially. I'm hoping you could spend some time talking about how should we think about margins on the AI side versus maybe segment averages because your margins appear to be holding up a lot better versus they have done at Dell or Super Micro, for example. So I'd love to just understand how do we think about AI system margins versus corporate averages? And if you just touch on what do you think differentiates your AI solutions versus companies like Super Micro, Dell, that'll be super helpful. Thank you.

Hi Amit, good afternoon. it's Marie, and happy to take the question. And look, obviously, we shipped $900 million of AI revenue in the quarter. And I think as you saw, our margin rate on our service segment from an operating profit perspective was 11%. So look, honestly as the CFO, very pleased that's what we guided and that's what we achieved, and that's what we've guided for the second half of the year. In terms of what's the puts and takes and the headwinds and tailwinds, let me give you some color around it. So from a headwind perspective, obviously we're dealing with a tougher inflationary commodity market, particularly even in the second half. And we also see, as you saw in the quarter, a greater mix of AI servers actually in our overall server mix. And as you know and you've heard, it's a pretty competitive market out there I might add, too. But clearly, we're managing it very well. And I'd say what's benefiting us is a couple of really important tailwinds. One is what we are seeing in terms of the Gen11 transition. That part of the business brings a higher AUP. And then also frankly, Amit it's the work we're doing around cost. So as a result, I think this really illustrates that we are very disciplined around both price and cost and frankly, it's part of our strategy to drive profitable growth. So pleased with the results, and that's how we are guiding the back half of the year, Amit.

So Amit, on the differentiation, I will summarize this on four key elements. One is our ability to deliver and run systems at scale, so AI system scale, that's a unique expertise and we have decades of experience. Number two is our infrastructure cooling intellectual property. We actually have all the IP necessary to cool systems in three different ways for them other. Our manufacturing footprint, which is very unique. We have one of the largest water-cooled manufacturing footprints in the world with two very important locations in the US and in Europe, which are close to customers. And then last but not least is services. What I think people are coming to realize that running the system of scale requires unique services capabilities. And that's why with Marie, we started showing you what the services pull-through is, which is also over time, a lever to improve the gross margin in this business. And we cover all aspects from day zero which consulting, to day one, which is advisory and professional services design and then -- and build, and then day 2, which is a running part with our -- in our operational services side and deep expertise when it comes down to this system of scale, including direct liquid cooling. All those four key elements are a big differentiation for us.

Thank you Amit. We move to the next question.

And the next question is from Aaron Rakers with Wells Fargo. Please go ahead.

Yes. Thanks for taking my question. I guess sticking on the AI topic, if I could first ask, when you referenced the AI enterprise customers starting to show up, and I think the comment on the conference call was, it's now north of 15% of your AI orders. Can you give a little bit of more context of that? What has that been over the last couple of quarters? I'm just trying to think about the trajectory of that. And then Antonio, on the liquid cooling side, as we and investors think about Blackwell product cycle from NVIDIA, I'm curious of, can you be a little bit more specific of exactly where, from a technology perspective, you differentiate at liquid cooling? Is there something unique that HPE does within the 300 patents that you would want to highlight for us, as sustainably differentiated. Thank you.

Yes. Thanks, Aaron. I think it's fair to say that the enterprise demand has started to pick in Q1 and really accelerate in Q2. Early on, if you go back to the Q1 2023 all the way to, call it, calendar 2023, a lot of demand came from the model builders, the service providers, and hyperscalers and you see the reference to our partner, Microsoft. But as I think about that, I think three segments of the market. I think about [dark segment] (ph), which is driving a lot of demand for a lot of GPUs and accelerated compute in general. The second segment is sovereign clouds and that starts to pick up now. And that's, think about tens of customers around the globe because obviously, our countries. And then there is enterprise customers, which will be thousands of customers over time. So today, we are very pleased with the momentum in enterprise AI. A lot of the conversations are happening. I was in Europe the last two weeks and I was in London, I was in Paris, I was in Madrid. All of them want to adopt AI. And I think they are attracted to HPE because of the trust, the quality, and the ability to deliver a simplified experience to our HPE GreenLake platform. As for the differentiation, HPE has three different ways to cool systems. So one is the traditional way, which is called the liquid-to-air cooler, think about that, basically running water supply in chilled locations where basically cools the air around the systems. Everybody has done that for a long time. The second is what most of the industry is doing today, which is what I call 70% direct liquid cooling or hybrid liquid cooling. Those companies still use fans to cool aspects of the…

Aaron, thank you very much, Gary.

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

Hi, this is Mary on for Meta. I just had a question for you on Intelligent Edge. Where are you in the Intelligent Edge inventory digestion and when do you expect to emerge from it?

Yes. Good afternoon. And in terms of where we're at Intelligent Edge, I think as I commented in my prepared remarks, we saw Q2 as being the trough period, and we've been transitioning through that throughout the quarter. And if you look at the market and where it's at right now, I'd say, that our channel inventory right now is in really good shape. And we did mention in the guide that we do expect a modest sequential improvement in networking in the back-half of the year.

Yes. And I will say in addition to what Marie said, what I'm really excited is that we see interesting areas of growth happening now. If you go back to Mobile World Congress and you see even announcements like we made yesterday, the enterprise private 5G is picking up significant momentum. Of my almost 40 meetings I had in Barcelona, more than half were about enterprise private 5G. And so yesterday, we announced the most complete enterprise private 5G on the back of the Athonet acquisition.

Thanks very much Mary, Gary.

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

Yes, good afternoon and thank you for taking my question. I just wanted to follow up on the guidance. You talked about enthusiasm for the second half, but you beat revenues this quarter relative to your expectations by $400 million and by guiding up an additional percent, you're actually only guiding up the full year by $300 million. So I'm wondering, are you just being conservative, given the commentary around enthusiasm and forces at work in the second half or how do we reconcile that discrepancy? And then also just on AI servers for the second half, I think you talked about six-week to 12-week lead times. So if you have $3 billion in backlog and lead times for six weeks to 12 weeks, why can't you deliver $3 billion in AI systems like next quarter or certainly in the second half? Thank you.

Yes. Hi Toni, good afternoon. So this is Marie. I'm going to take the first question just on the guide. So let me just clarify the guidance in terms of how we put it together. So we raised the guide from -- to $1.85 to $1.95, and that actually was the pass-through on that 19% stake in H3C. So we actually put $0.03 related to the 19% stake. What I did point to though, Toni, is I pointed to the higher end of the range, so that's really what's giving us confidence based on the increase that we made on revenue. So you're seeing that higher top-line and then also the confidence I got around just the cost discipline. So you've seen that just in the last couple of quarters where we've had a really strong scrutiny and focus around OpEx. And plus we did have some favorability in OI&E this quarter, that [beats] (ph) – that was actually just a onetime. So I just want to make that point of clarification. So overall, Toni, keeping the guide at $1.85 to $1.95 but really pointing to the higher end of the guide in terms of just the confidence that you articulated. So I'll turn it over to Antonio to cover the second question.

Yes. Toni, I think there is an opportunity to potentially exceed that. I think the limiting factor is not the supply, to be honest with you, is the availability of data center space. I made this comment in Q1, if you recall, data center space and power and cooling. And so some -- we are working with the customers to time everything correctly, six to 12 weeks, think about it, maybe less than a quarter, but then you have to go and install it. And there is a nice percentage of our deals in generative AI, which are all actually GreenLake. And so while we can recognize the revenue upfront, we are deferring all the services piece of it. So it really is going to come down to the timing of the data center and the power and cooling. And if that all aligns correctly, then we may have an opportunity to do better. But we felt prudent at this point in time to keep it the way it is and raising by 1%.

Toni, thanks very much, Gary.

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

Hi, thanks for the question. This is Joe Cardoso on for Samik. So maybe just following up on the AI questions. You're seeing a sequential decline in AI backlog this quarter, admittedly off of a very robust revenue quarter. But maybe you can just discuss the pipeline you're seeing. And sitting here, like what are some of the puts and takes that investors should be considering when seeing the sequential decline in backlog despite what appears to be a strong underlying demand environment overall? Thanks.

Sure. Thank you. Yes, our backlog was slightly down quarter-over-quarter, also was based on the demand we took in and also the fact that we converted more. I think you have to realize some of these deals, particularly larger deals take time and a little bit lump. Some of them have to go through the financing side. And so we feel good about where we are today. But in terms of the pipeline, think about multiples of the current backlog, multiples of the current backlog. So as we go through the next weeks and quarters here, we feel very confident in our ability to capture that AI for all the reasons I described before, and also the ability to close these deals as some of them may include, by the way, the need to provide data center space as well because we are not just building the system. And these are all generative AI systems, by the way, all of them that we also need to run it for customers.

Thanks very much Joe, Gary.

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

This is Victor Chiu in for Simon. The doubling the AI system's revenue is a pretty sharp inflection this quarter. Can you just tell us how much of the increase was driven by allocation improvement versus ability to ship orders? And kind of just help us understand the dynamic there a little bit.

No, I don't think it has to do anything with location. I read all this thing about location. We have a fantastic partnership with NVIDIA is about lead times in the general H100, which obviously NVIDIA made significant improvements on their own. And then obviously, as we start ramping our manufacturing processes, we actually become better and better at the revenue conversion. And I would say, I want to thank my team because my team did a fantastic job and we feel good about as we go forward. So it's a combination of multiple things, better lead times on supply. We feel pretty good about the ability to deliver systems 6 to 12 weeks to Toni's question, and some of them are straightforward is just shipments and some are with our HPE GreenLake offering wrapped around.

Thanks very much Victor, Gary.

The next question is from Ruplu Bhattacharya with Bank of America. Please go ahead.

Hi, thanks for taking questions. It's Ruplu filling in for Wamsi today. Can you talk about how much of the GreenLake revenue and ARR growth came from AI? And then Antonio, do you think that having GreenLake is helping you sell AI systems? And I also wanted to clarify, Antonio, you talked about sovereign AI. Can you talk about what innings you're in? And are there specific requirements of sovereign AI where you think HPE is well positioned to satisfy?

Hi Ruplu, we look forward to seeing you tomorrow. So in terms of your question around just ARR and AI, actually, it was the fastest growth element of ARR in Q2, followed by storage and networking. So I think, as I said in my prepared remarks, we are starting to see AI to sort of move through our entire portfolio. So pleased with the progress that we had this quarter, and I'll turn it over to Antonio to add some more context.

Yes. On the second part of the question, I think we are early at this point in time. I think there is more to be seen. And I want to make sure I captured exactly what you said. Can you repeat the last part because you were a little bit breaking.

Yes, I just wanted to ask about sovereign AI. What innings are you in, and are there specific requirements that you can satisfy?

Yes. So on sovereign AI, I said it's early, early on. I think there is a lot of engagements right now happening at the country level. The good news, we have very good reach across the board. And it's a combination of both. There is a combination of providing what I call generative AI locations where customers, enterprise customers can get access to -- to a sovereign cloud that the government may be helping funding at the same time. And the other one is what I call supercomputing power, right, itself. And so the two are very well aligned to the sovereign AI opportunities. And that's why I'm excited because HPE already provides to a lot of the sovereign governments supercomputing. So now we can extend into generative AI. If you think about the example of the UK Bristol is a generative AI system that the UK is funding as a part of the Bristol University, that the venture is going to be open to start-ups and enterprises in the UK, to either train models or do other type of research. And that's what we see.

Okay. Thanks very much Ruplu. Gary, we have two more questions, please.

And the next question is from Ananda Baruah with Loop Capital. Please go ahead.

Hi, good afternoon guys. Really appreciate, taking the question. Just a quick clarification and a quick question, Antonio. Did you say that in the last 12 months, AI growth was driven by service providers? And was it mobile, you said? And then the question is, what's a good way to think about cloud, your gen AI cloud scale opportunity, hyperscalers and Tier 2s going forward? Thanks a lot.

Yes. No, thank you. I said that the segment where we have seen, obviously the vast majority of action and demand is the model builders. Those are the big companies that build large and small language models. Obviously, you saw our comments about our partner with Microsoft and the extension of their capacity to OpenAI. That's an example of a model builder. But also there are other service providers. And in fact, in my remarks, I mentioned Scaleway, which is a French service provider that provides the capacity for the local French model builders. In fact, there is a lot -- there is a very vibrant ecosystem in France about building AI models that will use that capacity to train the models. That's what I referred to at this point in time. And that's what we see and that's what we've seen. So we are very interested in not just the model builders but Tier 2, Tier 3, which also is going to be a big driver. But understanding that enterprise, ultimately what the action is going to happen in terms of fine-tuning and deploying these AI models over time.

Okay. Thank you very much Ananda. And last question, Gary.

And the last question is from Lou Miscioscia with Daiwa. Please go ahead.

So thanks for getting me in. my question is really about GPU or accelerated diversification. Obviously, AMD and Intel and others are starting to come out. So as you think about calendar 2024, when do you think that your system will be for this? And what do you think demand will be and then maybe continue that into 2025?

Yes. I mean, listen, I'm very pragmatic about these things. Today, in generative AI, the market leader is NVIDIA. And that's where we have aligned our strategy, that's where we have aligned our offerings. And as I made my remarks earlier, we have 10 systems already in the mixed cooling environment and six systems or six offers also in the direct liquid cooling environment. So we are aligning with NVIDIA today, and that's why you are going to see at Discover, Jensen coming on stage with me to talk about what we're doing together. Now when you go into the sovereign space where there may be some components of supercomputing down the road, obviously, they designed their own systems with our help, and that will be a mixed environment. But just in the last month or so, we opened a new system in the Los Alamos laboratory, which was actually an NVIDIA system with HPE and is direct liquid cooled, so we are clear about that. But then there are also systems that will come in 2025 that may have different type of accelerators. Over time, we are going to be time to market. But right now, we have aligned to NVIDIA and that's what we're doing. And that's why I think it will be a great opportunity for you to join us at HPE Discover because you can see everything we talked today on the floor. Every system I just referred to my slides, every comment I made in my answers to the questions, you can come and see it. These are systems and IP that we are shipping today and you're going to see our time to market with this silicon in addition to all the services in HPE GreenLake. So it's going to be an amazing opportunity…

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