Good afternoon. And welcome to the First Quarter Fiscal 2025 Hewlett Packard Enterprise Earnings Conference 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 now like to turn the presentation over to your host for today's call, Paul Glaser, Head of Investor Relations. Please go ahead, sir. Good afternoon. I am Paul Glaser, Head of Investor Relations for Hewlett Packard Enterprise.

I would like to welcome you to our fiscal 2025 first quarter earnings conference call with Antonio Neri, HPE's President and Chief Executive Officer, and Marie Myers, HPE's 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 business 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 information available at this time and could differ materially from the amounts ultimately reported in HPE's quarterly report on Form 10-Q for the fiscal quarter ended January 31, 2025. 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 noted otherwise, are presented on a year-over-year basis and adjusted to exclude the impact of currency. Finally, Antonio and Marie will reference our earnings presentation in their prepared comments. With that, let me turn it over to Antonio.

Thank you, Paul. Good afternoon, everyone. Before I share my comments on our Q1 performance, I would like to start by addressing the recent decision of the Department of Justice to file a lawsuit seeking to block a proposed acquisition of Jourdan Networks. The DOJ's analysis of the market is fundamentally flawed. We strongly believe this transaction will positively change the dynamics in the networking market by enhancing competition. HPE and Juniper remain fully committed to the transaction, which we expect will deliver at least $450 million in gross annual run rate synergies to shareholders within three years of the deal closing. The court has set a trial date of July 9th. We believe we have a compelling case and expect to be able to close the transaction before the end of fiscal 2025. As you know, the US administration enacted tariffs on imports from Mexico and Canada, with increased tariffs on imports from China, beginning March 4th. In anticipation of this decision, we have been evaluating numerous scenarios and mitigation strategies since December to assess the potential net impact. We intend to leverage our global supply chain to mitigate aspects of the expected impact with pricing adjustments also expected. Pending further announcement from the US administration, our outlook for the balance of the year reflects our best estimate of the net impact from this tariff policy. Marie will provide more details shortly. Turning to our Q1 performance, we delivered against our commitments for the quarter, including achieving strong double-digit year-over-year revenue growth. However, we could have executed better. While our Q1 operating profit outlook anticipated increased pressure on our server operating margins, three factors impacted our profitability more than expected. Near the end of the quarter, we saw that our traditional server pricing did not adequately account for the…

Thank you, Antonio, and good afternoon, everyone. During the first quarter of fiscal 2025, we saw increased demand for service, storage, and networking products. Our revenue grew 17% compared to last year, marking the fourth straight quarter of accelerated revenue growth. We met our outlook, achieving double-digit growth in server and hybrid cloud. Intelligent Edge also performed better than we expected and is set to grow further in this quarter. We reported non-GAAP diluted net earnings per share of 49 cents, aligning with our outlook, showing strong profitability in hybrid cloud and Intelligent Edge. However, we faced some challenges in the service segment, which we are addressing. Here's a closer look at the details of the quarter. Our first quarter revenue was $7.9 billion, up 17% year-over-year, but down 7% quarter-over-quarter, reflecting typical seasonality and lower AI systems revenue. Annual recurring revenue was $2.1 billion, up 46% year-over-year, driven by AI and Intelligent Edge. Non-GAAP gross margin was 29.4%, down 680 basis points year-over-year and 150 basis points quarter-over-quarter. On a year-over-year basis, gross margin was impacted by a higher mix of server revenue and lower contribution from Intelligent Edge. And we faced challenges in server that pressured margin, both year-over-year and sequentially. Non-GAAP operating margin was 9.9%, down 160 basis points year-over-year and 120 basis points sequentially, primarily due to headwinds in gross margin. Operating margin partially benefited from a 9% decrease in non-GAAP operating expenses, reflecting lower variable compensation and continued cost discipline. In my first year as CFO, we implemented cost-saving measures by targeting discretionary spending, reducing non-GAAP operating expenses from 24% in fiscal 2023 to 22% of revenue in fiscal 2024. In Q1, these actions lowered operating expenses to a record low of 19% of revenue. This year, we aim to target more structural cost savings.…

We will now begin the question and answer session. At this time, we will pause momentarily to assemble our roster.

Great. Thanks. Appreciate the question. Marie, it sounds like you anticipated some of the

raising pressure kind of on the GPU market when you gave the original 10 to 11% fifty basis point shortfall. You know, how much of that was CPU versus kind of pricing inventory additional pricing and inventory on GPU. Thank you. Yeah. Hi, Meta. And thanks for your question. I think you were referring to Q1, so I'm going to answer you in terms of the Q1 actuals. So as you know in our original guide, we actually had 10 to 11% per server, and that did actually include some of the pressures that Antonio mentioned in his prepared remarks in terms of the AI GPU transitions. However, the magnitude of that impact was greater than we expected. And what I would say was unanticipated was the pricing challenges that we experienced in traditional compute. That was not in our Q1 guide. So, hopefully, that gives you some context there, Meta.

Your next question. Thank you. And your next question today will come from Aaron Rakers with Wells Fargo. Please go ahead.

Yeah. Thanks for taking the question. Just just kind of building on, you know, Meta's question there.

Know, when we when we look at the gross margin profile of your AI

server revenue and and and thinking about the monetization of the backlog as we as we move forward, I'm curious of how you know, how that's changed or how your views have kinda structurally changed over the course of the last three months and whether or not the gross margin pressure you might be seeing, is there any kind of inventory charges or write downs that are more transitory in the model and just any context on how margin profile looks thinking about the hopper going to the Blackwell product cycle would be helpful. Thank you. Yeah. Thanks, Aaron. This is Antonio. So when I think about the AI market again and the AI market, high margin in that context, I see three segments. Right? So you talk about the service provider, builders. They lead with time to market with the latest technologies. And that's why in Q1, we saw a quite significant amount of Blackwell. In fact, I think I said 70% of the mix of the $1.6 billion was Blackwell. When you go to the other two segments, the sovereign and the enterprise AI, that's not the case. They go with a combination of prior technologies and maybe new technologies in the software, an enterprise market, definitely, it's n minus one or even minus two. For that matter. And so that's why that inventory in the AI that was higher than normal is because now it will take a little bit longer for us to basically transition that inventory as we go through the other two segment consumption while the service providers and the model builders will shift much more quickly into the, the latest technologies. And that working capital, because in the end, it's all working capital. Pressure is not so much the margin pressure of what you sold when, is what compounded the issue in Q1. And it will take, like we said, one or two quarters to that backlog. The $3.1 billion into revenue plus new orders are coming in, and then return the traditional server business to the, what I would call, more normal operating margins because that was mostly impacted by the the, what I call the, higher discounted and that one time thing, we would call it the value of our inventory itself.

K. Thank you, Aaron.

Next question, please.

And your next question today comes from Wamsi Mohan with Bank of America. Please go ahead.

Yes. Thanks for the question. Your guidance implies over $2 billion year on year growth in revenue. But at the midpoint, almost a $150 million year on year decline in operating profit dollars. So can you just help us think through how much of operating profit dollar headwind you are baking in explicitly from your from your tariff assumptions and if you could bridge that

you Similarly, for free cash flow on a year on year basis where you're you're going from north of $2 billion to $1 billion. How much of that is is tariffs versus competitive pricing versus inventory, that'd be helpful. Thank you. Yeah. Hey, Wamsi. Good afternoon. And maybe I'll take the second part of your question first in terms of cash itself. So for the full year guide, as you know, we, in my prepared remarks, are I mentioned at least a billion. The way to think about cash flow is you you take out net earnings at the midpoint of one eighty. The biggest driver is really work capital and then also the announcement that we made around the cost efficiency program. So they're the two biggest drivers that sort of influence cash flow from a year on year basis. And then, obviously, the tariff impact flows straight into the the earnings at the midpoint. In terms of tariffs, Wamsi, how to answer that? What we've got in the guide is actually seven cents for the year, and that gets you to the midpoint of the one eighty on the guide. I would add, though, the way to think about tariffs is we're working you know, we've worked obviously on mitigation effects, but it does take time to see those mitigation effects take place. So as a result, literally four cents of that seven cents is actually going to be in Q2 and it's also in the server business, which is where we see the greatest extent of that server sorry, of the tariff impact. So tariffs seven cents in a year, but the the sort of, like, the hottest part of the tariff sort of impact is really going to be borne in Q2.

Very good. Thank you, Wamsi. Next question, please.

And your next question today will come from Tim Long with Barclays.

Thank you. Sorry to keep beating the AI server horse here. But maybe, Antonio, just on the strategy side,

just curious. You know, it seems like from the outside, a year year and a half two years ago, some of your peers were really chasing model builders, lower gross margin business, and you guys seemed much more focused on you know, super compute and areas that had better margin to it. It it seems like that strategy has changed and now HPE is more willing to get into some of these lower margin businesses like the GV200 NPL72 I imagine very low gross margin. What's what's with the am I right in that strategy change and in the future should we expect that you know, chasing the model builder business may never get better on a gross margin? Basis, so that might be something that's more challenging to continue to compete in if we're gonna be talking single digit gross margins for that? Thank you. Yeah. Thank you. So no, our strategy has not changed. You know, if you look at the Q1 performance on our server operating margins, it was not particularly driven by the AI gross margins or operating margins in many ways. Of the pricing of the deals. We participate in service provider where we believe through scale and other, you know, mixes that we drive in the in that deal, whether it's services, manufacturing, the like, we we can make the math work to ultimately deliver that overall 10% server margin combined with the rest of the server business. What what was different in Q1 for us was, again, the higher than anticipated discounting on the traditional server business, and the fact that unfortunately, this is on us. You know? It's been bad news, good news in many ways. Right? Is that the the cost that we saw in our valuation of the inventory was…

Thank you, Tim. Next question please.

And your next question today will come from Simon Leopold with Raymond James. Please go ahead.

Thank you very much. I wanted to see if you could talk a little bit about your customer mix and how it how it might be changing. And to be transparent. I'm wondering are you targeting more of the the cloud builders right now and is that affecting some of the the assumptions? So you're in a more aggressive space, or are we seeing issues where perhaps your federal market, which I assume is very profitable, is is weaker in the mix. So trying to get a little bit of unpacking particularly around compute around what's going on in the verticals that might be affecting margin. Thank you.

Well, thank you, Simon. No. I mean, I don't think this is new news. But in the service provider model builders, we obviously target those who value the value of our intellectual property. Now, obviously, direct liquid cooling is 100% fanless. Is what we shipped three weeks ago. For the first time and and that takes a lot of work. From the company side, but as well on the manufacturing side. But that's a market that's super concentrated. Mean, when you think about it, the mobile builders maybe you can count it with a finger of two hands, maybe less. And then on the service provider, it's probably fifteen to twenties that make a difference. Right? And that's why you need to find a balanced approach. I'm particularly targeting the tens of thousands of enterprise customers that now are now adopting a variety of AI models and more agented approaches. And while the value of the order transaction is much lower, obviously, comes with a complete different margin profile. And what I'm pleased is that we now see the acceleration of that and a significant pipeline. And our channel motion is actually an advantage for us. So you may end up you know, obviously, everybody think about what's gonna happen with the CapEx deployment in one segment of the market. That may be, you know, slowed down at some point. I don't know. But right now, it feels solid. And then a growth on the enterprise, which will benefit our mix between the segments. And in between, the serve the sovereign, right, you know, when you think about a sovereign, when it comes down to supercomputers, I think we win three out of four. Very easily. And then on top of that, you add now this generative AI and, you know, like, universities of Bristol or Japan ASC, or many others that are coming through the pipeline, and that's where we find the balance for the server business. And in the meantime, drive the refresh in the traditional compute you know, which has been very solid. In fact, we had again double digit year over year orders Ralph? And all ultimately now with Gen 12, we have another great platform transition the installed base. Lower cost

Four

with more sustainability with 65% energy reduction. Thank you, Simon. Next question please.

Your next question today will come from Amit Daryanani with Evercore.

Thanks for taking my question. I guess Antonio, Marie, if I look at the fiscal 2025 guide that you folks are giving out right now, it implies that you know, revenue growth will be close to double digits, nine and a half, ten percent in the back half of the year. At the same time, I think you're implying about a dollar EPS in the back half. So that would I think, mathematically, get to about a 250 basis points step up in operating margins in H2 versus the Q2 levels. Can you spend some time on what's giving you the confidence that a, revenues will actually snap up this way, and then b, if the revenues are really gonna snap up with AI servers, how do you get that sort of operating margin expansion in the back half of the year?

Yeah. So good afternoon. Let me take that one there. I mean, it's so first of all, on terms of the back half, you're correct. We are very weighted in terms of both revenue and profitability in the back half, and it's not that dissimilar to fiscal 2024. Couple of things to bear in mind, as I said in my prepared remarks, we do see the timing of AI systems sort of moving into the back half as well. So that will drive some of the revenue to point you you just raised. And then secondly, I would say this in terms as you think about profitability. And the fact that I think we said in the prepared remarks, we do expect our server business to exit a year in around about the 10% range as well. The factors underpinning that are obviously three sort of critical areas. One, the actions that Antonio referred to around server execution, you'll see those impacts. Obviously, they cross in Q2, and they will continue to flow through the P&L in Q3 and Q4. Secondly, we would have had time to mitigate tariffs, so that's another contributor as well. And then third, we will see the impact of the cost efficiency program. So it's really those three drivers that will sort of influence profitability. And then finally, like I said, just reiterating, just the timing of AI systems, which really know, those deals as we've said in the past are very lumpy, and they sort of obviously can drive a a a sort of different seasonality in terms of your quarterly revenue. So bear all that in mind when you think about the guide, but essentially Q4 is really going to account for a higher percentage of our full year earnings compared to what you've seen in terms of some of our recent years.

I will add only one more thing to what Marie said. It's the fact that our network business, will continue its recovery. Right? Again, we talk about three consecutive quarters of sequential growth. Supported by now double digits. Double digits orders growth. On a year over year basis. So this was the last quarter, technically. That we lapped the higher compares and then from here on, right, we expect it to be in the mid single digits revenue growth for the balance of the year. So that's why, you know and that obviously comes with the completely different profile. And as you know, in Q1, we delivered 27% operative margins. And and and that's a big opportunity for us. And that's why we are also committed to the Juniper deal because the combination of two will accelerate the profit recovery later when the deal close you know, in the back in the back of probably Q4, and then, obviously, in 2026.

Thank you for the question, Amit.

And your next question today will come from Samik Chatterjee with JPMorgan. Please go ahead.

Hi. Thanks for taking my question. I guess Antonio,

you're talking about the mitigation efforts that you're doing in relation to the tariffs. I was curious how should I think about the sort of focus relative to supply chain flexibility versus pricing to mitigate the impact of tariffs. Which one is sort of the bigger focus you are going into the back half? And particularly when it comes to pricing, how are you thinking about sort of the level of conference and taking pricing, particularly when you're mentioning certain markets where discounting is more aggressive than you thought and how should we think about those sort of level of visibility or confidence into getting those pricing actions done without really impacting demand? Thank you. Yeah. So first of all, we have a a very holistic and global supply chain, which allows us to mitigate some of the impact of the tariffs. We build products around the globe close to the customer. Because, obviously, we need to be close to them to meet the turnaround times that they require. But we're able to shift productions from one side to the other side. Because of our flexibility that we have. Separately, you know, on the on the pricing side, no question. We will, you know, adjust pricing accordingly. While we continue to drive the working capital down. Per the comments Marie made, and therefore create more flexibility in our pricing as we manage discounting more tightly. What I don't know and, you know, this is best guess for everyone. What the overall tariffs increases and how that materialize in the end in the market will do to demand you know, maybe in the second half of the year. But we are confident in our revenue guide. That we provided, which I think one of your colleagues spot on, you know, the nine and a half at the midpoint which is very high for us, right, in the very, very high single digit perhaps even double digits. And and we feel good about that. It could impact maybe some aspects, but overall, that range is very comfortable for us. This point in time.

Thank you, Samik. Next question, please.

And your next question today will come from David Vogt with UBS. Please go ahead. Great. Thanks guys for taking my question. Marie, I thought I heard you say on the call the cost structure restructuring savings or in addition to the Juniper savings, so does that mean I I couldn't hear you clearly, but does that mean the savings that you're announcing today

impact more of the server storage side of the business? And not Aruba and Intelligent Edge. Just trying to get a sense for how that layers in over the next couple of years. And if that's the case, is the four twenty five or four fifty that you mentioned regarding Juniper all from the Juniper side of the from the transaction if it closes? Thanks. Yes, David. Hey. Good afternoon. It's Marie. So just to clarify,

yes. So first of all, the Juniper at least four fifty, is completely tied to Juniper as a standalone. And then in terms of the $350 million of gross annual run rate savings that we announced today, that actually ties to our current organization, our current company. So as I mentioned, you know, we expect to, you know, achieve these numbers over the course of twenty five and twenty six, and this is really much more focused around what I would describe as cost efficiency. And I think we mentioned in terms of eliminating around about 2,500 jobs inside the company as it is today. So think about them as sort of two separate initiatives and two separate plans.

You know, I I mean, this is very simple. We have the plan to close the transaction. At the end of Q1. It is very disappointed that, the DOJ decide to file a lawsuit. But if we had the plan also to announce we felt was the opportunity to go forward to take incremental cost out. If you take the two programs together, it's at least $800 million. But we have not closed the Juniper transaction. Therefore, we have to wait for that. And we are committed to deliver at least $450 million once the transaction closes. In the meantime, we are moving forward with the $350 million that Marie talked about it. And, and that's why, you know, I think it's the right time to do so. Also, in the context what the market is expecting and what happening with tariff and the like. And also what happened to us in Q1, which we feel confident we will address. But think about the whole thing. It can be sizable. But in the meantime, we're addressing the stand alone because that's who we are.

Very good. Thank you, David. Next question, please.

And your next question today will come from Mike Ng with Goldman Sachs.

Hi, good afternoon. Thank you very much for the question. Tony, I just wanted to ask about the the AI systems orders momentum throughout

the quarter. You know, the $1.6 billion implies a little bit of a slowdown in December and January after

the $1 billion plus order in November. You know, has the demand environment for AI systems changed? You know, what have you seen during the quarter? And then

you know, in in a couple months since. And if if I could just ask Maria a quick follow-up on free cash flow. Anything other than the $250 million of cash restructuring, restructuring that impacts the the outlook, I just wanted to see if there was anything unusual there. Thank you. Yeah. Thank you, Michael. I think you're correct. I mean, obviously, we we were we started strong the quarter. And then obviously vacations and the like. But remember, this is a lumpy business. Right? You may have strong spurs of demand you know, happening one month and then perhaps not so much the next month. On aggregate, right, when you think about it, we we booked, $8.3 billion that was up double digits, and we've doubled it. Quarter over quarter. I think that's the message. Right? So our AI systems net orders in the quarter were twice as big as the Q4. That said, you know, what I'm particularly proud is the fact that the AI enterprise is strong. And that to me is a testament on our customers are deploying the solutions, particularly in inferencing. And the inferencing is where all the value gets realized. And the pipeline remains some multiples. On every segment of the AI, whether it's sovereign, enterprise AI, or model builders and service providers.

And just to clarify on the cash flow, the number four actually, for twenty five, the four hundred million, two hundred and fifty, which comes from the cost efficiency program that we just announced, and we also have some carryover from prior period restructuring programs. So that's what gets you to four hundred in terms of the cash flow that I did earlier.

Thank you, Mike. Next question please.

And your next question today will come from Matt Niknam with Deutsche Bank. Please go ahead.

Hey, thanks so much for squeezing me in. I'm wondering, has the macro backdrop in and specifically around tariff uncertainty, has that had any impact on customer purchasing or demand to date and just in a similar vein, are you baking in any incremental softness from US Fed as a result of some of the DOJ initiatives? You.

Yeah. Thank you. No. So far, no. In fact, as we we we we said in our prepared remarks, we have double digits order growth. In all our business units. That's true for networking. That was true for servers. That was true for AI systems. That was true for storage. It was actually triple digits. And now the electric grid represent more than 50% of the mix. So demand was very, very strong. We don't see yet the full impact of the tariffs in the market. I think case will take another month or two. On the federal side, it depends on which agency you're working with. So far, not a significant slowdown, but remember, the HP company provide core. CoreTech Infrastructure. For the Department of Defense and Department of Energy and many agencies that that that provide national security of sorts. And therefore, you know, that has not in c? But we'll see what happen next. Hard to predict at this point in time. K. Thank you, Matt.

We are ready for our last question.

And your last question today will come from Ananda Baruah with Loop Capital. Please go ahead.

Hey. Yeah. Thanks, Scott. Good afternoon. And, Tony, just a quick question on getting the I server mix. As you guys are thinking about it. For for fiscal twenty five. And I guess, really, what I'm what I'm what I'm interested in is any context on how much of what you're looking at in the in the backlog pipeline. Would go into GreenLake, versus the revenues in the traditional sales set and then any any sense of how your mix might change from, SPs and and model builders relative to enterprise and sovereigns. And that's it for me. Thanks.

Yeah. Thank you. You know, when I think about enterprise AI, there is a big component that goes through the GreenLake because it is a subscription of the software to the GreenLake platform. All that software that we coengineer with NVIDIA. So that's what we call NVIDIA Computing by HPE. It's actually a subscription into the GreenLake platform with a CapEx on the infrastructure attached to it. Think about it that way. While the growth is very nice, and you saw the 40% growth in orders, it actually takes time to see it. Right? And now remember, we have now $2 billion plus in AIR that you will be adding to it as we grow that installed base. But on the service providers, or the model builders, have been in at least in the last couple of quarters, all CapEx purchases. And, therefore, there is no GreenLake flex offer associated at this point in time with that one. So that's why it's more CapEx on one. Over time, you have a CapEx plus a subscription on the other one.

Okay.

Well, I think we are at the end of the the the call. Thank you for joining the call. Again, I will leave you with this. Number one, is we delivered a solid quarter. But we could have executed better. I'm really proud of the demand we've seen that tells me the innovation and the strategy is right. But, ultimately, we could have executed better in the server operating margin side where a couple of things were under our control, and, obviously, we are committed to go fix that. Confident to return to the normalized EPS by Q4 and the 10% server margin at the exit Q4. And then, you know, we took aggressive action on incremental cost that we can take out now. And, also, we factor the tariff impact now. So you have one complete view of what fiscal year 2025 looks like. And last but not least, we are totally committed to the Juniper deal. We believe we have a very strong case and we expect to close that transaction in the second half of 2025. And the good news, at least, there is a trial date now set for July 9th. And we believe we have a compelling case to to get the favorable ruling. Thank you for your time today, and hope to talk to you.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.