Good afternoon, and welcome to the Fiscal 2025 Second Quarter 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 second 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 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 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, 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. Antonio and Marie will refer to our earnings presentation in their prepared comments. Finally, I would like to announce that we will hold our security analyst meeting on October 15, 2025. We will provide more details as the date gets closer. With that, let me turn it over to Antonio. Thank you, Paul. Good afternoon, everyone.

In Q2, HPE delivered solid results. We executed well and delivered both revenue and non-GAAP diluted net earnings per share above the high end of guidance. Through focused and disciplined execution, we have addressed the operational challenges we experienced in our service segment last quarter. We expect these actions will contribute to margin improvement through fiscal year-end. In the second quarter, we saw a very dynamic macro and trade policy environment. The IT industry continues to navigate significant withdrawal uncertainty brought on by tariffs, the AI diffusion policy, and broad macroeconomic concerns. While this led to uneven demand during the quarter, we did not benefit from significant order pull-ins. Ended Q2 with our stronger pipeline compared to Q1, reinforcing that our strategy is the right one. Q2 revenue was $7.6 billion, up 7% year over year and just above the high end of our previously provided guidance. We saw year-over-year revenue growth in every product segment. The results were led by higher AI system revenue conversion in server, solid performance in Intelligent Edge, and stronger than expected performance in our hybrid cloud segment, which was driven by our HPE Alletra MP storage transition and the continued adoption of HPE GreenLake cloud subscription services. Q2 operating profit grew year over year in hybrid cloud, Intelligent Edge, and HPE Financial Services. As we said in our Q1 earnings, we expect that server operating profit to decline quarter over quarter, although our server revenue and operating margin were near the high end of our Q2 guide. We remain laser-focused on execution in our server segment. Since our last update, we have closely monitored the changes implemented to improve profitability. These include the rollout of new pricing analytics, increased discount scrutiny, and inventory management. As we said in our last call, it will take…

Thank you, Antonio, and good afternoon. In Q2, we addressed the execution challenges we experienced in Q1. Which enabled us to drive improved margin performance in our server business as we moved through the quarter. While we still have more work to do to return the segment's operating profit margin performance to a double-digit rate, we are on the right trajectory to achieve that by Q4 of this year. Addition, our Intelligent Edge business returned to year-over-year top-line growth after five quarters as the networking market recovery gained momentum. And we reported double-digit year-over-year revenue growth in our hybrid cloud segment for the third consecutive quarter with all product lines contributing to growth. We also made significant progress against the cost reduction program we announced last quarter, which we expect will contribute to our results in future quarters. We reported non-GAAP diluted net earnings per share of $0.38 ahead of our outlook, driven in part by a more moderate tariff impact and operational However, we continue to navigate a complex macroeconomic and geopolitical landscape. And remain prepared to take additional action in the back half of the year to deliver against our fiscal 2025 outlook. Let's talk about the details of the quarter. Our second quarter revenue was $7.6 billion, up 7% year over year, but down 3% quarter over quarter. Reflecting strong top-line performance in intelligent edge and hybrid cloud and a year-over-year increase in server revenue. We did not see a significant benefit from tariff-related demand pull forward based on quarterly business linearity and historical order patterns. Our annualized revenue run rate was $2.2 billion, up 47% year over year, driven again by AI and Intelligent Edge. Our software, and services ARR grew nearly 60% year over year and improved its mix of ARR by 700 basis points…

Thank you. We will now begin the question and answer session. The interest of time, we request that you please ask only one question. We will now pause momentarily to assemble our And your first question today will come from Amit Daryanani with Evercore. Please go ahead.

Good afternoon. Thanks for taking my question. I guess maybe just to talk about April numbers came in better than expected up especially on the server side where you had a few issues last quarter, I think both on the x86 and the AI side. If you could just talk about what's needed at this point for server margins to go from 5% to 10% plus by year-end, would be helpful just to understand and get an update on what issues have been resolved versus what still needs to be tackled as you go forward to get to that 10% number? And then Antonio, maybe somewhat related to all this, since we last spoke, there have been articles around an activist engagement. So I'd love to understand sort of how do you think about it and maybe talk about your priorities or options in the event Juniper doesn't close with that? I think you've talked a fair bit about what the model can look like with Juniper in there. Thank you.

Well, Amit and good afternoon. So as I said in my remarks, so Marie, we addressed the execution challenges we had in Q1. If you recall, we spoke about three issues. It was the cost, in our pricing It was the discounting and it was the inventory which obviously was elevated. And that drove incremental expenses. So we feel that we have addressed those issues with very targeted actions that will continue to deliver results as we go through the back half of the year. So examples of these actions are on the pricing side, new analytics so that gives us a better insight of what comes next in our pipeline. And how to price in discount those. Obviously, very, very stringent discounting and empowerment throughout the organization. And then on the inventory side, look quarter over quarter we reduced inventory by $500 million We believe that the remaining actions will be addressed through the back half as we convert more revenue. In Q3, we're going to convert a very large deployment that we expect to be completed here soon. And so we are confident that those actions will help us return to the 10% exit on operating margins in Q4. And also clearly that's also substantiated also by the incremental actions we have taken costs. So we are confident about that. That's why we have raised the bottom end of our guide And we believe we have line of sight to that. In terms of your second question, look, we don't comment on specific communication that we have with our shareholders. Our board and I engage a number of shareholders and we have an ongoing dialogue on a range of issues and opportunities. We value the constructive input from all of them. We believe today the fastest path to increase in AceraDa shareholder value is the Juniper transaction. But we also have seen and explore a number of other options if the Juniper deal doesn't happen and that inclusive of capital return and other portfolio actions. But are not going to discuss those until we see the outcome of the Juniper transaction. And we are look, we are within five weeks of the trial and we hope to get that result and start the integration of the assets.

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

Please go ahead. And your next question will come from Tim Long with Barclays.

Thank you.

Antonio, I was hoping you could elaborate a little bit. You talked about I think, the pipeline exiting Q2 being a little stronger than exiting Q1. You also mentioned a multiplier on the AI backlog. So I'm assuming that's part of the answer. But can you just kind of run through the businesses and give us a little bit color on that? Pipeline, whether it's product driven or geographic? What is what is driving that upside in pipeline compared to last quarter? Thank you.

Yes. Thanks, Tim. Look, we saw strengthen of the pipeline across the portfolio. So let's start with AI. Obviously, you saw that we recorded one third of our orders in AI being now driven. So that's a very strong momentum there. It's driven by our servers both Reliant and Cray with GPUs and private cloud AI. Then in sovereign, we continue to see a very strong engagement. We have a number of opportunities in the making. And we hope to close some of those here in the short term. And then in the traditional service provider, right, and model builders, obviously those are large deployments. As I said, we are closing now a deployment, which will be one of the large GP200 deployments so far in the world. And we participate there where it makes sense. Because obviously there is a margin aspect and a working capital aspect. But there also we have multiples of our current backlog, is now $3.2 billion So it went up $100 million quarter over quarter. So that's on AI and so we continue to see very strong momentum. In the hybrid cloud, I'm very, very pleased with the momentum we have in storage. With our Letra MP portfolio. In our booking more than 75% order growth of consecutive quarters is pretty stunning. But as you know, a portion of that order gets deferred once we convert to revenue, because there is a SaaS piece connected to the CapEx. In the short term, it's a revenue headwind. In the long term, is a profit accretion. But the demand for Alletra is very strong because we introduce a very unique disaggregated architecture with multiple multi-protocol support We also introduced integrated offerings with NVIDIA and at the same time each of these aspects whether it's the server…

Thank you.

Operator, next question please.

Your next question today will come from Meta Marshall with Morgan Stanley. Please go ahead.

Great. Thanks. Just wanted to get a sense of kind of where you're seeing the most AI server traction kind of right now And then maybe just on the second piece, just about improving kind of the the margin profile of the storage business, realize kind of Elektra doing quite well, but just kind of how what you see as the path towards kind of improving the margin profile there with your own IP products? Thanks.

Yeah, Meta. So on the server side, look, it's a combination depending on the customer segment. When you think about these large service providers, or model builders, they tend to consume a large amount of compute is very compute driven. Meaning accelerating computing. But that comes with networking and all the things that you have surround around the infrastructure, which obviously directly cooling, which we have been talking about since last October is now a necessity. And we believe HPE is uniquely positioned both from an IP perspective and manufacturing capability at scale perspective. It takes an enormous amount of work and we have learned a lot in these deployments in the last few months. But then as you go to sovereign, it's a mix of compute and storage and as well as supercomputing. Let's not forget supercomputing continue to be a very important element. But clearly there are 15 to 20 countries They're all trying to deploy AI factories. For sovereign reasons and the like. And they are again very compute centric, but there are other type of infrastructure you can attach to it. In an enterprise, is all the above, right? And what we see in enterprise is time to value. Is not time to market. Time to value meaning, I don't need to spend a lot of time gluing together infrastructure. I need to deploy infrastructure at the speed that can deliver value to the enterprise. And this is where storage and compute are very tightly coupled with networking that really brings all of that together And the software piece of that is the most essential component And that's why GreenLake resonates because once you are in GreenLake, you already have access to all the software. And that's the co-engineering work have done with NVIDIA. Bringing their software and HP software in an environment. Where they can accelerate time to value. So that's what we have seen. In terms of storage margin, Marie, you want to Yes. Look, I'd say, Meta, we do expect to see the margins, as you know, we reflect that in our hybrid cloud segment And through the course of the year, we do expect to see the margins actually turned up towards the end of the year to the high single digits. So you'll see some of that favorability for basically flow through by the end of Q4.

Good. Thanks, Meta. Next question please.

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

Hi, guys. This is Victor Chiu in for Simon Leopold. Has Blackwell demand helped to bridge the recovery in AI servers and contribute the improved line of sight that you noted earlier. And I guess, what steps have you taken to ensure that you have optimized inventory levels around AI servers going forward?

Yes. I mean, in Q1, said that the demand, the orders we booked shifted very rapidly to Blackwell. And that clearly is now what we've seen. And the way we drive this process now, remember for some of the customers not all of them is prepayment, And that means that unless we prepay us, we don't buy inventory. So that's point number one. And point number two is that on the previous generation of inventory has been decreased dramatically. There's still demand but our exposure on the older inventory is significantly lower and we are adequately preserved at this point in time.

Okay. Thank you. Next question please.

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

Hi. Thanks for taking my question. I guess maybe, Antonio, on the general purpose servers, if I can ask you, just rate it to one competitors has talked about more specifically sort of calling out weaker trends and general purpose servers in The US specifically. Maybe if you can sort of highlight what trends you're seeing there in terms customer autos, of the execution that you're seeing in that business? And maybe a follow-up there. I know you're reiterating the 10% margin target for the total server. Segment for April. But, that sort of the reiteration from the quarter ago, but that is sort of lower headwind than what you've had to pay the ninety days ago. So you automatically assume that the outlook was better than what you thought ninety days ago? Thank you.

Yeah. I'm really sorry. I have a very hard time hearing you. Maybe I don't know if you can reconnect with a better line. I caught a little bit about North America, think it was. Look, we in North America, we didn't see any slowdown. At this point in time. I mean, it was steady as we normally have seen. Have a strong engagement with our partner network. And so I didn't see that at this point in time. In fact, I will argue that our monthly order demand was stronger than the previous two months. So that's what I saw. And then the second part, couldn't hear. Are you got it, Samik, I heard you just talk about the server operating margins. So let me just sort of walk you through how to think about those margins through the year. As we look sequentially, we do expect to see those margins improve. We walk from Q2 to Q3 and Q3 to Q4, Q3 is going to be driven as Antonio mentioned earlier, by the mix of server revenue which is going to be skewed by that large AI order that we expect to ship in Q3. Then as you correctly said, as we move from Q3 to Q4, we do expect Q4 to exit the year around 10%. That's consistent with what we've said before. So I just want to clarify that for you as well, please.

Great. Okay. Thank you, Samik. Operator, next question please.

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

Yes. Thanks, guys. Appreciate the question. Yes, just I guess, Antonio, as we get going through the Blackwell Ramp since you're at the front end and you're already starting to notice it in your business Is it Is it reasonable to anticipate higher highs, increased highs in both systems revenue over time. And in backlog as well as we go through the cycle. You saw this through the hopper cycle. It would make sense that you would see it through the Blackwell cycle. But just want to get your thoughts on that as well. Thanks. That's it for me. Thanks.

Yes. No, thank you, Matt. Look, this business is lumpy, right? So you're going to have periods of very high orders you close one or two very large deals with service providers. Obviously, after that is the revenue recognition because I can tell you from what I learned in this deployment, it takes several months to build it, ship it, install it and make it productive. And so, that said though, as we go from the 200 to the 300, I think the mix is going to shift a little bit between the Grace Blackwell 300 with Blackwell only 300 and that has to do with performance and it has to do with the use case between training and inferencing. But I will say that as I think about these large deals that are in the pipeline, pretty much all of them are 200 with a loss shifting already to 300. And that will take time to see it from orders to revenue because remember the 300 is coming in the back half of 2025. Or early twenty twenty six at scale.

Okay. Thank you, Ananda. Operator, next question please.

And your next question today will come from Michael Ng with Goldman Sachs. Please go ahead.

Hi, good afternoon. Thank you for the question. First, I wanted to ask about the comments around federal and state and local education spending. Any visibility into when that improves and when you get better line of sight into that, And then second, just on the higher than expected AI systems revenue in the quarter, I think you mentioned some of the AI outperformance driven by improved customer readiness. Could you just provide a little bit more texture around that? Is that driven by a greater need to do these AI deployments? Is it component availability? Any thoughts there would be great. Thank you.

Yes. I mean on the US federal spend, right, so clearly, there was a period of time where the government had to enact their plans Remember, not every vendor participates uniformly across the federal We are unique in many ways because we provide systems at large scale sometime in classified environments, sometimes in non-classified and that has not slowed down. In the context of what we see. However, there are areas of the government where there was a pause whether it's reviewing current deals that the government needed to an incremental approval to get it done. But we expect that to solve itself as we go in the back half and we have a very solid pipeline related to the U. S. Federal business. Now remember, we are also a large provider of supercomputing capacity. That's very important. And we already see new opportunities in the pipeline as we go through the refresh of that. The second part of the question was, I'm trying to think about the deal timing of for some of these AI deals. No, look, there is the timing of the deals and the deployment, right? We believe that aligned to the customer needs. So when we think about these deployments, see an acceleration of deployments because in enterprise they either put it in a colo or they put it in their own data center. And so what we see customers is modernizing their data center especially because they are focused on data sovereignty and compliance. Free up the space and bring the infrastructure that they need to do ragging or fine-tuning or influencing. And then in service providers, look, there is a lot of build outs but they tend to be very straightforward unless you work a very, very large deployment But in terms of components availability, we have now seen a constraint in components availability to the current generation. As we go to the 300, it's a different story. I'd just add that specifically in Q2, that we saw that incremental AI revenue it was really related to what Antonio said around customer readiness. So just thinking about it as from a timing perspective. That's the way to think about that AI revenue in Q2.

Thank you, Mike. Next question please.

And your next question will come from David Vaught with UBS. Please go ahead.

Great. Thanks guys for taking my question. So maybe Antonio, can I dig in on sort of the drivers and the demand backdrop? Because I thought I heard you say that demand seemed to be relatively solid even in the April. I guess what I'm trying to understand is July of the quarter guide looks relatively strong. But if I kind of take it in the context of the full year, we're looking for, I think, a relatively modest sequential growth in October. Now I recognize the backdrop is murky and the comp is tough on a year over year. Can you maybe just expand on why you're being a little bit more conservative than I thought you would be given the trends in October? And then maybe just for Marie, on the workforce reduction plan, I would imagine that the vast majority of that is skewed towards the server business. If not, please correct me. But I'm trying to think through what are the margin impacts on server as we exit this year when the plan complete and you're exiting at a 10% rate? Mean, does that suggest that we can get back to the level of margins previously before this most recent downdraft because of some execution issues? I'm thinking more of like fiscal fiscal 2024? Thank you.

So why don't I take the second part of question first on the server margins and the restructuring plan. So first of all, just pleased to say we're on track in terms of our savings goals. What we said on the last call that we had 20% of savings of the $350 million are in the year. At this point, overall, I think I said in my prepared remarks, we've actually seen really good progress against the headcount. So absolutely on track to achieve the goals we had. We With respect to how to tie that to server margin, that plan is actually more than server. It's actually enterprise-wide. So I just want to correct your question because it's not specifically aimed at server. It's aimed at just actually the entire company, and we did announce Catalyst also as part of the statements I made as well earlier. So we think about server margins, we'll let you know because we've got SAM coming up in October, we'll give you further color around how to think about those margins for '26 So that's it on the server piece. Then in terms of just the revenue linearity in the back half of the year, as I said in my prepared remarks, we do expect to ship a very large AI deal in Q3. So as a result of that, we're going to see a more non-seasonal pattern in Q3, and then we'll continue to see revenue growth from a year on year basis into Q4, but it's going to be moderated because of fact we've got that large conversion of that large AI system deal in Q3. So that's how you should be thinking about the revenue seasonality in the back half in respect respectively between Q3 and Q4.

And I will say for Q4, right, look, is timing related to some of the deals. But if you recall, in Q4 2024, we had an exceptional Q4 with a significant year over year revenue growth. And despite that, we expect year over year revenue growth in Q4. But to Marie's point, the seasonality between Q3 and Q4 is a little bit different because this very large acceptance we are working right now. As we speak.

Okay. Thank you. And operator, this will be our last question please.

And your final question today will come from Aaron Rakers with Wells Fargo. Please go ahead.

Yes. Thanks for taking the question. I want to just kind of dig a little bit deeper into the AI server competitive landscape Antonio, if I look at your closest competitor, I think their new order number was like $12 billion You guys talked about $1 billion So I'm curious, should we kind of think about H as a little bit different in terms of how you're going to market? What segments you really wanna focus on maybe relative to your peers. Or has there been any kind of changes in the competitive landscape in terms of deals that you'll go after and maybe walk away from? I'm just curious how you would kind of compare the fairly different numbers in terms of the order momentum we're seeing on these AI servers. Thank you.

Sure, Adam. Look. We are focused in all segments of the market. We participate with discipline where we see path to gross margin accretion and obviously working capital that eventually translates into free cash flow. And look, what I saw there is probably a couple of larger opportunities that we decided not to participate. And if you look at their results, it's fair to say that they actually on the we will see what they're going to do. But my view is that enterprise, we're all in. And we see that momentum. In sovereign we're all in and we see the momentum as you see more in the next few weeks. And then in service provider, we're participate where we believe we can sustain that 10% operating margin and still sustain our revenue as we go forward. Antonio, any closing comments? Yes. No, look, I know we probably have more questions, but I know we have follow-up calls with each of you. Look, we delivered a solid Q2. I'm very pleased with the fifth consecutive quarter of year over year revenue growth. We see the actions we have taken in server already delivering the results that we want and we don't see that in the next two quarters. Networking continued to do very well. And we are very pleased with hybrid cloud But as always there is more work to do. I believe we have line of sight to our new guide and commitments and it's all about driving the execution which is sustained by an amazing portfolio with amazing innovation And I hope you will pay attention to what we have to say in three weeks at HP Discover. You will be very impressed about the number of new innovation we going to continue to bring to market across networking, hybrid cloud and AI. And we hope next time we speak going to have an answer on the Juniper network deal. So thank you again for your time today.

Conference has now concluded. Thank you for attending today's presentation. You may now disconnect.