Good day, and welcome to the Fiscal 2026 First Quarter Hewlett Packard Enterprise Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to 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 2026 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 web page. Elements of the financial information referenced on this call are forward-looking and are based on our best view of our business and the external factors affecting us 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, 2026. Figures used in verbal remarks are rounded for ease of discussion. For more detailed information, please see our earnings materials as well as disclaimers relating to forward-looking statements that involve risks, uncertainties and assumptions. Please refer to HPE's filings with the SEC for a more detailed discussion of these risks. For financial information that we are showing 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. Unless otherwise noted, all financial metrics and growth rates discussed today are non-GAAP, and EPS refers to non-GAAP diluted net earnings per share. Certain financial information featured in the presentation today has been normalized to include Juniper Networks results as of the beginning of HPE's fiscal year 2025. 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. HPE started fiscal '26 with a strong first quarter, delivering revenue growth at the high end of our outlook range and record earnings per share, driven by strong performance in Networking and a disciplined execution in Cloud & AI. Our Q1 results give us the confidence to raise our fiscal '26 outlook, which Marie will cover later in the call. Q1 revenue was $9.3 billion, up 18%. We delivered record earnings per share of $0.65, well above the high end of our outlook, with strong Q1 free cash flow of $708 million. Orders significantly outpaced revenues, fueled by strong customer demand. We saw strong product orders across networking, servers and storage, driven by ongoing AI deployment, on-premises infrastructure modernization and some customer pull-ins due to ongoing commodity shortages and price increases. GreenLake remains a critical differentiator for our software and services portfolio, delivering strong order bookings, customer adoption and ARR growth. Phase 1 of our Juniper integration is complete. We remain on track to achieve our fiscal '26 synergy targets. As we move to our second phase, we are focused on building a new networking market leader by aggressively executing our strategic product and software road map while driving revenue synergies through our go-to-market scale. We are excited about what comes next for our customers and our shareholders. Before I provide our business segment highlights, I want to address how we are navigating the commodity shortages and inflationary cost environment impacting the industry. The IT market is facing a sharp acceleration in supply tightness and increasing component costs, most notably in DRAM and NAND. We expect elevated prices to persist well into 2027. We are taking a series of distinct actions to address the current industry dynamics. First, we are focused on securing supply.…

Thank you, Antonio, and good afternoon, everyone. I'm pleased with our performance this quarter as we delivered on our commitments with strong profitability across the board. Q1 was a strong start to fiscal 2026, reinforcing our confidence in our strategy and demonstrating our ability to execute in a dynamic environment. We exceeded expectations on net earnings and free cash flow while continuing to invest with discipline for long-term value creation. This quarter was defined by 3 themes. First, strong operating discipline and favorable mix drove operating margins above our outlook in both Networking and Cloud & AI. Second, overall demand strengthened sequentially with orders exceeding revenue and backlog building, reflecting customer investment in data center modernization and anticipation of component cost increases. And third, Catalyst savings and Juniper-related cost synergies are tracking to plan, contributing to higher profitability. Now let me walk you through the details of our Q1 performance. Revenue was $9.3 billion, up 18%, driven primarily by the inclusion of Juniper Networks and down 4% sequentially, reflecting typical seasonality and lower AI Systems revenue as expected. Gross margin improved sequentially to 36.6%, driven by continued pricing discipline and a favorable mix towards networking, which helped to offset higher commodity costs, particularly in memory. Operating margin was better than expected at 12.7%. Margin strength in both Networking and Cloud & AI reflected our conscious pivot to focus on higher-margin, more profitable components of our business. Operating expenses also declined 5% sequentially, consistent with our outlook, driven by strong cost discipline. For the quarter, EPS was a record $0.65, exceeding the high end of our guidance range. GAAP EPS was $0.31. I'm particularly pleased with our strong free cash flow of $708 million, a notable outcome as Q1 typically represents a seasonal cash flow outflow. Free cash flow growth is…

[Operator Instructions] The first question will come from Wamsi Mohan with Bank of America.

It's Ruplu filling in for Wamsi today. Antonio, do you think the current environment is or will drive more customers to use HPE GreenLake? And you mentioned some pull-ins. Which areas were those in? And likewise, did you see any pushouts or lower demand as you raised prices in response to the component cost increases?

Yes. No, thank you for the question. So obviously, GreenLake, the cloud, gives customers the flexibility to adopt an elastic model through our subscription services, including our GreenLake Flex, which includes the consumption of the infrastructure on a demand basis. And this is where our HPE Financial Services plays a key strategic role. And as you saw from our results, HPE FS had a very, very strong quarter with a return on equity over 20%. And during these cycles, the ability to offer precertified -- preowned certified products is very, very strategic. So the answer is yes, we should expect an ongoing adoption, not different by the way that we saw during the pandemic. So that's very important. We also announced some unique programs with HPE FS as well for financing during this transition time. As for demand, no. Demand is very strong. Demand is very, very, very strong. There is no pushout. Last week, I was in Europe where I met with many customers at Mobile World Congress. Then I went to the U.K., and all of them understand the environment related to inflationary cost and all of them ask how we can get the product faster. So reality is that demand is strong, whether it's driven by the projects or deploying AI, obviously concerned about the costs -- inflationary costs, but 0 impact on demand at this point in time.

The next question will come from Katherine Murphy with Goldman Sachs.

To ask a quick one on memory pricing, can you talk about how rising memory prices are reflected in the outlook for profitability in both your traditional data center business and then networking for fiscal '26? And if you could quantify what you're assuming for memory prices throughout the year, that would be helpful. And then to ask my follow-up, in terms of securing supply, do you have sufficient supply secured to meet the midpoint of the fiscal '26 guidance?

Well, thank you, Katherine. I will start, and maybe, Marie, if you want to add anything, let me know. In our guide, the guide Marie just provided, we have contemplated our line of sight for the supply that we need to deliver that outlook range both on the revenue side and on the profitability side. So when we provide outlook, it's because we have line of sight on our ability to go execute that. So that's point number one. Point number two, on the memory cost increases, we will continue to see that throughout 2026. Today, against our order backlog and the demand momentum we see, we don't have enough supply to meet all the customer demand. But as I said earlier, we have line of sight for the outlook we provided. And look, you will see the reports from the industry analysts. The reality is that between CQ4 and CQ1, you have been out from the industry triple-digits increase in pricing. And we continue to expect double digits as we go forward. And this is one of the things we did very well in Q1, as Marie commented earlier, is that we took action on pricing early. We actually increased prices in November and then in December and then in January, and we have done it multiple times. And that's why our focus is, first, secure the supply to meet the customer demand. We have the supply to deliver the outlook. Second is obviously protect our margins, and we're doing that through pricing and through managing the mix. We are, of course, favoring the high-margin businesses. Networking uses less memory but is a critical component of our demand shaping, and then obviously traditional servers. And then in AI, we focus on really enterprise first and sovereign following that.

Yes, maybe I'll just add that in terms of the guide and how we thought about memory pricing, as you know, we raised our guide actually. So we expanded the -- we raised $0.05, so $2.30 to $2.50. A comment about Networking, a comment about Cloud & AI, from a Networking perspective, one thing to bear in mind is that some of the revenue and synergies that we've had as part of the programs we announced do help to offset some of those inflationary costs on Networking. So just bear that in mind. And then as you think about Cloud & AI, we're really focused on prioritizing those higher-margin orders. So that's how we're managing it in each business, and all of that is reflected in our guide. And obviously, look, it's a prudent guide. And if we can do better, we absolutely will.

The next question will come from Simon Leopold with Raymond James.

I wanted to see if you could talk about the topic around demand elasticity because I would think with IT equipment that with you raising prices to pass off the higher memory costs, we would see some more of a tailwind for your revenue growth rather than demand destruction. Could you help us understand what respect to this is conservatism in your view versus how customers are behaving towards accepting the higher price points?

Well, thank you, Simon. I think I should divide that question in 2 parts. One is the demand side, and I can tell you the demand continues to be very, very strong. There is no sign of slowdown at this point in time. Obviously, there is a question of unit, an average unit price as we go forward. But the reality is that with the density of the servers and the ability to process more data to the servers, customers are finding the right balance there, but the demand is very, very strong. On the ability to fulfill the demand, which translates into revenue, again, Marie and I put that in the guidance, and she just comment, prudent in many ways. But look, we don't have enough supply for all the demand we are seeing and the backlog we have. However, in our guide, we factor the supply needed to deliver that outlook. And it's going to be interesting as we navigate the next few months. But as I said earlier, Simon, I met with a lot of customers, a lot of customers in Europe. There was no one single customer that told me, I don't want the product because now it's too expensive or higher price than I thought. All of them said, okay, I understand the price increases. What we can do to shape the demand, maybe a different configuration. Some may take a lower-end configuration to get the product, but it was all about speed to get the product, not the price.

And maybe I'll just add, Simon, that, of course, there's going to be some impact from the increased pricing and -- on units, and that's really what we see more so in the second half of the year, just to follow up on what Antonio said. But I'd just clarify for Cloud & AI, probably similar to many others out there, we are expecting growth, particularly for our traditional server business on a net basis. So just remember that we did guide Cloud & AI to mid- to high single digits from a revenue growth perspective as well.

And let's not forget, Simon, another part. When we sell traditional servers, obviously, it's healthy from the services attach perspective, which -- it may -- doesn't generate in-period revenue or 2026 revenue, but it's very important for '27, '28 and '29.

The next question will come from Amit Daryanani with Evercore ISI.

I guess maybe I'll stay away from memory since everyone's asking about that and ask you about Networking a little bit. It's nice to see you folks taking up the Networking growth expectations for the year to mid- to high single digits. Antonio, I'm hoping you can just talk a little bit more on what's driving this uptick. Is it AI? Is it campus? Is it something with Juniper's routing business on -- scale across? I'd love to just understand what's driving this uptick here. And then maybe just related to Networking, you folks did nearly 24% operating margins in Q1, which is ahead of what you folks were initially expecting. What do you think is resulting in the guide for the full year to be low 20%? Why are you assuming a degradation in those margins given you still have some more synergies ahead of you versus not? So just touch on Networking a bit, that would be great.

So I will answer the first part and then Marie can talk about the margins for Networking. I think it's 2 parts, Amit. One is demand for our products. I mean very clear. I mean we have a world-class portfolio with the addition of Juniper and the combination with Aruba. And so campus and branch, our value is -- differentiation is in the self-driving networks. I saw that at the Olympics. I have to tell you, it was very impressive to see how the teams were operating using AI to manage a very complex network over multiple locations in Italy with different events taking place in a massive amount of scale. But the CIO told me, I'm doing this with less than 20 people, which was remarkable, remarkable. And our team was very small, just enabling them to understand how to use these AI technologies, and it went flawless. So that's an example. So we grew high single digits in the campus and branch. WiFi 7 there, I don't know if you caught it, 10x. We sold 10x more access points on the WiFi 7 than a year ago. And obviously, it's driven by the experience we can provide. But then on the data center side, on the AI buildout, we had a tremendous order intake with data center switching, which is the QFX fabric, mid-40%. So that's a remarkable amount of order intake. And then routing, which generally tends to be a much lower growth in the past was obviously aligned with the telcos, now it's all aligned to data center interconnect and AI on-ramp grew mid-20%. So the combination of data center switching and routing, which is what we call networks for AI, now we expect that to grow to $1.7 billion to $1.9 billion in cumulative orders,…

And just to sort of add on, on the margins, Amit, obviously really pleased with the results that we had in Q1, 23.7%. So it was above our guide in terms of the operating margin. And it was a combination of reasons due to the scale that you're starting to see in the business that Antonio referred to. We had good pricing discipline and early Juniper synergies that came through. Now what I would just add to sort of bear in mind, as Antonio mentioned, we're just through Phase 1 of the integration itself. So we've sort of got sales day 1, but there's still more to do at this point in time. So it is the prudent thing to do at this point to keep our range, which is the low 20%. And honestly, if we can do better as we've demonstrated, we absolutely will, Amit. Thank you.

The next question will come from Erik Woodring with Morgan Stanley.

I want to say maybe touch back on the demand environment. And maybe Marie, if we look back over the last 5 years, revenue has typically declined from January into the April quarter by about 3% for legacy HPE and similar trends for Juniper. You're guiding to 5% sequential revenue growth in the April quarter. And in response to one of the earlier questions, Antonio mentioned customers very active or trying to get product faster given future supply risk. And so I guess my question is, is it -- shouldn't we classify that as pull forward? Or how do you maybe delineate between strong demand that has longevity through the year and some of these customers just trying to get product quickly because of the risk of supply in the second half?

Well, maybe I'll start. So look, I think we are redefining our seasonality here a little bit, right? You saw that in Q1 a little bit with our free cash flow and efficiency of the working capital now having Juniper and the work we have done with Marie and the team. But Q2, obviously, you start seeing the benefits of having Juniper and the strong momentum in the networks for AI, which obviously is helping as well. I think is a reflection that we have been taking large amount of orders now for a number of quarters. And therefore, the ability to convert that orders moves through the process. But that range is actually in line to what we had in our original guidance that we provided at SAM in terms of the year seasonality. And then the back half, we're going to have the AI Systems conversion come in through the process. So look, there is, of course, demand pull-in from some customers, but there is also a lot of demand used for deployment, deployment of AI. And I look at 2 key metrics in enterprise, particularly. One is adoption of AI in the business workflow. We see the adoption of agentic AI. Many European customers want to do that on-prem, very clear. And GreenLake disconnected is a big, big differentiator for us. And number two is the growth in inferencing. The inferencing portion of AI is growing very, very rapidly, and that aligns really nice with our portfolio, particularly with Juniper and servers. I've met many of the telcos. They are really focused on the AI inferencing. And many of them also are going to play a sovereign role because they have the trust from the governments to become the AI cloud in many of these countries where they are going to build some of the Gigafactories. But in general, I will say, driven by the demands of AI, driven by the demands of modernizing their infrastructure for data and then deploying AI on-premises is going to play a role for us in addition to networks for AI to build large-scale data centers.

Just to sort of reinforce what Antonio said, Erik, I mean, at this point, I sort of use as a guidepost that normal seasonality won't really apply to this year. And I think it's a combination of both the deal itself, the timing when we close that, plus all the component dynamics. I think what would be important to put in your models is that Cloud & AI revenue is going to be pretty much weighted to the second half. And that's really due to what I think I said in the last call, which is more the timing of some of those server shipments. And frankly, we factored all these dynamics into the guide that we put forward today as well.

That's right.

The next question will come from George Notter with Wolfe Research.

I just wanted to come back to a question earlier. I didn't hear the answer. Did you guys give us the assumption for full year revenue associated with pull-forwards? And how much incremental might you get this year also based on higher pricing associated with memory? I'm just trying to sort of break down the impacts here in terms of their constituent pieces.

Now, look, George, I mean, at this point in time, we haven't quantified the pull-forwards. I think we gave clarification on our revenue ranges, which for both businesses were actually in the mid- to high single digits for the year. So that's the way I'd be anchoring your model.

The next question will come from Samik Chatterjee with JPMorgan.

Antonio, if I can ask you to drill down a bit into the networks for AI orders that you're referencing, which you're raising today, the $1.7 billion to $1.9 billion. Is that really just expansion with the existing customers on that front? Or are there any specific sort of wins with maybe hyperscale customers that sort of are in -- helping you in relation to those orders? Just curious about some of the drivers there. And as we look at that target, should we -- how should we think about the mix between data center Networking relative to routing in your definition of networks for AI?

Yes, Samik. It's a combination of existing customer buying more but then also gaining new customers on our footprint. And so it's a combination of service providers, neoclouds. And also now we start seeing the benefits of getting access to our server go-to-market because we are actually making entrances or introductions to those customers and be able to have those conversations in a more integrated way. So that's what we see today, and the pipeline is very, very strong, which gives us the confidence to raise the outlook to $1.7 billion, $1.9 billion. But it's a combination of both existing customers and new customers as we go forward. In terms of the other, we don't provide that level of guidance at this time.

The next question will come from Aaron Rakers with Wells Fargo.

Kind of just going back on a lot of the other questions. I'm curious, I mean, we all talk about memory pricing, but there's also been a lot of discussion around just tightness on server CPUs and just the demand outstripping supply. So I'm curious, Antonio, how would you characterize the lead times that you're seeing on traditional servers today relative to what they were, let's say, 3 months, 6 months ago? And I think in your preamble, you alluded to like you've changed some of the dynamics around order contractual things, pricing, et cetera. Can you just walk us through again what exactly you changed to kind of pass through pricing and maybe provide some stickiness to the orders that you're seeing?

Yes, sure. On the CPU side, less constrained but constrained. And there, because of our very diversified CPU portfolio, obviously, we have one of the broadest CPU set of platforms with the ProLiant business. We are able to steer demand, although there may be 1 or 2 SKUs more constrained than others. I'm significantly less concerned about the CPU. But if you have the CPU, you don't have the memory, you're kind of stuck in the middle, right? So right now, less concerned about the CPU, but there is active demand shaping to the right socket based on the type of workload the customer wants to run on it. In terms of the pricing itself, right? So look, all the terms, right? Look, we have taken a very agile posture where basically we have significantly shortened our quoting cycles in terms of commitments, and we have reserved the right to increase the price from the time we quoted the product to the time we ship it. And so the customer has always the right to cancel the order before it gets shipped. But once again, when I had this discussion last week with all our European customers, they all understood that dynamic. What they want is lead time transparency, clarity of the price increase. Think about it this way, Aaron, and the way I say it is like, what is the memory cost and the NAND surcharge, right? So if you quoted X, now the cost is Y, what is the difference between X and Y? So we are very transparent on what the surcharge for the increase is. And that's what we're doing. That's -- look, I mean, I always said, quick no is better than a long yes. And fundamentally, that level of communication is super important as we navigate this environment.

The next question will come from Tim Long with Barclays.

I wanted to touch on kind of the campus and branch business for a little bit. A lot going on there as well. It's been really strong. Looks like a little bit at least on the revenue side deceleration this quarter. But obviously, the WiFi 7 sounded like it was really strong. So could you just talk a little bit about the offsets? Are we seeing anything different in win rates? Or are there just any other type of delays or pushouts? I think the orders were a little better than revenues. Just curious about the growth rate in that business and what you're seeing from a competitive landscape.

Sure, Tim. As I said, our campus and branch order intake was high single digits this quarter. And that's obviously on a normalized basis, right? And so we believe that customers now have the clarity which path to follow between Juniper Mist and Aruba Central. And we did a very good job laying that foundation because we now have every possible deployment capability. And in Europe, obviously, they favor more sovereign disconnected offers versus a cloud-connected offer. But when there is a cloud-connected opportunity, we lead with Juniper Mist. When there is an on-prem virtual private cloud or disconnected requirement, we lead with Aruba Central. And as you recall, last December at our HPE Discover event, we launched what we call the dual-boot infrastructure with our WiFi 7. And we saw a 10x increase this quarter in access points, which means customers resonate with our AIOps self-driving network in each of the platforms. And we introduced also new AI agentic approaches to both platforms as a part of the combined innovation. So the dynamic there is that customers, obviously, they are moving forward. We announced a number of strategic deals. For example, another interesting win, although it's in the sports space, Atletico Madrid is going to revamp the entire venue, including the space outside the stadium using our offerings. But that's one example. As I talked before, the entire Olympic Games run on the Juniper Mist infrastructure. But there are other ones in Europe that in the case of Atletico Madrid or others, they're using Aruba Central. So we have the ability to compete against anyone in every deployment model. And we expect this to continue as we go forward because now we have one integrated sales organization, all selling the same portfolio and all compensated for selling the same offers. So now I'm excited about scaling this and driving revenue synergies and then sales productivity.

The last question will come from Asiya Merchant with Citigroup.

Just if I can on AI, with the majority of the backlog here in the second half, a lot of it from enterprise, sovereigns. Just high level, how should we think about the margins in this segment overall for Cloud & AI progressing? And if you could provide any color on the attach rates that you're seeing with those AI revenue backlogs in addition to the server revenues that you're recognizing.

Yes, Asiya. In terms of just the margins for AI, the right way to think about it is in terms of the guide that we've given. So I think we had obviously a very strong Q1 here for the whole segment itself. But as I mentioned in my prepared remarks, we expect Q2 to be towards the midpoint of the range. And then throughout the year, we expect that to be back into about 7% to 9%. So obviously, at this point in time, those ranges are going to be impacted to a large extent by the shipment timing of both the deals themselves and the types of deals that we have in the quarter. So as more AI revenue in the quarter, we expect to see a little bit more pressure on the margins. So that's the way I'd be thinking about the correlation between the AI revenue and the margins themselves for Cloud & AI segment. And I'd say, look, overall, we're very confident about the full year margin range for the whole segment of 7% to 9%. And the key thing for us, as you've heard us talk about today, is really focusing on protecting those margins and taking all the actions that we need to really navigate the commodity prices that we've spoken about.

All right. Well, thanks, everyone. We will follow offline with each of you as part of the normal process. I want to thank you for joining the call. I will end where I started, which is basically we had a very strong start to fiscal year '26. You see that the combination of Juniper and HPE is paying off. The Networking business outperforms -- outperformed our own expectations. We are very excited about what's happening there from an innovation and momentum perspective. Demand continues to be very strong above -- both segments. But we are adjusting our strategy to make sure we focus on delivering profitable growth because now we have a great portfolio. And also, we are also focusing on managing our working capital in an efficient way. And one of the things that you see, we are raising our free cash flow to at least $2 billion while we're paying down the debt. And I think we will be able to do that in -- even despite the environment we are navigating through today. So again, a great start. We raised our guidance and we expect that we will deliver against this commitment like we have done in the previous quarters. So thank you again for your time.

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