Hewlett Packard : Q2 2022 Earnings Transcript

Hewlett Packard Enterprise Company

Second Quarter Fiscal 2022 Earnings Conference Call

Wednesday, June 01, 2022, 5:00 PM Eastern

CORPORATE PARTICIPANTS

Antonio Neri - President, Chief Executive Officer

Tarek Robbiati - Executive Vice President, and Chief Financial Officer

Andrew Simanek - Vice President, Investor Relations

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PRESENTATION

Operator

Good day, and welcome to the Second Quarter Fiscal 2022 Hewlett Packard Enterprise Earnings Conference Call. My name is Chuck, and I'll be your conference moderator for today's call. At this time, all participants will be in a listen-only mode. We will be facilitating a question and answer session towards the end of the conference. Should you need assistance during the call, please signal a conference specialist by pressing the "*" key followed by "0." As a reminder, this conference call is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Mr. Andrew Simanek, Vice President of Investor Relations. Please proceed, sir.

Andrew Simanek

Great, thank you. Good afternoon, everyone. I'm Andy Simanek, Head of Investor Relations for Hewlett Packard Enterprise. I'd like to welcome you to our fiscal 2022 second quarter earnings conference call, with Antonio Neri, HPE's President and Chief Executive Officer, and Tarek Robbiati, HPE's Executive Vice President and Chief Financial Officer.

Before handing the call over to Antonio, let me remind you that this call is being webcast. A replay of the webcast will be made available shortly after the call for approximately one year. We posted the press release and the slide presentation accompanying today's earnings release on our HPE investor relations web page at investors.hpe.com.

As always, elements of this presentation are forward-looking and are based on our best view of the world and our businesses as we see them today. For more detailed information, please see the disclaimers on the earnings materials relating to forward-looking statements that involve risks, uncertainties, and assumptions. For a discussion of some of these risks, uncertainties, and assumptions, please refer to HPE's filings with the SEC, including its most recent Form 10- K and Form 10-Q. 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 30th, 2022.

Also, for financial information that has been 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, after Antonio provides his high-level remarks, Tarek will be referencing the slides in our earnings presentation throughout his prepared remarks. As mentioned, the earnings presentation can be found posted to our website and is also embedded within the webcast player for this earnings call.

With that, let me turn it over to Antonio.

Hewlett Packard Enterprise Company Wednesday, June 01, 2022, 5:00 PM Eastern

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Antonio Neri

Well, thank you, Andy and good afternoon, everyone. Thanks for joining today's earnings call. HPE's second quarter results reflect significant customer traction for our differentiated portfolio and underscore our progress in becoming the edge-to-cloud company. The macroeconomic environment of the last few months has presented enterprises around the world with strategic challenges that are usually not confronted all at once. The market shifts have certainly created a dynamic backdrop for our global customers and have made it harder for them to realize their goals in the short-term. But more than ever, organizations need technology partners to help them weather challenges, while successfully digitizing and transforming their businesses in order to increase their market competitiveness.

HPE's ability to address these customer needs was key to our performance in the second quarter. Once again, HPE generated significant orders growth, steady revenue, and sustained profitability, even as tight supply conditions continued across global industries. We are seeing persistent demand from our customers, underscoring both their IT spending prioritization and their attraction to our compelling portfolio. Very strong customer demand in the second quarter drove orders growth higher, rising 20% year-over-year, which makes this the fourth quarter in a row that HP has logged year-over-year orders growth of 20% or better.

Our HPE GreenLake edge-to-cloud platform contributed to as-a-service orders doubling year- over-year, the third straight quarter of triple-digit growth. We continue to see a great deal of customer interest in our platform, which is evident in our sales pipeline.

Our orders backlog across the business is high quality and we are now…and we are seeing particular strength in our intelligent edge and compute segments, with orders climbing 45% and 23%, respectively. HPC and AI orders grew more than 18%, bringing backlog there to an impressive record of approximately $3 billion.

Total HPE revenue rose 1.5% year-over-year to $6.7 billion against a record breaking backlog of orders in the midst of industry supply constraints. ARR climbed 25%.

We have momentum across the portfolio with our as-a-service model differentiating us. This quarter, though, through a combination of supply constraints, limiting our ability to fulfill orders, as well as some areas where we could have executed better, we did not fully translate the strong customer orders into higher revenue growth. I am confident that we have identified where we can strengthen and expect continued improvement as we move into the back half of the year.

Importantly, the quarter's biggest standout, even if we were somewhat limited by supply chain, is that we maintained non-GAAP gross margins of 34%, thanks to disciplined execution and timely pricing actions. Non-GAAP diluted net earnings per share was $0.44, which together with our Q1 results, makes the first half of 2022, the second strongest EPS half year performance at HPE on a continuing operations basis.

As Tarek will detail for you, we are reaffirming our full year outlook of revenue growth of 3% to 4% and our long-term 2024 revenue CAGR outlook. We are also reaffirming our full fiscal year free cash flow guidance of $1.8 billion to $2 billion.

As announced in February, we suspended all shipments to and sales in Russia and Belarus. We have now determined that it's no longer tenable for us to maintain operations in these countries. Therefore, today, we are announcing the closing of our operations in both countries,

Hewlett Packard Enterprise Company Wednesday, June 01, 2022, 5:00 PM Eastern

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and we'll proceed with an orderly managed exit. Our business in these countries represents less than 2% of HPE's total revenue in fiscal year 2021.

We have booked a $126 million pre-tax charge related to the impact of Russia to our business, which is included in our second quarter GAAP earnings per share results. We expect less significant additional charges in the third quarter related to winding down these operations, partially to reflect this necessary action and partially to unfavorable foreign exchange movement, we are updating our full fiscal year non-GAAP diluted net earnings per share to between $1.96 to $2.10, which is the guidance we provided at our Securities Analyst Meeting last October.

In the short term, we recognize the supply and logistics constraints, rising inflation and evolving economic and geopolitical conditions are all contributing to a dynamic environment. However, enterprise demand continues to persist across our entire portfolio. We are focused on translating the demand we see in the market and a high-quality backlog into profitable growth, while continuing to closely manage our inventory position. When even the supply of low-value components can be hard to secure in today's environment, we will continue to be disciplined and prudent in our decision-making to deliver on our commitments.

As we look to the future, we are strengthening the scale and resilience of our supply chain, including opening a new factory in the Czech Republic for next generation HPC and AI technologies, which will help us address the very solid demand we have for these specialized solutions.

There is no question that we have positioned HPE well to help our customers double down on digital transformation. HPE GreenLake is at the center of our strategy to deliver edge-to-cloud solutions to enable customer's data first modernization strategies. I hope many of you will join us later this month to see firsthand how our strategy comes to life when we host HPE Discover live in Las Vegas for the first time in three years. We will have a lot to show you as it has been an exciting few months for our customers and for HPE.

In March, we announced features on HPE GreenLake that deliver greater choice and simplicity. We added 12 new cloud native services with now more than a total of 50 cloud native services available through the platform. We also continue to expand our partner ecosystem, increasing the number of partners actively selling HPE GreenLake this quarter by more than 50% from the same period last year. In addition, partners who sold multiple HPE GreenLake deals in the quarter increased by 2.5 times year-over-year.

At the edge, our capabilities are in high demand as organizations need to securely connect distributed workforces and create engaging experiences. We are focused on delivering cloud- native services that can more easily be embed into an automated network to absorb evolving networking configurations. And with the convergence of Aruba Central and HPE GreenLake, more than 120,000 Aruba customers now have access to the HPE GreenLake platform.

As customers adopt hybrid multi class solutions, we know they also need a secure and flexible on-premises cloud solution. We were recently selected as the prime provider for Google's Distributed Cloud Hosted solution. HPE GreenLake will enable Google to deliver an on- premises cloud experience for organizations with strict data residency, security, and privacy requirements.

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Our hybrid cloud offerings have attracted nearly 150 new customers in Q2, including BMW Group, who is using HPE GreenLake to streamline and unify the company's data management across its global locations in the cloud and Worldline, the world's fourth largest payment provider who chose HPE GreenLake to implement their major performance upgrade to its payment platform as it continues to deliver against a cashless economy vision. HPE Financial Services had a unique hand in the Worldline upgrade to HPE GreenLake, with our asset renewal program funding approximately 25% of the refresh.

From a data perspective, we continue to make meaningful enhancement that allow customers to extract more insights from their data to accelerate business outcomes. For instance, we are creating sophisticated AI models to generate and share insights in distributed environments.

In April, we introduced HPE Swarm Learning, which enables users to share learning's through an AI model at the edge and from distinct sites without compromising data privacy. One University in Germany is already using HPE Swarm Learning to more accurately diagnose colon cancer by applying AI learning's that can predict cancerous genetic alterations.

And early this week, Frontier, an HPE designed and built system became the world's first and the fastest exascale supercomputer, taking the number one ranking on the world's top 500 list of supercomputers, exceeding the one exaflop performance threshold for the first time. To put this in perspective, this performance is three time faster than the number two supercomputer. HPE has deployed four of the top 10 supercomputers and ranked first, second, third and fourth, on the Green 500 list of the most energy-efficient supercomputers in the world.

Our as-a-service pivot is also innovative in the way it helps our customers meet their sustainability goals. HPE Greenlake helps customers reduce their carbon footprint by more than 30% versus traditional IT models. Later this month, when we release our living progress report, we will share more about our efforts to support our customers' goals, while pushing ourselves in the industry to improve our own.

Few of us could have predicted that the challenges of the last several years would require enterprises to adopt so dramatically. I spend at least 50% of my time with customers around the world and I can tell you that when they think about how they are going to re-imagine their futures, they see HPE as an even more relevant and essential partner than ever before.

As I reflect on Q2, and look ahead to the future, I am confident in our ability to deliver on our commitments. We have the right strategy to capitalize on market trends with an expansive edge-to-cloud portfolio that's connected through our market-leading HPE GreenLake platform. We have significant momentum with our customers. And perhaps most importantly, we have a truly stellar team. I am proud of the 60,000 team members who make our results possible, and who help us deliver on our purpose as a company. This team will continue to innovate and execute in ways that will further set us apart and continue to create value for our shareholders.

With that, let me turn it over to Tarek to walk you through the details of our business segment results and overall performance.

Tarek Robbiati

Thank you very much, Antonio. I'll start with a summary of our financial results for the second quarter of fiscal year 2022. As usual, I'll be referencing the slides from our earnings presentation to guide you through our performance. Antonio discussed the key highlights on slide one and two. So now, let me discuss our Q2 performance details, starting with slide three.

Hewlett Packard Enterprise Company Wednesday, June 01, 2022, 5:00 PM Eastern