Hewlett Packard : Q4 2021 Earnings Transcript

Hewlett Packard Enterprises

Fourth Quarter Fiscal 2021 Earnings Conference Call

Tuesday, November 30, 2021, 4:30 PM Eastern

CORPORATE PARTICIPANTS

Antonio Neri - President, Chief Executive Officer

Tarek Robbiati - Executive Vice President, Chief Financial Officer

Jeff Kvaal - Investor Relations

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PRESENTATION

Operator

Good afternoon and welcome to the Fourth Quarter Fiscal 2021 Hewlett Packard Enterprise Earnings Conference Call. My name is Gary, and I'll be your conference moderator for today's call. At this time, all participants will be in listen-only mode. We will be facilitating a question and answer session toward 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 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 go ahead.

Jeff Kvaal

Well, good afternoon, everyone. I am actually Jeff Kvaal of Investor Relations, I am filling in for. Andy today. I'd like to welcome you all to our fiscal 2021 fourth 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 January 31, 2021. 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 otherwise noted, are presented on a year-over-year basis and are adjusted to exclude the impact of currency. Finally, we will be referencing the slides and our earnings presentation throughout our 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 you Antonio.

Antonio Neri

Well, thanks Jeff, and good afternoon, everyone. Thank you for joining our call today, and for those of you who attended our Virtual Security Analyst Meeting last month, thank you. We appreciate the opportunity to discuss how our edge-to-cloud strategy positions us to capture an expanded market opportunity and accelerate shareholder value creation.

Hewlett Packard Enterprises

Tuesday, November 30, 2021, 4:30 PM Eastern

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HPE ended fiscal year 2021 with strong momentum. Customers are responding to our edge-to- cloud value proposition as evidenced by the record demand for our solutions. Demand accelerated in the second half of the year, driving fiscal year 2021 orders growth of 16% year- over-year.

Revenue of $27.8 billion in fiscal year 2021 grew in line with our long-term outlook, up 1% year- over-year. In fiscal year 2021, we executed very well, which enabled us to exceed our commitments across all financial metrics, even with a substantial order backlog.

Our as-a-Service annualized revenue run rate or ARR of $796 million was up 36% year-over- year. We significantly improved our gross and operating margins, which increased our fiscal year 2021 non-GAAP operating profit by 25% year-over-year.

We delivered fiscal year 2021 non-GAAP diluted net earnings per share of $1.96, up 27% year- over-year. And we generated the fiscal year 2021 free cash flow of $1.6 billion, up $1 billion year- over-year, which translates to growth of 177%. This was a very strong performance, and it was particularly impressive against the backdrop of industry-wide supply constraints, which continue to challenge our ability to convert orders to revenue as quickly as we would like. We have a world- class global operations team that continues to work closely with a long-standing diverse network of suppliers. We continue to take proactive inventory measures to better position us to deliver against this robust customer demand.

Our results in Q4 strengthened the momentum we have as we enter fiscal year 2022. Increased demand in the quarter drove orders growth of 28% year-over-year, with particular strength in our as-a-Service orders, which grew an impressive 114% year-over-year, including a large network as-a-Service win. We also saw record levels of orders in key growth areas, including Intelligent Edge, High Performance Computing & Artificial Intelligence businesses.

We delivered $7.4 billion in total Q4 revenue, which was up 7% sequentially and above normal sequential seasonality. We expanded our gross and operating margins, increasing our Q4 non- GAAP diluted net earnings per share by 27% year-over-year and we generated Q4 free cash flow of $94 million, in line with the outlook we provided at the end of Q3. Tarek will take you through our quarterly results in detail, but I would like to spend a little more time putting our full fiscal year in context for you.

Our fiscal year 2021 results proved the relevance of our strategy to customers and the traction of our transformation to become the edge-to-cloud company. As we discussed at our Security Analyst Meeting last month, HPE is at the center of several compelling megatrends, the explosion of data at the edge, the mandate for a cloud experience everywhere, and the need to extract value from data to generate insights.

HPEs differentiated edge-to-cloud strategy uniquely positions us to capitalize on these trends and capture growing profitable markets. Our solutions and services help customers overcome the challenges of multi-generation IT, and enable them to access, control and maximize the value of all their workloads and data everywhere.

We are executing with focus and speed to deliver against our vision and strategy. We are making strategic investments and taking deliberate steps to continue to shift our business. And as I have said previously, this transformation is my number one priority, and I'm proud of the progress we have made in fiscal year 2021.

Hewlett Packard Enterprises

Tuesday, November 30, 2021, 4:30 PM Eastern

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Our Intelligent Edge business grew fiscal year 2021 revenue 13% year-over-year with orders exceeding for the first time $4 billion. Customer demand was up strong double digits year-over- year as more customers look for ways to create new digital experiences at the edge and capitalize on the data generated there. But the industry-wide component shortages kept us for converting our full order momentum to revenue in Q4, and we entered fiscal year 2022 with record levels of backlog.

Our market leadership at the Edge remained very strong. HPE was positioned as one of the leaders in the Magic Quadrant Gartner provides for wireless access network edge infrastructure, which is notable because HPE is only one of the two companies to be positioned in the Leader Quadrant four years in a row.

We continue to drive strong innovation in this business. In Q4, we introduced the industry-first distributed services switch, which brings software-defined services and security right to where the data is created and processed. Developed in partnership with Pensando, this solution eliminates legacy appliances and whole software needed to build the hybrid cloud demanded by modern applications and IT organizations.

In Q4, we closed the largest network as-a-Service deal in HPE history to help a large US retailer enhance its customer and employee experience throughout the stores. In addition, the Major League soccer franchise, FC Cincinnati standardized on Aruba at the TQL Stadium to deliver next-generation digital cashless, counter-less fund and event experiences. The franchise deployed an end-to-end Aruba Edge Services platform network at its new 26,000 seats stadium to power this game day and special event experiences.

Orders of HPE's High Performance Compute & AI offerings were also up strong double-digitsyear-over-year. This record level of demand has generated an order book of awarded contracts now at $2.7 billion, excluding the important $2 billion win with the US National Security Agency.

HPE expanded our number one market position in HPC with 37% market share as of calendar Q2 data, which is more than 14 points above the closest competitor. And according to the list of the top 500 supercomputers released just two weeks ago, 33 of the top 100 most powerful supercomputers in the world were built by HPE. This is more than any company.

At the end of Q4, the National Energy Research Scientific Computing Center, NERSC at Berkeley Lab accepted the first phase of the Perlmutter supercomputer. Powered by the HPE Cray EX system, Perlmutter introduces a new generation of supercomputing capabilities to more than 8,000 scientists performing research for the US Department of Energy Office of Science. HPE is uniquely positioned to bring the AI, deep learning and data analytics capabilities of our most advanced supercomputers to mainstream enterprises through the HPE GreenLake platform.

In Q4, we announced that ENI, a global energy company selected HPE GreenLake to upgrade its existing HPE supercomputer. Through HPE GreenLake, ENI can accelerate discovery of new energy sources with more accurate modeling and simulations, as well as become more sustainable by monitoring utilization and energy consumption within an as-a-Service solution. We continue to strengthen our Compute and Storage businesses where we saw strong orders and profitability in fiscal year 2021.

In Compute, orders increased more than 10% in fiscal year '21 and we delivered operating margins of 10.8%, up 260 basis points year-over-year. We are making bold moves to transform our Storage business into a cloud-native data services business, which resulted in a high single-

Hewlett Packard Enterprises

Tuesday, November 30, 2021, 4:30 PM Eastern

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digit order growth and gross margin expansion, up 130 basis points year-over-year. And we continue to see high services attach rate, helping enable HPE Pointnext orders to increase mid- single digits in fiscal year '21. This contributed to the overall performance of HPE Pointnext, which ended fiscal year 2021 with a book-to-bill ratio of 1.15 of revenues, highlighting the potential for future revenue growth in fiscal year 2022 and beyond.

In fiscal year 2021, we generated strong momentum in our transformation to an as-a-Service company. Our company as-a-Service orders increased 61% year-over-year, with HPE GreenLake orders increasing 46% year-over-year. Our as-a-Service annualized revenue run rate, or ARR, of $796 million was up 36% year-over-year. The growth of our ARR is particularly noteworthy because this recurring revenue stream is high quality and high margin.

During our Security Analyst Meeting last month, Tarek shared that more than 60% of our ARR mix is software and services. And we believe that portion will grow to more than three quarters in the next three years.

Our ARR gross margins are well above our corporate average gross margins today. And the addition of high-value software content will drive margins even higher. Our pivot to an as-a- Service company is enabled by HPE Financial Services, which increased fiscal year 2021 financing volume 3% year-over-year, driven by strong growth within HPE GreenLake.

We continue to advance our leadership in our HPE GreenLake offering. In September, we introduced HPE GreenLake for data protection, which are cloud services designed to protect data across edge-to-cloud, overcome ransom ware attacks and deliver rapid data recovery. This new set of solutions marks our entry into the growing data protection as-a-Service market. Our acquisition of Zerto enabled us to add market-leading data protection to our cloud services portfolio to help enterprises take cyber threats and ransom ware attacks head on.

We also launched HPE GreenLake for data analytics, which includes the industry-first, unified modern hybrid analytics and Data Lake platform. This strategically important solution positions HPE in the growing Unifi analytics market and helps customers accelerate modernization initiatives for all data across edge-to-cloud. We continue to see incredible response to our HPE GreenLake offering. We added more than 300 new GreenLake customers during fiscal year 2021, bringing our customer count to more than 1,250.

New GreenLake logos represent an increasing share of orders with approximately one quarter of Q4 GreenLake orders coming from new customers. Today, more than 900 partners sell HPE GreenLake, one of the largest, partner of ecosystems selling as-a-Service offerings in the industry. We added more than $1.5 billion of GreenLake total contract value over the last year, bringing the total to more than $5.7 billion.

Examples of new GreenLake logos includes Trinchero Family Estates, the second largest family- owned winery in the world which adopted HPE GreenLake through our channel partner PKA technologies to add flexibility and scale, its capacity to meet the increasing demand of automation.

The HPE GreenLake solution powers the winery's automated warehouse, where approximately 60 different types of wines are produced, bottled and packaged for shipping while reducing overall IT costs.

Hewlett Packard Enterprises

Tuesday, November 30, 2021, 4:30 PM Eastern