Hewlett Packard : Q4 2022 Earnings Transcript

Hewlett Packard Enterprise Company

Fourth Quarter Fiscal 2022 Earnings Conference Call

Tuesday, November 29, 2022, 5:00 PM Eastern

CORPORATE PARTICIPANTS

Antonio Neri - President, Chief Executive Officer

Tarek Robbiati - Executive Vice President, and Chief Financial Officer

Jeff Kvaal - Vice President, Investor Relations

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PRESENTATION

Operator

Good day, and welcome to the Fourth 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. Jeff Kvaal, Vice President of Investor Relations. Please go ahead, sir.

Jeff Kvaal

Good afternoon and thank you Chuck. I'm Jeff Kvaal, Head of Investor Relations for Hewlett Packard Enterprise. I'd like to welcome you to our fiscal 2022 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 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 release on our HPE Investor Relations webpage at investors.hpe.com. 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 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 annual report on Form 10-K for the fiscal year ended October 31, 2022. 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 call, all revenue growth rates, unless noted otherwise, are presented on a year-over-year basis, and are adjusted to exclude the impact of currency. Finally, after Antonio provides his high-level remarks, Tarek will be referencing the slides and our earnings presentation throughout his prepared remarks. The earnings presentation is also embedded within the webcast player on our website for this earnings call.

And with that, let me turn it over to you, Antonio.

Antonio Neri

Well, thank you, Jeff, and good afternoon and thank you for joining our call today. HPE had an impressive fourth quarter, delivering outstanding performance across our key performance metrics.

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Q4 was HPE's most profitable quarter on a non-GAAP continuing operations basis since 2017, with our second highest quarterly revenue and record quarterly free cash flow. In 2018, we introduced a clear strategy to deliver sustainable long-term value for shareholders. And in 2019, we began our pivot to prioritize recurring revenue through our HPE GreenLake edge-to- cloud platform. We have refocused our portfolio and our customer value proposition to a high growth and higher gross margin solutions. We also improved our operating leverage across the company. We are now seeing these strategic actions paying off.

In Q4, orders remained steady, showing continued interest in our differentiated edge-to-cloud solutions across industries from enterprises, large and small. Demand over the course of the year was enduring and proved to be better than we anticipated. We closed this fiscal year with a significantly larger order book that we had at the start of the year. I am very proud of our performance in the quarter and in fiscal year 2022. Faced with ongoing macroeconomic challenges, supply constraints and adverse foreign exchange, HPE executed exceptionally well.

During the fourth quarter, total HPE revenue climbed 4% year-over-year on a constant currency basis to almost $8 billion, which was above our sequential outlook as we started to see a slight improvement to ongoing supply constraints.

Our Compute and Intelligent Edge businesses had particularly strong revenue growth, each rising more than 20%. Even on these higher revenue base, we grew our non-GAAP operating margin. Non-GAAP operating margin rose to 11.5%, up 180 basis points year-over-year, one of the highest quarterly levels in HPE's history. Non-GAAP gross margin was just above 33%, a 10 basis points improvement year-over-year, reflecting ongoing pricing discipline.

As customers continue to turn to our edge-to-cloud solutions, we saw increased demand for our HPE GreenLake platform. Annualized revenue run rate rose 25% year-over-year even with supply constraints as a headwind. Total as-a-service orders again increased more than 30% from a year ago, helping us close the fiscal year with the as-a-service order growth of 68%. In the final quarter of the fiscal year as-a-service orders represented approximately 12% of the total company bookings.

Non-GAAP profit in the quarter was a standout. We achieved record quarterly profit, despite the continued unfavorable effects from foreign exchange. Our non-GAAP diluted net earnings per share was $0.57, a 90% sequential rise and 10% increase year-over-year.

Free cash flow in the final quarter was just shy of $2 billion, our best ever for a quarter. Free cash flow improved in the second half of the fiscal year 2022, as expected, following better supply chain conversion [indiscernible] and working capital actions as we took to increase cash flow from operations.

As we look at our full fiscal year '22 performance, it is clear the HPE GreenLake platform has enhanced our financial profile with more resilient, recurring revenue. Our portfolio is steadily becoming richer in software and services. We continue to shift our next to higher growth markets and more IP rich offerings. And we continue to invest in our go-to-market capabilities that are solution-led and outcome-based. Since we began our as-a-service pivot in 2019, our AIR has more than doubled to $963 million. We exited fiscal year 2022 with more than $8.3 billion in HPE GreenLake total contract value, more than twice what it was just two years ago.

In fiscal year 2022, we produced $28.5 billion of revenue, 5% higher compared to 2021, and above the 3% to 4% outlook we provided at Securities Analysts Meeting 2021. We achieved

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this revenue despite not yet having booked all revenue from our Frontier exascale system, which was delayed because our customer needed to extend the acceptance timeframe.

Through a combination of pricing actions, portfolio mix shift and cost discipline, we sustained our margins in fiscal year 2022, even in the face of supply constraints, and higher components and logistic costs. We increased our operating margin moving 210 basis points from above 8.5% two years ago to 10.6% for fiscal year 2022.

Overall, in fiscal 2022, our operational performance resulted in a record non-GAAP diluted net earnings per share of $2.02, which came in above the midpoint of the guidance we gave at SAM 2022 in Houston last month, despite ongoing supply impacts, foreign exchange challenges and our exit from Russia and Belarus.

We generated the second highest free cash flow in the fiscal year, a total of $1.8 billion, three times what it was in fiscal year 2020. We exited fiscal year 2022 with free cash flow at the midpoint of the target we guided at SAM 2022.

Our fourth quarter and yearend results position us for continued, durable, profitable growth in fiscal year 2023, and we are confident in the guidance targets we gave last month at SAM. Going into next quarter where optimistic demand will sustain globally. It is clear that customers view their data first digital transformation critical to their success, and are prioritizing hybrid cloud solutions to propel them forward, particularly in these dynamic times.

As we look ahead for the next fiscal year, after many quarters of supply constraint in our market, we are beginning to see some improvements. Demand from the consumer sector is slowing, allowing some substrate capacity to shift to enterprise IT technologies. As a result, we have been able to reduce anticipated lead times for some products. We are continuing to take proactive measures to mitigate supply chain challenges and we are working through our large order book, which has experienced no material cancellations. Over the course of 2023, we expect to see great and easy but not an end to supply shortages.

Despite supply constraints, the momentum we are generating with customers for our HPE GreenLake platform has been evident across our financial metrics. HPE GreenLake offers customers a unified and automated secure hybrid cloud experience, integrated across the edge data center colocations and public clouds. It is open, so customers can take advantage of the choice in architecture, but also benefit from the consistent cloud operating model HPE GreenLake provides for all workloads and applications across hybrid IT estates.

With a true cloud metering capability, HPE GreenLake enables customers to flex capacity up and down, based on their business needs while benefiting from a wide range of cloud services to protect and analyze their data. Our market-leading differentiators helped us attract more new customers to our platform during the fourth quarter than any other quarter before, leading to twice as many new HPE GreenLake logos to end fiscal year 2022 than we had a year prior.

Also, customers are consuming more HPE GreenLake services increasing usage above the original contract commitments. Our partners are also seeing the relevance of HPE GreenLake with our customers. Partners booked more HPE GreenLake orders during the fourth quarter than they ever did before, extending the strength of orders growth to 22 consecutive quarters. During the fourth quarter, we also saw a greater share of partners booking multiple HPE GreenLake deals.

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Next week, we will meet face-to-face with several thousand customers and partners at HPE Discover Frankfurt, to discuss hybrid cloud transformation strategies, ways to drive value from the data across edge-to-cloud and how to bring the cloud experience to applications and data with HPE GreenLake. At the event, we will unveil important updates to our HPE GreenLake platform.

One European customer who has recently adopted the HPE GreenLake platform is SPAR. SPAR is the supermarket, you see everywhere in Europe from micro roadside convenience stores to massive one-stop hypermarkets. SPAR has decided to build its own hybrid cloud on HPE GreenLake to run the company's core business. Our platform is running all major applications of SPAR's innovation engine as the retailer pursues its ambition to create the future of grocery and retail shopping. The HPE GreenLake platform also helps SPAR use data to make strategic decisions on everything from warehousing and logistics to in-store experiences to advance its business. HPE GreenLake is playing an increasingly important role in customers' IT strategies and in addressing all their needs with one unified edge-to-cloud experience.

This fiscal year, we performed remarkably well for our customers, our shareholders and our HPE team members. We helped our customers use technology to accelerate the business outcomes while navigating in dynamic environment. Our expanding market leadership demonstrates the trust that customers place in us and the value defined in the differentiated edge-to-cloud portfolio that only we can deliver. Demand for our HPE solution has been enduring throughout 2022 and continue to be steady as we move into fiscal year 2023.

For our shareholders, by executing our strategy, we have pivoted HPE to a richer mix of software and services that is delivering recurring profitable growth. In fiscal year 2022, we posted strong revenue growth, record breaking non-GAAP earnings per share and outstanding free cash flow. I am so proud of our team members around the world who have made these results and our transformation possible through their ingenuity and engagement.

In fact, this year, HPE achieved one of the highest employee engagement scores in the history of our company, up 20 points over the last five years. Our culture has attracted some of the brightest, most innovative talent in tech. HPE's team members are bringing their energy and ideas to write HPE's next chapter and cement us as the edge-to-cloud market leader.

With our team engaged, our strategy taking flight and our market-leading solutions playing critical roles in customers' business, we entered fiscal year 2023 with incredible momentum on all fronts. And I look forward to advancing our strategy and leadership even further in the next year.

And with that, I would like now to pass it over to Tarek to make his comment and provide a little bit more details about our financial performance. So, Tarek, over to you.

Tarek Robbiati

Thank you very much, Antonio. Q4 was no question, an outstanding quarter for HPE. As usual, I will reference slides from our earnings presentation to guide you through our performance. Antonio discussed key highlights for Q4 '22 and fiscal year '22 on slide four and five. Let me discuss our Q4 performance details, starting with slide six.

Sustained demand continues to be a core attribute of our differentiated edge-to-cloud portfolio, which is translated to record or near-record results. As expected, year-over-year order growth continued to moderate in Q4 '22 to down 16% year-over-year as we lap challenging compares.

Hewlett Packard Enterprise Company

Tuesday, November 29, 2022, 5:00 PM Eastern