Hewlett Packard : Q1 2021 Earnings Transcript

Hewlett Packard Enterprise

Q1 2021 Earnings Conference Call

Tuesday, March 2, 2021, 5:00 PM Eastern

CORPORATE PARTICIPANTS

Antonio Neri - President, Chief Executive Officer

Tarek Robbiati - Executive Vice President, Chief Financial Officer

Andrew Simanek - Vice President, Investor Relations

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PRESENTATION

Operator

Good day and welcome to the First Quarter 2021 Hewlett Packard Enterprise Earnings

Conference Call. My name is Cole 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." And 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 proceed.

Andrew Simanek

Great, thank you. Good afternoon everyone, I'm Andy Simanek of Investor Relations for Hewlett Packard Enterprise. I'd like to welcome you to our fiscal 2021 first 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' webpage 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.

You may 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 31st, 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 noted otherwise, are presented on a year-over-year basis and adjusted to exclude the impact of currency. Also, please refer to our recently filed Form 8-K for detailed information on our realigned financial results for fiscal year '19 and fiscal year '20 to account for changes to our reporting structure in fiscal year '21 that better align to market trends and more accurately reflect how we are managing the business today.

Finally, after Antonio provides his high level remarks, Tarek will be referencing the slides and 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.

Hewlett Packard Enterprise

Tuesday, March 2, 2021, 5:00 PM Eastern

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With that, let me turn it over to Antonio.

Antonio Neri

Well, thanks, Andy, and good afternoon, everyone. Thank you for joining us today. And I hope you and your families continue to be safe and healthy. It is hard to comprehend everything that has transpired around the world over the last year.

The world we knew pre-pandemic has changed forever and the need to use innovative technologies to advance the way people live and business operates has never been greater. Improving the health of our communities from educating our children to digitizing our economy and enable its recovery creates an enormous opportunity. I believe we are entering a new era, the age of insight, fueled by the amount of data around us.

The arrival of safe and effective COVID-19 vaccines is a marvel of innovation and good news for us all, bringing hope and optimism for what lies ahead. I am personally very excited about the future of innovation and the impact it will have.

I am very pleased with HPE's Q1 results. Our revenue exceeded our outlook and represents a stronger than normal sequential seasonality. We significantly expanded our gross and operating margins, driving strong profitability across our businesses ahead of pre-pandemic levels. Our non-GAAP earnings per share exceeded the high-end of our guidance and free cash flow was a record Q1 performance. These results give us confidence to raise our fiscal year '21 EPS and free cash flow outlook, which we will address in more detail later on the call.

The global pandemic has brought a renewed focus on digital transformation as businesses are rethinking everything from remote work and collaboration to business continuity and data insights. As the world recovers, our customers are looking for the agility and simplicity of the cloud-native world with the flexibility and control of a hybrid business model. This is where we have a unique and differentiated value proposition. HPE acted intentionally and quickly last year to become a more agile organization and enable our ability to innovate faster.

Our Q1 results demonstrate our progress in enhancing our position to accelerate what comes next for our customers. I am very grateful for our dedicated, passionate, and resilient team members. They have been laser-focused on delivering for our customers and executing our strategy to drive long-term sustainable profitable growth for our shareholders. We are strengthening our core businesses, doubling down in key areas of growth, and accelerating our as-a-service pivot to become the edge-to-cloud platform-as-a-service choice for our customers and partners.

Our total revenue of $6.8 billion was down 3% from the prior year. When normalized for the backlog from last quarter, this is better than expected sequential seasonality. We saw solid order linearity intake across all of our businesses throughout the quarter. We are executing on multiple growth opportunities and we are particularly pleased with strong revenue growth in our Intelligent Edge business and growth in our as-a-service orders and revenue.

Going forward, we expect to see gradual improvement in customer spending as we progress through fiscal year '21 giving us the confidence in our ability to deliver on our long-term revenue growth guidance.

Hewlett Packard Enterprise

Tuesday, March 2, 2021, 5:00 PM Eastern

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Importantly, our non-GAAP gross margin of 33.7% is up 30 basis points year-over-year and 300 basis points sequentially. Our non-GAAP operating profit of 11.3% is up 130 basis points year-over-year and our non-GAAP EPS of $0.52 is up 4% year-over-year and significantly above the high-end of our outlook.

We generated a record Q1 free cash flow of $563 million, the highest achieved in the first fiscal quarter in the history of Hewlett Packard Enterprise. These are impressive results made possible through disciplined execution, strong expense management, and critical investment prioritization. Based on the strong start to fiscal year '21, we are raising our fiscal year '21 non- GAAP EPS outlook to $1.70 to $1.88 and free cash flow to $1.1 billion to $1.4 billion.

Tarek will discuss the financial results and outlook in greater detail but let me first give you some additional context around our business segment performance and innovation highlights for the quarter. To emerge and recover from the global pandemic, enterprises require secure connectivity, data insight, and a cloud experience to accelerate their digital transformation, all of which further reinforces the significance of HPE's differentiated edge-to-cloud platform-as-a- service vision.

In our prioritized areas of growth, our Intelligent Edge business had an outstanding quarter with revenue of $806 million, up 11% year-over-year. We again expect to take market share in both campus switching and wireless LAN segments of the market. We are seeing continued traction from our investment at the edge include rich software capabilities like our Aruba ClearPass security, our cloud-native Aruba Central, and most recently Aruba ESP, our edge services platform. Our Aruba SaaS revenue grew triple-digits year-over-year. The first full quarter following our Silver Peak acquisition reinforces that we are on track to grow high-margin recurring revenue with technology that accelerates our ability to capture the high-growth SD- WAN market opportunity.

Our Silver Peak SaaS offering provides customers the ability to connect all their edges and all their clouds in a fully automated and autonomous way. We launched new SD-WAN capabilities to centrally monitor, manage, and automate connectivity from branch location to AWS, adding support for the AWS Transit Gateway Connect solution. And early today, you may have seen our announcement introducing new solutions from deeper integration between our Aruba ESP and Microsoft Azure, which will simplify IoT device connectivity and bring Aruba Central to Microsoft Azure.

Finally, we introduced a new class of cloud-native and fully automated data center switching products specifically designed for the edge cloud data centers, which represents a $12 billion TAM expansion opportunity for Hewlett Packard Enterprise. These new offerings also enable us to accelerate the delivery of workload optimized solutions for our HPE GreenLake Cloud Services offering. Aruba's innovations are why customers like Santander, Skechers USA and L3 Harris are choosing Aruba. We have multi-growth drivers in our Intelligent Edge business and we believe we are well positioned to outgrow the market.

High Performance Compute and Mission Critical Solutions is inherently a lumpy business due to the timing of deals and customer acceptances, because we can only recognize revenues once customer workloads are in production. In Q1, revenue was down 9% from the prior year. We remain very confident in this high-growth segment, based on our backlog of our awarded business, which now exceeds well over $2 billion of exascale contracts and a robust pipeline of multi-million dollar size deals. We are on track to deliver the 8%-to-12% annual growth rate communicated at our Security Analyst Meeting last fall.

Hewlett Packard Enterprise

Tuesday, March 2, 2021, 5:00 PM Eastern