Hewlett Packard Enterprise Company (HPE) Earnings Call Transcript & Summary

Good afternoon. I'm Andy Simanek, Head of Investor Relations for Hewlett Packard Enterprise. And I'd like to welcome you to a recorded briefing on our recent Form 8-K filing with the SEC, where we published reconciliation tables to our fiscal year '20 reporting structure for the previous 2 years. First, given we are in our quiet period ahead of our first quarter fiscal year 2020 earnings announcement on March 3, today's commentary will not update any prior outlook and will only discuss the financial realignments of our historical results for fiscal year 2018 and fiscal year 2019. We will also be unable to address any questions until after our next earnings announcement on March 3. Second, let me remind you that this webcast will be made available for approximately 1 year. We posted a copy of the Form 8-K filing and a slide deck accompanying today's presentation on our HPE Investor Relations web page at investors.hpe.com. As always, elements of this presentation are forward-looking. For more detailed information, please see the disclaimers on the accompanying presentation 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. 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 annual report on Form 10-K for the fiscal year ended October 31, 2020. Also, for financial information that has been expressed on a non-GAAP basis, we have provided reconciliations to the comparable GAAP information in our fourth quarter fiscal year '19 earnings presentation located on our website. Please refer to the slide presentation accompanying this briefing on our website for details. So turning to Page 1. Let me remind you of the rationale for the new reporting structure. As we discussed at our Securities Analyst Meeting in October 2019, HPE is making additional disclosures to provide better visibility to the financial performance of our business and our progress towards becoming an as a Service company. The fiscal year '20 reporting structure aligns to market trends and our internal organizational structure. It also takes into account the economic differences that exist across our businesses and provides enhanced revenue and operating profit disclosures. The new disclosure also include annualized revenue run rate or ARR that I will discuss in more detail shortly. This new segmentation and set of disclosures should provide investors with a better understanding of our business as we shift to sustainable, profitable growth. HPE has furnished an 8-K with the SEC providing reconciliation tables for fiscal year '18 and fiscal year '19 results by quarter to facilitate accurate year-over-year compares going forward. Please note, there is no change to total HPE consolidated GAAP or non-GAAP results. Turning to Slide 2. You can see the new fiscal year '20 reporting structure where Hybrid IT is replaced with 4 new segments: compute; high-performance compute and mission-critical systems or HPC & MCS; and storage, each of which will include related operational services; and advisory and professional services or A&PS. Both revenue and operating profit will be provided for each of these segments. Please note that we will report Pointnext operational services revenue and orders in total for all of Hybrid IT in fiscal year '20. There will be no changes to the other segments of Intelligent Edge, Financial Services and Corporate Investments. As a reminder, our Corporate Investment segment includes HPE Labs and our Communications and Media Solutions business, known as CMS. We also are now reporting 1 consolidated ARR number, which primarily consists of our GreenLake business and other SaaS offerings. In terms of defining ARR, as shown on Slide 3, and as a Service GreenLake solution contract consists of several components: one, an infrastructure component, such as compute, storage or networking configuration that is software-defined; two, a services capacity contract; three, platform software, such as Aruba Central; plus four, a financial services charge as the customer pays for the solution over the term of the contract. In a GreenLake as a Service contract, the infrastructure is pre-provisioned typically to a minimum capacity level agreed with the customer. The customer pays the minimum capacity plus any usage in excess. As the needs of the customer evolve, the customer can decrease or increase the capacity commitment over the duration of the contract. Although this flexibility is similar to how the public cloud is consumed, remember, the primary difference is that GreenLake gives the customer full control and flexibility on-premise, a critical benefit that our customers are asking for. As of Q4 fiscal year '19, our ARR was $462 million. We will provide this quarterly going forward and expect growth at a compound annual growth rate of 30% to 40% through fiscal year '22. Now turning to Page 4. I want to discuss some specific details of how the fiscal year '20 reporting structure was realigned. The primary change is we are replacing the historical Hybrid IT business segment that included compute, storage and HPE Pointnext, with 4 new business segments: compute, HPC & MCS, storage and A&PS, which I'll now discuss individually. Compute includes general purpose servers and certain workload optimized servers, previously part of the compute business unit and now adds the related operational services previously part of HPE Pointnext. HPC & MCS includes high-performance compute, mission-critical systems and edge compute, previously part of the compute business unit and now adds the related operational services previously in HPE Pointnext. We are excited about the recent Cray acquisition, which will be included in this segment and the growing TAM and premium gross margin of HPC & MCS relative to compute. Storage includes the former storage business unit and now adds the related operational services previously in HPE Pointnext. Note, storage now also includes hyperconverged infrastructure, which has been a very high-growth business for us that previously contributed to our compute business. The new segmentation for storage is also important since it is consistent with the framework that our peers use, including related operational services and HCI, which allows investors to better compare our business. A&PS represents advisory and professional services, which are our consultative, people-oriented services previously part of HPE Pointnext. This business is a strategic asset used to create demand across the rest of our portfolio, including our as a Service business. While most of our realignments occurred within Hybrid IT, there is 1 change that extends into the Intelligent Edge segment. The Intelligent Edge segment now includes data center networking, operational services, previously part of HPE Pointnext. The data center networking business, other than operational services, had been transferred to Intelligent Edge in a prior realignment. As mentioned before, these realignments have no impact on historical financials for HPE Financial Services and Corporate Investments. Further, total HPE GAAP and non-GAAP consolidated results remain unchanged. Lastly, Slide 5 provides a 2-year summary view of the new segment reporting fiscal year '18 and fiscal year '19. Please refer to the recently filed 8-K for complete details and reconciliation tables referred to during this briefing. And with that, we would like to wrap up this presentation. We appreciate you listening and your interest in Hewlett Packard Enterprise. We look forward to you joining us on March 3 for our Q1 fiscal year '20 earnings announcement when we will be able to answer any questions. Thank you.