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

[Audio Gap] Sanjot Khurana, Director of Investor Relations at Hewlett Packard Enterprise. Before we start, let me make a moment -- take a moment to read our disclosures. You'll hear some forward-looking statements in today's discussion. These are based on risks and assumptions that are described in our annual report on Form 10-K and Form 10-Q. Our actual results could differ materially, and we assume no obligation to update. More details can be found on our website as well as our recent Q2 earnings announcement press release dated May 21. So with that, let me turn it back to Toni.

Thank you for the introduction, Sanjot, and welcome, HPE. Welcome, Antonio, to our SDC conference. It's great to have you here.

Thank you, Toni, for having me.

I just have a couple of housekeeping items before we start. For participants, you probably know that we do have this active -- interactive Q&A now that replaces the physical cards that we had in fireside chats before, and it's called Pigeonhole. And there's a link on the left side of your screen to access Pigeonhole. You can click on that link. It will open up a browser, and you can submit questions. There's some already there. You can vote on whether you think a question is important or not. And so that will add some flavor to the discussion. So feel free to go ahead and click on that. You'll continue to hear this conversation as you do that. The second thing I wanted to underscore is we have a -- also a link on the second -- on the left-hand side from our partner, Procensus, which does live polling of investors' views for each company at the SDC. And again, that link is on the left-hand side. Towards the end of the conversation or at the conclusion of it, I'd love you to take a minute to complete the poll of your views on HPE. And as soon as you submit your answers, you'll see what other investors have said as well. So there's some -- you'll only be able to see other investors' views by completing the survey. So with those administrative details behind us, why don't we plunge right in. Antonio is a third timer at the SDC, first time in the virtual SDC. And it's a pleasure to have you here. As folks know, it's been about 5 years since HPE split from HPQ. It's been about 2.5 years since Meg Whitman left, and Antonio's been at the helm. And they just reported last week. So we're going to start a little bit just reviewing some of the key highlights from earnings, and then we'll talk more broadly about strategic issues.

So Antonio, it was a tough quarter, as you guys talked about, revenues were down 16%, EPS was down 47% as reported. You talked a lot about supply issues on the call, which a few other vendors have mentioned, but it hasn't been a common big theme among all companies. Maybe you can discuss what happened from a supply perspective and what that meant in terms of your backlog.

Well, first of all, good morning, good afternoon, everyone. Thank you for joining me and Toni today. And thank you, Toni, for having me here. I appreciate the opportunity to speak to you. Yes, definitely, Toni, obviously, it was a difficult quarter in term of the outcome of the results. As I said in my remarks last week, this was characterized by a challenge mostly in the supply chain with some continued uneven demand. And obviously, we exited the quarter with a ginormous backlog, which my view is always be direct and transparent with everybody, and we even shared the number, which was $1.5 billion, which is pretty significant, right? It's 2x the normal backlog. And so remember that this was a quarter that we actually lived throughout the entire period under the coronavirus-19 pandemic because our quarter started in February. And so what we saw at the end of January started the challenges in 3 areas. One was the tightness of strategic commodities. These are components you need to build a system, whether it's a server or storage on a high-performance computing system. And those are memory, obviously, SSDs and some CPUs. On the other hand, we had subcomponent challenges. And those have come pretty much from China. And obviously, China was in a lockdown for much of February and March. And it took time to them to recover both on the capacity on the supply chain and restart their own supply chain that actually depends on other vendors themselves. And then third was the logistics. And so in that context, we had actually a very steady intake of orders, the bookings, right? And that was a good news. We -- in fact, I measure every week where we are against our own plan, and we were not missing a bit. The problem is we couldn't convert those orders in actual revenues. And some of our products are fairly complicated in the sense that, remember our mix is a little bit different than some of our competitors, but we have a sizable business on High Performance Compute. And even though some of those systems were shipped, we need to install it and turn it on before we can recognize revenue. Customers being locked down, they were not available. And on the other hand is the fact that the fundamental challenge was eventually getting these components into the regional hubs, not just in China. And logistics was the other challenge because I think people don't realize that at least 30% to 40% of the logistic goes in the bellies of the commercial planes. And as people stopped flying, that impacted logistic -- the logistics. So we worked very hard on that. So that was the net. But as I think about the good news of this is the fact that we have some pockets of very strong performance. Aruba was very, very strong for us. We outperformed the peers. Most of our peers have reported in that space, call it, the traditional networking space. And clearly, even though that business was down 2% year-over-year in constant currency, we grew actually our Wi-Fi business with a strong offering, Aruba, remote access points through the cloud, 7%, and our North America business grew 12%. And obviously, our stated strategy to offer everything as a service, which drives the recurring revenue, grew another 17% year-over-year. And then obviously, solutions that were attuned for this environment, working at home, also grew very nicely. And then also about data, data analytics, and that's why big data storage was in excess of 60%. So bottom line, tough quarter, but I will say, encouraged by the progress we've made at the end of the quarter as we enter Q3. And now it's all about clearing the backlog and continue that demand intake.

So Antonio, if I can just follow up on a couple of the statements. So you talked about backlog doubling, that was entire company backlog, and we should think about normal would be $750 million, and you were at $1.5 billion? And I think your backlog was elevated coming into the quarter. So how much of that -- I don't think you built an extra $750 million in backlog in the quarter. So how do we think about the sort of lost revenue opportunity in terms of, did your backlog start like at $1 billion and went to $1.5 billion? Because I think you commented last quarter that you're having supply issues and backlog was elevated. So could you comment on that?

Yes. Absolutely. We entered Q2 with some backlog, but not at this level. It was slightly elevated but not at this level. I will say, probably more than 2/3 of the backlog we generated in Q2 was related to Q2. So to give a sense. And even in Aruba, by the way, so the $1.5 billion, call it, more than 90% is in Compute, Storage and HPC. But even in Aruba, we have some backlog. And the backlog was clearly in 2 products. One was 95% absolutely on the remote access points. One thing we noticed immediately, and we saw the power of the portfolio of Aruba play an immediate success, is the remote access points where basically, we can provision from the cloud connectivity, like in your house, with 2, 3 clicks by shipping our remote access points. And you don't have to be an IT person to even connect any of that. And that was amazing. And we -- by the way, we also donated $50 million of that product to hospitals and schools and so forth. So that, we exit Q2 with some backlog in that space. And then a little bit on switching on one particular platform, but it was negligible in the grand scheme of things. But we have some backlog there, too.

So Antonio, you mentioned that you track orders very closely, linearity was good. So the last couple of quarters, your overall reported revenue at constant currency has been down kind of 7% to 9% the last 3 quarters. Are you suggesting that had you been able to ship sort of normally, your -- that's sort of the revenue growth we would have seen? I mean the math almost works, if you believe there was a big backlog build, the math almost works. So are you effectively saying that had you been able to deliver, your revenue run rate would have been pretty similar to what you've seen over the last few quarters?

Yes. Remember what we did in 2019, Toni. Obviously, we had some decline there, also driven by the commodities pricing fluctuations. But if you look at our quarters, we were pretty stable, right, stable quarter-after-quarter, almost the same number. And then obviously, we had already at the end of Q4 and in Q1 some challenges with some strategic commodities pre-coronavirus-19, and we named those in the SSD and some CPUs. Those started getting better in Q2, but then we're running through the other big issue, which is the subcomponents, like people generally don't pay attention to more microelectronics, cables, connectors and so forth. So we definitely would have done much better. And the one thing that really surprised me in a good way is that our North America business, in the traditional business, Compute, Storage and networking, actually, from the bookings perspective, was up year-over-year. So for us it's -- again, fundamentally, it is addressing the supply chain and obviously continue to pivot our offers to where the demand will be. Because, obviously, this new environment will change a little bit few things. We're going to live in more a distributed model. Connectivity is going to be absolutely a necessity. I think about connectivity as electricity and water going forward. Obviously, it has to be secure. And so how we continue to pivot our investments in the areas of the future and also continue to accelerate? What I believe we have a differentiated opportunity with GreenLake, which is unique in the marketplace. It's not just hardware-as-a-service. It is also delivering standardized offerings-as-a-service, outcome-oriented. And these were our innovation, both in GreenLake central and in the Container Platform, are critical elements of that strategy going forward. And we see the results, right, 17% year-over-year growth despite the challenge.

So Antonio, I just want to be sure I heard you correctly. So in the second quarter, we actually saw Compute and Storage bookings go up year-over-year despite the pandemic? So...

In 1 region. Yes. In North America, absolutely, we saw that.

In North America, right. But if you were to characterize order rates, if -- and I realize there were some things that impacted the second half of '19 and Q1 '20 with components. But you were looking at a minus 7%, minus 8%, minus 9% revenue trajectory. Effectively, were the order rates kind of consistent with that in the quarter? I -- you obviously reported minus 16% because you couldn't ship a lot. But were the order rates kind of in the same ballpark, like you're saying if we went from January to February to March to April, January to April didn't have a big change in daily order rates?

It depends by region, Toni. Not every geo is equal, right? So...

In aggregate.

In aggregate, we have been obviously close enough. But the reality, it depends by which product, which solution. But in aggregate, definitely, it would have been much better than what we deliver, no question about it. And this is where I said in my remarks, we had some very steady order intake, consistent with our plans. And honestly, we had the ability to book those within a traditional way to be able to convert it, but we couldn't because obviously, the supply chain wasn't there.

Antonio, you -- inventory increased $900 million in the quarter. So clearly, you have stuff in transit, you -- finished goods, non-finished goods. I think you've also said basically your manufacturing sort of levels have gone back to normal. So if you have the inventory and manufacturing is okay, assuming there's no hiccup, why wouldn't you be able to make substantial progress on this backlog? If 2/3 of the build was this quarter, couldn't that all reverse? And if the order patterns are not changing, then shouldn't we see like a dramatic improvement in Q3? And just push back on why -- because if I just interpret what you said, that would be my conclusion. Huge backlog, plenty of inventory, demand relatively stable, we're going to close some of that backlog. That feels like Q3 should be a lot better.

Yes. No, it's actually a good point. And so here is the thing. Remember, the inventory is the inventory that we own, but also suppliers' own inventory. And so generally, the inventory we hold is for the strategic commodities, right, that we actually provide to our suppliers to eventually build the products. But the suppliers are the one procuring other aspects of the inventory, which they have higher velocity and bigger scale. And a great example of this can be voltage regulators, can be transistors. That's not what we host on that level. That's not what we hold. And that's probably, Toni, the biggest problem, right? So we have a lot of inventory that we are ready to obviously deploy, and we are deploying as we speak. And there we are working with our suppliers, who eventually take our inventory plus their inventory to build a system. And there are -- there has been some constraints in these subcomponent levels because some of these components are built, obviously, in China, and some are built in other geographies where they have been locked down. And so what I expect to happen is that as we build the major motherboard systems, which is the biggest constraint right now, or has been, and we put our inventory on top, which is the CPU, the memory and everything else, we will be able to accelerate the recovery of that inventory. So that's where I'm focused with the team. But I will deliver a message that our focus now is to improve quarter after quarter after quarter. And definitely, I will expect improvement in Q3 versus Q4 -- versus Q2. And remember, we're still taking orders in, obviously, and it's a question not just clearing the backlog, but also taking care as well as the new inventory and all the new orders. And then eventually, make sure that we still have the demand in the right place as we go along. So my view is that as we think about Q3, it should get better than Q2 and then go from there.

Antonio, I think the question that I heard most from investors following the earnings call was, it sounded like from a fundamental perspective, Antonio felt pretty good about where demand was. And yet, the company announced a very large restructuring when as recently as 3 and 6 months ago, you said there was no need for a restructuring, right? And so I think a lot of investors said, there's a disconnect here where Antonio is saying demand is pretty good. There's a backlog build. The results don't look great. And yet they're doing this huge restructuring. How do we -- how do you reconcile that to investors that if linearity and demand was kind of in line with your expectations, despite the pandemic, that you're taking this big proactive step, which you were suggesting you would not be doing?

Yes. So what I said, I mean, demand has been steady. It's not fantastic, steady. And obviously, the pandemic has changed quite a few things. But in the end, the reason why we decided to take this step is because of the learnings of the past, one. And number two, also, we did a lot of analysis, Toni, about how this economy is going to recover. I'm not an economist, but definitely, I read things, we work with Tarek and we work with economists and people like you to understand a little bit more what's going on. And we subscribe to that thesis that it's going to be a U-shaped curve. And the question is how deep that U is and then how far apart the 2 sides of the Us are. And when I think about that and the implication to 2021 more than 2020, we feel that this is an opportunity, an opportunity to accelerate our transformation and be able to do the hard things that normally, sometimes, you can do in normal times and therefore, take advantage of a very unfortunate event obviously to accelerate our strategy, which is to deliver long-term, sustainable, profitable growth by one hand, obviously, we've got to continue to improve our core businesses, particularly Compute, as you know, because we speak about this quite a bit, and there is an element of transformation in that space. Obviously, double down at the edge, which we believe is a given right to play and win, and we have assets there to play and win. And the pandemic has shown us that we can do that. And then obviously, continue to be as aggressive as possible to make everything we're doing in our company available as a service. And in doing so, we learn from HPE Next, there are certain things we can go and do to continue to drive efficiency, obviously rescale OpEx in the right place and then reallocate resources in the future areas of growth. And that's one step. And the second step is because a lot of hard work has taken place through HPE Next, which as you recall was rearchitecting processes, modernizing IT, now we can start digitizing on that new foundation, this new customer engagement models. And so while in the eye, obviously, the stakes are large in our restructuring, obviously, the pandemic has created a challenge. But as I think about what's going on and the amount of uncertainty we all live in, I felt with the team, let's double down, go harder at this problem because we want to become stronger on the other hand. And then we learned quite a bit, Toni, on the 2008, 2009. And honestly, I think in 2008, 2009, we, at the time, were obviously a different company. We made a couple of mistakes. But in the end, you learn from it, and that's where you double down on R&D, too.

Right. Now I mean, historically, IT spending has been pretty correlated with GDP growth. And we saw that in spades in the Great Financial Crisis. And forecasts for GDP growth are very weak for this year. Why would this time be any different? And despite the fact that it seems like you haven't seen a material change in demand, why shouldn't we expect a material change in demand if global GDP and corporate earnings are lower? And why shouldn't we see kind of a commensurate pressure on your business as we did during the financial crisis? Like, do you have an estimate, like what do you think IT spending will grow in 2020, just IT spending in general?

I'm not futuristic. And obviously, we rely, like everybody else, on the analysts that track markets and GDP. You're absolutely right. And obviously, GDP is going to be challenged in the next 12, 18 months here. And again, I'm not saying I'm optimistic on demand. I'm saying what we have -- saw through the Q2 was steady intake of what we were planning for. And so far, so good. But in the end, it will take time to recover where we were in -- particularly in previous times. So I think, for me, it's more about why we think the evolution of IT will continue to be solid, is the fact that, number one, data continue to explode. And we talked, I think, about this before, data is not created in the cloud. It's created here where we work. And look, I am in a virtual call with a lot of investors on the line, that's the edge, right? So -- and fundamentally, we believe that's a big opportunity. Second is the digital transformation will accelerate. I think what we talked about, what the enterprise of the future will look like? I said it will be edge-centric, cloud-enabled and data-driven. Well, I guess that's the reality, right? We're going to live in a much larger distributed model where ubiquitous connectivity will be essential like water and electricity. It has to be secure. Therefore, security is a big aspect of that. And then the cloud, as we know it, is not just a destination, call it the public cloud or on-prem. It's an experience that has to traverse from the edge to the cloud. And therefore, the cloud has to move much, much closer to the edge. And then last but not least, you got to drive outcome from the data. And we see AI and machine learning obviously as the techniques to accelerate those outcomes, and we have interesting solutions in that space. And that's where I think customers are going to step back and look at this and look at the implication to the workforce. Because, obviously, I made a point last week that we believe at least 50% of our employees were not going to come back to the office ever because fundamentally, there is a way to drive productivity with the digital tools we have and ultimately streamline the company from the global real estate and use the real estate in a very different way than we have done it before. So these are all things -- themes that we see. Interesting enough, yesterday, I was at The World Economic Forum with another 20 CEOs, where we were debating what the future look like. But everybody agreed, one element of this will be essential is IT resiliency. Because, obviously, as you know, we're talking before here, making sure that everything works for this call, it is going to be essential. And I think that will drive interesting opportunities and demand, but it comes down to simplicity and cost.

Now Antonio, just before we leave this quarter and the restructuring plan, some people speculated, "Oh, they didn't say anything about May. This was in reaction to demand weakening in May that they held on through April. They saw May got worse, and they're sort of planning for the worst, hoping for the better." Can you confirm that the restructuring was not a result of a materially different demand profile in May relative to what you saw during Q2?

Yes. I think -- I mean, it has nothing to do with May. It had to do with how we see the world and the opportunity in the next 18 months, 2 to 3 years out. And again, I go back to what I said. Obviously, when you have this level of revenues and understand it will take time to recover, whether it's backlog and eventually pivoting the company, you've got to take action. And I feel time is of the essence. Things don't get better with time, but I also saw it as an opportunity, Toni, to move faster.

Okay. Now one of the things that we hear about HPE is, yes, you espouse a hybrid cloud world. But workloads are moving to the public cloud. And that's not an area you really play in. Your server sales to hyperscalers are almost 0 by design now. You've taken that down. And we've done our own math that sort of says, "Look, over the next 5 or 10 years, cloud revenues might grow at 20% a year, and on-premise revenues will decelerate from 2%, 3%, 4% growth to 0 or below." And so how do you respond to the fact that HPE is really an on-premise player and where the growth is, it's kind of like the server market, the growth is all in hyperscalers, but that's not something by design you're choosing to play with? Your end market is really an on-premise market. And I think a lot of forecasts expect the on-premise market to actually decelerate and get negative. So how do you respond to that, that you're not a victim of cloud shift?

I mean that is undeniable that, obviously, the public cloud will continue to grow. That's no question here. And -- but at the same time, not all workloads are created equal. And I said, and by the way, we said this many years ago, the world will be hybrid. And fundamentally, hybrid is not on-prem and off-prem, it's edge to the cloud. Okay? And I think that's quite interesting to see. We -- to your point, in 2017, we said, "You know what? This is not accretive to the company. It's a bunch of revenue, which is interesting, but it's not accretive to the company." We vacated the Tier 1 space, as we call it, which was selling very low-margin servers to the big cloud providers. And instead, we pivoted the company to what we call the value side of our house. And in that, there are significant pockets of growth driven by the workloads. So a great example of that obviously is high-performance computing. And you saw us taking deliberate actions to strengthen that portfolio. And we have a pretty interesting backlog of awarded business that we have to deliver over the next 2 to 3 years and in excess of $2 billion just on that business. And then I think about the architectures of the futures with things like hyperconverged or distributor hyperconverged, where our software and our infrastructure, which is a server, by the way, also will drive growth. But in the end, it's going to come down on how we deliver that as-a-service experience from the edge to cloud, where the public cloud is a component of it. Because what customers are telling me is, on one hand, I don't want to be in the data center. On the other hand, I don't want to be in the RAN business. But the world has gotten way more complex for them. Unless you put 100% of everything you do, Toni, in the public cloud, you're not going to do that, and we know that. And by the way, in our hpe.com, you can see a wonderful set of use cases called the digital game changers. You can go see the use cases or what customers are really doing. But in that, we can bring the RAN experience in a simple to deploy and manage and in a cost-effective way and pay as you go because we have the software capabilities. It's not a financial engineering thing. It's a true software-enabled capability to be able to bring the true hybrid experience. Now obviously, as you go through this, there is the peaks, the valleys, right? So we know certain things will go on, and certain things will go high. And that's the transition we are on. But ultimately, we need to deliver the lowest cost per workload for compute on-prem, all the way to the edge, and we need to bring the cloud experience and everything we do and obviously bring that data intelligence into it. And ultimately, that's why we said we want to be the edge-to-cloud platform-as-a-service company that's open, intelligent, autonomous and secure.

Now Antonio, this is a Pigeonhole question, but it says, even excluding Tier 1 and hyperscale, HPE has lost server share over the last several years. And I think that's correct. I think we've looked at it, traditional servers, ex hyperscale revenue and units, and HPE has lost share. So then the question is, what has gone wrong? And why do you expect this to change?

Yes. So a couple of things on that. In at least the last quarter, which was the calendar Q4, we actually gained 1.4 points of share. But in general, I agree with the team, also because remember, in China, we have a unique situation, right, which basically says we cannot recognize their server share in China because of our minority. So while we can sell the H3C, also recognize their server share, the tracker says, while HPE includes H3C, but we go underneath and do the compare, actually, it does not include those share numbers. So obviously, for us, it's understandable. We got that. It's just the way things work. But obviously, it brings other benefits from the EPS perspective, which ultimately is way more profitable than recognizing share. And for us to continue to gain share, it comes down to really 2 buckets. One is win this bubble in the hyperconverged space, which is the server share, even though it's sold as a storage. Number two, obviously, continue to grow HPC. And number three is also continue to grow the cloud aspect, not the large ones, but the SaaS players, where we have an ability to continue to grow there as well. And then in the true value, value categories, we tend to do very well because we have unique systems like in memory, computing or composable infrastructure that no one else has in the market. And in enterprise, I will argue, if you look at one share as a total, it's one thing. But if you look at the enterprise versus [ MD ] and versus the cloud segments, it's a whole different story. In some cases, we're way stronger than others.

Right. So your contention is if you were able to adjust for H3C, given that you sell revenues, that you sell them and you recognize that revenue in the form of your equity investment, that you were -- that on an apples-to-apples basis, your share would be more confident towards that?

Yes. Yes. But it's not a question in the last 3 years we lost share in total. But obviously, we have a lot of puts and takes. And I always say, Toni, when you're explaining, you're losing. But the problem is the way the tracker works is complicated. And this is where I always tend to look at, if you look at revenue share, it's one thing. If you look at unit share, it's another thing. And these dynamics play. And then if you look at profit share, we are actually, by far, the biggest profit share in servers because the way we drive the mix. So it's a question of do you want share for the sake of share? Or you want profitable share? And I always said, since the beginning, we are pursuing profitable share, which is going to drive cash flow.

Right. Well, is it -- I guess the broader question is, is it realistic to believe HPE can grow? I think if we look back to 2016, revenue was $30 billion. Last year, 2019, it was $29 billion, and there was some pretty substantial M&A in there. And so the organic revenue base has declined over the last 4 years. And there have been pockets of growth, as you've highlighted. And so I guess the question is, if you are focused on profitable growth, and these are challenging end markets, the compute market, in particular, is very challenging, is it really realistic to think that the top line can grow? And obviously, putting aside this year, why is that different?

Yes. I mean if you go back to 2018, we actually grew the company 6% in constant currency. And last year was a small decline. But in 2 years, actually, we grew the company. And again, we obviously have 48% of the business aligned to the Compute business. And as you know, there is -- commodity prices plays a huge role. But as I think about the next generation of servers that are coming in with the generation 10.5 and generation 11, we're going to see another structural improvement on the average unit price of the servers because of the amount of attach we're going to drive in the systems. And therefore, one thing is unit growth and one thing is revenue growth. I think we can grow revenue in 2021, also because this year is so depressed anyway. And then second is continue to grow that edge business. But obviously, we got to make sure the Compute business is stable and improving from there and then continue to grow the recurring revenue side, which obviously is incredibly profitable for us, and then use the Compute as a way to drive that, not just as a way to compete just for the Compute for the sake of Compute.

So Antonio, if I shift gears just a little bit, does this industry need to consolidate? And is HPE a consolidator or a consolidatee?

I mean, obviously, we will see what happens from here. Obviously, there is always opportunities for drive consolidation. We have done some of that ourselves, right? We have been a consolidator of things like Nimble or SimpliVity or Cray, obviously, SGI. But again, we have to do it in the context of our capital allocation and what is the best return eventually for our shareholders. And also, if this makes sense for customers because you can't just look at this financially, right, just consolidating things, and in the end, it's just a financial transaction, maybe a short-term opportunity. But in the end, it's how we continue to position HPE for the long term. And this is where we talked about 2 things. One is, we are incredible, committed to credit rating. So that's off the question. We continue to do that. Second is to apply our very strong diligence on return on invested capital, and we have shown that throughout the last few years. I have done 15 acquisitions in the last 5 years. I was the one that did Aruba with Meg, but it was under my business unit at the time, and have proven to be accretive. They have to be transformative in many ways. And obviously, it takes time. And then last but not least, obviously, is the fact that as I think about acquisitions, we need to think about how we continue to transform the portfolio because ultimately, you have to look at this from a both short-term and long-term perspective. We believe our strategy is right, as also takes an enormous amount of work. But in the long term, we believe the strategy is right. And we will continue to assess what's available there, Toni. But we have been very committed and disciplined about this.

Now if we just think about priorities for capital, you've suspended the buyback for now. You've retained the dividend, which is -- cost you about $600 million a year in terms of your cash flow. You've said you will -- in the past, you'll return 50% to 75% of your free cash flow to investors, and you've done that and generally done more. So how do we think about that capital return framework now? Should we still be thinking of 50% to 75% of free cash flow in total being returned?

Yes. So that's exactly what we said last October at the Securities Analyst Meeting, right, that we had in New York. And as you saw, we paid the dividend for Q3, and we will assess in Q4. But our goal is to continue to pay the dividend. And the share buyback we suspended because it makes sense at this point in time, considering we want to protect and improve our liquidity, which, by the way, we have $10 billion in the balance sheet, which is very, very strong, between our cash and also other vehicles that we were able to work. So for us, I think those are the themes, Toni, that's exactly right. That's where we should be. And obviously, as we go along, we will assess what is the best return for shareholders in the context of the return on invested capital and continue to position the company the right way. Because sometimes, you have to look at this is -- one thing is paying dividend, and one thing is share buyback. But potentially, it could be something transformative that will help us. But in the end, we have done the type of acquisition that makes sense, the Aruba like we talked before. And I think there are some opportunities out there. But we are committed to continue to pay the dividend at this time and stay with the down framework of the free cash flow you mentioned before.

Now does -- is reinstating your buyback a precondition for M&A?

Not necessary.

So you suspended your buyback. But if you thought you found something opportunistic tomorrow, you could go and do that.

Yes. I mean we will see. I mean, obviously, I'm not in a position to comment at this time because there is nothing in particular. But I will say, we have to evaluate this in the framework we discussed. And remember, Toni, when I became the CEO and in my first quarter announcement in February 2018, I committed that we will have returned $7 billion to shareholders, and we delivered exactly $7 billion between share repurchases and buybacks. And in October, exactly what you said, that we have done that. Obviously, the pandemic has changed quite a bit of things. We feel paying the dividend is important, and then suspending the buyback was the right thing to do, until this uncertainty goes away. And then continue to use the framework to assess what is best for shareholders and continue to position the company long term.

Well, I think investors' sense was in the fall, particularly, Tarek and you were a bit more expressive about the willingness to do M&A. I think the notion was, we've made good headway with HPE Next. We've got ourselves in kind of the right position. And there was a sense that, that was something that was an important priority. So it sounds like M&A is still an important priority for you when the conditions are there. And is it -- is there any limit to what size deal you would do? So I know Aruba was $2 billion, $3 billion, and you hold that up as an example. But would you do a deal that's $5 billion or more? Is that on the table if it met your strategic criteria?

Right. Yes. So M&A is absolutely important. It's one of the tools. And again, I mentioned before, I have done 15 of them and was very proud with incredible discipline. For us, we -- I actually like the one asset that obviously generally are accretive either at the beginning or soon after that, that bring intellectual property and talent to the organization. And generally, those values are lower than the numbers you quoted because you have to find the right vision, that they are commonly aligned, the right strategy that are commonly aligned. And at this point in time, I will say we tend to be in the Aruba-like type of path at this point in time, which I believe there are some opportunities. But obviously, you've got to drive it the right way. I don't see anything in the horizon that we say, "Wow, this is a big thing." Don't consider any of that at this point in time.

And then just on cash flow. I think the aspiration of $2 billion in cash flow has sort of been the target. And if you adjust for financing receivables, you basically hit that last year. But now you've announced -- obviously, results will be pressured this year from the pandemic.

Yes.

And you've announced a big restructuring, which is going to have charges for the next 3 years.

Correct.

So how do we think about free cash flow relative to net income over time? And over the next 3 years, why shouldn't we be expecting free cash flow to be notably below net income?

Yes. I mean let me comment. Last year, actually, we exceeded our goal about financial receivables. But remember, we had to pay $665 million on an arbitration, which was a onetime event. Unfortunately, that happened. But if you -- to be fair, if you consider that and exclude some onetime real estate sales, so it goes both ways, right? Actually, we hit $2 billion and we did that in 2 years' time. Obviously, this year is totally different. And obviously, we made the strategic decision to go faster in some areas to rearchitect certain things. But bottom line, when I think about our ability to generate cash flow from operations, it's very strong. Right now, we have a timing issue and a working capital transition, as we discussed before, with the inventory. And so I think this is going to take a handful of quarters to level up and take care of itself. But generally, you always made the point, "Antonio, well, if you make this much profit, why the cash flow doesn't follow?" And there is the capital -- the working capital, and the main goes on CapEx expenses but generally are minimal. So normally, it will be one-on-one but not exactly. Maybe it's a 10%, 20% deviation from there on. But I think over time, it will level up itself, Toni. I think for us, obviously, 2021 is going to be about executing against the market opportunity, deliver the gross margin levels that we committed to ourselves. And as you recall, up to the last quarter, we were expanding margins all the time. And even this quarter, we were kind of flattish 20 basis points only year-over-year despite the issue. So for us, cash is all tied to the transformation we're going to drive obviously in OpEx and allocating resources in the right place. And then obviously, work this working capital timing issue, which obviously right now is a challenge in the short term. And as soon as we clear that inventory, we go to normal, it should get all leveled out on the free cash flow, too.

Right. But I guess, you're right. I do subscribe to the belief that most hardware companies should have cash flow relatively equal to net income. But the exception is if you have significant ongoing charges and you had HPE Next, which triggered a lot of charges, you had the integration. And now you have another HPE Next, which is going to trigger $1 billion-plus in charges over the next 3 years. So if HPE is a perennial restructurer, then why isn't free cash flow sort of structurally lower than net income going forward?

Well, let's take last year, right, Toni. And again, not every year is all the same. But last year, we had expenses for HPE Next, and we still delivered the free cash flow, right? And we have always opportunities to do things in a certain way and whether it's payment terms and all these things we normally do to manage this working capital. But I think, over time, it should be all level up. I just cannot tell you exactly the time. And by the way, we shared, though, with you and everyone last week what the timing of these expenses are, of the $1 billion you talked about it, which is $300 million, then it's not linear, right, $400 million. So in the grand scheme of things, yes, it's an impact on cash flow, but it's not the previous restructuring we have had here. And a lot of this also is done internally for ourselves. So I think I just want to get through the next 2 quarters. And hopefully, by the end of the year, when we get together, we get a much clearer view because right now, there's so much uncertainty, and I need to get a better understanding. And obviously, my hands are on it as we get through this working capital challenge we have in the short term.

Okay. So just to conclude, we're asking kind of the same question to all CEOs, which is, as you think through and beyond the pandemic, how do you expect your priorities to shift, especially as they relate to cutting costs or increasing levels of investment?

Yes. So first priority, obviously, is to focus on that execution, right? So now you have to execute even better than before. And remember, when I became CEO, I had 3 priorities. One was customers and partners, two was innovation, three was the culture of the company. And I will argue, we made very good progress on the 3 of them. One area I'm incredibly proud is the culture of the company. We have an enormous amount of positive feedback from employees. Even announcing last week, I have to tell you the feedback from employees has been amazing. "We like the fact that you are direct and transparent with us, the empathy to do this the right way." And it's just -- it's mind-blowing to me sometimes because this company is incredibly resilient. This brand has an incredible cachet. And obviously, what we do really matter for our customers. So one aspect of that is execution, and culture goes with it. Second is accelerate the innovation, Toni, because, as I said earlier, the learning I have from the 2008, 2009 is that -- and you can see these charts in the past, is that you don't want to penalize R&D. In this aspect, R&D, you actually want to go faster. R&D is absolutely a top priority. But obviously, you want to make the rest of the company way more efficient. So for us, double down R&D and double down on the things that will drive the long-term sustainable, profitable growth. And then obviously, how this workforce is going to work in the future, right? I think, fundamentally, it's going to change quite dramatically. And I have seen in the last 8 weeks an incredible amount of productivity, to be honest with you. I see the real estate footprint that we're going to have a totally different place. You have a picture of my headquarters here, but it's going to change. It's going to be more a collaborative, innovative place than just coming in and do your work every day. And so those are -- will be the key areas. And then ultimately, continue to be smart about the capital allocation, right, because in the short term, whatever decision we make there will have implications in the long term as well. So those are, in my view, the key priorities. But really, it's going to come down to operational excellence and execution while you keep doubling down on R&D going forward.

Great. Well, Antonio, thanks very much for your support of the Bernstein Strategic Decisions Conference. As a reminder to participants, you can click on the Procensus poll to provide your feedback. Thanks again for doing this, Antonio, and hope to be able to speak some Italian with you in person next time we get together.

Yes. Okay.

[Foreign Language]

Thank you. [Foreign Language] Thank you very much.