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

Okay. We are live. And hello there, everyone, and thank you so much for joining us. My name is Jim Suva. I'm the IT hardware and tech supply chain analyst here at Citigroup Investment Research. This fireside chat is with Hewlett Packard Enterprise, stock ticker HPE. Vishal Lall is joining us. He's the Chief Operating Officer of the Intelligent Edge business. I do want to start things off by talking about, first of all, please see Hewlett Packard Enterprise Investor Relations site where they have their harbor statements, which refer to risks and uncertainties as well as forward-looking statements. We do note also that the company has a lot of SEC filing documents on that. Citigroup Investment Research also has disclosures that are accompanying this. And if you're a MiFID II investor, please make sure, our client in the MiFID II regions, that you have those agreements in place. Media and press are expected and asked to politely disconnect. This is not for media and press. This is for institutional investors only. So I want to set that stage. And then I want to introduce Vishal Lall, the Chief Operating Officer of the Intelligent Edge business. So we're going to keep this discussion around Intelligent Edge. But Vishal, to start things off a little bit, can you give us a little bit of background about yourself, first, before we start talking about Intelligent Edge items?

Absolutely, Jim. First of all, thank you for having me here. I'm excited to be here at this fireside chat, and good evening, everybody. My background, I've been at HPE for a few years now. I started at HPE back in 2012, so 8 years ago. Time has just gone by. And before I started at Aruba about 6 or 7 quarters ago, I was the Chief Strategy Officer at HPE. So I ran strategy for the company, working very closely with our CEOs, Meg Whitman first and then with Antonio Neri. And I've been in this new role, which is the COO of the Intelligent Edge business, now for 6 or 7 quarters.

Well, that's great. It's interesting. You have a long history with -- working with Hewlett Packard Enterprise and their leaders, as am I. I've been doing this job for decades.

Vishal, can we talk a little bit about, for those who aren't that familiar with what Intelligent Edge for the segment of Hewlett Packard Enterprise, maybe some real-life examples so that people can actually, in their mind, envision and embrace what these Intelligent Edge segment and examples are and what you're doing.

Yes. No, thanks, Jim. Thanks for the question. I'll give you a little bit of history in terms of kind of how we got started. So we got started at this segment, we broke this segment out about a couple of years ago, maybe a little bit longer than that, as we were looking at the overall strategy of the company. And we basically said, "Hey, there's a set of data center and cloud technologies, and then there is a set of technologies outside of the core data center that are going to get more important as we move forward." And that was kind of early on, right after the -- we had acquired Aruba as 1 of the 4 tenants of that particular segment of the market. And that's kind of how we got started. And then really, the easiest way to think about the Intelligent Edge is a set of technologies that enable experiences -- let's say, experiences as well as business outcomes outside of the core data center. So think of technologies, to your question -- to your point, Jim, in terms of specific examples. So things of -- think of technologies that power an office campus, a hospital, a stadium, a factory, a cruise ship. So things of that nature basically where compute, connectivity, security sector come together at the edge outside of where the core data center is. And the reason I said experiences and business outcomes are both important because they come together very, very interestingly and very meaningfully at the Intelligent Edge. So when I say experiences, think of how an end user, whether it's a customer or a guest or an employee, interacting with technology. So think of a guest checking into a hotel kind of experience around that or a fan enjoying a game in the stadium, right? Think about the experience around that. And business outcome, as we all know, is equally important because that's what drives the ROI and [ new ] business case for new technology. And in terms of the Intelligent Edge, it takes on more meaning because things like uptime in a factory, uptime in a fast-food store, they're all relevant and they're directly connected to that. So that's kind of how we think about Intelligent Edge, and that's how we pulled it together in terms of a segment. And really there are 4 attributes that define -- 4 technology attributes that define Intelligent Edge. There's connectivity. There is security. There's an analysis of the data that is generated at the edge, and there's autonomous operations. And I'll get at this a little bit more, right? Connectivity is foundational. And as you know, we are -- that's been a core strength of ours with wireless, with wired technologies, also new types of connectivity technologies, Bluetooth, ZigBee, et cetera. LTE 5G, another element of technology. So connectivity is foundational because it's all about connecting devices and users at the edge. Second is security. And also visibility, right, because device visibility is very important at the edge. And again, these are -- processing happens outside of the 4 data centers, outside of the firewall environment. So security becomes absolutely paramount in this world. And then the third is the value that comes from analysis of the data, right, because you are just analyzing tons and tons of data. Think of whether it's data from a machine in a factory or a jet engine in flight. There's a ton of data that gets generated, and there's where technologies, such as machine learning, [ come into play ] . And then finally, the edge needs to be autonomous. What do I mean by that? What I mean is you can't always rely on connectivity back into the cloud or into a data center for mission-critical scenarios. Think of a store, right, like a fast-food store. Again, I mean, at some point, if you lose connectivity to the cloud, you just can't stop serving your customers. So again, these operations need to be autonomous, and that's a critical element of how we define the Intelligent Edge. So in summary, that's kind of how we think about Intelligent Edge and kind of -- I just wanted to give you some history of how we thought about the segment and why we broke it out as a segment as part of the company.

And ballpark, is my memory correct, you're about 10% of total Hewlett Packard Enterprise? Am I right on that?

That's approximately correct, Jim, a little bit -- a lot higher than that. But yes, we are about a $3 billion segment.

Okay. Got you. Who are your primary competitors that you typically may go head-to-head with against in the marketplace out there in the world?

So here's kind of how I would answer that question, right? There's a set of traditional customers that are -- that we directly compete against day in and day out today, and then there are a set of customers where we see competition in the future. So if you look at it today, it's Cisco, it's Arista, it's Juniper, it's Meraki -- Cisco Meraki, right, companies like that, Extreme, RUCKUS, right? So those are all kind of connectivity companies. That's where -- whom we compete against today because the bulk of our revenues are there. As you look at the vision going forward, which is more IoT, connected devices, more analytics at the edge, right, so there's -- that competitive set is much less defined, right? So there are companies like the ones I just spoke about, other infrastructure companies. Cloud companies are also trying to access that space. There's a whole bunch of start-ups. So much more muddy in terms of the competitive landscape there, but also gives a lot more opportunities for a new emerging vendor. So that's kind of how we think about the space. There's a set of competitors we compete against today and a bunch of emerging companies in a less defined space where we think competition happens 3 or 5 years out.

Now normally, we would be having this discussion, you and I, on stage in New York in front of hundreds of people. But I'm doing it from my home office, and it looks like you're doing the same. And my children are doing remote education. Can you help talk to us a little bit about on one hand, we have remote-from-home learning, remote-from-home working, yet IT budgets seem to be pressured as companies work their way through coronavirus. Can you help me kind of reconcile or talk about these opposing dynamics and the impact on your segment.

Yes. Absolutely. So let me pick it up this way, Jim, right? I mean if you look at the past many years, and again, I'm kind of thinking -- talking from my old strategy hat as well here for a second, there's always been pressure on CIO budgets, right? But -- and exactly to your point, it's just become much tougher in the COVID world as enterprises are getting much more conservative and have become much more conservative in this setting, right? But that being said, if we look at the past few quarters now, right, customers are rebalancing budgets within their envelope to spend on customer and employee experience, right? So when COVID started, we got a tremendous amount of demand for enabling exactly these home offices, right? So we have these products which enable -- we basically bring the corporate network to an employee's home, and we saw a tremendous amount of demand around that type of technology. As we go forward, what we are starting to see is demand for areas like micro branches. So think of a bank, right, retail bank. Every branch -- if employees start working from home, the banks want security all the way into -- and connectivity all the way into an employee's home. So we are starting to think about what that means. I mean we are basically calling it a micro branch architecture. I'll get into an acquisition that we are working on in just a second just to illustrate that point more. But then also, what I'll say is as we kind of look at the response to COVID, right, the impact varies by customer segment, by industry, by geography, right? So camp like offices where you and I work on a day-to-day basis is one segment, right? But there's a whole bunch of other industries in which people still go to work, right? Think of manufacturing, think of health care, right? So again, those are -- there's a different set of dynamics that we are starting to -- that are playing out in financial services, public sector, health care, et cetera. However, whether it's offices like ours where people are working from home, we are selling them remote working solutions. But at the same time, what we are seeing is a set of -- a different set of dynamics at play by country, by customer segment. And then certain countries are getting more impacted by COVID, certain countries are back. I mean if you go look at Europe or certain parts of Asia, people are back in the offices, right? Spending has picked up again. So again, the dynamics vary quite a bit based on industry, based on customer segment, based on the geography, right? But again, overall, we feel that we are very well positioned whether people want to work from home or remotely. We have micro branch type solutions. And then for our customers who are in their facilities, whether it's a manufacturing facility, a health care facility, et cetera, we are seeing -- we're seeing pretty good demand there. And actually, in certain ways, I think we are starting to see some rebound in demand happen as we speak right now.

And are there differences that you see from like enterprise or larger companies and the small and mid-sized IT budgets, whether it be now or the spending trend that you look out for the next 1 to 3 years?

Yes. I think there is a difference, right? SMB has definitely been more impacted by COVID, right? And though we have seen some strength in the segment over the past couple of quarters, they are under more pressure. And -- however, I feel optimistic about the prospect and the medium to long term for SMB spending as well because, I mean, I don't know if you know or not, but pre-COVID, SMB was growing at a pretty good clip and was somewhat outpacing enterprise. And we expect that growth trajectory to come back. And specifically for the SMB, I mean, we've actually launched a set of products in the last, I would say, 18 months or so. There's a brand called Instant On that is very focused on the SMB segment. And again, in the March, April time frame when we first got hit by COVID, we were expecting that market to suffer more than it did. I think it's been -- definitely had an impact, but it's been less than what we thought it was going to be. So enterprise, we feel, is going to come back faster. We see SMB -- we believe SMB -- it will take a little bit longer for SMB to come back, but we are definitely seeing some strength in that market [indiscernible].

Let's take this now, next question, about concerns and excitement as you look ahead. Maybe let's first start with concerns since I feel like a lot of 2020 has been trade wars, can't ship to certain customers, pandemic, wear your face masks, no handshaking. Let's start with concerns. So what's your most concerns? And then once you rattle off your list and talk about some of those, we'll talk about what gets you most excited.

I mean you kind of -- the concerns have changed over time, right? At the beginning of the -- right after Chinese New Year, our concern was supply, right? As you rightly pointed out, it was the [ supply ] sector that came back pretty quickly. Right now, those things are pretty stable. I think the biggest concern that, at least, I personally have is just the macroeconomic, right, if the macroeconomic climate is the impact of COVID and how depressed enterprise spending on IT will be because of COVID. So that's, in my opinion, the biggest concern.

Opportunities. I want to be a positive looking-forward guy as you look ahead. And at some point, we'll get to have a nice coffee and tea and sit down together and talk in person. But what are the opportunities as you look ahead as you're working from home as am I?

Yes. So I think -- I mean, we look at it this way, right? I mean leave the macroeconomic alone for a while. I mean it will do what [ we think it will ] do. But as we look at it from a perspective of how we stand, so I mean, there are a few things that make us feel very good, right? And again, we saw a lot of these trends in the early part of the year, in our Q1, which started in November of last year, and number one, being just the product portfolio, right, that we have. We are very innovative, very differentiated. And in multiple analyst firms, right, whether you take a Gartner or a Forrester or an IDC, they all rate us and Aruba technologies, the Intelligent Edge, HPE Technology as the leading technologies, right, on their respective competitive [ map ]. So products like AirWave, Aruba Edge Services Platform, which is a cloud data platform, our recently launched CX switching platform are rated very, very high. So we feel very good about that, right? We are considered an innovative company with a differentiated portfolio. And which basically what that means is it drives high gross margin side, which are good for us, good for our investors. And then very few vendors provide full portfolio that we do, right, all the way from wireless to switching, data center campus. And then we just announced recently wide area network -- a software-defined wide area network company called Silver Peak that we will be acquiring. So again, that -- the portfolio that we have is better than what we have ever had. So I think that makes us feel good. And then from an industry perspective, we are very well-known in terms of being a very customer-centric company. And we have this mantra called customer first, customer last, which is just being all about the customer. So that's been a differentiator for Aruba for -- and the Intelligent Edge segment for a while. That serves us quite well. And the last thing I would say is in the last 18 months or so, we've really strengthened our execution capabilities. So -- which is now starting to pay dividends. We've gained some share as we -- since the start of the year, which is good, even in a market that has gotten hit by COVID. So overall, I mean, we feel good about how we are positioned. The market size is good. The opportunity in front of us is good, right? We target about a $40 billion TAM, right? And like, we are about $3 billion. So a lot of headroom for us, right, to grow. So a lot of opportunities. I think we are very well positioned. I think the one x factor is macroeconomic. But again, I think we are starting to see some strength, specifically in some segments like I mentioned earlier and some geos, which are coming back. So we feel good overall the way we are positioned right now, Jim.

I do look at your reported segment, which your Investor Relations gives details of, and I'm not sure that the July reported quarter is indicative of a normal world or a normal environment given coronavirus and all. So whether you address the next question about your year-over-year growth rates that you've been seeing, whether you look at this quarter or maybe a trailing full quarters or whatever, can you talk about which segments within your reporting segment or products have been growing and which one are kind of under pressure? Because of course, this quarter had coronavirus. But if we look back the past several quarters, it looks like in total sales, it's seen some pressure.

Yes. So I think there's a -- let me start a little -- going back a bit, Jim, right? So back in 2019, we had some execution issues, specifically in the North America segment, right? And then when I first came on board, that was when we were -- we actually changed the complete execution of that segment. We changed the way we go to market there, changed some leadership. And all of a sudden, we are starting to see really good return from that particular segment. So that segment had declined double digits. In the last 3 quarters, we have seen growth back in that segment despite COVID, right? So that tells you that execution was an issue there, which we have fixed, and we are starting to see the benefits of that, right? Especially in Q1 this year before COVID, we saw fantastic results from that segment -- from that particular part of our business. And then as we go forward, right, if you look at the early part of the year before COVID hit, we were growing. We were growing pretty well. And then again, in the last reported -- in the first couple of quarters, we grew. We took some share. In the last quarter, again, we've declined year-over-year, about 10%, 11%. Quarter-over-quarter, we sequentially grew, but that was pretty much in line with the market. So if you look at the market, it declined somewhere between 11 and 14 points, quite impacted by COVID, right? But again, these are segments that have had historical growth. And as we go forward, both switching and wireless LAN, we expect them to grow in the single-digit range over the next 2, 3 years easily. And especially, we may get some strength and -- with low compares as we come out of COVID. So my point being is if you look at the market, it's a single-digit growth market. We've taken some share recently. I think we are well positioned to grow faster than the market, and that's how we are approaching the market as we go into the fourth quarter of our fiscal and then the next fiscal year.

Can we talk a little bit about Silver Peak? Explain to those on the line what that acquisition is all about, the investors on the reason for this strategic acquisition and dig into this a little bit.

Yes. Sure. So thanks, Jim. Silver Peak is a significant acquisition for us, right, and we're excited about it. I mean as we announced, it's over $130 million in revenue. We are paying about $925 million for it. So a large acquisition, probably the largest that we've done at the Intelligent Edge segment. And this is focused on the SD-WAN, the software-defined wide area network, sector, which is what Silver Peak does. And Silver Peak is a leader. If you look at the Magic Quadrant, they're positioned as 1 of the 2 leaders in that -- for the entire market. So what we wanted to do was buy somebody at scale at, who was a leader, would really make a difference to our overall portfolio as well as more. And then in terms of what Silver Peak does, right, so one of the -- as I earlier discussed, right, applications and data are moving to the edge. And for that, you need secure connectivity from edge locations, whether it's offices, whether it's stores, et cetera, into the cloud, right? And earlier, what companies would do, they would build dedicated circuits, right, leased lines, what you call MPLS circuits, back in -- from every location back into their offices. And what SD-WAN does is it has a software-defined architecture where it actually goes over the internet. So -- and creates a secure connectivity between branch locations, stores, offices, factories, et cetera, back into the cloud, right? And so what it does is it's faster, it's self-driving and automated architecture. And it drives significantly lower TCOs for companies, right? And today, I mean, if you look at the size of the market, billions, tens of billions of dollars are spent on these circuits. And so that's the market opportunity in front of us with SD-WAN. The market is early. It's growing somewhere around the 20% bar. Right now, that market is about $2 billion or so, expected to grow to $5 billion very fast. So a big opportunity in front of us, right? And so the momentum is pretty strong, and that's kind of one of the reasons we went after that particular market because it's an adjacent -- very close adjacency to what we do, and it's a product and a solution that can be carried and combined with our solutions by our sales force. So net-net, that's kind of why we went after that market. So we are very excited about that. It strengthens our edge-to-cloud strategy. It is a large growing market. There is a very clear business case around TCO for customers as well as flexibility and automation, right? And we're feeling good about this particular acquisition, will be closed in -- sometime in this month. So it should be done pretty soon. And again, like I said, financially, it's $100-plus million fast-growing company. So it will make an impact to our financials as well.

And when you mentioned -- I believe you said that you think your segment can grow ballpark, I think you said low single digits like 3%. Does that include Silver Peak excluded? Or is it just Silver Peak's so small, it doesn't move that number at all?

No, Jim, I was talking about the market growth, right? I was talking about a 3 -- single -- low single digits is what we expect the market to do. Of course, we want to grow faster than the market, right? So of course, we'll be growing faster than the market. And Silver Peak will add -- it's not that small, right? It will add a point or 2 on top of our growth because it's $130 million, $150 million. It's growing relatively fast. So it does drive some growth on top.

Okay. In your segment, if we were to look out kind of pretty long term, what percent of revenues do you think your company will represent at the total company, meaning Intelligent Edge? I think it's 10%, 11%, 12% today. I assume you expect to outgrow some of the other parts of Hewlett Packard Enterprise. Is that correct?