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

Good afternoon, everyone, and thank you for joining us today. I'm Andy Simanek, VP and Head of Investor Relations, and I'd like to welcome you to the 2020 Hewlett Packard Enterprise Virtual Securities Analyst Meeting. While we'd love to be hosting you in person, we're still very pleased to connect with you virtually. We have a great lineup of presenters and content to share with you over the next couple of hours. Before we get started, I'd just like to go over some logistics and the agenda for the day. In a few moments, Antonio will kick us off to discuss our vision, strategy and the tremendous opportunity in front of us. Throughout his presentation, he will be joined by Keerti Melkote, who heads our Intelligent Edge business; Pete Ungaro, who heads up High Performance Computing; and Keith White, who heads our GreenLake cloud services business to provide additional insights into some of the most exciting areas of our portfolio. That should run us until about 1:15 p.m. Pacific Time, when we'll transition to our Chief Financial Officer, Tarek Robbiati, to discuss how we will drive long-term value creation and provide our outlook for FY '21. Then we will have each of our presenters available for a management Q&A session where we'll take live questions from analysts, which should end us around 2:15 or 2:30 p.m. Pacific. We will publish all of the materials shared today after the end of Tarek's presentation. The materials will be posted on HPE's Investor Relations website at hpe.com/investors/SAM2020. Also, a replay of this webcast will be made available shortly after completion and will be available for approximately 1 year on the IR webpage. And lastly, the disclosures. This event may include forward-looking statements involving risks, estimates and assumptions. HPE assumes no obligation to update such estimates. So with that, let's get started with a quick video on why we are invested in HPE. [Presentation]

Good afternoon. I hope you and your family are healthy and safe. We obviously will prefer to be hosting you on the floor of the New York Exchange. But instead, we welcome you to our first-ever virtual securities analyst meeting. We are broadcasting live from San Jose, California, observing the social distancing and health protocols established by the Santa Clara County. The world as we knew it less than a year ago is vastly different. 2020 has tested global markets, customers, employees and all of us in ways we could have never imagined. The pandemic has created lasting and permanent changes in the way we operate. I am tremendously proud of HPE's response in this unprecedented time. And as you will hear today, we believe HPE is very well positioned to help customers transform and digitize their businesses to adapt and operate in the new world. Last year at SAM, I detailed the steps HPE has taken to lay the foundation for the next phase of our transformation journey. I introduced our edge-to-cloud Platform as a Service vision to address evolving customer needs and deliver long-term, sustainable, profitable growth. While the global pandemic is unlike any crisis we have ever faced. It has served as a catalyst, making digital transformation a critical and strategic priority for enterprises. We are seeing increased customer demand for secure connectivity, remote work solutions and data analytics capabilities. Enterprises now require more resilient IT to ensure continuity in their operations. They also need to increase speed and agility to better serve their employees and customers while preserving liquidity to navigate the macroeconomic uncertainty and to adapt to the new world. This is a significant opportunity for Hewlett Packard Enterprise, and this is why we are advancing our strategy by aligning resources to critical core businesses and areas of growth that accelerate our ability to meet these new increased customer needs. I am pleased with the progress we made in the last year despite very challenging circumstances. We strengthened our core capabilities and advanced our innovation agenda on many fronts. And I am convinced of several things that I plan to cover in our time together today. First, they are very compelling industry trends that we are driving the next wave of digital transformation and that presents tremendous market opportunities for HPE. Second, we already have a distinctive and industry-leading portfolio of edge-to-cloud solutions and unique capabilities that are resonating with our customers. And third, our strategic priorities will position us well to deliver long-term, sustainable, profitable growth. The pace of technology disruption continues to accelerate. Digitally native and digitally transformed companies are outpacing competition. Digital transformation is no longer an option for enterprises but a strategic imperative. Customer spend on the digital transformation technologies is expected to more than double in the next 5 years. Secure connectivity is required for digital transformation. It is critical to enabling new digital experiences and disruptive business models and empowering remote work forces. It is estimated that more than 45% of the workforce will be working remotely through 2020 and beyond, while more than 55 billion devices and things will be connected to the Internet by 2025. Two years ago, HPE defined enterprise of the future as edge-centric, cloud-enabled and data-driven. This vision has been validated by the global pandemic. The future we defined is here now. Customers now operate in a very large distributed enterprise. They need an edge-to-cloud architecture and set of technology capabilities to bridge the digital and physical worlds so they can personalize experiences for customers or provide remote connectivity to employees or digitally enable classrooms for students, but ultimately, deliver outcomes for enterprises. This personalized and automated edge experiences must be cloud connected and always secure. Data growth is the driving force for every industry that's fueled by the explosion of edge devices. But data means nothing without insight. 65% of the data is unorganized with limited usage. The world is shifting from centralized and close approaches in data centers to a future of centers of data everywhere, highly decentralized and distributed. We have moved from the information area to the age of insight. Enterprises need an intelligent and automated data fabric that can put agility and intelligence close to customer data sources. Today, more than 70% of applications and data still reside in a data center, not in a public cloud, and more applications and data are moving to the edge, the place where we live and work. That is why the world is hybrid. In fact, today, more than 90% of enterprises are using a hybrid cloud model. Customers want the agility and simplicity of the cloud-native world and the flexibility and control of a hybrid business model. We want to enable our customers to be the broker of services to their enterprise by providing access, visibility and control so they can deliver the right cloud and as-a-service experience across all their applications and data wherever they live. Last year, I committed to delivering our entire Portfolio as a Service by the end of 2022. This year, we are seeing acceleration to as-a-service models for all aspects of IT, with the on-premises as-a-service market representing one of the fastest growing. Demand for infrastructure, software and services is expected to grow from $6 billion in fiscal year 2020 to $22 billion in fiscal year 2023, at a 58% compound annual growth rate. We believe this is faster than the growth rate of the public cloud. Enterprises of all sizes are looking to digitally transform to develop next-generation, cloud-native applications, create actionable insights from the data and drive business growth, but they face many challenges including lack of in-house IT skills, limited budgets and options for financing, and the lack of flexibility to choose the technology foundation that best meets their needs. Consumption-based IT offers solution to these challenges by providing greater agility, empowering people to shift from managing infrastructure to drive an innovation by leveraging insights from their data, all while eliminating capital and operating expenses tied to infrastructure overprovisioning. Every day, you hear more companies declaring plans to offer everything as a service. But it's HPE that is distinctly differentiated in delivering a true consumption-based IT experience. We saw the opportunity early on, and we are unique in both the breadth of our solutions and approach. HPE has industry-leading software, services, infrastructure, financing and as-a-services capabilities. Our HPE Ezmeral software portfolio provides a true cloud-native stack that can address both the legacy and cloud-native environments. Our services talent and capabilities are best-in-class in delivering advisory and operational support experiences. Our infrastructure portfolio is the broadest in the market that delivers truly optimized solution for any workload. Our financing solutions are not only industry-leading in asset life cycle management and consumption-driven business models, but also industry-leading in sustainability that enables the circular economy. And finally, our as-a-service experience is year ahead of the competition, driven by early investment in our software platform and managed services capabilities, enabling HPE to provide a true consumption-based experience from the edge to the cloud for all workloads, applications and data. We have very strong differentiation in this area, which can be seen in the momentum of our HPE GreenLake cloud services bookings and in the annualized revenue run rate, or ARR, year-over-year growth. Tarek will provide more details about this in his remarks. We boldly declared last year that we are the edge-to-cloud Platform as a Service company. Our approach hinges on providing a true distributed cloud experience at the edge, in a data center, in a co-location or in the public cloud to help customers modernize and transform their applications. Over the last several months, customers have increasingly turned to HPE to ensure they have the capabilities edge-to-cloud to extract insights from critical data and to help them leverage and consume IT more flexibly as a service. And here are some examples of the outcomes we have delivered for our customers. [Presentation]

As you can see from these customer stories, each of our businesses drive critical outcomes for our customers and is essential to delivering on our strategy to deliver long-term sustainable profitable growth that will create shareholder value. Across all our HPE businesses, we are aligning resources, unlocking operating leverage and investing in growth. We are focused on transforming and stabilizing our core businesses. Our compute and storage businesses are critical to our customers, and our ability to invest in future growth. Every 60 seconds, we ship 46 terabytes of storage and 4 servers. As we drive increased performance and further cement our market leadership position in our core businesses, we'll be able to further align resources to new growth segments that will accelerate our strategy. Compute and storage are also critical components of our edge-to-cloud Platform as a Service strategy. HPE's unique and broad portfolio of core compute and storage are assets that are key to drive our competitive differentiation. We have multiple near-term growth opportunity and are doubling down on growth areas like Intelligent Edge and high-performance computing. Our acquisition of Cray and Silver Peak are great example of recent accretive value-enhancing investments that improve our competitive position and accelerate our growth in these businesses. Our pivot to offering everything as a service is a significant long-term value driver. And as we discussed earlier, we have great momentum. Every business within HPE is focused on new ways to deliver a true cloud-native experience, including our core businesses. So let me elaborate on our efforts to strengthen our core businesses. Compute is essential for our customers to process data. And we have a distinct set of priority to drive our ability to transform and optimize this business. We are focused on growing compute market share in profitable market segments. For instance, the Tier 2, Tier 3 and SaaS service providers have a growing compute market CAGR of 9% by 2023. Telcos represent another growing compute opportunity for us driven by the 5G requirements to virtualize the core network and the need to provision edge computing. This segment of the compute market has tremendous potential for us with a CAGR of 15% over the next 3 years. We are optimizing R&D and supply chain costs to drive and deliver the lower cost per compute workload. We have significant progress -- we have made significant progress this year, and we'll continue our efforts to drive offer simplification and supply chain efficiencies. We are pivoting our compute infrastructure software management also to a SaaS solution. This new SaaS capabilities enable us to provision a life cycle manage compute resources in true cloud-native environments, which is also a key enabler for our GreenLake cloud services offerings. And finally, we will increase our Pointnext operational services attached with new automated support experiences and software-defined offerings. Long term, as customers increasingly adopt our GreenLake cloud services platform, we see additional potential opportunities to drive higher margin and recurring revenues in our core compute business. Our portfolio of secure compute solution is industry leading. IDC's most recent Q2 market share report for worldwide servers shows HPE and our New H3C Group ranked #1. Our investment in H3C is showing benefits as we continue to be the #2 server vendor in China. We deliver unmatched workload optimization, security and automation. For example, we have the best-in-class innovations in firmware protection, malware detection and firmware recovery delivered through our HPE's secure supply chain. Early this month, we became the only major manufacturer to ship U.S. factory-made servers that feature hardware and data protection during the manufacturing process. These secure capabilities are critical to U.S. customers across federal, public, banking and finance, and health care verticals. Our solutions are optimized for the fastest-growing workloads with intelligence built in to simplify and automate management of tasks, establishing a foundation for hybrid cloud, and we will continue to innovate and lead in this critical core business. In an age of exponential data growth, storage is also critical for our customers. And our new segmentation provides greater insight into the size, strength and a very attractive financial profile of our storage business, which is a $5 billion business at HPE with incredible operating margins. In storage, we are positioned in the portfolio in high-growth areas like all-flash array and hyperconverged infrastructure, where we have recently gained significant market share. We also have been on a multiyear journey to create an intelligent data platform from the edge to the cloud, and pivot to SaaS data storage solutions, which enables higher level of operational services attached and margin expansion. Stabilizing this business at profitable margins will allow us to generate significant cash flows. And similar to compute, we see long-term opportunities as customers increasingly adopt our GreenLake cloud services platform to drive higher-margin recurring revenue business in storage. Our portfolio is resonating with customers, and we have seen momentum in key areas of investments like big data storage with HPE Apollo; primary storage with HPE Primera; and the growing hyper-converged market with Nimble dHCI, our disaggregated HCI solution released last year for business-critical applications. And we bring software-defined solutions through the acquisition of MapR and BlueData storage. And we have clear differentiation with our AIOps capabilities. Our HPE InfoSight software, which is the industry's most advanced AI for infrastructure operations, is able to predict and resolve 86% of the issues all the time. It is now utilized on 85% of Nimble and Primera arrays. And it continues to ramp on different HPE server lines, delivering an industry-leading AIOps experience for our customers and enabling our Pointnext technology services offerings. We are focused on making strategic investments to fuel future growth. We have taken very deliberate steps to pivot our portfolio and expand into new customer segments and markets. Our Intelligent Edge and High Performance Computing businesses are great examples of investing for growth. I would like to turn it over to Keerti Melkote to provide an update on our Intelligent Edge business. We saw the enormous opportunity at the edge when we acquired Aruba. The explosion of devices, applications and data at the edge will drive demand for secure connectivity, cloud computing capabilities and analytics, especially in a post-COVID world. According to industry analysts, more than $700 billion in cumulative CapEx will be spent over the next 10 years on IT infrastructure and software at the edge. Our recent acquisition of Silver Peak provides HPE Aruba with an immediate and leading position in the fast-growing SD-WAN market. Keerti, over to you.

Thank you, Antonio. I want to take a few minutes to talk to you about the growth opportunities that we are seeing at the Intelligent Edge. The Intelligent Edge is your office space. It's your homes. It's your retail stores, hospitals, clinics, stores, stadiums, warehouses and so on. These are all venues that you and I are very familiar with. And our customers are deploying technology and infrastructure at these locations to generate either better customer experiences or better operational efficiencies, ultimately driving better business outcomes for themselves. And if you look at what the Intelligent Edge is all about, it's about data. Customers are deploying vast amounts of new IoT devices and sensors to sense the environment that generates new data, and then this new data has to be computed upon and acted upon. And this requires vast amounts of compute infrastructure as well. Now this data is very difficult for us to shift the data to the cloud, compute it there and take the results and turn it back. A lot of times, the latency is -- for the applications at the edge, require less than 20 millisecond round-trip times from the moment data is generated to creating a business outcome. And so therefore, we see edge infrastructure getting deployed to generate new insights and new business outcomes for our customers. So how do we intend to monetize this opportunity at the Intelligent Edge? The first opportunity area is connectivity. We have to get all these IoT devices, users and things connected at the edge. And so connecting them within the edge using LAN infrastructure, but also connecting them to the cloud. Edge to cloud becomes the first monetizable opportunity. And networking as a whole is growing at 5% CAGR, but there are subsegments within networking, especially edge networking, which we expect will grow even faster. Adjacent opportunities that we see beyond connectivity are the need to protect the infrastructure at the edge. That is the edge security opportunity that we are seeing a growth opportunity in as well. And finally, crunching the data, analyzing the data and acting upon it, which gives rise to the need for edge computing, which we also see as an adjacency in terms of growth. So these are new emerging growth opportunity for us. And the first opportunity, of course, is monetizing on the connectivity opportunity at the edge. To do that, we introduced the Aruba Edge services platform earlier this year. And this platform is purpose-built to give customers the end-to-end connectivity requirements that they need from WiFi and switching technologies to connect users and devices to technologies like Bluetooth Low Energy and ZigBee to connect IoT as well as SD-WAN and 5G to connect the edge to the cloud. On top of this infrastructure, we are able to layer on top a set of security technologies that allows customers to protect their infrastructure and their users and devices and things. And finally, a layer of AI that allows you to act upon the data generated at the edge. Taken together, this is a cloud-native platform that our customers are able to consume very flexibly through a SaaS service, or if they want it on premise, we can deliver this on premise. And finally, we can deliver this as a managed service as well. In terms of the near-term growth opportunities of how ESP will be applied in our customers, what we are hearing as growth drivers for FY '21. First and foremost, is recognition that we live in a post-COVID world, and now we see the opportunity for hybrid work, working from home as well as safely returning to our workplaces. This is going to drive increased interest in our remote access point solutions for the home office opportunity, increased interest in our WiFi solutions, especially those that enable location-based services including contact tracing. And finally, the pull-through of our switching infrastructure connected to the WiFi front end. The next opportunity that we see is the connecting the edge to the cloud. And here, this is the SD-WAN opportunity. And as I said earlier, this is one of the growth opportunities that are growing much faster than the rest of the enterprise networking industry. And here, it is taking the edge connecting directly to cloud applications, transforming wide area networking infrastructure from legacy MPLS to the future-looking self-driving WAN architectures, and finally, transforming security architectures itself to be more cloud-native. The third area, which is a nascent area but growing interest from our customers is to deploy network as a service. Think of this as a managed service that our customers would buy instead of buying the traditional CapEx-oriented model, especially in these times of budget challenges for our customers. Network as a service gives them the opportunity to stretch their budget dollars and get better return on investment in -- over a period of time. Now let me talk a little bit about some of our customers. The first customer I want to talk about is Lowe's. Lowe's has deployed Aruba wireless technology to modernize their customer experience in all their stores. This is over 1,800 stores nationwide. But also they've selected Silver Peak to deploy and modernize their WAN network from a legacy MPLS network to now connecting their stores directly to cloud applications as well as to their data center applications using the Internet as the connectivity method. The second example I want to talk about is Texas A&M University, which is deploying Aruba wireless and switching infrastructure inside their colleges, starting with the college of engineering. And here, they were looking for the network to be delivered as a service, as a managed service. And using Aruba, they're able to modernize their classroom environment and create a much richer learning experience for their students using Aruba network as a service solution. The third example is Vancouver Clinic, which is a health care facility up in the Pacific Northwest where once COVID hit, they were very interested in relocating their call center agents to their homes and yet get them connected to the corporate applications. To do this, they deployed Aruba Remote Access Point solutions inside these call center agents' homes, and they were able to convert over 80% of their call center agents into micro branches, their homes into micro branches. And doing so allowed them to continue to do their work, helping their patients setting up appointments as well as turning a number of their what would have been in-person visits to the doctor into telemedicine visits. The last one I want to touch upon is KEMET, which is an industrial manufacturing company. They were interested in modernizing their manufacturing operations and automating their manufacturing operations by deploying a lot of IoT devices. The only problem was the traditional technology that they were using required them to manually provision these IoT devices on the network, which took them hours per device. Using Aruba ClearPass and Aruba ESP, they were able to automate the deployment of this IoT infrastructure, monitor for safety and ensure that the customer -- ensure that they have visibility into all the devices that are getting deployed at the edge, really making them turn around factory operations and automated factory operations at scale in record time. So as all these examples illustrate, there are very unique advantages to using Aruba in each one of these scenarios. Let me summarize them for you through these 6 distinct advantages. The first one is our culture. We live and die by the mantra, Customer First, Customer Last. This has given us a level of intimacy with our customers in a way that allows them to try different solutions from us as we bring those to market. A great example of that is by integrating Silver Peak into our portfolio, we are able to now expand what we can offer to our customers from WiFi and switching into the SD-WAN space. The second opportunity for us is, of course, selling an end-to-end network solution. In the past, we were limited to selling WiFi and switching. But with now SD-WAN and security built on top, we have an end-to-end network architecture that connects them from the edge to the cloud. But uniquely, we are able to do it without forcing forklift upgrades. We believe in a multi-vendor approach, which means it gives our customers choice and freedom to migrate their infrastructures on their time, not on our time. Another big advantage that our customers talk about is that we're able to deliver simplicity at scale. One customer talked to me about how they were able to save maintenance times on the network from 600 hours a year of maintenance on the network down to 6 hours. So 100x reduction in their maintenance times because of our unique nonstop WiFi network services. Another example of our differentiator, especially against Cisco, is that we have a unified infrastructure that allows it to be managed from the cloud or on-premises or both. We don't force a choice on our customers to take down a cloud silo or an on-premises silo and force a forklift upgrade of the hardware infrastructure. The infrastructure is capable of being flexibly managed from both, and that is a very unique selling proposition and a value proposition. And finally, all this infrastructure is managed from the cloud using AI. We've had 4 years of experience developing intelligence in our AI systems, which means our customers are able to take advantage of the unique insights that the AI algorithms are able to generate, reducing downtime and taking care from a reactive model to a proactive model. These are examples of why we are winning in the market, and we look forward to doing more of that and updating you in the future. Meanwhile, let me turn it back to Antonio.

Thank you, Keerti. It is also important to acknowledge our Communications Media Solutions business that is addressing another significant opportunity at the edge with 5G. In our CMS business, we have over 30 years of experience in the telco space. We have industry-leading software solutions for edge, radio access network and core network virtualization and orchestration plus significant relationships with our major service providers in North America, Europe and Asia. Our customers depend on HPE mobile core software to link a wide range of mobile phones and other devices such as tablets and watches. We also provide critical virtual function capabilities and cloud-native subscription-based models for telco operators. Integration also with our HPE Aruba Edge services platform, which extends our market coverage and overall TAM opportunity in this very exciting market transition. I would like now to introduce Pete Ungaro, who runs our high-performance computing and mission-critical systems businesses. HPC is a fast-growing area, aimed at tackling our customers' most data-intensive challenges. It is a strategic growth area for HPE and one we will have clear differentiation, made even stronger through our acquisition of Cray where Pete was the CEO. Our mission-critical systems power the most critical workloads and applications in the world, including financial services, telco and manufacturing. Pete will discuss this growing market opportunity and how we're expanding the ability to bring supercomputing power and in memory computing to everyday environments. Pete, over to you.

Thanks, Antonio. The high-performance computing market is one of the fastest-growing of all the server markets and continues to grow faster with the growth of data and the need for high-performance systems. As HPC systems are the backbone of modeling, simulation, high-end big data analytics and AI workloads. The overall HPC market is large at $23 billion, and it's growing at 15% to over $35 billion. Not only servers, but great pull-through of networking, storage, software and services. Bringing together the previous acquisition of SGI and now Cray, and combining it with the breadth of HPE, we are playing broadly across this entire market space. When you break out the server side of the market, it's a $12 billion TAM growing at 7%. But what's more exciting is that the higher end of the HPC market is growing even faster. The supercomputing segment, which is represented by systems that cost over $0.5 million, is a $5 billion market growing at 14%. And over the next few years, there'll be a new systems at the highest end of the supercomputing market, known as exascale systems. These systems are 5 to 10x faster than the fastest systems on the planet today. During this first wave of exascale and preexascale systems, we expect an addressable market of over $5 billion. And today, we've won 5 of the 6 exascale and preexascale systems announced worldwide. We're the leader in these markets and own 35% to 40% of the supercomputing space and even more at the highest in exascale systems. So as systems get bigger, our technology advantages get larger, and with the explosion of data, the market is growing faster as you move up to larger and larger systems, which is our sweet spot. Building a supercomputer and more importantly, an exascale supercomputer, is just amazingly cool and very exciting. Just think about a system that can compute in 1 second, what would take every man, woman and child on the planet, 6 years to accomplish. But it's not just about these massive systems. It's about a new era of computing, what we like to call the exascale era, where we'll build technologies for these amazing exascale systems that will enable for everyone to use not just the largest research organizations, but every corporation and business around the globe. Because as Antonio said, this is -- new era is about a new age of insight. And at its core, the underlying growth driver of the age of insight is the massive growth in data. It's a driver that has no end in sight. The growth of data forces us to build larger and larger models, both math models for simulation and data models for analytics. More data and larger models need larger computers, again, playing to our strength. On top of this, there's new algorithms to compute on this data, such as AI, with machine learning and deal learning fueled by technologies such as 5G and IoT. We're driving the need for insights on this massively growing data to accelerate the time to discovery in areas such as finding vaccines for pandemics, as we're doing today with the coronavirus; building safer cars and planes; more accurately predicting severe weather events; and finding new sources of energy and many more. To do something we haven't done before, we're innovating in new ways to build our advantage and differentiation in the market. Without a doubt, we are investing more in R&D to build out this vision than any of our competitors. And we've been working on this technology across 3 companies, HPE, SGI and Cray, to bring together unmatched capability. With these acquisitions, we have unrivaled expertise across HPC, AI and mission-critical solutions. We have the largest applications and performance team in the industry. We have the only trusted supply chain in the U.S. from the silicon root of trust all the way through manufacturing, and we have amazing R&D in Hewlett Packard Labs to ensure we maintain our lead for the years ahead. Our second major focus is in our technology for high-performance computing, including rethinking today's high-performance networking with our Slingshot system interconnect and its unique congestion control and adaptive routing capabilities and combining that with our photonics leadership from Hewlett Packard Labs to optically enable our systems for scale, performance and cost advantages. Silicon-based memory-driven computing technologies to enable the largest shared memory environment delivered through our Superdome Flex architecture and high-performance storage and data management with our cluster store and DMF solutions. We have also rearchitected our software stack to not only have a full developer ecosystem within HPE Cray and partner capabilities, but we built our new stack on a cloud-enabled micro services-based framework and orchestration, leveraging containers and Kubernetes to support converged modeling, simulation, analytics and AI and workloads. And workflows running on a single system and even within a single application. We're delivering all of this technology not just in exascale systems, but we're taking them mainstream and driving it down to standardized solutions into a single rack and even a single server across the entire HPE portfolio. So you can have a system of any size in any data center either in a traditional CapEx model or as a service through GreenLake. And this strategy is absolutely working. We've already won over $2 billion in contracts that we're going to deliver over just the next couple of years. And we've done nearly a clean sweep of the currently announced exascale and preexascale systems, all based on this new technology and vision. Preexascale systems at NERSC and Los Alamos National Laboratory and exascale systems at Oak Ridge, Argonne and Lawrence Livermore National Labs. There are many other wins with smaller systems, leveraging these exact same exascale era technologies to customers across energy, financial services and manufacturing industries as well as universities and government agencies around the world. We're building a new type of system and infrastructure that's very different than traditional supercomputers, scale-out clusters or enterprise computers. Our vision is to build HPC AI and mission-critical solutions that perform like a supercomputer and run like a cloud. It isn't only our vision, but our product road map, and it'll further extend our leadership in this fast-growing market as we believe that every data center in the future will have systems and technologies in them that come from a supercomputer to help handle their growing data needs, providing us the ultimate leverage in our technology and IP investments. Thank you, and now let me pass it back to Antonio.

Thank you, Pete. Finally, I would like to introduce Keith White, who leads our HPE GreenLake cloud services business. This is consistently one of the fastest growing businesses. And last quarter, our HPE GreenLake cloud services bookings grew a record 82% year-over-year. We continue to invest in our capabilities to deliver a differentiated experience for our customers, which is clear in the momentum you see in this business. We recognize every enterprise is different in how it wants to control its technology stack, and we continue to expand our as a service capabilities with our HPE software platform. We also know a consistent experience is critical in how we bring new innovation to market to address these new expectations. At our Discover Virtual Experience in June, we launched our next generation of HPE GreenLake cloud services, all accessible via self-service point-and-click catalog on our GreenLake cloud portal. We also introduced our new HPE Ezmeral software platform that underpins our customers' cloud experience through GreenLake and enables transformation of applications, data and operations to drive speed unlocking sites and boost efficiency. We will play a short video that highlights the experience we are able to deliver through GreenLake, and then we will welcome Keith on our virtual stage. [Presentation]

Thanks, Antonio. Hi, everyone. I'm excited to be leading the HPE GreenLake Cloud services business. Now I joined HPE in January of 2020 from a long career at Microsoft, where my last role was leading the intelligent cloud business from a sales, go-to-market and partner ecosystem standpoint. Now I've seen firsthand how customers are digitally transforming and modernizing their environments, and how the industry has accelerated to a hybrid and distributed cloud world to meet these needs. And that's why I'm excited to be here at HPE. Now as Antonio mentioned earlier, HPE GreenLake is one of our fastest-growing businesses, driven by a significant shift in the market to a consumption-driven model. Why are customers moving? Well, there's a few reasons. As customers implement their digital transformation and modernization efforts to accelerate growth, they're turning to consumption-based offerings to simplify IT. Enterprise-wide adoption, standardization and consistency drives this simplification. With cloud services being managed for them on the back end, customers can free up their valuable resources to focus on business outcomes. Now customers are also requiring the flexibility to run these workloads and solutions wherever they want in the data center, up in the public cloud, in a colo or at the edge to deploy and scale their solutions quickly. As their needs change, and with the explosive growth of data being generated, they require elasticity to increase or decrease their capacity with the ability to access additional resources in minutes, not months. Consumption-based models enable customers to respond rapidly to their changing business needs, and provides a distinct competitive advantage to allow them to be agile and flexible to these changing business requirements, which has really been exemplified by the COVID pandemic. Customers see this model as a way to control costs and increase free cash flow as they pay only for what they use with no overprovisioning of resources. Now this provides them a low barrier to entry and easy access to a broad range of technologies and tools with no large capital outlay. Customers can leverage the latest innovations and have peace of mind that the technology is always up to date. Now consumption also comes with sophisticated telemetry and metering capabilities, which provides greater visibility over usage, spend and compliance. We have a significant opportunity. With respect to overall technology spend, we see CapEx-based spending declining, and we see as a services growing at a 16% CAGR. All of this creates tremendous opportunity for HPE to help our customers transform, digitize and modernize their businesses. As Antonio showed, we expect the total addressable orders market for on-prem as a service to grow to nearly 60% CAGR over the next 3 years, and it will become a $22 billion-plus market by 2023. Nearly half of this growth will be driven by a select set of workloads including things like unstructured data management and analytics, engineering design apps, HPC, app dev and VDI. We have deep expertise and relationships in all of these areas. We're also seeing incremental growth opportunities with an upside of approximately 25% across HPE's portfolio. As customers are looking to obtain a complete cloud experience, our Pointnext services, including advisory, support and GreenLake managed services will be in higher demand. Our investment in customer success will also drive additional usage in our existing customers. All of this is financed through HPE Financial Services where we expect to see continued opportunity. Now we're seeing great momentum in the marketplace. Today, our GreenLake cloud services are being used for a wide range of solutions in nearly 1,000 customers and over $4 billion in total contract value worldwide including several Fortune 500 companies and across all industries. For example, HPE is partnering with Zenzic, formerly known as Zenuity, a leading developer of software for self-driving and assisted driving cars to develop next-generation autonomous driving cars. They're using GreenLake to provide the crucial artificial intelligence and high-performance computing infrastructure they need to develop these next-generation autonomous driving systems. Kern County, the third largest county in California, recently embarked on a digital transformation initiative to modernize its IT and operations to their nearly 40 departments. With GreenLake, Kern County has cut 42% of its storage costs and continue to provide vital support and services through the COVID-19 pandemic, including rapidly deploying a VDI solution to their over 8,300 end users. We're partnering with one of the world's leading industrial automation companies, ABB, on their factory of the future. They're leveraging GreenLake in their Robotics as a Service offering to provide a new business model to their customers through pay-per-use consumption. This is a great example of processing data at the edge as the precision required for the robotics arm is so critical. Just a 10% increase in efficiency delivers a 2x gain in profitability, something the public cloud can offer. LyondellBasell, one of the largest plastics, chemicals and refining companies in the world wanted to get out of the data center management business and modernize their data center to improve efficiency. They're using GreenLake in a colo to manage their data center and advance their sustainable profile as they've already seen an absolute reduction of over 2,000 tons of CO2eq per year. Why do we know we'll win because? We're the only company that brings the cloud to you. HPE GreenLake cloud services brings the cloud experience to current and future workloads, which can't or won't move to the public cloud in a self-serve, scalable, pay-per-use model at your location in the data center, in a colo or at the edge, all managed for you by HPE and our partners. Our industry-leading edge-to-cloud portfolio is the broadest in the market that delivers truly optimized solutions for any workload. Combined with our HPE Ezmeral software portfolio, this puts GreenLake years ahead of the competition, enabling us to provide a true consumption-based experience from edge to cloud for all our customers' workloads, apps and data. Now we're delivering true cloud services that are automated and self-serve. Combined with our optimized and standardized hardware and software, we can deliver to customers at their location. This provides them with the fastest time to value, enabling them to bring their solutions to market 75% faster than traditional CapEx. Now GreenLake offers customers the only true pay-per-use on-prem model in the market as we provide actual metered usage, whereas our competitors, they offer leases disguised as consumption. This allows customers to free up capital and remove the risk of expensive overprovisioning. And we're seeing savings from our customers, on average, about 30% to 40%. Our approach means no data egress charges you would otherwise incur with the public cloud. As Antonio mentioned, HPE Financial Services are not only world-class in the asset life cycle management and consumption-driven business models, but also industry-leading in sustainability that enables the circular economy. This provides a number of benefits to our customers with the ability to simplify contracts, keep the hardware current and provide flexible financing options to meet the customers' specific business needs. And all of this is managed for you. We bring the cloud experience to customers by managing everything for the customer. Things like availability, performance, capacity, all the way up to the app or the workload. Our talented Pointnext organization and capabilities are best-in-class in delivering advisory and operational support experiences worldwide. Because we manage it all for them, customers are spending 44% less time keeping the lights on and are seeing a 40% increase in productivity, allowing them to focus their critical resources on more value-add efforts. Now GreenLake also provides the broadest and most experienced partner ecosystem in the industry. Along with transforming our channel, we're also partnering with the top global SIs, such as Accenture, who's powering their Accenture hybrid cloud with GreenLake. We're also working with top ISVs, such as SAP where we recently announced our joint partnership on SAP HEX customer addition via HPE GreenLake. And we're winning, and we're winning big. Today, I'm happy to announce that Wells Fargo has selected HPE as a foundation for an important digital transformation initiative at the bank. Working with HPE and Splunk, Wells is creating a unified data repository that all groups inside of Wells Fargo can use, leveraging the enormous amount of machine and telemetry data that Splunk captures every day. They're also embracing Kubernetes and container technology to modernize their legacy applications. Now this is a signature win for GreenLake and the Ezmeral container platform and demonstrates the potential with large data-intensive requirements. This is our largest deal so far, and we continue to see large opportunities in the pipeline. Well, we have an incredible opportunity ahead, and I'm super excited about our future. With that, I'll hand it back over to Antonio.

Well, thanks, Keith. That [ single ] deal is symbolic of what we can do for our customers. In fact, in that deal, we have seen 17x better performance than any other solutions that Wells Fargo tested including the public cloud. But as you can see, we have a number of compelling growth drivers, both in the near and long term with our Intelligent Edge, HPC and HPE GreenLake cloud services. Customers need more than the right technology to accelerate their transformation. They also need expertise and financial flexibility. We have the right expertise through Pointnext technology services to accelerate our customer digital transformation and to design, build, optimize and run their hybrid IT estate. HPE Financial Services creates investment capacity to accelerate customers' transformation by helping them free up capital, capture value from all their assets, achieve sustainability goals, invest in new technologies as a service and weather financial volatility. And the benefit of all consumption-based models is that we can leverage HPE Financial Services to spread our upfront cost over the duration of the customer contract. HPE's channel is a hugely strategic asset playing an essential role in both shaping and executing our strategy. We have one of the largest networks of channel partners in the industry, and it continues to be recognized as best-in-class. Nearly 70% of our sales go through the channel network today, and we have more than 80,000 channel partners around the globe. Today, more than 700 partners in our HPE channel ecosystem actively sells HPE GreenLake cloud services. And over the past year, we have seen a triple-digit growth in HPE GreenLake bookings from our partners. We know our ability to continue to innovate for our customers is met only possible by strong fiscal management and strong execution, which in turn drives shareholder value. We have taken a deliberate set of actions to strengthen our financial foundation, become a more agile and modern organization and align our resources to critical core businesses and areas of growth that accelerates our edge-to-cloud platform vision. We are ahead of -- we were ahead of our peers when we announced our cost optimization and prioritization plan this past spring. And we remain on track with our guidance to generate a net annualized run rate savings of $800 million by the end of fiscal year '22, with most of the savings achieved by the end of fiscal year '21. We have made significant improvements in our supply chain execution. In our most recent reported quarter, we reduced our backlog by over $500 million. And while there is still more work to be done, we are very confident that we will return to normal backlog levels as we exit Q4 2020. This year, we further simplified our operating model, and we have aligned it to the financial segmentation we introduced last year at SAM. This has provided increased visibility into each of our businesses and established end-to-end accountability to drive further efficiencies. And across all of our businesses, we are making bold moves to drive agility, strengthen our capabilities, simplify our processes and enhance our execution. For instance, we are reenvisioning our go-to-market strategy to elevate the customer experience and accelerate our pivot to as a service. And we'll be making changes to these teams to provide a more seamless, holistic sales experience. Our goal is to partner with our customers to help them achieve outcomes that drive their individual unique digital transformations. But we undertake all of these transformative work guided by our purpose, which is to advance the way people live and work. HPE exists to address challenges like the ones the world has faced in 2020. In our world of rapid change, mounting global challenges and racial injustice, we have a responsibility to make a difference to guide society to a more sustainable future, to shape a world that is equal for all people. Our people and our innovation can continue to solve society's toughest challenges and improve lives at scale. That is an incredible opportunity, and one that's very meaningful to me and to our entire team. Before I turn it over to Tarek, I will leave you with this video that speaks directly to the enormous privilege we have at HPE to make a difference. I know we will continue to create lasting impact for our team members, our customers, our communities and you, our shareholders. [Presentation]

Good afternoon, everyone, and thank you for joining us today for our virtual SAM 2020. Having been the Chief Financial Officer of Hewlett Packard Enterprise for just over 2 years now, I would like to share my insights into how HPE's execution of its strategic priorities will translate over time into a solid and resilient financial profile and create value for our shareholders. As you know, HPE has a unique portfolio of assets across the edge-to-cloud continuum, and we are very well positioned to lead our customers' digital transformations which have been put into overdrive in the current environment. The acceleration of our customers' digital transformation has led us to redefine the edge-to-cloud experience and industry model and adapt it to our customer evolving needs. At our SAM presentation last year, we outlined a segmentation framework which brought greater insight to our businesses, allowing you to value them based on their unique characteristics. This new segmentation aligns with our overall strategy and lays the foundation for our investment priorities. During this presentation, we'll dive deeper into each of our business segments by providing greater insights into the economics and market growth opportunities of each business as well as the key operating imperatives that guide our execution. I will also share our 3-year financial targets, our dynamic capital allocation framework, our FY '21 outlook, culminating with a Q&A session with our leadership team. With that said, let's get going. Antonio has talked about our vision, the large market opportunity we see before us and our strategic priorities. Clearly, there are several inflection points within enterprise IT trends that have created a substantial opportunity for us including driving a seamless connectivity experience from all edges to all clouds; providing a cloud-like experience for customers that is engaging and personalized; gaining deeper insights from data everywhere to drive business outcomes; and consuming infrastructure in a flexible consumption model with software-defined architectures and solutions. Now in order to capitalize on this opportunity, we have outlined a set of key strategic priorities that will allow us to stabilize our core business and at the same time, provide us with the capacity to make investments in the growth areas of our company. The combination of executing on our strategic priorities with the robust financial architecture geared towards reigniting top line growth and boosting free cash flow generation in future years will result in long-term value creation. That said, let me start by giving you some key insights into the specifics of our key strategic priorities. Our framework for driving long-term value creation focuses on 4 key strategic priorities. You've heard that for Antonio. Transform and stabilize the core; double down on growth businesses; accelerate the pivot as a service; and entirely rethink allocation of resources to invest for the future. I will provide more detail in each of these priorities in the upcoming slides by bringing them to life across our segmentation framework. Now each of our reported segments has unique opportunities and plays an important role in our long-term value creation. First, let's consider our core compute and storage businesses that account for over 60% of our revenue and more than 80% of our total company operating profit. Transforming and stabilizing these core infrastructure businesses is a top priority. Since they are critical enablers of our edge-to-cloud platform as a service strategy, and they provide a unique and broad portfolio of assets that is a key differentiator versus many of our peers. Furthermore, both of these businesses generate significant amounts of cash that provide the foundation for us to invest in growth areas of our portfolio. Second, we consider Edge and HPC/MCS as high-growth businesses that will drive overall revenue growth for HPE. We're doubling down in these areas with both organic and inorganic investments to capture the expanding market opportunity. Third, we have several businesses that are enablers of our pivot to become an as-a-service company. These are our advisory and professional services business, A&PS; HPFS; and a newly formed HPE platform service business unit within the corporate investment segment. Each of these segments provide unique capabilities, whether it's consulting, financing or software that are foundational to the differentiation and as-a-service offering. Finally, our corporate investment segment include Hewlett Packard Labs and our Communication and Media Solutions business, CMS, that is focused on the growing service provider opportunity being fueled by 5G. Labs play a critical role in our innovation by helping develop our own unique intellectual property that differentiates our commercial product offerings. Also, CMS helps us address unique opportunities at the cell edge with our industry-leading software and solutions for telcos. With that, let's deep dive into the financials, the market opportunity and key operating imperatives for each of these business segments. Starting with the core. The compute business has a $51 billion addressable market with a flat growth rate, excluding Tier 1. To transform and stabilize this business and achieve a fiscal year '23 operating profit margin between 10% and 12%, we highlight the following operating imperatives: we will gain market share in profitable growth areas with effective market segmentation; we will also drive supply chain efficiencies and streamline processes to enhance productivity in what is a high-volume, low-touch business; we will transition infrastructure software to SaaS and enhance Pointnext OS attach rates across customer segments. In turn, the storage business has a $35 billion addressable market opportunity growing at approximately 2%. To stabilize this business and achieve fiscal year '23 OP margin between 16% and 18%, we are focusing on the following: positioning the portfolio for growth in the high-growth areas of all-flash array and HCI, where we have been recently taking significant share and are excited about our Nimble dHCI offering; also, transitioning infrastructure software to SaaS with InfoSight to enable intelligent data management; and maintaining historically strong Pointnext OS attach rates. Stabilizing these businesses at profitable margins will allow us to generate significant cash flows and make investments in other faster-growing areas of our portfolio. And as I mentioned previously, as we transform our core, we need to invest in growing areas of our portfolio such as Intelligent Edge and HPC/MCS and GreenLake as a Service, where we see strong customer demand and high returns. The Intelligent Edge segment represents a $39 billion market opportunity growing at a 5% CAGR. As Keerti discussed earlier, we have clear operating imperatives that will help us outpace the market and grow revenue at a 6% to 10% CAGR, including taking share with our best-in-class and differentiated set of products, such as our cloud-native Aruba Central and Aruba Edge Services Platforms, which are already gaining traction with customers and contributing towards ARR. Also integrating additional services such as 5G, security and IoT. And finally, Silver Peak. I am very pleased to have recently closed a Silver Peak acquisition that will accelerate our SD-WAN growth in a market growing 20%. Switching to HPC and MCS, and as you heard from Pete, high-performance computing is a $12 billion market opportunity growing at a 7% CAGR over the next 3 years. We are extremely well positioned in this market with several recent exascale wins. And there is more. In this segment, we expect to outpace market growth given our win rates with an 8% to 12% revenue growth CAGR over the next 3 years. Our key operating imperatives for this segment include delivering on $2 billion-plus worth of exascale contracts already won, and maintaining our strong win rates with an already identified pipeline of over $5 billion through fiscal year 2023; capitalizing on increased market demands driven by the advent of AI, machine learning and big data analytics; pursuing silicon-level and software stack innovation to bring new revenue streams; and finally, achieving credit cost synergies of over $100 million in run rate by the end of fiscal year '21. I am very pleased to report to you that we remain on track to achieve that goal. With all these opportunities in front of us, the edge and HPC/MCS segments will help drive our mix of growth business that includes as a service to more than 30% of our total company revenue in fiscal year '23 versus close to 20% today. This puts us firmly on the path towards top line growth with higher margins. Now let me talk more about several of our other business segments that act as enablers of our pivot towards an as-a-service company. First, our Advisory & Professional Services business is strategically important. It helps customers navigate through the intricacies of their digital transformation journey and enables customer adoption of as-a-service models. It is a critical sales motion that provides a lot of pull-through revenue for our GreenLake business. We anticipate more than 75% of A&PS revenue to come from our as-a-service advisory business by fiscal year '23, and in doing so, we will focus on improving productivity and chargeability rates to make this business more profitable. Second, as I have mentioned on previous occasions, HPFS is very critical in facilitating our as a service pivot in multiple ways. For customers, HPFS creates investment capacity to adopt new as-a-service models and accelerate the digital transformations by leapfrogging to the next-generation technology in an affordable manner. HPFS also plays a role globally in promoting the circular economy with a best-in-class asset management business. Thirdly, HPFS' track record in managing the entire life cycle and infrastructure assets for certified pre-owned down to recycling is second to none. HPFS also helps to fund the increased capital intensity that comes inherently with growing an as-a-service business through asset-backed securities at a very low cost of capital. Finally, we continue and expect HPFS to consistently generate a return on equity in excess of 15%. As you may recall, we introduced our HPE Ezmeral software portfolio earlier this year with the launch of our ML Ops and container platform. Our goal is to drive penetration of these offerings to support on-prem workloads and combine them with other existing software solutions such as InfoSight, GreenLake Central and Aruba Central. This will help build momentum and monetize our as-a-service software solutions for infrastructure automation and customer experience. Overall, we expect our HPE platform software to grow in excess of 35% CAGR through fiscal year '23. Now let's discuss our CMS business that has over 30 years of industry-leading experience and over $500 million in revenue. As Antonio mentioned, CMS is addressing a significant multibillion-dollar opportunity at the cell edge with 5G and is playing in a very large telco market. CMS provides industry-leading software solutions such as network virtual function capabilities with license and subscription-based models on-prem. CMS has relationships with all major service providers globally, more specifically in North America with AT&T, Verizon, T-Mobile, Rogers; in Europe with the likes of Deutsche Telekom, Swisscom, and Telecom Italia; and in Asia with NTT, SoftBank and China Mobile. Remarkably, I don't know if you know this, but more than 800 million mobile devices worldwide are connected to the network thanks to CMS software. 5G networks need a new core to operate efficiently across multi-vendor networks, and HPE is taking the lead here by deploying a new 5G core software stack that is agile, cloud-native, open-sourced and preintegrated with multiple vendors. Plus this team is working with Aruba to provide seamless connectivity between 5G and WiFi 6 for high-mobility IoT applications. Our goal here is to further increase adoption of cloud-native software offerings that we expect to grow at a 15% CAGR over the next 3 years. The punchline is there are very few assets globally that match CMS. Now let's deep dive and look at how our as-a-service business is performing. As Antonio mentioned, we are seeing acceleration of as-a-service for all aspects of IT. Importantly, the on-premises as a service market is growing rapidly at a 58% CAGR faster than the public cloud. This is why we have aligned our strategy and resources to make our entire portfolio available as a service, and customer adoption has been very strong. In fact, we have gone from 375 customers in fiscal year '17 to over 900 expected in fiscal year '20, with ever greater growth in total contract value which has more than tripled in that time period to over $4 billion today. Customer retention rates for this business have been in excess of 90% for the last several years. And as you heard from Keith, the future looks bright as well. The order momentum we are seeing in this business is clearly promising. Orders are expected to grow at a 50% CAGR from fiscal year '20 through fiscal year '23, surpassing $3.5 billion by the end of fiscal year '23. Clearly, the acceleration of the on-prem as a service market is fueling order growth in our as-a-service business. And all of this momentum will translate into ARR growth, which is what I'm going to talk about next. On this slide, I want to talk about our total revenues in our as-a-service business, our annual run rate revenues and the overall mix of ARR as percentage of as-a-service revenues. First, let me clarify and point out the distinction between revenues and annual run rate revenues for our as-a-service business. Our ARR is our recurring revenue stream that we introduced last year at SAM, while the total revenue for as-a-service includes recurring revenues and nonrecurring revenues, which is hardware revenues recognized upfront in capital lease transactions. Therefore, the ARR recurring revenue stream is a subset of our total as-a-service revenues and not a lead indicator in total as-a-service revenue. However, the ARR is a lead indicator of latent, recurring revenue and revenue momentum. To illustrate this, I would like to draw your attention to the top left chart which shows our projected total as-a-service revenue growth. Given the order momentum I highlighted on the previous slide, we expect our total revenues for as-a-service business to increase from $900 million at the end of fiscal year '20 to over $2 billion by the end of fiscal year '23. That's a CAGR of 30% to 35%. What's more interesting is that our ARR or recurring revenue stream is growing at a faster rate than the total revenues as we transition towards standard offerings and add software revenue in our mix and growth usage. Here is where our GreenLake as a Service offering is different from more simplistic, rudimentary replica schemes that are coming way too late in the market, and that involve installment payments in a lease. With GreenLake, customers pay at all times for their actual usage of the IT solution. Starting from a minimum usage commitment, customers can grow their business and gradually expand their IT solutions capacity with GreenLake. This is true as-a-service consumption and not an installment payment subterfuge. It benefits our customers and our ARR grows with it as customers grow and each customer's usage increases. This is highlighted in the middle chart, which shows ARR nearly tripling from more than $500 million at the end of fiscal year '20 to $1.4 billion by the end of fiscal year '23, consistent with the 30% to 40% guidance that we provided you at SAM last year. This is why, as you can see from the chart on the right, that the high-quality ARR is growing at a faster pace than total revenues. And we make up over 70% of the total as-a-services revenue by the end of fiscal year '23, up from approximately 60% at the end of this fiscal year. Finally, I'm sure you may ask the question. I would like to talk to you about the margins of this as a Service business. The gross margins for this business are materially above our corporate average today. That's why I'm so excited about it. The margin should also expand further in outer years as we shift towards more standardized offerings and provide more software content within each deal. Moving forward, needless to say, we will continue to update the market on the progress we are making with our as a service pivot. Now let's shift to how we are creating capacity for investments in our growth areas and as a service pivot. As I mentioned previously, underpinning our strategy is the fourth strategic priority, resource allocation and investment for the future. We introduced our cost optimization and prioritization program during our second quarter '20 earnings announcement. This initiative is our enterprise transformation that allows us to reinvest in growth areas for the future of our business. Here, example of what's included: digitizing our marketing operating model to deliver more value at lower cost; radically rethinking the allocation of sales resources to align with the enhanced pipeline generated by our new segmentation structure and growth areas of our portfolio; modernizing our IT systems to improve our business process agility and speed in an increasingly as-a-service world; and also optimizing our real estate footprint to account for the new work-from-home reality. Overall, our cost optimization and prioritization plan is a fundamental transformation program that is anchored on finding sources of efficiencies in the back-end support functions to fund and make more effective our front-end go-to-market and R&D engines to spur innovation and growth. On a net basis, we are well on track to deliver greater than $800 million in annualized net run rate savings by the end of fiscal year '22, with the majority of execution plan for FY '21 unlocking most of the annualized $800 million run rate savings. With that, let's transition to the more exciting part of our presentation, that is, our financial architecture. I will deep dive into 4 areas: our long-term financial model; our balance sheet and free cash flow; our capital allocation framework; and yes, our fiscal year '21 outlook. Now with that in mind, let's discuss our long-term financial model, starting with revenues. On the top line, as we transform and stabilize the core, double down on the tremendous opportunities that lie ahead in our growth businesses of edge and HPC & MCS and accelerate momentum in our as-a-Service business, we are confident of achieving a positive top line CAGR growth profile over the next 3 years. Furthermore, the quality of the revenue will improve as we expand our sustainable recurring revenue base with as-a-Service ARR growing at a 30% to 40% CAGR. The combination of a higher margin and stronger growth-oriented revenue mix, more profitable recurring revenue structure and the cost optimization from our enterprise transformation will allow us to grow our non-GAAP operating profit faster than revenue, which will generate robust free cash flow in the outer years. And lastly, we will continue to preserve our balance sheet to enable disciplined investments for future growth and to sustain capital returns to shareholders. Now let me translate these financial priorities in our long-term model with expected CAGRs from fiscal year '20 to fiscal year '23. For revenue, we expect to grow 1% to 3%, with non-GAAP operating profit growing at 10% to 12% and non-GAAP EPS growing at 7% to 9% due to nonoperational headwinds, including an increased tax rate and other income and expense I will explain later when discussing the details of our fiscal year '21 outlook. We expect free cash flow to be above historical levels of fiscal year '19 by the end of fiscal year '22, just 2 years from now. Furthermore, we expect free cash flow growth to track earnings over time as we wind down our enterprise transformation and deliver next-gen IT, which will reduce onetime payment obligations. Finally, we will prioritize dividend distributions and investments that help fuel future growth through a dynamic capital allocation framework. We'll also engage in opportunistic share buybacks if and when we are in a position of excess cash. Now let me provide some insight into balance sheet, free cash flow and capital allocation in the upcoming slides. With respect to our balance sheet, I would like to reiterate that our balance sheet remains strong, and we remain committed to maintaining our existing investment-grade rating. Preserving a strong balance sheet and liquidity profile provides us with security and financial flexibility to make disciplined growth investments and sustain capital returns to shareholders. The numbers on this balance sheet slide reflect our position at the end of our fiscal year Q3 quarter with adjustments made for the bond redemption payment of $3 billion in August and the closing of the Silver Peak transaction in September for approximately $900 million. It is very important here to distinguish between the operating company and the financing company capital structures. Looking at our operating company, you will observe that we have a slight net debt position of $400 million, which shows that we run the operating company almost on a net cash neutral basis. Turning to HPEFS, all the debt is associated with the financing of receivables, and very little cash support levels are required to run this business. You may ask why. Well, this is explained by world-class underwriting performance with bad debt losses of less than 1% of average net receivables, and this has not materially changed post-COVID. In turn, this world-class underwriting performance enables a very efficient capital structure and a high return on equity of close to 15% on a $13 billion asset loan book. It is also worth noting that HPEFS has positively contributed to total HPE free cash flow in fiscal year '19, and we expect that HPEFS will continue to grow its book of business with no significant impact to the total free cash flow of HPE moving forward. We also have a very strong liquidity profile with access, as you know, to a $4.75 billion 5-year credit facility. Together, with about $4.6 billion of cash on hand, we have about $9.4 billion of liquid reserves. As I mentioned previously, we also entered the asset-backed securities market in the United States to diversify funding sources with better matching of financial services liability duration with the contract durations of the receivables. The refinancing of higher cost unsecured debt with ABS financing allows access to another funding market at a very favorable cost of capital, and this helps diversify our balance sheet further and lower interest expense payments in the future. This becomes more important, especially as we continue to grow our as-a-Service business. Currently, we have approximately $2.1 billion in outstanding ABS issuances with further potential to tap more into the ABS market. Bottom line, we have a strong cash position, ample liquidity and investment-grade rating with access to low cost of capital to run our operations, continue to invest in our business and execute on our growth strategy. Now let's turn to cash flow. Let's first remind everyone that we delivered $1.7 billion of free cash flow in fiscal year '19 after making a onetime payment for a settlement with DXC of over $660 million. I still haven't forgotten that. This give you a sense of the cash-generating power of this business. Our fiscal year '20 free cash flow has been impacted by COVID, and we expect to end the year with free cash flow in fiscal year '20 of approximately $600 million. As we look forward, it's important to note that our core transformation efforts and future investments in key growth areas will utilize cash in fiscal year '21 and fiscal year '22, but lower onetime payments and higher profitability will drive free cash flow growth in the outer years. Another important thing to note is that our GreenLake business and HPC exascale deployments require upfront working capital but will significantly enhance our future cash generation. Now with that backdrop, it's important to note that we still expect free cash flow to rebound above historical levels of fiscal year '19 by the end of fiscal year '22 and to exceed $2 billion by the end of fiscal year '23. The net takeaway is that we will be growing cash flow at a 3-year CAGR of over 50% between fiscal year '20 and fiscal year '23. Now let's talk about capital allocation. Our capital allocation framework is returns-based with a rigorous investment evaluation process to maximize shareholder value. Dividends are a very important part of our capital allocation framework and returns to shareholders. We have a strong track record of growing and paying our dividends, and we will remain committed to dividends. As noted previously, we will engage in share buybacks opportunistically if and when we are in a position of excess cash. On the investment front, we have invested both organically and inorganically to fuel innovation and drive growth. Recent examples of organic innovation include HPE GreenLake Central, HPE Ezmeral software portfolio and Aruba Edge Services Platform amongst lots of others. On the inorganic side, we have now built a very successful track record of disciplined acquisitions from Aruba to Nimble to SGI and, more recently, MapR, Cray and Silver Peak. As I said before, our acquisitions have been disciplined and have given us the ability to scale the acquired business through our large and diverse channel distribution network. Also, it is worth noting that our investment in H3C continues to climb in value with our unique and differentiated setup in China. This setup is the envy of most of our peers. As of the end of 2019, H3C is #1 in China for enterprise networking and #2 in enterprise compute and storage, well ahead of global international players such as IBM, Dell or Cisco. The equity interest contribution from H3C in the first 9 months of the year has grown almost 20% year-over-year to $160 million, and this despite the global pandemic as China recovered faster than other countries. As a reminder, we have a put option to sell all or part of our 49% stake in H3C at a 15x trailing 12-month earning multiple through April of 2022. We are very pleased with H3C's performance. It is accreting in value, and we will regularly evaluate the asset as we do with our entire portfolio to create value for our shareholders. To conclude, over the longer term, we believe this capital allocation framework will drive value creation and provide meaningful capital returns to our shareholders. Now with that, let's turn to the much awaited fiscal year '21 outlook. Let's start by discussing the key assumptions underpinning our fiscal year '21 outlook, which includes obviously Silver Peak. As we have mentioned in prior calls, we expect a slow and gradual recovery from this global pandemic in fiscal year '21. We are navigating through continued business uncertainty and cautious customer spending. But having said that, from a top line perspective, we are comfortable with the current revenue consensus for fiscal year '21 at $26.9 billion. And of course, this is subject to no further adverse impacts from foreign exchange rates or COVID-19. Before we discuss profitability, please note that we are moving stock-based compensation expense from non-GAAP to GAAP, in line with industry practice and consistent with almost all of our peers. To give you a sense of the magnitude of the change, stock-based compensation expense will be $0.19 per share in fiscal year '20, and all growth rates in this presentation are adjusted to reflect this. With that said, we are targeting non-GAAP operating profit dollar growth of 15% to 20% as our gross margin expansion and core transformation continues to drive profit growth while allowing us to invest in R&D and sales. Adjusting for stock compensation, we expect to grow our non-GAAP diluted net EPS double digits year-over-year to a FY '21 range of $1.56 to $1.76. We expect free cash flow in fiscal year '21 to be between $900 million and $1.1 billion, reflecting over a 65% increase at the midpoint over fiscal year '20 expected levels. Looking at nonoperational assumptions, we expect OI&E, which includes our equity interest in H3C and net interest, to be approximately a $150 million expense in total. Finally, turning to our tax rate. Similar to fiscal year '20, we continue to report our non-GAAP effective tax rate based on a structural tax rate expectation utilizing a 3-year rolling forecast. At this time, our structural non-GAAP effective tax rate is rising from 12% in fiscal year '20 to 14% in fiscal year '21. This adjustment is primarily driven by a combination of removing stock-based compensation expense and associated tax benefit from the non-GAAP results effective fiscal year '21 and also a more uncertain tax legislative environment as countries around the world look to recover from financial impacts related to COVID-19. Now let me provide you with some more insights into our fiscal year '21 non-GAAP EPS assumptions with the bridge. Looking at the fiscal year '20 to fiscal year '21 non-GAAP EPS bridge, we first adjust for the stock comp expense of approximately $0.19. That is moving from non-GAAP to GAAP. This will result in an adjusted fiscal year '20 outlook of $1.51 at the midpoint. Starting from our adjusted fiscal year '20 non-GAAP EPS guidance of $1.49 to $1.53 per share, we expect $0.20 to $0.32 per share of benefit from net operational improvements, which includes increased demand, the benefits of our cost optimization and prioritization program and margin expansion from a favorable product mix, all of this offset with ongoing investments in high ROI growth areas of our portfolio. OI&E will be a $0.05 to $0.07 headwind primarily due to onetime gains in fiscal year '20 that we don't expect to repeat in fiscal year '21. Finally, we expect a $0.04 to $0.06 headwind from share count and tax primarily due to the change in our non-GAAP structural effective tax rate, as I explained earlier. The net of all of this is that our fiscal year '21 non-GAAP diluted net EPS outlook will be in the range of $1.56 to $1.76, delivering a non-GAAP EPS growth rate of 10% year-on-year at the midpoint of our outlook range. So before I turn it over to Q&A, let me just recap why we believe HPE is a unique investment opportunity. First, we have the right portfolio of assets to meet our customer needs edge-to-cloud and the financial strength to invest in the areas where we see the strongest opportunity for growth and high returns. Second, there is a significant opportunity ahead of us as we help our customers transform and digitize their businesses to adapt and operate in this hybrid world. Now to seize this opportunity, we are transforming and stabilizing our core businesses and doubling down on tremendous growth opportunities we have within our edge, HPC and our service businesses with investments supported by our enterprise-wide transformation efforts. This will result in a healthy long-term financial profile with sustainable growth of 1% to 3%, operating profit growth of 10% to 12% and EPS growth of 7% to 9%. Furthermore, the mix of our business will shift significantly by fiscal year '23 to higher-quality revenue streams with greater visibility. Our growth business mix will change from current low to mid-20% range of total HPE revenues to over 32% of higher-margin, faster growth revenue in just 3 years. As foreshadowed last year, our as-a-Service ARR will nearly triple from more than $500 million today to over $1.4 billion in 3 years, providing a more profitable and recurring revenue stream. And the combination of these efforts will translate into a more robust free cash flow over the outer years, growing to over $2 billion by the end of fiscal year '23. Let me close by reiterating that I'm very proud of what we have accomplished as a team during very challenging and uncertain times and look forward to fiscal year '21. We are very well positioned. So with that said, let's bring back Antonio, Pete, Keerti and Keith for the Q&A session. Thank you.

Great. Thank you, Tarek. So just as a quick reminder to everyone before we jump into the Q&A, all of the materials we just shared with you today will be posted to our IR website shortly if you wish to download them. So with that, let's go ahead and get started with the Q&A. [Operator Instructions] Operator, first question, please.

Your first question comes from Wamsi Mohan.

If I could, Antonio, how do you think about this on-premise, as-a-Service opportunity in terms of incremental growth to the HPE model? Do you think that this is adding incremental growth versus just a shift in timing of revenues that you've captured -- that you would have captured anyway? And if I could, Tarek, your guidance for a growth rate of 1% to 3% for 3 years is the same as last SAM, but your base in 2020 is almost $2.5 billion lower than in 2019. So are you not really expecting the recovery in IT spending that would drive a faster growth from this lower base over the next 3 years?

Thanks, Wamsi. Thanks for the call and for participating today. So we believe it's accretive, incremental because, as Keith described, this is a significant market in transition from $6 billion this year to $22 billion in 2023. But remember that while there is some shift between CapEx and OpEx, there is also the incremental opportunity that he called out with an incremental driving of the usage by 25%. So we believe there is a transition of CapEx to OpEx, but we believe that 25% opportunities is totally incremental. And as we described, we have a unique set of capabilities in software and services with our channel that we can capture that opportunity. So we believe it will drive more compute and storage in that transition and then drive the usage over time, which is standard in this type of business model. And the other question you had, and I will pass it to Tarek, is the fact that 2020, obviously, the sea level came down quite dramatically because of COVID and so, clearly, has delayed the recovery. As Tarek said, there is still uncertainty, but we are very confident with the guidance we provided between 1% and 3%. So Tarek, over to you.

Well, thank you, Antonio, and thank you, Wamsi, for the question. As Antonio said, the tide has come down from the high levels that we had in fiscal year '18 and '19. Remember, in fiscal year '18 and '19, we had wonderful tailwinds in the industry such as tax reform. Now things may change in the opposite direction. This is why we have not changed our long-term financial model. But I'm very confident that we can do 1% to 3%. Most importantly, it's not just the total percentage growth that matters but the quality of the growth and how that growth is coming, where it's coming from. Is it coming from the areas where it is uncontested or less contested? And is it coming in a way that is recurring? Is it coming by way of high-calorie gross margin revenues? We feel very good about the prospects of the growth. This is translating into higher margins from our standpoint, particularly when you look at the revenue mix impact from HPC & MCS and the work that Keerti is doing with Aruba, plus the as-a-Service pivot. I think the combination of those 3 should really cement a very different and higher-quality growth profile for HPE.

Your next question comes from Aaron Rakers.

I guess I would first want to start -- obviously, you're changing your accounting with regard to stock-based compensation. The 10% to 12% operating margin, if I think about that relative to where the Street expectations are, it doesn't seem like it's that dissimilar to probably what the Street has been modeling, kind of 8%, 9%, 10% kind of range. So first of all, if you can unpack that a little bit. And I guess, underneath of that, I'm just trying to understand why we wouldn't see a bit more operating margin leverage. And just maybe help us understand the context of how much more is the as-a-Service offering in terms of generating gross -- or operating margin higher than the corporate average, just kind of any framework of how you're thinking about that because it doesn't appear like based on the model that you guys were assuming any significant incremental operating margin leverage here.

So Tarek?

Okay. So specifically for the Compute long-term operating profit margin, we flagged 10% to 12%, probably, it's in line with what the Street consensus is for that business. This is a business that has to be stabilized, most importantly. And also, we're ensuring that this business is much more of a high-volume, low-touch business moving forward. You always have a series of fluctuations that are really driven by commodities in this business. I feel very good about that operating profit margin profile in the long term because the industry continuously evolves, and there is a very, very dynamic environment in a high-volume, low-touch business as our Compute segment is. Now with respect to as-a-Service gross margins, we do believe -- we know that they are today much higher than our corporate average, and this will continue to increase. The gross margin percentage will continue to increase with the pace of our addition of further software in the mix, which is one of the major drivers of gross margin expansion. And I feel very good about this. So we will continue to update you all on the progress of our as-a-Service business and operating leverage that this creates in the future. We are where we are today. We're giving very good insights around the metrics and how this business is performing. And we wouldn't be doing this business if we did not believe that there was a substantial opportunity there from a profitable growth standpoint.

Your next question come from the line of Jeriel Ong.

I think I want to kind of ask about the long-term kind of plan. So -- and just focusing on the EPS growth versus the operating profit growth, I think what's a little bit different this time is that operating profit growth from '20 to '23 is at 10% to 12%, so 11% at the midpoint, but there's always still a little bit of EPS deleverage, 7% to 9%. And I'd love to -- I think I can kind of hear around the edges what the pieces and drivers of that might be, but I'd love to hear it all in kind of one place, what exactly -- why exactly there wouldn't be more EPS leverage and operating profit leverage.

I guess, Tarek, you should take that.

All right. So we did say in our presentation that our operating profit growth is expected to be between 10% and 15%. Now EPS growth is at 7% to 9% due to essentially 2 things. One is the removal of the stock-based compensation from non-GAAP and putting it into GAAP. Therefore, on a non-GAAP basis, you don't have the benefits of that stock-based compensation expense. This is why you have to factor that into the calculation of the EPS growth. Second, the tax impact of stock-based compensation, but also, we do see in many geographies and many countries, legislation is changing with further tax pressure on essentially recouping the financial deficits that the COVID pandemic has created. Having said that, I have to tell you that a 14% effective tax rate is materially better than anybody else in the industry, and this is really translating into real cash. So I'm pretty pleased with that.

Your next question comes from Shannon Cross.

I wanted to talk about cash flow. Looking at your free cash flow, which is up a lot, but albeit off a very low base in fiscal '20, how should we think about the investments? And maybe, Antonio, you can take it qualitatively and Tarek, maybe quantitatively. As you think about what investments are required for GreenLake and exascale restructuring that's sort of baked into your expectations, getting to $2 billion of free cash flow by '23 and also working capital, just so we can get an idea of what you're investing and how you're making those decisions and then how it will sort of run through the model.

Well, I will start, Shannon, thank you for the question. Then Tarek can comment on the rest. Obviously, as Tarek said, we are continuing to make investment in the business. The GreenLake business continued to scale, and that requires not only the capabilities in our services organization to cover more accounts, and we call this the customer success story kind of resources, because those people are not only there to support the customers and curate the workloads but to drive usage. And therefore, they have a quick payback because, obviously, the more usage we drive, the more revenue at the higher margin, that Tarek just answered that question. Second is, in Pete's business, obviously, you saw we have more than $2 billion in awarded contract with exascale. What happened with that business is simply we got to acquire all the commodities, build these massive systems. Remember, we're talking about, in some cases, 100 racks that have to be all put together and deliver in a 2 basketball court fields that eventually becomes the exascale, and that's working capital we have to put upfront. And then remember, this business requires us to build it, ship it, install it and turn it on. And therefore, there is a timing element, which should not be a surprise for those who have followed Cray before. So this is not new news. And that's why there is an impact on the working capital, and we have comprehended that. 2021 is an important year is an important year because we have an enormous amount of systems to be built, also an enormous power that we have to bring to the factories. So that's one of the reasons. But ultimately, we are fueling these businesses with investment either to drive that higher growth at higher margin. So Tarek?

Yes. I will not add much more to what Antonio said. I think I want to remind everybody about the main drivers of our free cash flow next year. Aside from operating profit, you have also the cost of restructuring related to our cost optimization and prioritization program. We flagged those very clearly for you in our presentation. The second aspect that affects free cash flow generation is working capital for those exascales deals with the timing effects that Antonio highlighted. We got to go after this opportunity. No one is as well positioned as we are with Pete for this opportunity. We have $2 billion-plus of secured contracts, line of sight over further $5 billion. We got to go over this opportunity. It's absolutely necessary. This is clearly going to deplete our working capital, but it's a necessary thing. There's no one else who can do this but us. We have to go and capture that opportunity. And then there is also what Keith does and what Keerti do by pivoting their business to be much more as a Service. This is also a revenue quality-enhancing set of measures that we're taking by shifting more our revenue towards being as a Service by way of software and GreenLake. So this is what is explaining our free cash flow guidance. But bear in mind, our free cash flow will surpass historical high levels of fiscal year '19 in fiscal year '22. We are at the end of fiscal year '20. So it's just 2 years, and then we'll grow beyond that.

Next question comes from Amit Daryanani.

I guess I have -- I guess my question really is around the H3C asset, would you look to exercise the put option over that because from everything you guys have laid out today, it actually seems like you could use those proceeds to invest in growth opportunities in your core business. So I'm just wondering what triggers the decision to keep versus exercise that put option, it would just be helpful to get that perspective. And if I could sneak one in for Keerti. Keerti, you spoke a lot about SD-WAN. I'm curious, do you think you need to have firewall capability to really accelerate the growth over there or you can do it without firewalls?

Well, I mean, as Tarek said, we are incredibly pleased with the partnership and the momentum H3C has in China. Let's remind ourselves, China is the second largest market when it comes down to IT. And we have a very strong position through them in networking, compute and storage. And so it's our ability to cover market that today is incredibly hard. But as Tarek said, we continue to assess what is the best return on invested capital for our shareholders. There is an opportunity to reinvest that money somewhere else. Those are the things we continue to assess on an ongoing basis. There isn't a specific, call it, driver to trigger that put. Let's remind ourselves that put option based on the multiples today continues to improve because of the performance of H3C. So we are not in a hurry to execute anything here that does not give us the ability to invest the money in other areas that will drive future growth because the reality, as Tarek said, that also drives a lot of OI&E opportunities that we show in our EPS. So at this point in time, we are sort of pleased, but obviously, as a part of the ROIC assessment process, we continue to assess. I don't know, Tarek, if you have any other question -- other comments you want to make.

It's perfectly -- this asset continues to accrete in value, and we'll -- we evaluate it as part of our return base framework all the time, and we'll determine what to do with the value of that put. Keerti?

Thank you. And I should actually start out with saying that we are super excited to have the Silver Peak team now be a part of the family here. And as far as your question of firewall growth, the main trend that we are seeing is in connecting the edge to the cloud, enterprises are adopting a posture of zero trust. And they're adopting a framework that actually Gartner established called SASE. It stands for secure access services edge. And the key point I want to make there is edge. The pivot point for making intelligent decisions, whether it comes to application performance or security, is at the edge. And that is why we think the Silver Peak asset is a very strategic asset. And when you couple that with ClearPass, which really gives you deep insights into the users, the devices and things that are actually connecting on the network, with the application intelligence that the Silver Peak edge connect gateways actually provide, we are able to create a full context from a security perspective of connecting end to end from the edge to the cloud. And so we fully intend to actually embed functionality like firewalls, unified threat management, et cetera, that's already, frankly, part of the Aruba ESP architecture. We'll infuse that into Silver Peak in a way making 1 plus 1 equals 3, taking Silver Peak, Aruba ESP and ClearPass and delivering on the Gartner SASE architecture for the enterprise. So we feel very confident with the growth assertions that the market makers are making of -- in excess of 20% and very, very pleased that the team is now part of Aruba.

I have to say I'm incredibly excited about this acquisition. It's one of those acquisitions like the other ones that perfectly time for the market transition, the inflection point we see. Unfortunately, obviously, COVID has accelerated some of these inflection points. But boy, their experience with SD-WAN and our experience with Aruba is a perfect combination to take advantage of this significant opportunity at a very high growth rate and obviously at a very high margin. So this is going to be a point of differentiation for us as we think about the next 3 years.

Your next question comes from the line of Katy Huberty.

Antonio, I want to drill down a bit on the priority to double down on growth categories. If we just look at the business model the last 3 years, R&D grew 24%, but revenue still declined materially. So it does feel, from at least an investor standpoint, that M&A has to be a part of returning the business to sustainable growth. So the question is, are you willing to consider either increasing the size or the quantity of M&A transactions in order to help build that confidence around sustainable growth? And if so, what are some of the areas of the business that you're particularly looking to invest in?

Yes. Obviously, if you start -- if you go back to 2018, what I said, the edge is the next frontier and a big opportunity for us. We have been investing $4 billion over 4 years, so '18, '19, this year and then next year. And the acquisition of Silver Peak is an incremental additive to that strategy but, again, always with a discipline on return on invested capital. Cray is another great example of doubling down after the acquisition of SGI in our organic business in HPC. So for us, as I think about the growth, the plan that Tarek just walked you through, the 1% to 3% and the margin's expansion, is pure organic at this point in time. We don't need an incremental acquisition. But obviously, we continue to assess what is out available at the right valuation that will accelerate the strategy the team and I walked you through. And those areas are in the software space, definitely in the software space, because obviously that's what makes this experience unique and differentiated. And anything that favors that pivotal as a Service will be also considered. So I just want to reinforce that we are very disciplined on this. We have done it. I have done actually 18 acquisitions since 2015. My first one was HPE Aruba, since Aruba, one we did in 2015. And that has proved to be successful. But obviously, we need to continue to assess what's available and always think about can we bring the right intellectual property and the right talent that we can quickly incorporate in our solutions and then take it to our go-to-market at scale. So we'll continue to do that, Katy. And I expect that to continue to be the case.

Your next question comes from the line of Toni Sacconaghi.

I just wanted to follow up somewhat on that question. So last year, you talked about 50% to 70%, 75% at a minimum of cash being returned to shareholders. Right now, you're really just speaking to a dividend, so that does feel like a departure. And so how do we think about what -- should we be thinking about the majority of the rest of the cash flow being directed at M&A? Do you expect your cash balance at the end of fiscal '23 on your balance sheet to be lower than you are today? And what is the maximum net debt level that you would ultimately be comfortable with? It would be helpful. And I guess you're -- just related to this, your growth rate of 1% to 3%, I presume that includes acquisitions. Cray added about 2 points last year. Silver Peak will add about a point in fiscal '21. So is that an organic growth rate? Or is that a reported growth rate, the 1% to 3% target?

So Tarek?

Okay. So let me start with the last part of the question. I'll repeat what Antonio said. The 1% to 3% is with the acquisition that we currently completed, which means it includes Cray, it includes Silver Peak, it's organic from hereon. No further acquisitions. New acquisitions are baked into the 1% to 3% range. The second part of your question on the capital allocation framework, if you look at our free cash flow guidance for fiscal year '21 of $900 million to $1.1 billion and if you consider the fact that we are committed to dividends, it's fairly straightforward. We paid $0.12 per share of dividends, which each quarter means we pay $154 million. You do the math, you are still well within that guidance that we spoke about last year, which is about 70% of our free cash flow returned to our shareholders. With respect to buybacks, as you can imagine, we said now it's important at this junction of the company to continue to invest and pay dividend to our shareholders with the residual cash that is available. It's not excess cash that you can deploy towards buybacks in a meaningful way. It doesn't really make any sense to do a buyback for a couple of hundred million dollars. So we'll look at that opportunistically as things go better and as we generate more cash flows. But right now, the priority is to invest for the growth, reigniting the growth and continue to pay dividends for our shareholders. Finally, on the balance sheet question, what is the level of debt that we are willing to consider, we continue to protect, generously protect, our investment-grade credit rating. There is a very simple math to be done in terms of how much more debt capacity we can add on that basis. I'm very comfortable with the debt capacity that we have based on our current net debt-to-EBITDA ratio, but it's very, very important that we remain disciplined around the use of our balance sheet moving forward. And the threshold for us is the investment-grade credit rating. We may go below that, but at this stage, I don't want to envisage it.

I will add one comment on it, just to make sure we don't lose an important point. Cray now just got their first anniversary with us, which means that the entire 2020, the Cray revenue has been in our numbers, which means as we enter 2021, that's part of the baseline. And therefore, that's why we are confident that the 1% to 3% is pure, what we call, organic. And obviously, the Silver Peak will be on top of that for Keerti's. But going back to the -- how much of the free cash flow we'll return to the shareholder is exactly in that 50% to 75% range we shared with you last October, at SAM. And to Tarek's point, that's very close to those numbers [ we are writing ] on the 60% to 65% when you do that math.

Your next question comes from the line of Ittai Kidron. I'm sorry, that was Rod Hall.

I had 2 for you. First one for Antonio, and then, Tarek, I wanted to come back to the balance sheet question. So Antonio, I was looking at the TAM that you're talking about for the as-a-Service business, on-prem, of $6 billion and then growing to $22 billion. And I wanted to know if that TAM that was talked about there is apples-to-apples with the kind of targets you're talking about for your as-a-Service revenue growth. It looks like if it is, the $0.9 billion is about 15% share of that TAM. And I wonder maybe you could talk about who has the rest of that market share and what your aspirations for share in that as-a-Service business are over time as you approach those targets. And I'll throw the balance sheet question out there as well. Tarek, could you just remind us on the investment grade, how is the rating agency seeing the financial services liabilities? I think they consider those, but can you just remind us whether that's true or not? And if it is true, are you having any discussions with them because that's fully collateralized and so on about maybe removing those from that or at least looking at it a little bit differently? Or do you think they're already doing that? So just wondering how that's all progressing in terms of discussions with the rating agencies.

I will start, and I will give Keith the opportunity to speak as well. Obviously, when we look at the on-premises as-a-Service market, we consider hardware, software and services. So you have to think the entire stack, not just a hardware part. And as Keith said, a lot of that market is moving -- is pivoting to the as a Service. But we provide a true consumption-based model, which is a combination of the first installation, which -- where the customers consume the hardware as a CapEx and OpEx embedded in the as a Service. And we talked about this before. Tarek has provided a lot of insight about that. And then obviously, the software and the services that gets recurred, and that gets recurred over the time. And so for us, it's important that we capture a very high share of that. We want always -- in any market we participate, our goal is to be in excess of 20% market share. But we believe in this particular market. We have unique differentiated capabilities because it's a true consumption-based model, and it is very well optimized. It's not infrastructure. The example of Wells Fargo is a great example. We took Splunk, which is kind of a new workload, if you think about it. It started in the cloud. We brought it on-prem, a massive amount of data, and we're able to deliver a 17x better performance than the public cloud. And those who are -- workloads that have very large data-intensive workloads are actually prone to stay on-prem because, obviously, the cost of aggressing data back and forth is one that the customers are realizing now and they don't want to incur. So think about it. I think once, he asked me the first time, and the first question, it is -- a lot of that is incremental, and we plan to drive usage in that $22 billion that we want to capture over time. Keith?

Yes, that's right. In essence, we see a bunch of small players that are across that from the overall market share standpoint. So when you talk to customers, they really want to basically standardize and then move a lot of their different workloads to what we're doing. So as Antonio mentioned, we're investing in customer success. We're seeing a lot of repeat customers, which has been very exciting for us. So we see a significant amount of the next project and the next project running on GreenLake. And so that's why we think that there's a huge opportunity there. But again, having the holistic offering that we've talked about from hardware, software, services, full management and the financing piece of it is really what customers are after, and that's why we think that we've got a huge opportunity here.

Great. Maybe, Tarek, we can go to you on the balance sheet question and the treatment of the financial services debt.

Yes. Certainly. So look, Rod, in simple terms, the rating agencies totally understand what we're doing with our balance sheet and capital structure. They associate already the debt we have with the receivables. And as we continue to accelerate our asset-backed securities program, this becomes even more self-evident. So we did only, so far, $2.1 billion of ABS issuances in the United States, as we spoke on many other occasions, we have about a book of $5 billion and growing. There is greater potential to substitute existing debt with ABS debt to match the term of the debt, the term of the receivables. And therefore, more and more, the debt is going to be treated as segregated between anything co-debt and any OpCo debt. That's why we showed you the balance sheet slide today in our presentation. We're very happy with this, and it's perfectly in alignment with the rating agencies.

Your next question comes from Ittai Kidron.

I made it. All right. So I got -- thanks, guys, for today by the way, very helpful and informational. I got kind of just 3 questions kind of wrapped up together in one. First on GreenLake, clearly, you're seeing very good success over there. When you look at the customers that have adopted GreenLake, can you talk on average how much of their footprint does -- of your -- their physical on-premise footprint moves to that model? Just trying to understand kind of what is the peak penetration into customers. And then, Tarek, maybe on the ARR side, can you talk about -- when you talk about your fiscal '23 expectation of ARR, what percent of your physical footprint with customers do you expect would be in an ARR mode at that time? I'm just trying to think how much more you can go beyond that time frame.

Well, thanks for the question. I'm going to start and give it to Keith because, obviously, he is involved with all the customers every day. But I have to tell you, you have customers like Zenuity or Zenzic, as an example, that's 100%. It's 100% GreenLake. The entire HPC cluster plus the storage is 100%. You have others like financial institutions. They are starting with a storage as-a-Service piece because they want to make sure they can consume data in a flexible way, and then they move the compute with it. So to your ranges, but the opportunity is enormous. I'm so excited about the business because we're winning, and we're winning big. In the example of Wells Fargo, they took a specific workload called Splunk, and they moved that as a Service. In the case of Kern, they're moving their entire infrastructure for the county. So Keith, maybe you want to share other examples of that.

Yes. You nailed it, Antonio. In essence, IDC will tell us that nearly 70% of apps and data can't move to the public cloud. And so you're seeing a significant amount of movement into this on-premise as-a-Service offering with the 70% of current and also future workloads. And in essence, we're starting to see the spread happen. As I mentioned, we're seeing more and more of our pipeline and our wins happen as the next project and the next project within these existing customers. Yes, Kern County is a great example, Antonio, where they're about 85% today, planning to move to 100% on top of that. And so it's just a matter of time as we see more and more folks establish footprints, especially in these, I'd say, more regulated, higher secure type scenarios, the financial services, the government, defense, health care, some of these key industries, automotive. So yes, we consider -- depending on the customers' need, we know it's a hybrid world. We know that it's going to be multi-cloud, but people are really, really embracing GreenLake and seeing that move as they start with one project and then get into the next ones.

Okay. Sorry. With respect to the ARR, Ittai, I would say 2 things. We spend a lot of time and the financing strategy team to ascertain the size of the opportunity of the as-a-Service business on-prem. The slide that Antonio showed you is a reflection of the work that we have done, and there's a $22 billion opportunity there. Now if you tie this to what I showed you in my presentation around as-a-Service revenue and ARR at $2.2 billion of total as-a-Service's revenue matching on '23, the $22 billion opportunity, it's only 10%, 11% of that market. I do believe there is tremendous potential beyond that, and that's why we have to go at a very, very fast pace. That's why we're here with Keith, with Keerti, with Peter to just drive this opportunity even further. The opportunity is ahead of us. The second thing I would say to you is beware of the rudimentary replicas. There will be replicas coming and wanting to take a share of that market. That's normal. But the only business that provides true consumption as a Service is GreenLake because we have the capabilities, including, most importantly, the metering capability that delivers to our customers true consumption at any point in time. So I feel very good about the long-term potential of as a Service given the analysis that we have done and the capabilities that we have to execute.

Great. Perfect. Ittai, thank you for the question, and thank you, everybody else, for the questions and all the participants today. So with that, I'd like to turn it over to Antonio for some final comments.

Well, thank you for joining us today. You have heard today the compelling trends that are driving the next wave of the digital transformation. You have heard us articulate why we believe we are very well positioned to convert these trends to opportunity. And you have heard us outline a very deliberate strategy to transform our core businesses, double down in key growth areas and accelerate our pivot to as a Service. I hope you also appreciated hearing from some of our leaders who are driving these efforts and also from Tarek who gave you a lot of details today. I believe we have an incredible talented, experienced team that is laser-focused on the right set of priorities. Next month, HPE will celebrate 5 years of standing alone as a new company, and I am tremendously pleased with how far we have come. At the same time, I don't take for granted the trust our customers, partners, team members and you, our shareholders, place in us. There is more work to be done, certainly, but our vision has been validated by our customers. The future enterprise is here now, and we are delivering in ways others cannot. In solving complex challenges for our customers, we will deliver sustainable, profitable growth, which will drive strong results and returns for our shareholders. We believe HPE is a compelling investment opportunity. Thank you for joining us today. Stay safe and healthy, and I hope to see you soon.