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

Thank you. Thank you, everybody, for joining us this afternoon. I'm Aaron Rakers. I'm the IT, hardware and semiconductor analyst here at Wells Fargo. Extremely excited to have with us Keith White, the General Manager of HPE's GreenLake Cloud Services offerings. First of all, Keith, thank you so much for joining us. It's going to be a great discussion given the importance of GreenLake at HPE. But before we go to you, I've been told that let's pass it over to Marcus Kupferschmidt to kind of run through a quick -- this safe harbor.

Thanks, Aaron. Before we start, let me take a moment to read our disclosures. You'll hear some forward-looking statements in today's discussion. These are based on risks and assumptions that are described in our annual report on Form 10-K and Form 10-Q. Our actual results could differ materially, and we assume no obligation to update. More details can be found on our website, investors.hpe.com, and our recent Q4 earnings announcement press release dated December 1. With that, Aaron, let me turn it back to you.

Perfect, Marcus. You nailed it. That was great. So Keith, let's -- first of all, again, thank you for joining us. Again, your role as Senior Vice President and General Manager of HP Enterprise's GreenLake efforts, for those in the audience that aren't familiar with Keith, I would love for him to go back, maybe take one step back and go through his background. I think you joined from Microsoft back early part of this year. And in that context, I would love to understand of what maybe your experience at Microsoft kind of brings to HPE as they go down this journey with GreenLake.

No, no. It's a great question. And frankly, yes, I was at Microsoft for 25-plus years. I had the benefit of doing a phenomenal set of different jobs in careers that I ran the Office business for a period of time in the United States. I ran our Embedded and Appliance business before we were putting Windows on phones. I was also leaning up our public sector business, and that was really targeting sort of government, health care and education. But my last role in Microsoft was basically leading the Intelligent Cloud business. And so that, as many of you know, is our sort of Azure, Windows Server, SQL Server, Dev Tools sort of back office-type scenario. So I did that for about the last 7 or 8 years of my time at Microsoft, and so super fortunate to have the opportunity. And my portion of that was not engineering and was not product management, but I was the lead on our, what's called, our solution area side, which is all the sales, go-to-market, partner ecosystem development standpoint for that -- for the Azure business. And yes, I joined HPE in January of 2020. And frankly, I had been talking to customers for quite some time about how they are digitally transforming, modernizing their environments and how the industry has really accelerated to what I like to call a hybrid and multi-cloud world to meet their needs. And so I had that background with Azure and what we were doing at Microsoft, from a public cloud standpoint, and from our customers, from a hybrid standpoint, with the Windows Server, SQL Server side. But at the same time, what was really compelling, with respect to coming to HPE, is that Microsoft went through a pretty significant transformation, if you will. You might recall, they were on a 3-year enterprise agreement approach with their customers. They were selling Office and Windows, traditional transactional-type partners that they had in the disti and resellers. And customers have really sort of pivoted to digital transformation, workloads and vertical solutions, consumption-based, usage-based IT, customer success and really selling through and with a much broader partner ecosystem. And so I was first-hand at that at Microsoft, and frankly, it's the exact and very close to the exact same thing that we're going through here at HPE. And so being part of that and getting the chance to lead that transformation here as well is really an exciting opportunity.

That's a great overview and a great background to bring to HPE. Let's start from there in the discussion of -- for those that aren't as familiar with what HPE is doing with GreenLake, how much that's expanded within the strategy at HPE, where we're at today, where kind of we're going, if you kind of put your forward-looking hat on, over the next whatever time frame you want to think about from a portfolio perspective?

No. I think that's great. And first off, as you're probably aware, we did highlight HPE GreenLake as one of our fastest-growing businesses, especially as we're seeing this significant shift in the market to a consumption-driven model for IT. And so yesterday, we announced our Q4 results. And the fact of the matter is our ARR was up 20 -- I'm sorry, 30% year-over-year, around $585 million, which was fantastic to see. And as you know, GreenLake makes up the majority of that. But if you think about the sort of customer set, the rapid growth of the public cloud has really driven a strong set of, what I would call, customer expectations about and how they want to consume and simplify their IT going forward. Again, they're digitally transforming, they're modernizing their environments, and they want that cloud experience. And when I think about that, I think about automated, self-serve capabilities. They want the cloud economics, so they want it to pay as they go, they want capacity available to them very, very quickly. And they want the cloud management piece of it as well, right? They want the ability to have someone manage it all for them on the back end, updates, keeping it always up-to-date and available so that they can free up valuable resources that they have to really focus on business-critical needs. And so GreenLake, what that does for folks is it brings this modern cloud experience to customers' apps, data and workloads in their locations, so on-prem, so in their data center, in a colo or at the edge. And we do this in an automated, self-serve, pay for what you use, scale up and down, and we manage it all for them through HPE and our partners. So these solutions are workload-optimized for the customer. So we're leveraging the best of HPE across our hardware, our software, third-party components and software, and then of our Pointnext Services and our HPE Financial Services organization to bring these all together. So we take the best of that and deliver these to customers in as little as 14 days to really meet the customers' needs. And so you asked like -- yes, go ahead. Yes.

Go ahead. No, go ahead, Keith. Keep going.

Yes. I was going to say, IDC expects about 70% of current and future workloads to stay on-prem. And if you listen to AWS in their keynote last, I guess, it was earlier this week, they talked about even the 90% scenario that they're seeing with their customers. So the reality is it's a hybrid world, and it's going to be a hybrid scenario. And those are happening for very specific reasons, right, data gravity, data latency, security, compliance and regulatory scenarios, existing apps that are connected and entangled. And so GreenLake really gives that cloud experience without the cost, risks or time to move all that stuff to the cloud as well as it helps free up capital for customers and boost their operational and financial flexibility because they're paying for what they use and again, freeing up that talent for what they need. And so our goal is to make sure that we're a key part of that hybrid solution for that 70% to whatever percent with GreenLake.

And I think the company has been pretty clear, like this strategy is going to proliferate across the product portfolio. And I think you recently came out with support for cloud VDI. Where do we stand as far as the GreenLake umbrella, that as-a-Service umbrella kind of going through or across our product portfolio for HPE right now?

Yes. Perfect question, Aaron. In essence, we've delivered what we call a set of cloud services. So again, these are automated, they're self-serve for the customer, point and click. They're metered. And specifically, we've launched, this year, cloud services around sort of the core foundation, if you will, so compute, storage and networking, which makes up most of everything. And then we've brought this cloud service capability also to virtual machines and to containers. So those are becoming obviously much more prevalent as we go. Additionally, to your point, we've delivered a set of core workloads. So one of the big things that's happening out there, data is becoming such a critical part. So we've delivered machine learning operations to help data scientists and analytics-type scenarios, if you will. We've delivered this VDI, virtual desktop infrastructure, that you mentioned. A lot of growth with respect to everyone working from home, companies wanting to ensure a secure desktop and a secure connection so their customer -- their employees can be productive in that sense. And then you might have noticed, we also announced a partnership with SAP earlier this year. So GreenLake is now -- HPE GreenLake is now a part of the HEC customer edition. So this is -- they're migrating a number of their customers to SAP HANA. And what they found was a lot of people wanted to keep that on-prem, again, because of security, latency, the apps that they had built, et cetera. And so we're excited to partner with them on SAP with GreenLake.

So going forward?

Yes. Yes, go ahead. Yes.

Keep going, Keith.

Yes. Going forward, we're going to continue to develop more of these horizontal workloads. So you'll hear us talk about a variety of things around our sort of core compute storage and networking, but manifesting those into workloads that customers care about. And we're also engaging now deeply with a number of the vertical vendors, if you will, folks like Splunk, Epic, a few other folks to ensure that we're also providing these vertical workloads in this optimized format to our customer base. So think about finserv, hub stack, defense is obviously big, health care, automotive and manufacturing. And in fact, we're going to announce a few of these next week. So you'll hear more news on the 9th.

Okay. That's great. And let's talk a little bit about the business, right? I mean you touched on $585 million of ARR. I think, last night, you talked about 20% order growth. I think the prior quarter was 82%. So you've seen some good, solid double-digit growth there. And the company has continued to emphasize and reiterate that you see this business growing at a 30% to 40% CAGR over the next couple of years. So in that context, underpinning all of that, I would love to understand if you could help us appreciate some of the customer metrics. Like when you're engaged with a large enterprise customer, what percentage of these customers today are really deciding to look and engage on that as-a-Service-type model? Let's start there.

Yes. No, I think it's great. So in essence, as I mentioned, the value prop for GreenLake is really resonating with customers, right? The world is hybrid, it's multi-cloud. And interestingly enough, what's really happening is they're looking for a partner in this modernization, digital transformation-type scenario, right? So it's really getting away from being just a vendor and a provider of technology, to really being that partner. And then with COVID hitting, you're now seeing customers looking for a much more cost-effective spending scenario, right? OpEx versus CapEx, not having to write big checks upfront, maintaining that free cash flow that we know is so important. So a few of the metrics that we look at, for example, the number of customers. So in FY '17, when this all started, before I got here, we had about 350-or-so customers. Today, we're at over 1,000 customers worldwide. And this is in 50 countries, a number of the Fortune 500 as well as a variety of the industries, some that I talked about and others as well. And that total contract value has more than tripled to over $4 billion of where we're at today. As you know, there's a lot of new customers that we're getting. A great example is, you all at Wells Fargo, we announced the work we're doing with you and Splunk at our Securities Analyst Meeting in October. We're basically taking and creating a unified data repository that all the groups inside of Wells can use because there's a ton of machine and telemetry data that Splunk captures every day that folks need to leverage to do their jobs more effectively. And we're seeing that consistently around. We also announced LyondellBasell. They are a large chemical manufacturing organization. They wanted to get out of the data center business, but they didn't want to move things to the public cloud. They still wanted control, so they wanted to modernize and migrate their data center to a colo. And so they've done that with GreenLake. It's a scenario where we manage that fully for them. We help them with the migration itself. And they get the benefit of no longer having to manage that, no longer having to worry about how much power comes to this sort of coolant that or space -- real estate this. They get all that taken care of for them, and as well as the footprint from a sustainability standpoint gets addressed as well. So these new customers are really critical for us to see the continued growth that we have. And so they're coming to us and saying, "Hey, we're looking for a solution. We're looking for consumption-based, but we want to keep it on-prem." And so that's really key. At the same time, there's this whole growth -- the motion is sort of, I would say, land and expand because what happens is once a customer gets on GreenLake, we're seeing a vast majority of our pipeline be from existing customers as well. So they're taking in, they're growing their usage, plus they're also adding on the next project and the next project. And so you look at someone like Nokia, they're now using GreenLake for their entire DevOps operations for when they build new applications. Our friends at Danfoss were using GreenLake for their SAP implementation. They've now gone to a private cloud on a worldwide basis using GreenLake as well. And then you're seeing government agencies like Kern County. They started to use GreenLake as a way to get their arms around their data to see -- to get everything in a central place, similar to what we talked about with Wells. But now they've standardized on GreenLake across their 40 different departments to have a standard approach to IT, again, to simplify and free that up. So huge opportunity ahead from that standpoint.

So it kind of brings me to a question that just kind of popped out of my head, is that we all know that HPE has the infrastructure, right? You've got not just traditional compute x86 compute. You've done, as last night's results, from the HPC & MCS side was very strong, storage, et cetera. But that ability to have that abstraction, that metering capability, because I guess where I struggle a little bit is that there's a lot of companies that talk about as-a-Service today. So can you talk a little bit about what makes HPE's capabilities just architecturally, competitively different?

No. I think you nailed it. And in essence, when you think about sort of what other companies are doing, in essence, there are sort of 6 key areas that I think we really differentiate ourselves from. So first off, you mentioned this upfront, but this edge-to-cloud portfolio that we provide, really delivering truly optimized systems. So because we have the edge components, such as Aruba, all the way up to the largest computers, with Cray, as the acquisitions that we've made and everything in between, with compute storage and networking, we really can take from the best of the best. And so, in essence, you have that piece of it. Combine that with our software portfolio, the work we've done around AI and analytics, the HPE Ezmeral software portfolio that you've probably heard about, it really puts us sort of years ahead of the competition. And it really creates this true consumption-based scenario. The other thing, as I mentioned upfront, is we're really delivering cloud services on-prem. So not just the usage capability that I think a lot of our competitors are doing, but true cloud services that are automated and self-serve. And I had mentioned virtual machines and containers and ML Ops and a variety of other workloads. And this really basically allows customers to bring solutions to market about 75% faster than they would in these traditional CapEx. And you nailed one of the key differentiators that we have is we do true pay-per-use on-prem charging for our customers, right? So in essence, they only pay for what components of the system that they actually use. So we do true metered usage, and our competitors are really just doing a leasing program that's disguised as a consumption scenario. But again, this is where we're seeing folks free up capital from expensive overprovisioning, and this is averaging in the 30% to 40% range from a savings standpoint. And then key with the public cloud is we don't have a data egress charge. So anytime you put data up in the cloud, to pull it back down, you get charged for that. And this can turn into millions of dollars of cost just to get your data out, and so significant savings on that, that front end.

So are you able to go into an existing HPE customer and engage on this front, even with their existing footprint of infrastructure and take over that data center environment and layer it or enable them to just move this, move over to this GreenLake offering strategy?

Yes. It's a great question because as customers want to see this, so we have a few options for those types of customers. So we do something called buyback. And we'll do this not just for HP equipment, but we'll do it also for non-HP equipment. And this is done through our HPE Financial Services. They're one of the industry-leading asset life cycle management and drivers of this consumption-based business. And so we'll actually do buybacks and then update the customer with the full GreenLake scenario, if that's what they would like to do. So we can absolutely do that. What's happening with these customers is they're basically making decisions on every workload and every solution. And as I mentioned, hybrid, multi-cloud world means that they're always looking for the best implementation of that. And so sometimes, the CapEx scenario might be most beneficial for them from an accounting or a financial standpoint. Sometimes, the public cloud might be the best for that specific workload. But as I mentioned, we're seeing about 70% of apps and data really stay on-prem, and these workloads are ones that then GreenLake becomes very compelling to them from that standpoint.

I want to go back to the competitive differentiation a little bit because I feel, and again, you can kind of add context or just tell me if I'm wrong, if I'm wrong. But the metering capability, right, versus a lease model, is that -- help me understand the components of that. How is that competitively different? Is that something that HPE built itself? Is it for an acquisition or something? Just because to me, that is truly an important competitive piece of the equation.

No. Great point, and I probably should have articulated that. So yes, we did acquire a company called Cloud Cruiser about 3 years ago. And they're the ones that we get all of our metering capabilities from. And so what we do is we're tracking on the system how many gigabytes of storage you're using, how many of the cores or the CPUs are you using. And again, we would have something that has a lot of capacity. And if the customer is only using a portion of that, we -- that's what we would charge them for. And so we charge a cost for that unit, if you will, for what the customer uses. So it really means that, hey, instead of me buying a system that's way overprovisioned for what I need or is much more horsepower than I maybe won't ever use, I get that true benefit. And so you're right, most of the other -- our competitors don't have this type of technology or capability. It's really unique to us through that acquisition. And we've really sort of continued to build on that to provide a lot of insights for customers. So we'll actually even take that data and we put it into our cost analytics environment. So we can see, hey, how much am I spending on GreenLake, in what scenario, where am I spending it, in which location. But we've also extended that out to Azure and AWS. And so as a CFO, I can look at my spend across public and GreenLake Cloud spend, and then we provide a set of analytics, machine learning models to do cost benefit analysis to say, "Hey, where is the most effective place for you to run this, where can you save dollars." And so we have a lot of value-add on top of it as well. But yes, that Cloud Cruiser technology, the fact that we meter things down to each individual component, and that's what we charge customers for. And we can also do the understanding of what's being spent where as well as the cost analytics to provide them with the cost savings is significant.

Yes. And the importance of HPFS wrapped around that is really a key component as well.

Yes.

Yes. So kind of same question, Ezmeral, talk a little bit about what that is, what -- how that fits into the GreenLake strategy, why that's important.

No, it's a really good question because, in essence, we have made a couple of other acquisitions, so I'll start there so that you can -- we can flow into that. But we purchased MapR, which is a world-leading file system, and BlueData, super deep on data and analytics. And based on those technologies, we came out with our HPE Ezmeral Container Platform. So this is a full, what we call, CNCF-certified, using 100% open-source Kubernetes. It's optimized for multi-tenant, multi-cluster management. And it's suitable for cloud-native apps, non-cloud-native apps, legacy applications. And we can run it not just in GreenLake, but on other HPE hardware, in the public clouds as well as on non-HPE hardware. So it really provides that capability. And as part of that, we made an acquisition called [ Quake ] as well, and we've taken that cluster management capability to, again, enable administrators to easily create these clusters, add policies and permissions and allocate clusters to groups for developers or analytics, if you will. So this Ezmeral Container Platform is really sort of geared towards these high-end data capabilities and the opportunity to containerize these applications and simplify that over time. And that's becoming a much more key piece of our all-up GreenLake solution offering. I had mentioned the internal software that we're using, that's a core component for our ML Ops, for our Containers-as-a-Service offering that I talked about as well. So yes, we're really excited about the great work that's happening there. And Kumar Sreekanti and his software team are doing fantastic work.

That's a great overview. And now to go back to the -- well, to go back to the financials. I think it was in the July quarter, with the 82% order growth in GreenLake. It was also noted that North America was growing, I think it was 5x year-over-year. So it's a big number on a growth basis. Can you talk about the geographical expansion that you've seen? Is this still predominantly North America? Is it -- any kind of metrics you can give around the geographical expansion in any way?

Yes. You bet, you bet. No, I think it's a great question because yes, we did see significant growth in North America. And frankly, as with most businesses, this was similar with Microsoft, there's a large percent of the business that does sit in North America. That said, I was pleasantly surprised to see significant growth in the other areas as well. I think I mentioned upfront that we have over 1,000 customers. We're in 50 different countries worldwide. And we saw fantastic growth in EMEA as well as in Japan and our APAC region. And so the nice thing is, is we're seeing a nice balance of it. So if you think about a country like Japan, they don't have a lot of internal IT scenarios. And so -- and they don't -- aren't doing a lot with the public cloud. And so for them, on-prem managed for you and then the benefit of being able to pay for a consumption basis is super compelling. And then, as I mentioned, APAC, in areas like Australia and Korea. And then in Europe, we're seeing really strong growth in the Northwest Europe scenario as well as in our Germany and U.K. regions as well. So -- and frankly, it's moving down into EMEA also. So I would say this -- geographically, we're getting fantastic traction across the board. And again, it goes back to where we're seeing a need, where people have the security requirements, the data sovereignty requirements, the regulatory-type scenarios. And again, when it's 70-plus-percent, there's opportunity worldwide. And that's why we see this, I think we mentioned it at the -- at SAM, the $22 billion market opportunity in FY '23.

Yes. And that's perfect. And on that same kind of topic or customer engagement, I know it's probably hard to answer this because HPE is a very broad, diverse company from a customer standpoint. But how have you seen GreenLake result itself into engagements with new customers or new opportunities?

No -- it's been a fantastic door-opener for us. And in essence, to your point, we have a lot of fantastic relationships. And I think one of the benefits, when I came into HPE, that I saw was, wow, very strong enterprise name, our Pointnext Services, world-class in providing support, advisory and professional services and all that capability, as you mentioned, HPE Financial Services really helping customers in that front and then strong, solid market share across the different products. But -- and what we're seeing is as customers are going through this digital transformation, they're also looking for new business models. So when you think about something like GreenLake to be able to charge as-a-service, we're seeing a lot of managed service providers being very interested in what we're doing, and we're seeing sort of new ideas. So I've mentioned at SAM a little bit about what we're doing with ABB, one of the top manufacturing companies in the world, where we've been partnering with them on their factory of the future. And so in essence, they're promoting scenarios like Robotics as a Service, where because the precision of a robotic's arm is so critical on that manufacturing floor, everything has to be done locally, right, you have to do the computing, the analytics, the precision of getting that manufacturing component just right. And they're providing that now as-a-service to their customer base. So in essence, they're selling GreenLake through into what they're providing to their customers. And so we're seeing a lot of new growth with a lot of these partnerships, like the SAP scenario. Accenture runs their Accenture hybrid cloud all in GreenLake. And so it's interesting, we're getting that through the pull of these solutions from our partner base. But at the same time, as people have sort of played with the public cloud, they're seeing opportunities to, again, have that hybrid scenario and they want that similar experience. And so that's why I say GreenLake is starting to open up that new set of opportunities for us.

That's perfect. I think, Keith, we're right up against our time window. I really -- that's a quick 30 minutes. So I really appreciate you spending the time with us and walking us through what seems to be a very good ramp in the GreenLake strategy.

And thank you so much for having me. Any time. I really appreciate the opportunity, and happy to join any time if there's an opportunity again. Thanks.

Okay. Thanks, Keith. Bye.