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

Well, folks, thank you for joining us. This is Simon Leopold, Raymond James, data infrastructure analyst. Appreciate you joining us at our annual tech conference this year held virtually in the cloud. Our next session is with HP Enterprise, and our guests in this fireside chat include Keerti Melkote, who is President of the Intelligent Edge and founder of Aruba Networks; as well as his colleague, Jonathan Faust, who's the Chief Financial Officer of the Intelligent Edge business unit. We also have Nancy Lee, who handles part of the Investor Relations team with HP. And so Nancy, I think you've got some safe harbor comments before we get into our discussion.

Thanks, Simon. My name is Nancy Lee, Director of Investor Relations at HPE. Before we start, let me take a moment to read our disclosures. You will hear some forward-looking statements in today's discussion. They 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 significantly, 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. So with that, let me turn it back to you, Simon.

Great. Thanks a lot, Nancy. So maybe to just set some context given the fact that you represent a business unit, maybe if you both could tell us a little bit about your responsibilities within Hewlett Packard, and maybe a little bit about your background just to fit some context for our discussion.

Yes, happy to do that, Simon. Good day to everyone there. I am Keerti Melkote. I started Aruba back in 2002 as the founder and led it through its IPO and eventual acquisition by HPE 5 years ago. And today, I run the Intelligent Edge business for HPE, which constitutes effectively all the networking assets across wired and wireless and SD-WAN as well as for campus branch and data center and with a view towards effectively delivering infrastructure solutions and services at the edge of the enterprise. So that would be any environment that you can think of outside of the cloud or outside of the core data center itself.

Great. Thank you. And this is Jon Faust. And as Simon mentioned, I'm the CFO for the Intelligent Edge business units, supporting Keerti and his whole staff for all aspects of the business from sales, R&D, marketing, supply chain, et cetera. I've been with the company with HP and HPE for about 20 years now. Prior to my current role as the Aruba CFO, I was the CFO for our Hybrid IT business unit and prior to that was the Head of Corporate Finance for about 5 years. So thank you for having us, Simon.

Great. So why don't we start out talking a little bit about what's been going on with the Intelligent Edge business. Outstanding quarter last quarter, $786 million, up 15% sequentially, 6% year-over-year, 10% non-GAAP operating margin. And I think you've indicated you believe you've taken market share. Could you talk a bit about what drove the success and how we should view these growth rates as we're heading into fiscal '21? Now keeping in mind, you have talked in the past about a 6% to 10% CAGR, 20% to 23% at the analyst meeting. Can you sort of help set the context of what 2021 looks like in that overall strategy?

Yes. Thanks, Simon. This is Jon. So I can start with this one and then let Keerti add some comments as well. So as far as what drove our success in Q4 and the growth rates that you quoted, it really comes down to 2 things: number one, our great portfolio, which really expands the entire networking business; and then two, really solid go-to-market execution, particularly in the North America region. So we're very pleased with that. And it wasn't even just Q4, right? If you look at our full year performance, we're pretty pleased with how we did overall. We started off our fiscal year, which was back in November, so just a little over a year ago. Very strong, so up about 4%. And then, of course, the COVID pandemic started to set in. April was a tough month. So Q2 was a bit more muted. In Q3, we really took the full brunt of it. But coming into Q4, as you said, we were up quite a bit, 5% year-over-year. And we think during that entire time for the full year, we really either kept pace or exceeded the market. So we do believe on a full year basis that we took share. In addition to that, every single quarter in terms of profitability, we also expanded margins. So we're pleased with that performance, and that was really due to 3 things: first, favorable mix impact, right, a shift more towards the wireless LAN, software services; improved productivity from prior investments, we made a lot of investments over the last couple of years in the business; and then, of course, number three, disciplined cost management, really in the discretionary spending space, especially during Q2 and Q3 when COVID was coming in. And then on top of that too, from a growth perspective, back to your key point there, we also closed the Silver Peak acquisition in the late September time frame. So it wasn't a huge impact to Q4, but we certainly think -- we certainly know going forward that, that's going to help to the overall profile of the business, both on the growth side and helping to expand margins, too. So lastly, when you think about FY '21 and beyond and what we guided during our Security Analyst Meeting back in October, we really think the strong momentum coming out of Q4 and the growth that we had there is going to carry us into Q1 and beyond. So we feel very confident still in what we guided, that 6% to 10% CAGR over the next 3 years and think we're on a good trajectory so far. Keerti, anything you want to add to that?

Yes, sure, Jon. I mean, obviously, very pleased with the outcome of Q4 and the momentum was really good to see. I would say both -- the strength was consistent across wired and wireless. Wireless was much stronger, honestly. But I would say both were positive. And we saw, I would say, in terms of verticals, more interest coming from schools, K-12 schools, universities, state and local governments as well as large government deals. We talked about the Pentagon win, which was a huge win in Q4. So government spending, and also, North America was very, very strong. So I mean these are pockets Aruba is strong in. We have a lot of exposure, obviously, to commercial and enterprise business as well. But in relation, I would say the education sector, the select sectors, state, local education sector was perhaps a stronger sector in that particular quarter. And -- but overall momentum is very positive. And it speaks, I think, to the competitive position we have in the market. Last few months, in particular, have been really good with the launch of the Aruba Edge Services Platform, which effectively is a new offer in the market, which is totally AI-driven and cloud-native in a way to consume all these secure connectivity solutions. And we've gotten fantastic recognition by analysts like Gartner that have placed us again for the -- in the leaders' quadrant for the 15th year in a row for wired and wireless. And more importantly, we rated #1 in all 6 use cases in their critical capabilities, companion documents, which reflects the strength, I think, of the portfolio and the offer and the team that brings it to market. So I feel well positioned, and wins like Pentagon obviously put our -- effectively more wind behind our sails. So all of those things have come together for the execution there.

So I wanted to follow up with maybe a question about sustaining profitability, and I want to be transparent about what's underlying that question is, with I think, just about every company we follow, there's some assumption of a return to normal, and therefore, expenses rising as we resume travel and entertainment. So maybe we don't know exactly when everybody gets a vaccine, but some expectation of a recovery. How are you thinking about profitability and increasing expenses throughout the fiscal '21?

I'll let Jon answer this first, and then I'll go after. Jon?

Yes. It kind of gets back to the point that we mentioned before, Simon. So when we think about profitability for the business, we are -- we have been expanding our margins with more of that mix shift towards the wireless LAN, software and otherwise. And also the services side of the business, right, which gives us more confidence on the recurring revenue, recurring profitability. So certainly, most like other companies, large companies over the last 9 months or so throughout the COVID pandemic put more restrictions in place on discretionary spending, travel, entertainment, things like that. But as we see the business coming back, hopefully, the vaccine that's been announced, like that starts to work and so forth, and we'll gradually get back to that normal level of spending, but that's something that we've planned for, right? So we've got our own estimates, our own models of when we think that's going to return. And of course, we'll be very disciplined and thoughtful and careful about how that continues, how those expenses continue to grow and make sure that, that happens along the lines of top line performance, right, because we continue to expect to expand our margins and much like we said at our Security Analyst Meeting, right, as we get into the future years, here get up into the teens. We exited Q4 at about 10% operating margin. So we're very pleased with that, especially considering the circumstances, which was up quite a bit year-over-year, and we continue to expect to continue to drive it further up from there.

Yes. From my perspective, I think our plan is to obviously grow revenues faster than expense for the year. So I think we should see more operating leverage in the model. The investments will be -- some of it will be, as you said, just return-to-normal kind of activities, travel, et cetera, in a responsible way like Jon said. But we have, obviously looking at investments with a long-term perspective of what the returns would look like. For us, the business is driven by innovation and differentiation. And we have to keep investing in the capabilities to continue to differentiate us in the market and meet the market where the demand is. So things like work from home is going to become a primary use case. And so we've got to figure out how do we innovate around that particular opportunity, which didn't exist pre-COVID, but it's much bigger now post-COVID. So we have to modulate the investment strategy to go after these incremental opportunities as we see it, as well as invest, make targeted investments in go-to-market, for example, a small-medium business comes back and starts to spend again, we might want to go put more money on the marketing side of the house there. So it's very targeted at growth-oriented investments to essentially deliver on what we have guided the Street to and, hopefully, more than that as well.

So that kind of takes me to my follow-up, which is, I want to talk a little bit later about the technology and architecture around the Silver Peak acquisition. But maybe this is a good time to address the financial impact. And for anybody who might have missed it, just run through some of the financial details of what this deal was, when it closed and how it affects the financial model.

Yes. I can start with that, Keerti. So as I mentioned earlier, Simon, we closed the Silver Peak transaction in late September. So its contribution to our Q4 performance was pretty minimal, less than a couple of points. And we think that it will certainly become more meaningful in the future. But what was great about the acquisition, in general, and Keerti can speak more to this is, it give us an immediate and leading position into the SD-WAN market, right? And so that really helped to complement our portfolio overall. And it's really a natural extension of the operating that we have, and I know Keerti can speak to this in more detail. But we think going forward, not only is it going to help from a growth perspective, but it's going to help to support our margin expansion, right? And we had mentioned at SAM that we expect it to be neutral to EPS and our operating profit by 2022. So right now, we're just working on, focused on getting the business integrated. I'm talking with their customers and vice versa, looking at the cross-sell opportunities on both sides and continue to drive it forward.

Yes. And again, just qualitatively here, the transition for edge to cloud is real, right? And the pandemic has accelerated that as customers -- we are now working from home, and that's the ultimate edge in terms of how far the enterprise extends. And cloud is becoming increasingly -- the application as stated is becoming more and more hybrid, right? You have data center applications, cloud applications and SaaS applications. And so how do you now bring all these distributed edge locations to connect to all the applications in a secure manner? And increasingly, the internet is the transport for all of us. And so the era of private wide area networks is over, right? And basically, what we're going to do -- see is, all those private WANs that were purpose-built by an enterprise will become shared WANs across the internet. And that's really what SD-WAN technology does. And so we're in the very early innings of that transition. And Silver Peak, obviously, had a very differentiated offer in the market and good, I would say, established practice. It was a fully-fledged company with a proper go-to-market structure to attack this particular opportunity. And so we saw an opportunity to bring it together with the wired and the wireless businesses of Aruba and offer a full solution to the customer that says we can take you from the edge to the cloud from a secure connectivity standpoint. and also accelerate using the Aruba go-to-market strength and the HP go-to-market strength. So we are very bullish. I think this is a CAGR of over 20% over the next 3, 4 years. It's a pretty strong market. And so not only do we want to grow along those CAGR dimensions for this business, but also help pull through the rest of the infrastructure behind the SD-WAN sale.

Great. So looking at the marketplace, I want to maybe start by reflecting back a little on the past year before we pivot to looking out at the future. So when you think about the drivers and the applications, 2020 is going to go down as a bizarre year, thanks to COVID-19. Could you talk about how it affected your business in particular?

Sure. Yes, happy to do so. For this year, fundamentally as -- financially, as Jon already said, April through July was the rough patch, and we are starting to see the recovery starting in August. And the way I saw -- so look, the first realization, I think, we all came to is in a COVID world, connectivity is absolutely our lifeline. Without connectivity, we really could not provide the level of productivity that this economy has seen. We are all working from home to the extent possible. It's not to say there's not essential workers that are out there, whether it's in restaurants or any other place where they're doing critical functions. But a vast majority of us, office workers, if you will, were able to go home and get work done. And the reason we were able to do that is because we could be connected to the internet. And if anything, the reliance on connectivity and the value of solid, reliable, secure connectivity has only gone up. And I think the initial reaction from a lot of Enterprises was, let me just figure out how to get people connected. Securely, I'll use a VPN, I'll use any tools that are at my disposal to go make my enterprise productive again. And that's really what the early part of the conversations were. Obviously, there was a budget impact, right, because everybody is expecting lower revenues for the year. And therefore, there's a cost implication to that. And IT is one of the first places you go to because of discretionary spend, and you're looking to see if you're going to pause on some of that. So IT sector as a whole, we'll see a little bit of a compression for this year. So that's sort of the macro. I think the -- we're fortunate to be in that connectivity business. So we got a little bit of the early signs of recovery. And I think if anything, there is a realization across every enterprise that they are fundamentally -- if they don't operate in a digital-first manner, both internally and externally, that they are not going to be able to navigate future disruptions to business like this or otherwise, right? There could be natural disasters. It could be anything else. There was -- in financial industry, 10 years ago when the SaaS first-edition came out, there was this drive towards business continuity and people who are putting business quantity plans, diversifying data centers and all of that. And I think this is now magnified 100 times in terms of what a long-term disruption could actually mean for the business. And I think, coming out of this, every CEO is going, how do I keep my enterprise connected, productive, operating, resilient and secure as I come out of this? So I think IT investments and specifically connectivity investments will come back going out. And specifically micro-opportunities within the TAM, for example, work from home, is going to become -- take more strategic importance as we look at the next year.

And that was actually -- nicely leads into kind of this next line of thinking, because in the investment community, many of the folks I talked to feel that the campus environment is never going to recover, that many companies may permanently work from home or may reduce the number of employees at site. And so I think there's this conventional wisdom that the upgrade cycles have faced a significant setback and may not catch up. Now you know I don't agree with that philosophy. I imagine you don't either, but how do you counter that inquiry?

Yes. I think there's -- let me answer that directly, and there's just a few other things I want to talk -- actually, I'll talk about 2. So to me, the commercial real estate part, which is probably where many people go with that saying, hey, what is going to happen to commercial real estate as the people come back. The first order of business that I see everyone attend to is when people come back to the office, and it is a when, not an if. And not everyone will come back, but everyone will go back for some period of time. So real estate is looking at every floor plan and reevaluating what the floor plan should look like, right? If you had cubicles in the past or office spaces in the past, what is the new structure going to look like? How do we factor in social distancing? How do we make sure there's a safety element to the picture, et cetera? For a while, real estate was going towards more densification, more open floor plans, hoteling and these kinds of things. And many of you might be familiar with the WeWorks and other models where there was flex workspaces, et cetera. I think that kind of thinking will become more mainstream, but with safety in mind, which leads to wholesale office replanning. Whenever that happens, there is an infrastructure element that goes with it, which is -- it's not just furniture, it's also IT infrastructure. What is the IT platform that I'm going to set up to serve my employees in the workplaces that I maintain? So I see an upswing of projects, right, replan and infrastructure projects that will come out of this pandemic by necessity. They may redeploy infrastructure that they may already have. They're not end of life. Many people will say, hey, this is -- infrastructure is old enough, so I've amortized it enough, so I'm going to do a refresh. So I think in the near term, there is going to be more activity, not less, just to ensure that the office spaces are going to be okay for everybody to consume. The real estate space itself may shrink a little bit. But I personally have seen this movie operating in this business for a long time. Companies go in and out of these cycles, but I've never seen buildings go empty and shut down or unutilized for a long time. So I look at every building out there, as long as it's not being torn down, it will be repurposed in some manner. It might become a shopping mall. It might become a warehouse. It might become some other type of facility. And no matter what facility it is and that's the opportunity at the edge, you need connectivity. Whether it's to operate a warehouse, whether it's operate a hospital, whether it's to operate a school, whether it's to operate an office, it doesn't matter what's that. The physical space needs connectivity to operate in a digital-first manner. And that's how I see as the opportunity. It might look and feel different in that space. So that's why I don't worry about it a whole lot. I think in the micro, there might be readjustments of the real estate space. To me, the next -- additional opportunity that has come out of this is the work from home, where it was a casual thing before, it is no longer casual. It is mission-critical. It is productivity impacting and ensuring that enterprises support employees at home, with the right technology set, with the right connectivity, the right security. It's going to be very, very critical. And so I see that as a TAM adder, while this commercial real estate might go through some sort of a cycle in the near term.

Yes. I wanted to follow that because one of the points that I've heard from the industry is that the number of employees and their workload is what sort of drives the IT spend. And so in a recovery, the number of employees isn't changing. But what I've heard an argument for is that the disruption of the kind of modification and changes you just outlined may actually stimulate an organization to make change, that, that's sort of the catalyst that leads them to say, okay, we need to bring in this new software solution, this new network management solution because our 500 employees are no longer in the office building, half of them are working from home, and I need to manage those resources differently. And I guess, are you observing this happening? Or is this something on the coms? Do you disagree that this disruption is sort of opening the door for maybe a product cycling?

I actually look forward to it. I hope there is some of that revaluation because, frankly, our market share position is 10% to 15% in the grand scheme of things. I think there's a lot more market to be attacked. And so -- and we have to go gain market share. And we are -- we find ourselves in a very good place from a differentiated position standpoint. So I do want to see a little bit of this, the evaluation of the incumbency, if you will, that they may be currently -- in a current situation with. To figure out what is the new approach, how do I think differently about this new space, right? For example, maybe I go mobile-first, wireless as a primary network as opposed to wired. Maybe I use location-based services to actually ensure safety of the people that are inside a building. So new capabilities that are software-defined will become more important. I'm very positive of that. And this cycle, I think, is accelerating the look ahead, and things like AI will become more important. So I feel like it will drive a rethink. And I actually look forward to it because it gives us an opportunity to put our wares on the table and talk to customers about it.

Great. So HP has talked about investing an incremental $4 billion over the last few years into the Edge business. So how do you think about the return on that investment and the benefits to your product portfolio?

Yes. Okay, I can take that one, Simon. So that's exactly correct. And just as a reminder for everyone else, it was back in June of 2018, it's a little over 2 years now that we announced our intentions to invest $4 billion into the Intelligent Edge over a 4-year period. And that was primarily an organic investment across R&D and also our go-to-market, right? So on the R&D side, it was really to advance and innovate on new products, services, consumption models, something that we talk a lot about within Aruba and also HPE, across technology domains like security, AI, machine learning, automation, edge computing, so a number of different areas. So we've certainly been investing in that. On the go-to-market side, we've been doing the same, looking to expand our coverage and continue to build on that. So building upon what we are -- verticals that we already work with now, segments and otherwise. So from a return perspective, we're already starting to see that over the past few quarters, just like as I have spoken about earlier, so you look at our Q4 results or the results over the full year. So we really start -- we're starting to see the impact of that a couple of years in. And we're very much on track. And I'd actually said that we're actually investing beyond that because if you think about what we just did with the Silver Peak acquisition, that was another incremental investment, inorganic, of course, to help us expand our portfolio overall. So that helped to round out the portfolio in aggregate. So we continue to do that. We're seeing the results already in the P&L and the top line, on the bottom line, and so we expect to continue to do more and drive that CAGR that we talked about at our Security Analyst Meeting.

Great. I want to maybe pivot a little bit and talk about some of the competitive dynamics as well as how HP differentiates itself in this particular area. So one of the topics that frequently comes up with investor discussions is the maturity of Cisco's Cat9k refresh cycle. I think it's a recognition that the campus as a whole is overdue for a refresh. What's your sense of what's happening in the industry and the opportunities this presents to you given Cisco's approach with the product refresh coupled with a software subscription requirement?

Yes. I think the competitive dynamics right now, given everything that is going on, there was a pre-COVID sort of mode of -- it's just a refresh, and some portion of that business naturally goes to the incumbent. So it benefits Cisco in that context. But post-COVID, for all the reasons we just talked about, I do believe there is a refreshed, renewed rethink of what the campus infrastructure should do and must do. And I think it's a shift towards more of an AI-rich software-defined infrastructure that provides more services. So that's for the digital workplace, right? So it's becoming sort of a new platform for delivering digital services to employees and the team members within these buildings. And so the way, at least that I'm seeing is, there is a little bit of fatigue, Cisco fatigue, if you will, in the market, specifically around subscriptions. I think it's viewed by many customers as a forced subscription as opposed to something they were asking for, and it doesn't necessarily give them added value. It is just changing the purchasing dynamic from buying a box with embedded software to buying a box with subscription software attached to it. What I see customers more open to is when there's added value on top of the software. And that usually does not emanate from the box on the switch or the access point. It comes from the cloud. It is analytics. It is security intelligence. It is the ability to do self-healing, these kinds of capabilities that customers do find added value and are willing to pay extra for. But the base business, just refactoring it in a different financial model, is not that interesting for customers. In fact, it increases costs, not reduces costs. And they are very -- they do the 5-year TCO analysis, and they fully get that it is not necessarily in their best interest to just do a renewal with the subscription model. So I think that is also forcing a rethink, and there is, I think, a new level of energy and interest in alternatives in a particular market. And we go in there with a simple solution, right? With Aruba, you get a unified solution that is AI-driven and cloud-native. You don't have to go pick your swim lane, if you will, that I'm cloud-native, so I have to go pick the Meraki side, And I'm not cloud-native. I'm a campus business, so I need to pick the Cisco Classic. For us, it's all the same thing. You can deploy campus environments, branch environments, warehouses, whatever your business operates in with the same architecture. And you can go back and forth. So that flexibility exists, which leads directly to investment protection, right? It means that maybe I chose my on-prem swim lane right now because that suits my business. But I have a plan to move to cloud in 2 years, I don't have to refresh and forklift upgrade my infrastructure. I can just flip over to the cloud swim lane. That allows them to have a better ROI for their investments as they go forward. So that, I think, is one of the core differentiators we go against Cisco. But there's many more, and I won't drain the swamp here on the differentiators. I just wanted to give you a sense of the dynamic in the market and our competitive positioning. And of course, getting validation from the Pentagon and the Gartners of the world doesn't hurt.

So I appreciate that. I guess the other pushback I get from investors is hey, we're 3 years into a cycle, it's done. Fast growth is behind us. It's peaked. Now when I talk to folks in the industry, I get a very different answer. But I'd love to hear your view on how long or what's the runway opportunity TAM, however you like to measure it, of a refresh cycle of the campus environment?

Yes. So I think -- I think of refresh in 2 areas, Simon, for us. There's 2 very critical businesses. There's a switching business and the WiFi business. The WiFi business itself is going through a refresh, to WiFi 6 technology as well as in the near future, WiFi 6E, which actually promises even more bandwidth over the year. And that's a pretty sizable driver of our business. And so we are in the early innings of that. I would say we are probably a year in, in a meaningful way in that refresh, and these refreshes tend to last 3 years, if you will, for the peak. And WiFi 6E, which will come out next year will, I think, prolong that refresh a little bit longer. So I feel like we are in a good spot. And I think WiFi will become, as I describe, a primary or the primary way to connect into these networks going forward. It will pull through the switching. So every time you are going to refresh WiFi 6 and WiFi 6E, that has some unique -- because now the performance of WiFi is so great that a traditional gigabit ethernet port that you put in a switch, that used to serve a desktop, no longer suffices. You need higher speed ethernet going to these access points, higher power capabilities. So the WiFi refresh will drive a switching refresh as well. And so to me, I look at the mobile-first approach to these offices in a post-COVID world and what that refresh cycle is going to look like as a primary, as opposed to simply the 9k refresh cycle opportunity, if you will.

So I want to ask you maybe a question about the SD-WAN/SaaS new market. I guess I've come across maybe some philosophical debates within the industry as to architecture. So there's a school of thought that argues that the firewall is a logical starting point because of the importance of security in the location. And so that's sort of the Fortinet view. We've got arguments that it's the networking platforms, and maybe that's a little bit of a maybe Cisco view. And so WAN optimization is sort of the roots of Silver Peak. And maybe that's a different starting point. I guess, to me, I see some merits to all of these, but you've made a choice, you've made an investment. How do you think about the evolution of this category of SD-WAN into SASE? And why do you think the architectural choice you bet on is the right one?

Yes, absolutely. I think that's a very, very critical question. I think the first most important point that everybody has to realize is the edge, in other words, the actual physical customer premises, whether it's a home, whether it's a branch office or a customer or a campus, is the pivot point for making these intelligent decisions on how to steer network traffic, okay? It is not in the cloud, because it's too late by the time you get it to the cloud, or to the data center for that matter. So that fundamentally leads to our strength in our position. The Edge is the pivot point. And why do I say that, right? If you look at this particular call, we are on a Zoom call, and -- or looks like a Zoom call. But it could be anyone, it could be Webex, it could be Teams, Skype for Business. There's a whole bunch of these, right? So if you had to ask yourself the question, these packets, is it going through a great big firewall in the sky? And the answer is no, it is not, right? It has to be peer-to-peer to deliver this application experience that we're all used to, right? So not all applications are going to go through a firewall. Not every packet is going to go through a firewall. It has -- what -- and when I say that, a firewall that sits in a data center deep in the cloud or a virtual firewall inside the cloud, right? So this decision of how to route the traffic is at that point at the edge. Some traffic goes straight peer-to-peer, if you will, like in these kinds of settings to ensure application experience is fantastic. Some other applications where security is more critical, I will route through a particular firewall, maybe even an intrusion detection system to ensure no malware is -- so let's say, you are browsing the web and shopping on the Internet, right, that traffic, absolutely, we call it the wild west internet, we have to take it through a very deep security stack. If you're going to, let's say, Office 365, which is a sanctioned application, right? I may not choose to take it through a firewall because it's encrypted end-to-end. I'd go from the desk from my endpoint directly to Office 365, get my e-mail. So there's this whole variety of applications. And the way you choose application traffic, it really depends on the type of application and the importance and the security characteristic and the application experience characteristic of it. Ultimately, all those decisions are made at the edge. And to me, it comes down to 2 fundamental requirements: Ensuring a great application experience, which is a networking problem; at the same time, ensuring you don't compromise security, which is, as Fortinet says, is a firewall problem. They have to come together. You can't -- so the firewall problem, frankly, is an easy problem. It's a permit or deny problem, once you understand the application. And Silver Peak has a very deep library of applications thanks to their WAN optimization heritage. So the permit deny decision is super-straightforward. What's not as straightforward is ensuring the right traffic engineering to deliver that fantastic application experience. That is the heritage that they have. And ultimately, for you and me, when we use an app, if it doesn't work, we're going to throw the app out. And that is the reason why we believe the networking problem is the harder problem, and we need to solve it properly.

So before we run out of time, I want to be sure to get to this question about HP as a company, your management, your CEO have talked about this transition to an as-a-service consumption model. And I guess I want to make sure we put this into context within the Intelligent Edge business. How do you see this affecting how you do business, what you're selling and the acceptance of your customers?

Sure. I think it's driving -- and overall, I think the cloud purchasing model is driving an expectation of consumption-driven model across the board in the IT industry. And as you can see, the core business, the HP core business with GreenLake is driving the consumption of compute and storage infrastructure in that vein. Networking, we are still not there. We're not selling bandwidth. Although Silver Peak's business is based on bandwidth consumption. So that part is consumption-based. The wired and wireless connectivity business is still very much an element-based business, device-based. People buy switches and access points. They attach software subscriptions to it, the analytics and the security value on top. So you will see us deliver more SaaS-based services attached to the networking hardware. There is an early nascent movement towards what we call the NaaS market, network as a service. which we actually take to market through our partners. All the major telco service providers, they are the ones that deliver the as-a-service experience to customers as an MSP. And we intend to obviously continue to innovate in that area with new solutions as well as go-to-market through partners.

Well, great. Well, thank you very much. Keerti, Jonathan and Nancy. It looks like we're out of time, got through just about all the questions, but do appreciate you spending time with us as well as the investors who joined us on the call today. So folks, we're wrapping this session up with Hewlett Packard Enterprise. This is Simon Leopold at Raymond James, signing off. Thanks.

Thank you.

Thank you.

Thank you, Simon.

Bye.