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

Hello, everybody. Tim Long here at Barclays. Thank you for joining us for this fireside chat with HP Enterprise. We have Pete Ungaro with us, who is General Manager for the high-performance computing and mission-critical solutions group. Pete did come over from the Cray acquisition a year or so ago. And we're really looking forward to the discussion. Before we start, I'm going to throw it over to Marcus to read a quick disclosure.

Thanks, Tim. Can you hear me okay?

Yes.

All right. Great. Before we start, let me take a moment to read our disclosures. You will 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 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 earnings announcement press release dated December 1. So with that, let me turn it back to you, Tim.

Thank you, and thank you, Pete, for the time here. We really appreciate it. It's pretty timely to have you on given the performance last quarter. So maybe we'll start there. It's really just an outstanding set of numbers. I think overall, the numbers for the company were pretty solid. But in your division, it was certainly stand out with 50% sequential and 25% year-over-year growth. So maybe if we could start kind of on the high level of kind of -- what kind of high-level drivers you're seeing for the strong performance in the business. And I think this business has been earmarked at 10% or so, I think, 8% to 12% CAGR at your last Analyst Day. So how do we think about growth coming off a pretty high number as we look into next fiscal year?

Yes. Thanks, Tim. And we're -- we couldn't be more excited about the performance that we had last quarter. The core drivers of the high-performance computing and AI business is really the growth of data. And this is something that every company is dealing with, large and small. And it's driving them to have larger data sets and build larger models and also there's new algorithms to compute on that data. AI being probably the best example of that now. But many of the digital transformation applications are new ways to compute on that data. So the whole digital transformation wave in the enterprise is driving the need for more HPC infrastructure. And then in the research and science areas, exascale computing kind of the next-generation of computing is really driving that market. And so we have really strong market drivers, which gives us a lot of confidence in achieving our growth rates over the next few years.

Okay. Great. And as far as the -- this 10%-ish growth, I think it's -- that's probably mostly industry? Or do you think you're in a position to be taking some share as well as you look forward?

Yes, absolutely. So we have a good growing industry, and so we're going to grow with that industry. But at the same time, we'll also take share because we have a strong technology advantage right now. We have pretty unique technology, very differentiated solutions that just nobody else in our industry really has. And so being able to bring together, as you mentioned, I came from Cray, a year ago, but being able to bring together HPE, an acquisition HP did a couple of years ago, Silicon Graphics, SGI and Cray, and bring all that together into 1 company has just really built us a very strong portfolio that we can sustain this growth and advantage. The enterprise demand has been rising for our HPC systems. And companies like HPE as well as NVIDIA and AMD are taking advantage of that. And I think that we'll all see pretty strong growth over the next few years.

Great. Great. You mentioned kind of technology advance -- advantages maybe if you can just kind of double-click there and walk us through some of the things that some of the assets and technologies that HP has that might be a little bit more difficult for others to replicate. As you said, pulled from a number of pretty strong sources.

Yes, for sure. Our technology differentiation, I think, is really the engine that will continue to help us to grow and it's really in 3 major areas, I would say, Tim. So the first is software. So think about software to manage these large systems. So a big supercomputer can be the size of a basketball court and millions and millions of processing elements. So being able to manage all of that and then get as much performance out of each individual processor as we possibly can, is really important. So our software-defined kind of value-add is more and more important. We'd like to think about building systems that perform like a supercomputer and run like a cloud. So really infusing that with cloud-enabled technologies and so forth. So that's kind of one area. The second would be in the network. So the high-performance network or sometimes we call the system interconnect in the HPC market. We have a very unique technology there, which we call Slingshot, and it gives us a really major advantage in controlling congestion. So as you can imagine, when you're moving data around these large machines, you start to have traffic jams. And so having a network that allows you to get through those very quickly and keep all of the processors of the system busy is a huge advantage and it's all based on ethernet, which is really interesting. Because ethernet hasn't really been thought of as being able to be leveraged in high performance. So it gives us both the flexibility and more the enterprise-class capabilities that we have with the high performance. And then the last is in storage, just getting really, really high-performance storage and being able to manage your growing amounts of data through multiple tiers of the storage hierarchy. So is -- this technology advantage is what's really driving a lot of our growth. And as Moore's Law continues to slow down, it puts more pressure on the network and the software capabilities. And because we have big advantages there, that's really extending our technology lead, which is driving our market.

Okay. Great, great. That's helpful. Maybe if we -- we're talking about the HPC market here. You mentioned AI, but can you just give us a little, a little bit more on kind of applications and use cases that you're seeing? And how relevant is it to benchmark this business? Should we -- what should we be looking at to kind of benchmark against?

Yes, great question. As we think about the market, it's a wide variety of applications. So we have the traditional modeling and simulation applications that we have with scientists and engineers, everything from scientists doing COVID research and helping us find cures for this -- vaccine for this pandemic to automobile companies that are trying to build safer cars. So we have a wide variety of applications in that traditional modeling and simulation. But what we've seen over the last few years is that, that's being converged with high-end analytics applications. So data, big data analytics applications as well as AI, so machine learning and deep learning applications. And all of these are finding their pathway to high-performance computing systems. And so that's what's really driving this growth is just the breadth of application that's driven by a huge wave of data that's not going to stop. It's the growth in data is going to continue as well far as anyone can see. And so this is really creating this market that is all of a sudden, having a lot of growth and a lot of activity overall. And we couldn't be more excited in the second quarter, the market share data came out. We have 37% of the market, 10 points higher than our next closest rival. So we're in a really good position with this growing market.

Okay. Great. Maybe if we could just talk a little bit about kind of the integration of Cray and SGI and obviously, you referenced some of the technology advantages. I'm sure that some of those have been pulled from those different assets. But maybe just talk to us about where we are with this kind of unified offering. And are there any advantages to come on the synergy front as we look forward?

Yes, absolutely. It couldn't be more exciting to have a team that is almost like handpicked, the best of these 3 companies all put together in 1 team, which is really fun to lead. But it's been going really well because the -- what we found is that the advantages and the strengths of the 3 different companies are quite different. And the technologies that each had were quite different. So for instance, at Cray, we had these software stacks and with the system interconnect or high-performance network and storage. At SGI, we had technologies to do very large shared memory computing. And then at HP, you have this amazing breadth of capability with supply chain and manufacturing and just reach into virtually every company on the planet as well as a very strong balance sheet, which is really important because we're building these very large exascale computers at the very high end of the market. We have over $2 billion of backlog already over the next 3 years and leveraging HP's financial capabilities is just huge to be able to continue to grow at the pace that we want to grow in this business. So pulling all those things together has been great. And the Cray acquisition happened just over a year ago. And we were on track. We hit our goals in FY '20 and on track for '21. So I feel really good about how it's all coming together.

Great. Great. Yes, you mentioned the exascale type of wins. I think there were 3 last quarter, as you mentioned. So could you talk a little bit about kind of how long these things take to come to fruition? What does pipeline look like and kind of competitive landscape and kind of what were you hearing that helps you guys win those deals?

Yes, absolutely. It's a super exciting piece of the market. It's the high end. But what we're seeing is that the capabilities that these exascale super computers have are able to be brought down, we can bring them down into a single cabinet or even a single server for everybody. So we get a lot of leverage from doing these very high-end machines. But if you want to just think about an exascale computer, think about something that roughly the size of a basketball court, maybe 100 cabinets or maybe even a couple of hundred cabinets that are refrigerator-sized cabinets, chuck-full of processors and GPUs and then a very high-performance network and software environment to connect all those up and run together. And so all of those technology advantages that I talked about, that's what's really driving our growth and our success in this market. We had -- in the U.S., we had a clean sweep of the pre-exascale and exascale systems. So we're doing really well from that perspective. We just announced a new pre-exascale machine in Europe, in Finland with the LUMI consortium. They're across a number of countries in the EU. So this technology -- it all kind of fits together, right? We have this technology advantage that enables us to have a leadership systems and at the -- especially the high end of the market, those become incredibly important and unique for us against our competition in the marketplace. And our market share grows as the size of system grows. So I mentioned we have 37% share of the broader market. As you get up into the very high-end systems, we have even much higher share than that. And that's just a really exciting place to be because we see more and more growth in that over the next few years. So we have a couple of billion already of backlog. We're hoping to add to that over the next couple of years.

Okay. Great. It's a good position to be in for sure. So maybe on that, just to follow-up on that. How do you kind of manage cash flow needs or CapEx needs and the revenue growth opportunity? My sense is if the more and more opportunities you get, the more you're going to have to invest in capital to feed that. So is there a correlation there? And how do you think about that balance?

Yes, absolutely. I mean it is a capital-intensive business. And you mentioned earlier the length of time that it takes for these. You don't just come and order exascale computer, and we deliver it next week, right? These are systems of new technologies that take months or even years to develop and deliver and bring to fruition, right? And so typically, we see even just from when a customer orders it to when we deliver it, that can be a year in time. And then you have to install it and get it accepted and go through a big process there. And plus the procurement process in front of that. So these are multiyear programs which gives us a lot of insight, but it is capital intensive. So as we start to grow more and more, I mentioned we have $2 billion of backlog already in these big machines, it can use cash. And a huge advantage, I think, and one of the things that it's been great coming from Cray, which was a smaller company, we would have struggled with some of the success and fueling that success financially. But HPE has a great balance sheet and allows us to continue to grow the business and be able to manage that through cash. So it's -- it does hurt free cash flow a little bit. But it -- but with the growth and how it can build momentum over the years, you can make that back up over a couple of years and really start to see the benefits of that, not just on the top line, but on the bottom line.

Okay. So it sounds like it'll -- it tends to be probably a lumpy order business. But as far as revenues and implementation and installation process, you guys have the ability to smooth it somewhat. Is that a fair way to...

It's a lumpy business. So I think if you look at my business, even it's a $3 billion business that we did last year, growing, as we mentioned, in double digits. But it is lumpy quarter-to-quarter. So it's a little tricky to follow. It's not a smooth kind of business because you can have a single exascale computer, $400 million or $500 million, $600 million in 1 quarter can hit. So it can make that very lumpy quarter-to-quarter. So that, though, is that -- I would say that's maybe a thing that makes this business unique, but also gives us an opportunity to have this differentiation and capability that nobody else has. Because it is a unique business, and it's not a normal just deliver systems off the end of an assembly line and get them out to customers kind of a business.

Right, right. Not a lot of assembly lines can spit out basketball size -- basketball court-sized products?

No, no. [ Same guys who want to remind us ]. That's all I can say. We got a really great one.

Excellent. Excellent. Maybe just -- I just -- I think you mentioned COVID kind of in one of your comments. I'm sure it's really been a driver for some of the verticals that you guys might be talking about. So could you kind of talk about impacts there? And do you think there's more long standing? And then maybe also touch on the government vertical, if you can. I would imagine there's got to be a pretty buoyant demand environment from governments as well.

Yes, for sure. I mean COVID hit our business at HP like it hit many businesses. And we had a couple of quarters where we had a slowdown in our business, both from a supply chain perspective, but also, like in my business, revenue recognition perspective. Because we can't get systems recognized from a revenue perspective until they're fully accepted by a customer and COVID-controlled -- so very limited number of people that could be into a data center to get the machines installed and up and running and accepted and things like that. So it just slowed things down for a couple of quarters. The company overall returned to kind of pre-COVID levels of revenue in the fourth quarter, which is really exciting, and our business exploded in the fourth quarter, and we expect that to continue because we had a positive -- even with all of this, our book-to-bill was positive last year. So we continue to build on that momentum overall. You mentioned -- well, one more thing on COVID that I should just say, which is high-performance computers are used a lot in COVID research. So HPC and AI is a huge part of it. So it's pretty exciting for us to just be able to work with these scientists and engineers to take advantage of our systems and do COVID research, and it's pretty inspirational from that perspective. But the other thing I would say is the government vertical, as you mentioned, it's remained pretty strong. And whether that's from the growth of data, whether that's from the going to exascale and building these very, very large systems, whether that's doing better job of forecasting the weather and understanding climate change, all of these things are driving the government side of things, and that's been a huge strength of our business, not just in the U.S., but worldwide.

Great. Great. I know HP and a lot of the hardware or enterprise-type companies has a pretty big focus on kind of as-a-service offerings. So can you talk a little bit -- I think you guys had an announcement recently, talk a little bit about how you see the as-a-service transitioning in this part of the market? It seems pretty ripe for it given the scale of some of your projects.

Yes. Yes. If you think about it, Tim, the growth of data isn't just about large corporations, like everybody on the planet is dealing with this. And so -- but not everybody on the planet has the knowledge and the facilities and everything that these large supercomputer centers have. And so the question that we really asked ourselves was, how can we take these technologies that we're building for the very high-end machines? How do we take supercomputers and bring that down and let everybody take advantage of it? And so yesterday, we just announced GreenLake Cloud Services for HPC. So think about GreenLake is a cloud that we bring to the customer. So it's on-prem or in colos that customers can use and access just like they do the public cloud and build a better environment for applications that they want to remain in control of and for data locality reasons, latency, many reasons, just amount of data that you have to move on and off a cloud, for instance, and the cost of doing that. So lots of things driving this. And so we announced GreenLake for Cloud Services to take this technology the same systems and same capabilities down to small companies. So how does a start-up use this? Or how does a small department within a company take advantage of the same technology that you get in these very large systems. Maybe an example, Tim, there's an application at -- that does simulations. It's used on some of the largest supercomputers on the planet. That same application is used in automobile manufacturers as they crash test cars, for instance. At that same application, the same needs are used with a golf club manufacturer because hitting a golf ball with an iron or a driver is the same application as crashing 2 cars together as we're doing in these very same research. So you want that same capability even down to a smaller company that's building a golf club that unfortunately hasn't helped my game that much, but same applications. So the same need of that technology, same deal with the data side. So we are enabling all of that for customers with GreenLake Cloud Services for HPC. So it's very exciting to kind of almost democratize high-performance computing in this way and really bring that to more people, which for us also grows our addressable market, hugely, especially in the commercial and enterprise segments.

Okay. Interesting. That's great. Car crash and golf swing. I'm familiar with that. So maybe just one other and it might be related to what you were just speaking about. But I'm just curious about how you think of kind of ecosystem across your business, whether it's -- as you're kind of taking it down, as you're saying into more SMBs, but also how do the cloud guys factor into this, telcos, maybe if you could just, system integrators, maybe just give us a little flavor on how that's evolving.

Yes. It's a super large and complex ecosystem in our market overall. We're kind of at this -- I like to think we're at the center of it. And on the one hand, we have some of the processor and GPU, Intel, NVIDIA, AMD that are providing us with some of the technology that we put into these solutions and bring them to customers. On the other side, we have people that are ISV, so applications that suppliers or we have system integrators that are taking our systems and building complete solutions. So for instance, we have a partnership with a system integrator right now that's taking one of our supercomputers and building an entire weather forecasting environment for a country around our systems, right, with our systems kind of being the centerpiece of running the models, but they're building all of that infrastructure and capabilities around that. And then you have the cloud providers. And so one of the things that's been really interesting part of our business, both in the high-performance computing business, but also in my mission-critical solutions business, because we have this unique technology, and typically, most of the cloud infrastructures are not unique technologies. It's pretty commoditized technologies. And so we've actually partnered with many of them that take our technologies and put those out on the cloud. So we have some of our systems that are out on clouds that are running complex enterprise applications like SAP HANA, for instance, because we can do that in a very large shared memory way or a Cray supercomputer that's in Azure in the clouds today that gives them unique capabilities and unique offerings to address more problems for their customers and leveraging our technology. So it's a very interesting kind of market, and we play in a lot of different parts of it, and we're connected really to all of it.

Okay. Great. I think we're just at the end of the session here. So Pete, really appreciate the time. Marcus, thanks for joining as well. Really, really interesting stuff. Congrats on the success of the business. I'm sure it will continue into next year as well. Thank you, everybody else for joining. Everyone, have a great day and stay safe.

Yes. Thanks, Tim. Thanks, everybody. Take care.

Thanks, Tim.