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

Good day, and welcome to the HPE Aruba ESP Briefing Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Marcus Kupferschmidt. Please go ahead, sir.

Thank you, Chuck. This is Marcus Kupferschmidt, Director of Investor Relations and Business Intelligence. On behalf of HPE, I want to thank you for joining us in this Aruba ESP briefing. Our goal is to help you better understand the Aruba networking platform and its industry-leading ESP software platform. We also want to overview last week's product announcements, which marked the second phase of the ESP strategy. Joining us today on behalf of Aruba is David Hughes, Senior Vice President of HPE's edge networking WAN business and Founder of Silver Peak. The format of today's call is a 20-minute formal presentation, followed by live Q&A with our sell-side coverage analysts. [Operator Instructions] We will only address questions about the products and strategy, not financial questions. Before I turn this over to David, let me take a moment to read our standard 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 Q1 earnings press release. So with that, let me turn it back to you, David. Thanks.

Thank you, Marcus. So welcome, everybody. And just to reiterate and to introduce myself, I am David Hughes. I was the Founder of Silver Peak back in 2004. I served as its CTO for the first few years and then as its CEO from 2013, where we took a 5x Magic Quadrant leading WAN optimization business and pivoted and created a new subscription business with a product called EdgeConnect in the SD-WAN market. And of course, in September last year, we combined with Aruba, and we are very excited about what we are doing together. In today's call, another piece of important context is Aruba's Atmosphere conference, which, of course, this year ran virtually and which we wrapped up last week. And so as part of Atmosphere, we announced a number of new capabilities and gave our customers and analysts and other interested parties an update on what we are doing with our edge services platform. So the purpose today is to give you a little more insight into what we talked about at Atmosphere and where we're going with our edge services platform and how the Silver Peak integration is moving forward. So the first thing I'd say when I think about Aruba and Silver Peak is that we were both born at the edge of the network, that we're companies that have worked with our customers from the edge to enable them to transform their IT infrastructure and to drive business outcomes. This is in contrast with some other players that we compete with who may have been born in the data center or, more recently, those that may have been born in the cloud. We believe the edge is a very compelling and very unique position to execute from. The edge is, of course, where everything happens. It's where everything happens in real life, where products are sold and it's factories where things are built. It's the place where all of digital transformation is happening, where those sensors are measuring and helping businesses optimize their operations, drive efficiency and create new experiences. So enterprises, as they look at digital transformation and how to grow their businesses and drive customer engagement, are searching for what's the right balance between implementing functionality at the edge, in the data center or in the cloud. We believe that the edge is a pivot point for transformation, be it network transformation where the customer is trying to move from a traditional MPLS-based, data-centric networking architecture to something that's cloud-facing and leveraging the Internet. The edge is the thing that lets them make that change and lets them move from where they are today to where they want to be. It's about being able to take a brownfield situation and be able to move to a desired new state. We can drive that transformation from the edge. Much like we can do that with networking, we can also do that with security. And so what we are seeing in general is securities moving from a perimeter-based architecture, building a fortress around the data center, to something that is much more distributed. And in order to implement that distributed, more cloud-oriented security architectures, people need to be able to transform. And again, the edge is the pivot point for that transformation. The edge is where we're intercepting traffic from people, be they -- be it home, working from home. Whether they're in a branch, whether they're in a retail location or they're on the road, we can intercept that traffic and decide, should this be going to a data center-based security service? Should it be going to a cloud-based security service? Or can we take it directly to a SaaS service? So we are really excited that the edge is a great place to help our customers from and a great place to compete from. So a year ago, Aruba announced their Edge Services Platform or ESP. The idea of ESP is to not just offer a set of appliances or pieces of hardware but to be able to surround that with a complete software stack, which helps our customers implement their transformation goals. In ESP, there are 3 layers. The first layer is called the connect layer. The second layer is the protect layer. And the third layer is analyze and act. I'm going to drill into each of those just briefly. So the connect layer is the infrastructure layer, where the appliances and switches and WiFi access points lie. It's about the fundamental networking that goes on, how do you get basic connectivity. The next layer is the protect layer, and that's where we provide security. And in particular, what we talked about at Atmosphere and what I'll talk about a little later on in the call here is it's where we provide edge to cloud security. The third layer is to analyze and act layer. It's all about automation and AIOps and being able to have a data lake, which consists of all of our customers' data. We can drive insights and operational efficiency not just for individual customers but with fleet learning across all of our customers. The ESP platform is all wrapped together with our cloud-based management system called Aruba Central. Aruba Central has been growing dramatically. We're now up to approximately 90,000 customers. At Atmosphere last week, we also announced the availability of Aruba Central on-prem. And so one of the things we believe is the cloud isn't necessarily a destination, it's an experience. And so we want to bring that cloud-managed network experience to our customers who, for whatever reasons, may be regulatory, they want to make sure that, that is something that they house on site. The -- one of the key things about the Edge Services Platform or ESP is that we're really bringing the power of automation and orchestration to help deliver business outcomes to our customers. I can think of a couple of cases just in the last week where I've heard from customers that we've done remarkable things like reduce their downtime by a factor of 10. And it's not necessarily that each individual appliance, so each switch or each access point that we make, has 10x better reliability. We always strive to build more reliable software and hardware. But what really drives that improvement is the power of orchestration. If you're a customer and you have thousands or even tens of thousands of devices to manage, and each of those devices get configured with thousands or tens of thousands of lines of command line, it's almost impossible for that network to run smoothly. It's almost possible -- impossible for humans not to make mistakes. But if instead you can have an automated system that's configured with the outcomes that you want to achieve and then have that system orchestrate all those devices on your behalf, you can eliminate a lot of those human error, a lot of that -- a lot of those mistakes. You can get consistency and dramatic improvements, like a 10x improvement in uptime. And so we see the Edge Services Platform as being really key to extending beyond a hardware networking business to something that's much more valuable to our customers to be able to help them achieve the outcomes that they're looking for with regard to their network and security transformation. Now one of the major topics at Atmosphere was also update on the integration of Silver Peak into Aruba. And so obviously, this is a thing that I'm involved with personally. And right from the outset when we combined back in September, I needed to evaluate how do we bring the Silver Peak portfolio into the Edge Services Platform. And the first piece is at the connect layer. Obviously, we -- as Silver Peak had EdgeConnect and network -- piece of networking equipment, and it fits in the infrastructure layer, along with Aruba's switches and access points and so on, that's the most straightforward part what kind of basic interworking. But above that, we talked about the connect layer. And we decided that a lot of the early wins we could get working together would come from focusing on that security layer, on the protect layer. In general, there's 2 big trends happening in the industry which are driving the networking players and security players closer together. The idea of transforming your network and transforming your security are closely associated. And so you've seen the rise of terms like SASE or Secure Access Edge, an architecture that is kind of first described by Gartner, and ideas like zero trust or dynamic segmentation or cloud-delivered security. All of these ideas are really responses to things that are happening in the environment. And so one of those major things is this kind of idea of working from anywhere. Bring your own device and kind of working on the road was already a thing before the pandemic. But with the pandemic and everyone working from home, the idea of work from anywhere has become pervasive. And this idea that the workplace, even when we go back, is going to be transformed. And so customers are looking at how do they make that user-to-application experience better. And what they've also seen is that with the distribution of people, distribution out to the edges of the network, there's been an erosion of that security perimeter that surrounds the data center and that the old perimeter-based architectures are falling short. Now at Aruba, with Silver Peak, we bring together a full secure edge portfolio from the VIA product for mobile worker; to micro branches, which are access points with WAN connectivity; to the SD-Branch software, which is integrated, wired and wireless LAN with WAN capabilities; to EdgeConnect with the kind of most advanced, most flexible SD-WAN capabilities. We enable the enterprise to implement a secure access edge with a full portfolio, all the way from the mobile user to the home user, to someone in a small branch, to someone in a factory, to someone on a campus or in the data center. We also allow our customers to adopt cloud services at their own pace. So like we talked about a little earlier, we don't believe that everything needs to be on-prem at the edge. But likewise, we don't believe that everything can be done in the cloud, and it needs to be a balance. And so we help customers strike that balance between what do they want to do on-prem, what do they want to do in the cloud and how fast they want to move to their ultimate goal. Another major thing that kind of runs in parallel with this idea of work from anywhere is digital transformation and the rise of IoT. So while SASE or Secure Access Service Edge is focused on the user-to-application or user-to-cloud traffic, IoT is driving device-to-device, device-to-edge and device-to-cloud traffic as a different set of traffic flows. And while the transformative effect of IoT is really important in terms of realizing the transformational promise, IoT devices are also recognized as a weak point and if you break into just one IoT device's threat of a bad person being able to move laterally and, in fact, other parts of customers' infrastructure. So that drives the need for segmentation. And what we've seen is that traditional segmentation approaches based on things like VLANs have done an okay job in providing a course level of segmentation. But as a number of types of device proliferate, this method just doesn't scale. The other thing is while the user-to-app case, the SASE case, a lot of that can be driven from the cloud, for the IoT device security, it must be handled on-prem because that's where you can intercept the traffic. Many of the cloud-based approaches involve installing an agent on a user's phone or a user's laptop in order to intercept the traffic. But that's not possible for IoT devices. So the IoT security risks very heavily on capabilities you have at the edge. And so what we announced last week at Atmosphere was a zero trust dynamic segmentation, a way of being able to make sure that each IoT device can be constrained. So it could only connect to devices or services that are needed that are consistent with its role and to nothing else. And so the idea of taking a network where anything can talk to anything to micro segment it into small pieces, where each device or each person can only talk to the services that are needed to perform their job or function. And this level of segmentation provides a much more robust way for customers to move forward and operate their infrastructure. So the result of all that we're doing is what we call edge-to-cloud security. It includes elements of the Secure Access Service Edge architecture. It includes a zero trust-based micro segmentation at the edge to support IoT deployments, secure IoT deployments. And we're giving the customer the freedom to transform their network and transform their security at their pace. We're letting them find the right mix of edge- and cloud-delivered capabilities, whether using our security stack, our capabilities or in the case of, say, cloud services leveraging a partner via orchestration from our side. So we are really excited with what we are doing together. We're very excited about the adoption of the Edge Services Platform. We believe that no one else has this combination of broad physical edge infrastructure, all the way from wide and wireless LAN through controllers, through WAN edge devices like EdgeConnect and SD-Branch; and that we're being able to bring together automation, comprehensive security and AIOps with ESP in a way that no one else has. And so at this point, hopefully, I've given you a little bit of a background on some of the things we covered at Atmosphere last week and a little bit of an update on what we're doing with Edge Services Platform or ESP. So we are ready to open up for questions.

[Operator Instructions] And the first question will come from Simon Leopold with Raymond James.

A couple of things I wanted to ask. One was with an understanding that a key part of SASE is security. During the event last week, I think you talked about some partnerships with security suppliers of the likes of a Palo Alto, a Zscaler. So one of the things I'm trying to understand is, what does this HP Enterprise bring to the table specifically from a security structure and architecture versus where are you partnering? And then I've got a follow-up.

Yes. So that's a great question. And one of -- I think the first most important thing to understand is we're bringing a lot to the table relative to security. So first and foremost, I think this idea of dynamic segmentation is really important. It's something that you can't add on outside the infrastructure. It has to be part of the access network. And so that is a very important piece that Aruba uniquely brings to the table. With our integration with ClearPass, we can make sure that we are constraining the communications of devices and users to that, which is consistent with their role. And so that's very much part and parcel of what we do. The other thing we've introduced is firewall capabilities and now IPS/IDS or Unified Threat Management inside the Aruba portfolio across both the new Silver Peak EdgeConnect products as well as the existing Aruba products. And so we have a consistent security layer native to our offering. And customers can use that so that, say, in a branch, they could decide to break out locally to the Internet via our security stack. They could choose to backhaul to the data center where they may have a traditional security stack from a traditional security provider or they could decide that maybe for some traffic, maybe people that are doing home from work, whether they're browsing e-mail, doing shopping at work, they don't want to carry that traffic across to their data center, but they want to get it off their network, but they want to have it inspected. So they'll give that to a cloud-delivered security service from one of our partners. And so really, what we want to bring to the customer is their ability to choose, freedom of choice to leverage our security capabilities where that's a good fit. And we think that, that's certainly the case for a broad range of scenarios. But when they want to be able to continue to do things the way they have in the data center, we want to enable that. And then if they want to be able to move more aggressively to cloud-delivered security services, we have orchestration and automation of that, that makes that really easy for them as well.

And the follow-up I wanted to ask about is, how do you engage the customer? Is this built into Aruba Central? Is this an add-on? And if it's an add-on, is it a subscription? Just help us understand what exactly the customers are signing up for and how they're paying for it.

Yes. So there's a little bit of nuance in that question. So obviously, with Silver Peak, we're going through an integration. And we have an EdgeConnect product, which is sold by subscription, and we -- and that continues to be the way that it is. We're working hard to integrate that within Aruba Central because we hear from our customers, that's a huge value add. And so there was a demonstration of some of the work that we're doing to incorporate the EdgeConnect product inside Aruba Central last week. And I think that in general, we are moving towards, for Aruba Central and the whole Aruba portfolio, a enabling subscription model so that people are paying for hardware -- for the basic hardware and then paying subscription for the value-added services on top.

David, this is Marcus. One of the thing I think we should add, I know Simon followed the company for a long time, but for some of those who are newer, it should be understood that ClearPass is one of the original differentiators that Aruba created that help them to really do something different for customers and win share for networking. And want to make sure people understand this is not something new. This is deep within the heritage of the company and the security focus.

Yes. That's correct. So a big part of how we're enabling this is integrating EdgeConnect with ClearPass. Fundamentally, that's one of the major things we've delivered.

The next question will come from Jim Suva with Citi.

Can you maybe give us a little bit of look at Silver Peak before it got integrated into Hewlett Packard Enterprise? Was most of its offerings organically put together or acquisitive? And I guess more going forward, as you look forward, I'm not sure how much more you have to add, but this space continues to evolve, continue to mature, continue to take on new characteristics of security and things. And in doing so, will most of the new products and enhancements be coming out organically driven? Or is there just a lot of M&A in this sector? I'm just kind of curious about backward-looking and forward-looking on that topics in the skill sets.

So from a backward-looking perspective, at Silver Peak, we developed virtually everything organically. So we developed the technology ourselves and brought it to market ourselves. And I don't think I can talk about the future definitively, but there's a lot that we're doing organically bringing the Silver Peak capabilities together with the native Aruba capabilities. And we believe just with that combination, there's a lot of room for innovation and for delivering 1 plus 1 equals 3 for our customers.

The next question will come from Rod Hall with Goldman Sachs.

This is RK on behalf of Rod. I wanted to expand on the question on competitive landscape. So could you talk about what's the most differentiated versus the players born in the data center? And what's the most differentiated versus the ones born in the cloud and versus other edge players as well?

Yes. So I think relative to people that are born in the cloud, the weakness of cloud-delivered security is you have to get the traffic to the cloud somehow. And that typically involves installing an agent. And while that's a good approach for a laptop or a mobile device, it doesn't translate so well to IoT devices and other things that are locked down. And so really for that whole class of traffic, if you want to apply security, it has to be intercepted. And the natural place to intercept that is in the edge infrastructure, in the wired and wireless LAN, in all of your locations where all of these devices are. And so I think that broad presence at the edge of the network is a real strength for Aruba and gives us a set of capabilities and a reach that you just don't have if you're coming from a pure cloud point of view. But that doesn't stop us working well with those cloud vendors because, in some ways, we're complementary. Relative to the more historic security or networking players that are focused in the data center, they've tended to be very much focused on building out the data center as a fortress and something that you need to protect. And we've all seen that with COVID and just with the world in general becoming much more distributed, it's really hard to approach security as building a wall around everything. And I think that what we bring is this ability to be able to take some of the key ideas that have been important in the data center like micro segmentation and bring them to the edge and deliver them at the edge. And there's so much talk about the cloud. And generally, it's put -- and juxtaposition with the data center, with the data center going down, cloud going up. But people forget that the edge is huge. Edge is where everything is happening. And so as a company, we believe we've got a really unique position in terms of helping our customers develop their networking and security capabilities with an edge-driven focus. And because so much data is being created at the edge, we anticipate that over the coming few years, the edge is going to become more and more strategic.

The next question will come from Amit Daryanani with Evercore.

I guess I have 2. First, on the security side, it sort of appears that what I think what Aruba is really doing is building on the networking and automation function, and you're leaving security part to your partners like Check Point and Zscaler. I'm wondering, is there a rationale or a good reason to perhaps have a tighter integration with security offerings that are more in-house versus partnering with others? Just how do you go through that decision? I realize you don't have firewall security in-house, but I'm curious, could that be a logical extension eventually of this? And then secondly, as you integrate ClearPass into ESP, could you just talk about what does that accomplish on the edge? And do things like automation or orchestration that people generally like about ClearPass, do those scale into the edge as well?

Yes. So 2 questions. The first about firewall and universal -- Unified Threat Management. Both of those are part of the Aruba portfolio. So perhaps a well-kept secret, but the -- both the Silver Peak EdgeConnect and the Aruba SD-Branch have built-in firewall capabilities, and they're used by many of our customers. And we are continuing to invest in that, most recently with IPS and IDS capability. And so there are a lot of security capabilities that are part of the native portfolio. But at the same time, we do recognize that customers have other vendors that they've worked with for a long time and that have -- that maybe do things in a different way. For instance, they may be a company that's focused on delivering security from the cloud, and that's all they do. They're specialists in that. In that case, what we want to do is provide really good integration, the ability, for instance, to geolocate, figure out where their nearest POPs are and redirect traffic to the nearest most available POP automatically, be able to report on how the integration with that service is operating and so on. So there's a lot of value add that we can do from orchestration even when we're working with partners. But I do want to make sure it's clear that there are -- we have pretty comprehensive security capabilities within the product, and that was a big part of what we were highlighting last week. Can you remind me about the second part of your question?

Yes. I was just wondering, as you integrate ClearPass into ESP, maybe just talk about what does that accomplish in the edge and do things like the automation/orchestration that folks like about ClearPass today. Do those scale into the edge as well?

Yes. Well, ClearPass has really always been about enabling control of the edge, so deciding which devices can be trusted, which users can be trusted and what they should be allowed to do. And so what we're really doing with integrating between EdgeConnect and ClearPass is bringing that control not just to LAN but also to the wide area network, and as we go forward, puts us in a position where we can build zero trust networking edge to edge, which is really what our customers are looking for.

The next question will come from Shannon Cross with Cross Research.

I was just curious, when you think about the customers that are out there that you're targeting right now, the installed base of hardware out there, how much of it can handle some of the new services that you're offering? And how much would require more sort of a field upgrade, especially as we move further into the edge? And I have a follow-up.

Yes. I don't have that exact data. But in general, we work to make sure that people are able to adopt services like Aruba Central, wherever possible, without having to adopt new hardware.

Okay. And then I guess the other question I had is this seems to be fairly enterprise-focused or maybe I'm misunderstanding. So I'm curious, as you -- what are the benefits that HP has had over the years in terms of acquisitions, has been able to go out and use the channel and the acquired companies have done very well? So I'm wondering, how flexible is this in terms of size of business and how complex is this for some of the VARs to understand and deploy?

So your question is relative to ESP, the Edge Services Platform, or to Silver Peak's EdgeConnect?

I guess either or both at this point in time. I'm just trying to understand more how Silver Peak and some of the offerings are going to fit in within the overall HPE infrastructure. And again, we've seen benefit -- significant benefit from HP's sales efforts over the years. So I'm wondering how it will sort of flow into that and, obviously, leveraging Aruba as you're part of that.

Yes. Okay. So I think I'll answer it with respect to Silver Peak's EdgeConnect product line. So obviously, yes, I think if you look at Silver Peak standalone, we are primarily sold in North America and primarily to medium to large enterprises. And so one of the big advantages of becoming part of HPE is that we are part of a much broader go-to-market, so broader from a geographical point of view and also broader from a perspective of being able to not just sell into large enterprises but into the mid-market and potentially into commercial as well. So -- and a lot of that is done via traditional VAR and distributor-type channels. But there's also, I think, particularly in the area of SD-WAN, opportunities to work with service providers and having service providers leverage our technology to bring offerings to their customers.

As there are no more questions from the audio side, I would like to turn the call over to Mr. Kupferschmidt for any webcast questions. Please go ahead, sir.

Yes. Thanks, Chuck. I have, David, 2 questions that we did not get to. The first question is if you could talk a little bit more about why our customers are interested in Network as a Service, the concept, the value add. And what is Aruba doing in that area? And what are the catalysts for the market adoption?

Yes. So I think Network as a Service is very interesting because as we go down this path of implementing AI operations and automation and orchestration, a lot of the benefits accrue to the operator of the network. It becomes more efficient, and you'd be able to become more business-oriented in terms of what goals you set for your infrastructure. And so there's really 2 models. One is you could sell subscription to customers to let them run the network with this better infrastructure, which is the predominant model today. But if you take that just one step further, you could say instead of giving the customer the tools, what if we took ownership of making sure everything is operating well? We leverage the AI operations and automation that we have, and we provide everything to the customer as a service from their hardware footprint through to the software to the operations. And so that's a slightly longer-term trend but one that we believe really interesting. And it provides another way of kind of monetizing the advances that we're making relative to orchestration and AI operations.

Great. Thanks, David. And then the second question, maybe a touch granular, so you can try and keep it high level. But the question is, can you give the call a sense around how much of the switching business typically is sold in conjunction with APs versus to what degree we're selling stand-alone switching and -- as a business. Are you able to talk to that?

I'm sorry, I don't have the data at my fingertips. I think we should follow up with that one.

Okay. Then let's do that. All right, operator. So let me just wrap this up. And I want to thank everybody for spending the time with us and learning more about ESP and the evolution of Aruba. And I hope everyone has a great day, and look forward to talking to you again soon. Thank you, operator. You can end the call.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.