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

Good afternoon, everyone. Before we get started, if you are a member of the press or media, please disconnect at this time. This is a restricted line. Any unauthorized party in this meeting or any unauthorized use of the information communicated in this meeting is subject to prosecution to the fullest extent of the law. Any unauthorized person, including the media, who is on the line at this time, please disconnect. Please note, today's call is being recorded.

Hey. Good afternoon. Good morning, everybody. Thanks for joining us today. We're pleased to have Wells Fargo, Aaron Rakers from Wells Fargo, host our CEO, Antonio Neri. And Aaron, I'll kick it over to you in a second to kick things off. But very -- first, I have to start off with a few disclosures. So 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 our quarterly report on Form 10-Q. Our actual results could differ materially, and we assume no obligation to provide updates. More details can be found on our website at investors.hpe.com and our recent Q1 earnings announcement press release dated March 2. So with that, Aaron, let me turn the floor over to you.

Thanks, Andrew. I appreciate everybody attending today's discussion. I'm thrilled to get to host a detailed discussion with HP Enterprise's CEO and President, Antonio Neri, Just a quick -- for those that don't know Antonio, I mean, I think you've spent 25 years at HP, HP prior to the separation. previously running, I think, the Enterprise Group for the company and prior to that, I think servers and networking. So looking forward to the discussion. And for those of you in the audience, this is going to kind of be back and forth with me and Antonio, but feel free to shoot me any e-mails with questions that you might have at [email protected]. So before we kick it off, Antonio, I want to say again thank you so much for letting us host this discussion.

Well, thank you for hosting the discussion, and good morning, good afternoon, everyone. Glad to be here with you today.

Perfect. So Antonio, I've got a list of questions. I think that the first question on a lot of investors' minds right now is, well, we understand that you're not going to give kind of an update for the current quarter as much as we would love to hear that, I think just a quick overview of helping us appreciate what you're seeing in the demand environment as we think about a post-COVID recovery. I think the last couple of quarters, you've gotten incrementally more constructive than what we were seeing demand-wise. So maybe level set the discussion there, and we can kind of double-click from that.

Sure. Absolutely. Well, let me start by saying we are very pleased at the way we started our fiscal year 2021, where we saw strong rebounds in our revenue obviously. And then we saw actually stronger than in-line seasonality in the way we performed, which is a testament of the order linearity momentum that we had exiting Q4. If you recall, Q2 last year was the lowest point because of the major disruption we saw with the supply chain, particularly in China. And then it took us a couple of quarters to get back to pre-pandemic levels. But I was really pleased with the order linearity momentum and strength in Q1 and then delivered a better than normal seasonality. And in that, what we saw is strength in new areas of the portfolio where we have spent a significant amount of time and resources as we execute our vision and our strategy, particularly at the edge. When we've started the edge, I said that the edge, in 2018, I said the edge will be the next frontier. And we saw an edge performance which was really very, very strong, with 11-plus percent growth year-over-year on the back of the demand for remote connectivity, but also started getting the benefit of the Silver Peak acquisition, which it is a softer asset that allows us to deliver against this edge-to-cloud architecture. And market share has now been published, and clearly, we gained share in both switching and wireless LAN. And that momentum will continue, Aaron. That momentum is very, very strong, and we're very confident that, that business will deliver a high single-digit, low double-digit growth in the balance as we go forward as we stated at SAM. The other thing we saw obviously is the need to extract insight from data. And we have a unique portfolio with High Performance Computing, which is the backbone for these new technologies, new techniques and capabilities like AI, deep learning and machine learning. And that business is just literally on fire in the way we are booking. Remember, there is the bookings and then there is the revenue. And the revenue is more lumpy because, obviously, it takes time to build the systems. And at the same time, the only way we can recognize revenues is when we deploy the systems and we activate the workloads, is not at the time we ship the system like the rest of the portfolio. But I have to tell you, we are very confident that business will deliver 8% to 12% growth for the balance of the year. And ultimately, we see a tremendous opportunity beyond 2021, where we already have more than $2-plus billion in awarded business that we need to ship, deploy and turn on for our customers. So that's what we're seeing. And then we saw stabilization in the core business, right, with margin expansion. And that's why our strategy is very simple, right? It is all about strengthening the core, double-down in the growth area of the business like the edge and HPC and pivot to as a Service. But we see improvements in the demand, more steady improvements. And I think as obviously we deploy the vaccine and the economies are reopening, the IT spend will follow that. And let's remember also, at the same time, there are new technology capabilities being deployed that play exactly in the context of the portfolio that we have today.

Yes. And before we get into those kind of segment discussions, and I definitely want to touch on the as a Service and GreenLake traction that you're seeing, I guess, a common question I often get is that HPE and some of your competitors, as we think about this motion around digital transformation and with that always comes the discussion around how workloads migrate from on-premise to public cloud, what are you -- how do you think about that dynamic as we think about the on-premise side of the world going through this digital transformation where cloud fits in and maybe where continued infrastructure investments on-premise play out?

Obviously, digital transformation on top of mind for customers. I spent probably 50% of my time talking to customers every day, and it's no longer a priority. It's actually a strategic imperative. It's a strategic imperative. We live in a digital economy. And if you are not connected, you're not going to participate in this digital economy. And the first step in driving this digital transformation is all about providing secure, seamless connectivity. And this is where the Aruba platform is so differentiated for us and a source of quite significant growth as we go forward. But in the end, we think about the cloud, I don't -- not as a destination but as an experience for all your applications and data, wherever they live. And this is why the world is hybrid. We were probably the first company to say the world will be hybrid. And as I think about where workloads will land, it's all about the data. Data has gravity, and obviously, we create more data than ever before. In fact, we believe we're going to create twice the amount of data in the next 2 years than we created in the entire human history. That data has value. And those who can extract insights from data faster will be the winners. That's why I said we are entering now what I call the new age of insights. If you think about it, where the data is created, it's created where we live and work, which we define as the edge. Think about it, you and I having this video call with a lot of investors on the line, we are generating a lot of bytes right now. And eventually, somebody is going to replay it or maybe transcribe it, whatever it is. So that data has value. And that's why we believe customers need an edge-to-cloud architecture and bring that cloud experience to all the apps and data, wherever they live. Now cloud-native workloads, those that were born in the cloud, potentially will stay in the cloud. But as I think about that data-driven type of workloads, the propensity is to stay on-prem because it's way more economical to bring the cloud to the data than the data to the cloud and more and more at the edge. And that's why Hewlett Packard Enterprise is uniquely positioned to provide a true hybrid experience, inclusive of the public cloud, which includes managed services, and then more and more of that cloud experience at the edge with connectivity and edge computing and then provide that elastic consumption-based model.

Yes. And then before we move on, it sounds like your views on the demand environment, the post-COVID recovery dynamics, are unchanged relative to what they were a couple of months ago. But there's a lot of things going on around the supply chain component pricing. So let's kind of unpack that a little bit. Have you seen or are you seeing any challenges, incremental challenges, from a supply chain perspective in terms of lengthening lead times for products? And remind us again how you manage component pricing. And I think the one that comes up the most is obviously always DRAM.

Yes. Well, this is the beauty of this business. There is always something that you have to worry about, right?

Yes. Exactly.

Whether it's the COVID or a crisis or a hurricane or a boat stuck in the middle of the Canal, there is always something happening. There is no question there is a bigger challenge coming ahead of us. But what I said in our Q1 earnings, that in the short term, we will not see an impact on our ability to fulfill against the customer orders. However, there is no question we are seeing some disruption in the availability of certain commodities driven by the shortages of what we call substrates. Substrates is referred to as the wafers that allow you to build, whether it's a DRAM, memory or NAND, which is flash, or even a chipset. And so as we understood that, we went ahead. And remember, we exit Q4 with higher inventories, and we have buffer inventories and we continue to buffer inventories based on our ability to reach the supply base and the fact that we have long-term agreements that protect a certain level of availability against the demand and pricing against the cost. And so this is going to be what I think is going to define 2021, which is we see demand in steady improvement as the economy reopens and IT spend follows, but then is the ability to match that forecast and planning against this unique challenge, where we have made clear investments and then be able to manage the price in elasticity. The way I think about pricing is I use the analogy of a plane taking off. When the cost goes up, it's like taking off. You go high fast in about 35,000 feet in a few minutes. But when the plane lands, which means the cost is coming down, it takes much longer. And that art and science is something that this company knows how to do because of our expertise over decades, right, managing that forecasting, planning the availability of components still in demand and then ultimately take advantage of our working capital to be able to sustain the momentum that I think will continue to be there, in particular, as we shift the portfolio to these growth areas, notwithstanding that the core business with Compute and Storage is very important because it's a very important source of free cash flow for us.

Yes. And so, I mean, and just closing that loop on that question, pricing on DRAM and stuff like that, I mean, is it like we price that -- we have the ability to kind of elastically price that through in a quarter or so? Or how does that -- remind us again how...

No, I can price it in a week. I can price it in a week for that matter. I mean we change prices all the time. In fact, Hewlett Packard Enterprise is probably the leading vendor in driving price changes in the market, and our competitor tends to generally follow us. But pricing is very dynamic. It can be changed anytime for that matter. But also, you need to understand that it's not just pricing. It's the structural changes we are driving in our products because as new technologies like NVMe and other things come to play, there's multiple threats happening at the same time. You have spinning disk, you have flash and now you have NVMe. And that mix management is very important as you price each of them correspondingly and also, at the same time, is the fact that there are structural changes. These solutions are becoming well more efficient in power consumption, more attach of options, meaning maybe you have the same number of things in the server but at higher capacity. And therefore, you have 2/3 that is driven by the structural change and 1/3 driven by this fluctuation in cost and pricing.

Yes. Yes. That's perfect. I want to make sure I get to the key heart of the discussion, which is more of the transformational things, the things that you've put in place over the last few years in driving HPE forward. I think the first thing that I often find is maybe a little bit underappreciated, it's just the mix. And you've touched on it a little bit here about how you're strategically driving a more beneficial mix of business, margin accretion. And so can you help us understand or appreciate what do you look at today as seeing the incremental ability to drive further margin expansion in the portfolio, be it either mix-driven or operationally driven for HPE?

Well, let me start by saying we're never done with that part of the equation. This is a business that can always get better, more efficient and more effective. That's the way I think about it, right? So there is always opportunities to simplify the portfolio in the core business to automate everything we do and ultimately, to continue to drive operating leverage. So we continue to shift dollars and resources into the areas of growth as we drive forward, which ultimately will drive the mix shift in the revenue to drive what I call the long-term sustainable, profitable growth for our shareholders, which is our strategy. And remember, it starts with a vision. The vision is to become the edge-to-cloud Platform as a Service company. I think it's very clear. It has been validated by customers and partners, unfortunately, a part through the events that we went through or we're still going through, the global pandemic. Second is being validated by our competitors. Our competitors are copying everything. I mean I find it sometime ridiculous, they even copy our words, the way we say things. I said 3 years ago that the enterprise of the future will be edge-centric, cloud-enabled and data-driven. Well, that has been validated. We said 2 years ago that we will offer everything as a Service, and we are on time to deliver that by 2022. But the fact of the matter is, our strategy is very clear against the vision, strengthen the core to maximize operating leverage and free cash flow, which obviously is a source to give back to our shareholders, where we're incredibly committed to the dividends. Second is invest in these growth areas and third, pivot to as a Service, right? And when I think about that journey, is both organic and inorganically, by the way, but organically, it's all in our execution everyday. And then, honestly, when I think about our results so far and the visibility I have going forward based on this transformation, it's all about transform while you perform. But by the end of 2023, more than 30% of our revenue will become -- will be in these growth areas, which, by the way, comes with higher margins. So we have an ability to expand margins in the core through all the operational changes we're driving and then expand margins by shifting more than 30% of our revenue in these growth areas, which obviously will drive operating margins and then continue to drive that cycle. It is a journey, right? And the one thing I'm really proud of as CEO is that we have that clarity of vision with a purpose, which is to advance the way people live and work, and then the culture of the company because you need both innovation and people to deliver against this vision.

Yes. And wrapped around that -- and I want to touch on HPC. I want to touch on core compute definitely in the discussion. But let's start with GreenLake. GreenLake, I think, $4.5 billion in total contract value. I think annual recurring revenue was up 27% this last quarter. Can you just remind us at a high level, GreenLake, how is -- how prolific is GreenLake today across the product portfolio? How is GreenLake priced? And what I really want to get to is, to me, it feels like a lot of the competitive landscape, everybody has a hybrid cloud strategy, it feels. What makes GreenLake structurally, or what's the underlying differentiators of GreenLake?

Yes. Well, I believe, I truly believe we have years of a head start against the competition when it comes down to consumption-based models, on-prem or at the edge. We started this journey in 2013. At the time, actually, I was managing the services business for the Enterprise Group, not the IT outsourcing, the business that's attached, and then, obviously, the business that drives customer transformations. In that context, the reason why GreenLake works is because it has a clear value proposition. The simple way to say it is we bring the cloud to you wherever your apps and data sit. And in that, it's all about the software and the services. It is a true consumption-based model enabled by the software that we invested over the years. It allows you not only to deploy a workload-optimized solution on-prem that you can consume elastically because we have metering capability at every level, but also allows you to manage workloads off-prem, whatever public cloud choice you have, that can be managed and consumed the same way. And our differentiation is the software recipe and the services that we bring to it, with the integration of financing into the model and as to life cycle management. You asked me the question early on about digital transformation. What is the biggest challenge customers have when they go through the digital transformation journey? It's capital. They need to free up capital. HPE Financial Services, it is the entity inside our company that frees up the capital because we have the best asset life cycle managers on the planet. And by the way, we also drive sustainability in that process with the circular economy because we can recover those assets at 99.5% of the value. But at the same time, we have to free up the capital. We design and implement and run that solution, whether it's on an on-prem, on a colo or at the edge. We modernize the workloads. And we actually establish this consumption model. And if the customer says, "You know what, I don't want to be anymore in the run time." That's not what my value is as a CEO. My CEO value is in the innovation side, which is to basically get the insights from this data faster. And then we take over even the public cloud aspect of what they do, and we provide an integrated experience. And that takes years and years of work, Aaron, which, at the core, is all about software.

Yes. And that software, I think what I'm hearing from you, and maybe touch on this a little bit, is the metering capabilities, right, that the finer in metering...

Well, it's everything. It's identity management. It's security. It's metering. It is billing. It is analytics. It is automation. They all come together in this platform, which we call as HPE GreenLake Central, right, which is that cloud operating model that we deploy for customers. And then there is the run time that runs into the infrastructure and the software, to run it together as a workload-centric approach. And this is where we invested in a solution called HPE Ezmeral, which, by the way, is targeted for these modern workloads that are very data-intensive workloads. I have a joke, right, that says basically it is cheaper to move the cloud to the data and not the data to the cloud. Once you move the data to, let's say, a public cloud environment, it's like checking in Hotel California. You check in, you never check out. Why? Because it's incredibly expensive. Egressing data back is incredibly expensive. So we allow customers to address compliance, security and cost, and we bring the cloud experience to that data in a way others can't. But then we give the whole hybrid IT experience that they are looking for. By the way, ask me one of the other points that differentiation will say, is our channel. Our go-to-market is unique. Remember, 70% of our business gets done in -- through the channel network, which is distributors, value-added resellers, solution integrators, ISVs. And in that, that GreenLake business is growing triple digits through the channel partners. Why? Because they also need to transform themselves. They are on razor-thin margins, some of them in distribution. Those who have some expertise, they can get more value added than that. And we make, by the way, the platform open, which means they can ride through the APIs, with their own services on top of it.

Yes. That's perfect. And I know that you've started to get metrics like 95% retention rates. I think it's 120% average customer usage growth.

Correct.

Are those trends that we should start to think about continuing? And I guess underneath that, given the size of what HP Enterprise is, it's probably a hard question to really think about. But GreenLake, new customers, deal sizes, any kind of metrics you can help us appreciate a little bit more deeply the greenlight momentum that you're seeing?

Yes. So let me start by saying number of logos, right? The number of logos continue to grow exponentially because the way about this is about land and expand, right? The way I think about it is not just transitioning traditional CapEx to OpEx. And that's where we measure a very maniacal number of new logos and wins against new opportunities, workload-driven and against public cloud and other competitors that want to play in the consumption model. So last quarter, we won more than 70 new logos, and we will continue to report that metric as we go along. But the number of logos, meaning in terms of size of the deal and scope, continue to grow. But that's just the first step, Aaron, because the second step is that -- is the usage. And what I have seen is that, normally, there is -- depending if you are a Bespoke as a Service or you are in true catalog-oriented cloud services, what happens is that the usage goes up. And we haven't seen no one customer going down. They like the fact that procurement cycles are no longer in the middle. Once you establish that, somebody is watching this for them, is running it as efficient as they can. And then obviously, we plan capacity ahead and they keep adding and adding and adding. Let me give you a great example. Storage is a perfect use case. Autonomous driving is another interesting use case. But we are working with companies that they are developing the autonomous driving software. And if you think about it, they start with 30 cars on the street, they would go then 300 cars on the street. Every time you drive on one of these cars for 20 minutes, they collect 6 terabytes of data. Now as they go to 300 cars, whatever number of hours a day, they need more storage, and therefore, they need that elastic storage. If they move all that data to the public cloud, they will be paying an enormous amount of cost, notwithstanding the developers that develop the software for the autonomous driving will have latency issues, in some cases. And at the same time, they don't have the data at their fingertips. So we created a cloud model for them to stay on-prem but then consume and pay only as they go. So one, we are in sometimes 10 petabytes of storage every month. But they don't need to build the church for Easter Sunday when they only need it for one time. So we can grow that, that storage, as they go and only pay as they go, as their revenue matches the cost and then they can go. So those are great examples, right? But what I am proud of is the customer satisfaction. It is unbelievable, and I think it's testament to why our -- why the proposition resonates in the market.

Right. And so what I'm basically rolling all together here is that your confidence in driving 30% to 40% compound annual rate of growth in the ARR business -- or ARR of GreenLake is unchanged, if not, improving. I'm not going to put words in your mouth, but...

Absolutely. Absolutely. We say that the business will triple in the next 3 years. And when you -- generally, people don't like to comment more than 1 quarter at a time or 1 year at a time. But the fact that we went out and committed 3 years out is because we believe it has something very unique and special that customers want and need at this time. And we see the momentum.

Speaking of what I think is unique and maybe special at HPE is obviously leveraging very successfully the acquisition of Cray several years ago and benefiting from the trends that we're seeing and not just High Performance, the big of the big, but also the convergence of AI and HPC and the portfolio that you've had. You mentioned earlier that you have $2 billion. I think that $2 billion number is in reference to just exascale opportunities in the pipeline. I think there's another $5 billion on top of that. So...

Correct.

Can you talk about how we should think about the revenue trajectory of those opportunities? And just leveraging, and maybe more tightly, is there other layers of integration that could play out with regard to the HPE acquisition of Cray?

Yes. Well, let me start by saying that we are clearly the undisputed leader in high-performance computing. We -- I think we've done a great job integrating, both an organic portfolio with the inorganic play, both SGI and Cray supercomputers. So basically, we can address every aspect of the use case around data analytics, simulation and modeling, AI, machine learning and deep learning, whether it's the lower end to the higher end. But the differentiation, Aaron, is that we own the vast majority of the stack. which means we have foundation technologies at the silicon level through both our HPE Labs and the Cray acquisition, particularly what we call the interconnect. And the software stack to manage these unique specialized workloads would require a set of programming environments for the developers. And that's very unique compared to some of the rest of the portfolio. And so what it allows us to do is really address this massive demand for the hunger of computational capabilities, where we see the data explosion happening in every industry. Now we talk about the $2 billion. It's related absolutely to the exascale. We won 5 of the top 6 exascale systems. Just to put in context, exascale means 18 0s to the comma, which means we can process a billion, billion, million square transactions per second. And that's not just a good thing from the -- our revenue and margin perspective because we own more of the stack, which means it's higher margin, but it's good for the country because we address some very unique use cases around cybersecurity, life sciences and so forth. And then, for us, is how they materialize in growth, to your question, is we are very confident in that 8% to 12% growth on a compound annual growth rate that we're going to see. The only challenge there, honestly, Aaron, is the timing and in the short term, there is a little bit of working really hard with customers around the acceptances because of all the logistics. But that's why I said, this year, we will deliver that number. And then the $5 billion-plus pipeline will continue to fuel that momentum. Our factories, I will tell you, they're going to be busy already for the next 3 years. It is a marvel of engineering coming in, coming out. And so I'm very confident that it will be one of the reasons why our revenue as a total company will be in the 1% to 3% that we committed at SAM because of this business delivering on that promise.

So I think, Cray, I think you could -- correct me if I'm wrong, but I think the integration work around Cray is pretty much done. But I think what I -- I think I've asked you this on stage at the Analyst Day in the past, is there other layers of monetization? You mentioned the interconnect. Interconnect is becoming ever more important in these architectures. And we're seeing this evolution around smart mix and data processing units or DPUs. That slingshot interconnect, is there additional ways to leverage that, monetize that, from a portfolio standpoint?

Yes. Yes. Absolutely, and that was one of the thesis in our acquisition, is to leverage that technology for ourselves, which is an Ethernet interconnect fabric at very, very high speeds. That is a combination of the kind of technologies of the backplane, but also the SmartNIC to the DPUs that you talked about at. And so our goal is actually threefold. One is deliver these massive systems. Number two is monetize the component side of the house because we can sell it. Particularly, by the way, some of the hyperscalers need this technology, and this is not for everyone. It's not like getting into a commoditized compute. This is serious stuff. And number three is to cascade that technology in the rest of the portfolio in our Compute and Storage portfolio over time. And so when you think about a storage appliance, particularly in the mission-critical side, there is a need for a switch in the middle of all this storage that you bring together. And we will be able to leverage some of the technology on our own versus buying from somebody else like Brocade, for example. So that's a combination of revenue growth in the HPC, revenue growth to adjacency and margin expansion in the core business because I can leverage that technology over time. And that's why I don't think people understood the Cray acquisition. Actually, we didn't want it that people understood it at the beginning because we knew there was something very special in their asset, and we wanted to get that asset because of the foundation technology and the software, not because you're going to build a supercomputer.

Right. And so there's more to come. There's more -- basically, what you're saying is there's an evolution there, okay.

Absolutely. More. Absolutely.

Okay. Shifting gears, maybe before I go to Compute, I want to make sure I hit on Pointnext. We talked about GreenLake, but a tremendous amount of profitability comes from the Pointnext Operational Services offerings that you guys offer. How have you seen -- I think, orders, you've mentioned last quarter, flat revenue, but orders are starting to pick up. Just remind us or help us appreciate what you're seeing or how we should think about that important piece of the portfolio as far as attach rates or any other metrics we should be thinking about.

Well, Pointnext is one of our crown jewels because it drives customer loyalty and customer retention. I always said, I used to be in services for many years. The truth is, in the core phase, would something happen, right? So customers buy not just because you have the right technology, but because you have great services. And we think about that as an integrated portfolio. That's why this new segmentation that our CFO, Tarek, implemented, the intent was to give the shareholder even more transparency about how this portfolio really comes together and the value that we create for our shareholders. And OS is a key component in each of their hardware businesses because it's about attach rate and also the penetration rate. So our penetration rate has gone up as a part of that as we went along. Part is because we have been very deliberate in the way we drive that portfolio of OS. In fact, just a few weeks ago, we introduced a new portfolio of OS. And as we drive more SaaS-based software in the core business, which you will see here shortly, there is also an incremental opportunity to attach the OS to the SaaS business. So you're going to have hardware, plus the traditional hardware maintenance, then you have the SaaS to run this hardware with this new cloud-native architecture and the attach of OS also on top of that Software as a Service offering. And that's where the magic happens because customers need that, but also from the P&L perspective, becomes a margin expansion for us. And to your point, yes, we start seeing the order momentum pick up. And then obviously, it's all about book-to-bill ratios, right? So as the book-to-bill ratio and the penetration rate continues to improve and expand in the SaaS, we should continue to see the momentum play out at very high margins in the portfolio.

Okay. I think we've got about 10 minutes left, and I've got about 40 more questions. So we'll try and plow through some of these real quickly. So on the Compute side, the core business, most investors obviously know at this point, we're going into the midst of a server CPU upgrade cycle. How would you characterize that opportunity? How do you think about the installed base, if you will, as far as age or just the setup for that upgrade cycle as we move through this year? And I'm talking about Intel Ice Lake, the AMD's Milan, et cetera...

Yes. I think it's a significant opportunity. There is no question there is pent-up demand to modernize and I call, cloudify, that infrastructure. So today actually is -- we are having what we call Compute Day. It is our introduction of our Generation10 Plus, which not only improves performance and power efficiency, but we added new features and functionality in certain areas of the portfolio that will continue to drive AUP accretion to us and at the same time, added a few new features in the security space, which obviously is top of mind for customers. But this cycle is always an opportunity to drive the installed base refresh, but it's not just that, it's also driving the attach of services and software per our conversation. And we have the broadest portfolio in the market. We were one of the first to introduce the AMD portfolio. Lisa and I know each other for a long time. When she decided to reenter that market, obviously, we can mix and match any type of configuration of customer need, but we have a very large installed base. And one of the things we have done really well is another acquisition of CloudPhysics, Aaron, that we are extending now into the Compute because we now can understand all that installed base and automatically give quotes to our sellers to go back and modernize that infrastructure without spending any sell cycles.

Interesting. And as far as the Intel and AMD, does that create opportunity for you guys? Does it create a more competitive landscape in CPUs that's better for HPE? Or how do you...

Yes, of course, of course. The fact that AMD is there, and now even ARM, for the other -- ARM is becoming way more mature and they're consistent, particularly with the availability of libraries and tool change for application -- app developers. The more diversity, the better it is for us, no question.

Yes. Okay. A couple of other quick questions. Intelligent Edge, I know yesterday, the company hosted a webinar on integration, I think, of Silver Peak and some of the ESP efforts. I think it was mentioned that Aruba Central has 90,000-plus customers. I think last date, it was like 65,000 back in mid-2020. But it's a -- just again, I think you touched on it a little bit earlier, but where are we at as far as some of the upgrade cycle dynamics impacting that business, more of the traditional Wi-Fi 6 and campus switching and so on and so forth? What's -- what are you looking at over the next 12 months as really confidence of driving that business continually from a growth perspective?

I'm extremely bullish about that business. We have a unique value proposition that started many, many years ago with a cloud-first, mobile-first approach. This pandemic obviously has validated we're going to work in a much more distributed enterprise than ever before. Think about your home office being the micro branch in that branch campus, data center and cloud architecture. We can address all those customer needs in a true cloud-native and in a software-driven approach. That's where you heard about the Aruba Edge Services Platform. We have a road map here that not only already includes AI and analytics and building these new experiences. With the acquisition of Silver Peak now, we allow customers to connect all the edges and all the clouds in a very software-driven and autonomous way, which is both a reduction of CapEx and OpEx. There is more subscription software in there, more services attached to it. Wi-Fi 6 has become the de facto new solution, right? And we are pivoting -- we are already the largest vendor shipping Wi-Fi 6 ports in the market. But I think it's just the beginning, especially with the IoT, increased number of devices and things that get attached to the network everyday. In fact, we connect 14 million devices and things everyday to the network. That's a massive opportunity. But our road map includes the integration of 5G in 7 countries, especially as the spectrum gets shared between Wi-Fi 6 and 5G, which creates a private LTE opportunity, and then also the edge computing, as we discussed before, Aaron. So stay tuned here in the next 6 weeks. You're going to see a tremendous amount of innovation all gearing up to our HPE Discover, which adds to this massive portfolio. But I'm bullish about the business growing double digits for us.

Yes. Strategic questions, maybe quickfire around here. So I'm going to wrap 2 together. I think any conversation you or Tarek could have over the last many, many quarters has been H3C asset or put option, $3 billion. Strong free cash flow, you've raised free cash flow guide for this year. Pretty clearly, it seems to be confidence in that progression to $2 billion-plus free cash flow. How do I think about that in the context, one, H3C, your current thoughts; secondly, with free cash flow, the M&A strategy for the company?

Well, let me address first, our Q results give us quite a bit of confidence to raise the guidance, both on EPS and free cash flow, and we are on track to deliver on all our commitments, particularly associated with that program we announced last year, which is basically allocating resources in the right place and creating operating leverage. So we are well on our way to do that and by 2022, return to what we call normalized free cash flow. The H3C asset has been an amazing asset for us for many reasons. Number one, I think we were ahead of the industry understanding the China dynamics. If you are not considered a China champion, you can't compete in China. At the same time, China is the second largest IT market on the planet. And so we have until May 2022 to decide what to do with the options. Right now, we think -- we believe that, that asset has tremendous value also because of, you remember, the way the construct was done with a joint venture there. So we're going to make that decision in due time, what is the best for our shareholders and for the company in the context of China, and then how to reutilize that capital in the most effective way. Remember that we have a very stringent and disciplined return on invested capital in this company, and I'm very committed to that.

And M&A, how do you fit M&A into your thought process? Is there...

Yes. No, no. Yes. Yes, M&A is an important tool that you have to use to accelerate your vision or strategy. I think about innovation in 3 forms, right, organic, inorganic and through partnerships. Organic, obviously, we are making our organic investments, and you see the momentum in the market. Through partnerships, it's both the ecosystem that we drive and also small -- very small investment in start-ups that we can bring as a part of our solution, so we have the right of first refusal when it makes sense to acquire those companies, in particular in these new areas. And then M&A, in the context of accelerating that strategy with the best IP and the best talent, leveraging our very, very large go-to-market, we like the Aruba-like type of acquisitions, as we said many, many times. I think the -- I have done now, believe it or not, 19 acquisitions since 2015. The first one was Aruba, when I was running the Enterprise Group. And the last one is called Silver Peak, right, and in between, all sorts. But I think all of them delivered great accretive value to the company and positioned us in this new area. So we'll continue to assess what is available out there, but obviously, we maintain ourselves aligned to that return on invested capital, where it makes sense because valuations are high and in some cases, make no sense.

Yes. And kind of closing the loop on capital return and thinking about a very disciplined approach to return on invested capital and stuff, you've also emphasized dividend as a key use of capital and normalizing free cash flow. Can you -- dividend versus share repurchase, I think you've got a $2 billion authorization remaining on the share repurchase side. How do you balance those 2? Or how do you think about dividend versus share repo and growing dividend, I guess, over time?

Yes. I mean return on capital to shareholders is part of our strategy, obviously, and we are totally committed to that. And we said at SAM, we will return at least 50% of our free cash flow to shareholders. And the first vehicle is dividends. Dividends is the most effective way to do so. And on the share repurchase, right, we think about this in a more dynamic way, where it makes sense. But right now, we believe that dividend is the most important part and then continue to make the right investment of the business so we can continue to drive that portfolio shift at a higher margin, higher in recurring revenues and at the same time, look at share repurchase, where it makes sense in a more dynamic way.

Antonio, we touched on a ton of stuff. I want to be appreciative of your time. I think we've got 1 minute left. We didn't talk about Storage. I don't know if you want to touch on that real briefly...

Yes. Sure.

Or for that matter, if there's anything that I haven't asked and I really should have asked, I'm completely open to that as well.

No. Well, Storage, obviously, is a core component of our business. You will see here, in the next few weeks, an incredible vision and introduction of new solutions that I think will define the market in new ways and obviously, have -- drives a higher margin. But as you know, our Storage portfolio, it's a combination of owned IP and nonowned IP. And we are pivoting that portfolio to all owned IP, to both organic and inorganic approaches. But in the end, there, it's all about data services, data insights, intelligence versus just a monolithic appliance. Again, stay tuned, Aaron. In a couple of weeks, you will see what that is going to look like. Right now, we're getting traction in many areas of our IP portfolio. Primera has grown triple digits. When I think about the hyperconverged infrastructure, we have a unique value proposition with disaggregated hyperconverged because we know these modern workloads require a different type of Compute and Storage that can be kind of put together dynamically, come together in a dynamic way. And HPE Nimble is a source of significant growth for us. But then what is the next move? And again, in a couple of weeks, you will see it. And then we have other assets. Listen, HPFS is an incredibly well-run business. It has a return on equity of more than 50%, a loss -- a debt ratio loss that is less than 1, and a normal basis should be 0.5%, which obviously the pandemic had created some challenges. But that business is also strategic for us for many reasons. One is extract every penny of that asset; and number two, to pivot to as a Service. And then last but not least, we have a Software business, which is called the Communications and Media Solutions business, that also drive this big transition in the telecommunications industry with 5G. We adopted open 5G standards. We have a tremendous amount of opportunity. We're working right now with many of the telecommunications vendors around Open RAN. And we have the whole stack. We have virtualization, we have orchestration, and we have 6 of the key virtual functions you need to run 5G. So we're excited, but we bring all this back to the vision, to become that edge-to-cloud architecture because while we drive performance in each of the segments, is that horizontal solution in Consumer as a Service that drives those long-term higher-margin growth in revenue and recurring revenue with it. So that's our strategy, and I'm super confident we can deliver on that. And the momentum we see in Q1 should continue for the rest of the year as we go through this recovery.

That's great, Antonio. I think unless you had any other quick comments, I think we'll end it there. Like I said, I want to be appreciative of your time and letting us host this discussion with you today.

Well, thank you for having me, and I hope everybody found this informative, and always available with our Investor Relations team to answer any questions you have.

Great. Thanks, Antonio. Thanks, Andy.

Thank you, Aaron.

Bye-bye.

Bye-bye.