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

Good afternoon, everyone, and thank you for joining us today. I'm Andy Simanek, VP and Head of Investor Relations. I'd like to welcome you to the 2021 Hewlett Packard Enterprise Virtual Securities Analyst Meeting. While we were hoping to be hosting you in New York this year, we're still very pleased to connect virtually, and we look forward to hopefully seeing you in person soon. Before we get started, I'd like to go over the agenda for the day and some logistics. First, Antonio will kick us off and discuss how HPE's differentiated edge-to-cloud as-a-service strategy will continue to deliver value for our shareholders. Following Antonio's presentation at about 1:30 p.m. Eastern Time, and because we are hosting this event during market hours, we'll be issuing our SAM press release and posting the full set of SAM slides to our Investor Relations website at hpe.com/investor/SAM2021. Tarek will then discuss our shareholder value creation framework and how it positions HPE for long-term sustainable revenue and free cash flow growth. He will also share our fiscal year 2022 outlook. And then we will have plenty of time to answer your questions. Also, a replay of this webcast will be available shortly after completion and will be available for approximately 1 year on our Investor Relations website. And lastly, the disclosures. This event may include forward-looking statements involving risks, estimates and assumptions. HPE assumes no obligation to update such statements. So with that, I would like to welcome Antonio Neri, President and Chief Executive Officer of Hewlett Packard Enterprise. Antonio?

Good afternoon, and thank you for joining us for the Hewlett Packard Enterprise Securities Analyst Meeting. We appreciate your time and interest in HPE. We welcome you today from Houston and look forward to the opportunity to host you at our next new headquarters when it opens next year. Today, I will discuss how HPE's differentiated edge-to-cloud strategy will continue to deliver value for our shareholders. I am convinced of several things that I will cover in our time today. First, HPE is capitalizing on distinct and significant megatrends. Second, we are accelerating our market leadership. We will show you how our customers are responding to our value proposition and how we continue to innovate and execute with discipline to deliver against our strategic growth priorities. And finally, our uniquely integrated approach and portfolio offer synergies and position us well to drive sustainable profitable growth and free cash flow with higher margins. The pandemic has created a new and different world, accelerating several key technology trends we bet on early. Customers now need to connect and engage in different ways, and technology plays a critical role in improving the health of our communities and digitizing our economy as it recovers and evolves. Our purpose at HPE to advance the way people live and work has never been more important or relevant than it is today. The pandemic has accelerated several relevant megatrends. First, we see the explosion of data at the edge, driven by the proliferation of devices and things. As Garner recently predicted, by 2025, more than 50% of enterprise managed data will be created and processed outside the data center or a cloud. We have all witnessed the importance of living and working at the edge firsthand, particularly over the last 18 months, whether it was watching our children engage in distance learning, having doctors provide health care through telemedicine or simply working from home. Secure connectivity is essential in this new reality, to enable today's digital interactions, empower new engaging digital experiences in the future. In 2018, we declared the edge will be the next frontier, and we backed that vision with a commitment to invest $4 billion over 4 years in our edge business, and we see the benefits of this investment in double-digit growth. The growth of data at the edge is fueling the second megatrend: The need for a cloud experience everywhere. The past decade was about the cloud-first mandate. Looking ahead, the next decade will be about managing data and workloads wherever they live across a distributed enterprise, a cloud-everywhere mandate. In fact, 92% of enterprises have embraced multi-cloud strategies, and they recognize the need for different cloud environments for different types of data and workloads. In 2019, we announced that we will make our offerings available as-a-Service by the end of fiscal year 2022. And we are delivering on our commitment by bringing the cloud experience with a flexible consumption model to HPE technology solutions across compute, storage and networking. Finally, data growth has created countless new opportunities. As you have heard me say before, data is the new currency that powers the digital economy. Data is now our most valuable asset, and I predict that one day, it will be recorded on balance sheets. However, the key to success is not simply capturing data but quickly extracting value from it. Enterprises need analytics to protect themselves against cyber attacks and generate insights to build new business models. Cutting across all these trends is the shift in how enterprises are consuming their technology. Increasingly, customers want to digitally transform while preserving capital and eliminating operating expense by paying only for the IT they use. For instance, according to IDC, 50% of data centers will be operated via an as-a-service consumption model by 2024. Each of these market trends represent a significant area of addressable growth for HPE. Within these growth markets, we are particularly focused on the subsegments that will deliver the most profitable, sustainable growth. We are actively investing in both organic and inorganic innovation, to ensure we capitalize on these margin reach opportunities. And again, we see a significant market shift in how enterprises are consuming IT. The market demand for IT-as-a-service is quickly accelerating with a CAGR of 46% by 2024, and HPE is well positioned to capture this market in transition. Most enterprises today are on a multigenerational IT journey, many started with a data center environment and shifted to a hybrid multi-cloud approach to drive innovation and increase speed and agility. Now they recognize the need to securely access and control all their data assets from edge-to-cloud in order to accelerate business outcomes. HPE is uniquely positioned to help customers bridge the present with the future, unifying service delivery across all their environments. As they continue to transform, customers most better harness the power of their data. Data insights are critical to delivering new, compelling experiences for customers, speed and critical decision-making and anticipating what's next to drive disruptive business models. But extracting value from all this data is very, very challenging. Data is growing and evolving rapidly. Its characteristics are shifting as it becomes more unstructured, more time-sensitive and more distributed. Frequently, data is silo and spread across different multi-gen IT systems and often trapped in critical legacy architectures. For many organizations, the edge is an afterthought or they can adequately extract insights from the data at the edge. Many face cloud migration challenges because of their legacy applications. Customer need a data-first modernization approach across edge to data center to cloud. And this is why HPE declared our vision to become the edge-to-cloud company. Our HPE GreenLake platform accelerates multi-gen IT transformation through a unified cloud service experience that enable customers to access, control and maximize the value of all their workloads and data. It is an open, secure, fully integrated platform that brings a unified experience across the edge data center colocation and cloud. It is automated and easy to consume with capacity available to scale up and down on demand. It offers true pay-per-use consumption so customers only pay for what they use. And they can have the entire hybrid cloud experience managed for them through our HPE GreenLake managed services offering. We say that the HPE GreenLake edge-to-cloud platform gives customers the freedom to choose not to choose. See what I mean in our recently unveiled HPE advertisement. [Presentation]

Customers gain the freedom to choose not to choose because of the unique HPE GreenLake platform built on a cloud-native architecture with several guiding principles in mind. First, the unification of cloud services through a simple consumption experience, enabling customers to learn, try, buy and run all their edge-to-cloud solutions. Second, the ability to scale up and down, compute and storage resources across their entire hybrid estate. Third, automation and AIOps capabilities to deliver outcomes while reducing run-time operating expense. And fourth, the integration of data management services to enable customers to extract insights from data wherever it lives. Our leadership in connectivity at the edge give us a distinct advantage, as enterprises have become more distributed. Our data fabric built on HPE Ezmeral software manages and protects the data at each location as well as between them. Workloads can run on bare metal, virtual machines or containers all with unified management at scale as one fleet. Our AIOps ensure the health of the entire hybrid estate, which is managed centrally with security and compliance. Our HP Pointnext advisory and professional services and operational support services talent provides unique transformation capabilities including service to design the right digital transformation strategy, build the relevant IT solutions and optimize and run customers' IT deployments so they can focus on innovation. This expertise is complemented by HPE Financial Services, which help customers unlock financial capacity to drive digital transformation. Through HPFS, customers can choose to move to an HPE GreenLake solution at their own pace. They can easily convert some or all their estate to HPE GreenLake. We are quickly accelerating our HPE GreenLake road map to continue to enhance the services and experience under the leadership of our new Chief Technology Officer, Fidelma Russo, who joined us last month. Fidelma has a remarkable innovation track record in the technology sector. She is accountable for continuing to build and differentiate our HPE GreenLake edge-to-cloud platform as we accelerate our transformation. Our value proposition is winning in the market with new customers continue to entrust their important business outcomes to HPE. And one great example is the Home Depot. Millions of people started home improvement projects during the pandemic, driving a sudden sales surge at the Home Depot. Powered by HPE Edge-to-Cloud technology solutions, the company was well prepared to handle the demand. Home Depot has accelerated new digital strategies fueled by advanced video analytics and expanded IoT use cases. Insights from these edge applications, predict customer needs for merchandizations and support fraud protection efforts. The retailer is refreshing its network across more than 2,000 stores with a network-as-a-service solution through HPE GreenLake for Aruba, which will optimize how associates interact on the store floor as well as enhance the customer experience with features like in-store wayfinding and location-based alerts when customers arrive for curbside pickup. Our work for the Texas Rangers represents how impactful connectivity-as-a-service can be for consumer experience-rich environments. The Rangers deploy our HPE Aruba Edge Services platform at the new 40,000-seat global live field stadium to power everything, from a 5.5-acre retractable roof to an immersive baseball application. They chose HPE Aruba ESP to deploy high-performance WiFi 6 and our intelligent automated infrastructure to engineer the equivalent of a living, breathing facility, while minimizing IT and back office overhead. We are delivering a cloud experience to Japan's leading credit card settlement agency, CARDNET to underpin mission-critical settlement services and process increased credit card transaction volumes. As Japan shifts to a cashless society, demand for digital payment transaction has increased up 118% from 2019 to 2020 alone. Our HPE GreenLake Cloud Services solutions uses the HPE Superdome Flex Server for in-memory processing and mission-critical capabilities to ensure a secure, resilient, high-performance platform for digital payments that can flex to meet changing market demands. And lastly, Carestream Healthcare, a leading global provider of medical imaging systems. It's helping improve diagnosis and patient care by transforming the way it delivers AI applications for medical imaging using HPE GreenLake for machine learning operations or MLOps. Powered by HPE Ezmeral, Carestream next-generation AI platform will improve accuracy, automate radiology workflow processes and reduce cycle times, adding value across the entire imaging chain for both patients and providers. These are just a few examples of how customers are harnessing the power of the HPE portfolio. But we know our continued customer traction relies on a combination of both innovation and operational execution. Through our R&D efforts, we continue to innovate and bring to market compelling new solutions. At the same time, we have been executing with discipline, which is allowing us to deliver greater shareholder value as evident in our 2021 results. And we believe that we have substantial upside going forward. I am proud of our market leadership, breakthrough innovation and strong performance across our portfolio, which is aligned to the megatrends we discussed earlier. In the connectivity space, we have strong leadership with more than 20% of the WiFi 6 market and consistent placement in the leader quadrant of Gartner's wired and wireless Magic Quadrant. This summer, we enhanced our leading HPE Aruba Edge Services Platform, or ESP, to streamline network operations and maximize efficiency for enterprises with new AIOps, IoT and security features for Aruba Central as well as addition to the Aruba CX switching portfolio. Aruba Central, our leading cloud-native network management solution already enabled more than 100,000 customers to manage and optimize networks from a single cloud console and also has served as the foundation for a unified IT operating model in HPE GreenLake. Our HPE GreenLake for Aruba Network-as-a-Service offering is a growth opportunity, as we see customers like the Home Depot increasingly attracted to buy networking as a managed service. We're also helping our telco customers capitalize on the edge opportunity. For example, our HPE 5G Core Stack with HPE GreenLake offers carriers a purpose-built open cloud native 5G core with minimal upfront investment. This type of innovation has accelerated our financial results with 19% year-over-year growth in the Intelligent Edge in the first 3 quarters of this fiscal year. In cloud, we were a first mover in on-premises as IT as-a-Service. We now have more than 1,100 HPE GreenLake customers, and our 95% customer retention rate demonstrates that our solutions are working and driving business outcomes. We offer a wide variety of portfolio of services on-premises, including cloud solutions, which also adds our Infrastructure as-a-Service for both compute and storage as well as workload optimized and vertical cloud services. Through HPE GreenLake, customers can access compute and storage on demand so they can scale resources based on their workloads and data needs. We are transforming our core portfolio into software-defined cloud-native architectures, which will expand our margins. In the last year, we have introduced new cloud services tailored for specific workloads and verticals, including those for managing electronic medical records, financial payments, risk management and many more. We have also expanded our cloud services for virtual machines, containers and bare metal management with scalable modular entry, specifically designed for the mid-market. And we introduced HPE GreenLake Lighthouse, a secure cloud-native stack built with HPE Ezmeral software to autonomously optimize different workloads across hybrid states, reducing time to deployment and operating costs. The traction of our HPE GreenLake cloud services offering is seen in our financial results, with a 33% year-over-year growth in our ARR, as of the third quarter of this fiscal year and 46% as-a-Service order growth. In the data space, we have leading positions in AI, deep learning and data analytics workloads at scale. I am proud that HP will help create a new area of data insights and innovation by building the first U.S. exascale system, which will deliver 10x faster performance than many of today's most powerful supercomputers. The U.S. Department of Energy upcoming exascale system, called Frontier, which will be hosted and managed by the Oak Ridge National Laboratory is expected to be delivered by the end of this calendar year. Frontier will enable users to model entire last span of a nuclear reactor and uncovered disease genetics and build on recent developments in science and technology to further integrate artificial intelligence with data analytics, modeling and simulation. And while we're building credible technology at the highest end of the market for advanced research purposes, we're also accelerating adoption of high-performance computing and AI with mainstream enterprises. Through HPE GreenLake AI offering, any enterprise can run its most demanding data-intensive workloads with fully managed pre-bundled HPC Cloud services to operate in any data center or co-location environment. We're also well positioned in the big data and analytics software market, which IDC forecast will reach $110 billion by 2023. Just last month, we introduced HPE GreenLake for data analytics and opened a unified analytics cloud offering that modernizes all data and applications everywhere on premises and the edge and in the cloud. In addition, with our recently launched HPE GreenLake data protection offering, we entered the rapidly growing data protection as-a-Service market. Our new cloud services are designed to help customers modernize data protection from edge-to-cloud, overcome ransomware attacks and deliver rapid data recovery. These innovations are driving strong performance, with a 17% year-over-year orders growth in HPC and AI year-to-date with more than $2.5 billion in current orders. In the storage space, we have seen more than 100% year-over-year growth in HPE Primera and more than 140% growth in disaggregated hyperconverged infrastructure or DHCI, during the first 3 quarters of this fiscal year. But in addition to organic innovation, we continue to bolster our capabilities through targeted acquisitions that have positioned us in very attractive growth market and bring value for our shareholders. We have a strong track record of disciplined return on invested capital, which we are committed to maintaining. A great example of it is Silver Peak, which is generating exceptional value. The acquisition is significantly accretive to our growth and contributed 7 points to Q3 growth in our Intelligent Edge business. With Silver Peak, we provide customers the unification of the networking layer that will enable them to connect from any edge to any cloud. Our acquisition of Zerto will accelerate the transformation of our storage business into our cloud-native data services business by helping HPE GreenLake enter the rapidly growing data protection as-a-Service market with a proven scaled solution. We also advanced our innovation through strategic investments: Our Hewlett Packard Pathfinder, venture capital program, invests in category-leading start-ups, integrates their technology with our portfolio and architects joint go-to-market programs to the benefit of our customers. Pathfinder also closely monitor long-horizon disruptive innovation, helping encourage technological advancements that keep HP on the leading edge. And just last week, we announced 3 new Pathfinder investments that solve key customer challenges across connectivity, cloud and data. Our strategy is driving strong results, and it is driving strong societal impact. At HPE, we view our business and ESG strategies as inextricably linked. Our transition to our an As-a-service company goes hand-in-hand with our sustainability agenda. We help customers drive more sustainable digital transformations by enabling them to flexibly scale their IT to meet their needs, reducing IT inefficiencies that harm the planet. In fact, customers transition to HPE GreenLake from traditional CapEx model can achieve a more than 30% reduction in energy costs. We're also committed to contribute to the circular economy. HPE Financial Services transforms and repurposes IT assets into new IT capabilities through its technology renewal centers. In 2020, we recovered 3.1 million IT assets and refurbished 87% for our second life. And at the center of our sustainability strategy is our commitment to become a net zero enterprise by 2050. We continue to make our climate goals more ambitious and plan to publish new targets in our net zero road map in the year ahead. We see our sustainability initiatives as a business driver. In fiscal year 2020 alone, $847 million in HPE revenue were directly attributable to customers choosing HPE because of the environmental benefits of our solutions. In addition to driving strong leadership in sustainability, we are committed to investing in human capital and improving our communities. Nothing we do as a company is possible without the right talent. Our team members are more engaged and connected to HPE than ever before. In fact, we have the highest team member engagement scores in our history and voluntary retention is at 95%. We continue to make strides in improving diversity throughout HPE by setting diverse hiring and representation goals and sharing our progress. There is no denying the fact that HPE is at the center of very compelling megatrends that are driving new customer expectations and presenting new profitable growth opportunities. Our edge-to-cloud strategy, backed by an experienced leadership team and culture has never been stronger, is unmatched and is being validated by our customers. We have strong momentum in the market, and we will continue to accelerate our pivot to become the edge to cloud company that innovates for our customers and executes with precision. We have a strong track record of delivering shareholder value, and I'm confident that we will continue to drive strong returns. I hope you emerge from today with confidence and excitement for the compelling investment opportunity presented by HPE. Now I will pass it over to Tarek to discuss our shareholder value creation framework and our fiscal year 2022 outlook before we take your questions. Tarek, over to you.

Thank you, Antonio, and good afternoon, everyone. Thank you for joining us today for our virtual SAM 2021. I look forward to providing my insight into how the vision and strategy Antonio laid out will translate to a financial profile that will maximize value for our shareholders. At our SAM presentation last year, I provided a deep dive into each of our business segments by providing greater insights into the unique economics and market growth opportunity of each business as well as the key operating imperatives that guide our execution. This year, I'll take you through how our edge-to-cloud as-a-Service strategy is delivering revenue and free cash flow growth that is increasingly recurring at higher margins. I will provide an update on each one of our segments and how we are shifting the mix of resources in our asset portfolio to accelerate that growth while delivering strong and consistent financial performance to ultimately maximize value for our shareholders. I will also share our 3-year long-term financial targets, our capital allocation framework, and of course, our FY '22 outlook before we take your questions. We have been pleased with our performance year-to-date in FY '21 in what has proven to be a very dynamic year. We are significantly exceeding the key outlook metrics we set at the beginning of the fiscal year. For earnings, we raised our full year outlook after every quarter reflecting strong demand and continued execution of our cost optimization and resource prioritization plan, where we are on track to achieve our expected savings. The results can be seen in our record gross margins last quarter in Q3 of 34.7%, up 130 basis points versus the fiscal '19 exit level. In addition, our operating profit margin last quarter was 9.8%, and this is up versus the corresponding FY '19 exit level when you adjust for the revenue base and acquisitions. If you measure the improvement in gross and operating margins relative to the FY '19 baseline, you will observe that we are well on track to deliver $800 million in net run rate savings by the end of fiscal year '22, with the majority of these savings materializing in fiscal year '21. We have also been able to make investments in key areas of our portfolio to drive future growth while delivering operating profit growth of 28% year-to-date. In total, we have been able to raise our outlook by $0.26 at the midpoint from the beginning of the fiscal year. With respect to free cash flow, we have delivered record levels year-to-date in fiscal year '21 and are on track to generate $1.5 billion to $1.7 billion this year, which is $600 million at the midpoint above where we started the year, and this primarily driven by earnings expansion. Recently, we were pleased to receive $2.35 billion of cash from Oracle, which represents Oracle's satisfaction of the judgment in the Itanium litigation. Please note that this will impact our GAAP earnings and free cash flow. And of course, our $1.5 billion to $1.7 billion free cash flow FY '21 outlook obviously excludes this onetime item. The cash proceeds will be treated like any other cash and be utilized under our capital allocation framework that we will discuss together in detail later. As we close out fiscal year '21 in just a few days, I'd like to highlight that we continue to navigate the industry-wide supply chain challenges that have been worsening lately, with materials in short supply and logistic costs rising. We expect that these supply chain issues will likely take well into the second half of next calendar year to begin abating. As a result, we now expect to end our fiscal year with even higher backlogs than we did at the beginning of Q4. The demand environment is also stronger with firm orders in Q4 across all our segments, which gives us great momentum throughout next fiscal year. In addition to being pleased with customer demand, I am particularly excited about the fact that our edge-to-cloud strategy is delivering revenue and free cash flow growth that is increasingly recurring at higher margins. This sets us up to maximize shareholder value moving forward. Our strategy is focused on 3 primary value-creation levers. The first is our portfolio mix, which is shifting to higher growth markets and more IP-rich offerings that improve our revenue growth and margin profile. The second is our accelerating as-a-Service momentum that increasingly involves software content to drive faster ARR growth at higher margins. And lastly, our capital allocation framework prioritizes investments to drive further long-term revenue and free cash flow growth with consistent returns to our shareholders. We will discuss each of these levers in more detail, but first, I will begin with our long-term financial model. Starting with the top line, we expect to deliver a 3-year revenue CAGR of 2% to 4%, driven by our growth businesses in Edge, HPC and AI, and our as-a-Service business. These businesses are just under 25% of our total revenue today and will exceed 35% by fiscal year '24. It is also important to remember, as we discussed at SAM 2019, that we will have 1 point to 1.5 point headwind to revenue growth from our as-a-Service business. Nonetheless, we will grow this business as fast as possible given its favorable financial profile of recurring revenue at higher margins. We're expecting our ARR to grow at a 3-year CAGR of 35% to 45%. The combination of higher margin and stronger growth-oriented revenue mix, more profitable recurring revenue structure and the run rate savings from our cost optimization and resource allocation plan will allow us to grow our non-GAAP operating profit faster than revenue at a 3-year CAGR of 8% to 10%. For earnings per share, we do expect a small headwind from I&E as fiscal year '21 benefited significantly from onetime gains, not expected to repeat. So we expect non-GAAP diluted net EPS to grow at a 7% to 9% CAGR. Earnings growth will be a primary driver of cash flow, but we're also beginning to wind down our past year's restructuring programs, which will enable us to grow free cash flow faster, at a 15% to 20% CAGR over the next 3 years. This translates to cumulative fiscal year '22 to '24 free cash flow of $6.5 billion to $7 billion. Ultimately, our strategy enables an attractive long-term financial model that delivers substantial cash, allowing us to maximize value for shareholders by balancing investments for growth and capital returns. Now let's dive into our key value creation levers. You heard Antonio discuss how our business strategy bridges the present and the future, and our financial architecture complements that view. As a reminder, I introduced our new financial architecture at SAM 2 years ago. Each of our businesses has a unique economic profile and plays an important role in long-term value creation. This framework has enabled us to efficiently shift resources across our portfolio to accelerate our edge-to-cloud as-a-Service strategy. First, our core compute and storage businesses provide a unique and broad portfolio of offerings. Both businesses generate significant cash that provides us the foundation for us to invest in growth areas of our portfolio. Second, we consider the Intelligent Edge and HPC and AI high-growth businesses that will drive overall revenue growth for HP. We have renamed our former HPC and MCS segments to HPC and AI to better reflect the nature of this business, including our recent acquisition of Determined AI. We are making significant investments, both organic and inorganic into these areas to capture the expanding high-value market opportunity created by the explosion of data and data becoming the most precious asset of any enterprise. Third, we have several businesses that enable our edge-to-cloud as-a-Service strategy. The 2 largest are HPE Financial Services and Advisory and Professional Services. They provide unique capabilities in both consulting and financing that are foundational to our differentiation and as-a-Service offering. For each of these businesses, I'll dive deeper into the financials, market opportunity and execution priorities. Our compute and storage segments are critical to helping customers transition from their core infrastructure environments to an edge-to-cloud as-a-Service model. Compute is a $55 billion market that is growing low to mid-single digits when you include China and higher growth opportunities like private cloud, 5G and as-a-Service. It is important to note that we do not consolidate revenue in China from HPC, which is growing well above the overall compute market. From a market share standpoint, we expect to grow in line or above the overall market when including HPC. We also captured tremendous value from China in our earnings through equity interest far beyond any of our multinational peers because of the unique structure of our business in this market. Beyond China, we will continue to focus on gaining share in the most profitable growth areas with effective market segmentation and this while streamlining our supply chain and operational processes for the high-volume, low-touch business. To bridge to the future, we will deliver and leverage our edge-to-cloud platform to provide a cloud operating model for unified compute operations while scaling as-a-Service offerings tailored to specific workloads. This will result in higher long-term margins, which we think can reach between 11% and 13% by fiscal year '24, rather than the 10% to 12% we previously expected. In storage, the TAM is a $60 billion market and growing at 3%, where we expect to deliver in line to above market growth. We see higher growth opportunities in All-Flash Array, HCI and data life cycle services. This is why we are transitioning our portfolio to a cloud-native, software-defined data services business aligned to customer needs. We're also shifting the portfolio to our owned IP offerings that provide richer margins due to the high content of unique software. We're integrating Zerto into our cloud data services offering, which will enable us to capture the high-growth data protection as-a-Service market. The increasing amount of software content in our offerings will enable us to deliver long-term operating profit margins above the high end of our prior outlook of 16% to 18%. The key takeaway here is that compute and storage have areas of growth within each segment and generate substantial cash flow that enables important investments in our high-growth business. We have been investing heavily in the Intelligent Edge and HPC and AI. These are areas where we have very unique and differentiated assets that can drive growth for HPE with expanding profitability. The Intelligent Edge segment operates in a $48 billion market that is growing at a CAGR of 4%. It is currently approaching a Rule of 40 business and will have strong momentum heading into fiscal year '22 and with record high levels of backlog. We expect further share gains to allow us to exceed market growth with best-in-class, platform-based differentiated solutions. These include our cloud native management platform, Aruba Central, Aruba Edge Services platform, and of course, Silver Peak. Market tailwinds for us here include campus refreshers to better support remote work and the WiFi 6 migration that still has ways to ramp. Much of our innovations, such as Aruba Central and Silver Peak is in higher-margin software solutions. So we expect operating margins to improve over time beyond the level of high teens observed today. While reported in our Corporate Investments segment, we also want to highlight our CMS business here since it is an edge opportunity with CMS as a global leader in telco solutions where we serve more than 300 operator customers. We believe a shift to Open RAN in the telco cloud in 5G will be a tailwind for us as well the growth of edge computing at the sell-side level. Our HPC and AI business plays in a $10 billion market that is growing at 11%. These trends are in our favor here, given rising demand for AI, machine learning workloads and big data analytics. We expect to outpace market growth given our #1 share in HPC and global leadership position in exascale with unique set of software and silicon assets. We will also enter fiscal year '22 with more than $2.5 billion of backlog. And in addition, we will begin delivering against the $2 billion contract over 10 years awarded to us by the NSA. The Intelligent Edge and HPC and AI segments will help drive our mix of growth businesses, including as-a-Service from just under 25% today to more than 35% of our company revenue mix in fiscal year '24, which will position HPE for sustainable revenue growth with higher margins. Now HPE also benefits from a few key enablers that accelerate our strategy to become the edge-to-cloud company. HPE Financial Services is an incredibly well-run business and facilitates our as-a-Service pivot in multiple ways. For customers, HPFS creates investment capacity to accelerate their digital transformations and provides our financing capabilities in support of our GreenLake as-a-service offerings. HPFS also plays a major role in promoting the circular economy with its best-in-class asset management business. HPFS' track record in managing the entire life cycle of infrastructure assets from certified preowned down to recycling is second to none. From a financial perspective, we've been steadily improving margins by securitizing our portfolio via the ABS market that reduces our funding costs and diversifies our financing. Given the improvements, we expect HPFS' return on equity to increase from our prior target of 15% plus to now 18% plus, demonstrating the strong returns it provides. Second, our Advisory and Professional Services business is strategically important. It helps customers navigate the intricacies of their multi-gen IT journey and enables customer adoption of as-a-service models. It is a critical sales motion that provides a lot of pull-through revenue for our entire portfolio and increasingly our as-a-Service offerings where we expect more than 20% of future GreenLake orders to originate from. We have been making good progress improving productivity and chargeability rates across the portfolio, and we expect to maintain consistent levels of profitability going forward. The key point to take away here is that these businesses play critical roles delivering our edge-to-cloud as-a-Service strategy. Let's talk about that for a moment. Our pivot to as-a-Service is accelerating. The market is growing rapidly, and we are capturing that growth with customers' increased adoption of HPE's edge-to-cloud offerings. This customer traction is reflected in strong growth across all the metrics we introduced to you last year at SAM. Our as-a-Service orders have been very strong this year, and we expect them to grow 55% to 60% in total for fiscal year '21. We have made significant progress since our Analyst Day last October by adding more than 200 new enterprise GreenLake customers to a total of more than 1,100 today and increasing our current lifetime TCV of well over $5 billion. We also recently disclosed a $2 billion contract to be realized over 10 years with the NSA to deliver high-performance computing solutions through HPE GreenLake. This will help our orders grow even faster in FY '22 and over the next 3 years. We, therefore, expect order growth of approximately 45% driven by storage cloud data services with Zerto, Silver Peak and new workloads optimized offerings. As a reminder, our as-a-Service revenue is different from our ARR because it includes nonrecurring upfront infrastructure and services revenue. We expect to grow as-a-Service revenues 35% to 40% in FY '21 to roughly $1.2 billion. Today, based on our order strength, we now expect as-a-Service revenue to grow at an accelerated 40% to 50% CAGR over the period of FY '21 to '24 to $3.5 billion or approximately 12% of total HPE revenue. Finally, we are raising our 3-year ARR CAGR outlook to 35% to 45% from fiscal year '21 to '24, given order strength to date, market momentum and our leadership with new offerings. It was previously 30% to 40%. As a result, we expect ARR well in excess of $1 billion next year that more than doubles by FY '24 to over $2.3 billion or approximately 8% of total HPE revenues. It is also important to note that unlike some of our competitors, HPE does not include the benefit of future M&A in our as-a-Service growth rates. Now this recurring revenue stream is high quality and high margins. As mentioned in prior calls, we plan to demonstrate the richness of the offering and how it is becoming more and more valuable to both customers and investors by providing incremental disclosures around our ARR and our as-a-Service business. As you heard from Antonio, HPE GreenLake is a unique offering with an edge-to-cloud platform that gives customers full control over their data through a unified cloud experience. Beware of the imitations out there, there is much more in GreenLake than a simplistic hardware leasing model. These additional disclosures we are providing here highlight the composition of our as-a-service offerings and show why GreenLake is unique. As you can see on the left, our current fiscal year '21 mix, we are already above a 60% mix of software and services. This is what enables our ARR gross margin to be well above our corporate average gross margins today. On the right-hand side of the chart, you will see not only are we growing ARR at a 35% to 40% CAGR, but the mix is becoming even more software-rich to bring our software and services content to over 75% of ARR by fiscal year '24. This enables us to expand ARR gross margins even further above today's levels. And we are doing this by adding more software capabilities, including our new storage data services, Zerto, further transformation of our edge business to as-a-Service, including Silver Peak and obviously, new workload solutions. The headline here that you need to take away is that our ARR is already well above corporate average gross margins, and we are adding to it more and more high-value software content driving margins even higher. Now in addition to driving margins, I would like to highlight that our strategy will translate in free cash flow growth. We've made tremendous progress in generating free cash flow in fiscal year '21, and we have bounced back from the pandemic lows and already raised our free cash flow outlook by $600 million since the beginning of the year, and this was primarily driven by operating profit expansion. We expect to deliver $1.5 billion to $1.7 billion in fiscal year '21 with the high end of the range aligned to peak levels of free cash flow attained in fiscal year '19. As mentioned previously, our outlook does not include the $2.35 billion of cash we have already received from the Itanium litigation. As we look forward, there are a few primary drivers of free cash flow growth worth noting. The first and most durable is operating profit growth from growing and more recurring revenue with higher margins. The second is reduced cash payments for our prior restructuring plans that begin to wind down in fiscal year '22 and even further in fiscal year '23 before becoming immaterial thereafter. All other transformation efforts to shift the mix of resources in our asset portfolio will enable us to self-fund the investments needed to accelerate our edge-to-cloud strategy. The other key driver of free cash flow will be growing HPE Financial Services' lease volume, which require front working capital to support our high-growth as-a-Service business with GreenLake, but will significantly enhance future cash generation. It is very important to note that the improvement in profitability in HPFS not only is yielding an 18% return on equity but also positive in year free cash flow for the first time ever in fiscal year '21. As a result, we expect to grow free cash flow at a 15% to 20% CAGR in the coming years and generate between $6.5 billion and $7 billion of cumulative free cash flow between fiscal year '22 and fiscal year '24. Now let me put this in perspective for you. If 15% to 20% free cash flow CAGR puts us at the top quartile of S&P 500 companies and cash generation in excess of $2 billion represents a free cash flow to equity yield in excess of 10% based on today's share price. I would like to reinforce for you that we have line of sight to strong free cash flow growth over the next 3 years. Now you may ask, how do we plan to deploy that cash? Well, we plan to deploy the cash within our capital allocation framework to maximize shareholder value. To do this, we always follow a disciplined, return-based capital allocation framework with a rigorous investment evaluation process that balances the investment for growth with capital returns to shareholders. Our top priority remains investing in high ROI growth areas to capture the Edge-to-Cloud opportunity as much as possible while remaining committed to dividends and opportunistically repurchasing a significant amount of shares. We have invested both organically and inorganic to fuel innovation and drive revenue and further free cash flow growth. We will continue to prioritize our higher-growth, higher-margin businesses, and you will see further investments in our as-a-Service business next-generation storage with cloud data services and the Intelligent Edge. On the inorganic side, we have built a very successful track record of acquisitions going back to Aruba and more recent examples like Silver Peak, Determined AI or Zerto. Our acquisitions have followed a disciplined ROI-based framework and accelerate our edge-to-cloud as-a-Service strategy with unique IP for secure connectivity, cloud experiences and data insights. We're also increasingly leveraging our Pathfinder venture portfolio that has been very successful delivering top quartile returns and accelerating our edge-to-cloud strategy with the recent investments in Cellwize, vFunction and SingleStore. Beyond investment, returning consistent capital back to our shareholders remains important and very important element of focus in maximizing value for shareholders. We remain committed to dividends, and we expect to pay roughly $625 million to shareholders in fiscal year '22, which represents a yield above 3% in the top decile of our peer group. We will also repurchase shares of at least $500 million in FY '22, which is in addition to the up to $250 million we will complete in Q4 of fiscal year '21. In total, we will be returning at least 60% of free cash flow to shareholders in fiscal year '22 and potentially more based on the progress we make in executing our strategy. Moving forward beyond fiscal year '22 as the execution of our edge-to-cloud strategy accelerates and continues to gain traction, we will continue to balance growth investment with capital returns to shareholders. In saying all of this, it's also important to highlight that our balance sheet remains strong. Following the receipt of the cash from the Itanium litigation, we recently announced our intent to redeem early our $1 billion 4.65% coupon outstanding 2024 notes in a positive NPV transaction that is net debt neutral. The make-whole premium paid will be a GAAP-only expense in Q4 and will realize meaningful interest expense savings over the next 3 years. As a result, we will now be in a net position at the operating company level of net cash of about $1 billion. You should takeaway here that our capital allocation priorities is about balancing long-term revenue and free cash flow growth with consistent returns to maximize shareholder value. Now let's quickly recap our long-term value creation levers before we get into the much awaited fiscal year '22 outlook. First, we are improving our growth and margin profile through our portfolio mix to higher growth and higher-margin segments. Second, as our as-a-Service momentum is accelerating with increasing software content to drive faster ARR growth at higher margins. Finally, our capital allocation priorities balance investments to drive further long-term revenue and free cash flow growth while consistently returning capital to shareholders. Now with that, let's discuss the specifics of our fiscal year '22 outlook. With the current long-term financial and current supply and demand dynamics in mind, let's discuss the key assumptions underpinning our outlook for next year. As we discussed upfront, the demand environment has been incredibly strong and accelerating in the second half of fiscal year '21, showing the strength of our edge-to-cloud offerings. We also continue to work through industry-wide supply chains that will give us much higher than typical backlog levels exiting fiscal year 2021. We expect to work through the supply chain challenges in the coming quarters that has been factored in into our outlook. With demand showing no signs of slowing down, we are entering fiscal year '22 with very solid momentum. From a top line perspective, we therefore expect to grow revenue near the top end of our long-term range and be up 3% to 4% year-over-year in constant currency. We currently expect just over 0.5 point headwind to revenue based on current exchange rates. Furthermore, it is also important to note that we have 1 to 1.5 points of headwind to revenue growth from our as-a-Service business, which we want to grow as fast as possible given its favorable long-term financial profile. Looking at profitability, we continue to expect expanding gross margins from favorable mix shift and continue investing from -- for growth aligned to our edge-to-cloud as-a-Service strategy. As a result, we are targeting non-GAAP operating profit dollar growth of 10% to 15%. With regards to I&E, which includes our equity interest in HPC, it is expected to be a $20 million to $40 million expense in total. This is a significant headwind versus fiscal year '21, which had several large onetime gains associated with increased valuations in our Pathfinder venture portfolio. We are maintaining our existing effective tax rates of 14% based on current loss, but there could be some upward pressure to outer year tax rates for multinational companies like ours if the recent proposals being contemplated become low. As a result, we expect our fiscal year '22 non-GAAP diluted net EPS to be between $1.96 and $2.10. We also expect free cash flow in '22 to be between $1.8 billion and $2 billion, which reflects our operating profit growth and reduced restructuring payments. This somewhat offset by growing our as-a-Service business and the buffering inventory measures that we'll continue to take to navigate the current supply chain environment. Bottom line, we feel good about the momentum we have entering the fiscal year. and delivering a strong set of results for fiscal year '22. So before I turn it over to Q&A, I'd like to recap why we believe HPE is well positioned to maximize shareholder value. First, we have the right portfolio of assets to capitalize on the megatrends of edge, cloud and data. And this with our differentiated edge to cloud as-a-Service strategy. Second, we are accelerating our market leadership by winning customers as we help them bridge multigenerational IT environments and are driving strong performance in growth areas. All this translates into an attractive financial profile with sustainable long-term growth of 2% to 4%, driven by our growth businesses in edge and HPC and AI. In addition, our ARR is accelerating and growing at a CAGR of 35% to 45%, which will give us much more than $2.3 billion of ARR by fiscal year '24. This will put us in a position to have more than 35% of our revenue coming from growth businesses. We also have a better margin profile driven by the mix shift across the portfolio with more software content through all our offerings. Ultimately, we're driving sustainable, profitable growth and free cash flow with our unique assets and strategic investments. The key point to take away from this presentation is that this strategy will deliver $6.5 billion to $7 billion of free cash flow over the next 3 years. We have the right strategy aligned to dominant market trends with the right financial architecture to maximize value for our shareholders. With that, I'll turn it back to Andy to start the Q&A session. Thank you.

Great. Thank you, Tarek. So just as a quick reminder before we jump into Q&A. All of the materials shared today are already posted to our Investor Relations website, if you wish to download them. So with that, let's go ahead and jump into the Q&A. In addition to Tarek and Antonio, we also have key members of the management team available to answer questions. We also ask that each participant only ask 1 question with 1 follow-up. So operator, with that, can we go to the first question, please?

The first question is from Aaron Rakers from Wells Fargo.

Yes. I wanted to kind of just first start on just the degree of backlog build that you're expecting as you exit this fiscal year. And how you kind of underpin the fulfillment against that backlog when you kind of think about the revenue growth guidance of 3% to 4%? Just trying to -- are you assuming some of the supply constraints ease at all into the back half of the year? Just any help with how you're framing that.

Sure. Thanks, Aaron. Antonio, maybe we'd start with you on that one.

Sure. Well, thank you, Aaron, for the question. Well, listen, we're going to end the quarter with a backlog that is higher than we anticipated at the beginning of Q4. That said, that the momentum is going to improve as we enter the second half of 2022. However, all those challenges have been factored in our guidance, the guidance that Tarek provided at the beginning of this presentation. We continue to take our own measures, right? So we started this journey at the end of 2020 when we start building buffers in our inventory. We continue to take actions in our engineering efforts because obviously, one of the key distinctive aspects -- attributes we have as a company is fantastic engineering that allows us to do substitution and also in a go-to-market, there's still demand where there is more availability. But there's no question we're going to end Q4 with a higher backlog than we anticipated. However, all of that was included in our guidance that Tarek just reinforced. And we know that the first half will be a little bit more challenging, but as always, right, we think we are well positioned to navigate to that. And we will continue to take the necessary actions with our suppliers and our go-to-market to get through the other side of this, which we think it would get better in the second half of 2022.

Yes. Very helpful. And then as I look at the kind of the TAM expectations that you've outlined today relative to last year, given the size of the business for overall HPE, it looks like the compute expectations are higher. I think you're guiding 4% CAGR. A year ago, it was flat. You're guiding a higher operating margin structure for that business. So can you just help us appreciate what's underneath of that higher growth expectation for that important piece of HPE's revenue stream?

Yes, Antonio, maybe you want to address the TAM question and Tarek can take margins?

Yes, absolutely. I mean last year, we were here at SAM. We talked about the pivot of our focus on the go-to-market to growing segments that we see, particularly in the SaaS segment, in the telco segment and in the on-premises segment, which obviously is now being consumed as-a-Service. And we have done a really good job there, and we believe we still have runway in front of us. But I think the one thing that we expect to continue to drive that momentum is, number one, as I said, and Tarek said also in his remarks, is the pivot-to-cloud-native architectures, where, obviously, our value differentiation, the security and the management level will continue to play a big role. Second is the structural changes that we see in the composition of that compute market. Remember that 2/3 of that business get structured by new technologies, think about NVMe, more memory, more options attached to it. And therefore, a combination of the pivot as-a-Service, more focus on this unique market and then obviously, the structural change give us the confidence to continue to deliver on that promise. And then on the margin side, Tarek will comment here, right? The pivot to a software defined will be a key enabler, but also all the actions we have taken in the last 18 months, which actually gave us some new thinking in how we approach the market. So Tarek, over to you on the margin side.

Yes. Thank you, Antonio, and thank you, Aaron, for asking the question. Compute remains a very important part of our company, and we feel having taken the measures through our cost optimization and resource prioritization program that we can extract further margins out of compute. We -- last year was very cool. We talked about 10% to 12% operating margins in the long term. We think that we can shift the point up across the range, so 11% to 13%, thanks to all the measures we have taken, the fact that we are also accelerating our as-a-service pivot, which is benefiting compute but every other segment across the company as well.

Next question is from Amit Daryanani from Evercore.

This is Lauren on for Amit. So just first, congrats on the free cash flow guide, really impressive. Just want to talk a bit about the key variables to consider that will put you on kind of the high end, low end of the guide. And then thinking more long term, this is -- the free cash flow growth is about 2x EPS growth in the long run. So help us kind of think about that as well.

Sure. Thanks, Lauren, for the question. Tarek, maybe that's a good one for you to tackle.

Thank you, Andy. And yes, it's a great question. So why is free cash flow growth greater than EPS growth, and there are a couple of key drivers around that. And first and foremost, our operating profit is growing pretty much at 10% to 15% year-over-year, and we feel this is a key driver of free cash flow growth moving forward. The EPS growth is dampened by the fact that we have an OI&E expense, but ultimately, our free cash flow growth is driven by the termination and the subsiding of the restructuring expenses that we have in our cash flow statement. The restructuring programs that we've launched in the past, HPE Next and also our cost optimization and resource allocation program are coming to an end. And we feel that right now, the company from a cost structure is relatively rightsized. And therefore, with the restructuring coming off the free cash flow statement, you see substantial reduction of restructuring expense and that is fueling free cash flow growth of the FY '21 exit level that we believe at $1.5 billion to $1.7 billion is perfectly within reach. So from that baseline and on to '22, '23, '24, you can expect a 15% to 20% CAGR in free cash flow, as we also continue to accelerate our as-a-Service strategy, which is a very important -- a very important lever of recurring and accelerating free cash flow because that revenue comes at higher levels of margins as we hopefully convey to you during the course of this presentation.

The only thing I will add to that, Tarek, because I think important -- and you mentioned this in your remarks, right? The one thing that we are super, super pleased is that HPE Financial Services, again, an incredible well-run business now generates positive free cash flow, not as a use of cash to finance whatever model we are on it but obviously, as we go forward, it's going to be a very strategic level for the as-a- Service. But right now, free cash flow from HPFS is a positive contributor to that $6.5 billion to $7 billion.

Great. Thank you, Lauren, for the question.

Next question is from Simon Leopold from Raymond James.

I wanted to see if maybe you could talk a little bit about the opportunities you see from the Pensando partnership that you announced, I don't remember whether it was this week or last week, but recently, you've been relatively small participant in the data center market, much bigger on campus. Just want to see if this is something that's driving some of the growth that you're seeing? And then I've got a follow-up.

Sure. Thanks, Simon, for the question. Antonio, it's probably a good one for you.

Yes. Simon, thanks for the question. We are very bullish about the partnership with Pensando. We see the world with Pensando and [indiscernible] the same way. I talked in my opening remarks about the way now the enterprise operates in a much more distributed way where the edge becomes way more critical, and therefore, the architectures are evolving. These edge-to-cloud set of architectures need a connectivity at a point where data is created. So we see several opportunities, Simon. Number one is the opportunity to integrate the Pensando technology in our compute platforms because now, as you know, there is an offload from how data is processing the server into the network. And we have a unique set of technologies that are combined with Pensando, will provide a true differentiated solution because we have our Silicon Root of Trust that will be integrated with the Pensando and our security stack, which we announced a couple of months back called Project Aurora that tests every level of the stack. And that's a point of appreciation for customers because they don't need to invest in more layers of security. We take CapEx away and we improve OpEx. The other one, which was announced 10 days ago, was what we call the distributed services network, which allows us to move from the campus and branch into the edge of the data center and eventually into the data center where we simplify the architectures at the application layer, which allows us to build the networking application-centric approach, and therefore, we can move data, and what we call, west to east, east to west in a much more efficient way. So you take that, you take the integration with the server, and we can create now the next generation of cloud-native stacks, which we will deliver through our offer called HPE GreenLake Lighthouse, which we introduced at Discover in June. And now we embed the HPE Ezmeral software, which is the run time with security that gets integrated. And that's not only revenue growth, but a significant margin expansion opportunity for both the Intelligent Edge business as well as over time in our workload optimized solution, which, by the way, includes compute.

And just as a follow-up, if we could get some thoughts on H3C in terms of how much cash do you see coming from that business? And what are your options to unlock the value of your JV?

Sure. Thanks, Simon. Antonio, maybe we can start with you on that one.

Yes. Well, I have to say we have a unique and incredible successful setup with H3C in China. Let's remind ourselves that China is the second largest IT market. And as Tarek mentioned in his opening remarks, not only we are able to recognize the growth that H3C drives in China through our OI&E because of the dividends we collect in that JV, but also be able to participate in the market because they also resell some of our HPE technologies. At the same time, it's the most profitable thing that anyone, any multinational is doing in China because, obviously, it comes at a profit level that you would not be able to achieve if you were competing on your own in China. So we believe this tap is unique, very successful. But as always, right, we look at what is the best return, the best value for our shareholders and yet understand how we participate in that market. We're going through that process, not different than we commented at the end of Q3. We will continue to look at what is the best outcome of that. And as you know, the put will expire in May next year. And by then, we're going to make the right decision, based on the financial return and the ability to compete in China. Maybe, Tarek, you want to add more when we are in the process itself and the ability to execute the put.

Sure. So thank you, Antonio. What's very important for us all to know on the call is that the performance of HPC remains incredibly solid. Year-to-date, operating profit at HPC is up 25%. So as Antonio said, the value continues to accrete. We are immune to the restructuring of UniGroup, which is happening in the structure 2 levels above the ownership that we have in HPC directly ourselves. We monitor the situation very, very carefully. We know that we have the opportunity to exercise the put. I remind everybody that the value of the put is determined based on the last 12-month of earnings. So the accretion is benefiting the valuation of our stake. And over and above the valuation of our stake, we have also important commercial agreements. And those commercial agreements between the parties will continue. No matter what happens, those commercial agreements gives us access to China. And we feel very comfortable with the collaboration, the ongoing discussions we have with the restructuring team that is in charge of the Unigroup restructure. We'll keep an eye on to the situation, but there is no rush in exercising the put given that it continues to accrete in value for us.

Great. Thank you, Simon. Thanks for the question, Simon. Operator, can we go to the next one, please?

The next question is from Kyle McNealy from Jefferies.

Can you give us a sense of how much of your 2022 guidance is held back by the component constraints you're talking about maybe in terms of points of growth. Along the same lines, I guess, do you assume to close the supply-demand gap by the end of the year? Or do you still expect to have some elevated backlog at the exit? And then separately kind of connected, how many quarters worth of or how much of your 2022 guide is supported by firm orders for components or purchase commitments with suppliers?

Sure. Thanks, Kyle, for the questions. Maybe, Tarek, we can start with you on outlook. And then Toni, I'm sure you want to comment as well.

Yes. Sure. So I want to remind you of what I said to you in my script. So between the beginning of Q4 and the end of Q4, we're 2 days away from the end of the quarter, we've seen supply chain constraints worsening in terms of supply of raw materials and also freight cost. I mean freight costs, you can read the papers, logistic costs have risen to the point where maritime container cost is almost on the par with airfreight. So that said, we had taken inventory buffering measures that helped us navigate Q4. And also, most importantly, demand at the end of Q4 is much stronger than we have foreseen at the beginning of Q4 entering into fiscal year '22, which gives us great momentum. And this is why for '22, specifically, we're targeting 3% to 4% top line revenue growth. So the demand is really across the board. There is not a specific segment I will point you to. We are seeing in some segments, customers placing orders already for the first calendar year quarter. But the demand is strong across the board, and that's a point you need to take away. We feel that the supply chain constraints will continue to be in the market all the way to the second half of calendar year '22 before we see them abating. At this stage, I think it would be too early to give you a view as to what level of backlog we would be exiting fiscal year '22 with. But we feel pretty good about our prospects in fiscal year '22, given the demand environment.

Yes. I will say -- I would like to start where you ended, Tarek. The demand is super, super strong. And again, it goes back to the megatrends I talked earlier. Connectivity is off the charts. Obviously, cloud experience for all the applications with on-prem being very, very strong, as you see in our GreenLake. And then anything that has to do with data insight is exploding because customers now realize they have to create new business model opportunities through the lens of the data. And so we have a unique edge-to-cloud portfolio, coupled with better execution, we also -- again, we have been on a journey to improve our go-to-market execution. Our go-to-market is performing extremely well. And remember, we have a unique setup with our channel partners. I just was with our channel partners 2 weeks ago, and they talked about 2 things. Your vision strategy is perfectly aligned to the customer needs and GreenLake is on fire. And when I bundle all this together, it gives us the confidence that we're going to basically continue to drive this momentum. Eventually, everything levels up because, obviously, supply and demand will be rebalanced at some point, with supply getting better in the second half. And to give a sense how confident we are, we are placing POs for aspect of our portfolio, in particular, in the Aruba business, 52 weeks ahead. So that tells you how confident we are in our unique value proposition in the strength of the demand that will continue to drive the momentum that we have seen in the last 3 quarters. But as Tarek said, we have to navigate here the first half. And I can tell you, so far, no one has canceled any orders with us.

Great. Thanks, Kyle, for the questions.

Next question comes from Toni Sacconaghi from Bernstein.

I have one question and one follow-up as well, please. You outlined a very bullish stance on demand and your ability to grow free cash flow and Tarek, you highlighted how some of those metrics are top quintile but your stock is not reflecting that. It's trading at about 7x your guided earnings for next year. So the question is, given your confidence and visibility, why wouldn't you be dramatically more aggressive in repurchasing shares. It's a very low interest rate environment. You could probably borrow in the low single digits. I think investors would value significant leverage on the company that you could handle and take out 30% or 40% of the share count now and signal that confidence to investors? Why not be more bold on that front? And I have a follow-up, please.

Thanks, Toni, for the question. Sorry about mangling your name there a little bit. Tarek, maybe we can start with you on that one.

Yes. Thank you, Toni. It's a great question. So first of all, we are very confident. I mean we don't need to really be gung-ho about share buybacks to demonstrate confidence. And the confidence that we have comes from our strategy and our willingness to go and capture the edge to cloud opportunity that exists in the market. We have articulated a capital return framework that balances this opportunity that we want to capture with growth in revenue and growth in free cash flow with consistent returns of capital to our shareholders. It's very, very important to note that this capital management framework is dynamic. We're not earmarking except for fiscal year '22, we're not earmarking from the onset a specific amount of dollars that we would be returning to shareholders. And there's a reason for it. It's because if we do that, then we become static in our ability to allocate resources and capture opportunities that present themselves to drive higher growth and higher recurring free cash flow for the long term. That's why we articulated the capital management framework the way we did. Specifically, for FY '22, knowing that we've received the proceeds from the Itanium case, we already put that money to work. We already repurchased $1 billion worth of outstanding notes that we were expensively paying a 4.65% coupon for. And knowing that we have that cash, we have also decided to buy back $500 million worth of shares in fiscal year '22 and possibly more if we see the opportunity to do so in the context where we want to capture the growth opportunity provided by our strategy. This is the key point to take away on our capital management framework, and I hope that this has come clear to you.

Just my second question, I know you've gotten several questions on backlog, but just to be more pointed on it, you've said repeatedly that the supply chain considerations were deteriorated through the quarter but the demand was strong. When we balance those, should we still -- are you still confident in fiscal Q4 consensus revenue and EPS expectations because after a bullish Analyst Day, I don't think you want people misunderstanding the message you're communicating when you get to the Q4 results. And then when you talk about your guidance for next year, what is built into your guidance around backlog? So are you assuming that backlog in fiscal '22 will be flat at the end of the year with the beginning of the year? Or are you assuming you're going to draw down x weeks of backlog? What is the explicit assumption on how you think about backlog?

So I want to remind everybody that we are in the blackout period, given that the quarter essentially terminates on Sunday. So we are not going to comment specifically on revenue versus consensus, et cetera, given that we are in a blackout. Obviously, you know that we are here today. And if we had to update the guidance we would have, but we didn't, so you should take that as well. Second, with respect to fiscal year '22, our outlook of 3% to 4% top line revenue growth is factoring in backlog coming into fiscal year '22, supply chain constraints as we discussed before. And we feel pretty good about the level of demand we have across the entire business, which has pointed us to put that guidance forward for fiscal year '22, 3% to 4% top line growth.

Thank you, Toni, for the questions. Operator, can we go to the next one, please?

Next question is from Shannon Cross from Cross Research.

I wanted to ask a bit about GreenLake. What I'm trying to understand from the questions we get from investors are how to think about it relative to cloud and is GreenLake at this point and as-a-Service in general, still a push to customers? Or are you seeing customers actually coming to you and asking for it? And then if you can talk maybe a little bit about if you've gotten to the point where you're renewing some of these contracts, are you able to upsell the existing customers so that you're actually seeing growth in the base, not just from new customers but also from your existing ones? And then I have a follow-up.

Sure. Thanks, Shannon, for the question. Antonio, I think that's a great one for you to tackle.

Yes. Well, as I said in my remarks, a unique cloud platform that we built for now several years with the principles of openness, inclusion of data management services, a true consumption model and the unification of the cloud. And customers are coming to us. I mean, it's not like I have to do a tremendous amount of effort to present GreenLake. Our pipeline, Shannon, is just amazing. And that's why we see that consistent growth that you see every quarter. And we are very bullish about this business. Obviously, we are now operating a cloud environment, which means we need to keep adding features and new experience and capabilities. And that's why to the previous question that Toni asked, we need to continue to invest in a balanced way to capture that opportunity. And as you saw, that transition to as-a-Service is going to grow 46% here over the next few years. But what is attracting to customers is the ability to provide a true, open and with flexibility. And more and more, they are using as a way to drive digital transformation from a data-centric approach, not just running as-a-Service compute and storage. And that's our opportunity, including, by the way, the connectivity aspect of it. And so we feel pretty good about this. Not like some people are out there. Obviously, people trying to move in the same space. But we have years ahead of leadership here, and that's what is resonating with customers today. Now to your point about new customers or existing customers, well, first of all, new customers, we already added another 200 enterprise customers and growing. But what we do here is land and expand. What is amazing about this is that no one customer that has landed on GreenLake has gone backwards and say, well, now we need to scale down. Everyone keeps adding new capacity, either what they have or expand into a new workloads. We have seen customers starting with just computing elasticity, now going into data services, now they want to go to the edge. And that's the power of the GreenLake is a true edge to cloud architecture that we provide customers one integrated experience where they can learn trial buy and also run their environment. Because that's not just a CapEx opportunity but also OpEx reduction, which now they are seeing some of the customers we just announced in the last 3 months, LyondellBasell. And even in the last 3 days, we announced multiple customers. They see a reduction in OpEx. They don't need to make the capital investment. And at the same time, they see also the sustainability improvement, which obviously, in the case of some customers see 30-plus percent energy reduction. So all coming together at the right time, but we keep need to fuel the momentum with more innovation. That's why we have Fidelma Russo . She has a tremendous track record, and we are so bullish about this that we are putting everything we can behind the platform. And that was my presentation from the beginning to the end.

And Shannon, maybe before your follow-up, Tarek, it might be helpful reminding folks about the updated outlook we've got on our ARR for the GreenLake business.

Yes. So you can certainly refer to the presentations that now have been posted, I believe, Andy, on our website. But I want to remind everybody that when we introduced the ARR 2 years ago, we talked about 30% to 40% CAGR in fiscal year '19 at SAM 2019 for the subsequent 3 years. Last year at SAM 2020, we kept the same 30% to 40% CAGR on the ARR, where we moved the time period a year forward in addition. And this year, we feel very confident that we can even accelerate that growth from 30% to 40% CAGR to 35% to 45%. And what's more important is that not only do you have an acceleration of the CAGR on the ARR, but also, we showed you the composition of ARR and how much of the ARR is coming from software and services. We expect that 75% of our ARR by fiscal year '24 will come from software and services as opposed to 60% today. So you can see there's quite a big important mix shift in the richness of this revenue stream in terms of margins. And that's why we feel very bullish about this opportunity Antonio.

And Shannon, I believe you had a follow-up?

Yes, I do. I guess my follow-up is just on inflation. I mean you talked a lot about incremental supply chain challenges and costs, which are tied into inflation. But I'm curious, just when you think about headcount costs and all of the other incremental costs that we've seen right now, are you seeing things to be somewhat transitory? Or do you think they're more permanent? And then within that, you mentioned one of the cash flow drivers is basically the lack of restructuring costs in future years. Are you confident that you won't need to have another restructuring to offset what's going on right now?

Yes. Maybe Antonio, we can start with you. I think it's also worthwhile to hit on pricing for us as well.

I have a headline probably people would not like it afterwards. But we are the market leader in raising prices, to be honest with you. We have been always leading when we see these issues because we have a history of taking those actions early on, and we are very disciplined with that. In terms of transition, I mean, listen, right now, obviously, there is inflation and it's inflation across both cost on commodities and obviously, logistic costs, as Tarek said. In terms of headcount, we have a very unique, differentiated distributed footprint. And obviously, where we place our headcount allows us to really balance that. But ultimately, it's all about getting the right talent in the right place with the right attitude and the right skill sets. And we are making investment in different areas, obviously, to balance that. Obviously, that's a very important part of our strategy and talk about the human capital and let's not forget about the diversity aspect of it. So it's a comprehensive thing. But we hope that all these costs associated with commodity and logistics will taper off over time, but we still have to get through at least in the next 6 to 9 months to see what's happening. I don't know, Tarek, if you want to add anything on that.

Yes. I mean as you said, Antonio the world is becoming more dynamic. And as a result of that, forward pricing is really important to factor in some incremental commodity cost increases and logistic cost increases. We believe these issues will be transitory in nature of how long the transition is, is everyone's guess. But we feel that it's very, very important to have a handle on pricing in everything we do day to day. And sometimes, we have to raise prices. And sometimes, we take prices down because the market dynamics impose that. So it's becoming a more dynamic market, and we have to take that into account in everything we do. Back on to your point on restructuring costs, Shannon, I'd like to underscore that today, our margins across the board are probably best-in-class in some aspects of our portfolio. There is more room across the company. But we feel that if there is some cost takeout, we can execute it without restructuring costs. But if you really look at the margins of particularly in compute and the fact that we're today saying 11% to 13% versus 10% to 12% in the prior SAM meeting is a positive in my mind as to how we feel we have rightsized the business moving forward. And hopefully, you concur with that view.

One thing I would like to add, Shannon, because it sometimes gets lost. Remember, since I became CEO, we embarked on a journey, what we call the HP Next. And at the time we re-architected our go-to-market now, we see the progress that we've made on our eliminated layers and simplifying structure. At the same time, we went through the business process and IT modernization of this company. which we are almost there. Believe it or not, we are going to be now standardized and one way to do business across the entire company, one single ERP system, one single version through the data, more automation in our processes. And that's also why it gives us confidence over time to increase productivity and operating leverage, not just because we need less people. It's because we're going to be way more efficient in the way we engage our customers. And with the H2 cloud architecture in the portfolio, we also added the as-a-service-automation for subscription and consumption. We believe that's a significant point of differentiation. It's incredible hard to do at the scale we are -- a company of ours. And that also is a way to mitigate potentially some of the costs associated with headcount because we will need less people but we can focus on the right people for the future.

Great. Thank you, Shannon. Operator, I think we have time for a couple of more questions. Can we have the next one, please?

Next question is from Wamsi Mohan from Bank of America Merrill Lynch.

Congrats on the nice free cash flow guide. If I look at the high end of this range out through your forecast period, you'll be close to $3 billion in free cash flow by 2024. Can you talk about what sort of CapEx assumptions you have over this period of time? And how large that contribution that you noted from HPEFS can be to that $3 billion level and I will follow up.

Sure. Thanks, Wamsi. Tarek, maybe to you.

Sure. So Wamsi, thanks for the question. You recall, we spoke about this back in SAM 2019. We said that with the move to as-a-service, there's a degree of capital intensity that comes with it. And the good news is we've got a great way to offset that capital intensity, thanks to HPFS. HPFS every year writes about $6 billion of volume and just to maintain the asset base of about a book of $13 billion. And we feel that this is the right set of volume dollars that the company has to continue to write possibly growing it a little bit more. But I would not expect CapEx overall to grow substantially over those years. I want to also remind you that our CapEx needs for internal purposes from next-gen IT, which is the comment that Antonio was referring to before, are probably going to subside in FY '23 and '24 because the program comes to an end in fiscal year '22. And so we feel that the -- our CapEx needs moving forward are going to be stable to marginally up because of our pivot to as-a-service. And we feel that with the securitization program that we have with HPFS, we can offset that capital intensity from a financing standpoint so and it's a good thing for us to do because it's a good thing for us to have a capital intensity coming in with GreenLake because you have more recurring free cash flow at higher gross margins and margins overall as we discussed.

Wamsi do you have a followup?

Yes. Thanks, Andy. I did. So if you think about the incremental sources of cash from ops, where do you think most of that will come from? I mean, I see your forecast by segment, but just maybe just qualitatively, if we think about compute growth and got negative cash conversion cycle in such a material part of your business, would you say that your cash flow forecast is built on a significant amount of that really from compute from conversion? Or would you say that it's more evenly spread across sort of your various businesses?

So obviously, if you use OP as a proxy for free cash flow, then yes, compute is a very important part of the free cash flow equation. I also want to highlight to you that within computer in every other segment, our GreenLake business is embedded in those. And so the nature of the free cash flow is changing by virtue of the fact that we're going to have a substantial amount of revenue that will be recurrent. And we've opted to have an embedded GreenLake business in each one of the segments because each segment's contribution to free cash flow will become more and more recurring over time. Right now, GreenLake is about growth, and we're growing the business very, very nicely. You will see over time that this growth will translate into free cash flow in the medium to long term.

Great. Thank you, Wamsi for the questions. Operator, can we go to the last one, please.

Next question is from Katy Huberty from Morgan Stanley.

Is it fair to assume that the reason you don't want to commit to a transformational capital return is because there is opportunity for more transformative M&A? And if that's accurate or your bias, can you just talk about where you see opportunities for M&A? Is it in software or infrastructure or both? Are there particular segments where you see bigger opportunities for M&A to drive growth? And then I have a follow-up.

I can take that.

Sure, yes, Tarek, let's start with you.

Okay. So Katy, thanks for the question. It's really good that you give me the opportunity to clarify that point. We see the edge-to-cloud-as-a service opportunity as compelling, and we need to invest organically and potentially inorganically. It's very, very important that we keep the focus and the strategic flexibility to accelerate our ability to invest both organically and inorganically, organically in R&D and in also go-to-market because the opportunity is there for the taking. And so this is why levering up the company doesn't make sense to us because if we do lever up the company too much, then we will forego the ability to capture that opportunity that we see with the edge-to-cloud platform-as-a-service business becoming really mainstream for us. And on the M&A front, we're not signaling any particular size. Any size is possible with always with the view that this has to fit a very disciplined ROI framework to maximize return for our shareholders. And I wanted to underscore this so that you appreciate the dynamic nature of our capital management framework because if we adopt a static approach to the way we handle capital, we miss on both the organic side of the opportunity and potential inorganic M&A to pepper it.

The only thing I will add to that, Katy, is that we're always going to look at how we maximize shareholder value, both capital return again and position the company to grow into the future. And to Tarek's point, we need to have that balanced approach. And right now, again, I hope you take away from my presentation, Tarek's presentation, we are very bullish about our vision and strategy. It's working. It's creating momentum. But obviously, you've got to get this transition to these 3 areas. You ask what 3 areas we're looking all the time. I give you the 3 areas, is connectivity to cloud and data, connectivity, obviously, we think about the opportunity with 5G and obviously, AI analytics and so forth. In the cloud is all software because it's all about automation deliver that unification of the experience. And then on the data, right, it's all about how we drive more insights from that data from edge-to-cloud. And so that's what we're looking for. But again, if you go back for the last 5 years or so, we have been incredibly disciplined. Every acquisition we have drove here has been spot on for what the customer in add and accretive to shareholders. And we are committed to maintain that discipline but we need that balance. And obviously, the most important thing is how we maximize shareholder value, not just this quarter but in a longer-term perspective.

And Antonio, just a follow-up on GreenLake. You clearly highlighted the upward revision to the forecast. But even if you look at the fiscal '24 numbers, GreenLake revenue is low teens percentage of the total business. What are the friction points from keeping more customers from transitioning the traditional architecture-to-as-a-service, the customers that aren't moving to GreenLake, why is that? And is there anything you can do to address those friction points?

Well, first Katy it is a mathematical challenge to begin with because obviously, much of this is all deferred, right? And Tarek talked earlier about the $5-plus billion in TCV value. And obviously, the as-a-service revenue being different than the AIR, but we are committed to that ARR, which obviously is the durable side over time. I have to say you also have to become way more vertical on this. Their industries are more oriented to CapEx in the industry, they are more open to OpEx. But in the end, it's about scaling our momentum through our channel network, both ISVs, obviously, which are the application solution level, SIs, distribution and value-added resellers in addition to what Tarek said, invest in our go-to-market. And we are making some significant pivots, Katy, in our go-to-market coverage, compensation, everything to go faster. And we think we can go faster because once we have the IT systems and the ongoing introductory new offers, the whole ecosystem will continue to pivot that way. And that's why when I show up at the channel confidence, I was actually very pleased and surprised to see everything -- people talking to me was GreenLake, GreenLake, GreenLake. And there's a couple of things we know we need to do better, pricing and deal registration and cost selling, but ultimately bring them in our ecosystem. And that's why GreenLake is so unique because it's an open platform. You will see here early next year, the introduction of marketplaces with our unique partners that will expose their own services that attracts the rest of our solutions as we talked early on. I personally, as I said that in the Q3, I am spending pretty much all my time transforming the portfolio into that direction. Obviously, there is an engineering component associated with that and there is a go-to-market component and a business model innovation. Tarek leads the day-to-day to make sure we deliver against those commitments. And we both believe this is going to be a very good year for us from the pivotal transformation and ability to create that shareholder value and maximize that value overall long term.

Thank you, Katy, for the question and everybody else for the questions you posed today. Antonio, maybe I can turn it over to you to close this out.

Yes. First of all, thank you for joining us today. Let me start by saying we are not here by coincidence. Everything we show you today has been a consistent execution year after year after year. Remember, what I said in 2018, the enterprise of the future will be a centric cloud-enabled data-driven, we bet big on the edge and is paying off. In 2019, I said we will offer everything as-a-service, and we are on track to deliver that promise by the end of '22. Obviously, 2020 was a little bit different year because obviously, we have the pandemic, and we had to take action to protect our financial liquidity. But at the same time, we took opportunity to accelerate that strategy pivot and obviously allocate resources for the future. And today, everything is coming together a unique moment in time that obviously, with that vision and our strategy in mind, I hope it gives you the insights about how we're going to grow this business in a profitable way and capture the market opportunity because these are all compelling investment opportunities that we think HP presents. And so with that, I hope you take away the opportunity to invest in HPE. We are very excited about what we see in the next 3 years. And I hope to see you soon, hopefully, hosting you at the new headquarters here in Houston, Texas, when we open early next spring. With that, thank you very much for joining us today and be well, stay safe.