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

Okay. Welcome, everyone. I'm Kyle McGilley, equity research analyst covering IT infrastructure here at Jefferies. Thanks very much for joining the call today. For this call, we have HP Enterprise, worldwide leader in edge to cloud compute, storage and networking infrastructure. We're thrilled to have with us today, HP Enterprise CFO, Tarek Robbiati; and Head of Investor Relations, Andrew Simanek. The format for the call -- this call today will be a 45-minute fireside chat, where I'll ask questions for about the first 30 minutes before opening up to questions from the audience. If you would like to ask a question, you can enter it in the box below at the bottom of your webcast screen or emailing me at [email protected]. That's K_M_C_N_E_A_L_Y @jefferies.com. So before we start, I want to turn it over and kick it over to Andy for a quick disclaimer from HP Enterprise. Andy?

Perfect. Thanks, Kyle. I appreciate you having us. So before we start, let me take a quick moment to read our disclosures. You will hear some forward-looking statements in today's discussion. These are based on risks and assumptions that are described in our annual report on Form 10-K and our quarterly reports on Form 10-Q. Our actual results could differ materially, and we assume no obligation to make any updates. More details can be found on our Investor Relations website at investors.hpe.com and our recent Q4 earnings press announcement, press release, dated November 30. So with that, Kyle, let me turn it back to you.

Thanks so much, Andy. So Tarek, what do you think that investors should be thinking more about or paying more attention to with regard to HP Enterprise? Everyone's trying to gauge what we can really make of the strong order growth of what seems to be coming through with the spending environment, how representative the order growth is of true demand or isn't, the underlying IT spending and demand environment. What's your current view of how much this order momentum, 28% in the last quarter year-over-year, is durable demand growth versus pull forward, long-dated orders or any double ordering?

Yes. A great way to start the chat, Kyle. Thank you, first and foremost, for having me and Andy here on the call today with your clients. So to put FY '21 into perspective, we grew orders 16% on a full year basis and revenue by 3%. So we ended up the year with a record book of orders. As you noted, this included strong fiscal year Q4 orders, which grew 28%. And therefore, our momentum exiting fiscal year '21 and entering fiscal year '22, that started November 1, is actually very strong. And that momentum is -- has generated in Q4. And therefore, this bodes very well for this current fiscal year '22. Now as part of the equation, obviously the duration of our backlog has increased. And there may be some pull forward of orders or ordering ahead, in some cases, to ensure that supply is on the right time frames for our customers and in some cases, also ahead of some price increases that we have put forward, which are good for us in our bottom line. Also, please keep in mind our as a Service progress, which delivered more than 100% order growth this quarter. And this as a Service progress also lengthens our backlog book. However, it's very important to also understand that the vast majority of the order strength is from an uptick in structural underlying demand driven by the megatrends of connectivity, cloud and data that we've been very well-positioned to capitalize on. And these have accelerated during the pandemic.

Okay. Great. That's good color. It seems that Juniper is trying to do something interesting. It seems unique in what they're trying to do with normalizing out orders for delivery in future quarters, giving an adjusted order growth. They may have a different structure than you, but how should we think about what your 28% order growth might step down to if you try to normalize on dated orders, maybe different from your perspective, whether you actually have delivery dates that aren't near quarter? But what do you think about that? Is there a way that you can facilitate some type of adjustment like that or not?

It's a very different situation for Juniper than it is for us. So first of all, we have a much broader portfolio than they do, a much more different diverse portfolio of products and services. I would not attempt to speculate between order growth and revenue growth beyond what we laid out in our guidance. I suggest that we have a very good handle on order growth when we laid it out, our 3% to 4% sales growth target for this fiscal year, in the context of our 2% to 4% CAGR revenue target over the next 3 years. And the reason why I'm saying please don't go and second guess orders, books and book-to-bill ratios, et cetera, I've seen some very poorly written equity research, not by yourself, Kyle, obviously, but by other people who have attempted to speculate, and their math is simply wrong because they cannot understand, from the outside, the timing of such orders. So if you take, for example, the duration of GreenLake and operational services orders, some of these orders that we get in Q4 of fiscal year '21 will generate revenue over the next 3 to 5 years plus, right? So this is why I would caution anybody to try and second guess the timing between orders and revenue growth beyond what we gave you in our guidance, which we reaffirm today. It's very, very important that we understand the dynamics here as we move more and more the company to as a Service and as our Pointnext OS business stabilizes and also grows. By the way, this is, in fiscal year '21, the first time where we got to a positive growth in Pointnext OS, which is our most profitable revenue stream in a while. You also began by asking what investors should be paying more attention to. And there are several areas I would like to point out to yourself and your clients. We believe the public cloud will coexist with private infrastructure for lots of reasons. First and foremost, the public cloud also has side effects that our customers are paying more and more attention to, particularly loss of sovereignty on -- of data, latency that is not necessarily adequate for supporting high-performance applications and cost. And -- but we do recognize that the public cloud is there to stay. We never said that we deny that a lot of workloads are moving to the public cloud. But we feel that the world is hybrid. And we are extremely well-equipped to help our customers navigate this hybrid world that extends ever further with the edge. And you can see our as a Service progress, we've done extremely well there, navigating the edge to a multi-cloud environment. We look at our as a Service order growth, particularly relative to our closest peers and how we're doing. Finally, one last thing that is also overlooked in our performance is H3C, our joint venture in China. It's much more than an element of the sum of the parts. It's really a differentiated channel for us into a very large and the second-largest IT market in the world and the fastest-growing market in the world, which is China. And we actively manage our joint venture with H3C. And this has been very difficult for our peers to replicate and extract value as much as we have from China, thanks to our setup with our Chinese partners. And we feel very good about this, and I would encourage everyone on the call to really take a look at the performance of H3C and see how much value is there in them.

Okay. It's a bit of a good segue as you were speaking about as a Service, and I wanted to talk a little bit more about the as a Service offerings and the push you're making there with that model. Are your as a Service -- your as a Service ARR, it hit another record for year-over-year growth in the quarter at 36%. It sits at $796 million. At SAM, you increased your long-term guidance, from 30% to 40%, to 35% to 45%, for growth through fiscal '24. How long do you expect to keep accelerating from here? For the past few quarters, it's been accelerating in terms of year-over-year growth. How long do you expect that to keep going and considering that you're still well ahead in terms of order growth versus ARR revenue growth?

So yes. So look, we're very, very pleased with our as a Service momentum, and that included a signature win last quarter and we are very confident in our growth trajectory there because the demand for deals like that is on the rise. And we are very much capturing the vast majority of the share in that as a Service on-prem market. And much of it is the -- due to the growing strength of our portfolio with Aruba, with our Storage portfolio, with our Compute business, HPC and AI, all of that enabled by HPFS. And it's also, I would say, it's fair to say that customers are increasingly comfortable ordering under that model because they more and more turn their attention to getting outcomes, business-related outcomes, from their IT infrastructure and want a partner to help take the problem of managing that infrastructure, which is increasingly distributed and complex, out of their focus. So they would like a partner like HPE to step into that role. And this is why we're gaining a lot of traction with our as a Service offerings. I want to remind everybody, we have $5.4 billion of total contracted value and adding to it every day. So the momentum in this business is going to be stronger as we go quarter after quarter.

Okay. That large Q4 Network as a Service deal in Intelligent Edge, it stepped up order growth quite a bit. That seems to be the main driver of the over 100% year-over-year order growth. How many points of this ARR growth can that translate to going forward when it turns on? And are there any other deals out there of that size and magnitude? Or is this a one-off? Or do you have a funnel of these type deal sizes? What else can you say about that?

Yes. So look, it's a -- not a one-off. It's the first of what we perceive to be many deals, where you have more and more customers, like I said, a second ago, who are happy to have a partner step in and help them manage their infrastructure and doing so as a Service. So this is a NaaS. A Network as a Service deal is one of many that we see as potential coming out in the future. And you're welcome to run the exercise of calculating the impact of that deal on growth. We disclosed it's 800 basis points dilution to the growth of Aruba. So you can form -- easily form a view of what that means in terms of deal size in absolute dollars. This is a 5-year deal. And none of that materialized in our Q4. So the benefits of that deal will materialize in fiscal year '22 and beyond. And this is also part of the reason why we increased our target CAGR by 5 points to 35 to 45 points. And the key message is that our customers are more and more receptive to these kinds of transaction and this model. Although sometimes, the deals that come through are not always of this magnitude.

Okay. Great. Is there also a headwind we should be thinking about as more Network as a Service deals come into the Intelligent Edge segment? I'm thinking of an as a Service transition, where there's an upfront revenue headwind, and then kind of a hockey stick as you start building the new revenue that's laid down with the as a Service-type model. How should we think about that?

No, we would do-- I don't want to leave you with -- it's a great question. I don't want to leave you with the impression that everything at the edge is now moving to Network as a Service. No, far from it. The edge continues to be a high-growth story for us overall, and we'll balance some NaaS deals with transactional deals. And also, remember, that the Edge as a Service contribution comes more and more from its software platform, Aruba Central, which is built on a ratable basis across the universe of customers, whether they decided to get their infrastructure paid for as a Service or paid for in transactional matters. So the edge is -- remains a growth story for us, and there's no change to that.

Okay. Great. You're still expecting free cash flow to grow nicely year-over-year even with accelerating as a Service growth. Are you getting past the point where as a service is a net headwind to cash flow? Or can we still see volatility going forward kind of dependent on big-growth quarters for as a Service?

Another great question. So look, it's -- right now, as a Service is not a leading driver of free cash flow growth. It's somewhat of a drag on free cash flow today, but it will turn into strong cash generation over the next couple of years as we gain more scale. Remember, we have $5.4 billion of total contracted value that will unwind over the next few years. We've talked about as a Service consuming about 100 to 150 basis points of sales growth in the near term, which implies modest margin and cash impact as well. But if you take the big picture and what drives our free cash flow, it's more the overall operating profit expansion from sales growth, gross margin expansion, OpEx control. And the second most important driver of free cash flow is the magnitude of restructuring charges. Our restructuring charges are declining significantly this year, and we'll do so again in fiscal '23. This is why we are pretty comfortable guiding for a -- over the next 3 years, to a 3-year cumulative free cash flow amount of $6.5 billion to $7 billion.

Okay. I want to transition over a bit to the supply chain, a very important topic right now. Supply constraints continue to be a significant issue. It's pretty much across the industry, especially given the strong demand. So for the July quarter, you said you had some tightening in the supply chain, which constrained revenue, but you're still able to post record gross margin. And then in the October quarter, you said you saw shortages in components and higher commodity costs, and gross margin ultimately came in 130 basis points below consensus. Can you dig a little deeper into what surprised you, what changed from the July quarter, the October quarter? What turned most negative and how you seem to mitigate a lot of the cost pressure, whether it's straight-up mitigation or whether it was just other positive drivers offsetting it, in the July quarter? What was different between July and October for you?

So look, nothing surprised us really. The -- it was just a continuation of the same trends that we have seen. The supply situation became that more difficult through the October quarter, which contributed to some cost pressure, but not an enormous cost pressure either. The lead drivers of the sequential downtick were -- on gross margin were the mix effect from aged inventory, but also increased expedite fees and freight costs. Everybody experienced an increase in expedite fees and freight costs. I mean there are plenty of stories around the cost of a maritime container, from China to the U.S., costing as much as freight. These trends have persisted in Q3, Q4 and will persist for maybe another quarter or 2. And you will see some element of pressure on gross margin in a very short term. But really, the real trend on gross margin is the mix shift towards the edge, HPC, owned IP storage and as a Service, all of which are positive to gross margin. That's why we continue to believe that our gross margin in fiscal year '22 will continue to grow. And most importantly, whilst supply was tighter in Q4, demand was also much, much better. I mean it's extraordinary that we finished Q4 in -- with orders up 28% in the quarter relative to a year-to-date order growth in Q3 of 11%, right? So this is why we finished the year with orders up 16%. And this demand momentum is unbelievable. We posted $8.1 billion worth of orders in Q4. And we see -- and I'm very happy to tell you that nothing has changed on that front in Q1 of '22 either. The demand remains extremely strong.

Okay. On gross margin, can you give us a sense for the size of the negative impact from the supply chain? We're curious whether you're still seeing the positive margin tailwinds from -- that we just spoke about, product mix, increased sales of software-rich solutions, growth in as a Service. It feels like it would mean that supply chain is a bit bigger than the 130 basis point deviation with consensus. How can you -- is there a kind of quantification you can give us for the total impact in the October quarter, at least?

Yes. Look, so supply chain impacts our -- the ebb and flow with seasonal mix of revenue during the course of the year. You've seen our annual gross margin increase steadily. The 230 basis points annual increase on FY '21 and FY '20 is the result of a mix shift to the edge, Aruba, the rising mix of software and as a Service revenue across all our business lines and which are configs in our Compute business, where we're also pricing very diligently. So these were the main drivers. A quarter doesn't make a trend. You have to look at things on a seasonal basis, on a full year basis. I'm comfortable with our gross margin trend on a fiscal year '22 basis, and we believe they're going to be improving relative to fiscal year '21.

Okay? So for you, we assume that the incremental positive or negative change in the cost and availability of components versus what your planning assumptions are in a given quarter are the most important. So is there any sense you can give us whether you've seen worsening or improvement in the past few weeks and how conservative you can [ leave ] assumptions that you made for your Q1 guidance there?

So for Q4 orders, the patterns have strengthened as the quarter progressed. And at the same time, supply tightness did also become more difficult. So the constraints several quarters ago were restrained to a few specific parts. Now the constraints are involving a broader range of components that have an intermittent availability. But look, all of that is accounted for in our guidance of 3% to 4% top line growth and now, of course, our EPS guidance as a result.

Okay. So you still feel confident that it's all calculated within your guidance [ and are ] conservative.

Yes. Yes.

Okay. I kind of want to like transition. It's kind of connected to the supply chain. But pricing actions, can you give us a bit more sense for what types of pricing actions you've taken to date to offset supply chain cost pressure? Have they been targeted or broad? What are the number and level of increases that you've made? When do you expect -- and when do you expect them to flow through gross margin in P&L?

So our pricing -- our pricing increases are different and obviously across our portfolio, but they've been very sticky thus far, in part because it's not just us. And so if you look at our commoditized part of our portfolio in Compute, Dell tends to follow our Compute pricing moves. And Cisco has also raised prices, for example. We'll, of course, see extra freight costs come out, and DRAM is volatile and coming down, so this is favorable to gross margins. And we feel that, put it this way, the pricing environment is rational when we judge the actions of our peers as we monitor daily their list prices. So I feel pretty comfortable with this. The gross margin impacts are already flowing through our P&L. But you have this backlog mix effect [ that are with ] old orders versus the new orders. But I can see already today, at my level, that the new orders are coming at higher gross margin than the old ones. The question is how quickly we can offset that mix effect that I just spoke about.

Okay. So is there anything more you can say about how early you started to implement price actions and how long it might take for them to flow through backlog and then into the P&L? And then are we starting to see the effects in the January quarter of price actions you took a few quarters ago?

I'm already seeing those. We take price actions very frequently. This is because we think we operate in a very different environment now. Whereas, in the past, the environment did not require frequent pricing interventions. We feel now the environment is more volatile, given everything that happens with supply, that we have to be much clearer and much more proactive in taking pricing actions. And we're doing that all the time. So I'm not going to be telling you, at this stage, when you will see specifically quarter-by-quarter the fruit of the actions we're taking. I'll again reiterate what I said before, which is that we feel good about our gross margins overall as a company continuing to rise on fiscal year '22 versus fiscal year '21.

Okay. All right. Great. And when you take pricing actions, do they apply only to new orders, so you do need to go through backlog? Or is there some type of surcharge mechanism that you can implement or expedite fees, things like that, that are a little bit more across the board and you don't have to wait for it to flow through backlog? How do your pricing mechanisms work for you?

So obviously, the price increases translate directly into the new orders, right? In some cases, it's really customer by customer, we can pass on, rush expedite fees to the customer. But the -- so far as the historic orders and prices, we have to honor the historic order prices, no other possibility. And it wouldn't be right by our customers if we were to change that. So that's what we're doing every day.

Okay. That's helpful. Aside from pricing actions, are there any other levers that you can pull to support gross margin, like taking your order book and prioritizing the richer software, richer configuration deals, the higher-margin opportunities, if you have limited components? Can you prioritize what's the most premium-type products for you?

Yes, absolutely. I mean this is demand steering 101. That's exactly what you're describing. So we will prioritize higher-value systems when we have a finite supply of certain components that are needed for different products, like Storage over Compute. And this is around the edges. However, it's not enormously helpful to our margin structure overall, but we do it because we have to do it. It's just that when you are short of components, it's a rational thing to do.

Okay. Great. Shifting to Compute. Can you drill down a couple of areas within your Compute segment that are driving the results right now? This October quarter was a bit higher than we were expecting and certainly higher than I think consensus was expecting by a fair amount. I get that there's some FX in there that helped. But what segments of the market, what areas? You mentioned edge earlier. I would love to hear a little bit more about that. What areas have been stronger for you? And can you give us a sense for how much the recent ASP growth comes from memory versus product mix versus richer configurations versus the price increases that we just spoke about?

So look, Compute now is performing very well. We have a very solid management team that is extremely proactive and attentive to the dynamics that are pretty strong in this segment. I would say the dominant quarter-to-quarter change in AUPs has been the pricing increases we've passed along. Also, our mix has been shifting to richer configs for some time now, but we consider that to be a structural shift that should persist.

Okay. Great. You talked about opportunity with SaaS providers in the past, to support them building their own infrastructure versus leaning on public cloud. Can you talk a bit more about how tangible you feel that's getting and whether you got any customers that are like doing meaningful deployments right now in that category? And it would be great if you could highlight some types of customers that are actually deploying, to put some meat around the bone on that opportunity with SaaS providers.

Yes. So this requires a -- it's a long, long discussion, but I will try to summarize it. Look, we never said it's on-prem versus the public cloud. Absolutely not. Our strategy is edge to cloud. And by definition, it includes private clouds and public clouds. And that's how we think about it. And as the public cloud matures, customers are realizing that it's great for many things, but not for everything. This is why you have to have a multi-cloud hybrid strategy. And one of the lessons that we're learning is that vendor lock-in, data sovereignty, costs at scale, are a concern to our customers. And this is why we remain very, very confident that the world is a hybrid one. Yet, it does present opportunities for us to work with SaaS providers and the public cloud. And keep in mind that much of the data is generated at the edge, and we therefore have the opportunity to bridge this hybrid world and drive solutions between the private infrastructure and the public cloud. We've seen several SaaS providers that grew up in the public cloud at the beginning of their history. They are also now, as they gain scale, realizing that they can spread their infrastructure needs and costs across a hybrid state. They realize that the cost of public cloud is prohibitive. And in some cases, they decide to come back on-prem for some of those workloads. And so it's a very, very dynamic hybrid world that we're navigating, and we feel there are opportunities for us with our customers across this hybrid state.

Okay. Great. So it's not like we can think of SaaS providers making a decision between on-prem with [ HPE ] or public.

No.

It's very much them embracing a hybrid environment and choosing use cases for...

Absolutely. And we are -- we have embraced that hybrid environment ourselves. It's not -- it's a false choice to say on-prem versus public cloud. The world is hybrid. So you have to be able to embrace this world in its entirety.

Got it. Got it. Okay. So moving across the Storage, you've seen accelerating growth there in the past few quarters with all-flash array, Primera and Nimble all growing nicely in the October quarter. How do you feel about your market share trajectory there in storage looking forward? And do you see that there's -- with this transition to all-flash array and more software-defined storage, is that breaking down some of the incumbency advantage, some of the barriers of the big footprint players, and helping you from that perspective?

Yes. So we said, as you imply, that our Storage business will grow at least as fast as the market. Within that, we're very pleased with the above-market growth of all-flash array and our dHCI business. We've been, as you know, pivoting this business away from third-party sales, to internal IP revenue, and this trend will continue for several more quarters. I'm feeling very comfortable about this business. Now we have the right management structure in place, the right product road map. And also, some of the products, the newer products that you may refer to, they come at a higher margin because they are richer with software content than our older products. And so, 2 years ago, Kyle, I would have said Storage is not going to grow. Now we have a different strategy, much more a software-based, focused strategy. And this strategy is unfolding, and you're going to see the benefits of the software mix shift to come forward in the next few quarters, more and more of which will be realized as a Service there. So the 2 main business units that are contributing to our as a Service growth are, today, the edge and increasingly Storage moving forward.

Okay. Great. Now I wanted to remind folks on the line to -- how to ask a question and that we're going to open up here to client questions in a moment or 2. So if you would like to ask a question, you can enter in the bottom of your webcast screen or you can send me an email at [email protected]. So I'll take a few minutes to -- or take a few seconds to collect some questions, and then I will go into them. But one more on Storage for me. Do you see opportunity in Storage to expand your op margin even further than it's at right now within that business? You spoke about the higher software content. How many points of improvement can that software content drive it? And I guess, as the mix of all-flash array increases, the mix of software-driven storage increases. Obviously, right now, it's getting muted by supply chain costs, but how many points of growth do you think that can drive [ or expansion ]...

Points of margin expansion. Early days, but the opportunity is very large for us. It's a very profitable business, by the way. It's in the high teens in operating profit margins already. But we feel that there is further room there to expand gross and operating profit margins by way of software. And you could see what we're doing with unique offerings, like Zerto is pretty much a 90% gross margin business. And the more we continue to invest in software, the more we're going to be improving operating profit margins.

Okay. Great. Let's switch over to HPC and AI. I feel like -- how much is that segment like a coiled spring right now? It hit 2.7% growth for the year, fiscal '21. What contributed to that coming in well below your 8% to 12% growth CAGR target? And you recently raised that target to 11%, growing faster than the market, that's growing 11%. Is there a big set of projects within that business that are going to hit rev rec all at once? [ And then there will ] be a period of outsized growth in the next year to make up for the fact that it did 2.7% in fiscal '21.

Yes. We finished the quarter strong. We had a $1 billion revenue quarter in Q4. But we had, over and above that, a few large deals that we expected to gain acceptance in Q4 that were pushed into this fiscal year '22. This is the nature of the business. It's a lumpy business due to the effort involved in standing up a very complex and massive system and delivering these large systems. But it's just a matter of timing. So it doesn't change our confidence at all with respect to our long-term CAGRs. And if you really think about the CAGR that we referred to in the past, the 8% to 12% growth target, it suggests that FY '22 will be a strong year for HPC.

Okay. Is it a few large deals that held it up in October? Or is it kind of a trend across the board? I'm not sure how large these deals are relative to the size of the business in any given quarter. What's been holding things up in terms of rev rec of a deal that you may have thought was going to hit in the Q4 period that didn't? How should we think about the trajectory here in the next quarter and what held it up in the past quarter?

So you do have -- [ exiting ] Q4, we had one very large deal delivered for the Department of Energy. And that deal in itself is in close to $100 million by itself, right? So you can see that a shift of one of these deliveries or acceptances by customers can have a massive impact on any particular quarter. So it's across the board, but we are starting to get the systems and the delivery and the [ sending ] out of them and acceptances improved. We're planning -- it's a planning exercise. And we feel very comfortable around fiscal year '22, where we'll have a very substantial system delivered during the course of the year. And we feel good about the prospects of that system coming along.

Okay. Great. And the NSA deal was $2 billion for 10 years. It's a great win for you guys. Which quarter does rev rec start for that? And how much of that deal do you expect in fiscal '22?

So it's obviously difficult for me given the nature of the customer to disclose when, by quarter, we'll start to see revenue flowing. But we're obviously very, very pleased to get this marquee win. We'll start to recognize meaningful revenue this next year, '22, and beyond. It's a very long-tenanted contract that we have there, 10 years. And it will include substantial hardware for the first 2 years, and then it will be largely services after that, which is very important for us from a profitability standpoint.

Okay. Great. I have a question coming in from the audience. Given the supply chain issues and move to as a Service offerings, should we expect both Compute and Storage to grow in fiscal '22, the Intelligent Edge deal that caused the 8% headwind, the Network as a Service deal that will be recognized ratably rather than upfront, hence will throughout '22? Or was this delayed, and will it be recognized upfront at a later date? And I guess, that speaks to does it -- is there still a slug of revenue that comes in from the Network as a Service deal? Or is it much more ratably over time? And then, I guess, the other part of that question is Compute and Storage, will they grow in '22?

Yes. So for the Edge NaaS deal, none of it was recognized in Q4. It is a 5-year deal that will be recognized over time, starting fiscal year '22. So hopefully, that answers that part of the question. Insofar as specific segment guidance on revenue growth by segment, I would want to refer you all to my SAM presentation, where we explain segment by segment what to expect. I can reiterate that we do expect edge to grow, but we expect also Storage to grow. And for the rest, please refer to my SAM presentation, which is available online.

Okay. Let's dig in a little bit more to Intelligent Edge. It's been growing nicely for you, even if you normalize out Silver Peak. Can you break down the drivers that are really pushing the envelope for Intelligent Edge right now? I assume Wi-Fi 6 upgrades, they are a big part. But you're also getting switching attach and controller software attach, SD-WAN growth that, as you normalize out Silver Peak, you don't -- you can normalize for that. But going forward, that should be contributing growth for you and then maybe some market share gain, too. But could you give us a sense for like the prioritization of which of these factors are most meaningful for you in types of level of impact?

Yes. I mean you already gave a lot of the drivers, Kyle, and...

Maybe magnitude. Magnitude would help. What's the most important drivers? What are...

Yes. Yes. So we grew the edge at 13% in FY '21, which is very clearly above market. So we're very pleased with that. The order growth is very robust. Even if you account for longer backlog duration, we finished FY '21 with more than $4 billion of orders. So this bodes very well for '22. The main drivers are remote work with the edge, extending itself all the time, security, the Wi-Fi 6 cycle, digital transformations. These are the things that our customers talk to us about. I want to mention also our growth in the fixed switches, the CX Series. And this is getting traction and becoming more and more positively received by our customers. So I feel very comfortable with the edge there.

Okay. Great. Operating margin stepped down quite a bit sequentially in the October quarter. The Network as a Service deal might have had something to do with that and obviously scale. But can you help us understand what drove that? Is it supply chain-related? How much of it was scale? How much of it was that Network as a Service deal?

Yes. It's -- so the NaaS deal had a dilution impact of 800 basis points on revenue growth. And obviously, this translates into 500 basis points on margin impact. So -- but that's a choice. It's a choice that we have decided to make with respect to this customer and the way we structured the deal, and we're very happy with that choice. I'm not sure there's much else I would add there, and I think I've answered the question, haven't I?

Okay. Yes. H3C, you mentioned this earlier in the discussion. It's been widely reported in the media that Alibaba has a consortium that's kind of a favored bidder for Unigroup in China as they're facing bankruptcy proceedings. I mean Unigroup is a parent entity, so not the direct owner entity of the 51% of H3C, but how would Alibaba, coming in as an owner, subject to that being the case, how would that influence your -- like the H3C business? Alibaba has an internal server and chip development program. So I'm not sure whether it would mean that they would ever be a customer. But what are your thoughts on Alibaba being a potential owner of the parent-to-parent entity of H3C?

Yes. So the situation is evolving. And it is my understanding that as of yesterday evening, a winner has been announced for the restructure of Unigroup in China, and it's not Alibaba. So the winner is JAC Capital, which is the technology fund of the CIC, the China Investment Corporation, which is the sovereign wealth fund of the country. We know very well both Alibaba and JAC. I just saw this morning a press release in Chinese referring to JAC as a winner. If that were the case, that would be very welcome to us. We feel very good about either of them -- either one of them, Alibaba or JAC. Like I said, we know them really well, and we look forward to engaging with them. I feel very, very positive about our position in China with H3C. And whoever is ultimately the winner, we will engage with, with respect to our stake.

Okay. Great. And in the past, you've said you got many options for monetization of H3C. The 2 obvious ones are exercising the put or just continuing to own it the way you own it right now and getting the equity earnings and dividends. Are there any other options besides those 2? Or is that really the decision you're making as you're heading into the kind of the April put option expiration and going forward?

So no, these are the 2. You're absolutely right. Our strong preference would be to extend the put and renegotiate it in its terms, and we're working through that. The put is an insurance for us, and it's an opportunity to trigger a monetization event. That's why I much rather extend the put and keep a monetization event in -- under -- in our shareholder agreement for us, then let the put expire and no longer have an easy monetization event. So that's what we're working through, and we feel good about where we are.

Okay. All right. Great. That's helpful. On cash flow -- we have just a few minutes left. Improving free cash flow has been important in terms of your investment thesis and important -- it seems to be also important to the management team in terms of priorities. You had a solid first half performance, with a step down in the back half after normalizing for the Itanium settlement. Your guidance for fiscal '22 is $1.8 billion to $2 billion. It implies a pretty strong pickup from here, given the slower back half of fiscal '21 and good growth for the year. So given the supply chain pressure that you expect to remain through the first half of the calendar year, what does that mean for the shape of free cash flow? Is it different than a normal year? Is it going to be slow for the next 2 quarters and ramp hard? Or what can we think about the free cash flow in relation to what your guidance is for fiscal '22?

Yes. So in fiscal year '20 and '21, there were peculiar dynamics around free cash flow driven by the pandemic. And in fiscal year '21, we had a very different seasonality on free cash flow because we had, by and large, completed our cost optimization and resource allocation program early in '21, so that benefited the free cash flow equation. In fiscal year '22, we are reverting back to more traditional seasonality, and that's what we wanted to guide you all with. So if you look back at FY '19, typically, our revenue split between H1 and H2 is a 47%, 48%, to 53%, 52% between H1 and H2. We're going to revert back to this, back to normal in fiscal year '22. And obviously, when we talked about our revenue and gross margin trends with that seasonality in mind, that premise extends to free cash flow. And so we expect more typical free cash flow flows, where Q1 is a lower free cash quarter, but there will be an acceleration of free cash flow in the second half of fiscal year '22 to deliver the guidance that we said, the $1.8 billion to $1 billion -- $1.8 billion to $2 billion, which I'm very happy to reiterate today.

Okay. Great. And one last one, running up on time. M&A and capital return, looking back to your last few larger acquisitions, Zerto, with the most recent. You had Silver Peak, MapR and Cray before that. Can you tell us about how successful you think those have been and the benefit you're getting from integrating them into the broader HP Enterprise? Give us a sense for what those companies were growing at before coming into HP Enterprise and what they're growing at now. And then when you balance M&A versus capital return with share repurchases, the stock is very -- is at a very low valuation versus peers. You view your stock as undervalued. We view your stock as undervalued. Why not buy more shares as you balance the decision between M&A and what you can do with integrating these companies and increasing the growth for those acquisition targets versus buying your shares back? Give us a bit more about your rationale there and which approach is going to be going forward?

Yes. So we've been extremely successful recently with our [ RNA ] program. And I think the market, and probably yourself, Kyle, would agree that we've done very well with the acquisitions you mentioned, Cray, MapR, Silver Peak, Zerto, all of these. And look at the multiples, look at the price we paid and how well we executed these transactions. So I feel extremely comfortable and proud about what we did there. We are extremely disciplined, and we are not moving away from our return-based framework to assess how we can best put capital to use. We are sticking to this, and there will be no change there. It's very important that we do so and remain disciplined, particularly in the circumstance, where if you want my opinion about valuations right now, valuations in the private markets are completely crazy, completely crazy. There are companies who are exclusively valued on revenue multiples of 20, 50, 100x, and nobody, nobody is looking at what does that imply in terms of future free cash flow or EBITDA multiple for these companies. Valuations in the public sectors are a little bit better because you have a more rational market. But still, I feel that the market is very, very high. But time will tell. We've seen some recent rotation into value away from growth, but the valuations appear to be frothy and this is why we have to remain disciplined from an M&A standpoint. And so when we look at our capital management policy, we do believe we are undervalued, no question, and you heard me say that. And even some events like if you take the Itanium litigation proceeds, which are $2 billion-plus, should translate into some share price upside, they haven't. They have been factored into our share price and our share price has not moved, which is extremely surprising and irrational from my standpoint. But when we look at our capital return programs, we have to balance investment for growth with consistent capital returns to our shareholders. And this is why we adopted a dynamic capital allocation program. We have to continue to remunerate our shareholders by way of dividends and share buybacks and yet, in doing so, invest organically and inorganically for future growth. And we committed to 60% of our free cash flow in '22 return to shareholders by way of dividends and buybacks. But beyond fiscal year '22, we do need to keep the strategic flexibility of how we allocate our cash because we know that what drives our share price is the top line growth, and the PE multiple reflects a perception that we don't agree with, but perception is a reality, that HPE cannot grow. We feel we can grow, and we have that very clear in our guidance for fiscal year '22. And we'll have to just demonstrate that in the upcoming quarters.

Okay. Great. All right. And so we're out of time, so we're going to have to cut it off there. So I want to say thanks everyone on the line for joining the call today. Tarek, and I want to say, thank you very much for your time and your perspective. It's been great to be able to get you on the line here. It's certainly an interesting time for the space and an interesting time for HP Enterprise. I'll kick it over to you in case you have any closing remarks, but we wish you the best of luck, and thanks for joining us.

Well, thank you, Kyle. This was an absolute grilling, but a pleasure to be with you. So thank you for organizing this. Thank you to everybody in the audience. Hopefully, you find this useful, and I look forward to speaking with all of you again upon our Q1 earnings. Thank you. And if you celebrate Christmas, Merry Christmas, and Happy Holidays to everyone.

Great. Thanks so much.

Thank you.