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

Good morning, afternoon, evening, and welcome to the Atmosphere 2022 Investor Debrief Conference Call. My name is Jason, and I'll be your conference moderator for today's call. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Jeff Kvaal, Senior Director of Investor Relations. Please proceed.

Thank you, Jason, and good afternoon, good morning, to everyone. Thanks for joining the call. HPE's Aruba has just wrapped a very exciting and energizing atmosphere event out in Las Vegas, in-person for the first time, in some time, which was great. We are delighted that we're going to be able to present a recap session hosted by David Hughes; and Andrew Schultz. They're both here to discuss the highlights. As many of you already know, David is Andrew's -- I'm sorry, David is Aruba's CTO and Chief Product Officer, joined us through the Silver Peak acquisition. Andrew is Aruba's CFO. David has several slides to run through, and then both David and Andrew will be here for Q&A. We will have a standard Q&A session. You are also welcome to e-mail me with questions, if you would like, and I will try and work them in. Before we begin, please let me read our disclosure. 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 10-Q forms as well. Our actual results could differ materially, and we assume no obligation to update our statements. More details can be found on our website, investors.hpe.com, and of course, in our recent 1Q earnings announcement's press release from March 1 of this year. And with that, David, please, let me turn it over to you.

Thank you, Jeff, and welcome, everybody. So as you know, from our first quarter results, Aruba is continuing to do really well. We have great momentum, with 35% year-over-year growth in orders and about 11% growth in -- across the portfolio from a revenue perspective. And we went into Aruba -- went into Atmosphere with a really strong audience, so more than 4,000 people attending in-person, which is amazing given the circumstances, and about 6,000 virtual attendees, so very well-attended. What I want to lead you through is just a couple of slides, one on some of the kind of major themes. And then one on 5 announcements that we made in conjunction with Atmosphere. So if we could move to the first slide, digital acceleration requires network modernization. As a backdrop, we see 3 big shifts that are driving the acceleration of our business. So first is hybrid work. So people, with the pandemic, obviously a shift from home. We're now getting into a stage with the recovery, where we are looking at a hybrid workplace, where people need to be able to work from home, on the road, in the office, in the factory. And they want to be able to do that in an environment that's consistent, sort of gotten expectations that things will work as well in the office as they do at home. They want to be able to do this securely, and from an IT point of view, you want to be able to manage things consistently regardless of how the applications are accessed and regardless of whether those applications are hosted in the data center or the cloud. The second big trend we're seeing is a shift in new business models, whether it's been driven by the pandemic, which have accelerated a lot of changes in things like telehealth; whether it's related to things like curbside pickup, that were driven by all of the different global supply chain disruptions. Digital acceleration has been moved forward by the pandemic, and many people are looking at how to adapt their networking to cope with that. Then the third area is a drive for efficiency from lines of business, looking at networking and IT as a way of driving better efficiency, and from that point of view of the IT organization, people needing to move from a mindset of thinking about their responsibility being about managing a set of devices, to delivering IT as a service. All of this is driving the need for what we call network modernization, and there are 3 main elements to this, automation, which is all about using AI and automation to drive efficiency, to supplement humans, to take jobs that would have been tough for a human, either tedious or error-prone, and making them automatic, taking things that would require assessing volumes of -- huge volumes of information to find a needle in a haystack and automating that. So that's one key pillar. The second key pillar is around security and in particular, security based off zero trust principles. For Aruba, security goes right back to when the company was founded, when it took consumer WiFi and moved it into the enterprise space. We needed, at that stage, to find ways to make WiFi communication secure, but more importantly, to authenticate and authorize who could connect to watch. And today, that is really the foundation of what people call zero trust security. So there's a lot of innovation we've been making in the security environment in order to deliver on the needs of the enterprise today. And then finally, a third major component of network modernization is agility. And we want to make sure that we are giving our customers and our partners infrastructure that's easy to adapt to change. Let's move to the next slide. In response to all of this, Aruba has an architecture called the Edge Services Platform. The Edge Services Platform has 3 key layers in it; the connect layer, which is really all about unified infrastructure. So we have a very broad set of wireless access points. We have a broad wired portfolio of switching, SD-WAN gateways. We have integration with 5G technology and IoT. This connect layer is where traditional networking begins and ends. But as we talked about, the customers today are not just looking for connectivity, they're looking for secure connectivity. And that's when our protect layer comes in. The protect layer is all about delivering edge-to-cloud security, with authentication, continuous monitoring, policy enforcement and more. Above this, we have our analyze and act layer, which is all about bringing orchestration, AI ops, into the picture, whether it's for the kind of day 0 onboarding, for day 1 provisioning or day 2 orchestration; whether it's processing analytics to derive insights, to use location information, this all sits in the analyze and act layer. This all comes together in Aruba Central, which is delivered as part of HPE's GreenLake platform. Aruba Central gives you one UI from which you can manage all of the Aruba portfolio, across remote locations, branch, cloud, data center, giving you this integrated connectivity, security and AIOps. And then finally, we let customers choose how they're going to consume this. Aruba Central is a cloud-native application, and so the default is to manage from the cloud with Aruba Central. But for those customers that are in industries that want to run on-prem, Aruba Central is also available on-prem. And then more and more, we're seeing everything we're doing delivered as a service, Network as a Service, which we'll get through in a second here. Now coming into the ATM, we had 5 key announcements. And at the show, we had demonstrations and -- demonstrations of these different capabilities. The first is around Aruba Central NetConductor. This brings cloud-native network configuration and security policy services into the picture and leads us to microsegmentation across the enterprise, all the way from the edge, from the wireless edge, across the WAN, into the cloud and into the data center. So this is a key new capability that's becoming part of Aruba Central. Another big topic for us at the conference was what we call Open Locate. So it's a new architecture that we've developed to deliver really good accuracy from WiFi access points. I think you're probably all familiar, you're walking outside and you're looking at your Google map or your Apple map and you can see a location with pretty good accuracy, it's a relatively small circle around the dot that represents you. However, often when you walk into a large building, you'll see that, that accuracy drops. And suddenly, it's saying that you're inside this building somewhere, with plus or minus 500-meter accuracy, and it's not even sure which direction you're walking in. So that experience has been a problem, and that's what we're addressing. There's multiple pieces to this, but one is we have introduced GPS receivers into APs so they can locate themselves. But just that, in and of itself, is not enough because many access points will be still deployed deep inside buildings where GPS doesn't work. And so Open Locate is all about bringing together the GPS information from APs that are towards the outside of the building, which are getting a good signal, and using fine time measurement, which is a WiFi technology for location, combining those 2 things together so that each AP can locate its own position in absolute GPS coordinates. Then it's able to broadcast that information to phones, to laptops, to anything with a WiFi receiver, can now pick up this much more accurate location information. And so we talked a lot about this initiative and how we're moving forward with that. We think it will be game-changing in some industries, where having accurate location information is really important. The third topic we talked about or third announcement was around developing a unified SD-WAN fabric. So what we're doing is bringing all of our WAN-facing assets together and connecting them into the Silver Peak-derived EdgeConnect SD-WAN fabric backbone. So with EdgeConnect mobile, we're dealing with mobile users; with EdgeConnect remote, we're dealing with remote users; the Microbranch users with our Microbranch offering; SD-Branches with the Branch offering; and then Enterprise users with our Enterprise offering, all of these tied together into a single SD-WAN fabric, meaning that unlike competitors, customers don't have to choose a certain kind of SD-WAN technology if they have small -- many, many small sites, and then a different technology if they have large sites. Customers can go with the Aruba fabric and then make a choice on a site-by-site or application-by-application basis, which is the right technology to deploy at that site. They all connect together in a unified way and integrated into ESP and Aruba Central. The fourth announcement was about HPE GreenLake for Aruba. So we have 8 new Network as a Service offerings. Aruba first began working with some of our very large customers around Network as a Service about 2 years ago. And on the first day, I had on stage with me, Colleen Matsuo from Home Depot talking about the work we've done with them as a NaaS customer. Those -- they're in a class of customer where it's a very large customer and we spend often several months with them working out how we could help them operate their network on their behalf. What we announced is a scalable offering, which we believe will be applicable for a far larger range of customers and which provides a foundation for our partners to provide value. So the idea of the new service offerings is that you take something like an AP or a switch or an SD-Branch gateway and take the hardware, the subscription services support and monitoring and bundle all of that in a fixed monthly price and use that as a foundation building block to build NaaS services on top of. The fifth area is around the move of Aruba Central onto the HPE GreenLake platform. So as many of you know, this is a major focus for HPE. We want to have one unified platform that spans Compute, Networking and Storage. And this platform has been released. It's based off technology that Aruba has developed over many years. And at this point, we are moving the Aruba Central into this more generic platform, bringing everything together. So we're super excited about that and the unified experience that it can bring to our users. So moving to the next slide. The next slide has a little more detail on the 8 new service offerings. So we talked about the idea of optimizing for sale through the channels, speeding up deployments. The 8 offerings is 3 for wireless, so indoor wireless, outdoor wireless and remote wireless. There's 3 for wired, so wired access, wired aggregation and wired core. Then it's SD-Branch and then User Insights as a Service. All of these fit under the same framework, with a monthly cost per instance, and the ability to flex up and flex down. We are very excited about the opportunity with NaaS. You'll see at the bottom there a recent survey showed 1/3 of people claim to be using this. 82% said that they were shrinking their network planning cycles due to COVID, or really people are looking for ways to be able to get more flexibility in their deployments. So moving to the last slide. To summarize, we are working in 3 areas to help our customers modernize. One is driving automation using AI to assist users to be -- to make their organizations more efficient, to be able to offload the tedious and error-prone activities. We are building in security to our offerings. So building on the base that Aruba has always had, we have intrinsic security in our APs, in our switches, in our gateways. And we are looking to be able to extend those, the microsegmentation across the entire enterprise. And then finally, we're delivering on the promise of agility, with flexibility, with on-prem or cloud deployment, with an ease of migration, giving customers the ability to use their resources efficiently and recognizing that, for many customers, they're deploying us into a brownfield where there are other vendors, and so multivendor interoperability is very important. So that, I hope, gives you an overall summary of some of the announcements and some of the key themes from Atmosphere. I'm sure you've got lots of questions. And rather than try and anticipate all of those in a monologue, I think it would be good at this point if we could move to Q&A.

[Operator Instructions]

Jason, while we are pausing for a second, I did have a few that have come in over e-mail that I wanted to surface. David, Andrew, what -- the question is essentially what can you tell us about how far the industry has progressed in demand for consuming Network Services as a Service?

So at the moment, it is a small part of the market. First of all, I would just step back and say that Network as a Service is a term that has many different meanings. And so it depends on how you define it. But if -- for the purposes of this question, I'm talking about customers that are consuming their services, paying periodically, typically on a monthly basis, for a service that contains their hardware costs and subscription costs, potentially the operation costs and so on. That's a small part of our business at the moment, but it is very fast-growing and we are seeing tremendous interest from our customers. It comes up in almost every conversation. And I think regardless of whether someone wants to consume as a Service, they're definitely shifting to thinking about Networking as a Service that should be consumed and to focus on outcome, that what they want is not 100 APs, what they -- access points, that is. What they want is secure and reliable wireless connectivity across all of their sites. And so the closer you can get to delivering and offering something that's directly related to that outcome, the more attractive for this for everybody.

And I would just add to that, that as companies are looking to shift their capital models to OpEx-type models, we are seeing a growing demand which is in line with our strategy because we are customer-first, customer-last, we do listen to our customers, and we have got a key focus on driving that ARR component into our future revenue streams as well as customers are pivoting to this way of buying from us as well.

Yes, just one last clarifying thing there is, I think that I am answering with respect to Network as a Service. But obviously, Aruba Central, our cloud management offering, is now pretty mainstream. And so that's different than NaaS.

Okay. Makes sense.

Then the Aruba Central is part of our NaaS offering, but that you all -- many of our customers use Aruba Central without adopting the NaaS offering.

The second part of that question is could you -- what can you tell us about the competitive landscape in NaaS and where Aruba is positioned in this transition?

So we believe that we are really the leader in this space, both in terms of the number of customers we have, in terms of the number of countries that we are able to operate in and the number of offerings that we have. So I think on all of those metrics, we would be the leader.

Okay. Second question that came in here is on Pensando. What -- I mean, we see the news today that AMD is buying Pensando. What can you tell us about the relationship that you've had with Pensando historically? Why has it been important to you? And what can we expect going forward?

So broadly speaking, HPE has 2 initiatives with Pensando, 1 around SmartNIC and 1 around smart switching. So I'm going to speak about the latter one, which is work we've been doing between Pensando and Aruba. You're probably familiar, but we, at the end of last year, announced Aruba CX 10000 distributed switching architecture. And this, we developed in cooperation with Pensando. So it's a joint project around using their technology to deliver security services and other high value-add services at the top of rack. So in terms of the announcement today, AMD, who are buying Pensando, are a long-standing partner of HPE. And so we expect to be able to continue to work and accelerate what we're doing in this area. We're very excited about the customer reception to the 10000 and the future that we have with that.

Okay. Andrew, this is kind of just to elaborate on that question for a second, but what can you tell us about the mix of Aruba's business and growth between sort of what were founded in the WiFi realm and now where we are on campus and also in data center switching?

Yes. So that's a good point. I mean I could have double-clicked that we do. This is not our only entry into the data center switching realm. In terms of our portfolio, we do have other capability that we do sell into the data centers. And so the 10000 switches is one of our new -- newer switches in the portfolio, which we're looking to leverage along with our partnership with Pensando. As you know, we acquired Silver Peak in 2019, and that was named by Frost & Sullivan as the SD-WAN Vendor of the Year. So we have a lot of capabilities that we've brought with Silver Peak, and that acquisition has been a good contributor towards the Aruba's growth and the Aruba portfolio. So we're still seeing very strong demand across all of our capabilities, with our CX switching driving strong share gains as well as our growth in our switching portfolio and also in our SD-WAN and now our secure wireless access portfolio, which we're very well-known for. You ought to see, Jeff, as well, and I think Tarek and Antonio, at the last announcement, mentioned our strong growth. David opened up with our 35% growth, and that's like we've grown over 35% for the past 4 quarters. And that is also translating into strong revenue growth. And we've seen 6 quarters of revenue growth now as well year-over-year revenue growth. So again, we're not seeing any impact on the order momentum in our bookings that we're taking. Our customers clearly know of our value. And we're also seeing very good strong pipeline in the larger deals as well. So we did announce one in Q4 of last year, which was the Home Depot deal. We are seeing similar-size deals coming now that will help us with market share gain and our growth from some of these large deals in our pipeline as well.

Okay. Here's one. What can you 2 tell us about the state of the supply chain in networking in particular?

Yes, I think -- after you, David.

So Andrew, you go.

Yes. I mean I think, more broadly, I think the industry understands the component constraints. It's not new. It's specifically in the older nodes as well that we're seeing some of those issues. But we are seeing that the industry is adding capacity, and some of that capacity will be providing some relief in the newer products and the newer nodes as well. So those would be where we see some recovery first. The other good news is that our customers really understand. And as we've said, like we have built a very good backlog of orders now. We're not seeing any cancellation. We don't expect much cancellation. We feel very strongly about the quality of our backlog and our orders, and we are seeing a lot of understanding customers. At Atmosphere, itself, there were new -- there was always a lot of questions around where we see the supply chain over the coming months. We do feel that the switching is going to take a little longer than in the wireless side of the backlog to clear. But certainly, there is a lot of understanding from the customer's perspective on the whole component constraints and the supply chain constraints. Not sure if you wanted to add to that, David?

I think you covered it pretty well, Andrew. Just so that the audience, like they're probably familiar, but the -- everyone in the industry is facing the same challenges where, effectively, there's the demand for semiconductors outstrips the supply, and that those supply constraints are tightest on the older manufacturing nodes, where people are not building new fabs. And the -- so this is going to persist for some time. But as Andrew mentioned, things are getting better at present for our AP portfolio, still fairly tight for switching. And I think this is common across the industry.

Another question, and this one is, I guess, back to the competition, and that is about Zscaler. Can you help us understand where Zscaler fits into the whole Network as a Service landscape? And do you run into them in competitive bids?

So Zscaler is a partner of HPE Aruba, and we actually work together in many bids. We are not competitive. And so I think the easiest way of thinking about this is in terms perhaps of Gartner's framework. So they launched something a couple of years ago called SASE, Secure Access Service Edge. And they define that as being the combination of SD-WAN kind of on-prem and then cloud-delivered security services, like SWG or secure web gateway; CASB, cloud access security broker; DLP, data loss prevention. They recently released a new Magic Quadrant called the Secure Services Edge Magic Quadrant, which is really focused on those cloud-delivered services. And you'll see that, for instance, Zscaler is a leader in that Quadrant. But none of the leaders there are manufacturers of either network or security appliances or hardware. And so what we see evolving in the industry is there are those that bring security embedded into the network devices, like Aruba, with our SD-WAN portfolio, with our switching and wireless portfolio, where we're delivering on the security that the customer needs on-prem and in particular, defending against threats where IoT devices are compromised, where you're inside the location and you're trying to stop east-west traffic. That's kind of on-prem security and something that Aruba is focused on building into the products intrinsically. And then that's coupled with the cloud-delivered security capabilities from the likes of Zscaler on that scope. And the customers need both. They need the on-prem security for dealing with east-west threats within the enterprise, particularly IoT threats because SASE relates to users accessing apps, not devices. And then they want to have the cloud-delivered security services as a more modern way of dealing with the user who's moving around, from home, to on the road, to working in the branch. And in that environment, we see many large enterprises going with best-of-breed on-prem, and with selecting a vendor like Aruba, coupled with going with best-of-breed in terms of cloud-delivered security, going with a vendor like Zscaler. And so that's why we see a lot of the joint wins.

Okay. Thank you. All right. The same fellow has a couple more questions that I'll throw out. One is a lot of us have seen very, very strong order growth across the networking community, and we are struggling to know how to translate that into durable revenue growth. Do you feel like there is -- do you have any clues for how we could do that? Do you feel that underlying demand is sustainably better than it was pre-pandemic? Can you help us interpret those order numbers?

Yes. I think as we've seen our orders momentum and our growth is we feel very confident. I mean we are talking obviously and we do consider our -- some of our competitors double-booking, are they overloading. Clearly, we've got working capital and cash flow targets we're managing to, so we don't want to be overexposing ourselves and we certainly aren't encouraging or even supporting any of that specifically. So we are very clear around the quality, as I said, around our backlog and the orders we've taken. As David mentioned in his slide deck, there has been a big transition through COVID and the pandemic that has driven networks and businesses into this new environment of hybrid working and has increased the demand overall. And I think businesses are just preparing themselves for what might come. There's a lot of geopolitical issues, there's ongoing COVID crisis in many countries, and it's not really changing the way people are working. And as people are starting to look to return to office, we can see now evidence of that changing across the entire industry, and the demand is still there and still growing. So again, through our channel partners, our customers going direct through all of our distributors, we are not seeing any issue around cancellation or double-booking in our order book, and we feel very strongly about that. And clearly, I can't talk on behalf of the competitors, right? Sorry, Jeff. I just -- I can't talk about the competitors or...

Right. Right, right. Well, as you started, Andrew, I might ask you not to. So...

Yes.

There we go, there we go. All right. So I've got one more here, and then we'll see if I've preempted everything on the lines or not with these inbound e-mails. But the last one is what can you tell us about how the market is tolerating pricing increases?

Yes. Well, again, I think, just broadly, as we touched on there, the component constraints and then the rising commodity costs are evident across the entire industry. And so there have been multiple instances over the prior quarters of our competitors as well as us raising prices. So we've actually raised prices 4 times now. David and I work closely together with these acutely across all of the portfolio and managing those with us. Again, we're obviously seeing increase in prices from fuel costs. We're seeing increase in prices from logistics. And because we've got such backlog, where we're looking to clear things, we're having to do a lot more air than we are traditionally doing, that we've done in the past. We've had a good balance between sea and air, and that those are all translating into pressures from a profitability and a gross margin basis. So the price increases are necessary for us. They are being received well by the customers. Again, evidence of that is just in the bookings growth. So over the 4 price increases we've done, we're continuing to see an overachievement and orders momentum as well. So it's not changing the customers' buying behavior when prices go up. In fact, what it is doing is actually driving them to secure more product at the current price before additional price increases come. So there is a continued level of understanding from that, and we're managing that well in our communications with our customers as well. But it is necessary for us in order to maintain our innovation, our growth as well as our profitability targets overall.

Okay. Jason, do we have any in the queue? Or did we preempt all of the questions that came in by our e-mail?

There are no questions in the audio queue.

Okay. All right. Well, with that, David, Andrew, do either of you have any last remarks that you would like to make, or we can close it here, if you would like?

No remarks for me.

Yes. No, just thank you for your participation and -- your participation and support today. And we look forward to speaking to you again soon. Thank you.

Wonderful. Thank you both very much, and thanks, everyone, for joining. We'll speak soon.

Ladies and gentlemen, this concludes our call for today. Thank you.