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

Hello. Good morning, everyone. Thank you again for joining us on another of our View from the Top CEO call series. I'm Wamsi Mohan, senior IT hardware analyst at BofA. First, I need to mention that conflict disclosures relating to the individual companies or securities discussed on this call today can be found on the call invitation. With that out of the way, we're delighted once again to welcome President and CEO of HPE, Antonio Neri. Antonio has been doing this with us now for a few years, so we really appreciate him coming back on. Always had such excellent feedback on such candid responses from him, so it's always a pleasure. Especially in times that are more puzzling for investors because of all the market volatility and all the macroeconomic changes, it's extremely timely, and we really appreciate Antonio's time. As you all know, Antonio became CEO of HP in 2018. And prior to that, he had a very active role at the company as EVP and GM of HP's Enterprise Group, which included the company's servers, storage, networking and technology services business unit. He's been at HP for over 25 years. He's overseen a lot of innovation that's come out of HPE, including, for some of the people who've been around long enough, Apollo and some of the HPC platforms as well, just to name a few. He's been instrumental in the HPE Next program from several years ago. That was an initiative that helped save HPE approximately $1.5 billion in costs through various actions. And he's more recently spearheaded the headquarter shift to Texas as well, and I believe Antonio is coming to us today from Houston. And he's also led a lot of several interesting M&A deals. I'm sure we're all very eager to jump into Q&A. But before we get started, we also have Andy Simanek from IR who needs to go through some quick disclosures. Andy?

Great. Thanks, Wamsi. Appreciate you having us. So you will hear some forward-looking statements in today's discussions. These are based on risks and assumptions that are described in our annual report on Form 10-K and Form 10-Q. Our actual results could differ materially, and we assume no obligation to make updates. More details can be found on our website at investors.hpe.com and our recent Q1 earnings announcement press release dated March 1. So with that, Wamsi, appreciate it, and I'll turn it back to you.

Thank you so much, Andy, and thanks, Antonio. Welcome again. A pleasure to have you -- yes, good morning. So the thing that's on the topic that's on most people's minds is really what is the trajectory of Enterprise spending. We all read the news. We see how things are sort of softening from a consumer standpoint. Obviously, that weighs on sentiment. And the conclusion that most people are coming to is that there could be a somewhat material slowdown in Enterprise spending. So from your seat now, as things are starting to open up and you're possibly meeting more people face-to-face, maybe you can give us some sense of the sentiment out there and what do you think about the trajectory of Enterprise spending in this current macro climate.

Well, again, Wamsi and everyone, good morning. Thanks for having me again. It's always a pleasure to speak to you and current investors and prospect investors. I have to say, Wamsi, first of all, we live in interesting times, as you said. And our job is not just to advance the business but also the communities we participate. And I'm speaking to you from Houston, Texas, our new headquarters, where we brought to life an amazing site for our close to 3,000 employees here in Texas, in particular, in Houston, with an amazing digital experience and a space where we actually welcome customers, which is what I spend most of the time, Wamsi. 50% of my time is with customers and partners. I have to tell you the demand continues to be unbelievably strong. Of course, we look at the future with interest to see what's happening with this very unfortunate event, which is the Ukraine-Russia situation, the continuous geopolitical tensions that we all live. But I have to say from the IT perspective, demand continues to be very strong. Last week, I actually hosted 15 customers which we call the Board of Advisers. We talked about our strategy and where we're going, and they continue to be very bullish. But I think HPE is in a prime spot to capitalize on these new emerging trends driven by the digital transformation we see, which is no longer a priority. It's actually an imperative, and that has created a new world, which is the world we call the edge-to-cloud world. And this is where our strategy is centered around with a platform called HPE GreenLake. And if you think about the demand we saw in the last 3 quarters, in particular, we saw 3 consecutive quarters of bookings orders, right, that exceeded 20% year-over-year growth. And obviously, when we think about what customers are consuming, when I talk to them, they need more connectivity and obviously needs to be secure because that's the on ramp to digital transformation. If you are not connected, you can't digitize your processes. They need cloud but cloud in a form of an experience for all the apps and data, therefore, is a hybrid journey. And then what they're looking for is insights from the data, and this is where a lot of the action is happening. We have done studies and we talked obviously a lot of customers, and we look at the brands that have done a better job mining that data. You see those brands performing better in the marketplace. And last but not least, I think the pandemic obviously has created an environment where customers are rethinking how to consume IT, and the flexible as-a-service consumption model is an opportunity that's growing. And that's why GreenLake in our Q1 results that we announced a couple of months ago grew 136% year-over-year. So demand continues to be strong, and we are very bullish about what we see in the next coming quarters, understanding the current issue right now, supply availability with a very, very big backlog.

Yes. So maybe, Antonio, you can talk to us a little bit about the backlog. When you've sort of -- you alluded to the extremely strong demand. You alluded to the fact that orders have been 20% plus, growth across various parts of the business. How are you seeing that order trend, if you're seeing any changes in that order trend? And then just about the backlog itself, like how comfortable are you that this is backlog that is not a result of people looking at the supply chain constraints and double-ordering in various places and just sort of the comfort level that you have with the backlog or any metrics you can help with around that?

Well, let me start by saying we don't think the backlog has peaked, Wamsi, which tells you the demand still is going to continue to be very strong. So Q1 backlog was the highest ever in our history and bigger than Q4. If you recall, when we started the pandemic, we exit 2020 with a backlog that we cleaned at the end of Q4 last -- that year. But now we have a backlog which is a multiple of that backlog, and we don't think we have peaked the backlog. Even though we continue to make some progress on the supply availability through, of course, the work we do with our suppliers, our long-term agreements, the fact that more capacity is coming online, that trajectory will continue to be better, but we don't think it's going to be what it needs to be until late 2022, beginning of 2023, which means with that big backlog, plus the strong demand, we continue to have a significant tailwind in our second half and into 2023, which give us the confidence to deliver what we committed at the Security Analyst Meeting, which was that 3% to 4% revenue CAGR, with areas that are going to grow way faster than 3%, 4%. Because if you look at the Connectivity business, we call the edge business, with our Aruba portfolio, that business actually from the bookings perspective, has grown 35% for 4 quarters in a row, and we see no slowdown in that business. HPC now is getting close to a $3 billion of backlog. We normally have talked between $2 billion and $2.5 billion, but we continue to win some amazing deals, large deals, both in the commercial space and the public sector space. And obviously, storage is actually very good, is our ability to convert at this point in time and then the as-a-service. The as-a-service is a significant catalyst for us to drive the pull-through of compute storage and networking that you can consume as a service, but it all really comes down to bring the cloud experience to wherever the workloads and data live. So we believe it's going to continue to be very strong, the demand. Progress will be made, but that gave us a very strong momentum. In answering the question double booking, I think customers are planning ahead at this point in time and is several reasons for that. Number one, obviously, is the ability to get the products on time for whatever project they have. Number two is the inflation, right? So obviously, they don't want to pay more than they should by locking in on a price point that obviously protects them. And then number three is, boy, the demand for anything that's cloud and data is off the chart. And we believe we have a portfolio that actually competes very well in the market in a hybrid approach because workloads will live both on-prem, off-premises and more and more at the edge.

Okay. That's very helpful context. Maybe, Antonio, you can talk a little bit about the supply situation, right? I mean, this has been a difficult supply situation for every company across the board. And when you look at some of these challenges, one is around semiconductor availability, and then there is inflated costs with logistics and freight especially. How are you navigating sort of this more difficult supply environment? And when do you think that starts to normalize?

Well, I mean, if you take Q1 as a major reminder of our execution, I think we executed very well, very solid performance, both on the revenue side, and in particular, on the gross margin and profitability side. So on the revenue side, it's all about our ability to convert in time and obviously prioritize customers in ways that we think is appropriate in terms of whether it's GreenLake or whether it is mission type of -- mission-critical type of customers. So again, we're working with our suppliers. I think one differentiation we have is a broader portfolio that allows us to drive substitution of components. The other one is, I think, best-in-class engineering capabilities because the ability to certify, qualify components faster is a key advantage these days. But again, like I said earlier, right, this situation is going to persist for some period of time. And the reason why, think about it, right? So when the pandemic hit, everybody went into preservation mode, which means a lot of suppliers did not invest in capacity, planning for that capacity because they didn't know what the demand will be. But as the economy recovered and the demand for IT, in particular, was much stronger than expected, now they got caught a little bit in the middle, right? So to invest all that CapEx again, to increase capacity in these fabs, if you will, to increase the production of substrate, it will take time. On the other hand, there is also a transition on technology, meaning from the older technologies like 28 nanometers down to 10 or 7. And that also created a little bit of dislocation, particularly on the older technologies side. That's why automotive and some other industry have been impacted most. But when you think about the low-level components, the things that go into power supplies or microcontrollers, most of that are still in the older technologies. So we are navigating through that. But I think what we're doing really well, and I want to highlight this, is our ability to manage cost and pricing. Because when you think about our gross margin, which is a very important metric, which obviously Tarek and I look every single day, we improved gross margin by 90 basis points despite the fact that we have supply shortages and despite the fact we couldn't convert everything we wanted. So I think that's a discipline you should expect, and this is something that this company does extremely well, and that's why we delivered the results we delivered in Q1.

So, Antonio, if we just parse that a little bit and say these gross margins, which have been very impressive, and it's been great to see them trending in the right direction, how much of that would you say is pricing, especially in an environment where you have supply chain challenges, so customers might be more willing to take whatever they can, and you can configure the SKUs to higher ASP, higher mix SKUs that can also help gross margin? So can you talk a little bit about the sustainability that you see and how much of this was potentially pricing?

Well, you have to break our portfolio, right, by each of the segments, right? If you think about Compute, which obviously is a large segment for us, 2/3 of the AUPs, the average unit price, is structural, meaning it is about the type of components we attach, how we configure the product and so forth. And especially as new technology comes available, this compute platform becomes way more denser, which means you can put more gigabytes, more memory, more compute power in the same form factor. And therefore, customers get a better utilization of those systems. So 2/3 is structural, and 1/3 is obviously the cost and the pricing. So we believe in the short term, this is totally sustainable as we see the CPI and inflation rate, what it is. As capacity becomes more available, obviously, that will be a headwind. But think about it this way. The analogy I bring is that when you take off, right, is when the cost goes up. It's like when you take off with a plane, it goes fast, right? And when you land, takes a little bit longer. So it's more durable on that. But at the same time, we need to understand the changes in the structure of the products, which, in 2023, we, as a company, are going to come with a new generation of platform, which we'll call a Gen 11. And that also will offset some potential pressure from the cost declines we may see. Now it's going to come down to demand. It's going to come down to everything else. We feel pretty positive about that. Also understanding the attach rate of services is a big component to maintain the gross margin, which is the penetration rates of attach of services to the platform. On the other part of the portfolio, those are now pretty much structural, right, in many ways. Think about the connectivity portfolio, those have run very high double digits. If you think about storage, the same thing. But the one thing we are seeing more and more, which is a benefit to us and an advantage, is the as-a-service model with GreenLake. Everything we do caters to the GreenLake platform, which means the software and services component is much higher. And if you see our Q1 results, which we disclose now the mix of services and software to the hardware, is now 2/3 when you buy as a GreenLake. And the more we do that, the better it is in terms of deferred revenue, higher gross margin. So that's why, over time, you're going to continue to see a gross margin improvement through managing these segments and the mix that we bring together in the as-a-service side of the house.

That's super helpful. Maybe just to talk about freight and logistics. Are you seeing those continue to remain elevated? And what's your sort of assessment on maybe when that starts to -- is that peaking? Has that peaked? Are you expecting things to improve here?

I think that we're going to live with that in this environment for a while, Wamsi, for several reasons. Number one, logistic channels are overloaded, obviously, with the demand we see in the market. And remember, we have a global supply chain with 30 nodes around the globe in every geo because we obviously need to build products closer to the customers. But at the same time, a lot of components come from the usual location we're familiar with: Malaysia and Taiwan and China and the United States. So we have to be able to distribute those last points where we complete the -- manufacturing the product before we ship it. So the legs to customers from the manufacturing to the customer is not the biggest problem is from those as, call it, major hubs to these locations. And so there is definitely a pressure there. And then on the other hand, it's obviously the cost of fuel, right, as we see the cost of fuel, what it is. But again, we pass those through our pricing discipline, right? So that's why, again, in Q1, you saw what you saw, and you will continue to see that from us going forward. But ultimately, we continue to work on our supply chain resilience and where we build the products to be able to manage some of those challenges in a more dynamic way.

Is there any sort of gross margin like characterization that you can help us with, Antonio? And how much negative pressure is being put on gross margin because of these elevated costs that hopefully will maybe reverse, I don't know if it's this year or next year, but at some point, should reverse? And so is it sort of in the 50 basis points? I mean, how should we think about it?

Yes. It's hard to come to a number because when you think about it, there is the cost of the commodities, the cost of the base components, right? So there is the value commodities, the lower components. Those are components, by the way, are cents of a dollars, right? Although, in some cases, go for dollars value at this day. So it's very hard. And then on the logistics side, there is not one number we can pin to it, although logistics tends to be the lowest part of our cost structure, if you will. Most of our cost is in the cost of sales of the product itself. So if you think about it, we deliver 34% or so gross margin in Q1. We believe that's totally sustainable and again as we keep driving the mix and that pricing discipline, particularly on Compute. And just to give us a very good data point on that, so we reported on Compute alone, 13.8% operating profit in Q1. That was bigger than some of our competitors when you combine compute, storage and networking together. So that tells you what we -- how we manage the business with incredible discipline. And we pursue profitable growth business, not volume for the sake of volume, if you will. And that's why I think the balance in total would come well for us.

Okay. That's helpful. So, Antonio, one of the conversations that we have been having with a lot of investors is some sort of scenario analysis around recessionary impacts because, clearly, you mentioned inflation. The Federal Reserve is going to a much more tighter monetary policy than we have seen in maybe over a decade. So as we think about that, I mean, clearly, there is risk, some risk that we go into a recession. And I was wondering if you could maybe help investors take through either what is peak to trough sort of earnings scenarios that they should think about. Or alternatively, maybe how are you preparing the company in the eventuality of a recession? What are the actions and levers that you have at hand and disposal and what you're planning for?

Yes. I think, obviously, we look at the economic data like everybody else. And obviously, you guys are one of the largest banks in the world, and we leverage some of your services to understand what's -- what we think is going to happen. But ultimately, how that translates to IT spend, right? That's a very important aspect. It's not just economic trends but what impact will have to IT budgets. Here's the thing. I think we are living now to a point that the economic data and the IT spend are diverging a little bit. Here is why. It's because we live in a world where data is exploding, where people need to get more insight from the data, where in this environment, you need to be digitized. And therefore, we're going to see a little bit of divergence between IT spend and whatever the economic GDP data will tell us. And that was validated, by the way, last week with 15 very large customers we've worked with. And that's kind of an interesting data point. So -- but from the preparation perspective, remember, we went through several crisis here. And one of the, I guess, the marquees under my tenure is managing crisis pretty much over here from natural disasters to geopolitical tension, to tax reform, to global pandemic, to supply chain disruption, and I can go on and on and on. What we have done, though, is make this company way more resilient. So we -- remember, when we announced our Q1 results in 2020, Tarek and I went out and said, "We believe there's an opportunity to make this company more efficient, more leaner and better prepared for whatever cyclicality we're going to live." And we enacted a program after HPE Next, right, that is going to return $100 million to shareholders, but at the same time, be more agile and more nimble when this situation may or may not happen. So we believe we are much better prepared to handle whatever is needed. We're going to create quite a bit of -- generate quite a bit of free cash flow. As you recall, we committed, for the next 3 years, $6.5 billion to $7 billion of cumulative free cash flow. And then each of the businesses are set up in a way, as we pivot to the as-a-service, that actually, in itself, is almost like a hedge, if you will, because customers will, again, if there is a recession, they only pay for -- they want to pay for only what they consume. And that environment, HPE GreenLake, which is the core of our strategy, which is an edge-to-cloud platform where you can consume every service you need. Whether it's connectivity at the edge, whether it's a cloud, both on-prem and off-prem, including the public cloud, or you want data insights with data analytics, we bring it under one platform, and you only pay for what you consume. And that, to us, is a huge differentiation because we saw that at the beginning of the pandemic, where customers said, "I don't want to invest in more CapEx. I just want to pay for what I consume." And now that business, just in the last quarter, we had another $500 million in TCV, and that should unwind. And now we have now $6 billion in the balance sheet. It should continue to unwind as we go forward despite what we may see or don't see. So we feel we are pretty well positioned for that. And as always, we execute with discipline, and we make decisions based on return on invested capital.

No. That's helpful. So, Antonio, you mentioned before that the order growth is very, very strong. It's been north of 20%. You also reiterated sort of where you expect revenues to fall for the year. When and how does this convergence happen between orders and revenues because there's such a wide gap between the 2? How are you thinking about when and how that convergence happens?

Well, I mean, if you think about it, right, so in Q1, we reported 2% year-over-year revenues to $7 billion, and then we booked 20%. So there is an 18% spread, if you will, right? So as I said earlier, right, so this should unwind as we go forward. We believe in the latter part of 2022. Obviously, this year, we should start getting some of the benefits of that. At the same time, we have a business which is the HPC and AI business, which has a lot of large deals being deployed, as we speak, which the recognition of the revenue is not the typical recognition. We have to deploy the system. We have to turn it on. We have to run the workload that the customer has. And then eventually, they give us the acceptance. Once they give us the acceptance, we can recognize that revenue. And in that point, you may have a quarter, right, which we're going to basically deliver potentially several hundred million dollars over because the fact of the matter is just get the recognition of a system like that. So we believe, again, as supply continues to improve and the work we are doing, plus some of these HPC systems, we start seeing more and more convergence in the latter part of '22 and definitely carry a lot of that into '23, which is why I'm so confident about our ability to deliver what we said last October despite some of these challenges we just talked about with inflation or potential recession, also because our IT demand is so strong. And that's why I don't think it's going to have a tremendous impact to what we do, particularly because of our strategy.

Okay. That's helpful context. Antonio, you guys have called out on the last call about operating at elevated inventory levels, and you guys have been buffering for inventory, just to ensure that you're dealing with the supply chain issues a little bit better than maybe other folks are. Can you help us think through how this elevated inventory level has helped you? Are you seeing it helping you? And when does that decline? And what impact that should have on your free cash flow targets?

Well, let me start by reaffirming our commitment to the '22 free cash flow, right, which Tarek and I guided, $1.8 billion to $2 billion for the year. So we believe that's totally in the reach. You're correct. We have been investing in inventory actually since calendar Q4 of 2020. So it's, whatever, 6 quarters, if you want to call it that way, 5 quarters and change. And that's because we already knew at the time there will be a challenge, right, fulfilling customer demand, although we did not expect it to be this strong as we see it for the last 3 quarters. That said, we build inventory, and the inventory now is almost 2x we used to have. And we made strategic buys in specific areas that give us a competitive advantage. Now some of that inventory is now going to be transitioned as we get these low-level components. And therefore, the working capital scenario is going to flip, right? So which means the inventory goes down, free cash flow goes up, and the revenue and profit should follow the mix that we talked early on. So we think, as we go forward -- and remember, this year, we're going back to the traditional seasonality that we used to have, Wamsi, where the first half is a consumer of cash, if you will; and the second half, we generate a lot of cash, is because of the seasonality of our business. So we feel pretty good about where we stand at this point in time. But ultimately, it's going to come down to the conversion of that backlog into revenue and profit. And ultimately, the working capital gets taken care of itself. Now that said, we'll continue to make strategic buys where it makes sense. And sometimes it comes down to timing. Sometimes, it comes down to specific demand that we see that other customers -- sorry, other competitors don't see. Our portfolio is rich and wide, if you will. And so we have to continue to do that because we believe the opportunity is there. This is an opportunity to generate significant profit as we go forward in the next 4 to 8 quarters as we clean that backlog.

But what would you say, Antonio, is -- you mentioned sort of you're running at inventory of maybe 2x the level that you were before a year ago. But where would you say most of that inventory increase has happened, like in which business segment has it happened? And what sort of components would you say would you highlight?

Yes. Well, it's in all the businesses. If you look at our Aruba business, right. It's just on a tier, let me put it bluntly. It is so strong, it's unbelievable. The backlog is multiple, multiple of what the historical should be. And that business, obviously, is dependent on ability to procure radio because, obviously, WiFi is one aspect or chipsets on the switching side. And by the way, a lot of the chipsets are designed by ourselves. We don't -- while we have commercial silicon in some aspect of the portfolio, a lot is actually our own silicon. And that's why you see that very high gross margin because the software and the silicon is developed by Hewlett Packard Enterprise. But I will say the edge is very high in terms of backlog. And then the usual things, right? You're talking about mostly in the commodity plays like NAND, DRAM, and those are the 2 big ones. But we're really dealing, the fighting is not at that level. It's in the low components like microcontrollers, power supplies. But eventually, when it becomes available, this higher-value commodity cost gets eliminated from the inventory. So it's not just the quantity, it's the value of the part. As soon as the lower cost comes in, then you eliminate quite a bit because a lot of the products are just waiting for that to come in and which is complete the shipment.

Antonio, we mentioned about the strength in free cash flow and sort of that recovering nicely over the last few years. Can you talk about how you're thinking about M&A, especially that some of the software and even the hyperconverged assets have come down significantly from a multiple standpoint? How are you thinking, both in terms of acquisition as well as anything that comes to mind in terms of divestitures?

Sure. Let me start by saying always think about M&A in 3 forms: organic, inorganic and through strategic partnerships. Obviously, on the organic side, it's always a better use of our balance sheet because it's a better return, and we have made strategic investments over the years. You mentioned some at the beginning of this call, but I will mention the work we're doing around storage with block storage and data services or what we're doing, obviously, with GreenLake. These are high-margin or higher-margin businesses that will have a big return for our shareholders. On the strategic partnership, we do both selective partnerships where we want to deliver a joint value proposition from the engineering perspective and then with margin accretion on top of that. And then there is what we call the Pathfinder, where we actually go to entry companies, start-up companies that have disrupt in technologies, and we make investments. And you saw some of those over the years where we either -- we brought into our portfolio, we integrate in a solution for our customers. Or in some cases, it got sold, and the return for our shareholders was great because we've got a multiple of the money we invested. And then on the pure M&A, I have done now 25 acquisitions over the last 5, 6 years, starting with Aruba in 2015. And those have been uniquely targeted in these 3 domains: edge, cloud and data. And that's how we'll continue to look at it. Obviously, a lot of that is software because ultimately, you have to think about the value gets delivered through the software and the services integration, and the hardware continues to be more a cost of sales over time, that you integrate into that value because more durable. But from the hardware perspective, we see higher margins when we lead with software, no question about it. So we believe -- I think HPE is in a prime position to capitalize on the edge-to-cloud trends that we see. We'll continue to look at what are the potential targets but always in the return on invested capital framework we have laid out for many, many years, which Tarek and I hold ourselves accountable, right? And if you look at some of the acquisition, let's say, in the last 12, 15 months, whether it's Silver Peak, right? So if you think about the edge, obviously, WiFi and LAN convergence happened early for us with the acquisition of Aruba and the reverse integration of our switching portfolio, then what was the next click to the unification of connectivity was SD-WAN. 3 years ago, it was just maybe $1 billion or $2 billion in total addressable market, but now it's growing so fast. It's like $5 billion, $6 billion, $7 billion, depending on how you size it. And Silver Peak give us that capability, especially when you look at the distributor world we work in. So if you're working from home, Bank of America will say, "Wamsi needs these services," and they can provision that with a single touch and then maintain an SLA for your services because of the topic you do -- the work you do, but you do it with security, and that's why SASE is another component that gets integrated in the SD-WAN. On the data side, think about it right, we did an acquisition like Determined AI as a prepackaged AI because customers tell me all the time, "We love AI. We want to get forward, but I don't have the skills. I don't have the capabilities to train a model and deploy a model, whatever the model needs to be deployed, whether it's on-prem or off-premises." So Determined AI, together with HPC and AI business, allows us to democratize, if you will, HPC and AI to customers, which, by the way, we can offer as-a-service, so they don't have to invest millions of dollars in capital. And then more and more around data services. Yes. You need to store the data. You need to drive governance. Obviously, you need to drive compliance but ultimately is what is the services you had on top of it, backup recovery, block of storage or ransomware protection services. And that's why the acquisition of Zerto was unique because a unique technology that allows you to protect your data and restore data with a few clicks, God forbid you get encrypted without dealing with a ransomware aspect, and also be able to move data in a very efficient and cost-effective way in a true hybrid environment. And all of this is about delivering against our vision from edge to cloud and ultimately drive sustainable, profitable growth.

Okay. That's helpful, Antonio. The other part of your portfolio that a lot of people have a lot of interest in what your strategy is around H3C. Clearly, it's been a great asset for you guys. It's shown tremendous amount of growth in the past. You guys have this put option that's coming up. How should investors think about how you're evaluating what to do with H3C?

Well, this is one of the, call it, divestitures at the time, although it was a joint venture, right? I would like to call it more that way that I did with Meg in 2015, where we saw at the time -- listen, China is the second-largest IT market on the planet, but I will argue today is probably the fastest-growing market on the planet. And obviously, a lot of this is commercial-driven, a lot of this is government-driven. At the time, we said, do we want to own an asset that will decay over time because the field is not level to play? Or we want to own a minority of it, although not a lot, because it's 49% and growing? And that has proven to be right. And that's why with Tarek, we disclosed how much of that market is improving our EPS, and it has proven incredibly successful. So we still have time to make that decision, Wamsi. We're going to make the right decision in the context for shareholders but also what is right in the market. We understand all the geopolitical situations, but it has worked for both, China and us, in many ways, right? Because having a partner like us, remember, we take some of the products that they built into the rest of the world. And they also take some of our products they buy from us. We don't share any IP. They just buy from us to support multinational companies in China. And that asset is growing. It's the most valuable asset in that structure and we believe has a lot of upside. On the other hand, we need to understand what we can do if we decide to exercise the put. We believe that put has more value. And so we have time. And over the next couple of months, we'll communicate what we're going to do.

Okay. And just to maybe take down a little further, Antonio. Would you say that when you look at your JV partner there, right, like they -- this asset is contributing a material part of the overall value of that entity. And so on the other hand, they've had other parts of the businesses that have been more challenged and that require additional capital injection, so to speak. And so their balance sheet is not quite as pristine. And so when you think about it through that lens, do you feel that if you were to exercise the put, that there is the liquidity there and the availability of capital to come back to HPE? Or alternatively, is that something that you take into account as you perhaps consider maybe an extension to the put or renegotiating the put or whatever may be the other outcomes that you're contemplating?

Yes. So again, it's exactly what I said, right? H3C is probably one, if not the most, valuable asset in that restructuring, that Unigroup is driving, and H3C is part of Unisplendour which sits inside Unigroup. We have great conversations with the selected party. If you exercise the put, generally, there will be no issues, but it will take time. We have been able to, obviously, extract the cash in the previous 51% sale, but it will take quite a bit of time. On the other hand, we are assessing the momentum we have with H3C in China because it's the China champion in many ways and the growth they're driving, particularly on the back of some of the challenges Huawei went themselves. And so -- and we believe the current put, which is again set at 15x over multiples EBITDA, we don't believe is sufficient in our mind because we believe the value of the asset has more. So we are assessing what is the best outcome here. It could be selling of the put or it can be a renegotiation of the put. Now strategically, if you decide to exercise the put, you basically decided not to be in China. There is no way you can reenter China. It's impossible, I mean, at least in that short period of time, which means you are vacating a very important market. We know all our competitors are struggling in China, so I think everybody sees our setup there as a unique advantage. And by the way, we basically are just an investor, right, in the entity, although we have significant rights, right? We have significant rights. The Chairman of the Board, plus a lot of the direct members of the executive team reports to the Chairman, not to the CEO. So again, we have a little bit of time. We want to understand more what the new investor has in plan, and we have great dialogues with them.

Okay. No. I appreciate the follow-up there. Antonio, there's obviously been a big shift to public cloud over time that is still underway. How are you thinking about the dynamics between on-prem public cloud? And how are you actively positioning HPE to address some of these shifts?

Well, I think we -- again, our strategy is very clear. We want to be an edge-to-cloud company that's business through our platform that eventually can consume as a service if you decide to do so. And I talk about the megatrends we have seen for some time, and some of them were accelerated by the pandemic. The need for secure connectivity, particularly at the edge, because that's where the vast majority of the data is created. It's not created in a public cloud. It's created where we live, where we work, in a factory floor, in a hospital, in an entertainment venue, in hospitality and so forth. And so for us, that's a massive opportunity. That's why in 2018, I made the comment and the commitment that the edge will be the next frontier, and we will invest $4 billion over the next 4 years. And that's what is resulting now with an amazing platform that you had unification of the connectivity, plus security and analytics, that's growing 35-plus percent for 4 consecutive quarters. That's the Aruba business. In 2019, I said that we believe customers want to consume IT more flexibly, and I made a commitment to offer everything as a service by the end of 2022. That was 3 years ago, and we are well on our way to do it. And that's why you see the results of growth, 136% in Q1, and it continue to be super, super strong. But now with the pandemic, what we see is the way we work has changed. You and I were chatting just before the call, right, how people are going to work, are going to work in hybrid environment, which means more and more people will be at the edge. Less and less people would be in the office, although will be hybrid. To manage that level of experience, you need a different connectivity and cloud experience that has to become together as a part of a platform, and that's where our HPE GreenLake is the core tenet of our strategy. And then remember, one of the challenges customer has, and it was again evident the last week when I met with them, the 15 I was talking about, they all go in through multigenerational IT. They have workload and data, a legacy infrastructure, very expensive to replatform. Therefore, what they want is modernize and make it more efficient. They have workloads that are gravitated to on-prem because of latency, because of security or because of data gravity. And their workloads that are created or workloads has lift and shift to the public cloud. But the fact of the matter is a hybrid experience. And what customers told me was fascinating. I'm talking about large customers. By the way, Wamsi, one of them was your bank was here with us. They told us is I need a partner who can bring this hybrid experience to life. I know I'm going to have a multi-cloud, which means I may have workloads in AWS or Azure or Google. But the moment I do that, I have to connect these pipes. These 2 don't talk to each other. And then I have -- obviously, we're loading it on-prem. And the problem is how you manage that environment in an experienced, unified way and ultimately in a cost-effective way. That's what GreenLake does, and we bring it all the way to the edge. And that's why I'm very excited about our strategy because we add value on top of the public cloud, and we can grow with the public cloud, not different we are doing with the data services business at this point in time through the introduction of the services we made a month-plus ago. So we see growth through the public cloud, growth in on-prem and growth as a hybrid control plane.

Okay. That's helpful context. When you think about -- you mentioned earlier about next generation of server product coming out next year, and I'm sort of curious how you think about replacement cycle dynamics and how are you expecting sort of Gen 11 to be different from Gen 10 in some ways in terms of maybe the opportunity for customers to upgrade. What do you think like the ASPs are going to do because of all these more intensive workloads that customers are having to use? And just from a unit perspective, I don't even know if it makes total sense to look at the market from a unit perspective anymore, but any color you can share about sort of what you're seeing in your pipeline in terms of the server refresh cycle?

Well, if you look at last quarter, our bookings were 20% up year-over-year. So clearly, there's a pent-up demand for modernizing and, call it, cloud-define, if you will, their infrastructure, right? So the journey to provide a public cloud experience on-prem still needs to happen. And that's why I'm excited with GreenLake because we can bring the public cloud experience on-prem and do the compute refresh, if you will, with it, which means is that a more efficient compute platform, which is also necessary in term of carbon footprint. With GreenLake actually, not only we can provision cloud compute anywhere they want it, right, anywhere they want it, pay only for what they consume, which means the IT cost goes down, at the same time, improve the sustainability metrics by lower carbon footprint because a lot of those assets generally don't sit in the balance sheet, on their balance sheet what they consume as a service. And even if they sit on the balance sheet, only pay for what they consume, so which means we can turn it on and off, even if it's their own premises or in a colocation. So we believe there is going to be another cycle here coming from different technologies, right, as more core counts become available, which means certain workloads will be able to exploit that, which means they can get better performance and lower energy cost. By the way, we can actually charge per core, which is unique in the industry. No one has done that. We have done that together with Intel, and we are talking to AMD at this point in time. But as the CPUs become more core-intensive, the other thing it has done is also increasing the amount of memory around the CPU. But remember, there is another inflection point that's happening. Part is driven by what we have done with our partnership with Pensando, which I'm very excited that now is part of AMD because AMD and us have a unique amazing relationship, is the fact that the compute architecture is also shifting. There is a trend to go to more in-memory, and that's driven because the amount of transactional things that needs to happen, think about payment systems, right? That's a big in-memory computational capability, not different than blockchain, by the way. On the other hand, you have HPC, which needs a lot of GPU and CPU. But if you look at the cloud architecture, the ability to connect from the cloud to a compute resource is going to come through the network. And that's why this emergence of distributed power units where the CPU gets offload to the network with security embedded into it, and we have our own intellectual property there with our own silicon and our own operating system. Together with the silicon, we have been working with Pensando. We're actually going to drive another cycle, if you will, for enterprises to become service providers. Because in the end, every enterprise will become a service provider, ability to provision a cloud, whatever they need and manage it from the cloud is going to be essential. And everything we do, think about it this way, Wamsi, is managed by GreenLake, connected to the end point and then attach software to it in a subscription model. So over time, you're going to see compute sold as a SaaS in many ways, but the hardware comes with it. But you're subscribing to the software, to the compute, not just buying the server, where there is both CapEx and OpEx, transitions, and we are excited about being able to offer both in a modularized way.

No. That makes a lot of sense. I just want to touch briefly on -- some of your other competitors have also started to offer products as a service, and I'm just wondering, as you think about, and you guys have been doing this now for a while, like what's your -- what do you think the key differentiating factors are when you talk to customers? What is it that makes them choose HPE, say, GreenLake or maybe Dell APEX, for instance?

Well, it comes to 3 layers. One is the experience and be able to offer from edge to cloud because it's not just about consume and compute storage in an elastic way. You need the networking capability. You need also the software to make it happen. Second is the IP that you bring to the infrastructure to as-a-service. There is one aspect of infrastructure as a service. The other one is the services you put on top of it. And the third is the back-end capability to their scale. And this is where, Wamsi, I think is important to speak about that. You talked at the beginning of the call HPE Next, right? So that was 4 years ago. As of March 31, believe it or not, 18 days ago, we were completed with our modernization and transformation of IT, which, at the back end, we used to have 10 ERP systems and 24 master data, which means I have 24 version potential, Wamsi. Now we have one of each. But what we have done behind the scenes, either in the SaaS and the consumption on the platform, massive scale. So -- and that's why now it's bolted now into GreenLake. And GreenLake today, with the addition of the Aruba, has 125,000 customers on the platform. We manage 2 billion data points per hour on behalf of the customer. So all the data analytics where we give it back to customers to build into the mobile apps or to do metering and billing, we manage that as a part of the GreenLake. So it comes down to those 3. It takes many, many years, but it comes down to the software you have and the intellectual property you add on top of this IS, plus the back-end capabilities. We -- I guess we are trendsetters, if you will, but we have said the world is hybrid and we believe now the world is going to go to more an edge to cloud. That's why it's hybrid and then ultimately more as a service. It will take many years for the competitors to catch up, particularly the Dells with APEX or the Lenovo with Truscale and so forth. And that's why we believe we have a competitive advantage that, for us, is to continue to stay ahead. And the only way to stay ahead is to continue to out-innovate. And if you look at our announcement on March 22, we brought to the market some very, very industry-leading offerings, the unification of the platform from edge to cloud. We added block of storage and data services. We added more HPC capabilities. And the one thing we added because we are consistent is our partner ecosystem. By adding 4 key distributors to our marketplace, we now extend the coverage to 100,000-plus value-added resellers, and the entire experience gets fully automated from us to our distributors to the value-added resellers as they consume services on GreenLake. That's a huge advantage. And here in 2 months from now at the HPE Discover, we're talking about bringing people back face-to-face, you're going to see the next major inflection point with more services through the public cloud as well as more capabilities on-prem and the edge.

Antonio, I have a question here from an investor who's asking about what percentage of your customer base is really interested in GreenLake? Is this more of a push effort or is this sort of a pull? Because the analogy is sort of Cisco is forcing a lot of its customers to go to as a service. So how should investors think about this?

It's more and more -- great question, more and more a pull, to be honest with you. Now, I mean, the pipeline looks amazing. It's just simply amazing right now. And if you look at the chart that we published in the Q1 earnings, you will see that 4, 5 quarters ago, 20%, 40%, 60%, 80%, 136%, you can see an acceleration. And what's happened is that the type of deals and the size of deals is changing, too. What it is to me is very important to reinforce. What we are doing here is moving from a transactional value to a customer lifetime value. It's all about getting customers on the platform and keeping them on the platform. Because once they are on the platform, they keep consuming more and more. They may start with compute for virtualization or containerization. They move to storage as a service, then they keep adding Aruba at the edge. They keep adding data services. So the expansion is both already customers, which, by the way, the Net Promoter Score is 92, which is incredible high, and our renewal rates are above 95%. No one has come down on consume. Actually, the elasticity, you have a minimum commit, actually had gone up. The last number we reported that the consumption against the original commit is 120%, which means the value is already 20% higher. So it's a pull, and the number of customers continue to grow. And we plan to add roughly 100 new logos in this year. But on the other hand, what we see is that the Aruba now integration will give us the ability to cross-sell and upsell on those who already are on the Aruba platform. And that's why that integration was so important to us because Aruba has already 2 million devices under management and more than 120,000 customers on the platform. Now we added the GreenLake on top of it, and we have more logos as we go along the way.

So, Antonio, you've been very generous with your time, and I know we're coming up on the top of the hour. Maybe to wrap it up, you've given us a lot to think about. There's clearly, you believe that demand environment remains strong. You think the order rates are something that are going to persist and continue to be strong. The backlog is something that will slowly work down over time. You've sort of spoken about very strong free cash flows and how the gross margins are sustainable, so lots of things that are very bullish in nature. Stock, however, trades at this like massive discount, whichever way you look at it, whether it's on EV to free cash flow or PE or whichever way you look at it. So maybe to sum it up, you can give your quick thoughts around what you -- what investors should pay attention to and why HPE should be something that they should focus on over the next several years.

Well, again, thank you, Wamsi, and thank you, everyone, for joining the call today. Appreciate you investing the time with us. If you're an investor, thank you for your support. Listen, I think HPE is at the center of very compelling megatrends driven by the customer needs that we see, and some of them has been accelerated from what we saw in the last 2 years. And that presents itself massive growth opportunity. We believe we have positioned the company at the center of those megatrends with our platform called HPE GreenLake, which is an edge-to-cloud platform. We have very strong momentum in the market. We have strong bookings, no matter how you look at it, in every single business. We have a massive backlog that eventually is going to translate into revenue and profit. And we have a very, very strong deferred balance sheet. Again, if you think about GreenLake now with $6 billion in deferred revenues and continue to add to the question was asked early on, more customers and more usage, and that will translate on itself on a 35% to 45% growth in IRR, which we believe by the end of '24 will be close to 80% software and services. Therefore, you can imagine what the gross margin trajectory would be. And then from the free cash flow, now we are what I call in the normalized phases, where in the next 3 years, '22, '23 and '24, we will deliver $6.5 billion to $7 billion. And one of the key fixed component of the free cash flow is dividends, right? So the dividend side, sample, we are unbelievably committed. You see the dividends with a yield, which is probably one of the highest in this IT sector. And then we apply dynamic capital allocation for the rest between share buybacks and investments we need to continue to make in the business. The last 4 years has been remarkable because we have transformed the company, and we have a strategy aligned into the future. And the culture. The culture of this company is amazing. The employee engagement scores are the highest ever we have ever seen, in the mid-80s. Attrition rates are below IT norm. It's all about strong execution. I have an amazing team surrounding me, which I personally handpicked, supported by a very diverse Board that obviously is committed to ESG, and you see some of the commentary we made in our Living Progress report. So one thing I will suggest, if you have some time, look at our Security Analyst Meeting, look at our proxy materials, and you will see everything I just talked through in more detail. But I think it's a compelling investment opportunity, to your point, Wamsi, is we need to drive the stock up. And it's just a question of multiples. And I think as we convert the revenue to sort of the backlog to revenue growth. With that free cash flow, I think the market is going to see us from a different lens, and I'm very confident we'll get there.

Excellent. Well, thank you, Antonio. This has been great. We really appreciate you taking the time and look forward to seeing you soon in person.

Thank you, same here. Be well.

Thank you, Antonio, and thank you, everyone, for joining us today. And please reach out to me if you have any follow-up questions, and we will try to get you answers to the best that we can. Thank you so much.