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

[Audio Gap] and welcome. I'm Matt here, technology supply chain analyst at Stifel, and we're delighted to be hosting a fireside chat with folks from Hewlett Packard Enterprise including CFO, Tarek Robbiati. Before we get started, Andy Simanek from Investor Relations at HP, he's going to go through some statements beforehand. Andy?

I appreciate it, Matt. Thanks for having us. So you'll hear some forward-looking statements in today's discussion. These are based on risks and assumptions that are described in our annual report on Form 10-K and 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 Matt, let me turn that back to you.

Okay. Great. Thanks, Andy. And again, thanks for joining us. We're hosting a call here with CFO, Tarek Robbiati. Tarek joined HPE in 2018 and has played a key role in the company's transformation over the last 4 years, including its HP Next initiative, which reorganized the company and took out significant costs, the pivot toward the as-a-service model with HPE GreenLake and the focus on growth drivers such as intelligent Edge and high-end computing. So thank you again, Tarek, and thanks for joining us.

Thank you, Matt, for having me. It's a real pleasure to be here with you today.

Great. So yes, we've got a lot of questions here, and there's also an opportunity for participants to ask questions, there is a Q&A box that you can punch questions in, and we'll look at those. But first, obviously, the top of mind of investors is the demand environment. During your last earnings call, your take on demand was very strong. And even last week, your CEO, Antonio Neri, was on another investor call and had a similar take and Stifel just surveyed 50 IT solution providers and more than half are more optimistic today than they were 3 months ago about 2022 prospects. Yet there is concern that CEOs and CIOs are going to be more cautious on budgets later this year, given rising macro issues, Ukraine, et cetera. And then the question is, all that backlog, what happens after that backlog works down. So what's your take on demand?

So yes, so it's a great way to start the conversation, and thank you for asking this first question, Matt. It's a really very strong demand environment that we are facing. And the demand is very strong across the board. And Q1 was the third quarter where we had double-digit year-over-year order growth. We had 20% plus order growth overall. And we continue to have a very strong demand across every business unit in HPE. The order growth is very much aligned with the strategy that we have. So if you think about the edge, we're experiencing extremely strong demand in Aruba, our hybrid cloud offerings in storage and supported by Compute also very much in focus, and we see strong demand there, too. And why is that? It's because the reality is that there is an ever increasing amount of data that companies need to process, and this is fueling the growth from the edge all the way on to the private cloud and the public cloud. And then also our as a Service business continue, therefore, to really do very well. Our order growth there was in triple digits in Q1. And we are not seeing that demand slowing far from it. There is much greater focus now on our GreenLake strategy than before, and customers are very receptive to it. Now this is all the positives on the demand, but obviously, I'm sure you would agree that this is in the context of broader geopolitical issues with Russia, Ukraine at war. We have some exposure to Russia, Ukraine. We're managing it, and we feel good about the steps we have taken to manage the situation. All in all, demand is extremely strong, and we're not at the point of peak backlog. There's still a few quarters before our backlog peaks. And this is because the main challenge is more on the supply side, right? The supply environments continue to be tight, and you're seeing some of it with events unfolding in parts of the world such as Shanghai in China.

Okay. Yes. And I didn't want to talk about the backlog because you and some of your peers have been talking about record backlog levels. The concern, though, is that as that gets worked off, particularly our supply constraint is, then we're going to see maybe a drop-off in orders and then sales. And so how should we think about the correlation between backlog and sales? And when the backlog starts to slip, is that going to be a sign of lower demand or just a more equilibrium in terms of supply demand.

Yes. I think the first point of call is demand and the order book and is the order book stable? And the answer is, it is. We haven't seen any meaningful order cancellations whatsoever in our company. The second point of call is, is supply easing, and therefore, are we able to eat into the backlog that we have. The answer to that question is the progress we're making on supply chain is superseded by the strength of the demand. And this is why the backlog hasn't really reduced. And we do expect supply chain constraints to begin to improve by the end of '22, possibly by the first half of '23, no earlier than that. And that is because there are still disruptions in the overall global supply chains. I was mentioning Shanghai a moment ago. Some of you may have seen the picture of the amount of ships that are just outside the waters of Shanghai waiting to dock in, but they can't because of the pandemic being -- affecting the city right now. So these disruptions bottom line have one implication, the elongated time of delivery of any goods to customers. And this is why when you think about our revenue profile is more driven by the ability to fulfill orders that are in the backlog than orders generated in the quarter. So we're navigating this, and we're obviously keeping a close eye on what's happening in Asia. We're looking at ways to shift capacity in different parts of the world to be able to meet the demand and eat into the backlog.

Okay. Great. And that does segue into the question. Just on supply and how HPE has managed about 3 or 4 quarters ago, your peers have struggled along with some peers, but seem to have caught up in the last couple of quarters. You had really strong results and good execution last quarter. But it sounds like there's still issues out there and new issues that seem to pop up every week. But would you say that you're still sort of managing it relative to where you were a quarter ago, and still feel like you're going to be able to [indiscernible] your forecast?

Look, we are doing with this current environment. It's now part of life, that's a reality. And we're comfortable with our full year revenue growth forecast of 3% to 4% for fiscal year '22. That doesn't change no matter what the supply environment thrown at us, we feel we can navigate this well. And that is because -- we have put in place mitigation strategies where we have sufficient inventory levels. We are continuing to acquire parts that are in short supply worldwide to be able to meet the demand. And our global operations team is spending an incredible amount of time judiciously building inventory where appropriate and leaning on our long-standing supplier relationships. So we feel good about this. The supply environment does not affect our total revenue growth guidance for this year, 3% to 4%, which I'm happy to reiterate today.

Okay. Great. Yes. And just obviously, the world is much different today than it was 2 years ago, particularly in supply. Their whole notion of onshoring. You just talked about moving some manufacturing around. What are some of the lessons learned over the last couple of years? And what are some of the initiatives that are in place that may be different today than they were a couple of years ago.

So a lot has changed. I mean, we didn't talk much about supply chain 3, 4 years ago. I think several things have changed the picture. First, obviously, is the pandemic has disrupted the supply chains of every physical good company that you can think about. And also, quite frankly, the geopolitical situation and the China decoupling have also changed the equation quite a bit. And so we have to really think carefully about our supply operations model, and we have put in place different strategies to move manufacturing flows between sites and create redundancy and resiliency in our global supply chain. So, so far, we have been successful. In the past, supply chains were only a matter of cost. No matter what you thought. No matter how many bits and pieces and components you had to manufacture a server, that server would end up being manufactured because somehow at some point, the components would show up. The question was how much would they cost? Today it's different. Today, it's a world where it's about cost, still no question and costs are rising due to inflation. But it's also about speed. It's also about resiliency, it's about logistics. So it's a world that is more complex than what we were used to when the world was thought to be global and globalization now is no more.

Got it. Okay. And then as you discussed, part of your strategy has been to strategically build inventory and your inventory now sits at just over $5 billion or roughly nearly double what it was a year ago. Are we at peak inventory levels? And at what point do you see that unwinding? And how does that play into your free cash flow targets of $1.8 billion to $2 billion for fiscal '22?

It's a great question. So I would say, yes, we've been strategically building inventory where appropriate. We've been doing so since the past 18 months. And because we saw that there will be a glut coming and we got ready in anticipation of it. Our inventory was up $2.5 billion year-over-year. It is now as you pointed out at $5.3 billion. It will probably continue to rise a little bit before peaking after this quarter. You got to expect elevated inventory levels for the balance of fiscal year '22 as we work through our order backlog. But we feel also that it's important that we consider in the equation our very large exascale contracts for very significant systems that are required to be built on site and then eventually provisions and accepted by the customer. So that's also part of the inventory equation that we have several hundred million dollars at stake in exascale, and we are navigating this really well. And so you do expect, therefore, that the inventory will not come down very fast in '22, but it will peak in '22 and come down progressively as we work through the order backlog that we've got. Will that put pressure on free cash flow? Yes. It is putting pressure on free cash flow, but it doesn't impair our ability to attain our free cash flow guidance of $1.8 billion to $2 billion that we posted for this fiscal year. $1.9 billion at the midpoint, we feel good about that. And also, if you think about the combination of inventory levels, backlog orders and everything we just discussed, that bodes well for fiscal year '23 and the 3-year free cash flow guidance that we gave at our Securities Analyst Meeting in October 21, which was of $6.5 billion to $7 billion of free cash flow over the next 3 years from '21 to '24.

Okay. And you talked about building inventory in the high-performance computing area. Are there other areas where there are issues and you're also building like the Aruba Intelligent Edge business, for instance?

I think it's across the board. But the difference between exascale and the rest is that the simple size of the systems that are being built is just unknown to the market, right? So we're building systems that the Department of Energy that are the size of 2 basketball courts put together and they all need to operate as one system, right? So it is a really substantial amount of equipment that goes there that is optimized by way of hardware, by way of the cooling, by way of the software stack that runs on top. And these take time to build and tune. And that is something that we reckon. That's the difference between exascale and the rest of our portfolio. But the rest of our portfolio is also facing shortages because there are simple components that normally would be considered to be trivial for lack of a better word, than are in short supply given the manufacturing capacity in the world that has that hasn't increased materially to cater for components in the electronic space. So that's the situation there.

So by those components, are we talking about commodity components like legacy semiconductors and discretes and that type of thing?

Yes, you're talking about board level components. You're talking -- obviously, the main ones, RAMs and CPUs are not in question, but you have to think about everything that makes a server, everything that makes a storage system in Aruba Switch or an Aruba access point. These -- we used to focus on a few critical components. Now the net is that we have to cast is wider, and we have to really take into account also logistics costs, which we do and reflect that in our pricing. I feel very comfortable. Very comfortable with the pricing measures that we've taken and the quality of the backlog that we have.

Okay. Yes, the next question actually is on the input costs. And that as a potential headwind to your margin expansion story versus passing along those costs. So how is that progressing in terms of the ability to pass along costs? And are you getting any pushback at all? Or at some point, is that going to hurt demand?

Yes. So I think that's really a good question, Matt. The demand shocks are often cured by pricing or rationing of supply and eventually, you get back into an equilibrium as we all know. I think we've been very good at anticipating on the demand and also the supply glut. We've raised prices and our competitors are following suits. Everybody is really watching their cost of commodities rising. And what makes it difficult in some parts of our portfolio like compute is that the dynamics are and the frequency by which cost fluctuate is very high, and therefore, having good insight on forward pricing becomes really, really critical. So far, we were able to do this. And as you can see from our Q1 results, we're very proud of those Q1 results. The quality of our earnings was there. It allows us to make the right choices in terms of investments when you have high gross margins. We feel very good about our performance there. And what is in the backlog now is of a different make than prior year backlogs that we had like in, for example, in 2020, almost 3 years ago now, where we had a different dynamic on the backlog that we currently have today. So we feel very, very good about this, and we expect that the ability to sustain gross margin will continue.

Okay. And what is different in terms of that -- you mean you're talking just about the pricing structure of that backlog?

Yes. So think about it this way. In any quarter, there are 2 sources that make up revenue. The orders that are in the backlog that we convert in the quarter in question to realize revenue and also orders that have been generated in that quarter that we convert in that quarter to generate revenue. And therefore, you have a mix effect between the 2 component, the backlog and the new orders in the quarter. And when you look at it this way, then if you have elongated delivery cycles due to supply shocks, then it is very clear that the component comes from the backlog is carrying a bigger weight in the overall revenue equation than the orders in the quarter component. And if the backlog has not been priced adequately, then as you produce the servers and storage systems and access points and switches, if the underlying component have risen in cost and the orders that underpin the backlog have not been priced adequately, you get a margin squeeze. And we didn't experience that at all in Q1. This is because we were very, I would say, very disciplined in our pricing, and we managed this equation very tightly. We've learned from mistakes in the past, to be honest. In 2020, we faced the opposite dynamic. We had rising costs, the backlog was mispriced. We had a big backlog mix in the revenue component. And therefore, we faced a shortfall in margins. You can all contrast our execution in Q4 '21 and Q1 '22 versus the execution in Q3 2020 and Q4 2020 is remarkably different, and that is because quite frankly, I really thought this could be a problem, and we started to take over the management of pricing in a different way in my team and then you see the results today.

And is that why you've got -- still got confidence that you plan to expand your gross margin in the second half of your fiscal year based on that backlog?

We do expect that the gross margin expansion is sustainable and you have -- part of it is due to the backlog, most part of it is also due to mix. And mix comes from 2 sources. Obviously, the mix between the segments and Aruba being a key growth segment in double-digit rates, that helps quite a bit. And then also as a Service is very much accretive to margins at the gross margin level. Not at the operating profit level, but that's not how we look at the business. It's a growth business that we're incubating. But when we report our ARR to The Street, we always show you the composition of the ARR. And last quarter, the amount of software and support that was comprised in the ARR was the vast majority of the ARR. So therefore, you can hypothesize that any revenue from GreenLake is at accretive gross margins for the company. And we feel very good about our asset service transformation for that very, very same reason.

Okay. Great. I do want to get to some of the product segments and the as a service model in a second. But related to your cost and the drivers of your EBIT expansion. OpEx is a big part of that. Your SG&A was down pretty significantly sequentially last quarter. And 1 question that we get from investors is how sustainable is that? And is that where you expect to really get leverage on the operating side?

No. I think what you can expect is that we'll have to continue to make select and surgical investments in R&D and sales and marketing to fuel the growth. We've got to a level of productivity in our sales and marketing that is very good. And we feel that we can, by better executing the pivot to as a Service and managing the growth across segments, we could drive reasonably higher gross margins that could fund those investments and sustain OP margins ultimately. So that's where we are. It's no longer going to be a case of never mind the gross margin, let me take some costs out to make up the OP. That's never how I intended to manage the business, and now we are in a position where we feel that there is sufficient differentiation in our portfolio to be able to execute a different operating leverage play.

Yes. So how do we interpret that in terms of like should we think about OpEx or SG&A as a percentage of revenue? And I mean, it sounds like there's some investment opportunities there to an actual dollar basis versus as a percentage.

That's right. That's right. And that's -- but the key is to look at, is this translating into growth in absolute dollars versus growth in percentages for R&D and sales and marketing? I feel very comfortable about the decisions we're making there and our ability to continue to generate OP and OP growth. I want to remind everybody that our OP growth for this year is targeted to be between 10% and 15%, right? That's what we targeted. And we have no deviation from that plan in the guidance I provided there.

Okay. And just also just related to OpEx. We've seen from a lot of companies, expenses have been down during COVID, not a lot of travel, marketing expense, et cetera. Things are opening up. I know you're doing more events. Is that factored into your guidance as well?

Yes, of course, it is. Things are opening up. We've been pretty good at doing events even virtually during COVID, and we are maintaining now a format that is mixed between physical events and virtual events. The beauty of a virtual event is that your reach is much greater. And then you have the ability to continue to capitalize on the generation of the content in multiple forums and push the content in areas of the market where you were not present before. So we feel very good about that, and it is entirely both the physical new events or the resumption of physical events and the virtual events that we're running are factored into our guidance.

Got it. Okay. Yes, I'd like to let me spend some time on your various segments. Digital transformation has been really a key focus for HPE as you reorganize the business, as you've sort of pruned your portfolio within the different segments, doing M&A, et cetera. So can you just discuss the -- each of your main product segments, how they're positioned around those themes? And how that supports your growth target of 2% to 4% through 2024? Maybe starting with compute and then running down the other segments?

Sure. So it's a great question. So by this, you can see really all the cylinders in the engine of the company. So compute is not a high growth segment. It's a segment where you can expect that our growth would be in line with the market. The market grows at about 4%, but that's including China. So we don't consolidate our China participation in H3C and the revenue line nor the OP line. Everything pertaining to H3C is consolidated in the [indiscernible] line. But that growth in compute is cyclical. And so you can expect that we. [Technical Difficulty]

Tarek, are you there?

Yes. It looks like we froze here. Maybe they'll come back. Yes. That's the one downside of doing virtual calls. Let's see if we can get him back here.

Yes. I think he's signing back out. Just give them a second here.

Okay.

Yes, sorry, I just pinged them. It looks like he's online. So hang on.

Yes. Hopefully, if we can hit that link button again, it will pop back up.

Yes, that's right.

Let's see. Here we go.

We got them. Okay. Tarek, can you hear us?

Yes, I can. I hope you can hear me and I apologize for the disconnection here.

No problem.

Yes, no problem. Thank you, Tarek. Thanks for everyone for standing by. So yes, you were talking about the compute business being sort of in line with the market, not really a growth business, but sort of a key business, right, in terms of your relationships with customers?

Yes. And also, I was -- I think we got disconnected at the time when I was saying it's not a growth business. It's a very important margin and free cash flow contributor to the overall company. So I also think we discussed briefly storage. And I said to you that we do expect growth in storage to be at least in line with market growth of 3%. It also is going to be a bit cyclical, but less so than compute. For us, our storage business is in deep transformation. We are moving the vast majority of our storage portfolio, which is a mix between our own IT products and third-party products to be more of all IP and much more as a Service. We've made a significant announcement over the past few weeks with regards to our storage business. And our launch was about block storage that is a solution that customers pay for on a per gigabyte basis for mission-critical storage that resides either on a GreenLake platform or even in the hybrid cloud. So that's very, very promising because our strategy is really about the hybrid estate, and this is what storage is going through. And Storage has posted 4 consecutive quarters of 15% plus product order growth, which goes to show that the strategy is taking hold and that customers are liking what we're doing in that space. Now carrying on to the segments. If you like me, Matt, HPC AI, is at least a low double-digit market growth business. It continues to be I would say, very cyclical given the size of those very large systems that need to be delivered. We have $2.7 billion of backlog and continues to grow. It's lumpy in its nature but we feel very good about this business that is unmatched. No one has our HPC AI capabilities, and we feel very good about these in the context of the competition. And finally, networking and Aruba has been doing extremely well with double-digit growth for the past 4 quarters. And we're seeing a very, very high order growth in Aruba. We had 35% plus order growth, which goes to show that we're taking share from main competitors in the market, and we are very encouraged to see these trends in Aruba. So to sum it up, if you look at all our segments, we will enter fiscal year '23 with very high levels of an order book and the backlog, which gives you good visibility over the medium term on total revenue growth for the company.

Okay. And then within each of those divisions, I know over the years, you've done acquisitions, you've divested some businesses. And it seems like -- and you've got multiple brands, for instance, within the storage business with Nimble and others. How are you in terms of the foundation of each of those businesses? Is there more to do in terms of pruning or more acquisitions? And where do we stand in terms of each of those segments?

I think on the whole, there is always more to do. I mean you can't really satisfy yourself and say I'm done. We don't do that. There's always more to do, but there's a lot that needs to be done organically and also if we can accelerate this inorganically, making sure that in doing so, we have a real return on the acquisitions that we may consider is very important to us. So areas that are in focus for us are obviously networking and storage. These are 2 important areas for us in our portfolio. I don't see anything in HPC that is meaningful. There is a lot that is meaningful in the AI space, but we're very cautious about valuations in the AI space today. And in any event, what we have to do is to balance our investment policy with the need to continue to be returning capital to shareholders as we have always done in the past few years. So this is where we are on that front.

Okay. Okay. Great. And then yes, I'd like to talk about the GreenLake as a Service model and basically as a Service, as you talked about, Storage, other areas that really plays into all of your businesses. So can you just talk about that broadly? And then also any differentiating characteristics from what you're offering versus competitors?

Yes. So a lot of people think of as a Service as being a packaging of existing hardware by way of a lease. This is not what GreenLake is about, okay? What GreenLake is an edge-to-cloud platform that is truly differentiated and that enables the automated provisioning and management of the infrastructure in the on-prem environment of our customers. And so the way this operates, there were significant announcement made in March about GreenLake and you'll hear more and more about that. It's -- you're going to hear more and more about that in the upcoming marketing events and investment as we will hold. This is the broadest and deepest portfolio of on-prem cloud services that now includes over 50 services from edge to the cloud. And so we announced on March 23, 12 new services, including block storage that I've discussed before, HPC. And we continue to add on the GreenLake platform, a number of customers, right? So for instance, Aruba today with Aruba Central, which is the derivation of the GreenLake platform that originated. We have more than 120,000 customers on the Aruba Central GreenLake platform, right? So if you think about this, why is that? That is because if today you want to manage your networking infrastructure, you will need the tools to do so and you need to be able to see how your network performs from every access point all the way back on to the switch. And this is what Aruba Central is providing to customers, and we're seeing this being a very successful model because it takes away a lot of pressure that network managers have and CIOs have in managing their infrastructure, and they can, therefore, very quickly reduce their total cost of ownership using GreenLake, which is good for us, right? This is why you can see a substantial amount of growth in GreenLake in terms of orders. And our ARR is at about $800 million, $798 million to be precise. But the demand for GreenLake is continuing to be very, very strong. Because what GreenLake is also providing in terms of benefits is a real good flexibility in managing the on-prem infrastructure, retaining full control over the data, which is the most valuable assets that our customers have, reduced costs for specific applications. No data ingress, egress fees like the public cloud charges. These are prohibitively expensive. And GreenLake allows our customers to place infrastructure anywhere, including at the edge to address some fundamental latency issues that they may face, right? So this goes to show to you that GreenLake is not at all a leasing wrap unlike our competitors. And so be aware of the [imitations]. It's a much, much different value proposition. We do believe that we have a cracker here and that our as-a-service transformation with GreenLake is our #1 operating priority to capture the opportunity that we see all the way from the edge to the cloud, and that includes the private and the public cloud.

And I know that you're targeting growth or CAGR of 35% to 45% to over $2 billion by '24. But you're also looking at targeting the mix going from, what 61% software and services to 77%. How do you get there? And what's driving that?

So our ARR, you're right, was $798 million at the end of Q1. It was up 23% year-over-year. We have had like in any other parts of our business, some limitations to the growth of ARR due to supply chain constraints. We still have to deliver the part of the solutions, which are hardware related. It's no different than the rest of the business. But the growth in our orders in GreenLake has been north of 130% in Q1. And that growth continues unabated. And we feel very confident, therefore, that when we will solve the supply issues that we can deliver our 35% to 45% CAGR from fiscal year '21 to fiscal year '24. It's like you mentioned, the mix is going to shift from 66% to 77% with respect to software and services. We are building substantial amount of services in the platform. You -- I don't want to repeat what we said before. We're making significant organic investments there with our CTO, Fidelma Russo who is driving the development of the platform, and we'll continue to add features to it. We are building a market to place around it, to make sure that other partners can come in the ecosystem, and they get benefit from the GreenLake platform overall. So we feel very good about the prospects of shifting that percentage you referred to from 66% to 77%. It's a journey that we are on, and we feel that we are on a winner here.

Okay. Great. It's actually a question just regarding the Aruba business related to -- we saw a recent negative pre-announcement from Netgear in this WiFi business. I know a lot of that was consumer focused, but any read-through there in terms of competitive environment and in terms of demand, anything concerning there?

Yes, so I don't think you should look at Netgear and infer anything negative about it with respect to our Aruba platform. The reason why this is, is because Aruba solves a different kind of problem. Aruba is designed for large installations that are more sophisticated than the ones that we would have as consumers in our homes. And when you think about building a WiFi installation at scale, it's not simple to deal with the networking challenges that this presents. Interferences being one of them. And for that, you need a lot of software and you need a platform. And you need to manage the -- actively manage the network through the software on that platform. This is what Aruba has been extremely successful at doing. And this is why you have very large customers in the United States who have chosen Aruba. And these customers are also either large in their own sectors in hospitality or in retail, but also very sophisticated. I'll remind you all that, for example, the Pentagon has chosen Aruba for their own connectivity needs within their footprint. So it's not the same as a consumer WiFi. It's very, very different. There's a lot more intelligence into it. And this is why Aruba continues to win substantial share in the marketplace.

Okay. Good enough. Okay. I would like to -- we did talk about the leverage in the model, your targets for 9% to 10% EBIT growth, 2% to 4% top line growth. But 1 question that we're getting now, obviously, given the macro environment and concerns, what is the model and what does the business look like in a down market, right? When IT spending maybe reverses, you talked about cyclicality in storage and some other businesses, just 2 or 3 years ago, in your 2018, '19 was a down year. So what does the model look like it's sort of the new HPE, if you will, in a down environment?

So it's to be seen when you're going to have a down environment, and what does that mean? If you say a downwards environment from an inflationary standpoint, yes, I would agree that there is a risk that inflation poses to the economy for every company in every sector. And that inflation was not factored in by many. But for us, we feel that with everything we're doing on a pricing standpoint, we are factoring that in really well. And you can see that in the results of our compute business, which is more cyclical and therefore more prone to inflation in other parts of our portfolio. Now downturn in terms of real demand and drop in demand for parts of our portfolio, that can happen. But I would say the forces at play that continue to fuel the demand are not going to receive, particularly what the world has learned from the pandemic is the need to continue to digitize that business. It's very obvious to you, Matt and other members of your audience, that the most resilient businesses have been those who have been more digital during the pandemic. So that has changed fundamentally the nature of the demand that we are forecasting. It may have some ebbs and flows, but we are not seeing the demand abating anytime soon to a point where it would come completely drop. If anything, IT spend as a percentage of GDP worldwide is rising for the reason I just mentioned. And then there are things that we're watching carefully also, which could fuel the demand in further. For example, think about the metaverse, right? There is a lot of talk around the metaverse. I prefer to focus on the amount of money that gets deployed into it. There is an enormous amount of capital being deployed into it. And if you simply follow the money and you think about what's being built is a substantial distributed infrastructure globally that will allow consumers to immerse themselves in a virtual reality that is as good or broader even than the physical reality that we're all living in. What does that mean in terms of demand for the portfolio is something that we are monitoring carefully because in a world like this, you need a substantial amount of computational power distributed in many different locations to harness the data that is going to be generated, right? So there are many forces there. I will stop here. I just want you to think about the longer-term nature of the demand shifting. It's no longer what we had it in the past. It's going to be a different demand than before. Will we have cyclicality due to inflation? Yes, but this is something that we're well equipped to navigate.

Okay. I mean in terms of sort of a Plan B, if demand -- if your revenue is down 2% to 4% instead of up 2% to 4%, in terms of the levers of what the sort of the base case earnings look like. I'm sure there's some plans in case things do fall off?

Of course. Of course. I mean we were not asleep at the wheel when the pandemic hit. I was criticized for being the most conservative CFO on Wall Street. I took pride of it because the reality is a lot of people were a little bit surprised by the extent of the pandemic. We plan for the worst and we emerged very strong on top. And so we constantly look at what happens in the marketplace. Sometimes we may not get it right, but we're always a little bit paranoid about our business and making sure that we are always running steadily even if the waters in which we navigate are uncharted waters.

Okay. Great. And then next, I wanted to talk about the H3C joint venture in China. I know there's some news there. You announced this morning that you extended the put option exploration date another 6 months. But I think that's also a business that's often overlooked by investors, but it's been a good growth business, a good obviously contributor to your profit. So can you talk about that and then talk about the latest news?

Yes, certainly. So H3C is a critical part of our business. We make money through our H3C venture in 3 ways. We sell some products to H3C. We on-sell some of their products outside China in some jurisdictions where we operate. And that's the second one. And the third one is we actually benefit from the share in the economic value that H3C generates each year. And so if you think about it in these terms, our contribution to I&E in Q1 was a little bit south of $50 million in Q1, $48 million to be precise. And every year, we extract a substantial amount of that economic interest in cash by way of dividends out of China, which is wonderful. And so we have a very interesting construct, a unique construct that no one else has in our view that allows us to participate in the second largest IT market in the world, but the fastest-growing IT market in the world. And so we feel very good about our position there. What we attempted to do over the past few weeks was to negotiate an extension of the put, and we were succeeded in that. And all that allows us to do is to buy a little bit of time. We can exercise the put for the next 6 months at any time if we wanted to. But the reason why we wanted to buy some time is to allow the main shareholders of Unigroup, the parent company of HPC is to settle in and close their recapitalization of Unigroup. It was just a temporary measure. The full extension of 6 months was a temporary measure to allow the recapitalization of Unigroup to settle. And that also gives us the opportunity to renegotiate the terms of our own equity holding in H3C and possibly change the economic conditions of our put moving forward. So I feel comfortable about the prospects there, and I feel that this temporary measure is the right one. It's really hard to, as one I notice put it this morning in a note. It's really hard to negotiate when the ownership is in flux, right? So we just have to keep that in mind and continue to engage, and I feel comfortable that our position is rock solid at a 15x multiple as a minimum, possibly more. We'll see where we get to.

Yes. And as you said, the put option now is based on 15x trailing 12-month profits. Is there a third number that you're targeting?

There is. There is and I'll keep it for myself until the time.

Okay. Good enough. And then we're down to the last few minutes here. There is just a question here regarding the -- your competition in -- some competitors adding compute at the edge capabilities. There's a lot of intelligent edge solutions from software-only players, from some of your competitors. So how is HP positioned there in terms of that competitive environment?

So we feel extremely good in our positioning there. And the reason why this is, is we have proven test cases that we can point you to about that. So by the way, one of them is at Verizon. And if you really look at the implementation of Open RAN at Verizon. That is the largest implementation of Open RAN in the entire telecom industry globally full stop. And who's barring this? It's HPE, with our communication and technology group and Open RAN solutions there involve a substantial amount of compute power at the edge, at the [indiscernible] edge. And it's probably the best demonstration of what we can do in that space. So it's an area that is very promising for us, and this is why I was drawing your attention to the world that may come as the edge becomes not just a point where you connect from, but an area where you have a lot more data to address new opportunities that exist that require lower latency and computational power at the edge, such as the metaverse, such as everything that happens when you want to try and get to where the data source is in the field, and you need to go at the mobile edge and the far mobile edge with 5G and technologies of the sort.

Okay. Great. And just lastly, I did want to talk about just the stock and how we should think about that in the current market sentiment, the stock still trades at a significant discount to market multiples in most of your peers as well despite a lot of progress as a company and obviously, your optimistic long-term view. So what do you think investors are missing? And what will it take for that valuation and for that, basically to get that credibility?

So I think there is a lot that needs to change. I think I do believe, and I did say this many times that the market was undervaluing value and overvaluing growth. Normally, over the long-term, value outperforms growth. While we're coming from a period from 2008 to say, November 2021, so say 14 years where growth was trumping everything. I find that this market correction is healthy. And what was going on in 2021 was quite frankly, insane in terms of revenue multiples when you had companies trading at 35x revenues. I just can't believe that the market was lacking such discernment to get to these levels back in October, November 2021. And so at some point, revenue has to turn into profits and profits have to turn into cash. And what people have to realize is what does a certain revenue multiple imply in terms of cash generation and very few analysts do the math. We feel good about where we are. I'm very comfortable with our 3-year cash flow guidance of $6.5 billion to $7 billion, and the prospects of our business. We just have to continue to execute and give you and the entire market evidence of the progress as we kept doing for the past few quarters. And in the very short term, deliver the 3% to 4% top line growth that we said we would deliver, and I'm comfortable that this year is a year where we're going to be demonstrating that growth. And hopefully, if you concur that, that should, therefore, translate into a meaningful share price appreciation for us.

Okay. Great. It looks like we're out of time. Is there anything else that we haven't brought up that you want to raise?

No, Matt. Thank you very much. Your line of questioning was very thorough. I hope that I've answered all the questions from your audience. I want to thank you for having me on the call today. I apologize for the interruption before. But hopefully, it was still a good call for you and your customers. And thank you again for having Andy and I join your call today.

Absolutely. You've been very helpful, and we appreciate it, and we look forward to your next earnings call.

Thank you. All the best. Bye-bye.

Okay. Bye-bye.

Bye-bye.