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

Okay. Why don't we get underway with the next session. Again, good afternoon, everybody, and it's terrific to be here with you all at the 22nd Barclays Global Technology Conference. This afternoon, we have a very special guest, the CEO and President of HPE, Antonio Neri. Antonio, welcome. Thank you for doing this with us. We greatly appreciate it.

Well, thank you, Paul, for having me and good afternoon, everyone.

And again, I know you're very well known to a lot of people in the room, but I might just quickly go through sort of your resume, just sort of because some of it will be relevant to the questions that we'll get into. So you were born in Argentina, you began your military education at 15 as an apprentice -- engineering apprentice in the Argentine Navy. From there, you studied engineering at the National Technology University (sic) [ National Technological University ] where I also believe you studied art as well. And very early in your career, you left Argentina and moved to Italy to join a small IT company. You then moved on to join HPE or HP as it was at the time in 1995 in Amsterdam. You worked through a number of very, very senior roles, ultimately culminating in February of 2018. You were announced as the CEO of HP, replacing Meg Whitman, and then you also joined the Board of Directors. You have been credited with spearheading some of the key technologies, Apollo HPC portfolio, the Superdome X. And today, beyond being the CEO and President of HPE, you're also on the Board of Directors of Elevance Health and on the Advisory Board of Maserati, which sounds like a very cool responsibility.

Antonio, we don't have a great deal of time. We've only got 30 minutes, so I'm going to dive right in. And I think the most logical place to start is a week ago, you released an exceptional set of results. Revenue is up 15%. What was sort of really the underlying drivers of that extraordinary performance that really, I think, having validated your strategy in many regards?

Well, I think the results of last week is a testament that the strategy that we put in place when I became CEO is working, and we have been curating the strategy for that period of time. But it's not -- it was no one thing, it's multiple things that we think are playing now in our favor based on the megatrends of the market we see today in networking, in hybrid cloud and AI. And so when you look at our performance, obviously, very pleased. At the company level, we grew 15% year-over-year on revenues. We delivered record-breaking performance and operating profit of $938 million. We achieved growth on every business on a sequential basis. We grew orders year-over-year pretty much in all our businesses. We delivered the best financing volume for HPFS. And when you look at the full 2024, we exceeded our revenue guidance. We exceeded our GAAP and non-GAAP EPS guidance and commitments, and we delivered record-breaking free cash flow performance of $2.3 billion, the highest in the history of the company. And underneath that, what we see is that the networking business is on a recovery from an orders perspective. We have transitioned a lot of that business in a subscription-based model. So over time, you're going to see that revenue climb. Remember, we are going through the period of digestion after COVID where the Aruba business, and we closed the transaction in 2015, and Barclays was a leading banker at the time, has been an incredible success. And obviously, we have now the pending acquisition of Juniper, which will double the business in our networking business. It would be an $11 billion business with very strong structural margin. So very excited about that. But what it tells us that, that networking market recovery is going to be a tailwind for us as we go '25 and '26. On the hybrid cloud, which has been quite interesting, people were a little surprised our performance. I mean if you look at our customer adoption of the platform, it should tell you that this is not a coincidence. We have now 39,000 customers on that platform. And the underlying growing drivers are 4. Number one is our storage performance. It was very, very strong on our IP products. And Alletra is now a $1 billion annualized revenue, and we introduced a series of new offerings just in the last month, targeting AI specifically with object storage and file. When I think about private cloud is driving growth for us, and we have fantastic offerings both on the virtualization side with our own HPE VM Essentials software that gives an alternative to the VMware stack but at the same time, it allows you to manage the VMware stack and other stacks. And then the other piece of this was the private cloud for AI, which is now ramping very nicely. And last but not least, this is all the adjacent software and services that is driving 2/3 of the annualized revenue run rate, which now is at $1.9 billion, again, growing at 48% year-over-year. So all those are driving elements, plus all the subscription to networking and servers because each of them requires a software, which is disaggregated inside the GreenLake platform. And so for me, that's very important because networking is the core foundation from edge to cloud. Hybrid cloud is necessary to deploy AI because data lives everywhere. And then we have the AI business. In the AI business, on the server side, there is a very strong momentum on the traditional server side, but the AI servers, obviously, are growing very rapidly. And in the quarter, we booked $1.2 billion. Before the booking, we felt it was absolutely necessary because the customer was not the level we wanted in terms of delivering on their commitments. But that said, we -- today, we are at $3.5 billion of backlog, which is very strong. And then we continue to have a pipeline that's a multiple of that. And so very exciting. I think when you look at AI, there is 4 different segments that HPE has the ability to play, enterprise to the Private Cloud AI enterprise solution, the sovereign because we have both sovereign in terms of supercomputer and sovereign in terms of generative AI and then the model builders and the service providers.

Yes. Yes. I mean on the back of such an outstanding set of results, internally within the organization, what are you talking about as being the top 2, 3 priorities that you're going to really focus on in the next 3 [ years ]?

Well, I think I said it in my remarks during the call. For us, I can wrap the year with one word, which is innovation. So that's one of the key messages across the company. When you look at the innovation that we brought in the market in '24, but also in '23 and '22, first, through the focus on the edge, then focus as a service, then focus on storage and then focus on AI, we have tremendous momentum. I just had a conference in Barcelona 2.5 weeks ago, where we made a series of announcements again. And there were 5,000 customers, they are all very excited about the innovation because the way we create value for our shareholders, yes, of course, there is capital deployment and the like. But ultimately, it's about relevancy with customers that are willing to buy your solutions that generates profitable growth. And we see that number of customers growing very rapidly. In fact, in 2024, we added 9,000 new logos to our portfolio across every segment. And so that tells me we are becoming way more relevant. They're all very excited about the Juniper acquisition, and that drives value for our shareholders. And that value is shown in the profitability of the business and the free cash flow that we generate. So that's why I am very excited about 2025 and '26. And our organization has now the highest engagement scores I ever had in the organization. We are at 85% of the employee engagement index. I just had a call the other day with all the team members. And when you ask question, is the strategy relevant? Do you see us as a winning organization? And that is the mid-90s, which is very, very high. And culture plays a role. And to me, culture is everything in the end of the day because without the right culture, the right behaviors, you can't do anything. And that's why innovation and talent management and mobility are the 2 key priorities. Why? We continue to find tremendous opportunity to streamline and simplify the organization. And obviously, we are deploying AI ourselves. And I can tell you, we have more than 200 use cases that we are either already deployed, at least close to 20% of them, or we're going to ideation in testing so that we can rapidly turn to that, and then we can also consult with our customers how to deploy it.

Yes. I just want to pick up on what you talked about around innovation. And as the CEO of the organization, how would you describe sort of the model of innovation inside HPE? And how do you sponsor it and use it as a means by which you differentiate yourself from competitors?

Yes. I think there's multiple ways. So first of all, innovation comes in 3 forms: organic innovation, where you invest $1 from your balance sheet is a better return for shareholders because I subscribe dollars per gross margin basis, how much that dollar can generate and then making sure there is a hell of a return on that. Then there is the inorganic innovation, which you need because you can't innovate everything yourselves. And that's where Juniper or Aruba or Morpheus Data or Cray or many others have done 35 acquisitions in the last 8 years to accelerate that innovation so that we can take that unique IP and the unique talent and scale it through our go-to-market. And clearly, that has resonated with customers and partners, but it needs to be integrated. It cannot be a widget. And that's why GreenLake is so important. And last but not least, is very unique curator partnerships. So those are the way I think about it. But ultimately, this mentality of fail fast and improve is so important. And the future belongs to the fast and fortune favors the bold. So when I think about that, in the context of innovating in GreenLake, we have to take a different approach. When you are such a large businesses inside the company, what tends to happen culturally is that everybody wants to derisk their business. But now in order to deliver a solution, you need to innovate horizontally. And when we started a GreenLake journey, we had to select what I felt was 30, 35 people out of their jobs and focus on that transformation, not commingle, has nothing to do with the rest of the business. And once you scale it, then you bring it back. And so the approach evolves over time, Paul. But fundamentally, it's not just technology, it's business model innovation and culture and operating model shifts. In fact, in our sales model, we have shifted over the last 7 years, multiple times from HP, obviously split it. We have to reduce the number of layers. We went to a geo model. Now between me and the seller is only 2 layers. So I get the truth for the most time until you inspect, right? Then we went to a common segmentation, then we shift the model to a orders pay to our sellers. Then we went through a specialized model. Each of these has been a turn of a crank based on where we were on the portfolio innovation and ability to go sell it against the competition.

Yes. AI service, obviously, a very, very hot area. How are you at Hewitt Packard Enterprises leveraging your leadership in supercomputer and high-performance computing to win business?

Well, it's a core tenet, right? So when I think about the requirements of generative AI are not that significant different than a supercomputer. You're talking about accelerated computing capacity, parallel computing that ultimately, the magic, yes, there is this silicon discussion that all we are having. And honestly, there will be many more in the future years. But the reality is to bring it all together, you need a unique expertise. And supercomputing does that, whether it's an NVIDIA GPU or whether it's an AMD GPU or whether it's an accelerator of sorts, the magic of that happens in the infrastructure design and the networking fabric. And so we design architectures that are very large, sustainable. And this is why HPE has been in the liquid cooling for decades. Obviously, we acquired a lot of IP through the Cray acquisition. And we have done liquid cooling for at least 20 years plus, and we have a lot of patents. But we are the only company that today is the first of a kind that has 100% direct liquid cooling. So when you go to direct liquid cooling, what happens is that you can save 90% energy and you can save up to 50% space. But today, when the people refer to liquid cooling, they refer to what I call a hybrid. You cool the GPU or the CPU but then the rest of the system still air-cooled, which means you need fans. When we do liquid cooling, we don't need fans. It's actually a quiet system you can be in, and there is no blowing air anywhere. And therefore, we can increase the density and the energy efficiency. And so HPE has that expertise at the infrastructure level. And at the same time, you need to have a lot of services capabilities because when you go to liquid cool, now it's like -- I always make the joke, it's like -- how many of you have aquariums here? You have to maintain the aquarium and the bacteria in the aquarium. Those system runs millions of gallons of water a day. And so it's a very unique chemistry. And so you have to be able to maintain, the maintenance cycles are very, very different. And then this networking fabric is very special because ultimately, you have to be able to connect 40,000, 50,000, 60,000, and we just introduced the next generation of that fabric with 400 gig, which is liquid cooled. HPE has the only liquid-cooled switch on the planet and fundamentally bring in a way they access one system. In the cloud, if a server fails, nobody cares. It's just it's virtualized, moves on. But if one GPU fails in a run, you're going to have a problem. And that's what HP knows how to do.

Yes. Yes. Antonio, let's turn to the acquisition of Juniper. I might get you just to talk a little bit about how that acquisition that you announced in January, how does that fit into that overall vision that you just articulated?

Yes. I think when the acquisition is closed, at the core, HPE will be a networking company. That's the message number one. And fundamentally, it's going to have every aspect of a networking stack to challenge the incumbency, which I believe was here an hour or so ago, and do it in a modern, secure and AI-driven way because the networking infrastructure is not keeping up today with the demands of AI. And I just explained some aspects of that. So fundamentally, HPE will have an Edge-to-Cloud architecture from silicon. And I want to remind everybody that in the campus switching, HPE has its own silicon. I do not buy 90% of the silicon from Broadcom. It is our HP Aruba Networking silicon. But that's an example of it. Juniper has a lot of silicon in a high-performance fabric with routing and data center switching. So those are 2 aspects. Silicon, infrastructure, operating systems, they are proven both on the Aruba AOS-CX, which has now more than 30 million ports deployed. And then obviously, the Junos OS on the Juniper side, both for switching and routing. Then security, traditional firewall with Juniper and what I call cloud-native approaches with SSE with the SD-WAN. We have an SD-WAN business, which I acquired in 2020 with Silver Peak and then all the AIOps capabilities. So I feel HPE plus Juniper will give customers a much better architecture that will catch up with the demands of AI plus the HPE Slingshot architecture, which is the liquid-cooled architecture for large systems. That will become the core of the company as we go forward. But that technology will find its place in other places, including in the storage business because in the storage business, you need a switch to connect disks or flash to controllers. And as we already are in the 800 gig, we can actually replace third-party switches in our storage arrays with our own switching. But when I think about these AI data centers, the first thing you need, simply put, you need a big pipe into the data center. That's a routing, and Juniper has already the 800-gig router high speed. Once you are inside the data center, you need to lay all the pipes to connect all these holes and racks, and that's the Juniper QFX fabric with 100 gig. Once you go to the rack, obviously, you can adopt different architectures. But with our Slingshot fabric plus high-performance silicon for Juniper, we can collapse that fabric and make it more CapEx -- [ slow savings ] in CapEx and a lot of OpEx savings because you don't have to manage 2 control planes or sometimes 3 control planes. And that's the opportunity for us in addition to drive high performance. And then HPE has silicon photonics, which we intend to transfer to that networking business so that we can also capture the opportunity at the interconnect level even outside the data center. So that's why the opportunities are pretty significant beyond just the synergies of the deals that generally financial people tend to understand. But what excites me is the ability to really capture this massive inflection point with synergies of the deal that makes this a no-brainer for shareholders.

Yes. Yes. Does this -- talk about how -- does this introduce you to a new client set that you can now bring the full suite of the consolidated HPE?

Absolutely. I mean obviously, HPE has been with Aruba business pretty much contained in the, what I call the campus and branch segment of the market. And there, we have done a fantastic job by unifying the connectivity layer between Wi-Fi, which obviously, now we are going to enter the Wi-Fi 7 cycle, campus switching, SD-WAN, private 5G, and HPE has a fantastic private 5G offer through another acquisition we did with Athonet and then IoT. On top of that, we built the security layer with access security and then the AIOps. But that was campus and branch. But now I extend all the way to the cloud. And fundamentally, whatever you want to size the TAM opportunity, we go from approximately $35 billion to $40 billion total addressable market to $135 billion addressable market. So we're more than triple the addressable market. And the combined business still below 20% market share, which means the runway is pretty significant. But that runway comes with a complete different margin profile, the current margin profile HPE has as a whole company. And that's why I'm excited, again, from an innovation perspective, from a customer relevancy perspective, from a shareholder perspective, this is a very unique combination that's very strong.

Yes. Yes. Terrific. Maybe I might get you to talk a little bit about partnerships and how partnerships feature in the growth strategy of HPE. And in particular, if you could talk a little bit about the partnership that you recently announced with NVIDIA.

Yes. I mean obviously, Jensen and I have spent a lot of time thinking about what the combination of NVIDIA-HPE can do better for our customers. And we both agreed from a history, we have participated together in the sovereign space with some of the supercomputing or some of the generative AI clouds we are building today for both the U.K., Bristol national laboratory or the Japan AIST entity. These are NVIDIA GPUs with HPE infrastructure, servers and everything else we talked about, including the HP Slingshot. By the way, the Los Alamos system is exactly that. It is an NVIDIA GPU with everything else being HPE. But we said, "Hey, ultimately, all of this is wonderful. But if you don't sell and you deploy this technology at enterprise level, what it's for, right?" One thing is consumer and one thing is commercial. And so we felt that let's go and architect a value proposition for enterprise that addresses their unique pain points. And those pain points are the core in enterprise is time to value and return on investment. And we felt that the simplicity of the value proposition needs to be as simple as 3 clicks and less than 30 seconds to deploy an AI application. And that's what we did with NVIDIA Computing by HPE, which really brings our HPE GreenLake cloud with our control plane, all our services in the cloud, including the data fabric, including the BigLake warehouse, including all the infrastructure life cycle management for servers, storage, networking, plus NVIDIA stack, which people used to call it CUDA but it's NVIDIA enterprise software plus all the NIM agents. And then we added on top of that since the announcement, now the configurations are available since September and people already buying and deploying, is the unique partnerships with people like -- companies like Deloitte because ultimately, it's a business process optimization, where the focus is and business productivity realization when you deploy AI. And so that's why I'm excited that this is not about giving them a reference architecture and a bunch of widgets, it's about giving them a complete integrated value proposition that addresses those 2 fundamental problems.

Yes. Yes. How are you thinking about the outlook for 2025 sort of from a macroeconomic perspective? And what is that telling you around sort of the visibility of sort of orders growing as you head into '25?

Well, I think, first of all, if you take it by market, I will say, in general, the United States has been very solid. But we'll see with the new government transition, what happens. Sometimes there is -- some people thinking, let me see what interest rates does, what the policies are. But if you go back to the incoming administration, which was here 8 years ago, you will see it was -- the first year was very positive. Remember, we had the timely tax reform. This year, we may have a different thing with tax and tariffs. But fundamentally, I'm positive. Now then you go underneath each of the segment. I think the server segment is in a positive upswing on the cycle. We at HPE have 0.5 million servers that we have an opportunity to go modernize by shrinking the footprint 10:1, reduce energy by 65% and then capture the unit plus the services attached. And by the way, when you add our competitors, that's a bigger number. Why that's important is because many customers need to free up data center space and power. When you were on the CPU base, you were running single-digits kilowatts per rack. Now you're running at least double, in some cases, triple. And so they understand that AI is not just a computing thing because in the cloud space, when you work through the cloud journey, it was about, okay, let me ride the wave of innovation in the public cloud and let me get a commodity computing unit. This time, it's about where I'm going to host the data to RAG or fine-tune that model. So it's a data-first approach, computing second. So that's why I think the server will continue to be solid. And then obviously, our ramp will be -- continue to be accretive. We have not seen cannibalization between one and the other one. And the number shows up because we have had 3 quarters of double-digit orders growth on our traditional CPU while we ramp the AI business. On the networking, I think the market is on a sequential recovery, and we have had 3 consecutive quarters of order growth. And as I said earlier, I think networking is going to be the upside for HPE today and after the Juniper acquisition. And then on the AI, I think, like I said earlier, I think about AI in 4 unique segments. There is the model builders and the hyperscalers. They will continue to drive a lot of demand because they are in the business to build these large language models and integrate the models in their applications where they make sense. Then you have the Tier 2, Tier 3, which are there to support either sovereign requirements or [ been hosting ] of people that need capacity on demand or enterprises that may need to use a colo because they don't have space. And then you have the sovereign, which, obviously, there are at least 15 countries taking the lead. European countries, Middle East, very strong. Obviously, they're going through the process for the importation license, but you see more positive news on that. But fundamentally, every big geography wants to control their AI models for culture, for geopolitical reasons and governance and compliance and security. And then last but not least is enterprise. And so it's funny because if you look at this model, you can define it in 2 axes, number of customers, number of GPUs. So there is the first segment one, which is the model builders and hyperscalers, a few customers. You can count it with a finger of 2 hands, but they drive million GPUs, right? You go to the Tier 2, maybe 20 to 40, depending on the capitalization of this company and then drive maybe into the tens of thousands that go into hundreds of thousands GPUs. You go to sovereign, they have very bespoke systems to begin with. And those will be 15 to 25, maybe in the tens of thousands of GPUs. They go to enterprise, tens of thousands or hundreds of thousands of customers but you know what, they're going to consume hundreds of GPUs because you don't need all these GPUs. You need few GPUs that they are doing this RAG and fine-tuning and inferencing. And inferencing, obviously, will continue to grow. Sometimes you do it at the center, sometimes you do it at the edge. And that's another opportunity with Juniper with a presence on the core, obviously, but then moving to the metro and the edge, that's where we can expose some of these inferencing capabilities through the network connectivity.

Yes, Yes. Antonio, unfortunately, we're nearly at time. But I did want to ask you one final question. Like what's your big prediction for 2025?

I think we are living in a remarkable time. I think there will be some rationalization going on into this AI space because, obviously, there was a lot of hype at the beginning, but the technology has tremendous potential. I see it everywhere. I spend 50% of my time talking to customers. But we have to make it simple. We have to make it super simple for the enterprise side. But I think over the next 3 years, I do believe IT will continue to outpace GDP. And that has to do with a lot of things we see today around data modernization and capabilities that ultimately everybody needs today. Without IT, you can't run any company. And so that's why I'm very positive, and I'm more positive on our hand because HPE has a unique set of assets that no one else has in the traditional space we are in. Some have unique things in one area, but no one has the diversification to be able to deliver on its own or as a part of a solution, a fully integrated experience that ultimately delivers better margins over time to our shareholders.

Yes. Yes. I think that's a terrific place for us to stop. Antonio, thank you so much for doing this.

Thank you for having us.

That hopefully, you've all enjoyed the conversation. Enjoy the rest of the afternoon, and Antonio, thank you.

Thank you, Paul. All right.