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

Thank you, everyone, for joining. Tim Long, Barclays IT Hardware Comm Equipment analyst. Thanks for joining, and happy to have Marie Myers here, EVP, CFO, of HP Enterprise. So I think you got to read a safe harbor first and then we'll get into...

Yes, I got to read safe harbor Tim. You want me to get going?

Sure go for it.

So my remarks may contain forward-looking statements. So please refer to our SEC filings, including our most recent Form 10-Q for a discussion of the risk factors that relate to our businesses. Done.

Excellent. So thanks, Marie. Let's -- I got a big list here, but I want to start with kind of the 3 popular ones we get most. And obviously, you guys just reported, so it's good we have fresh numbers and outlooks. But a lot of focus on networking, obviously, with the Juniper acquisition and it being half of profitability at this point, much different complexion for HP as a whole. So talk to us a little bit about kind of that growth expectation, I think, kind of mid-single digit. Maybe the moving parts now. There's a lot of -- you've got Campus, you got data center, you've got telco, you've got cloud routing. You got a lot of pieces. So maybe walk us through your view of kind of what's going to inform that number higher or lower when thinking about the key end markets that you're playing in?

Yes. No, first of all, excited to be here and obviously coming off a big transformative year. I think there's no doubt that this deal has transformed HPE into an AI-led networking company. And moreover, as you said, like 50% of our operating profit now comes from networking and about 30% of the revenue. So a very different company going into '26 than what we were in '25. In terms of what's sort of underpinning and driving the mid-single digits, I think what's really important, we'll disclose this, obviously, when we get to our Q1 results, we're now going to look at the business in really 4 different segments. So maybe I'll take it segment by segment. So breaking it down by Campus and Branch, data center routing and security, and then we're going to give you a split around service provider and enterprise from a customer perspective. So I think you're going to get plenty of disclosure in terms of how to think about the business and then how do we think about the customer profile. In terms of just what's underpinning the mid-single digit, I would add that in the earnings announcement, I did clarify for folks as we're going through the whole resegmentation we did move out $300 million of sort of revenue into our corporate others. So those were businesses that we consider somewhat stranded that we took out of the networking segment. So going forward for '26, we really anchored the guide around $11 billion. So that's the number we're looking at in terms of networking. And thinking about that on an as-reported basis, that 65% to 70% growth on a year-on-year or mid-single-digit as I said on the call. So obviously, a significant opportunity. I would couch it and say we're pleased with the performance that we saw in Q4. But what could tip that either way, let me talk about sort of tailwinds and headwinds. We are early days in the integration. And our folks are super excited about the numbers we posted, that we do have a really significant signpost in terms of the integration coming up in January. So we're in the middle of combining both of our sales organization. So the first couple of weeks of January, we will actually go live with our integrated sales force. So by the time we get done with Q1 earnings, Tim, hopefully we can give you more color on how that's going. But we're being prudent because candidly, integrating 2 sales organizations of the scale and the magnitude of these 2 companies is no small undertaking. And for the most part, we don't have significant overlap, but there is a heavy lift, I'd say, plenty of wood to chop in North America. So that's going to be the one that we've got to watch and spread the needle on very carefully. And obviously, we've done all the work that we need to do to get in place the right sales plan, but still in an integration of this scale and magnitude, there's just a lot to get through in terms of sales day 1. So that's one of the biggest milestones in the integration. Like I said, we'll be done with that by the time we get through Q1 earnings. So we'll be able to give you an update on how it's going. But I'd say that's one of the bigger integration milestones that could impact the performance of the business. And then obviously, I think you and I are going to get into a breakdown of all the different subsegments and how they're going. But there's clearly opportunity in data center. I think it's one we're super excited about. We're seeing new opportunities that we never saw before where we can actually bid contiguously together on deals that are bringing both server and networking in. So lots of excitement and growth opportunities on both data center routing. And then I know we'll talk more about all the other segments.

Yes. Yes. Actually, my follow-up was going to be on the synergies. Obviously, there's a heavy lift, as you mentioned, integrating sales force. But -- and I think when the deal was announced, there weren't really revenue synergies planned at that point, but it sounds like you're starting to see opportunities. I know HPE had their own networking stack, but it was pretty small. So Juniper is pretty well respected technology-wise in that area. So maybe talk to us about how you see that synergy, particularly for the data center switching. That seems like the most obvious. You're selling a lot of servers, a lot of storage, not hard to try to bundle in the networking. So is there -- is that like a separate time line than getting the sales force? Or is that something that can happen organically now?

Yes. No, I think when we closed the deal, we were really clear that the deal was predicated on cost synergies, right, not on revenue synergies. So from a cost side of the house, we did announce at the Securities Analyst Meeting that we were going to see line of sight to $600 million, right, over the next couple of years, which I think was very positively received. And it's sort of like $200 million each year, $00 million in '26, $200 million in '27, et cetera, and we're well on track in terms of just the initial sort of out the gate cost work that we're seeing. From a revenue perspective, we didn't give any revenue synergy. So we said that we needed to get into the deal and do the transaction to see how that would evolve. What I would say, look, if we start out with Campus and Branch, obviously, I think Rami articulated the strategy there around how we're going to integrate over time, both platforms. So we're seeing, I think, good progress in terms of sort of layering in different capabilities amongst Mist and amongst our Aruba Central platform. So in Campus and Branch I think there's a fairly solid story. Obviously, we're #2 in that space. And we'll continue, obviously, to play and win in that market. The areas that I think folks are getting really excited about is data center. Now obviously, in data center, we're starting off a fairly low base. So there's opportunity there when you're coming into a roll market, which is fairly nascent and new. We just announced last week in Barcelona, had some really exciting product announcements we came out with our QFX, I believe, sort of first to the market. Liquid cooling, Tomahawk 6, so clearly, putting our -- planting the flag there in terms of being out early in the market with a product, which I think the market should get really excited about it. Frankly, we're excited about it. So opportunity there on data center. I think the other piece underscoring that is just the bids like we're starting to see for the first time the chance to actually bid on deals across both server and networking. So that's quite promising. I think the other one that's starting to get a bit more air time is routing. So this is a new space for us at HPE, but certainly Juniper brings sort of a beachhead capability here that I think is going to be very promising going forward in terms of routing and then obviously, security, just a significant market opportunity there in terms of Zero Trust. I think that market is over $30-plus billion. Now all of that today, when we did guide the company and we reaffirmed our -- we actually upped our guide for the business, for the outlook for the year, we said all of that is in the guide right now, Tim. So in terms of EPS and revenue, everything is in there. It's a prudent guide. We've got some commodity headwinds against us. I think we're going to talk a bit more about that. So between where we're at in the deal and the commodity headwinds, we feel like we've captured everything that we know. It's prudent. If we can do better, we obviously will, Tim.

Okay. Great. Great. Yes. We'll probably come back to some networking, but let's hit on a few others. AI servers I feel like particularly investor perception of this business has done a little bit of a yoyo over the last 2 years. Initially, HP wasn't participating like some of the peers in the really low-margin stuff and then margins seem to have gone down even more. So maybe talk high level about the strategy with much more of the focus on some of the enterprise and sovereign opportunities, obviously, being more careful about margin and working capital. So maybe just walk us through kind of your view of how you can play in your own way in the AI server world?

Yes. So certainly, as you said, this market has gone through its sort of trials and tribulations. I'd say we've stepped back and sort of come forward with a framework that we're using to manage that business. And I'd say we're really anchored around 2 key variables. One is profit and the other is cash flow and working capital. So we feel as a company that we're really best positioned to win and play, particularly post the Juniper integration in both the sovereign and enterprise space. And I think we said on the call that more than 50% of the order backlog right now is actually a combination of both sovereign and enterprise. So we see the service provider segment as being one where if there's a deal that to be had that makes -- it sort of makes economic sense, absolutely. But what we see from a customer perspective and company perspective that we're best placed in those 2 categories. What I would say with the announcement we just made last week in Barcelona, we announced Helios, which is sort of scale up both in terms of networking and server. What we see is that the sovereign folks really, from an architecture perspective, we have a chance with the Helios stack and with just our experience on the Cray side to really sort of position our architecture very well there. And the same to be said on the enterprise side. I think both of our experience and our heritage makes us a natural winner in those places. And also from a profitability perspective, as a CFO, I'd rather see us play, frankly, in those categories as well. So we've made that intentional decision to be really intentionally focused on those areas. What I would say is with that, it does bring more lumpiness to the business. So definitely, sovereign is a -- I think we've said it in the past, it's a lumpy business. These large deals, they'll come into the pipeline, they'll come into delivery and they'll move through. And certainly, sovereigns, just by their nature, because they tend to be government focused, et cetera, also have a different dynamic in terms of customer acceptance. So we also expect that, that will impact the lumpiness. And we said on the call that from an AI perspective, right now, what we see is those deals are very much, much more loaded in the back half of the year. So I think I said 46% of the revenue is going to be in the first half. The remaining will be in the back half of the year, similarly with EPS. So clearly, this business is more -- is competitive, does put pressure on your margins. But I think you saw our performance in Q4. We're back in the core server business back in the 10% range, and we guided to slightly above the range for Q1.

Okay. And I imagine in the non-sovereign or like neocloud where it's more competitive, HP will still look and if there's opportunities that fit the framework, then you can participate. It's just whether or not it fits the margin framework? Is that how to think about it?

I think the right way to think about it. Yes, I think we're being very -- as I said, very intentional around where we want to compete. And those deals definitely come in. I see those deals come in. And obviously, we look at the framework we've got. And if they apply, absolutely, we'll go out there and bid against the business. But we need to be very judicious around profit and around cash flow. And I think we laid out a 3-year vision of a cash flow target and returning 80% back to our shareholders, and we want to remain on track. That's our North Star, I would say, in terms of how we think about the business going forward, particularly post Juniper, we have -- we're very committed to our leverage ratio. We want to get down to 2x by '27. So for me, personally as a CFO, cash flow and returning equity back to investors is -- back to our shareholders is super important. We want to hit those milestones we laid out at our Securities Analyst Meeting.

Okay. Great. Great. Maybe one of the other topics, GreenLake and kind of the ARR and the whole SaaS type of model. It's done really well for HP. I think HP is kind of a little bit more at the forefront of that transition for the larger hardware-related companies. So approaching 10% of revenues, if you do a little ARR math. Talk to us about what you're seeing there, how you see that business progressing? And is there a ceiling? Or how should we think about the mix of ARR type business of the total as we move through the next several years.

Yes. No, I think at the Security Analyst Meeting, we said we hit $3.2 billion ARR for the year. Obviously, we've got a significant lift there as we brought the Juniper business into the portfolio. Juniper is very highly concentrated in terms of SaaS software. So we saw all of those benefits flowing through into ARR. In fact, I'd say, literally, I think around about 80% plus of our ARR today is driven by SaaS and software, which is really where you want to be. By the end of the year, we said we get to $3.5 billion. It's obviously a nice growth trajectory continuing. And really, that ARR is driven by both software, SaaS and GreenLake. A moment on software SaaS. Now what you're starting to see, I think, Tim, is just the benefit of both the Juniper portfolio. Obviously, Mist, Aruba Central as well, obviously got a significant amount of SaaS and software embedded in their businesses. But also just -- I think the flags that we planted over the last few years, whether it's OpsRamp, Morpheus, Zerto, all that software mix is starting to play through. Now what I really like as a CFO is that these AI businesses obviously have a much richer gross margin profile. Certainly, the gross margins we posted in Q4, what we're expecting to post in Q1, there -- this mix plays into supporting that gross margin. So clearly, super important to us in terms of the revenue stream, but more importantly, also just in of the gross margin profile. As the businesses continue to evolve, we've got a strong focus in the company around AAR and driving performance in these spaces. Then on the GreenLake side of the house, I think we announced 40,000-plus customers in this space. So we're seeing traction. And obviously, customers as we go through the AI journey, I think, are definitely looking to this GreenLake portfolio as one way to achieve some of their goals. So pleased with the progress we've made and continuing to keep it as a strategic focus for the company going forward.

And is this the type of area where maybe there's different sales compensation or incentives to move it along? Or is that something that doesn't necessarily need to happen and still...

It does need to happen, Tim, absolutely. Selling SaaS ratable revenue is completely different to selling product revenue. So I think for a company like ourselves, who has had -- we've had a strong DNA as a product-led sales organization. So to get a salesperson to really understand how to sell software is definitely a shift, and we've had to clearly put the incentive structures in place in the sales force to ensure that the right incentives are there for them to sell this type of mix. Because if you're a product salesperson, it's a different -- very different motion when you're out there. So yes, it's been a transition. I'd say Antonio has really driven this at the top of the company, all the way through from everything you can imagine through to order management through to sales, all needs to be rewind to sell with this type of mentality. And I would say that one of the great things I see with Juniper also coming over is Juniper had a really good sort of intuitive DNA around how to win in this space, too.

Great. Maybe if we touch on kind of traditional enterprise end markets, and we have to talk about NAND and DRAM and commodity cost...

I was waiting for that to come.

Yes, it's not a huge focus for me. I know it is for a lot of investors. But maybe just give your perspectives on, call it, DRAM for servers and NAND for storage more or less. Is it pass-through? What are the near-term, midterm impacts, pricing changes? How -- what's the strategy around rapidly changing commodity environment?

Yes, we're certainly entering a very volatile period of time here around commodities. And as you rightly said, both DRAM and NAND are sort of leading at the front in terms of what we're seeing out there. Now obviously, a lot of this has been driven by just the tremendous demand pressure that's been out there with AI. And the last couple of months, I think we've all witnessed some pretty significant price changes in both NAND and DRAM. So in terms of what we're doing about it, first and foremost, we expect, I would just say quite clearly, to pass on a lot of these increases in commodity costs to customers. In fact, I would say we already started pretty early in some of the service space already trying to get out there ahead of what we saw coming in terms of the market itself. So first and foremost, that's how we're playing in that space. Now obviously, we had pressure from tariffs over the last few quarters. So we've all learned how to sort of get out there and reprice in the market. So we've got -- we're leveraging that infrastructure that we built on the tariff side. We had wall rooms focused on pricing, focused on quoting. So we're just using those existing wall rooms and practices to help us really manage through and navigate what we're seeing out there. So first is pricing, right, being able to pass on the majority. The second is obviously demand shaping. So using what we have and then getting out there and demand shaping in the market as the market continues to play out. So we'll -- we use those techniques. We've done it before during COVID times. We'll do it again in terms of demand shaping. And then I think, obviously, leveraging purchase commitments where we can as well. And you'll see that we expect to increase our purchase commitments on a quarterly basis as we file our disclosures. So these are all the different techniques that you use. It is a volatile time. I would say that we're -- we've got all of what we know in the guide as we can at this point in time. And it's just volatile. I'd say if we can do better, we will. We're trying to remain prudent, Tim, obviously. And I would just add that given that now the more than 50% of our operating profit comes from networking, networking is somewhat less impacted by this. So it's also good in terms of business mix from a portfolio perspective. It is really server first, storage second and sort of networking third is the way to think about it in terms of impact. So as you think about our peer base, you got to put that context out there, too.

Right. Okay. That's helpful. Maybe on to storage. It's been pretty good moves on own IP storage. So maybe walk us through how that evolution has gone and how much more room there is? And it seems like it's been pretty decent growth as well for the business.

Yes, absolutely. So we made a fairly bold strategic move in our Securities Analyst Meeting to really focus on our own portfolio, which is our Alletra MP platform. So really going after our owned IP and putting less emphasis and really deemphasizing the sort of the non-IP part of our storage business. I would say that the owned IP -- the Alletra MP platform has been very favorably received by the market. We've seen tremendous triple-digit growth in orders. It's been one of the fastest ramps, I think, in history of a product for HPE. And we've actually -- the third and most important metric is to me is market share. We've gained share and points in a fairly competitive market. And so that's a proof point that when you invest in your own IP and you win, you definitely got -- you've got the right strategy. So certainly focused on Alletra MP and more to go in that space. And so we've reengineered the business. We've moved -- also, I would just add, we've collapsed our hybrid cloud portfolio and our server portfolio into one segment. So going forward from a reporting perspective, as we go to report our Q1 results, we'll be reporting that under the cloud and AI segment. And we will call out storage revenue specifically, so you get a much cleaner disclosure around storage going forward too, too.

Okay. Great. And then maybe on the server side, a lot of discussion about server upgrades for power reasons. And it's also been a fairly good enterprise server year for the industry. So maybe touch on how sustainable you think that business would be?

Yes. No, absolutely. As we -- most recently, we went through the announcement of both our Gen11 and Gen12 products. They constitute today probably upwards of about 90% of the revenue on the traditional server side. Now clearly, these generations of servers just have high performance, high compute power. And if you're running a data center today, you've got enormous pressure both in terms of space and power. So I think it's been a fairly easy choice for CIOs to move into newer generation and new performance because I think one, Gen11, Gen12 replaces a multitude of older servers like Gen8s and such. So if you're just doing sort of server economics and you're a CIO, it is certainly -- you have -- upgrading becomes a much easier decision when you've got all these pressure points in terms of just the space available and then also power. Now clearly, the commodity cost environment is going to put some pressure there. There's no doubt that you're going to face some rising server costs. But the expectations are that the performance will continue to just outweigh some of those server economics. So we continue to be optimistic about server -- continued performance of traditional server. We've had a good year, I'd say, in '25 after we got through what was perhaps a correction in Q1. The remainder of the year, I'd say, went really well in terms of traditional server economics. We're expecting that to continue. I'd say the only sort of headwind there is going to be certainly commodity costs as we go through '26.

Okay. Great. Wanted to go back to networking with our last time here. One of the things that was interesting, Juniper deal took a while to close and there's overlap in Campus and Branch and WiFi. But both businesses did pretty well, which is kind of rare because your competitors are going to go in and say, "You can't go with them, you don't know what's going to happen." So walk us through, from your standpoint, how is that business different now that's it's all done and you're starting the integration. Does that position the combined asset to be even stronger than the 2 pieces before? Or any color on that would be helpful.

Yes. No, absolutely. I think you're spot on. I mean a lot of times in deals like this, things can go awry in your sort of core part of your product portfolio. What I'd say, particularly in Campus and Branch, we're clearly very strong #2 today, which is excellent. And I think Rami gave a big shout out to the product teams. I think they've done a tremendous job of trying to navigate the 2 platforms, both Mist and Aruba Central. And last week in Barcelona, I think Rami articulated quite clearly what the plans are. And I think his strategy is really to cross-pollinate the best of both platforms into each other so that customers see that stickiness in terms of the commitment that they've made to the respective platforms. I know on the Mist side, I'll give you an example here. We've sort of taken the back engine of the LLM that we had on Mist and now applying that to Aruba Central. So Rami's team had years of experience. They built up on just networking, both in terms of understanding like Zoom performance, video performance. We've taken all that leverage to all of that learning now, and we've sort of applied that to Aruba Central as well. So that's great. So that means that those customers now can avail themselves of all the years of learning, et cetera, that came out of Mist into Aruba Central. So I think that strategy that Rami has taken around cross-pollination onto both platforms has hopefully given customers a sense of security that there is commitment there and they can understand that they're going to -- the platforms themselves are going to scale up in terms of just the capabilities over time. So I think that has really helped us. Plus, I'd say there's just an opportunity on areas like WWAN in terms of Campus and Branch. And honestly, at the end of the day, one of the things that Juniper probably lacked that today that we're going to have is an expanded go-to-market portfolio. Juniper operated, I think, in about 30 countries, more than double that, just joining the HPE family today. We've got the opportunity to open up that entire platform to more than 2x of those countries around the world. So our partners community is super excited because now they can sell a much more expanded portfolio than they could before, and we can take the Mist platform and vice versa and plant that into our very strong enterprise backbone that we've had many years. So I think that it was a very good deal on a lot of fronts, but perhaps folks underestimated a lot of those strengths out there, Tim, that we had because Juniper just didn't have that scale and reach from a go-to-market perspective.

Right. Right. Okay. Good. Maybe we'll end with financial 1 or 2 for you. You talked about some of this at SAM, but when you think high level about margin opportunities for the company, obviously, you have some of the restructuring that's happening or the cost savings from Juniper. What do you think are the big drivers when thinking about gross and operating margin in the next few years?

Yes. No, look, I think headwinds and tailwinds, obviously, the headwind we talked about here is just commodities on gross margins. But what I would say is that on a tailwind side, we announced at Securities Analyst Meeting a combined synergy plan for both Juniper and Catalyst of $1 billion plus and really pleased with the performance that we've seen there. That's certainly a tailwind for us as we continue to execute that through '26, '27. We expect a lot of the hard work on restructuring will be done by the end of '27. So you'll start to see that flow through margins in the back half of '26 and then obviously well into '27. So that should provide, I think, a nice tailwind there into the business. And what I would say is, look, we've seen pretty good performance already just out the gate on margins alone in Q4, particularly on the networking side and actually even on our cloud and AI business, and we expect that to continue into Q1, particularly on networking as well and cloud and AI. And candidly speaking, I would say that we were pleased with cash flow. We didn't talk much about cash flow, but we had really good solid performance on cash flow in Q4. We actually were able to improve working capital on core Juniper just by taking our own credit collections process and even applying that to Juniper, we got a nice uplift on cash flow. So early days yet, Tim, but I'm sort of optimistic about just the progress we'll make on the actual integration of the deal itself and the flow-through economics that we'll see on margins and cash flow.

Okay. Great. You took my follow up on cash flow, I didn't even have to ask you.

Did I? There you go.

All right. I think we're coming up on time here. So really appreciate the time. Thank you for coming. Thank you everybody for joining.

Thanks, Tim. My pleasure. Thank you very much. Great to be here.