Hewlett Packard Enterprise Company ($HPE)

Perfect. Good morning. Good afternoon. Good morning, everyone. Good afternoon, I guess, to be on the webcast on the East Coast. Really delighted to have with us Shannon Cross, the Chief Strategy Officer, Head of Investor Relations and AI deployments at HP Enterprise. I'm going to add things to your title, Shannon.

Thank you. I have many hats.

You have many hats. Perfect. Well, really appreciate the time and being here. We don't have a lot of time, but you folks had some fairly, fairly impressive numbers last night. I think the part that surprised me was the free cash flow numbers that were out there for 2 years ago, got pulled into this year. I think same with EPS and profits.

Maybe spend a couple of minutes just recapping the earnings, you guys -- what you folks are seeing from a demand perspective, and then I'm going to dig into a couple of questions on service and networking.

Yes. And thank you very much for having me here. Hello to everyone. When I think about the quarter, we were very pleased, as you might imagine, both with what we were able to achieve as well as our guide. I think there were several areas that we've been working on for a long time that came to fruition in terms of our plans. Beyond that, we're seeing strong demand from our customers. And so overall, just came together, I think, very well in terms of this quarter and then looking forward. Specifically, if you take the various categories, I think starting with networking, we did about 10% revenue growth in networking in the quarter. We're guiding to around 10% for the year, and our longer-term outlook is 8% to 12%, which we gave a fiscal '27 framework basically. And so within networking, we're seeing very strong demand. Our order growth is quite high. Campus & Branch, Routing and Enterprise data centers were all in the 20% plus range. We see a significant opportunity in our networks for AI, which we took up -- we have a cumulative year-end '26 target. We took that up to $2 billion. And really, what we're seeing there are hyperscalers, enterprise, people who are very excited about what we bring to the table with the Juniper technology, what we can do with Tomahawk 6. One of the things I'm really excited about is that we've been able to take our R&D from the two companies and kind of combine them. The Tomahawk 6 QFX platform that we've announced uses direct liquid cooling. We're leveraging the direct cooling technology we have from Cray there. So overall, I think it's a testament to the integration of the company. And then if you go into Routing, clearly, there is significant opportunity for us on what is scale out effectively combining data centers. And that with the PTX platform has been really well received, and we're very happy with the logos we're talking to around that. Security was up 18%. So that was positive. And then we had the scale across with the QFX platform. So overall, things, I think, in networking are going well. And the Juniper integration is at to ahead of schedule. And so when I first came to the company, we just announced Juniper, this company had never done an integration of this scale. And I will tell you the planning that went into it. The extended period of time we had to do planning helped probably a little bit, but we could have done without it. But in general, we're really pleased with how everything is coming together. So that's networking. I think on the Server side, traditional Server, it's really interesting. I truly believe there's a fundamental inflection point going on, and there's a new TAM being developed. with regard to Agentic AI. I mean we're seeing customers with ASPs that are significantly higher than they were 4 quarters ago, coming in with new use cases. They're buying up in terms of compute power and memory requirements on the device. And so to us, this feels very sustainable, durable, and it's a change in the way people look, I think, at their server infrastructure. And then on the AI server business, we continue to play in the areas that we think we have the most opportunity, both from a margin and a cash flow or working capital perspective, which is enterprise and sovereign. We will look at hyperscale deals where they make sense, but I think we continue to address that market very prudently. And then finally, I would just say, from a cash flow perspective, we're really excited about the cash that we were able to generate in the quarter, $915 million. It was up $1.8 billion year-over-year. So it was a significant improvement from that perspective. And I see our working capital management and, frankly, just our operating profit really flowing through to free cash flow. And we did take up our net leverage target in terms of when we expect to hit or 2x to the end of this year. We had been at the end of '27. And as we've told everyone, our plan is to return 75% of free cash flow to shareholders through dividends and share repurchase as soon as we get to the 2x net leverage target, which means we'll start that early in '27.

Perfect. Thank you for that. One of the things I got a lot last night, and I'm sure you got this a fair amount, too, which is just trying to understand the durability of the growth you're focusing, especially on the traditional server side of the market, right? I think revenues were up like 33%. But orders, I think, were up triple digits. I mean the question is like, is this just a big pull-in? Or how durable is it? Just anything you can talk on that front would be helpful.

So we -- as you might imagine, for those of you who don't know, I used to be a sell-side analyst. And so I push very hard with the team on things like pull-in and double ordering and all the things that I've heard about 20-some-odd years on Wall Street, right? So we do a ton of analysis on what we're seeing in terms of the order book, what we're seeing in terms of our pipeline, conversations with customers. At this time, we're seeing minimal pull-ins. I wouldn't say we're not seeing any because I think that would be kind of silly. There certainly are probably a few. But generally speaking, what we see is sustained demand. And the triple-digit orders were very positive. Underlying that, there was some AUP increase, but there was also very strong unit orders. And so when we look at what people are using it for, there's Agentic AI use cases, obviously. There's traditional data center refresh that's going on because you have effectively the ability to replace several older generation servers with one, and that saves on space, cooling, power, et cetera. So that's also helping. And we're seeing customers -- and I've talked to a number of our EC leaders, our executive committee leaders who deal with customers all the time. And they're hearing from people about literally new use cases and also repatriation of data on-prem. Again, I covered the space for a long time, and the cloud came and everybody said things would repatriate potentially at some point. And we do have hybrid cloud, which I think my company was one of the leaders in and is one of the leaders in. But we are absolutely, I think, starting to see customers say, because of regulatory, because of compliance, because of data latency, data security; we're going to bring things on-prem. And then the other thing that I think is very interesting and it's early days, and we're candidly doing it internally as well; is looking at the tokenomics of what's going on in terms of all of this Agentic AI and inferencing in that. And how do you do it most cost effectively. And if you can manage to know sort of what you need on-prem, you can use open source models, you can use much more targeted models, you can use our PC AI offering, you can use traditional servers. And I think that is something that probably is a bit underappreciated in terms of customers right now where they're at, understanding what their token costs are because we are in that journey as well. And then what's the best way to optimize their IT spend around that. So I think that's another area where you'll probably see some more shift on-prem. I mean it's a great time to be in the hardware space. I would say that's a long time coming in making that statement, but it's very exciting. And I think the other thing that I would just say is the combination of HPE server and HPE networking is something that I think is going to be really interesting over time, whether it's the Helios stack that we're doing with AMD or it's what we can do in the data center cross-selling because remember, networking has a better margin profile. I think the opportunity to continue to go up into the right is pretty significant.

Maybe just on networking, and we'll go back to servers as well. But on the networking side, right, one that was folks like 21% operating margins, give or take, last quarter. But the guide for '26 and then '27 actually has a really good step-up in networking margins getting back to this mid- to high 20% range, I believe. or at least improving from the levels. What is driving this margin expansion in networking? Is it the Juniper integration? Is it revenue synergies?

Well, I think in general, we're very pleased with what we're seeing in terms of the operating margin. Keep in mind, we have -- we're having a very strong quarter and a very strong year. And so along with others in the industry, we are seeing an increase in variable compensation. So that is something that you don't think will necessarily repeat in the coming year depending on how the company does. So that is an area where we would expect to see some improvement as you look at '27. Now it's going to stay elevated in '26. Beyond that, you do have the Juniper synergies. And again, those are at ahead of schedule, very pleased with how that's going. And then I think from a -- there are some areas where we're actually seeing some Catalyst savings as well. So that plays in. And then just continuing the revenue growth, I think, is going to be really important as you look to '27. And we've said 8% to 12% for networking because you'll get scale leverage off of that. And that should really help us as we think about the overall operating profit. But I think the business is being run very well. It's -- I would say the management team there is very prudent in terms of where they spend money. We definitely have a lot of oversight, which I think is good. I didn't cover Juniper, but I've heard stories about they had a lot of things that they wanted to invest in. And I think we're -- the positive here is they're able to leverage our scale and our scope and our supply chain and our sales force and everything else that we kind of brought to the table, and it gives them the capacity to really invest where it drives incremental revenue.

Are you seeing signs of revenue synergies where you're able to bring Juniper along in deals as you sell traditional servers, AI servers? And that are you seeing net revenue synergies unlocked at all from that asset?

It's early days, I would say, but there are anecdotal stories and areas where we have been able to -- either HPE has brought in Juniper or Juniper has brought in HPE. So I think that the sales forces are learning how to work together and how to drive that. I do think that there's -- one of the products that I'm very excited about, again, very early, we'll have to see how it all plays out is the Helios rack stack from -- it's the AI stack from AMD. And Juniper is actually designed in on a scale-up basis. And so we have Juniper trays in there. We'll have HPE's server technology in there. I think it's going to be a really interesting use case. And again, the hyperscalers have all committed to silicon diversity. So over time, we'll see how that works. But I think we have a really good shot there.

Got it. If I zoom out a bit, servers are doing very well for you guys. Your peers are kind of seeing the same exact growth rates, if not better in some cases. Demand is fairly robust for a lot of companies. But at the same time, I think we look at IT budgets, like these don't seem to be growing triple digits or high double digits.

That would be nice.

That would be nice. Where do you think the money comes from for all this stuff from an IT budget perspective? Or where enterprises getting the money to spend on all this stuff?

I don't know. I think that there's probably a mix shift away from lesser important areas, and they're probably sweating some technology that they don't need quite as significantly or at least at present. I do think it's interesting that servers used to be what was sweated. And so apparently, that's not the case right now, which is really nice. We're still seeing strong demand on our Storage side. I mean our Electro MP orders were up triple digits. Our revenue was up triple digits. And I think that's a testament to, I would argue, leading technology that's positioned toward AI or that's positioned toward next-generation data centers is an area where investors continue to -- or not investors, sorry, where customers continue to invest. I do wonder -- I mean, obviously, there's labor savings. I mean you see it, you hear it across the Valley certainly in terms of what people are doing to be able to invest more aggressively in AI. And beyond that, there's -- the one thing that we look at, and maybe this is a fair way of thinking about it, we look at AI internally because I help to lead the AI strategy of the company. And we look at it as, yes, fine, a cost savings optimization, but so much more of it is literally let's change the process, let's try to improve both for the employees as well as the customers, the experience. And we're seeing benefit there. And I think the other thing I try to emphasize at the company with Catalyst is it's not just a cost-cutting exercise. It is literally a way that we can reallocate resources and really drive better outcomes for our customers and, frankly, for our shareholders over time. And it's funny because when I was on sell side, people say, "Oh, we're going to reallocate resources." I'm like, "Oh, okay, that makes sense." It's like it's really hard. I mean this is not something where you just snap your fingers and things move around, people's lives are affected in that. And there's a significant amount of training, and they call it management of change where you have to go in and actually make sure everybody is sort of on the journey with you. But I think that, that's really where you're going to see increasing investment. And again, a lot of that is -- goes back to hardware and what sort of underlies it. Obviously, software and other things play in there, too. But I think we're in a good position.

The other topic -- other dynamic on this is really -- you obviously have a very robust set of numbers that you've guided for the next couple of quarters, next 18 months really. How do you think about component availability? And how much of the memory or other things you have spoken for already versus you still have to go out and procure?

Well, we have long-term agreements. I mean we've been in this business for a very long time going back to Compaq. And I mean, I'm sure some of the components probably go back to oscillators, if you go back 80 years. But I think the key here is what we have guided to is what we see line of sight to do. Now we have a significant backlog, and we have a really big pipeline. Our pipeline is multiples of our backlog sort of across the board. And this is one of those quarters where everything looked good. It was the -- I mean, pretty much everything was really solid. And so when you think about that and you think about our component environment, if we can procure more components, it will drive upside. But we're very comfortable with the numbers that we put out and the growth rates and the expectations that we have for the company. Again, we're at 8% to 12% for both networking as well as Cloud & AI revenue next year. Our operating margin guidance is 12% to 16% operating margin and our EPS growth is 12% to 16%, yes, 12% to 16% EPS growth. Sorry, it's been -- it was a very late flight last night. So at the end of the day, we are very pleased with what we're seeing. And it's incumbent upon us to execute. And that's what I keep telling everybody in the company. We -- I will tell you, we have really good assets. I've said that since the day I walked in 2 years ago. We just need to be consistent and execute. And I think we've gotten on the path where we can do that. And it's also helping that the underlying market is very strong. So -- but I do think we are in a unique -- with networking, with Hybrid Cloud, with Server, with our services capabilities, with our financing capabilities; we are the only ones that can bring all of that to table. And we haven't even talked about GreenLake, which is the platform on which people are able to actually purchase and utilize our technology from sort of a -- on a capacity basis. And what that provides, especially now when you think about the cost of a server and what servers have done, I mean, prices are up significantly, and you could have effectively sticker shock. But if you're able to buy it on a ratable basis as you need it, I think that makes it a lot more palatable. And again, it allows customers to do things that are a cloud-like experience on-prem, which certainly in the Agentic space right now with the concerns around data, I think, is very attractive.

On the AI system side, right, I think you talked about a $5.9 billion backlog that you're sitting at right now with AI systems, you always talk about "Hey, the focus is enterprise and sovereign." You said this earlier, "We look at hyperscalers that makes sense, but we don't want to be aggressive there." Does that start to change as maybe other companies back away from it, like a Supermicro, for example, where the profits get more attractive, where it makes sense to engage with new clouds? Or is it really the focus on the enterprise and sovereign?

I mean, look, I think we're happy to work with anyone, and we will evaluate deals, and we bid on things. I mean, certainly, where it makes sense. I would say customers -- some customers are starting to look for alternative suppliers. The other thing you have to keep in mind, though, is there's a finite amount of components. So if we're sitting on a bucket of components, we have a backlog, we have a very strong order book, and we have existing customers and loyal customers and maybe some new customers that we want, you have to really do -- it's one of the things that I think I'm seeing right now is a lot of account strategy about where you put the precious components you have and how you drive the best shareholder return for what you do with those components. So make sure they go to the highest margin or you make sure they go to the customers that have the most potential long term. I mean you have to really think about some of the stuff strategically. And I think that's an area where we're working on and we've become more nimble. And I would just throw in, I think that COVID and the tariffs actually helped probably not just our company, but other companies become far more nimble in the way they address the market.

Perfect. The red light blinking over there. So I think I'm up on time. But maybe I'll turn it back to you any closing comments, anything we did not touch on that you want to flag our way?

No, I think we're very pleased with the fact that we're 2 years ahead of our plan that we put out. I think it's a testament to the hard work that the company has done and frankly, the assets that we have amassed, whether it's on the networking side or what we developed in AI server and then leveraging, frankly, our traditional Server business. So I think we're just getting started. I see tremendous opportunity for this company over the next several years. And whether it's catalyst on the cost and the optimization side or it's everything we can do from a revenue growth standpoint, I really do think we've reached an inflection point.

Perfect. I look forward to the next fiscal '28 targets now.