Hewlett Packard Enterprise Company ($HPE)

Welcome to Day 2 of Bank of America at Global Tech Conference. I'm Wamsi Mohan. I cover IT hardware here for the bank. I'm delighted to welcome HP Enterprise today to the stage. We have Shannon Cross, who's Chief Strategy Officer. A lot of you probably know Shannon Cross from her prior roles as well. So Shannon, welcome. Pleasure to have you here.

Thank you. Very excited to be here. It's a great time to be talking about the company.

Yes, absolutely. I mean this has been a pretty incredible learning season from a hardware standpoint and you guys really knocked it out of the park. The question that we get a lot is how sustainable is this? And you express confidence by giving an outlook for '27 as well. So I would love to -- for you to frame that a little bit for everyone. .

Sure. I think when we see what we -- obviously, we're very pleased with what we were able to report for the quarter, how we're looking at the growth that we expect, I mean, in '26, took up our EPS target by 40%. And then we did provide a financial framework for '27 that I think underscores our belief that what we're seeing is durable and sustainable. What we've been getting in terms of questions clearly on the sustainability and durability side is far more on the server versus networking. I think networking good story, people are standing it. We're -- and I'll touch on that a bit in the future. So right now, I'll focus on server. I think I've been around this industry for a long time. And clearly, I think we're seeing the creation of a new TAM, the creation of a situation where servers are seen as a really critical important component of company's agentic AI journey. In terms of the data points and the reasons why we think this is going to be sustainable, when we talk to our customers, they're clearly at the early days of their agentic AI journey. They see that they want their data to be more on-prem. They want to do more of the compute on-prem, there -- we're seeing demand at the higher end of our platforms. So more memory more compute power. Clearly, there's a reason when you've seen ASPs increased as much as they have over the last year, that customers are still saying, hey, we want to buy, we're going to start new programs, we're willing to pay the higher prices because we clearly see that there's an ROI in whatever they're putting out there that justifies the purchase of the hardware. And I think that's something that's different than we've seen in the past. We're also seeing customers who when we had contracts that were not particularly advantageous for us because, remember, we used to have 90-day quote validity. We pulled that back in. We went back to our customers and we said, "Hey, we need to renegotiate. We need to look at this." They weren't all happy. I mean, I'm sure we would have been super happy in this situation. But they've seen what's gone on with the memory provider. They've seen what the stocks have done. They've seen what obviously, some of the bonus payouts and things that are being talked about right now. And so they realized this isn't a server situation. This is an industry situation. So we were able to come to terms with a lot of those customers and we're mutually beneficial arrangements. And so I think that plays into it. I would say that we're seeing and we talked about this quarter, we're seeing triple-digit order growth in the quarter. So even in light of the higher ASPs, people are buying. We are -- we have the highest backlog that we've ever had, a record backlog. Our pipeline is multiples of our backlog. We -- the conversations we're having, clearly, customers are looking at what they're going to need. It's not -- this isn't just -- I think we've talked about for a while this idea of a data center refresh. I'm sure that plays in somewhat. But I do think that they're fundamentally seeing that the server is driving a higher ROI. I mean I kind of think about it when we look at the company, like our company and we talk about it, we have cost of workforce, cost of our consultants. And then we, I think, are going to have sort of cost of whatever you call the agents within the server ultimately. And so again, it's just -- it's become such more a part of the way that people are doing business. Now I know there's questions about pull-ins, we are seeing minimal pull-ins. Are there some? I'm sure there are, and we have heard of some cases. But in general, we believe this is just sustainable demand. And we do track. We look for cancellations. We look for signs of double ordering. We're monitoring the situation very closely, but everything seems strong. And again, we're seeing now where the orders that we're placing are at ASPs that are substantially higher than earlier in '26. And so when you figure you leave '27 at that higher ASP, that also provides some underlying support.

Yes. No, that's a great framework to start with. Maybe just to remind a little bit right, like what would you say specifically changed over the last 90 days from customer conversations. Is that sort of an acknowledgment that this inflationary environment is just going to stay longer? Is it agentic? Like what is it that's kind of driving this elevated level of interest but now is going to sustain itself? .

Well, I think -- and we all -- we think in 90-day increments, right? But I think a lot of the building blocks for what we're seeing now have been in place over the last 6 months or so. You could even go back to November when we were the first to raise prices and customers continue to buy, and so we continue to see sustained demand. I will say we are hearing more about agentic AI. I would say if you think about our PC AI business, when we first launched it, we had small, medium, large, extra large, and then we realize people want to developer sizes so more like the extra small and we're seeing those extra small purchasers now moving up the stack and buying multiples of PC AI and also just buying bigger ones. And so to me, that means they're finding agentic AI use cases that they're able to deploy. Internally, we're -- we have a multitude of use cases that we have and we've been looking at it very closely in terms of we've got grassroots, how do we put the enterprise framework on top of it. And part of my team is working on that. So I've been talking to a lot of our other Chief Strategy Officers or transformation officers about what their journey is. I think we're all sort of in the same camp, and we're all moving forward, we see significant opportunity. And again, underlying that is the server, the data center. I don't want to sell networking short. I think there's a significant opportunity for networking as well, and we're super happy to have Juniper in the fold. So I think that's part of it. And just in general, I think the idea that customers continue to come and like I said, triple-digit order growth in the quarter, no signs of slowdown. And so I think all of that is kind of playing into the opportunity. I mean I do think one of the questions we've been getting at this meeting is -- or in the conferences we've been at is basically where is the money coming from? I think that's a legitimate question over time. But I think that right now and certainly for the foreseeable future, technology is what's going to enable this incredible improvement that we should see in productivity, and we're right at the center of that.

Yes. Yes. And anecdotally, like we've heard about basically parts of whatever was allocated within corporate, within finance, within sales and marketing, within all these other functions there. money is coming from all of those to kind of support a lower cost structure and higher productivity essentially for an organization. So kind of aligns with the increased use of agentic AI and enterprise. Maybe, Shannon, you can talk about how, as a company, you're thinking about the inflationary environment and how you're managing that. I mean I think there's a lot of concern in the market that for particularly hardware OEMs, it's going to be a really difficult time with the rate and pace of DRAM and LAN price increases. So how are you managing that? And what's kind of your strategy on a go-forward basis? Are you doing anything with LTAs, are you doing anything in terms of procuring how much supply do you have access to? Because I think supply, I think you said it was a gating factor in road.

Yes. I think -- I mean, 1 thing to keep in mind is HPE has been in this business. I mean, we'll go back to compact. We've been in it for decades. And so we have very, very long close relationships with all of the component suppliers. We've had LTAs for a long time. We've had various different agreements. So are people leaning a little more heavily into them? Sure, but it's not like this is a significant change in the way we do business with our partners. And I do think that our long-term relationships play in here. I also think the memory providers want to have diversity of customers. And so one of the areas when I talk to the Head of Supply Chain, they're definitely very cognizant that they want to keep us healthy and our competitor is healthy, frankly. It's an interesting kind of position. So I think from that perspective, we're benefiting. In terms of managing the margin side of it, we were the first to raise prices back in November, everybody else followed. We've continued to raise prices. Everybody -- the entire industry changed sort of the quote validity period. And then, again, the conversations, and I think this was -- it's a testament to the relationships and the trust our customers have in us. When we went back to them and said, "Hey, that quote we gave you 90 days ago, we can't honor it because it's -- the prices have moved so much." They worked with us, and we worked with them. And I think that goes back to very tight, long-standing relationships. When I got to the company, I think that was one of the things that I found very positive relative to maybe how I thought about the way the world works is that our customers are sort of the who's who of, I don't know, everywhere, like all industries, we're global. It's just we're kind of there. And they do look to HPE as a trusted resource. They respect us. They take our advice. They love our technology. And so I think all of that kind of plays into the ability for us to have the conversation with customers and then have the positive outcomes that we have seen over the last few months. So all of that kind of comes in, it's just -- it's talking to them -- talking to our supply chain all the time, talking to all of our partners and working with them. And it's -- I think it's been a -- it's a tough -- I mean it's a tough environment. Don't get me wrong. And as Antonio said on the call, if we had more supply, you would see upside because demand is not an issue. It's supply. But I think we're managing through it as good as could be expected.

Yes. No, I mean that's actually impressive to see the margin results that you guys are delivering in the face of this. Maybe sticking with servers for a minute more before we switch to networking. I do want to ask about AI servers and storage because it feels as though that the AI servers you guys have been selective about the type of deals that you do, we're not maybe participating in the super competitive end of that spectrum, whereas on the storage side, I would love to also get your perspective if the server strength is translating and if there is more yet to come on the storage side? And how do you see that playing out? .

I think when it comes to AI server, I think we've been pretty upfront with -- if you go back 2 years ago, we announced that we're going to buy Juniper. It's a $14 billion acquisition, largest company is done, and we levered up to do it. And so then as you sort of move through the AI server journey, we wanted to focus on making sure that we maintain investment grade that we paid down the debt that we were very prudent with the way that we approach working capital and that we also focused on where we thought we had the right truly to win and to add extra because when you add extra, that drives more margin. And so from our perspective, and I think it's played out, we focused on sovereign and enterprise and we do -- I mean, we bid for hyperscale deals. We will play in there where it makes sense and it fits our framework. But so far, I think our strategy has definitely been working. And clearly, from a Juniper perspective or from a capital -- from a balance sheet perspective, if you look at it right now, we're now going to be at 2x net leverage by the end of '26, which is a year ahead of our plan. So super happy about how that's working out. And so I do think there are areas that you should remember, we'll get to networking. But I think don't disregard the fact that when we think about the hyperscale opportunity and the large model builder opportunity, networking is going to play a significant role. We've come from a very small position in what we call networks for AI just a few quarters ago to now talking about having $2 billion -- over $2 billion in cumulative orders by the end of '26 so we may not lean super heavily into the lower margin opportunities for hyperscalers and AI server, but we're certainly looking at what we can do from a networking perspective. And we're also interested -- we work very closely with NVIDIA, but we're also very interested in what we can do with Helios because on the AMD side, we actually have the Juniper technology that's been designed into the system for scale up, and then we have our server technology. And so that, I think, may be an entree for us to be maybe a little more aggressive on the hyperscale server side as well.

Okay. And what about storage, are you seeing any pull in?

I think it's still early for storage. We're happy with what we're seeing in terms of electro NPE demand. We had triple-digit growth there for -- I can't remember what number consecutive quarter. I mean, we're doing well in that space. But I think it's still coming. And what I really do like though, is the quality because I mean we're not the biggest storage provider out there. I mean I don't think it's a surprise to anybody. But when I talk to the customers, and I talked to the leadership in that business, it's really the technology that's pulling customers along. They're very happy with the idea that they can have one platform that has filed block and object on it. We are seeing both and this is really important in storage because another thing I didn't quite realize when I was on your side of the table was just how sticky storage is really hard to rip and replace. And what we're seeing here is not just a refresh of our installed base, but also significant new logos coming to the platform. So it's a smaller part, but it also just like networking has a really nice margin profile.

Yes. Yes. So maybe now switching to networking, right? So clearly, you're now showing some better traction with the Juniper acquisition. And if we just think back to Sam versus now? I mean, you obviously -- I think people felt like your guidance at Sam might have been conservative feels like he is conservative, right? So what are some of the opportunities that you think were not properly calibrated by the market from a Juniper standpoint. Let's start with the revenue side and we will talk about...

Well, I think it's fair because we have consistently raised our revenue expectation through the year. So I'm not sure it was just market. It was how we were looking at things because I do think -- look, this is the largest acquisition the company had done. We had to bring together a sales force as we had to bring together products, which we still are. We had to bring customers along on the journey with us. And so I think we approach guide for '26 from a networking perspective very prudently, clearly too conservatively given what we're seeing. But I also think that things have played in that are better than we expected. So clearly, campus and branch is doing well. Wi-Fi 7 refresh. There's significant demand there. Our orders were high 20% this quarter. So we're seeing positive moves there. I think from where there's really excitement and I think probably we were too conservative as you think about networks for AI and the opportunity in data center scale out, scale across what we're seeing in terms of the routing opportunities is strong. But again, in the $2 billion, it's both data center networking as well as data center interconnect. So there's a combination there. And I think the -- whether Juniper could have gotten there themselves, I think having HPE for the scale and the scope, some of the introductions has really helped. And I mean we're at the table with a lot of the large logos that you guys would all be very excited about because they do want alternatives. And we also -- we're time to market, first to market with Tomahawk 6 in terms of direct liquid cooling and we're 100% direct liquid cool there. And that's something we started investing in months ago. We started investing in the Helio stack many months ago before it was really maybe something that everybody else wanted to lean in on. So I think that it's a testament to the Juniper and Aruba combined management team that they had the foresight put the money in the dollars in those places. And it's -- we've made the right bets, I think, and they're coming through. But if you went back to October, a lot of that was just in very infancy stage. So we weren't necessarily sure where that was going to play out. But I think overall, the reaction has been extremely positive. The combination of the sales force, I mean, that's always kind of a risk, right? You have one salesperson at one account, and then you got the HP and the Juniper and you put them together, you figure out who's the best, either you keep both or you probably don't, but all of that can cause disruptions. And I think we've managed it exceptionally well. And that is one thing, too, I would say, while we didn't want the extra time, and obviously, some of it was pencils down as we were dealing with the DOJ and all of that. I do think that this integration has been extremely well planned out, gone through -- there are issues. I mean everything is going to have an issue, but I think it's been very smooth relative to what could have happened. And I think that's a testament to the leadership that we have.

Yes. No. It's -- I mean your execution has been obviously very strong here. And it's a complicated deal. It's a very big deal and complicated portfolio emerging, technology emerging. So great job on that. I guess, if I -- you mentioned like data center interconnect. What's the sort of IP that you're able to bring to the table on DCI and how do you think about that opportunity? .

Well, we have our own silicon. And I think maybe that's something that people don't necessarily appreciate as much, whether it's parts of campus and branch, whether it's routing, obviously, we work with Broadcom in other areas, too. But HPE has and Juniper has their own silicon. And I think it does create a competitive differentiator that again, I probably underappreciated it. So I'm guessing it's maybe not necessarily as well understood out there. So that's part of it. I think AI Ops and some of the technology we have, obviously, the Mist platform is extremely popular and provides customers with significant savings and better quality of service and just their experience. And some of that, we're able to bring over just put in, and I think that's pretty key. And Juniper has been doing this for a very long time. I mean, they helped to build the original one of the Internet for those of you who -- I remember back then, but -- some people that investors get younger every day or every year. But yes. No, I think it's just -- it's the quality of the IP too. And I think that's something where maybe it hasn't had the opportunity to shine as much as both the market and the acquisition and the support we've given them have allowed them to do.

When you think about the scale up opportunity, is there room for also scale out within sort of the within the AMD system that you refer to? .

Well, I mean we'll provide the technology there as well. But I think the key here is this is the first opportunity for us to do scale up. right? And I mean we had -- we had Slingshot. We had some -- again, that goes back to the Cray technology for supercomputing. But here, I mean this is when an AI server rack that we can do scale up. And then, of course, we could do top rack and scale out as well. That would be -- that's obviously more on the Broadcom side.

Yes. Maybe pivoting a little bit to margins. Your networking margin guide is pretty strong. I think when you look at considering where pre-acquisition Juniper margins were where HPE's margins are so really, really strong performance. What's driving some of that? I know you've been leading catalysts. There's been a whole bunch of other things that have been happening at HPE. So how should we think about the trajectory and the step-up here in margins? .

I think there's -- part of this is, obviously, you have the synergies coming together and we're at or ahead of our synergy targets. So that's positive like what we're seeing, what we thought was going to happen is coming through. So I think that's been a big positive in terms of bringing the companies together. I think there's been a focus, I want to make sure everybody realizes we do appreciate that we spent $14 billion on Juniper from an HPE perspective, we're not going to start with the company. We have continued to invest and that's seen in what we've talked about with Helios and what we're seeing in terms of scale across and the silicon investments and everything we're doing there. So we do continue to invest while we're getting these margins out. I think gross margins, there's been some benefit from that perspective, too, in terms of bringing the supply chain together and all of that. And then scale, frankly. I mean, you get scale leverage as we're growing revenues. And we're talking about around 10% revenue growth for Juniper for this year, and we guided to 8% to 12% for next year. So within that, there's opportunity. And then the catalyst program, we're bringing in, I think, OpEx discipline, which is key. And we do -- we're not double counting. We are very careful that we have the synergies and we have, obviously, what we're doing in catalyst. But I think overall, from a company perspective, we're thinking about how can we do processes better? How can we then layer on AI because you don't want to just throw out like, "Hey, go use co-pilot, go do this." You have to actually change how people do work. And I think that's a pretty key part of it. But yes, no, I think there's -- and I would give Marie Myers, huge credit, our she is exceptionally focused on making sure every single dollar we spend drives value, has an ROI. I'm not saying it wasn't part of the core fabric of the company before, but it is absolutely something that we talk about, focus on, track very carefully. And I think that's a mind shift in the company that I think is very beneficial because everything I do at the company, I'm constantly focused on, again, given my history, given shareholder dollars. Is there a return? Are we doing -- when you care about your employees, you care about your customers, absolutely. But we definitely need to think about what can flow through to the bottom line. And I think you're seeing that in terms of the EPS guidance that we've given for both '26 and '27.

And on the '26, '27, particularly '27, are you baking in continued price increases and inflationary environment as you think through because it doesn't -- it feels like it's going to be the way, but I'm curious how you'll talk about it. .

I think what we've said is we expect to continue inflated environment. We're not getting any specifics on units versus pricing. But we expect to see continued pressure in terms of the supply that's out there as you look at next year. Clearly, D-RAM, it's over 60% of the BOM now. I'm not sure exactly where it's at. So that's an area to watch when you think about what you would expect for pricing. There are other inflationary parts, but that's clearly the biggest focus. And I think that's on the server side. I mean, in terms of networking, there's a bit less pressure there. But clearly, from a supply chain perspective, given the significant ramp in demand that we're seeing, you have to kind of manage that through. I mean it's not the same, and I think there's been a lot of learnings, but think back to some of the challenges that everybody had an AI server when everything was ramping and there were just shortages of various random pieces. I think we're working very carefully to try to alleviate any of those concerns before they really become an issue.

Yes. Now you also completed your H3C divestiture, and that's been great. I think those -- we don't mind 2 years ago, and people had no idea if this money would get come your way or not and obviously.

Yes, team did a great job.

Yes. And you guys have executed on that, so good issue. -- now that you have that, as you think about maintaining a certain level of leverage and then capital return, how are you thinking about that?

Well, I don't think there's been a change to how we're thinking about capital return, except that we brought it forward a year. So we had said that we -- by the end of '27, we get to 2x net leverage and then kick in our 75% return of cash to shareholders. We are now bringing that forward to the end of '26. So you can expect that we'll be out buying back stock more aggressively starting in '27 as well as maintaining our dividend. And when we announced our dividend increase. I think it was Sam, I can't. Anyway, whenever we did that, we talked about the fact that we'd like to -- our goal, obviously, it's a Board decision. Our goal is to be a dividend growth company so that's how we think about that as well.

Okay. Well, we're coming up on time only a couple of minutes left. So Shannon, any message you want to give investors on how to think about HPE. I mean, I'll say that when the stock was at $20, we thought it was super undervalued, one of the stocks that told people like it was something that could double within my portfolio, like the stock that would be potential double and you're already 3x now, I guess, it still seems that the revisions are outpacing any expectations that people might have had. So would love to put that in context and best to investors.

Sure. I think -- I'm super excited. I joined the company 2 years ago. I saw the vision that Antonio had about what we could create I think the Juniper acquisition has been a home run and will continue to benefit us. And it's beyond just thinking about what Juniper was when we bought the company. It's where Juniper and the networking industry can go over the next several years. And the key position that networking will play as sort of the orchestration level of the data center and what we're doing in AI data center. I think on the server side, we are sort of in a new renaissance for server again, I've been around a long time. I think this is beyond just your typical cycle. I do think that servers and the value of servers are changing, and I think that, that's been reflected in what customers are doing. And then I also would say underlying all of this is a level of operational discipline that we placed in the company that I think, again, the catalyst program is becoming more sort of the fabric of how we run the company. And so I think that also provides us with support from a profit perspective. And then overall, we've got the cash flow, and I think that's something that's going to be really important. We feel very comfortable with how we're managing cash. And we're -- now that we're kind of through paying down Juniper, we're going to be returning it to shareholders. And I think that will be helpful as well. So I'm super excited. I don't think we're done. I think there's a ton of opportunities as we look forward. And I think we're just starting this journey. And I think we're in an incredibly good position. As Antonio says, we've got hybrid cloud, server and networking, and that's kind of the core of where people are going to be investing going forward.

Amazing. Well, with that, we'll have to wrap. Thank you so much and really appreciate you being over here. Thank you. .

Thank you, Wamsi.