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

Good afternoon, everyone. Asiya Merchant here. I'm part of the tech hardware, tech supply chain research here at Citi. Happy to see everyone. It's day 1 of Citi's Technology Conference, the afternoon portion here. Very excited to have HPE. We have Marie Myers here. She is the CFO of Hewlett Packard Enterprise. We have a few other folks from HPE as well in the audience. Before we kickstart, is there any safe harbor? We're good. I think -- okay. All right. So this is a fireside. We have a bunch of questions here. I'm going to leave some time towards the end for investors. I just request that you please do raise your hand so we can bring the mic to you.

So Marie, you guys just reported a very, very strong quarter. And you guys are guiding for fiscal '27. You did guide for fiscal '27. You upped that guide now for fiscal '27 as well. Your order backlog, you normalized orders, like you said, was up 42%. You have very strong backlog. One of the questions that we're asking is like -- as you step back and you think about the current demand environment and the fact that there's so much -- so many supply constraints as well still, what gives you confidence that even as you look into fiscal '27 that this is durable demand that you're seeing in your order book and it's not just customers coming to HPE or coming to one of your peers and saying, "I have an order, take us?" And so there is durability to this demand and not just people signing to make sure they get something?

Yes. No, first of all, thank you for having me at the conference. And as you just said, we posted, frankly, one of the best quarters I've ever had in my career. So I was delighted to have to present a set of numbers like that, and we did actually have beat and raised and we guided up our '27 numbers as well. And in terms of the demand profile and what gives us confidence, we are in an environment where demand is just outstripping supply at levels that were probably unprecedented in the industry. And as we reported, our order book on networking was actually up 36% year-on-year. We're seeing a very durable sort of super cycle going on in networking, where it's refresh of networking, combined with new momentum, particularly since we closed the deal with Juniper around areas like data center. And then on the Cloud & AI space, our orders were up over 70%, almost 75%, 76% on a year-on-year basis. And what we're seeing in that side of the house is just really strong demand in terms of data center modernization and refresh. But I think what's really interesting is the whole conversation around the data center has moved from just a pure refresh. You have folks that have got pressure on power, cooling. And the economics are pushing really hard on how do I really manage this environment, but you've also got new workloads like AI coming into data center. And we did disclose in the quarter, a very large enterprise customer where we saw a very significant inference investment. So we're starting to see these inference investments really pick up pace in the enterprise. So that's what gives us the confidence. And that's why we felt really it was the right time to go ahead and reguide the framework, which we guided for 13% to 17% on revenue and EPS actually growing faster than revenue at 16% to 20% and at least $5 billion cash flow, which was, I think, a really great number for us.

Right. Especially given that you had an Investor Day not too long ago, where you were sharing targets, which were much lower than that. Right. Okay. And just -- you just talked a little bit about the constraints, right? So you wouldn't have raised your revenue guidance for fiscal '26 and fiscal '27 if you didn't have the supply, and that's been something that Apple is talking about supply. You talk to any of your peers as well, they're talking about supply constraints. So just -- you obviously did have some supply agreements. Tell us how you feel about -- I mean, your purchase commitments went up. Like how confident are you of having the supply that's needed? And is that a gating factor? Like if you could get more supply, could your guide be even better?

Well, I'd say the guide that we actually gave was really anchored around the supply that we have confidence in getting for '27. So that's why we thought it was opportune to come out with a revised framework because we knew we would have -- we could see line of sight to the supply for the guide that we gave. Now we did also disclose, in fact, we just filed our Q the day after earnings. Our purchase commitment level is at an all-time high, actually over $30 billion. So purchase commitments are up both on the networking side and on the Cloud & the AI side of the house. And those are multiyear, what we call long-term arrangements, LTAs. So that really gives you assurance of supply. Not necessarily price, but at least gives us the confidence that we could see supply. Now obviously, the more supply, given the order demand, then there could be -- if the strength was there in terms of continued supply, then that would help us translate a lot more of that order book into revenue.

Okay. All right. Is outside of supply, is there any other factors that we should think about where HPE could track towards the high end of the guide that you guys have shared now for fiscal '27?

Look, I'd say there's puts and takes as always. I think Antonio did mention, and I do want to sort of follow up on this point that the Helios stack, which I know we're going to talk about here later is not included in our fiscal '27 guide. It is early days on Helios. We're super excited about it because it has a combination of both our server. But most importantly, we have a networking tray in Helios. And it's early days in terms of customers sort of trialing, looking at the workloads and POCing. So more to come in that space, but we're super optimistic on Helios, but none of that is included in our '27 guide.

Okay. And then just in terms of visibility, right? So your order book, like is -- are customers willing to sign orders that are maybe extending beyond what they traditionally have done? I don't know if it was a few quarters, it was up to a year. Are you getting better visibility from your customers? And are the duration of the orders extending a little bit beyond just a couple of quarters?

Yes, I'm just thinking about -- I think it depends very much on the customer segment. What we're seeing -- and it's probably a much more recent trend -- is that a customer will place an order and then potentially come back shortly after that and actually increase that order quite significantly. So -- and most of that we're seeing so far to date has been around AI workloads specifically. So I wouldn't say there's substantial change in customer order profiles or patterns. But we are constantly reviewing our backlog to ensure that there is no evidence of double bookings or what I would say, sort of placing orders that potentially could be canceled at a later point in time. So we feel really confident in the quality of our backlog that we don't see any evidence of those types of things going on.

Okay. And gross margins, I mean, they were very robust. And -- I mean in the quarter -- sorry, in the third quarter, you guys even talked about it. And you said that we should expect a little bit of moderation here in your fiscal 4Q. But the pricing environment is still very robust, right? None of your peers are necessarily doing any discounting. So just help us, why margin should perhaps moderate or maybe there was a bunch of factors that led to margins being so robust in Q3?

So I think I commented on the call that our gross margins were 40% Q3, which actually was a record for the company. And it was a confluence of factors that really brought that gross margin out, and it was one, obviously, the pricing discipline that we've shown as a company. Secondly, the mix of deals in the quarter, particularly on the AI side, we did not have a large shipment of AI. So going into Q4, I think I commented that we do expect to see an increasing mix of AI in the quarter. And then we had some benefits that came in with respect to the synergies that also helped to buffer some of the gross margins as well. Then going forward into Q4, we do expect not just a more nuanced environment in terms of pricing. We've come off some several months now, very aggressive pricing curves. We expect that to sort of moderate. We do still expect pricing increases to happen into '27, but the pace and the acceleration of those prices, we expect to slow down somewhat as we get into '27.

Now after Juniper's acquisition, you now have Campus & Branch, you have data center, you have routing, you have security. And you are now competing against very large competitors, right? I mean, you have especially on the networking side. And so just help us understand where are you seeing opportunities to gain share relative to where you guys -- relative to Juniper on their stand-alone or where HPE used to participate with your Aruba portfolio?

Look, I'd say there's opportunities across the entire stack that you commented on. If we look at Campus & Branch, obviously, the combined portfolio makes us a very formidable player in Campus & Branch today. We have been going down a very deliberate path to integrate which was known as the Mist platform that came from Juniper with the CNX platform from our HPE legacy Aruba side. And I think the Mist platform has exceptional AI capabilities. And we've been able to successfully integrate a lot of that actually into the CNX platform or moreover, continue to build off the Mist platform. In fact, we leveraged a lot of the data out of CNX into Mist to build even a more powerful AI engine. So I'd say we're continuing to leapfrog that AI baseline that we built in Campus & Branch. And I see that as an opportunity for us to really potentially win more and more business. I actually went in the labs with the team a couple of months ago. And I'm a bit of an AI geek myself, and I was completely impressed with just how far we've gone in a very short time since the integration with that platform. On the data center side, we were first time to market with a liquid cool switch Tomahawk 6 QFX. Nobody else in the market was able to do that. Shortly after the deal closed, we took the liquid cooling technology out of our server business and actually applied it to the Juniper technology. And so we had absolute time to market. We beat many of the names that you've mentioned. And I'd say that puts us in a prime position to win some of those large deals. Now we just closed and announced a deal with Oracle in our earnings call. And clearly, that I think gives us a really good sort of toehold into the data center at a good proof point that we can become, I think, a very formidable player in the data center over time. And that deal in itself leveraged the strength of the entire portfolio you mentioned, it's a combination of routing. So switching and then services. Our services portfolio was actually probably one of the hidden jewels. It has a very high margin rate, very, very sticky. And then we also leveraged our financing actually to pull that deal.

Okay. Good segue into the next question. So how should investors think about the Oracle deal, right? I mean, the Oracle deal has routing, you have Express silicon in there. I think you mentioned software, you have AIOps. It's a multiyear, it's a gigawatt-scale agreement. So when you think about the revenue ramp and how much of -- how should we think about the timing of the revenue ramp over the next couple of years? And could this be a proof point for additional, I don't know, neoclouds or sovereigns to come to HPE? Are you thinking about additional hyperscalers here as well coming to HPE for these kinds of deployments?

Yes. No, I think I'll start on your second point, which is absolutely yes. I think that's a great proof point for us that we could absolutely compete against the best of the best of this space and actually win a big deal like this. And as you said, it is one of the largest AI infrastructure build-outs. So we're delighted to be chosen by Oracle to be a key partner to have that level of confidence in our ability. And what I love is it tests the whole portfolio. So I think it is absolutely a great example of opportunities that I hope we can continue to win. And I would say there is strong interest in our portfolio for the reasons that we just discussed earlier. So in terms of the deal ramping and how to think about it, we just announced it, so it's fresh off the press. We see '27 very much as sort of the early stages of just getting started with that deal, and that deal is multiyear in nature. So we do have an Investor Day coming up September 30th, and we'll provide some more details and insights about how we think around the timing of that deal. And then as we get up into our Q4 revenue guidance at the end of our Q4 earnings call, we'll give you some more specificity about the guides.

All right. When we talk about the networking, I know margins and -- both the top line growth rate as well as margins have been key focus for investors as you guys are -- walk us through sort of when you think about margin expansion in this segment, is it just revenue that's growing, let's say, mid-teens here? Are you talking about better order conversion that's underpinning that? You're talking about Juniper synergies that's underpinning your margin guidance? What should investors be looking for as you're looking at that margin expansion story within networking?

Yes. First of all, I'd say we're really pleased with the performance of the business. We did actually close 10% revenue year-on-year in Q3, and we posted operating margins at 22%. When we first bought Juniper, the deal itself was only predicated on cost synergies. So we guided investors in the Street to actually $600 million worth of synergies by the end of '28. And I'd say in terms of signposts, one of them is absolutely, are you on track to meet that. So the answer to that is absolutely. In fact, we're performing better than we expected in terms of delivering cost synergies. You can see that in the operating profit that we guided for the remainder of 2026. And actually, we guided up into '27 for mid to high 20s in terms of operating margin. And if you think about it, what's different between '26 and '27 is the fact that we'll have a full year of those Juniper synergies in '27. So that's absolutely helping to drive some of the improvement in the rate that we expect in '27. Secondly, let me just comment about revenue. Obviously, very strong order performance. I think I mentioned 36% year-on-year. We're seeing better conversion in Q4 and then even better conversion into '27. So we guided for 12% in Q4 and then up to a range of 14% to 17% getting into '27. So we're expecting revenue to continue to convert at a better pace. As I mentioned earlier, we have secured purchase commitments both for our networking business and for our Cloud & AI business. So we do expect to see that improvement in order conversion take place picking up in Q4 and then more so into '27. We haven't spoken a lot about revenue synergies. I know Rami did at Security Analyst Day speak specifically to cost synergies and where we saw those coming from. As we get into the Networking Investor Day, there will be more to say in this space. So I'll just put another plug in for September 30, where I expect Rami will cover a little bit more of the success we've had here. But I would look at the data center deal and say that's a good example.

Okay. And then talk about AMD Helios. I know it's kind of -- it's a big opportunity. You guys are looking at scale-up now as well. It's not incorporated in your guide initially. I know you talked about early days. But just -- what should investors be looking for? I mean, are there any qualifications? What is it that's kind of going to help investors understand the size of this opportunity? And what could HPE's share be in scale-up? Could it be equivalent to what you have in scale-out? When we think...

I'm personally super excited about Helios because it gives us an opportunity to really get out there and participate in a segment of the market that we potentially haven't been as competitive in. What's great about Helios, it incorporates a networking tray. And then obviously, we work with AMD on the server architecture. But frankly, by having the networking tray in the stack, it obviously gives us a much better margin profile on these types of deals. So what I would say is where are we in terms of looking at these opportunities. Right now, we are in POC stage with a number of different customers. And I'd say we've got some strong interest. Customers are obviously testing those workloads because they have to evaluate performance. It's a new stack. Many of them have been accustomed to working on their existing architecture, their existing stacks, so they're happy to gain confidence that they can see these workloads really performing at the levels that they want. I expect that once we get through that stage, we'll start to see those proof of concepts convert into orders and then obviously into POs. Once we see that happen, then we'll obviously bring that to you in terms of the guide. But this is very much, much more into '27 and beyond. It's still early days is what I would say. But so far, we've definitely got some strong interest from a number of different players around the world.

Okay. And I know Rami is going to talk a lot more about it on networking, but margins, and we talked about synergies. I mean, I know you were a big factor in driving some -- you're talking about those synergies even earlier on. Just what's gone better than expected as you talk about, whether it's channel, whether it's go-to-market, whether it's products, stuff like -- what has gone better? And what are the -- is low-hanging fruits done? Where are you guys now kicking it up so do you get to better synergy?

Yes. Like I said, I think really pleased with the performance of synergies. What went faster was probably just the core integration. I mean, in terms of just mapping a lot of the sort of overlap between the two organizations went really, really quickly. What I would say that very successful was the sales and go-to-market integration. That's usually one of the tougher sides of large deals like this I've been involved in a number of transactions in the past. And you can sometimes get it wrong in the sales space, but the mapping that we did of our accounts and the actual sales day 1 that went live a couple of quarters ago was virtually very seamless, and we didn't see confusion in terms of customer account mapping, region mapping. And the one that was probably the most -- probably had us the most focused going into the deal was the U.S. because that's where we knew we had potentially much more overlapping accounts. But so far, that's gone extremely well, probably exceeded expectations in terms of the pace and the sequencing. And then I'd say on the product side as well, too, we've had -- you could have expected to be more sort of ambiguity around road map consolidation, et cetera. But for the most part, customers, I think, have been very happy with the way in which Rami and the team have navigated the road maps as well. So pleasantly surprised. I always believe in deals like this, it does come down to people and culture. And the two companies, if you sit in the room with the team from HPE or the team from Juniper, it's really difficult to detect which company people came from. I mean, the cultures are very, very similar and have a very strong ability to blend very quickly. And I think that, that was one of the probably underestimated parts of the deal that the new team would assimilate so quickly, whether that was technically or even out in the field in sales. And I had a chance, like I said, to sit down with the Mist team. Some of the AI team from the HPE side is working hand-in-hand side-by-side, and you wouldn't have had a clue who would had worked for which company. Having worked on Compaq and Digital and all these other deals in the past, I must admit, I've had quite a few different experiences. So this one actually surprised me. And I think it's been a huge advantage for us getting into this stage of the transaction.

Okay. And then looking ahead, like sort of where is more of the focus going to be in year 2?

Year 2 is heavy going on IT systems integration. First year, we probably kept a lot of the dual systems sort of side-by-side. As we get into next year to '27, we're going to do a hardcore system integration. Big deal for me in finance because we'll map a lot of the financial architecture. So my team will be under a fair bit of pressure going into '27, but that will be the year where we get a lot of the system integration done.