Walgreens Boots Alliance Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 28, 2023

There are 10 speakers on the call.

Operator

Good afternoon, and welcome to the 4th Quarter 2023 Hewlett Packard Enterprise Earnings Conference Call. My name is Gary, and I'll be your conference moderator for today's call. At this time, all participants will be in a listen only mode. We will be facilitating a question and answer session towards the end of the conference. As a reminder, this conference is being recorded for replay purposes.

Operator

I would now like to turn the presentation over to your host for today's call, Jeff Kall, Senior Director, Investor Relations. Please proceed.

Speaker 1

Thanks, Gary, and good afternoon, everyone. I'm Jeff Qual. I'd like to welcome you to our fiscal 2023 4th quarter Earnings conference call with Antonio Neri, HPE's President and Chief Executive Officer and Jeremy Cox, HPE's Senior Vice President, Controller and Interim Chief Financial Officer. Before handing the call to Antonio, let me remind you that this call is being webcast. A replay of the webcast will be available shortly after the call concludes.

Speaker 1

We have posted the press release and the slide presentation accompanying the release on our HPE Investor Relations Web page. Elements of the financial information referenced on this call are forward looking and are based on our best view of the world and our businesses as we see them today. HPE assumes no obligation and does not intend to update any such forward looking statements. We also note that the financial information discussed on the call reflects estimates based information available at this time and could differ materially from the amounts ultimately reported in HPE's Annual Form 10 ks for the fiscal year ended October 31, 2023. For more detailed information, please see the disclaimers on the earnings materials relating to forward looking statements that involve risks, uncertainties and assumptions.

Speaker 1

Please refer to HPE's filings with the SEC for a discussion of these risks. For financial information we have expressed on a non GAAP basis, Finally, Antonio and Jeremy will reference our earnings presentation in their prepared comments. And with that, let me turn it to you, Antonio.

Speaker 2

Thanks, Jeff, and good afternoon and thank you for joining us today. Well, thanks Jeff, and good afternoon and thank you for joining us today. In fiscal year 2023, HP delivered record performance against non GAAP financial metrics I capitalized in a strong momentum across our portfolio. Our steady execution has resulted in higher revenue, further gross margin expansion, Larger operating profit and record breaking non GAAP diluted earnings per share and free cash flow. Our growth engines in Intelligent Edge and HPC and AI as well as our HPE GreenLake platform are helping to accelerate our revenue and profit Importantly, HPE has achieved the most robust success this year in our ongoing portfolio pivot to higher growth, higher margin areas aligned to the key market megatrends driving customer demand.

Speaker 2

I will focus my commentary today on our full year fiscal year 2023 results and allow Jeremy to expand on the 4th quarter and segment results. I'm very proud of all that HP delivered in Our portfolio differentiation and our strong execution. We delivered extraordinary innovation to customers, resulting in share gains in key markets and profitable growth for our company. HP generated our highest gross margin and our highest operating profit since I became CEO and our highest annual revenue in 4 years. Non GAAP diluted net earnings per share and free cash flow were the largest ever in our company's history.

Speaker 2

We saw healthy sustained growth in revenue at $29,100,000,000 for the full year, an increase of 5.5% year over year in constant currency, a 3rd straight year of revenue point of our full fiscal year 2023 guidance of 5%. Gross margins exceeded 35%. We also added substantially to our annualized revenue run rate, closing fiscal year 2023 Non GAAP operating profit margin was up 20 basis points year over year to end the year at 10.8%. We have executed well on our addressable market opportunities and exercised prudence with our expenses and obligations. Non GAAP EPS increased 6.4% year over year to $2.15 Improved profitability also means that we have significantly boosted free cash flow, which rose by about $400,000,000 this year to $2,200,000,000 and nearly 25% year over year increase.

Speaker 2

Both non GAAP EPS and free cash flow results are record breaking and well above our fiscal year 2022 some guidance. In summary, HPE delivered an impressive set of results in fiscal year 2023. With the progress we have made this year and our confidence in generating further value For our shareholders, we are raising our dividend in 2024. HP is more relevant than ever to our We have deliberately aligned our strategy over the last few years to significant trends in the market around edge, hybrid cloud and AI. These growth engines align to our customers' interests and where they are targeting their IT spend.

Speaker 2

Even against an uncertain microeconomic backdrop, we saw continued though uneven demand across our HP portfolio With a significant acceleration in AI orders, demand in our AI solutions is exploding. We saw a significant uptick in customer demand in recent quarters for accelerated computes computing infrastructure and services. In Q4, orders for servers that include accelerated processing units or APUs represented 32% of our total APUs, which includes GPU based servers orders across our business, represented 25% of our total server Our HPC and AI segment revenue grew 25% year over year in fiscal year 2023. This stops what has been a historically large order book in the Q3 as demand accelerated for our supercomputing and AI We anticipate demand next fiscal year will remain very strong. We likely have a large order backlog until GPU supply is 2 weeks ago at the supercomputing conference, we expanded our collaboration with NVIDIA to announce a turnkey The new solution Speeds up the training and fine tuning of AI models using private datasets.

Speaker 2

Designed for large enterprises, research institution and government organizations, It comprises HPE AI software, our industry leading supercomputing and storage solutions, our HPE Slingshot Interconnect Fabric and HP eServices and the Quad NVIDIA Grace Hopper GH200 Superchip. Later this week at HP Discover Barcelona, will further expand our NVIDIA partnership with new solutions created for enterprise customers. Also this month, The University of Bristol announced that HP has been selected to deliver the U. K. Fastest supercomputer, thanks to our U.

Speaker 2

K. Government investment of 2 Communications Technology recently turned to HP Cray XD Supercomputers to develop an AI based multilingual communication tool to process, Translate and interpret text and images for 17 languages. And we just announced a partnership with Dark Byte, a provider of next generation high performance computing green data centers to power its AI cloud service with HPE Create supercomputers and our purpose built machine learning software suite. With HPE built supercomputers consistently ranked Our monthly top 10 within the top 500 most powerful and sustainable supercomputers, our clear leadership in this space Our Intelligent Edge segment was the largest driver of our revenue and profit growth in fiscal year 2023, making up 18% of our overall revenue and 39% of the segment operating profit. Fiscal year 2023 revenue in this segment increased by 45% to $5,200,000,000 while operating margins demonstrating the relevance of our offering and the payoff of our investments over time.

Speaker 2

A critical part of our intelligent Edge portfolio in the Edge to Cloud portfolio is to continue will continue to contribute meaningfully to profitable growth for our shareholders. The Compute segment is going through a cyclical period where customers are consuming prior investments, making this a price competitive market for now. As we prepare to capture a greater share of AI linked inferencing opportunities, we saw overall demand improve moderately in the second half and are encouraged in our outlook for this segment. Customer interest in servers with APUs is growing. We are investing in specialized resources that can enhance future growth.

Speaker 2

We also know we must keep our focus on capturing every unit in this business while keeping balance in our operating margin performance. The overall storage market has been sluggish this year and On our uneven performance in this segment is in line with most of our peers. However, we are encouraged with 3 quarters of stable demand. We saw sequential improvement in storage revenue in the 4th quarter. We continue to invest in our self execution capabilities.

Speaker 2

We recently deployed a large specialized storage sales force, including a team devoted to growing our storage IP product mix. We expect our subscription based offerings and differentiated IP products like HPE Alletra will continue to be sources of strong growth to enhance the profitability of this business in the year ahead. We remain focused on advancing our position in hybrid cloud. We ended the year with 29,000 customers on our HPE GreenLake Cloud Platform. Customer require a hybrid by design IT estate.

Speaker 2

They are attracted to our cloud platform because of its experience, flexibility and cost. In the Q4, we closed our largest HP GreenLake for private cloud enterprise deal to date. In addition, we saw more customer demand around our HP GreenLake SaaS offerings across data protection, observability and sustainability services. Finally, our HPE Financial Services segment for our shareholders. Financing volumes rose year over year with a major contribution from efforts to boost Our as a service volumes through HP GreenLake.

Speaker 2

Fiscal year 2023 was an important year for HP, one we advanced our strategy and delivered record financial performance for our shareholders through focused execution and operating discipline. I'm I'm confident in our ability to continue to deliver for our shareholders in fiscal year 2024 and beyond for three main reasons. First, the work we have done over the last Several years to innovate and invest in the right places, places where we have the expertise and the ability to scale has given us a portfolio that I believe Stands apart from any other. 2nd, we have weathered cyclical dynamics well. While others have had much more severe shift We have been able to stay the course in bringing our strategy to life because we have made operational improvements and have managed expenses in a disciplined way.

Speaker 2

And finally, we have been involved in undertaking transformation across the company. The changes we have made to our operating model to strengthen capabilities in our growth segment, focus on our roadmaps across the portfolio, Create new customer experience and reach them in new ways will each pay off next year and beyond. We are set up very well to navigate The current climate with and for our customers and to add significantly to the long term profitability and value we create for our shareholders. While headwinds remain in certain segments of the IT market, HPE is positioned very well to continue our momentum. We are laser focused in areas where we know we can do more to improve our performance.

Speaker 2

I hope you share my optimism in what HP can achieve in the year ahead. Let me now invite Jeremy to discuss the 4th quarter and specific segment results. So Jeremy, over to you.

Speaker 3

Thank you very much, Antonio. We closed FY 'twenty three with another solid performance. Our Q4 results reflect our strategic focus to diversify our business towards higher growth, Higher margin areas of the market. The company's transformation we have undertaken several years ago to pivot to edge and cloud is paying off. And with AI exploding in 2023, we see several promising indicators as we look further in 2024 despite some unevenness in some areas of the IT market where we participate.

Speaker 3

Q4 performance was highlighted by healthy revenues Revenue grew 5% sequentially in constant currency to $7,400,000,000 hitting the midpoint of our Q4 revenue guidance range. Year over year revenue, however, was down 6% on a difficult compare to Q4 'twenty two, during which significant order book consumption boosted our results. Q4's non GAAP gross margin was 34.8%, which was up 170 basis points year over year, largely due to the increasing contribution Let me remind you of the deliberate targeted investment decisions we made in Q4 that I flagged as SAM, which were funded with the better than expected OIME performance in the same period. The impact of this investment This is down 60 basis points sequentially and 180 basis points year over year. We expect non GAAP Operating margins to quickly recover in Q1 'twenty four.

Speaker 3

This led to GAAP diluted net EPS to $0.49 and non GAAP diluted net EPS to $0.52 which was at the high end of our Q4 guidance range of $0.48 to $0.52 Our Q4 free cash flow of $2,300,000,000 was record breaking for the company. HPE also delivered an impressive full year performance in FY23. We delivered revenue growth of 5.5 percent in constant currency, which was at the upper end of our guidance range of 4% to 6%. Currency was a 3 30 basis point headwind for the year. Non GAAP diluted net EPS of $2.15 was also at the high end of our prior guidance and well above our initial guidance from SAM 2022 of $1.96 to $2.04 FY 'twenty three free cash flow of $2,200,000,000 was well above our guidance of $1,900,000,000 to $2,100,000,000 Let's now turn to our segment results.

Speaker 3

As a reminder, all revenue growth rates on this slide are in constant currency, and I will discuss the segments in our prior structure. The company is now operating according to our new structure, and as communicated at SAM, we plan to file restated historical Financials for the new segments well before we report our Q1 'twenty four results. In Intelligent Edge, we grew revenues 40% year over year in Q4. Demand in our core product was down sequentially on customer digestion, but grew in our software centric solutions, such as our HPE Aruba Central Cloud Management Software and in our new TAM opportunities such as our SASE security software suite. Our operating margin of 29.5 percent was up more than 1600 basis points year over year.

Speaker 3

While very pleased with this performance, We continue to expect a mid-twenty percent operating margin over time as communicated at SAM 2023. And finally, We're making progress on our order book and expect to be back close to historical normal levels by mid year 2024. In HPC and AI, Q4 revenue grew 38% year over year and 41% sequentially. Q4 revenue results included only a modest amount of AI revenue. On a sequential basis, the continued strength in AI demand lifted our order book in the HPC and AI segment to more than $3,000,000,000 despite our significant revenue growth in the quarter.

Speaker 3

We continue to expect double digit revenue growth in the segment over the next 3 years And we are increasingly confident we will be above trend in FY 'twenty four with GPU supply our gating factor. Our Q4 operating margin was 4.7%, up 120 basis points year over year and 5 50 basis points sequentially. While we have much more progress to make, this does illustrate the positive benefits of scale. The early stage of the AI market, Tightness in certain key accelerators and long lead times in this segment mean that the HPC and AI margins will fluctuate. Storage revenue fell 12% year over year on a difficult compare, but rose 3% sequentially.

Speaker 3

Storage demand has now been flat to up for 3 straight quarters. HPE Electric revenue grew over 50% year over year and it will remain a robust growth contributor in FY24 supported by growth in file and object storage. HPE Alletra is shifting our mix within storage to higher margin Software subscription revenue, which is a key driver of our ARR growth. Q4 storage operating margin of 8.1% was down 7 30 basis points year over year. Headwinds included the deferred revenue impact of the HPE Alletra subscription software, Accelerated investment outpacing year over year revenue performance and a high mix of third party products this quarter.

Speaker 3

Our investments and product portfolio give us confidence storage will make progress through FY24 toward our long term operating profit Margin target communicated at SAM 2023 of mid teens. Compute revenue was down 30% year over year on a difficult compare and down 1% sequentially. Deal elongation and customer digestion we discussed previously continue to be most prevalent in compute. Declining AUPs from a record high in Q1 'twenty three was also a meaningful driver. However, 2 straight quarters of sequential improvement in demand lends further confidence to our FY 'twenty four outlook.

Speaker 3

Our full year operating margin of 13 point 7% exceeded our target range of 11% to 13%, but the operating margin of 9.8% in Q4 was temporarily below the range. Given gross margins remain largely flat sequentially and the sequential demand increases, we continue to We expect operating margins to be in the target range for FY24. HPE Financial Services revenues were points year over year reflecting rapid interest hikes that we are offsetting through pricing as well as asset management margins returning to normal as supply challenges ease. Our Q4 loss ratio remained steady at 0.5%. Let's double click on our portfolio pivot to higher growth, higher margin recurring revenue and in particular to Intelligent Edge.

Speaker 3

Even 3 years ago, the Intelligent Edge This segment constituted just 10% of segment revenue. This year, it represented 18%. The operating profit trajectory is even more telling. The Intelligent Edge segment contributed approximately 14% of the segment's operating profit 3 years ago and was nearly 40% in FY2023. In FY 'twenty four, we intend to give you a similar view combining our growth pillars of HPC and AI, Hybrid Cloud and Intelligent Ed segments.

Speaker 3

Within that, we expect the Intelligent Ed segment growth to moderate and the HPC and AI segment growth to accelerate. Robust demand in our hybrid cloud and as a service offerings illustrates the durability of our portfolio shift. ARR exceeded $1,300,000,000 in Q4. This represented 37% year over year growth, which is in line with our long term CAGR target of 35% to 45%. Storage and Intelligent Edge Software and Services are the fastest growing components of ARR.

Speaker 3

We continue to lift HPE GreenLake's value proposition with an increasing mix of higher margin recurring software and services revenue. Our software and services mix was 68% in the quarter. We expect this mix to increase into the upper 70% range by FY 'twenty six. This expansion is driven by the growth of subscription based software With our products and the increase attached of our HPE operational services, which rose double digits in Q4, The rising software and services mix is expanding our as a service margins. Our as a service orders grew 11% year over year in Q4 and finished the year up a solid 23% after 68% growth in FY 'twenty two.

Speaker 3

Our cumulative as a service TCV has now increased to nearly As ARR is now on a clear path to meaningful scale, we will simplify our as a service disclosure from ARR As of service orders in TCV to only ARR in FY 'twenty four. The explosion in AI demand is driving robust growth in our APU orders. Total APU orders, which include APUs in our Compute, Cray EX and Cray XD Businesses totaled $3,600,000,000 in FY2023, which is up from the over $3,000,000,000 we closed at SAM 2023. HPE Cray XD APU orders accelerated in Q3 and in Q4, reaching $2,400,000,000 for the year. The impressive APU server demand is also evident in our total server demand.

Speaker 3

APUs represented 25 percent of total server order dollars in FY23, up from 10% in the prior year. We will continue to disclose APU orders. However, orders can be easily north of $100,000,000 each. Therefore, orders may be lumpy. But the key point is that we are capturing AI demand now and are well positioned for coming demand across the entire AI lifecycle From training to tuning to inferencing.

Speaker 3

Our strategy is delivering top line growth and gross margin expansion. Despite the challenging macro, ongoing product digestion and currency headwinds, we still produced one of our highest quarterly revenue figures since 2018, while sustaining our expanded gross margin profile. Our Q4 non GAAP gross margin rose 170 basis points year over year to 34.8 percent And our full year non GAAP gross margin rose 140 basis points to 35.3%. That's a more than 5 Moving to free cash flow. In Q4, we generated $2,800,000,000 in Our 2,200,000,000 in free cash flow in FY 'twenty three was above the high end of our guidance and up meaningfully from $1,800,000,000 in FY 'twenty two, primarily on improved earnings and net income conversion.

Speaker 3

We exited FY 'twenty three with a cash conversion cycle of negative 4 days, which exceeded our expectation for neutral we communicated at SAM. Strong working capital management in Q4 and reduced transformation costs in FY2023 drove an improvement in our conversion of non GAAP net earnings to free cash flow to 80% in FY 'twenty three. Continued progress in FY 'twenty four and beyond leads us to expect to reach 90% by FY We returned over $1,000,000,000 in capital to shareholders in FY2023, including $421,000,000 in share repurchases. While certain price and volume parameters of our trading program limited us to below our $500,000,000 target in We reiterate our goal of returning 65% to 75% of free cash flow to shareholders between FY24 in FY 'twenty six. Before we dive into our outlook, let me remind you that we will exclude H3C earnings the receipt of the cash proceeds in the first half of calendar twenty twenty four.

Speaker 3

For Q1, We expect revenues in the range of $6,900,000,000 to $7,300,000,000 This incorporates historical seasonality in our overall including in the HPC and AI segment after its strong Q4. We expect AI revenue acceleration to drive sequential growth and HPC and AI and total HPE revenue in Q2 'twenty four. We expect GAAP diluted net EPS between 0 point 24 And non GAAP diluted net EPS between $0.42 $0.50 We're reiterating our prior year 2024 guidance of 2% to 4% revenue growth in constant currency. We expect OI and E, which as noted excludes H3C going forward, to be a headwind of approximately $300,000,000 and our non GAAP structural tax rate to be 15%. Our full year GAAP diluted net EPS guidance of $1.81 to $2.01 is $0.02 lower than our prior view as a bit of transformation costs slipped into FY 'twenty four.

Speaker 3

We are reiterating our full year non GAAP We continue to believe our FY 'twenty four performance will be weighted to the second half of the year as GPU supply improves. We are increasing our dividend by 8% in FY 'twenty four and intend to return 65% to 75% of free cash flow to shareholders this year. So to conclude, while there continues to be unevenness in some areas of the IT market, Our investment in growing areas of our portfolio is paying off. We are confident in our ability to continue to capture the AI explosion in demand. AI also opens broader customer discussions about the benefits of AI inferencing at the edge and the need to be hybrid by design.

Speaker 3

Our HPE GreenLake cloud platform, our AI native portfolio, and our services expertise are perfectly aligned to the needs of our customers that we believe will turn into profitable growth for our shareholders. Now, let's open it up for questions.

Operator

We will now begin the question and answer session. We also request that you only ask one question. The first question is from Mike Ng with Goldman Sachs. Please go ahead.

Speaker 4

Hey, good afternoon. Thank you very much for the question. I just have one on the APU orders of $3,600,000,000 I was wondering if you could talk a little bit about the mix between compute, supercomputing and Cray XD And if you could offer any color on the type of customers that are making this order? Is this your typical enterprise customer? Is it more of a Tier 2 or AI CSP?

Speaker 4

Any thoughts there would be great. Thank you.

Speaker 2

Well, thanks, Mike. This is Antonio. So pretty much all the orders are in the HPC and AI segment, the vast majority. We saw now in Q4 some uptick in demand in the what I call the traditional compute. But what you have to think about it is AI is a lifecycle, Right, training, tuning and inferencing.

Speaker 2

And the products we talk here, whether it's HP, E, Cray, XD or EX, Really out on the training side and the tuning side. And so when I think about the type of customers, I think about the model builders, Right. So these are unique customers that in the past we generally would have talked about it. Think about companies like Recursion, Pharmaceutical, Crusoe Energy, obviously large language models like alifalpha, Tiger Data or Northern Data, Geo Research and the like, these are big model builders and they need large amount of computational Now what we start seeing is an uptick in the tuning side with enterprises because Generally, they don't tend to build models. They tend to leverage foundation models in the open source or some of these companies provide.

Speaker 2

And then they tune those models with their data, but they want to do it in a private, secure and obviously sustainable way. And that's why we have made announcements with NVIDIA and you're going to see further announcements later in the week. And then AI inferencing, I call it for using a The singles and the doubles, right? So these are maybe a server with 8 GPUs or accelerator results where they started Pulling these models, they have been trained or tuned into a production and think about where their real time processing data Happen where business transformation takes place or maybe doing some sort of POC or pre training experiments. And so now we start seeing that increasing.

Speaker 2

But the vast majority of compute is still CPU centric. And we saw some uptick in the GPUs, but the vast majority of all the APUs that we talked about it I'm in the traditional high density for training and tuning and that's where our HP Cray set of platforms Plays a big role. And obviously, they also find its way to supercomputing a large scale that we have talked Anything you want to add?

Speaker 3

The only thing I would just add to that is the supercomputing piece specific to your question is less than 10% in the total APU orders in FY 'twenty three. The other interesting point to add on to the journey towards inferencing that Antonio mentioned is within compute, although against a very Small base, we did see non Tier 1 customer orders around GPU or APUs for Compute increased about 100% in the quarter. So again against a small base, but an interesting point to see the focus start moving towards that realm.

Speaker 2

And again, only 10% of the APUs were consumed in supercomputers. The rest was all in AI. Okay.

Speaker 1

Thank you, Mike. Thanks, Mike. Gary, can we have the next question, please?

Operator

The next question is from Wamsi Mohan with Bank of America. Please go ahead.

Speaker 5

Yes. Thank you so much. Antonio, we've seen some networking companies talk about a slowdown in some inventory digestion. You're still delivering very strong growth in Edge, high 30s. I know you called out a more front end loaded performance for Edge, but curious how you're thinking about The weight and pace of that business trajectory, both on revenue and margin terms as you go through the course of the year?

Speaker 2

Yes, thanks, Wamsi. I'm going to talk about demand and then Jeremy can talk about revenue in March, which we were very clear of some, right, What to expect, obviously, we have dropped a significant growth over the last 2 years. I think it was the 12 consecutive quarter of Year over year revenue growth, that's very impressive. We added $2,000,000,000 of revenue in the last And obviously, that came with an expanded set of gross margins because of our software and subscription based models that we have been driving. Traditionally, think about that has been in the campus and branch, where switch or Wi Fi, but more and more lately, obviously, it's all software driven and as well as expansion into The new times we discussed at the Security Analyst Meeting, including SD WAN and security To create the SSC framework or the SaaS framework, we talked about it.

Speaker 2

And going forward, we also are going to add the private 5 gs, which we discussed. And let's not forget, we have been also gaining momentum in the data center with our offers, which are an extension of our switching portfolio into data center. So definitely was a quarter over quarter slight decline in orders for demand for Products in the campus and branch, but we saw strong demand in the software, in the security space. And that's why With Phil, we talk about these multiple adds, adjacencies we have added to the platform. And they are all incorporated into the HP The Aruba Central platform, which is part of HP GreenLake.

Speaker 2

So again, we are committed to grow revenues Next year, on the higher base that we created, again, on the $5,200,000,000 we just delivered, albeit you should not expect a 40 And that's why I want to have Jeremy talk about what we are reaffirming here in terms of revenue and as well as margins.

Speaker 3

Right. Yes. As Antonio mentioned, we did, as Sam mentioned, a slight growth we're expecting year over year on a full year basis for Edge. As I think about that, I'd almost break that down into 2 halves. The first half, as we mentioned, we do still benefit from A backlog position or an order book position that will go into the first half and help support that revenue performance and then the second half will be more dependent on demand improvements and in the areas that Antonio mentioned and the investment areas that we're helping drive that expectation.

Speaker 3

From an operating margin perspective, I would say that, I would expect the first half to still benefit from higher operating margins Again, the order book consumption has been at higher priced with lower cost. So that's helped drive our operating margin performance, which again this quarter At 29.5 percent is exceptional. But we would expect over time, Probably more in the second half, you'll start seeing that operating margin rate get more back towards the mid-20s that we had mentioned at SAM is our

Operator

The next question is from Toni Sacconaghi with Bernstein. Please go ahead.

Speaker 6

Yes. Thank you. If I look at your take the midpoint of your Q1 revenue guide And I run out normal seasonality. I get revenues down about 5% for the year. You've just stated that The Edge business is going to be weaker In the second half, so below normal seasonality.

Speaker 6

So clearly, you're expecting a huge ramp in HPC NAI over the course of the year and I'm wondering if you can dimension that or are you expecting Greater than normal seasonality in the traditional server business and why would that be? And then finally, can you just comment on Total backlog for HPC and AI exiting the quarter, you said it was $3,000,000,000 exiting last quarter or greater than $3,000,000,000 What is it today? Thank you.

Speaker 3

Tony, this is Jeremy. I'll take those 2 for you. So you're spot on. As we think about next year, We will have a seasonal drop in HPC and AI. That's largely as Q4 really benefited from a meaningful amount of CrayEX acceptances.

Speaker 3

And as you know, the time between order and acceptance can be a long period of time and Q4 saw A larger number of acceptances, which help drive the revenue performance. We'll see a bit of a dip back down in Q1 and then Q2 and the second half Really benefiting from the acceleration in AI as well as some additional supercomputing business. And so you will see a pretty significant ramp As we go from Q1 to Q2 and then sustaining at or ramping beyond that in the second half of the year and HPC and AI will be a big part of the revenue growth story Your question on the order book total, it landed at just over $3,200,000,000 which was slightly above where we landed in Q3. And that really came off the back though of Q4 revenue performance in HPC and AI, Up about $350,000,000 on a quarter over quarter basis. And so what happened is you had a run off of order book from revenue performance in Q4 And then how to rebuild of that order book coming largely from AI demand in Q4 that took it back up to its historical high level of just over 3,200,000,000

Speaker 1

Thanks very much, Tony. Gary?

Operator

The next question is from Samik Chatterjee with JPMorgan. Please go ahead.

Speaker 7

Hi, thanks for taking my question. I guess, in your prepared remarks, you did make it a point to highlight the uneven demand backdrop that I was wondering if you can flesh that out a bit more in terms of what you're seeing between the different product groups. And particularly when I look at that in Contrast to the strong AI demand you're seeing, would you really sort of then see some of the AI demand from enterprises cannibalizing their own spend towards The other product groups or is the uneven demand more of inventory correction? Thank you.

Speaker 2

Yes, sure. I mean, no question we see an And demand in AI, Jeremy just comment on that. And I will say of that order book that Jeremy just Talked about in Q4, only very little was converted in AI. And to the point he made, the growth we had in Q4 was driven by The supercomputing acceptances, but we have a very, very large pipeline in front of us, which is very exciting. But ultimately, it's going to come down to Time to revenue based on the GPU availability.

Speaker 2

But I will say that business is going to continue to be super strong. And clearly, when I speak Customers, which I do more than 50% of my time, there is huge amount of interest in AI and how to accelerate the deployment of AI across the enterprise, Understand that there are challenges, whether it is sustainability challenges, whether Power and Cooling and others. And that's why HPE went bolt on that front last June to basically make the announcement we're going to offer supercomputing as a public cloud instance so customers can use as a virtual private clouds. So that would feel very good about it. GreenLake continues to be very strong.

Speaker 2

Just to be of a context, we added $1,000,000,000 in TCV Quarter over quarter, we had 2,000 customers and AIR obviously is a function of the deferred revenue that we materialize over time. But what customers really love about our experience is that it's hybrid by design. They can consume anything from H2 Cloud to HP GreenLake, Whether they pay CapEx or OpEx, it doesn't really matter in the end, but they really love the experience. And that's why we're building the AI components into the same platform. So those are 2 very strong.

Speaker 2

Edge obviously had tremendous momentum. I think we're going to have the typical adjustments, But that's why we spend a lot of energy and time on adding more capabilities to the edge platform, security, SD WAN, private 5 gs data center networking, which adds to the momentum, understand that there will be potentially some digestion on the campus and branch. But as Jeremy said, we have very well covered for the first half of twenty twenty four. So we have to see that. And then compute, right, is a typical business goes through this cyclicality, right?

Speaker 2

So last year, obviously, we had a huge amount of orders. We converted our order faster than people expected. And in the back half of this year, we saw sequential demand improvements in units And stable AUPs. And now we start seeing upticks in the mix with AI inferencing, which has these accelerators. But Q3 demand was higher than Q2 and Q4 was higher than Q3.

Speaker 2

So I think it's fair to say we are stabilized We are improving. I will not call it yet a recovery. And then on storage, I believe we're going to see some improvements over time because of AI Demand which require file and object and we have a great portfolio with HPE Alletra and we intend to capitalize on that. But for 3 consecutive Now we have seen stability and improvements and in Q4 we saw revenue improvements on a sequential basis. So customers are prioritizing the spend where it makes sense, but ultimately have a portfolio that can meet their needs wherever they are And HP GreenLake is the way we deliver all of this, which ultimately for shareholders drive higher margins and higher recorded revenues and profit.

Speaker 2

Sorry? Cannibalization. Cannibalization, sorry, Jeff has reminded me cannibalization. We have no evidence of that yet. I think that will become clear when the traditional compute CPU driven Return to some normal levels.

Speaker 2

But remember, not every customer has deployed cloud across their enterprise. Still Quite a bit of journey to go. And there are clear customers assessing where is the best place to Whether it's in a public cloud or whether it's repatriating on prem because of the cost or because of data, I think AI is a huge driver of repatriation in my mind because if you have data distributed across multiple states, It's very hard to really train and fine tune the models when you have data everywhere. And our focus there is really providing them an automated data pipeline with our unified analytics platform. So fundamentally, it's early to say.

Speaker 2

But so far, in the traditional compute business, we have not seen evidence of cannibalization at this

Operator

The next question is from Simon Leopold with Raymond James. Please go ahead.

Speaker 8

Thanks for taking the question. I wanted to see if you could talk a bit about the trends you're seeing in compute for the non accelerated platforms. And Really the thing I'm trying to tease out here is sort of this issue of the AI projects pulling budget or Oxygen out of the room versus organizations buying up compute platforms to prepare for AI inferencing and embracing AI as a inferencing element, not just training. Thanks a lot.

Speaker 2

Yes. Thanks, Simon. Again, Maybe I will elaborate a little more to the comments I've made before. So we saw Q4 over Q3 and Q3 over Q2 Improvement in demand in units and a lot of that was CPU driven, although there is a small base of AI accelerated Kind of APUs, if you will, that we saw an increase in Q4. But I will say The unit growth in Q4 was not driven by the APUs.

Speaker 2

It was driven by a combination of CPUs, The vast majority and some APUs because the base is still very, very small. So definitely customers are Inside will accelerate over time whether it's to do some pre training or POCs or really deploying in production. And I think many customers also will accelerate deployments of tuning solutions on prem because of the data aspects I talked before. No question, we're still digesting what we bought last time on the CPU side of the house. But again, we saw some improvements in demand sequentially in units.

Speaker 2

And then let's remind ourselves that we also for us and the industry, we are going through the transition of Sapphire Rapids And ultimately, we call that the Gen 11 platform. That became now, what, Jeremy, 25% of the mix,

Speaker 3

53 percent of orders in Q4.

Speaker 2

53 percent of the orders in Q4, 25% of the revenue mix. And so that's good for us because obviously drives higher density and obviously we can attach more options to the same platform. And customers like the sustainability piece of that and the hybrid by design nature of that, which is And GEN 11, by the way, was conceived to accept any type of processing unit, Whether it's a CPU or whether it's an APU, including ARM based solutions or GPU based solutions, whether it's Intel or AMD on the X86. So that gives us tremendous amount of flexibility. But ultimately, it's not just about the server, it's the software that comes with it.

Speaker 2

And this is where we spend a lot of time building the partnerships and relationship with NVIDIA. So now you can deploy a tuning or inferencing with the NVIDIA Stack and our software as well, all part of the HP and the like.

Speaker 1

Thank you very much, Simon. Gary?

Operator

The next question is from Tim Long with Barclays. Please go ahead.

Speaker 5

Thank you. Can you just touch on the storage business a little bit? It's been kind of challenged like some of the other Businesses on macro, could you talk a little bit about the outlook for recovery there? And also if you could just touch on the 3rd party Business there that's kind of impacted gross margins profitability, how does that look to be trending as we look out over the next year or 2? Thank you.

Speaker 3

Sure. I can take that particularly towards the latter part of that. I think And Tony already hit on some of the demand dynamics, again, where we've seen 3 quarters of flat to increasing demand and So some positive trends from that perspective. I think from an operating margin perspective, certainly, we saw a reduction in Q4. That was driven off a combination of several things, including a higher third party mix that you mentioned, as well as the fact that we saw some incremental OpEx In this segment and that OpEx as a comparison to the revenue performance in the quarter also put pressure onto that operating margin.

Speaker 3

However, we do expect a pretty quick recovery there. As we look into Q1, in particular, Revenue is not expected to accelerate meaningfully, but we think the mix will improve as far as towards our IP product. And the we should see some OpEx moderation and favorability as we go into the quarter coming out of Q4 and some of the investments that we made there. And So I expect to see that get back into a low double digit kind of area. And then as we work through the quarter and that IP mix starts to improve more On demand acceleration, then we should start seeing us working back towards our mid teen target that we identified at SAM for this segment.

Speaker 2

I will say also, if you look at HPE Alletra product, it's the fastest ramp we ever had in the history of the company. This This past quarter grew another 50%, but also there is some short term impact because a portion of that revenue Get deferred because the subscription software on the platform. And so that was an intentional strategy because ultimately the infrastructure It's one piece of it, but the operating system and the cloud services that comes with it are actually a subscription to HP So while we're growing 50%, we are not materializing the full revenue because a portion of that gets deferred at least to over 3 years. And that's good because ultimate comes to a significant higher margin for us. But our strategy is to Dramatically improved the mix to IP and you will see more announcement this week in the storage portfolio all geared to the AI opportunity With file and object and that will accelerate some of the momentum we have in the storage IP portfolio.

Speaker 1

Thanks, Tim. Gary?

Operator

The next question is from Sidney Ho with Deutsche Bank. Please go ahead.

Speaker 8

Thank you for the question. I want to ask about ARR and it was flat quarter over quarter, but still up very strongly 39% year over year. Can you walk us through the dynamics, why it didn't change in the quarter? You just talked about GreenLake being very strong multiple times. Are there some negatives, maybe some cancellations offsetting the growth?

Speaker 8

Or is it more pause after 2 very, very strong quarters? And lastly, was there much contribution from AI servers in the ARR number at this point? Yes, thank you.

Speaker 3

I'll take that. So just on the last point, no, there wasn't any meaningful AI impact, but we do expect that to be an accelerator, particularly In FY 'twenty four, as we go to Q2 and towards the second half, that will be a big part of our ARR story and we expect that to be an accelerator for us and FY 'twenty four. On the quarter over quarter, this business, similar to what I mentioned on the supercomputing area, does have some time between order To revenue recognition, in this case, when ARR begins to be reported. And so I think the sequential story was more about Early in the year, we had seen more as the backlog had been burning down and some of those deals that have been waiting in the pipeline turning into In converting, that helped drive and accelerate the ARR through the 1st three quarters. We saw a little bit less of that in Q4, I don't think that at all is an indication of a slowdown in this space.

Speaker 3

In fact, between the 35% 45% kind of CAGR annual growth, I expect us in FY 'twenty four to see the higher end of that range.

Speaker 2

Sidney, there is some grounding in there

Speaker 1

as well that we can talk through, but thank you. Gary, this should be our last question, I think.

Operator

And our final question will be from Meta Marshall with Morgan Stanley. Please go ahead.

Speaker 9

Hi, this is Mary on for Meta Marshall. I just had a question on demand trends. Can you speak to linearity within the quarter And whether pockets of weakness you saw during the quarter changed as the quarter went on?

Speaker 2

Yes, I think Overall, it was more back ended, I will say, in the quarter. We saw strengthening as we went through the weeks. As always said, we have 13 weeks in the quarter and we saw stronger momentum as we built along the way. And remember what we said to Assam, right? So Assam, we said in AI, year to date to October 'nineteen, I think was the sum date, we had $3,000,000,000 in cumulative orders, Both between supercomputing and AI specifically, and we ended the year at 3.6%.

Speaker 2

So in the last 12 days, we booked $600,000,000 in incremental AI orders. That tells you the strong. It was true also for compute and By the way, the last few weeks, call it 3, 4, 5 weeks were stronger than the beginning of the quarter. So I will not make much out of that. Sometimes customers Take the time.

Speaker 2

We still actually live in elongated flow cycles, that's for sure. Customers taking more time to make those decisions And ultimately issued the POs. But what really is giving me the confidence is the strong pipeline we have ahead of us. That's obvious and clear in AI, it's significant stronger than we ever imagined. And the only challenge we have there, then as Jeremy said, right, so it's We really recognize very little revenue in AI in Q4.

Speaker 2

That's why we expect the acceleration starting in Q2 And beyond as lead times improve and some of the supercomputing also get accepted, but the reality 2024 will be the year of AI revenue Growth. And then in the Edge, obviously, we have the momentum that we talked about in subscription, the scale of our software And the incremental engines that we have. So overall, it was a typical quarter, but stronger on the back versus the front. I think we have time for one

Speaker 1

more. Let's do one more. Thanks, Barry. Gary, please.

Speaker 2

Maybe just one more question.

Operator

And sure, the final question will be from Aaron Rakers with Wells Fargo. Please go ahead.

Speaker 8

Yes. Thank you, guys. This is Michael on behalf of Aaron. I just want to ask around AI software. Can you just help us appreciate or understand how your own AI software solutions that you guys Complementary or is it more of a substitute?

Speaker 8

Just how to think about that overall? Thank you.

Speaker 2

Yes. Great question. And I will say overall there is a lot of complementary and there are some places overlap obviously, but with Jensen and the team, we have a clear joint plan to win together in different segments of the market. But let me break it out because We talk about software in general terms, but let's start first at the infrastructure level. We have unique software that allows us to run these Supercomputers and AI system, which are cloud AI native by nature at massive scale.

Speaker 2

Think about when you run a model, you need to start and complete the model training. And you have to have unique technologies for checkpoints and making sure that all the compute power is acting as unified System, because unlike the public cloud or the cloud as we know it, you run multiple workloads on multiple nodes. In this case, you run 1 workload on multiple nodes. And that's parallel computing as we know it. And ultimately you need the software to run this at scale.

Speaker 2

The magic around that is that checkpoint and then the second piece of that It's our networking interconnect fabric, which allows us to really connect every accelerated unit To every accelerated unit in a cohesive approach, and that's our Slingshot Contention Fabric as we know it. And then on top of that, we have our machine learning development environment. This is where developers and the like Use our machine learning development services to prepare the models to automate the data pipeline. One of the biggest challenges customers have is And then with NVIDIA, we use their AI enterprise software, including some of the foundation models that they In order to provide a complete solution and obviously we leverage their APUs, call it GPUs, whether it's H100, L40 or L40S, A100s in the past and going forward as the announcement we made, as supercomputing 2023 in Denver, we are leveraging the Grace Hopper H200. So it's a combination depending on the use case, And we feel pretty good about what we're doing and stay tuned because Thursday we're going to make further announcements about our partnership with NVIDIA.

Speaker 2

It's our IP and their IP that makes us together unique and differentiated in the AI space. Okay. Well, thank you, everyone. I appreciate all of your time. I know you're busy and covered in all the earnings.

Speaker 2

But I will say, just to wrap, in fiscal year 2023, Clearly, we demonstrated our strategic investments and the extraordinary innovation across the growth areas of edge, Hybrid cloud and even compute for the matter are really resonating with customers and is helping us accelerate revenue growth And profit diversification, that's why you see the growth in gross margin and profit. And I believe we will continue to capitalize on this growing market And I'm confident to continue to increase the returns to our shareholders. And that's why we are raising the dividend for 2024.

Operator

Ladies and gentlemen, this concludes our call for today. Thank you for attending our presentation. You may now disconnect.

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Earnings Conference Call
Walgreens Boots Alliance Q4 2023
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