Hewlett Packard Enterprise Q4 2021 Earnings Call Transcript

There are 9 speakers on the call.

Operator

Good afternoon, and welcome to the 4th Quarter Fiscal 2021 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 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, Mr. Andrew Siminek, Vice President of Investor Relations. Please go ahead.

Speaker 1

Good afternoon, everyone. I'm actually Jeff Kvaal of Investor Relations. I'm filling in for Andy today. I'd like to welcome you all to our 2020 1 Q4 earnings conference call with Antonio Neri, HPE's President and Chief Executive Officer and Tarek Robiotti, HPE's Executive Vice and Chief Financial Officer. Before handing the call over to Antonio, let me remind you that this call is being webcast.

Speaker 1

A replay of the webcast will be made available shortly after the call for approximately 1 year. We posted the press release and the slide presentation As always, elements of this presentation are forward looking and are based on our best view of the world and our businesses as we see them today. For more detailed information, please see the disclaimers on the earnings materials relating to forward looking statements that involve risks, uncertainties and assumptions. For a discussion of some of these risks, uncertainties and assumptions, please refer to HPE's filings with the SEC, including its most recent Forms 10 ks and Form 10 Q. HP assumes no obligation and does not intend to update any such We also know that the financial information discussed on this call reflects estimates based on information available at This time and could differ materially from the amounts ultimately reported in HPE's quarterly report on Form 10 Q for the fiscal Quarter ended January 31, 2021.

Speaker 1

Also for financial information that has been expressed on a non GAAP basis, we have provided reconciliations Please refer to the tables and slide presentation accompanying today's earnings release on our website for details. Throughout this conference call, all revenue growth rates, unless otherwise noted, are presented on a year over year basis and are adjusted to exclude the impact of currency. Finally, we will be referencing the slides and our earnings presentation throughout our prepared remarks. As mentioned, the earnings presentation can be found posted to our website and is also embedded within the webcast player for this earnings call. With that, let me turn it over to you, Antonio.

Speaker 2

Well, thanks, Jeff, and good afternoon, everyone. Thank you for joining our call today. And for those of you who attended our Virtual Security Analyst Meeting last month, thank you. We appreciate the opportunity to discuss how our edge to cloud strategy positioned us to capture an expanded market opportunity and accelerate shareholder value creation. HP ended fiscal year 2021 with strong momentum.

Speaker 2

Customers are responding to our edge to cloud value proposition as evidenced by the record demand for our solutions. Demand accelerated in the second half of the year, driving fiscal year 2021 orders growth of 16% year over year. Revenue of $27,800,000,000 in fiscal year 'twenty one grew in line with our long term outlook, up 1% year over year. In fiscal year 2021, we executed very well, which enabled us to exceed our commitments across all financial metrics, even with a substantial order backlog. Our as a service annualized revenue run rate, or AIR, of $796,000,000 was up 36% year over year.

Speaker 2

We significantly improved our gross and operating margins, which increased our fiscal year 2021 non GAAP Operating profit by 25% year over year. We delivered fiscal year 'twenty one non GAAP diluted net earnings per share of 1.96 up 27% year over year. And we generated fiscal year 2021 free cash flow of $1,600,000,000 up $1,000,000,000 year over year, which translates to growth of 177%. This was a very strong performance, and it was particularly impressive against the backdrop of industry wide supply constraints, which continued to challenge our ability to convert orders to revenue as quickly as we would like. We have a world class global operations team that continues to work closely with our long standing diverse network of suppliers.

Speaker 2

We continue to take proactive inventory measures to better position us to deliver against Our results in Q4 strengthened the momentum we have as we entered fiscal year 'twenty 2. Increased demand in the quarter dropped orders growth of 28% year over year, with particular strength in our as a service orders, which grew an impressive 114% year over year, including a large network as a service win. We also saw record levels of orders in key growth areas, including Intelligent Edge, High Performance Computing and Artificial Intelligence Businesses. We delivered $7,400,000,000 in total Q4 revenue, which was up 7% sequentially and above normal sequential seasonality. We expanded our gross and operating margins, increasing our Q4 non GAAP diluted net earnings per share by 27% year over year.

Speaker 2

And we generated Q4 free cash flow of $94,000,000 in line with the outflow we provided at the end of Q3. Tarek will take you through our quarterly results in detail, but I would like to spend a little more time putting a full fiscal year in context for you. Our fiscal year 2021 results prove the relevance of our strategy to customers and the traction of our transformation to become the edge to cloud company. As we discussed at our Security Analyst Meeting last month, HPE is at the center of several compelling megatrends. The explosion of data at the edge, the mandate for a cloud experience everywhere and the need to extract value from data to generate insights.

Speaker 2

HP's differentiated ACE2 Cloud strategy uniquely positioned us to capitalize on these trends and capture growing profitable markets. Our solutions and services help customers overcome the challenges of multi generation IT and enable them to We are executing with focus and speed to deliver against our vision and strategy. We are making strategic investments and taking deliberate steps to continue to shift our business. And As I have said previously, this transformation is my number one priority, and I'm proud of the progress we have made in fiscal year 2021. Our Intelligent Edge business grew fiscal year 'twenty one revenue 13% year over year with orders exceeding for the first time $4,000,000,000 Customer demand was up strong double digits year over year as more customers look for ways to create new digital experiences at the edge And capitalize on the data generated there.

Speaker 2

But the industry wide component shortages kept us from converting our full order momentum to revenue in Q4, And we entered fiscal year 2022 with record levels of backlog. Our market leadership at the Edge remained very strong. HPE was positioned as the leader in one of the leaders in the Magic Quadrant Gartner provides for wireless access network edge infrastructure, which is notable because HP is only one of the 2 companies to be positioned in the leader quadrant 4 years in a row. We continue to drive strong innovation in this business. In Q4, we introduced the industry first distributed services switch, which brings software defined services and security right where the data is created and processed.

Speaker 2

Developed in partnership with Pensando, This solution eliminates legacy appliances and host software needed to build the hybrid cloud demanded by In Q4, we closed the largest network as a service deal in HP history to help a large U. S. Retailer enhance its customer and employee experience throughout the stores. In addition, The Major League Soccer franchise FC Cincinnati standardized on Aruba at the TQL Stadium to deliver next generation digital cashless, contentless The franchise deployed an end to end Aruba Edge Services platform network at its new 26,000 seats stadium to power this game day and special event experiences. Orders of HPE's high performance computed and AI offerings were also up strong double digits year over year.

Speaker 2

This record level of demand has generated an order book of awarded contracts now at $2,700,000,000 Excluding the important $2,000,000,000 win with the U. S. National Security Agency, HP expanded our number one market position in HPC with And according to the list of the top 500 supercomputers released just 2 weeks ago, 33 of the top 100 most powerful supercomputers in the world were built by HPE. This is more than any company. At the end of Q4, the National Energy Research Scientific Computers Center, NERSC, at Berkeley's lab accepted the first phase of the Perlmutter supercomputer.

Speaker 2

Powered by the HPE Cray EX System, Bermuda introduced a new generation of supercomputing capabilities to more than 8,000 scientists performing research for the U. S. Department of Energy Office of Science. HP is uniquely positioned to bring the AI, deep learning and data analytics capabilities of our most advanced supercomputers to mainstream enterprises through the HP GreenLake platform. In Q4, we announced that ENI, a global energy company, selected HP to upgrade its existing HP supercomputer.

Speaker 2

Through HP GreenLake, ENI can accelerate Discovery of new energy sources with more accurate modeling and simulations as well as become more sustainable by monetary utilization and energy consumption with an Asset Service Solution. We continue to strengthen our compute and storage businesses, where we saw strong orders and profitability in fiscal year 2021. In compute, orders increased More than 10% in fiscal year 'twenty one, and we delivered operating margins of 10.8%, up 260 basis points year over year. We are making bold moves to transform our storage business into a cloud native data services business, which resulted in a high single digit order growth and gross margin expansion, up 130 basis points year over year. And we continue to see high services attach rate helping enable HPE Pointnext orders to increase mid single digits in fiscal year 2021.

Speaker 2

This contributed to the overall performance of HPE Pointnext, which ended fiscal year 'twenty one with a book to bill ratio of 1.15 of revenues, highlighting the potential for future revenue growth in fiscal year 'twenty two In fiscal year 2021, we generated a strong momentum in our transformation to an as a service company. Our company as a service orders increased 61% year over year, with HP GreenLake orders increasing 46 Our as a service annualized revenue run rate, or AIR, of $796,000,000 was up 36 The growth of our AIR is particularly noteworthy because this recurring revenue stream is high quality and high margin. During our Security Analyst Meeting last month, Tarek shared that more than 60% of our AIR mix is software and services, And we believe that Porsche will grow to more than 3 quarters in the next 3 years. Our AIR gross margins are well above Our corporate average gross margins today and the addition of high value software content will drive margins even higher. Our pivot to a loss of service company is enabled by HP Financial Services, which increased fiscal year 2021 financing volume 3% year over year, driven by strong growth within HP GreenLake.

Speaker 2

We continue to advance our leadership in our HP GreenLake offering. In September, we introduced HPE GreenLake for data protection, which are cloud services designed to protect data across edge to cloud, This new set of solutions marks our entry into the growing data protection as a service market. Our acquisition of Zerto enable us to add market leading data protection to our cloud services portfolio to help Enterprises take cyber threats and ransomware attacks head on. We also launched HPE GreenLake for data analytics, which includes the industry first unified modern hybrid analytics and data lake platform. This strategically important solution positions HPE in the Grow With Unified Analytics market and helps customers accelerate modernization initiatives for all data across edge to cloud.

Speaker 2

We continue to see incredible response to our HP GreenLake offering. We added more than 300 new GreenLake customers during fiscal year 'twenty one, bringing our customer count to more than 1250. New GreenLake logos represent an increasing share of orders with approximately onefour of Q4 GreenLake orders coming from new customers. Today, more than 900 partners sell HP GreenLake, one of the largest partner ecosystems selling as a service offerings in the industry. We added more than $1,500,000,000 of GreenLake total contra value over the last year, bringing the total to more than $5,700,000,000 Examples of new GreenLake logos includes Trinchero Family Estates, the 2nd largest family owned winery in the world, which adopted HPE GreenLake to our channel partner PKA Technologies to add flexibility and scale, Its capacity to meet the increasing demand of automation.

Speaker 2

The HP GreenLake solution powers the 1 in its automated warehouse, where approximately 60 different types of wines are produced, bottled, packaged and prepared for shipping while reducing overall IT costs. We also won a deal with ONGC, India's largest oil and natural gas company, which is using the HP GreenLake platform to make one of the largest The year for HPE and I'm proud of all what we have accomplished. We have made incredible progress in transforming to become the edge to cloud leader, executing on a strategy to help customers in truly differentiated ways and position ourselves for sustainable profitable growth for our shareholders. At the same time, we have advanced our ESG initiatives, which in Q4 earned us a position on a highly competitive Dow Jones Sustainability Award Index, placing in the 98 percentile. We exceeded our commitments in fiscal year 'twenty one, and our momentum is strong as we enter fiscal year With that, I will turn it over to Tarek to share additional details about the quarter.

Speaker 2

Tarek, over to you.

Speaker 3

Thank you very much, Antonio. I'll start with a summary of our financial results for the Q4 of fiscal year 2021 and as usual I'll be referencing the slides So now let me discuss our Q4 performance starting with Slide 3. I am very pleased to report that we continue to see Unprecedented demand across all our businesses with robust order growth, up 28% year over year. Building on the strength from the last quarter, we delivered Q4 revenues of $7,400,000,000 up 7% from the prior quarter, above normal sequential seasonality and this despite increased supply chain challenges that we foreshadowed at SAM last month. It's also worth highlighting that $7,400,000,000 of revenue represents the highest level since Q1 of fiscal year 2019, well before Our non GAAP gross margin was 33%, which was up 2.30 basis points from the prior year, And this was driven by our deliberate actions to shift towards higher margin, software rich offerings, strong pricing discipline and cost takeout.

Speaker 3

As previously indicated, gross margins were pressured from prior quarter levels due to an increasing industry wide shortages of certain components that have resulted in extended lead times and higher commodity costs underpinning backlogged orders. We continue to take proactive inventory measures and display healthy price discipline to minimize the impact of recent disruptions. We expect this dynamic We also continue to invest in high gross margin rich areas of our portfolio. We've made investments in our overall go to market to accelerate our growth and our shift to an as a service model. Even with these investments, our non GAAP operating margin was 9.7%, up 120 basis points from the prior year, which translates to a 16% year over year increase in operating profit.

Speaker 3

Within other income and expense, We benefited from further strong gains related to increased valuations in our Pathfinder Venture portfolio and outstanding operational performance in H3C that I will address in more detail later. With strong execution across the business, we ended the quarter with non GAAP EPS of $0.52 up 27% from the prior year and at the high end of our outlook range for Q4. Excluding $2,200,000,000 of after tax proceeds received from Oracle satisfaction of the judgment in the Itanium litigation, Q4 cash flow from operation was $784,000,000 and free cash flow was $94,000,000 For fiscal year 'twenty one, this brings our total cash flow from operations to $3,700,000,000 up $1,500,000,000 from the prior year and our free cash flow to $1,600,000,000 up $1,000,000,000 from the prior year, driven primarily by an increase in earnings. Our strong execution and cost optimization and resource allocation program has effectively put us 1 year ahead of schedule with respect to delivering our previous free cash flow targets. Finally, the strength of our cash flow has positioned us to return substantial capital to our shareholders.

Speaker 3

We paid $157,000,000 of program in Q4 buying $213,000,000 in shares reflecting our confidence in future cash flow generation and our view that the stock is undervalued. Slide 4 highlights key metrics of our accelerating as a service business. We have made significant progress over the last year by adding Over 300 new enterprise GreenLake customers to over 12.50 today and increasing our TCD by over $1,500,000,000 to a current lifetime TCV of over $5,700,000,000 For Q4 specifically, our ARR was 7 $6,000,000 which was up 36% year over year as reported and total as a service orders were up 114% year over year, which represent an acceleration from Q3, demonstrating the strong momentum we are experiencing in this business. It's also important to remember the incremental disclosure we provided at SAM 2021, highlighting the significant proportion of software and services in our offerings that together make up more than 60% of the IRR mix today. We expect this mix percentage to expand to more than 75% by fiscal year 'twenty four as we add more software capabilities driving further gross margin improvement.

Speaker 3

Overall, based on Strong momentum this year, I'm very happy with how this business is progressing, which gives us confidence to increase our ARR growth targets by 5 points to a 35% to 45% CAGR from fiscal year 2021 to fiscal year 2024. Let's now turn to our segment highlights on Slide 5. Our growth businesses, which now represent nearly 25% of our total company revenue generated record levels of orders, up strong double digits. In the Intelligent Edge, revenue grew 2% year over year in Q4 and for fiscal year 2021 was up 13%. Demand continued unabated in Q4 with order growth up over 50% year over year, but the component shortages we foreshadowed at SAM were more pronounced in our Aruba business.

Speaker 3

Additionally, Our Edge as a Service offerings were up triple digits year over year, significantly contributing to our ARR. We delivered a multimillion dollar NASH Network as a Service deal in Q4 for a large U. S. Customer, which represented more than 800 basis points headwind in the short term to Aruba revenue in Q4, but will help our long term financial We expect it will take some time for supply chain challenges to ease, but we finished fiscal year 2021 with over $4,000,000,000 in orders, which will give us strong momentum through fiscal year 2022. In HPC and AI, demand strengthened even further with another record level of orders.

Speaker 3

Revenue grew 35% sequentially and was flat year over year with a difficult compare. We did have customer acceptances of some large contracts get pushed out into fiscal year 2022 and we now have $2,700,000,000 of awarded contract in addition to the $2,000,000,000 contract awarded by the NSA, giving us confidence for next year and beyond. We expect robust revenue growth in fiscal year 2022 to get us back within the range of our original long term 8% to 12 and CAGR outlook. In Compute, order growth was up strong double digits. Revenue grew 4% Quarter over quarter reflecting above normal sequential seasonality and was up double digits year over year when normalizing for the Q4 FY 2020 backlog.

Speaker 3

Operating margins of 9.4% were up 2 80 basis points from prior year due to disciplined pricing and the rightsizing of the cost structure in this segment. Within storage, Order growth accelerated and was up double digits year over year. Revenue grew 2% year over year and 7% quarter over quarter ahead of normal sequential seasonality driven by strong growth in software defined offerings. All flash arrays grew 7% year over year led by Primera, up Strong double digits. Nimble grew 4% year over year with ongoing strong DHCI momentum growing double digits year over year.

Speaker 3

Storage operating profit margin was 13.8%, reflecting OpEx investments to continue driving product mix shift towards Including Nimble Services, orders accelerated and were up high single digits in Q4 and up mid single digits for fiscal year 2021. Most importantly, revenue also grew as reported overall for fiscal year 2021, the first time in several years. This is again very important as we enter fiscal year 2022 with strong momentum in our most profitable business. Within HPE Financial Services, volume increased 18% year over year, driven by strong double digit growth in GreenLake. Revenue was up 3% sequentially and flat year over year.

Speaker 3

Our profitability is also benefiting from higher residual values realization and lower borrowing costs as we continue to securitize our U. S. Portfolio via the ABS market. Our operating margin was 14.1 percent, up 6.30 basis points from the prior year and our return on equity Slide 6 highlights our revenue and EPS performance where you can clearly see the strong rebound from last year and sustained momentum throughout fiscal year 2021. As mentioned previously, Q4 revenue of $7,400,000,000 is the highest level we've delivered since Q1 2019.

Speaker 3

With a strong demand environment, our strategic business mix shift and execution of our cost optimization and resource allocation program, We increased our Q4 non GAAP EPS to $0.52 up 27% year over year. Turning to Slide 7, we delivered non GAAP gross margins in Q4 of 33%. While rates were impacted From the supply chain challenges previously discussed, we expanded gross margins up 2 30 basis points from the prior year. This was driven by strong pricing discipline and a positive mix shift towards high margin software rich businesses. In total, in fiscal year 2021, We delivered nearly $900,000,000 of incremental gross profit.

Speaker 3

Moving forward, we will face lingering supply chain challenges in the near term, but longer term, Structural gross margins will improve from continuous mix shift towards the Intelligent Edge, own IP storage, GreenLake and all of our as a service offerings. Moving to Slide 8, you can see we have utilized some of the incremental gross profit to make targeted growth investments while simultaneously expanding non GAAP We have increased our investment levels in R and D to fuel our long term innovation engine and field selling costs to accelerate our growth and higher shift to our as a service pivot. Even with these investments to drive long term growth, we delivered operating margin In Q4, up 9.7%, up 120 basis points from the prior year. On Slide 9, we want to highlight our Unique setup in China through our investment in H3C that has and continues to generate tremendous value for our shareholders. Our investment and commercial agreement gives us a route to market in the 2nd largest, fastest growing IT market in the world.

Speaker 3

As you know, we do not consolidate revenue and operating profit from H3C, but recognize our 49% share of H3C's earnings through the equity interest statement line on our P and L as part of other income and expense. H3C has delivered outstanding operational performance throughout the year and generated $257,000,000 of equity interest in fiscal year 2021, which was up 21% from the prior year. This makes our business in China a very large contributor to our P and L, one that no other multinational has been able to replicate. Turning to Slide 10, we finished excluding obviously the $2,200,000,000 of after tax cash received from Oracle satisfaction of the Itanium litigation. Free cash flow was up $1,000,000,000 year over year and is $600,000,000 more than the midpoint of our outlook at the start of fiscal year 2020, primarily driven by increased earnings.

Speaker 3

Our cash flow profile is becoming more predictable and aligned to profitability as our restructuring costs diminish And we grow our as a service business beginning to recognize more deferred revenues from software and services. Moving on to Slide 11, we have made further progress enhancing our balance sheet strength with a strong free cash flow and payment from Oracle. Following the receipt of the cash from the Xtanium litigation, we redeemed early our $1,000,000,000 4.65 percent coupon outstanding 2024 notes and this in a positive NPD transaction that is net debt neutral. The Mako premium paid was a GAAP only expense Bottom line, our improved free cash flow outlook and cash position ensure we have ample liquidity available to balance long term growth investments with consistent return of capital to our shareholders. Now turning to our outlook on Slide 12.

Speaker 3

At our Securities Analyst Meeting last month, we provided our outlook for fiscal year 2022 and I would like to encourage you to review my presentation for a more detailed Having said that, let me reiterate a drill down into a few key components. We expect fiscal year 'twenty two revenue growth in constant currency of 3% to 4%. As discussed, The supply chain environment remains very dynamic and we expect component shortages with increased commodity costs, expedite and shipping fees to last for the next few quarters impacting near term revenue and gross margins. In a nutshell, we expect to have more of a back end loaded year in fiscal year We expect non GAAP EPS to be $1.96 to $2.10 and free cash flow to be $1,800,000,000 to $2,000,000,000 We expect free cash flow to be more in line with historical seasonality where the second half is a stronger generator of cash than the first half. Now specific to Q1 revenue, given the very strong backlog balanced by supply chain constraints, We expect revenue to be in line with normal sequential seasonality of down mid single digits from Q4 of fiscal year 2021 and are comfortable with current consensus levels.

Speaker 3

We also expect gross margins to be pressured in the short term given supply chain. As a result, for Q1 2022, we expect GAAP diluted net EPS of $0.19 to $0.27 and non GAAP diluted net EPS of $0.42 to $0.50 So overall, I'm very proud of our progress throughout a strong fiscal year 2021. As Antonio said, we exceeded all our key financial targets in fiscal year 2021, often by a significant margin. The demand environment has been incredibly strong across our business with acceleration in the second half of fiscal year 'twenty one, demonstrating that our Edge to Cloud strategy is working well and that we are entering fiscal year 2022 with strong momentum. We are now well positioned to capitalize on the opportunity in front of us and deliver against our fiscal year 2022 outlook.

Speaker 3

Now with that, 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. Our first question is from Shannon Cross with Cross Research. Please go ahead.

Speaker 4

Thank you very much. I wanted to dig a little bit more into the as a service performance. Obviously, orders are extremely strong during the quarter. How much of that was from the one time well, not one time, but from the large contract signed? How should we think about The longer term growth potential, how it flows through the model, as we look to the next year or 2.

Speaker 4

And I don't know, maybe if you can give a little bit more on the composition of the as of service. Is there any one product or service that's really driving that business at point in time. Thank you.

Speaker 2

Well, thank you, Sean. I will start and obviously, I would like Tarek to comment on the modeling itself. Listen, we are super proud of the momentum we have in the market with HP GreenLake. We believe it's truly differentiated in the market. And as we show you some, 2 third of that is already in the software and services, and we believe In 3 years, we'll be more than 75% of it, which obviously come with high margin and more durable revenue in many ways.

Speaker 2

What customers like about the model is the ability to procure everything from edge to cloud from 1 integrated platform. And it's not just, what I call infrastructure as a service or hardware as a service on premises in a colo or at the edge. It's the fact that they can consume anything from network as a service, subscription to Aruba products to what I call private cloud to data services, which is part of the transformation we are driving in our storage And as we said, dollars 5,700,000,000 already in total contra value. And in Q4, That growth was accelerated by a number of new logos, which again, we had the 300 in fiscal year 'twenty one, which drove the order growth to 1 Okay. So when you think about this, we have been delivering 40%, 50%, 60%, and in Q4, it was 114%.

Speaker 2

And Aruba is one key component of that. But what we see now, Shannon, is also the storage part of this is growing very rapidly. And that's why I'm excited about next year because we also are adding new capabilities to that platform, particularly in the early part of 2022. So overall, I will say this has been a home run. We believe we have years of advantage.

Speaker 2

We are disclosing all our numbers, as you see, versus some of our competitors, they're not sharing anything as far as I can see. And what I'm really pleased is that we have now 900 partners selling with us, co selling, and you will see their offers In our platform here soon because that's where we drive pull and push from both sides, direct and indirect. So Tyler, you want to talk about the modeling?

Speaker 3

So yes, I mean Antonio said already quite a few things. So first and foremost is 1 This first and largest network as a service contract contributed to orders in Q4 substantially, but did not contribute to the IRR because the The revenue will be recognized over time. But notwithstanding that, the ARR, if you really look at our ARR progression Quarter after quarter in fiscal year 2021, it's outstanding. We did $649,000,000 in Q1 of ARR, grew that to $678,000,000 in Q2, $705,000,000 in Q3 and now approaching $800,000,000 $796,000,000 to be precise in Q4. So the momentum in this business is extremely And there isn't a particular business unit that is contributing.

Speaker 3

We're executing an integrated strategy that is about edge, Cloud and data, right now the main contributors are the various parts of the organization that fit these 3 pillars. Aruba is one of them. The storage business unit is another one. We will also continue to expand our as a service offerings in HPC and AI because we see a tremendous opportunity there And the future will tell us how big that opportunity will be for us, but we firmly believe in it.

Speaker 1

Thank you, Shannon. Operator, next question please.

Operator

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

Speaker 3

Hi, yes, thank you. Antonio, I'm trying to reconcile your comments around strong backlog, which you guys have been very consistent about. Relative to what happened in the quarter and the guide here for in the near term, it sounds like component shortages We're a major reason for that, but you're maintaining your full year guide. So just trying to understand like what gives you the confidence that these will resolve itself And what gives you the confidence that this is this back end loaded year is going to pan out as you're seeing it now?

Speaker 2

Sure. Well, I mean, if you look at our results, right, Wonsey, Rice was all, we grew orders, total company orders 16% Year over year, but our revenue in actual dollars was up 3%. Obviously, there is a big divergence there between 16% and 3%, right? And that's driven by the supply availability, despite the fact that we continue, I think, to do a great job navigating through the challenge. And the one area I'm really particularly pleased, one thing, is the fact that linearity in the business in the way we approach customers that will book Orders is now more front end than back end in the quarter itself.

Speaker 2

I always talk about quarters having 13 weeks. And what is amazing to me in the last couple of quarters, The bookings have been more on the front end than the back end, which allows us actually is a little bit counterintuitive, if you think about it. The more orders I bring early on, the more I can convert despite the supply chain challenges because I have more time and more velocity, if you will. So listen, as Tarek said and I said in my remarks, short term, we're going to continue to navigate. This is an industry wide challenge, But we're very confident in the actions we are taking ourselves.

Speaker 2

And the fact of the matter is that the backlog is Very durable. People asked me early on, have you seen cancellation? I can tell you right now, 0. No cancellations whatsoever. And the orders coming in every day, every week is incredibly strong.

Speaker 2

So we have to navigate the next quarter or 2. And then based on our understanding and the work we have done with our suppliers, the second half will be better. And then also remember, we have, I think, world class capabilities, both on the supply chain operations and our engineering capabilities to be able to Adjust components based on the BOM. And then also, remember, a big chunk of the backlog is related to acceptances In the customer base with HPC, which is already built and shipped, but as you know, we cannot recognize revenue until fully accepted. This quarter, we recognize A customer, which had a large order in HPC.

Speaker 2

But remember, in 2022, we have the large exascale deals. And one of them is going to be very important for us as we think about the back half of the year. So that's why Tarek and I are very confident on that 3% to 4% guidance. And let's remind ourselves, in that 3% to 4% guidance, we have 1% to 1.5 points of headwind because of the transition towards the service, Right, which is great. It's durable.

Speaker 2

It's long term growth. And so you normalize for that. It's more like 5% to 5.5%, if you will. And then on top of that, you have to add the currency, which obviously is a headwind in the sense that the 3% to 4% is So if you are all of that, we are more like in the 7% to 8% growth. And remember that Q4 was a $7,400,000,000 The largest quarter despite the supply chain going all the way back to 2019.

Speaker 1

Thank you, Wamsi. Operator?

Operator

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

Speaker 5

Thanks for taking the question. On this 28% order growth, I'm wondering if you could unpack Maybe some of the factors that contributed to it and what I'm thinking about is, is there an aspect here of customers trying to get in ahead of price increases or an aspect of customers placing orders earlier because of extended lead times. If you could just help us understand What you see contributing to that massive number? Thank you.

Speaker 2

We're glad you call it massive because we agree with you. It's a strong momentum and clearly was stronger in Q3 and Q4 than the first half of the year. I think it's a combination, Simon. I think that obviously there is market demand out there, driven by the recovery in the economy. I think customers also worry about the impact of the supply that will have in the short, mid term.

Speaker 2

But on the same time, we should not underestimate The power of our portfolio, because I got this question early on, you think there's double bookings, perhaps in the commodity space, but not in the value space. We believe Aruba is unique and differentiated. This is not something you can swap by somebody else. And that business is a true mobile first Cloud native approach, which drives a unique experience at the edge. And that's the momentum has happened for a number of quarters now Despite the short term challenge of supply, HPC, we are the clear number one leader with 35% market share And 14 points advantage against the 2nd competitor.

Speaker 2

And then the supercomputer, I don't think there's anybody that can match us. 35 And of the top 100 supercomputers are all Hewlett Packard Enterprise and we're going to deliver the excess scale in 'twenty two. And GreenLake, again, the question about GreenLake It's a true hybrid differentiated offerings from edge to cloud. And I think that's been in the making now for a number of years, And the pipeline is just amazing to me. And now we're getting better and better in closing deals faster And deploying that solution, which remember, it's not just deploying it, it's also driving usage.

Speaker 2

And so it's a combination of growth in the current installed base and new logos, which I commented 300 new logos. So we believe There may be some in the commodity space, but the rest is because of our H2 Cloud offering, which is resonating in the market and we believe that's going to accelerate in 2022.

Speaker 1

Thank you, Simon. Operator?

Operator

The next question is from Kyle McNealy with Jefferies. Please go ahead.

Speaker 6

Hi, thanks for the question. I was wondering if you could drill down a bit more in the areas that are driving your Compute segment results. They were a bit higher than we expected and certainly the consensus. I get that there's some FX in there. You quantified that, but are there segments of the market That had been stronger for you that you can contextualize?

Speaker 6

And can you give us a sense for unit growth for compute and maybe A split of how much ASP growth comes from memory versus product mix versus general price increases? Thanks.

Speaker 2

Go ahead, Tarek, and then I will comment on the back.

Speaker 3

Sure, Kyle. So, in terms of customer segments, the demand remains Very strong across the board in large enterprise customers, SaaS companies, telcos. And we see very robust demand from all these customers. With respect to unit growth, units I've been roughly flat quarter on quarter, but The right comparison is a normalized year over year comparison. If you normalize for Q4 'twenty Units that were sold, but for orders that were generated in Q1 and Q2, you remember the dynamics of fiscal year 2020, Units have grown 13% Q4 'twenty one over normalized Q4 'twenty, which is an excellent result for us.

Speaker 3

We're very pleased with it. And this comes together with very strong disciplines From our management team there in the compute space, we've executed a number of price increases ahead of Price hikes of commodities and logistic costs coming up by way of expedite fees and Container costs that have been rising quite dramatically, as you know. The AUP have risen overall at about 3% When you think about this on a normalized basis, we feel pretty good about our performance in compute, both On the P, the price and the quantity, we feel that there is still strong demand moving forward, in fiscal year 'twenty two with the order book that we have been able to generate and the backlog that we have in that segment. But that comment that I just made is True and very true for Aruba, where we feel a very strong order demand in Aruba and also in storage. So we feel pretty good about fiscal year 'twenty two, as Antonio commented a moment ago.

Speaker 2

Yes. Just a few comments. In simple terms, this is

Speaker 1

the way to think about it.

Speaker 2

So first of all, our compute orders were up more than 10% in 2021. Our units normalize for remember the 2020 backlog, if you remember when the COVID started, We had a $750,000,000 backlog, which we cleared $500,000,000 in Q3 2020 $250,000,000 in Q4. When you normalize for that, units are up. Obviously, AUPs are up for two reasons: number 1, cost and number 2, structural changes. As we introduce the next generation of our compute platform, call it Gen 10.5 and Gen 11, you're going to see more options and more density in those platforms, which drive structural changes, which are we believe those structural changes are sustainable, irrespective of the changes of the commodity cost.

Speaker 2

And then if you listen to what we said in 2020 2021, our pivot to different segments of the market. We said We want to focus on growing segments of the market. While enterprise still super important, SaaS, Telco and Edge are 3 growing markets where we have been benefited from. Telco, obviously, with a 5 gs deployment, our intelligent edge solutions At the Edge, particularly in retail, manufacturing and hospitality. And then obviously, the focus on the SaaS, which is Not the big cloud providers, but software as a service companies, which are driving quite significant growth.

Speaker 2

And then we have our own value built into the platform with silicon And all of this, by the way, is all now being delivered to HP GreenLake as well. So GreenLake is A force multiplier for the growth in compute because the more we sell as a service, the more recurring revenue and compute we're going to have over time. So I hope that answered the question.

Speaker 1

Kyle, thank you very much. Operator?

Operator

The next question is from Katy Huberty with Morgan Stanley. Please go ahead.

Speaker 4

Yes, thank you. Antonio, how should we reconcile your commentary on incredibly strong order growth in just about every business and Orders up 16% in fiscal 2021 with the 3% revenue growth that you reported last year and the similar 3% to 4%

Speaker 2

Yes, I will let Tarek start and then I will add a few comments.

Speaker 3

Yes. So, Katy, the most important Comment I would make to you with respect to orders is that the acceleration of orders manifested itself very strongly in the second half of fiscal year 21. And it's continuing from here on. The demand remains very strong. We're getting orders every day and the linearity is better even this quarter than it was in the prior quarter last year.

Speaker 3

The trough for our business was hit in the Q2 of 2020, ever since Revenue has been edging up. And we're now at a point in Q4 'twenty one where we hit the revenue that is At the high watermark that is on the par with the Q1 of fiscal year 2019, roughly. We do see the acceleration of the revenue growth year over year manifesting itself on a full year basis. But timing wise, We did say in my script and hopefully it was understood that the fiscal year 'twenty two is going to be back end loaded. Why is that?

Speaker 3

It's because we still have to navigate supply chain constraints and those supply chain constraints are probably not going to abate before the end of fiscal year 2022 and most likely calendar year 2022. Specifically for Q1, we're comfortable with current consensus levels on revenue And which also imply, as I said in my script, a seasonal decline of mid single digits. But When you really look at the overall trend year over year from now on, we do expect an acceleration of revenue that will be dampened a little bit by supply chain constraint that we're navigating day after day, month after month and quarter after quarter.

Speaker 2

Yes, Katy, I think in addition to what Tarek said, first of all, I don't see the demand abating anytime soon. I actually see that continue to accelerate. And what is amazing to me is that in the areas where we place A particular focus, we see amazing growth. And what excites me is that I knowing what I know about our New offerings and acceleration of innovation, particularly in the 1st calendar quarter, we believe that's going to be a turbocharge. Now as you can imagine, I spent a lot of time with our global supply team driving the day to day operations with Tarek here.

Speaker 2

And obviously, we have to navigate the 1st 2 quarters of the year, but I feel pretty good about accelerating that in the back half, A combination of supply availability and customer acceptances. But again, when you normalize the growth for everything I said earlier to 1C, which is including the as a service pivot, you should think about not 3% to 4%, but more like 6% to 7% because that's the way we should think about it. And then in that, remember the growth of the AIR is going to continue to accelerate at 35% to 45%. And hopefully, in 2022, we're going to get the credit for the transformation we're driving this business.

Speaker 1

Thank you very much, Katie. And operator?

Operator

The next question is from Amit Daryanani with Evercore. Please go ahead.

Speaker 7

Perfect. Thank you. Yes, I guess maybe I want to talk a little bit on the Intelligent Pet side. And Tarek, maybe we could just talk about what's Driving not just the revenue deceleration, but also the margin declines over there. The margin drop seemed fairly material.

Speaker 7

So I would love to understand kind of what's happening there. How do you see that business ramp up through fiscal 2022? And Antonio, I want to touch this with you, which is you've talked a fair bit about The conviction in the orders that you have and how good they are and I think you've said about lack of cancellations being a pretty big driver for it, girthy of confidence. I would imagine cancellations will only happen when supply chain issues alleviate versus right now. Is that fair?

Speaker 7

And if so, are there other things you're looking at in your business that gives you These orders will convert.

Speaker 1

So Tarek, do you want to

Speaker 2

talk about the Aruba piece of it, which obviously the network as a service was a big component of that.

Speaker 3

Yes, yes. So let me take that and Tonya, thank you. So Amit, as we shared in our scripts, We signed a very substantial network as a service contract for the first time with a large U. S. Retailer.

Speaker 3

And this had a headwind on revenue growth in Aruba of about 800 basis points and a headwind on operating margins of about 500 basis points. So if you were to normalize for it, you still You would realize that the double digit growth in Aruba and high teens margins are still there. And we are very comfortable there. For us Aruba is a 40% business, meaning we do see the top line growth to be in the high teens and the margins We feel very comfortable particularly knowing That the order book remains very strong. If anything, there was one part of our company that suffered a little bit more of supply chain constraints.

Speaker 3

In Q4, it is Aruba, but it is just simply deferring revenue that could have been realized in Q4 into Q1 and Q2 of fiscal year 'twenty two. The order story remains incredibly strong and the demand there is super solid. So we're very Confident about the prospects of Aruba for fiscal year 'twenty two? Yes.

Speaker 2

I mean, I think that'll cover pretty much everything. Remember what we said in our Commenter, right, that this is the 1st year that Aruba crossed the $4,000,000,000 marks in orders. I remember when I acquired Aruba in 2015 and then we merged it with the rest of HP business, it was in the high 2s. Now we are $4,000,000,000 And we again, to Tarek's point, we believe this business is going to continue to grow double digits. We obviously have to think about this business long term growth, particularly as we pivot more as a service The network as a service is a nascent market, but the subscription side is actually a growing and more established market.

Speaker 2

So remember, there is 2 different value proposition here. I subscribe to a Wi Fi connectivity or a LAN port. That's today the triple digit growth that Tarek talked early on, on the Azure service side. And then there is the nascent network as a service, which the hardware component of that It's totally deferred over the length of the contract. And when you have in excess of a $100 plus 1,000,000 deal, obviously, that has a huge impact.

Speaker 2

But it's good for the long term durability and that's why we are very bullish about this business. And listen, as I said earlier to Katie, we believe Over time, this is going to alleviate the supply. We're going to convert more of that. But we exit with a backlog I've never seen in my life. And obviously, Customers need connectivity to operate in this digital economy.

Speaker 3

And so then the second part of his question was, do we believe that The orders get canceled when supply chain No.

Speaker 2

Yes. Well, I mean, listen, my view is not Because we allow those orders are also related to GreenLake as well, not just transactional business. And obviously, we prioritize orders in a way that drives the profitability of the business and mission critical requirements for our customers. And therefore, we don't believe that's going to be the case. Our job is to convert as many as we can as fast as we can.

Speaker 1

Thank you very much, Amit. And operator, why don't we take 2 more questions, please?

Operator

And the next question will be from Sidney Ho with Deutsche Bank. Please go ahead.

Speaker 5

Hi, this is Jeff Rand on for Sydney. Thanks for taking the question. You continue to grow your inventory on your balance sheet. Can you talk about how your inventory strategy has changed

Speaker 2

with the supply constraints and

Speaker 7

what type of impact you're expecting from higher inventory

Speaker 5

And what type of impact you're expecting from higher inventory on free cash flow in fiscal year 2022?

Speaker 3

Yes, sure. So, thanks for the question, Jeff. We've been buffering inventory for the past 5 quarters to navigate supply chain constraints. Obviously, this leads to a situation where our inventory levels are higher than in some cases we would like, but it's necessary and It's okay. It doesn't really impact our free cash flow guidance for fiscal year 'twenty two, which I'm very happy to reiterate.

Speaker 3

We said we would be Attaining $1,800,000,000 to $2,000,000,000 of free cash flow in fiscal year 2022 and the increase in inventory is factored into the guidance. The guidance is more attained on free cash flow by way of earnings growth, number 1. Number 2, also by reduction of restructuring costs as our restructuring programs are Winding down and then yes, there is a bit of an offset headwind from inventory increases, but It's absolutely fine. When you're having your order book in the way we have it, you got to get ahead of the curve by way of buffering inventory and that's what We've been doing for the past 5 quarters and we'll continue to do so in fiscal

Speaker 7

year 2022. Yes.

Speaker 2

I will say, first of all, since the question was not asked, but I may be answered Proactively, Tarek talked about the restructuring. We are winding that program, and we are well on track to deliver that commitment With that, which makes us a more lean and agile company. And part of that is also the ability to execute faster. One of the big changes we made also was the way we compensate So forth on orders, and this is what you see. We were now confident based on our systems implementation.

Speaker 2

If you recall, we started 3 years ago, and we're also getting close to that completion, allowed us to make some changes Here in the way we drive the business going forward. And I think this is all about operational excellence and execution. On the inventory side, I think the team has done a remarkable job driving working capital and but also at the same time making the right Long term bets on this inventory, which give us not just the ability to convert, but pricing power. And as I said in the At the analyst meeting, we tend to be the market leader in changing prices, and we will continue to do so because it's the right thing to do at the right time. And so we will continue to manage that inventory as needed for our customers and for delivery of numbers.

Speaker 1

Thank you very much. And operator, let's make this our last question.

Operator

And our final question will be from Samik Chatterjee with JPMorgan. Please go ahead.

Speaker 8

Hi. Thanks for squeezing me in here. I guess I wanted to get your thoughts on H3C. You had a strong year with 20% plus growth How should we think about kind of fiscal 'twenty two there? And what's the visibility into H3C navigating The supply chain constraints as well and through the conference call today, you've mentioned multiple times about a back end loaded year.

Speaker 8

So just wanted to see if that's consistent with how We should think about H3C Equity Income as well. Thank you.

Speaker 2

Yes. Well, Tarek and I felt it was important to share with you how H3C contributes to our financial performance. You saw that slide that shows that Interest of 49%, what value drives for our shareholders, which is pretty significant. And H3C is an independent entity, which operates in China, obviously, and they manage the business day to day. And they have done a remarkable job.

Speaker 2

I mean, they continue to grow their business in China. They are positioned extremely well in the what they call the ICT business. They support telco. They support enterprise customers and SMB. They have a unique value proposition in several products, which are very well received.

Speaker 2

And we expect our business to continue to grow double digits. And the report is an incredible accretive to what we do. But also at the same time, as Tarek said, It's a unique setup, which no other multinational really has been able to achieve in a country, obviously, which has gone to a lot of changes here. And it's the 2nd largest market on the planet, okay? So if you believe that market will continue to grow and they are very well positioned, this will continue to accrete to our shareholders.

Speaker 2

Now as we said in previous quarters, our put expire at the May time frame. That's right. And as always, we will do what is The right thing for our shareholders, what is the best return for our shareholders, and we will make that decision on the right time. And

Speaker 3

Antonio said it very well. I would simply add that the interesting data point on the slide Hopefully, you all take away is that we're not in a rush. The value of our stake continues to accrete and we feel very, very good about our position in H3C.

Speaker 2

Okay. Well, thank you, everyone. Thank you, Jeff. We appreciate you making the time to talk to us today. I hope you walk away with a clear view of how we are performing.

Speaker 2

I'm particularly pleased with the momentum we have as we enter 2022. Our strategy could not be more on point. I think the demand is strong, not only because of the market, but because of our solutions. And I'm very excited about the ability to create and accelerate our shareholder value in 2022. And then we have some Amazing things coming down the pipeline in term of innovation.

Speaker 2

That's going to differentiate us even further. And so I'm looking forward to 2022 while we navigate this short term challenge of This short term challenge in supply, but we are very confident on the current guidance and the consensus out there. And we hope to exceed that as we execute in the next quarter. If I don't speak to you in the next month or so, thank you very much. Be well.

Speaker 2

Happy holidays to everyone and to a prosperous 2022. Thank you very much.

Operator

Ladies and gentlemen, this concludes our call for today. Thank you.

Earnings Conference Call
Hewlett Packard Enterprise Q4 2021
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