Thank you all for coming. Thank you for joining us for the fireside chat with HPE. My name is Chris Derison, part of the Global Technology Investment Banking team, and I'm joined by Marie Myers, CFO of HPE. Marie, thanks for joining us.
Thank you very much, and Good morning.
So I have some questions which will help guide the discussion. You know, we'll talk about business positioning, recent close of Juniper. Congratulations. I know you guys reported financial results yesterday. Congratulations. We'll cover that a bit. Product and platform and capital allocation, so we'll talk about that. Anxious to dive in. So maybe first on the quarter. Alright, you have a statement?
I have a statement. I got to Networkingtleman, Chris, so I'll go first. So, let me just start saying good morning, everybody. Quick caveat here, my remarks may contain forward-looking statements, so please refer to our SEC filings, including our most recent Form 10-Q, for a discussion of risk factors that may relate to our business. Thank you.
Great. So you know, you reported earnings yesterday. Congratulations on the success. Could you talk a little bit about the demand environment? How would you characterize it? Maybe how would you characterize it relative to, say, six months ago? How do you feel?
Yeah. No, well, first of all, pleased that earnings are over, and we wrapped up a solid quarter yesterday. In fact, we had record revenue in excess of $9 billion, incorporating one month of Juniper's results. And both with and without Juniper, we had very strong revenue performance. We also saw sequential improvement in our operating profit across most of our major business segments. So in all, I think a solid quarter and a good way to start the integration of Juniper. In terms of demand, to answer your question, you know, it was a fairly consistent quarter in terms of what we've seen. There were no noticeable pull-ins or demand differences geographically. And I would say that was relatively consistent, Chris, across all the businesses. I know we continue to be in an evolving macro. The tariff environment continues to play out.
However, I would say it was fairly a consistent quarter in line with expectations and what we typically see. So no noticeable call-outs across any of our businesses.
Got it. Yeah, thank you. So, you know, obviously, big change in the business with Juniper now closed. Congratulations. You know, I've followed the kind of the transformation story that Antonio's been executing on, over the past few years and, you know, for the Edge -to -Cloud story. Now, with Networking doubled in size effectively, and it's nearly 50% of the business on an operating profit basis, it certainly feels like it's a difference and an inflection point in augmentation in the business platform overall. Obviously, the strategy is still the same. How do you feel about the positioning of the platform to deliver to customers across that Edge -to -Cloud story and across that infrastructure story?
Yeah, I think you underscored it when you said transformative. I mean, frankly, the deal is a transformative moment for the company. I think a couple of points I'll pick up on, which is, first of all, going forward, more than 50% of the operating profit is actually going to come from the Networking segment, and it pivots the company along the lines of what you mentioned in terms of the edge-to-cloud strategy. We're seeing very much, you know, an environment where Networking becomes a critical segment of the company's business, and in fact, we've integrated both our Intelligent Edge business and Juniper Networks into one segment that we now call Networking going forward, so hopefully, that'll be relatively easy for everybody to track and understand.
I think from a customer perspective, I'm fortunate enough to be the exec sponsor on some of our largest accounts, and, you know, I think customers are very excited because they have the opportunity now to sort of work with one person across the portfolio. And as we move into the era of AI, and I know we're going to talk about this later, you know, we see the opportunity to have sort of network-led conversations depending on the segment you're operating in, and, you know, really compete effectively across the portfolio. And I should add, Chris, there's really nobody else out there who has this portfolio of assets. So, you know, I'll go back and start where we... Kind of wrap up where we started, which is this is a transformative moment for HPE, and frankly, is one of the reasons I joined the company.
I think this is going to be a very different journey from here on.
Yeah, absolutely. I would agree. You know, maybe, and you touched on it a bit in terms of the breadth of the platform and positioning, but could you talk a little bit about competition and how you're positioned relative to peers who might operate in, you know, more specific of those verticals?
No, I think first and foremost, there is nobody that has this collection of assets. So if you're looking at, for example, the data center space or where, you know, we compete for some of our business, you know, we can now have a network-led conversation with those customers, whereas in the past, that really, you know, we weren't able to, you know, really compete in that segment. And so now with the collection of both Juniper and Intelligent Edge, it gives us a much broader customer segmentation that we can participate in, and then clearly, the network is such an important part of the stack. You know, we've seen, you know, in terms of just AI itself, the network is crucial to enable, you know, performance even at the GPU level.
You know, with Juniper here, you know, really starting to make traction in the data center space and AI, I think it's just one good example where we'll be able to differentiate ourselves, to your point, against some of our more traditional customers that we've, you know, competed head-to-head with.
Mm-hmm. And so, you know, I've heard you describe the end customer segmentation for AI infrastructure as model builders-
Mm-hmm.
Cloud service providers, sovereigns, and then finally the enterprise. Could you talk about how, a little bit about how the needs of those individual customers are distinct, and how you, as HPE, are positioned to deliver across all of those needs?
Sure, absolutely. And maybe I'll just summarize first to say we had really strong performance for our AI business in the quarter we just closed. We actually shipped $1.6 billion of revenue for AI and closed the quarter with a really strong backlog of $3.7 billion. And what we're, you know, I'm particularly excited about is that actually, out of that $3.7 billion, more than 50% was in the enterprise and sovereign space that you just raised. And what we see is that enterprise and sovereign also has a different sort of profit pool, and it's also, I think, an area that we have the right to win.
As a company, we've been, you know, very well known in the enterprise segment, and clearly, we see this is an opportunity for us as companies start to adopt and mature, you know, AI itself. It's an area that we can really extend very naturally into compete. I would just say from a segmentation perspective, you know, we have a deliberate pricing framework. You know, we use that framework to really help guide us through decisions to bid across all of the segments that you mentioned, everything from model builders, CSPs, sovereign, and enterprise, and that framework really takes into account sort of margins and working capital. I would say from a model build perspective, we tend to be very selective. Those deals tend to be lumpy, large, and competitive, and I would say more dilutive in terms of the deal itself.
As we look across CSPs and then into sovereign, we're seeing sovereign transactions, as I mentioned, become increasingly, you know, becoming a much broader part of our portfolio. We do have a very strong legacy and history in this space because of our heritage around supercomputing, so it's a natural place for us to play, a natural place for us to win. And, you know, we see more and more sovereign transactions working their way into our backlog, that I mentioned earlier. And then finally, on the enterprise side, enterprise is an area that I feel that we absolutely have a place to play and win, and it's an area that we see, you know, more and more customers are gravitating to. We have AI Factory.
We also have our, what we call our private cloud, PCAI, and both of these are just great examples of where we see HPE really performing and winning in enterprise, and once again, you know, we look forward to the next quarter. You know, we see AI revenue coming down slightly, but we see the mix of that revenue really moving much more towards sovereign and enterprise.
Great. And I know you've incorporated AI into your day-to-day to some extent. I know you've talked about it. How is that going? Are you going to be able to work from the beach at some point?
You know, that would be awfully nice, Chris. I'm Australian, and I grew up on the beach, so you've sort of pegged me right there. I would say that, look, you know, we've been working hard, my own finance team, on a product that we called Zora AI. We're actually incorporating it on our own PCAI infrastructure and architecture, and it's specifically focused on CFOs and finance organizations. Excited, we're about to go live here, and it will be available to our finance team. We've started first with our operational sort of KPIs. It's an area I think that most companies typically tackle.
It's typically also very, let's just say, human-centric, a lot of work that the teams usually get ready for a Monday morning ops call, and we're basically going to take the AI platform and, you know, enable AI to really drive all the data collection, synthesis, so that we'll be able to take all that workload off the organization. So super excited about that. I frankly see enormous opportunity just in finance alone for AI to take a lot of the sort of day-to-day grunt work out of finance. So lots of transformation here. I'm personally really committed to it, and I'm personally committed to actually using our own infrastructure so that we can go out and sell that to customers. And we're partnering with Deloitte here to help drive that. So I've got a lot of CFOs I'm talking to, myself as customers.
Yeah, as a roadmap. Very good. So, you know, we talked about Networking a bit. The other big winner, you know, within your portfolio is Alletra MP, the storage platform. Could you talk a little bit about what you see as the future for that, and some of the drivers?
Yeah, absolutely. I'd say, look, we are, first of all, start out in saying that we are in the midst of a transition in storage, both in terms of the product itself, the Alletra MP platform, and in terms of the model itself. You know, we're moving to much more of a ratable revenue model, which I think is the right thing for us. We have a phenomenal leader, Fidelma Russo, who's been the sort of architect of that model and the product line and has been driving that transition. And we're seeing really strong adoption, and it's showing up in terms of just the share performance. We've done super well, most recently on our share, and in terms of just growth. I think we've seen triple-digit growth that we reported in our earnings announcement yesterday. So right product, right time.
I think the key is just understanding as we move to that ratable revenue, we'll have a lot more on the balance sheet that we'll recognize over time, and plus the profit, you know, the profit profile of that product will play out. So I think a lot to look forward to, but it is a lumpier transition, is what I would add.
Now on the integration of Juniper, you know, there's obviously a big synergy, cost synergy potential, $600 million. And I, you know, that breaks down across G&A, cost of goods sold and gross margin. And then there's obviously the ability to deploy AI on your business, which you're already doing. Could you talk about those three categories of where you see the synergies coming from? And, you know, maybe what the biggest levers are and timing of those?
Sure. So I think Antonio and Rami, we had a call shortly after we closed the transaction, where we updated our outlook around synergies, and this is purely cost synergies. So we haven't sort of spoken of revenue synergies yet, but from a cost perspective, you know, we raised our outlook from at least $450 million to at least $600 million. And at the time, Antonio mentioned that, you know, we expect to see that sort of recognized over the course of the next three years. $200 million in year one, cumulatively going to $200 million, you know, et cetera, et cetera, over the course of three years, exiting around about $600 million. Now, clearly, you know, those opportunities are very obvious in, you know, as you mentioned, in the G&A space.
G&A is a natural area where you have overlap and duplication, everything from finance, HR, real estate, et cetera. These are, I think, the very obvious areas that you look to the two businesses to sort of integrate. What I would add, a couple caveats before I dive deeper here, is that, first of all, this is the largest transaction, you know, that has been done by this company since the split, and it's almost 10 years coming up here. I can hardly believe it. I was actually on the original split team that set up the other company that I used to work at, the PC and print company, so it's a large deal, and it's a complex transaction, so it is going to take time.
And albeit, we did have a little bit more time, so to speak, to get ready for this, but it is going to be a tough journey. For those of us who have been fortunate enough to have sat through large cost transformations, this is not one for the shy, let's put it that way. So a lot of work to be done in terms of driving those cost synergies and aligning those cost synergies. What I would say is, apart from the numbers on the human sort of side of things, culturally, there is a lot of similarity between the two companies. So I think that's going to bode well for us as we go through this transformation. Now, in terms of just, you know, other opportunities for cost synergies, the obvious one's supply chain.
You know, obviously, we have the breadth and scale that Juniper didn't have, and so that's going to be, I think, super important as you put both of these Networking businesses together. You now have scale opportunities in terms of supply chain, purchasing, et cetera. And then, you know, I think these are going to definitely be the areas that we will focus on as we go into the early stages of the integration. Then as you look across the platforms, more to come here as we get closer to the Security Analyst Meeting. I don't want to steal the thunder here of, in terms of how Rami and Antonio are going to talk about the platform integration and the product line integration.
So we'll leave that for our Security Analyst Meeting on October, where we'll provide you more updates around how we think about the portfolio, the product platform, et cetera, from a synergistic perspective. And then the other piece, you know, that I think is super important is just revenue synergies. You know, we haven't commented on that. Once again, I'll leave that as well for... So you all make sure you stay tuned and come to Security Analyst Meeting in October. But overall, I think, look, you know, a lot of, certainly, you know, it's the right point in terms of the Networking industry market to come together like this. We're coming together at a point where the industry is starting to recover. So I think that should hopefully provide nice tailwind.
But I'll close out and say this is not a transaction for the faint-hearted. There's going to be a lot of work here to take the costs out.
I think you're well prepared for that, though.
Thanks for the vote of confidence there, Chris. I appreciate it.
Maybe switching a little bit to capital strategy. You know, how are you thinking about capital allocation and balance sheet priorities over the, you know, over the next twelve to twenty-four months?
I think it's been, you know, I would say it's pretty obvious right now.
Yeah.
We just closed this super large transaction. Our leverage ratio has gone, you know, above three. So I would say that we're intensely focused on one key variable, which is free cash flow. The intention right now is to be focused on the balance sheet. You know, frankly, paying down that debt is and meeting the objective that we've, you know, I think Antonio communicated at the onset of the transaction, which is to get down to a leverage of 2x sort of by the end of 2027. So that's, I would say, front and foremost. If you step back and look at our capital allocation framework, you know, really nothing has changed.
I mean, we're focused on maintaining that investment-grade credit rating, focused on, as I mentioned, paying down the debt, and then obviously any excess cash, you know, returning that back to shareholders, you know, either in the form of dividends or, or share repurchasing. So at this point, you know, no change to the framework. Obviously, as we get to a point, you know, excited about the cash generation opportunity that this deal presents, and then we'll provide a more broader update at our Security Analyst Meeting around how we see that evolving over the course of the next three years. But, you know, I think I mentioned in the call yesterday, you know, we continue to buy back shares.
We didn't buy them back this last quarter because we were in the midst of, you know, a material non-public information that we have subsequently disclosed, and that we'll continue to sort of, you know, buy shares to help to manage dilution. But I did clarify yesterday, obviously, we do have a more dilutive moment as we've taken on Juniper, and so we just had to clarify for the analyst yesterday that our share count has changed as well. For those of you who are listening, that are out there updating models, just make sure that you've got the new share count in the model. Many of you didn't have it, so we're at 1.44 on shares as well. Just wanted to sort of add that caveat out there.
Maybe switching back a little bit to revenue and pipeline. Can you talk about pipeline and, you know, what's in it, confidence to get to the end of the year?
Yeah, no, I think overall we've seen, you know, I'll just start out with our Networking segment, strong order growth. You know, I think particularly on the Juniper side, coming into the transaction only one month so far, to speak, but we saw double-digit growth in orders. And I think that very much just aligns with the comment we made earlier about where we're at in terms of the recovery on Networking. So, you know, I think overall, pleased with the performance from an orders perspective as we look at Networking. Maybe I'll flip and say a comment about AI, you know, as well, but you know, we said the pipeline was multiples of our backlog.
You know, I think it's also just time and place in terms of where we see the maturity on AI as well, and, you know, pleased with what we see from a pipeline perspective across the other segments of our business as well.
Mm-hmm. And maybe a bit on kind of geopolitics. It's a complicated time, but, you know, as you think about one of the categories of the AI opportunity being sovereigns, how are you sort of navigating, you know, the complex environment broadly and globally with, you know, your you know expertise with serving end customers and the users on the sovereign side?
Yeah, I think as I said yesterday, it's definitely an evolving macro, and the geopolitical situation continues to evolve as well. You know, we do have sovereign transactions, some of which I think we disclosed are in the Middle East, so we have to work through the government processes just like everybody else, and you know, we just intend to, you know, be very transparent about where we're at in those processes and going through the appropriate government controls. You know, at this point, I think we all understand that things will continue to change, and I think the key is just being agile here and having, you know, the ability to manage through the environment that we're in.
You know, I think once again, we'll just be very transparent around what this means for us in terms of our pipeline, and also our orders.
Got it. So we've covered a lot. I do want to open it up a bit to the audience. I know you have some more questions, which we can get to, but-
Sure.
Maybe I'll just call on a few questions, if there's anything in the front.
You were talking about cost synergies. That would be challenging and could you elaborate on what you mean by that? Are you speaking more from a human aspect or actually identifying those cost synergies, which I assume you've already done? Can you just elaborate what you mean by that, please?
Yeah. No, at this point, we have obviously had time to be able to put together our plans, which is why we raised our synergy target from $450 million to $600 million. I was referring more to the human aspect i n terms of, you know, we've got to announce some significant workforce reduction programs, which, you know, are difficult and challenging from a human perspective.
Oh, okay. That's what I figured it.
Yeah.
Just one other follow-up question. Can you speak to... It sounds like you want to save some of this for your analyst day in October, but can you speak about the opportunity to, you know, accelerate the growth of Mist and its leadership position in that market, with, you know, the leverage that you have with a bigger sales force, bigger footprint, along those lines?
Sure. I mean, I think one obvious benefit for the integration between Juniper and HPE is the, you know, I'd say just not only the geographic, but the customer footprint. We operate today, HPE, in a broader suite of countries. Juniper has operated in a much more narrow suite of countries. So I think that clearly the sales footprint and go-to-market is going to be an asset for the platform, as you correctly said, like Mist, where we have already a reach into very strong enterprise accounts, that we'll be able to sort of leverage that through to the entire Juniper portfolio, frankly. But in terms of the Mist platform, more specifically, we'll give, you know, Rami will be giving an update when we do our Security Analyst Meeting in October.
So I'll defer to that meeting to really provide a lot more details as to our outlook. But I think an obvious synergy benefit that we, I think we mentioned right at the beginning of the transaction, was the fact that we saw the global reach of HPE's footprint and go-to-market definitely being able to extend into the Juniper platform.
Any other questions from the room? Great, I have,
Okay, I know you've got some more.
Yeah, I do. I wanted to... Sure. So maybe just on traditional, you know, we talked a lot about AI. On the traditional server side, how do you expect performance, you know, in that business to do? Do you expect any sort of cannibalization from the AI, as the enterprise starts adopting AI more and more in AI servers?
Yeah, look, I'd start by saying we just launched our new Gen 12 server, and clearly that has helped to drive some of the performance that we saw in the business in the quarter. It tends to have a higher AUP because of the configuration and mix. What I'd say is, look, you know, there is just what we've seen, customers have sort of sweated their older assets, you know, like the Gen 8s, Gen 10s, for a longer period of time. So there is an opportunity out there, putting aside AI, to actually just sort of drive the refresh of a lot of the older generations of servers. Today, you know, customers are under pressure because of data center space and really just data center economics in terms of, you know, managing a more efficient data center, heating, et cetera, cooling.
So, you know, I do think that there is just this unique opportunity right now to actually just refresh a lot of the older infrastructure, not so much from a cannibalization perspective, but just even from a data center sort of modernization opportunity. So we're seeing that as a driver in the portfolio. Today, most of our portfolio, I would say, is still Gen 11. It does take time for customers to move from generation to generation. But I think just what we saw just through the COVID period, that folks typically sweated their assets a little longer and that there is really a great opportunity to continue to drive just data center modernization with the new architecture.
Mm-hmm. And you might have covered some of this in your earnings yesterday, but how are you seeing the tariff environment impacting customer demand? And how is it impacting your business? What are you doing to mitigate?
I'd say overall, the tariff environment for us has been somewhat stable. You know, we have guided to about $0.04 in the year in terms of tariff impact, $0.02 within the first half and sort of $0.02 within the back half. Nothing has really changed for us. I mean, I think in terms of just the impact financially, it's maintained the same level of impact. In terms of customer demand, we haven't seen any particular noticeable impact so far to speak of. You know, we do have the benefit potentially of a globally well-positioned supply chain. We have a fairly international footprint across our business, and certainly, that's given us perhaps a fairly agile basis to work from.
But at this time, I'd say we haven't seen any specific demand impacts to speak of in terms of tariffs at this point.
Got it,
I would add, it continues to be an evolving macro.
Yeah. Yeah.
We do have to say, I think for all of us, we have to be very agile today and keep a close eye as to how we manage our supply chain footprints.
Agreed. What, I mean, what do you think the public market investors are necessarily missing? Or, you know, conversely, what do you think they appreciate most about the HPE story? Can you talk about that?
Yes. No, I think it's clear that the closing of the Juniper transaction was a critical month, critical milestone for us, and really changes both the shape of the portfolio, and frankly, opens up, you know, a suite of opportunities for us that perhaps we haven't been able to unlock in the past. And so I think, first and foremost, the Juniper transaction changes the shape of the business. It becomes more than 50% of our operating profit and gives us the opportunity to really, you know, I think bring a lot of credibility to our cloud to edge AI story. And I don't want to steal the sort of thunder from SAM, but this will be, you know, the backbone of how we'll talk through our SAM opportunity.
I'd say that on our server business, you know, we continue to see the transition, as I mentioned, to Gen 12, as a real critical sort of driver of data center modernization and refresh. And then from an AI perspective, you know, we see that opportunity, particularly in the enterprise and sovereign, as our, you know, order book changes to have more than 50% of those two segments in our business. Storage, you know, pleased with the progress around the transition to our Alletra MP platform, and really look to that as a key driver. GreenLake, obviously helping to drive the performance of our ARR. We didn't talk too much about that, Chris, but we hit $3.1 billion in ARR in this last quarter, with almost $600 million coming from Juniper.
Even the shape of that is, you know, very much trending towards almost up to 80% of that is software and services, so very pleased with the performance and the change of the profile that's going on inside the company, and then finally, you know, as we look to the future, you know, I think consistent, solid performance from our HPFS business. We don't get to talk about that business very often, but, you know, it continues to be, you know, a mainstay in the company and perform very well, as well, so overall, you know, I think we have a lot to look forward to here as we close out our fiscal year, and we're going to have a lot to say at our Security Analyst Meeting coming up here very shortly.
Good. Good. Well, you know, this has been excellent. Thank you for your time, and thank you for joining us.
Thank you very much.
Thank you all for coming.
Thank you very much.