Welcome everybody to the HPE Fireside Chat at the Goldman Sachs Communacopia + Technology Conference. The privilege of having Shannon Cross here from HPE to join us. My name is Kat Murphy. I cover HPE and IT hardware more broadly here at Goldman Sachs. We have about 35 minutes for today's session, inclusive of Q&A. You have some safe harbor to read first before I get started?
Yes. I'm sure no one's heard this before. My remarks may contain forward-looking statements, so please refer to our SEC filings included in our most recent Form 10-Q for a discussion of the risk factors that relate to our business. Thank you very much for having me.
Great. Thank you for being here. To kick it off, HPE reported earnings last Wednesday.
Raised both your fiscal 2026 and fiscal 2027 outlook, now calling for 13%-17% revenue growth, 16%-20% EPS growth for fiscal 2027. Before we dig into some more strategic questions and talk through the drivers of that raised outlook, could you provide a brief recap for the quarter and any key takeaways that you think are important to level set for this audience?
Sure. We were very, very pleased with the quarter and the strength we saw. Our revenue was strong. Our order growth was even stronger. We exceeded EPS significantly from the guide we had provided. We did $1.11 in earnings this last quarter, which was the first quarter the company has done over $1 in earnings. That was pretty exciting. We also had a record free cash flow, and that is something that is near and dear to my heart, for the quarter as well, at almost $1 billion. Overall, we are seeing very strong demand on the networking side. Our revenue grew 10%. We had 36% growth in orders, so very good there. Our storage business actually grew 10%, and we saw twice the growth there in terms of orders as well.
We had very strong server growth, especially on the traditional side, and our order growth in traditional server was 75% year-over-year. Overall, demand remains really strong. I think what the management team right now is extreme focused on is converting all of those orders into revenue as we look forward to a really strong 2027.
Maybe following up on that point, you have talked about guidance being constrained by supply more so than the demand element, which remains very strong. In your Form 10-Q, there were some disclosures around $30 billion in purchase commitments, stepping up from $6 billion last quarter. Can you talk about the improving visibility that you have into supply and what is driving some of that opportunity to raise your fiscal 2027 outlook?
Sure. Yes. We are very happy with what we have committed to. I would say what we disclosed during the call was basically that our purchase commitments for Networking doubled quarter-over-quarter. Obviously, if you see $6 billion to $30 billion, part of that is Networking, but the remainder is focused on cloud and AI. As you can imagine, that basically is focused on the components that are in the shortest supply right now. What we are doing, we have always signed LTAs. I think maybe one of the misconceptions that has been out there, I think it is kind of packed now, but was that LTAs were kind of a new invention. They are really not. They have been around for a long time, and our company has relationships with the DRAM manufacturers going back to Compaq days.
Very tight there, but we have signed multi-year larger agreements to lock in supply, and that is one of the things that makes us feel more confident in what we gave for fiscal 2027.
Got you. Let's spend some time on the Networking portfolio. You raised the Networks for AI order target to $2.5 billion-$3 billion for fiscal 2026. You have talked about the opportunities across scale up, scale out, and scale across, but before we go into each of those in more detail, where do you see the biggest opportunity for that Networks for AI number, in 2026 and 2027, and then going forward, maybe across those three buckets?
Sure. Yes, Networks for AI, for those who are keeping score, we started back in October at $1.5 billion by the end of the year, and we are now getting closer, obviously, to the end of the year, and that target is now $2.5 billion-$3 billion. We have seen significant demand in what was really a nascent market for us even a year ago. We are very excited about our position and where we stand. When you look at what we are offering, we are offering basically scale across with our PTX router, which has its own silicon. We have the Express silicon chip there. It is something that Juniper has worked on. We are on multiple generations now, and we believe that that is a really strong product that has seen extreme demand. If you remember Juniper's history, that was the telco business before.
The telco business, I remember looking back at it and it was like, well, how low can it go? Now obviously with AI data center and the opportunity there, we are seeing significant demand and hypergrowth. Like that side of it, we have the MX, which is the on-ramp. That is our Trio silicon, and the MX router is basically on-ramp to the data center. That has seen significant demand. This is one of the reasons why Oracle was really interested in signing with us. We have our QFX, which is the first 100% direct liquid-cooled Tomahawk 6 top-of-rack switch. We are seeing demand across the board. I would say routing is absolutely something that connecting all these AI data centers is in really strong demand in an area that I think we are extremely well positioned.
Across the board, we are really happy with what we see in Networks for AI, and I would expect to see, not an update, but more details provided. We are hosting a Networking Investor Day on September 30th. It is in the Bay Area. If people would like to attend, please let us know, and it will be webcast.
Great. Can you talk more about that gigawatt -scale Oracle deal that you announced last quarter? You mentioned the QFX platform as being something very attractive, but any more details on what really drove HPE's win of that opportunity and kind of quantifying the scale of the opportunity?
Sure. This is different than the relationship that Juniper and Oracle had in the past. I think maybe some of that got lost in translation. This is absolutely AI data center. We are providing the PTX, the MX, and the QFX, which basically running the back end of the data center, which this was a competitive bid or a competitive contest that we went through. So obviously Oracle saw value in us. I think there were a few things that really drove it. One, I think the interest level in what Juniper can do really peaked up when we announced the Direct Liquid Cooling, the DLC switch. Because, again, we are time to market versus the competition by at least six months. So that was helpful. It reduces power consumption.
It is a smaller device, so it is basically the same thing that you would see in the data center for servers gets transferred over to what we are doing on the switch side. So that was part of it. I think there was an existing relationship between the two companies. I think the scale and scope of what HPE brings to the table from a balance sheet perspective, Oracle has the ability to use some of our HPE FS, which is our Financial Services, our leasing business. So that was also of interest to them. And I think it is really what is important to us is this is a proof point that we can play in this market. We are talking to a number of other players in the market, and I am pretty excited about this opportunity for us as we look to 2027 and beyond.
Great. Maybe going back to routing. The routing portfolio, you saw revenue accelerate sequentially in the quarter. Can you talk about how much of that, at least in the last print, was related to the core, we'll call it cloud on-ramp business versus some of these new AI use cases?
The vast majority of it, I would say is. There's core, right?
We all know what core was doing. The growth is really from the new use cases.
Got you. Then back to the scale-out opportunity and talking about really the switching platforms that you're selling into these data centers. Can you talk about the target customer for a Juniper data center switch and how that might be different than, if it is different from the target routing customer, and some of the use cases that you're going after there?
Well, I think one of the things that is really interesting about the combination of HPE and Juniper, and I think what we are talking about right here is really an example of 1 + 1 = 3, which I have been looking for and trying to find examples of for quite a while in the company. There have been some, but I think they are really starting to ramp now. I think one of the big opportunities is to go into and sell to the enterprise.
Yep.
If you talk to Rami, one of the things that they were focused on and one of the uses of OpEx, which dampened margins at Juniper, was the need to build out basically an enterprise sales force. Combining the two companies gives him an opportunity to leverage his technology across HPE's existing channel and partner network. An important milestone here is that while we combined the sales force back in January, on November 1st, we are doing Partner Day One. So all the partners will be able to sell both products, and that should be beneficial as well. I think enterprise is key. From a hyperscale standpoint, Juniper also did not have necessarily the relationships and the ability to go after. Now, they probably would have built it over time, so I am not saying it would not have happened.
But I think combining HPE and Juniper, there is really ability for the combined company to go out and sell some of these products into the hyperscalers in ways that I do not think Juniper would have been able to do on its own, or certainly not as fast. Again, 1 + 1 = 3. So when I think about the opportunity, hyperscale obviously is significant. It is kind of like what we think about in server. There was huge opportunity in AI server for training. But now what we are seeing is this, and then we will get to it, but this big ramp on the inference side that we think is just coming. I think the same thing to some extent on the networking side. Big opportunity in AI data center, but then overall a refresh and a need to modernize data centers to handle AI within the enterprise market as well.
Got you. That is very helpful. Let us round it out with a discussion on scale-up. You have talked about participation from a networking perspective in the AMD Helios rack.
Can you clarify, to the extent that you've talked about it, what HPE is doing in the scale-up opportunity for AMD Helios and how we can think about maybe putting a framework on the size of that opportunity? I know it's not included in the TAM or it's not included necessarily in the outlook, but talking about how investors can think about the size of that opportunity.
Sure, and I think you can also go back to some of what AMD has talked about in terms of the size and extrapolate from there as well. I think HPE will do two things with Helios. The first is we'll provide the whole rack. Put HPE on it, server technology, obviously the scale-up networking technology, and that's one option. We're also going to be providing to the market trays. So basically we'll provide on a white label basis trays into the server competitors of ours, coopetition, I suppose, that are going to be working with AMD on Helios. So it's a two-pronged approach. I think initially it'll be most likely the full servers, but over time there's only a couple of us that have been qualified in. It's not that we think the market will stay that duopolistic for long. Who knows?
If this is really successful, more people will come in. But we're really excited about Helios for a couple of reasons. One, as you look at what we have done on AI server over the past couple of years, we've really focused in on enterprise and sovereign. This gives us an opportunity to become more aggressive in the hyperscale and neocloud space with an offering that has a better margin profile because it will also have our Networking IP in it. So that is one area that I think is pretty interesting and exciting. And remember, HPE has a very long-standing relationship with AMD. So we leaned in heavily on this early on, and we're excited about the RFPs that we're seeing right now.
And then the other side of it is this Cray opportunity, which opens up a whole new market for us that I think we'll look at over time. Again, that's something that Rami and the team are working on, and we'll talk a bit more about it the Networking Day. Helios, I think is a good opportunity. In terms of size, we're not putting anything out right now because we don't want to get the cart before the horse. We want to make sure we have specific timing and numbers to provide you. I would assume that by the time we report fourth quarter, which will be late November, early December, we should have more to say there, in terms of the rollout.
Great. Thank you. On the campus and branch side, you touched a little bit already on the synergies of this joint go-t o- market from the November 1st kind of combined Partner Day One that you're expecting. We're also seeing strong momentum in the campus and branch opportunity overall from a Wi-Fi 7- led refresh, concerns around security. Anything to share just on how the joint Mist and Aruba go to market is shaking out relative to expectations, better or worse, and how that opportunity seems to be unfolding?
Sure. I think the Wi-Fi 7 refresh has been really positive, and then adding Mist into our portfolio is really driving a lot of interest from customers. We were pleased with our low teens growth in terms of orders in campus and branch this quarter. We grew our revenue 8%. I think, this is not obviously at the hyper growth level that we're seeing for AI data center and that, but this is a really nice slow and It's not slow at that level, but steady business with upside. I think when you think about opportunities, we've signed some really big logos. Can't disclose them here, but impressive wins on our side. I think from a product perspective, we continue to basically move to converge using the best of both breeds over a long period of time.
We're very, very cognizant making sure that our Aruba customers are super happy and our Mist customers are very happy. At this point, the response has been positive. I like what we're doing in campus and branch and the Mist technology is something that in various forms and where it makes sense, we're going to look at putting across the data center as well.
Got you. Putting it all together, the full year outlook for Networking for fiscal 2027 was raised from 8%-12% to 14%-17%.
You talked about all of these demand vectors. You also talked about doubling of network purchase commitments. How do we think about parsing out the drivers of that raised outlook across more demand versus better supply?
Yeah, I think a couple of things to think about there. One, that does include some contribution from Oracle. We're relatively prudent, I think, in the way we're looking at it, but it does include some from Oracle and then some modest acceleration in the core business. I will tell you, management remains incredibly focused on order conversion. I think if Marie were here, she'd say if we can do better, we will. We meet weekly, talk about what we can do to improve it. What Rami has said is sequentially, quarter- over- quarter, it should get better. The doubling of the purchase commitments definitely helps. I think that's something that's going to be really important because whether it's server or it's on cloud and AI or it's on the networking side, demand is absolutely not a problem.
I think you've heard that from others in the industry. It's basically being able to deliver the customers. We're working as hard as we can to fulfill that.
To round it out on Networking, you are guiding for margins to expand into the low to mid to high 20s%—
Mid to high 20s%.
—For fiscal 2027. Talk about how [Mist] factors into this, maybe some other one-time things that are falling out from 2026 to 2027 that should get that nice margin expansion within the segment.
Yeah. It is mainly synergies and what we are seeing from a synergy perspective. I think it is really important to emphasize that we are not only looking at synergies and ways to improve the new companies coming together, but we continue to invest aggressively in silicon development and new products and leaning into things like Helios and that to be able to drive growth going forward. I think that it is really important for that because we spent $14 billion on this acquisition. Having spent 20 some odd years on the sell side, I have seen a lot of failed acquisitions.
This one is really going well, and I think that's because the company, the board, the management team, made a commitment to really look at the integration, drive for success, invest where it's required. I think that's important because legacy tech companies, which we used to be, now we're a growth company, so we're going to change our sweatshirts or whatever. These kind of companies had a tendency of buying companies and kind of, I don't know, kind of forgetting about them or letting them live on their own and then just moving on to the next thing. When there was a downturn, cutting investment dollars and that. That's absolutely not what's happened here. I think it's really important because we want to make sure we're good shepherds of shareholder dollars.
Great. Let's switch gears to cloud and AI. We'll start on the traditional server side. You mentioned orders up 75% year-over-year in traditional servers. Can you articulate for this audience your confidence in the durability of demand here?
I'll ask the question of units versus ASPs.
Anything you can share just on what,—
Sure.
—is underlying the confidence in the growth in demand?
Yeah, I think there's a few things, and for those of you who know me, I've been around quite a while, and I truly believe there's something different here. There is a new TAM developing. This is different than some of the other, "Oh, they're going to move it on-prem," because of whatever from a cloud perspective. I think there are key drivers here that are actually creating incremental demand beyond what we've already seen. I would say the first is because customers need to invest in AI technology, they need space in their data center. So I do think that there's some refresh going on in the older stuff running databases and whatever, just because you can consolidate servers, and when you consolidate servers, you save on space, power, et cetera. So there's a bit of that.
But more importantly, what we're seeing and what we're hearing from customers is this idea of being able to contain token cost and security of data. So from a token cost perspective, if you bring in. We're drinking our own champagne here because my group's actually working on this. We're putting out effectively what you call an AI factory or what have you. Ours, in this case, is HPE PCAI, which is our Private Cloud AI hardware, putting open-weight models on top, having an intelligent router that basically says, if you're a cutting-edge software developer, you can go up to the hit a frontier model and spend for tokens. If you're me sitting there doing sort of basic corporate stuff, I never need to leave the cloud. So our costs in that case are just buying the hardware and managing the hardware, as opposed to paying one of the token providers.
So we're doing that or the large LLMs. So that's something that we announced, for instance, that we were awarded a $3.5 billion enterprise deal after the end of the quarter. We wanted to highlight that. I mean, the number's great, but more it's this concept, and we're seeing many of these, maybe not as big, but many of these opportunities come through from an RFP perspective, where large retailers, large technology companies, large banks, large pharma, they're all looking at this and going, "Wow, our token costs are going to ramp substantially. How do we manage it? How do we control it?" I've talked to transformation officers and CFOs across the country, different industries, who are all working on this. So I think this is absolutely a new reason for people to be buying hardware, and I think it's very sustainable.
The other thing I would say is that there's absolutely concern about data sovereignty and security. You don't necessarily want all of your data going up and somehow becoming the sum total of human knowledge. So from that perspective, people are really focused on gating things off to the best of their abilities. I think it's interesting, but in terms of how this market is going to develop, it seems to us, and maybe this is anecdotal, that it's ramping faster in the U.S. We hear things, again, HPE is in 160 countries and everywhere. When I talk to some of the country managers, you hear anecdotes of more demand out there, but we've really started to see this ramp, and I think it's sustainable. I'm pretty excited about it because it's cool to be in hardware again, or at least in server again.
Talking more about that $3.5 billion enterprise hyperscale deal where you were engaging in some on-prem use cases. Similar to the Oracle question, what drove HPE's win in that particular deal? Maybe more broadly, when thinking about going after this enterprise and even sovereign AI opportunity, how much of your sales motion is led by the breadth of your portfolio in both compute, storage, and networking?
That's a good question. I think in terms, and I have actually asked why we won this, because it's curious. I think we won it because we can do services, we can do installation, we can maintain it. My speculation here is that maybe some of these companies are getting a little stretched with all the growth, everything they have to do, and so they wanted a really real trusted partner that can come in and build the data center for them and help them out. So, to be clear, this was a hyperscaler, but these are traditional server margins. We're very happy about the development of this business because obviously, we all know that AI server tends to be a very low-margin opportunity. This is not. The other deals that we're seeing out there are similar.
I think the interesting thing about HPE when it comes to our customers, one, we are the Fortune 200 in terms of the customer base, Fortune 500. We have a really marquee set of customers. I'm sure our competition has good customers as well, but I was personally surprised when I came from the sales side and saw who we work with because it's pretty impressive. So from that perspective, I think our existing customer base will be a really good area to mine as they go and they look at more inferencing options. I think that from our product perspective, we are the only one that can bring networking, server, storage services. We have a professional services arm, HPE Financial Services, so we have the ability to finance things.
If you are a Fortune 200 customer and you want to lease something, we are going to be happy to do it because you have really good credit quality. Then we have this enormous channel, and that is another thing I think that is underappreciated at this company. The channel that we have originated out of Compaq and has been expanded over the years. It is a global, deep, very close relationship channel, and I think that is something that is also going to be really beneficial. Because one of the things that as you move a little bit down from maybe the super big customers can manage all of this stuff once you get it out there on their own. But you move down, they are going to need partners, they are going to need help and solutions. I think what we have will be good.
In terms of cross-sales, I think that is still something that we can candidly do better. But it is an area where between networking and server, we are definitely starting to see some cross-selling.
Let us touch on the AI server opportunity. You have been very focused and deliberate about maintaining margins in that opportunity set with a focus on enterprise and sovereign. But saw some nice orders in the quarter, $2.4 billion in the quarter, almost $7 billion in backlog. How should we think about the mix potentially changing now that you are getting more scale in the business and you are seeing some attractive opportunities, both from an engagement with the hyperscale and neoclouds on the AMD Helios side? Is there an opportunity to change your mindset on the AI server framework?
I think it will be really interesting to see how it plays out. I do think Helios provides a margin uplift when you combine in the networking and the server technology. So I am excited about what we can do there. I think that overall, we are maintaining a balanced approach. We still bid for a lot of these, but if the margin is really not there, we do not need empty-calorie revenue. I do not think investors necessarily want that. We are really focused as well on driving our free cash flow, so you have to manage your working capital. I think people probably saw we took our working capital, or sorry, we took our free cash flow target this year up to $3.75 billion in fiscal 2026, at least, and at least $5 billion next year. So this company is a cash-generating engine.
It's a board decision, obviously, in terms of return on cash flow, but a return of cash. The bias has always been to give it back to shareholders. Obviously, we've said, in fourth quarter, we're going to give back at least 75% of our free cash flow through share repurchase and dividends. I think that's also a very important balance that we look at in terms of how much working capital do we want to tie up. For instance, you saw our inventory went up this quarter. That's positioned because we do expect AI server revenue to be up in fourth quarter. We do have some big deals. We expect growth in fiscal 2027 in our AI server business. You've seen some of, they've been press-released, that we had some big wins from, for instance, U.S. government and some of the labs.
Talking more about those U.S. government and lab wins, and we'll call it the sovereign opportunity more broadly. It's really where the legacy of Cray seems to have a competitive advantage. You had mentioned earlier that things seem to be ramping faster in the U.S. than internationally, but HPE also does have a very significant international footprint in EMEA in particular. Can you talk about your outlook for the sovereign AI buyer, maybe both domestic and international, to come to market? How the profile of that type of buyer might look different from the neocloud opportunities you may have walked away from earlier?
Sure. To be clear, when I talked about the fact that things were starting more in the U.S., that was really the inferencing.
Understood.
The traditional server purchases, this idea. There was an article in the FT, by the way, today talking about Latham & Watkins that are bringing on. I don't know if they're our customer. I've asked, I haven't heard. But they are buying Nvidia GPUs, putting them on-prem, basically, in a colo and managing it themselves so that they can reduce token costs. That's something that I think has got legs and is kind of starting in the U.S. From a sovereign perspective, we do. We work with sovereigns all over the world, and we have very close relationships stemming from Cray and frankly from HPE as well, because HPE's big Compaq server business had longstanding government relationships. I think from a margin perspective, if you think about the continuum, the more you do for a customer, the higher your margin.
If you are with a hyperscaler wrapping metal around an Nvidia stack, the margin is probably not that great. As you go up, and some of these sovereigns are pretty sophisticated, a lot of them need a lot of help. That is kind of how you think about the margin there. I think we have several areas where we are talking to people, whether it is on Helios, whether it is on our existing Nvidia kind of racks that especially in Europe, where there is a lot of interest. Governments are looking at wanting to have their own clouds within their own borders, whether it is for defense or a government kind of activity, or it is literally to help jumpstart some of the startups and that within their own country. There is a lot of demand out there. There is probably some questions about where the dollars come from a government perspective.
But in general, we see that as a really healthy market.
Okay. I will ask one more, and then I will open it up to see if there is any questions from the audience. Just talking about your cloud and AI segment-level margin outlook for FY 2027, guiding to 13% next year.
You delivered 17% this quarter, but maybe some one-time items in there. Can you talk about the various impacts that are driving, whether it be mix, whether it be supply, anything to consider when—
Sure.
—talking about that margin framework?
Yeah. Look, if you look at the company, we did a 40% gross margin this quarter. Pretty high. There were some deals, some things that came through. This is not really a component pricing situation. It was more composition of deals and that benefited us this quarter. I think as we look forward, there is always a balancing act between units and ASPs, and then margin, which flows through to EPS, which flows through to cash flow. In cash flow, you also want velocity, right? Because these, whether it is the server business or it is a PC business, which we obviously don't own, you can really speed up your cash conversion cycle. So you want to make sure that you are driving a sufficient amount of units through the model.
I think we are definitely kind of leaning when we see growth next year to be more of a combination of ASP increase in units, as opposed to this year, it has been definitely driven a bit more by ASP. So, that can have a little bit of pressure on margin. The other thing I would point out is that we do expect our AI server revenue to be up year-over-year. That does have a lower margin profile than traditional server. Now, stay tuned. If we keep seeing the kind of growth rates that we are seeing in traditional server and some of these deals that are coming over the pike, maybe there is some opportunity there. We do continually strive to drive for the most growth profit dollars we can as a company.
Okay. Any questions? We can get a microphone over here.
The $3.5 billion—
Oh. I'll give you a microphone.
—that CPU server with a CSP, but it's on-prem?
Yeah.
So—
It's for their internal usage.
Okay.
Yeah. Just think about, just like us, and we use PCAIs, they're using more of a traditional server approach, and it's for inferencing.
Do you have any examples of what they're using this PCAI for, or rather the compute for internally, just to contextualize?
I don't. It's an order that they placed. I would say internally, what we use ours for is basically, my chat. If I use ChatHPE, it doesn't go outside. It just stays internal, so I don't actually incur any token costs.
What would the duration of a deal like that be? Because that is a big deal.
It is a—
Over a year, or?
—I mean, it is a server deal, so it is a fairly quick turnaround.
Okay. Are there more of them like that in the pipeline?
Well, I do not know if there are $3.5 billion ones, but there are several large enterprise customers with multi-hundred-dollar deals that are out there that we are looking at. The amount of investment dollars that people seem to be. Again, it is early, but I think there is legs here. The amount of money that people seem to be wanting to put into on-prem is pretty impressive.
Is it all CPU, is it not GPU?
I believe this is predominantly CPU.
The margins.
They were traditional server margins.
Okay.
Yeah.
We have a couple of seconds here. Do you want to plug the Networking Investor Day again and let this audience know about any—
Sure.
—expectations for?
Yeah, I think—
—related to them?
—We are going to have the Networking Investor Day, September 30th, in the Bay Area. We want to explain who HPE Networking is now. We will have Rami, we will have all of his direct reports. I think it will be a good opportunity for people to ask a lot of the same questions you are asking now, and hopefully get answers from the subject matter experts, as opposed to me.
Thank you, Shannon.
Thanks.
Appreciate it.