HPE's Head of Investor Relations, Jeff Kvaal, welcomed everyone to the Third Quarter Fiscal 2023 Earnings Conference Call. He reminded the participants that the call was being webcast and a replay would be available soon. He also reminded the participants that the financial information discussed was based on estimates and could differ from the amounts reported in HPE's quarterly report. He concluded by noting that the financial information expressed was on a non-GAAP basis.

HPE delivered another solid quarter with increased revenue, gross margin, and earnings per share year-over-year. Their success in shifting the portfolio to higher growth, higher margin parts of their portfolio is driving 120 basis points of non-GAAP gross margin expansion. Intelligent Edge is now HPE's largest source of operating profit, contributing 20% of total company revenue and 49% of total segment operating profit. HPE GreenLake hybrid cloud platform is also accelerating, with an annualized revenue run rate of $1.3 billion, a 48% increase year-over-year.

HPE experienced a 3.5% year-over-year increase in total revenue during the third quarter, along with a 120 basis point increase in non-GAAP gross margin and a 2% increase in non-GAAP diluted net earnings per share. HPE is raising its full year non-GAAP diluted net earnings per share guidance, while maintaining its full year constant currency revenue growth and full year free cash flow guidance. Demand for HPE's products and services grew sequentially in the third quarter, driven by high-growth areas such as AI and HPE GreenLake, with customers showing strong interest in HPE's AI and supercomputing offerings.

HPE GreenLake cloud platform is a key driver of financial performance, with orders rising 122% year-over-year and a total contract value of nearly $12 billion. HPE GreenLake supports 27,000 customers and 3.4 million connected devices, and over 1,100 partners sell the platform. The quarter saw a double-digit increase in demand for HPE operational services, which contributed to the impressive gross margin in as-a-service recurring revenues. HPE GreenLake provides customers with a unified hybrid cloud experience to access, analyze, and extract value from data, no matter where it is located.

HPE's Intelligent Edge segment saw impressive growth in the third quarter, with revenue increasing by double-digits in all regions and operating profit more than doubling. HPE also saw a surge in demand for their AI solutions, resulting in a larger order book than ever before, driven by their AI software, slingshot networking fabric, services offerings, and sustainable supercomputers. An example of this success is the University of Maryland, which chose HPE Aruba Networking for a campus-wide refresh.

HPE has won contracts to build two supercomputers, Isambard 3 and TSUBAME 4.0, which use AMD CPUs and NVIDIA GPUs to accelerate AI-driven scientific discovery. Recursion Pharmaceuticals has used HPE AI software to scale its model efforts and speed up training. HPE's LUMI supercomputer, the fastest in Europe, has enabled generative AI projects and helped researchers apply AI for early detection of breast and prostate cancers. HPE is making progress in ushering in the area of exascale supercomputing for larger AI models.

HPE has started to build and test El Capitan, a two exaFLOPS supercomputer, in collaboration with the Lawrence Livermore National Laboratory. This quarter, HPE saw solid year-over-year demand in their Storage and Compute segments, with Storage SaaS revenue increasing double digits. HPE also released new ProLiant Gen 11 servers optimized for AI workloads which boosted AI inference performance by more than 5x. HPE Financial Services revenue increased 7% year-over-year and financing volume ticked up 6%, showing the importance of HPE GreenLake in their as-a-service volumes. HPE is strengthening their innovation from edge to cloud for the future.

HPE hosted its annual Discovery event in June, where it unveiled new edge, hybrid cloud and AI solutions. HPE announced it is entering the AI public cloud market with HPE GreenLake for large language models and extended its hybrid cloud leadership with new HPE GreenLake hybrid cloud services. Additionally, HPE expanded its partnership with Equinix to deploy HPE GreenLake hybrid cloud solutions outside of the data center. Examples of customers using HPE GreenLake for private cloud enterprise are Swisslog and Media House, who both wanted to accelerate their digital transformation and better leverage data. HPE GreenLake will help them achieve operational agility, mitigate risk and address IT skills gaps.

HPE Discover has expanded its HPE GreenLake private cloud portfolio with HPE GreenLake for Private Cloud Business Edition, a new offering that allows customers to spin a virtual machine across hybrid clouds on demand. The company has also previewed a sustainability dashboard and a portfolio of sustainability services to help organizations reduce their carbon footprint. HPE's strategy and strong execution have led to new customer logos, greater recurring revenue, margin, earnings per share, and free cash flow, which is why the company is raising its non-GAAP diluted net earnings per share guidance.

Antonio appointed Jeremy Cox as Interim CFO and Jeremy discussed their financial results for the third quarter of FY 2023. Despite some challenges, the company delivered 3.5% year-over-year revenue growth in constant currency and saw some promising indicators of stabilization. These included a 120 basis-point year-over-year expansion of non-GAAP gross margins, a sequential improvement in demand across their four product segments, and signs that their largest customers were returning to the market.

HPE's Intelligent Edge business saw a rapid increase in revenue and a 120 basis point year-over-year increase in gross margin to 35.9%, while operating margin reached 29.7%. This led to a GAAP diluted net EPS of $0.35 and a non-GAAP diluted net EPS of $0.49, which was up from the previous year. HPE's as-a-service revenue pivot also showed strong momentum, with ARR reaching $1.3 billion in Q3 '23. The company returned $831 million in capital to shareholders this year, paying $154 million in dividends and repurchasing $187 million in stock.

In Q3, HPE GreenLake's value proposition was increased with a higher mix of higher-margin, recurring software and services revenue, which rose to 68%. As-a-service order growth was robust, delivering 122% year-over-year order growth and a cumulative as-a-service TCV of nearly $12 billion. In Intelligent Edge, revenues grew 53% year-over-year and 8% sequentially, and customers are increasingly adopting software-centric solutions such as Edge Connect SD-WAN software and Aruba Central management platform. HPE's ARR growth has accelerated from 25% in Q4 '22 to 48% in Q3 '23, which is above the long-term 35-45% target.

In Q3, HPE's operating margin was up 1,300 basis points year-over-year and 280 basis points sequentially. Revenue from HPC & AI grew 3% year-over-year, driven by AI deals which have higher gross margin rates than historical levels. Storage revenue fell 2% year-over-year but rose 3% sequentially, with HPE Alletra revenue growing triple digits for the fifth consecutive quarter. HPE will continue to invest in R&D and their own IP products within the Storage business unit. HPE will discuss their outlook for revenue growth, investment, and margin improvement at their Securities Analyst Meeting.

In Q3 '23, HPE Alletra pushed revenue recognition out into future periods and deal elongation challenges were most prominent in the Compute business. Compute revenue was down 10% year-over-year and HPE Financial Services revenues rose 7% year-over-year. Despite an uneven spending environment, a transition to a recurring revenue model, and FX headwinds, HPE held their revenue steady and expanded non-GAAP diluted net EPS year-over-year.

HPE has made significant progress in their portfolio shift, with Intelligent Edge now representing 20% of revenue and 49% of operating profit. The company has also seen a 120 basis point increase in non-GAAP gross margin, despite FX headwinds, and a 10.3% non-GAAP operating margin. HPE has also announced a put option on their shares in H3C, with the transaction expected to close in the first half of 2024.

H3C dividends are expected to increase in FY '23, and free cash flow is expected to be between $1.9 billion and $2.1 billion in FY '23. The cash conversion cycle is expected to remain steady at 23 days and the order book is more than double pre-pandemic levels. For Q4, revenues are expected to be in the range of $7.2 billion to $7.5 billion.

HPE is reiterating its guidance for 4-6% revenue growth in constant currency and 6-7% non-GAAP operating growth, as well as its GAAP and non-GAAP diluted net EPS guidance. The company is expecting a 300 basis-point revenue headwind from FX, and is expecting free cash flow of between $1.9 billion and $2.1 billion. OI&E is expected to be a positive $50 million to $70 million for the full year, and the company plans to return approximately 60% of free cash flow to shareholders via dividends and repurchases.

Antonio Neri reported that the AI deals discussed at the end of Q2 and during HPE Discover have been booked and the pipeline remains strong. He also noted that the order book is now more than twice the pre-pandemic level, and they are now beginning to ship orders. However, there are supply constraints and elongated times for revenue recognition that may affect the timeframe for seeing the benefits of the AI wins.

Simon discussed the different solutions that customers are coming to them for, such as training, tuning, and inferencing. He also mentioned that customers will be able to use foundational models to tune their data in a secure and responsible way. He believes that these solutions will be an accelerator for Compute and Edge, and that customers should look at this from a mid- to long-term basis. Aaron Rakers asked if they should expect the large hyperscale cloud opportunities to expand, and Simon did not answer the question.

HPE has been winning opportunities in the cloud due to their unique intellectual property, flexibility for customers, expertise in AI, and sustainability. This is why they have seen growth in their HPE GreenLake as-a-service AI bookings. They are able to provide customers with the ability to consume their solutions in a sustainable way, as well as data center services to run their AI solutions.

Aaron highlighted their software-led strategy of using their supercomputer as a cloud experience, wrapping around all the services and software needed to provide that capability. Antonio Neri spoke about the Intelligent Edge business segment, noting the investments they have made to build the right solutions to allow customers to drive a data-first digital transformation. This includes return to work, connectivity, and the ability to process data and connect devices.

Aruba has a unique portfolio of edge-to-cloud networking capabilities, having shipped over $30 million ports with Wi-Fi 6 and 26 million ports in the switching side. The company has made these cloud native and added Software-Defined Wide Area Network, Silver Peak, and Axis Security to their portfolio, integrating Athonet to provide 5G software-defined solutions and private 5G at the edge. This comprehensive portfolio has resulted in 20% of the company's revenue and almost half of their profit, and Aruba expects to exit Q4 with an elevated order book.

HPE Alletra is HPE's primary storage system, which covers various price segments and allows customers to access block, file, and object storage services in a cloud-native, subscription-based model. HPE Alletra has seen rapid growth, going from zero to over $1 billion in a short amount of time and growing triple digits. This system provides customers with significant cost savings, both in terms of CapEx and OpEx.

Antonio Neri and Jeremy Cox discussed how the subscription product from Alletra is deferring 14% of its revenue onto the balance sheet. This should have a positive impact on revenue and operating margins in FY '24. They also mentioned that they have seen demand increasing from Q1 to Q2 and Q2 to Q3, and they expect this to show up as they transition orders into revenues. Samik Chatterjee asked about the cyclicality of the Compute business, and the team mentioned that there may be more downside to revenue and margins as they move into the fiscal fourth quarter.

Antonio Neri explains that the server category, which is a combination of general-purpose compute and HPC and supercomputers, saw an improvement in demand quarter-over-quarter. This was driven by unit demand, storage demand, and HPE GreenLake. He predicts that the server category will continue to show improvement in demand for HPC and AI in 2024.

Antonio Neri and Jeremy Cox discuss the evolution of pricing in the commodity space and the importance of Gen 11 in driving AUP premiums. They expect the 11-13% operating profit range to remain reflective of their long-term expectations. Despite the cyclicality of Compute, they anticipate that the mix shift towards edge, hybrid cloud, and AI will improve margins and this was evident in their Q3 results as margins increased by 120 basis points.

Antonio Neri of HPE is confident that the company's revenues will continue to improve in fiscal year '24, despite a high single-digit decline in revenues this year. He notes that the company's margins have increased in the past two years due to a shift in business composition, and that the Q4 revenue will be lapped due to the improvement in supply in the quarter. He also notes that while revenue will improve year-over-year, it will still be below the Q1 revenue of $7.8 billion.

Jeremy discussed the headwinds in FX and how the company's revenue is growing faster than expected, increasing from 2-4% to 4-6%. The mix of revenue and gross margins is changing, as well as the way free cash flow is generated. Despite some challenges, the company is still growing revenue, expanding margins, and improving their net earnings per share. The Security Analyst Meeting in October will provide more information.

This summary was generated with AI and may contain some inaccuracies.