The operator introduces the First Quarter Fiscal 2024 Hewlett Packard Enterprise Earnings Conference Call and hands it over to Shannon Cross, Senior Vice President and Chief Strategy Officer and Investor Relations. Shannon reminds participants that the call is being recorded and introduces Antonio Neri, HPE's President and CEO, and Marie Myers, HPE's CFO. She also mentions that the call is being webcast and a replay will be available. Shannon also notes that the financial information discussed is forward-looking and subject to change, and that the information presented is based on current estimates and may differ from the final report.

HPE's first quarter revenue did not meet expectations due to industry-wide softening of network demand and a delay in large GPU acceptances. The company also faced a shortage of GPU supply, limiting their revenue potential. However, they were able to surpass profitability expectations and saw strong growth in recurring revenue.

In this paragraph, the speaker discusses the steps the company is taking to address their revenue decline, including streamlining reporting segments, implementing a new sales model, managing spending, and maintaining execution discipline. They also mention that campus networking product demand has weakened, but AI server demand remains strong. The company is prioritizing profitability and has seen an increase in non-GAAP gross margin and diluted net earnings per share.

HPE is implementing new sales strategies and cost management measures to improve order linearity and streamline reporting segments. They have combined the Compute and HPC and AI segments into one server segment and simplified their hybrid cloud strategy. Despite cyclicality in submarkets, HPE remains confident in their long-term strategy aligned with market trends. They have gained share in the campus networking market and seen growth in SASE and private 5G offerings. HPE GreenLake continues to drive ARR growth, with a 41% increase in Q1 and expected growth of 35% to 45% in the future.

HPE is taking advantage of cross-selling opportunities by offering both AI solutions and storage solutions to customers. They have seen a significant increase in demand for AI systems and their cumulative orders have reached $4 billion. This demand has also led to increased demand for storage solutions. HPE's server and hybrid cloud segments are expected to grow in the fiscal year due to AI demand and improved GPU supply. Customers are validating their value proposition, as seen with their deals with A&E and the AGH University of Science and Technology. Additionally, HPE is experiencing growth in AI inferencing.

Coles Supermarkets implemented an HPE ProLiant Gen11 AI inferencing solution to reduce theft and improve checkout scanning. HPE also expanded their collaboration with NVIDIA for enterprise AI solutions and introduced a preconfigured solution for fine-tuning large language models. They also announced an expanded HPE GreenLake for file storage designed for AI applications, which has attracted new customers such as the U.S. Navy Fleet Numerical Meteorology and Oceanography Center. At the Mobile World Congress, AI and private 5G were major topics among telcos and service providers.

The pending acquisition of Juniper Networks will expand HPE's portfolio and allow them to better serve customers from the edge of the network to the core 5G and cloud. Customers are interested in HPE's integration of Athonet private 5G capabilities and their cloud OpenRAN and VRAN solutions. The acquisition is expected to double the size of HPE's networking business and create a new networking innovator. The transaction is also expected to be financially beneficial for shareholders. Q1 2024 was a mixed quarter for HPE, with strong profitability and record ARR growth, but lower revenue due to softening networking market and other factors. HPE remains focused on execution despite fluctuations in demand.

Marie Myers, the new CFO of HPE, will discuss the company's adjusted guidance for the year ahead. Despite any challenges faced in the current quarter, the company remains confident in its future and has taken necessary actions to maximize value for shareholders. The company's focus on technology and relevant strategy positions them well for long-term opportunities. Marie is excited to join the HPE team and believes they have a significant opportunity for growth. The quarter saw record gross margins and expense discipline, and demand for traditional and newer products remains strong.

In the first paragraph, the CEO discusses the reasons for lower than expected Q1 revenue, including soft demand in Intelligent Edge, GPU availability, and deal timing. The company is taking action to address these challenges by cutting costs and driving efficiencies. The CEO then provides details on the quarter's revenue, highlighting the impact of backlog consumption and strong momentum in HPE GreenLake. The company's non-GAAP gross margin also improved, driven by a mix shift to Intelligent Edge and favorable input cost management. The CEO emphasizes the company's focus on controlling what they can in the current networking market dynamics, including prudent cost management and disciplined execution.

In Q1, our focus on cost management led to a decline in non-GAAP operating expenses and strong gross margins. This resulted in a non-GAAP operating margin of 11.5%, only a slight decrease from the previous year. Our GAAP and non-GAAP EPS exceeded our guidance range, and we have invested in our business to take advantage of opportunities in networking, hybrid cloud, and AI. We have also created a new service segment that combines our compute and HPC and AI segments to better serve our customers' AI needs. Server revenues were down due to a difficult year-over-year comparison, but we are seeing strong growth in AI demand.

In Q1 '23, our APU orders have risen to $4 billion, and our pipeline for APU products is strong. Despite supply constraints, APU product revenue has increased to over $400 million, and demand remains high with a backlog of over $3 billion. AI revenue also saw growth, including from our first AI cloud offering and a win with a large hyperscale customer. Traditional high-performance computing and supercomputing revenue decreased seasonally, while revenue from traditional server business increased. The mix of next-generation servers is expected to continue growing, with a focus on AI inferencing and enterprise applications. Our Gen11 services come with an attached subscription to our compute ops management software, which improves our margin structure. Operating margin for Q1 was 11.4%, up sequentially but down year-over-year due to declining revenues. Intelligent Edge revenues were $1.2 billion, up 2% year-over-year, with the largest contributor being a decrease in demand for campus switching and Wi-Fi products in Europe and Asia. Mid-single-digit growth benefits from existing backlog are expected to normalize in the future.

HPE's channel inventory is within the normal range, and they are seeing growth in their new TAMs. Their Intelligent Edge portfolio subscription revenue grew over 50%, and their operating margin increased by 1,000 basis points year-over-year. The new hybrid cloud segment, which includes their storage and HPE GreenLake business, saw a 10% decrease in revenue. However, their Electro subscription revenue grew over 100%, showing a transition to an as-a-service model. HPE Financial Services revenue was down 2%, but their operating margin increased by 130 basis points. In terms of cash flow and capital allocation, HPE consumed $482 million in free cash flow this quarter but typically generates cash in the second half of the year.

HPE's first quarter free cash flow was positively impacted by prepayments from pending deals and a reduction in their cash conversion cycle. They returned capital to shareholders and provided an outlook for the second quarter and full year, expecting sequential revenue increases in server and hybrid cloud segments but softness in the Intelligent Edge market. They anticipate negative free cash flow in the second quarter and potential lumpiness in their business.

In the second half of fiscal year '24, the company expects a ramp in revenue from large Cray and HPE GreenLake deals. However, they have revised their outlook for fiscal year '24 due to current networking market challenges and exclude H3C earnings and gain on sale from their non-GAAP results. They anticipate zero to 2% growth in constant currency revenue and non-GAAP operating profit, with a slight decrease in gross margin. Operating expenses are expected to be flat to down from fiscal year '23, and operating margin is expected to be flat. OI&E is expected to be a $200 million to $250 million headwind, and free cash flow is expected to be at least $1.9 billion. The company remains committed to their dividend, which was raised by 8% for fiscal year '24.

The company has performed well in the first quarter despite challenges in the market. They have taken steps to reduce costs and manage expenses while investing in growth areas such as AI, networking, and hybrid cloud. The company's new Chief Strategy Officer will oversee investor relations and they welcome questions. The first question is about delays in GPU availability and the CEO mentions power and other factors causing the delays. The CEO does not provide a timeline for when the delays will be resolved.

In the first quarter, the company experienced a revenue shortfall of $300 million, primarily due to a couple of deals that were pushed into future quarters as customers took longer to prepare their data centers. The GPU side also faced a tight environment, with improvements expected in the future. The backlog at the end of Q1 was $3 billion. The company expects improvements in both GPU availability and customer acceptances to drive revenue conversion. In terms of the full year guidance, the networking segment was the main driver of the revenue shortfall in Q1, with one deal being pushed out.

In response to a question about changes in the Intelligent Edge segment, Antonio Neri explains that there has been an acceleration of demand softness at the end of Q1, but the company does not have a channel inventory problem. He also mentions that customers are taking longer to install products already shipped to them.

The company expects to see a slight improvement in the second half of the year, with the second quarter being the lowest point. The traditional buying season in the US for state and local education is expected to contribute to this improvement. The company's pipeline is strong and they have not lost any deals due to the slowdown or the announcement of the acquisition of Juniper. There was a slight increase in inventory in the SMB sector, but it is a small part of the business. The next question is about backlog contribution and sequential growth in servers and storage. The company does not disclose the backlog for edge, but it has returned to normal levels except for the AI system. The company is optimistic about seeing sequential growth in servers and storage, and the CEO will provide more details.

The industry has seen a softening market and the demand for networking has decreased. The trough is expected to be in Q2 and improve in the second half of the year. Servers have shown signs of stabilization with a mix shift to Gen11 servers, which come with higher pricing and cost inflation. However, the number of units has remained stable or slightly improved and there is confidence in sequential improvement. The introduction of a new offer for file storage and the growth of HP Electra will also contribute to demand. Software revenue is now disaggregated from the solution, with the CapEx portion recognized in the quarter and the subscription part amortized over the contract period.

ARR is growing due to increased subscriptions in networking, storage, and AI. The server market is also improving, with lead times for GPUs decreasing but still elevated at 20+ weeks. The recovery in demand for traditional servers is expected to continue, driven by the shift to Gen11. AMD is well-positioned to support multiple types of GPUs, including the upcoming H200 and MI 300x, due to its unique network and interconnect fabric.

HPE's differentiation in the AI market is its ability to support all three types of AI systems - NVIDIA, supercomputing, and others. This gives them flexibility to convert orders and grow their ARR. A significant portion of the $4 billion cumulative orders is going through the HPE GreenLake platform, which will drive growth in ARR and margins. The company also announced that they have crossed 31,000 customers on the GreenLake platform, which is a significant increase in just one quarter.

The speaker discusses the increase in demand for AI in the enterprise sector, specifically in inferencing workloads. They mention that this demand may not materialize into revenue until fiscal year 2025 due to lead times. They also highlight the difference between AI training and inferencing, with the former being more focused on hyperscalers and the latter being more relevant for well-funded companies building large language models.

The speaker discusses how enterprises are using AI models and fine-tuning them with their own data in various locations, including data centers, Coles supermarkets, and the public cloud. They also mention the importance of inferencing at the edge for real-time decision making, and how the recent acquisition of Juniper will help with network connectivity for these processes. The question then shifts to profitability for the AI server business, specifically in terms of accelerated compute and how it differs between the Cray and standard compute segments.

HPE's server segment has delivered strong performance, with a target range of 11% to 13%. The company's ability to combine traditional and accelerated systems allows for flexibility and the opportunity to maximize blended margins. The EX system supports up to 80,000 GPUs and 40,000 CPUs in one system, and the XD platform is more oriented towards AI and has the flexibility to mix different configurations. HPE also offers a machine learning development environment, which can lead to server sales. The average unit prices for XD and EX systems are significantly higher than traditional servers, with XD being 20 times and EX being 35 times the value.

The speaker discusses the potential for optimizing margins through configurations and attached services, and mentions the shift towards using GPUs for accelerated computing in the cloud-native world. However, they also acknowledge that traditional monolithic applications will continue to coexist and not all applications will require GPUs.

The speaker discusses the future capabilities of phones and PCs in managing large language models, with the need for servers and GPUs for higher parameters. They mention the company's unique differentiation in supporting customers with AI and renewable energy, and the role of Juniper. The speaker concludes by stating their confidence in the company's strategy and team.

The speaker discusses the company's recent moves, including the acquisition of Juniper, and how they will allow the company to participate in the current AI momentum. They emphasize the need for more networking bandwidth and the company's commitment to social responsibility in addressing ethical challenges related to AI. The speaker also mentions the company's strong execution and discipline, as well as their adjusted guidance and pending acquisition, which they believe will put the company in a stronger position in 2025. The call concludes with a thank you and a reminder to disconnect.

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