The operator welcomes participants to the Second Quarter Fiscal 2024 Hewlett Packard Enterprise Earnings Conference Call and introduces the host, Jeff Kvaal. The call will include a question-and-answer session and is being recorded for replay. The call will feature forward-looking statements and financial information, which are subject to risks and uncertainties. Non-GAAP financial information will be reconciled to GAAP on the company's website.

HPE had a strong second quarter, with revenue and earnings exceeding expectations. AI systems revenue doubled from the first quarter and there is a robust pipeline for this business. The company is optimistic about future growth, driven by increased AI demand, adoption of HPE GreenLake, and improvement in traditional infrastructure markets. They are raising their full-year guidance and focusing on cost discipline and efficiency to sustain growth. Business process simplification and digitization, including the use of AI, are also being implemented.

HPE's AI systems revenue has doubled to over $900 million, with a lead time of 6-12 weeks for NVIDIA H100 solutions. Enterprise interest in AI is rapidly growing, with a 15% increase in enterprise orders and a tripling of Enterprise AI customers. HPE's expertise in air and liquid cooling systems, as well as their patents and manufacturing capacity, make them well-equipped to meet the demands of accelerated computing. This was demonstrated in May when HPE's AI leadership was recognized in the top 500 list of the world's most powerful supercomputers.

HPE has four of the world's top 10 fastest supercomputers, two of which are exascale. They also have seven of the top 10 energy efficient systems. This makes them an attractive partner for governments and sovereign states pursuing AI strategies. HPE has a strong ecosystem of AI partners, including NVIDIA, and they will be unveiling new innovations with NVIDIA at an upcoming event. Enterprise customers are already responding positively to HPE's AI portfolio, with companies such as QBox, JT Group, and Scaleway using their AI systems for various purposes.

In addition to capitalizing on the growth of AI, HPE is also seeing a market recovery in traditional and cloud infrastructure markets. They are experiencing sequential and year-over-year growth in orders for traditional services, driven by customers in North America and Europe. HPE is not seeing any cannibalization from accelerated computing demand. They are also seeing success with their HPE GreenLake hybrid cloud, which has attracted new customers and has a growing contract value and annualized revenue. The company has also made advancements in their storage offerings, introducing new functionality and expanding their capabilities for hybrid cloud and AI. They have also introduced new options for file storage specifically targeting the demands of AI.

HPE has increased its specialist sales capacity and expects improved order-to-revenue conversion in the future. The company's HPE Alletra product has seen rapid deployment and the networking market is expected to improve gradually. HPE has announced new innovations in alignment with their AI strategy, including AI Ops capabilities and new security tools. They have also recently launched a private 5G and Wi-Fi portfolio through their HPE GreenLake cloud platform, which has been well-received by customers. HPE is also excited about their proposed acquisition of Juniper Networks.

HPE is currently in the regulatory process for a transaction and expects to close by the end of 2024 or early 2025. They are investing in innovation and driving operational and cost discipline to improve their cost structure. They are also focused on reducing complexity and implementing automation and AI across the company. They have restructured the sale of their stake in H3C and announced the divestment of their communications technology group. The company had a solid performance in Q2 and has raised their full year revenue and earnings guidance. There is growing demand for AI across their portfolio and they have competitive advantages in this area.

The speaker, Marie Myers, expresses her excitement about the opportunities in AI, hybrid cloud, and networking at HPE. She mentions that they are already seeing strong interest and revenue in these areas and have exceeded their expectations in Q2. She also highlights their liquid cooling expertise and the potential for future demand in AI. Overall, she sees AI as a long-term driver of financial results and a key part of their growth strategy.

In Q2, HPE saw a 4% year-over-year and 7% quarter-over-quarter growth in revenue, exceeding their prior guidance. HPE GreenLake, their AI-driven offering, showed strong momentum with a 9% increase in customers and a 39% growth in ARR. AI was the fastest growing component of ARR. The company's software and services mix also increased, validating their transformation to as-a-service offerings. Non-GAAP gross margin was down due to a shift in revenue mix, but OpEx discipline helped offset the decline in operating margin. GAAP and non-GAAP EPS were $0.24 and $0.42, respectively.

In the last quarter, the company's revenue and cost management exceeded expectations, with non-GAAP diluted net earnings per share excluding certain costs. The company is focused on becoming a simpler and more agile company and is investing in AI, hybrid cloud, and networking for future growth and profitability. Server revenue increased significantly, driven by AI systems and traditional servers. The company's AI system product and service orders have also increased, and their services business is expected to become more significant. The company's differentiation with liquid cooling, software, and services is resonating in the market, leading to a threefold increase in their enterprise AI customer base. Traditional server revenue also increased, and the company expects this trend to continue. Additionally, there is a shift towards higher-priced servers and the company has been able to pass on rising input costs to customers.

In the second quarter, the company's operating margin was 11%, in line with expectations. They are seeing adoption of AI and enterprise applications in their Gen11 pipeline. Hybrid cloud revenues were up 1% sequentially but down 9% year-over-year. The company is managing two transitions, one to a more software-intensive platform and the other to file storage for AI. Their operating margin for this division was 0.8%. Intelligent Edge revenues were $1.1 billion, down 9% sequentially and 19% year-over-year due to backlog consumption.

Despite a soft demand environment and a lack of large enterprise customers, there are signs of growth in networking and strong performance in software and services. The Intelligent Edge portfolio saw a 50% increase in subscription revenue and the company expects the operating margin to return to the mid-20% range by Q4. HPE Financial Services revenue and operating margin also saw steady growth, with a focus on driving AI growth. The company generated $1.1 billion in cash flow and $610 million in free cash flow in the quarter.

In the second quarter of fiscal 2024, the company has seen better-than-expected net income and has made prepayments for AI systems, resulting in a negative cash conversion cycle. They have also returned $240 million in capital to shareholders. The company expects a strong second half, driven by AI systems, traditional servers, and HPE GreenLake. They anticipate improving margins in the hybrid cloud and Intelligent Edge segments, with a mid-20% operating margin for Intelligent Edge and approximately 11% for server.

In Q3, the company expects revenues between $7.4 billion and $7.8 billion, with GAAP diluted net EPS between $0.29 and $0.34 and non-GAAP diluted net EPS between $0.43 and $0.48. For fiscal year 2024, they anticipate constant currency revenue growth of 1% to 3% and reiterate their non-GAAP operating profit growth guidance of 0% to 2%. The company is reducing their GAAP diluted net EPS guidance due to updates to their H3C proceeds, but raising their non-GAAP diluted net EPS guidance. They expect a mix shift from networking to AI systems to impact gross margins, but are driving efficiency and cost management to balance this. They anticipate a modest decrease in OpEx for fiscal year 2024 and a flattish operating margin year-over-year.

In paragraph 15, the company expects OI&E to be less of a headwind this year due to a one-time benefit and the retained portion of their H3C stake. They anticipate currency to have an immaterial effect. The strong first half free cash flow increases their confidence in delivering at least $1.9 billion in fiscal year '24. They expect significantly stronger free cash flow in the second half of the year due to higher earnings from their ramp in AI systems. They also mention their commitment to their balanced capital allocation framework and returning a portion of free cash flow to shareholders. The proposed Juniper deal is on track to close in late 2024 or early '25, and the company remains committed to their dividend and investment grade rating. They conclude by stating their excitement for the IR Summit and opening the floor for questions. The first question is from Amit Daryanani regarding the company's AI systems.

The speaker, Marie Myers, is discussing the company's strong revenue performance in the AI sector, which has doubled sequentially. She addresses the question of how margins on the AI side compare to segment averages and what differentiates their AI solutions from competitors like Super Micro and Dell. Myers notes that the company achieved an operating profit margin of 11% in the service segment, despite facing headwinds such as inflation and a competitive market. However, they are benefiting from the Gen11 transition and cost management strategies. Overall, the company is focused on driving profitable growth through disciplined pricing and cost management.

Antonio Neri discusses the four key elements that differentiate Hewlett Packard Enterprise in the AI market. These include their ability to deliver and run systems at scale, their infrastructure cooling intellectual property, their unique manufacturing footprint, and their services capabilities. He also mentions that their AI enterprise customers now make up over 15% of their AI orders, showing a positive trend in this market.

Antonio Neri, CEO of HPE, discusses the company's liquid cooling technology and its impact on the Blackwell product cycle from NVIDIA. He mentions that demand for liquid cooling has increased in Q1 and Q2, with three main segments driving the demand: model builders, sovereign clouds, and enterprise customers. Neri also highlights HPE's three different ways of cooling systems, including the traditional liquid-to-air cooler. He emphasizes that HPE's trust, quality, and simplified experience through its GreenLake platform make it an attractive choice for enterprise customers looking to adopt AI.

HPE has three different types of liquid cooling systems, with the most advanced being 100% direct liquid cooling. This is a unique advantage for HPE, as they have both the technology and manufacturing capabilities to support it. They also have a unique design for hybrid cooling, called the ARC, which allows for both liquid and air-cooled systems to be colocated in the same data center. As for Intelligent Edge, HPE is currently in the process of inventory digestion and expects to emerge from it in the near future.

The speaker discusses the current state of the Intelligent Edge market and mentions that Q2 was the lowest point, but they have been transitioning out of it throughout the quarter. They believe that their channel inventory is in good shape and expect a modest improvement in networking in the second half of the year. The CEO also mentions seeing growth in areas such as enterprise private 5G. A question is asked about the guidance and the speaker explains that they are conservative due to enthusiasm for the second half and forces at work. They also mention a backlog of $3 billion for AI servers with lead times of six to 12 weeks, but it is unclear why they cannot deliver this amount in the next quarter or second half.

The speaker is clarifying the company's guidance for the upcoming quarter. They explain that the increase in guidance is due to a 19% stake in H3C and confidence in revenue growth and cost discipline. They also mention that there is potential to exceed the guidance, but it depends on the availability of data center space and power and cooling for their generative AI deals. They have chosen to keep the guidance at $1.85 to $1.95 for now, but there is a possibility for it to be higher.

During a conference call, Toni Neri, CEO of a technology company, addressed a question about the decline in AI backlog in the previous quarter. Neri explained that the decline was due to the time it takes to close larger deals and the need for financing. However, he also mentioned that the company's pipeline for AI deals is strong and is multiple times larger than the current backlog. He also noted that the increase in AI system revenue this quarter was due to both improved allocation and the ability to ship orders.

In response to a question about the dynamic between HPE and NVIDIA, Antonio Neri states that it has nothing to do with location and credits his team for their success. He also mentions that lead times have improved and they feel confident in their ability to deliver systems within 6 to 12 weeks. When asked about the contribution of GreenLake to their AI revenue, Marie Myers states that it was the fastest growing element of ARR in Q2, followed by storage and networking. Antonio Neri adds that AI is starting to move through their entire portfolio.

During the conference call, Antonio Neri was asked about the growth of AI in the last 12 months. He clarified that the growth was driven by service providers, specifically in the mobile sector. Ananda Baruah then asked about the potential for HPE's generative AI cloud in the future, particularly with regards to hyperscalers and Tier 2 companies.

Antonio Neri discusses the demand for AI models and the role of model builders and service providers in the market. He mentions partnerships with companies like Microsoft and Scaleway, and the potential for enterprise use of AI models in the future. When asked about GPU diversification, Neri states that NVIDIA is currently the market leader and that HPE has aligned their strategy and offerings accordingly.

HPE has aligned with NVIDIA and will be showcasing their joint efforts at Discover. They have opened a new system in Los Alamos and are focused on time to market. Customers and partners will join them at the keynote at Sphere, where they will highlight their AI system revenue growth and solid quarter. Due to strong demand in AI and recovery in traditional infrastructure, they are raising their revenue and EPS guidance.

The company is confident about its revenue and EPS, and is looking forward to the second half of the year and HPE Discover conference in two weeks. The call has now ended.

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