The operator welcomes participants to the Third Quarter Fiscal 2024 Hewlett Packard Enterprise Earnings Conference Call and introduces Paul Glaser, Head of Investor Relations. Glaser reminds participants that the call is being recorded and will include a question-and-answer session. He also notes that the call is being webcast and a replay will be available. Glaser mentions that the financial information discussed is forward-looking and subject to change, and directs participants to the HPE Investor Relations web page for more details. He also cautions that the information discussed may differ from the final report and refers participants to HPE's SEC filings for more information.

In the second paragraph, the speaker discusses the financial information for the quarter, including revenue growth rates, non-GAAP reconciliations, and earnings per share. They also mention the strong performance of the company, with high revenue and operating margin, as well as the increase in dividend and raised earnings guidance. The speaker also notes the receipt of proceeds from the sale of equity and the improvement in the demand environment, with strong growth in certain regions. They conclude by stating their competitiveness and strong position in the market as they approach the end of the fiscal year.

The author is proud of the progress made in delivering on their edge-to-cloud vision, with accelerated innovation in networking, hybrid cloud, and AI through their HPE GreenLake cloud platform. They have a strong presence in the AI-driven networking market and are excited to expand with the pending acquisition of Juniper Networks. In hybrid cloud, they have redefined the space with a hybrid-by-design approach and have transitioned their server and storage products to cloud-native solutions. This gives customers flexibility and a unified hybrid cloud operations experience.

The AI business at HPE is built on decades of expertise and has rapidly expanded its portfolio. The company's differentiation has made it highly relevant to customers and partners and has driven profitable growth for shareholders. In Q3, the Server segment outperformed expectations due to an increase in converting AI system orders to revenue. Revenue from the traditional server business also increased, reflecting an improvement in the market. The company's momentum in AI is clear, with increasing customer demand and a robust pipeline for its offerings.

HPE is seeing high interest in generative AI from enterprises, with adoption accelerating. Direct liquid cooling is a key driver for large-scale AI customers, creating a services opportunity for HPE. The company has a strong partnership with NVIDIA and has announced a portfolio of codeveloped AI solutions. One of these solutions, HPE Private Cloud AI, is now available and offers an energy-efficient and flexible option for developing and deploying generative AI applications.

HPE Private Cloud AI will be available in four configurations to meet various inferencing needs. Customers can choose between self-managed or fully-managed service and can purchase it as a service or capital expense. The system is easy to deploy and manage, and offers a catalog of pretrained AI workflows for various use cases. HPE has seen high customer interest and is increasing resources to meet demand.

HPE Private Cloud AI is expected to drive growth for HPE's hybrid cloud business, and they are filing patents to protect their leadership in this area. Their investments in product portfolio and specialized sales are paying off, with improved revenue and profitability. HPE is also seeing growth in orders for their HPE Alletra Storage and HPE GreenLake hybrid cloud offerings, with thousands of new customers in the past three months. They have also announced a new agreement with Deloitte to use HPE GreenLake for their AI computing needs. HPE's focus on adding profitable software and services is reflected in their ARR mix of 71%, and their recent acquisition of Morpheus Data solidifies their leadership in the hybrid cloud market.

HPE is looking forward to incorporating Morpheus Data's multi-cloud automation and orchestration capabilities into their HPE GreenLake cloud platform. They have seen a market recovery in Intelligent Edge, with improved revenue and increased orders in all regions. HPE Aruba Networking has reinforced their cyber defenses with new AI-powered solutions and attracted customers like Nobu Hotels. They are also excited for their pending Juniper Networks acquisition, which they expect to be accretive to their margin profile and non-GAAP EPS in the first year.

The deal has received regulatory approvals in multiple jurisdictions and is expected to close in late 2024 or early 2025. The company is focused on successful integration post-close and is pleased with their third quarter performance, which reflects strong revenue growth and customer excitement for their latest innovations. They remain disciplined in managing their business and costs and delivered profitable growth for shareholders in a competitive environment. The company looks forward to hosting investors at their Wisconsin manufacturing facility next month. Marie then discusses the segment results, highlighting strong top-line revenues, sequential growth in each segment, and improved profitability. The company also received $2.1 billion from the partial sale of the H3C equity position and their results demonstrate their ability to deliver in a dynamic macro environment.

In the third quarter, HPE saw a recovery in enterprise demand in North America and modest improvement in other regions. The company is well-positioned in AI, hybrid cloud, and networking, with a 40% increase in AI systems revenues and signs of recovery in traditional servers. HPE's Private Cloud AI offering has received a strong customer response, and results in networking were solid. The company is making progress towards its strategic goals, including recent acquisitions. Revenue grew 10% year-over-year and 7% quarter-over-quarter, driven by continued momentum in as-a-service offerings.

In the most recent quarter, HPE saw a 39% growth in ARR, driven by AI and networking and storage subscriptions. There is a growing demand for a consumption model for enterprise AI customers. HPE is increasing the mix of higher-margin software and services in their ARR. Non-GAAP gross margin decreased due to a lower mix of Intelligent Edge revenue and a higher mix of AI server revenue, but was balanced by cost controls and pricing discipline. Operating expenses decreased year-over-year and quarter-over-quarter, leading to a stable non-GAAP operating margin. This, along with profitability improvements, resulted in GAAP and non-GAAP diluted net EPS above the high end of their guidance ranges.

The non-GAAP diluted net EPS for the company excludes $149 million in costs and the segment results show strong growth in both traditional servers and AI systems. The company's Gen11 product is performing well and they have been able to manage an inflationary environment. Demand for AI systems remains strong, with a growing backlog and increasing interest from enterprise customers. The company is also seeing demand for liquid cooling in the model builders and sovereign AI market.

The paragraph discusses HPE's success in the AI system market and its focus on profitability in the competitive AI server market. The company's operating margins remained stable and it expects them to be at the low end of its target range for the full year. In terms of Hybrid Cloud, both revenue and profitability improved quarter-over-quarter, but the company is managing a sales and product transition within its storage business. This transition is towards a more cloud-native, software-defined platform with HPE Alletra, which offers unified storage and aligns with customer preferences for a hybrid cloud model. However, translating this growth into revenues will take time due to the higher mix of ratable software and services. The company's Alletra MP offering saw sequential improvement, driven by its business transformation efforts.

HPE is seeing signs of improving demand for block storage and early traction in file storage. They are closely monitoring the impacts of commodity costs on demand and having constructive conversations with customers about their virtualization strategies. They recently announced efforts to develop virtualization capabilities and a Private Cloud AI offering in partnership with NVIDIA. Their Hybrid Cloud operating margin was down year-over-year but improved sequentially due to better OpEx controls. In the Intelligent Edge business, revenues were down year-over-year but up sequentially and they believe they have moved past the trough. They saw order improvements in each geography and in data center networking and in-campus products. They also saw mid- to high-single-digit growth in services and SASE orders, with customers remaining excited about their Aruba Central platform.

In the third quarter, the company saw growth in data center networking, SASE, and services, but declines in campus and switching due to tough year-over-year comparisons. They expect to see improvement in operating margins by the fourth quarter. HPE Financial Services revenue and financing volumes also saw growth, with a focus on AI-driven demand. The company generated strong cash flow and remains confident in their ability to do so, even with rising component costs. The cash conversion cycle was positive and there was an increase in days of inventory and payables due to AI system orders and strategic purchases for the server business.

The company expects working capital to have a neutral effect on free cash flow due to a decline in inventory and an increase in accounts payable. They have received $2.1 billion in proceeds from a partial sale and are focused on managing their balance sheet and maintaining their dividend. They plan to close their Juniper acquisition by the end of calendar year '24 or early calendar year '25. For the fourth quarter, they anticipate revenue growth and a sequential decline in operating expenses. The Server segment is expected to see strong AI system revenue conversion and continued demand for traditional servers. The company maintains their expectation of achieving the low end of their operating margin range for the full year.

HPE expects a slight revenue increase for Hybrid Cloud, but faces pressure from rising commodity costs. They anticipate a slight revenue increase for Intelligent Edge, with benefits from cost reduction efforts. They are tracking towards the high end of their revenue guidance for the full year and expect to balance gross margin pressures. They have tightened their non-GAAP diluted net EPS expectations and increased costs related to the Juniper transaction. They remain committed to their balanced capital allocation framework and dividend, and will continue share repurchases at a similar pace. Q3 results were strong and they will now begin the Q&A session.

During the earnings call, a question was asked about the higher-than-expected Server margins and the factors that contributed to it. Marie Myers, the CFO, explained that the strong margins were due to the shift to Gen11 servers, successful passing through of commodity costs, and OpEx discipline. She also mentioned that the company shipped $1.3 billion of AI servers, which constituted about 30% of Server revenue. Despite this, the margins were at 10.8%. Another analyst asked if there were any other factors outside of the AI server mix that impacted gross margins, to which Myers did not provide a specific answer.

In the upcoming quarter, the company expects to maintain its operating margin outlook by implementing operating discipline and potentially moderating gross margins. The mix of AI orders and the company's selective approach to deals have impacted gross margins, but the company remains disciplined on costs and prices. As enterprise AI gains momentum, gross margins are expected to improve and contribute to higher profitability.

The speaker discusses the impact of the upcoming Juniper transaction on gross and operating margins, stating that more than 50% of the company's operating profit will come from networking. They also mention a focus on managing operating expenses and being prudent on deals. The next question is about the downtick in free cash flow, and the speaker explains that it is primarily due to timing of working capital and seasonality, but they expect to see a reversal and improvement in the next quarter.

The company expects to see an increase in AI revenue and a sequential improvement in shipments, leading to a stronger conversion of AI revenue. They are still on track to reach $1.9 billion in free cash flow for the full year, but have adjusted expectations for the rest of the year. There were no unusually large deals in the third quarter, and the percentage of bookings in the service provider and enterprise sectors was consistent with the previous year.

The speaker discusses the increase in AI system orders and the mix of products and services being sold. They mention that services make up a growing percentage of AI system orders and that they expect this trend to continue. They also mention that there has been little services revenue recognized so far, but that as they recognize more, it could improve margins for server and AI system margins.

Antonio Neri, CEO of HPE, discusses the company's satisfaction with the growth of their AI systems services, which is expected to continue as they expand into the enterprise market. However, he notes that the services component of this business is mostly deferred and will contribute positively to gross margins over time. When asked about the potential cannibalization of traditional servers by AI-accelerated platforms, Neri states that they have seen no signs of this happening and emphasizes the importance of considering the segment point of view.

Antonio Neri, CEO of Hewlett Packard Enterprise, discusses the three segments of the AI space: service providers, model builders (including hyperscalers), and the sovereign space. He notes that the enterprise segment is growing, but there is no clear sign of cannibalization from AI deployments into traditional workloads. He also shares that the AI backlog composition varies across the portfolio and mentions healthcare and financial services as some of the verticals where enterprise demand is being evaluated.

The pipeline for the company is expected to grow in the next few quarters, with a focus on enterprise and service provider spaces. The company's Private Cloud AI offering is aimed at customers with clear use cases and a need for a full stack solution. There is also a significant interest in sovereign AI, with multiple opportunities in different regions for both AI and traditional supercomputing. The infrastructure for these systems is liquid cooled.

Antonio Neri discusses HPE's success in the enterprise side of the AI market, with expansion into finance, manufacturing, and marketing. He emphasizes the importance of a partner ecosystem in defining use cases and realizing business value. The company's sweet spot is currently in building, deploying, and running large AI systems, requiring expertise in manufacturing and services. Neri believes the next big thing for enterprise AI will be simplicity, with a focus on ease of use, automation, and security.

In this paragraph, the speaker discusses the importance of HPE GreenLake in their AI strategy and how it helps with deployment and management of infrastructure for enterprise customers. They also mention the upcoming addition of networking capabilities through the Juniper acquisition and how this will contribute to their full-stack solution for AI. The speaker expresses confidence in their strong revenue growth and ability to deliver profitable growth, despite questions about margins. They also highlight the successful closure of the first tranche of their H3C put option.

The speaker discusses the importance of networking and hybrid cloud in terms of gross margin and bottom-line results. They emphasize the need for disciplined execution in a competitive market, and mention raising guidance for EPS for the full year. They thank listeners for their time and invite them to visit their facility in Wisconsin on October 10. The call then concludes.

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