The paragraph is an introduction to the Hewlett Packard Enterprise (HPE) Fiscal 2025 Second Quarter Earnings Conference Call. Paul Glaser, Head of Investor Relations, welcomes participants and introduces the key speakers: Antonio Neri, HPE's President and CEO, and Marie Myers, CFO. The call is being recorded and webcast, with a replay available afterward. Glaser emphasizes that the financial information presented includes forward-looking statements based on current estimates, which may change and are subject to risks and uncertainties, as detailed in HPE's SEC filings.

In the second quarter, HPE reported strong financial results with both revenue and non-GAAP earnings per share exceeding guidance. The company successfully addressed previous operational challenges in its service segment, contributing to expected margin improvements. Despite facing uncertain macroeconomic and trade policy environments, including issues related to tariffs and AI diffusion policy, HPE’s strategic focus resulted in a stronger pipeline and a year-over-year revenue increase of 7% to $7.6 billion. Revenue growth was seen across all product segments.

In the third paragraph of the article, the company highlights its strong financial performance, driven by increased AI system revenue in servers, successful Intelligent Edge, and hybrid cloud segments, particularly through HPE GreenLake services. The company reported year-over-year growth in operating profit within these segments and managed to exceed its non-GAAP earnings per share guidance, aided by favorable tariff impacts and strong revenue performance. They anticipate a recovery in server segment margins by Q4, due to new pricing strategies and inventory management improvements. The company is optimistic about revenue growth in the second half of the year, raising its earnings guidance and focusing on trends in AI and hybrid cloud. Networking is also recovering, with three consecutive quarters of order growth and a return to revenue growth.

The paragraph highlights several key achievements and developments in AI and hybrid cloud technologies. The company signed $1.1 billion in new AI orders, converted over $1 billion into revenue, and has a $3.2 billion AI backlog. The hybrid cloud segment, particularly the Aletra portfolio, saw significant growth, with orders for Alletra MP rising over 75% year over year for four consecutive quarters. GreenLake has expanded its customer base to around 42,000, with an annual revenue run rate increase of 47% year over year. Additionally, the company launched a private cloud portfolio integrating Morpheus and HPE virtualization software, offering significant cost savings and unified management for multi-cloud and multi-vendor IT estates. Significant customer interest in VM Essentials, particularly from Danfoss, was noted as part of these efforts.

The paragraph discusses HPE's advancements in networking and AI innovation. HPE Aruba in Central has expanded its Zero Trust network access offerings, now available for on-premises deployment, supporting data sovereignty and managing over 5 million devices. HPE's partnership with NVIDIA includes a major deployment of Grace Blackwell MVL72 systems. Recent announcements include enhanced storage and server platforms, integration of NVIDIA's latest GPUs improving AI performance, and the launch of HP Elektra Storage MPX 10,000 SDK. These innovations support higher growth and margin areas, aiding enterprises in business transformation across networking, hybrid cloud, and AI. Lastly, HPE reaffirms its commitment to closing the Juniper Networks transaction.

The paragraph discusses the expectations and developments surrounding a proposed transaction expected to deliver $450 million in annual synergies within three years. The deal aims to enhance both companies' portfolios with modern AI-driven solutions. They anticipate closing before fiscal year 2025 ends. The company reports solid Q2 results, having tackled previous server execution issues and maintaining focus on goals to increase profitability and shareholder value. They express optimism for future growth, particularly with the anticipated closure of a deal with Juniper Networks. Marie Myers acknowledges execution improvements leading to better margins in their server business and highlights growth in their Intelligent Edge and hybrid cloud segments.

In the second quarter, the company achieved significant progress in its cost reduction program, leading to non-GAAP diluted net earnings per share of $0.38, surpassing expectations. Revenue reached $7.6 billion, up 7% year over year but down 3% quarter over quarter, with strong performance in intelligent edge and hybrid cloud sectors. The annualized revenue run rate increased by 47% due to AI and Intelligent Edge, and software and services ARR grew by nearly 60%, driven by GreenLake Flex subscriptions and AI services. Despite challenges in gross margins, primarily due to an unfavorable server mix, cost management efforts resulted in an 8% non-GAAP operating margin. Operating expenses as a percentage of revenue improved year over year due to better cost discipline. The company is prepared for further actions in the year's latter half to meet its fiscal 2025 objectives amid a complex macroeconomic and geopolitical environment.

In the quarter, discretionary cost management and efficiency efforts continued, resulting in increased incremental structural cost savings. The company reported a negative free cash flow of $847 million, slightly better than expected, partially thanks to converting some AI backlog. The GAAP diluted net loss per share was $0.82, falling below guidance due to a non-cash goodwill impairment charge caused by macroeconomic uncertainty, while non-GAAP diluted net earnings per share of $0.38 exceeded expectations. The impairment was mainly linked to the hybrid cloud business, with an increased cost of capital assumption since the last test. Factors excluded from non-GAAP results included expenses from cost reduction programs, stock-based compensation, acquisitions, and other charges. In segment results, Serba's revenue was $4.1 billion, up 7% year over year but down 5% sequentially due to lower traditional compute volumes, partially offset by higher AI systems revenue.

The company addressed execution issues by enhancing reporting and deal desk controls, and managing AI-related inventory to boost performance and profitability for fiscal 2025. Traditional server revenue declined due to volume drops, despite Gen 11 and 12 server shipments driving core compute sales. AI system orders grew significantly, generating over $1 billion in revenue for the quarter, a 10% sequential increase. Server operating margin met expectations, with improvements from Q1 remediation actions lessening backlog pricing and tariff impacts. The Intelligent Edge business saw revenue and operating profit grow year-over-year in Q2 after five quarters of decline.

The paragraph discusses the company's financial performance, highlighting an 8% year-over-year revenue increase to $1.2 billion, aided by network market recovery and reduced backlog impacts. Quarter-over-quarter revenue rose by 2%, with strong order growth, particularly in data center and campus switching, and sequential triple-digit Wi-Fi seven demand. Government spending was mixed, but enterprise demand remained positive. Operating margins improved year-over-year due to revenue growth and cost discipline, but declined quarter-over-quarter due to higher compensation expenses. The hybrid cloud segment also saw significant growth, with revenue up 15% year-over-year and a 4% sequential increase, driven by the success of the HPE Elektra MP platform and a strong pipeline for private cloud products. Hybrid cloud's operating margin increased year-over-year but fell sequentially for similar reasons.

The financial services division reported $856 million in revenue, a 1% increase year-over-year but a 2% decline quarter-over-quarter, with financing volumes down by 20% to $1.3 billion and a Q2 loss ratio of 0.6%. The operating margin rose to 10.4%, the highest in two years, due to strong cost management. Operating cash flow saw an outflow of $461 million, and free cash flow a $847 million outflow, slightly better than expected due to improved earnings and inventory reduction. Inventory totaled $8.1 billion, down $481 million from the previous period. A positive cash conversion cycle of 20 days was noted, impacted by vendor payments and shipment timings. Improved free cash flow is expected moving forward. The company returned $171 million through dividends and $50 million in share repurchases. The quarter underscored the balance between investment in growth and cost management, with a recent cost reduction program aimed at workforce optimization and cost structure improvements.

The company is undertaking a comprehensive program focused on reducing workforce by 5% to improve cost efficiency, with the goal of completing this by year-end and achieving financial targets by FY 2025. The headcount is now under 59,000, and efforts to flatten the organization aim to enhance agility and decision-making. These initiatives, part of the Catalyst program, include workforce cost reductions, operational efficiency improvements, portfolio optimization, and AI utilization. The existing budget covers the workforce optimization, and updates will be provided in October for fiscal 2026. The company seeks to simplify business operations, improve customer responsiveness, and leverage AI, including a co-developed AI initiative with Deloitte for enhanced executive reporting.

The company is enhancing its efficiency by transforming data into actionable intelligence, speeding up reporting by 50%, and cutting processing costs by 25%. The goal is to become a faster, more competitive organization, not just by reducing costs but by rethinking operations. They are adjusting their tariff impact estimates, predicting a reduction due to an expiring pause, and have revised fiscal 2025 guidance for revenue growth to 7%-9%, with less currency impact. Segment growth expectations include mid-single-digit for Intelligent Edge, high single digits for Hybrid Cloud, and low double digits for Server. Non-GAAP gross margins are forecasted below 30% for the year. Operating expenses will rise in Q3 due to marketing but will normalize in Q4, and a full-year non-GAAP operating margin is expected to be above 9% at the midpoint.

The company anticipates various performance metrics across segments for the coming period. Hybrid cloud operating margins are expected in the mid to high single digits, while Intelligent Edge will maintain mid-twenty percent margins. Server segment margins should improve to around 10% by year-end. Non-GAAP diluted net earnings per share for fiscal 2025 have been revised to $1.78 to $1.90, with operational improvements and reduced tariff expenses contributing $0.01 each. GAAP earnings are guided at $0.30 to $0.42 due to a goodwill impairment charge. Free cash flow is projected to remain around $1 billion. Q3 revenues are forecasted between $8.2 and $8.5 billion, improving across Intelligent Edge, hybrid cloud, and server segments. GAAP diluted earnings per share for Q3 is expected between $0.24 and $0.29, and non-GAAP between $0.40 and $0.45. The latter half of fiscal 2025 is expected to be stronger, with increased free cash flow due to inventory reductions and higher net income.

The paragraph discusses a question-and-answer session where Amit Daryanani from Evercore asks about improving server margins from 5% to over 10% by year-end and addressing issues faced in previous quarters. Antonio Neri responds by mentioning that they have tackled the three main issues from Q1: costs, discounting, and elevated inventory. He highlights targeted actions such as employing new analytics for better pricing and discount strategies to improve results in the latter half of the year.

The article discusses efforts to enhance financial performance through stringent discounting and inventory reduction, with a reduction of $500 million in inventory. The company is optimistic about achieving a 10% operating margin by Q4, supported by cost-cutting actions and revenue conversion from a large deployment in Q3. While not commenting on specific shareholder communications, the company emphasizes its engagement with shareholders and values their input. They believe the Juniper transaction is the fastest way to increase shareholder value but have alternative plans if the deal doesn't proceed. A trial related to the deal is approaching, which they await the outcome of to start asset integration. Tim Long from Barclays is expected to ask about pipeline and AI backlog, which were mentioned earlier.

In the paragraph, Antonio Neri discusses the strong pipeline momentum across the company's portfolio, with a notable emphasis on AI, driven by server sales and private cloud AI. The company is seeing strong engagement in sovereign projects and traditional service provider deployments, including significant GP200 deployments. The company's current backlog increased to $3.2 billion, reflecting a $100 million rise quarter-over-quarter. In the hybrid cloud sector, there is significant growth, particularly in their Letra MP storage portfolio, showing consecutive quarters of over 75% growth. Although a portion of these orders is deferred due to a SaaS component linked to CapEx, it presents a short-term revenue challenge but promises long-term profit benefits.

The paragraph discusses the strong demand for Alletra due to its unique disaggregated architecture and integrated offerings with NVIDIA. There's a robust pipeline with a thousand customers undergoing proof of concepts, including a commitment from a customer named Downforce to transition 75% of their estate. GreenLake is performing well with a 47% growth in subscription services, driven by storage, intelligent edge, and private cloud growth. The networking market has shown signs of recovery, evidenced by demand in Wi-Fi 7 transition and data center switching. The expected closure of a deal with Juniper is anticipated to accelerate growth. Europe has shown strong performance, aided by a strengthening euro. The company plans to make new announcements soon to bolster the pipeline.

The paragraph discusses the traction of AI servers, highlighting that large service providers and model builders require significant compute resources, which involve not just computing power but also networking and cooling infrastructure. HPE is seen as advantageously positioned to meet these demands due to its intellectual property and manufacturing capabilities. In addition to AI, supercomputing remains important, with many countries aiming to establish AI infrastructure for sovereign purposes. In the enterprise sector, the focus is on quickly deploying infrastructure to deliver value rather than simply bringing products to market.

The paragraph discusses the integration of storage, compute, and networking with a strong emphasis on the importance of software, particularly through the GreenLake platform, which offers comprehensive software access. A collaboration with NVIDIA aims to accelerate value creation. There is an expectation of increased storage margins by the end of the year, reaching the high single digits. The conversation also touches on AI server demand, specifically the shift to Blackwell, and strategies to manage inventory levels effectively, including a prepayment model for some customers to mitigate inventory risks.

The paragraph is a Q&A session during a financial call. Samik Chatterjee from JPMorgan asks Antonio Neri about trends in general purpose servers in the US and the 10% margin target for the server segment. Neri responds, saying that they haven't observed any slowdown in North America; in fact, order demand has been stronger in recent months. Regarding server operating margins, they expect sequential improvements from Q2 to Q3 and Q3 to Q4, with Q3 margins being positively impacted by a large AI order expected to ship.

In the paragraph, Ananda Baruah from Loop Capital asks Antonio Neri about the potential for increased revenue and backlog as they progress through the Blackwell cycle, comparing it to the previous hopper cycle. Antonio Neri responds by indicating that their business experiences fluctuations, with high order periods followed by a lengthy process of building, shipping, installing, and making systems productive. He mentions that while transitioning from the 200 to the 300 models, there's a shift in focus due to performance and specific use cases, primarily between training and inferencing. Neri also notes that large deals in the pipeline are mostly for the 200 model, but there is a shift towards the 300 model, which is expected to become available at scale in the latter half of 2025 or early 2026.

In the discussion, Paul Glaser addresses questions from Michael Ng about federal, state, and local education spending, as well as higher-than-expected AI systems revenue. Antonio Neri responds, explaining that while there was a temporary slowdown in certain areas of U.S. federal spending due to the need for plan approvals, they anticipate improvement in the latter half of the year. The company remains a significant provider of large-scale systems and supercomputing capacity. Regarding AI systems, the revenue outperformance is attributed to improved customer readiness and evolving deployment timing aligned with customer needs.

The paragraph discusses the acceleration of deployments in enterprise data centers due to a focus on data sovereignty and compliance, with customers modernizing infrastructures for tasks like fine-tuning. It mentions constraints in component availability for the current generation and a shift to a different scenario with the 300 series. Additionally, it highlights an increase in AI revenue due to customer readiness in Q2. David Vaught of UBS asks about the solid demand backdrop and why the company's guidance for modest growth in October is conservative, given current trends. He also queries whether the workforce reduction plan is primarily affecting the server business.

The paragraph discusses the company's progress on its restructuring plan and its impact on margins. Marie Myers clarifies that the plan, which aims to save $350 million, is enterprise-wide and not solely focused on server margins. The company is on track with its goals, particularly in headcount reduction. Myers also mentions an upcoming large AI deal in Q3, which will lead to a non-seasonal revenue pattern. Revenue growth is expected year-over-year into Q4, but it will be moderated due to the Q3 AI deal conversion. More details on server margins will be provided in October.

In the paragraph, Antonio Neri discusses the company's approach to market participation and revenue growth. Despite a strong Q4 in 2024, the company expects year-over-year revenue growth in the current Q4, although the seasonality between Q3 and Q4 differs due to a significant acceptance being worked on. When addressing AI server competition, Neri emphasizes that the company is strategic in its market participation, focusing on segments with potential for gross margin growth and cash flow benefits. He mentions choosing not to participate in some large opportunities and stresses that the company is fully committed to the enterprise and sovereign segments, where they see strong momentum.

In the paragraph, Antonio discusses the company's solid performance in Q2, highlighting five consecutive quarters of year-over-year revenue growth. He notes the successful results in server actions and ongoing success in networking and hybrid cloud. Antonio emphasizes the importance of execution and innovation in their portfolio. He mentions an upcoming event, HP Discover, where they plan to introduce new innovations in networking, hybrid cloud, and AI. He also hints at providing an update on the Juniper network deal in the future. Paul Glaser concludes the conference call.

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