Hewlett Packard Enterprise Co Q4 FY2024 earnings call

Juniper Networks Acquisition Update: Received approvals from key geographies including EU, UK, India, South Korea, and Australia; engaged with DOJ in US, expecting review to continue into early 2025, and anticipate deal closure in early 2025. ### Q4 Performance: Record quarterly revenue of $8.5 billion, up 15% year-over-year. Server revenue at $4.7 billion, up 31% year-over-year, third consecutive quarter of double-digit growth. AI systems revenue in Q4 was $1.5 billion, with cumulative orders since Q1 2023 at $6.7 billion, and backlog over $3.5 billion after Q4. Hybrid Cloud revenue grew 18% year-over-year and 21% sequentially to $1.6 billion. Storage: Alletra Storage MP continues to grow, with new HPE Alletra Storage MP X 10000 announced. Innovation: AI-related innovations like 100% fanless direct liquid cooling architecture, HPE Slingshot Direct Liquid Cool networking fabric, and delivering the fastest supercomputer to Lawrence Livermore National Laboratory. Partnerships: Collaboration with Deloitte on AI solutions and launch of Unleash AI Partner Program.

Server: Record server revenue of $4.7 billion in Q4, up 31% year-over-year, accounting for a significant portion of overall revenue. Hybrid Cloud: Revenue grew 18% year-over-year and 21% sequentially to $1.6 billion. Intelligent Edge: Total revenue was $1.1 billion, down 20% year-over-year and essentially flat quarter-over-quarter. Financial Services: Generated $893 million of revenue, up 2% year-over-year and up 1% quarter-over-quarter. Financing volumes increased 41% year-over-year to a new all-time high of $2.1 billion.

Fiscal Q1 2025 Outlook: Expect year-over-year revenue growth in mid-teens. Server revenue expected to be down quarter-over-quarter. Traditional compute expected flat to modest growth sequentially, lower AI systems contribution. Server operating margin to be closer to 10%-11%. Hybrid Cloud expected sequential decline in Q1, operating margin in mid-single-digit range. Intelligent Edge operating margin expected in low 20% range. GAAP diluted net EPS estimated between $0.31 and $0.36, non-GAAP diluted net EPS between $0.47 and $0.52. Intend to buy back shares at similar pace to Q4.

Risks: Orders can be lumpy, as seen with AI systems orders. Specific orders may have risk factors such as concerns about customer ability to fulfill and associated component risks. Macro environment and geopolitical factors could impact business operations and financial results.

Q: Can you give us some sense of how your AI pipeline is shaping up, given the dip in backlog levels in the quarter?

A: The pipeline is a multiple of the current backlog which is more than $3.5 billion. The pipeline includes model builders, hyperscalers, and enterprise customers. The enterprise AI pipeline is growing steadily with hundreds of customers in the pipeline, and there are large-sized deals in proof-of-concept.

Q: Can you talk about some of the puts and takes on server margin this quarter?

A: In server, traditional compute like Gen11 is about two-thirds of the mix, driving richer AUPs and higher structural margins. We've been successful in passing over commodity costs. GPU servers are competitive but revenue scale helps. Cost controls also play a role in server margins.

Q: Can you clarify the de-book comment and talk about metrics for the AI business?

A: We de-booked a large order due to concern about a specific customer's risk. For the AI business, we have a framework for pricing, aim for profitable growth, and see improving profitability over time as the market moves to sovereign and enterprise sectors with services attach.

Q: What's driving the gross margin degradation and how low can OpEx go?

A: Gross margin degradation is due to lower contribution from Intelligent Edge revenue and higher AI systems revenue mix. We expect gross margin to improve modestly with better business mix. On OpEx, we've been focused on discretionary costs and using GenAI for productivity, with plenty of opportunity for further OpEx management as we grow revenue.

Q: Can you unpack the traditional servers outlook for the January quarter?

A: Traditional servers are expected to be flattish to slightly up sequentially. There's momentum in the traditional server business with two-thirds of the mix being Gen11, but it's a competitive environment. AI backlog over $3.5 billion with more than one-third Blackwell-related, needing time to convert to revenue.

Q: Where does HPE stand on the Blackwell platform shipping and when will volume shipping occur?

A: Service providers, hyperscalers, and model builders will lead with the latest technology, transitioning in the first half of 2025. Sovereign space has a mix of configurations, and enterprise will be N minus 1 or 2 as it's about simplicity and time to value, with HPE Private Cloud AI based on H100 currently.

Q: Did your AI pipeline grow sequentially and about Hybrid Cloud's large sequential jump?

A: AI pipeline grew sequentially. Hybrid Cloud revenue was up almost 18% year-on-year and 22% quarter-on-quarter, driven by Private Cloud and HPE Alletra MP Storage. It's a fast-growing area with strong momentum and expected to continue growing with margin improvement.

Q: How are you thinking about Intelligent Edge's next year and priorities?

A: Intelligent Edge had third consecutive order growth but revenue is flattish as growth areas are subscription-based. Areas like SD-WAN with SSE, HPE GreenLake Aruba Central subscription services, and Wi-Fi 7 orders are growing. Customers are focused on modernization, efficiency, and sustainability in this portfolio.

Q: What's the risk with the de-platforming of orders?

A: HPE has strong control environment, orders and backlog are subject to booking pushouts and cancellations prior to rev rec, and we maintain tight controls on risky orders.

Q: What's changed in the macro backdrop heading into 2025?

A: Macro environment has improved with focus on AI, hybrid model implementation, cyber, sustainability. Networking needs to catch up to AI demands, and the combination of HPE and Juniper is important. Customers are focused on modernization, efficiency, and sustainability in their IT budgets.

Q: Can you double click on enterprise services on the AI side?

A: Enterprise services related to AI went up quarter-over-quarter. Services include day 0 (defining use cases), day 1 (designing and implementing), day 2 (running). HPE is uniquely positioned in all these, with partnerships like Deloitte and co-location stacks, expecting continued improvement in services side for gross margin.