Hewlett Packard Enterprise Company (HPE) HPE Securities Analyst Meeting 2023

Hewlett Packard Enterprise Company (NYSE:HPE) HPE Securities Analyst Meeting 2023 October 19, 2023 2:30 PM ET

CorporateParticipants

Jeff Kvaal – Vice President, Investor Relations

Antonio Neri – President and Chief Executive Officer

Phil Mottram – Executive Vice President and General Manager of Aruba

Fidelma Russo – Executive Vice President, Chief Technology Officer

Justin Hotard – Executive Vice President, General Manager HPC & AI

ConferenceCall Participants

Operator

Please welcome, Vice President Investor Relations, Jeff Kvaal.

Jeff Kvaal

Good afternoon. Welcome to the 2023 HPE Securities Analyst Meeting. Thanks for joining us in our return to New York. We haven’t been here since before COVID. So four, five years now, I’ve it’s nice to see so many familiar faces in the audience. And I hope for you New Yorkers, this council is in the office day, I trust in office. And thank you to the many folks that are tuning in virtually as well.

The agenda, we have Antonio first, he’ll give us a look at how we’re pivoting to our higher growth, higher margin recurring revenues, also positioning ourselves for sustainable and profitable growth. Through his talk, Antonio will introduce the Heads of three of our new segments. So we’ve got Phil Mottram from Intelligent Edge, Fidelma Russo in Hybrid Cloud, and also Justin Hotard from HPC and AI. They’ll give us deeper dives into each of their own businesses. We will then take a break until four o’clock.

Jeremy will come after. During the break, please give the execs a little bit of space. We’ll have plenty of time for Q&A at the end. Jeremy’s presentation wraps up, we’ll have approximately an hour or so for Q&A.

Okay. So with that, I guess let me mention that once the webcast does conclude that’s when we’ll be issuing our press release or putting it all on the presentation materials on our website. That is at hpe/investor/SAM. Also we will put a replay up on IR website. We’ll keep that up there for about a year.

And lastly, let me get to the disclosures. The event may include forward-looking statements involving risks, estimates and assumptions. HPE assumes no obligation to update those statements.

And with that, it’s now my pleasure to welcome Antonio Neri, HPE’s President and CEO. Antonio?

Antonio Neri

Well, good afternoon and thank you for joining us today. It is excited to be back at the New York Exchange. I had the honor this morning to do again, the opening bell, is always fun to be here. And welcome to those of you joining us virtually via the webcast. Together with my leadership team today, I’m excited for the opportunity to demonstrate to you how much additional value our strategy can create for our shareholders in the near and long-term. I’m very proud of the progress we have made in the last five years. The world around us has changed immensely and so have we.

Today as I prepared to share with you the opportunity, we see for HPE in the next three years, also reflect on the last three years and what they have demanded of HPE and enterprises around the world that require vision, agility and resilience. From every enterprise around the globe, as well as confronted, we all were confronted with unimaginable challenges.

In that time period, HPE has transformed to become the age to cloud company. We have anticipated what customers will lead as they recover from the pandemic, which we call the New World post-pandemic. We have offered unparalleled innovation, and we have executed extremely well. Since the beginning of fiscal year 2021, HPE has successfully deployed our strategic pivot to higher margin and higher growth areas of the market, which has created strong value for our shareholders. We have delivered 13.4% revenue growth since then, compared to the last trailing 12 months with particularly exceptional growth in recurring revenue.

Since we began our strategic as a service pivot in 2019 and started tracking annualized revenue run rate or ARR. We have tripled it. Last quarter ARR rose to a record of 48% exceeding a long-term target growth rate of between 35% and 45%, which we share last year at SAM.

HPE has grown our annual non-GAAP diluted net earnings per share by 43.5% between fiscal year ’20 and the trailing 12 months through the most recent quarter. In fiscal year ’20, it was $1.54, and it is now at $2.21.

Our non-GAAP gross margin growth has also been impressive. We have added 310 basis points to our non-GAAP gross margin since fiscal year 2021. And in the most recent trailing 12 months period 34.8%. Our non-GAAP operating margins improved by 280 basis points in the same period.

We have made these profitability gains as a result of diversifying our business to grow the software and services rich parts of our portfolio, while maintaining discipline in pricing, particularly in our compute business segment. And we have introduced profitable subscription based cloud services with HPE GreenLake, which enhances the stickiness of our solutions with our customers.

Greater profitability has also enabled us to significantly increase free cash flow generation in the last three years. From the start of fiscal year 2021 through their most recent trailing 12 months, we have more than tripled free cash flow generation. And we are on track to deliver within the range we guided during fiscal year ’23 Q3 earnings.

Over approximately in the last three years, we have strategically focus our portfolio on areas of high growth and high margin. We generated more than 121% total shareholder return as compared to a 37% return for the S&P 500 over the same period. Importantly, this return represent a CAGR of 31% as compared to the 11% CAGR for the S&P 500.

As we produce higher profit and greater cash flow, we deliver on our commitments to provide direct capital return to our investors. Through our disciplined capital allocation framework, we returned about $11 billion to shareholders through dividends and share repurchases from the start of fiscal year 2018 to our most recent quarter, obviously, that included the spin off proceeds. But this capital return benefit represents 122% of our free cash flow over that period. These strong consistent results will have been admirable in any period, but I’m particularly proud of them coming up such a turbulent three years. Frankly, I believe the market should give us more credit for the accomplishments, because they are a testament to the relevance of our strategy, the differentiation of our portfolio, and the strength of our execution. We deliver when it mattered the most.

And as we continue to execute against the strategy in fiscal year 24 and over the next three years, we will continue to accelerate value for our shareholders.

Today I will discuss HPE’s compelling market opportunity for sustainable profitable growth. And at the conclusion of our time together, I hope you’ll walk away with a deeper understanding a few things. First, how HPE’s bet on the intelligent edge is pay enough with a sizeable proportion of our revenue growth and segment operating profit coming from this business segment. And then how we plan to sustain our momentum through time expansion and market share gains. Second, how our hybrid cloud business is positioned to become a sustainable center for growth through the scale of HPE GreenLake with investments to make us the number one leading hybrid cloud provider.

Third, how AI has expanded overall market opportunity to drive what we expect will be profitable growth in the next fiscal year, adding to our overall compute and HPC and AI businesses. And finally, how our continued mix shift to those areas of our portfolio combined with operational discipline will drive profitable revenue growth for our shareholders.

HPE strategies aligned to the significant market trends we see today around edge, hybrid cloud and AI, all which we create profitable market expansion opportunities that will help us fuel our growth.

Customers continue to validate our strategy turning to us to power critical business transformations. And even in this micro economic environment, we continue to see them prioritize in data first digital transformation initiatives. And those initiatives increasingly include AI which is invigorating today’s IT spending.

We anticipate the overall total addressable market across, our portfolio will rise by nearly $100 billion from the end of fiscal year 2022 to more than $340 billion by fiscal year 2026. When we eliminate some of the crossovers because obviously you have some [indiscernible] portfolio can be added in different segments. And we intend to capture this growing TAM across the megatrends of edge hybrid cloud and AI through a mix of HPE’s business segments.

Our approach will include the innovation in key markets where we already have a very strong position, as well as customer acquisition and expansion in high margin adjacent markets.

Let’s start at the edge. The edge we are expanded on innovation in security, Private 5G, and data center networking. In hybrid cloud, we continue to expand in private cloud the segment of the market we anticipate growing at approximately 10% CAGR.

We can also capture a larger portion of the hybrid cloud market with our entry into the growing AI power IT operations management segment through our recent acquisition of OpsRamp. And in AI, we are well positioned to capture the sizable growth with our full stack AI native architecture. That includes AI infrastructure growing at a 23% CAGR and AI platform software are growing at a 32% CAGR. Ultimately, we anticipate the AI market where we play growing by roughly 2.4x to almost $150 billion by 2026.

Clearly, there is a great opportunity for HPE in those growth segments. Let’s detail each one today, so you can emerge with a better appreciation for a differentiated innovation, and the strength in each category and our plans to further capitalize on the opportunity ahead of us.

On intelligent edge business is a prime example of what HPE can do to maximize future growth, with the right investment at the right time. We have invested nearly $6 billion in our HPE Aruba networking business organically and inorganically since I became CEO. It is on track to be a more than $5 billion annual business in fiscal year ’23 and beyond, poised to generate sustained revenue growth and the highest profitability of any of our business segments. It is a critical part of our business both from a strategic and financial standpoint.

Our broad portfolio delivers what we call security first networking, from edge to cloud to exascale, which is very important component, we’re going to talk later about that.

In fiscal year ’24, we will build on our successes in our HPE Aruba networking, the core businesses of campus and branch with a goal of continuing to take share in the enterprise mid-market and SMB customer segments. We’re expanding our offers in growing markets like security, Private 5G and data center networking, which we have entered through organic innovation and acquisitions this year.

We intend to increase our already high gross margin in this business. By fiscal year 20. We expect our total addressable market at the edge and networking to grow to about $94 billion.

Customers will continue to expect a unified networking experience that is secure, automated and high performing as well as flexible subscription and consumption-based solutions. Our value proposition is absolutely suited to address these needs. This adds up to the significant opportunity for HPE and for our shareholders.

Phil Mottram will now provide more details about our leadership position and priorities in this very important segment. So we’d like to welcome Phil. Phil please.

Phil Mottram

Thank you, Antonio. So my name is Phil Mottram. And I’ve been running the intelligent edge business now for a little over two years. So it’s been an incredible journey for me and my team. As you look around this room today and you admire the great decoration, and you’re scanning the ceiling occasionally. I also want you to pay attention to the Aruba access points that have been installed in the alcoves and the corners, so NYSE make great technology choices. And we’re proud to be the wireless provider here at the New York Stock Exchange. So nice one NYSE if that’s a phrase we can use.

If you’ve been following HPE for the last few years, you’ve undoubtedly heard Antonio, refer to us as the edge to cloud company. The first part is all about the connectivity and that’s where our intelligent edge business comes into play.

In the last two years, we’ve seen significant growth in this segment, and by the end of ’23, we expect the annual revenue of our intelligent edge business to increase by nearly $2 billion from FY ’21 levels through consistent growth over that timeframe.

The third quarter of FY ’23 marked the 11th consecutive quarter of year-over-year growth, and this segment represented 20% of the company’s revenues. In addition to the top-line revenue growth, we’ve also seen an increase in profits since 2021. Through intentional efforts towards operational efficiency, as well as portfolio management and a focus on margin rich products, we’ve increased our profitability.

In Q3, we marked a record level of operating profit margin, and we accounted for 49% of the company’s total segment operating profits. So we’ve done this by capitalizing on the high demand in the market for our products and solutions, strategically adding more product areas to expand our TAM and focusing on our delivery mechanisms. We’re giving the customers the option for consumption, or subscription purchasing through our network as a service offerings and through HPE GreenLake.

With Aruba Central on HPE GreenLake, we are one of the only companies giving customers the ability to manage all of their network solutions from one single platform. As we go forward, we will continue to follow the network in order to identify selling and upselling opportunities. From the access point in the ceiling to the campus switch to the SD-WAN network.

Selling these incremental products to our existing customers will continue to drive revenue in core business segments. We’ll also be following the network even further into the data center, integrating it with security and adding Private 5G and delivering it all through the same unified cloud native experience.

Additionally, we’re weaving sustainability into everything that we do. This is something we feel is vitally important, and we’ve heard loud and clear that it’s a priority for our customers as well. To give you an example of this, our asset lifecycle management program within HPE Financial Services, reclaims and refurbishes used assets from our customers. And over the last three years, we’ve given more than 8.2 million devices a second life, ultimately reducing the amount of material that’s directed towards landfill.

Bringing all of this together, we’re confident that we have the right strategy in place to drive sustainable, profitable growth and deliver value for our shareholders.

As we look ahead, we believe that the trends in the marketplace around hybrid work, security and datacenter requirements will create new opportunities for us. And while there are some headwinds related to the overall networking market growth projections, we expect to continue to sustain our intelligent edge business segment performance through TAM expansion and continued market share gain in key segments.

We continue to innovate and enhance our offering and receive validation from leading industry analysts in this regard. In the edge and networking space, we’re targeting a TAM of about $94 billion by 2026. And that’s one and a half times the TAM that we pursued in 2022. And within that, I see four distinct areas of growth for our business.

The first area is security. We believe that the networking market is converging with the security market under a framework called SASE, or Secure Access Service Edge. And we’re not alone in that belief. Gartner believe that 60% of enterprise customers will buy SASE from a single vendor within three years.

SASE has five key elements and we already had two of them with networking and firewalls. The acquisition of Axis Security earlier this year allowed us to add the missing three elements of SASE, namely ZTNA, SWG and CASB. Within HPE networking, HPE [indiscernible] that makes them sorry, we’ve always been great at protecting things on the network. Adding access security now gives us the ability to be able to protect people. So we can protect people and things across multiple network devices, all from one location on HPE GreenLake. We have a compelling and highly differentiated offer, and we’re poised to gain share in this high growth market that will represent a $3 billion TAM in 2026.

The second area of growth for our business is in Private 5G. So the rollout of 5G has advanced mobile networks around the world. And in many countries, governments have now assigned 5G spectrum to be used by enterprises privately, which is what is referred to as Private 5G. We believe that Private 5G and Wi-Fi will exist side-by-side and enabling new customer use cases where outdoor coverage and latency is important, such as imports, defense applications and other scenarios like mining operations and sporting events. Indeed, we recently provided Private 5G and Wi-Fi 6E connectivity for the Ryder Cup in Italy. So we provided always on connectivity to 250,000 spectators, whilst also delivering a secure private network for the operations staff across the hundreds of acres that made up the venue. So hats off to us for that.

So Private 5G represents a significant opportunity to HPE to enable a unified customer experience with Security and Policy Management. Additionally, this represents a significant opportunity to HPE to capture market share in this space at a healthy gross margins.

The third area of growth for our business is in datacenter networking, which is an area that will grow to a $19 billion TAM by 2026. Today, our HPE Aruba networking CX switch platform is already sold into many data centers around the world. We’ve spent 12 months enhancing the capability of our switching products and have a two-year roadmap that is highly differentiated through our HPE Aruba Networking CX operating system, which will enable enterprise customers to deploy cloud native networking in their data centers or colo facilities. We expect to continue to capture market share from existing customers, especially those who want to extend the management ease of Aruba Central into their data center.

The fourth area of growth for our business is in NaaS or network as a service. The NaaS market is expected to represent a $3 billion opportunity by 2026, which is good news. But the better news is that we already have a clear lead in this market. With our customers, we can take them on a journey to NaaS, as opposed to some of the more recent startups in this space, which require customers to rip and replace all of their network technology in order to deploy NaaS.

Our intelligent services capability, or the Managed Services piece of NaaS offers a 98% reduction of network events through automation, and utilization of AI, ML driven analytics. NaaS also represents an important way in which we’re delivering on our commitment to sustainability. Because NaaS creates a circular economy by extending the life of assets for customers.

For these reasons and more, we continue to see demand from customers for NaaS solutions. Today we have a growing number of customers across different verticals, including retail, hospitality, higher education and manufacturing. And some of the customers already consuming on NaaS services, the Home Depot, CarMax, and KPMG.

And now in addition to large and global customers, we’re now scaling into the commercial and mid-market segments through and with our channel partners.

So those are the four areas where we expect to see significant growth in our business, aggressively pursuing these growth opportunities, while continuing to capture revenue in our core segments is how we will drive sustained business momentum. And our ability to do that can all be put down to one key point, customers buy HPE Aruba networking, because we are customer-centric.

Aruba Central, which is our HPE GreenLake Cloud Control Plane is the industry’s first AI powered cloud native architecture, designed to connect, protect and automate the edge. This gives customers a simple but powerful management tool to drive efficiencies in their business. And the three core layers of our portfolio each deliver specific benefits for customers.

First, our unified infrastructure helps eliminate operational silos and streamline operations. We do this by bringing together wired wireless and SD-WAN technologies across campus, branch, remote worker, and data center locations into a single cloud native management on orchestration tool, and that’s Aruba Central.

Second, our edge to cloud security simplifies network security through a combination of built in zero trust features focused on users devices, and IoT, and a SASE integration framework that combines one edge functions and integration with third-party cloud delivered security services. And third, our AI and automation software enables our customers to resolve issues quickly, ideally before they impact the business while also helping IT departments operate more efficiently.

We have a robust portfolio of products and solutions that deliver what our customers want and need to harness the power of the edge. And while we’ve seen fantastic growth in recent years, we are not standing still. We have the right strategy in place and will continue to accelerate shareholder value by sustaining growth in core segments, expanding our overall TAM and gaining market share in key high growth margin rich areas. Back to you Antonio.

Antonio Neri

HPE is a pioneer in hybrid cloud, which represents our largest market opportunity, recognizing the strategic importance of this market and our differentiated value proposition led by HPE GreenLake. Last month we announced we will create a new hybrid cloud business unit at the start of Fiscal Year 2024. Establishing this new segment reflects the maturity of our offering and set us apart from our peers.

Our hybrid cloud business unit will bring together into a single hybrid cloud segment or storage and compute as a service. The only offers related to that inclusive or HPE GreenLake private cloud and software solutions are updated operating model will enable greater focus and efficiency, faster execution and a superior cloud native experience for our customers and our partners. Our simplified operating model also incorporates a self-transformation to enhance the execution between our business units and our go-to-market function. Through these changes, we will in we will engage customers more directly on the offerings they want the most.

HPE GreenLake is at the heart of our hybrid cloud strategy and offering its growth truly remarkable. At the end of Q3 we support 27,000 unique customer logos and 3.4 million connected devices. Today, more than 1100 partners transact HPE GreenLake edge and hybrid cloud offerings showcasing HPE GreenLake’s incredible cloud strength and scale.

HPE GreenLake also plays a key role in expanding our gross margin with software and services comprise an increasing portion of our ARR mix, now nearly a 70% at the end of Q3.

Fidelma Russo, our Chief Technology Officer has been leading our HPE GreenLake cloud platform development and will take on the responsibility of accelerating our hybrid cloud services growth opportunity when she becomes the General Manager of the new hybrid cloud business segment on November 1. I’d like to invite her to talk about how we will enhance our leadership position in this growing market. Fidelma?

Fidelma Russo

Good afternoon, everyone. I’m honored to lead our future hybrid cloud business segment, which I believe will be a large and enduring growth engine for HPE and will create long-term shareholder value.

Enterprises across the world are moving from a public cloud first approach to a hybrid approach. And they’ve come to the realization that as their data grows and becomes more distributed in nature, it is neither scalable nor economical to rely solely on the public cloud. The emergence of generative AI has made this reality even more clear, and this creates a tremendous opportunity for us. Our new hybrid cloud business segment accelerates our participation in several large and attractive markets, across storage, private cloud and infrastructure software. Combined, we are looking at a $160 billion plus market that is highly profitable. And as enterprises continue to embrace hybrid, this market will see robust growth for the future.

To capitalize on the market opportunity, our strategy is to take share in storage, scale private cloud with the momentum we have with HPE GreenLake and expand into infrastructure software. Ultimately, this strategy starts and ends with our customer. We offer the most differentiated customer value proposition among our competitors, including cloud providers, we have a growing portfolio of market leading offerings, and we are seeing strong customer adoption.

As Antonio said, we are a pioneer and leader in hybrid cloud with HPE GreenLake. And the reason we’ve been successful, and the reason we’ve been able to differentiate versus the public cloud, is because when we show up to our customers, our mission is to solve three of their biggest challenges. Transform their business through the power of data, modernize their IT infrastructure with a true cloud experience, and dramatically simplify the operations of their multi-generational and multi-cloud IT estates.

Let me give you some more color on how we address each of these customer challenges, and how different aspects of our portfolio come together to drive an integrated value proposition through the power of our GreenLake platform.

Everything starts with data, which is the most valuable asset companies have, and is at the center of any digital transformation. Its gravity and distributed nature are what drive enterprises to embrace the hybrid cloud. And this is why storage is foundational to our hybrid cloud strategy. With our HPE Alletra line of storage products, we offer customers a value proposition none of our competitors can match. We have engineered a truly modern, scalable platform with unified support for block and file that is capable of meeting the most demanding requirements for AI.

It has been engineered for a true hybrid cloud experience. And it’s made possible with an architecture that’s built from the ground up to be cloud native and software defined. We continue to deliver industry leading uptime and resilience enabled by our market leading AI ops capabilities. And since its launch HPE Alletra has seen the fastest customer adoption of any storage platform in HPE history.

In addition to our product leadership, we are also increasing investments in our go-to-market, both in our direct sales force and in the channel. And with these investments, we are poised to take share from our competitors. But not only are customers trusting us with our data. They are also trusting HPE to build and in many cases operate their hybrid cloud infrastructure on top of their data through HPE GreenLake.

Our entire strategy around HPE GreenLake is built on three foundational beliefs which differentiate us from the public cloud. First, customers should not have to choose between the agility of the public cloud and the performance and control of their private infrastructure. Second, customers want choice and freedom from lock in. And third, they operate multi-generational, multi-vendor IT estates that need to coexist with the public cloud.

Over the last five years, we have built a multibillion dollar HPE GreenLake franchise, and it is the envy of our competitors. And we are continuing to double down on that success. This year, we added a host of new cloud native offerings and capabilities, including hybrid multi cloud orchestration for virtual machines, containers, and bare metal, a full suite of private cloud offerings that enable customers to self-manage or choose a fully managed experience and a portfolio of world class AI infrastructure delivered as a service. The portfolio clearly resonates with customers, and it is allowing us to extend our market leadership.

Now, we understand that the adoption of hybrid introduces several operational challenges for our customers. And through a curated strategy of organic investments and acquisitions. We have built a compelling set of SaaS offerings aimed at helping customers, simplify the data management and protection of their hybrid multi-cloud environment, while reducing the risk of public cloud locking.

So we have focused on three critical customer needs. AI-powered monitoring and observability for day two operations and beyond, through our acquisition of OpsRam. Unified data access through our HPE Ezmeral Data and Analytics Suite, and that helps customers move and transform their data for use in AI and other applications. Then data lifecycle management and protection through our suite of offerings, including Zerto Disaster Recovery. All of our software is built for hybrid to give our customers the flexibility they need to simplify their hybrid cloud operations at any location.

Our offers support multi-vendor, multi-cloud environments, and enable native integrations for both HPE GreenLake and major public clouds. Our strategy with our HPE GreenLake SaaS offerings is to drive aggressive penetration across our customer base.

All of our hybrid cloud offerings, storage, private cloud, and SaaS, as well as HPE Aruba Networking, and HPE Compute offerings are natively delivered through our HPE GreenLake cloud platform. And we will deliver our AI offers natively on the platform over the next couple of years. The Platform enables our customers to have a consistent cloud-based management experience across all our offerings. It provides a set of essential services including consumption analytics, and a sustainability dashboard that helps customers understand and reduce their carbon footprint. And as more customers adopt our cloud platform, they are reaping the operational benefits of a truly unified cloud-based management model, which reduces upfront CapEx and ongoing OpEx running costs. And the more HPE offerings, our customers consume through HPE GreenLake, the bigger the operational benefit they gain, and the higher the value we have generated for our shareholders.

So to bring our differentiation to life, I’d like to share a couple of examples of how our customers are leveraging HPE hybrid cloud portfolio to solve their business challenges. For those of you who have a great time watching football, you will be glad to know the Dallas Cowboys were looking for a solution to allow their players and coaches to watch and analyze video footage across different locations. And our high performance Alletra storage solution with multi-site replication perfectly suited their needs.

Danfoss loved the manage for you aspect of our private cloud solution. And it allows them to focus on delivering business innovation globally while reducing their carbon footprint. So there’s no question that HPE GreenLake is winning in the market, and hybrid cloud is the driving force behind us. We’re seeing tremendous adoption with our customers and partners. With more than 27,000 unique customers using the HPE GreenLake platform. We are creating significant shareholder value because we are expanding our infrastructure offerings into new and higher growth markets.

Our recurring revenues are growing at more than a 35% CAGR, which is faster than the public cloud. And we are delivering greater profitability through our software and services rich portfolio.

In closing, HPE has a winning hybrid cloud strategy. We have a highly differentiated value proposition that is grounded in a deep understanding of our customers’ evolving needs with respect to data, infrastructure modernization, and hybrid cloud operations. The differentiation comes from being a pioneer in as a service with HPE GreenLake. Or unrivaled HPE edge to cloud portfolio, and it’s further enhanced by years of curated M&A, organic investment in our SaaS portfolio, and our HPE GreenLake platform. Value proposition is clearly resonating with our customers, and our continued success will fuel sustained growth and profit expansion for our shareholders. Now back to Antonio. Thank you.

Antonio Neri

Well, thank you, Fidelma, excited to have Fidelma now lead this great opportunity we have in hybrid cloud.

Just as we have a very differentiated hybrid cloud value proposition, we also uniquely positioned with a compelling high performance computing NAI offering as this market dramatically expands. The markets extreme acceleration in the last year and anticipated growth over the next several years reflects the enterprise realization that they must embrace AI or they will lose their competitiveness and get left behind. As organizations lean into AI, they are discovering a few things. First, the data intensity of the AI workloads require a hybrid by design solution, rather than a cloud only approach. They need a solution across the entire AI lifecycle from training to tune into inferencing. And given the energy and data center services required for large scale AI workloads, sustainability must be built into the technology from the start. HPE addresses these needs with an end to end portfolio designed for the full spectrum of use cases spanning large scale AI model development, training and inferencing as well as unique liquid cooling data center services expertise.

Customers are attracted to HPE’s market leading supercomputing capabilities, differentiated network and interconnect IP, AI specific software and services expertise. This capability is positioned as favorably in a rapidly growing total addressable market, comprising HPC and supercomputing AI infrastructure NAI platform software. Our pursuit of an outsized share of this market opportunity will deliver real value to shareholders, especially with our path to AI driven profitability charted in the next fiscal year. Our investments in our unique silicon and software are expected to drive a larger profitable revenue base.

I would like to welcome Justin Hotard, who leads our HPC and AI segment to discuss how we’ll plan to capitalize on the booming AI opportunity. Justin?

Justin Hotard

Thank you, Antonio.

AI is driving the next wave of investment in innovation, resulting in value creation in the IT market, in the global economy. It will have a transformative impact similar to what we saw with web, mobile and cloud. And we are seeing demand shift dramatically as our customers realize the potential of AI to deliver business transformation.

Today, I want to make sure I cover three points with you. First, AI market is growing rapidly, and HPE is well positioned to profitably capture that market expansion. Second, we have a right to play and win in AI. And we’re already winning in the market today. You already are seeing this in our sales pipeline in our orders, in our revenue. Third, we deliver solutions for the AI lifecycle, across training, tuning and inferencing that will drive higher growth and margin expansion.

AI adoption is fueling significant market growth. We’re targeting three areas of the AI market supercomputing, the AI infrastructure, and AI software platform. As you can see, our total addressable market for these segments will grow at nearly 24% CAGR to $146 billion by 2026. By focusing on these areas, we are empowering customers to transform their businesses to dramatically enhance productivity, accelerate innovation, and create new revenue models.

Let me cover each in depth. First supercomputing. HPE is a market leader in delivering the world’s leading supercomputing and high-performance computing solutions. We hold the number one position of performance share for the world’s 500 fastest supercomputers and deliver the majority of the world’s top 10 most efficient supercomputers.

Our leadership positions us to continue to capture share in the markets forecasted double-digit growth. We will continue to invest in our supercomputing technology and leverage our global service delivery footprint.

The second is the AI infrastructure market. By 2026, this market is expected to be seven times larger than our core supercomputing market and reach $86 billion. A significant amount of this growth will be driven by AI model training, which is one of the most computationally intense workloads of our time. Customers require powerful infrastructure capable of the scale and performance that supercomputing technologies deliver. For this reason, key features of supercomputing technologies, including management software, networking, and liquid cooling, will become requirements for AI infrastructure. These are technologies where HPE has unique intellectual property that positions us to deliver differentiated solutions to customers.

Third, we have an opportunity above the infrastructure layer in the AI software platform market. This market is expected to grow to $49 billion by 2026. And we plan to capture share through continued investment and innovation. We will extend our current software suite and invest in new offerings to specifically target market opportunities across the entire AI lifecycle.

As this portion of our portfolio grows, we anticipate healthy margins that will be accretive to our business. We believe our strategy to focus on these three segments across the AI lifecycle of training, tuning, and inferencing, will lead to increased market share in two ways. First, through our core supercomputing business and trusted global brand will create new opportunities and expand our share of wallet within our existing customer base. And second, by further building on these core offerings with purpose built AI solutions, and HPE’s global presence, we expect to attract new customers to win even more market share. In fact, it’s the combination of the market opportunities across supercomputing, AI infrastructure, and the AI software platform that differentiates HPE from the competition.

Now, let me transition and cover how the growing AI market will be driven by compute and data intensive workloads. And we’ll need an architecture that HPE is uniquely positioned to provide. This AI native architecture is different from the cloud architecture. Traditional cloud architectures are optimized to run multiple workloads on a single server. They were not designed with AI in mind. There are four key attributes of an AI native architecture.

First the market texture should be designed with computing and infrastructure that is at the scale of supercomputing to take full advantage of computing capacity. This is essential to train, retrain and tune AI models using large quantities of data with efficiency, speed, and accuracy to accelerate time to value.

Second, ensuring a truly hybrid design provides the flexibility to train, tune and deploy AI models in any environment. Customers need the flexibility to integrate data that exists in the public cloud, the private cloud and the edge. For example, enterprises need to deploy inferencing where they can deliver real time insights. This will be necessary for large language models as enterprise use cases scale, just as it already is for computer vision applications across autonomous driving, and medical imaging.

Third, an open hardware and software ecosystem delivers strong advantages. Having an open AI ecosystem expands training and inferencing market solutions to accelerate adoption for customers and support ongoing innovation in the broader ecosystem.

And fourth, these architectures must be sustainable by design. By 2028, it’s estimated that AI workloads will grow at a 35% CAGR and require about 20 gigawatts of power within data centers. Customers will need an architecture satisfies this demand and a new level of energy efficiency to minimize the impact of their carbon footprint.

HPE is uniquely positioned to deliver this new AI native architecture through our technology, differentiation and expertise. For many years, we’ve made strategic investments in AI and led AI focused research in Hewlett Packard labs. As a part of this, we have a powerful blend of strong technology, intellectual property, expertise and talent to deliver an AI native architecture. This positions us to be a long-term market leader and to capture market share in the nearly $150 billion AI TAM, I previously highlighted.

Our multi-year investment plan targets three distinct areas to enhance our differentiated position in the market that will set us apart from the competition. These include software, high performance networking, and supercomputing infrastructure. We expect these investments to significantly expand our HPC and AI business segment operating margins by 2026.

First, our machine learning development platform is proven to train quickly, efficiently and at scale to create reliable and accurate models that can make valuable predictions and reduce business risk. With our current software, and the investments we’re making across the AI lifecycle, we will deliver a robust platform of open source software. This software stack also integrates with the HPE Ezmeral Data Fabric that Fidelma covered in her overview. By integrating the two platforms, we’re making it easy for customers to manage their entire data lifecycle.

Second, we deliver Ethernet based high performance networking with HPE Slingshot, which is purpose built and proven for significant AI scaling. This technology currently powers Frontier, the world’s fastest supercomputer with nearly 40,000 GPUs at the United States Department of Energy’s, Oak Ridge National Laboratory. HPE Slingshot will also power the upcoming Aurora exascale supercomputer, which features more than 60,000 GPUs at Argonne National Laboratory HPE Slingshot connects all GPUs to operate as one single large supercomputer. This makes it possible to train trillion parameter AI models in one single instance.

HPE Slingshot is built upon the ethernet standard and it already supports a variety of GPUs and accelerators including those from Nvidia, AMD and Intel. This creates market options for customers training needs, as the market continues to scale

And finally, to support the reliability and resiliency of AI systems required for large scale training. We offer powerful and integrated supercomputing solutions to address these needs. These include our expertise in system integration, and our supercomputing software. As a part of our supercomputing infrastructure, we have extensive experience in R&D, it focuses on sophisticated liquid cooling solutions. Liquid cooling is essential to deliver sustainable datacenter infrastructure for AI. Our solutions can drive up to a 20% performance improvement per kilowatt over air cooled solutions and consume 15% less power. Further, we believe next-generation accelerators will require liquid cooling in every system to meet power and thermal demands.

Our intellectual property and liquid cooling infrastructure and our advanced manufacturing capabilities in this area position as well to capture this demand. However, technology alone is not sufficient. Customers training AI models don’t have the time to develop the expertise to operate their AI infrastructure and platform. This is an opportunity that positions us to offer unique innovations like a Virtual Private Cloud for AI, with HPE GreenLake for large language models that we announced in June. This is a turnkey cloud service that integrates our AI infrastructure and AI software platform for model training, where we see significant global demand. The service is also designed to lower carbon footprint.

As I covered, our intellectual property and AI is proven and it positions us well to accelerate innovation in the market. This is why customers from various verticals are turning to us.

I’d like to point out a couple of examples that illustrate how our AI-focused solutions are making a transformative impact in the market today. We have a strong partnership with the U.S. Department of Energy and its national laboratories, to co-design and co-develop powerful supercomputers. As we have with exascale to accelerate national initiatives in AI driven science and innovation. Argonne National Laboratory, for example, is creating a series of generative AI models at the exascale level that will be trained on HPE supercomputers in the pharmaceutical industry. Recursion Pharmaceuticals, a leading tech bio company uses advancements in AI to accelerate and industrialize the discovery of new drugs. Recursion uses the HPE machine learning development environment to manage its large-scale AI training jobs on its AI supercomputer. This software significantly speeds up model training across more than 25 petabytes of biological and chemical data and improves team collaboration.

Customers like Tiga cloud and Crusoe Energy partner with us to leverage our expertise and global supercomputing leadership to deliver full stack solutions that integrate our industry leading infrastructure, open source software and on site services.

In our supercomputers and AI software, also behind the work of foundation model builders that create pre-built models used by broader enterprises. For example, Alfalfa has built a powerful large language model in five languages using HPE supercomputers and machine learning development platform. This large language model is already used today as an advanced AI digital assistant across banks, automotive manufacturers, legal firms to accelerate business outcomes. They turned to HPE to scale their training capabilities in a virtual cloud, versus relying on deploying and managing their own supercomputer and software. As our launch customer for HPE GreenLake for large language models. Alfalfa will extend their customer reach globally and accelerate their growth.

As this business scales, the combination of top line growth and higher margin offerings within our portfolio will help us achieve double-digit operating margins. AI is a fast-growing market that will be fundamental to transforming businesses and accelerating economic growth. We believe we are well-positioned to profitably capture the market opportunity and win in AI to drive higher growth and margin expansion. With our trusted expertise, differentiated IP and long-term sustained market leadership, we can capture significant value from the AI market. This is an exciting opportunity for our company. And we look forward to fueling the value creation from AI for our customers, and in turn for our shareholders.

And now let me turn it back over to Antonio.

Antonio Neri

Thank you, Justin.

Each of these areas have — we just presented provide our customers and our shareholders with tremendous opportunity. And the engine that powers our ability to capture that opportunity is compute, which produces cash flow to invest in our business and deliver direct capital return to our shareholders. As you all know, there is a cyclical nature to the computer business. Over the last several years digital transformation drove increased investment to modernize infrastructure. Now customers are focused on digesting those investments. We will be very intentional about how we execute and compute during the cycle to maintain our scale and industry leading profitability.

We are focusing on capturing every unit while maintaining balance in our operating margin performance. We are capturing opportunities in a steady compute market from cloud repatriation from edge and IoT world’s demand from the telco and 5G sector and service providers and from the emerging needs from AI inferencing solutions Justin talked about that. We expect continued demand next year for service with now GPUs and all other compute accelerator types, combined with our shift to HPE ProLiant Gen 11 servers, which delivers significant greater performance compared to the previous generation. We anticipate a tailwind in compute average unit price in fiscal year 20/24.

We will measure our progress in part to tracking the servers we sell with us in our data processing units or APUs. That is because customer can use a variety of compute accelerators, beyond just GPUs to support AI workloads. We have a complete compute portfolio to address the entire AI lifecycle across training, tuning and infancy.

We also continue to see strong interest in our HPE services, which is additive to both revenue and margin. Our class HPE services team helps us to deliver great customer experience and customers can gain maximum benefit from HPE GreenLake, from our software, designing and building their infrastructure and running their hybrid IT estates with one exceptional end-to-end customer experience.

Just as compute serve as an engine to power aspirator growth, HPE Financial Services continue to be a critical competitive advantage for HPE. This business create smarter IT lifecycle solutions for our customers and partners through offerings that combine insights, financial expertise, and deep rooted focus on sustainable IT. It is also strategically important for us as we increase our other service business to HPE GreenLake. Customers can transition to HPE GreenLake using our [indiscernible] lifecycle management services to access efficient technology and cloud consumption models creating value for our business.

Going forward, we see even higher demand from our customers as they put more emphasis on finding ways to accelerate their sustainability goals through our services and the circular economy solutions. For our investors, HPE Financial Services offerings and its best-in-class return on equity, provide a great source of profit that expand our earnings.

In addition to driving impressive organic innovation across our portfolio, we continue to be opportunistic in making the right acquisitions. So far this year, we have acquired five businesses to accelerate our strategy and enhance our capabilities. When we assess opportunities to make organic and inorganic investments, we focus on the potential to drive higher level of recurring revenue and profitability. We maintain particular interest and investment to help us innovate and grow profitably at the edge in hybrid cloud NAI. We will continue to be opportunistic in making beneficial and creative acquisitions while following our discipline return base framework and ensuring integration success.

Jeremy will address more specific on the long-term sustainable value creation and free cash flow generation objectives, we pursue on behalf of our shareholders. When I reflect on HPE strong business momentum, I’m particularly proud that a great deal of the strength come from solution to help customers advance their important environmental, social and governance objectives. In fact, in fiscal year 2022 alone, we generated about $1.3 billion in net revenue that we can directly attribute to sustainability engagements with customers.

In addition, our portfolio enhances opportunity for customers to achieve their environmental goals. I am very proud that HPE is one of the only two global IT companies to have a net zero target of 2040 or sooner approved by the science-based target initiative. Last year, we did the submission directly with our controlled by more than 1/5 from the 2020 baseline and reduced our overall carbon intensity by 2% year-over-year. We also believe a diverse and engaged workforce fuels innovation and performance. Since 2017, our employee engagement score has risen 20 percentage point to 83%. And while we have work to do and so the entire IT industry, I am proud of our progress in diversifying our workforce.

Our U.S. workforce is 32% ethnically diverse, and more than 26% of executive positions worldwide are held by women at HPE. We also have a very diverse Board of Directors. Half of our independent directors are female, and we are innovating with a strong ethical compass. We went the right way.

In the last year, we have put in place even more comprehensive governance around AI to enable us to size the opportunity this technology possesses in the right way. We have the right strategy aligned with a key market megatrends. We have the right team with strong focus on delivering business outcomes for our customers. And while the world is navigating uncertainty, we are confident HPE will continue to accelerate value for our shareholders.

To speak about shareholder value creation, Jeremy Cox will take the stage after a short break. As you know, Jeremy serving as our Interim Chief Finance Officer while we continue our internal and external search for a permanent CFO.

And we will be back on stage as soon as the market close. Thank you for your time and attention.

Question-and-Answer Session

Q – Unidentified Analyst