HPE CEO Antonio Neri: The Market Should Give ‘Us More Credit’ For Our Accomplishments
“The strong consistent results would have been admirable in any period, but I am particularly proud of them coming in such a turbulent three years,” said Neri.
Hewlett Packard Enterprise CEO Antonio Neri told Wall Street analysts Thursday that he believes the edge-to-cloud powerhouse deserves ‘more credit’ for its strong financial performance over the last three years.
“The strong consistent results would have been admirable in any period, but I am particularly proud of them coming in such a turbulent three years,” he said, referring to the pandemic, supply chain challenges and geopolitical turmoil. “Frankly, I believe the market should give us more credit for these accomplishments because they are a testament to the relevance of our strategy, the differentiation of our portfolio and the strength of our execution. We delivered when it mattered the most.”
HPE has grown its annual non-GAAP diluted net earnings per share by 43.5 percent between Fiscal Year 2020 through the trailing 12 months in the most recent quarter. “In Fiscal Year 2020 it was $1.54 and it is now $2.21,” Neri said.
HPE’s stock price closed Thursday at $16.30, down about 5 percent from $17.18 on Nov. 4, 2019, the start of HPE’s Fiscal Year 2020.
Over the last three years, HPE has generated more than a 121 percent total shareholder return as opposed to a 37 percent return for the S&P 500 over the same period, said Neri.
“Importantly, this return represents a CAGR [compound annual growth rate] of 31 percent as compared to the 11 percent CAGR for the S&P 500,” he said.
“As we produce higher profit and greater cash flow, we deliver on our commitments to provide direct capital return to our investors,” said Neri.”Through our disciplined capital allocation framework we returned about $11 billion to shareholders through dividends and share purchases from the start of Fiscal Year 2018 to our most recent quarter.”
HPE’s non-GAAP gross margin has grown by 310 basis points since Fiscal Year 2021, ending in the most recent trailing 12 months at 34.8 percent. During that same period, HPE’s non -GAAP operating margins have improved by 280 basis points.
HPE, meanwhile, has more than tripled free cash flow generation from the start of Fiscal Year 2021 to the most recent trailing 12 months, said Neri.
The free cash flow and profitability gains come with HPE strategically focusing on areas of high growth and high margin with a pivot to software and services, including the HPE GreenLake pay-per-use cloud service.
HPE provided a Fiscal Year 2024 non-GAAP diluted net earnings per share outlook of between $1.82 and $2.02 on revenue growth of 2 percent to 4 percent in constant currency.
HPE shares were down 6 percent, or $1.01, in midmorning trading on Friday to $15.27.
Here is a look at the biggest takeaways from Neri’s presentation at HPE’s annual securities analyst meeting in New York.
HPE’s Intelligent Edge Bet Is Paying Off
“HPE’s bet on intelligent edge is paying off with a sizable proportion of our revenue growth and segment operating profit coming from this business segment,” said Neri.
In the most recent quarter, the Intelligent Edge business was up 50 percent to $1.4 billion, the fifth consecutive record quarter for intelligent edge sales.
HPE’s Intelligent Edge business with Aruba networking now accounts for the largest segment of HPE’s operating profit, accounting for 49 percent of total operating profit in the most recent quarter.
HPE has invested nearly $6 billion in the HPE Aruba networking intelligent edge business since Neri became CEO on Feb. 1, 2018.
“It is on track to be more than $5 billion in Fiscal Year 2023 and beyond, poised to generate sustained revenue growth and the highest profitability of any of our business segments,” he said. “It is a critical part of our business both from a strategic and financial standpoint.”
HPE is poised to expand its intelligent edge total addressable market by moving into “security, private 5G and data center networking, which we have entered through organic innovation and acquisitions this year,” said Neri. “We intend to increase our already high gross margin in this business. By Fiscal Year 2026, we expect our total addressable market at the edge and networking to grow to about $94 billon.”
HPE will continue to provide customers a “unified networking experience that is secure, automated and high-performing as well as flexible subscription and consumption-based solutions,” said Neri.
HPE’s GreenLake Hybrid Cloud Success: The Largest Market Opportunity
“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,” said Neri.
Last month, HPE said it is creating a new hybrid cloud business unit to be led by current CTO Fidelma Russo effective at the start of the new fiscal year, which begins Nov. 1.
“Our hybrid cloud business unit will bring together a single hybrid cloud segment of storage and compute as a service and all the offers related to that, including HPE GreenLake private cloud and software solutions,” said Neri. “Our 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 sales transformation to enhance the execution between our business units and our go-to-market function. Through these changes, we will engage customers more directly on the offerings they want the most.”
Neri said he sees the hybrid cloud business becoming a “sustainable center for growth through the scale of HPE GreenLake with investments to make us the No. 1 leading hybrid cloud provider.”
HPE’s GreenLake business in the most recent quarter accounted for $1.3 billion in annualized revenue run rate, a 48 percent increase from the year-ago period. Software and services account for nearly 70 percent of HPE’s ARR.
HPE GreenLake, which has a total contract value of nearly $12 billion, now supports 27,000 unique customers with 3.4 million connected devices, said Neri.
In addition, more than 1,100 partners transact with HPE GreenLake and edge offerings, said Neri.
“We can also capture a larger portion of the hybrid cloud market with our entry into the growing AI-powered IT operations management segment through our recent acquisition of OpsRamp,” he said.
AI Is Providing Expanded Market Opportunity
“AI has expanded our market opportunity to drive what we expect will be profitable growth in the next fiscal year, adding to our overall compute and HPC/AI businesses,” said Neri.
HPE is “well positioned” to capture “sizable growth” in the AI market with its “full-stack AI-native architecture,” said Neri. “That includes AI infrastructure growing at 23 percent CAGR and AI platform software growing at a 32 percent CAGR. Ultimately, we anticipate the AI market where we play growing by roughly 2.4 times to roughly $150 billion by 2026.”
Even in the current macroeconomic environment, customers are prioritizing “data-first digital transformation initiatives, which increasingly includes AI,” said Neri.
“Just as we have a very differentiated hybrid cloud proposition, we are also uniquely positioned with a compelling high-performance computing and AI offering as this market dramatically expands,” said Neri. “The market’s 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.”
The AI Market Opportunity Requires A Hybrid Cloud Solution
“The data intensity of the AI workloads requires a hybrid by design solution rather than a [public]-cloud-only approach,” said Neri. He said customers are finding that AI requires a solution across the “entire AI life cycle from training to tuning to inferencing.”
What’s more, Neri said, sustainability must be built into the AI solution 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,” he said.
“Customers are attracted to HPE’s market-leading supercomputing capabilities, differentiated networking interconnect IP, AI-specific software and services expertise,” said Neri. “These capabilities position us favorably in a rapidly growing total addressable market, comprising HPC and supercomputing AI infrastructure and AI 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.”
Compute: The Engine That Powers Future Opportunity
“The engine that powers our ability to capture that [intelligent edge, hybrid cloud and AI] opportunity is compute, which produces cash flow to invest in our business and delivers direct capital return to our shareholders,” said Neri.
Over the last several years, digital transformation drove increased investments from customers to modernize infrastructure, said Neri,
“Now customers are focused on digesting those investments,” he said. “We will be very intentional about how we execute in compute during this 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 workloads, demand from the telco and 5G sector and service providers and from the emerging needs from AI inferencing solutions.”
HPE expects continued demand for compute with GPUs and other compute accelerators, said Neri.
With the shift to HPE ProLiant Gen11 servers, which deliver significantly greater performance, HPE anticipates an increase in compute average unit price in Fiscal Year 2024, said Neri.
A Total Addressable Market Expansion Across The HPE Portfolio
“We anticipate the overall total addressable market across our portfolio will rise from nearly $100 billion from the end of Fiscal Year 2022 to more than $340 billion by Fiscal Year 2026,” said Neri.
“We intend to capture this growing TAM across the megatrends of edge, hybrid cloud and AI through a mix of HPE’s business segments,” he said. “Our approach will include innovation in key markets where we already have a strong position as well as customer acquisition and expansion in high-margin adjacent markets.”
Neri said the edge, hybrid cloud and AI opportunity provides “tremendous opportunity” ahead.
HPE—which has made five acquisitions this year—will continue to be “opportunistic in making beneficial and creative acquisitions while following our disciplined return-based framework and ensuring integration success,” said Neri.
“We have the right strategy aligned with the key market megatrends; we have the right team with strong focus on delivering business outcomes for our customers,” said Neri. “While the world is navigating uncertainty, we are confident HPE will continue to accelerate value for our shareholders.”