Good afternoon, and welcome to the Second Quarter 2017 Hewlett Packard Enterprise Earnings Conference Call. My name is Lawson, and I’ll be your conference moderator for today’s call. At this time, all participants will be in listen-only mode. We will be facilitating a question-and-answer session towards the end of the conference. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Andy Simanek, Head of Investor Relations. Please proceed.

Good afternoon. I’m Andy Simanek, Head of Investor Relations for Hewlett Packard Enterprise. I’d like to welcome you to our fiscal 2017 second quarter earnings conference call with Meg Whitman, HPE’s President and Chief Executive Officer; and Tim Stonesifer, HPE’s Executive Vice President and Chief Financial Officer. Before handing the call over to Meg, let me remind you that this call is being webcast. A replay of the webcast will be made available shortly after the call for approximately one year. We posted the press release and the slide presentation accompanying today's earnings release on our HPE Investor Relations webpage at investors.hpe.com. As always, elements of this presentation are forward-looking and are based on our best view of the world and our businesses as we see them today. For more detailed information, please see the disclaimers on the earnings materials relating to forward-looking statements that involve risks, uncertainties and assumptions. For a discussion of some of these of risks, uncertainties and assumptions, please refer to HPE’s filings with the SEC, including its most recent Form 10-K. HPE assumes no obligation and does not intend to update any such forward-looking statements. We also note that the financial information discussed on this call reflects estimates based on information available at this time and could differ materially from the amounts ultimately reported in HPE’s quarterly report on Form 10-Q for the fiscal quarter ended April 30, 2017. Finally, for financial information that has been expressed on a non-GAAP basis, we have provided reconciliations to the comparable GAAP information on our website. Throughout this conference call all revenue growth rates unless noted otherwise, are presented on a year-over-year basis and beginning with fiscal year 2016 are adjusted to exclude the impact of divestitures and currency. We believe this approach helps provide a better representation of HPE’s operational performance, given the significant divestitures we’ve recently completed, including the sale of 51% of our H3C business in China and TippingPoint amongst several others. Please refer to the tables and slide presentation accompanying today’s earnings release on our website for details. With that, let me turn it over to Meg.

Good afternoon, everyone and thank you for joining us on the call today. As you know, during the past year and half, we've made significant progress in strengthening HPE to compete and win well into the future. We've been marching towards becoming a smaller, nimbler and financially stronger company that is more committed to customers and partners than ever before. With this call in mind, we separated from HPI in November of 2015 and last month, we spun our enterprise services business and merged it with CSC to form DXC Technology. Completing this transaction was a major milestone in our strategy and I'm proud that we were able to execute such a significant change within the tight schedule we laid out and on budget. Later this summer, we'll complete the spin merger of our software business. The two spin merger transactions will deliver more than $20 billion in value based on the current stock prices of the DXC and Micro Focus. We've also made a number of strategic acquisitions in key growth segments of the market that are directly aligned with the three pillars of our strategy. In November, we acquired SGI, which has cemented our leadership position in the high-performance computing market, which is growing 6% to 8% per year. Earlier this year, we acquired SimpliVity, a leader in hyperconverged, a market growing 25% per year. Niara, a leader in network security that uses machine learning and big data to discover network attacks. We'll make Aruba even stronger. Cloud Cruiser brings IT consumption analytic to our flexible capacity services offering, giving customers clear insight into IT usage and spend and the ability to effectively plan and manage their IT systems and with the addition of Nimble, we now have a complete world-class flash storage portfolio from entry-level to the…

Thanks Meg. As discussed, while our overall performance in Q2 was impacted by tough markets and the external factors I discussed last quarter, we continue to drive growth in our higher margin businesses and align our cost structure with the future HPE operating structure. Total revenue for the quarter was $9.9 billion. This includes $2.5 billion for two months of enterprise services, which is not reported in discontinued operations. Revenue from continuing operations of $7.4 billion was down 5% adjusted for divestitures and currency driven by declines in software and tier 1 server sales. If you exclude software and tier 1 and consider just the future HPE, revenue was actually up 1%. I'll dive into the business segment performance in a minute. From a macro perspective, we continue to see competitive pricing and a challenging commodities environment. Currency remained unfavorable and was an 80-basis point year-over-year headwind to revenue. HPE's performance in the U.S. was stable excluding tier 1 servers as core servers improved and strong growth and networking was offset by a challenging storage market. Revenue in Europe continue to be weak driven by the U.K. although strong results in Germany helped the region. APJ was mixed with good performance in Japan and India, more than offset by broad softness in the rest of Asia. Turning to margins, gross margin of 33.8% was down 200 basis points year-over-year and down 240 basis points sequentially. Non-GAAP operating profit of 7.8% was down 130 basis points year-over-year and down 270 basis points sequentially. As Meg discussed EG margins were negatively impacted by increased DRAM pricing, currency, stranded costs and short-term dilution from the recent acquisitions, as well as a very competitive pricing environment. I'll discuss these in further detail in context of the enterprise group. Combined non-GAAP diluted net earnings per…

We'll now begin the question-and-answer session. [Operator instructions] Our first question comes from Sherri Scribner with Deutsche Bank. Please go ahead.

Hi. Thank you. If we look at the midpoint of your 3Q guidance and the midpoint of your full-year guidance, it suggests an EPS for 4Q of somewhere around $0.45 which is a pretty significant acceleration versus the 3Q guidance. Can you give a little bit of detail on how you get to that number? Is that primarily the cost cutting that you're seeing and some of that accelerated cost that you can take out or maybe give us a little detail on why you're confident you can hit that number?

Sure Sherri. So first of all, just to remind everybody, the full-year guide includes a partial year for ES and a full year for software. So, it may be easiest to start with Q2. So Q2 we ended up with an EPS of $0.35, now $0.10 of that was related to ES, which was in discontinued operations. So, when you move from Q2 to Q3, that's relatively flat and basically what you're seeing there is the impact and the pressure from the stranded costs, from the short-term dilution of the acquisitions and some of the commodity cost pressures. Those are being offset by the second-half cost actions okay. And then to your point, when you go from through 3Q to 4Q, you'd see that would imply about a $0.19 improvement quarter-over-quarter and there is really three elements to that. The first one is just typical seasonality. So, if you were to go look at last year's results, we saw a similar uplift in Q3 to Q4. Same thing in 2015, we would anticipate that same type of lift due to seasonality in Q4 of this year. If you just think about the software business as an example, Q4 is typically much higher than Q3. The second component of it is as we eliminate the stranded costs and as we get right size the cost envelopes around the acquisitions, that will be favorable in Q4 and then thirdly, is a $200 million to $300 million of cost out. So, the way I would think about that is roughly a third of that will come in Q3 and then two thirds of that will come in Q4 and that's what's going to drive the remainder of the lift. So that's why you see that ramp up in Q4.

Okay. Thank you. That's very helpful and then looking at the operating margin in EG, it's a little disappointing. Can you give us a little more detail on which segment that came from? Is it related to the weakness in the server market? I would assume it would not be that much related to servers given that a lot of that is tier 1 which doesn't have a lot of margin. So, is it more a result of the weakness in the storage market? Thank you.

Yeah. We don't really give BU specific guidance on the margins, but yeah, I would say servers is driving a component of that and again the way I think about it as we talked about in the prepared remarks is there's a component of that that's structural. There's a component of that that's one-time cost and then you have the operational headwinds, which is primarily the commodities cost increases. Again, most of that is memory. So that has a heavy impact on the server margin.

I think the other thing I would add to that is we believe that the worst is over from a margin pressure perspective in Q2 and we expect year-ago levels by Q4 as the structured -- the structural challenges that Tim mentioned roll-off as does the one-time acquisition dilution that goes away. So, what you're left with is the more normal business challenges that we all have where it's commodity price increases or whatever and then of course obviously the $200 million to $300 million of cost reduction also helps the margin.

Great. Thank you, Sherri. Can we have -- go to the next question please?

Next question is from Toni Sacconaghi with Bernstein. Please go ahead.

Yes. Thank you. I wanted to revisit that operating margin question. My understanding from the conference call last quarter was that you expected the enterprise group to be pretty similar in Q2 to Q1 both from a revenue and from a profitability perspective and there was a dramatic downturn in profitability sequentially 390 basis points. And I understood your bridge Tim, but many of the things you noted like H3C divestiture you had in Q1 or the acquisition impact you had most of that in Q1 the stranded costs I think were very visible to you. And so, I guess my question is was this simply incremental competition that didn't allow you to raise prices in the way that you thought or what changed and as I think about like a reality check if TS is 30% your business in EG and has 30% margins, that means everything else is zero profitability today, pre-overhead allocations and with overhead allocations, it's negative and how do we reconcile such dramatically weak levels of profitability?

Okay. I think there are a few questions in there. So, let me see what I can do. So, I think to your point, we did on the Q1 call, we did think that revenues would stabilize. We did not say that margins would stabilize and again if you're going through a quarter-over-quarter walk, to your point, stranded cost is a big element of that. We did not see that in Q1 obviously because we just separated the ES business in March. So, all the overhead that we were allocating to ES in Q1, a lot of that was being allocated to EG. There is some FX impact. Again, we were hedged from an FX perspective in Q1 from the prior hedges that we put on in Q4. So, there was some pressure driven by that. There was also some dilution in the acquisitions which we really didn't -- we didn't talk about in Q1, nor did we have that pressure. That gave us some pressure from an overall margin perspective. DRAM is causing a pressure point. We did know about that in Q1. To your point, we talked about that. Obviously, that's why we took our guide down, but if you look at memory costs in 2Q, they're actually up another 10%. So, we saw a big increase in Q1 that was when we got the 40% and 50% lift, but those have continued to go up in Q2. So that drives some incremental pressure. And then from a pricing point, we did go out with global price increases, but to be honest with you, the results were mixed. We saw some traction in APJ and those came in in line with what we thought they would. When you look at the Americas, we did not gain as much…

Great. Thank you, Toni. Can we have the next question please?

Our next question is from Jim Suva with Citi. Please go ahead.

Thank you very much. In the press release as well as the prepared remarks, you mentioned several times the excluding the tier 1 server sales, can you just help us understand strategically is that just you guys at Hewlett Packard Enterprise have strategically decided to shift away from that? Is it permanent share loss, timing, absorption. Is this something we should expect to have you call out many times in the future quarters to come or one-time in nature because last quarter it came up and now hear it again? How should we just think about this huge issue of excluding tier 1 server sales, thank you?

Yeah, so tier 1 service provider is a segment that we entered I think maybe 18 months ago, two years ago and we are heavily dependent on one customer. So, we're doing a couple of things. We anticipate that one customer to continue to - purchases to decline and so this tier 1 rationale or the way we talk about is going to continue for the next couple of quarters because it's a pretty big number. We're doing a couple things, one is we're really thinking hard about what the future strategy is for tier 1. We continue to get new tier 1 customers, but this is low calorie business actually and so we need to think through does it make sense to continue that business on a go-forward basis or are we better off actually putting our selling resources and our R&D resources against more margin-rich sustainable profitability. But the answer is yes, there will be I think for another at least a couple of quarters, there will be the explanation of what does our server business look like ex tier 1, which we think is a better -- gives you all a better understanding of what's happening with that one customer and then what's happening with the rest of the core industry-standard server business.

Are there other tier 1 server customers besides that one that we should think about?

It's the vast majority is with one, there is a few others and we're building out some more tier 1 customers, but fundamentally the strategic question is, is this a business we really want to be in because we're not in the business for share, for share's sake. We're in it to get a return on our investment dollars and right now that doesn't look like a particularly productive segment for us.

Thanks for the details, much appreciated.

Thank you, Jim. Can we have the next question please?

Our next question is from Katy Huberty with Morgan Stanley. Please go ahead.

Yes, thanks. Good afternoon. I appreciate that in the original guidance, but have you contemplated the ideal of removing $200 million to $300 million post the ES transaction or is that incremental work to offset the memory cost that surprised you this year and then just as a follow-on to that. How should we think about incremental cost takeout as we -- how did the next year post the software divestiture is that $200 million to $300 million run rate or more like $400 million tto $600 million for the full-year the right run rate to think about for next year?

Yes, sure Katy. So, I'll answer the first piece and then Meg you can jump in here. From a cost perspective, the $200 million to $300 million is incremental and it is all in the second half. So, as you know, we're always looking at cost. Now we're trying to be and we continue to be very sensitive to protecting our R&D, protecting our sales costs. But net-net, particularly given the spinoff and now the fact that we have 110,000 fewer people and we've had a little bit of time under our belt to operate in the new model if you will, we do think there are opportunities and there are going to be opportunities in the usual suspects. So, if you think about just tighter spending around travel, around optimizing programs spend, around tighter policy enforcement, we think there's more work to do there and we can continue to do that, but there's also an opportunity to simplify. So, if you think about now as a standalone or as a remain co. if you will, you have the global structural versus the regional, versus the country. You have spanning control, you have all those types of things. Those are the things that we're having better line of sight on and that's some of the cost that we will address in the second half the year and Meg do you have anything else to put on it?

Yeah, I think Katy, if you cast all the way back up, we have just gone through one of the largest transformations may be in American business history. We've created four industry-leading companies that I think are poised to do very well in their given segments and so now we are very focused on the go-forward Hewlett Packard Enterprise financial architecture. And I think there's a couple things Tim said it well, we now need to look at that cost structure and say what is the process reengineering we need to do? What are some of the policy decisions we need to make upstream to be a much more efficient, leaner company that we can really see the productivity benefits and Tim mentioned simplification. There's lots we can do here. So, I am -- we are now in a different stage. I can see this very clearly now that ES is gone, software is on its way and of course HPI has been on its own for 18 months. So, we're at that next stage that I think we can have a major impact in how we run this company more efficiently and leanly. So were super excited about it. It's going to be a lot of work because whenever you restructure a company, it's a lot of work, but I can see it very clearly. Now I want to say one thing is that we will not be adding to the restructuring dollars that we had already laid out for you. So, remember there are $700 million of restructuring in cash payment in this year, another $200 million in '18. We may pull that $200 million in depending we're still working on that, but any incremental cost savings will be funded through the P&L. There will be no more restructuring dollars, which I think is an important point to make because I remember many of you especially when we owned ES and said this is sort of the perennial restructuring that actually is not going to be the case going forward.

Great. Thank you, Katy. Can we have the next question please?

Our next question is from Maynard Um with Wells Fargo. Please go ahead.

Hi thanks. On the server business, can you just help us with the expectations over the next couple quarters. You'll have SimpliVity for another full quarter, you'll have synergy ramping and the alliances look like they're growing. Do you think that gets you back to flattish type growth in Q3 and Q4 and then I have a follow-up?

Sure. As synergy comes online, as we continue to grow particularly if you think about high-performance compute and some of the areas of the portfolio, again excluding tier 1, from a year-over-year component, we would expect to return back to growth in the latter part of the year.

Great. And then on the storage side, how long do you think it will take to fully integrated the Nimble storage to be ready from a go-to-market and channel perspective and when do you think we start to see the ramp in storage from Nimble, thanks?

So, we're working hard to integrate Nimble into our data center storage sales teams. SimpliVity is all the way in both from an R&D perspective and as a sales perspective. Nimble R&D is going to merge with three par R&D to be a more powerful storage R&D team. And then we're just about now ramping Nimble into our data center storage business. What's interesting about Nimble is there are some markets where Nimble actually had quite a good position. There are some markets where Nimble is not at all. So, we're actually building from scratch in a number of those markets, which is great actually. But I'd say certainly by the end of this quarter, Nimble will be firmly integrated into our go-to-market motion and I think you'll start to see the ramp. Interestingly, what we saw with Aruba, what we saw with SimpliVity and what we believe we will see with Nimble is actually being part of the HP family helps accelerate those wins. There's many customers who said, we would not have considered Nimble as a standalone independent company without being part of HPE. Actually, I think Aruba would tell you the same thing. We're winning deals there because they're part of the family. SimpliVity, we're winning deals there because they recognize that it actually holds into our overall offering and you're not purchasing an island. In other words, a completely new technology that's unconnected to the rest of your data center. There is actually it's part of the family of HPE infrastructure. So that's worked really well for us and I think you're going to see Nimble ramp through the end of the year nicely.

Great. Thank you, Maynard. Can we -- let's go the next question please?

Our next question is from Shannon Cross with Cross Research. Please go ahead.

Yes. Thank you for taking the question. Can you talk a bit about your cash usage strategy? Obviously, you made several acquisitions over the last few quarters and you've had cash come in from both sometimes operating cash flow as well as what you've got from the divestitures. So how are you thinking about cash as you sort of normalize it out? Has there been any change and how are you thinking about acquisitions given all the ones that you have that you're now integrating and then I have a follow-up? Thank you.

Sure. So, I'll give it a shot and Meg you can jump in here. So again, I think our strategy is still the same. We are going to continue to focus on organic investments because where we do that well and we do it right, it's good for customers, it's good for shareholders, it's good for partners, it's good for employees. We always continue to look at share buybacks. Obviously, we're bias toward share buybacks right now. And then we're going to continue to look at M&A as long as it fulfills gaps in our strategy. So, the way we think about M&A again as being very consistent and it's all around complementary IP, where we can leverage our distribution and drive profitable growth. So, it's all returns based. That a framework that's worked well for us in the last 12 to 18 months and I would expect us to continue to operate within that framework going forward.

No. I don't have much to add to that. The only think I would say is as we think about innovation, as Tim said, our first choice is organic innovation, think synergy. We will also look at innovation coming from M&A, but as Tim said, it's return based. We have to buy it right. It has to be complementary technology that can leverage our distribution channels and then the third area is actually our Pathfinder program where we make small investments in new generation companies that we're not to be a venture capital company. I'm not looking for venture returns there. I'm looking for companies that further our strategy powering hybrid IT, powering the intelligent edge and the services that we can weave into our solution. So, for example Docker, Mesosphere, Chef are all woven now into HPE one view. That makes HPE one view much more valuable to our customers, actually creates beginnings of a new stack as a control plane for hybrid IT and is actually good for those small companies and doesn't require us to outlay $300 billion, $500 billion, $600 billion for relatively unproven technology. So that's the way we think of it and it's been a cultural change for the company because we're used to selling only what we own, but actually this Pathfinder programs has been great success. I think it's a differentiator for Hewlett Packard Enterprise because in some ways what we do is we curate Silicon Valley for our enterprise customers.

Okay. Great. Thank you. And then my second question is just as we think about Remain Co given all of the moving parts, then you talked about EPS ranges in the past and that, is there any shifting around given the accelerated restructuring versus maybe the pressure from component or from a server standpoint that we should take into account as we look forward past '17?

So, if you look at Remain Co. and again I'll take you back to Sam, we guided a $1.25 to $1.35 from an EPS perspective and we had normalized free cash flow of $2.1 billion to $2.4 billion. Now obviously we took that number down or we took our number down in total by $0.12 that was in Q1 that was driven by some of the FX pressures we saw, some of the commodity cost pressures we saw as well some execution issues that we were working through. So, as I look at those three categories, those were all primarily EG related. So, I would adjust the $1.25 to $1.35 by that $0.12 and then I would also adjust your $2.1 billion to $2.4 billion of normalized free cash flow. I would take that down to roughly $2 billion of normalized free cash flow to reflect the earnings pressure. So that will give you sort of a baseline as we exit '17 of about $1.13 to $1.23 and I think there are two or three areas that are going to impact that you need to think about as we move forward. The first one is commodity cost movements and the corresponding pricing mitigation. Again, as we talked about earlier we are making traction in that we anticipate an APJ, but we're finding it very difficult in the Americas and EMEA. So, depending on how that equation plays out, that would have an impact on your baseline. From the second-half cost actions, the $200 million to $300 million that we talked about, to the extent that a piece of that is recurring, which we would expect, that would also impact your baseline going forward and then when you look at the rightsizing, the cost envelopes particularly around the acquisitions, that should provide a little bit of accretion going forward. So that's how I would think about the baseline for Remain Co. from both a cash and EPS perspective and we will give much more guidance and clarity and visibility at SAM in October.

Great. Thank you

Perfect. Thank you, Shannon. Can we go to the next question please?

Our next question is from Steven Milunovich with UBS. Please go ahead.

Thank you very much. Regarding the storage business, first of all, I didn't see the converged traditional breakout? Are you still giving that and you did say that you're supply constrained in the quarter on storage and that that would continue, is that correct?

Yes, sure. So, from a converged perspective, I think the converged part of the portfolio was down roughly 8% and traditional was down roughly 20% and then from a material perspective, really the supply constraints are much more around SSD and again as that market is very tight right now, we're getting our fair share of supplies, but given the complexity of our broad product portfolio, we're finding it challenging to what we call demand shift. But we would expect that to loosen up in the second half of the year particularly as 3D yields improve as well as more factories come online. So that should loosen up in the second half of the year.

Okay. And then Meg internally last quarter you talked about execution issues, could you bring us up date in terms of if those are alleviated and externally, what are you hearing from your customers in terms of the split? I've heard a few customers wonder if you may be pruned too far relative to having full solutions capability.

Yes, so let me talk a little bit about the execution issues. I would say we have largely overcome most of the execution issues that we discussed in Q1 and the biggest hurdle was getting through the ES separation that in many ways was far more complex than the HPE HPI separation because we had to spin and then merge into a third-party. So, a third party actually had to be managed and worked with here. So, the first time it was separating the siblings, now we had to merge with the cousin. I would say -- and by the way that took a chunk of our leadership time in every country around workforce councils and things like that. The other thing that we talked about last time was we had three new heads of all of our regions plus a new head of worldwide sales and that as I said last time might've been a little bit too much change at once, but now I'm firmly convinced we got the right people in the right job. They've now been in place six months and you're starting to see their impact. For example, the server business in the US ex tier 1, actually had a pretty good quarter and that's thanks to Jim Merritt and his team. So, I feel like execution-wise we're back on track and I think you saw that in terms of the growth areas that we talked about on the call. The feedback from customers that I'm getting is actually they are amazed at how smoothly the separation of these companies has gone, whether it was HPI or CSC. I think if customers are saying have we shrunk back too far, we still need to educate them about the services capability that we still have at HPE and it's not only our TS business, our services and support business, it's our TS consulting business, it's Aruba Services and that's very important, that advice and transform capability I think we need to do a better job of if you will advertising that. But customers who know us well, I think are super excited about the focus. They know the services capability that we have. They really resonated to the strategy. This strategy of we make hybrid IT simple, we power the intelligent edge and we have the services to make it happen totally resonate and so we're excited about that. So, I have no doubt about the strategy. I have no doubt about the validity of the spins. We are going to end up as a much stronger set of companies than we would have before and I think you all recognize the value creation for shareholders that has occurred here.

Great. Thank you, Steve. I think we have time for one last question please?

And our next question is from Wamsi Mohan with Bank of America Merrill Lynch. Please go ahead.

Yes. Thank you. Tim, you mentioned bulk tightening on travel, other discretionary spend items that sound obviously transitory in nature. How much of that $200 million, 300 million of incremental cost saves would you view as transitory versus elements that could be more structural like the span of control initiatives. And my follow-up Meg just to clarify, did you say that the worst of the pricing environment in servers is behind you and if yes what do you think that's the case? Thank you.

Yes, I actually said that I thought the margin pressure was the worse that we're going to see in Q2 and it should return to last year's level by Q4 and I can't say necessarily that the pricing is going to alleviate but we've got the $200 million to $300 million of cost structure we've got both structural things and we've got obviously the one timer like stranded costs and acquisition dilution. So that's why I say it's going to come back to last year's level by Q4.

And then from a cost structure perspective ballpark, I think roughly half of that $200 million to $300 million is more of the discretionary type stuff like policies, like travel and then the other half is labor related and within that labor piece, I'd break it out into two components. I think half of that is really around lowering our rehire rates, taking a look at contractor. So, when you think about the cost to do those things, there really is no cost to do that and then there's the remaining 25% that would be more structural and that's why we're evaluating the restructuring that we have in 2018 employing forward.

Yes, I would say the other thing I would add here is I think of that $200 million to $300 million as a down payment on the cost structure and reengineering that we need to do on the go-forward Hewlett Packard Enterprise. As I said to the answer to one of the earlier questions, I am now laser-like focused on what is the future of Hewlett Packard Enterprise financial architecture? How do we simplify? How we reengineer the processes and how we take out overhead given that we are now a $28 billion company down from $110 billion company just five years ago. So, I have a much clearer view of how this company needs to be re-architected from a financial perspective and reengineered from a process and complexity standpoint. So, I'd say listen, the way I think about that is the down payment on what we could do in 2018 and beyond.

Great. Thank you, Wamsi. I think with that we can wrap up today's call, thank you.

Ladies and gentlemen, this concludes our call for today. Thank you and you may disconnect your lines.