Good morning, evening and afternoon, and welcome to the Fourth Quarter 2019 Hewlett Packard Enterprise Earnings Conference Call. My name is Sean, and I will be your conference moderator for today's call. At this time, all participants will be in a 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. Andrew Simanek, Head of Investor Relations. Please go ahead.

Good afternoon. I am Andy Simanek, Head of Investor Relations for Hewlett Packard Enterprise. I'd like to welcome you to our fiscal 2019 fourth quarter earnings conference call with Antonio Neri, HPE's President and Chief Executive Officer and Tarek Robbiati, HPE's Executive Vice President and Chief Financial Officer.Before handing the call over to Antonio, 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 risks, uncertainties and assumptions, please refer to HPE's filings with the SEC, including its most recent Form 10-K and Form 10-Q.HPE assumes no obligations 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 annual report on Form 10-K for the fiscal year ended October 31, 2019.Also for financial information that has been expressed on a non-GAAP basis, we have provided reconciliations to the comparable GAAP information on our website. Please refer to the tables and slide presentation accompanying today's earnings release on our website for details.Throughout this conference call, all revenue growth rates, unless noted otherwise are presented on a year-over-year basis and are adjusted to exclude the impact of currency.Finally, please note that after Antonio provides his high level remarks, Tarek will be referencing the slides in our earnings presentation throughout his prepared remarks. As mentioned, the earnings presentation can be found posted to our website and it is also embedded within the webcast player for this earnings call.With that, let me turn it over to Antonio.

Thanks, Andy. Good afternoon and thank you for joining us today. We have just closed a very successful fiscal year 2019 at HPE marked by strong and consistent performance across the company. We did what we said we would do this year and built on our track record of delivering on our promise since I became CEO almost two years ago.In fiscal year 2019, we realized the benefits of a more streamlined and focused company and we executed with discipline. We've made organic investments and targeted acquisitions to shift our portfolio to higher-value, higher-margin offerings. And we made our culture a priority, which has resulted in an 18-point increase in our employee engagement score over the last three years.This reenergized, high-performing team is committed to accelerating what is next for customers and partners. Through these efforts, we improved profitability across the business and significantly exceeded our original non-GAAP earnings and free cash flow guidance.Let's take a closer look at our full fiscal year financial results. Revenue has been stable sequentially the last three quarters with total revenue of $29 billion for fiscal year 2019, down 2% year-over-year when adjusted for Tier 1 and currency. Revenue was impacted by our deliberate action to realign our portfolio as we continue to exit the lower margin Tier 1 server business as well as certain macroeconomic factors.In key areas of strategic investment, we saw strong double-digit growth and reported record revenue for the year in high-performance compute, Hyperconverged Infrastructure, and Composable Cloud. We also continued to see very strong growth in HPE GreenLake orders.I am pleased to report our first annualized revenue run rate of $462 million consistent with the outlook we provided at our Security Analyst Meeting last month. This metric is to help investors track our progress and better value the recurring…

Thank you very much, Antonio. Now let me provide you more detail on our financial results for the quarter and the full-year 2019. As I have done before, I'll be referencing the slides from our earnings presentation to better highlight our performance in the fourth quarter and our fiscal year.Starting with Slides 1 to 3, I'd like to first talk about the key highlights for the full-year 2019. In fiscal year 2019, we continue to pivot our portfolio towards higher margin and more recurring revenue that will lay the foundation for sustainable, profitable growth in the future. We've executed on our strategy with great discipline and despite an uneven macro environment, we maintained sequentially stable revenue for the last three quarters.And we did this while significantly expanding non-GAAP gross margins, which improved by 270 basis points this year, driven primarily by structural improvements including product mix and cost of sales efficiencies. Our gross margin improvements have enabled us to make further investments in the business, while simultaneously delivering growth in non-GAAP operating profit.The combination of margin expansion and below the line benefits including share buybacks, resulted in diluted non-GAAP EPS of $1.77, which is up 20% year-over-year and well above our original outlook of $1.51 to $1.61 provided at SAM in October 2018.On the cash front, we generated significantly higher levels of free cash flow this fiscal year of $1.7 billion, which was up 58% compared to the prior year. I'll talk more about that later in the presentation.On the acquisition front, we successfully closed the Cray transaction in September, well ahead of schedule. While the financial impacts of Cray were minimal in fiscal year 2019, we expect to derive more material benefits in fiscal year 2020 and beyond.Finally, we also delivered on our capital returns program commitment over fiscal…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question today will come from Katy Huberty with Morgan Stanley. Please go ahead.

Thank you. Good afternoon. As we look into the January quarter, do you have any thoughts around the revenue trajectory? Just looking at street expectations for a revenue increase of 2% to 3% from the October quarter, but since the spin from HP, there isn't a consistent seasonality and in fact, revenues have been flat to down in past January quarters?

Hi, Katy. Good afternoon. It's Tarek here. So, as a broad reminder on fiscal year 2020, we do expect to grow revenue adjusted for currency overall. Now when you specifically get into the Q1 of fiscal year 2020, you have two effects to take into consideration.Number one, the reality that we're operating in is different than one it was in fiscal year 2018 owing to the macro environment. Number two, we will consolidate the contribution of revenue from Cray in full for the first quarter.So, on the whole, we do expect within the context of what I mentioned and with seasonality that we will grow revenue for the full-year, and on a first quarter basis will be roughly flat sequentially relative to where we stand right now.

Okay, that's helpful. And Tarek, how should we think about the contribution from lower commodity costs on gross margin of the 260 basis point gross margin expansion? How much of that would you say is from commodity costs? Thank you.

Yes. So far, as we explained at SAM and even in prior earnings releases, some of the gross margin expansion is structural in nature as a result of the products and the mix of what we sell, and the remainder is driven by commodities. So, I would say 50/50 is the rough split between what is structural and mix related on one side versus commodities on the other.We feel that the commodities environment is probably at best it could be right now and is going to continue for a little bit. The question is how long will that be continuing for. We do believe that the profitability level that we are experiencing right now are there to stay for at least couple of quarters.

And I will Katy, couple of things. One thing I am pleased is our discipline with pricing. I think the team has done a very good job, despite the changes in commodity price and to drive the right configuration for the right workloads and the right pricing, which as you can see, we have achieved what I believe a record year of profitability in the Hybrid IT business.But as we talked before, the structural changes continue to be there because obviously the systems with more IP built into it, particularly with software defined as well as the configuration for density and more data kind of driven type of configurations give us the confidence on that AUP stability as we go along.

Great. Thank you, Katy. I appreciate it. Can we go to the next question please?

Our next question will come from Toni Sacconaghi with Bernstein. Please go ahead.

Yes, thank you. I was wondering if you could just comment on the demand in macro environment. I know you use the term stable a lot in terms of revenue stability. But if we look at the metrics that you like to use most, which is, I think the most accurate which is ex-Tier 1 at constant currency, it's gone from plus 1 in Q2 to minus 3 in Q3 to minus 7 in Q4, and the comparisons are really not all that different and if anything you had a bit of Cray this quarter?And so at least on the surface, it appears as though the macro environment might be becoming more challenging and you've had a number of other enterprise players suggest that. So perhaps you can provide us with an update on the macro environment, and if you do believe it's relatively stable then why are we seeing this deceleration in revenue trajectory? And I have a follow-up, please.

Sure. Thanks, Toni for the question. As I said our macro economy view has not changed – materially changed from Q2 since we started talking about this, but I will say, Toni there has been two halves here.The first half, obviously, coming in from a strong 2018 with inflationary commodity costs. Obviously, Tarek can talk a little bit more about the tax reform and what that did, and in some pent up demand on some modernization that needs to take place because of digital transformation.And then the second half, more driven by the tariff situation with the global trade, some geopolitical instability and then the deflationary side of the commodities. We saw unit increase in Q4 of 2%. So, I think, listen, the elongated sales cycles continue to be there. We believe the demand is there. It's just a matter of timing in many ways, and obviously customers are looking at where to spend the dollars. And I would say a lot of dollars are spent to make sure they can harness the power of the data as fast as possible because that's the value of doing this.But obviously, if we stay in this environment, there will be always a little bit more questions out there. So hopefully, we're going to get the result one way or the other one. But I am still very hopeful about the future because obviously this digital transformation continues to be there and continue to accelerate, and the data continues to explode about around that 7. Tarek, do you have any additional comment on that?

Yes. Thank you, Antonio. I'd like to add some comments on the impact that tax reform has had on the industry. We've done a fair bit of work on this internally, and there is no doubt that the fiscal year 2018 was propelled by the benefits from tax reform, i.e. there was more disposable income for large corporates worldwide to be spent on infrastructure, and that has happened – that carried on pretty nicely all the way on to the first quarter of fiscal year 2019.Beyond that point, there was a drop due to macroeconomic factors, but also we do believe that there is an element where the spend that was taking place in fiscal year 2019 has to be digested by the companies moving forward. So, in simple terms, I'd say the tide has come down in fiscal year 2019 relative to fiscal year 2018, and that digestion is taking place.So year-over-year compares, which give rise to the calculations you've – you put forward, Toni. By the way, your calculations are correct. The year-over-year compares are lesser and less relevant in the context where you do have to assume that this infrastructure is to be digested.And what's important for us is to see that the revenue remaining stable should bode well for the future as continuous demand for data will get to a point where that capacity that has been essentially consumed in fiscal year 2018 will be needing to be refreshed in the upcoming quarters. So hopefully that provides you with a color on the year-over-year comparison.

And I will say, Toni, one more thing is that our revenue for the last quarter has been stable. So despite all of this, our revenue would be stable for three consecutive quarters.

Thank you for that – I know you've made some very conscious decisions about exiting Tier 1 and focusing on higher value products. But just on a reported basis, your revenue is down $1.7 billion or about 6%, and so the question is, in light of a smaller topline, do you have to sort of take out incremental costs because you have a lower revenue base and how do we think about that like as HPE all done or is there more?Do you feel you need to take out more cost and certainly at least in this quarter, you seem to have very tight control over OpEx even R&D, which have been growing all year seem to have come down this quarter, despite Cray?So maybe you can comment on in light of a top line albeit somewhat driven by your own decisions being down, whether you need to take out incremental cost and how specifically you're thinking about OpEx and whether Q4 was really a sign of what we should expect going forward?

Sure. So like Antonio said, Toni, the revenue for us was stable hovering above the $7.2 billion mark for Q2, Q3 and Q4. What's interesting in this is the underlying profitability of the revenue has materially improved as a result of some actions that we have taken shifting the mixed structural improvements in the products, et cetera.So the underlying EPS and you could see it also from an operating cash flow standpoint has been improving materially, although the revenue is stable. So EPS for Q2, we were at $0.42, for Q3, we were at $0.45 and for Q4 we were at $0.49. So we are extracting more and more value over a revenue base that is stable.In saying that, we are not going to cut costs materially to propel our EPS forward in fiscal year 2020. The reason is, we do believe that we have to continue to make the investments in R&D in the key strategic areas of our business, the Edge being one of them. The second one storage as well and you'll see more and more of that in the upcoming quarters.There is always an element of having to apply cost discipline and that is normal in the context of any company and should be expected. We feel that it's important that we stay relatively Nimble in our thinking and on inflate our cost base, too much. But the underlying fundamental trends of data are there and they're playing.That's why we are investing quite significant amounts of dollars in R&Ds in the right category and the performance of our Edge business this year, if you really look at it and what has driven it in the detail, a lot of the underlying operating profit performance is driven by those R&D and FSC investments that we have made to pivot the business to growth in the upcoming quarters.

So Toni, I will add a couple of things. First of all, if you're asking the question there will be a separate cost reduction program again? No. We are executing our HPE Next. This is the year three, and we are super, super pleased with the outcome and we expect to continue to derive productivity from what we have done in the previous two years. Understand there is one more year to go here, which will complete the program.But as Tarek said, we will always look for opportunities to improve the productivity of the business by improving the way we engage customers and partners, and obviously we still need to get a lot of the benefits of the investment we've made in IT.This year, we invested plus 10% when you look at the year as a whole, plus 10% growth in R&D and FSC and that will also drive productivity in term of growth in the key strategic areas that we're looking for.So we are very proud and pleased with the work we have done and I think we have still a disciplined mentality here to continue to be very, very rigorous about our approach, but I want to make clear that there is no one-off program here, we already have done what we needed to do and that becomes now part of the DNA of the company going forward.

Thank you.

Great. Thanks, Toni. Can we go to the next question please?

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

Thank you. Can you provide more details on the performance and storage this quarter? If you can talk pricing and demand competition, just wondering what the underlying trends you're seeing there are. And I have a follow-up. Thank you.

Sure. I mean, storage was down year-over-year, 11%. But when you look at the year, Shannon, it was down 2%, within that, we saw growth in Hyperconverged, which is up 25% for the year and we saw Nimble to a record year of 35%.And we are leveraging now the platform called HPE InfoSight, which you're familiar with, our AI ops platform, that we embedded everywhere, where it is in ProLiant, where it is in our storage business across the entire portfolio, be on Nimble. So we have now Hyperconverged, we leverage it in HPE Primera. Primera for us will be an area of growth going forward.But if you look at the last point of market share, we actually gained 100 basis points in market share last quarter. So in a market, obviously, there has been kind of stop in the growth in the second half and probably decline and we don't have the final figures here, we gained share. So that's why we are very excited about our storage portfolio and obviously is a key strategic area for us.And then with the acquisition of MapR and BlueData storage, now we have a complete portfolio for our customers in the software defined space and that's why we introduced our HP container platform last week. So for the year again, the revenue was down 2%, but in that a lot of growth in key strategic areas and a lot of profit improvements and share gain in the last quarter that was reported.

And specifically for storage Shannon, if I may add, Storage revenue in Q4 relative to Q3 was marginally up on a sequential basis. This is again another element of the prior answer which is year-over-year compares are of a different nature, given the various effects at play nowadays, but revenue from storage, sequentially Q4 on Q3 was marginally up.

And pricing, what trends are you seeing there? Given what's going on in commodities?

I think I would say, pricing on storage is stable.

Okay. Thanks. And then my final question or my second question is just on China. Can you touch on what you're seeing through the joint venture and what that market looks like and maybe some of the trends in terms of using your technology versus H3C's? Thank you.

Yes. So our set up in China continued to be a point of focus for us. We are pleased with that set up because obviously it allows us to participate in a market that obviously is unique. The indigenous part of the H3C in China continues to grow nicely and obviously we capture that through our dividends.And our portfolio, meaning the HP side of portfolio continue to be sold through that entity because they have the exclusive distributor of products in China, but that has been declining because of the shift between the indigenous products and the green products of HP Green or HP owned products.So overall, in total that business continue to grow, but as always, there is challenges there driven by the same situation we see here. But overall, we are very pleased with the set up and I think it's the right set up at this point in time we are today, considering the global trade tensions.

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

Our next question will come from Simon Leopold with Raymond James. Please go ahead.

Great. Thanks for taking the question. I want to see if we could maybe double click on what's happening trend wise in the Intelligent Edge, the HPE Aruba business in that. I think earlier this year, you had talked about some execution issues was hampering this business, and now, I guess, we've got some concern about the macro yet some opportunities from things like Wi-Fi 6. Just if you could maybe walk us through the cross currents and how to think about the trajectory of that line of business? Thank you.

Sure. First of all, I am excited about the business because it is positioned for where we see the trends in the market, right. So first of all, the digital transformation starts by providing secure connectivity to drive the experiences through the digital transformation.Second, more and more workloads are moving to the edge. And so we have been working on a couple of things. First, our portfolio of products, so we have the best portfolio we had now since the introduction at HP Discover and later in Q3 with Aruba Central, which is the most comprehensive as a service model for both mid-market and enterprise and Aruba Instant On, which is a killer solution for the SMB market, obviously Wi-Fi 6 became available in the second half of 2019.And as I said in my earlier comments, more than one-third of the Wi-Fi 6 and Enterprise was Aruba, but it is early stages, obviously we have to work on our own execution on in North America, which we feel we have put behind us and we feel that that's going to give us momentum as we enter 2020.But in the Aruba portfolio, obviously we sell Aruba and the rest of the portfolio and I will say that the Aruba parts of the portfolio is steady and growing slightly and the other ones were slightly down, but in aggregate, that's where you see the performance. So I know Tarek has few comments to add associated with that.

Yes. Thank you, Antonio. So I found the Intelligent Edge, if you look at our presentation and you referred specifically to Slide 3. You will observe that the majority of the operating profit decline is driven by the conscious decision we made to invest in R&D products to equip the Edge with a full suite of products.So more than two-thirds of the operating profit decline year-over-year is a conscious decision we've made to invest in R&D to equip Aruba with a full suite of products and very recently they've launched a number of different solutions including a single operating system to cater for the high end of the market all the way down to branches Wi-Fi 6 Aruba Central.And we feel that now the company is from a portfolio standpoint – product portfolio standpoint, extremely well positioned for the future, it's been acknowledged by number of industry outage publications, including the Ghana Group, IDC and Forrester Research and there we feel that we are extremely well equipped and positioned for the future with Aruba. Now this puts more emphasis obviously on execution in fiscal year 2020 and we look forward to seeing the fruits of those investments.

Thank you.

Great. Thanks, Simon. Can we get our next question, please?

Our next question will come from Rod Hall with Goldman Sachs. Please go ahead.

Yes. Hi guys, thanks for the question. I wanted to start by asking if you've seen any change in the size of customers exhibiting these delays and lower spending patterns, in other words, have you seen it moved from Fortune 100 type customers down to mid markets in any of your business line or in all of them. And then I have a follow-up to that.

No, no really, I mean what we said is that the elongation sales cycles are really in the mostly in the enterprise space in the larger deals, not in the smaller deals or smaller customer segments.

Okay, great. Thanks, Antonio. And then the follow-up, I wanted to see maybe Tarek, if you can answer this. With the potential transaction at HPQ changed their commitment to you in terms of financial services in any way or whatever commitment they have with you persist through any sort of potential transaction?

The simple answer to your question is no. There is a contract in place between the parties. We've been working for more than decades with HPI on financing their own equipment. This is incredibly well established and set across the channels. It's incredibly difficult to therefore dislodge HPFS from those channels. We feel very good about this. I don't think a transaction will cause us any palpitations in that regard.

Okay, great.

Because of the market we cover, and the vast majority of those customers or channel partners, we have direct relationships anyway.

Okay, excellent. Thank you.

Great. Thanks, Rod. Next question please?

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

Thanks. I have two questions and I'll ask them at the same time. So you can decide which to ask first – answer first or second. So the first one is your sales growth, you mentioned growth for next year, is that with or without Cray? I know you said on a currency as adjusted basis, but I want to be clear is that with or without Cray? And then my second question is your fiscal 2020 EPS outlook is the same from your Investor Day. Does that include more stock buyback and if so how much should we plan on? Thank you.

The first question is with Cray which is what we said at the Security Analyst Meeting, and Tarek will answer the question on EPS.

So yes remember – at our Securities Analyst meeting, we said that we would be from a capital management policy return between 50% to 75% of our cash flow to shareholders. And therefore that this would be tracking cash flow, which in turn will be tracking earnings and there is no change to this.We've assumed a certain level of share buybacks, which is – what is currently implied by the market and the dividend we up the dividend from $0.1125 to $0.12, so you can very easily do the math to understand the level of share buyback that is implied by the figures, I've just quoted to you.

Thank you so much for the details. That's greatly appreciated.

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

Our final question today will come from Aaron Rakers with Wells Fargo. Please go ahead.

Yes. Thanks for taking the question. I have one question and a follow-up as well. As we think about the impacts of component pricing dynamics and it sounds like the positive trends might continue here for a little bit with regard to the business in the gross margin.I'm just curious, is there any kind of framework you can help us understand of how much mix has played a part within the server category, particularly any comments on how much content growth you've seen from say DRAM or memory, in general, just trying to think about the structural kind of sustainability of those trends going forward?

Okay. So you may recall from my speech that I made a comment with respect to units, and we explained that when you look at the units of what we sell excluding Tier 1s and China, our server units have been growing sequentially since the second quarter of fiscal year 2019, and they were up 2% year-over-year in Q4 with higher services intensity.So this is really the key driver of our earnings performance in Q3 and Q4, and we see those trends continue, although now most of what we sell is Gen10 on the server side. We do believe that the configurations that customers require to cater for the exponential growth of data are closing ultimately to see units going up and eventually AUP after phase of deceleration will start to go up again. So that's what we are seeing in the medium to long-term.

Obviously, we have taken actions ourselves to take advantage of the supply, pricing, and as you know, we do a lot of long-term supply arrangements as they become available. But in the end, the structure of the systems, particularly as the Generation 11 comes online, that will drive again another structural change in our AUPs because of the configurations.

That's helpful. And then as a second follow-up question. On the storage business as we think about the product portfolio, I know you mentioned strong growth in Nimble, but I'm just curious of where we're at with the Primera product? When do we expect that to really start to materialize from a revenue standpoint?And just remind us how much of your business in storage is related to more of those higher end platforms? I think that that's founded on the legacy 3PAR platform. I'm just trying to think about the refresh opportunity as you look through this next several quarters what that might present?

Yes. I mean, we have received very strong accolades and interest on HP Primera, and remember HP Primera, we don't sell it just as a part of our independent storage appliance, but we sell it as a part of a Composable Cloud. And with integration, with both HP Synergy and HP Composable rack as a block of IT that has all the software defined intelligent and automation including HP InfoSight.And obviously our strength has been mostly in the mid-range market and, but the high-end is very – is a market that's very interesting for us and we are rolling that as we speak, and I believe throughout 2020, will be a driving force for growth for us.Generally, the market is actually moving in a direction that's more software-defined. And that's why HP InfoSight is a key component of HP Primera for us, because it's mostly softer on appliance-based driven solution, but it is actually the software that makes that unique.

Thank you very much.

Great. Thank you, Aaron.

So I think we're unfortunately out of time for questions. But, Antonio, let me turn it over to you for any final comments.

Well, as always thank you for joining us today. I just wanted to wrap up by saying I believe we had another very strong year. This is the second year as a CEO and we did what we said we would do. I think we have achieved record level of profitability, non-GAAP EPS and free cash flow. I will emphasize the free cash flow because we actually improved cash flow by 58%.We are on track to deliver that normalized cash flow. We have spoken many, many times and we are very, very confident that $1.9 billion to $2.1 billion. What I'm really pleased is about the execution in the business with disciplined by pivoting the business and excited about the future without forgetting the fact that the culture of the company as it plays a huge role and I couldn't be more pleased and proud of the work we have done here. So thanks again for joining us today and hopefully see you soon.

Ladies and gentlemen, this concludes our call today. Thank you.