The Six Five Team discusses HPE Q3 2023 earnings.

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Transcript:

Patrick Moorhead: HPE, the Data Center to Edge company, the as a service company. Now listen, I had a great conversation with Antonio Neri yesterday, and to be honest, I really wasn’t expecting much given what we saw from Lenovo ISG, that they were off 8%, NetApp was off 10%. We didn’t have Dell yet. We did have Cisco, which crushed it, right? 30% on networking. But HPE is not the same type of networking company. But wait for it. The Edge was up 53%. That is absolutely boggling and just numb when I look at that number.

This Aruba acquisition has got to go down as one of the best acquisitions that I’ve seen in all of tech. And ironically, when HP and HP Inc were the same company, there was just a string of horrible acquisitions, so nobody really knew. But to Antonio’s credit, it has gone swimmingly well. So HP is also a service company, ARR was up 48%. They increased their EPS and free cash flow forecast.

So for the future, I’ll be looking for that HPC and AI number to get really big soon, once the remaining national labs come online. I think there’s three to go and they’re bigger than the first one that they went online. And of course, what also goes into that AI number is the training as a service on some of HPE’s crazy fast hardware out there.

The final thing on the Edge, SD-WAN and 5G hasn’t even kicked in yet on the Edge. And that can roll a completely new cycle out there. And it’s weird, as I was going through the numbers, Dan, and I was looking at ARR or that big ARR crawl chart. Is this company starting to look more like Cisco that has a lot of subscriptions and a lot of software, but is grounded in an infrastructure business? I don’t know. We’ll have to look at it. And by the way, the multiples between HP and Cisco are radically different.

Daniel Newman: Who do you think is higher everybody?

Patrick Moorhead: Well, I hope they know. No, it’s Cisco by leaps and bounds.

Daniel Newman: I was just seeing if our audience is smart.

Patrick Moorhead: Of course they are. We don’t have any dumb listeners.

Daniel Newman: I’ve always been under the impression that we have the smartest listeners on the planet, all 5,941 of them right now. So again, this is a really weird thing and I hate to keep using the AI train, but the AI train would indicate that any company that could sell GPUs should be just crushing it right now. But we all know that that’s not how the market actually works. First of all, those that actually had an understanding of the impending demand were first in line to get their orders in.

Second of all, the hyperscalers are getting the vast majority of the available GPUs. So when you look at a number like this and you see server sales down or compute sales down, you’re kind of blown away. Now the good news is the pricing power is immense and it’s helping these companies show better margins and being able to have better results on less revenue, which, who doesn’t like that?

The revenue growth was conservative, but it was there. And by the way, pretty consistent with what it’s been for some time we did see strong free cash flow creation. Pat, to answer your question, I mean, look, I wrote the original white paper that said everything is a service in GreenLake and why the company was well positioned. I did that five or six years ago. I know, I saw this. And the thing about it is that you can argue where workloads will be placed, but what you can’t argue is the way they want to be consumed. Meaning people want to consume, whether it’s on-prem or in the cloud in a much more public cloud-like fashion, okay? People want to consume software licensing like SaaS. People just want that model of constant care, service, SSLA update, support. And so GreenLake is always-

Patrick Moorhead: CapEx to OpEx too.

Daniel Newman: And wherever it can. And in many cases, depending on the company situations, CapEx to OpEx is also seen as a good thing. The growth of ARR, the growth of total contract value, the AI story is in there. The overall business performance was very good. And Pat, I think you mentioned it, and this is just something to point out, but there will be a next frontier of opportunity for not just AI but business at the edge. And HP has really crushed it in this particular area.

It’s kind of been a quiet crushing because while its overall business has kind of been in that mid single-digit up or down across the different categories, the intelligent Edge business, which the Aruba part, and of course the rest of its intelligent Edge business is growing mid to high double digits and it’s doing that pretty consistently, Pat.

And so when all this data at the edge and the inferencing that gets to be required to be done at the Edge continues to proliferate, that puts HP in a really good position longer term to monetize this whole, A, this as a service thing, and B, this whole AI wave, which is going to be a potential opportunity. The other thing by the way is I don’t know about the forecasting to be able to meet demand, Pat, but if you look at what Nvidia is forecasting and the ability over three or four quarters to deliver, I would imagine the backlog and the amount of that backlog that’s tied to AI servers and is tied to higher margin could really prop up the quarterly results over the next few quarters for the company if they’re able to, A, deliver on all that demand, B, continue with this strong pricing power and there’s nothing to indicate yet that won’t be the case going forward. So solid results, good times.