HPE Earnings Call

OperatorGood day, and welcome to the Fiscal 2026 Second Quarter Hewlett Packard Enterprise Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by 0. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then 1 on a touchtone phone. To withdraw your question, please press star and then 2. Please note this event is being recorded. I would now like to turn the conference over to Paul Glaser, Head of Investor Relations. Please go ahead, sir.

Paul GlaserGood afternoon. I'm Paul Glaser, Head of Investor Relations for Hewlett Packard Enterprise. I would like to welcome you to our fiscal 2026 second quarter earnings conference call with Antonio Neri, HPE's President and Chief Executive Officer, and Marie Myers, HPE's Chief Financial Officer. Before handing the call to Antonio, let me remind you that this call is being webcast. A replay of the webcast will be available shortly after the call concludes. We have posted the press release and the slide presentation accompanying the release on our HPE Investor Relations webpage. Elements of the financial information referenced on this call are forward-looking and are based on our best view of our business and the external factors affecting us as we see them today. 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 30th, 2026.

Paul GlaserFigures used in verbal remarks are rounded for ease of discussion. For more detailed information, please see the earnings materials, as well as disclaimers relating to forward-looking statements that involve risks, uncertainties, and assumptions. Please refer to HPE's filings with the SEC for more detailed discussion of these risks. For financial information that we are showing 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. Unless otherwise noted, all financial metrics and growth rates discussed today are non-GAAP, and EPS refers to non-GAAP diluted net earnings per share. Certain financial information featured in the presentation today has been normalized to include Juniper Networks results as of the beginning of HPE's fiscal 2025.

Paul GlaserAntonio and Marie will reference our earnings presentation in their prepared comments. With that, let me turn it over to Antonio.

Antonio NeriThank you, Paul. Good afternoon, everyone. HPE delivered an exceptional quarter with record-breaking results, disciplined execution, and clear proof that our strategy is working. We made excellent progress in our Juniper integration and in our Catalyst initiative, with both running ahead of schedule. Revenue in the quarter reached $10.7 billion, up 40%. Non-GAAP earnings per share of $0.79 increased 108%, significantly above the high end of our outlook. We generated $915 million in free cash flow, an improvement of $1.8 billion, driven by strong cash from operations and improved cash conversion cycle performance. Demand was even stronger than revenue growth. Orders more than doubled, significantly outpacing revenue, resulting in a record company backlog. Customer investments in Agentic AI and AI inferencing accelerated. We also saw broad-based demand strength across the portfolio, driven by ongoing investment in compute infrastructure modernization, unstructured storage data growth, and private cloud adoption for AI.

Antonio NeriLast year at the Securities Analyst Meeting in New York, we laid out our strategy and fiscal 2028 financial commitments. Based on our strong first half 2026 results, our record backlog, and our visibility into the second half demand, We now expect to deliver $3.40 in non-GAAP earnings per share at the midpoint and at least $3.5 billion in free cash flow in fiscal 2026. That is 2 years ahead of our committed long-term plan. Marie will provide more detail on our third quarter and full year fiscal 2026 outlook, as well as our fiscal 2027 framework which is grounded on durable customer demand and the profitability of both business segments. Now let me turn to our business segment highlights, starting with networking. I am particularly pleased with the progress we are making on the Juniper integration. We are ahead of our integration milestones and synergies commitments, and the unified portfolio and sales force are already strengthening our market position and growth momentum.

Antonio NeriOur combined networking portfolio and vision for self-driving networks is resonating with customers, and that enthusiasm, together with strong go-to-market execution, is reflected in our results. Networking delivered revenue of $2.7 billion, up double digits on a normalized basis, with orders growing significantly faster than revenue. We saw increased demand in campus and branch, networks for AI, and security. I am pleased with the strong demand we saw from enterprise customers for our networking portfolio. Campus and branch orders reached a new record high, growing in the upper 20% range on a normalized basis. We won multimillion-dollar deals across multiple verticals, including retail, automotive, government, and technology. Wi-Fi 7 access point sales increased more than 7 times, reflecting a clear shift toward network modernization. HPE, for the 20th time in a row, was named a leader in the Gartner Magic Quadrant for enterprise wired and wireless LAN infrastructure.

Antonio NeriWe believe this independent industry analyst validation reinforces how far ahead we are in enterprise networking beyond even incumbents. Customers trust us with their most critical networking infrastructure decisions as they expand their digital initiatives and AI investments. One customer taking advantage of the power of our combined campus and branch networking portfolio is Lowe's, with over 1,750 stores across North America, Lowe's chose HPE to deliver the network foundation for a major technology transformation to support its digital on-ramp and AI-enabled operations. The solution is built on our HPE Mist AI platform for wired and wireless networking infrastructure alongside our HPE EdgeConnect SD-WAN solution. Last month, we reached a milestone with the launch of new autonomous agents powered by Agentic AI for optimizing networking performance. The self-driving network is no longer a concept, it is a reality.

Antonio NeriThe UK Ministry of Justice is an early adopter example. It was able to reduce the number of incidents seen by its network operations center by approximately 75% after deploying a suite of solutions that included our new HPE Self-Driving Network capabilities. In enterprise data center switching, orders increased nearly 20% on a normalized basis. Our data center switching pipeline remains strong. Cross-portfolio product integration and sales across server storage and networking are driving deeper customer engagement and larger deals. Security orders grew in the mid-teens on a normalized basis. We continue to make the network a first line of defense that responds to threats in real time. This quarter, we launched the HPE Juniper SRX 400 series, bringing carrier-grade firewall protection to the branch for large distributed environments. We see significant runway as more customers consolidate networking and security with a single vendor, forcing convergence all the way to the silicon layer of the stack, where HPE will have further differentiation.

Antonio NeriIn our service provider customer segment, revenue increased double digits on a normalized basis, with routing orders growing significantly faster than revenue. Routing orders increased nearly 30% on a normalized basis, driven by data center interconnect deployments in large cloud service providers. Customers are choosing HPE because we help them scale in every dimension. Scale up by increasing the performance and density of individual platforms for the most demanding AI workloads. Scale out by expanding the networking fabric to connect thousands of GPUs and accelerators within a single data center. And scale across by extending high-bandwidth interconnectivity between data centers, across campuses, and into the wide area network, so AI services can run wherever they are needed. HPE is developing a scale-up Ethernet switch and software designed specifically for the AMD Helios AI rack-scale architecture, which we expect will be introduced in the fall.

Antonio NeriIn scale-out, we lead with our AI-driven QFX switching fabric. HPE is the first OEM to productize a Tomahawk 6-based 100% liquid-cooled switch with industry-leading performance and power efficient for AI infrastructure. In addition, our leading fabric management and AI ops capabilities reduce congestion, latency, as well as operational complexity. We expect our roadmap to extend this leadership through co-packaged optics, resulting in lower overall power consumption. In scale across, the Juniper PTX series delivers 800 Gb/s density with exceptional power efficiency. Leveraging our distinct Express Silicon and simplified AI-native automation. Because of our leading innovation and market momentum in Networks for AI, we are raising our cumulative fiscal 2026 Networks for AI order target to at least $2 billion. We are laser-focused on building the best networking business in the industry. Our priorities are clear: extend AI-driven automation across the portfolio, help customers scale modern AI infrastructure with secure, high-performance networking, and lead in the convergence of networking and security.

Antonio NeriWe have the team, the capabilities, and the momentum to convert the opportunity in this segment into durable shareholder value. In our Cloud and AI business segment, we executed with strong discipline across all business lines.

Antonio NeriRevenue was $7.7 billion, up 23%, driven by exceptional traditional server orders and very strong demand in AI systems, Alletra MP Storage private cloud, and GreenLake software and services. Traditional server orders increased triple digits as customers continue to modernize their compute infrastructure and invest in AI inferencing. We are working very closely with our silicon and memory partners to continue to secure supply, which we factor into our new fiscal 2026 guide. We're also engaging customers and channel partners on lead times and configuration options to help them plan effectively. We saw strong demand in AI training throughout the quarter. We booked $1.8 billion in new AI systems orders, bringing cumulative AI systems bookings to $16.4 billion. We enter Q3 with $5.9 billion in backlog, primarily composed of enterprise and sovereign orders. We are seeing a broad pattern across industries.

Antonio NeriEnterprises want the flexibility of choosing multiple AI models with the governance and control of on-premises. We will continue to manage AI systems opportunities with a focus on profitable growth and prudent working capital management.

Antonio NeriStorage had an outstanding quarter. Alletra MP Storage orders increased triple digits, the 6th consecutive quarter of strong growth. Several weeks ago, we expanded the platform with new file storage and Agentic AIOps capabilities. This extends Alletra MP into the growing unstructured data market. Our HPE Morpheus Enterprise and HPE VM Essentials software offerings continue to build momentum. Revenue grew sequentially for the fourth consecutive quarter. VM Essentials customer count increased 43% in the first half, with a notable rise in net new logos. Private cloud AI orders increased again this quarter with a growing base of new customer wins. We recently launched our second-generation PC AI offering designed for enterprise AI inferencing and cloud-gapped sovereign environments, which position us for continued growth. More broadly, we are embedding Agentic AI capabilities across our storage and data protection portfolio to help customers automate AI data pipelines and operations.

Antonio NeriWe continue to add new cloud and AI agentic services to our GreenLake cloud platform, acquiring new customers and increasing the net retention rates for our GreenLake Services business, which remains near 110%. We exited Q2 with approximately 50,000 customers operating their IT in our GreenLake cloud, managing more than 6.7 million systems, up from 5.3 million a year ago. One win that brings the power of the full HPE portfolio together is the Dallas Cowboys, the most valuable sports franchise in the world. They came to HPE with a clear objective: modernize their infrastructure, simplify operations, and build the right secure foundation for AI. We delivered a comprehensive solution anchored on our HPE GreenLake private cloud offering, spanning ProLiant servers, Alletra MP storage, and HPE Morpheus Enterprise. The Cowboys are also adopting HPE VM Essentials as their preferred virtualization layer.

Antonio NeriThis is a strong example of the value customers can unlock when they choose HPE as an end-to-end technology partner. Lastly, HPE Financial Services delivered another outstanding quarter with record return on equity. Financial Services deepens customer relationships, supports our GreenLake cloud adoption, and remains a meaningful competitive advantage as customers ramp their investments in AI.

Antonio NeriBefore I close, I want to highlight two important upcoming events. In 2 weeks, we are hosting HPE Discover in Las Vegas. We will share updates on our networking cloud strategies, including major product announcements, along with a live Q&A for investors and analysts. I hope to see you there. Then later this fall, we will host a dedicated networking investor day.

Antonio NeriIn closing, HPE delivered an exceptional quarter. Our results demonstrate that our strategy continues to pay off. We now expect to significantly exceed our original fiscal 2028 non-GAAP earnings per share target and generate at least $3.5 billion in free cash flow in fiscal 2026, 2 years ahead of plan. The market trends driving our performance remain strong and well aligned to our strategy. We expect demand strength to continue into fiscal 2027 and beyond, which will accelerate durable shareholder value as we continue to scale profitably. We are executing with strong discipline, creating meaningful value from the Juniper acquisition and strengthening our position at the intersection of networking, cloud, and AI. With the combined strength of HPE and Juniper, we have the portfolio, the talent, and the go-to-market scale to lead in the market. I want to thank our team members for their focus and strong execution.

Antonio NeriWith that, let me turn it to Marie to take you through the financial results and our 2026 and 2027 outlook. Marie.

Marie MyersThank you, Antonio, and good afternoon, everyone. I'm pleased with our outstanding second quarter results. We exceeded our commitments delivering record revenue and EPS, driven by disciplined execution and a strong demand environment. A large backlog, favorable industry tailwinds, and improved demand visibility support a higher growth outlook. In addition, we are achieving Catalyst cost savings and Juniper synergies ahead of schedule. As a result, we are increasing our fiscal '26 EPS outlook by over 40%. I will address the drivers behind the strong EPS and free cash flow outlook shortly, but first, let's take a look at our Q2 performance. Revenue of $10.7 billion was above the high end of our guidance range, led by traditional server as customers accelerated investments in GenAI and AI inferencing, and by networking where we saw broad-based growth across the portfolio. Sequentially, revenue grew 15%, reflecting higher average selling prices within our server business, driven by ongoing DRAM and NAND inflationary costs and supply constraints.

Marie MyersWe continue to work with our partners to secure long-term agreements while executing the pricing actions we discussed last quarter. Gross margin improved to 36.9%, driven by mix as we shape demand to higher margin products. Catalyst savings and Juniper-related synergies also contributed to improvement on a year-over-year basis. Operating profit was $1.4 billion above our expectations, representing a 13.3% operating margin. As the company scales and we continue to capture accelerated Catalyst cost savings and Juniper synergies, we expect operating profit growth to continue to outpace our top line. EPS was 79 cents, well above the high end of our guidance. GAAP EPS was 44 cents. We delivered Q2 free cash flow of $915 million, fueled by strong operating profit. Now let's turn to our segment results. Networking delivered another solid quarter. Revenue of $2.7 billion was up 10% on a normalized basis as growth accelerated.

Marie MyersOur backlog continues to grow given elevated demand and supply constraints, and this is reflected in the greater than 40% sequential growth we saw in our purchase commitments. We continue to see strong demand for our Networks for AI portfolio and now expect cumulative orders to reach at least $2 billion by fiscal year-end '26. Within our product categories, campus and branch normalized revenue growth accelerated to 10%, anchored by large deals across multiple industries. Security growth inflected positively to 18%, benefiting from improved backlog conversion and solid in-quarter demand. Data Center Networking and Routing grew 6% and 9% respectively, reflecting robust Networks for AI demand. We are optimistic about the demand momentum we are seeing based on our growing pipeline. Across customer verticals, Service Provider revenue grew 13% and Enterprise grew 9% on a normalized basis. Our AI-native Self-Driving Network solution is clearly resonating as customers prioritise AI use cases and simplify their network operations.

Marie MyersNetwork operating margin of 21.6% was in line with guidance, reflecting improved operating leverage as Juniper synergies continue to ramp. The sequential decline in margin reflected two factors. First, Q1 benefited from certain one-time items, And second, Q2 absorbed higher variable compensation expense. We remain focused on disciplined execution, operational efficiencies, and synergy realization to improve profitability and expand margins in the second half and beyond. Moving to Cloud and AI. We delivered revenue of $7.7 billion, up 23%, as strong order activity and pass-through of higher costs of new orders in traditional server and storage drove the upside, partially offset by supply constraints and timing of AI server shipments. Financial Services continues to perform well. Scale benefits drove operating profit of nearly $1 billion, up 48% sequentially and triple digits year-over-year, pushing operating margin to 12.4%, up 220 basis points sequentially.

Marie MyersServer revenue increased 33% as ASP growth in traditional server more than offset supply-constrained unit volume. Demand remained broad-based as orders more than doubled year over year and increased strong double digits sequentially. We see accelerating demand in high-memory configured servers targeted at agentic AI workloads, supporting our expectation of sustainable growth. AI systems orders of $1.8 billion were more balanced and broad-based this quarter. Demand is expanding beyond AI server factories into broader AI workloads like orchestration, data movement, and agentic AI. Service provider orders exceeded the combined total of its prior 4 quarters, underscoring the inherently lumpy nature of our large-scale AI deals. Our backlog increased nearly 20% sequentially to a new high, and our pipeline remains multiples of our backlog. We continue to expect AI revenue to improve in the back half of the year, now peaking in Q4.

Marie MyersStorage revenue grew 2%, driven by strong orders, the ongoing mix shift towards higher-value owned IP, and disciplined pricing execution. Alletra MP customer migration momentum accelerated sequentially, driving triple-digit year-over-year growth in both orders and revenue. Continued demand strength in private cloud and our expanding backlog are driving improved revenue visibility. Lastly, Financial Services revenue was up 6% and generated an all-time high in return on equity exceeding 30%.

Marie MyersTurning to our catalyst initiatives and Juniper synergies. I'm pleased that we are running ahead of plan as we work on a range of programs to reduce cost of sales and OpEx across our business. As a result of these programs, at quarter end, we reported an employee base of just over 65,000, the lowest level at which we have operated as a combined company and reflecting an over 9% decline since both programs began. Within Juniper synergies, we continue to focus on the 4 pillars we laid out at SAM. Phase 1 of the integration, which we completed in January, focused on reducing overlapping corporate functions and optimizing sales and service organizations. As our Mist and Aruba portfolios converge, we expect to optimize our R&D spend. In addition, we plan to continue to leverage overall HPE scale to improve commodity prices and consolidate our vendor footprint to drive savings through supply chain integration.

Marie MyersFinally, regarding customer support, we intend to leverage scale and digital capabilities inherited from Juniper to further improve efficiency and the customer experience. We expect to exceed our annual target of $200 million by the end of fiscal year '26. I'm pleased with our progress on Catalyst, and we are ahead of plan. Workforce transformation continues to drive the majority of our savings, and GenAI-enabled process simplification now represents nearly 20% of our fiscal '26 initiative savings. We are leaning into GenAI to increase productivity and reduce costs across the organization, including customer support, HR, and marketing. Our teams are driving greater automation, redefining work management, and reducing costs. We are also rationalizing our global lab footprint by more than two-thirds and reducing our contractor base and supply chain customer service by over 90% through targeted consolidation.

Marie MyersTaken together, we are building a leaner, more efficient organization and delivering meaningful benefit to our operating margin. Turning to free cash flow. We delivered operating cash flow of $1.4 billion. Free cash flow totaled $915 million in Q2, bringing our first half fiscal '26 total to $1.6 billion, about 75% above our prior comparable period high reported in fiscal '21. Our cash conversion cycle improved by 2 days from Q1, driven primarily by an increase in days payable due to higher purchases to support future shipments. This was offset by an increase in days of inventory due to higher inventory in anticipation of second half AI service shipments. Days receivable increased by 5 days from the prior quarter due to strong revenue performance towards the end of the quarter. Inventory ended the quarter at $9 billion, up year-over-year and sequentially, supporting second half AI installations and targeted commodity purchases.

Marie MyersWe remain committed to our capital allocation strategy. During Q2, we returned $343 million to shareholders, including $189 million in common dividends and $154 million via share repurchases. We refinanced $2 billion of debt, received gross proceeds of approximately $1.4 billion after closing our previously announced H3C transactions last month, and used cash on hand to retire our term loan. We expect the net impact will reduce annual net interest expense by approximately $75 million. Importantly, we improved our pro forma net leverage ratio to 2.3x at quarter end, down from 2.6x last quarter. Turning to guidance. We are taking up our outlook on the back of Q2 results and greater visibility into the second half demand environment. Starting with Q3, we expect total revenue will be between $11.5 and $12.1 billion, driven by strong demand. For networking, we expect revenue to grow 73% to 78% year-over-year and on a reported basis, or approaching 10% on a normalised basis.

Marie MyersWe expect revenue performance and synergy realisation to help offset the impact of inflationary component costs, driving an operating margin rate in line with our full-year guidance. In Cloud and AI, we expect revenue to grow in the high teens, reflecting demand durability, elevated pricing, and improved AI systems revenue. We expect operating margins to be in the low to mid-teens. On a consolidated basis, we expect Q3 total operating expense to increase sequentially, supporting seasonal marketing expense and networking R&D investments. We expect our operating margin rate to be up on a sequential basis, driven by improved operating leverage. Consequently, we expect EPS between 88 and 93 cents and GAAP EPS between 84 and 89 cents. For fiscal year '26, we are raising our EPS outlook range to $3.35 to $3.45. We are also raising our GAAP EPS range to $2.42 to $2.52. We are making the following updates to our outlook.

Marie MyersWe are raising our full-year consolidated revenue growth to 29-33% on a reported basis, or high teens on a normalized basis. We are also raising our full-year consolidated operating profit growth outlook to 80-85% on a reported basis. For Cloud and AI, we expect server demand and pricing to remain durable, driving sustainable revenue growth. Consequently, we are raising our full-year cloud and AI revenue growth to the low 20% range from our prior mid- to high single-digit range, driven by higher ASPs in our traditional server business and improved AI systems revenue. We are also raising our operating margin rate outlook to low to mid-teens. We are raising our full-year networking revenue growth to 72% to 75% on a reported basis, or approaching 10% on a normalized basis, reflecting accelerated business performance as our integration efforts take hold. We are lowering our OIE outlook to a range of $420 to $460 million, reflecting lower net interest expense expectations.

Marie MyersLastly, we are increasing our free cash flow outlook to at least $3.5 billion, up from our prior outlook of at least $2 billion. We are confident in our new fiscal '26 outlook as we see continued order momentum in the business thus far in Q3. Based on the durability of demand we are seeing in our results, we are providing an initial framework for fiscal '27. We see sustained secular tailwinds driving consolidated revenue growth of 8% to 12%, with a similar range for both of our networking and cloud and AI segments. Our outlook assumes an acceleration in AI systems revenue growth. We see improved operating margins of 12% to 16% for the company and expect to see a year-over-year reduction in operating expense. We forecast networking margin in the mid to high 20% range, driven by scale mix and synergies, with cloud and AI operating margin in the range of 10 to 15%, depending on the mix of AI business and the pace of catalyst savings.

Marie MyersWe expect revenue growth and operating leverage to deliver EPS growth of 12 to 16% and free cash flow of at least $4.5 billion. Our outlook is expected to enable faster debt paydown. As a result, we now expect to reach our 2x net leverage goal by the end of fiscal year '26, 1 year ahead of schedule. Once we reach our leverage target, we expect to return at least 75% of free cash flow to our shareholders via dividends and share repurchases. To close, Q2 was an outstanding quarter for HPE. We scaled the business, expanded margins, and generated significant free cash flow. We raised our outlook and are building a stronger, more profitable HPE. I am confident in our ability to create long-term value for our shareholders. With that, I'll turn the call back to the operator to begin the Q&A.

OperatorThank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star and then 2. In the interest of time, please limit yourself to one question. We will now pause momentarily to assemble the roster.

OperatorThe first question will come from Asya Merchant with Citi. Please go ahead.

Asya MerchantGreat. Thank you for taking my question and outstanding results and guidance. Marie and Antonio, I guess, you know, folks are kind of talking about enterprise budgets just given the price inflation that you guys are seeing through and being passed through. You know, where do you see enterprise budgets still sustaining themselves? And obviously your guide here now into fiscal year '27. Thank you very much for that as well. You know, many people are concerned that there is some kind of like demand cliff that you could see even past the more near-term outlooks and growth forecasts that you're seeing. What gives you this confidence to now provide fiscal year '27 guide? If you could help, you know, help us understand, I think it's between networking as well as cloud and AI. What gives you the confidence that you're seeing in being able to provide an early outlook into '27? That would be great. Thank you.

Antonio NeriWell, thank you, Asya, for the question. I think it's multiple factors. Factor number one, and probably the most important one, is the durability of the demand based on what my conversations are with customers and the large, large pipeline, which remains multiples of the current backlog. And when you look at that demand and the pipeline, it's driven by the new use cases we see with deployment of AI or the buildouts of new data centers for AI, obviously. And then the modernization taking place in enterprise. And so it's a combination of multiple things that ultimately give us the confidence to not only provide the new guide for '26, but an early view of '27. So, you know, when you think about our results in the first half and the backlog we have, and the supply that we have on hand and what is coming, that solidifies the '26. And then in '27, the momentum we have in networking is outstanding across all customer segments and as well product segments.

Antonio NeriWe talked about some of the demand that we see today in campus and branch, upper 20%, and cloud networking, which is in the 30%, and so forth. And customers, you know, when you think about budgets, obviously they are challenged because of the price increases we have seen driven by the cost of commodity. But I can tell you we have not seen any pull-in. Uh, we don't see a cliff. And in many ways, I think customers are prioritizing getting access to technology now faster than ever before because nobody wants to be left behind when it comes down to deploying AI. I give an example in our own company. We have 1,200 use cases in AI. Marie, which is next to me here, is one of the, you know, the early adopters, and I will say aggressive adopter. But we have more than 250 use cases, mostly Agentic AI, which has been already deployed. And now we see this across the entire spectrum. I was last week in Chicago, I met with a number of customers and partners, and they see this.

Antonio NeriAnd when you go through that motion, then AI inference is growing. And so we expect that AI inference is going to be an accelerator of our demand as we go forward. And therefore points to be durable in our demand, in our ability to convert that.

Antonio NeriThank you, Asya.

Paul GlaserNext question, please.

OperatorThe next question will come from Wamsi Mohan with Bank of America. Please go ahead.

Wamsi MohanYes, thank you. Really impressive set of results here and guide. Antonio, can you give us maybe some rough mix of the opportunity that you see? You mentioned scale up, scale out, scale across, especially as you look into fiscal '27. How do you see that evolve? And if I could, Marie, the growth in free cash flow as well in excess of EPS for '27, hoping you might be able to share some color on the drivers of that. Thank you so much.

Antonio NeriWell, thank you, Wamsi. I think it's fairly balanced across the 4 product segments, Wamsi. I mean, Let's start with campus and branch, which has been and is the lion's share of our networking mix. I think the self-driving network vision and now the execution of it is absolutely resonating with customers. We announced our roadmap last December at the HPE Discover in Barcelona. You will see new announcements here in 2 weeks. Our ability to support Aruba switches with Mist and cross-pollinating the two platforms. But ultimately, that AI-driven experience is resonating, and I mentioned one of the customers as an example taking advantage of that. When I think about data center networking, we grew 20% in enterprise. That obviously is driving synergies with the rest of the portfolio because now we have a full conversation with customers across server, storage, and networking. Now we are introducing, uh, in the fall, the new switch with the Helios stack reference architecture.

Antonio NeriThat's the first time to market Tomahawk 6, 1.6 terabits. That will be a tailwind as 2027 start adopting that footprint in large service providers. And then obviously scale across the PTX platform is, I will say, the reference when it comes down for data center interconnect, and the PTX 10,000 and 12,000 is resonating to drive data center interconnect. So it's fairly balanced, I will say, and we are early, early in the process. You know, obviously you have to win the reference architecture and the kind of the discussion with the customers at that level, but then it's going to be synergies across the rest of the portfolio with compute. So I feel very good about the momentum And kudos to the team who has executed flawlessly. And when you think about an integration of this scale done so fast, because if you put in perspective, we integrated R&D teams, we announced the roadmap, we didn't miss a bit on networking innovation.

Antonio NeriWe integrated the sales force in January and we're ahead of the integration milestones of Synergy. So I think this is a reference for how to do large acquisitions. You know, in the market. So, Marie, you want to—.

Marie MyersYeah, absolutely. So, Wamsi, I'll answer your question on the strong free cash flow guide for '27. And it's pretty simple. It's really just based around the expectations that we have of the operating profit growth. And obviously, that supports higher profitability. And that's translating, frankly, into cash flow. And just one other thing just to bear in mind. Our '26 baseline actually has the charges associated with the Juniper synergies, which obviously you're not going to see that level of magnitude repeated in '27. So that's also one of the benefits that's playing as well into the free cash flow guide. Just to close, as I said in my prepared remarks, that'll get us to 2x leverage by the end of '26. And I think I mentioned that we will pull in our share repo now into early '27 as well. So I just wanted to sort of close with that comment.

Paul GlaserVery good. Let's please limit questions to one per analyst. Next question, please.

OperatorThe next question will come from Amit Daryanani with Evercore. Please go ahead.

Amit DaryananiI can't ask a multi-part question after Paul just called me— called us out on that, I guess, now. So maybe I'll stick to one. And Antonio, this may sound like a bit of a silly question, but given these numbers are so strong, especially when I look at the fiscal '27 guide, can you just talk about, you know, what's the bigger gating factor to growth as you go forward? Is it customer demand? Or is it more component availability? And I'm really trying to understand whether the outlook reflects the level of demand you're actually seeing today or is there actually additional demand that could be served if component supply and availability becomes a bit more easier? Just love to understand just on the component side what's going on. Thank you.

Antonio NeriWell, thank you, Amit. I think demand to me equals bookings or orders. And so we expect that demand to be strong and durable well into 2027. I think we have an amazing portfolio perfectly aligned to the inflection point that we see today across networking, cloud, and AI. And so we are uniquely positioned when it comes to demand and bookings. And as I said in my prepared remarks, uh, the, the pipeline remains multiples of the current backlog, which is record-breaking at the company level. When it comes down to potential upside on the revenue and, uh, and the ability convert that, it really comes down to availability of supply. And what we factor both in '26 and '27, first is the allocation that we already got in our supply for '26. I will say our teams have got much more proficient, by the way, using AI to really do a better supply matching with the demand that we have versus the supply that we have in terms of what type of mix you want to drive based on the capacity you've got allocated.

Antonio NeriSo that's why with Marie, we provide that new revenue guidance. There is no incremental supply in '26 at this point in time unless somebody, you know, cancels something and then we are able to get that. And in '27, as you know, we, we have long-term agreements where we lock capacity. And we divide, divide that capacity every quarter based on the mix of orders and backlog and what we see in the pipeline. And so all of that has been factored in our guide. So if supply improves in '27, you know, with the momentum and demand we have, we may have an upside. But I will tell you, I don't expect the supply availability to change in '27 that much. Neither the cost will continue to be elevated. Until these new factories will, uh, will provide the yields to, you know, compensate for the incredible demand that we see across the portfolio. Thank you, Amit.

Paul GlaserNext question, please.

OperatorThe next question will come from Catherine Murphy with Goldman Sachs. Please go ahead.

Catherine MurphyThank you for the question. Can you talk more about the improved AI systems outlook that you talked to, and if there's anything you can share on the demand outlook across customer types? And if expectations for AI Systems profitability are improved relative to 90 days ago. Thank you.

Antonio NeriThank you, Catherine. I will start and Marie, if you want to add something. Look, we have been very deliberate in our strategy to focus on the markets related to AI where HPE can drive value and can drive the portfolio that we have, not just pursuing just revenue for the sake of revenue. And those markets has been 3. One is enterprise, and you can see the momentum in enterprise, and in particular with our AI factory for enterprise, which is private cloud AI. By the way, deep, deep integration with NVIDIA, and you're going to see more of that in, uh, in a couple of weeks, which includes a lot related to software. It's not just taking the GPUs and distributing in a server. And by the way, that now includes storage, which is the first platform to be fully certified by NVIDIA when it comes down to the file kind of structural data. Second part obviously is sovereign, and those are long, you know, long cycles.

Antonio NeriBut when you think about sovereign, I don't think about just large 1 gigawatt factory. I think about deployments that act as a sovereign and ultimately are governed under the sovereign law or air-gapped to meet the sovereign requirements. And then there are large pursuits in the large scale that may take longer to achieve. But what we see right now, Catherine, is a huge growth in inferencing. Inferencing clearly is accelerating, and that's a combination of both GPUs and CPUs. And this is why we see the momentum also on the traditional server, because a lot of these, uh, inference deployments will be done on CPUs and it will be done in locations that where the customer feel confident in terms of governance, data privacy, and so forth. And that's why I think we all need to realize there is a new market there. It's not the traditional market that we know or have been used to, but this give us the confidence that we have the right portfolio.

Antonio NeriAt the right time to capture this market. And I believe by the end of the decade, much of the demand will be in the inference space. And that's why combination with networking and compute and storage and memory, by the way, will give us the ability to, to be more competitive and honestly harvest more of the value of the gross margin as we go forward.

Marie MyersAnd maybe I'll just add a comment, Catherine, on the margin. So we typically don't break out AI Systems margins. But as Antonio alluded to, you know, we do see enterprise and sovereign typically being a more profitable sort of part of the mix compared to, say, your classic service provider or model builder. So that's just some context to how to think about margins.

Antonio NeriAnd last, we'll say on the service provider, we play selectively in that market, and we have been prioritizing prudent working capital management. And this is one of the reasons, together with the cash commercial cycle, which obviously is slower on the AI system side compared to the traditional business side, and the fact that we have now sold 100% of this H3C stake, that we can pay down that debt faster to return to the 2x leverage commitment that we gave a year earlier. And that will allow us to make the right investment and return approximately 75% of capital in 2027. Thank you, Katherine.

Paul GlaserNext question, please.

OperatorThe next question will come from Samik Chatterjee with JPMorgan. Please go ahead.

Samik ChatterjeeHi. Thanks for taking my question, and congrats on the strong results and outlook here. Antonio, if I can just— on the growth outlook that you have this year and trying to compare that to next year, This year you're expecting cloud and AI to accelerate relative to networking, but when we get to your guidance for next year, you're expecting similar growth rates or the growth rates to converge. I'm just wondering, is that more function you think about the individual drivers being slightly different in terms of timing with your customers, or is there more of a supply component in there as the growth rates converge next year? If you can sort of help me out in terms of what changes in the drivers. Thank you.

Antonio NeriYeah, I think, you know, in the cloud and AI outlook, there is the usual lumpiness, I will say, of the AI system conversion. And so that's one aspect. But then across both segments, there is the timing of supply availability. Look, if you think about networking for a moment, right? And you think about on an average, we grew 10% this past quarter, but We grew 2x or 3x the orders, the bookings in some of the product segments. That tells you we are growing much faster than the revenue. And, and then on the cloud AI, obviously we have a very large backlog in servers and then we have the lumpiness of the AI systems. And also we have constraints on the NAND side of the equation for storage. So it's a combination of many things. There is no one specific number, but as memory becomes available, then we should see an acceleration of conversion. But again, don't expect that to happen. And, you know, early on in that cycle in '27, if anything, maybe at the end of '27.

Antonio NeriBut once again, we factor all of that in our 8 to 12% guide for 2027.

Antonio NeriThank you, Samik.

Paul GlaserNext question, please.

OperatorThe next question will come from David Vogt with UBS. Please go ahead.

David VogtGreat. Thanks, guys, for all the details. Really appreciate it. Maybe, Antonio, can we touch on networking for a second? So obviously strong results there, really strong orders. But just trying to get a sense for how we think about how those orders flow into the business because you guided, you know, to approaching kind of double-digit normalized growth for this year and effectively double-digit growth at the midpoint for next year. Is there a reason why we're not seeing an acceleration? And then Along those lines, what's driving the margin uplift next year in fiscal '27 in the networking business, particularly given the supply chain constraints and cost inflation that you've mentioned earlier? Thanks.

Antonio NeriYeah, thanks, David. Look, it's all about supply chain. Supply chain is the name of the game in networking. You know, some of these products have DDR4, some have DDR5. Some have other components that are constrained by the wafer capacity. We continue to work with our suppliers. By the way, we believe now we are the largest OEM partner of Broadcom in the networking space and also combined with the rest of the business. So it's all about the supply availability in that moment in time to convert these orders. And I think, you know, that's That's the opportunity, I will say. I think, you know, one hand is a challenge, but on the other hand is an opportunity. Something unlocks there, then it will be faster conversion of this amazing momentum we have in networking into revenue. So that's what it is. And Marie, you want to talk about the—.

Marie MyersOn the margins themselves, David, good afternoon. What you're seeing in '27 is actually the full year benefit of the Juniper synergies program, which you recall we started, you know, when we closed the deal. So All of that we expect is going to flow on a full-year basis from '26 into '27. And frankly, that's what's driving the margins. And I might add, it actually also helps us on cost of sales as well. So as we sort of buffer some of the impact that we've discussed here today on commodity costs, we're seeing some of those benefits help us out on gross margins as well.

Antonio NeriThat's right. Thank you, David.

Paul GlaserOperator, next question, please.

OperatorThe next question will come from Eric Woodring with Morgan Stanley. Please go ahead.

Eric WoodringHey guys, thank you for taking my questions and echo the congrats on the quarter and the outlook. Antonio, when you take a step back, can you just help us better understand exactly what has happened over the last 90 days in cloud and AI? And what I really mean by that is your significant price hikes were already well known last quarter, so that's not a surprise. But now you're looking obviously at low 20% year-over-year cloud and AI revenue growth versus 90 days you thought it would be mid to high single digits. So exactly what changed changed so abruptly in the last 90 days? And can you help us understand what customer base cohort did this inflection come from? Thanks so much.

Antonio NeriYeah, thanks, Eric. Well, I will say at the core is demand acceleration, and I think, you know, that demand acceleration was manifested on a number of categories in the cloud AI business. Obviously, the traditional server I talked before about the concern to get access to products and don't wait for things to improve. I think that was very clear. Second is the Agentic AI. Definitely, definitely that has been a key driver of demand acceleration. I think on the storage side, obviously we have our own benefits because we are forcing a transition to our Alletra MP because also we are, you know, end of life in legacy products. And then we introduced new data platforms with object, which we expect to accelerate now with introduction of file. I think there is a combination of virtualization modernization because customers with the new commercial terms, they're very concerned about cost. When you modernize your software virtualization estate, By definition, you're modernizing the infrastructure that sits underneath.

Antonio NeriThat's a combination of our Morpheus, dragging the Private Cloud Business Edition for virtualization. And as we grow Private Cloud AI, call it AI factory for enterprise, that infrastructure and software is pretty much the same. The only really changes is the GPUs in the server and the Alletra MP X10000 in the storage. But then GreenLake also is a driver of additional adoption of technology because once you're on the platform, as I said earlier, we have a net retention rate of near 110%. And obviously as budget gets constrained, you know, we expect obviously the consumption model to grow over the next few quarters because you move to more an OPEX model. So it's a combination of many things. But the pipeline and the customer engagement are super strong. And then obviously the networking provides a core foundation to drive cross synergies as we go forward.

Paul GlaserVery good. Thank you, Eric. Next question, please.

OperatorThe next question will come from Matthew Niknam with Truist. Please go ahead.

Matthew NiknamHey guys, I will echo the congrats everyone has relayed as well. Phenomenal results. Antonio, you mentioned cross-portfolio sales, and I'm wondering how prevalent these are right now. And is it in the context of more security and networking among enterprise customers, or are you seeing more cross-portfolio purchasing across server storage and networking products to really bring some of these Juniper revenue synergies to fruition? Thanks.

Antonio NeriWell, thank you. I think it's the latter, and I will say it's early even. Because as I said in my opening remarks, our enterprise data center switching orders grew 20%. And that's very early, very early in the process. We see now larger deals and larger engagement because we have the scale of our sales force where the networking sales force can get access to customers that in the past they were not able to get to. And then there is the product integration. To give a sense of the product integration, we are integrating what is called the Apstra lifecycle management or intent-based provisioning for data center switching with Morpheus. What that allows us to do is to provide a full hybrid control plane for server storage and networking, and also integrating the software-defined networking into the VM Essentials stack. That also will drive the data center switching inside the private cloud reference architecture.

Antonio NeriEventually, when we move into the Ethernet-based storage, as the speeds continue to grow, that's going to be, of course, a Juniper switch at the 1.6 terabits. So I will say we're early. Now, networking and security, that's more insulated within networking because obviously, if you think about the edge, deploying a SASE or a secure Service Edge. That will drive convergence between network and security. But there we are not thinking about driving security convergence just at the software level. We are taking a bold approach, which is to drive it at the silicon level. And you're going to see more of that as we go forward with Rami and team.

Paul GlaserThank you, Matt. Next question, please.

OperatorThe next question will come from Aaron Rakers with Wells Fargo. Please go ahead.

Aaron RakersYeah, thanks for taking a question. Also, congrats on the results, very impressive. I guess my question, some of it's been a little bit asked, but I want to go back to the traditional server business, you know, 40-plus percent year-on-year growth, very impressive. But I'm curious if you could unpack, you know, how much we're seeing in terms of the ability to price through some of the inflationary component costs relative to underlying unit demand. And, you know, I guess when we look forward Does the guidance reflect a continued expectation of price increases to mitigate any margin impacts? Any kind of color of what you've done on the pricing strategy would be helpful. Thank you.

Antonio NeriYeah, thank you. Look, units are up, and we expect units to increase as we go forward because as prices normalize, obviously, the AUP and units will rebalance. But units were up slightly. This quarter. The second part of this is that, you know, the pricing, we have been very disciplined, right? And obviously we have seen significant dislocation on the cost. We expect that to moderate in the second half and eventually normalize. But I will say, Aaron, that the cost environment and pricing environment will continue to be very elevated in 2027. But the units will rebalance. And, you know, as we said earlier, right, we expect that demand to continue to be very strong as we look into 2027, especially the content is going to change because of the Agentic AI deployment.

Marie MyersAnd maybe I just add a couple of comments just on the margin durability. We do also see the impact of our catalyst program helping us out both on gross and operating margins. And I think I commented in my prepared remarks, we're slightly ahead. So So that's giving us confidence around the durability of those margins. And we do expect that the— to see some improvement in unit volumes in the back half of the year as well.

Paul GlaserThank you for your question, Aaron. Next question, please.

OperatorThe next question will come from Tim Long with Barclays. Please go ahead.

Tim LongThank you. I was hoping to touch on storage for a minute here. Maybe just if you could just talk a little bit about kind of seeing the outsized growth in server but not in storage, what you would think about kind of pull-through there. And I would assume you're— I know there's a lot of ASP increase in servers because of DRAM, but I think also some in storage because of NAND. So maybe could you touch on that dynamic around the storage business? Thank you.

Antonio NeriYeah, sure. Look, the Alletra MP block customer migration accelerated. We talk about driving triple digits year-over-year growth on the Alletra MP, which is the go-forward platform in both orders and revenue. Marie talked about that. Obviously, that takes time to see in the total number, but because we have other stuff in the storage. But overall, the storage was up 2%. But the Alletra MP, which is the platform that has both block file with object, is growing triple digits, both revenue and orders. And remember that that revenue is also somewhat impacted by the fact that we are deferring a portion of the revenue over a longer period of time. Why that's the case? Because our software is a SaaS-based solution on that CapEx, which is the hardware. But the takeaway, our go-forward platform is growing triple digits, both orders and revenue. And over time, that's going to fuel the growth in the total storage as it becomes the biggest part of the portfolio.

Tim LongOkay. Thank you.

Paul GlaserTim, operator, this will be the last question, please.

OperatorOkay. The final question will come from Simon Leopold with Raymond James. Please go ahead.

Simon LeopoldHi, guys. I think most of the questions have been asked. I guess, you know, we've heard some contradictory commentary from some of your peers, you know, regarding pull-through orders. You know, just curious what's giving you the confidence that, you know, that the strength this quarter, you know, doesn't reflect any of that. And, you know, You know, what's, you know, giving you confidence, you know, in, you know, the sustainability going forward?

Antonio NeriYes, I mean, we have no evidence in our orders or backlog of any pulls in. And honestly, unlike COVID where people maybe were also doing double booking, we don't see that at all. And we have no cancellations. So that's the answer related to that question. And because of the pipeline that we have, we feel confident about the durability of that demand, which will drive this sustained momentum. And that's why Marie and I went on and we provided the guidance for '26 as we did and the financial framework for '27. That's what we see. Well, good. I know there's more questions, but I know the team will follow up with you. I just want to wrap by saying we delivered an exceptional quarter with record-breaking results. That result, those results were driven by the strong demand that we see in the market, strong disciplined execution, and honestly, our strategy, because our strategy is more encompassing when it comes down to networking, cloud, and AI.

Antonio NeriThe Juniper acquisition in my mind has been a home run and is proven to be a big source of shareholder value creation. Therefore, we believe the strategy is working. I think our portfolio is the strongest it has ever been, and you're going to see more of that here in 2 weeks because, you know, I will encourage you to log in either the keynote or to be in person there. We're going to have 7 acres of technology on display, just to put it in perspective, and you're going to see the synergies across the portfolio as we were talking about it. And the most important part is that We are building durable momentum for the future. These results is not a one-time thing. It's the combination of the quality of earnings that we are driving across the portfolio. And my view is that we just, you know, unlocking the value that was always here in the company. And I think, you know, there is more to be done. But I'm very proud of what the team has delivered this quarter and the guide that we provided.

Antonio NeriAs we think about '26 and '27. So thank you again for your time. Hope to see you soon or at the HPE Discover.

OperatorThe conference has now concluded. Thank you for attending today's presentation. You may now disconnect.