HPE CEO: Our HPC business is a 'crown jewel'

Information technology corporation Hewlett Packard topped Q1 earnings and revenues estimates. Hewlett Packard Enterprise president and CEO Antonio Neri sat down with Yahoo Finance’s Brian Sozzi to break down the company’s latest financial results and weigh in on the future of cloud computing.

Video Transcript

BRIAN SOZZI: Shares of Hewlett Packard Enterprise are up 10% over the past month, bucking the rout underway in the tech sector. The gains reflect in part another solid quarter out of HPE this week, where it continued to deliver on cost cuts and saw solid demand in many areas of the business.

Hewlett Packard Enterprise president and CEO Antonio Neri joins us now. Antonio, always good to see you here. And I want to start this comment I pulled off a recent JPMorgan analyst report. They said, quote, "The stock looks attractively valued, neglected by the sell side. And it feels like a good contrarian long trade." So my question to you is, you think the Street still doesn't quite show you enough respect on the turnaround that you're driving at the company?

ANTONIO NERI: Well, Brian, good morning. Thanks for having me today. Listen, I'm super proud of what we have done in Q1. It was a great start to fiscal year 2021. We had a solid quarter, which was marked by strong profitability and free cash flow and continued momentum in the key areas of focus that we laid out in front of our shareholders and the analyst community last fall.

So we make great progress on a number of dimensions. Obviously, our intelligence business is on fire. We outgrew the market quite significantly. And we see the momentum continued.

We beat the guidance we gave to the Street on the higher end. And we achieved a record-breaking free cash flow. So I think the Street is learning us. They start to understand our turnaround story around our vision to become the edge to cloud platform as a service company and our strategy to bring the cloud to all the applications and data, wherever they live.

I still believe our stock continues to be heavily discounted when you look at our P/E multiple. And I think as we go through 2021 and we continue to deliver on what we say and the opportunity that's in front of us, I believe the Street will take notice, and the stock will continue to improve, which to your point, has been up in the last few weeks.

BRIAN SOZZI: Antonio, I am going to resist my inherent urge to discuss P/E multiples with you. But one key component to your story has been cost reductions. Where are you at in your $800 million cost reduction plan?

ANTONIO NERI: Well, as you recall Brian, last Q2 in 2020, obviously, we saw a massive disruption on the supply chain front because of the start of the global pandemic. And my experience here in the industry and in our company is while it was definitely a big challenge, it was also an opportunity to reposition us for when we would get out of this pandemic.

And we took immediate actions, very deliberate actions to not just cut costs because cutting costs is not the hardest thing you can do, but to really drive productivity and operating leverage that we can reinvest in the areas of the future. And we are doing that. And we are right on track, if not slightly ahead.

And remember, we committed that $800 million net savings by the end of fiscal year 2022. But I believe the bulk of that will happen in 2021. And that's also one of the reasons why we delivered record-breaking free cash flow in Q1. It was a combination of mix. It was a combination of gross margin expansion. It was a combination operating leverage and working capital. So feel pretty good about it. But it feels good also to invest in the areas for the future.

BRIAN SOZZI: A lot of workers haven't been back to their office in about a year, maybe over a year because of the pandemic. And because of that, a lot of the equipment in these offices, I would imagine, is extremely outdated. Do you think there's some form of major campus upgrade cycle coming in the next 12 to 18 months?

ANTONIO NERI: Well, I'm glad you asked the question because when I look at our intelligent edge business, it is targeted for the edge to the office. And obviously, we sell a series of architectures for the campus and branch and now what I call, Brian, the micro-branch. The micro-branch is your home office.

And so what customers are looking for is, obviously, to provide remote working capabilities to the workers that will continue to work at home and yet be able to connect their massive distributed edge to the enterprise in an autonomous and intelligent way, which obviously, the campus and branch are core of that, but then all the way to the cloud. And that's what our vision is, to provide the edge to cloud platform that can be consumed as a service.

So listen, we start seeing some more investments from customers to modernize their infrastructure. And that includes the campus through connectivity, Wi-Fi, and obviously 5G and going forward. Then bring that cloud closer to where the data is created. And I think that's a massive opportunity for us as a company. And that's why the intelligent edge performance was astonishing in many ways. We grew 11% this past quarter. And we will continue to grow double digits as we go through 2021 because we have a unique value proposition for that segment of the market.

BRIAN SOZZI: And how will you play in the 5G rollout?

ANTONIO NERI: So multiple fronts. Number one, we play at the core. Just a couple of weeks ago, we introduced our open 5G telco stack, which includes our software, which many people don't understand what we offer in that space. But the reality is, we offer the virtualization and orchestration for the core network.

And also, we offer the virtual functions, six of them, that you need to run the 5G in the core network. We also have [INAUDIBLE] solutions for that space as you move closer to the edge. And then as we go through this next phase of our innovation with our Aruba edge services platform, which is a cloud-native solution, where we already have wireless, we already have LAN switching, we already have SD-WAN with branch, and then the acquisitional super pick.

We are actually integrating in the same Cloud Control play in 5G because customers are telling us, Antonio, we want a common experience with a common policy and common security kind of principles. And we are going to deliver that by the end of this year, beginning of 2022.

BRIAN SOZZI: I was surprised to see the sales in the high-performance and computing segment. They were down 9%, operating margins down 190 basis points. What is going on in the supercomputing market?

ANTONIO NERI: Well, listen, let me tell you that our HPC business is a crown jewel for our company because we have a unique point of differentiation in this new area which I call the edge of insight, where AI, deep learning, machine learning are all playing a significant role in analyzing that data and extracting the value of it.

As I said many, many times, HPC is inherently a lumpy business because we can only recognize revenue in that business once we build it, ship it, install it. And then we run the customer [INAUDIBLE] in production versus the rest of our portfolio. Once you ship it, you can recognize revenue.

As you can imagine, these are very large systems. In some cases, it's like a football field-sized type of clusters you have to deploy. And then you have a lot of testings you have to do. So we are, in many ways, a little bit of our own enemy here. But also the fact that the customers need to be able to accept those clusters once they feel comfortable with the performance of the system--

But on the order side, on the booking side, Brian, we continue to win an enormous amount of business. We have way over $2 billion in awarded the business that we have to ship, install, and deliver in the next 12 to 18 months. And in that business, we also have five exascale systems, which are worth hundreds of millions of dollars.

So I'm not worried at all. Last quarter, we grew 25% year over year and 50% sequentially. You're going to see that. But I can tell you, we're going to deliver 8% to 12% year over year growth just this year in just a matter of time. So don't be surprised if one of the next quarters, you're going to see a massive growth because that's the way the business works.

BRIAN SOZZI: And before I let you go, what's the status on the company's headquarters move to Texas?

ANTONIO NERI: Well, I'm actually talking to you today from Houston, Texas. This is the current campus that we have. And this afternoon, I'm going to visit the new campus. We're making fantastic progress. It's an unbelievable site, state of the art, truly digitally native. And we will probably be completed by Christmas time. So I have always said to my people I would like to get that Christmas present. so sometime between Christmas and the beginning of the new year, we're going to have the new campus in place.

And obviously, by then, we hope that people will be returning to the office and be able to work together, pre-pandemic in many ways, although the world has changed forever in the way we work going forward. So super excited, Brian. And I hope to see you soon there at that site.

BRIAN SOZZI: Yeah, no. I'm going to need an invite. And that's a shiny, large, new Christmas present for you and the team. We'll leave it there. Hewlett-Packard Enterprise president and CEO, Antonio Neri. Good to see you. Stay safe.

ANTONIO NERI: Thank you, Brian.