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Hewlett Packard Enterprise Company (NYSE:HPE) Citi’s 2020 Global Technology Virtual Conference Transcript September 10, 2020 6:05 PM ET

Executives

Vishal Lall - Chief Operating Officer, Intelligent Edge Business

Analysts

Jim Suva - Citigroup Investment Research

Jim Suva

Okay. We are live and hello there everyone and thank you so much for joining us. My name is Jim Suva. I’m the IT Hardware and Tech Supply Chain Analyst here at Citigroup Investment Research. This fireside chat is with Hewlett Packard Enterprise, stock ticker, HPE. Vishal Lall is joining us. He’s the Chief Operating Officer of the Intelligent Edge Business.

I do want to start things off by talking about, first of all, please see Hewlett Packard Enterprise Investor Relations sites where they have their Safe Harbor statements which refer to risks and uncertainties, as well as forward-looking statements. We do know also that the company has a lot of SEC filing documents on that.

Citigroup Investment Research also has disclosures that are accompanying this and if you’re MiFID II investor please make sure or client in the MiFID II regions that you have those agreements in place. Media and press are expected and asked to politely disconnect. This is not for media and press. This is for institutional investors only.

So I want to set that stage and I want to introduce Vishal Lall, the Chief Operating Officer of the Intelligent Edge Business. So we’re going to keep this discussion around Intelligent Edge. But Vishal to start things off a little bit. Can you give us a little bit of background about yourself first before we start talking about Intelligent Edge items?

Vishal Lall

Absolutely, Jim. First of all, thank you for having me here. I’m excited to be here at this fire chat -- fireside chat, and good evening, everybody. My background, I’ve been at HPE for a few years now. I started at HPE back in 2012, so eight years ago, times just fallen by.

And before I started at Aruba about six quarters or eight quarters, seven quarters ago, I was the Chief Strategy Officer at HPE. So I ran strategy for the company, working very closely with our CEOs, Meg Whitman first and then with Antonio Neri, and I’ve been in this new role, obviously, the CEO of the Intelligent Edge Business now for six quarters or seven quarters.

Question-and-Answer Session

Q - Jim Suva

Well, that’s great. It’s interesting you have a long history with -- working with Hewlett Packard Enterprise and their leaders. As of I, I’ve been doing this job for decades. Vishal, can we talk a little bit about for those who aren’t that familiar with what Intelligent Edge for the segment of Hewlett Packard Enterprise. Maybe some real life examples so that people can actually, in their mind, envision and embrace what these Intelligent Edge segments and examples are what you’re doing?

Vishal Lall

Yeah. No. Thanks, Jim. Good -- thanks for the question. I’ll give you a little bit of history in terms of kind of how we got started. So we got started at this segment. We broke this segment out about a couple of years ago, maybe a little bit longer than that, as we were looking at the overall strategy of the company.

And we basically said, hey, there’s a set of data center and cloud technologies and then there is a set of technologies outside of the core data center that are going to get more important as we move forward. And that was kind of early on right after the, we had acquired Aruba as one of the core tenants of that particular segment of the market. And that’s kind of how we got started.

And then really the easiest way to think about the Intelligent Edge is set -- is a set of technologies that enable experiences and I am -- and I say experiences, as well as business outcomes outside of the core data center.

So think of technologies to your question -- to your point, Jim, in terms of specific examples. So think of technologies that power an office campus, a hospital, stadium, a factory, a cruise ship. So things of that nature, basically where compute, connectivity, security sector come together, at the edge outside of the core data centers.

And the reason I said experiences and business outcomes are both important, because they come together very, very interestingly and very meaningfully at the Intelligent Edge. So when I say experiences, think of how an end user, whether it’s a customer or a guest or employee interacts with technology. So think of a guest checking into a hotel, kind of the experience around that, or a fan enjoying the game in the stadium. I think about experience and all that. And business outcomes, as we all know, is equally important because that’s what drives the ROI and the business case for new technology.

And in terms of the Intelligent Edge, it takes on more meaning because things like uptime in the factory, uptime in the fast food store, they’re all relevant and they’re directly connected together. So that’s kind of how we think about Intelligent Edge and that’s how we pulled it together in terms of a segment.

And really there are four attributes that define -- four technology attributes that define the Intelligent Edge. There is connectivity, there is security, there is analysis of the data that is generated at the Edge and there’s autonomous operations, and I’ll get into that just a little bit for why connectivity is foundational, and as you know, we are the speed of four strength of ours with wireless, with wire technologies also new types of connectivity technologies, Bluetooth, ZigBee, CETRA [ph], LTE, 5G, another element of all G. So connectivity is foundational because it’s all about connecting devices and users at the Edge.

Second is security and also visibility, why? Because device visibility is very important at the Edge, and again, these are processing happens outside of the core data center, so outside of the firewall environment. So security becomes absolutely paramount in this world.

And then the third is the value that comes from analysis of the data, right? Because you’re just analyzing tons and tons of data, think of, whether it’s data from a machine in the factory or a jet engine in flight, there’s a ton of data gets -- that gets generated and there’s where technologies such as machine learning come to play.

And then, finally, the Edge needs to be autonomous. What do I mean by that? What I mean is, you can’t always rely on connectivity back and -- or on data center for mission critical scenarios. Think of a store, right? Like a fast food store.

Again, I mean, at some point, if you lose connectivity to the cloud, you just can’t stop serving your customers. So, again, these operations need to be autonomous and that’s a critical element of how we defined it today.

So in summary, that’s kind of how we think about Intelligent Edge and kind of I just wanted to give you some history of how we thought about the segment and why we broke it out as a segment as part of the company.

Jim Suva

And ballpark is my memory correct, you’re about 10% of total Hewlett Packard Enterprise, am I right on that?

Vishal Lall

That’s approximately correct, Jim, a little bit a lot higher than that. But, yeah, we are about a $3 billion segment.

Jim Suva

Okay. Got you. Who are your primary competitors that you typically may go head to head with against…

Vishal Lall

Yeah.

Jim Suva

…in the marketplace out there in the world?

Vishal Lall

So here’s kind of how I would answer that question, right? There’s a set of traditional customers that are -- that we directly compete against in the day in and day out today and then there are a set of customers where we see a competition in the future.

So if you look at today, it’s a Cisco, it’s Arista, it’s Juniper Meraki, Cisco Meraki. But companies like that, Extreme Network, right? So those are all kind of connectivity companies that’s where we compete against today because the bulk of our revenues are there.

As you look at the debate as the vision going forward, which is more IoT connected devices, more analytics at the Edge, right? So there’s a -- that competitive set is much less defined, right? So there are companies like, the ones I just spoke about, other infrastructure companies, cloud companies are also trying to access that space. There’s a whole bunch of startups.

So much more money in terms of the competitive landscape there, but also gives a lot more opportunities for a new emerging vendor. So that’s kind of how we think about the space. There’s a set of competitors we compete against today and a bunch of emerging companies in a less defined space where we think competition happens three year or five years out.

Jim Suva

Now normally we would be having this discussion you and I on stage in New York in front of hundreds of people, but I’m doing it from my home office and it looks like you’re doing the same and my children are doing remote education. Can you help talk to us a little bit about on one hand, we have remote from home learning, remote from home working, yet IT budgets seem to be pressured as companies work their way through Coronavirus. Can you help me kind of reconcile or talk about these opposing dynamics and the impact on your segment?

Vishal Lall

Yeah. Absolutely. So let me pick it up this way, Jim, right? I mean, if you look at the past many years, and again, I’m kind of picking, talking from my old strategy I had that as well here for a second. This whole -- this put pressure on CIO budgets, right? But and exactly to your point, it’s just become much tougher in the COVID world as enterprises are getting much more conservative and have become much more conservative actually, right?

But that being said, if we look at the past few quarters now, right, customers are rebalancing budget within their envelope to spend on customer and employee experience, I’d say, as when COVID started, we got a tremendous amount of demand for enabling exactly this home offices, right? So we have these products which enable -- which basically bring the appropriate nature to an employee’s hold and we saw a tremendous amount of demand around that type of knowledge.

As we go forward, what we are starting to see is demand for areas like micro branches. So think of a bank, right, retail bank, every branch, if employee started working from home, the banks want security all the way into -- and connectivity all the way into an employee. So we are starting to think about what that means and we have embrace it calling it a micro branch architecture, I’ll get into an acquisition that we are working on in just a second just to illustrate that point more.

But then also what I’ll say is as we kind of look at the response to COVID, right? The impact varies by customer segment, by industry, by geography, right? So camp like offices where you and I work on a day-to-day basis is one segment, right? But there’s a whole bunch of other industries which -- in which people still go to work, right? Think of manufacturing, think of healthcare, right?

So, again, those are -- there’s a set -- different set of dynamics that we are starting to feel that are playing out in financial services, public sector, healthcare, et cetera. However, whether it’s offices like ours where people are working from home, we are selling them remote working solutions. But at the same time, what we are seeing is a set of -- a difference set of dynamics at play by country, by customer segment and then certain countries are getting more impacted by COVID, certain countries are back, I mean, if you go look at Europe or certain parts of Asia, people are back in the offices, right? Spending has picked up again.

So, again, the dynamics vary quite a bit based on industry, based on customer segment, based on the geography, right? But, again, overall we feel that -- we are very well-positioned, whether people want to work from home or remotely, we have micro branch type solutions and then for our customers who are in their facilities, whether it’s a manufacturing facility, a healthcare facility, et cetera, we are seeing -- we have seen pretty good demand there. And actually, in certain ways, I think, we are starting to see some rebound event happen as we speak right now.

Jim Suva

And are there differences that you see from like enterprise or larger companies and the small and mid size IT budgets, whether it be now or the spending trend you look out for the next one years to three years?

Vishal Lall

Yeah. I think there is a difference, right? SMB has definitely been more impacted by COVID, right? And though we have seen some strength in the segment over the past couple of quarters, they are under more pressure. And however, I feel optimistic about the prospect in the medium-to long-term for SMB spending as well.

Because I mean, I don’t know if you know or not, but pre COVID, SMB was growing at a pretty good clip and was somewhat outpacing enterprise. And we expect that growth trajectory to come back. And specifically for the SMB, I mean, we’ve actually launched a set of products in the last, I would say, 18 months or so, there’s a brand call Instant On that is very focused on the SMB segment. And again, in the March, April timeframe when we first got hit by COVID we were expecting that market to suffer more than it did. I think it’s been definitely had an impact but it’s been less than what we thought it was going to be.

So enterprise we feel is going to come back faster. We see SMB -- we believe SMB -- will take a little bit longer for SMB to come back. But we have definitely seen some strength in that market as well as balance.

Jim Suva

Let’s take this now, next question about concerns and excitement as you look ahead.

Vishal Lall

Yeah.

Jim Suva

Maybe let’s first start with concerns since I feel like a lot of 2020 has been trade wars can’t ship to certain customers, pandemic, where your facemask, no handshaking. Let’s start with concerns. So what’s your most concerns? And what you rattle off your list and talk about some of those, we’ll talk about what gets you most excited?

Vishal Lall

I mean, you kind of, the concern have changed over time, right? At the beginning of the right after Chinese New Year, our concern was supply, right, as you rightly pointed out it was the supply chain sector that came back pretty quickly. Right now those things are pretty stable.

I think the biggest concern that at least I personally have is just by the macro economy, right? It’s a macroeconomic side and it’s the impact of COVID and how depressed enterprise spending on IT will be because of COVID. So that’s, in my opinion, the biggest concern.

Jim Suva

Opportunities, I want to be a positive looking forward guy.

Vishal Lall

Yeah.

Jim Suva

You should look ahead, and at some point, we’ll get to have a nice coffee and tea and sit down together and talk in person, but what are…

Vishal Lall

Yeah.

Jim Suva

… the opportunities as you look ahead as you’re working from home as am I?

Vishal Lall

Yeah. So, I think, I mean, we look at it this way, right? I mean, leave the macroeconomic alone for a while, I mean, it will do what we prefer to do. But as we look at it from a perspective of how we stand? So I mean, there are few things that make us feel very good, right? And again, we saw a lot of these trends in the early part of the year in our Q1 which started in November of last year.

And number one being just the product portfolio, right, that we have, we are very innovative, very differentiated and in multiple analyst firm, I believe it take a partner or a forester or an IDC, they all rate us and Aruba Technologies, the Intelligent Edge HPE technology as the leading technologies, right, on their respective roadmap.

So products like, AirWave, Aruba Edge Services platforms, which is a native platform, our recently launched CX Swishing platform are rated very, very high. So we feel very good about that, right? We have considered an innovative company with a differentiated portfolio and which basically what that means is it drives high gross margin, right, which are good for us good for investors.

And then a very few vendors provide full portfolio that we do, right, all the way from wireless to switching, data center, campus, and then we just announced recently wide area networks -- as software defined wide area network company called Silver Peak that we will be acquiring. So, again that, the portfolio that we have is better than what we’ve ever had. So I think that makes us feel good.

And then from an industry perspective, we are very well known in terms of being a very customer centric company. And we have this mantra call customer first, customer last, which is just being all about customers. So that’s been a differentiator for Aruba for -- and the Intelligent Edge segment for a while, that services quite well.

And the last thing, I would say is, in the last 18 months or so, we’ve really strengthened our execution. So which is now starting to pay dividends, we are -- we’ve gained some share, as we -- since the start of the year, which is good, even in the market that has gotten hit by COVID.

So, overall, I mean, we feel good about how we are position the market, the market size is good, the opportunity in front of us is good, right? We target about $40 billion TAM, right, and like, we are about $3 billion, so a lot of headroom for us, right, to grow.

So a lot of opportunities, I think, we are very well-positioned. I think the one X factor is macroeconomic, but again, I think, we’re starting to see some strength specifically in some segments, like, I mentioned earlier, and some geos, which are coming back. So if we feel good overall the way we are position right now, Jim.

Jim Suva

I do look at your reported segment, which your Investor Relations gives details of and I’m not sure that the July reported quarter is indicative of a normal world or normal environment, given Coronavirus at all. So whether you address the next question about your year-over-year growth rates that you’ve been seeing, whether you look at this quarter or maybe a trailing four quarters or whatever, can you talk about which segments within your reporting segment approximate growing and which one are kind of under pressure? Because, of course, this quarter had Coronavirus, but if we look back the past several quarters, it looks like in total sales it seems some pressure?

Vishal Lall

Yeah. So I think there’s a -- let me start a little going back a bit, Jim, right? So back in 2019, we had some execution issues specifically in the North America segment, right? And then when I first came on Board. That was when we were -- we actually changed the complete execution of that segment. We change the way we go to market there, change some leadership and all of a sudden, we’re starting to see really good return from that particular segment.

So that segment had declined double digits. In the last three quarters, we’ve seen growth back in the segment despite COVID, right? So that tells you that execution was an issue there which we have fixed and we are starting to see the benefits of that, right, especially in Q1 this year before COVID, we saw fantastic results from that side -- from that particular part of the -- part of our business.

And then as we go forward, right, if you look at the early part of the year before COVID hit, we were growing pretty well. And then, again, in the last reported -- in the first couple quarters, we grew, we took some shares in the last quarter, again, we’ve declined a year-over-year about 10%, 11% quarter-over-quarter, we sequentially grew, but that was pretty much in line with the market.

So, if you look at the market, it declines somewhere between 11 points and 14 points, quite impacted by COVID, right? But again, these are segments that have had historical growth, and as we go forward, both switching and wireless and we expect them to grow in the single-digit range over the next two to -- two years, three years easily and especially we may get some inner strength and with low compares as we come out of COVID.

So my point mean is, if we look at the market, it is a single-digit growth market. We’ve taken some share recently. I think we are well-positioned to grow faster than the market and that’s how we are approaching the market as we go into the fourth quarter of our fiscal and then the next fiscal fourth -- fiscal -- next fiscal year.

Jim Suva

Can we talk a little bit about Silver Peak? Explain to those on the line what that acquisition is all about? The investors on the reason for this strategic acquisition and dig into this a little bit?

Vishal Lall

Yeah. Sure. So thanks, Jim. Silver Peak is a significant acquisition for us. Why don’t we excited about it? I mean, as we announced, over $130 million in revenue, we are paying about $925 million for it. So a large acquisition, probably the largest that we’ve done at the Intelligent Edge segment.

And this is focused on the SD-WAN, the software defined wide area network segment, which is more Silver Peak does. And Silver Peak is a leader, if you look at the Magic Quadrant deposition, as one of the few leaders in that for the entire market. So what we wanted to do was buy somebody at scale at who was a leader, would really make a difference to our overall portfolio as well as market.

And then in terms of what Silver Pick does, right? So, one of the -- as we -- as I earlier discussed, right, applications and data are moving to the Edge. And for that you need secure connectivity from Edge locations, whether it’s offices, whether it’s stores, et cetera, into the cloud, right?

And earlier what companies would do, they would build dedicated circuits, right, these lines in a way called MPLS circuits back in -- from every location back into their offices. And what SD-WAN does, it has a software defined architecture where it actually goes over the internet. So -- and creates a secure connectivity between branch locations, stores, offices, factories, et cetera, back into the cloud, right?

And so what it does is, it’s faster, it is self driving and automated architecture. And it drives significantly lower TCOs for companies, right? And today, I mean, if you look at the size of the market, billions -- tens of billions of dollars are spent on these circuits and so as the market opportunity in front of us with SD-WAN the market is early, it’s growing somewhere around the 20% par. Right now that market is about $2 billion or so expected to grow to $5 billion very fast. So, a big opportunity in front of us, right?

And so the momentum is pretty strong and that’s kind of one of the reasons we went after that particular market, because it’s an adjacent -- very close adjacency to what we do. And it’s a product and solution that can be carried and combined with our solutions by our sales force. So, ne-net, that’s kind of why we went after that market.

So we are very excited about that. It strengthens our Edge to cloud strategy. It is a large growing market. There’s a very clear business case around TCO for customers, as well as flexibility and automation, right, and we’re feeling good about this particular acquisition.

We closed in a -- in -- some time in this month, so it should be done pretty soon. And again, like I said, financially it’s $100-plus million, fast growing company, so will make an impact to our specials [ph] as well.

Jim Suva

And when you mentioned, I believe you said that you think your segment can grow ballpark, I think you said low single-digit like 3%. Does that include Silver Peak excluded or is it just Silver Peak so small, it doesn’t move that number at all?

Vishal Lall

No. Jim, I was talking about the market growth, right?

Jim Suva

Okay.

Vishal Lall

I was talking about a three -- low -- single -- low-single digits is what we expect the market to do. Of course, we want to grow faster than the market, right? So, of course, we’ll be growing faster than the market.

And similar we will add. It’s not that small, right? It will add a point or two on top of our growth, because it’s $130 million and $150 million, it is growing relatively fast. So it does drive some growth as well.

Jim Suva

Okay. And your segment, if we were to account kind of pretty long-term, what percent of revenues do you think your company will represent at the total company? Meaning, Intelligent Edge, I think, it’s 10%, 11%, 12% today. I assume you expect to outgrow some of the other parts of Hewlett Packard Enterprises. Is that correct?

Vishal Lall

That’s great, Jim. I mean, we are -- as a company we’re investing behind this particular segment pretty hard. As you know, Antonio announced $4 billion investment in this particular segment years ago. That discovered our customer confidence and so we are investing behind this.

We believe this is a growth engine for the company and we are both from an OpEx perspective and a balance sheet perspective there’s investment behind it. We are at $3 billion right now. Our next milestone is $5 billion, right. So that’s kind of the next mark that we are working to. And we are working to scale the business accordingly. And so that’s where we are right now.

So, again, I think, the opportunity is immense in front of us. Just in the four markets, like I said, there’s enough share opportunity and then some of the other areas I spoke about, there’s new opportunities. So lots of potential, it’s all about execution and making sure we can go after the markets in a systematic, organized manner and I think we are doing that. So, again, for us, as a management team, we are focused on the $5 billion mark. That’s kind of the next milestone. We’ll take it forward from there.

Jim Suva

And Vishal, during our conference, many companies talked about 5G has a potential beneficiary to their business. This 5G impact your business, is it a catalyst and if so, how and why? Maybe some examples so people can actually grasp what you’re talking about?

Vishal Lall

Oh! Absolutely. No. Yeah. Absolutely right, Jim. 5G is a demand driver for us. Because it does a few things, right? It doesn’t, first of all, it will drive refresh off the IT network side, because of the speeds we’ll have customers who will want to upgrade their current IT network, so which is beneficial to us.

And the other thing it does is it enables a bunch of new use cases side, especially I think, in terms of examples, I think the ones that I would cite are around smart factories and connected devices such as IoT devices, right, both of them.

Connected factories, for example -- connected smart factories, they’re mostly often wide architectures today, right, just because the requirements are such. They need ultra low latency and then 5G will enable that. So there’ll be new types of use cases mostly in factory settings, IoT devices, et cetera, that will come on Board.

And WiFi and cellular, WiFi is kind of what we offer cellular. It is kind of next-generation of 5G. Our complimentary technology and they have coexisted, right, for many, many years. And we’ll see the evolution as we kind of -- as 5G comes along, we’ll see the next-generation of wireless, whether it’s 6 or 7, right, they’ll all come together to provide a very seamless connectivity.

And -- but that being said, right, we’ve seen 5G adoption in the enterprise to be a bit slower than we had anticipated and what the industry had anticipated a couple years ago, I actually sit on the World Economic Forum’s 5G Council. And my observation is that most of these are still in POCs suppose of the smart app retirement when patients are still in POC phase.

So I think they will grow eventually, but again, we expect this to be a demand driver for us. I think there’s a saying at Aruba, which is interesting, which basically says that, every G has been good for us and this one should be no different. So, again, I think, should be tailwind when we see expansion of this particular technology going forward.

Jim Suva

I like that every G is good for you. So speaking of Aruba, the company in late 2018 or ‘19 hit a bit of a rough spot, but then you really turned it around pretty quickly. Can you walk us through about kind of what happened for a little hiccup or rough spot? What did you do to fix it?

Vishal Lall

Yeah.

Jim Suva

And should we think about it going forward?

Vishal Lall

No. Good question, Jim. I mean, not, I think, there was very, very much an execute -- sales execution related problem, right? And we -- once we started seeing that, we tried -- we diagnose it pretty fast. And kind of it was -- we were starting to see EMEA and APY continuing to grow, right? But it was North America that was declining. So it wasn’t the product issue, right? It wasn’t anything else. It was pretty much sales execution.

And what had happened was over time that the model that we had in North America was a model that wasn’t scaling, right? It was a model that Aruba had had at the time of acquisition when they were less than $1 billion, $700 million or so worldwide. And again, so we hit a cap, right, in terms of just the ability to scale, right?

And so what we did was we basically completely unwound the model. We restructured our entire North America sales force and we aligned them with customer segments, right? So large accounts, smaller accounts -- larger accounts, medium accounts, small accounts and we also made some personnel changes to put some leadership in place to drive kind of that structure.

And the results have been very favorable. We were somewhat worried about the change that we were making. We made it at the end of the last fiscal, ‘19, but again coming out of the gates in FY’20 we saw fantastic results, like I said, I mean, we’re seeing the positive growth in business and we have seen some bookings for that business, right?

So even in the last quarter, which is Q3, which ended in July, we saw 12% year-over-year booking growth in North America, right and that is in the middle of COVID, just remind you, right?

So again, I think, that’s one example of where we diagnose the problem quickly, we kind of put the bold step to fix the problem and we are starting to see the results of that. So we expect to, we’ve gained some share in North America. We expect to continue gaining shares as we go forward.

Jim Suva

You mentioned every G is good for you. We talked about 4G and now 5G. What about the shift from 100-gig to 400-gig, does that hit your radar screen, and if so, how should we think about the impact and opportunity there?

Vishal Lall

It does from a switching perspective, right? So I think it absolutely does. And then, I mentioned earlier, Jim that we have invested in this new product called CX. It is a completely new code base. It’s a cloud native code base for swishing, very analytics focused and we’re starting to break into some very, very large accounts, using that as kind of the entry point for large customers.

So again, this is relatively early. This is the first year in production for that particular product line and we are seeing very, very good traction. So we feel very good about it, especially as I talk to our sales teams. They’re starting to -- they’re very excited about the CX opportunity.

Because I mean, if you know the history of Aruba has been mostly WiFi and then switching we have some legacy switching platforms from HPE. But this is a brand new currently one of the leading industry -- leading switching platforms in the industry.

So our sales guys are feeling very good about it. They are starting to have conversations with large clients like they have not had in the past with this particular client and 100 to 400 G’s is definitely a catalyst for that too. So we are excited about the opportunity. We are excited about this new platform and I think we are starting to see some really good traction with large customers.

Jim Suva

As Operating Officer, I’m sure you’re not like the Financial Officer, but I’m sure you calculate and still take a look at margins.

Vishal Lall

Absolutely.

Jim Suva

Can you talk about your margins for your segment, maybe historically and kind of currently and look -- looking ahead what are the puts and takes in the margins?

Vishal Lall

Yeah. We’re very focused on the margins, as you know, right, I mean, given all the software content that we have and most of our value add is in the software, right, that we sell as an appliance and in the networking business.

Our margins are pretty much what you would expect from a networking vendor with differentiated products. So our gross margins run in the low 60s, right. And we expect our gross margins to hold steady and even improve over time as we add more software to the field.

Take the example of Silver Peak, that’s a good example. Silver Peak has software like gross margins that are slightly higher than the current Aruba gross margins that improve the overall gross margins of the business. So overall the gross margins are healthy. They are stable to improving, right?

And in terms of the overall operating profits of the business -- of the segment, we actually have driven a lot of profit improvement from FY’9 to FY’20. So this year, you will see much higher profitability and the bottomline from this particular segment.

And then as we go forward, we feel that there’s further potential for overall margin improvement at the Intelligent Edge segment, as we get more leverage from scale and as we just improve the way we operate, right? So we can get more efficiencies and we are getting more efficiencies. So definitely, that’s a focus for us, improve, basically stay with high gross margins and then improve the operating profits, which we are doing year-over-year and we will continue doing going forward as well.

Jim Suva

So I’m looking kind of at your financial results, it looks like they have been trending up year-over-year for the past several quarters despite Coronavirus. Is that because you’re selling less hardware and more software and security or is it something different, because what I’m wondering is if you return back to growth, will margins continue or margin see the opposite as far as growth goes, because again this year…

Vishal Lall

Yeah. No…

Jim Suva

… you’re up year-over-year for margins?

Vishal Lall

Yeah. No. No. Those are going to stick, Jim, right? Because there maybe are that -- the multiple levels to it, right, there’s a mix shift, because we are adding more and more software into our solution. So definitely the gross margins are going up. But we are getting more operating margin benefits as well right from scale from the way we are operating, of just driving more efficiencies in the business, right?

Using our channel more, right, in terms of going to market, because it’s less costly than using a direct sales force. There’s a whole bunch of things we are driving from an operating margin -- from an operating margin improvement perspective and that’s sustainable. That’s not our -- that’s not a short-term blip that you see.

Jim Suva

Got you. Okay. And then when we take a look at next year, whether it be revenues or margins or go-to-market or your sales force, what are the things that you’re focused on, Vishal, as Chief Operating Officer, assuming we come out of Coronavirus, I met next year, meaning fiscal year, because your fiscal year is quickly coming to a close here, if I remember right…

Vishal Lall

Absolutely.

Jim Suva

… the end of October.

Vishal Lall

Yeah. It is correct, Jim. And it’s good timing because we have right in the middle of planning for the next fiscal year, right. And as -- in the segment as a management team and even as it take Antonio and Tarek kind of our CEO and CFO and the Board, the focus for Intelligent Edge is to drive growth, right?

So end of the day, what we are doing is just figuring at -- figuring out how we can go faster, right, grow faster than the market. So we are -- that’s the focus right now is how do we grow faster than market? How do we integrate Silver Peak and grow faster by driving revenue synergies, right? So that’s number one priority for us, right?

Number two, like I said as, we are hold it very, very focused on gross margins, right? Because I mean, end of the day that drives a lot of the profitability for us. So we are focused on that.

And then third is, there sort of efficiency that we are driving overall, right? I would say, one thing I would do is, I would call kinds of a supply chain, as we were talking about operations. It’s just been spectacular the conversion rates that we’ve had for supply chain, I think, it’s industry leading.

And what -- some of the reasons we’ve gotten some share earlier in this year was because our supply chain just executed really, really well, right, off the Intelligent Edge supply chain. And we were able to get products into the markets where our sales guys were selling and we heard from a channel that we were just better position than other factors, right, in terms of product placement. So, overall operations and execution is an important element of it, but it’s all -- the focus of the entire team is on future growth.

Jim Suva

So you seem pretty encouraged about the Silver Peak integration. Are there other parts and you don’t have to identify companies or whatever that, customers are asking you to say, hey, Vishal, we wish you had a few more things here they’re on our menu of desired of wish list items or do you have the exact menu that everybody’s asking for?

Vishal Lall

No. I mean, the menu is endless, Jim, right? We could keep going. The way things we look at it is, there’s so much opportunity in kind of the spaces -- space we have right now. We need to get Silver Peak to work. It is a large integration for us, right, given the size of the segment. So we need to get that to work and the focus will be all in making sure that we are execute -- executing on that, right, and the business case that we have promised to the Board. So that’s number one.

Number two, if you look at kind of adjacent areas, the way at least I think about acquisitions is, my personal perspective is that, there has to be go-to-market scale and leverage. If you go into a -- if you go and do an acquisition where you can’t leverage your go-to-market is difficult, right, to get synergies. There you’re basically relying on possibility.

So anytime we look at an expansion through acquisitions, it has to be an adjacency that can leverage our go-to-market. So that’s how we think about acquisitions. There’s a whole bunch of areas and I -- and these are just examples. I’m not giving you any kind of -- I am not giving any areas [ph]. These are not areas we are focused on, right? But these are examples of areas where we are looking it and we will continue looking it, whether it is adjacent to the networking, like, SD-WAN, we just spoke about, right?

There are other IoT type adjacencies to networking. There’s visibility of devices out in the especially around IoT and connected devices, right? There is security, especially security around the Intelligent Edge, right? There’s analytics. There’s a whole bunch of those types of areas, Jim, kind of like, remember if you go back to the four things I just talked about connectivity, security, analytics and autonomous. So that’s the strategy that we have and we’re looking at -- we look at capabilities and in the context we look at Edge industry.

Jim Suva

And when you look at that strategy, this week during our conference, we had some companies like, they don’t directly compete with you, but somewhat they’re in that end market a little bit of like, Ciena, Corning, who has optical and connectivity and stuff like that, as well as KeySites talked about a slowdown. Does that surprise you or are they just different markets? Are you seeing similar functions there?

Vishal Lall

Yeah. I would say there are. I don’t know that -- I haven’t followed them, Jim. So I don’t know the slowdown is kind of like temporary if you are seeing it for the few quarters at least longer term, right? Our market, I mean, absolutely, we have seen the slowdown in terms of like, if you just look at last quarter, right, like I said, the market declined 12 points to 14 points, right? So we’ve seen a slowdown.

But we’ve seen resurgence as well and we -- as we look out into the next calendar, we think the markets will expand back in the next calendar, right. We are -- I mean, we are seeing, we are definitely seeing strength in each geographies, right?

And one of the things I should mention is, one of the things that is driving growth for us is the stimulus that many of the companies, many of the countries have out there. I will take the U.S., take Japan, take parts of Europe, there’s a lot of stimulus money that’s not starting to show up in IT spend, right? What some of the large wins that we had last quarter were actually fueled by stimulus and some of the large RFPs that we’re seeing now are fueled by stimulus as well.

So definitely that money showing up and showing up in companies spend and federal led business, education. Those have been some of the strengths for us, right? So I’m confident that things will come back next year as we look into the next fiscal and the next calendar.

Jim Suva

And as we wrap up this call, could you maybe, Vishal, talk about a couple items that you’re very excited for and optimistic for, assuming the pandemic Coronavirus is behind us. What are you excited for you want investors to know why they should trust in you and Hewlett Packard Enterprise…

Vishal Lall

Yeah.

Jim Suva

…and put their money behind that trust?

Vishal Lall

Yeah. I mean, I think, I mean, again, like I said, if I focus this conversation on Intelligent Edge segment, right? We are your leaders from an innovation perspective, right, from a product position perspective. I think our portfolio is very, very strong, right? We have a strong go-to-market, good execution, right?

And if you look at -- look out three years to five years, right, there’s a lot of opportunities in front of us, especially driven by what you said 5G, IoT, some of the analytics at the Edge, right, just edge computing. So tons of opportunities in front of us, we are going after those opportunities. We have a differentiated portfolio. We have strong solid execution.

And then what we’re targeting is good topline growth and good bottomline growth. And so from an investor perspective, there’s a company where you’ll see like growth in revenues and growth in operating cost.

Jim Suva

Well, I want to sincerely appreciate you for your time and I see -- appreciate Hewlett Packard Enterprise Investor Relations for all the one on one meetings they’ve been hosting today. And I looked at their schedule and it is absolutely packed.

And with ladies and gentlemen, this now concludes our call with Vishal Lall, who is Chief Operating Officer of Hewlett Packard Enterprise’s, Intelligent Edge. Thank you so much and we wish you all a safe day. Thank you.

Vishal Lall

Thank you, Jim. Thank you all.

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