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Making Markets EP13: From Edge to Cloud, HPE’s Plan to Win Over Investors with CEO Antonio Neri
by Daniel Newman | November 1, 2021

On this episode of Making Markets, HPE CEO Antonio Neri joins the show following the company’s Securities Analyst Day to discuss how the company intends to continue its growth journey to everything as a service and win over more investors in the process.

As Hybrid Cloud continues to be the path forward for companies seeking to digitally transform their business, HPE has gone all-in on enabling a seamless transition to the right mix of cloud and on-premise technologies. Neri shares the vision, the path, and what investors, press, and analysts must pay attention to when following the legendary Hewlett Packard Enterprise brand.

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Disclaimer: The Making Markets podcast is for information and entertainment purposes only. Over the course of this podcast, we may talk about companies that are publicly traded and we may even reference that fact and their equity share price, but please do not take anything that we say as a recommendation about what you should do with your investment dollars. We are not investment advisors and we do not ask that you treat us as such. 

Transcript:

Daniel Newman: Three years ago, HPE CEO Antonio Neri, made a huge commitment that the IT giant would move its entire product portfolio to a consumption-based service. Pivoting to realize the opportunity for recurring revenue, hybrid cloud, and meeting its customers where they are. Today, Antonio joins the show to share how that journey is going and gives us some insight into why the market should be excited about HPE’s future. All this and more, you’re tuned in to Making Markets.

Announcer: This is the Making Markets Podcast, brought to you by Futurum Research. We bring you top executives from the world’s most exciting technology companies, bridging the gap between strategy, markets, innovation and the companies featured on the show. The Making Markets podcast is for information and entertainment purposes only. Please do not take anything reflected in this show as investment advice. Now, your host Principle Analyst and Founding Partner of Futurum Research, Daniel Newman.

Daniel Newman: Hi everybody. Welcome back to another exciting edition of the Making Markets podcast. Very excited about this show. I have Antonio Neri, HPE CEO joining me here. I love these shows. I love these chances to have these kinds of interviews here. It’s why I started the show. Of course, as a reminder, I bring these CEOs on. This show is not for investment advice, you heard that in the early disclaimer. But coming off the company’s Securities Analyst Day, this is going to be, what I think, a great conversation. So, without further ado, Antonio, welcome to Making Markets.

Antonio Neri: Hey Daniel. Thanks for having me.

Daniel Newman: Very excited. I don’t really think an introduction is required. We did that in the cold intro. Everybody heard who you are and I’m just thrilled to have you here. We’ve had many chances over the past few years to have discussions. As you know, my firm, Futurum Research covers HPE very closely, in many different capacities across your business. It’s been a big week for you, though. So, if you don’t mind, I’m just going to dive right in.

Antonio Neri: Sure. Absolutely.

Daniel Newman: All right. Over the last week you had your Securities Analyst Meeting. And this is where I want to start, because I’ve got some big questions that goes back to your whole strategy that I’ve been following over the past few years. But tell me, the Securities Analyst Day, and the meeting went great as far as I’m concerned. But tell me, what were your key headlines, messages, and thoughts to how the market reacted to the event?

Antonio Neri: Sure. Well, again, Daniel, thank you for giving me the opportunity to speak to you and your audience. Every week is a big week, by the way, Daniel. Now, last week was a little bit different because, as you said, we hosted our annual Securities Analyst Meeting. This is the event that every year, Tarek, I, and sometimes a member of my executive team, go through the strategy, where we are on that strategy, progression, and share the shareholder value creation framework, and obviously we provide the outlook for the next year. We are very excited about the momentum that we have, but it was important to reground everyone where we are on our journey. And the headlines are very simple. Very, very simple, right? Number one, is that HPE is at the nexus of the mega trends that we see today. Since you have been following me for some time, you know that, in 2018, I said the enterprise of the future will be edge centric, cloud-enabled and data driven.

And unfortunately, through an event like the pandemic, that we saw, we were able to validate those trends. But the reality is that HPE already knew what’s happening at the time with the customers in transition through the digital transformation. And the pandemic validated those trends. And so, what are those threads? Number one, we all need connectivity. The connectivity is an essential service to deliver against the digital transformation opportunity. And that now is even more important, because obviously we live in a distributed enterprise. Number two, is the fact obvious, cloud is an experience for all the world loads and data. And number three, is the fact data has become the most important asset enterprises have. But at the same time, one trend that crosses across all these three mega trends is the pivot to consume IT as a service. And again, in 2019, we said we’re going to offer everything as a service.

So again, all of this is happening now at the time, where the company has been executing against those, but for investors, the headline was very simple. We are very bullish about this strategy, which will create value for our shareholders and those metrics are very simple. Free cash flow will be $6.5 to $7 billion over the next three years in a cumulative basis, we are going to expand our operating profit by 10 to 15%. And we’re going to grow the company between two and 4% on a revenue basis. Not withstanding, there is a point and a half for headwind because when you transition to, as a service, a lot of the revenue get deferred, but that’s good because in the end is much more profitable revenue than the one we had before. And to me, the most important one probably in the end is customer relevancy. And that is making HP more relevant to customers than ever.

Daniel Newman: I’ve been talking about this for a long time and I feel like there’s been a bit of a disconnect. I’ll hit you up with that more later Antonio, but I feel like you’re on the right path. In fact, the broader markets are validating that regularly competitors going down the same path as you. You mentioned about the three years ago. I remember being there back in the era of live events, which thankfully are slowly, beginning to return. You, standing up there on the stage, it was early in your tenure as CEO and you made a really bold statement. And over the years that followed, I’ve been tracking this closely.

I wrote a white paper that actually specifically said, “Why Everything-as-a-Service and why HPE was doing it right.” And this was again, before many of the players that have now announced to participate in this space had made any commitment or comment whatsoever on their strategies there. You said, “Three years, we will take our entire portfolio, we will make it all into a service that can be consumed like the cloud,” and it was ahead of its time. But it’s been about three years. So give me the quick, how are we doing?

Antonio Neri: I think we’re doing great. And what’s interesting, Daniel, is that it’s been validated also by our competitors. They’re all entering this market. Now they see it, but we have at least 40 years of leadership advantage. Building an as a service model is not simple. Is not just putting financing wrapper around your technologies to deliver a true consumption experience, that ultimately delivers outcomes on an SLA-based. And that’s a very different value proposition than just financing your infrastructure. And it takes time, it takes time. You’re building a backend set of capabilities that allows us to do this at scale, be able to automate everything in that offer, and ultimately be comfortable that you are going to commit and deliver against those SLAs.

But we as a company have gone through that journey already, not only building the cloud operating model on the backend, so we can provide connectivity in a subscription model, a cloud experience to your point, not different than you can procure in a public cloud, or run your analytics now edged to cloud. Because one of the biggest challenges customers have now today, is that they need to accelerate insights from the data, but the data siloed. Sometime, in a multi-generational IT set of systems sometime in legacy architectures, and we are simplifying all of that, to what we call a data first modernization approach to our platform, which is the HP GreenLake platform, the H2 Cloud platform that you can consume as a service.

And then listen, is not just innovation in the solution, it’s innovation in the business model, and it’s innovation in your it systems that come together. And it’s not a coincidence, Daniel. I think that’s the important part here. As I said, in my closer remark last week, we are not here by coincidence. This has been a journey over the last three and a half years. And that’s why it now give us that confidence, that bullishness to deliver those, commitments from the financial perspective for the 22 and 24, which is an acceleration of everything we have done.

Daniel Newman: And the growth and the ARR, the consumption, these are the things that every business out there are striving for. And if I was looking from the outside in, I would be feeling really confident that, “Hey, let’s look at the predictable revenue that this company has. Let’s see what’s in its pipeline. Let’s see what’s already been committed. Then let’s look at the service expansion, let’s look at net revenue expansion within the client base.” We’ve already identified for certain that public cloud is not going to win all the workloads despite rumors. It’s going to be very well diversified and distributed and likely, it’ll balance out at some point. And my analyst instincts says going to be closer to a 60/40, 40/60 type of split when all is said and done. I don’t see it really ever budging completely beyond that, and by the way, hyperscalers have validated that through their own product developments. They know it’s not all coming to the public cloud.

Again, all of validation that you are on the right track. Now, you started off in, you talked about this during SAM, you talked a little bit about this earlier in the conversation. The pandemic was challenging. And for big IT companies kind of in that traditional IT OAM, we know you’re evolving beyond that reputation, but that did lots of CapEx, lots of big iron. This was tough because on-prem investments came to a halt. So unlike some of the SaaS companies and pure cloud companies that had that instant catapult of growth, you guys had to weather this storm a little bit differently. But yet throughout this time you’ve been making acquisitions, you’ve made this shift to consumption, you’re expanding software, data services, there’s a double down on the hybrid cloud. I’d love to talk just a little bit beyond Everything-as-a-Service or XaaS as I like to call it. Okay, what’s next? Is it all about service expansion or what?

Antonio Neri: I think it’s all about data, honestly. I think that’s what’s going to come down to. In one of the comments I made that data is not only the most precious assets, but data is the currency, the power of the digital economy. And I believe data one day will be recorded in balance sheets of companies. That’s how valuable data has become. But the problem, Daniel, is as you know, we are not using the full potential of that data. At best, we may extract 10% of the insights. And if we are able collectively to extract more insight from that data, and be able to share insights, not data, which is two different things, we actually can go solve, not just business problems, but some of the biggest societal problems we are all dealing with. Think about it, the COVID vaccine, it took nine months to get to it, and it was because we were able to share insights across multiple research entities, and because we had the computational capabilities.

By the way, Hewlett Packard Enterprise offer a lot of that and for free, including our patents to help accelerate that research. But those are the things that we think about going forward. But to your point, now you think about enterprises, their journey, right? They were in a data center in big infrastructure, CapEx-oriented. They moved to a hybrid cloud multi-cloud approach. Obviously mobile phones approach still plays a big role because a lot of our business gets done through mobile phones these days. But now they need to go into the next phase of this, which is the age of insights and they need that H2 Cloud architecture. And that’s where Hewlett Packard Enterprise with our HP GreenLake H2 Cloud platform is going to play a big role. Because again, we are at the intersection of those mega trends, but we are building an experience. We are building a unify experience that drives that data first modernization. Because I believe that’s the biggest opportunity enterprises of all sizes have going forward.

Daniel Newman: Absolutely. And by the way, when you mention experience, I’ve been very positive on the development within GreenLake Central, the control plane layer. Which is what I feel to some extent has been missed from the prem companies that are trying to help move to the public clouds. What people really loved about public cloud is not that they want to put their workloads in someone else’s cloud, they want to actually have the simplicity to be able to scale up, scale down, pay. I kind of always jokingly say, “Swipe a credit card and just let it bill as needed,” like the old SaaS model, Antonio. And you’ve really worked hard though from a prem standpoint, on hybrid standpoint, to replicate that experience and create a software or control plane layer that emulates what has been so well received by CIOs and ITDMS that are investing heavily in the cloud.

Antonio Neri: Well, actually we’re taking a step further, right? It’s not just about emulating, is about addressing the pain points customers are dealing every day. It’s not just about the ability to swap a credit card and pay only for what you consume. It’s the ability to learn, try, buy, and run their environment from a single console, that ultimately they can see everything that’s happening in their enterprise. Remember, Daniel, that you and I talked about this. I think the CIO of the future, it’s going to be a service provider, not someone that focus on technology architecture, speeds and feeds and all the machination that goes with it. Is actually focus on innovation. And therefore to focus on innovation, you have to become a service provider and shift a lot of your resources into that data aspect we talked earlier.

And that’s where HP GreenLake to our portal. We are giving them the ability to learn, try, and buy. By the way, you can buy even a CapEx for that matter, but ultimately the way you deploy and manage is an as a service orientation. And then you can see there, everything you have across your enterprise that you do with Hewlett Packard Enterprise, and obviously more and more we want them to adopt our technologies. Whether it is, I’m going to subscribe to an access port, maybe a switch or a wifi, or maybe I deploy elastic computing storage as a service, or maybe I deploy a world load optimized solution for SAP or VDI or backup recovery or data protection. Or what are my exposure in terms of cyber and so forth. And then is my data in compliance.

And then ultimately figure out on the fly very dynamically, what is the best place to host our load and move that data if necessary. Because in the end, what we’re doing is bringing the cloud experience to all the world loads and data, wherever they live and be able to run it from there. And that to me, is both a CapEx and OPEX reduction. And then obviously free up human capital to focus on innovation.

Daniel Newman: Absolutely. I’ve always said nobody invests in technology to solve technology problems. Businesses, they make the investments in technology to solve business problems, and so we’ve really seen a shift to almost Everything-as-a-Service, but almost outcome as a service, right? The real thing, you don’t want to pay for more. If you can start to guarantee outcomes, people will pay almost anything for that. So predictability, that’s why everyone loves ARR so much. Predictability that’s from the investor standpoint, but from the technology standpoint, is can this technology get our business where we need to go? So great points, Antonio.

I want to spend the last few minutes we have together talking about something that’s just caught my attention and I know it’s caught yours, and that’s all this success, all this progress, strong double digit growth and consumption. Being the first in, really the first in to get this and established market. Being bold in your strategy. But the share price, even as the markets climb back across the board has been somewhat stagnant, it’s struggled to budge. I mean, what do you attribute this to? Do investors not understand it? Is Wall Street not doing a good job explaining it? Are there doubts from the market? I can’t wrap my arms around all the success not translating to an increase in the share price.

Antonio Neri: Well, I think is a combination of all of that, and at the same time, I think investors are missing a significant opportunity. I mean, not to get into the financial acumen associated how stock has been valued, but the fact that [inaudible], listen, we just guided for fiscal a 2022, $1.96 to $1.10 with a midpoint of $2.3. So if you take just a 10 time multiples, the stock should be $20 per share. If you look at the free cash that we got for 2022, we got a 1.8 to two billion, which is the $2 billion magic number that people have been waiting for. Again or 10 times on forward looking free cash flow, that would be $20 per share. No matter how you could look at it, it should be at least $20 per share. That said, I think sometimes, the Street get excited on certain things.

And one of the things that the Street gets fixated on it is compute, compute, compute. Well, let me tell you, compute is a $12.5 billion-business, that we expect that to grow for many reasons. Number one, is the fact that we have pivoted our business in different segments of the market, where we see growth. Number two, is the fact that through the HP GreenLake offer as a service, we see a significant pull through or compute on-prem in a call or at the edge that you can consume as a service. And then number three, also is the fact that we are integrating computing to this world load optimized cloud native stacks. And then last but not least, there is continuous structural changes in compute, new architectures and new options that ultimately drive what I call two-third of the structural change, which drive AOPs up.

And so we feel that business is important because it give us a resource that customer need, and by the way, generates a ton of free cash flow. And because we are transforming that business into a SaaS business in terms of the software that runs and compute, that will expand margin. And if you look at the guidance we gave them, it’s actually a point higher than we guided last year. So it’s 11 to 13% margin. But in their minds, they believe, “Well, that’s under secular pressure. And therefore, I’m not sure you can grow well.” If you look at our track record, we always deliver what we say, and in fact, we always travel upside. And so that to me is deposit in the credibility bank. But I think, the Street sometimes get fixated on the things, listen, on our side, we need to tell the story better, and I think the way we did our SAM was I think very, very crisp and bullish.

And over time, we’ll take few, maybe days and weeks for people to sync it. But ultimately you have to do what is right in terms of position the company into the future. And I believe as you deliver the results, the stock eventually will take care of itself. Because right now we are significant undervalue and there is no justification for that. So eventually the stock will catch up, but I’m proud of what we have done since 2018, and I think this company looks very, very different than then.

Daniel Newman: I think you had a lot of things on your head. I’ve said if I had to really simplify the answer to what I believe, Antonio, it’s been the company’s starting to be treated as a more like the way cloud consumption software SaaS companies are treated, and the multiples that are associated. And I think as that revenue number grows, that commitment, that backlog, the delivery, the services on GreenLake, and as GreenLake continues to become more and more the center point of focus around the future, I think the outsiders can start to recognize it.

Now with the last minute or two I have with you, that’s the question I want you to finish on for me. You’ve said it, it’s been crisp, SAM, you delivered it crisply. You’re doing a good job here of delivering the message. What can you do? How do you shift the perception and create that confidence in the market? What are a couple of things that can be done to start that shift today, instead of everybody always waiting? All jokes aside, Mark Zuckerberg can announce a project for five or 10 years out, people get excited. You’re announcing something that’s real, it’s tangible, that’s needed, that’s being purchased and invested in right now. What gets the investors, Wall Street, business media on your side?

Antonio Neri: Well, I tend to be a very pragmatic person, right? I cannot predict the future 10 years out. To be honest with you. I may have a vision for it, but I don’t think I can predict it. Who knew the pandemic will hit us right in the front of our head at the early of 2020? Nobody knew, right? And that was a surprise we had to adapt. But what I can tell you right now, I’m very, very confident and excited about what we’re going to do the next three years. And I believe our customers start to understanding it, and once customers get it, obviously you are going to have a pool for what you do. And listen, demand right now is off the charts. We have demand that I have seen in my entire career here. Is just remarkable to see. Whether it’s GreenLake, high performance computing, our data management services, our connectivity.

That’s what guides me. And obviously you have to deliver what you say. And what we’re going to do a little bit different Daniel, since you asked the question, Tarek and I are going to talk to investors, one-on-one now in the next handful of weeks, because we want to give them the next click down. Because one thing is the sell side and you have to do that. But the most important part you can do is talk to the investors. The investor care about a lot of things. They don’t just care about the financial side. They care about your ESG strategy, which I covered as well yesterday. Care about the durability of this, which we believe is very durable.

So those are things we’re going to do slightly different. But right now it’s all about execution, Daniel. It’s all about getting it done day in day out, as always said, a quarter has 13 weeks, and every day counts, but what I’m doing as well, myself leading a group of people that are accelerating this transformation to go further and faster. And I believe 2022 will be the breakaway year for Hewlett Packard Enterprise.

Daniel Newman: That’s a great way to leave it, Antonio. And I want to thank you so much for joining me here on Making Markets. You are invited back whenever you would like, of course, after earnings, after your next SAM, we’ll figure out a time. We’ll have to have you back obviously to continue this conversation much more to be heard here. And that’s it everybody. Antonio Neri, HPE CEO, what a great conversation. I hope you absorbed it. Definitely check out some of the content that I mentioned in the pod. Some of the papers we’ve written, we’ve covered this closely. It was really great that Antonio came. Validated some of the things that I’ve been saying for some time, and then of course, hopefully for you, made some things clear that maybe you didn’t already understand. So hit that subscribe button. We appreciate all of you here on Making Markets come back next week. We’ll have Juniper’s CEO as well as Poly CEO, joining the show. So much more to come, but we got to say goodbye for now. We’ll see you later.

Announcer: Thank you for tuning in to Making Markets. Enjoyed what you heard? Please subscribe to get every episode on your favorite podcast platform. You can also watch us on the web at futurumresearch.com/makingmarkets. Until next time, this is Making Markets, your essential show for market news, analysis, and commentary on today’s most innovative tech companies.

About the Author

Daniel Newman is the Principal Analyst of Futurum Research and the CEO of Broadsuite Media Group. Living his life at the intersection of people and technology, Daniel works with the world’s largest technology brands exploring Digital Transformation and how it is influencing the enterprise. Read Full Bio