The Six Five team discusses HPE’s latest earnings.

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Transcript:

Pat Moorhead: HPE absolutely crushed it again. They had their highest revenue since 2016. Highest, a record for operating margin, up 80 basis points to 11.88%. They raised revenue and EPS which was incredible. Their run rate, their ARR, an annualized version of that is $1 billion. If you look at where the company was before Antonio Neri came on and I really appreciated the conversation that I had with him last Friday on earnings. It is not even the same company. It’s a company that is less focused on volume and more focused on value. It’s a company that’s more focused on software. It’s not that hardware doesn’t matter, it does. But, total solutions with a combination of their own software, combined with their own differentiated hardware is where it’s at. And then finally, you have to give the tip of the hat to GreenLake, which has a lot to the driving of that ARR number. It is a huge thing. In fact, over the last two years they doubled the as-a-service number to $10 billion through the end of this quarter.

Daniel, the company just doesn’t get the credit I think it deserves. It’s funny, a company like Salesforce has a train wreck and they make this comeback and their stock just skyrockets. HPE, again, you can no longer say this is a fad. You can no longer say, “Oh, this is because they’re catching up on supply chain.” This is because they have the right strategy. This is because of the incredible leadership of Antonio Neri. The company deserves more credit on the street.

Daniel Newman: Yeah, I was just pulling up a data point, but I think the company trades at just an incredibly low ratio, at most times. On the trailing 12, it’s maybe in the range of around 20. It’s actually trading higher. It’s doing better right. It lingered at 12 or $13. It’s up at $15 a share. Company pays a dividend. I came out in November and I basically put a market watch piece out saying, “Watch out for what are considered to be these stodgy old tech companies, and watch them have a really big 2023.” I am here to collect credit because I think it’s important, from time to time, when people make good calls. Let’s talk about the tailwinds for HPE. The tailwinds for HPE is, they made the transformation early. Meaning that every one of the big OEMs right now is going through this process of saying we want to go to subscription.

Most software licensed companies are doing the same thing. HPE saw that early, 2019 Antonio Neri announced the everything as a service strategy. HPE GreenLake, the company has made that move. Of course, it’s been able to grow that business to a substantial recurring revenue number and has been able to do so, I believe it’s run rate’s a billion now for the first time of recurring revenue. That’s a big meaningful transformation for a company. But, it’s still trades like a company that just sells big iron. That’s one of the things I think that, hopefully, the market begins to fix, but historically has not. By the way, Dell has had the same struggle as it’s moved into multiple billions of ARR. This is an industry-wide challenge. I believe in a meeting that was open, because Chuck said everything we talked about in that meeting at MWC was.

They articulated, Chuck Robbins from Cisco said same thing. Chuck is CEO of Cisco, Chuck Robbins, has over 40% of recurring revenue and the company still trades at a very diminished ARR. That, to me, has a lot to do with the fact that analysts in the market doesn’t fully get or appreciate, A, how critical these company’s technology are to operating an enterprise, and B, how successfully most of them have actually been in their transformations from all hardware or hardware plus some sort of service to a true subscription and software strategy. But, Antonio Neri – and I got a chance to talk to him on earning’s night, sometime around midnight in Barcelona. What I really took away is I think he’s finally feeling, for the first time, there is a little bit of, “We get it,” coming from the market. It’s being validated by customers who are now looking at the GreenLake portfolio in the crawl chart of products and services for things like data services, data protection, and backup, compute workloads, ML, and AI and everything else, and starting to say, “We aren’t going to move everything to the public cloud.”

We got that a long time ago. We continue to get that right. The biggest beneficiaries are going to be companies that have on-premise services that look like the public cloud. HPE is the furthest along. I’m comfortable saying at this juncture, HPE is the furthest along. That has been a catalyst. The fact that companies are being more cautious, they’re slowing spend, they’re being more scrutinous of moving workloads to the cloud, and that they’ve all settled on hybrid and multi-cloud architectures bodes well for HPE. This isn’t me saying the hyper-scale cloud is going to slow anytime soon. I actually believe the demand for compute services, automation, AI will only continue to drive forward more growth across the whole landscape. But, this also goes back to my comment on MWC, Pat. On why I’m optimistic. This is why I’m optimistic. The market is good for tech. The stock market? Maybe not so much just yet. But, people and companies are investing in tech to take advantage of deflationary value and to scale the growth of the business.

Pat Moorhead: Listen, the public cloud had a decade time advantage and it’s going to take a while for the hybrid multi-cloud to build out. I think what’s going to separate companies in this future age are their ability to support the hybrid multi-cloud, whether it’s a hyper-scaler that’s whether it’s an on-prem provider, I fully expect somebody, one of these companies, to get snatched up, acquired by one of these companies to go in and get that. I think they’re trying to figure out, right now, other elements of growth. But, simple Cue service from AWS came out in 2004. Azure didn’t even come out until 2010. It just shows you how much of an advantage that the public cloud has.