HPE CFO: AI opportunity for HPE is 'very, very significant'

HPE shares falling sharply after the information technology company reported second quarter revenue that came in lighter than analysts were expecting. One area where HPE plans on growing is AI technology. In an interview with Yahoo Finance Live, HPE CFO Tarek Robbiati says the AI opportunity for HPE is "very, very significant" because the company has the ability to "assemble the large systems that needed to test AI models."

Video transcript

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JULIE HYMAN: Shares of HPE are in the red today after the company took a hit from a slowdown in spending on cloud services, bringing second quarter revenue in below expectations. But despite a weaker than expected revenue forecast, the company does see potential with artificial intelligence. Tarek Robbiati is Hewlett Packard Enterprise CFO. He's joining us now, along with our executive editor Brian Sozzi.

Tarek, it's good to see you. Thanks so much for joining us. We're all trying to figure out the size and possibilities around AI, right? Can you tell me right now for HPE, how much of the business is that, and whether it's just that spending on everything else continues to sort of be weak and slowing and that's responsible for this past quarter?

TAREK ROBBIATI: Yes. Good morning. And thank you very much for having me on your program, Julie. So the AI opportunity for HPE is very, very significant. And it comes from the fact that we have unique manufacturing and engineering capabilities to assemble the large systems that are needed to test AI models. And by way of an example, as you may remember in the first quarter, we delivered the largest supercomputer on the planet, which was frontier, which is a system that powers simultaneously 37,000 GPUs that work as one machine to test complex models for the Department of Energy over here in the United States.

And so on the back of that, we are winning substantial orders from our customers. So far, in the past few months, we've earned $800 million worth of orders and counting. And this number is set to grow more and more. Why is that? It's because to test those AI models of the future, you need a very substantial computational power which we're capable of building. And then in answer to the second part of your portfolio, the portion of the portfolio that is currently experiencing a slowdown is a traditional compute servers business that we have.

It is representing less than 40% of the total revenue of the company. The rest, our AI business, our intelligence edge business, are performing extremely well, and our Aruba networking business has grown 50% year over year, and 15% sequentially, which shows that there's still a lot of demand at the edge, which we intend to capitalize on. And so, when you look under the hood at our results and our earnings, you see a tale of two stories. The traditional server business that is slowing down and it's cyclical by nature, but you're seeing a lot of growth in AI and at the intelligent edge.

BRIAN SOZZI: Tarek, Brian here. Good to see you as always. $800 million of AI-related business. That's a huge number. And I think that surprised a lot of people out there. When you talk to investors, do you think they're underestimating HPE's opportunity in terms of sales and profits as it pertains to AI? Because I hear a number like that from HPE. I think what Nvidia said last week, I mean, that guidance from them was about a couple of billion higher than consensus expectations. It's telling me the street is just way off and how they model companies like this.

TAREK ROBBIATI: That is true. And I think there is a lot of hype around the AI. And there are lots of companies that claim to be AI-like. Then the question is, who are the companies that are capable of building those systems. And we feel we are one of them. We believe that we have the track record, as demonstrated by Frontier, to really deliver very large AI systems that are needed for the future. Because the reality is when you're testing an AI model, your AI model is as good as the amount of data it has been tested with.

And to test that amount of data, you really need a very large machine. And small AI systems are not going to be able to deliver on the promise of the future, which is very accurate models that are predictive of what's happening in a particular industry. So you have to look at this under a critical lens, because there is a lot of hype in that space. And be discerning, please, around the opportunities and the companies who can pursue this new wave of growth.

BRAD SMITH: Right. And so, because of that, yeah, we've probably heard a lot of talk, but kind of sparse on details over the course of this earnings season, especially with all of the AI mentions that we've gotten. You gave us a figure in that $800 million worth of orders. But if you think further out, are you able to quantify the benefit to the revenue run rate that you would expect to achieve because of the AI investments that you're making right now?

TAREK ROBBIATI: The 800 number is just a start. And we see the opportunity being much larger as there are different business models emerging for us, whereby we either build those machines for our cloud providers and some of the $800 million that we're realizing whereas in terms of orders. We're around customers in the cloud space. There is also different types of business models where we are going to build machines ourselves for us to on-lease with our GreenLake platform. There's many, many opportunities that we can capitalize on for the future at HPE around AI with the technology and know how that we have.

JULIE HYMAN: Tarek, we're talking about this $800 million in orders. I mean I'm looking at your revenue for last fiscal year, which was what something like $28 billion, right? So this-- I get the future proposition here. This is not the bulk of your business today. And that seems to be, again, what the market is reacting to. When is that business going to see more of a recovery? How long is this dip in this spending cycle going to last?

TAREK ROBBIATI: That's right, Julie. We are about a $30 billion company. And within that, you have about $12 billion that is about general compute service. This business is very cyclical. And I want to remind you and your audience that in the past two years, we've witnessed unprecedented demands where companies were buying servers in a context where supply was scarce. And so, it is normal that this portion of the business is actually experiencing a period of digestion, where customers are digesting the past investments that they have made, and eventually, will resume on the buying pattern.

That is only a portion of our business. The rest of our business, AI and also our edge Aruba business are doing extremely well our Aruba business grew more than 50% year over year, and 15% sequentially, and delivered outstanding margins. And when you really analyze what's performing under the hood in our company, is this margin story that is coming out of this mix shift of the portfolio away from general purpose compute onto AI and networking.

And this is why we were able to up our operating profit guidance for the full year and our EPS guidance for the full year as well. We're also pretty much generating a lot of cash out of these businesses. So we are very well-equipped to use that cash to invest it for future growth as well.

BRIAN SOZZI: Tarek, what is driving that cautiousness right now amongst some consumers of HPE's, And do you see that starting to turn in the back half of this year?

TAREK ROBBIATI: So what has happened in the second quarter, as you recall, is there was a major slowdown in the banking industry. We have a number of banking clients globally. And when you really look at our compute business, overall, in the mid-market, we're doing fine globally, whether it's Asia or Europe or even the United States where there has been a slowdown.

And it was very much witnessed in the manufacturing and financial services sectors, which have taken a pause on their spend, following a large amount of purchase during the course of calendar year '22. And we do expect spending to resume. It's really difficult to call a bottom, particularly, for our service business in the circumstance. But we do expect spending to resume once this digestion phase is over. It's a matter of maybe a couple of quarters. And from there on it should be a different story.

BRAD SMITH: And how does that trickle through to margins in the near term right now?

TAREK ROBBIATI: It's a great question. So this cyclical business of compute is relatively low margin. We are, right now, posting 15% operating profit margins. And the story overall for the company is one where we have Aruba, our business in networking, which is generating 26% or north of 26% operating margins. So it's a mixed story. And as one business slows down, the other one picks up, and the margin story is intact and actually is very strong at HP enterprise, which has led me to raise operating profit guidance for the full year. And also EPS guidance for the full year 23.

BRAD SMITH: Tarek Robbiati, who is the HPE CFO, alongside Yahoo Finance executive editor Brian Sozzi. Tarek, thanks so much for taking the time and breaking down some of the numbers here with us today. We appreciate it.

TAREK ROBBIATI: Thank you very much, Brad and Brian. Nice to see you again.

BRAD SMITH: Good to see you.