HPE CFO talks earnings, business spending, and ‘explosion of data’

HPE CFO Tarek Robbiati joins Yahoo Finance Live to discuss earnings, secular tailwinds, and the broader macroeconomic environment.

Video transcript

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JULIE HYMAN: Investors cheering Hewlett Packard Enterprise this morning. The shares are up about 1 and 1/2%. The corporate computing specialist reporting a beat on earnings-per-share and raising guidance, providing a rare bright spot in the tech sector that has otherwise been largely clobbered this year. The company leaning on subscription revenue to sustain that momentum.

For more, let's turn to Tarek Robbiati, Hewlett Packard Enterprise CFO. Tarek, thank you so much for being here. We were talking earlier about spending trends among clients with really across the software and tech space. And so I'm curious, what you saw in your earnings, what you were hearing from clients in terms of their willingness to spend on technology right now.

TAREK ROBBIATI: Good morning and thank you for having me. And it's a great way to start our conversation.

From our vantage point, demand that we're seeing is steady. And what is driving the demand from our customers is the fact that data continues to explode, and they need to modernize their IT solutions and IT infrastructure, and we're benefiting from it.

And this is across every facet of our portfolio. Every business unit at HP has been delivering record results in Q4. Q4 ended on October 31. And this is also across geographies. It's not just a matter of the United States.

We see reasonably solid demand, steady demand in Europe. And this overall demand has been quarter-over-quarter remaining at the levels that we were expecting it. And we are entering fiscal year '23 with a very solid momentum because we've built an order book over the past two years that is substantial.

And now we have received the supply to be able to deliver the solutions to our customers. And this has translated into a very solid Q4. And this has been the main driver behind us raising guidance for Q1.

BRIAN SOZZI: Tarek, it was called on the earnings release the margins declined sequentially. Is that likely to continue?

TAREK ROBBIATI: I am not sure where you got that the margins declined sequentially. I think the margins for Q4 at operating profit level were at 11.5%. And this is up, quite substantially year-over-year. More than two points.

Sequential margins at the gross margin level were up year-over-year 10 basis points. It was a decline that was sequential but that is normal. Now, that is a mix effect because we had an outstanding quarter in compute and our server business is lower gross margin than the rest of the portfolio. Hence, this decline that is sequential.

But you have to look at that decline in the context of overall seasonality. And if you adjust for seasonality margins, were up year-over-year 10 basis points across the company.

BRAD SMITH: Tarek, what are you hearing from some of your customers? The portfolio of clients who are trying to figure out what their own cost structure looks like right now and how much of that spending they'll continue to allocate towards a relationship with HP Enterprise.

TAREK ROBBIATI: So it's clear that obviously now with the overall concerns on macro, customers are becoming more concerned and scrutinize their spend a little bit more. But this is why we have also taken the view that the way our customers are gonna consume infrastructure, moving forward, is as a service.

And our GreenLake offering, which allows our customers to forget about the infrastructure but consume that infrastructure provided by us as a service, is gaining substantial traction. And our ARR, Annualized Revenue Run rate, has increased by 25% as a result of it.

So whether you look at it or not, there is this need to cater for this explosion of data. You can decide to purchase or you can decide to enter into another service contract with HP. And we're playing it on both sides of the equation.

BRIAN SOZZI: Tarek, one comment that stuck to me on the call last night, the earnings call was this. "We will balance our strategic and financial benefits of a continuous involvement in China with rising risks, including geopolitical risks." Just-- can you just break down what you're seeing in China and how you're having to adjust your business right now?

TAREK ROBBIATI: So we operate in China thanks to a very successful joint venture called HBC, in which we owned a 49% stake. And we continue to be reaping the benefits of that joint venture. We receive regular dividends and we receive regular cash out of that.

But we have also to be cognizant of the fact that China right now is not in a great space. And we have to watch what's happening in terms of implication on supply chain, implication of geopolitical tensions between the United States and China. But so far, so good. We keep with our position through the joint venture. And we will keep monitoring moving forward.

JULIE HYMAN: Tarek, I also want to ask you about some of the different segments of your business. High performance computing and AI was down, primarily because a contract from the US Department of Energy that was pushed back to the current quarter.

When you sort of back that out though, what can you tell us about the health of that business? And sort of X that contract, what demand you're seeing.

TAREK ROBBIATI: So this is a unique business. We are probably the only player in the world who is capable of delivering high performance compute and artificial intelligence at scale globally. And we're doing extremely well in that business.

It's obviously a very lumpy business where you have significant sized systems that are being delivered at one point in time. Just to give you an idea, the system that you were referring to is called Frontier. That is a system that is about the size of three basketball courts side-by-side. And that's one computer. It is the largest supercomputer on the planet, capable of delivering one exabyte of computational power.

And so this is one of the few things where we are undisputedly the number one and we're delighted with that performance. The fact that you just simply had a slippage on the receipt of the cache, pertaining to that contract, is just normal course of business. We are not concerned about it. It moved into our Q1 of fiscal year '23.

And the underlying trends of our HPCI business remain extremely strong. Globally, we're gaining share. Not just in the United States but also in Europe, given the advance that we had from a technology standpoint.

BRAD SMITH: Tarek, we've seen a wave of layoffs hit the tech industry right now. And specifically in the software as a service category and even cloud services category, we've seen some layoffs to sales teams, as they're trying to still kind of sell back into the existing client base while also generating some of those net new clients. Do you foresee that there will be any significant restructuring that HP Enterprise has to move forward with? And how would you quantify that?

TAREK ROBBIATI: It's a great question. So what I would say to you is what we are witnessing across the sector is the aftermath of the binge of 14 years where growth was coming almost at free money. And that is what is necessary to correct right now for many players in the sector.

We're not in that position. We've taken the strategic actions that we needed to take three years ago during the pandemic. And we're done with restructuring. Now, we have a right-sized cost structure for the company. We have a substantial order book. And we feel that we can withstand the macroeconomic environment as it is.

We have factored the macroeconomic concerns in our guidance. And we feel very comfortable with our ability to continue to deliver on substantial operating leverage and earnings moving forward.

JULIE HYMAN: And so, Tarek, if I can further on that. Are you-- what kind of hiring position are you in right now? Staying where you are? Hiring more people in 2023? Letting people quit and not replacing them? Where are you in that spectrum.

TAREK ROBBIATI: We're fine as we are overall. However, it's really important that we continue to hire the specific skills that sets us apart for the long term. And we are adopting here a longer-term view on hiring for the company's future.

JULIE HYMAN: Copy that. Tarek Robbiati, thank you so much for being here, giving us some insight into your business. The CFO of Hewlett Packard Enterprise. Appreciate it.

TAREK ROBBIATI: You're most welcome. Thank you.