Hewlett Packard Enterprise Company (NYSE: HPE) Third Quarter 2022 Earnings Conference Call August 30, 2022 4:30 p. m. Eastern Time
Participating companies
Andrew Simanek – Vice President, Investor Relations
Antonio Neri – President and CEO
Tarek Robbiati, Executive Vice President and Chief Financial Officer
Conference Call Participants
Shannon Cross – Credit Suisse
Meta Marshall – Morgan Stanley
Toni Sacconaghi – Bernstein
Tim Long – Barclays
Amit Daryanani – Evercore
Aaron Rakers – Wells Fargo
Wamsi Mohan – Bank of America
Rod Hall-Goldman Sachs
Operator
Hello and welcome to Hewlett-Packard Enterprise’s third quarter 2022 earnings conference call. I’m Chuck and I’ll be your convention moderator for today’s call.
At this time, all participants will be in listen-only mode. We will have a Q&A consultation towards the end of our convention. [Operator Instructions] As a reminder, this convention is recorded to correct it.
I would now like to speak with your host for today’s call, Mr. Andrew Simanek, Vice President of Investor Relations. Please continue, sir.
andré simanek
Great. Thank you. Good afternoon everyone. I’m Andy Simanek, director of investor relations at Hewlett Packard Enterprise. I would like to welcome you to our fiscal 2022 third quarter earnings conference call with Antonio Neri, President and CEO of HPE; and Tarek Robbiati, Executive Vice President and Chief Financial Officer, HPE.
Before I pass the floor to Antonio, let me remind you that this call is being broadcast over the Internet. There will be a repeat of the webcast within a while after the call for about a year. We have published the press release and the slideshow. accompanying today’s earnings release on our HPE investor relations website in inverter. hpe. com.
As always, the elements of this presentation are forward-looking and based on our global vision and our business as we see them today. For more detailed information, please refer to the disclaimers in the effects documents relating to forward-looking statements involving risks. , uncertainties and assumptions. For an analysis of some of those risks, uncertainties and assumptions, see HPE’s FILINGS with the SEC, adding its recent 10-K and 10-Q maximum forms. HPE assumes no legal liability and does not intend to update those forward-looking statements.
We also note that the monetary data discussed in this call reflect estimates based on data available at the time and possibly differ significantly from the amounts reported at the end in HPE’s Quarterly Report on Form 10-Q for the fiscal quarter ended July 31. , 2022.
In addition, for monetary data expressed on a non-GAAP basis, we have provided reconciliations with comparable GAAP data on our online page. Check out the tables and slides that accompany today’s effects on our online page for more details. Throughout this convention call, all rates of profit expansion, unless otherwise stated, are presented on an annual basis and adjusted to exclude the impact of the currency.
Finally, after Antonio has provided his high-level feedback, Tarek will refer to the slides and our presentation of the effects, his comments ready. As mentioned, the presentation of the effects can be found on our online page and is also incorporated into the webcast. player for this effects call.
With that, let me talk to Antonio.
antonio neri
Very big. Thank you, Andy, good afternoon, everyone. Thank you for participating in today’s call. As we demonstrated in 2022, HPE delivers on its promises to our consumers and shareholders. In the third quarter, HPE posted higher revenues, higher earnings and strengthened gross margins through continued operating concentration and execution and despite continued adjusted source and unfavorable exchange rate situations. .
In our results, you will see visitor demand for our industry-leading portfolio. We continue to increase our recurring revenue this fiscal year, which validates the compelling pricing proposition we offer our visitors, and the long and strong reaction to HPE GreenLake, our unified edge-to-cloud platform as a service.
Customers continue to prioritize IT investments. They find that HPE’s generation responses are applicable in today’s complex macroeconomic environment, where technological innovation is critical to accelerating business transformation and achieving meaningful business outcomes.
In the third quarter, HPE’s overall earnings grew 4% year-over-year to $7 billion, which was also higher than the sequential outlook we gave. a new record. This is significant, considering that in the last 4 consecutive quarters, we have higher orders by 20% or more year over year. We continue to see strong visitor demand in the market and a high sustainable level. quality sales pipeline.
Our HPE GreenLake visitor base is developing and our consumers are [voting] (ph) with their workloads and data. In the third quarter, we doubled HPE GreenLake’s new year-over-year growth point, and our existing HPE GreenLake consumers continue to renew and extend their contracts with us.
The HPE GreenLake platform has an exabyte of knowledge under control and is connected by consumers around the world by more than 2 million devices. This momentum is reflected in annualized earnings expansion of up to 28% and overall orders as a service of up to 39% year-over-year. , bringing year-over-year expansion in our orders to 86%. These signs show a persistent call to our responses as a service, even though source limitations have limited some facilities.
Once again, we increased our gross margins in the quarter. Non-GAAP gross margin of 34. 7% increased 0. 5 issues sequentially and is the highest point we have generated since we began our business as a service in 2019.
We advanced consistent non-GAAP margin with margin even more than gross margin to 10. 5% this quarter, an increase of 120 core issues sequentially and 70 core issues year over year. Non-GAAP diluted net income consistent with the consistent percentage was $0. 48, accumulating 9% and 2% year-over-year.
Our operating cash flow was $1. 3 billion and our loose cash flow in the quarter was $587 million. This is in line with our typical seasonality, as we improve money conversion cycles in the current part of the year.
From a supply chain perspective, momentum has remained largely unchanged from recent quarters, with some parts still in short supply, which has limited shipments. However, we have made progress in the proactive steps we have taken for the resilience of our source. chain, adding demand for products that do not require limited source parts, providing new multiple sourcing options, and implementing the [appropriate] (ph) design for our world-class engineering capabilities. We can also see some relaxation in the source state, if customer demand continues to decline and component capacity is passed on to corporate customers.
Overall, we expect the chain of origin to remain a challenge, the source is still a challenge next year, there are very early symptoms of possible short-term relaxation. We remain focused on translating visitor call into successful earnings growth, as evidenced by our third quarter. results.
Customers continue to tell us they want to make their vital virtual transformation paints while keeping prices in check. And it’s clear that we’re fulfilling those wishes with our edge-to-cloud portfolio delivered through the HPE GreenLake platform.
HPE GreenLake brings a unified hybrid cloud experience to our consumers’ information and workloads, enabling them to consume IT as a utility. Discover. Introducing a number of new cloud installations and enhancements for the HPE Connect platform to advance the hybrid cloud experience for consumers.
We were excited to announce HPE GreenLake for the personal cloud enterprise, which satisfies consumers’ preference for having their own automated, flexible, enterprise-grade personal cloud. To continue to grow our developing spouse ecosystem and enable them to adapt to the conversion needs of visitors, we have introduced a new program that is helping spouses grow their business in the most sensitive form of our HPE GreenLake platform.
Customers entrust HPE GreenLake with their peak workloads and critical applications. Japan’s card network, Japan’s leading credit card payment network, and an existing HPE GreenLake visitor extended their contract in the third quarter to upload a one hundred percent platform for [Indistinguishable] running on HPE NonStop Servers, with integrity, with built-in software.
The new implementation will force non-easy CARDNET systems, which are transaction-intensive programs as Japanese consumers increase the use of credit cards and cashless payments.
In India, the country’s largest public sector metals manufacturer also expanded adoption of the HPE GreenLake platform to increase productivity and energy consumption. By modernizing your S environment
These are just two examples of existing consumers multiplying their investments in the HPE GreenLake platform to meet new needs. We see this as a popularity of the valuable role HPE GreenLake plays in our consumers’ IT strategy. At the edge, we continue to drive innovation with our solutions. Aruba had an impressive quarter with a 12% increase in year-over-year earnings and an order increase of more than 15% for the seventh consecutive quarter.
In the third quarter, Aruba announced new AIOps features to reduce the time IT groups spend on manual responsibilities, such as troubleshooting network issues, adjusting roles, and security compliance. users who are now on the HP Connect platform to visibility, operations, and user experience.
Our Edge generation was on demonstration earlier this month when we created a secure network to force the Birmingham 2022 Commonwealth Games in the UK. Aruba provided the gaming network that connects thousands of workers and volunteers and more than 4400 athletes in 20 locations and 38 simultaneous events to ensure the games went smoothly.
Committed to leaving a legacy of virtual sustainability in the region, HP now works with the local organization to make the generation used for the occasion be had in the community, adding schools and hospitals. As knowledge continues to grow and evolve rapidly, see consumers employing our generation to enable knowledge in ways. Catharina Hospital, one of the largest hospitals and central disease centers in the Netherlands, is employing HPE Ezmeral software to create a cloud-native knowledge lake space that securely collects and analyzes anonymous patient knowledge. from internal and external sources. This will boost cellular education and technical abnormalities among the 500,000 electrocardiograms already available for those analyses with greater precision to identify the right type of diagnosis and treatment.
And in one of the most exciting advances to showcase the power of AI at scale, earlier this month I had the thrill of visiting Oak Ridge National Laboratory to celebrate Frontier, the world’s first fastest, greenest exascale supercomputer that HP built for the lab.
Frontier represents a new domain of clinical discovery and innovation that will be the U. S. commercial and national security competition. USA HPE has a long history of unique and unique business innovation that promotes social progress. improve the way other people live and work.
We have also achieved our purpose through our commitment to creating a more equitable and sustainable world. Earlier this summer, we made the ambitious resolution to push forward our 10-year net-zero carbon goal by 2040. An effective strategy to achieve zero carbon emissions is the cornerstone of the company’s longevity, and we continue to help consumers drive their own sustainable transformation.
I am proud of HPE’s functionality in the third quarter and the progress we are making to consolidate our position as a leader from edge to cloud. When I communicate with clients, it is very rewarding to hear how they use our differentiated portfolio to solve their problems to the fullest. critical business problems.
Every day, we find that HPE is a must for consumers and the communities we serve. We could not have achieved this without the determination of the 60,000 members of our team who impress me every day with their ambitious innovation and disciplined execution.
At HPE, we have developed a winning strategy in the marketplace, and I am confident in our ability to meet our commitments to strong demand, a strong project portfolio, and an edge-to-cloud offering that drives the expansion of our company’s earnings and gross margins and operating margins.
I look forward to updating you on our strategic priorities and perspectives when we hold our security analyst assembly at the end of October. I hope you will subscribe to receive information on how we plan to continue to drive pricing for HPE shareholders.
Let me now ask Tarek to talk about our functionality in detail and review the effects of our lines of business. Tarek, it’s your turn.
Tarek Robbiati
Thank you very much, Antonio. I will begin with a summary of our monetary effects for the third quarter of fiscal 2022. As usual, I will refer to the slides in our effects presentation to check our performance. Antonio analyzed the highlights of slide 1.
So, let me now talk about the main points of our functionality in the third quarter, starting with slide 2. We continue to see healthy demand in our differentiated portfolio from the edge to the cloud. As expected, year-over-year order expansion rates slowed to 9% this quarter as we began to overcome difficult comparisons.
As a reminder, orders increased as much as 29% year-on-year in the third quarter of fiscal 2021. We continued to increase our order book sequentially this quarter to a new record of 96% year-on-year.
Our order book is also expected to be more or less strong in the next quarter and remain as a company without significant cancellations. CAGR outlook of 2% to 4% provided at our 2021 securities analyst meeting.
In the third quarter, we generated a profit of $7 billion, up 4% from the previous year and above our single-digit sequential expansion outlook, despite a continued challenging source environment and stronger currency headwinds.
Based on existing rates, we now expect the currency to be a 2. 5-point drag on full-year earnings, compared to the 50 core issues expected at the start of our fiscal year. We remain very pleased with the resilience and expansion of our non-GAAP gross margins, despite the inflationary environment and continued supply chain disruptions that increase logistics and fabric costs.
We achieved a non-GAAP gross margin of 34. 7%, more than 50 core issues sequentially and solid year over year, basically driven by a strong pricing field and our continued evolution from composition to higher margin software-rich offerings.
Non-GAAP operating margins were 10. 5%, an increase of 120 core issues sequentially and 70 core issues year-over-year, reflecting the operating leverage of superior gross margin and operating expense savings resulting from our load optimization moves during the pandemic.
We expect to increase our operating leverage in the near term as we drive earnings expansion and gain advantages from investments in thriving sectors with high expansion in our portfolio margins.
As a result of our better-than-expected earnings growth, we achieved consistent non-GAAP diluted net income with a consistent percentage of $0. 48, up 9% sequentially, despite higher input prices due to consistent source constraints across the industry and having an effect on exchange rates. As previously reported, the steady cash flow is following our overall seasonality this year, and current capital also became a tailwind in the current part of the year.
In the third quarter, we generated $1300 million in operating money and loose money of $587 million. We continue to invest more in strategic actions to navigate the existing source environment, and we are now at peak stock levels. We will begin to reduce our balance sheet stocks in the next quarter and the following year, and I will discuss this in more detail in our outlook.
Finally, we continue to return truly extensive capital to our consistent shareholders. We paid $156 million in dividends in the current quarter and claimed a fourth quarter dividend of $0. 12 consistent with the percentage payable in October.
We also repurchased $197 million in percentages, on track to reach our goal of at least $500 million in repurchase percentages executed this fiscal year and raising our overall return on capital to date to $851 million, reflecting our long-term confidence in money. generation.
The third slide highlights key metrics that demonstrate our progress in our business as a service, with more recurring gains in the top margins. Total orders as a service remained strong, with a year-on-year increase of 39%, as we began to face more difficult comparisons.
So far this year, our orders as a service have exceeded 86%, which is the indicator of the long-term fitness of this business and reinforces our confidence in achieving our three-year CAGR ARR target of 35% to 45%. from fiscal year 2021 to fiscal year 2024.
Our RIO expansion rate advanced from last quarter and increased 28% year-over-year to $858 million, but we still face restrictions from sources that continue to restrict some facilities. We also continued to increase our margins as a service as our software and combined continued to grow at 64% in the third quarter, up 6 issues year-over-year, with our cloud and SaaS offerings expanding, specifically in Edge and Edge. Storage.
Now let’s move on to the highlights of our segment on slide four. Our expansion business continues to show accelerated earnings momentum and record levels of overdue orders driven by strong demand.
At Intelligent Edge, we achieved a record point of orders and profits in the quarter. We recorded double-digit order expansion for the seventh consecutive quarter and have approximately 20 times our overall points of pending orders. Revenue expansion accelerated by as much as 12% year-over-year. year, beating the festival and demonstrating specific strength for Silver Peak and our Edge-as-a-Service offerings, either of which has increased considerably by double digits. year over year, reflecting increased operating leverage in this business despite higher component and logistics costs.
In HPC and AI, revenue increased 15% year-over-year and order backlog for awarded contracts remained strong at just under $3 billion. extra in the next quarter, with the popularity of significant transactions.
On the computation, demand remained solid, with order accumulation expanding sequentially to some other record and now at five times overall levels. sourcing features for some parts and a shift in demand towards new solutions.
We also remain very focused on executing our dynamic pricing strategy which has been effective in managing emerging purchasing and logistics prices and gives us a very high quality order book. The effects are reflected in the functionality of our operating margin at 13. 3%, plus 210 fundamental issues year over year and still well above our long-term target set in SAM 2021 of 11% to 13%.
In garage, we achieved a new record point of order book and profits above 1%. We continued to succeed in our own IP margin on products that experienced double-digit expansion, adding agile and hyperconverged products. Our garage as-a-service offerings like Block also lead the expansion of orders and ARR among our business segments. Thanks to the favorable evolution of the combination, our operating margins increased to 14. 7%, to 210 basic problems sequentially.
As for Pointnext’s operational services, combined with garage services, orders are receding and reaching an average figure since the beginning of the year in constant currency, similar to the grades of the total for fiscal year 21 despite the exit of our activities. As you know, this is a key component of the recurring earnings and profits of our segments.
At HPE Financial Services, volume grew 4% year-over-year in constant currency with strong GreenLake functionality and a gain of more than 1%. It should be noted that our leasing business protects well from emerging interest rates over time, as our costs are extended and clients decide to increase their rents under dubious macroeconomic conditions.
Our profitability also continues to gain advantages from higher residual prices and bad debt cancellations have returned to pre-COVID levels. 19. 5% remain well above the target of more than 18% set at SAM 2021.
Slide five highlights our earnings performance and EPS, where you can see that our earnings and EPS continue to grow despite the challenging source environment, the exit of our Russian business, and the expansion of currency headwinds. So far this year through the third quarter, we’ve already had a headwind of $0. 05 for currencies and $0. 03 for Russia’s exit. Despite those setbacks, we achieved a greater combination of superior margin gains across our portfolio as we continue to execute our edge-to-cloud strategy.
This improvement can be seen on slide 6, where we achieved non-GAAP gross margins of 34. 7% in the third quarter, up to 50 basic issues sequentially and solid year after year, showing their resilience despite logistics and emerging component costs. This is due to our strategic price movements and the favorable harvester change we have brought to the forefront of the IP garage and our business as a service.
Let’s move on to slide 7. You can see our non-GAAP operating margins of 10. 5% this quarter, 1. 2 more issues sequentially, and 70 core issues year over year. This reflects the expansion of earnings combined with the expansion of gross margin and OpEx savings to give us strong operating leverage across the enterprise. This has also been achieved by proceeding to invest more in R
On slide 8, let’s take some time to remind everyone of the prestige of our unique configuration at China H3C. As announced at the end of April, we have cancelled our existing put option which is blocked at 15 times earnings for the past 12 months to October 31, 2022. We did this to allow new investors in Unigroup to complete their restructuring and are now determining the long-term path for our stake.
We value our presence in China, the largest and fastest growing IT market of the moment, before the execution of any expansion, we will balance the strategic and monetary benefits of continued participation in China with the expanding risks, adding geopolitical risk. H3C represents a vital component of our P
Let’s move on to slide 9. Our operating cash flow was $1. 3 billion in the third quarter. This is in line with our overall seasonality before the pandemic and our favorable expectations of current capital in the current part of the year. We have accumulated actions strategically this year to navigate the supply chain environment. While we still expect to start cutting stock titles in the fourth quarter, it will take longer than expected and through fiscal 2023, it still puts us in a better position to convert continued demand for orders into earnings and money in the coming quarters.
Now let’s move on to our perspective on slide 10. As noted, Antonio and I are very pleased with the continued strength of the call and the development of the order book that gives us confidence to achieve our initial SAM earnings guidance for fiscal 2022 for an adjusted expansion of 3% to 4% for the currency, which now includes a headwind of 2. 5 exchange rate problems throughout the year.
Specifically for the fourth quarter of 2022, we expect earnings to grow at least 5% sequentially, as noted, including currency difficulties. This is still above our overall seasonality to reflect some innovations at the source due to the full recovery of factory activity. in China and our moves to multiple sources, more parts and drive demand.
From an EPS perspective, we are adjusting our diversity of non-GAAP perspective for fiscal 2022 as we move toward the end of the year at $1. 96 to $2. 04. This reflects the effect of the source environment, which we hope to maintain. in the fourth quarter, and the continued appreciation of the US dollar since the last quarter.
As a result, this implies that for the fourth quarter of 2022, we expect a GAAP diluted net EPS of $0. 32 to $0. 40 and a non-GAAP diluted net EPS of $0. 52 to $0. 60. In addition, our loose money is also affected by the exit. of our operations in Russia, as well as through the headwinds of unfavorable currency movements that in the past were absorbed into our previous perspective.
As a result, we now expect to generate loose money for fiscal year 2022 from $1700 million to $1900 million. So overall, I’m very pleased with our effects for the quarter, which are characterized by sustained demand and very strong execution, in a still challenging source environment.
With record degrees of high-quality order book, we are well placed to capitalize on the existing edge-to-cloud opportunity and close out a strong fiscal year 2022. We look forward to seeing you at our next stock analyst assembly in October to give you our outglance for the year and beyond.
Now, with that, let’s open it up for questions.
Q&A session
Operator
Now we will start the response and response session. [Operator Instructions] And the first will come from Credit Suisse’s Shannon Cross. Continue.
Shannon Cross
Thank you so much. I tried to communicate a little bit about the relative strength of his recommendation and how he thinks about his order book and that, obviously, in contrast to his competitor who reported last week, who had a much more conservative or disastrous outlook on demand, frankly. .
So I’m curious, how did you check the backlog?I mean, which gives you confidence to faint and stick well to the recommendation because the currency is more affected now. So any color you can give us even on a geographical or vertical basis in terms of what you hear and see?Thank you.
antonio neri
Of course. Thank you, Shannon, for the question. I can start, then Tarek, feel free to upload your comments. I mean, I’ll say, this neighborhood, Shannon, has been characterized, in my opinion, through a lasting call from customers. And you see what the delay is.
I mean, it’s a record level, more than 3 times the overall old seasonality in some segments. It’s amazing to see the momentum of demand, think of Aruba’s old grades multiplied by 20, and even calculate five times the old degrees.
So it’s very nice. And I think it’s a testament to our pricing proposition, because GreenLake is an extraction platform for us in each and every facet of our portfolio. As we have said about the source chain, the dynamics of the source chain remain largely unreplaced. But what has replaced us is that over the months and quarters, we have taken steps to double our resources or directly order our products, and then implement notoriously in place design changes. That’s because of the combination of our portfolio and visitor segments, we are very well placed to meet this challenge early next quarter and into 2023. But we expect the source to remain challenging as we approach 2023.
That said, I mean, the thing is that we think that at the end of the day we’re going to see symptoms of appeasement by — from what we’re seeing in the customer area and even in industry and automotive, which are a verbal exchange with suppliers as they start thinking now about how to balance that substrate of suppliers and, obviously, the company is well positioned.
As for the elimination of accumulation, it will still take a little while, and that’s good news for us, because it gave us momentum in the fourth quarter of 2023, which is wonderful because remember, two things happened in that accumulation. The first is the value of a maximum gross margin, as Tarek just did. So, in many ways, it is for that gross margin. And number two, we haven’t noticed any significant cancellations of all of them.
Tarek Robbiati
Yes. Shannon, if I could upload some comments. What we do is design new responses that rely less on parts experiencing shortages. We drive demand for those answers in all aspects of our portfolio. .
But as Antonio said, it will still be a complicated environment next year. And it’s an opportunity for us to continue generating profits with high-quality margins through fiscal 2023.
I need to pick up on what you said correctly about the third class and have absorbed an accumulation of two hundred basis points in terms of exchange rate. This is a very vital point. Another two hundred fundamental headwind emissions are around $580 million in profits. Multiply that through the OP margin, and you can really see what effect it would have had on EPS. Therefore, we are very satisfied with the functionality of our company. And the fact that, despite significant coin headwinds, we can keep the 3% to 4% earnings consultant in a constant currency and therefore our EPS consultant accordingly. So thank you for pointing it out.
antonio neri
One last thing, Shannon, is that she also wants to perceive that as we continue to expand the as-a-service component of this, storage, computing, personal cloud, and other responses are more standardized, giving us greater predictability on this front. So it will also happen to us through this environment of scarcity of sources.
Shannon Cross
Thankbyou
andre simanek
Super. Thanks for the question, Shannon. Can we talk to one, please, operator?
Operator
The next one will come from Meta Marshall with Morgan Stanley. Continue.
marshall meta
Super. Maybe based on this question. The OpEx or the type of your EPS commentary could imply a higher OpEx in the fourth quarter, especially given the gross margin levers you saw in the last quarter. So you’ve noticed that some of that fits the effects of FX, but I think there’s some sort of FX tailwind in the OpEx coin. So, I just sought to get an idea of, is this, do you see higher than expected operating expenses and expenses?Is there less leverage in gross margin, as we possibly would?Do they recognize higher price inventories? Anything that is taken into account in the fourth quarter would be useful. Thank you.
Tarek Robbiati
Of course, Meta. Thank you for asking the question. Therefore, FX is obviously a headwind for cash inflow because 55% of our cash in the company is denominated in currencies other than the US dollar. of the prices we incur are lower in dollar terms. Net-net FX is a headwind for operating profit and EPS. Therefore, we charge containment in the midst of the pandemic, as you may recall, in April, May 2020. And we continue to be disciplined in OpEx to move forward.
And this is demonstrated through our performance in gross and operating margin. We are confident in the trend of our gross margin and believe, based on my scenario, that there is an additional opportunity to extract operating leverage in the fourth quarter and beyond, thanks to the expansion of the spaces to the upper margin of our portfolio, such as the periphery.
I feel quite comfortable with the situation. If you take a look at our gross margins, to add more color, they’ve increased 50 basic issues sequentially and are solid year after year. And this despite an inflationary environment that would put a lot of pressure on the supply chain. , logistics prices and curtain prices, of course, but also in hard work prices. So in general, look at our margins and where they lie in relation to the headwinds we just talked about.
antonio neri
I will admit a thing or two. First of all, from one year to the next, you see a slight reduction in operating expenses as part of the turnover, but those operating expenses that we report, obviously, the long deadlines, the R
And then in R
andre simanek
Super. Thank you Meta for the question. Operator, can we move on to the next one please?
Operator
The next one will come from Toni Sacconaghi with Bernstein. Please continue.
Toni Sacconaghi
Yes. Thank you for answering the question. I wonder if you can just comment on the linearity throughout the quarter in terms of orders and if you saw any deterioration. And then I hoped that maybe it could help me quantify the overall order book because, as you noticed, comparisons of your orders are very complicated going forward, up 20% in the last 4 quarters. So if orders end up falling 10% annually over the next 3 or 4 quarters, that means $2. 8 billion in fewer orders. I have the impression that it has maybe $3 or $4 billion in arrears that are getting higher than normal. So, that would still recommend that the reported earnings expansion can be recovered. But I wonder if you can also communicate about this complicated ordering dynamic and probably face negative order expansion and if the delay in the end lives up to the calculations I’ve described that make everyone feel smart about the concept of continuing to rack up profits. Thank you.
Tarek Robbiati
Of course. So, first of all, I should point out that our – we do not make any comments and do not give an exact figure on the order book. But suffice it to say that it’s almost twice as much as last year at this time of year. . That’s the first conclusion, and we rely on her and her company.
There are no significant cancellations. So, it’s a tailwind for profit generation, and we’re increasingly running on our global operations team to turn that accumulation into profit. The controls are there. And they are there when we look at segment by segment, we give them in our presentation, the detail of the expansion of orders.
So, you can see the expansion in orders in Edge, for example, which has been relentless, had seven consecutive quarters of really extensive double-digit Edge order expansion. And the same goes for the other parts of our portfolio.
HPC, AI has its own dynamic with futures contracts and a really extensive order book north of $3 billion. Therefore, demand is not slowing down to the point of affecting our fiscal 2023 consultant that we delivered to SAM last year, and that we reiterated this year.
We’re still seeing an ongoing call. Even in the third quarter, strong demand across the portfolio in compute, storage, HPC, AI at the edge. It’s likely to be lower than it was four quarters ago for apparent reasons. These are complicated comparisons.
But the way to think about it is that the tide has risen. And now the tide is catching its breath a little bit, but it’s still there compared to where we were at the point of knowledge of the pandemic.
antonio neri
I’ll say, Toni, just to get on that, we use the word stable, because obviously you use the word expansion in the context of the comparisons here. But stable. Stable, then in stability, we have expansion in some exclusive segments that continues. And Tarek talked about Edge, we have 20 times more delays in this sector. And even at Compute, we still have five times.
So, and the other thing here is that GreenLake is an ordering accelerator as it gives us a touch of renewal, expansion and cross-selling across the enterprise. So I think the initial direction we set for Sam last year, which was 2% to 4% over the long-term period, is still true.
And then when we meet here at SAM at the end of October, we’ll tell you what we’re going to do in particular for 2023. But I’m sitting here today and I feel pretty smart about the momentum we have, because the demand is strong and our strategy resonates with the shift to service as a service.
Toni Sacconaghi
Thankbyou
andre simanek
Perfect. Thank you Toni. Next question please.
Operator
The next one will come from Tim Long of Barclays. Pass forward.
long tim
Yes, I looked to get back to the business as a service and ARR type. You limit yourself to the long-term consultant here, it’s a small acceleration of what we’ve noticed in the last quarter. Could you dig a little deeper into that?What do you see going on to this peak of expansion over several years of new systems or new products that maybe make a style transition so that we can stay from 25 to, sorry, 35% to 45% expansion?ARR rate? Thank you.
antonio neri
Of course. Well, our transformation as a service through the Edge-To-Cloud platform, GreenLake, is my number one priority and is at the heart of our strategy to bring that unified hybrid cloud that everyone is talking about in the market. , consumers need to consume IT responses in other ways. And this style of computational application is developing very, very fast. And I would say we were the first with our strategy. our order momentum, on the right, since the beginning of the year. We have higher bookings as a service through 86%.
And clearly, it gives you the assurance that 35% to 45% can surely be achieved. But what gives me the most confidence, honestly, Tim, is the fact that when I was at Discover just two months ago, and you were looking at the breadth of our answers across the platform and delight that we offer, whether it’s to deploy connectivity anywhere in your company or where to deploy a personal cloud that we’ve created with the new personal cloud business responses, where you can run any type of workload, whether virtualized, containerized, or without an operating system, or if it is mandatory to implement knowledge responses to take advantage of knowledge growth.
And this platform today has more than one knowledge under control and 2 million devices under control as well. So our confidence to deliver 35% to 45% is surely there. And don’t forget that at the last meeting of security analysts, we were guided until the end of 2024 to have an ARR close to $2300 million, and we are on track to get there. Tarek, do you have any comments on that?
Tarek Robbiati
I think you said it very well, Antonio, we are just pointing out one thing strategically, clearly, the word is now hybrid. Our consumers have spoken, the market has spoken, the global is hybrid. In order for us to scale a business as a service into a global hybrid for any player to do, you want to create a platform. Without the platform, you can’t scale, scale sustainably, and take credit for the global hybrid.
And when you take a look at what that means, it translates into superior margins in that business over time. The margins of this business are enriched as we load more installs on the platform and more software content into the offerings. progress in expanding our software and facilities is combined through six editions year after year to the current point of around 64%. And we’re aiming for more than 75% through fiscal 2024, as we upload more and more software content with knowledge garage installations like Zerto, upload more flexible content with networking installations like Silver Peak, and new workloads.
So, our ARR is already well above companies’ average gross margins, and we’re pushing it to even higher levels by adding more and more high-value software and content.
long tim
Super. Thank you so much.
andre simanek
Thanks for the question, Tim. The right one, please.
Operator
The next one will come from Amit Daryanani with Evercore. Please continue.
Amit Darianani
Thank you for taking my question. I guess I hope you can communicate a little bit about the October quarter consultant and what he’s hinting at here. I think the implication is that margins will accumulate through about a hundred basis points, if not more sequentially. And Tarek, I know he talked about a bigger potential combination there. But maybe it can only help us understand what the gains would look like sequentially compared to the previous seasonality in October?And then, thinking about this base margin expansion a hundred more, the operational line sequentially, what are the main catalysts?If you call it that, it would be useful.
Tarek Robbiati
Yes, okay. So let me check it out to break it down through the P
Mix that with the fact that operating expenses are expected to decrease because of the measures we’re taking and the pause we’re putting in hiring and spending of a discretionary nature, or I.
Amit Darianani
Perfect. Thank you for running the total style on what we have here.
andre simanek
Appreciated. Thanks for the question, Amit. The one please.
Operator
The next one will come from Aaron Rakers of Wells Fargo. Continue.
Aaron Rackers
Yes. Thank you for responding to the query. I sought to return to the type of sustainability of the operating margin and specifically in the computing segment. If we take a look at the last few quarters, you will have noticed that from the singlest digits decrease to a kind of more important teenagers per unit. However, ASPs have increased by 10% to 20% year over year. So I guess my query is, how do you feel about the sustainability of that profitability given the uptick in ASP noted in recent quarters?And can you separate the increase in value you’ve noticed between the combination and the pass-through from the component value increases in recent quarters?Thank you.
antonio neri
Maybe he’ll start and then give it to Tarek. Thanks for the question. I mean, obviously, we handle our. . . computing business very differently from our competitors. And you see that in the functionality of our operating margin, on the right, 13. 3%, which is more than two hundred basic issues year over year. year. But we’ve guided you and the rest of the street by 11% to 13%. So, we expect that over time they will return to the levels of some, somewhere in that range. But at the same time, we continue to be incredibly disciplined when it comes to pricing. And this order book that we have, which is now five times the old levels, has been valued with that in mind, with that discipline of pricing. And that’s why it gives us confidence that in future quarters here, we continue to see strong functionality.
But in the end, obviously, we will see the balance between sets and PUAs, because in particular, reminiscence prices will begin to take effect. But at the same time, we are also focusing on successful expansion sets in other market segments.
And one strategy to achieve this is our GreenLake platform, as we will be successful in other consumers with other configurations with a more positive margin, especially since all GreenLake offerings come with the XOS pointnext accessory.
And one domain that will also see us replaced is the software that comes with our computing platform, which will also ship as a SaaS on the GreenLake platform, as we have entered now or soon we will enter GEN-11.
So, this unit pricing dynamic and then provide us with the setup that we’re going to test through the next generation here. But that 11% to 13% is more moderate in our mind. And clearly, we achieve this through the administration of our e-book of orders and new orders. Tarek, do you have any comments on that?
Tarek Robbiati
I can upload a little more color about the dynamics of the earning AUP sets here, right?So, I should point out that our backlog is made up of very clever raises in sets and UPAs, right?Revenue for each quarter comes from the order book. And particularly for the third trimester, when it reached sets and AUP, sets were reduced in adolescence due to the tight supply chain, but PUPs also increased in adolescence due to richer configurations. And the price movements we’ve had. Therefore, it remains a very dynamic company to observe.
Antonio pointed out the need to control RAM prices, which we do on a one-basis. And we can temporarily oppose our pricing strategy if the market realigns. But I think the long-term trend I’d like you to focus on is that of richer configurations.
These are the main driving force and the more structural driving force of AUP increases than pricing equipment and the movements we can take. And we’re very, very satisfied overall with the way we manage margin sets in costs and combine in this computational business. And as Antonio pointed out, with OP margins of 13. 3%, it is by far the most successful computer server business in the industry.
Aaron Rackers
Yes. Thank you.
andre simanek
Super. Thanks for the question, Aaron. The one, please.
Operator
The next one will be from Wamsi Mohan of Bank of America. Continue.
wamsi mohan
Yes thank you very much. Tarek, maybe just to keep this comment on costs. When you think about structural rather than cyclical effects, can you analyze how much of those costs you see as structural rather than cyclical?We’re talking about improvements in procurement, how do we deserve to reconcile that with the backlog that’s still high?If we take a look at fiscal 2023, we start to see a moderation there in unit expansion and the AUP is softening. Can it also help us think about the effect on the flow of money?Thanks a lot.
Tarek Robbiati
Oui. Il, therefore, it is complicated to analyze what is structural through configurations and / or prices in relation to what motivates our general AUP in the calculation table. And the explanation of why they are our own actions. We started to drive demand towards new configurations where we have the supply and in particular gen10 plus servers are very lucky in today’s market. And those are, by definition, a superior configuration compared to Gen10. And so, I would say that a lot of the good fortune we have there is due to our own engineering and call address to be able to fulfill the orders that we have in our portfolio.
And then, particularly for the flow of money, in general, at the corporate level, the dynamic that everyone wants to take into account component of the expansion of profits that we report, which would be at least 5% based on earnings, according to reports. , applying the margin observation we discussed, there is going to be some expansion of monetary gains in the fourth quarter sequentially compared to the third.
But the ultimate vital driving force of loose money in the fourth quarter is our money conversion cycle. We are already beginning to see in the third quarter that foreshadowed current capital turns into a tailwind. And in the fourth quarter, as we process our accumulation and generate, as a result, higher revenue, we will also decrease stock levels. And our overall money conversion cycle will go from a positive 18 today to a negative figure, which is favorable for losing money generation in the fourth quarter.
This is the key dynamic that I need you not to forget as we analyze stocks, stocks peaked in the third quarter, it will take longer than expected to arrive. But overall, our goal is to manage our money conversion cycle, reduce it to a negative number, which is smart to lose money and we’re going to start doing it with our team without delay in the fourth quarter, and we’ll stay that way for the next few quarters.
antonio neri
So Wamsi, just a comment on the factor around the design and the scenarios and the like. We’ve been talking about it for several years, I would say. And each and every generation that we’ve brought to computing, call them Gen10, Gen10. 5, soon Gen11, you see that, speaking, the two-thirds, one-third rule holds over time, right?the server platform, and this is motivated by more reminiscences and more garage and other garage categories because obviously, when you transfer to NVMe, then you transfer to NVMe in Fabrics and others, adding SmartNIC, the content of the service becomes richer and richer and therefore, the content of Pointnext OS also becomes richer because it now has other amounts to back up.
So over time, when I look at trends, it’s the same two-thirds, one-third. And this venture continues to surpass $12 billion, no matter how you look at it. But I’m convinced that as we move forward with GreenLake, the type of setup is also enriched through the cloud experience we’ve built around it.
andre simanek
Super. Thanks for the question, Wamsi. Operator, I think we have time for one, please.
Operator
The last one will come from Rod Hall with Goldman Sachs.
Bar room
Hi, guys. Thanks for the question. Thank you for having me. I guess most of my questions have been answered. I think I could ask questions about money services. This number has decreased in the last 3 quarters. Just out of curiosity, if you see something in that from the point of view of origin or anything else that can give us a clue about what’s going on with other parts of this business. We know there are corporations outside your doorstep that are there. By the way, Dell said they saw an accumulation in the origins because of what they see in the larger macro. And I wondered if they had more color in that.
Tarek Robbiati
Yes definitely. So, yes, as with our competitors, we’re seeing an increase in volume or what we call the volume of funding. It is accumulating up to 4% year over year. And this is due to the robust functionality of GreenLake, but also to everything we fund at HPFS monetary facilities. So, the $13 billion leasing portfolio continues to generate really extensive profits and those gains come from two sources. First, it’s about cash in cash, as all of its monetary facilities are, it’s about propagation and making sure the spread isn’t affected by emerging interest rates. This continues unabated.
And we also see the successful expansion driver of the HPFS moment, which is the fact that in this macroeconomic environment, consumers tend to use their appliances longer, which improves the realization of residual values. And all of this is going in the right direction. We’re very happy with that. And if you take a look at the quality of HPFS goes backwards, it’s incredibly superior. Bad debts have regressed to pre-COVID levels, which is remarkable. of the portfolio. And that’s a maximum equity pullback of 19. 5%, 1. 3 more emissions than last year, and it’s well above my long-term forecast for this company of an 18% return on investment and well above previous pandemic levels. So I am very satisfied with the functionality of HPFS.
Bar room
It’s great. Thank you very much Tarek. Enjoy.
andre simanek
Thank you, Rod, for the question. Antonio, I give you the ground for your last observations.
End of questions and answers
antonio neri
I would like to comment on the last question, which is vital that you also understand. HPFS is very strategic when moving as a service, because as the business grows, it will manage many assets. And fleet control is an essential component of the strategy. And that gives us great merit when you have a set of asset lifecycle control and scale functions, because in some cases, consumers will say, ‘Hey, okay, we’re this solution, and we’re going to have the ability to deliver to our consumers faster. ‘ So I don’t need to miss that point from a strategic standpoint.
Now, just to conclude, I know some of you probably have to move on to the HPQ call, but I’m passing through to conclude by saying that we had other quarterly functionalities forged like the ones we did in 2022. I think we concentrate on strategy, operations execution is quite acceptable to shareholders, and that is reflected in our effects and forecasts.
Our project portfolio is incredibly strong and our order book is now breaking records. And it gives us the confidence to deliver on our 2022 commitments and the consultant we just provided today. But what pleases me most is that HPE is adapting more and more applicable to our consumers through our approach.
Thus evolved a unique and differentiated strategy that addresses, what I call, the demanding situations of modernization of knowledge first and the opportunity we see in the market, and that resonated with HPE GreenLake.
Therefore, we are very confident in our ability to deliver what we discussed today, in the fourth quarter and through 2023. And we have a very talented control team and 60,000 workers who are motivated for this purpose of pivoting the company and offering our shareholders. So thank you for your time and we look forward to seeing you at the security analyst assembly at the end of October. Thank you.
Operator
Ladies and gentlemen, this concludes our day today. Thank you for your participation. You can now log out.