Andrew Simanek - Head, IR Antonio Neri - President and CEO Tarek Robbiati - EVP and CFO

Katy Huberty - Morgan Stanley Simon Leopold - Raymond James Toni Sacconaghi - Bernstein Shannon Cross - Cross Research Jim Suva - Citibank Jeff Kvaal - Nomura Instinet Rod Hall - Goldman Sachs Amit Daryanani - RBC Capital Markets

Good morning, afternoon, evening and welcome to the Fourth Quarter 2018 Hewlett Packard Enterprise Earnings Conference Call. My name is Brian. I will be your conference moderator today. At this time, all participants will be in listen-only mode. We will be facilitating a question-and-answer session towards the end of the conference. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today’s call, Mr. Andrew Simanek, Head of Investor Relations. Please proceed.

Good afternoon. I am Andy Simanek, Head of Investor Relations for Hewlett Packard Enterprise. I would like to welcome you to our fiscal 2018 fourth quarter earnings conference call with Antonio Neri, HPE’s President and Chief Executive Officer; and Tarek Robbiati, HPE’s Executive Vice President and Chief Financial Officer. Before handing the call over to Antonio, let me remind you that this call is being webcast. A replay of the webcast will be made available shortly after the call for approximately 1-year. We posted the press release and the slide presentation accompanying today’s earnings release on our HPE Investor Relations webpage at investors.hpe.com. As always, elements of this presentation are forward-looking and are based on our best view of the world and our businesses as we see them today. For more detailed information, please see the disclaimers on the earnings materials relating to forward-looking statements that involve risks, uncertainties and assumptions. For a discussion of some of these of risks, uncertainties and assumptions, please refer to HPE’s filings with the SEC, including its most recent Form 10-K. HPE assumes no obligation and does not intend to update any such forward-looking statements. We also note that the financial information discussed on this call reflects estimates based on information available at this time and could differ materially from the amounts ultimately reported in HPE’s quarterly report on Form 10-Q for the fiscal year ended October 31, 2018. Also for financial information that has been expressed on a non-GAAP basis, we have provided reconciliations to the comparable GAAP information on our Web site. Please refer to the tables and slide presentation accompanying today’s earnings release on our Web site for details. Finally, please note that after Antonio provides his high level remarks, Tarek will be referencing the slides and our earning presentation throughout his prepared remarks. As mentioned the earnings presentation can be found posted to our Web site and it is also embedded within the webcast player for this earnings call. With that, let me turn it over to Antonio.

Thanks, Andy. And thanks to everyone for joining us on the call. Hewlett Packard Enterprise deliver another strong quarter in Q4, concluding a very successful fiscal year 2018. As we close my first fiscal year as a CEO, I’m thrilled with where we’re stand in the marketplace; and I’m very excited about our team and our strategy. Our strategy should be familiar to all of you at this point. We are accelerating growth in the Intelligent-Edge, delivered in profitable growth in a hybrid IT space; and continue to grow operating profit and expand margins all while investing for growth in the future. To do that, we’ve been driving a better delivered strategic shift of our portfolio. Which we first laid out for you are the Security Analyst Meeting in 2017. We have been focused on executing against our strategy and we’ve delivered on what we said we will do. In fact, we exceeded the revenue growth, non-GAAP, operating profit, non-GAAP earnings per share and free cash flow tied to get that we said at the Security Analyst Meeting over a year-ago. We are driving both meaningful top line growth and margin expansion, fueling shareholder returns, and we're doing all of that while simultaneously advancing our innovation agenda, laying the foundation to deliver value in the future to customers, partners, and shareholders. Fiscal year 2018 shows this strong momentum I’m talking about. For the full-year, we grew revenue 7%, well above $30 billion, which is even slightly higher than I predicted on our 2018 Security Analyst meeting in October. We achieved 13% growth in our strategic Intelligent Edge segment for the year with $2.9 billion in revenue. We grew our large Hybrid IT business this year by 6% to over $25 billion. Our growth this year was nicely balanced from a geographic perspective with particular strength in EMEA. I commend our team in Europe for executing very well on their go-to-market priorities and getting traction in value segments, which are particular strong results against a backdrop of political and economic challenges in that region throughout the year. At the same time, even as we drove impressive growth, we also expanded profitability in fiscal year 2018 generating $2.8 billion in non-GAAP operating profit. That is an increase of $576 million in profit over the prior fiscal year. This profitability enabled us to exceed our free cash flow targets generating $1.1 billion for the year, largely powered by strong cash flow from operations of $3 billion, which more than doubled over the prior year. Lastly, we also returned more than $4 billion to shareholders in fiscal year 2018. Our performance in fiscal year 2018 tells me we have the right strategy at the right time, and that we have the right leadership team driving innovation and execution. We have strong momentum across our differentiated portfolio as we head into an expected healthy IT spending environment in 2019. Let's take a quick look at our portfolio. Our competitive differentiation is becoming increasingly clear to customers, it should be to all of you as well. At Discover Madrid last week and at the Security Analyst meeting in New York in October, we talked a lot about our unique ability to advance our customers businesses. We do this through a strategic mix of product and services that address their current needs while also them transition to an edge-centric, cloud-enabled, and data-driven enterprise of the future. So how are we doing that? First, we believe the Intelligent Edge is the next frontier and it is our top strategic priority. 75% of the data is created at the Edge and our customers increasingly need help to tuning all their data from the Edge to the Cloud into intelligence they can use in real-time. This business is growing double digits, up 15% for the full-year. All three categories within this business campus and branch, edge compute and Aruba services are demonstrating meaningful growth. And as more compute capacity moves to the Edge, we expect this business to continue to be a driver for us. Our Hybrid IT business, which includes compute, storage, data center networking and our Pointnext services business also had solid year-over-year growth in fiscal year '18 of 6%, coupled with meaningful operating margin expansion of a full percentage point. The secret of our success in Hybrid IT is that we continue to focus deliberately and successfully on portfolio mix. Our compute value offerings grew 9% for the year included 25% growth in high-performance compute. Also, our composable offerings with HPE Synergy have an incredible year growing over 280% and reaching an annual run rate of over $1 billion. And even as we orchestrate the shift from volume to value, we still posted better-than-expected results in -- for compute volume offerings that were up 7% for the year. We are also continuing to be very focused on our storage business and we saw 15% growth in the business. As we move into fiscal year '19, customers continue to see strong value in our Nimble and 3PAR platforms with HPE InfoSight and are enabling customers to operate more efficiently in our autonomous data center. Finally, our HPE Financial Services business continue to serve a strategic role for our customers. It is a critical piece of our overall offering affording customers flexibility in how they consume technology, and often helping them to unlock value trapped in their own balance sheet. HPE Financial Services' core capability that stands behind our HPE GreenLake model, and every GreenLake contract includes 100% attach of our Pointnext operational services offerings. We are delivering these benefits for customers while growing our financing volumes in achieving a double-digit return on equity. In short, we are becoming more selective in where we are investing for growth and improvements you see in overall margin shows these approaches paying off. Tarek will take you through our Q4 results in a moment. But before I turn the call over to him, let me offer some final thoughts on the opportunity I see for Hewlett Packard Enterprise moving forward. The ongoing explosion of data is powering intelligent edge, creating a $140 billion opportunity. As you know, we have committed to invest $4 billion over four years to capitalize on this market. Meanwhile Hybrid IT market opportunity remained enormous at $185 billion. And we see no end in sight for the mix shift from volume to value. We continue to see great momentum in ongoing shift to hyperconverged and composable infrastructure, which is driving our customers portfolio mix. The other major trend we're benefiting from is customers increasing demand for flexibility, both in terms of how they deploy infrastructure and how they pay for it. By desegregating the hardware and software elements of the infrastructure, we can give customers the cloud experience in economic on-premises with applications deciding where they should run in the most efficient way. HPE GreenLake is a flagship offering here, combining a cloud like experience for on-premises infrastructure, let the customers pay as they go and only for what they consume. To date, we already have more than 400 customers using our consumption based model. We estimate this is over $2 billion of total contract value, including hardware. Along with our HPE Synergy platform, this solutions has our customers decide how they use infrastructure and run the application in the most efficient way. One of the recent development, I want to highlight is the acquisition of BlueData, which takes our consumption model a step further in through AI, machine learning and Big Data analytics. BlueData has developed an outstanding as a services software platform that uses continue technology to make a simpler and more cost-effective to deploy large-scale machine learning and big data analytics environments. It is complementary to our Apollo systems and professional services, extending our data first strategy. By seamlessly combining their software platform with our existing software defined infrastructure and services we will be able to help our customers accelerate their AI and big data transformations and better extract insights from the data, whether on-premises, in the cloud, or in a hybrid architecture. Overall, our unique offerings have positioned us right where I want us to be, a powerful force as we show the way customers are generating and utilizing data in their businesses. Across all area of the business, we're putting our customers at the center of everything we do and that’s reflected in our performance, customer feedback, and recent customer wins. For example, we recently support an extensive technique to create a wireless access point for an in-flight entertainment system, utilizing our eight mobile-first campus products. These wireless access point mobile is one of the most advanced in-flight wireless network in the sky. HPE also signed two multimillion dollar contracts, we grew for sometime there in Spain and Mexico. For the deployment of Santander's mobile cloud based on HPE Synergy and we had the significant HPE GreenLake win with Danfoss, the largest manufacturing company in Denmark. Looking ahead to 2018, I’ve a great confidence that we will continue to build on all this momentum. We will continue our work to accelerate growth in Intelligent Edge, deliver profitable growth in Hybrid IT, and balance all of this with continued cost savings from HP Next, a resulting margin expansion. Now before I turn the call over I will like to formally welcome Tarek to his first earnings call as a CFO. As you know by now, Tarek joined us in September 17 and jumped right been quickly getting up to speed on HPE's Strategy and financial commitments so that we can continue to deliver for our customers and partners and rise significant value for our shareholders. Hope many of you have the opportunity to meet and speak to Tarek at the Security Analyst meeting. We're very fortunate to have him on the team and we will continue to benefit from his financial expertise, his customer centric mindset and insight and his industry segment knowledge. Tarek? A - Tarek Robbiati: Thank you very much, Antonio. It's a real privilege for me to report Hewlett Packard enterprise quarterly earnings for the first time in my new role as CFO. In my view, there is a great potential at HPE. No other company has the full suite of assets and channel capabilities needed to compete across the extra cloud continue. During the half month into the role, I'm very excited to be part of HPE's leadership team as we got the company and our customers into the next phase of a technology led transformation. But before I share with you our results in detail, I would like to take this opportunity to thank my predecessor Tim Stonesifer for the hard work stands behind HPE strong fiscal year '18 performance and a great handover between us. Now let me share with you our financial results for the quarter. I will be referencing the slides from our earnings presentation to better highlight the strong momentum of the business throughout fiscal year '18. Starting with Slide one, you will see that our Q4 financial results were very strong. We ended the fiscal year with robust revenue growth, significantly improved operating margins, better-than-expected non-GAAP-earnings and free cash flow. Our results demonstrate our ability to grow free cash flow by accelerating growth in the Intelligent Edge, driving profitable growth in Hybrid IT and continuing to grow operating profits by expanding operating margins through HPE Next and also by shifting the portfolio mix, higher margin and better services attached offerings. The punch line is that our resulting growth of 49% year-over-year in cash flow from operations demonstrate that our strategy is bearing fruit. From a macro perspective, IT spend continue to be strong and customer demand remains healthy heading into fiscal year '19. The market remains competitive, but pricing remains rational and we are holding onto favorable pricing with improving commodities costs to expand gross margins. DRAM cost have peaked and are starting to come down. NAND prices who are less of an impact on our portfolio continue to decline. Currency drove a 50 basis points tailwind to revenue year-over-year. Having said that, foreign exchange rates continue to move unfavorably in the last couple of quarters. And we now expect currency to be a headwind of closer to two points of revenue growth in fiscal year '19 Looking at Slide 2, total revenue for the quarter was $7.9 billion, up 4% year-over-year and 3% in constant currency. Top line performance in fiscal year '18 was driven by strong execution in a healthy demand environment that we expect to continue heading into fiscal year '19. Slide 3 and 4 give you a geographic breakdown for the quarter. Regionally, HPE's performance was solid across the globe. Americas revenue was up 3% in constant currency. Core compute, which excludes mission-critical systems and Tier 1 and Intelligent Edge both grew double digits in constant currency. Revenue growth in EMEA continued to be strong, up 8% in constant currency with double-digit growth in the U.K., France, and Italy. Performance in EMEA was robust across all business segments with notable growth in Core Compute at 24% and Intelligent Edge at 14%. Asia-Pacific was down 4% in constant currency due to our focus on profitable share in the China market. Growth in APJ, excluding China was up 2% with solid results across all business segments with notable strength in Core Compute, which grew 18%. Slide 5 shows our performance in the quarter by segment. I won't take you through every number, but the key takeaway is that from a portfolio mix perspective, we're winning where it matters. We maintained robust double-digit growth in our strategically important Intelligent Edge segment. In Hybrid IT, our compute value portfolio grew over 20% this quarter. And within HPE Pointnext, our operational services business grew orders and revenue by 2% in fiscal year '18. Overall, we're confident in sustaining robust revenue growth as we continue pivoting our business towards higher margin, higher value offerings and improve our performance in our services business in fiscal year '19. Turning to margins on Slide 6, we continue to deliver significant margin expansion as a result of focusing on profitable growth in Hybrid IT, shifting our portfolio towards higher value, higher margin offerings and continuing to drive HPE Next initiatives. Gross margin of 30.9% was up 120 basis points year-over-year and 20 basis points sequentially. Non-GAAP operating margin of 10.1% was up 190 basis points year-over-year and 50 basis points sequentially. HPE Next has been an incredible success story for us this year and we expect to continue reaping the operating margin expansion benefits delivered by HPE Next for years to come to drive operating leverage and cash flow growth. Moving on to Slide 7. Non-GAAP diluted net earnings per share of $0.45 in Q4 of fiscal year '18 was above the high-end of our previous outlook of $0.39 to $0.44 per share due to strong operational performance, favorable other income and expense and a lower-than-expected tax rate. This marks the fourth consecutive quarter we exceeded the high-end of our outlook range. GAAP diluted net earnings per share was a $0.52 loss, below our previously provided outlook range of $0.16 to $0.21 per share, primarily related to the impact from U.S Tax Reform which was a drag of over $0.85 to GAAP earnings this quarter. Without the impact, we would have exceeded our outlook on this metric as well. Now turning to the segment and business units, starting on Slide 8. In the Intelligent Edge, revenue was up 17% year-over-year and 15% in constant currency with strength across all regions. Operating margins of 10.1% were down 240 basis points year-over-year due to the ongoing significant investments in sales and R&D as we continue to manage this business for growth and share leadership in the $140 billion Intelligent Edge market opportunity. Aruba product grew 17% with continued strong growth across all product categories, including Campus Switching, Wireless LAN and Edge Compute. We continued gaining share in the Campus Switching business recording seven consecutive quarters of share gain and saw an audible triple digit growth in our Edge Compute business. Aruba services was up 16% on continued installed base growth due to strong attach of our software platform like ClearPass or Secure Network Access Control. As you can see from the revenue mix chart, Aruba services represents today a small portion of Aruba's total revenue, which highlights a great potential for the upcoming years. Moving on to Slide 9, in Hybrid IT, revenue was up 5% year-over-year and up 4% in constant currency. Operating margins were 11.9%, up 210 basis points year-over-year and 130 basis points sequentially in line with our expectations. Compute Revenue was up 9% year-over-year and 14% excluding Tier 1. As a reminder, Tier 1 was over 20% of our compute portfolio couple of years ago and is now under 10%, which is a proof point of our commitment to improving our portfolio profitability mix. Our Compute Value business, which has higher margin and better services attached has continued momentum growing at over 20% year-over-year. This was driven by our hyperconverged portfolio, which includes synergy up triple digits and currently at over $1 billion revenue run rate. Also our high-performance compute category, which was up over 50% and finally mission-critical servers which was up 14%. Revenue growth in our volume business was once again higher than planned in the high single digits excluding Tier 1, driven by strong growth in core rack and tower. Also we continue to drive higher AUPs in total compute, which was up 20% excluding Tier 1 by increasing our mix of Gen10 servers with richer attach configurations maintaining pricing power and to a lesser extent passing through elevated DRAM costs. As expected, unit declines excluding Tier 1 moderated to mid single digits this quarter and we're confident that we can continue to offset moderating unit declines with structural AUP increases heading into fiscal year '19. Storage revenue was up 6% year-over-year as customers embraced our intelligent storage offerings embedded with our AI-based predictive analytics InfoSight platform and we improved our go-to-market execution. Big Data had another strong quarter growing at 92% year-over-year, which will further benefit from a recently announced acquisition of BlueData. Entry storage growth was also solid. Looking forward into fiscal year '19, we are pleased with our full portfolio across Nimble and 3PAR and we expect to gain share in the external storage market. HPE Pointnext revenue declined overall 3% year-over-year due to our continued intentional exit from low-margin countries in the advisory and professional services business, but was flat on our full-year basis and would have been up 1%, normalizing for those country exit. If you look at our higher margin operational services business, revenue was up 2% on a full-year basis. Looking into fiscal year '19, we see continuous growth in operational services orders as we expect favorable mix from our value offerings that have better services intensity and from our consumption based offerings with HPE GreenLake, which grew orders at a 30% year-over-year rate in constant currency this quarter. Moving to Slide 10, HPE Financial Services revenue declined 7% year-over-year and 5% in constant currency due to a large one-time lease buyout deal in the prior year period. Normalizing for this one-time buyout, revenue was up 3% year-over-year. Financing volume remained strong across all regions and was up 8% year-over-year with solid growth in our direct business. Operating margin increased 20 basis points year-over-year to 7.8%. We are very pleased with HPFS performance and look to accelerate its contribution to the business for years to come. Now turning to cash flow on Slide 11, free cash flow was $1 billion in Q4 in line with our expectations and consistent with prior year seasonality. Cash flow from operations growth has been significant in fiscal year '18, driven by HPE Next and shifting our portfolio mix to where we want to win. That is where we have higher margins and better services attached. In fiscal year '19, we expect free cash flow to be $1.4 billion to $1.6 billion as we announced at SAM a significant improvement compared to this year. We also expect our cash flow seasonality to be similar to prior years where the first half is a use of cash with particular emphasis on Q1, and then we generate significant cash in the second half of the year, primarily in Q4. With respect to our capital management strategy and as part of our continued $7 billion capital return plan through fiscal year '19, which we announced in Q1, we returned $1.1 billion to shareholders during the quarter. This includes the previously announced 50% dividend increase, totaling $164 million in dividend payments. We repurchased $983 million of shares in the quarter and exceeded our $3.5 billion buyback target for fiscal year '18. Finally, as you can see from Slide 12, our balance sheet remains strong and we ended the quarter with an operating company net cash balance of $3.1 billion. Looking into fiscal year '19, we expect to return approximately $2.9 billion, which is the remainder of our $7 billion capital returns program thus delivering on our commitment to shareholders. Antonio provided our fiscal year '18 performance overview, but let me recap it here now that you’ve seen the quarterly results. Fiscal year '18 was really an outstanding year as you can see from Slide 13 through 16. For the full-year, we grew revenue by 7% year-over-year with notable growth in compute value at 9%, storage at 13%, and edge at 13%. We grew non-GAAP operating profit by 26% and delivered a non-GAAP operating margin of 9%, which was up 140 basis points year-over-year and in line with recent communications. We executed well HPE Next, pivoted our portfolio mix towards higher value, higher margin offerings, which came with better Pointnext services attached and grew our consumption based services business. Also we delivered non-GAAP EPS of $1.56 above our most recent outlook of $1.50 to $1.55 and well above our original SAM 2017 outlook of a $1.15 to $1.25, a growth of over 60% year-over-year from continuing operations. Cash flow from operations were $3 billion, a growth of over 120% year-over-year, while free cash flow came in at $1.1 billion significantly above our fiscal year '17 levels and above our fiscal year '18 guidance. In summary, we're far exceeded our full-year revenue, operating profit, and cash flow commitments outlined at SAM in 2017. This demonstrates that we have the right strategy and our execution remains robust. Now turning to our outlook on Slide 17, at our recent Securities Analyst meeting, we provided our outlook for fiscal year '19 and I would encourage you to review representation for a more detailed discussion of that outlook. It's worth reiterating a few points for this call. Our top line perspective, we expected to grow our fiscal year '19 revenue adjusted for lower margin Tier 1 business and currency fluctuations. Also we expect to grow our fiscal year '19 non-GAAP operating profit by 6% to 8%. As a reminder, we will be removing nonservice pension costs and benefits from our non-GAAP results. Consequently, our fiscal year '18 non-GAAP EPS adjusted for pension accounting and taxes would be a $1.45. We finished the year better than what we flagged in our 2018 SAM. Looking forward, our fiscal year '19 guidance is unchanged with diluted net earnings per share of a $1.51 to $1.61 for non-GAAP EPS and 8% improvement over the prior year. In our GAAP EPS outlook remains $0.73 to $0.83 per share. Finally for Q1 '19, we expect diluted net non-GAAP EPS of $0.33 to $0.37 and diluted net GAAP EPS of $0.19 to $0.23 per share. So, overall, I'm very pleased with the performance not just in the quarter but the full fiscal year. We have the right vision and execution and the results show that we are winning where it matters. With that, now let's open it up to questions.

[Operator Instructions] Today’s first question will be from Katy Huberty with Morgan Stanley. Please go ahead.

Thank you. Good afternoon. Sorry about the voice. Just two quick questions, I will ask them at once. The first is how would you breakdown the server revenue growth in the quarter between units and ASPs. Then you mentioned a couple times in the call that you expect robust demand that continue into next year. Who are those signals that give you that confidence given everything that's going on in the macro environment. Thank you.

Hi, Katy. This is Antonio. First of all, I hope you guy will soon -- I will answer the second question first about the macro environment. That is why I’m confident is because we see ongoing demand from customers and their demand is driven by the amount of data we are creating, we are generating. And obviously regulations like privacy, and others, requires that data to be stored, to be managed, to be managed to be curated, and obviously extracted value as soon as possible. So it's a function of the data. And if you look at the charts actually, the data growth outpaces the compute growth, which means that compute growth has to catch-up sooner or rather than later. So from my vantage point, as long as that data continue to grow and I mentioned this before, two years from now we’re going to generate twice the amount of data we generated in human history. That means that data has to be computed and today only 6% of the data has been utilized. The other 94% is not being utilized. So from that point I feel very good and confident about the ongoing demand and we see that in the momentum we have in the last few quarters, and at this point in time, I think that will continue. In terms of the server AUPs, listen, as we said before, is all structural. This quarter actually if you recall two quarters ago, I said as we exit 2018, we will see mitigated declines in units and that's exactly what happened here as being very low single-digit decline in units. And the rest is all structural AUP driven by the mix shift to Gen10, which drives more option attach. And then ultimately the elevated DRAM price is still there, although now started declining. But the fact of the matter is that these servers, this computer platform will continue to add more and more options and therefore, the AUP structural changes are permanent as we go along.

Great. Thank you, Katy. And we have the next question please.

Yes. Next question will be from Simon Leopold with Raymond James. Please go ahead.

Hi, guys. I wanted to see if you could speak about how you see the trajectory of the server markets, excluding the hyperscale portion you know and then how much this is imposed by the macro and then other factors and just when -- I will just add in there, are you expecting any changes in the competitive dynamics with Dell considering its plan to come back into the public space now. And it's a search in the integration with EMCs is complete?

Yes, I mean, we have a very deliberate strategy to shift from volume to value, despite that the volume business grew 7% for the year, which is good and our value business grew 20% year-over-year and that's because the software-defined infrastructure is the perfect architecture to deploy on-premises against these specific optimized workload solutions that customers are looking for. When you look at that value business, our HPC business, our high performance compute business grew 25% and that’s driven by the big data analytics and specific segments like government, oil and gas, weather, and academia. If I look at hyperconverged business grow in triple digits. If I look at our synergy business, it grew 280%, but now is already a $1 billion run rate. All these platforms actually drive higher services attach with Operational Services. And so we continued that to -- we continue to believe that’s going to continue to grow. And everything we have gone is deliberated to shift to that model not just from the engineering perspective, but as well as from the go-to-market perspective, because the way we actually incent our people is to go sell solutions that there were load optimize. So I feel very good about that and we expect that to continue whether its on-prem, cloud infrastructure or mission-critical applications. In fact our mission-critical business think about workloads like HANA or SQL, or Oracle. Actually that business grew 35%, which is very, very strong. So I feel good about that. Now in term of the Tier 1 business or the hyperscale, we made our decision almost 2 years ago. And to Tarek's comments, it used to be 20% of the business, now it's less than 10% of the business and we’ve been better delivered about that because there was no margins to be made or least not the one that we wanted to make. And number two there was no services of postal associated with that. So we are certain our strategy and that's what we're executing. Dell, listen I'm focused of my strategy and listen I am very pleased and proud that we’ve done here in the first year with a team, we're growing revenue of the company on the high single-digit. We're expanding profitability by 63% or now earnings per share, we are returning $7 billion of cash or capital to shareholders. And we are validating our strategy with customers every single day. Last week, at HPE discovered in Madrid, we had more than 10,000 customers coming and telling us we are on the right path.

Great. Thank you.

Great. Thank you, Simon. Can we go to the next question please?

Yes. Next question will be from Toni Sacconaghi with Bernstein. Please go ahead.

Yes. Thank you. Two questions, please. First, I’m wondering if you can comment at all on the impact of tariffs. I think as of November 1, you increased pricing on Aruba by 10%. And I'm wondering would you continue to increase price if there were change in tariffs and did you see any kind of pull in, in advance of the price increases that benefited Aruba in the quarter? Could you comment on that, please.

Yes, Toni. So, yes, we increased prices like any other competitor has done. Remember, in the U.S tariff they were four faces. The first two faces we manage it that was no impact to us. The third face is exactly the one you’re talking about at the 10%. And as you read, the last few days is uncertain what they're going to happen on January 1. We see the outcome of the negotiation. But we increase the prices 10% and we saw no follow-up because of that price increase expected on November 1st. So there was no incremental benefit for Q4. So that's the bottom line. As these new whatever the new tariff comes in play, we’re already working on two aspect of it. One obviously is the pricing side, but the other one is the supplier side. So we continue to work with our supply chain or suppliers to figure out what is the long-term strategic option here, but we need to wait what’s to happen and with the negotiation, because of 10% it makes no sense to change anything. A 25% obviously you have to consider other options.

Okay. Thank you for that. And then I’m just wondering, I don’t think you commented on what the or maybe I missed it and I apologize on what the services operational support growth was specifically in Q4? And I understand the move to value, but I was under the impression that support services are largely correlated to unit growth and with unit growth down again mid single digits this quarter and down I think double digits for the year, is it really realistic to believe that high-margin operational services can grow in fiscal '19? And if so, why? Thank you.

Right. So with respect to the operational services orders, in Q4 they were down as we pulled through some of those orders into Q3. In the course of the fiscal year '18 overall, OS services orders were up 2% as I mentioned in my script. Moving forward to fiscal year '19, Toni, the thing that one has to factor in is what Antonio said with respect to the categories of products that we’re selling, they drive higher services attached. We do expect continues growth in OS services in fiscal year '19 as a result of a shift in the category mix that we are driving right now with our strategy.

Yes, Toni, another point I want to make is that units is one thing, but also remember the operational services ratio of the, what we call, the intensity rate is a percentage or a correlation to the average unit price of the unit. So you can just use units, right. You have to use the penetration rate and intensity rate associated with that. And as AUP goes up, the reality on the compute side, the reality is that you’re supporting more components in that platform. Therefore the services component of that goes with it as the ratio. So that’s why we are confident that in 2018 our operational services orders or the bookings will continue to grow as we continue to shift through a more blocks of IP, which is value-oriented.

Great. Thank you, Toni. Can we go on to the next question, please.

Yes. Next question will be from Shannon Cross with Cross Research. Please go ahead.

Thank you very much. I want to talk a bit about operating cash flow and free cash flow. Both AP as well as AR were uses of cash benefit from inventory. If you can just talk a bit about some of the moves there. And then how we should think about fiscal 2019? I know you reiterated your guidance, but maybe if you can provide some reminders about what's nonrecurring that hit this year that gives you comfort and the higher guidance for next year or the growth next year?

So you can refer to the presentation and specifically on Slide 11 with respect to the operating cash flow trends versus the total free cash flow trends. The one thing that you wanted me to comment on is the role of inventory in the quarter. We have sold more of our own manufactured products and that's why when you calculate the impact of free cash flow you have to factor in the movement in inventory. The growth in overall operating free cash flow is very, very tangible and the best way to see the sources out for the growth in operating free cash flow is to look at the margin expansion in our operating profits between the first quarter '18 versus the fourth quarter '18 exit. You can observe, for example, that the first quarter '18 we finished OP at $593 million and whereas, in the fourth quarter of fiscal year '18 we exit with close to $800 million in operating profit. That was standing behind the growth in overall free cash flow. That is sustainable. That is what is being driven by the HPE Next program. And we keep a tight lid on the benefits and run rate benefits that HP in excess delivered to us. And this is what stands behind the growth that we foreshadowed at SAM in October 2018 for fiscal year '19 and beyond. With respect to the nonrecurring item on free cash flow, there will be more of that in the 10-K that we will file in the upcoming days, but suffice to say that there are recurring charges in the amount of $531 million that we took for the full-year. Some IT costs, some consulting fees that were one offs and other nonrecurring charges, a total of which is about $800 million give or take you'll see all that breakdown in the 10-K that we will file in the upcoming two weeks.

I will say, Shannon, I mean, we’re very confident about our '19 and '20 guidance as you recall at the Security Analyst meeting we said we’re going to grow 50% free cash flow between '18 and '19, and we’re going to double it by 2020. And that’s because all the leverage that we get through HP Next, the portfolio mix shift, that we talked about it and I will say we have executed and exactly where we committed a year-ago and this year has been really good from that vantage point.

Thank you. And then can you just talk a bit more about China and some of the pressure you’re seeing there? I'm curious if the declines we saw this quarter on year-over-year basis sort of give us an idea of the magnitude of what you're walking away from to the foreseeable future or what specifically is going on there as you walk later on profitable contracts? Thank you/

Yes, so let's remind our self with a model for us is in China. We have a joint venture, although we own only 49% of that joint venture and we resell our products through H3C or the new H3C, while the new H3C which is a company that we actually sold to the unit group, couple of years ago. And so they make their own choices right. So they’re trying to balance profitability and growth and there were demand in certain areas of the portfolio including hyperscale as they decided not to participate. So from that perspective, we are actually kind of an [indiscernible], if you will. We just sell through them and they make their own choices. So we work with them on an ongoing basis, because ultimately they are the ones that make those decisions.

Perfect. Thanks, Shannon. Can we move to next question please.

Yes. Next question will be from Paul Coster with JP Morgan. Pleases go ahead.

Thank you. I wonder if you can just give us a little bit color on the Edge compute growth trajectory, but it's something else. And do you see any cross selling, some synergies with your broader Hybrid IT offerings?

Yes, so the Edge Compute business is growing significantly. This driven by the used cases in specific verticals. We see that the manufacturing that the hospitals as the IoT part of this in the convergence of both the OT, operational technology in IT becomes a reality that's a big advantage that we have. We are one, the only vendors that have a true converge OT and IT platform. And I can tell you it's growing triple digits. And obviously, we expect that to continue to be the case. But more and more is a vertical solution, top to bottom from infrastructure to software to analytics to connectivity and security. And that’s why the combination of Aruba with networking, connectivity, and security with an Edge Compute allows us to provide a full blown solutions for customers. So that that’s what we see at this point in time. And definitely there are dissynergy because all the large deals that we see with Aruba are the reasons that have been through our cross synergy and our go-to-market with Hybrid IT. More and more, we sell an edge to cloud architecture. We sell the campus and branch solutions with Aruba. In verticals we sell Edge Compute and then we sell the cloud. The cloud -- call it on-premises or hybrid, if you will. And in that context, we see the whole pull through. A great example of this is the announcement I made with the Golden State Warriors, although we do it the Formula 1 just to bring it to reality. We provide them the cloud for the factory. We provide them the edge, the circuit and so in other use cases. So it's a big opportunity and its all driven by this experience we need to provide with the edge and the fact you need to extract value and deliver outcomes from the data that generate at the core. And so that’s why I'm very excited about our strategy.

Are there any special incentives around the data center products inside that Intelligent Edge team?

Yes. So there's a -- definitely there's a compensation that the account manager sells everything. They get paid on selling the full blown solution. And then obviously while you bring the specialist, they’re paid on the specific components of it. But the reality it is cross incentives that goes back and forth, but let's be clear. The edge people are just the specialist people. Really the people who bring to bear the solution and the Hybrid IT people sell everything, edge to cloud. And so, that’s why the strategy is working and more and more pull through for Aruba is happening and the same the other way around, because once you have connectivity, you have to do some sort of processing of data and that’s why we bring the Edge Compute to bear.

Great. Thank you, Paul. Next question please.

Yes. The next question will be from Jim Suva with Citi. Please go ahead.

Thank you very much. In your prepared comments, you made a reference to some efforts in China that I believe impacted your margins a little bit. Can you just give us some color on what's going on with your efforts there and the margins and the outlook, especially as it relates to who knows what's going to happen with trade wars and stuff, and does this relate at all to H3C, which historically we’ve known or is it something different? Thank you.

Yes, no, so again, we don't sell directly in China. We actually moved to this new model almost 3 years ago now and H3C is the sole distributor of HPE products and they represent us in China, but they’re sold as a part of the HPC portfolio and what we are doing like they’re doing is focus on profitable growth. As they focus on the entire portfolio, they pick and choose where they believe is the best thing to do and we’re very happy actually, incredibly happy with the performance of H3C, because as you know we collect dividends and they’ve done really well performance wise.

Yes, what I was getting was more forward-looking is, what you've seen going on is that something we should expect into 2019 or is it a new change from what we’ve heard in the past?

No, I think it continues 2019, and honestly, listen, China is the second largest IT market now. There are a lot of opportunities, but you’ve to be very focused on where to spend your energy to drive profitable growth, and they’re the ones that make those decisions. As you recall, we’ve actually rights in the governance, because obviously, we are a part of the Board, but the reality is that that market will continue to grow. Then, there will be some seasonality viability quarter-to-quarter depending on the pipeline, but in the end, we believe China is a great market going forward, and we rely on them and very happy with what they are doing.

And just housekeeping, tax rate was lower this quarter, and other income was better, how should we think about for 2019, those items?

Hey Jim, so I would refer you to what we said at the Security Analyst meeting. We basically guided other income and expense at a $250 million expense that includes the equity interest. And then if you remember, the tax rate, we basically said from a non-GAAP perspective would be 13%. So I would continue to use those going forward.

Thank you so much for the details and clarifications. It's greatly appreciated.

Sure, thanks, Jim. Next question, please.

Next question would be from Jeff Kvaal with Nomura Instinet. Please go ahead.

Yes. Thank you, gentlemen, for taking the question. I would like to lead off with an Aruba question. Obviously, that's been a source of great strength, both naturally and also some upside. Can you talk a little bit about where you think that strength is coming from? Obviously, there's a decent amount of good IT spending, there's a little bit of a switch refresh under way from your competitors. Does that help and then how much is share gain a factor there? And then, secondly, Tarek, maybe for you, but I think you had mentioned earlier in the script that the FX headwinds had stiffened a little bit for you over the course of the quarter. That doesn't appear to have changed your guidance at all and I'm wondering if you could talk us through that, please.

Sure. I will take the first question and then Tarek will take the second one. So we continue to see strength in the Aruba business because the reality is the edge is where we live and work and everybody is looking for providing a whole different experience and the mobile first, cloud first approach that Aruba has is actually resonating with customers and allows them to provide these new experiences whereas in hospitals or venues or retail verticals they are looking to provide that connectivity with an application experience that collects data and obviously extracts value out of that data and Aruba is perfectly suited for that because it has a platform driven approach. And that drives switching, it drives the new architecture for wireless connectivity with Wi-Fi 6 that's going to be available here soon and obviously the expansion in through these IoT-led use cases, for example, smart buildings and so forth. That’s why we are so bullish about the business and then when you bring Edge Compute to that platform, then you add incremental capabilities because it is easier to move cloud compute where the data is, not the other way around. That’s what we see and it's all experience driven and architecture we have actually enabled that.

Yes, on FX, good observation. the FX rates have moved somewhat unfavorably relative to the prior month when we were at SAM. When we were at SAM the Euro was trading at about $1.15, and now the new spot rates are pointing to $1.13 trending a little bit lower. Remember, then we said we would face a headwind of one to two points, now it's going to be looking closer to two points for fiscal year '19. That's what we can say at this stage given where the rates are trending.

But Tarek …

[Indiscernible]. We can change.

All right. Great. Thank you.

Thank you. Next question, please.

Next question will be from Rod Hall with Goldman Sachs. Please go ahead.

Yes. Hi, guys. Thanks for fitting me in. I just wanted to ask a question about the cash flow. I see that the proceeds from the sale of PP&E almost more or less doubled in the quarter off of last quarter. And I wonder if you could give us any color on what drove that increase and then I have a follow-up to that.

Yes, that is correct. We did have quite a unique transaction during the course of the quarter. There was a -- overall in the year, there's about $400 million of real estate gains and most of which happened in Q4. We effectively sold the campus that we occupy right now in Palo Alto and we're moving into a new location during the course of fiscal year '19, at the beginning of the calendar year of '19. You will see all of that explained and disclosed in our 10-K for greater details, but that's a one-off. We will continue to optimize our real estate, but that is quite a unique transaction that has happened in the fourth quarter.

Okay, great. And then just a follow-up on that, I wanted to -- I know that the underlying business there is -- or at least a lot of that is the leasing business, and I know some of that is HPQ related leasing and I wondered if you could say, what proportion of that leasing business in the financial services arm is related to HPQ and how much is HPE, I just don't really know the split between the two things.

We don't disclose the split of the receivables in financial services between HPE and HPQ, but it has been trending around at the same levels that historical data prior to the split. There hasn't been any major change in that regard, we continue to drive significant growth in volume. We pointed to 8% volume growth in financial services of this year and I am very pleased with how that is going.

Okay, great. Thank you.

Thanks, Rod. I think we’ve got time for one more question, please.

All right. And our last question today will be from Amit Daryanani with RBC Capital Markets. Please go ahead.

Thanks for squeezing me in guys. I guess the two questions will be one on storage. Was that 13% year-over-year that's fairly impressive. Can you just talk about what enabled that and how do you think that trends going forward through fiscal '19? And then secondly on Pointnext, I think it was down 3% year-over-year. How much would it be down or what are the extra divestitures, [geos] that you’re exiting from on Pointnext?

Yes, let me talk about storage first. Listen, I'm very pleased with our performance in fiscal year '18. We grew 8 -- 13% for the full-year, which is faster than the market, so we expect to gain share in external storage and that's driven by a cohesive strategy with both Nimble and 3PAR enabled by a phenomenal platform called HPE InfoSight, which provides predictive analytics for storing and managing that data. And last week I announced that we're extending that platform now to the rest of the on-premises infrastructure including both compute and networking. The customer sees the value of predictive analytics, fix the problems before they happen and obviously now we keep adding features to both the InfoSight and the two platforms both Nimble and 3PAR with the availability of new flash storage and so forth. If you are the hyperconverge part of that on top of storage, well, actually we will be growing almost 20%, 19% and so the combination of different infrastructure for different use cases plus our intellectual property is paying off. And again, we expect that to continue to be the case in 2019 and beyond because we’ve some exciting solutions that are coming to market, and some of them we announced it last week at HPE Discover in Madrid. I don't know, Tarek, you want to talk about the Pointnext question?

Yes, if to add a little bit more color on revenue for Pointnext in the quarter, revenue from operating services was down 1% overall for the full-year it was growing at 2% equally orders for the full-year were growing at 2% and that was reflected in my script as well.

Perfect. Thank you.

Great. Thanks Amit. I think with that we can close up the call, please.

Well, thank you for the time and thank you for the questions and I just want to wrap by saying I’m very pleased with fiscal year '18 performance with our growth and expanding profitability and our innovation. I think we make great progress as we transition, and this was all 100% execution driven. 100% of what we did here was about executing our strategy which is clear, and resonating with our customers and partners.

Ladies and gentlemen, this will conclude our call for today. Thank you very much. Have a great one.