 Live from Las Vegas, it's theCUBE. Covering Discover 2016 Las Vegas. Brought to you by Hewlett Packard Enterprise. Now, here are your hosts, John Furrier and Dave Vellante. Okay, welcome back everyone. We are here live in Las Vegas for HPE, HPE Enterprise. Discover 2016, this is SiliconANGLE Media's theCUBE. This is our flagship program. We go out to the event, extract the symptom noise. Kind of like Game Day, we go out there and get all the action. Three days of wall-to-wall coverage. We're into day three for HPE Discover. And I'm John Furrier, my co-host, Dave Vellante. Next guest is Chris Hsu, who's the chief operating officer for HPE. He's the man who makes the trains run on time. Some trains are leaving the station and some are growing. Welcome to theCUBE. Welcome to being CUBE alumni. Thank you very much. I like the idea of being on Game Day. So, you know, how do you feel? The game's almost over. We have one more day. The HPE Enterprise team now has got a good, almost a year into their belt with the split. It's a humanized company. We have access to, the customers are here. Different vibe. Yeah. Okay. What's your take on that? Is that by design? Are you guys talking as an executive team saying, hey, let's get down and get personal with the customers and everyone here? I think that's what Discover's all about. It's all about the customers. It's all about bringing the customers to Las Vegas and London, the one that we do in Europe. And really showcasing what we are, both from a solution perspective, but also who we are as people, who we are as a company, what our culture's about, and what we're trying to drive in the transformation of our own company, as well as the transformations that they have. So, you guys, I'll use a Star Trek analogy since you guys have that awesome commercial with the Star Trek Beyond. Check out the trailer. You guys have some concepts in there. So, you're on the bridge. Meg Whitman's in the captain's chairs, and you're basically running the main machine room of there. I don't know if you're Scotty or Sulu. I don't know where we go with that one, but I think maybe Scotty the engineering one. More power, Scotty, you know. I do it for years. You can be a spark. You can be a spark. We'll figure that out by the end of the interview. But, you know, the big thing that's going on, the split is under your belt, but the spin merge with CSC, really big news, dominating a lot of the conversation, certainly on Wall Street, where's the growth going to come from? What's the rationale behind that? Again, this is one of those trains leaving the stations. Give some color around that transaction, and really the impact both to HPE and the customers. Yeah, so, you know, we announced two weeks ago, the spin merge of our enterprise services business was spin it and then merge it simultaneously with CSC. You know, really a competitor in the space. It has a very similar business. And the way we think about this is, number one, we're creating a pure-play IT services company in the new merch code. And we have a company that is going to be at scale. It's a $26 billion pure-play IT services company. And we believe there's real growth opportunities for them. Number one, they've got a CEO and CFO of a public company, CSC, that it has a really good track record and really good performance. And then what we've built in our own enterprise services under Mike Nefkins and his team is, they've driven a real turnaround and they've posted two quarters of constant currency stable growth, which is outstanding in this industry because it's a fairly challenging industry. And they've done that through building practices and services and also go to market, really re-engineering the entire go-to-market. So we think by putting these two companies together, we create scale, we bring together management teams of the two companies that have different skillsets. I mean, Mike Lowry and Paul Soleil have really proven their ability to take out costs and drive operating profit improvement. Mike and his team have really proven their ability to service customers and build a strong set of practices for future growth. So from that perspective, we think we're setting this new company up for real success and our shareholders will own 50% of that new company. So it's super important to us that we set that up so that it can be strategically positioned and have long-term success. So the street really liked the move, obviously, but one of the questions people had that I'd like you to address to our audience is, well, given that the business was doing so well, why spin it out? Why now? Well, when we look at our portfolio, we think about things like, okay, what do we need to have in our portfolio that's going to make us strategically competitive such that we can win in the marketplace? And we think about what are the synergies between these businesses? And do we have synergies that are so great that by having these assets as separate entities that we can't maintain some of that synergy? Or are these things better off as a standalone? And in this case, we believe that this is better off as a standalone, both because the value that we create from a shareholder perspective, but also because we're creating a scale IT services platform that can then go do M&A and continue to grow both organically and inorganically. And within the broader Hewlett Packard Enterprise, our capital structure and our focus on where we're investing our money is not on building out and acquiring services companies. And so I think that's a case where, look, we can continue to maintain that strong synergy and relationship which we aligned around in a three-year contract, commercial contract to pull through our hardware, software and services. And we can continue to do that, but also set this company up. So on the capital structure, you mentioned 50% ownership. And the financing behind that is coming from HPE. So okay, so the cap table basically 50-50, right? The 10-2. And the financing is coming from HPE. So think about it like this. When we do the spin and the merge, we're creating a completely new company. And that new company has to go put in place a capital structure that we've jointly defined. That will be a new capital structure. So as they set this new company up, they'll go out and they'll raise debt. They'll raise debt to basically do a couple things. One, they're going to pay Hewlett Packard Enterprise a cash dividend of one and a half billion dollars. They're going to assume some debt from Hewlett Packard Enterprise in the form of pension liabilities and also some debt that we have on our ES asset. 2.5 billion. That's right. And we'll offset that. We'll contribute offshore cash to fund some of those pension liabilities. And thus, they create the beginnings of a balance sheet. So essentially, think of it as a clean view. So it's good financial engineering from HPE Stamp. We could leverage, love the use of offshore cash. Certainly Apple's got the same problem too. We know that. So okay, so that makes a lot of sense. Let's talk about the partnership and also the growth strategy. So you mentioned M&A. Was that M&A of the Spin Merge or M&A for HPE? Or both. Look, I think on the Spin Merge, on the new company, they again, they have a global platform at scale and they have the ability, I mean, the services market is extremely fragmented. And there are tons of services companies out there that can be bought in a verticalized space, in a specific application space, bolted on to this new platform and then used for growth and then also to get additional market. How about that fragmentation? Because we're seeing that the high end global system integrators, like CSE, Accenture and whatnot, that they've been disrupted and they kind of saw that movie, that train coming down the track probably two years ago in the past year, you see them find their swim lanes. Can you add some color on how the swim lanes are developing vis-a-vis the integrators, the big guys, the ones that are transforming their businesses on the delivery side and then also specialties like EY as a certain focus, Accenture as this. What is CSE, HP services, Spin Merge, Co. going to look like from a swim lane perspective? From a swim lane perspective, just to clarify, do you mean specialty focus? Is there going to be one kind of specific thing that you're going to hang your hat on? Got it. So it's a very broad portfolio. So if you think about it at a high level, they will continue to have a large presence in IT outsourcing. In the world that we live in today, when you hear all this talk about hybrid, every company, especially large enterprises, are trying to figure out how much of the traditional data center do I want to maintain? How much private cloud do I need in my infrastructure and in my IT organization? And then how much is public cloud? And what our companies can do together is really build out that suite of services around IT outsourcing, which spans that whole hybrid infrastructure space. And then they will jointly then have a large business in application development, application transformation, business process outsourcing. Those are going to be at the high level of the big businesses. And then both companies have different verticalized strengths. So as an example, CSE is really deep in insurance and just did a couple of industry vertical acquisitions around the insurance space. You know, we're really strong around consumer package goods and travel and financial services. And we've built out specific offerings for those verticals. Bringing the two companies together, you now have more depth in more verticals. And so I think those are the types of things that we see as real opportunities. David and I were talking yesterday about, you know, the turnaround plan from Meg Whitman and the five-year plan. And I was commenting and we were talking about kind of where they were. And the split really kind of took up a year and a half of that. If you kind of take that year and a half out, we're still close, not even close to the five years. That's what was my comment. But I want to get your take on, now that the split's done, you got the spin merge going on. This theme here at HPE discovers speed, go faster, be disrupting markets and win in current markets. What are you guys doing internally to make your thoughts faster as a company? You've got category changing products with the IoT edge line and some really cool stuff happening on the converged infrastructure side. How are you guys going faster? How are you guys going to execute? What's the guiding principles? What's the thoughts internally? Yeah, so I'm going to go back to the split for a second because I do think, if you think about the five-year transformation, we're right in the midst of the accelerate part of that transformation. And I'm glad you asked about speed because the split really allowed us to accelerate. If you think about what Dion and his team are doing over at HPE, they're accelerating transformation in a really tough market. You know, they're really taking out costs. If you look at the innovation that they're launching, I mean, it's really remarkable. You look at where they're placing their investments now. They're making investments that they wouldn't have made as part of the larger Hewlett-Packard enterprise because they have built their capital structure and their investment capacity focused on those things that are going to drive their growth. So that's an example of acceleration. On our side, we've accelerated the speed of decision-making. We're able to go much deeper on different aspects of our business. You can see us pivoting to campus branch IoT. We think that's a huge trend. We don't think that that trend is a subject to the same issues that you have in the core data center around public cloud and the transformation is going around hybrid infrastructure. So the speed at which we're moving, you've heard about hyper-converged and a launch of hyper-converged in five months. Who would have thunk it? You know, it's the ability to focus these companies on a narrow set of customers, a narrow set of products and competitors, and to be able to make decisions faster because you have fewer people at the table and then drive those decisions. Well, it's pretty shocking that the break-up, if you will, didn't have an effect. We don't like to use that word, but... Split, sorry, split, sorry. But it really didn't have an effect on your business performance. I remember the day that a son moved from an Amdahl system to a son system and it crushed him for three quarters. He really didn't miss a beat. We had Robert Gates on the secretary of defense and we were talking to him a couple of weeks ago in theCUBE and I think with your military background, some of the things that you face make this job look trivial, but how did that affect your decision-making and your ability? Because you were only in that job about a year. That's right. That's pretty record time. Talk about that a little bit. Well, look, I think there are a lot of analogies and similarities to the military. I mean, we had a clear mission. We knew that on November 1st, we were going to separate this company. We had to organize our troops. We had to know where the enemy was and the enemy was complexity. The enemy was the decision-making that is so diffusing the organization. And we had to mobilize our forces and we had to move online in consistent fashion until we met the enemy, destroyed the enemy and then we're able to separate the company on November 1st. Use your analysis. Yeah, all kinds of systems, the new site. I mean, basically it's a new company almost. It is a new company, infrastructure-wise too. That's right. And one of the things I would say is you may get the very beginning that's made a very smart decision. She said, listen, I want to stand up a fully dedicated separation management office and I want to resource that separate from the business because I want the business focused on delivery, delivery, delivery. We have to deliver our commitment to shareholders. And over and over, she said, listen, the first sense of credibility they have for the two new management teams is whether we're able to deliver during the course of separation. Then that freed us up as the separation management office to make tough decisions fast and rapid and then Meg and the executive steering committee completely backed us on those decisions because in a large diffuse organization with 300,000 people in 120 countries with 800 legal entities, the ability to obfuscate or wait till decisions are made and then go behind the scenes and try and undo those, it's just, it's a normal course of business. And what we were able to do is separate the run from the separation and then have decisions made quickly and stick. And the business teams bought into that. That's the, you know, the amazing thing. What about financial services? I know you're involved in that somehow, HPE Financial Services. What's going on there? That's right. So, Irv Rothman runs that business and reports in through me. And I think that's one of the best parts of my job. Basically, my job is to be an evangelist for Hewlett Packard Enterprise Financial Services. And I have to tell you, this business is on trend. And just to give you an example, you know, our Q2 volume growth was up 15% year over year, which is faster than anything in our portfolio is growing, which gives you a sense that it's actually driving penetration in the portfolio. And what's driving that? Fundamentally, it's a lot of what's going on in the marketplace around public cloud. You know, when public cloud really started emerging as a real deployment model that for enterprise, they changed the game around consume as you go, consume what you need, meter, billing, et cetera. And then what customers started to want to say, well, hey, look on my normal infrastructure, I want to be able to do the same thing. I want to be able to consume as I go. I want to be, I want more flexibility in how I buy and consume IT. And HPE financial services is spot on that trend. Well, that bill, well here, the other thing is that we love this composable message because that's up and down the stack. You want to get down and dirty with storage, you can talk about composable. You want to move up to the application of the developers. And ultimately your customers are builders now. So they're consuming and building, big build out. You guys have to run fast. So you've got cleaned up, Dave always has to have the balance sheet is getting healthier at HP, which can make you guys much stronger, certainly on the M&A side. So I got to ask you the innovation strategy from a product leadership standpoint. I was seeing some good stuff here beyond the organic growth internally. M&A, you guys feel good about that? Meg has said publicly that once things get cleaned up and strong, they'll do some, you know, inquisitive things. That's right. Look, I think we are very returns based, ROI focused investor. And you know, we have an M&A, we have a couple of different buckets. Number one, we have our Pathfinder program, which is run by Loc Ananth, and he reports up through me as well. And you know, that is where we make VC investments, typically series B, C and D, in emerging enterprise technology companies who are core to the strategy that we have. And it's not about making money like a VC 20% IRR, it's about making great investments in great disruptive companies. So that's mandate specific on the investors. So people understand it's not VC, meaning IRR based or financial return. It's not as much a profit motive, more than a strategic investment. Exactly, so you saw MISO sphere was out here the last couple of days. We have a Pathfinder investment, which is a small investment, venture based investment in that company. So we understand the technology. You guys just closed the amount on that? That much funding? It's big, it's large. It's much less than that. But these are small investments. They're anywhere from two to 10, in some cases up to $50. Exidite was public, I think it was eight, right? I mean, the security, I mean, retail and the security. You're not jumping in on the Uber billion dollar financing. You're not missing, you're not in the unicorn. You're coming into the people who need growth, kind of looking for an ecosystem is a certain profile. We're looking at customers that are really on the cutting edge of disruption in an enterprise space, who we can partner with. We bring them to meet our customers. We are working together, develop, go to market solutions that work together. We're embedding them in our technology and we're using them internally. But that's a small part of our M&A strategy, but really important. It's really part of our strategy, our core strategy to be out there on the cutting edge and really understand the market. I got to ask you a question. I got the number one question I get is two things. What's the transformation leader of the future look like? And I was just having a chat this morning with a community and it's going on in London DevOps event. And that was the number one question. I hear that all the time. And the other one is what is the white spaces that you guys would like the marketplace to fill in, certainly on the ecosystem side, whether it's entrepreneurial activity and or people that are, it's a softening of the market, people who can't get a revenue model, but with an ecosystem injection and some potential partnerships, that creates opportunities. So two things, transformational leader, what do you see as that profile persona? And then two, what's the white space for those emerging companies? Well, there's a lot of questions in there. Take your pick. Welcome to the queue. And it's a point where you come back to the M&A piece because there's a second leg to that I think is very important. But on the transformational leader, I think in today's IT world, you need somebody who really can see what's around the corner. You need somebody who is flexible because the speed and pace at which this industry is changing is not one in which you can have to use another military term, set piece battle. It's more like a battlefield that's changing all the time. So you need a 360 approach to this that's flexible, but also that allows you to place investments that you can have mature over a multi-year period of time. That's a real challenge for most CIOs because look, there's very few CIOs that have budgets that are going up 10, 20% a year. Most of them being told, I want real productivity. I want you to do the same with less. Bookings drive investment from their standpoint. That's right. And that's one of the things where, just maybe back to you look back at enterprise financial services is really important because a lot of our customers want to transform to the hybrid infrastructure, but they don't have the money to do it. You're going to help fund that. And so what we can do is help them fund that upfront. We help them fund their transformation upfront. And part of that is the asset management business that we have where we can go in and we can say, listen, you've got a bunch of older assets. We can help you monetize those assets and we can do it in a secure way because we can clean, take all your secure information data, et cetera. And then we can place those in the public markets. In addition to that, we can then give you money upfront to guess what, fund that transformation and buy more stuff from us. Well, you prime the pump and you de-risk the customer. Exactly. And the parachute opens when they go. That's exactly the way to do it. But look, I mean, a transformational leadership is required in an industry like this. It is moving so rapidly. And IT is not a back office function anymore. It is front office. It is core. You know, before I even joined the backward enterprise, I was in private equity. And what I realized the last couple of years in private equity is every company we were looking at, we were increasingly dilagencing their IT platform. We were increasingly dilagencing how the online, the relationship they had with their customer, the data was actually driving the fundamental business. And I think that's where we're at today. IT is core to the frontline, is core to the fundamental business of every company. Let's finish the thoughts on M&A. I mean, Aruba obviously looking great. HPE, we've been saying, is got to get really solid acquisitions going and get good at acquisitions. Aruba looks like it's on track. Three-part great acquisition, but John and I could have done that acquisition. It was a no-brainer. So, finish the thoughts on that. Maybe we should get in the private equity business. Exactly. Maybe we should establish a consulting relationship where you guys can help us with our M&A. You guys, we have a long list. But I think the things that you outlined, and especially if you look at Meg's track record since she's been here, she's done no big acquisitions that have been outside of our core. And Aruba is a great example. Aruba was a company that we bought that's really in our core that had a unique technology that was looking for access to channel, was looking for access to international markets. One of our core competencies is we have one of the largest and best partnership models and go-to-market models in the tech industry, bar none. If we can find great technologies and we can bring them into our company and scale them through that, that's a win-win. And then if we are able to buy something that's at really the forefront of one of the macro trends in the industry, IoT, mobility, connected devices, et cetera, it gives us another platform for growth. Something that we can build off of. And I think if you look at what we're doing with Aruba, it's really exciting. We're really excited. And the competition you guys talk about the military example, the battlefield, certainly changing, I would agree with you. And it really is becoming a big supplier battle. Not winner-take-all, but winner-take-most in most of the cases. So you got a lot of competitive landscape. At the same time, the ecosystem pressure to have a robust ecosystem is certainly critical with seeing that in the developer community. But in your core, you got to win those battles against competition. So what's your thoughts on the competitive strategy as you guys look at the 3D chess match or the battlefield with the competition? Well, in this battle, you don't know who your enemy is. Sometimes you don't know who your friends are. And sometimes you have to partner with lots of different people. And a great example is some of the partnerships we struck recently. If you think about what we're doing with Microsoft, I mean, Microsoft is aggressively going after public cloud with their Azure strategy. But we think that we can actually be a great partner for Microsoft. And we can also build a big business off of being the leading player in private cloud. And if we can bring Azure Stack to many of our customers, we can help them bring private cloud functionality and economics into their own data center. And many of our customers would prefer to have that functionality in those economics and control it within their own data center. But that's a great example of a partner ecosystem that we're building to really be successful in this transformation to hybrid. Chris, I really appreciate you taking any time out of your busy schedule to join theCUBE and share your insight and perspective on what's going on as you guys run the trains and spin out some more trains and merge in with the CSC appreciate it. I want to ask one final question for you. Share with the audience. You've got a private equity background. Obviously get the military analogies that really work well in this new market is what are the core assets of HP? Obviously we talk about this in theCUBE all the time. Great channels, great sales, great customer satisfaction, great leadership in R&D. As someone in a private equity certainly see what were the top three things that make HP super valuable with a lot of leverage to be successful in this new economy? Well, look, I think number one, and you said many of them, we have a great relationship with our customers and we have a great relationship with our partners in go to market. We think that's a big competitive advantage for us. Number two, we have a long history in a culture of deep seated research and IP that is underpinning all of our products. And then our services arm, especially through our technology services is an IP based technology services arm. It's sticky, it's like an annuity and it's highly profitable. So I think we have a great core with our infrastructure, our services and our software assets to really make that transformation. I think in addition to that, when we do the spin merge of ES and CFC, our investors and our employees and our customers are left with a financially sound, stable, high free cash flow generating company, which might not be exciting to everyone, but that's the thing that fuels the ability to be here for a long time and be able to reinvest in that business so that we can stay relevant for our customers. And the last thing I'll say is, Meg has built an amazing leadership team and many people say to me, it's amazing. We can tell you guys like each other. You guys work together and you guys are breaking down barriers and boundaries across the company so that we can all be successful. And it seems that people are very much approachable, the execs and the people around the trenches rolling their sleeves up. And certainly great congratulations. And as to end on the Star Trek note, customers in your field probably saying, Scotty, more power, fire everything. So congratulations on your success and thanks for coming on theCUBE. I really appreciate it. Thank you, really appreciate it. Chief Operating Officer for Eulah Packard Enterprise, HPE, E for Enterprise. This is theCUBE Silicon Angles flagship program. I'm John Furrier with Dave Vellante. We'll be right back with more coverage from HPE Discover. You watching theCUBE.