- Revenue: $7.2 billion, up 4% year-over-year and 7% quarter-over-quarter in constant currency.
- Non-GAAP Diluted Net EPS: $0.42, above the high end of the guidance range.
- Free Cash Flow: Exceeded $600 million.
- AI Systems Revenue: More than doubled sequentially to over $900 million.
- AI Systems Orders: Reached $4.6 billion this quarter.
- Annualized Revenue Run Rate (ARR): Grew 39% year-over-year to above $1.5 billion.
- Non-GAAP Gross Margin: 33.1%, down 310 basis points sequentially and year-over-year.
- Non-GAAP Operating Margin: 9.5%, down 200 basis points sequentially and year-over-year.
- Server Revenue: $3.9 billion, up 16% sequentially and 18% year-over-year.
- Hybrid Cloud Revenue: $1.3 billion, up 1% sequentially and down 9% year-over-year.
- Intelligent Edge Revenue: $1.1 billion, down 9% sequentially and 19% year-over-year.
- HPE Financial Services Revenue: Up 1% year-over-year with a financing volume of $1.7 billion.
- Cash Flow from Operations: $1.1 billion.
- Capital Returned to Shareholders: $240 million in Q2, including $169 million in dividends and $45 million in share repurchases.
- Q3 Revenue Guidance: $7.4 billion to $7.8 billion.
- Q3 GAAP Diluted Net EPS Guidance: $0.29 to $0.34.
- Q3 Non-GAAP Diluted Net EPS Guidance: $0.43 to $0.48.
- Fiscal Year 2024 Revenue Growth Guidance: 1% to 3% in constant currency.
- Fiscal Year 2024 Non-GAAP Diluted Net EPS Guidance: $1.85 to $1.95.
- Fiscal Year 2024 Free Cash Flow Guidance: At least $1.9 billion.
Release Date: June 04, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Hewlett Packard Enterprise Co (HPE, Financial) exceeded revenue and non-GAAP diluted net earnings per share expectations for Q2 2024.
- AI systems revenue more than doubled sequentially to over $900 million, driven by strong demand and improved GPU availability.
- HPE raised its full-year revenue and non-GAAP earnings per share guidance, reflecting confidence in the second half of fiscal year 2024.
- HPE GreenLake saw a 9% sequential increase in customer organizations, with annualized revenue run rate growing 39% year-over-year.
- HPE's leadership in AI at scale and across the entire AI lifecycle continues to attract new customers, including partnerships with major players like Microsoft and NVIDIA.
Negative Points
- Non-GAAP gross margin declined by 310 basis points sequentially and year-over-year, driven by a mix shift from higher-margin Intelligent Edge revenue to server revenue.
- Intelligent Edge revenues were down 9% sequentially and 19% year-over-year, with backlog consumption creating difficult comparisons.
- Operating margin for the hybrid cloud segment was only 0.8%, down 300 basis points sequentially and 110 basis points year-over-year.
- The market for traditional storage remains challenging, with a year-over-year decline in revenue.
- Despite strong AI system revenue growth, the overall mix shift to AI systems is a gross margin headwind.
Q & A Highlights
Q: Can you discuss the margins on the AI systems side versus segment averages and what differentiates HPE's AI solutions from competitors like Dell and Super Micro?
A: Marie Myers, CFO: We shipped $900 million of AI revenue in the quarter, achieving an 11% operating profit margin for the server segment. Despite inflationary pressures and a competitive market, our disciplined approach to pricing and cost management has helped maintain margins. Antonio Neri, CEO: Our differentiation lies in our ability to deliver and run systems at scale, our infrastructure cooling intellectual property, our extensive manufacturing footprint, and our comprehensive services capabilities.
Q: Can you provide more context on the growth of enterprise AI customers and the differentiation of HPE's liquid cooling technology?
A: Antonio Neri, CEO: Enterprise AI demand started to pick up in Q1 and accelerated in Q2. We see three segments driving demand: model builders, sovereign clouds, and enterprise customers. Our liquid cooling technology is differentiated by our ability to offer 100% direct liquid cooling, which is essential for future silicon designs like NVIDIA's Blackwell. We have a significant manufacturing footprint and unique cooling solutions that allow us to co-locate different cooling systems in the same data center.
Q: Where are you in the Intelligent Edge inventory digestion, and when do you expect to emerge from it?
A: Marie Myers, CFO: Q2 was the trough period for Intelligent Edge, and our channel inventory is now in good shape. We expect modest sequential improvement in networking in the second half of the year. Antonio Neri, CEO: We see growth in areas like enterprise Private 5G, which is gaining significant momentum.
Q: How do you reconcile the discrepancy between your raised revenue guidance and the strong performance in Q2?
A: Marie Myers, CFO: We raised our full-year revenue guidance by 1% and our non-GAAP EPS guidance by $0.03 due to the retained portion of our H3C stake. We are confident in the higher end of our EPS range due to strong top-line growth and cost discipline. Antonio Neri, CEO: The limiting factor for AI system revenue is not supply but the availability of data center space, power, and cooling. We are working with customers to time everything correctly.
Q: Can you discuss the pipeline for AI systems and the factors affecting the sequential decline in backlog?
A: Antonio Neri, CEO: Our backlog was slightly down due to the conversion of more orders and the lumpy nature of large deals. However, our pipeline is multiples of the current backlog, and we are confident in capturing AI demand. Some deals include providing data center space, which adds complexity but also opportunity.
Q: How much of the increase in AI systems revenue was driven by allocation improvement versus your ability to ship orders?
A: Antonio Neri, CEO: The increase was not due to allocation but better lead times for NVIDIA's H100 and improved manufacturing processes. Our team did a fantastic job, and we feel good about our ability to deliver systems within 6 to 12 weeks.
Q: How much of the GreenLake revenue and ARR growth came from AI, and how is GreenLake helping you sell AI systems?
A: Marie Myers, CFO: AI was the fastest-growing element of ARR in Q2, followed by storage and networking. Antonio Neri, CEO: GreenLake is a key differentiator, providing a simplified experience for enterprise customers. We are early in the sovereign AI market, but our supercomputing capabilities and generative AI systems position us well.
Q: What is the outlook for GPU or accelerated diversification, and how do you see demand evolving in 2024 and 2025?
A: Antonio Neri, CEO: We are currently aligned with NVIDIA, which is the market leader in generative AI. We have multiple systems in both mixed and direct liquid cooling environments. While we are open to other accelerators in the future, our current focus is on NVIDIA, and we will showcase our offerings at HPE Discover.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
