Hewlett Packard Enterprise (HPE +12%) is surging today following its Q2 (Apr) results last night. HPE reported a solid EPS upside and strong revenue growth, surprising investors after missing expectations for the last two quarters. The Q3 (Jul) guidance showed decent results, with the EPS midpoint slightly below analyst expectations, while the revenue midpoint was notably above.
- HPE attributed the outperformance to improving enterprise demand for traditional servers and a sharp increase in AI server demand. Enterprise customer interest in AI is growing rapidly, with HPE's sellers noting higher engagement levels. Enterprise orders now make up more than 15% of its cumulative AI systems orders, with the number of enterprise AI customers nearly tripling year-over-year.
- AI demand continues to accelerate, with cumulative AI systems orders reaching $4.6 billion this quarter. HPE has a robust pipeline in this business and expects continued revenue growth, driven by increased AI systems demand, continued adoption of HPE GreenLake, and ongoing improvement in the traditional infrastructure market, including servers, storage, and networking.
- HPE more than doubled its AI systems revenue sequentially to over $900 million, helped by improved GPU availability, which was an issue in Q1 (Jan). For example, HPE says its lead time to deliver NVIDIA H100's is now between 6-12 weeks. HPE expects this will boost revenue in the second half of the fiscal year.
- Beyond AI, HPE is seeing signs of a market recovery in traditional and cloud infrastructure markets. Orders for traditional services grew sequentially and year-over-year, driven by enterprise public sector and SMB customers in North America and Europe. The number of customers using HPE GreenLake increased almost 9% sequentially to 34,000. HPE is also enthusiastic about its pending deal to acquire Juniper Networks (JNPR, Financial), expected to close by the end of 2024 or early 2025.
Investors might be surprised by HPE's big move considering the modest Q2 EPS upside and mixed Q3 guidance. However, sentiment was low heading into this report. Last quarter, HPE discussed soft demand industry-wide and a GPU supply shortage. HPE appeared notably more bullish on this call, especially for AI and its traditional business.
The significant Q2 revenue upside and Q3 revenue guidance were notable, especially after two consecutive misses. The stock has been in a narrow $15-20 trading range for much of the past year. This report might finally push HPE above this range, signaling a bullish trend.
