Release Date: September 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) delivered a strong Q3 performance with net revenue of $7.7 billion, up 10% year over year.
- Non-GAAP diluted net earnings per share increased to $0.50, $0.02 above the high end of guidance.
- Free cash flow exceeded $660 million, and the company will pay a dividend of $0.30 per share.
- HPE received the first payment of $2.1 billion from the sale of part of its equity position in H3C.
- The company saw significant growth in AI systems revenue, with a 39% increase from Q2, and strong customer interest in HPE GreenLake Cloud and AI offerings.
Negative Points
- Gross margin was down 410 basis points year over year, driven by a lower mix of Intelligent Edge revenue and a higher mix of AI server revenue.
- Operating expenses decreased approximately 7% year over year, but the company still faces pressures from rising commodity costs, particularly in SSDs.
- Revenue from the Intelligent Edge segment was down 23% year over year due to tough comparisons and slower recovery in campus switching products.
- The company noted geographic variation in demand, with Europe and the Middle East lagging behind North America, Asia Pacific, Japan, and India.
- HPE's non-GAAP operating margin was stable at 10%, but the company expects continued pressures on gross margins due to the higher mix of AI systems.
Q & A Highlights
Q: Given the AI revenue contribution, Server margins were higher than expected. Could you break down the reasons for this margin strength?
A: Antonio Neri, President and CEO: The margin strength was driven by the shift to Gen11 servers, which have richer configurations and higher margins. Additionally, we successfully passed through commodity costs despite a competitive environment and maintained OpEx discipline.
Q: Can you elaborate on the factors impacting gross margins and the outlook for the next quarter?
A: Antonio Neri, President and CEO: The primary factor impacting gross margins was the higher mix of AI servers. We offset this with OpEx prudency and disciplined cost and pricing strategies. As enterprise AI gains momentum, we expect improving profitability. The upcoming Juniper acquisition will also positively impact gross and operating margins.
Q: What drove the year-over-year decline in free cash flow, and what is the outlook for the next quarter?
A: Marie Myers, CFO: The decline was due to the timing of working capital and normal seasonality. In Q4, we expect benefits from working capital reversals and stronger AI revenue conversion, keeping us on track for $1.9 billion in free cash flow for the full year.
Q: Were there any unusually large AI server deals in Q3, and what is the outlook for AI bookings in Q4?
A: Antonio Neri, President and CEO: There were no unusually large deals; the bookings were more uniform across the service provider space. We expect a continuation of this trend in Q4.
Q: Can you discuss the mix of products and services for AI systems and the impact on margins?
A: Antonio Neri, President and CEO: We are seeing strong momentum in services attach for AI systems, which will continue to grow, especially with the HPE Private Cloud AI offering. Most services revenue is deferred, but as it gets recognized, it will positively impact gross margins.
Q: How do you view the risk of AI-accelerated platforms cannibalizing traditional servers?
A: Antonio Neri, President and CEO: We see no signs of cannibalization. AI workloads are distinct and do not replace traditional workloads. The enterprise segment, in particular, continues to show strong demand for traditional servers.
Q: Can you provide more color on the AI backlog composition and enterprise demand?
A: Antonio Neri, President and CEO: The pipeline is robust, with a significant portion from the enterprise space. Enterprise demand is focused on clear ROI use cases across various verticals, including healthcare and financial services. Sovereign AI projects are also gaining traction.
Q: What is HPE's sweet spot in generative AI, and how do you see it evolving?
A: Antonio Neri, President and CEO: Our sweet spot is in building, deploying, and running large AI systems, leveraging our expertise in manufacturing and services. The focus is on simplicity, automation, and security, integrated within HPE GreenLake. The Juniper acquisition will further enhance our capabilities in networking, crucial for AI workloads.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
