Hewlett Packard Enterprise (HPE, Financial) saw its stock drop 7% following its Q3 (July) results. While EPS showed solid but not massive upside, revenue impressed with a 10.1% year-over-year increase to $7.71 billion. This marks HPE's first double-digit revenue growth since Q1 of the last fiscal year, with sequential revenue growth in each segment. Q4 (October) guidance was in line, although the midpoint of revenue was above consensus.
- HPE attributes its growth to a significant acceleration in AI systems revenue. Despite a dynamic macro environment, HPE demonstrated its ability to deliver results. Although some customers remain cautious, prioritizing mission-critical projects, HPE is optimistic about the recovery in enterprise demand, especially in North America.
- The demand environment improved this quarter, with sequential and year-over-year order growth, though with geographic variations. North America, Asia Pacific, Japan, and India showed strong demand, while Europe and the Middle East lagged. HPE is aggressively pursuing opportunities in better market conditions.
- HPE is well-positioned for the AI opportunity, with AI systems revenue growing approximately 40% sequentially. The company is winning deals with model builders and sovereigns and is also addressing enterprise AI demand. Customer response to its Private Cloud AI offering has been strong, which is expected to drive AI adoption in enterprises.
- In traditional servers, HPE is seeing signs of recovery with increased demand and revenue. Networking results were solid, with improving sequential demand in WLAN, data center networking, and switching, along with continued growth in security and services. HPE remains optimistic heading into Q4.
- Regarding its pending acquisition of Juniper Networks (JNPR, Financial), HPE is excited about expanding its networking business. The acquisition will accelerate its edge-to-cloud vision with a comprehensive networking IP stack. The deal is on track to close in late 2024 or early 2025.
Overall, the report had notable positives, such as the upside in EPS/revenue and solid guidance. However, there were concerns about client caution and geographic weaknesses, as well as a competitive AI server market. Analysts also raised questions about AI server margins during the Q&A, noting that AI now accounts for 30% of server revenue, up from 10% a year ago.
