HPE's Q3 2025 Earnings Call: Contradictions Emerge on AI Server Profitability, Margins, Growth, and Networking Margins

The above is the analysis of the conflicting points in this earnings call

Date of Call: September 3, 2025

Financials Results

• Revenue: $9.1B, up 18% YOY and up 18% sequentially
• EPS: Non-GAAP diluted EPS $0.44 (toward high end of $0.40–$0.45 guidance); GAAP $0.21 (below $0.24–$0.29 guidance)
• Gross Margin: 29.9% non-GAAP, down 190 bps YOY and up 50 bps sequentially
• Operating Margin: 8.5% non-GAAP, down 150 bps YOY and up 50 bps sequentially

Guidance:

• FY25 revenue growth 14–16% constant currency; ~30 bps FX headwind.
• Q4 revenue $9.7–$10.1B.
• Q4 non-GAAP EPS $0.56–$0.60; GAAP $0.50–$0.54.
• FY25 non-GAAP EPS $1.88–$1.92; GAAP $0.42–$0.46.
• Q4 gross margin mid-30%; FY25 >30%.
• FY25 non-GAAP operating margin upper-9% range; Q4 upper-11%.
• Networking: Q4 revenue >60% q/q; OM low-20% (Q4, FY25).
• Server: Q4 revenue down mid–high single digits q/q; OM ~10%.
• Hybrid Cloud: Q4 revenue roughly flat q/q; OM mid–high single digits.
• FY25 FCF ≈$700M (ex-Juniper ≈$1B); Q4 FCF up sequentially.
• Q4 OI&E $180–$200M; diluted shares ~1.44B.

Business Commentary:

• Revenue Growth and Networking Acquisition:
• HPE reported record revenue of $9.1 billion for Q3, up 18% year-over-year, fueled by strong momentum across AI, networking, and hybrid cloud.

• The growth was driven by the strong performance of both AI and networking segments, with a significant contribution from the acquisition of Juniper Networks.

• AI Segment Performance:

• AI systems revenue reached an all-time high of $1.6 billion in Q3, with a 25% year-over-year increase.

• Growth was attributed to robust sovereign net new orders and continued traction in enterprise, with cumulative orders from sovereign and enterprise now accounting for more than 50% of total AI systems net orders.

• Networking Segment Enhancement:

• Networking revenue was $1.7 billion, up 54% year-over-year, with a 43% increase in operating profit dollars.

• The growth was propelled by the integration of Juniper Networks, which contributed to strong performances in campus and branch, data center switching, and routing.

• Server Segment Profitability:

• Server revenue reached $4.9 billion, with a 16% year-over-year increase and 21% sequential growth.
• The improvement in profitability was driven by changes in pricing and discounting strategies, resulting in traditional server margins returning to historical levels.

Sentiment Analysis:

• Company delivered record revenue ($9.1B, +18% YOY), record AI backlog ($3.7B), and raised FY25 non-GAAP EPS to $1.88–$1.92. Networking revenue rose 54% YOY with Juniper closed; Server revenue hit $4.9B (+16% YOY) with $1.6B AI systems revenue. Q4 outlook calls for higher operating margin (upper 11%) and Networking revenue up >60% q/q. Management emphasized strong demand across AI, networking, and hybrid cloud and progressing synergies (≥$600M over 3 years).

Q&A:

• Question from Aaron Rakers (Wells Fargo): How should we think about Server margins, especially AI systems, and the path to the ~10% target?
  Response: Traditional Server margins are back to historical ~10–12% after pricing fixes; Q3 total was 6.4% due to a large AI deal and inventory actions, but mix shift toward sovereign/enterprise AI supports Q4 Server OM around 10%.

• Question from Wamsi Mohan (BofA Securities): Early Juniper integration/go-to-market progress and where AI presents the bigger opportunity across networking vs servers?
  Response: Integration is on track with cross-selling incentives and strong channel interest; expect ≥$600M cost synergies. AI strategy: lead with networking for service providers, rack-scale Networking+Server for sovereign, and fully integrated stacks for enterprise—networking strengthens HPE’s AI positioning.

• Question from Samik Chatterjee (JPMorgan): Networking margins stepping to low-20% post-Juniper and cash flow implications next year?
  Response: Q3 Networking OM was 20.8% (Edge 22.7%, Juniper 15.8%); Q4 guided to low-20% due to Juniper mix, variable comp, and product costs. Cash flow guidance affirmed; more detail at SAM, with focus on FCF amid higher OI&E and integration costs.

• Question from Amit Daryanani (Evercore ISI): Growth outlook for combined Networking and Aruba–Mist product integration approach?
  Response: Aim to grow above market over the next three years. Will sell both Aruba and Mist, integrating thoughtfully at the AIOps/cloud layer while maintaining portfolio breadth; Juniper leads in data center switching/WAN and complements security.

• Question from David Vogt (UBS): How much Networking growth depends on Juniper’s AI model-builder traction, and were product costs AI-mix related?
  Response: AI networking opportunity spans service provider, sovereign, and enterprise; Juniper’s traction plus HPE’s global reach broadens access. The cited product cost increase was an Intelligent Edge platform transition, not AI mix.

• Question from Erik Woodring (Morgan Stanley): End-market demand signals and share-gain opportunities outside Networking?
  Response: Demand is robust. Traditional servers are in refresh with double-digit growth and Gen12 efficiency gains; Hybrid Cloud benefits from virtualization transitions (Morpheus, VM Essentials) and OpsRamp; Storage Alletra MP grew triple digits with share gains; Wi‑Fi 7 ramp also aids growth.

• Question from Simon Leopold (Raymond James): More detail on Juniper’s AI position and wins?
  Response: Juniper is becoming the standard above NVIDIA Spectrum‑X in large AI deployments, has a solid backlog, and targets neoclouds and service providers; HPE will lead with networking for AI while integrating server offerings.