HPE echoes Dell as AI demand remains strong
2min read Hewlett Packard Enterprise (HPE) delivered strong third-quarter fiscal 2024 results, with revenue of $7.71 billion, exceeding consensus estimates of $7.673 billion and marking a 10% year-over-year increase. The company reported adjusted EPS of $0.50, surpassing the forecast of $0.47 and reflecting solid growth from the prior-year period. HPE’s AI-related revenue was a significant highlight, with orders reaching $1.6 billion for the quarter, far exceeding the $600 million estimated by analysts. This strong performance in AI contributed to HPE's ability to outperform expectations across key metrics.
Segment performance revealed a mixed picture. The server business was a standout, generating $4.28 billion in revenue, up 35% year-over-year, though just slightly missing the estimate of $4.29 billion. Meanwhile, the Hybrid Cloud segment posted revenue of $1.30 billion, closely aligned with estimates but down 7% year-over-year. Intelligent Edge, however, struggled, with revenue of $1.12 billion, down 23% from the previous year, though in line with expectations. Financial Services contributed $879 million, posting marginal growth of 0.7% year-over-year and meeting estimates.
HPE’s margins came under pressure in the quarter, with adjusted operating margins at 10%, in line with forecasts but down from 10.3% a year ago. Gross margin was also softer, at 31.8%, missing the estimate of 33.4% and dropping from the prior year's 35.9%. Despite these pressures, the company managed to generate $1.15 billion in cash flow from operations, although this represented a year-over-year decline, falling short of the $1.46 billion estimate. Free cash flow came in at $669 million, well below expectations of $813.8 million.
A key driver of HPE’s performance was the surge in AI infrastructure demand, with the company’s AI order backlog swelling to $3.4 billion, significantly higher than the $3 billion anticipated. This demand, combined with cost-cutting efforts, allowed the company to offset margin pressures and maintain profitability. HPE's AI strength positions it well to capture a larger share of the growing AI infrastructure market, which management sees as a critical growth driver.
Looking ahead, HPE provided positive guidance for the fourth quarter of fiscal 2024. The company expects revenue between $8.1 billion and $8.4 billion, slightly ahead of the $8.15 billion consensus estimate. For adjusted EPS, HPE projects a range of $0.52 to $0.57, compared to the forecast of $0.54. The company also raised its full-year fiscal 2024 adjusted EPS guidance to $1.92 to $1.97, up from its previous range of $1.85 to $1.95, reflecting confidence in its ability to navigate the current macroeconomic challenges.
Despite the upbeat results and guidance, HPE shares fell by 3.8% following the announcement, possibly due to concerns around margin contraction and cash flow shortfalls. Investors may also be wary of the competitive pressures in the tech space and the broader macroeconomic uncertainty. However, management remains confident in the company’s growth prospects, particularly in AI and cloud infrastructure, where demand is robust.
In conclusion, HPE’s third-quarter results showcased solid execution, with strong AI demand driving revenue growth. However, margin pressures and lower-than-expected cash flow weighed on the stock. With the company raising its full-year EPS guidance and maintaining a healthy AI backlog, HPE remains well-positioned to capitalize on future growth opportunities, although it will need to manage margin challenges carefully.