HPE's Q3 2025: Contradictions Emerge on AI Server Margins, Networking Margins with Juniper, and AI Demand

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

Date of Call: None provided

Financials Results

• Revenue: $9.1B, up 18% YOY and up 18% sequentially; $8.7B excluding Juniper (up 11% YOY)
• EPS: Non-GAAP $0.44 per diluted share (toward high end of $0.40–$0.45 guidance); GAAP $0.21 (below $0.24–$0.29 guidance)
• Gross Margin: 29.9% (non-GAAP, incl. Juniper), down 190 bps YOY and up 50 bps sequentially; 28.3% excl. Juniper
• Operating Margin: 8.5% (non-GAAP, incl. Juniper), down 150 bps YOY and up 50 bps sequentially; 8.1% excl. Juniper

Guidance:

• FY25 revenue growth expected at 14%–16% CC (≈30 bps FX headwind).
• Q4 non-GAAP gross margin mid-30%; FY25 above 30%.
• FY25 non-GAAP operating margin in upper 9% range; Q4 to upper 11% range.
• FY25 GAAP EPS $0.42–$0.46; non-GAAP EPS raised to $1.88–$1.92.
• FY25 FCF ≈$700M (≈$1.0B excluding Juniper).
• Q4 revenue $9.7B–$10.1B.
• Q4 Networking revenue up >60% QoQ; Networking OM in low-20% (Q4 and FY25).
• Q4 Server revenue down mid-to-high single digits QoQ; AI systems down >30% QoQ; Server OM ~10%.
• Q4 Hybrid Cloud revenue roughly flat QoQ; OM mid-to-high single digits.
• Q4 GAAP EPS $0.50–$0.54; non-GAAP EPS $0.56–$0.60.

Business Commentary:

• Revenue Growth and Strategic Acquisitions:
• HPE achieved record-breaking revenue of $9,100,000,000 in Q3, up 18% year over year.

• The growth was driven by strong momentum across AI, networking, and hybrid cloud, as well as the completion of the Juniper acquisition.

• Networking Segment Performance:

• Networking segment revenue was $1,700,000,000, increasing 54% year over year.

• This growth was attributed to the recovery in the networking market and the consolidation of Juniper's results for one month.

• AI System and Server Demand:

• AI systems revenue reached an all-time high of $1,600,000,000, with a 25% year over year increase.

• The growth was driven by strong demand for traditional servers and the conversion of AI backlog to revenue.

• Hybrid Cloud and Software Growth:

• Hybrid cloud revenue was $1,500,000,000, marking the fourth consecutive quarter of year-over-year growth.
• This was due to strong software and services revenue, particularly in GreenLake cloud, driven by innovations like GreenLake Intelligence.

Sentiment Analysis:

• Management reported record revenue ($9.1B, +18% YOY), strong AI momentum (AI orders nearly doubled QoQ; backlog $3.7B), and raised FY25 non-GAAP EPS to $1.88–$1.92. Networking revenue rose 54% YOY; Server and Hybrid Cloud delivered growth with sequential margin improvement. Q4 guide calls for higher operating margins and sequential EPS growth, with full-quarter Juniper benefits.

Q&A:

• Question from Aaron Rakers (Wells Fargo): How should we think about traditional vs. AI server margins and the path to ~10% total server OM?
  Response: Traditional server margins are back to historical ~10–12%; Q3 total server OM was 6.4% due to AI mix/one large deal and inventory work, but mix shifts and pricing discipline support ~10% server OM in Q4.

• Question from Wamsi Mohan (Bank of America): Early Juniper integration progress and where AI value is larger—networking or servers?
  Response: Integration is on track (sales harmonization by year-end; channels incentivized); AI strategy leads with networking for model builders, integrated rack-scale (networking+servers) for sovereign, and full stack for enterprise—networking strengthens HPE’s AI position.

• Question from Samik Chatterjee (JPMorgan): Networking margin trajectory post-Juniper and cash flow implications?
  Response: Q3 combined Networking OM was 20.8% (Edge 22.7% with sequential pressure from variable comp and product costs); guide is low-20% near term as Juniper runs a few points below Edge; cash flow focus remains high with Juniper costs/OI&E factored—more detail at SAM.

• Question from Amit Daryanani (Evercore): Growth outlook for combined networking vs. market and Aruba–Mist product integration path?
  Response: Aim to grow above market; will thoughtfully integrate Juniper and Aruba at the AI-ops/cloud management layer while selling both portfolios; data center switching remains Juniper-led; strong security and SDN integration into Hybrid Cloud.

• Question from David Vaught (UBS): How dependent is AI networking growth on Juniper’s traction, and what drove product costs?
  Response: AI networking opportunity spans service providers, sovereign, and enterprise; Juniper broadens reach via HPE’s footprint; product cost pressure was in Intelligent Edge due to a platform transition.

• Question from Eric Woodring (Morgan Stanley): End-market demand outlook and HPE share opportunities outside networking?
  Response: Demand is robust with consistent order linearity; traditional servers in refresh (Gen12 efficiency/security), disciplined volume/margins; Hybrid Cloud benefits from virtualization transitions and software growth; storage Alletra MP posted third straight quarter of triple-digit growth.

• Question from Simon Leopold (Raymond James): Update on Juniper’s AI positioning and wins?
  Response: Juniper is becoming the standard above NVIDIA Spectrum-X in large AI deployments, with solid backlog; strategy is to lead with networking for AI in service provider/neo-cloud segments and leverage that to pull through rack-scale solutions.