HPE scores a big revenue beat fueled by AI, and its stock rockets

By Emily Bary

Earnings top expectations as well, even as networking business remains pressured

Momentum in artificial-intelligence servers lifted Hewlett Packard Enterprise Co. to a sizable revenue beat in the latest quarter as the company returned to growth.

HPE (HPE) reported $7.2 billion in total revenue for its fiscal second quarter, up 3% from a year before and ahead of the $6.8 billion FactSet consensus. Growth in the latest quarter came after HPE posted a 14% revenue decline in the fiscal first quarter.

The stock climbed 15.2% in Tuesday's extended session.

The company called out AI as a chief driver, as cumulative AI systems orders came out to $4.6 billion. Chief Financial Officer Marie Myers spoke of "a pipeline that has...multitudes of the current orders."

Myers said that AI demand is broadening geographically and in terms of the customer base, while HPE's expansive portfolio and compute history are resonating with customers.

While current Nvidia Corp. (NVDA) chips can work with water cooling, Myers thinks direct liquid cooling will become more necessary once the Blackwell line rolls out.

"That's going to be a real differentiator for customers because customers will want to go to work with someone where not only do you have the intellectual property and sort of the plumbing, but you've got the know-how around how to manage that data-center environment, because these data centers are going to become quite complex to manage," she told MarketWatch.

Overall server revenue grew 18%, but intelligent edge revenue fell 19%. While AI servers are a strong growth area for HPE, the company is seeing cyclical pressures in networking, which are weighing on margins. Adjusted gross margins were 33.1%, down from 36.2% both sequentially and relative to a year before.

AI systems had a 11% operating margin, Myers said, in line with what management had expected. "But certainly from a gross and operating [total-company] perspective," margins were impacted by the revenue mix, which included lower contributions from networking.

Myers added that HPE is "pleased with the margin profile" of AI revenue even though it's "just not networking," since that business has more than two times the operating margins. '

HPE in the latest quarter topped profit expectations, delivering 42 cents in adjusted earnings per share, while analysts were modeling 39 cents.

On a GAAP basis, the company record net income of $314 million, or 24 cents a share, down from $387 million, or 29 cents a share, in the year-before period.

For the fiscal third quarter, HPE anticipates $7.4 billion to $7.8 billion in revenue, while analysts were looking for just over $7.4 billion. The company also expects 43 cents to 48 cents in adjusted earnings per share, while analysts were modeling 47 cents.

HPE boosted its full-year view and now expects revenue to grow 1% to 3% on a currency-neutral basis, and it's looking for $1.85 to $1.95 in adjusted EPS. On HPE's prior earnings call, it was calling for flat to 2% growth in revenue on a constant-currency basis, as well as $1.82 to $1.92 in adjusted EPS.

"That's really underscored by the confidence that we saw just this quarter, particularly in AI systems," Myers said.

-Emily Bary

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06-04-24 2025ET

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