HPE hit its revenue forecast for Q3 of fiscal 2024 ended July 31, led by AI and traditional server sales. Yet it wasn’t all good news. The infrastructure giant’s share price dipped after margins slid due to the high volume of sales of these AI compute boxes.
According to HPE, revenue for the three months bounced 10 percent year-on-year to $7.7 billion and the bottom line climbed 10.3 percent to $512 million.
CEO and president Antonio Neri said: “We delivered a strong third quarter, with impressive revenue growth, especially from our AI system conversion, and we improved profitability.”
EVP and CFO Marie Myers said: “We are well positioned to capture share of the growing AI infrastructure market and expect to see the continuing benefit of our cost management efforts. We are confident in finishing the year strong and are raising EPS guidance as a result.”
Financial summary
- Gross margin: 31.6 percent, down 420 basis points year-on-year
- Diluted EPS: $0.38, up 9 percent
- Cash flow from operations: $1.14 billion, a decline of $371 million
- Free cash flow: $669 million, down $286 million
- Capital returns to shareholders of $221 million in the form of share repurchases and dividends
The business unit results varied significantly. The Server division brought in $4.3 billion in sales, up 35 percent year-on-year. However, Intelligent Edge was down 23 percent to $1.12 billion, and Hybrid Cloud declined 7 percent to $1.3 billion. Reliable as clockwork, the Financial Services unit pulled in $879 million, up 1 percent.
HPE’s annualized revenue run rate (ARR) rose 35 percent to $1.7 billion.
Double-digit sales – from both a quarter-on-quarter and year-on-year perspective – were reported for HPE’s traditional servers (ProLiant) as demand was aided by a transition to generation 11 ProLiants. HPE said AI systems orders rose $1.6 billion quarter-on-quarter, from $4.6 billion to $6.2 billion, with AI systems revenue coming in at $1.3 billion in this latest quarter. It seems that AI systems, followed by traditional (ProLiant) servers, are the leading HPE growth factors.
Dell generated $11.6 billion in revenue from servers, storage, and networking sales in its latest quarter, which compares to HPE’s equivalent $5.4 billion from its combined servers (ProLiant + Cray) and Intelligent Edge divisions. Dell’s PowerEdge is strongly outselling HPE’s combined ProLiant server and Cray supercomputer systems.
Asked on the earnings call if AI server systems were replacing ProLiant servers, Neri said: “We see no signs of cannibalization. AI workloads are distinct and do not replace traditional workloads. The enterprise segment, in particular, continues to show strong demand for traditional servers.”
Yet it seems AI servers are having a deflationary impact on HPE’s margins, and the financial markets voted with their feet as the company’s share price fell 3 percent in extended trading, nibbling at the double-digit gains HPE has made this year.
Intelligent Edge order growth grew on the prior quarter and HPE interpreted this as a networking market recovery. The Juniper Networks acquisition is scheduled to close in late 2024 or early 2025, and that will bump up HPE’s networking revenues further. Neri said: “The Juniper acquisition will further enhance our capabilities in networking, crucial for AI workloads.”
Orders rose double digits year-on-year for Alletra storage and hybrid cloud SaaS offerings. The GreenLake cloud (subscription business) customer count increased by almost 3,000 quarter-on-quarter – and 10,000 year-on-year – to 37,000, with ARR up 39 percent annually.
HPE received $2.1 billion from the partial sale of its equity position in China-based H3C Technologies Co from Unisplendour International Technology. This will be reflected in HPE’s Q4 and full FY 24 earnings announcement later this year.
The outlook for the fourth quarter is for revenues of $8.25 billion +/- $125 million and 12.2 percent higher year-on-year at the mid-point. The full year outlook is $29.92 billion, up 2.7 percent more than a year ago.
Bootnote
HPE’s Hybrid Cloud product portfolio consists of ProLiant servers, Alletra storage, Private Cloud (virtualization, containers), Backup & Recovery, Zerto DR, and GreenLake Flex offerings. HPE AI includes Cray XD servers, EX systems, Private Cloud AI (Nvidia GPU-based systems with ProLiants), and MLDE (Machine Learning Development Environment) software.
HPE Private Cloud AI is now available to order and HPE is introducing new solution accelerators to automate and streamline AI apps. The first one, available today, is a GenAI virtual assistant to help developers build interactive chatbots that answer questions asked in natural language, informed by an organization’s private data and powered by open source large language models (LLMs).
