Hewlett Packard Enterprise Company (HPE) 2024 Q3 Earnings Call Summary

Optimistic Highlights

• Strong Revenue Growth

HPE reported net revenue of $7.7 billion, up 10% year-over-year, at the high end of guidance.

• AI Systems Revenue

AI systems revenue conversion accelerated, contributing $1.3 billion, a 39% increase from Q2.

• Free Cash Flow

Generated more than $660 million in free cash flow and will pay a dividend of $0.30 per share.

• HPE GreenLake Growth

HPE GreenLake cloud platform now has almost 37,000 unique customers, driving annualized revenue run rate subscription growth.

• Juniper Networks Acquisition

Pending acquisition of Juniper Networks expected to significantly expand HPE's networking business and be accretive to margins and non-GAAP EPS in year one.

Pessimistic Highlights

• Gross Margin Decline

Non-GAAP gross margin was 31.8%, down 410 basis points year-over-year, driven by a lower mix of Intelligent Edge revenue and a higher mix of AI server revenue.

• Intelligent Edge Revenue Decline

Intelligent Edge revenues were $1.1 billion, down 23% year-over-year due to tough comparisons.

• Operating Margin Pressure

Non-GAAP operating margin was stable at 10%, but gross margin pressures were offset by strong cost controls.

• Free Cash Flow Realization

Free cash flow realization was about 75% of net income, indicating ongoing challenges in converting earnings to cash flow.

• Geographic Variation in Demand

Demand was strong in North America, Asia-Pacific, Japan, and India, but lagged in Europe and the Middle East.

Company Outlook

• Positive Revenue Guidance

For Q4, HPE expects revenues in the range of $8.1 billion to $8.4 billion, with GAAP diluted net EPS between $0.76 and $0.81, and non-GAAP diluted net EPS between $0.52 and $0.57.

• AI Systems Growth

Continued strong pace of AI systems revenue conversion expected, with enterprise AI gaining momentum.

• Hybrid Cloud and Intelligent Edge

Slight revenue increase expected in Hybrid Cloud and Intelligent Edge segments, with improving profitability.

• Juniper Networks Integration

Juniper Networks acquisition expected to close by end of calendar year 2024 or early 2025, significantly impacting gross and operating margins positively.

• Full Year Guidance

Tracking towards the high end of revenue guidance of 1% to 3% growth in constant currency, with non-GAAP diluted net EPS expectations tightened to $1.92 to $1.97.

Q & A Highlights

• Q: Server Margins Breakdown (Meta Marshall, from Morgan Stanley)

A: Server margins were driven by the shift to Gen11, better pricing discipline, and OpEx discipline. (Marie Myers)

• Q: Gross Margin Impact (Samik Chatterjee, from JPMorgan)

A: Gross margins were impacted by AI server mix, offset by OpEx discipline. Enterprise AI adoption expected to improve profitability. (Marie Myers)

• Q: Free Cash Flow Downtick (Amit Daryanani, from Evercore)

A: Free cash flow was impacted by timing of working capital and seasonality. Expecting benefits from working capital and AI revenue conversion in Q4. (Marie Myers)

• Q: AI Server Deals Lumpiness (Toni Sacconaghi, from Bernstein)

A: No unusually large deals in Q3; expecting continuation of current trends in Q4. (Antonio Neri)

• Q: AI Systems Orders and Services Mix (Mike Ng, from Goldman Sachs)

A: Growing share of services in AI systems orders expected to continue, improving margins as services revenue is recognized. (Antonio Neri)

• Q: Traditional Servers vs. AI Servers (Simon Leopold, from Raymond James)

A: No signs of cannibalization of traditional servers by AI servers; different segments and workloads. (Antonio Neri)

• Q: AI Backlog Composition and Enterprise Demand (Wamsi Mohan, from Bank of America Merrill Lynch)

A: AI backlog includes service providers and enterprise customers; enterprise use cases expanding in various verticals. (Antonio Neri)

• Q: HPE's Sweet Spot in GenAI (Ananda Baruah, from Loop Capital)

A: HPE's expertise in building and running large systems is a key differentiator; focus on simplicity and automation for enterprise AI deployments. (Antonio Neri)