- HPE’s Q3 earnings and revenue exceeded expectations, with a profit of $512 million and 50 cents per share.
- Revenue grew by 10% to $7.7 billion, slightly above the $7.6 billion forecast.
- Adjusted gross margin fell to 31.8%, below last year’s 33.4%, driven by lower-margin AI server sales.
- AI server revenue surged by 39% to $1.3 billion, but profitability concerns remain due to bulk sales to cloud providers.
- The sale of HPE’s stake in H3C Technologies generated $2.1 billion, which will aid the planned acquisition of Juniper Networks.
- HPE provided modest Q4 guidance, forecasting earnings between 52 to 57 cents per share and revenue of $8.1 billion to $8.4 billion.
- Full-year earnings guidance was raised to $1.92 to $1.97 per share, in line with analyst expectations.
- Despite the stock decline, HPE shares are up 11% year-to-date.
Main AI News:
Hewlett Packard Enterprise Co. (HPE) saw its stock fall despite posting strong third-quarter results that exceeded Wall Street’s expectations for both earnings and revenue. Investors were concerned about lower-than-expected margins in HPE’s data center server business, which dampened enthusiasm despite the company’s performance.
HPE reported a net profit of $512 million, up from $464 million a year ago, and earnings per share of 50 cents, beating estimates of 47 cents. Revenue grew 10% to $7.7 billion, slightly above the forecasted $7.6 billion. However, its adjusted gross margin fell to 31.8%, below last year’s 33.4%, due to a higher mix of AI servers, which tend to carry lower profit margins.
While HPE’s AI server revenue reached a record $1.3 billion, up 39% from last year, analysts expressed concerns that lower margins from AI servers, largely driven by bulk sales to cloud providers, could overshadow the company’s growth in this area. Despite this, HPE expects to improve margins over time by offering higher-margin services alongside its AI infrastructure.
The company also received a financial boost from the $2.1 billion sale of its stake in H3C Technologies, which will help fund its planned acquisition of Juniper Networks Inc., expected to close in late 2024 or early 2025, pending regulatory approval.
Looking ahead, HPE offered modest guidance for the fourth quarter, forecasting earnings of 52 to 57 cents per share on revenue of $8.1 billion to $8.4 billion. The company also raised its full-year earnings forecast to $1.92 to $1.97 per share, in line with analysts’ expectations. Despite the recent stock decline, HPE shares have risen 11% year-to-date, reflecting ongoing investor confidence in its growth potential.
Conclusion:
HPE’s strong Q3 performance highlights its growing AI and cloud portfolio, but margin pressures create investor hesitation. The company’s shift toward AI servers is delivering significant revenue growth, though at the cost of profitability, due to the high costs of AI components like GPUs. This margin compression could present challenges as competitors like Dell and Super Micro face similar issues. However, HPE’s strategy to incorporate higher-margin services alongside AI infrastructure could help offset the hardware margin pressure over time. The market will be watching HPE’s ability to deliver on these higher-margin opportunities as it navigates increasing demand in the AI space.
