Hewlett Packard Enterprise (NYSE:HPE) has reported a solid third-quarter fiscal year 2024 performance with a 10% year-over-year increase in revenue, reaching $7.7 billion. The company surpassed its non-GAAP diluted net earnings per share (EPS) guidance by $0.02 and generated a substantial free cash flow of $660 million.
Additionally, HPE announced a dividend payment of $0.30 per share and raised its full-year guidance for both GAAP and non-GAAP EPS, reflecting confidence in its year-to-date performance. The company's strategic advancements, including the sale of part of its equity in H3C and the pending acquisition of Juniper Networks (NYSE:JNPR), have contributed to its growth and optimistic outlook.
Key Takeaways
- HPE's revenue increased by 10% YoY to $7.7 billion, with a non-GAAP diluted net EPS exceeding guidance by $0.02.
- The company generated a free cash flow of over $660 million and announced a dividend of $0.30 per share.
- Full-year guidance for GAAP and non-GAAP EPS has been raised due to strong year-to-date performance.
- HPE received a $2.1 billion payment from the sale of equity in H3C and is experiencing strong growth in various regions.
- The company is making strides in its edge-to-cloud vision, with significant progress in AI, networking, and hybrid cloud.
- The Server segment outperformed expectations with AI system revenues reaching $1.3 billion, a 40% increase from the previous quarter.
- The pending acquisition of Juniper Networks is expected to enhance HPE's offerings and be accretive to margins and non-GAAP EPS in the first year.
Company Outlook
- HPE has raised its full-year guidance for both GAAP and non-GAAP EPS.
- The company is on track to close the Juniper Networks acquisition between late 2024 and early 2025, which is expected to positively impact margins and non-GAAP EPS.
- HPE remains committed to its balanced capital allocation framework.
Bearish Highlights
- The Hybrid Cloud segment saw revenues decline by 7% year-over-year.
- The Intelligent Edge segment experienced a 23% year-over-year revenue drop.
Bullish Highlights
- HPE's AI system revenues increased by approximately 40% from the previous quarter.
- The company has seen growth in orders for HPE GreenLake and HPE Alletra Storage offerings.
- A new agreement with Deloitte to utilize HPE GreenLake cloud services has been announced.
- The acquisition of Morpheus Data solidifies HPE's position in hybrid cloud software capabilities.
Misses
- There were no specific misses mentioned in the provided context.
Q&A Highlights
- Marie Myers discussed the positive impact of the AI server mix on gross margins and the company's continued focus on cost management.
- Antonio Neri emphasized HPE's position in the AI market and the lack of cannibalization from AI deployments into traditional workloads.
- Neri also highlighted the upcoming AI Day event and a facility visit in Wisconsin.
In summary, Hewlett Packard Enterprise's third-quarter results and strategic moves, such as the sale of H3C equity and the pending acquisition of Juniper Networks, reflect a company on the rise. With increased guidance for the full year and a strong free cash flow, HPE continues to demonstrate its ability to adapt and thrive in a competitive technology market.
InvestingPro Insights
Hewlett Packard Enterprise (HPE) has showcased robust fiscal performance in Q3 2024, with notable strategic advancements and financial achievements. To further understand HPE's market position and future potential, let's consider key insights from InvestingPro.
InvestingPro Data indicates that HPE's market capitalization stands at $24.39 billion, with a P/E ratio of 13.4, which adjusts to 11.58 on a last twelve months basis as of Q2 2024. This suggests that the company is trading at a low price-to-earnings ratio relative to its near-term earnings growth. Additionally, HPE's revenue for the last twelve months as of Q2 2024 was $28.31 billion, despite a slight decline in revenue growth by 4.36%. Nevertheless, the company's gross profit margin remains strong at 34.97%, indicating healthy profitability.
InvestingPro Tips highlight that HPE has a high shareholder yield and is considered a prominent player in the Technology Hardware, Storage & Peripherals industry. Moreover, the company has consistently maintained dividend payments for 10 consecutive years, with a dividend yield of 2.77% as of the latest data, and a dividend growth of 8.33% over the last twelve months. This consistent dividend payment history underscores HPE's commitment to returning value to shareholders.
Furthermore, analysts predict that HPE will be profitable this year, a forecast supported by the company's profitability over the last twelve months. These insights, coupled with the company's strategic moves, such as the pending acquisition of Juniper Networks, position HPE as a company with a strong foundation and growth potential.
For readers interested in further analysis and additional InvestingPro Tips, there are currently 6 more tips available on HPE at InvestingPro for next year and maybe even the following year because of Juniper integration charges? Or where is the pathway to where we can see free cash flow to net income being positive?
Antonio Neri: Yeah. Thank you, Toni. This is Antonio. I'm going to take the first part. The quick answer is no. There have not been very, very large deals or lumpy deals. It's been more spread and more uniform across the service provider space. And on the enterprise side, because obviously, we talk about this, the percentage of bookings relative to the $1.6 billion was -- as a mix, was in the mid-teens. So, very consistent with the prior year's quarter. However, obviously, the dollars are much larger, right, because now this quarter, we book $1.6 billion. So, I actually argue this is a good thing. And we don't expect significant super-large deals, I'd call it, in Q4 based on what we have visibility in the pipeline, but more a continuation of what we saw in Q3. And Marie, you want to talk about the free cash flow?
Marie Myers: Yeah. No, just, Toni, I mean, I think in terms of your comments on free cash flow, from an FY '24 perspective, I mean, in terms of bridging net earnings to free cash flow, it's the normal puts and takes for the year, so working capital, CapEx, et cetera. and sort of employee benefits. So, there is no specific charges in there in terms of our working capital -- sort of our net earnings for the year to free cash flow. In terms of '25, what we said, Toni, I think in the transaction stays the same. And look, honestly, we'll be guiding '25 when we do our next earnings call. So, I'll provide more color around free cash flow for '25 as we get into the next call.
Paul Glaser: All right. Thank you, Toni. Next question, please.
Operator: The next question is from Mike Ng with Goldman Sachs. Please go ahead.
Mike Ng: Hey, good afternoon. Thank you for the question. I just had a question about the mix of products and services for the AI systems orders and revenues that you guys disclosed on Slide 12. I guess, I was struck by two things. First, the growing share of services as a percentage of AI system orders, should we expect that to continue over time? And what are some of the key services you're selling with AI systems? And then, second, the very little services revenue that's being recognized to-date, as you recognize that services revenue in AI systems, should that improve the margins for server margins and AI system margins? And how much can that improve margins by? Thank you.
Antonio Neri: Yeah, thanks, Mike. Yeah, listen, we are very pleased with the services attached momentum on the AI systems portion of our business, which I believe will continue to grow as we grow the enterprise segment of the market, because that segment of the market comes with more rich services day zero, day one and day two services like we call it. And yesterday was the first day it became available out of HPE Private Cloud AI, and that has quite a bit of services component with it. And so -- but right now, as we started disclosing last quarter, the services component of that which you saw in one of the slides, as Marie was providing her remarks, much of that is pretty much all deferred. So, unless we are doing an installation and that gets recognized immediately, most of that is the maintenance that gets recognized over the length of the contract. And therefore, over time, we expect that will be contributing positive to our gross margins in the segment that we recognize that revenue, which obviously is the Server segment of the market. So, yes, but I'm positive on both gross margin accretion as we recognize the revenue and more services as we start selling the HPE Private Cloud in the enterprise space.
Paul Glaser: Thank you, Mike. Next question, please.
Operator: The next question is from Simon Leopold with Raymond James. Please go ahead.
Simon Leopold: Thank you very much. I wanted to see, Antonio, if you could talk a little bit about the trends with traditional servers, given we hear these arguments that AI-accelerated platforms would cannibalize traditional servers, but you're seeing good growth and good order patterns. How should we think about the risk that maybe that cannibalization eventually happens, or how are you really thinking about traditional versus AI? Thank you.
Antonio Neri: Yeah. Thank you, Simon. We have seen no signs of cannibalization into the traditional server market. And remember, I always try to bring a segment point of view, right? So, the segment point of view in the AI space, you have three segments. You have the service providers, model builders, which obviously include the hyperscalers, and there we have not sold traditional servers in a long time once we made the decision in 2017 to not participate in that market. And then, you have the sovereign space, which is now going up in term of interest, but the sales cycles are longer because of the government engagements and the procurement, but there, generally speaking, there is no traditional service per se. It's a combination of architectures and GPUs and CPUs in a unique form factor. And then last but not least, we have the enterprise. And the enterprise, while it's growing, has been very much focused on the AI applications. And for customers to move a traditional workload, call it, legacy workloads and the like, to a accelerated compute, the question is why you will do that when, A, you need to use the accelerated compute to either fine-tune the model or to do inferencing; and second, from a PCO perspective, there is no clear view that, that will be cost less. And so that's why when I think about workloads and customer segments, we don't see signs of cannibalization from the AI deployments into the traditional workloads.
Paul Glaser: Thank you, Simon. Gary, next question, please.
Operator: The next question is from Wamsi Mohan with Bank of America Merrill Lynch (NYSE:BAC). Please go ahead.
Wamsi Mohan: Yeah, thank you so much. Antonio, I was wondering if you could just share some color on why the -- on what the AI backlog composition is across maybe your portfolio where you're seeing more strength versus not. And within the enterprise demand commentary that you're calling out, can you share some color on what kind of projects are being evaluated? I know you called out some verticals like healthcare and financial services. Curious if you could provide some color on that as well. Thank you so much.
Antonio Neri: Yeah. So, first of all, the pipeline we have in front of us is multiples of the current backlog, which is a positive news, because that tells you the momentum will continue in the next few quarters. Second is that the backlog composition, as I said, in the mid-teens is the enterprise space and the rest is the traditional service provider space. On the service provider space is basically compute capacity to train models or to do hosting for that matter, in large colos. And then, on the enterprise space is really focused on the use cases where they see clear line of sight for the return on that investment, and there are several use cases by segment that customers by verticals that they are driving. Obviously, many of them are very obvious. And now we are seeing a little bit more sophistication in some of those use cases and the maturity of. And that's why our Private Cloud AI offering is targeting those type of customers, because ultimately comes with entire stack from the, what I call, the workloads at the top, specifically designed for the verticals, down into the training models, all the way down to the infrastructure. They are sized for that type of deployment. And then, on the sovereign AI, obviously, we see now a significant interest. We are working across multiple geos on several opportunities. A lot of them are basically to open AI clouds for sovereign reasons or privates and compliance reasons on data. And a lot of them actually want to look a little bit like supercomputers in many ways because many of those systems are designed to do both AI large language models, and that's very obvious with some of the deployments we have done in the European Union and the one we're going to do now for the U.K. And other ones are basically for traditional supercomputing. So, the infrastructure in the end is the same. All of these systems are very much liquid cooled systems. And so, that's an opportunity for us. But on the enterprise side, I think you can see now expansion from traditional bots and customer service into other areas in finance, manufacturing, marketing, where they can see the clear return on that investment. And we're helping them even upfront through a partner ecosystem to define those use cases, because ultimately, it goes beyond just deploying IT, but they're really to realize the business value.
Paul Glaser: Thank you, Wamsi. Last question, please.
Operator: And the final question is from Ananda Baruah with Loop Capital. Please go ahead.
Ananda Baruah: Hey, guys, yeah, good afternoon. Really appreciate you taking the question. Maybe, Antonio, actually just dovetailing from there, like I'd love any more insight you can give a context around, like what's the HPE sort of sweet spot right now for business you win in GenAI, like what types of deployments or workloads? And then, how do you see that -- do you see that changing, or how do you see that evolving over the next few years as well? And that's it for me. Thanks, guys.
Antonio Neri: Well, I think right now, one of the key sweet spots is we now have to build and deploy and run these large systems. That requires a unique expertise. That's why you see the services portion being attached to those assistants. And ultimately, you need expertise both in the manufacturing space. And again, we're going to host our AI Day in one of, what I believe is, the largest footprints in the world where you can see how this gets done. And then, on the services side, you should not underestimate the services expertise needed to run. But for enterprise, where is the next big thing is -- in my view, is all about the simplicity. And several of the patterns we are actually filing and getting done are actually in areas like ease of use, automation, obviously, security. These are all spaces where we are actually building all those capabilities in our offer. And remember, all of this gets built inside HPE GreenLake as we deploy these optimized infrastructure and configurations. And that's why for me, GreenLake is an important component of our AI strategy, because ultimately, we manage a lot of the deployment on-prem through enterprise customers, specifically, through HPE GreenLake. And that's an accelerator and a way to upsell, cross-sell, build, ultimately, customers' confidence and control of the data, which is the fundamental value when it comes down to AI. And then, next year, once we close the Juniper transaction, we're going to add another key component, which is the networking piece. And it's very important that we recognize that AI, A, is a hybrid workload. The core foundation of that across hybrid is the network. And HPE will have unique IP and capabilities in that space in addition to the traditional server storage, which is now certified for AI, and then the GreenLake software and services attached to it. And that's how I want to think about it. Independent businesses are all accretive to AI, but then when we get to a solution, HPE will have the full-stack solution to offer to our enterprise customers.
Paul Glaser: Thank you very much. Antonio, any comments?
Antonio Neri: Yeah, no, thank you very much for the time. Again, I will say we delivered a strong quarter. We drove very strong revenue growth. We said what -- we did what we said. And honestly, I'm very confident about the next quarter and what comes next after the Juniper acquisition. I'm super-pleased that we also closed the first tranche of our H3C put option. Obviously, that took a lot of work in an environment that's complex. And as you think about our ability to deliver profitable growth is there. I understand the questions around margins, but when I think about margins, on the server side, we are consistently driving a stable around 11% or so operating margins. We think about that way more than gross margin because ultimately it's all about cash. And then, ultimately, on the networking and hybrid cloud is about both gross margin, because of our content is more software and services, while we'll deliver on the bottom-line. So, I think our strategy all coming together, but it's very competitive dynamic there and we have to execute every day with discipline, which is what we did again this quarter. And again, we raised guidance for the full year on the EPS side of the house. So, thank you very much for your time. And I look forward to hosting some of you at our facility in Wisconsin on October 10.
Paul Glaser: Very good. Thank you, everyone, for joining today.
Operator: Ladies and gentlemen, this concludes our call for today. Thank you.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.