HPE’s record results buoyed by rising AI tide
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HPE’s record results buoyed by rising AI tide HPE beat its $12.1 billion high-end revenue guidance for its third fy2026 quarter as AI pumped up overall enterprise demand. Revenues of $12.2 billion in the quarter ended July 31 were up 34 percent on the year, with GAAP net income of $1.5 billion; an increase of 405 percent Y/Y as HPE’s profitability shot up. It had record orders, driven up by inferencing and agentic AI workloads. Sales momentum continued as the company received a $3.5 billion inferencing deal from a hyperscaler customer for servers after the quarter ended. HPE president and CEO Antonio Neri said: “Our results demonstrate the durability of our profitable growth momentum. We delivered record revenue, orders, and profitability, fueled by surging customer demand across our portfolio. AI is becoming a multi-year growth driver for HPE, and our differentiated portfolio positions us to capture that opportunity at scale.” His earnings call commentary expanded on this, saying: “AI has become a multi-year growth driver, expanding demand across our HPE portfolio. Customer demand in the quarter accelerated across both business segments, with orders growing faster than revenues. We booked more orders than any prior quarter in our history, resulting in a record-breaking backlog for the company.” Quarterly financial summary: - Gross margin: 40.1%, up from 36.9 percent last quarter and 29.9 percent last year, - Operating Cash flow: $1.6 billion vs $1.4 billion last quarter and $1.3 billion a year ago, - Free cash flow: record $1.0 billion vs $915 million in the prior quarter and $790 million a year ago, - Diluted EPS: a record $1.06 vs $0.44 last quarter and $0.21 a year ago, - Cash & cash equivalents: $6.2 billion vs last quarter’s $5.3 billion and the year-ago $4.7 billion, - Total net debt: $14.0 billion vs $16 billion last quarter. HPE is paying off its net debt (deleveraging) faster than it anticipated, helped by the $1.4 billion proceeds from exiting the China-based H3C business. There are two main business segments, Network and Cloud+AI. The networking segment saw $2.9 billion in revenues; 74.9 percent higher Y/Y, with orders up 36 percent to $700 million. It has 4 components: - Campus and Branch revenue was $1.4 billion, up 31% from the prior-year period and a record high, - Data Center Networking was $382 million, down 6% from the prior-year period, - Security was $281 million, up 12% from the prior-year period’ - Routing was $788 million, 23% higher Y/Y. Neri commented that, in networking: “Orders are growing 3.5 times faster than the revenue. What has limited us is the availability of supply. We expect that supply to become more aligned to our order bookings as we go forward, starting Q4.” The Cloud and AI segment grew revenues a more relaxed 25.4 percent to a record $9 billion. Its component results were: - Server was $6.8 billion, up 35.3% Y/Y, - Storage was $1.3 billion, up 10.2% Y/Y, - Financial Services was $0.9 billion, 0.3% down Y/Y, - Other - $278 million, up 3% Y/Y. HPE could have shipped more kit but, Neri said: “Supply constraints continue to affect our ability to fulfill the increased customer demand. We are collaborating very closely with our partners to secure additional multi-year supply agreements.” That’s for memory and NAND. The revenue rise was down to servers, Neri saying: “The server product category drove the outperformance with high demand for traditional servers and AI systems. We saw strong demand from large enterprises, neo cloud service providers, and sovereign customers. We expect demand to remain exceptionally high as our pipeline remains multiples of our backlog.” EVP and CFO Marie Myers noted: “Higher average selling prices drove server revenue to an all-time high. … We see enterprises increasingly moving from AI pilots to production deployments, using traditional servers for agentic AI workloads and inferencing.” Like Dell and NetApp, Neri is seeing a structural market change: “A fundamental shift in the server business is becoming quite clear.” He added: ”The way customers value their IT infrastructure is changing. Their focus is not just whether a server can run AI workloads, but also how it can enable entirely new business workflows using new AI applications. We are seeing AI-related enterprise initiatives receive higher levels of investment than traditional IT projects. There is more top-level executive engagement in making those investment decisions, including company boards, which are championing AI technology to unlock further business transformation potential.” The hyperscaler server inferencing deal is not for the hyperscaler to offer services to its customers. Neri said: ”Think about them as an enterprise customer who is going to use our AI inferencing for their own internal usage.” It’s traditional servers as well, not AI servers with GPUs." Neri talked up HPE’s storage business: “Storage had a standout quarter with record revenue. It benefited from our decision to focus on our own IP offerings by delivering a modern multi-data protocol platform for the AI era. Customers are beginning to evaluate whether the AI workloads can be run most efficiently with the best secure data management and the lowest cost per token. “Organizations are still in the process of modernizing data storage environments while preparing for the next generation of AI-driven workloads and applications. They want data to be close to their AI infrastructure, and they want control over sensitive information. These trends are driving strong demand for our HPE Alletra Storage MP storage solutions. We are confident our comprehensive data storage value proposition will continue to accelerate this momentum in our storage business.” Myers added this nugget: “Alletra MP orders and revenue increased strong double digits year-over-year. We see robust growth potential for our X10K object and file system, broadening our AI solutions portfolio to address the rapidly expanding unstructured data market.” We’ve charted the recent storage revenue histories for Dell, Everpure, HPE and NetApp to provide a comparative view, and it shows HPE outpaced Everpure this quarter. But it trails behind NetApp and storage market leader Dell. HPE’s GreenLake subscription business is booming. GreenLake customer numbers grew 18 percent to 52,000, up from 44,000 a year ago. HPE is using AI internally to lower its costs, Myers saying: “we have expanded both our AI and operational simplification efforts across the enterprise. HPE is now deploying an internal agentic AI platform built on our own Private Cloud AI (PCAI), open-source, and open-weight models, leveraging intelligent routing that sends each workload request to the most cost-effective AI model. According to our own internal analysis, our PCAI offering can reduce token costs versus the public cloud by up to 60 percent.” “Routine tasks stay on-premise, while frontier models are reserved for the most complex work.” Looking ahead, Myers said: “With our Q3 results and our order backlog at a record level, we are raising our financial outlook.” The fourth quarter revenue outlook is $14.4 billion ± $450 million, a 48.8 percent mid-point rise on last year’s Q4. Its full fy2026 outlook is lifted from $44.6 billion ± $186 million to $46.5 billion ± $515 million, a 35.5 percent mid-point rise on fy2025. AI is pleasurably and durably inflating HPE’s revenue expectations, and that's helping HPE increasing its fy2027 expectations, Myers saying: “Given the demand strength and sizable backlog we saw at the end of Q3, combined with some large deals we signed post quarter close, we are updating our fiscal 2027 framework and now expect consolidated revenues to grow 13-17 percent.” The previous growth range was 8-12 percent. Neri said: ”Our guide is informed by what we see in the market, and the market is telling us that demand continues to be exceptionally strong.” HPE and Oracle HPE Juniper Networking routing and switching platforms support Oracle Cloud Infrastructure’s (OCI) data center and edge networks. OCI is expanding its AI superclusters. As a consequence, Oracle is now buying more Juniper networking to link its AI data centers. This provides for the potential multi-year deployment of Juniper Networking PTX and MX routing platforms and QFX and EX switching platforms across Oracle data centers globally, along with multi-year networking support services. The latest QFX switches will provide the high-density connectivity, dynamic load balancing, and advanced congestion management required for large RoCEv2 (RDMA over Converged Ethernet version 2) AI backend networks. Oracle and HPE are also collaborating on intelligent telemetry that delivers deeper visibility into device and fabric behavior.
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