Release Date: December 05, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Hewlett Packard Enterprise Co (HPE, Financial) reported record quarterly revenue of $8.5 billion, marking a 15% year-over-year increase.
- The company achieved record server revenue of $4.7 billion, up 31% year-over-year, driven by strong demand for AI systems and traditional servers.
- HPE's AI systems revenue grew significantly, with a 16% sequential increase to $1.5 billion, and a strong backlog of over $3.5 billion in AI systems orders.
- HPE GreenLake saw continued adoption, contributing to a 48% year-over-year increase in annual recurring revenue (ARR) to $1.9 billion.
- The company generated a record-breaking $2.3 billion in free cash flow for fiscal year 2024, exceeding their guidance of at least $1.9 billion.
Negative Points
- Gross margin declined by 390 basis points year-over-year to 30.9%, impacted by a higher contribution of AI systems revenue and lower Intelligent Edge revenue.
- Intelligent Edge revenue was down 20% year-over-year, reflecting a slower recovery in networking demand.
- The company experienced a $700 million debook of AI orders due to concerns with a specific customer, highlighting potential risks in order fulfillment.
- HPE's hybrid cloud segment, despite strong growth, is expected to see a sequential decline in revenue in the first quarter of fiscal 2025.
- The competitive environment in both traditional servers and AI systems remains challenging, affecting pricing and margin pressures.
Q & A Highlights
Q: Can you provide an update on your AI pipeline, given the backlog levels dipped in the quarter?
A: Antonio Neri, President and CEO, explained that the AI pipeline is a multiple of the current backlog, which is over $3.5 billion. The pipeline includes four key market segments, with the biggest drivers being hyperscalers and Tier 2 and Tier 3 providers offering GPU capacity on demand. The enterprise AI pipeline is growing steadily, with hundreds of customers and some large deals in the pipeline.
Q: Can you discuss the factors affecting server margins this quarter, particularly the impact of XD servers and El Capitan?
A: Marie Myers, CFO, noted that server margins were strong at 11.6%, with the highest-ever AI server revenue of $1.5 billion. El Capitan was included in the quarter, and traditional compute, particularly Gen11, accounted for about two-thirds of the mix, driving higher AUPs and structural margins. Successful cost management and passing on commodity costs also contributed to the margin performance.
Q: Could you clarify the $700 million debook of AI backlog? Was it a competitive loss or something else?
A: Antonio Neri clarified that the debook was due to concerns with a specific customer, not a competitive loss. HPE maintains strong controls and decided it was prudent to debook the order due to the associated risks.
Q: What is driving the gross margin decline, and how low can you take OpEx given your revenue growth expectations?
A: Marie Myers explained that the gross margin decline was primarily due to a lower contribution from Intelligent Edge revenue and a higher mix of AI systems in servers. Despite this, gross profit dollars grew year-over-year and quarter-over-quarter. HPE expects gross margin to improve modestly due to a better business mix and is focused on productivity improvements, including using gen AI internally.
Q: Can you explain the significant sequential increase in hybrid cloud revenue? Was there anything unusual driving this growth?
A: Marie Myers attributed the strong hybrid cloud growth to private cloud and the adoption of HPE Alletra MP Storage. The growth was driven by ongoing adoption and the addition of 39,000 customers on GreenLake. The Q1 guide anticipates a modest revenue decrease, aligning with typical seasonality.
Q: How is the Intelligent Edge business performing, and what are the expectations for the next year?
A: Antonio Neri noted that Intelligent Edge had its third consecutive quarter of order growth, although revenue was flat due to a higher subscription-based growth in SD-WAN and Aruba Central. The market is recovering, and networking is expected to be a significant growth area for HPE in 2025 and beyond.
Q: Can you elaborate on the AI services orders and where HPE is winning in this area?
A: Antonio Neri stated that AI services orders increased quarter-over-quarter. HPE offers services across day zero, day one, and day two, helping customers define use cases, design and implement solutions, and run them. Partnerships with companies like Deloitte are crucial for reaching customers and providing business process-oriented approaches.
Q: What changes have you observed in IT spending heading into 2025, and how has the macro backdrop evolved?
A: Antonio Neri highlighted that the macro environment has improved compared to a year ago, with a focus on AI, hybrid models, and sustainability. Networking is expected to be a key area of focus in 2025, and HPE is well-positioned to address these needs with its innovation-driven strategy.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
