Release Date: March 06, 2025
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Hewlett Packard Enterprise Co (HPE, Financial) delivered strong double-digit year-over-year revenue growth of 17%, marking the fourth consecutive quarter of improved top-line growth.
- The Intelligent Edge segment recorded 2% quarter-over-quarter revenue growth, marking the third consecutive quarter of sequential revenue growth.
- HPE's GreenLake Cloud platform surpassed $2 billion in annual recurring revenue, up 46% year over year, highlighting strong demand for hybrid cloud and AI workloads.
- The company achieved significant growth in its AI systems business, with $1.6 billion in new AI system orders and a 29% quarter-over-quarter increase in AI systems backlog.
- HPE's innovation efforts continue to pay off, with new product launches such as the ProLiant Gen12 server platform and the Alletra MP storage portfolio showing strong market interest and adoption.
Negative Points
- HPE faced challenges in its Server segment, with operating margins falling below expectations due to pricing competition and inventory valuation issues.
- The company is experiencing pressure from tariffs on imports, which are expected to impact the Server business and overall profitability.
- HPE plans to reduce its workforce by 5% over the next 12 to 18 months, affecting approximately 2,500 positions, as part of cost-cutting measures.
- The proposed acquisition of Juniper Networks is facing legal challenges from the Department of Justice, potentially delaying the expected synergies from the deal.
- Free cash flow was negative $877 million for the quarter, reflecting normal seasonality but also impacted by inventory levels and restructuring charges.
Q & A Highlights
Q: Marie, regarding the pricing pressure on the GPU market, how much of the 250 basis point shortfall was due to CPU versus additional pricing in inventory on GPUs?
A: The original guidance included some pressure from AI GPU transitions, but the impact was greater than expected. The unanticipated pricing challenges in traditional compute were not included in the Q1 guidance.
Q: How has the gross margin profile of AI server revenue changed, and are there any inventory charges or write-downs that are transitory?
A: Antonio Neri explained that the AI market consists of three segments: service provider model builders, sovereign, and enterprise AI. The transition to new GPUs has caused higher-than-normal AI inventory, impacting working capital rather than margin. The company expects to convert the $3.1 billion backlog into revenue over the next one to two quarters.
Q: Your guidance implies a decline in operating profit dollars despite revenue growth. How much of this is due to tariffs, and what are the other factors?
A: Marie Myers stated that the full-year guide includes a $0.07 impact from tariffs, with $0.04 of that in Q2. The biggest drivers of cash flow impact are working capital and the cost efficiency program.
Q: Has HPE's strategy shifted to focus more on lower-margin model builder businesses?
A: Antonio Neri clarified that the strategy has not changed. The focus remains on a mix of segments, including enterprise AI, which has shown 40% year-over-year orders growth. The Q1 margin issues were due to unexpected discounting in traditional servers and inventory valuation, not a shift in strategy.
Q: How is the customer mix changing, and is there a focus on cloud builders affecting margins?
A: Antonio Neri emphasized targeting enterprise customers adopting AI models, which offer a different margin profile. The company is balancing between service providers, sovereign, and enterprise AI, with a focus on transitioning the traditional compute installed base.
Q: What gives you confidence in the revenue and operating margin improvements expected in the second half of the year?
A: Marie Myers highlighted the timing of AI systems deals, server execution improvements, tariff mitigation, and cost efficiency programs as key drivers. Antonio Neri added that the networking business recovery will also contribute to improved margins.
Q: How is HPE mitigating the impact of tariffs, and what is the focus between supply chain flexibility and pricing?
A: Antonio Neri explained that HPE's global supply chain allows for production shifts to mitigate tariff impacts. Pricing adjustments will be made while managing working capital and discounting more tightly.
Q: Has the macro backdrop, particularly tariff uncertainty, impacted customer demand?
A: Antonio Neri stated that there has been no significant impact on demand yet, with double-digit order growth across business units. The full impact of tariffs on the market is expected to be seen in the coming months.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
