HPE follows in Dell's footsteps as it rides the AI server boom to a big earnings beat

By Britney Nguyen

Unlike Dell, HPE focuses on enterprise and sovereign customers, which one analyst noted have a better profit profile

HPE reported July-quarter earnings results on Wednesday afternoon.

Hewlett Packard Enterprise is seeing more artificial-intelligence demand across its portfolio of servers and networking, which powered a strong earnings report on Wednesday afternoon.

HPE (HPE) reported revenue of $12.2 billion for the July quarter, up 34% from a year ago and ahead of the $12 billion that analysts tracked by FactSet were looking for. The company's adjusted earnings of $1.11 per share topped expectations of 93 cents for the quarter.

"Our results demonstrate the durability of our profitable growth momentum," HPE CEO Antonio Neri said in a statement. As AI emerges as "a multiyear growth driver" for the company, Neri said it feels well positioned "to capture that opportunity at scale."

HPE's networking business saw revenue of $2.9 billion for the fiscal third quarter, up 75% from the previous year and in line with what analysts tracked by FactSet had been expecting. Networking revenue in the company's campus and branch segment was $1.4 billion, while data-center networking drove in $382 million during the quarter, which was a 112.2% increase from a year ago.

The company's cloud and AI business saw revenue rise 25% from a year ago, to $9 billion. Server revenue increased 35% to make up $6.8 billion of that figure, while storage revenue was up 10% to $1.3 billion. HPE makes both traditional and AI-optimized data-center servers that hold central processing units and AI chips like Nvidia's (NVDA) graphics processing units.

HPE CFO Marie Myers told MarketWatch that customers are both upgrading data centers to meet new workload demands and moving to adopt AI in enterprise settings.

She also noted that the company saw more than $2 billion in operating profit for the quarter, which contributed to strong cash flow.

"We've just got the right portfolio at the right time," Myers said, adding that positive AI effects are being felt across the company. With demand continuing to grow, "it's sort of never been a better time to be in this business," she added.

The company announced shortly ahead of its earnings call Wednesday afternoon that it was expanding its partnership with Oracle (ORCL) to scale the cloud provider's global AI infrastructure. HPE will deploy its Juniper networking in Oracle's AI data centers, it said.

HPE's stock had risen 115.8% so far this year through Wednesday's close. It fell about 5% in Wednesday's extended session. Oracle's stock gained fractionally in after-hours trading.

For the October quarter, HPE is forecasting revenue of between $13.9 billion and $14.8 billion, which is above the FactSet consensus for $13 billion at the midpoint. The company's outlook for adjusted earnings of between $1.20 and $1.30 per share also comes in ahead of estimates for $1.07.

The company also raised its outlook for revenue growth in both its current fiscal year, which ends after October, and the following one. For fiscal 2026, the company expects revenue to grow between 34% and 37%, while its networking segment is projected to see between 73% to 74% growth. In fiscal 2027, which starts on November 1, HPE now expects revenue to grow between 13% and 17%.

Ahead of the report, Deutsche Bank analyst Gianmarco Conti initiated coverage of HPE's stock with a buy rating, calling it the "the deliberate contrarian of the AI server cohort."

While its AI server rivals Dell Technologies (DELL) and Super Micro Computer (SMCI) are focused on "the low-margin" race to outfit hyperscaler data centers, more than two-thirds of HPE's $6.3 billion AI backlog is focused on enterprise and sovereign AI efforts where its networking and software "are actually monetizable," Conti said in a note to clients. Margins refer to the portion of revenue that companies retain after handling their expenses.

HPE CFO Myers told MarketWatch that the company's enterprise and sovereign customers make up a majority of demand for its AI servers, and that's where HPE sees the largest profit opportunity.

HPE's networking offerings are its "earnings engine," Deutsche Bank's Conti said, with its Juniper and Aruba products giving it a strong position in campus networking.

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-Britney Nguyen

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09-02-26 2022ET