Hewlett Packard Enterprise Company (HPE) Earnings

Management highlights

### Overall Company Performance - HPE delivered a record Q2 FY26 with $10.7 billion in total revenue (up 40% year-over-year), non-GAAP EPS of 79 cents (up 108% year-over-year), and $915 million in free cash flow (a $1.8 billion improvement year-over-year). - Total orders more than doubled year-over-year, outpacing revenue growth and resulting in a record company-wide backlog. - Broad-based demand strength is driven by agentic AI and AI inferencing adoption, enterprise compute infrastructure modernization, unstructured data storage growth, and private cloud AI adoption. ### Integration and Cost Savings Initiatives - **Juniper Networks integration**: Progress is ahead of original milestones and synergy commitments; the unified portfolio and combined go-to-market have strengthened market position. Phase one integration (corporate function overlap reduction, sales/service organization optimization) was completed in January 2025. Expected to exceed the $200 million annual synergy target by the end of FY26. - **Catalyst cost savings initiative**: Also running ahead of plan. As of Q2 end, total combined company headcount is just over 65,000, a 9% reduction since the start of both programs. Gen AI-enabled process simplification accounts for nearly 20% of FY26 initiative savings, with additional savings from global lab footprint rationalization (more than two-thirds reduction) and contractor base consolidation. ### Product and Strategic Milestones - HPE was named a Leader in the Gartner Magic Quadrant for enterprise wired and wireless LAN infrastructure for the 20th consecutive quarter. - Launched new agentic AI-powered autonomous agents for self-driving networking, bringing the concept to commercial reality; launched the HPE Juniper SRX400 series carrier-grade firewall for large distributed branch environments. - A new Ethernet switch purpose-built for AMD Helios AI rack scale architecture is scheduled to launch in fall 2026; HPE is the first OEM to productize a Tomahawk 6-based 100% liquid-cooled switch for AI infrastructure. - Expanded the Aletra MP storage platform with new file storage and agentic AIOps capabilities, extending it into the fast-growing unstructured data market; launched second-generation private cloud AI for enterprise inferencing and cloud-gapped sovereign environments. - GreenLake added new agentic AI services, growing customer count and maintaining strong net retention.

Guidance

- **Q3 FY26**: Total revenue is expected to be between $11.5 billion and $12.1 billion. Non-GAAP EPS is expected to be between 88 cents and 93 cents, with GAAP EPS between 84 cents and 89 cents. Networking revenue is expected to grow 73% to 78% year-over-year on a reported basis (approaching 10% on a normalized basis), with operating margin in line with full-year guidance. Cloud and AI revenue is expected to grow in the high teens, with operating margin in the low to mid teens. Consolidated operating margin is expected to increase sequentially. - **Full Year FY26**: Management significantly raised all outlook metrics: non-GAAP EPS is expected to be between $3.35 and $3.45 (midpoint $3.40, over 40% above prior guidance), GAAP EPS between $2.42 and $2.52. Consolidated revenue growth is expected to be 29% to 33% on a reported basis (high teens on a normalized basis), with operating profit growth of 80% to 85% on a reported basis. Cloud and AI revenue growth is raised to the low 20% range (from prior mid-to-high single digits), with operating margin expected in the low to mid teens. Networking revenue growth is raised to 72% to 75% on a reported basis (approaching 10% on a normalized basis). Free cash flow is expected to be at least $3.5 billion, up from prior guidance of at least $2 billion. The two-times net leverage target is now expected to be achieved by the end of FY26, one year ahead of the original schedule. - **FY27 Initial Framework**: Sustained secular tailwinds are expected to drive 8% to 12% consolidated revenue growth, with the same 8% to 12% growth range for both the Networking and Cloud and AI segments. Consolidated operating margin is expected to be 12% to 16%, with year-over-year operating expense reduction. Networking operating margin is expected to be in the mid to high 20% range (driven by scale, mix, and full synergy benefits), while Cloud and AI operating margin is expected to be 10% to 15% (dependent on AI business mix and Catalyst savings progress). Non-GAAP EPS is expected to grow 12% to 16% year-over-year, and free cash flow is expected to be at least $4.5 billion. Once the 2x net leverage target is met, HPE expects to return at least 75% of free cash flow to shareholders via dividends and share repurchases starting in 2027.

Segment performance

1. **Networking Segment**: Reported Q2 FY26 revenue of $2.7 billion, an increase of 10% on a normalized basis, accounting for 25.2% of total company revenue. By product category: campus and branch grew 10% on a normalized basis; security grew 18%; data center networking grew 6%; routing grew 9%. By customer vertical: service provider revenue grew 13% on a normalized basis; enterprise revenue grew 9% on a normalized basis. Segment operating margin was 21.6%. Networking orders grew significantly faster than revenue, with campus and branch orders growing in the upper 20% range, data center switching orders growing nearly 20%, and routing orders growing nearly 30% on a normalized basis. Cumulative fiscal 2026 networks for AI orders are targeted to reach at least $2 billion. 2. **Cloud and AI Segment**: Reported Q2 FY26 revenue of $7.7 billion, an increase of 23% year-over-year, accounting for 71.96% of total company revenue. Server revenue increased 33% year-over-year, with orders more than doubling year-over-year; AI systems orders reached $1.8 billion in the quarter, bringing cumulative AI systems bookings to $16.4 billion, with a $5.9 billion end-of-quarter backlog. Overall storage revenue grew 2% year-over-year, while Aletra MP storage orders and revenue grew triple digits year-over-year for the sixth consecutive quarter. Private Cloud AI orders grew again in the quarter, GreenLake net retention rate remains near 110%, and the segment reached ~50,000 GreenLake customers managing over 6.7 million systems. HPE Financial Services revenue grew 6% year-over-year, with return on equity exceeding 30% (an all-time high). Segment operating profit was nearly $1 billion, up 48% sequentially and triple digits year-over-year, with an operating margin of 12.4% (up 220 basis points sequentially).

Risks & headwinds

- Persistent component and memory supply constraints limit the conversion of strong order backlog into revenue; supply availability is not expected to meaningfully improve in FY27, and elevated component costs are expected to remain through 2027. - Large-scale AI server deals are inherently lumpy, creating revenue timing variability across quarters. - Inflationary component costs create pressure on gross margins, partially offset by cost savings and synergy initiatives. - Broad macroeconomic uncertainty and potential enterprise budget constraints from ongoing price inflation could impact future demand, though management has not observed demand pull-ins or cancellations to date.

Analyst Q&A

• Q: Analysts are concerned about a potential near-term and long-term demand cliff given enterprise budget pressure from price inflation. What gives HPE confidence to issue an early FY27 outlook? /

  A: Management's confidence comes from durable, broad-based demand that is supported by a pipeline that remains multiples of the current record backlog. Demand is driven by AI data center buildouts, enterprise infrastructure modernization, and accelerating agentic AI adoption, with no observed pull-ins or cancellations. Networking demand is particularly strong across all product and customer segments, and customers are prioritizing AI infrastructure investment to avoid falling behind, offsetting budget pressure from commodity cost increases.

• Q: What is the biggest gating factor for growth going forward? Is the outlook constrained by limited component supply, or does it reflect actual current demand? /

  A: Demand is strong and durable well into FY27, with pipeline far exceeding current backlog. The only constraint on converting demand to revenue is component supply availability; all guidance for FY26 and FY27 already factors in the locked-in supply allocations HPE has secured. There would be upside to revenue if supply improves, but management does not expect large supply availability improvements or meaningfully lower costs in 2027.

• Q: Cloud and AI revenue growth guidance was raised drastically from mid-to-high single digits to low 20% year-over-year in just 90 days. What changed to drive this inflection? /

  A: Core demand has accelerated broadly across the cloud and AI portfolio. Key drivers include faster-than-expected traditional server demand as customers prioritize securing infrastructure access for AI deployments, rapidly growing agentic AI demand, faster-than-planned migration to the high-growth Aletra MP storage platform, and growing adoption of HPE's virtualization and private cloud software. The GreenLake consumption model also continues to grow as customers shift to OPEX-based IT spending amid budget constraints.

• Q: Why do Networking and Cloud and AI growth rates converge to 8-12% for FY27 after Cloud and AI grows faster in FY26? Is this driven by demand dynamics or supply constraints? /

  A: The converged growth rate is a combination of the inherent lumpiness of AI system revenue conversion in Cloud and AI, and broad supply constraints across both segments. Networking has very strong order growth today, but supply chain constraints are slowing conversion of orders to revenue. In Cloud and AI, strong backlog and memory supply constraints limit near-term acceleration. All of these timing and supply dynamics are already factored into the 8-12% FY26 growth guidance, with upside possible if supply improves later in the year.