Hewlett Packard Enterprise Company Q3 FY2025 earnings call

Management Statement and Operational Highlights

• Closed the Juniper Networks acquisition in July, positioning HPE to accelerate momentum in Networking, Cloud, and AI.
• Q3 revenue was $9.1 billion, up 18% year over year, fueled by strong momentum in AI, networking, and hybrid cloud. Record AI backlog stood at $3.7 billion.
• Server revenue was an all-time high, and hybrid cloud posted its fourth consecutive quarter of year-over-year top-line growth. Intelligent Edge revenue growth improved as the networking market recovered.
• Completed the Catalyst cost-saving program, aiming for at least $350 million in gross savings by fiscal year 2027. Launched new HPE servers with NVIDIA Pro 6,000 and Blackwell accelerated computing platforms.

Segment Performance

• Networking: Revenue was $1.7 billion, up 54% year over year and 48% sequentially. Including one month of Juniper's results, networking operating margin was 20.8%, down 160 basis points year over year. Excluding Juniper, Intelligent Edge orders grew mid-teens percent year over year.
• Server: Revenue reached $4.9 billion, an all-time high, up 16% year over year and 21% sequentially. AI systems revenue was $1.6 billion, also an all-time high. Server operating margin was 6.4% in Q3.
• Hybrid Cloud: Revenue was $1.5 billion, up 11% year over year for the fourth consecutive quarter. ARR increased 75% year over year (including Juniper), and operating margin was 5.9% in Q3, up 50 basis points sequentially.
• Financial Services: Generated revenue of $886 million, down 1% year over year. Financing volumes increased 2% year over year to $1.5 billion, and operating margin was 9.9%, up 90 basis points year over year.

Guidance

• Revised FY 2025 outlook to incorporate four months of Juniper's contributions. Expected constant currency revenue growth of 14% to 16%.
• Non-GAAP gross margin for Q4 expected in the mid-thirty percent range, and above 30% for FY 2025.
• Full-year non-GAAP operating margin expected in the upper 9% range, with Q4 expected in the upper 11% range.
• Q4 revenue forecasted between $9.7 billion and $10.1 billion. Networking revenue expected to be up over 60% quarter over quarter. Server revenue forecasted for a mid to high single-digit decline quarter over quarter.

Risks

• Integration risks associated with the Juniper acquisition, including potential timing issues in cash flow and working capital calculations.
• Exposure to currency fluctuations that could impact financial results.
• Dependence on successful execution of cost-saving initiatives and maintaining profitability across segments.

Question and Answer

• Q: Dive into the server margin profile.

A: Traditional server has returned to historical levels, but AI mix shift impacts margin. Q4 server operating margin expected to be around 10% as traditional server normalizes and AI mix evolves.

• Q: Early progress on Juniper integration.

A: Integration is progressing well, sales forces are incentivized to sell both HPE and Juniper products, and the channel ecosystem is excited about the combined offerings.

• Q: Networking margin roadmap.

A: Networking operating margin in Q4 expected in the low 20% range, with Juniper's margin lower than previous Intelligent Edge, and focus on free cash flow generation.

• Q: Networking growth and product integration.

A: Networking expected to grow above market, with strong performance in campus/branch, data center switching, and security. Products will be integrated through AI ops layer.

• Q: Juniper's position in AI.

A: Juniper is gaining traction in service providers, sovereign, and enterprise AI spaces, key in networking for AI deployments and expected to expand footprint in these segments.