Hewlett Packard Enterprise Co (HPE)

$700 Million De-booked AI Order
Q: Why did you debook the $700 million AI order?
A: We debooked a large $700 million order due to concerns with a specific customer. Maintaining strong controls and risk management is paramount, so we decided it was prudent to debook and focus on other areas of the business. This was not due to competition or double ordering. -

Gross Margin Decline Causes
Q: What's driving the gross margin decline, and can you offset it?
A: Gross margin decreased to 30.9% due to a lower contribution from Intelligent Edge revenue—the lowest for the entire year—and a higher contribution from lower-margin AI systems in servers. Despite this, we grew gross profit dollars both year-over-year and quarter-over-quarter. We expect gross margin to improve modestly going forward, driven by an improved business mix, particularly with growth in Intelligent Edge. In the longer term, future acquisitions are expected to positively impact both gross and operating margins. Additionally, higher-margin opportunities in AI, especially in sovereign and enterprise sectors, will contribute to profitability. -

AI Pipeline Growth and Composition
Q: How is the AI pipeline shaping up amid backlog dips?
A: Our AI pipeline is a multiple of the current backlog of over $3.5 billion. While hyperscalers and Tier 2/3 providers remain significant drivers, we're pleased to see the enterprise AI pipeline growing steadily with hundreds of customers and varied deal sizes. After making our co-engineered solution with NVIDIA available in September, we've already collected orders and closed deals in enterprise AI. -

AI Business Metrics and Profitability
Q: How do you approach AI margins, and did the de-book affect competitiveness?
A: The de-booked order was not due to competition; we had concerns with a specific customer and deemed it prudent to debook due to risk considerations. Regarding AI margins, we have a disciplined framework for pricing and cost management to pursue profitable growth. We balance gross margin pressures with cost control and strategic buys. Over time, we expect improving profitability as the market shifts toward sovereign and enterprise sectors where we see services attach. -

Blackwell Platform Shipments
Q: When will you ship Blackwell platform configurations in volume?
A: We expect to ship Blackwell platform systems in volume in 2025, particularly in the first half. Service providers, hyperscalers, and model builders will lead with this latest technology during the transition. In the enterprise space, adoption will typically lag by one or two generations, focusing more on deployment simplicity and time to value rather than the newest GPUs. -

Hybrid Cloud Strong Performance
Q: Was there anything unusual in the Hybrid Cloud revenue jump?
A: We're pleased with Hybrid Cloud's strong performance, with revenue up almost 18% year-over-year and 22% quarter-over-quarter, driven by both Private Cloud and the rapid adoption of HPE Alletra MP Storage. Alletra MP is one of the fastest-growing products in our history, already on a $1 billion annualized basis. There were no unusually large deals; this growth reflects the culmination of sustained efforts and customer adoption of our solutions. -

Intelligent Edge Growth and Outlook
Q: Intelligent Edge revenue growth seems limited; what's the outlook?
A: We've seen the third consecutive quarter of order growth in Intelligent Edge, but revenue appears flattish because accelerated growth areas are subscription-based, such as SD-WAN with SSE and HPE GreenLake Aruba Central services. Customers are placing orders for future quarters related to Wi-Fi 7. While campus switching hasn't fully rebounded, data center networking with intelligent features has achieved double-digit growth. We're optimistic about networking being a significant growth area for HPE in '25 and '26. -

Traditional Servers Defying Seasonality
Q: Traditional servers are flattish to slightly up next quarter; why?
A: Yes, despite typical seasonality, we expect traditional servers to be flattish to slightly up due to ongoing momentum. We've experienced strong growth in traditional compute, particularly Gen11 systems, which comprise about two-thirds of the mix so far. These higher configurations are driving richer average unit prices and higher structural margins. We're also maintaining pricing discipline and successfully passing on commodity costs. -

AI Services Revenue Growth
Q: Are AI services a growing percentage of orders and revenue?
A: Yes, our AI services orders increased quarter-over-quarter. Customers seek services across day 0 (defining use cases and ROI), day 1 (design and implementation), and day 2 (operations). HPE is uniquely positioned to deliver across these phases. Partnerships with firms like Deloitte enhance our offerings, allowing us to provide business process-oriented solutions. We expect continued improvement in services, contributing positively to gross margins. -

IT Spending Outlook for '25
Q: Has anything changed in the IT spending outlook heading into '25?
A: The macro environment has improved compared to a year ago. Customers are focusing more on AI, hybrid models, and data-intensive workloads. Cybersecurity remains a priority. Spending varies by geography. There's a modernization cycle in servers, with attention on sustainability and efficiency. Networking needs to catch up to AI demands, presenting opportunities for us to drive the next wave of innovation. -

Operational Expense Control
Q: What's driving OpEx controls, and how low can you take OpEx?
A: We've been diligently managing discretionary costs throughout '24 and are now moving into enhancing productivity. We're utilizing generative AI internally, including in finance, to drive efficiency. In a company as large as HPE, there's significant opportunity for further cost reductions. We're balancing gross margin pressures with cost control, strategic buys, and maintaining pricing discipline, which all contribute to our ability to offset margin headwinds. -