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    Hewlett Packard Enterprise Co (HPE)

    Business Description

    Hewlett Packard Enterprise (HPE) is a global technology leader that develops intelligent solutions enabling customers to seamlessly capture, analyze, and act upon data from edge to cloud . The company offers a range of products and services across various segments, including general-purpose and workload-optimized servers, high-performance computing systems, data storage solutions, networking products, and financial services . HPE's Compute and Intelligent Edge segments are among the top contributors to its consolidated net revenue .

    1. Compute - Offers general-purpose servers and workload-optimized servers, which are significant revenue sources for HPE .
    2. Intelligent Edge - Focuses on networking products and services, contributing significantly to HPE's revenue .
    3. High Performance Computing & Artificial Intelligence (HPC & AI) - Provides integrated systems for high-performance computing and AI workloads, including products like HPE Cray EX and HPE NonStop .
    4. Storage - Delivers data storage and management solutions .
    5. Financial Services - Provides leasing and financing solutions to support HPE's product sales .
    6. Corporate Investments and Other - Encompasses various corporate investments and other business activities .

    Q4 2024 Summary

    Initial Price$19.80July 31, 2024
    Final Price$19.49October 31, 2024
    Price Change$-0.31
    % Change-1.57%

    What went wrong

    • Declining gross margins: HPE's gross margins decreased by 390 basis points year-over-year and 90 basis points quarter-over-quarter to 30.9%, primarily due to a lower contribution from Intelligent Edge revenue and a higher mix of lower-margin AI systems revenue, raising concerns about profitability sustainability.
    • Risks in AI order pipeline: The company had to debook a large $700 million AI order due to concerns with a specific customer, highlighting potential risks and unpredictability in the AI order pipeline that could negatively impact future revenues. ,
    • Dependence on pending Juniper acquisition: HPE expects that 50% of operating profit going forward will come from Juniper, indicating significant reliance on the success of the pending acquisition, which is still under DOJ review. Any delays or complications could adversely affect projected profitability improvements. ,

    Q&A Summary

    1. $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.

    2. 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.

    3. 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.

    4. 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.

    5. 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.

    6. 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.

    7. 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.

    8. 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.

    9. 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.

    10. 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.

    11. 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.

    Revenue by Segment - in Millions of USDFY 2015Q1 2016Q2 2016Q3 2016Q4 2016FY 2016Q1 2017Q2 2017Q3 2017Q4 2017FY 2017Q1 2018Q2 2018Q3 2018Q4 2018FY 2018Q1 2019Q2 2019Q3 2019Q4 2019FY 2019Q1 2020Q2 2020Q3 2020Q4 2020FY 2020Q1 2021Q2 2021Q3 2021Q4 2021FY 2021Q1 2022Q2 2022Q3 2022Q4 2022FY 2022Q1 2023Q2 2023Q3 2023Q4 2023FY 2023Q1 2024Q2 2024Q3 2024Q4 2024FY 2024
    Server---3,2463,8124,2174,9316,205
    Compute2,6242,28811,129-----
    - Intersegment---0-0--
    Hybrid Cloud---1,2061,1921,2441,7445,386
    HPC & AI8361,0433,775-----
    Storage1,0741,0254,329-----
    Intelligent Edge1,4151,345,1861,1931,0811,1101,1484,532
    Financial Services8738623,4668728678778963,512
    Corporate Investments and Other3183431,2502382522622621,014
    Products---3,956----
    Services---2,643----
    Financing Income---156----
    Total Revenue7,0027,35129,1356,7557,2047,7108,45830,127
    Revenue by Geography - in Millions of USDFY 2015Q1 2016Q2 2016Q3 2016Q4 2016FY 2016Q1 2017Q2 2017Q3 2017Q4 2017FY 2017Q1 2018Q2 2018Q3 2018Q4 2018FY 2018Q1 2019Q2 2019Q3 2019Q4 2019FY 2019Q1 2020Q2 2020Q3 2020Q4 2020FY 2020Q1 2021Q2 2021Q3 2021Q4 2021FY 2021Q1 2022Q2 2022Q3 2022Q4 2022FY 2022Q1 2023Q2 2023Q3 2023Q4 2023FY 2023Q1 2024Q2 2024Q3 2024Q4 2024FY 2024
    Americas2,9723,23612,5772,8013,1443,4103,8813,235
    - United States2,4332,65610,3692,2942,5842,8823,1310,890
    - Americas excluding U.S.539582,208507560528752,345
    Europe, Middle East and Africa2,4342,54610,1512,4342,4542,5552,74610,189
    Asia Pacific and Japan1,5961,5696,4071,5201,6061,7451,8326,703
    Other Countries--------
    Total Revenue7,0027,35129,1356,7557,2047,7108,45830,127

    Executive Team

    NamePositionStart DateShort Bio
    Antonio NeriPresident and Chief Executive OfficerFebruary 2018Antonio Neri has been with HPE for over 25 years, having joined HP in 1996. He has held various leadership roles, including Executive Vice President and General Manager of HPE's Enterprise Group .
    John F. SchultzExecutive Vice President, Chief Operating and Legal OfficerJuly 2020John F. Schultz joined HP Co. in 2008 and has held several senior roles, including Executive Vice President, Chief Legal and Administrative Officer and Secretary .
    Alan MayExecutive Vice President and Chief People OfficerJune 2015Alan May leads a global HR function at HPE, focusing on business growth and transformation. He previously held senior HR roles at Boeing, Cerberus Capital Management, and PepsiCo .
    Gerri A. GoldExecutive Vice President, President, and Chief Executive Officer, HPE Financial ServicesFebruary 2023Gerri A. Gold leads HPE Financial Services and has held various leadership roles at HP Co., Compaq Financial Services, and AT&T .
    Fidelma RussoExecutive Vice President, Chief Technology Officer, and General Manager of Hybrid CloudNovember 2023Fidelma Russo has held senior positions at VMware, Iron Mountain, Inc., and EMC Corp. before joining HPE .
    Justin HotardExecutive Vice President and General Manager of HPC & AIMarch 2022Justin Hotard has led corporate transformation efforts at HPE and held leadership positions at NCR Corporation, Symbol Technologies, and Motorola, Inc. .
    Neil B. MacDonaldExecutive Vice President and General Manager of ComputeMarch 2022Neil B. MacDonald has been with HP Co. since 1996 and has held various senior roles within the Compute business .
    Philip J. MottramExecutive Vice President and General Manager of Intelligent EdgeMarch 2022Philip J. Mottram was previously the President of the Intelligent Edge business and has held leadership positions at Zayo Group and Vodafone .
    Jeremy K. CoxSenior Vice President, Chief Financial Officer, Corporate Controller, Chief Tax Officer, and Principal Accounting OfficerAugust 2023Jeremy K. Cox joined HP Inc. in 2008 and has held various senior positions at HPE, including roles in Global Tax and Financial Planning .
    Kirt P. KarrosSenior Vice President, Treasurer and Investor RelationsMay 2022Kirt P. Karros has led Treasury and Investor Relations at HPE and previously held a similar role at HP Co. He is also the Executive Chairman of H3C Technologies .

    Questions to Ask Management

    1. You mentioned debooking a large $700 million AI systems order due to concerns with a specific customer; can you provide more details on what led to this decision and how it might affect future AI systems orders?
    2. Given that AI systems orders can be "lumpy" and net orders were approximately $500 million after the debooking, how confident are you in the sustainability of AI systems revenue growth, and what measures are you taking to manage the volatility in this segment?
    3. With the AI systems business contributing to lower gross margins due to competitive pressures, what strategies do you have to improve profitability in this area, and are there specific gross margin thresholds you aim to maintain when pursuing AI deals?
    4. As you transition to next-generation GPUs like Blackwell, what challenges do you foresee in maintaining your AI systems revenue momentum, and how might this transition impact your operating margins in the upcoming quarters?
    5. The Intelligent Edge business experienced a 20% year-over-year revenue decline and continued prolonged sales cycles; what specific actions are you taking to address these challenges, and when do you anticipate a return to growth in this segment?

    Share Repurchase Program

    Program DetailsProgram 1
    Approval DateOctober 13, 2015
    End Date/DurationNo specific expiration date
    Total Additional Amount$3.0 billion
    Remaining Authorization$0.8 billion as of October 31, 2024
    DetailsAllows repurchases in the open market or in private transactions

    Past Guidance

    Q4 2024 Earnings Call

    • Issued Period: Q4 2024
    • Guided Period: Q1 2025
    • Guidance:
      1. Revenue Growth: Mid-teens year-over-year.
      2. Server Revenue: Expected to be down quarter-over-quarter.
      3. Traditional Compute: Flat to modest growth sequentially.
      4. AI Systems Contribution: Expected to be lower.
      5. Server Operating Margin: 10% to 11%.
      6. Hybrid Cloud: Sequential decline with mid-single-digit operating margin.
      7. Networking: Flattish sequential growth with low 20% operating margin.
      8. Gross Margin: Expected to benefit from a favorable revenue mix.
      9. Operating Expenses (OpEx): Modest sequential decrease.
      10. Other Income & Expense (OI&E): Positive contribution with higher net interest income.
      11. GAAP Diluted Net EPS: $0.31 to $0.36.
      12. Non-GAAP Diluted Net EPS: $0.47 to $0.52.
      13. Free Cash Flow: Typically consumes cash.
      14. Share Buybacks: Similar pace to Q4 .

    Q3 2024 Earnings Call

    • Issued Period: Q3 2024
    • Guided Period: Q4 2024 and FY 2024
    • Guidance:
      • Full Year Guidance:
        1. Revenue Growth: High end of 1% to 3% growth.
        2. Operating Profit Growth: Low end of 0% to 2%.
        3. Non-GAAP Diluted Net EPS: $1.92 to $1.97.
        4. GAAP EPS: $1.68 to $1.73.
        5. Free Cash Flow: $1.9 billion.
      • Q4 2024 Guidance:
        1. Revenue: $8.1 billion to $8.4 billion.
        2. GAAP Diluted Net EPS: $0.76 to $0.81.
        3. Non-GAAP Diluted Net EPS: $0.52 to $0.57.
      • Segment-Specific Guidance:
        1. Server Segment: Low end of 11% to 13% operating margin.
        2. Hybrid Cloud: Mid-single-digit operating margin.
        3. Intelligent Edge: Mid-20% operating margin .

    Q2 2024 Earnings Call

    • Issued Period: Q2 2024
    • Guided Period: Q3 2024 and FY 2024
    • Guidance:
      1. Non-GAAP Operating Profit Growth: 0% to 2%.
      2. GAAP Diluted Net EPS: $1.61 to $1.71.
      3. Non-GAAP Diluted Net EPS: $1.85 to $1.95.
      4. Fiscal Year '24 Non-GAAP Gross Margin: Below 35%.
      5. Fiscal Year '24 OpEx: Down modestly.
      6. Fiscal Year '24 Operating Margin: Flattish year-over-year.
      7. OI&E Headwind: $150 million.
      8. Free Cash Flow: At least $1.9 billion.
      9. Revenue Growth: 1% to 3%.
      10. Q3 Revenue: $7.4 billion to $7.8 billion.
      11. Q3 GAAP Diluted Net EPS: $0.29 to $0.34.
      12. Q3 Non-GAAP Diluted Net EPS: $0.43 to $0.48 .

    Q1 2024 Earnings Call

    • Issued Period: Q1 2024
    • Guided Period: Q2 2024 and FY 2024
    • Guidance:
      1. Revenue: $6.6 billion to $7 billion.
      2. GAAP Diluted Net EPS: $0.20 to $0.25.
      3. Non-GAAP Diluted Net EPS: $0.36 to $0.41.
      4. Free Cash Flow: Negative in Q2.
      5. Full Year Non-GAAP Gross Margin: Slightly down from 35%.
      6. Operating Margin: Flattish year-over-year.
      7. OI&E: $200 million to $250 million headwind.
      8. Free Cash Flow for Fiscal Year '24: At least $1.9 billion.
      9. Non-GAAP Operating Profit Growth: 0% to 2%.
      10. GAAP Diluted Net EPS for Fiscal Year '24: $1.81 to $1.91.
      11. Non-GAAP Diluted Net EPS for Fiscal Year '24: $1.82 to $1.92.
      12. Intelligent Edge Margin: Mid-20% range.
      13. ARR Growth: 35% to 45% .

    Latest news

    Recent developments and announcements about HPE.

    Financial Reporting

      Earnings Call

      ·
      Dec 6, 2024, 10:00 AM

      Hewlett Packard Enterprise (HPE) recently released its earnings call transcript for the fourth quarter of fiscal year 2024, highlighting several key points:

      1. Revenue and Profit Performance: HPE reported record quarterly revenue of $8.5 billion, marking a 15% increase year-over-year. This growth was driven by strong performance in AI systems and traditional servers, with AI systems revenue growing 150% to $4.1 billion for the year. The company also achieved a record non-GAAP operating profit of $938 million, translating to an operating margin of over 11% .

      2. Management’s Forward Guidance: HPE anticipates closing its acquisition of Juniper Networks in early 2025, which is expected to enhance its portfolio and provide complete edge-to-cloud solutions. The company expects continued growth in AI systems and traditional compute, with a focus on digital transformation projects in Hybrid Cloud .

      3. Market Conditions and Strategic Initiatives: HPE is seeing increased customer interest in AI and hybrid cloud solutions, driven by the need for more flexible and data-intensive workloads. The company is investing in innovation, such as its industry-first 100% fanless direct liquid cooling architecture, to support next-generation AI and supercomputing needs .

      4. Analyst Questions and Management Responses: Analysts inquired about the AI service pipeline and gross margin pressures. HPE clarified that a $700 million order was debooked due to risk concerns with a specific customer, not competitive pressures. The company remains disciplined in its pricing strategy and expects improved profitability as the market evolves .

      5. Financial Highlights: HPE generated a record $2.3 billion in free cash flow for the fiscal year, exceeding its guidance. The company returned $826 million to shareholders through dividends and share repurchases .

      Overall, HPE's strong performance in Q4 and strategic focus on AI and hybrid cloud position it well for future growth, despite some challenges in the competitive landscape and market dynamics.

    Financial Actions

      Dividend Policy

      ·
      Sep 13, 2024, 12:00 AM

      Hewlett Packard Enterprise (HPE) has recently announced a significant change in its dividend policy through the issuance of a new series of preferred stock. On September 10, 2024, HPE announced the pricing of its public offering of $1.35 billion in Series C Mandatory Convertible Preferred Stock, with a liquidation preference of $50.00 per share. This preferred stock will pay cumulative dividends at an annual rate of 7.625% on the liquidation preference, which may be paid in cash, shares of common stock, or a combination of both, subject to certain limitations. The dividends are payable quarterly on March 1, June 1, September 1, and December 1, starting December 1, 2024, and ending on September 1, 2027 .