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    Hewlett Packard Enterprise Co (HPE)

    Q2 2024 Summary

    Published Jan 10, 2025, 5:10 PM UTC
    Initial Price$15.34February 1, 2024
    Final Price$16.44May 1, 2024
    Price Change$1.10
    % Change+7.17%

    What went well

    • Rapid Growth in AI Systems Revenue with Strong Margins: HPE's AI systems revenue more than doubled sequentially to over $900 million, while maintaining strong operating margins of 11% in the server segment, demonstrating the company's ability to drive profitable growth in the competitive AI market.
    • Unique Differentiation in Direct Liquid Cooling Technology and Manufacturing: HPE holds over 300 patents in direct liquid cooling and has one of the largest water-cooled manufacturing footprints globally, providing a competitive advantage in meeting the demands of future AI infrastructure requiring advanced cooling solutions, such as NVIDIA's upcoming Blackwell GPUs.
    • Accelerating Enterprise AI Demand and Robust Pipeline: Enterprise AI orders now comprise more than 15% of HPE's cumulative AI orders, with the enterprise customer base growing, indicating strong future growth prospects supported by a pipeline that is multiples of the current backlog.

    What went wrong

    • HPE's Intelligent Edge revenues fell 19% year-over-year, and the company anticipates only modest sequential improvements, indicating potential ongoing weakness in this segment. ,
    • Despite exceeding revenue expectations by $400 million, HPE only raised its full-year revenue guidance by 1%, suggesting possible concerns about sustaining growth or underlying business uncertainties. ,
    • Competitive pressures and market headwinds in the AI systems market, including a tougher inflationary commodity market and a highly competitive market environment, may pressure HPE's margins moving forward. ,

    Q&A Summary

    1. AI Systems Revenue and Margin Outlook
      Q: How are AI systems revenue and margins progressing?
      A: HPE shipped $900 million in AI revenue this quarter, doubling sequentially. Operating profit margin in the server segment was 11%, matching guidance. CFO Marie Myers is pleased with the results and maintains guidance for the second half.

    2. AI Backlog and Future Pipeline
      Q: What is the outlook for AI backlog and pipeline?
      A: The AI backlog was slightly down quarter-over-quarter due to higher revenue conversion, but the pipeline is multiples of the current backlog. Antonio Neri notes potential to exceed guidance, but limiting factors include data center space, power, and cooling availability.

    3. Differentiation in Liquid Cooling Technology
      Q: How does HPE's liquid cooling technology differentiate it?
      A: HPE's unique 100% direct liquid cooling capability sets it apart, essential for upcoming high-power GPUs like NVIDIA's Blackwell. With over 300 patents in liquid cooling and the largest water-cooled manufacturing footprint, HPE can deliver AI systems at scale.

    4. Competitive Positioning Against Dell and Super Micro
      Q: How does HPE's AI margin compare to competitors?
      A: HPE's AI margins are holding up better than those of Dell or Super Micro. This is attributed to disciplined pricing, cost management, and differentiation in delivering AI systems at scale with unique cooling and services capabilities.

    5. GreenLake Revenue and ARR Growth from AI
      Q: How is AI contributing to GreenLake revenue and ARR growth?
      A: AI was the fastest-growing element of Annualized Recurring Revenue (ARR) in Q2, followed by storage and networking. HPE is seeing AI permeate the entire portfolio, enhancing GreenLake offerings.

    6. Guidance and Revenue Performance
      Q: Why does guidance not fully reflect the revenue beat?
      A: The guidance raise includes a $0.03 increase related to the 19% stake in H3C but maintains the previous range, pointing to the higher end. CFO Marie Myers cites confidence from strong top-line growth and cost discipline, while noting some onetime OI&E favorability.

    7. GPU Diversification and Future Products
      Q: What is HPE's view on GPU diversification with AMD and Intel?
      A: HPE currently aligns with NVIDIA, the market leader in generative AI, offering multiple systems optimized for NVIDIA GPUs. While open to future accelerators from AMD and Intel, HPE emphasizes its current focus on NVIDIA partnerships.

    8. Intelligent Edge Inventory Digestion
      Q: Where is HPE in Intelligent Edge inventory digestion?
      A: Q2 was the trough period for Intelligent Edge, with channel inventory now in good shape. HPE expects a modest sequential improvement in networking in the second half of the year.

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