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Hewlett Packard Enterprise Co (HPE)·Q3 2023 Earnings Summary

Executive Summary

  • HPE delivered steady top-line growth and margin expansion: revenue $7.00B (+1% YoY, +3.5% cc) and non-GAAP gross margin 35.9% (+120 bps YoY), with non-GAAP EPS $0.49 above guidance range, while GAAP EPS was $0.35 .
  • Strong Intelligent Edge performance (revenue $1.42B, +50% YoY; operating margin 29.7%) and accelerating HPE GreenLake ARR to $1.3B (+48% YoY) underpin the mix shift to higher-margin software and services .
  • Management raised FY23 non-GAAP EPS guidance to $2.11–$2.15 and maintained FY23 revenue growth 4–6% cc, FCF $1.9–$2.1B; Q4 revenue guided to $7.2–$7.5B and non-GAAP EPS $0.48–$0.52 .
  • AI momentum is a key catalyst: 122% YoY growth in as-a-service orders, largest-ever HPC & AI order book, and a hyperscaler win, though component tightness elongates revenue timing and keeps HPC & AI margins volatile near breakeven .
  • Compute remains cyclical (revenue -13% YoY; margin 10.9%), and Storage margins are temporarily diluted by ratable Alletra revenue recognition; FX was a ~300 bps headwind to growth trajectory, but portfolio mix is structurally lifting margins and EPS .

What Went Well and What Went Wrong

What Went Well

  • Intelligent Edge delivered a fifth consecutive record quarter: revenue $1.42B (+50% YoY) and 29.7% operating margin; Edge now 20% of company revenue and 49% of total segment operating profit .
    • “Our Intelligent Edge business contributed 20% of our total company revenue… now the largest source of HPE's operating profit at 49%” — Antonio Neri .
  • HPE GreenLake momentum: ARR $1.3B (+48% YoY); software and services mix within ARR rose to 68%; as-a-service orders +122% YoY taking cumulative TCV to nearly $12B .
    • “HPE GreenLake orders rose 122% year-over-year… cumulative booked total contract value now stands at just under $12 billion” — Antonio Neri .
  • Non-GAAP EPS beat and FY non-GAAP EPS guidance raised: $0.49 in Q3 above $0.44–$0.48 guidance; FY non-GAAP EPS raised to $2.11–$2.15; free cash flow robust at $955M (+$368M YoY) .

What Went Wrong

  • Compute down and margins compressed: Compute revenue $2.62B (-13% YoY) and operating margin 10.9% (below long-term 11–13%), driven by elongated deal cycles and digestion of prior investments; AUPs declined from Q1 peaks .
  • HPC & AI near breakeven: revenue $836M (+1% YoY) with -0.8% operating margin; component tightness and long lead times drive margin volatility despite strong orders .
  • Storage margin down during ratable transition: Storage revenue $1.07B (-5% YoY) with operating margin 10.7% (down 360 bps YoY) as Alletra shifts mix to higher-margin software with deferred recognition .

Financial Results

MetricQ3 2022Q2 2023Q3 2023
Revenue ($USD Billions)$6.95 $6.97 $7.00
GAAP Diluted EPS ($)$0.31 $0.32 $0.35
Non-GAAP Diluted EPS ($)$0.48 $0.52 $0.49
GAAP Gross Margin %34.5% 36.0% 35.8%
Non-GAAP Gross Margin %34.7% 36.2% 35.9%
GAAP Operating Margin %6.7% 7.5% 6.7%
Non-GAAP Operating Margin %10.5% 11.5% 10.3%
Cash from Operations ($MM)$1,254 $889 $1,525
Free Cash Flow ($MM)$587 $288 $955

Segment breakdown (revenue):

Segment Revenue ($USD Billions)Q3 2022Q2 2023Q3 2023
Compute$3.03 $2.76 $2.62
HPC & AI$0.83 $0.84 $0.84
Storage$1.13 $1.04 $1.07
Intelligent Edge$0.94 $1.30 $1.42
Financial Services$0.82 $0.86 $0.87
Corporate & Other$0.30 $0.30 $0.32

Segment operating margins:

Segment Operating Margin (%)Q3 2022Q2 2023Q3 2023
Compute13.5% 15.2% 10.9%
HPC & AI3.4% -0.2% -0.8%
Storage14.3% 7.9% 10.7%
Intelligent Edge16.5% 26.9% 29.7%
Financial Services11.8% 9.8% 8.4%
Corporate & Other-10.3% -15.9% -11.9%

KPIs and mix shift:

KPIQ1 2023Q2 2023Q3 2023
ARR ($USD Billions)>$1.00 $1.10 $1.30
ARR YoY Growth (%)+26% +35% +48%
As-a-Service Orders YoY (%)N/AN/A+122%
Cumulative AAS TCV ($USD Billions)N/AN/A~$12
Software & Services Share of ARR (%)N/A66% 68%
Capital Returns ($MM)$229 $261 $341
Dividend per Share ($)$0.12 $0.12 $0.12

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Revenue ($B)Q4 FY23N/A$7.2–$7.5 New
GAAP Diluted EPS ($)Q4 FY23N/A$0.36–$0.40 New
Non-GAAP Diluted EPS ($)Q4 FY23N/A$0.48–$0.52 New
Revenue Growth (cc)FY234–6% 4–6% Maintained
GAAP Operating Profit Growth (%)FY23180–184% 180–184% Maintained
Non-GAAP Operating Profit Growth (%)FY236–7% 6–7% Maintained
GAAP Diluted EPS ($)FY23$1.42–$1.50 $1.42–$1.46 Lowered upper bound
Non-GAAP Diluted EPS ($)FY23$2.06–$2.14 $2.11–$2.15 Raised
Free Cash Flow ($B)FY23$1.9–$2.1 $1.9–$2.1 Maintained
ARR CAGR (FY22–FY25)Multi-year35–45% 35–45% Maintained
OI&E ($MM, full-year)FY23~Neutral +$50–$70 Raised
Non-GAAP Tax Rate (%)FY2314% 14% Maintained
Dividend per Share ($)Q4 FY23$0.12 $0.12 Maintained

Earnings Call Themes & Trends

TopicPrevious Mentions (Q1 2023, Q2 2023)Current Period (Q3 2023)Trend
AI/technology initiativesQ1: HPC & AI record revenue; ARR >$1B; HPE GreenLake-led strategy . Q2: AI demand strengthening; record gross margins .AI as-a-service orders +122% YoY; largest HPC & AI order book; hyperscaler win; elongated revenue timing due to supply/acceptance .Accelerating demand; revenue lag
HPE GreenLake/ARRQ1 ARR +26% YoY; >$1B run-rate . Q2 ARR $1.1B; +35% YoY .ARR $1.3B; +48% YoY; software/services mix to 68% .Strong acceleration
Intelligent EdgeQ1: $1.13B; 21.9% margin . Q2: $1.30B; 26.9% margin .$1.42B; 29.7% margin; double-digit growth globally; SASE/SSE expansion (Axis) .Share gains, margin expansion
Compute cyclicalityQ1: 17.6% margins, strong AUPs . Q2: 15.2% margin; elongated cycles .$2.62B revenue; 10.9% margin; unit demand stabilizing; Gen11 to aid AUPs .Near trough; improving units
Storage/Alletra transitionQ1: Alletra triple-digit growth . Q2: Storage margin 7.9% due to mix/ratable software .Storage up seq.; 10.7% margin; 14% deferral of software rev impacts near-term margin .Recovery as ratable rev recognized
Supply chain/macro/FXQ2: FX headwind; uneven IT spend .FX headwind ~300 bps; demand improving sequentially; order book >2x pre-pandemic .Stabilizing demand amid FX headwind
Regulatory/legal (H3C)Q2: Put option at $3.5B; 6–12 months to close .Continued update; maintaining China presence via H3C; proceeds plan post-close .Pending approvals

Management Commentary

  • “Our strategic shift toward edge, hybrid cloud and AI delivered through our HPE GreenLake platform is working.” — Antonio Neri .
  • “ARR reached $1.3 billion in Q3 ’23… 48% growth is above our long-term 35% to 45% target” — Jeremy Cox .
  • “We exited the quarter with the largest HPC & AI order book we have ever had… order book now at more than 2x pre-pandemic levels.” — Antonio Neri .
  • “Intelligent Edge… operating margin of 29.7%… we’re benefiting from revenue scale and prior pricing actions.” — Jeremy Cox .
  • “Storage… Alletra includes a meaningful component of ratable revenue… we expect operating margins to recover back to historical levels as we look forward to ’24.” — Jeremy Cox .

Q&A Highlights

  • AI bookings and timing: All previously disclosed AI awards booked; revenue recognition lags due to supply/installation/acceptance; pipeline remains strong and consistent QoQ .
  • Hyperscaler traction: Won a large hyperscaler AI deal; customers value HPE’s open ecosystem (Slingshot fabric) and sustainable supercomputing; partnerships across NVIDIA/AMD/Intel enable flexibility .
  • Intelligent Edge drivers: WiFi6 upgrades, SD-WAN (Silver Peak), SSE/SASE (Axis Security), private 5G (Athonet); sustained elevated order book into FY24 .
  • Storage margin recovery: Alletra’s ratable software deferrals temporarily depress margins; ~14% of software is deferred; margins should inflect positively into FY24 as deployments recognize revenue .
  • Compute cycle outlook: Signs of unit demand improvement; Gen11 servers optimized for AI inference expected to lift AUPs; long-term operating margin target 11–13% remains intact .

Estimates Context

  • Wall Street consensus EPS and revenue via S&P Global were unavailable due to request limits at the time of retrieval. As a proxy, HPE’s non-GAAP EPS of $0.49 was above internal guidance ($0.44–$0.48), and revenue exceeded the midpoint of guidance .
  • Given the beat vs internal guidance and raised FY non-GAAP EPS, sell-side models likely need upward revisions on non-GAAP EPS and ARR trajectory; Storage margin recovery may be paced as Alletra deferrals unwind .

Key Takeaways for Investors

  • Mix shift is the story: Intelligent Edge and GreenLake ARR are structurally expanding gross and operating margins; maintain focus on recurring software/services share within ARR .
  • AI is a multi-quarter catalyst: 122% YoY AAS orders and largest-ever HPC & AI order book support medium-term revenue/margin uplift, but recognition will be uneven due to supply and acceptance timing .
  • Near-term caution: Compute remains cyclical with margin compression; Storage margins temporarily diluted by ratable software; expect gradual recovery into FY24 as deployments ramp .
  • Guidance supports EPS momentum: FY23 non-GAAP EPS raised to $2.11–$2.15; OI&E now +$50–$70M; dividend maintained; capital returns ~60% of FCF .
  • FX headwinds and macro: ~300 bps revenue headwind; sequential demand improvement across segments and >2x pre-pandemic order book provide buffer .
  • Trading setup: Beat vs guidance, FY non-GAAP EPS raised, Edge/ARR momentum and AI orders are positive catalysts; any updates on hyperscaler deployments, component availability, and HPC & AI margin trajectory will drive sentiment .
  • Medium-term thesis: Portfolio pivot to software/services-rich Edge and AI delivered via GreenLake should continue to expand margins and FCF; watch H3C proceeds and capital allocation post-close .

Sources: HPE Q3 FY2023 8-K results press release and financial tables , Q3 FY2023 earnings call transcript (prepared remarks and Q&A) , Q2 FY2023 8-K , Q1 FY2023 8-K .