HPE boosted revenue thanks to growing sales of AI servers, but as a result, gross margins fell and the company’s shares fell

Hewlett Packard Enterprise (HPE) reported financial results for the third quarter of fiscal 2024, which ended July 31, 2024. The company’s revenue came in at $7.71 billion, beating the prior-year quarter by 10% and the Zacks Consensus Estimate by 0.56%. Adjusted earnings per share (Non-GAAP) came in at $0.50, up 2% year-over-year and 19% above the prior-year quarter, as well as the Zacks Consensus Estimate of $0.46 per share and the company’s own estimate of $0.43. –$0.48.

HPE’s net income (GAAP) rose 10.3% to $512 million from $464 million a year earlier. Net earnings per share (GAAP) were $0.38, up 9% year-over-year and 58% quarter-over-quarter, also beating the company’s own guidance of $0.29 to $0.34 per share. ARR (annual recurring revenue) increased year-on-year by 35% to $1.7 billion.

The server division generated $4.28 billion in revenue, up 35% year over year. At the same time, revenue from the Intelligent Edge division fell by 23% to $1.12 billion, and from the Hybrid Cloud division decreased by 7% to $1.3 billion. Revenue from financial services grew by 1% to $879 million.

Image source: HPE

Sales of traditional HPE servers grew by double-digit percentages both quarter-over-quarter and year-over-year as demand was driven by the transition to 11th generation ProLiant. HPE reported that orders for AI server systems increased by $1.6 billion compared to the previous quarter, from $4.6 billion to $6.2 billion, with sales revenue of $1.3 billion. Revenue from AI systems now stands at 30% of total revenue from sales of server systems, compared to 10% a year earlier.

When asked whether AI servers are replacing traditional ProLiant servers, CEO Antonio Neri said, “We don’t see any signs of cannibalization. AI workloads are different and do not replace traditional workloads. In particular, the enterprise segment continues to demonstrate strong demand for traditional servers.”

However, growth in AI server sales had a negative impact on HPE’s GAAP gross margin, which declined 420 basis points year over year to 31.6%, as revenue levels are lower than for traditional servers. In this regard, the company’s shares fell by 3%.

Orders for Alletra’s storage and hybrid cloud SaaS offerings grew by double-digit percentages year over year. The number of GreenLake cloud clients increased by almost 3 thousand compared to the previous quarter and by 10 thousand year on year – to 37 thousand.

For the fiscal fourth quarter, HPE expects revenue of $8.25 billion +/- $125 million, up 12.2% year-over-year on average, and adjusted earnings per share (non-GAAP) of $0.52 – $0.57. Full-year fiscal 2024 guidance is for revenue of $29.92 billion, up 2.7% from the prior fiscal year, and adjusted earnings per share (non-GAAP) of $1.92 to $1.97.