Drill Down Earnings, Ep. 477: Hewlett Packard Enterprise Q3 earnings – ($HPE) – A Deep Dive with Cory Johnson

Cory Johnson (0:04)

Welcome to Drill Down News. We have quartered the results out from HPE Hewlett Packard Enterprise, that very successful part of Hewlett Packard, something I thought words would never come out of my mouth. I'm Cory Johnson, Chief Market Strategist of Epistrophy Capital Research. And yeah, I've been covering Hewlett Packard for so long, it was a joke for every quarter for decades, one that I laughed at. Not the people there, great people there, but the attempts by former CEOs to try to put lipstick on the pig of that company were comical at times. But this company is doing great things now. HPE is selling the physical guts of enterprise computing, so server storage, some say Juniper Networks routers and switches that stitch AI data centers together and indeed use AI to repair those systems. A really interesting company, HPE. And with enterprises moving from AI palace to production, from training to inferencing, HPE is becoming one of the few vendors selling the whole stack on premises. And this quarter, we found they couldn't build things faster. Very strong Q3, better than expectations. On Wall Street, $12.2 billion in revenues and $1.11 in earnings per share. Whatever, that's Wall Street stuff. Those are just numbers. What we see here is a company that is making the products are needed to build out AI, everything, the hardware, I should say, as well as some software. But the hardware that's happening at the corporate level, not just in data centers, although some important data centers, an important deal with Oracle as well here. But it helped them hit $12.2 billion in revenue record for this HPE business, up 34 percent in a year over year basis, 14 percent sequentially, and really strong operating margins for this company. 8.6 percent, some of the best that they've had in years. Gross margins of 40 percent, 40.1 percent. So pretty impressive numbers here from HPE, and operating margins of 11.4 percent. So again, gross margin of 40.1 percent.

Operating margins of 11.4 percent, EBIT margins are also really strong here for this company. So the revenue blend. We've got two ways to look at things from this company. The old way that they're still giving us the numbers, and the new way that they're also giving us the numbers. The old way, servers, hybrid cloud, intelligent edge, and financial services.

The big takeaway is the server growth has been great. The servers that go in to make AI happen, both in the data center and in the corporate world, 37 percent growth on a year-over-year basis, super strong here. So even while their hybrid cloud business cooled a bit down 13 percent in a year-over-year basis, if you look at the two of their biggest businesses here, their hybrid cloud and their server sales, service sales have just erupted here and really taking off, growing at 37 percent, making up for the decline in hybrid cloud. And indeed, their whole business is just growing really well, including the GreenLake business, the number of customers up 18 percent. That's a strong sign for their growth in the future here. Now, with the new way they're going to break out the numbers, they've been breaking out the numbers for the last few quarters here.

Networking is one business, cloud and AI is another, with corporate investments a smaller bit. The networking business, absolutely taking off. We can all look at sequential numbers here. We still don't have the year-over-year numbers, but 8% growth sequentially, really, really strong. The networking business up 2.9%.

But really, 75% year-over-year growth, they told us. But when you take out the Juniper edition, 10% growth, still really impressive number here for AI. And their cloud and AI business, $9 billion in revenues in a quarter, 17% sequentially, 25% in a year-over-year basis, nice operating margins there. And signing some really big deals in a quarter, the backlog was through the roof. Their AI systems backlog was $6.8 billion. How did Marker react? Well, the stock went up, then went down, then kind of leveled off, ultimately down about 3% during the, you know, to the end of the conference call. But for the year, this stock is up 128%, a really fantastic move for HPE, recognizing where this company is and what they're selling and why that's what the world right now. That I mentioned that backlog surge in the overall backlog of 105% on a year over year basis.

Just a huge backlog, nearly $8 billion in the quarter now. Asked specifically about what's happening in the enterprise. CEO Antonio Neri talked about this moment that, maybe I haven't been emphasizing enough in these quarterly calls, because I'm hearing it on lots of them. This agentic AI business. Here's how I'm thinking about this before we get to the quote. If your market is all the businesses out here and all the business are going to get created, or maybe all the people, what if you're selling, I don't know, shoelaces or something, and you imagine you only sell as many shoelaces as there are people, probably some subset of people, or how many shoes an individual person might get, minus the people who wear sandals, I don't know. You're limited by how many people there are in terms of what you sell. But in a world of AI agents, that's not true. Every person could have 10 agents, every person could have 100 agents. And we're starting to see that show up right now. And Antonio Neri talked about that. Enterprises are hitting this inflection point where agentic AI, where AI agents are growing faster than users of computers. And that number, it's hard to even conceive of where the limits might be. Here's Antonio Neri, the CEO of HPE, talking about that inflection point of agentic AI.