AI Momentum Fuels HPE's Return To Revenue Growth But Profitability Has Yet To Enter The Picture

On Tuesday, Hewlett Packard Enterprise HPE reported its fiscal second quarter results that surpassed estimates as its server business got a helping hand in the form of availability of AI chips from Nvidia Corporation NVDA. Although earnings fell compared to last year’s comparable quarter, the server and storage manufacturer, HPE lifted its full-year guidance. 

Fiscal Second Quarter Highlights

For the quarter ended on April 30th, HPE reported revenue grew 3% to $7.2 billion, surpassing FactSet’s estimate of $6.8 billion, while earnings dropped 19% to 42 cents a share.

Server revenue grew 18% YoY to $3.9 billion, while AI systems revenue exceeded $900 million, fueled by growing demand for AI servers. Similarly, Dell Technologies Inc DELL recently reported it sold $1.7 billion of AI systems in its most recent quarter. Dell recorded its AI systems sales multiplied 2.1 on a sequential basis and as many as 10 times on a YoY basis. Like HP, Dell revealed its margins suffered by those AI server sales or more precisely, Dell also did not significantly profit from such an increase in revenue. What is astonishing about these figures is that unlike HPE, Dell has not been selling pre-exascale and exascale GPU-accelerated supercomputers for many years. 

Management disclosed AI systems revenue for the first time and Chief Executive Antonio Neri added that it more than doubled on a sequential basis driven by the company’s strong order book and better conversion from its supply chain. Neri noted that the company’s very deep and broad expertise in designing, manufacturing, and running AI systems at scale fueled the growth of cumulative AI systems orders to $4.6 billion, out of which more than 15% was contributed by enterprise AI orders. The hardware maker also pointed out it had benefited from improving supply of H100 chips from Nvidia, which are housed in its Enterprise servers. However, intelligent edge revenue tanked 19% to $1.1 billion.

Fiscal Third Quarter Guidance 

For the current-quarter, HPE guided for sales between $7.4 billion and $7.8 billion, comfortably meeting and exceeding analysts’ consensus estimate of $7.4 billion. HPE expects adjusted earnings to range between 43 cents to 48 cents per share, while analysts projected 47 cents a share.

A Lifted Full Year Outlook

As for 2024, HP Enterprise lifted its revenue growth outlook from previously expecting flat to 2% growth to a range between 1% to 3% growth. HPE also raised its adjusted earnings guidance from the prior range between $1.82 and$1.92 a share, with the outlook now being between $1.85 and $1.95 per share.

Raymond James analyst Simon Leopold  evaluated that HPE was more successful in navigating margin headwinds than its peers thanks to its cost discipline and the strong services attachment with AI system sales. After reporting its fiscal first quarter revenue contracted 14%, HP succeeded to return to revenue growth in its fiscal second quarter. The good news is also that Nvidia needs Dell and HPE, along with other original equipment manufacturers to spread the GenAI adoption and hardware to the masses, further fueling their revenue growth. But while Nvidia continues to sprint in an effort to keep its leadership as it just unveiled new AI chips only months after its latest release, both Dell and HP need to figure out how to make more profit from selling AI servers.

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