Hewlett Packard Enterprise (NYSE: HPE) has delivered stronger-than-expected third-quarter results amid significant conversion in AI system revenues. The prospects for the company’s AI server and edge computing businesses look promising though there is cost-related pressure on gross margin.
The Texas-based IT solutions provider’s stock dropped this week despite the positive results, reflecting the market’s concerns over the weak gross margin performance. HPE traded mostly sideways in the early half of the year, before climbing to a new high in June. Now, the shares are hovering near the levels seen a year ago. Considering the relatively low price and the bullish outlook on the industry, investors will be keeping a close watch on the stock.
Q3 Numbers
In the July quarter, the tech firm’s revenues increased to $7.7 billion from $7.0 billion in the prior-year period and topped expectations, aided by a 35% growth in the main Server segment that was partially offset by a 23% decrease in Intelligent Edge revenues. While demand was strong in North America, Asia-Pacific, Japan, and India, Europe and the Middle East experienced weakness.
Earnings, adjusted for special items, moved up to $0.50 per share in the third quarter from $0.49 per share a year earlier and came in above consensus estimates. On a reported basis, net income was $512 million or $0.38 per share in Q3, compared to $464 million or $0.35 per share in the third quarter of 2023.
Margin Woes
Meanwhile, gross margin dropped 410 basis points, hurt by a lower mix of Intelligent Edge revenue and a higher mix of AI server revenue. While margins are expected to remain under pressure in the coming quarters, they will rebound when there is a favorable shift in the revenue mix. Of late, the bottom line has been under pressure from higher component prices.
“We are aggressively going after the opportunities presented by better market conditions and are well-positioned in a competitive and dynamic environment as we close our fiscal year. I am very proud of the progress we have made in delivering on our edge-to-cloud vision over the last several years, which is generating this performance momentum. We have accelerated innovation across all pillars of our strategy. Networking, hybrid cloud, and AI delivered through a unified cloud-native and AI-driven experience as a part of our HPE GreenLake cloud platform,” Hewlett Packard’s CEO Antonio Neri said at the Q3 earnings call.
AI Prowess
While it is still in the early stages of AI adoption, Hewlett Packard recently launched HPE Private Cloud AI, developed in partnership with Nvidia. It is expected that innovations in this area will be a key growth driver for its hybrid cloud business. Encouraged by the positive performance so far this year and continued strong demand for AI systems, the company raised its full-year 2024 earnings per share guidance to the range of $1.68 to $1.73 and to the $1.92-$1.97 range, on an adjusted basis.
Extending the post-earnings downturn, Hewlett Packard’s stock traded lower soon after opening on Thursday. The current stock price is broadly in line with the 52-week average.