Hewlett Packard Enterprise (HPE) reported its Q1 2025 financial results, showing mixed performance against forecasts. The company’s revenue surpassed expectations at $7.85 billion, slightly above the projected $7.81 billion. However, its earnings per share (EPS) came in at $0.49, just below the forecasted $0.50. Following the earnings release, HPE’s stock experienced a significant decline, dropping 19.6% in after-hours trading, settling at $14.44. According to InvestingPro analysis, HPE appears undervalued, trading at an attractive P/E ratio of 9.3x and showing strong free cash flow yield.
Key Takeaways
- Revenue exceeded expectations, reaching $7.85 billion.
- EPS fell short of forecasts, coming in at $0.49.
- Stock price plummeted by 19.6% in after-hours trading.
- AI systems orders doubled quarter-over-quarter, reaching $8.3 billion.
- Workforce reduction of 2,500 positions announced for cost savings.
Company Performance
Hewlett Packard Enterprise reported a solid revenue increase of 17% year-over-year for Q1 2025, driven by strong demand in the AI systems market and significant growth in annual recurring revenue, which rose 46% to $2.1 billion. Despite these gains, the company faced challenges with declining margins, as its non-GAAP gross margin fell by 680 basis points to 29.4%, and the operating margin decreased by 160 basis points to 9.9%.
Financial Highlights
- Revenue: $7.9 billion, up 17% year-over-year.
- EPS: $0.49, consistent with the outlook but below forecast.
- Annual Recurring Revenue: $2.1 billion, up 46% year-over-year.
- Non-GAAP Gross Margin: 29.4%, down 680 basis points year-over-year.
- Non-GAAP Operating Margin: 9.9%, down 160 basis points year-over-year.
Earnings vs. Forecast
HPE’s revenue of $7.85 billion slightly outperformed the forecast of $7.81 billion, marking a positive surprise. However, the EPS of $0.49 fell short of the expected $0.50, a minor miss that may have contributed to the negative market reaction. The revenue beat was modest, and the EPS miss was relatively small compared to previous quarters.
Market Reaction
The market reacted negatively to HPE’s earnings report, with the stock price dropping by 19.6% in after-hours trading. This decline brought the stock to $14.44, moving it closer to its 52-week low of $15.77. The significant drop suggests investor concerns over the company’s ability to manage margin pressures and execute cost-saving measures effectively. InvestingPro technical analysis indicates the stock is in oversold territory, while the company maintains a "FAIR" overall financial health score of 2.38 out of 5.
Outlook & Guidance
Looking ahead, HPE projects full-year constant currency revenue growth of 7-11% and expects non-GAAP gross margin to remain below 30%. The company aims for a non-GAAP operating margin around 9% and targets a 10% server operating margin by Q4. HPE anticipates higher AI revenue conversion in the second half of 2025, driven by continued demand across its AI systems segments. Analyst targets range from $19 to $29 per share, with a consensus recommendation of "Hold." Detailed analysis and comprehensive valuation models are available in the HPE Pro Research Report, one of 1,400+ deep-dive reports available exclusively on InvestingPro.
Executive Commentary
CEO Antonio Neri remarked, "We delivered a solid quarter, but we could have executed better," highlighting the company’s mixed performance. CFO Marie Myers expressed confidence in the measures to improve the server business, stating, "We are confident in our measures to improve our server business." Neri also emphasized the strategic focus, saying, "Our focus is really in the mix of the three segments."
Risks and Challenges
- Margin pressure: Declining gross and operating margins could impact profitability.
- Workforce reduction: The reduction of 2,500 positions may affect operations.
- Market volatility: The significant stock price drop indicates market uncertainty.
- Tariffs: New tariffs may pose challenges to cost management.
- Competitive landscape: Maintaining a competitive edge in AI and cloud services is crucial.
Q&A
During the earnings call, analysts raised concerns about server margins and inventory management, seeking clarity on the company’s strategies to mitigate these issues. HPE addressed the momentum in AI systems orders and market demand, while also clarifying that cost-saving initiatives are separate from potential acquisitions.
Full transcript - Hewlett Packard Enterprise Co (HPE) Q1 2025:
Conference Operator: Good afternoon, and welcome to the First Quarter Fiscal twenty twenty five Hewlett Packard Enterprise Earnings Conference Call. At this time, all participants will be in a listen only mode. We will be facilitating a question and answer session towards the end of the conference. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today’s call, Paul Glazer, Head of Investor Relations.
Please go ahead, sir.
Paul Glaser, Head of Investor Relations, Hewlett Packard Enterprise: Good afternoon. I am Paul Glaser, Head of Investor Relations for Hewlett Packard Enterprise. I would like to welcome you to our fiscal twenty twenty five first quarter earnings conference call with Antonio Neri, HPE’s President and Chief Executive Officer and Marie Myers, HPE’s Chief Financial Officer. Before handing the call to Antonio, let me remind you that this call is being webcast. A replay of the webcast will be available shortly after the call concludes.
We have posted the press release and the slide presentation accompanying the release on our HPE Investor Relations webpage. Elements of the financial information referenced on this call are forward looking and are based on our best view of the world and our business as we see them today. HPE assumes no obligation and does not intend to update any such forward looking statements. We also note that the financial information discussed on this call reflects estimates based on information available at this time and could differ materially from the amounts ultimately reported in HPE’s quarterly report on Form 10 Q for the fiscal quarter ended 01/31/2025. For more detailed information, please see the disclaimers on the earnings materials relating to forward looking statements that involve risks, uncertainties, and assumptions.
Please refer to HPE’s filings with the SEC for a discussion of these risks. For financial information we have expressed on a non GAAP basis, we have provided reconciliations to the comparable GAAP information on our website. Please refer to the tables and slide presentation accompanying today’s earnings release on our website for details. Throughout this conference call, all revenue growth rates, unless noted otherwise, are presented on a year over year basis and adjusted to exclude the impact of currency. Finally, Antonio and Marie will reference our earnings presentation in their prepared comments.
With that, let me turn it over to Antonio.
Antonio Neri, President and Chief Executive Officer, Hewlett Packard Enterprise: Thank you, Paul. Good afternoon, everyone. Before I share my comments on our Q1 performance, I would like to start by addressing the recent decision of the Department adjusted to file a lawsuit seeking to block our proposed acquisition of Juniper Networks. The DOJ’s analysis of the market is fundamentally flawed. We strongly believe this transaction will positively change the dynamics in the networking market by enhancing competition.
HPE and Juniper remain fully committed to the transaction, which we expect will deliver at least $450,000,000 in gross annual run rate synergies to shareholders within three years of the deal closing. The court has set a trial date of July 9. We believe we have a compelling case and expect to be able to close the transaction before the end of fiscal twenty twenty five. As you know, the U. S.
Administration enacted tariffs on imports from Mexico and Canada, with increased tariffs on imports from China beginning March 4. In anticipation of this decision, we have been evaluating numerous scenarios and mitigation strategies since December to assess the potential net impact. We intend to leverage our global supply chain to mitigate aspects of the expected impact with pricing adjustments also expected. Pending further announcement from the U. S.
Administration, our outlook for the balance of the year reflects our best estimate of the net impact from this tariff policy. Marie will provide more details shortly. Turning to our Q1 performance, we delivered against our commitments for the quarter including achieving strong double digit year over year revenue growth. However, we could have executed better. While our Q1 operating profit outlook anticipated increased pressure on our server operating margins, three factors impacted our profitability more than expected.
Near the end of the quarter, we saw that our traditional server pricing did not adequately account for the evaluation of our inventory, which resulted in incremental server margin pressure. Higher discounts due to aggressive pricing competition in the market compounded this issue. And finally, our server margins were further pressured by the higher than normal AI inventory caused by the rapid transition of demand to next generation GPUs and related components. We have already implemented aggressive actions to address these issues and are already seeing the positive effects of doing so. However, we do expect to see continued pressure over the next one to two quarters before we realize the full benefit of these measures including expected higher AI revenue conversion.
Looking ahead, we see additional opportunities to take incremental corporate cost actions to further strengthen our financial profile. We plan to reduce our employee base 5% over the next twelve to eighteen months through the reduction of approximately 2,500 positions and expected attrition. Doing so will better align our cost structure to our business mix and long term strategy. These are not easy decisions to make as they directly affect the life of our team members. We will treat all those transitions with the highest level of care and compassion.
I will touch on a few highlights from the quarter and Marie will go through each segment in greater financial detail. At the company level, we delivered revenue and diluted net earnings per share consistent with our outlook. Q1 revenue growth of 17%, a near record was in line with our mid teens growth expectations. This was the fourth consecutive quarter of improved year over year top line growth driven by our server business, which grew revenue 30% year over year and hybrid cloud, which was up 11% year over year. Non GAAP operating profit dollars in the quarter were flat year over year.
That resulted in non GAAP diluted net earnings per share of $0.49 consistent with our Q1 outlook range. We are pleased by the performance of Intelligent Edge, which recorded 2% quarter over quarter revenue growth, the third consecutive quarter of sequential revenue growth for the segment. With the market continuing its positive path to recovery, we delivered double digit year over year orders growth across all key geographies and key products, including campus switching. During the quarter, HP Aruba networking attracted new large enterprise logos, underscoring the confidence our customers in our strategy, product portfolio and roadmap. Hybrid cloud grew 11% year over year, although down sequentially following an exceptional Q4.
The growth shows our storage and GreenLake cloud product strategies are working. Demand for our Alletra storage MP was up triple digits year over year and now represents greater than 50% of our IP block product orders. GreenLake remains a key differentiator, enabling HP to capture new enterprise hybrid cloud and AI workloads and data. We finished Q1 with more than 41,000 enterprises using HP GreenLake Cloud. And AIR surpassed $2,000,000,000 for the first time, up 46% year over year.
In AI, we continue to see strong demand from model builders and service providers. We booked $1,600,000,000 in new AI system orders in the quarter, bringing our cumulative AI system orders to $8,300,000,000 The Blackwall GPU generation of products represented approximately 70% of our new order intake in Q1. We exited the quarter with $3,100,000,000 in AI systems backlog, up 29% quarter over quarter and our pipeline remains multiples of our backlog. On the revenue front, we delivered $900,000,000 in AI systems revenue in Q1. As we have said before, the AI systems business tends to be lumpy as large deals take time to convert.
We expect significantly higher AI revenue conversion in the second half of twenty twenty five, driven by the transition to Blackboard GPUs. We’re proud to have achieved a new milestone three weeks ago, when we announced the shipment of our first NVIDIA GB200 systems. In the enterprise AI market, we saw an accelerated adoption of a variety of AI models including agentic AI approaches in specific market verticals and workflows. In Q1, our enterprise AI orders increased 40% year over year, driven by higher conversion from the proof of concept phase. An example is KDDI, who in partnership with HPE designed and implemented a platform which will be used both internally and externally to develop, train and tune Japanese generative AI models for domain specific use cases.
Our enterprise AI pipeline continues to grow with customers continue to validate their use cases on our private cloud AI solution powered by GreenLake Cloud. We see broad and increased interest from Sovereign customers globally. Sovereign customers are deploying both AI systems for the development of sovereign generative AI large language models and supercomputing systems for simulation and modeling using AI. Recently, the Leibniz Supercomputer Center at the Bavarian Academy of Sciences Humanities selected HP to build their new supercomputer called Blue Lion. It features HP innovations including our industry first one hundred percent fanless direct liquid cooling infrastructure with our slingshot networking fabric.
Lastly, HP and Accenture are collaborating on a new agentic AI solution for procurement powered by Accenture AI Refinery with our private cloud AI offering. This new solution will be deployed across HPE’s category and sourcing strategies, spend management, strategic relationship analysis and contract obligation management. Shifting to the innovation front, I am proud of our new and differentiated products and services we continue to bring to market to fuel the success of our customers and growth of our business. For example, in Intelligent Edge, we announced new vertical solutions for retailers to accelerate security first AI driven networks. These solutions provide Intelligent Edge processing for IoT data in real time, improving security, operational efficiencies, and customer experiences for retailers.
In hybrid cloud, last November, we introduced a new KVM based HPE VM essential software offerings. Hybrid cloud orchestration and on premises infrastructure virtualizations are tremendous growth opportunities for HPE. Our new VM essentials enables customers to deploy a more cost effective virtualization solution than VMware with full hybrid cloud orchestration. Since its launch, we have had hundreds of customers in trials demonstrating strong market interest and excitement. We are in the process of integrating our VM Essentials into our private cloud offerings.
We also continue to offer it as a standalone software on HPE and multi vendor infrastructure. In storage, we are very pleased with our triple digits year over year orders growth in our Alletra MP portfolio. This validates our strategy to provide customers a disaggregated data infrastructure with subscription based hybrid cloud native services. Alletra MP now offers block and fast objects, supporting a variety of data workloads, including AI. This reduces customers’ need for multiple infrastructure purchases and management.
And finally, in our server business, two weeks ago we launched a new ProLiant Gen12 server platform with our next generation of high low quantum resistant security enclave and direct liquid cooling support. This latest generation offers the most sustainable and secure cost per computing core performance. One Gen 12 server can replace up to 26 Gen nine servers and up to 14 Gen 10 servers. This reduces power consumption by at least 65%. In closing, in Q1, we saw continuous strong demand across the portfolio driven by our new impressive innovations and customers’ continued enthusiasm for our offerings.
However, we could have executed better, particularly in our server segment. HP has a proven execution track record and we are committed to doing what is needed. We have already taken steps to improve our execution performance and we expect our efforts will contribute to improvements in the back half of fiscal year twenty twenty five. We have made great strides at HPE in accelerating our strategy and aligning our product portfolio to market inflection points and customer needs. We will continue to make bold moves to enhance our portfolio and attract new customers in ways that accelerate value for our shareholders.
Now let me turn the call over to Marie, who will provide more details on the quarter. Marie?
Marie Myers, Chief Financial Officer, Hewlett Packard Enterprise: Thank you, Antonio, and good afternoon, everyone. During the first quarter of fiscal twenty twenty five, we saw increased demand for service, storage and networking products. Our revenue grew 17% compared to last year, marking the fourth straight quarter of accelerated revenue growth. We met our outlook, achieving double digit growth in server and hybrid cloud. Intelligent Edge also performed better than we expected and is set to grow further in this quarter.
We reported non GAAP diluted net earnings per share of 49¢, aligning with our outlook showing strong profitability and hybrid cloud and intelligent edge. However, we faced some challenges in the service segment, which we are addressing. Here’s a closer look at the details of the quarter. Our first quarter revenue was $7,900,000,000 up 17% year over year, but down 7% quarter over quarter, reflecting typical seasonality and lower AI systems revenue. Our annual recurring revenue was $2,100,000,000 up 46% year over year driven by AI and Intelligent Edge.
Non GAAP gross margin was 29.4%, down six eighty basis points year over year and 150 basis points quarter over quarter. On a year over year basis, gross margin was impacted by a higher mix of server revenue and lower contribution from Intelligent Edge. And we faced challenges in server that pressured margin both year over year and sequentially. Non GAAP operating margin was 9.9%, down 160 basis points year over year and 120 basis points sequentially, primarily due to headwinds in gross margin. Operating margin partially benefited from a 9% decrease in non GAAP operating expenses, reflecting lower variable compensation and continued cost discipline.
In my first year as CFO, we implemented cost saving measures by targeting discretionary spending, reducing non GAAP operating expenses from 24% in fiscal twenty twenty three to 22% of revenue in fiscal twenty twenty four. In q one, these actions lowered operating expenses to a record low of 19% of revenue. This year, we aim to target more structural cost savings. Free cash flow was negative $877,000,000 in line with normal seasonal patterns. GAAP diluted net earnings per share was 44¢ above guidance of 31¢ to 36¢ due to a gain recognized on the sale of a Communications Technology Group or CTG and lower than expected Juniper related costs.
Non GAAP diluted net earnings per share of 49¢ was within our guided range of 47¢ to 52¢. Non GAAP diluted net earnings per share excludes $57,000,000 in net costs primarily related to stock based compensation expense, h three c divestiture related severance costs, acquisition, disposition, and other charges, and amortization of intangible assets primarily offset by the gain recognized on the sale of CTG. Now let’s break down the segment results. Server revenue was 4,300,000,000 up 30% year over year. Revenue fell sequentially primarily due to the timing of AI systems deals.
In traditional compute, our Gen 11 value proposition resonated with customers, contributing to year over year AUP growth. Gen 11 accounts for the majority of our traditional compute sales, and we expect to begin shipping the new Gen 12 portfolio later this year. In AI systems, we signed $1,600,000,000 in net orders and added enterprise and sovereign customers, although most demand is still from model builders. We recognized roughly $900,000,000 of revenue, up from about $400,000,000 last year, but down sequentially as expected due to chip availability and customer readiness. We expect these factors will continue to affect our AI systems business.
Server operating margin was well below expectations at 8.1%. While our guidance of 10 to 11% assumed impact from the GPU transition and competitive pricing, market pressures were greater than expected and execution issues further impacted operating margin. We have made improvements and taken additional steps to reduce costs, expecting server operating margin to be around 10% by Q4. Let me provide further details. In traditional compute, we face challenges in pricing strategies and discounting.
We now have a more rigorous discount framework with increased deal mix scrutiny. These changes will take time to impact our P and L as we work through our backlog. In addition, we expect pricing adjustments may negatively impact top line growth in the near term. In AI, our margins were affected by the transition to new GPUs and managing older GPU inventory. We believe this is an industry wide challenge that will improve as supply and demand align.
We have implemented actions to reduce inventory. Now on to Intelligent Edge, which exceeded our expectations and is ready for growth in Q2. Revenue was $1,100,000,000 up 2% quarter over quarter, ahead of guidance of flattish growth. Revenue was down 4% year over year as we move past post pandemic related backlog. We saw double digit year over year growth in Sassy and data center switching, with notable order growth for wireless LAN and campus switching.
Despite some pressure from weaker federal spending, we grew orders double digits year over year in all major regions. We expect the business to return to year over year growth in Q2 given order trends and normalized channel imagery. Operating margin was 27.4%, down 200 basis points year over year, but up 300 basis points quarter over quarter due to higher revenue and cost controls. Moving to hybrid cloud. We saw broad based strength growing revenue 11% year over year to $1,400,000,000 in line with our guidance.
Sequentially, the business declined 12%. Our HPE Electra MP platform is ramping nicely, adding over a 50 new logos this quarter. HPE Electra MP’s higher deferred revenue will benefit the long term P and L but impacts near term growth and margin. The transition to Electra MP pulls through more owned IP, which benefits profit. HPE Private Cloud AI continues to attract customers with fast deployment and competitive ROI.
We continue to grow our pipeline with opportunities spanning regions and sectors. During the quarter, we received orders for small, medium, and large configurations with use cases varying from inferencing and fine tuning to manufacturing and life sciences. Hybrid cloud operating margin was 7%, up 300 basis points year over year primarily due to cost controls, but down 80 basis points sequentially. Lastly, financial services. Our financial services business generated $873,000,000 of revenue, up 2% year over year and flat quarter over quarter.
Financing volumes decreased 14% year over year to $1,200,000,000 after a record high last quarter. Our Q1 loss ratio was 0.6% and return on equity totaled 16.4%. Operating margin was solid at 9.4%, up 90 basis points year over year and up 20 basis points quarter over quarter. Moving to cash flow and capital allocation. Reflecting normal seasonality, we consumed $390,000,000 of operating cash flow in the quarter and free cash flow was an outflow of $877,000,000 Inventory totaled $8,600,000,000 at the end of the period, up $767,000,000 quarter over quarter, primarily to support AI systems orders signed during the quarter.
We are focused on reducing inventory levels to normal ranges. Q1 cash conversion cycle was positive five days, up seventeen days from last quarter, primarily due to an increase in the days of inventory to support purchases for AI systems, partially offset by an increase in days payable due to timing of vendor payments. We returned $171,000,000 through dividends and $52,000,000 via share repurchases to common shareholders, respectively. Overall, the quarter was within our guidance, but given the performance in SERVA, we took immediate actions to limit hiring, travel and discretionary expenses. We also decided to take further actions in the form of workforce reductions and attrition management to better align our cost structure with the current business needs.
This tough decision will help streamline our organization, improve productivity, and speed up decision making. We will support affected team members with resources and assistance during this transition. We expect to achieve at least $350,000,000 in gross savings by fiscal twenty twenty seven, with about 20% of the savings achieved by the end of this year. The timing of reductions will vary by geography. Total cash charges will be around $350,000,000 through fiscal twenty twenty six.
These savings are in addition to the synergies we will realize after closing the Juniper acquisition. Before I get into the details of our guidance, let me first provide some context. Recent tariff announcements have created uncertainty for our industry, primarily affecting our server business. We are working on plans to mitigate these impacts through supply chain measures and pricing actions. Through these efforts, we expect to mitigate to a significant degree the impact on the second half of the year and to a lesser extent the impact on Q2 as it takes time to implement mitigations.
The guidance we are providing today reflects our best estimate of the impacts of the March 4 tariffs and our mitigation plans. Also, because we now expect to close Juniper by the end of this fiscal year, we will provide full year stand alone guidance. For fiscal twenty twenty five, we expect constant currency revenue growth of 7% to 11% with revenue weighted towards the second half. We estimate currency impacts of around 150 basis points. By segment, we expect Intelligent Edge will grow sequentially through the year equating to year over year growth in the mid single digits.
For hybrid cloud, revenue is expected to grow in the high single digits. And for server, we anticipate revenue will slow to low double digit growth with AI systems revenue ramping meaningfully in the back half. In addition, we expect to see more pronounced service seasonality in Q3 given the expected timing of AI shipments. Our outlook assumes non GAAP gross margin will be below 30% for the full year, with quarterly rates impacted by the timing of AI systems deals. We expect full year non GAAP operating margin of around 9% at the midpoint, but we expect to exit the year approaching normal ranges.
By segment, we expect hybrid cloud operating margin in the mid to high single digits and Intelligent Edge to remain in the mid 20% range. Server is expected to improve in the back half, exiting the year with operating margin around 10%. We expect OI and E will be a net expense of approximately $15,000,000 We are guiding GAAP diluted net earnings per share between $1.15 and 1.35 and our non GAAP diluted net earnings per share between a dollar 70 and a dollar 90, weighted to the second half. Non GAAP diluted net earnings per share outlook assumes Q4 will account for a higher percentage of our annual non GAAP net earnings compared to recent periods. We expect free cash flow will be approximately $1,000,000,000 including operating profit of roughly $3,000,000,000 at the midpoint, negative working capital and the restructuring charges related to the cost savings we announced today.
For Q2, we expect revenue will be between $7,200,000,000 and $7,600,000,000 This range includes a return to year over year growth in Intelligent Edge with operating margin in the mid 20% range. For hybrid cloud, we expect revenue will be down slightly sequentially with operating margin in the mid single digits reflecting seasonality. For server, we forecast a sequential decline in the mid to high single digits, including a modest decline in AI systems revenue. Q2 will be the trough for server operating margin, in the mid single digits due to both the timing of tariff implementation and the corrective actions we are taking in the business. We expect GAAP diluted net earnings per share to be between $0.08 and $0.14 and non GAAP diluted net earnings per share between $0.28 and $0.34 Lower earnings combined with investments in our AI business will be a headwind to Q2 free cash flow resulting in abnormal seasonality.
As such, we expect Q2 will be our weakest cash generation quarter during 2025. In summary, we are confident in our measures to improve our server business. In 2025, we will focus on rightsizing our cost structure while leveraging AI technologies to enhance our processes aiming to make HPE more agile and positioned for the long term. We remain a leader in innovation, encouraged by the strong demand for products like HPE, Electra MP, and private cloud AI. The networking market is recovering, and our business is performing well.
We look forward to closing the Juniper acquisition later this year. With that, I’ll open the floor for questions.
Conference Operator: We will now begin the question and answer session. And your first question today will come from Meta Marshall with Morgan Stanley. Please go ahead.
Meta Marshall, Analyst, Morgan Stanley: Great, thanks. Appreciate the question. Marie, it sounds like you anticipated some of the pricing pressure kind of on the GPU market when you gave the original 10% to 11% operating margin guidance. But I just wanted to get a sense of the two fifty basis point shortfall, how much of that was CPU versus kind of pricing inventory additional pricing and inventory on GPUs? Thank you.
Speaker: Yes. Hi, Meta, and thanks for your question. I think you’re referring to Q1. So I’m going to answer you in terms of the Q1 actuals. So as you know, in our original guide, we actually had 10% to 11% for server.
And that did actually include some of the pressures that Antonio mentioned in his prepared remarks in terms of the AI GPU transitions. However, the magnitude of that impact was greater than we expected. And what I would say was unanticipated was the pricing challenges that we experienced in traditional compute. That was not in our Q1 guide. So hopefully that gives you some context there, Meta.
Conference Operator: Thank you. And your next question today will come from Aaron Rakers with Wells Fargo. Please go ahead.
Aaron Rakers, Analyst, Wells Fargo: Yes. Thanks for taking the question. Just kind of building on Meta’s question there. When we look at the gross margin profile of your AI server revenue and thinking about the monetization of the backlog as we move forward, I’m curious of how that’s changed or how your views have kind of structurally changed over the course of the last three months and whether or not the gross margin pressure you might be seeing, is there any kind of inventory charges or write downs that are more transitory in the model? And just any context on how margin profile looks thinking about the hopper going to the Blackwell product cycle would be helpful?
Thank you.
Antonio Neri, President and Chief Executive Officer, Hewlett Packard Enterprise: Yes. Thanks, Aaron. This is Antonio. So when I think about the AI market again and the AI margin in that context, I see three segments, right? So you talk about the service provider, model builders, they lead with time to market with the latest technologies and that’s why in Q1 we saw a quite significant amount of orders on Blackwell.
In fact, I think I said 70% of the mix of the $1,600,000,000 was Blackwell. When you go to the other two segments, the sovereign and the enterprise AI, that’s not the case. They go with a combination of prior technologies and maybe new technologies in the sovereign and in enterprise market definitely is N minus one or even minus two, for that matter. And so that’s why that inventory in the AI that was higher than normal is because now will take a little bit longer for us to basically transition that inventory as we go through the other two segment consumption while the service providers and the model builders will shift much more quickly into the latest technologies. And that working capital because in the end it’s all working capital, pressure is not so much the margin pressure of what you sold when is what compounded the issue in Q1 and it will take like we said one or two quarters to convert that backlog, the $3,100,000,000 into revenue plus new orders are coming in and then return the traditional server business to the what I would call more normal operating margins because that was mostly impacted by the what I call the higher discounting and that one time thing we would call it the value of our inventory itself.
Speaker: Okay. Thank you, Aaron. Next question please.
Conference Operator: And your next question today comes from Wamsi Mohan with Bank of America. Please go ahead.
Wamsi Mohan, Analyst, Bank of America: Yes. Thanks for the question. Your guidance implies over $2,000,000,000 year on year growth in revenue, but at the midpoint almost $150,000,000 year on year decline in operating profit dollars. But can you just help us think through how much of operating profit dollar headwind you are baking in explicitly from your tariff assumptions?
Paul Glaser, Head of Investor Relations, Hewlett Packard Enterprise0: And if
Wamsi Mohan, Analyst, Bank of America: you could bridge that similarly for free cash flow on a year on year basis where you’re going from north of $2,000,000,000 to $1,000,000,000 How much of that is tariffs versus competitive pricing versus inventory? That would be helpful. Thank you.
Speaker: Yes. Hi, Wamsi, good afternoon. And maybe I’ll take the second part of your question first in terms of cash itself. So for the full year guide, as you know, we in my prepared remarks, I mentioned at least $1,000,000,000 The way to think about cash flow is you take out net earnings at the midpoint of $180,000,000 the biggest driver is really working capital and then also the announcement that we made around the cost efficiency program. So they’re the two biggest drivers that sort of influence cash flow from a year on year basis.
And then obviously, the tariff impact flows straight into the earnings at the midpoint. In terms of tariffs, Wamsin, how to answer that? What we’ve got in the guide is actually $0.07 for the year and that gets you to the midpoint of the $180 on the guide. I would add though, the way to think about tariffs is we’re working we’ve worked obviously on mitigation effects, but it does take time to see those mitigation effects take place. So as a result, literally 0.04 of that $0.07 is actually going to be in Q2 and it’s also in the server business, which is where we see the greatest extent of that server sorry, of the tariff impact.
So tariffs $0.07 in a year, but the sort of like the hardest part of the tariff sort of impact is really going to be borne in Q2.
Speaker: Very good. Thank you, Wamsi. Next question please.
Conference Operator: And your next question today will come from Tim Long with Barclays. Please go ahead.
Paul Glaser, Head of Investor Relations, Hewlett Packard Enterprise0: Thank you. Sorry to keep beating the AI server horse here, but maybe Antonio, just on the strategy side, just curious, it seems like from the outside a year, year and a half, two years ago, some of your peers were really chasing model builders’ lower gross margin business. You guys seemed much more focused on super compute and areas that had better margin to it. It seems like that strategy has changed and now HPE is more willing to get into some of these lower margin businesses like the TB200 NPL72, I imagine it’s very low gross margin. What’s with am I right in that strategy change?
And in the future, should we expect that chasing the model builder business may never get better on a gross margin basis? So that might be something that’s more challenging to continue to compete in if we’re going to be talking single digit gross margins for that? Thank you.
Antonio Neri, President and Chief Executive Officer, Hewlett Packard Enterprise: Yes. Thank you, Tim. So, no, our strategy has not changed. If you look at the Q1 performance and our server operating margins, it was not particularly driven by the AI gross margins or operating margins in many ways of the pricing of the deals. We participate in service provider where we believe through scale and other mixes that we drive in that deal whether it’s services, manufacturing and the like, we can make the math work to ultimately deliver that overall 10% server margin combined with the rest of the server business.
What was different in Q1 for us was again the higher than anticipated discounting on the traditional server business and the fact that unfortunately this isn’t us, it’s been bad news, good news in many ways, right, is that the cost that we saw in our valuation of the inventory was not completely factored in that pricing for traditional servers compounded by the higher than anticipated discounting. And then obviously the GPU transition on the working capital that Marie just described, which obviously had an impact on the AI margin, but not because the pricing was off or anything. So in many ways, I’m confident, obviously we have put the right actions in place. The cost issue has been taken care. We found out the near end of the Q1, so I’m personally very disappointed about that.
It’s on us, it’s on me. And we feel we have the corrective actions in place. But our focus is really in the mix of the three segments. Clearly a huge focus on enterprise AI. As I said in my remarks, 40% year over year orders growth.
We have a great platform there. We drive additional services, particularly on the maintenance and the GreenLake subscription on that and then the balance on sovereign between generative AI and supercomputing, which is very good for us. And then in the service provider where it makes sense. And so for me is that’s the approach. And again, in Q1, we had this unique set of situations that we know we’re going to fix.
And that’s why at the end of Q4, we’re going to basically drive to the normalized, what I call, 10% overall sever margin in the full segment.
Speaker: Thank you, Tim. Next question please.
Conference Operator: And your next question today will come from Simon Leopold with Raymond James. Please go ahead.
Paul Glaser, Head of Investor Relations, Hewlett Packard Enterprise1: Thank you very much. I wanted to see if you could talk a little bit about your customer mix and how it might be changing. And to be transparent, I’m wondering, are you targeting more of the cloud builders right now? And is that affecting some of the assumptions that you’re in a more aggressive space? Or are we seeing issues where perhaps your federal market, which I assume is very profitable, is weaker in the mix?
So trying to get a little bit of unpacking, particularly around compute, around what’s going on in the verticals that might be affecting margin? Thank you.
Antonio Neri, President and Chief Executive Officer, Hewlett Packard Enterprise: Well, thank you, Simon. No, I mean, I don’t think this is new news, but in the service product model builders, we obviously target those who value the value of our intellectual property, now obviously direct liquid cooling 100% fanless. This is what we shipped three weeks ago for the first time and that takes a lot of work both on the capital side, but as well on the manufacturing side. But that’s a market that’s super concentrated. I mean, when you think about it, the model builders maybe you can count it with a finger of two hands, maybe less.
And then on the service providers, probably 15 to 20 that make a difference, right? And that’s why you need to find a balanced approach. I’m particularly targeting the tens of thousands of enterprise customers that now are now adopting a variety of AI models and more agentic approaches and while the value of the order transaction is much lower obviously, comes with a complete different margin profile. And what I’m pleased is that we now see the acceleration of that and a significant pipeline and our channel motion is actually an advantage for us. So you may end up obviously everybody think about what’s going to happen with the CapEx deployment in one segment of the market.
That may be slow down at some point, I don’t know, but right now it feels solid. And then a growth on enterprise, which will benefit our mix between the segments. And in between the sovereign, right, when you think about our sovereign, when it comes down to supercomputers, I think we win three out of four very easily. And then on top of that you add now this generative AI and you know like the University of Bristol or Japan ASD or many others that are coming through the pipeline and that’s where we find that balance for the server business. And in the meantime drive the refresh in the traditional compute, which has been very solid.
In fact we had again double digit year over year orders growth And ultimately now with Jan twelve, we have another great platform to transition the installed base to lower cost per core with more sustainability with 65% energy reduction.
Speaker: Thank you, Simon. Next question please.
Conference Operator: Your next question today will come from Amit Doudianani with Evercore. Please go ahead.
Paul Glaser, Head of Investor Relations, Hewlett Packard Enterprise2: I guess, Antonio, Marie, if I look at the fiscal twenty twenty five guide that you folks are giving out right now, it sort of implies that revenue growth will be close to double digits 9.5%, ten % in the back half of the year. And at the same time, I think you’re implying about $1 EPS in the back half. So that would, I think, mathematically get to about a two fifty basis points step up in operating margins in H2 versus the Q2 levels. Can you spend some time on what’s giving you the confidence that A, revenues will actually snap up this way? And then B, if the revenues are really going to snap up with AI servers, how do you get that sort of operating margin expansion in the back half of the year?
Speaker: Yes. So good afternoon. Let me take that one there, Amit. So first of all, in terms of the back half, you’re correct. We are very weighted in terms of both revenue and profitability in the back half, and it’s not that dissimilar to fiscal twenty twenty four.
Couple of things to bear in mind. As I said in my prepared remarks, we do see the timing of AI systems sort of moving into the back half as well. So that will drive some of the revenue to the point you just raised. And then secondly, I would say this in terms as you think about, profitability and the fact that I think we said in the prepared remarks, we do expect our server business to exit the year in around about the 10% range as well. The factors underpinning that are obviously three sort of critical areas.
One, the actions that Antonio referred to around server execution, you’ll see those impacts obviously they trough in Q2 and they will continue to flow through the P and L in Q3 and Q4. Secondly, we would have had time to mitigate tariffs, so that’s another contributor as well. And then third, we will see the impact of the cost efficiency program. So it’s really those three drivers that will sort of influence profitability. And then finally, like I said, just reiterating just the timing of AI systems, which really those deals as we’ve said in the past are very lumpy and they sort of obviously can drive a sort of different seasonality in terms of your quarterly revenue.
So bear all that in mind when you think about the guide, but it’s actually Q4 is really going to account for a higher percentage of our full year earnings compared to what you’ve seen in terms of some of our recent years.
Antonio Neri, President and Chief Executive Officer, Hewlett Packard Enterprise: I will add only one more thing to what Marie said, is the fact that our networking business will continue its recovery, right? Again, we talk about three consecutive quarters of sequential growth, supported by now double digits orders growth on a year over year basis. So this was the last quarter technically that we lapped the higher compares. And then from here on, right, we expect it to be in the mid single digits revenue growth for the balance of the year. So that’s why and that obviously comes with a completely different profile.
And as you know in Q1 we delivered 27% operating margins. And that’s a big opportunity for us. And that’s why we are also committed to the Juniper deal because the combination of two will accelerate the profit recovery later when the deal close in the back of probably Q4 and then obviously in 2026.
Speaker: Thank you for the question, Amit. Next question please.
Conference Operator: And your next question today will come from Sameet Chatterjee with JPMorgan. Please go ahead.
Paul Glaser, Head of Investor Relations, Hewlett Packard Enterprise3: Hi. Thanks for taking my question. Guess, Antonio Marie, you’re talking about the mitigation efforts that you’re doing in relation to the tariffs. I was curious how should I think about the sort of focus relative to supply chain flexibility versus pricing to mitigate the impact of tariffs, which one is sort of the bigger focus you are going into the back half? And particularly when it comes to pricing, how are you thinking about sort of the level of confidence in taking pricing, particularly when you’re mentioning certain end markets where discounting is more aggressive than you thought?
And how should we think about those sort of level of visibility or confidence into getting those pricing actions done without really impacting demand? Thank you.
Antonio Neri, President and Chief Executive Officer, Hewlett Packard Enterprise: Yes. So first of all, we have a very holistic and global supply chain, which allows us to mitigate some of the impact of the tariffs. We build products around the globe close to the customer, because obviously we need to be close to them to meet the turnaround times that they require. But we’re able to shift productions from one side to the other side, because of our flexibility that we have. Separately on the pricing side, no question, we will adjust pricing accordingly, while we continue to drive that working capital down per the comments Marie made, and therefore create more flexibility in our pricing as we manage discounting more tightly.
What I don’t know and this is best guess for everyone, what the overall tariffs increases and how that materialize in the end in the market will do to demand maybe in the second half of the year. But we are confident in our revenue guide that we provided, which I think one of your colleagues spot on, that 9.5% at the midpoint, which is very high for us, right, in the very, very high single digit, perhaps even double digits. And we feel good about that. It could impact maybe some aspects, but overall that range is very comfortable for us at this point in time.
Speaker: Thank you, Samek. Next question please.
Conference Operator: And your next question today will come from David Vaught with UBS. Please go ahead.
Paul Glaser, Head of Investor Relations, Hewlett Packard Enterprise4: Great. Thanks guys for taking my question. Marie, I thought I heard you say on the call the cost structure restructuring savings are in addition to the Juniper savings. So does that mean I couldn’t hear you clearly, but does that mean the savings that you’re announcing today impact more of the server storage side of the business and not Aruba and Intelligent Edge? Just trying to get a sense for how that layers in over the next couple of years.
And if that’s the case, is the $4.25 or $4.5 that you mentioned regarding Juniper all from the Juniper side of the from the transaction if it closes? Thanks.
Speaker: Yes, David. Hey, good afternoon. It’s Marie. So just to clarify, yes. So first of all, the Juniper at least $450,000,000 is completely tied to Juniper as a stand alone.
And then in terms of the $350,000,000 of gross annual run rate savings that we announced today, that actually ties to our current organization, our current company. So as I mentioned, we expect to achieve these numbers over the course of 2025 and 2026, and this is really much more focused around what I would describe as cost efficiency. And I think we mentioned in terms of eliminating around about 2,500 jobs inside the company as it is today. So think about them as sort of two separate initiatives and two separate plans.
Antonio Neri, President and Chief Executive Officer, Hewlett Packard Enterprise: Avi, this is very simple. We have the plan to close the transaction at the end of Q1. It is very disappointed that the DOJ decided to file a lawsuit, but if we had the plan also to announce what we felt was the opportunity to go forward to take incremental cost out. If you take the two programs together, it’s at least $800,000,000 but we have not closed the Juniper transaction. Therefore, we have to wait for that and we are committed to deliver at least $450,000,000 once the transaction closes.
In the meantime, we are moving forward with the $350,000,000 that Marie talked about it. And that’s why I think it’s the right time to do so. Also in the context what the market is expecting and what’s happening with tariffs and the like. And also what will happen to us in Q1, which we feel confident we will address. But think about the whole thing, it can be quite sizable, but in the meantime, we’re addressing the stand alone because that’s who we are.
Speaker: Very good. Thank you, David. Next question please.
Conference Operator: And your next question today will come from Michael Ng with Goldman Sachs. Please go ahead.
Paul Glaser, Head of Investor Relations, Hewlett Packard Enterprise5: Hi, good afternoon. Thank you very much for the question. And Tony, I just wanted to ask about the AI systems orders momentum throughout the quarter. The $1,600,000,000 implies a little bit of a slowdown in December and January after the $1,000,000,000 plus order in November. Has the demand environment for AI systems changed?
What have you seen during the quarter and then in the couple of months since? And if I could just ask Marie a quick follow-up on free cash flow. Anything other than the $250,000,000 of cash restructuring that impacts the outlook? Just wanted to see if there was anything unusual there. Thank you.
Antonio Neri, President and Chief Executive Officer, Hewlett Packard Enterprise: Yes. Thank you, Michael. I think you’re correct. I mean, obviously, we started strong in the quarter and then obviously vacations and the like. But remember, this is a lumpy business, right?
You may have strong spurs of demand happen in one month and then perhaps not so much the next month. But on aggregate, right, when you think about it, we booked $8,300,000,000 that was up double digits and we doubled it quarter over quarter. I think that’s the message, right? So our AI systems net orders in the quarter were twice as big as the Q4. That said, what I’m particularly proud of is the fact that the AI enterprise is strong and that to me is a testament that now customers are deploying the solutions, particularly in inferencing and the inferencing is where all the value gets realized.
And the pipeline remains multiples on every segment of the AI, whether it’s sovereign, enterprise AI or model builders and service providers.
Speaker: And just to clarify on the cash flow, the number four actually for $25,000,000 is $400,000,000 2 50 million dollars which comes from the cost efficiency program that we just announced. And we also have some carryover from prior period restructuring program. So that’s what gets you to $400,000,000 in terms of the cash flow that I did earlier.
Speaker: Thank you, Mike. Next question please.
Conference Operator: And your next question today will come from Matt Niknam with Deutsche Bank. Please go ahead.
Paul Glaser, Head of Investor Relations, Hewlett Packard Enterprise4: Hey, thanks so much for squeezing me in. I’m wondering, has the macro backdrop and specifically around tariff uncertainty, has that had any impact on customer purchasing or demand to date? And just in a similar vein, are you baking in any incremental softness from U. S. Fed as
Antonio Neri, President and Chief Executive Officer, Hewlett Packard Enterprise: a result of some of
Paul Glaser, Head of Investor Relations, Hewlett Packard Enterprise4: the Doge initiatives? Thank you.
Antonio Neri, President and Chief Executive Officer, Hewlett Packard Enterprise: Yes, thank you. No, so far, no. In fact, as we said in our prepared remarks, we have double digits order growth in all our business units. That’s true for networking, that was true for servers, that was true for AI systems, that was true for storage was actually triple digits and now the electric MP represent more than 50% of the mix. So demand was very, very strong.
We don’t see yet the full impact of the tariffs in the market. I think it will take another month or two. On the federal side, it depends on which agency you’re working with. So far not a significant slowdown, but remember the HP company provides core tech infrastructure for the Department of Defense and Department of Energy and many agencies that provide national security of sorts. And therefore, that has not been seen, but we’ll see what happen next.
Hard to predict at this point in time.
Speaker: Okay. Thank you, Matt. We are ready for our last question.
Conference Operator: And your last question today will come from Ananda Baruja with Loop Capital. Please go ahead.
Paul Glaser, Head of Investor Relations, Hewlett Packard Enterprise6: Hey, yes. Thanks, guys. Good afternoon. And Tony, just a quick question on Geni AI server mix as you guys are thinking about it for fiscal twenty twenty five. And I guess really what I’m interested in is any context on how much of what you’re looking at in the backlog pipeline would go into GreenLake versus the revenues in the traditional sales sense?
And then any sense of how your mix might change from SPs and model builders relative to enterprise and sovereigns? And that’s it for me. Thanks.
Antonio Neri, President and Chief Executive Officer, Hewlett Packard Enterprise: Yes. Thank you. When I think about enterprise AI, there is a big component that goes through the GreenLake because there is a subscription of the software to the GreenLake platform. All that software that we co engineer with NVIDIA, so that’s what we call NVIDIA computing by HPE is actually a subscription into the GreenLake platform with a CapEx on the infrastructure attached to it. Think about it that way.
While the growth is very nice and you saw the 40% growth in orders, it actually takes time to see it, right? And now remember, we have now $2,000,000,000 plus in AIR that you will be adding to it as we grow that installed base. But on the service providers or the model builders, those have been in at least in the last couple of quarters all CapEx purchases. And therefore, there is no GreenLake Flex offer associated at this point in time with that one. So that’s why it’s more CapEx on one and over time you have a CapEx plus a subscription on the other one.
Okay. Well, I think we are at the end of the call. Thank you for joining the call. Again, I will leave you with this. Number one is we delivered a solid quarter, but we could have executed better.
I’m really proud of the demand that we’ve seen. That tells me the innovation and the strategy is right, but ultimately we could have executed better in the server operating margin side where a couple of things were under our control and obviously we are committed to go fix that. Confident to return the normalized EPS by Q4 and the 10% server margin at the exit Q4. And then we took aggressive action on incremental costs that we can take out now and also we factor the tariff impact now, so you have one complete view of what fiscal year twenty twenty five looks like. And last but not least, we are totally committed to the Juniper deal.
We believe we have a very strong case and we expect to close that transaction in the second half of twenty twenty five. And the good news, at least there is a trial date now set for July 9, and we believe we have a compelling case to get the February ruling. Thank you for your time today, and hope to talk to you soon.
Conference Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
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