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    HPE
    Earnings call· Jan 2025(Q1 FY25)

    Hewlett Packard Enterprise Co HPE

    Mar 6, 2025 Source

    Executive summary

    Hewlett Packard Enterprise Company Q1 FY25 — Strong Revenue Growth Amidst Server Margin Pressures and Strategic AI Ramp

    HPE delivered strong Q1 FY25 revenue growth, particularly in its Server business and GreenLake ARR, demonstrating robust demand for its innovation and AI offerings. However, profitability was significantly impacted by unexpected server margin pressures and AI inventory challenges, which the company is actively addressing. Strategic cost reductions and tariff mitigation plans are in motion, with a strong recovery in profitability and AI revenue conversion anticipated in the second half of the fiscal year, alongside continued commitment to the Juniper acquisition.

    Highlights

    5

    • Q1 revenue grew 17% year-over-year, marking the fourth consecutive quarter of accelerated growth.

    • Server business revenue increased 30% year-over-year, driven by strong demand.

    • Intelligent Edge segment recorded 2% quarter-over-quarter revenue growth, exceeding expectations and showing double-digit orders growth in all major regions.

    • GreenLake Annual Recurring Revenue (ARR) surpassed $2.1 billion, up 46% year-over-year.

    • Booked $1.6 billion in new AI system orders in Q1, bringing cumulative AI system orders to $8.3 billion, with backlog up 29% quarter-over-quarter to $3.1 billion.

    Concerns

    5

    • Server operating margin was well below expectations at 8.1% due to traditional server pricing issues and higher AI inventory.

    • Non-GAAP gross margin declined 680 basis points year-over-year to 29.4% due to server mix and margin pressures.

    • Free cash flow was negative $877 million in Q1, and Q2 is expected to be the weakest cash generation quarter.

    • Tariffs are expected to impact Q2 EPS by $0.04, with a full-year impact of $0.07.

    • Financing volumes decreased 14% year-over-year to $1.2 billion in Financial Services.

    Guidance & targets

    23
    CategoryTargetConfidence
    Full-year FY25 Constant Currency Revenue Growth
    7% to 11%
    high materiality
    High
    Full-year FY25 Currency Impact on Revenue
    around 150 basis points
    medium materiality
    High
    Full-year FY25 Intelligent Edge Revenue Growth
    mid-single digits
    medium materiality
    High
    Full-year FY25 Hybrid Cloud Revenue Growth
    high single digits
    medium materiality
    High
    Full-year FY25 Server Revenue Growth
    low double-digit growth
    high materiality
    High
    Full-year FY25 Non-GAAP Gross Margin
    below 30%
    high materiality
    High
    Full-year FY25 Non-GAAP Operating Margin
    around 9% at the midpoint
    high materiality
    High
    Full-year FY25 Hybrid Cloud Operating Margin
    mid- to high single digits
    medium materiality
    High
    Full-year FY25 Intelligent Edge Operating Margin
    mid-20% range
    medium materiality
    High
    Full-year FY25 Server Operating Margin
    around 10% exiting the year
    high materiality
    High
    Full-year FY25 OI&E Net Expense
    approximately $15 million
    low materiality
    High
    Full-year FY25 GAAP Diluted Net EPS
    $1.15 and $1.35
    high materiality
    High
    Full-year FY25 Non-GAAP Diluted Net EPS
    $1.70 and $1.90
    high materiality
    High
    Full-year FY25 Free Cash Flow
    approximately $1 billion
    high materiality
    High
    Q2 FY25 Revenue
    $7.2 billion and $7.6 billion
    high materiality
    High
    Q2 FY25 Intelligent Edge Operating Margin
    mid-20% range
    medium materiality
    High
    Q2 FY25 Hybrid Cloud Revenue
    down slightly sequentially
    medium materiality
    High
    Q2 FY25 Hybrid Cloud Operating Margin
    mid-single digits
    medium materiality
    High
    Q2 FY25 Server Revenue
    sequential decline in the mid- to high single digits
    high materiality
    High
    Q2 FY25 Server Operating Margin
    mid-single digits
    high materiality
    High
    Q2 FY25 GAAP Diluted Net EPS
    $0.08 and $0.14
    high materiality
    High
    Q2 FY25 Non-GAAP Diluted Net EPS
    $0.28 and $0.34
    high materiality
    High
    Q2 FY25 Free Cash Flow
    weakest cash generation quarter
    high materiality
    High

    Segment performance

    4
    SegmentRevenueYoYQoQMargin
    Server
    Revenue fell sequentially due to timing of AI systems deals. Operating margin was well below expectations due to greater-than-expected market pressures and execution issues in traditional compute pricing and AI inventory management. Gen11 accounts for majority of traditional compute sales.
    AI Systems Net Orders: $1.6 billionAI Systems Revenue: $900 millionAI Systems Backlog: $3.1 billionAI Systems Backlog QoQ Growth: 29%Enterprise AI Orders YoY Growth: 40%
    		$4.3 billion30%down sequentially8.1% operating margin
    Intelligent Edge
    Exceeded expectations, with sequential growth ahead of guidance. Year-over-year decline as the company moves past post-pandemic related backlog. Expected to return to year-over-year growth in Q2. Operating margin improved sequentially due to higher revenue and cost controls.
    Operating Margin QoQ Change: +300 bpsSASE Growth: double-digit YoYData Center Switching Growth: double-digit YoYOrders Growth (Wireless LAN & Campus Switching): notableOrders Growth (all major regions): double-digit YoY
    		$1.1 billion-4%2%27.4% operating margin
    Hybrid Cloud
    Saw broad-based strength in revenue. Sequentially declined after an exceptional Q4. Alletra MP platform is ramping nicely, benefiting from higher deferred revenue. Operating margin improved year-over-year due to cost controls.
    Alletra MP New Logos: 150+Alletra MP Orders Growth: triple-digit YoYAlletra MP % of IP Block Product Orders: >50%Operating Margin YoY Change: +300 bps
    		$1.4 billion11%-12%7% operating margin
    Financial Services
    Generated solid revenue and operating margin. Financing volumes decreased after a record high last quarter.
    Financing Volumes: $1.2 billionFinancing Volumes YoY Change: -14%Q1 Loss Ratio: 0.6%Return on Equity: 16.4%Operating Margin YoY Change: +90 bpsOperating Margin QoQ Change: +20 bps
    		$873 million2%flat9.4% operating margin

    Operational metrics

    12
    Revenue Growth
    17%YoY
    Q1 FY25

    Fourth consecutive quarter of accelerated revenue growth.

    Non-GAAP Gross Margin
    29.4%-680 bps YoY, -150 bps QoQ
    Q1 FY25

    Impacted by a higher mix of Server revenue and lower contribution from Intelligent Edge, along with Server challenges.

    Non-GAAP Operating Margin
    9.9%-160 bps YoY, -120 bps QoQ
    Q1 FY25

    Primarily due to headwinds in gross margin, partially benefited from a 9% decrease in non-GAAP operating expenses.

    Non-GAAP Operating Expenses as % of Revenue
    19%down from 22% in FY24, 24% in FY23
    Q1 FY25

    Achieved a record low due to cost-saving measures.

    GAAP Diluted Net EPS
    $0.44above guidance of $0.31 to $0.36
    Q1 FY25

    Exceeded guidance due to a gain on sale of CTG and lower Juniper-related costs.

    Non-GAAP Diluted Net EPS
    $0.49within guided range of $0.47 to $0.52
    Q1 FY25

    Within the guided range for the quarter.

    Inventory
    $8.6 billionup $767 million QoQ
    Q1 FY25 end

    Increased primarily to support AI systems orders signed during the quarter.

    Cash Conversion Cycle
    positive 5 daysup 17 days from last quarter
    Q1 FY25

    Primarily due to increased inventory for AI systems, partially offset by timing of vendor payments.

    Capital Returned to Shareholders (Dividends)
    $171 million
    Q1 FY25

    Returned through dividends.

    Capital Returned to Shareholders (Share Repurchases)
    $52 million
    Q1 FY25

    Returned via share repurchases.

    Tariff Impact on FY25 EPS
    $0.07
    FY25

    Reflects best estimate of net impact from tariff policy and mitigation plans.

    Tariff Impact on Q2 FY25 EPS
    $0.04
    Q2 FY25

    The hardest part of the tariff impact is expected to be borne in Q2, primarily in the Server business.

    Industry KPIs

    8
    MetricValueDetails
    Capital return FCF$171 million dividends; $52 million share repurchases; -$877 million FCFUSD
    Unit shipments ASPGen11 accounts for majority of traditional compute sales
    Gross margin drivers29.4%%
    Services peripheral attach$2.1 billionUSD
    Component supply constraints—
    Installed base refresh runwayOne Gen12 server can replace up to 26 Gen9 servers and up to 14 Gen10 serversunits
    Ai server orders revenue backlog$1.6 billion new orders; $900 million revenue; $3.1 billion backlogUSD
    Revenue mix by end market segmentServer: $4.3B; Intelligent Edge: $1.1B; Hybrid Cloud: $1.4B; Financial Services: $873MUSD

    Orderbook & backlog

    2
    AI Systems Orders (Cumulative)$8.3 billionQ1 FY25
    AI Systems Backlog$3.1 billionQ1 FY25 end

    up 29% QoQ

    Pipeline remains multiples of backlog; expected significantly higher revenue conversion in H2 FY25.

    Product announcements

    3
    ProductTypeDetails
    HPE VM Essentials softwarelaunch
    HPE Alletra MPupdate
    ProLiant Gen12 server platformlaunch

    Deals & partnerships

    3
    Juniper NetworksProposed acquisition to enhance competition in the networking market.

    DOJ filed a lawsuit seeking to block the acquisition, trial date set for July 9. HPE and Juniper remain fully committed to the transaction.

    KDDIDesigned and implemented a platform for developing, training, and tuning Japanese generative AI models.

    Partnership to develop domain-specific use cases for generative AI.

    AccentureCollaborating on a new agentic AI solution for procurement.

    Solution powered by Accenture AI Refinery with HPE's Private Cloud AI offering, to be deployed across HPE's category and sourcing strategies, spend management, strategic relationship analysis and contract obligation management.

    Capital programs

    1
    Workforce Reduction and Cost Efficiency Programunderwayat least $350 million
    Start: Q1 FY25

    Benefit: gross annual savings

    Plan to reduce employee base by 5% (~2,500 positions) over 12-18 months. Approximately 20% of savings expected by end of FY25. Total cash charges around $350 million through FY26. These savings are in addition to Juniper acquisition synergies.

    Risks & headwinds

    5
    Server Operating Margin PressureQ1 FY25, expected to continue for 1-2 quarters

    Q1 operating margin at 8.1%, well below expected 10-11%

    Mitigation: Implemented aggressive actions including rigorous discount framework, increased deal mix scrutiny, and inventory reduction. Expect Server operating margin to be around 10% by Q4 FY25.

    Higher AI InventoryQ1 FY25, expected to take 1-2 quarters to resolve

    Higher-than-normal AI inventory

    Mitigation: Implemented actions to reduce inventory, expecting improvement as supply and demand align and older GPU inventory is consumed by sovereign and enterprise customers.

    Tariff ImpactFY25, with Q2 being the trough

    $0.07 EPS impact for FY25, with $0.04 in Q2 FY25

    Mitigation: Leveraging global supply chain to mitigate aspects of the impact, with pricing adjustments also expected. Mitigation plans are in place to reduce impact in H2 FY25.

    DOJ Lawsuit against Juniper AcquisitionTrial date July 9, 2025

    DOJ filed lawsuit to block acquisition

    Mitigation: HPE and Juniper remain fully committed to the transaction, believing they have a compelling case and expect to close before end of FY25.

    Weakest Free Cash Flow QuarterQ2 FY25

    Q2 FY25 expected to be weakest cash generation quarter

    Mitigation: Lower earnings combined with investments in the AI business are headwinds. Full-year FCF expected to be approximately $1 billion.

    What to watch in Q2 FY25

    5

    Server Operating Margin Recovery

    Q2 FY25 (trough), Q3 FY25, Q4 FY25
    Current8.1%
    Targetmid-single digits (trough), improving towards 10% by Q4 FY25

    Why it matters

    Server margin recovery is crucial for overall profitability and reflects the effectiveness of corrective actions against pricing and inventory issues.

    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.

    Q&A highlights

    6

    How much of the Q1 Server operating margin shortfall was due to CPU pricing challenges versus AI GPU inventory/pricing?

    The original Q1 guidance for Server margins (10-11%) anticipated some impact from AI GPU transitions. However, the magnitude of this impact was greater than expected, and the pricing challenges in traditional compute were unanticipated and contributed significantly to the shortfall.

    “what I would say was unanticipated was the pricing challenges that we experienced in traditional compute. That was not in our Q1 guide.”

    asked by Meta Marshall · answered by Marie Myers

    2 min read6 chapters

    Detailed Narrative

    01

    Server Segment Challenges and Mitigation

    HPE's Server segment experienced significant operating margin pressure in Q1 FY25, falling to 8.1% against an expected 10-11%. This was attributed to unanticipated aggressive pricing competition and discounting in traditional compute, as well as higher-than-normal AI inventory due to the rapid transition to next-generation GPUs. Management acknowledged execution issues related to inventory valuation and has implemented aggressive actions, including a more rigorous discount framework and inventory reduction, aiming for Server operating margins to recover to around 10% by Q4 FY25.

    02

    AI Systems Momentum and Future Conversion

    Demand for AI systems remains strong, with HPE booking $1.6 billion in new orders in Q1 FY25, bringing cumulative AI system orders to $8.3 billion. The backlog increased 29% quarter-over-quarter to $3.1 billion. While Q1 AI revenue was $900 million, management expects significantly higher conversion in the second half of FY25, driven by the transition to Blackwell GPUs. Enterprise AI orders grew 40% year-over-year, indicating increasing adoption beyond model builders and service providers.

    03

    Intelligent Edge and Hybrid Cloud Performance

    The Intelligent Edge segment exceeded expectations with 2% sequential revenue growth and is poised for year-over-year growth in Q2 FY25, supported by double-digit orders growth across all major regions. Hybrid Cloud revenue grew 11% year-over-year, with the Alletra MP platform seeing triple-digit orders growth and representing over 50% of IP block product orders. GreenLake ARR surpassed $2.1 billion, up 46% year-over-year, highlighting its role as a key differentiator for hybrid cloud and AI workloads.

    04

    Strategic Cost Actions and Juniper Acquisition Update

    HPE announced plans to reduce its employee base by 5% (~2,500 positions) over 12-18 months, targeting at least $350 million in gross annual savings by FY27, with $70 million expected by the end of FY25. These actions are separate from and in addition to the anticipated $450 million in synergies from the proposed Juniper Networks acquisition. The DOJ has filed a lawsuit to block the Juniper deal, with a trial date set for July 9, but HPE remains fully committed and expects to close the transaction before the end of FY25.

    05

    Tariff Impact and Mitigation Strategies

    New US tariffs on imports from Mexico, Canada, and China are expected to impact HPE's Server business. The company is implementing mitigation strategies, including leveraging its global supply chain flexibility and pricing adjustments. Management estimates a $0.07 EPS impact for FY25, with $0.04 of that concentrated in Q2, which is expected to be the trough for Server operating margins and free cash flow due to the timing of📎 tariff implementation and corrective actions.

    06

    Innovation and Product Portfolio Expansion

    HPE continues to innovate, launching new vertical solutions for retailers in Intelligent Edge and introducing HPE VM Essentials software for cost-effective virtualization. The Alletra MP portfolio now supports various data workloads, including AI. In the Server business, the new ProLiant Gen12 server platform was launched, featuring quantum-resistant security and direct liquid cooling, offering significant sustainability benefits and performance improvements over previous generations.

    AI-generated summary of the company’s earnings call. Not investment advice.