HPE falls after topping estimates and lifting outlook

Hewlett Packard Enterprise (NYSE: HPE ) stock fell in premarket trading on Thursday after the company reported fiscal third-quarter results that topped Wall Street expectations and raised its full-year outlook.

Revenue rose 34% year over year to $12.2 billion, exceeding the $11.91 billion Street estimate.

Adjusted operating profit more than doubled to $2 billion, while adjusted earnings per share of $1.11 surpassed the consensus estimate of 93 cents.

Strong demand for artificial intelligence and networking drove record order bookings, with orders growing faster than revenue amid ongoing supply constraints.

Normalized orders surged 42%, outpacing revenue growth.

Record bookings pushed HPE’s backlog to an all-time high, although fulfillment remains constrained by limited supply.

Adjusted gross margin topped 40%, but management expects margins to moderate toward historical levels as AI systems account for a larger share of the business and traditional server margins normalize.

Inventory rose to $11.8 billion at the end of the quarter, both sequentially and year over year, reflecting higher commodity costs and targeted purchases to support stronger orders and backlog.

HPE returned $324 million to common shareholders during the quarter, including $189 million in dividends and $100 million in share repurchases.

The company ended the quarter with net leverage of 1.8 times, below its 2-times target, after receiving approximately $1.4 billion from H3C transactions and repaying a term loan.

HPE plans to retire $1.25 billion of notes later this month following the sale of its telco solutions business.

Hewlett Packard Business Performance Networking revenue rose 10% on a normalized basis to $2.9 billion, while orders jumped 36%, about 3.5 times faster than revenue.

Data center networking revenue fell 6% because of shipment timing, while strong hyperscaler and NEO cloud demand pushed networking backlog to a record.

Networks-for-AI orders reached $2.2 billion, exceeding HPE’s fiscal 2026 target and prompting the company to raise its year-end goal to $2.5 billion-$3 billion.

HPE also more than doubled networking purchase commitments sequentially to secure supply.

Cloud and AI revenue reached a record $9 billion, up 25%, while server revenue rose 35% sequentially as higher average selling prices offset supply-constrained volumes.

AI Systems orders increased more than 30% sequentially to $2.4 billion, while backlog rose 14% to a record level.

AI Systems revenue was nearly $1.6 billion, with fourth-quarter revenue expected to improve as backlog converts.

Cloud and AI operating margin rose 460 basis points sequentially to 17% in the third quarter but is expected to moderate to the mid-teens in the fourth quarter.

Supply Constraints Limit Demand Fulfillment HPE’s CEO said ongoing supply constraints continue to limit the company’s ability to meet increased customer demand.

The CEO expects server demand to remain exceptionally strong, with HPE’s pipeline at multiples of its current backlog.

HPE’s CFO said that after the quarter ended, the company secured a multibillion-dollar server deal with a hyperscaler customer.

The company expects AI Systems revenue to improve sequentially in the fourth quarter, driven by the timing of backlog conversion.

Hewlett Packard Guidance Raised HPE expects fiscal fourth-quarter adjusted EPS of $1.20-$1.30, above the $1.07 analyst estimate.

Revenue is projected at $13.9 billion-$14.8 billion, compared with the $12.961 billion consensus estimate.

Total operating margin is expected to decline sequentially in the fourth quarter, mainly because of a higher mix of AI Systems and pricing factors.

HPE expects fourth-quarter networking revenue to grow 11%-13%, supported by stronger orders and improved supply-chain conversion.

Cloud and AI revenue is projected to increase 60%-72%.

For fiscal 2026, HPE raised its adjusted EPS outlook to $3.75-$3.85 from $3.35-$3.45, above the $3.43 estimate.

The company also increased its revenue guidance to $45.957 billion-$46.986 billion from $44.242 billion-$45.614 billion, compared with the $44.944 billion analyst estimate.

The guidance increase reflects continued growth in AI infrastructure investments and strategic partnerships, including an expanded collaboration with Oracle Corp. (NYSE: ORCL ).

HPE expects free cash flow of at least $3.75 billion in fiscal 2026 and plans to return at least 75% of fourth-quarter free cash flow to shareholders.

For fiscal 2027, HPE expects revenue growth of 13%-17%, including networking growth of 14%-17% and Cloud and AI growth of 14%-18%.

Operating profit is projected to rise 14%-18%, with an operating margin of 14%-15%.

Networking margin is expected to remain in the mid-to-high 20% range, while Cloud and AI margin is projected at approximately 13%.

HPE expects fiscal 2027 operating expenses to decline as variable compensation normalizes, while Catalyst transformation efficiencies and Juniper integration synergies provide additional savings.