Strategic shift toward edge, hybrid cloud and AI delivers solid results in Q3

AUGUST 29, 2023 • BLOG POST • ANTONIO NERI, PRESIDENT AND CEO

IN THIS ARTICLE

  • HPE increased Q3 revenue, gross margin, and earnings per share year-over-year
  • Results driven by intentional shift to higher-growth, higher-margin parts of our portfolio
  • Exceptional performance in the Intelligent Edge and HPE GreenLake fueled performance
  • Demand grew sequentially across all key  business segments, led by interest in AI and HPE GreenLake

Revenue growth and gross margin expansion driven by outstanding peformance in Intelligent Edge and HPE GreenLake

Today, HPE reported third quarter financial performance, and I am pleased that we have delivered another solid quarter. In an IT market that is still pressured in some areas, we again increased our revenue, gross margin, and earnings per share, year-over-year. Our results are being driven by our intentional, ongoing shift to higher-growth, higher-margin parts of our portfolio. We delivered exceptional performance in the Intelligent Edge, where revenue set its fifth consecutive quarterly record, and HPE GreenLake, which has helped generate higher recurring revenue and gross profit across our product segments. Demand for our products and services grew sequentially in the third quarter across all business segments – driven by high-growth areas like AI and HPE GreenLake. 

Highlights from the quarter include:

 

  • HPE grew revenue 3.5%(1) year-over-year to $7.0 billion.

  • Non-GAAP gross margin(2) rose 120 basis points year-over-year to 35.9%, very close to the record level we achieved in the second quarter.

  • Higher profitability resulted in a 2% year-over-year increase in non-GAAP diluted net earnings per share(2) to 49 cents.

  • We generated $955 million dollars in free cash flow – an increase of nearly $370 million year-over-year.

  • We once again raised non-GAAP diluted net EPS guidance for the full fiscal year.

Driving financial performance through HPE GreenLake 

Our strategic shift toward edge, hybrid cloud and AI delivered through our HPE GreenLake platform is working, generating higher recurring revenue and gross profit– driven by the increased mix of high-margin software and services. In Q3, HPE GreenLake delivered an annualized revenue run-rate (ARR)(3) of $1.3 billion, a 48%(1) increase year-over-year. As we grow our ARR, we are also increasing its share of high-margin software and services, which comprised 68% of our total ARR mix, up two percentage points from last quarter.

HPE GreenLake continues to attract new customers – and compel existing customers to expand their contracts, with the platform now supporting 27,000 unique customer logos and 3.4 million connected devices. HPE GreenLake orders rose 122% year-over-year, resulting in a nearly $1.5 billion increase in as-a-service total contract value (TCV)(4) since last quarter. Our cumulative booked TCV now stands at nearly $12 billion. 

These results demonstrate the relevance of our HPE GreenLake value proposition of providing one unified hybrid-cloud experience to empower customers to access, analyze and extract value from their data – no matter where it lives – at the edge, in their colos or datacenter, or in the public cloud. 

Exceptional performance in the Intelligent Edge

HPE’s performance in the Intelligent Edge segment was particularly noteworthy in the quarter.  Revenue increased 53%(1) year-over-year and contributed 20% of our total company revenue. Operating profit more than doubled in another exceptional quarter for this business; it is now the largest source of HPE’s operating profit, at 49% of our total segment operating profit(2).

We are gaining share, benefiting from improved availability of supply, higher shipment volume, and a strong response to our SaaS edge offerings in terms of both demand and revenue. Momentum in Intelligent Edge was consistent around the globe, with revenue increasing by double digits year-over-year in all regions in the third quarter. 

Wave of demand in HPC & AI

We continue to see strong interest in our AI and supercomputing offerings from enterprise customers who are incorporating artificial intelligence into their businesses. This is translating into significantly higher demand for our HPC & AI business segment, as customers choose HPE for our unique end-to-end AI value proposition. As a result, we exited the quarter with the largest HPC & AI order book we have ever had. Our AI momentum has also helped grow our total HPE order book, which is now at more than two times pre-pandemic levels, driven by exceptional customer demand for our AI solutions.

Only HPE can combine our unique AI software and Slingshot networking fabric, HPE Services offerings, and market-leading sustainable supercomputers, which power unprecedented levels of performance for AI at scale. Our open ecosystem of AI suppliers is also an advantage for customers, who are turning to us for a full spectrum of enterprise AI workloads and use cases – spanning large-scale model development, training and inferencing.

We are seeing AI projects generate exciting results on our supercomputers. For example, the HPE-built LUMI supercomputer, the fastest system in Europe and third fastest in the world, has enabled generative AI projects, such as creating the world’s largest Finnish language model, and has helped researchers apply AI for early detection of diagnosis of breast and prostate cancers.

And we continue to make progress in ushering in the era of exascale supercomputing, which enables unprecedented scale and performance for larger AI models, such as generative AI. This quarter, HPE, in collaboration with Lawrence Livermore National Laboratory, started to build and test El Capitan, one of the largest upcoming exascale supercomputers. El Capitan, which is expected to reach 2 exaflops of peak performance, will allow researchers to apply AI to advance U.S. national security and make breakthroughs in medical and drug research initiatives. 

Shift to software- and services-rich businesses delivers for shareholders

Our third quarter performance demonstrates the progress we have made to shift our portfolio to higher-growth, higher-margin areas that are the most critical to customers as they continue to transform. Our pivot to software- and services-rich businesses has led to greater recurring revenue, margin, earnings per share, and free cash flow. 

Despite a slowdown in some parts of the IT industry, our HPE team has executed our strategy, bringing differentiated innovation and a diverse portfolio to our customers around the globe. This positions us to continue to win in the market and deliver for our shareholders. 

1 Adjusted to eliminate the effects of currency. A description of HPE’s use of non-GAAP financial information is provided in the earnings presentation at https://Investors.hpe.com.
2 Reconciliation of specific adjustments to GAAP results for the current and prior periods and description of HPE’s use of non-GAAP financial information are included in the earnings presentation at https://Investors.hpe.com. 
3 For definition of as-a-Service orders and ARR, please refer to the earnings presentation at https://Investors.hpe.com.
4 Total Contract Value (TCV) represents the total value of one-time and recurring revenue for the period defined by the contract.

 

This blog contains forward-looking statements subject to risks; results could differ materially. For more cautionary language regarding forward-looking statements, refer to the earnings presentation at investors.hpe.com.

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