Enterprise technology company Hewlett Packard Enterprise (NYSE:HPE) fell short of the market’s revenue expectations in Q1 CY2025, but sales rose 5.9% year on year to $7.63 billion. Its non-GAAP EPS of $0.38 per share was 16.3% above analysts’ consensus estimates.
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Hewlett Packard Enterprise (HPE) Q1 CY2025 Highlights:
- Revenue: $7.63 billion (5.9% year-on-year growth)
- Adjusted EPS: $0.38 vs analyst estimates of $0.33 (16.3% beat)
- Adjusted Operating Income: $613 million vs analyst estimates of $549.5 million (8% margin, 11.6% beat)
- Revenue Guidance for Q2 CY2025 is $8.35 billion at the midpoint, above analyst estimates of $8.18 billion
- Management raised its full-year Adjusted EPS guidance to $1.84 at the midpoint, a 2.2% increase
- Operating Margin: -14.5%, down from 5.9% in the same quarter last year
- Annual Recurring Revenue: $2.25 billion at quarter end, up 47.2% year on year
- Market Capitalization: $23.24 billion
StockStory’s Take
Hewlett Packard Enterprise’s first quarter results reflected a mix of headwinds and operational improvements across its core segments, as management targeted execution issues in its server business and capitalized on expanding demand for AI-driven infrastructure. CEO Antonio Neri highlighted that the company “addressed the operational challenges we experienced in our service segment last quarter,” referencing the implementation of new pricing analytics and increased discount scrutiny. Growth was led by higher AI system revenue, improved performance in the Intelligent Edge segment, and robust adoption of the hybrid cloud platforms, particularly the HPE Alletra MP storage transition and GreenLake cloud services. CFO Marie Myers noted that the company also made significant progress with its cost reduction program, which included workforce reductions and organizational streamlining.
Looking ahead, management’s guidance is anchored by anticipated improvements in server profitability, ongoing strength in AI and hybrid cloud demand, and incremental benefits from structural cost actions. Neri stated, “We continue to capitalize on the mega trends reshaping the IT industry across networking, AI, and hybrid cloud,” and expects further margin recovery in the server segment as corrective actions take hold. The company anticipates a less pronounced impact from tariffs, continued scaling of its annual recurring revenue, and additional product launches in AI and networking. Myers emphasized a focus on balancing investments in innovation with disciplined cost management, cautioning that macroeconomic and trade policy uncertainties remain potential headwinds for the remainder of the year.
Key Insights from Management’s Remarks
Management attributed the quarter’s performance to stronger AI systems revenue, momentum in hybrid cloud and Intelligent Edge, and operational changes aimed at improving server margins.
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Server margin remediation: Management implemented new pricing analytics, tighter discount controls, and inventory management to address previous execution issues in the server segment. These steps are expected to result in server operating margins recovering to approximately 10% by year-end.
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AI systems and backlog growth: The company highlighted over $1 billion in recognized AI systems revenue, an increase from the prior quarter, and a $3.2 billion AI systems backlog. Growth was attributed to enterprise and sovereign customer demand for AI infrastructure, with management noting a “multiples of our backlog” in the pipeline.
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Hybrid cloud and storage momentum: The HPE Alletra MP storage platform experienced high double-digit growth, with orders for Alletra MP growing over 75% year over year for four consecutive quarters. The transition to a subscription model is currently a revenue headwind but is expected to support long-term profitability.
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Intelligent Edge recovery: Intelligent Edge returned to revenue growth after five quarters, benefiting from improved demand in networking and the introduction of new Wi-Fi 7 solutions. Channel inventory levels remained healthy, and data center and campus switching orders saw double-digit growth.
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Cost reduction and organizational changes: The company executed a cost reduction program, including a 5% workforce reduction and the launch of the “Catalyst” initiative to streamline operations and leverage AI for internal efficiency. Myers described these efforts as “accelerating our reporting cycles by approximately 50% and reducing processing costs by an estimated 25%.”
Drivers of Future Performance
Management expects ongoing AI and hybrid cloud momentum, server profitability improvements, and disciplined cost actions to drive results, though macroeconomic and trade policy uncertainties remain significant factors.
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AI and hybrid cloud demand: Management projects continued high demand for AI systems and hybrid cloud solutions, especially as enterprise and sovereign clients expand deployments. The company’s integration with NVIDIA’s new GPUs and AI software partnerships are expected to further expand market opportunities.
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Server margin recovery: The server segment’s profitability is expected to improve as pricing and discounting controls, inventory management, and cost actions take full effect. Management reaffirmed the target for server operating margins to approach 10% by year-end, supported by the rollout of new server generations and improved backlog conversion.
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Operational efficiency and cost control: The “Catalyst” initiative, including workforce reductions and AI-driven process improvements, is expected to deliver incremental cost savings and improved agility. Management cautioned that ongoing trade policy changes and macroeconomic volatility could affect both demand and margins.
Catalysts in Upcoming Quarters
In coming quarters, the StockStory team will monitor (1) the pace of server margin recovery and execution on cost reductions, (2) sustained growth in AI systems and hybrid cloud platforms as new product launches roll out, and (3) the closing and integration of the Juniper Networks acquisition. Other important indicators include annual recurring revenue expansion and signs of stabilization in the networking and Intelligent Edge segments.
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