HPE raises outlook after record revenue & AI demand

HPE reported record third-quarter revenue of USD $12.2 billion and raised its outlook for fiscal 2026 and fiscal 2027.

Revenue rose 34% from a year earlier, while GAAP operating profit increased 464% and non-GAAP operating profit climbed 155%.

Net earnings also exceeded HPE's expectations. GAAP diluted earnings per share were USD $1.06, up USD $0.85 from the prior-year period, while non-GAAP diluted earnings per share reached USD $1.11, up USD $0.67 and above the company's forecast range.

Cash generation improved during the quarter. Cash flow from operations rose to USD $1.6 billion from USD $1.3 billion a year earlier, while free cash flow increased to USD $1.0 billion from USD $0.8 billion.

Shareholder returns totalled USD $324 million through dividends and share repurchases. The board also declared a regular cash dividend of USD $0.1425 per share.

Demand for networking and artificial intelligence infrastructure was a key driver of the quarter, lifting orders and pushing HPE's backlog to a record level.

"HPE's strategy is proving itself again this quarter. Our results demonstrate the durability of our profitable growth momentum. We delivered record revenue, orders, and profitability, fueled by surging customer demand across our portfolio," said Antonio Neri, President and Chief Executive Officer of HPE.

"AI is becoming a multi-year growth driver for HPE, and our differentiated portfolio positions us to capture that opportunity at scale," Neri said.

Segment growth

Networking was the fastest-growing major business in the quarter. Revenue in that division reached USD $2.9 billion, up 74.9% from a year earlier, while its operating profit margin was 22.0%, broadly unchanged from 22.1%.

Within networking, routing posted the strongest growth. Revenue from routing jumped 270.0% to USD $788 million, while data centre networking more than doubled to USD $382 million. Security revenue rose 75.6% to USD $281 million, and campus and branch revenue increased 31.0% to USD $1.4 billion.

Cloud and AI remained the largest division by revenue. Sales rose 25.4% to USD $9.0 billion, and the segment's operating profit margin climbed to 17.0% from 7.0% a year earlier.

Within Cloud and AI, server revenue increased 35.3% to USD $6.8 billion, while storage revenue rose 10.2% to USD $1.3 billion. Financial Services revenue slipped 0.3% to USD $0.9 billion.

Corporate Investments and Other reported revenue of USD $278 million, up 3.0%, with an operating profit margin of negative 24.1%, compared with negative 7.0% a year earlier.

Margins improve

Profitability strengthened across the group. GAAP gross margin was 40.1%, up 1,090 basis points from a year earlier, while non-GAAP gross margin was 40.4%, up 1,050 basis points.

Operating margin also widened. GAAP operating profit margin reached 11.4%, up 870 basis points year on year, while non-GAAP operating profit margin rose 770 basis points to 16.2%.

Marie Myers, HPE's Executive Vice President and Chief Financial Officer, attributed those gains to demand and execution.

"Our outstanding revenue performance and expanded profitability in the third quarter reflect robust demand across our portfolio and consistent, disciplined execution," said Marie Myers, Executive Vice President and Chief Financial Officer of HPE.

"With our Q3 results and our order backlog at a record level, we are raising our financial outlook and plan to return at least 75% of free cash flow to shareholders in Q4," Myers said.

Higher outlook

For the fourth quarter, HPE forecasts revenue of USD $13.9 billion to USD $14.8 billion. It expects GAAP diluted earnings per share of USD $1.12 to USD $1.22 and non-GAAP diluted earnings per share of USD $1.20 to USD $1.30.

HPE raised its full-year revenue growth outlook to 34% to 37% and lifted its networking revenue growth forecast to 73% to 74%.

It now expects full-year GAAP diluted earnings per share of USD $2.93 to USD $3.03, and non-GAAP diluted earnings per share of USD $3.75 to USD $3.85. Free cash flow guidance was also increased to at least USD $3.75 billion for the year.

Beyond the current year, HPE also raised its fiscal 2027 framework. It now expects revenue growth of 13% to 17%, non-GAAP diluted earnings per share growth of 16% to 20%, non-GAAP operating margin of 14% to 15%, and free cash flow of at least USD $5.0 billion.

The updated figures suggest HPE is relying on networking strength and AI infrastructure demand to drive both revenue growth and margin improvement, with networking approaching a quarter of group revenue after its sharp sales acceleration.