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Unwavering demand for AI systems pushed Hewlett Packard Enterprise (HPE +10%) past analyst earnings and sales expectations in Q4 (Oct). Even though the server, storage, and networking systems provider projected Q1 numbers only in line with consensus, management expressed bullishness on 2025, commenting that multiple tailwinds should contribute to solid revenue growth. As a result, shares are soaring to a new record high, a roughly +50% move following a sell-off on Q3 (Jul) performance in early September.

• In typical fashion, HPE exceeded bottom-line estimates by a few pennies, delivering adjusted EPS of $0.58, an 11.5% jump yr/yr. Non-GAAP gross margins compressed by 390 bps yr/yr to 30.9% due to a record contribution from AI systems revenue (AI-related server offerings carry lower margins than traditional offerings) and a lower mix of Intelligent Edge sales. However, due to expense reductions, non-GAAP operating margins climbed by 140 bps yr/yr to 11.1%.
• HPE's top line accelerated for the third consecutive quarter, leaping by 15.1% yr/yr to $8.46 bln, cruising past HPE's $8.10-8.40 bln forecast. HPE's Server segment primarily underpinned its strong performance, growing by double-digits yr/yr for the third straight quarter at 31% to $4.7 bln. AI systems and traditional servers both supported the impressive gains. AI systems backlog swelled to over $3.5 bln exiting Q4 while traditional server order growth topped double-digits for the third quarter in a row.
• Hybrid Cloud, which combines on-premises data center and public cloud networking and storage, experienced an 18% pop in revenue yr/yr to $1.6 bln, substantially above HPE's prediction of a slight increase. Private Cloud and the ongoing ramp of Alletra MP contributed to the outperformance in the quarter. Financial Services also gained, inching 2% higher to $893 mln. Financing volumes ballooned by 41% to a new all-time high of $2.1 bln, led by robust demand for more investment capacity to deploy AI and accelerate cloud adoption.
• The laggard in Q4 remained Intelligent Edge, which endured a 20% drop in revs yr/yr to $1.1 bln. However, HPE is still optimistic that this business is on a path to recovery as customers have already mostly digested excess inventories. Furthermore, HPE is noticing more large deals in its pipeline.
• Looking toward next quarter, HPE anticipated some stagnation sequentially, targeting adjusted EPS of $0.47-0.52 and revenue growth in the mid-teens percentage yr/yr. An ongoing recovery in Intelligent Edge primarily contributes to the potentially flatlining growth next quarter. Meanwhile, a greater shift toward AI servers may boost revenue but take a bite out of margins.

After cautious comments surrounding certain clients and geographies last quarter, HPE squashed lingering fears with its Q4 report as numbers indicated further recovery progress. As AI shows no signs of slowing, HPE is capitalizing on a secular tailwind that it anticipates will fuel further growth in 2025. Meanwhile, HPE expects its previously announced acquisition of Juniper Networks (JNPR) to close in early 2025, which is consistent with its previously stated timeframe. Adding JNPR should further enhance HPE's overall portfolio, given the similarities between the two organizations.