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Hewlett Packard Enterprise (HPE -7%) is heading lower following its Q3 (Jul) results last night. HPE reported solid but not huge EPS upside. What stood out more was the strong revenue upside, as revenue rose 10.1% yr/yr to $7.71 bln. This was HPE's first double-digit revenue growth quarter since Q1 of last fiscal year and HPE grew revenue sequentially in each segment. The Q4 (Oct) guidance was in-line although the mid-point of revs was above consensus.

• HPE says its impressive growth benefitted from a notable acceleration of AI systems revenue conversion. The co described Q3 as demonstrating HPE's ability to deliver results despite a dynamic macro environment. HPE concedes that some customers remain cautious and are prioritizing mission-critical projects. However, HPE is encouraged by the recovery in enterprise demand in North America followed by modest improvement across other geographies.
• The overall demand environment this quarter has improved. HPE saw sequential and yr/yr order growth but with some geographic variation. Demand was strong in North America, Asia Pacific, Japan, and India, while Europe and the Middle East lagged. HPE is aggressively going after opportunities presented by better market conditions.
• HPE believes it's well-positioned for the AI opportunity. This quarter, it grew AI systems revenue approximately 40% sequentially as it continues to win deals with both model builders and sovereigns. It's also well-positioned to address enterprise AI demand. HPE is encouraged by the early and strong customer response to its Private Cloud AI offering which it expects to drive AI adoption in the enterprise.
• In traditional servers, HPE is seeing signs of a recovery as both demand and revenue increased sequentially. Finally, HPE said results were solid in networking, it's seeing improving sequential demand in WLAN, data center networking and switching along with continued growth in security and services. All of this keeps it optimistic heading into Q4.
• In terms of its pending acquisition of Juniper Networks (JNPR), HPE remains excited to significantly expand its networking business. HPE explains that the acquisition of this high-margin business will accelerate its edge-to-cloud vision with a full networking IP stack from silicon to infrastructure, to the OS, to security to software. The deal remains on track to close in late calendar 2024 or early calendar 2025.

Overall, there were some notable positives from this report, namely the upside EPS/revs and solid guidance. However, HPE also talked about some weakness/caution among some clients and some geographies. It also talked about a competitive AI server market. Also, during the Q&A, analysts asked a number of questions about AI server margins, which are lower than traditional servers. AI now accounts for 30% of server revenue vs 10% a year ago, so there seemed to be some concern there.