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Hewlett Packard Ent (HPE -15%) is heading sharply lower following its Q1 (Jan) results last night. It was a rough report all the way around. HPE reported a slight EPS miss following eight consecutive beats. Revenue rose 16.3% yr/yr (+17% CC) to $7.85 bln, slightly better than expected. The bigger problem was the outlook as both Q2 (Apr) and FY25 guidance came in well below analyst expectations.

• HPE saw increased demand for servers, storage and networking products in Q1. Its +17% CC top line growth marked the fourth straight quarter of accelerated revenue growth. HPE posted double-digit growth in Server and Hybrid Cloud while Intelligent Edge also performed better than expected. However, HPE concedes it faced some challenges in the Server segment.
• Specifically, Server revenue was $4.3 bln (+30% CC). However, revenue fell sequentially primarily due to the timing of AI systems deals. In AI systems, HPE signed $1.6 bln in net orders and added enterprise and sovereign customers. However, most demand is still from model builders. HPE recognized roughly $900 mln of AI revenue, more than double last year, but down sequentially due to chip availability and customer readiness. HPE expects these factors will continue to affect its AI business.
• Margins were another problem area and helps explain the rare EPS miss. HPE saw yr/yr operating margin declines in both its Server and Intelligent Edge segments. Traditional servers were impacted by higher discounts due to aggressive pricing competition in the market. Server margins were further pressured by the higher-than-normal AI inventory caused by the rapid transition of demand to next-generation GPUs.
• HPE has already implemented aggressive actions to improve Server margins, including immediate actions to limit hiring, travel, and discretionary expenses. It also reduced its workforce to better align costs with demand. Nevertheless, HPE expects margin pressure to continue over the next 1-2 quarters.
• The company also provided an update on its pending acquisition of Juniper Networks (JNPR). As previously announced on Jan 30, the DOJ sued to block the deal. HPE believes the DOJ's analysis of the market is fundamentally flawed. The new information we got last night was that a trial date has been set for July 9. HPE believes it has a compelling case and expects to close the deal before the end of FY25.

Overall, this was a rough quarter for HPE. What really stood out was that the guidance was well below expectations. Specifically, we think investors are focusing on cautious comments relating to its AI systems. HPE cautioned that the AI systems business tends to be lumpy as large deals take time to convert. However, any weakness in AI is making people nervous. That was similar to what we heard from Marvell (MRVL) this week and fuels concerns that there may be an AI digestion problem this spring/summer. HPE expects significantly higher AI revenue conversion in 2H25, driven by the transition to Blackwell GPUs. However, investors are understandably nervous for now.