HPE Sees ‘Accelerating’ Demand For AI Systems, Shares Soar 15 Percent

Hewlett Packard Enterprise is seeing accelerating demand for AI systems with revenue in that segment more than doubling sequentially to over $900 million in the most recent quarter, sending shares soaring by 15 percent Tuesday.

“Demand for HPE’s AI systems is accelerating at a faster pace, and our solid execution enabled us to more than double our AI systems revenue sequentially to over $900 million, helped by supply chain conversion through improved GPU availability,” said HPE CEO Antonio Neri in a conference call with analysts.

Key to the strong AI systems revenue performance was improved availability of Nvidia’s H100 GPUs, which were in short supply and now are available in six- to 12-week lead times depending on order size and complexity, said Neri.

“We expect this will provide a lift to our revenues in the second half of the year,” said Neri. “Enterprise customer interest in AI is rapidly growing, and our sellers are seeing a rapid level of engagement.”

In fact, Neri said enterprise orders now make up more than 15 percent of cumulative AI systems orders, with the number of enterprise AI customers nearly tripling year over year. Cumulative AI system orders overall increased to $4.6 billion.ADVERTISEMENT

“As these engagements continue to progress from the exploration and discovery phase, we anticipate additional acceleration in enterprise AI systems orders through the end of the fiscal year,” said Neri.

The strong AI results sent shares of Spring, Texas-based HPE up 15 percent in after-hours trading, or $2.69 per share, to $20.29.

In an interview with CRN ahead of the conference call, Neri said that AI systems revenue had “solid profitability,” with HPE’s focus on “profitable growth through business discipline” combined with “services attach.”

The AI systems profitability appeared to be in sharp contrast to HPE rival Dell Technologies, Round Rock, Texas, which last week reported that orders for AI-optimized servers grew $900 million quarter over quarter but suffered a 15 percent drop in shares on May 30 after hours following the release of its financial results due to questions about the profitability of that business.

On May 31, Dell shares closed down 18 percent, or $30.36, to $139.56

Toni Sacconaghi, managing director and senior research analyst at Bernstein, in fact, asked on the Dell conference call if there was zero operating margin in AI servers.

Dell CFO Yvonne McGill said the company has looked at the AI-optimized servers as “margin rate dilutive and margin dollar accretive.”

Server Sales Also Strong

Besides the strong AI systems performance, HPE also reported that server revenue sales were up 18 percent to $3.9 billion with an 11 percent operating margin.

HPE Executive Vice President and CFO Marie Myers said HPE sees AI as a “long-term driver of our financial results and as a pillar of our strategy to pursue higher growth, higher margin revenues.”

As a result of the strong results, HPE is raising guidance for the full fiscal year, with sales now expected to be up one to three percent, up from zero to two percent. In addition, HPE is raising its non-GAAP diluted net EPS by three cents to $1.85 to $1.95.

Even with raising the guidance, HPE said it expects the shift from networking to AI systems to impact gross margin with fiscal 2024 non-GAAP gross margin now expected to be below full year expectations of 35 percent.

To balance that gross margin shift, HPE is driving “further simplicity and efficiency,” including accelerating generative AI initiatives, said Myers.

In fact, HPE plans to use HPE large language generative AI models and chatbots for its sales and services reps, said Myers. “Prudent cost management, simplified processes and disciplined execution across cycles are key tenets of our long-term journey toward higher margins,” she said. “These cost actions will be evident in the financial results of the second half of fiscal 2024. We now expect fiscal year 2024 Opex to be down modestly from fiscal 2023 Opex.”

Overall, HPE reported both sales and earnings above expectations for its second fiscal quarter, ended April 30.

Sales for the quarter were $7.2 billion, up three percent from $6.75 billion in the year-ago quarter. The Zacks consensus estimate was $6.83 billion.

Non-GAAP diluted net earnings per share for the quarter was 42 cents per share, down 19 percent from the year-ago quarter, but above the Zacks consensus estimate of 38 cents per share.

Partner Enablement Will Be Key To HPE AI Success

Terry Richardson, chief revenue officer of Portsmouth, N.H.-based Blue Mantis, No. 148 on the 2024 CRN Solution Provider 500, said he was heartened by HPE’s full-court press on the enterprise AI opportunity and ProLiant Gen11 systems.

“HPE sees the customer interest in AI and is doing a lot to capitalize on that market opportunity with partners on the enterprise and commercial opportunity,” he said. “It’s great to see HPE put a focus on AI workloads on ProLiant and not just focusing on Cray large generative AI models or hyperscalers. Enterprise AI is going to be a sweet spot for the channel.”

Ultimately, Richardson said the key to success in the channel for HPE and other vendors is going to rest on how “they embrace the channel with enablement to drive AI partner scale.”

HPE, for its part, has already initiated a new AI Partner Ready Vantage pilot program with a select group of hand-picked partners that will take the lead on capturing the massive AI market opportunity.

Hewlett Packard Enterprise Worldwide Channel and Ecosystem Leader Simon Ewington has told CRN in a recent interview that the company has a “broad” AI channel strategy that will lead to opportunities for all of HPE’s partners.

“There will be opportunities for AI with all of our partner community irrespective of the skills and capabilities they have today or where they are on their own AI journey,” said Ewington.

C.R. Howdyshell, CEO of Advizex, a Fulcrum IT Partners company which has made significant AI solution investments and is staking out a position as a hybrid AI leader, said the HPE results show once again the strong demand for AI solutions from customers.

“This is the biggest opportunity I have seen in my 20-plus years in the channel,” he said. “Customers have a craving for education and trusted partners that can cut through the FUD (fear, uncertainty and doubt) when it comes to AI.”

Advizex, for its part, has invested heavily in a vertical market hybrid AI solutions offensive and has even named one of its top executives, Steve Kucker, a 26-year sales superstar, as its first vice president and general manager for high performance compute and AI.

Cleveland-based Advizex already has a $50 million to $70 million AI solutions sales pipeline, said Howdyshell. Key to closing that sales pipeline is support from Advizex OEM partners, including HPE, he said.

“You need creativity and flexibility to get these deals done,” he said. “A lot of them are high-risk deals where support from our OEM partners is critical.”

CPP Associates, one of HPE’s top enterprise partners based in Clinton, N.J., is also seeing a strong appetite among customers for AI solutions, said CPP General Manager and Managing Partner Pat O’Dell.

In fact, CPP recently held an AI and security event that had record attendance, said O’Dell. “There’s a lot of interest in our HPE and Nvidia AI solutions,” he said.

O’Dell is expecting double-digit HPE sales growth this year and potentially even triple-digit sales growth. “We are seeing one of the biggest sales pipelines for HPE in our 15-year history,” he said.

“We continue to see GreenLake momentum and a lot of interest in AI and security,” he said. “There is also pent-up demand from some customers who put off investing in infrastructure and are now looking at refreshing that infrastructure.”

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