HPE's server sales grew 32% in the fourth quarter, reaching 4.71 billion dollars, with an adjusted gross margin of 30.9%, lower than the average estimate of 31.1%. HPE's chief financial officer stated that competition in the traditional server and AI systems market is very intense, "AI server sales are putting pressure on profit margins."
The demand for ai servers is strong, and HPE's quarterly revenue exceeded expectations, but due to fierce market competition, the profit margin was below expectations.
HPE, a company spun off from hp inc that focuses on computer hardware and storage devices, reported total revenue growth of 15% in its fourth fiscal quarter ending October 31, reaching $8.46 billion, exceeding analysts' average expectation of $8.26 billion; eps was 58 cents, higher than the average expectation of 56 cents from Wall Street.
HPE's performance was primarily driven by server revenue, which surged as demand for training new ai models skyrocketed. The financial report indicated that the company's ai system revenue grew by 16%, reaching $1.5 billion, while server sales rose by 32%, reaching $4.71 billion, slightly below analysts' average estimate of $4.76 billion, with an adjusted gross margin of 30.9%, down from the same period last year and also below the average estimate of 31.1%.
In post-market trading, HPE's stock price fell slightly by 0.23% to $21.65. As of Thursday's close, the stock has risen 28% this year.
Investors are increasingly concerned about profit margins since ai servers incorporate expensive nvidia GPUs.
HPE's chief financial officer, Marie Myers, stated during a conference call that competition in the traditional server and ai system markets is intense, saying, "Sales of ai servers are putting pressure on profit margins, and the company is focusing on simplifying its cost structure and closely managing discretionary spending."
However, HPE's chief executive officer Antonio Neri told the media that HPE has strict disciplinary management in customer segmentation and pricing, and the company is conducting its ai business in a "disciplined manner" so that it can maintain growth without competing on price, thus avoiding a reduction in profitability.
The revenue growth for HPE in the quarter also depends on the recovery of the company's hybrid cloud division. After several quarters of decline, the division's revenue grew by 18% year-on-year and 22% quarter-on-quarter. Neri stated that the drivers of growth are new customers and the return of existing customers.
However, hybrid cloud has the lowest pre-tax profit margin among HPE's divisions, remaining in the single digits. Meanwhile, its network division, which has the highest profit margin, experienced a 20% decline in sales over the year.
Some investors are concerned that the rapid changes in HPE's revenue composition may impact profitability.
Edward Jones analyst Dave Heger told the media, "The gross margin has declined year-on-year, which is closely related to the product mix. But they are indeed strictly managing operation expenses to maintain the operating profit margin."
