Strong demand for servers leads to significant sales growth for HPE, but intense competition causes a decline in gross margin

AI server demand is strong, and HPE's quarterly revenue exceeded expectations, but due to intense market competition, profit margins fell short of expectations.

The financial report from HPE, a computer hardware and storage device company spun off from HP, shows that for the fourth fiscal quarter ending October 31, total revenue grew by 15% to $8.46 billion, surpassing the average analyst expectation of $8.26 billion; earnings per share were $0.58, higher than the Wall Street average expectation of $0.56.

HPE's performance was primarily driven by server revenue, which soared as demand for training new artificial intelligence models surged. The financial report indicates that the company's AI systems revenue grew by 16% to $1.5 billion, and server sales increased by 32% to $4.71 billion, although slightly below the average analyst estimate of $4.76 billion. The adjusted gross margin was 30.9%, down from the same period last year and below the average estimate of 31.1%.

After hours 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.

As AI servers include NVIDIA's expensive GPUs, investors are increasingly concerned about their profit margins.

HPE Chief Financial Officer Marie Myers stated during a conference call that competition in the traditional server and AI systems market is very intense, "AI server sales are putting pressure on margins, and the company is focused on simplifying its cost structure and closely managing discretionary spending."

However, HPE CEO Antonio Neri told the media that HPE has strict discipline in customer segmentation and pricing, the company is conducting its AI business "in a disciplined manner," allowing it to maintain growth without having to compete on price, thus cutting into profitability.

The quarterly revenue growth for HPE also relied on the recovery of its hybrid cloud division. After several quarters of decline, this division's revenue grew by 18% year-over-year and 22% quarter-over-quarter. Neri stated that the growth was driven by new customers and the return of existing customers.

However, the hybrid cloud division has the lowest pre-tax profit margin among HPE's divisions, remaining in the single digits. In contrast, its highest-margin networking division saw sales shrink by 20% over the year.

Some investors are concerned that the rapid changes in HPE's revenue composition may affect profitability.

Edward Jones analyst Dave Heger told the media: "The year-over-year decline in gross margin is largely related to the product mix. But they are indeed managing operating expenses tightly to maintain operating margins."