Record networking and AI server demand pushed order growth well past revenue growth last quarter, and HPE's own executives say component shortages, not softening demand, are the reason the gap hasn't closed.
Hewlett Packard Enterprise reported fiscal third quarter revenue of $12.2 billion, up 34 percent from a year earlier, and adjusted earnings of $1.11 a share, the first time the company has topped $1 in adjusted profit in a single quarter. Over the first nine months of its fiscal year, HPE has grown revenue 31 percent to $32.2 billion and swung to $2.6 billion in GAAP net profit from a $118 million loss a year earlier, when the company was absorbing costs tied to its Juniper Networks acquisition.
Networking revenue jumped 75 percent to $2.9 billion last quarter, powered by a 270 percent surge in routing revenue, a 112 percent increase in data center networking, and 76 percent growth in security products, with the core Campus and Branch business up 31 percent, a segment built substantially on the Juniper deal. Cloud and AI, HPE's larger segment, grew 25 percent to $9.0 billion, with server revenue up 35 percent to $6.8 billion and storage revenue up 10 percent to $1.3 billion. The smaller Financial Services unit, which finances customer equipment purchases, slipped slightly to $903 million, while Corporate Investments and Other grew just 3 percent. Gross margin reached 40.1 percent on a GAAP basis, up nearly 11 percentage points from a year earlier, and adjusted operating margin reached 16.2 percent company wide, up more than seven and a half percentage points. Operating cash flow rose to $1.6 billion and free cash flow to $1.0 billion, both up from the prior year period.
HPE raised its full year adjusted profit forecast to $3.75 to $3.85 a share, up from its prior forecast of $3.35 to $3.45, and guided fourth quarter revenue to $13.9 billion to $14.8 billion. It also introduced a fiscal 2027 framework calling for 13 to 17 percent revenue growth, up from an 8 to 12 percent range previously, and free cash flow of at least $5 billion.
Shares fell about 4 percent in after hours trading, to roughly $49.70, from a regular session close of $51.83.
The stock reaction sits awkwardly next to a results package built almost entirely of records, and the explanation both raises and complicates the growth story at once. Orders grew 42 percent last quarter while revenue grew 34 percent, a gap chief executive Antonio Neri and finance chief Marie Myers both tied to constraints on the supply side rather than softening demand. Myers told analysts that shortages of DDR5 and DDR4 memory, NAND flash, and wafer capacity are limiting how quickly HPE can convert its order backlog into recognized revenue. AI systems orders rose more than 30 percent sequentially, she said, while the AI systems backlog reached a new high, up 14 percent from the prior quarter. Cumulative networking orders tied to AI infrastructure reached $2.2 billion, already past the company's full year target, prompting HPE to raise that target to $2.5 billion to $3 billion. “Demand is far outstripping supply,” Myers said.
A backlog growing faster than the revenue used to fill it can be read two ways. It can mean demand is durable enough that HPE keeps beating its own guidance as supply catches up, or it can mean the eventual conversion of that backlog carries execution risk tied to a component market outside HPE's control. Myers gave investors a specific reason to expect some near term cost either way, telling analysts gross margin should moderate toward more historical levels as the AI systems mix grows, with operating margin likely to moderate further in the fourth quarter as that mix shift continues.
Neri said the company's integration of Juniper Networks, a year after the deal closed, has its cost synergies “ahead of schedule,” and that networking order bookings and revenue reached record levels “despite supply constraints.” HPE returned $324 million to shareholders in the quarter and said it plans to return 75 percent of free cash flow to shareholders in the fourth quarter.
HPE's next quarter, and whether the order backlog behind its raised targets actually converts into revenue at the pace management is promising, is the test that will settle which reading of this quarter's results holds up.