HPE Reports Record Sales and Growth

Hewlett Packard Enterprise reported results for the third fiscal quarter of 2025 on September 3, achieving record revenues of $9.1 billion, an 18% year-over-year increase, and completing its acquisition of Juniper Networks. Operating profits were driven by the new networking segment, which accounted for nearly 50% of consolidated operating profits, while adjusted earnings per share reached $0.44 and free cash flow recovered to $719 million.

The acquisition of Juniper reshapes HPE's network profile and margins

The inclusion of one month of results from Juniper Networks raised network revenue to $1.7 billion, a year-over-year increase of 54%, but the operating margin of the segment fell to 20.8% due to the lower margin profile of Juniper compared to HPE's traditional business. The call emphasized at least $600 million in projected cost synergies over the next three years, with $200 million expected for next year.

"We are now combining in a segment called networks. And the combined operating margins were twenty point eight. The Edge margin was 22.7, and we saw a sequential reduction mainly due to two factors: variable compensation expenses and product-related costs," explained Marie Myers, Chief Financial Officer.

The impact on margins confirms that while scale and revenue accelerate with the acquisition, investors should watch for short-term dilution as integration progresses.

AI and private cloud drive record growth in servers and recurring revenue

Server segment revenues reached a record high of $4.9 billion, a 16% year-over-year increase, driven by the rapid adoption of AI systems. Annualized recurring revenues were $3.1 billion, a 75% year-over-year increase, with over 44,000 GreenLake customers and a record AI portfolio of $3.7 billion at the end of the quarter.

"AI system orders increased by nearly 100% quarter over quarter. We have increased enterprise AI orders year over year in every quarter since the beginning of fiscal year 2024," stated Antonio Neri, CEO.

The discipline of cost and cash flow recovery reinforces the deleveraging plan

The company generated $719 million in free cash flow, aided by a sequential reduction of $1.9 billion in inventory. It ended the period with a pro forma net leverage ratio of 3.1x after the acquisition with Juniper, with the explicit intention of returning to a ratio of 2x by fiscal year 2027.

"Reducing inventory levels has been a key priority and we exited the quarter with our balance close to our normalized level. We remain committed to our investment-grade credit rating and intend to reduce our net leverage ratio back to our target in the range of 2x by 2027," Myers stated.

Perspectives

The management projected a revenue growth in constant currency of 14%-16% for fiscal year 2025 and raised the earnings per share expectations to $1.88-$1.92, incorporating four months of contributions from Juniper Networks. Revenue for the fourth fiscal quarter of 2025 is projected to be between $9.7 and $10.1 billion, with networking revenue expected to increase by more than 60% quarter-over-quarter, while server revenue is expected to decline by mid to high single digits, reflecting a sequential drop of more than 30% in AI systems revenue following a major deal in the third quarter. The management reaffirmed a target of approximately $700 million in free cash flow for fiscal year 2025.

I'm not entirely convinced about this acquisition. Although the numbers seem impressive, the drop in network margins could be problematic in the long run if they don't achieve the promised synergies. We'll have to see if they can really integrate these operations efficiently or if it will end up being another overvalued corporate merger.