Hewlett Packard Enterprise Co ($HPE) Q2 2026 Earnings Call

Good day and welcome to the fiscal 2026 second quarter Hewlett Packard Enterprise earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touchtone phone. To withdraw your question, please press star and then two. Please note this event is being recorded. I would now like to turn the conference over to Paul Glazer, head of investor relations. Please go ahead, sir.

Good afternoon. I am Paul Glazer, head of investor relations for Hewlett Packard Enterprise. I would like to welcome you to our fiscal 2026 second quarter earnings conference call with Antonio Neri, HPE's president and chief executive officer, and Marie Meyers, HPE's chief financial officer. Before handing the call to Antonio, let me remind you that this call is being webcast. A replay of the webcast will be available shortly after the call concludes. We have posted the press release and the slide presentation accompanying the release on our HPE investor relations web page. Elements of the financial information referenced on this call are forward-looking and are based on our best view of our business and the external factors affecting us as we see them today. HPE assumes no obligation and does not intend to update any such forward-looking statements. We also note that the financial information discussed on this call reflects estimates based on information available at this time and could differ materially from the amounts ultimately reported in HPE's quarterly report on Form 10-Q for the fiscal quarter ended April 30, 2026. Figures used in verbal remarks are rounded for ease of discussion. For more detailed information, please see the earnings materials as well as disclaimers relating to forward-looking statements that involve risks, uncertainties, and assumptions. Please refer to HPE's filings with the SEC for more detailed discussion of these risks. For financial information that we are showing on a non-GAAP basis, we have provided reconciliations to the comparable GAAP information on our website. Please refer to the tables and slide presentation accompanying today's earnings release on our website for details. Throughout this conference call, all revenue growth rates, unless noted otherwise, are presented on a year-over-year basis. Unless otherwise noted, all financial metrics and growth rates discussed today are non-GAAP and EPS refers to non-GAAP diluted net earnings per share. Certain financial information featured in the presentation today has been normalized to include Juniper Networks' results as of the beginning of HPE's fiscal 2025. Antonio and Marie will reference our earnings presentation in their prepared comments. With that, let me turn it over to Antonio.

Thank you, Antonio, and good afternoon, everyone. I'm pleased with our outstanding second quarter results. We exceeded our commitments, delivering record revenue and EPS driven by disciplined execution and a strong demand environment. A large backlog, favorable industry tailwinds, and improved demand visibility support a higher growth outlook. In addition, we are achieving catalyst cost savings and Juniper synergies ahead of schedule. As a result, we are increasing our fiscal 2026 EPS outlook by over 40%. I will address the drivers behind the strong EPS and free cash flow outlook shortly. But first, let's take a look at our Q2 performance. Revenue of $10.7 billion was above the high end of our guidance range, led by traditional server as customers accelerated investments in agentic AI and AI inferencing, and by networking where we saw broad-based growth across the portfolio. Sequentially, revenue grew 15%, reflecting higher average selling prices within our server business driven by ongoing DRAM and NAND inflationary costs and supply constraints. We continue to work with our partners to secure long-term agreements while executing the pricing actions we discussed last quarter. Gross margin improved to 36.9%, driven by mix as we shape demand to higher-margin products. Catalyst savings and Juniper-related synergies also contributed to improvement on a year-over-year basis. Operating profit was $1.44 billion, above our expectations, representing a 13.3% operating margin. As the company scales and we continue to capture accelerated catalyst cost savings and Juniper synergies, we expect operating profit growth to continue to outpace our top line. EPS was $0.79, well above the high end of our guidance. GAAP EPS was $0.44. We delivered Q2 free cash flow of $915 million, fueled by strong operating profit. Now let's turn to our segment results. Networking delivered another solid quarter. Revenue of $2.7 billion was up 10% on a normalized basis as growth accelerated. Our backlog continues to grow given elevated demand and supply constraints, and this is reflected in the greater than 40% sequential growth we saw in our purchase commitments. We continue to see strong demand for our networks for AI portfolio and now expect cumulative orders to reach at least $2 billion by fiscal year-end 2026. Within our product categories, campus and branch normalized revenue growth accelerated to 10%, anchored by large deals across multiple industries. Security growth accelerated to 18%, benefiting from improved backlog conversion and solid in-quarter demand. Data center networking and routing grew 6% and 9% respectively, reflecting robust networks for AI demand. We are optimistic about the demand momentum we are seeing based on our growing pipeline across customer verticals. Service provider revenue grew 13% and enterprise grew 9% on a normalized basis. Our AI-native self-driving network solution is clearly resonating as customers prioritize AI use cases and simplify their network operations. Network operating margin of 21.6% was in line with guidance, reflecting improved operating leverage as Juniper synergies continued to ramp. The sequential decline in margin reflected two factors: first, Q1 benefited from certain one-time items; and second, Q2 absorbed higher variable compensation expense. We remain focused on disciplined execution, operational efficiencies, and synergy realization to improve profitability and expand margins in the second half and beyond. Moving to Cloud and AI, we delivered revenue of $7.7 billion, up 23%. Strong order activity and pass-through of higher costs on new orders in traditional server and storage drove the upside, partially offset by supply constraints and timing of AI server shipments. Financial services continues to perform well. Scale benefits drove operating profit of nearly $1 billion, up 48% sequentially and triple digits year-over-year, pushing operating margin to 12.4%, up 220 basis points sequentially. Server revenue increased 33% as ASP growth in traditional server more than offset supply-constrained unit volumes. Demand remained broad-based as orders more than doubled year-over-year and increased strong double digits sequentially. We see accelerating demand in high-memory configured servers targeted at agentic AI workloads, supporting our expectation of sustainable growth. AI systems orders of $1.8 billion were more balanced and broad-based this quarter. Demand is expanding beyond AI server factories into broader AI workloads like orchestration, data movement, and agentic AI. Service provider orders exceeded the combined total of its prior four quarters, underscoring the inherently lumpy nature of our large-scale AI deals. Our backlog increased nearly 20% sequentially to a new high, and our pipeline remains multiples of our backlog. We continue to expect AI revenue to improve in the back half of the year, now peaking in Q4. Storage revenue grew 2%, driven by strong orders, the ongoing mix shift towards high-value owned IP, and disciplined pricing execution. Alletra MP customer migration momentum accelerated sequentially, driving triple-digit year-over-year growth in both orders and revenue. Continued demand strength in private cloud and our expanding backlog are driving improved revenue visibility. Lastly, financial services revenue was up 6% and generated an all-time high in return on equity, exceeding 30%. Turning to our catalyst initiatives and Juniper synergies, I'm pleased that we are running ahead of plan as we work on a range of programs to reduce cost of sales and OpEx across our business. As a result of these programs, at quarter end, we reported an employee base of just over 65,000, the lowest level at which we have operated as a combined company, and reflecting an over 9% decline since both programs began. Within Juniper, we continue to focus on the four pillars we laid out at SAM. Phase one of the integration, which we completed in January, focused on reducing overlapping corporate functions and optimizing sales and service organizations. As our Mist and Aruba portfolios converge, we expect to optimize our R&D spend. In addition, we plan to continue to leverage overall HPE scale to improve commodity prices and consolidate our vendor footprint to drive savings through supply chain integration. Finally, regarding customer support, we intend to leverage scale and digital capabilities inherited from Juniper to further improve efficiency and the customer experience. We expect to exceed our annual target of $200 million by the end of fiscal year 2026. I'm pleased with our progress on catalyst and we are ahead of plan. Workforce transformation continues to drive the majority of our savings, and Gen AI-enabled process simplification now represents nearly 20% of our fiscal 2026 initiative savings. We are leaning into Gen AI to increase productivity and reduce costs across the organization, including customer support, HR, and marketing. Our teams are driving greater automation, redefining work management, and reducing costs. We are also rationalizing our global lab footprint by more than two-thirds and reducing our contractor base and supply chain customer service by over 90% through targeted consolidation. Taken together, we are building a leaner, more efficient organization and delivering meaningful benefit to our operating margin. Turning to free cash flow, we delivered operating cash flow of $1.4 billion. Free cash flow totaled $915 million in Q2, bringing our first half fiscal 2026 total to $1.6 billion, about 75% above our prior comparable period high reported in fiscal 2021. Our cash conversion cycle improved by two days from Q1, driven primarily by an increase in days payable due to higher purchases to support future shipments. This was offset by an increase in days of inventory due to higher inventory in anticipation of second half AI server shipments. Days receivable increased by 5 days from the prior quarter due to strong revenue performance towards the end of the quarter. Inventory ended the quarter at $9 billion, up year-over-year and sequentially, supporting second half AI installations and targeted commodity purchases. We remain committed to our capital allocation strategy. During Q2, we returned $343 million to shareholders, including $189 million in common dividends and $154 million via share repurchases. We refinanced $2 billion of debt, received gross proceeds of approximately $1.4 billion after closing our previously announced H3C transaction last month, and used cash on hand to retire our term loan. We expect the net impact will reduce annual net interest expense by approximately $75 million. Importantly, we improved our pro forma net leverage ratio to 2.3 times at quarter end, down from 2.6 times last quarter. Turning to guidance, we are raising our outlook on the back of Q2 results and greater visibility into the second half demand environment. Starting with Q3, we expect total revenue will be between $11.5 and $12.1 billion, driven by strong demand. For networking, we expect revenue to grow 73% to 78% year-over-year on a reported basis, or approaching 10% on a normalized basis. We expect revenue performance and synergy realization to help offset the impact of inflationary component costs, driving an operating margin rate in line with our full-year guidance. In Cloud and AI, we expect revenue to grow in the high teens, reflecting demand durability, elevated pricing, and improved AI systems revenue. We expect operating margins to be in the low to mid-teens. On a consolidated basis, we expect Q3 total operating expense to increase sequentially, supporting seasonal marketing expense and networking R&D investments. We expect our operating margin rate to be up on a sequential basis driven by improved operating leverage. Consequently, we expect EPS between $0.88 and $0.93, and GAAP EPS between $0.84 and $0.89. For fiscal year 2026, we are raising our EPS outlook range to $3.35 to $3.45. We are also raising our GAAP EPS range to $2.42 to $2.52. We are making the following updates to our outlook. We are raising our full-year consolidated revenue growth to 29% to 33% on a reported basis, or high teens on a normalized basis. We are also raising our full-year consolidated operating profit growth outlook to 80% to 85% on a reported basis. For Cloud and AI, we expect server demand and pricing to remain durable, driving sustainable revenue growth. Consequently, we are raising our full-year Cloud and AI revenue growth to the low 20% range from our prior mid-to-high single-digit range, driven by higher ASPs in our traditional server business and improved AI systems revenue. We are also raising our operating margin rate outlook to low-to-mid teens. We are raising our full-year networking revenue growth to 72% to 75% on a reported basis, or approaching 10% on a normalized basis, reflecting accelerated business performance as our integration efforts take hold. We are lowering our OI outlook to a range of $420 to $460 million, reflecting lower net interest expense expectations. Lastly, we are increasing our free cash flow outlook to at least $3.5 billion, up from our prior outlook of at least $2 billion. We are confident in our new fiscal 2026 outlook as we see continued order momentum in the business. Thus far in Q3, based on the durability of demand we are seeing in our results, we are providing an initial framework for fiscal 2027. We see sustained secular tailwinds driving consolidated revenue growth of 8% to 12%, with a similar range for both of our networking and Cloud and AI segments. Our outlook assumes an acceleration in AI systems revenue growth. We see improved operating margins of 12% to 16% for the company and expect to see a year-over-year reduction in operating expense. We forecast networking margin in the mid-to-high 20% range driven by scale, mix, and synergies, with Cloud and AI operating margin in the range of 10% to 15% depending on the mix of AI business and the pace of catalyst savings. We expect revenue growth and operating leverage to deliver EPS growth of 12% to 16% and free cash flow of at least $4.5 billion. Our outlook is expected to enable faster debt paydown. As a result, we now expect to reach our two times net leverage goal by the end of fiscal year 2026, one year ahead of schedule. Once we reach our leverage target, we expect to return at least 75% of free cash flow to our shareholders via dividends and share repurchases. To close, Q2 was an outstanding quarter for HPE. We scaled the business, expanded margins, and generated significant free cash flow. We raised our outlook and are building a stronger, more profitable HPE. I'm confident in our ability to create long-term value for our shareholders. With that, I'll turn the call back to the operator to begin the Q&A.

Any time your question has been addressed and you would like to withdraw your question, please press star and then two. In the interest of time, please limit yourself to one question. We will now pause momentarily to assemble the roster. The first question will come from Assia Merchant with City. Please go ahead.

Great. Thank you for taking my question and outstanding results and guidance. Marie and Antonio, folks are kind of talking about enterprise budgets just given the price inflation that you guys are seeing through and being passed through. Where do you see enterprise budgets still sustaining themselves? Obviously your guide you're now into fiscal year 27. Thank you very much for that as well. Many people are concerned that there is some kind of demand cliff that you could see even past the more near-term outlooks and growth forecasts that you're seeing. What gives you this confidence to now provide fiscal year 27 guide? If you could help us understand, I see it's between networking as well as cloud and AI. What gives you the confidence that you're seeing in being able to provide an early outlook into 27? That would be great. Thank you.

Thank you, Assia. Next question please.

The next question will come from Wamzy Mohan with Bank of America. Please go ahead.

Yes, thank you. Really impressive set of results here and guide. Antonio, can you give us maybe some rough mix of the opportunity that you see? You mentioned scale up, scale out, scale across, especially as you look into fiscal 27. How do you see that evolve? And if I could, Marie, the growth in free cash flow is well in excess of EPS for 27. Hoping you might be able to share some color on the drivers of that. Thank you so much.

Yeah, no, absolutely. So, Wamzy, I'll answer your question on the strong free cash flow guide for 27. It's pretty simple. It's really just based around the expectations that we have of the operating profit growth and obviously that supports higher profitability and that's translating frankly into cash flow. And just one other thing to bear in mind, our 26 baseline actually has the charges associated with the Juniper synergies which obviously you're not going to see that level of magnitude repeated in 27. So that's also one of the benefits that's playing into the free cash flow guide. Just to close, as I said in my prepared remarks, that'll get us to 2x leverage by the end of 26. And I think I mentioned that we will pull in our share repo now into early 27 as well. So I just want to close with that comment.

Very good. Let's please limit questions to one per analyst. Next question, please.

The next question will come from Amit Dariani with Evercore. Please go ahead.

I can't ask a multi-part question after Paul just called us out on that, I guess now. So maybe I'll stick to one. Antonio, this may sound like a bit of a silly question, but given these numbers are so strong, especially when I look at the fiscal 27 guide, can you just talk about what's the bigger gating factor to growth as you go forward? Is it customer demand or is it more component availability? I'm really trying to understand whether the outlook reflects the level of demand you're actually seeing today or is there actually additional demand that could be served if component supply and availability becomes a bit easier? Just love to understand on the component side what's going on. Thank you.

Thank you, Amit. Next question please.

The next question will come from Katherine Murphy with Goldman Sachs. Please go ahead.

Thank you for the question. Can you talk more about the improved AI systems outlook that you talked to and if there's anything you can share on the demand outlook across customer types and if expectations for AI systems profitability are improved relative to 90 days ago? Thank you.

And maybe I'll just add a comment, Katherine, on the margins. So we typically don't break out our AI systems margins, but as Antonio alluded to, we do see enterprise and sovereign typically being a more profitable part of the mix compared to your classic service provider or model builder. So that's just some context to how to think about margins. And lastly, we will say on the service provider, we play selectively in that market and we have been prioritizing prudent working capital management. This is one of the reasons, together with the cash commercial cycle which obviously is slower on the AI system side compared to the traditional business side and the fact that we have now sold 100% of the S3C stake, that we can pay down that debt faster to return to the 2x leverage commitment that we gave a year earlier, and that will allow us to make the right investment and return approximately 75% of capital in 2027.

Thank you, Katherine. Next question please.

The next question will come from Simick Chattery with JP Morgan. Please go ahead.

Hi, thanks for taking my question and congrats on the strong results and outlook here. Antonio, if I can just on the growth outlook that you have this year and trying to compare that to next year. This year you're expecting cloud and AI to accelerate relative to networking, but when we get to your guidance for next year, you're expecting similar growth rates or the growth rates to converge. I'm just wondering, is that more a function you think about the individual drivers being slightly different in terms of timing with your customers or is there more of a supply component in there as the growth rates converge next year? If you can sort of help me out in terms of what changes in the drivers. Thank you.

Thank you, Sic. Next question please.

The next question will come from David Vaud with UBS. Please go ahead.

Great. Thanks guys for all the details. Really appreciate it. Maybe Antonio, can we touch on networking for a second? So obviously strong results there, really strong orders. But just trying to get a sense for how we think about how those orders flow into the business because you guided to approaching kind of double-digit normalized growth for this year and effectively double-digit growth at the midpoint for next year. Is there a reason why we're not seeing an acceleration? And then along those lines, what's driving the margin uplift next year in fiscal 27 in the networking business, particularly given the supply chain constraints and cost inflation that you've mentioned earlier? Thanks.

On the margins themselves, David, good afternoon. What you're seeing in 27 is actually the full-year benefit of the Juniper synergies program, which you recall we started when we closed the deal. So all of that we expect is going to flow on a full-year basis from 26 into 27. And frankly, that's what's driving the margins. I might add, it also helps us on cost of sales as well. So as we buffer some of the impact that we've discussed here today on commodity costs, we're seeing some of those benefits help us out on gross margins as well.

Thank you, David. Our next question, please.

The next question will come from Eric Woodring with Morgan Stanley. Please go ahead.

Hey guys, thank you for taking my questions and echo the congrats on the quarter and the outlook. Antonio, when you take a step back, can you just help us better understand exactly what has happened over the last 90 days in cloud and AI? What I really mean by that is your significant price hikes were already well known last quarter, so that's not a surprise. But now you're looking at low 20% year-over-year cloud and AI revenue growth versus 90 days ago you thought it would be mid to high single digits. So exactly what changed so abruptly in the last 90 days and can you help us understand what customer base cohort did this inflection come from? Thanks so much.

Very good. Thank you, Eric. Next question please.

The next question will come from Matthew Nicknam with Truis. Please go ahead.

Hey guys, I will echo the congrats. Everyone has relayed as well. Phenomenal results. Antonio, you mentioned cross-portfolio sales and I'm wondering how prevalent these are right now. Is it in the context of more security and networking among enterprise customers or are you seeing more cross-portfolio purchasing across server, storage, and networking product sets to really bring some of these Juniper revenue synergies to fruition? Thanks.

Thank you, Matt. Next question, please.

The next question will come from Aaron Rakers with Wells Fargo. Please go ahead.

Yeah, thanks for taking a question. Also, congrats on the results. Very impressive. I guess my question, some of it's been a little bit asked, but I want to go back to the traditional server business. 40% plus year-on-year growth, very impressive, but I'm curious if you could unpack how much we're seeing in terms of the ability to price through some of the inflationary component costs relative to underlying unit demand. When I look forward, does the guidance reflect a continued expectation of price increases to mitigate any margin impacts? Any color on what you've done on the pricing strategy would be helpful. Thank you.

And maybe I just add a couple of comments on the margin durability. We do see the impact of our catalyst program helping us out both on gross and operating margins. I think I commented in my prepared remarks. We're slightly ahead. So that's giving us confidence around the durability of those margins, and we do expect to see some improvement in unit volumes in the back half of the year as well.

Question Aaron. Next question please.

The next question will come from Tim Long with Barclays. Please go ahead.

Thank you. Was hoping to touch on storage for a minute. Just if you could talk a little bit about seeing the outsized growth in server but not in storage. What you would think about pull-through there. I would assume there's a lot of increase in server because of DRAM, but I think also some in storage because of NAND. So maybe could you touch on that dynamic around the storage business? Thank you.

Okay, thank you, Tim. Operator, this will be the last question please.

Okay, the final question will come from Simon Leopold with Raymond James. Please go ahead.

Hi guys, I think most of the questions have been asked. I guess we've heard some contradictory commentary from some of your peers regarding pull-through orders. Just curious what's giving you the confidence that the strength this quarter doesn't reflect any of that and what's giving you confidence in the sustainability going forward.

The conference has now concluded. Thank you for attending today's presentation.