Five key takeaways from HPE's third quarter results

Vendor posts strong order growth despite revenue fall when adjusted for currency

HPE's CEO Antonio Neri claimed the company is "continuing to accelerate the shift to an edge-centric, cloud-enabled and data-driven world" following the release of its financial results for the three months ending July 31.

Revenue for HPE's third quarter was up one per cent year-on-year to $6.9bn but down two per cent when adjusted for currency, while the vendor also saw increased demand for its services.

But supply challenges continued to have an impact on the business, with Neri stating that he is "particularly pleased" with the results given the company is still "mitigating against industry-wide supply constraints".

He also added that HPE is "taking proactive inventory measures, working closely with our suppliers and deploying our best-in-class engineering capabilities to establish specific response plans".

Here are five key things we learned from HPE's financial results…

Order demand and ARR growth

HPE said its Q3 orders were up "strong double digits" year-over-year, with its year-to-date order volume increasing by 11 per cent.

And its annualised revenue run rate, its metric for recurring services, grew 33 per cent year-on-year to $705m as total as-a-service orders increased 46 per cent from last year.

The vendor reiterated its ARR guidance first issued at the 2020 Securities Analyst Meeting of 30-40 per cent compounded annual growth rate from fiscal year 2020 to fiscal year 2023.

CEO Neri said the rise in orders showed "the strength of our edge-to-cloud offerings".

Profit and margin increases

The company highlighted "significant improvements" in gross and operating margins as a key strength of the quarter, with year-to-date non-GAAP operating profit up 28 per cent.

Non-GAAP gross margin stood at 34.7 per cent, up 420 basis points from the prior-year period, while non-GAAP operating margin was 9.8 per cent, up 190 basis points from the prior year.

And Non-GAAP diluted net EPS was $0.47, compared to $0.36 in the prior-year period, which came in above the previously provided outlook of $0.38 to $0.44 per share

Intelligent Edge performs well

One of the big successes of the quarter was HPE's growth in its Intelligent Edge segment, with revenues of $867 million, up 27 per cent from the prior-year period or 23 per cent when adjusted for currency, with 15.8 per cent operating profit margin compared to 10.4 per cent from the prior-year period.

Neri said the Intelligent Edge Business and the High Performance Compute & Mission Critical Solutions business had "done a record number of orders", with both segments now making up a quarter of the company's total revenue.

"Strong customer demand for secure connectivity has generated a backlog five times greater than at the close of Q3 last year, as customers increasingly looked for solution to collect, connect, analyse and act on data at the edge," Neri said.

Compute revenue fall

But despite growth in Intelligent Edge, HPE's Compute segment revenue fell nine per cent year-on-year or 12 per cent when adjusted for currency to $3.1bn.

That's despite revenue from the prior-quarter period increasing by four per cent, while Neri said Compute and Storage orders are up "mid-single digits" for year-to-date.

Tarek Robbiati, executive vice-president and chief financial officer, said the results reflected "normal sequential seasonality despite previously anticipated supply chain tightness".

Future outlook

The company has raised its non-GAAP diluted net EPS outlook to $1.88 to $1.96, up from previous expectations of $1.82 to $1.94.

"Based on the strength of our Q3 performance and our confidence about our momentum in the market, we are again raising our fiscal year 2021 EPS and free cash flow outlook, and we're also resuming stock repurchases," Neri said.

But its fiscal fourth quarter outlook for non-GAAP diluted net EPS of $0.44 to $0.52 is below analyst expectations of an average of $0.49, Bloomberg reports, with supply challenges set to continue impacting the business.

"We expect the challenged supply chain conditions to persist until at least the middle of calendar year 2022 and have factored these into our revenues, costs and cash flow outlook," Robbiati said.