HPE networking boom offsets server dip as revenue hits $9.3B

HPE revenues for Q1 FY 2026 were a mixed bag, with networking up strongly but servers down, though good enough to raise its full-year outlook for EPS and cash flow.

Revenues of $9.3 billion were within its $9 billion to $9.4 billion guidance, held back by a 2.7 percent year-over-year fall in Cloud & AI sales to $6.3 billion, despite networking revenues rising 151.5 percent year-over-year to $2.7 billion. HPE is not seeing an AI boost for its server sales, unlike Dell, where its AI-optimized server revenue was up an enormous 342 percent to $9 billion in its most recent quarter. GAAP profit was $425 million, down 28 percent year-over-year.

President and CEO Antonio Neri said: "HPE delivered a strong first quarter, outperforming in our networking business and posting one of our most profitable quarters on record. Our Q1 results reflect our newly combined networking innovation, and effective operational discipline in a dynamic commodity supply environment. Demand for our products and solutions was strong, with orders increasing double digits year-over-year across all segments."

Quarterly financial summary:

• Gross margin: 35.9 percent, up from 33.5 percent last quarter and 29.2 percent last year
• Cash flow from operations: $1.2 billion vs $2.5 billion last quarter and up $1.6 billion year-over-year
• Free cash flow: $708 million vs $1.9 billion in the prior quarter and up $1.6 billion year-over-year
• Capital returns to shareholders of $348 million in the form of dividends and share buybacks vs last quarter's $271 million
• Diluted EPS: $0.31 vs $0.11 last quarter, down $0.13 from the prior year
• Cash & cash equivalents: $4.84 billion
• Total net debt: $16.8 billion

HPE has two main business segments, Networking and Cloud & AI. Cloud & AI segment revenues were lackluster:

Servers: $4.2 billion, down 2.7 percent year-over-year

Storage: $1.1 billion, up 0.6 percent

Financial services: $876 million, up 0.3 percent

Other: $261 million, down 2.2 percent

Networking sector revenues ramped vigorously:

Campus & Branch: $1.23 billion, up 42 percent

Data Center Networking: $444 million, up 382.6 percent

Security: $255 million, up 114 percent

Routing: $780 million (no comparable revenue last year)

There was some positive news in the Cloud & AI sector, with traditional and AI server orders increasing in the low double digits year-over-year and a $5 billion-plus AI backlog. Storage Alletra MP orders were up 42 percent year-over-year, the fifth consecutive double-digit growth quarter, and HPE now has almost 50,000 GreenLake subscription customers.

Neri said in the earnings call: "Orders significantly outpaced revenues, fueled by strong customer demand. We saw strong product orders across networking, servers and storage, driven by ongoing AI deployment, on-premises infrastructure modernization and some customer pull-ins due to ongoing commodity shortages and price increases."

HPE is coping with DRAM and NAND shortages and price rises in several ways, firstly by aiming to secure its supply lines with multi-year agreements. Second, there are also price rises, Neri said, "with shorter quote commitment cycles. We have amended our quoting terms with a right to reprice existing orders for commodity cost increases between quoting and shipment."

The company says that it's proactively communicating with partners and customers about these actions.

Its attitude to its two main business segments is markedly different. Neri said of networking: "I am incredibly pleased with our Q1 Networking segment performance and with the excellent progress we have made in integrating Juniper Networks. Our strategy is paying off. We deliver strong revenue growth at the high end of our guidance, with orders growing faster than revenue."

He was not so bullish about Cloud & AI, with no expressed pleasure, saying: "Revenue declined 3 percent with operating margin dollars up 18 percent, driven by pricing and cost discipline." Demand was good, though. "We don't have enough supply for all the demand we are seeing and the backlog we have."

CFO Marie Myers said: "This performance primarily reflects timing of AI server revenue shipments, offset by growth in the traditional server business and stable performance in storage and financial services." She also noted: "We continue to migrate customers to Alletra MP" as "we are exiting our third-party non-IP business to drive greater profitability."

The contrast with Dell's server business is stark. Traditional servers saw demand outpacing supply, with double-digit demand growth across every region in its latest quarter. Apart from this traditional server business, Dell recorded $9 billion in AI-optimized server revenues, up 342 percent. By contrast, HPE reported $4.42 billion in server revenues, down almost 3 percent, which suggests HPE is lagging in this area.

Myers talked about server prospects in HPE's earnings call, saying: "We are expecting growth, particularly for our traditional server business on a net basis." That implies AI-optimized server growth will be more limited. Dell has focused more strongly on AI-optimized servers than HPE, and it's paid off. 

HPE's new outlook guidance is based on networking revenue growth being lifted from a 65-70 percent range to a 68-73 percent one. Cloud & AI growth is downgraded from the prior mid single-digit to low double-digit range to a mid to high single-digit one. Despite this, as networking is more profitable than servers, the EPS range is lifted by $0.05 to $2.30 – $2.50.

For next quarter, the outlook is $9.8 billion in revenues ± $200 million – a 28.5 percent increase at the midpoint. HPE expects a sequential increase in AI server revenue with the majority of AI deals to ship in the second half of the year.