Shares of Hewlett Packard Enterprise Co. were flying high in extended trading today, up more than 16% on better-than-expected earnings and revenue that was driven by enterprise demand for servers that can support artificial intelligence workloads.

The enterprise data center hardware company said its AI server sales have been boosted by wider availability of the Nvidia H100 graphics processing units, which are an essential component of those products. Until recently, Nvidia had been struggling to meet the market’s demand for its GPUs.

The company reported second-quarter earnings before certain costs such as stock compensation of 42 cents per share, coming in ahead of Wall Street’s consensus estimate of 39 cents. Revenue for the period rose 3% from a year earlier to $7.2 billion, comfortably beating the Street’s target of $6.8 billion. All told, HPE delivered a net profit of $701 million in the quarter, down from the $919 million profit it reported a year earlier.

Revenue growth was driven by a strong performance in the company’s server business, where sales leaped by 18%, to $3.9 billion, well above the analyst forecast of $3.46 billion. Within that segment, AI system revenue surged more than 50%, to more than $900 million, company officials said on a conference call.

In a statement, Chief Executive Antonio Neri (pictured) hailed the company’s solid results, citing the company’s “strong order book” for AI servers and better conversion relating to its supply chain. “Our deep expertise in designing, manufacturing, and running AI systems at scale, fueled growth of cumulative AI systems orders to $4.6 billion dollars, with enterprise AI orders representing more than 15%,” he added.

In the conference call, Neri said the company benefited from much better availability of Nvidia’s chips, compared to previous quarters. He explained that the company now has booked cumulative orders for AI systems of more than $4.6 billion since the beginning of fiscal 2023, up $4 billion from the first quarter. The company’s order backlog for AI servers remained flat from the proper quarter.

The strong AI server sales helped to offset a weak performance in the company’s other main business segments. For instance, the intelligent edge business saw revenue fall 19%, to $1.1 billion, with the decline there blamed on high customer inventories. As for the hybrid cloud segment, sales dropped 8% to $1.3 billion, just ahead of the Street’s consensus estimate of $1.23 billion. Financial services revenue edged up 1%, to $867 million.

In an interview with Barron’s following the earnings call, Neri explained that orders for AI servers now represent more than 15% of its total. He also claimed that HPE is making a decent profit from selling AI servers to enterprise customers, because those companies generally require additional software and services, whereas cloud infrastructure providers such as Amazon Web Services Inc. and Microsoft Corp. do not.

That statement was likely to be music to the ears of shareholders. Last week, when HPE’s rival Dell Technologies Inc. delivered its latest earnings report, that company’s stock fell more than 17% in a single day on questions about whether it was able to generate any meaningful profit from its rising AI server sales.

But Neri claimed that HPE’s server segment delivered an operating margin of 11% in the latest quarter, suggesting that his company is having no such troubles. The CEO said the company is focusing on deals where it can see a path to profitability, through the sale of additional, attached services.

According to Neri, AI server demand is being driven by three distinct kinds of customers, including cloud hyperscalers such as AWS and sovereign states, which need the servers to provide compute capacity for government, academic and commercial workloads. He cited a new order from the University of Bristol in the U.K. as an example.

The third type of customer is enterprises, which need internal AI compute capacity to power their AI model training and inference workloads on-premises. According to Neri, many enterprises want to do their AI work in-house or at co-location facilities rather than the cloud, on fears of intellectual property leakage, compliance and costs.

Just 12 months earlier, the idea of HPE leveraging AI as a growth engine was would have seemed pretty far fetched by almost every analyst, but that is precisely what the company has done, said Holger Mueller of Constellation Research Inc. He said the reason for this lies in HPE’s heritage as a provider of High-Performance Computing or HPC systems, and its acquisition of the supercomputer maker Cray.

“AI systems need high performance hardware and that is what HPE builds, so AI is helping the company to grow,” Mueller said.

However, the analyst said investors may be concerned that HPE’s previously designated growth engines, hybrid cloud and intelligent edge, are now both in decline.

“The company managed to reduce its cost base by almost $600 million compared to a year earlier, but other effects such as less earnings from operations, higher interest rates and lower equity earnings meant its profit declined by $200 million overall,” Mueller added. “Revenue was up slightly, but investors will be looking to see if the demand for its AI systems is enough to drive more meaningful growth for the company, considering its declines elsewhere.”

Looking forward, HPE expects AI server demand to remain strong, and it’s guiding for another decent quarter. Its third-quarter forecast calls for earnings of 43 to 48 cents per share on revenue of $7.4 billion to $7.8 billion, compared to the Street’s forecast of 47 cents per share on $7.4 billion in sales.

HPE also raised its full-year revenue forecast. It said it now sees fiscal 2024 sales growth of between 1% and 3% in constant currency, compared with its previous guidance of flat to 2% growth. In terms of earnings, HPE now sees a range of $1.85 to $1.95 per share, up from an earlier forecast of $1.82 to $1.92 per share.

Prior to today’s report, HPE’s stock had gained just 4% in the year to date.

Photo: SiliconANGLE