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Hewlett Packard Enterprise HPE reported record fiscal 2026 third-quarter results, citing accelerating demand for AI infrastructure, continued networking momentum and disciplined pricing. The company also raised its fiscal 2026 outlook and updated its fiscal 2027 growth framework as orders outpaced revenue and backlog reached a record level.

Revenue for the quarter totaled $12.2 billion, up 34% from a year earlier and above the high end of the company’s guidance range. HPE reported a record non-GAAP gross margin of 40%, non-GAAP operating profit of $2 billion and non-GAAP diluted earnings per share of $1.11. GAAP EPS was $1.06.

Free cash flow reached $958 million, HPE’s highest third-quarter result, while operating cash flow was $1.6 billion. Chief Executive Officer Antonio Neri said the company exceeded its financial commitments across revenue, gross margin, operating profit and earnings per share.

“AI has become a multi-year growth driver, expanding demand across our HPE portfolio,” Neri said. “Customer demand in the quarter accelerated across both business segments, with orders growing faster than revenues.”

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HPE said normalized order growth was 42% year over year, led by demand for traditional servers, AI systems and networking products. The company said it booked more orders than in any prior quarter, producing a record backlog.

However, management said supply constraints continue to limit its ability to convert demand into revenue. Neri cited constraints involving DDR5 and DDR4 memory, NAND flash and other components affected by wafer capacity. HPE is seeking to address the situation through increased purchase commitments, multiyear supplier agreements, alternative product configurations and closer demand planning with customers.

Chief Financial Officer Marie Myers said inventory ended the quarter at $11.8 billion, reflecting higher commodity costs and targeted purchases intended to support rising orders and backlog. HPE’s cash conversion cycle improved by one day sequentially, helped by collections and billing timing, although higher inventory partially offset those gains.

Management said supply availability should improve enough to support higher revenue conversion in the fourth quarter, while remaining a constraint into fiscal 2027.

Networking revenue was $2.9 billion, up 10% on a normalized basis, while orders increased 36%. Myers said orders grew about 3.5 times faster than revenue, with supply constraints and shipment timing limiting data center networking revenue conversion.

Networks for AI orders reached a quarterly record of $700 million and grew by triple digits. Cumulative networks-for-AI orders reached $2.2 billion, surpassing HPE’s previous fiscal 2026 target. The company raised its year-end target for cumulative networks-for-AI orders to between $2.5 billion and $3 billion.

Within networking, campus and branch revenue grew 8% on a normalized basis, routing revenue rose 23%, and security revenue increased 12%. Data center networking revenue declined 6% because of supply-constrained shipment timing. Networking operating margin was 22%, in line with HPE’s guidance.

HPE also announced an expanded collaboration with Oracle involving routers, switches, software and AI operations capabilities for Oracle’s AI cloud infrastructure build-out. Neri described the deployment as a multiyear, multi-gigawatt opportunity that includes QFX switching products and PTX routing products.

The company said a U.S. federal court approved its settlement with the Department of Justice related to the Juniper Networks acquisition in August. Neri said integration and cost-synergy efforts remain ahead of schedule, while Myers reiterated HPE’s target of achieving a $600 million annual run-rate of Juniper-related savings by the end of fiscal 2028.

Cloud and AI revenue totaled $9 billion, up 25%, exceeding HPE’s outlook. The segment generated operating profit of more than $1.5 billion and an operating margin of 17%, which increased 460 basis points sequentially.

Server revenue rose 35%, driven by higher average selling prices in traditional servers, which offset supply-constrained unit volumes. Management said traditional server orders increased by a strong double-digit percentage year over year. HPE expects unit volumes to strengthen in the fourth quarter as supply becomes more available, though constraints are expected to persist.

AI systems orders were $2.4 billion, up more than 30% sequentially, while AI systems revenue was nearly $1.6 billion. HPE expects AI systems revenue to improve sequentially in the fourth quarter as backlog converts to revenue.

After the quarter ended, HPE said it received a multibillion-dollar server deal from a hyperscaler customer for internal AI inferencing usage. Neri emphasized that the transaction involves traditional servers for the customer’s own use rather than the type of cloud infrastructure deployments HPE had previously pursued with large hyperscalers.

Storage revenue increased 10%, aided by demand for higher-value owned intellectual property and private cloud offerings. Private Cloud AI orders grew by triple digits, while Alletra Storage MP orders and revenue also increased by strong double-digit percentages, according to management.

HPE GreenLake customers rose 18% year over year to 52,000. The company also said HPE Financial Services recorded third-quarter highs in financing volumes, residual value and return on equity as customers sought financing options for AI investments.

For the fiscal fourth quarter, HPE expects revenue of $13.9 billion to $14.8 billion. It forecast networking revenue growth of 11% to 13% and cloud and AI revenue growth of 60% to 72%. The company expects non-GAAP EPS of $1.20 to $1.30 and GAAP EPS of $1.12 to $1.22.

HPE raised its fiscal 2026 non-GAAP EPS outlook to $3.75 to $3.85 and its GAAP EPS outlook to $2.93 to $3.03. It also increased its fiscal-year free-cash-flow target to at least $3.75 billion.

For fiscal 2027, HPE now expects consolidated revenue growth of 13% to 17%, networking growth of 14% to 17%, and cloud and AI growth of 14% to 18%. The company forecast EPS of $4.40 to $4.60 and free cash flow of at least $5 billion.

Management said the fiscal 2027 framework includes some contribution from the Oracle collaboration and the recently announced hyperscaler inferencing deal. It does not include potential revenue from the AMD Helios opportunity, which HPE expects to become available for ordering later in the calendar year.

HPE returned $324 million to common shareholders during the quarter through $189 million in dividends and $135 million in share repurchases. The company said it exited the quarter with net leverage of 1.8 times, below its target of two times, and plans to return at least 75% of free cash flow to shareholders in the fourth quarter.

Hewlett Packard Enterprise (HPE) is an enterprise technology company that designs, develops and sells IT infrastructure, software and services for business and government customers. Its core offerings span servers, storage, networking, and related software, together with consulting, integration and support services aimed at modernizing and managing enterprise IT environments. HPE's product portfolio includes systems for traditional data centers as well as solutions for high-performance computing, edge computing and telecommunications infrastructure.

A major focus for HPE is hybrid cloud and consumption-based IT.

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