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Hewlett Packard Enterprise ((HPE)) has held its Q3 earnings call. Read on for the main highlights of the call.

Hewlett Packard Enterprise struck an upbeat tone in its latest earnings call, underscoring record results across revenue, margins, profit, earnings per share and cash generation. Management acknowledged ongoing supply constraints and some pressure points, yet emphasized that robust AI demand, networking momentum and a larger backlog are driving a materially stronger outlook for the next two fiscal years.

Record Third-Quarter Financial Performance

HPE reported record third-quarter revenue of $12.2 billion, up 34% year over year and above the high end of guidance. Non-GAAP gross margin reached 40%, operating profit hit $2 billion, up 2.5 times from a year ago, and non-GAAP EPS came in at $1.11, marking the company’s first quarter above the $1 threshold.

Cash Generation and Higher Free Cash Flow Targets

Free cash flow for the quarter reached a record $958 million, supported by strong profitability and collections. Reflecting confidence in its trajectory, HPE raised its fiscal 2026 free cash flow target to at least $3.75 billion, signaling more room for balance sheet strengthening and potential shareholder returns.

Record Orders and Backlog Build

Orders grew 42% on a normalized basis, outpacing revenue growth and hitting an all-time high for the company. This surge translated into a record backlog, giving HPE greater visibility on future revenues even as supply constraints limit how quickly orders can be converted into shipments.

Upgraded Fiscal 2026 and 2027 Outlook

Management raised fiscal 2026 EPS guidance to a range of $3.75 to $3.85, with GAAP EPS expected between $2.93 and $3.03. For fiscal 2027, HPE laid out a framework calling for consolidated revenue growth of 13% to 17%, operating profit growth of 14% to 18%, EPS of $4.40 to $4.60 and free cash flow of at least $5 billion.

Networking Growth and Margin Strength

Networking revenue reached $2.9 billion, up 10% on a normalized basis, while orders jumped 36%, growing roughly 3.5 times faster than revenue. Segment operating margin was 22%, consistent with guidance, showing that HPE is growing networking while preserving profitability.

AI Networking Orders Exceed Targets

Networks for AI orders hit a quarterly record of $700 million, rising by triple digits and pushing cumulative orders to $2.2 billion. Having already surpassed its prior fiscal 2026 goal, HPE lifted its year-end target for AI networking orders to a range of $2.5 billion to $3 billion.

Oracle Partnership for Large-Scale AI Infrastructure

HPE unveiled an expanded collaboration with Oracle aimed at accelerating gigawatt-scale AI infrastructure deployments. Under the deal, Oracle will use HPE Juniper QFX switching and PTX routing products, along with software and AI operations tools, across a multiyear AI build-out.

Broad-Based Networking Segment Expansion

Within networking, Campus and Branch revenue grew 8% on a normalized basis and delivered record revenue, while routing revenue increased 23% and security rose 12%. Enterprise networking revenue expanded 12% and service-provider networking climbed 5%, highlighting broad-based demand across key customer segments.

Juniper Integration and Cost Synergies Ahead

HPE received U.S. Federal Court approval for its settlement with the Department of Justice tied to the Juniper acquisition, clearing a regulatory hurdle. One year after closing, the company said integration and cost synergies are ahead of schedule, keeping it on track to reach a $600 million annual run-rate savings target by fiscal 2028.

Cloud & AI Segment Hits Record Profitability

Cloud and AI revenue reached $9 billion, up 25% and ahead of outlook, delivering both record revenue and operating profit. Operating profit exceeded $1.5 billion, rising 61% sequentially and by triple digits year over year, with the segment’s operating margin improving to 17%.

Surging Server and AI Systems Demand

Server revenue grew 35%, as higher average selling prices drove traditional server revenue to an all-time high despite unit constraints. AI Systems orders reached $2.4 billion, up more than 30% sequentially, while AI Systems revenue was nearly $1.6 billion and backlog rose 14% to another record.

Large Inferencing Server Win with Hyperscaler

Following quarter end, HPE secured a multibillion-dollar server deal from a hyperscale customer for AI inferencing workloads. Management noted that the infrastructure will be used primarily for internal enterprise applications rather than traditional Tier 1 public cloud services, underscoring growing AI use inside large corporations.

Storage and Private Cloud AI Tailwinds

Storage revenue increased 10% and reached record levels, helped by strong order growth, higher selling prices and a favorable mix toward higher-value owned intellectual property and private cloud. Private cloud AI orders rose by triple digits, while Alletra MP orders and revenue expanded by strong double digits year over year.

Expanding GreenLake Customer Base

The number of HPE GreenLake customers climbed 18% to 52,000 in the third quarter, up from 44,000 a year earlier. Customers are broadening their use of GreenLake cloud services, including new software and intelligent offerings, which HPE said is boosting net retention rates.

Financial Services Segment Profitability

HPE Financial Services delivered third-quarter records in financing volumes, residual value and return on equity. While segment revenue was roughly flat year over year, return on equity exceeded 20%, indicating solid profitability despite limited top-line growth.

Cost Transformation and Internal AI Use

HPE reported that projects to lower the cost of sales and operating expenses, including the Catalyst program and Juniper integration, are ahead of plan. The company is also rolling out an internal agentic AI platform on its private cloud AI stack, claiming it can cut token costs by up to 60% versus using public cloud solutions.

Leverage Reduction and Shareholder Returns

The company ended the quarter with a net leverage ratio of 1.8 times, below its 2 times target and more than a year ahead of schedule. HPE returned $324 million to common shareholders via $189 million in dividends and $135 million in share repurchases, and plans to distribute at least 75% of fourth-quarter free cash flow.

Asset Sales and Debt Retirement

HPE received about $1.4 billion in gross proceeds from closing its H3C transactions and used cash on hand to retire a term loan. It also completed the sale of its Telco Solutions business and intends to retire $1.25 billion of notes maturing later in the month, further tightening its balance sheet.

Near-Term and 2027 Segment Growth Expectations

For the fourth quarter, HPE expects revenue of $13.9 billion to $14.8 billion, with networking revenue up 11% to 13% and Cloud and AI revenue surging 60% to 72%. Looking to fiscal 2027, the company forecasts networking revenue growth of 14% to 17% and Cloud and AI revenue growth of 14% to 18%, supporting overall double-digit expansion.

Enterprise AI Adoption Reaches Inflection Point

Management said enterprise AI demand has reached an inflection point, as customers shift from pilot projects to production deployments in areas like agentic AI and inferencing. HPE cited more than 1,200 internal AI use cases, with over 300 already in production, and noted rising customer budgets for AI infrastructure and replacement of aging systems.

Helios Opportunity Not Yet in Long-Term Plan

HPE expects its AMD-based Helios infrastructure to be available for ordering later this calendar year and is working on a sizable pipeline with AMD. Management stressed that this opportunity, which it described as a market worth tens of billions of dollars, is not included in the current fiscal 2027 networking growth framework.

Persistent Supply Constraints on Revenue

Supply constraints continued to hamper HPE’s ability to translate strong demand into revenue, affecting components such as DDR5, DDR4, NAND and wafer capacity. Management warned that supply would remain tight, limiting revenue conversion and requiring careful planning to support the elevated backlog.

Data Center Networking Revenue Pressure

Despite high double-digit growth in data center switching and routing orders, data center networking revenue declined 6% on a normalized basis. The drop was driven by shipment timing and supply constraints, highlighting the mismatch between robust demand and limited component availability.

Gross Margin Expected to Normalize

HPE expects gross margins to moderate toward more historical levels over time, reflecting growth in AI systems and a normalization in traditional servers. This is expected to be partially offset by a rising mix of higher-margin networking, but investors should anticipate some margin compression from current record levels.

Operating Margin Rate Set to Decline

The company anticipates its fourth-quarter operating margin rate will decline sequentially, largely because of a higher mix of AI systems within Cloud and AI and pricing actions. Cloud and AI operating margin is expected to moderate to a mid-teens rate, even as the segment continues to grow rapidly.

Operating Expenses and Compensation Dynamics

Third-quarter operating expenses rose 17% sequentially, mainly driven by higher variable compensation tied to the record results. HPE expects operating expenses to decrease in fiscal 2027 as variable compensation normalizes, supporting its longer-term margin and profit targets.

Higher Inventory Levels to Support Demand

Inventory ended the quarter at $11.8 billion, increasing both year over year and sequentially, reflecting higher commodity costs and targeted purchases. Management said the elevated inventory is intended to support increased orders and backlog, given ongoing supply limitations in key components.

Flat Financial Services Revenue Amid Strong ROE

HPE noted that Financial Services revenue was roughly flat compared with the prior year, even as financing activity hit records across several metrics. The segment still generated a return on equity above 20%, reinforcing its role as a profitable but steady contributor rather than a growth engine.

Supply-Constrained Traditional Server Volumes

Management explained that fiscal 2026 unit growth in traditional servers was constrained by supply availability, meaning much of the revenue increase came from higher average selling prices. HPE expects unit volumes to improve in the fourth quarter, though supply is likely to remain constrained and backlog elevated.

Cost and Pricing Pressures from Memory and Wafers

Persistent supply tightness in memory and wafer capacity is expected to affect both costs and pricing, adding complexity to margin management. HPE indicated that the longer-lasting nature of these constraints will have consequences for how it navigates component costs and customer pricing.

Forward-Looking Guidance and Outlook

For the fourth quarter, HPE guided revenue between $13.9 billion and $14.8 billion, EPS of $1.20 to $1.30 and GAAP EPS of $1.12 to $1.22, alongside strong networking and Cloud and AI growth. For fiscal 2026 and 2027, the company raised EPS and free cash flow targets and is projecting double-digit revenue and profit growth, with networking and Cloud and AI at the center of its expansion plans.

HPE’s earnings call painted the picture of a company riding powerful AI and networking tailwinds while proactively managing supply bottlenecks and margin normalization. For investors, the combination of record results, a strengthening balance sheet, rising cash flow and ambitious guidance suggests that HPE is positioning itself as a central player in enterprise AI infrastructure over the next several years.