$ AAPL

$ ABBV

$ ABNB

$ ACGL

$ ADI

$ ADM

$ ADP

$ ADSK

$ AEE

$ AEP

$ AES

$ AFL

$ AIG

$ AIZ

$ AJG

$ AKAM

$ ALB

$ ALGN

$ ALL

$ AMAT

$ AMCR

$ AMD

$ AME

$ AMGN

$ AMP

$ AMT

$ AMZN

$ ANET

$ AOS

$ APA

$ APD

$ APO

$ APTV

$ ARE

$ ATO

$ AVB

$ AVGO

$ AWK

$ AXON

$ BA

$ BALL

$ BAX

$ BBY

$ BDX

$ BEN

$ BG

$ BIIB

$ BKNG

$ BLDR

$ BMY

$ BR

$ BRO

$ BXP

$ CAG

$ CAH

$ CARR

$ CAT

$ CBOE

$ CBRE

$ CCL

$ CDNS

$ CDW

$ CEG

$ CF

$ CHD

$ CHRW

$ CI

$ CINF

$ CL

$ CLX

$ CMCSA

$ CMG

$ CMI

$ CMS

$ COIN

$ COO

$ COP

$ COR

$ CPAY

$ CPB

$ CPRT

$ CPT

$ CRL

$ CRM

$ CRWD

$ CSCO

$ CTRA

$ CTSH

$ CTVA

$ CVS

$ CVX

$ CZR

$ DAL

$ DASH

$ DAY

$ DD

$ DDOG

$ DE

$ DELL

HPE’s Q3 outlook is buoyed by strong revenue and ARR growth, but margin recovery is challenged by rising inventory and working capital pressures, making cost control and cash flow key investor watchpoints.

# Hewlett Packard Enterprise: Margin Recovery in Focus as Revenue Momentum Builds – FY2025 Q3 Earnings Outlook

## Executive Summary

We maintain a **Neutral-to-Bullish** outlook for Hewlett Packard Enterprise (NYSE: HPE) heading into FY2025 Q3, underpinned by **robust revenue guidance of $8.2–$8.5B** (up from Q2’s $7.627B) and continued strength in high-growth segments such as Hybrid Cloud (+13% YoY) and Servers (+6% YoY). While **ARR growth of 46% YoY** and a record **AI systems backlog of $3.2B** support top-line visibility, margin recovery remains a key watchpoint following a Q2 non-GAAP operating margin dip to 8.0%. The market may be underestimating the near-term impact of working capital pressures—specifically, a sharp increase in inventory and a lengthening cash conversion cycle—which could temper the pace of margin improvement in Q3.

## Recent Trends Signal What’s Next

Recent quarters have shown a clear **revenue acceleration** and segment outperformance, but also margin volatility. Q2 FY2025 saw total revenue of **$7.627B** (up sequentially), with **Server revenue at $4.058B (+6% YoY)** and **Hybrid Cloud revenue up 13% YoY**. However, **GAAP operating margin fell to –14.5%** (due to impairment), and **non-GAAP margin dropped from 9.9% in Q1 to 8.0% in Q2**. EPS also softened, reflecting these margin headwinds.

### Quarterly Financial Trend Table

| Quarter      | Revenue ($B) | Gross Margin (%) | Operating Margin (%) | Net Margin (%) | EPS ($) |
|--------------|--------------|------------------|----------------------|---------------|---------|
| Q3 FY2024    | 7.0          | 32.1             | 9.2                  | 5.1           | 0.38    |
| Q4 FY2024    | 7.4          | 32.5             | 9.7                  | 5.4           | 0.41    |
| Q1 FY2025    | 7.8          | 33.0             | 9.9                  | 5.6           | 0.44    |
| Q2 FY2025    | 7.627        | 32.2             | 8.0                  | 4.2           | 0.36    |

**Trend:** Revenue and gross margin are trending upward, but operating and net margins compressed in Q2, setting the stage for a critical Q3 inflection.

## Management’s Forward Tone and Positioning

Management’s Q2 call marked a **notable shift in tone** from “operational challenges” to “stronger pipeline” and “on the right trajectory.” CEO Antonio Neri stated, **“We delivered solid results and are confident in margin recovery as we move through the year,”** while also acknowledging a “complex macro environment.” This is a more constructive stance than prior quarters, where commentary focused on “navigating headwinds” and “cost discipline.” The Q3 guidance—**revenue of $8.2–$8.5B and non-GAAP EPS of $0.40–$0.45**—reflects this cautious optimism, with management signaling incremental improvement but not a full margin rebound yet.

## KPI Trends & Upcoming Quarter Drivers

Key performance indicators point to both opportunity and risk for Q3:

- **Annualized Revenue Run-Rate (ARR):** **$2.2B (+46% YoY)**, supporting recurring revenue growth.
- **AI Systems Backlog:** **$3.2B**, up slightly QoQ, indicating sustained demand.
- **Working Capital Metrics:** **Days Sales Outstanding (DSO) increased from 38 to 46 days**; **cash conversion cycle lengthened from –12 to 26 days**; **inventory rose to $8.1B**.

### KPI Movement Table

| KPI                | Q2 FY2024 | Q1 FY2025 | Q2 FY2025 | YoY Change | QoQ Change |
|--------------------|-----------|-----------|-----------|------------|------------|
| ARR ($B)           | 1.5       | 2.0       | 2.2       | +46%       | +10%       |
| AI Backlog ($B)    | 2.7       | 3.1       | 3.2       | +19%       | +3%        |
| Inventory ($B)     | 6.2       | 7.3       | 8.1       | +31%       | +11%       |
| DSO (days)         | 38        | 41        | 46        | +21%       | +12%       |

**Implication:** ARR and backlog support revenue, but rising inventory and DSO could pressure margins and cash flow in Q3.

## Missed by the Street

A key underappreciated signal is the **“Catalyst” cost optimization program**, referenced in filings but not widely discussed by analysts. This initiative is designed to streamline operations and accelerate margin recovery, with management hinting at **“margin acceleration in H2”** even if Q3 improvement is modest. Additionally, the **impact of expiring tariff pauses (July 2025)** is not fully reflected in consensus margin estimates, posing a potential Q3 cost headwind.

## Scenarios for the Upcoming Quarter

### Scenario Table

| Scenario | Revenue ($B) | Non-GAAP EPS ($) | Operating Margin (%) | Key Assumptions                                                      |
|----------|--------------|------------------|----------------------|-----------------------------------------------------------------------|
| Bull     | 8.5          | 0.45             | ~10                  | Faster cost recovery, strong ARR/backlog conversion, stable FX/input costs |
| Base     | 8.35         | 0.42             | ~9.5                 | Steady segment growth, manageable working capital, moderate cost inflation |
| Bear     | 8.2          | 0.40             | ~9                   | Inventory overhang, FX volatility, slower cost recovery, tariff impact     |

**Most Likely:** The **Base case** is most probable, given current segment momentum and management’s measured guidance, but with working capital and cost risks capping upside.

## Appendix – Data Tables & Management Quotes

### Quarterly Financials Table

| Quarter      | Revenue ($B) | EPS ($) | Gross Margin (%) | Operating Margin (%) |
|--------------|--------------|---------|------------------|----------------------|
| Q3 FY2024    | 7.0          | 0.38    | 32.1             | 9.2                  |
| Q4 FY2024    | 7.4          | 0.41    | 32.5             | 9.7                  |
| Q1 FY2025    | 7.8          | 0.44    | 33.0             | 9.9                  |
| Q2 FY2025    | 7.627        | 0.36    | 32.2             | 8.0                  |

### KPI Movement Table

| KPI                | Q2 FY2024 | Q1 FY2025 | Q2 FY2025 | YoY Change | QoQ Change |
|--------------------|-----------|-----------|-----------|------------|------------|
| ARR ($B)           | 1.5       | 2.0       | 2.2       | +46%       | +10%       |
| AI Backlog ($B)    | 2.7       | 3.1       | 3.2       | +19%       | +3%        |
| Inventory ($B)     | 6.2       | 7.3       | 8.1       | +31%       | +11%       |
| DSO (days)         | 38        | 41        | 46        | +21%       | +12%       |

### Key Management Quotes

1. **“We delivered solid results and are confident in margin recovery as we move through the year.”**  
   – Q2 FY2025 Earnings Call  
   *Signals management’s expectation for sequential margin improvement.*

2. **“The pipeline is stronger than it’s been in several quarters, particularly in AI systems.”**  
   – Q2 FY2025 Earnings Call  
   *Indicates robust demand visibility for Q3.*

3. **“We are executing on our Catalyst program to drive operational efficiency and cost savings.”**  
   – Q2 FY2025 10-Q  
   *Highlights a structural margin improvement lever.*

4. **“Inventory levels increased as we positioned for anticipated demand, but we are monitoring closely.”**  
   – Q2 FY2025 Earnings Call  
   *Acknowledges risk of margin pressure if demand lags.*

5. **“We expect some cost headwinds as temporary tariff pauses expire in July.”**  
   – Q2 FY2025 Earnings Call  
   *Warns of potential Q3 cost inflation.*

6. **“Working capital metrics are elevated, but we expect normalization in the second half.”**  
   – Q2 FY2025 Earnings Call  
   *Suggests Q3 may still see pressure before improvement.*

7. **“We are maintaining our full-year guidance of 7%–9% revenue growth and non-GAAP EPS of $1.78–$1.90.”**  
   – Q2 FY2025 Earnings Call  
   *Reinforces management’s confidence in the underlying business trajectory.*

---

**Bottom Line:** HPE’s Q3 is set up for revenue growth and early signs of margin stabilization, but working capital and cost headwinds warrant close monitoring. The “Catalyst” program and backlog strength are positives, but the pace of margin recovery is the key variable for the quarter.

HPE: Margin Recovery Key Amid Revenue Growth