Hewlett Packard Enterprise HPE posted non-GAAP earnings of $1.11 per share for the third quarter of fiscal 2026, which increased 152.3% year over year and beat the Zacks Consensus Estimate of 95 cents by 16.8%.
Revenues of $12.21 billion rose 33.7% year over year and beat the consensus estimate by 1%. The quarter benefited from accelerating demand for traditional servers, AI systems and networking, while disciplined pricing and a richer networking mix supported profitability.
HPE’s normalized orders increased 42% year over year, and total AI backlog reached a record $7.6 billion exiting the quarter.
HPE's Networking Orders Outpace Shipments
Networking revenues were $2.89 billion, up 74.9% year over year on a reported basis and 10% on a normalized basis. The segment's operating margin was 22% compared with 22.1% in the year-ago quarter.
Normalized Networking orders increased 36%, materially faster than revenues as supply constraints limited conversions. Campus & Branch revenues were $1.44 billion, while Routing contributed $788 million. Networks for AI orders reached $700 million in the quarter, taking cumulative orders to $2.2 billion and prompting HPE to raise its fiscal 2026 target to $2.5-$3 billion.
The company also signed a gigawatt-scale deal with Oracle for routers and switches supporting a major AI cloud infrastructure buildout. Management said networking purchase commitments more than doubled sequentially to help improve supply availability and convert the elevated backlog.
Hewlett Packard Enterprise's Cloud & AI Demand Accelerates
Cloud & AI revenues totaled $9.04 billion, up 25.4% year over year. The segment's operating margin expanded to 17% from 7%, supported by strong server demand, pricing and scale.
Server revenues rose 35.3% to $6.77 billion, while Storage revenues increased 10.2% to $1.29 billion. AI Systems orders were $2.4 billion, and backlog climbed to $6.8 billion. After quarter-end, HPE was awarded a $3.5 billion inferencing deal with a hyperscaler customer.
Private Cloud AI orders increased at a triple-digit rate year over year, while the HPE GreenLake customer count grew 18% to 52,000. Management said enterprises are moving from AI pilots toward production use cases, particularly agentic AI and inferencing workloads.
HPE Expands Margins on Pricing and Mix
Non-GAAP gross profit reached $4.93 billion, up from $2.73 billion a year ago. The non-GAAP gross margin widened to 40.4% from 29.9%, reflecting pricing discipline in traditional servers and a favorable mix.
Non-GAAP operating profit increased to $1.98 billion from $777 million, while the operating margin improved to 16.2% from 8.5%. Non-GAAP operating expenses rose 17.3% sequentially to $2.95 billion, mainly because of higher variable compensation.
Management expects gross margin to moderate as AI Systems become a larger portion of sales and traditional server margins normalize. Juniper integration synergies remain on track to reach a $600 million annualized run rate by the end of fiscal 2028, with the integration running ahead of plan.
Hewlett Packard Enterprise Strengthens Cash Flow
Operating cash flow was $1.64 billion, while free cash flow totaled $958 million. HPE returned $324 million to common shareholders through dividends and share repurchases during the quarter.
Cash and cash equivalents ended the period at $6.22 billion. Total net debt fell to $14.03 billion, and the net debt-to-adjusted EBITDA ratio declined to 1.8 times, below the company's two-times target more than a year ahead of its original plan.
Inventory ended the quarter at $11.82 billion as HPE built targeted supply to support higher orders and backlog. The cash conversion cycle improved by one day sequentially, helped by stronger collections and more favorable billing timing.
HPE Raises Fiscal 2026 and 2027 Outlook
For the fourth quarter of fiscal 2026, HPE expects revenues of $13.9-$14.8 billion and non-GAAP earnings of $1.20-$1.30 per share. Networking revenues are projected to grow 11-13%, while Cloud & AI revenues are expected to increase 60-72%.
For fiscal 2026, HPE raised its revenue growth outlook to 34-37% and non-GAAP earnings-per-share guidance to $3.75-$3.85. Free cash flow is now expected to be at least $3.75 billion.
For fiscal 2027, management raised its revenue growth framework to 13-17% and projected non-GAAP earnings-per-share growth of 16-20%. The company expects a 14-15% non-GAAP operating margin and free cash flow of at least $5 billion, with Networking revenue growth of 14-17% and Cloud & AI growth of 14-18%.
Zacks Rank & Other Stocks to Consider
HPE currently carries a Zacks Rank #2 (Buy).
Advanced Energy Industries AEIS, Astera Labs ALAB and ACM Research ACMR are some other top-ranked stocks that investors can consider in the broader Zacks Computer and Technology sector. AEIS, ALAB and ACMR sport a Zacks Rank #1 (Strong Buy) each at present. You can see the complete list of today’s Zacks #1 Rank stocks here.
AEIS shares have risen 28.1% in the year-to-date period. The Zacks Consensus Estimate for AEIS’ third-quarter 2026 earnings suggests year-over-year growth of 74.7%. The consensus estimate has been revised upward in the past 30 days.
ALAB shares have gained 64.8% in the year-to-date period. The Zacks Consensus Estimate for ACIW’s third-quarter 2026 earnings indicates a year-over-year growth of 143%. The consensus estimate has been revised upward in the past 30 days.
ACMR shares have surged 77.2% in the year-to-date period. The Zacks Consensus Estimate for ACMR’s third-quarter 2026 earnings suggests a year-over-year rise of 143%. The consensus estimate has been revised upward in the past 30 days.
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Astera Labs, Inc. (ALAB): Free Stock Analysis ReportThis article originally published on Zacks Investment Research (zacks.com).
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