管理層發言
Good day. And welcome to the fiscal 26 second quarter Hewlett Packard Enterprise Earnings Conference Call. All participants will be in a listen only mode. Please signal a conference specialist by pressing the star key followed by 0. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then 1 on a touch tone phone. To withdraw your question, please press star and 2. Please note this event is being recorded. I would now like to turn the conference over to Paul Glaser, Head of Investor Relations. Please go ahead, sir.
Good afternoon. I am Paul Glaser, head of investor relations for Hewlett Packard Enterprise. I would like to welcome you to our fiscal 26 second quarter earnings conference call. With Antonio Neri, HPE's president and chief executive officer and Marie E. Myers, HPE's chief financial officer. Before handing the call to Antonio, let me remind you that this call is being webcast. A replay of the webcast will be available shortly after the call concludes. We have posted the press release and the slide presentation accompanying the release on our Investor Relations webpage. Elements of the financial information referenced on this call are forward looking, and are based on our best view of our business and the external factors affecting us as we see them today. HPE assumes no obligation and does not intend to update any such forward looking statements. We also note that the financial information discussed on this call reflects estimates based on information available at this time and could differ materially from the amounts ultimately reported in HPE's quarterly report on Form 10-Q for the fiscal quarter ended 04/30/2026. Figures used in verbal remarks are rounded for ease of discussion. For more detailed information, please see the earnings materials, as well as disclaimers relating to forward looking statements that involve risks, uncertainties, and assumptions. Please refer to HPE's filings with the SEC for more detailed discussion of these risks. For financial information that we are showing on a non-GAAP basis, we have provided reconciliations to the comparable GAAP information on our website. Please refer to the tables and slide presentation accompanying today's earnings release on our website for details. Throughout this conference call, all revenue growth rates, unless noted otherwise, are presented on a year over year basis. Unless otherwise noted, all financial metrics and growth rates discussed today are non-GAAP and EPS refers to non-GAAP diluted net earnings per share. Certain financial information featured in the presentation today has been normalized to include Juniper Networks results as of the beginning of HPE's fiscal 25. Antonio and Marie will reference our earnings presentation in their prepared comments. With that, let me turn it over to Antonio.
Thank you, Paul. Good afternoon, everyone. HPE delivered an exceptional quarter with record-breaking results, disciplined execution, and clear proof that our strategy is working. We made excellent progress in our Juniper integration and in our Catalyst initiative, with both running ahead of schedule. Revenue in the quarter reached $10.7 billion, up 40%. Non-GAAP earnings per share of $0.79 increased 108%, significantly above the high end of our outlook. We generated $915 million in free cash flow, an improvement of $1.8 billion, driven by strong cash from operations and improved cash conversion cycle performance. Demand was even stronger than revenue growth. Orders more than doubled, significantly outpacing revenue, resulting in a record company backlog. Customer investments in agentic AI and AI inferencing accelerated. We also saw broad-based demand strength across the portfolio driven by ongoing investment in compute infrastructure modernization, structured storage data growth, and private cloud adoption for AI. Last year, at the security analyst meeting in New York, we laid out our strategy and fiscal 28 financial commitments. Based on our strong first half 26 results, our record backlog and our visibility into the second half demand, we now expect to deliver $3.40 in non-GAAP earnings per share at the midpoint and at least $3.5 billion in free cash flow in fiscal 26. That is two years ahead of our committed long-term plan. Marie will provide more detail on our third quarter and full year fiscal 26 outlook as well as our fiscal 27 framework, which is grounded on durable customer demand and the profitability of both business segments. Now let me turn to our business segment highlights starting with networking. I am particularly pleased with the progress we are making on the Juniper integration. We are ahead of our integration milestones and synergies commitments, and the unified portfolio and sales force are already strengthening our market position and growth momentum. Our combined networking portfolio and vision for self-driving networks is resonating with customers and that enthusiasm together with strong go-to-market execution is reflected in our results. Networking delivered revenue of $2.7 billion, up double digits on a normalized basis with orders growing significantly faster than revenue. We saw increased demand in campus and branch, networks for AI, and security. I am pleased with the strong demand we saw from enterprise customers for our networking portfolio. Campus and branch orders reached a new record high, growing in the upper 20% range on a normalized basis. We won multimillion-dollar deals across multiple verticals including retail, automotive, government, and technology. Wi-Fi 7 access points sales increased more than 7x, reflecting a clear shift toward network modernization. HPE, for the 20th time in a row, was named a leader in the Gartner Magic Quadrant for Enterprise Wired and Wireless LAN Infrastructure. We believe this independent industry analyst validation reinforces how far ahead we are in enterprise networking beyond even incumbents. Customers trust us with their most critical network and infrastructure decisions as they expand their digital initiatives and AI investments. One customer taking advantage of the power of our combined campus and branch networking portfolio is Lowe's. With over 1,750 stores across North America, Lowe's chose HPE to deliver the network foundation for a major technology transformation to support its digital on-ramp in AI-enabled operations. The solution is built on our HPE Mist AI platform for wired and wireless network and infrastructure, alongside our HPE EdgeConnect SD-WAN solution. Last month, we reached a milestone with the launch of new autonomous agents powered by agentic AI for optimizing networking performance. The self-driving network is no longer a concept; it is a reality. The UK Ministry of Justice is an early adopter example. It was able to reduce the number of incidents seen by its network operations center by approximately 75% after deploying a suite of solutions that included our new HPE self-driving network capabilities. In enterprise data center switching, orders increased nearly 20% on a normalized basis. Our data center switching pipeline remains strong. Cross-portfolio product integration and sales across server, storage and networking are driving deeper customer engagement and larger deals. Security orders grew in the mid-teens on a normalized basis. We continue to make the network a first line of defense that responds to threats in real time. This quarter, we launched the HPE Juniper SRX 400 series, bringing carrier-grade firewall protection to the branch for large distributed environments. We see significant runway as more customers consolidate networking and security with a single vendor, forcing convergence all the way to the silicon layer of the stack where HPE will have further differentiation. In our service provider customer segment, revenue increased double digits on a normalized basis, with routing orders growing significantly faster than revenue. Routing orders increased nearly 30% on a normalized basis, driven by data center interconnect deployments in large cloud service providers. Customers are choosing HPE because we help them scale in every dimension: scale up by increasing the performance and density of individual platforms for the most demanding AI workloads; scale out by expanding the networking fabric to connect thousands of GPUs and accelerators within a single data center; scale across by extending high-bandwidth interconnectivity between data centers across campuses and into the wide area network so AI services can run wherever they are needed. HPE is developing a scale-up Ethernet switch specifically for the AMD Helios AI rack-scale architecture which we expect will be introduced in the fall. In scale-out, we lead with our AI-driven QFX switching fabric. HPE is the first OEM to productize a Tomahawk 6-based 100% liquid-cooled switch with industry-leading performance and power efficiency for AI infrastructure. In addition, our leading fabric management and AI op capabilities reduce congestion and latency as well as operational complexity. We expect a roadmap to extend this leadership through co-packaged optics, resulting in lower overall power consumption. In scale-across, the Juniper PTX series delivers 800-gigabit density with exceptional power efficiency, leveraging our distinct Express Silicon and simplified AI-native automation. Because of our leading innovation and market momentum in networks for AI, we are raising our cumulative fiscal 26 Networks-for-AI order target to at least $2 billion. We are laser-focused on building the best networking business in the industry. Our priorities are clear: extend AI-driven automation across the portfolio, help customers scale modern AI infrastructure with secure high-performance networking, and lead in the convergence of networking and security. We have the team, the capabilities and the momentum to convert the opportunity into durable shareholder value. In our Cloud and AI business segment, we executed with strong discipline across all business lines. Revenue was $7.7 billion, up 23%, driven by exceptional traditional servers orders and very strong demand in AI systems, Alletra MP storage, private cloud and GreenLake software and services. Traditional server orders increased triple digits as customers continue to modernize their compute infrastructure and invest in AI inferencing. We are working very closely with our silicon and memory partners to continue to secure supply, which we factored into our new fiscal 26 guide. We are also engaging customers and channel partners on lead times and configuration options to help them plan effectively. We saw strong demand in AI training throughout the quarter. We booked $1.8 billion in new AI systems orders, bringing cumulative AI systems bookings to $16.4 billion. We entered Q3 with $5.9 billion in backlog, primarily composed of enterprise and sovereign orders. We are seeing a broad pattern across industries. Enterprises value the flexibility of choosing multiple AI models with the governance and control of on-premises. We will continue to manage AI systems opportunities with a focus on profitable growth and prudent working capital management. Storage had an outstanding quarter. Alletra MP storage orders increased triple digits, the sixth consecutive quarter of strong growth. Several weeks ago, we expanded the platform with new file storage and agentic AIOps capabilities. This extends Alletra MP into the growing unstructured data market. Our HPE Morpheus Enterprise and HPE VM Essentials software offerings continue to build momentum. Revenue grew sequentially for the fourth consecutive quarter. VM Essentials customer count increased 43% in the first half with a notable rise in net new logos. Private cloud AI orders increased again this quarter with a growing base of new customer wins. We recently launched our second-generation PCAI offering designed for enterprise AI inferencing and cloud and sovereign environments, which positions us for continued growth. More broadly, we are embedding agentic AI capabilities across our storage and data protection portfolio to help customers automate AI data pipelines and operations. We continue to add new cloud and AI agent tech services to our GreenLake cloud platform, acquiring new customers and increasing the net retention rates for our GreenLake services business, which remains near 110%. We exited Q2 with approximately 15,000 customers operating their IT in our GreenLake cloud, managing more than 6.7 million systems, up from 5.3 million a year ago. One win that brings the power of the full HPE portfolio together is the Dallas Cowboys, the most valuable sports franchise in the world. They came to HPE with a clear objective: modernize their infrastructure, simplify operations, and build the right secure foundation for AI. We delivered a comprehensive solution anchored on our HPE GreenLake private cloud offering, spanning ProLiant servers, Alletra MP storage, and HPE Morpheus Enterprise. The Cowboys are also adopting HPE VM Essentials as their preferred virtualization layer. This is a strong example of the value customers can unlock when they choose HPE as an end-to-end technology partner. Lastly, HPE Financial Services delivered another outstanding quarter with record return on equity. Financial Services deepens customer relationships, supports our GreenLake cloud adoption and remains a meaningful competitive advantage as customers ramp their investment in AI. Before I close, I want to highlight two important upcoming events. In two weeks, we are hosting HPE Discover Las Vegas. We will share updates on our networking, cloud and AI strategies including major product announcements along with a live Q&A for investors and analysts. I hope to see you there. Then later this fall, we will host a dedicated networking investor day. In closing, HPE delivered an exceptional quarter. Our results demonstrate that our strategy continues to pay off. We now expect to significantly exceed our original fiscal 28 non-GAAP earnings per share target and generate at least $3.5 billion in free cash flow in fiscal 26, two years ahead of plan. The market trends driving our performance remain strong and well aligned to our strategy. We expect demand strength to continue into fiscal 27 and beyond, which will accelerate durable shareholder value as we continue to scale profitably. We are executing with strong discipline, creating meaningful value from the Juniper acquisition and strengthening our position at the intersection of networking, cloud and AI. With the combined strength of HPE and Juniper, we have the portfolio, the talent and the go-to-market scale to lead in the market. I want to thank our team members for their focus and strong execution. With that, let me turn it to Marie to take you through the financial results and our 2026 and 2027 outlook. Marie?
Thank you, Antonio, and good afternoon, everyone. I am pleased with our outstanding second quarter results. We exceeded our commitments delivering record revenue and EPS, driven by disciplined execution and a strong demand environment. A large backlog, favorable industry tailwinds, and improved demand visibility support a higher growth outlook. In addition, we are achieving Catalyst cost savings and Juniper synergies ahead of schedule. As a result, we are increasing our fiscal 26 EPS outlook by over 40%. I will address the drivers behind the strong EPS and free cash flow outlook shortly. But first, let's take a look at our Q2 performance. Revenue of $10.7 billion was above the high end of our guidance range, led by traditional servers as customers accelerated investments in agentic AI inferencing and by networking where we saw broad-based growth across the portfolio. Sequentially, revenue grew 15%, reflecting higher average selling prices within our server business driven by ongoing DRAM and NAND inflationary costs and supply constraints. We continue to work with our partners to secure long-term agreements while executing the pricing actions we discussed last quarter. Gross margin improved to 36.9% driven by mix as we shape demand to higher-margin products. Catalyst savings and Juniper-related synergies also contributed to improvement on a year-over-year basis. Operating profit was $1.4 billion, above expectations, representing a 13.3% operating margin. As the company scales and we continue to capture accelerated Catalyst cost savings and Juniper synergies, we expect operating profit growth to continue to outpace our top line. EPS was $0.79, well above the high end of our guidance. GAAP EPS was $0.44. We delivered Q2 free cash flow of $915 million fueled by strong operating profit. Now let's turn to our segment results. Networking delivered another solid quarter. Revenue of $2.7 billion was up 10% on a normalized basis as growth accelerated. Our backlog continues to grow given elevated demand and supply constraints, and this is reflected in the greater than 40% sequential growth we saw in our purchase commitments. We continue to see strong demand for our Networks-for-AI portfolio and now expect cumulative orders to reach at least $2 billion by fiscal year end 26. Within our product categories, campus and branch normalized revenue growth accelerated to 10%, anchored by large deals across multiple industries. Security growth inflected positively to 18%, benefiting from improved backlog conversion and solid in-quarter demand. Data center networking and routing grew 69% and 69%, respectively, reflecting robust networks-for-AI demand. We are optimistic about the demand momentum we are seeing based on our growing pipeline. Across customer verticals, service provider revenue grew 13% and enterprise grew 9% on a normalized basis. Our AI-native self-driving network solution is clearly resonating as customers prioritize AI use cases and simplify their network operations. Network operating margin of 21.6% was in line with guidance, reflecting improved operating leverage as Juniper synergies continued to ramp. The sequential decline in margin reflected two factors. First, Q1 benefited from certain one-time items. Second, Q2 absorbed higher variable compensation expense. We remain focused on disciplined execution, operational efficiencies, and synergy realization to improve profitability and expand margins in the second half and beyond. Moving to Cloud and AI, we delivered revenue of $7.7 billion, up 23% as strong order activity and pass-through of high costs of new orders in traditional servers and storage drove the upside, partially offset by supply constraints and timing of AI server shipments. Financial Services continues to perform well. Scale benefits drove operating profit of nearly $1 billion, up 48% sequentially and triple-digits year over year, pushing operating margin to 12.4%, up 220 basis points sequentially. Server revenue increased 33% as growth in traditional servers more than offset supply-constrained unit volumes. Demand remained broad-based, as orders more than doubled year over year and increased strong double-digits sequentially. We see accelerating demand in high-memory configured servers targeted at agentic AI workloads, supporting our expectation of sustainable growth. AI systems orders of $1.8 billion were more balanced and broad-based this quarter. Demand is expanding beyond AI servers into broader AI workloads like orchestration, data movement, and agentic AI. Service provider orders exceeded the combined total of its prior four quarters, underscoring the inherently lumpy nature of our large-scale AI deals. Our backlog increased nearly 20% sequentially to a new high and our pipeline remains multiples of our backlog. We continue to expect AI revenue to improve in the back half of the year, now peaking in Q4. Storage revenue grew 2% driven by strong orders, the ongoing mix shift towards high-value owned IP, and disciplined pricing execution. Alletra MP customer migration momentum accelerated sequentially, driving triple-digit year over year growth in both orders and revenue. Continued demand strength in private cloud and our expanding backlog are driving improved revenue visibility. Lastly, Financial Services revenue was up 6% and generated an all-time high in return on equity exceeding 30%. Turning to our Catalyst initiatives and Juniper synergies, I am pleased that we are running ahead of plan. We are working on a range of programs to reduce cost of sales and OpEx across our business. As a result of these programs, at quarter end, we reported an employee base of just over 65,000, the lowest level at which we have operated as a combined company and reflecting an over 9% decline since both programs began. With Juniper synergies, we continue to focus on the four pillars we laid out at SAM. Phase 1 of the integration, which we completed, focused on reducing overlap in corporate functions and optimizing sales and service organizations. As our Mist and Aruba portfolios converge, we expect to optimize our R&D spend. In addition, we plan to continue to leverage overall HPE scale to improve commodity prices and consolidate our vendor footprint to drive savings through supply chain integration. Finally, regarding customer support, we intend to leverage scale and digital capabilities inherited from Juniper to further improve efficiency and the customer experience. We expect to exceed our annual target of $200 million by the end of fiscal year 26. I am pleased with our progress on Catalyst, and we are ahead of plan. Workforce transformation continues to drive the majority of our savings, and GenAI-enabled process simplification now represents nearly 20% of our fiscal 26 initiative savings. We are leaning into GenAI to increase productivity and reduce costs across the organization, including customer support, HR, and marketing. Our teams are driving greater automation, redefining work and reducing costs. We are also rationalizing our global lab footprint by more than two-thirds and reducing our base and supply chain customer service footprint by over 90% through targeted consolidation. Taken together, we are building a leaner, more efficient organization and delivering meaningful benefit to our operating margin. Turning to free cash flow, we delivered operating cash flow of $1.4 billion. Free cash flow totaled $915 million in Q2, bringing our first half fiscal 26 total to $1.6 billion, about 75% above our prior comparable period high reported in fiscal 21. Our cash conversion cycle improved by two days from Q1 driven primarily by an increase in days payable due to higher purchases to support future shipments. This was offset by an increase in days of inventory due to higher inventory in anticipation of second half AI shipments. Days receivable increased by five days from the prior quarter due to strong revenue performance towards the end of the quarter. Inventory ended the quarter at $9 billion, up year over year and supporting second half AI installations and targeted commodity purchases. We remain committed to our capital allocation strategy. During Q2, we returned $343 million to shareholders, including $189 million in common dividends and $154 million via repurchases. We refinanced $2 billion of debt, received gross proceeds of approximately $1.4 billion after closing our previously announced H3C transactions last month and used cash on hand to retire our term loan. We expect the net impact will reduce annual net interest expense by approximately $75 million. Importantly, we improved our pro forma net leverage ratio to 2.3x at quarter end, down from 2.6x last quarter. Turning to guidance, we are taking up our outlook on the back of Q2 results and greater visibility into the second half demand environment. Starting with Q3, we expect total revenue will be between $11.5 billion and $12.1 billion driven by strong demand. For networking, we expect revenue to grow 73% to 78% year over year on a reported basis or approaching 10% on a normalized basis. We expect revenue performance and synergy realization to help offset the impact of inflationary component costs, driving an operating margin rate in line with our full year guidance. In Cloud and AI, we expect revenue to grow in the high teens, reflecting demand durability, elevated pricing, and improved AI systems revenue. We expect operating margins to be in the low to mid-teens. On a consolidated basis, we expect Q3 total operating expense to increase sequentially, supporting seasonal marketing expense and networking R&D investments. We expect our operating margin rate to be up on a sequential basis, driven by improved operating leverage. Consequently, we expect EPS between $0.88 and $0.93 and GAAP EPS between $0.84 and $0.89. For fiscal year 26, we are raising our EPS range to $3.35 to $3.45. We are also raising our GAAP EPS range to $2.42 to $2.52. We are making the following updates to our outlook. We are raising our full year consolidated revenue growth to 29% to 33% on a reported basis or high teens on a normalized basis. We are also raising our full year consolidated operating profit growth outlook to 80% to 85% on a reported basis. For Cloud and AI, we expect server demand and pricing to remain durable, driving sustainable revenue growth. Consequently, we are raising our full year Cloud and AI revenue growth to the low 20% range from our prior mid-to-high single digit range, driven by higher AI ASPs in our traditional server business and improved AI systems revenue. We are also raising our operating margin rate outlook to low to mid-teens. We are raising our full year networking revenue growth to 72% to 75% on a reported basis or approaching 10% on a normalized basis, reflecting accelerated business performance as our integration efforts take hold. We are lowering our OI&E outlook to a range of $420 million to $460 million reflecting lower net interest expense expectations. Lastly, we are increasing our free cash flow outlook to at least $3.5 billion, up from our prior outlook of at least $2 billion. We are confident in our new fiscal 26 outlook as we see continued order momentum in the business thus far in Q3. Based on the durability of demand we are seeing in our results, we are providing an initial framework for fiscal 27. We see sustained secular tailwinds driving consolidated revenue growth of 8% to 12%, with a similar range for both of our networking and Cloud and AI segments. Our outlook assumes an acceleration in AI systems revenue growth. We see improved operating margins of 12% to 16% for the company and expect to see a year-over-year reduction in operating expense. We forecast networking margin in the mid-to-high 20% range, driven by scale, mix and synergies, with Cloud and AI operating margin in the range of 10% to 15% depending on the mix of AI business and the pace of Catalyst savings. We expect revenue growth and operating leverage to deliver EPS growth of 12% to 16% and free cash flow of at least $4.5 billion. Our outlook is expected to enable faster debt pay down. As a result, we now expect to reach our 2x net leverage goal by the end of fiscal year 26, one year ahead of schedule. Once we reach our leverage target, we expect to return at least 75% of free cash flow to our shareholders via dividends and share repurchases. To close, Q2 was an outstanding quarter for HPE. We scaled the business, expanded margins and generated significant free cash flow. We raised our outlook and are building a stronger, more profitable HPE. I am confident in our ability to create long-term value for our shareholders. With that, I will turn the call back to the operator to begin the Q&A.
分析師問答
Thank you. We will now begin the question and answer session. Star then 1 on your touch tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star and then 2. In the interest of time, please limit yourself to one question. We will now pause momentarily to assemble the roster. The first question will come from Asiya Merchant with Citi. Please go ahead.
Great. Thank you for taking my question and outstanding results and guidance. Marie and Antonio, I guess folks are kind of talking about enterprise budgets. Just given the price inflation that you guys are seeing through and being passed through, where do you see enterprise budgets still sustaining? And obviously your guide, you are now into fiscal year 27—thank you very much for that as well. Many people are concerned that there is some kind of demand cliff that you could see even past the more near term outlooks and growth forecast that you are seeing. What gives you this confidence to now provide fiscal year 27 guide? If you could help us understand—I see it is between networking as well as Cloud and AI—what gives you the confidence that you are seeing in being able to provide an early outlook into 2027? That would be great. Thank you.
Well, thank you, Asiya, for the question. I think it is multiple factors. Number one and probably the most important one is the durability of the demand based on my conversations with customers and the large pipeline, which remains multiples of the current backlog. When you look at that demand and pipeline, it is driven by the use cases we see with deployment of AI or the build-outs of new data centers for AI, and the modernization taking place in enterprise. It is a combination of multiple things that ultimately give us the confidence to not only provide the new guide for 2026, but an early view of 2027. When you think about our results in the first half, the backlog we have, and the supply that we have on hand and what is coming, that solidifies the 26 outlook. In 2027, the momentum we have is outstanding across all customer and product segments. We talked about some of the demand that we see today in campus and branch, upper 20% and cloud networking which is in the 30% and so forth. Regarding budgets, obviously they are challenged because of the price increases we have seen driven by commodity costs. But we have not seen any pull-in. We do not see a cliff. In many ways, customers are prioritizing getting access to technology now faster than ever before, because nobody wants to be left behind when it comes to deploying AI. I give an example in our own company. We have 1,200 internal AI use cases—Marie, who is next to me here, is one of the early adopters and I will say an aggressive adopter. We have more than 52 use cases, mostly agentic AI, which have already been deployed. We see this across the entire spectrum. I was last week in Chicago, I met with a number of customers and partners and they see this. When you go through that motion, AI inference is growing. We expect that AI inference is going to be an accelerator of our demand as we go forward, and therefore it points to durable demand and our ability to convert that. Thank you, Asiya.
Next question please. The next question will come from Wamsi Mohan with Bank of America. Please go ahead.
Yes, thank you. Really impressive set of results here and guide. Antonio, can you give us maybe some rough mix of the opportunity that you see? You mentioned scale up, scale out, scale across. Especially as you look into fiscal 27, do you see that evolve? And if I could, Marie, the growth in free cash flow is well in excess of EPS for 27. Could you share some color on the drivers of that? Well, thank you, Wamsi.
I think it is fairly balanced across the product segments, Wamsi. Let's start with campus and branch, which has been and is the lion's share of our networking business. The self-driving network vision and now the execution of it is resonating with customers. We announced our roadmap last December at HPE Discover in Barcelona. You will see new announcements here in two weeks. Our ability to support Aruba switches with Mist and cross-pollinate between the two platforms is important. That AI-driven experience is resonating and I mentioned one of the customers as an example taking advantage of that. When I think about data center networking, we grew 20% in enterprise. That obviously is driving with the rest of the portfolio because now we have a full conversation with customers across server, storage and networking. We are introducing in the fall the new switch with the Helios stack reference architecture; that is a first-to-market Tomahawk 6, 1.6 terabit product. That will be a tailwind as 2027 customers start adopting that footprint in large service providers. And then obviously scale-across, the PTX platform is the reference for data center interconnect. The PTX 10,000 is resonating to drive data center interconnect. So it is fairly balanced, I will say, and we are early in the process. You have to win the reference architecture and the discussion with customers at that level, but then it is going to be synergies across the rest of the portfolio with compute. I feel very good about the momentum and kudos to the team who has executed flawlessly. When you think about an integration of this scale, it is so fast because, to put it in perspective, we integrated R&D teams, we announced the roadmap, we did not miss a beat on network innovation. We integrated the salesforce in January and we are ahead of the integration milestones and synergies. I think this is a reference for how to do large acquisitions in the market.
Wamsi, I will answer your question on the strong free cash flow guide for 2027. It is really just based around the expectations that we have of the operating profit growth, and that supports higher profitability, which translates into cash flow. One other thing to bear in mind is our 2026 baseline includes the charges associated with Juniper synergies, which you are not going to see at that magnitude repeated in 2027. So that is also one of the benefits playing into the free cash flow guide. As I said in my prepared remarks, we expect to get to 2x leverage by the end of 2026, and we will pull in our share repurchases into early 2027 as well.
Very good. Let's please limit questions to one per analyst. Next question, please. The next question will come from Amit Daryanani with Evercore. Please go ahead.
I cannot ask a multipart question; I apologize—called out on that, I guess, now. Marie I will stick to one. And Antonio, this may sound like a bit of a silly question, but given these numbers are so strong, especially when I look at the fiscal 27 guide, can you just talk about what is the bigger gating factor to growth as you go forward? Is it customer demand? Or is it more component availability? I am really trying to understand whether the outlook level of demand you are actually seeing today, or is there actually additional demand that could be served if component supply and availability becomes a bit easier to access? Just love to understand on the component side, what is going on. Thank you.
Thank you, Amit. Demand to me equals bookings or orders. We expect that demand to be strong and durable well into 2027. We have an amazing portfolio perfectly aligned to the inflection point that we see today across networking, cloud and AI. We are uniquely positioned with regard to demand and bookings. As I said earlier, the pipeline remains multiples of the current backlog, which is record-breaking at the company level. When it comes to potential upside on revenue and the ability to convert that, it really comes down to availability of supply. What we factored into both 2026 and 2027 is the allocation that we already have in our supply for 2026. Our teams have become more proficient, using AI to do a better supply matching with the demand that we have versus the supply allocated, in terms of mix and capacity. That is why with Marie we provided the new revenue guidance: no incremental supply in 2026 at this point in time, unless somebody cancels something and then we are able to get that capacity. For 2027, we have long-term agreements where we lock capacity and we divide that capacity every quarter based on mix of orders, backlog and what we see in the pipeline. All of that has been factored into our guide. If supply improves in 2027 with the momentum and demand that we have, we may have upside. But I do not expect supply availability to change dramatically in 2027, nor do I expect costs to normalize until new factories increase yields to compensate for the incredible demand across the industry.
Next question please. The next question will come from Catherine Murphy with Goldman Sachs. Please go ahead.
Thank you for the question. Can you talk more about the improved AI systems outlook that you noted? And is there anything you can share on the demand outlook across customer types? And are expectations for AI systems profitability improved versus 90 days ago? Thank you.
Thank you, Catherine. We have been very deliberate in our strategy to focus on the AI markets where we can drive value and where our portfolio can win, not just pursuing revenue for the sake of revenue. Those markets are threefold. First is enterprise: you can see the momentum in enterprise and in particular with our AI factor for enterprise, which is private cloud AI with deep integration with NVIDIA. You will see more of that in a couple of weeks, and it includes a lot related to software—it is not just taking GPUs and putting them in a server. This now includes storage, which is the first storage platform to be fully certified by NVIDIA for file and unstructured data. Second is sovereign—these are long cycles and often involve air-gapped or regulated environments. They are large pursuits and may take longer to achieve. Third is service providers, where we play selectively. What we see right now is huge growth in inferencing. Inferencing is clearly accelerating and is a combination of both GPUs and CPUs. This is why we see momentum also in the traditional server business, because many inferencing deployments will be done on CPUs in locations where customers want governance and data privacy. There is a new market emerging that is not the traditional market we have been used to, and that gives us confidence that we have the right portfolio at the right time to capture this market. I believe by the end of the decade much of the demand will be in the inferencing space. The combination of networking, compute, storage and memory gives us the ability to be competitive and to harvest more of the gross margin value as we go forward.
Maybe I'll add a comment on margins. We typically do not break out AI systems margins, but as Antonio alluded to, enterprise and sovereign opportunities typically are more profitable compared to classic service provider deals. That gives you context on how to think about margins.
And on service providers, we play selectively and have prioritized prudent working capital management. This is one reason, together with the cash conversion cycle, which is slower on AI systems compared to our traditional business, that the proceeds from the H3C transaction allowed us to pay down debt faster, returning us to the 2x leverage commitment one year earlier. That will enable the right investment and returning approximately 75% of capital in 2027. Thank you, Catherine.
Next question please. The next question will come from Samik Chatterjee with JPMorgan. Please go ahead.
Hi. Thanks for taking my question and congrats on the strong results and outlook. Antonio, if I can ask: on the growth outlook this year versus next year, this year you are expecting Cloud and AI to accelerate relative to networking, but in your guidance for next year you are expecting similar growth rates or the growth rates to converge. Is that a function of timing of customer projects, or is there a supply component in there as the growth rates converge next year? Could you help us understand what changes in the drivers? Thank you.
I think there are a few elements. In Cloud and AI there is the usual lumpiness of AI system conversion, which affects timing. Across both segments, timing of supply availability matters. For networking, we grew roughly 10% in the quarter, but we grew two to three times orders and bookings in some product segments, which tells you demand is much faster than revenue. In Cloud and AI, we have a large backlog in servers, lumpiness in AI systems, and constraints on NAND for storage. It is a combination of many things. As memory becomes more available, we should see acceleration of conversion, but do not expect that to happen early in 2027. We factored all of this into our 8% to 12% guide for 2027. Thank you.
Next question please. The next question will come from David Vaught with UBS. Please go ahead.
Great. Thanks guys for all the details. Really appreciate it. Marie and Antonio, can we touch on networking for a second? So obviously strong results there, really strong orders. But just trying to get a sense for how we think about how those orders flow into the business because you guided approaching kind of double-digit normalized growth for this year and effectively double-digit growth at the midpoint for next year. Is there a reason why we are not seeing an acceleration? And then along those lines, what is driving the margin uplift next year in fiscal 27 in the networking business, particularly given the supply chain constraints and cost inflation that you have mentioned earlier? Thanks.
Thanks, David. It is all about supply chain in networking. Some of these products use DDR4, some DDR5 and other constrained components tied to wafer capacity. We continue to work with our suppliers; we believe we are the largest OEM partner of Broadcom in the networking space, especially when combined with the rest of the business. It is about supply availability at any given time to convert these orders. That is both a challenge and an opportunity—if something unlocks, conversion can accelerate. Marie, do you want to comment on margin?
What you are seeing for 2027 is actually the full-year benefit of the Juniper synergies program, which we started when we closed the deal. We expect those synergies to flow on a full-year basis from 2026 into 2027, and frankly that is what is driving the margins. It also helps us on cost of sales, buffering some of the commodity cost impacts and helping gross margin as well.
Next question please. The next question will come from Erik Woodring with Morgan Stanley. Please go ahead.
Hey, guys. Thank you for taking my questions and echo the congrats on the quarter and the outlook. Antonio, when you take a step back, can you just help us better understand exactly what has happened over the last 90 days in Cloud and AI? Your significant price hikes were already known last quarter, so that is not a surprise. But now you are looking at low-20% year-over-year Cloud and AI revenue growth versus 90 days ago you thought it would be mid-to-high single digits. What changed so abruptly in the last 90 days? Which customer cohort did this inflection come from?
Thanks, Erik. At the core is demand acceleration. That demand acceleration showed up in multiple categories in Cloud and AI. First, traditional servers—customers do not want to wait; they want access to products now. Second, agentic AI has been a key driver of demand acceleration. Third, on storage, we are benefiting from customers transitioning to Alletra MP as a go-forward platform, and we introduced new data platforms with object and file. There is a combination of virtualization modernization—customers modernizing virtualization layers also modernize the underlying infrastructure—our Morpheus and private cloud offerings are driving that. GreenLake is also a driver because once customers are on the platform, our net retention is near 110%. With budget constraints, consumption models grow because customers prefer OpEx models. Overall, the pipeline and customer engagement are super strong and networking helps drive cross-portfolio deals as well.
Next question please. The next question will come from Matthew Niknam with Truist. Please go ahead.
Hey, guys. Echo the congrats as well—phenomenal results. Antonio, you mentioned cross-portfolio sales. How prevalent are these right now? Are you seeing more cross-portfolio purchasing across server, storage, and networking product sets to bring some of these Juniper revenue synergies to fruition? Thanks.
I think it is the latter and it is early. Our enterprise data center switching orders grew 20%, which is very early in the process. We now see larger deals and larger engagement because the networking sales force has access to customers they previously did not. Product integration is happening: we are integrating Apstra lifecycle management intent-based provisioning for data center switching with Morpheus, enabling a full hybrid control plane for server, storage and networking and integrating software-defined networking into the VM Essentials stack. That will drive data center switching inside private cloud reference architectures. As Ethernet-based storage speeds grow, the advanced switching will be the Juniper switch at 1.6 terabits. Network and security convergence is also happening at the edge with SASE and secure service edge, but we are taking a bold approach to drive convergence down to the silicon layer. You will see more of that as we move forward.
Next question please. The next question will come from Aaron Rakers with Wells Fargo. Please go ahead.
Yes. Thanks for taking this. Congrats on the results. I want to go back to the traditional server business—40+ percent year-over-year growth is very impressive. Could you unpack how much of that is price pass-through to mitigate inflationary component costs versus underlying unit demand? And looking forward, does the guidance reflect continued expectation of price increases to mitigate impact? Any color on pricing strategy would be helpful. Thank you.
Thank you, Aaron. Units are up and we expect units to increase as we go forward because as prices normalize, units will rebalance. Units were up slightly this quarter. On pricing, we have been disciplined. We have seen significant cost dislocation. We expect costs to moderate in the second half and eventually normalize, but the cost and pricing environment will remain elevated into 2027. Units will rebalance and we expect demand to remain very strong into 2027, especially with agentic AI deployment.
Just to add on margin durability: our Catalyst program is helping both gross and operating margins. We are slightly ahead on that program, which gives us confidence around the durability of those margins. We also expect to see some improvement in unit volumes in the back half of the year.
Next question please. The next question will come from Timothy Long with Barclays. Please go ahead.
Thank you. I was hoping to touch on storage for a minute. Marie, could you talk about seeing outside growth in servers but not as much in storage—what do you think about pull-through there? I assume there is some ASP increase in storage because of NAND; could you touch on that dynamic? Thank you.
Sure. Alletra MP customer migration accelerated; we are driving triple-digit year-over-year growth in Alletra MP in both orders and revenue. Remember revenue recognition timing can be affected because some of our software is SaaS-like and portions of revenue may be deferred. Our go-forward storage platform is growing triple digits in orders and revenue, and over time that will fuel broader storage growth as it becomes a larger part of the portfolio. Overall storage was up 2% in the quarter, driven by the mix shift and disciplined pricing.
The final question will come from Simon Leopold with Raymond James. Please go ahead.
Hi, I think most of the questions have been asked. I guess we've heard some contradictory commentary from some of your peers regarding pull-through orders. Just curious what is giving you the confidence that the strength this quarter does not reflect any of that? And what is giving you confidence in the sustainability going forward?
We have no evidence in our orders or backlog of any pull-in or cancellations. Unlike past episodes where double-booking may have occurred, we do not see that. Because of the pipeline we have, we feel confident about the durability of demand that will drive sustained momentum. That's why Marie and I provided guidance for 2026 and a financial framework for 2027. I know there are more questions and the team will follow up with you. I want to wrap by saying we delivered an exceptional quarter with record-breaking results. Those results were driven by strong demand in the market, disciplined execution and our strategy—networking, cloud and AI—working together. The Juniper acquisition has been a home run and a big source of shareholder value creation. We believe the strategy is working. Our portfolio is the strongest it has ever been and you will see more of that in two weeks at HPE Discover. We will have seven acres of technology on display to show synergies across the portfolio. Most important is that we are building durable momentum. These results are not a one-time thing; they reflect the quality of earnings we are driving across the portfolio. I believe we are just unlocking value that has always been here and there is more to be done. I am very proud of what the team delivered this quarter and the guide we provided for 2026 and the framework for 2027. Thank you again for your time. Hope to see you soon or at HPE Discover.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.