# HPE: AI drives compute and networking revenues higher while storage languishes > Source: > Published: 2026-06-02 14:34:00+00:00 AI/ML # HPE: AI drives compute and networking revenues higher while storage languishes HPE’s second fy2026 quarter saw rocketing networking revenues as AI meant more data had to move to servers, with HPE significantly beating its outlook and raising future guidance. Revenues in the quarter ended April 30 were $10.7 billion, 40 percent higher Y/Y, and rather more than its $10 billion high-end guidance. GAAP net income totaled $624 million, a big turnaround from the year-ago $1 billion loss. The Cloud and AI business segment brought in $7.7 billion, up 22.9 percent, while Networking reported revenues up 148.2 percent to $2.7 billion, substantially increased through the [Juniper acquisition](https://www.blocksandfiles.com/storage-networking/2024/01/10/juniper-networks-kit-that-hpe-will-get-if-14b-buy-clears/1592298?_gl=1*15p7o1f*_ga*MzE5OTg0NTIxLjE3NjI4MTAzNjQ.*_ga_NSDTXHMMN0*czE3ODAzOTg2OTkkbzM5NSRnMSR0MTc4MDM5OTAzNSRqNTMkbDAkaDA.). (This was a 10 percent rise when normalized to take into account Juniper’s year-ago revenues.) The gross margin was 36.5 percent, up 810 basis points (8.1 percent) on the year and 60 basis points (0.6 percent) since the last quarter. There have now been ten consecutive growth quarters and HPE said these record second quarter results put it two years ahead of its fiscal 2028 long-term financial plan. Antonio Neri, president and CEO, said in the [earnings call](https://seekingalpha.com/article/4910772-hewlett-packard-enterprise-company-hpe-q2-2026-earnings-call-transcript): “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.” He added: “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, unstructured storage data growth and Private Cloud adoption for AI.” **Quarterly financial summary:** Gross margin: 36.9 percent, up from 35.9 percent last quarter and 29.2 percent last year Cash flow from operations: $1.4 billion vs $1.2billion last quarter and -$390K a year ago Free cash flow: $915 million vs $708 million in the prior quarter and -$887K a year ago Capital returns to shareholders of $343 million in the form of dividends and share buybacks vs last quarter's $348 million Diluted EPS: $0.44 vs $0.31 last quarter Cash & cash equivalents: $5.3 billion vs last quarter’s $4.84 billion Total net debt: $16.0 billion HPE's networking segment has 4 components: Campus and Branch revenue was $1.3 billion, up 50.2 percent from the prior-year period and a record high. Data Center Networking was $320 million, up 233.3 percent from the prior-year period. Security was $273 million, up 155.1 percent from the prior-year period. Routing was $775 million, compared to $1 million in the prior-year period The Cloud and AI segment grew less dramatically but within it, servers sent revenues up substantially: Server was $5.5 billion, up 32.7 percent from the prior-year period. Storage was $1.2 billion, up 2.4 percent from the prior-year period. Financial Services was $0.9 billion, up 5.6 percent from the prior-year period. HPE said traditional server orders increased by triple digits Y/Y as customers upgraded their server estate for AI Inferencing and general modernization. Unlike Dell, HPE does not separate out AI-optimized servers from traditional servers. HPE took in $1.8 billion in AI systems orders. Server revenues were helped by higher average selling prices, driven by ongoing DRAM and NAND inflationary costs and supply constraints. Storage was the weakest link, however, and for the sixth consecutive quarter, orders for Alletra Storage MP increased by triple digits. Neri said: “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 percent in the first half, with a notable rise in net new logos.” The weak storage link is being strengthened by HPE pushing customers towards the Alletra products; Neri again: “We are forcing a transition to our Alletra MP because also we are end-of-lifing legacy products. And then we introduced new data platforms with object, which we expect to accelerate now with [the] introduction of [file](https://www.blocksandfiles.com/file/2026/05/12/hpe-updates-alletras-x-and-b10000-zerto-and-data-fabric-in-greenlake-private-cloud-update-blast/5239011).” So, “over time, that's going to fuel the growth in the total storage [area] as it become the biggest part of the portfolio.” AI is getting added in to the products: “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 & AI agentic services to our GreenLake cloud platform, acquiring new customers and increasing the net retention rates for our GreenLake services business, which remains near 110 percent.” The GreenLake subscription platform now manages over 6.7 million systems, up from 5.3 million a year ago, with approximately 50,000 customers. Asked whether the demand rise HPE is seeing is durable and not due to customers buying ahead of expected price rises, Neri said: “customers, when you think about budgets, obviously, they are challenged because of the price increases we have seen driven by the cost of commodity. But I can tell you, we have not seen any pull in. We don't see a cliff,” he told analysts foreseeing a forthcoming drop-off in orders. Internally HPE has “more than 250 use cases, mostly agentic AI, which have been already deployed. And now 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. And when you go through that motion, then AI inference is growing. And so we expect that AI inference is going to be an accelerator of our demand as we go forward.” Neri is convinced of this: “I believe by the end of the decade, much of the demand will be in the inferencing space. And that's why [our] combination with networking and compute and storage, and memory, by the way, will give us the ability to be more competitive and honestly harvest more of the value of the gross margin as we go forward.” HPE reckons it is in an advantageous position because it can talk to enterprises about combined compute (CPU and GPU), networking and storage, AI-focussed IT infrastructure uniquely, unlike competitors Dell and Lenovo. Turning to the outlook, Neri said: “We expect demand strength to continue into fiscal 2027 and beyond, which will accelerate durable shareholder value as we continue to scale profitably.” EVP and CFO Marie Myers said: “Based on our performance, we are raising our fiscal 2026 guidance and introducing a fiscal 2027 financial growth framework. These updates reflect the durability of our performance and continued operational excellence – and point to faster progress toward our long-term financial plan.” HPE is raising revenue growth expectations for the Networking segment to 72 percent to 75 percent. With that in mind, next quarter’s revenues should be $11.8 billion ± $300 million, a 29.2 percent rise at the mid-point. The full fy2026 guidance is a 31 percent mid-point rise $44.6 billion ± $186 million The company is introducing its growth framework for FY27, estimating revenue growth to be in the range of 8 percent to 12 percent, reinforcing the idea that it sees current high demand lkevels staying strong. Bootnote The divestiture of HPE’s stake in China-based H3C Technologies Co. was completed on May 28. Cash proceeds totaling approximately $1.357 billion were received in exchange for the sale of HPE’s remaining 19 percent of total H3C shares outstanding. Recent publicly owned supplier quarterly storage results: Dell - $4.3 billion, up 8 percent Y/Y Everpure - $1.1 billion, up 35 percent NetApp - $1.95 billion, up 12 percent HPE - $1.2 billion, up 2.4 percent We understand that, only when the Alletra transition is complete and on-prem AI Inferencing pushes up data storage needs, will HPE storage revenue growth accelerate.