‘Customers are exploring new ways to use AI, adding to our already robust pipeline and creating even more runway for our broad AI offerings,’ said HPE CEO Antonio Neri as the company released fiscal third quarter financial results. ‘Enterprise interest in generative AI is high, and while adoption is still in the initial stages, it is accelerating.’

Hewlett Packard Enterprise CEO Antonio Neri told investors Wednesday that AI momentum is increasing, with AI system orders growing $1.6 billion sequentially in the most recent quarter to a cumulative $6.2 billion since the first quarter of Fiscal Year 2023.

“In AI, our momentum is very clear,” said Neri. “Customer demand for HPE AI systems rose sequentially, with opportunities increasing in both enterprise and sovereign AI clouds as customers explore more use cases.”

Overall AI system orders are up approximately $3.5 billion over the last year, Neri said.

For the third fiscal quarter, ended July 31, HPE converted approximately $1.3 billion of orders into AI systems revenue, an approximately 40 percent increase from the last quarter.

“Customers are exploring new ways to use AI, adding to our already robust pipeline and creating even more runway for our broad AI offerings,” said Neri. “Enterprise interest in generative AI is high, and while adoption is still in the initial stages, it is accelerating. Customers tell us that they see the possibilities and are building the business cases.”

In fact, Neri said, HPE sees use cases across multiple enterprise verticals, from health care to financial services to manufacturing. As the use cases “mature,” those customers are looking for help from HPE and its partners to guide implementation across the enterprise, said Neri.

HPE is set to get a big boost to its AI efforts with the formal general release this week of its breakthrough HPE Private Cloud AI turnkey offering, developed hand in hand with AI kingpin Nvidia as part of the new “Nvidia AI Computing By HPE” portfolio.

“With three clicks and less than 30 seconds to deploy, HPE Private Cloud AI dramatically simplifies DevOps, ITOps, and FinOps for enterprise customers, allowing them to easily establish and meter their [AI] environments,” he said.

In an interview with CRN before the conference call, Neri said AI “momentum” with service providers and generative AI large language model builders continues to be “very strong.”

As for enterprise adoption, it is growing, with 15 percent of total orders for AI systems now coming from the enterprise, said Neri. “That is not even with HPE Private Cloud AI on the market, which just became available,” he noted.

HPE Executive Vice President and CFO Marie Myers said that HPE continues to see “positive” AI signs from enterprise customers, with more than 80 percent of enterprises now experimenting with GenAI initiatives.

“That supports our view that the number of customers will continue to trend favorably,” she said. “This quarter our enterprise AI pipeline more than doubled sequentially.”

Neri told CRN he has “tremendous hope and excitement” about the growth potential of AI. “Customers are now maturing their business models and are becoming more confident in their ability to use this technology,” he said.

As for sovereign cloud sales, Neri said there is “huge interest,” but it takes time for those deals to close because the “design and procurement process are elongated” with government and venture capital approvals lengthening the sales cycle.

Besides the AI momentum, HPE server sales in the quarter were up 35 percent from the year ago period to $4.3 billion with a 10.8 percent operating margin compared with 10.1 percent in the year-ago quarter. That operating margin is up 70 basis points year over year but down 20 points sequentially.

HPE server sales were up 27 percent through partners, said Neri.

AI system revenue now makes up a 30 percent share of total system revenues, up from just 10 percent in the year-ago quarter, said Myers.

C.R. Howdyshell, CEO of Advizex, a Fulcrum IT Partners company and a top HPE partner that has invested heavily in hybrid AI and on-premises pay-per-use cloud consumption, said he expects his HPE sales to be up at least double digits this year with strong sales in both AI infrastructure and pay-per-use on-premises consumption with HPE GreenLake.

Howdyshell praised HPE Vice President and General Manager of High Performance Computing and AI Solutions for North America Jerome Boucher for helping drive the strategic engagement with Advizex around HPE AI infrastructure and software.

“These AI infrastructure deals are heavy lifts,” he said. “These deals are hard. They are six-month sales cycles. It takes a collective effort with help from channel-committed sales leaders like Jerome Boucher. Currently the margins are small. The important thing is to be committed to the AI strategy and the investment it requires to make long term AI gains.”

Key to success in driving AI solutions with partners is establishing AI credibility with both OEMs and customers, said Howdyshell. “Once you establish that credibility, bigger sales will follow,” he said.

Advizex, No. 115 on the 2024 CRN Solution Provider 500, overall among all of its OEMs—including HPE and Dell Technologies—has booked $60 million in total AI infrastructure and software deals this year, said Howdyshell.

“As a result of AI and on-premises pay-per-use cloud consumption, we are seeing top-line gains with both HPE and Dell,” he said.

The big difference at Advizex in driving the AI and consumption sales has been the appointment earlier this year of Steve Kucker, an 11-year Advizex sales veteran, to the new position of vice president and general manager for high-performance compute and AI, said Howdyshell.

“Steve Kucker is delivering, focused only on AI and consumption with AI,” he said. “We have a strong sales funnel. The challenge for us is can we close enough of them to make it another special year.”

Overall for its third fiscal quarter, HPE reported non-GAAP earnings of 50 cents per share—two cents above the high end of its guidance—on a 10 percent increase in sales to $7.7 billion, which was also at the high end of HPE guidance.

HPE shares were down 36 cents or two percent to $18.41 in after-hours trading.

HPE’s non-GAAP gross margin in the quarter was 31.8 percent, down 410 basis points year over year driven by a “lower mix of intelligent edge revenue and a higher mix of AI server revenue,” said Myers.

“We have balanced gross margin pressures by executing on strong cost controls and by maintaining pricing discipline in a competitive AI server market,” said Myers.

HPE non-GAAP operating expenses were down 7 percent year over year, said Myers, despite a “seasonal increase” in marketing expenses associated with the annual HPE Discover event.

Myers said HPE expects to “balance gross margin pressure from a higher mix of AI systems with continued operating discipline” with a plan to come in at the low end of operating profit growth guidance of zero to 2 percent.

Neri said HPE is “very pleased” with the services that are attached to AI systems. “I believe that will continue to grow as we grow the enterprise segment of the market,” he said. “That segment of the market comes with more rich services—day zero, day one and day two services.”

Most of the AI services attach is maintenance that gets recognized over the length of the contract, said Neri. “I’m positive on both gross margin accretion as we recognize the revenue and more services as we start selling the HPE Private Cloud in the enterprise space,” he said.

Overall, the IT demand environment improved in the quarter, said Neri. “We saw sequential and year-over-year order growth but with some geographic variation,” he said. “Demand was strong in North America, Asia Pacific, Japan and India, while Europe and the Middle East lagged. We are aggressively going after the opportunity presented by better market conditions and are well positioned in a competitive and dynamic environment as we close our fiscal year.”