Hewlett Packard Enterprise (HPE, Financial) experienced a significant drop of 15% following its Q1 results. The company reported a slight EPS miss after eight consecutive beats, with revenue rising 16.3% year-over-year to $7.85 billion, slightly surpassing expectations. However, the outlook for Q2 and FY25 was well below analyst predictions.

Key highlights from the report include:

• HPE saw increased demand for servers, storage, and networking products, marking the fourth consecutive quarter of accelerated revenue growth. Server and Hybrid Cloud experienced double-digit growth, while Intelligent Edge exceeded expectations. Challenges persisted in the Server segment.
• Server revenue reached $4.3 billion, a 30% increase in constant currency (CC), but fell sequentially due to the timing of AI systems deals. HPE signed $1.6 billion in net AI orders, mostly from model builders, recognizing $900 million in AI revenue, more than double last year but down sequentially due to chip availability and customer readiness. These factors are expected to continue impacting the AI business.
• Margins declined year-over-year in both Server and Intelligent Edge segments, contributing to the EPS miss. Traditional server margins were affected by aggressive pricing competition and higher AI inventory due to demand shifts to next-gen GPUs.
• To improve margins, HPE has limited hiring, travel, and discretionary expenses and reduced its workforce to align costs with demand. Margin pressure is expected to persist over the next 1-2 quarters.
• Regarding its pending acquisition of Juniper Networks (JNPR, Financial), a trial date is set for July 9 following a DOJ lawsuit to block the deal. HPE believes the DOJ's market analysis is flawed and expects to close the deal by the end of FY25.

The quarter highlighted a significant concern with HPE's guidance falling short of expectations, particularly in the AI systems segment. Investors are cautious due to the lumpy nature of large AI deals, a sentiment echoed by Marvell (MRVL, Financial) recently, raising fears of an AI digestion issue in the coming months. HPE anticipates higher AI revenue conversion in the second half of FY25, driven by the transition to Blackwell GPUs, but investor apprehension remains.