Hewlett Packard Enterprise (HPE) reports mixed first quarter results, beating adjusted EPS expectations but missing on revenue –– the company reporting $6.76 billion versus the $7.10 billion expected. CEO Antonio Neri tells Yahoo Finance the revenue shortfall stems from tough competitors, network slowdown, and constrained AI supply. Despite these challenges, Neri stresses that HPE continues to drive "very strong profitability, up 200 basis points year over year."

On AI, Neri notes enterprise adoption requires robust data center capabilities that the enterprise space currently lacks. To this end, HPE aims to build out AI-optimized infrastructure. In the meantime, the company plans to "offer alternatives" to meet customer needs within AI's limitations.

As AI adoption advances, Neri sees HPE's technology becoming critical to running complex AI systems at scale.

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Editor's note: This article was written by Angel Smith

Video Transcript

BRIAN SOZZI: HPE shares in focus after some sales results and overall results that may have surprised a few investors. Let's get right to HPE CEO Antonio Neri. Antonio, always nice to see you. I think a lot of focus today is on the double digit revenue drop. Explain to investors what happened in the quarter. And then what did you see towards the end of the quarter?

ANTONIO NERI: Well, good morning, Brian. Thanks for having me. There is a lot to be proud about this quarter, although it was mixed in the sense that we beat our own profitability expectations. We continue to drive that recurring revenue, which was up another 41%. And obviously, we beat the EPS. But our total revenue was below our expectation. It was driven by three key factors, I would say.

Number one, let's remind ourselves we have tough competitors. Because last year this time of the quarter, we had to ship all that backlog. And therefore, we had that tough compare this time around. But I think people understand that.

But really, the two key drivers of the kind of softening on the revenue were the networking slowdown in the market, which is consistent with our peers. And then second is the fact that AI, although is strong, we don't have enough supply.

And part of that revenue we shipped in the quarter actually went to the deferred revenue. And that's going to be the case going forward. Because as enterprises ramp, particularly on the inferencing aspect, they cannot afford these large systems. They have to pay as you go. So that's why you have that dynamic.

But overall, I mean, we continue to drive very strong profitability. In fact, our profitability was up 200 basis points year-over-year, again, 600 basis points from five years ago. And we have an amazing pipeline ahead of us, with a backlog in AI that now sits at $3 billion.

BRIAN SOZZI: I really enjoyed a lot of the granular details, Antonio, you and your team talked about on the earnings call with respect to getting some of this new technology into companies and then companies setting it up. And I think you called out power and cooling requirements. I haven't heard a lot of other tech companies acknowledge that these things or these bottlenecks are happening. What exactly are you seeing with companies as it pertains to those things?

ANTONIO NERI: Yeah, Brian, I mean, when you think about AI, I think about all the life cycle-- training, tuning, and inferencing. Much of the action we have seen to date has been pretty much on the training side. Think about large companies like OpenAI and others, but also the hyperscalers. And now we start seeing the uptick in the enterprise space. But the enterprise doesn't have all the capabilities in the data center, where the power and cooling required to run these large systems.

And that's why we have stood up two sites, where we're going to host some of these environments in as a service model for our enterprise customers. But you need a lot of power. To give a sense, 500 GPUs can take more than 2 megawatts sometimes of power. And so that's not very easy to come by, and therefore, you have to work toward that goal and offer alternatives to those customers.