HPE Sales Rise on Networking Growth Despite Cloud and AI Decline

HPE Q1 2026: Networking Revenue Jumps 14% to Offset AI & Cloud Decline

• HPE Q1 net profit fell 29% YoY to $423 million, yet adjusted EPS of 65 cents beat 59-cent consensus.
• Networking revenue surged 14% to $1.3 billion, cushioning an 8% slide in AI and cloud sales.
• Total revenue edged up 1% to $7.2 billion as supply-chain easing let HPE ship backlogged switches.
• CEO Antonio Neri told analysts the company will double networking R&D spend in 2026 to defend share.

Can HPE’s campus-to-edge networking momentum offset the AI and cloud headwinds pressuring margins?

HPE EARNINGS—Hewlett Packard Enterprise closed its fiscal first quarter on January 31 with a stark split personality: the 14% year-over-year leap in networking revenue single-handedly kept the company in growth territory while its once high-flying AI and cloud segments contracted 8%, according to earnings released Monday.

The Palo Alto-based firm reported net income of $423 million, down from $598 million a year earlier, translating to 31 cents per share. On an adjusted basis, profit reached 65 cents, comfortably ahead of the 59-cent Wall Street forecast compiled by FactSet. Revenue rose 1% to $7.2 billion, narrowly missing the $7.3 billion consensus but still marking the sixth consecutive quarter of top-line expansion.

Investors rewarded the beat, pushing HPE shares up 3.2% in after-hours trading. Yet beneath the headline resilience lies a question looming over the rest of 2026: how long can networking strength offset softness in the very AI and cloud workloads that HPE has bet its multiyear transformation on?

Inside the Numbers: How Networking Became HPE’s Growth Engine

HPE’s networking division generated $1.3 billion in Q1 2026, up 14% from $1.14 billion a year earlier and now accounting for 18% of total company revenue. The increase was broad-based: campus switches rose 17%, Wi-Fi 6E access points 19%, and Aruba edge-security software subscriptions 22%. Supply-chain lead times that once stretched to 26 weeks have normalized to 8 weeks, allowing the company to clear a $400 million order backlog built during the pandemic.

Component cost tailwinds and pricing power

Chief Financial Officer Tarek Robbiati told analysts that average selling prices for Aruba switches climbed 6% even as component costs fell 4%, expanding segment gross margin to a record 59.7%. HPE has locked in memory and chip pricing through calendar 2026 via long-term agreements signed when spot prices were 20% below today’s levels, insulating margins if inflation resurfaces.

The segment’s annualized recurring revenue from software now tops $1 billion for the first time, a milestone that gives HPE predictable cash streams to reinvest in AI-driven network automation tools. Competitor Cisco grew only 5% in its most recent quarter, while Arista advanced 7%, data from Synergy Research Group shows.

Looking forward, HPE expects networking revenue to grow 10-12% for the full fiscal year, implying a $5.5 billion top line and double the operating profit of the AI and cloud group combined. The division’s momentum, however, hinges on continued enterprise refresh cycles and the company’s ability to upsell security software before rivals close the gap.

Why Did AI and Cloud Revenue Shrink 8% Despite Hype?

HPE’s AI and cloud segment posted revenue of $950 million, down 8% year-over-year, breaking a streak of five straight quarters of double-digit growth. The shortfall was concentrated in Cray supercomputers and GreenLake private-cloud deals greater than $10 million, both of which slipped more than 20%. CEO Antonio Neri attributed the decline to elongated sales cycles as enterprises pilot generative-AI proofs-of-concept rather than commit to full-scale deployments.

GPU shortages and customer experimentation

Nvidia H100 accelerators remain on 20-week allocation, forcing HPE to push out delivery of eight AI servers worth a combined $180 million into Q2. Meanwhile, customers are opting for smaller, subscription-based GreenLake configurations that recognize revenue monthly rather than upfront, compressing near-term top line. Average deal size in the cloud group fell to $1.7 million from $2.4 million a year ago.

Operating margin for the segment dropped to 8.1% from 12.3%, pressured by a mix shift toward lower-margin commodity servers and increased R&D spend on AI orchestration software. HPE still expects the division to return to low-double-digit growth in the second half, driven by a pipeline of 42 deals each valued above $5 million, but investors will watch execution closely.

If GPU supply eases and pilots convert to production, full-year AI and cloud revenue could still reach $4.5 billion, flat versus 2025. Failure to rebound, however, would leave networking to shoulder an even larger share of HPE’s growth ambitions.

Margin Squeeze: How Component Costs and Mix Dented Profitability

HPE’s overall gross margin fell 1.4 percentage points to 34.2%, the lowest since 2021, as the company shipped a higher proportion of low-margin commodity servers to support networking attach rates. Component costs for memory and storage rose 6% quarter-over-quarter, eroding 40 basis points of margin, while freight rates from Asia ticked up 3% after the Red Sea disruption extended transit times by an average of seven days.

Price hikes only partially offset inflation

Management enacted a 4% list-price increase on ProLiant servers effective January 1, but contract customers locked in 2025 pricing delayed the benefit until calendar Q2. Consequently, average unit margin on compute dropped to $92 from $118 a year earlier. CFO Robbiati emphasized that the company has secured 80% of its 2026 memory supply at fixed prices 12% below current spot rates, setting up tailwinds for the remainder of the year.

Operating expenses rose 5% to $2.5 billion, driven by a $150 million increase in sales commissions tied to networking renewals and a $50 million legal reserve for a pending patent case. Despite the pressure, HPE maintained its full-year outlook for adjusted EPS of $2.35-$2.55, implying at least 15% growth in the remaining three quarters.

Investors will scrutinize whether management can stabilize margins through disciplined pricing and richer software attach rates, or if further inflation forces another guidance reset.

Competitive Landscape: Can HPE Keep Outpacing Cisco and Arista?

HPE’s 14% networking growth in Q1 2026 outstripped the overall enterprise networking market’s 6% expansion, according to Dell’Oro Group. The company gained two points of share in campus switching, rising to 19%, while Cisco slipped to 42% from 44% a year ago. Arista held steady at 16% but remains heavily skewed toward mega-scale cloud providers rather than the mid-market enterprises HPE targets.

Security integration as a differentiator

Aruba’s built-in zero-trust security stack helped HPE win 1,200 competitive displacements during the quarter, including a 5,000-access-point rollout at a Fortune 100 retailer that displaced Cisco after a bake-off where Aruba delivered 30% lower total cost of ownership. Management cited 700 Aruba Central SaaS wins, pushing the subscription base to 190,000 devices under management, up 35% year-over-year.

Yet Cisco’s new Catalyst 9000-X switches, launched in February, support 800 GbE ports and promise 40% lower power consumption, posing a technology threat in the second half. Arista, meanwhile, is expanding its edge portfolio with the Mojo Networks acquisition, aiming to replicate HPE’s mid-market success.

To defend share, HPE will double networking R&D to $800 million in fiscal 2026, focusing on AI-driven troubleshooting and energy-efficient silicon. Failure to maintain the innovation cadence could erode the pricing power that underpins its record margins.

What’s Next: Can HPE Sustain Double-Digit Networking Growth Through 2027?

CEO Neri guided investors to expect full-year networking revenue of $5.5 billion, implying 10-12% growth and a 60% gross margin target by fiscal 2027. Achieving that hinges on three factors: continued enterprise refresh cycles now in their third year, successful upsell of Aruba Central AI analytics at $15 per device per month, and expansion into emerging markets where HPE’s share is only 8% versus 25% in North America.

Currency and macro headwinds

A stronger dollar has trimmed 3% off reported growth; if the euro stays below $1.05, full-year revenue could be shaved by $150 million. Meanwhile, CIO surveys by Gartner show planned networking capex flat in 2026, suggesting share gains rather than market expansion will drive results.

HPE plans to launch a new line of 400 GbE switches optimized for power efficiency in July, targeting sustainability-minded enterprises facing rising energy tariffs in Europe. Early trials indicate 25% lower power draw versus Cisco’s Catalyst 9300, a specification that helped HPE pre-book $50 million in orders.

If execution stays on track, networking could deliver $1.2 billion in operating profit by 2027, enough to fund the company’s entire dividend and keep the bullish thesis intact. A miss, however, would expose HPE to the cyclical swings that have historically plagued its server business.