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Despite reporting better-than-expected earnings and raising its 2019 forecast Thursday, Hewlett Packard Enterprise Co. Friday saw its shares move sideways as investors digested some mixed results.

Initially HPE’s stock rose more than 3 percent in after-hours trading Thursday after the veteran enterprise computing company’s profit per share jumped 31 percent from a year ago, to 42 cents — ahead of analyst consensus estimates of 35 cents.

Quarterly revenues fell 2 percent from a year ago, to $7.6 billion, but HPE said that figure was dragged down by “tier 1 products,” which is the company’s shorthand for commodity hardware. Factoring out those low-margin items, the company said sales grew 1 percent, while hardware sales rose 3 percent.

HPE also raised its full-year earnings guidance to between $1.56 and $1.66 per share from the $1.51 to $1.61 it had estimated last quarter. It was the fifth straight quarter in which the company has raised estimates. Update: After sleeping on it, investors were less enthused. Shares rose a half-point Friday, to $16.31 a share.

“Financially, HPE is doing great and is a company that doesn’t get nearly as much credit as it deserves,” said Patrick Moorhead, president and principal analyst at Moor Insights & Strategy.

Winning where it matters

Still, the revenue decline broke a four-quarter string of growth following five years in which the company shrank by divesting much of its services and software businesses. On the quarterly earnings call, executives repeatedly invoked the term “winning where it matters” to describe its high-margin strategy.

The dividends of that strategy were evident in higher profitability metrics such as cash flow and operating margins, which were up 169 percent and 22 percent, respectively. Operating profit grew 19 percent, well above the 6 to 8 percent target the company had set last quarter. Despite recent rumblings about a general slowdown in information technology spending, HPE executives said business looks strong for the foreseeable future.

Growth markets such as composable computing, hyperconverged infrastructure and flash storage arrays continued on a strong trajectory. Synergy, which is the company’s software-defined composable platform, is on a $1 billion sales run rate two years after its introduction and the company’s hyperconverged portfolio grew 70 percent, said Chief Executive Antonio Neri (pictured). Sales of all-flash arrays rose 20 percent and the high-performance computing category as a whole jumped 50 percent.

However, revenues in the Hybrid IT category – which is by far the company’s largest – fell 3 percent, although profit margins increased. Chief Financial Officer Tarek Robbiati said the top line continues to be drawn down by what he called “dilution” created by low-margin hardware products that constitute a steadily dwindling percentage of the portfolio. Dilution in the first quarter was greater than expected, Robbiati said, but should be below expectations going forward.

“HPE still has work to do to unwind itself from the hyperscaler business, which has been a drag overall on severs for five quarters,” Moorhead said.

Restoring growth to that category should be a priority, said Holger Mueller, principal analyst and vice president at Constellation Research Inc. “Positive momentum is slowing down,” he said. “The company must get growth up in its hybrid computing division to return to healthy and encouraging growth.”

Revenues for the Intelligent Edge category led by the company’s Aruba networking gear and services grew only a scant 5 percent and account for just 9 percent of total revenue. But Neri stressed the long-term strategic significance of that business as more processing moves to the network edge.

“We see the growth of the cloud being closer to where the data is created,” he said. A broad refresh of the Aruba product line announced in November should trigger strong results in the Intelligent Edge business for the rest of this year.

“Our unique ability to connect all our customers’ data between all their infrastructure and clouds is a significant differentiator,” he said. “Our bookings in Aruba are incredibly strong. We’re super, super bullish about the new offerings.”

Betting on the edge is a smart strategy given that HPE completely missed its opportunity in public cloud infrastructure, Mueller said. “Now it’s about saving on the hybrid side what can be saved and coexisting with the public cloud vendors as partners,” he said.

With reporting from Robert Hof

Photo: HPE/livestream