Hewlett Packard Enterprise Co.’s stock rose as much as 8% in after-hours trading Tuesday after it reported third-quarter earnings that beat Wall Street estimates and raised its full-year forecast.

However, investors might be getting ahead of themselves, as revenue fell 7% and the company offered little optimism that growth would resume anytime soon.

Adjusted earnings of 45 cents per share beat the high end of the company’s previous guidance by five cents. Quarterly revenue of $7.22 billion was down from $7.8 billion in the same quarter a year ago. Analysts had expected earnings of 40 cents per share on revenue of $7.27 billion.

The company raised full-year earnings-per-share guidance for the seventh consecutive quarter. Profit per share is now expected to come in at between $1.72 and $1.76, up from a forecast range of $1.51 to $1.61 at the beginning of the year.

On the conference call with analysts, executives emphasized that their focus on growing profitability is paying off. Cash flow has been a record $2.6 billion year-to-date, up $927 million from the prior year. Operating margins improved to 9.9% from 9.1% in the same quarter a year ago and free cash flow rose to a record $860 million.

HPE is in the early stages of radical transformation of its business. Chief Executive Antonio Neri (pictured) has set a goal of delivering all of its product as a service by 2022. “I remain confident in our ability to drive profitable growth as we execute our strategy,” Neri said in a statement, an ambitious forecast given that a shift to consumption and subscription pricing usually exacts a toll on companies that rely mostly on product sales.

HPE has also focused on shedding low-margin businesses in favor of more lucrative high-end products. The improvement in gross and operating margins indicates it’s making steady progress on that front, but the company’s continued revenue shrinkage is concerning, said Charles King, principal analyst at Pund-IT Inc.

Profits over revenues

“The problem is that HPE’s plan to focus on higher margin software-optimized  hardware is similar to pretty much every one of its competitors, several of which have arguably deeper, stronger portfolios,” he said. “This quarter’s good news on profitability was offset by weaker revenues, indicating that HPE is by growing sales of its higher-margin products and cutting organizational and operational costs.”

Those sentiments were echoed by Patrick Moorhead, president of Moor Insights & Strategy. “HPE continues to drive solid profits and growth in select high-growth areas like hyperconverged infrastructure , networking, composable infrastructure and high-performance computing,” he said. “Now the company needs to focus on increasing the size of those growth areas to drive overall revenue growth.”

HPE’s revenue picture has been bumpy for the past several years, in part from several large acquisitions and divestitures. Annual revenues declined in 2015 and 2016, bounced back for the two following years and resumed their slide in the first three quarters of this year.

For the quarter, HPE’s “Hybrid IT” portfolio, which comprises both cloud and on-premises data center infrastructure. brought in the lion’s share of business at $5.5 billion, down 5% from last year when adjusted for currency fluctuations. The division also accounted for 90 percent of operating profit.

Compute revenue led the revenue dropoff, contracting 12%. Composable Cloud, which is a private cloud platform based on the company’s usage-based pricing, was up 28% and Nimble Storage grew 21%. Revenue from sales of the GreenLake flexible capacity compute platform were up 24%. “Our portfolio shift is working and our underlying revenue and earnings are significantly improving,” said Chief Financial Officer Tarek Robbiati.

High-performance computing and hyperconverged infrastructure didn’t fare as well, growing 2% and 4%, respectively. HPC revenue growth was down significantly from the 25% rate of the previous quarter, but has grown for 10 straight quarters and is expected to resume growth with the completion of the acquisition of Cray Research Inc., which Neri said will close ahead of schedule in calendar 2019.

Revenues from “Intelligent Edge,” which includes the Aruba networking product line, fell 3%, led by a 5% decline in Aruba product sales. On the bright side, Aruba services revenues grew 15%, but services is typically a low-margin business.

Hints of MapR acquisition cost

Executives also gave the first clue as to what HPE paid for the assets of MapR Technologies Inc., which it acquired earlier this month. MapR was purchased for “less than one times annual revenue,” Robbiati said. The competitive insights firm Owler has estimated the software company’s annual revenues were at an $80 million run rate.

Average unit prices are trending downward, which is a worrisome trend for a maker of data center servers, but the amount of add-on memory and storage that customers buy is continuing to increase, Neri said. “The cost per bit is coming down but the number of bits continues to grow,” Neri said.

In the cloud computing realm, HPE continues to focus on integrating public and private cloud infrastructure rather than helping customers manage multiple clouds, as many of its largest competitors are doing. Pund-IT’s King said that’s concerning.

“Helping customers better manage on- and off-premise systems, applications and data should be of paramount concern; if you don’t do that, customers will find a vendor that will,” he said. “Maybe HPE believes its cloud and software partners can fill in those gaps, but that kind of optimism borders on naïveté.”

Image: HPE/Facebook