When Hewlett Packard Enterprise Co. stunned investors with an unexpected 15% decline in revenue in its fiscal second quarter, Chief Executive Antonio Neri reassured them that the shortfall was a onetime event related to the COVID-19 pandemic. It appears he was right.

HPE today reported profit and revenue for its fiscal third quarter that, while lower than a year earlier, came in well above Wall Street estimates. On the company’s conference call, Neri (pictured) and other executives repeatedly invoked the importance of comparing results to the previous quarter rather than to a year ago. It was easy to see why.

Profit fell nearly 30% from a year ago, to 32 cents per share, while revenue declined 5%, to $6.82 billion. However, both were far better than the 23-cent-per-share profit and $6.06 billion in revenue that analysts had expected. They also represented strong growth over the previous quarter’s $6 billion in revenue and 22 cents in earnings. Shareholders bid up HPE stock by more than 5% in after-hours trading.

Executives said the company’s audacious publicly stated goal of shifting to a 100% software-as-a-service model by the end of 2022 was prescient. The company’s annualized run rate for its as-a-service offerings was $528 million in the quarter, up 11%. Sales of GreenLake, the platform that delivers on-premises infrastructure as a service, grew 82%.

“Navigating through the pandemic and planning for a post-COVID world have increased customers’ needs for as-a-service offerings, secure connectivity, remote work capabilities and analytics to unlock insights from data that are aligned to our strategy,” said Neri.

The company guided the outlook for its fourth quarter to a profit of between 32 and 36 cents a share, ahead of analysts’ 31-cent estimates. It also raised full-year guidance to between $1.30 and $1.34 per share compared to consensus estimates of $1.21.

‘Bet the company’

“GreenLake was a ‘bet the company’ play and it’s nice to see things coming together,” said Patrick Moorhead of Moor Insights & Strategy. “It’s always painful reorienting a company around services, but HPE so far is doing an admirable job.”

Compute revenue of $3.4 billion was flat with the previous year but up 29% over the previous quarter, driven by a $500 million order backlog that HPE said it successfully worked down along with a surge in demand for virtual desktop infrastructure. Storage sales declined 10%, to $1.1 billion, but rose 4% from the prior quarter.

“The company’s server revenues were flat and storage sales declined but HPE succeeded at curtailing expenses and improving supply chain execution,” said Pund-IT analyst Charles King. “Add in growing demand for its GreenLake cloud solutions and you have the makings of a considerably better-than-expected quarter.”

HPE’s gross profit margin of 30.4% was down from 33.9% a year earlier, but Chief Financial Officer Tarek Robbiati attributed the decline to larger shipments of low-margin computers as the company pared its backlog. Neri said that after normalizing for backlogs, both storage and compute gross margins grew over the previous quarters. Free cash flow rose an impressive 43%, to $924 million.

Executives said the company’s financial position is solid for the long term, buoyed in party by expected annual savings of at least $800 million by end of 2022 thanks to a “simplified portfolio and revamped customer engagement,” Neri said. Added Robbiati, “Bottom line is we have a strong cash position and ample liquidity available to run our operations and continue to invest in our business.”

Neri was bullish about the long term as well. “Customers are looking to strengthen their operations and IT plays a huge role in that, particularly in strengthening resiliency,” he said. “As a result, HPE is stronger. We are confident we will see steady growth going forward.”

Image: HPE