In a boost to optimism that Hewlett-Packard Enterprise Co.’s worst days are behind it, the company topped analysts’ estimates and its own guidance in its first quarter under new Chief Executive Antonio Neri and also raised its full-year revenue outlook.

But thanks to a downbeat forecast for the second half of the fiscal year from Neri (pictured), investors aren’t quite buying the turnaround yet. HPE’s shares plunged almost 11 percent Wednesday, to $15.58 apiece.

Fiscal second-quarter revenue rose 10 percent from a year ago, to $7.5 billion, or up 6 percent when adjusted for currency fluctuations. Net income of $778 million, or 34 cents per share, doubled last year’s figure and beat analysts’ expectations of 31 cents. Adjusted revenues were up 6.4 percent, the fourth consecutive increase in quarterly revenues after three straight quarters of decline.

An important data point was the growth in operating margins for the company’s Hybrid IT portfolio — which contributes more than 95 percent of total revenues — to 10.3 percent, up more than two points over the previous year. Increasing profitability is a sign that HPE is “pivoting from volume to value,” following a series of major divestitures of its noncompetitive and low-margin businesses, said Neri.

The company raised its third-quarter earnings forecast to between 35 and 39 cents per share and its full-year estimates to $1.40 to $1.50 per share, up from earlier guidance of $1.35. HPE got an unusually large boost from favorable currency exchange rates in this quarter, a situation Neri said is unlikely to continue. Nevertheless, he said, “I’m confident we will deliver on our annual FY18 outlook.”

Investors mildly applauded the news at first, bidding up HPE shares by about four-tenths of a percent in after-hours trading Tuesday, following a decline of over a half-percent on a day when the Dow Jones industrial average lost nearly 180 points. But the next day, Neri’s comments weighed much more heavily on the shares.

“Despite some thawing in the hardware spending environment, we think fundamental spending challenges persist, with meaningful upside to expectations less likely over the near term,” Mizuho Bank analyst Abhey Lamba wrote in a note to clients.

Nonetheless, some analysts appeared to like the longer-term prospects. “While revenue growth will slow on tougher compares in the back half of this year we see low single digit growth as sustainable which combined with cost savings that are back half loaded leaves room for further upward EPS revisions,” Morgan Stanley analyst Katy Huberty wrote in a note to clients.

Turning the corner

With four straight quarters of revenue growth, HPE appears to have closed the book on a painful two-year process of downsizing and divestiture. “This isn’t an anomaly; it appears the company is on track with its one-two punch of hybrid IT and intelligent edge,” said Patrick Moorhead,  president and principal analyst at Moor Insights & Strategy. “The company has shown leadership in composable infrastructure, edge computing and edge wireless networking for mobile buildouts.”

Computing revenue grew 6 percent, storage revenue climbed 24 percent and data center networking sales rose 2 percent. Storage growth was bolstered last year’s acquisition of Nimble Storage Inc., but organic growth was still a respectable 14 percent. All-flash memory arrays grew 20 percent.

“While the overall storage market remains competitive, we like our competitive position,” said Chief Financial Officer Tim Stonesifer. He said the company expects to gain at least one-half percent of market share in the fiscal third quarter, which would be the 10th straight quarter HPE has held or grown storage market share.

Pointnext, HPE’s rebranded services organization, was one of the few disappointments, with sales growing just 1 percent, to $1.85 billion, a decline when factoring in currency fluctuations. Stonesifer dismissed the results as a function of exchange rates and the long-term nature of Pointnext contracts. Neri added that the revenue figure undervalues the leverage that the services business provides by driving sales of high-margin products. “Our services business is a major revenue contributor,” he said.

The company’s fledgling Intelligent Edge business, which connects endpoint devices in a distributed network, rose 17 percent, to $710 million. The Aruba networking business was also a bright spot, with 18 percent revenue growth. Neri said HPE has high expectations for its hyperconverged server line with the addition of the technology it picked up with this month’s acquisition of software-defined networking startup Plexxi Inc.

The effects of the company’s cost control efforts showed in general and administrative costs that were slightly lower than the same period last year. Cash flow declined, but Stonesifer said the company expects full-year cash flow to achieve the $1 billion target the company set at the beginning of the year. Sales outside the U. S. were particularly strong, with 18 percent growth in Europe/Middle East/Africa and 11 percent in Asia Pacific. Sales in the Americas rose only 2 percent.

HPE is in the midst of a shift in its operating model called HPE Next that is intended to streamline operations, reduce management overhead and simplify its product portfolio. The program, which Neri championed from the beginning, has “reduced layers of management, dramatically reduced the number of platforms from 26 to seven and moved more decision-making to the front line,” he said. He estimated HPE Next saved $250 million in the first quarter alone.

“We have tremendous opportunity to improve our cost structure and growth through streamlined operations,” Neri said. “We will automate everything we can.”

With reporting from Robert Hof

Image: SiliconANGLE