Analysis: The first quarter of the newly split-off HPE Enterprise under Meg Whitman offers analysts a chance to review the strategy of the former software and services side of HP. Technology Business Research Analyst Andrew Smith takes a look.

HAMPTON, N.H. – HPE Software remains in cost-saving mode as it improves integration and go-to-market capabilities under the HPE umbrella.

With the completion of HPE’s corporate split the vendor moves forward with an emphasis on becoming a cloud and software-driven business, focusing growth around four customer transformational areas: hybrid cloud, security, big data and workspace productivity. HPE announced its dedication to these growth initiatives in December as it prepared to enter its first quarter as an independent company, separate from HP Inc.

Year-to-year revenue declines in 4Q15 cap off a challenging year for HPE and the HPE Software unit, prompting the vendor to focus on margin expansion and resource alignment during 1H16.

The earnings report: HPE shares surge

Here’s what The AP reported on HPE’s earnings Friday:

Hewlett Packard Enterprise’s stock rose nearly 14 percent, a day after the commercial technology vendor reported solid earnings in its first quarter as an independent company.

Analysts said the results were better than expected, showing the new company can increase sales and become more profitable after spinning off from the old Hewlett-Packard last fall.

Hewlett Packard Enterprise Co. sells commercial tech products and services, while another spin-off, HP Inc., is focused on personal computers and printers.

While total sales were down 3 percent from a year ago, HP Enterprise said revenue from computer servers, data storage systems and networking gear all increased after adjusting for currency fluctuations and one-time costs. All told, computer hardware contributed more than half of the company’s $12.7 billion in revenue for the quarter that ended Jan. 31.

The company also reported revenue from technology services was flat, after excluding the effects of a strong dollar. But analysts said the company should be able to increase profits from that segment in future quarters, as CEO Meg Whitman carries out previously announced plans to cut staffing and move some jobs overseas.

The results show “operating margins improved and we believe it will likely continue, due to improved (an) business mix as well as restructuring benefits,” said Wells Fargo analyst Maynard Um in a note to clients Friday.

Credit Suisse analysts said the results provide “continuing evidence” of a turnaround for the company, after several years in which the old Hewlett-Packard struggled with internal problems and changes in tech industry buying patterns.

HPE’s revenue declined 3% year to year in 4Q15 to $12.7 billion. HPE Software’s revenue totaled $780 million in 4Q15, a decline of 10% year-to-year. License revenue declined 6% year-to-year, while SaaS revenue declined 9% year-to-year during 4Q15. HPE remains challenged to overcome significant product and business model shifts, driven by customer transitions to cloud purchasing preferences.

Many software vendors face similar challenges. IBM, Oracle and VMware struggle to grow new products while also slowing the erosion of legacy install bases as customers migrate to cloud applications and services.

We believe the decline of HPE’s license revenue is a result of customer transitions from perpetual license agreements and the expansion of term licenses and subscriptions for software as a long-term annuity. We believe it is important to note that HPE’s license declines have shrunk over the past four quarters, and we expect them to continue trending toward positive growth during 2016. The continued decline of HPE’s SaaS revenue presents a more challenging picture for HPE.

The vendor’s SaaS revenues have experienced year-to-year declines since 1Q15, which we believe is due to the slow transition of legacy license agreements to a true SaaS model and increasingly competitive price points in SaaS markets, which results in a race-to-the-bottom scenario where HPE is being outpaced by cheaper competitors. However HPE continues to transition its portfolios strategy to combat this reality. During HPE’s earnings call, CEO Meg Whitman reported the Software group’s ITOM and ADM portfolio experienced record SaaS revenue growth.

HPE outlined its long-term strategy to overcome these business and portfolio challenges. During the vendor’s 4Q15 earnings call, HPE reiterated its dedication to aligning its software portfolio and go-to-market approach to areas that will provide consistency in messaging and enhanced growth opportunities. Margin improvement also remains a key strategy for HPE to improve its bottom line and sustain investment in new product development and M&A opportunities necessary to grow its expanding portfolio of hybrid cloud, security and mobility solutions.

In 3Q15 HPE Software’s operating margin was the highest of any HPE division. HPE Software continued this distinction in 4Q15, achieving operating margin of 17.4%. Finally, HPE will continue divesting noncore software assets to shift assets to higher-value opportunities. HPE has divested iManage, LiveVault and TippingPoint solutions.

We expect HPE to continue managing the decline of its legacy license and maintenance revenue streams while transitioning customers to annuity-based purchasing options in high-value areas. We expect the vendor’s big data and hybrid cloud management solutions to experience growth over the short term, continuing to establish a strong foundation for growth. HPE announced on its earnings call that Verica experienced triple-digit license revenue growth in 4Q15.

HPE focuses on private and managed cloud solutions to deliver IT and application management capabilities across multiple, hybrid platforms — making partnerships more critical than ever

HPE announced its exit from the public cloud market on Oct. 21, signaling an important strategic shift that positions the vendor as cloud broker and integration specialist. We expect the move to allow HPE to leverage its strengths in cloud components and private cloud to more effectively deliver open and vendor-agnostic tools and services to enable hybrid cloud transformation.

Expect HPE to align with leading public cloud suppliers such as Amazon Web Services (AWS), Microsoft and Google, where its integrated IT and application management capabilities will help customers unlock the full value of their hybrid cloud technology stack.

We also believe HPE’s cloud strategy will allow it to take advantage of a wider range of services-oriented business engagements that can facilitate cloud and software-defined transformations. At HPE Discover in December, HPE announced an expanded partnership with Microsoft that unlocks opportunities for HPE to provide infrastructure and services in concert with Microsoft’s hybrid cloud offerings. The two vendors also announced plans to integrate compute platforms to help customers transform their hybrid IT environments, and the introduction of HPE Hyper Converged 250 for Microsoft Cloud Platform System Standard.

TBR believes the expanded collaboration with Microsoft illustrates HPE’s focus and ability to provide complementary components and integration assets as a hybrid cloud broker.

(C) TBRI