Editor’s note: HPE endures revenue attrition as its transforms to embrace hybrid IT as made clear in its latest earnings report, writes Technology Business Research Analyst Stephanie Long. 

HAMPTON, N.H. – In the fourth quarter of 2016, HPE endured near-term internal and external challenges as it executed long-term modernization strategies

In 4Q16, Hewlett Packard Enterprise (HPE; NYSE: HPE) achieved $11.4 billion in revenue, representing a 10% year-to-year decline. This performance reflects HPE’s status as an incumbent vendor in a challenging market, with multiple internal and external challenges preventing top-line gains. For example, HPE’s converged storage business — a large and mature piece of its overall storage business — experienced a 12% year-to-year revenue decline in 4Q16, inhibiting the vendor’s ability to offset the impact of declining demand for legacy storage technologies.

To drive long-term revenue stabilization and customer engagement, HPE remains committed to its long-term strategy of enabling hybrid IT, which is supporting customers’ use of in-house and cloud-based environments. Through a series of R&D- and acquisition-supported portfolio evolutions, HPE is consolidating its business around, and exhibiting pockets of growth in, associated markets. For example, the company noted during its 4Q16 earnings call that its November 2016 acquisition of high-performance computing (HPC) solution provider SGI resulted in accelerated momentum in the HPC space.

HPE continues to evolve, as evidenced by its pending spin-merge transactions for noncore services and software assets with CSC and Micro Focus, as well as its pending acquisitions of hybrid cloud orchestration provider Cloud Cruiser and network security vendor Niara. In the face of strong competition and similar evolutions from Cisco, Dell Technologies and others, HPE faces a period of continued investment to ensure its long-term differentiation.

HPE’s operating margin increased 110 basis points year-to-year to 4.1% of revenue in 4Q16, supported in part by headcount optimization initiatives. This improvement stands to be compounded by increased cash flow from HPE’s forthcoming spin-merges. TBR notes this bodes well for HPE’s ability to continue tuck-in investments and build from overhauled executive leadership to stabilize revenues, likely during 2018.

Strategic acquisitions reinforce the transformation of HPE’s portfolio into a digitization enabler

HPE continues its ongoing business model restructuring to sharpen its focus on its infrastructure and related services and software capabilities. In addition to streamlining its portfolio by integrating noncore services and software assets with CSC and Micro Focus, HPE is utilizing a range of strategic acquisitions to fill out portfolio capabilities in key areas such as high-performance computing, hybrid cloud integration, hyperconverged platforms and network security.

TBR believes strategic acquisitions will assist in the reversal of some revenue challenges in key aspects of its Enterprise Group portfolio. For example, we see opportunity for HPE to use its acquisition of SimpliVity to stabilize its core server revenue. In addition to quickly gaining access to strategic, niche capabilities, HPE benefits from its large, existing install base, which provides a fertile customer base to which HPE can promote adoption of new solutions.

However, integration will take time, and the competitive landscape is stiff. For example, Dell Technologies will utilize its newly launched channel program to target HPE customers in strategic areas, and Cisco also continues to drive its own portfolio toward software-defined infrastructure, for example, refreshing its HyperFlex hyperconverged platform offering. This will impact the ongoing effect of shrinking demand for legacy technologies, resulting in near-term revenue attrition for HPE, but will position it for long-term success.