Jack Narcotta, senior analyst at TBR, says HP Inc.’s move into premium PC markets is paying off, analyzing the device major’s latest financial results.
Rebooting its PC gaming brand and renewing its focus on the premium notebook PC segment in calendar Q2 2016 highlight how HP Inc. intends pursue long-term, lucrative growth in a challenging PC market. Successfully executing on these strategies in Q2 2016 fostered a significant turnaround in consumer PC markets in Q2 2016 for HP Inc., allowing this segment to counter some of the effects of declines in the midrange commercial PC and printing supplies product segments that generate the bulk of HP Inc.’s revenue and profits.
HP Inc.’s overall revenue and gross profit declined 3.8 percent and 6.6 percent to $11.9 billion and $2.2 billion, respectively, illustrating the ongoing challenges for HP Inc., particularly in midrange PC price bands where competition among the largest vendors is intensifying as the global PC market shrinks, and challenges in implementing changes to its printing supplies inventory and go-to-market strategies. Foreign currency fluctuations amplified overall revenue decline; in constant currency HP Inc.’s revenue fell just 1 percent year-to-year.
However, revenue decline was slower than in the past, and operating income and operating margin improved in tandem with its resurgent Personal Systems segment. Overall operating income climbed 10.9 percent year-to-year to $1.1 billion in Q2 2016, and overall operating margin improved 130 basis points year-to-year to 9.4 percent. Headcount reductions and other restructuring initiatives helped reduce operating expenses, but stronger margins and greater profits in the Personal Systems segment were among the primary drivers behind the overall increases.
The company reported increased PC market share, to nearly 21 percent, and managed to improve PC average selling price (ASP) despite heightened competition from Asus, Dell and Lenovo, as well as negative currency effects. TBR believes consumer demand for premium PCs, particularly thin-and-light and gaming-ready notebook PCs, will continue, a trend that validates HP Inc.’s push into the premium PC segment, and will promote continued margin improvement and profit recovery for HP Inc. through 1H17 even as overall revenue declines.
A narrower go-to-market focus fuels Personal Systems’ revenue and margin recovery
TBR forecasts revenue growth between 5 percent and 15 percent year-to-year each quarter through 2017 in premium consumer notebook PC and gaming PC segments, which promise greater profits per PC sold and are enticing Windows PC OEMs to enact new strategies to capitalize on these lucrative segments. HP Inc.’s new initiatives in PCs with ASPs of $1,000 and up from its revamped OMEN gaming PC brand and Spectre premium notebook PCs are clear signs that HP Inc. is aware of this trend and the opportunities within its existing customer base and addressable markets.
Personal Systems’ revenue and operating income recovered 0.1 percent and 57.8 percent year-to-year to $7.5 billion and $333 million, respectively, in Q2 2016, showing the potential of excelling in premium and gaming segments in which the typical 2-in-1 or gaming PC sale generates two to three times more revenue and profit compared to traditional notebook PC form factors. Unit shipments were up 4 percent year-to-year, to 12.8 million, fueled largely by greater demand for notebook PCs, and consumer revenue climbed 8 percent year-to-year to a TBR-estimated $1.7 billion. Greater scale in premium PCs will also help strengthen HP Inc.’s brand, increase its customer loyalty, and raise awareness and purchasing consideration of high-margin peripherals and services in its portfolio.
While fostering commercial PC growth is emerging, somewhat uncharacteristically, as a challenge — HP Inc. cited a greater mix of Chromebooks in its commercial PC mix, particularly in education and finance markets, as a detractor to commercial PC revenue and ASP — TBR believes HP Inc.’s move into the premium PC segment will shield the company from this trend, as well as most of the effects of greater competition among Asus, Dell and Lenovo for customers in a shrinking global PC market.
TBR believes HP Inc.’s strategy to architect its business to endure declines in midrange and entry-level devices as it formulated its strategy to capitalize on growth in the premium PC market was a savvy move by the company, and has strengthened HP Inc.’s competitive position relative to its largest competitors. Revenue recovery, slowing gross profit erosion and operating income gains in a declining global PC market illustrate the potential long-term impact on Personal Systems, as well as HP Inc. overall, should it continue to successfully execute on its PC strategy.
By Jack Narcotta, senior analyst at TBR