HP Inc revenue analysis

hp-brand-campaignPersonal Systems, and HP Inc.’s overall revenue, are reaping the rewards of a premium-led PC strategy, says Jack Narcotta, senior analyst at TBR.

Personal Systems revenue (+4 percent)
Commercial revenue (+3 percent)
Consumer revenue (+7 percent)
Total units (+5 percent)
Notebooks (+9 percent)
Desktops (+1 percent)

Printing (–8 percent)
Hardware units (+1 percent)
Commercial hardware units (+10 percent)
Consumer hardware units (–3 percent)

A second consecutive quarter of year-to-year growth in total PC units shipped, PC revenue and PC operating shows the PC strategy shift HP Inc. enacted in earlier 2016 is paying off for the company’s overall revenue and its Personal Systems segment. Resurrecting its gaming PC brand, and making a stronger push into the premium notebook PC segment, have raised awareness of HP Inc.’s rebooted PC portfolio in a recovering consumer PC market. Premium Omen gaming PCs, and Spectre and EliteBook notebook PCs, are claiming larger shares of the company’s overall PC sales mix, setting the stage for revenue and profit stabilization even if overall unit shipments return to their previous declines.

HP Inc.’s Personal Systems segment revenue climbed 4.2 percent year-to-year to $8 billion in calendar 3Q16/fiscal 4Q16, and the segment’s operating profit rose 18.3 percent year-to-year to $346 million. A 5.4 percent increase from calendar 3Q15 in PC units shipped, to a TBR-estimated 14.5 million, helped propel PC revenue 4.3 percent year-to-year to $7.2 billion, the segment’s highest total in nearly two years, as well as lift HP Inc.’s overall revenue 2 percent year-to-year $12.5 billion. Healthy growth in these metrics, relative to global declines and the performances of HP Inc.’s competitors, show the potential for premium PCs to transform the company’s stalwart PC segment as well as ease concerns about its ability to grow PC revenue and profit, not just slow declines.

More premium PC competitors highlight opportunities for HP Inc. to move into mine revenue and profits from adjacent PC services markets

However, HP Inc.’s CEO Dion Weisler stated on calendar 3Q16’s earnings call that shifting market dynamics, brought about the allure of the increased profit-per-PC-sale promised by in the premium PC segment, will influence the financial performance of HP Inc. and its Personal Systems segment in 1H17. While Weisler maintained that HP Inc. is “playing our game” and choosing to play in segments of the market that generate profit-per-sale, stronger moves from Acer, Asus, Dell and Lenovo, as well as a renewed push by Apple, into these higher price bands illustrate the challenges HP Inc. faces as these vendors seek to gain share at HP Inc.’s expense. Even with HP Inc. gaining premium PC market share, greater consumer demand for thin-and-light notebooks and 2-in-1 PCs, as well the cross-over sales potential for these devices in enterprise markets, will invite greater competition that undermines HP Inc.’s value proposition, robbing the company of sales momentum, revenue and profits.

TBR believes Weisler’s plan to counter these hardware-centric trends by elevating the role services play in HP Inc.’s PC value proposition is a sound strategy. Emerging PC as a Service business (PCaaS) models, especially HP Inc.’s emerging Device as a Service solution, illustrate how HP Inc. plans to pursue generating greater profits even in highly competitive hardware markets in which profit-denting lower ASPs have typically played a leading role. While adoption of PCaaS is not yet widespread, and existing programs have not yet advanced far beyond pilot programs, TBR believes the impact of the PCaaS model will encompass 10 percent to 15 percent of all PCs shipped by 2020, illustrating the potential influence of profits from service contracts, which the margins for which are typically two to three times those of hardware sales.

The greater service attach rates inherent to HP Inc.’s Device as a Service offering, and an increased focused on attaching more services to each PC sold overall, will supplement HP Inc.’s revenue and profit streams. Additionally, greater use of HP Inc.’s services will boost customer loyalty and provide an effective shield for the company’s commercial PC installed base, the largest source of PC revenue and profits, against stronger competition from Dell, Lenovo and, to a lesser degree, Apple.

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