HP Grapples With The Evolving PC Market

On Tuesday, HP Inc HPQ showed a mixed picture with its fiscal third quarter report as inflation and economic uncertainty continue to weaken the demand for consumer electronics, with the PC market being in a slump for over a year now. Upon the report, shares of the Palo Alto, California-based company fell 5.6% in after-market trading as fundamental figures are not improving as quickly than HP had anticipated, causing management to trim its fiscal year outlook. Meanwhile, HP's PC rival Dell Technologies Inc DELL is set to report its second quarter results on Thursday, August 31st.

Fiscal Third Quarter Highlights

HP’s total revenue dropped 9.9% YoY to $13.20 billion, which was short of Refinitiv’s consensus estimate of $13.37 billion. Revenue of its personal systems unit dropped 11%YoY to $8.9 billion. This segment that covers personal computers is HP’s biggest growth driver and is suffering with the PC market slump. Due to supply chain difficulties, printing net revenue also dropped 7% YoY.

However, efficient cost control initiatives enabled HP to demonstrate at least some sort of resilience as it delivered adjusted earnings in line with estimates. As total costs and expenses decreased 8.6% YoY, HP delivered adjusted earnings of 86 cents per share.

A Cautious Outlook

HP CEO Enrique Lores expects sequential growth in the fourth quarter but noted that the recovery in China is not expected to happen anytime soon and therefore, has been excluded from guidance. Lores admitted that external conditions are improving at a slower than expected pace and therefore, HP lowered its outlook.

Fourth quarter earnings per share have been guided in the range between 85 cents and 97 cents, while management previously anticipated 95 cents. 

Although HP reiterated it is on track to achieve 40% of its three-year cost savings aim by the end of the fiscal year, full fiscal year adjusted earnings per share guidance has also been lowered from the prior range (between $3.30 and $3.50) and are now expected between $3.23 and $3.35.

Meeting Customer Needs In An Evolving Market

HP has recognized the customer softness and adjusted its approach accordingly. Its fiscal third quarter results showed its cost-cutting efforts are helping it to navigate external challenges but the external environment remains unfavorable. Analysis firm Canalys reported that PC shipments to China have tanked 19% over the past few months with the country remaining cautious about electronics spending. 

AI Is About To Significantly Change Computers

At the beginning of August, HP held an event in Tokyo, Japan, where it revealed its plans for growth and innovation. HP’s head of personal systems, Alex Cho, spoke of PCs undergoing a massive transformation as they will deliver AI-powered experiences, stating that generative AI will result in greater personalization and enhanced productivity. HP is turning to AI for growth opportunities as its legacy businesses are fading away.

Meanwhile, its rival Dell has partnered with Nvidia NVDA on the AI front. Together, Dell and Nvidia will be working on an artificial intelligence venture that has been named as Project Helix. Announced back in May, Dell and Nvidia will be joining their forces to make it easy for enterprises to both build and deploy generative AI in a trustworthy, responsible and accurate manner. Nvidia partnership is expected to boost Dell’s second quarter earnings as Nvidia gave Dell a chance of making a mark in the AI-powered future. Therefore, HP's cautious outlook is a wise approach as the external environment will remain both macroeconomically challenging and highly competitive for the foreseable future.

DISCLAIMER: This content is for informational purposes only. It is not intended as investing advice.