​Why premium PCs are paying off for HP

​Why premium PCs are paying off for HP

Consumer gains revitalise commercial PC business as tech giant takes market to new level.

Dion Weisler - CEO, HP

Dion Weisler - CEO, HP

HP has bucked global trends to record an encouraging start to 2017, backed by an expanding premium PC portfolio and greater traction across the commercial market.

Operating in a PC market that dipped for the fifth consecutive year, the tech giant is reaping the rewards of a push into premium, illustrated through strong financials for the first fiscal quarter of 2017.

Specifically, HP’s Personal Systems segment revenue surged 10.1 per cent year-to-year, the largest year-to-year gain since 2014, to US$8.2 billion during the three month period.

In addition, the segment’s operating profit increased 35.2 per cent year-to-year to US$313 million, aided by a greater mix of premium PCs but also by headcount reductions and financial discipline.

“As a more nimble company, we've been able to accelerate our strategy, and we're now firing on all cylinders,” HP CEO, Dion Weisler, said.

“A perfect demonstration of this is in Personal Systems, where yet again for the third consecutive quarter the team delivered exceptional results."

Through leveraging HP Spectre Laptop, HP Spectre x360, HP Spectre x2 and HP ENVY 13 product lines, HP has used consumer gains to revitalise its commercial PC business, taking its market reach to the next level as a result.

“In Q1, we delivered earnings at the high end of our outlook range with strong free cash flow, driven by relentless execution and innovation,” Weisler added.

“We are confident in our ability to manage our business and deliver our FY17 financial commitments.”

Six months on from Weisler’s assessment of a “challenging and somewhat volatile”, premium is now paying off for the happily single HP.

“HP’s premium PCs are its most potent revenue and profit generators,” Technology Business Research Senior Analyst, Jack Narcotta, observed.

For the third consecutive quarter, HP’s revamped PC strategy, in which the vendor’s premium consumer notebooks are cemented as cornerstones, propelled year-to-year growth in total PC unit shipments, revenue and operating profit.

Furthermore, PC unit shipments climbed a Technology Business Research-estimated 7.6 per cent during the quarter, to an estimated 15.4 million, the highest total since 2012.

“With premium PCs leading HP’s strong push back into the global consumer PC market, the continued rebound of the company’s PC business is a stark contrast to the declines it endured in calendar years 2015 and 2016,” Narcotta said.

“The rebounds also validate its decision to disengage from protracted price wars with Dell Technologies, Lenovo and Asus.”

Robert Mesaros (HP); Dion Weisler (HP) and Richard Bailey (HP)
Robert Mesaros (HP); Dion Weisler (HP) and Richard Bailey (HP)

Locally, the switch to premium PCs has been enhanced through the unveiling of HP’s new Customer Welcome Centre (CWC) in Sydney, which opened doors to the channel in December 2016.

Following on more than a year after the vendor opened the doors of its Experience Centre in Melbourne (MEC), the new space offers on-site HP technicians and visiting channel partners the ability to reconfigure equipment and put together tailored solutions based on the needs of individual end clients or target vertical markets.

Converting consumer to commercial

In looking ahead both locally and globally, for HP, Narcotta believes the “premium PC effect” extends beyond consumer markets.

“Pivoting away from the low-price-centric, volume-sales-based PC strategy that drove HP’s go-to-market strategy - and exacerbated its revenue and profit declines - and successfully executing on its strategy to pursue profitable growth in premium price bands has allowed HP to strengthen its brand in all regions of the global PC market,” Narcotta said.

According to Weisler, the company experienced balanced growth across all three regions (Americas, EMEA and APAC) during the quarter, fuelled by broader appeal of HP PCs across all price bands, not just at the high end of the consumer market.

“The appeal of premium consumer PCs is helping revitalise HP’s commercial PC business, as the devices create crossover sales opportunities in enterprises,” Narcotta added.

“HP was not the first PC vendor to realise the revenue and profit potentials of premium PCs; rebooting its XPS lineup in early 2015 arguably grants Dell Technologies that title.”

Yet Narcotta believes HP’s growing scale in the most coveted segment of the PC market has generated momentum for the vendor in premium consumer PC markets as well as created a “halo effect” around its similarly lucrative commercial PC business.

During the three-month period, consumer revenue in Personal Systems climbed 15 per cent year-to-year, and commercial revenue climbed seven per cent from a year ago, the largest such increase since calendar 3Q14.

Printing challenges remain

Meanwhile, ongoing challenges for HP’s printing business in commercial printing hardware and supplies markets offset PC growth and continued to pressure overall profits and margins, but Personal Systems’ results helped limit the declines compared to prior quarters.

During the quarter, HP’s overall gross and operating profits declined 1.6 per cent and 7.8 per cent year-to-year to US$2.2 billion and US$856 million, respectively.

Delving deeper, HP’s gross and operating margins shrank 100 and 90 basis points year-to-year, respectively, in calendar 4Q16 to 17.7 per cent and 6.7 per cent.

“We expected persistent revenue and profit erosion in HP’s Printing segment to squelch some of Personal Systems’ momentum, but a greater mix of premium devices in the overall PC sales mix will help protect HP’s overall revenue and margins,” Narcotta added.

During its earnings call, HP CFO, Kathie Lesjak, noted that a consequence of stronger-than-expected performance from its PC business would be a decline larger than the six per cent decrease she stated Personal Systems typically experiences in calendar 1Q17.

In line with this guidance, TBR estimates Personal Systems will shrink 10 per cent year-to-year to US$7.4 billion.

“However, we believe Personal Systems’ evolution into a premium-centric PC vendor has the segment poised to quickly counter 1Q17’s expected revenue decline and set the stage for revenue growth throughout the remainder of 2017,” Narcotta added.

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