HP’s Long-Term Optimism Toward PCs Remains Intact, Says CEO

HP, like many tech companies, is managing through the “unexpected and very abrupt” downturn in market conditions “with a focus on what we can control,” said CEO Enrique Lores on an earnings call Tuesday for fiscal Q3 ended July 31. Net revenue for the quarter of $14.66 billion was down 11.1% sequentially from Q2 and 4.1% lower year over year.

Inflation that worsened during the quarter in many parts of the world “led to lower consumer spending for our product categories,” plus demand in Europe worsened against the “backdrop” of the war in Ukraine, said Lores. Though senior HP executives highlighted “pockets of consumer softness” during their fiscal Q2 call on May 31 (see 2206010001), “the environment deteriorated more rapidly late in the third quarter,” he said. The stock plunged 7.8% Wednesday, closing at $28.68.

The strength of HP’s commercial business “helped us to partially offset declines in consumer demand,” said Lores. “Still, the fact that we remain supply-constrained did not allow us to fully rebalance” demand and supply, he said. “There are some very clear actions we can take to mitigate the impact of near-term headwinds,” he said.

With market volatility “becoming the norm,” HP continuously is seeking better ways to “respond to it,” said the CEO. “We view this as an opportunity to further improve our ability to adapt to quick transitions in the market in the future.”

Fiscal Q3 revenue declined 3% in HP’s personal systems segment where its PC business resides, “primarily driven by softening consumer demand for our categories and more price competition,” said Lores. “We are taking actions to optimize consumer performance, and we are focusing on pockets of growth across our portfolio, such as premium and peripheral, which grew double digits this quarter.” Channel inventory levels increased during the quarter, “and we expect pricing will become more aggressive in Q4 to address this,” he said.

Despite the “near-term market uncertainty,” HP’s long-term optimism toward the PC market and its “adjacencies” hasn’t changed, said Lores. “We have confidence in the trajectory of personal systems over time.” HP’s $3.3 billion Poly buy (see 2203280036), which closed Monday, “accelerates our expansion and scale in two key growth businesses, peripheral and workforce solutions,” he said.

The macroeconomic environment “remains challenging,” and consumer softness “is likely to continue in the near term,” said Lores. “We also see some companies taking a more measured approach to their spending,” as new orders show signs of “softening demand in commercial categories,” he said. Despite HP’s “significant progress” in fixing its supply chain issues, “some shortages remain,” he said.

Amid the low prospects for an “economic rebound” in the short term, “we believe the prudent thing to do is to adjust our Q4 outlook,” said Lores. “We also believe that the current situation is temporary, and just as market conditions deteriorated quickly, they could also rebound quickly.” The company is “modeling several scenarios based on a range of assumptions,” said Chief Financial Officer Marie Myers. For fiscal 2022 ending Oct. 31, “we now see a wider range of outcomes,” she said. “As a result, we are lowering our overall outlook.”