The News: Hewlett Packard (NYSE: HPQ) announced financial results for the third quarter ended July 31, 2023 (Q3 2023), with the company reporting revenue of $13.2 billion, down 9.9% (down 7.4% in constant currency) from the prior year period. Read the HP Q3 2023 earnings Press Release for more information.
HP Q3 2023 Earnings Show Accelerating Signs of Improvement
Analyst Take: HP reported its FY Q3 2023 earnings, with the company’s revenue posting at $13.2 billion, down 9.9% year over year (YoY) or down 7.4% in constant currency. We can broadly attribute these results to persistent macroeconomic headwinds, inflationary pressures, and stubbornly slow-moving inventories still plaguing the tech sector, and particularly hardware and device-focused businesses in the aftermath of the COVID pandemic.
Personal Systems: A Slow Recovery Is Still a Recovery
Personal Systems net revenue was $8.9 billion, down 11% YoY (-8% in constant currency) Operating margin was 6.6%. Both Consumer PS and Commercial PS net revenues were down (12% and 11% respectively), but paradoxically, total unit shipments were up 3%, with Consumer PS units up 8% and commercial PS units remaining flat. Note that Hewlett-Packard’s Personal Systems division remains heavily weighted toward the commercial market, which helps explain why positive results in Consumer PS shipments are not having a broader impact on overall PS numbers.
While these results remain disappointing, they do suggest a trend toward normalization. Compared with Q2’s PS net revenue being down 29% YoY and an operating margin of 5.4%, Q3’s 11% drop and 6.6% operating margins do represent a more-than-marginal improvement.
Perhaps more importantly, Q3 numbers suggest that the post-COVID slump in the hardware and devices market may finally be coming to an end. For instance, In Q2, Consumer PS net revenue was down 39% and Commercial PS net revenue was down 24%. In Q3, the previous quarter’s losses slowed to 12% and 11% respectively. Not quite the trend reversal one might hope for, but an encouraging signal all the same.
Where we do see a more significant turnaround, however, is in unit numbers. In Q2, total units were down 28%, but in Q3, total units were up 3%. In Q2, Consumer PS units were down 34% and Commercial PS units were down 23%. In Q3, Consumer PS units were up 8% and Commercial PS units were flat. Breaking out the streamers might be premature at this point, and we remain guarded about the possibility of a near-term Personal Systems turnaround for HP, but seeing these numbers trending in the right direction deserves a checkmark in the progress column. The positive 8% bump in consumer units is an especially encouraging indicator that consumer spending on devices like PCs could be strengthening again, and that HP’s relevance even as the PC market begins to shift toward more AI-centric capabilities and features continues to strike the right notes.
Softness in commercial unit numbers reflects that enterprise IT decision-makers may still be holding off until at least later this year or the start of 2024 to begin updating their workstations. Beyond inventory and budgetary pressures, this delay may be additionally explained by several new competitive vectors in the space, primarily renewed interest in both the performance and appealing TCO of Apple’s custom’s silicon, as well as improvements in on-device AI, multi-day battery life, and enhanced connectivity features entering the Windows PC market. HP continues to capitalize on these trends with its focus on high-performance workstations and high average selling price (ASP) segments.
While no one expects an overnight return to pre-COVID demand, these numbers feel a bit more like the outer edges of a temporary wait-and-see holding pattern than an organic continuation of demand slump the market is in the process of emerging from. Nevertheless, this holding pattern could artificially act as a brake on the market’s rebound by a quarter or two, at least on the enterprise side.
Following seven consecutive quarters of YoY decline, the global PC market continues to show signs of recovery, and HP’s robust market share (just slightly behind Lenovo) gives the company the kind of beachhead and momentum that should help accelerate its return to growth.
Printing: Q3 Revenue of $4.3 Billion, But the Printer Segment’s Next Pivot Remains Elusive
Printing net revenue was $4.3 billion, down 7% YoY (-5% in constant currency) with an 18.6% operating margin. Consumer Printing net revenue was down 28%. Commercial Printing net revenue was down 6%. Supplies net revenue was down 2% (flat in constant currency). Total hardware units were down 19% overall, with Consumer Printing units down 20% and Commercial Printing units down 8%.
Printing is still a $4 billion+ strong business for HP but here too, disruption from COVID, digital transformation, work-from-home (WFH), cloud services, and AI continues to take a toll. Despite easily holding on to the lion’s share of the global printer market, three critical obstacles still stand between HP and a return to growth for its successful printing business: (1) WFH, which makes printing documents less of an operational necessity at scale; (2) the ESG-driven shift to paperless operations, which brings additional layers of environmentally-conscious best practices to document creation, distribution and storage; and (3) the digitization of everything, including paperless document signing. The push by many organizations to bring workers back into physical offices 3-4 days per week may help slow down the decline in printing demand we have seen over the last three years, but it is difficult to be bullish about the growth prospects of consumer and commercial printing products in an increasingly digitized, paperless age.
Key Highlights of HP’s Fiscal Q3 2023
- FY Q3 2023 net revenue of $13.2 billion, down 9.9% from the prior year period.
- FY Q3 2023 non-GAAP diluted net earnings per share (EPS) of $0.86, within the previously-provided outlook of $0.81 to $0.91 per share.
- FY Q3 2023 GAAP diluted net EPS of $0.76, above the previously-provided outlook of $0.61 to $0.71 per share.
HP Q3 2023 Key Takeaways
All in all, HP performed reasonably well during the quarter given the persistence of macroeconomic headwinds and inventory bloat carried over from previous quarters. FY Q3 2023 delivered sequential growth, with HP combining effective innovation with disciplined cost controls and execution to gain profitable PC market share and achieve its non-GAAP EPS target.
We are confident in HP’s ability to drive long-term growth and value creation, but lingering market conditions may continue to act as a brake against recovery and net positive growth into the next quarter. We nonetheless expect Q4 to bring another quarter of sequential growth and notable amelioration, at least for HP’s Personal Systems business. The slight strengthening of the consumer market we are already seeing, combined with momentum from back-to-school shipments and the coming holiday season should help drive more growth for the consumer side of the business in Q4. On the commercial side, HP could also see K-12 and federal government buying give the PS unit a much-needed boost in the United States next quarter.
We also expect that HP’s focus on high-margin and high-ASP segments (high-performance workstations, gaming PCs, accessories and AI-enabled conference room peripherals) is a winning strategy in a market currently in the process of recalibrating device relevance and value along new AI-defined parameters.
On the printer systems front, the push to lure employees back to the office 3-4 days per week could bring some improvement in Q4, but we remain guarded about the scale and pace of the revenue growth this partial return to the office is likely to generate.
Overall, we feel mostly positive about these earnings and feel that HP continues to be well positioned for a return to growth as the market continues to correct itself.
Daniel Newman and his co-host of The Six Five Webcast, Patrick Moorhead of Moor Insights and Strategy discussed HP’s earnings in their latest episode. Check it out here and be sure to subscribe to The Six Five Webcast so you never miss an episode.
Disclosure: The Futurum Group is a research and advisory firm that engages or has engaged in research, analysis, and advisory services with many technology companies, including those mentioned in this article. The author does not hold any equity positions with any company mentioned in this article.
Analysis and opinions expressed herein are specific to the analyst individually and data and other information that might have been provided for validation, not those of The Futurum Group as a whole.
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Author Information
Research Director Olivier Blanchard covers edge semiconductors and intelligent AI-capable devices for Futurum. In addition to having co-authored several books about digital transformation and AI with Futurum Group CEO Daniel Newman, Blanchard brings considerable experience demystifying new and emerging technologies, advising clients on how best to future-proof their organizations, and helping maximize the positive impacts of technology disruption while mitigating their potentially negative effects. Follow his extended analysis on X and LinkedIn.
