Editor’s note: HP Inc. starts its independent existence with a tough quarter, and the news means the faster cutting of 3,000 jobs as well as other non-labor spending reductions, says Technology Business Research analyst Ezra Gottheil.
HAMPTON, N.H. – HP Inc. (NYSE: HPQ) is the PC and printing half of the old HP. With the PC and printing markets contracting, HP Inc. suffered double-digit year-to-year decreases in revenues and a reduction in operating margins. Total revenue was $12.2 billion, down 12% from 4Q14, a 5% decrease in constant currency. Nevertheless, the company reported increased PC market share, to more than 20%, the highest share ever, and managed to maintain average selling price (ASP), despite negative currency effects. In printing, hardware ASPs increased, as the company exited the lowest price tiers for printers.
In declining markets, cut costs
The company is addressing the problem of declining markets with additional cost-cutting measures. A reduction in headcount of 3,000 that was planned for the next three years will be accelerated, with the goal to complete it by 2016. The company predicts a reduction in costs from this action of $300 million in 2017 and going forward and expects other non labor-related cost reductions to reduce costs by a greater amount.
Adapting to the new normal
President and CEO Dion Weisler said, “The current environment is the new normal.” By this he meant the critical PC and printing markets will continue to contract, albeit not necessarily at current rates. This means the cost structure must be smaller and more flexible so the company can adapt to market-driven revenue fluctuations. The fact that HP Inc. managed to contain the annual decrease in PC operating margin to 40 basis points despite a 700 basis point change in exchange rates demonstrates this process is underway. In fact, PC gross margins were flat year-to-year.
The process in both markets is one of managing product mix. Weisler spoke of walking away from unprofitable deals but also acknowledge the need to address the lower-priced end of the market to achieve scale. HP Inc. has one of the most successful lines of low-priced PCs in its Stream models. HP Inc.’s ability to maintain ASP despite the success of Stream demonstrates the success of some of its higher-end products. The company claimed increased market share in mobile workstations and gaming PCs, high-price and high-margin categories.
HP Inc. emphasized cost-cutting does not impinge on innovation. Headcount and other reductions do not include R&D. Leadership products like the Elite X3, a Windows phone that becomes a PC when docked, and PageWide XL printers were mentioned several times. There will be announcements this year about 3D printing, a very important initiative for HP Inc., but Weisler downplayed the near-term impact of this technology on HP Inc.
HP Inc. expects slower decreases in revenue and increases in operating margins in the second half of 2016, both as a consequence of market changes and HP Inc.’s improved execution, and TBR concurs. HP Inc.’s management of channel inventories will help it reduce revenue decreases, and its cost containment will contribute to improving margins. In addition,
TBR believes HP Inc.’s longer-term profit-enhancing strategies will begin to gain traction, now that the transition to the new HP Inc. is complete. In PCs HP Inc. will increase attached sales, especially of services, aiming at emulating the printing model of managed print services. In printing HP Inc. will continue to expand its presence in commercial and large-format printing.
HP Inc. is making positive steps to reshape itself to the “new normal.” Transitioning from a large diverse company to a smaller more focused one is difficult, and the transition from growing to shrinking markets is also difficult, but HP Inc. is a leader in both markets and will adapt successfully.