Editor’s note: Another strong quarter from HP shows that Lenovo’s shrinking hold on the rank as world’s No. 1 PC seller continues to be in jeopardy. Recent statistics show Lenovo’s lead is shrinking, and Technology Business Research Analyst Jack Narcotta explains why HP is gaining strength. (Note: Watch an HP video about its ongoing transition at https://www.youtube.com/watch?v=nsrSa5midcs )

HAMPTON, N.H. – HP Inc.’s bets in the premium consumer PC market continued to pay off in 4Q16

For the third consecutive quarter, HP Inc.’s (NYSE: HPQ) revamped PC strategy, in which the company’s premium consumer notebooks are cemented as cornerstones, propelled year-to-year growth in total PC unit shipments, revenue and operating profit. With premium PCs leading HP Inc.’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, and validates its decision to disengage from protracted price wars with Dell Technologies, Lenovo and Asus.

HP Inc.’s Personal Systems segment revenue surged 10.1% year-to-year, the largest year-to-year gain since 2014, to $8.2 billion in calendar 4Q16/fiscal 1Q17, and the segment’s operating profit increased 35.2% year-to-year to $313 million, aided by a greater mix of premium PCs but also by headcount reductions and financial discipline.

PC unit shipments climbed a TBR-estimated 7.6% from calendar 4Q16, to an estimated 15.4 million, the highest total since 2012 and, per HP Inc., earning the company its highest-ever global PC market share, at 21.8%. In tandem with greater PC revenue, HP Inc.’s overall revenue climbed 3.6% year-to-year to $12.7 billion.

Ongoing challenges for HP Inc.’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 limited the declines compared to prior quarters. In calendar 4Q16, HP Inc.’s overall gross and operating profits declined 1.6% and 7.8% year-to-year to $2.2 billion and $856 million, respectively.

HP Inc.’s gross and operating margins shrank 100 and 90 basis points year-to-year, respectively, in calendar 4Q16 to 17.7% and 6.7%. TBR expects persistent revenue and profit erosion in HP Inc.’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 Inc.’s overall revenue and margins.

On its calendar 4Q16 earnings call, HP Inc. CFO Kathie Lesjak noted that a consequence of stronger-than-expected performance from its PC business would be a decline larger than the 6% decrease she stated Personal Systems typically experiences in calendar 1Q17; in line with this guidance TBR estimates Personal Systems will shrink 10% year-to-year to $7.4 billion. However, TBR believes 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.

For HP Inc., the ‘premium PC effect’ extends beyond consumer markets

Pivoting away from the low-price-centric, volume-sales-based PC strategy that drove HP Inc.’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 have allowed HP Inc. to strengthen its brand in all regions of the global PC market. HP Inc. CEO Dion Weisler stated on calendar 4Q16’s earnings call the company experienced balanced growth across all three regions (Americas, EMEA and APAC), fueled by broader appeal of HP Inc. PCs across all price bands, not just at the high end of the consumer market.

Additionally, TBR believes the appeal of premium consumer PCs is helping revitalize HP Inc.’s commercial PC business, as the devices create crossover sales opportunities in enterprises. HP Inc. was not the first PC vendor to realize the revenue and profit potentials of premium PCs; rebooting its XPS lineup in early 2015 arguably grants Dell Technologies that title.

However, TBR believes that HP Inc.’s growing scale in the most coveted segment of the PC market has generated momentum for HP Inc. in premium consumer PC markets as well as creating a positive halo effect around its similarly lucrative commercial PC business. In calendar 4Q16, consumer revenue in Personal Systems climbed 15% year-to-year, and commercial revenue climbed 7% from a year ago, the largest such increase since calendar 3Q14.