HP: Commendable Results, but We're Skeptical

After taking a fresh look at

HP's third-quarter results exceeded guidance by delivering year-over-year revenue increases of 14% for personal systems and 11% for printing. Notebooks and desktops both grew units by 7%, and operating profits for personal systems increased to 3.9% of revenue. The personal systems segment enjoyed higher average selling prices and a favorable product mix as HP continues to gain share in premium computers. The printing business' revenue growth came at the sacrifice of operating margins, which decreased 130 basis points to 16.0%. Operating margins were dragged down by investments in the A3 and 3D printing markets. Consolidated gross margins declined year over year to 18.4% and operating margins came in at 7.4% for the quarter.

Management increased its guidance for fourth-quarter earnings per share and said shareholders should expect a return up toward 75% of HP's free cash flow. We expect sequential top-line growth for both business units with operating margin compression. For fiscal 2019, we expect a considerable slowdown with marginal organic revenue growth as HP's competitors respond with new PC products and printing services becomes more cost-competitive.

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