HP Earnings: PC Demand Improving but It Remains Soft; Difficult Macroenvironment Persists

We maintain our $30 fair value estimate for no-moat HP HPQ after it reported fiscal third-quarter results that exceeded the high end of its guidance range. Management provided fiscal fourth-quarter guidance that was below our previous expectations as the difficult macroenvironment has persisted longer than anticipated, resulting in a more moderate outlook for HP’s fiscal 2023 earnings. The turning point that HP expected has yet to be realized and cost discipline actions remain in place. We reiterate our view that markets will rebound in the medium term but still view HP’s offerings as lacking a long-term moat and we view shares as fairly valued.

Fiscal third-quarter revenue declined 10% year over year and grew 2% sequentially as demand remains soft and channel inventories are elevated affecting average selling prices. Margins continue to be buoyed by HP’s printing segment, reaching 18.6% on a non-GAAP basis, although we do not view this as a growth vector for HP as sales are in decline which we view as a secular trend. Personal systems like PCs grew 9% sequentially from back-to-school demand and higher volume but still fell 12% year over year.

Non-GAAP operating margin contracted 70 basis points year over year but grew 10 basis points sequentially to 8.8% as cost management initiatives are realized. Guidance for $560 million in gross annual run rate savings exiting the fiscal year remains intact as the firm consolidated its marketing team and expanded its in-house model on top of other cost-saving initiatives.

For the fourth fiscal quarter, management expects a continued difficult operating environment with softness weighing on revenue but lower operating expenses helping to support margins. Despite continued cost savings, for the full fiscal year, management now expects non-GAAP EPS in the range of $3.23 to $3.35, down from $3.30 to $3.50. We view this target as realistic as management rides out the macroenvironment affecting both inventory and demand.