HP's revenue sinks amid supply chain challenges

Supply chain and macroeconomic challenges lead to backlog in second quarter for print giant

Supply chain constraints caused by COVID-19 shutdowns were blamed for HP's lacklustre second quarter results.

The company's revenue three months period ending 30 April was $12.5bn, down 11 per cent on the same quarter last year, with net income down 2.6 per cent to $764m. The results caused the vendor's share price to fall just over four per cent in after-hours trading.

CEO Enrique Lores told analysts on an earnings call that there is "no doubt" that COVID-19 is impacting the business, and that the revenue decline was a result of "macroeconomic and supply chain" challenges associated with the pandemic.

"While some areas performed very well as people shifted to work from home, others suffered and we faced supply chain disruptions," he told analysts on the call, transcribed by Seeking Alpha.

"Both Print and Personal Systems experienced manufacturing and supply chain disruptions during the quarter.

"Starting in late March, we also experienced disruptions to operations in South-east Asia and other parts of the world as the pandemic spread. We took swift action to adjust to these developments and our manufacturing capabilities were largely back to full capacity by early May."

He added that the vendor was mulling over increasing its inventory levels as part of plans to improve the resiliency of its supply chains.

"On the demand side, there is no question that a lockdown around the world has created new and different demand dynamics in the market. This presents both tailwinds and headwinds across our portfolio," he said.

However, HP's results indicated it was more the latter than the former.

Revenue in the Personal Systems segment was down seven per cent to $8.3bn, despite CFO Steve Fieler stating that the segment benefitted from the pivot to remote working and learning.

"We're pleased with the profit growth of this business despite factory supply constraints that pressured our top line during the quarter," he noted on the same call.

Notebooks sales were flat, while desktop and workstations revenues fell 18 per cent and 23 per cent, respectively.

"In Personal Systems, we saw increased demand as organisations of all types and sizes focus on keeping people connected, productive and secure. This strong demand combined with a constant supply resulted in an elevated backlog which we expect to work down during Q3," explained Lores.

"Customers all around the world have been reminded of the essential role the PC plays, and we're taking action to capitalise on these opportunities."

HP's Print segment saw the biggest hit in the quarter, with sales dropping 19 per cent to $4bn, commercial hardware sinking 31 per cent to $808m and consumer hardware tumbling 16 per cent to $509m.

"In Printing, we're facing near-term challenges, driven by both supply and demand issues. In commercial print, including office and graphics, we saw a significant slowdown in late March as offices closed and large events and trade shows were cancelled," the chief exec continued.

"While we believe that office and graphics usage will rebound once businesses fully reopen, we expect that Q3 will be similar to April. And thus we expect that our financial results will be more negatively impacted in Q3 than Q2."

HP is implementing temporary reductions in compensation for its executives and board member, as well as restricting external hiring and making "certain further reductions" in discretionary spending, in order to mitigate the financial fallout from the pandemic, Lores said.

Despite the disappointing results for the company, Lores is optimistic that it can weather the ongoing crisis.

"The strength of HP's diversified portfolio, go-to-market capabilities and balance sheet position us well to navigate macroeconomic challenges and drive long-term value creation," he stated.

"We are seeing strong demand from our customers in notebook PC orders and Instant Ink subscriptions, as well as growing interest in 3D printing and digital manufacturing in key verticals such as healthcare. The current environment will be a catalyst for transformation and innovation across HP."