HP revenue diversity accessories

HP’s Strategic Approach to Revenue Diversity Saved a Bad Quarter

The high-tech market, and particularly the PC market, is experiencing a sharp decline this year largely due to three things. First, the pandemic forced premature PC refresh rates in the preceding years which collapsed the short-term Total Available Market (TAM) due to product saturation with buyers (both commercial and consumer). Second, high-interest rates to control high inflation are making any high-ticket items like PCs far more difficult to justify for individuals or companies. And third, demand generation for the segment is a fraction of what it once was, preventing the segment from competing effectively with segments that haven’t also cut their marketing budgets.

When there is a market downturn like this, we know that buyers shift from buying PCs to buying accessories, but you need to have a significant enough accessories effort to make use of that recurring trend. HP recently acquired Poly and HyperX and put one of its strongest executives, Andy Rhodes, in charge of the effort, which appears to have paid off very well this quarter.

Let me explain.

Market downturn

We saw the market downturn coming last year when it became clear that the logistics problems during the pandemic had created a bit of a delayed feeding frenzy. Sales spiked as the logistics problems eased. But the result is that a very high percentage of buyers have new PCs and won’t want to replace them any time soon. This kind of saturation can take up to three years to work through, suggesting that this downturn based on this one data point alone could last a long while.

Raising interest rates, a common practice to reduce inflation, is intended to reduce sales. This is problematic for anyone selling anything, but it’s particularly problematic for high-cost products because it both significantly increases the cost and implies that if you just wait, those interest rates will come down and you’ll get a better product price. This makes the already reduced TAM even smaller.

Demand generation is critical for any market because whether the buyer is an individual or a company, they will have a choice of where to spend their limited funding. If one market is doing demand generation and the other is not the customers and their money are more likely to buy something that is better marketed from another segment. Other than Apple, which used to set the bar regarding product marketing, the PC OEMs have cut way back, and the old market-makers (Intel and Microsoft) have also decreased efforts significantly.

When you combine all three together, you get an ugly year. But for three exceptions, HP’s financials showcase that ugliness. It’s one thing to see a disaster coming, but it is something else again to prepare for it. That is what HP did.

Wrapping up: HP’s successful hedge

HP acquired Poly and HyperX knowing that, when there is a downturn and the market is saturated, customers tend to increase their purchase of accessories. So, HP bought two successful parts companies to hedge their revenue and pivoted printers strongly towards a subscription model. Subscriptions tend to hold well during market downturns. For instance, for several decades, IBM subsisted almost completely as a subscription vendor which allowed the company to survive, even during prior market downturns. In what was a largely negative market, these segments showcased double-digit growth, significantly offsetting the declines in HP’s other businesses (except commercial printing which did surprisingly well with 2% growth).

I shouldn’t downplay executive leadership. Enrique Lores has proven to be a caring, insightful, and strategic CEO who better anticipated problems than his peers, and Andy Rhodes, who HP acquired out of Dell, has proven to be an inspired leader by first bringing out HP’s iconic Dragonfly notebooks and more recently executing the acquisition of HyperX and Poly.

While HP shared a downturn in revenue with its peers, the end result is that it overperformed with print subscriptions and accessories which provided a gleaming lifeline to what otherwise would have been a far uglier quarter. We often talk about how companies can’t think strategically. Well, this quarter, HP proved the exception to the rule. Its strategic decisions to emphasize subscriptions and expand its accessory capability helped it shine in an otherwise painful quarter.

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