HP Inc. (HPQ) Earnings

Management highlights

- **CEO Search**: The search for a permanent CEO is proceeding well, but no timeline or details were shared. Interim CEO Bruce Broussard emphasized strengthening the operating infrastructure to be AI-enabled and data-driven. - **AI Strategy (Edge Focus)**: HP is pivoting towards 'Edge AI,' bringing data center-class capabilities to local devices to reduce cloud costs, latency, and security risks. Key products include HP ZGX FURY workstations and Omnibook Ultra 16 laptops powered by NVIDIA RTX Spark. - **Personal Systems Growth**: Achieved 10th consecutive quarter of growth. AI PCs (AIPC) now represent 46% of shipment mix, targeting 50% by fiscal year-end. Commercial segments drove over 70% of PS revenue. - **Innovation & Software**: Launched WXP platform integrating HP PolyLens for unified device management. Precise Print AI tool reduces paper/ink usage significantly. Signed a $100 million strategic agreement with RRD for industrial print automation. - **Supply Chain & Costs**: Executing a mitigation plan involving supply securing, demand shaping, cost reduction, and disciplined pricing. Memory and storage supply availability is secured for FY26, though costs are rising. - **Operational Efficiency**: Building a fundamental operating model improvement focused on order delivery predictability and conversion accuracy, rather than short-term efficiency fixes.

Guidance

- **Full Year EPS**: Raised to $3.19–$3.29, up from previous guidance of $2.90–$3.10. This includes a 19-cent favorable impact from estimated tariff refunds. - **Q4 EPS**: Expected between $0.69–$0.79, including an 8-cent benefit from tariff refunds. - **Free Cash Flow**: Increased full-year outlook to $3.0–$3.2 billion, driven by strong Q3 performance and working capital management. - **Personal Systems Outlook**: Expects below-seasonal revenue in Q4 due to high-teens unit declines and commodity price increases, though year-over-year revenue growth is anticipated due to premium mix and pricing. Margins expected to bottom out in Q4 before improving into FY27. - **Print Outlook**: Expects mid-single-digit hardware market decline in H2. Q4 revenue expected to align with historical seasonality. FY27 margins remain targeted at 16–19% (excluding one-time tariff benefits).

Segment performance

Personal Systems: Revenue reached a record $11.8 billion, an 18% year-over-year increase. This segment accounted for approximately 75% of HP's total revenue. Operating margin was 4.6%, down year-over-year due to higher commodity costs and variable compensation, partially offset by pricing actions. Print: Revenue decreased 2% year-over-year (down 4% in constant currency). This segment contributed approximately 25% of total revenue. Operating margin improved to 18.1%, up roughly one point year-over-year, driven by tariff refunds and pricing discipline; excluding tariffs, the margin was in line with the low end of the long-term range.

Risks & headwinds

- **Commodity Inflation**: Rising memory and storage costs continue to pressure Personal Systems margins, with higher-cost inventory flowing through the P&L in the second half of the fiscal year. - **Demand Elasticity**: Aggressive pricing actions and rising PC prices may suppress unit volumes, with industry TAM projected to decline high-teens in the second half of the calendar year. - **Market Competition**: The print market remains highly competitive with aggressive pricing, particularly affecting commercial office markets in North America and China. - **Geopolitical & Supply Constraints**: Ongoing geopolitical pressures and potential supply chain disruptions require continuous mitigation strategies regarding sourcing and tariffs.

Analyst Q&A

• Q: Amit Nani asked if the trend of declining units but growing revenue will persist into FY27, and about memory supply improvements.

  A: Karen Parkhill clarified that while Q4 expects high-teens unit declines, revenue will grow via premium mix and pricing. She noted supply issues are resolved, but margins will bottom in Q4 as lower-cost inventory depletes, with improvements expected thereafter due to mitigation plans and product redesigns.

• Q: Mark Newman inquired about the timing of memory cost headwinds and whether pricing power is fully realized across channel partners.

  A: Parkhill confirmed the low-cost inventory benefit is largely behind us. Patel added that pricing lags vary by channel (online vs. enterprise contracts), ranging from immediate to months, but HP continues to use pricing as a last lever after reshaping demand and optimizing designs.

• Q: Stephen Cullen asked about AIPC configurations, attach rates for discrete accelerators, and Windows 11 refresh drivers in APJ/EMEA.

  A: Bruce Broussard stated AIPCs exclude workstations and have standard attach rates (~30%) for accessories/services. Patel highlighted AIPC mix is at 46%, targeting 60-70% in 2027. Parkhill noted Win 11 refresh is ~70% complete but increasingly augmented by AI workload demands driving premium upgrades.

• Q: Wanzi Mohan requested details on channel inventory levels and ROI/utility of AI PCs versus future-proofing.

  A: Parkhill stated channel inventory is controlled and healthy despite inflationary expectations. Patel explained AI PCs offer clear ROI via token cost savings, data privacy, and latency improvements in high-value use cases like engineering and customer service, with adoption expanding from pilots to broader fleets.

• Q: Mike Caduce asked about free cash flow upside drivers beyond tariffs and the scale of AIPC deployments.

  A: Parkhill attributed strong FCF to underlying PS growth and negative 37-day cash conversion cycle, not just tariffs. Patel noted enterprises are deploying AI PCs for specific workflows (dev, CS, manufacturing) using WXP for manageability, with unique value in connecting endpoints, security, and IT environments.