Release Date: May 29, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- HP Inc (HPQ, Financial) delivered non-GAAP operating profit and non-GAAP EPS growth on a sequential and year-over-year basis.
- Personal Systems returned to growth for the first time in 8 quarters, indicating market stabilization.
- HP Inc (HPQ) showcased over 100 AI-enabled solutions at their Amplify Partner Conference, driving long-term growth.
- The company announced a strategic collaboration with NVIDIA to integrate their pretrained models and software into HP's AI Studio tools.
- HP Inc (HPQ) introduced the world's most powerful ultra-mobile next-gen AI PCs, receiving positive initial reactions.
Negative Points
- Net revenue was down 1%, continuing a trend of decline, although the rate of decline has slowed.
- Print revenue was down 8% year-over-year, with soft demand particularly in China and parts of Europe.
- The pricing environment remains competitive, especially in the consumer and commercial print sectors.
- Total hardware units in Print decreased 17% year-over-year, driven by lower volumes and weak demand.
- HP Inc (HPQ) continues to face challenges in the China market, with no improvement in demand for both Print and Personal Systems.
Q & A Highlights
Q: Enrique, at the start of the year, you had talked about the Print business performing in line with the market at roughly flat this year. Year-to-date, it's declining mid-single digits. Why do you believe the Print market will stabilize in the second half of the year? Are there any underlying factors changing as you look to the second half?
A: We expect the market to stabilize due to easier year-over-year comparisons and stable usage, especially in the office space. Additionally, we have been working to reduce our cost structure to be more competitive, which should help us gain share in the second half. Our strategy remains focused on profitable growth.
Q: Within Personal Systems, we saw inflections in both Consumer and Commercial units. Can you expand on the recovery in Commercial PCs? Are there specific verticals where you're seeing improved spend?
A: The recovery in Commercial PCs was consistent across North America and Europe, and between enterprise and SMB. The need to refresh the aging installed base and the start of Windows 11 refresh are key drivers. We also expect the federal business to improve in the second half due to budget releases.
Q: How are you thinking about the adoption curve of AI PCs? What should we expect in terms of the mix of AI PCs versus non-AI PCs and ASP tailwinds in fiscal '24 and '25?
A: We expect AI PCs to represent around 10% of shipments in the second half of this year, with a more significant impact in '25 and '26. We anticipate AI PCs will account for 40% to 60% of our sales three years after launch, driving an improvement in average selling price of 5% to 10%.
Q: Can you expand on the signs of commercial recovery in Personal Systems, particularly regarding Windows 11 adoption?
A: We are starting to see Windows 11 refresh in the funnel of opportunities from large enterprise customers. Microsoft's public statements on costs to support previous operating systems have accelerated this process. Additionally, the aging installed base is contributing to the strength we are seeing in the Commercial side.
Q: What percentage of your revenues today come from subscription-based revenues, and what is your longer-term view on this mix?
A: We don't disclose specific numbers, but we continue to see growth in net subscribers and revenue in Consumer services. Our goal is to grow this business as it offers a better value proposition to customers and allows us to capture more value per customer, leading to a more accretive business.
Q: Can you explain why you are guiding below normal seasonal for Q3 despite positive momentum in PCs and AI PCs?
A: We saw strength in Commercial PCs but are more cautious on Consumer demand, which has a stronger seasonality in the second half. This conservatism in Consumer demand impacts our overall seasonality assumptions.
Q: What is your strategy around strategic buys and component purchases? How far in advance are you buying these components?
A: We evaluate strategic buys based on financial sense and operational efficiency. There is no predetermined timeline for how far in advance we buy components; it depends on the impact on the P&L and our ability to consume the products in a reasonable amount of time.
Q: Can you provide more details on the inventory increase due to strategic buys? Is there a structural change in inventory levels?
A: There is no major structural change in inventory levels. The increase is primarily due to strategic buys and sea shipments, which provide economic value. We continue to improve our operational inventory to offset these strategic decisions.
Q: How do you see the demand environment in China progressing through the rest of the year?
A: We did not see an improvement in demand in Q2 for either Print or Personal Systems and have not built any improvement into our projections for the second half. We expect the economic situation in China to remain challenging.
Q: What are your thoughts on battery life and capacity for AI PCs over the next 36 months?
A: Battery life is a key differentiator for our next-generation AI PCs, with over 30 hours of battery life driven by ARM technology and large language models that optimize PC usage. This optimization will have a significant impact on battery savings for both ARM and x86 products.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
