Q1 2024 Earnings Summary
- HP expects a stronger performance in the second half of fiscal 2024, driven by recovery in the commercial PC market, the Windows refresh cycle, seasonal consumer demand, and the impact of cost reduction efforts.
- HP is investing in AI-enabled PCs and anticipates significant penetration, with AI PCs expected to account for 40%–60% of sales three years after launch, positioning the company to capitalize on growth opportunities.
- HP is regaining market share in both big tank printers and office printers, due to portfolio enhancements and operational improvements, with progress seen in regions like Europe, India, and China.
- Aggressive pricing environment and weak consumer demand in print hardware are impacting HP's market share and profitability. HP faces aggressive pricing from Japanese competitors in the consumer print market due to unfavorable exchange rates, leading HP to avoid unprofitable deals and potentially lose market share.
- Weakness in key markets such as China and U.S. federal business is causing softer demand and impacting HP's revenue growth prospects. HP continues to see areas of weakness like China and softness in the U.S. federal business, especially in January.
- Declining print margins and supplies revenue are expected in the second half of the year, potentially impacting overall profitability. HP expects print margins to decrease from 20% in Q1 to within the 16%-19% range for FY '24, driven by hardware weakness and declining supplies revenue, which is expected to decline low to mid-single digits for the year.
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Printing Margins Outlook
Q: Why will printing margins decline in second half?
A: We expect printing margins to fall from 20% in Q1 to within the 16%–19% range for the year due to a shift in hardware mix and anticipated declines in supplies revenue. While hardware contributes to lower margins, we're not changing our supplies revenue outlook, which we expect to be down low to mid-single digits for the year. Our focus remains on growing operating profit dollars rather than margin percentages. -
Second Half Outlook
Q: What drives expectations for a stronger second half?
A: Our stronger second half is driven by several factors: anticipated recovery in the commercial space, traditional seasonality with consumer demand typically higher in the latter half, increased impact from our cost reduction efforts, and the upcoming Windows refresh cycle. While growth will be slightly lower in the second half compared to the first, we are still projecting overall growth. , -
Supplies Business Performance
Q: Why will supplies revenue decelerate rest of year?
A: Despite recent outperformance, we expect supplies revenue to decline low to mid-single digits for the year due to ongoing negative impacts from reduced usage and a shrinking installed base. The favorable comparisons and pricing adjustments that benefited us this quarter are not expected to continue at the same level. Our channel inventory remains healthy. -
PC Pricing Dynamics
Q: What drove PC pricing in the quarter?
A: PC prices were flat overall, with commercial prices increasing and the mix shifting slightly toward consumer. However, price pressures in the low-end consumer segment, driven by market softness, offset these gains. Looking ahead, we anticipate PC prices to rise as commodity costs increase and our product mix shifts more towards commercial. -
Commercial Recovery Conviction
Q: Why confident in commercial recovery amid weaknesses?
A: Our confidence stems from industry projections and several factors: the starting Windows refresh cycle, expected positive impacts from pricing and mix due to rising component costs, and observed stability in SMB and education sectors. Notably, we've seen PC market growth in Europe for the first time in a long while. Despite ongoing weaknesses in areas like China and U.S. federal business, we believe the overall market will improve in the second half. -
AI PCs Outlook
Q: What are the milestones for AI-PC adoption?
A: We're enthusiastic about the potential of AI PCs to enhance security, reduce latency, and lower costs. Key milestones include delivering capable hardware in partnership with silicon providers, ensuring software applications leverage new capabilities, and training customers and sales teams. We project that AI PCs will comprise 40%–60% of our sales three years after launch, with modest impact in 2024 and greater contributions in 2025 and beyond. -
Peripherals and Growth Areas
Q: How is peripheral business performing?
A: Our peripherals business has been impacted by caution in the commercial segment but is expected to recover alongside market improvements. Encouragingly, several growth areas, including our Workforce Solutions and Consumer Services businesses, began growing in Q1—a positive sign for recovery. We're also launching our first consumer subscription that integrates hardware, advancing our strategy to offer our full portfolio as a subscription service. -
Competition in Print Business
Q: Is competition from Japanese peers affecting print?
A: Yes, we're seeing pricing pressure from Japanese competitors primarily in the consumer segment, driven by favorable exchange rates giving them an advantage. Consequently, we've chosen not to pursue certain unprofitable deals in traditional consumer categories. The commercial side remains stable, and any potential risks are already reflected in our guidance. -
Industrial Graphics Update
Q: What's the outlook for industrial graphics?
A: We've seen renewed momentum in our industrial graphics business, especially in labels and packaging, with encouraging recovery. At the upcoming Drupa event in May 2024—a major printing industry gathering—we'll launch new products and services, which we expect to positively impact the following quarters. We're optimistic about our prospects in this segment for 2024.
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