HPQ Q2 2025: AI PCs to hit 35% mix, driving margin recovery
- Accelerated AI PC Growth: Management is rapidly driving its AI PC portfolio—aiming for AI PCs to exceed 35% of the PC mix by year-end—which, coupled with a 10–20% premium pricing, is positioned to boost revenue and margins.
- Effective Tariff Mitigation & Supply Chain Diversification: The company has swiftly diversified manufacturing away from China to locations like Vietnam, Thailand, India, Mexico, and the U.S., with actions expected to fully mitigate tariff-related cost impacts by Q4, supporting margin recovery in Personal Systems.
- Resilient Print Segment Performance: With solid margins consistently above guidance, driven by disciplined cost management, favorable pricing, and a path toward $2 billion in annual structural savings, the Print segment reinforces overall profitability.
- Tariff and cost headwinds risk persist: The call highlighted that unmitigated tariff impacts (approximately 100 bps on operating margin and a $0.12 EPS drag in Q2) could continue to pressure profitability if mitigation actions fall short or face delays.
- Moderated PC demand outlook: Guidance for the second half reflects low single-digit market growth amid macroeconomic uncertainty and pricing pressures, suggesting that weaker demand—even with catalysts like Win11—might hamper top‐line performance.
- Increased working capital and cash flow concerns: Supply chain diversification and accelerated manufacturing shifts are driving up working capital requirements, contributing to negative free cash flow trends that, if prolonged, could negatively affect overall financial flexibility.
| Metric | YoY Change | Reason |
|---|---|---|
Total Revenue | +3% (Q2 2025: $13,220M vs. Q2 2024: $12,800M) | Broad-based revenue growth is driven by improvements across key segments and geographies. Building on the modest +2% growth seen in Q1 2025, enhanced performance in Personal Systems (rising ASPs and premium mix) and improved regional results, particularly in APJ, have contributed to this uptick. |
Personal Systems Revenue | +7% (Q2 2025: $9,024M vs. Q2 2024: $8,426M) | Stronger Personal Systems performance is attributed to higher commercial volumes and disciplined pricing strategies that shifted the mix toward premium products. This mirrors Q1 2025 trends where favorable ASP increases and volume gains in the commercial segment supported revenue growth. |
Commercial Segment (within Personal Systems) | +9% (Q2 2025: $6,786M vs. Q2 2024: $6,242M) | Commercial segment revenue growth stems from a 6% increase in units sold and a 4.1% rise in ASPs, driven by a focus on high-margin, premium categories. This result is consistent with Q1 2025 performance—where strategic investments in premium and AI-enabled platforms boosted growth—even as the segment continued to benefit from a market recovery. |
Corporate Investments | +220% (Q2 2025: $16M vs. Q2 2024: $5M) | The dramatic surge in Corporate Investments reflects increased spending on incubation projects and digital enablement initiatives. Similar expense profiles were observed in Q1, and the substantial increase reinforces HPQ’s commitment to investing in future growth areas, despite these being recorded as losses from operations. |
Asia-Pacific and Japan Revenue | +7% (Q2 2025: $3,034M vs. Q2 2024: $2,836M) | APJ regional improvement is likely driven by stabilizing market conditions and renewed commercial demand. Building on a moderate recovery in Q1 2025 (+3.9% YoY in APJ), the stronger Q2 performance suggests that HPQ’s focus on premium mix and market recovery is positively impacting the region. |
| Metric | Period | Previous Guidance | Current Guidance | Change |
|---|---|---|---|---|
Non-GAAP Diluted EPS | FY 2025 | $3.45 to $3.75 | $3 to $3.30 | lowered |
GAAP Diluted EPS | FY 2025 | $2.86 to $3.16 | $2.32 to $2.62 | lowered |
Free Cash Flow | FY 2025 | $3.2B to $3.6B | $2.6B to $3B | lowered |
| Topic | Previous Mentions | Current Period | Trend |
|---|---|---|---|
AI PC Growth | Q1 2025: Saw an expected adoption rate of 25% of PC shipments by year-end with sequential growth and product innovation. Q4 2024: Focused on a 15% share in shipments with defined next‐gen features. Q3 2024: Launched innovative AI PCs with advanced performance and mobility. | Q2 2025: HP expressed strong confidence with a goal for AI PCs to represent over 35% of the PC mix by end of year, emphasizing significant growth driven by customer demand. | Accelerated and more aggressive adoption of AI capabilities with higher targets and mainstream integration. |
Premium Pricing | Q1 2025: Premium pricing advantage of 5%-10% ASP uplift with a focus on profit margins. Q4 2024 & Q3 2024: Noted as a contributor to improved ASP and margin support. | Q2 2025: Premium pricing now set between 10% and 20% higher than regular PCs, with introduction of AI PCs to the mainstream market. | Sharper pricing strategy and enhanced premium positioning to boost margins and capture higher value. |
Supply Chain Diversification | Q1 2025: Emphasized building a resilient supply chain with over 90% of North American products built outside China. Q4 2024: Focused on diversifying facilities globally to adapt to geopolitical shifts. Q3 2024: No notable mention. | Q2 2025: Detailed accelerated manufacturing shifts out of China to locations like Vietnam, Thailand, India, Mexico, and the U.S., alongside a redesigned logistics network to avoid tariffs. | More aggressive and expansive actions to diversify production and logistics, indicating stronger operational repositioning. |
Tariff Mitigation | Q1 2025: Addressed current tariffs through production relocation and cost reduction measures. Q4 2024: Discussed collaborating with the administration and managing production exposures. Q3 2024: Little detail provided. | Q2 2025: Launched comprehensive measures—including cost actions, strategic pricing adjustments, and process efficiency initiatives—to mitigate tariff impacts, with full mitigation targeted by Q4 2025. | Enhanced mitigation efforts and a multifaceted approach showing increased urgency in countering trade-related cost pressures. |
Print Segment Dynamics & Margin Pressures | Q1 2025: Noted a 2% revenue decline with strong margins maintained at the high end of the 16%-19% range. Q4 2024: Reported slight revenue growth, robust margins (approaching 19%), and aggressive cost reductions. Q3 2024: Faced competitive pricing pressures with operating margins around 17.3%. | Q2 2025: Print revenue expected to decline in low single digits with continued focus on profitable high-value categories and maintaining margins through cost discipline and pricing actions. | Consistent focus on profitability despite modest revenue declines, with a continuous emphasis on cost discipline and margin support. |
PC Demand Outlook & OS Refresh Cycles | Q1 2025: Projected mid-single-digit growth with strong commercial and enterprise momentum, supported by an accelerating Windows 11 cycle. Q4 2024: Forecasted mid-single-digit overall growth with the Windows refresh cycle boosting demand. Q3 2024: Recorded commercial recovery with varied growth rates across segments. | Q2 2025: Forecasted low single-digit growth in PC demand amid an uncertain macro environment while viewing the Windows 11 refresh as a key catalyst for demand. | More cautious near-term outlook despite reliance on OS refresh catalysts, reflecting greater sensitivity to macroeconomic challenges. |
Cost Savings, Free Cash Flow & Working Capital Management | Q1 2025: Raised cost savings target from $1.6B to $1.9B with timing-related free cash flow impacts from increased inventory. Q4 2024: Reported strong free cash flow and notable working capital improvements, driving nearly $1.6B cash from operations. Q3 2024: Achieved about 80% of targeted cost savings with solid free cash flow performance. | Q2 2025: Committed to at least $2B in gross annual structural savings while revising free cash flow expectations downward due to higher working capital needs driven by supply chain diversification. | Sustained commitment to cost discipline with evolving short-term challenges in working capital, indicating an adaptive approach to operational efficiency. |
Strategic Acquisitions & AI Integration | Q1 2025: Announced the acquisition and integration of [Human] assets to boost their AI ecosystem with products like AI-powered platforms. Q4 2024: Highlighted the Vyopta acquisition to enhance the workforce experience and expand digital integration. Q3 2024: Acquired Cybercore Technologies to strengthen security and AI-enabled services. | Q2 2025: Focused on integrating a humane asset acquisition into its technology organization while expanding its AI PC portfolio (including new products like the HP ZGX AI Station and Workforce Experience platform) to drive broader AI adoption. | Consistent and evolving investments in acquisitions and AI integration, with an intensified focus on expanding AI capabilities across product lines. |
Government Segment Growth | Q1 2025: Mentioned observable growth in the government segment, with positive commentary on government demand. Q3 2024: Reported strong government growth (6%-7%), including significant deals like with NASA. | Q2 2025: No mention of government segment performance or growth. | Omission in Q2 suggests either a temporary deprioritization of the topic or stable performance that did not warrant discussion this period. |
Macroeconomic & Geopolitical Uncertainty | Q1 2025: Addressed uncertainty primarily through tariff impacts, supply chain resiliency, and increased cost-saving targets. Q4 2024: Discussed enhanced supply chain resilience and collaboration with policymakers to navigate geopolitical shifts. Q3 2024: Implicitly referenced via challenging market conditions and dynamic pricing pressures. | Q2 2025: Provided extensive discussion on the impact of tariffs causing a 100 basis point hit to operating profit, revised outlook guidance, and detailed measures to mitigate these effects, all set against a background of broader macroeconomic uncertainty. | Stronger emphasis on the operational and financial impacts of geopolitical and macroeconomic uncertainties, with more detailed mitigation and adjustment strategies deployed. |
-
EPS Q4 Beat
Q: What drives Q4 earnings jump?
A: Management explained that robust seasonal demand—with strong back‐to-school and holiday effects—combined with accelerated cost reductions and pricing actions is expected to boost EPS from $0.70 to around $1 in Q4, reflecting improved margins and overall execution. -
EPS Impact Breakdown
Q: What is the 40% EPS impact from?
A: They noted that about $0.12 of the impact came directly from unmitigated tariff costs, while a broader moderation in growth expectations amid macro uncertainty drove the rest of the guidance reduction. -
Tariff Mitigation
Q: How are tariffs being mitigated?
A: The team is countering tariffs with a mix of price adjustments, supply chain realignments, and targeted cost actions—though they don’t break out each individually—with full mitigation expected by Q4. -
Supply Chain Shifts
Q: How secure is the supply chain shift?
A: They are rapidly moving production from China to Southeast Asia, Mexico, and the U.S. and are confident these agile moves will compensate for tariff costs within about two quarters. -
PC Market Outlook
Q: Why is the PC market guide down?
A: Management cited a softer second‐half environment driven by lower consumer and business confidence and upcoming price increases, although healthy channel inventories and continued Windows 11 momentum remain positive. -
AI PC Growth
Q: What drives AI PC adoption?
A: They emphasized strong interest in AI PCs—backed by over 100 supporting software solutions—aiming for the AI mix to exceed 35% and contribute higher average prices (10–20% premium) within the overall PC business. -
Free Cash Flow Guidance
Q: Why did free cash flow expectations decline?
A: The slight dip in free cash flow is linked to lower-than-expected working capital improvements and operating margin impacts—temporary factors as cost actions and supply chain measures take effect. -
Growth Businesses
Q: How significant are growth businesses?
A: While detailed percentages weren’t shared, management stressed that growth areas like AI PCs, advanced workstations, and workforce solutions are expanding faster and have higher margins than core products, playing a key role in future revenue. -
PS Margin Range
Q: Will Personal Systems hit 5%-7% margins?
A: They expect Personal Systems margins to ultimately settle in the 5%–7% range, though this quarter’s margins were in the lower end due to tariff pressures, with sequential improvement anticipated. -
Print Margin Drivers
Q: What boosted Print margins this quarter?
A: Strong pricing discipline, rigorous cost management, and a favorable grant from Singapore helped drive Print margins to outperform expectations, despite challenging hardware conditions. -
Sequential Margin Improvement
Q: What will improve PS margins from Q3 to Q4?
A: Management highlighted that a strong Q4 season, benefiting from both supply chain efficiencies and additional pricing actions, will enhance PS margins sequentially. -
Long-Term Cost Impact
Q: How will supply chain changes affect long-term margins?
A: They expect that, beyond this transitional period, the new supply chain configuration will not adversely affect fiscal ’26 margins, with costs normalizing as tariff impacts are fully offset. -
Pricing Elasticity
Q: What about PC and Print pricing pressure?
A: In PCs, modest upward ASP pressures have been factored into guidance, while Print prices remain stable overall, with industry peers also moving to raise prices amid tariff challenges. -
PC Pull-In Effect
Q: Is PC pull-in significant in H2?
A: The pull-in effect remains minimal—less than 1% overall—though it may appear larger in the U.S. due to relative market size, with no material impact anticipated companywide. -
GenAI Configurations
Q: Are customers buying richer configurations for GenAI?
A: Yes, there is noticeable growth in demand for higher-spec AI PCs, as customers are valuing enhanced performance and functionality specifically designed for generative AI applications.
Research analysts covering HP.