Q3 2024 Earnings Summary
- HP expects EPS growth this year, viewing recent challenges in the Print segment as temporary, while operating profit continues to grow in Personal Systems. ,
- The company is experiencing strong growth in the government segment, with revenue increasing 6% to 7% this quarter, and expects this to continue, supported by major deals like the one with NASA.
- HP anticipates a significant PC refresh cycle due to Windows 10 end-of-life, with the majority of refresh still ahead and momentum picking up in the commercial segment, indicating potential revenue growth in Personal Systems.
- Operating profit growth is under pressure, especially in the Print segment, due to a smaller market and aggressive pricing driven by a weaker yen. Enrique Lores stated, "We have not seen operating profit growth in print... the major driver for that is the smaller market that we see, especially in office, and the more aggressiveness that we see, especially driven by the weakness in yen."
- Despite significant cost savings from the Future Ready program, operating profit dollars are expected to be flat, as savings are being offset by investments and headwinds, indicating a lack of structural improvement in profitability. Karen Parkhill acknowledged, "We are focused on driving savings to offset our headwinds and ensure that we can maintain our investments... you saw this quarter was us having some headwinds hit us, taking some action that's going to help us more in the quarter ahead than it did in this quarter, and purposely continuing our investment because we're focused on the longer term."
- Softness in consumer demand is leading to lower-than-expected growth in Personal Systems revenue, with growth expected to be lower than historical levels. Enrique Lores mentioned, "We expect the growth is going to be lower than what we have seen in previous years given that we expect to see this sobbing consumer."
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Print Margins Pressure
Q: What drove the pressure on print margins, and will it improve?
A: Print margins were below expectations due to more aggressive pricing and a challenging market environment, particularly in China. HP expects margins to improve in Q4, aiming near the top end of the 16% to 19% target range, driven by seasonal revenue strength and accelerated cost-cutting actions from the Future Ready plan. -
Operating Profit Impact of Cost Savings
Q: Will cost savings from the Future Ready plan improve operating profit?
A: Despite achieving $1.3 billion in run rate savings, operating profit is expected to be close to flat for 2024 due to headwinds and continued investments in growth areas. Savings are flowing through and helping deliver margins within or above target ranges, but they are also offsetting headwinds and funding investments. -
Capital Allocation and Share Repurchases
Q: What is the plan for capital allocation and share repurchases?
A: HP remains committed to returning roughly 100% of free cash flow to shareholders, with a new $10 billion share repurchase authorization. The company plans to continue this return policy as long as gross leverage remains below 2x. -
EPS Growth Deceleration
Q: Why is EPS growth decelerating despite revenue acceleration?
A: EPS growth deceleration is due to competitive pressures, especially in the Print segment, where operating profit has not grown as expected. The challenges are seen as temporary, with no structural issues, and EPS is still expected to grow at the midpoint of guidance. -
Commercial PC Refresh Cycle
Q: Is the commercial PC refresh cycle still ahead?
A: The commercial PC refresh cycle is starting, with strong growth in enterprise and government segments. The installed base is aging, and Windows 11 adoption is influencing upgrades, especially with Microsoft ending support for Windows 10. The majority of the refresh is still ahead, and HP expects continued momentum. -
AI PCs and Market Impact
Q: How are AI PCs impacting consumer and commercial segments?
A: AI PCs are performing well, with sales slightly above 10% in the second half. Adoption is expected to be faster in consumer initially, with commercial adoption taking longer due to evaluation processes. HP projects AI PCs to represent 50% of shipments by 2027, with an average increase of 5% to 10% in revenue. -
Print Market Share and Competition
Q: How is HP managing print market share amid competition?
A: HP grew market share in home and A4 value segments, despite aggressive pricing from competitors benefiting from a weaker yen. The company placed profitable units and maintained investments in key growth areas. Supply chain and cost reductions are helping HP remain competitive. -
Free Cash Flow Guidance
Q: Will free cash flow meet guidance despite EPS revisions?
A: HP's free cash flow outlook remains unchanged at $3.1 to $3.6 billion for the full year. The company is confident in delivering the remainder in Q4, with sequential revenue improvement in Personal Systems contributing. -
Maintaining Pricing in Personal Systems
Q: Can HP sustain recent price increases in Personal Systems?
A: HP continues adjusting prices upward, though it takes time due to contracts and the competitive environment. The company expects to maintain ASPs as price adjustments progress in coming quarters. -
Print Hardware Placements and Instant Ink
Q: What's the update on print hardware placements and Instant Ink?
A: HP placed more hardware units, grew market share, and continues making progress with Instant Ink subscriptions. Approximately 50% of units are sold with upfront profit, consistent with previous reports.
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