HP Inc. (HPQ) Earnings Call Transcript & Summary

Welcome, HP Inc. We have Enrique Lores here. Welcome to the all the investors to Citi's Global TMT day 1. It's already been a busy morning. It almost feels like the afternoon. I do have some disclosures to read on behalf of HP. So just bear with me. Today's discussion includes forward-looking statements involves risks, uncertainties and assumptions which are further described in HP's SEC filings, including Form 10-K and 10-Q, HP Inc. assumes no obligation and does not intend to update any such forward-looking statements. For more information, please visit HP's IR web page at investor.hp.com. With that, welcome, Enrique.

So you guys just reported, it was just last week. So we're asking all our companies a little bit about end demand. You sit here in calendar third quarter. What has changed from a demand perspective across your various end markets, let's say, compared to the start of the year when there was just so much uncertainty or tariffs? Just how would you characterize how the markets have performed relative to your own earlier expectations, let's say, 6 months ago?

First of all, thank you for having me here. As we said in the call, demand overall performed in a very similar way to what we were expecting. We have continued to see growth in the PC market. And we have seen [indiscernible] operating performance as we were expecting. In the case of PC, it's probably the biggest difference is that the consumer market was stronger than what we had anticipated, and this was reflected both in the market size, but also in our results. And in the case of [ Grint ], again, overall also was as expected, but the office market was softer than what we had anticipated. So 2 small changes, but overall, similar performance than what we expected at the beginning of the year.

Okay. And then as you look, you guys at your typical analyst event, do share some long-term targets, both for PCs as well as [for print]. Given where we are in the cycle in terms of PC refresh, just help us understand where we are? Can you talk about the puts and takes towards that kind of growth expectations that you have for both PCs and print individually? Yes.

We will have our Investor Day at the early 2026, so then we will provide again some guidance for the coming years. What we have shared at this point is we expect PCs to grow -- to continue to grow mid-single digit through 2025 and to also grow 2026. And we expect the print market to slightly decline in '25 and to perform in a similar way in '26. These are at this point, the 2 trends that we have shared. And again, we will be providing a much more updated you in a few months when we have our Investor Day.

Okay. And then let's just dig into PCs because that's been an interesting one. We've talked about AI PCs. Clearly, HP has been one of the market share leaders. When it comes to PCs, you guys see a lot of that, and you obviously -- you guys are also global. So just trends that you're seeing in PCs. Like is it really just the end of life that's driving refresh? Or are there other factors that are in place to kind of talk about the piece of growth that you're talking about, both mid-single digits this year and even into next year?

I think there are multiple factors driving growth of PCs One is if we look backwards in the last 5 years, there was a big increase of sales during COVID, and we are starting to refresh of the -- we're starting to see the refresh of these units happening now. . On top of that, we are going through the transition from Windows 10 to Windows 11, and this drives traditionally has driven an increase of demand, and we are seeing it this year. And on top of that, we see the transition to AI PCs. And so let me talk a bit about each of them. In the case of Windows 11, the transition this time is going slightly slower than we have seen in previous transitions, but it's happening. Our estimate is that we are slightly above 50% of the transition having been completed, which means this is going to continue to help us to grow in -- for the rest of '25 and at least early '26. So that's how we see this happening. In the case of AI PC, we see demand continue to grow. Our goal was to have 25% of our [indiscernible] AI PCs by the end of this year. We have done 1 quarter ahead of plan. So the transition is going slightly faster than we were expecting, and we think this is to continue through '26. Both have -- both changes are helping positively, and we think they are going to have an impact not only this year, but also at least in '26.

Okay. And then just to remind investors, when you talk about AI PCs or actually first, just the PC segment growth, mid-single digits? Is that units? Is it revenues? Is there an add-on because AI PCs drive higher ASPs revenue should be more than units.

Thank you. So yes, we -- when we talk about growth, we always talk about units. Well, Thank you for asking. Revenue growth is higher than unit growth, both because we see more growth in premium categories as AI PCs and also the growth of other elements that are driven by PCs like [indiscernible] or like services also helped to to have faster growth on revenue than units. But that's an important comment. .

Okay. And then just we had CDW just before you. And obviously, they are more in commercial, SMBs, education, public, which includes state and local, just -- are you seeing any differences or anything you can comment on, on PC refresh or even AI PC adoption across the various verticals?

Sure. I think several things. One is, we saw overall -- in North America and CDW is mostly an [indiscernible] comment, so to be aligned with them. We have seen strong growth across all commercial segments, government, enterprise and SMB. Probably the only exception has been education where the market has been softer than previous years. That's probably the biggest change. . In terms of adoption and the transition to Windows 11, we are seeing faster adoption in the enterprise than in SMB. And this is something that traditionally happens. So it's not new, it's how these transitions happen, which means there is more opportunity in SMB in the coming quarters than what we have seen until now. But again, it is aligned to the models that we have.

Okay. And then what about from a geo perspective, geographic perspective? Is there any change or any differences you observe in AI PC adoption or Windows refresh across different geographies?

Not many differences. Performance in Europe has been very strong as well. Probably the only difference, which is not new, is the relative weakness that we see in China, given where the overall economy is. This quarter, we have seen more positive impact of some of the consumer demand activities that the government has put in place. There have been significant investments in subsidies for consumer products that have driven demand, but when we look at the economy, we continue to see significant weakness that we don't see this significantly changing in the coming quarters.

All right. And then just a little bit on how you're thinking about pricing as it relates to not just commodity components, but also tariff related, just remind investors how you're looking at those tariff-related costs both in terms of migrate -- the actual cost but also in terms of migrating your supply chain to become -- and logistics related to that? How you're looking at pricing for your PC products as a function of [ air ] direct and indirect costs.

Maybe let me explain some of the changes that we are doing because of the changes in tariffs and then I will talk about pricing. During the last 3 quarters, we have significantly accelerated the changes that we have done in our supply chain. We started this process 2, 3 years ago after COVID to build a more resilient supply chain. And what we have done is to accelerate this change. Our goal was to produce oil products for North America out from China by the end of the year. We accelerated that, and we are done. So by during Q2 -- during our Q3, we completed the transition, and we have moved manufacturing from China to Southeast Asia to Mexico and a bit to the U.S. This gives us now a much more flexible supply chain than what we had before. We have the ability to move and to build product in many other areas of the world and optimize to mitigate the impact of the new trade situation. In terms of cost, of course, this creates some increase of cost that, first, we are mitigating by looking for opportunities to reduce cost of products or cost of structure. We have accelerated our structural cost reduction plan, and we are going to deliver on the more aggressive [indiscernible]. And of course, in some cases, also we increased prices to compensate for that. With [indiscernible] this in Q2, we also did it in Q3, and this will have more impact over the months because it takes time to -- for us to change prices and for these prices to have an impact.

Okay. And then PC is a fairly competitive market. How do these price increases impact the way you're thinking about margins obviously positive? But how are you thinking about the share gains? Is this an opportunity? If you raise prices, I believe Dell has not. The [indiscernible] would have like how do you think about market share despite for the price increases?

Two things, our strategy has not changed, and we continue to be focused on profitable growth. Our goal is not to grow share for the sake of gaining share, is to drive profit and to drive growth. And what we see in the market is fairly consistent usually in the PC space when cost increases prices change and whether it's a higher lease price or whether it's lower discounts, all companies move and our expectation is that the market will be moving in this direction. Because there are many ways to control pricing, these are not only what you're doing on the spreads. .

Yes. Okay. When I just see -- if the audience has any specific questions. I have a whole list here. This is meant to be open fireside. So if you do have a question, please raise your hand, so we can bring the mic to you. No. We can continue. The AI PCs is interesting. I mean people want to know where are the use cases that you're seeing that's driving the need for an actual AI PC. I mean people talk about copilot, but copilot runs a lot in the cloud as well. So I know you guys have talked about being more efficient with tokenization, being reduced battery power, increase privacy, increased security, if you do AI on the PC on the edge itself. So just walk us through perhaps the use cases that you're seeing, that's really driving adoption of AI built into the devices itself.

[indiscernible] 2 different type of use cases. One is, let's call it, new applications, like what you mentioned, copilot or copilot [indiscernible] or some of the applications we have developed like AI companion that led customers to influence in locally. By doing [indiscernible] in locally, it is cheaper, as you said, it is more secure and also faster. So that's one set of applications. The other set of use cases is driven by the same applications you use in your [indiscernible] PC but that take advantage of the new capabilities at PC have. In the call last week, I mentioned some examples, for example, [ CrowdStrike ] is now using the NPU capabilities to scan the memory in the PC locally faster, looking for virus, looking for anomalies. That's capability that they can do only [indiscernible] AI PC that will bring significant advantage. Adobe and Zoom are developing their applications to take advantage of both the [indiscernible] and the GPU capabilities in AI PCs. So they can ran some inference in locally, which in the case of Adobe, for example, will reduce their cost in the case of Zoom, helps them to do some of the work that they were doing in the cloud. They can do it locally, and they can do it with higher quality. And this is going to be a big driver of demand. So it's not only what new things you can do is more and more the same software applications you have been doing that -- you have been using traditionally [indiscernible] will [ from ] faster, better or at lower cost because you've seen AI PCs. And this is our key message to our customers. If you're an enterprise and SMB, you expect the life of your PC to be 3 or 4 years. And if you are buying a PC now, you want to make sure that the PC will support the new capabilities that [indiscernible] will bring in the coming years. So you should be building an AI PC -- you should be buying an AI PC not a traditional PC.

Right. Just, enterprises or SMBs need to change things on the back end as well. So it's not just the edge itself. But are you seeing investments that they need to do to enable these applications that you're talking about to do things faster. It doesn't require...

It doesn't require changes.

It's independent because I know there's always investments going on there as well. But -- okay. All right. Just help us understand, you've talked about AI PCs carrying higher ASPs, obviously, but at the same time, they carry higher bond because there is more -- there's obviously an NPU in there as well now. So how does that -- how do you guys think about your margin trajectory and the targets that you have for margins as it relates to -- as you start to see more AI PC adoption?

We have not shared the specifics on margins on AI PCs. What we have offered is that we should be looking at the AI PCs as premium PCs. I mean this way, everything that you said for AI PCs is [ true ] for premium PCs. They have more expensive processors. They have more memory, they have better connectivity, this drives cost up, but also this drives price up, [indiscernible] better margins. This year, our expectation with AI PC. .

Okay. Is there something that's you need to the way HP is driving AI PC adoption that could drive sustainably higher market share than you've had in the past?

Well, in AI PCs today, we have higher share than what we have in the traditional categories. And there are many things that we are doing differently. I would highlight 3. One is the work with software companies. This is something, I think, fairly unique that we have been doing for some time that is now helping helping to drive adoption. Second is, today, we have the AI PCs with the fastest and the strongest performance. So we are the only company that have 55 [ TPUs ], AI PCs, which is a strong differentiator. And third is security. Security has been for a long time, a key HP differentiator. In the case of AI PC, it's even more critical, and we are going to continue to invest on that front to make our AI PCs more secure than anybody else has in the industry.

Okay. Anything on the chip side of things? Because I know there's a lot more chip suppliers now are planning to enter the PC. Traditionally, it's always been Intel. And of course, we have [ AMT ], now we have, whether it's Qualcomm, I know NVIDIA has talked about, some presence there as well, not just in the supercomputer, but more in the mass adoption side of things. So just maybe help us understand how does the change in chip landscape impact your offerings or the SKUs? Or is there going to be more of them? Is it going to be more concentrated?

This is a very positive change for us. In a world where there are multiple microprocessor vendors, we have an opportunity to have a more differentiated offering and also to have a much stronger ability to negotiate that what we had when there is one sold to our [indiscernible] and 1 microprocessor. That was the situation 5, 10, 15 years ago. So that's a positive change. The -- I would say, the market is very dynamic, and we have seen AMD having a very strong offering in the AI PCs, probably in the [ x86 ] side, they have the strongest offer today. And we have seen Qualcomm introducing ARM technology with very strong AI capabilities. And in both cases, we are leveraging those investments and creating a portfolio of products to drive and to support this new deal technology. In the case of Qualcomm, you're going to see us introducing a very complete portfolio of products in the coming months. The [indiscernible] will be attractive both for SMBs and for consumer. And with both AMD and Intel, we have a very complete lineup on both commercial and consumer products.

Okay. And then HP has always also been really good on the commodity side of things in terms of purchasing ahead. Obviously, you guys have a big business. So just any outlook on some of the commodity components as we look into the back half of this year.

Yes. We -- this year, we have seen an increase of commodity costs compared to where we were in [indiscernible]. And we think year-on-year, this is going to continue in the second half. We think especially [indiscernible] of memories both driven by the transition to new generations and also by just pure cost increases, we expect to see cost [ increases ]. To mitigate those, we do strategic wise. We have increased our inventories to make sure we mitigate the transition, but we see -- and we expect this cost to increase in the second half. . And in what happens usually in space is this is affected in price. So when we talk about pricing increases, it's not only driven by tariffs, it's also driven by commodity cost increases.

Yes. And just if you can remind investors, as it relates to tariffs, I know PC is imported into the U.S. right now qualifying or Section 232 tariff exemption. Any change to that relative to -- I know you guys update your slides at the -- in the earnings call as to the impact of tariffs.