HP's Q3 2024 Earnings: AI PCs, PC Refresh Cycle, and Growth Opportunities

HP Inc. Earnings: CEO Lores Says PC Refresh 'Is Coming'

'The refresh is still ahead of us. We have only started to see that. And we continue to believe that this opportunity is coming,' HP CEO Enrique Lores said during the company's quarterly earnings call. HP Inc. CEO Enrique Lores told analysts on Wednesday's quarterly earnings call that the majority of the PC refresh cycle "is still ahead of us" due to an aging install base, Microsoft's Windows 11 operating system and the October 2025 end-of-support date set for Windows 10. However, HP moderated its fourth fiscal quarter and full fiscal quarter expectations, with slower recovery in the print market a factor. Wednesday's quarterly earnings report covered the third quarter of HP's 2024 fiscal year. The quarter ended July 31. "Companies are seeing the need to refresh," Lores said, adding that the Palo Alto, Calif.-based company has seen improvement in not only traditional PC sales, but the "funnel of new opportunities." [RELATED: HP Q3 Earnings: CEO Lores Calls AI PCs 'An Incredible Growth Opportunity' For Partners] "The refresh is still ahead of us," Lores continued. "We have only started to see that. And we continue to believe that this opportunity is coming." Lores acknowledged that compared with previous PC refresh cycles, this one "has probably started in a slightly slower way," but HP sees momentum picking up. "When we look at the funnel of opportunity that we have and the growth of the funnel compared to where we were a few quarters ago, it is definitely growing and definitely supporting the opportunity that we see," Lores said. When asked on the call if customers are waiting for Intel's Lunar Lake client processors slated to arrive in the third quarter of 2024, Lores said HP is seeing the opposite. "We are starting to see good momentum in commercial as the results this quarter reflect and under the projections that we have shared for Q4 and for the coming quarters," he said. During the call, Lores voiced disappointment in HP's print business performance, saying that "even in this type of challenging environment, I expect us to do better." As for plans for the fourth fiscal quarter and full fiscal year, Lores said that HP "will maintain investments and progress in high-value and key growth areas and accelerate our cost reduction plan." HP's revenue growth in the quarter marked the first in nine quarters, Lores said. He called commercial PC results "a signal of ongoing market stabilization." HP's global PC share was flat year over year and up 1.3 points quarter over quarter, Lores said. Workstations and consumer premium helped drive the growth. Next-generation AI PCs that have only just started shipping haven't shown "a significant impact" yet, Lores said. But "the reaction has been positive" and "experiences that we're able to generate are very compelling." "Our focus is on delivering new AI experiences for our customers," Lores said on the call. "Our AI PC expectations across shipments, higher ASPs [average selling prices) and premium mix remain on track with our expectations for the second half." Looking at traditional PC customer segments, Lores said that enterprises grew close to 5 percent. Small and midsize businesses grew 3 percent. Education grew 1 percent. The government sector grew between 6 percent and 7 percent. A deal that should boost HP's federal government business is the acquisition during the quarter of CyberCore, No. 149 on CRN's 2024 Solution Provider 500. Lores said on the earnings call that CyberCore is "a leading provider of secure supply chain management and cyber solutions for the U.S. federal government" and should "help further [strengthen] our security expertise." The solution provider will operate as a subsidiary of HPI Federal and a stand-alone entity and channel partner, according to a LinkedIn post. CyberCore COO Jennifer Kauffman was elevated to the CEO position in June, according to her LinkedIn account. Former CEO Neal Frick left the solution provider and started a consulting firm called Avandra, according to his LinkedIn account. Marking her first quarterly earnings call as HP CFO after starting earlier this month, Karen Parkhill told listeners that the vendor's print business margins were hurt by "an incrementally aggressive pricing environment as our Japanese competitors continued to benefit from the weaker yen," plus a challenging market environment in China and elsewhere. "Against that environment, we took the opportunity to place hardware units that are profitable long term but diluted to the current overall margin rate," Parkhill said. "Despite the headwinds, we also maintained our investment in the key growth areas that are going to generate long-term value." Hardware units declined 2 percent year over year, but HP's total print market share increased both year over year and sequentially, she said. Lores said that the challenges to print are not "structural changes, but definitely they are impacting our performance in 2024." "We were expecting to be able to be more aggressive in the second half, and we were driving a cost reduction at the hardware level," Lores said. When asked on the call about the durability of HP personal system price increases, Lores said that the vendor is "still in the process of adjusting our prices." "We cannot adjust prices immediately because there are contracts that have been signed or deals that have been done," he said. "It takes us some time to adjust." Competition prevented HP from adjusting prices "as much as we wanted," but the vendor "will continue to look in the coming quarters." When asked about a decrease of about $400 million in revenue through the first three quarters and growth of about $300 million year over year in operating expenses, Parkhill said that HP's savings are apparent in the vendor's margin delivery in personal systems and print and that the growing expenses are due to "reinvesting" in the business. Personal system services and hybrid systems saw revenue grow double digits year over year with video collaboration a driver, according to HP. Personal systems grew for the second consecutive quarter and saw double-digit sequential growth, Parkhill said. Parkhill said that HP expects "seasonally stronger" print revenue for its fourth fiscal quarter, plus "taking more aggressive actions to drive that margin improvement." "We're accelerating our Future Ready plan," she said. "We're driving further reductions across the core -- that includes business consolidation, reduction in platforms and supply chain optimization. And with all of this taken together, we're confident in our ability to deliver the print margins near the top end of our 16 [percent] to 19 percent target range." The Future Ready Plan aims to deliver gross annualized structural cost savings of $1.6 billion by the end of fiscal year 2025, Parkhill said. The vendor expects to exit the current fiscal year with savings of $1.3 billion instead of the former projection of $1.1 billion. As part of the Future Ready plan, Parkhill said that HP is "using generative AI capabilities to reduce customer call times in Workforce Solutions, and in our commercial organization, our move to more end-to-end processes is enabling much faster deal quotes for contractual customers and allowing customers to more easily buy and renew on HP.com." The vendor expects personal systems to grow sequentially in the low to mid single digits. Print should grow in the low to mid single digits. Supplies' sequential increase should be in line with the prior year, Parkhill said. Parkhill reaffirmed HP's full-year free cash flow of between $3.1 billion and $3.6 billion. The moderated fourth-quarter expectation now includes a sequential increase in the low to mid single digits, she said. "We are expecting continued strength in commercial, but given the lingering softness in the consumer market, we are expecting less seasonal growth than we have seen historically," Parkhill said. "We anticipate personal systems operating margin to remain in the upper half of our long-term target range of 5 [percent] to 7 percent in Q4 as we work to offset increased commodity costs through pricing and discipline cost management while continuing to invest in strategic priorities. HP's expected fourth fiscal quarter revenue growth for print is in the low to mid single digits, she said. Supplies revenue in fiscal year 2024 should decline in the low single digits. HP's stock fell about 4 percent after market close Wednesday, trading at about $33 a share.

HP Inc. Earnings Preview: 5 Things To Know

AI PCs, traditional PCs and printers are subjects likely to come up on the company's earnings call. Sales of new PCs crafted for the artificial intelligence era. A potential recovery in the traditional PC market. And possible continued troubles for printers. These are some of the major subjects expected to come up Wednesday when Palo Alto, Calif.-based HP Inc. reports earnings for the third quarter of its 2024 fiscal year. The quarter ended July 31. [RELATED: Lenovo Q1 Sales Up 20 Percent As CEO Says 'Hybrid AI' Will Dominate Future] In an August report by Bernstein, the investment firm estimated that HP will report $13.35 billion in revenue for the third fiscal quarter, in line with Wall Street's consensus expectation of $13.38 billion. The firm expects $53.7 billion in revenue for the year, slightly above Wall Street's $53.6 billion consensus, according to the Bernstein report. Here's what else you need to know heading into HP's third fiscal quarter earnings. Microsoft Copilot+ PCs aimed at AI users hit the market in June, perhaps giving HP executives enough time to provide an early snapshot into this emerging market. HP Copilot+ PCs include the OmniBook X AI PC and EliteBook Ultra G1q AI PC, with computer makers Lenovo, Samsung, Dell Technologies, Asus, Acer and Microsoft itself offering rival products. In an August report by Bernstein, the investment firm said that HP has been touting AI PCs as drivers of "a huge change in the industry structure and could be a 10-20% tailwind to PC ASPs (average selling prices) overall with penetration reaching 40-60% through 2026, leading to an estimated 200 bps tailwind to annual revenue growth each year for the next three years." Overall, "PC OEMs are increasingly positive on the impact of AI on the PC market and have noted growth in adoption of AI-tagged PCs, potentially driving incremental PC replacements, albeit from a low base," according to the Bernstein report. New AI-tagged Copilot+ PCs are on average about 20 percent more expensive than non-AI equivalents, according to Bernstein, which could create "an ASP and premiumization tailwind." A Bernstein survey of CIOs also suggested "a willingness to trade up to richer configurations" due to "increasingly demanding workloads being run on PCs." In July, IDC reported that PC sales through distribution returned to growth in the second quarter of 2024, with PC sales reaching $3.9 billion for the quarter, 9.9 percent growth year over year. AI PCs generated about 20 percent of PC revenue in the quarter, up 33 percent quarter over quarter, according to IDC. "Apple and Microsoft have experienced successful adoption of AI PCs with their revenue mixes at 75% and 32% respectively," according to IDC. "But Lenovo and HP still held the first and second spots for total PC sales even with lower AI PC product mixes for the quarter. AI PCs featuring Neural Processing Unit (NPU) technologies are expected to continue ramping up over the coming quarters." "While IDC believes the commercial market has the biggest short-term upside for AI in the PC industry, the consumer story has yet to be told in full," according to the research firm. Gartner said in July that even with the introduction of the first Arm-based Windows AI PCs in the second quarter, "the demand for AI PCs has been slow, as the product is still in the early introduction stage, and the real benefits of owning such a device are not yet clear to most buyers." HP's earnings Wednesday will also give analysts and the channel insight into the greater PC market and whether sales have improved this long after the pandemic-era purchasing flurry. A separate IDC post in July said that the traditional PC market saw a "second quarter of growth following eight consecutive quarters of decline." Worldwide PC shipments hit 64.9 million units in the quarter, 3 percent growth year over year and 5 percent excluding China. Lenovo topped the list of PC companies with 14.7 million units shipped in the quarter, according to IDC preliminary results. That is 3.7 percent growth year over year. HP came in second with 13.7 million shipments, 21 percent of the market and 1.8 percent growth year over year. No. 3 was Dell with 10.1 million units, 15.5 percent of the market, a 2.4 percent decline year over year. In July, research firm Gartner said that worldwide PC shipments hit 60.6 million units in the second quarter, up 1.9 percent year over year and marking three consecutive quarters of year-over-year growth. Lenovo, HP and Dell maintained their rankings and similar shipment and growth results under Gartner's measures. However, HP held the top spot in the U.S. PC market -- 5 million units, 27 percent of the market and 3.5 percent growth year over year, according to Gartner. HP bested Dell's 4.7 million units -- 25 percent of the market and a 3.4 percent decline year over year. No. 3 was Lenovo with 3.2 million -- 18 percent of the market and 7.7 percent growth year over year. The U.S. PC market saw the highest shipment volume since 2022's third quarter -- 18 million shipped PCs, 3.4 percent growth year over year, according to Gartner. The firm attributed the growth in part to a high sales season for government and education, with "surging business PC demand" expected in the U.S. for the second half of the year. The August Bernstein report said that the firm expects 2 percent growth year over year for revenue in HP's Personal Systems Group (PSG), below a Wall Street consensus of 2.5 percent. The consensus view implies "that ASP headwinds reverse from being a -4.7% headwind to a +0.7% tailwind." "Given a better industry-wide pricing environment, the fact that HPQ's ASPs already improved from being a -9.7% headwind in Q1 to -4.7% in Q2 ... and an extremely easy -15% ASP comp, and the company's view that AI PCs would be an ASP tailwind ... we see this as likely, and potentially a bit conservative, pointing to some upside to PC numbers," according to Bernstein. Bernstein called the second-quarter PC market data "ahead of normal seasonality, and at the high end of pre-Covid levels, which appears to suggest a PC market recovery may be underway." The firm models sales of between 265 million and 275 million units for the year, which would mean 2 percent to 6 percent growth year over year. Helping to drive the growth are "no channel inventory in 24 vs. drawdowns in 23 (which depressed 2023 sell-in)" and "some initial refreshes of early Covid shipments in 2020," not to mention "potential corporate refreshes in advance of Windows 10 support expiration in late 2025," according to Bernstein. In a July report from Morgan Stanley, the firm cited a survey of CIOs that showed "EU-based CIOs expect 2024 Hardware spend to decelerate 70bps Y/Y, to +0.9% Y/Y." The firm said that CDW, HP and Xerox executives had mentioned "relative weakness in Europe" in public comments. U.S.-based CIOs, however, said they expect "2024 Hardware growth to accelerate 90bps Y/Y, to +2.1% Y/Y," according to the firm. "While this translates to overall hardware budget growth accelerating 40bps Y/Y in 2024, it's clear budget growth is being driven entirely by the US, as EU spending weakness persists into 2024," according to Morgan Stanley. "Similarly, the entirety of the 20bps upward revision to 2024 Hardware budget growth expectations came from US CIOs (+70bps vs. our 1Q24 CIO Survey) while EU CIOs downticked on 2024 Hardware budget growth vs. our prior survey." Gartner reported that the Europe, Middle East and Africa (EMEA) PC market saw a third consecutive quarter of growth -- 4.8 percent year over year. But quarter over quarter unit volumes were about flat. The firm called EMEA's market "stabilizing from previous declines and returning to its seasonal trends, rather than experiencing a significant surge." Asia fell 2.2 percent year over year, according to Gartner. But the decline was less steep than in prior quarters. A weak market in China was a factor in the decline, but emerging countries saw mid-single-digit growth. Mature countries saw the first growth year over year in two years. An August report by Bernstein said that the firm expects HP "to benefit from a solid PC performance and ongoing cost management through its Future Ready program," but that the printing business remains a concern. "Printer hardware revenues have declined for 9 consecutive quarters, and hardware units have declined double digits for four straight quarters," according to the Bernstein report. "We see the potential for significantly weaker supplies growth (mid to high single digit declines) over the next four quarters given tough comparisons and a shrinking installed base. We continue to believe that printing is in structural decline, and is the key challenge for the company." The printing business accounts for about 60 percent of segment operating profits, according to Bernstein. The firm lists "poor execution in its migration to its new HP+ printing model" as among the biggest downside risks for HP's stock price, along with potential "weakness in IT spending and PCs" and "further third party competition for supplies," as well as "incremental price competition in the PC space." The firm forecast Imaging and Printing Group (IPG) revenue down .5 percent year over year, in line with Wall Street's predicted 4 percent decline. This would also be down 2.9 percent quarter over quarter, slightly below HP's guidance, according to Bernstein. "We believe supplies in particular could be weak," the Bernstein report said, with HP acknowledging that supplies are "expected to continue to decline low to mid single digits for the full year (in line with the long term trend), and commentary from Xerox confirms that enterprise printing demand continues to decline." HP also "saw unusually strong supplies growth in 2023, with supplies declining" 1 percent ignoring foreign exchange, which was "above of the long term trend," according to Bernstein. This gives a tough comparable year over year. Bernstein believes that supplies "could decline 5% or more YoY for the next several quarters, which could pressure IPG margins." On Tuesday, HP revealed that it is in the running for a proposed $50 million award from the federal government under the U.S. CHIPS and Science Act. Executives might want to go into detail about how those funds would help the computer maker's capabilities. The funds will go toward HP's 47-year-old microfluidics semiconductor fab in Corvallis, Ore. Analysts on the call might seek more details around larger trends in components. Falling component prices and AI PC ASP tailwinds could help HP's margins, according to the August Bernstein report. Prices for dynamic random access memory (DRAM) "appear to have bottomed and are now recovering," which has driven "an inflationary component cost environment for PCs (and other hardware products)," according to Bernstein. "OEMs will likely pass on some costs to customers, creating an ASP tailwind." Bernstein said that an over-shipping of central processing units (CPUs) "appears to be driving a channel build, which could lead to component pricing pressure going forward as vendors attempt to clear the channel ."

HP Q3 Earnings: CEO Lores Calls AI PCs 'An Incredible Growth Opportunity' For Partners

HP will 'continue to invest in our partners so they can take advantage of this opportunity,' CEO Enrique Lores tells CRN in an interview. HP CEO Enrique Lores called the emerging artificial intelligence PC market "an incredible growth opportunity" for solution providers and encouraged them to leverage the computer maker's certification resources to get ready for the AI wave - while acknowledging a slower recovery than expected for printers. "We have been building training programs for them because we think this is an incredible growth opportunity, and we need to make sure that they are ready for that," Lores told CRN as part of a briefing ahead of HP's third-quarter earnings release on Wednesday. "We launched a certification program on AI for our channel partners - both for, let's say, product-oriented and service-oriented partners." Lores said that the program has had "a very good reception" so far and pledged that the Palo Alto, Calif.-based vendor will "continue to invest in our partners so they can take advantage of this opportunity that we think is fantastic for them." [RELATED: HP Teams Up With Nvidia To Offer Amplify Partners 'AI MasterClass' Training] HP has about 250,000 channel partners worldwide, according to CRN's 2024 Channel Chiefs. The vendor reported earnings Wednesday for the third quarter of its 2024 fiscal year. The quarter ended July 31. During the conference call CRN participated in with Lores, the CEO also said that HP is "pleased with the momentum that we are building," with HP returning to revenue growth during the quarter driven in part "by strong performance in commercial PCs." When asked on the conference call about how AI PC sales are going, Lores said, "Things are going (as planned). But it is early. ... We just did the launch a few weeks ago. ... Orders are as (planned). But we are only (just) starting." Lores said that AI PCs should help the commercial and consumer markets, with faster adoption by consumers. "Commercial customers, especially big customers, need to go through an evaluation process that takes a few weeks or a few months," he said. "This is naturally going to delay the adoption of AI PCs, but this is what we're expecting. So nothing different from what we're expecting a few months ago when we started to define the category." Lores continues to expect that next-generation AI PCs "will represent around 50 percent of the total PC category three years after launch, and that they will drive an average price increase of between 5 and 10 percent." HP continues "to navigate dynamic and competitive markets," with the print market not recovering "as we were expecting," Lores said on the conference call. "We are taking actions to compensate for that ... to accelerate our structural cost savings to compensate for some of the market slowdown." When asked for more details on the conference call, Lores said that HP is seeing the slowdown "especially in the office space in the hardware side." "Hardware for office is not growing as we were expecting," he said. "We have seen return to growth in the home side, in consumer ... where we saw growth for the first time in multiple quarters. And supplies, and especially usage, are going as (planned)." The other printer segments' performances lead Lores to believe that commercial print's slower recovery "is temporary." Although Lores did not detail on this call specific changes HP has made to manage and reduce costs, he said that HP has started doing "cost reduction activities" this year instead of waiting until next year. "We were we were expecting to achieve by the end of the year 70 percent of the savings, and we are going to achieve now 80 percent of the savings of the program we announced two years ago," he said. HP expects a strong fourth fiscal quarter and is "confident in the path forward." HP's "Future Ready" plan continues to pay off, Lores said, with innovation investments "enabling us to deliver industry leading experiences, especially around AI and hybrid." AI PCs have "had very positive reactions from customers," Lores said, with HP starting OmniBook X and EliteBook Ultra AI PCs in June. HP's Workforce Experience platform has reached 250,000 devices connected or managed, "exceeding expectations." When asked on the conference call about the $50 million in federal funding HP stands to get under the U.S. Chips and Science Act for a fabrication plant in Oregon, Lores said that the fab is responsible for some manufacturing and design related to semiconductors for ink cartridges. Over the last few years, HP has been developing the next generation of the technology used at the fab under the internal name of G5, Lores said. With the funds, "we are going to accelerate the exploration of how to use this technology in other spaces, like, for example, life sciences or sensors." HP reported net revenue of $13.5 billion for the quarter, up 3 percent year over year ignoring foreign exchange. HP saw free cash flow of $1.3 billion. The personal systems segment brought in $9.4 billion in net revenue, up 5 percent year over year. Consumer PS net revenue fell 1 percent year over year. Commercial grew 8 percent. Total units grew 1 percent. Consumer units fell 6 percent and commercial units grew 6 percent, according to HP. Printing net revenue fell 2 percent year over year ignoring foreign exchange, resulting in $4.1 billion for the quarter. Consumer printing net revenue grew 2 percent. Commercial fell 5 percent. Supplies net revenue fell 1 percent ignoring foreign exchange. Total hardware units fell 2 percent - with consumer printing units flat and commercial units down 4 percent.