HP, Inc. Slows the Bleeding, Beats Estimates

Supplies Revenue Expected to Stabilize by End of 2017   

  • HP, Inc. revenue of $11.9 billion (B) declined 4% Y/Y, 1% in constant currency (CC)
  • Printing revenues declined to $4.4 B (14% Y/Y, 10% Y/Y CC)
  • Printing supplies revenue comprised 64% of Printing segment
  • Supplies declined 18% YTY to $2.8B (18% Y/Y)
  • Printing hardware units were down 10% Y/Y
  • Consumer hardware revenues declined to $293M (14% Y/Y)
  • Printing operating profit was relatively flat at $903M (0.77% Y/Y)
  • Printing Operating Margin was 20.4% up 3.0 points Y/Y
  • 1,000 employees left company in 3Q16, 2,300 YTD. HP expects a total of 3,000 people to exit by the end of the end of October.

2016 0825 fig 1 HP Q3 2016 earnings

2016 0825 fig 2 HP Q3 2016 earnings

2016 0825 Fig 3 HP Q3 2016 earnings

Our View

HP, Inc. reported quarterly revenues that were better than expected even though it encountered a decline of 4 percent Y/Y. HP’s stock prices dropped 6.25 percent in pre-market trading on Thursday, but by Thursday afternoon long-term investors had brought the stock price to slightly above even. HP has delivered $269 million of capital to its shareholders through dividends and share repurchases.

The PC market improved more than what HP had forecasted. This supported HP’s improved “revenue trajectory” that was driven by strength in Personal Systems and which offset the expected decline in Printing.

Dion Weisler, HP president and CEO, highlighted the company’s presence at drupa stating HP’s graphics business sold a record 130 Indigo presses. As such, HP increased its Indigo manufacturing capabilities to fulfill these orders including 25 of its latest Indigo presses that were sold to Shutterfly to support the upcoming holiday season.

During the earnings conference call, Weisler championed several of HP’s products and technologies including PageWide (for 3D and digital presses that are “accelerating the transformation from analog to digital print”), the DeskJet 3755 (the world’s smallest AiO inkjet printer), instant ink (HP’s subscription-based supply service), and HP’s new PC-as-a-Service business model (that has been getting some interest globally).

Overall in the Printing segment, revenue declined 14 percent (Y/Y). The trend on unit sales is encouraging. In Q1 unit sales were down 20 percent, in Q2 sales were down 16 percent, but in Q3 unit sales were down “only” 10 percent. Weisler pointed out this has resulted in share gains of 2 points in laser and 1 point in inkjet hardware in Q2.

Over and over again, conference call listeners were treated to ‘NPV positive printer units’ being placed. This is HP’s objective in placing hardware units with a higher usage of supplies. Weisler gave as a proof point that HP gained share in the “value, MFP laser printers” for the 17th consecutive quarter. This laser segment has one of the highest supplies usages.

Supplies is the most profitable segment in printing and brings in the most revenue so it garners a lot of attention from investors. In June, HP disclosed plans to cut inventory of printing supplies and reduce discounting in an effort to turn around this important part of the business. HP is in the process of changing its supplies business model from a ‘push’ model to a ‘pull’ model. This has impacted supplies sales (see Figure 2 and Figure 3). HP spent some time discussing how it was going to “harmonize” its pricing. With the help of its channel partners it started executing on the strategy in Q3.

One of the trends that HP has been speaking about over the previous three quarters is that customers are increasingly shifting from transactional to contractual buying. This was evident in that HP’s managed print services revenue increased again year-over-year.

Shannon Cross asked an important question near the end of the conference call involving Brexit and the effect on HP. Cathie Lesjak, HP CFO, said HP saw, “very, very limited impact from Brexit…we were largely hedged by the time the Brexit vote actually happened. And so, Q3 was really a non-event.” Lesjak was more concerned about the effect going forward.

As a wrap-up, Weisler said HP’s main markets were “remaining challenging and somewhat volatile” but the company was attacking the “right opportunities” to set HP on a successful path. For the full year, HP sees adjusted EPS of $1.59 to $1.62 which is lower than its prior forecast for $1.59 to $1.65. With Q4 upon the company, it would not surprise me that HP exceeds guidance once again.

 

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