HP Inc. (HPQ) Q4 2025 Earnings Call Transcript

Access earnings results, analyst expectations, report, slides, earnings call, and transcript.

Overview

The earnings call indicates strong financial performance with strategic initiatives in AI and cost reduction, offsetting memory cost impacts. The PC market is expected to grow, and HP is confident in its strategies for service and subscription growth. Despite some pricing challenges, guidance remains optimistic. Overall, the sentiment is positive, with potential for stock price appreciation.

Key Financial Performance

Q4 Revenue Growth 4% year-over-year, driven by Personal Systems gains in commercial and consumer.

Personal Systems Revenue 8% year-over-year, driven by increased ASPs and 7% unit growth. Key growth areas like AI PCs doubled revenue year-over-year.

Print Revenue Declined 4% year-over-year, reflecting market softness and delayed purchasing decisions across all regions.

Consumer Subscriptions Revenue Double-digit revenue growth, nearing $1 billion in annual revenue.

Industrial Graphics Revenue Exceeded $1.8 billion in annual revenue, driven by the ninth consecutive quarter of year-over-year growth.

3D Printing Revenue Double-digit growth, driven by applications in drone and robotics manufacturing.

Workforce Solutions Revenue Double-digit growth, with key wins in industries such as energy, technology, and services.

Full Year Revenue Growth 3% year-over-year, with key growth areas collectively growing double digits and representing over 1/3 of total revenue.

Personal Systems Full Year Revenue Grew 6%, driven by commercial strength.

Print Full Year Revenue Declined 4%, with supplies revenue down 2% in constant currency.

Operating Margin (Q4) 8%, down year-over-year but improved almost 1 point sequentially.

Non-GAAP EPS (Q4) $0.93, representing a sequential increase of 24%.

Free Cash Flow (FY 2025) $2.9 billion, consistent with outlook.

Future-Ready Cost Savings $2.2 billion in cumulative gross annualized savings, surpassing the original $1.4 billion target.

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Operating Highlights

AI-powered devices: Introduced a new edge class device, the AI station powered by NVIDIA, capable of running up to 200 billion parameter models. Also launched the industry's first 49-inch ultra-wide monitor with AI noise reduction and AI-driven printing and scanning features.

Workforce Experience platform: Uses telemetry from 48 million endpoints to manage 2.4 million connected devices and remediate over 12 million IT issues monthly. Integrated with Microsoft Security Copilot for generative AI in IT management.

Personal Systems: Revenue grew 8% year-over-year, driven by PC market share gains in high-value categories. AI PCs now represent over 30% of shipments.

Print: Revenue declined 4% due to market softness, but Consumer Subscriptions grew double digits, nearing $1 billion in annual revenue. Industrial Graphics exceeded $1.8 billion in annual revenue, with 3D printing showing double-digit growth.

Supply chain resilience: Invested in making the supply chain more resilient to mitigate future risks, part of the future-ready plan initiated three years ago.

Cost savings: Achieved $2.2 billion in cumulative gross annualized savings through the future-ready cost plan, surpassing the original $1.4 billion target.

AI integration: Launched a company-wide program to embed AI into operations, targeting $1 billion in gross run rate savings over three years. This includes workforce reductions of 4,000 to 6,000 employees.

Leadership transitions: Welcomed new leaders for Personal Systems, HP Solutions, and Strategy and Transformation to drive innovation and long-term strategy.

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Risk or Challenges

Trade-related costs: HP faced challenging trade dynamics, which impacted operating profits and gross margins. These costs took several quarters to be absorbed, affecting financial performance.

Memory cost inflation: Rising memory costs, which constitute 15%-18% of a typical PC's cost, are expected to impact Personal Systems margins in the second half of fiscal year 2026. The rate of increase has accelerated recently, creating cost pressures.

Print market softness: The print market remains weak globally, with delayed purchasing decisions and competitive pricing pressures. This has led to a decline in print revenue and unit sales.

Supply chain risks: Although HP has invested in making its supply chain more resilient, trade-related costs and inflationary pressures highlight ongoing vulnerabilities in the supply chain.

Workforce reductions: HP plans to reduce its workforce by 4,000 to 6,000 employees over the next few years as part of cost-saving measures, which could impact employee morale and operational continuity.

Economic uncertainties in North America: Demand softness in North America, particularly in the commercial segment, has been noted, which could impact revenue growth.

Inflationary pressures: Inflationary pressures, particularly in memory costs, are expected to create headwinds for profitability in the second half of fiscal year 2026.

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Guidance & Outlook

Revenue Projections for FY '26: HP expects the PC unit TAM to decline in units but the revenue TAM to grow low single digit. Personal Systems revenue is expected to be stronger in the second half of the year, driven by normal seasonality and pricing adjustments against rising costs. Print revenue is anticipated to outperform the market, with a low single-digit decrease in the hardware market and growth in big tank and industrial markets offsetting declines in traditional hardware.

Operating Margin Projections: Personal Systems operating margin is expected to stay in the 5% to 6% range in the first half of FY '26, with potential impacts from higher memory costs in the second half. Print operating margins are expected to be in the upper half of the 16% to 19% range for FY '26.

AI Integration and Cost Savings: HP plans to embed AI into its operations to improve productivity, accelerate innovation, and enhance customer experiences. The company aims to achieve approximately $1 billion in gross run rate savings by the end of FY '28, with $300 million of those savings expected by the end of FY '26. This initiative includes workforce reductions of 4,000 to 6,000 people over the next few years.

Free Cash Flow Guidance: HP expects to deliver between $2.8 billion to $3 billion in free cash flow for FY '26, with the second half of the year being stronger than the first.

Dividend Increase: HP announced a quarterly dividend increase to $0.30 per share, marking the 10th consecutive annual increase since 2015.

Key Growth Areas and Market Trends: HP expects growth in premium categories such as AI PCs, workstations, and new device categories. The company also anticipates increased attach rates of higher-margin offerings and continued growth in industrial and subscription-based printing solutions.

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Shareholder Return Plan

Quarterly Dividend Increase: HP announced a raise in its quarterly dividend to $0.30 per share. This marks the 10th consecutive annual increase since 2015, reflecting confidence in the company's long-term outlook.

Share Repurchase Program: HP returned close to $800 million to shareholders in Q4 through dividends and share repurchases. For the fiscal year, the company returned more than $1.9 billion to shareholders.

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Key Q&A

Q:What are the elements offsetting the headwinds in cash flows due to increased memory pricing, and does the $2.9 billion in free cash flow include any cash restructuring charges?

A:The flat free cash flow guide is due to improvements in working capital, favorable cash conversion cycles, and slightly lower CapEx and restructuring costs. The $2.9 billion includes restructuring charges, which are expected to be roughly $250 million for the year.

Q:How does HP plan to navigate the unprecedented memory cycle and manage price elasticity in a weaker consumer market?

A:HP plans to leverage its scale, qualify additional suppliers, optimize configurations using the Workforce Experience platform, manage portfolio shifts, and use pricing as a tool to mitigate impacts. They aim to balance profitability with customer experience.

Q:Would HP consider price increases across the entire portfolio or more tactical increases, and can they quantify these price increases?

A:HP will consider price increases selectively, varying by country, category, and situation. The impact of memory costs is significant, so increases will happen across the board but will be tactical.

Q:Do you expect the Windows 11 refresh to be a tailwind beyond fiscal year '26, and will tariff considerations impact this?

A:The Windows 11 refresh is expected to be a tailwind for the first half of fiscal year '26 and potentially beyond. Tariff considerations are not expected to have a significant impact.

Q:What is the rationale behind the new cost savings initiative announced by HP, and is it related to high memory costs?

A:The initiative is not a response to high memory costs but is driven by opportunities from AI to accelerate product development, improve customer satisfaction, and boost productivity. HP aims to achieve $1 billion in productivity savings over the next three years.

Q:What is HP's conviction about PC momentum going into 2026, especially after the Windows 11 refresh?

A:HP is confident due to an aged installed base needing refresh, the ongoing Windows 11 transition, and the growth of AI PCs. They will focus on premium categories and attach peripherals and services to drive revenue growth faster than unit growth.

Q:How is HP thinking about seasonality for next year, and what are the dynamics for revenue and margins?

A:HP expects stronger revenue in the second half due to normal seasonality and pricing adjustments. Print operating margins will follow seasonal trends, and PS operating profit rates may dip below 5% in Q3 and Q4 due to higher memory costs. EPS is expected to be evenly weighted throughout the year.

Q:What is HP's strategy for growing its base of services, subscriptions, and software?

A:HP is focusing on consumer subscriptions like Instant Ink, workforce solutions, and software businesses. They aim to drive more recurring revenue, which is less cyclical and has higher margins, as part of a gradual transition.

Q:What is the gross impact of memory cost increases on EPS, and how confident is HP in its mitigation strategies?

A:The gross impact is significantly larger than the $0.30 net impact on EPS. HP is confident in its mitigation strategies, including pricing and supplier relationships, and has taken a conservative approach to guidance.

Q:How are tariffs and elevated commodity costs affecting AI PC penetration and pricing dynamics?

A:HP remains optimistic about AI PC penetration, prioritizing premium categories to manage memory costs. They are working with software companies to enhance AI PC value and have seen productivity improvements internally.

Q:What is the market reception to HP's pricing actions in PC and print, and how does it differ between consumer and commercial segments?

A:In print, commercial pricing actions led to some share loss due to competitors benefiting from currency advantages, while consumer and supplies segments saw share growth. In PCs, price increases have been smaller and have not significantly impacted market reception.

Q:How is HP positioned to weather the memory cycle, and what differentiates it from peers?

A:HP has long-term agreements with suppliers, improved operational processes, and strong supply chain management. These factors, along with their scale and relationships, provide a competitive advantage.

Q:What is HP's overarching strategy for the print business, and can it achieve sustainable operating income growth?

A:HP aims to capture more value per customer, reduce unprofitable customers, grow Big Ink and subscriptions, and launch a new office portfolio in 2026. They also focus on industrial graphics growth and cost management to drive sustainable income growth.

Q:Why is HP's guidance for the memory price impact conservative, and how does it affect product mix and AI PC dynamics?

A:HP's guidance is conservative due to the rapid changes in memory prices and the expected impact in the second half of the year. They will prioritize higher-margin products, which may affect entry-level volumes but not AI PC dynamics.

Q:Review of Unclear Management Responses

A:Management avoided directly answering the question about the specific number of weeks of memory inventory on hand, citing only that they are well-positioned for the first half of the year. Additionally, they did not provide detailed quantification of price increases or the gross impact of memory costs, instead emphasizing their conservative guidance and mitigation strategies.

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Earnings Word Cloud

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