HP Q3 FY2025 Earnings Call Transcript

HP Inc. (NYSE:HPQ) reported its third-quarter financial results after the closing bell on Wednesday.

Below are the transcripts from the Q2 earnings call.

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OPERATOR

Good day everyone and welcome to the third quarter 2025 HP Earnings Conference Call. My name is Krista and I’ll be your conference moderator for today’s call. At this time, all participants will be in a listen only mode. We will be facilitating a question and answer session towards the end of the conference. Should you need assistance during the call, please signal a conference specialist by pressing the star key followed by the zero. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Orit Keinan-Nahon, Head of Investor Relations. Please go ahead.

Orit Keinan-Nahon, Head of Investor Relations

Good afternoon everyone and welcome to HP’s third quarter 2025 earnings conference call. With me today are Enrique Lores, HP’s President and Chief Executive Officer, and Karen Parkhill, HP’s Chief Financial Officer. Before handing the call over to Enrique. Let me remind you that this call. Is a webcast and a replay will be available on our website. Shortly after the call for approximately one year, we posted the earnings release and accompanying slide presentation on our investor relations as always, elements of this presentation are forward looking and are based on our best view of the world and our businesses as we see them today. For more detailed information, please see disclaimers in the earnings materials relating to forward looking statements that involve risks, uncertainties and assumptions. For a discussion of some of these risks, uncertainties and assumptions, Please refer to HP’s SEC report, including our most recent Form 10K. HP assumes no obligation and does not intend to update any such forward looking statements. We also note that the financial information discussed on this call reflects estimates based on information available now and could differ materially from the amounts ultimately reported in HP’s SEC filings during this webcast. Unless otherwise specifically noted, all comparisons are year over year comparisons with the corresponding year ago period. In addition, unless otherwise noted, references to HP channel inventory refer to Tier 1 channel inventory and Market share. References are based on calendar quarter information. For financial information that has been expressed on a non-GAAP basis, we’ve included reconciliations to the comparable GAAP information. Please refer to the tables and slide presentation accompanying today’s earnings release for those reconciliations. With that, I’d now like to turn the call over to Enrique.Enrique Lores

Thank you Orit and thank you to everyone for joining today’s call. Let me start by saying we made solid progress against our goals and key strategic initiatives in Q3. We continue to execute with discipline and focus, delivering on our commitments and advancing our ambition to be a leader in the future of work. Today we will take a closer look at at our third quarter performance, highlight some of our newest innovations and discuss our Q4 outlook. Beginning with our performance, I am pleased to report that we delivered a fifth consecutive quarter of growth in Q3. Top line revenue increased 3% year over year driven by strong performance in personal systems. This momentum was fueled by continued Windows 11 refresh, AIPC adoption and services growth. We also drove collective double digit growth year over year and sequentially in our key growth areas. Our operating profit margins for both print and personal systems were in line with our guidance. A non GAAP EPS was slightly above the midpoint of our guide reflecting a sequential improvement of 6%. These results demonstrate our ability to execute our plan and adapt quickly to the evolving trade environment. We are on track to reach our future ready gross annualized savings of $2 billion by the end of fiscal year 25 which we expect will help drive continued improvements in operating profit. At the same time, we are making solid progress on our actions to mitigate higher trade related costs including manufacturing diversification, cost reduction and pricing adjustments this quarter as planned, nearly all products sold in North America are now built outside of China helping to further reduce trade related costs. We continue to ramp up production across Vietnam, Thailand, Mexico and the us. Most importantly, we have done what we said we would. We have demonstrated we can remain agile in responding to external pressures while staying focused on our long term strategy. Now let me share more color on the performance of each business unit. In personal systems, revenue grew 6% year over year above our expectations. We continue to shift our mix to higher value segments such as AI PCs Commercial Premium and services. We saw strong year over year growth in both commercial and consumer segments. Commercial performance was supported by the Windows 11 refresh and increased AI PC adoption. We are very pleased with accelerating demand for the AIPC category which grew revenue double digit sequentially. It has surpassed our expectations with shipments continuing to ramp, now reaching over 25% of our mix a quarter ahead of our plan. Consumer growth was supported by a strong back to school season in our key growth areas. We delivered double digit revenue growth in advanced COMPUTE solutions. In services, momentum continued with strong revenue growth year over year driven mainly by digital services and managed services. Yes, we did see software demand in hybrid systems as companies are delaying some of their IT projects. Our installed base of active AI PC users is growing significantly and positioning us well for future AI driven innovations. We are seeing strong momentum in the AIPC ecosystem with a number of software companies introducing solutions growing by double digits quarter over quarter. We are working closely with Microsoft and Silicon providers to capture the opportunity created by the AI PC platform. Key ISV partners such as Adobe and Zoom are shifting workloads locally to to take advantage of the NPU. We grew share in high value categories, especially in premium segments. This includes year over year and sequential gains in PC Commercial Premium, Consumer Premium and AI PCs. Last quarter we committed to actions to return our personal systems operating margin to its long term target range. I am pleased to report we achieved that delivering an operating margin back into our target range. Turning to print, revenue declined 3% in constant currency. As expected, our key growth areas in print continued to perform well and had strong growth year over year. While we continue to take actions to mitigate the increase in trade related costs, we saw overall a more aggressive pricing environment. Demand in the office segment was slightly softer than anticipated, particularly across North America and parts of Europe. However, we maintained our shared position in office and we continue to focus on profitable unit placements in home. We maintain discipline in a competitive pricing environment. Supplies revenue performed as expected. Diving deeper into our key growth areas, Consumer subscriptions had a strong ramp in new subscribers of our all in plan, we had key wins with workforce solutions in industries such as finance, manufacturing, retail and public sector. We saw another quarter of strong growth in industrial graphics with share gains year over year reflecting the strength of our portfolio. Now let’s take a closer look at recent innovations that are positioning us as as a leader in the future of work. In Q3, we advanced our portfolio of AI powered solutions that help businesses drive growth and employees achieve professional fulfillment. On the commercial side, our AI PC lineup received industry recognition. Our Elitebook Ultra was named top AIPC in the CRM Tech Innovator Awards. It was noted for its design, performance and impact on productivity. Our Workforce Experience platform was recognized in the Enterprise IT Management category, praised for its ability to reduce digital friction and improve IT efficiency. Since launch, the platform has been deployed in 40 countries and we plan to expand to more than 30 additional countries in the coming months. We are redefining how people connect and collaborate. We introduced HP dimension with Google BIM, a video communication tool that uses six cameras and AI to generate 3D video of participants designed to enhance remote collaboration and we are excited to bring advanced AI capabilities to a broader audience with our OmniBook 5 notebook for the prosumer, it delivers high performance and up to 34 hours of battery life, empowering customers to stay productive longer. In our print portfolio, we are integrating AI to drive intelligent automation and customer centric design. HP Neo, an AI powered chatbot for Industrial Print is helping print shops improve production efficiency in large format. HP Build Workspace an AI vectorization tool helps architecture, engineering and construction professionals reduce drafting time by up to 80%. Responsible innovation and sustainability are foundational to our future of work efforts and we continue to demonstrate meaningful, measurable impact. Today, 99% of HP home and office printers, desktops, notebooks, displays and workstations incorporate recycled content. We have reached 100% renewable electricity across our US operations, marking a significant step toward our net zero goal. And in partnership with the YMCA, we’re establishing digital hubs that have already reached over 700,000 people worldwide, helping them succeed in the digital age. In addition, HP is pleased to support the White House Initiative to Advance AI Education for Americas Youth. This is an important step toward equipping the next generation with the skills needed to thrive in the future of work. As we look ahead, we remain confident in the strength of the PC market in 2025. We expect the market to grow mid single digits in the second half. With continued strong momentum from Windows 11 refresh and the AI PC adoption, we believe this catalyst will continue to drive PC market growth in 2026. We expect the print market to decline low single digits in 2025 and at a similar level in 2026. However, our strategy is focused on protecting the operating profit contribution of the print business to the company. We will continue focusing on reducing unprofitable units by shifting to big tank, increasing lifetime customer profitability through growth in our consumer subscription business, gaining share in the higher value office categories, growing our key growth areas and maintaining cost discipline. AI is also opening new possibilities to transform how we operate and compete. Beyond driving structural cost reductions, we see tremendous potential to automate additional workflows, streamline decision making and accelerate innovation across the business. These capabilities will help us reduce complexity and drive lower costs. You will hear more about this from us in the quarters ahead. Externally, we recognize there is continued uncertainty in the global trade environment we have planned for today’s landscape and have proven our ability to respond quickly to any future changes. Through our actions, we have strengthened our operational agility and have full confidence in our ability to navigate evolving conditions. As we continue to adapt to this dynamic environment, engagement with investors is a top priority. We are looking forward to sharing our long term plans during our investor day in early 2026. There, we’ll provide updates on our progress and explore the exciting opportunities ahead to advance our strategy. Before I close, I want to thank our employees for their dedication, resilience and customer first mindset which have been key to our progress. We know what it takes to deliver results and be a leader in the future of work and we are executing with focus now. Let me hand it over to Kerryn.Karen Parkhill

Thank you Enrique and good afternoon everyone. We are pleased with the progress we’ve made in the quarter to advance our strategy to lead the future of work while navigating an evolving market environment and delivering on our financial commitments. We drove another quarter of solid revenue growth with continued momentum in personal systems fueled by AI PC and Windows 11 refresh activity and strong performance in our key growth areas. In fact, we delivered double digit sequential growth in personal systems resulting in strong free cash flow in the quarter. In print and P’s, we executed decisively on the actions we laid out to mitigate trade related headwinds and are pleased with the meaningful progress we made in the quarter including accelerating supply chain resiliency, cost reduction and pricing action. As a result, we were able to mitigate the majority of tariff costs in Q3 while delivering operating margins within our expected ranges for both businesses and non-GAAP Epersonal systems slightly above the midpoint of our guidance range. Taking a closer look at the details of the quarter, net revenue was up 3% year over year both nominally and in constant currency with growth across all regions. In constant currency, Americas and EMEA each grew 1% and APJ was up 11% with particularly strong personal systems performance. In China, gross margin was 20.5% down year over year with a higher mix from personal systems, increased trade related costs and unfavorable currency impacts. We offset those headwinds in part with disciplined pricing actions and cost management. As anticipated, non-GAAP operating expenses were up year over year. We drove our future ready cost plans and maintained strong expense management while importantly investing in growth with key strategic and go to market initiatives all in our non-GAAP operating margin was 7.1% down year over year and in line with our expectations. Finally, with a diluted share count of approximately 954 million shares, our non-GAAP diluted net earnings per share was 75 cents and our GAAP earnings per share was 80 cents, helped by favorable tax adjustments in the quarter. Now let’s turn to segment performance. We delivered our sixth consecutive quarter of solid ...