HP Inc. (HPQ) Earnings

Management highlights

- Strategic Positioning for AI at the Edge * Management identifies a growing industry shift toward hybrid AI, with increasing demand for edge inferencing driven by rising cloud costs for generative AI, latency concerns, data privacy requirements, and enterprise security needs * HP is positioned as a trusted intelligent edge provider, with device and software architecture supporting local AI workloads, and new product innovations to capture this structural opportunity * New product launches this quarter include: AI-optimized z workstations and AI stations, an AI-enabled LaserJet series, a compact accessible industrial 3D printing system (HP Multi Jet Fusion 1.2 thousand), HP IQ (a cross-product intelligence layer with spatial connectivity features), and enhanced AI-driven management tools for the WXP workforce platform (now manages over 5.2 million devices across 180 countries) * AIPC shipment mix grew from 35% to 44% this quarter, with management projecting it will reach 60-70% of shipments next fiscal year and over 70% by FY 2028 - CEO Search Update * The board of directors is conducting a comprehensive external search, prioritizing candidates with a track record of long-term value creation, experience operating in complex fast-changing environments, and global multi-segment business experience; no timeline for completion is provided - Operational Execution and Mitigation for Commodity Headwinds * HP delivered 8th consecutive quarter of top-line revenue growth, with total revenue up 9% YoY (6% constant currency), non-GAAP diluted EPS of $0.86 (up over 20% YoY), and gross margin of 20.9% (up YoY) * The company executed a four-pillar mitigation strategy for rising memory and storage costs: secured sufficient supply for full fiscal 26 via long-term supplier agreements, implemented a real-time aligned supply-demand planning model, held strategic inventory to maintain competitiveness, and maintained discipline on pricing and costs * A multiyear cost transformation program remains on track to deliver $1 billion in annualized gross run rate savings by the end of FY 2028; a voluntary early retirement plan was implemented this quarter, with related expenses included in Q2 restructuring charges - Capital Allocation * Generated $900 million in operating cash flow and ~$800 million in free cash flow (above expectations) this quarter; returned nearly $400 million to shareholders via dividends and share repurchases, and remains within target leverage ratios * Management remains committed to returning ~100% of free cash flow to shareholders over time, as long as gross leverage stays below 2x and no higher-return investment opportunities emerge

Guidance

- Full year fiscal 26 EPS guidance was revised upward to $2.90 to $3.10, from prior expectations that EPS would land closer to the lower end of the initial guidance range - Full year fiscal 26 free cash flow is expected to land solidly in the $2.8 billion to $3.0 billion range - Q3 fiscal 26 diluted EPS is expected to be in the range of $0.61 to $0.71 - Memory and storage costs are expected to continue increasing in H2 26, with personal systems operating margin expected to remain below HP's long-term range for the remainder of the year; Q4 26 is expected to be the margin trough, with sequential margin improvement beginning in FY 27 - For the second half of the calendar year, HP aligns with industry projections of a high-teens decline in total PC unit TAM; HP still expects full fiscal year personal systems revenue growth, driven by pricing actions, premium share gains, and higher attach rates for higher margin offerings; Q3 personal systems revenue is expected to come in below seasonal levels due to Q2 demand pull ahead of commodity price increases - In print, HP aligns with projections of a low-single-digit decline in the total print hardware market in H2; the company expects to gain share in big tank printers and office segments, maintain momentum in subscription and industrial print, and deliver full year operating margins solidly within HP's long-term range; Q3 print revenue is expected to follow normal seasonality, with operating margins near the lower end of the long-term range - Full year other income and expense is projected to be $500 million, with corporate other expense expected to come in slightly under $1 billion - Supplies full year revenue is still expected to decline low-single-digits in constant currency

Segment performance

1. Personal Systems: Revenue grew 13% year-over-year (YoY), with 10% YoY revenue growth in consumer and 14% YoY growth in commercial. AIPCs increased to 44% of shipment mix, up from 35% last quarter, and double-digit YoY growth was delivered in AIPCs, advanced compute solutions, and workforce solutions. Operating profit grew 30% YoY, with an operating margin of 5.2%. This segment contributed the majority of HP's 9% total company YoY revenue growth. 2. Print: Total revenue was flat YoY, in line with expectations. Consumer print revenue declined 10% YoY due to lower traditional printer volumes, but the segment delivered double-digit unit growth in big tank printers and gained share YoY and sequentially. Commercial print revenue was flat YoY, with higher average selling prices offsetting lower volumes, and sequential share gains were achieved across all A4 office categories. Print supplies revenue was flat YoY in constant currency. 3D printing delivered double-digit YoY revenue growth for the fifth consecutive quarter, and consumer print subscriptions grew double-digit YoY. Print operating margin was 10.3%, down YoY as expected.

Risks & headwinds

- Ongoing memory and storage supply constraints and rising commodity costs, which are expected to pressure margins in H2 fiscal 26, particularly in the personal systems segment - Broader inflationary pressures beyond components, including rising oil prices and downstream impacts on resin, transportation, and other input costs - A projected high-teens decline in PC unit TAM and low-single-digit decline in print hardware TAM in the second half of the calendar year - Intensely competitive pricing environment in consumer print, particularly for traditional hardware - Long-term structural headwinds of declining installed base and usage for traditional print supplies - Tariff refund opportunities are currently unavailable for complex multinational firms like HP, as the U.S. government is not processing refunds for this category of companies at this time - Potential supply ripple effects from strong demand for data center CPUs impacting PC CPU availability

Analyst Q&A

• Q: How do offsets for rising memory costs break down between further cost reduction and additional price increases in the back half, and is the print mitigation playbook the same as personal systems? /

  A: Management confirms input costs will rise in H2, and the benefit of lower-cost existing inventory will fade, pushing margins below long-term ranges for the rest of the year, with Q4 expected to be the margin trough followed by sequential improvement in FY 2027. The same mitigation playbook used in Q2 (leveraging scale, silicon diversity, supplier relationships, cross-commodity cost reductions, demand shaping to higher-margin configurations) is used for both segments, and ongoing cost reduction will benefit H2 and next fiscal year. There is potential for upside if actions outperform or the environment improves.

• Q: How much of Q2 personal systems commercial strength came from demand pull-forward ahead of price increases versus durable underlying demand? /

  A: Management estimates that pull-forward added approximately 2-3% to Q2 personal systems commercial revenue, with the rest of the double-digit growth driven by underlying demand from the ongoing Windows 11 refresh and AIPC transition. Approximately 30% of the total installed base still remains to be refreshed to Windows 11, creating ongoing near-term tailwinds.

• Q: What is your visibility into demand elasticity in the second half and into 2027, after the Q2 pull-forward? /

  A: HP aligns with industry projections of a high-teens decline in unit TAM in H2, driven by higher pricing and the Q2 pull-forward, but expects this unit decline to be offset by price increases, a shift to premium mix, and higher attach rates for higher-margin offerings to deliver revenue growth. Structurally, demand remains supported by the ongoing Windows 11 refresh and the long-term shift of AI workloads to the edge, which drives ongoing strength in commercial and premium AIPC demand.

• Q: What is driving the better-than-expected flat supplies revenue this quarter, and should we expect a Q4 margin bounce back for print after Q3's expected low-end margins? /

  A: Flat supplies revenue was driven by implemented pricing actions and share gains that offset installed base headwinds, but management still expects full year supplies revenue to decline low-single-digits in constant currency. Q3 print margins are expected to be at the lower end of the long-term range due to seasonality, incremental hardware placement, and input cost pressures, but Q4 margins are expected to improve, leaving full year print margins solidly within the long-term range.