Speaker 1 (00:02):
Good day everyone, and welcome to the Second Quarter 2025 HP Incorporated Earnings Conference Call. My name is Tina and I'll be your conference moderator for today's call. At this time, all participant lines will be in a listen-only mode. We'll be facilitating a question and answer session toward the end of the conference. Should you need assistance during the call, please signal a conference specialist by pressing the star key followed by zero. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Orit Keinan-Nahon, head of Investor Relations. Please go ahead.
Orit Keinan-Nahon (00:41):
Good afternoon everyone, and welcome to HP's second 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 webpage at investor.hp.com. 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 discussion of some of these risks, uncertainties, and assumptions, please refer to HP's SEC report, including our most recent Form 10-K.
(01:47)
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 like to turn the call over to Enrique.
Enrique Lores (02:54):
Thank you, Orit, and thank you to everyone for joining today's call. Against the backdrop of a highly dynamic landscape, we delivered another quarter of solid top-line growth driven by continued momentum in the personal systems commercial business. However, due to additional tariff costs that could not be fully mitigated in the quarter, our non-GAAP operating profit fell short of expectations. Today, we will take a deeper dive into Q2 performance, the evolving external environment, and our outlook. I will also highlight new innovations we introduced to drive our momentum forward. Let me start with our Q2 results.
(03:47)
Overall, we delivered revenue growth for the fourth consecutive quarter with a 5% increase in constant currency year over year. We saw strong growth in personal systems, particularly in commercial and high-value categories, driving momentum in our key growth areas. These meaningful results show that our future-of-work strategy is working. Nonetheless, the rapidly changing external landscape, including shifting trade policies and additional tariffs had a net impact of approximately a hundred basis points on our non-GAAP operating profit, mainly in April and primarily impacting personal systems.
(04:40)
This resulted in a roughly 12% impact on our non-GAAP earnings per share. By net impact, we are referring to all tariff-related impacts after taking into account the mitigation actions. We swiftly responded to these changing market dynamics and were able to partially offset them in the quarter through cost actions, pricing, and accelerating the transition of our manufacturing footprint. We continue to diversify our manufacturing locations so that we can best respond to geopolitical changes with agility. We have expanded our manufacturing footprint for both PCs and printers to different locations, and we recently increased our production coming from Vietnam, Thailand, India, Mexico, and the US. By the end of June, we now expect nearly all of our products sold in North America will we built outside of China, significantly accelerating our previous plan. However, it takes time and investment to fully mitigate such impacts. Let me now share more color on our business unit performance. In personal systems, revenue grew 8% in constant currency above our expectation driven by strong commercial performance. PC commercial revenue grew 9% year over year, including strong growth in North America and Asia. As expected, we saw continued strength in AI PC demand and the Windows 11 refresh, and we believe that momentum will carry forward. We drove shared gains year over year in commercial PC, particularly in premium, workstations, AI PCs, and gaming. We drove growth in services with several new wins in healthcare, financial services, and retail. Personal systems operating margin came in below our guidance largely due to higher tariffs that were not fully offset by our actions in the quarter.
(07:05)
We expect to successfully mitigate this cost and return to our long-term target range of five to 7% next quarter. In print, revenue declined 3% in constant currency in line with our expectation. We saw revenue growth across home and office in Europe, helping to offset a slowdown in North America and continued weak demand in China, and we continued to drive momentum in home with units up 2% fueled by strong big-tank growth. We grew share year over year in developed markets, optimizing profitable share mainly in office pay for value and A fee. In our key growth areas for print, we saw continued growth in consumer subscriptions and workforce solutions, and we drove another quarter of growth in industrial graphics supported by the portfolio launched at Drupal, confirming the high adoption of our new product introduction.
(08:19)
Our focus remains on what we can control, executing with discipline, supporting our customers, and making strategic decisions that position HP for the long term. Now let's turn to the significant strides we've made in innovation. This quarter, we advanced our strategy to lead the future of work by delivering experiences that help businesses grow and employees find greater professional fulfillment. At our global Amplify Conference in March, we deepened relationships with over 1100 partners and customers. We unveiled more than 80 new products and services, and the positive reactions from attendees reaffirmed our direction. A key highlight was the global rollout of the HP Workforce Experience Platform.
(09:20)
Combining AI with real-time insights, this software solution enables CIOs to boost productivity and address issues before they disrupt work. Feedback from our early adopters has been incredibly positive, highlighting the platform's impact on workplace efficiency and its role in improving employee satisfaction. To accelerate the adoption of AI and bring its benefits to the mainstream, we introduced one of the most comprehensive AI PC portfolios in the industry. This portfolio features the redesigned HP EliteBook and EliteDesk engineered to help people work smarter and faster while keeping their data secure. To enhance advanced workflows for data scientists and AI developers, we teamed up with NVIDIA to launch the HP ZGX AI station, a high-performance workstation powered by Blackwell and designed to accelerate productivity and enhance security. In print, we are leading the way in security with our new LaserJet enterprise devices, the first printers in the world designed to guard against quantum computer attacks, and our industrial print team received five prestigious European digital press awards, recognizing our bold vision to lead the industry for automation, productivity, and sustainability.
(11:09)
In April, we brought our latest generation of latest technology to life engineered to simplify production and optimize printing processes. Third, we have print hub software. Print shops can now drive greater efficiency and control from a single platform. This innovation played a pivotal role in our recent collaboration with Scuderia Ferrari where we co-engineered a high-performance car wrap that's up to 14% lighter and 17% thinner, translating breakthrough technology into real-world speed. The advancements across our entire portfolio this quarter demonstrate our leadership in creating a secure and powerful AI stack that connects devices, data, and workflows to drive meaningful productivity.
(12:09)
In Q2, we acted quickly to address tariff-related headwinds, taking decisive steps like accelerating our manufacturing rebalancing, redesigning our logistics network, shifting sourcing, and qualifying new product configurations. These efforts both strengthened our operational agility and led the foundation for continued resilience. We'll carry this momentum into Q3 and Q4 as we further reinforce our supply chain and operational capabilities. Additionally, we have implemented price increases to help offset cost pressures. While these decisions are never taken lightly, they are essential to maintaining our financial discipline.
(13:01)
Looking ahead, the remainder of fiscal 2025 will be shaped by a range of factors, some of which remain uncertain. We have planned for today's tariff landscape and if it changes, we'll respond swiftly as we did in Q2. We continue to expect the PC market will grow in 2025 but softer than originally planned, driven by increased macro uncertainty. That said, we remain confident in our ability to grow faster than the market and gain share. In print, we continue to expect the market to decline low single digits for calendar year 2025.
(13:51)
We expect the actions we are taking to gain full traction in the second half, leading to sequential operating profit improvement. We are making progress with execution of the future-ready accelerated plan that we announced last quarter, and we are now expecting to exceed our goal and deliver at least $2 billion in gross annual run rate structural savings by the end of fiscal year '25. This incremental structural savings will help mitigate macro and geopolitical uncertainties while continuing to support investments in strategic areas. We are confident in our ability to navigate an evolving market. We have always excelled in managing complex environments. We have an incredible team capable of optimizing processes, implementing best practices, and achieving global efficiency, but as we move forward, we remain committed
Enrique Lores (15:00):
… to delivering sustainable growth and creating long-term value for our shareholders. Our focus on harnessing the power of AI to make work more personal, productive, and fulfilling will drive our success now and into the future. Let me now hand it over to Karen.
Karen (15:23):
Thank you, Enrique, and good afternoon everyone. We delivered another quarter of solid top-line growth driven by continued momentum in the personal systems commercial business aligned with our vision of leading the future of work. We executed our strategy across multiple fronts, including growing share and high-value categories across personal systems and print, driving momentum in our key growth areas and exercising disciplined cost management while continuing to invest in strategic initiatives.
(15:57)
However, against the backdrop of a dynamic geopolitical landscape, our non-GAAP operating profit fell short of expectations due to additional tariff costs that could not be fully mitigated in the quarter. As a reminder, our guidance for Q2 included tariffs in place at the time. While we planned for a range of scenarios in the quarter and we worked aggressively to respond to changes in the regulatory trade environment, the tariff increases announced in April were higher than expected. That said, as you heard from Enrique, we made meaningful progress expanding our supply chain and manufacturing footprint, and we accelerated actions on cost reduction and pricing. However, as we indicated last quarter, the full benefit of these mitigating actions can take a few months lead time depending on the scope. So in the quarter, our operating margin was impacted by net tariff costs, mainly in personal systems.
(16:59)
Taking a closer look at the details of the quarter, net revenue was up 3% nominally and 5% in constant currency with growth across all regions. In constant currency, APJ grew 9%, Americas grew 5%, and EMEA grew 1%. And while we made progress on the cost of good reduction actions we started at the beginning of the year, gross margin at 20.7% was down year over year with increased tariff and commodity costs. We drove non-GAAP operating expenses down year over year to help offset, including driving future ready cost savings, continuing disciplined cost management, and reducing variable compensation.
(17:46)
All in, our operating margin of 7.3% was impacted by roughly a hundred basis points due to unmitigated tariff and related impacts, mainly in personal systems. Below the out profit line, non-GAAP net OINE was flat year over year, in line with our expectations with lower short-term borrowing costs offset by currency losses. Finally, with a diluted share count of approximately 956 million shares, our non-GAAP diluted net earnings per share was 71 cents, reflecting the tariff and related impacts, net of mitigations, of approximately 12 cents.
(18:27)
Now let's turn to segment performance. We delivered another quarter of solid growth in personal systems with revenue up 7% nominally and 8% in constant currency, above our expectations and driven by higher commercial volumes and increased ASPs. We did see some demand pull forward, but estimate it was minimal, accounting for less than 1% of our revenue growth. As we signaled, we drove disciplined pricing actions to help mitigate increased tariff and component costs and shifted mix toward premium categories. And momentum continued in our key growth areas with strong performance in AIPC's advanced compute and workforce solutions.
(19:13)
We also drove commercial unit growth of 11%, gaining share overall and in premium categories as the market momentum and refresh activity continued. Commercial revenue increased 9% year-over-year with pricing actions and mixed shift toward premium offset in part by currency impacts. In consumer, our results reflect our strategy to rebalance our portfolio to a more profitable mix. We saw 2% revenue growth on lower volume through favorable pricing and mix shift, including share gains in gaming. Our operating margin in personal systems was 4.5%, below the range we guided at the beginning of the quarter and down year-over-year from higher commodity costs and tariff costs that were not yet fully offset by repricing and cost reductions. It's worth noting that excluding the impact of tariff costs, our PS margin would've been well within our five to 7% guidance range.
(20:18)
Turning to print, our results were in line with expectations as we continue to focus on profitable unit placement. We increased our market share in high value categories and drove overall hardware unit growth. Our key growth areas continued to gain momentum, including revenue and subscriber growth and consumer subscriptions and industrial growth fueled by both hardware and supplies. Across print, revenue declined 3% in constant currency on supplies declines and hardware softness in North America. By customer segment, we grew consumer units 3% year year over year, led by strong growth in big tank. In commercial, revenue declined 3% year over year on a 2% unit decline. We continued our purposeful focus on profitable long-term unit growth, gaining share in the higher value categories of A4 and A3. Supplies performed as expected, down 3% in constant currency, and we drove favorable pricing and market share gains that were more than offset by installed base and usage headwinds. Yet we delivered strong print operating margins, up year over year and above the high end of our range, reflecting rigorous cost discipline and pricing actions as well as the favorable impact of grant funding received in the quarter.
(21:48)
We continue to execute our accelerated future-ready plan across process efficiency, automation, portfolio optimization, and operational excellence. And as Enrique mentioned, we now expect to achieve cumulative gross run rate savings of at least $2 billion by the end of fiscal year '25 with no change to our estimated restructuring charges of $1.2 billion for the program. These incremental structural savings continue to be a key lever to help offset macro and geopolitical uncertainties while also continuing to fuel investment in our key growth areas and AI innovation, all designed to position as well for long-term sustainable growth.
(22:35)
Now let me move to cash flow and capital allocation. Our cash flow from operations was roughly $38 million in the quarter, and as expected, free cash flow was slightly negative due to the timing of payments for intentional inventory actions we took in the prior quarter as part of our overall tariff mitigation. Those payments resulted in a decrease in DPO and corresponding increase in our cash conversion cycle in Q2, also as expected. Lastly, we returned close to $400 million to shareholders through both dividends and share repurchases. A planned debt refinancing, ahead of an upcoming maturity, contributed to us finishing the quarter slightly above our target leverage range. So in line with our stated policy, with a temporary increase in leverage, we limited our repurchase to offsetting stock compensation dilution.
(23:33)
As we look ahead, we will continue to navigate a dynamic environment that may be impacted by continuing evolution in global trade policy, broader macroeconomic trends, and the associated impact on customer demand. For that reason, we believe it is prudent to moderate our guidance for the second half of the year to reflect this. In our guide, we have accounted for the added cost driven by the current tariffs in place and associated mitigations, including leveraging our supply chain flexibility, future-ready cost reductions, and pricing actions. We were able to mitigate part of these costs in Q2 and we are confident that we will fully mitigate them by Q4.
(24:18)
In personal systems, while we expect to continue to gain share, we now expect the PC market to grow low single digits for both the second half and full calendar year given the uncertain macro environment. We still anticipate commercial PC catalysts, including the Win 11 refresh and AIPC adoption to drive solid revenue growth in the back half of the year. And we expect the actions we are taking to offset the cost of tariffs to gain full traction in the second half, leading to sequential improvement in personal systems margins in both Q3 and Q4.
(24:56)
In print, we continue to expect the market to decline low single digits for the calendar year with the second half of the year declining closer to mid-single digits in line with industry experts. We also expect our operating margin to continue to be near the top of our 16 to 19% long-term range for the year. Beyond the segments, we expect corporate other to be slightly higher, approaching $1.1 billion as we integrate the operations of our Humane asset acquisition into our technology and innovation organization. With this all in, we now expect FY25 non-GAAP diluted net earnings per share to be in the range of $3 to $3.30 and FY25 GAAP diluted net earnings per share to be in the range of $2.32 to $2.62.
(25:51)
Turning to Q3, in personal systems, we expect revenue to grow high single digits sequentially as we continue to see strength in commercial aligned with our future of work efforts and pricing actions. And we expect personal systems margins in the lower half of the five to 7% range, improving sequentially as a result of the mitigation efforts we are driving. In print, we expect Q3 revenue growth to perform better than typical seasonality on incremental hardware placements and pricing actions. We expect operating margins solidly within our 16 to 19% range as we continue to focus on profitable unit placement, tariff mitigation, and disciplined cost management. With all of this, we expect third quarter non-GAAP diluted EPS to be in the range of 68 cents to 80 cents and GAAP diluted net earnings per share to be in the range of 57 cents to 69 cents.
(26:52)
In line with our revised earnings, particularly in personal systems where we have a negative cash conversion cycle, we now expect free cash flow to be in the range of $2.6 to $3 billion for FY25. With regard to working capital, we expect our cash conversion cycle to also be impacted by the timing of purposeful actions we are taking to mitigate the fluidity of the tariff situation.
(27:18)
It is important to note however, that we not only expect the impact of these actions on working capital to be temporary, but as mentioned earlier, we also expect to fully mitigate the current cost of tariffs by Q4. And on our balance sheet and capital allocation, given the impact of tariffs, we expect our leverage ratio to continue to be above our target range in Q3. That said, we remain fully committed to returning approximately 100% of free cash flow to shareholders over time as long as our gross leverage ratio remains under two times and we do not see more attractive investment opportunities. In closing, we responded quickly to the changing market dynamics in the quarter to address headwinds from a rapidly changing trade environment. We remain focused on what we can control and are confident that the actions we are taking are the right ones to position us for long-term profitable growth. With that, I would like to hand it back to the operator and open the call for your questions.
Speaker 2 (28:26):
Thank you, and we will now begin the question and answer session. To ask a question, you may press star then one on your touch tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, press star then two. We also ask that you please limit yourself to one question and a single follow up, and our first questioner today will be Erik Woodring with Morgan Stanley. Please go ahead.
Erik Woodring (28:55):
Thank you so much for taking my questions. Enrique, maybe just to start, can you maybe add a little bit more context around your expectations for the PC market in the second half of the year? What is causing the guide down? Is it large enterprise's weaker? Is it small enterprise's weaker? Is it the SMB that's weaker? International market's weaker? You've talked about raising prices, so I'd just love a little bit of context, a little more context on PCs in the second half of the year, including any channel inventory comments. And then big picture, does this really mean that Windows 11 refresher is really not a catalyst that we need to think about if we're growing low single digits during the refresh period? Just a little bit more context will be helpful, and then I have a quick follow up. Thanks.
Enrique Lores (29:50):
Sure. Thank you, Erik. So let me try to answer all the questions you have in your question. First of all, in Q2 and in the first half, we
Enrique Lores (30:00):
… we have seen strong demand on the PC side, especially in commercial, as reflected in our results. When we think about the second half though, we thought it was important to be more prudent in the estimation that we have for the market, given a few of the trends that we see. First of all, we are today in a very different economic situation from where we were a few months ago, in terms of both consumer and business confidence.
(30:29)
Second, we have seen announcements across the industry or price increases in the second half, and we think the combination of both will potentially have an impact in the demand that we see. We are not integrating any effect from Chinese inventory. All of them are under control, they are in a healthy position. We think that the impact will be both for consumer and commercial. And again, it's more a matter of prudency as we look at the second half, more than we saw any trends in Q2 that we thought we were going to be impacting the overall market size in the second half.
(31:11)
Our plan and our goal is to grow share in that market, and of course, if the market is bigger than what we're expecting today, this should be reflected in our results.
Karen (31:24):
I would just add, Eric, that Win 11 does remain a catalyst for the back half. And if demand comes in stronger than our moderated guide, that will be reflected in our results.
Enrique Lores (31:39):
Okay, great.
Erik Woodring (31:39):
I appreciate all of that color, guys. Thank you so much for that. And then, maybe a follow-up. Enrique, I would just love if you could give a little bit more high-level color for your growth businesses. I think it would help us all better understand two key metrics there. First, just when you add up all of the growth businesses that you alluded to in your presentation, how big are they? What percentage of revenue or personal systems or print? Any color that you could share in the size there?
(32:06)
And then, how fast are they growing? I appreciate the commentary on sequential growth, but I assume many of these businesses have different seasonality. So, just how big are these businesses? How fast are they growing year-over-year? And how should we think about growth of these businesses, say, over the next one to three years? Would just love to get better context on that. Thanks so much.
Enrique Lores (32:28):
Thank you, Eric. So, we haven't disclosed the overall size of the businesses. Let me tell you the two key metrics we have shared before that continue to be true is they're growing faster than the core businesses and the growth margin is also higher than the gross margin of the core businesses. So, these two key factors continue to be true. We've seen growth businesses will include businesses like AIPCs, where we have seen very solid growth not only quarter-on-quarter, but year-on-year. We said that our goal is for AIPC to represent more than 25% of the PC business by the end of the year, and we are on track to meet that goal.
(33:11)
Within growth businesses, we have also our workforce solution business on services and consumer services. Both of them have very solid growth in the quarter. Within the growth businesses, we have workstations that had a very solid growth performance during the quarter. Industrial print, so overall, they perform well. They perform as we were expecting, and they're a significant part of why we continue to see the second graph stronger than the first half, because they will continue to drive growth for the company.
Erik Woodring (33:48):
Got it. Thanks so much, Enrique.
Enrique Lores (33:50):
Thank you, Eric.
Speaker 2 (33:50):
Our next question comes from the line of Michael Ink with Goldman Sachs. Please go ahead.
Speaker 3 (34:00):
Hi, good afternoon. Thank you for the question. I have just two, both on personal systems. First, just on personal systems margins, it's encouraging to hear that you'll return to the long-term range next quarter. I was just wondering if you're assuming that you'll be in that 5% to 7% range for the full year as well? And what are some of the key swing factors that you're watching for?
(34:27)
And then, secondly, I was just wondering if you could comment on whether you saw any personal systems demand pull-in in this past quarter ahead of any prospective tariffs and the current outlook there? Thank you.
Karen (34:46):
Yeah, thanks, Michael, for the question. In terms of PS margins, yes, we do expect for margins to be in the 5% to 7% range for the full year. Given the impact in Q2, for the full year it's likely to be in the lower half of that range, but with good sequential improvement.
Enrique Lores (35:06):
And in terms of pull-in, we saw some pull-in in the PC space in Q2, but at the overall level, fairly small. Our estimation having looked at shipment data, sell-out data is at less than one point of growth was driven by pull-in. It's a relatively small number overall. Of course, if we look at North America sales, it will be bigger because it'll represent a bigger percentage. But again, overall at the company level was less than 1%, and this is the case for PCs. We didn't see any pull-in for print.
Speaker 3 (35:43):
Thank you, Enrique. Thank you, Karen.
Speaker 2 (35:50):
Our next question comes from Kasia Merchant with Citigroup. Please go ahead.
Speaker 4 (35:57):
Great. Thank you very much. Couple of ones. One on just AIPCs. I know you're still pretty bullish on AIPCs, but if you can just help us understand what are some of the killer applications that you hear from your end customers on this mix shift towards AIPCs? And then, within your expectations for PS systems growth, how should we think about the impact of pricing and mix shift versus AIPCs within your overall growth expectations for that segment? And then, I have a quick follow-up. Thank you.
Enrique Lores (36:33):
Thank you. So overall, as I said before, we are very pleased with the progress that we see in AIPCs. Our goal is that there will be more than 25% of the mix of PCs by the end of the year, and this continues to be the case. In terms of key applications, what we have seen is a large number of software companies introducing solutions that utilize the capabilities of AIPCs. We have more than 100 ISVs supporting that now and this number is only growing. And this is why we think that the penetration is going to continue to grow because if you're in the commercial space and you buy a PC today, you want to be able to take advantage of those capabilities as software will be available. That's the key message we make to customers. And as you can see from the progress we're making it's resonating.
(37:26)
In terms of the impact it will have, you're correct, it will have an impact on average selling price. The goal that we have shared before is that they will represent around 50% of the total shipments of PCs at three years after introduction, so about two years from now. We are on track to make that number. At the average, they are between 10% and 20% higher price than regular PCs, so this, of course, will have an impact on the total value.
(37:57)
Something relevant to highlight this quarter is that we introduced AIPCs for the mainstream. This was one of the major innovation announcements we made in Q2 that is going to continue to help to drive adoption and to drive growth in this category.
Speaker 4 (38:14):
Okay. Thank you for that. If I may on just free cash flow. I understand PCs are a negative cash conversion cycle, and hence, affecting… But just if you can help us understand the free cash flow margins sticking down a little bit in terms of your guide, that would help a lot and what are the drivers for that? Thank you.
Karen (38:36):
Yeah. No, thanks for the question. Our free cash flow guide that we revised does follow earnings. And so, in line with that earnings guide, we did reduce our free cash flow expectations for the year, but it's mainly driven by the reduction that we saw in earnings, which is really driven by the operating margin impact that we had this quarter. That, along with lower than expected working capital improvement is what caused us to guide down. We still do expect working capital improvement, but just a little lower than we had anticipated, given the fact that we're focused on doing everything we can to offset these trade-related costs. I would say it's important to note though that these working capital moves are temporary and they are purposeful actions, really, as we mitigate the fluidity of the situation.
Enrique Lores (39:31):
Let me maybe provide some color on the working capital side. We have heard in the prepared remarks, we have diversified our supply chain, we have built factories in different places. And to operate those factories now, we need more working capital than we did in the past. Over time, we will optimize and we will make them more efficient. And this is why Karen was saying this will be temporary, but we see a needed increase now as the supply chain has become more diverse.
Speaker 4 (40:02):
Thank you.
Speaker 2 (40:06):
Our next question comes from Wamsi Mohan with Bank of America. Please go ahead.
Speaker 5 (40:12):
Yes, thank you. I was wondering if you could share a little more color on some of the mitigation impacts that you're putting in place? How much of this tariff impact you expect to offset from pricing? So, maybe some thoughts around what those price increases could look like and which areas of the market would you be targeting, versus cost actions, versus potentially moving supply chain? Any quantification there would be helpful and I have a follow-up.
Enrique Lores (40:41):
Let me provide more color on that and maybe Karen also wants to complement. We have taken a lot of actions during the quarter to mitigate the change of the trade environment. Let me start by… We accelerated the shift of factories all from China into South East Asia, into Mexico to certain extent in the US, to mitigate the impact of the change. A quarter ago, we shared that our goal was to have less than 10% of the products in North America being shipped from China by September. We have accelerated that and we shared that now almost no products will be coming from China sold in the US by June. That's a very significant acceleration of the plan that we have.
(41:27)
We have also changed our logistics network. And for example, we have removed the US distribution hub for products that will be going to Canada or to Latin America, which will avoid us having to pay tariffs. We have also taken additional cost actions, as Karen mentioned in the call. And also, in a very targeted way, we have also taken price actions across the full portfolio, both in personal systems and print to reflect the cost that we have seen. This, we have seen the market and the rest of the competitors taking similar actions across the two industries. So, we see this as an industry change that will be being put in place at the end of Q2 and now in Q3.
Karen (42:18):
And I would just add that we are not going to quantify what comes from price versus supply chain moves versus other cost to actions. But on our future-ready program, we did talk about driving an additional $100 million more in savings, and we targeted higher goals for many of the savings opportunities that we were already working on. That included the consolidation of some of our teams under our new TIO organization, also driving more simplified management layers and locations and reduction in IT applications throughout. And as a result, these actions are now yielding more upside than we initially anticipated and we'll be realized sooner than planned. And then lastly, I would just note as we said before, that by the time we exit this year in Q4, we expect to fully mitigate the cost of these current tariffs.
Speaker 5 (43:18):
Okay, thanks for that color. And as my follow-up, you are actively moving the supply chain away from China, but you also noted areas like Vietnam, Thailand, Mexico, Philippines. What gives you confidence that your moves, given we still don't know where reciprocal tariffs might end up, that these moves are going to be optimal? What are some of the things that you're thinking through? And how quickly would you be able to shift production between these areas as you think about what might happen potentially with reciprocal tariffs? Thank you.
Enrique Lores (43:55):
Yeah, I think you're right. We are in a fairly fluid environment, so I think I don't want to speculate on what could happen and what changes we will do. I think what you have seen is we have reacted very fast to the changes that we saw in April. We have been able to rebalance supply chain and accelerate some of the plans that we had. We will be fully compensating for that in about two quarters by Q4, as Karen just said. And we'll respond in a similar way to whatever changes happen going forward. We will look for the opportunities, we will optimize the supply chain and we'll respond swiftly to those changes.
Speaker 5 (44:34):
Thank you very much.
Speaker 2 (44:40):
Our next question is from Samik Chatterjee with JPMorgan. Please go ahead.
Speaker 6 (44:47):
… question. And maybe if I can start off with the print margins in the quarter. Again, very solid margins. Maybe if you can just help us with the driver of the margin or performance you had there,
Speaker 6 (45:00):
How much of it that is maybe some business drivers versus the future-ready cost actions that you're taking. And particularly in relative to the guidance you have for 3Q, you talked about above seasonal revenue growth as well, but you're moderating the margin expectations. So is there a certain one-off driver there that we should think of, or is that more just in terms of business mix to really play out in the quarter? And then I have a follow-up. Thank you.
Karen (45:29):
Yeah. Thanks [inaudible 00:45:30] for the question. So on our print margins, we were pleased with the fact that they continued to be high and above the high end of our range. And that reflects rigorous cost discipline as well as the pricing actions we were taking to offset the trade-related costs.
(45:49)
And we mentioned a favorable impact of a grant funding received in the quarter. It was a multi-year grant from the Economic Development Board of Singapore, and that was in support of activities that we've had there for over 20 years. I would just say it's a long-term grant, and it was signed in Q2, but it was retroactive to the beginning of the calendar year. So the amount booked in Q2 was a little higher than the quarterly rate that we will see going forward.
(46:17)
And in terms of our confidence in print margins going forward, we do expect margins to be solidly within our 16 to 19% range in Q3, and that's really because we expect to drive some incremental hardware placements. But then we also expect sequential improvement in Q4 with a higher supplies mix that we typically have in that quarter along with the full benefit of the traction that we're making on trade-related actions and future-ready cost savings. So hopefully that helps.
Speaker 6 (46:56):
Yep. No. Thank you for that. And the second question is just a clarification on the PS margins and the sequential improvement to expect in Q3 and Q4.
(47:06)
From your prepared remarks, Q3 does have part quarter benefit from the supply chain changes that you're making. But as we look from Q3 to Q4, is it really the improvement, the realization of a full quarter benefit of the supply chain changes or is there an incremental benefit from pricing as we move from Q3 to Q4 as well? Thank you.
Karen (47:28):
Yeah. So we are expecting strong improvement in Q4, and I'll start with the fact that Q4 is typically our strongest quarter for both print and PS.
(47:39)
And this year, we do expect continued momentum in the PC market driven by commercial. We also see Q4 is typically our highest season with an increase in consumer demand tied to back to school and the holiday purchases. And we have many new products for customers to choose from.
(47:58)
And then also, we talk about the cost side. We've implemented these moves in the manufacturing supply chain that are going to take broader traction as we proceed through the year. And then we're on track to achieve the additional 100 million to achieve the two billion in broader cost savings as we exit our future-ready program at the end of the year.
(48:22)
And, of course, pricing will play a role too. Altogether, we expect our PS margins to be in the lower half of the five to 7% range in Q3 and improve sequentially. So hopefully that helps.
Speaker 6 (48:37):
Yep.
Enrique Lores (48:37):
The thing is probably important to highlight that based on the guide that we are providing that we have high confidence for, we will be exiting Q4 with both the company with revenue growth at the company level and with both businesses within the long-term ranges that we have shared before, but which is a sign of confidence for the future.
Speaker 6 (49:01):
Great. Thank you. Thanks for taking my questions.
Speaker 2 (49:07):
Our next question comes from Amit Daryanani with Evercore. Please go ahead.
Amit Daryanani (49:14):
Good afternoon, everyone. I have two as well. I guess, maybe just to start off with Enrique, what you were talking about the end right now, you're embedding a very sizable step up in owning in your fiscal Q4. I think the implication is you'll do a dollar of owning power in Q4.
(49:29)
Can you just touch on how much of that ramp up from call the 70 cent run rate you have right now to a dollar? How much of that is revenue driven versus driven by all the cost reduction initiatives that you have in place? Would be good to understand just how much of this is controllable versus not, perhaps?
Enrique Lores (49:45):
Thank you. It's a combination of both. In Q4, as Karen just said, we expect to see a strengthening of demand compared to Q3. And if you look at normal seasonality, this is what happens.
(49:57)
For example, in the consumer space driven by both back to school and the holiday season, Q4 is a very strong quarter. And in the commercial side, we continue to expect to see the demand that we have seen in the previous quarter driven by Windows 11, driven by the refresh of the install base, and driven by AI. So all these will have an impact on the demand side.
(50:22)
And then on the margin side, on the cost side, both the pricing actions that we are taking, but also all the work on cost, both redesigning supply chain, the impact of future ready will have an impact in the margins on Q4 sequentially. And this is what gives us confidence that we'll be able to achieve these numbers.
(50:44)
As I said at the beginning, we have moderated our growth expectations for peers especially, but we continue to expect that the peers business will grow in the second half compared to what it was a year ago.
Karen (50:59):
I would just reiterate that much of our confidence is because of the actions that we're taking today that we know just take time and will gain a full traction in Q4.
Amit Daryanani (51:14):
That's fair enough, and that's helpful to just understand those dynamics. You first have talked about a couple of issues that are impacting your fiscal '25 EPS guide, right? It's about 45 cent impact right now. At a very high level, is there a way to think about how much of that 45 cent impact is from just the direct trade tariff-related issues that you have versus demand potentially moderating? Is there a way to think about those two buckets and how big of an impact each one's causing?
Karen (51:41):
Yeah. I would think about it this way, that the impact that we had in this quarter of 100 basis points on our margin and 12 cents of EPS was due to the tariff-related impact that we weren't able to fully mitigate. And as we look ahead in the back half, the reduction in our guide is mainly driven by us choosing to prudently moderate our growth expectations given a macroeconomic environment,
Enrique Lores (52:16):
But an in indirect way also, the exchange of expectations is related to the new trade environment and to the new trade situation. Not directly on cost but just on demand.
Amit Daryanani (52:30):
Fair enough. Thanks.
Speaker 2 (52:36):
And your next question is from the line of David Vogt with UBS. Please go ahead.
David Vogt (52:49):
[inaudible 00:52:49] the manufacturing to avoid the near-term tariffs, and you've noted that you expect higher working capital. But my question is what are the longer term impacts from these changes particularly to your expense structure and margin for the new configuration versus the prior configuration in fiscal '26 and beyond? Thanks.
Enrique Lores (53:07):
As we said before, we expect to finish the year within the range that we had provided before. And at this point, this continues to be the expectation for the year '26 and beyond. We think that we can compensate the cost impact on tariffs. It takes us this time a couple of quarters, and this continues to be the assumption that we have going forward.
David Vogt (53:34):
Thank you.
Speaker 2 (53:40):
Our next question comes from the line of Ken Long with Barclays. Please go ahead.
Ken Long (53:49):
Maybe just on the first one on the PC one on print, on the PC side, you just talk a little bit about price elasticity and what you've seen in prior cycles. It sounds like there might be some upward ASP pressure due to tariffs and everything else. If you could just talk about what you've seen traditionally in this time, do you think because of AIPC and enterprise and maybe in age-based, it's not as much of an issue?
(54:14)
And then second on the print-related businesses, could you just talk about competitive landscape and any kind of yen movement that might have impacted or might be impacting competition either way there? Thank you.
Enrique Lores (54:29):
Yes. I think in terms of elasticity, it's hard to compare this situation to previous situations given what is driving that. We have built some of that into our estimation for the second half, and the more conservative plan or estimation for market that we have put in place. And I think this is the best way to reflect the changes and the elasticity that we see.
(54:54)
In terms of print, what we have seen quarter on quarter is that pricing has been more stable. So we haven't seen an improve of the pricing environment, but it has stayed stable versus what it was a quarter ago. And during the last weeks, most of the print competitors announced price increases related to the changes in the trade environment. So this will be reflected in the overall pricing environment in the market in Q3 and in Q4.
Ken Long (55:26):
Thank you.
Speaker 2 (55:31):
And our final question comes from the line of Alek Valero with Loop Capital. Please go ahead.
Alek Valero (55:38):
Hey, guys. Thank you for taking my questions. This is Alek on [inaudible 00:55:41]. So my question, I actually have one more on PC pull-in. So I know you mentioned you saw a very small impact during the quarter, but I wanted to see if there's any impact to second half of the year.
Enrique Lores (55:56):
Again, the impact was so small that again at the company level has had very minimum impact. If we look at the US, it had more jazz because of mathematics of dividing the pull-in versus a smaller market, and we have reflected on that in the guide that we have for the second half and in the estimation that we have for the market.
Alek Valero (56:21):
Got it. Thank you for that. Just a quick follow up, also on PCs, are you seeing customers buy richer PC configurations yet specifically for the purpose of gen AI?
Enrique Lores (56:34):
Well, we have seen significant growth of the AI PC category, and the mix continue to improve of course year-on-year, but especially quarter on quarter, which is more relevant at this stage. So clearly, they are having customers have value in the new functionality, the new performance of this product, and this is driving the improvement in mix.
Alek Valero (57:01):
Got it. Thank you.
Enrique Lores (57:04):
Thank you. So I think that we are approaching the end of the call. So again, thank you, everybody, for participating and joining the call today. I would like to close the call confirming our confidence in three areas.
(57:18)
First, the confidence in our future of work strategy to continue to drive growth. Second, the confidence in the team on how to respond and how to navigate any type of environment, responding quickly and decisively. And finally, our confidence in our ability to continue to create shareholder value. Thank you, everybody, for joining today and looking forward to continue the conversation in the coming weeks. Thank you.
Speaker 2 (57:50):
This concludes today's conference call. You now disconnect.
