HP Inc. (HPQ) Q1 2026 Earnings Call Transcript
Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
Overview
The earnings call summary indicates positive sentiment with strong financial metrics, a dividend increase, and a focus on AI integration and cost savings. Despite higher memory costs, the company has mitigated risks with secured supplies and pricing strategies. Shareholder returns, including increased dividends and share repurchases, add to the positive outlook. The Q&A reveals confidence in navigating challenges and gaining market share. Overall, these factors suggest a positive stock price movement in the short term.
Key Financial Performance
Revenue $14.4 billion, up 7% year-over-year, driven by performance in Personal Systems, particularly due to PC demand in the Windows 11 refresh cycle and AI PCs.
Non-GAAP EPS $0.81, reflecting 9% growth compared to the prior year, attributed to strong expense management and cost savings programs.
Gross Margin 19.6%, influenced by an increased mix from Personal Systems and higher commodity and trade-related costs, partially offset by pricing and cost reduction actions.
Personal Systems Revenue Up 11% year-over-year on 12% unit growth, driven by Windows 11 refresh, AI PC adoption, and strong Consumer performance.
Consumer Revenue in Personal Systems Up 16% year-over-year on a 14% unit increase, attributed to demand pull-in to avoid rising memory prices and increased ASPs.
Commercial Revenue in Personal Systems Up 9% year-over-year with units up 11%, driven by Windows 11 refresh and AI PC strength.
Print Revenue Down 2% year-over-year due to lower supplies volumes and market-driven hardware declines, partially offset by higher ASPs.
Consumer Subscriptions in Print Grew double digit year-over-year, driven by the ramp of the All-in-Plan and focus on increasing lifetime value per customer.
Industrial Print Revenue Grew mid-single digit year-over-year, driven by the shift from analog to digital production.
Free Cash Flow Approximately $200 million, reflecting typical seasonality and higher days of inventory due to rising commodity prices.
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Operating Highlights
AI PCs: AI PCs accounted for over 35% of PC shipments, up from 30% in the prior quarter and 25% a quarter before. The HP EliteBoard G1a, the first AI PC with intelligence built into the keyboard, was launched for hybrid work.
AI-powered print solutions: New AI-powered scanning and redaction capabilities were introduced, simplifying workflows for small businesses. HP's leadership in AI-driven print solutions was recognized by industry analysts.
HP Digital Passport: A personalized hub centralizing information across the HP ecosystem was launched, improving customer engagement and support.
PC market share: HP achieved PC market share gains in high-value Commercial and Consumer categories, contributing to double-digit revenue growth in the segment.
Big Tank share: Big Tank share grew in developed markets, driven by profitable unit placements.
Cost mitigation measures: HP implemented strategies to address rising memory costs, including securing long-term agreements with suppliers, qualifying new suppliers, and accelerating product configuration changes.
AI-enabled operational efficiencies: AI was integrated into processes like channel partner experience and supply chain management, automating workflows and improving productivity.
Future of Work strategy: HP focused on enabling edge computing, integrating AI into products, and simplifying experiences through integrated solutions to expand market share and ensure pricing reflects delivered value.
OpenAI partnership: HP partnered with OpenAI to pilot their enterprise platform, OpenAI Frontier, for building and managing AI agents, positioning HP at the forefront of enterprise AI deployments.
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Risk or Challenges
Rising Memory Costs: HP is facing increased input costs due to rising prices of DRAM and NAND, which are expected to remain volatile throughout fiscal '26 and likely into fiscal '27. This could pressure margins and financial performance.
Supply Chain Challenges: The company is implementing mitigation measures to address memory cost volatility, including securing long-term agreements, qualifying new suppliers, and building strategic inventory positions. However, these measures may not fully offset the challenges.
Tariff Uncertainty: The U.S. Supreme Court ruling on tariffs introduces potential trade-related cost uncertainties. While HP does not expect immediate negative impacts, the situation remains fluid and could affect operations.
PC Market Decline: The PC unit TAM is projected to decline double digits in calendar year '26, which could impact HP's revenue growth despite efforts to gain market share and increase premium category sales.
Print Market Decline: The hardware market for print is expected to decline low single digits in calendar '26, posing challenges to HP's print segment revenue.
Commodity Price Volatility: Rising commodity prices, particularly in memory, are impacting costs and could pressure margins despite mitigation efforts.
Economic Uncertainty: The dynamic and uncertain economic environment could impact demand and HP's ability to execute its strategic plans effectively.
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Guidance & Outlook
Revenue Growth: HP expects to drive revenue growth in fiscal year 2026 through pricing actions, share gains in premium categories, and increased attachment of higher-margin offerings. Above seasonal revenue performance is anticipated in fiscal Q2, with growth moderating in the back half of the year.
PC Market Outlook: The PC unit TAM is projected to decline double digits in calendar year 2026, reflecting the impact of industry-wide pricing actions on demand. HP plans to offset this with pricing actions and share gains in premium categories.
Memory Costs: HP anticipates rising memory costs, with prices roughly doubling versus the prior quarter. This volatility is expected to persist throughout fiscal 2026 and likely into fiscal 2027. Mitigation measures include securing long-term agreements, qualifying new suppliers, and implementing targeted pricing actions.
Print Segment Outlook: The hardware market is expected to decline low single digits in calendar year 2026. HP aims to drive growth in Big Tanks and industrial print to offset this decline. Supplies revenue is anticipated to be down low single digits for the year in constant currency, with pricing and share gains expected.
Operating Margins: Personal Systems operating margins are expected to be below the long-term range for the remainder of the year due to cost pressures from rising memory prices. Print operating margins are projected to be near the top end of the long-term range for both Q2 and the full year.
Non-GAAP EPS Guidance: HP maintains its annual non-GAAP diluted earnings per share guidance range of $2.90 to $3.20, with expectations to be closer to the lower end of the range due to challenging operating conditions. Q2 non-GAAP diluted EPS is expected to be in the range of $0.70 to $0.76.
Free Cash Flow: HP maintains its annual free cash flow guidance range of $2.8 billion to $3 billion, with expectations to be closer to the low end of the range.
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Shareholder Return Plan
Dividends: In Q1, HP returned over $600 million to shareholders through both dividends and share repurchases. The company remains committed to returning approximately 100% of its free cash flow to shareholders over time, as long as its gross leverage remains under 2x and there aren't better return opportunities.
Share Repurchase: HP repurchased shares in Q1 as part of its commitment to return capital to shareholders. The company has maintained increased cash balances to ensure sufficient funds for debt maturities in 2026, enabling share buybacks during the quarter.
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Key Q&A
Q:What is the memory cost impact in the January quarter, and what is expected for the April quarter and fiscal year? Are LTAs with memory suppliers for volume only or both volume and pricing?
A:Memory costs have increased roughly 100% sequentially and are expected to further increase throughout the fiscal year. Memory and storage costs now make up approximately 35% of the PC bill of materials, up from 15%-18%. LTAs with memory suppliers protect supply coverage, and pricing is managed on a rolling basis.
Q:What is the expected decline in PC unit TAM, and which segments will decline more?
A:PC unit TAM is expected to decline double digits, in line with industry trends. Specific segment declines were not quantified, but momentum is seen in Windows 11 and AI PCs, which are driving revenue mix expansion.
Q:How is the company approaching fiscal '26 guidance given memory cost uncertainties?
A:The company is taking a prudent view, assuming revenue strength in the first half moderates. Memory costs are expected to increase 100% sequentially in Q2 and further throughout the year. Mitigation actions, including pricing increases and cost reductions, are being implemented to offset these headwinds. Fiscal year EPS is expected to be more first-half weighted.
Q:What is the approach to capital returns in fiscal '26?
A:The company remains committed to returning 100% of free cash flow to shareholders over time, as long as gross leverage remains below 2x. Despite leverage slightly above 2x, $600 million was returned to shareholders in Q1, including $300 million in share repurchases.
Q:Is the pull-in in the PS segment demand more on the Consumer or Enterprise side?
A:The pull-in in demand was observed more on the Consumer side, particularly in December. Enterprise demand was strong in Europe and Asia, driven by the Windows 11 refresh cycle.
Q:Will PS margins stabilize or recover towards the long-term range by the end of the year?
A:PS margins are expected to remain below the long-term range for the rest of the year due to the fluid environment. However, the company expects to return to the long-term range over time.
Q:What was the actual memory pricing impact realized in Q1, and what is expected for the full year?
A:Memory cost increases in Q1 were roughly in line with initial expectations. Current prices are up 100% sequentially from Q1 to Q2, with further increases expected later in the year. Peak memory costs are not anticipated to be reached by Q2.
Q:What is the status of memory negotiations with suppliers, and is there a risk of supply shortages?
A:The company has good relationships with long-term suppliers and has secured the supply needed for the year. Pricing is locked in on a rolling basis, and there is no anticipated risk of supply shortages.
Q:What is the nature of long-term agreements with suppliers, and are new suppliers being qualified?
A:Long-term agreements cover volume and pricing, which is managed on a rolling basis. New suppliers are being qualified to maximize available supply and meet regulatory and compliance needs in different regions.
Q:How is pricing strategy being managed in the current environment?
A:Pricing is adjusted across various routes-to-market, with durations varying by channel. The company is sensitive to demand elasticity and works with customers to optimize configurations and pricing. Total cost of ownership and customer use cases are key drivers of pricing decisions.
Q:What is driving free cash flow generation in fiscal '26, especially in the back half of the year?
A:Free cash flow is back-half loaded, supported by better-than-expected Q1 performance and growth in the PS business, which has a negative cash conversion cycle. Working capital improvements are also contributing.
Q:What is enabling print margins to expand towards the high end of the range?
A:Print margins are supported by profitable growth strategies, including Big Tanks, increased subscriptions, share gains in high-value categories, and cost structure reductions.
Q:What is the status of the CEO search, and what qualities are being sought?
A:The CEO search is ongoing, with a focus on candidates with a proven track record of delivering shareholder value, navigating complex environments, and managing global, multi-segment businesses. Candidates from outside the PC and print industry are also being considered.
Q:What is the impact of memory costs on the PC BOM, and how does it relate to PS GP dollars?
A:Memory costs now account for 35% of the PC BOM, up from 15%-18%. One-third of PS GP dollars come from businesses not reliant on memory, such as higher-margin attached businesses and Workforce Solutions.
Q:What is the correlation between PC demand and peripherals or print?
A:Peripherals demand typically follows PC refresh cycles, with increased needs after major refreshes. The company sees growth opportunities in peripherals and plans to gain share in this category.
Q:Where is the company confident in gaining share, and what is the OpEx outlook for fiscal '26?
A:The company is gaining share in premium PC categories, AI PCs, and print (Big Tanks and supplies). OpEx for fiscal '26 is expected to be roughly flat year-over-year, with cost reductions offsetting necessary investments.
Q:What is the expected impact of memory costs on fiscal '26 guidance, and how does it compare to previous estimates?
A:Memory costs are higher than previously estimated, with a 100% sequential increase from Q1 to Q2 and further increases expected. The company is not quantifying the impact due to volatility but is implementing mitigation actions.
Q:What is the normal seasonality for PS revenue in Q2, and how does it compare to current expectations?
A:Normal seasonality for PS revenue in Q2 is being exceeded due to share gains in premium categories, AI PCs, peripherals, and solutions. The Windows 11 refresh and price increases are also contributing to stronger-than-normal revenue.
Q:Review of Unclear Management Responses
A:Management avoided directly quantifying the memory cost impact for Q1 and the full year, citing volatility and mitigation actions. They also did not provide specific details on the expected decline in PC unit TAM or the exact impact of pricing strategies on demand elasticity. Additionally, the CEO search process lacked detailed updates beyond general qualities being sought.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
AI PC
AI agent
AI cloud
AI curve
AI deployment
AI edge
AI memory
AI print
AI product
CEO transition
Future Work
HP Imagine
Microsoft
OpenAI
WXP
analyst
challenge
commitment
cost environment
device
employee supplier
experience HP
focus AI
life
memory cost
mitigation measure
need
others
partner
role
strategy supply
success
technology
trade cost
update
week
workflow
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The earnings call summary indicates positive sentiment with strong financial metrics, a dividend increase, and a focus on AI integration and cost savings. Despite higher memory costs, the company has mitigated risks with secured supplies and pricing strategies. Shareholder returns, including increased dividends and share repurchases, add to the positive outlook. The Q&A reveals confidence in navigating challenges and gaining market share. Overall, these factors suggest a positive stock price movement in the short term.
HPQ Slides
HPQ Report
Frequently Asked Questions
Where does this earnings call transcript come from?
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