HP Inc. Earnings Preview: 5 Things To Know

AI PCs, traditional PCs and printers are subjects likely to come up on the company’s earnings call.

Sales of new PCs crafted for the artificial intelligence era. A potential recovery in the traditional PC market. And possible continued troubles for printers.

These are some of the major subjects expected to come up Wednesday when Palo Alto, Calif.-based HP Inc. reports earnings for the third quarter of its 2024 fiscal year. The quarter ended July 31.

HP Third Quarter

In an August report by Bernstein, the investment firm estimated that HP will report $13.35 billion in revenue for the third fiscal quarter, in line with Wall Street’s consensus expectation of $13.38 billion.

The firm expects $53.7 billion in revenue for the year, slightly above Wall Street’s $53.6 billion consensus, according to the Bernstein report.

Here’s what else you need to know heading into HP’s third fiscal quarter earnings.

AI PC Sales

Microsoft Copilot+ PCs aimed at AI users hit the market in June, perhaps giving HP executives enough time to provide an early snapshot into this emerging market.

HP Copilot+ PCs include the OmniBook X AI PC and EliteBook Ultra G1q AI PC, with computer makers Lenovo, Samsung, Dell Technologies, Asus, Acer and Microsoft itself offering rival products.

In an August report by Bernstein, the investment firm said that HP has been touting AI PCs as drivers of “a huge change in the industry structure and could be a 10-20% tailwind to PC ASPs (average selling prices) overall with penetration reaching 40-60% through 2026, leading to an estimated 200 bps tailwind to annual revenue growth each year for the next three years.”

Overall, “PC OEMs are increasingly positive on the impact of AI on the PC market and have noted growth in adoption of AI-tagged PCs, potentially driving incremental PC replacements, albeit from a low base,” according to the Bernstein report.

New AI-tagged Copilot+ PCs are on average about 20 percent more expensive than non-AI equivalents, according to Bernstein, which could create “an ASP and premiumization tailwind.”

A Bernstein survey of CIOs also suggested “a willingness to trade up to richer configurations” due to “increasingly demanding workloads being run on PCs.”

In July, IDC reported that PC sales through distribution returned to growth in the second quarter of 2024, with PC sales reaching $3.9 billion for the quarter, 9.9 percent growth year over year.

AI PCs generated about 20 percent of PC revenue in the quarter, up 33 percent quarter over quarter, according to IDC.

“Apple and Microsoft have experienced successful adoption of AI PCs with their revenue mixes at 75% and 32% respectively,” according to IDC. “But Lenovo and HP still held the first and second spots for total PC sales even with lower AI PC product mixes for the quarter. AI PCs featuring Neural Processing Unit (NPU) technologies are expected to continue ramping up over the coming quarters.”

“While IDC believes the commercial market has the biggest short-term upside for AI in the PC industry, the consumer story has yet to be told in full,” according to the research firm.

Gartner said in July that even with the introduction of the first Arm-based Windows AI PCs in the second quarter, “the demand for AI PCs has been slow, as the product is still in the early introduction stage, and the real benefits of owning such a device are not yet clear to most buyers.”

Traditional PC Market Recovery

HP’s earnings Wednesday will also give analysts and the channel insight into the greater PC market and whether sales have improved this long after the pandemic-era purchasing flurry.

A separate IDC post in July said that the traditional PC market saw a “second quarter of growth following eight consecutive quarters of decline.”

Worldwide PC shipments hit 64.9 million units in the quarter, 3 percent growth year over year and 5 percent excluding China. Lenovo topped the list of PC companies with 14.7 million units shipped in the quarter, according to IDC preliminary results. That is 3.7 percent growth year over year.

HP came in second with 13.7 million shipments, 21 percent of the market and 1.8 percent growth year over year. No. 3 was Dell with 10.1 million units, 15.5 percent of the market, a 2.4 percent decline year over year.

In July, research firm Gartner said that worldwide PC shipments hit 60.6 million units in the second quarter, up 1.9 percent year over year and marking three consecutive quarters of year-over-year growth.

Lenovo, HP and Dell maintained their rankings and similar shipment and growth results under Gartner’s measures.

However, HP held the top spot in the U.S. PC market—5 million units, 27 percent of the market and 3.5 percent growth year over year, according to Gartner.

HP bested Dell’s 4.7 million units—25 percent of the market and a 3.4 percent decline year over year.

No. 3 was Lenovo with 3.2 million—18 percent of the market and 7.7 percent growth year over year.

The U.S. PC market saw the highest shipment volume since 2022’s third quarter—18 million shipped PCs, 3.4 percent growth year over year, according to Gartner. The firm attributed the growth in part to a high sales season for government and education, with “surging business PC demand” expected in the U.S. for the second half of the year.

The August Bernstein report said that the firm expects 2 percent growth year over year for revenue in HP’s Personal Systems Group (PSG), below a Wall Street consensus of 2.5 percent. The consensus view implies “that ASP headwinds reverse from being a -4.7% headwind to a +0.7% tailwind.”

“Given a better industry-wide pricing environment, the fact that HPQ’s ASPs already improved from being a -9.7% headwind in Q1 to -4.7% in Q2 … and an extremely easy -15% ASP comp, and the company’s view that AI PCs would be an ASP tailwind … we see this as likely, and potentially a bit conservative, pointing to some upside to PC numbers,” according to Bernstein.

Bernstein called the second-quarter PC market data “ahead of normal seasonality, and at the high end of pre-Covid levels, which appears to suggest a PC market recovery may be underway.”

The firm models sales of between 265 million and 275 million units for the year, which would mean 2 percent to 6 percent growth year over year.

Helping to drive the growth are “no channel inventory in 24 vs. drawdowns in 23 (which depressed 2023 sell-in)” and “some initial refreshes of early Covid shipments in 2020,” not to mention “potential corporate refreshes in advance of Windows 10 support expiration in late 2025,” according to Bernstein.

Trouble In Europe?

In a July report from Morgan Stanley, the firm cited a survey of CIOs that showed “EU-based CIOs expect 2024 Hardware spend to decelerate 70bps Y/Y, to +0.9% Y/Y.” The firm said that CDW, HP and Xerox executives had mentioned “relative weakness in Europe” in public comments.

U.S.-based CIOs, however, said they expect “2024 Hardware growth to accelerate 90bps Y/Y, to +2.1% Y/Y,” according to the firm.

“While this translates to overall hardware budget growth accelerating 40bps Y/Y in 2024, it's clear budget growth is being driven entirely by the US, as EU spending weakness persists into 2024,” according to Morgan Stanley. “Similarly, the entirety of the 20bps upward revision to 2024 Hardware budget growth expectations came from US CIOs (+70bps vs. our 1Q24 CIO Survey) while EU CIOs downticked on 2024 Hardware budget growth vs. our prior survey.”

Gartner reported that the Europe, Middle East and Africa (EMEA) PC market saw a third consecutive quarter of growth—4.8 percent year over year. But quarter over quarter unit volumes were about flat. The firm called EMEA’s market “stabilizing from previous declines and returning to its seasonal trends, rather than experiencing a significant surge.”

Asia fell 2.2 percent year over year, according to Gartner. But the decline was less steep than in prior quarters. A weak market in China was a factor in the decline, but emerging countries saw mid-single-digit growth. Mature countries saw the first growth year over year in two years.

Printing Questions

An August report by Bernstein said that the firm expects HP “to benefit from a solid PC performance and ongoing cost management through its Future Ready program,” but that the printing business remains a concern.

“Printer hardware revenues have declined for 9 consecutive quarters, and hardware units have declined double digits for four straight quarters,” according to the Bernstein report. “We see the potential for significantly weaker supplies growth (mid to high single digit declines) over the next four quarters given tough comparisons and a shrinking installed base. We continue to believe that printing is in structural decline, and is the key challenge for the company.”

The printing business accounts for about 60 percent of segment operating profits, according to Bernstein.

The firm lists “poor execution in its migration to its new HP+ printing model” as among the biggest downside risks for HP’s stock price, along with potential “weakness in IT spending and PCs” and “further third party competition for supplies,” as well as “incremental price competition in the PC space.”

The firm forecast Imaging and Printing Group (IPG) revenue down .5 percent year over year, in line with Wall Street’s predicted 4 percent decline. This would also be down 2.9 percent quarter over quarter, slightly below HP’s guidance, according to Bernstein.

“We believe supplies in particular could be weak,” the Bernstein report said, with HP acknowledging that supplies are “expected to continue to decline low to mid single digits for the full year (in line with the long term trend), and commentary from Xerox confirms that enterprise printing demand continues to decline.”

HP also “saw unusually strong supplies growth in 2023, with supplies declining” 1 percent ignoring foreign exchange, which was “above of the long term trend,” according to Bernstein. This gives a tough comparable year over year.

Bernstein believes that supplies “could decline 5% or more YoY for the next several quarters, which could pressure IPG margins.”

Components, Peripherals, CHIPS And Science Act

On Tuesday, HP revealed that it is in the running for a proposed $50 million award from the federal government under the U.S. CHIPS and Science Act.

Executives might want to go into detail about how those funds would help the computer maker’s capabilities. The funds will go toward HP’s 47-year-old microfluidics semiconductor fab in Corvallis, Ore.

Analysts on the call might seek more details around larger trends in components. Falling component prices and AI PC ASP tailwinds could help HP’s margins, according to the August Bernstein report.

Prices for dynamic random access memory (DRAM) “appear to have bottomed and are now recovering,” which has driven “an inflationary component cost environment for PCs (and other hardware products),” according to Bernstein. “OEMs will likely pass on some costs to customers, creating an ASP tailwind.”

Bernstein said that an over-shipping of central processing units (CPUs) “appears to be driving a channel build, which could lead to component pricing pressure going forward as vendors attempt to clear the channel .”