Good day, everyone, and welcome to the Second Quarter 2025 HP Inc. Earnings Conference Call. My name is Tina, and I will be your conference moderator for today's call. At this time, all participant lines will be in a listen-only mode. We will 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 star. 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.

Good afternoon, everyone, and welcome to HP Inc.'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 a discussion of some of these risks, uncertainties, and assumptions, please refer to HP's SEC reports, including our most recent Form 10-Ks. 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 amount 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.

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, I 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. 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 area. 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 100 basis points on our non-GAAP operating profit, mainly in April and primarily impacting personal systems. This resulted in a roughly $0.12 impact on our non-GAAP earnings per share. By net impact, I am 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 some 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 better 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 literally all…

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 in high-value categories across personal, driving momentum in our key growth areas, and exercising disciplined cost management while continuing to invest in strategic initiatives. 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 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. 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…

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.

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 enterprises weaker? Is it small enterprise weaker? Excuse me. Is it international markets weaker? You know, you've talked about raising prices. So I just love a little bit of context, a little more context on kind of PCs in the second half of the year, including any channel inventory comments. And then, you know, big picture, does that just really mean that kind of Windows 11 refresher is really not a catalyst that we need to think about? If we're going low single digits during the refresh period, just a little bit more context would be helpful, and then I have a quick follow-up. Thanks.

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 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. Second, we have seen announcements across the industry of price increases in the second half, and we've seen the combination of both will potentially have an impact on the demand that we see. We are not integrating any effect from channel inventory. All of them are under control and 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 were going to be impacting the overall market size in the second half. Our plan and our goal is to grow share in that market, and, of course, if the market is bigger than what we are expecting today, this should be reflected in our results.

And I would just add, Erik, that Windows 11 does remain a catalyst for the back half. And, you know, if demand comes in stronger than our moderated guide, that will be reflected in our results.

Okay. I appreciate all of that color, guys. Thank you so much for that. And then maybe a follow-up. You know, Enrique, I would just love if you could give a little bit more kind of high-level color for your growth businesses. You know, I think it would help us all better understand kind of two key metrics there. First, just, you know, when you add up all of the growth businesses that you allude to in your presentation, how big are they? What percentage of revenue or personal systems or print? Any color that you could share in size there? And then how fast are they growing? You know, 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 the growth of these businesses, say, over the next, you know, one to three years? We would just love to get better context on that. Thanks so much.

Thanks, Erik. So we haven't disclosed the overall size of the business yet. Let me tell you the two key metrics we have shared before that continue to be true: they are growing faster than the core businesses, and their gross margin is also higher than the gross margin of the core business. So these two key factors continue to be true. Within growth businesses, we include businesses like AIPC, where we are seeing very solid growth, not only quarter over 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. Within growth businesses, we have also our workforce solution business 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, and Industrial Print. So overall, they performed well. They performed as we were expecting, and they will be a significant part of why we continue to see the second half stronger than the first half because they will continue to drive growth for the company.

Got it. Thanks a lot, Enrique. Thank you.

Our next question comes from the line of Michael Ng with Goldman Sachs. Please go ahead.

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? And then secondly, I was just wondering if you could comment on whether you saw any personal systems demand pull in this past quarter ahead of any prospective tariffs and, you know, the current outlook there. Thank you.

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. You know, 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. And in terms of pull-in, we saw some pull-in of in the PC space into Q2, but at the overall level, fairly small. Our estimation, having looked at shipment data and sell-out data, is at less than 1% of growth was driven by pull-in, a relatively small number overall. Of course, if you look at your North America sales, it would be bigger because it will represent a bigger percentage. But again, overall, at the company level, it was less than 1%. And this is the case for PCs. We didn't see any pull-in for print.

Thank you, Enrique. Thank you, Karen.

Our next question comes from Asiya Merchant with Citigroup. Please go ahead.

Great. Thank you very much. A couple of ones. One on just AI PCs. I know you're still pretty bullish on AI PCs, but if you can just, you know, help us understand what are some of the killer applications that you hear from your end customers, you know, on this mix shift towards AI PCs. And then within your expectations for PS systems growth, you know, how should we think about the impact of pricing and mix shift towards these AI PCs within your overall growth expectations for that segment? And then I have a quick follow-up. Thank you.

Thank you. So overall, as I said before, we are very pleased with the progress that we see in AI PCs. Our goal is that they 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 AI PCs. We have more than 100 ISVs reporting 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 are 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 is resonating. In terms of the impact it will have, you're correct, it will have an impact on average selling price. Our goal, the goal that we have shared before, is that they will represent around 50% of the total shipments of PCs three years after introductions or about two years from now. We are on track to make that number. On average, they are between 10% and 20% higher priced than regular PCs. But this, of course, will have an impact on the total value. Something relevant to highlight this quarter is that we introduced AI PCs 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.

Okay. And then if I may, 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, you know, the free cash flow margins ticking down a little bit in terms of your guide. Would help a lot. And what are the drivers for that? Thank you.

Yeah. No. Thanks for the question. You know, 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 trade environment.

And let me maybe provide some color on the working capital side. As we have said 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. 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.

Thank you. Our next question comes from Wamsi Mohan with Bank of America. Please go ahead.

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 do 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 qualification there would be helpful, and I will follow-up.

Let me provide more color on that, and maybe Karen also wants to complement. So we have taken a lot of actions during the quarter to mitigate the change of the trade environment. Let me start by saying we accelerated the shift of factories out from China into Southeast Asia, into Mexico, to a 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 share that now almost no products will be coming from China sold in the US by June. It's a very significant acceleration of the plan that we have. We have also changed our logistics network. And, for example, we have removed the US as a 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 in print, to reflect the costs that we have seen. 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.

And I would just add that we're not going to quantify, you know, what comes from price versus, you know, supply chain moves versus other cost actions. But on our future-ready program, we did talk about driving an additional $100 million more in savings. And those are really higher; we targeted higher goals for many of the savings opportunities that we're 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, you know, these actions are now yielding more upside than we initially anticipated and will 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.

Okay. Thanks for that color. And as my follow-up, you know, you are actively moving the supply chain away from China, but you also noted areas like Vietnam, Thailand, Mexico, and the Philippines. What gives you confidence that your moves, given sort of we still don't know where reciprocal tariffs might end up, but 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.

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 the 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 will 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 will respond swiftly to those changes.

Thank you very much.

Our next question is from Samik Chatterjee with JPMorgan. Please go ahead.

Thank you for taking my question. And maybe if I can start off with the print margin in the quarter, again, very solid margins. Maybe if you can just help us with sort of the driver of the margin or performance you had there, how much of it is maybe some business drivers versus the future-ready cost actions that you're taking. And particularly in relation to the guidance you have for Q3, you talked about above seasonal revenue growth as well, but you're moderating the margin expectation. 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 sort of really play out in the quarter? Then I have a follow-up. Thank you.

Yeah. Thanks, Samik, 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. And we mentioned a favorable impact of a grant funding received in the quarter. It was a multiyear 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 is a little higher than the quarterly rate that we will see going forward. 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. Hopefully, that helps.

Yep. Thank you for that. And the second question is just a clarification in Q3 and Q4. 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 incremental benefit from pricing as we move from Q3 to Q4 as well? Thank you.

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. And this year, we do expect continued momentum in the PC market, you know, driven by commercial. We also see Q4 as typically our highest season with an increase in consumer demand tied to back-to-school and holiday purchases. And we have many new products for customers to choose from. 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, you know, the additional $100 million to achieve the $2 billion in broader cost savings as we exit our Future Ready program at the end of the year. And, of course, pricing will play a role too. Altogether, we expect our PS margins to be in the lower half of the 5% to 7% range in Q3 and improve sequentially.

So, hopefully, that helps. And I think it's 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. Which is a sign of confidence for the future.

Thank you. Thanks for taking my questions.

Our next question comes from Amit Daryanani with Evercore. Please go ahead.

Good afternoon, everyone. I have two as well. I guess maybe just to start off with, Enrique, what you were talking about at the end right now. You're sort of embedding a very sizable step up in earnings in your fiscal Q4. I think the implication is you'll do a dollar of earnings power in Q4. Can you just pass on how much of that ramp up from, call it, the $0.70 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? It would be good to understand just how much of this is controllable versus not, perhaps.

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. For example, in the consumer space, driven by both back-to-school and the holiday season, Q4 is a very strong quarter. And on the commercial side, we continue to expect to see the demand that we have seen in the previous quarters driven by Windows 11, driven by the refresh of the installed base, and driven by AI. So all these will have an impact on the demand side. 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 the supply chain, the impact of future-ready, will have an impact on the margins of Q4 sequentially, and this is what gives us confidence that we'll be able to achieve these numbers. As we, as I said at the beginning, we have moderated our growth expectations for PS, especially, but we continue to expect that the PS business will grow in the second half compared to what it was a year ago.

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 full traction in Q4.

Fair enough. And that's helpful to just kind of understand those dynamics. You know, you first have talked about a couple of issues that are impacting your fiscal 25 EPS guide. Right? It's about a $0.45 impact right now. At a very high level, is there a way to think about how much of that $0.45 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?

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 $0.12 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.

Bettina, in a direct way, also the exchange of expectations is related to the new trade environment, to the new trade situation. Not directly on cost, but yes on demand.

Fair enough. Thanks.

And your next question is from the line of David Vogt with UBS. Please go ahead.

Moving 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.

So 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 for the cost impact on tariffs going forward. It takes us this time a couple of quarters, and this continues to be the assumption that we have. Thank you.

Our next question comes from the line of Tim Long with Barclays. Please go ahead.

Maybe just on the first one, one on PC, one on print. On the PC side, can you just talk a little bit about kind of price elasticity and what you've seen in prior cycles? It sounds like, you know, 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 maybe an age space, it's not as much of an issue? And then second, on the print-related businesses, could you just talk about the competitive landscape and, you know, any kind of yen movement that might have an impact there or might be impacting competition either way there? Thank you.

Yeah. I think in terms of elasticity, it's hard to compare the 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 the market that we have put in place, and I think this is the best way to reflect kind of the changes and elasticity that we see. In terms of print, what we have seen quarter on quarter is that pricing has been more stable. So we haven't seen an improvement in 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.

Thank you.

And our final question comes from the line of Alek Valero with Loop Capital. Please go ahead.

Hey, guys. Thank you for taking my questions. This is Alek on for Fernanda. So my question, I actually have one more on PC pull-ins. So I know you mentioned you saw a very small impact during the quarter, but I wanted to see if there's any impact on the second half of the year.

Again, the impact was so small that, again, at the company level, it has a very minimal impact. If we look at the US, it has more just because of the 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, meaning the estimation that we have for the market.

Got it. 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?

Well, we have seen significant growth of the AIPC category, and the mix continues to improve, of course, year on year, but especially quarter on quarter, which is more relevant at this stage. So clearly, customers are valuing the new functionality, the new performance of this product, and this is driving the improvement in mix.

Got it. Thank you.

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 by confirming our confidence in three areas. First, confidence in our future of work strategy to continue to drive growth. Second, the confidence in the team on how to respond and to 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 continuing the conversation in the coming weeks. Thank you.

This concludes today's conference call. You may now disconnect.