Q2 2025 HP Inc Earnings Call
Good day, everyone and welcome to the second quarter 2025, H P 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 will be facilitating a question and answer session towards the end of the conference should you need assistance during the call. Please signal a conference specialist by pressing Star then.
Starkey followed by zero as a reminder, this conference is being recorded for replay purposes.
Speaker Change: I would now like to turn the call over to our rate Kinder Mulholland head of Investor Relations. Please go ahead.
Speaker Change: Good afternoon, everyone and welcome to H B is second quarter of 2025 earnings Conference call.
Speaker Change: With me today are in retail or is H, b as president and Chief Executive Officer.
Karen Parkhill: And Karen Parkhill, Hps, Chief Financial Officer.
Karen Parkhill: 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.
Speaker Change: We posted the earnings release and accompanying slide presentation on our Investor Relations webpage at Investor, though the H B Dot com.
Speaker Change: 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.
Speaker Change: For more detailed information please see disclaimers in the earnings materials relating to forward looking statements that involve risks uncertainties and assumptions.
Speaker Change: For a discussion of some of these risks uncertainties and assumptions. Please refer to Hp's SEC reports, including our most recent Form 10-K.
Speaker Change: H B assumes no obligation N.
Speaker Change: And does not intend to update any such forward looking statements.
Speaker Change: 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 Hps SEC filings.
Speaker Change: During this webcast unless otherwise specifically noted all comparisons are year over year comparisons with the corresponding year ago period.
Speaker Change: In addition, unless otherwise noted.
Speaker Change: References to H B channel inventory referred to tier one channel inventory and market share references are based on calendar quarter information.
Speaker Change: Financial information that has been expressed on a non-GAAP basis. We've included reconciliations to the comparable GAAP information.
Speaker Change: Please refer to the tables and slide presentation accompanying today's earnings release for those reconciliations.
Enrique: With that I'd now like to turn the call over to Enrique.
Enrique: Thank you all right. Thank you to everyone for joining today's call.
Speaker Change: Against the backdrop of a highly dynamic landscape, we delivered another quarter of solid top line growth.
Speaker Change: And by continued momentum in the personal systems commercial business.
Speaker Change: However, due to additional part of course, but could not be fully mitigated in the quarter, our non-GAAP operating profit fell short of expectations.
Speaker Change: Today, we will take a deeper dive into Q2 performance.
Speaker Change: If all the external environment and our outlook.
Speaker Change: I would also highlight new innovations, we introduced to drive our momentum forward.
Speaker Change: Let me start with our Q2 results.
Speaker Change: Overall, we deliver revenue growth for the fourth consecutive quarter, we felt 5% increase in constant currency year over year.
Speaker Change: We saw strong growth in personal systems.
Speaker Change: Clearly, even commercial and high value categories.
Speaker Change: Driving momentum in our key growth area.
Speaker Change: These meaningful result show that our future of work strategy is working.
Speaker Change: The rapidly changing external landscape, including shifting trade policies and additional tariffs had a net impact of approximately 100 basis points when our non-GAAP operating profit.
Speaker Change: Mainly neighboring primarily impacts in personal systems.
Speaker Change: This resulted in a rapidly toilsome impact on our non-GAAP earnings per share by net impact we are referring to all parties related impact after taking into account the mitigation actions.
Speaker Change: We swiftly responded to these changing market dynamics and were able to partially offset in the quarter through first our terms pricing and accelerating the transition of our manufacturing footprint.
Speaker Change: We continue to diversify our manufacturing locations. So that we can bid based upon the geo political changes with agility.
Speaker Change: We have expanded our manufacturing footprint.
Speaker Change: Both Pcs and printers to different locations and we recently increased our production coming from Vietnam, Thailand, India, Mexico, and the U S.
Speaker Change: But at the end of June we now expect literally all of our products sold in North America will we built outside of China significantly accelerating our previous plan.
Speaker Change: However, it takes time and investment to fully mitigate it.
Speaker Change: Fox.
Speaker Change: Let me now share more color on our business unit performance.
Speaker Change: In personal systems revenue grew 8% in constant currency above our expectation.
Speaker Change: And by strong commercial performance.
Speaker Change: P C commercial revenue grew 9% year over year, including strong growth in North America and Asia.
Speaker Change: As expected we saw continued strength in a P C demand and the Windows 11, we finished and we believe that momentum will carry forward.
Speaker Change: We drove share gains year over year in commercial P. C. A T.
Speaker Change: Equally in premium workstations.
Speaker Change: P CS and gaming.
Speaker Change: We drove growth in services with several new wins in health care financial services and retail.
Speaker Change: Personal systems operating margin came in below our guidance largely due to higher targets that were not fully offset by our actions in the quarter.
Speaker Change: We expect to successfully mitigate discourse and return to our long term target range of 5% to 7% next quarter.
Speaker Change: In print revenue declined 3% in constant currency in line with our expectation.
Speaker Change: We saw revenue growth across home and office in Europe, helping to offset a slowdown in North America and continued weak demand in China.
Speaker Change: And we continued to drive momentum in home with units up 2% fueled by strong Big Bank group.
Speaker Change: We grew share year over year in developed markets optimizing profitable share mainly in office eight four value on AC.
Speaker Change: In our key growth areas for print, we saw continued growth in consumer subscriptions and workforce solutions.
Speaker Change: And we drove another quarter of growth in industrial traffic.
Speaker Change: Supported by the portfolio of Dupont confirming the high adoption of our new product introductions.
Speaker Change: Our focus remains on what we can control and executing with discipline.
Speaker Change: Our customers and making strategic decisions that position HP for the long term.
Speaker Change: Now, let's turn to the significant strides we've made in innovation.
Speaker Change: This quarter, we advanced our strategy to lead the future of work right delivering experiences that help businesses grow and employees and greater professional fulfillment.
Speaker Change: At our global Amplify conference in March we deepened relationships with over 11 kind of partners and customers.
Speaker Change: We unveiled more than 80, new products and services and the positive reactions from attendees reaffirm our direction.
Speaker Change: A key highlight for the global rollout of the H P workforce experience platform.
Speaker Change: Combining <unk> with real time insights. These cobalt solution enables C of yours to boost productivity and address issues before they disrupt pork.
Speaker Change: It back from our early adopters has been incredibly positive highlighting the platforms impact on workplace efficiency and it's thrown at improving employee satisfaction.
Speaker Change: To accelerate the adoption of hey, I am bringing its benefits to the mainstream we introduced one of the most comprehensive hey, Yeah U P C portfolios in the industry.
Speaker Change: These portfolio features the redesign HP elite book and elite desk engineer to help people work smarter and faster while keeping their data secure.
Speaker Change: To enhance advanced workflows for data stallion piece, and then developers we teamed up with Nvidia to launch the H P.
Speaker Change: D G X.
Speaker Change: These are high performing workstation powered by Blackwell and designed to accelerate productivity and enhanced security.
Speaker Change: In print, we are leading the way in security with our new laser jet enterprise device. The first printer in the world designed to guard against quantum computer attacks.
Speaker Change: And our industrial printing team receive five prestigious European Digital Press awards.
Speaker Change: Now you've seen our bold vision to lead the industry port automation productivity and sustainability.
Speaker Change: In April we built our latest generation of latest technology to life.
Speaker Change: Janine to simplified production and optimized printing processes.
Speaker Change: Third with our print hub software pretty shops can now drive greater efficiency and control from a single platform.
Speaker Change: This innovation played a pivotal role in our recent collaboration with good area for variety, where we co engineer a high performance car prep, that's up to 14% lighter and 17% female translating breakthrough technology into real world speed.
Speaker Change: The advancements across our entire portfolio this quarter.
Speaker Change: Straight our leadership in creating a secure and powerful a ice pack that connects devices data and workflows to drive meaningful productivity.
Speaker Change: 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.
Speaker Change: These efforts both things in our operational agility.
Speaker Change: The foundation for continued resilience.
Speaker Change: We will carry this momentum into Q3 and Q4 as we further reinforced our supply chain and operational capabilities.
Speaker Change: Additionally, we have implemented price increases to help offset cost pressure.
Speaker Change: These decisions I've never taken lightly.
Speaker Change: Essential to maintaining our financial discipline.
Speaker Change: [noise] ahead, the remainder of fiscal 2025 will be shaped by a range of factors some of which three main uncertain.
Speaker Change: We have planned for two days studies landscape and if it changes we will respond swiftly as we did in Q2.
Speaker Change: We continue to expect the PC market will grow in 2025, but softer than originally planned driven by increased macro uncertainty.
Speaker Change: That said, we remain confident in our ability to grow faster than the market and gain share.
Speaker Change: In print we continue to expect the market to decline low single digits for calendar year 2025.
Speaker Change: We expect the actions we are taking to gain full traction in the second half.
Speaker Change: Leading to sequential operating profit improvement.
Speaker Change: We are making progress with the execution of the future of radio accelerated plan that we announced last quarter and we are now expecting to exceed our goals and deliver at least $2 billion in gross annual run rate structural savings by the end of fiscal year.
Speaker Change: 25.
Speaker Change: These incremental structural savings will help mitigate macro and geopolitical uncertainties, while continuing to support investments in strategic area.
Speaker Change: We are confident in our ability to navigate an evolving market.
Speaker Change: Have always excel in managing complex environment, we have an incredible team capable of optimizing processes implementing best practices and achieving global efficiency.
Speaker Change: How do we move forward, we remain committed to delivering sustainable growth and creating long term value for our shareholders.
Speaker Change: Our focus on harnessing the power of AI.
Speaker Change: To make work more personal productive Unfulfilling will drive our success now and into the future.
Kevin: Let me now hand, it over to Kevin.
Kevin: Thank you Enrique and good afternoon, everyone.
Kevin: We delivered another quarter of solid top line growth driven by continued momentum in the personal systems commercial business.
Kevin: Aligned with our vision of leading the future of work.
Kevin: We executed our strategy across multiple fronts.
Kevin: Including growing share in high value categories across personal systems and print.
Kevin: Driving momentum in our key growth areas and exercising disciplined cost management, while continuing to invest in strategic initiatives.
Kevin: However against the backdrop of a dynamic geopolitical landscape, our non-GAAP operating profit fell short of expectations.
Kevin: The additional tariff costs that could not be fully mitigated in the corner.
Kevin: As a reminder, our guidance for Q2 included tariffs in place at the time.
Kevin: While we plan for a range of scenarios in the quarter and we worked aggressively to respond to changes in the regulatory trade environment.
Kevin: Tariff increases announced in April were higher than expected.
Kevin: That said as you heard from Enrique we made meaningful progress expanding our supply chain and manufacturing footprint.
Kevin: And we accelerated actions on cost reduction and pricing.
Kevin: However, as we indicated last quarter the full benefit of these mitigating actions can take a few months lead time, depending on the scope.
Kevin: So in the quarter, our operating margin was impacted by net tariff costs, mainly in personal systems.
Kevin: Taking a closer look at the details of the quarter.
Kevin: Net revenue was up 3% nominally and 5% in constant currency with growth across all regions.
Kevin: In constant currency a P. J grew 9% Americas grew 5% and EMEA grew 1%.
Kevin: And while we made progress on the cost of good reduction actions, we started at the beginning of the year.
Kevin: Gross margin at 27% was down year over year with increased tariff and commodity costs.
Kevin: 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.
Kevin: All in our operating margin of seven 3% was impacted by roughly 100 basis points due to unmitigated tariff related impacts mainly in personal systems.
Kevin: Below the op profit line non-GAAP net Oh irony was flat year over year in line with our expectations with lower short term borrowing costs offset by currency losses.
Kevin: Finally, with a diluted share count of approximately 956 million shares.
Kevin: Our non-GAAP diluted net earnings per share was <unk> 71.
Kevin: Reflecting the tariff related impacts net of mitigation of approximately 12%.
Kevin: Now, let's turn to segment performance.
Kevin: We delivered another quarter of solid growth in personal systems with revenue up 7% nominally and 8% in constant currency.
Kevin: Above our expectations and driven by higher commercial volumes and increased ASP.
Kevin: We did see some demand pull forward, but estimate it was minimal accounting for less than 1% of our revenue growth.
Kevin: As we signaled we drove disciplined pricing actions to help mitigate increased tariffs and component costs.
Kevin: And shifted mix toward premium categories.
Kevin: And momentum continued in our key growth areas with strong performance in AI P. CS advanced compute and workforce solutions.
Kevin: Yeah.
Kevin: We also drove commercial unit growth of 11% gaining share overall and in premium categories as the market momentum and refresh activity continued.
Kevin: Commercial revenue increased 9% year over year with pricing actions and mix shift toward premium offset in part by currency impacts.
Kevin: In consumer our results reflect our strategy to rebalance our portfolio to a more profitable mix.
Kevin: We saw 2% revenue growth and lower volume through favorable pricing and mix shift including share gains and gaming.
Kevin: Our operating margin in personal systems was four 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.
Kevin: It's worth noting that excluding the impact of tariff costs are P. S margin would have been well within our 5% to 7% guidance range.
Kevin: Turning to print our results were inline with expectations as we continue to focus on profitable unit placement.
Kevin: We increased our market share in high value categories and drove overall hardware unit growth.
Kevin: 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.
Kevin: Across print revenue declined 3% in constant currency on supplies declines in hardware softness in North America.
Kevin: By customer segment, we grew consumer units, 3% year over year led by strong growth in big tank.
Kevin: In commercial revenue declined 3% year over year on a 2% unit decline.
Kevin: We continued our purposeful focus on profitable long term unit growth gaining share in our higher value categories of a four and a three.
Kevin: 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.
Kevin: Yet we delivered strong print operating margins up year over year and above the high end of our range.
Kevin: Selecting rigorous cost discipline on pricing actions as well as the favorable impact of grant funding received in the quarter.
Kevin: We continue to execute our accelerated future ready plan across process efficiency automation and portfolio optimization and operational excellence.
Speaker Change: 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 'twenty five with no change to our estimated restructuring charges of $1 2 billion for the program.
Speaker Change: 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.
Speaker Change: All designed to position us well for long term sustainable growth.
Speaker Change: Now, let me move to cash flow and capital allocation.
Speaker Change: 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.
Speaker Change: Those payments resulted in a decrease in D. P O and corresponding increase in our cash conversion cycle in Q2 also as expected.
Speaker Change: Lastly, we returned close to $400 million to shareholders through both dividends and share repurchases.
Speaker Change: Our planned debt refinancing ahead of an upcoming maturity contributed to us, finishing the quarter slightly above our target leverage range.
Speaker Change: So in line with our stated policy with a temporary increase in leverage we limited our repurchase two offsetting stock compensation dilution.
Speaker Change: As we look ahead, we will continue to navigate a dynamic environment that may be impacted by a continuing evolution and global trade policy broader macroeconomic trends and the associated impact on customer demand.
Speaker Change: For that reason, we believe it is prudent to moderate our guidance for the second half of the year to reflect this.
Speaker Change: In our guide we have accounted for the added cost driven by the current tariffs in place and associated mitigation.
Speaker Change: Including leveraging our supply chain flexibility future ready cost reductions and pricing actions.
Speaker Change: We were able to mitigate part of these costs in Q2, and we are confident that we will fully mitigate them by Q4.
Speaker Change: 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.
Speaker Change: We still anticipate commercial P C catalysts, including the wind 11 refresh and AI P. C adoption to drive solid revenue growth in the back half of the year.
Speaker Change: And we expect the actions we are taking to offset the cost of tariffs to gain full traction in the second half leading to a sequential improvement in personal systems margin in both Q3 and Q4.
Speaker Change: 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.
Speaker Change: We also expect our operating margin to continue to be near the top of our 16% to 19% long term range for the year.
Speaker Change: Beyond the segments, we expect corporate and 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.
Speaker Change: With us all in we now expect FY 'twenty five non-GAAP diluted net earnings per share to be in the range of $3 to $3 30.
Speaker Change: In FY 'twenty five GAAP diluted net earnings per share to be in the range of $2 32 to $2.62.
Speaker Change: Turning to Q3.
Speaker Change: In personal systems, we expect revenue to grow high single digits sequentially as we continued to see strength in commercial aligned with our future of work efforts and pricing actions.
Speaker Change: And we expect personal systems margins in the lower half of the 5% to 7% range improving sequentially as a result of the mitigation efforts we are driving.
Speaker Change: In print, we expect Q3 revenue growth to perform better than typical seasonality on incremental hardware placements and pricing actions.
Speaker Change: 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.
Speaker Change: With all of this we expect third quarter non-GAAP diluted EPS to be in the range of 68 to 80.
Speaker Change: And GAAP diluted net earnings per share to be in the range of 57 to 69.
Speaker Change: In line with our revised earnings, particularly in personal systems, where we have a negative cash conversion cycle.
Speaker Change: We now expect free cash flow to be in the range of two $6 billion to $3 billion for FY 'twenty five.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: And on our balance sheet and capital allocation given the impact of tariffs.
Speaker Change: Expect our leverage ratio to continue to be above our target range in Q3.
Speaker Change: 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.
Speaker Change: In closing we responded quickly to the changing market dynamics in the quarter to address headwinds from a rapidly changing trade environment.
Speaker Change: 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.
Speaker Change: With that I would like to hand, it back to the operator and open the call for your questions.
Speaker Change: Thank you and we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone if youre 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.
Speaker Change: And a single follow up and our first questioner today will be.
Speaker Change: Eric Woodring with Morgan Stanley. Please go ahead.
Eric Woodring: Thank you so much.
Speaker Change: My questions.
Speaker Change: Maybe just to start.
Speaker Change: Can you maybe.
Speaker Change: Add a little bit more context around your expectations for the PC market in the second half of the year.
Speaker Change: What is causing the guide down.
Speaker Change: Large enterprises.
Speaker Change: Small enterprise or excuse me SMB, that's weaker international markets weaker 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.
Speaker Change: And then big picture does that just does this really mean that kind of windows 11 refresher.
Speaker Change: He is really not a catalyst that we need to think about it.
Speaker Change: If we're growing low single digits during during the refresh during.
Speaker Change: During the refresh Barry just a little bit more context would be helpful. And then I have a quick follow up thanks.
Speaker Change: Thank you Eric So let me let me try to answer all the questions you're covering your question well first of all in the in Q2 I mean, the first half we have seen strong demand on that.
Speaker Change: <unk> side, especially in commercial.
Speaker Change: The member response when.
Speaker Change: When we think about the sickle hospital, we felt 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.
Speaker Change: First of all we are today in a very different economic situation from where we were in a few months ago in terms of both consumer and business confidence.
Speaker Change: Second we have seen announcements across the industry for price increases in the second half and we've seen the combination of both we will potentially have an impact in the demand.
Speaker Change: We see we have not integrating an ear for any effect from channel inventory all of them are under our control are under good.
Speaker Change: Since the procedure.
Speaker Change: We've seen that the impact will be both for consumer and commercial and again. This is more a matter of prudence here as we look at the silicon cost more than we saw any trends in Q2 that we felt we were going to be we're gonna be impacting the overall market I see in the second half hour.
Speaker Change: Our plan and our goal is to grow share in that market and of course, if the market is bigger than what we were expecting to do this should be reflected in our results.
Eric Woodring: And I would just add Eric that went 11 does remain a catalyst for the back half.
Eric Woodring: And and you know as if if demand comes in stronger than our moderated guide that would that will be reflected in our results.
Eric Woodring: Okay I appreciate all that color guys. Thank you so much for that.
Eric Woodring: And then maybe a follow up.
Eric Woodring: I would just love if you could give a little bit more kind of high level color for your growth businesses I think it would.
Eric Woodring: Help us all better understand kind of two key metrics. There first just when you add up all of the growth businesses that you alluded to in your presentation, how big of that what percentage of revenue our personal systems and print any color that you could share on the size there and then how fast are they growing.
Eric Woodring: 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.
Eric Woodring: How should we think about growth in these businesses over the next one to three years, but just love to get better context on that thanks. So much. Thank you.
Eric Woodring: So we haven't disclosed those harsh weather businesses, let me tell you. The two key metrics. We have shared before that continues to be to ease their growing faster than the core business is on the gross margin is also higher than the gross margin of our core businesses with these two key factors continued to be true.
Eric Woodring: <unk> seen growth businesses. We include businesses like <unk>, where we have seen very solid growth not only quarter over quarter, but year on year.
Eric Woodring: He said that we our goal is for <unk> to represent more than 25% of the PC business by the end of the year and we are on track to meet our good we've seen growth businesses. We have also our workflow solutions business home services and consumer services before going in coverage.
Eric Woodring: Solid growth in the in the quarter, we've seen new growth businesses. We have workstations, that's had a very solid growth.
Eric Woodring: <unk> performance during the quarter industrial clean so overall, they perform well they perform as we would expect them and they will get a significant part of why we continue to see the second graph stronger than the first half because it will continue to drive growth for the company.
Eric Woodring: Got it thanks, so much.
Eric Woodring: Greg.
Speaker Change: Our next question comes from the line of Michael <unk> with Goldman Sachs. Please go ahead.
Michael: Hi, good afternoon, and thank you for the question.
Speaker Change: I have just two both in personal systems.
Speaker Change: First just on personal systems margins, it's encouraging to hear that Youll return to the long term range next quarter. I was just wondering if you'll you're assuming that you'll be in that 5% to 7% range.
Speaker Change: For the full year as well and what are some of the key.
Eric Woodring: Swing factors that you're watching for and then secondly, I was just wondering if you could comment on.
Eric Woodring: Whether you saw any personal systems demand pull in.
Eric Woodring: In this in this past quarter ahead of.
Eric Woodring: Any perspective tariffs and the current outlook there. Thank you.
Eric Woodring: Yeah. Thanks, Michael for the question in terms of P. S margins.
Eric Woodring: 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 the quaint good sequential improvement.
Eric Woodring: And I mean in terms of pooling, we saw some cooling off in the PC space into Q2, but that the overall level fairly small our estimation of how we look at human data.
Eric Woodring: Data is a little less than one point of growth.
Eric Woodring: Even by pooling, especially on relatively small number overall of course, if we look at North America is it would be bigger because it will represent a bigger percentage, but again overall at the company 11, who lives at one person and he said too because he is the case for Pcs, we didn't see any pull in footprint.
Speaker Change: Thank you Enrique Thank you Karen.
Speaker Change: Our next question comes from <unk>.
Speaker Change: <unk> merchant with Citigroup. Please go ahead.
Speaker Change: Great. Thank you very much couple ones Black Allergist, AI Pcs I know, you're still pretty bullish on <unk>, but if you can just you know help us understand what are some of the killer application that you hear from your end customers on this mix shift towards <unk> and <unk>.
Speaker Change: Within your expectations for <unk> growth.
Speaker Change: You know how should we think about the impact of pricing and.
Speaker Change: Mix shift towards E. P. CS within your overall growth expectations for that segment and then I have a quick follow up thank you.
Speaker Change: So overall as I said before we are really pleased with the progress that we see in a <unk>. 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.
Speaker Change: Introducing solutions that utilize the capabilities with AIP suite, we have more than 100 <unk> reporting that now and this number is totally is only growing and this is why we've seen that the penetration is going to continue to grow because he viewed in the commercial space and Dubai RPC today do you want to be able.
Speaker Change: To take advantage of those capabilities are software will be available. This is the key message we make to customers as you can see from the progress we're making is resonating.
Speaker Change: Resonating in terms of the impact it will have.
Speaker Change: You are correct. It will have an impact on average selling price our goods are going but we have shared before is that they will represent around 50% of the total shipments of Pcs.
Speaker Change: Two years after the introduction of about two years from now we are on track to make that number on average you remember, it's a beverage there between 10 and 20% higher praise and regular pieces, but this of course will have an impact on <unk>.
Speaker Change: On the total value.
Speaker Change: Relevant to highlight this quarter is that we introduced <unk> for the mainstream this word one of their major innovation announcements were made in Q2 that he is going to continue to help to drive adoption and to drive growth in these categories.
Speaker Change: Okay, and then if I may thank you for that if I may on just free cash flow I understand Pcs or a negative cash conversion cycle and hence effecting, 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.
Speaker Change: To help a lot and what are the drivers for that thank you.
Speaker Change: 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 are that we saw in earnings which is really driven by the APA.
Speaker Change: <unk> margin impact that we had this quarter.
Speaker Change: You know that along with lower than expected working capital improvement is what you know 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.
Speaker Change: 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.
Speaker Change: Let me maybe provide some color on the working capital side, but we have heard in the prepared remarks, we have diversified our supply chain with a build factories in different places and to a pretty good smart cities now we need more working capital than we did in the past over time, we will optimize and we will make them for the fish.
Speaker Change: And this is why are you cutting we're saying this will be temporary but we see unless I needed to increase now on the supply chain has become more diverse.
Speaker Change: Thank you.
Wednesday Mohawk: Our next question comes from Wednesday, Mohawk with Bank of America. Please go ahead.
Wednesday Mohawk: 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 some thoughts around what those price increases could look like and in which areas of the market.
Speaker Change: Would you be targeting at worst as cost actions versus potentially moving supply chain any any quantification there would be helpful and I have a follow up.
Speaker Change: Yeah, Let me, let me provide more color on that and maybe kind of notional one crew complement.
Speaker Change: We have taken a lot of hard times during the quarter to mitigate the change of the trade environment. Let me start by we accelerated the shift for factories from China into Southeast Asia into Mexico to certain extent in the U S.
Speaker Change: T V mitigate the impact of the change.
Speaker Change: A quarter ago, we shared that our goal was to have losing 10% of the products in North America being shipped from China by September we have accelerated that and we're sure that no almost no approvals will be coming from China as well in the U S. By doing these are very significant acceleration.
Speaker Change: From a friend that we have.
Speaker Change: We have also changed our logistics network and for example, we have removed the U S with handlers for distribution hub or products that will be go into kind of our thought Latina America, which.
Speaker Change: I will avoid them, having we will not only does having to pay 30. We have also taken additional cost actions as Carey mentioned in the call.
Speaker Change: Also in a very targeted way we have also taken price actions.
Speaker Change: The full portfolio of both in personal systems.
Wednesday Mohawk: And Brent to reflect the cost that we have seen this we have seen the market and the rest of the competitors taken similar actions across the two indices. So we see these her son industry change that will be.
Wednesday Mohawk: It's been put in place at the end of Q2 and now in Q3.
Speaker Change: And I would just add that we were 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.
Wednesday Mohawk: Talk about driving an additional $100 million more in savings and and those are really and 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 T. I O organization.
Wednesday Mohawk: So driving more simplified management layers and locations and reduction in I T 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.
Wednesday Mohawk: But by the time, we exit this year in Q4, we expect to fully mitigate the cost of these current tariffs.
Speaker Change: Okay. Thanks for that color and as my follow up are you you are actively moving the supply chain away from China, but you also noted like areas like Vietnam, Thailand, Mexico, Philippines.
Speaker Change: What gives you confidence that your moves given sort of we're still don't know where a reciprocal tariffs might end up but these moves are going to be optimal what what are some of the things that you're thinking through and how how quickly would you be able to ship production between these areas.
Speaker Change: About.
Wednesday Mohawk: What what might happen potentially with cyclical Paris. Thank you.
Wednesday Mohawk: Yeah, I think youre right. We are in a fairly fluid environment. So I think you don't want to speculate on what could happen and what will change. It. We will do I think what you will have 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.
Wednesday Mohawk: <unk>, who will be fully compensating for that in about two quarters by Q4, that's getting just head and we will respond in a similar way to whatever changes happen going forward. We will look for the opportunities we will optimize our supply chain and we will respond quickly to those changes.
Speaker Change: Thank you very much.
Speaker Change: Our next question is from Sami <unk> with J P. Morgan. Please go ahead.
Speaker Change: Question, and maybe if I can start off with the margins in the quarter again very solid margins.
Speaker Change: Maybe if you can just help us with sort of the driver of the margin performance you had there how much of that 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 three Q.
Speaker Change: You talked about above seasonal revenue growth as well, but you moderating the margin expectation. So is there a certain one off driver there.
Speaker Change: That we should think off or is that more just in terms of business mix to sort of really play out in the quarter and then I have a follow up thank you.
Speaker Change: Yeah, Thanks to make for the question. So on our print margins we were pleased with.
Speaker Change: With the fact that they were.
Speaker Change: It 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.
Speaker Change: Taking to offset the trade related cost and we mentioned the favorable impact of a grant funding received in the quarter. It was a multi year grant from the economic development Board of Singapore, 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.
Speaker Change: And it was signed in Q2, but it was retroactive to the beginning of the calendar year. So the amount booked in Q2 with a little higher than the quarterly rate that we will see going forward and in terms of our of our confidence in print margins going forward, we do expect our margins.
Wednesday Mohawk: To to be solidly within our 2016% 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 a full benefit.
Wednesday Mohawk: Of the of the traction that we're making on trade related actions and future ready cost savings. So hopefully that helps yes.
Wednesday Mohawk: Yes.
Speaker Change: Thank you for that.
Wednesday Mohawk: The second question is just a clarification on the margins and the sequential improvement we expect in Q3 and Q4.
Wednesday Mohawk: From your prepared remarks, Q3 does have bought quarterly benefit.
Wednesday Mohawk: From the supply chain changes that youre, making but.
Wednesday Mohawk: 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 that incremental benefit from pricing as we move from Q3 to Q4 as well. Thank you.
Wednesday Mohawk: Yeah. So we are expecting a strong improvement in Q4 and I'll start with the fact that Q4 is typically our strongest quarter for both print N P. S.
Wednesday Mohawk: And this year, we do expect continued momentum in the PC market driven by commercial.
Wednesday Mohawk: 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.
Wednesday Mohawk: And then also we talk about the cost side, we've implemented these moves in the manufacturing supply chain and 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 mm to achieve the $2 billion in broader.
Wednesday Mohawk: Cost savings as we exit our future ready program at the end of the year.
Wednesday Mohawk: And of course pricing will play a role too.
Wednesday Mohawk: Altogether, we expect our PS margins to be in the lower half of the 5% to 7% range in Q3 and improved sequentially. So hopefully that helps.
Wednesday Mohawk: It's probably important to highlight that.
Wednesday Mohawk: 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 for the company level.
Wednesday Mohawk: Both business here as we've seen the long term ranges.
Wednesday Mohawk: We have shared before.
Wednesday Mohawk: Which is a sign of confidence for the future.
Speaker Change: Okay. Thank you thanks for taking my questions.
Wednesday Mohawk: Our next question comes from Amit <unk> with Evercore. Please go ahead.
Wednesday Mohawk: Yes.
Amit: Good afternoon, everyone I have two as well I guess, maybe just to start off with and review what you were talking about the end right. Now are you sort of embedding a very sizable step up in owning in your fiscal Q4, I think the implication that you'll do a dollar for earnings power in Q4.
Wednesday Mohawk: Can you just touch on how much of that ramp up from call. It. The <unk> run rate you have right now to $1. How much of that is revenue driven worth is driven by all the cost reduction initiatives that you have in place would be to understand just how much of this is controllable versus not perhaps.
Wednesday Mohawk: Thank you it's a combination of both in Q4 I was kidding just said, we expect to see a thing for me now of demand compared to Q3.
Wednesday Mohawk: If you look at normal seasonality she's worth happens for example in the consumer space.
Wednesday Mohawk: If anybody goes back to school and the holiday season, Q4 is a very strong quarter on the commercial side, we continue to expect.
Wednesday Mohawk: 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 it.
Wednesday Mohawk: So all of these will have an impact from the demand side and then on the margin side on the cost side, both the pricing actions that we're taking but also all the work on close both of these design and supply chain the impact of future already will have an impact in the in the emerging from Q4 sequentially.
Speaker Change: What gives us confidence that we will be able to achieve these numbers.
Wednesday Mohawk: As we as I said at the beginning we have moderated our growth expectations for peers, especially but we continue to expect that the Tas business will grow in the second crop compared to what it was a year ago.
Wednesday Mohawk: I would just reiterate reiterate that much.
Wednesday Mohawk: Much of our confidence is because of the actions that we're taking today are that.
Wednesday Mohawk: But we know just take time and will gain full traction in Q4.
Speaker Change: Okay Fair enough. That's helpful. Do you just kind of understand those dynamics.
Speaker Change: You've also talked about a couple of issues that are impacting your fiscal 'twenty five EPS guide right. It's about 45% impact right now at a very high level is there a way to think about how much of the 45 cent impact is from just the direct trade tariff related issues that you have worse, if demand potentially moderating and is there a way to think about those two buckets and how big of a <unk>.
Wednesday Mohawk: But each one salvi.
Speaker Change: 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.
Wednesday Mohawk: Due to the <unk>.
Wednesday Mohawk: Tariff related impact.
Wednesday Mohawk: That we werent able to fully mitigate them and as we look ahead in in the back half of the reduction in our guide is mainly driven by is choosing to prudently moderate our growth expectations given the macroeconomic environment.
Wednesday Mohawk: But right now I mean, there are indirect way close or the change of expectations related to the new trade in predominantly the new trade situation no directly on cost produced on demand.
Speaker Change: Fair enough. Thanks.
David Buck: Your next question is from the line of David Buck with UBS. Please go ahead.
Speaker Change: Moving to manufacturing to avoid that 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.
Speaker Change: For the new configuration versus the prior configuration in fiscal 2006 would be off thanks.
Speaker Change: As we said before we expect to finish the need to finish the year within the range that we had provided before and at this point is continues to be the expectation for the year of 26 and beyond.
Speaker Change: <unk> seen that we can compensate the cost impact from parties. It takes hours. This time, a couple of quarters and this continues to be the assumption that we have going forward.
Speaker Change: Thank you.
Tim Long: Our next question comes from the line of Tim Long with Barclays. Please go ahead.
Tim Long: Maybe just on the first one on TC went on print on the PC side can you just talk a little bit about.
Tim Long: <unk> kind of price elasticity and what you've seen in prior cycles. It sounds like there might be some upward ASP.
Tim Long: Pressure due to tariffs and everything else if you could just.
Tim Long: Talk about what you've seen traditionally in this time do you think because of AI PUC in enterprise than maybe a niche space, it's not as much of an issue and then second on the <unk>.
Tim Long: Related businesses could you just talk about competitive landscape.
Tim Long: Any kind of yen movement that might have impact there might be impacting competition either way there. Thank you.
Tim Long: Yes, I think in terms of elasticity is hard to competitive situations to previous situations. Given what is what is driving that we have built some of that into our estimation for the second half.
Tim Long: More consistent conservative plan or estimation for a market that we have put in place and I think this is the best way to reflect kind of the changes and the elasticity that we see.
Tim Long: In terms of print, but we have seen quarter on quarter is that pricing has been more stable, but we haven't seen an improved pricing environment, but it has stayed stable versus what it was a quarter ago and during the last weeks most of the prime competitors announced price increases.
Tim Long: Related to the changes in the trade environment. So these will be reflected in the overall pricing environment in the market in Q3 and Q4.
Tim Long: Thank you.
Speaker Change: And our final question comes from the line of Alex Valera with loop capital. Please go ahead.
Speaker Change: Hey, guys. Thank you for taking my questions as Alec on for <unk>. So my question actually I have one more on PC pool, and so I know you mentioned you saw a very small impact during the quarter, but I wanted to see if theres any impact our second half of the year.
Speaker Change: The games are the impact was so small that the game at the company level has had very minimal impact.
Speaker Change: Look at the U S. You've got more jazz because of mathematics will be right in the pull in there.
Speaker Change: Suicide, a smaller market and we have reflected that in the guide that we have for the second half I mean, the estimation that we have for the market.
Speaker Change: Got it thank you for that.
Speaker Change: Just a quick follow up.
Speaker Change: Also on Pcs are you seeing customers by Richard PC configurations, yet specifically for the purpose of journey II.
Speaker Change: Well, we have seen significant growth or the a b C category under mix continued to improve.
Speaker Change: Rose year on year, but especially a quarter on quarter, which is even more relevant. These days. So clearly they are having a.
Speaker Change: Customers are valuing the the new functionality the new performance of these products and this is driving the improvement in mix.
Speaker Change: Got it thank you.
Speaker Change: Thank you. So I think that we are approaching the end of a console game. Thank you everybody for participating and joining the call today I would like to close the call confirming our computer and skincare.
Speaker Change: First the confidence in our future of work strategy to continue to drive growth.
Speaker Change: Second the confidence in the team and how to respond 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.
Speaker Change: Thank you everybody for joining today and looking forward to continue the conversation in the coming weeks. Thank you.
Speaker Change: This concludes today's conference call you may now disconnect.
Speaker Change: Yeah.
Speaker Change:
Speaker Change: