Welcome, HP Inc. We have Enrique Lores here. Welcome to all the investors to Cities Global TMT Day 1. It's already been a busy morning. Almost feels like the afternoon. I do have some disclosures to read on behalf of HP, so just bear with me. Today's discussion includes forward-looking statements, involves risks, uncertainties, and assumptions, which are further described in HP's SEC filings, including Form 10-K and 10-Q. HP Inc. assumes no obligation and does not intend to update any such forward-looking statements. For more information, please visit HP's IR webpage at investor.hp.com. With that, welcome, Enrique. You guys just reported. It was just last week. We are asking all our companies a little bit about end demand.
As you sit here in calendar third quarter, what has changed from a demand perspective across your various end markets, let's say, compared to the start of the year when there was just so much uncertainty, there were tariffs? How would you characterize how the markets have performed relative to your own earlier expectations, let's say, six months ago?
Perfect. First of all, thank you for having me here. As we said in the call, demand overall performed in a very similar way to what we were expecting. We have continued to see growth in the PC market, and we have seen overall printing performing as we were expecting. In the case of PC, it's probably the biggest difference is that the consumer market was stronger than what we had anticipated, and this was reflected both in the market size but also in our results. In the case of print, overall also was as expected, but the office market was softer than what we had anticipated. Two small changes, but overall similar performance than what we expected at the beginning of the year.
Okay. As you look, you guys at your typical analyst event do share some long-term targets both for PCs as well as for print. Given where we are in the cycle in terms of PC refresh, just help us understand where we are. Can you talk about the puts and takes towards that kind of growth expectations that you have for both PCs and print individually?
We will have our investor day at early 2026, but then we will provide, again, some guidance for the coming years. What we have shared at this point is we expect PCs to continue to grow, meeting a digit through 2025 and to also grow in 2026. We expect the print market to slightly decline in 2025 and to perform in a similar way in 2026. These are, at this point, the two trends that we have shared. We will be providing a much more updated view in a few months when we have our investor day.
Okay. Let's just dig into PCs because that's been an interesting one. We've talked about AI PCs. Clearly, HP was being one of the market share leaders when it comes to PCs. You guys see a lot of that. Obviously, you guys are also global. Just trends that you're seeing in PCs, like, is it really just the end of life that's driving refresh? Are there other factors that are in place to kind of talk about the PC growth that you're talking about, both mid-single digits this year and even into next year?
I think there are multiple factors that are driving growth of PCs. One is, if we look backwards in the last five years, there was a big increase of sales during COVID, and we are starting to see the refresh of these units happening now. On top of that, we are going through the transition from Windows 10 to Windows 11, and this traditionally has driven an increase of demand, and we are seeing it this year. On top of that, we see the transition to AI PCs. Let me talk a bit about each of them. In the case of Windows 11, the transition this time is going slightly slower than we have seen in previous transitions, but it's happening.
Our estimate is that we are slightly above 50% of the transition having been completed, which means this is going to continue to help us to grow for the rest of 2025 and at least early 2026. That's how we see this happening. In the case of AI PCs, we see demand continue to grow. Our goal was to have 25% of our mix being AI PCs by the end of this year. We have done it one quarter ahead of plan. The transition is going slightly faster than we were expecting, and we think this is going to continue through 2026. Both changes are helping positively, and we think they are going to have an impact not only this year, but also at least in 2026.
Okay. Just to remind investors, when you talk about AI PCs, or actually first just the PC segment growth, mid-single digits, is that units? Is it revenues? Is there an add-on because AI PCs drive higher ESPs? Revenue should be more than units.
Thank you. Yes, when we talk about growth, we always talk about units. Thank you for asking. Revenue growth is higher than unit growth, both because we see more growth in premium categories as AI PCs, and also the growth of other elements that are driven by PCs, like peripherals or like services, also help to have faster growth on revenue than units. That's an important comment. Thank you.
Okay. We had CDW just before you, and obviously, they are more in commercial, SMBs, education, public, which includes state and local. Are you seeing any differences or anything you can comment on regarding PC refresh or even AI PC adoption across the various verticals?
Sure. I think several things. One is, we saw overall in North America, and CDW is mostly a North America comment, so to be aligned with them, we have seen strong growth across all commercial segments, government, enterprise, and SMB. Probably the only exception has been education, where the market has been softer than previous years. That's probably the biggest change. In terms of adoption and the transition to Windows 11, we are seeing faster adoption in the enterprise than in SMB. This is something that traditionally happens. It's not new. It's how these transitions happen, which means there is more opportunity in SMB in the coming quarters than what we have seen until now. This is aligned to the models that we have.
Okay. What about from a geo perspective, geographic perspective? Is there any change or any differences you observe in AI PC adoption or Windows refresh across different geographies?
Not major differences. Performance in Europe has been very strong as well. Probably the only difference, which is not new, is the relative weakness that we see in China, given where the overall economy is. This quarter, we have seen more positive impacts of some of the consumer demand activities that the government has put in place. There have been significant investments in subsidies for consumer products that have driven demand. When we look at the economy, we continue to see significant weakness that we don't see this significantly changing in the coming quarters.
All right. Just a little bit on how you're thinking about pricing as it relates to not just commodity components, but also tariff-related. Just remind investors how you're looking at those tariff-related costs, both in terms of migrating the actual cost, but also in terms of migrating your supply chain to become and logistics related to that. How you're looking at pricing for your PC products as a function of tariff direct and indirect costs.
Maybe then let me explain some of the changes that we are doing because of the changes in tariffs, and then I will talk about pricing. During the last three quarters, we have significantly accelerated the changes that we have done in our supply chain. We started this process two, three years ago after COVID to build a more resilient supply chain. What we have done is to accelerate this change. Our goal was to produce all products for North America out from China by the end of the year. We accelerated that, and we are done. During our Q3, we completed that transition, and we have moved manufacturing from China to Southeast Asia, to Mexico, and a bit to the U.S. This gives us now a much more flexible supply chain than what we had before.
We had the ability to move and to build product in many other areas of the world and optimize to mitigate the impact of the new trade situation. In terms of cost, of course, this creates an increase of cost that, first, we are mitigating by looking for opportunities to reduce cost of products or cost of structure. We have accelerated our structural cost reduction plan, and we are going to deliver on the more aggressive goal. Of course, in some cases, also, we increase prices to compensate for that. We did this in Q2. We also did it in Q3. This will have more impact over the months because it takes time for us to change prices and for these prices to have an impact.
Okay. PC is a fairly competitive market. How do these price increases impact the way you're thinking about margins? Obviously positive, but how are you thinking about the share gains? Is this an opportunity? If you raise prices, I believe Dell has not. Lenovo has. How do you think about market share despite the price increases?
Our strategy has not changed, and we continue to be focused on profitable growth. Our goal is not to grow share for the sake of gaining share. It's to drive profit and to drive growth. What we see in the market is fairly consistent. Usually, in the PC space, when cost increases, prices change. Whether it is a higher list price or whether it is lower discounts, all companies move. Our expectation is that the market will be moving in this direction.
OK.
Because there are many ways to control pricing. It's not only what you do on this price.
Yes. Okay. I'm going to just see if the audience has any specific questions. I have a whole list here. This is meant to be an open-fire site. If you do have a question, please raise your hand so we can bring the mic to you. You know, the AI PCs is interesting. I mean, people want to know where are the use cases that you're seeing that's driving the need for an actual AI PC? I mean, people talk about Copilot, but Copilot runs a lot in the cloud as well. I know you guys have talked about being more efficient with tokenization, being reduced battery power, increased privacy, increased security if you do AI on the PC, on the edge itself. Just walk us through perhaps the use cases that you're seeing that's really driving adoption of AI built into the devices itself.
I think there are two different types of use cases. One is, let's call it new applications, like what you mentioned, Copilot or Copilot+ , or some of the applications we have developed, like AI Companion, that let customers do inferencing locally. By doing inferencing locally, it is cheaper, as you said, it is more secure, and also it's faster. That's one set of applications. The other set of use cases is driven by the same applications you use in your current PC, but that take advantage of the new capabilities that PCs have. In the call last week, I mentioned some examples. For example, CrowdStrike is now using the NPU capabilities to scan the memory in the PC locally faster, looking for virus, looking for anomalies. That's a capability that they can do only in an AI PC that will bring significant advantage.
Adobe and Zoom are developing their applications to take advantage of both the NPU and the GPU capabilities in AI PCs. They can run some inferencing locally, which in the case of Adobe, for example, will reduce their cost. In the case of Zoom, it helps them to do some of the work that they were doing in the cloud. They can do it locally, and they can do it with higher quality. This is going to be a big driver of demand. It's not only what new things you can do. It's more and more the same software applications you have been doing using traditionally now will run faster, better, all at lower cost because you're seeing AI PCs. This is our key message to our customers. If you're an enterprise or an SMB, you expect the life of your PC to be three or four years.
If you're buying a PC now, you want to make sure that the PC will support the new capabilities that software will bring in the coming years. You should be building an AI PC, you should be buying an AI PC, not a traditional PC.
Right. Do enterprises or SMBs need to change things on the back end as well? It's not just the edge itself, but are you seeing investments that they need to do to enable these applications that you're talking about to do things faster? It doesn't require.
It doesn't require changes.
Okay. It's independent because I know there is obviously investments going on there as well. All right. Just help us understand, you've talked about AI PCs carrying higher ASPs, obviously, but at the same time, they carry higher BOM because there is more, there's obviously an NPU in there as well now. How does that, how do you guys think about your margin trajectory and the targets that you have for margins as it relates to, as you start to see more AI PC adoption?
We have not shared the specifics on margins on AI PCs. What we have offered is that we should be looking at AI PCs as premium PCs. In the same way, everything that you said for AI PCs is true for premium PCs. They have more expensive processors, more memory, and better connectivity. This drives cost up, but also drives price up and creates better margins. This is our expectation with AI PCs.
Okay. Is there something that's unique to the way HP is driving AI PC adoption that could drive sustainably higher market share than you've had in the past?
In AI PCs today, we have higher share than what we have in the traditional categories. There are many things that we are doing differently. I would highlight three. One is the work with software companies. This is something I think fairly unique that we have been doing for some time that is now helping to drive adoption. Second is today we have the AI PCs with the fastest and the strongest performance. We are the only company that has 55 CPUs AI PCs, which is a strong differentiator. Third is security. Security has been for a long time a key HP differentiator. In the case of AI PC, it's even more critical. We are going to continue to invest on that front to make our AI PCs more secure than anybody else's in the industry.
Okay. Anything on the chip side of things? I know there's a lot more chip suppliers now are planning to enter the PC. Traditionally, it's always been Intel. Of course, we had AMD. Now we have whether it's Qualcomm. I know NVIDIA has talked about some presence there as well, not just in the supercomputer, but more in the mass adoption side of things. Maybe help us understand, you know, how does the changing chip landscape impact your offerings or the SKUs? Is there going to be more of them? Is it going to be more concentrated?
This is a very positive change for us. In a world where there are multiple microprocessor vendors, we have an opportunity to have a more differentiated offering and also to have a much stronger ability to negotiate than what we had when there is one software vendor and one microprocessor. That was the situation 5, 10, 15 years ago. That's a positive change. I would say the market is very dynamic. We have seen AMD having a very strong offering in the AI space. Probably in the x86 side, they have the strongest offering today. We have seen Qualcomm introducing ARM technology with very strong AI capabilities. In both cases, we are leveraging those investments and creating a portfolio of products to drive and to support this new technology.
In the case of Qualcomm, you're going to see us introducing a very complete portfolio of products in the coming months that we think will be attractive both for SMBs and for consumers. With both AMD and Intel, we have a very complete lineup on both commercial and consumer products.
Okay. HP has always also been really good on the commodity side of things in terms of purchasing ahead. Obviously, you guys have a big business. Just any outlook on some of the commodity components as we look into the back half of this year?
Yeah. This year, we have seen an increase of commodity costs compared to where we were in 2024. We think year on year, this is going to continue in the second half. We think, especially in the case of memories, both driven by the transition to new generations and also by just pure cost increases, we expect to see cost increases. To mitigate those, we do strategic buys. We have increased our inventories to make sure we mitigate the transition. We see and we expect this cost to increase in the second half. What happens usually in this space is this is reflected in price. When we talk about pricing increases, it's not only driven by tariffs. It's also driven by commodity cost increases.
If you can remind investors, as it relates to tariffs, I know PCs imported into the U.S., right now qualify under Section 232 tariff exemption. Any change to that relative to, I know you guys update your slides in the earnings call as to the impact of tariffs?
I mean, what we do is we forecast based on what has been already decided. This is why we are very clear on what are the assumptions that we're using. As you know, the 232 investigation is still open. We don't have a clear date on when it's going to be defined. When it will be defined, we will see how we need to adjust our plans. I think the key thing is, during the last quarters, we have shown that we know how to respond. We have now a much more flexible supply chain than we had before. We can continue to reduce our costs, and we will. Eventually, if in some cases we need to use pricing to compensate, we will. We need to wait until the final decision is made.
Any impact from pull forwards? Like, you know, are people just buying ahead? Or do you think people are just like, no, we're buying what we need and sort of looking for making sure our capabilities are in place for the next, you know, until the next refresh cycle?
We haven't seen a big impact on pull forwards. In Q2, we estimated it was less than 1% globally. We didn't provide an estimate in Q3 because it was very small. We are not seeing that in a material way.
Is that just a function of the way you're looking at your orders that are coming in and it's tracking in line? Is there something else that gives you confidence that, yeah, this is not really pull forward? This is kind of business as usual?
We look at all sorts of things. We look at orders, inventories in the channel, sellout, and how the funnel is evolving. It's hard to triangulate because we can look at multiple variables. When we look at them, we don't see a big pull forward.
All right.
If you think about demand, it's not only driven by what happens in the U.S.
Of course.
Tariffs are not impacting the rest of the world, and we have continued to see strong demand there. That also helps to triangulate.
Okay. All right. I'm going to jump to print.
Yes.
I know you love print more than PCs. Help us understand, you know, print, there are obviously secular challenges there. You've talked about some declines there in 2025 and maybe continuing into 2026. At the same time, I think you talked about print volumes. I mean, that hasn't dramatically changed. Just kind of walk us through the puts and takes to your print outlook. You know, why is the target that you've provided for 2025 and potentially for 2026 the right number? What are the drivers behind there?
Yeah. If you think about print, the driver, the fundamental driver of the print business is usage. Our customers are using printers and how many pages are being printed. When we saw the softness in the office space, of course, we immediately go to monitor what is happening on pages. Are the number of pages printed declining, growing? Are they behaving as we were expecting? We have a lot of telemetry because many printers report back to us what is the usage, how many liters of ink are being used, or kilograms of toner, and how many pages are being printed. When we look at telemetry, what we see is that performance or usage is going as we were expecting. No deviations versus plan. What has happened, we think, is that customers, especially enterprises, are prioritizing other investments versus refreshing their print install base. They're investing in AI.
They're investing in PCs. Print is not one of the top priorities now in terms of investment. This is why we shared. We think this is a temporary effect because at some point, these printers will have to be replaced. When we look at usage, no deviation versus the plan that we had and versus the models that we have.
Okay. That usage is more a function, more tied up in with your supplies.
Exactly.
Yeah, which is the higher margin portion of your Printing business anyway.
Exactly. Exactly.
Okay. That is why, you know, HP's print margins are, you know, amazing. Can you talk a little bit about the sustainability of those print margins? Is it page volumes? Are you doing something else that suggests that sustainability? Maybe also talk a little bit about the competitive landscape. I mean, you've had Xerox or a Lex Mac now trying to get more into the office, you know, into the A4s, as you call it, print side of things.
There are many, many different things in your question.
We can start with supplies first.
Let me start with supplies.
Yeah.
The supplies business is performing as we were expecting. We have said it will decline mid-single digits, and this is what we see happening. There are multiple variables that drive that. On one side, on the negative side, install base is shrinking. There are less active printers now than there were a few years ago, and usage is also slowly declining. On the other side, we have been able to grow our market share of the install base, so the share of HP original supplies has been growing, and also, pricing has been increasing. Some trends are compensated by the others. Overall, the supplies business is performing as we were expecting, not only this year, but now for many years. We have been able to really model that business and execute based on our plans.
In terms of the competitive environment, many of the print competitors are Japanese companies, and they have had a strong advantage during the last few quarters because of the currency rate between the yen and the dollar. This is something that at some point we will have to change. We have clearly seen that benefit in many of them. In the particular case of the office space, we think that the fact that the market was smaller has also increased the aggressiveness of some of our competitors and has driven pricing in the office space down and more aggressive than what we had modeled or what we had expected before. You also ask about Xerox and LexMac. We think this is clearly not a surprise. We have been saying that this market will be consolidating, and this is another move in that perspective.
We are in a very strong position both in A3 and A4, so we are very confident in our ability to continue to compete. We are going to do that by continuing to bring innovation and also by continuing to drive our cost structure down, as we have been doing during the last years.
Yeah. When it relates to innovation, you know, people talk about AI, AI PCs. Just how does AI come into the print? Or maybe there's other innovations that we're not looking at because we're so focused on AI.
I think AI is going to be also very significant in the print space. We announced a few months ago something we called perfect print, which is the ability for the printers to understand what customers want to print, even if they get the wrong instructions. I'm going to use an example that I think will make it more real and probably something very relevant to this room. I'm sure many of us have printed spreadsheets, and we made a mistake choosing the part of the spreadsheet we wanted to print. We sent it to the printer, we got it back, and we got something different than we were expecting. With AI, we can interpret the instructions that are sent to the printer. The printer will be able to say, this customer is telling me to print this, but I think in reality, this is what wanted to be printed.
The printer will be telling you, are you sure this is what you want? Or did you want this different part of the spreadsheet? Probably you will say, yes, printer, you're right. This is what I want, and that will happen. That's an innovation that AI is going to be allowing in the print space. I use a spreadsheet case, but there are many other cases where this ability to really understand what the customer wants versus what the customer sends is going to be a big innovation and a big differentiator in the printing space.
Okay. I'm going to see if there's any questions here in the audience. All right. Just subscription. That's been a big driver for you. You know, I subscribe to HP. I don't have to keep running to the Staples to refresh it because my kids do print quite a bit for their schoolwork. Any updates there on your subscription, where you are in terms of your installed base, as a percentage of subscribers? I think you do provide some of those metrics typically at your analyst event.
I think the latest number we have said is we have around 13 million subscribers.
Yeah.
It's a significant part of the install base today. The big change is probably that we have been expanding the portfolio of offerings we have. We started by selling ink. We have expanded to paper a year and a half ago, two years ago.
Okay.
About a year ago, probably slightly less than that, we started to offer the full printer as a subscription. We call it the all-in program. In the previous model, you had to buy a printer, and then you subscribed for supplies. Now you get all in from the beginning, which means you get the printer, you get the supplies, and you also get support. You get a care pack included in the service. This new model is growing very nicely. We are going to continue to expand to other parts of the portfolio, and we are going to combine this with the other big trend that we see in consumer, which is the shift from the traditional printer and cartridge model to the big tank model, where you buy the printer and the supplies all integrated.
We started to offer the all-in model for big tank a few months ago, and you are going to see us expanding that in the future because we think it's better for customers and also it's better for us for HP.
Is it higher margins? Is that why you're trying to move into more of that of the printing?
Yes.
I mean, it is IP that you guys own.
It's both IP. We offer a better service to customers, and therefore, we are able to retain value because we don't, when we, the key value proposition behind the subscription programs is not cost. It's convenience.
Yeah.
You don't need to go and buy cartridges, you don't need to go and buy paper. The printer is always working.
Right.
Customers are willing to pay for that convenience.
Okay. Right. Just tariffs. It's slightly different because I guess printing doesn't fall under Section 232 investigations. As it relates to printing, obviously, you have had some tariff increases, price increases. You kind of roll that forward in the form of price increases. What's been the impact to your end customers?
In fact, in Q3, the impact of tariffs was higher in printing than in PCs because PCs was impacted only by the China tariffs.
Yeah.
Were not impacted by the reciprocal tariffs that impacted printing.
Right.
Our response was similar. We have also moved manufacturing out from China not to have to pay the China tariffs that are higher.
Right.
We have driven cost actions, cost reductions. Also, in some cases, as you said, we have increased prices both during Q3 and at the end of Q3, beginning of Q4. We will see some impact on tariffs in Q4, and it's built into the guide. The impact of the price increases will be more relevant. It will over time compensate.
OK. Just a little bit on the Poly acquisition now. You know, that kind of falls into your peripherals or PC add-ons. It's been a few years now. Just walk us through how things have shaped out in the peripheral space relative to your expectations. Where are we now with video conferencing, adoption in rooms, especially given macro, unemployment rates, et cetera? Are you thinking about that?
Yes. First of all, it's a very important part of our portfolio. When we look at the strategy of the company going forward, we see what we call the future of work as the key opportunity. The fact that we have PCs, printers, headsets, video conferencing systems, and we can build, and we are building, a full system around that is a big differentiator for us in the market. It's really, really important from a strategy perspective. Also, when we think about AI, I was talking about AI for printers, AI for PCs. There is clearly an opportunity to differentiate our headsets, differentiate our video conferencing rooms with AI. During the next years, you're going to see us driving that. There is the experience. You were asking about video conferencing rooms. The experience that all of us have today connecting to a video conferencing setting is up.
It's clearly an opportunity for improvement that we are driving. Connecting HP PCs with HP conferencing rooms and really simplifying the experience is going to be one of our key differentiators. Compared to where the business was in 2020, 2021, where it is today, clearly the market has been impacted by the post-COVID transition. Going forward, the penetration of video conferencing rooms continues to be small. Our opportunity to integrate better with our portfolio is there. It's going to be a big area of investment for us. Maybe to close, this quarter, we announced a new video collaboration system that we work with Google. It's a 3D experience, fully immersive, that I invite everybody to see because it's really differentiated. You are in a video conferencing room, but you believe you would be able to touch and to see the other person, given how high quality the system is.
Okay. I'm going to wrap it up here, Enrique. Just last few words for investors. Like, you know, what are they underappreciating or maybe missing out on as it relates to investing in HP care?
I think maybe three key messages. One is we have clearly demonstrated that we know how to operate in this fluid environment. We declared what our objectives were about tariffs a few quarters ago, and we have executed on them. This is clearly seen in our results. Second, the opportunity to continue to grow by driving innovation around AI, focused on the future of work, is going to be a big differentiator for us in the company. Third, our capital, which we haven't talked, our capital approach to capital is very investor-friendly. Our goal is to return 100% of free cash flow if our leverage stays below 2%. Unless there are other better opportunities with M&A, this is what we have been driving the last years, and this is what we will continue to do.
All right. With that, I would like to thank Enrique Lores from HP Inc. Good luck with all the rest of your meetings.
Thank you. Great to see you. Thank you.