Hello, everyone, and welcome to the HP Fireside Chat at the Goldman Sachs Communacopia + Technology Conference. I have the privilege of hosting Karen Parkhill, CFO of HP here today. My name is Kat Murphy. I cover HP and IT hardware here at Goldman Sachs. We have about 35 minutes for today's session, inclusive of audience Q&A at the end. With that, Karen, thank you very much for being here. To start off, you reported earnings two weeks ago with very strong results in the Personal Systems segment on portfolio mix and pricing benefits, more inline results on Print. Is there anything you can share to help contextualize those results for this audience or anything that you want to highlight for the purposes of this presentation?
Yes. Thank you, Kat, and thank you for having us here. I would say we had a really strong third quarter. We were pleased with the results, because we did deliver record revenue in our PS segment, 18%. We continued to execute on our four-pillar mitigation plan during this commodity cost cycle. Print expectations were definitely in line, but we had some really great things going on in Print, particularly in our key growth areas, where we drove share gains in Big Tank aligned with our strategy. We drove really strong growth in Industrial Printing and 3D Printing, continued to drive subscribers to our HP All-In Plan. I'd say really strong results that ultimately enabled us to increase our annual guidance. We obviously had the benefit of some IEEPA tariff refunds in the quarter, and we expect some more in the fourth quarter.
We increased our guidance even without the benefit of tariffs. W e were really pleased with our execution and with our remaining outlook for the year.
Starting on the Personal Systems segment, I want to talk more about the portfolio mix benefits that you saw and that you're enacting through some strategic focuses on key verticals. Can you talk about what the key PC customer for you and why you think you're well-positioned to go after those certain sub-sectors of the market?
Yeah. We're really excited with the strength of what we've got and what we're offering to our customers. We're seeing increased focus from us, in particular, on premium PCs, in the commercial space, in particular, with AI PCs, with workstations, with greater attach of both peripherals and service offerings, including our WXP platform, which is our Workforce Experience Platform. We are purposely driving those to increase market share and to drive our revenue growth and drive, ultimately, a greater mix to our margins, too.
When you think about the mix by region, is there any particular strength or any region that you think aligns well with those AI PC categories and workstations, where you may be prioritizing growth?
We are driving growth across all of our regions around the world, so pleased with the performance worldwide. In particular, this past quarter, we did regain our market leadership, particularly in the Americas and North America. R eally pleased to see that because that is clearly in line with our strategy as well.
AI PCs approaching 50% of your overall mix. Can you talk about what's driving this AI PC purchase decision for your customers? Is it future-proofing, or are there some tangible agentic AI or cost considerations that your customers are making that's driving this decision to upgrade to a premium AI PC?
I'd say early on last year, it was a little bit more future-proofing. Now it's not. Now it is truly our customers, particularly our enterprise customers, really wanting a solution and an alternative to conducting AI in the cloud. Tokenomics is one compelling reason with this significant rise of token costs, but also having something that is faster, more secure, enables better focus on privacy is what customers are seeking right now. The AI being run locally in addition to in the cloud, we call it running AI hybrid. We believe that is the future, and we're beginning to see the pull of wanting solutions locally.
Can you talk about what in HP's portfolio in particular positions you well for this trend of hybrid compute or even AI at the edge?
Yeah. I'd say we've got really strong product offerings right now, many that are award-winning. W e also have a software solution, our Workforce Experience Platform that I mentioned, that is also a compelling offering, enabling greater digital experience for employees out there. Because what it does is it enables CIOs to really manage the devices that they have out there, and it's not just PCs, but it's also workstations and printers and now our collaboration devices that we recently put on this platform just last quarter. It enables CIOs and the IT managers to see problems and issues before they happen, to fix them before they happen, to ensure that employees have the right memory that they need to enable the work that they need to drive.
This Workforce Experience Platform was recently put into the Magic Quadrant for Gartner, and it's a really compelling offering that we've got right now.
Maybe sticking on the WXP platform, can you talk more about the operational insights that both you and your customers get from deploying WXP across their fleet? You mentioned memory usage, but anything that you can share as to how that platform may help you help your customers navigate input costs?
Yeah, it definitely helps that. We've got telemetry data that enables us, particularly when our customers are purchasing equipment, that enables us to share with them and have them see the memory needed by various employees or employee groups. I t enables them, particularly in this rising cost environment, to purchase exactly what they need rather than more than what they need. It also enables us to help them configure the equipment for the various uses that they need too.
Let's talk more about margins. You've talked to this four- pillar mitigation plan, addressing supply, shaping demand, cost reductions, and pricing actions. I want to talk to each of the four, but first on pricing. 40% increase in ASPs for personal systems last quarter. Question that's very top of mind for investors is thinking about when we should start to see some demand pullback in light of these major price increases. Maybe just to start, can you talk about the outlook for demand elasticity, how that might change in different parts of your portfolio, and any considerations investors should have when thinking about the magnitude of price increases going forward from here?
Yeah. Thanks for the question, Kat, and well done on our mitigation four pillars. What I would say just on ASP, yes, you've seen ASP increase, but it's not just driven by price, it's driven by mix. What we're seeing is, yes, you've got unit decline going on, which has been well built into our forecast and the industry forecast out there, but the decline is more from the lower end of PCs. F or us, we don't believe it's a unit game anymore. It's really offering solutions that can enable AI locally at the edge is really the game right now. What we're seeing is a greater demand for higher premium products, of which we are very focused on meeting that demand, whether it's AI PCs or our strong workstation offerings, and the peripherals and attach that we have to go along with it.
Mix, I'd say, is a really important driver here, and it's the premium mix that's helping ASPs and the decline of lower value products that is honestly helping that impact too on ASPs.
Anything you could share to quantify the relative impacts of mix versus like-for-like price increases that you're passing through as you absorb these higher input costs on the memory side?
Yeah, I would say we don't give that for competitive reasons. I would say we've been very focused on managing this commodity cycle incredibly well, and our four- pillar mitigation strategy, price is the last piece of that mitigation strategy. W e're focused on doing everything that we can before we need to hit price for our customers. O f course, in this incredibly strong rising cost environment, we are increasing our prices. T hat does play a role as well.
Let's talk about securing supply. Can you talk specifically about the levers that you have to secure more memory and storage supply and other constrained components as we look into the next fiscal year? M aybe talk to some opportunities to engage with the Chinese memory suppliers to address some of the constraints.
Yep. O f our four- pillar plan, the first is securing supply. We have been very focused on ensuring that we have got the supply that we need this fiscal year, and we are also working on next fiscal year at this point. We believe that we have got the supply that we need to meet the demands of our customers. In terms of securing that supply, we focus on long-term relationships that we have had with suppliers for many, many years. We also have been focused on qualifying new suppliers at record speed. We have done that early on in this cycle, and those do include some Chinese suppliers as well. We use those Chinese suppliers to supply our product in China and in some of the other countries around the world.
Anything you can share to quantify how big that opportunity could be, the China and rest of world, or memory needs that could be addressed by these newly qualified suppliers?
I would say that it is still a smaller part of what we are securing, but it has been important to help us make sure that we have got the supply that we need.
Gotcha. You have guided for Personal Systems margins to trough in the fiscal fourth quarter, and then recover into your long-term framework of 5%-7% as we move throughout next year. This is really driven by the other two levers that we have not talked about, the non-pricing and the non-supply- related levers. Can you talk to and help us understand what these operational levers are? Maybe any examples as to why you have confidence that Q4 will be the trough for your Personal Systems margins?
Yeah, thanks for the question, Kat. Y es, in this past fiscal quarter, we did say that we expect our Q4 margins to be lower than Q3 in our PS segment, but improve sequentially from Q4 and be back into our long-term range in FY 2027, at some point in FY 2027. I would start by saying that the margin impact that we've seen during this cycle, we have been very transparent and predicted it the entire year. I n the first half, we said our margins were going to be higher. We said they were going to be lower in the back half. That's indeed what's happening. W hat gives us confidence is that we've got many different levers that we've been focused on. Mix is one of them. Price is one of them that we've talked about.
Some of the levers that we've been driving can work rapidly and others take a little bit of time. F or example, we have long-term customer relationships, and we've got long-term agreements with those customers, and repricing those long-term agreements can take a little bit of time. We also have been working to redesign some of our products to require a little less memory, and those redesigns can take a little bit of time. W e see those longer-term efforts beginning to kick in, along with mix playing an important role. W e also see the cost next fiscal year continue to rise, but at a lesser slope. T hey were a very steep slope this fiscal year, and we see them at a lesser slope next year.
I want to ask more about the long-term agreements or contracts that you have with some of these customers that you're working through repricing. Can you share anything around how big this is as a share of your portfolio, and maybe any characteristics of the types of customers with whom you have these long-term agreements?
So we have long-term agreements with our enterprise customers. W hen you think about last quarter, roughly 70% of our business was commercial. I t gives you a little bit of a rough estimate. We don't disclose exactly how much is enterprise, but gives you a little bit of an estimate.
That's very helpful. I want to turn to the printing segment. Last quarter, you highlighted a few ways in which HP is embedding AI into the print portfolio more broadly. Can you talk about how we should think of the impacts of AI on the broader print opportunity? Is this something that impacts the TAM, impacts the go-to-market, the use cases, the margin profile for print? Anything you can share just on the portfolio more broadly.
Yeah. Using AI in print, it really is a more compelling offering for our customers and delivers important experience and value for our customers, and that's why we think it's important to do it. It doesn't necessarily increase the print TAM, but it clearly delivers a better customer experience. We are using AI in print quite heavily to do things like we call it Precise Print. It's an offering that we introduced in the U.S., and we're now bringing to 130 countries, and it enables you to print exactly what you want to print. Think about a spreadsheet that you want to print or a download of something from the web. It automatically prints the exact piece of what you want in your spreadsheet, and it eliminates all the marketing that comes with a web print that you want to do. It's called Precise Print.
The other things that we do are things like automatically redacting sensitive information. Think about Social Security numbers or birth dates or things like that, where it will automatically know to redact that when it's printing. We also, when you scan documents on the printer, we use Copilot to enable it not just to email the scanned document, but also a summary of the scanned document. Things that just make it a little easier for people to do their work.
Is that something you can charge for? Does that add to the opportunity from a pricing perspective, especially when you think about the opportunity in both home and office prints?
It does. These new things that we are offering are things that we can charge for.
Got you.
Yeah.
You are executing against your strategy towards more high-value opportunities. You talked about share gain in Big Tank when we think about the home printing opportunity.
How large is Big Tank as a share of your home print business today? Are there considerations as you move to more of this profit-up-front model when thinking about the long-term operating margin profile for print?
Yep. Big Tanks, if you think about it in terms of size, roughly 17 million printers were sold worldwide last quarter, and about 1/3 of those were Big Tanks. It gives you a sense of the size. In terms of Big Tanks, that's been a growing segment in the market that we had not been participating in as much. Last year, we put our muscle behind it and really focused on driving growth in Big Tank. When you think about our market share in print, it's in between low to mid-30s worldwide, and in Big Tank right now, it's low to mid-20s. We have plenty of room to continue to grow in the Big Tank space. You saw us gain four points of share last quarter, for example.
In terms of print in general, participating in this growing segment of the market is really important. We're also focused on participating in other important growing segments, Industrial Printing, for example, 3D Printing, all of which have been really good growth drivers for us. While we see in the traditional printing space, low single-digit decline and in supplies over the long term, we still believe that we'll have low to mid-single- digit decline. It's these growing areas that help offset it, along with things like our subscription offering, where we're driving more and more subscribers to our HP All-In Plan. Those are things that help us offset some of that decline and also ensure that we continue to execute this business really well with margins that are higher than many of our competitors.
On the margin front, you've guided for fiscal 4Q margins to be at the low end of your 16%-19% range, and you attributed that to unit placements as well as navigating some input cost pressures.
Yeah.
First on the unit placements, and to the extent that this is different than what you just said, why is placing more units important for HP when the TAM is thought to be down low single digits? Is it a function of mix shift, or what's the strategic importance of going after these unit placements?
I'd start by saying that Print is a very large profitable market out there. The TAM for the whole print space is about $150 billion. It's a big market, and we're focused on operating profitably within that market. We're doing that by all the things that I already talked about, as well as continuing to place long-term profitable hardware units. Making sure that we continue to maintain as much of an installed base as we can that this drives the supplies later is an important piece of operating profitably in this big market.
On the input cost front, can you talk about what specific near-term pressures you're navigating in the Print segment, if it's resin or something beyond resin, and how we should think about the impacts of that as we move through the back half of this year and into calendar 2027?
Yeah. Just like the PC market, we've got the rising cost of memory and storage. It impacts Print to a lesser extent than PCs, but it does impact Print. We also have had some increased costs with the oil-related markets like resin and plastics. W hat you see for a long period of time is us managing those headwinds just fine. We're focused on dealing with our headwinds and working to offset them, and you've seen us do that. In Print, we've been doing it with continued cost reduction, with growing where we can grow, with mix, and then obviously with some price increases, too.
That's very helpful. Then in thinking about, you've been very helpful in the past of quantifying for investors the share of your bill of materials from memory, which is a very helpful way of thinking about your embedded assumptions on pricing and mix. Anything to share on the bill of materials for Print? I know it's a more diverse product category, but anything we should be monitoring or major categories that are top of mind?
Yeah, I would say, we don't share what it is for bill of materials in Print for any one component because none of them are as big as the memory and storage was for the PC business, for example. W e do have rising input costs, just like I mentioned earlier.
Gotcha. One last one on Print, then I'll maybe turn it over to the audience to see if there's any questions. Industrial Print delivered its 12th consecutive quarter of growth. You noted that Industrial and 3D are both categories that you're investing behind because they're TAM expanding. What is the industrial print opportunity in your mind, and why is HP's leadership in home and office one that should translate to Industrial?
Yeah. The underlying Print technology is similar, whether it's Industrial or whether it's home or office. W e're leveraging basic platforms in any of the spaces in which we operate. In terms of Industrial Printing, that's been a really good and strong growth driver for us. Part of it is the switch from analog to digital for labels and packaging printing, which we've been capitalizing on. W e also are helping many large print customers, think Shutterfly, think RRD, who are big customers of ours, help them with AI-enabled workflow management that enables them to go from concept to final print much more quickly than it did before we had AI enablement. We now have a software called HP Neo attached to our Industrial Print that has been award-winning for AI enablement in printing.
That's clearly helping our customers, and it's enabled us to garner a lot more business too.
Great. Maybe one more, and then I will turn it over to the audience. Just quickly on tariff refunds. You mentioned there was a benefit in this quarter. We guided to a benefit for the upcoming quarter. Anything you can share to quantify the total size of the refund you expect? I know you have talked about $500 million in tariff and tariff-related expenses paid in the last fiscal year, and how we should think about those benefits hitting both segments, both in the last reported quarter and then as we look forward into the end of the year.
Yep. The $500 million in tariff and tariff-related expenses that we talked about last fiscal year was not just IEEPA tariffs and not just tariffs alone. It is the IEEPA tariffs that we are receiving the refunds for today. We have chosen to book them when we receive them. In the third quarter, we said we had about an $0.11 positive benefit from IEEPA tariff refunds. That also amounted to about an 80 basis points benefit on both our gross and our operating margins in the quarter. We said that in Q4, we expected roughly $0.08 of IEEPA tariff refund benefits. We will have a little bit more to go after the $0.11 and the $0.08, and we will book it when we receive it and be transparent about it.
We might have a little bit more in the fourth quarter, it might be the first quarter. We will see. At this point, I do not expect it to go much beyond the first quarter, and we will be very transparent about it.
Anything on the mix between the Print and the Personal System segment in terms of where you are recognizing that benefit?
Yeah, the vast majority is in Print. In Q3, the vast majority was in Print, and there was a little bit of benefit in our PS segment. In Q4, expect all of it to benefit Print.
Great.
Yeah.
I'll see if there's any questions in the audience for Karen. [inaudible]
If we assume that memory prices come back down to more normal levels, how would it affect HP in terms of, margins are going to improve, but what about profit dollars and what's going to happen to the volumes on the low end that you've been missing out? Do you expect a catch- up, and do you expect that to come in on a more premium level as well?
Yeah. Thanks for the question. We do expect the cost of memory to continue to rise next fiscal year, as we said, but at a less steep slope. We do expect it to moderate a bit. We do believe that on the lower end, that we have seen more of a demand delay, than a demand drop-off. We do believe that as prices and costs stabilize a bit, that some of that demand delay from the lower end should come back. In the meantime, we see a really strong demand for the foreseeable future for the need to have an ability to run AI locally. I don't see that changing anytime soon. I think it's an important driver for us that we're just seeing the early phase of it now, and that's going to continue for a long time to come.
Any other questions in the audience? I have a couple more here. Any update on the status of your CEO search?
Sure. It is just like we say on the earnings call. The search is progressing well. I think our board is being incredibly thoughtful about making sure that they select the right next leader for HP to lead us into this era of AI at the edge-driven growth.
Searches like this, we are seven months in, and typically searches like this take six to nine, sometimes 12 months. I think we are right in line with what is typical in these kind of time frames. I would say most importantly in this interim time, we are not skipping a beat. Y ou are seeing us execute incredibly well in this very dynamic environment, and we are not putting on hold anything related to our strategy while we are waiting for a next CEO. We are advancing our strategy with momentum and you can just expect us to continue to not skip a beat.
Should we still expect to learn more about your outlook for FY 2027 even without a CEO in place as we get to the next quarter earnings call?
Yes. When we do our fourth quarter earnings call is when we give our expectations for the following fiscal year. You should expect that to continue.
Great.
Yeah.
You're helping customers to deploy AI, but HP is also a large enterprise. Can you talk about the ways in which internally HP is deploying agentic AI and any ways we can think about the operational improvements, the margin expansion opportunities that that's leading HP to have?
Yeah. Thank you for that question, too. I would say, first of all, we view ourselves as customer zero when it comes to our AI offerings. We are using them, whether it's AI PCs or things like our Workforce Experience Platform. We're using them internally, and they're helping us. In areas like in Asia, in our manufacturing facility, we're using our AI-enabled information to help us drive better quality first time in our facilities. I would say, but just more broadly on AI enablement helping to transform HP, we are using it to help improve our customer experiences with our call centers, using agents, for example, to answer our customers' questions much more rapidly.
We're also using it in our back office to enable us to be far more productive, and to enable us to do things like pricing to our customers much more rapidly than we've been able to do before.
Very helpful.
Yeah.
Maybe one final closing question for you here. When you look out over the next three or five years, what aspect of HP's strategy are you most excited about, and do you think there's a part of the story that investors might be underappreciating today?
Yeah. Thanks for that question. I do think that we are at the very early stages of having AI conducted in a hybrid fashion, both in the cloud and locally at the edge. I think that that is an important, huge opportunity for us to lead and drive well into the future. I am super excited about HP leading AI at the edge.
Great.
Yeah.
If there's any other questions from the audience, we have a couple of extra seconds here. If not, Karen, I really appreciate the time. This has been a privilege to have you.
Thank you, Kat.
Thank you.
Appreciate it too.