A Closer Look at HP Inc. Financials, Samsung Integration, More

Yesterday, HP Inc. reported financial results for its second quarter of 2018, reporting revenues of $14.0 billion, up 13 percent; net earnings per share of $0.64, up from $0.33; and net earnings of $1.1 billion, up 89 percent, with all versus second-quarter 2017. The results included contributions from Samsung’s Printing Solutions group, which HP Inc. acquired in November 2017.

In an earnings call with analysts yesterday, HP Inc. executives discussed those results, including the integration of Samsung’s Printing Solutions group.

HP Inc. President and CEO Dion Weisler, who noted that this is HP Inc.’s 10th quarter since its separation into HP Inc. and Hewlett Packard Enterprise, reported that HP’s: “Print business delivered the trifecta of revenue, profit and share growth in quarter two. Total print revenue was up 11 percent, with growth across commercial hardware, consumer hardware, and supplies. We are seeing growth across all regions and broadly across the business. Print units were up 13 percent and supplies revenue grew 8 percent, further supporting our confidence in the health of the print business for the long-term. The overall print hardware market grew 1.7 percent in the first calendar quarter, and we grew faster than the market, adding 1 point of share.”

As for the A3 copier/MFP business, HP’s CEO noted that  “we continue to on-board new partners and gain year-over-year share. This business is strategic to us given the higher attach rates of supplies and services.” HP is continuing to target 12 percent market share in the A3 market by 2020.

No Room for 14 Players in the Printer/Copier Market

HP’s Weisler forecast continuing consolidation in the printer/copier market, noting: “There is not room in an essentially flat market for 14 players. And so I think naturally over time that market will consolidate as well, but I don’t subscribe to the fact that it has to be done through acquisition. I think we made a very strategic execution of the Samsung print business that was a technology acquisition, as well as an acquisition of some incredibly talented people, but it wasn’t a market share play.”

Weisler also noted that in printing, HP will continue to move towards a services-led approach, and noted that HP is well-positioned in both A4 and A3, as well as in ink and toner (laser).

HP Inc. CFO Cathie Lesjak, who will be retiring next year (see New CFO for HP Inc.; Lesjak Retiring), said that HP is pleased with its continuing integration of Samsung’s Printing Solutions group (otherwise known as S-Print).

Lesjak noted that in HP’s Printing group: “Total hardware units were up 13 percent, with consumer units up 4 percent and commercial units up 88 percent. Sequentially, commercial units were up 10 percent.” She also noted that in HP’s first-quarter 2018, HP’s overall print unit share was 42 percent, up 1 point year-over-year, and up 4 points sequentially, while second-quarter 2018 printer supplies revenue was $3.4 billion, up 8 percent year-over-year.

Continuing Instant Ink and MPS Growth

Lesjak noted that HP’s Instant Ink ink-subscription program is continuing to enjoy strong growth, and that it’s continuing to grow its global subscriber base for the Instant Ink program. She noted that HP also continues to grow its managed print services (MPS) program revenue.

HP’s Weisler also stated that HP is continuing to focus on MPS: “We are very focused on managed print services. There is no doubt the business model is shifting even in the traditional A4 space. It’s moving from transactional to contractual; that’s happening at a different price in every country, but it is a mega-trend that we certainly want to be out in front of managed print services, we have been doing now for many years.”

Weisler also noted that HP is also focusing on device-as-a-service: “…device-as-a-service is really strong, so PC-as-a-service and increasingly customers are looking to have everything both at Print and Personal Systems and workstations and even 3D printing in the future as a service. So we remain focused on that.”

Second-Quarter Printer Group Results

HP’s Lesjak noted that: “Operating profit for HP’s Printing group grew $19 million in the second quarter, and operating margin was 16 percent in the quarter, down 1.3 points year-over-year, but up 20 basis points sequentially.” Lesjak said the primary drivers of the year-over-year margin decline “were strong unit placements and go-to-market investments largely as a result of adding S-Print (Samsung’s Printing Solutions group). ” HP also saw increased raw material costs in the second quarter for its Printer group; it expects these raw-materials costs to continue throughout the year. These raw materials include resins, plastics, and DRAM (memory chips).

Lesjak also noted that HP expects that its restructuring costs will increase by $150 million to $200 million, and expects to complete its restructuring plan by the end of fiscal 2019.

Currently, HP is forecasting an operating margin of 16 percent for its Printer group, but, Lesjak expects this to improve, “… near to mid-term; the way to think about it is as we integrate S-Print, ramp the A3 business, as well as the 3D (printer) business, and execute on our productivity initiatives, we do expect that the margins will improve from the 16 percent, but that’s really a kind of a mid-term kind of comment.”

Commenting on the printer business overall, Lesjak commented: “I think the best way to think about it is that Print by all means has had a very strong first half in terms of performing. We are very pleased with the top-line growth as well as the unit placements, the margin expansion and frankly the supplies revenue growth as well.”

Integration of Samsung’s Printing Solution Group (S-Print)

Lesjak noted that HP is “integrating the S-Print business into the core HP print business frankly as fast as we can.” At this point, for instance, integration at this point means that HP is not able meaningfully determine what S-Print’s contribution to its supplies’ revenue is.

3D Printing Business

HP continues to be bullish on its 3D-printer business, where it’s seeking to disrupt the $12 trillion global manufacturing market with 3D printing. HP’s CEO acknowleged however that this will take some time: “…it’s a long path, I have always said this is a 5 to 10-year journey and we are making the investments today to really secure shareholder value both today and for the future. We are seeing significant sales momentum, including repeat orders from customers as well as service bureaus.

While about 50-percent of HP 3D printers are used for prototyping and other applications, Weisler is encouraged that about 50 percent of applications is for production 3D printing. Among HP 3D-printer customers are Forecast 3D, which is expected to produce millions of 3D-printed parts this year with HP Multi Jet Fusion 3D printers. Another prominent HP 3D-printer customer, Jabil, is deploying HP Multi Jet Fusion 3D printers in the United States and and Asia as part of its distributed manufacturing strategy. More recently, HP entered the 3D printer market in Mexico (see HP 3D Printing Solutions Now Available in Mexico).

Events at Xerox

While HP’s Weisler didn’t respond directly to a query about the recent tumultuous events at Xerox, he noted that such events represent an opportunity for HP: “…so whilst these competitors that are distracted with structure and that generally presents an opportunity in the marketplace. So what we are doing is doubling down and playing our own game. If we are out in front of a customer making a call and our competitors are gathered around the water fountain, then we are out in front of the customer and that’s really where we want to be spending our time.”

Revenue and Region Breakdowns

HP Inc. revenue growth from second-quarter 2016 to second-quarter 2018.

As the graphic below indicates, the lion’s share of HP Inc.’s revenue is derived from notebook PCs (37 percent), followed by printer supplies (25 percent). Within the printer group, printer supplies made up 65 percent of revenue, followed by commercial printers and systems (23 percent), and consumer hardware (12 percent).

As the graphic below indicates, the majority of HP Inc.’s revenues are derived from the United States, Canada, and Latin America (42 percent), followed by Europe, the Middle-East, and Africa (EMEA), at 37 percent, and last by the Asia-Pacific region (excluding Japan), at 21 percent. EMEA continues to provide the strongest revenue growth for HP Inc., with EMEA revenue growth up 20 percent year-over-year in EMEA in the second quarter.

Our Take

We agree with HP CEO Weisler’s statement that: “There is not room in an essentially flat market for 14 players.” The printer/copier market has been ripe for consolidation for some time. That said, we believe HP will capture significant A3 market share, based on the strength of the HP brand name in companies and enterprises, and HP’s hybrid A3 laser and PageWide inkjet strategy.

HP CFO Lesjak noted that HP commercial printer units were up 88 percent in the second quarter, reinforcing our view that the biggest growth opportunities in printing are in the commercial and production-printing environments, which are increasingly embracing ink-based systems. Meanwhile, most of the 14 players cited above continue to push toner-based A3 color copiers and production solutions.

CFO Lesjak also commented that: “I think the best way to think about it is that Print by all means has had a very strong first half in terms of performing. We are very pleased with the top-line growth as well as the unit placements, the margin expansion and frankly the supplies revenue growth as well.” This is what happens when a company (HP) actively and successfully markets a full-range (consumer, business, production, commercial) of solutions ranging from desktop to business inkjet, to toner-based A3, to various types of production/commercial printing solutions.

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