HP Inc. CFO Discusses Supplies, Tariffs

HP Inc. CEO Steve Fieler recently discussed lower printer-supplies revenue, as well as tariffs, at the Citi 2019 Global Technology Conference, giving analysts an overview of how HP is tackling various challenges involving both areas.

Fieler first noted that in HP’s recent third quarter, the company’s printer commercial hardware revenue grew 3 percent year-over-year, with consumer hardware declining 10 percent year-over-year, and supplies revenue declining 7 percent year-over-year. Fieler noted that in the first half of the year, EMEA (Europe, Middle-East, Africa), printer-supplies revenue was down 9 percent. In the third quarter, EMEA supplies revenue was down in the mid-teens. Fieler noted “that diagnosing the challenge, again it’s primarily driven by EMEA and primarily within the commercial channels in EMEA.”

How Important are Supplies for HP?

According to Fieler, “one of the common misperceptions (is) that the only thing that matters about HP is (printer/copier) supplies.” Fieler noted that while supplies revenue is important, “there are other mechanisms for us to drive value and driving that value shows up in our operating profit dollars.” He noted, for instance, that HP non-GAAP EPS growth was again, up 10 percent year-to-date, and driving that has been improvements in HP’s free cash flow.  While supplies revenue is down, “We’ve got many mechanisms to drive profit at the company.”

However, Fieler acknowledged that there’s been various operational challenges in HP’s EMEA region, in particular around its supplies business there. (Most likely reflecting continuing EMEA supplies troubles, was the resignation of  HP EMEA president Nick Lazaridis this week.) One negative factor that continues to affect HP’s supplies’ business is the continued presence of clone copy-cat printer supplies being sold around the world, particularly on the Amazon ecommerce websites for the the Americas and Asia-Pacific  On the positive side, Fieler noted that HP has an “impressive IP” portfolio for protecting its supplies.

Despite recent weakness in the industry, particularly in parts of HP’s printer business, and particularly in the consumer-printer business, HP still sees opportunities for growth in its printer business, particularly in its graphics/commercial printer segment, 3D-printer segment, and contractual segment (managed print services and Instant Ink).

Fieler also noted that while HP: “… saw a deterioration over the past couple of quarters in China,” it’s also seen “some real pockets of growth,” with Japan being “a great performer for us in our third quarter.”

Optimizing Manufacturing and Tariffs

One of HP’s current strategies involves optimizing its manufacturing and supply-chain footprint. This includes a “a diversified manufacturing and supply-chain strategy that has further diversified in recent periods as parts of our mitigation mechanisms on the tariffs.” Shifting some production has enabled HP to minimize the effects of tariffs that have been imposed by the current U.S.-China trade war.

However, Fieler noted that in its printer business, HP does anticipate raising prices on some printer hardware in response to new U.S. tariffs on China-made goods that were imposed earlier in September. “We’ll have to see how that may or may not impact demand.” On HP’s PC side – noting that the U.S. may impose tariffs on PCs in December – Fieler said HP is “… preparing ourselves in case the tariffs do happen in the December time frame to effectively mitigate as much of that as possible.”

HP will continue to work on mitigating the effects of the current trade war, with Fieler noting, “Yes, we joke internally that we have a new job called called a tariff engineer, because we have been working on various scenarios and mitigation strategies on the respective tariffs now for, I guess, a good year as we’ve been working through the various puts and takes of if, when, and how much. And so, it still remains fluid from a tariff perspective, but the team has done a real solid job of preparing various mitigation strategies for the tariffs.”

‘Seeding Strategy’

Fieler noted that, beginning in the 1980s, “HP began going to market with different business models, but ultimately settled upon a business model in print that I’ll call the seeding strategy.”

He explained that under this strategy, HP seeded the market with an installed base of printer hardware. HP would lose lose money on that hardware, but make money on supplies – a business model with which the printer industry has generally been successful with.

Fieler objected to the idea that this is necessarily razor/razor blade model “because we’ve got so much intellectual property in the razor… our printer… we invest tons of tons of IP in that hardware, which is a little bit different than that model.”

Moving on to 3D printers, Fieler noted that HP has a “great opportunity to have a more solution-centric business model where we can monetize beyond the hardware itself from the hardware to the supplies to the sort of services and data that we can help our customers manufacture better.” Essentially that means HP’s 3D-printer model is one in which it just won’t make money on supplies, but also on hardware and solutions.

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