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HP Q1 2024 Earnings: The Calm Before the Start of the AI PC Supercycle

HP Q1 2024 Earnings: The Calm Before the Start of the AI PC Supercycle

The News: HP and its subsidiaries announced fiscal 2024 first quarter (Q1 2024) net revenue of $13.2 billion, down 4.4% (down 4.9% in constant currency) from the prior-year period. Q1 GAAP diluted net earnings per share (EPS) was $0.62, up from $0.47 in the prior-year period and within the previously provided outlook of $0.60 to $0.70. Q1 non-GAAP diluted net EPS was $0.81, up from $0.73 in the prior-year period and within the previously provided outlook of $0.76 to $0.86. The full press release is available on the HP investor news page.

HP Q1 2024 Earnings: The Calm Before the Start of the AI PC Supercycle

Analyst Take: At first glance, HP’s Q1 2024 net revenue of $13.2 billion might suggest that perhaps the PC recovery we have been talking about in recent months hit a bit of a speed bump last quarter. The 4.4% year-over-year (YoY) drop certainly is not encouraging, But I do not think this has anything to do with the PC segment’s recovery. Not with AI PCs about to hit the market and turbo-charge the segment’s refresh cycle. All signs point to excitement for upcoming AI PCs acting as a slight drag on non-AI PC shipments—a phenomenon we could see continuing into Q2 and perhaps even Q3. Before we continue this discussion, let’s take a look at HP’s quarter by the numbers.

Personal Systems

Coming in at $8.8 billion for Q1, Personal Systems slipped 4% YoY—down 5% in constant currency—while delivering a 6.1% operating margin. Consumer PS net revenue was also down (just 1% though) as well as Commercial PS net revenue (-5%). Total units were up 5%, however, with Consumer PS units up 10% and Commercial PS units up 2%.

Printing

Printing net revenue for the quarter was $4.4 billion, down 5% YoY with a 19.9% operating margin. Consumer Printing net revenue was down 22% and Commercial Printing net revenue was down 12%. Supplies net revenue was flat (up 1% in constant currency), while total hardware units were down 17%. Consumer Printing units were down 15% and Commercial Printing units rounded out the trend by being down 18%.

What Does This All Mean?

Let me preface my thoughts by reminding everyone that it is a weird time to be in the PC business … but an exciting time as well, given how on-device AI promises to reset the device market and turbo-boost the PC segment back into an overdue growth trajectory. Here’s the tricky part though: It is still Q1 2024, so PC OEMs (and their semiconductor partners) are basically stuck in the no-man’s land between the extended PC market slump we have been discussing for far too many consecutive quarters now, and the on-device AI disruption slated to start gaining momentum in H2. Meanwhile, the market is leaning into the hype around on-device AI and feeding on the constant stream of AI PC chip announcements from Intel, AMD, and Qualcomm, and kind of missing the lag between announcing something and actually shipping PCs. In other words, my advice for anyone with hurt feelings about HP’s PC numbers for the quarter is to take a breath, sit tight, and trust the process.

Look, if I’m an ITDM right now, I am looking at Intel, AMD, and Qualcomm’s AI PC chipset announcements, talking to engineers, gathering whatever benchmarking data I can get my hands on, clocking AI PC launches on my calendar, and thinking about how I am going test, pilot, and validate these new solutions for specific use cases and personas across my org before the next refresh cycle. What I am probably not doing, though, is rushing to invest in a ton of new “traditional” PCs this close to what promises to be a significant disruption in the PC space, knowing that I will want to start adding AI PCs to my PC mix just a few months from now.

My read on HP’s slight miss on consensus targets for its PC numbers for the quarter is that it does not reflect soft demand for PCs, let alone HP’s PCs. I stand by my hypothesis that demand for PCs is still accelerating, and nothing I have seen or heard at CES and Mobile World Congress in Barcelona this past week has shaken my hunch. Quite the contrary. What these numbers reflect is PC buyers tapping the brakes for now and waiting for AI PCs to hit the market later this year.

The good news is that despite that weird dynamic, HP’s numbers still look solid. (The benefits of a mature, sophisticated business and all.) And to be clear, no one is suggesting that everyone is looking to run out and buy an AI PC later this year, let alone that everyone is going to need to upgrade to an AI PC anytime soon. These will initially be premium and high tier machines. Other market segments will be slower to adopt, and the trickle-down effect of successive generations will take a few cycles to spread real on-device AI performance to lower price tiers. And so, looking at the pace of AI PC penetration across, say, the next 12 months, I find the gap between expectations and HP’s actual numbers kind of interesting in its own right, given my AI PC hypothesis. One could even spend a few minutes playing with those numbers and reverse-engineering some back-of-the-napkin forecast models for what the AI PC to non-AI PC mix might look like, a year from now, if one were so inclined.

I should also note that another point of confusion for the market right now is that not all PCs powered by so-called “AI chipsets” are technically AI PCs yet, and I wonder how many people looking at HP’s numbers for the quarter are aware of this.

To recap, the PC market is accelerating towards a very strong rebound starting in H2. I don’t think anyone with any credibility doubts this, and I certainly haven’t run into a credible case against the inevitability of the impending AI PC disruption. The only real variable here is velocity: Depending on the timing of AI PC launches, the effectiveness of the work done to educate the enterprise and consumers in the leadup to those launches, and the heavy-lifting it’s going to take to get volume into the enterprise, the disruption could come hard and fast, or it could look smooth and steady. Either way, I would advise against mistaking soft PC numbers between now and September for a signal that PC demand remains as soft as it was last year. Correlation isn’t causation. The next PC refresh cycle is going to be hot, and I have every reason to believe that HP will do extremely well when the pace starts to pick up.

I also really want to talk about HP’s ecosystem and attach opportunities, but let’s table that for another time.

Regarding HP’s Print business, well, what can I say that anyone paying attention to the trend towards paperless doesn’t already grasp? On the bright side, HP’s print business is still massive and highly profitable. As I pointed out in Q3 and Q4, printing is still a $4+ Billion strong quarterly business for HP. But despite easily holding on to the lion’s share of the global printer market again, three critical obstacles still stand between HP and a return to growth for its successful printing business: WFH, which makes printing documents less of an operational necessity at scale; the ESG-driven shift to ‘paperless’ operations, which brings additional layers of environmentally-conscious best practices to document creation, distribution and storage; and the digitization of everything, including paperless document signing. Organizations working to bring staff back into physical offices could help tap the brakes on the pace of decline in printing demand, but we aren’t seeing any real evidence of that yet.

Unlike the PC segment, which we feel will be invigorated by the at-scale introduction of AI PCs, the printer segment doesn’t currently have a significant—or proportional—AI-enhanced product pipeline to reverse its downward trend. Having said that, I anticipate that AI-enabled and generative-AI-optimized printers could absolutely breathe new utility into the segment, both in the commercial and consumer markets. At any rate, the downward trend appears to be holding steady for now, but I am hopeful that we could see it level off in the next year and a half.

Overall, HP looks solid, and not only fully recovered from last year’s final stretch of the PC downcycle but primed and ready to hit the gas later this year, when AI PCs start making their way to users. Again, any softness in HP’s PC numbers between now and then, I attribute to excitement for AI PCs, not softness in either PC demand or HP’s PS solutions.

Disclosure: The Futurum Group is a research and advisory firm that engages or has engaged in research, analysis, and advisory services with many technology companies, including those mentioned in this article. The author does not hold any equity positions with any company mentioned in this article.

Analysis and opinions expressed herein are specific to the analyst individually and data and other information that might have been provided for validation, not those of The Futurum Group as a whole.

Other Insights from The Futurum Group:

HP Q4 2023 Earnings Point to Market Recovery for the PC Segment

HP Q3 2023 Earnings Show Accelerating Signs of Improvement

HP Inc Q3 2023 Earnings

Author Information

Olivier Blanchard has extensive experience managing product innovation, technology adoption, digital integration, and change management for industry leaders in the B2B, B2C, B2G sectors, and the IT channel. His passion is helping decision-makers and their organizations understand the many risks and opportunities of technology-driven disruption, and leverage innovation to build stronger, better, more competitive companies.  Read Full Bio.

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