by John McIntyre
On Feb. 22, HP Inc. released its Q1 2018 earnings report, covering the company’s performance for the period from Nov. 1, 2017 through Jan. 31, 2018. Financial highlights for the period included:
- 2018 first quarter net revenue of $14.5 billion, up a whopping 14 percent (13 percent in constant currency) from the prior-year period.
- First quarter GAAP diluted net EPS was also huge — $1.16, up from $0.36 in the prior-year period and above the previously provided company guidance of $0.38 to $0.42.
During the period the company dealt with a variety of adjustments and charges due to restructuring, acquisition-related charges, benefit plan settlement and retirement-related credits/charges, amortization and tax-related issues.
Break out the champagne folks – if you are a CEO, you can’t wait to address investors with the good news, and the company’s prepared release featured the following statement from HP Inc. President and CEO Dion Weisler: “We’re coming out of the gate strong in Q1, with double-digit revenue and EPS growth year over year … Our impressive results spanned all segments and all regions, reflecting our innovative product portfolio and global execution.”
In the company’s Q1 investor conference call, Weisler echoed and expanded on those comments, saying “Right out of the gate, we are off to a strong start for the fiscal year. A great quarter of double-digit revenue and earnings per share growth year-over-year speaks to our ability to deliver consistent and sustained momentum across our portfolio and across regions. … To echo what I have said many times, we are playing our own game, delivering operational excellence, predictable shareholder returns and prioritizing profitable growth. And we are doing this while building the business for the long term and investing in our core, growth and future strategic framework.”
PCs and Imaging: On different tracks?
The star of the Q1 18 show was HP’s Personal Systems [PC] unit – which again delivered very strong numbers in the midst of a generally lackluster PC market. Weisler was effusive in his praise for the group’s stellar achievements, saying, “Personal Systems had a terrific start to FY 2018. Net revenue grew 15 percent year-over-year, marking five consecutive quarters of double-digit revenue growth. Let me repeat, five consecutive quarters of double-digit revenue growth. And this quarter comes on top of 10 percent growth in Q1 of FY 2017 versus the prior year. We also achieved the trifecta: share gains, revenue gains and profit dollar growth. Congratulations to this team for a stellar job!” I assume the Personal Systems team will have a copy of that quote handy during their annual performance reviews.
Personal Systems – Revenues, millions
|Q1 18||Q1 17||YOY %|
|Total Personal Systems||$9,440||$8,216||15%|
For a benchmark, industry researcher IDC reported worldwide shipments of traditional PCs (desktops, notebooks and workstations) grew a mere 0.7 percent year over year in calendar Q4 17, but lauded HP’s results, noting “HP Inc. pulled further ahead as the top [PC] company … Shipments grew 8.3 percent compared to a year ago for the seventh consecutive quarter of positive growth and volume hit more than 16 million units for the first time since … 2011. HP further consolidated its position in the U.S. market, growing its market share to 34 percent.” (It is not a direct quarterly comparison, because the HP quarter ended Jan. 31 and not Dec. 31, and the IDC report is based on unit shipments, not revenues.) IDC noted that in the same quarter, heavyweight PC competitors (Apple excepted) didn’t impress in their performance, with No. 2 Lenovo showing flat shipments, No. 3 Dell treading water at 0.7 percent growth, while ASUS and Acer finished the fourth quarter in a statistical tie for fifth – but both firms exhibited YOY declines in shipments. While unit shipments don’t directly equate to revenue performance, it appears clear that whatever HP is doing in PCs is working. So, like HP’s printer and imaging unit, the company’s PC unit dominates its product category and appears to be solidifying that position against formidable competition.
At a quick glance, the results from the firm’s Printing operations were also quite strong – but a closer look at the numbers reveals a somewhat cloudier situation.
Printing – Revenues, millions
|Q1 18||Q1 17||YOY %|
For analysis purposes, it is convenient that HP officially closed its acquisition of Samsung’s printer operations Nov. 1, 2017 – which coincides with the start of HP’s Q1 18 reporting period – and the company did include contributions from the Samsung operations (termed ‘‘S-Print’’ by HP) in the earnings statement. That considered, a 28 percent surge in “Commercial Hardware” revenues (HP does not classify any of the acquired Samsung operations revenues in the “Consumer Hardware” sector) begs a deeper look when, again for reference, IDC’s Worldwide Hardcopy Peripherals Market Unit Shipment Tracker announced a modest YOY increase of 1.2 percent in calendar Q4 for the overall market – while claiming that HP showed a YOY shipment decline of 3.8 percent in calendar 4Q 17. IDC did point to very strong share increases from Epson and Brother during 2017, while almost all other OEMs declined – clearly indicating that the 1.2 percent shipment growth was isolated to only a few players.
IDC says that market unit shipment growth “was driven by a solid performance in the inkjet market, which grew 3.3 percent year over year.” Of course, HP is the biggest — but not the only — player in the inkjet category. IDC also says HP’s overall unit volume for the year was flat. If HP unit shipments were flat, but assuming the firm enjoyed any of the inkjet market growth, then, obviously, laser shipments sank. In conference call remarks, CFO Cathie Lesjak conceded some weakness in Q1 unit share, but offered very positive unit shipment results, “Total hardware units were up 14 percent year over year with consumer units up 7 percent and commercial units up 73 percent. In calendar Q4, overall print unit share was 38 percent, down two points year over year.”
We inquired about this curious discrepancy (how can shipments increase 14 percent YOY while admitting unit share dropped 2 points?) and a HP spokesperson told us the following:
“When HP reported Q4 YOY growth, we compared combined HP and Samsung shipments in Q4 17 versus HP shipments only in Q4 16 … [HP is] not legally required to restate previous numbers after an acquisition, hence [HP] did not provide a like for like comparison … this [is] why IDC reports negative growth of -3.8 percent while [HP claims] we had a 14 percent unit growth YOY.”
“HP Sprocket shipment numbers [HP’s small, mobile photo printer] are seemingly not included by IDC but [are] included in [HP’s] consumer category shipment numbers (14 percent growth) and the unit numbers were and still are significant.” The HP spokesperson did not know if HP provided shipment guidance to external research houses, such as IDC, for this new product category or if those numbers were not included in their printer shipment report.
HP did also note that there is a 30 days shift between HP’s FY quarters and the calendar quarters used by the IDC report, but that difference is likely the smallest contributing factor in the discrepancy.
Responding to an inquiry from BPO Research, HP’s Analyst Relations group provided more detail about the “S-Print” representation in the quarterly report. Using their info as a guideline, we redid the quarterly Printing results with S-Print shown as separate line items where appropriate. Unit/segment revenue data for Samsung print operations in 2017 are not public, so no direct YOY comparison is possible.
Printing – Revenues, millions
|Q1 18||Q1 17||YOY % w/o
|YOY% including S-Print|
|Commercial Hardware HP||$850||$839||1.3%||28%|
|Commercial Hardware S-Print||$220|
|Consumer Hardware||$655||$590||N/A||11% (no S-Print impact)|
|Total Printing HP||$4676||$4464||4.7%||14%|
|Total Printing S-Print||$400|
A review of the above triggers the following observations:
Obviously, S-Print contributions to HP’s reported Printing revenues added almost 10 percent to the overall numbers for the segment, cutting the huge 28 percent reported growth in the Commercial Hardware sector down to size – actually, fairly close to the market unit growth average as reported by IDC.
The same measures apply to Supplies – where S-Print contributions to HP’s reported Supplies revenues more than doubled the percentage YOY increase from 4 percent to 10 percent.
S-Print contributions to HP’s reported Printing revenues amounted to approximately $400 million – equating to an estimated $1.6 billion annualized figure. In conference call comments, Lesjak noted that the company had previously stated the revenue contribution of the Samsung unit would be about $1.4 billion to HP’s Printing unit. HP did note to us that the S-Print revenue contributions would be “… front loaded to the beginning of the [FY] year,” so that $400 million-per-quarter contribution number is expected to dwindle as FY 18 unfolds, likely meeting HP’s projected $1.4B outlook. That outlook also seems to consider that HP doesn’t expect to convert every dollar of S-Print existing revenues into HP-branded revenues as Samsung-branded models are phased out and replaced by HP successors.
HP doesn’t intend to break out S-Print contributions going forward for several reasons. The company commented to BPO Research, “We are working hard to make sure that there is no separate S-Print or HP business going forward. That is not how we think about the business. As a result, we likely won’t be breaking out S-Print results going forward because of the way that we are integrating the portfolios. The SKU rationalization (25 percent of Samsung SKUs as of Q1 are rationalized) makes it impossible to accurately report this – i.e., we are placing HP branded SKUs where we might have placed Samsung before the transaction closed, which distorts the [reporting] data.” Fair enough, so what we see reported here is about as much as we are going to ever know regarding S-Print versus branded HP Printing performance.
The numbers also provide a behind-the-curtain look at possibly why Samsung sold its printing unit – a very weak supplies sales model. For HP, the combined revenues of its hardware sectors (Commercial and Consumer) have generally been less than half the revenues of its Supplies unit – and for Q1 18, that model is evident (without S-Print, HP brand only):
- Q1 18 hardware revenues (Commercial and Consumer combined): $1.505 billion
- Q1 18 supplies revenues: $3.171 billion
However, for S-Print
- Q1 18 hardware revenues: $220 million
- Q1 18 supplies revenues: $180 million
While equivalent comparisons for other OEMs are not easy to come up with because numbers are not publicly revealed, the 2:1 supplies-to-hardware revenue model benchmark for this business is understood by many to be the ballpark to be playing in to have a profitable operation. The variance in the Samsung operation is likely due to:
- the company’s strong unit market share in lower-end (and accompanying low supplies consumption) models and weaker share presence in higher-end models.
- significant hardware market shares in geographies where aftermarket supplies have far higher market acceptance than in the U.S. and the EU (translation – far lower typical OEM supplies sales)
- smaller business unit contributions from more profitable “contractual” customers and enterprise-level accounts than HP.
The differences in the HP and Samsung printing operations model is evident in the “earnings from operations before taxes” numbers with and without S-Print contributions included:
In the quarter ending Oct. 31, 2017, Printing revenues (without S-Print included) were $4,859 billion, delivering $805 million in earnings.
In the quarter ending Jan. 31, 2018, Printing revenues (with S-Print included) were $5,076 billion, delivering only $801 million in earnings. Ouch … but an expected one.
CFO Lesjak acknowledged this reality, explaining, “The largest driver of the [Printing Q1] margin decline is the impact of adding S-Print. We expect that our Q1 operating margin rate will be the low for the year.” She added, “… as expected, S-Print’s hardware and supplies revenue base was in decline driven by low-end A4 products. We also described that S-Print would be in investment mode during the first half of the  fiscal year, putting pressure on overall Print margins before becoming profitable during the second half.” So, simply put, S-Print operations lost money in Q1 and are also forecast to do so in Q2.
Lesjak reiterated HP’s integration and migration plans for the existing S-Print operations, “It’s important to re-emphasize that we intend to integrate the business across the globe as quickly as possible. This is fundamental to our value creation plan and includes:
- Rationalizing SKUs with 25 percent of Samsung branded SKUs already reduced by the end of Q1
- Combining the respective Samsung and HP branded products into an integrated portfolio for our collective sales force and transitioning the S-Print installed base into the HP sales model. The faster we integrate, the quicker we create value and this is exactly our plan.
- A direct result of this integration strategy is that we are unable to accurately size organic versus inorganic hardware unit or revenue results. Said differently, depending on the actual trade-offs already being made in the field, the additional $1.4 billion of acquisition revenue in FY 2018 may indeed come from either Samsung or HP-branded SKUs.”
The “creating value” plan is simple – transition and sell HP-branded hardware to the existing Samsung channel and buyers – as fast and as much as possible, though the firm is not sure yet exactly how the details of that will shake out. Again, fair enough.
Regarding the A3 arena, Lesjak stated, “In calendar Q4, we achieved 7.9 percent total share, including both S-Print and HP.”
HP’s Consumer Hardware organic revenue growth of 11 percent easily outshines both Commercial Hardware and Supplies growth increases – an impressive achievement in what has generally been a moribund consumer printing arena. The company has previously pointed to the contributions of its new Zink-technology based Sprocket line for digital photo printing, which sells for $129-$149, as one element in its strategy to “reignite” consumer printing.
The HP-branded Commercial Hardware revenue growth of 1.3 percent for Q1 would seem to be a major disappointment considering Weisler’s positive comments about many parts of the unit’s operations, pointing to growth in strategic areas such as A3, graphics, and MPS.
- “Graphics [which for HP includes wide-format] revenue grew year-over-year, largely driven by Indigo and PageWide Presses;
- “Managed Print Services revenue grew year-over-year as businesses continue to shift to contractual printing;
- “In IDC’s most recent report, on the smart multifunction Print market, HP was the recognized leader for both A4 and A3 across Laser and PageWide. IDC recognized HP as the No. 1 vendor in both capability and strategy;
- “And in A3, we are gaining market share both year-over-year and sequentially. In Q1 we added an important new functionality to our A3 PageWide products for the enterprise with low-cost color, maximum uptime and best-in-class security.”
Positive points all – so again, let’s look at that weak organic Commercial Hardware revenue growth. The last two quarters have been periods when the firm’s launch of its new A3 line was in full swing – a period which normally includes “pipeline loading” – front-end loaded shipments necessary to fill channel inventories. That activity should have helped boost HP-branded Commercial Hardware revenues, particularly because of their much higher average sale prices. If B2B (Commercial) inkjet products such as HP’s highly-touted PageWide are part of a 3.3 percent inkjet market increase according to IDC, revenues should have risen accordingly. Everything considered, a 1.3 percent revenue growth in Commercial Hardware appears to be a disappointing result.
In a number of areas, the company seems to be on a roll, especially in PCs but also Consumer and Commercial Hardware on the Printing side. If the company succeeds in grabbing share in its new A3 products, and the accompanying growth from incremental contractual pages, then the outlook is clearly sunnier. Still, HP’s A3 success is far from assured, won’t likely be swift, and many secular market trends are shifting against broad-based supplies revenue growth. It really all comes down to capturing pages at every level of the market – consumer, commercial, contractual and transactional. But, that is not really news to anybody, is it?
John McIntyre serves as a senior analyst for BPO Media. With more than 40 years of experience in the printing industry as an analyst, product developer, strategist, marketer, and researcher, he has covered the printing and supplies sectors for prominent market research firms such as Lyra Research, InfoTrends, and BIS Strategic Decisions, and served with major OEMs such as Samsung, NEC, and Diablo Systems/Xerox. McIntyre is the former managing editor of Lyra’s Hard Copy Supplies Journal and has conducted research and consulting engagements examining issues such as market and business strategies, product positioning, distribution channels, supplies marketing, and the impact of emerging technologies. Follow John on Twitter @John2001S.