We recently looked at HP’s Q4 and full fiscal year 2018, which showed sector-leading performance in many important metrics, including double-digit revenue growth, healthy earnings, and strong cash flow and EPS. For both PCs and printers, 2018 was a good year, as HP has reported growth throughout 2018 while numerous competitors struggled to demonstrate consistent sales or earnings performance.
However, as we wrote several months ago when the firm announced its Q3 numbers, a few things do cause us pause.
- The company has been consistent in projecting low expectations for supplies revenue growth in 2019, qualifying it as either flat to slightly up. Frankly, we find this baffling based on 2018 printing unit achievements the company touts such as:
- commercial print units sold increased by a whopping 83 percent in 2018 (think about it)
- the firm consistently says its MPS business is doing well
- its Graphics (wide format, etc.) business is growing
- it is installing numbers of Indigo production presses
- the embryonic 3D business is gaining traction, including in volume production applications
- it is increasing its A3 market share
- its consumer printing operation grew nicely in 2018
- it just acquired Apogee, which brings with it a large installed customer base it can migrate to HP hardware and sell HP supplies to
- and that it is laser-focused on placing what it calls “NPV” (Net Positive Value) printer units – machines that will consume sufficient supplies to make its lifetime value a positive contribution to HP’s portfolio
It is hard to imagine how, with all these likely positive drivers of the printer group’s supplies business, that the company can be forecasting merely flat to slightly up supplies sales in 2019. The major performance levers of the OEM supplies business include:
- the OEMs installed hardware base
- the average print/page volume of the in-field machines
- the per-page print density of the in-field machines
- whether the installed units are mono or color
- the percentage of aftermarket supplies penetration in the OEMs installed base machines – or, what percentage of the potential supplies business does the OEM retain?
Considering the Printing unit’s positive achievements in 2018, if the supplies business is likely to be flat to slightly up, there must be areas where the business is underperforming, perhaps such as:
- the OEMs installed hardware base – maybe the growth in installed base is minimal because new shipments are only replacing existing installed base units, or even worse, that newer, faster printers are replacing multiple older installed base machines.
- the average print/page volume of the in-field machines could be flat to declining
- the per page print density of the in-field machines could be flat to declining, or users are becoming more attentive to printing in toner-saving modes
- whether the installed units are mono or color – are users resistant to printing a bigger share of color pages even if the cost-per-page is significantly lower for PageWide inkjets? Is HP installing PageWide inkjets in place of existing Color LaserJets, and thereby actually lowering the supplies dollars produced per unit due to lower PageWide CPPs?
- the percentage of aftermarket supplies penetration in the OEMs installed base machines – or, what percentage of the potential supplies business does the OEM retain? This is the big one, isn’t it? One basic OEM supplies retention strategy is to continually refresh the installed base as often as possible, because an industry maxim is that the older an installed base unit is, the more likely it is to be using non-OEM supplies. Perhaps, even though HP is replacing installed base machines, the average age of those machines is increasing?
Why so much focus on this one line item in HP’s glowing financial reports? You know why – that one line item carries gross margins that are maybe an order of magnitude greater than those in PC hardware, and can make or break the printing unit’s business viability and with it, HP’s overall financial position. Retained pages, and the supplies consumed producing them, are the reason HP bought the Samsung unit, dived into the A3 business, bought Apogee, is investing in growing its MPS share, developed the PageWide family, and a hundred other HP printing unit efforts in production print, wide-format and graphic arts, personal and consumer printing, and industrial printing to name but a few. And in 3D print, the page metric equivalent is the volume, size, and cost of materials of items produced by the 3D installed base.
Another reason the flat line in supplies sales is puzzling is data we have recently gathered in our annual survey with 166 dealers which told a somewhat encouraging story on clicks. The survey respondents told us that some dealers were experiencing drops in mono clicks — averaging about 5 percent — while others were seeing either flat click counts or increases averaging about the same 5 percent, and almost all dealers were experiencing increases in color clicks, which averaged 9.4 percent. Clicks directly drive supplies revenues for both ink and toner, but also the consumption of maintenance kits and related parts – a good business when you have millions of installed base printers. Since HP has the biggest installed base by far, and also was noted by dealers as one of the OEMs experiencing higher than average increases in color clicks, the logical assumption is that HP should be seeing increases in its supplies revenue line.
While it was apparent from the few numbers offered by HP about the acquired Samsung print operation that the supplies business accompanying those sales was very weak, and insufficient to yield a profit from any installed base hardware. So, if commercial print units sold increased by that whopping 83 percent in 2018, one could deduce that the overwhelming majority of that 83 percent increase were the Samsung branded units which are not going to drive any increase in the supplies business, and the business of winding those models down is directly hitting printer unit profits as described by the firm. It is no secret in the industry that HP has been heavily discounting a number of Samsung printer models – discounts that further widened the gulf between profit and loss on the sales of those models.
However, despite some metrics that don’t seem to add up (in our view, anyway), HP is obviously one of the healthiest OEMs in the printing industry, with a market-leading PC operation, and it looks well-positioned to capitalize when the 3D printing business evolves into a more commercialized state.
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