HP Closes Out FY 2018

PC and printer maker HP released its Q4 and full fiscal year 2018 results Nov. 29  — accounting for the period ending Oct. 31 – showing 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.

In a press release announcing the firm’s results, HP President and CEO Dion Weisler stated, “Our results once again demonstrate HP’s consistent performance with full-year non-GAAP EPS growth of 22 percent year over year and free cash flow generation of $4.2 billion. These results reflect our continued innovation across the portfolio and sharp execution across segments and regions as we position HP for continued long-term sustainable growth.” In top-line figures, the company reported net revenues of $58.5 billion, up 12 percent (10 percent in constant currency, or CC) from the prior-year period. In a conference call, Weisler was more assertive and assumptive, commenting, “As we close fiscal 2018, I’m proud of the results we delivered. It was a strong quarter and an exceptional year for HP. Our results demonstrate sustained operational performance, a disciplined investment framework, and prudent cost management. Our core growth and future strategy is working. And we’re well positioned for continued success across our categories and our regions … we enter 2019 well positioned to compete across Personal Systems, Printing and 3D.”

Q418 results

• Q4 net revenues were $15.4 billion, up 10 percent (up 9 percent in CC) from 2017’s Q4 while Q4 GAAP diluted net EPS was $0.91, up from $0.39 in the prior-year period and above the previously provided outlook of $0.48 to $0.51. Business was up across all HP geographies, regionally, in constant currency, Americas grew 6 percent, EMEA was up 9 percent, and APJ grew 17 percent.
• Personal Systems (PCs) net revenue of $10.1 billion was up 11 percent YOY (10 percent in CC), delivering a 3.8 percent operating margin.  Commercial and Consumer PC net revenue increased 11 percent. The company says total units were up 6 percent, with notebooks units up 8 percent and desktops up 2 percent. This very strong growth is much better than recent data from IDC’s PC tracker, which stated that traditional PCs will decline about 3 percent by the end of 2018, while slate tablets, traditional notebooks and mobile workstations are forecast to decline over the next several years. While the PC business generally floundered in 2018 – a bit up here, a bit down there — HP reported good growth in every quarter.
• Printing net revenue was up 9 percent YOY (8 percent in CC) in Q4 with a 16.1 percent operating margin. Total hardware units were up 11 percent with Commercial hardware units up 85 percent and Consumer hardware units up 3 percent. Supplies net revenue was up 7 percent (up 6 percent in CC).

It appears that HP is outperforming the market by quite a bit in both hardware and supplies/post-sale dollars, although we must note that HP’s figures now incorporate the acquired Samsung printer operations; these were not part of FY17 financial performance reports so base Printing YOY performance figures are essentially impossible to obtain. HP has not reported separate results for the Samsung operation since offering a few data points in its Q118 earnings discussions. However the company has repeatedly pointed to additional costs and expenses related to that acquisition as the driver in declines in printer unit operating profits all year long.

FY18 overall

The company’s FY18 report, issued alongside its Q4 compilation, closely mirrors the percentages and ratios noted in that Q4 report. For FY 18, Personal Systems (PCs) net revenue of $37.7 billion grew 11 percent YOY (10 percent in CC) delivering a 3.7 percent operating margin ($1.4B).  Commercial PC net revenue increased 14 percent while Consumer revenue increased 11 percent. For FY18 HP says print Supplies net revenue grew 7 percent YOY in CC. The company says total units increased 7 percent as follows:

• Notebooks units were up 7 percent but delivered a 14 percent increase in revenues as HP sold more higher-end models such as the Spectre line.
• Desktops units grew 5 percent but produced a 12 percent increase in revenues, again by selling more premium models including OMEN PCs for gaming.
• Printing produced net revenue of $20.8 billion, up 11 percent YOY (10 percent in CC), delivering a 16 percent operating margin ($3.3B). For FY18 HP says print Supplies net revenue grew 7 percent YOY in CC. The company says total units increased 13 percent as follows:
• Commercial print units increased by a whopping 83 percent (HP classifies all Samsung unit sales activity in the Commercial sector and none in the Consumer sector.)
• Consumer print units sold increased by a comparatively modest 4 percent — though that is actually very good performance growth in a segment that has been declining or moribund for several years.
• FY18 numbers include a full year’s impact of the acquired “S-print” (Samsung) printer.

In the earnings conference call, Weisler recognized milestones achieved in the Printing unit in FY18, including:

• “As we mark the anniversary of the S-Print acquisition, I’m pleased with the progress we have made. We’re one team focused on accelerating our penetration of this large addressable market.”
• “Earlier this month, we further accelerated our penetration of the copier market by completing the acquisition of Apogee, providing us with deep solutions and services expertise and a faster mean to scale this business and tap into the profit pools that they offer.”
• “A key win… is ePac Flexible Packaging, an all-digital flexible packaging converter who purchased 20 additional HP Indigo Digital Presses to expand operations across the U.S.”
• “In 3D printing, this quarter [HP] announced a new Metal Jet platform bringing 3D mass production to the metals manufacturing industry for the first time.” Noting that HP is “… working closely with automotive and industrial leaders like GKN, Volkswagen, Parmatech and many more … [and] encouraged by the volume of final part applications we’re delivering across verticals including the transportation, industrial and medical markets.” Also in 3D, Weisler called out new applications that have developed … [such as] BMW is now manufacturing production parts for their cars on HP’s Multi Jet Fusion, and Forecast 3D now has two dozen Multi Jet Fusion deployed, operating around-the-clock to produce millions of final parts.” He added later, “The introduction of the 3D printer for the plastics market, we’ve become the No. 1 player for production in a very short period of time.”
• “Customers will begin using our [3D] Metal production service … in 2019. We’ve added new materials. We started with PA12 plastic. We then went to glass beads. We’ve got PA11 and TPU coming very soon. And metal powders with GKN, which is really focused in the automotive industry.”
• Weisler summed up FY18 achievements for the 3D print unit but lowered expectations for next year, saying, “… [HP] made great strides in 3D printing. We expanded our portfolio, increased the number of customer applications tenfold, signed numerous strategic partnerships, and generated multiunit customer orders. Multi Jet Fusion is now the most used industrial 3D printer in the world …. [but] it’s not something that we expect will have a material impact for us in 2019 … .”

Insightful comments

The discussion on the firm’s earnings conference call with securities analysts centered mostly on the company’s PC products, which are facing potential market shortages of RAM and CPU parts, and the impact of recently implemented China tariffs. The following interesting observations were made by HP management in the session:

• Steve Fieler, HP CFO, mentioned the impact of “S-print” operations several times:
  • “[Q4] overall gross margin was … down 0.5 points, primarily resulting from the addition of S-Print.”
  • “[Q4] Non-GAAP operating expenses … were up 7 percent. This increase was driven by the addition of S-Print along with incremental R&D and go-to-market investments to support ”
  • “For the full year, supplies revenue grew … inclusive of the acquired S-Print supply stream and installed base, which as we described at SAM [previously held Security Analysts Meeting], we expect to continue to decline.”
  • “Printing … operating margin was 16.1 percent, down 0.5 points year-over-year…The primary drivers of the year-over-year margin decline were the addition of S-Print and the strong unit placements as well as investments in growth and future initiatives … .”
  • Looking ahead at 2019, Fieler noted: “In Printing, we continue to expect overall supplies revenue to be flat to slightly up for the full-year, and we are including the full-year expected impact from the Apogee acquisition … we will continue to drive supplies to flat to slightly up this year.”
  • When prompted, Fieler discussed the unknown end outcomes and impacts of the ongoing tariff spat between Washington and Beijing, “… I would say [it] didn’t have a material impact on the company. But … they did have an impact on our Personal Systems business and Desktop … that really is a margin headwind that we help mitigate through other factors.”
  • Asked about the prospect of a 2019 positive supplies impact from the new installs of A3 units in 2018, Fieler repled, “… We start to get some benefit clearly in 2019, but it does take time to get that install base built. So we certainly see the greater upside in FY20 and years beyond.”

Full speed ahead

While a host of printer and PC competitors report an uneven mix of business successes and shortcomings, HP appears to be an exception – reporting near market-leading sales growth in both of these sectors while increasing its overall profits, and staking out a place in future growth markets.  The company would seem to have the solid building blocks and applicable technologies to capitalize in areas such as 3D printing (when the 3D printing business evolves into a more commercialized state) and selling IT products as a service.