HP's Q3 2025: Contradictions Emerge on AIPC Demand, Print Margins, and Tariff Mitigation

The above is the analysis of the conflicting points in this earnings call

Date of Call: None provided

Financials Results

• Revenue: Up 3% year over year (nominal and constant currency), with growth across all regions
• EPS: $0.75 non-GAAP diluted EPS, up 6% sequentially (GAAP EPS $0.80 due to favorable tax adjustments)
• Gross Margin: 20.5%, down year over year due to higher Personal Systems mix, increased trade costs, and unfavorable currency
• Operating Margin: 7.1% non-GAAP, down year over year and in line with expectations

Guidance:

• Q4 non-GAAP EPS expected at $0.87–$0.97; GAAP EPS $0.75–$0.85
• Personal Systems: Q4 revenue in line with prior-year seasonality; OP margin solidly in 5–7% range and improving sequentially
• Print: Q4 revenue in line with prior-year seasonality; OP margin near top of 16–19% range
• FY25 free cash flow: $2.6B–$3.0B, including ~$(0.4)B cash restructuring
• Non-GAAP tax rate to remain consistent; recent tax legislation supports stability
• PC market: mid-single-digit growth in 2H25; momentum expected into 2026
• Print market: low-single-digit decline in 2025 and similar in 2026

Business Commentary:

• Revenue Growth and Strategic Shifts:
• HP Inc. reported 5% year-on-year top-line revenue growth for Q3, driven by strong performance in Personal Systems.

• The growth was fueled by continued Windows 11 refresh, AIPC adoption, and services growth, reflecting strategic shifts towards higher value segments like AIPCs and premium categories.

• Print Segment Dynamics:

• Print revenue declined 3% in constant currency, impacted by a competitive pricing environment and softer office demand, particularly in North America and parts of Europe.

• The decline was despite strong performance in key growth areas like consumer subscriptions and industrial segments, highlighting the need for continued focus on profitable unit placements and market share protection.

• Personal Systems Momentum:

• Personal Systems revenue grew 6% year-on-year, exceeding expectations, with a 5% unit growth and increased ASPs.

• Demand was driven by commercial and consumer growth, with strong year-over-year gains in AIPCs and hybrid systems offsetting some softness in hybrid systems.

• Cost Management and Tariff Mitigation:

• HP successfully mitigated a majority of trade-related costs through supply chain optimization, cost reduction, and selective price increases.
• The company completed a switch to manufacturing outside of China, with nearly all products sold in North America now built outside of China to reduce trade-related costs.

Sentiment Analysis:

• Management reported a fifth consecutive quarter of growth and EPS slightly above guidance midpoint, with Personal Systems up 6% YOY and strong AIPC momentum. However, gross margin fell to 20.5% (down YOY) and Print revenue declined 4% YOY amid aggressive pricing and softer office demand. They expressed confidence in Q4 guidance and tariff mitigation but acknowledged continued trade and pricing headwinds.

Q&A:

• Question from Krish Sankar (TD Cowen): Can you quantify tariff-related costs and how much you offset versus absorbed?
  Response: Majority of tariff costs were mitigated in Q3 via supply-chain diversification, cost reductions, and selective pricing; plan to fully offset as actions mature.

• Question from Krish Sankar (TD Cowen): With RTO trends, why no improvement in Print outlook, and what about FY26?
  Response: Enterprises are prioritizing AI and PCs over print hardware near term; pages printed remain on plan, supporting eventual hardware demand recovery.

• Question from Amit Daryanani (Evercore ISI): Do AIPCs carry higher ASP/margins than non-AIPCs?
  Response: AIPCs command a 5–10% pricing uplift versus comparable PCs; ecosystem momentum is accelerating.

• Question from Amit Daryanani (Evercore ISI): Q4 EPS guide implies above-normal sequential increase—drivers?
  Response: Sequential EPS uplift driven by seasonal PS revenue, improving PS margins from tariff mitigation, and Print margins benefiting from higher supplies.

• Question from David Voigt (UBS): What underpins confidence in normal Q4 PC seasonality after strong recent quarters?
  Response: Consumer holiday seasonality plus stronger commercial funnels from Windows 11 and AIPCs; only slightly >50% of base converted to Win11, leaving runway.

• Question from David Voigt (UBS): What drives Print margin rebound toward top of range in Q4?
  Response: Higher seasonal supplies volume, disciplined pricing and cost management, and ongoing grant benefits support margins.

• Question from Wamsi Mohan (BofA): Are Print margins structurally higher than the long-term range after recent volatility?
  Response: No change to long-term range; variability largely supplies mix. Strategy stays: shift to Big Tank, grow subscriptions, target higher-value office/industrial, and keep tight costs.

• Question from Wamsi Mohan (BofA): Are you taking PC share given your stronger outlook vs industry trackers?
  Response: Demand is broad-based; focus is profitable share in premium, commercial, and AIPCs, with ASPs supported by premium mix.

• Question from Michael Ng (Goldman Sachs): Outlook for Print pricing aggressiveness and office demand into next year?
  Response: Expect aggressive pricing to persist near term; fundamentals steady as pages printed are unchanged; too early for detailed 2026 view.

• Question from Michael Ng (Goldman Sachs): Will you return ~100% of FCF soon as leverage falls, and clarify segment revenue guidance wording?
  Response: Leverage improved to ~2.04x; anticipate more buybacks as leverage improves, using cash to reduce debt as needed. Segment revenues guided to be in line with prior-year seasonality.

• Question from Eric Woodring (Morgan Stanley): Where is AIPC adoption strongest and what use cases drive it?
  Response: AIPCs exceeded 25% mix, ahead of plan; adoption driven by local AI workloads (Adobe, Zoom), security scanning (CrowdStrike), Microsoft libraries, and HP’s own AI apps.

• Question from Eric Woodring (Morgan Stanley): How does Windows 11 refresh differ by customer segment, especially SMB?
  Response: Enterprises lead; SMB lags as in prior cycles. Overall conversion trails past refreshes, extending the cycle and SMB opportunity into 2026.

• Question from Ananda Baruah (Loop Capital): Update on Poly/hybrid systems demand and enterprise spending?
  Response: Hybrid systems were soft (especially Europe/headsets) as customers prioritized AI and PCs; HP continues to invest, while gaming peripherals (HyperX) were strong.

• Question from Ananda Baruah (Loop Capital): Any specific product lines targeted for refresh?
  Response: Broad refresh across PCs (consumer, commercial, workstations) and Printing, reflecting continued R&D investment.