Executive Summary / Key Takeaways

• HP Inc. is actively transforming its business model, focusing on higher-value segments like commercial Personal Systems, AI PCs, and Print services/solutions, moving beyond transactional hardware.
• Recent financial performance shows a return to revenue growth driven by Personal Systems, particularly commercial, while the Print segment faces market softness and competitive pricing pressures exacerbated by currency fluctuations.
• The company is accelerating its "Future Ready Plan" to achieve significant structural cost savings ($2B target) to offset headwinds and fund strategic investments in AI and key growth areas.
• Additional tariffs, particularly impacting Personal Systems, have pressured recent operating margins and led to a moderated outlook for FY2025 EPS and Free Cash Flow, though management expects to fully mitigate current tariff costs by Q4 FY25 through supply chain diversification, cost actions, and pricing.
• HP maintains a strong commitment to shareholder returns, increasing its dividend and continuing share repurchases, underpinned by expected strong free cash flow generation despite near-term working capital impacts from tariff mitigation efforts.

Setting the Scene: A Company in Transition

HP Inc. (NYSE: HPQ) stands as a familiar name in the technology landscape, primarily recognized for its Personal Systems (PCs, laptops, workstations) and Printing segments. Born from the 2015 separation of the Hewlett-Packard Company, HP Inc. inherited the consumer and enterprise-facing hardware businesses, embarking on a journey to redefine its role in an evolving digital world. After navigating a period of revenue contraction, the company has recently returned to growth, signaling a potential inflection point driven by strategic shifts and market dynamics.

At its core, HP's strategy is increasingly centered on leading the "Future of Work." This involves a deliberate pivot towards higher-value segments, integrating advanced technologies like Artificial Intelligence (AI) across its portfolio, and building more resilient, service-oriented business models. This strategic evolution is critical in a competitive landscape marked by established giants like Dell Technologies (DELL), Lenovo Group (LENOVO), Apple Inc. (AAPL), and Canon Inc. (CAJ), as well as emerging players and the pervasive influence of cloud computing. HP's ability to execute this transformation, while managing macroeconomic headwinds and geopolitical complexities, forms the crux of the current investment narrative.

Technological Differentiation and the AI Imperative

Central to HP's strategic pivot is its focus on technological differentiation, particularly in the burgeoning field of AI and its application at the edge. While HP competes across broad hardware categories, its efforts in AI PCs and integrated solutions represent a key area of potential competitive advantage.

HP is actively developing and integrating AI capabilities directly into its devices. This includes equipping Personal Systems with Neural Processing Units (NPUs) to handle AI tasks locally, enhancing performance, security, and user experience. The company has introduced a comprehensive portfolio of AI PCs, including redesigned EliteBook and EliteDesk models, and high-performance workstations like the HP ZGX AI station developed with NVIDIA (NVDA), targeting data scientists and AI developers. These AI PCs are positioned to offer tangible benefits, such as faster decision-making, more effective collaboration, real-time translation, and enhanced security against AI-assisted cyber-attacks. Management expects AI PCs to command an average selling price (ASP) premium of between 10% and 20% compared to regular PCs. The company aims for AI PCs to constitute over 25% of its PC business mix by the end of fiscal year 2025 and between 40% and 50% within the next two years, highlighting the expected rapid adoption and strategic importance of this technology.

Beyond PCs, HP is integrating AI into its printing solutions with features like HP Print AI, designed to simplify and enhance the printing experience, and new LaserJet Enterprise devices engineered to guard against quantum computer attacks. The acquisition of strategic assets from Humane, including their AI-powered platform Cosmos and a skilled technical team, is intended to accelerate HP's plans to build an intelligent ecosystem across all devices, from PCs to smart printers and connected conference rooms, enhancing the "better together" experience. The stated goal is to accelerate the deployment of AI at the edge and improve the seamless connectivity and functionality of HP products.

For investors, these technological initiatives are crucial as they represent HP's attempt to build a competitive moat beyond hardware specifications. The focus on AI at the edge and integrated solutions aims to drive higher ASPs, improve profitability through a richer product mix, and create stickier customer relationships, potentially offsetting some of the margin pressures inherent in commoditized hardware markets. The success of these efforts in driving quantifiable improvements in performance, efficiency, and security compared to competitors will be key to realizing the long-term growth potential tied to the "Future of Work" strategy.

Business Segments: Performance and Dynamics

HP operates through two primary segments: Personal Systems and Printing. Recent performance highlights the divergent trends and strategic focus within each.

Personal Systems: This segment has been the primary engine of HP's recent revenue growth. In the three months ended April 30, 2025 (Q2 FY25), Personal Systems net revenue increased 7.1% nominally year-over-year (8% in constant currency), contributing significantly to the overall company growth. This performance was largely driven by strong commercial volume growth, particularly in high-value categories, and increased ASPs resulting from disciplined pricing actions and favorable mix shifts. The six months ended April 30, 2025, saw a 5.9% nominal increase in Personal Systems revenue.

Despite the top-line strength, Personal Systems operating margin in Q2 FY25 fell to 4.5% from 6.0% in the prior-year period, landing below management's guidance. This decline was primarily attributed to higher commodity and tariff costs that were not fully offset by mitigation actions within the quarter. For the six months, the operating margin was 5.0% compared to 6.1% year-over-year. Management expects Personal Systems margins to return to their long-term target range of 5% to 7% in Q3 FY25 and improve sequentially into Q4 as mitigation efforts gain full traction.

In the competitive landscape, HP holds a significant position in the PC market, competing directly with Dell and Lenovo for overall market share and with Apple in premium segments. While precise, directly comparable market share figures for all niche competitors are not publicly detailed, HP's performance indicates it is gaining share in commercial PCs and high-value categories like AI PCs, where it claims the number one market share in the Windows ecosystem. Dell's strength lies in enterprise customization and supply chain efficiency, while Lenovo excels in high-volume, cost-sensitive markets. Apple differentiates through its integrated ecosystem and premium branding. HP's strategic focus on AI PCs, hybrid systems, and workforce solutions aims to leverage its brand and distribution to capture growth in these areas, positioning itself against competitors by emphasizing innovation, security (HP Wolf Security), and a growing ecosystem of software partners.

Printing: This segment has faced more significant headwinds. In Q2 FY25, Printing net revenue declined 4.3% nominally year-over-year (3% in constant currency), partially offsetting the growth in Personal Systems. The decline was driven by softness in Supplies and Commercial Printing, along with unfavorable currency impacts. The six months ended April 30, 2025, saw a 3.4% nominal decline in Printing revenue. Challenges include changing customer behaviors, weak demand in certain regions (notably China), and a competitive pricing environment, exacerbated by Japanese competitors benefiting from a weaker yen.

Despite the revenue decline, the Printing segment demonstrated strong operating margins, reaching 19.5% in Q2 FY25, up from 19.0% in the prior-year period and above the high end of the long-term range. This was attributed to rigorous cost discipline, pricing actions, and the favorable impact of a multiyear grant received in the quarter. For the six months, the operating margin was 19.2% compared to 19.5%. Management expects Print margins to remain near the top of the 16% to 19% long-term range for the full year.

In the printing market, HP competes with players like Canon, which also offers a broad range of hardware and supplies. HP's strategy focuses on profitable unit placement, gaining share in high-value categories (A4 value, A3), and expanding its subscription-based models (Instant Ink, HP All-In Plan) and Managed Print Services. The supplies business, a key profit driver, performed as expected despite declines in the installed base and usage, supported by disciplined pricing and market share gains. The growth in consumer subscriptions and industrial graphics also provides momentum. HP's ability to maintain strong margins in Print despite revenue pressure highlights operational efficiency and a focus on profitability over volume in certain areas, a key differentiator in a competitive market.

Strategic Initiatives and Operational Efficiency

HP's response to market challenges and its pursuit of the "Future of Work" strategy are underpinned by significant strategic initiatives, most notably the "Future Ready Plan." Launched in fiscal year 2023 and accelerated since, this plan aims to drive structural cost savings through digital transformation, portfolio optimization, and operational efficiency. The target for gross annual run rate structural savings has been increased to at least $2 billion by the end of fiscal year 2025. These savings are intended to offset macroeconomic and geopolitical uncertainties, including tariff impacts, while also funding strategic investments in growth areas like AI and advanced solutions.

A critical operational response to the evolving trade environment, particularly the imposition of tariffs on imports to the United States, has been the acceleration of supply chain diversification. HP has rapidly shifted manufacturing for PCs and printers out of China into locations like Vietnam, Thailand, India, Mexico, and the US. Management expects that by the end of June 2025, virtually all products sold in North America will be built outside of China, a significant acceleration of previous plans. This rebalancing, along with redesigning the logistics network and shifting sourcing, is aimed at mitigating tariff costs. While these actions require investment and can temporarily impact working capital, they are viewed as necessary steps to build a more resilient supply chain and fully offset current tariff costs by Q4 FY25.

Financial Health and Capital Allocation

HP's consolidated financial performance in the first half of fiscal year 2025 reflects the dynamics of its segments and the impact of external factors. For the six months ended April 30, 2025, total net revenue increased 2.8% year-over-year to $26.7 billion. However, gross profit decreased by 5.6% to $5.6 billion, and earnings from operations declined by 20.6% to $1.5 billion, primarily due to the factors impacting Personal Systems margins. Net earnings for the period were $971 million, down from $1.2 billion in the prior year.

Liquidity remains a focus. As of April 30, 2025, HP held $2.7 billion in cash, cash equivalents, and restricted cash, down from $3.3 billion at October 31, 2024. Total debt stood at $10.7 billion. Net cash provided by operating activities for the six months was $412 million, a decrease from $702 million in the prior year, influenced by an unfavorable cash conversion cycle and lower net earnings, partially offset by changes in receivables. Net cash used in investing activities increased significantly to $1.1 billion, primarily due to collateral posted for derivative instruments and higher capital expenditures. Net cash provided by financing activities was $198 million, a notable shift from $1.1 billion used in the prior year, driven by increased debt proceeds ($1.2 billion) and reduced share repurchases ($0.2 billion vs. $0.6 billion). The company issued $1.0 billion in senior unsecured notes in April 2025, intending to use proceeds for general corporate purposes, including debt refinancing. HP maintains access to a $6.0 billion commercial paper program and a $5.0 billion revolving credit facility.

HP remains committed to returning capital to shareholders. During the six months ended April 30, 2025, the company returned $0.7 billion through dividends ($0.5 billion) and share repurchases ($0.2 billion). As of April 30, 2025, approximately $9.1 billion remained under the share repurchase authorization. While a temporary increase in leverage due to debt refinancing and working capital impacts led to limiting share repurchases in Q2 FY25 to offsetting dilution, the long-term commitment to returning approximately 100% of free cash flow to shareholders over time, contingent on leverage targets and investment opportunities, remains in place.

Outlook and Guidance

Management has moderated its outlook for fiscal year 2025, reflecting the impact of the dynamic external environment. The full-year non-GAAP diluted net earnings per share is now expected to be in the range of $3.00 to $3.30, and GAAP diluted net earnings per share in the range of $2.32 to $2.62. This compares to previous expectations of $3.45 to $3.75 (non-GAAP) and $2.86 to $3.16 (GAAP) provided in Q4 FY24.

The revised outlook incorporates the added costs from current tariffs and associated mitigation efforts. Management expects the PC market to grow low single digits for both the second half and full calendar year 2025, a softer view than originally planned due to increased macro uncertainty. Despite this, HP anticipates growing faster than the market in Personal Systems, driven by commercial PC catalysts like the Windows 11 refresh and AI PC adoption, which are expected to drive solid revenue growth in the back half. Personal Systems margins are expected to be in the lower half of the 5% to 7% range for the full year, with sequential improvement in Q3 and Q4 as tariff mitigation gains traction.

The Print market is still expected to decline low single digits for the calendar year, with the second half potentially declining closer to mid-single digits. Print operating margins are expected to remain near the top of the 16% to 19% long-term range for the year.

For the third quarter of fiscal year 2025, HP expects non-GAAP diluted EPS in the range of $0.68 to $0.80 and GAAP diluted net earnings per share in the range of $0.57 to $0.69. Personal Systems revenue is expected to grow high single digits sequentially, with margins in the lower half of the 5% to 7% range, improving sequentially. Print revenue is expected to perform better than typical seasonality, with operating margins solidly within the 16% to 19% range.

The full-year free cash flow outlook has also been revised downwards to a range of $2.6 billion to $3.0 billion, in line with the revised earnings expectations and reflecting the temporary impact on working capital from tariff mitigation actions. Management expects to exit Q4 FY25 with both the company and its core businesses within their long-term financial ranges, signaling confidence in the effectiveness of their mitigation strategies and strategic focus.

Risks and Challenges

HP operates in a complex and dynamic environment, facing several key risks that could impact its performance and the investment thesis. Macroeconomic and geopolitical uncertainties, including ongoing conflicts, volatility in global markets, inflation, and evolving trade policies, pose significant challenges. The imposition of additional tariffs, particularly on goods imported into the United States, has already demonstrated its potential to pressure operating margins and cash flows if not fully mitigated. While HP is aggressively diversifying its supply chain, the fluidity of the trade environment and potential reciprocal actions by other countries remain risks.

The competitive landscape is intense across both Personal Systems and Printing. HP faces pressure from established rivals on pricing, market share, and innovation speed, as well as from emerging technologies and business models. The Print segment, in particular, is vulnerable to market softness, competitive pricing (exacerbated by currency advantages for some competitors), and the impact of non-original supplies.

Execution risk is inherent in HP's strategic transformation. Successfully shifting to higher-value segments, integrating AI across the portfolio, and realizing the full benefits of the "Future Ready Plan" and supply chain diversification require effective operational execution and disciplined investment. Litigation and contingencies, including intellectual property disputes, commercial claims, and environmental matters, also present potential financial and operational risks.

Conclusion

HP Inc. is navigating a pivotal period defined by strategic transformation, technological evolution, and external headwinds. The company's return to revenue growth, fueled by a robust Personal Systems segment and a strategic focus on commercial markets and AI PCs, provides a foundation for the investment narrative. While the Print business faces ongoing challenges, its ability to maintain strong profitability underscores operational resilience.

The core investment thesis hinges on HP's capacity to successfully execute its "Future Ready Plan," delivering significant cost savings to offset pressures from commodity costs and tariffs, while simultaneously funding strategic investments in AI and high-growth areas. The acceleration of supply chain diversification is a critical response to the evolving trade landscape, aimed at building long-term resilience.

Despite the recent moderation in the FY2025 outlook due to tariff impacts and a more cautious view on PC demand, management's expectation of sequential improvement through the year and a return to long-term financial ranges by Q4 suggests confidence in their mitigation strategies. The commitment to returning substantial free cash flow to shareholders further reinforces the value proposition.

Investors should monitor the pace of AI PC adoption, the effectiveness of tariff mitigation efforts, the stability of the Print market and competitive pricing dynamics, and the successful execution of the Future Ready plan. HP's ability to leverage its brand, distribution, and technological advancements, particularly in AI, to drive profitable growth in a competitive and uncertain environment will ultimately determine its long-term value creation.