HP (HPQ.US) Q3 conference call: AIPC penetration rate is rushing to 70%, memory chip costs are depressed, profit margins are expected to begin to be repaired in fiscal year 2027

The Zhitong Finance App learned that personal computer (PC) and printer giant HP (HPQ.US)'s net revenue for the third quarter of fiscal year 2026 reached a record US$15.677 billion, up 12.5% year on year, up 10.9% at a fixed exchange rate; GAAP diluted earnings per share were 0.71 US dollars, down 11.3% year on year, and non-GAAP diluted earnings per share were 0.83 US dollars, up 10.7% year on year. Both figures include a benefit of $0.11 per share due to tariff refunds. Even after excluding this one-time income, non-GAAP earnings per share are still above the company's original guideline limit. Quarterly operating cash flow was US$1.74 billion, free cash flow was US$1.57 billion, up 7% year over year, and approximately US$600 million was returned to shareholders.

Personal systems business revenue reached a record $11.767 billion, up 18% year over year, with commercial business up 22% and consumer business up 10%; despite a 16% drop in total PC sales, price increases, high-end product portfolios, AI PCs, workstations, and additional services are driving strong revenue expansion. HP management said during the performance conference call that AIPC (that is, personal computers equipped with end-side AI chips) already accounts for 46% of HP's shipping portfolio. The company expects it to rise to 50% by the end of this fiscal year, reach 60% to 70% in FY2027, and over 70% in FY2028. Furthermore, HP management said that the company's high-end PC and workstation market share increased by 2.6 and 1.8 percentage points, respectively, and that additional peripherals, collaboration solutions, and services such as WXP have contributed about one-third of the gross profit of the personal systems business.

HP's quarterly gross margin was 18.8%, and the non-GAAP operating margin was 6.5%; the operating margin for personal systems fell to 4.6%, mainly affected by rising memory and storage costs, the decline in low-cost inventory dividends, and increased variable compensation. Management expects the fourth fiscal quarter to be a low profit margin for personal systems. Since then, with repricing, long-term contract revisions, product redesign, platform optimization, and the expansion of the high-profit AI PC portfolio, profit margins will improve quarterly in FY2027. The printing business's revenue fell 2% to $3.9 billion, but with the help of tariff refunds and price increases, the operating profit margin rose to 18.1%; after excluding one-time refunds, it is still at the low end of the company's long-term range of 16% to 19%.

HP positions itself as a “trusted edge AI platform”, extending data center-level AI capabilities to PCs, workstations, manufacturing sites and enterprise terminals through HP ZGX Fury, OmniBook Ultra 6, HP Z Boost, WXP, and OpenAI Frontier. Local reasoning can reduce token costs, reduce latency, reduce network dependency, and enhance data security and governance. Customers have seen clear return on investment in software development, customer service, industrial quality inspection, predictive maintenance, retail, and healthcare. Management believes that with approximately 70% of the Windows 11 switching cycle being completed, future PC demand will gradually be taken over by AI PCs, intelligent workloads, and edge electronic devices with higher configurations.

HP raised the 2026 non-GAAP diluted earnings per share guide from $2.90-3.10 to $3.19-3.29, raised the GAAP earnings per share guide to $2.52-2.62, and raised the free cash flow outlook from $2.8 billion to $3 billion to $3 billion to $3.2 billion; non-GAAP earnings per share for the fourth fiscal quarter are expected to be $0.69-0.79. Although management expects PC market sales to drop by 10% year-on-year in the second half of the year, price increases, the increase in the share of high-end products, the expansion of AI PC penetration, and high-profit additional services are expected to drive revenue growth in the fourth fiscal quarter.

Below is the full text of HP's performance conference call (AI tool assisted translation):

Presentation session

Moderator:

Hello everyone, and welcome to the HP FY2026 third quarter results conference call. My name is Lisa, and I will be the host of today's conference. [Moderator's note] Everyone is reminded that this conference call will be recorded for replay. Now I'd like to give the call to Mr. Alok Juyal, Global Treasurer and Head of Investor Relations. Please get started.

Alok Juar, Head of Global Investor Relations:

Good afternoon everyone, and welcome to HP's FY2026 third quarter results conference call. I'm in attendance today with Bruce Broussard, HP's interim CEO, and Karen Parkhill, HP's chief financial officer. Before handing over the phone to Bruce, allow me to remind everyone that this conference call will be webcast, and a replay will be available on our website shortly after the conference, and will be kept for about a year.

We have published a press release on our results press release and supporting presentations on our investor relations website investor.hp.com. As always, parts of this statement are forward-looking statements based on our best judgment on the current world situation and the company's business. For forward-looking statements involving risks, uncertainties, and assumptions, please refer to the disclaimer in the performance materials for more details.

For a discussion of some of the risks, uncertainties, and assumptions, please refer to HP's reports to the U.S. Securities and Exchange Commission, including the most recent Form 10-K annual report. HP does not assume and does not intend to update any such forward-looking statements. We also need to note that the financial information discussed during this conference call reflects estimates based on currently available information, and may differ materially from the amount reported by HP when it finally submitted its documents to the U.S. Securities and Exchange Commission.

In this webcast, unless otherwise specified, all comparisons are year-on-year comparisons with the same period last year. What HP refers to as channel inventory refers to tier-1 channel inventory, and market share data is based on natural quarterly information.

Additionally, unless otherwise specified, all financial measures discussed today are non-GAAP measures, and earnings per share refer to non-GAAP diluted net earnings per share. For a reconciliation table between these non-GAAP measures and the most comparable GAAP measures, please refer to the performance press release and supporting presentation published today on our website. Next, I'll hand over the phone to Bruce.

Interim CEO and Director Bruce Broussard:

Thank you, Alok, and thank you all for attending today's meeting. I'm happy to announce that we achieved record third-quarter revenue and continued to exceed expectations in earnings per share. We are also laying a solid foundation for the AI era and continue to accumulate momentum for development. Our strategic execution, strong commodity cost mitigation programs, and relentless investment in innovation are helping us grow our business and help our customers successfully address this most significant technological transformation.

Today, I'll cover the third-quarter results highlights, discuss the innovations we're bringing to market, and briefly explain how we're responding to the current environment. Until then, I know that some of you would like to know the latest developments in the CEO selection process. I'm sure everyone can understand that I can't reveal specific details or timelines right now, but the selection process is progressing smoothly, and we are continuing to make good progress in finding the next suitable leader for HP.

During this time, through leading the company's day-to-day operations over the past few months, I have developed a deeper understanding of HP, four of which stand out in particular. First, we need to continue to upgrade our operating infrastructure to achieve a higher level of connectivity, AI enablement, and data drive to improve productivity while bringing better experiences to customers, partners, and employees.

Second, we will continue to promote the evolution of devices in the leading direction of AI and deploy more computing power to the edge that generates contextual information. This will make the device more intelligent, able to anticipate demand and proactively resolve issues. Third, we need to accelerate the transformation to an integrated solution with a broad portfolio across devices, create differentiated products, create greater value for customers, and expand recurring revenue opportunities.

Finally, we need to more clearly define where we compete and allocate capital, resources, and capabilities around these priorities in a focused and rigorous manner. HP has invaluable assets: one of the most iconic brands in the tech industry, a strong global presence, a mature supply chain, deep commercial customer relationships, and a talented team.

There are plenty of opportunities for HP to become more powerful, more collaborative, and more efficient. We are now taking action to strengthen the foundation, focus on priorities, and improve execution so that when the next CEO takes office, we can continue to build on this momentum and lead HP into a new chapter of growth and value creation. Let's talk about our performance below. This quarter, we achieved revenue of $15.7 billion, setting an historic record for HP's third fiscal quarter.

This represents a 13% increase in revenue, which is also our ninth consecutive quarter of revenue growth, mainly driven by the personal systems business once again recording strong performance, while the printing business met our expectations. We have delivered on our promises and accelerated the development of key growth areas. Together, these businesses grew 46% year over year, faster than our core business.

We continue to seize share in high-value market segments while dealing with cost pressure through commodity cost mitigation programs; even after excluding tariff refund earnings, earnings per share are still higher than expected, and free cash flow is strong. In short, we did what we promised to do. The personal systems business achieved revenue growth for the tenth consecutive quarter, with a year-on-year increase of 18%, and both commercial and consumer businesses achieved steady growth.

We are particularly pleased to see that the AI PC product portfolio continues to grow strongly and is expected to account for 50% of the company's shipping portfolio by the end of this fiscal year. Meanwhile, in line with established strategies, key growth areas, including advanced computing solutions and workforce solutions, have achieved double-digit revenue expansion.

We are also continuing to seize market share in high-value categories such as high-end PCs, and are once again the market share leader in the American market. Overall, these results show that customers are still investing in the hardware and solutions needed to run AI, enabling AI to play a role in actual work scenarios. Let's talk about the printing business. Against the backdrop of continued intense market competition, printing business revenue declined 2% year over year. We remain focused on strict pricing discipline and launching devices that generate profits.

We said we would double our investment in the Osumikura market, and we did, increasing our market share by another 4 percentage points this quarter. The industrial printing business achieved its twelfth consecutive quarter of revenue growth as customers continued to drive digital workflows and business growth with our award-winning hardware portfolio. In both business segments, we are balancing short-term execution with long-term investments, and shifting our product portfolio to higher-value, more profitable categories.

Let's talk about innovation. This quarter, we released a number of technological advancements designed to help our customers thrive in the AI era. We see the future of AI as a hybrid model, which means AI will run both in the cloud and increasingly at the edge. For customers who already feel that the cost of AI in the cloud continues to accumulate, the economy alone is enough to make edge AI extremely attractive. Edge AI can also enhance security, reduce latency, and enhance data governance.

To make edge AI a reality, we are working with customers and ecosystem partners to build platforms to extend data center-level AI capabilities to the edge. By enabling GPU sharing through HP Z Boost and integrating it with WXP's software layer, security features, and device functionality, we're making traditional cloud AI capabilities available locally. In the past, building advanced AI locally often meant dedicated infrastructure, huge budgets, and complex deployments.

We are changing that situation. With HP ZGX Fury, we bring data center-grade AI to the table, enabling teams to locally build and run leading-edge scale models and continuously online agents. Since we first demonstrated this direction at Computex Taipei, the market feedback has been clear: customers want local AI they can control. Over the next month, we'll expand this momentum to more devices that people already use with them, and equip device-side models with the memory and power they really need.

A leading automotive company is using HP solutions to deploy visual AI and inference capabilities directly to production lines to improve quality inspection, production performance, and economic efficiency. We see the same potential in many other industries that require field computing performance, strong security, and the most cost-effective way to manage increasingly complex AI models. This has created significant opportunities in retail, public sector, and healthcare.

We're also improving the tasks a PC can do as an edge device. In the age of smart devices, PCs are becoming partners that can understand user needs and help meet them. So we're reimagining the power of personal computers with the new OmniBook Ultra 6 series powered by NVIDIA RTX Spark. It brings the computing power required to build and run complex AI models and personal intelligence devices into lightweight mainstream mobile PCs.

Our OmniDesk Mini desktop combines the performance of a full-sized device with a compact design and built-in AI capabilities. In the field of printing, we are already using AI to create real value for our customers. In June of this year, we expanded our flagship AI printing experience “Precise Print (Precise Print)” to more than 150 countries. Accurate printing can intelligently remove unnecessary web content before printing, helping customers reduce paper usage by up to 38% and ink consumption by up to 47%.

Our HP Nio AI Assistant introduces intelligent AI into industrial printing operations, and market momentum is increasing. Nio won the “Best Software Agent Award in the AI category for the printing industry” in the 2026 European Digital Printing Association Awards. This highlights our commitment to building an intelligent, data-driven production ecosystem with built-in remote repair capabilities; more importantly, it can solve equipment uptime issues for printer service customers.

In the third quarter, we also signed a three-year, $100 million strategic agreement with RRD, one of the world's leading printing service providers. This reflects the shared vision of the two sides to accelerate the development of AI, industrial automation, and printing production. Success at the edge also requires intelligent management of technology portfolios. Work across PCs, conference rooms, collaboration tools, printers, and other devices. Our WXP platform helps CIOs track and manage groups of connected devices and applications.

This quarter, we've integrated HP Poly Lens and collaboration features into WXP to enable IT teams to have a more comprehensive view of PCs, printers, and collaboration devices. By integrating insights previously scattered across different environments, enterprises and channel partners can transform data into actionable intelligence, improve employee experience, reduce costs, and establish layers of governance.

WXP was named a 2026 Gartner Magic Quadrant Leader for Digital Employee Experience Management Tools. We believe that future computing will be increasingly intelligent and integrated, with devices capable of predicting user needs, performing tasks seamlessly, and connecting cloud and desktop environments that are traditionally separate from each other. By bringing AI capabilities closer to users, these devices can provide contextual information needed for more effective reasoning and inference.

Edge AI can bring significant benefits to customers while creating significant incremental growth opportunities for the entire industry. With a broad portfolio of products and services, trusted brands, a business footprint spanning more than 180 countries, and a strong innovation pipeline, we believe HP is uniquely positioned to lead this evolution. Combined, these benefits will create huge opportunities for growth.

At HP, we see ourselves as “customer zero” and use our business as a testing ground for testing the products and solutions we develop. Like customers, HP is currently benefiting from localized AI capabilities through the use of edge inference in all areas of the business. For example, at the Singapore production facility, the team is using ZBook workstations running OPUS models to enhance quality assurance and defect detection capabilities on the production line.

Last quarter, we expanded our collaboration with OpenAI. Through OpenAI Frontier, we're integrating AI into customer and partner experiences, HP Marketplace, digital support, WXP telemetry, employee productivity, and software development. Early deployments are already helping the team speed up engineering workflows, enhance security analysis, and automate routine tasks while continuing to maintain HP's high standards for data, governance, and security.

Our partnership with OpenAI has only just begun. We expect to share more information as the pilot project transforms into large-scale capabilities that create commercial value. Next, I'll focus on the external supply and cost environment, which is still complex. We continue to effectively implement our cost mitigation plans. We remain confident that the memory and storage supplies needed for this fiscal year are guaranteed, and we are also watching for next year and beyond.

The enhanced operating model we are building aims to have compound benefits over time, creating a more connected, process-oriented enterprise to serve customers with greater consistency, speed, and predictability. What we are building is not a short-term efficiency plan or a temporary response to a specific situation, but a fundamentally stronger operating model that more closely links the planning, decision-making, and execution of the entire enterprise.

We're already seeing early signs of this model working in areas such as predictability of order delivery, where increased accuracy is also driving improved conversion rates for new orders. As existing mitigation measures are progressing steadily and more measures are about to be implemented, we are still confident in HP's short-term and long-term upward potential, especially after the restrictions faced by the industry begin to ease. Going forward, we will continue to focus on being a trusted resource for our customers when dealing with dynamic environments.

In the personal systems business, we see opportunities brought about by commercial workloads, AI PCs, advanced computing, widespread transformation to hybrid AI, and the growing demand for context-aware applications at the edge. In the printing business, we will continue to invest in hardware equipment that can generate profits, develop large ink warehouses and subscription businesses, and invest in industrial applications.

Our team will continue to address memory, storage, and geopolitical pressures through pricing, procurement, supply chain actions, productivity improvements, and product portfolio choices. The opportunities ahead are enormous. AI is moving from an isolated experimental phase into everyday workflows, devices, and environments. HP is well-positioned to become an edge AI platform that customers can trust, helping customers fully grasp this transformation.

Finally, I'm proud of the HP team's performance this quarter. We have achieved strong growth in our personal systems business, successfully tackled the challenging printing market, and continued to drive innovations that will shape the way we work in the future. Thank you to our employees for their input and for the continued trust our customers, partners, and investors have placed in us. Next, I'll hand the phone to Karen.

CFO Karen Parkhill:

Thank you, Bruce. Good afternoon everyone. We are pleased with our third quarter results, which reflect solid execution and continued progress around the priorities set at the beginning of the year. We achieved higher-than-expected revenue growth for the third consecutive quarter, and earnings per share also reached the upper end of the guideline range or above the guideline range, highlighting the team's execution discipline in a dynamic business environment.

We have once again achieved strong quarterly revenue growth, and the personal systems business and key growth areas continue to grow. The personal systems business achieved double-digit month-on-month growth, which also supported strong free cash flow this quarter. Meanwhile, as Bruce said, we are continuing to advance our four-pillar plan to deal with rising investment costs.

We continue to take measures to guarantee supply, guide demand, implement targeted cost cuts and strict pricing. These actions are constantly being accelerated, and allow us to achieve operating profit margins in line with the guidelines even after eliminating the favorable tariff refunds for this quarter. Below, I'll go over the third quarter results in more detail. Our revenue grew 13% and grew 11% at a fixed exchange rate, and all regions saw growth.

From a regional perspective, strong performance in the personal systems business led to 22% revenue growth at fixed exchange rates in Asia Pacific and Japan, 10% in Europe, the Middle East and Africa, and 5% in the Americas as customers continued to upgrade equipment to handle more demanding workloads. The gross margin was 18.8%. As expected, the year-on-year decline was mainly affected by rising commodity costs and an increase in the share of personal systems businesses. These negative factors were partially offset by pricing, strong growth in key growth areas, and tariff refunds.

Strong revenue growth, combined with our focus on strict cost management, helped reduce operating expenses as a share of revenue while still enabling us to make significant investments in innovation, product promotion, and employees. Overall, the operating margin was 6.5%. Excluding the revenue from customs refunds, the operating margin was in line with our expectations.

In projects below operating profit, higher cash balances reduced financing costs for the quarter and made other income and expenses better than expected. Net earnings per share were $0.83, up 11% year over year, including $0.11 per share from tariff refunds. Importantly, even without customs benefits, our earnings per share are above the upper limit of the guideline range. Let's talk about the performance of each business segment.

The personal systems business achieved record third-quarter revenue of $11.8 billion, up 18% year-on-year in a better-than-expected market environment. Despite the expected decline in sales, we continue to prioritize high-value equipment, reprice higher commodity costs, and expand our service business, factors that are sufficient to offset the negative impact of the decline in sales.

In line with our established strategy, we have taken more market share in the high-end PC category, with strong performance in key growth areas, including AI PCs, advanced computing solutions, hybrid systems, and workforce solutions, all of which achieved double-digit revenue growth. Looking at customer categories, both commercial and consumer business revenue also achieved double-digit growth, with increases of 22% and 10% respectively, mainly driven by strict pricing actions and favorable product portfolios.

In line with the strategy of focusing on high-value market segments, commercial business accounted for more than 70% of personal systems revenue this quarter. The operating margin for personal systems was 4.6%, below the long-term target range as expected, and declined year over year due to rising commodity costs and variable compensation; we partially offset these effects through repricing and other cost reduction measures. Let's talk about the printing business.

As expected, in a competitive pricing environment, printing business revenue declined by 2% and decreased by 4% at a fixed exchange rate due to declining sales of consumables and hardware. Contributions from key growth areas partially offset these negative factors. Among them, industrial printing continued to maintain momentum, equipment usage increased, 3D printing achieved double-digit growth, and the number of “all-inclusive plan” subscribers continued to rise. By customer category, consumer printing revenue fell by 2%, and sales of traditional printers declined, but the increase in average selling prices partially offset the impact.

In line with the established strategy, we continue to increase our penetration rate in the ink cartridge printer market. Sales of this important pro-profit category increased by 42%, and the market share increased year over year and month over month. Commercial printing revenue fell 1%, mainly affected by declining sales and an unfavorable product portfolio. The office printing market in North America and China is particularly weak, and our performance also reflects the fact that in an aggressive price competition environment, the company is still focused on launching profitable equipment.

In line with expectations, consumables revenue declined by 4% at a fixed exchange rate, partly affected by adverse factors in the Middle East market. Overall, the printing business operating margin was 18.1%, an increase of about 1 percentage point over the previous year, reflecting the positive impact of tariff refunds and pricing actions. Excluding the revenue from tariff refunds, the operating profit margin of the printing business is in line with our guidelines and is at the lower end of the long-term target range. Let's talk about cash flow and capital allocation.

Thanks to the strong performance of the personal systems business, the third quarter generated more than 1.7 billion US dollars in cash from operating activities, and free cash flow was about 1.6 billion US dollars. As planned, we paid off slightly more than $500 million of debt due this quarter. Through strict management of working capital and strong growth in the personal systems business, free cash flow has exceeded 2.5 billion US dollars so far this fiscal year, which is significantly better than normal seasonal performance.

This quarter, we returned nearly US$600 million to shareholders through dividends and share buybacks. The amount has been refunded so far this fiscal year has exceeded US$1.5 billion; the leverage ratio at the end of the quarter is within the target range. As always, we are committed to returning approximately 100% of our free cash flow to shareholders over time, as long as the total leverage ratio remains below double and there are no higher-return investment opportunities.

Looking ahead to the rest of this fiscal year, we continue to expect investment costs to rise, putting pressure on recent operating margins, particularly in the personal systems business. We have included this factor and the progress made in the cost mitigation plan into our fiscal fourth quarter outlook. Looking at the business sector, in the field of personal systems, we still agree with industry experts' predictions that in the second half of the year, the total potential market volume of PC units will drop by about 10% year-on-year.

Considering the impact of commodities-driven price increases, we expect revenue performance in the fourth fiscal quarter to be lower than normal seasonal levels. Despite this, we still expect year-over-year revenue growth for the quarter, driven by pricing actions, increased market share in high-end categories, increased penetration of high-margin add-on products, and increasing AI PC penetration as more AI workloads move to edge devices. We continue to anticipate further increases in memory and storage costs as a share of the bill of materials.

As indicated in the previous quarter, we expect profit margins for the fourth fiscal quarter to be lower than for the third fiscal quarter, followed by a month-on-month improvement after entering fiscal year 2027. In terms of the printing business, our outlook is in line with the industry's expectations for a single-digit decline in the hardware market in the second half of the natural year.

We will continue to consolidate the share growth of ink cartridge printers by expanding our product portfolio and targeted promotions, and complete the deployment of the latest AI laser printing product portfolio in the office market by the end of this fiscal year. The revenue from the printing business for the fourth fiscal quarter is expected to be in line with historical seasonal patterns.

Excluding any tariff refunds that may be received during the quarter, we expect operating profit margins to be in the lower half of the long-term target range, reflecting the company's emphasis on the launch of new hardware equipment and recent investment cost pressure; we are actively taking action to mitigate these pressures. In addition to the business segment, we expect other revenue and expenses and company-level projects for the fourth fiscal quarter to be similar to the third fiscal quarter. Overall, we are raising our outlook for the current fiscal year based on strong performance this quarter.

Currently, we expect net earnings per diluted share of $3.19-$3.29, higher than the previous forecast range of $2.90-3.10, which includes the positive impact of expected tariff refunds of $0.19 per share. Specifically for the fourth fiscal quarter, we expect net earnings per diluted share of $0.69-0.79, including the positive impact of expected tariff refunds of $0.08 per share.

In view of improved earnings and strong free cash flow in the third quarter, we also raised our free cash flow outlook for the current fiscal year to $3 billion to $3.2 billion. Looking ahead to this fiscal year, as Bruce said, we see significant opportunities as workloads continue to migrate to the edge; with equipment, software, and services we can trust, we are well-equipped to lead this transformation.

In the personal systems business, we plan to continue investing in innovation in AI PCs, workstations, and high-value solutions, and strictly focus on increasing market share in the high-end category. We expect investment costs to continue to rise, but at a lower rate than in FY2026. Of course, we will continue to focus on mitigating the impact of the dynamic commodity environment and strive to return personal systems operating profit margins to the long-term target range as soon as possible in the 2027 fiscal year.

In the printing business, we will continue to protect operating profits by increasing the market share of margin front-loading ink cartridge printers, expanding the consumer subscription business, strengthening our position in the office market using AI innovation, maintaining the momentum of the industrial graphics business, and adhering to cost discipline. I'll be providing more information on the FY2027 outlook during the fiscal fourth quarter results conference call.

Finally, we are pleased with this quarter's results and the progress made around our strategic and financial priorities. We have a strong track record of execution and continue to believe in the company's ability to continue to drive future growth and value creation. Let's move on to the Q&A session. Considering that the PC market environment continues to change, we invited Kaitan Patel, head of the personal systems business, to attend the conference. Now I'm returning the phone to the host, so please start asking questions.

Q&A session (AI-assisted summary and translation):

Moderator:

[Moderator's note] Today's first questioner is Amit Darianani from Evercore ISI.

Amit Darianani, Equity Research Department, Evercore ISI Agency:

I have a question and a follow-up. First, Karen, can you take a moment to introduce the assumptions used in the personal systems business for the fourth fiscal quarter? I think you're implying that individual system revenue will be below seasonal levels, but the model should still achieve year-over-year growth. I think that's a reasonable understanding. However, what I would like to know is: Will sales drop by 10% in the fourth fiscal quarter and the trend of revenue still increasing by a few percentage points will continue until the 2027 fiscal year, or will it be limited to the fourth fiscal quarter?

CFO Karen Parkhill:

OK, thanks for the question, Amit. The outlook for the fourth fiscal quarter reflects the industry's judgment that PC sales will drop by 10% in the second half of the year as pricing actions suppress demand. However, as we said, revenue is still expected to increase year over year. We expect revenue to decline month-on-month, but achieve year-over-year growth; a richer portfolio of high-value products, including high-end commercial and consumer PCs, AI PCs, workstations and add-ons, plus pricing, will be enough to offset the decline in sales.

I would also like to point out that we will continue to strictly prioritize profitable growth and edge AI-driven demand rather than chasing low-margin market shares. Our review of revenue growth is for the fourth fiscal quarter only. It is still too early to give guidance for FY2027, and we will be posting the relevant information on the FY4 conference call.

Amit Darianani:

Very reasonable, but I'd like to try asking. Regarding memory, you mentioned in your press release that memory supply has improved significantly and order fulfillment rates have increased. Can you explain if this is just because you got better supply quotas, or is there an increase in supply in the spot market? What exactly do these changes mean for HP? From your perspective, at what level are personal system profit margins likely to bottom out in the future?

Karen Parkhill:

Ok, thanks for the question. From a supply perspective, we can get the supplies we need to meet customer needs, so supply isn't an issue. Looking ahead to the profit margin for the fourth fiscal quarter, we stated in the conference call last quarter that the profit margin for the fourth fiscal quarter is expected to be low. We still hold this judgment and are highly confident that profit margins will improve thereafter. In dealing with this volatile environment, we have not only maintained transparency, but have also proven that we can deliver on our promises.

We indicated at the beginning of the year that as the fiscal year progresses, the impact on profit margins will continue to increase. Costs continue to rise, while the benefits from low-cost inventory on the balance sheet in the first half of the year are gradually fading away. More expensive inventory is now being reflected in the income statement in the second half of the year. At the same time, however, we have been successfully implementing cost mitigation plans and have secured the required supply.

We have certified new suppliers, realigned requirements and product configurations, adopted targeted cost measures, and strictly implemented repricing. As we said before, some actions can take effect quickly, while others require some preparation time, such as product redesign and platform optimization for cost reduction, and long-term contract revisions for pricing.

We also anticipate that focused high-end categories, AI PCs, high-value add-ons, and edge AI workloads will bring profit margin benefits, all of which will help improve overall profit margins. Regarding investment costs, we have stated that investment costs are expected to rise in the fourth fiscal quarter and fiscal year 2027, but the growth rate is lower than the level so far. Therefore, as I said, we will focus on returning individual system profit margins to the long-term target range as soon as possible while continuing to drive profitable growth.

Moderator:

The next questioner is Mark Newman from Bernstein.

Bernstein Institutional Services Research Division Mark Newman:

Keep asking about individual system profit margins. Regarding the timing of the rise in memory costs, have the benefits of low-cost memory inventories come to an end? Or is there still some cost benefit in the newly announced third fiscal quarter? What I want to know is, on the cost side, are you still facing more adverse factors and need to gradually normalize inventory costs to current memory market prices; or are future cost increases simply based on memory market prices continuing to rise?

Related to this, in terms of PC pricing, this performance clearly means a considerable increase in prices, which is driving strong revenue growth. But what I want to know is that since part of the revenue comes from channel partnerships, and channel partnerships may cause a certain lag in price increases, have you adjusted the pricing to the level you want to achieve? Or does pricing with some channel partners still need to be gradually caught up according to relevant terms?

In other words, I'm wondering if there is any further upside in pricing, or should we expect your pricing to keep pace with the market in the future?

CFO Karen Parkhill:

OK, Mark. Let me answer this longer question first. If Keitan has anything else to add, I will also give him the floor. First, with regard to personal system profit margins, it is true that we benefited from the inflow of low-cost inventory in our balance sheet into the profit and loss statement earlier this fiscal year. Although some low-cost products are still mixed in inventory, I think this benefit is largely over.

As I said, the more expensive inventory is now being reflected in the income statement. However, on the cost side, we are also taking other steps to drive costs down, such as product redesign and platform optimization. These measures will take some time, and we'll start to see some of the benefits in the future. This is also one of the levers that drive profit margins forward.

When it comes to pricing, we're always increasing our prices. As investment costs rise, we expect to continue to increase prices. After focusing on driving demand, reconfiguring products, and cutting costs as comprehensively as possible, we will use pricing as our last leverage. Please add Kaitan below.

Kaitan Patel, President of Personal Systems Business:

Thank you, Karen. As for the pricing issue, you've explained it very thoroughly. Let me just add: we have multiple market entry channels, including online channels, regular channel partners, enterprise customers, and contract end customers. The time required for various channels to reflect the latest pricing varies, so it ranges from immediate effect to several months before the price changes are fully reflected in all customers.

Moreover, all of these pricing actions were taken after the mitigation measures Karen just mentioned. Therefore, we will undoubtedly continue to advance some of the relevant actions. In addition to this, while pricing is one of the levers, other measures we have taken are also helping the company cope with the current situation. I'll give you two examples.

First, we use strong supply information-driven demand planning and demand guidance capabilities, and the insight of the WXP employee experience platform to identify key configurations for specific customer workloads to provide customers with optimal value at the right cost.

Second, we actively promote cost-oriented design plans to achieve highly optimized costs for specific products in specific countries. This gives us the structural ability to once again meet customer needs at the right value and cost.

Moderator:

The next question comes from TD Cowen's Krish Sankar.

Ginny Qin, TD Cowan Research Department:

I'm Steven, asking questions on behalf of Krish. The first question was for Bruce. Bruce, you mentioned earlier in your prepared statement that your goal is to reach 50% of AI PCs by the end of the year. I'd like to know the configuration of these AI PCs: do they include a large number of AI workstations? What is the approximate addition rate of a standalone AI accelerator in this part of the AI PC portfolio?

Interim CEO and Director Bruce Broussard:

Thanks for the question. This refers to the overall AI PC, not including the workstation. Let me explain this background first. As far as the added rate is concerned, the addition rate of AI PCs is very similar to other areas of the PC business; traditionally, this type of additional business accounts for about one-third and brings opportunities with a profit margin level of about 30%. In addition to this, we also see opportunities to continue adding solutions for AI PCs.

These solutions include the HP IQ, which will launch later this year. Equipment safety is another area we focus on, and even AI printing in the printing business can complement AI PCs.

So when looking at AI PCs, as Kaitan and Karen said, they have high-end pricing and can create significant value for customers; at the same time, they also have the added business opportunities we usually see. Based on this, we can add a variety of solutions to AI PCs to make the product more valuable to customers and, frankly, more valuable to us.

Kaitan Patel, President of Personal Systems Business:

Based on what Bruce said, I'd like to add that AI PCs also performed strongly this quarter, accounting for 46% of our product portfolio, in line with the forecast of 40% to 50% for the 2026 fiscal year. We expect this ratio to rise to 60% — 70% in 2027 and surpass 70% in 2028.

Additionally, we've accelerated partnerships with over 150 independent software developers and software companies to take full advantage of the power of these PCs. As Bruce said in his speech, more and more AI workloads are shifting to the edge, driven by cost, latency, and privacy factors, and the role of these groups of PCs and customer devices will continue to expand. As a result, this will increase our profit margins, and we will continue to focus on AI PC portfolios and workstations; these are key growth categories.

Ginny Qin, TD Cowan Research Department:

Understood. My question relates to the strong double-digit growth you are seeing in the European, Middle Eastern and African, and Asia Pacific and Japan markets. If I remember correctly, the Windows 11 switch cycle is an important driving force in the near future. I want to know is Windows 11 switching still an important driver this quarter and even next? Or will this factor gradually subside in the short term? It would also be helpful if you could introduce other drivers of demand.

CFO Karen Parkhill:

OK, thanks for the question, Steven. Currently, the Windows 11 switching cycle is about 70% complete. It has been a good growth catalyst for the past few years and is still driving SME demand.

However, the Windows 11 catalyst is increasingly being complemented by increased demand for AI PCs, edge AI, and intelligent workloads, which require more powerful PCs. Frankly, we think these tailwinds will shape the market over the next few years. As Kaitan mentioned earlier, we are proud that AI PCs currently account for a high proportion of shipments and will continue to increase in the future.

Moderator:

Today's next question comes from Bank of America's Wamsey Mohan.

Wamsey Mohan, Bank of America Securities Research Department:

Can you talk about channel inventory levels for PC and printing businesses, and how is the current inventory situation compared to the ideal level? I have one more question.

CFO Karen Parkhill:

Thank you, Wamsey. What I'm saying is that we definitely maintain strict discipline when managing inventory across channels. In an inflated cost environment, we expect inventory to be higher than normal, and this is true of the current personal systems business. Despite this, channel inventory levels are well controlled.

Inventory is within the demand outlook and continues to support the continuity of supply we hope to maintain in an environment where memory supply is limited. In the printing business, channel inventory remains at a healthy level and within what we consider normal.

Wamsey Mohan:

OK. As a question, we've heard many discussions about AI and the proportion of AI PCs in the product portfolio. What I want to know is, are customers already quantifying the return on investment of local inference deployments? What application scenarios are driving this trend? Or are customers choosing AI PCs simply because they are becoming the default configuration during the switch cycle? In other words, how much actual utility are AI PCs currently providing in terms of return on investment, and how many are just being configured for the future?

Kaitan Patel, President of Personal Systems Business:

I'll answer that. Wamsey, thank you for the question. It's clear that AI PCs now offer more value than last year. As workloads move from the cloud to the device side, it is creating significant value for customers, particularly in terms of token economics; this is becoming an important topic as customers begin deploying workloads in their own environments.

Customers are already seeing this significant value. In addition to this, they've also seen other benefits, including getting sensitive data closer to where it's generated, reducing reliance on network connections, reducing response times, and managing AI costs more effectively, as I said before. As a result, we are seeing the adoption of AI PCs unfold in stages.

Currently, it is helping customers implement high-value application scenarios with clear return on investment, such as employee productivity, engineering and design workflows, customer service, and predictive maintenance. As customers build confidence in some application scenarios, these capabilities will be extended to a wider range of devices and enterprise workflows. That's the trend we're seeing right now.

Moderator:

The next questioner is Asia Merchant from Citi.

Citigroup Research Michael Cadiz:

I'm Mike Cadiz, Asia Merchant representing Citi. I'm asking two questions at once. The first question is, can the reasons for the increase in free cash flow guidelines be further explained? Does this include drivers other than tariff refunds or is there more leverage available? That's the first question. The second question is, can you further explain what proportion of enterprise customers are in different pilot stages and large-scale deployment stages in the process of deploying AI PCs?

CFO Karen Parkhill:

Thanks for the question, Mike. I'll answer the free cash flow question, then ask Kaitan to answer the second question. As far as free cash flow is concerned, we are satisfied with our performance this fiscal year to date. The performance is better than the seasonal pattern, which allows us to raise our guidance for the whole year.

This performance was actually driven by strong growth in the personal systems business and continued focus on working capital. Our cash conversion cycle is negative 37 days and we continue to place great emphasis on this indicator. Therefore, the improvement in free cash flow does not only come from tariff refunds. Tariff refunds have provided some help, but the main driver is clearly underlying business performance. Can you answer the second question, Kaitan?

Kaitan Patel, President of Personal Systems Business:

OK. Based on what I just said about AI PCs and workloads, I'd like to say that customers clearly have unique needs, and we're currently meeting modern office needs with PCs, printers, peripheral services, and conference room solutions. At the same time, solutions such as WXP enable IT teams and administrators to effectively monitor and support end users. In a world where humans and smart bodies work together, this is becoming an important requirement.

Currently, our AI PC has the strongest ability to run AI models locally. As Bruce said, we've shown the native AI model for the first time with HP IQ. The Wolf Security solution that HP is deploying is also unique and can prevent intrusions at the BIOS level. These elements are being combined as customers deploy these capabilities in high-value application scenarios and further scale up their applications.

However, one trend we are seeing, and a major advantage of HP's market positioning, is that the company has a unique ability to connect terminals, user experience, enterprise manageability, security, and the broader information technology environment. This is forming a good value proposition we can offer.

Interim CEO and Director Bruce Broussard:

Kaitan, I'll add one more thing. We have seen good returns on investment in many different areas. As Ketan said, one important area is developers and customer service; we're also seeing rewards in manufacturing, where workstations can be integrated into production lines for quality control and other AI-related manufacturing tasks.

So we're really seeing rewards in manufacturing, and we're also seeing rewards in retail. Additionally, we're starting to see related applications in healthcare. Whether in the industry segments we are focusing on, or in the broader fields mentioned by Ketan, some very powerful application scenarios have generated a great deal of interest and demand.

Moderator:

The next question comes from Morgan Stanley's Eric Woodlin.

Eric Woodlin, Morgan Stanley Research Department:

Sorry, I joined the conference call late. Karen, you sound very optimistic about the personal systems operating margin for FY2027 and think the quarter ending October will be a low point. However, if you consider that the decline in sales is accelerating, parts inflation continues, and more expensive inventory is flowing into the profit and loss statement, and demand elasticity is likely to increase due to these factors, I don't fully understand what factors can actually drive the improvement of personal system operating profit margins.

Even Nvidia tonight indicated that next year's memory costs will put pressure on profit margins. So can you help us better understand what factors can counteract these pressures? Then I have one more brief question.

CFO Karen Parkhill:

OK, Eric, happy to explain. Obviously, we've already mentioned that costs are expected to continue to rise, but the rate of growth will slow down. This is the first point. Meanwhile, the mitigation actions we have been taking are really starting to take effect. For example, long-term contract revisions on the pricing side require some preparation time; cost measures such as product redesign and platform optimization that we have been promoting also take some time, and these measures are now beginning to take effect.

Importantly, we will continue to focus on the direction we have been promoting until now, which is to increase the share of high-end products such as AI PCs and workstations, while increasing the share of additional products, and there is still plenty of room for further growth in this area, including peripherals, services, and WXP platforms. It is all these factors combined to give us a high level of confidence that profit margins can improve starting at current levels.

Eric Woodlin:

OK, I see, thanks. As a quick question, I know this conference has always focused on personal system profit margins, and so did I. So, looking ahead to next year, what is the operating profit margin of the printing business? What do you expect it to look like? What are the positives and negatives to consider?

CFO Karen Parkhill:

Regarding the profit margin of the printing business in FY2027, I first confirm that we still accept the long-term operating margin range of 16% to 19%, which is still in effect in FY2027. Exactly where we fall within the range may vary from quarter to quarter and be affected by seasonality and how much long-term profitable equipment we can launch in a competitive environment.

However, looking more broadly into the 2027 fiscal year, we will continue to protect operating profits by increasing the market share of margin front-loading ink cartridge printers, expanding the consumer subscription business, and strengthening our position in the office market using AI innovations that are being introduced to the market. At the same time, we will also maintain the momentum of the industrial graphics business and always adhere to cost discipline. Hope this helps.

Moderator:

Today's next question comes from Kathryn Murphy of Goldman Sachs.

Kathryn Murphy, Goldman Sachs Group Research Department:

Revenue from the personal systems business increased by 18%, while sales fell by 16%, which is an impressive performance. Can you help quantify, or at least explain in order of importance, how much did the price increase of similar products, the benefits from the shift in product portfolio, and the increase in the additional rate of related services each contributed to the implied average sales price increase this quarter? Furthermore, about one-third of the business's gross profit still comes from these additional businesses. Is that still the correct way to understand? Then I have one more brief question.

CFO Karen Parkhill:

Thank you, Katherine. I'll answer that question; Kaitan can add if he wants to. All of the steps we've taken have collectively contributed to revenue growth, but we won't quantify how much each one contributed. However, as we increased our share of high-end products, AI PCs, hybrid systems, and employee experience platforms, the product portfolio clearly played a role; all of these had an impact, as did pricing. Due to rising investment costs, we have continued to increase prices, which also had an impact. Kaitan, do you have anything else to add?

Kaitan Patel, President of Personal Systems Business:

OK. To further explain how the product portfolio contributed to overall profit margin performance, our share in the high-end category grew strongly month-on-month. The market share of high-end products increased by 2.6 percentage points, and the market share of workstations increased by 1.8 percentage points. The categories themselves are growing, and we're excited to continue to seize market share.

As for your question about non-hardware business contributions, yes, the additional business consists of peripherals, collaboration solutions, and services such as WXP, which contribute one-third of the overall gross profit of the personal systems business. This is in line with our predictions, and we will continue to focus on growing these businesses.

KATHERINE MURPHY:

Very good. Next, I'd like to ask if you have formed any initial opinions on PC sales in the 2027 fiscal year?

Karen Parkhill:

Regarding fiscal year 2027, it is clear that we are still in the planning phase. It is still too early to give specific figures on the outlook for this fiscal year. PC sales are also still changing, so it's not ripe to discuss this issue at this stage.

Kaitan Patel:

I'll just add that looking ahead to 2027, there are two demand vectors. As Karen previously stated, the first catalyst for growth is a shift in workloads to AI, so categories such as AI PCs, high-end PCs, and workstations will benefit, which will form a tailwind factor.

At the same time, due to price increases this year, some customers have delayed product replacement, and demand has been delayed as a result. As costs begin to stabilize for some time to come, we will gradually see the re-emergence of some switching requirements. These are the two different signals of demand we're seeing.

Moderator:

The next question comes from UBS's David Vogt.

David Vogt, UBS Investment Banking Research Department:

Karen, I'd like to ask a clarifying question about profitability and profit margins for 2027. Can you explain the comments on protecting the profit margins of the printing business in more detail? Does this judgment exclude the revenue from tariff refunds for fiscal year 2026? Should we interpret your comments on 2027 this way?

Or does that include the benefits from this year's tariff refunds? Also, can you help us understand - I joined the conference late, sorry - are customs refunds mainly reflected in the printing business? I'm guessing the personal systems business is also reaping quite a bit of revenue, but I didn't fully listen to the prepared statements.

CFO Karen Parkhill:

OK. Regarding the profit margin of the printing business next year, when we talk about the long-term range of 16% to 19%, this does not include, or exclude, any one-time benefits that may be obtained from tariff refunds. We did receive some of the tariff refund revenue this quarter, and we have indicated that we will receive more revenue next quarter.

It is true that tariff refunds mainly benefit the printing business, and the personal systems business also received a small portion of the revenue, but the main beneficiary is the printing business. As a result, the profit margin of the printing business was higher than expected this quarter, which was driven by this revenue. Excluding these earnings, profit margins were generally in line with expectations.

David Vogt:

Very clearly, this is in line with our judgment. What follows is a brief question. Regarding the product portfolio, we were previously concerned about this quarter's portfolio shifting to hardware; apparently, compared to consumables, the hardware business is stronger seasonally. How should we view the hardware side investment costs and their impact on the business?

Because in the past, we've talked about exchange rate effects, and we've also talked about the impact of commodities such as oil. Looking ahead to the 2027 fiscal year, what do you think of these factors? I know you don't want to provide formal guidance, but when I consider these variables, which are to some extent not controlled by the company, how should I understand their contribution to the future?

Karen Parkhill:

Overall, in the printing business, we will continue to focus on maintaining momentum in key growth areas and launching new products in the more traditional printing business. This includes expanding the ink cartridge product portfolio and boosting the recently launched office AI laser printing product portfolio to gain further momentum for development.

Regarding consumables, we have long stated that we expect consumables revenue to drop to the middle single digits at a fixed exchange rate. Specifically, by the 2026 fiscal year, we expect a single-digit reduction based on a fixed exchange rate, but the long-term view on the consumables business has not changed.

Moderator:

The next questioner is Ananda Barua of Loop Capital.

Ananda Barua, Research Division, Loop Capital Markets

I would like to continue discussing the revenue structure after entering 2027. Are enterprise customers currently trending to upgrade to higher-configuration PCs? In other words, you're seeing an increase in average sales prices, not only because of memory prices, but also because customers are actually increasingly looking to buy higher-equipped devices.

What I'm trying to understand on a factual level is are customers more and more likely to naturally accept higher pricing? Is customer acceptance of higher prices increasing, especially as memory prices continue to rise from 2027 to 2028?

Kaitan Patel, President of Personal Systems Business:

OK, I'll answer that, thank you for the question. We do see customers choosing higher-configured products, mainly because AI needs to be executed on the edge to support growing AI workloads. As customers deploy AI into their own workflows, this need is becoming more common than ever.

At the same time, increased smart device usage, rising concerns about token cost, and varying requirements for cybersecurity, privacy, and delays in many applications are driving customers to switch to more capable PCs. So, as you said, we do see that as a natural change in the product portfolio, demand is also shifting to higher-end devices.

Ananda Barua:

This is a difficult question to answer, so I'll just ask it briefly. Are you now able to observe enterprise users adopting or discussing AI PCs? You mentioned briefly earlier that AI PCs can run models off the internet, so enterprises can run the model natively locally and avoid token fees without having to bear the cost of token tokens. Has this become an important part of customer discussions?

Kaitan Patel, President of Personal Systems Business:

Yes, there are two major types of discussions currently underway as customers introduce these workloads. The first category is that token costs continue to rise, and how deploying models to the local edge can help customers optimize costs while meeting the needs of employees to use different AI models at work.

This is certainly one of those important discussions. The second type of important discussion is how to govern these agents in a more secure way and achieve the right level of enterprise manageability as customers deploy more agents in their own environments. In addition to the vertical industry workflow Bruce mentioned earlier, we believe these are the two most important application scenarios right now.

Moderator:

Ladies and gentlemen, this concludes the Q&A session. I will now return the phone to Mr. Bruce Broussard and ask him to make additional or concluding remarks.

Interim CEO and Director Bruce Broussard:

Thank you, and thank you all for asking in-depth questions and attending today's meeting. As you can feel from our tone, we're excited for the future. Edge AI is creating incredible opportunities, and HP is well-equipped to lead the field.

As we discussed, with a strong product portfolio, extensive network coverage, and a trusted brand, we have everything we need to help our customers thrive in the AI era. As always, we thank our customers, partners, and investors for their continued trust in HP. We look forward to continuing to keep you informed of progress. Have a nice afternoon everyone, thank you.

Moderator:

Ladies and gentlemen, this concludes our conference call for today. Thanks to everyone who participated, you can now disconnect.