HP Inc. (HPQ) reported first-quarter adjusted earnings per share of $0.81, which was in line with estimates. Revenue, however, fell short, $13.2 billion compared to an estimate of $13.58 billion. The ongoing sluggishness in the PC market weighed on the company's results.
HP CEO Enrique Lores told Yahoo Finance Executive Editor Brian Sozzi that he does expect PC sales to grow in 2024, with the second half of the year being stronger than the first. What's driving the PC slowdown? Lores says, "What we have seen is that demand has slowed down. I think it's driven by the cautiousness that we see in corporate customers." Lores, however, strikes an optimistic tone looking forward, arguing that he expects "recovery on the commercial side and also a strong seasonal performance on the consumer side."
Watch the video above to hear Lores has to say about how AI will impact HP's business going forward.
For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.
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Editor's note: This article was written by Stephanie Mikulich.
Video Transcript
JULIE HYMAN: Let's also take a look at shares of HP Inc. That company's revenue missing estimates here. $3.19 billion was the first quarter net revenue number. $13.58 billion is what analysts had been anticipating. And the company's second quarter forecast of adjusted earnings per share of $0.76 to $0.86 is-- compares with the $0.82 that analysts had been forecasting here. But it seems like that sales miss is to blame for the drop in the stock.
In addition to that, first quarter free cash flow at only $25 million versus the billion dollars that analysts had been anticipating. That's a bit of a head-scratcher. So we'll dig into that a little bit further. But effectively, what you have here is that PC sales are still relatively weak here. So that revenue figure is down 4.4%.
JOSH LIPTON: Yeah. It'll be just be very interesting to see what the company says about the PC market now and looking ahead, what's the demand environment like, what's pricing going to look like. There are some folks who've been betting on a PC recovery.
JULIE HYMAN: Yeah.
JOSH LIPTON: And remember, of course, you've got printing. Ink and toner, I know not the most riveting topic, Julie Hyman, but critical for this company. So also what the company sees their, print consumer, print commercial will be very important.
JULIE HYMAN: It looks like printing was kind of in line with estimates. It's where the actual PC sales came in that disappointed.
JOSH LIPTON: Yeah. For more on this, Yahoo Finance's very own Brian Sozzi did catch up with HP's CEO Enrique Loris to go over the numbers.
BRIAN SOZZI: Enrique, earnings came in fairly well. And I think that says a lot about how your team continues to manage costs. But talk to us about why sales in the computing business and the printer business-- why did they decline in the quarter?
ENRIQUE LORIS: I think I would say we had a solid quarter in Q1. And both the decline on revenues was really driven by what we see from a market perspective. But internally, we are executing well. We grew share in PCs, which is the major driver of revenue. So from an execution perspective, we do well.
I think what is also important to highlight is that we continue to expect the PC market to grow in 2024. We expect the second half of the year to be stronger. And we are well positioned to ride that growth when it will come.
BRIAN SOZZI: What is it about those market dynamics, Enrique, that you just mentioned that is putting pressure on volumes of PCs and printers?
ENRIQUE LORIS: Well, what we have seen is that demand has slowed down. I think it's driven by the cautiousness that we see in corporate customers and by the many products that were bought in the past by consumer customers. I think this is what is the key thing that is behind what we see on the market. When we look at the future, we think we expect to see recovery on the commercial side and also a strong seasonal performance on the consumer side.
BRIAN SOZZI: What gets that commercial side going back? In terms of sales, what gets that growing in the right direction?
ENRIQUE LORIS: We think there are multiple factors. One is whatever is the evolution from a macro perspective. But then if we think about the specific PC category, Window Refresh is going to be a major driver of that. You know there is a discontinuity-- discontinuance on some of the previous OS, so that will drive growth. It has happened all the time.
There will be some impact on AI PCs that we think it will be modest in 2024. And then there is also-- there will be a positive impact on prices, a combination of mix. And also, as some of the commodity costs will increase, we will see an increase of prices.
BRIAN SOZZI: In terms of the AI PC, and this is something you and I have talked a lot really a lot about over the past year, year and a half, what is the ramp of uptake look like on those PCs amongst consumers?
ENRIQUE LORIS: We-- first of all, we continue to be very excited about the value that AI PCs are going to be bringing to customers because they will enable them to do many things that they cannot even dream about doing today. We think that the ramp is going to take about three years. Our projection is that three years after launch, the penetration will be between 40% and 60%. And therefore, the impact in '24 will be smaller, but we will see it gradually growing in '25 and in '26.
The key thing is not only going to be the availability of hardware that we will be driving but also to make sure that applications take advantage of the new functionality that PCs will be having. And this is the work that we are doing working with many of the key application developers to make sure they understand the possibilities and they integrate them in their solutions.
BRIAN SOZZI: Within-- there's a lot of focus right now of course on AI in hardware devices. But how important, Enrique, is it that a lot of companies are making more chips? And how important is domestic manufacturing of chips in the United States to ultimately bring some of these new AI PCs, AI cell phones to market?
ENRIQUE LORIS: We think that during the pandemic, we realize how important resiliency was. And to have a more resilient supply chain, whether it's chips or hardware in general, having a more distributed manufacturing network is important. And this is why we were very supportive of the CHIPS Act to make sure that we saw chips factories being built again in the US, because we think that, for the long term, it's going to be really critical to have those capabilities in the country.
BRIAN SOZZI: How big or how much of your supply chain is still in China?
ENRIQUE LORIS: We-- China continues to be an important manufacturing platform for us. But again, similar to what we were just talking about chips, we know we need to diversify. And we are increasing our manufacturing capabilities and capacity in other parts of the world. We are doing that in North America. We are doing that in Southeast Asia, in other countries to make sure that we have a more resilient model going forward.
BRIAN SOZZI: Pretty interesting week, Enrique, with Google-- Google CEO or Alphabet CEO talking about wrong inputs coming out of their AI models. And now they're really scrambling over there to fix it. How concerned are you about the information that an AI PC might put out because of these models?
ENRIQUE LORIS: I think as we look at AI, we need to look at it from two perspectives-- the value and the productivity improvements is going to bring. But at the same time, we need to be careful about the bad information and what the impact this may have. And we are really supportive of all the actions that are being taken place in different parts of the world to make sure that regulation is put in place, to really make sure that drone behaviors are under control.
BRIAN SOZZI: What does it feel like, Enrique, to be running a legacy tech company like an HP and just an iconic American company of PCs and printers at a time where there's so much attention and valuation or valuations are exploding for a lot of these software players and these chip players and these up and coming players in AI that nobody has really heard of? What do you think about that?
ENRIQUE LORIS: I remain very optimistic about the future of the company. I think the changes that we see happening in the technology space driven by AI, the changes that we continue to see in how people work driven by hybrid work are opening a tremendous opportunity for HP. And we are driving strong innovation in all these fronts to really be able to capitalize and to lead some of these changes.
So as you know, I have been in the company for a very long time. I am more optimistic now than I have been in the many, many years I have been before.
BRIAN SOZZI: Well, Enrique, look, you still look 27 years old. So you know, I will say that-- I will just say that publicly. But actually, before I let you go, on that point, you have seen a lot of cycles. You've been doing this for a good bit. You've lived through the dotcom crash and the financial crisis and now this AI situation. What's your read on valuations? Do you think investors investing in AI are wrong? Or are they just right to be as enthusiastic about some of these companies that, in some cases, they've never even heard of before?
ENRIQUE LORIS: I think when I look back at the last 30 years, there has been technology discontinuities that have created a lot of value. Think about the dotcom evolution 20 years ago, the mobile changes 10 years ago. I think AI is a similar disruption that is going to enable the creation of significant value that today we really don't understand how it will come. But I'm sure it's going to happen. And it is really what opens the opportunity for all of us to be optimistic about the future.