Wednesday, February 20, 2008

More from HP (NYSE HPQ) on Q1 printer business

Following their Q1FY08 earnings announcement and conference call yesterday, HP (NYSE HPQ) has released the transcript of the call, and as promised I'm providing the printer-related highlights.

From CFO Cathie Lesjak's prepared remarks:

Now drilling in on the performance by business segment. During the first quarter, Imaging and Printing had revenue of $7.3 billion, up 4% year-over-year. Excluding cameras, revenue was up 5%. Supplies revenue grew 6%, and commercial hardware revenue grew 7%, while consumer hardware revenue declined 5% year-over-year. Segment operating profit was $1.2 billion, or 15.7% of revenue, reflecting gross margin expansion and favorable product mix.

We continue to see solid momentum in our growth initiatives. Our graphic arts business grew in double digits, and color laser and multifunction printer units grew 14 and 23%, respectively. Commercial hardware units increased 13% and consumer hardware units declined 2%. We continue to focus on targeting unit growth in areas of high supplies consumption, but do believe that we had more unit opportunities than we realized in Q1. Going forward, we expect to at least maintain share in the mature inkjet market, and see additional opportunities for growth in targeted areas such as graphic arts and enterprise printing.

Within IPG, we are also focused on reducing the cost structure and have a number of ongoing initiatives to improve supply chain efficiency and lower product costs. At the same time, we will continue to invest for growth and profitability through our commitment to research and development, targeted share gains, growth in graphic arts, and expansion of our enterprise printing sales force.

And from the Q&A, with printer-related questions (three of the total thirteen questions), with questions as attributed and HP CEO Mark Hurd on the answers:

[Question]Richard Gardner - Citigroup - Analyst

Thank you very much. Mark and Cathie, the thing that struck me from a product perspective this quarter was that supplies revenue growth actually accelerated, despite the fact that you had a tougher year-over-year compare. It looked like you were actually a little bit better than seasonal norm for the quarter. I was wondering if you could give us a little bit of color around what is driving the strength in supplies revenue growth, and whether it was toner or ink, etcetera.

[Answer] Mark Hurd - Hewlett-Packard Company - Chairman, President, and CEO
I know no meaningful difference between toner and ink trends in the quarter. Again, we have the benefit of a large installed base. During the quarter, we shipped our 500 millionth printer. So when you look at this, the pure scale of the business and the size of the installed base, it's a big one. As you know, we've invested from a unit perspective into that base for a while.

Now, let me give you some further color. When you look at the camera and you look at the appliances -- and we were very cautious, as we mentioned in our previous call, about appliance placements, there's -- I'm giving you a full-year characterization here -- roughly 2 to 3 points I'd say of growth headwind -- I want to say it one more time -- growth headwind for IPG in rationalizing those two categories through the portfolio.

So again, I would ask you to take IPG in the context of a pretty radical transformation we're doing inside IPG. We're working on a lot of cost that we're trying to take out of the business. We're investing in growth markets that are giving us substantive growth. To Cathie's point that she mentioned, graphics and the enterprise performed very nicely from a growth perspective for us in the quarter. So we're taking money and investing in those categories, and it is showing up, at the same time as we have a core business where we're sort of picking our spots as to where we feel makes sense to work on.

As Cathie also mentioned, and I'll follow-up on that, that we had some inkjet placements in the quarter that we could have made and didn't, from a unit perspective. We had some tailwind -- some headwind because of the appliances, but we could have done better than we did. And just to be very blunt, I'm not real happy about it. So there's more work for us to yet go do.

[Question] David Bailey - Goldman Sachs – Analyst
Just to sort of follow-up on that. Your overall per unit growth has come down four quarters in a row. Given the weakness we see in inkjet demand across the industry, should we think of this as a trend that should continue, or are there some reasons that you should start to see some stabilization or a rebound in growth as we go through the year?

Mark Hurd - Hewlett-Packard Company - Chairman, President, and CEO
I'll make a couple of comments and Cathie can follow-up. I sort of tried to give you that even, actually, in Richard's question. We reported 1% unit growth. There's a couple of points of unit growth tied up in the appliance piece. Remember that the laser growth in the quarter was 13%, so very significant double-digit laser growth. So I think when you think a couple of points on the inkjet side of total units would have come back through the appliance side, plus we left a couple of points on the table that we felt we could have had. So you've really got two different tales here. You've got kind of the laser business that's 13% growth that's going pretty quick. You've got the inkjet business that has some of the characteristics you described. I would, at the risk of giving you one more twist, tell you that long run, we're very focused on pages. So when we talk about inkjet units, we sort of lose the context of what happens in Scitex growth and Indigo growth in the high-end commercial printing that, frankly, has as much to do with our future -- and to Richard's earlier point, we may wind up with a slight disconnect in trying to model unit growth and inkjet to supplies growth, because what happens is the -- and I won't do this again -- but an Indigo printer when it goes up is worth thousands and thousands of inkjet consumer printers going out. And as those businesses grow, you can start to get a disconnect in what the suppliers growth looks like and what the actual inkjet unit growth looks like. And you're going to hear us talking a lot more about trying to get you some transparency to what that page growth looks like, and the implication it has long-term on our supplies business.

[Question] Shannon Cross - Cross Research – Analyst
Just wanted to ask a bit more on the printer side of the business. Mark, when you think about the trade-off between margins and market share and unit placements in that, can you kind of go through your idea on where you're going at for this year, because obviously, with unit volumes slowing, you think you'd have a mix shift to supplies. And I think you also mentioned some pretty aggressive comp moves within IPG. So at the end of the day, how aggressive do you think you'll be on pricing? How much do you think you'll sort of return to the bottom-line through margin expansion, etcetera? Thanks.

[Answer] Mark Hurd - Hewlett-Packard Company - Chairman, President, and CEO
We'll try to be precise in our aggression, if that makes sense, as opposed to just running around trying to do things that are aggressive in a broader sense. But again, I would like to tell you that IPG is a bit more complicated in the context of think ofthem with at least four big things we're trying to do at the same time. One is we're trying to realign our cost structure. And the great thing about IPG is it's a great business that's made a lot of money.The bad thing is it's a great business that's made a lot of money. And like with many businesses that have done that for a longtime, we have certain ways of doing things that VJ and Cathie and I know we can do a lot better than we're doing today. And it forms the basis for a big cost opportunity for us, and we're working it. Secondly, we want to grow the graphics business. Cathie, I thought, was very clear on our [intent] and our performance in that business. Third, we want to grow our enterprise business. And both of those have performed nicely for us over the past several quarters; again in Q1.Fourth, there is a core consumer business. We look at that differently by geography. As we described, we look at the laser business a little different than we do the inkjet business. And so when you look at that entire aggregation, we will pick our spots. And I will tell you here that we are not just trying to drive margin; we're looking at the optimization of long-term margin, which has a balance of units of placement, but making sure they're sensible unit placements that have long-term supplies connect at the same time as we try to get short-term operating profit. So it is very possible, Shannon, as you know, that we have a profit number that we wish we would have put more units in the market. And as I mentioned earlier, there were some units we could have put in the market as we looked back on it afterwards that we wish we had. And it is what it is. So we'll go back and make sure we try to get this right as we move forward here.

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