HPQ Q2FY2010 Printer metrics and commentary

Below find the updated spreadsheet on HP's printer business, as updated during this week's earnings announcement and discussion. Some of the commentary includes:

CEO Mark Hurd, prepared remarks:

IPG continues to make significant progress in placing units with high page consumption such as ink in the office, wireless, and graphics, each of which grew more than 30%. We installed roughly 2400 retail photo kiosks this quarter and expect roughly 7,000 placements by year-end. Managed print services had strong signings and Indigo press pages grew 26%. We continue to make significant investments in this business while delivering 17.2% operating margin.

CFO Cathie Leskjak, prepared remarks:

Looking at the details of our performance by business, during the second quarter, revenue in the Imaging and Printing business grew 8% to $6.4 billion. Consumer hardware revenue increased 16% and commercial hardware revenue grew 13% compared with the prior year quarter and supplies posted solid 6% growth. Segment operating profit totaled $1.1 billion or 17.2% of revenue. Total printer unit shipments grew 9%, with consumer printer units up 15%. Commercial printer units declined 8%, reflecting constrained product availability. During the quarter, laser printer average selling prices increased as we focused on placing high value units. We expect LaserJet system availability to improve significantly in Q3 with more than 30% year-over-year unit growth next quarter. For the full year, we still expect double digit unit growth for both Inkjet and LaserJet printers.

We continue to gain significant traction in our growth initiatives with managed print services, retail publishing and commercial graphics each delivering double digit growth. Managed print services had multi-million dollar wins in every geography across diverse industries including financial services, telecommunications, and transportation. HP's managed print services offering is being recognized by customers and industry analysts for its industry leading management tools and infrastructure, and its ability to deliver focused solutions for customers. Retail publishing has had several large wins, installing approximately 2400 systems this quarter. In our commercial graphics business, growth accelerated across the portfolio with digital impressions up 26% from the prior year.

From the Q&A following, four distinct questions regarding printing and imaging, with some very interesting answers from Hurd and Lesjak.

Bill Shope - Credit Suisse - Analyst

Okay, thanks. Mark, can you walk us through your strategic rationale on the PALM deal, and then going forward should we still assume that most of your future acquisition focus will be at least more enterprise focused than consumer?

Mark Hurd - Hewlett-Packard - Chairman, CEO

Well, our enterprise -- our history has been more acquisitive certainly in the enterprise but again, Bill, like we've said before, all of our acquisitions, regardless of where they are, go through a pretty extensive filter in terms of making sure they are strategically sensible, financially sensible and that we can actually operate and get some incremental leverage in operating performance out of it. So it's got to hit all three filters.

I think in this case, of PALM and our planned acquisition of PALM, it really has more to do with the intellectual property and the fact that when you look across the HP ecosystem of interconnected devices, it is a large family of devices and we think of printers, you've now got a whole series of web connected printers and as they connect to the web you need an OS. We prefer to have that OS in our case to be our IP where we can control the customer experience, as we always have in the printing business and that's a big deal to us. You can certainly make the same case for smaller form factor products in the mobile world like Slate and some other products and again, I don't want to tell you that we're not going to have --

Microsoft is probably one of the best relationships we've got in our Company and they are still extremely important to us. There are a couple of form factors, though, that are very attractive for us and there are small form factors where we think the IP can be very additive to us. So it isn't precisely, Bill, a SmartPhone play as I've seen some people write. Clearly that's a $45billion total available market that is growing and so that is an attractive market, but it is for us strategically broader in the context of the number of HP interconnected devices where we can leverage the IP and that's what we plan to do.

Ben Reitzes - Barclays Capital - Analyst

Thanks a lot. Mark, could you talk about what's going on in printing? I was kind of stunned by the guidance for laser printer snext quarter, up 30%. It would seem like there was a significant deferral or push out and last quarter you said that the constraints would be over by this quarter and now it's by next quarter, I'm just wondering if this is a firm target or a moving target and then just how we reconcile the printing units for the year that way.

Mark Hurd - Hewlett-Packard - Chairman, CEO

Sure, thanks, Ben. Listen, we think we'll have a strong quarter this being Q3 in terms of unit placements for lasers. I'm not thrilled with the Q2 unit numbers, but I am pretty pleased with the types of units we put in the market. The ASPs were up significantly in lasers, so the units we could get, we got the right units, if you will, from a printer placement perspective. So I think you should expect a very strong back half in laser and a very strong Q3 and we have good line of sight and good visibility to that going into the quarter. Demand has continued to be strong. I think, Ben, when you talked about the broader printing business, a very strong quarter for us obviously in ink placements again, we felt very good about our ink line up of products, the growth in wireless printing and in web connected printers continues to be very strong. So I think IPG very strong in ink. As we mentioned in our script and in our opening messages, the position in retail photo kiosk, Ben, is a big deal. We installed as many retail photo kiosks in the quarter as we had for the entire life of the product, so for us this was a doubling of that base. We plan to exit at over 7,000 as we exit the year. Managed print services had another very significant quarter and again, the importance of those two businesses for us are those are long term businesses, managed print services five year contracts, retail photo kiosks staying installed nine and 10 years,100% connect of supplies to those products and they are beginning to be a meaningful part of our portfolio. So I think across IPG, when you look at the supplies growth we reported, which is the dollar number as opposed to the local number and the local number would have been yet higher. Ben, overall we felt very good about the IPG quarter, and we've worked hard to get the business in a position to be able to do what we've just reported. The one thing we really want to get done is what you opened with. We want to get the laser printer number into a position where we're driving unit growth and the demand is there.

Ben Reitzes - Barclays Capital - Analyst

It sounds like you're guiding for acceleration in the segment, so that's the bottom line, right?

Mark Hurd - Hewlett-Packard - Chairman, CEO

Yes, listen. We feel good about the position of the segment. Now, as you know, the acceleration of the segment and sometimes comes with a price and as we place more units when we see the demand opportunity, but that's one of the reasons we've worked so hard on the supply chain, to put ourselves in a position to actually get that acceleration, or if you will, seize that acceleration when the opportunity presents itself. And Ben, I think that's the position we put ourselves in.

Ben Reitzes - Barclays Capital - Analyst

Thanks a lot.

Cathie Lesjak - Hewlett-Packard - CFO
Ben, the other thing I'd add is that we did say at the end of Q2 and we still believe this is the case, that we will get double digit growth in laser units and ink units for the full year and if you actually look at the results that we teed up in terms of laser unit placements in Q2, they were not materially different than what we had expected going into Q2.

Ben Reitzes - Barclays Capital - Analyst

Okay, thank you.

Mark Hurd - Hewlett-Packard - Chairman, CEO

Yes, thanks, Ben.

Scott Craig - Banc of America Merrill Lynch - Analyst
Thanks, good afternoon. Cathie, can you maybe look at the IPG margins over the next couple of quarters as you see the hardware increasing perhaps as a percentage of sales, particularly given the laser growth that you're looking at? How does that impact the margins of that business and your thought process around the range of what possible margins could be in there throughout the rest of the year? Thanks.

Cathie Lesjak - Hewlett-Packard - CFO

Well, I'm not really going to update the guidance for the full year beyond the 15% to 17% that we think are kind of the margins for IPG this year. We believe we can definitely manage anything that's coming down the pike right now in that range. On the hardware unit placements can uptick significantly and we still absorb it and that's because we've just done a great job of frankly making operating IPG in a tighter way and getting supply chain costs and OpEx costs out of the cost structure, so that we're able to absorb these unit placements and still maintain industry leading profitability.

Mark Hurd - Hewlett-Packard - Chairman, CEO

I think to Cathie's point, this is a big point, Scott, in a very strange way 2009 was really a blessing for us and I'll emphasize in a strange way, because it really got us sharper and IPG is a really good example of that. We thought we were going in pretty sharp and we certainly sharpened up. Our ability now to deal with some of these issues has just given us more flexibility, to do the kind of unit performance that we've talked about here for the full year, forget this quarter or that quarter, but when you look at the full year unit performance and the opportunities we have in terms of placements. Again understand, Scott, we've done this while investing and placing these retail photo kiosks. So I want to make sure this is no trivial issue that we've been able to absorb the start up of the managed print services businesses, we've been able to install these retail photo kiosks, which are very similar to the printer model just bigger units, forecast the growth to take the unit growth in Inkjet, the forecast that we have in laser and do all of that within the targeted margins that we've described, and this has given us a level of flexibility that, frankly, if you went back three or four years, we simply couldn't have done this and so this is a big deal for us.

Cathie Lesjak - Hewlett-Packard - CFO

Scott, it's not just about the P&L. It's also about working capital management. We have -- we're able to operate with much lower channel inventory levels today because we've improved our efficiency on that side, and then also the owned inventory levels are down significantly year on year, again this quarter. And we expect continued improvement in that space and so it's really the entire ecosystem of the IPG business, both the income statement and the balance sheet and our partners.

Mark Hurd - Hewlett-Packard - Chairman, CEO

Great. Thank you.

Scott Craig - Banc of America Merrill Lynch - Analyst

Thanks, I'll keep it to my one question.

Brian Alexander - Raymond James & Associates - Analyst

Thanks, just to go back to the laser business, sorry for beating a dead horse, but can you just be a little more specific on what caused the core laser units to be down 8% after growing 11% last quarter while the market growth was actually accelerating? What specifically needs to improve? Seems like the product constraints have been prevalent for multiple quarters. So is any of this intentional seeding of market share due to low price points by competitors, and if you could comment on supplies, did the growth in local currency accelerate in line with your expectations and do you think that will continue for the balance of the year as placements for lasers pick up? Thanks.

Cathie Lesjak - Hewlett-Packard - CFO

Well, on the laser side it's really capacity. Just the inability to get as many laser units as we wanted and the demand that we had for them so two things have happened. One is demand has picked up and improved more than what we had expected. That's good news and it's also bad news because we haven't been able to get the capacity. We have a very strong backlog coming out of Q2, and like I said earlier, what happened in Q2 in terms of the laser unit decline is not really a surprise to us. It's materially what we had expected going into Q2. This was always going to be a back half, very strong back half unit placement for lasers in order to get to the double digits for the year that we believe is very doable.

Mark Hurd - Hewlett-Packard - Chairman, CEO

Yes, Brian, this is where we expected to be roughly speaking. There was no sort of surprise to us. I think what -- I would characterize it differently. We would like to have had more. That's probably the better way to think about it and let me make sure I'm clear with you. No, we did not do any hold back because of price points, quite the opposite. We were pushing as hard as we could towards the end of the quarter and we're pushing as hard as we can right now. The demand is strong, so to Cathie's point that's the good news.

The bad news is we haven't been able to fulfill as much customers want. The brand loyalty to HP is just, unless you're here feeling it you wouldn't get it. It is just amazing how our partners and our customers stick with us on this and we're going to get better at this and I'm telling you, I think you three will turn on it. To your point about supplies, supplies have been strong. It's good news and I think it's also not just the unit placements, as we've talked before, Brian. Getting the right units placed is actually more important than the unit -- number of units that get placed and to some degree I think you saw that show up in Q2 as well. When you look at the ASPs in the laser business, let me flip it around, what we were able to focus on was getting the right units out and that did pay dividends within the context of a number that clearly we just wish was better. Okay, well let me wrap it up here. I think the conclusion of it for us is we feel very good about the broad based growth in the quarter, 13% growth for us is, we think, a good result, not only the fact that we grew 13, but the fact that it was contributed to across regions and across our businesses we think was extremely positive. We are a stronger Company today and I want to emphasize that based on our portfolio, our scale, and our consistent execution. Now, at the same time we have more work to do to transform ourselves to reach our potential. So as good as we feel in some respects about what we've done, we are still not to our full potential and we feel good about our position, which gives us the confidence, as we described here, to raise our outlook from where we previously had it.

So thank you all for joining us. We do appreciate it.