HP Inc. — Q1 Fiscal 2024 Form 10-Q
Reporting period: Three months ended January 31, 2024; comparisons are with the three months ended January 31, 2023 unless noted. HP sells personal computing devices, printers and supplies, and related services. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q1 FY2024 | Q1 FY2023 |
|---|---|---|
| Net revenue | $13.185 billion | $13.798 billion |
| Gross margin | $2.888 billion; 21.9% | $2.787 billion; 20.2% |
| Operating earnings | $935 million; 7.1% margin | $743 million; 5.4% margin |
| Net earnings | $622 million | $469 million |
| Diluted EPS | $0.62 | $0.47 |
| Cash from operations | $121 million | $(16) million |
- Revenue fell 4.4% year over year (4.9% on a constant-currency basis). Product revenue declined to $12.419 billion; services revenue rose to $766 million.
- Gross margin expanded 1.7 percentage points, which HP attributed mainly to lower commodity and logistics costs, favorable currency effects, and cost savings, partly offset by competitive pricing.
- Operating expenses were $1.953 billion versus $2.044 billion. Lower restructuring and acquisition-related charges contributed to the improvement; SG&A increased 3.9%.
- Effective tax rate was 21.6%, versus 16.6%. The prior-year quarter included $56 million of net discrete tax benefits.
Segments and material changes
- Personal Systems: Revenue decreased 4.1% to $8.809 billion; operating earnings rose 13.1% to $537 million and operating margin increased to 6.1% from 5.2%. Unit volume increased 5.1%, while average selling price fell 7.5%, reflecting competitive pricing and mix.
- Printing: Revenue decreased 5.1% to $4.375 billion; operating earnings were nearly flat at $872 million, and margin improved to 19.9% from 18.9%. Printer unit volume fell 16.5%; supplies revenue was approximately flat.
- HP said revenue declines continued to slow sequentially. It reported overall demand softness, cautious commercial IT spending, reduced discretionary consumer spending, competitive pricing, and particular pressure in China. Foreign currency was favorable in Q1.
Cash, debt and liquidity
- At January 31, 2024, cash and cash equivalents were $2.263 billion, restricted cash was $154 million, and total debt was $9.660 billion, compared with $3.107 billion cash and $9.484 billion debt at October 31, 2023.
- Quarterly cash flows: operating activities provided $121 million; investing used $228 million; financing used $708 million. Cash, cash equivalents and restricted cash decreased $815 million.
- Financing included $500 million of share repurchases and $275 million of cash dividends paid. HP had approximately $1.5 billion remaining under its share repurchase authorization.
- HP maintained a $5.0 billion revolving credit facility and a $1.0 billion 364-day facility, plus $1.0 billion of available uncommitted lines. HP stated it was in compliance with credit-facility covenants and expects available liquidity and financing sources to meet foreseeable needs.
- Accounts payable included $5.3 billion of obligations confirmed under supplier finance programs; $0.7 billion of that amount was owed to participating financial institutions. The program does not change HP’s stated payment terms.
Outlook, plans and risks
- HP expects near-term demand and market pressures to persist; the filing provides no specific numerical revenue or earnings guidance. Management said it was on track to meet its FY2024 gross annual run-rate structural savings target and the overall FY2025 plan goal.
- The Fiscal 2023 Future Ready Plan is expected to run through FY2025 and includes digital transformation, portfolio optimization and operational efficiency. HP expects approximately 4,000–6,000 employee reductions and estimates approximately $1.0 billion in pre-tax charges. It expects about $0.4 billion of future restructuring cash payments, including $0.2 billion in FY2024.
- Key risks include macroeconomic and geopolitical uncertainty, foreign-exchange movements, competitive pressure, demand and pricing volatility, reliance on some single-source printing suppliers, and execution of restructuring and business-model changes.
- Control weakness: Disclosure controls were assessed as ineffective due to an unremediated material weakness in IT general controls over certain software used in revenue accounting. HP said the weakness had not caused a financial-statement error or material misstatement, but could have resulted in one; remediation and testing were ongoing.
- Legal and tax matters: HP said it could not reasonably estimate potential losses in several early-stage patent disputes, including Nokia-related cases and a German R2 Semiconductor case. The R2 court issued an adverse judgment after quarter-end, including a potential sales injunction and recall; HP appealed and sought a stay. HP disclosed $1.2 billion of gross unrecognized tax benefits and approximately $943 million of recorded liabilities and related interest and penalties for uncertain tax positions.
Important facts for investors to verify
- Whether PC and printing demand, unit volumes, pricing and revenue trends stabilize, and whether segment margins remain resilient.
- Progress in remediating the material weakness in revenue-related IT controls and the timing of management’s effectiveness testing.
- Cash generation, working-capital needs, supplier-finance balances, and the sustainability of dividends and share repurchases given the decline in cash and outstanding debt.
- Execution and realized savings from the Future Ready Plan, including restructuring costs and cash payments.
- Developments in patent litigation and related injunction or recall risks, and outcomes of tax audits and uncertain tax positions.