Investors clearly weren't happy with the earnings results that HP Inc. (NYSE:HPQ) turned in, sending its shares down nearly 17% on February 28 and putting the stock into negative territory for the year. Investors were apparently unhappy about the weakness in the company's printing supplies business.
Although such a large decline might tempt some investors to hit the panic button and sell their shares and others to immediately buy the dip, it's worth stepping back and seeing what management had to say about the business before making a move either way. To that end, here are some important quotes from HP Inc.'s most recent earnings call.
The printing supplies shortfall
On the call, CEO Dion Weisler began by explaining that the company's printing supplies revenue was down 9% year over year during the quarter, and cited, in particular, the EMEA region for that weakness. (EMEA stands for "Europe, the Middle East, and Africa.")
Weisler said that the company views its supplies business in a so-called four-box model that consists of the following categories: "in store base, usage, share, and price."
"The two factors that varied from our plan were a decline in share and, to a lesser extent, pricing," Weisler added.
He then went on to say that all of HP's commercial customers "are purchasing supplies online, and while we have leading share online, it's at a lower percentage than our share with traditional commercial resellers and in-store retailers."
The executive also added that "as macro uncertainty has increased, we have seen further price sensitivity among customers, pressuring both our share and our supplies pricing."
All of this led the company to revise its printing supplies business forecast from "flat to slightly up" for the current fiscal year to a 3% decline.
Check out the latest earnings call transcript for HP Inc.
Printing supplies action plan
During the call, Weisler outlined the company's plan to cope with the headwinds that hit its printing supplies business. First, the company is "taking actions to lower the level of supplies inventory in the market to be consistent with our new share assumptions."
Additionally, the company is set to put into motion "additional share improvement plans, including online programs, targeted marketing, and brand protection to promote the value of HP original supplies in terms of quality, sustainability, and environmental impact."
"The team's agility and ability to respond to challenges gives me confidence in how we'll manage through this environment," the executive said.
Personal systems strength
Although the company's printing supplies business is set to fall short of expectations for the fiscal year, the company's personal systems business -- which consists primarily of personal computer sales -- keeps performing well.
During the quarter, HP reported that its personal systems revenue was $9.66 billion, up 2.3% from the prior year (and, as the company pointed out in its earnings presentation, up 3.5% in constant currency). Operating profit rose to $410 million, up $75 million, or 22.4%, from the prior year.
With respect to this business, Weisler said that "[we] are improving our product mix and managing our costs." He also claimed that the company is "strengthening [its] position in strategic segments where we see pockets of growth and delivering differentiated and premium hardware services and solutions." (Examples of such areas include gaming-oriented PCs.)
HP CFO Steve Fieler explained that for the rest of the year, HP's personal systems segment will be forced to cope with supply constraints on CPUs in the first half of fiscal 2019 "with improvements in the second half."
By definition, CPU constraints will put a lid on the number of systems that HP can ship, suggesting that the company's personal systems revenue should be lower than it would have otherwise been without those constraints.
Fieler also said that "we expect the cost from the overall basket of components and logistics to improve compared to Q1 levels." This suggests gross margin and, ultimately, operating margin expansion for the personal systems business, barring some large increase in operating expenses.
HP's stock is certainly taking a beating following the disappointment on the printing supplies side of things. On the bright side, though, the company's personal systems business is still doing well, with things looking set to improve in the second half of the year. Moreover, the company outlined a credible plan to help stabilize its printing supplies business.
And, to top it all off, if the company hits its full-year guidance of between $2.12 and $2.22 in non-GAAP EPS, then the stock isn't particularly expensive after the drop, trading at about nine times the midpoint of that range.
While it might be a while before an upside catalyst emerges for the stock, the risk of significantly more downside looks pretty low to me.