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HP Inc. to Lay Off Thousands as Printing Business Faces a Reckoning

By Timothy Green - Updated Oct 7, 2019 at 1:58PM

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The company has long sold its printers cheaply and relied on ink sales for its profits. It's about to reverse that formula.

HP Inc. (HPQ 1.26%) has a plan to save its struggling printing business, which Bernstein analyst Toni Saccanoghi likened to a "melting ice cube" last month. HP's razor-and-blades model, under which it sells its printing hardware cheap to drive sales of expensive ink and toner cartridges, has been under pressure as third-party ink suppliers selling at discounted prices eat away at its market share. HP's supplies sales are down 4.5% year to date.

Incoming HP President and CEO Enrique Lores said the company would be "taking bold and decisive actions." In reality, its plan is a mix of heavy cost-cutting, throwing money at shareholders, and shifting away from a business model that's clearly no longer working.

Scissors cutting paper that reads costs.

Image source: Getty Images.

Workforce reduction

HP expects to eliminate 7,000 to 9,000 employees worldwide as part of its fiscal 2020 restructuring plan, through a combination of layoffs and voluntary early retirements. HP had roughly 55,000 employees as of Oct. 31, 2018, so this will amount to as much as a 16% workforce reduction.

These job cuts are expected to produce annualized gross savings of $1 billion by the end of fiscal 2022. Before that, HP will take charges totaling $1 billion related to the restructuring. About $100 million worth of those charges will show up in Q4 2019; another $500 million of charges will be spread across fiscal 2020; the remainder will be split between fiscal 2021 and 2022.

The cost savings will mostly come from corporate functions and back-office support, according to CFO Steve Fieler in an interview with Bloomberg.

Buybacks and dividends

In a classic restructuring move, HP has authorized a multibillion-dollar stock buyback to be executed during the same period as it's laying off employees. HP added $5 billion to its existing share repurchase authorization on Sept. 30, bringing the total available to $6.7 billion. HP says it will use those funds to offset the dilution caused by shares issued through employee stock plans, and to buy back shares opportunistically.

The dividend will also get some love in fiscal 2020 with a 10% boost. HP will allocate at least 75% of its free cash flow -- forecast to be at least $3 billion -- to dividends and share buybacks combined. 

Shifting printing economics

HP Inc's business model in printing is no longer working, so it's pivoting: The era of selling printers cheap is mostly over.

The tech company will now try to profit more from selling hardware and lower its dependence on selling supplies. It will focus on system profitability, raise hardware margins, and push services like Instant Ink for consumers and Managed Print Services for offices. Bloomberg reports that the company will still sell some inexpensive printers, but that it will use new technologies to make sure they don't work with non-HP ink cartridges.

This plan could backfire spectacularly if HP's competitors don't follow suit, and instead choose to undercut it on hardware pricing. Even if the plan does work out, it seems unlikely that the lost profits from high-margin supplies sales will be fully offset by additional profits from hardware sales. The most likely scenario is that the printing business becomes less profitable for HP over the long run.

HP expects to produce GAAP earnings per share between $1.98 and $2.10 in fiscal 2020, which includes one-time charges. While the stock now trades for around 8 times that earnings guidance, a low PE ratio means nothing if those earnings aren't sustainable. Cost-cutting can prop up the bottom line for a while, but it can't fix the problem of deteriorating printing profits.

Timothy Green has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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