HP CEO: 'We can't bring a musket to a drone fight'

Dion Weisler on how HP has to adapt its channel model as its printer supplies business comes under attack

HP reported its Q1 results overnight, with the vendor's share price dropping despite seeing a revenue increase.

On the earnings call, CEO Dion Weisler opened up on the struggles HP is facing in the printer supplies space, while also lowering the vendor's full-year outlook.

Here we round up the key information from the report and investors call.

Revenues grew, but missed estimates

HP's shares fell by 12 per cent in after-hours trading after the firm published its financial results for the first quarter of the year.

Revenues grew by a slim one per cent year on year in Q1 to $14.7bn. Its PC business - called Personal Systems - increased revenues by two per cent to $9.66bn, missing analyst estimates of $9.74bn. Total units sold declined by three per cent in Q1, with notebook units down one per cent and desktops down eight per cent. Commercial trumped consumer sales with three per cent growth against one per cent.

Its printing arm similarly failed to meet expectations and declined by 0.7 per cent year on year to $5.06bn, marginally below Wall Street's $5.19bn target.

HP CEO Dion Weisler said the firm's PC division is performing well despite operating in a tough market.

"Our Personal Systems team continues to perform at a high level, driven by relentless focus on execution and profitable growth," he said in an earnings call transcribed by Seeking Alpha.

"As expected, the first-half headwinds we previously shared with you are playing out. But we are navigating them well. We are also strengthening our position in strategic segments where we see pockets of growth and delivering differentiated and premium hardware services and solutions."

HP has oversaturated its EMEA channel with printer supplies

Weisler's earnings call with investors was dominated by questions from investors about HP's printer supplies business, which suffered a three per cent sales decline in its Q1 and a nine per cent decline in EMEA.

Printer supplies performed below expectations, and Weisler was candid in his responses to analysts, claiming that HP is battling against online platforms selling third-party products. More commercial customers are now buying online, he said.

"We are essentially fighting the same war but we are now engaging on a new battlefield and it's called online," he said.

"Online office is a growing market for alternatives and we are seeing more commercial customers moving to online where our overall share, while still leading, is not as large."

… And is reducing inventory among channel partners to bring it back under control

He added: "We just can't bring a musket to a drone fight. Most importantly, what are we going to do about it? First, we need to continue to evolve that go-to-market and expand our online initiatives as well as our targeted marketing and we'll certainly be doing that."

As a consequence, HP's share assumptions were lower than what played out in Q1, causing an excess of HP supplies within its channel ecosystem and creating a negative impact on pricing.

Weisler said there was a slowdown in sales between its Tier-1 partners (which buy directly from HP) and Tier-2 partners (which buy via Tier-1 partners and sell to the end user). Now HP intends to lower its inventory among Tier-1 partners to bring inventory levels under control.

These actions will create a $100m "headwind to supplies revenue" according to Weisler, equating to one per cent of total supplies revenues. As a result, CFO Steve Fieler claims HP's supplies business will decline by three per cent year on year in 2019.

"We've tightened the levels of total inventory available in the ecosystem going forward. By doing this, pricing should improve. Therefore, we will be fine-tuning our operations and further reducing our channel inventory ceilings. Also, we need to enhance our business management systems including more telemetry data to improve the quality of our inputs," he said.

HP lowers full-year earnings outlook

The vendor announced that it has lowered its profit forecast for full-year 2019 to between $2 and $2.10 per share, down from $2.04 to $2.14 per share. It did, however, reinstate its 2019 adjusted forecast of $2.12 to $2.22 per share.

"We know we have work to do to manage through the current dynamics and that's exactly what we're going to do and what you should expect from us," said Weisler.

"And we will continue to play our own game. We will execute to our strategy with rigour and focus on driving sustainable, long-term earnings and cashflow growth."