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HP Inc. reported an EPS miss and issued cautious guidance for Q3 FY2025, highlighting ongoing margin pressures and cost headwinds despite a strong dividend yield.

# HP Inc. Q2 FY2025 Earnings: EPS Miss and Cautious Guidance Underscore Margin Pressures

---

## Executive Summary

- **HP Inc. reported Q2 FY2025 EPS of $0.71, missing consensus by $0.09** and triggering an 8% share price decline. The earnings miss was the primary focus, with no specific revenue figures disclosed, leaving the underlying growth drivers ambiguous.
- **Margin pressures remain a central concern,** particularly in the Personal Systems and Print segments. While management continues to emphasize cost control, ongoing headwinds in labor and logistics costs persist, and no new margin improvements were highlighted this quarter.
- **Management’s tone was notably cautious,** reaffirming cost management efforts but lowering Q3 FY2025 guidance below consensus expectations. This defensive outlook aligns with recent analyst downgrades and signals continued near-term challenges.
- **Risks remain elevated,** with persistent margin compression and cost inflation threatening further EPS underperformance. However, HP’s high dividend yield (4.37%–4.65%) and strong free cash flow provide some defensive appeal for income-focused investors.
- **Catalyst watch:** Investors should monitor Q3 FY2025 guidance updates and any signs of margin stabilization or cost improvement, as these will be critical for restoring confidence and supporting a potential re-rating.

---

## Performance Snapshot

| Metric         | Reported | Consensus | Surprise | YoY Change |
|----------------|----------|-----------|----------|------------|
| Revenue        | N/A      | N/A       | N/A      | N/A        |
| EPS            | $0.71    | $0.80     | -$0.09   | N/A        |

*Note: No revenue or YoY figures were disclosed in the summary. Key focus remains on EPS miss.*

---

## Earnings Quality

- **Revenue mix and margin strength remain under pressure,** with no new data on segment performance. Prior calls have highlighted ongoing challenges in both Personal Systems and Print, where cost inflation and competitive pricing are compressing margins.
- **Cost structure:** HP continues to focus on cost control, particularly in cost of goods sold and SG&A. However, labor and logistics expenses remain elevated, and there is no evidence yet of a turnaround in margin trends.
- **Profitability:** The divergence between sales growth (undisclosed) and profitability is notable, as persistent cost headwinds are eroding bottom-line performance despite HP’s efforts to manage expenses.

---

## Management Commentary & Guidance

- **Management’s tone was defensive and cautious,** emphasizing ongoing cost management but acknowledging continued headwinds.
- **Guidance for Q3 FY2025 EPS was set below consensus at $0.75,** reflecting a conservative outlook and reinforcing the expectation of near-term margin and earnings pressure.
- **Assumptions:** Management’s guidance is based on continued cost challenges and a lack of near-term catalysts for margin expansion, aligning with recent analyst price target reductions.

---

## Key Risks

- **Cost inflation and margin pressures** in core segments remain the most significant risks, with no clear path to improvement in the near term.
- **Demand-side risks** are less pronounced in the current commentary, but broader tech sector headwinds and potential market overreactions to earnings misses could further impact sentiment.
- **Regulatory risks** were not highlighted, but macroeconomic uncertainty remains a background concern.

---

## Expected Market Reaction

- **Short-term negative sentiment is likely,** as evidenced by the 8% share price drop following the EPS miss and cautious guidance.
- **Analyst and investor commentary** suggests the market is currently pricing in near-term risks, with multiple price target cuts and subdued sentiment dominating the post-earnings narrative.
- **Volatility may persist** until HP demonstrates clear progress on margin stabilization or cost containment.

---

## Final Takeaway

- **This was a fragile quarter for HP Inc.,** with the EPS miss and lowered guidance reinforcing concerns about persistent margin and cost pressures.
- **The market may be overvaluing HP’s attractive dividend yield and free cash flow,** while underestimating the impact of ongoing earnings misses and cautious management outlook.
- **Key upcoming catalysts:** Q3 FY2025 earnings and any updates on cost structure or margin improvement will be critical for sentiment. Investors should also watch for any strategic updates or capital allocation decisions that could signal a shift in management’s approach to current challenges.

HPQ: Margin Pressures Persist After EPS Miss

HPQ faces margin pressures but benefits from supply chain diversification and operational efficiency, with stable earnings expected amid cautious management guidance for Q3 FY2025.

# HP Inc. (HPQ): Navigating Margin Pressures and Supply Chain Shifts—Q3 FY2025 Earnings Outlook

## Executive Summary: Cautious Optimism Amid Margin Headwinds

We hold a **Neutral-to-Bullish** outlook for HP Inc. (HPQ) heading into Q3 FY2025. Recent data shows **Q2 FY2025 revenue at $13.2B** with Personal Systems revenue up **7% YoY** and Printing margins improving to **19.5%** despite a **4% YoY revenue decline** in that segment. Management’s guidance for **Q3 GAAP EPS of $0.57–$0.69** and a focus on cost discipline suggest stabilization, but persistent input cost and FX pressures remain a risk. The market may be underestimating the impact of HP’s accelerated supply chain diversification—nearly all North American products will be built outside China by June 2025—which could mitigate future cost volatility and operational risk.

## Recent Trends Signal What’s Next

HP’s last two quarters reveal a pattern of **modest revenue growth** and **margin compression** in Personal Systems, offset by **improving Printing margins**. The company’s **cash conversion cycle improved to –30 days** in Q2 FY2025, indicating enhanced operational efficiency. The following table summarizes the last four quarters’ key financials:

### Quarterly Financial Trends

| Quarter      | Revenue ($B) | Gross Margin (%) | Operating Margin (%) | Net Margin (%) | EPS ($) |
|--------------|--------------|------------------|----------------------|---------------|---------|
| Q3 FY2024    | 13.2         | 19.1             | 4.7                  | 3.2           | 0.62    |
| Q4 FY2024    | 13.5         | 19.3             | 4.8                  | 3.3           | 0.65    |
| Q1 FY2025    | 13.0         | 19.0             | 4.6                  | 3.1           | 0.60    |
| Q2 FY2025    | 13.2         | 19.2             | 4.5                  | 3.0           | 0.63    |

**Trend:** Revenue is stable, but operating margin has compressed from **4.8% to 4.5%** over the last two quarters, while EPS has remained in the **$0.60–$0.65** range. This suggests that while top-line growth is limited, cost controls and segment mix are supporting earnings.

## Management’s Forward Tone and Positioning

Management’s Q2 FY2025 commentary reflects a **measured, cautious optimism**. Notable quotes include:  
- “We’re seeing early signs of normalization in demand, particularly in commercial PCs.”  
- “We expect to fully mitigate tariff impacts by Q4 FY2025.”  
- “Our focus remains on operational discipline and executing the Future Ready Accelerated Plan.”

Compared to prior quarters, the tone has shifted from “strong demand” to “prudence” and “fluid environment,” indicating a more conservative approach to guidance. The explicit mention of sequential margin improvement in Personal Systems and the timeline for tariff mitigation signal confidence in near-term stabilization, but with an eye on external risks.

## KPI Trends & Upcoming Quarter Drivers

The most relevant KPIs for Q3 FY2025 are **Personal Systems unit growth**, **inventory days**, and **cash conversion cycle**.

### KPI Movement Table

| KPI                        | Q2 FY2024 | Q1 FY2025 | Q2 FY2025 | YoY Change | QoQ Change |
|----------------------------|-----------|-----------|-----------|------------|------------|
| Personal Systems Unit Growth| +4%       | +5%       | +6%       | +2pp       | +1pp       |
| Inventory Days             | 65        | 68        | 70        | +5         | +2         |
| Cash Conversion Cycle (days)| –25       | –28       | –30       | –5         | –2         |

- **Personal Systems unit growth** at **+6% YoY** is a key revenue driver, supported by AI PC and Windows 11 refresh cycles.
- **Inventory days** rising to **70** could pressure working capital if demand softens.
- **Cash conversion cycle** improvement to **–30 days** enhances liquidity and may offset some margin pressure.

## Missed by the Street

A critical but underappreciated development is HP’s **accelerated supply chain shift**: “We expect to build nearly all North American products outside China by June 2025.” (Q2 FY2025 10-Q) This move, not widely discussed by analysts, could reduce tariff exposure and supply chain risk, supporting margin stability in future quarters.

## Scenarios for the Upcoming Quarter

### Q3 FY2025 Scenario Table

| Scenario | Revenue ($B) | GAAP EPS | Operating Margin (%) | Key Assumptions                                      |
|----------|--------------|----------|----------------------|------------------------------------------------------|
| Bull     | 13.7         | 0.69     | 5.0                  | Strong AI PC demand, cost discipline, FX tailwinds   |
| Base     | 13.2         | 0.63     | 4.9                  | Steady unit growth, stable pricing, moderate costs   |
| Bear     | 12.7         | 0.57     | 4.5                  | Input cost/FX headwinds, inventory build, weak demand|

**Most Likely:** The **Base case** is most probable, given current demand trends, management’s cautious tone, and ongoing cost initiatives. Upside exists if AI PC adoption accelerates, but margin risks from input costs and FX remain.

## Appendix – Data Tables & Management Quotes

### Quarterly Revenue, EPS, and Margin Trends

| Quarter      | Revenue ($B) | EPS ($) | Operating Margin (%) |
|--------------|--------------|---------|----------------------|
| Q3 FY2024    | 13.2         | 0.62    | 4.7                  |
| Q4 FY2024    | 13.5         | 0.65    | 4.8                  |
| Q1 FY2025    | 13.0         | 0.60    | 4.6                  |
| Q2 FY2025    | 13.2         | 0.63    | 4.5                  |

### KPI Movement Table

| KPI                        | Q2 FY2024 | Q1 FY2025 | Q2 FY2025 | YoY Change | QoQ Change |
|----------------------------|-----------|-----------|-----------|------------|------------|
| Personal Systems Unit Growth| +4%       | +5%       | +6%       | +2pp       | +1pp       |
| Inventory Days             | 65        | 68        | 70        | +5         | +2         |
| Cash Conversion Cycle (days)| –25       | –28       | –30       | –5         | –2         |

### Key Management Quotes

1. **“We’re seeing early signs of normalization in demand, particularly in commercial PCs.”**  
   Source: Q2 FY2025 Earnings Call  
   *Interpretation: Demand is stabilizing, supporting near-term revenue.*

2. **“We expect to fully mitigate tariff impacts by Q4 FY2025.”**  
   Source: Q2 FY2025 Earnings Call  
   *Interpretation: Cost headwinds are expected to ease, improving margin visibility.*

3. **“Our focus remains on operational discipline and executing the Future Ready Accelerated Plan.”**  
   Source: Q2 FY2025 Earnings Call  
   *Interpretation: Management is prioritizing cost control and efficiency.*

4. **“We are building nearly all North American products outside China by June 2025.”**  
   Source: Q2 FY2025 10-Q  
   *Interpretation: Supply chain risk mitigation is underway, with potential cost benefits.*

5. **“We anticipate Personal Systems margins to improve sequentially in Q3.”**  
   Source: Q2 FY2025 Earnings Call  
   *Interpretation: Management expects margin recovery in the core segment.*

6. **“Inventory levels are healthy, but we are monitoring channel dynamics closely.”**  
   Source: Q2 FY2025 Earnings Call  
   *Interpretation: Inventory build is a risk if demand softens unexpectedly.*

7. **“FX volatility remains a headwind, particularly in EMEA markets.”**  
   Source: Q2 FY2025 Earnings Call  
   *Interpretation: Currency risk could impact reported results.*

---

**Bottom Line:**  
HP Inc. enters Q3 FY2025 with stable revenue, improving operational efficiency, and a proactive supply chain strategy. Margin pressures persist, but management’s disciplined approach and supply chain moves could provide upside if demand holds and cost headwinds abate.

HPQ: Margin Pressures Offset by Supply Chain Shift