HP Inc. (HPQ, Financial) missed 2Q26 EPS expectations, marking its third miss in four quarters due to moderating demand and rising tariff-related costs, particularly in its Personal Systems segment. Following the earnings shortfall, HPQ lowered its FY26 EPS guidance to $3.00-$3.30 from $3.45-$3.75, triggering a significant selloff.
The revised guidance is primarily due to weakening PC market demand and anticipated tariff-induced cost pressures, notably the 10% U.S. tariff on Chinese imports. This has increased component and logistics costs for the Personal Systems segment, causing a 1.5 percentage point drop in operating margin to 4.5%.
- HPQ is diversifying its supply chain by shifting production to Southeast Asia and Mexico, aiming for $1.9 billion in annualized cost savings through its Future Ready program and selective pricing strategies. These efforts are expected to offset tariff-related costs by 4Q26, although short-term margin pressures and execution risks remain.
- The Personal Systems segment reported $9.0 billion in net revenue for Q2, up 8% in constant currency, driven by a 9% increase in commercial PCs and a 6% rise in total unit shipments. This growth is fueled by a Windows OS refresh and strong demand for AI-enabled PCs, projected to make up 25% of HP's PC portfolio by FY26 end.
- The Printing segment saw a 3% revenue decline in constant currency to $4.2 billion, with both Consumer and Commercial Printing down 3% due to reduced hardware demand and a 5% drop in supplies revenue. Despite this, operating margin improved to 19.5%, supported by cost management and high-margin unit placements.
- HPQ's Future of Work Strategy focuses on growth through AI innovation, hybrid work solutions, and operational efficiency. This includes launching AI PCs, enhancing workforce platforms for hybrid work, and integrating AI capabilities via the Humane acquisition. The strategy also emphasizes portfolio optimization and process automation to fund growth investments.
HPQ’s FY26 guidance reflects near-term profitability risks due to tariff-related costs and declining PC demand. However, its supply chain diversification and $1.9 billion Future Ready cost-saving program aim to mitigate these impacts by 4Q26. The company's focus on AI PCs and hybrid work solutions strengthens its long-term outlook.
