HP Inc.’s comeback hit a big speed bump Wednesday as something called “online” caught up with its printing-supplies business.
HP HPQ, -0.21% revealed Wednesday that one of its biggest money-makers, selling printing supplies, faces new pressure due to internet sales, which is squeezing previously juicy margins, especially in some overseas markets. HP seemed to be taken by surprise that customers buy their printing supplies online, where they said they have less of the market and pricing isn’t to HP’s benefit.
“We’re now engaging on a new battlefield and it’s called ‘online,’” Chief Executive Dion Weisler said, giving some listeners of a certain age flashbacks to the late 1990s.
“We need new weapons to fight on the new battlefield,” he later said. “You know, we just can’t bring a musket to a drone fight.”
The PC and printer giant reported fiscal first-quarter results that were weaker than expected, mostly due to an unexpected 3% revenue drop in the supplies business. A decline in HP’s stock after the numbers hit worsened considerably as the company’s conference call went on, ultimately ending up with a near 13% decline in after-hours trading.
While HP is known for hardware such as printers and PCs, the supplies segment of the printer business is the big profit engine, thanks to high-margin sales of products like ink and toner that businesses and consumers need to keep their printers running. HP’s printing business makes twice as much profit with about half the revenue as the PC business — in the first quarter, the PC business had net earnings of $410 million before taxes, on revenue of $9.6 billion, while printing profit was $821 million before taxes, on revenue of $5.0 billion.
HP said supplies revenue was weaker than expected and declined the most in the EMEA region (Europe, Middle East and Africa), where it fell 9%. The company said that all commercial customers are buying supplies online, and while it has a leading share, it’s a lower percentage than traditional commercial resellers and in-store retailers.
“More online purchasing has also led to a growing market for alternatives,” said an HP spokeswoman. “We are implementing share improvement plans, including online programs and targeted marketing, to address this.”
HP’s issue appears to be is that it is getting hit by less expensive ink and toner options available from re-manufacturers and after-market providers, rather than HP-branded ink and toner.
“Online purchases of competing ink/toner is not a new phenomenon that suddenly became an issue in the recent quarter, but rather, HPQ was not aware of how much share the competing online products had until now,” said David Ryzhik, an analyst with Susquehanna International Group, in an email. “Said another way, they overestimated their own market share, because they didn’t have that much visibility into the ‘downstream’ usage until recently.”
HP’s forecast calls for the slowdown in supplies to continue through the rest of the year, citing pricing issues and high inventories. HP said supplies revenue will be down about 3% this year, after previously guiding for that revenue to be flat or to gain slightly in 2019.
HP has had issues with counterfeit ink and toner in the past, which its printers can now detect. Weisler said HP is working to discourage counterfeits and protect its intellectual property and encouraging services such as its managed ink program. But some of the comments on Wednesday’s call made it sound like HP’s printer business is just waking up to the issues of the e-commerce era. Being the leader can also turn into complacency, which has put an unexpected dent in its recent recovery progress.
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