Excerpt from Lesjaks prepared remarks:
Imaging and printing revenue for Q2 was $5.9 billion, down 23% year-on-year, due to a tough economic environment. IPG delivered another quarter of operating profit in excess of $1 billion. Segment operating margin increased 220 basis points to 18.2%, as favorable supplies mix and cost reductions were partially offset by hardware rate declines.
Compared to the second quarter of last year, total printer units declined 27%, and consumer and commercial hardware units declined 23% and 36%, respectively. Supplies revenue declined 14% due to lower end-user demand and reductions in channel inventory.
Last quarter, we outlined several actions that IPG was taking to align its supply chain with lower demand. IPG made progress against these objectives with both owned and channel inventory down significantly since the end of Q1.
We continue to be the undisputed leader in printing, with over twice the market share of our nearest competitor. We are investing in new innovation across the printing business that we expect will drive page growth and extend our leadership. Some of the more innovative investments include our retail publishing systems, touch smart technologies, the Indigo 6000, and new mobile and Cloud printing technologies. In addition, weve demonstrated good momentum in wireless printing and managed print services in Q2.
The second question in the Q&A addressed printer supplies and the nature of their business decline, and Hurd and Lesjak used the opportunity to address the entire printer strategy, and its impact on the companys bottom line. The multi part answer goes from how great the longer-term analog-to-digital transformation strategy is going in spite of the short-term economic woes, to how IPGs $1 Billion quarterly profit now makes up only approximately one-third of company profit.
From the question and answer session (with question from Brian Alexander, analyst from Raymond James and Associates):
Brian Alexander - Raymond James & Associates – Analyst
Okay. On the supplies business, just given the year-over-year declines of 7% and 14% that youve seen over the last two quarters, so a little bit over 10% in the first half of the year, Mark -- what specific metrics do you track internally, whether they be macro or micro in nature, that might support your argument that the declines youre seeing in the supplies business are entirely cyclical versus secular?
Mark Hurd - Hewlett-Packard - Chairman of the Board, CEO and President
So, theres a lot of metrics we track. Obviously, we track revenue performance. We track owned or profit, if you will. We track owned inventory and channel inventory, if you will -- the aggregated supply chain across the business. We track market share by segment.
We track market share by country. So its a pretty thorough score card we track in the printing business. We obviously, then, look at it relative to our pools of the business, which is graphics, which is obviously a place that we have a lot of intellectual property -- inkjet, where we have a lot of intellectual property, and then laser. So we actually look across those three pools as well, with the same metric set.
So, with supplies, I think you should expect probably in Q3 a bit more of what you saw in Q2 for us. Theres some places that we did a very good job in IPG, managing the collective owned inventory and channel inventory. We feel very good about that. But theres some places that we like to align the mix of hardware with supplies within the context of the channel inventory.
I also think in Q3 you should expect to see us going after a bit more share than what you saw in Q2. This is really interesting for us -- one point that would be a little noticeable I thought in the quarter was we had some hardware situations where we had some outages. And we could have shipped some more hardware units in the quarter than we did. So well try to take advantage of those opportunities from a market share perspective in Q3.
Brian, let me just for a second, though, try to take you up a level and try to give you some context for how we look at the whole business, because I think its related to your point. I mean, our view is the base business is slightly up over the long-term – flat to slightly up would be the way I would think of the entire printing segment.
Digital printing content is growing. So the cyclical stuff that were seeing right now, as weve talked about before, is based on GDP and unemployment. But secular changes that occur in printing, which Ive heard from several people that says, is there some big secular change in printing? Secular changes occur over years and decades and over very long periods.
I mean, home photo-printing, for example, is less than 10% of our supplies revenue. Its shifting to the Web and its shifting to retail locations as well as the home, which is one of the reasons why you see HP investing in Snapfish. Its one of the reasons why you see HP investing in retail photo kiosk. That as everything that goes -- when things go to Snapfish, a photo book, for example, is printed on an Indigo printer using HP intellectual property and HP ink.
When you go to a retailer and see an HP photo kiosk, youre printing that on HP ink and HP intellectual property. And the reason why we build that strategy around pages is because we want to be where the consumer goes to print. And so were agnostic as to where the consumer goes, to be able to get that photo printed. And we see that base business being again some good things and some things that perhaps are headwinds, in terms of what the overall business looks like.
So, think of it this way -- continued growth and printable content; a lot of movement from analog printing to digital. So there is a big market pool for analog printing to move to digital -- things like brochures, signage, labels, coupons, manuals -- stuff like this is all stuff thats shifting from analog to digital, giving us an opportunity for us to get more business.
At the same time, digital printing is increasing and improving its ability to deliver quality, speed; its lowering its costs. And that will shift to more applications to digital. So things like newspapers, directories, magazines, all these things have an opportunity to move to digital. And then that gives us an opportunity for us to leverage our intellectual property as we move.
So, when we look at the whole thing, we say the base business is flattage [sic] -- flat to up slightly. And then we like our opportunities to gain share in the context of that hand that gets dealt to us.
Brian Alexander - Raymond James & Associates – Analyst
Thanks for the detail.
Cathie Lesjak - Hewlett-Packard - EVP and CFO
Let me just add that we think that with the position that weve got our technology roadmap and our strong competitive position, that we will gain share in that market over the long-term, when economies come back. And that that would allow us to grow this business in the low to mid-single digits, which Mark talked about earlier.
I think the other thing I really want to make clear to folks is, IPG today is roughly one-third of HPs profit. Thats a very different position that IPG is in today versus historically. Weve now got a much better balanced set of segments from a profitability perspective. I mean, you see services this quarter generating over $1 billion -- $1.2 billion in operating profit. And IPG, at just over $1 billion.
From a margins expectation perspective in the near-term, we expect IPG margins to stay up in the high teens, because we get such a high supplies mix. But over the longer term, with us going out and gaining share, again, getting the unit placements when the market turns around, we expect it to basically go back to the more normal mid-teen range.
And so thats really how you should think about this printing business. We are very well-positioned for when economies turn and we have this makeshift from analog to digital.
Mark Hurd - Hewlett-Packard - Chairman of the Board, CEO and President
I mean, I think, Brian, probably more data than youre asking for, but I think its important to set the context. And we look at the market as being a low single-digit growth market. And then we like our opportunity to gain share within it.
And thats probably the point when were dealing with some of the issues we had in Q1, where we get frustrated because we just think the opportunity is a marvelous one for us to take advantage of, given our IP position, our share position, our brand position, and the movement from analog to digital.
Brian Alexander - Raymond James & Associates - Analyst
Thanks.
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