HP Inc. (HPQ) Earnings Call Transcript & Summary

Thank you, everybody, for joining. Tim Long here at Barclays. We're happy to have HPQ with us for this fireside chat. We are happy to have Tuan Tran, who is President of the Imaging, Printing and Solutions Business at HP. He's a long-time veteran of the company. Before we get into Q&A, I'm going to throw it over to Tesh to share the disclosure.

Sure. Thanks, Tim. Appreciate that. And before -- as we know, this call is being webcast. Elements of this discussion are forward-looking and based on our best view of the world and our businesses as we see them today. For a discussion of some of these risks, uncertainties and assumptions, please refer to HP's SEC reports, including our most recent Form 10-K and Form 10-Q. HP assumes no obligation, does not intend to update any such forward-looking statements. Handing back to you, Tim.

Okay. Great. Thank you, Tesh. Maybe let's start off at a high level. If you could talk a little bit about just the printing business. This year, it's obviously been a crazy year on a lot of different levels. But maybe just give us an update on kind of what you're seeing in the business as far as trends and kind of a little bit of a touch on both the commercial and consumer subsegments of print.

Yes. So thanks, Tim. So good to be here this morning. So I would say our business, like, I guess, many businesses around the globe impacted by the pandemic. And so what happens in the pandemic really determines kind of the big factors in the print business for HP. And so for us, I'd say at the highest level, I think the demand for office and our industrial businesses are down, offset by demand in our home business actually significantly going up. And so for us, it represents the fact that the pandemic forced everyone to work and learn from home and that they have a fundamental desire to print and that print desire actually comes out in terms of a stronger home demand. So that's kind of the macro level. If you think about 1 segment lower than that, 1 level lower than that, obviously, we see that as the pandemic impacted kind of offices and commerce in general, we see larger businesses actually being more impacted than the smaller businesses. We see the dynamic actually playing out very differently by geography. And so you think about a China that was the first country with COVID-19, significant shutdown, very fast, very immediate shutdown in a particular region, actually the economy rebounding. And for the most part, China is back, back open for businesses across the board. You see some of that -- some of those elements playing out in Southeast Asia, where they would actually have a better handle but -- on the pandemic. And then most of it's back. And then what you see in western geographies, the U.S. and Western Europe, an ebb and flow depending on the country, depending on, if we were in the summer period versus now. It's been amazing actually to see the usage levels across geography, across country, in some cases, across states in the United States. We actually have pretty good flammatory data that gives us some insights on our customers and office customers, in particular, home customers, how that diameter has ebbed and flowed really correlated with the pandemic and how much of a shutdown we've had.

Okay. Great. Great. That's helpful. Maybe if we just dig into the commercial business for a little bit. Obviously, a macro recovery will help everything that's office work...

We're working on that.

Yes, exactly, exactly. But maybe what are some of the other things, area of focus for that commercial business? Maybe talk about the managed print service offering and just kind of more HP-specific drivers there.

Yes, yes. So I'd say, break it into 2, our industrial and -- which includes large format, Indigo businesses or Scitex businesses. Those businesses actually, for the most part, are down substantially over -- year-over-year given the pandemic, and given the lack of commerce trade shows, general construction slowdown, all of that. We see and we expect that as the economy emerges from COVID, as businesses return to normal, we expect that business to come back. And I think even in the pandemic though, we've been able to see some substantial increases in labels and packaging. The demand for that actually -- given the pandemic has actually been very robust. We've actually signed some new businesses with ePac as well as Shutterfly announcements we've had lately. So encouraging signs even in pandemic for that business in terms of dynamic printing, the value in terms of commercialization in that business. I would say that the general office market, and you're right, as the economy comes back. And even what we saw early summers, we saw a lot of the small businesses, the ones that could open and could not work from home. Those businesses when the government started easing off restrictions for essential business only, your dentist office, your chiropractor office, your -- all those types of businesses actually came back. And printing actually made a recovery there. The challenge for us is obviously the larger management service, the larger companies that could work from home, many of their employees still remain in work-from-home mode. And so the office print dynamic is depressed from where it was pre-COVID. Now we expect that as we get vaccines, as we get more people vaccinated, more towards the second half, that's when -- next year, that's when we expect that recovery to actually take place. And I think there's a lot of speculation, a lot of discussions around what the new normal for office looks like. We believe that, that new normal, it is going to be a distributed office. You will have devices in the home that are personal devices that are corporate paid, corporate provision, corporate managed. And so the world that is going to move to this office space is more of a collaboration place rather than a workplace. And so that plays a lot to our strengths. We believe that as we think about the HP strength around small discrete devices that are low cost, like replace in the home, we need to build that bridge between those home devices versus what a IT professional has for its management security towards advancing those. And when I say manage, I mean, both from a security, from an asset management, but also from a provisioning, so customers aren't going to be willing to pay for their office bills while they're home. So you've got to be able to actually -- for instance, Instant Ink program, be able to give them some Instant Ink allowance pages for work. So Barclays might say, "Hey, Tim, we'll give you 150 pages of your Instant Ink plan free and then anything above that you pay." So those are the types of discussions we're having with the large management [indiscernible]. They want smaller devices, they want security, they want manageability, and they want flexibility in billing. And those -- and that's really, I think, the new normal as we see it.

Okay. Great, great. You guys recently hosted a tech talk on HP+. Can you talk a little bit about that? And how that fits into kind of the broader print strategy?

Yes. Yes. And this is something we laid out, I guess, about a year now, where we're moving our business model from heavy reliance on supplies, right? Place the hardware and over time, relying on supply is going to really recoup that hardware investment. And I think we've done a lot of work in the last year with regards to our Big Ink, Big Toner programs, our moving the business services with Instant Ink, plus also ARU increases across the board. So all those things are immediate actions that we took last year to rebalance our business model from supplies more towards hardware. HP+, I think, is a natural evolution in that. And that's a program that we launched in Staples about a month ago. And we previewed, I think, last year that we talked about long term, we want to move to a model that is -- that gives the customer choice. At the point of purchase, the customer has a choice. He as an end-to-end model, or he has -- or they have a flexible model. So similar to your cell phone model. You have a lot cell phone and a lot cell phone. And so our end-to-end model is really HP+, and it's really important for us to ensure that end-to-end model has a great value proposition for our most loyal and high use customer because that's not all share is the same. That's the customer you want to attract. And that's where you make all the money. And so for us, we have a value proposition, HP+ around -- centered around 6 months of reprinting and an extended 1-year additional warranty. And we actually charge about $40 for that interactive hardware for laser product. And it's really focused in, again, if you're a high-value customer, it's a brain dead simple value proposition for you to pay that extra $40. And those are the customers we're trying to track. So far, so good in terms of the responses back in terms of sell-through, in terms of price premium, in terms of attach or Instant Ink. So we've seen all of those things actually up into the left. Now early days, but optimistic around that. Now I also mentioned long term, over the next 2 years, we will be transitioning the bulk of our transactional portfolio to that end-to-end HP+ model.

Okay. Great. Maybe just on this topic of kind of Instant Ink and subscription. How do you see the kind of customer adoption on the -- if we look at the business from a corporate standpoint and a consumer standpoint, how do you see the slope of adoption for both of those? And what kind of challenges does the evolving business model place on HP? I mean, obviously, it's nice to have that recurring more certain revenue stream, but what challenges are there with that type of model as well?

So I'll break it in 2, on the commercial and office side, we have management service, and that's something we've been running for many, many years. It is slow and gradual progress in terms of customers making the decision between the transactional business model to a contractual business model and management service. And we've been pushing that and moving in that direction, and we think that large corporate enterprise move there first. Now we're in the mid-market. And we think that will -- that's actually the evolutions taking place. On the consumer and transactional side, our big push is the Instant Ink. And with the pandemic, that's really accelerated. We announced, I think, at SAM last year, over 5 million customers were in Instant Ink. We actually had ended the year or will end the year somewhere north of over 8 million customers. And so pretty big uptick this last year in terms of our growth of Instant Ink customers. And that's really a testament to the value proposition of getting ink delivered before it runs out as well as saving 50%. And so what we see, your question around demand on HP, it's transitioning to the Instant Ink product. From a financial perspective, it's one of those where you have a certain annuity, but you miss out on the initial supplies purchase. So there's that transition that has to take place, that long-term annuity comes with a deferral of revenue over time. And I think we've modeled that and actually built that into our financials, but that's probably the -- one of -- that's a financial challenge. The other one is technical challenge, managing -- getting your products connected to the lab, managing subscriptions, investment in IT infrastructure, customer engagement via direct customer engagement, managing the plans, managing the operations, that web connectivity. Those are the additional burdens on our technology and operational teams that we didn't have in the past. So it's almost -- it's running a subscription service. And for us, it's been something we've built over the last 10 years, and I think it offers us a big competitive advantage versus other print vendors in the market.

Okay. Great, great. Maybe if we could switch gears and talk about some other growth opportunities. I mean, your business has been around a long time. It's definitely a mature industry, but things like 3D printing or any other new growth drivers that you see looking for the next few years?

Yes, you're right. The $100 billion print business, it is relatively flat. Below that, we see opportunities for growth, right, for us. As I mentioned, the opportunity to move to more of an upfront model with our Big Ink and Big Toner is a growth opportunity yet for us. So the move to Instant Ink and subscription model is an opportunity for us. The -- in the office space, if you think about the growth opportunities, we're very much a big player, significant player in the transactional market, but we're relatively underpenetrated in a $55 billion contractual market. And that's part of our A3 focus and our contractual focus. So we think that's a growth opportunity, gaining share in the marketplace. On the industrial side, obviously, we see growth in packaging and label and dynamic printing, signage as the economy recovers. And obviously, 3D is a big area of investment for us. So even though at the highest level, you have relatively flat market. I think underneath that, there are certainly opportunities for us for making the things grow given where our penetration rate is, right?

Okay. And you mentioned that outside the transactional part of the office, that $55 billion market. How is it that you can -- what's the plan to attack that part of the TAM?

Yes. It's something that we've been focused on over the last few years. We think that too is going to be impacted by the pandemic. Our vision, what happens after the pandemic in the office. Again, it's a distributed office, where you're going to have distributed printers. The distributed printers are not going to be your large A3 office, they're going to be your small-sized consumer level printers that fit inside the home and are designed with low-cost hardware and line. That plays hugely to HP's advantage, right? You think about the commercial print vendors out there, the office print vendors out there. HP is uniquely qualified with all of our [indiscernible] and our balanced deployment to actually win in that space. And so a combination of low-cost hardware, plus our IT backlog where we can actually take the consumer offerings that we have and really enable a workforce that's distributed, enable an IT manager to provision, to manage, to secure, to basically do billing for office printing as well as home printing in 1 bill. And so I'll give you a great example of that. You are a management customer of HP. And Tim, you work for those companies, what we would do is we work with you to say, "Hey, Tim's got an Instant Ink account printer, he's got a printer at home already. He's an Instant Ink customer." What we'll do is we will provide multiple -- with your company, provide you, say, 100 pages, 200 pages, as part of your base plan, and you print that for free, anything above that, you pay kind of subscription model. So those types of -- we call that opportunity to flex worker. And that's something we started rolling out with our customers, being able to actually provision, secure, manage and build printers that are in your employees' homes. And we think we have a role to play as the world comes at work-at-home like plans. And I think that's going be more and more a competitive advantage post-pandemic. We'll see that remote working. And so that just gives us a big competitive strength. And then, of course, we're rounding at our A3 portfolio and building out capabilities on that front as well.

Okay. Great, great. Maybe if we could just talk a little bit about kind of investment in the business and margins. There's a lot of moving parts here, obviously, with the kind of the strategy change around how you're treating the hardware and move to subscription. So could you just talk a little bit maybe high level about how you view profitability and investment in this business as the model evolves?

Yes. I mean, I think the expectations we've set with our shareholders is that long term, the print business is focused on driving OP dollar growth, right? That's our metric. OP dollar growth is what we're anchored on. And that helps us, as you think about the shift from supplies to hardware. We invest a lot of money today in placing hardware with an uncertain supply in the future. So as you move more of that upfront into the hardware. At time of purchase to be able to get that margin, more of that marginal upfront. And so for us, that's important. Not to say that suffices is going to be hugely important for our financials for the foreseeable future, but moving more of that annuity upfront is a way of locking it in. So I think that's an important shift for us. We -- consistent with that, we've guided a range of 16% to 18% operating profit. And I think we're committed to that range. We've also discussed the fact that today, if you look at our printing model because we invest so much with our hardware, we lose money about 25% from our customers, who want to reduce that over the next 2 years to about 15%. That's the trick of this business model, right? How do you actually invest in hardware placement and ensure that you get that supplies annuity. So that investment is a good investment. And so for us, there's opportunities and value to be unlocked where we can actually optimize that hardware upfront investment and get the long-term annuity. So again, back to OP dollar growth and then 16% to 18% OP rate.

Okay. Great, great. And then maybe just 1 last one. We have a few minutes left. Could you talk a little bit about the competitive landscape, maybe both on the hardware side and on the supply side, I think as you mentioned, you guys have good representation across commercial and consumer. So any cross-pollination there probably helps. But what do you see from the competitive landscape? And then maybe just touch on the ink side. Obviously, there's been periods where there's been some low-end players coming in, how has that battle been going on the supply side?

Yes. So for us, if you think about the competitive, I'll just address hardware, I think on the home side, HP gained 5 points of share. We continue to be a significant player in home hardware. Our home business is market leading. And actually, we've been able to actually gain a substantial amount of share in Q4, 5 points of share is what we reported, year-over-year change in Q4. On the office side, I think as -- if you look at HP as a company, printing company, we're faring a lot better in terms of managing this pandemic than many of ours competitors. They're quite challenged in their financials. So we think it gives us, in the short-term, a competitive opportunity to go after share, just given our financial strength and our balanced portfolio, and where the market is going in terms of smaller, lower cost devices. So that's from a hardware side, how I see the competitive situation. From a supply perspective, I think we've been able to actually gain share in our ink business. And I think we're doing very well in terms of the active market share, the supplies value proposition for ink, actually, is very well. We've actually had challenges in the short-term over on the toner side, and we've actually been able to gain back share over the last 12 months on toner as well, copying some of the same playbooks that we have on ink. I think we shared some of that in the value plan. But for us, competitively, we're gaining back on both the hardware side as well as on the supply side for both toner and ink.

Okay. Great. Yes, I think we're bumping up against the end here. So really appreciate your time today and insights into the business. Good luck with all the changes going on here and stay safe, and we look forward to talking again soon. Thank you, everyone, for joining.

All right. Take care. See you.