HP Inc. (HPQ) Earnings Call Transcript & Summary

Good morning, and good afternoon, everyone. This is Krish Sankar. I'm the analyst who covers HP. And we are very fortunate enough to have Alex Cho, the President of the Personal Systems segment of HP here. Thank you, Alex, very much for your time. And also just as FYI, there is a slide that is out there on forward-looking statements from HP. So in case any investors want to look at it, you can see that, and that slide is on display throughout this at this moment. So with that, let me maybe start, Alex. Again, thank you very much for your time, and it looks like interesting time for you with both the business booming and I guess, you just closed the HyperX acquisition today. So I'm sure you're a very busy person.

So maybe let me just start out with the PC market, right. So how is the PC market looking today? I remember you sounded bullish on the call. And I think in the past, you've spoken about close to like 1 million PCs a day kind of a run rate for the industry, is that still intact? And how should we think about PC units this year and beyond, if possible?

Sure. I think -- well, number one, it's great to be here. I'm very encouraged by the underlying dynamics in this segment. And it's really because the whole dynamics around hybrid. Hybrid work, hybrid learning, increased gaming and entertainment that's happening on a PC type device as well as how people are connecting together. And we see that as really structural changes that is going to drive continued strength and growth in this category. We see that as a great driver because customer behaviors are shifting. It's actually very positive to refresh rates and drivers for refresh and upgrade. And then as well, you're right, for us, we look at some landmark milestones. One was getting to 1 million units a day, which clearly enough demand, we're operating more in a supply-constrained environment. But we think that this is not just a short-term topic, it's very much a long-term driver and a long-term dynamic because the underlying shift to more hybrid work environments and hybrid learning, too.

Got it. Got it, Alex. That's very helpful. And with that -- within the PC market, like it seems like the mix is more consumer today, but it might shift to commercial. And how does it impact HP and your margin profile? Because there's a general view that HP is more levered to consumer versus commercial. So I'm just kind of curious how you look at that? And how does that mix shift impact your business?

Well, for us, we operate very much in both consumer and commercial segments, and we have a very balanced portfolio and profile. But you're right. Actually, I'm very encouraged to see commercial, and we expect commercial to grow, particularly as we head to the end of this year and into the future, again, driven by the trends that I mentioned to you around hybrid work and everything around the need to be equipped, whether you're in the office or working from home. That for us is very favorable. It's favorable for us because commercial is a profitable segment. It's favorable for us because also the ability to attach things around the devices there and because people are spending so much more time on their PCs, the need for services and support is also expanded, and that continues to be a favorable driver for us as we look at our business short and in the medium and longer-term horizons.

Got it. And then the other part of the PC opportunity is the upgrade business. And I remember like either you or Enrique in the past has spoken about, the industry has about 400 million installed PCs that are over 4 to 5 years old. And do you see any signs of the accelerating replacement cycle there based on either performance needs or like some of those PCs maybe can't do zoom meetings or whatever it is, so how should we think about that? And also, how would you characterize the PC density in terms of PCs per household? And I believe that number is also increasing from 1 per household or something like that, right?

Yes, yes. And there's multiple elements there. So first, I would say is, you're right, there's a very large installed base of PCs that are greater than 4 years old. Over 400 million in aggregate. And what we see is that, that is not only right for upgrade and refresh. But actually, we've been encouraged because refresh rates have been reducing, which is favorable for our category. Now it's not just because there's more shift to notebooks, which traditionally have had a shorter refresh cycle than desktops, but it's because of the elements that we mentioned before, people are working from home as an example. And guess what, the #1 thing that people are looking for is now to be able to show up well on a video conference. They want to be heard. They want a big display to make sure they're productive. And so these things are driving both the upgrade of that installed base as well as additional peripheral opportunities around and that's a very favorable trend because we have concrete use cases and new customer behaviors, not just the commercial dynamic, consumer, gaming. The amount of gaming that's happening on a PC, entertainment because of people wanting to consume more content, hours of time watching content, whether it's Netflix, et cetera, is growing, and they want great displays. They want more compute. All of them are very favorable, again, to more relevance but then as well accelerating refresh into the category, and that bodes very well for us as we think 1, 2, 3 and multiple years out because of the overall momentum in the core category.

Very interesting. And if I remember right, I think 1 of the things you guys mentioned in the earnings call recently was that you probably see an increasing trend towards more notebooks versus desktops. Is that -- do you still think that's true, especially, as the people go back to the office and enterprise starts picking up, do you think they will still go gravity towards notebook versus desktops?

Well, we see a couple of things. First is, you're right, we have seen a mix shift toward notebooks. And that, we believe, actually will continue because of the flexibility. One of the key things to note is we are not expecting that customers and employers will be back into a fixed model of only working in the office or only working at home. It's going to be an increasing hybrid work environment where employees and employers are looking to receive and give more flexible work options. Over 60% of the customers that we recently surveyed are expecting that they will need to provide more flexible in a hybrid work environments. That means that the computing also follows. And so that is one of the drivers for more of that notebook mix. And by the way, though, they not only want just a notebook, as we described, they want a notebook that has great battery life because they're working from home, they're actually moving around in the home, surprising how much, in our telemetry and in our research, we've seen they want great battery life. They want great audio, great video. They want to be very productive because they're doing work while on Zoom, while on teams. And so the need for more compute is increased. So again, very favorable to a sustained growth driver that we see because it's going to be a hybrid work environment. Same applies for learning, too.

Got you. And then so maybe on the learning side, clearly, there it seems like Chromebooks is the big driver. How big is this business for HP today? And what are your growth expectations on Chromebooks for this year? And also, if you can give some color on how to think about margins for Chromebook versus a windows laptop?

Yes. Well, let me just say, the driver is learning. The driver is hybrid learning. And we see in both segments, by both segments, I mean, in the higher ed. In higher ed, what has already started around more distance learning options will continue to grow. And then in [indiscernible], we've seen clearly a boom in that segment, and we don't expect that to stop. Because even as children will go back into the classroom, the need for compute devices one-to-one is expanding. You're right, in terms of chrome being one of the beneficiaries and reflections of that growth. HP is #1 in the EDU space, and we have been growing actually both in our chrome and windows categories. And from a chrome perspective, NHP, I'm actually very pleased. We made a lot of progress. Our profit -- our margin profiles on our chrome devices are approaching that of the overall category. So it's a very profitable in terms of overall growth for us. And it's something that we think is very important, not only for short-term and long term.

Got it. And Alex, one other thing that's kind of interesting is that you're in this extremely strong demand environment, but also at the same time, you had to deal with all the semiconductor component shortage. So where are the bottlenecks today? And when do you expect the tightness to ease -- start easing for your business?

Yes. You're right. We do see that dichotomy. I mean we do see fundamental demand drivers and actually response to HP innovation very strong, and we also see ourselves in a constrained environment. But that constrained environment, we see across multiple types of components, particularly more focus has been on ICs. And as you know, that dynamic is across a much broader industry. It's an industry-wide issue in compute, but also in other categories around the world. We've communicated that we expect that kind of constraint, will be in that kind of period, at least at the end of this year, and we're doing multiple things around this. #1 is we're using the strength of our balance sheet, we're using the strength of our scale, to -- as we shared last week, we are increasing our on-hand inventory to give us more flexibility. We're using the scale of our business to have longer-term agreements with our suppliers. The other thing that we're doing, quite frankly, is really using all the operational discipline around simplification, revamping our tools to be more effective in a constrained environment so that we can optimize how we use every part for second sourcing, second qualifying. And then another part of this entire equation for us as we execute, not just with our supplier base and how we operationally do so. It's also on pricing. We have the ability to manage pricing in all of our segments, and we've been doing so because the ability to reprice is very important in this environment. So we feel very good about all 3 elements of our execution. It is, yes, less ideal to be supply constrained, given the fact that we want to meet every customer who wants to buy a product or solution from us. But we feel very confident about the operational actions. And I think you can see our performance has shown that we're able to perform well. And as much as we can get more supply, we'll see improvement as well.

Got it. Alex, and thanks for the color. That's super helpful. If you try to dig it like 1 level deeper, it seems like when you talk to folks in the industry, the tightness is mainly in things like display drivers and even CPUs. So do you see the same thing? And if so, you also mentioned you're building inventory, what kind of inventory do you have today for a display driver or a CPU?

So yes. So first is, I think what we've communicated, we have grown on-hand inventory. We have grown CPUs in order for us to continue to maintain flexibility. The constraints that I also highlighted was on the broader IC componentry out there. And that's a very broad set of components. That includes those that are used on wireless, bluetooth, codex, all those areas that are related to what we deliver in a PC. And in those areas, as I mentioned, we are actively working with our suppliers. We're actively working on ensuring that we are multiple sourcing. We're actively working to manage our operational processes to simplify. We've got new AI-based automation to go enable that. And then again, we are actively repricing the market too so that we really think about this end-to-end across our value chain.

Got it, Alex. And I think like you also said about, I guess, diversifying your supplier base. I remember a few years ago, you was looking at even like qualifying, like, for example, AMD on the CP side besides Intel, how is it going? And I am more curious, especially on the commercial side, where it feels like it's a higher barrier to diversify the suppliers?

Yes, you're right. And I would say that this is a little bit pre -- I mean, this goes back several years. We offer probably 1 of the largest portfolios out there. We're very much focused on customer choice. And as a part of that has been a multi-CPU offering. And that's been very favorable for us. It's been very favorable because, first, we focus on offering choice to our customers. And we believe that having multiple options out there is important for our customers. Secondly, in a supply-constrained environment that is favorable because that gives us more options as we try to optimize how we manage components to deliver products to our customers. So yes, having a multi-vendor broad portfolio is a strength of ours that we've done across both the consumer and commercial segments.

Got it. And then maybe just 1 other question on the CPU side. Everyone is well aware of the well-publicized issues Intel had with its road map in terms of delivering some of their chips. So has that actually impacted PC demand in a positive or a negative way? Or do you think that the industry has overseen past like Intel's road map challenges?

Well, when you talk about demand, I think it is separate from supply issues. I shared with you before the drivers of the core market, customer behavior, hybrid work, hybrid learning. Those are more secular structural shift. The need for the latest in technology so that you can video conference better, you can work better remotely, which is driving reduced refresh rates as well as penetration. I didn't fully answer your question before and then I think about it is, in the past, the focus was on 1 PC per household. But I mean, the PC is essential. People are not sharing PCs for work in the house. They're not sharing PCs among their kids. It's 1 PC, not per household, it's 1 PC per person. And we have upside structurally in this entire category as penetration increases. The other thing to note is people are actually getting beyond just 1 PC as well. We see that the the number of U.S. households who are buying a second PC per person is increasing. And we see that offices and employers are offering and wanting to ensure that employees have a dedicated work computer because -- especially in segments like financial segments and insurance segments, where data security is so important, they want to make sure that they have a dedicated work PC. So all of these are the drivers for what we see underlying. It's not really how the constraints in the supply ecosystem as we've discussed.

Got it. Got it. Very helpful, Alex. And you use the term hybrid work environment. So when you start seeing that do you think that the line between commercial and consumer is getting more blurry? Or do you think it's still very 2 distinct segments?