HP Inc. (HPQ) Earnings Call Transcript & Summary

Perfect. Good afternoon, everyone. I guess it is afternoon to everyone unless you're still in Hawaii, in which case, a, I'm very envious of you, but it's morning for you. My name is Amit Daryanani, the IT hardware networking analyst here at Evercore. I'm delighted to have with us HP Inc. here for our next fireside chat. And we have from HP are Marie Myers, the Chief Financial Officer, and we also have Tesh Dahya from the IR team present as well. We'll keep this fireside chat around 30, 35 minutes. And while I go through the Q&A process, please do feel free to read the entirety of the forward-looking statements that are up there. While you're doing that, let me just kind of outline the agenda a little bit. I'll spend the first 20 minutes of this, along with Irvin on my team, going through some of the questions we have. We'll open it up to questions from the audience post that. [Operator Instructions] So with that, Marie, thank you very much for being with us. I really appreciate your time.

And I guess before I really dig into the session, and this, as you just told me, was your first institutional investor sell-side conference, so I'm honored that we get to do this together. But I was hoping maybe you could, Marie, spend a couple of minutes just recapping your recent earnings call, which had some extremely impressive set of numbers, almost too impressive actually, [ but thinking ] about the stock performance after that. But maybe just talk about what you saw last quarter a little bit across both PCs and the Print side of the business.

Yes. And good afternoon, Amit, and thank you for this opportunity to be at the inaugural TMT conference. And in fact, it's my inaugural TMT conference as well. So really excited to be here this afternoon. So first of all, I'd start out by saying, look, we're really pleased with our results. And as you alluded to, Amit, they showed up in our numbers, right? I mean, pretty extraordinary numbers, $15.9 billion in revenue, up 27% year-on-year. We grew earnings 56% year-on-year to $1.2 billion. Then great cash flow, $1.3 billion and then returned more than $1.8 billion to shareholders. So I'd say a damn good set of numbers for my first quarter, Amit. And I think what was really important, and I know we're going to talk about this today, is the themes that we saw around both businesses, and that being that HP is really at the core of hybrid work. And we're going to talk -- I know we're going to talk about PS, and you see just the strength in that business there and the way in which the PC has become a central part of life. And then in Print, what I'd say overall, that gives us strong confidence in our long term. And I know we're going to go into this in a bit more detail here. And I think, Amit, we're even so confident. As you know, we raised our expectations. In fact, we raised the second half at $0.19. Yes, that's $0.19, which is about 50% year-on-year EPS growth. So I think we're feeling really confident in our ability to deliver great results in it. So excited to be here.

Absolutely. And thank you for that quick background there. So really, one of the big discussions I end up having and it's been more so since the earnings call with investors is really the durability of these numbers. And maybe I'll start with the PC side, the Personal Systems side of the house. I think sales are up 25%. Consumer was up 70%. I mean, these are staggeringly impressive numbers, I think. But the question I get, the question I would love to ask you is, what do you think is the long-term growth rate here? And how has COVID really altered the growth narrative when it comes to Personal Systems?

Look, I'd say we're really well positioned to capitalize on these trends, Amit. I mean hybrid work, whether it's work or learn, has become part of our lives. I have 3 kids, probably like many of you listening today. And all of them got a PC before COVID and they weren't really big PC users. But today, they're just wrapping up school. I got to tell you, Amit, those PCs have become part of their lives. And I know that those stories are happening all over the world. So a couple of data points just to kind of bring home the long-term part of what you brought up. And first of all, I can't help but not say that the market for '21 is now 360 million units. That's literally 1 million PCs being shipped every day. And that's much larger than what the analysts -- in fact, about almost half the size larger than what they predicted before COVID. And then a couple of other things to bear in mind is that there is an installed base of more than 400 million PCs that are still Windows 10 or 4 years older. So this is sort of -- not only is there the demand as one PC becomes part of life for every person, but then there's also this sort of refresh opportunity that's out there. So look, we see really strong outlook and secular outlook for beyond '22 and beyond for PCs, just driven by these trends and by the fact that the world is really converging on one PC per person.

Yes, I know, absolutely. And I'll tell you, I have 2 kids. And to your narrative, not only do they have computers now, school PCs, but I got to imagine the replacement cycle is a lot shorter than mine are because it's [ the bottom line ] why -- they used to do a lot of things beyond just working sometimes. There's another part over there. When I think about supply chain, and this has been a constant kind of pain point for a lot of companies I've been talking to, it will be really helpful to understand, how does HP think about the supply chain implications? What happened to you folks? And I think the commentary in the last call was at an all-time high backlog or at least at a very high number on the backlog side. So can we just talk about what's happening on the supply chain side? How is HP dealing with it as we go forward?

I think we're in a very unique time, which -- where demand is literally outpacing supply. And as we mentioned on the call, we're seeing the challenges across the supply chain. And it's a complex situation out there and part of it is the COVID pandemic, but then the component shortages, logistics. And I'd say one thing about HP, and I joined this company more than 20 years ago when it was Compaq. And that operational sort of strength is -- it's in our DNA. And we're really -- I'd say we -- the good news is we saw this coming, and we have taken a lot of steps to help really drive the results that you're seeing. And a couple of those examples, you asked me what are we doing. So first and foremost, we've signed up long-term contracts with some of our key suppliers, and you would have seen that. We've got higher levels of HOI. So we're getting ahead of that. And then we're really ensuring that we're managing components for availability, and it's a very complex situation out there. I mean you've got to be able to match supply and demand, match all those components. And so that requires a lot of precision around SKU management, portfolio management, logistics management. But I'd say we've got great insight there. We're building and investing in all the tools. And then finally, I've been doing 2 jobs actually up until today. And so my other job was the transformation. And one of the things we did do, and I'm really glad we did this early on, is that we actually moved to one sales organization inside the company. So that makes it much easier for us to have the telemetry across the world and to understand how to really match supply and demand across the business. So I think we've been able to leverage that strength and able to take a lot of the benefits out of the transformation and help navigate this dynamic time.

Absolutely. One of the things on the PC side that's been very apparent is not only are units doing well, Marie, but you're also seeing ASP benefits becoming fairly sizable. I think a little bit of this is raising prices, perhaps people moving upmarket. But I'm just [ wondering ], how much of this ASP uplift do you think is sustainable? Because I'm used to thinking of the PC market as prices decline by 2, 3 points a year, not go off the way they have. What do you feel of the ASP trend line, especially if demand starts to normalize a little bit?

Look, we're confident in our long-term outlook. I hear your commentary as demand stabilizes. But right now, we're seeing those structural trends, as we talked about, really driving demand. And I'd say pricing is not one size fits it all. There are a number of variables that go into pricing, whether it's currency, commodities, logistics, availability, market dynamics. And we really actively reprice and manage that sort of basket of variables very carefully. So I think the good news is we really have that pricing power. So we're going to appropriately reprice to manage this sort of inflationary environment. But pricing is a complex dynamic. But I think we're very confident right now in our ability to navigate and manage that into the longer term.

Perfect. And you'll -- maybe as I wrap up the Personal Systems discussion over here, on the operating margin line, I think last quarter was 6.7%, well above your long-term targets, if you may. And I think on the call, if I remember, we talked about fiscal year should still be about a long-term target range of 3.5% to 5.5%. I'm curious, though, given some of the structural shifts you're seeing in PC that you've just talked about, should this just be a higher-margin business period on a multiyear basis?

Yes. As you mentioned, in the quarter, certainly, Q2, the margin was -- we did have favorable pricing. We've talked about that in some of our prior earnings calls, and it was offset partially by some of the mix in commodities. But as we look to the sort of longer-term outlook, we do expect our margins to stay slightly above that higher end of the 3.5% to 5.5% range. And I'd say, look, we're confident in our ability to continue to drive that. And part of it's linked right to the strategy that we talked about a bit earlier, whether it's some of the areas that we're investing in like peripherals and we've got the HyperX acquisition that we just did, which is sort of helping to balance out the margins of the business, the similar thing with gaming and services. And then also, we've just got the ability to continue to manage some of those structural trends that we mentioned earlier. So I'd say, overall, that gives us the confidence that we should be pretty much at the higher end of our long-term range here.

You mentioned HyperX. I guess I have to ask this question. How do I think about really not just HyperX, but a broader narrative around the PC peripherals part of the market, right? How do you think about that? Do you think you're under-indexed there? And maybe just talk about what is the strategy beyond HyperX as you think about the broader peripheral display strategy?

Yes. First of all, I'd say just with hybrid work, from a secular trend perspective, we are currently -- prior to HyperX, we've been under-indexed in peripherals. And hybrid work is really broad [ at home ] like what we're doing today, right? I mean, you need all the peripherals that go with it. You need great audio. And I think perhaps going into the pandemic, we didn't really place as much value on these experiences as we do today. So HyperX -- and in fact, we just closed it actually last week. It really helps to drive that strategy and also the profitability, frankly. As you know, these peripherals businesses certainly have very attractive margins. So I think it's a great fit for us in terms of our portfolio. And then looking forward to the future, peripherals is, frankly, it's a strategic area of focus for us. And I can tell you, I've been using -- just to put a plug in for peripherals here, I've been using some of the HyperX headsets, and it's really, frankly, one of the best headsets I've ever used in my lifetime. So -- and you really see just how important it is not just in the sort of gaming space, which is where it's a natural synergy, but also in all the commercial and enterprise work as well. So clearly, peripherals is a great adjacency for our business and a very strategic part of our portfolio, Amit.

Perfect. I look forward to getting these HyperX headsets at the next SAM event, by the way, now.

Yes. Actually, that's a good one. Yes, we'll have to make sure we fix you up -- we [ keep you out ] for the SAM event.

Perfect. I wanted to shift this a little bit, and I think this is an aspect that is less talked about, in my opinion at least, about HP, but should we talked more about, which is really subscription offerings at the end of the day, right? And I think, Marie, the skills beyond just Device as a Service, there's Managed Print Services, there's Instant Ink. There's a lot in there. I'm wondering, from your seat, right, are there any metrics you can share either as a percent of revenue or what the growth rates look like under the subscription model? And what are your targets? What are your aspirations over here?

I'd say this is another one of the sort of trends that we've seen in COVID, just the strength of our subscription businesses. And as you rightly said, we actually have subscription across the portfolio in Print and in PS. So let me just give you a couple of little data points here today. So on the Print side of the house, the one that we've seen perform very well during the pandemic has been at Instant Ink. And Instant Ink enrollees have grown here to almost just shy of 10 million enrollees. So great, great surge in demand that we showed throughout the pandemic. As you could imagine, customers are really looking for better ways to get their ink into their homes. So I think great momentum in that business, and we're very, very pleased with the results that we've seen. I'd say then on the sort of commercial side of the house on MPS, we're seeing some green shoots there, too. In the last quarter, we did see our TCV up double digit, 31% year-on-year and 26% quarter-on-quarter. So I think that's a -- we sort of use that as a leading indicator of the performance of MPS. And then as we sort of get to the PS side of the house, we have a business called DaaS, which is Device as a Service. I'd say it's still a small part of the business, but one of the things I'm excited about is we actually launched HP Provisioning Center. And that's -- as the -- I've been running IT up until today. And so it's really important, when everybody went home, that IT teams need to be able to support all those devices. So that's really a service offering to help CIOs manage those environments that have been distributed throughout the world and throughout the workforce. So I think a lot of excitement in our subscription businesses. And certainly, I believe that these are going to be important for us going forward. So thanks for asking that question.

Absolutely. And by the way, I'm curious, is there a way to think about what targets you may have in this marketplace from a revenue or ARR? Or how do we think about these things?

We're working on that, Amit. Stay tuned for the SAM event. So certainly, that's one of the things actually I've been working on as a CFO is like I did come out of -- I did a short interlude and a subscription model. So I was able to take that background and I'm working very closely with the team to really build out that sort of profile for our business. So more to come in that space. I'd say stay tuned for SAM.

Perfect. You've been very generous by not mentioning UI path, but that's where you came from. But now my list for SAM is HyperX headsets and ARR for [indiscernible]

Okay. You got me there now.

I'm keeping a list now. If I maybe think about the growth by [indiscernible], I think there are a lot of discussions especially of late. Marie's fixated on cyclicality and [indiscernible], but you have a lot of assets that are growing very well. 3D printing, gaming comes to mind. Graphics, I think, perhaps on the upswing again. So let me just touch on some of these subsectors, if you may. What are you the most excited about in these markets?

Yes, very exciting actually in terms of just what I would say interesting opportunities that we've got in all those spaces. So let me sort of give you a couple of points to think about in each one. And certainly, there's been a lot of market momentum, I'd say, in 3D overall through the COVID pandemic. And we are really focusing our efforts around a few key industry verticals. And obviously, health and wellness has been one, automotive, industrial. And we want to focus deep into these verticals. That's sort of the strategy we're taking in 3D. And just to kind of give you a couple of nuggets to think about here. The molded fiber business is where we've got really strong customer engagement. And due to [indiscernible] printed parts, up, interestingly enough, 34% year-on-year. So molded fiber are a place that we're really continuing to engage with customers and build out those kinds of relationships. With respect to graphics, you brought up graphics. It is interesting. We've seen really strong performance in graphics in the last most recent quarter. In fact, I think it's all tied to the consumer momentum that we're seeing with the sort of the economy and the way the economy is evolving. And you wouldn't be surprised to hear areas like labels and packaging basically grew double digits, and a lot of it's like consumer demand. And so as you think about it, people buy things, they need labels and need packaging. So we're seeing that strength flow through in our graphics business. So very pleased there. And then I'd say on the Indigo business, we actually sold 100 Indigo press in the quarter. So really good performance there. And then finally, the one that probably doesn't get talked about a lot, but obviously, it's a key adjacency for our HyperX business and the peripherals is OMEN. And I don't know about you, Amit, but I know in my house, a lot of folks -- a lot of my kids were getting very, how do you say, in the gaming during COVID. So as you can imagine, that benefited our business, and now I've got a suite of gamers at home as well. So we don't provide -- I know you want those financial metrics, but we don't provide those metrics on gaming. But I'd just say it's a sizable business, Amit. It's north of $1 billion. So -- but obviously, as you know, gaming has had great momentum during the last sort of year or plus, too, as well. But there are really exciting growth vectors. These are all part of the reasons I came back to HP. I think we've got some great opportunities here.

Okay. I wanted to shift the discussion to Print. Your performance on Print was perhaps even more impressive than your PS business, with sales up 27% and supplies is up 17% during your most recent quarter. So perhaps if you can touch on the supplies trajectory and reflect on some of the strength you're seeing there, that would be helpful for us investors. And I also wanted to ask just about -- on the sustainability of supplies performance. Given that the thought process here is that historically, the supplies market is something that's thought of as a flat to down market. And that business being up 17%, does that mean there's some sort of mean reversion at play looking ahead? Or has there been something that's been secularly shifted?

Well, let me unpack that question. You've asked a couple of good ones in there. So first of all, just to kind of help folks think through the supplies performance. And as you said, look, we certainly had very strong results from supplies and it was a bit of a peak quarter. Q2 is typically our strongest quarter. So let me sort of just put the quarter itself in perspective. So first of all, if you go back and you look year-on-year, a year ago is when the pandemic started. So we had a bit of an easier compare there for supplies because as you recall, the factories shut down. So all of that sort of was flowing through our financials a year ago. Then obviously, we've had strong demand. We had demand in the home. As you know, people -- the whole hybrid work experience has really driven that sort of draw on supplies. And then we've talked about our favorable pricing mix. And then finally, as I mentioned, just like on the graphics, we've seen some of that improvement in commercial take place inside the quarter and in some replenishment as well. So all of that sort of tied into that strong -- very strong supplies performance that you saw in the quarter. Now to answer your question specifically about the long term and how to think about supply, so I kind of boil it down to a few key points. First of all, in 2021, we expect supplies will be up for fiscal '21, frankly, but that's going to be compared to '20. And those growth rates are going to be lumpy quarter-on-quarter. We expect the home to be better than pre-pandemic. I think that's sort of pretty straightforward. But we're starting to see some of that office recovery happen. But we don't expect to be at sort of pre-COVID levels. You're starting to see that return to work, particularly in the U.S., open up. But it's certainly not going to be at the sort of pre-COVID levels anytime soon. So I'd say overall, our focus in this business is really around driving our operating profit dollars. And so we don't need supplies to really achieve our long-term plans. Amit and I just dialogued here a moment ago about what we're doing in some of our growth vectors and how we're thinking also about Print. So really, what's core to us is just how do we continue to grow OP dollars at that Print level and really pivot to our strategic pillars in the Print business.

Got it, got it. And while we're on the topic of return to work, how will a return-to-office dynamic affect HP's Printing business with page volumes shifting from back home from the home to office? How does that alter your business model?

The great thing for us at HP is that we have a broad portfolio. And I think I remember when we split the company, it was a long time thinking about how to balance this portfolio, that this could have -- on both businesses, between home and the office. So that breadth and that diversity is really important for us in terms of just that rebalance. Now we do expect that the Consumer is probably going to be better than pre-COVID just because of the sort of trends that we've talked about here around hybrid work and that the office recovery is probably going to be gradual. It's going to be even lumpy and uneven. So -- but as I said earlier, we saw some of those improvements in our MPS business. We kind of look at the TCV rates as an indicator of commercial as well. So we're seeing that improve. But I'd say overall, it's going to certainly be a gradual and uneven return to the office. So -- but I think our strong -- and our breadth and our diverse portfolio will help balance out the performance in Print.

Got it. And I do have a financial question for you, given that you are the CFO. On the topic of capital allocation, you have a fairly impressive free cash flow generation at maybe a $4 billion annual run rate. Can you talk about your share repurchase commitment? And how do you think about balancing shareholder return via dividends and buybacks versus investments for growth?

No, thank you for that one. Great question. So obviously, we've returned a significant amount of capital to shareholders in the past 12 months. And in fact, we've basically returned about $6.3 billion to shareholders and we bought back about 70% of our shares. Those are pretty amazing numbers, I would say. And as I mentioned during earnings, we're going to continue to buy at least about $1 billion a quarter. So we believe that this strategy is the right thing to do now. It's prudent for both ourselves, the shareholders. And we continue to frankly see our shares as undervalued.

Perfect. I have a couple of questions, Marie, from folks in the audience. So maybe we'll just address a couple of them. First, I guess, on 3D Printing, any way to size the revenue in aggregate? And anything you can touch on how much of this is metal 3D printing and what you're see in metals specifically?

Right. Sure, Amit. I mean, certainly, we don't give out our numbers on revenue of 3D Printing. But I would say that we play in all those spaces with molded, metal. And certainly, what we've seen most recently is that the molded fiber business is where we've seen that strength, particularly in the last couple of quarters. So on the metal space, we're continuing to evaluate opportunities there and look to sort of develop it out as we go forward. But I'd say stay tuned for SAM to hear more on metals.

The other one was on PCs. From a supply chain basis, what are the bottlenecks on the component side that you're seeing? And when do you see these bottlenecks alleviate?

Yes. No, certainly, I think it's certainly pretty -- I think the one that's probably the most challenging is certainly ICs, and there's been a ton of press. In fact, I don't know if you guys saw the article Flex had out yesterday, I think, about the outlook in that space. So we expect that, that's going to continue on certainly for the rest of the calendar year. I think Enrique commented on that in the earnings call. And it's not just limited to ICs. And in fact, what's interesting is that it -- ICs kind of hits us both on Print and PS, but I think we've been very prudent in the way we've sort of managed around this operationally, as I mentioned earlier. In terms of -- there are panels, but we see panels probably getting better here in the second half of the year. So I think the key is being able to really manage the match sets and being able to sort of manage across the portfolio, which is what I alluded to earlier, Amit. But certainly, this is going to continue on for at least the foreseeable rest of the calendar year.

One more here from the audience. And the question is actually on PCs, but I think I would love to hear both on PCs and Print. Where do you think the channel inventory levels are today across PC and Print? And in theory, how long does it take to optimize these?

That's a great question, especially the second bit at optimizing. So I'd say what's -- we are still on both businesses at historic low levels of channel inventory. And this has been -- certainly, I've been in the company, like I mentioned, on and off more than 2 decades and haven't seen these levels across both businesses at the same time, very low. And I think that's just an indicator of the strength in the demand. And more importantly, on the PC side, it's not just the channel imagery that's at a historic low. It's the fact that backlog actually improved and got larger quarter-on-quarter. So -- and to answer the second part of that question, when do we see that changing? Well, I think as I mentioned, demand is really outpacing supply. So we obviously -- we look -- we've managed very carefully the ecosystem on channel inventory. And so we're going to be continuing to use that same level of discipline and prudency around managing the channel going forward. But the key for us is just really making sure we can satisfy customer demand.

Got it. And then I know Irvin asked you this on a return to work from a Print basis. But I'm curious, how do you think about the ramifications of return to work on the PC side of the equation? Because I think there's a [ school of pod ] that would say, anyone wanting a new computer already has one, so it doesn't matter. On a very personal level, I would say, I'm in the midst of discussing in my IT team that I need 2 computers because I don't want to take my entire setup at home and go to work every time back and forth. So I'm curious, what do you think return to work means for the PC business in the next 6, 9 months?

Well, I think as I mentioned earlier, I mean, the PC, it's -- we're getting to a world of 1 PC per person, whether you think about the consumer or the commercial environment. Certainly, at work, as we move into hybrid work, you're going to have to have a setup at home and a setup in the office. And you need to have that sort of seamless interaction. So I think that the demand, certainly in the commercial space, is absolutely going to be driven by those secular trends. And I think as I mentioned earlier, too, is just that whole Win 10. I mentioned the fact that there's 400 million units that are still sitting out there that are 4 years or older. And so CIOs have all of those challenges to deal with as well, Amit, is where I'd sort of go with the commercial space. And I can tell you, just as I've been running IT inside of HP for over 1.5 years and live that firsthand and just trying to keep up with the pace of the satisfying our own internal employees' demand.

And then maybe I want to go back to this capital allocation discussion Irvin had. But on the leverage side, right, I think if I remember this right, Marie, you've talked about 2x leverage sort of a target from a debt-to-EBITDA basis. I think you're operating -- maybe to 1.5 is the range you've had especially out there. You're operating well below the lower end of that range. And I think free cash flow will probably exceed $4 billion, my words, not yours. But what is -- when or what do you want to see to get comfort to take leverage to the target range, if not at the higher end of it?

Yes. You didn't -- those were your words, Amit, not mine. So I'll just remind you that, look, our balance sheet is a strategic lever for the company. You see that right now in the pandemic how important that is. And as you said, our -- the range that we've talked about, we committed to as part of our value plan, was 1.5 to 2. And so clearly, we're below that right now. And frankly, it's our strong earnings and free cash flow that have been the drivers of our ability to drive that strong capital return over the past year. So I'd say, certainly, in the short term, sort of in the medium term, we know we would like to get back into that range. But for the short term, the balance sheet is just a crucial strategic lever for the company. So we'll -- cash balances will be slightly elevated. They're at $3.4 billion, and we expect to use that excess cash flow for capital return over time as well.

And then maybe one last one for me. I know we're coming up on our time here. But ESG, I think it's been -- HP's one of these -- I think it's the smallest of 10 companies that have the AAA rating from CDP over here from an ESG effort perspective. So maybe you just want to touch a little bit on your focus, your efforts as it relates to ESG and sort of what has enabled you to get the -- these high ratings.

Yes. No, honestly, Amit, this is one of the draw cards for me to come back to HP. I mean, I think HP is one of those companies that really -- where actions speak much louder than words. And we have this ambition to really be a company that is the world's -- amongst the world's most sustainable and most just company. And those are words that we just don't take lightly. There's a lot of meaning behind that. And frankly, there's a lot of dimensions and frankly, numbers behind that. So I'm hoping that folks will appreciate this. And just to give you a couple of sort of examples of where we're really putting that action and really putting our commitment. First and foremost, we basically committed in terms of our carbon neutrality to really be one of the first companies to actually get out there. And I believe by 2025, we expect -- try to be carbon neutral. And these are big statements that you don't take lightly. And then also, we've got a number of ambitious goals around diversity, equity and then inclusive technology. So a lot of initiatives in this space, and we are really leaning in here and see this as one of our strategic differentiators.

Perfect. I think I'm -- I have 90 seconds left here, so maybe I'll pause here. Thank you very much for your time, Marie. This has been really informative, really insightful for me. I want to turn the mic back to you, I guess, and see if there are any closing comments, anything that we did not touch on that you want to make sure investors are aware about as they think about HP.

Sure. Thank you, Amit. I just want to say thank you for your time today. It's been a pleasure to spend time with you. And just to close by saying I think with the secular trends of hybrid work, HP is incredibly well positioned here to be a leader in this place. And well, I look forward to our next conference, and wishing you all a great day. Thank you very much for the opportunity.

Thank you very much. Thanks, everyone.