HP Inc. (HPQ) Earnings Call Transcript & Summary

Hello, and welcome back to the Six Five Summit. I'm Shelly Kramer, one of the founding partners of Futurum Research, and on behalf of my team at Futurum and the team at the Moor Insights & Strategy conference, we're glad to have you. In this fine session, Futurum's Daniel Newman sits down with Enrique Lores, the President and CEO of HP, to discuss the changing demands in the PC marketplace, and oh, what a year for PCs it's been. They also explore HP's focus on innovating new products and services that will serve humanity. No small undertaking. This is going to be a fantastic conversation. Let's get to it.

Enrique Lores, thank you so much for joining us here at the Six Five Summit 2021. How are you doing today?

I'm doing very well. And really, thank you for having me here.

Yeah, we're very excited. What a great day it's been. This is the fourth day of the Six Five Summit and we've just had a slate of tremendous speakers over the first 3 days, today, on our devices and semiconductor day. We're so glad that you're able to make the time. So much to talk about, only have about 20 minutes with you. So if you don't mind, I'm going to dive right in.

Please, let's do it.

So we've had occasional opportunities throughout the pandemic to talk, but as busy as it's been, we haven't had as much face time as we may have historically. Events have been off the table, so we've had to depend on a few conference calls and a few big launch updates. But I'd love to hear from you, just kind of the overall perceptions you've had about the impact of the pandemic, some of the trends you're seeing. Just kind of the -- a little bit of the year-end review and what you kind of see the world looking like now that we're in that late part of the pandemic.

Well, I think that the pandemic has have -- has had and is going to have a tremendous impact almost in every aspect of our lives. I think we have changed how we work. Our kids have changed how they learned, how they communicate, how they play. And this is really going to have an impact not only now but will continue to have an impact for many years. And what this means for HP is that we are now at the heart of how -- of this new hybrid world, where we will be combining working from the office with working from home, where we are going to be using our PCs as communication tools, where we will be using them to get access to health care. So it's really a big opportunity for us to develop new technologies, develop new products, to continue to make the life of our customers easier. But we have also seen a big change of how customers want to consume. We have seen a tremendous growth of online businesses. We have seen tremendous growth of new ways of consuming print, like subscription, which again are very aligned to the directions that we had before the pandemic and are just making -- helping us to accelerate our plans.

Yeah. I saw a data point come across my screen in a briefing earlier this week. And it said something along the lines, Enrique, that there were about 8% of meetings prior to the pandemic had a virtual or remote employee on the meeting. And it said the expectation in this survey was it's something like 98% after the pandemic will continue to have remote personnel on the meeting. And let's just take one example where, even after vaccine, and even after the health care part of this crisis gets resolved and returns to some level of normalcy, there are secular trends and behaviors that are going to last well beyond this pandemic. And these businesses are already preparing for it, which makes what you guys do. And the whole PC is essential story that Alex Cho shared with us here at our Six Five Summit last year, seemed to really have not only been accurate in its day, but it built momentum. And the companies actually have created new behaviors that are going to last long beyond this pandemic. Now, I have you here. And as a CEO of a manufacturer of PCs, you are heavily dependent on semiconductors. And this is by the way, the semiconductor day. So I want to pivot real quickly. But I want to talk to you a little bit about supply constraints. This year has been a wild narrative around chips. You never heard so much news, so many news cycles, stories that every day people are now interested in what's going on with semiconductors and chips. Talk a little bit about what you're seeing on the supply constraints. How is it impacting your business? And sort of how do you see this being resolved, if you can share a few insights?

Sure. I think that before I talk about the supply constraints, I think it's important to explain why we have supply constraints, which is really connected to the first conversation we were having. The new hybrid world that has made PCs essential, is really -- has really driven a significant increase of the demand for PCs and other electronic products. Just in the case of PCs, the market is going to be, in 2021, about 360 million PCs, which means 1 million PCs are going to be bought per day. This is 40% more than what we were expecting to be a year ago. And this very significant increase of demand is driving the shortages that we see, because there is no way any industry can cope with that increase in volume and respond that in a short period of time. So this is why we are seeing the shortages that we are all seeing. And really, if we will look at what is driving that, this increase of demand is really combined with areas where there has not been a lot of investment during many years because where -- the areas where there are shortages are with what we call old technologies, 19 nanometers, more than 13 nanometers, which are really the basic components that we are missing today. And therefore, this is having an impact now. We think that the impact will continue through 2021 and potentially through the beginning of 2022. And again, the stronger the demand will be, which we think will continue to be strong given the trends that we see in the industry, the longer we are going to be living through this difficult situation from an availability perspective.

Yeah, we're definitely seeing different waves of demand and shortages. Like you said, a lot of the older process that got tied up in early pandemic supply planning, have ended up flipping to the back. Like the automotive space had no idea there would be so many -- so much demand for vehicles. And the demand actually didn't decrease, it didn't even go flat, it actually increased. And so many manufacturers said, hold production. And then the fab started manufacturing other chips. And I've talked about this in some other session. Most of the world doesn't realize it's not like you can just turn it on and turn it off. There's a lot of planning involved. I also think some of your partners, you guys partner with several of the leading manufacturers of chips, some are fabulous. Some fabricate their own. But you're starting to really hear about, where are chips made? Do more chips need to be made here in the U.S., or in other places? Not just U.S., but just other places than where they're being made now. And then, like you said, and I think you made a really important point that I want to reiterate about, the leading edge has actually been fulfilled pretty well. We've been able to meet a lot of the demand. That's why people are still getting their high-performance phones and devices and PCs. And those have not been as hard to come by as some of the other things that depend on chips. Sometimes a $3 part is holding up a $300 Chromebook, or a $0.30 chip is holding it back. So it's all really interesting. I'd really love getting your perspective on that. Let's move to a couple parts of the business. I want to talk a little bit about the personal systems, and then I'm going to hit you up a little bit on the print part of the business. But you started alluding to this. We saw this whole PC as essential movement. Everybody's living every day on the PC. The demand is through the roof for these devices. We're seeing it in the quarterly reports. I hear it in your earnings calls. But what's the future look like? I mean, how do -- how are personal systems going to start to evolve now that we've kind of really established this baseline of higher demand?

Well, I mean, it's very hard to talk about the future. And I think what we have seen during the last two years is really how difficult it is to predict where things will go. But if we look at the trends that we see in the market today, we are really optimistic about the future of the overall PC business. We think that the trend of PCs being essential and every person needing a PC are here to stay. And they will -- if you think about how you and I will be working, how our kids will be working, they need a PC to continue to work from home or from the office, from home or from the school. And we still see that the penetration of PCs, when we look at the market from that perspective, is relatively low. So this is why we see the strength of the demand for PCs is going to continue. And there is -- there has been a reset of the overall market size. So the market is now bigger and will continue to grow from that new position, really driven by the expansion of the growth of penetration that we expect to continue to see in the future. So if you think about what HP used to say 10 years ago that the PC is personal again, I think something similar is happening now. The PC is personal again. And it's even more important because now, it's essential for everybody to do work or learn, or communicate.

Absolutely. And it's been great to watch the evolution and the improvements in just the construction and quality. I've had the chance to test some of the high-end laptops that have come out, some of the gaming systems, some of the workstations, some of the desk PCs. But just the whole way they feel, the touch, the look, the backlighting on the keyboards, the touchscreens on everything, I have to say, it's come such a long way in the last few years. These machines, they are just -- I'm so excited to kind of see how they continue to evolve. I mean, I laugh because in the beginning, you couldn't even imagine doing a Zoom call or a Webex call because the cameras were so bad. The mics were so -- and I mean every component on these things has just become so much higher quality and the look and the feel -- in the early days, a lot of people would try to use that as a way to demarcate say, a mac versus the PC. And I would say, arguably, right now, some of these PCs are made, they feel they look and they respond even better. So I'm excited at where the personal systems are going, and it's been reflected in your success.

So I think what you are seeing is the consequence of how we have changed our design approach. We are not designing products anymore. We are really designing experiences. And when we think about what to bring to market, it's not anymore about the product alone. It's really about what do we need to do to really help our customers to have the experience they are looking for. If they're looking for a great video call, what do we need to do to make that video call work. If they are looking to create a new graphic design, what do we need to do to make that happen? And this change and evolution on our focus from just the products to the full experiences really is helping us to make a big difference and really meet really the demand that our customers are looking for because they don't want to buy PCs. What they want to do is be able to use the PCs to get the work that they are looking for.

I'm about to pivot to printing, but I do want to add some of the security upgrades and updates. I still remember being very early with the privacy on the screen that you guys did that very early. And you laugh, but I mean visual hacking was such a big thing. And we look at how people end up getting breached and where threat really comes from, we are so often a victim of our own behavior. And you guys have been very prudent. The Wolf campaigns, I like that show a lot, Mr. Robot, a lot of fun, but security. I mean, security is a huge topic. So we've talked about supply and chips. We're really seeing how are we hardening everything from the -- from that semiconductor to application and you guys have been very active in getting involved in that. So let's move on for a moment to the print side of the business. People say there is no more innovation to be had. People say, it's just paper. You guys clearly don't buy into that. You have been very busy innovating both the products, but also the business model. I still remember I attended -- I spoke at the very first HP event after the split. It was a sales kickoff event. I'd like to say maybe it was in San Diego. We rent -- you guys rented out a whole street. I remember there was a party at [indiscernible] and the Gaslamp. Anyway, but the point, I think that it was the first time I heard about your kind of Print as a Service business model and some of the shift. But that was several years ago and the innovation has been busy. Talk a little bit about the print business, the innovation of the business. Where do you see that part of the business going? And then I'm going to hit you up a little bit on 3D.

Yes. I think we -- there is clearly -- there is always opportunity to innovate. And in the case of print, we are driving a lot of innovation on the business model side, again, because we believe that by driving a different business model, we can create a better experience for our customers. And the -- for example, the subscription program we have put in place delivers a better experience for our customers, makes printing cheaper, they pay less per copy and also removes one of the key concerns that we hear from our customers about printing, which is the typical problem many of us have experienced. Someone in our family needs to print is usually our kids that need to present homework, bring homework to the school the next day. It's 10:00 p.m., they try to print something in the printer and the printer is not working because we didn't buy supplies when we run out of ink the last time. With our program, we addressed both problems. Printing is cheaper. And because we monitor the amount of ink in the printers of our customers, we make sure that they are always working. And this program has seen a significant acceleration through the pandemic. Before and after the number of subscribers almost multiplied by 2, and we are now close to have 10 million subscribers, which is a very strong number and a very good number to use this to build a platform, to expand and to grow into new areas. But we also see areas for innovation in security. As we were talking before, printers are also connected to the network, they could be vulnerable, and they could be used as an entry point for the bad guys to penetrate either your home network or your company network. And we have been investing in security in the printers to prevent that from happening. And then the third big area of innovation is related to sustainability. More and more of our customers are concerned about sustainability. What plastics are you using? What does it mean to be using paper when you print? And this has been and is another big area of differentiation and investing in innovation on the print side.

You covered a lot of ground there, but I'm just going to have to go down one more on print. 3D, it's been something that HP has been involved in early, it's something that we hear more and more about. I wouldn't say it's become pervasive to the broad public, but it's becoming more and more. Kind of what's the strategy there. How is that going to evolve? What should we expect to see in the coming year?

Yes. First of all, I think through the pandemic, we saw the value that 3D printing could have. And the very early days when doctors and nurses didn't have access to PPEs, we had an opportunity of mobilizing our own printers but also our partners to produce a lot of that equipment. And during the early months of the pandemic, we produced more than 5 million PPEs, masks, parts for ventilators, all sort of equipment to really help those working on the front lines to manage and to help the people through the pandemic. So we clearly saw the value there. And if I look at that business going forward, we continue to see the growth and the opportunity. Last quarter, we announced that we saw a number of parts growing more than 40% of parts being created in our printers. And going forward, you're going to see us operating in 2 different areas. One, we are going to continue to develop printers from both plastic and metals for others to use to build products. But in some specific areas, we want to really work with the end users to build and to design the parts that will be created with our technology. And we have been talking lately about the work that we are doing in tooling for molded fiber as an example of the opportunities that we see. But we really see for the company a big opportunity to continue to push the envelope, to continue to find new applications for 3D and show the world what is the value that 3D printing is going to have.

Yes, it seems like there's a much bigger future and I really like that you bring up that example. Early in the pandemic, we did hear a lot about it. As the pandemic went on, the subject matter changed. We didn't hear as much about it as manufacturing caught up, but the opportunity to do exactly what you did showed the validity of being able to take a design for a mask or a part that was required to scale ventilator manufacturing and make these things almost on demand. Like talk about just in time. Now if only, we could do that for chips. I just don't think it's going to work yet. But maybe someday...

Well, one day.

Maybe someday in the future. Now we're getting way into the future, Enrique.

Exactly.

Well, let's take this conversation home. You alluded to sustainability a little bit when you talked about printing and you were talking about because obviously, ink, paper, cartridges, these are not necessarily things that are extremely favorable to sustainability, but you guys are focused on trying to improve in every way that you can to apply more carbon-neutral, sustainable behaviors, activities in your processes. Talk a little bit about the impact, the goals and ambitions that you have for the company and how that's going?

We have a very simple objective. We want to be the most sustainable and just technology company. And we have made that commitment both to our customers, but also to our employees because of 2 key reasons. First of all, we think it's the right thing to do. We want to leave to our kids to our grandkids a better world than the world we got. But also, it is critical and is starting to be critical for our business. Our customers are demanding that, both large corporations and consumers. We have made public that last year, we generated more than $1 billion with businesses that really care about our sustainable practices. And more and more, we see consumers also making demand and buying products, not just because the products are great, but because the brands support the values that they have. It is also very important for our employees. It's critical to attract talent. And it's also very important and starting to be very important for investors. And we all saw what happened with Exxon last week where some of their Board members were not selected because investors had concerns about their sustainability practices. And the way we translate this objective is in 2 different areas. First, in what we call environmental sustainability, and we have made very clear and specific goals. By 2040, we want to be carbon-neutral in our full value chain. But given that we are a company that consumes a lot of plastic, and also paper in our printers, we have made goals more specific to these areas. And for example, in printing, since people have this -- built this connection between printers, printing, paper and trees, we have made one of our objectives to make printing forest positive, and we will monitor the paper that is used in our printers and where it is not coming from sustainable forest we will be planting trees to compensate for that. And then the second big area is around diversity and inclusion. And we have also made very specific commitments in that space. We are the first Fortune 500 technology company to have as an objective to have 50-50 gender equality by 2030, which will require a lot of changes in how do we develop our talent to be able to meet that goal. And we have also made specific goals in the area of developing and helping to grow our African-American employees. And we have committed to double the number of executives by 2025. So again, we really think this is critical for the company. It's one of our key objectives as you are going to continue us to work really hard in that space because no matter the progress that we have made, we know that we need to continue to making much more progress to really help both the company but also our communities.

It's great to hear from you about more than just the sustainability and the whole spectrum of ESG that HP is focused on. And the moves that you're making. And I really do have to say, Enrique, I appreciate and like companies that are being specific. And some of the things that you just said, what I really enjoyed about them was you set timelines, you've set dates. And what that means is accountability. That means the market is going to be able to say, Enrique, HP, you said, did you do it? You said, did you do it, right? And so it also lets you and all of your teams really work towards those goals. And after 2020 and all of the visibility that was brought to various ESG and issues inside of corporations, big technology companies like yours have an opportunity to really lead and serve as an example to the world as to the right way to do things in the right way to help us overcome the challenges that have plagued our societies for a long time. So thank you so much for sharing all that.

Thank you.

Enrique Lores, with that, though, I'm going to have to say goodbye and say thank you so much for being part of our 2021 Six Five Summit. It was great to have a chance to ask you some candid questions. I thank you for playing along and answering them all.

No, thank you for having us here, and congratulations for a great event. Thank you.

Absolutely. So stay tuned with us. We have a great day. This is day 4 of the Six Five Summit, and we have a wonderful slate of speakers, as I said in the beginning. But remember, all these sessions are available on demand and they will be available well beyond the week that this event is taking place. So if you like what you heard here, click on the others, check them out. We have more than 50 sessions. If you have some time, share with your friends, join us getting to the social conversation. For this conversation, though, we got to say goodbye. Thanks for tuning in. We'll see you later.