HP Inc. (HPQ) Earnings Call Transcript & Summary

Good afternoon, everyone. Before we get started, if you are a member of the press or media, please disconnect at this time. This is a restricted line. Any unauthorized party in this meeting or any unauthorized use of the information communicated in this meeting is subject to prosecution to the fullest extent of the law. Any unauthorized person, including the media that is on the line at this time, please disconnect. Please note, today's call is being recorded.

Great. Thanks. Good morning or good afternoon, everybody. Thanks for joining us. I'm Aaron Rakers. I'm the IT hardware and semi analyst here at Wells Fargo. Excited to host the discussion here with Christoph Schell, who is the Chief Commercial Officer at HP Inc. [Operator Instructions] Christoph, thank you for joining us. But before we get there, I'm going to read the disclaimer. [Audio Gap] I'm sure I'll touch -- and let me know if I didn't, but I think I got that right. So Christoph, again, thank you for joining us. I wanted -- maybe I'll start it off to you. I mean I don't know if you kind of wanted to -- I believe, maybe you had a little bit of prepared comments, but I definitely want to start the discussion on the demand picture as you see it today and maybe how you're thinking about it into '22. But I'll let you kind of take the floor and we can jump right in from there.

Yes. Look, I'm happy to do that, Aaron. So firstly, big thank you for having me. I appreciate it. And this is the first conference that I'm doing after the end of our fiscal year and after the end of Q4. I think the way we look at Q4 and the fiscal year Q4 was the -- was a great quarter to finish a great year. That's really how we overall feel. And I think if you look at the year, we grew revenue, we grew operating profit. We grew EPS. We grew free cash flow. So I think overall, that's quite positive. I think what I like most about last fiscal year is the change in opportunity out in the marketplace. I think that the pandemic has changed customer behavior. And the way I've summarized it for my team is we're in a hybrid environment. In the past, we looked at our business as it is a big consumer business, it's a big commercial business. I'm responsible for go-to-market with the team and we had dedicated go-to-market teams, dedicated go-to-market strategies. But during the pandemic, that has changed, and it's now one, it's one segment, okay? That's how I look at it. And you can have an engagement with a customer that starts with a professional need. But then that customer is also operating very often from home. And when you have that opportunity, you can have a discussion or a dialogue about entertainment needs of the family and you do this back and forth multiple times a day. From a portfolio point of view, from a hardware portfolio point of view, from a services portfolio point of view, from a go-to-market capability point of view, HP is well positioned to take advantage of that hybrid opportunity. And I think you've seen that shine through in fiscal year '21. And I think it will stay with us as we go on into '22 and beyond.

Yes. And kind of on that if we kind of think about PCs and print, maybe I'll start with PCs on '22. There's a lot of debate amongst investors. And I think one thing that's come out of the last earnings cycle is that there's evidence that maybe PCs are sustainably at a higher level post COVID, right? We were running 250 million plus or so units a year, and that's uplifted to 340 million, 350 million where we stand today. So how do you see -- how does HP subscribe to the views of the PC and the market from a demand profile as we look into next year? Do you subscribe to the view that PCs actually grow next year? And just kind of help us understand or appreciate the underlying dynamics there.

Yes. I think you raised the key point already there. I mean the total addressable market simply has increased. It was, prior to COVID, I was tracking at 248 million units sold per year, and that is now at 350 million units. And I think as we look into fiscal '22, we think that it will be that amount as a minimum. And that's obviously very encouraging. The other thing that is encouraging is if you look at that mix of backlog that we carry, I mean we publicly talked about the size of backlog that we have. It's approximately a quarter worth of backlog. When I look at the composition of that, it's a backlog that is very focused or very strong in commercial and also very strong on a favorable mix of product. So what I mean by that is it's not just opening price point type of products but products that are more high end and particularly in gaming, around workstations. And that obviously is interesting for us because it helps us to grow AUP, average unit price, and that's something that we are really after. So we are not so much in the business of chasing share within those 350 million units. We are really, as the #1 priority, looking at mix, look at price elasticity in order to ideally grow revenue faster than units. And that's, in particular, what my team is doing. So that's how I look at the overall category right now. I see a lot of opportunity because we are having this core strength in the PC market, but then we have this added on opportunity of hybrid. There's a lot of peripherals, a lot of services opportunity that we attach to this going forward. And that is something that has developed nicely during the pandemic. So Aaron, I hope that answers your question, but let me know if you need more.

Yes. No, I mean I appreciate that answer. I mean, look, I think it showed up last quarter, right? I mean, units on notebooks, for example, I think were down 12%, but revenue was up 13%. So it sounds what I'm hearing from you is it's not share for share's sake, but just continually we should be thinking about that ASP, that mix dynamic that's really core to the strategy as you foresee it.

It is. And it obviously has something to do with the overall very fluid and constrained supply chain reality, okay? So when we have components to have a [ max set ] ready that we can ship to a customer, we're obviously trying to get the maximum out of that max set and so that's why we are so focused on mix.

Yes. And then the same question on print. I mean print has obviously been an area where operating profitability has been very sustainably strong. There's some -- hardware units were down quite a bit. There's some transformational things going on within HP's print business. So just help us appreciate what you see on the print side as we look into '22 right now and some of the drivers we should be kind of considering.

And look print, very interesting business, a business that I know fairly well. If you look at Q4, we continue to see a recovery in commercial, but it is a slow recovery, and it is fairly [ uneven matter ]. It really has to do with how different countries, how different markets are thinking about going back to the office. And obviously, every curve ball that the pandemic is throwing at us, this has -- this can change. And we have seen our NPS usage grow in Q4. We have seen that our commercial revenue actually in the quarter was up, I think it was up 19% year-on-year, 3% quarter-on-quarter. So there's strength relative to where we're coming from. But we also believe that, that commercial business in Print is not going to go back 100% to where it was before COVID. So we actually, in our own internal planning, we think it's going to go back to 80% of the pre-COVID levels. And that -- it's obviously -- it makes this an environment where you have to be very smart about what services do you sell on top of just the printer itself. I like very much where we are from a total contractual value as we enter fiscal year '22. We are up 28% in Q4 year-on-year, and that's a very good indicator to project what will happen going forward. And then on the consumer side of printing very positive Q4 performance. Our challenge in print overall is supply and the impact that, that has on us being able to cater to demand. I made that comment on Personal Systems, and we definitely see on both categories, PC and print, that there will be impact to demand from supply chain not being able to cater to it for at least until the summer of '22, and that's what we're busy dealing with.

And that supply discussion on Print is both commercial and consumer? Or is it just more weighted towards consumer?

Now it's unfortunately across both segments. It's also across both technology, inkjet and laser technology. So it's across both.

Yes. On that topic, the supply chain, you just alluded to it that you see this constrained environment kind of persisting at least into the mid part of 2022. How does HP or how do you think about assessing the common question that comes up on any call, which is the perishability of that demand profile? That backlog that you're carrying that's a quarter in PCs, for example, how are you looking at that? Have you seen any changes or signs of [ double wording ] or perishability of the demand?

No, I haven't. And so that is obviously the daily check of what is happening with the backlog. Our customers getting frustrated, our customers moving away, losing patients. Our partners placing orders that they might not actually need just in order to be safe, place orders with different vendors at the same time. We're looking at that. And I haven't really seen it. What has changed for us a little bit in fiscal '21 is we've done a lot of work on supply chain, getting visibility with our suppliers on the components that they deliver, getting better about putting components together to get to max sets, both on Personal Systems and on Print. We had a very important breakthrough, I would call it, almost with our new ERP coming live in the summer and actually having the factories visible to us and the system that has enabled the ability for us to invest into further digital tools to enhance how we talk to suppliers, how we talk to factories, how we prioritize orders. And I think most important, and for me most important, the visibility we give to customers and partners about their order backlog, giving them dates. The challenge, Aaron, is it's one thing to wait for an order, it's another thing waiting for the order and not having a clear visibility on when the order ships. I think a lot of our customers actually have accepted that there are extended lead times, they are planning in their forecast and in their dialogue with us accordingly, but we need to be able to give them a date and then we need to be able to stick to that date. And I think I've seen improvements in fiscal year '21. We are not perfect. We are not exactly where I want us to be, but I think we have come a long way, and I think we have a good path forward of how to deal with this going forward.

And that kind of brings up a follow-up question to me is that as you look out, let's say, we get back to some normalization and there's probably a structural change and it's not just just-in-time inventory anymore, maybe it's a little bit of a higher level of held inventory. But should we also think about a PC growth dynamic into '22 or into your next fiscal year, "Hey, at some point, we can replenish some of the channel inventory. Like I know you guys don't disclose channel inventory necessarily, but I would have to assume that there's that attribute of that in the model over the next couple of quarters. Is that a fair assessment? Or do you think that you kind of continue to run channel inventory pretty lean on PCs and Print?

I think we are -- it's obviously something that we pay a lot of attention to. We do a lot of our business through the channel. And so in order to really have a healthy business, we need to look at the inventory in the channel and also at the dynamics of sell-through and sellout in a 2-tier channel model. So it's very important to us. I think we have -- in pockets of the market, we are fairly low on channel inventory for Personal Systems. In others, we are -- we actually have maybe a little bit too much. We talked about Chromebooks and the change there. But overall, I think we're in a very healthy situation. We went -- when we looked into -- when we started with COVID, we were very low also on some of our general inventory in Print. And we learned how long it actually takes in a constrained environment to replenish channel inventory. We talked about this in previous earnings on our ink replenishment. So it's something that is very important. But I also think the interesting learning for us is that it's actually -- it's possible to operate with lower channel inventory. That's at least for me has been a key learning. I like that. And we have given it a name. We call it slightly hungry, and it works. Because what you get to is you find these pockets of price elasticity in such an environment much more easily than in a channel that is not managed healthily, in a healthy level. And so I like where we are right now. That does not mean that I wouldn't appreciate on some products a little bit more and that is definitely true for Personal Systems.

So I want to shift a little bit into -- at the Analyst Day, you recently laid out some of the key growth drivers. I think they were gaming, peripherals, Instant Ink, industrial graphics, 3D, et cetera, et cetera. Maybe one of the topics I want to start with is just the peripherals opportunity for HP. And maybe update us on what you're seeing since the HyperX acquisition and probably more importantly, how you're driving either an expansion of that product portfolio or the growth profile for peripherals, which obviously would be a margin mix shift benefit for HP looking forward.

Yes. I think great question. I mean you are right. Peripherals is one of the five key growth categories that we have. And we believe that we have -- that we're underrepresented and that we can -- that we have a lot of right to grow. And then obviously, the acquisition of HyperX is helping us significantly. We grew in Q4 double digit for peripherals, and that was a very strong proof point and it's helping us also to justify a little bit the focus that we're giving this. And so we think it is working. And now it's obviously a question of how sustainably can we grow this. I think the acquisition of HyperX is very important because it has given us the right to play. We are the #1 gaming audio peripheral player in the U.S. That's a big deal. There are other aspects of the HyperX portfolio that we really like. If you think not just about audio, but you think about keyboards, you think about mic, when you think about microphones, you think about video. These are all things that are important, not just in the gaming environment, but in an overall hybrid work, hybrid learning environment. And this is where peripherals becomes a key asset. I said this early on, we believe that hybrid is the future and peripherals have a very important role to play here as we bring services and solutions to our customer. The other thing that I like about peripherals is that it's a very sticky category. If you look at the customer behavior, and we see that coming from HyperX, we have -- we simply have gamers that spend a lot more on peripherals than your average PC user, the purchasing frequency is a lot higher. So you get more intimacy with your customer, and there's also more loyalty here. The refresh rates are 5x the refresh rates of PC. So this is something that is really important. And I think for us, the important piece right now is that from a go-to-market point of view, there's a lot of additional assets we can bring to the HyperX team, the amount of stores that we can add to the existing coverage that the HyperX team has is really good. And that's what the team and I are driving together with the HyperX team. That's one. The second piece is what are services that we have already, services platforms that we have, for example, on the printing side. What can we do with that when we think about gaming, when we think about peripherals? Maybe also in the commercial in the commercial customer space. So there is opportunity to grow for us across the customer segmentation, if you want. And I'm, for one, I'm really happy with the acquisition, with the skill set it brings, not just from a product or a go-to-market point of view, but also from an engineering point of view in the company.

Yes. And on HyperX, I mean, you mentioned go-to-market, you mentioned portfolio. Obviously, it's been a short -- you've had HyperX in the portfolio for a little while now, but we're still early days. I mean where do you think -- where do you think we're at in terms of the full breadth of that portfolio? Does HyperX give you what you need to envision this broadening peripherals opportunity? Or would I expect to see HP look at strategic opportunities to go deeper there from an M&A perspective or some other way?

There's 2 questions here, I think, you're asking. So look, I, for one, am very happy with what HyperX is bringing to the party and what it helps us to give to our customers. I think what will be important is to take their HyperX skills and depth around gaming and consumer [ preference ], bring that into a commercial environment and then bring that also into a wrapper of commercial workforce services. That is one thing that we're clearly working on. And so that is opportunity that we haven't touched on. I also will tell you that purely from a coverage point of view, HyperX hasn't joined us that long ago. So there's still opportunity for us to increase coverage and we're doing that in select geographies across the globe. And on M&A, I think Enrique and Marie laid this out during the earnings, but I think we have a capital allocation strategy that really isn't changing all that much. I think on the one hand side, we said we would buy share back -- we would buy shares back in the coming year for at least $4 billion. We also talked about the $1 dividend that we have laid out. So that gives you in totality at least $4 billion of capital return. But we also said that we want to keep flexibility to go after M&A. And that is something that I think has worked well for us in fiscal '21. And HyperX is one example. I mean the other one that I really like is Teradici. So I think that's how we should think about it from a capital point of view.

Yes. And a lot of the HyperX -- and I know I didn't ask this, but just curious. Gaming, obviously, is a growth driver. Can you help us appreciate how big of a growth driver that's been for HP? How important that is to the PC business?

I think, look, if you -- I'll take myself as an example. I'm sitting here with my laptop. And during the week, that laptop is really underutilized because all we are doing and what I'm doing is e-mails and Zoom calls like the one I'm doing right now with you. And so from a CPU point of view, memory point of view, it's really boring. But on the weekend, I used this laptop to play FIFA. So I've become a gamer. And the cool thing is, this is where I need the breadth of the components that are in this laptop. I also need peripheral products around it. When you then look at Teradici, for example, that gives you an ability to scale compute power up and down as you need it, a service that sits on top of your hardware. Now gaming becomes really interesting. And I already talked about the impact gaming has on peripherals and how we really like the higher frequency, the higher ticket price that gamers are willing to spend on peripherals. Now think about this as a compute service that you can give to a customer. And so this is, I think, where the journey is going. I think that gaming is a leading category within Personal Systems that will drive a much higher affinity for services around the box that will then halo into other entertainment needs of the family, but also into our working life, as we might have requirements to scale our compute power up and down in our jobs as well. And I think this is where this is going. So gaming is for me a leading category within Personal Systems to inform about the service opportunity that we have.

Yes. That's perfect. I want to make sure I spend the rest of the time, the little bit of time that we have on the print side because, obviously, it's a smaller percentage of revenue, but it's a big percentage of the profitability of the company. One of the things that the company has really emphasized is this transformational drive. It was laid out a year plus or go HP+ 2 years ago. And I think last Analyst Day, you said that 20% of the unit mix is now in upfront profitable segments or hardware solutions, 20% of the mix is under HP+. So just talk a little bit about the rollout of HP+ and how that's been impacting margins and what we should be thinking about as we move into the next fiscal year?

Yes. I think it's a really important question. I mean, if you want to understand HP well, you need to understand print, you need to understand the dynamics in print. And I think we get -- usually, we get a lot of question about Supplies growth and what we think there. And I think it's important in that context to actually understand how HP+ is changing the system that we're selling. In print, we are always selling a system. It's a system that can consist just of hardware and supplies. But then there's actually a lot more if you really want to deliver a service to a customer. And so that's what we're doing with HP+. We're changing a little bit the [ knots ] of the different chapters within that system. And I think it's working to the customer's advantage and it's working to our advantage. So what we've done is we launched HP+ now across 35 countries. We added our desktop portfolio and Envy portfolio to it, so it's basically growing across the available hardware product. And this value proposition that we give to a customer is that, "Hey, we want you to think about this as a really smart offer." On the one hand side, you get a printer that is sitting in the cloud and is connected, you're getting smart supplies. We are managing to all replenish your supplies and you're also getting, when you sign up, you're getting 6 months of free printing with Instant Ink, it's a great value proposition You then have access to the HP Smart App. We have more than 50 million users on the Smart App that visit it monthly and use it monthly. And then you get a very smart choice from an environmental point of view because we are helping you to recycle those cartridges [ and to close the loop ]. And so the impact that, that has on our value proposition to customers is actually quite favorable. When we have the traditional model next to the HP+ model, most of the customers decide to go for HP+. And that's, I think, a very strong proof point that it really is a -- it hunts for us. It's a really compelling value proposition. And then I think as one sub-value proposition within HP+, we have Instant Ink. Instant Ink launched prior to HP+. It's a subscription service that helps customers to replenish their ink and toner needs. It's a business that is now already at $500 million for us. We have 10.6 million users that are subscribed and these are cumulative enrollees. And we have seen over 20% growth in the number of enrollees that we have on that service. We are continuing to expand geographically. We still have ways to go to cover the globe with this value proposition. But if you look at the 2 together, if you look at the success of HP+ and the success of Instant Ink, I think we've been able to really follow through on what we said 2 years ago that we would change the composition of the print system.

Yes. And I'm not sure if you've talked about this, but I'll ask anyway is that 20% of unit mix under HP+, if I look out, is it 2 years from now, 3 years from now, the progression of that, how maybe HP defines success? Is that by 50% by 2023? How do I think about the progression of that mix profile?

We want to grow this. Definitely, okay. I haven't put a number to this yet. I think there's also a very interesting dynamic. On the one hand side, you have HP+, which kind of hunts in a non-IT managed environment. On the other hand side, you have managed print services. This is more for our named accounts and for our global accounts. And then I'll bring this back to what I said early on, these 2 value propositions, they will come together, right? They are coming together in a hybrid world. So we have, for example, already a couple of accounts, named accounts, global accounts, that are talking to us about Instant Ink offerings for the employees that are at home. And so this will be interesting to see the intersection of the 2 value propositions as we go forward.

Yes. That's an interesting point to watch how that evolves as we move to more hybrid. One of the things that we've seen over the last couple of quarters, and in part because of the recovery on the commercial side in print, is that you definitely emphasize some of the growth you're seeing in the graphics, the industrial graphics side of the business. So I'm curious of how important is that as we consider the growth in print. And just talk about some of the drivers you're seeing in that piece of the print business.

Look, it's a very interesting business, industrial graphics, because it's apart from a customer engagement point of view on -- from the core print business. We've seen, I think, good momentum in Q4. We had a triple-digit hardware growth, and that was obviously, it was important. But if you look at the addressable market, we are really after flexible packaging and labels. That's what we are focusing on. If you look at the total market, it's a $50 billion opportunity, but that packaging segment is [ $15 billion ] only and we have 70% market share there. And we want to continue to grow the segment but also grow our market share there. It's with a technology called Indigo. We think that, that is uniquely positioned in the market. Feedback from customers is that they like the quality of the product, they like how versatile the product can be used and how predictive it is -- how productive it is, how they can scale it up and down. So I'm fairly positive here. We have another segment, which we call corrugated. Here, we're using our PageWide technology, also something that is a really strong delivery for us in that segment. So overall, industrial graphics is important for HP Print and important for the next 2, 3 years because we see growth opportunity here, and it's something that we definitely are very focused on.

Yes. I think we're right on time. I mean I'd open it up to you. I mean is there anything that you'd like to leave the audience with as far as maybe what you think are underappreciated in the HP story or things that we didn't discuss that necessarily -- you're saying, " Hey, these are important as I have discussions with other end users or customers?

I think what is important for me is to get the message across that we are evolving with our customers. Our customers are asking us to serve them more in outcomes. And that is happening in the named account space, in the enterprise, but also in our consumer space. And that's what we're doing, aside from making the right value propositions available, investing R&D into software, into workflow services and then really making sure that we are not throwing an army of people at this, but that we are able with digital solutions to cater to our customers, I think that's an important piece that I want to communicate. On the go-to-market side, I have made a lot of changes in the last month developing an outcome-based go-to-market capability, which is very different than selling transactionally. And I think to get the message across that this is not completely new business to HP. I mean we have -- our workforce services are already operating at $4 billion a year, and we see significant growth. You mentioned the 5 growth areas where we think we're going to be at $10 billion in '22. So this is exciting. It changes the composition of the revenue. It changes the composition of the customer engagement, and that's what HP is standing for.

Good stuff, thanks so much. Great discussion, and hopefully, we'll have you back again. I appreciate the time.

Thank you very much for having me. Have a good day.

Thank you.