HP Inc. (HPQ) Earnings Call Transcript & Summary

Great. Good afternoon, everyone, and good evening for people in Europe, and thank you for joining Day 3 of the UBS Global TMT Conference. My name is David Vogt. I am the U.S. enterprise hardware and networking analyst here at UBS. And we're pleased to have with us today, Alex Cho, HP's President of Personal Systems, where he leads a roughly $40 billion business spanning PCs, display, accessories and services. So Alex, thank you again for joining today.

Happy to be here.

And before we get started, HP asked me to read a brief safe harbor agreement. So today's discussion includes forward-looking statements that involve risks, uncertainties and assumptions, which are further described in HP's SEC filings, including HP Form 10-K and 10-Q. HP assumes no obligation and does not intend to update any such forward-looking statement. For more information, please visit HP's Investor Relations website at investor.hp.com.

So with that out of the way, thank you again, Alex. So I thought maybe it would be helpful for investors jumping in here who haven't really spent a ton of time on the PC market and your story. I wanted to -- before we get into the deeper dive into the PC business, I wanted to start with the most recent quarter. In Q4, Personal Systems was up 10% on a constant currency basis, meaningful improvement from the third quarter. But the results -- the underlying results are somewhat different when I look quarter-to-quarter as price was a key driver, up 17% quarter-over-quarter. So maybe just so we can level set the discussion to get people sort of focused on where we are, can you kind of give us color around what happened in the quarter from an ASP perspective? And maybe any sort of commentary on mix, whether it's Chromebook, consumer versus commercial? And any sort of like-for-like considerations you think are relevant that happened in the quarter?

Yes. So happy to. So the first is, I think as you know, the narrative around this industry is heavily around 2 things. One is increasing demand that we believe will be structural but also a constrained supply environment. So compares dynamics quarter-by-quarter are heavily also weighted by supply constraints, et cetera. So I need to put that out. For us, in particular, for Q4, we saw strength driven by really a combination of both mix and rate. And we've been talking about this. We talked about this in our Analyst Day on mix. We are actively managing our mix to a more profitable and there's a more commercial focus to our mix. As well, what we -- what you all have seen is we've been very disciplined in managing pricing really around the world and across all segments. And the combination of both has driven the type of performance you saw in Q4.

Great. Great. And so you just mentioned demand, supply availability. That seems to be the most hotly debated topic, I would say, in our coverage group over the last, call it, 4 to 8 weeks. Maybe we could just start with what we saw from a hybrid learning, hybrid work environment over the last 12 to 18 months and what we're seeing from a potential change in behavior, at least any structural change in behavior going forward with these new variants that unfortunately seem to keep cropping up and companies kind of pushing out sort of the day of reckoning when you have to return to the office. So when you think about that sort of dynamic, what's your sense or what's your view on how maybe not next quarter, but when we think about the calendar '22, calendar '23, calendar '24, kind of what's the philosophical view that underpins your view of your business, meaning we're permanently hybrid and that consumer as we were kind of talking about this in the preconference call, the structure of the work-at-home environment versus structure of work in work or in the office. And just maybe kind of level set us on how you're thinking about how this is going to flow out over the intermediate term to potentially longer term?

Yes. So first is COVID definitely has accelerated hybrid. And our view is that, that change is something that's not just a cyclical onetime, but it's structural. And that applies to multiple elements of the categories we play in. So let's talk about work. Work will continue to be -- even when people can travel more, it will continue to be more hybrid. All companies that I know are working through policies around employees will have telework, hybrid work, full-time on-site different types of options. And that is a structural change that will require ongoing technology enablement to support. Great example is that almost all companies are looking at: a, how to equip their employees now that they're going to be working more at home. So 75% of them are actively investing in improving their home setups. And at the same time, the majority of IT departments are looking at how do you reconfigure office spaces to be far more collaborative. Those are structural changes in how people will work. People are reducing travel spend and assuming that technology has to be the replacement to enable that reduction. So that's one area. Second area is all things related to education and learning. Even when students will be able to go back in the classroom and many have been, particularly in K-12, the ability to actually reach resources and teachers and for children to learn students collaboratively remotely, I mean, COVID was really an accelerant for recognizing the breadth of learning and resources that can happen in a hybrid environment. That's a structural shift. We only expect that to continue. Then you think about the consumer space where, wow, look at gaming. Gaming is a huge secular shift even ahead and just even more because it's the way people connect, socialize, entertainment is mixing in. And suddenly, these categories, the PC category, becomes the center of how all of that's happening. All of that we see as structural accelerants to the markets that we play in. And quite frankly, we're still very under indexed and underpenetrated in PCs that enable it. Our language has been the PC is essential for work, for learning, for play, even think of telehealth. And yet, while penetration rates have been increasing, there's still room for growth. And we see that all as good news for this ecosystem that we're participating in.

So maybe just getting a little bit more specific at the Analyst Day and during your most recent earnings call, other companies talked about and you talked about thinking 2022 is going to be an up year for the industry. Some of your peers have echoed those comments some of the broader ecosystem, whether it's the CPU providers, productivity tool providers, so on and so forth. But the market, generally speaking, seems to have a high degree of skepticism around sort of that trajectory given where we came from a couple years ago to where we are today. So if I look at, say, 340 million, 350 million units this year as our reasonable benchmark, it sounds like you think that the company is public about this, that this is sort of a new normal, and this is sort of the new baseline. That's even been sort of maybe bandied about that this is a constrained number. Kind of maybe can help us understand how you're thinking about that, especially in light of sort of that constrained comment as well.

Yes. So first is, if you refer back to our Security Analyst Day, first, as we look forward, given the drivers that I just mentioned, the PC being essential in how you work, learn, play, even how you connect with other people on an ongoing basis, we see that the total addressable market for these categories as being structurally larger and will continue to grow. I mean we shared that. As we look forward, the market is going to be $560 billion. That's a 40% increase versus pre-pandemic expectations. So all of that first is stating, we're operating in a larger and a continuing to grow, that's what we see in a market that will continue to grow. Secondly, you are right, though, that we are operating near term in a supply-constrained environment. So again, what I said was there's 2 dynamics of this business, underlying structural demand growth but also supply constraints. We've shared that. That supply constraint is heavily in ICs that affects the PC ecosystem, but the much larger ecosystem as well. Automotive is one that gets a lot of attention. And we expect the supply constraints to continue at least through the second half or into the second half of the year. So we are in an environment where demand is larger than supply. We -- if -- our backlog, as we've shared, is quite elevated, and it's a backlog that reflects that delta between demand and supply. And so that's why some of the numbers that you hear, whether it's 340 million or 350 million, is a supply-constrained view. However, again, we think that as we work through that, all the drivers around growth will continue to play out, which will be favorable as we think of '22, '23, '24 and so on.

So maybe along those lines, I know '22, this coming 4 quarters is going to be a little bit difficult to compare to prior years, not just from a level perspective but from a -- I think you guys used the word linearity turn in your most recent call. Let's say we do get past 2022 and supply does improve, and we come into a more normalized balanced supply-demand environment, should the PC business or the Personal Systems business look similar to the business pre-COVID at -- on a cadence perspective. Maybe without getting into the specific numbers, but -- or have we shifted the purchase behavior that maybe -- that peak in that trough is a little bit less, and it's more muted over the long term, not just in 2022. And so you have a better predictable, more visible model in the longer term.

Yes. So a great question. And so when we look at this from a macro view around these type of levers, first thing, for those who are part of the PC business, have watched it, one key element is refresh cycles. And refresh cycles are reducing or are they getting faster. And one of the key drivers for that is that they're recognizing, I need more than a PC, I need a device that has helped me show up on video have my voice heard to be able to be in a -- I think we're in a Zoom call while having other tabs open and not slow down. And that is driving refresh at a faster rate which is a positive driver to the overall cadence of this business. By the way, audio and videos, one of the top drivers for refresh, and that will continue to be the case. Second driver that you see in this is there's a continued shift from desktop to notebook or mobile or laptop, form factors. And in general, the refresh cycles of notebooks are faster than desktops. That's another larger ship that's driving a cadence difference in here. The third thing to note about this and is really an important part of how we think about this. We don't see our participation in this market as a PC player. We see ourselves as a participant in hybrid work in gaming. And as we've shared, that means, yes, we're participating through PCs, but we're also participating with peripherals, and we're also participating on services and new digital services that allow us to deliver really meaningful new experiences. And I say all that because for us, we look at the peripheral business, the refresh rate of a peripheral is 5x faster than notebook. So I just gave you PC data points about a cadence. For us, then there's a peripheral refresh rate that's accelerating and in particularly the segments that we are focusing on gaming, that's even faster because refresh rates of gaming PCs and gaming peripherals are faster than the average ones. So again, there are multiple dynamics at play here, all of it driven by the PC being essential in this new world of hybrid work, learning and playing. Our categories in PCs are continuing -- are larger, continuing to grow with a faster refresh rate. But our game is really -- our participation is really in these experience opportunities where PCs, peripherals, services are how we're going to deliver breakthrough experiences. And in that, we see just a really strong and optimistic view of what this category could be.

Great. So maybe I just want to drill down a little bit into the Personal Systems growth and sort of that refresh rate. So when you think about the compute side of it, which is what I think everybody thinks of right off the back, right, that's the easy, more tangible sort of growth driver for the company. And I think you've been on record saying the target is to increase penetration, faster refresh cycle, which you just articulated. I guess that backdrop, and I think you have targets out there that suggest the compute portion is growing, let's say, at 40 basis points CAGR for the next 2 to 3 years, is that -- does that reflect -- I guess that reflects the refresh, the migration from desktop to notebooks. I would imagine a slightly faster growth dynamic in commercial and maybe consumer or correct me if I'm wrong. And if so it captures sort of those positive tailwinds that you just sort of referenced in that on a unit basis, in my words, maybe not yours, the industry kind of is flattish for the foreseeable future, just on a unit basis. Some -- maybe some revenue uplift. Is that a reasonable way to think about it?

So yes, if you use that 40 basis point growth, so I think you're using that as same [ freight ] or so. First is, what we are sharing in data that is being used around market sizing, IDC, and we use that as a baseline scenario. However, all the drivers that I mentioned, we actually think provide drivers for acceleration of that baseline growth rate. And let me just repeat them because it is very important in order for us to make sure we have a baseline, we have a baseline plan that is much larger and will continue to grow. However, as penetration rates accelerate, that will grow that growth rate more as you see an increasing shift to more of these mobile form factors that will grow. And in fact, all of these used cases that we talked about, that will also help accelerate as we really innovate reasons to drive and enable refresh. Let me just give you another example. The penetration rate today, we -- most of us may be familiar with what they might be, they're growing in developed markets, still room to grow. Think about emerging markets. We are so focused more generally as HP around addressing the digital divide. PC penetration rates are very low. And so with both -- growth in broadband, connectivity and new platforms that we can deliver to help on education, that is also more top line accelerant to that baseline growth rate that we're using as a starting point. So we think that, that is only the baseline from which we actually have scenarios by which we see that growing faster.

Got it. So it sounds -- okay. So I appreciate the correction that you're going to grow faster than the market. And when you think about sort of that penetration, let's say, in the developing world, we've seen numbers that it used to be, obviously 1 PC per household some survey work in the U.S. and other large markets here. Purchase intent has been steadily climbing throughout the pandemic. And it actually has been relatively strong even before the omicron. So as people have gone back to work, purchase intent still seems to be relatively strong. Maybe if you can share with how you're thinking about it. Obviously, we're never going to get to a one-for-one device to individual. But I mean, are we on the path to maybe 2 per household, 2-plus per household? Is there sort of -- I know it's a really difficult question to answer, but we're just trying to think through what the runway looks like over the next 3 to 5 years, given sort of this change in behavior that seems to be somewhat permanent?

Yes. So let me give you multiple layers to that because this is an area that we've got a lot of passion on. So first is, we absolutely believe that the PC is essential for these use cases, again, and that's not a short-term thing. That being the case, as we mentioned, we've been very clear, the opportunity is for the industry to enable 1 PC per person, which you said. I think it was in the '80s, right? That, that ambition was 1 PC per household. If it's so essential, they need to get 1 PC per person, and we are still under-indexed even though penetration rates have been growing, both in developed and emerging. And we see that, that is a huge driver for us on a longer-term basis for this entire category. And then as we think about what that means, that means that: number one, the entire market size will be larger, but then there's such a rich opportunity for innovations to really accelerate that. Again, audio and video, video collaboration like this is a very strong driver. People are saying, even if I have a PC, I need an upgraded one or you have environments where it's maybe their first device and, they're not recognizing they're not going to be working on the resume on their smaller phone. They want to work on the resume or they really want to be absorbing content in a larger form factor that will drive it. Let's talk about entertainment, just as another example. You know what's interesting in countries around the world, more than a TV, people are looking for getting a laptop per bedroom so they can watch Netflix or which is amazing because it's showing the intersection of entertainment into this space. There's other adjacent points to note like in particular, in developed markets. People are moving beyond 1 PC per person to 2. There's one that the companies are saying, that I'd like to make sure that you have for company purposes and not making with their consumers. So we are seeing places where people are even getting beyond one. All of that kind of combines into this macro growth trajectory on top of a larger size base by which we think that this category is operating in.

So you brought up a great point, and that was going to be 1 of my next questions. When you think about the dichotomy between consumer and commercial PCs, I think the market -- investment -- the investor community has a preference for commercial, typically a higher rich, more rich configuration, typically a better price point. When you think about, let's say, I'll use UBS as an example, they want a send me home with a device, and that's going to be for security reasons, keeping people off the network, the whole suite of concerns that they have. In your mind, is that considered -- that's a commercial purchase. So as we have more PCs in the household, does it skew more towards like this weird high grade, where it's not really consumer PCs in the household, but it's more commercial PCs with more commercial specs, more commercial like specs. So the configurations will be rich, price points may be better than ultimately, margins are better as well. I mean, is that the right way to think about it?

Yes. So quick answer is yes, but let me provide some color on that because this is really an element of the big shift that is, we think, very favorable for us. So largely speaking, yes, commercial has a lot of upside. I mean I know we've been taking total [indiscernible] about commercial. We see that in particular in '22, but going forward. And that actually plays to our strengths very well because where we are very strong is in the commercial category. So that's a very favorable shift. That being the case, I think the larger dynamic that we also see is really this blending of categories, are this blending of segments, consumer, commercial. And your used case is a good one. Hey, I have a PC that is from a corporate issued or corporate minded and yet I might be using that in the home. And at the same time, though, some of the types of experiences people have on their consumer devices, they're looking at for their commercial devices. And that really plays to what we've started to do, and given our strength in both the consumer and commercial space, we think we can do really uniquely for our customers. In particular, we have very strong consumer assets. Our ability to design devices, we've won more awards and continually winning design awards. We're taking all that capability into our commercial line. Vice versa, we're taking our commercial-grade security and manageability assets. If you are a consumer, you want that too, because your word is privacy. You want to make sure that everything that you do for banking or et cetera, that you have the level of security that a large enterprise environment might be thinking of -- for a consumer example. And so our ability to take the strengths of both is really the core part of where we think we can lead. Our Dragonfly notebook is a great example. When you look at it, people don't know if that's a consumer/commercial device. It looks as exciting as a consumer device. It has the type of enterprise-grade security and manageability as you would expect, maybe in the commercial device. And guess what? It's a part of the world's most sustainable PC portfolio. Great sustainability we're doing as well. So we're so excited about how these things are really moving into a direction that plays to the strengths we've had in the past.

So I hadn't thought about this, but you just made an interesting point. When I think about the future of your portfolio and the blending of the specs and the really -- the difficulty that people are going to have determining whether or not this is a consumer notebook or a commercial notebook. What does that mean for your distribution? I would imagine that you want to be more focused on where you can make the gross -- the most gross profit dollars, right, as the specs blend together. So does that mean that more of your units are going to be skewed towards commercial going forward where you're really strong in commercial likely grows faster and that maybe there's some simplification of the consumer portfolio that needs to happen where more and more devices are being sourced from the commercial channel even at home. And so maybe some of your traditional retail partners will have fewer SKUs and maybe less of a sort of an assortment going forward. I know that may be a little bit out of my field, but that's just kind of how we're thinking about it.

Yes. The way I would share with you our plans is we actually believe that we will leverage the breadth of our portfolio and the breadth of our go-to-market, whether it's more consumer bias, commercial biased or with those partners online. Our approach is really to recognize that while some of the needs are converging, the unique strength that we have is both portfolios and the unique strength that we have is the go-to-market reach to both segments. And so for us, I manage both portfolios, both go-to markets so we can make sure that we are using strengths in 1 and added to the other, but we actually want to maximize the coverage and the breadth of what we can offer because there are unique dynamics. If you're a consumer, yes, you will want more of the security attributes we have. But you will be first looking at attributes that as a consumer, let's say you're a gamer you're looking for. If you're a commercial or corporate employee, yes, absolutely. Increasingly, you want a device that has a level of consumer experiences. But for sure, you're going to want that thing to have the level of commercial attributes like ruggedness or the type of manageability that fitting into your corporate environment that you're going to want. So there's room for both knowing that the strengths and attributes of them are also being shared.

Okay. Got it. That's helpful. And maybe just digging down a little bit into the numbers a little bit more. So you guys are confident enough to raise your margin targets for the Personal Systems business at the Analyst Day to 5 to 7. We get a ton of questions on sustainability in light of component pricing and where margins go. And so maybe can you just -- we'll start there. When we think about 5% to 7% margins, right now, the business, given the supply chain constraints, the demand strength, we're coming along at the high end of that range. Maybe can you kind of help us think about when or hopefully, if component prices do come down as supply chain gets better how that will flow through some of the Personal Systems business and from a margin perspective? How much do you hold on to today? What's the lag? And how should we think about it as we move into '22 and '23?

Yes. Why don't I share with you with, what are the levers by which that whole thing stacks up, as you know. There's many different elements. First is we continue to make progress in all the operational digital transformation activities that enable us to continue to have a world-class cost structure. I state that because in this business, every penny counts, digitizing, transforming, getting more streamlined is hugely important and that will continue to be a part of the equation, and we're making very good progress. Secondly, as I mentioned to you, mix and pricing, right? Continue to be an element of how we're managing this business so that you see the type of dynamics and favorability that we share with you. And third, over a longer period of time, the broader portfolio expanding into peripherals and services is also an important part of the equation, David. And one of the main reasons why is, peripherals margins are above our average PC margins. Services margins, especially these new digital services are above our average PC margins. And that on an ongoing annual recurring basis is very favorable for us. You add all those things together, noting that you have the fluctuations around commodities or supply constraints or logistics. That was a driver behind conveying that we feel confident in raising our ongoing targets from 3.5%, 5.5% to 5% to 7%. We expect that in '22, we'll be operating at the high end of that range. And look, if we can go do more, we'll go do more. But we feel confident in our progress across all of those areas so that we can state that kind of revised guidance going forward.

And so maybe just as a quick follow-up. If component prices do come down, how long can you hold price rather than giving it back to commercial and/or consumer customers, measured in a couple of quarters, measured in less than a quarter?

So first is we manage a shopping basket of commodities. I think that's an important thing to note. And there's many puts and takes across most of them. What we expect going forward, at least this next year, is going to be roughly flattish as we go forward, maybe slightly more of a headwind as we head into this next year. But nonetheless, to note, we manage a basket of goods as we think about this. We obviously look at the dynamics of each one. That's important. Secondly, demand for HP products and our innovation continues to be very strong. And we think that's a very important part of this because that plus our ability to reprice are important levers of within a shopping basket of commodities, how is our innovation and how is our ability to manage pricing as we do that going forward. We'll continue to manage that. Again, as we head into this next year, and again, that is baked into our assumptions as we look into FY '22, again, we expect to be at the high end of the range there.

Got it. And obviously, you've done a good job with demand steering and putting forth products that people need and want to come at a relatively good profit dollar margin for yourself and we get this question all the time, so I'm going to ask it. When you think about backlog coming down and availability becoming less of an issue, hopefully, sooner than later, how much of your pricing steering do you think remains? Obviously, you're very good at managing a lot of different sort of vectors in the business, but how much of a tool can that be going forward when there's at least, hopefully, a proliferation of options for consumers and commercial buyers alike out in the marketplace?

I think that our ability to manage pricing, but also managing our mix is very important. One of the areas that within this constrained context, and it will be -- continue to be the case as we head forward. As we shared in our analyst meeting, we are continuing to shift the mix not only because of operational constraints, but also because of the innovation opportunities to the more premium segments. I think that's an important element to note around this. And we think that adds a nice ability for us to continue to manage the mix, not only in a supply-constrained environment, but also because of the nature of the opportunity: premium, gaming, commercial, audio/video-driven refresh opportunities, those are very favorable. And again, we add in on top of that, the continued opportunity we have around peripherals as well as services on top of that. And the collection of all that, we feel as though will be very favorable as we manage our portfolio going forward. Here's where the type of assets that we have in companies like HyperX and Teradici are so valuable because they really add in new assets for us in highly attractive growing segments that we are going to be continuing to scale as a part of the broader personal systems engine.

All right. I'll ask you in a different way, unrelated to the component prices. So you mentioned peripherals have a better margin profile, services have a better margin profile. Next to higher-end consumer clearly is favorable to margins. How does Chromebook fit in, right? So Chromebooks have been typically speaking, a lower margin product than the core portfolio. Recently, we've had sort of a flushing of the backlog effectively of Chromebooks. So how does Chromebooks fit in the mix going forward in terms of your participation in that market? It's obviously a lower profit dollar product and has met at least recently, it seems to be somewhat more cyclical than the rest of your business. And so do you expect to be as involved in that market? Is it still a critical focus of HP given that you have a fairly large presence historically? And should we expect that portfolio to be a much smaller part of the business going forward as we kind of move past hopefully this COVID dynamic?

Okay. So first is, let's just talk about that segment. For us, we've made a lot of progress really in the core profitability investing. It's OP dollar additive. So one good thing in that we feel good about, and I think the team has made a lot of good progress is making sure that, that at least category is OP dollar accretive for us. Secondly, I do want to put in context, while Chrome units have been an area of discussion and obviously, there's been demand growth and you talked about backlog, as a percentage of our total revenue it's in the single digits. So it's not a significant contributor. However, clearly, it's a contributor in the Education segment. So number one, it's profitable, it's additive, but I want to put in context of the entire Personal Systems business. The third is, yes, it is a core part of education. And number one, as I mentioned before, we think education will continue to be structurally advantaged through hybrid. Number two, it is an area that we have been a leader in, and we think that we plan to continue to be that way. Number three is, we are seeing some cyclical adjustments, but we fully expect that education will continue back into normal purchasing cycles where we have a very strong opportunity given the strengths that we have. So we feel very favorable about it. And also I want to make sure you understand how it fits into the broader mix of the Personal Systems business.

Is it potentially a gateway product, right? So as they break little quickly like a notebook, maybe not just on the education side, but the individual person or a small business that buys them, maybe they upgrade to a more full-featured set notebook sort of a little bit of a Trojan horse, I guess, effectively, could it be used in that capacity? Or is it just a unique discrete market that really there's no sort of attached to a higher -- with Chromebooks, you don't have a tremendous amount of peripherals right? I highly doubt there's tremendous amount of service attached to a Chromebook given the low price point? Or it's just sort of a key part of the educational offering that you guys currently have, and that's kind of how it's going to be for the next couple of years?

We don't think of it as a distinct stand-alone category. We do think of it, and it is very much a part of a portfolio that we offer. And I'll give you some examples. When we sell to school districts, they will definitely want Chromebooks. They'll also want all other type of devices, maybe for their computer labs or for their teachers, right? And by the way, for that, they are increasingly wanting to make each person more productive, having more displays or monitors as a part of that is really a key part of that. So number one is we see that and it is being very much a part of an increasing portfolio player on that. We're also seeing Chrome, and you see some of the innovations that we've provided. We're taking our innovations into Chrome, so that other types of used cases can take advantage of some of the benefits of the Chrome ecosystem. We're bringing our privacy screen to it because some people are wanting to make sure the type of privacy working in or learning and studying in more public environment that you want to take advantage of. So we have our Sure View privacy screen that we have there. We're also enabling docking and -- our meaning the ability to talk and have multiple displays because people like that productivity. So that's why having as a part of our portfolio has been very favorable for us, and we think continuing to participate and lead in the education space means having this as a part of our portfolio.

One last question before I get into peripherals in a little bit more deeper discussion. Backlog, you're probably going to get it. It's a pretty common topic discussion. It sounds like backlog has been flat quarter-over-quarter given the strength of the business. As we move through 2022, and we get to, hopefully, a more normalized environment, how do you see backlog in this new framework that you described at the beginning of the conversation playing for HP, right? 1/4 of backlog is not sustainable. So is there some sort of metrics you can help us out with to kind of think about how we can best think about optimal or maybe suboptimal amounts of backlog depending on where we are in the cycle, just so we have a sense for when we get beyond 2022 in the out years.

Yes. So I mean, let me remind just kind of dimensionalize. As we've shared, we have about a quarter's worth of backlog. One element to note is it is far more weighted toward commercial -- in commercial non-education, it's just to be clear on that. We do expect it to go down over time as we find ourselves in a more favorable supply environment and our ability to execute in that space continues to improve. We do think that will take at least into second half given, again, the level of backlog and what we're seeing around supply. We do expect to, again, operate with lower backlog. That being the case, I mean this is a very fluid environment. And so the mix of it, et cetera, is one that we'll continue to be actively managing and prioritizing as we head into the future.

Let me ask it a slightly different way. And that's another company this as well. Has the world been spoiled by just-in-time inventory in the last 10, 15 years, and there needs to be some maybe modification in terms of how companies think about how they handle the supply chain and the appropriate levels of inventory. I mean it's early days still probably, I'm sure these discussions are ongoing. But do you have any sense for once we get through this, maybe things revert back to normal or maybe there's a little bit more prudence and conservatism baked into for the numbers.

Yes. I mean let me share with you a few things so that I can give you more insight to how we're navigating through this. Number one is, as we shared a supply-constrained environment, we are moving to a lot more direct relationships with our suppliers. And that's an important part of this equation because we do believe having more direct touch. We now cover over 90% of really top components. We are using the strength of our balance sheet and putting in long-term agreements as a part of that. We are also dramatically simplifying getting more leverage in our portfolio so that you can have more flexibility in managing within the supply-constrained environment. And we also have the benefit of now having moved our internal systems and all the digital transformation that allows us to be far more real time. To me, those are all the elements of the shift in capability particular environment where supply is something that is different than it was before. And we expect, given the continued growth in these categories, we need to be ready to be operating in that kind of environment. You're right, just in time is not a capability right now that I think is something that gives you an advantage. So that's why the strength of our balance sheet, designing for more flexibility, ensuring that we also have more simplification in our portfolio, we think are very strong assets. We've already started to see the benefits. And as we said, over the subsequent quarters, we're going to see continued benefits from all those actions that we've taken.

Got it. And then maybe just one final point on that. I mean companies, it seems like a broken record, but anything different on the supply chain, I would imagine nothing's changed since you guys reported a couple of weeks ago. You mentioned earlier, its ICs tend to be a big problem and [ Mac ] sensor problem. As an outsider, what are the signpost that we should look for maybe in your numbers or in your communication as we move through '22 as evidence of a slight improvement? Should we be monitoring traffic in the ports, airfreight prices or anything that you guys would publish directly within your numbers that would suggest things are on the margin getting a little bit better or just qualitative comments from you directly?

Yes. So no real update since our earnings, which were just a couple of weeks ago. Yes, first thing that I'd say is from our side, from an HP perspective, we've shared the actions that we're taking. We know what we have to do to actually be even more effective in this environment. And so you're going to see the results of that as we continue to share our progress quarter after quarter, we've shared in Q4, as you can see that we've been able to make a lot of progress in actively managing our mix, our quarter-on-quarter improvement on just Windows-based shipments is probably a good view of that. You'll continue to see improvements in how we manage our mix in that environment. So again, that's a HP barometer. As we look more broadly, it is a very -- it's a multifaceted environment where there's many different elements. Yes, the issue went from traditionally more CPUs, traditional is not right, maybe 3 years ago to CPUs to panels to now ICs. ICs are distributed across many products, and not only in the PC category, but the electronics and automotive category. So I think you have as well kind of monitoring what's happening in the broader ecosystem as a key part of that. There are, yes, we continue to look at what's happening around logistics around the world, and those are other elements of the total environment that gives you at least additional data points to understand the dynamics around supply and constraints around that. But other than that, again, I think we look also at the importance of that category and the fundamental nature of the relevance to the category and strength there because that is also affecting the supply as supply improves, so is demand. And so we're very much around, yes, maximizing supply is becoming more effective in a constrained environment and continue to make sure that we're innovating for the future. So as that improves, demand can continue to accelerate.

Understood. Yes. No, I think most investors are well aware that the CPU has been a problem for a number of years now. It's not just COVID-related. Since you have a new camera, talking about peripherals, maybe just in the interest of time, the last question, obviously, that seems to be a pretty important driver of the business going forward, high single-digit category growth. You've done the HyperX deal, which sounds like it's been a success so far. In the context of that marketplace, do you have any necessary holes to fill? Is your product portfolio complete? And does that lend itself, if maybe there isn't stuff that maybe if there is something you need to go out to get. Is it an extension of the HyperX acquisition? Or you need to go out there and maybe do a couple of small bolt-on acquisitions? Kind of help us understand where your peripheral product portfolio is today and where you think you can get to?

Yes. So we're very bullish about this part of our strategy. And I think it's important to note as well, for us, peripheral is not a hardware strategy. Peripherals is part of our experience strategy. And so when I say that increasingly, we're the leader in gaming, then that gives you a sense of what that means for us. We're going to have great PCs that are gaming focused. We continue to expand. HyperX provides a lot of leadership in gaming peripherals. Mics, I've got a HyperX mic here, which I love, headsets, which is such an important part, we'll continue to build out that experience as well as the services on top of there. We also communicated that for us, hybrid work. And in the future, as you think about it, hybrid work, you should think HP, hybrid work will be HP because across a compute, the peripherals and the services that we deliver we'll be able to enable both the experiences that employees want, wherever they are as well as IT managers. The biggest headache for IT managers, "Oh, my goodness. A good portion of these employees are not going to just temporarily be working from home, but working from home or multiple places on an ongoing basis." So those -- so that drives -- we announced our HP Presence technologies, which takes the best of our audio and video engineering really across the company and delivers them into new room solutions, peripherals and we're going to be incorporating them into our PCs as well so that wherever you are engaging in some digital connection for work, you're going to have the best of HP audio and video technologies that allows you to show upgrade, be heard great and yes, I did share with you ahead of time. I'm using a new camera here. And one of the key elements of it is really being able to follow you, we call it auto framing, sitting all day long in front of your device gets tiring, I'd like to move around. And so as I move, the camera will continue to move and make sure that I'm centered because people just want to be active and they don't want to sit, and these are huge drivers of future employee productivity and well-being. So it's a big space. We've got a lot of assets. We've got a lot of room to grow in terms of these markets. So we're very excited about how that will continue to be a growth driver for the entire personal system stack.

Great. So Alex, I think we've used up a lot of time, and I appreciate all of your time and your generous volunteering to do this. This has been helpful. And to the rest of the team on HP, thank you for your help. And if anyone has any other questions, please feel to reach out and e-mail me or the HP Investor Relations teams directly. And so Alex, thank you again. And everyone, have a great day.

Welcome. Thanks.

Thank you.