HP Inc. (HPQ) Earnings Call Transcript & Summary

Good morning, everyone. Thank you for being here. I have the pleasure of hosting Dave McQuarrie, who's the Chief Commercial Officer of HP Inc., or HPQ, as you would refer to it. So what we'll do is, we definitely want to talk about some of the announcements, some questions about the businesses. But before I do that, I have been asked to read out a disclosure here, which reads as, today's discussion includes forward-looking statements that involve risks and uncertainties and assumptions which are further described in HP's SEC filings, including Form 10-K and 10-Q. HP assumes no obligation and does not intend to update any such forward-looking statements. For more information, please visit HP's Investor Relations webpage.

So let me hand it over to you, Dave. Thank you for being here. We generally just want to start with most companies talking about sort of the announcements you're making around, yes obviously a big kind of industry conference and interest to meet investors. So just take us through -- I saw some of those around gaming et cetera, maybe talk us through that and then we will get it into some questions.

Thank you for having me here. So it is an exciting year for us and an exciting show. We have -- obviously, there is an underlying theme that we're all experiencing hybrid work, which runs through a lot of the announcements we made. So from the commercial PC side, we have new Dragonfly products, both Windows and Chrome that acknowledge that need for working wherever we are. So with improved microphones, the ability to have multiple cameras and then a very high-resolution Chromebook that gives people who are -- have moved to Chrome. We know Chrome became a big part of everyone -- a lot of people's lives through the pandemic. So we have big announcements on the PC side. In Print, we have expansions on the business -- subscription business that we've been moving towards consistently HP+, the expansion of Instant Ink to other -- and instant toner to other offerings. And then in our peripherals and services side, there are -- with the HyperX and Poly businesses that we now have integrated significant launches of new products that are HyperX or Poly around gaming headphones and the ability to 3D customize key caps on keyboards in HyperX because we know that, that hyper customization, if I may, feel the term is so important. And again, in Poly, that deal, which is going well, and we'll talk about perhaps has a number of products coming out that are again aimed to the hybrid worker, whether it's the fact that you're in an office and you need quality in the room. It's a room solutions and services or on the go with new headset, new earbuds that all acknowledge the type of work we're now doing. So -- and then, of course, a bunch of other peripherals displays and other. So it's a significant amount of product that is now out, that is being announced, that are already available or coming out shortly that we think acknowledges very much the zeitgeist of where we are right now within industry and as users of technology.

Yes. We had the pleasure of recently visiting your Palo Alto offices. And clearly, all of that equipment would look great in any [indiscernible].

Indeed. Indeed.

So let's get in to some of the sort of questions here and particularly related to sort of your new role here as Chief Commercial Officer, which is pretty recent. Talk through the sort of priorities for you for 2023, and sort of in the backdrop that we are in -- in relation to the macro as well, like how are you thinking about 2023 and what you need to focus on?

So it is new. I've been in the role since the beginning of November. And for us, the 3 big priorities for -- for me, the 3 big priorities as a company, we have -- of course, you listened to Enrique, he talked about -- for me, the 3 big ones are refocused and intensified the focus on our customers, and I'll speak about that in a second. The second is, regain profitable market share. Because we have -- as we know, we have significant pockets of our business that are very profitable. We want to continue to gain share there. And the third is to keep growing our growth businesses, and we'll get to them, I'm sure. But on the first, during the pandemic, the focus of all of the HP organization went to serving the extremely high levels of demand and finding, sourcing, reconfiguring, requalifying, it became an organization very oriented around serving the demand that was there. And as that demand has softened, the need for our teams, particularly my team, to get back out there with customers, with partners to grow the business, to win business has become the higher priority. And so that -- that focus of where does the sales organization spend its time, how to spend the time, priority #1. Priority #2, profitable share. There are so many pockets of our business. If you take the Print business, we know it's been the jewel in our crown for a long time. We need to keep growing there. Now we've had good growth there. So I say regained. It can be gained more. But we need to go and recover where we've not held and we need to keep growing in the path that we have strong market share. And then if you look on the PC side, we've had good growth in some places. Gaming, we'll talk about -- a few others that we've done well. But others where frankly, we know we lost share. And where we make good margins and our customers want to buy from us, and for various reasons, they weren't able to, and so now our job is to go back and win them back. And in all the conversations I'm having, the good news is they want that. They want HP back in there. If they had us 100% and they took that down a little, they want us back at the 100%. And if they didn't have us, then they want us. So there's great opportunity for us to regain those profitable customers and the segments. And then third, as we talked about in the most recent earnings call, the growth businesses for us, they were high growth, over $10 billion -- over -- in fact, over $11 billion of revenue, of the company's revenue for the year. We need to keep growing them, right? The Poly business, the services business, I've talked -- perhaps talk about some of the subscription and other services businesses we have, plus gaming. These are all growing even in a softer market, and they are more profitable than our average. So we've got an opportunity and an expectation on ourselves to go grow them. So those are the 3 for the commercial organization.

And yes, we'll get into some of the subscriptions and others in a bit. But let's start with PCs, and the pull forward of demand around the pandemic is not solely on PCs. You're seeing it in different end markets like e-commerce, et cetera. So we're seeing the signs of that, but agreed also a lot of that was Chromebooks, which are lower margin. But maybe just walk us through how you're thinking about, firstly, near-term demand. And once you go through that sort of effect of the pull forward on the near term, how do you think about long-term demand here? And what I'm also interested on is how you're thinking about mix? Or sort of where is the consumer preference rotating into when they look at these devices and using them now?

Well, while it is true that what the demand we experienced through the pandemic was at a peak and then it has come off that peak. It is also true that the market for PC is structurally larger than it was when we came into the pandemic. The value of the devices is higher the need for them from the customer, the demands are higher and therefore, inevitably so are the prices that they pay and the features that they expect. So we leave the pandemic with 2 dynamics occurring. Yes, a softening versus the peaks of '22, but a market that was larger than when we came in with higher prices and, to your point about mix, with a mix towards more premium devices than we're experiencing before. The other part of -- the other dynamic that's at play is, this move to hybrid work has made not only the need higher for the device to be always on, always high performing, but the specs and performance of the device to be much higher than it was. So that the customer has gotten a lot more demanding around what they want, how they get it, how it works. And so that gives us confidence that there is a refresh cycle coming. Because if you think today, beginning of '23, most of the devices that are 3 or 4 years old were bought in '19 or '20, the devices that were built for that period were built for pre-pandemic. They were not build for hybrid work in the way that we're now experiencing hybrid work. And so there is opportunity, we think, in the commercial space over the next years as those devices get refreshed. So there's -- in PC, there's a significant correction, as you talked about. We think that would come out of that as we come into the second half. But in any case, structurally larger market, hybrid work is a big driver of the move towards the higher end. And then if you look at the commercial dynamic, if you look at the consumer dynamic, gaming is clearly the space where growth continues regardless of the more broad macro conditions. Gamers have a higher propensity to use the device to turn it over, and we may get to that. But in any case, the PC market, we come out stronger than we went in, albeit off of a higher '22.

And just to follow up on that. Any quantification that you've done in terms of -- obviously you get data from all the deployed PCs that are out there, like anything in terms of how much has the installed base increased during the pandemic? How much of a bigger replacement opportunity does that result in?

Yes. We have some of that data. We don't normally publish it. But the way I would describe the installed base is, there is a significant percentage of the installed base that is either older than the 4 years that I mentioned, which means not only the device, it's not 2019, 2020 level, they're older than that, making them really not fit for the purpose that we today have, or there are corporations who are declaring, regardless of the age of the fleet that they want to upgrade, and they want to move. Some of our largest customers are making those declarations to us and we're working with them right now. So yes, we have a lot of the IP data, and we work on where that opportunity is being presented. But overwhelmingly, the message we take from that is there's opportunity there. Now there are customers here in these next couple of quarters who are going through the same macro headwinds as everybody else. But if we look long term, we think there's a huge untapped opportunity to unlock in the installed base.

Okay. And the second follow-up I have to that is the 2 segments of the PC market, consumer and commercial, one of the things that's been very typical of the consumer side has been the promotions through the channel that you then have to sort of use to support the buying behavior of consumers. Any thoughts around does that structurally change? Or what we're seeing now in terms of promotions, is that just a near-term headwind. And structurally, there's some different way of doing that business in the long run because that obviously is another driver of sort of how the mix erodes to some extent. How do you think about -- maybe extending that question, how do you think about differentiation because that can really drive the promotions to be not as severe as they have to be, right?

Yes. I mean there are 2 parts to the question. If we just start with the channel part of your question, we are seeing a period right now where the channel and the promotions in the channel are higher. That's a combination of supply versus the current demand and the fact that we've seen some macro headwinds. So either of those 2 correcting, we should expect that to normalize itself through the year of '23. So I think the activity or the dynamic you're seeing in the channel right now is temporary. It is not a structural change to a higher promotional need in and with the channel. I don't see that as a dynamic that will stick for longer than it takes to clear through those 2 realities. As far as how customers buy, what they want to buy and how we do that through with the channel, which is a significant part of our business. Look, we capture a significant amount of customer data already. Some of that, we catch it directly from customers, through, for example, our Instant Ink programs and other direct engagements we have, and others we work with our partners through our Amplify program to collect significant amounts of data that we and they use to go and serve customers together. We will continue to expand that data collection for the purpose of serving the customer and serving them better products, better services at the time they need them as a way of us driving more revenue either through the channel or directly from the customer. So for us, the channel continues to be a critical partner, a critical path to the customer. But what is really obvious is that our relationship with the user of our devices needs to continue to increase. And you see that in a lot of the offerings we have, whether it's Instant Ink or MPS or even some of the subscription and services that we provide on PC, and that will continue. The relationship with the customer, the insight we get from their behavior, from their needs, and our opportunity to drive upsell or drive services to them that they need, we'll continue to expand that while acknowledging that the channel is a strong partner [ that we really want to work ].

And the last one on sort of the PC near-term headwinds that I had was, how are you thinking about when do you get past these sort of inventory digestions that you're seeing. And particularly as we're looking globally, obviously, there's a big concern around sort of how the China reopening goes, et cetera. But maybe sort of help us frame that in terms of which geographies sort of matter the most in clearing some of that inventory that you have and getting to a more rightsized between supply and demand so that we can sort of look past this inventory digestion.

Yes. I mean, China is a unique situation, as we know. Our business there remains strong. So the China business continues to perform for us, albeit with an incredibly difficult environment for the local population there for our employees there. But we do think that China gets through this. And it is not -- it is not now and it has never been an area where inventory has been a problem for us. We run a very lean business in China deliberately so. The inventory situations in North America and Europe are higher, and I do expect them to come down. As that comes down, and one of the ways it will come down is, I talked about our relationship with the channel. That relationship of sharing data, of having a more granular view of what's happening where, us being more country by country in the way that we engage, how much inventory exists, some of the supply chain changes that we have made already that allow us to be a lot more surgical about where product goes, when it goes rather than, in the past, where it was we moved as much as we could because there was such spike in demand through the pandemic. So there's -- there have been a number of actions already taken to get that channel motion more efficient. And we will continue to drive that efficiency in. But to your question about when I think through the course of '23, we should see it, correct. And all of the things that I talked about from our own ERP transformation, the supply chain transformation and the planning we do with our partners, there's a lot more detail and needs to be, and we'll continue to get more and more detail, combined with the data that we share, allows us to feel confident that we get through it and we get to a point where we're able to manage the business with the channel effectively.

Okay. Let's take a step back from PCs then, and obviously, in your role, you're looking and talking to customers on a regular basis. And one of the big concerns is given sort of how estimates for GDP or macro have shaped up, what is sort of enterprise spending going to look like on IT infrastructure or even IT devices? And maybe just share what your latest discussions are coming up with on that front. Like the big question, obviously, everyone is IT spending up next year. Is it down? Is it flat? And where are the priorities going to be? Is Print going to be a priority for a customer? Or is sort of devices going to be a priority? What are you hearing on that front?

Yes. If we start with Print, obviously, with offices being used much less during the pandemic, the baseline for growth for print is there. We do think that MPS or the office printing space and specifically the managed print space will come back. We think it will come back to about 80% of our pre-pandemic assumptions for '23 and beyond. And so -- and we are seeing that trend. We are beginning to see the increased business in the office space for printing. So while these macro trends that you're describing are real off of the baseline of '22, we are seeing a long-term trend being positive for us. If you think of the long-term footprint overall, that's a low single-digit growing market over the long term. As the market leader, we think that we can grow at that rate. So even though we do expect in '23 there to be a correction down, long term, we think the print market still has good growth in it for us. And given our strength there, that we can grow with it. Specifically, in the consumer part of that market, obviously, our Instant Ink business, it's got a shot in the arm during the pandemic, and it will continue to be the direction we take our business. And we will continue to transform the Print business to a more profit upfront space in that consumer. So whether it's the tank printing business or the subscription or the HP+ models, all of these are examples of us moving that business over time to a services, subscription and a more balanced between the hardware and the profitability of the print business consumer, particularly. On PC, yes, the market, as I said, is correcting down, and we serve the majority of the Fortune 500, and they are all going through some version [ of amounts ] in the headlines what is happening in the large enterprise space. With that said, as I mentioned before, they are all moving to hybrid work. All of them. And therefore, the need remains regardless of the macro situation, regardless of the short term, the need remains for them to have fleets and have offices. We talked at the beginning, right, offices need to reflect the fact that we come together, but we also have people that are not with us physically. And so whether it's room solution opportunities, there are 90 million rooms around the world, of which only about 1/10 are fit-for-purpose audio visual equipment, or it's the equipment that we carry around with us. That set of customers is going to go through an upgrade cycle that we think is positive for us. Then SMB, the most profitable segment for many companies, certainly for us. Good opportunities there in both hybrid work and in some of the very smaller businesses in the S of the SMB as freelancers and other industries or other types of work scale. They are well suited to the products or we are a good fit for the services and product needs they have. So look, short term, there are headwinds. In the long term, whether it's print or PC, whether it's enterprise or SMB or consumer, we think there's a good opportunity to grow.

Okay. The one thing that I sort of heard you say, which is you think print is a low single-digit growth business long term. And that's often an area where there's a lot of pushback from investors and the perception there most investors carry is that it's a secular decline business because when you think about how the print -- out print business outside of managed print has really tracked in addition to that, you sort of see the change in printing behavior or use of digital copies, et cetera, during the pandemic that some of the secular decline drivers have probably accelerated rather than sort of move back. And so how do you really sort of then think about those drivers and why print is still a low single digit growth business and not a secular decline as such, obviously, recognizing that management has a different sort of -- in a different growth trajectory overall.

Yes. I mean, well, when we -- I mean, for start, SMB is, and therefore, that contributes to the growth of the industry. But taking it aside, the growth opportunity for us regardless of whether your view on single-digit growth and secular decline, the growth opportunity for us is, we are a strong player in many of those industries, and we are moving rapidly towards a different business model in that industry. And so growing into that different model is our priority because trying to project whether indeed it will be one of those [ set up flat ] up down is not as valuable to us as making sure that we are moving customers from the unprofitable model. There is a small subset of customers who are in that model. We want to move to a more profitable way of buying, whether it's a tank model that is profitable upfront, or whether it is a subscription where we can guarantee that they have HP supplies and therefore, that they are buying and using our equipment to -- for their printing needs in consumer. And then the expansion of that into instant toner or instant paper areas that we're moving into, so for us, the growth opportunities are significant. And therefore, our growth opportunity within it is what we focus on. And like I said, if we can move customers and move that business as we have been so far over the last years, continually towards these more profit balanced models, and we think there's reason for promise and continued strength in that business.

So maybe let's talk about the transformation on that side and sort of give us an update on how far along you are. And just as I'm thinking about it, like it's a great way to sort of grow profit in terms of moving more profit upfront. But at the same time, if I'm a customer, probably, to me, upfront looks like a higher price that I'm paying for a printer. And driving that change in 2023, in a year with a tough macro backdrop, seems a bit more challenging. So we talk about sort of the progress and do you envision sort of making a similar progress in 2023? Or 2023 is going to be a slower year for progress for those reasons.