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HP Inc. (HPQ) Q2 2023 Earnings Call Transcript

HP Inc. (HPQ)

Q2 2023 Earnings Conference Call

Company Participants

Orit Keinan-Nahon - Head of Investor Relations

Enrique Lores - President and Chief Executive Officer

Marie Myers - Chief Financial Officer

Conference Call Participants

Erik Woodring - Morgan Stanley

Samik Chatterjee - JPMorgan

Toni Sacconaghi - Bernstein

Shannon Cross - Credit Suisse

Michael Ng - Goldman Sachs

Wamsi Mohan - Bank of America

Amit Daryanani - Evercore

Robert Mertens - Cowen

David Vogt - UBS

Presentation

Operator

Good day, everyone, and welcome to the Second Quarter 2023 HP Inc. Earnings Conference Call. My name is Sarah and I'll be your conference moderator for today's call. At this time, all participants will be in a listen-only mode. We will be facilitating a question-and-answer session towards the end of the conference. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the call over to Orit Keinan-Nahon, Head of Investor Relations. Please go ahead.

Orit Keinan-Nahon

Good afternoon, everyone, and welcome to HP's Second Quarter 2023 Earnings Conference Call. With me today are Enrique Lores, HP's President and Chief Executive Officer; and Marie Myers, HP's Chief Financial Officer.

Before handing the call over to Enrique, let me remind you that this call is a webcast and a replay will be available on our website shortly after the call for approximately one year. We posted the earnings release and accompanying slide presentation on our Investor Relations web page at investor.hp.com.

As always, elements of this presentation are forward-looking and are based on our best view of the world and our businesses as we see them today. For more detailed information, please see disclaimers in the earnings materials relating to forward-looking statements that involve risks, uncertainties and assumptions. For a discussion of some of these risks, uncertainties and assumptions, please refer to HP's SEC reports, including our most recent Form 10-K.

HP assumes no obligation and does not intend to update any such forward-looking statements. We also note that the financial information discussed on this call reflects estimates based on information available now and could differ materially from the amounts ultimately reported in HP's SEC filings. During this webcast, unless otherwise specifically noted, all comparisons are year-over-year comparisons with the corresponding year ago period. In addition, unless otherwise noted, references to HP channel inventory refer to Tier 1 channel inventory.

For financial information that has been expressed on a non-GAAP basis, we've included reconciliations to the comparable GAAP information. Please refer to the tables and slide presentation accompanying today's earnings release for those reconciliations.

With that, I'd now like to turn the call over to Enrique.

Enrique Lores

Thank you, Orit, and thank you, everyone, for joining the call today. When we began our fiscal year six months ago, we were clear about two things. We said we would focus on the things we can control to navigate a demand-constrained market in fiscal year '23. And we said we would continue driving progress against our long-term growth priorities.

Halfway through the year, this is exactly what we have done. And I am pleased to say the actions we are taking as part of our future-ready plan have started to take hold. Because of this, we delivered non-GAAP EPS towards the high end of our guidance and we have built strong momentum for the second half of the year.

Today, I'm going to discuss our Q2 results and the progress against our future ready plan. I will then provide color on our business unit performance and I will close with some insight into how we see the balance of the year before turning the call over to Marie.

Starting with our results. Net revenue was $12.9 billion, that's down 22% or 18% in constant currency. As expected, the industry-wide headwinds we described last quarter continued to impact our business. Against this backdrop, our teams did an excellent job controlling our costs, managing our pricing and shifting our mix.

This allowed us to deliver non-GAAP EPS of $0.80. We also grew non-GAAP EPS and operating profit quarter-over-quarter. And we delivered on our year-to-date cost target, keeping us on track to deliver at least 40% of our three-year savings by the end of fiscal year '23.

A key part of our strategy is to reinvest savings into innovation. We are doing this in our core business and our key growth areas. We believe this is very important because even though both our core and growth markets are impacted by the current macro environment, we see opportunities to further strengthen our position during this down cycle.

Our innovation was on full display at our Amplify Partner Conference in March, where we launched more than 50 new products and solutions. This was our largest channel event of the past four years, attracting more than 1,500 of our top partners from around the world.

It has sparked strong energy and momentum across our sales teams and our partners could see the significant progress we are making in our key growth areas. The benefit of our acquisition of Poly was one of our key areas of focus at the conference.

Hybrid work is a long-term secular trend that we believe will continue to create attractive growth opportunities. We showed our partners how we are leveraging our combined hybrid system portfolio to create new solutions for customers.

A great example is our new Poly video operating system, which uses AI-driven speaker tracking and auto framing to enable better remote collaboration. We also showcased the progress we are making in workforce services and solutions, including the launch of HP Wolf, Protect and Trace.

This is the world's first digital service capable of remotely locating, locking and erasing a PC, even if it is turned off or offline. And we unveiled new advanced computing solutions through our ZBook line including specific offerings designed for data science, AI and machine learning applications.

Let me now give you some more color on what we saw this quarter in each business. Looking first at the market level, global economic uncertainty remains elevated. The macro environment is challenging across most geographies. We continue to see cautious consumer discretionary spending, while enterprises are delaying capital investments.

With that as a context, Personal Systems revenue was $8.2 billion. That's down 29% or 25% in constant currency. Like last quarter, we estimate that the sell-out to customers exceeded sell-in to the channel, which means that end-user demand was stronger than revenue shipments.

This helped us further reduce our channel inventory. There are still pockets where we need to improve, but we are making good progress as per our plan. Our PS operating margin was 5.4%, in line with our expectations.

PS margins remained flat sequentially, reflecting our disciplined mix strategy and cost reductions in a competitive pricing environment. We delivered solid PS services growth with particularly strong performance in digital services. We also continue to improve our execution.

Our teams are showing a relentless drive to win in the market. We gained PC share in calendar Q1, both year-over-year and quarter-over-quarter. And we are not simply gaining share for the sake of share, we are gaining in more profitable areas such as commercial, where we now have the number one position and gained 2.5 share points year-over-year.

We will keep acting with urgency to build on this momentum while improving our results in segments like premium and gaming. And while the broader gaming market is currently challenged, it remains a massive long-term opportunity where we continue to invest. This quarter, we launched a wide range of Omen and Victus gaming innovation incorporating the latest Nvidia RTX graphics technology.

We are equally focused on the opportunities, generative AI is starting to create for our PS business. We are actively working with our major software and silicon partners to engineer new architectures that will integrate AI applications into everyday use cases. This is a very exciting opportunity. In the same way, the Ethernet 8 fundamentally changed the way people use computers, I believe the age of AI will transform the role PCs play in our lives.

Turning to Print. Revenue was $4.7 billion, that's down 5% or 2% in constant currency. We continue to see soft demand and aggressive pricing in the consumer print market. This was offset by favorable mix in our office business, including 10% revenue growth in commercial hardware and supplies performed better-than-expected driven by better demand in office. We delivered Print operating margin of 19%. This shows the continued benefit of our disciplined cost management as well as favorable pricing in office as we bring strong innovation to market.

For example, this quarter, we launched a new line-up of laser jet printing systems designed to help businesses maximize productivity. We also continue to make progress rebalancing overall system profitability. Our HP+ and big tank printers once again represented more than 50% of our shipments in the quarter. We gained share year-over-year and sequentially in big tank and Instant Ink grew revenue and new enrollees.

Just as we have done in Personal Systems, we need to improve our execution in Print to gain share. We aim to do this in a thoughtful way, focused on winning in the right areas to drive profitable growth and increasing our mix of profitable customers.

Turning to our Industrial segment. Graphics continued to be impacted by macro headwinds. While flexible packaging and folding cartons are back to growth, this was offset by a decline in leveling. In 3D, the business returned to growth this quarter with good momentum in both plastics and metals. And we recently introduced our new HP Jet Fusion automation solutions, which simplify workflows and reduce cost for high-volume 3D production. Overall, this quarter's results show that we are making progress against our priorities.

Yes, we have more work ahead, but we are continually upping our game as we execute our future-ready plan, and our teams are playing to win. We also continued to win the right way.

Next month, we will release our annual Sustainable Impact Report. It will disclose the continued progress we are making towards our climate action, human rights and digital equity goals. As you know, this work is integrated into how we run the company. It has been an important factor of new sales wins for the past several years.

And we see this trend continuing across commercial and consumer segments. Going forward, we are taking a more comprehensive approach to measuring the total business impact of our sustainability initiatives. Specifically, we have adopted the Corporate Knights Sustainable Economy Taxonomy. This is a well-established industry benchmark to measure what's called sustainable revenue. This measure allows us to quantify revenue generated from products and services that meet leading environmental standards and reduce our environmental impact.

Using the Corporate Knights methodology, sustainable revenue represented more than 60% of our total revenue in fiscal year '22. Let me now turn to capital allocation. As we said last quarter, we plan to maintain our current capital allocation approach. We are applying the same framework we have used the last few years. We are committed to returning 100% of free cash flow to shareholders over time and less opportunities with a better return on investment arise and as long as our gross leverage ratio remains under two times EBITDA.

As planned, we did not repurchase any shares in Q2 given where we finished the quarter on our gross leverage ratio. Looking ahead, we continue to expect our second half performance to be stronger than the first half. We see this being driven by improved channel inventory and seasonality, primarily in Personal Systems as well as the positive impact of our cost savings measures.

Entering the second half of the year, we believe we have full line of sight to deliver on our structural cost reduction goal for fiscal year '23. We remain focused on optimizing our portfolio. We have talked before about creating a simpler, more focused company. There are many ways to deliver on this, such as reducing our number of SKUs rationalizing our portfolio or trimming our various lines of business.

We will continue to approach this work in a way that enables us to best meet customer needs while creating value for our shareholders. We are also capitalizing on infrastructure investment to become a more digital company. This is driving greater speed and efficiency across our operations while enabling new value propositions for customers as we expand our services and subscription offerings.

To sum up, we are confident in our future ready plan. We strongly believe we have the right strategy and team in place to deliver on our priorities and drive long-term sustainable growth and our continued execution of our plan will allow us to emerge stronger as the market improves.

Let me now hand the call over to Marie to talk more about our financials and outlook....

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