HP Inc.

Good day, everyone, and welcome to the first quarter 2019 HP, Inc. earnings conference call. My name is William, and I'll be your conference moderator for today's call. At this time, our participants will be in listen-only mode. We will be facilitating a question and answer session towards the end of the conference. Should you need assistance during the call, please signal a conference specialist by pressing the star key followed by zero. As a reminder, this conference call is being recorded for replay purposes. And I would now like to turn the call over to Beth Howe, Head of Investor Relations. Please go ahead.

Good afternoon. I'm Beth Howe, Head of Investor Relations for HP, Inc., and I'd like to welcome you to the Fiscal 2019 First Quarter Earnings Conference Call with Dion Weisler, HP's President and Chief Executive Officer, and Steve Feiler, HP's Chief Financial Officer. Before handing the call over to Dion, let me remind you that this call is being webcast. A replay of the webcast will be made 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 webpage at www.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 Form 10-Q. for the fiscal quarter ended January 31, 2019, and HP's other SEC filings. During this webcast, unless otherwise specifically noted, all comparisons are year-over-year comparisons with the corresponding year-ago period. 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. And now I'll turn it over to Dion.

Thanks, Beth. Good afternoon, and thank you for joining us. In Q1, we once again delivered top and bottom line growth. We continue to demonstrate our ability to deliver on our EPS, generate free cash flow, and we remain focused on positioning the company for long-term sustainable growth. While this quarter had many areas of strength and progress against our plan, there was an unexpected challenge in supplies, and we have more work to do there. First, let me cover the highlights for the quarter, and then talk about the business more broadly. In quarter one, we delivered revenue of $14.7 billion, up 1% or up 2% in constant currency. Non-gap earnings per share of 52 cents, an increase of 8%, and in line with our outlook. and we generated strong free cash flow of approximately $700 million, returning almost a billion dollars to shareholders in the form of stock repurchases and dividends. Our results demonstrate the continued vitality of our innovation across the portfolio, as well as our ability to execute and adapt in a tough environment. Our strategy remains consistent, and a key part of that strategy is our focus on continuing to refine our business model to match changing customer needs and market conditions. This is one of the core strengths of our organisation. We have a proven track record of leveraging change to create opportunity. Let's go through the performance of each of our businesses, starting with Personal Systems. Our Personal Systems team continues to perform at a high level, driven by a relentless focus on execution, and profitable growth. In quarter one, personal systems revenue grew 2% and delivered strong 4.2% operating margins. We are improving our product mix and managing our costs. As expected, the first half headwinds we previously shared with you are playing out, and we are navigating them well. We are also strengthening our position in strategic segments where we see pockets of growth and delivering differentiated and premium hardware, services, and solutions. In January, we kicked off CES with a bold lineup of innovative firsts for modern lifestyles, changing workplaces, and immersive gaming. For consumers, we introduced the new Spectre x360, the world's first 15-inch laptop with an AMOLED display for exceptional clarity and color. We announced the world's first quantum dot on glass display, providing movie theater quality visuals at home. And we showcased the world's first AMD-based Chromebook, bringing the power of cloud applications to a broader range of customers. We also introduced solutions designed to power the workforce, workplace, and work styles of the future. We launched the third generation of HP Shoreview technology, further protecting users against visual hacking. And with more than 70% of US workplaces using open concept designs, we unveiled the world's first display and first all-in-one with an integrated privacy screen, giving workers confidence in their security and privacy. We also expanded our gaming portfolio with innovation that creates even more immersive experiences to take gaming to new heights. We debuted the world's first 65-inch gaming display with integrated soundbar, and launched the new OMEN 15, featuring HP's fastest display refresh rate, 240 Hz, to help gamers stay ahead of the competition. We also remain focused on driving innovation and growth in key vertical segments. This quarter, we introduced a variety of education-centric Chromebooks, simple, secure, and shareable devices that enable schools to empower the next generation of innovators and leaders. And in retail, we launched a new point-of-sale solution, including a strategic collaboration with PayPal, specifically designed for small and medium-sized retailers and hospitality owners. In print, while we have made progress against our strategy, growing hardware revenue, share, and operating profit dollars, our supplies performance did not meet our expectations this quarter. So this is what I want to cover first. Supplies revenue. was weaker than anticipated, particularly in EMEA, where supplies declined 9%. As you know, we look at our supplies business in terms of our four box model, install base, usage, share and price. The two factors that varied from our plan were a decline in share and to a lesser extent, pricing. We saw this most significantly in our commercial channels, which is having the largest impact on office supplies. There are several factors contributing to the change in customer purchasing behaviour. More commercial customers are purchasing supplies online, and while we have leading share online, it's at a lower percentage than our share with traditional commercial resellers and in-store retailers. In addition, as macro uncertainty has increased, we have seen further price sensitivity among customers, pressuring both our share and our supplies pricing. The combination of these two factors negatively impacted HP Supply's share. It also changes our assumptions in the full box model for the remainder of the year. As a result, we no longer expect supplies to be flat to slightly up in fiscal 19. On a related note, we continue to maintain the levels of channel inventory under our Tier 1 ceiling and monitor Tier 2 inventory where we had some visibility. However, we continue to fulfill orders likely over multiple quarters, based on our original share assumptions, which we now believe were overestimated. This resulted in additional HP supplies in the ecosystem, including the unmonitored downstream portion. In summary, this is what led to the challenges in supplies. Now let me tell you what we're going to do about it, and Steve will provide additional details. We are taking actions to lower the level of supplies inventory in the market to be consistent with our new share assumptions. And we are implementing additional share improvement plans, including online programs, targeted marketing and brand protection to promote the value of HP original supplies in terms of quality, sustainability and environmental impact. The team's agility and ability to respond to challenges gives me confidence in how we'll manage through this environment. We are taking action, and importantly, we are maintaining our non-gap EPS and free cash flow outlook for the full year. As Enrique talked about at our security analyst meeting, our markets are changing, and we must keep evolving our business and business models. This is why we are focused on accelerating our strategy toward contractual sales, which we expect will have two benefits, diversifying our profit pool through services and securing a higher share of the supplies for these units. Both Instant Ink and Managed Print Services are examples of these models. The Instant Ink subscriber base continues to have impressive growth. We have now rolled out the program in 18 countries and continue to see strong adoption rates. In Managed Print Services, our machines in field number is growing double digits and we are scaling our NPS coverage with expanded opportunities for our premier channel partners in both the A3 and A4 categories. We are also evolving our business to include products that generate a larger portion of their lifetime profitability at the time of purchase. This includes not only products like Sprocket, but also our HP Smart Tank and HP Ink Tank printers that can print up to 8,000 colour pages before more ink is required. These printers not only deliver strong total cost of ownership, They deliver the quality and durability that customers expect from HP Original Ink. Our print innovation continues to help define this business. In home, printing products like HP Tango X, the world's first smart app-based home printer, are helping us to make printing relevant again in modern homes and to a new generation of users. This quarter, Tango launched in APJ and expanded into new countries in EMEA. This printer has been called the smartest and most elegant printer on the market. In office printing, our push into the contractual A3 market continues with the introduction of finishing capabilities on a range of systems that help to drive affordable colour printing, best-in-class performance and energy efficiency. We now have 9% A3 market share, which is up 1.1 points since last year. In graphics, We introduced a design-to-print portfolio at Autodesk University to help users experience the speed and simplicity of HP PageWide Excel and large-format printing solutions. This kind of innovation, paired with our transition to services, is how we'll reinvent the print category and deliver on our long-term opportunity. Looking at the 3D printing business, we're expanding both our production and prototyping install base across the automotive, industrial, consumer and healthcare markets. Millions of final production parts are now being produced each quarter on the MultiJet Fusion platform and the range of applications being printed is incredible. As part of our MultiJet Fusion portfolio expansion, This quarter, we began ramping shipments of our 300-500 solutions targeted at the prototyping market. We also continue to execute on our 3D printing metals technology with partners including Volkswagen and GKN. As I speak with CEOs across multiple industries, the fourth industrial revolution is here and is shaping up to be one of the most significant opportunities of our lifetime. The future of manufacturing and production is digital. and is becoming a mainstream topic as businesses look to change the way they design, manufacture and deliver new products to their customers. Leaders from the corporate world, government and academia recognise there is incredible potential to not only unlock new economic growth, but to also drive a more sustainable industrial revolution with new and reskilled workers. HP is leading the industry forward to democratise manufacturing, with our 3D printing technology. This continues to be an enormously exciting part of our business. To sum up, HP delivered results consistent with our financial outlook and we are generating strong cash flow and investing in the future to create long-term value. We know we have work to do to manage through the current supplies dynamics and that's exactly what we're going to do. We will continue to play our own game, execute our strategy with rigour and focus on driving sustainable long-term growth. Our markets will continue to change and evolve, and we will focus on adapting and reinventing. With that, I'll pass the call over to Steve to go through additional details.