HP Inc.

Good day, everyone, and welcome to the second quarter 2022 HP Inc. Earnings Conference Call. My name is Josh, and I'll be your conference moderator for today's call. At this time, all participants will be in listen-only mode. We will be facilitating a question and answer session toward 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 is being recorded for replay purposes. I would now like to turn the call over to Orit Kenyon-Neha, Head of Investor Relations. Please go ahead.

Good afternoon, everyone, and welcome to HP's second quarter 2022 earnings conference call. With me today are Enrique Loris, 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 webpage 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 discussion of some of these risks, uncertainties, and assumptions, please refer to HP's SEC reports, including our most recent Form 10-K and Form 10-Q. 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 April 30, 2022, 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 non-GAAP basis, We've included reconciliations to the comparable gap 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.

Thanks, Arit, and thank you to everyone joining our call today. We are now halfway through our 2022 fiscal year. And I am proud of the results our teams have delivered as we continue building a stronger HP. But before I talk about our performance, I want to acknowledge the tragic events of the past few weeks. Last Tuesday, 19 children and two other teachers were sensibly killed at a Texas elementary school. About a week earlier, 10 people were killed in a racially motivated attack in Buffalo. These horrific events and others like them are deeply disturbing, and our hearts are with the communities who are bearing unimaginable loss right now. At the same time, we're also thinking about the people of Ukraine. More than three months into the war with Russia, The devastation and suffering across Ukraine is difficult to comprehend. So too is the situation facing the 6 million Ukrainian refugees. We continue to mobilize resources to support them. The HP Foundation has provided additional funding to support humanitarian relief across Central Europe, and we are donating a significant number of pieces to help refugees and their families. consistent with our global efforts to promote digital equity and education. Times like these are painful reminders of how much work is still needed to create a more just future. And I believe it's incumbent upon companies to lead with purpose. These values have long been core to HP Brands, and they will continue to guide us. Let me now turn to our results. When we held our Investor Day last October, I discussed our plans to continue our push to advance our leadership in our core markets, while creating our growth-oriented portfolio by expanding into adjacencies and creating new businesses. I also highlighted the long-term secular trends we see propelling us forward. especially the rise of hybrid work and the exciting opportunities it creates across our broad portfolio. Our second quarter results show some momentum in each of these areas. In the face of a volatile and dynamic microenvironment, we executed well and grew revenue and non-GAAP EPS while returning capital to our shareholders. We are delivering on our commitment. and our business is well positioned for sustainable long-term growth. For the quarter, revenue grew 4% year-over-year to $16.5 billion as we continue to see strong demand for HP technology and services. Non-GAAP EPS grew 16% year-over-year to $1.08. That's at the high end of our previously provided outlook. We generated $0.4 billion of free cash flow, and we returned $1.3 billion to shareholders through share repurchases and dividends. We remain committed to building a more growth-oriented portfolio. Our key growth businesses, which includes gaming, peripherals, instant ink, workforce solutions, and industrial graphics and 3D collectively grew double digits and delivered total revenue of $5.6 billion in the first half of fiscal 22. And we are well on track to deliver on our $10 billion full-year revenue target that we announced last October. We feel very good about these results. We mitigated the impact of higher commodity costs by implementing effective pricing strategies in both print and personal systems while maintaining strong demand. And as we navigate the macro environment, we are making consistent progress on our strategic priorities and bringing strong innovation to market. This is reflected in our business unit performance. In personal systems, Revenue grew 9% to $11.5 billion. This was our highest Q2 revenue ever, reflecting the durability of PC demand. We also delivered operating profit margin of 6.9% at the high end of our target range. PS portfolio with great discipline, focused on driving profitable revenue growth more than units. Our continued mixed shift toward commercial and premium, combined with our pricing strategy, allowed us to more than offset fewer unit shipments in the quarter. Increased spending on hybrid work solutions is driving strong commercial PC demand. Commercial revenue grew 18%, driven by double-digit growth in Windows-based notebooks, desktops, and workstations. and commercial was trending up to 65% of our peer revenue mix in the quarter. In consumer, while the market has seen some signs of softening demand, it still exceeded pre-pandemic levels. There are pockets of growth in areas like premium and gaming that we are most focused on. And we are driving continued growth in peripherals, which grew more than 40% this quarter. Our supply chain actions also continue to have a positive impact. We reduced our backlog quarter over quarter. While the backlog remains elevated, particularly in commercial, we believe the actions we are taking will drive continued improvement. And as we prioritize operational execution, we are equally focused on strengthening our portfolio. During the quarter, we entered into an agreement to acquire Poly. Once completed, we expect this transaction will strengthen our position in hybrid work solutions and accelerate our growth in peripherals and workforce solutions. Since the announcement was made, we have received very positive feedback from reseller partners and commercial customers about the opportunity ahead. Our integration planning efforts are well underway, and we are working closely with the POLY team to prepare for a smooth transition upon deal close. We look forward to welcoming the POLY team to HP later this year. Turning to print, we continue to operate in a components and logistics constrained environment, and performance was also impacted by the macro events this quarter. As a result, print revenue declined 7% in the quarter, and our ordered backlog remained elevated in Q2. We expect supply chain dynamics to improve, but continued shortages, especially in application-specific integrated circuits, will impact print for the remainder of the year. We are actively working with our partners to mitigate the risks by executing on dual sourcing whenever possible, and redesigning circuit boards and components in our printers. We are also managing prices with great discipline, and we delivered another quarter of solid profitability. Our print operating profit margin was 19.3 percent, our second consecutive quarter above our target range. Print consumer demand remained solid, despite some softening in Europe. and we made important progress on two strategic objectives, rebalancing system profitability and growing our subscription business. We have seen strong acceleration with HP+, and increased adoption in developed markets since launching last spring. In addition, we see strong growth on our profit upfront units, including our big tank models, especially in emerging markets. BigTank revenue and units grew double digits year over year. We plan to continue expanding the BigTank portfolio with new product launches of high-end platforms in the rest of our markets. Overall, HP Plus and BigTank printers have become a larger portion of our portfolio mix, representing 48% of printer shipments in the quarter. In consumer subscriptions, Instant Ink delivered another quarter of double-digit growth in revenue and cumulative subscribers. In commercial print, the office segment continued to be impacted by supply availability as well as uncertainty around the timing of offices reopening. This was partially offset by our industrial graphics and 3D businesses growth. In industrial graphics, we delivered solid revenue growth and built a strong funnel, continuing the positive trajectory we have seen in recent quarters. We had significant new installations of our latest Indigo digital presses, and I am particularly proud of the team's work for our customer Hershey as we created customized packaging to support their International Women's Month campaign. We also deliver double-digit revenue growth in 3D printing. This quarter, we announced a partnership with Ligor Group, a leader in metal science and production for the luxury jewelry and fashion accessories market. This is an important milestone as we prepare to make MetalJet more broadly available later this year. The progress we made in our first half of 2022 gives us confidence to raise our full year non-GAAP EPS outlook. And as we enter the second half, we will remain focused on discipline execution in today's challenging and volatile macro environment. From a demand perspective, we expect to continue to see strong commercial demand with some softening of the consumer businesses. From a supply perspective, we see two causes of constraints. First is the industry-wide component shortages that we expect will continue through fiscal 22. Second are the COVID-related disruptions in China, which we expect will primarily impact fiscal Q3. We will also see an impact from the Russia-Ukraine war. Last February, we suspended shipments to Russia and Belarus across our portfolio and paused all marketing and advertising activities. Considering the current environment and long-term outlook for Russia, we have decided to stop our Russia activity and have become the process of fully winding down our operations. Business there accounted for approximately $1 billion in revenue in fiscal year 2021. Marie will talk more about the financial aspects of our Russia plans. We remain committed to taking structural costs out of the business, and we are on track to meet our transformation cost targets. These actions, combined with top-line growth and effective working capital management, give us confidence in achieving our free cash flow target. And we remain committed to our shared repurchase plan of at least $4 billion in fiscal year 2022. A final point I'd like to make is that we are delivering on our financial commitments while making progress against our sustainable impact strategy. Later this week, we will release our annual sustainable impact report outlining progress against climate action, human rights, and digital equity goals. Let me give you a few examples. From 2019 to 2021, we achieved a 9% absolute reduction in our greenhouse gas emissions across HP's value chain. I am proud that we continue to decrease absolute emissions while our net revenue increased by 8 percent during the same period. We have reduced single-use plastic packaging by 44 percent compared to 2018. And we have enabled better learning outcomes for over 74 million people globally since 2015 by providing curriculum, training, and technology. I am inspired by the progress we are making toward becoming the world's most sustainable and just technology company. Not only are these the right things to do, they are also differentiating our brand and helping to drive our business. To sum up, this quarter caps off a strong first half of 2022. We are building a more growth-oriented portfolio while also operating with great discipline and agility in the face of macro challenges. The environment will remain dynamic in the second half. We are not immune to these challenges, but our strong performance and momentum through the first two quarters gives us confidence to increase our full-year non-GAAP EPS outlook. We are equally confident in our free cash flow outlook for the year, and we remain committed to our capital allocation strategy and continuing to return capital to shareholders while investing in the business to build a stronger HP. I will stop here and let Marie provide a closer look into our financial and outlook.