HP Inc.

Good day, everyone, and welcome to the third 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 Arit Kinan Nahon, Head of Investor Relations. Please go ahead.

Good afternoon, everyone, and welcome to HB's third quarter 2022 earnings conference call. With me today are Enrique Lores, HB's President and Chief Executive Officer, and Marie Myers, HB'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 risk, uncertainties, and assumptions. For a discussion of some of these risks, uncertainties, and assumptions, please refer to HP's ACC 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 10Q for the fiscal quarter ended July 31st, 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 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 would like to turn the call over to Enrique.

Thank you, Orit, and thanks to everyone who is joining the call today. As part of our earnings today, we will cover three important themes. First, we will talk about the unexpected and very abrupt shift in the macroeconomic environment and how this is challenging our overall business in the short term. Second, we will enumerate the decisive actions we are taking in response to this microeconomic challenge, including continued progress in our structural cost reduction programs while we continue prioritizing our investments in growth areas. We will convey that our confidence in the medium and longer term prospects of our markets and growth drivers remains intact. We are firmly committed to our strategy for sustainable profitable growth over the long term and discipline capital return to shareholders. First, regarding the macroeconomic environment, like many companies, we are managing through some challenging market conditions with a focus on what we can control. Inflation increased in many parts of the world, and this led to lower consumer spending for our product categories. And demand in Europe worsened against the backdrop of the Russia-Ukraine war. Although we highlighted pockets of consumer softness during our Q2 call, the environment deteriorated more rapidly late in the third quarter. The strength of our commercial business, particularly in the enterprise, helped us to partially offset declines in consumer demand. Still, the fact that we remained supply constrained did not allow us to fully rebalance. As a result, net revenue was $14.7 billion in the quarter. That's down 4% nominally and 2% in constant currency year over year. Despite this, we were still able to deliver non-GAAP EPS of $1.04, in line with our previously provided outlook. This reflects our very disciplined cost management and pricing strategy, as well as our continued ability to shift more of our portfolio to higher growth, higher value segments. And while we cannot control how the economic situation evolves in the coming months, there are some very clear actions we can take to mitigate the impact of near-term headwinds and drive continued progress against our long-term growth strategy. And we are taking a very measured approach with a focus on five clear priorities. First, we are optimizing our performance by staying disciplined in our pricing and increasing our focus on pockets of profitable growth, such as premium, peripherals, services and solutions. Second, given volatility is becoming the norm, we are focused on continuously improving the way we respond to it. We are taking decisive actions to address issues that have surfaced due to the abrupt changes we have seen in the industry. And we view this as an opportunity to further improve our ability to adapt to quick transitions in the market in the future. Third, we are doubling down on our growth portfolio while protecting our core business. Collectively, our key growth businesses once again grew double digits in Q3. and we remain on track to exceed our $10 billion revenue target for the full year. We expect our key growth businesses will continue to be a critical part of our growth strategy. Fourth, we are taking actions to reduce our variable spend and further reduce our structural cost by accelerating our digital transformation. We have already met or exceeded many of our objectives in our current transformation plan. And we are in the process of finalizing the foundation for a new multiyear transformation program that we plan to share with you during our Q4 call. And finally, we are maintaining our capital allocation strategy. We return $1.3 billion to shareholders, and we expect to exceed our commitment to return $16 billion to shareholders as part of our value creation plan. These are the right areas of focus, regardless of the macro environment. In times like this, they become even more important, and the actions we are taking will enable us to continue building a stronger HP. Let me now spend a few minutes discussing our Q3 business unit performance. In personal systems, revenue declined 3%, primarily driven by softening consumer demand for our categories and more price competition. In constant currency, peer revenue was flat in the quarter. We delivered operating profit margin of 6.9%. This is at the high end of our target range, driven by disciplined pricing and our mixed shift to high-value segments and robust cost management. Within commercial, our Windows-based revenue grew approximately 18%, with commercial premium and workstations up double digits. and commercial was more than two-thirds of our peer revenue mix in Q3. We are taking actions to optimize consumer performance, and we are focusing on pockets of growth across our portfolio, such as premium and peripherals, which grew double digits this quarter. We saw overall higher channel inventory levels in the quarter. And we expect pricing will become more aggressive in Q4 to address this. While this environment creates some near-term market uncertainty, our long-term view of the PC market and its adjacencies has not changed. And we have confidence in the trajectory of personal systems over time. One source of our confidence is our acquisition of Poly, which we closed yesterday. We are thrilled to welcome the POLY team to HP. POLY accelerates our expansion and scale in two key growth businesses, peripherals and workforce solutions. POLY, devices and software, combined with HP's leadership across compute, device management and security, creates a comprehensive portfolio of hybrid work solutions. We continue to receive very positive feedback from resellers, partners, and commercial customers about the opportunity ahead. We expect the transaction will be accretive to non-GAAP EPS in fiscal year 23. With the POLY deal completed, I am pleased to share that Dave Schultz, POLY's former CEO, will be joining HP to lead a newly created workforce services and solutions organization. This is a big step forward for our business that will allow us to drive a more integrated and expansive commercial services growth agenda across personal systems and print. Dave is a terrific executive with extensive global experience and he will be a great addition to our leadership team. Let me now turn to our print business. Like P.S., consumer softness and supply constraints weight on our results. Specifically, print revenue declined 6%, or 5% in constant currency, with supply revenue declining 9%. We delivered operating profit margin of 19.9%, which is well above our target range and reflects our discipline pricing and cost management in a tough market. as well as commercial hardware supply constraints. We also made progress against our plans to rebalance system profitability and accelerate in key growth areas. HP Plus and big tank printers continue to become a larger portion of our portfolio mix, representing more than 50% of printer shipments in the quarter. And our strong focus on big tanks in emerging markets allowed us to gain shares. We delivered another quarter of double-digit revenue and cumulative subscriber growth in our consumer subscription business. This model is proving to be resilient, and its value proposition is even more attractive to consumers in this environment. Industrial graphics impressions also grew year over year, and we built a strong funnel with recovery in all segments. And we deliver double-digit revenue growth in 3D as customers increase their deployment of our thermoplastic solutions. Across both personal systems and print, we continue to drive an aggressive innovation agenda. Last week, we kicked off a global roadshow with our top channel partners. And I will tell you what I told them. We have built our strongest portfolio ever. We have introduced more than 100 new products and solutions over the past 18 months. Much of this innovation is being driven by the rise of the hybrid office. Our devices are what's enabling people to connect, create, and collaborate across multiple locations, and do it securely. Last week, we introduced our HP Instant Ink for small business and our new LaserJet Pro with HP+. This is an intuitive printing system that Styler made to meet the unique needs of small businesses by enabling greater productivity, effortless device management, and advanced security. And in personal systems, we just unveiled our next-gen Dragonfly Folio. a beautiful PC that has been thoughtfully crafted for hybrid work. Enhanced by our HP presence video conferencing solution, the DragonFly's advanced camera capabilities, automatic voice leveling and background noise filtering technologies, and digital pen create a superb remote work experience. The Dragonfly is also made using ocean-bound plastic and other recycled materials, which supports our overall commitment to sustainable impact. We continue to advance our efforts in this area. We announced last week a significant expansion of our HP Amplify Impact Program, which mobilizes and rewards our channel partners as they make progress on their own sustainability and diversity goals. This work is differentiating our brand, motivating our people and strengthening our communities. Looking ahead, the macroeconomic environment remains challenging. Consumer softness is likely to continue in the near term. We also see some companies taking a more measured approach to their spending and new orders showing signs of softening demand in commercial categories. And although we have made significant progress on supply chain, some shortages remain. Given that we do not currently foresee an economic rebound in the short term, we believe the prudent thing to do is to adjust our Q4 outlook, which Marie will discuss in her remarks. But like all economic downturns, we also believe that the current situation is temporary. And just as market conditions deteriorated quickly, they could also rebound quickly. We have consistently proven our ability to manage the company through up and down markets. We are prepared for multiple scenarios and ready to act as needed. Most importantly, the fundamentals on which our long-term strategy is built have not changed. Hybrid work is here to stay. Gaming will continue to grow in popularity. The rise of digital services and subscriptions is unlocking new business models, and industrial markets are being disrupted by new technologies. These are long-term secular trends. Each of them plays to HP's strength, and we are confident in our long-term growth targets, even as we take the actions necessary to mitigate near-term headwinds. To give you additional insight into our performance and outlook, I'm going to pass it over to Marie.