HP Inc.

Good day, everyone, and welcome to the first quarter 2023 HP Inc. Earnings Conference Call. My name is Lisa, and I will 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. Should you need assistance during the call, please signal a conference specialist by pressing the star followed by zero. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Ulrike Keenan-Nahian. Head of Investor Relations, please go ahead.

Good afternoon, everyone, and welcome to HP's first quarter 2023 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 ending 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 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, 2023, 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. 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.

Thank you, Orit, and thank you to everyone for joining today. Since our Q4 call last November, The macro volatility we described has continued. Our approach remains consistent. We are taking decisive actions to improve our performance while continuing to invest in long-term growth. By doing what we said we would do, we delivered on our Q1 EPS guidance, and we are reaffirming our full year outlook. Today I'm going to focus my comments on three areas. I will begin by summarizing our results and progress against our future ready plan. I will then cover our business unit performance. And I will conclude with our outlook before handing the call to Marie. Starting with our results, net revenue was $13.8 billion in the quarter. That's down 19% nominally and 15% in constant currency. This reflects industry-wide headwinds, including corporate budget tightening that has started to impact large enterprise demand. Despite this top-line pressure, we delivered non-GAAP EPS of 75 cents. This is in line with our previously provided outlook. and it reflects the actions we are taking on costs as well as discipline execution on pricing and mix. The Future Ready plan we shared with you last quarter is already having an impact. As a reminder, the plan has two primary objectives. One is to further reduce our cost structure. The second is to continue to assess and optimize our overall portfolio and to develop the required operational capabilities to deliver long-term sustainable growth. We are making clear progress in both areas. In terms of costs, our teams have done an excellent job reducing spend and driving efficiencies. We delivered on our Q1 cost target, and we are on track to deliver at least 40% of our three-year savings by the end of fiscal year 23. This is allowing us to maintain our investments in long-term growth. Collectively, our key growth businesses grew double digits in Q1, including Poly. We are investing in a down market so we can accelerate our growth when the external environment improves. For example, new hybrid work models are fueling demand for peripherals and other collaboration solutions. We will now refer to this part of our business as hybrid systems. Our hybrid systems business more than doubled year over year, and our poly integration is going very well. The combined HP and poly portfolio is creating better experiences for customers and building a strong funnel. Hybrid work is a long-term secular trend driving innovation across our portfolio. We introduced more than 25 new products that earned over 50 innovation awards at CES. This included our new Dragonfly Pro series, which we co-engineered with AMD. It reflects how we are building deeper partnerships with our silicon partners to co-create better experiences for customers. In addition, we launched our new Poly Voyager wireless earbuds. With three mics per earbud, they deliver higher quality voice transmission and audio experiences. We are also doubling down on services and subscriptions. There is growing demand for new consumption models that allow us to deliver a better value proposition. And we have created dedicated teams to drive greater focus on these growth opportunities. This supports our strategy to foster lifetime customer relationships and drive recurring revenue. Last year, we created our workforce services and solutions organization. It is providing customers with an integrated set of offerings and expanding our addressable market. we deliver healthy WSS revenue growth in Q1. And we drove margin expansion by shifting more of our mix to digital services and achieving cost efficiencies. We are excited about the opportunities ahead. Our investments in software security and AI will enable us to develop new solutions. For example, our HP workstations and data science stack is accelerating machine learning and AI workflows, which is leading to the creation of a new category of high-performance PCs specifically designed for data science and AI applications. And we are partnering closely with NVIDIA on new products and platforms for this growing use case. And this quarter, we also created a new organization focused on consumer subscriptions. It's designed to expand upon the success of Instant Ink. Our long-term goal is to ultimately offer the HP portfolio as a subscription. Let me now touch on our business unit performance, starting with personal systems. At the market level, we continue to see soft demand in consumer and commercial. We also see pricing pressure given elevated channel inventory across the industry. In addition, corporate budget tightening began to affect large enterprise demand. This is leading to longer sales cycles in our commercial business. Against that backdrop, personal systems revenue was $9.2 billion. That's down 24% or 20% in constant currency. Sell-out to our customers was higher than sell-in to the channel, with a corresponding reduction in channel inventory. Our estimate is that end-user demand was stronger than revenue shipments. P.S., operating margin was better than expected at 5.4%, and we grew operating profit sequentially. This reflects our actions on costs, and a favorable mixed shift improving our performance. We accelerated the growth of our hybrid systems and PS services businesses. And we remained focused on growing profitable share. In calendar Q4, we grew shares sequentially in the high value segments we have prioritized. Our commercial PC share increased by 2.8 points. and our overall PC share grew by 2.5 points as we regained the number one or number two position in all regions. Turning to print, current market conditions are more stable, and we see different dynamics playing out by business. The consumer print market continues to see demand softness and pricing pressure. In supplies, the situation in Q1 was better than expected, and we continue to see strong adoption of profit upfront and subscription models. The commercial print market is being impacted by macro uncertainty, corporate budget tightening, and the uneven pace of return to office. Within commercial, office printing has seen improvement as the supply situation normalizes. Taking all this into account, Our Q1 print revenue was $4.6 billion. That's down 4.5% or 2% in constant currency. We delivered print operating margin of 18.9%. Operating profit was flat year over year in a very tough market. This shows that our strategy is working. Discipline cost management. and favorable pricing in Office had a positive impact. Our Office hardware revenue grew 13% year-over-year, or 5% sequentially, and we gained share in Office quarter-over-quarter in calendar Q4. Although return to Office is uneven, the pages per device remain in the range of 80% of pre-COVID expected levels. We also continued to rebalance system profitability. HVplus and Big Tank printers represented 56% of printer shipments in Q1, and we gained share sequentially in Big Tank. We now offer the industry's broadest lineup of tanks, from the low end of the market to the world's first and only laser tank printer. We delivered double-digit revenue growth in Instant Ink, surpassing 12 million subscribers. And we drove early adoption of our Instant Ink with paper add-on. Industrial graphics and 3D were impacted by macro headwinds, with revenue down year over year. We view this as a short-term situation. and we plan to continue investing in these areas to drive long-term growth and value creation. This quarter, we expanded our jet fusion lineup, and we drove adoption of our metal jet solution with key customers such as John Deere and Schneider Electric. Across our business, sustainable impact remains at the core of our strategy. And our leadership on important topics like climate change, human rights, and digital equity is building trust in our brand. And it's helping us win new business. It's also driving innovation. Our new all-in-one lineup is a great example. It includes the world's first PC with recycled coffee grounds, which are used in the finish of the device. The enclosure is made with more than 40% post-consumer recycled plastics. The arm stand uses 75% recycled aluminum. And the stand base uses 100% reclaimed polyester. We have also reduced the products packaging so we can ship up to 66% more units per pallet. I am proud we were recently named America's most responsible company by Newsweek for the fourth consecutive year. Let me turn to capital allocation. As we said last quarter, we plan to maintain our current capital allocation approach, and 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, unless opportunities with a better return on investment arise. And as long as our gross leverage ratio remains under two times EBITDA. Given the volatility of the market and our growing contractual business, we believe it's important to maintain a healthy balance sheet through prudent financial management. Therefore, we moderated our share repurchase activity in Q1 as planned, while maintaining a leverage ratio within our target range. Looking ahead, we are not expecting a significant economic recovery during fiscal year 2023. We continue to expect our second-half performance to improve relative to the first half, driven by our cost-saving measures and as improved channel inventory levels create a more normalized pricing environment. This is consistent with the view we shared in November. The PC market in units may regress to pre-COVID levels in the short term, but we expect it will remain at a structurally higher level with more premium and high value mix. As we said last quarter, We expect the overall pre-market to be down low single digits this year. This is mainly driven by the challenging macro environment and slower than expected return to the office. And as I said at the top of the call, we are maintaining our full year financial outlook. To sum up, we are operating in a tough market right now. but we are taking decisive actions as part of our future-ready plan to improve our performance. And we remain confident in our ability to deliver. By focusing on what we can control, we believe we are well positioned to navigate near-term volatility. And by maintaining investments in our growth priorities, we are strengthening the company for the future. This is what we did in Q1, and it's what you can expect from us moving forward. Let me now hand the call over to Marie for more details.