Good day everyone. And welcome to the Fourth Quarter 2021 HP Inc., Earnings Conference Call. My name is Gary and I will be your conference moderator for today’s call. At this time all participants will be in a listen-only mode. [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.

Good afternoon, everyone, and welcome to HP's Fourth Quarter 2021 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 being webcast. A replay of this webcast will be made available on our website shortly after the call for approximately 1 year. We posted the earnings release and the 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 related 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-K for the fiscal quarter ended October 31, 2021, 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'd now like to turn the call over to Enrique.

Thanks, Orit. And thank you all for joining today's call. At our Securities Analyst Meeting last month, we shared our plans to continue building a stronger HP, one that delivers sustained revenue, operating profit, EPS, and free cash flow growth. This quarter results reflect our continued momentum against these plans, and they give us great confidence in our future. Let me talk through the details. In Q4 revenue grew 9% to $16.7 billion, non-GAAP EPS grew 52% to $0.94. And we generated more than $900 million of free cash flow while returning $2 billion to shareholders through share repurchases and dividends. Our Q4 results are a great finish to an exceptional year. For the full year, we grew revenue 12% to $63.5 billion and generated $1.7 billion of incremental non-GAAP operating profit. Non-GAAP EPS grew 66%. This means that we exceeded our value creation plan target for non-GAAP operating profit and EPS a full year ahead of plan and we return a record $7.2 billion to shareholders while continuing to invest in strategic growth opportunities across the business. Our Q4 and full year performance shows our company on a strong foot and hitting its stride. Long-term secular trends such as hybrid play for our competitive thing. Our leadership across our markets and the innovation agenda we are diving are enabling us to turn these trends into tailwinds. We are making organic and inorganic investments to drive profitable growth. We are accelerating our transformation, building new digital capabilities, while also reducing structural costs and driving efficiencies. The progress we are making against our priorities is creating a more growth-oriented portfolio. At our Analyst Day, I shared that we expect our five key growth areas to grow double-digit and generate over $10 billion in revenue in fiscal '22. These businesses collectively grew…

Thanks, Enrique. And hello, everyone. It's good to be back together. And it was great to connect with so many of you following your Analyst Day. I want to start by building on something Enrique said a moment ago. Q4 was a strong finish to a very strong year. It builds on our proven track record of meeting or exceeding the goals we set. And it underscores our confidence in our FY '22 and long-term financial outlook. Let me begin by providing some additional color on our results, starting with the full year. Revenue was $63.5 billion, up 12%. Non-GAAP operating profit was $5.8 billion, up 42%. We grew non-GAAP EPS even faster, up 66% to $3.79. This continues our trend of growing non-GAAP EPS every year since separation. Our $4.2 billion of free cash flow was consistent with our full year guidance and adjusting for the net Oracle litigation proceeds and we returned a record $7.2 billion to shareholders. That’s a 172% of free cash flow. What’s especially important to note is how well balanced our performance is. We are growing our top and bottom-line. We are returning capital to shareholders and investing in the business. We are accelerating new growth businesses and driving efficiencies. This reflects the company geared towards both short and long-term value creation as we enter a new period of growth for HP. This is supported by our Q4 numbers. Net revenue was $16.7 billion in the quarter, up 9% nominally and 7% in constant currency. Regionally, in constant currency: Americas declined 4%, EMEA increased 15% and APJ increased 18%. As Enrique mentioned, supply chain constraints continue to impact both Print and Personal Systems revenue and this was particularly impactful to our print hardware results this quarter. That said, demand remain strong as hybrid work…

Thank you. And we will now begin the question-and-answer session. [Operator Instructions] The first question is from Amit Daryanani with Evercore.

Thanks a lot. Good afternoon and congrats on a nice quarter. I guess my first question really is on the personal systems side, a very impressive, I think, reversal on the growth profile versus last quarter ago. It looks like it's heavily driven by ASP's. If my math is right, maybe ASPs are up close to 20%. So I'd love to understand, when I look at the ASP uplift, how much of that is just mix because you perhaps had less Chromebooks versus just apples-to-apples price increases? And then how should we think about the durability of that ASP increase as you go forward into the next fiscal year?

Hi, Amit, thank you for the question. Let me start and then Marie will provide more detail. So first of all, as you said, we are very pleased with the performance of the PC business this quarter. It is really a consequence of the strong demand that we continue to see, both across consumer, but especially in commercial and the way we have been managing both mix and pricing as you were saying. We have been very effectively managing both, driving the component that we have toward the categories where we saw the highest value for the company, which in general the commercial categories and the high end of the consumer side. And this has really been driving the performance that you saw. And now Marie will comment on pricing.

Sure. Good afternoon, Amit. So, first of all, just to give you some context around ASP's, they're actually up 24% year-on-year and 17% Q-on-Q and what's driving that is really a combination of favorable pricing including some currency, but as you said there's that favorable mix into higher commercial, as well as even a mix shift inside commercial to both premium and mainstream. So we've got less low-end and that favorable mix shift within consumer. In terms of year-on-year, consumers up 11%, driven predominantly by pricing and commercial is up 31.7%, which is a combination of both mix and pricing. And as we've said earlier and I think in our Security Analyst Meeting, we do expect to see some of that favorable mix shift to continue into the following year as well.

Perfect. And if I could just follow up, Enrique, I think everyone is sort of used to thinking as supply revenues go down, print margins will be under pressure. And certainly, I think what you're seeing right now, what you're guiding for more important in fiscal '22 would say even if supply start to decline margins should hold up in that 17% to 18% kind of range. So I'd love to get -- kind of get your perspective, what are the two or three big things, vectors that investors should think about that is enabling print margins to expand even as supplies revenues might be a little bit more down next year?

Thank you. And this is really consistent to what we -- the strategy that we started to execute two years ago, when we are driving the change of profitability from supplies more into hardware. And as we shared during Analyst Meeting, we have been making very good progress driving that strategy. We have increased the mix of products that includes supplies when customers buy them, what we call profit up from products. We have also increased the percentage of end-to-end systems, what we call now HP+. And we have also been driving a transition toward subscription and service-oriented businesses. That is also contributing very positively from a profitability perspective. So what you see happening is what we said two years ago we were going to drive. We have been making good progress and this makes us confident in the guide that we provided for fiscal year '22 in our Analyst Day and about the guidance we have provided today for Q1.

Also just to keep in mind that I'm sure you know this that we're lapping some tough compares. So what we're really focused on is driving incremental OP dollars over time and driving more OP dollars outside of supply and it's exactly what Enrique said to really shifting the business model.

The next question is from Ananda Baruah with Loop Capital.

Congrats on the strong results. Yes, just two if I could. Enrique, any new anecdotal you guys clearly continue to sound as net positive on demand as you did five weeks ago at the Analyst Day. But any new context over the last five weeks with regards to what you're seeing, customer conversations, conversion, anything like that you picked up over the last five weeks would be super helpful? And then I have a quick follow-up.

What we have seen is, I'm sorry to disappoint you is very consistent to what we discussed in our Analyst Day. We continue to see strong demand, especially from commercial customers and we share their office -- as companies are reopening offices, getting employees back to work, they're investing to improve their experiences and therefore they improve investing in PCs and invest in notebooks and desktops. We also are seeing strong consumer demand as the holiday season comes. We are seeing demand behaving as per plan, so no deviations from what we discussed a few weeks ago.

We had a great quarter with backlog too. So our backlog still remains elevated.

Yes. Thanks Marie for that. And then, I guess the follow-up is on the commercial side, any distinction to make what you're seeing between two enterprises small medium business, small medium business has been a good chunk of your business for a while. And so any distinction to make there between the center of demand between those two? Thanks.

I wouldn't make any big distinction. We see growth across the board, both for large enterprises and for SMBs. We have a very strong business in both areas and we see demand in the two customer segments, so no major deviations from that. Thank you.

The next question is from Toni Sacconaghi with Bernstein.

Yes, thank you for taking the question. I was wondering if you could maybe just provide a little more detail on your backlog. I think last quarter you said that your backlog in PCs was about 13 weeks. Can you provide an update on that? And you mentioned that print, hardware was probably the most supply constrained. So, perhaps if you can dimension the backlog and how much it may have changed in the quarter? And then I have a follow-up, please.

So in terms of PC backlog, it remains at a very elevated level, Toni, very similar to where we were a quarter ago. So, no major changes. It continues to be similar to what you saw despite a quite a strong business that we have created this quarter. And then, in terms of print, you are correct, print hardware is where we have seen the major supply chain limitations, largely because of the factory lockdowns in many Southeast Asia countries, which is what we shared during the last week. So no news here. And part of this also elevated but is lower than what we have on PCs.

Okay. And then just to follow-up, you talked about the strength in pricing. Prices were up 17% sequentially in PCs, yet your operating margins in PCs were the lowest they were all year. I know there were some incremental supply chain costs, but that kind of price leverage, why did you not see greater operating profit leverage? And then, somewhat related to that, I think you basically said we should sort of ignore traditional seasonality and kind of think of flattish growth throughout the year, but if you're actually going to make any progress in drawing down your backlog and demand remain strong, your seasonality actually should be above normal seasonality because demand is continuing at the same rate, but you're getting a tailwind from backlog ultimately if you're able to draw that down. So maybe you could just help provide some color on both of those things, potential inconsistencies and set me straight? Thank you.

Yes. No worries, Toni, and good afternoon. So when I talk first about seasonality and I'd say that first out that we've seen that strength in the quarter in PS and we do expect that to continue into '22. So as a result, we do expect revenue linearity in the year to be more linear across the quarters and that's more so, Toni, than what we've seen in the last few years. So as sequential revenue growth in '22 is therefore going to be more consistent quarter-to-quarter. And I'll just reiterate like I did it I think at the San Meeting that we don't expect normal seasonality. And then, with respect to the PS operating margins in the quarter. The rate was actually down slightly quarter-on-quarter and that was just really due to you might recall the material change in estimate that we had back in Q3. And also you saw just the strength of the business that we actually had. So we did take the opportunity to make some one-time investments that we don't expect that they are probably going to repeat in in '22.

The next question is from Shannon Cross with Cross Research.

Thank you very much. Enrique, could you talk a bit about your peripherals initiative, and how -- what we should look for in terms of proof points, and what you've done internally to try to improve that business so that it can contribute in fiscal 2022? And then I've a follow-up. Thank you.

Sure. Thank you, Shannon. So as we said in our Analyst Day, peripherals is one of the five growth areas of the company, and we think that really is going to be contributing to the sustained growth that we expect to see in Personal Systems. We have done a lot of changes internally to manage the business better. We -- in the past, if you remember, we were calling it attach, and when you call our business attach, you don't put a best engineer, you don't put a investment that the business requires and you don't have the organizational focus, and we have changed all that. We have a dedicated organization to peripherals. We have put some of the strongest leaders in the company to drive that initiative. We are increasing internal investment. We are moving some of our best engineers to the Group, and we have also invested in organic in acquisitions as the acquisition we did with HyperX to reinforce our position in some specific area, like in the case of HyperX in peripherals for gaming. What you will see us doing in the future is to continue to invest in this space. We think we have a great opportunity to continue to grow going forward and we will be providing regular updates of the progress that we are going to see in that category going forward. And just to close, this quarter we have double-digit growth in this category. So we are really pleased with the growth in peripherals.

Okay. Thank you. And then I was wondering if you could give us an update on 3D printing, what kind of contribution you're seeing? I know you're not going to give a specific numbers, but where that's -- how that's going coming out of the pandemic and where you're seeing strong demand? Thank you.

Thank you. So let me cover 3D printing from two angles. First is after the pandemic, we are seeing very strong growth in what I would call the traditional 3D printing, basically selling printer, selling supplies and selling services around those, very strong growth we have seen really a pickup of demand. But also, we shared during our Investor Day that we have complemented that part of the business with the investment in three specific end-to-end, we call it applications or businesses where we think we have the opportunity of capturing more value, because we are not just selling the printers, we are designing the parts, and in some cases, we are also selling the parts to the consumers or to the end-users. And we shared in our Investor Day that we were working on molded fiber and sustainable packaging and on orthotics and on footwear, three areas where of businesses in the $8 billion to $12 billion, where we can really drive a strong disruption because we think 3D printing is really going to help us to grow and to transform those industries. So great progress, we are on track, this is what we discussed a few weeks ago. And during 2022, we will continue to provide updates on where we see this business going.

The next question is from Katy Huberty with Morgan Stanley.

Yes. Thank you. Good afternoon. There is a pretty wide dispersion in revenue growth across the regions this quarter with Americas down 4% and double-digit positive growth in EMEA and Asia-Pacific. What explains that dispersion, some of it is year-on-year comps, but that's not nearly all of it? Are prices passing through in different rates across the regions? Is there differences in how the distribution channels are rebuilding inventory coming out of the downturn, just any context around the pretty wide dispersion in geographic growth? And then I have a follow-up.

Yes, I think the dispersion is really driven by what -- how we've been prioritizing and where we have seen growth. If you think about a year ago, we saw very strong growth on the consumer business in North America. And as we have shared, we are now driving our business more towards higher premium categories mostly in commercial, and therefore, this has implications on the year-on-year comparison. This is really what is driving that delta, Katy.

Okay. And then as a follow-up maybe for Marie, inventory was a use of cash over the past year, it did come down in the fourth quarter. Should we assume that your balance sheet inventory gradually normalizes as you move through fiscal '22?

Yes, no, we expect basically for our inventory levels to remain somewhat elevated while we're through this supply chain constrained environment. However, we do expect to moderate our components depending on the supply and the demand that we see around the components. But certainly as we look forward into the first half of '22, we still expect to see those levels somewhat elevated.

What you saw Katy is like, what we -- if we're seeing -- if we look at components where availability has improved with the need to maintain those levels of inventory and there we -- therefore we are correcting that. But as Marie was saying, since we expect to continue to be in a supply constrained environment at least through the first half, inventory will stay at high levels.

The next question is from Samik Chatterjee with JPMorgan.

Hi. This is Angela Chan on for Samik Chatterjee. Just had one question, wanted to dig in a little into the margin here. I think someone mentioned earlier that you had 17% price increase in PCs, and so just thinking about moving forward assuming you have for a favorable pricing into fiscal year '22 and that the supply situation at least starts to, seems to be stabilizing or may be easing a bit, should we expect to see margin for to remain at that elevated level even beyond your first quarter guidance?

Yes, no, sure, and good afternoon. So we are very much on track towards the high end of our long-term SAM range which we gave at our Analyst Day for PS. So we continue to see that strong demand for our PCs, particularly in commercial and we expect to see that favorable pricing as well, and that's how we think about our guide for Q1. I would just add, I think I mentioned to Toni that we were down slightly Q-on-Q and that was really driven by the material change in estimate we had last quarter. But going forward, we absolutely expect our PS margins to continue to be at the high end of our long-term range.

And just a brief reminder, we increased our long-term range a few weeks ago. So what we are saying is we are going to stay at the high end of the new ranges that we just provided.

Great. Thank you.

The next question is from Sidney Ho with Deutsche Bank.

Hi, thanks for taking my question. I got two questions. First one is you mentioned your backlog is staying at elevated level, now that you have another quarter of serving this dynamics, can you talk about how you monitor to make sure that orders are real, and how confident are you that once supply constraints start to ease you don't see a sharp decline in -- sharp increase in cancellation rate or decline in this backlog? And I have a follow-up.

Yes, thank you. So, as we have shared in the past, this is really something that we pay a lot of attention to, and we constantly monitor all the orders that we get, the quality of the orders and what cancellations are happening. And as we have shared before, the percentage of cancellations is very, very slow -- is very, very small. So we have not seen any cancellations. Also as we look at the competition of the backlog, the majority of the backlog now is coming from commercial customers, given that this is where we continue to see the stronger demand. Usually, there is an end user or in many cases, it is an end-user associated with our backlog, so it means the probabilities of double booking or cancellations even lower. But we rest assured, this is something we monitor constantly and we don't see any cancellations. Now, of course, our goal is to over time to reduce the amount of backlog that we have because -- and we expect that, that supply will get normalized during the next quarter, we will be reducing the amount of backlog that we have.

Great. That's helpful. Maybe my follow-up question is on the free cash flow for fiscal '22 of more than $4.5 billion, how should we think about the profile of that going to look like as we go through the year, typically you see the lowest free cash flow in fiscal second quarter and highest in fiscal third quarter, but this year could be different, but any other factors we should be thinking about? And kind of related to that, how may that change the amount of share buyback as we go through the year? Thanks.

Yes, so maybe I'll hit up cash flow and then we'll go to the buyback. So, first of all, we guide cash flow on an annual basis. And as we mentioned at SAM, we're confident in our guide of at least $4.5 billion. A couple of things to bear in mind, obviously cash flows driven by revenue and operating profit growth, and then secondly, I think we did comment that we did expect to see some favorable working capital as we start to see those inventory levels potentially moderate in the second half. So that's how we're thinking about, we've built that all into our guide basically in terms of free cash flow. With respect to our buybacks, we remain committed to repurchase at least 4 billion of our shares, and as you probably recently saw at our Analyst reports, Analyst meeting as well, we're expecting to pay out a dividend of $1 per share. So I think really a meaningful plan there with respect to our buybacks starting to return of capital to our shareholders.

The next question is from David Vogt with UBS.

Great. Thank you for taking my question. I just have one question, it's more of a financial philosophical question. And trying to think through your long-term financial framework that sort of underpins the high single-digit EPS growth that you laid out at SAM, and if I just take sort of your framework at face value as operating profit grows and your dividend grows along with up profit and/or earnings, what are sort of the parameters that you're using to think about the buyback in terms of how much you want to use, because as the stock appreciates, and let's say the multiple expansion you no longer quote-unquote undervalued or maybe even less value, I would imagine that you might ratchet down or maybe pull back on the buyback, and that seems to be a pretty important part of the longer-term EPS growth that you've laid out at the SAM. So just want to get a bit of an understanding how you're thinking about it over the longer-term? Thanks.

Yes, maybe I'll just start out by commenting firstly that our FY22 guidance is a combination of both operational flow-through and the results of share buyback. Now addressing your question specifically about how we're sitting, thinking about your philosophical question around the buybacks, look I would just say that we're absolutely committed to the capital allocation strategy that we've outlined at SAM, and those ingredients, nothing has changed there and a big part of that is our return of capital to shareholders. So we're on track to continue to buy back shares at elevated levels of at least 4 billion. And in fact, I think we're going to surpass what we said we do back at our value plan of at least $16 billion. So that's how we're thinking about it, and our commitment really hasn't changed.

And maybe to complement a little what Marie was saying. What we have committed is that we will be returning, and I'm talking about the long-term, 100% of free cash flow unless other better opportunities arise, and we have also committed to increase our leverage ratio to two points, and we will be doing this over time. So both will be sources of cash that we will be using to return capital to shareholders or potentially to M&A, if we -- if M&A would bring better returns.

Great. Maybe just as a quick follow-up, Enrique. So does that imply that the dividend effectively a sort of -- a sort of marching in lockstep with sort of earnings growth and then the flexible use of cash flow between M&A will be -- the cash flow will be between M&A and buybacks over the longer-term?

I believe, while we believe that the shares are undervalued, and this is clearly the situation today, so this is what you should expect us to do, thinking at least while we see that delta.

The next question is from Wamsi Mohan with Bank of America.

Hi. Yes, thank you. In your prepared commentary, Enrique, you mentioned that M&A -- you also called out M&A as an important lever, and I was curious, just given the strong cash flow, free cash flow that you would be generating plus the payment from Oracle, you have a sizable warchest for M&A. So any sizing parameters, anything that you can share with us, and what you're looking, should we expect similar to what you've done here in the recent past or something larger?

Yes, so let me kind of remind what we have been discussing during the last weeks. First is, we have shared that M&A is an important part of our plan. Second, we have identified five key growth areas for the company, where we think M&A could help us to grow profitably at a faster way and that we are scanning opportunities to do that. At the same time, we have also said that we are going to be very rigorous stewards of capital that any opportunity we would take versus the strategy, versus the operational ability that we need to have to deliver on the financial goals, and then, of course, we need to have attractive returns, whether to return the buyback shares, which is a fairly high threshold given that we believe that shares are undervalued. In terms of specific side, I don't think we have any -- we haven't made any commitment on -- commitments on that space. They really need to deliver strong financial results and based -- and that be aligned with their strategies. But we are not going to do anything different because of the Oracle cash that we got. We are going to continue to manage capital with the framework that we have been discussing until now and with the same rigor.

Okay, thanks, Enrique. If I could follow up, a few people have asked about the ASP and the sustainability, and clearly you talk about strong demand backlog and this ASP strength to sustain in fiscal '22. But if I could ask it maybe a little differently, how much of this ASP increase would you attribute to the tightness in the market, which is driving favorable pricing versus potentially as supply improves over the course of the next few quarters, do you still anticipate the mix can drive these sort of elevated levels of ASP growth? Thank you.

Yes, I think the key thing really is what is going to be the gross margin that we will be delivering or the operating profit margin. And as Marie was saying, we increased our guidance a few weeks ago and we expect to continue to be at the high end of the range through 2022. What we think will happen is eventually the price favorability will reduce as volumes will increase, but as volumes will increase, we will also see additional business. So one will compensate the other. So we will stay within the high end of the range through 2022.

And I'd just add, we are still in that, it's a bit like the laws of economics while you're in a supply constrained environment, favorable pricing really persist, but in addition, demand is strong. So together, that really contributes to what we've seen in terms of this favorable pricing dynamic, which we do expect will continue through '22, but we do expect some normalization as the year goes on as well.

The next question is from Aaron Rakers with Wells Fargo.

Hi, this is Jake on for Aaron. Congrats on the great quarter. Just really quick, I was wondering if you could talk a little bit more about what you're seeing in the graphics market and then kind of just how you're thinking about that business heading into 2022?

Yes. So we are seeing a strong recovery of the overall industrial graphics business, mostly driven for the -- by the more industrial side driven by label and packaging. We have seen nice growth in Q4 and we expect to see very nice growth in 2022. So really good progress and really a contributor of growth for the company in 2022.

And just as kind of a follow-up on to that. Is that a market you guys would be targeting for M&A with just how fragmented it is, is that something you're focused on?

Well, we have a very strong portfolio in that category that is a combination of both internal development of M&A that we have done over the years. We have done several acquisitions in that space, both in printing technologies and also in software, and we have identified this as one of the key five growth areas of the company. And as I said, M&A is part of our plan, we expect to continue to do that in 2022. And as we also shared, we have room to do that, while at the same time, we return aggressive capital to shareholders through both share repurchases and dividends. And as I said before, over time, we will be increasing our ratio to 1.5 to 2, which will be also another source of capital.

Great. Thank you.

And I think it's now time to wrap up. So let me close the call by saying that we really feel strong about the quarter that we have, it's a great proof point of the ability that we have to deliver value to our shareholders and shows the strong momentum that we have entered in fiscal year '22. And this is why we provided the guide that we provided for Q1 that shows the things that we see in our business. So, thank you everybody for the call today. And we wish all of you a great Thanksgiving with your families. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.