Good day, everyone, and welcome to the First Quarter 2022 HP Inc. Earnings Conference Call. My name is Betsy, and I’ll 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 First Quarter 2022 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 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 web page 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, 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’d now like to turn the call over to Enrique.

Thanks, Orit, and thank you all for joining today’s call. Before I discuss the quarter, I want to briefly address the unfolding situation in Ukraine. The well-being of our people, their families and our customers and partners is our top concern. We are doing everything we can to keep them safe. We want nothing more than to see peace and stability restored to the region. We have an experienced cross-functional team in place focused on business continuity. The environment is very fluid and we are preparing for a range of scenarios. And in the meantime, in compliance with administration’s recently approved sanctions, we have suspended shipments to Russia. The difficult situation in Ukraine is the latest in a series of global challenges we have faced. Time and again, our team has shown remarkable agility and determination, and I have great confidence in their ability to manage these situations. When we were last together at the end of 2021, I talked about our strategy to modernize our core, expand into valuable adjacencies and build a more growth-oriented portfolio. And our first quarter results show the progress we are making against this plan. We continue to see very strong demand, driven in large part by the secular tailwinds associated with hybrid. The way people work and live have fundamentally changed, and we see this trend continuing across our segments long past the pandemic. This creates incredible opportunities for innovation and growth. Companies are reconfiguring office space to be more collaborative, and this is requiring a refresh in their IT strategies, services and security offerings. Consumers are investing to improve their home office setups as hybrid work becomes the norm. And when they are not working, people are looking for more immersive entertainment experience with improved video, audio and battery performance. Underlying all…

Thank you, and good afternoon, everyone. It’s great to connect with all of you again. I want to start where Enrique left off in terms of our performance in the quarter. It was a very strong start to the year. Demand for our technology, favorable trends such as hybrid and powerful innovation across our portfolio are driving long-term value creation. And you see this reflected in our Q1 results as we delivered across all of our key financial metrics, including growing revenue, operating profit and EPS. Let me give you a closer look at the details. Net revenue was $17 billion in the quarter, up 9% nominally and 8% in constant currency. Regionally, in constant currency, Americas declined 1%, EMEA increased 8% and APJ increased 28%. Demand remains strong, creating sustained tailwinds across our businesses. But as Enrique mentioned, supply chain constraints remain a top line headwind for both Personal Systems and Print revenue. These dynamics were particularly impactful to our Print hardware results, which I will talk about in a moment. Gross margin was 19.9% in the quarter, down 1.3 points year-on-year. The decrease was primarily driven by increased Personal Systems mix and higher costs, including commodities and logistics, partially offset by pricing, including currency. Non-GAAP operating expenses were $1.9 billion or 11.1% of revenue. The increase in operating expenses was primarily driven by increased investments in go-to-market, partially offset by lower Personal Systems R&D due to partner funding. Non-GAAP operating profit was $1.5 billion, up 1.5% and non-GAAP net OI&E expense was $66 million for the quarter. Non-GAAP diluted net earnings per share increased $0.18 or 20% to $1.10, with a diluted share count of approximately 1.1 billion shares. Non-GAAP diluted net earnings per share excludes a net expense totaling $117 million, primarily related to: restructuring and other…

Thank you. [Operator Instructions] The first question today comes from Shannon Cross with Cross Research. Please go ahead.

Thank you very much for taking my questions. Given the importance of ASP growth in your revenue, can you help us to understand a little bit more about the dynamics behind what’s driving the increases, both in print and PCs? And what I’m thinking is how much of the growth is related to mix, like in PCs going to commercial from consumer and versus sort of how much are the price increases more on a like-for-like basis and they’re kind of positioned to offset inflation? And then I have a follow-up. Thank you.

Hey Shannon, good afternoon. How are you? I hope you’re doing well. So first of all, I’ll just start out by saying, look, we’ve continued to see the benefit from favorable pricing, as you mentioned, due to the dynamics around supply and demand imbalances. And with respect to how we see it to mix shifts, we’ve seen the impact of mix shifts year-on-year and quarter-on-quarter from consumer to commercial. As you heard in the – in our earnings announcement, we had a very strong performance on our revenue in commercial, particularly in PCs. So in PS and in Print hardware, that mix shift was actually what drove a lot of the strength that you’ve seen in ASPs.

Was some of it inflation, though, or…?

Well, actually, we have been pricing - I think one of the benefits we’ve seen in the quarter is the impact of favorable pricing. So right now, we’ve been able to price through the impacts that we’ve been seeing around supply chain, commodity costs and logistics. So I’d say overall, we’re managing the pricing environment very well.

Okay. And then the second question is just on free cash flow. Going forward, you had a significant benefit from accounts payable. How should we think about free cash flow dynamics as we look through the year? And how are you thinking about perhaps the ability – I mean, what’s going on now in Europe is sort of throwing this all in the air. But in terms of the ability to maybe manage inventory levels a bit better and bleed through some of the excess component inventory you may have. Thanks.

Yes, no. Sure Shannon. So first of all I’d start out by saying that, look, we’re really pleased with the free cash flow in the quarter of $1.4 billion. And I’d just, at this point in time, reiterate that we’re still confident in our guide of at least $4.5 billion. And I’d just point out that given the supply chain challenges that you referred to, we are not planning to decrease our inventory as we originally commented. Therefore, we expect, at this point in time, to stay on track to our guide of at least $4.5 billion. In addition, I’d add, just in closing, that typically we don’t adjust out, I think, our free cash flow guide at in the quarter either.

The next question comes from Ananda Baruah with Loop Capital. Please go ahead.

Yes. Hi, good afternoon guys. Hey congrats on the solid execution and the ongoing amendment. I appreciate you guys taking the question. Two if I could. I guess I jumped on a few minutes late, so I apologize if this was already talked to. But what are you guys thinking at this juncture for PC growth for the year? And if you have like a calendar year view also, that would be helpful. And then I have a quick follow-up as well. Thanks.

Let me – hi Ananda. I will give you, first, a view of what do we think in the market, and then Marie will give you some comments on the guide. I think market-wise, we continue to see strong demand on the PC side. The market projection for this year is that it will be around $200 billion bigger than what it was before the pandemic. And we don’t expect to see the level of growth that we saw in the past, but we think that the market is going to stay at the level where it is today, which is, again, significantly higher than it was before the pandemic. Now Marie will talk about our guide and what we expect to see in our side.

Yes, Ananda. Good afternoon. I hope you are doing well. So for the year, we expect PS margins to be at the high end of the range. Now I would comment just to note that in Q1, there were some partner benefits from our Personal Systems partners that were onetime in nature. So if you look at our PS rate in Q1, if you exclude those benefits, we’re still ahead of the Q1 EPS range. But basically, we’d be at the high end. And so if you think about – the way to think about the margins in the rest of the year is really it’s that mix shift that we’re seeing towards commercial, those higher-margin categories are driving the rate. And finally, we’re seeing that the benefit of favorable pricing. And we’re really seeing the ability for us to be able to reprice for some of those commodity challenges that are out there in the market.

That’s helpful. And then just my follow-up is, I know throughout 2021, you guys have been putting in some initiatives to improve your positioning for component allocation. And was just wondering what the state of those are today. And do you think you’ll be successful in procuring, so improving your component allocation share as you go through the year?

Let me take that question. So, I think the progress we are making is reflected in the strong results that we had in Personal Systems this quarter. As we said during our Investor Day, our focus was really on getting capacity and getting components for the premium categories for commercial, and the growth in this area reflects the progress we have made. So, we are pleased with the progress. At the same time, we have to acknowledge that the situation continues to be difficult. We expect to continue to be and to operate with high levels of inventory through the – of backlog through the end of the year, but we are making good progress, Ananda.

The next question comes from Jim Suva with Citi. Please go ahead.

Thank you. Since you spoke about PCs some, can we talk a little bit about printing? And specifically, can you talk about the supply chain about ink as well as print units in the channel versus equilibrium, a little bit about that? And then maybe my follow-up I’ll ask right now about what type of assumptions or page volumes are you expecting versus, say, pre-COVID levels?

So let me talk about the situation first on the hardware and then I will talk about supplies. On – from the hardware perspective, shipments this quarter have been impacted by availability of supply. As we shared both in our Investor Day and during our Q4 earnings call, we have a majority of the factories for printers and of our suppliers in Southeast Asia, and those countries were in full lockdown the majority of the fall until December. And therefore, we are seeing now the impact of that situation. Additionally, in Print, we used several components that are ASICs that have been designed by us, where also we are seeing shortages. So as a consequence of both, we clearly had our sales impacted this quarter, and we expect this to continue through the rest of the year. In the case of supplies, the situation has significantly improved. We don’t have any more limitations in terms of shipment. And the supplies business overall performed in a very positive way, similar to what we shared during our Investor Day, so no big deviation from the plan that we had.

I’ll just add, on the comments on the channel, I think you brought up, right now for both print hardware and supplies, we’re comfortably within our range, and in some cases, due to those supply constraints that Enrique referred to, we’re actually below in some cases.

Great. And then the follow-up about assumptions of return to the office versus pre-COVID levels for printing, what’s your thoughts on that?

Yes. So let me go, on the office side, again, no different from what we shared a few months ago. We expect that the volume of pages and the overall size for the market will be around 80%, 80, of what it was pre-COVID. We – and we are on our way to get there. Clearly, because of Omicron and the delays in some office reopening, we’re still not there, but we are seeing steady progress. In the case of home, the market is now stronger than what we were predicting before COVID, and we expect it to continue to be for the foreseeable future.

The next question comes from Toni Sacconaghi with Bernstein. Please go ahead.

Yes, thank you for taking the question. Maybe I could first ask for just better clarification on what is happening with backlog. I think Enrique, in your prepared remarks, you said that PC backlog came down in the quarter, but Marie said that supply was a constraint to PCs in the quarter. So maybe you can be explicit about either how your backlog changed in the quarter for both PCs and print hardware, or you can comment on order growth versus hardware in the quarter. That would be helpful to dimension that backlog question. And then I have a follow-up, please.

Sure. So let me take that one. As I said in the prepared remarks, in the case of Personal Systems of PCs, we saw a decline of backlog during the quarter. It was driven by two things: number one is the progress we made on the supply chain side, being able to address the demand that we had in categories like commercial or premium. It was also was driven down because we saw a slowdown in some other categories like, for example, low-end consumer where we have seen a reduction of demand. The combination of both drove a reduction of backlog, but we are still operating with significantly higher backlog than what we normally do. So backlog remains elevated and we expect it to continue to be elevated for – during the next quarters. In the case of Print, the situation is different. Backlog grew quarter-on-quarter because of the two factors I explained before, where the factories are located and also the availability of certain components like ASICs or other type of power chips that we are still experiencing shortages.

That’s helpful. I appreciate the color. Could you quantify specifically what happened to PC backlog in the quarter? I think last quarter, you said it was nearly a quarter of backlog, so either provide the number of weeks that it came down or what the relative order growth rate was in dollar terms for PCs relative to your revenue rate, that would be really helpful. And then just so I – just to clarify on guidance for my second question. It looks like normal seasonality is down 4% or 5% sequentially. I think on your last call, you sort of said this is going to be a wacky year in terms of normal seasonality. So, how do we think about what seasonal growth will be in Q2? I think you said PCs would be down high single digits sequentially. How do we think about overall revenue for HP on a sequential basis? And how do we sort of think about seasonality for the year? Are your comments around kind of a more smooth year still sort of how we should expect things or can you add any color on that? So just a follow-up on specificity on PC backlog, please and then Q2 and seasonality for the remainder of the year. Thank you.

Yes. So on PC backlog, I will only be a little bit more specific. It is below one quarter, which is where we were, but continues to be very elevated. Maybe the other color I will provide is similar to what I shared a week last – a quarter ago, we are seeing it more concentrated now in some areas of the portfolio like commercial and premium home. This is where the backlog is elevated. And Marie will take the question on guide.

Hey, Toni good afternoon. So in terms of just addressing your question around seasonality, very much in line with what we said at the Analyst Day that normal seasonality, I’ll just start out there, doesn’t apply for FY 2022. Obviously, now as you think about Q2 and beyond, we’ve had a very strong start to the year. And as a result of that, with the performance that we’ve had a year in Q1, we expect now a much more balanced first half versus second half. And so we’re no longer expecting our revenue to be more linear across the quarters as we have historically seen. And then just to sort of reiterate the point that you made around Personal Systems revenue, as we said earlier, due to the record revenue, the Russian situation and the continuing supply challenges that you’ve heard Enrique talk about, we do expect Q2 PS revenue to decline high single digits sequentially. I hope that helps.

The next question comes from Amit Daryanani with Evercore. Please go ahead.

Thanks for taking my question. I have two as well. I guess, first on the supply side, very specifically within Print, I think it was down 2%, 3% year-over-year in Jan quarter. I’m wondering how should we think about supplies in April quarter and even beyond because you compare start to get very difficult in that business. So, I’d love to understand how you’re going to see that supplies business stack up for the next couple of quarters, because I don’t think you have a whole lot of supply chain issues in that piece of the business.

So, I think on the – in supplies, what the performance is for this quarter is in line to the guide that we provided at some in during the Investor Day, where decline that we said we expected supplies to decline low to mid-single digits. And when we look at the rest of the year, we expect that this will continue and be aligned to that projection, Amit. Again, as I said before, supplies performed as we were expecting. Very small deviations, slight reductions or usage in the office side as offices were closed were probably below expectations, but share and price compensated for that. So overall, in line to what we were expecting.

Got it. And then if I could just follow up, either Enrique and Marie, but when I think about the full year guide that’s been raised right now, you’re sort of implying 12%, 14% EPS growth, I think, for fiscal 2022. Could you just talk about how do I think about the delta or how much of that is going to come from buybacks versus operating profit dollar expansion, operating profit dollar growth? Because in Q1, at least, your shares on reduction was 15%. So if that momentum sustained, you could conceivably achieve your full year guide, even if your operating profit dollars don’t have any growth. So maybe just talk about how that math works for you for the year.

Yes, sure. Good afternoon. It’s Marie here. So look, I think at our guide at Analyst Day, we commented that the operating profit flow-through was really a full fiscal year view. So, I’d just say that we’re confident that we will see the total of Print and PS operating profit dollars, that they will increase year-on-year for the full year 2022, though I would just point out, it’s probably going to vary quarter-by-quarter.

And I think it’s important to remember, Amit, that how strong last year was because we are saying we are going to be growing EPS and also profit after a very, very strong year. So that’s we always important to remember, given the compare that we had in 2021.

The next question comes from Wamsi Mohan with Bank of America. Please go ahead.

Yes. Thank you. Marie, you noted this quarter-on-quarter decline on high single-digits to PS revenues. I was wondering if you could frame it a little differently sequentially. How should we be thinking about units versus ASPs? And correct me if I’m wrong here, but from your comments, it sounded like the size of the partner benefits to margins was roughly $100 million, which was onetime. Can you give us some color on that? And I have a follow-up.

Yes. So just a couple of comments to help you then on the sequential on PS. So as I mentioned, we do see that single-digit sequential decline on PS revenue driven primarily, as I mentioned, around both the ongoing supply chain challenges and the Russia-Ukraine situation, which we also, I think, commented in my prepared remarks. So that’s what’s guiding the revenue. Then on the op margin, as I mentioned earlier, there were some partner benefits from our Personal Systems partners. They’re onetime in nature. Now if you basically sort of exclude those in Q1, that you would get back to basically the PS margin range being at the high end of the range, which is where we anticipate we will – what the results will look like the Q2.

Okay. Thanks, Marie. And Enrique, if I could. If we look at sort of a broader picture of what is happening with units, we’re starting to see a decline on a year-on-year basis. And it aligns fully with your comments on the comps being extremely tough from last year. Why should investors not be concerned that this deceleration in units is a leading indicator of an eventual compression of ASPs in Print, but also on the PC side? Thank you.

Well, in the – thank you. In the case of Print, really shipments this quarter are really totally determined by availability of supply. So, I really wouldn’t read anything on declines of volumes because this is really totally driven by how many printers we and the rest of the market has been able to produce because it’s not – has not been an HP situation, it has heavily been an industry situation. In the case of Personal Systems, our view and the rest of the industry is that the size of the market this year will be in the 340 million to 350 million units. This is what it was a few months ago and continues to be. We also said that we expect the demand to shift towards commercial. This is what we have seen this quarter. And actually, if you look at our numbers, we grow significantly in both Windows-based PCs and commercial PCs, in many cases, above 20%. So it’s happening what we told the market it was going to happen. And when we look now at the funnel not only in backlog but at the funnel of opportunities we have for the second half in – for the rest of the year in commercial continues to be very strong.

The next question comes from Erik Woodring with Morgan Stanley. Please go ahead.

Hey guys. Thanks for taking the question. I think, I want to just follow up on that question and really just ask about the sustainability of PC ASPs. And I ask because I imagine your ability to leverage pricing gets more difficult as we move later into the year and supply improves plus you obviously face more difficult pricing comps. And so maybe just to dig down a little bit more. So, how should we think about maybe PC pricing versus units in the second half of this year? Any color that you can share there? And then I have a follow-up. Thanks.

Yes. I think the evolution of pricing is really going to be determined by the difference between supply and demand. As I mentioned before, there are areas where the demand-supply, there is more balance between demand and supply like low-end consumer. And therefore, there, we expect to see more price competition. There are other areas like premium, like commercial, where really still demand is above supply, where we expect to continue to maintain the ability to price that we have had until now. And all these factors are built into the guide that we provided. I think it’s also important to highlight that within the Personal Systems side, we continue to see very high growth opportunities in the growth area that we have identified on both gaming, peripheral, workplace solutions are really growing in a very strong way, which also gives confidence in our ability to continue to grow in a sustainable way.

Awesome, I appreciate that. And then maybe just as my follow-up, you guys have committed to doing $5 billion of buybacks this year. But if I look back over the last quarters, you’ve done more than $1.5 billion of buybacks on average each quarter. So maybe why shouldn’t we think about buybacks and the rest of this fiscal year being – or for the total of this fiscal year being closer to $5 billion or $6 billion? And if they – if $4 billion is a target, would that imply or should we be thinking about buybacks slowing down into the remainder of the year? Thanks.

Well, I have to clarify because you mentioned $5 billion. Our goal and what we have said is that we will buy at least $4 billion of shares, and this continues to be our plan. So this is what I would build in your model. Yes, we bought more this quarter but our goal is to complete their value plan as we declared it three years ago and $4 billion is the minimum we need to do.

The next question comes from David Vogt with UBS. Please go ahead.

Great. Thank you guys and thanks for taking the question. So my first question is, can you give us some more clarity on sort of the price increases that you pushed through on the printing side? I think earlier this year, kind of what the market reaction has been and the likelihood of that sticking as supply comes online as we move through the rest of this year. And I’ll just give you my second question as well, is when you think about backlog, I think you mentioned it’s primarily commercial and high-end consumer. Can you just kind of give us an update on where Chromebook sits in that backlog and how we should think about potentially Chromebook becoming a bigger part of the backlog as we move into, let’s say, the fall and next year’s holiday season and kind of the prospects for Chromebook becoming a bigger part of the business in the second half of the year? Thanks.

Let me take those questions. In the case of Print, I think we should differentiate hardware versus supply. In the case of hardware, the current shipments are so limited by supply that it had to read any implication on pricing because really what has been driving the number of units we have shipped is the number of units we have been able to produce. We are shipping everything we build. In the case of supplies where we also drive price increases, I think what is important to highlight is that for both ink and toner, despite the price increases, we were able to grow share, which I think is a very important metric that shows that the – from a volume perspective, we haven’t seen any negative impact on driven by the price increase.

To Enrique’s point, our full year guide actually contemplates also those price increases as well.

And then your question on Chromebooks, let me – as I did a quarter ago, let me remind that Chromebook is a relatively small part of our business. We already said a quarter ago that the backlog for Chromebooks has been basically totally reduced. We are expecting demand for Chromebooks to start growing as we had seen in previous years, in the Q2, Q3 time frame. But at this point, we have enough availability of components on that side that we – and we don’t expect backlog to grow in that space.

And just quickly, that’s embedded in your PSG margin sort of a growth in the Chromebook business as we move through the year as well?

Yes. All of it is built into the guide and into the margin projections that we have, of course.

The next question comes from Samik Chatterjee with JPMorgan. Please go ahead.

Great. Hi, thanks for taking my question. If I can just start on Print first. In the commercial segment, Enrique, you mentioned the ongoing recovery in the office print business as well as the market share increases. Was really curious because I think even when we talk to one of your smaller competitors in the commercial print market, they talk about share increases. So if you can dive into that a bit more, what’s driving the share increase, particularly as you remain supply constrained, what drives longer-term share increases for HP in the commercial print business? And then I have a follow-up. Thank you.

Yes, sure. My comment on share increases was specifically on supply, which as we heard a couple of years ago, is a big part of our strategy on supply. And what we have been doing during the last two years is to execute on the toner side, on the commercial printers, the same strategy that we had implemented on home printers for ink for previous years. And this is a combination of marketing efforts, it’s a combination of technology that we built in the printer, it’s the combination of improving the quality of supplies. And as a result of all of that, we are driving – we have been able to reverse a trend that we had in the past of losing share in toner. And as we have been sharing during the last quarters now, we are growing share of toner again. So that’s the – this is what I meant. In the case of hardware, there were also some improvements from a share perspective. But again, this is just driven by availability of supply. When we have supply, there is demand, and we’re able to ship more.

Got it, got it. And for my follow-up, I think this might be more for Marie, but the PS margins, I think, for the quarter, you mentioned you’ll be – once we exclude the partner benefits, you’ll be at the high end of the range that you specified, 5% to 7%. But how do we think about the higher cost of components or supply in that number? I’m just trying to think about, does that moderate as you go through the year or you take some supply actions? Is that going to drive that higher component cost to process for longer? How should I think about it? Thank you.

Yes. So with respect to our margin ranges for the rest of the year, we basically calibrated our ability to be able to reprice for commodities. So, I think we’ve done an excellent job of actually managing our pricing and really being able to deal with the volatility that we’re seeing across commodities, logistics and then repricing that through the market. So our PS margin, we expect it to be at the high end of the range for the remainder of the year, and it reflects that.

And I think this was our last question, so let me say thank you all for joining the call. As I said at the beginning of the call, we are really pleased with our start of the year. Clearly, the strategy that we have to modernize our core, expand into adjacencies and creating new businesses is growing, and this is reflected in the results that we posted today. And this, of course, gives us great confidence in our ability to grow revenue, operating profit, EPS and free cash flow in a sustained way. And today, before we leave, I want to invite all of you to join me in wishing Marie a very happy birthday because I am sure there is nothing better to do in her birthday than spending it with us in an earnings call. Marie, happy birthday.

Thank you, Enrique.

And thank you, everybody, for joining.

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