Good day, everyone, and welcome to the Fourth Quarter 2023 HP Incorporated Earnings Conference Call. My name is Krista, and I'll be your conference moderator for today. 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. [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 2023 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 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 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, everyone, for joining our final earnings call of 2023. It was great to host many of you for our Securities Analyst Meeting last month. As I said at the time, we have made significant progress against our strategic priorities. And we see attractive opportunities ahead. Our Future Ready plan, combined with our relentless focus on the things we can control, enable us to make steady progress against our plan in fiscal year '23. We are very pleased with our Q4 results, and we have finished the year in a much stronger position than we began. We knew from the start that it could be a tough year. The challenging external environment constrained demand across the industry, and this is reflected in our full-year results. Net revenue was $53.7 billion, down 15% year-over-year, and non-GAAP operating profit was $4.6 billion, down 14%. We executed well in the face of these market dynamics, growing non-GAAP operating profit and non-GAAP EPS sequentially throughout the year. And our second-half results were significantly stronger than the first. We also made good progress in our key growth areas, which grew mid-single digits and drove approximately 20% of our total company revenue for the year. Our plan is designed to grow these businesses to at least $15 billion in revenue by the end of fiscal year '26. And we over-delivered on our gross annualized structural cost savings plan, putting us well on-track to achieve our recently increased three-year target of $1.6 billion. Our results reinforce our confidence in the financial outlook we shared with you in October. And I want to say a big thank you to our entire HP team for paving the way toward our next phase of growth. I'm going to use my time today to summarize our…

Thanks, Enrique, and good afternoon, everyone. It's a pleasure to be here with you all today. We delivered another strong quarter financially, due to outstanding operational execution and good progress in our Future Ready transformation. We generated solid results across revenue, non-GAAP operating margin, non-GAAP EPS and free cash flow, building on our proven track record of meeting or exceeding our goals. Our team is executing well despite the challenging macro environment, delivering Q4 sequential growth in revenue and non-GAAP operating profit dollars in both Personal Systems and Print. Margins were at or above the high-end of our ranges, resulting in a return to year-over-year growth in non-GAAP EPS, while free cash flow more than doubled sequentially, consistent with our outlook. We exceeded our Future Ready transformation cost savings target for fiscal '23 and are on track in '24 to continue reducing our structural costs while investing in our key growth areas. While we continue to monitor economic indicators and geopolitical risks, we're pleased with the momentum and health of our business. We will continue our efforts to drive fundamental improvements to our cost structure longer term, while prudently and aggressively managing near-term expenses. With the savings we generate, we'll continue to focus on prioritizing our investments, so that we are well positioned to deliver on the longer-term financial outlook, we outlined at our Securities Analyst Meeting last month. Now, let me begin by providing some additional color on our results. Starting with the full year, we stayed focused on what we could control, disciplined execution and cost management, and we delivered solid performance despite the macroeconomic and competitive dynamics we faced. Revenue was $53.7 billion, down 15% nominally and down 12% in constant currency. Revenue in our key growth areas grew mid-single digits, constituting approximately 20% of total revenue.…

Thank you. And we will now begin the question-and-answer session. [Operator Instructions] And our first questioner today is Wamsi Mohan from Bank of America. Please go ahead.

Yes, thank you so much. I was wondering maybe you could help us think through the seasonality. Obviously, it's been -- for the first half versus second half, what's implied in your guidance? If we go back a few years, the low 50% of EPS was recognized in the second half versus first half. So, I'm wondering if you could maybe either characterize it that way or second half versus first half on a growth basis on earnings. And maybe within that context you can just give us some sense the commercial PC market continues to be quite weak. I know, Marie, you said that the guidance for fiscal '24 bakes an in-line with market performance. But can you be somewhat explicit about what that performance is in commercial PCs in your fiscal year guide? Thank you so much.

Yeah. So, Wamsi, hi, this is Enrique. Let me provide a view on macro, and then Marie will be more specific about seasonality on EPS, because I think it will help to understand it better. So, from a macro perspective, what we saw in Q4 is an increase in seasonality, especially for PCs, between Q3 and Q4. And also, on the commercial side, we saw stability of sales. Market continued to remain soft, but especially when we look at real end user demand, we saw demand being stable. And somehow this helps us in the projection that we have for next year. As we discussed before, we expect the PC market to be slightly growing from 2024 to 2023, and the print market to be about flat to slightly decline between '24 and '25 -- '24 and '23, and we expect both segments to improve gradually through the year. So, having said that context, Marie will address the EPS question.

Yeah, no, good afternoon. So, let me walk you through how to think about seasonality. If you take the midpoint of that guide, which is what we gave at SAM, which is the $3.45, if you take the midpoint, basically you can assume the macro is stabilizing. And also, we expect the revenue to improve over the course of the year. So, I would just say we're not back yet quite to normal seasonal patterns, but we're definitely expecting the back half to improve over the first half. So, think about a gradual recovery over the year. But I'll just add, as we think about the Q1 guide, particularly for Personal Systems, I would say at this point, we don't expect that normal seasonality yet due to the pace of the market recovery. So, we're going to see that quarter-on-quarter differential relative to the Q4 period that we've just come out of. So, same guide unchanged, but definitely still not quite back to normal seasonality yet throughout the year.

Thanks, Enrique. Thanks, Marie.

Thank you.

Thank you.

Your next question comes from the line of Amit Daryani from Evercore ISI. Please go ahead.

Thanks a lot. Good afternoon, everyone. I guess my question is just on the Print side. Enrique, I'm hoping you could just touch on what do you seeing from a competitive perspective, given a lot of your peers are in Japan, who are probably leveraging the weaker currency, I think, on the pricing side. I'd love to understand how you're reacting to that. And then really how do you maintain the operating margin of this run rate, given the pricing headwinds -- or competitive headwinds that you have? Maybe you can just touch up on that. And then, Marie, could you just maybe flush out free cash flow? If there are any seasonality we should be cognizant about in Q1 versus rest of the year, that would be helpful. Thank you.

So, let me start on Print. So, not much has changed since we met a few weeks ago. So, we continue to see a competitive environment on the Print side, especially driven by the current situation between yen and dollar. But I have to say, between Q3 and Q4, we didn't see more aggressive pricing. If anything, prices sequentially improved Q3 to Q4. We have not seen an increase in competition from that perspective. When we look at '24 and the actions that we are taking to compensate for a potential more pricing increase, we are going to be executing the plan that we described before. We have an aggressive cost reduction plan that will help us to manage that. We continue to drive the shift toward HP+ units and profit upfront units that will also help from that perspective. And we continue to drive -- and we expect to grow share in the office space, which will be a contributor of margin improvement. And finally, as we shared in our prepared remarks, we have seen an improvement of the performance of the industrial business. We have seen a recovery of the market. And within the market, we have grown both hardware and consumption. And we think this is going to help us also in 2024.

Yeah, and just a couple of points on the Print rate. So, as we guided in SAM, we're still very confident in the outlook we gave around the revised range on Print. And as a result of that, we do expect in Q1 to still be at the high-end of that range, and then in '24, we expect to be solidly in the range. So, just keep that in mind as you're working through your model. And then, with respect to cash flow and the comments on seasonalities, we're reiterating our guide that we had at SAM of $3.10 to $3.60. And I just add from a seasonality perspective, just always bear in mind that Q1, we do expect cash flow to be lower, and that's due to the fact that we always accrue for our bonus in the prior period, and we typically pay that out in Q1 of the current year. So, expect that Q1 free cash flow will therefore be somewhat lower. But, similarly, as I said in SAM, we expect it to be in-line with net earnings and continue to see those fluctuations around working capital throughout the remaining quarters.

Perfect. Thank you very much.

Your next question comes from the line of Krish Sankar from TD Cowen. Please go ahead.

Yeah, hi. Thanks for taking my question. Enrique, I had a question on the PC side. You said you're expecting modest growth next year. I'm kind of curious, is there a way to quantify it? And how much is AI driving it? And also, when it comes to AI PC, how much kind of an uplift in ASP do you expect versus regular PC? Thank you.

So, let me start by saying that we are really excited about the impact that AI PCs are going to have in the overall PC category. As we have shared before, we think that they will drive -- they will double the expected growth from '24 to '26. So, it's really going to have significant impact. If we talk about '24, we think the impact will be smaller just because of: first, timing, the first AI PC will be introduced in the second half; and second, because of penetration, when we launch a new category, we know also it takes time for the category to penetrate. Our expectation is that in three years, 40% to 60% of the PCs will be AI PC, but it's going to be a gradual penetration of the category. But again, we are really excited, not only because of the impact that it will have on the business, but also because of the value -- additional value this is going to bring to our customers.

Can you really quantify the ASP uplift?

Thank you. Yes. So, what we had said before, and we haven't changed our projection is, average selling price for PCs will increase between 5% and 10%, as a consequence of the penetration of AI PC. Thank you.

Thank you.

Your next question comes from the line of Toni Sacconaghi from Bernstein. Please go ahead.

Yes, thank you. I was wondering if you could comment on supplies growth in the quarter. It was up sequentially. That hasn't happened in -- at any point in the last 10 years on an organic basis. So, what was driving the non-seasonal growth in supplies? Did you change prices and people bought in before? Or was there some channel fill? And then, could you also just comment on -- you talked a lot about Future Ready and the strength. I think you've taken out maybe run rate about $600 million worth of costs. But OpEx is essentially identical to the first quarter of this year. So, when we think about Future Ready, should we actually think about OpEx going down in fiscal '24? Or we won't see the impact of Future Ready on OpEx? Thank you.

Yeah. Hi, Toni. Good afternoon. So, let me just start out with the question on Future Ready. So first of all, obviously, really pleased with the performance, I think, as I mentioned in my prepared remarks, for '23. And then, going into '24, as you know, we raised our target to $1.6 million in SAM. So, very much on track. And I think as we've discussed at SAM, Future Ready is a combination of both OpEx and cost of sales. So, some of those savings, we're reinvesting back in growth and in people to help us manage through some of the volatility, but we do also drop that through to the bottom-line. And frankly, Toni, you can see that in the rates that we even delivered in this last quarter and also in terms of how we're guiding the rates going forward in terms of solidly in the range for the year and really at the high-end of the range for both businesses in Q1. Now, OpEx will be up year-on-year, and it's driven by exactly those factors I mentioned earlier, the investments in our growth, the investments in our people. And I would just sort of add as a sort of closing comment around this is, if you look at the geography of the P&L, you could see in our gross margins that we're shifting out now to higher gross margins, and that's been partially offset by operating expenses. So, hopefully, that gives you a little bit more context around how to think about Future Ready. And I'll turn it back to Enrique on supplies. I'll just add on the supplies' ecosystem, we're in good shape, Toni. From a multi-tier perspective, we ended the quarter in good shape.

Yeah. So, let me complement that. So, I think there are multiple factors that drove the good performance of supplies in Q4. As I have said many times though, when we look at year-on-year compares, it's not the best way to look at the performance in a quarter because there are many adjustments that are done every quarter, and then comparisons can all -- can distort the overall perspective. We are driving many positive actions on supplies. We continue to grow share overall, which is something that we have been doing already for several quarters. We have increased prices to reflect the value that we bring. So, the combination of all these things help us to grow supplies quarter-on-quarter. And again, we are pleased with the performance. But in the long term, we continue to expect the supplies to decline low- to mid-single digits. We are not changing our projections for supplies in the future.

Thank you.

Thank you.

Your next question comes from the line of Asiya Merchant from Citigroup. Please go ahead.

Great. Thank you for the opportunity. A little bit on inventory. If you could just comment on how you look at the inventory in the channel, both on the PC and the Personal -- on the Print side as well? Specifically, in PCs, I think there was commentary that there was some elevated ones, when you spoke about it last quarter, not for HP but generally for the industry in general. And then, if you can just talk about the cadence of EPS? As you progress, if the second half is going to be stronger, I think, as was commented earlier, you're starting the first year -- first quarter up 10%, if math is correct, and you're ending for the year at 5% for the year. So, if you can just kind of walk through that, that would be great. Thank you.

So -- good afternoon, Asiya. So, why don't I just start out on the EPS sort of seasonality and how to think about it. So, in terms of Q1, just to sort of give you some context there, a third -- we usually have corporate other expense that hits in -- from a seasonality perspective, a third of that hits in Q1. So, if you look at our Q1 guide, just bear that in mind because that's typically the stock comp expense period. So, as a result of that, you're going to see that seasonality adjustment in our Q1 EPS. And as you correctly said, we're actually up, I think, 11% on the midpoint year-on-year in our Q1. But we're -- SAM guide, I'll just reiterate, of $325 million to $365 million, hasn't changed. And just to close, Q1 is just really typical seasonality. And then, if you think about channel inventory, both Personal Systems and Print were in really healthy shape, and we're pleased with where we landed in terms of the progress we made this quarter. I would add on Personal Systems that we've seen declines sequentially and that we are really now back to much more normalized levels. And in fact, the industry levels themselves are also normalizing. And you can see that in terms of the quality of our pricing in the last quarter as well. So, I think looking back, we've seen CI really return back to more normalized levels, particularly in Personal Systems and in Print as well.

Great. And if I can squeeze one more in on components, deflationary expectations, I think there was some commentary previously on how you think about components.

Yes. It's very much in-line with our SAM guide in terms of forward-looking. We expect both Print and PS to be headwinds for the year. And as we look into Q1, we do expect a headwind in PS, but a slight tailwind on Print. And then, in terms of just what you've seen in the quarter, we've seen tailwinds -- sorry, tailwinds and favorability on Print as well, but definitely headwinds for both businesses for the year.

Great. Thank you.

Your next question comes from the line of Aaron Rakers from Wells Fargo. Please go ahead.

Hi. This is Jake on for Aaron. Thanks for the question. I was hoping you could give some additional color on the amount of promotional pricing for PCs you expect to see heading into the holiday season and maybe how this could compare to prior years.

We expect to see a similar level of aggressiveness that we were seeing before channel inventory was high. And at this point, what we know about the holiday season is that based on the selling, the shipments we have been making, the strength of our portfolio, we have very good assortment on the stores. We have just introduced significant innovation across our full portfolio. So, we are optimistic about the holiday season in the coming weeks.

Great. Thanks. And then, I was also wondering if you could talk a little bit more about the growth you're seeing in Poly and maybe some of the momentum you expect with the new as-a-service subscription offering.

Sure. We continue to be very bullish about the opportunities that we have with the Poly business. Of course, during the last week, it has been impacted -- during the last quarter, it has been impacted by macro. But feedback we get from our channel, from our customers continues to be very positive. As you said, we just introduced both new technology in the systems and the new as-a-service model, which we think will help us to drive growth in 2024. And really the opportunity to grow and to innovate continues to be there. From a process perspective, we are now finishing the IT integration based on the plan that we shared a few quarters ago. We have been driving the process as per plan. And again, we are happy with the progress we have made. I'm really optimistic about the opportunities this business is going to bring to us.

Great. Thank you.

Thank you.

Your next question comes from the line of Erik Woodring from Morgan Stanley. Please go ahead.

Great, thank you very much for taking my question. I just wanted to circle back to Toni's question on Print supplies. You obviously outperformed Print supplies this quarter. So, I just wanted to make sure I understood specifically, what drove the upside in the quarter. And given hard -- Print hardware units are declining 20% year-over-year, should -- what are the offsets to that as we think about supplies in the Four Box Model? I think you mentioned share gains in pricing. But if you could just go through kind of all the four different factors just to make sure we understand the different drivers, that would be helpful, for '24. Thank you.

Perfect. Thank you, Erik. And thank you because when I was answering to Toni, I missed to mention one of the elements that also helped, which is the easy compare, because last -- Q4 last year was not a strong quarter for supplies. So, this also has an impact on the year-on-year compare. If I -- if we look at the Four Box Model and the different drivers of supplies, clearly, installed base has continued to decline. So, this is a negative factor. Usage continues to go down, which is a negative factor, though I have to say, continues to be above, especially the home, in space, the references and the projections that we were making before the pandemic. And then, two positive factors that have had an impact this quarter; one is pricing, we have increased prices for supplies, and market share. As I mentioned before, we have continued to grow share for supplies, which has a positive impact on the overall supplies growth. Thank you.

Your next question comes from the line of Mike Ng from Goldman Sachs. Please go ahead.

Hey, good afternoon. Thank you very much for the question. I just have one for Marie and one for Enrique. Marie, you guided to PS and Print margins to be at the high-end of the range for the fiscal first quarter and then solidly in the range for the full year. Can you talk about some of the factors that drive that margin normalization for each of those two segments throughout the year? And then, Enrique, within Commercial Printing, I was just wondering if you could talk a little bit about any differences in outlook for A3 versus A4, or are the competitive dynamics very similar. Thank you very much.

Yes, sure, Mike. Good afternoon. Why don't I start out and give you some context on the ranges and how we're thinking about them. So, on PS, as we mentioned, we'd be at the high-end for Q1, and really what's driving that is just a combination of the mix. I think you heard Enrique talked to that in his prepared remarks, in terms of the higher value and also the improved pricing on -- as channel inventories normalizes. As I mentioned earlier, we saw a sequential improvement, and we expect, as a result, to see less promotional pricing. And then obviously, we've got the benefits of the Future Ready program that I talked about a moment ago with Toni. Obviously, also working against that are the headwinds that we've got with commodity costs and some of that is really what's influencing the sort of seasonality of the rates that we see in terms of being more solidly in the range as the year progresses. So that's sort of Personal Systems. And if you think about Print, similar drivers in terms of just being at the high-end of the range for Q1, and it's really driven by the profitability that we talked about, the shift in the model with supplies, some of the new business models. Also, frankly, the impact of growth is having an impact on both businesses. Similarly, the impact of the Future Ready. And once again, we also see pricing normalization and we see supplies -- there is no change to the supplies outlook to -- in terms of low- to mid-single digits. So, all those factors together is what really drives us to see both businesses be solidly in the range for the year, but at the high-end of the range for Q1. I'll turn it to Erique.

Yeah. And just in your question about the office market in Print, two key comments. One is we have continued to shift change from A3 to A4, especially in Commercial -- in large Commercial customers. We think this is driven by the fact that we expect to see less printing -- people in the office. And therefore, they have reduced the printing volumes that they were expecting and they need less production type of products. So that has been one change. Second, in terms of both A4 and A3, we continue to see an opportunity to grow share. We did it in this quarter in A3, and we have started to grow our share in A4 in several geographies. We did it in North America -- in Americas. We did it in several countries in Europe. We did it in China. And we know we have some work to do, but we expect to continue to drive that during 2024.

Great. Thank you, Enrique. Thank you, Marie.

Thank you.

We have no further questions at this time. I will now turn the call over to Enrique Lores for closing remarks.

Thank you. Well, first of all, thank you, all of you for joining. With the Q4 results, we believe are a signal of the progress that we are making and increase the confidence that we have in the plan that we shared with all of you a few weeks ago. And this reinforces the key message that we shared at SAM, that we believe that HP shares are undervalued and continue to be a good investment. And then last but not least, for those of you in the U.S., let me close the call wishing all of you a very happy Thanksgiving. Thank you.

This concludes today's conference call. Thank you for your participation, and you may now disconnect.