Good day, everyone, and welcome to the First Quarter 2025 HP Inc. Earnings Conference Call. My name is Regina, and I will be your conference moderator for today's call. At this time all participants will be in listen-only mode. We will be facilitating a question-and-answer session 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 First Quarter 2025 Earnings Conference Call. With me today are Enrique Lores, HP's President and Chief Executive Officer; and Karen Parkhill, 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 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 and market share references are based on calendar quarter information. For financial information that has been expressed on a non-GAAP basis, we've included reconciliations due to comparable GAAP information. Please refer to the tables and slide presentation accompanying today's earnings release for those reconciliations. With that, I'd now like to turn the call over to Enrique.

Thank you, Orit, and thank you to everyone for joining today's call. Q1 was a strong start to the year. We delivered top line revenue growth, increased momentum across our key growth areas and maintain our focus on positioning HP for long-term success. Today, I will focus on three main areas: first, our Q1 results and key innovation highlights. Second, a deeper dive on our business unit performance. And finally, I will share our outlook for the year ahead including the actions we are taking to respond to evolving market conditions while continuing to fuel our long-term growth. Let me now turn to our Q1 results. Overall, we delivered revenue growth for the third consecutive quarter, up 2% year-over-year. This was largely driven by growth in our Personal Systems, commercial business and key growth areas. Non-GAAP earnings per share of $0.74 sales was slightly above the midpoint of our guidance. Operating profit margins for both Print and Personal Systems were in line with our expectations. These results demonstrate our ability to deliver on our commitments and execute our strategy to build a stronger HP. Last quarter, I outlined our ambition to lead the future of work. We know companies need highly productive workforces to drive growth and employees are seeking fulfillment in the work they do. With our robust portfolio of PCs, printers, peripherals and more, we not only have a unique competitive advantage as we sit at the intersection of this opportunity. I am pleased to report we are making solid progress against our strategy. We are doubling down on our efforts in the commercial segment and aggressively investing and innovating in new AI and software capabilities. As an example of that, we recently entered into an agreement to acquire strategic assets from Humane. Once completed, we will benefit…

Thank you, Enrique, and good afternoon, everyone. We are pleased with our first quarter results and the solid progress on delivering towards our financial commitments for the year. We drove revenue growth for the third consecutive quarter with continued strength in the personal systems commercial business and momentum in our key growth areas. We also gained share in a stabilizing print market while executing against our plan to drive strong operating margins. We have made excellent progress in accelerating our future-ready plan and, as Enrique said, have increased the gross annualized run rate savings target for the program by the end of fiscal year 2025. And through disciplined execution and rigorous cost management, we delivered on our EPS commitments while maintaining important investments in strategic areas, including the future of work. Now taking a closer look at the details of the quarter, net revenue was up 2% nominally and 3% in constant currency, with growth across all regions. In constant currency, APJ grew 5%, Americas grew 3%, and EMEA grew 2%. Gross margin was 21%, down year over year due to increased commodity costs. As mentioned last quarter, we have put in place cost reduction and pricing actions to offset these headwinds. However, they will take time to ramp through the year, leading to stronger margins in the second half. Non-GAAP operating expenses were up year over year, reflecting continued investment in key strategic initiatives and our people, offset in part by disciplined cost management, including future-ready cost savings. All in, non-GAAP operating profit was $984 million, in line with our expectations. Below the out-profit line, non-GAAP net OI&E was also in line with our expectations and flat year over year, with lower levels of short-term financing activity offset by higher currency-related losses. Finally, with a diluted share count of…

[Operator Instructions] Our first question will come from the line of Samik Chatterjee with JPMorgan. Please go ahead.

Hi, thanks for the question. This is actually Joe Cardoso on for Samik. I guess the first one here is just wondering if you can quantify the impact of the China tariff and the guidance, and how are you expecting that to trend through the year, given the mitigation efforts you outlined? And then just relative to the latter part in terms of the mitigation efforts, any color in terms of where this production may be heading in terms of essentially moving production a bit out of China, just given the outstanding tariffs currently up in the air? And then I have a quick follow-up. Thank you.

Thanks, Joe, for your question. In terms of the tariffs, as a practice, we will include the known impacts in our guide. So in both Q2 and the full-year guide, we've included the added cost driven by the current tariffs in China. And those mostly impact our PS business. I would say keep in mind roughly a third of our revenue is generated in the U.S. And as Enrique said, by the end of FY '25, less than 10% of this revenue will come from China and be subject to the tariff. We're not going to quantify, but in terms of what we're doing, we're leveraging our global supply network to mitigate this impact. We are moving production around the world to the network where we've got other places to produce. We also have got our higher future ready cost reductions that we talked about on the call that will help mitigate. And we can take pricing actions as needed.

And let me provide some additional color. This is something you have heard us talking before. After COVID, we said we needed to build a more resilient supply chain. And this is what we have done. And to do that, we have built manufacturing facilities in multiple countries, Southeast Asia, other parts of Asia, increased the capacity in other parts where we're already present. And this is, as Karen said, this is what we're doing, rebalancing supply chain. And we are now in a much longer position than we were three years ago, because we have been really putting a lot of focus on that and driving a lot of changes.

Now, I appreciate the color there, guys, for both of you. I guess maybe the follow-up here is just in terms of the PS growth. Obviously, you guys kind of raised your outlook here in terms of growing faster than the market. I'm just curious if you can rank order the drivers here. You talked about share gains, perhaps a little bit of pricing. Maybe there's a bit of a higher mix on the AIPCs than what you were expecting further? Just wondering if you can flesh that out a bit in terms of where the goodness is materializing for HP? And thanks for the questions.

Yes, of course. I think, first of all, we expect the market to continue to grow, especially in commercial, as we have seen during the last two quarters. And the key drivers of that, first, is the aging of the install base, second, the Windows 11 refresh, and third, to some extent, the penetration of AI PCs. This is what is driving that. Then, in this market, we are performing well. We are driving significant innovation. We have a strong sales team. And this has been driving our progress and driving the better competitive position that we have and the improvement that we have made. Of course, pricing is part of it, also because of mix. Our focus, as you know, is to grow in the most profitable premium categories. This is what we are doing, and this is impacting our results. And this will continue to impact our results through the end of the year.

Our next question will come from the line of David Vogt with UBS. Please go ahead.

Hey, thanks for taking the question. This is actually Brian Luke on for David. So, for my first one, just on Windows end of life, do you think it's becoming clearer to businesses what devices they will need as it relates to specs like optimal tops, AI-related use cases, or security? In other words, are they becoming more competent in refreshing their devices, or is the full deadline still the main driver in businesses' decisions? Then I have a follow-up.

Yes, I would say it's both. First of all, what we have seen is that there is an acceleration of the Windows 11 refresh. As I have said in previous calls, one of the key leading indicators for us is the size of the funnel and the funnel has grown significantly in the last two quarters, which tells us that customers are really much more aware and much more ready to drive the refresh. In terms of products they buy, I think they see the need to buy some of the latest generation products, both driven by the AI capabilities, but also by the new use models of PCs that more and more are used as communication tools. And this has a big influence also in the type of devices that they are buying. And in both cases, we have a leading portfolio that is showing up in the progress that we are making in this category.

Got it. That's helpful. And then for my follow-up, do you have any updates on customer adoption of AI PCs? Do you still see them composing 20% of PC shipments this year and a 40% to 60% adoption rate into calendar year 2027? And then any change to the 5% to 10% premium versus traditional PCs? Thank you.

Yes, of course. Our current expectation is that the penetration at the end of this year will be more in the 25% range, slightly higher than the 20% you mentioned. We have not changed our projection for two years from now. We continue to expect it to be between 40% and 50%. And then in terms of average selling price, our expectation continues to be that it will be at an average between 5% and 10% higher than what it is today, driven by the penetration of AI PCs.

Our next question comes from the line of Wamsi Mohan with Bank of America. Please go ahead.

Thank you so much. First one for Karen. I appreciate all the color you shared about first half versus second half seasonality. But when you look at the second half versus first half, that's a very material increase in earnings, I think 33%, which has never happened historically, despite other times when you have done restructuring. And even if you take into account the run rate, and this is at a gross level of restructuring and flow that through at some net rate that you have done historically, it just doesn't add to the full bridge. So I'm just hoping you could shed some color on which one of these drivers should we really be focused on, especially given the fact that the tariff environment still remains uncertain. And so PC uptake has also been disappointing over the last several quarters. How confident should we feel that this kind of seasonality can be achieved? And I have a follow up, please.

Yes, thanks for the question, Wamsi. So I'm going to step back and just talk about why we're confident in our EPS guide and ramp that we talk about between the first and the second half. You know, I start with just a reminder that, you know, given the seasonality for our business, EPS is historically stronger in the second half. But specific to this year, on top of that, we expect both revenue and cost to improve in the back half. And on revenue, we expect more pronounced PS seasonality tied to the PC recovery, which includes the Windows 11 refresh and the ramp of AI PCs. We also expect continued mix shift to premium, including a higher penetration of AI PCs as we move through the year, which leads to higher ASPs. And we expect continued momentum in our growth segments that will help improve our margin profile. And in cost, we expect reduced commodity costs because we're qualifying lower cost components right now. We're also further driving consolidated volumes through strategic partners that can provide us with a cost advantage. And we've got incremental savings from our future ready plan. And then lastly, we've got a step down in our corporate other costs as we move past the first half of our year. So I'd say all of these things, along with the momentum you've seen already driving our revenue growth the last couple of quarters, give us confidence in this ramp.

Let me emphasize a couple of the comments that Karen made. I think this was the analysis that you were describing, Wamsi. There is both improvement on the revenue side and improvement on the cost side. And the combination of both is what drives us, brings us confidence in the guide that we have provided. As Karen said also at the beginning, we are including in the guide the impact of the current tariffs for China. We are not including the rest. We think it's difficult to speculate and it's hard to know exactly what the tariffs will be. So we are not including that in the guide.

Okay, thanks for that. Could I just ask around the tariff piece, right? So is it, could you just clarify if it's a 10% tariff that you're incorporating in China or there's some news this morning of an incremental 10%. So are you incorporating a full 20% rate at the moment? That's my clarification. And just in light of that, if you think that you will have to utilize pricing, I mean, as you have decoupled your supply chain, let's say, away from China. If other PC makers are unable to do that, would you say you would utilize pricing as a lever to take share or how should we think about that? Thank you.

First of all, as Karen said at the beginning of the call, we are including only in the guide what is official. And at this point, only the first 10% tariff increase is built into the plan. Depending on what happens, I mean, we need to see what happens now for China or other parts of the world, but we are not including that in the guide. In terms of how will we manage the situation, you know that our goal continues to be profitable growth. And we look at tariff as another area of cost. And if we have that advantage, we may use it for price. We may use it to create better profit to be able to invest in other areas. We will see how, depending how the situation goes, we will go one direction or another. Our goal for the rest of the year is to do better than the market, as Karen has explained in the guide. So our expectation is that we will be gaining share, especially in the commercial space, especially in premium.

And I would also say, Wamsi, that with the future tariffs, we plan to use the same playbook that we have already used for the first 10% in China. So should there be more in China, we have got the playbook. Should there be more somewhere else, we are going to run that same playbook.

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

Hi. It's actually Dylan Liu for Erik. So my question is, can you help us better understand when you expect the current commodity cycle to deflect to a tailwind to margins? And would you try to hold pricing at that time? Or would you be willing to pass those savings back to a customer at that time? And I have a follow-up after this?

Yes. For the full year, we expect commodity will continue to be a headwind for margin for the full year. But we expect to see improvements quarter over quarter starting in Q2. That's the best view that we have at this point. And again, how will we use that will depend on the competitive environment. Again, our goal is to drive profitable growth. And we will be looking at pricing and other tools depending on what the situation will be.

Got it. Thank you. And just to follow up, I want to make sure we understand your personal system comments. So last quarter, you talked about the single-digit unit growth with ASP growth layered on top of that. And is it correct to think that you're now expecting a better than mid-single-digit unit of growth? Or how material is the outperformance? You're now betting in the full-year guidance?

Yes. I would say right now we're saying for PS that we expect to continue to gain share, particularly in commercial, and grow faster than the market.

And our expectations for the total market have not radically changed as to what we were saying a quarter ago. So no changes there.

Our next question will come from the line of Michael Ng with Goldman Sachs. Please go ahead.

Hey, good afternoon. Thanks for the question. Just as a follow-up to the prior one around personal systems growth and the PC market, can you just talk about what element got better? It sounded like personal systems performance in the quarter was in line. Is the April outlook better than you had originally anticipated? Is it the back half? Any color there would be helpful.

I think it's not only the market that we expect to perform as we were saying a quarter ago. It's really the momentum that we see, and this is being translated in the results. If you look at the growth that we had this quarter on commercial of 10%, this is clearly an improvement from where we were a quarter ago. And when we look at the momentum, the progress that we've seen in the market, this gives us confidence in the projections that we have shared for the rest of the year.

Great. Thank you. And I wanted to follow up on the Humane acquisition and the investments in the intelligent ecosystem across HP devices. Is this a reference and an investment in workforce solutions and DEX? If you could just expand on your vision, there and the momentum that you think you can get in that piece of the business. Thank you.

I think really the impact of Humane will be beyond workforce solutions and that part of the company. When we think that this is a smart acquisition for us, we have got into the company a very talented team with a lot of experience in AI development and a great software portfolio, a great subset of software assets that we can integrate to really drive the future of work strategy. What you will see us doing is use those software assets to accelerate the deployment of AI at the edge and accelerate our plans there, and also to accelerate what we call the better together experience of having our products connecting among themselves and offering a much better and radically simpler experience to our customers. For example, one of the first areas we are going to be deploying that is in having our PCs and video conferencing rooms connecting in a seamless way, which we know is a big pain point for customers. I'm sure that all of you experience that when you have to go to a conference room. That will be the first area where we will use some of the technologies from Humane and we expect to do that in the coming quarter.

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

Good afternoon. This is Mike Cadiz for Asiya Merchant at Citi. So, can I ask, how do you think about the PC industry growth rate for this year? Some external parties are saying maybe 4% to 5%. We at Citi are saying about 4%. And then if you layer on top of that your price increases, can one relatively safely assume that PCs can see high single digits this year?

So, the answer is yes. As I said before, our projections for the market continue to be the mid-single-digit growth for units. We haven't changed that, which is aligned with what most of the industry analysts are saying. And we expect pricing to have a positive impact on top of that. And we expect to be growing faster than the market.

Thanks. And then as my follow-up, could you add more color and characterize PC demand across the different segments like consumer, SMB, and large enterprise, please? And that's it for me. Thank you.

Sure. Let me provide some color. Last quarter, we saw growth both in terms of units, both growth in both the consumer and the commercial space. In the consumer space, it was more driven by low-end products, in the commercial space, it was more balanced. If I go through segments, we saw growth in the government space. We saw significant growth in the enterprise and SMB spaces. And we only saw decline in the education category. So, overall, fairly solid growth for PCs. And again, especially in the commercial, in the more premium categories.

Our next question comes from the line of Christian Carr with TD Cowen. Please go ahead.

Hi, this is Stephen calling on behalf of Chris. My first question is regarding your print business. I guess, Enrique, like just given the ongoing strength of the U.S. dollar, I know this is sort of out of your control, but given the pricing power that some of your Japanese competitors have, do you feel like there could be a longer-term structural disadvantage that you guys have? And are you seeing any of that pricing disadvantage spill over into commercial contract pricing?

Well, we continue to see a very competitive environment on the print side, but not more competitive than what we have seen during the last few quarters. And we are not expecting it to change in the coming quarters, and this is what we're using as a planning assumption. Despite of that, and even enabled by the work that we did in cost, we grew share in the print space this quarter, especially in the home side. And our plan continues to be to drive profitable growth and really focus on the more profitable customer side as we have been during the last year.

Thank you for that. And for my second question, I had one for Karen regarding inventories. I just wanted to clarify for the second quarter, just given your comment earlier on negative free cash flow, I was wondering if that was implying further growth in inventories, and if so, is that more on the component side or finish gate side? Thank you.

Yes, thanks for the question. It was not necessarily implying further growth in inventory, though we might take advantage of strategic buys like we do in any given quarter. It was really taking into account the fact that we took on extra inventory that we will pay in accounts receivable this quarter, which will impact our cash conversion cycle.

And this was one of the actions that we took to mitigate the impact of tariffs. We increased the amount of finished goods inventories in the U.S., so we could respond to tariffs, so we could protect some shipments from a tariff increase.

And again, we said that that's not going to impact our full year free cash flow. It's a timing impact only.

Our next question will come from the line of Aaron Rakers with Wells Fargo. Please go ahead.

Hi, this is Jake on for Aaron. Thanks for the question. Maybe to start out, I was wondering if you could just give some additional color around the competitive environment for print within China, maybe specifically around supplies and how that has potentially changed over the last few quarters?

Sure, I'll take the question. We haven't seen from a supplies competitive perspective a radical change from what we have been in China or actually anywhere else in the world. The supply business is performing well. We have been able to both to continue to grow share overall, which is one of our key plans, key strategies, as you know, and we are very pleased with the progress we are making overall.

Great, thanks. And maybe just as a follow-up, you mentioned some strength in consumer subscriptions. I was just wondering if you could get some extra color there.

Sure, thank you. So, yes, in terms of our key growth areas, this is one of the areas where we continue to see more solid growth. We had double-digit revenue growth this quarter. We continue to grow the number of subscribers, and we highlighted in the call that we are launching additional services, for example, paper. They also are having good traction, and we surpassed 1 million subscribers for our paper program. And as I have said before, this is a service to deliver paper at the home of our customers, and I would call it premium paper because this is really driven by convenience, not driven by price. We have also expanded the rest of the offering that we have, and in the all-in program where customers get the printer and also consumables, we have added the big tank products, which is also a strong differentiator for this category of products in the market. So we are really pleased with the progress we are making in this space. Thank you.

Our final question will come from the line of Alek Valero with Loop Capital. Please go ahead.

Hey, guys. Thank you for taking the question. This is Alek on Fernanda. My first question is, what kind of back-to-office assumptions have you put into your assumptions for print?

Back-to-office, I think you said. We are not assuming any radical change in terms of those assumptions and that the situation will remain fairly stable in the coming quarter.

Thank you for that. As a quick follow-up, do you guys have any thoughts on the competitive landscape and AI PCs given that there's new players coming to market such as NVIDIA? Do you potentially view this as a positive for greater AI PC market adoption?

Well, we are working with NVIDIA to integrate their technology into AI PCs. NVIDIA has been, and we expect to continue to be, a key partner for us. And you will see us introducing very exciting products with their technology in the coming quarter.

That will conclude our question-and-answer session, and I'll now turn the call back over to Enrique Lores for closing remarks.

Perfect. Thank you. Thank you, everybody, for joining the call today. We know it's a little bit later than other times, so really thank you for staying with us. And I just want to finish by reemphasizing some of the comments we have made today. First, we are pleased with the results that we achieved in Q1, not only from a financial perspective, but also from a competitive and from an innovation perspective. It will show the way we’re going to be going forward. Second, we are pleased with the momentum that we have in the market, and this is why we maintain the guide that we provided last quarter, despite, for example, the incremental tariff that we have seen in China. And third, when we look at the future, we are really excited about the opportunity we see in the future of work, and this is really what is driving the innovation and the plans that we have for new products and new services. Thank you again, and looking forward to talking to you again next quarter. Thank you.

That concludes our call today. Thank you all for joining. You may now disconnect.