Great! Well, welcome to the HP Inc Fireside Chat at the Goldman Sachs Communacopia and Technology Conference. I have the privilege of introducing Enrique Lores, CEO of HP. Enrique has been in HP for nearly 35 years, and prior to taking over as CEO in 2019, he served as president of the printing business, helped to architect the separation of the Hewlett-Packard Company in 2015, and held multiple executive roles across the organization. My name is Michael Ng, and I cover hardware here at Goldman Sachs, and we have about 35 minutes for today's presentation, inclusive of investor Q&A. Before we get started, I just wanna read off some disclaimers. Today's discussion includes forward-looking statements that involve risks, uncertainties, and assumptions, which are further described in HP's SEC filings, including HP Form 10-K and 10-Q.
HP assumes no obligation and does not intend to update any such forward-looking statements. For more information, please visit HP's Investor Relations webpage at investors.hp.com. Thank you so much, Enrique, for making yourself available today.
Good morning, and thank you for having us here.
Yeah, of course. So HP is a market leader in PCs and print, with a very broad portfolio of solutions for consumer and commercial buyers. Could you just give us an overview of your vision for the company, its key priorities, as well as recent initiatives that it's investing in?
Sure. And again, thank you, thank you for the time. I think, as you said, we are the leaders today in two large categories: printing and PC. And where we see the future is really about how do we integrate all the portfolio of products that we have to deliver consistent experiences to customers to enable hybrid work? We think that in the future, the way of working is going to be hybrid, and hybrid means spending some time at work, some time in the office, and being able to work seamlessly between both environments. And our aim is to, by integrating AI into our portfolio, be able to enable those experiences in a way that will significantly improve productivity for employees. That's the goal that we have as a company.
Great. And last month, we just went through HP's fiscal third quarter twenty-four earnings. Since it's so, you know, fresh on investors' minds, I was just wondering if you could give us a little bit of a postmortem on earnings?
Mm-hmm.
What are you seeing in the demand and pricing environment? You know, when should we think about PCs and print returning to more levels of normal seasonality?
Sure.
Yeah.
It's a very long question, so I'll try to cover all the elements. First of all, I think the most important thing of earnings last week was that the company returned to growth, and we have been not growing for a few quarters now, and the fact that we were able to grow is probably the most important thing. Growth was driven by PCs, mostly by commercial PCs, which is what we're expecting. And this really shows the fact that the PC market has stabilized, and we are starting to grow again, which is the expectation that we explained at the beginning of the year. We expect the PC market to slightly grow in 2024, and to grow more in 2025.
On the other side, we continue to see decline on the print side. The decline continues to be smaller, so we declined less now than we did a few quarters ago, but it's true that the PC print market didn't grow as much as we were expecting. We were expecting it to be flat through the year, and now we are expecting it to slightly decline, but the combination of both will still drove growth. From a regional perspective, we saw fairly consistent performance in Europe, in the US, and in many parts of Asia. Probably where we saw the biggest deviation to the numbers was China, where we continue to see significant decline, and on the other side, we saw significant growth in India, which we see as a future source of future growth in the future.
Yeah, and to be fair, the more sober outlook on print wasn't just HP, but I think a lot of industry market analysts like thought something similar, where print has been-
Yeah
... a little bit disappointing.
I think the overall market was expecting the print market to be flat through the year, and I think collectively we have seen this is not going to happen. We expect now it to grow next year, but in 2024, it will not grow.
Right. Let's talk a little bit more about the industry PC market. You know, to your point, we're beginning to see signs of stabilization. You know, flat to slight growth this year, which is actually a very sharp improvement relative to what we've seen-
Mm-hmm
... in the last couple of years. But could you expand a little bit more on your outlook for industry PC volumes?
Sure
... over the next couple of years? What does, you know, refresh demand look like, and AI PCs, and things like that?
Yep. So we think, as I was mentioning before, that growth is gonna continue in 2025 and beyond. In fact, we expect the market to grow in 2025 more than it will grow in 2024, and this is really driven by multiple things. First of all, there is a large and aging installed base on PCs. Many of these PCs were bought during COVID, and now we are four or five years after they were bought, and they will have to be replaced. Second, we also see an opportunity driven by the Windows 11 refresh that is only starting now, and this is what is behind some of the strength that we see on the commercial side. Microsoft has announced the date that they will start discontinuing the support from the previous versions, and this always drives the replacement and upgrade.
And third, some this year, more in 2025, more in 2026, we think that the introduction of AI PCs, especially as software vendors will start taking advantage of the new functionality and new capabilities, this is going to be also an accelerator of demand on the PC side. So these are the different factors. In the short term, what we see is clearly demand in the commercial side picking up. We started to see that in Q1, in Q2, we saw this in Q3, and we expect it to continue in Q4. While consumer is, especially when we think about normal seasonality, slightly below normal seasonality, we continue to see softer demand on the consumer side than what we see in commercial.
Great. And I want to hit all of those summary points in turn. Maybe just starting to talk about the install base, right? You know, when I look at the install base from twenty fourteen to twenty nineteen, I think the PC install base had declined a little bit each year. You know, there was obviously big growth during the pandemic. What's the right way to think about the shape of the install base curve in the future? You know, are a lot of the new systems that were put into place during the pandemic, will those stay in place, or will the install base actually decline over the next couple of years?
I think if we think about the combination of factors I mentioned before, Windows 11, just the aging of the products, the introduction of new capabilities with AI PCs, they are gonna be driving a refresh of the installed base, starting in commercial, but also having an impact in consumer. And this is why we think this is going to be a source of growth for the next years, and why we think the market is gonna continue to expand. If we think about the total size of the PC space, we still see many countries where there is a lot of growth, where penetration is very low. So this is another factor that is gonna be driving growth in the coming years.
If we think about total numbers in the globe, we think there are at least around two billion people that don't have access to computers today, that we think will have in the next three to five years, and that's another source of growth of the category.
Great. And one area of strength that you called out was commercial, right? Two consecutive quarters of growth in commercial after several quarters of declines. What are you hearing from your commercial customers in the conversations that you're having? What does that tell you about the health of overall enterprise IT spending, and, you know, is this commercial momentum sustainable?
We think the momentum is sustainable. We think we are only at the starting phases of the refresh, both because of aging and also because of Windows 11. Both of them are just starting. When I look at variables that we use to project the future and what is gonna be the performance in the coming quarters, for example, the size of the opportunities and the size of the funnel that we have, funnel now is significantly bigger than it was a year ago, and tells us that really the opportunity is still ahead of us, and that we are gonna see growth, solid growth in the commercial side in the coming quarters.
Yeah. And based on conversations that I've had with investors, it feels like the Windows 10 end of life is a hard line, right? And it feels like there's this coiled spring of replacement demand that'll happen irrespective of when it starts.
As part of the funnel of opportunities that we see, we track which ones are driven by Windows 11, and probably a couple of quarters ago, we started this to start growing, and we expect this to continue to grow. This clearly confirms that the opportunity is there. If we look at previous cycles, clearly the opportunity always accelerates when Microsoft announces dates and the pricing of the new support, which has happened during last quarter, and therefore, this is gonna be driving demand in the coming quarters.
That's great to see. Let's talk about the other side of PC demand, which is on the consumer side, which has been a little bit more mixed. We haven't seen a sharp inflection yet. I think there have been 12 consecutive quarters of decline. You'd think we'd be approaching the bottom, but why do you think consumer PC demand has been a little bit slower to recover and, you know, when should we expect that growth to return more meaningfully? Is it gonna be AI PCs that's gonna be that new product innovation that, that drives that demand?
Yeah. First of all, let me kind of share the split. Our business is close to 75% commercial, 25% consumer. So for us, the commercial PC business is way more relevant, not only in units, but especially in pricing, where we see higher prices, higher ASPs, and therefore, also better margins on the commercial side.
Right.
But in going to consumer, I think it's a combination of multiple things. One is overall consumer spend in hardware categories has been soft, and PCs are just one more element of where consumers are spending money, and we think this is probably the major driver of it. It's not an area where consumers have been spending their money, and this has had an impact on demand overall. At some point, though, we think refresh will have to happen for similar reasons, both aging, but also we think that AI is going to have an impact also on the consumer side. As more and more applications will start taking advantage of that, whether it is in gaming or in other areas, this will drive demand, and we think it will also have an impact on in consumer.
Great. Maybe we can shift gears and talk a little bit about AI PCs.
Mm-hmm.
I think the expectation is that AI PC shipments as a percentage of total shipment should actually be pretty modest this year, but should grow to 40%-60% of shipments industry-wide over the next few years. Could you talk a little bit about how you expect AI PCs to drive unit growth? What will be the impact on ASPs? Are there gonna be any specific software or features that AI PCs will enable that will help drive that adoption?
Yes. So let me start with the projections, and then I will talk about the value proposition. So our projection is that three years from now, AI PCs will be around 50% of shipments in the market, and that they will drive between a 5% and 10% ASP increase of the total PC category. So very relevant in terms of both sides, and impact they will have from an average price perspective. AI PCs bring three clear benefits over traditional PCs. First of all is latency. Today, when you access one of the AI applications in the cloud, there is a delay between you asking your question and then you getting the response. This is very different when you run the model locally, and this is a strong benefit for customers. Second is cost.
Running these applications in the cloud, and this is especially relevant for business customers, is expensive. If you run them locally, you don't have the cost of running all the compute calculations in the cloud, and this has another significant advantage, and third, and especially for small and medium companies, the fact that you don't need to bring up your data, you don't need to upload your data, you can run the model with your data locally, is another significant advantage from a security perspective, so speed, security, and cost are the three advantages that AI PCs will bring, and what we need to do now is, the hardware is starting to be available. We need applications to start taking advantage of that, and this is what we are driving.
We are working both with the key software developers, but also with many small companies, to make sure they understand the opportunity and they use and take advantage of it, because this is what is required to really take advantage of it. Applications that are already available, for example, are real-time translation. You can dialogue with your PC using whatever language you want to use, and the other in the other side, have someone using a different language, and the PCs locally will be running real-time translation. That's an application that we have today. Microsoft has many applications that are also starting to take advantage of that, and in the coming months, we are gonna see more and more applications really bringing to life the possibilities that AI PCs offer.
Yeah, we've only scratched the surface at this point.
Only.
One other factor that-
Sorry, and we
Yeah, please
... have said that for a while. Sometimes hype doesn't help. We have said for many, many quarters, the impact in 2024 is gonna be small. There will be more in 2025, more in 2026, and the adoption is following our cycle. Sometimes hype helps, sometimes it doesn't. In this case, it's not helping.
Yeah. And if I could just follow up on that, what are the gating factors to drive more AI PC adoption? Are we looking for more powerful chips on the processor side? Is it more on the application layer that you think is the gating factor?
Until now, has been availability of product. Because there are AI PCs and what we call next-generation AI PCs. Next-generation AI PCs are only starting to be available. We made the first announcements in June with Qualcomm, and in July with AMD, and shipments are only starting. You need at least forty TOPS. TOPS is trillions of operations per second in the PC to really show the benefit to customers, and these units are only starting to be available. ISVs or software vendors are only starting to develop the applications for those. These are kind of the two limiting factors until now.
Great. That's very clear. The other factor that you mentioned at the onset around things that are impacting PC demand is China, and there has been some noticeable weakness there, particularly last quarter. Could you just talk about what you're seeing in the region? Is it really just a function of weaker macro, or is there something more to talk about there?
I think the biggest thing is weaker macro. I'm sure you do much more analysis than we do in terms of what is the situation in the country, but when you look at the situation on real estate, the situation on unemployment, unemployment of young people, clearly the country is going through a significant, a difficult period of time, and this is impacting demand overall, especially on the print side. In the PC side, we have seen decline above 10% market-wise in both consumer and commercial, and this is really mostly driven by macro.
Okay, and if you think globally, are there any differing trends as you look by industry vertical?
There are some spaces where we have seen faster growth. For example, in the overall federal and government space, across the world is where we have seen the fastest growth last quarter. They were growing more than 6%, so it's very significant growth. The next sector was enterprise, so large corporations that are really driving the refresh. We also saw significant growth, about 5%. Then SMBs, small companies, grew less, but also grew between 2% and 3%, so there has been growth across all segments. Then in terms of verticals, we saw significant growth in the defense space, driven by all the investments that companies and countries are doing in this category, and it's probably one of the verticals where we saw the highest growth.
Okay, great. And rounding out some of the discussions around personal systems, maybe we can talk a little bit about Poly.
Mm-hmm.
You know, Poly has a robust video conferencing solutions offering. How should investors think about the growth opportunity for Poly? Does it simply correlate with what we're seeing in commercial PCs, or is it a more nuanced discussion on that, and where do you see the opportunity?
I think it's, it's similar in terms of where CIOs decide to do their investments. In the case of Poly, one of the most important businesses is video conferencing systems for video conferencing rooms. And we have said before, we think between 10% and 15% of the meeting rooms in the world have today, a video conferencing system. Because of hybrid work, we think this number is going to grow significantly, and this is really what is gonna be driving one of the key growth opportunities for Poly. We have seen growth this quarter, and we expect to continue to see growth in Q4 and in the coming quarters. And, and we really see this as, as a great growth opportunity for the company.
It's also relevant, not only from a financial perspective, but also from the opportunity we have to improve the experience to our customers. If any of us have participated multiple times in a video conference, we know how painful the experience is, especially some people are in the room, some people are connected. From an innovation and experience perspective, there is a lot of room for improvement, and this is why it also makes us think that it will help us to differentiate our solutions going forward.
Great. And could you talk about opportunities that you have to attach more accessories and peripherals to your PCs or your Poly sales? And you know, how does that impact the financial profile of the segment, right?
Yeah.
Because I think peripherals are higher margin, so, how much room do you have there?
I think the overall attach opportunity continues to be a very good opportunity for us. During the last two years, we have made very good progress in some of the areas, for example, attaching services, and this has been one of the drivers of better margins, and going forward, with growth in the commercial side, the opportunity to attach things like headsets or speakers or cameras is a significant opportunity, and this is why we decided to invest in this space, both in the commercial side and in the gaming side, because consumers spend significant amounts of money in peripherals, and this was an area where we were underrepresented, and now we have a strong portfolio in both cases that will help us to drive growth.
For example, something I have shared before is, in the gaming side, gamers spend three times more money in peripherals than they do in their PCs, and with HyperX, we have now a very strong portfolio of gaming peripherals, which are margin accretive for us and where we see growth opportunity by improving attach, so it's a solid opportunity going forward.
Excellent. Let's shift gears to print, a segment that has been very durable, I think, with the margin profile that has surprised people for, you know, several years now. How would you characterize where the print market sits today? What does end user demand look like? If there are any comments you can make about commercial versus consumer, that'd be great.
Sure. I think when we talk about print, it's important to differentiate the different segments that we have in print, because in print we have three different opportunities. There is an opportunity in the consumer side, which is a market that has been declining for some time, and a market where we have been driving a change of business model to compensate for the decline, and we have made very good progress reducing our dependency on supplies by shifting our model to subscriptions, to services, and by units that we call Profit Upfront, where we sell printers and supplies together, and in both cases, we have made good progress. For example, in our subscription program, we have now around 13 million subscribers that pay us every month for the option to get supplies delivered at their homes.
This means these customers are more profitable or more accretive to us than traditional customers. So it's a big and important change in order to protect profitability in a category that is declining. Second category in print is office. The office category went down through COVID, as people were not in the office, and we are expecting that category to be flattish in the coming years, declining in developed markets, growing in growing markets. This is a category where we have seen in 2024, the biggest deviation versus plan. We were expecting it to grow in 2024. It is not gonna be growing, and this is what is driving the different performance in print than we were expecting. Then the last category in print is industrial, which is a market that is growing. We are growing in the market.
We are the leaders in that space, and we see continued opportunity to grow in the coming years, so very different dynamics in the three sectors.
Great. Maybe if we can narrow in on the comments around office. Which element kind of surprised the downside this year that led to the slower than expected growth? And do you see some of the fluctuation in the yen becoming more favorable to competitive intensity on the go forward, or is it too early at this point?
I think what we have seen in the office side are, from one side, we have seen less sales of hardware, because I think companies have dedicated the right investments to other areas, including PCs, where we have not seen a change, which is a positive trend, is in terms of number of pages printed. We actually have seen usage behaving as we were expecting, which gives us confidence in the future, because it's not that suddenly people have stopped printing. The number of pages printed continue to be aligned to our expectations. What we have seen is a reduction of new printers being bought, which we think is temporary, because at some point also, customers need to drive the upgrade. So that's a big change. And then the second, from a competitive perspective, is what you said.
Yen has been probably at the weakest position versus dollar it has been in, in a very, very long time, and this has allowed some of our Japanese competitors, which are the, probably the largest number of competitors in the market, to be more aggressive, and this has been driving prices down from a hardware perspective also in the category.
And then on some of the subscription initiatives, you know, incredibly successful. Instant Ink has done really well, 13 million subscribers, to your point. But you've also been doing other things in terms of, Instant Paper, you know, Big Tank, which was one of the-
Mm-hmm
... profit up front initiatives. I guess, where are we in terms of the adoption of some of these new products? How much more room is there to grow beyond the thirteen million subscribers? And then obviously, the profit up front is slightly different.
Yeah, we continue to see opportunities to grow our subscription businesses, driven by two things. One is 13 million is a good number, but we think we can continue to grow, both by expanding into more geographies, but also by increasing penetration in some of the countries where we already have the program. But also, we see an opportunity to grow by offering additional subscriptions. And you mentioned paper. We launched the paper subscription about a year ago. It has been growing fairly fast. And we sell paper not based on price, but based on convenience. And what we have learned is that these subscription programs offer significant convenience to our customers, and they are willing to pay a premium to have ink or to have paper delivered at home, and not having to go and buy them.
Only a few months ago, we launched the All-In program, where we include the printer in the program, and it's starting to show us that the opportunity to add services and other subscriptions continues to be there.
Great. And, you know, one area of consistent outperformance, at least relative to my expectations in print over the last couple of quarters, has been in industrial graphics. And it's not something that, you know, I had always thought of when I think about HP's printing business, but clearly there's an opportunity there, and it's growing really well. I think there have been four consecutive quarters-
Mm-hmm
... of industrial graphics revenue growth. Maybe you can just level set and talk a little bit about that business. You know, how is it able to deliver such strong growth against the backdrop of what feels like an overall more sluggish, like, print market?
Sure, and before I go there, one more comment on subscriptions.
Yeah.
Another reason why subscriptions are important is customer satisfaction is much higher than in traditional models, so we measure that very carefully, and we see that it has significantly high Net Promoter Score than any of our other businesses, which also shows the opportunity to continue to grow. Now, shifting to industrial, we are very pleased with the performance of that business, and the growth is driven by two things. One is technology innovation, and we continue to accelerate, to drive technologies that make printing faster and cheaper, and to print in a larger number of substrates, and this is really one of the key drivers of growth, and when we talk about industrial, we are talking about printers that are as large as this room, so printers that are five, seven, eight meters long and two meters wide and tall, three or four meters.
What we build are printing factories for our customers. It's not small printers that you have at home. It's real industrial equipment. One growth vector has been technology. The other growth vector is the benefit they bring to the end users. When you print using one of the traditional technologies, the time it takes from, for example, a new package, between the time it is designed until it is available to manufacturers, is between three, six, and even nine months. When you do it digitally, the time gets significantly reduced. In a world like where we are today, that everybody wants to move faster, wants to launch new programs, new campaigns, new products faster, doing this digitally with, in this case, with digital printers, brings a very significant advantage.
This is really what is behind the growth that we continue to see in industrial digital printing. In terms of applications, over the last years, we have expanded our offering from marketing brochures to labels, flexible packaging, corrugated packaging. Almost anything that you can think in terms of industrial documents or industrial packaging, we can now produce, and this has been another big driver of growth.
Great. Why don't I ask one more question before I see if there are any audience questions. But, as mentioned at the onset, print margins have been very strong. Cost savings have been an important initiative to drive that. Could you elaborate a little bit more on how you're managing costs? You know, the Future Ready program, I think, has been very successful, so, maybe you can just discuss that.
Yeah. You have heard me saying many times, in a company like us, there are always opportunities to drive cost. And once you do certain things, you realize that you could do more, and this has been the dynamic that we have built in the company, that really helps us to be more productive and more competitive every day. And as you said, the Future Ready program has been very effective in terms of we started identifying a set of areas where we thought we had an opportunity to reduce our cost, and we have been driving those very hard. And these are basically three. One is portfolio simplification and opportunities we had to simplify our portfolio. Second is adoption of digital technologies to become more efficient from a process perspective, and the rest are just efficiencies across the full company.
Every quarter we execute on those, we identify new opportunities and we drive them stronger. This is why this quarter we decided to raise the goal that we had for this year. This year, our original goal was to accomplish 70% of the goal that we have of the three-year program, and we will be close to 80% by the end of 2024.
Great. Why don't I see if there are any questions from the audience? We got one up here, if we could please get a mic runner. Oh, why don't you? You can try again.
There we go. Hi, thanks. I'll take a question. There's a lot of discrepancy and back and forth in the marketplace about the PC cycle. I think that's probably an understatement. It's interesting because when you talk to executives or listen to executives, I don't think you're wildly bullish, but you're, you seem to be, as a group, more positive than the investment side of the equation narrative. Certainly in the commercial side, and you, you sort of were a little bit more cautious on the consumer side, but you seem to be, you know, it seems like there's some probability that it's better than we think. Why do you think that disconnect sort of exists, in your opinion? Thank you.
I mean, it's hard to answer what the other side will think. I think between both vendors and analysts, the position is fairly similar. There are small differences, but I think we have a similar view. I think where we need to do a better job convincing the market, especially around the value proposition that the AI PCs are going to bring, and to convince that really there will be an engine of refresh in the category. If I had to summarize one, that will be the major discrepancy, because in terms of aging and in terms of Windows 11 refresh, I think the visions are fairly aligned.
Why don't we close out, and I'll ask you a closing question. You know, what are the key priorities and strategies for HP over the next 12-24 months? How are you thinking about operational execution, but also capital allocation, if you can?
Sure. I think the priorities are totally consistent with previous conversations. Our aspiration is to continue to drive the company to grow. We want to grow faster than the two markets where we are, and improve profitability faster by continuing to drive efficiencies across the full company, and that's the financial model that we have put in place. And then in terms of capital allocation, we will remain consistent with the approach that we have followed over the last few years. Our goal is to return to shareholders 100% of free cash flow, while our levered ratio will be below two, and unless opportunities with better ROI show up, which is what we have been doing now for the last three or four years, and we know it's an important component of the value proposition that we have to our investors.
I think when we look at the future, given the opportunities that hybrid work is going to bring, that the AI is going to bring, we remain very confident in our ability to execute and to drive this going forward.
Great.
Thank you.
Enrique, it's been such a privilege to be able to spend some time with you today. Thank you so much.
Thank you, Michael.
Thank you.
Thank you.
Appreciate it.