HP Q1 2022 Earnings Call Transcript

Quartr
Provided by Quartr
February 28, 2022

There are 12 speakers on the call.

Operator

Good day, everyone, and welcome to the First Quarter 2022 HP Incorporated 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. We will be facilitating a question and answer session towards the end of the conference. As a reminder, this conference is being recorded for replay purposes.

Operator

I would now like to turn the call over to Orit Kinan Nahon, Head of Investor Relations. Please go ahead.

Speaker 1

Good afternoon, everyone, and welcome to HP's Q1 2022 earnings conference call. With me today are Enrique Loris, HP's President and Chief Executive Officer and Marie Meyers, 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 1 year. We posted the earnings release and accompanying slide presentation on our Investor Relations webpage at investor. Hp.com.

Speaker 1

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 ACC reports, including our most recent Form 10 ks. 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.

Speaker 1

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.

Speaker 2

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 And to see peace and stability restored to the region.

Speaker 2

We have an experienced cross functional team in place Focus 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.

Speaker 2

When we were live 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 Q1 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 has fundamentally changed, and we see this trend continuing across our segments Long part of 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.

Speaker 2

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 experiences with improved video, audio and battery performance. Underlying all this It's a growing desire from both consumers and commercial customers to buy from companies with well developed ELC goals. Each of these trends play to our strengths, and they drove our Q1 results. We grew revenue, operating profit, EPS and free cash flow, continuing our track record Of meeting or exceeding our commitments. Let me walk through the details.

Speaker 2

For the quarter, Revenue grew 9% to $17,000,000,000 This is our highest ever quarterly revenue since separation, driven by demand for our products and services. Non GAAP EPS grew more than twice as fast as revenue, up 20% to $1.10 And we generated $1,400,000,000 of free cash flow while returning 127 percent of free cash flow to shareholders through share repurchases and dividends. Our results were particularly strong in the This includes more than 20% growth in gaming, more than 40% growth in peripheral And 20% growth for our industrial graphics and 3 d portfolio. We are bullish in our opportunities in this And we expect them to become a larger part of our overall revenue and profit mix moving forward. We delivered while continuing to navigate a complex environment of industry wide component shortages and logistical constraints.

Speaker 2

Despite steady progress against our plans to strengthen our operational processes, it will take time Before the gap between supply and demand fully dissipates, we are securing more parts for products, Sourcing from alternate part suppliers and allocating available parts to optimize our product mix. This is an area of relentless focus for our team. Let me now talk about the progress we see across each of our business units. In Personal Systems, it was a record quarter with our highest revenue and operating profit since separation. Revenue grew 15% to more than $12,000,000,000 We delivered OP rate above the high end of our target range.

Speaker 2

And our disciplined execution And pricing strategy enabled us to manage cost and component headwinds. A big contributor to our success It's the improved mix we are driving. Our leadership in the commercial PC market is a significant competitive advantage As more and more offices reopened. This is where we saw the most demand and highest profitability. Within commercial, we saw strong growth in Windows based notebooks and mobile workstations, where our share expanded this quarter.

Speaker 2

In Consumer, we continue to experience demand shift into high value categories like premium and gaming. We also reduced our backlog quarter over quarter, and our supply chain actions are generating positive results. And as we prioritize operational execution, we continue to innovate at the heart of hybrid. Last month, we had our biggest consumer electronics show ever, launching nearly 50 new innovations that are changing the way people collaborate, create and play. This included a major expansion Our portfolio of HP Presence enabled devices as we strengthen our position in the large and growing Video conferencing market.

Speaker 2

We also launched our latest gaming solutions and peripherals, including a new HyperX wireless headset that can last 300 hours on a single charge. Turning to print, we continue to face industry wide supply chain challenges. As a result of component shortages On logistics disruptions, revenue declined 4% in the quarter and our elevated order backlog increased sequentially. We now expect these dynamics to impact PRINT throughout March of fiscal year 'twenty 2. We are driving a very disciplined pricing and allocation strategy across Sprint.

Speaker 2

And our operating profit rate of 18.2 percent was above the high end of our target range. We are also making good progress Our long term priorities, we continue to modernize core print and drive HP Plus global adoption. HP Plus is a big selling point of our new ENVY Inspire lineup, which we successfully launched in the U. S. Last year and rollout across Europe in Q1.

Speaker 2

And we are seeing strong demand for our commercial portfolio as companies Plans for office reopening. We are earning accolades for industry leadership in areas such as hybrid work, Security and Print Sustainability. It was an outstanding quarter for our industrial printing businesses. In Industrial Graphics, we generated another quarter of double digit revenue growth and have built A healthy backlog of industrial presence. This illustrates the positive recovery trend from prior quarters.

Speaker 2

And we delivered significant year over year revenue growth in 3 d printing. More than 120,000,000 Multi Jet Fusion parts have been printed, And we are accelerating our strategy to create high value end to end applications in vertical markets. Along these lines, we completed the acquisition of Chu's Packaging. Chu's has invented The world's only commercially available 0 plastic paper bottles. And they are working with many global brands to commercialize their offerings, including large enterprises like Henkel.

Speaker 2

This acquisition complements our molded fiber solution and positions HP well in the $10,000,000,000 fiber based Sustainable Packaging Industry. There are more than 150,000,000 tons of single use plastics produced each year, and we intend to disrupt this market with fiber based 100% plastic free packaging. In fact, our focus on sustainability It's driving innovation across our entire portfolio. In Personal Systems, we now have more than 300 products we have ever developed. This supports our broader ERG and sustainable impact strategy.

Speaker 2

The actions we are taking on climate, human rights and digital equity are differentiating our brands and helping to drive our business forward. In fact, our sustainable impact agenda Help us to win more than $3,500,000,000 in new sales in fiscal 2021. This is a threefold increase over the previous year, reflecting the power of our commitments. Our partners are also doubling down on sustainability. More than 10,000 channel partners Across over 40 countries, we're now able to participate in HP Amplify Impact, a first of its kind partner program aligned with our sustainable impact strategy.

Speaker 2

It is a great example of how we are leveraging our global scale to help address some of society's biggest challenges while also positioning our business for success. The progress we are making across our strategic priorities is driving strong cash flow, And we continue to be disciplined stewards of capital. We have a robust return based approach that we are applying to every aspect of our capital allocation strategy. We expect To continue to make organic and inorganic investments in areas where we see growth opportunities, While continuing to return capital to our shareholders and we are committed to aggressive repurchase levels of at least $4,000,000,000 in fiscal year 2022. It was an excellent start to the year.

Speaker 2

We are delivering on our commitment and creating significant value for our shareholders. We are returning highly attractive levels of capital to shareholders, and we remain confident in our ability to deliver sustained revenue, Operating profit, EPS and free cash flow growth as we build a stronger HP. Let me now turn the call over to Marie, who will take you through the details of the quarter and our fiscal Q2 outlook. Marie, over to you.

Speaker 3

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.

Speaker 3

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 $17,000,000,000 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.

Speaker 3

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 $1,900,000,000 11.1 percent of revenue.

Speaker 3

The increase in operating expenses was primarily driven by increased investments in go to market, partially offset by lower Personal Systems R and D due to partner funding. Non GAAP Operating profit was $1,500,000,000 up 1.5 percent and non GAAP net OI and E expense was $66,000,000 for the quarter. Non GAAP diluted net earnings per share increased $0.18 or 20 percent to $1.10 with a diluted share count of approximately 1,100,000,000 shares. Non GAAP diluted net earnings per share excludes a net expense totaling $117,000,000 primarily related to restructuring and other charges, Amortization of intangibles, acquisition related charges and other tax adjustments, partially offset by non operating retirement related credits. As a result, Q1 GAAP diluted net earnings per share was $0.99 Now let's turn to segment performance.

Speaker 3

In Q1, Personal Systems revenue was $12,200,000,000 Up 15% year on year. Total units were down 6% given the expected supply chain challenges, logistics delays and lower chrome mix. Despite this, we still grew revenue double digits, reflecting the strength of windows demand, favorable pricing and our mix shift towards higher value categories like mainstream and premium commercial. As an example, Commercial PC Windows units were up over 20% year on year. Drilling into the details, consumer revenue was down 1% and commercial was up 26%.

Speaker 3

By product category, revenue was up 14% for notebooks, 17% for desktops and 40% for workstations. We also continued to drive double digit growth across peripherals, gaming and device as a service, each of which a part of what Enrique shared as our focus on creating a more growth oriented portfolio. Personal Systems delivered almost €1,000,000,000 of operating profit with operating margins of 7.8%. Our margin improved 0.7 points, primarily due to favorable pricing, including currency, Product mix, operating expense mix and part of our R and D funding, partially offset by higher commodity costs. In print, our results reflected our focus on execution and the strength of our portfolio as we navigate the supply chain environment.

Speaker 3

In Q1, total print revenue was $4,800,000,000 down 4%, driven by lower print hardware units and lower supplies revenue. This was partially offset by favorable pricing in hardware And growth in Industrial Graphics and Services. Total hardware units declined 28%, largely due to continued component and logistics constraints, which we now expect to extend into the second half of twenty twenty two. By customer segment, consumer revenue was down 23% with units down 31%. Commercial revenue grew 9% with units down 3%.

Speaker 3

Consumer print demand remained solid. However, Revenue across both home and office was again constrained by the current supply chain and logistics environment. The commercial recovery showed further progress with hardware revenue growth and double digit increases in both industrial graphics and large format. We expect to see a gradual and uneven recovery in commercial extending through 2022. Supplies revenue was $3,100,000,000 declining 2% year on year consistent with our outlook that we provided at our Analyst Day.

Speaker 3

The decline was driven primarily by further normalization in home printing as expected, partially offset by the gradual recovery in commercial. We saw momentum in our contractual business with Instant Ink once again delivering double digit increases in both We also drove Managed Print Services revenue and total contract value with Renewals TCV up double digit. Current operating profit was $879,000,000 declining $119,000,000 And operating margin was 18.2%. Operating margin decreased 1.6 points, driven primarily by a tough prior year compare and higher costs including commodity and logistics costs. This was partially offset by pricing, including currency and improved performance in Industrial Graphics and 3 d.

Speaker 3

Now let me turn to our transformation efforts. As we move into the 3rd year of our cost savings program, we remain steadfast in our focus on delivering on our $1,200,000,000 Gross run rate structural cost reduction plan. Our transformation continues to create new capabilities and long term value creation. In print, for example, we are modernizing our digital ecosystem by consolidating our software and firmware platforms. Our new architecture provides a digital ecosystem, allowing us to develop modern capabilities and services offerings to drive differentiated customer experiences via our HP Smart app.

Speaker 3

In addition, We are leveraging these digital ecosystem enhancements to streamline and scale our big data platform capabilities, allowing us to gain valuable real time insights about our customers and business operations. The structural cost savings from our transformation efforts are enabling these types of strategic growth drivers, and we see many more opportunities to drive business enablement through additional software, services and solutions offerings. Now let me move to cash flow and capital allocation. Q1 cash flow for operations and free cash flow was strong at $1,700,000,000 $1,400,000,000 respectively. The cash conversion cycle was minus 33 days in the quarter.

Speaker 3

This improved 8 days sequentially as higher days payable outstanding and lower days sales outstanding was only partially offset In Q1, we returned approximately $1,800,000,000 to shareholders, which represented 127% of free cash flow. This included $1,500,000,000 in share repurchases and $271,000,000 in cash dividends. We expect to aggressively buy back shares of at least $4,000,000,000 in FY 2022, and we remain on track to exceed our $16,000,000,000 return of capital target. Looking forward to Q2 and the rest of FY 2022, We continue to model multiple scenarios related to supply availability, logistics constraints, pricing dynamics and the overall macro environment. In particular, keep the following in mind related to our Q2 and overall financial outlook.

Speaker 3

We are raising our full year outlook for FY 2022 to reflect the strength of our Q1 results and expected strength of our Q2 performance. We expect currency to be about 1% year over year headwind for FY 2022. With regard to the financial impact of the unfolding situation in Ukraine, including the current sanctions on Russia, we are factoring in our best assumptions at this time. Recognizing that the situation remains fluid and highly uncertain. In Q2, We expect a negative impact to our top line and bottom line as a result of the sanctions that have been imposed.

Speaker 3

In total, net of mitigations, We have factored in a $0.02 to $0.03 EPS headwind to our Q2 guidance. For the second half of twenty twenty two, The broad ramifications of the situation in Europe and beyond are uncertain and we are monitoring this closely. For Personal Systems, we continue to see strong demand for our PCs, particularly in commercial as well as favorable pricing. We expect solid PS revenue growth to continue through fiscal 2022 with a further shift towards higher value categories, including commercial premium and peripherals. Specifically for Q2, we expect our top line results to be incrementally constrained by volatile supply chain and logistics environment and also the dynamic macro environment, including the Russia situation, all negatively impacting our top line.

Speaker 3

In total, we expect a high single digit decline quarter on quarter to Personal Systems revenue. We expect PS margins at the high end of our 5% to 7% long term range, particularly in Q2. In print, we expect solid demand in consumer, favorable pricing, disciplined cost management and further normalization and mix as commercial gradually improves through 2022. With regard to print supply chain, we expect similar to what we saw in Q1, Component shortages and logistics delays to constrain revenue. We expect these supply chain constraints to continue into the second half of twenty twenty two.

Speaker 3

We now expect print margins to be at the high end of our 16% to 18% range for FY 2022. For Q2 specifically, given the continued hardware constraints we are anticipating, we expect print margin to be above our 16% to 18% range. Taking these considerations into account, we are providing the following outlook. We expect 2nd quarter non GAAP diluted net earnings per share to be in the range of $1.02 to 1 $0.08 and 2nd quarter GAAP diluted net earnings per share to be in the range of $0.95 to 1 $0.01 We expect FY 2022 non GAAP diluted net earnings per share to be in the range of $4.18 to $4.38 and FY 2022 GAAP diluted net earnings per share to be in the range of $3.87 to $4.07 For FY 2022, we expect our free cash flow to be at least $4,500,000,000 We are making excellent progress against our priorities, and I am confident in our ability to deliver consistent Long term sustainable growth. I'll stop here, so we can take your questions.

Operator

Thank you. And we will now begin the question and answer session. We also ask that you please limit yourself to one question and a single follow-up. The first question today comes from Shannon Cross with Cross Research. Please go ahead.

Speaker 4

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 PC? 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

Speaker 3

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 We've seen the impact of mix shifts year on year and quarter on quarter from consumer to commercial.

Speaker 3

And as you heard 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.

Speaker 4

Was some of it inflation though

Speaker 3

or? Well, actually we have been pricing. I think one of the benefits we've seen in the quarter is the impact 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.

Speaker 4

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 And bleed through some of the excess component inventory you may have.

Speaker 3

Thanks. Yes. No, sure, Shannon. So first of all, I'd start out by saying that we're really Pleased with the free cash flow in the quarter of $1,400,000,000 And I just at this point in time reiterate that we're still confident in our guide of at least And I'd just point out that given those 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 4,500,000,000 In addition, I'd add just in closing that typically we don't adjust our free cash flow guidance at this point in the quarter either.

Operator

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

Speaker 5

Yes. Hi, good afternoon, guys. Hey, congrats on the solid execution and the ongoing amendment. I appreciate you guys taking the question. 2 if I could.

Speaker 5

I guess I jumped on a few minutes late, so I apologize if this has already talked to you. But What are you guys thinking at this juncture for PC growth for the year? And do you have like a calendar year view also that would That would be helpful. And then I have a quick follow-up as well. Thanks.

Speaker 2

Let me hi, Ananda. I will give you first a view of what do we think in And then Marie will give you some comments on the guide. So I think market wide, we continue to see strong demand on the PC side. The market projection for this year is that it will be around $200,000,000 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.

Speaker 2

Now Marie will talk about our guide and what we expect to see in our side.

Speaker 3

Yes. And then good afternoon, Ana. Hope you're 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 one time in nature.

Speaker 3

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 bet 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 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.

Speaker 5

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 I was just wondering what the state of those are today and you think you'll be successful in procuring sort of improving your component allocation share as you go through the year?

Speaker 2

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.

Speaker 2

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,

Operator

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

Speaker 6

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? Let

Speaker 2

me talk about the situation first on the hardware and then I will talk about supplies. 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 majority of the factories for printers and of our suppliers in Southeast Asia. On those countries were in full lockdown, the majority of the fall until December. And therefore, we are seeing now the impact of that situation.

Speaker 2

Additionally, in print, we use 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 shipments. 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.

Speaker 3

Maybe 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.

Speaker 6

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

Speaker 2

Yes. So let me take that one. 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 of the market will be around 80%, eight-zero, of what it was pre Same, eight-zero, of what it was pre COVID. We and we are on our way to get there.

Speaker 2

Clearly, because of Omicron and the delays in some office reopening were still not there, but we are seeing steady progress. In the case of home, the market It's now stronger than what we were predicting before COVID, and we expect it to continue to be for the foreseeable future.

Operator

The next question comes from Tony Sakanagi with Bernstein. Please go ahead.

Speaker 7

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 Splice is about, either how your backlog changed in the quarter for both PCs And print hardware or you can comment on order growth versus revenue growth for both PCs and Print hardware in the quarter, that would be helpful to dimension that backlog question.

Speaker 7

And I have a follow-up, please.

Speaker 2

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 2 things. Number 1 is the progress we made on the supply chain being able to address the demand that we had in categories like commercial or premium.

Speaker 2

It 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 We 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. The 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.

Speaker 7

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 to clarify on guidance for my second question, It looks like normal seasonality is down 4% or 5% sequentially.

Speaker 7

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,

Speaker 8

how do

Speaker 7

we think about overall revenue for HP on a 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 to follow-up on specificity on PC backlog, please. And then Q2 and seasonality for the remainder of the year? Thank you.

Speaker 2

Yes. So on PC backlog, I will only be a little bit more specific. It is below 1 quarter, which is where we were, but continues to be very elevated. Maybe the only 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 This is where the backlog is elevated. And Marie will take the question on guide.

Speaker 3

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 That 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 And as a result of that, with the performance that we've had here in Q1, we expect now a much more balanced 1st half versus second half.

Speaker 3

And so we're no longer expecting our revenue to be more linear across 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.

Operator

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

Speaker 9

Thanks for taking my question. I have 2 as well. I guess, first on the supply side, very specifically within print, I think it was down 2%, 3% I'm wondering how should we think about supplies in April quarter and even beyond because you compare, so I think it's very difficult in that business. So, I want 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.

Speaker 2

So I think on the in supplies, what the performances for this quarter is in line to the guide that we provided at SAM during the Investor Day We're declined. We said we expected supplies to decline low to mid single digit. 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 officers were closed were probably below expectations, But share and price compensated for that, so overall, in line to what we were expecting.

Speaker 9

Got it. And then if I can just follow-up, Yeah, Ita, Enrique, Marie. But when I think about the full year guide that's been raised right now, you sort of implying 12%, 13% EPS growth, I think, for 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 Thanks on operating profit dollar growth. Because in Q1 at least your share count reduction was 15%. So if that momentum sustains, you could conceivably achieve your Your guide, even if your operating profit dollars don't have any growth.

Speaker 9

Can you just talk about how that math works for you for the year? Yes,

Speaker 3

sure. Good afternoon. It's Marie 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'll just point out, it's probably going to vary quarter by quarter.

Speaker 2

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

Operator

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

Speaker 10

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 $100,000,000 which One time, can you give us some color on that and then a follow-up?

Speaker 3

Yes. No, 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 on 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.

Speaker 3

They're one time in nature. Now if you basically sort of exclude those in Q1, then 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 for Q2.

Speaker 10

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

Speaker 2

Thank you. In the case of print, really shipments this quarter are really totally determined by availability of supply. So I really couldn't read anything on declines of volumes because this is really totally driven by how many printers We and the rest of the market have been able to produce because it's not a has not been an HP situation, it has been had really been an industry situation. In the case of Personal Systems, our view on the rest of the industry is that the size of the market this year will be In the 340,000,000 to 350,000,000 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.

Speaker 2

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 at backlog, But the final of opportunities we have for the second half in for the rest of the year in commercial continues to be very strong.

Operator

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

Speaker 11

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 2nd half of this year. Any color that you can share there?

Speaker 11

And then I have a follow-up. Thanks.

Speaker 2

Yes. I think this 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 the factors are built into the guide that we provided.

Speaker 2

I think it's also important to highlight that we 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.

Speaker 11

Awesome. I appreciate that. And then maybe just as my follow-up, you guys have committed to doing $5,000,000,000 of buybacks this year. But if I look back over the last You've done more than $1,500,000,000 of buybacks on average each quarter. So maybe why shouldn't we think about buybacks in The rest of this fiscal year being or for the total of this fiscal year being closer to $5,000,000,000 or $6,000,000,000 And If they if $4,000,000,000 is the target, would that imply or should we be thinking about buybacks slowing down into the remainder of the year?

Speaker 11

Thanks.

Speaker 2

Well, just to clarify, because you mentioned 5, our goal and what we have said is that we will buy at least $4,000,000,000 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 The value plan as we declared it 3 years ago and $4,000,000,000 is the minimum we need to do.

Operator

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

Speaker 6

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 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

Speaker 11

And I'll

Speaker 6

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.

Speaker 2

Let me take both 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's hard 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 shares, which I think is a very important metric That shows that from a volume perspective, we haven't seen any negative impact on driven by the price increases.

Speaker 3

I agree to Enrique's point. Our full year guide actually

Speaker 2

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 year in the Q2, Q2, Q3 time frame. But at this point, we have Enough availability of components on that side that we would and we don't expect a backlog to grow in that space.

Speaker 6

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?

Speaker 2

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

Operator

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

Speaker 8

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 Competitors in the commercial print market, they talk about share increases.

Speaker 8

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.

Speaker 2

Yes, sure. My comment on share increases was specifically on supply, which as we shared a couple of years ago is a big part of our strategy on supply. What we have been doing during the last 2 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 technologies that we built in the printer. It's a combination of improving the quality of supplies.

Speaker 2

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 Proner. 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.

Speaker 2

When we've had supply, there is demand and we're able to ship more.

Speaker 8

Got it. Got it. And for my follow-up, I think this might be more for Maheep. 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 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?

Speaker 8

Is that going to drive that higher component cost

Speaker 3

Yes. So with respect to our margin ranges for the rest of the year, we basically Calibrated our ability to be able to reprice our 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 peers margin, we expect it to be at the high end of the range for the remainder of the year and it reflects that.

Speaker 2

And I think this was our last question. 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, expanding to 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.

Speaker 2

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 expanding it with us In an earnings call, Marie, happy birthday.

Speaker 3

Thank you, Enrique.

Speaker 2

And thank you, everybody, for joining.

Operator

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

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Earnings Conference Call
HP Q1 2022
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