Q2 2020 Earnings Call
[music].
Good day, everyone and welcome to the second quarter 2020, HP Inc. earnings Conference call.
My name is Eilean I'll be your conference moderator for today's call.
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.
Should you need assistance during the call. Please signal a conference specialist by pressing the Star T followed by zero.
As a reminder, this conference is being recorded for replay purposes I.
I would now like to turn the call over to best how head of Investor Relations. Please go ahead.
Good afternoon, I'm bathhouse head of Investor Relations for HP, Inc. I like to welcome you to the fiscal 2022nd quarter Earnings Conference call with me today, our Enrique Laura's H. piece, President and Chief Executive Officer, and Steve Filer, H. piece Chief Financial Officer.
Before handing the call over to Enrique Let me remind you that this call is being webcast a replay of the webcast. We made available on our website. Shortly after the call for approximately one year.
We posted the earnings release and the accompanying slide presentation on our Investor Relations Web page at Investor that HP dotcom.
As always elements of this presentation are forward looking at our based on our best view of the world and our businesses as we see them today.
For more detailed information, please see disclaimers and the earnings materials relating to forward looking statements that involve risks uncertainties and assumptions, including the potential impact of Akovaz 19 pandemic.
For a discussion of some of these risks uncertainties and assumptions. Please refer to each piece I see see reports, including our most recent form 10-K and form 10-Q.
H.P. assumes no obligation and does not intend 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 a mouse ultimately reported <unk> form 10-K for the year ended October 30, Onest 2020, NHP other SEC filings.
During the webcast unless otherwise specifically noted all comparisons are year over year comparisons with a corresponding year ago period.
For a financial information that has been expressed on a non-GAAP basis. We've included reconciliations to comparable GAAP information.
Please refer to the tables and slide presentation accompanying today's earnings release for those reconciliation.
And now I'll turn it over to Enrique.
Thank you Brad Thank you everyone for joining.
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So let me start with our response to that London.
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That's exactly what we have seen in recent months.
Hi, I'm proud of that way or teams that book to support or burden of customers Sun communities.
Well work, but probably already do cost being fun we remain.
On safety pull forward employees.
From this park, we group you'd be well the vast majority people for people to work from home.
Well go through manufacturing on another critical functions, but cannot work remotely we implemented so she'll do something along with additional safety on premium protocols.
On a significantly we felt they become meaningful action to remain closed door cosiness on partner.
Specifically, we have implemented bubble or will you be removed immunotherapies to husband, nobody gets it operational and financial challenges.
We believe these investments will further strengthen publisher relationships onto Burke for value creation strategy over the long term.
Well the currencies of these magnitude demand that we do more than simply put their solar business.
We must also protect their communities we serve.
Our team took immediate action to deploy our technology fund resources towards this a range of urging me.
I will share just a few at some point.
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We are now ramping up production both through the print that moves on swaps with BARDA to helping this work for my system.
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Oh or teams have adopted to new routine I am proud of all the way they kept the needs for our customers and I were communities from some center.
Turning to over so there's no doubt that called reclaim team is impacting our business.
Well in some areas performed very well lets people shifted to work from home oldest suffer on Wifi supply chain disruptions.
Despite these challenges we've been lever non-GAAP earnings per share for 51 cents.
Revenue Rose $12.5 billion don't see live in person driven by macroeconomic on supply chain challenges associated with different than me.
Let me provide some context on the impact who have seen from both the supply and demand side, but without the auctions were taking to mitigate risks.
Third we supply.
Both print on personal systems, expedience manufacturing and supply chain disruptions during the quarter.
As we noted its whenever February cool manufacturing in China remained shut down after Chinese new year before beginning to ramp in late February.
Starting in late March we also experienced refurbishment store operations in southeast Asia on other parts of it was finally pandemic spreads.
We took swift action to adjust to these developments on our manufacturing capabilities were largely back to full capacity by early may.
Well, we continue to money towards the situation for any other potential disruptions.
Moving forward, we are evaluating plans to improve the resiliency of our supply chain, including increasing our levels of inventory to help mitigate the risk for future public.
On the demand side, there's no question that they looked accounts for around the world have created new and different demand dynamics in the market.
These pre since both Tailwinds on who we are close our portfolio and it wouldn't do what would you who would we have seen.
Lets people work from home operate their businesses remotely on completes the schools you had on line, we're playing an even bigger arose in their everyday life.
The current environment, we'll have a lasting impact on the way, we live and work on Reid will further increase the importance of technology.
For our business this pretty soon some attractive near and long term opportunities, but we'll have some challenges that we will talk about.
In personal systems. We also include the month, that's organizations of all types and sizes focused on keeping people connected productive unsecured.
These strong demand combined with a consensus blight resulted in a military that backlog, which we expect to work down during Q3.
That's them is all around the rules have been reminded of the essential role that BC. Please and we're taking action to capitalize on lease opportunity.
During their pandemic, we have introduced so I mean, clearly, we'll innovation aligned to custom it seems like.
For example.
Pardon me to rapidly and securely deploying new devices to workers, who are either at home or on the phone lines.
To meet this means we launched new enterprise Chromebooks and moved by seeing claim.
We also launched a new range of the book by each be mobile workstations fun envy notebooks, that's mpower creators.
And just this week, we introduced the next generation affiliates, BC and said when I make money, though.
We also launched dedicated services to improve temporary experiences on his work as connect to the cloud and collaborate with colleagues.
And with people spending more time at home. The PC also continues to emerge a hub of entertainment.
Gaming is the Best example.
Earlier this month, we launched a new lineup of own Mpcs Sunday slate.
And printing, we are facing near term challenges driven by both supply and demand issues.
In commercial print, including overseas on graphics, we saw significant slowdown in late March box office has closed a large events on trade shows were canceled.
While we believe that or piece on graphics usage will rebound wednesday's Mrs. Fully reopened we expect Q3 will be similar to a pill.
And that we expect that our financial results would be more negatively impacted in Q3 Q2.
In consumer we saw increased demand for hardcore fans Inc. supply has gone through when people look down on customers fit our home office on school invite them.
However, we wouldn't be able to fulfill all of the older given the manufacturing these options.
On the positive side. We also saw are served instant ink.
And now have more than 7 million subscribers accelerating the shape to services that we have been driving.
It's been leadership across both consumer and commercial pre market makes us uniquely well positioned to weather the near term challenges on emerge from the crisis stronger than the competition.
Let me know move so a go forward strategy and value creation plan.
We are continuing to execute this strategy that we outlined at our security analysts meeting last year.
And we remain confident that it will deliver significant value over the long term.
That's a reminder, our strategy is focused on three key priorities.
Advancing our leadership in personal systems on print.
Disrupting industries with our technology and intellectual property.
On transforming the way, we work across HP to get closer to customers and reduce our cost.
We continue to make progress against our plan and we have rapidly adopting to the new realities.
The cooler and invite them.
In personal system, we are advancing our leadership with a continued focus on high value categories some cost efficiency.
As the DC play some more integral role in people like we see attractive opportunities to innovate with new hardware services and solutions, including security and sustainability.
And print we are evolving our business model with greater focus on driving more balanced see some profitability over time, well also taken significant cost out.
We see the opportunity to accelerate the shift towards services.
For example, we believe incenting momentum and their brother shift to contract. One will continue as work remains more mobile and location, that's not even when that by mix phase.
In addition, our diverse portfolio close consumer and commercial affords us unique opportunities in the changing landscape.
We also remain focused on developing industries, where our innovation and maybe give us sustainable competitive advantages.
Well some of these businesses in graphics on CD had been car T by the economic slowdown we believe they will recover post cobbett Hyundai remained significant long term opportunities for our business.
Supply chain flexibility and resilient will be a priority topic for all companies going forward.
And we expect digital manufacturing will be an important part of these discussions.
Refund dynamic has shown that benefits of three D printing, specifically speed agility and localized production.
This has led to deeper more strategic engagement with customers as they evaluate their supply chain and continue the remote distributed manufacturing modem.
Some examples in April one of our customers.
Eric quickly pivoted to enter Pandemics from making syntel aligners to producing personal protective equipment.
To deliver on our priority, we're executing our transformation program to become a leaner more digitally enabled company.
And the current crisis will actually help accelerate several initiatives.
We're making significant progress in these Uh huh.
Through the first half of the year. We're tracking ahead of our first year target to generate 40% of the total $1.2 billion in gross unrealized front a structural cost savings.
We're also taking additional actions to mitigate the short term headwind from Cobiz 19.
We started the top with temporary reduction in executive and board compensation.
We're also investing some external hiding and making further shirts and reductions in discretionary spending.
As we navigate their current environment, we remain committed to the principles of the value plan. We have line in February.
These include the multiple levers we have to drive profitability.
Our revised leverage target and our disciplined approach to capital allocation, including returning significant capital to shareholders OLED hi, good ROI opportunities emerge.
As it relates to the value plan targets, we are committed to the long term goals. We have said however, given the extraordinary and highly dynamic environment in which we are currently operating the timing touchy viscose may change.
But we have greater visibility on the macro environment, who will be in a better position to provide a long term financial updates.
We believe this is the most prudent approach, but we are in the best interest of our shareholders and all the stakeholders.
Before I turn the call over to Steve I want to provide some closing thoughts.
HP has always been fueled by innovation collaboration and a purpose driven culture.
These higher costs things of our company that position us well in our markets and drive our optimism about the future.
And although there are challenges like now due to commitment team, we never lose sight of the big picture.
It is clear that their pandemic shows can also be a catalyst for change at the intersection of the digital and physical world.
From the increasing relevance of Pcs in people like to that go in interest in three D and digital manufacturing and the importance of plane across consumer and commercial printing.
We continue to see significant opportunity for HP to drive long term value creation.
We believe our structural advantages disciplined cost management and were very focused on their customer position us well to navigate the current headwinds while capitalizing on new opportunities across our business.
With that I will turn the call over to Steve to take you through the financial detail.
Thanks, Enrique isn't Ricky described we've experienced significant changes since our last earnings call. This is creating both challenges and opportunities across our businesses and geographies.
Importantly, as we've seen over history, we believe the strong can become stronger in the years ahead, and therefore, we are not standing still.
This requires leadership energy already coupled with strong execution and leveraging each piece foundational strengths, including our geographic breadth and scale.
Folio and customer segment diversity from the office through the home.
As well as our balance sheet and strong liquidity position.
We have multiple levers of value creation in the company both in the short term and long term to adapt and manage the ups and downs in our business.
Now, let's look at the details of the second quarter.
Net revenue was $12.5 billion down 11% year on year or down 10% in constant currency.
Regionally in constant currency EMEA declined 7% America's declined 10% in Dpj declined 16%.
Gross margin was 20% up 60 basis points year on year, driven primarily by disciplined execution and improved rates in personal systems.
Non-GAAP operating expenses were $1.6 billion down $136 million sequentially and $138 million year over year.
We are seeing tangible structural cost savings achieved through our transformation program.
As well as the benefits of additional temporary discretionary cost actions taken in response to the current economic headwinds.
Non-GAAP net R&D expense was $57 million for the quarter.
We delivered non-GAAP diluted net earnings per share of 51 cents.
With a dilutive share count of approximately 1.4 billion shares.
Non-GAAP diluted earnings per share, excluding net benefits totaling $23 million related to non operating retirement related credits in other tax adjustments, partially offset by amortization of intangible assets and restructuring and other charges.
As a result, Q2 GAAP diluted earnings per share was 53 cents.
Before I get into the details by business, let me expand on Enrique his remarks regarding the supply chain impacts I'll cover three points.
First as expected we experience manufacturing disruption early in the quarter due to the China factory closures.
This impacted both personal systems and print.
This created a backend loaded supply quarters in a higher personal systems backlog entering Q3.
For reference we recorded roughly 50% of our PS revenue in month, three which is historically high.
Second greater in the quarter, we began to see manufacturing disruption in southeast Asia, which directly impacted our print business, both hardware and supplies and we're monitoring any impact to P.S. component suppliers.
Our print manufacturing capacity returned to normalized levels in early may.
So the supply disruption should primarily impact the first part of Q3.
Third logistics were challenging.
We have certain challenges delivering to our end customers in countries with food walk down such as India and in general our logistics costs were elevated.
Altogether Q2 was a complicated supply chain quarters, but are teams are highly experienced to manage through short term disruptions.
Turning to segment performance.
In personal systems, we are proving that the PC is essential.
We're pleased with the profit growth this business despite factory supply constraints that pressured our topline during the quarter.
The business benefited from strong demand related to working and learning from home, particularly in notebooks.
Revenue was $8.3 billion down 7% were 6% in constant currency.
Drilling into the details by customer segments, both commercial and consumer revenue were down 7%.
By product category revenue was flat for notebooks down, 18% for desktops and down 23% for workstations.
Personal systems has been consistently delivering profit growth and improved mix overtime.
Year over year commodity favorability, which was partially offset by higher logistics costs drove another quarter of exceptionally strong profitability.
Operating margins remained high at 6.6% and operating profit dollars were up 43% year on year to $552 million.
Personal systems opioids represented 50% of each piece profit mix for the quarter.
We remain confident in our long term operating margin target of 3.5% to 5.5%.
In print, we remain uniquely well positioned in the market by being leaders across both consumer and commercial print.
However, we are facing near term challenges driven by both supply and demand issues.
Starting with Q2 demand we saw a decrease in commercial print across our office and graphics businesses, especially in March and April.
This includes a negative impact to both hardware and supplies as businesses have temporarily closed and office workers transition to working from home.
Let me illustrate this with some additional detail that we don't typically provide.
Managed print services, we saw a roughly 40% monthly decline in pages from February to April.
And in graphics, Indigo impressions went from being up 9% year over year in February to down 24% year on year in April.
On the other hand in an environment, where much of the globe has moved to work from home.
We saw an increase in overall demand for consumer inkjet during the quarter.
Looking at the details.
Q2, total print revenue was $4.2 billion down, 19% nominally and 18% in constant currency.
Print operating margins were 13.2% down 280 basis points sequentially, driven by lower hardware and supplies volume, especially in commercial print.
And a negative impact from supply chain disruptions in higher logistics costs.
That said, despite or Q2 results remain confident in our long term operating margin target of 16% to 18% once workers return of the office and demand improves.
By customer segments commercial hardware revenue was down 31% and consumer hardware revenue was down 16%.
Total hardware units were down 23% with commercial units down, 25% and consumer units down 22%.
Second quarter supplies revenue was $2.8 billion down 15% in constant currency as office and graphics printing were significantly impacted by the cobot 19 walk down orders in the last month and a half of the quarter.
In Q3 and until workers return to the office and businesses reopened we expect supplies revenue to be more pressured into Q2.
Overall in Q2, the team remained disciplined in managing channel inventory.
Keeping tier one channel inventory levels below the ceiling. Despite the sudden demand declines in the commercial space.
Let me now turned toward transformation efforts and specifically our cost savings actions and opportunities ahead.
A few points.
First we are making good progress on our announced plans and currently tracking ahead of the 40% first year target, we set last quarter as part of our three year 1.2 billion dollar gross run rate cost reduction plan.
Second we plan to accelerate cost reductions as much as possible and look for new opportunities, including real estate.
Third we are taking prudent steps to reduce discretionary cost as much as possible.
While these are more temporary structural benefits, we believe it's the right thing to do in this environment.
Shifting to cash flow and capital allocation.
Due to cash flow from operations and free cash flow were negative point $5 billion and a negative point $6 billion respectively.
As a signaled last quarter.
Cash flow was negatively impacted due to the delayed manufacturing timing and backend loaded quarter in our business.
That said each piece businesses are strong cash flow generators over multiple periods and we maintained a strong balance sheets to meet liquidity needs.
In Q2, the cash conversion cycle was minus 34 days timing of procurement and production drove higher ATP inventory and other assets and liabilities.
Accounts receivable increased both due to revenue linearity and also because of the payment extensions, we are providing and specific cases help customers and partners whether the crisis.
We returned $123 million to shareholders through share repurchases and $252 million via cash dividends in Q2.
Our share buybacks were limited in the quarter due to the Xerox situation and close repurchase windows.
As an Ricky stated the principles of our value plan remain in place.
This includes how we manage our balance sheet, including the importance of investment grade credit rating and our one and a half to two times gross debt leverage target.
In the near term, we will be prudent to focus on managing through changing dynamics in our business operations as our top priority.
Therefore, we expect to be at the lower end of our debt to EBITDA range and to hold higher cash on the balance sheet.
Our return of capital principles also remains intact.
Putting our commitment to a robust dividend and share repurchase program.
In the near term, we expect to be active in the market and returns greater than 100% of our free cash flow in F. Why 20.
Beyond if why 20, we remain committed to returning 100% of free cash flow.
In addition, consistent with our previously announced strategy, we intend to pursue a significant enhanced share repurchase program, although the specifics will be determined once market conditions stabilize.
We will update you on Q3 on how these plans progress.
Looking ahead, we would like to make the following comments starting with the F. why 20.
Since the Cobot 19 crisis started we've been stress testing our model and running a number of scenarios based on a range of assumptions.
We're halfway 20, given the level of uncertainty around the duration of the pandemic, the timing and pace of economic recovery and the potential impact of a resurgence in cases, there is a much wider range of outcomes for the year.
As a result, we will not be providing an outlook for full year 2020.
That being said, we expect our business to generate positive cash flow for the second half of the year.
For Q3, we are factoring in our past assumptions at this time.
Recognizing the situation remains highly dynamic.
Specific to personal systems assumptions, we expect strong demand given the elevated backlog and surge from working and learning from home.
We will closely monitor its supply constraints, whether it be CPQ or from other select commodity suppliers and we expect the overall cost from the basket of components and logistics to be higher than we saw in the second quarter.
In printing, we expect Q3 to be more challenging than Q2 from a demand perspective until office buildings and businesses reopened.
So impact hardware and supplies, especially in commercial print.
We expect continued positive demand for printing at home.
With supply challenges from Southeast Asia, who will be constraining consumer print early in the quarter across hardware and supplies.
As a result, we expect to print revenue and margins to be lower in Q3 them Q2 with improvement beginning in Q4 following offices reopening.
Taking all of these considerations into account.
We are providing the following outlook.
We expect to 320 non-GAAP diluted net earnings per share to be in the range of 39 to 45 cents.
In Q3, 20, GAAP diluted earnings per share to be in the range of 35 to 41 cents.
In closing our strong balance sheet and ample liquidity provided solid foundation to manage through this uncertain environment, while also providing capacity to capitalize on emerging opportunities, which we expect to arise out of this disruption.
We will continue to take the necessary actions to manage through the near term challenges while remaining focused on executing our strategy to drive long term value creation.
And now I would like to hand, it back to the operator and open the call for your questions.
Thank you and we will now begin the question and answer session to ask a question you May Press Star then one our near Touchtone phone.
You are using speakerphone, please pick up your handset before pressing the key.
So we try your question. Please press Star then Q.
We also ask that you please limit yourself to one question in a single follow up.
Our first question comes from Katy Huberty with Morgan Stanley.
Thank you good afternoon and make it when you roll down the shift can printer strategy back in October you said that he would take end market feedback, which may cause you to either slow or accelerate the rollout of that strategy and the geographic expansion how has that impacted.
You know the pace at which you look to shift that printing strategy, particularly given there is some discussion around more of that structural shift away from the office and towards working in the home and then if that's not let.
Thank you Kathy so actually word we have learned in the last weeks I've been very encouraging in terms of it changes or devolution of their business model that we were driving improvement as we mentioned during their prepared remarks, we have seen a significant increase in adoption of subscriptions.
We which is a key part of the evolution and this means that really supports the rest of the changes that we're going to be driving.
As we announced almost a year no nine months ago, we'll be launching in the first problems with a new modern these phones and we're on track to to make that happen and as we said in February the feedback we're getting from customers has been very positive and we have been shedding back now with a significant number of retailers on another they will.
And you just to add to that from a contractual perspective, what we've started to hear from customers is because each p. plays so prominently in both the home and office.
And that's not just from a product perspective, but thats from a services perspective, it's from a delivery perspective of how we can uniquely leverage or managed print services offering with our instant ink offering to provide that sort of seamless transition from the home to the office with customers employee base. That's very important come in we have been having lots of conversations.
Maybe with customers on well do they need to do to enable them to a used to work from home. They ask for Pcs, Yes, what access studies, and that's where the ability to be able to coordinate employees to print and this is a unique advantage federica.
Interesting. Thank you for that Steve just as a follow up can you talk about what doesn't make up as inventory looked like at the end of the quarter sort of Pcs versus printers and component inventory versus finished good which of those categories drove the increase and then when should we expect to see inventory fall materials.
Thank you yeah, I mean, our inventory both in terms of dollars is as well as days, obviously, Pete here in Q2 coming from a lower pace.
In Q1, it was driven heavily by the build in a personal system space.
That was really two factors the largest factor was as expected the backend loaded when the area of the quarter with the China factory shutdown rolling in the quarter as we headed to the to the back half it just.
By Matt sort accrete to higher inventory in the in the back half for the quarter as well as all the in transit we did pursue some level of strategic buying on the personal systems side also in the quarter to set ourselves up for the second half.
Looking forward.
I would say that we are anticipating some level of higher inventory than what we traditionally held I'm not to the levels that we're at today.
And that's really more of a function of in the short term pursuing some resiliency or what.
Particularly around you know inc. or other products that we want to hard on hold a higher balance with we also did a pretty effective job around channel inventory and I said that broadly across hardware and supplies, while there's pockets clearly where we had to slow selling in the quarter as we reflect in our channel inventory levels broadly speaking, we remain a lot of.
Discipline throughout the quarter on Psi.
Our next question comes from Amit Daryanani with Evercore.
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Good afternoon, guys. Thanks for taking my questions I'll take is supposed to us all Enrique or Steve actually go back to the capital allocation discussion I'll. If I got this correctly. The commitment is to return over 100% of free cash flow for this and then 100% for fiscal 21, but you want a pause on the outsize buyback program those.
That's 16 billion capital return program I want to make sure I got that right and what makes you on pause as one of the guidepost. What are you gonna look like look forward to go back to that Outsize buyback program, you talked about 90 days ago.
But when I take that and I will repeat a little bit and maybe Adam maybe a bit more context or color to the prepared remarks.
But I think at the macro level the principles of the value plan remain in place and that includes how we manage the balance sheet our target leverage the one at the two times importance of investment grade credit rating.
Also overtime, we do see the opportunity to lower the cash on hand that being said in the short term, we think having a higher cash balances prudent to ensure we can work through any economic cycle.
We also see from principal perspective, the opportunity to drive free cash flow into the future and we believe we're undervalued. So I take all of those in consideration and then specifically in this current covert 19 situation. There is just a high level of uncertainty and we believe being prudent with our approach is the most important thing.
Okay, and therefore expect to be operating at the lower end of our leverage ratio and get higher cash on hand, and navigating the business is our top priority.
And then as it relates to the actual return of capital once we get through the different economic impacts from the pandemic well update you on the specifics in the meantime, we do plan to be active returning at least 100% in this fiscal <unk> 20 year for 21 and beyond we remain calm.
The 100% of free cash flow.
Unless there's a better returns based opportunity.
But I think the fundamental point is when we outlined at those principles of how we want to manage advantage of balance sheet, how that would ultimately free up excess cash and how we see the use of that excess cash returned to shareholders. All remains we really need to manage through the this current situation and clearly as we look at the months in quarters ahead, we'll be looking.
And our business in the market in general there's things that are in our control, but more importantly, we're probably looking at things outside of our control at the pace of folks moving back in the office and other social health indicators of making sure we're getting through the situation.
Perfect. That's really helpful. If I could just follow up you guys talked about Oh, I think elevated backlog on personal systems, very specifically, but it's something to think about how how big was as backlog and how long does it take to clear up and I assume this is all about personal systems are not supplies, but just any dimensions in time into tier.
Backlog that you just talked about.
So I mean look for so Oh, I want sides Pacific backhaul, what I'll say I'll make a couple points. The first being we've had so from a historical perspective, the several quarters of high backlog just given the CPQ constraint when I say in the current state the backlog has been even higher than what we've seen in prior quarters moral.
Over just from a linearity perspective, and I mentioned in my prepared remarks, but it's a really important statistic and that is we had 50% of our revenue and personal systems achieved in month, three and April that's historically high high levels.
And so as we saw the quarter progress clearly in the first month and two we were constrained by supply even though the demand was there and in month three I wouldn't supply started coming more robustly online we had a demand to go Phil but it really created a very high backlog situation, but ended the quarter.
Particularly in notebooks.
And work with even more important things not only what the the operation and situation. He is what is how our confidence about the beekman, but we have learned during the last weeks are that Pcs have become even more to change other than they would before where people are working from home for student learning from home from kids playing from.
Home on our confidence in the medium and long term for the business has yet to increase on whether these for Pcs productivity. We clearly see every single opportunity in this category.
Our next question comes from Toni Sacconaghi with Bernstein.
Yes. Thank you I just wanted to follow up on the PC commentary.
So if you're seeing strong demand and you have backlog to sale or should we be expecting PC revenues to be up more than what they typically are in Q3 sequentially. So sequentially, you're typically up high single digits or double digits.
I guess given all your commentary that would suggest to me and given that you have a high level of inventory that would suggest to me that you should be able to.
Grow Pcs on a sequential basis higher than that high single digit seasonal pattern, you typically see instead, a fair interpretation and.
If not why and I have a follow up please.
So when we look at our Q3 expectations around personal systems, while I won't specifically guide revenue I will say that Oh, we do see the opportunity to grow above normal sequential.
There's a lot of different periods, but I think when you look back in.
For multiple periods that we see the opportunity to provide upside on a normal sequential growth.
That being said, we continue to monitor to make sure we've got the supply to fulfill all that's man.
And while all the factories in general are up and back up and running given that much. This demand is coming from notebooks and given the reliance on various component suppliers in the geography in which operates.
It's important that we continue to monitor the situation, but from a demand perspective, we're definitely seeing demand to perform above normal sequential.
Okay, and then I just wanted to follow up on the.
Value creation plan, so I get the level of uncertainty I think what.
You know you've been asked sort of two or three times in various forms this question, but.
Let's say that this year is a tough year, obviously, it's going to be a tough year.
And you want to conserve cash, let's say fiscal 21 goes back essentially to normal free cash flow generation levels.
When we then assuming that through fiscal 23.
We should expect that you would buy backs $13 billion towards the stock, which is what the announced plan. So the timing would get pushed out one year.
That you would buyback 13 billion dollars' worth of stock.
And I guess the question would be why not you announced this plan will stock was a 23, it's now 16 and change and so the proverbial expression of if you like to 23, you must a lot of it at 16 and change. So <unk> is that essentially what you're saying, oh, thanks, or slow down, but youre committed to that magnitude.
Over time, it's just going to be pushed out.
So we should be thinking.
That order of magnitude 13 billion through 2023 lets say, assuming the economy comes back to something close to normal in fiscal 2021.
This is how we're thinking about and again, that's the principles remain and from a framework perspective.
There's really three three drivers first of which is the the leverage we take on and while in the current state we expect to be at the lower end certainly in a more steady state we have comfort moving up in that range and taking on greater leverage and therefore, freeing up cash. The second is our cash on hand, we finished with.
4.1 billion of cash on hand, again in a steady state, where we don't need to necessarily managed through such severe economic changes in short term, we can lower the cash on hand, and that would also free up capital and then the third is the free cash flow generation and again I guess to your to your question as well.
Going to stabilize in the market begins to stabilize we do have confidence in the multiple levers we have to drive cash flow is we get more visibility into that free cash flow projection that clearly provides even further opportunity. We'll take all those into account to then determine the actual size and deployment of what the the enhanced are we.
Term capital program could look like but that's kind of how we're thinking about it.
Our next question comes from Shannon Cross at Cross research.
Thank you very much I was curious what you've seen in heard from your customers recently as some other countries in Europe had started to open up and then obviously some of the states.
Both on the printing in the PC side, and if you've seen some improvement in terms of demand and flow through and then at the follow up thank you.
Sure, we do something that we have money 30, and very very closely as you can imagine Shannon.
Well, we have seen for assembly in China, where the recovery started earlier you talked for at least 30 recovery both of demand about space. How do you have usage, both dream team Ferndale, if he's familiar in graphics.
Two weeks after putting it was.
Equal the front do you make we have seen note that delivers would where you where we used to be but we continue to see steady progress.
We have also seen some improvement in some of that comes in Europe, where there are cases started earlier, we have seen that they need but are you starting to teach in Spain, My dad ready mid teens Mone moves.
We've seen guys sitting there makes weeks, we start seeing more more activity, we will see I see me that apart that untoward, we have seen hopping in China.
Okay, and then I am kind of hate to assets just because of what you went keyless era, but I'm curious depending industry is obviously under posco that as well as secular pressures in various places.
How are you thinking about consolidation I.
I mean is this something that makes sense for you to be involved in or does it make more sense for share repurchase and perhaps looking at adjacent sees or other areas, where there is growth like three D printing.
And I'm, not a indicating you're going to buy a threed printing company, but just in terms of technology. Thank you.
Sure. So at this point in China, where our focus is on executing our plan.
Is where it was paid weeks ago when before they can I say, so that he thinks even more important now given the overall environment.
We had declared and we continue to believe that didn't do a few space consolidation is high value creation activity, but really we've seen that now what we need to do is stay focused on our business and continue to drive it forward.
We're also monitoring all that up with Oh, the M&A opportunities not only on their core businesses, but those when they grow site now do we think because of the case it might be available to us, but again, our focus be seemed okay and execution in our plan.
Our next question comes from Paul Coster with JP Morgan.
Yes. Thanks for taking my question your oversea tremendously successful in branding the the value creation. Thank you. So we want to sooner rather than we were getting at all.
[laughter].
You've been converted some dry as well but.
If I understand is currently is to leverage the is the good compromise your body than the concept. So what's going on here. It's not on the expense containment program, you will the severance and restructuring charges associated with the or am I wrong.
Yeah, if we sort of break down the various components of the value plan.
There's a sort of return of capital, which I think we've we've discussed already on the call.
And you said two large extent is on managing through this situation with the right level of leveraging in cash on hand.
As it relates to the other components with the value plan and specifically on our ability to drive operating profit dollars in free cash flow into the future one of the prior primary mechanisms was the flow through pull through associated with our transformation program.
And that transformation program of called out for a 1.2 billion dollar.
Gross cost savings and halfway 22, with 650 million of that dropping to the bottom line as we sit here today, we have a high confidence in the restructuring and cost takeout program and a structural reductions in fact, we will continue to look for more opportunities such as real estate and other activities.
I'm. So we do remain committed to that we also will continue to explore other discretionary.
Cost Takeouts certainly in the current period, we have taken actions.
That Enrico highlighted.
Across the company with a certain salary reductions in such that we think is the right thing to do.
And we're going to accelerate as much of that transformation earlier, rather than later given we've got the opportunity to do so with over 19 situation. So the short of it is as we remain committed to the cost reductions that we have previously committed to.
Let me briefly explain because I think he is important in terms of their financial goes well their value plan. We're.
Well, we stayed fully committed to those both there.
Prophy, though that even if they will create I know so they flow who got the transformation activities I'm going to create.
There might be some timing impact given the current situation on given that 2020, he's going to be a challenging here, but we see both publicized onsite it's easy for us too early to restate what is the timing of that plan, but we are fully committed to their financial goals that we shared than that we've probably seen February.
And then maybe this is a technical question I understand but you do not intend to do the accelerated buyback using debt, but did you get also causation from the boards to proceed with that expanded buyback program and have you did discretion to execute should sir.
Stops is magically improve all of a sub.
It was part of what we announced in February.
We also announced that the board did approve an authorization and total of $15 billion of share repurchase for the company. So there's plenty of authorization to pursue an enhanced repurchase program.
Our final question today comes from Jerry along with Deutsche Bank.
Awesome, Thanks, just grades immune guys.
The other question the guidance it seems like a guidance for the S. At mid points about 20% lower quarter on quarter now I kind of juxtaposed against your revenue July is.
At least in the last four or five years has averaged about 4% quarter on quarter gross kind of a seasonally July is better than April. So I'm just trying to understand it is is the guidance.
<unk> 's conservative or do you expect revenue as well to be significantly below seasonal and perhaps even down significantly quarter on quarter.
Yes, so why don't I kind of walk through some of the assumptions you know I think maybe stating the obvious but it does remain highly dynamic situation across both supply and demand. That's why we have a little broader range than we typically would for a quarter that.
That being said things are important for us to be as transparent around the dynamics that we're seeing and specific to Q3.
Dynamics are different by segment and even different by categories within segments. So the assumptions are important in personal systems up I already commented on the expectation for strong demand entering the quarter with high backlog. Therefore, we would expect to see I'm positive sequential through above normal sequential growth.
With that as well as good year over year growth.
Assuming that we are supply enabled.
The overall baskets of supply chain logistics cost, we do anticipate to go up quarter over quarter, driven by a logistics costs and then we're closely monitoring the shift in our unit mix and in particular, the the demand around notebooks and the work from home and learn from home, including the demand on on.
The chromebook side.
For print and this is really the substance I think of the Q3 guide to your question. We are anticipating that commercial print will remain challenged across both the office and industrial businesses and this is a market wide comment we saw the negative impact.
Beginning in March and more definitively.
In April was his office is closed unlike our personal systems, where we saw very back end loaded quarter for print we saw just a bit over a quarter of the business in month, three given the slowdown in demand and our discipline on pulling back on revenue on the commercial side not as a result, we do it.
Back to larger impact in Q3 across both hardware and supplies and that's really the driver and beyond the cobot 19 situation. We do expect to continue taking cost out of the business, but when you add it all up.
You know, we what we see today is in between 39 to 45 cents.
Clearly, we're going to be driving the business based upon the respective dynamics out was that we see including where we can get supply, but the largest driver of the sequential decline is really that we've got more months in quarter three to deal with from Cobot 19 than we did in quarter, two <unk> and again.
Things that we see this impact our temporary Dsos will you know we show some of these data before for example in minutes being services. We saw a decline of pages printed off about prototyping get on yeah. It's a significant decline I've people are worth nothing deal fees and they wouldn't the biggest being thing they often we saw significant.
Impacting graphics, we went from growing about 9% immune to go pages in February to decline more than 20% in April again, these kind of temporary impacts.
Its economy would recover.
We will go back to a more normal petition, but when we look at it impacting Q3 as Steve said, we expect two months than I have to be mindful about therefore monthly. These categories. That's was about one month.
Got it appreciate I appreciate that and as a follow up just got the longer term question. It seems like every quarter My model I just yet.
Operating margins on personal system size, just keeps marching up in six seven almost quarters almost two years now that that's marched up and now above your range. Then Conversely print AD understand the latest quarter. In particular is is little bit different but in general kind of a downward trend now that you know the Nexus 50, 50, right and when history.
Barclay personal systems is probably closer to maybe a third if not a fourth of the profit mix between the two segments.
I'll point, you think it's structural or do you think that at some point you get back to that historical range, whereby personal systems is that one third versus trains that suit their mix or do you think eating it takes a long time as gap in a short order or do you think we're kind of seeing a new norm here.
Well I guess, we don't manage our business to try to solve for our respective mix I think we're very pleased with the results from our personal systems business.
And it's sort of by the end math that represents a half of the company's profit but to your question. We haven't driving very good margins both from a rate, but more importantly, when driving very strong operating profit dollar growth in that business and certainly see the opportunities to continue executing in the high.
Higher end of that long term range, which bodes well for a category, where the PC has become even more essential on print I would say that Q2 and are embedded in our outlook in Q3 are really.
Temporary odd challenges in the print margin.
Structure, you know, we're dealing with larger supplies revenue declines driven by commercial as well as commercial hardware declines, but once the market begins to recover and workers go back to the office, we would anticipate that those margins would normalize back into that 16% to 18%.
Longer term as we drive our strategy to.
Two or two to drive more profitable customers to drive a higher mix of contractual.
Too.
Further.
Penetrate new developing markets with our big tank offerings. These should be margin accretive opportunities for us. In addition to the cost take out so we're driving.
Now let me take now there the opportunity to close decision I phone way. Thank you for joining them. Thank you for your question.
Wanted to end up by saying that we firmly believe that HP is ready one position for the future.
Most companies are facing challenges right now are the best companies are doing those does not seem to weather the storm that taking advantage of the opportunities that we see on transformed our company and this is exactly what they'd be he's going to be doing we have many things are very strong balance sheet our diverse portfolio.
Very disciplined cost management and seven out of the trend started we have seen during the last week I'm going to help us to make our brand even more relevant even more to sanction for our customers.
Our focus stays in executing our plan on continued to deny value for our customers.
Thank you Stacy.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.