Q3 2020 HP Inc Earnings Call
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Good day, everyone and welcome to the third quarter 2020, HP Inc. earnings Conference call. My name is coal and I'll be your conference moderator for todays call.
At this time, all participants will be in listen only mode, we'll be facilitating a question and answer session towards the ended the conference should you need assistance during the call. Please signal a conference specialist brokers in the Starkey followed by zero.
As a reminder, this conference call is being recorded for replay purposes.
I like to turn the conference over to the head of Investor Relations. Please go ahead.
Good afternoon, everyone and welcome to age <unk> third quarter, Tony Tony Earnings Conference call with me today, our Enrique Laura H. piece, President and Chief Executive Officer, and Steve Filer, Hps Chief Financial Officer.
Before handing the call overtime Enrique let me remind you that this call is being webcast a replay of the webcast will be made available on our website. Shortly after the call her approximately one year.
We posted the earnings release and the accompanying slide presentation on our Investor Relations Web page and Investor that HP Dot com.
As always elements of this presentation are forward looking and are based on our best fuel 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 assumption. Please refer to hps FCC reports, including our most recent form 10-K and form 10-Q.
He 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 H. fees form 10-K for the year ended October 30, Onest 2020, and H. fees other SEC filings.
During this webcast unless otherwise specifically noted all comparisons are year over year comparison, with a corresponding year ago period.
For financial information that has been expressed on non-GAAP basis, we've included reconciliations to comparable GAAP information.
Please refer to the tables and slide presentation accompanying todays earnings release for those reconciliations.
And now I'll turn it over to Enrique.
Thank you Rick Thank you everyone for joining the call today.
Our to do hope you are you referring to you.
On the world.
Our strong Q3 results in the food well from pursuing pick uncertainty. We clearly are due to the forward fees from the strength of our portfolio.
Our people how to move those joke refugee adapting to changing market conditions on driving busy premixed fusion on cost management.
But as a result for the quarter, we delever beyond our expectations for revenue earnings from cash flow.
When we reporters $1 billion, so shirt really heard spoke prior levels.
Quarterly we're navigating the environment will find copies or lighting for new opportunities. We are positioning there was suppose to meet the evolving needs of our customers from the federal of MPC.
All of these first for forces on close to the rice for subscription based business model on more personalized solutions.
By consistently Terler working the times like these are winstone companies get stronger.
This quarter's results give me confidence in where we're headed.
The strength of our strategies on the operational capabilities will enable us to continue leading in both the print on PC categories.
Today, I'd like to quarter three topics with you.
My summary on our third quarter performance.
The parameters were making against our brands, we've upped transform strategy and our value plus.
And finally, our career expectations for how they pandemic an older market dynamics will impact our business.
In Q3, we delivered revenue of $14.3 billion flat year on year on Sixtym person quarter on quarter in constant currency.
Non-GAAP EPS was 49 cents on we generated free cash flow of $1.6 billion.
Importantly, non-GAAP operating expenses were down over a quarter $4 billion reviewed by our ongoing cost reductions on lower discretionary spend.
We are excellent results in the current environment.
We continue to advance our leadership in personal systems on print.
That's how to Sims will deliver growth in revenue profit from share when we deliver Rick or unit shipments in Q3.
The BP these more central to daily life than ever and PC use these have more than 20% seems coverage emerge.
We are empowering remote workers and students with the ultimate office and learning experiences at home.
This is fueled by a range of innovations that are keeping people connected collaborative unsecured.
For example in the quarter, we launched a build new lineup of commercial lead books, our new line of ergonomic monitors.
Beyond work nearly two thirds of people see the PC is one of the main ways they stay entertaining.
And this quarter, we expanded our lineup of omen im familiar and gaming PC displays and accessories.
Turning to print the business performed better than we expected.
Newly performance improved sequentially and we address the supply chain impacts for the factory closures, we discussed on the Q2 calls.
More broadly what do you mean uniquely will position given our leadership across both consumer and commercial print.
Our strength, that's a clear advantage in the current environment.
The shift to remote work on learning drove an uptick in home printing.
We saw an increase of ink usage versus our original target.
And we saw strong growth in hps, Marta abusive with mobile downloads up 70% year over year.
We also launched a new lineup of HP every printers with our first really centric feature sets.
We also continue to evolve our business model.
We expanded our instant ink subscription business growing subscribers double digits.
We expect to surpassed 8 million subscribers by the end of the fiscal year.
And we are connecting our instant ink and managed print services systems to take advantage of their work from home trend.
In Q3, we began rolling out the first phase of centralize billing for commercial employees printing from home.
In the coming quarters, where we'll be expanding these offerings to enable frictionless print from anywhere for customers, whose employees as noting the off his full time.
Importantly in commercial printing, we'd see some improvement as a quarter progress.
In my list print services July page volume goes down probably 25% an improvement from a boom would we saw a decline of revelry, 40%.
While there remains much uncertainty about the facing and pace of recovery refund early indication of office users heading into right direction.
But the same time, we're making progress against our plan to develop industries with our technology solutions on IP.
Across our industrial businesses will continue to see attractive opportunity to drive medium to long term value creation.
The benefits of Threed printing and the strength of our ecosystem are being clear throughout the pandemic.
HP signage positive coupled used more than 4 million threed printed parts for the healthcare sector.
We also introduced by new Threed printing materials can establish an alliance with ostler one of the Industrys largest three d. parts manufacturers.
While commercial business segments, such as graphics have been challenged due to business closures, we did see attractive pockets of growth.
Labels and packaging for example, so impressions increased 14% year over year.
Moving forward, we will continue to capitalize on opportunities to create value for HP and our customers by delivering new end to end applications that enable highly personalized products and solutions.
And as we advance on this up we're transforming the way we work.
Our focus is to unlock value and become a leaner more digitally enabled company.
We are well ahead of our cost reduction plans for the year and we're making progress against the many initiatives we are blind last fall.
We have extended our geographic simplification initiative beyond our sales organization to supply chain and customer support.
And to adapt our internal program to date digital realities, we launched a new partner program called amplify in Q3.
The program will enable enhanced data analytics and provide partner with a capability tools and insights required to capitalize on opportunities across the portfolio.
Overall, our Q3 results demonstrate progress, we're making against our strategy.
Two part in this strategy is I set of financial principles that we idled line in our value creation plan.
These principles include.
There are multiple levers, we have to drive profitability, including our structural cost reduction program.
Our revised leverage target of 1.5 to two times, maintaining an investment grade credit rating on our commitment to return to shareholder 100% of free cash flow on excess cash over the long term unless higher Peter on it.
Business opportunities emerge.
In the third quarter, we increased our share buyback repurchasing approximately $1 billion in stock.
This is a higher level in a single quarter since separation.
In the quarters ahead, we expect to maintain similar level at a minimum.
We remain fully committed to the principles of our value plan under demonstrating concrete progress toward our goals.
These lieske to the next topic the trends, we see in our business.
In the home and consumer segment, we expect continued strength through at least play into the year.
Even as currencies, we open people will continue to spend more time at home.
Very commercial market will likely remain dynamic in commercial PC, we expect the accelerated mix shift from desktops to notebooks to continue driven by strength in chromebooks, particularly in education.
In office on commercial print as I mentioned earlier, we have seen signs of improvement.
We anticipate the reopening of businesses will gradually increase the demand for printing and related services.
That said, they're facing on pace as a recovery remains dynamic.
I want to close on each these culture.
In tough times like these it matters more than ever.
Not only a high performance culture to drive innovation as well as shareholder value.
At our purpose driven culture that creates value for society.
And most of all our culture that unites employees with not only our share purpose, but also our commitment to doing what is right.
In the phase of the global pandemic and a long overdue reckoning Weve ratio inequality re has never been more important.
I am proud of the way our people and partners are stepping up on taking action to drive systemic change.
During that time, we so much strategy in the world we have seen our employee engagement scores reached all time highs.
They speak culture is our serves of thing that is guiding us Hello.
You will continue to see us take actions to drive I'm not sustainable equitable unjust future.
It is not just the right seem to do it is good for our shareholders.
In 2019, our sustainable impact work helped to drive more than $1.6 billion in new sales.
Our results these core to the commitment of our people and the strength of our culture give me confidence in where we're headed.
Well, we have lots of work to do we see significant opportunity to drive long term value creation.
Our structural advantages disciplined cost management and unwavering focus on the customer.
Position as well to navigate current headwinds.
And our leadership in both consumer and commercial uniquely positioned HP to capitalize on opportunities across the business.
With that I will turn the call over to Steve to take you through the financial details.
Thanks, Enrique we're pleased with our third quarter results, especially in light of our overall market and macro context, our performance reflected the companys multiple profit lovers execution agility and resiliency.
Third quarter net revenue was $14.3 billion down 2% year on year were flat in constant currency.
As expected we saw growth in personal systems revenue and declines in print revenue.
Regionally in constant currency A.J. increased 5% EMEA increased 2% in Americas declined 4% growth.
Gross margin was 16.7% down 320 basis points year on year.
The decline was due to combination of a higher personal systems mix, a higher consumer mix within personal systems and the lower print rate driven by volume.
Non-GAAP operating expenses were $1.5 billion down $274 million year over year.
The Opex decline was driven by our ongoing cost reductions program as part of our transformation efforts as well as reductions and discretionary costs.
Non-GAAP net Hawaiian expense was $42 million for the quarter.
We delivered non-GAAP diluted earnings per share of 49 cents with a diluted share count of approximately 1.4 billion shares.
Non-GAAP diluted earnings per share, excluding net benefit totaling $32 million related to non operating retirement related credits and other tax adjustments, partially offset by amortization of intangible assets debt extinguishment costs and restructuring and other charges.
As a result, Q3 GAAP diluted net earnings per share was 52 cents.
Turning to segment performance in personal systems, we delivered another strong quarter growing share revenue and profit dollars.
The business demonstrated its resiliency following the impact of cobot on supply chain issues in fiscal Q2.
In Q3 personal systems benefited from strong demand related to working and learning from home with revenue of $10.4 billion up 7% or 9% in constant currency.
Drilling into the details by customer segment, we saw differing results with consumer revenue up 42%, while commercial revenue was down 6%.
By product category again results differ.
Revenue was up 30% for notebooks down, 29% for desktops and down 30% per workstations.
The change in mix reflects the strong demand for notebooks, mainly in chromebooks from the educational and consumer markets, respectively, as a shift to working and learning from home continues.
Operating margins remained high at 5.5% and operating profit dollars were up year on year to $570 million, representing 54% of HP segment profitability.
This is the 11th consecutive quarter of operating profit dollar increase as the team has effectively navigated headwinds and tailwinds. During this time.
In print, we had anticipated a challenging quarter given the cobot impact on our commercial business and the team demonstrated agility and strong execution meeting or exceeding our expectations.
Importantly, HP remains uniquely well positioned in the print market by being leaders across both the home and office with longer term growth opportunities across our industrial categories.
This creates opportunities in this current environment and beyond to address the changing and holistic customer needs by providing innovative secure and strong ROI value propositions across geographies and customer segments.
Looking at Q3 demand as we expected we saw a decrease in commercial print across our office in graphics businesses.
This includes a negative impact to both hardware and supplies as many businesses remain close and office workers continue to work from home in many geographies.
The other hand in our own printing business, we continue to see strong demand coming from work from home.
As a result consumer hardware revenue grew 7% than units increased 3% and commercial hardware revenue declined 37% and units declined 32%.
Third quarter supplies revenue was $2.6 billion down 18% in constant currency as office in graphics printing were significantly impacted by the cobot 19 restrictions.
Overall in Q3, the team remained disciplined and managing channel inventory, keeping tier one channel inventory levels below the ceiling.
In total Q3 print revenue was $3.9 billion down, 20% nominally and 19% in constant currency.
In print operating margins were 12.2%, which included a full quarter impact of office closures in commercial print and the corresponding volume declines.
Operating profit dollars were $480 million.
In general we saw improvement in commercial print usage through the course of the quarter as well as our factories back to more normalized levels.
Therefore, we remain confident for Q4 operating profit dollars and margin rate, we will improve sequentially and that as volumes increase our operating margins will return to our long term target of 16% to 18% overtime.
Let me now turned toward transformation efforts, and specifically or cost savings actions and opportunities ahead.
Importantly, we're making good progress on our announced plans.
We are currently tracking well ahead of plan and our three year program to achieve 1.2 billion in gross run rate structural cost reductions.
To illustrate we've seen significant operating expense reductions throughout the year with Q3, non-GAAP opex as a percentage of revenue at 10.6%.
As we continue to generate savings we are the same time focused on improving effectiveness and speed.
As an example, we've seen a positive impacts driven across our centralized commercial organization and corresponding supply chain teams, where in recent quarters, we improved the speed and flexibility required to navigate the highly dynamic supply and demand changes across the globe.
We're also making investments, especially in digital which will help our overall customer partner and employee experience in the quarters in years to come.
During this dynamic environment, we're continuing to reduce discretionary cost as much as possible.
While these discretionary reductions can be more temporary than structural we will continue to focus on driving a lean cost structure to help us navigate.
Shifting to cash flow and capital allocation.
Q3 cash flow from operations and free cash flow were strong at 1.7 billion and $1.6 billion, respectively, which helped strengthen our revised full year outlook.
In Q3, the cash conversion cycle was minus 30 days.
Sequentially the cash conversion cycle is down four days driven by more normalized purchasing and sales linearity, including decreases in days payable outstanding days of inventory and days sales outstanding.
In Q3, HP raised $3 billion of senior unsecured notes.
This is our first corporate debt raise since 2014 and is consistent with our capital structure strategy communicated earlier this year.
The proceeds have many benefits, including creating capacity to make disciplined returns based capital allocation decisions, including share repurchases through.
Moving our debt maturity curve, including retiring approximately $1.6 billion of 2020, and 2021 notes along with short term commercial paper.
And in the near term during this dynamic period, providing additional balance sheet prudence.
These actions incorporate our commitment to an investment grade rating.
Importantly, we are committed to robust dividend and share repurchase program.
We returned $953 million to shareholders through share repurchases and $251 million via cash dividends in Q3.
For reference these actions equate to buying back roughly 4% of HP shares in Q3 alone.
Year to date, we've returned a total of $2.5 billion, which represents 121% of free cash flow.
Looking forward in the near term, we expect to continue being active in the market and buyback shares at elevated levels in the range of approximately $1 billion per quarter at minimum.
Heading into Q4 keep the following in mind related to our overall financial outlook.
We expect macroeconomic conditions to remain uncertain as we continue to monitor the dynamics of the cobot 19 pandemic.
Turning to specific personal systems assumptions, we expect continued strong demand in consumer in education with more caution in commercial, particularly desktops and workstations.
We expect industrywide, CPU and panel constraints to negatively impact our ability to meet demand, especially for notebooks, which will constrain topline growth.
We expect the costs from the overall basket of commodities to be similar compared to Q3 levels.
From a margin perspective, we would expect Q4 operating margins to be lower compared to Q3, driven by mix changes, but still being the upper half of our 3.5% to 5.5% long term operating margin target range.
In printing, we expect Q4 to improve relative to Q3.
This includes units total revenue supplies revenue profit dollars and margin rate.
We expect that our supply chain impacts mainly related to the earlier factory closures in southeast Asia to be largely mitigated.
From a demand perspective, we're still expecting commercial print to stay at depressed levels with positive demand coming from home printing.
Taking these considerations into account, we're providing the following outlook.
We expect Q4 20, non-GAAP diluted earnings per share to be in the range of 50 to 54 cents.
In Q4, 20, GAAP diluted earnings per share to be in the range of 32 to 36 cents.
GAAP EPS includes the cost of restructuring tax adjustments and onetime defined benefit plan settlement charges.
We expect fight 20, non-GAAP diluted net earnings per share to be in the range of $2 in 16 and $2.20.
In fact, 20 GAAP diluted net earnings per share to be in the range of $1.83 to $1.87.
We expect Fytwenty free cash flow to be in the range of $2.5 billion to $3 billion.
And now I would like to handed back the operator and open the call for your questions.
Thank you and we will now begin the question and answer session.
We ask a question in a press Star then one on your Touchtone phone.
If you're using a speakerphone, please pick up your handset or pressing the key.
Mr. All your question. Please press Star then too.
We also asking you please limit yourself to one question in a single follow up.
First question today will come from back Kabral with credit Suisse.
Go ahead.
Yes. Thank you.
Two questions on Pcs I guess I'll just ask both the same time I guess the first one I'm wondering if there's any way to breakout how much of the growth you saw in the quarter wins underlying strength versus just a backlog that carried over from April and just any more incremental commentary about how to think about the demand picture from here and then the second piece.
You guys talked about Chromebooks, a couple times in the prepared remarks wonder if you could spend a little bit more on what you're seeing there just how we should think about that relative to your mix and what that means relative to profitability of traditional PC is going forward.
Yeah, Thats, what I take a stab at this so first as it relates to demand I think whereas Turner's we still see very strong demand, particularly in notebooks.
Driven heavily by consumer and chromebooks.
We also saw strong demand in commercial notebooks in Q3 and that demand.
Continues to remain strong I think the way to think about it this year has.
Hi, slightly skewed seasonality just given the supply chain challenges. We saw on Q2 would certainly help the backlog entering Q3, we still have a strong backlog on the notebook side, but did when think about is our second half of the year should be historically stronger than our first half or maybe the other way to think.
Got it is if we look at our Q4 outlook. Our Q4, a forecast is roughly in line with what we see a typical Q4 being as a percentage of the total annual revenue mix.
It is relates to through the margin profile, we are seeing much stronger demand again on consumer and chromebook and that does have a slightly negative impact on our overall margin rate that is factored into our Q4 outlook as well.
And then maybe only one one additional comment as we look at the next quarter related there clearly mutation is another under the mine side on the demand side is actually on their supply chain tight because given the demand that we've seen some specific segment, we really need to find me to continue to find more components.
This has hurt us on finance to respond to that demand that we that we see.
And our next question will come from Kiss soccer with Cowen and company. Please go ahead.
Hi, Thanks for taking my question and congrats on the song landfill. The first question I had was on the fleet business.
Do you see the businesses bottom audiences and suffice to say given commotion Hudson depressed and along the same.
Are there any tangible milestones you can share.
Oh, we can evolve into subscription model on the print business them at a follow up.
Yes. This in my prepared remarks in really as expected or better than expected.
With our performance Q3, and our outlook for Q4, and so we are expecting improvement sequentially in our total revenue in our supplies revenue in the total units as well as in the margin dollars and margin rate from Q3 in Q4, so setup more directly yes, we view Q3, and that's because the trough.
I managed revenue per day of recovery does recover is really very aligned to the evolution of it pandemic. We have seen the regions where that are performing better vessels that pandemic have stronger performance a BJ the regions, where we still have unlimited stronger as they weren't have seal they invite.
These big I'd like to America.
And on the subscription side incentive to I guess finished my thought there I think one of the key things that we keep on focusing on instant ink subscribers.
And we started off the year reflect on Sam last year, just about a year ago and we were roughly in the 5 million subscribers were now all over seven would expect 8 million by the end of this fiscal year, which is I think a strong indicator of the shift to subscription model.
And our next question will come from Toni Sacconaghi with Bernstein. Please go ahead.
Yes. Thank you I was hoping you could just elaborate or clarify a little bit more on capital returns. So.
It sounds like you're saying you're going to look to buyback.
At least $1 billion in shares per quarter add your dividend on to that Thats about 1 billion to and capital return.
Per quarter or 5 billion a year your cash flow generation is 3 billion per year.
So should we expect this for the next several quarters, meaning three to five more quarters are you only commenting on.
Fiscal Q4.
And when we think about you have net debt right now 1.4 billion.
Where where are you comfortable in absolute terms taking that debt.
And will you be.
Looking to raise.
Additional debt to facilitate this buyback and I've a follow up please.
Yes, so from a return of capital perspective, the principles, we outline of the value plan are clearly in place that does include the significant return of capital. We do continue to believe our our stock is undervalued, we are demonstrating our ability to generate strong free cash flow this year outlook to.
And a half two to 3 billion I would say historically, we've been at the three and a half billion north level I won't comment on on future years at this point, but I think what you're seeing is the agility, our portfolio and ability to manage.
It's a strong free cash flow generating a set of businesses.
That ultimately gets to where we are today.
And we are kind at the same time, recognizing it's a dynamic economic environment.
Taking all those factors and considerations and we plan to react to the market and buyback at elevated levels.
It's at the approximately 1 billion per quarter at minimum and we see that over the next few quarters clearly if things change in economic environment. We can update you on any change to the return of capital plans from there.
In terms of through source of capital and your question around net debt.
We do have.
Comfort overtime of of having a higher net debt level, and specifically, even higher gross debt and at the appropriate time.
We have the opportunity potentially access that the debt markets again.
We are still slightly below our leverage target of 1.5 to two times.
And so I think we just need to monitor the situation and again at the appropriate time, we do have comfort of going out in accessing more time.
Okay. Thank you and I was wondering if you could just.
Comment on.
The dynamics in terms of how you're thinking of sequential growth. So Q3 to Q4 year typically up as a company about 5% sequentially.
Now you could say, if you're coming out of an economic recovery, particularly in printing, we should expect your revenue growth to be above that.
You did seem to suggest though that perhaps there could be.
This could have been some backlog benefit this quarter and could be some supply constraints.
Next quarter. So when we're thinking about the puts and takes relative to normal sequential growth for both imaging and printing for Q3 to Q4 should we be thinking about something that is seasonally in line for each of those businesses and particularly for printing why wouldn't we expected to be.
Better than that given you're calling for a gradual recovery.
And ill folks coming back to work et cetera.
So if you could comment on each of them in the forces at work on sequential growth relative to normal seasonality that'd be helpful. Thank you.
Yes, I think you're right to bifurcate between the two segments and on the print side, we are expecting above normal for historical sequential growth.
Driven by the fact that we did see a stronger month three on the commercial side from usage perspective than we saw exiting last quarter and we're continuing to see strength on consumer side, and whether still some small lingering kind ripple effect from the supply chain. The factories again are generally at normalized levels.
So that gives us confidence in above normal sequential growth on the print side.
On the PC side.
We're expecting a below normal sequential growth and that is driven by the two factors I think that we respond to in the first question.
The first one being we saw sort of the skewed seasonal patterns between Q2 in Q3, and therefore have a much higher Q3 base.
That we would grow from into Q4 and then the second factor is it really starts with the demand, but we're seeing such strong demand on consumer notebooks and chrome books in particular, we are supply constrained and that does impact our growth in Q4, and therefore again, we would see below normal sequential growth.
You put those two together at the company level, given Pete personal systems was 72% of revenue this past quarter and at a company level. We would anticipate that Q3 to Q4 I'm would have a below normal sequential growth of the company level.
And our next question will come from Katy Huberty with Morgan Stanley. Please go ahead.
Thank you can you give us some more color around the page volume recovery that you're seeing in countries that has reopened or further in the reopening and then how does that translate to a view around.
What the printer supplies decline will look like in the fourth quarter, and then I've a follow up.
Sure Let me, let me start with our global number and then it will give more color for the region, but the global level like we said last quarter in April we saw a decline on managing pain service pages, which is hardwood proxy of minus 40%. We have exited July into my new is 25 plus.
And range so through the quarter, we have seen significant improvement we have seen our cost untrained undeservedly co related to the situation vessels epidemic in many Asian countries, where they see tuition is much more under control, we see volumes close to where they were before the crisis.
The U.S., winning some of the amedica into where the impacts of a positive items 50, less dunga, they're still behind significantly more behind that number on Youtube is on plays initiative in the counties, where economic activities almost back to normal we see usage level north of their previous levels by then.
To close to that and what I'm talking is really the impact on the commercial side on the consumer side in the other side driven by people working from home Keith learning from home use had 11 in most cases, both our original projections on these balance on consuming on commission is what really.
Helps us and gives us confidence in what will be the evolution of the business going forward because we have time hedge on the consumer side to really manage whatever impact we see on their commercial side.
And then as a follow up just sticking with training in the context of the shift that you're seeing from commercial to consumer print hardware sales, what do you doing to improve the historical profitability.
Consumer printer hardware placements as well as the NPV of at a life such as those printers sure actually let me, let me clarify something when we look on the business from our system perspective that consumer premium business is more profitable for vendor coming.
Based on putting business.
Hi, while premia unless you have lower gross margin by that total business have higher profitability. So this is one of the reasons why these potential rebalancing essentially could be even beneficial for us from a from a margin perspective.
Michael in terms of what are we doing we are executing this strategy that we share a few quarters ago Emily evolving on shifting.
One thing that brophy between supply and hardware Hyundai comments, Steve was making about their growth of our infant inc., we admit EDA and IP. An example of how we are driving that forward, we have seen an acceleration of the deployment of instant ink.
We have seen these are critical parts of our strategy and on the other side that the introduction of their presented with a new business model. We are on track to start having some of these finishing their market by the end of the year.
Our next question will come from a military O'neil with Evercore. Please go ahead.
Yes. Thanks for taking my question I have two as well I guess first of all Steve I wanted to go back to the capital allocation discussion how do we think about duration of how long you in assisting this billion dollar buyback for quarter and if I heard you guys talk what you said, it's MB at minimum $1 billion per quarter.
Moving forward.
Recall, you guys have about a 14 billion dollar authorization thats out there. So do I think of this momentum to sustain for the next 14 quarters, what literally and then where does M&A fit into the narrative as well.
Yes, so I'll comment on the return of capital on maybe Enrique when I turn on M&A.
The comments they really are I would say more in the in the quarters ahead clearly is the economic situation.
Stabilizes.
In that timeframe add a week certainly can update our view on return of capital at that point in time, because we see it today the $1 billion at minimum and again just reflect on Q3, just given where our stock price is that represented roughly 4% of our shares outstanding.
So anywhere between 3% to 4% of our of our shares during the buyback with $1 billion at minimum and so I would say that's really for the for the quarters to come our lending complement that because what were doing these were taking a prudent approach we acknowledge that the overall situation is to influence on we think it's important to say.
With a high level of crushing the balance sheet to make had we got we have optionality, depending on how things have on but at the same time given this thing all of our progress we've seen week on maintain these elevated levels of share buybacks for the next few quarters until we see a better when do we have been addressed.
Ability award the evolution of it all environment will be.
I'm sitting now they have M&A question I would say that we haven't I remain very disciplined disciplined we feel our capital allocation process. We measure any action that we do and upfront against a very rigorous return on capital process and we have shared before any M&A activity we do.
We have to be aligned with a strategy that we have described we have to have better ROI that already amendment and clearly we believed that our shares are.
And that value today, and said, we need to have a clear execution plan.
These remains part of our thinking about again, we will be applying that same work against any opportunity that we would consider.
Got it that's really helpful. If thats just follow up quickly on the PC margin commentary for the October quarter up Steve I think it sounded like isn't a drop down somewhat but being the upper half of the range.
Just talk about what are the reasons or what are the levers that had been you having that margins are heading down because I get sales a sub seasonal managing this was going to grow. So maybe just one other couple of headwinds you have the operating margin on Pcs in October would be helpful.
It's really just mix and as we're seeing such a large demand in our consumer mix in particular in chromebook mix. It does have a slight downtick on our margin profile I would say over the long term all the actions and opportunities we haven't mix remain drew in driving more displays accessories services.
And premium categories, but certainly as we evaluate the demand in backlog that we see today.
It is more heavily weighted to the notebook and consumer notebook in that that does have a downtick on our margin profile. So it's really mix.
And our next question will come from Shannon Cross with Cross research.
Ahead.
Thank you very much I want to take a step back and think about the printing business. If it was laid back a year ago.
Which seems like ages ago after everything we've all been too, but if you go back how how have you know the work comes online from home.
Trends change sort of your your outlook on the subsidized unsubsidized business model you announced.
Well you might want to be investing in graphics, the athree strategy I'm, just kind of curious is Q.
How you look at what your assets were sort of trico that and then how do you think you're going to be able to leverage them. After covered since you had announced such it sort of large strategy change that you know obviously, it's as you make HSN is can be rolling out starting end of this year than another follow up thank you.
So the currency duration is making that strategy, even more important because as they come in as a consumer business becomes more relevant and this is what has happened during the last quarter and we've seen will continue to happen. During the next few quarter really the importance of the shaved into a modern way we.
Half profitability better balance between hardware and supplies becomes even more important and also as we shift into subscription models, our ability to maintain high share of HP engine and supplies. These higher we told us or makes that might evolution. Most important so I'd, we look at where do we see that business going.
Clearly winning in Astro med waiting the consumer side is important for us.
I mentioned before has higher profitability and actually our share is high yet.
I have not been a page as presented in their fees being printed on HBP and as Weve HP supplies, sorry pages shift to there through the home.
We have potentially positive trend for us.
And whether the element that we have added to this strategy is the need to connect their preannouncing they'll fees, we have preemptive at home or do we are getting for many cost for many of our clients and I think I share that in the previous call. These are they want to enable their employees to be able to a pain from home in I think you away and we like.
Companies paying for that so what we are doing is connecting our instant ink service offering to their managed print services offering we had already some initiatives that we did during Q3 and we are building the infrastructure to move out in a seamless way during the next quarter's ideally what is behind that is really the.
Ability to paint anywhere in I think you away with companies paying on funding that's for that employees.
Okay and end with regard to that the Athree.
Strategy any change there.
At this point no no changes there we continue to have no share in they all fees, but of course given all these market is nowhere eventually we ran that shifting some of our core focus through their consumer side is the financing that we see.
Our next question will come from an under Burrito with capital. Please go ahead.
Hi, good afternoon, thank for taking the questions just like a unique agency.
Enrique could you give us a sense of what you enterprise customers are saying you know sort of in general about their plans are for coming back to the op, Ed you've talked a little bit about that beginning and that sort of shaking some demand lease but would love to get context, there and then also.
How you guys, you're thinking about small medium business exposure.
As well and then have a quick follow up.
Sure. So we're seeing in general is that many many of the big customers I've noted that our be returning having that employees return to they all fit in the foreseeable future. We received the if he's had a consistent trend across different countries, though there are counties, where the situation is better under control and therefore, the number of him.
It is higher and actually is very similar to what were doing internally in the company you. Many countries where situation is almost normally we have our employees working back to in the office.
Other countries like the U.S., where the impact is still big most of our employees at the working from home. So this is what we see really happening across the board with many of our large customer.
That's that's helpful. Thanks, and then just as a quick follow up Steve on the on the buyback you did 56 million in this quarter I think the I think the blend sorry, the delays with down just around 20 million.
So is that that ormat is timing.
Oil was there some odd as the stock prices dot.
But just some dilutive impact of that diligent to the diluted shares.
How should we think about that and also give the the ending share count for us as well quarter ending share count, it's likely driven by timing in terms of through the accounting treatment on the fully diluted share count is dependent upon.
The timing in a quarter in which you repurchase those shares.
We ended Q.
Quarter of 1.4 billion shares we would definitely see that going down in the quarters to come out given the larger and elevated levels of our buyback program.
Final question today will come from Aaron Rakers with Wells Fargo.
Good.
Yes. Thanks for taking your question I'd before I go back here kind of the supply chain and component cost dynamics and good could you help us accretion theater or quantify the effect that you are slow in the current business last quarter and any kind of commentary you are expecting on that a pet impact this quarter and maybe a bit more substantially.
What kind of components.
Are you seeing constraints on because I think we've seen kind of CP keep you constraints remained a headwind for quite some time.
Just curious of what exactly you're seeing there.
Well I think the.
You know sort of the question.
Or issue starts with demand and again, we're seeing.
Strong demand in particularly categories of our personal systems business I notebooks.
Consumer notebooks and chromebooks in particular.
That is creating outsized demand and therefore, when we look at supply the areas that we see constrains are in panels and NCP use broadly to to fulfill that demand.
And on the component cost environment.
Your I think some of the component cost dynamics are starting to turn maybe more deflationary. So just curious.
Why maybe you might not be seeing some of that are just being conservative in your expectation. The next couple of quarters. Thank you.
We are seeing in certain parts of the basket overall commodities components. Some deflationary trends there were other parts that are more inflationary or stable when we put them all together, including the cost of logistics. We are viewing Q4 to be roughly at similar levels as Q3 again.
Some some up some down but overall kind of flat sequentially.
Well, let me let me close now we've we've some final thoughts first of all I wanted to kind of emphasize the fact that the fact that we have leadership position in both consumer and commercial markets both for both.
Personal systems unpaid he thought so things for us going forward no matter, how their current economic situation evolves and we're really focused on capitalizing on the opportunities as we see a head of the.
If he has become a sanchez and then we have discussed today. This is clearly an opportunity for us but those are the fact that was he goes im hoping home printing and home interpretation services area that I was gonna be helping our plans going forward. We're having said that we remain very focused on executing our strategy.
We are executing what we said we were going to do a few quarters ago.
And we're very confident you know what ability to continue to create value going forward. Thank you for joining us today.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.
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