Q1 2021 HP Inc Earnings Call
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[music].
Good day, everyone and welcome to the first quarter 2021, HP, Inc. Earnings Conference call. My name is Eylea and I'll be your conference moderator for today's call.
At this time, all participants will be in listen only mode. We will be facilitating a question and answer session towards the end of the conference should you need assistance during the call. Please signal a conference specialist by pressing the star key followed by zero.
As a reminder, this conference is being recorded for replay purposes.
I would now like to turn the call over to Beth Howe head of Investor Relations. Please go ahead.
Good afternoon, everyone and welcome to H piece first quarter, 'twenty and 'twenty One earnings conference call with me today are Enrique Lawrence <unk>, President and Chief Executive Officer, and Marie Myers, Hp's, Chief Financial Officer before handing the call over to Enrique Let me remind you that this call is being webcast. A replay of this webcast will be made available.
On our website shortly after the call for approximately one year.
Earlier today, we issued our earnings release, and we have posted the release and the accompanying slide presentation on our Investor Relations webpage at Investor that H P. Dot com as always elements of this presentation are forward looking and are based on our best view of the world and our businesses as we see them today.
For more detailed information, please see disclaimers and the earnings materials relating to forward looking statements and involve risks uncertainties and assumptions for a discussion of these risks uncertainties and assumptions. Please refer to Hp's SEC reports, including our most recent form 10-K.
<unk> 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 and Hp's form 10-Q for the fiscal quarter ended January 31 2021.
And Hp's other SEC filings.
During this webcast unless otherwise specifically noted all comparisons are year over year comparisons with the corresponding year ago period for.
And for financial information that has and expressed on a non-GAAP basis. We've included reconciliations to the comparable GAAP information.
Please refer to the tables and slide presentation accompanying today's earnings release for those reconciliations.
And now I'll turn it over to Enrique.
Thank you Beth and thank you everyone for joining the call today are.
And how are you and your families are safe and well.
H B program exception and start to the year with strong revenue and profit growth in Q1.
We are benefiting from the strength of our portfolio and the diversity of our businesses.
We continue to evolve our business model to meet changing customer movement, while expanding into adjacencies to grow our addressable market.
And we are driving and aggressive transformation agenda by rigorously managing our costs, while investing to drive future growth.
Simply put we are doing what we said we would do on our strategy is working.
Our Q1 results are impressive across many dimensions.
We deliver strong topline growth with net revenue up 7% to $15 $6 billion and balance growth our growth personal systems and print.
We deliver strong bottom line growth with $295 million in non-GAAP operating profit dollar flow through and double the profit growth in both personal systems and print.
We delivered non-GAAP net earnings of $1.2 billion up 24% with 92 cents of non-GAAP diluted net earnings per share.
This is up 27% compared to Q1 of last year.
And finally, we de lever and $108 million of free cash flow in the quarter.
We also remain committed to a significant return of capital, we returned $1 $6 billion to shareholders, including $1 $4 billion and share repurchases and $250 million and dividends.
Over the last three quarters, we have returned $4 $4 billion to shareholders.
Purchase approximately 13% of our shifts.
And the onset of the pandemic I told our teams, but this is a time when stone companies find ways to emerge stronger.
And last quarter results show, that's exactly what we are doing.
Hpe's broad and differentiated portfolio and leadership across consumer and commercial markets make us more resilient across business cycles and.
We continue to capitalize on the strong demand for our offering particularly in consumer to drive profitable growth.
Yeah, the impact of the pandemic is ongoing and the pace of the economic recovery remains uneven.
We are continuing to manage our business and a disciplined and prudent manner, while remaining agile in the face of change.
And these means capitalizing on opportunities when they arise while also managing volatility when it occurs.
How do we balance all of these dynamics, we have stayed focused on executing against our strategy to advance our leadership and personal systems and print by optimizing our core and expanding into attractive adjacencies.
Industries with our technology to create new businesses in areas like C D industrial print and Microfluidics and.
Tons for them the way, we work to be more digitally enabled and cost efficient.
Our continued progress against these strategic priorities is reflected in the strong revenue and profit growth free cash flow and capital returns we delivered in Q1 and.
And the positive momentum in each of our businesses.
I will start with personal systems, which had another strong quarter with revenue of $10.6 billion.
We shipped more than 18 million units and generated operating margins of seven 1%.
Consumer revenue growth accelerated to 34% with consumer premium up 34% gaming up 29% and consumer accessories up 22%.
And on top of these chromebook revenue quadruple.
We exited the quarter with a record backlog and we continue to operate with component supply shortages that are expected to constrain our growth through at least Q3.
It's clear we have entered a new era of innovation and growth for P. C.
They have become an essential part of how people work learn and play and we continue to innovate to create new experiences.
It's funny to say, but the D. C is personal and once again.
And we are seeing this in the awards, we are receiving and.
And last month's consumer electronics show, we introduced new devices and solutions to power hybrid work and vitamins and personal creative studios.
And we were recognized with over 70 awards for our latest launches, including our new five D enabled products.
Looking ahead, we expect to see continued PC unit growth through 2021, which we anticipate will create additional opportunities for us to drive profitable growth.
We are also accelerating and attractive adjacencies, such as gaming and pay for that.
And with every market in which we play our goal is to be a leader in the space.
This week, we announced the acquisition of hybrid ex the market leader in gaming headsets.
The addition of hybrids and expands our presence and they go and pretty for the us market with a brand that is trusted by games around the world.
Our existing strength in gaming hardware and combined with hybrid X portfolio spun and gaming headset microphone and older publishers will further expand our ecosystem and create another growth engine in personal systems.
Much like personal systems printing is off to a terrific start to the year.
This quarter demonstrated the power of print to help people learn and create and perform with 7% revenue growth, 16% and unit growth and 32% profit growth.
And Q1, our printing business generated revenue of $5 billion and operating profit of $1 billion.
Similar to the personal systems business, we remain supply constrained, particularly in consumer printer hardware and supplies.
While the COVID-19 related impacts and our manufacturing and supply chain have diminished. We anticipate these constraints to continue into the third quarter.
H P E shelter affirming its printing peers and remain uniquely well positioned given our leadership across both consumer and commercial print.
Our strong consumer business is a clear competitive advantage and hybrid work and school becomes the norm.
We have seen that people, who didnt have home printers wind and bought them.
And people signing up for instant ink in record numbers accelerating and already grow and part of our business.
And instant ink, we added 1 million new subscribers, surpassing 9 million enrollees in the first quarter.
Commercial printing improved in Q1 with most product categories showing sequential revenue growth.
And CQ four total printing market units grew 6%.
We continue to expect a gradual recovery in the overall commercial printing market, although the pace might be uneven given the very and pace of economic recovery.
And we expect that the strength and consumer will gradually subside as more schools and offices reopen.
We continue to execute on our strategy to modernize print and evolve our print business models in Q1, we rollout our into and platform strategy called HP plus debt combined convenient and instant ink and hps marked up services with innovative hardware.
It's early days, but we have already seen positive adoption.
In the coming quarters, we will be rolling HP, plus out and more broadly across multiple markets and product lines.
New value propositions like HP plus.
And indicative of the opportunities ahead, and we continue to innovate to meet evolving customer needs.
This also applies to our contractual businesses such as managed print services, where we see attractive opportunities to deliver services designed for the hybrid work force of the future.
One example is our HP flex workers services.
These services can be added to our company existing M P as contract to help remote workers and maintain their productivity.
And these means being able to seamlessly print scan and copy securely all the way to working from home.
And with leadership in both consumer and commercial and a strong track record of innovation H B is positioned to define and lead the future of printing in a post pandemic world.
And city printing and inductor and graphics, we continue to innovate across the portfolio to position ourselves for future growth.
Customers continue to use multi jet fusion for production grade output and we have seen more than 30% growth and the number of three D printed parts across our customer base.
We are also seeing strong early traction in our new molded fiber business that leverages, our true the printing technology to create and into and therapies for quick customized and environmentally sustainable packaging.
And industrial printing, we continue to see growth in digital labels and packaging with double digit growth in impressions and square meters printed.
Georgia Pacific one of the worlds largest packaging and paper goods providers easy flow in the third inkjet and we're prepared to expand their digital printing business.
This is a great milestone and validation of our technology.
We are excited for the disruptive potential in this sector. That's a very innovative technology opens up entirely new possibilities and personalization and digital manufacturing.
We are doing all this while continuing to transform the company to unlock value and become a leaner more digitally enabled company.
Our transformation journey continues to be ahead of plan with.
We have significantly reduced structural costs and driven productivity savings.
At the same time, we're enabling enhanced digitalization and we are shifting investments to attractive growth areas, where do we see opportunities for us to continue driving innovation and long term sustainable growth.
We are focused from both reducing structural costs and accelerating investments for the future.
Recently, we announced several new appointments to further strengthen hp's innovation capabilities and support its long term growth strategy.
Savi, Malaysia joined as our Chief strategy, and incubation officer, and Tolga called W. Herculean, HP as Chief Technology Officer.
And these roles and they will drive cutting edge research and incubate new business opportunities working together with the leadership team.
And last week, we named Marine barriers, plus our Chief Financial Officer.
Murray is a veteran of HP, having sales a number of leadership positions, but the company, including our controller and most recently with our Chief transformation Officer.
Marty and I have worked together for many years and she had a truly outstanding leader.
I know you will all enjoy getting to know her better.
Overall I am very pleased with the way we have started the year.
We built an hour and momentum from the end of 2020 and our teams are performing at a very high level.
And on top of delivering strong results. We are also staying true to H P values.
Last quarter H P was recognized by Newsweek and <unk>.
Free cash most responsible company for the second straight year and.
And we appear on their Barbara and list of Hungered, most sustainable companies for the third straight year.
In December we were named one of the 10 best managed companies by the Wall Street Journal.
These accolades and simply mean that we continue to ensure that making a sustainable impact remains and integrated part of our business strategy.
Let me close by saying Q1 was a strong quarter that increases our confidence about the opportunities ahead.
We have a diverse and resilient business model and we are leading in our core print and personal systems markets, while taking the steps necessary to create and scale new business sales for the future.
And our strong cash flow generation provides us flexibility to return significant capital to shareholders and invest in businesses, while also exploring and discipline and a weed.
We believe this is a time when strong successful companies like HP can get stronger.
We are not running our business to achieve incremental improvement we have tried and a much bolder transformation agenda that will expand our portfolio fueling innovation and and luck attack. These new sources of long term growth and value creation.
That is our ambition.
With that I will turn the call over to Murray, who will take you through the details for the quarter and our fiscal year outlook.
Murray over to you.
It's great to be with all of you today and I wanted to thank and reshape and he's trusted me and his finance partner and excited to take on the CFO role after more than two decades and H P.
I'm looking forward to getting to know the investment community as I settle into my new role it's.
It's clear that H P remains focused on executing each quarter, while also positioning the company for the future.
And our results demonstrate this balance of delivering in the near term, while investing in growth and leading through this dynamic environment.
Q1, with a very strong quarter, we grew revenue non-GAAP operating profit dollars faster than revenue and non-GAAP EPS even faster.
We are off to a strong start for the year and overall, we are very pleased with our results.
Now, let's look at the details of the first quarter.
Q1, net revenue was $15 $6 billion up 7%, both nominally and in constant currency.
Regionally and constant currency Americas increased 17% EMEA increased 3% and eight.
P J decreased 5%.
Gross margin was 21, 2% up one six points year on year.
The increase was driven by favorable pricing and commodity costs and personal systems and.
Favorable pricing and printing, particularly in consumer hardware.
Non-GAAP operating expenses were $1 $8 billion up $157 million.
And increasing operating expenses was driven by investments to position for future growth and increase and certain one time expenses.
Non-GAAP net away and expense was $63 million for the quarter non-GAAP diluted net earnings per share increased 42% to 92 cents with a diluted share count of approximately $1 3 billion shares.
Non-GAAP diluted net earnings per share excludes a net expense totaling $120 million, primarily related to restructuring and other charges amortization of intangible assets other tax adjustments and partially offset by non operating retirement related credits.
As a result, Q1 GAAP diluted net earnings per share was <unk> 83 cents.
Turning to segment performance and.
And Q1 personal systems benefited from strong demand related to working and learning from HUD with revenue of $10 $6 billion up 7% year over year.
Topline remain constrained due to industry wide component shortages.
Drilling into the details we continue to see differing results by customer segment with consumer revenue up 34%, while commercial revenue was down 6%.
By product category revenue was up 23% for notebooks down 18% for desktops and down 36% for workstations.
Strong demand for notebooks drove total unit growth of 15% year over year with chromebooks, representing 16% of our total personal systems units as the need for technology and education continued to growth.
Personal systems delivered a record $758 million and operating profit and operating margins of seven 1% much higher debt outlook.
The year over year increase was primarily due to favorable pricing, including fewer promotions and fee.
Favorable commodity cost.
And print our results reflected very strong execution as we continued to benefit from the strength of our portfolio as a leader across both consumer and commercial print.
Q1, total print revenue was $5 billion up 7% by.
By customer segment consumer revenue was up 55% with units up 18% and commercial revenue was down 11% and flat and units.
And total hardware units was very strong at 11.1 million units up 16%.
Supplies revenue was $3 $1 billion up 3%.
And the first quarter ongoing consumer demand combined with favorable pricing and inventory replenishment more than offset lower commercial demand.
Sequentially supplies revenue was flat.
Printing operating profit was very strong at $1 billion and operating margins were 19, 8%.
Year over year increase was primarily due to favorable pricing, including fewer promotions.
Let me now turn to our transformation efforts and specifically our cost savings opportunities.
And Q1 about 700 people exited the company as we continue to be ahead of plan against our three year 1.2 billion dollar growth run rate structural cost reduction plan.
During the quarter, we continued to execute and real estate site optimization activities at six sites that are aligned and without location and ability strategies. In addition, we have achieved additional efficiency improvements and customer service and support as we continue to shift to Digitization and automation.
Finally, we continue to be focused on further digital enablement and driving a lean cost structure as it provides us the flexibility to reinvest in other areas of our business.
Shifting to cash flow and capital allocation.
Third quarter cash flow from operations and free cash flow was solid at $1 billion and $908 billion respectively.
And Q1, the cash conversion cycle with minus 30 days.
Sequentially, the cash conversion cycle was flat as growth and inventory, primarily driven by strategic buys and finished goods driving increases and days of inventory offset by increases and days payable outstanding debt.
Day sales outstanding also decreased during the quarter.
For the quarter, we returned a total of $1 $6 billion to shareholders, which represented 179% of free cash flow.
This included $1 $4 billion and share repurchases and $215 million and cash dividends looking.
Looking forward, we expect to continue buying back shares and elevated levels of at least $1 billion per quarter in the coming quarters, unless higher return opportunities emerge.
Looking forward to the second quarter and the rest of fiscal 'twenty, one and keep the following in mind related to our overall financial outlook.
While we expect year over year revenue growth in FY 'twenty, one to affect that continued progress on our strategy. It is also important to note that growth trends in Q2, and Q3 will also reflect the easier year over year comparisons due to the unusual COVID-19 related impacts we saw last year and.
And then the second half of the here and we expect to see a more normalization of the market environment as more people return to the office and.
Kids return to school and as.
The pricing environment normalizes.
Outlook range is broader than usual given the current market environment.
We are modeling multiple scenarios related to supply availability pricing dynamics and the pace of economic reopening.
Our comments for Q2 are the following.
In personal systems, our backlog remains elevated as demand and consumer and education remains very strong and we expect industry wide component constraints to continue to negatively impact our ability to meet demand, especially for notebooks, which will constrain topline growth.
We expect the cuts from the overall basket of commodities to be slightly higher compared to Q1 levels and from a margin perspective, we expect Q2 operating margins to be in the range of Q1 margins.
And printing from.
From a demand perspective, we expect to continue to see strong demand for home printing as well as the continued economic pressure and commercial printing.
We expect to have to navigate supply constraints and the need to replenish stocks and that our ecosystem partners are well positioned to satisfy the strong demand that we see and printers and supplies.
We expect our operating margin for Q2 to be at the high end about long term range of 16% to 18%.
Taking these considerations into account we are providing the following guidance for Q2 and FY 'twenty one.
We expect second quarter non-GAAP diluted net earnings per share to be and a range of 84 to 90 cents.
And second quarter GAAP diluted net earnings per share to be and the range of 82 to 88 cents we.
We expect FY 'twenty, one non-GAAP diluted net earnings per share to be and the range of $3.15 to $3.25.
And FY 'twenty, one GAAP diluted net earnings per share to be in the range of $2 and 98 to $3.08.
FY 'twenty, one we expect our free cash flow to be at least $4 billion.
And now I would like to hand, it back to the operator open the call for your questions.
Thank you and they will now begin the question and answer session cash.
Ask a question you May press Star then one on your attached on Sun. If you are using a speakerphone. Please pick up your handset before passing the keys and withdraw your question. Please press Star then two.
Also ask that you please limit yourself to one question and a single follow up.
Our first question today will come from Shannon Cross with Cross research.
And thank you very much and Murray I, just wanted to congratulate you and your new role.
My My question I'm in and it's a two part question. So I'll just leave it to one question today and I was wondering and Richard can you talk a bit about sustainability and you know sort of beyond the quarter that you guided to and you know that's one of the big questions and I think people have right now and maybe if you can you know you've pointed to shortages and and.
T see lasting until third quarter. So you know maybe you can talk on the PC side, a little bit about what you see long term for the market and what my support the P C business sort of in future quarters.
And then if you could turn to printing you know if you can talk a bit about what print plus means for the long term model and how you see that impacting margins as well as discussing a bit cause I think maybe it's under appreciated.
How the shift to inkjet is going to help margins long term since you own the whole inkjet stack and you now have to partner with canon for laser sales.
If you could maybe address those two parks that is my completes my question.
Thank you Shannon and I will try to infer on all your points. So when he's probably sustainability yoga and momentum that we see and I would say that we are very optimistic about what.
And what are our expectations for the market for the coming quarters, we seem that many of the underlying trends that are driving demand today are going to see I think the pandemic has made technology clear.
Clear message for people to work to entertain to leave and this is going to continue to drive very strong demand for Pcs and food and home printers for the foreseeable future, but especially for P series, We also think that.
Oh, He said will reopen and we're gonna see an increase of demand on the PC space. Because here you will have to invest from PC game to make their employees productive and we are going to continue to see a shift towards notebooks that also helps on the demand side and the renewal cycles are shorter.
We also think that they need to the hybrid model of working between office and home opens new opportunities for us on the printing side to offer new services to create new services by combining both so overall again, we see that this is creating an opportunity for us not only to leverage New York.
And it is but really to continue to drive change and to continue to gain momentum.
If I go now to the second part of your question on on P. Fees, we expect to continue to see very strong demand for Pcs in the coming quarters and.
This strong demand is what is creating the supplies. The component shortages that you were mentioning we have provided still got strong guidance today, both for the quarter and for the year and this is based of course and the visibility that we have today for components and what we think we're gonna be able to shape.
He will get more components, we could do even better.
And then your final question on on print.
As you know we learned H P plus.
During last quarter. The reception has been very positive in terms of both adoption of the into a model and also feedback from customers in terms of the value proposition and feedback from partners. So he is going I would say we are optimistic about about the results we have seen and.
You know, we are going to expand into more countries and more categories. During the coming months until we complete the rollout in the middle of 2022.
You were also asking about the impact on margins, let me start there and maybe Marie will complement that clearly we see a benefit from the mix moving into India and fast food fast food later, because as you know when the pool in two and system, but this quarter. We have also seen a strong benefit from pricing, especially.
And hardware that is really helping to increase their profitability on from print.
And yes and golf.
Go ahead, and we'll introduction and Shannon and yes, we expect our print margins to remain strong throughout FY 'twenty, one and we expect the operating dollars to grow and operating profit rate to be at the higher end of the 16% to 18% range for 'twenty, one and then Q2, we'd expect to be above the range as well.
And our next question will come from Katy Huberty with Morgan Stanley.
Yes. Thank you good afternoon, and I wanted to ask a clarification first you said in your prepared remarks do you see P. CS growing through 'twenty and 'twenty. One does that mean that you will see growth and each of the debt four quarters. Obviously, you you grew strong and in <unk>.
Or is that just implying that you will grow for the full year and then in terms of my question just following up and the print business can you talk about how much channel inventory rebuild contributed to print revenue and in the quarter and Murray you've made it clear that you expect print margins at the upper end of the range, but why would they come down.
Sequentially, given the debt the pricing environment remains quite favorable thank you.
Thank you Katy let me, let me start with a clarification when you were talking about a P C.
B C growth to continue I was referring to market and I will.
And in China, there and the answer to Shannon, we expect the market to continue to be very strong growth this year and in the long term and.
Let me offer a data point if you look.
The projections that we have for PC market in 2021, and one we have now and we compared it to their projections and we have for 'twenty one before the pandemic started the market is 45% bigger. So there's talks about the growth that we have seen and disease and really the hardware.
We are so optimistic about this business going forward.
And nobody will talk about the margins for Green and Q1 actually attitude and move on and just kind of your question around channel inventory, Katy and said look with respect to that overall channel inventory is below what we believe a healthy appropriate levels for printing and that's really as a result of that strength debt.
We're seeing and consumer and right now were also below the range and that's driven by that demand in a high and we do expect however, some replenishment of stock throughout our partner ecosystem into Q3, and and that's going to help to bridge some of that demand from our customers. So overall.
We want to make sure that our partner ecosystem is very well positioned to satisfy that demand.
Our next question will come from County, second Nagi with Bernstein.
Yes. Thank you I have two questions as well.
First if I look at your guidance for the full year, it implies and EPS decline at the midpoint down more than 20% and the second half versus the first half.
Typically seasonality would point to EPS being up 10% and the second half.
So I was wondering if you can comment on that are you being conservative because it sounds like youre going to be supply constrained through potentially Q3.
Or are you, believing that this very favorable price environment is going to come off. So are you are you expecting this deceleration because of conservatism are you are you expecting it because of weaker than normal sequential revenue growth are you expecting it.
Cuz.
And you expect margins to go down to lower levels from the second half and then I have a follow up please.
Right, Hey, Tony and good afternoon, it's a pleasure to meet you so look.
And frankly, Tony we've provided actually a very strong guidance for the year and we're investing for our future and in fact, you know, we expect revenue growth and FY 'twenty, one and EPS to be up 38% to 43% and free cash flow growth as well so while to your point this is from.
And loaded in the first half.
And second half EPS growth, it's actually 23, 32%. After 111 that we actually delivered last year and and this actually includes earnings growth as well as the benefit of lower shares. So given the current environment as you could imagine we are more we are modeling multiple scenarios for the second half so look all.
And all we believe that this is a prudent guide based on what we know today and clearly if we can do better we absolutely will.
Okay.
Ah Okay, I guess I was trying to get a better sense of whether there was more confidence and the revenue trajectory or the margin trajectory.
But just in terms of a follow up.
I want to better understand this a restocking.
And whether this is hardware or supplies are both on the on the print side.
Is it principally consumer so I presume your stock is going down and the corporate side since demand is much weaker and your channel inventory and dollars is going up and the consumer side and that's obviously very very favorable but you talked about this being a benefit last quarter. This being a benefit this quarter this potentially being a benefit net.
This quarter I'd like to understand exactly what that benefit is and then maybe you could kind of zoom out a bit and just talk about how we should think about normalized supplies growth I think you know over the last eight or nine years, it's gone down about 4% per year. The aspiration was to get to flat supplies growth.
It took a little longer to get there you haven't really provided an update on how you think about supplies growth.
And then more normalized environment, how should we think about that thank you.
Okay. Thank you Tony Let me, let me start and let me emphasize that we are very confident on both the revenue and profit per your guidance for the year and this is what's reported strong guy that we have provided today in terms of channel inventory the comments from from debt. We made in the prepared remark and not only for supplies and also from hardware.
And we continue to be across the board and Pcs and printers and supplies below what we think are the ideal and inventory levels that we have for the China. So that's this is where we are today and all of this is driven by the very strong demand that we continue to see.
Actually, especially in our home products and <unk>.
Now, let me explain what where do we see and supplies and what do we think is the impact on the replenishment this quarter and thanks and weekend. So Tony looking at supplies performance, that's sort of really three.
Key dynamics to discuss festival ongoing demand and consumer supplies with work from home and and learn from home and there are ongoing challenges and commercial print as you know and then secondly, there's a favorable pricing environment, which was actually a tailwind and then thirdly the year over year compares also.
Benefited from that replenishment of stock, which was consistent with what we had indicated on the call in Q4.
Now if you adjust for the impact of inventory movements, we estimate that supplies revenue was down roughly 1% year on year and you know we have a multi tiered channel. So this is our best estimate based on the data we have including our estimates for product across the channel and and youth.
And stock. So this replenishment should have a short term benefit to supplies revenue.
And I'm talking commenting on the projections for the future Tony as you know we are we have redesigned the 30 year their company to reduce the dependency and supplies to deliver our goals. This is why the subscription programs HP plus also critical and we are very pleased with the progress that we're making a debt.
And we shared in the prepared remarks that we reached 9 million subscribers and instant ink, which means we added 1 million subscribers this quarter, which is the faster and the most we have done in the history of the program. So clearly that is accelerating and at the same and I also shared before we're really pleased with their response and we have.
And H B plus and.
And we are also making good progress and what we call big ink and big Toner for in emerging countries, which are key part of our strategy as well.
Our next question will come from Amit <unk> with Evercore.
Perfect. Thank you it looks like I really have no printing questions for you guys anymore.
But I do want to talk about free cash flow and you know if I.
And look into fiscal 'twenty, one guidance I think you can talk about $4 billion of free cash flow, it's really a modest uplift from the $3 9 billion with debt and fiscal 'twenty. So and he has helped me understand you know with with revenue up the way. It is and I think EPS is going be up 35, 40%.
Free cash flow up 100 million and change I'm, just what are the puts and takes that would be really helpful.
Yes, and and good afternoon, and Knits and festival look I'd start up and saying look we're really pleased with the results our free cash flow and and what we saw in the quarter now as we look forward to FY 'twenty, one and then we expect our free cash flow as I said in my prepared remarks to be at least 4 billion and and that is being driven by that.
Earnings growth and both P S and print and it is being sort of the headwind that we do have as it will be partially offset by changes in working capital, which we expect to you know from higher expected inventory and a R and and that's being driven obviously by the environment that we're in with P. S.
Got it and.
And then.
Marine really from your perspective, you know as you step into the CFO role and your background as the Chief transformation Officer and.
Would love to get a sense and as you go forward. How do you go between managing the need to reduce costs and optimize margins, whereas perhaps investing for growth as you go forward and as we think about H b over the next two three years what are the big priorities of the company for investments.
No. Thanks, Amit look frankly, you know I believe that great companies are like H P.
Focus on the and you know we we have to do both we have to reduce cost and we have to make the right investments for the future. So I can tell you as the CFO I'm going to be relentless about going after inefficiency and making sure we're driving value from our investments I think my role as the chief trend.
Formation of officer, really Teed me up nicely for that outlook now with respect to investments I'm going to turn it over to Ricky to add some color there.
And before I do that let me emphasize there coming from Maria about it and we need to continue and we will continue reducing costs and we will continue to invest in areas, where we see opportunities for the future and.
And my answer is not going to surprise anybody because this is the strategy. We have been executing during the last years is about modernizing our core business at both personal systems and print we see opportunities to create value on both it is about expanding into Adjacencies and yesterday, we were sure the acquisition of hybrids.
That is an example of a very attractive adjacency for us and we are also investing to create new businesses and industrial graphics and <unk>.
Renting and Microfluidics and we see also they need to invest and improving our digital infrastructure that will help us to create and your business model.
And what he was saying also to become more efficient leaner and really being able to respond to our customers and a better way.
And the strategy, we have been executing the results show that it is growing and this is where we're gonna be investing going forward.
Our next question comes from Matt Cabral with credit Suisse.
Yes. Thank you.
Enrique you just mentioned and hyperactive I wanted to dig a little bit more into that I guess first just a clarification.
The release, you guys said, it's EPS accretive, but wondering if you guys and come into the revenue contribution you expect from Hyperx going forward and then more broadly just wondering from your perspective on PC gaming and just how we should think about sustainability and their once people start leaving their homes and a more normalized manner and just how you think about hyperactive peripherals.
Fitting versus Jerome and brand within the lineup.
So first of all and start on gaming gaming is a very attractive opportunity for us both on the hardware side, where we have been growing significantly during the last quarter and where do we expect to continue to see growth.
And in the coming years more and more people are using gaming as their main entertainment and this is driving growth today and will continue to drive growth in the future. When we look about the game in the peripheral opportunities, especially attractive I gave her expense about 15 16 more time more money.
Oh and accessories than a normal PC user and where do we think about that opportunity and the acquisition of high predicts makes me really excited about the opportunity of really capturing that hybrid is a leader in gaming headsets. They have a very strong portfolio on microphone.
And mice keyboards, and really the growth the value proposition of acquisition is very clear, we are going to accelerate their growth by leveraging our geographical presence and.
And our brother and retail presence.
And as well and we will be taking their portfolio and expanding into new segments like commercial and so it is all about growth and this is the and this growth is what makes it accretive for us in 2022.
Thanks for that and and as my follow up I wanted to broaden out the discussion on M&A and and just talk about how you're thinking about M&A strategically and I heard and their prepared remarks. The plan is still outsized buybacks and bunch of better opportunity comes along and maybe just help us understand the criteria you think about that trade off between.
Repurchases and other uses of capital going forward.
So our approach has not changed from what we have been communicating with the last quarter.
We continue to believe that our stock is undervalued and we're going to continue to buy aggressively over shares Marie mentioned that we're gonna be volume at least $1 billion of shares every quarter and at the same time, we are always looking for opportunities to accelerate our strategy through M&A, we're looking at.
And it is and the core businesses and Adjacencies and also and also the support of our new businesses and the criteria are very simple and.
And my name and we will do will have to be aligned to the strategy. As we have explained he will have to have attractive financial returns.
At a minimum and a better ROI and buying our own stock and third we need to have a strong operational plan to execute on the value proposition of the of the acquisition. These are the criteria. We have been applying this is what we used to decide to acquire high predicts and this.
And how we think about M&A.
Our next question comes from Krish Shankar with Cowen and company.
Yeah, Hi, Thanks for taking my question and congrats on the solid results and Marie Ah Congrats on the fleet and CFO title.
I had two quick questions first and then in retail and Murray.
Is there a day to quantify what would be the upside to revenues. If you had no supply constraints and then I had a quick follow up.
I live and let me take that question what would you have in the guide and what we think we based on the current supply that we see available we can deliver.
Of course, if there was more supply we will be able to drive more but I don't think we we will quantify the what this number is but let me tell you is as I said in the prepared remarks, our backlog is at a record high so it will be a significant number but again, we are seeing shortages given how strong the demand is that growth.
The board.
Got it got it thanks, Enrique and then as a quick follow up you know the gross margins from the January quarter were really strong what are the drivers there and how to think about gross margins for the rest of the year, especially as complete and close get inflationary for you folks.
And I think I.
Thanks for.
The kind words, so look fundamentally at its just all about demand frankly, outpacing supply and really creating that favorable environment. So it's basically just the laws of supply and demand, which which helped us with better pricing and the quarter. So regardless of whether you're sort of talking here on year on court and corner that.
Preventing and gross margin was primarily driven by favorable pricing, which showed up as fewer promotions and and as cost improvements.
Our next question will come from Onesie, and <unk> with Bank of America.
Oh, yes. Thank you I was wondering if you can go back to print margins for a second and then and look at this on a quarter on quarter basis.
When we look at the sequential revenue improvement was about $200 million and print and print profitability went up by $300 million. So maybe you can help us think through how much of that was pricing on hardware, where there is fixed cost leverage that you might be recognizing versus higher mix on an H b and <unk>.
And as laser told or if there's a way to dissect this somewhat differently and the 300 million and purely a replenishment has has a role there too and any way to maybe size those different components and also if we can split between hardware and supplies I think that'll give us a better sense of how the trajectory of physical progress. Thank you.
Sure. Thanks for your question and so look the print rate really benefited from improved gross margins, particularly in auto and hardware and that was driven by that favorable pricing that I mentioned earlier.
And it was particularly in the consumer side and some of those and then we had reductions from a COVID-19 related supply chain costs that we had in Q4, and then that was partially offset by higher consumer mix and a lower supplies mix. So that and all is what contributed to the right and and overall, we're seeing the strength and resiliency.
Abroad print portfolio and leadership across our customer segments, and that's really positioned us very well against our competition.
Thank you.
Our next question will come from David Vernon with UBS.
Great. Thank you, maybe just going back to the component shortage issue for a second.
It's been persisting for some time now and there's been commentary across different industries that lead times are lengthening across the board I know inventory is up this quarter, you had 49 days and supporting the last corner, but can you give us more qualitative discussion on how you're thinking about remediation going forward and in the future procurement plans in case there is a.
Later disruption and what that might mean for your topline going forward. Thanks.
And so as I said before the shortages and hardware team are really driven by the very strong demand that we're getting are correct and full portfolio.
We of course are taking any action, we can to mitigate the impact and make sure that we can deliver even more and where do we have and the plan one of the big things that we have decided as Maria mentioned before is to increase the amount of inventory that we have on prime day.
And help us not only to increase the delivery or the shipment of products, but also to be able to ship more product in case, some components and made available during the quarter.
We are also building direct connection with suppliers and it until now we're gonna be managed from our ODM, usually suppliers for flow and no cost component because we have seen that is important to really establish a direct connection with them and in some cases, even buy products directly from them and Italian.
I would say are the two big things that we have already done and that we expect will help us to manage the situation during the coming quarters.
Yeah, and maybe just a quick follow up on that so when you think about kind of the inventory that you are taking in and that youre going to procure and going forward.
And here any sort of commentary or guidance you can give us in terms of what the margin impact might look like from that inventory today.
Going forward as you burn through that inventory and maybe later this year and into next fiscal year.
And I think given how strong demand is if you are concerned about obsolescence and counsel of inventory and I think the risk is extremely low because we really have very strong demand and we expect to ease to continue moving in the coming quarters in terms of cost of component we are expecting that in some cases.
And we'll be increasingly in the coming quarter, but all of this is built into our guidance and built into the comments that I made before in terms of operating margin during the coming quarters.
And just a follow up and re Guy's comment as a result, and we would expect from and overall basket of commodity pricing perspective for those prices to be higher than what we'd seen in Q1 going forward as well.
Our next question will come from Jim Suva with Citigroup.
Thank you very much and congratulations on a very strong results and outlook. When we dive I only have one question when we dive into the results on Pcs and yes, you are growing but it seems like some of your competitors, especially your north American competitors growing much stronger than you you did highlight.
That you grew a lot and chromebooks and I'm wondering is the strategy there to really focus on education, and chromebooks or profit share gains or market share and maintaining even if you lose some share I just wanted to revisit your strategy in the PC side when we.
Look at the data versus the industry. Thank you sure. Let me, let me be very clear and so we had a very strong quarter in absolute terms from Pcs revenue growth unit growth profit growth, but we did and on relative terms.
And being as competitive as we are this is not something that we are satisfied about.
And I explained before we are looking at what can we do and what will we do to improve our relative performance. We have already taken so much and two to do that by increasing inventory and changing how the connections that we have a certain component providers and these will be helping us to to improve our performance going.
Fourth we are really using this as a catalyst to optimize even further our operational capabilities and this is a good.
Good company through and what we will continue to do because again, we like to win and this is what we would do continue to do going forward.
So having said that I think we are close to time. So let me use this as an opportunity to wrap up first of all I want to repeat some of the comments I made during the prepared remarks, we are doing what we said we would do and our strategy is working we have had a very strong stuff.
Part of the year and we are confident in the projections that we have for 'twenty to 'twenty, one and beyond we see growth opportunities and our core markets in the Adjacencies and also in the new businesses that we are creating and we are really leveraging the opportunities that we see.
And with our strategy accelerates, our growth, which gives us great confidence in the future of the company. So again, thank you for joining us today and looking forward to continue to talk to all of you in the future. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.