Q2 2021 HP Inc Earnings Call
[music].
Good day, everyone and welcome to the second quarter 2021, HP, Inc earnings Conference call.
My name is Eileen and I'll be your conference moderator for today's call at.
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.
And as 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 P's second quarter fiscal 'twenty 'twenty, 1 earnings conference call.
With me today are Enrique Laura's, Hps, 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 1 year.
We posted the earnings release and the accompanying slide presentation on our Investor Relations webpage at Investor Day, 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 that involve risks uncertainties and assumptions.
For a discussion of some of these risks uncertainties and assumptions. Please refer to Hp's SEC reports, including our most recent form 10-K.
HP assumes no obligation and does not intend to update any such forward looking statements.
We also note that the financial information discussed on this call reflects estimates based on information available now and could differ materially from the amounts and ultimately reported and Hp's form 10-Q for the fiscal quarter ended April 32021, and Hp's other SEC filings during.
During this webcast unless otherwise specifically noted all comparisons are year over year comparisons with the corresponding year ago period.
For financial information that has been expressed on a non-GAAP basis. We've included reconciliations to the comparable GAAP information.
Please refer to the tables and slide presentation accompanying today's earnings release for those reconciliations.
With that I'd like to turn it over to Enrique.
Thanks, Bruce Good afternoon, everyone and thank you for joining work on.
I went too far on your technology and the Central group on there.
And it particularly in countries and it's hard for us to do.
We are doing everything to work on corridor and employees are from us on partners. During this difficult time.
We're in some parts of on rewards are beginning to improve and reopen.
It is much more work to do.
Burger and tolerably songs and work on and all of the Caribbean and Corker on both on the top and bottom line growth and which we believe are well above.
Our guidance range.
Our performance.
And the relevance of our technology and on increasing the Harvey balls.
And a few here and some of our business model and.
Operation on and kind of of our team.
And in addition to summarizing our results are you also on to how you might thinking and our parents driving through spring demand.
Our portfolio.
And it should be technology on pretty hard on on behalf of hybrid work.
We are accelerating and our strategy to drive long term sustainable growth.
This includes continuing to pounds harm and where we operate on deploying our substantial cash flow and maximize value creation.
And when we started with your Gorton.
And Q2, we saw exceptional demand for our products and delivered record revenue of 15.49 billion on going on.
On an increase of 27% with balance growth across print and personal systems.
Our non-GAAP net earnings increased 56% to $1.2 billion.
And we generated $1.3 billion on donuts on free cash flow, returning 1 billion door to share holders.
These results reflect continued strong growth and consumer hardware loss and improvement in our commercial business have on economic activity increased.
And our consumer segment, we delivered 72% growth in personal systems and 77% growth in Britain.
Commercial D. C revenue grew 10% on commercial print was up 34%, including 45% growth and our industrial printing business.
It is important to note on this response and against the backdrop of industry wide component shortages and supply chain challenges.
Currently there is not enough supply to keep up with a robust demand on the resurgence of Covid and South East Asia is creating additional pressure on our supply chain.
We expect supply constraints to continue at least through the end of 2 house on 'twenty 1.
Although the environment will likely remain dynamic we are taking actions to navigate through the challenges and enabling us to deliver strong results and increased our outlook for the simple cost.
And we remain focused on delivery and in the short term, we're equally focused on capitalizing on the attractive long term opportunities.
It is clear that the world will not simply go back to the way it was prior to Covid.
And there has been a fundamental shift and the way people work learn play from create and.
This shift is here to stay.
The future of work on education will be more hybrid.
According to recent surveys more than 60% of employees want flexibility and where and how they work.
And these future and mergers it will open the opportunity to create and your products and services for our customers.
And as consumers and businesses to greater mobility convenience and value. This supports our strategy to accelerate new business models geared toward more services and subscriptions. They enabled by the integration of our hardware and software.
On the opinion all of these is the growing importance of cyber security.
88% of I D decision makers, they love the watery their cyber risk cost and increased during the pandemic.
This presents a huge opportunity for us to expand our security offerings and deliver the most secure and resilient and Pcs and printers.
We saw our broad differentiated portfolio H P is uniquely positioned to capitalize on these secular trends.
And I think I've said this is a time for strong companies to get stronger and we are innovating across our portfolio to strengthen and grow our business and.
And personal systems, our innovation is driving growth in key segments, including remote work education and gaming.
The D C continues to be essential and daily life.
We're already capitalizing on these trends and a number of ways.
Our latest award winning Pcs and include features purpose built for hybrid work.
And we are developing new services like H, b provision and connect that's making it easier for <unk> to set up on support devices and employees' homes as well as and the office.
And the education market, where H B is the number 1 vendor PC sales have more than doubled due to remote learning.
At the same time, however, the number of Pcs per hundred students remain in the single digits.
As an industry, we still have a long way to go to close the digital divide and.
As a company, we have a big opportunity to be part of the solution.
The importance of the P. C extends far beyond work on schools.
In many cases it has become the entertainment center of the home.
From streaming and content creation and cause a rise of gaming and esports.
In Q2 revenue growth and gaming outpaced overall consumer PC growth.
We are building on this thing to expand into attractive adjacencies, including per day for them.
We are on track to close the hyper ex acquisition and Q3, we do expect to be accretive in year 1.
And printing, we are leveraging our leadership across consumer and commercial markets to provide innovative solutions needed in today's hybrid world.
This includes accelerating the evolution of our business model and subscription and services.
We recently announced the expansion of H, B, plus and instant ink, we turned on now in 35 countries across North America and Europe.
We believe HP plus will help us to optimize system profitability and provide a better customer experience.
Additionally, and employers are looking for more distributed printing and vitamins, which plays to hp's things and pay for printers.
The new laser good enterprise 400 series is designed to deliver seamless remote management for both hybrid workers on new office configurations geared towards collaboration.
At the same time greater workforce mobility is a catalyst for our print services portfolio.
We've seen our managed print services, we have introduced H b flex workers, serving to incorporate remote workers and brands officers into a company M. P. S contract.
This is allowing companies such as general motors to have better visibility on minutes ability on the printer fleet.
And our industrial businesses, new innovation is enabling production to be more agile and more personal on.
And industrial graphics, we're seeing improvement in the market and growth and hardware installations.
Among the customer wins, this quarter or the installation or the 1 country indigo presses on.
And our leader and labels and security and packaging solutions.
We also continue to see consistent double digit growth and print impressions on square meter.
And 3 D. We are creating more vertical go to market solution spanning equipment software and services our growth in there.
The street from industrial tooling total motive to health and wellness.
For example, our molded fiber truly and solution and strong customer engagement and adoption, including numerous repeated purchases and willing and able then to achieve significant production and cost efficiency.
In addition, we are partnering with Ford Motor company to extend the life of already used 3 D printed part by turning them into auto components for the.
250 trucks, and creating a closed loop on ways.
With our songs and diverse portfolio. We also continue to generate meaningful free cash flow.
And we remain focused on deploying our cash to maximize value creation.
We have the flexibility to return significant capital to share holder and reinvest in our businesses, while also exploring disciplined and money.
We will continue to look for opportunities to strengthen our core expanding into attractive adjacencies and create additional growth and indeed.
As always we will take a rigorous approach to evaluating M&A required and strategic fit on.
The financial returns that exceed those of buying out on stock and our strong operational plan to execute on the value proposition.
And on important enabler of our strategy is continuing to transform the company to become leaner and more digitally enabled.
For H B. There is a continued focus on both reducing structural costs and investing for the future.
To help us accelerate our progress we announced 3 new leadership appointments.
Yeah, they'll torque he joined me and HP as a precedent of personalization and 3 D printing.
Greg Baxter will be our next chief transformation officer and.
And look good and he's doing and H P.
These people officer.
Working together with our leadership team they would think that our innovation capabilities and help drive our long term strategy.
And a key part of our strategy is to deliver strong results, while staying true to H P values.
Last month, we announced an ambitious set of climate action goals.
By 2025, we aim to achieve carbon neutrality zero waste and HB operation and zero deforestation for H B paper and paper based packaging.
We're also committed to achieving net zero carbon emissions across our entire value chain by 2 felt on 14.
And last week, we announced a new set of diversity and inclusion goals.
This includes a pledge to achieve 50, 50, gender equality and HP leadership by 2030 and make them at the first fortunate on 1 kind of a tech company to make such a commitment.
I am proud to say our partners are joining us and these efforts.
Good day, or 14 content partners have signed it amplified impact led to set their own long term objective to drive a sustainable and impact.
This is where the size and scale of Hp's ecosystem truly shines.
Overall I am very pleased with our performance this quarter and excited for what lies ahead.
We continue to drive a relentless focus on execution, while taking decisive action to capitalize on attractive opportunities to advance our leadership and personal systems and print expands into attractive adjacencies disrupt new market and transform the way we.
Operating.
And I am confident that our strategy will continue to create significant shareholder value.
I know I speak for our more than 50000 employees. When I say, we are not content simply maintaining our current position.
We have a much bigger ambition.
And with that I will turn the call over to Mary who will take you through the details of our quarter and our fiscal year outlook Maria over to you.
Thanks, and regain H P and second quarter results highlight both our operational strength and the breadth of our portfolio.
We are demonstrating our ability to meet customer needs and continuing on our transformation journey.
All while growing operating profit.
Generating strong free cash flow and maintaining a robust capital returns, while continuing to make investments and the company grab feature.
Turning to the details on the second quarter.
Q2, net revenue was $15.9 billion up 27% nominally and 25% and constant currency.
Regionally in constant currency Americas increased 32% EMEA.
EMEA increased 19% and a P J increased 23%.
The year on year growth rate benefited from the prior year impact of Covid and supply chain disruptions.
Demand continued to outpace supply and we ended the quarter with elevated backlog in both personal systems and printing.
At the highest since the split.
Gross margin was 21, 7%.
Up 1.7 points year on year.
The increase was primarily driven by favorable pricing, including historically low promotion expense and favorable currency, partially offset by higher costs.
Non-GAAP operating expenses were $2 billion on.
12, 6% of revenue up 10 basis points year on year.
The increase in operating expenses was primarily driven by higher variable compensation as a result of the very strong performance. This year as compared to Q2, 2020 as well as increased investments and innovation and go to market.
Non-GAAP net OID expense was $64 million for the quarter non-GAAP diluted net earnings per share increased 82% to 93 cents with.
With a diluted share count of approximately 1.2 billion shares.
Non-GAAP diluted net earnings per share excludes net benefits totaling $70 million primarily related to <unk>.
And their tax adjustments and non operating retirement related credits, partially offset by restructuring and other charges as well as amortization of intangible assets.
As a result, Q2 GAAP diluted net earnings per share with 98 cents.
Turning to segment performance and.
And Q2 personal systems benefited from strong demand related to working and learning from home.
Revenue was $10.6 billion up 27% year over year day.
Matt and for a paradox remained very strong with backlog, increasing again quarter on quarter.
Drilling into the details we saw strength across consumer and commercial with revenue up 72% and 10% respectively.
By product category revenue was up 47% and their books down 8% for desktops and down 7% for workstations and strong demand for notebooks drove total unit growth of 44% with chromebooks, representing 20% of our total personal systems units as the need for technology.
<unk> and education continued to growth.
We also saw solid services attach with particular strength and commercial and significant double digit growth and consumer peripherals.
Personal systems delivered $710 million and operating profit and operating margin of 6.7%.
The year over year improvement was primarily due to favorable pricing, including lower promotion expenses as well as currency.
Partially offset by unfavorable mix and higher costs, including variable compensation commodity costs as well as investments and innovation and go to market.
And print our results reflected continued focus on execution and the strength of our portfolio.
We are uniquely positioned as leaders in both consumer and commercial and had the hardware supplies and services to deliver value and a hybrid world.
Q2, total print revenue was $5.3 billion up 28% and total hardware units grew 42% to $10.6 million.
By customer segment consumer revenue was up 77% with units up 45% and commercial revenue and units were up 34% and 22% respectively.
And commercial the recovery momentum continued with revenue up 13% sequentially, but.
But we continue to expect the recovery to be gradual and uneven at times across segments and geographies.
Supplies revenue was $3.3 billion up 17%.
The year on year growth was primarily driven by favorable pricing as well as ongoing consumer demand and improving commercial demand.
Our contractual business is a key element of our print strategy and both consumer and commercial printing.
And in consumer and instant ink business continued to resonate well with customers with cumulative and release growing 7% sequentially to $9.7 million.
On the commercial side, we drove growth and managed print services revenues and new TCP bookings for the first time since the pandemic took hold and strong with U O T. C. P bookings again this quarter.
The operating profit increased $403 million to $951 million and operating margin was 17, 9%.
And this year over year increase was driven by increased volume and favorable pricing across hardware and supplies, including less promotional expense, partially offset by unfavorable mix and higher costs.
Let me now turn to our transformation efforts and specifically our cost savings initiatives.
And the second you about program, we continue to look at new cost savings opportunities and remain ahead about $1.2 billion gross run rate structural cost reduction plan.
During the quarter, we continued our efforts to optimize our factory footprint to enable a best in class supply chain network and enhanced supply resiliency, while reducing our cost structure.
In addition, we continue to enhance and leverage and digital capabilities to transform ways in which we operate and deliver value to our customers.
The structural cost savings for that transformation efforts give us the flexibility to reinvest in our business for long term growth and profitability.
Shifting to cash flow and capital allocation second quarter cash flow from operations and free cash flow was better than expected at $1.4 billion and $1.3 billion, respectively. In Q2, the cash conversion cycle was -28 days sequentially.
Really the cash conversion cycle was up 2 days and Coors and inventory primarily due to strategic 5 growth increased days of inventory, partially offset by a reduction in day sales outstanding and higher days payable outstanding.
For the quarter, we returned a total of $1.8 billion to shareholders, which represented 137% of free cash flow.
This included $1.6 billion and share repurchases and $239 million and cash dividends.
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 third quarter and the rest of the fiscal 'twenty..1 we continue to model multiple scenarios related to supply availability pricing dynamics and the pace of economic reopening.
In particular keep.
Keep the following in mind related to our overall financial outlook.
From a demand perspective, we expect to continue to see strong demand for our P C's, particularly in consumer.
And print, we expect solid demand and consumer and continued improvement and commercial offices reopen.
While we expect to you on your revenue growth in FY 'twenty 1 to reflect our continued progress on our strategy. It is also important to note the growth trends in Q3 will also reflect the type of year over year comparisons, particularly in personal systems.
We expect supply constraints to continue to negatively impact our ability to meet demand and Pcs and printers at least through the end of calendar 'twenty 'twenty 1.
We expect gross margin pressure and the second half of the year and both personal systems and print due to increased cost and commodities and logistics as compared to Q2 levels and as we expect to see some more normalization and the market.
And pricing environment.
We expect operating expenses and the second half of the year to be more similar to Q1 run rate.
Finally, we continue to closely monitor the current COVID-19 resurgence and its potential impact to our supply chain and particularly in southeast Asia.
Taking these considerations into account we are providing the following guidance for Q3 FY 'twenty 1.
We expect third quarter non-GAAP diluted net earnings per share to be and the range of 81 to 85 cents.
And third quarter GAAP diluted net earnings per share to be and the range of 77 to 81 said.
We expect FY 'twenty, 1 non-GAAP diluted net earnings per share to be and the range of $3 and 42.
$3.50.
And FY 'twenty, 1 GAAP diluted net earnings per share to be and the range of $3.24 to $3.34.
For FY 'twenty, 1 we expect our free cash flow to be at least $4 billion.
And now I would like to hand, it back to the operator and open the call for your questions.
Thank you and we will now begin the question and answer session fast.
A question like that start on 1 and you touched on was on it.
People are using a speakerphone please pick up your handset before pressing the tool.
So let's try your question, sorry, and then killed.
We also ask you please limit yourself to 1 question and a single follow on.
Our first question today comes from Amit <unk> with Evercore.
Good afternoon. Thanks for taking my question and he said absolutely.
Fortunately I guess I'm, hoping if you could talk a little bit about the print margins are in the in the April quarter, I'm somewhat surprised they've been down on a sequential basis by nearly 200 basis points, even though the supplies mix I think it was fairly stable in July which they build so maybe just touch on what happened to the margins and then in and in the April quarter, and how do we think about.
And in the back on beer.
Sure no, thanks, Amit and and good afternoon, and so the decline we saw in the print operating rate was really driven by several factors. So first of all some of the unfavorable cost in commodities factory and logistics and and secondly by investments that we made and opex across R&D and marketing to support future growth.
And with and higher variable comp and and they look overall I'd. Just say you know, we have seen strength and resiliency and our board and our print portfolio, which really positions us well against the competition and as we look ahead into the future. We do expect our margins to be in the long term range of 16% to 18%.
And let me give you just a few things to think about as you think about the second half. So obviously the full year are with very very strong and the first half. So we expect to be towards the higher end of the range and just a couple of other points I would add is some of the exceptional benefit that we saw and H 1, particularly.
And in our February pricing will start to diminish and so we would expect that our mix as well would normalize as they often office reopens, we're likely to see higher commodity costs logistics costs and that will potentially impact our ability to meet demand and then finally, there is some seasonal mix headwind.
And in Q2 as in supplies as Q2 is typically our strongest quarter for supplies. So just keep that in mind as you're thinking about the second half and I'll. Just conclude that you know we're in the business of generating incremental O P dollars.
And we're a key point for our performance, we're bringing these quantities and we're really pleased on how they bring business day, whether you look at year on year comparison on whether you look at growth he really aligned to the trends that we described last quarter. The rebalancing that we see happening between home and office there goes on and we're starting to see and some of the commercial and and.
And I see all categories. So it brings a very strong quarter and weird and basically to continue through the rest of the year.
Got it set and that is really helpful. And then if I could just fall off and a comparable dynamic really Oh, you and you can't be a big focus for everyone is trying to understand what is steady state EPS look.
Looked like the H b over time, especially given the strong performance you've had and the post hoc and I'll be your back half guidance sort of implies EPS on declined high single digits, 10% plus in Q3 and Q4.
I'm curious and you touched on platelet and here's what all the other vectors that are driving that slowdown and EPS, especially given the fact, you have elevated backlog and.
And do you think the 70.586 implied EPS and October quarter is a representation of what normal EPS run rate, but it looks like for H b.
So first of all on let me talk about their year on year comparison, how we put things in perspective EPS for the second on cards is growing more than 40%, 40% from where we were a year ago. So we really representing very solid growth.
The same time as you are saying, we continue to see very strong demand across all of our portfolio. We expect this to continue to happen through the second half, but we're gonna be limited by supply given the sharp and just how do we see in the market and it is a fundamental part of what is driving our guide and we.
I have done in the past we are prudent when we guide we have been and the path and we will continue to be and we can do better we will we could be the better because of where their pricing because we could do better because of a better capacity. So again prudent guide we have demonstrated that we can do better we will do better.
And therefore, given all the anomalies that we see on the supply constrained and I don't think we should be using the Q4 number to project their business and the future.
Our next question comes from Shannon Cross with Cross research.
Thank you very much I had a question on inventories both.
On your balance sheet, and then within the channel.
And up about $800 million quarter over quarter, I'm curious, how much of that whereas component buying or maybe some you know and product just given supply chain hiccups and then you know whenever I said today I think that they see 2 to 3 weeks of inventory channel or channel inventory on P. CS use.
And both on the PC and the printer side and then I have a follow up thank you.
Let me start and I think maybe before and Mauritius and some of the numbers, let me share some of the strategies that we have behind it but we shared last quarter, but we were anticipating some of the supply challenges are the way our team we decided to operate with higher levels of H O I and this is what you see reflected in the numbers.
So maybe why don't you give some color on what are the increases in image right, Yeah, no absolutely and Enrique and so let me step back and and set some context for you Shannon and so obviously you know we've seen that strong demand across P. S and print and as you know we're also lapping the factory closures and disruptions from the inventory draw Downs last year.
And obviously that impacted the on the system all the way through and then we're on.
Obviously, you tried to continue to navigate the supply chain challenges given the ongoing nature of the pandemic, so and approve assurance of supply we are carrying higher levels of owned inventory and as we said you know we do this to navigate during this time, so H O Y at this point, it's likely to stay elevated to support business growth.
And so and that includes strategic buys and to answer your question, where particularly in Cpus and then going on to the second part of your question around channel Linda Dree overall.
I N P. S print's hardware and supplies is currently below historical levels and.
And our backlog is up and frankly quarter on quarter and and that gives us confidence on the demand that we are seeing Shannon.
Okay, Great and then just a question on pricing I think you and you noted you expect some normalization and pricing, but what we're hearing is prices are or someone increasing and so it was just more of a sort of and average price. So mixed impact or you know what what are you. What are you seeing because it if there's no supply out there and demand remains strong.
Wrong, I don't see where you might not and have some some pricing pressure sorry pricing advantage. Thank you.
Thank you Shannon and I think it is it wants to go through the back and discussion on business by business.
And that goes off Brent, we're having price increases across the board and you have you can see on our members and increase and the average price and that kicks off this is crazy and rates are growing so price and these categories and none of them are Phoenix category are going up but the overall price is going down because of mix because on 1 way I've seen and hygiene.
And in the market, so price I set up but because of mix you may see the average right I mean, no surprises going on.
And just to add to Enrique and comments are some of the favorable pricing that we saw and that the the benefit and the first half is starting to abate in the second half as well.
Our next question comes from Kelly second on <unk> with Bernstein.
Yes. Thank you for taking the question I just wanted to just try and square the circle on a couple of things, particularly around your guidance. So seasonally you're you're typically up and EPS and you're guiding for EPS to be down about 10% sequentially.
Our revenue is typically up 3 or 4% are you, suggesting that revenue is going to be lower than normal seasonal or is this all margin pressure and the reason I struggle with the margin question is it sounds like your backlogs, even bigger and you should be able to.
You know sell whatever you have you have incremental revenue incremental inventories should that should allow you to arguably meet demand better.
So if you're in a situation where people are changed and chasing demand and the mix doesn't fundamentally change.
And why do you expect pricing to abate.
And so I guess, a couple of questions and there 1 do you expect and impact the top line that's different from normal seasonal on.
Or is it all margin in terms of the your way below normal seasonal EPS guidance and then how do we square that margin pressure with the fact that there's really strong demand you had better inventory to fulfill that demand and.
And you should be able to continue to take price.
Hey, Tony Good afternoon, and its marine and so let me walk you through how to think about our guidance specifically, yeah, I'll give you a sense of what the headwinds and the tail winds are looking like so so first of all with respect to your comments on revenue. We do expect that revenue will be driven more by available.
Supply and demand and there are increasing margin headwinds versus the first half with all that said as a Ric I said right at the onset of the call. We are guiding for double digit operating profit and EPS growth and Q3 and and frankly you know we believe that this is a prudent guide in the context of the current environment obviously.
If we can do better we always will but let me walk you through what we're seeing from the headwinds and tailwind to give you some of that color and so on the headwinds, we're seeing component costs and logistics costs in both peers and print and and they will be an incremental headwind both quarter on quarter and.
A year on year and those overall basket of commodities, particularly and panel Ics and P. S. And then I CS and resins and print and then there are the tailwind that we've had and the first top around those favorable pricing dynamics. They will start to dissipate as we lap the onset others historically low.
<unk> expenses, and then getting into your comments on power wins, and how we're thinking about it demand and both P. S and print continue on to be very strong as you mentioned and you know we're seeing those trends of hybrid work continues and obviously that constrained by supply. So you know and in addition, just to kind of wrap up here and as we said we're going to continue to return capital to share.
Shareholders. So we expect that that repo or at least about 1 billion a quarter. So for the full year. We expect P. S margins will be slightly above the high end about longer term range of 3 and a half to 5 and a half and print for the full year at the higher end of 16 to 18. So at this point, we remain very confident about our guide and if we can do better.
Like I said, we will.
And I think Tony and something important to having consolidation and this year is that.
Really their business and their market is there anybody who play no day demand. So therefore, comparing this year with other years based on seasonality.
On the work because really the dynamics behind the market are very different or do we continue to see very strong demand across our portfolio and.
This is really the key the key driver is how much supply we can get.
If I could just follow up on the pricing dynamic. So if I look at our consumer print Asp's last quarter were up 30% this quarter were up 27.
If we.
If we went to something like zero pricing.
Basically put your operating margins dramatically down and the IPG group. So I I want to understand what is driving this pricing. So is this purely and apps and.
And absence of discounting is their say.
We're not building lower and Skus with lower margin and we're forcing people to take a a sort of more richly configured.
Consumer printers that have better margin or is it we're actually raising price because we can because demand is constrained but.
You know, obviously, 27% ASP growth this quarter at 30% last quarter.
And is helping your economics and enormously.
And it's you know as you suggested it's going to be less but I and I wanted to understand very specifically what is driving that E. S P and Chris.
And tell me, we and that's a person like they were and we are facing we are doing anything we can to optimize our business and therefore, we are guiding on the actions that you were mentioning.
We of course have reduced significantly our promotional discounts because of how strong. The demand is we are still in demand towards how you got amazing products and of course in the day says where do weekend also prices are going up because like we said before and we're seeing we are living in an inflationary environment and then whenever we can.
We will we have increased prices.
Our next question comes from Katy Huberty with Morgan Stanley.
Yes. Thank you and good afternoon, I heard you mentioned that P. T backlog is up sequentially is your print backlog and also up versus the first quarter and then can you talk about how the makeup of backlog. It is changing as you go through the year is there any shift from consumer to commercial from chromebook to other P.
CS and and just mix between hardware and supplies and then I have a follow up.
Let me go crazy on how you're thinking so.
So and the answer to the first question is yes, we're seeing on increasing backlog across both empathy and peanuts.
And in terms of how do we expect this durable and really aligned to where do we see demand come in during the next quarters and we mentioned before we expect through the end on the year and increase and the demand on the commercial side both on the PC side and also on the pain side and this is where these best because of that back and there will be moved.
Into into this direction, but stand and where you continue to see strong demand on consumer and as I mentioned before.
Great. Thank you and then PC margins this quarter were a bit lower than the flat sequential guidance what were the surprises on on costs or mix and a quarter and then should we expect with cost inflation that PC margins return to that roughly 5 per cent range from a couple of years ago.
Yeah, Katy it's Maria Hey, good afternoon, and so let me hit up your margin question. So yes. So you know the margins were strong again at 6.7%, which as you know it is above the high end of our long term range and some of that was obviously driven by that strong pricing discipline that we've spoken about and as well as some benefit from currency, but really it was.
Offset by mix and some of those commodity headwinds and as we get into the full year, we do expect that margins to be slightly above the high end about range of 3 and a half to 5 and a half this and and it's going to be driven by the themes that you're hearing today, particularly around.
There's continued shortages and commodities and that's obviously sort of transforming into higher component costs, and then knock on cost and logistics, but and then I'd. Finally, just add you know we are starting to enter a period, where the the impact on favorable pricing is going to start to diminish.
And as we start to lap that period and time.
Our next question comes from Tim long with Barclays.
Thank you yeah, 2.2 if I could first on the print side could you talk a little bit about you mentioned some of them.
Use your numbers for the as a service offering both for consumer and commercial seems like its pretty steady growth. There could you talk a little bit about some of the underlying drivers beyond that maybe usage or anything else, that's no potential potentially showing the strength there other than just the user base.
And then second if.
If you talked about another quarter of very strong chromebook could you talk a little bit about the impacts there are on on the model margin S P and.
And also as you'd expect to see a little bit of normalization.
2 P C growth is the expectation that.
On the rapid growth and and chromebook holes will be something that will pull back or do you think that's something that.
Could start replacing other mid and lower tiers of the of the PC segment. Thank you.
And many questions and 1 question on her will try to go 1 by 1.
And that's starting from print or the dynamics and we are seeing a very similar to where do we explained on a quarter ago and evolution is what we would expect and before to pre pandemic levels. We continue to see our home business to perform better and is on what we were projecting and this is driving the demand and we see both from peanuts and on.
And on top line.
And on the healthy side, we've seen the opposite effect cause many offices are still closed and people and I have no growth.
And back to the office and all of his business continued to be below where it was before the pandemic.
Through the end of the year, we expect the situation to reverse and all.
Office and will reopen we expect our office business to perform better and at the same time as more people and it will be less people wouldn't be working from home. We expect that this will have also an impact and negative impact on our home business. So a similar trend to what we expected and of course critical.
In terms of demand on their chromebooks side, we continued to see very strong demand from education. We have this is what is driving the growth of chromebooks.
And this is also when we were talking before about and yes piece on the PC side and the mix. There. This is what it is.
Having some of the impact and the pricing on the PC side, because chromebooks over and all have lower prices on the rest of the PCI portfolio.
Our next question comes from Aaron Rakers with Wells Fargo.
Yeah. Thanks for taking my question and congratulations on another solid quarter.
The first question and I have a follow up as you.
When we look at the results of the commercial business starting to recover I think you reported 10% growth I think your peer reported growth around that Tonight. So I'm curious of how you're thinking about the back to work back to office trend on the commercial PC side any any thoughts on kind of the installed base. The age of the installed base of how and how you think that the man shape.
Up through the course of the year.
Sure. So again similar to what we share a quarter ago, we expect the demand on the commercial side to start to recover and we are starting to see some recovery and who are saying I agree.
We what we're seeing from our clients is that they are realizing that they need to invest and better equipped and for further officers and employees come back and this is really going to be helping both the print and the PC business as you were mentioning.
In terms of dynamics, we continue to see a shift from desktops into notebooks, because even if and where you would be going back to the office that we still see the need for companies to offer and a hybrid where you're working and enabling and they've been their employees to work from home and therefore, we expect the shift mix from their thoughts and.
Notebooks to continue with.
As we have talked in the past probably all has a positive impact for the business because we're both pricing and by doing so because of the recycled.
And the recycle times that piece of debt costs compared to 2 day or something.
And then as a quick follow up just on the on our free cash flow I think you've stuck with the 4 billion and free cash flow or at least 4 billion for this year youre raising EPS and I'm just trying to maybe understand why free cash flow wouldn't be stronger and and trending higher with the EPS yes.
Yes, sure and let me let me go ahead and hit that 1 out for you. So look regarding free you know future free cash flow and as you know this is always driven by our strong net earnings look for what we're thinking is that working capital is going to be a headwind due to some of the decisions, we're making to carry more inventory and so and look for for 'twenty..1 we continue to remain confident obviously.
And our outlook and and confident in our guide of at least 4 billion and free cash flow.
And I think the let me add 1 more comment we're really pleased with the progress we have made and free cash flow and Q1 and Q2 and labor.
But we have provided if her if on east of at least $4 billion for the year and that's why he just mentioned we are really expecting to be at that level.
Our next question comes from Ananda Baruah with loop capital.
Hey, Thanks, guys for taking the question and congrats on the on the strong results 2.
2 quick ones, if I could and regain based on conversations with.
With corporate customers.
And given the backlog do you get the sense at this momentum.
Well actually continue into calendar 'twenty 2.
I'd love to get any updated context, there and then I used to have a quick follow up thanks.
So thank you for the question and we think that the changes that we have seen Dave embodies the pandemic I'm gonna be permanent and are going to continue to have an impact in 2021 and 2022.
There.
More and more people will have will be working in a hybrid way we've seen that market will continue to learn from call them on from the and from school and this is going to continue to have a positive impact on the overall size of the D. C market and therefore, we expect the size of the market to continue to be significantly larger than what we were expecting.
Before before the pandemic.
Additionally to that and we just described we also expect to see strong commercial demand through the end of the year. So this will also help and put even more drive even more growth on the PC side.
And.
And and just sticking there you just going back to the questions about next on the pieces that would.
You talked about strength in chromebook, and how that is having a sort of softer and makes impact on AFC.
Would that not reverse.
As a as commercial sales business.
And you continue to open up she and I expect that debt to reverse and carry on.
And into 'twenty 2 and.
So in terms of mix, yes, we expect and mix of commercial to go up food within the next quarter.
And this is why and what he was mentioning before that we expect the overall operating profit the person and he seems to be slightly higher than our guidance range through the end of the year.
That's great. Thanks, so much thank you.
Sure.
Our next question comes from Matt Cabral with credit Suisse.
Yeah. Thank you.
And on the print side I was wondering if you can give us an update on where you stand and trying to refill some of the supplies channel inventory just talk about how big of a factor that was in the quarter and how we should think about the contribution from here and maybe more broadly just an update on your efforts to add visibility as we start thinking about getting below those tier 1 tier 2 distributor.
Or is that you have out there.
Yeah, and it will show up Matt So maybe I'll just start with a quick comment on where we see the channel right now relative to supplies and I think I mentioned earlier that overall, our channel inventory levels for the company on a sort of below historic levels and and that includes supply.
Supplies and obviously, we continue to monitor that very carefully so that we can maintain a healthy and appropriate levels and that this quarter given you wind it back a year ago, we had the you know that.
The onset of the pandemic. So we've had that channel depletion that occurred last year and so there we did see some benefit in the year on year compare and you know from that impact of the inventory movements, we estimate that to be approximately 3% year on year and and as you know we have a multi tiered.
Channel. So this is our best estimate based on the data, we have including our channels for our product across the channel and and use of stock.
Yeah.
That's helpful. And then I think it was last week, you guys announced the new head of your 3 D printing business, maybe just a broader update on on how <unk> been ramping where do you guys standard with the push and just maybe a bigger picture on when we should start to thinking about some more explicit disclosure just a do you think about the impact of that.
Business more going forward.
Sure Let me, let me take that 1 and so first of all this quarter. We we started this here and we have seen the period 1 solid growth on there on the CD side, both grew more than 30%, which is a very solid number and.
And these are these shows kind of the potential that this business cards and the long term.
And we had announced before we are complementing our strategy on C. D to also focus on time and to and applications, where we think we're going to get even more value than just by selling and Tesco and core consumables and we were mentioning on our prepared remarks. The work that we're doing our molded fiber is an example.
But we've really seen that.
More and more where we thought we will be focusing on on applications to capture value in this business.
And this is why we selected DDA they'll talk to lead this business. He comes from the health and wellness industry. So he comes from an industry that will be disrupted by 3 D and we see and this will be I didn't significant value to the definition of our strategy.
And then in terms of when we will be more transparent on on their cities.
The business I think I think I said before there are 2 major things..1 is we want the business to have highest gain on.
And secondly, and probably most important then we need to have a better defined business model and this is where this combination of selling printer supplies or going after and train applications and it's very important so 1 who will have a complete.
And people who are this will be going long longer term anyway.
We will be brief.
And more visibility.
Our final question today comes from Sidney Ho with Deutsche Bank.
Hi, This is Jeff Rand on fashion day can you give us an update on the competitive environment and your personal systems business and how this has changed through the pandemic and now with a tight supply environment.
Yeah, I think that first of all on do we have discussed before really the performance of this business now is more driven by supply and then by the thing. So the portfolio now having said that we are really pleased with the progress we have made from a portfolio perspective.
And we if you look at the innovation that we have introduced this quarter, we go and significant awards across both consumer and commercial products. We have a 1 of the broadest portfolios and the market covering from lower and education on paradox too high and commercial products and we are in a very solid position to continue to grow.
Sure and we did this quarter.
Really the relevance of our portfolio.
Great and just my follow up how should we think about your operating expenses trending in the near term as costs like business travel start to return.
Well I think and if you look at their prediction on how do we have or the second half. We think we will be going back to a similar level to what do we wait and Q1.
This concludes our question and answer session I'd like to turn the call back on.
So any closing remark.
Okay. So let me close and thank you everybody for having joined US today I think the results of the quarter demonstrates the relevance of HB and this hybrid world and.
And how our technology is gonna be helping customer to really perform and a very different environment.
We are really pleased with the growth opportunities that we see both he and our core markets and attractive Adjacencies and also in the new segments that we are creating and we are going to continue to innovate across our technology to continue to create and drive differentiation. Thank you for your time today and look.
Going forward to meet in person sometime soon thank you.
And that's now conclude and thank you for attending today's presentation you may now disconnect.