Q4 2022 HP Inc Earnings Call
For today's call.
At this time, all participants will be in a listen only mode.
We will be facilitating a question and answer session towards the end of the conference.
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As a reminder, this conference is being recorded for replay purposes.
I would now like to turn the call over to Ari.
<unk> head of Investor Relations. Please go ahead.
Good afternoon, everyone and welcome to <unk> fourth quarter 2022 earnings conference call with.
With me today are Enrique <unk>, Hp's, 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 a webcast and a replay will be available on our website. Shortly after the call for approximately one year.
We posted the earnings release and accompanying slide presentation on our Investor Relations webpage at Investor The HB 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 in the earnings materials relating to forward looking statements that involve risks uncertainties and assumptions.
For a discussion of some of these risks uncertainties and assumptions. Please refer to Hp's SEC reports, including our most recent Form 10-K and Form 10-Q.
HP assumes no obligation and does not intend to update any such forward looking statements.
We also note that the financial information discussed on this call reflects estimates based on information available now and could differ materially from the amounts ultimately reported in Hp's SEC filings for the years ending October 31, 2022, and 2023 and the quarter ending January 31 2020.
III.
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 the non-GAAP basis, we've included reconciliations to comparable GAAP information.
Please refer to the tables and slide presentation accompanying today's earnings release for those reconciliations.
With that I'd now like to turn the call over to Enrique.
Thank you <unk>. Thank you everyone for joining the call today.
I'm going to focus my remarks on three key topics.
First I will recap, our Q4 and full year results.
Then I will discuss the actions, we're taking to position our business for the future.
Including our new three year plan focus on structural cost reductions that will drive the next phase of our digital transformation and the investment in our growth businesses.
And I will close by talking about our outlook for 2023, but let me start by 13. Some important context. It has now been three years since I became CEO .
From the day to cover my top priority has been to deliver long term sustainable profitable growth, while transforming our business for the future.
And we have made important progress.
We started by launching an aggressive plan to unlock value.
We implemented a new global operating model that brought us closer to customers and help us significantly reduce structural costs.
We initiated actions to rebalance profitability in our premium business.
And we began to diversify our portfolio to capture more value per customer.
We expanded into adjacent growth categories, such as pretty front, we extended our services and solutions offerings.
We shifted more of our business to subscription and contractual model.
These changes help us to improve our operational performance.
They also position us well for the disruption caused by the pandemic, which we were able to use as a catalyst to accelerate our transformation.
And our track record over these past few years provides a window into what you can expect from us moving forward.
We have proven to be resilient in the face of changing market conditions.
We delivered strong free cash flow controlled our costs and skewed our growth businesses.
At the same time, we will continue challenging ourselves to do better regardless of the external environment.
And there are areas, where we need to do better.
When we see things that aren't working we will fix them.
We will embrace every opportunity to improve our performance because our customers shareholders and other stakeholders deserve nothing less.
You can expect us to take the same approach in 2023 and beyond.
Let me now turn to our results for the quarter.
Revenue was $14 $8 billion down, 11% nominally or 8% in constant currency.
This reflects macro headwinds in the market and is very consistent with what we described last quarter.
We continue to focus on what we can control.
We manage our price and mix and costs to deliver non-GAAP EPS of <unk> 85.
Which is toward the high end of our previously provided outlook.
And we delivered strong free cash flow of $1 $8 billion, while returning $1 billion to shareholders.
Very importantly, we also maintained our momentum in our growth portfolio.
In short we did what we said we were going to do last quarter.
Turning to our Q4 business unit performance personal systems revenue was $10 6 billion.
That's down 9% in constant currency year over year, but up 2% sequentially or 4% in constant currency, including two months of poorly results.
They are poorly integration is going well, so far with the business performing better than expected.
We continue to receive very positive feedback from the market about the opportunity ahead.
We are well positioned to accelerate our <unk> growth and we expect fully to be accretive to non-GAAP .
<unk> profit and EPS in fiscal year 'twenty three.
Our peers operating margin was four 5% in the quarter below our long term target range due to increased competitive pricing, particularly in EMEA.
Still we remain confident in the long term trajectory of peers as we navigate near term volatility in the market.
Tam remains above pre pandemic level, and we're making progress against our long term strategic priorities.
This includes shifting more of our mix to high value segments.
In Q4, our commercial business continues to account for more than two thirds of our overall PS revenue.
However, we are not satisfied with our peers market share results this quarter.
We know we can do better and we will.
We see many opportunities to improve our execution and gain share in key segments of the market.
In print revenue was $4 5 billion.
That's down 7% year over year or 6% in constant currency.
Largely due to continued softness in the consumer market, both hardware and supplies and supply constraints.
That said, our operating margin of 19, 9% was well above our target range, reflecting disciplined cost management and pricing.
Yeah.
Our commercial business made a good recovery during the quarter with office hardware revenue growing double digits year over year Consequentially.
This was offset by declines in home and supply both of which were in line with our expectations.
We also made progress against our plans to rebalance system profitability and further reduced our reliance on transactional supply.
HP plan and victim printers continue to become a larger portion of our portfolio mix.
Presenting about 55% of our printer shipments.
And we had another good quarter in industrial graphics, and <unk>, both of which grew revenue year over year and sequentially.
Now turning to the full year, our Q4 results capped off a solid 2022 in the face of tough market conditions in the second half.
Fiscal year 'twenty to revenue was 63 billion.
That's down 1% nominally and up 1% in constant currency.
We exceeded our full year revenue target for our key growth businesses, each of which delivered double digit organic growth.
Collectively they generated more than $11 billion in revenue.
That's a $1 billion above our target and reflects the strong momentum we are building.
We delivered non-GAAP EPS of $4 eight.
That's up 8% year over year and within our target range.
We generated free cash flow of $3 $9 billion.
We returned $5 3 billion to shareholders in the form of share repurchases and dividends.
We also continued to advance our sustainable impact agenda.
This is a key differentiator for our brand and I am proud of the work our teams are doing to make it a competitive advantage.
This year, we were the only technology company globally to receive an a rating from CDP one of the worlds, leading engineers dedicated to environmental sustainability reporting.
And almost all the new printers laptops notebooks displays and workstations, we launched in 2022 included recycled materials.
Sustainable impact will remain a key strategic priority moving forward.
Fiscal year 'twenty, two also mark the completion of our three year value creation plan and we exceeded all the key targets we set.
In addition to delivering on our financial commitments the plan drove important investments in our future.
Most notably we invested in our digital infrastructure to begging pre platform in the company.
And we invested in both R&D and M&A to accelerate the growth of our businesses.
These investments have strengthened our resilience and positioned as well for the volatile market ahead.
I now want to talk about what comes next.
Because while we have delivered on our value plan, we are not done and.
And we have initiated the next phase of our transformation.
Our ultimate goal is to create a future ready HP.
Future ready is our strategic framework that we are driving across the company.
It has two primary objectives.
One is to develop the portfolio and operational capabilities needed to drive sustainable growth.
The other is to further reduce our cost.
Marie will talk more about the cost side of this transformation.
Today, I am going to walk you through three key elements of our future ready plan.
Digital transformation portfolio optimization and operational efficiency.
They are also the major drivers of savings of the plan we are announcing today.
I will start with digital transformation.
We are continuing the process of digitizing the company.
We plan to capitalize on the infrastructure investments, we made over the past three years to simplify and accelerate many processes throughout our nation and end to end management. For example, we are launching end to end initiatives that will enable faster conversion from lead generation to.
Free cash flow.
Our digital transformation, we also drive productivity speed and quality of our execution across supply chain customer support and go to market.
In addition, our new digital backbone will enable us to scale key growth businesses by delivering new customer value propositions, such as personalized services and solutions that allow us to capture more value per customer.
The second area of focus is on optimizing our portfolio.
In the current environment I believe it's essential that we zero in on businesses, where we can drive significant competitive advantage and market leadership.
We have an opportunity to create a more focused and more growth oriented lines of businesses.
Based on innovation that meets the changing needs of our customers.
We also have opportunities to simplify our portfolio.
For example in personal systems, there is an opportunity to significantly reduce our number of unique skus and.
And we plan to significantly reduce complexity and cost in businesses, where we don't expect to achieve growth, but can drive value.
A significant portion of the savings we generate is expected to be invested to drive innovation in our key growth businesses to increase the lifetime value of our customers.
I'll give you some examples.
In hybrid work solutions, we intend to leverage the combined strength of poorly and HP to drive attach while expanding in software and services to deliver differentiated hybrid work solutions for meeting rooms and home offices.
In gaming, we see significant opportunity to drive better collective experiences through both software and hardware.
And we will create seamless experiences across Pcs displays comparisons.
Through our newly formed workforce services and solutions business, we will simplify management for our customers through new device as a service offering tailored for hybrid ecosystem.
We will also expand our consumer services offerings beyond <unk> to include new areas, such as paper and print hardware.
Yeah.
Industrial graphics, we will continue to lead the industry in innovation that drives that analog to digital transformation.
And in <unk>, we will continue to invest in our own <unk> end to end printing applications.
And in our metals portfolio.
And we expect these businesses collectively to continue growing organically double digits next year.
Okay.
The third area of focus I am going to cover today is delivering operational excellence.
We plan to continue to optimize our performance by driving efficiencies simplifying our organizational structure and removing unnecessary costs.
This work will build on our previous transformation initiatives to unlock new structural savings.
Who will be taking actions across the company to reduce our variable spend and structural costs.
For example, in our premium business, who will further reduce our core fixed cost structure and align it to post pandemic market sizing.
And our consumer subscription offerings will allow us to be more efficient in simplifying our portfolio.
The cost actions of our future ready plan will generate at least $1 $4 billion in gross annual run rate structural savings by year end fiscal year 'twenty five.
They will allow us to mitigate near term market headwinds mitigate softness in the core businesses and just as importantly to maintain investments in long term growth.
Okay.
As part of the actions, we are taking who will be reducing the size of our workforce over the next few years.
We expect to reduce it by 4000 to 6000 people.
These are the toughest decisions, we have to make because the impact colleagues we care deeply about.
We are committed to treating people with care and respect, including financial and career services support to help them find that next opportunity.
But while these are difficult decisions, we are doing what's best for our business.
Let me now provide some color on our outlook for the year ahead.
We expect to operate in a challenging macro environment during fiscal year 'twenty three.
In our guide we are not assuming a significant economic recovery over the next 12 months.
We expect our second half performance to improve mostly driven by the cost saving measures we are implementing.
Okay.
We plan to maintain our current capital allocation approach applying the same framework we have used three in the last three years.
We plan to continue to return at least 100% of free cash flow to our shareholders over time, and there's opportunities with a better return on investment arise.
And as long as our gross leverage ratio remained under two times.
Given the volatility of the market. We believe it's important to maintain a healthy balance sheet through prudent financial management.
Therefore, we will temporarily reduce our share repurchase activity in the near term.
We are confident in the actions we are taking to navigate current market conditions and drive long term value creation.
And today marks the start of the next phase of our strategic journey.
While our growth trajectory may be uneven in the face of volatile market conditions, we remain confident to grow low single digits over the long term.
Based on our track record over these past three years, you can count on us to deliver on our commitments.
Let me now hand, the call over to Marie to talk more about our financials and outlook.
Thank you and good afternoon, everyone. Our Q4 results were impacted by many of the same macroeconomic challenges, we highlighted last quarter, including a significant slowdown in consumer demand ethics and inflation.
That said, we are adapted quickly to the current environment and had demonstrated disciplined cost management to deliver solid results to finish out the year.
In addition, we returned significant capital to our shareholders, while successfully closing our acquisition of <unk>.
We continue to believe in the long term opportunities across our business and are confident we have the right strategy and portfolio of assets to drive long term value creation.
Today, I will cover our Q4 results and a recap of FY 'twenty two followed by details about the cost transformation component of future ready building. Upon the foundation, we laid in our previous program and then finish with our outlook for Q1 and FY 'twenty three.
Turning to our Q4 results net revenue was $14 $8 billion in the quarter down, 11% nominally and 8% in constant currency gross margin was 18, 4% in the quarter down one two points year on year, driven by FX and increased pricing competition.
Typically NPS non.
non-GAAP operating expenses were $1 $6 billion or 10, 7% of revenue down 18% year on year in.
In Q4, we instilled further rigor.
Cost management with Opex down sequentially, excluding poly.
Year on year, we reduced our opex spend by nearly $350 million by prioritizing our spend and reducing variable compensation, while also capturing additional structural cost savings under our transformation plan.
At the same time, we made and expect to continue to make prudent and targeted investments, where we anticipate significant opportunity to drive growth, including our key growth areas, which enrique outlined earlier.
non-GAAP operating profit was $1 1 billion down 15% non-GAAP net <unk> expense was $128 million for the quarter up sequentially largely as a result of our acquisition of poly.
non-GAAP diluted net earnings per share decreased 10% to 85 with a diluted share count of approximately 1 billion shares.
non-GAAP diluted net earnings per share excludes net expenses totaling $855 million, primarily related to acquisition related charges amortization of intangibles tax adjustments and restructuring and other charges, partially offset by non operating retirement related credits.
As a result, Q4 GAAP diluted net earnings per share with zero, mostly due to onetime noncash tax expenses.
Now, let's turn to segment performance.
In Q4 personal systems revenue was $10 3 billion down 13% or 9% in constant currency.
This compares to the three point headwind we had expected.
<unk> revenue includes just two months of police results. Following successful completion of the acquisition in late August total units were down 21% on tough compares we also saw pricing competition increased sequentially due to high channel inventory levels across the industry.
And while supply availability has improved significantly constraints persisted in some pockets of the business.
Drilling into the details commercial revenue was down 6% or 2% in constant currency consumer revenue was down 25% or 21% in constant currency with FX remaining a significant headwind this quarter.
As an example currency was an approximate six point headwind to our personal systems business in EMEA this quarter, increasing one percentage point sequentially.
By product category revenue was down 23% for notebooks up 1% for desktops and up 9% for workstations, we saw a strong recovery in gaming sequentially with revenue up solid double digits due to better product availability.
We have cleared most of our outstanding backlog finished the quarter at a level consistent with pre pandemic levels and with most of the remaining backlog, reflecting higher doggy units.
Personal systems delivered 458 million of operating profit with operating margins of four 5%. We ended the quarter below our long term range for operating margins largely as a result of particular weakness in EMEA consumer revenue.
Operating margin declined two points year over year to date currency and increased promotional activity given elevated industry channel inventory levels, especially in the consumer business. These headwinds were partially offset by mix lower commodity costs and variable compensation we.
We are pleased with the strong execution by the poly team. They delivered just above breakeven operating profit exceeded expectations for the quarter.
In print our results reflect our focus on execution and the breadth of our portfolio as we navigated the highly dynamic environment.
In Q4 total print revenue was $4 5 billion down, 7% nominally or 6% in constant currency driven by lower supplies revenue and lower home hardware units combined with increased pricing competition in the home business.
Was partially offset by higher hardware units and Asps and growth in industrial graphics and instant ink services.
Total hardware units declined 3% driven largely by continued supply constraints for certain IC components and lower consumer demand.
We have taken mitigating actions that are beginning to yield improvements in our supply availability at a pace consistent with our plans.
While this has enabled us to make progress on reducing our backlog, we still expect print hardware constraints to extend into FY 'twenty three.
By customer segment commercial revenue increased 1% or 5% in constant currency with units up 5% consumer revenue was down 7% or 4% in constant currency with units down 4% office continued with its gradual recovery, while pricing remain disciplined even as supply constraints eased.
<unk>.
The hardware demand softened further sequentially, particularly in the EMEA and Americas regions impacting asps as competitive pricing increased during the quarter.
In Q4 commercial recovery remains slow due to the gradual and uneven pace at which the return to office is progressing.
There were pockets of strength with commercial hardware units up 5%, adding graphics, our India business closed its largest deal to date for 50 digital presses with APAC.
Leader in the flexible packaging market.
Supplies revenue up $2 7 billion declined just under 10% in constant currency.
The better than expected as demand weakness appeared to stabilize in the quarter.
The decline was driven primarily by continued consumer weakness, particularly in the EMEA region and the slow recovery in the office, partially offset by favorable pricing actions and continued market share gains and ink and toner.
Supplies finished FY 'twenty, two down nearly 7% on a constant currency basis.
Adjusting for approximate one point headwind related to the exit of our Russia business the year on year decline in supplies came in consistent with our original guidance range of a decline of low to mid single digits.
Operating profit increased $73 million to $903 million.
Up 9%, yielding an exceptional operating margin of 19, 9%.
Operating margin increased two nine points year on year, driven by favorable overall pricing and Opex management, including lower variable compensation, partially offset by unfavorable mix and higher commodity costs.
Now turning to cash flow and capital allocation in Q4.
Q4 cash flow from operations and free cash flow was $1 9 billion and $1 $8 billion, respectively exceeding our guidance for the quarter. The cash conversion cycle was minus 29 days in the quarter flat sequentially as lower days payable outstanding and higher days sales out.
Steadying was offset by the decrease in days of inventory.
In Q4, we returned approximately $1 billion to shareholders. This included $750 million in share repurchases and $249 million in cash dividends.
At the end of FY 'twenty two we successfully finished our transformation plan generating better than expected structural cost savings.
Our strong performance on our value plan over the past three years, including our capital return and broader capital allocation priorities were made possible in part by the transformation journey, we have been on.
In 2019, we launched a three year plan to unlock significant value and become a leaner simpler and more digitally enabled company. We took decisive actions aligned to the principles of our value creation plan to become closer to our customers by simplifying our operations and re platforming the company in total.
Our transformation program delivered gross annualized run rate savings of over $1 3 billion and reduced our head count by approximately 7700 as expected.
As part of our simplification journey, we changed our operating model moving to one commercial organization and created strong centers of excellence to drive efficiency and faster decision, making in addition, we optimized our real estate footprint, creating efficient digital workspaces as we transitioned to a hybrid work model.
We also made significant progress in optimizing our manufacturing footprint and continuing to enhance resiliency, while reducing our cost structure.
Digital re platforming with novel to finally enabler of our transformation efforts, we built a new digital backbone for the company with the deployment of one ERP system, creating the ability to deploy additional tools and capabilities. In addition, this new platform provides the foundation upon which we can drive incremental cost save.
<unk> as well as build new businesses with different business models as we move into FY 'twenty three with the launch of our future ready transformation plan.
We are now launching cost action efforts as part of that future ready program continuing to the next phase of our transformation.
We will continue to take actions to reduce structural costs across Cogs and opex to drive efficiencies, while protecting the investments necessary to accelerate our transformation, ensuring we are well positioned to drive long term growth.
This program is expected to ramp up to three years, and we expect to generate at least $1 4 billion in gross annual run rate structural cost savings by the end of FY 'twenty five.
We expect at least 40% of the run rate savings of approximately $560 million to be achieved by the end of FY 'twenty. Three we have line of sight to the savings and we also have a good funnel of additional cost savings opportunities that we are betting to help us exceed these targets the total expected restructuring charge.
Approximately $1 billion, which includes approximately $200 million in non cash charges in FY 'twenty three we anticipate approximately $600 million of the total charges to be in FY 'twenty three with the rest split roughly equally in FY 'twenty full at FY 'twenty five.
As <unk> mentioned, we take workforce reductions very seriously and with the utmost care.
But they remain critical to the long term health of HP.
In total we expect to reduce head count by 4% to 6000 over the next three years.
In addition to labor related restructuring charges of roughly $700 million.
We expect additional non labor charges related to.
Real estate and other corporate charges.
We anticipate the gross savings from this next phase of transformation will partially offset the challenging macro in the near term and incremental investments in growth opportunities we discussed earlier.
In summary, these actions will help enable us to build a stronger HP.
Looking forward to our Q1 and FY 'twenty three outlook.
We continue to believe in the long term opportunities and growth in our end markets, including our key growth areas and our strategy to create value for shareholders over time given.
Given the current macro environment, we do expect near term volatility.
In particular keep the following in mind related to Q1, and FY 'twenty three financial outlook.
Given the challenging macro environment driven by the headwinds have described we are modeling multiple scenarios based on several assumptions for FY 'twenty three we see a wide range of potential outcomes, which are reflected in the outlook ranges we are providing today.
<unk> with our Q4 results and ongoing strategy, we will continue to rigorously manage our opex spend while continuing to prioritize investments, where we see opportunities for growth. This is made possible in part by the decisive cost actions. We are announcing today, we expect currency to be about an approximate 5% year over year head.
In Q1, and 5% for FY 'twenty, three reflecting the current strength of the U S dollar.
In personal systems, we expect the overall PC market to see an approximate 10 point unit decline versus FY 'twenty too.
Many of the recent challenges we have seen in FY 'twenty, two will likely continue into FY 'twenty, three including softer demand in both consumer and commercial and higher channel inventory levels across the industry.
We anticipate these factors will put continued pressure on overall pricing at least through the first half of 'twenty. Three we expect personal systems unit mix to continue to improve as we focus on higher value categories, including commercial premium and hybrid work solutions, we expect personal systems margins to be below the low end about.
5% to 7% target range through at least the first half of FY 'twenty three driven by the high normalization of industry channel inventory levels.
And then improve into the second half as channel inventory normalizes at our transformation related cost actions start to more meaningfully impact our cost structure.
Regarding Q1 personal systems revenue, we expect to be down mid single digits sequentially.
In print in terms of the overall print market sizing, we expect it to be down approximately 3% year on year, driven by the challenging macro environment and slower than expected return to the office.
In the office market, we continue to expect the market sizing to be approximately 80% of our pre pandemic projections.
In hone, we expect the market to be down in 'twenty three versus the exceptional performance during COVID-19, but still above our pre pandemic predictions. We expect continued softness in consumer demand and favorable pricing in commercial units offsetting some normalization and consumer pricing, particularly in.
First half of 'twenty three.
In terms of our print hardware supply chain, we expect strength to continue particularly in office hardware at least through first half of FY 'twenty three.
We expect print margins for FY 'twenty three to be at the high end about 16% to 18% range driven by the resiliency of our portfolio and disciplined pricing and cost management, including our transformation efforts to reduce our fixed cost structure as Enrique mentioned.
And finally regarding supplies revenue, we expect to decline low to mid single digits in FY 'twenty three in constant currency consistent with our long term outlook for FY 'twenty three we expect to be within that range in aggregate, but for the first half of 'twenty three we expect to be at similar levels to Q4, given the macro environment.
And tough compares.
We expect free cash flow to be in the range of three to $3 $5 billion, which includes approximately $400 million of restructuring cash charges.
From a seasonality perspective, we expect the second half to be stronger than the first largely consistent with our net earnings combined with the fact that our first quarter is typically no given the timing of prior year variable comp.
Furthermore, normal quarterly sequential seasonality does not apply for FY 'twenty three given the dynamic macro environment, but we do expect some improvement in our revenue trajectory in the second half of 'twenty three.
We expect on key growth businesses collectively will continue to grow double digits organically in FY 'twenty three as we continue to invest in innovation and adjacent market opportunities.
With regard to Opex, we expect to rigorously manage our overall cost structure as part of our transformation, particularly in our core businesses, where we expect opex to be down year on year, However, including Holly we do expect total opex to be up year on year.
In addition for FY 'twenty three we expect <unk> expense will be approximately half a billion consistent with our Q4 exit run rate.
Moving to capital allocation.
We are not making any changes to our capital return framework.
As we have discussed in the past we are committed to our strategy of retaining 100% of free cash flow to shareholders over time as long as our gross leverage ratio remains under two times and there aren't any better return opportunities in order to maintain our credit rating.
Given the challenging current environment consistent with our disciplined financial management, we expect share repurchases will be modest near term based on our FY 'twenty three outlook today.
Lastly, we announced today that we are raising our annual dividend by 5% to $1 <unk> per share reflecting confidence in our long term outlook for the business. We have raised our dividend every year since separation in late 2015.
Taking these considerations into account we are providing the following outlook. We expect first quarter non-GAAP diluted net earnings per share to be in the range of 70 to 80.
First quarter GAAP diluted net earnings per share to be in the range of 47 to 57.
We expect full year non-GAAP diluted net earnings per share to be in the range of $3 and 20.
$3 60.
And FY 'twenty, three and GAAP diluted net earnings per share to be in the range of $2.22.
$2 and 62.
For FY 'twenty, three we expect our free cash flow to be in the range of three to $3 5 billion.
Which is net of about $400 million in restructuring cash outflows.
Before we open for Q&A I want to leave you with the following thoughts.
First as part of our future ready plan, we are taking clear and decisive actions, which includes aggressive structural cost reductions as we have just shared.
Second we are adapting to these challenging market conditions with our future ready cost transformation program, which includes plans to drive significant cost savings.
Third we are confident in the long term growth opportunities and are capitalizing on these opportunities by investing to become a more digital company with a more growth oriented portfolio.
We have an experienced management team with a proven track record in up and down markets.
We deliver on our financial commitments, we are disciplined in our capital allocation and committed to a strong balance sheet.
Short we are steadfast in our commitment to deliver long term value creation. We are building a stronger HP and I look forward to sharing our progress with you in FY 'twenty three.
Operator, please open the line so we can take your questions.
Yes.
Thank you.
And we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
If you are using a speakerphone please pick up your handset thus far pressing the keys.
Your question. Please press star one again.
We also ask that you please limit yourself to one question and a single follow up thank you.
Our first question comes from the line of Amit <unk> with Evercore.
Your line is now open.
Yes.
Thanks for taking my question.
And we can help you to start off talking a little bit more about the transformation plan.
What do you think HD it looks like after the transformation plan is done maybe double the growth rate on the operating margin profile.
What you've seen historically.
Just to understand.
What would be different about HP also certain transformation plan and its local platform. How do we think about net savings we will see growth on what you're talking about through this transformation that will be helpful.
Sure. Thank you Amit so first of all with <unk>.
Because of the transformation with <unk>, we will continue to support.
Support the guide that we provided last year about sustained revenue on profit growth year over year. This has been the goal that we had before and continues to be the goal that we have now from a business perspective. These will allow us to continue to accelerate our subscription and services business we will.
A more efficient company, because we will be leveraging our digital infrastructure to support and two we will have to transform many of their key processes that we have and the mix of our business between the core businesses and what we call. The growth businesses will also be different these will be the key key drivers.
We will expect to achieve through the transformation.
Neil commented and good afternoon regarding the savings. So we do expect at least $1 4 billion of gross run rate structural savings by the end of 'twenty, five and approximately $560 million of that by the exit of 23, just to add it will be a mix of both Cogs and.
Opex and we look at this over time as Enrique said and we expect that these savings and investments.
That we're making are going to provide that significant flow through over time.
Got it and if I recall.
On the margin.
Held up really well.
Supply side of the business.
Think about the performance was in the last three four quarters I think Martin <unk>.
All the things that you've been at enabling these margins instead of 20% right now near 20% and then what do you think the durability of this margin level.
In the fall of next year.
Yeah, no. Thanks, very much and it so look as you said, we're really pleased with the print margins. There were 19, 9% in Q4, which is actually at the high end.
Of our expected range and that increase if we look at it from a year on year perspective, the combination of things Firstly, we've demonstrated disciplined opex management that's contributed.
Along with overall pricing durability as you mentioned and I think both of these factors combined have really helped to sort of play into our into our performance as we look into next year. We do expect once again to be at the high end of the range of what it's really contributed by both the resiliency of the portfolio our strategy.
<unk> a combination of that pricing management I think that we've really marketed along obviously with the benefits of the future ready transformation program that we just announced today as well.
If you remember we announced the plan to rebalance profitability between hardware and supply two years ago, we have been executing on that this quarter, we shared that have more than 50% of the printers, where appropriate upfront. So all this has also helped.
He said, we expect to be the business within range during 2023.
Your next question comes from the line of Shannon Cross with Credit Suisse. Your line is now open.
Thank you very much my first question is looking at your growth areas.
I think we understand where there's there's pressure in your model, but maybe if you could talk a bit more about the $11 billion of revenue that you generated and I'm not sure if that like.
Pro forma for poly it doesn't equal policy.
That's excluding I'm not sure it's very small brand.
But.
If we can think about each one in their potential growth contribution and maybe how to think about the margin potential for each one of those and then I have a follow up question. Thank you.
Sure. So yes, you are right Shannon the $11 billion does not include poorly, but it will be on top of $11 billion that we that we explained.
The goal that we had at the beginning of the year works for them to be about $10 billion, but this is almost $1 billion more than what the plan was.
If you would.
Currency at this point is all of them grew double digit during 2022, and we expect collectively to grow again double digits in 2023.
As we shared with you as we look at the year. The gross margin was above the gross margin of the company.
And some of them we are still in investment mode, and we know we need to continue to invest to continue to accelerate the growth and this is one of the reasons why we have been working on the transformation for a few months now because we know that we need to both compensate for some of the.
Challenges that we see on the market side, given the slowdown in some of the market, but we also need to continue to invest on the growth initiatives because they will carry the growth of the company and the value of the company in the future.
Okay and then.
Marie if you can talk a bit about on the cash flow side of things I mean, youre guiding three through $5 billion I assume that with restructuring.
Maybe it doesn't but just just in general how do we think about sort of normalized cash flow model. After you go through as you go through the.
The restructuring plan and areas, where maybe you can draw down in terms of our.
Working capital and just you know again I think people are trying to understand maybe when you would get back to where you can buy back stock.
Just your comfort level and what Youre seeing in terms of cash flow. Thank you.
And good afternoon Shannon so.
As you said the cash flow guide is three to three and a half and just for clarification that actually doesn't include the $400 million of restructuring cash flows. So just take that into account in your model now in terms of how to think about free cash flow as you know it tracks with net earnings but in any quarter as you see interest in our results in the last couple of quarters.
It's driven very much by the mix of business that we see in the quarter and changes in working capital and those items conclude everything from the restructuring the bonus et cetera, and also just adjustments that we make to our inventory level. So you're going to expect that there's going to be a level of seasonality around it as well and then as we're thinking specifically.
About the first quarter, that's coming up we would say it's going to be we're going to guide here to a lower number because we expect typically from a seasonality perspective, that's when we pay out the bonus that we accrue in the prior year.
Also we expect specifically in Q1, just due to the fact, we've got this combination of both the unfavorable business mix from the topline pressure of personal system, you combine that with the bonus payout and restructuring.
And with the increase.
Increase in <unk> from contract manufacturers, which was partially offset by <unk>.
Continued the continued reductions we're taking England level, we expect our cash flow in Q1 is probably likely to be negative towards breakeven. So I know I've said a lot, but there is definitely.
A lot of factors going into driving the linearity in our cash flow, but once again still very confident in the guide that we've given for the year of three to three and a half and then I'll just turn it to recap he wants to comment at all with respect to our.
Repo strategy.
Sure. We can talk about that we shared in the prepared remarks that we are not changing our capital allocation plan, but we have said before we are going to be returning to shareholders, 100% of free cash flow and further opportunities arise and always within the hour, we will stay within our limited right.
In Q4, we completed the acquisition of fully we did one quarter before we were planning and therefore during the beginning of the year, we are going to slowdown or moderate our share buyback too.
I mean with our plan, but our plan is to go back to the original plan in the second crop we will have more a stronger foundation for our free cash flow perspective, and that's our plan, yes, I'll just add it is important that we're going to ensure that we at least offset dilution from employee benefit plans as well.
Your next question comes from the line of Toni <unk> with Bernstein.
Your line is now open.
Yes. Thanks.
I'm wondering if you could.
<unk>, how significant the backlog drawdown was in the quarter. Just so we can get a sense of what kind of baseline normalized.
Order our revenue growth was and then you provided some context on your expectation for Q1 revenues for <unk> to be down mid single digits sequentially. I'm wondering if you can comment on your revenue expectations for.
For Q1 overall and for fiscal 'twenty three for.
The next four quarters, Dallas, calling for revenues to be down in the teens I'm wondering if you see a more optimistic outlook than that and I have a follow up please.
Sure I'll take the question on market under Marie will talk about Q1 pro forma northern projection perspective, Tony the way we are modeling the PC market for next year is at two.
Two we are expecting that it will be declining by 10%.
From a backlog perspective, we basically clean the majority of our backlog during Q4, and we are back to where we were before the pandemic, which is one of the reasons why we expect the market to be in the minus 10% range.
During 2023.
Are you do you want to talk about.
Good afternoon. So just on the revenue per PFS, we do expect it to be down mid single digits sequentially. Obviously, that's driven by all the conditions, we've talked about earlier today.
We normally don't guide revenue, but we do expect that normal seasonality wouldn't apply in 'twenty. Three so we will see some improvements in the overall revenue trajectory in the back half, but overall, we do expect to see.
PS revenue down here in Q1.
The situation is different on the brain side, especially on the commercial side. We continue to have some shortages as we were expecting so backlog for commercial print remain elevated and we expect to clearly during the first half of 2023.
Okay, I still don't feel like we have a pretty good sense of what your range of outcomes is for revenue growth for 2023.
Maybe you can address that.
Following up with the second question.
You said supplies would be back to your traditional model of down kind of low to mid single digits, but you pointed to minus 10% growth in the first half so that means you're expecting supplies to grow in the second half.
It's pretty well the simple math and and why did we have this big perturbation from model.
The last couple of quarters and maybe the next couple of quarters, just channel inventory correction or why do we have a sudden reset off of model.
That is minus three to minus five minus 10, and then and then it kind of bounces back. Thank you sure. So as I explained in the last call the changes and the performance in the supply agreement is really driven by a slowdown of consumer demand. We started two cities at the end of Q3 and as we were expecting.
We have continued to see that in Q4, and we project that this will continue of course, if demand gets adjusted there is an inventory adjustment, but this is not the reason why we are seeing the impact in supply is really driven by adjustments in end user demand.
For the full year as we said last quarter and we continue to say, we expect the business to go back to our original guide and this means.
However, we'll have stronger performance from the first half.
As we look at quarter growth is one of the key metrics I think it's important to realize that our judgment on previous quarter have a lot of impact on growth. So we don't think is the best way to measure their success or the health of the business because anything that happens a quarter ago will have an impact and what is the next quarter.
But again, the big impact is driven by a slowdown in consumer demand and I think it's also important to highlight that our channel inventory is.
A very good position today I mentioned last quarter that it was slightly above where we wanted it to be we are now totally within the position where we like to be.
Your next question comes from the line of Aaron Rakers with Wells Fargo. Your line is now open.
Yes, thanks for taking the question I've got two as well.
Just going back to kind of Tony's question is a little bit I guess on the.
The context of the revenue side.
Just correct me, if I'm wrong, the 10% number with regard to Pcs being down that's a unit number so as we see.
ASP pressure come into play would the assumption be that revenue declined more and then also on the revenue contracts I think I think there was a comment thrown out there about 3% with regard to print.
I'm curious was that 3% sequential down in this quarter or was that kind of the commentary for the full year. I was just confused by that comment around 3% decline in print and I've got a follow up.
Sure Let me, let me start with the print side under Marie will talk about on the print side the minus 3%.
The expected decline in the overall market for premium between 2012 fiscal year, 'twenty and fiscal year 'twenty, two and there are different dynamics behind that number we are expecting the consumer number to the consumer market to go down year on year, the office market to go slightly up and the <unk>.
Israel market to continue to grow but <unk> has been growing during 2022. The net effect of all this is a minus 3% growth year on year.
Yes, no with respect to revenue I think as I said earlier with Tony's question, we do expect to see down mid single digits sequentially and as we mentioned earlier I think can make a comment in the prepared remarks down 10% on units and this is obviously with an environment, where you've got higher channel imagery, there is going to be.
Some ASP pressures. So we do anticipate though as you get into the second half that should clear out the inventory that we will see some of the revenue adjustment I think the way to think about it is that certainly the first half of <unk> is going to be challenged but obviously, we were doing our best to offset all of this with an improvement in our mix and I think we've demonstrated.
That over the last couple of quarters.
Yes, that's fair.
Very helpful. And then I guess the follow up was on the channel inventory discussion.
I guess.
Do you see that channel inventory.
Is the assumption right now that channel inventory normalizes as we get towards the mid part of calendar 'twenty three any any context of how you were currently characterize your own channel inventory.
Yes.
Sure. If we're talking just personal systems, absolutely, we expect that the inventory will remain elevated through the first half, but then normalize in the second half and then I think Enrique said earlier Princeton in really good shape, both supplies and hardware.
Thank you.
Okay.
Your next question comes from the line of Eric Woodring with Morgan Stanley .
Your line is now open.
Hey, guys. Thank you so much for taking my questions I have two as well maybe maybe Enrique start with you. This is your third consecutive kind of three year cost cutting or transformational plan I should say hp's third consecutive.
More than kind of a $1 billion of gross cost savings each plan. So I guess, if you take a step back and you think about.
The last night be almost decade in that context why has the prior plans I guess not bad enough for what are you doing with this specific plan that you haven't necessarily already done given even last summer you talked about.
Portfolio of SKU rationalization and digital transformation. So just maybe if you could help us understand that and then I have a follow up thanks sure. Thank you Eric I would say there are two things firstly the world.
Very different position now than what it was two years ago, but also the company is very different position in fact.
Significant part of the savings that we are going to be able to achieve now.
Driven by the investments that we have made during the last three years that really are they enabling a significant part of it for example, when we talk about continuing to work on the digital transformation. We can do it now because of all the investments that we have made during the last three years.
Additionally to that when we look at the return on this investment is really being very good results. We are going to be investing $1 billion and we will get of Murray with him $1 $4 billion of run rate savings.
End of 'twenty, five so really very solid return and on top of that this will also help us to continue to invest in our growth businesses within that is really important that we go through a challenging market condition. During the next quarter, we continue to invest in their future businesses of the company.
This transformation is going to enable us to do that going forward.
Okay. Thank you for that and then.
Maybe maybe Marie this one would be for you.
Net debt is up a little over $4 billion to $5 billion year over year, obviously poly had an impact on that and your gross leverages creeping towards the higher end of your one five to two times range target range. So.
Would you be willing to go over two times temporarily I mean, the math says due to temporary.
Technically get over two times over the next 12 months. So are you willing to let leverage get over two times and or why not try to work down some of that just given the more uncertain macro backdrop rising interest rates et cetera. Thank you yeah. No worries now we're very much committed to the strategy I think we've articulated it's staying inside our range. So absolutely we will.
Continue to execute against our strategy.
Within that the royalties and we have said very volatile and having a strong balance sheet is really important. So this is why we will stay below two keeping our investment grade rating is critical for many of our big deals with large corporations. So this is one of the big reasons, why we want to stay there and if everything we will deliver.
We are not planning to go beyond the range.
Yeah.
Your next question comes from the line of <unk> Mohan with Bank of America. Your line is now open hi, and thanks for taking my questions. It's filling in for <unk> today I have two questions Enrique one on Pcs and one on trend.
In the prepared remarks with respect to personal systems, you said that youre not happy with the share performance looks.
It looks like you lost.
<unk> lost some share both sequentially and year on year, but I'm sure you've already done in this quarter and what other companies are doing which is reducing price.
And with the inventory channel inventory remaining high for half of fiscal 2018 can you talk about your strategy in personal systems. How do you think you can gain share and what are some of the things that you just talked about execution, but what are some of the things you can do better to gain share in this year.
Sure.
And we have explained in the past our certainly our goal is profitable growth is not to gain share for the sake of gaining share and therefore, we are very judicious and very careful that we look at deals.
Different geographies different segment to make sure that the deal make financial sense for us.
<unk>.
This quarter, we saw very aggressive pricing in many countries in the world, especially in the consumer segment, especially in EMEA and in many cases, we decided not to participate.
But we also know that to maintain a strong leadership position in this market, we need to regain share and this is and we think that the cost reduction activities that we have been working on for some time are going to be part of the future already plan are going to help us to be more competitive and help us to win share during 2023.
We achieved our goal.
That's really the key of this will be the key driver of the share growth that we expect to have.
Okay. Thanks for the details there can I ask a follow up on the print segment.
People are going back to work how do you see the relative growth rate of your home subscription business in spending versus the commercial managed print services business. Our EBIT. One is one more profitable than the other and then just as you look at trend margins throughout the year you guided for the full year to remain at.
The high end of the range, but should we think that the first half.
Going to the second half you print margins normalize somewhat towards.
Within that range. So can you just give us your thoughts on the relative margins of those two subscription businesses and how do you see the growth rates for them as well as the margin progression. This year. Thank you sure for a margin perspective, similar to what happens on the transactional side. The home the incentive program is more profitable than the managed print services.
Program, that's driven by the fact that we own almost all the technology stack from a growth perspective, though theyre not related we have.
A lot of opportunity to grow both to grow the consumer subscription business and to grow as well the managed service business, especially as we start seeing some slow but some recovery on the LC side.
And just on the margins.
As I said in our prepared remarks, we do expect to be at the high end of the range, but intend to just how to think about it half on half just in the first half we do expect a little more softness in consumer due to some of the favorable pricing. So we'll see that probably in the first half.
Some normalization.
Your final question today comes from the line of Krish Shankar with Cowen <unk> Company. Your line is now open.
Yes, hi, Thanks for taking my question I have two of them first one.
Maria Enrique.
Aneel.
Cost reduction plan with the portfolio optimization, how should we think about the Tam opportunity for SP in FY 'twenty five.
Given that I understand you want to do profitable growth.
Thing with portfolio optimization, and the head count reduction.
Got it as one or the other and then I had a follow up.
Yeah. So our portfolio optimization has many different elements. Let me highlight a couple of them first we are going to maintain and in some cases increase our investment in the growth businesses as I said before we expect to get double digit double digit growth in 2023.
Going forward, they will continue to become a more relevant part of the company.
On the other side.
Also now we have opportunities to optimize some of their businesses in the core side.
For example, during 2021 and 'twenty two because of the component shortages, we have to duplicate many of Skus, which are the duplicate investments in board.
Many different paths to compensate for components shortages. This is clearly now an opportunity to simplify to rationalize and to reduce investment in cost in the cost side.
There are many other things, but these are two good examples of the type of things you will see us doing.
Got it got it.
Helpful.
Then a quick follow up actually a two part follow up.
On the 10% beta units down.
Slide <unk> challenge Detroit, three and can you just help us understand what your calendar 'twenty two based license and then the second part of the question.
I think Larry you mentioned.
Second half of FY 'twenty, they should get better.
And Lindsay Digest for Pcs I'm, just kind of curious is that.
Really a function of inventory digestion and expect demand to improve or is that.
Because it seems like most companies expect a second half recovery.
Uncertain demand in Nevada, and what is the confidence level on that improvement. Thank you.
Sure. So let me start with a minus 10% minus 10% is what we expect the unit decline to be during our fiscal year that goes from November 22 to November 'twenty. Three we are using that number because we are seeing is more relevant to understand the guide that we provided.
Today.
Yeah, and just on the second half just bear in mind, not only the channel andree will be in better shape up will also will see the impact of the future ready transformation programs that we will expect to see those gross run rate structural savings that I mentioned of about 560 million kick in in the back half as well. So that's another driver along with <unk>.
See supply chain in Peru, particularly in print and high end Pcs.
Just add that you know.
At the high end of the guide the upside is really coming from a better macro but we're not counting on it so.
That's what could drive us to the high end of the range.
Well, thank you everybody for joining the call today.
You can see that we are taking the actions under our control to manage the situation and to improve the situation clearly we know that we need to both continue to reduce our cost structure, but also to invest for the future of the company because I don't think anybody can predict when the rebound of the economy will happen but.
We want to make sure that we have a stronger HP. When this happened. So we can take advantage of that so really thank you everybody for joining I'm happy Thanksgiving for those of you in the U S. Thank you.
This concludes today's conference call. Thank you for attending you may now disconnect.