Q1 2023 HP Inc Earnings Call
<unk> Hps, President and Chief Executive Officer, and Marie Myers, Hps, 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, Though 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 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.
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 Form 10-Q for the fiscal quarter ended January 31, 2023, and Hp's other SEC filings.
During this webcast unless otherwise specifically noted all comparisons are year over year comparisons with the corresponding year ago period. In addition, unless otherwise noted references to H B channel inventory referred to tier one channel inventory.
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 now like to turn the call over to Enrique.
Thank you <unk> and thank you to everyone for joining today.
Our Q4 call last November where macro volatility. We described has continued.
Our approach remains consistent.
We are taking decisive actions to improve our performance.
Continuing to invest in long term growth.
By doing what we said we would do we deliver on our Q1 EPS guidance.
We are reaffirming our full year outlook.
Today I'm going to focus my comments on three areas.
I will begin by summarizing our results and progress against our future ready plan.
I will then cover our business unit performance.
I will conclude with our outlook before handing the call to <unk>.
Starting with our results net revenue grew 13 $8 billion in the quarter.
Down, 19% nominally and 15% in constant currency.
This reflects industry wide headwinds, including corporate budget tightening that has started to impact large enterprise demand.
Despite these top line pressure, we delivered non-GAAP EPS of <unk> 75 cents.
This is in line with our previously provided outlook.
It reflects the actions we are taking on costs as well as disciplined execution on pricing and mix.
For future ready plan, we shared with you last quarter is already having an impact.
As a reminder, the plan has two primary objectives.
One is to further reduce our cost structure.
The second is to continue to assess and optimize our overall portfolio and to develop the required operational capabilities to deliver long term sustainable growth.
We are making clear progress in both areas.
In terms of costs, our teams have done a <unk> job, reducing spend and driving efficiencies.
We deliver on our Q1 cost target and.
And we are on track to deliver at least 40% of our three year savings by the end of fiscal year 'twenty three.
This is allowing us to maintain our investment in long term growth.
Collectively our key growth businesses grew double digits in Q1, including poorly.
We're investing in a down market. So we can accelerate our growth when the external environment improves.
For example, new hybrid work models are fueling demand for <unk> and other collaboration solutions.
We will refer to this part of our business is hybrid systems.
Our hybrid systems business more than doubled year over year, and our poorly integration is going very well.
The combined HP and poorly portfolio is creating better experiences for our customers and building a strong funnel.
<unk> is a long term secular trend driving innovation across our portfolio.
We introduced more than 25 new products.
Over 50 Innovation awards.
Yes.
This included our new drag on slide prone areas, which we co engineered with AMD.
It reflects how we are building deeper partnerships with our silicon partners to co create better experiences for our customers.
In addition, we launched our new fully Voyager wireless earbuds, we see my expert ear Bud they deliver higher quality voice transmission and audio experiences.
We are also doubling down on services and subscriptions.
There is growing demand for new consumption models.
Allow us to deliver a better value proposition.
And we have created dedicated teams to drive greater focus on these growth opportunities.
This supports our strategy to foster lifetime customer relationships and drive recurring revenue.
Last year, we created our workforce services and solutions organization.
It is providing customers with an integrated set of offerings and expanding our addressable market.
We deliver healthy double your sales revenue growth in Q1.
And we drove margin expansion by shifting more of our mix to digital services and achieving cost efficiencies.
We are excited about the opportunities ahead.
Our investments in software security and AI will enable us to develop new solutions.
For example, our HPE workstations and data science stack is accelerating machine learning and AI workflows.
Rajiv is leading to the creation of a new category of high performance Pcs, specifically designed for data science and AI applications.
And we are partnering closely with Nvidia on new products and platforms for this growing use case.
And this quarter, we also created a new organization focused on consumer subscriptions.
It's designed to expand upon the success of instant ink.
Our long term goal is to ultimately offered HP portfolio as a subscription.
Let me now touch on our business unit performance, starting with personal systems.
At the market level, we continue to see soft demand in consumer and commercial.
We also see pricing pressure given elevated channel inventory across the industry.
In addition, corporate budget tightening began to affect large enterprise demand.
This is leading to longer sales cycles in our commercial business.
Against that backdrop personal systems revenue was $9 2 billion.
Down, 24% or 20% in constant currency.
Spell out to our customers was higher than sell it to the channel with a corresponding reduction in channel inventory.
Our estimate is that end user demand was stronger than revenue shipments.
<unk> operating margin was better than expected at five 4%.
And we grew operating profit sequentially.
This reflects our actions on costs and a favorable mix shift improving our performance.
We accelerated the growth of our hybrid systems and services business.
And we remained focused on growing profitable share.
In calendar Q4, we grew share sequentially in the high value segments, we have prioritized.
Our commercial PC share increased by two eight points.
And our overall PC share grew by two five points as we regained the number one number two position in all regions.
Turning to our print current market conditions are more stable.
And we see different dynamics playing out by business.
The consumer printing market continues to see demand softness and pricing pressure.
In supplies the situation in Q1 was better than expected and we continue to see strong adoption of profit upfront and subscription models.
The commercial print market is being impacted by macro uncertainty corporate budget tightening.
Uneven pace of return to office.
Within commercial office printing has seen improvement, but the supply situation normalizes.
Taking all this into account our Q1 print revenue was $4 6 billion.
<unk> down four 5% or 2% in constant currency.
We delivered print operating margin of 18, 9%.
Operating profit was flat year over year in a very tough market.
This shows that our strategy is working.
Disciplined cost management and favorable pricing in office.
<unk> impact.
Our office hardware revenue grew 13% year over year or 5% sequentially.
And we gained share in our fees quarter over quarter in calendar Q4.
Although our return to office is uneven the pages per device to remain in the range of 80% of pre COVID-19 expected levels.
We also continued to rebalance CCM profitability HP.
HP, plus and big tank printers represented 56% of printer shipments in Q1.
And we gained share sequentially and big tank.
We now offer the industry's broadest lineup of tanks from the low end of the market to the worlds first and only laser tank printer.
We delivered double digit revenue growth in instant ink.
12 million subscribers.
And we drove early adoption of our instant ink with paper.
Industrial graphics, and <unk> were impacted by macro headwinds with revenue down year over year.
We view these as short term situation and.
And we plan to continue to invest in these areas to drive long term growth and value creation.
This quarter, we expanded our Jade fusion lineup and.
And we drove adoption of our metal gate solution with key customers, such as John Deere and Schneider electric.
Across our business sustainable impact remains at the core of our strategy and.
And our leadership on the important topics like climate change human rights and digital equity is building trust in our brand.
And it is helping us win new business.
It's also driving innovation, our new all in one lineup is a great example.
It includes the worlds first PC with recycle coffee grounds, which are used in the finish of the device.
The enclosure is made with more than 40% post consumer recycled plastics.
The arm stand uses 75% recycled aluminum.
And there's 10 base uses 100% pre claim polyester.
We have also reduced the products packaging. So we can ship up to 66% more units per pallet.
I am proud we were recently named America's most responsible company by Newsweek for the fourth consecutive year.
Let me turn to capital allocation.
As we said last quarter, we plan to maintain our current capital allocation approach.
And we are applying the same framework, we have used the last few years.
We are committed to returning 100% of free cash flow to shareholders over time unless opportunities with a better return on investment of rice and.
As long as our gross leverage ratio remained under two times EBITDA.
Given the volatility of the market and our growing contractual business. We believe it's important to maintain a healthy balance sheet through prudent financial management.
Therefore, we moderated our share repurchase activity in Q1 as planned.
Maintaining our leverage ratio within our target range.
Looking ahead, we are not expecting a significant economic recovery during fiscal year 2023.
We continue to expect our second half performance to improve relative to the first half.
Driven by our cost saving measures and as improved channel inventory levels create a more normalized pricing environment.
This is consistent with the view we shared in November .
The PC market in unit May regress to pre COVID-19 levels in the short term.
But we expect it will remain at a structurally higher 11 with more premium and high value mix.
As we said last quarter, we expect to overall print market to be down low single digits. This year.
This is mainly driven by the challenging macro environment and slower than expected return to the office.
And as I said at the top of the corn, we are maintaining our full year financial outlook.
To sum up we are operating in a tough market right now but.
But we are taking decisive actions as part of our future ready plan to improve our performance.
And we remain confident in our ability to deliver.
By focusing on what we can control. We believe we are well positioned to navigate near term volatility.
And by maintaining investments in our growth priorities, we are strengthening the company for the future.
This is what we did in Q1.
Our needs what you can expect from us moving forward.
Let me now hand, the call over to Murray for more detail.
Thank you and good afternoon, everyone.
<unk> said, we continue to focus on what we can control and deliver on the commitments we have made.
In Q1, we remain disciplined and rigorously managing our costs.
Investing strategically while delivering on our outlook.
However.
Our results were impacted by ongoing soft demand.
Macroeconomic challenges persisted and corporate budget tightening began to affect large enterprise demand this quarter.
We are adapting quickly to the current environment, let's see continued opportunity to drive further improvement in our cost structure and operational execution.
Let me give you a closer look at the details.
Net revenue was $13 $8 billion in the quarter down, 19% nominally and 15% in constant currency driven by the declines across each of our regions.
In constant currency Americas declined, 16% EMEA declined, 15% and APG declined 13%.
Gross margin was 23% in the quarter up 0.4 point.
On year, primarily due to improved commodities and favorable mix, partially offset by competitive pricing including currency.
non-GAAP operating expenses were $1 $7 billion or 12, 5% of revenue.
A decrease in operating expenses was driven primarily by lower variable compensation rigorous cost management and favorable currency impacts partially offset by the poly acquisition.
non-GAAP operating profit was $1 $1 billion down 28, 3%.
non-GAAP net <unk> expense was $183 million up primarily due to higher interest expense driven by an increase in debt outstanding.
And interest rates non.
non-GAAP diluted net earnings per share decreased 35, or 32% to 75.
With a diluted share count of approximately 1 billion shares.
non-GAAP diluted net earnings per share excludes a net expense totaling $262 million primarily.
Primarily related to restructuring and other charges.
Amortization of intangibles acquisition and divestiture related charges debt extinguishment costs.
Other tax adjustments, partially offset by non operating retirement related credits.
As a result Q.
Q1, GAAP diluted net earnings per share was <unk> 49.
Now, let's turn to segment performance.
Let me start with pointing out that we have changed our revenue reporting presentation for personal systems this quarter.
We are now reporting revenue by business capability consumer and commercial.
This is our previous disclosure byproduct category, which better aligns with how we think about and manage the business.
The composition of our consumer and commercial business capabilities remains consistent with what we have outlined in the past with the exception of Polly which is now included in commercial.
Also note that Q1 reflects the first full quarter of <unk> results.
In Q1 personal systems revenue was $9 2 billion down.
Down, 24% or 20% in constant currency with FX headwinds as expected.
Units were down 28% with declines in both consumer and commercial driven by soft demand.
Half prior year compare.
And while commercial constituted about 60% of our units.
<unk> represented approximately 70% of our revenue mix for the quarter.
We made solid progress in reducing our channel inventory levels sequentially. However levels remained elevated for Ralph and across the industry with that combined with improved supply availability pricing competition intensified incrementally in the quarter.
Our backlog remains consistent with pre pandemic levels and still skews favorably towards commercial higher value units.
Drilling into the details consumer revenue was down 36% and commercial with that 18%.
Volumes, FX and increased promotional pricing where again headwinds.
Within commercial these were partially offset by favorable mix.
During calendar Q4, we improved our go to market execution and grew our overall market share sequentially. We also increased our market share in high value will profitable segments, including commercial desktops and notebooks.
Our focus continues to be on driving profitable share growth, especially in the premium segment of consumer and commercial markets.
Personal systems delivered almost $500 million of operating profit with operating margins of five 4%.
Our margin declined two four points year over year, primarily due to currency headwinds increased promotional pricing and favorable prior period R&D partner funding. This was partially offset by polycot divisions, and lower costs, including variable compensation and commodity costs.
In print our results reflect our focus on execution in growing our NPV positive units as well as the strength of our portfolio as we navigate the supply chain environment.
In Q1 total revenue was $4 6 billion down, 5% nominally or 2% in constant currency. The decline was driven mostly by lower supplies revenue and currency.
Hardware revenue was relatively flat driven by favorable pricing actions and commercial partially offset by unfavorable mix and competitive pricing actions.
Geographically it services revenue declined slightly reflecting emerging demand weakness in the enterprise space.
Total hardware units increased 2% as component availability and logistics constraints improved sequentially augmented by better than expected China demand.
We continued to make solid progress, reducing our backlog and are largely back to a pre pandemic level.
By customer segment commercial revenue increased 2% of 5% in constant currency with units down 8% consumer revenue was down 3% or up 1% in constant currency with units up 3% consumer printer demand remained soft in the Americas and EMEA regions driving incremental promotional.
<unk> as supply constraints continue to ease.
Commercial hardware demand remained tepid due to both the slow and uneven pace at which the return to office progressing and enterprise budget tightening.
Supplies revenue was $2 9 billion.
Declining, 7% nominally and 6% in constant currency.
The decline was driven primarily by further normalization in home printing and the gradual recovery in commercial.
This was partially offset by favorable pricing actions and continued market share gains in ink and toner.
Print operating profit was $870 million essentially flat year on year and operating margin was 18, 9% opt.
Operating margin increased <unk> eight points, driven by pricing actions and cost improvements, partially offset by promotional pricing unfavorable currency and higher commodity costs.
The cost improvements will largely due to lower variable comp expense management and transformation savings.
Now, let me turn to our future ready assets we.
We saw strong progress on our plan in Q1 and are on track to deliver at least 40% of our targeted $1 $4 billion in gross annual run rate structural cost savings by the end of FY2023.
In personal systems, we are targeting structural savings by streamlining our portfolio to better target customer needs.
We are increasing leverage in our product and engineering operations by standardizing on fewer platforms to reduce component complexity.
We expect these initiatives to reduce duplication and improve our agility and response time to shifting market needs.
We also took actions to optimize costs in our corporate business, where we drove significant savings.
We continued to optimize and reduce structural costs across our core businesses, particularly in office print.
Now supplies supply chain, including head count reductions.
In addition, we continue to see benefits from our investments to transform our customer support and services organization enhancing our capabilities to provide a more digitally enabled customer centric support experience.
We continue digitizing our customer support engagement assets using AI based interactive voice response technology.
We expect this initiative will help automate our processes to deliver a more seamless and connected support experience.
Lastly in January as part of our future ready target to reduce employee head count by 4000 to 6000, we announced a voluntary early retirement program in the United States.
The alpha provided eligible employees the opportunity to retire from HP with enhanced benefits.
More than 900 participants have opted into the plan with the majority expected to exit during Q2.
I continue to be confident in our ability to drive operating cost reductions consistent without future ready goals, enabling investments in our key growth areas.
Now, let me move to cash flow and capital allocation.
Q1 cash flow from operations was nominally negative free cash flow was an outflow of <unk> 2 billion.
In line with our expectations.
Our results were impacted by normal seasonality associated with the timing of variable comp payments as well as restructuring charges and lower volumes in personal systems.
Additionally, our free cash flow was favorably impacted by the timing of receipts and payments related to our factoring program.
This is expected to be net neutral to our full year free cash flow.
The cash conversion cycle was minus 22 days in the quarter.
This increased seven days sequentially, primarily due to an increase in strategic buys driving up DIY and an unfavorable business mix impacting both DIY and GPO.
While we decreased our inventory $3 billion sequentially in Q1.
We have more work to better align our inventory to our business volumes through operational excellence.
We will however.
Continue to take advantage of economic opportunities like strategic buys.
For more see transit both of which would result in carrying more inventory.
In Q1, we retired approximately $360 million to shareholders, including $100 million in share repurchases at $259 million in cash dividends. We finished the quarter towards the high end of our target leverage range.
<unk> without disciplined financial management.
And our strategy to prudently manage our leverage profile and maintain our credit rating in the current challenging environment.
We limited our Q1 share repurchases to an amount needed to offset share dilution.
Looking forward to Q2, and the rest of FY2023.
We expect the macro and demand environments will remain challenged and that our customer end markets will remain competitive.
We remain focused on what we can control as we navigate these difficult market conditions, we will continue to rigorously manage costs.
Mine operations and improve our performance as the year progresses, while continuing to invest in our growth businesses.
In particular keep the following in mind related to our Q2 and overall financial outlook.
Given the challenging macro environment, we are modeling multiple scenarios based on several assumptions.
For FY2023 we continue to see a wide range of potential outcomes, which are reflected in our outlook ranges I will discuss shortly.
Consistent with the view we shared in November we are not expecting a significant economic recovery during fiscal 2023.
We will continue to focus on driving structural cost savings and efficiencies in our business consistent with the progress we made in Q1 regarding our future ready transformation strategy.
We expect these cost savings will scale into the back half of the year.
Given recent weakness in the U S. Dollar, we now expect currency to be about a three percentage year over year headwind for FY2023.
Regarding <unk> expense, we now expect it will be approximately $7 billion for FY2023 based on Q1 as a run rate for the year.
We continue to expect free cash flow to be in the range of three to three 5 billion for FY2023 with the second half of FY2023 is stronger than the first as a reminder, our FY2023 free cash flow outlook includes approximately $400 million of restructuring cash outflows.
Turning to personal systems.
We now expect the overall PC market unit Tam to decline by a high teens percent in FY2023.
Specifically for Q2, we expect personal systems revenue will remain under pressure near term and declined sequentially by a high single digit we.
We expect revenue to improve over the course of the back half of the year as elevated channel inventory levels are expected to normalize by early fiscal Q3.
We expect to continue to drive improved mix shifts toward higher value more profitable units and services and expect this will help partially offset the headwinds we've discussed today.
We expect personal systems margins to be in the lower half about 5% to 7% long term range in Q2, as commodities and logistics costs improved in the quarter, but given elevated industry and HP channel inventory levels pricing continues to be very competitive.
For FY 'twenty, three we expect margins to be solidly in our target range driven by the gradual improvement in PC revenue in the back half of the year and increasing future ready transformation savings.
Input.
We expect consumer demand softness will persist and macro uncertainty and corporate budgeting tightening will remain headwinds for commercial <unk>.
<unk> cost management and further normalization of mix as office gradually improves should help to partially offset these trends.
With regard to print supply chain similar to what we saw in Q1, we expect component shortages will continue to improve but persist into at least Q2, particularly for office hardware, providing continued support for favorable pricing.
Regarding supply, we expect Q2 revenue in constant currency to decline by a high single digit versus our previous expectation to be down closer to double digits.
Given its variability we do not believe into quarter growth is indicative of our long term supplies growth.
We continue to expect revenue to decline in FY2023 by low to mid single digits in constant currency.
We now expect print margins to be above the high end of our 16% to 18% range for Q2, driven by continued hardware constraints.
We expect FY2023 margins also will be above the high end of our range driven by disciplined pricing continued progress on rebalancing, our system profitability and rigorous cost management, including future ready transformation savings.
These considerations into account we are providing the following outlook for Q2 fiscal year 2023.
We expect second quarter non-GAAP diluted net earnings per share to be in the range of 73.
283.
And second.
Second quarter GAAP diluted net earnings per share to be in the range of 40 to 50.
We expect FY2023 non-GAAP diluted net earnings per share to be in the range of $3 and 22.
To $3 60.
And FY2023 GAAP diluted net earnings per share to be in the range of $2.22.
To $2 62.
We continue to make meaningful progress against both our short and long term strategic priorities in a demanding environment.
I am confident we are taking the right actions and making the right decisions to create long term value for our shareholders.
I'll stop here. So we can open the line for your questions.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then one again, we also ask that you. Please limit yourself to one question and a single follow up.
Our first question comes from Shannon Cross with credit Suisse.
Thank you very much for taking my question.
Can you talk a bit about what's going on in terms of PC.
With regard to end demand and I think youre not alone in saying that second half of 'twenty three should be better.
Because inventory levels will normalize, but im wondering where youre seeing pockets of strength, what you're hearing how youre thinking about discounting or are what features are kind of going to drive an improvement as we get to the second half and then I have a follow up thanks sure. Thank you Shannon Let me let me take the question.
First of all something that has no change this quarter is the weakness that we have seen in the consumer space that we started to talk a couple of quarters ago.
Something you, though has been as we shared in the script, we have seen weakening demand on the corporate enterprise space as we have seen especially large companies become even more conscious about how they use their budget being slowly hiring people and this has had an impact in the PC side.
The positive side, we have seen reductions.
In terms of inventory, especially that bad one that addresses consumer and SMB business, the more transactional side of the business.
We reflect end user demand has been stronger than shipments.
Our current view is that we will be getting into a normalized channel inventory situation by the end of Q2 early Q3.
Which means that in the second half we will not have these headwinds and this is one of the reasons why we are optimistic about the evolution of the PC business. During the year, we think that demand will evolve similar to previous seasonality seasonality before COVID-19 and this is one of the reasons why we expect our second half to be stronger than the first.
Hi.
Okay. Thank you and then can you talk about working capital.
And how we should think about it as we go through the year I understand factoring receivables. This quarter I don't know if that sort of an immediate bounce back or a reversal and then just in general.
Maybe where you think we can end the year in terms of inventory and that given some of the pre buys versus ability to walk through what you have thank you and good afternoon Shannon.
It's a good time for me just to start out first with how I think about inventory and instead of DIY going forward I mean look candidly, we need to be good at doing both operationally and excellent actually and driving value, where we see opportunity. So as you've seen we've been very focused on driving up.
Our inventory turns and when we see economic value, we will pursue strategic buys right and look for lower cost modes of transport.
But let me sort of hit up specifically your question around Q1, and what we saw is that inventory turns declined but not necessarily in line with all our business volumes and that was really largely a result, Shannon of the strategic buys that we did in the quarter. So we want to remain open to.
Evaluate those economic opportunities, both with strategic buyers and frankly for lower cost modes of transport throughout the year.
We'll take our next question from Erik Woodring with Morgan Stanley .
Hey, guys. Good afternoon, and thank you for taking my question.
Mary.
This one is for you you obviously just guided the PC market a little weaker than you communicated three months ago, I think of that as a headwind to cash just given the strong negative cash conversion cycle at the same time as you just alluded to your inventory is still at relatively elevated levels and <unk> free cash flow was negative.
With with a tailwind from factoring and so I guess my question is really just what gives you confidence in maintaining the full year free cash flow guide.
What is it you're seeing the data where some of the specifics specific factors that you think ultimately get you back get you into that range for the full year and I have a follow up thanks.
Good afternoon, Eric So in terms of how we look at cash for the year I'd say first out our free cash flow for Q1 was absolutely in line with what we expected and unemployment. If you look at the earnings outlook that I gave in the guide for the rest of the year, it's absolutely in line with what we guided loss.
Quarter. So really it is the combination of both that give me confidence in our guide of three to three and a half for the year a couple of other points of note to pivot off what Enrique said early about seasonality now we do expect cash flow to sort of lineup with the seasonality comments then Enrique made earlier, so we expect it to be better and better.
Generally stronger in the second half of the year with that said, we do expect cash flow in Q2, therefore to be roughly in line with Q1 and just to remember in the second half of the year PS revenue will grow in the top line and as you know that piece contributes cash when it grows sequentially because of its negative.
Cash conversion cycle another source of cash just to hit on it I know Shannon brought up that point a moment ago. Another source is obviously continued inventory reductions that actually this quarter, we did reduce inventories. So both of those I think I'd just a really good examples of how we think about cash flow for the year.
Okay. That's really helpful. Thank you.
And then maybe my second question is just on operating margins.
Another really strong quarter, that's five consecutive quarters above your 16% to 18% target range, you expect to be above that range for the full year. So are we entering a new paradigm, maybe where print operating margins are going to be above that long term range or are there other factors.
That you expect it to become offsets such that longer term, we should think about print operating margins more within that 16% range.
Yes, Eric now maybe I'll take a shot at that one so as we've guided we do expect print margins to be above the high end of the range going forward at least for 'twenty, three and really it's a tale of what you saw in Q1. The print margins are really driven by I think our strategy working and you see that I think in a couple of dimensions, both in terms of rebel.
<unk> the profitability between hardware supplies also just shifting the business into HP plus big tanks. In fact, if you look at the last quarter more than 50%, 56% of the units shipped were in that HP, plus and big tank. The other point to note is this execution I think if you look at what we did in this last.
Quarter, It's a really good example of where you're seeing the actions both around our future ready cost cutting expense management are all showing up combined with resilient pricing all of those factors are contributing to the robust margin. So what we saw in Q1, Eric is really what we expect to see for the rest of the year in print.
Let me let me have him we are pleased both with the strategic progress we have made.
Executing the strategy that we defined three years ago proposal taken advantage in getting the benefit from all the work on cost that we did during the last few years and that we are continuing to do now.
We will take our next question from Ananda Baruah with loop capital.
Hey, Thanks, guys for taking the taking the questions really appreciate it.
I may have missed it Enrique and Murray, but did you did you mentioned of the growth business category.
What percentage of revenue those are now and what the growth profile.
For the quarter, and then I have a follow up as well thanks.
Sure. Let me. Thank you for the question because this is something that we wanted to clarify we mentioned briefly on the script, but we wanted to provide more detail during.
During this quarter, we have made some changes in the definition of the growth categories. Because we wanted to align better in how we talk about them externally to some of the internal changes we have made.
By growth categories were really referring to the six businesses that we think are going to be growing faster than the core business and that they are going to have accretive margins compared to core.
Something come on they have a common strategic intent, which is really to create more value for our customers by focusing on the long term relationship with those customers and this is behind the expansion into services and escape and many of these businesses.
During the last quarter, we made two impairment changes one is we created a focused organization to go after the workforce solution time servicing and we defined the goal of that team to drive and to grow therapies driven opportunities.
We also have just created a consumer subscriptions team that will be driving that opportunity across the company.
Starting from the award that we have done on instant ink on expanding now and during the next quarters to the rest of HPE portfolio.
We also decided to align.
The hybrid <unk> business with our gaming PC team. So we have one group that is really responsible for the full experience for gaming.
And we went through all these changes we realign also how we externally we'll be reporting those especially in the workforce solutions and services is we're really focused now on service enabled businesses.
Okay.
Thank you.
I'll keep it here.
Is that to say that.
You will no longer be providing us defense.
Yes.
The old way of doing what the percentage of revenue.
And what the growth rates of that grouping was.
Just a quick clarification.
We will continue to do that I will just highlighting the changes because for example, as we have done that the overall size of workforce solutions is going to be smaller than what it was because we have redesigned redefine their business. This is what they're worth highlighting every quarter, we will provide visibility as we have done over the last quarter of <unk>.
The growth of the different businesses, you will see that on the deck.
Yeah, we will be reporting the total value to us as we have done in the past Amanda.
Double digit collectively in the quarter as well in order just to to answer part of your question.
Thanks, and then my quick follow up.
And Richie you mentioned in the prepared remarks, and you just mentioned a moment ago.
Shifting the portfolio towards subscription is that is that to say the entirety of the AC portfolio you guys have.
And I am moving to Scripture model I'm trying to make sure I understand the context.
Thank you Mike.
So this is something that we shared already in our Investor day, a couple of years ago. So this is not new but we see an opportunity to better serve our customers.
Expanding our subscription business from supplies eventually other parts of the portfolio our long term direction is to enable them.
A large part of HPE portfolio, but this is a journey that is going to take multiple quarters, you will see us making progress in the next quarters. We are now including included paper will be including some of our Pcs and printers in the coming quarters and overtime, we will continue to expand the offering.
We'll take our next question from David boat with UBS.
Great. Thank you guys for taking the question.
Maybe just a question for both Enrique and Marie when I think about your comments about how the Tam develops in fiscal 'twenty three.
Extrapolate what you've done in the past pre COVID-19. It would suggest that by let's say by fiscal Q4. Your PC segment could be basically flat on a year over year basis is that the right way to think about the business as it sort of plays out over the next couple of quarters, and then I have a follow up.
Yeah, maybe I can sort of talk to just the PC outlook and how to think about the guide.
Obviously big part of this is I think Enrique said earlier around the channel of the Dream. We do expect that that channel inventory will get cleaned up through the course of Q2, and then into Q3 and I think every week I mentioned that some of that pressure that we're seeing in the corporate enterprise space and I think this is largely in line with what the indices assuming so.
At this point if you look at the midpoint of our guide we're not expecting any type of macro recovery, but if you sort of group all of this together, what we're expecting as we're going to see better PFS revenue in the back half as that channel sort of corrects and and cleans up.
Okay, and then maybe just as a follow up.
I think about the profitability of PC for the full year.
I kind of extrapolate your comments on on revenue in the back half that would suggest that in the second half of the year just round numbers quarterly profitability per quarter is going to have to be north of <unk> 90 per share.
Basically flattish with last year.
Do you expect is that the kind of if I just kind of take the midpoint of your full year guide is that the kind of leverage you would expect to get as the cost cuts start to flow and more in the July and October quarter up from sort of where we are in the April quarter.
So I think that ties very much to the comments I made earlier around the channel that also just combined with the fact that we do expect I think I said in my prepared remarks to see ourselves in the lower half of the range in Q2 as we go through that channel correction, then as we get into the back half, we're going to see the margin rates lift back up to be fully in the range and so it's a combination of the channel.
Plus we've got the impact of our future ready efforts, we've already seen some of that impact play out here in Q1, we expect those actions to continue to take a stronger hold throughout the year. So expect to see some of that in the rates as well and then I would add another factor, which did help it contributed actually to the margin in Q1 and that was the <unk>.
Mix inside the Pes business, just remember we have now a full quarter of poly and our numbers and that overall mix shift is also a driver and contributing to the overall margin structure as well, maybe let me add a comment on Tam if you will.
To understand these these members from Murray.
You were saying from a unit perspective, we expect the time of the year to be flattish compared to what it was in 2019, but we expect it to be higher from a revenue perspective, because of the change of mix that might be worth explaining so from a revenue perspective. This has an impact on total Tam and it will also have an impact on our performance.
We will take our next question from Toni <unk> with Bernstein.
Okay.
Yes. Thank you I have two as well.
<unk>.
Perhaps you can just give us an update on how much progress and savings were realized in Q1, and specifically it looks like SG&A went up considerably sequentially, even though revenues were down and I thought you had two months of poly last quarter. So there is some incremental poly, but maybe.
You can just reconcile what happened with SG&A on a sequential basis and then how much.
Progress towards 40% of the savings do you feel you captured in Q1 and I have a follow up please.
Yeah, Hi, good afternoon, Tony It's Maria So maybe I will just hit up quickly SG&A, what drove that increase sequentially. So primarily Tony that was due to the increase in incentive comp and stock comp. So you might recall that Q1 is a normal quarter for annual equity grants for employee. So that's that's what you've seen there relative to what.
What drove that increase and then with respect to the transformation savings I would say that we're off to a very strong dot and in fact these savings contributed to the overall results in the quarter and you saw that obviously in the evidence and the strength of the margins in both <unk> and Brent and I will tell you looking at we are absolutely confident we're on track.
For the plan for the year and we're continuing to work that funnel more into the funnel. So at this point in time, I'd say, where we are absolutely committed to delivering at least that 560 million of gross structural run rate savings by the end of this fiscal year.
And we and today, we have four growing across all the areas that we described last quarter strong portfolio simplification.
Moving to some elements of the portfolio simplifying them, making our processes more efficient using some digital tools looking for efficiencies across the board. So I think we will have a full program across the company driving that and we're making very good progress and just to reiterate Tony there in both cost of sales and Opex so to say.
Okay.
Right.
Thank you for that.
If I could follow up just on on cash flow. So if I think just really high level mid point of your guidance sort of points to about $3 3 billion and net income.
$400 million in restructuring costs that would take you down to $2 9 million.
Thanks for that and then you have a negative mix shift in terms of Pcs.
<unk> slower than the overall company in all likelihood per your guidance. So that would also hurt free cash flow. So if I just if I just look at those three structural things Youre actually looking below 3 billion. So are you.
What's the bridge to get to above $3 billion or are you counting on meaningful working capital improvements because you did condition that you still might do strategic guys or there may be other reasons, why perhaps you may not be able to bring down inventory. So.
Perhaps starting with my bridge you can you can tell me, what's missing and how we can get comfortable with three to $3 5 billion. Thank you.
Tony So I think just to reiterate what I did say earlier that both the Q1 numbers and the earnings guide that we gave last quarter.
Absolutely.
We're committed to those yet again I think that's just another point to note, but to build up your bridge. So one additional point you pointed out just around working capital. So we did actually reduce our owned inventory in the quarter from up by about 300 million. We do intend to continue to have reductions of owned inventory throughout the year. So obviously, we will be.
Managing those pending any economic opportunities for strategic buyers as I said earlier the other important point to think about is the we talked about a bit about this during the call is just that second half.
Prudent that we're expecting and personal systems revenue as you know.
Yes contributes cash when it grows sequentially and that's because it has that negative cash conversion cycle. So they're just two incremental points to to help you sort of model out the cash flow for the year.
Just one clarification the <unk> the improvement in inventory that Maria mentioned is net of the fatigue rise that we already the parameters and we already the term. Thank you Juan Thank you.
We will take our next question from Sidney Ho with Deutsche Bank.
Thanks for taking my question. My first question is on the print side. It does look like the supply is a little better than you expected and you also.
Slightly uptick the guidance guidance for Q2, just curious what the dynamics that youre seeing there and do you think the overall business trends have reached bottom in Q1, considering supply starting to improve and commercial constraints start to ease as well with a follow up.
Yeah. So maybe I'll just answer your question on Suppliers' terms, yes, Youre right. We did actually see supplies performed better in Q1, and our guidance that I think the guidance. We gave in our prepared remarks is that we expect it to decline by only high single digits in Q2, as we as we sort of think about the year, we do expect some.
<unk> revenue growth to be back to what we said at analyst days of back in that sort of low to mid single digit some of the sort of drivers of that firstly I really the strength that we're seeing around consumer usage and share trends.
I commented earlier, just around the pricing resiliency that we're seeing in print and specifically in supplies and then finally I'll just add because I know many of you ask this question is just around the channel inventory and if you look across our entire sort of multi tiered ecosystem.
Applies channel inventory is in very good shape.
And let me add one comment we have said that wind results were below the expectations, we had and I will say now. It also when we are both looking at quarter on quarter comparison, one year.
The best way to look at the health of the business. This is why we're saying we continue to I mean, we maintain the guide that we had for the year for supplies year on year comparisons are much better.
Small changes one quarter could have a big impact on the quarter on quarter compare so easily.
Not the right way to look at the health of the business.
Great. That's helpful. Thanks, guys real quick follow up here is that if I look at the full year EPS guide being a change obviously, but there is a lot of different moving parts are the on the on the on the positive side, you've got foreign exchange being better margin seems to be better and it sounds like on the negative side based on PC demand weaker than you expected.
Just maybe if you can help us bridge the various components that gets you back to the original guidance that will be that will be helpful. Thanks.
Yeah look at maybe I'll start out and say look the outlook as you know we've got a pretty broad range. There. So it does contemplate multiple scenarios and obviously, it's prudent and as always I think you'll see that from us. If we can do better we absolutely will but a couple of drivers there I'll just walk you through to kind of get you through the puts and takes on the guide first and foremost we've talked a bit about our.
Cost actions today for future ready, we do expect that they're going to continue to yield quite positive results in the back half of the year and also as I said earlier with Tony will work in that funnel to pull even more savings into FY2023 so that'll be a contributor we've talked about the channel ordinary contribution in terms of personal systems, plus we did get a chance to.
To hit on today, just the continued improvement in supply chain I think that's a very important point, we didnt get much time to talk about and then finally, just remember at the mid point, we don't expect to macro but we're working multiple scenarios. So that's why we put the the range that we have on the guide at this time. Thank you.
We will take our next question from Amit <unk> with Evercore.
Hi, This is Lauren on for Amit.
I just wanted to double click into your views on the PC Tam beyond 2023.
Kind of gives you the confidence in a structurally larger PC Tam versus some of the comments you know that IDC has made and some of the revisions they've made their long term forecast.
There are two big part.
These trends have continued work to highlight today the installed base is significantly higher than what it was before.
And therefore at some point these pieces need to be refreshed. So this gives us.
A positive tailwind for the business.
One from a revenue perspective, as I said before the way Pcs are used today. The applications that are being used for drive better mix require betting require greater configurations are when we put both of them together.
<unk> has the opportunity of them to be bigger.
Additional to that we see the adjacencies around Pcs like the hybrid opportunity in video conferencing systems camera is that and.
We believe that hybrid work adheres to say, that's another incremental opportunity versus what we saw in 2019.
Shift to services, where there is.
Contractual services for businesses for subscriptions for consumers also gives us an opportunity of growing the business and growing that Tam.
Great. Thank you.
We will take our next question from Jim Suva with Citigroup.
Okay.
Thank you and congratulations on the results and outlook, it's very impressing impressive considering the macro outlook.
Enrique.
<unk>.
My family our I C.
Subscription on instant ink and we love it.
Sure.
Comments about shifting to subscription.
For all options of your various projects or was it you actually think the future sales actually strategically as you think everyone will probably be doing subscriptions only the reason why I ask because I just think there that might be kind of the view.
View, particularly both of them, helping out based on I wanted to see you soon.
Ted subscriptions for everything how far down Youre kind of thinking about for every single transaction sale or is it more of options based upon your clientele.
It will be more options, depending on their clientele. We know that there are customers that will be willing to buy subscriptions I know, there's I'd prefer not to and of course, we will be offering both.
It seems you are our customers already have instant ink, let me do a small commercial you issued and rolling out to their paper program. Because now you can get not only ink, but you can get on the paper, which is in addition to the program over time, you will be able to buy the next printer and other type of services from us.
This is part of the roadmap that we have of expanding their portfolio of subscriptions that we shared in the past and that now we are starting to become real.
Well, let me tell you.
No you can keep a high on my account and then a question for Maria can you talk about your capital allocation plans because now poly is integrated it's a full year into your books, how should we think be thinking about stock buyback debt levels investment cash levels, where you feel comfortable and used.
Capital capital. Thank you.
Yeah, no worries and good afternoon, Jim So I would say nothing's changed we continue to make the same capital allocation approach that we've used for the last sort of three years or so.
But I would say one point, which I think you hit on there which is that we are very focused on keeping our gross leverage on the two and you would've seen in the quarter that we actually bought back over 100 billion shares so consistent with maintaining our leverage ratio. We don't anticipate buying back shares in Q2, but we do expect that we'll have room for share repurchases in the back half of the year. So.
Like to kind of close to say look we're committed to staying within our target leverage range broth, maintaining a strong balance sheet and an investment grade credit rating is critical to our business Jim.
Paul anything you want to add.
He'd like to add like us as our leverage ratio will allow us we continue to believe that buying back shares is a great way to return value to our shareholders and this is something that we plan to continue to do as we have done in the last few years.
And I think we've had these where the last question. So thank you everybody for joining thank you for spending time with us today and maybe let me confirm some of the key messages that we have driven today first of all that even in a challenging environment. We have deliver on the commitments that we've made a quarter ago based on the progress.
Have made in the areas that we can't control whether it is cost price mix growing share in profitable categories. We know that this is how we can manage where we need to focus on what we have been doing during the last quarter and at the same time, we have maintained investment in the growth areas, because we think that our goal continues.
B to position HP in a strong way for whenever the economic recovery will happen. Thank you again for joining us today and looking forward with OCA gaming in a quarter. Thank you.
And that does conclude todays presentation. Thank you for your participation and you may now disconnect.
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