Q4 2024 HP Inc Earnings Call
Okay.
Lisa: Good day, everyone and welcome to the fourth quarter 2024, H D. Inc. Earnings Conference call. My name is Lisa and I'll be your conference moderator 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 should you need assistance during this call. Please.
Conference specialist by pressing the star key followed by zero as a reminder, this conference is being recorded for replay purposes.
REIT Keenan: I would now like to turn the call over to a REIT Keenan <unk> head of Investor Relations. Please go ahead.
Speaker Change: Good afternoon, everyone and welcome to H B as fourth quarter 2024 earnings Conference call with me today are in re calories H B as president and Chief Executive Officer.
I'm, Karen Parkhill, Hps, Chief Financial Officer.
Karen Parkhill: 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.
Speaker Change: We posted the earnings release and accompanying slide presentation on our Investor Relations webpage at Investor Adult H B Dot com.
Speaker Change: 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.
Speaker Change: For more detailed information please see disclaimers in the earnings materials relating to forward looking statements that involve risks uncertainties and assumptions.
Speaker Change: 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.
H B assumes no obligation.
Speaker Change: And does not intend to update any such forward looking statements.
Speaker Change: 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 will definitely reported in hps SEC filings.
Speaker Change: During this webcast unless otherwise specifically noted all comparisons are year over year comparisons with the corresponding year ago period.
Speaker Change: In addition, unless otherwise noted references to H B channel inventory referred to tier one channel inventory and market share references are based on calendar quarter information.
Speaker Change: For financial information that has been expressed on a non-GAAP basis. We've included reconciliations to the comparable GAAP information.
Speaker Change: Please refer to the tables and slide presentation accompanying today's earnings release for those reconciliations.
Speaker Change: With that I'd now like to turn the call over to Enrique.
Enrique: Thank you alright. Thank you all for joining today's call.
Enrique: Today, we will cover our Q4 performance on 'twenty 'twenty four full year results.
Enrique: We will also discuss expectations for the year. It hurt on hold we are sharpening our strategic focus.
The future of work.
Enrique: But we felt like Q4 results.
For the second consecutive quarter revenue was up 2% year over year.
Enrique: Both personal systems and print demonstrated steady progress.
Enrique: In personal systems commercial units aren't sure games were strong contributors to revenue growth.
Enrique: Improved we drove revenue growth for the first time excuse called year 'twenty one.
Enrique: Our growth businesses also performed well.
Enrique: If you can be contributing to our growth in the quarter.
Enrique: non-GAAP EPS grew 3% from 93 seven in line with outlook we.
Enrique: We accelerated our future ready structural cost saving plans, while continuing to invest in our growth businesses.
Enrique: In short we did what we said we would do.
Enrique: Q4 also capped off an exceptional year of innovation.
Sure.
Speaker Change: H B imagine if any September we showcased breakthrough expedient for some platforms with new <unk>.
Probably worth capabilities.
Our expanded U C.
Speaker Change: <unk> portfolio is now we're equipped with HP <unk> com.
Speaker Change: Companion IV spoke application.
Speaker Change: Yep juices generative yeah.
Speaker Change: Help analyze private firms create content or respond quickly to key tasks.
Speaker Change: Through partnerships with a growing number of software companies, we are bringing to life, even more experience who support our customers.
Speaker Change: For example, we are collaborating with them to power AI come.
We wouldn't be voice capabilities that crime streamline between preparation quickly locate relevant documents on automating key tasks based or isn't meeting decisions.
Speaker Change: These types of experiences illustrate.
Speaker Change: With regard to AI compute will be in the workforce.
Speaker Change: We also launched H P boost a solution that allows these Australian piece Familia developers too.
Speaker Change: Sure Gpus remotely.
Speaker Change: And we continue to enhance our workforce experienced platform.
Speaker Change: The ability to monitor and manage printers and ink.
Speaker Change: Integrating popular business applications from Microsoft and service now.
Speaker Change: Our recent appreciation of our Yorktown.
Speaker Change: Either of collaboration management solution will strengthen the platform.
Speaker Change: It will offer customers comprehensive control over their digital ecosystems for my single dashboard.
Speaker Change: You bet Yeah a.
Speaker Change: D C category, we continue to lead with performance and security.
Speaker Change: We are delivering powerful experiences.
Speaker Change: Industry, leading battery life and flexible form factors.
Speaker Change: Building on our consumer launches last quarter, we introduced the most powerful next gem.
Speaker Change: Business notebook.
Speaker Change: The elite book ex Easter ideal for tech experts and business consultant, who run large applications for analysis.
Speaker Change: It is powered by an industry, leading 55 stopes into your performance.
Speaker Change: But at the same time it offers.
Enhanced protection to secure their most sensitive data.
Speaker Change: Freelancers and creators can also power did work with the Omnibook Ultra fleet, our first two in one P C.
We see it they have the ability to designed with a where there's kitchen <unk> team are collaborating.
Speaker Change: And with the power of HP Wolf security, they can't keep VITAS secure and protected.
Speaker Change: Beyond the P. C. We showed how we are making printing smarter with HP printer.
Speaker Change: It is the industry's first AI powered intelligent printer experience that simplifies and enhances printing.
Speaker Change: The perfect out with future juices.
Speaker Change: To deliver the perfect print Colvin, universal frustrations like spreadsheet and tables printing over multiple pages.
Speaker Change: Our innovations this quarter underscore our commitment to delivering impactful customers even solutions to define the future of work.
Before I continue I want to take a moment to acknowledge the incredible teams across HP delivering these experiences.
Speaker Change: Your commitment to innovate for our customers partners and the planet is inspiring.
Speaker Change: Let me now turn to business unit performance.
Speaker Change: For the third consecutive quarter revenue in personal systems was up year over year with 2% growth driven by strength in commercial.
Speaker Change: We saw continued pressure on commodity cost, which impacted operating profit and.
And we will continue to take actions on pricing and cost to mitigate these overtime.
Speaker Change: We drove gains in worldwide PC market share year over year, particularly in high value categories, including commercial and consumer at a premium.
Speaker Change: We believe there is more opportunity here and we will continue to prioritize these categories.
Speaker Change: Hey, Yeah, PC units this quarter were more than 15% of our shipments in.
Speaker Change: In fact.
Speaker Change: Recently published by Canalys, we have the number one market share of a P. C. In the windows ecosystem and we intend to maintain this position.
Speaker Change: Looking ahead, the power failure, coupled with the strength of our portfolio will enable us to deliver new levels of efficiency and security critical to the future of work.
Speaker Change: We expect yeah it.
Speaker Change: D C penetration to continue to further strengthen our commercial leadership.
Speaker Change: And it seems the windows 11 refresh as crime slower than previous industry transitions, we expect to see the impact of the upgrades to be more pronounced in 2025.
Speaker Change: And the growth areas hybrid systems and services delivered strong performance with revenue up year over year.
Speaker Change: And we grew gaming revenue quarter over quarter in line with normal seasonality.
Speaker Change: Turning to print revenue grew 1% year over year.
Speaker Change: The increase was fueled by strong performance in supplies and industrial graph here.
Speaker Change: Offset in part by a competitive pricing environment.
Speaker Change: In both home office, we gained share year over year.
In home, we continue to gain share across all categories, especially in big chunks.
Speaker Change: And we delivered on our commitment to regain share in office.
Speaker Change: In growth areas consumer services, and industrial performed strongly with revenue growth year over year.
Speaker Change: We believe sustainability is core to our long term growth and we continue to operate with a sense of purpose and intentionality.
Speaker Change: For example in Q4, our H P. Renewable solutions team received industry recognition for making it easier for customers to purchase high performing pre furby hardware.
Speaker Change: We would also recognize on newsweek's.
Speaker Change: World Most trustworthy companies list.
Speaker Change: Let me now talk about the full year performance.
Speaker Change: Revenue was flat year over year.
Speaker Change: non-GAAP EPS grew 3%.
Speaker Change: While the market recovery.
Speaker Change: So, especially in the first half we had a strong second half recovery with positive momentum going into the new fiscal year.
Speaker Change: We are pleased with our key growth areas, which collectively grew faster than the rest of the portfolio and drove approximately 20% of our total company revenue for the year.
Speaker Change: We generated strong free cash flow aligned with our annual guidance.
Speaker Change: We returned nearly 100% of our free cash flow to shareholders in line with our long term commitment.
Speaker Change: Over the past year, we have continued to drive solid progress with our future ready strategy.
Speaker Change: We said, we would invest in innovation focusing our portfolio on growth.
Speaker Change: Integrating new AI capabilities.
Speaker Change: And we have done that we have successfully implemented new business models, as we shifted more offerings to subscriptions and solutions increasing value per customer.
Speaker Change: We told you we were continuing to improve our operational capabilities.
Speaker Change: We have taken steps to ensure a more resilient supply chain improve our order to delivery time and reduce customer call time using AI.
Speaker Change: Overall fiscal year 'twenty for almost a year of steady progress.
Speaker Change: We know our plans are working and we are well positioned to capitalize on new opportunities.
Speaker Change: Right.
And grills.
Speaker Change: We are looking ahead with a clear focus on leading the future of work.
Speaker Change: With the proliferation of inflection.
Speaker Change: Flexible work customer expectations have continued to evolve.
Employers want to drive growth, while employees are seeking professional fulfillment.
Speaker Change: At this intersection.
Speaker Change: And attack the opportunity for H B.
With our powerful portfolio of solutions and the right team in place. We believe we have what it takes to lead the next era.
Speaker Change: He had his house.
Speaker Change: First we are investing and innovating aggressively in new AI powered capabilities and software.
Speaker Change: We will focus on delivering cutting edge.
Speaker Change: Powered pick pack.
Speaker Change: This is an exciting shift for our customers everywhere.
Speaker Change: We will provide them with new insights and automation personalized experiences and foster team collaborations.
Speaker Change: Our recently established technology and innovation organization.
Speaker Change: <unk> brings together all our software resources into a single team.
Speaker Change: The Tio will accelerate our move from a transactional hardware company to a more expedient led organization.
Speaker Change: Second we are leveraging the power of our portfolio to capture growth opportunities in commercial and solution.
Speaker Change: Commercial segments are growing faster than consumer segments, and we are prioritizing accordingly.
Speaker Change: Personal systems for example, commercial time is expected to grow three times faster than consumer.
And in print contractual office and industrial Tam I'd expect it to perform better than consumer and transaction.
Speaker Change: Thirdly, we are maintaining our focus on capturing profitable growth in premium consumer and gaming.
For example, we are taking measures to increase growth in consumer services.
Speaker Change: Building on the success of programs like our HP all in subscription plans.
Speaker Change: And in operations, we will continue to evolve our supply chain capabilities to support our future of work strategy, while ensuring supply chain resiliency and two and process automation and continuous improvement in our cost structure.
Speaker Change: Looking forward to fiscal year 'twenty five we assume that the PC market will grow faster than in fiscal year 'twenty four.
Speaker Change: Built by multiple catalysts for refresh including AI.
Speaker Change: And we expect the printer market to decline low single digits.
Speaker Change: We expect revenue for both personal systems and print to perform at least in line with our respective market.
Speaker Change: We have significant opportunities to accelerate our key growth areas, especially in commercial where the market is growing faster than consumer.
Speaker Change: We also remain committed to returning approximately 100% of free cash flow over time.
Less opportunities with a higher return on investment right now.
Speaker Change: As long as our gross leverage ratio remains and there are two times EBITDA.
Speaker Change: We are confident our strategic focus on operational capabilities will enable us to deliver.
Speaker Change: Solid growth in fiscal year, 'twenty, five odd crores revenue non-GAAP earnings and EPS and free cash flow.
Speaker Change: I will pause here and turn it over to Karen.
Karen Parkhill: Thank you Enrique and good afternoon, everyone.
We delivered solid financial results in Q4 with growth across both personal systems and print driving a year over year increase in revenue for the second quarter in a row.
We grew non-GAAP EPS year over year and delivered strong free cash flow in the quarter solidly within our full year guidance range.
Karen Parkhill: And as committed we returned nearly 100% of our free cash flow to shareholders for the full fiscal year.
Karen Parkhill: Taking a closer look at the details of the quarter.
Karen Parkhill: Net revenue was up 2% nominally and in constant currency.
In fact, we grew in constant currency across all regions with Americas, and EMEA growing 2% and a P J growing 3%.
Karen Parkhill: Gross margin was 21, 4% flat year over year, as we offset rising commodity costs with pricing and cost actions.
Karen Parkhill: non-GAAP operating expenses reflect continued investment in key strategic initiatives.
Karen Parkhill: All set in part by cost reductions, including the acceleration of future ready cost savings.
Karen Parkhill: All in non-GAAP operating profit was $1 2 billion in line with our expectations.
Below the op profit line non-GAAP net Oh irony was down year over year with lower currency related losses, and reduced levels of short term financing activity.
Karen Parkhill: Finally, with a diluted share count of approximately 970 million shares our non-GAAP diluted net earnings per share was <unk> 93.
Our year over year increase of three.
Now, let's turn to segment performance.
Karen Parkhill: Personal systems revenue was up 2% nominally and 3% in constant currency with higher commercial volumes and increased ASP.
Karen Parkhill: As we continue to adjust pricing where possible to mitigate increased component costs.
We outperformed the market in commercial with total units up 1% year over year.
Karen Parkhill: And we continue to see progress in key growth areas, particularly in hybrid systems that delivered strong growth for the second straight quarter.
Karen Parkhill: Drilling more into the details commercial revenue was up 5% and 4% unit growth with improved pricing and favorable mix.
Karen Parkhill: We increased our market share with gains in high value commercial premium and.
Karen Parkhill: In fact, our gains in commercial more than offset continued market softness in consumer.
Karen Parkhill: Where revenue was down 4% with units down, 3%, particularly in China and as expected.
Karen Parkhill: Our P. S operating margins were a little lower than expected, reflecting the headwinds from higher commodity costs and continued investment in strategic initiatives.
Not fully offset by repricing efforts and future ready savings.
Karen Parkhill: In print our results reflected our focus on execution in a market that is showing signs of stabilization.
Karen Parkhill: Total print revenue increased 1% on a reported basis and 2% in constant currency driven by supplies and key growth areas.
Karen Parkhill: Momentum in industrial graphics continued with growth in hardware supplies and services.
We also saw double digit growth in consumer subscriptions revenue.
Karen Parkhill: By customer segment consumer grew 3% year over year on 10% unit growth with share gains across all categories.
Karen Parkhill: And commercial while revenue declined 1% and a competitive pricing environment.
Karen Parkhill: <unk> increased 9% with share gains across all markets, except China as we purposely focused on profitable long term unit growth.
Karen Parkhill: Print operating margin of 19, 6% was not only up year over year, but above the high end of our range with favorable mix and savings from our accelerated future ready cost actions.
Karen Parkhill: Looking holistically at our future ready cost plans, we are pleased with the progress we made in the quarter to accelerate our actions.
Karen Parkhill: And at this point are ahead of the plans, we initially laid out.
Karen Parkhill: In fact with one year to go on our three year plan, we have driven roughly 80% of our total program goal of $1 6 billion of annualized gross run rate savings.
Karen Parkhill: As part of future ready, we have modernized our data infrastructure across the company.
Karen Parkhill: <unk> platforms in personal systems by over one third allowing for reduced commodity complexity.
Karen Parkhill: And driven further portfolio and resource reductions across core print.
Karen Parkhill: We look forward to completing these plans to drive further effectiveness and efficiency across the company in the next year.
Karen Parkhill: Now, let me move to cash flow and capital allocation.
Karen Parkhill: We generated more than $1 $6 billion in cash from operations.
Karen Parkhill: And $1 5 billion in free cash flow.
Karen Parkhill: And free cash flow for the fiscal year was $3 $3 billion.
Karen Parkhill: Finally within the guidance range, we set at the beginning of the year.
Karen Parkhill: We continue to improve our cash conversion cycle this quarter driving days payable up as a result of improving payment terms and higher manufacturing activity and.
Karen Parkhill: And inventory days down with lower strategic buy activity.
Lastly, we returned approximately $1 2 billion to shareholders through both share repurchase and dividends.
Karen Parkhill: And finished the quarter within our target leverage range.
Karen Parkhill: For the year, we returned close to $3 2 billion to shareholders nearly 100% of our free cash flow.
Karen Parkhill: Our Q4 and FY 'twenty four results reflect the consistent progress, we are making to drive profitable growth and maintain our leadership position and a steadily improving market.
And we intend to continue this momentum into next year as we drive further growth and investment in strategic areas, including the future of work.
Speaker Change: As we look ahead in FY 'twenty five let me start with our segments.
Speaker Change: In personal systems as Enrique said, we are aligned with industry experts projecting the PC market to increase mid single digits in 2025, with the commercial market growing faster than consumer.
Speaker Change: We expect our fiscal year 'twenty five revenue to grow at least in line with the market.
Speaker Change: And to be stronger in the second half of the year driven by normal seasonality timing of the Windows 11, refresh and increased penetration of AI Pcs.
Speaker Change: At this point, we anticipate <unk> will make up approximately 25% of our PC unit shipments in FY 'twenty five.
On operating margins, we expect to be in the upper half of our 5% to 7% range for the year, but to remain in the lower half in Q1, given continued pressure on our commodity costs.
Speaker Change: While we have put in place cost reduction and pricing actions to offset these pressures.
Speaker Change: It will take time and will ramp through the year, leading to stronger margins expected in the second half.
Speaker Change: In print, we expect to perform at least in line with the overall market.
Speaker Change: And as Enrique said, we are aligned with industry experts projecting the overall market to decrease low single digits in 2025 weeks.
Speaker Change: We expect the pricing environment to stabilize and our asps to benefit from our focus on driving profitable share gains in strategic categories.
Speaker Change: Particularly in office, we see the opportunity to capture share in the contractual segment, where we are under index.
Speaker Change: We expect supplies revenue to decline low to mid single digits in FY 'twenty five in constant currency consistent with our long term outlook.
Speaker Change: And we expect our operating margin to continue to be near the top of our 16% to 19% long term range, including in Q1, as we continue to exercise disciplined cost management and execute on our future ready plans.
Speaker Change: Beyond the segments, we expect corporate other to be relatively flat year over year at approximately $1 billion.
Keep in mind that due to the timing of our stock compensation expense, we expect approximately one third of our annual corporate other expense in Q1.
Speaker Change: With all of this we expect FY 'twenty five non-GAAP diluted net earnings per share to be in the range of $3 45.
Speaker Change: The $3 75.
Speaker Change: And FY 'twenty five GAAP diluted net earnings per share to be in the range of $3 six to $3 36.
Speaker Change: For Q1, we expect first quarter non-GAAP diluted net earnings per share to be in the range of 70 to 76.
Speaker Change: First quarter GAAP diluted net earnings per share to be in the range of 57 to 63.
Speaker Change: Overall, we expect EPS to be stronger in the second half with sequential improvements in each quarter.
Speaker Change: In FY 'twenty five free cash flow, we expect to deliver between 3.2 to $3 $6 billion with growth in line with earnings.
Speaker Change: As typical we expect the second half to be stronger than the first.
Speaker Change: Consistent with our net earnings and recognizing that our first quarter is typically lower given the timing of our prior year incentive comp payments.
On capital allocation, we remain committed to returning approximately 100% of our free cash flow to shareholders over time as long as our gross leverage ratio remains under two times and there arent better return opportunities.
Speaker Change: In closing we are excited for our future and also pleased to announce today that we are raising our annual dividend by 5% to $1 16 per share.
Speaker Change: This is the ninth consecutive annual increase since our separation in 2015 and reflects the confidence we and our board have in our long term outlook ahead.
Speaker Change: With that I would like to hand, it back to the operator and open the call for your questions.
Speaker Change: 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 before pressing the key to withdraw your question. Please press star. One again, we also ask that you. Please limit yourself to one question and a single follow up.
Speaker Change: First questioner today will be warm Simo hand bank of America.
Speaker Change: Hi, yes. Thank you so much.
Speaker Change: You're typically your first quarter EPS is about 25% of the full year. This year, you're guiding to EPS, that's closer to 20%.
Speaker Change: Can you talk about some of the puts and takes over there I know you called out the timing of stock comp, but is there anything else, that's driving that delta over there as well and I will follow up.
Speaker Change: Yeah. Thanks for that question Lindsay.
Speaker Change: Our in our Q1 EPS is typically down sequentially. So keep in mind, we have seasonal volume declines in the first quarter and yes, we do have a sequential increase and corporate other expense in the quarter and that's really driven by the timing of our stock compensation expense I said, we expect roughly a third of it too.
Speaker Change: To hit in Q1.
Karen Parkhill: Okay. Thanks, Karen.
Speaker Change: I guess my follow up is really around your future ready transformation plan, where you've done a lot of cost optimization already but when we look at the EPS guide for next year.
Speaker Change: Presumably most of that is really coming from share buybacks, which would mean that your organic operating income is roughly flat. Despite all these cost optimizations.
Speaker Change: Why should we not see a higher improvement in free cash flow next year, especially as you are starting to expect bce's to grow and you're also lapping some of these restructuring charge the magnitude at least is going down on restructuring charges as well so why isn't free cash flow.
Speaker Change: Somewhat materially higher range.
Closer to a couple of years ago. Thank you so much.
Speaker Change: Yeah. Thanks for the question you know, we're pleased with the free cash flow. We delivered this fiscal year and we do expect it to continue to grow roughly in line with earnings.
Speaker Change: We intend to drive continued improvement in working capital and free cash flow just as we have in the past few years.
Speaker Change: We expect that to continue and as we enter the third year of our future ready cost plan, we expend expect to spend a little less on restructuring charges, but we will offset with some slightly higher capital expenditures to support our growth plans, but again, we expect free cash flow to grow roughly in line with earnings.
Also another question about your first observation when we look at EPS growth year on year, driven both by share buybacks, but we are also expecting growth of operating profit and this is really what is supporting that midpoint of the guidance.
Speaker Change: Okay. Thank you so much.
Speaker Change: The next question is from Erik Woodring with Morgan Stanley.
Speaker Change: Awesome. Thanks for taking my question guys.
Speaker Change: Karen I guess for you Kevin just wondering what would be for you as you've done 19% print operating margins effectively three years in a row now all in years in which revenue print revenue has been down low to mid single digit. So maybe my question is why is 16 to 19, 4% the correct range and why wouldn't it be.
Speaker Change: Higher or has there been a degree of over earning that at some point should should normalize in the future I'm just trying to understand the relative outperformance versus the target and then I'll follow up. Thanks, Yeah. Thanks for that question you know you've seen US operate at this high end of the range. Both in Q4 and the full year and we do expect that to continue in FY <unk>.
Speaker Change: 25, we are focused on protecting our profitability in print we've been reducing unprofitable units through our shift to big to Big tank. We've also been increasing the lifetime customer profitability with growth in our subscription business and we're gaining share in some of the higher value categories in office.
Speaker Change: As we think about the guide.
Speaker Change: The range the range going forward, we're maintaining at the lower end of the range. Just so we can have flexibility to lean in where we find opportunity.
Speaker Change: But we're also going to remain cognizant of the dynamic market conditions that we've seen in recent years.
Speaker Change: And I think this is very consistent with previous conversations that's carrying just said we want to have flexibility to lean in case, we see opportunity to place more OTT hardware units.
Speaker Change: We do see the opportunity we want to have that time.
Speaker Change: Maybe put some pressure on the margin specific corporate.
Speaker Change: A change from previous conversation.
Speaker Change: Okay. Thanks, guys. Thank you guys and that's.
Andrew: My follow up Andrew.
Enrique: Enrique after a store.
Enrique: <unk> in which you gained share in both.
Enrique: Pcs.
Can you maybe just help us understand maybe why you don't expect to gain share next year talking about growing in line with the market is there any kind of competitive pressures that are pricing maybe from for example, where the yen is today or are you just trying to be a bit more conservative in setting expectations. So early in the year and that's it for me. Thanks, So much I would say it's more of a day.
Enrique: The leather.
Speaker Change: We want to be conservative in the assumptions of course, our goal is going to be to grow share, but as we always say grocery in profitable categories. Our goal is not to grow share for the sake of growing share is really about focusing on those areas, where we see opportunity to grow it to do it in a profitable way.
Speaker Change: This year, we have grown share in Pcs, especially in commercial and as we have said during the prepared remarks commercial and he is going to continue to be our priority.
Speaker Change: Hi, Nick.
Speaker Change: <unk>.
Speaker Change: Thank you Sir our next we'll take a question from Amit <unk> Evercore ISI.
Speaker Change: Hi. Thank you. This is irvin Liu on for Amit I have one and a follow up as well. So if I if I heard correctly AIG PC units were 15% of shipments during your fiscal Q4 and expect it to expand to 25% next year as this mix expands what sort of implications will this have four.
Speaker Change: <unk> four <unk> and your <unk> margins.
Speaker Change: We thank you we have not changed.
Speaker Change: Our view on the impact that <unk> is going to are going to have on Google inquiries have support desk I'm sure. I said, we have seen VIP fees are going to drive an improvement. However, it still implies well do we have been saying until now when we confirm is two years from now we expect them to be between 40 and 60.
Speaker Change: There's kind of a mix mix on behalf of around between a 510% impact on the overall category. That's the direction that we're taking on the Korean shipments on pricing coupons would we have seen until now.
Speaker Change: Got it.
Speaker Change: And then for my follow up.
Speaker Change: Upcoming change in administration and potential for tariffs can you just talk about how you are positioned to mitigate any potential impacts to your supply chain.
Speaker Change: Perfect. Thank you first let me say that we are really willing to collaborate with the new administration to reach the best solution for both our customers and our shareholders.
Speaker Change: You think about where do we have been talking about in the last few years, we have seen a lot of work to make our supply chain footprint and more resilient and we have been building factories in different parts of the world.
Speaker Change: To respond to changes in the geopolitical environment.
Speaker Change: Do you remember much stronger position than we were two years ago, and we're seeing that compared to other companies in our industry. We are in a strong position.
Speaker Change: At this point is hard to know with exactly the new parties are going to be.
Speaker Change: We'll take him space, we have a strong team that knows how to manage these type of environment and as we know where the frame and policies will be we will be the best plan for the company.
Our next question today will come from Tony Sacca Nike Bernstein.
Yes. Thank you I just wanted to follow up on the last question first.
Speaker Change: My understanding is outside of inkjet printer cartridges.
Speaker Change: Everything HP makes.
Speaker Change: Is outside of the country and imported so if we did have a tariff on all incoming goods, which is sort of the current statement from the administration.
Speaker Change: How does <unk>.
Speaker Change: Respond to that and I understand you may have less exposure, but.
Speaker Change: You're still making.
Speaker Change: Essentially all of your products besides from inkjet cartridges I believe.
Speaker Change: Outside the U S. So how would you address a global tariff on imported goods specifically.
Speaker Change: Uh huh.
Speaker Change: Tony at this point is we don't want to speculate on where the finance parties for are going to be we will respond to.
Speaker Change: Towards the final decisions hard on and actively manage our supply chain through to that you're correct. We have a small percentage of production into the U S is a bit broader than your <expletive> inkjet cartridges, but.
Speaker Change: How do we produce most of our prototypes throughout the years.
Speaker Change: Okay.
Speaker Change: And if I could follow up maybe you could just clarify what's your Mexico exposure because there actually has been a policy statement on that so what is your Mexico exposure and then as my follow up.
Speaker Change: Enrique or Karen.
Speaker Change: As we look forward to next year, it sounds like Youre expecting supplies to decline three 4% low single digits, but potentially the printing business to grow which would mean that hardware wood.
Speaker Change: Be positives why would that mix shift not pressure margins and what's the offset to keep margins at the high end of the range. Thank you.
Speaker Change: Let me take both questions first of all on Mexico, We don't disclose the specific percentage of problems, how do we get from them.
Speaker Change: So I I will defer the answer to that question in terms of green or do we have sandy.
Speaker Change: In fiscal year 'twenty funds, we expect the market to decline and this should be consistent to what you see also from.
Speaker Change: On the HP perspective, our goal is to do at least as well as market, but we're going to see some pressure on revenue from from the from the Prime perspective.
Speaker Change: As you said our guide our expectation is that supply is consistent with what we have been saying in the past we will continue to decline low to mid single digits for no change.
Speaker Change: Are you on.
Speaker Change: Your next question will come from Amit chatter J J P. Morgan.
Amit Chatterjee: Hi, Thanks for taking my question I guess for the first one if I can go to the.
Amit Chatterjee: The outlook that you shared for the PC market I think.
Amit Chatterjee: Commercial in particular growing higher than mid single digits.
I know that's sort of the consensus right now in the industrial and list, but just curious how you sort of.
Amit Chatterjee: Thinking about that sort of playing out in terms of the confidence in <unk>.
Amit Chatterjee: This sort of refreshing ahead of that date.
Amit Chatterjee: Deadline in terms of Windows end of life, but particularly given that we've all been a bit surprised that enterprises haven't refreshed as much. This year. How are you thinking about sort of the new deals that growth expectation as well as the likelihood that it won't really be days when data investing towards AI infrastructure. They don't end up deep fried.
Amit Chatterjee: We see that as a part of that spending sort of overall bucket that we're looking at.
Speaker Change: Our phone numbers one thank you.
Speaker Change: Yes, I think first of all if we look at the World Cup and in Q4, we have seen revenue growth in the commercial space of 5% and unit growth of 4%.
Speaker Change: We are already a fairly significant growth in the commercial Pcs days and.
Speaker Change: And when we think about next here first of all we seem to have the fact that the windows refresh has started and is lowered a worry that previews transitioned as we shared last quarter, yes. It makes the opportunity in 'twenty five bigger because there is a deadline in the food next year, whereas for protocols for Windows 10 is going to significant.
Speaker Change: The significant increase and therefore, a company will have a strong incentive to change on top of that we continue to have a an aged installed base that needs to be refreshed, which has been driving the growth there.
Speaker Change: We have seen in Q4, and we their mix of E. L. P. CS will continue to grow returns where he's going to have.
Speaker Change: Create a tailwind for the business.
Speaker Change: Yes, I'm sure arms that we have on them.
Took over that because we have done this year, we will continue to prioritize premium categories, where we have been growing share and this continues to be the goal for us as a company.
Speaker Change: Got it okay, great and for my follow up I mean.
Got it and maybe this is for you just going back to lump seasonal your question on what's driving the season 94 openings in one queue.
Speaker Change: Understand.
Speaker Change: Great.
Speaker Change: <unk>, but are you expecting anything different from a typical seasonality when it comes to the revenue outcomes for the quarter as well if you can just clarify that.
Speaker Change: Yeah, so for revenue we're expecting.
Speaker Change: Growth both year over year in the quarter and for the full year at the total company level with them with a strengthened and P. S offsetting likely.
Speaker Change: Klein and print them in terms of you know just are just a ramp through the year on an EPS.
Speaker Change: He said, we said that we expect a stronger second half and that you know Q1 should be our lowest quarter with improvement throughout the year and I would say the main drivers of that are more pronounced P. S revenue seasonality tied to the P. C recovery along with the actions that we're taking to improve PS margin.
Speaker Change: In the back half.
And as we already mentioned, we can we expect that step down in corporate other cost as we move past Q1, and I would say lastly, we're also expecting this higher penetration of AIP see muscles as we move through the year. So those along with our growth segments really driving improvement to our margin profile.
And let me add a comment on on course.
Speaker Change: We shared in the prepared remarks, we have seen pressure from commodity cost in Q4, we expect that this pressure will continue in Q1, but that through the year to replace him.
Speaker Change: Through additional course that we are all turns out we were taking to qualify lower cost components to concentrate volumes in a few specific cause can use we will be able to compensate for that and this also creates.
Speaker Change: An improvement quarter on quarter that is what is supporting that guy.
Speaker Change: And the next question will come from <unk> merchant City.
Speaker Change: Yeah.
Speaker Change: Hey, Thank you for taking my question I'm going to double click on your growth services, you know I think it was 20%.
Speaker Change: You said it grew mid single digits, how should we think about the expectations for these growth businesses to perform into next year. What are some of the drivers that would potentially accelerate growth here because I think at the analyst event, you guys did share higher growth expectations and if.
Speaker Change: You could talk about some of the drivers for that growth for the high a particular business. Thank you.
Speaker Change: Thank you so it's probably worth that we talk about a few of them so to explain.
Speaker Change: We're proud of the expectations that we have with banks here are the overall is that they will continue to grow faster than the overall company, which is why we put off are very important going forward.
Speaker Change: We think for example about growth that we expect in consumers' Henry says, we expect the number of subscribers through to continue to grow.
Speaker Change: Also we are expanding the portfolio of services that we offer them. During this year, we offered the papers I service program.
Speaker Change: For the <unk> program, and we will see the adoption of these two programs to to continue to increase we.
Speaker Change: We also have seen some of these girls, especially in the second half.
Speaker Change: Our workforce solutions portfolio book.
Speaker Change: Well, especially in the print episode of these devices have salaries from conference room muscle surveys and we expect these businesses to continue their growth next year, we have a strong cycle on travel and hybrid systems.
Speaker Change: The market is very common.
Speaker Change: This end market recovers, we will see growth in that category and we expect it to continue to to grow in in 'twenty five well cost most of them, we see opportunities to grow driven by the market and also driven by the innovation that we're going to continue to bring into market.
Speaker Change: Those many categories. This is why for us going forward, we see this growing opportunity in commercial in redefining the future of work, which is basically integrating <unk> into.
Speaker Change: In our food portfolio, allowing customers from an enterprise perspective to drive productivity and from an employee perspective to increase the fulfillment that they get with activities. They do and this is going to be more and more of the overall focus of the company.
Speaker Change: The next question.
Speaker Change: The next question from Chris <unk> car T D Cowen.
Speaker Change: Yeah, Hi, Thanks for taking my question I have two of them first one Enrique.
Thanks for your color on next year and the AIB season, all the good stuff.
Speaker Change: Curious what exactly is the definition of the AI PC does it have a higher silicon content like <unk> CPU memory, how do you describe the IPC because it was 15% over last quarter the mix and if that is the highest silicon content. What is the bom cost impact to margins and then I had a follow up.
Speaker Change: Sure. So when we talk about the 15% we use the official designation by D. C is using which are P. CS go to have a name to you building.
Speaker Change: What we are using for 15% to be consistent with the rest of the industry.
Speaker Change: And our focus really is more in what we call next generation P C.
Speaker Change: Our defined by its first having a stronger more powerful MCU above 40 tops.
Speaker Change: I think one or being able to run what we call. Our AI companion, we choose our own model designed to accelerate productivity in their offices, we're learning a bit uncertain, especially in the commercial space Pcs that have enhanced security capabilities because of hugging the MDU on trauma.
Speaker Change: So, Florida model, but we are building into them.
These next Jim <unk>, we just started to ship during Q4, so the impact they have had this year. This is limited but work has been done very exciting exciting is we have been able to give them two software companies to start developing new solutions, we displayed some of them in Nevada.
Speaker Change: Imagine event.
Speaker Change: Impacting productivity. They are going to have is very significant. So you asked me how confident I am about the impact of the a b C has gone to have even more than before because I have seen them in action I see the opportunities that they bring and I think it's gonna be a very very strong part of our portfolio in the coming years.
Speaker Change: Got it very helpful. Thanks for that Enrique for the clarification too.
Speaker Change: One other quick follow up you mentioned that commodity cost pressure is going to be that into the early part of next year.
Speaker Change: Typically what is the lag effect you see because the reason I'm asking is that if you look at most forecasts.
Speaker Change: Memory, DRAM and NAND is a big part of food commodity cost is expected to decline in calendar Q1, if that is true when would you see the benefit of that thank you.
Speaker Change: We expect to continue to see pressure from commodity costs through the first half of our fiscal year. So our Q calendar Q4, and calendar Q1, and then these to be mitigated in the second half of the year.
Speaker Change: Actually because of all the work that we're doing the first country pricing. We did repricing in Q4, we will continue to do that but there is always a.
Speaker Change: The difference in time between of course increases hands on on price increases, but over time. These gets compensated and also as I mentioned before the work that we're doing from a cost perspective, who qualify lower of course components to integrate or to aim to increase the volume on time specific excuse simplified simplifying.
Speaker Change: We're offering or we can buy more of it for single component. The two the three actions should help us to mitigate the impact in the second half of our fiscal year and I would just add Chris that our strategic buys helped us win commodity cost pressure first started.
Speaker Change: And now we're working on a repricing and cost down actions that just take time.
Speaker Change: Do you want to take hold.
Speaker Change: Oh.
Speaker Change: Next is David UBS.
Speaker Change: Great. Thanks, guys for taking my questions. The first one is maybe Enrique on print I just wanted to go back to the competitive landscape because the yen has been such a headwind for so long it doesn't sound like you are that concerned or that impacted this quarter.
What's going on in that market and how does that play out into fiscal 'twenty five and then I'll give you. My second question at the same time, so given sort of the.
Speaker Change: Treatment that youre thinking about it in the top line next year, and then really strong margins in trend given the future ready plan any thoughts you why the capital return policy is still fixed rates around sort of course leverage at two turns given the structural margin improvement that you've made in the business. Despite the revenue decline and I'll just turn it back.
Speaker Change: Sure I'll take the first one and then Karen will take the second so in terms of competitive environment in print, we have not seen a significant change.
Speaker Change: Continue to see our Japanese competitors, they came from advantage or the weakness of the yen and the punishment Cosmo change.
What has changed is that we do in the last two quarters as we announced at the beginning of the year, we have been working to aggressively reduce the cost of our products. So we could compete more aggressively and we have started to gain share both in chrome and interface, but he is not so much a result of the competitive environment.
Speaker Change: <unk> getting easier is really a consequence before the work that we're doing as part of our future ready plan as you said.
Speaker Change: And just on the capital allocation policy of returning capital to shareholders is a priority for us and our capital allocation policy has not changed.
Speaker Change: We still expect to return approximately 100% of our free cash flow over the long term.
Speaker Change: As long as high or higher ROI opportunities.
Speaker Change: Arent, there and you know we maintain our leverage ratio of two times just under two times on the leverage ratio, we do evaluate it every year and our analysis continues to indicate that this is the optimal level for us and it's aligned with the credit rating that is also aligned with our peers and provides us.
Speaker Change: Access to short term liquidity.
Speaker Change: Got it thanks for the clarity guys. Thank you.
Okay.
Speaker Change: The next question is Michael <unk> Goldman Sachs.
Speaker Change: Hey, good afternoon. Thank you for the question I just have two as well.
Speaker Change: A follow up on Davids question regarding print it was great to hear that you're working to reduce the cost and price of your products you see it in the unit.
Speaker Change: Growth this quarter I was wondering if you expect to see continued unit growth.
Speaker Change: As we head into next year as a result of some of your price action.
Speaker Change: And then I will give me the second one as well.
Speaker Change: Just on the PC refresh.
Speaker Change: It's widely understood that this October 2025 is a hard deadline I was just wondering in prior cycles have you seen enterprises.
Speaker Change: Do much by way of extended support or.
Speaker Change: Or does that not really.
Speaker Change: Kind of impact things at all thank you yep.
Yep.
Speaker Change: Two.
Speaker Change: In terms of Green our expectation is that next year My Kid is going to slightly decline.
Speaker Change: And this is our expectation on loans with the expectation from for most of the industry analysts.
Speaker Change: Our goal is going to continue to grow share units are profitable.
Speaker Change: This is Tim levels, but this is continues to be our goal, but at this point, it's hard to predict exactly how competitors are gonna be responding of course, we're going to maintain or deferred to continue to reduce cost as we as we always do.
Speaker Change: And then in terms of the PC refresh what we have seen previously is the companies respond to the deadline and this is why we're saying that we expect these trucks candidates through 2025, given that compared to previous refreshes refinish is growing a little bit slower and this is why.
Speaker Change: In in 'twenty, five and especially in the second half we expect an improvement for a further improvement of commercial demand even by this transition.
Speaker Change: Next up we'll take a question from Ananda Baruah loop capital market.
Speaker Change: Yeah, Hi, guys. Thanks for taking the question.
Speaker Change: I appreciate it.
Speaker Change: I guess sticking with sticking with Pratt.
Speaker Change: And the market decline.
Can you give us a sense of what you.
Thinking for a for a commercial relative to consumer I guess I'll ask thus year commercial decline Jonathan as you can see with the clients.
Speaker Change: On the commercial side.
Speaker Change: What are the what are the trends what are the sort of dynamics that are informing the market.
Alex: You can bet, Alex as macro and this is backed off.
Anecdotally and then how much.
Alex: Maybe to shift the detail on that.
Alex: Okay.
Alex: Okay. Let me, let me provide some color opinion penumbra Oh, we when we look at the different segments in print. We expect 13 25 consumer will continue to decline so no change from where do we have seen.
Alex: And Delphi side, we see two dynamics, we see contraction on.
Alex: But we expect that will decline, but we see what we call contract runoff is well managed print services as part of the REIT that will have a better performance than transactional and when we think about it he has to focus for US clearly this is an opportunity because the market will perform better and also because our share is low.
We've done another segment for us.
This picked us to really go.
Alex: After that category and then finally, we expect to continue to see growth in the industrial space. We saw strong growth in the second half of this year and we expect to continue to see that in in 'twenty five.
Speaker Change: Got it thanks, so much appreciate it.
Speaker Change: Next up is Aaron Rakers Wells Fargo.
Aaron Rakers: Yes, thanks for taking the questions I'm going to throw two of them out.
Aaron Rakers: Right away. So I guess as we kind of start to focus are definitely shift our focus to the windows upgrade cycle looking into next year I am curious as you guys think about the market opportunity.
Aaron Rakers: Any of the data that you look at it as sizing how large this AI or this windows installed base, aged installed base looks to be.
Speaker Change: As we think about that going forward and then I just want to be clear like if you look at the PC market. My second question. If you look at your PC growth estimate of mid single digits.
Speaker Change: That you know more or less is in line with where industry shipment expectations or why would we not see some ASP benefit from these AIP fees on top of that unit growth as we look into next year I'm just curious how youre thinking about that thank you.
Speaker Change: Sure.
Speaker Change: First part of your answer a question is the answer is definitely yes, we have a lot of.
Speaker Change: Analytics that support the opportunity about the refresh analytics, how do we have an always on analytics that Microsoft has and that we share because we thought coming into it for both companies to drive and this is what helps us to assess how much conversion has happened and how much opportunity we have going forward.
Speaker Change: In terms of E S P.
Speaker Change: On the PC side, we have seen to afford this year, we have seen very new growth above unit growth and we expect a similar phenomenon to happen in <unk>.
Speaker Change: 25.
Speaker Change: This is part of the guide and the cause we have provided today, yes, we do expect that we will benefit from ASP growth next year and in the first quarter and that's really you know just given the enhancement of premium offerings, including a richer mix of AI P. C.
Speaker Change: And everyone at this time there are no further questions.
Speaker Change: Perfect. Thank you everybody for joining today's call, where I know, it's been a bit later than other call, especially for those of you in the east coast. So thank you for being here.
Speaker Change: As you have heard we are very optimistic about the plan that we have in 'twenty five the company our expectation is that the company will be grow in both revenue.
Speaker Change: And operating profit and going forward, we see a strong opportunity in defining the future of work in helping companies to drive productivity improvement on Hilton employees to get more fulfillment from their work a very exciting opportunity that is gonna be driving their priorities, how do we use going forward.
Speaker Change: Again, thank you for joining today and for those of you in the U S. We wish you a very happy Thanksgiving holiday. Thank you.
Speaker Change: Once again, everyone that does conclude today's conference I would like to thank you all for your participation you may now disconnect.
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