The operator welcomes everyone to the Third Quarter 2023 HP Inc. Earnings Conference Call and introduces Orit Keinan-Nahon, Head of Investor Relations. She reminds participants that the call is being webcast and a replay will be available on the website for a year. She also mentions that the presentation contains forward-looking statements and encourages participants to refer to HP's SEC reports for more information. Lastly, she states that all comparisons will be year-over-year.

In the third quarter, HP reported $13.2 billion in net revenue, a 10% decrease from the previous year, but a 2% increase from the previous quarter. This growth was driven by the company's key growth areas, which were not immune to the market challenges, but still delivered solid sequential growth. HP is continuing to invest in these areas to strengthen their position and accelerate their momentum.

HP has achieved non-GAAP EPS of $0.86, which is at the midpoint of their guidance, and they are on track to deliver at least 40% of their three-year structural cost savings target by the end of the fiscal year. HP has also launched new products such as the Z4 Rack workstation, HyperX Cloud III gaming headsets, Poly Studio video solution, and HP SitePrint. They are also co-engineering new platforms with silicon and software partners to run generative AI at the edge, which will be unveiled at their HP Imagine event on October 5.

In the last quarter, the company released its annual Sustainable Impact Report, which showed a reduction in their carbon footprint by 18%, and their goal of enabling better learning outcomes for 100 million people was achieved three years ahead of plan. In terms of business unit performance, enterprise spending remains cautious while SMB and consumer segments are showing resilience and softness respectively. The Personal Systems revenue was down 11% year-over-year, but up 9% sequentially due to back-to-school demand, higher unit volume, and cost management. The PS operating margin was strong at 6.6%, and the company gained share in both Commercial and Consumer.

HP reported revenue of $4.3 billion in Print, which was down 7% year-over-year or 5% in constant currency. Supplies revenue was broadly flat year-over-year in constant currency. HP's Commercial, Gaming, and PS services TCV saw strong growth, while the graphics and 3D markets were impacted by macro environment and delayed ordering cycles. HP's workforce services and solutions business also saw solid growth in the quarter. HP is focused on regaining profitable share, improving their performance in office, and improving their cost structure to maintain long-term profitability.

Q3 was a solid quarter, with the company making good progress against its long-term growth priorities. However, the market remains challenging in Q4 due to aggressive pricing, sluggish demand in China, and enterprise demand. As a result, the company is moderating its expectations for Q4 and the full year, and taking action to reduce its cost structure and protect its profitability and free cash flow. Despite the near-term market volatility, the company remains confident in its long-term trajectory and is focused on driving disciplined execution to unlock value and executing its capital allocation strategy.

HP held a virtual Securities Analyst Meeting in 2021 and is looking forward to hosting the event in person in October. The meeting will focus on the progress of HP's Future Ready plan, digital transformation, and cost reduction, as well as innovation across the HP portfolio. HP reported positive results in Q3 and increased non-GAAP operating profit and non-GAAP EPS sequentially over the course of the year. They also completed a debt tender exceeding $1.1 billion and are on track to achieve $560 million in gross annual run rate structural cost savings.

In Q3, revenue for Personal Systems was $8.9 billion, down 11% or 8% in constant currency. Total units were up 3%, while sequentially revenue was up 9% and total units were up 21%. This was due to seasonal strength and back-to-school demand. Net revenue was down 10% nominally and 7% in constant currency, while gross margin was up 1.7 points year-on-year. Non-GAAP operating expenses were $1.7 billion, and Non-GAAP operating profit was $1.2 billion, down 15.1%. Non-GAAP diluted net earnings per share decreased $0.17 or 17% to $0.86, while GAAP diluted net earnings per share was $0.76.

In the second quarter, Commercial and Consumer markets saw an increase in market share, with Commercial accounting for 70% of revenue. Personal Systems saw a year-over-year revenue decline due to competitive and promotional pricing, but still delivered $600 million of operating profit with 6.6% operating margins. Print revenue was down 7% nominally or 5% in constant currency due to soft demand, market share losses, currency fluctuations, and lower supplies revenue.

Hardware revenue was down due to lower volumes, primarily in the Chinese market, and competition from Japanese competitors taking advantage of the weaker yen. There was a decrease in Commercial revenue of 6%, Consumer revenue of 28%, and Supplies revenue of 2%. Print operating profit was down 12%, with a decrease in operating margin of 1.2 points. Despite this, HP is making strong progress on their Future Ready transformation and expects to deliver 40% of their three-year gross annual structural run rate savings target of $1.4 billion for FY '23.

In Q3, HP has made great progress in simplifying their product portfolio and reducing commodity complexity. They have also optimized their media spend by consolidating programs and expanding their in-housing model. They are leveraging AI and telemetry data to improve customer efficiency and productivity, and are enhancing their software coding practices to accelerate code development. These actions are expected to drive cost reductions and cash flow improvements.

In Q3, HP returned approximately $216 million to shareholders via cash dividends and retired greater than $1 billion of debt. The cash conversion cycle improved two days year-over-year due to days of inventory decreasing and days payable increasing. HP expects operational improvements to drive a sequential increase in free cash flow in Q4, but the challenging economic climate and continued demand softness will remain headwinds. HP also expects operating expenses to be down year-over-year for FY '23 and to start managing dilution this quarter. The PC market size for the second half of calendar year '23 is smaller than expected due to demand weakness in China, and enterprise demand is expected to be softer.

HP Inc. is providing an outlook for Q4 and FY 2023, expecting Personal Systems margins to be at the higher end of their 5-7% long-term range, Print revenue to rebound sequentially, Print enterprise demand to remain soft, Print margins to be above the high end of their 16-18% target range, and non-GAAP EPS to be in the range of $0.85-$0.97 and $3.23-$3.35, respectively. They also expect free cash flow to be approximately $3 billion for FY 2023.

Enrique Lores answered a question about cost savings, saying the goal is to reduce structural costs by $1.4 billion, with 40% of that being achieved in the current fiscal year. He also noted that some of the headwinds they are seeing are temporary, and they are looking to accelerate savings to compensate. Marie then answered a question about free cash flow generation, saying that they need to hit a $3 billion number in Q4, and that this will be achieved through both working capital improvement and net income.

Marie Myers discussed the free cash flow for Q4 and how it is driven by working capital. Enrique Lores then addressed Shannon Cross' question about customer buying behavior related to subscriptions, stating that there have been no big changes in their thinking and that they have seen growth in the number of enrollees and revenue from their subscription program. They have also continued to expand their paper program and are now present in several countries in Europe.

Enrique Lores comments on the Poly business, which has been impacted in the short term by a reduction in the term of some of the major markets. Despite this, the reaction from partners and customers has been positive. There is potential to innovate in the space and deliver a better value proposition and experience. He mentions the potential of AI and other ways to interact with computers in the future.

Enrique Lores of HP discussed the need to focus on cost improvement in the printing business, as there has been a significant decline in home printing units of around 20%. HP plans to accelerate its cost-reduction activities, focusing on the home and consumer market, such as portfolio simplification, business model transformation, and growing more in bigging and big donor.

Marie Myers explains that the improved margins seen in both printing and PCs are due to the Future Ready transformation, normalization of CI, lower commodity costs, and structural and operating cost savings. These are offset by some enterprise softness. In Print, the improved margins are due to a combination of strategy and execution, as well as portfolio rebalancing.

Marie and Enrique discussed the pricing discipline and cost management from the transformation, which has allowed them to maintain their confidence in the 16%-18% rate for Print. They clarified that their goal is to grow operating profit dollars, not manage for rates, and provided guidance on how to model their performance. Samik Chatterjee asked how much of the expected moderation in the 4Q improvement was due to a promotional environment versus volume-driven, to which Marie and Enrique did not provide an answer.

Enrique Lores and Marie Myers explain that the change in the Q4 guide is mainly due to the fact that PC prices have not recovered as much as they were expecting and there is still significant channel inventory. They also mention that there are macroeconomic headwinds, ASP pressure, softer demand in the enterprise, and pressure on the Print business due to enterprise softness.

Enrique Lores of HP stated that the company does not expect a significant short-term impact from a potential ban on PC imports in India. HP has been working to increase its manufacturing capacity in India and has applied to participate in the local production plant, PLI 2.0 plan. HP recently announced a new cloud PC with Jio that is expected to help accelerate growth in the country.

Enrique Lores responded to Erik Woodring's question about channel inventory and the 2023 PC TAM. He reported that they have nearly normalized their inventory, except for Chromebook orders which increased at the end of the quarter due to Google increasing royalty prices. As a result, the 2023 PC TAM has been slightly reduced due to the market not growing as expected in China.

Enrique Lores is providing additional color on PC pricing, explaining that the ASP for PCs will grow from Q3 to Q4, but at a more moderate rate than expected due to higher channel inventory and promotional pressure, as well as a mix shift towards Consumer. He also notes that the PC business is still expected to grow from Q3 to Q4.

Enrique Lores and Marie Myers discuss the impact of lower revenue and lower margin on the midpoint of HP's fiscal Q4. They attribute the majority of the midpoint reduction to the change in the expectation of PC pricing, as well as smaller market size in China and a slowdown of orders in the enterprise print segment. Additionally, they mention that commodities pricing was a tailwind in fiscal Q3, but may be different in fiscal Q4.

Marie Myers responded to Sidney Ho's question about how long strategic buys would shield them from commodity price increases. Myers explained that commodity costs have been favorable in both businesses in the third quarter, and that they expect those trends to carry forward into the fourth quarter. She also noted that they are taking advantage of any opportunities that make financial sense. In response to Toni's question about margin dynamics, Myers noted that with lower PC sales, smaller total addressable market, and mix away from Chromebooks in the fourth quarter, they are expecting to see a flattening out of favorable trends in CPUs.

Marie Myers walks through the cost and pricing factors that are leading to higher margins in Personal Systems for the fourth quarter. These factors include cost management, structural cost savings, commodity costs, and stabilization of the CI level. Additionally, she notes that the enterprise softness in the market is underlying all of these factors. Myers also mentions that HP will be restarting their buyback in the fourth quarter.

Marie Myers and Enrique Lores of the company clarified that their strategy to manage their debt to EBITDA ratio under two remains unchanged and that they will be starting to buy back shares to manage dilution in Q4. They also stressed that they are managing their leverage ratio for the long term and will be restarting in a prudent way by compensating quarterly dilution.

Marie Myers explains that supplies revenue is expected to remain in the low to mid range for FY '23 due to resilient pricing, healthy inventory in the multi-tiered ecosystem, and a relatively easy compare to the previous quarter. Enrique Lores adds that supplies performance is driven by the number of units installed, which will create some pressure.

Enrique Lores discussed the competitive dynamics in Print, noting that Japanese competitors have been more aggressive in pricing due to the low exchange rate between the dollar and yen. He explained that their strategy has not changed and they will continue to focus on selling profitable units. He also mentioned that they are accelerating their cost actions in Print in order to stay competitive and maintain profitability. He concluded by saying that they had delivered a solid quarter in Q3 despite the tough environment.

The speaker is looking forward to a meeting in Palo Alto on October 10th to discuss their Future Ready plan for 2024, which includes both long-term investments and short-term responses to challenges. They thank everyone for joining the call and look forward to seeing them in person in a few weeks.

This summary was generated with AI and may contain some inaccuracies.