The moderator welcomes everyone to the Fourth Quarter 2023 HP Incorporated Earnings Conference Call and introduces the speakers, Orit Keinan-Nahon, Enrique Lores, and Marie Myers. The call is being recorded and a replay will be available on the website. The speakers remind listeners that the presentation may contain forward-looking statements and refer to disclaimers and potential risks. They also note that the financial information discussed is based on current estimates and may differ from final reported amounts. All comparisons are made to the corresponding year-ago period unless otherwise noted.

In the second paragraph, the speaker, Enrique Lores, thanks the participants for joining the earnings call and mentions the progress made by HP in their strategic priorities. They had a tough year due to external factors, but their Future Ready plan and focus on controllable factors helped them make steady progress. Despite a 15% decrease in net revenue and a 14% decrease in non-GAAP operating profit, they were able to grow their key growth areas and over-deliver on their gross annualized structural cost savings plan. This puts them on track to achieve their three-year target of $1.6 billion in cost savings.

In summary, HP's Q4 performance was in line with our expectations and we are confident in our financial outlook. Our key growth areas showed strong sequential growth and we delivered non-GAAP EPS of $0.90. Our innovation was showcased at the HP Imagine event, including the award-winning Spectre Fold device and our advancements in AI. We have also built a strong foundation for the AI PC category with our collaboration with Intel and NVIDIA.

HP is working with their partners to create an AI PC that will double the growth rate of the PC category. They have also refreshed their Print portfolio and launched new solutions for construction sites and conference rooms. They are focused on sustainability and have launched HP Renew to extend the life of devices. They are also supporting their communities, with a focus on those suffering in Israel and Gaza.

The safety and well-being of employees in the region has been the top priority since the attacks in October. The company has committed $1 million to humanitarian relief and is continuing to support local teams. The external environment remains consistent with previous expectations and the company saw an uptick in consumer demand and signs of stabilization in commercial customers. Personal Systems revenue was down 8% year-over-year but showed significant sequential improvement. The company gained share in both Commercial and Consumer markets and saw growth in Consumer and Gaming. The company also saw growth in PS Service TCV and Hybrid systems.

In the fourth quarter, HP's net revenue decreased by 3% year-over-year, but print revenue grew 4% sequentially. The company saw strong operating margins and significant growth in its Print+ and Workforce Solutions divisions. They also regained profitable print share and saw growth in their industrial graphics business. Despite the current environment impacting their 3D business, HP remains committed to their long-term growth priorities and returning free cash flow to shareholders. The company is confident in their investment potential.

HP has strong portfolios in the PC and print categories and is well positioned for profitable growth in its core markets. The company has opportunities for growth and efficient operational capabilities, as well as a shareholder-friendly capital return strategy. The Q4 and fiscal year '23 results reflect consistent progress and the company is confident in its plan to deliver sustained growth in revenue, non-GAAP operating profit, non-GAAP EPS, and free cash flow. Marie Myers, speaking on the financial results, notes that the company exceeded its transformation cost savings target and is on track to reduce structural costs while investing in growth areas. Despite challenges in the macro environment, the company's team has executed well and delivered strong results, with sequential growth in revenue and non-GAAP operating profit and a return to year-over-year growth in non-GAAP EPS. Free cash flow has also more than doubled sequentially. The company remains cautious but pleased with the momentum and health of its business.

Despite facing challenges in the macroeconomic and competitive environment, the company has focused on cost management and delivered solid performance. Revenue was down 15% but grew in key growth areas, and non-GAAP operating profit was flat year-over-year. In the fourth quarter, net revenue was down 6% and gross margin improved due to lower costs. Non-GAAP operating expenses were $1.7 billion.

In the fourth quarter, operating expenses increased due to reinvestment of Future Ready savings, investments in growth initiatives and people, and an extra month of Poly. Non-GAAP operating profit and net OI&E expenses also increased. Non-GAAP diluted net earnings per share increased by 10%. Personal Systems revenue was down 8% but up 5% sequentially, with flat total units and improved market share. Consumer revenue was down 1% and Commercial was down 11%, but both segments saw strong profit and margin results due to a focus on profitable growth and cost management.

In the fourth quarter, Personal Systems saw improved revenue and operating margins due to decreased competitive pricing pressures and normalized channel inventory. Print revenue declined due to a weak and competitive market, but cost management and supplies revenue growth helped offset the decline. Hardware revenue was down, driven by lower volumes and market share loss in Asia and China. However, industrial graphics revenue grew thanks to improvements in all major regions. Commercial and consumer revenue both decreased, with traditional home ink printers seeing soft demand but increased demand for big tank printers.

In the office hardware sector, ASPs saw a double-digit increase due to improved contractual A3 demand and favorable mix, but were offset by competitive pricing and currency headwinds. Supplies revenue also increased, but is expected to decline in the future. The print operating profit and margin decreased, mainly due to investments in people and competitive pricing. The company successfully completed the first year of their three-year transformation plan, exceeding their cost savings target and making progress in operational excellence, digital transformation, and simplifying their go-to-market organization.

HP is focused on accelerating their generative AI capabilities and simplifying their product portfolio to drive efficiency and operating leverage. They have already made progress in reducing the number of platforms in Personal Systems and plan to continue this trend in Print. They also see opportunities to optimize their cost structure and improve margin performance. In terms of cash flow and capital allocation, Q4 cash flow was strong and consistent with their outlook, with a decrease in the cash conversion cycle.

In Q4, the company returned $260 million to shareholders through dividends and plans to resume share repurchases in Q1 of FY '24. They expect to return 100% of their free cash flow to shareholders in FY '24, as long as their debt-to-EBITDA ratio remains under 2x. They expect the market to stabilize in their base case scenario and for revenues for Personal Systems and Print to grow in line with their respective markets. Operating margins are expected to remain within target ranges, and non-GAAP EPS for FY '24 is expected to be higher in the second half compared to the first half. Corporate other expenses are expected to be relatively flat year-over-year, with approximately one-third of the expenses occurring in Q1. The company expects the economic and demand environment to remain challenging but stable in Q1.

The company expects its operating profit margins for Personal System and Print to be at the high end of their target ranges for the quarter, and provides an outlook for Q1 and fiscal year 2024. They expect first quarter non-GAAP diluted net earnings per share to be between $0.76 and $0.86, and GAAP diluted net earnings per share to be between $0.60 and $0.70. For fiscal year 2024, they expect non-GAAP diluted net earnings per share to be between $3.25 and $3.65, and GAAP diluted net earnings per share to be between $2.68 and $3.08. The company remains focused on profitable growth and cost savings, and plans to return 100% of its free cash flow to shareholders. The first questioner on the call asks about the seasonality of earnings, and the company responds that historically, the second half of the year has seen higher EPS recognition compared to the first half. They do not provide specific growth numbers for the first half versus second half.

Enrique Lores and Marie Myers discuss the current state of the commercial PC market and their projections for the future. Lores notes that the market remains soft but demand is stable, and they expect both the PC and print markets to gradually improve in the coming year. Myers adds that the guidance for fiscal year '24 is in line with market performance and expects a gradual recovery in the second half of the year, but the first quarter may not follow normal seasonal patterns due to the pace of market recovery.

Enrique Lores and Marie Myers discuss the current competitive environment in the Print sector, noting that there has been no significant change since their previous meeting. They mention the impact of the current exchange rate between the yen and dollar, but state that there has not been a noticeable increase in competition. They also mention their plans to mitigate potential pricing increases through cost reduction and shifting towards HP+ and profit upfront units.

The company expects to see growth in the office space and improvement in the industrial business. They are confident in their outlook for the Print rate and anticipate solid results in 2024. They will continue to see fluctuations in cash flow due to seasonalities. On the PC side, they anticipate modest growth and attribute it partly to the rise of AI. They did not provide a specific quantification or estimate for the growth or the impact of AI on ASP.

Enrique Lores, CEO of HP, is excited about the impact that AI PCs will have on the overall PC category, with an expected doubling of growth from '24 to '26. However, he notes that the impact in '24 will be smaller due to timing and gradual penetration of the category. Lores also mentions that the average selling price for PCs is expected to increase between 5% and 10% as a result of AI PC penetration. In terms of supplies growth in the quarter, it was up sequentially, which is rare for HP. Lores attributes this to potential factors such as changing prices or channel fill. Additionally, Lores discusses the success of their Future Ready program and the reduction of costs, but notes that OpEx remains the same as the first quarter of the year.

Marie Myers, responding to a question about the impact of Future Ready on operating expenses, explains that Future Ready is a combination of both OpEx and cost of sales. She mentions that some savings are being reinvested in growth and people, but they are also dropping some of the savings to the bottom line. OpEx will be up year-on-year due to investments in growth and people. Enrique Lores adds that the supplies ecosystem is in good shape and multiple factors drove the good performance of supplies in Q4.

The speaker explains that looking at year-on-year comparisons is not the best way to evaluate quarterly performance due to various adjustments. They have been implementing positive actions on supplies and have been increasing prices to reflect their value, leading to growth in supplies quarter-on-quarter. However, in the long term, they still expect supplies to decline. They then address a question about inventory in the channel and the cadence of EPS, stating that the second half of the year is expected to be stronger and explaining the reasoning behind the difference in growth rates between the first quarter and the full year.

The speaker provides context for the company's Q1 results, noting that a third of the usual corporate expense is due to stock compensation. Despite this, the company's Q1 EPS is up 11% year-on-year and their SAM guide for the quarter remains unchanged. The speaker also mentions that channel inventory for Personal Systems and Print is in good shape and that both businesses are returning to more normalized levels. In terms of components, the company expects both Print and Personal Systems to be headwinds for the year, with a slight tailwind for Print in Q1. Overall, they have seen favorable results in the quarter but expect headwinds for the year.

The analyst asks about promotional pricing for PCs during the holiday season and the growth of the Poly business. Enrique Lores responds that they expect similar levels of aggressiveness as before, and are optimistic about the holiday season. He also mentions the positive feedback and opportunities for growth in the Poly business, as well as the progress made in the IT integration.

Erik Woodring thanks the speaker for taking his question and asks for clarification on the factors that drove the upside in Print supplies this quarter. Enrique Lores explains that the easy compare from last year, declining installed base and usage, and increased prices were negative factors, while market share gains were positive. The next question is from Mike Ng, who thanks the speaker and has one question for Marie and one for Enrique.

Marie Myers, speaking to Mike, explains that for the Personal Systems (PS) and Print segments, margins will be at the high-end for the first quarter and then solidly in the range for the full year. This is due to a combination of factors such as mix, improved pricing, the Future Ready program, and headwinds with commodity costs. For Print, there are similar drivers, including profitability, shift in the model, and impact of growth and the Future Ready program. Pricing normalization and steady supplies outlook also contribute to the margins.

The Q4 results for HP show progress and increase confidence in their plan. The company believes their shares are undervalued and a good investment. The call ends with a wish for a happy Thanksgiving to those in the U.S.

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