The moderator introduces the Second Quarter 2024 HP Incorporated Earnings Conference Call and hands it over to Orit Keinan-Nahon, Head of Investor Relations. She reminds listeners that the call is being recorded and a replay will be available. She also mentions that the presentation is forward-looking and based on current information. She cautions listeners to refer to disclaimers and SEC reports for more detailed information. The financial information discussed reflects estimates and may differ from actual amounts reported. All comparisons are year-over-year.

Enrique Lores, CEO of HP, begins by thanking the participants for joining the call and providing an overview of the company's goals for the fiscal year. He discusses the company's solid performance in the second quarter, including growth in non-GAAP operating profit and EPS, and a slowdown in the decline of net revenue. Lores highlights the recovery in commercial PCs and progress on strategic priorities, such as investing in AI and hybrid technologies. He then hands over the call to Tim for a more detailed financial analysis and outlook.

During the second quarter, the company showcased over 100 AI-enabled solutions at their Amplify Partner Conference, which attracted top partners from 95 countries. They also announced the HP AI Creation Center and a collaboration with NVIDIA to integrate pre-trained models and software into their AI studio tools. The company also launched the industry's largest portfolio of AI PCs and a new color laser jet series. In addition, they expanded their portfolio in hybrid systems and workforce solutions, and introduced an AI training and certification program for their partners and sales teams.

In this paragraph, the author discusses the success of their recent product launch at the Microsoft Copilot+ PC event, highlighting the positive reception and potential impact of their new AI-powered devices. They also mention their partnership with Scuderia Ferrari and their commitment to sustainability, earning a AAA rating from CDP for the fifth year in a row. The author then teases further details about the performance of their various business segments in the second quarter.

The Personal Systems division of the company saw growth in revenue and profitability, driven by market growth and commercial recovery. The team focused on driving profitable PC share in high-value categories and investing in key growth areas such as gaming and services. The company is confident in the long-term growth potential of the hybrid systems market, especially with the introduction of AI-enabled PCs in the second half of the year. The company has a comprehensive portfolio of AI-enabled devices and is also innovating with software and security solutions. In the Print division, revenue was in line with expectations, with a slight decrease year-over-year.

In the second quarter, the company saw soft demand in certain regions and faced competitive pricing in the consumer market. However, they were able to maintain a 19% operating profit and make progress in regaining profitable share in the printing industry. They saw growth in home and office share and in key areas like consumer services. The company is also focused on accelerating the adoption of digital technologies in industrial graphics and expanding their portfolio. 3D printing was impacted by longer purchasing cycles, but the company remains committed to their future ready strategy and expects to deliver on their growth and cost savings targets. They also plan to return a significant portion of their free cash flow to shareholders.

In the third quarter and second half of fiscal year '24, the demand environment is expected to remain competitive. However, the company is confident in their progress and anticipates a stronger second half due to commercial PC refresh and plans to gain share in Print. They also see opportunities for growth in key areas. In the second quarter, the company delivered solid financial results, with improvements in revenue, gross profit, operating profit, and EPS. They also managed to generate solid free cash flow while reinvesting in key growth areas and managing a mixed market environment. Net revenue was $12.8 billion, down 1% in both nominal and constant currency, with growth in Americas and declines in EMEA and APJ, which was impacted by soft demand in China.

In the second quarter, the gross margin for the company increased by one point due to lower costs and cost savings, but was partially offset by unfavorable mix and competitive pricing. Operating expenses increased due to investments in variable compensation, but there were also cost reductions. The company's non-GAAP operating profit increased by 2%. Personal Systems revenue also increased by 3%, driven by higher volumes in the commercial sector. Consumer revenue decreased by 3% while commercial revenue increased by 6%. The average selling price remained flat due to a shift towards commercial and lower-end devices.

In the first quarter of the year, our market share declined due to increased competition, but we saw improvements in high value categories like mobile workstations and commercial premium. We are focused on driving profitable revenue and share growth in both consumer and commercial markets. We launched a next-gen AI PC and have plans for more AI PC launches this year. Our Personal Systems division had a $508 million operating profit and 6.0% operating margins. In Print, revenue decreased by 8% due to declines in hardware and supplies. Industrial Graphics saw growth in revenue due to supplies and service, offsetting weaker hardware demand. Commercial revenue decreased by 12% and consumer revenue decreased by 16%.

In the big tank, the company saw an increase in volumes and market share, offsetting market softness and competitive pricing. Revenue and subscriber growth were also achieved in consumer services. Supplies revenue was in line with expectations, and operating profit and margin remained flat due to cost management efforts. The company is on track to achieve its cost savings goals through core business efficiencies and digital transformation initiatives, such as implementing AI tools and optimizing marketing capabilities.

In the second quarter, the company saw a decrease in the cash conversion cycle and returned $369 million to shareholders. They plan to continue simplifying their portfolio and expect stronger performance in the second half of fiscal '24. They are narrowing their non-GAAP EPS outlook range but remain focused on improving their cost structure and investing in growth businesses.

The company expects OI&E expense to be around $0.6 billion in FY'24 and free cash flow to be between $3.1 billion to $3.6 billion. Personal Systems revenue is expected to increase in Q3 and margins to be towards the high end of the target range. For FY'24, Personal Systems margins are expected to be solid and Print is expected to stabilize in the second half of the year. The company provides an outlook for Q3 and FY'24, with expected non-GAAP diluted net earnings per share in the ranges of $0.78 to $0.92 and $3.30 to $3.60, respectively. The operator then opens the lines for questions.

Enrique Lores, CEO of a company, is answering questions in a session. The first question is from Erik Woodring of Morgan Stanley. He asks about the Print business, which has been declining mid-single-digits year-to-date, but Lores expects the market to stabilize in the second half of the year. Woodring asks why Lores believes this, and if any underlying factors are changing. Lores mentions strong competition in the consumer and office space, but expects the market to stabilize due to an easier comparison to the second half of 2023.

The company is confident in their projected number for printer sales, citing stable usage and cost reduction measures as drivers. They expect to see share gains and maintain their strategy of profitable growth. On the printing side, operating margins were down slightly due to investments in variable compensation, but supplies gross margin rate was not a major factor. The company did not provide specific guidance for second half margins.

The company expects to be in the upper half of their long-term range for Print in Q3 and for the full year. This will be driven by a 2H sequential improvement in hardware and a decline in supplies. In the Personal Systems segment, there was growth in both consumer and commercial units, with strong performance in the commercial sector. The growth was consistent across regions and business segments.

The company saw weakness in Asia, particularly in China, but expects momentum to continue in the second half due to the need to refresh the installed base and deals driven by Windows 11 Refresh. They also anticipate improvement in the federal business in the second half due to released budgets. The company's philosophy and strategy regarding strategic buys has not changed, and they will continue to evaluate opportunities and offset them with efficient inventory management.

The speaker, Enrique Lores, discusses the company's plans for the future and mentions their focus on incorporating AI into their products. They expect AI PCs to represent around 10% of their shipments in the second half of the year and to have a larger impact in fiscal years 2024 and 2025. They anticipate AI PCs to make up 40-60% of their sales in three years and to increase average selling price by 5-10%.

During a conference call, Wamsi Mohan from Bank of America asked Enrique Lores about the signs of commercial recovery in PS and the impact of Windows 11 adoption. Enrique confirmed that they are starting to see the impact of Windows 11 refresh in their funnel and opportunities from enterprise customers. He also mentioned that the aging of the installed base is contributing to the strength in commercial sales. In terms of seasonality, Enrique stated that they expect high-single-digit growth in PS revenue and slightly below typical seasonality, with continued growth in Q4. He also mentioned that their margins are on track due to their Future Ready program.

An analyst asks about the flow of savings across HP's Personal Systems (PS) and Print businesses, as well as the company's cost savings and pricing strategies. Enrique Lores and Tim Brown respond by saying that they expect high-single-digit growth in Q3, but slightly below normal seasonality. They also mention that the Future Ready savings are impacting both businesses and allowing for reinvestment in key growth areas, such as AI. The analyst then asks about PC margins during the Refresh cycle, to which Lores and Brown say that Gen AI and AI PCs will likely make up a larger portion of the mix.

Enrique Lores, CEO of HP, stated that the company's PC business is expected to stay in the 5% to 7% margin range. He also mentioned that the company has multiple variables that may affect this projection, but this is their current view. An analyst asked about battery life for future AI PCs, and Lores responded that the company's next-generation AI PCs have a battery life of over 30 hours due to the use of ARM technology and large language models that optimize battery consumption based on individual usage. This is a key differentiator for AI PCs.

Samik Chatterjee asks Enrique Lores about the outlook for the China market and if there has been any recent improvement in demand. Lores responds that they have not seen any improvement and are not projecting any for the second half of the year. He also mentions that India has been a positive market for them. Chatterjee then asks about the poly business and if enterprises are starting to invest in video collaboration again. Lores responds that demand has been limited and enterprises have been limiting their investment in the overall hybrid systems business.

The company is seeing positive momentum in video conferencing systems and expects this trend to continue in the second half. They believe the hybrid work model will create growth opportunities in the future. In regards to PCs, they are projecting strength in the commercial sector but are more cautious about demand in the consumer sector, leading to a more conservative outlook for the second half. The company has not changed its approach of returning 100% of free cash flow to investors through share buybacks, unless they identify better opportunities for return on investment.

During the recent earnings call, HP's CEO Enrique Lores and analyst Toni Sacconaghi discussed the company's revenue and projections for the future. Lores stated that their leverage will remain below two and they plan to return 100% of free cash flow. Sacconaghi questioned why revenues are still 10% below pre-COVID levels, to which Lores attributed to a smaller print market and a goal to regain share in the PC market. Lores mentioned that they will provide more detailed projections for 2025 in the coming quarters. The next question came from Asiya Merchant with Citigroup, who inquired about the split between commercial and consumer sales in the second half of the year.

Enrique Lores, CEO of HP, discusses the impact of AI PCs on commercial and consumer markets. He notes that the launch of new products will have a small impact in the second half of the year, with stronger traction in consumer markets. However, he expects the penetration in commercial markets to grow in 2025 and 2026. In response to a question about subscription revenues, Lores does not disclose specific numbers but mentions that there was growth in net subscribers and revenue in the consumer services space in Q2.

The company has been expanding their portfolio to include paper and printers in their subscription model, which has been successful in increasing their value proposition and profits. There has been no major structural change in inventory levels, with the increase being attributed to strategic buys and sea shipments. The company does not expect this to have a long-term impact on their inventory levels.

Enrique Lores, CEO of HP, thanks everyone for joining the call and summarizes the company's solid Q2 and first half of the year. He notes the recovery in PC sales, particularly in commercial PCs, and expects a stronger second half. He also mentions progress in execution and growth in their businesses, giving them confidence in their ability to create long-term value. The call concludes and participants can now disconnect.

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