Good day everyone and welcome to the First Quarter 2024 HP Incorporated Earnings Conference Call. My name is Krista 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. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I will now turn the call over to Orit Keinan-Nahon, Head of Investor Relations. Please go ahead.

Good afternoon, everyone. And welcome to HP's first quarter 2024 earnings conference call. With me today are Enrique Lores, HP's President and Chief Executive Officer and Tim Brown, HP's Interim Chief Financial Officer. Before handing the call over to Enrique, let me remind you that this call is a webcast and a replay will be available on our website shortly after the call for approximately one year. We posted the earnings release and accompanying slide presentation on our investor relations webpage at investor.hp.com. As always, elements of this presentation are forward-looking and are based on our best view of the world and our businesses as we see them today. For more detailed information, please see disclaimers in the earnings materials relating to forward-looking statements that involve risks, uncertainties, and assumptions. For a discussion of some of these risks, uncertainties, and assumptions, please refer to HP's SEC reports, including our most recent Form 10-K. HP assumes no obligation and does not intend to update any such forward-looking statements. We also note that the financial information discussed on this call reflects estimates based on information available now and could differ materially from the amounts ultimately reported in HP's SEC filings. During this webcast, unless otherwise specifically noted, all comparisons are year-over-year comparisons with the corresponding year-ago period. In addition, unless otherwise noted, references to HP channel inventory refer to Tier 1 channel inventory. For financial information that has been expressed on a non-GAAP basis, we've included reconciliations to the comparable GAAP information. Please refer to the tables and slide presentation accompanying today's earnings release for those reconciliations. With that, I'd now like to turn the call over to Enrique.

Thank you, Orit, and thank you all for joining today's call. Let me begin by saying it was a solid start to the year. We delivered non-GAAP operating profit and non-GAAP EPS growth year-over-year and our future ready plan is positioning us well to deliver on our long-term growth targets. I'm going to focus my remarks today on our first quarter performance, our progress against key strategic priorities, and our expectations for the market for the balance of 2024. I will then turn the call over to Tim for a deeper dive into our financials and outlook. Starting with our results, we are managing through a volatile external environment that continues to impact demand across our industry. This is reflected in our top line with net revenue down 4% year-over-year. It's worth noting that the rate of revenue decline slowed for the third straight quarter, which we see as an encouraging sign of market stabilization. We continue to make progress in our key growth areas. We're maintaining our investments in a down market to strengthen our competitive position and there are several bright spots this quarter. We grew revenue and market share year-over-year in gaming. Orco Solutions delivered solid revenue growth and won several new accounts, including large global companies in the energy, retail, and telecommunication sectors, and we drove continued momentum in consumer subscriptions with Instant Ink delivering another quarter of revenue and net subscriber growth year-over-year. Alongside the progress we are making in our growth areas, we are also driving disciplined execution across the business. Non-GAAP operating profit dollars grew 5% year-over-year, and we delivered 11% non-GAAP EPS growth, which was right at the midpoint of our last quarter's guide. This reflects our focus on managing our mix, reducing our costs and maximizing operational efficiencies and we remain…

Thank you, Enrique, for the kind introduction. It's great to be with you all today. We are pleased with the progress we made during Q1 toward delivering on our financial commitments this year. On a year-on-year basis, our revenue declines continued to slow sequentially, consistent with the stabilizing trends we expected heading into the year. Non-GAAP operating profit dollars grew margins expanded in both Personal Systems and Print and non-GAAP EPS grew double digits. We remain on track with our future-ready plan to achieve our gross annual run rate structural cost savings target for this year and continue to reinvest these savings in our growth areas. We also returned a significant amount of capital to shareholders as we actively repurchased shares during the quarter. Top line results were impacted by lower market TAMs in both Personal Systems and Print. We saw cautious commercial demand as macro challenges persisted and a bit more pronounced slowdown than initially expected in consumer following Q4. As Enrique said, HP remains focused on executing each quarter while also driving long-term shareholder value. Our overall results reflect disciplined financial management and investment for sustainable profitable growth all while navigating a dynamic and competitive environment in the near term. We will continue to manage our business prudently while seizing opportunities to improve our market position as we continue to execute on our plan to deliver our fiscal year commitments. Now let me give you a closer look at the details. Net revenue was $13.2 billion in the quarter, down 4% nominally and 5% in constant currency, driven by declines across each of our regions. In constant currency, Americas declined 7%, EMEA declined 2%, and APJ declined 7%. APJ was impacted as soft demand in China continued. Gross margin was 21.9% in the quarter, up 1.7 points year-on-year…

Thank you. And we will now begin the question-and-answer session. [Operator Instructions] And our first questioner today will be from Samik Chatterjee from JPMorgan. Please go ahead.

Hi, thanks for taking my question. And sorry, if I'm having an echo, but sorry, that's coming across at your end as well. Maybe just to talk about the expectations for the year you are outlining seasonally strong second half to be the driver of your full year guidance. Maybe you can match that out on something the geography for market consumer or what's in order to decide where you expect people to be stronger second-half to second-half. Thank you. Thanks for taking the questions.

Of course, thank you, Samik, for the question. Let me take that one. So as you say and as we said in our prepared remarks, we are expecting a stronger second half than first-half of the year, and there are multiple drivers for that. First of all, we expect some recovery in the commercial space. Second, also traditional seasonality consumer is stronger in the second half than in the first half. And then internally, we will see more impact from all of our cost reduction efforts that we will also be having a bigger impact in the second half. If we go for the different segments, especially in the PC space, we also expect to see an impact from the winter reference that as you know, will be happening in the coming quarters, and this will have an impact. And then on the print space, mostly on commercial and industrial, we also expect to see some recovery. Thank you.

Your next question comes from the line of Wamsi Mohan from Bank of America. Please go ahead.

Yes, thank you. Enrique, the share gains you noted in the front end, both in big tank and also in office. What would you attribute that to, given you noted like a very aggressive pricing environment and also a weak period for print hardware. What are some of the levers you're using for some of the share gain.

Sure. There are slightly different, Wamsi. On the big tank side, during the last month, we have completed our portfolio. We have now a very complete lineup of products on the low end to products that will also be working on the home office side. And as we have completed that, as we are launching that into the different markets, we are starting to see the impact of the innovation that we brought to market. On the office side, as we highlighted a few quarters ago, we acknowledged that we have some operational work to do to address and to be able to regain some of the share that we have lost. We have been actively working on that. We have started to make progress. We are starting to see that in the progress that we are making quarter-over-quarter. That has been more relevant in some regions like Europe, China, India. But we will continue to work on that because our goal is to continue to regain share in both categories. Thank you.

Thank you.

Your next question comes from the line of Toni Sacconaghi from Bernstein. Please Go ahead.

Yes, thank you. I just wanted to follow-up on the question about second-half strength. It sounds like you expect your printing margins to fall pretty notably in the second half. You were 20% this quarter. We're expecting to be at the high end of the range in the second quarter to be solidly in the range for the second half that would imply printing margins fall considerably. And that's probably possible given that hardware weakness has been pretty strong the last few quarters, and that may translate into weakening supplies growth and therefore, lower margins. So I'm just trying to reconcile if 65% of your profits are going to have lower margins, perhaps notably lower margins in the second half of the year per your guidance? Why are you optimistic? And if I just roll out normal seasonality right now, it points to 4% decline in revenues. Are you expecting revenues to grow in fiscal '24?

Yes. So let me take that, Toni. First of all, just from a general perspective on print, we do expect to be, as you said, at the high end of the range in Q2 and the -- kind of -- solidly in the range of 16%, 19% for the year. And part of that is driven by what you said where we're trying to drive our mix from a hardware perspective up that does change the rate a little bit. And we aren't changing really what we expect from a supplies perspective where we expect Q2, as I noted in the prepared remarks, to be down mid-single-digits in constant currency and then low to mid-single-digits for the year. So I think that mix is really what's kind of driving the potential for that rate to move back a little bit through the course of the year. From an overall perspective, we expect PS as we said, to be seasonally stronger in the second-half, and that will drive -- and we'll be in the middle point of the range there. And then from a growth perspective, we do expect PS to grow in low single digits, kind of the 2% to 4% range and print will be flattish to down for the course of the year.

And Toni, I think another clarification. When we look at H1 '24 versus H1 '23, H2 '24 versus H2 '23, EPS will be growing around 7% in the first-half. If you look at the midpoint of our guide, it will be growing 4% in the midpoint of our guide. So we are expecting growth, but the growth will be slightly lower with the projections that we're making today in the second-half. And as we have said before, we've managed the company to grow operating profit dollars. We don't manage it to deliver on the margin guide we provide. We provide it because we know it's important for modeling, but this is not what the way we manage the company internally.

Thank you.

Thank you.

Your next question comes from the line of Brian Lu from UBS. Please go ahead.

Hey, thank you for taking the question. This is Brian Luke in for David. So in your view, what are the key drivers and milestones for AI-enabled PCs to get traction with commercial customers. Are customers currently in possession of devices today based on the financial benefits of more robust PC.

So first of all, let me say that we remain extremely excited about the opportunity that AI PCs will bring in terms of both the customer value that they will deliver in terms of security, in terms of latency, in terms of cost and also the impact it will have over time in the company. I think milestones come from two -- three different angles. First of all, we need to deliver the hardware to be able to support these new models, and we are working on that with the key silicon providers to make sure that we have a wide range of products and a very solid portfolio. Second, we need to make sure that the applications support that and we are working with all the keys of our companies again to make sure they understand the new capabilities and that they build them into their applications. And third is training both in terms of our customers, but also in terms of the sales teams, either HP or the resellers that will be selling that. And we are working on all fronts. Our projections continue to be that three years after launch, the penetration of AI PCs will be somewhere between 40% and 60% of the total sales that we will be making. And that growth is going to be gradual. There will be some impact in '24. But since this will be at the end of the year, fiscal year for us, the impact will be modest. If the impact would be bigger in '25 and the impact will be bigger in '26. But really from both an innovation and customer value is going to be very significant for our portfolio.

Your next question comes from the line of Erik Woodring from Morgan Stanley. Please go ahead.

Great, thank you so much for taking my question. Enrique, you know, again, nice performance on the supply side, you outperformed expectations for a second consecutive quarter. I'm going to ask you the same question I asked you last quarter, which is just if you can talk about the four-box model and kind of the different factors that are impacting supplies performance? And then if we kind of port that over to the rest of the year, you've been flat to growing over the last quarters on the supply side. What are the factors that are driving the deceleration to low to mid-single-digit declines for the entirety of the year, implying the rest of the year deteriorates from here? Thanks so much.

Thank you, Erik. And my answer is going to be very similar to the answer I gave you last quarter. So first of all, let me also share that, as we have said many times, looking at quarter-on-quarter comparisons is not a bad way to understand the health of the projections for the Supplies business because each quarter, many things happened that have an impact on the growth comparison quarter-on-quarter. And second, we are not changing the long-term projections for supplies of low to mid-single-digit decline nor the projections that we have for 24, but also, we expect it to be low single low to mid-single digits and no changes in our projections. In terms of what of the performance this quarter, there are as always multiple factors. First of all, we continue to manage our share and to gain share of supplies. This has always a positive impact. Second, pricing, we have made some pricing adjustments that are having positive impact and also at last quarter, we need to acknowledge that the compare is easy because supplies were declining in Q1 '23, so that comparison is also positive. On the other side, again, similar to what we discussed last quarter, we continue to see negative impact from usage and negative impact from the size of the installed base that has been shrinking. And then maybe to close a comment on channel inventory that I know is something of interest, channel inventory for supplies and actually for the rest of the business, stays in a very healthy position. So we are in a good position there. Thank you.

Your next question comes from the line of Amit Daryani from Evercore ISI. Please go ahead.

This is Lauren on for Amit. I was wondering if you guys could talk a bit about what gives a few conviction for the recovery in the commercial space given the pockets of weakness that you guys saw in Q1? Thanks.

Thank you. So first of all, I think we -- I would like to start by acknowledging that it's not only our projection, but it's really the projection that we see from industry analysts and also from the rest of the key players in the industry and there are multiple factors. I mentioned before the fact that we expect to see more impact from the Windows refresh cycle that is starting, and this will have a bigger impact on the second-half. We also expect to see a positive impact from pricing and mix, given that we expect component cost to increase, but this will also have a positive impact. And then when we look at what we saw this quarter, we have seen more stability on the SMB space. We have seen also more stability in the education space. We started to see growth in Europe on the PC side that has not happened in a long time. So while we continue to see some areas of weakness like China or, for example, the federal business in the U.S. that we saw softness in January. We continue to believe that the overall market will be improving in the second-half. Thank you.

Great. Thank you.

Your next question comes from the line of Asiya Merchant from Citigroup. Please go ahead.

Great. Thank you for taking my question. If I may, just given the conviction that you have that commercial will see improvement, maybe if you could talk a little bit about the peripheral side of your business, how that track. And overall, how did the growth portion of your business do as we started the year in '24, in fiscal '24?

Sure. Thank you, thank you, Asiya. So let's see, in terms of peripherals, as you are indicating, they have been impacted by the cautiousness that we have seen on the commercial side. And as the commercial market will recover, we expect them -- they will be recovering as well. And this is why we have continued to invest in innovation in these categories because we think that long term is a great growth opportunity for us, and this is confirmed both by our customers, our clients and also by resellers. In terms of the growth areas we -- several of them started to grow, which was really a very positive sign. We -- and for example, we -- for me, personally the fact that both services businesses, both our Workforce Solutions business, and our Consumer Services business grew in Q1 is a very important sign of recovery, also because of the strategic importance that this business has for the medium and long-term for the company. And I think something I would like to highlight to close is tomorrow, we are going to be launching on the consumer services side, the first subscription where we will be integrating hardware into the plan is something that we shared at our Investor Day. Finally, we will be releasing that tomorrow. And again, it's an important step because you know that one of the key directions we have for the long term is to offer our full portfolio as a subscription. And this will be the first time we are offering for consumers our hardware as well, and you will see us expanding the line over time.

Your next question comes from the line of Mike Ng from Goldman Sachs. Please go ahead.

Hey, good afternoon. Thank you very much for the question. I just wanted to follow-up on the commentary around Personal Systems pricing. What drove some of the pricing dynamics in the quarter? I know you guys called out improved commercial mix, but there was also an unfavorable mix shift in consumer. Could you provide a little bit more color there? And maybe just talk a little bit more about your outlook for ASP for the full-year, whether for the industry or for HP. Thank you.

Sure. So let me start and maybe Tim will be making additional comments. When we look at Q1 performance quarter-over-quarter, which we think is the best indicator to look at -- to monitor progress. PC prices were flattish, driven by commercial. Commercial prices were up and the mix moved a bit to consumer, when -- which means that from a mix perspective, we saw a positive impact. But at the same time, rates were down, mostly driven by price pressure that we saw in the low end of the portfolio, especially in the consumer side. And we think that this is a consequence of some of the softness that we saw in some of the consumer markets during the last quarter. But going forward, as commodity costs will increase and also as we see price as mix will evolve more towards commercial, we expect to see an overall increase of PC prices.

Your next question comes from the line of Krish Sankar from TD Cowen. Please go ahead.

Hi, thanks for taking my question. This is [Stephen] (ph) calling on behalf of Chris. Enrique, I wanted to ask you about the print business. In terms of the [Technical Difficulty] that you come [Technical Difficulty] your Japanese peers, I was wondering if you're also seeing that applied on the commercial and supply hardware and also supply portion of your commercial business, especially within the context of any long-term managed contracts and work for solutions? Thank you.

Thank you. So far, the pressure that we are seeing is mostly on the consumer side. And this is very similar to the trend that we explained last quarter where we -- given where the exchange rate between dollar and yen and euro and yes. Clearly, this is giving a strong advantage to some of our competitors in that space, and we are seeing that in the prices that they are going after. And this is why in the consumer side, you have seen us especially on the more traditional categories we have decided not to go after certain deals because these will be unprofitable customers that we are not interested in targeting. On the commercial side, we have seen more stability. There might be some risk of stabilization. We have some of that in our modeling, but all of this is built into the guide that we have provided today.

Thank you so much.

Your next question comes from the line of Aaron Rakers from Wells Fargo. Please go ahead. Aaron, your line is open.

Hi, sorry about that. This is Jake on for Aaron. I was just hoping you can get some additional color on your industrial graphics business. It seems like over the past few quarters, you're seeing a little bit more momentum there. So I was just hoping to see how you need it throughout the remainder of the year?

Yes. Thank you. So you said it well. We have started to see some momentum in that part of the business. especially in the labels and packaging side, we have seen some good recovery. And we -- you know that we -- in May '24, there is this big show called [Drupal] (ph), which is like the print -- major printing event and happens every 4 years. We are -- we have prepared a lot of new products and services that we will be launching them. And they usually have a fairly positive impact in the quarters after that. So we are expecting to see that happening in '24. But good recovery and very good expectations for '24 as Drupal as we will be launching a new set of products and solutions there.

That concludes the question-and-answer session today. I will now turn the call back over to Enrique Lores for closing remarks.

Perfect. Thank you. So thank you all for joining today. And I'd like to close with 3 messages. First of all, as you saw, Q1 was a solid quarter and a solid way to start the year, where we grew both operating profit and EPS. We remain positive about the outlook that we provided a few quarters, a few months ago about the rest of the year. And as we said, we expect -- continue to expect a stronger second-half than first-half. And we also remain very confident in the long-term, especially driven by the opportunities at both hybrid work and AI are bringing to us as a company and the innovation that we are going to be launching around that. So Again, thank you for joining us today and looking forward to continue to talk in the future. Thank you.

This concludes today's conference call. Thank you for your participation, and you may now disconnect.