HP Inc. (NYSE:HPQ) UBS Global TMT Virtual Conference December 8, 2021 3:00 PM ET

Company Representatives

Alex Cho - President of Personal Systems

Conference Call Participants

David Vogt - UBS

David Vogt

Great! Good afternoon everyone, and good evening for people in Europe, and thank you for joining Day 3 of the UBS Global TMT Conference. My name is David Vogt. I am the U.S. Enterprise Hardware and Networking Analyst here at UBS and we are pleased to have with us today Alex Cho, HP’s President of Personal Systems where he leads a roughly $40 billion business spanning PCs, display, accessories and services. So Alex, thank you again for joining today.

Alex Cho

Happy to be here.

David Vogt

And before we get started, HP asked me to read a brief Safe Harbor agreement, so today's discussion include forward-looking statements that involve risks, uncertainties and assumptions, which are further described in HP's SEC filings, including HP Form 10-K and 10-Q. HP assumes no obligation and does not intend to update any such forward-looking statements. For more information, please visit HP's Investor Relations website at investor.hp.com.

So with that out of the way, thank you again Alex.

Alex Cho

Let’s start.

Question-and-Answer Session

Q - David Vogt

And so I thought maybe it would be helpful for investors jumping in here, who haven't really spent a ton of time on the PC market and your story. I wanted to before we get into the deeper dive into the PC business, I wanted to start with the most recent quarter.

In Q4 personal systems was up 10% on a constant currency basis, you know meaningful improvement from the third quarter, but the results, the underlying results are so much different when I look quarter-to-quarter, you know as price was a key driver up 17% quarter-over-quarter. So maybe just looking to level set the discussion, you know to get people sort of focused on where we are. Can you kind of give us color around what happened in the quarter from an ASP perspective and maybe any sort of commentary on mix whether it’s Chromebook, consumer versus commercial and any sort of like-for-like considerations you think are relevant that happened in the quarter?

Alex Cho

Yeah, so happy to. So first is, I think as you know the narrative around those industries is heavily around two things. One is, increasing demand that we believe will be structural, but also a constrained supply environment. So compares, dynamics, quarter-by-quarter are heavily oscillated by supply constraints, etc., so I need to put that out.

For us in particular for Q4, we saw strength driven by really a combination of both mix and rate and we've been talking about this. We talked about this in our Analyst Day on mix. We are actively managing our mix to a more profitable and there's a more commercial focus to our mix. As well what we – what you’ll have seen is we've been very disciplined in managing pricing, really around the world and across all segments. And a combination of both has driven the type of performance you saw in Q4.

David Vogt

Great, okay. And so you just mentioned demand, supply availability. That seems to be the most hotly debated topic I would say in our coverage group over the last, you know call it four to eight weeks. Maybe we could just start with, what we saw from a hybrid learning, hybrid working environment over the last 12 to 18 months, and what we are seeing from a potential change in behavior, at least maybe structural change in behavior going forward with these new variants that unfortunately seem to keep cropping up and companies kind of pushing up sort of the day of reckoning when you have to return to the office.

So when you think about that sort of dynamic, what's your sense of what's your view on how, maybe not next quarter, but when we think about calendar ’22, calendar ’23, calendar ’24, kind of what's the philosophical view that underpins your view of your business, meaning we're permanently hybrid and that consumers were kind of talking about this in the pre-conference call, the structure of work-at-home environment versus structure of work in-work or in the office. And just maybe kind of level set us on how you're thinking about how this is going to play out over the intermediate term to potentially longer term.

Alex Cho

Yeah. So first is, COVID definitely has accelerated hybrid, and our view is that, that change is something that's not just a cyclical one time, but it's structural and that applies to multiple elements of the categories you play in, so let’s talk about work.

Work will continue to be – even when people can travel more, it will continue to be more hybrid. All companies that I know are working through policies around employees will have telework, hybrid work, full time on site, different types of options, and that is a structural change that will require on-going technology enablement to support.

Great example is that, almost all companies are looking at (a) how to equip their employees now that they are going to be working more at home. So 75% of them are actively investing in improving their home set-ups. And at the same time, the majority of IT departments are looking at how do you reconfigure office spaces to be far more collaborative. Those are structural changes in how people will work. People are reducing travel spend and assuming that technology has to be the replacement to enable that reduction, so that's one area.

Second area is, all things related to education and learning. Even when students will be able to go back in the classroom and many have been, particularly K through 12, the ability to actually reach resources and teachers and for children to learn, students collaboratively, remotely, I mean COVID was really an accelerant for recognizing the breadth of learning and resource that can happen in a hybrid environment. That's a structural shift and we only expect that to continue.

And you think about the consumer space where, Wow! Look at gaming. Gaming is a huge secular shift even ahead and just even more, because it's the way people connect, socialize, entertainment is mixing in, and suddenly these categories, the PC category becomes the center of how all of that's happening.

All of that we see as structural accelerants to the markets that we play in and quite frankly we're still very under indexed and underpenetrated in PCs that enable it. Our language has been the PC is essential, for work, for learning, for play, even think of Telehealth and yet while penetration rates have been increasing, there's still room for growth. And we see that all as good news for this ecosystem that we are participating in.

David Vogt

So maybe just getting a little bit more specific. At the Analyst Day and during your most recent earnings call, you know the company has talked about and you talked about thinking 2022 is going to be an up year for the industry. Some of your peers have echoed those comments, some of you the broader ecosystem, whether it's the CPU providers, productivity tool providers, so on and so forth, but the market generally speaking, seems to have a high degree of skepticism around sort of that trajectory given where we came from a couple of years ago to where we are today.

So if I look at say 340 million, 350 million units this year as a reasonable benchmark, it sounds like you think that the company's public about this – that is sort of a new normal and this is sort of the new baseline, and these have been sort of many be bandied about that this is a constrained number. Kind of maybe you can help us understand how you're thinking about, and especially in light of sort of that constrained comment as well.

Alex Cho

Yeah, so first is, if you refer back to our Security Analysts Day. First, as we look forward given the drivers that I just mentioned, the PC being essential in how you work, learn, play even how you connect with other people on an ongoing basis, we see that the total addressable market for these categories as being structurally larger and will continue to grow, and when we share that, as we look forward the market is going to be $560 billion, that's a 40% increase versus pre-pandemic expectations. So all of that first is stating we're operating in a larger and a continuing to grow, if that's what you say, and a market that will continue to grow.

Secondly, you are right though, that we are operating near term in a supply constrained environment. So again, what I said was those two dynamics of this business, underlying structural demand growth, but also supply constraints; we've shared that. That supply constraint is heavily in ICs that affects a PC ecosystem, but the much larger ecosystem as well, automotive is one that gets a lot of attention, and we expect that supply constraints to continue at least through the second half or into the second half of the year.

So we are an environment where demand is larger than supply. We – if our backlog as we shared is quite elevated and it's a backlog that reflects that delta between demand and supply. And so that's why some of the numbers that you hear, whether its 340 or 350, is a supply constrained view. However again, we think that as we work through that, all the drivers around growth will continue to play out, which will be favorable as we think of ’22, ’23, ‘24 and so on.

David Vogt

So maybe along those lines, I know ’22, you know this coming four quarters is going to be a little bit difficult to compare to prior year, not just from a level perspective, but from a, I think you guys used the word linearity, the term in the most reason call. Let's say we do get past 2022 and supply does improve and we come into a more normalized balanced supply demand environment, should the PC business or the personal systems business look similar to the business pre-COVID on a cadence perspective. Maybe not getting into specific numbers, but – or have we shifted the purchase behavior that maybe that peak and that trough is a little bit less and its more muted over the long term, not just in 2022, and so you have a better predictable, more visible model in the longer term.

Alex Cho

Yeah, so great question. And so when we look at this from a macro view around these type of levers, the first thing for those who are part of the PC business or have watched it, one key element is refresh cycles, and refresh cycles are reducing or they are getting faster. And one of the key drivers for that is that they are recognizing, I need more than a PC. I need a device that will help me show up on video, have my voice heard, to be able to be in a maybe in a Zoom call while having other tabs open and not slow down, and that is driving refresh at a faster rate which is a positive driver to the overall cadence of this business. By the way, audio and videos one of the top drivers for refresh, and that will continue to be the case.

Second driver that you see in this, is there is a continued shift from desktop to notebook or mobile or laptop, form factors. And in general the refresh cycles of notebooks are faster than desktops. That's another larger shift that’s on driving a cadence on difference in here.

The third thing to note about this and it is really an important part of how we think about this. We don't see our participation in this market as a PC player. We see ourselves as a participant in hybrid work, in gaming and as we’ve shared that means, yes, we're participating though PCs, but we are also participating with peripherals and we're also participating on services and new digital services that allow us to deliver really meaningful new experiences. And I say all that, because for us we look at a peripheral business, the refresh rate of a peripheral is 5x faster than notebooks.

So I just gave you PC data points about a cadence. For us then there is a peripheral refresh rate that’s accelerating and in particularly the segments that we are focusing on, gaming, that's even faster, because refresh rates of gaming PCs and gaming peripherals are faster than the average ones.

So again, there are multiple dynamics at play here. All of it driven by the PC being essential in this new world of hybrid work, learning and playing. Our categories in PC's are larger, continuing to grow with a faster refresh rate, but our game is really – our participation is really in these experience opportunities where PCs, peripheral, services are how we're going to deliver breakthrough experiences and in that we see just a really strong and optimistic view of what this category can be.

David Vogt

Great! So maybe I just want to drill down a little bit into the personal systems growth and sort of that refresh rate. So when you think about the compute side of it, which is what I think everybody thinks of right off the bat, right. That’s the easy more tangible sort of growth driver for the company, and I think you've been on record saying you know the target is to increase penetration, faster refresh cycle which is articulated. I guess that backdrop and I think you have targets out there that suggest you know the compute portion is growing let's say a 40 basis points CAGR for the next two to three years.

Is that – does that reflect – I guess that reflects the refresh, the migration from desktop to notebooks. I would imagine a slightly faster growth dynamic in commercial than maybe consumer or correct me if I'm wrong, and so it captures sort of those positive tailwinds that you just prefer to reference and that on a unit basis, my words maybe not yours, industry kind of is flattish for the foreseeable future just on unit basis, so maybe some revenue uplift. Is that a reasonable way to think about it?

Alex Cho

So yes, if you use that 40 basis point growth, so I think you're using that as the same flattish. So first is what we are sharing in data that is being used from market sizing, IDC and we used that as a baseline scenario. However, all the drivers that I mentioned, we actually think provide drivers for acceleration of that base line growth rate, and then we just repeat them. Because it is very important in order for us to make sure we have a baseline, we have a baseline plan that is much larger or will continue to grow.

However, as penetration rates accelerate, that will grow that growth rate more, as you see an increasing shift to more these mobile form factors, that will grow. And in fact all of these use cases that we talked about, that will also help accelerate as we really innovate reasons to drive and enable refresh.

Let me just give you another example. The penetration rate today, most of us may be familiar with what they might be. They are growing in developed markets, still room to grow. Think about emerging markets? We're so focused, more generally as HP around addressing the digital divide. PC penetration rates are very low and so with both the growth in broadband, connectivity and new platforms that we can deliver to help on education, that is also more topline accelerant to that baseline growth rate that we're using as a starting point. So we think that that is only the baseline from which we access scenarios by which we see that growing faster.

David Vogt

Got it, okay. So I appreciate the correction that you are going to grow faster than the market and when you think about sort of the penetration, let's say in the developing world. We’ve seen numbers that used to be obviously one PC per household, survey work, you know in the U.S. and other large markets. Purchase intent has been steadily climbing throughout the pandemic and actually it’s been relatively strong even before omicron. So you know as people have gone back to work, purchase intent still seems to be relatively strong.

Maybe if you can share with us how you are thinking about it. Obviously we are never going to get to one for one device to individual, but I mean are we on the path to maybe two per household, two plus per household. I know it’s a really difficult question to answer, but we're just trying to think through what the runway looks like over the next three to five years given sort of this change in behavior that seems to be somewhat permanent?

Alex Cho

Yeah, so let me give you multiple layers to that, because this is an area that we got a lot of passion on. So first is, we absolutely believe that the PCs essential for these use cases. Again, and that's not a short term thing.

That being the case as we mentioned, like we've been very clear the opportunity is for the industry to enable one PC per person, which you said. I think it was in the 80’s right, that that ambition was one PC per household. If it's so essential, then we need to get one PC per person and we are still under indexed even though penetration rates have been growing, both in developed and emerging, and we see that. That is a huge driver for us on a longer term basis for this entire category.

And then, as we think about what that means, that means that number one, the entire market size will be larger, but then there's such a rich opportunity for innovations to really accelerate that. Again, audio and video, video collaboration like this is a very strong driver. People are saying, ‘even if I have a PC, I need it upgraded one.’ Or you have the environments where it's maybe their first device and they're not – they're recognizing, they are not going to be working on their resume on their smaller phone. They will work on their resume or they really want to be absorbing contents in a larger form factor, that will drive it is.

This type of entertainment, just as another example, you know what’s interesting? In countries around the world, more than a TV, people are looking for getting a laptop per bedroom, so they can watch Netflix or which is amazing, because it's showing the intersection entertainment into this space.

There's other adjacent points to note, like in particular in developed markets, people are moving beyond one PC per person to two. You know there's one that the companies are saying, that I'd like to make sure that you have for company purposes and not make do with their consumers. So we are we are seeing places where people are even getting beyond one. All of that kind of combines into this macro, growth trajectory on top of a larger size base, by which we think that this category is operating in.

David Vogt

So you brought up a great plan, that was going to be one of my next questions. When you think about the dichotomy between consumer and commercial PCs, I think the market, the investment, the investor community has a preference for commercial. Typically a higher, rich, more rich configuration, typically a better price point. When you think about let's say, I’ll use UBS as an example. They want to send me home with a device, and that's going to be for security reasons, keeping people off the network, the whole suite of concerns that they have.

In your mind is that considered, that's a commercial purchase. So as we have more PC's in the household, does it skew more towards like this weird hybrid where it’s not really consumer PC's in the household, but it's more commercial PCs with more commercial specs, more commercial like specs. So the configurations will be rich, price points maybe better, then ultimately margins are better as well. I mean, is that the right way to think about it?

Alex Cho

Yeah, so quick answer is yes, but let me provide some color on that, because this is really an element of the big shift that is we think very favorable for us up.

So largely speaking, yes, commercial has a lot of upside. I mean I know we’ve been talking about commercial. We see that in particular in ’22, but going forward and you know that actually plays to our strength very well, because where we are very strong is in the commercial category, so that's a very favorable shift.

That being the case, I think the larger dynamic that we also see is really this blending of categories, you know or this blending of segments, consumer commercial and your use case is a good one. Hey! I have a PC that is from a corporate issued or corporate minded, and you now might be using that in the home. At the same time, there are some of the types of experiences people have on their consumer devices, they are looking at for their commercial devices. And that really plays to what we've started to do and given our strength in both the consumer and commercial space, we think we can do really uniquely for customers.

In particular, we have very strong consumer assets. Our ability to design devices, we've won more awards and continually winning design awards. We are taking all that capability into our commercial line.

Vice versa we are taking our commercial grade security manageability assets. If you are a consumer, you want that too, because your word is privacy. You want to make sure that everything that you do for banking or etc., that you have the level of security that a large enterprise environment might be thinking of consumer example. And so our ability to take the strength of both is really the core part of where we think we can lead.

Our Dragonfly Notebook is a great example. When you look at it, people don’t know if that’s a consumer or commercial device. It looks as exciting as a consumer device. It has the type of enterprise grade security and manageability as you would expect maybe in a commercial device. And guess what, this one is a part of the world's most sustainable PC portfolio. Great sustainability we are doing as well. So we are so excited about how these things are really moving into a direction that plays to strengths we've had in the past.

David Vogt

So you know, I hadn’t thought about this, but you just made an interesting point. When I think about the future of your portfolio and the blending of the specs and the really difficult – the difficulty that people are going to have to determine whether or not this is a consumer notebook or commercial notebook, what does that mean for your distribution? I would imagine that you want to be more focused on where you can make the gross, the most gross profit dollars, right, as the specs blend together.

So does that mean that more of your units are going to be skewed towards commercial going forward, where you're really strong and commercial likely grows faster? And then maybe, there's some simplification of the consumer portfolio that needs to happen where you know more and more devices are being sourced from the commercial channel even at home, and so maybe some of your traditional retail partners will have fewer skews and maybe less of a sort of assortment going forward. I know that maybe a little bit out of my filed, but that’s just kind of how we're thinking about it.

Alex Cho

Yeah, the way I would share with our plans is we actually believe that we will leverage the breadth of our portfolio and the breadth of our go-to-market, whether it's more consumer bias, commercial biased or with those partners online.

Our approach is really to recognize that while some of the needs are converging, the unique strength that we have is both portfolios and the unique strength that we have is a go-to-market to reach both segments. And so for us, I manage both portfolios, both go-to-markets, so we can make sure that we are using strengths in one and add it to the other, but we actually want to maximize the coverage and the breadth of what we can offer, because they're unique dynamics. If you are a consumer, yes, you will want more of the security attributes we have.

But you will be first looking at attributes that as a consumer, let's say you're a gamer, you're looking for. If you are a commercial or corporate employee, yes, absolutely, increasingly you want a device that has a level of consumer experiences, but for sure you're going to want that thing to have the level of commercial attributes like ruggedness or the type of manageability that fitting into your corporate environment that you're going to want.

So there's room for both, knowing that the strengths and attributes of them are also being shared.

David Vogt

Okay, got it, that's helpful. And maybe just digging down a little bit into the numbers a little bit more. So you guys are confident enough to raise your margin targets for the personal systems business at the Analyst Day to 5% to 7%. We get a ton of questions on the sustainability in light of component pricing and where margins get. And so maybe can you just – we'll start there.

When we think about 5% to 7% margins, right now the business, you know given the supply chain constraints, the demand strength, we're coming along at the high end of that range. Maybe can you kind of help us think about when or hopefully if component prices do come down as supply chain gets better, how that will flow though some of the personal systems business and from a larger perspective.

How much do you hold on to today, what’s the lag, and how should we think about it as we move to ’22 and ’23?

Alex Cho

Yeah, why don’t I share with you one of the levers by which that whole thing stacks up. As you know there's many different elements.

First is, we continue to make progress in all the operational digital transformation activities that enable us to continue to have a world class constructor. I state that because in this business every penny counts. Digitizing, transforming, getting more streamlined is hugely important and that will continue to be a part of the equation that we are making very good progress.

Secondly, as I mentioned to you, mix and pricing right, continue to be an element of how we're managing this business, so that you see the type of dynamics and favorability that we shared with you.

And third overall, over a longer period of time, the broader portfolio expanding into peripherals and services is also an important part of the equation, David, and one of the main reasons why is, you know peripherals margins are above our average PC margins. Services margins, especially these new digital services are above our average PC margins. And that on an ongoing annual recurring basis is very favorable for us.

You add all those things together, noting that you have the fluctuations around commodities or supply constraints or logistics, that was a driver behind conveying that. We feel confident in raising our ongoing targets from 3.5% to 5.5% to 5% to 7%. We expect that in ‘22 we’ll be operating the high end of that range. And look, if we can go do more, we’ll go do more, but we feel confident in our progress across all of those areas, so that we can state on that kind of revised guidance going forward.

David Vogt

And just maybe as a quick follow up, if component prices do come down, how long can you hold price rather than giving it back to commercial and/or consumer customers, measured in a couple of quarters, measured in less than a quarter?

Alex Cho

So first is, we manage a shopping basket of commodities. I think that's an important thing to note and there's many puts and takes across most of them. What we expect going forward, at least this next year is going to be roughly flattish as we go forward. Maybe slightly more of a headwind as we head into this next year, but none the less to note we manage a basket of goods as we think about this, we obviously look at the dynamics of each one, that's important.

Secondly, demand for HP products and our innovation continues to be very strong. I mean that's a very important part of this, because that, plus our ability to re-price, are important levers of within a shopping basket of commodities, how is our innovation and how is our ability to manage pricing as we do that going forward. We’ll continue to manage that. Again, as we head into this next year, and again that is baked into our assumptions as we look into FY ‘22 again. We expect to be at the high end of the range there.

David Vogt

Got it, and obviously you’ve done a good job with demand steering and you know putting forth products that people need and want to combat a relatively good profit dollar margin for yourself. And we get this question all the time, so I’m going to ask it. When you think about backlog coming down and availability becoming less of an issue, hopefully sooner than later, how much of your pricing steering do you think remains? Obviously you're very good at managing a lot of different sort of vectors in the business, but you know how much of a tool can that be going forward when just at least hopefully a proliferation of options for consumers and commercial buyers alike out in the marketplace?

Alex Cho

I think that you know our ability to manage pricing, but also managing our mix is very important. One of the areas that within this constrained context, and it will be continued to be the case as we head forward.

As we shared in our Analyst Meeting, we are continuing to shift the mix, not only because of operational constraints, but also because of the innovation opportunities to the more premium segments. I think that's an important element to note around this, and we think that adds a nice ability for us to continue to manage the mix, not only in a supply constrained environment, but also because of the nature of the opportunity premium, gaming, commercial, audio/video driven refresh opportunities, those are very favorable. And again, we add in on top of that, the continued opportunity we have around peripherals, as well as services on top of that, and the collection of all that, we feel as though will be very favorable as we manage our portfolio going forward.

Those were the type of assets that we have, in companies like HyperX and [inaudible] are so valuable, because they really add in new assets for us in highly attractive growing segments, that we are going to be continuing to scale as a part of the broader personal systems engine.

David Vogt

Alright, I’m going to ask it a different way, unrelated to the component prices. So you mentioned peripherals have a better margin profile, services has a better margin profile, mix to higher end consumer clearly is favorable to margins.

How does Chromebook fit in, right? So Chromebooks have been typically speaking a lower margin product, then a core portfolio. You know recently we’ve had sort of a flushing of the backlog effectively of Chromebooks. So how does Chromebook fit into the mix going forward in terms of your participation in that market. You know it's obviously a lower profit dollar product. At least recently it seems to be somewhat more cyclical than the rest of your business. And so you can be as involved in that market as it’s still a critical focus of HP given that you have a fairly large presence historically, and should we expect that portfolio to be a much smaller part of the business going forward as we kind of move past hopefully this COVID dynamic.

Alex Cho

Okay, so first is, let's just talk about that segment. I mean for us, we made a lot of progress really in the core profitability investing; its OP dollar additive. So one good thing, and that we feel good about it and I think the teams made a lot of good progress is making sure that that at least category is OP dollar accretive for us.

Secondly, I do want to put in context, while chrome units have been an been an area of discussion and obviously there's been demand growth and you talk about backlog. As a percentage of our total revenue, it's in the single digits, so it's not a significant contributor. However, clearly it's a contributor in the education segment.

So number one, its profitable, it's additive, but I want to put in context its entire personal systems business. The third is yes, it is a core part of education, and number one as I mentioned before we think educational will continue to be structurally, like advantage through hybrid. Number two is an area that we have been a leader in and we think that, we plan to continue to be that way.

Number three is, we are seeing some cyclical you know adjustments, but we fully expect that education will continue back into normal purchasing cycles, where we have a very strong opportunity given the strength that we have. So we feel very favorable about it, and also want to make sure you understand how it fits into the broader mix of the personal systems business.

David Vogt

Is it potentially a gateway product, right, so as they break quickly like a notebook, you know maybe not just from the education side, but you know the individual person or the small business that buys them. Maybe they upgrade to a more full featured set notebook. It’s sort of a little bit of Trojan horse I guess effectively. Could it be used in that capacity or is it just the unique discrete market that really there's no sort of attach to hire, you know because with Chromebooks you don’t have a tremendous amount of peripherals, right. I highly doubt there is a tremendous amount of service attached to a Chromebook given the low price point or it’s just sort of a key part of the educational offering that you guys currently have and that's kind of how it's going to be for the next couple years.

Alex Cho

We don't think of it as a distinct standalone category. We do think of it, and it is very much a part of a portfolio that we offer and I’ll give you some examples.

When we sell to school districts, they will definitely want Chromebooks. They will offer in other type of devices, maybe for their computer labs or for their teachers, right, and by the way, for that they are increasingly wanting to make each person more productive. Having more displays or monitors as a part of that is really a key part of that. So number one is, we are seeing that and it is being very much a part of an increasing portfolio player on that.

We're also seeing Chrome and you see it in some of the innovations that we provide. So we are taking our innovations into Chrome so that other types of use cases can take advantage of some of the benefits of the Chrome ecosystem. We are bringing our privacy screen to it, because some people are wanting to make sure that the type of privacy working in or learning and studying more public environments, they want to take advantage of. So we have our Sure View privacy screen that we have there.

We are also enabling docking, and our meaning the able to dock and have multiple displays, because people like that productivity. So that’s why having it as part of our portfolio has been very favorable for us, and we think continuing to participate in the lead in the education space, you know means having this as a part of our portfolio.

David Vogt

One last question before I get into peripheral, a little more deeper discussion, backlog you're probably going to get it. It’s a pretty common topic, discussion point. It sounds like backlog has been flat quarter-over-quarter given the strength of the business. As we move through 2022 and we get to hopefully a more normalized environment. How do you see backlog in this new framework that you described at the beginning of the conversation playing for HP, right. A quarter of backlog is not sustainable.

So is there some of metrics you can help us out with to kind of think about, how we can best think about optimal or maybe suboptimal amounts of backlog depending on where we are in the cycle, just so we have a sense for when we get beyond 2022 in the out years.

Alex Cho

Yeah, so. Let me remind this is kind of dimensionalized. As we’ve shared, we have about a quarters worth of backlog. One element to note is it is far more weighted towards commercial, and commercial non-education, just to be clear on that. We do expect it to go to go down over time as we find ourselves in a more favorable supply environment and our ability to execute in that space continues to improve. We do think that will take at least into second half, given again the level of backlog and what we're seeing around supply.

We do expect to again operate with lower backlog. That being the case, I mean this is a very fluid environment and so the mix of it etc. is one that we’ll continue to be actively managing and prioritizing as we head into the future.

David Vogt

Let me ask you in a slightly different way, and I’ve asked another company this as well. Has the world been spoiled by just in time inventory over the last 10 to 15 years, and there needs to be some modification in terms of how companies think about, how they handle the supply chain and the appropriate levels of inventory? I mean its early days still probably. I’m sure these discussions are ongoing, but any sense for, you know once we get through this maybe things will revert back to normal or maybe there's a little bit more prudence and conservatism baked into those for the numbers.

Alex Cho

Yeah, I mean let me share with you a few things that kind of gives you more insight into how we are navigating through this. Number is, we shared – in a supply constrained environment, we are moving to a lot more direct relationships with our suppliers, and that's an important part of this equation, because we do believe having more direct touch, we now cover over 90% of really top components. We are using the strength of our balance sheet and putting in long term agreements as a part of that.

We are also dramatically simplifying, getting more leverage in our portfolio, so that you can have more flexibility in managing within a supply constrained environment. And we also have the benefit of now having moved our internal systems and all that digital transformation allows it to be far more real time. To me those are all the elements of the shift in capability, particular environment where supply is something that is different than it was before and we expect given the continued growth in these categories, we need to be ready to be operating in that kind of environment.

You're right, just in time is not a capability right now. That I think is something that gives you an advantage. So that's why the strength of our balance sheet designing for more flexibility, insuring that we also have more simplification in our portfolio, we think are very strong assets. We've already started to see the benefits and as we said over the subsequent quarters, we're going to see continued benefits from all those actions that we've taken.

David Vogt

Got it! And then maybe just one follow-up point on that. I mean companies, it's seems like a broken record, but anything different on the supply chain? I would imagine nothing's changed since you guys reported a couple weeks ago. You mentioned earlier that IC’s tend to be a big problem and Mac sets [ph] are a problem. You know as an outsider, what are side hooks that we should look for, maybe your numbers or your communication as we move through ‘22, as evidence of a slight improvement. Should be monitoring traffic in the ports, air freight prices or anything that you guys would publish directly within your numbers that would suggest things around the margin are getting a little bit better or just qualitative comments from you directly.

Alex Cho

Yes, so no real updates since our earnings which were just a couple of weeks ago. The first thing that I’ll say is from our side, from an HP perspectives, you know we've shared the actions that we're taking. We know what we have to do to actually be even more effective in this environment, and so you're going to see the results of that as we continue to share our progress quarter-after-quarter.

We’ve shared in Q4 as you can see, that we've been able to make a lot of progress in actively managing our mix. Our quarter-on-quarter improvement on just windows based shipments is probably a good view of that. You'll continue to see improvements in how we manage our mix in that environment, so again, that's our HP perimeter.

As we look more broadly, it is a very – it's a multi-faceted environment where there's many different elements. Yes, the issue went from traditionally more CPUs, traditional is not right, maybe three years ago to CPUs to panels to now IC's. IC's are distributed across many products and not only in the PC category, but the electronics and automotive category. So I think you have as well, kind of monitoring what's happening in the broader ecosystem as a key part of that.

David Vogt

Got it.

Alex Cho

There are, yes, we continue to look at what’s happening around, logistics around the world and those are other elements of the total environment that gives you, at least addition data points to understand the dynamics around supply and constraints around that. But other than that again, I think we look also at the importance of that category and the fundamental nature of the relevance of the category and strength there, because that is also affecting supply. As supply improves, so does demand and so we're very much around, yes, maximizing supply is becoming more effective in constrained environments and continue to make sure that we are innovating for the future, so that as that improves demand can continue to accelerate.

David Vogt

Understood! Yeah, no I think most users are well aware that the CUP has been a problem for a number of years now, it's not just COVID related. Since you have a new camera, talking about peripheral, you know maybe just in the interest of time, the last question, obviously that seems to be a pretty important driver of the business going forward, you know high single digit category of growth.

You've done the HyperX deal, which sounds like it’s been a success so far. In the context of that market place, do you have any necessary holes to fill? Is your product portfolio complete, and does that lend itself, if maybe there isn't stuff that, maybe if there is stuff that you need to go out to get, is it an extension of the HyperX acquisition or you need to go out there and maybe do a couple of small bolt-on acquisitions. Kind of help us understand where you're peripheral, product portfolio is today and where you think it can get to?

Alex Cho

Yeah, so we are very bullish about this part of our strategy, and I think it's important to know it as well. For us peripheral is not a hardware strategy; peripheral is part of our experience strategy and so when I say that increasingly we’re the leading in gaming, then that gives you a sense of what that means for us. We are going to have great PC's that are gaming focused. We continue to expand. HyperX provides a lot of leadership in gaming peripherals, mics, I got a HyperX mic here which I love. You know headsets which is such an important part, we'll continue to build out that experience as well as the services on top of there.

We also communicated that for us hybrid work, you know in the future as you think about it, hybrid work, you should think HP. Hybrid work will be HP, because across a compute, the peripherals and the services that we deliver, we’ll be able to enable both the experiences that employees want wherever they are, as well as IT managers. The biggest headache for IT managers, Oh my goodness! A good portion of these employees are not going to just temporarily be working from home, but working from home or multiple places on an on-going basis.

So that drives – you know we announced our HP Presence Technologies which takes the best of our audio and video engineering really across the company and delivers them into new room solutions, peripheral and we are going to be incorporating them into our PC's as well. So that wherever you are, engaging in some digital connection for work, you’re going to have the best of HP audio and video technologies that allows you to show up great, be heard great.

And you know I did share with you ahead of time. I'm using a new camera here and one of the key elements of it is really being able to follow you, we call it Auto Framing. Sitting all day long in front of your device is tiring. I like to move around and so as I move, you know the camera will continue to move and make sure that I'm centered. Because people will just want to be active and they don't want to sit and these are huge drivers of future employee productivity and wellbeing.

So it's a big space, we've got a lot of assets; we got a lot of room to grow in terms of these markets. So we're very excited about how that will continue to be a growth driver for the entire personal system stack.

David Vogt

Great! So Alex, I think we've used up our allotted time. I appreciate all your time and your generous volunteering to do this. This has been helpful and to the rest of team on HP, thank you for your help and if anyone has any other questions, please feel free to reach out and email me or the HP investor relations team directly.

So Alex, thank you again, and everyone have a great day!

Alex Cho

Welcome! Thanks.

David Vogt

Thank you.