HP Inc. (NYSE:HPQ) Bank of America Global Technology Conference June 5, 2024 2:20 PM ET

Company Participants

Alex Cho - President, Personal Systems

Conference Call Participants

Ruplu Bhattacharya - BofA Securities

Ruplu Bhattacharya

Hey, everyone. Thanks for joining us today on the second day of our 2024 Global Technology Conference. My name is Ruplu Bhattacharya, and I'm with the equity research team covering IT hardware and electronics manufacturing services. Today I'm filling in for Wamsi Mohan, who is the Senior Analyst covering this space. We're honored to have HP Inc. here today, and from HP we have Alex Cho, who is the President of Personal Systems. Alex has 23 years of experience with the company, and even though he's heading Personal Systems, he's also worked in other branches of the company in print and services, and he's had lots of strategy and operational experience. So we're honored to have him, and we hope to have a very in-depth discussion today. So, Alex, thanks for being here today.

Alex Cho

You're welcome, good to be here.

Ruplu Bhattacharya

Before we get started, I'm going to -- I've been asked by HP to give -- read the forward-looking statement. So just today's discussion includes forward-looking statements that involve risks, uncertainties and assumptions which our future described -- 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 webpage at investorhp.com.

Question-and-Answer Session

Q - Ruplu Bhattacharya

So, with that out of the way, Alex, let's start the discussion maybe with a very high level question. How do you see the market evolving for home PCs and office PCs?

Alex Cho

Yeah, I'm going to talk maybe shorter term and then more in the longer term. So we had earnings last week. We communicated that we see that the commercial segment is holding very well and we see our funnel growing into the second half. This is a part of multiple dynamics at play. We see the dynamic that we've shared around there were purchases during COVID and they're nearing the time of refresh. Secondly, Windows 10 end of life and Windows 11 is next year and so companies need multiple quarters to get ready, and they're getting very serious about planning that. And then third is, there's just the energy around what can these new devices do that capitalize on AI that allow their employees to do new things. And the combination of that is keeping our commercial segment outlook very positive. In the consumer segment, we saw shorter term that there's more cautiousness in the consumer segment. That being the case, as we look into next year, we think that all these innovations around AI and the device, particularly how it enables customers similarly to do new things, some of the creativity benefits that you see on the devices, the better to do that and the ability to do that just uniquely by enabling AI locally that's going to drive longer term growth in that segment as well.

Ruplu Bhattacharya

So we're going to touch on each of the segments in more detail. But when I think about COVID and stay at home and hybrid work, these were drivers for very strong growth over the last couple of years. Do you think they're still drivers for either the commercial market or the consumer market?

Alex Cho

So there's both going to be some cyclical drivers and then the more secular ones. So yes, refresh would be a cyclical driver because of purchase. Hybrid we see as an ongoing secular trend that is driving this market. Why is that? Employees, all employees are offering some level of hybrid work environments. In a hybrid work environment, what is important to employees and their employers, can they be productive? Can they show up on that Zoom or Teams call in different type of lighting conditions? Can they show up naturally? Increasingly, if they're the one who's working from home and there's a meeting in the room, can they see what's really going on in that room and feel connected? These are the types of hybrid-driven secular drivers that we think are very favorable. By the way, a more flexible workforce is great from an employee flexibility. A more flexible workforce is also often a less secure workforce because you have laptops roaming around and with data security, in the future AI model security, security will be more important as well and so type of assets we have on enabling the best-in-class security will be also important in that space.

Ruplu Bhattacharya

I remember at the last Analyst Day, you segmented a core business and then growth areas and then some services. So maybe can you just, for our listeners, can you talk about what goes into each bucket here?

Alex Cho

Yeah, what we communicated was at an HP company level, right? We've got large businesses that we operate within print and personal systems, and we also have higher growth businesses within that, that we've said that we're going to be growing faster than our core businesses because they operate in large, faster growing markets that add a lot of additional value to our customers and over the long term, we think will go drive incremental benefit to the company. These are businesses like our hybrid systems business. When you think about video conferencing, you think about our services business within that. Our gaming business. These are large, growing markets where we intend and we are growing faster than our core. They're margin accretive over time, and they really add in unique value because they're really delivering a total experience for our customers.

Ruplu Bhattacharya

What do you expect the PC market TAM to be this year and next year in terms of units and in terms of revenues, both home and commercial?

Alex Cho

Yeah. We see the market consistently with what you would see in the broader estimates out there. We see that this year that the market will start to grow, accelerating into the second half, more of that is in the second half. We look at the next, and then beyond this year and the next few years, we see that the market will grow mid-single-digits. We think that is, again, driven by factors like refresh cycles, Windows 10 end of life. But I would say the more exciting one as a part of that is all the innovations that are happening that enables customers to do more, AI on the device, hybrid experiences, the ability to do more on these devices that you couldn't do before is going to drive that as we head into the future.

Ruplu Bhattacharya

So, do you see the commercial market growing faster than the consumer market? And traditionally I've thought of HP as more levered to consumer, but I think I'm wrong in that. So maybe talk to us about each of those.

Alex Cho

So first is, we shared this, we're pretty public, that we're about 70-30 commercial. So our footprint in the commercial space in our mix. Secondly, what we shared, was it last week? Last week in earnings, time flies, is that right now we see in the shorter term, for the second half, the commercial segment is holding up whereas the consumer segment, there's a bit more conservatism in that. We see over the long term period that a commercial is a very strong opportunity for all those drivers that I mentioned before. And we feel very good about that because we feel very well positioned. We're very well positioned because we've got leadership share. We feel very well positioned because particularly in commercial notebooks, where there's a faster refresh, we're very well positioned. We feel very well positioned because the value proposition that's distinct to us around security, performance, hybrid work enablement, services across the entirety of the employee devices that they would use from printers to PCs to rooms, that we have a unique advantage in that breadth of employee productivity devices. The thing we're positioned well as the commercial market grows and as it'll refresh.

Ruplu Bhattacharya

One of the things that was in high demand was Chromebooks, especially during COVID. Is this a segment that makes sense for HP to target? What is your share in that market? And do you think that Chromebooks will still be in that same demand that we saw over COVID? I mean, what is -- when you think about the actual like commercial notebooks versus Chromebooks, like do you see demand tapering or do you think demand sustains in that?

Alex Cho

Chromebooks are, I would say, a very strong value proposition that we've seen in education. We see them strongest in US education, and we're a very strong participant in that space. We've also started to see that overall education purchasing cycles, they follow typically a seasonal view, harvest season when education institutions are refreshing. We see that happening. We're participating and we're doing well in that. I will also say that Chrome is not a large part of our overall mix, particularly the revenue mix. So we participate. It's important to have that value proposition because of the unique attributes for EDU. But it continues to be a smaller part of the overall revenue mix for us.

Ruplu Bhattacharya

Okay. We talked about replacement cycles a couple of times. So what is the replacement years for a commercial PC versus a consumer PC versus a Chromebook?

Alex Cho

Sure. On average, refresh rates are about four to five years. You're going to see that more frequently in a notebook than on a desktop. We see different refresh rates also when you think about education environments because not companies, educational institutions will typically go through a yearly purchase cycle. So that's a little bit of a different mechanic that you see happening in that space. One of the things that we are energized about is the fact that not only is there a standard refresh cycle, but the reason to refresh and upgrade because of new things that you can do on the device, given our latest innovations and what we see coming in the future, will be even more compelling in the future. So we think there is a general refresh rate, little bit different notebooks and desktops, EDU has a cyclical cycle. But the innovations are coming that really make those refresh opportunities meaningful, particularly for us and what we have to offer, we feel good about.

Ruplu Bhattacharya

Over the last couple of years, notebooks have been very strong. How do you see the demand for desktops? I mean, are corporations refreshing their desktops at the same rate as before or do you think there's more push to have notebooks instead of desktops?

Alex Cho

So slightly longer refresh rates, as I mentioned. Secondly, we do see a shift more toward notebooks, which is very favorable for us as an aside because of our strong position in commercial notebooks. The third is there's definitely a value proposition for commercial desktops where you need that maximum in terms of expandability and that kind of flexibility in a use case environment where employees or a frontline worker is in a more dedicated space, has a very solid value prop that we see there. That's why you see that -- you see our road map continue to innovate, both on notebooks as well as desktops.

Ruplu Bhattacharya

Got it. I want to ask one more higher-level question and then I want to get into AI PCs, which I think is very -- it's been 10 minutes, I haven't asked about AI PCs. But just talk to us about your market share in commercial consumer. And is the focus on gaining share or is the focus on maintaining margins? So what's your strategy here?

Alex Cho

Yeah. So we have been very consistent that while we operate at scale, we are not chasing share for share's sake. I think that's an important part for us. We do operate at scale and leadership position. If you exclude China, we're number one in the market. We are stronger in the commercial space than the consumer space. I think what's important is our strategy is around identifying the areas that we can add the most value. We're also indexing our mix to higher-value categories. And for us, it's also about not just the device, something like this, but it's around the total solution experience. So it's the device plus the peripherals, plus the services. So that applies to gaming. If you think about it, we participate in the gaming PC space, yes. But through our acquisition of HyperX, we're also integrating in a super quick gaming peripherals experience and brand. And we have gaming software that makes our solution really standout for our customers. Other side, think about the employee and hybrid work, a commercial PC, yes, as well as peripheral, their home office or even their office on the meeting rooms. That's the value of Poly and that is we've enabled that employee to get a hybrid experience whether they're working at home or in the office and then services on top of that. So we create a solution value proposition for our customers. That's really how we think about the opportunities, delivering solutions that deliver higher value -- higher value categories. and we're very bullish about what that means for the future.

Ruplu Bhattacharya

Okay. Let's talk about AI PCs, and that's an exciting category. So how do you define an AI PC, what makes it different from a regular PC? And the question I want to ask you, it may be a strange question is, enterprises are typically concerned about their budgets, right? What would make -- why would an enterprise buy an AI PC?

Alex Cho

So, number one is we think that some of the industry definitions of an AI PC, they make sense. And what is it? It's because these devices support running models locally on the device. And that will open up a whole new set of topics. But the ability to do that is because of an NPU in these latest devices, that is a capability that's able to run those models locally. I think that's a good definition, and that's a good way to look at it because it's those NPUs that allow customers to do new things on their devices. When we talk about AI PCs, we very much look at it that way, plus for us, our AI PCs is about enabling that base capability, but we add in our AI engineering, we had in the ability to secure that through our security stack. We add in our ability to leverage AI to deliver a better audio and video experience. If you've heard from us HP Talk, AI is super exciting, ton of energy, we're going to do a lot, but most employees, they're thinking about working in a hybrid environment, Zoom and Teams and doing that well. So we embed and we optimize that experience through AI. So for us, it's that base amount plus additional element as we go forward. Second question is about commercial?

Ruplu Bhattacharya

Yes.

Alex Cho

What I love about this topic is this is not a speeds and feeds topic. It's not about having more. The AI PC is exciting because you can do new things. It's new use cases. And in a commercial environment, corporate IT, if you can enable an employee to be more productive, if you can enable through AI to better secure the device with machine learning models running locally to help secure you better, if you can enable that employee to not only be more productive, but have a better ability to work from the office and at home and not feel like they're missing out because they can't be seen or heard or they can't see what's going on in the room, that around attracting talent, enabling them to be productive, enabling them to feel connected and really thinking about the employee digital experience, which is a core part of their experience now that, that is a driver for companies to be investing in the value of what these AI PCs offer.

Ruplu Bhattacharya

Makes sense. You mentioned something interesting, which is ability to run models locally, right? So if I'm a corporation, should I be thinking that even if I pay more for the hardware of a PC, over time, I can probably save money because I can run some things locally instead of sending it back to the cloud. So is that the thought process that people should have?

Alex Cho

Yes. Let me expand that. First is, AI independent of the PC for one second, AI is enabling people to do more. And then this is where all the language of use cases are so important. What can they do more? They can summarize, synthesize. We're talking about our IR team, the sentiment analysis, they can be more creative. They can create images in a more professional way real time. If you're a software developer, you can do that more efficiently. These are tangible material benefits to productivity because of AI. Then you introduced the AI PC, the AI PC allows you to do those things faster because it's done locally and for many things, latency matters. Secondly, more cost effectively because of what you said, right, about running them locally versus sending them sending your data to the cloud to be inference and sent back. And that usually is an iterative process, not just once, right? We like to show the example of when you're doing some image creation, you can get professional AI enablement in the cloud, and there's a lot of value to that. But as well, you can do it faster and for what many people need locally on the device now, faster and more cost effective. Third is AI is about data. When it comes to data, the ability to have your data local, private and secure, whether you're a consumer or commercial, we think is a very strong value proposition for this. So we call it Why AI. We're seeing use cases and they are exciting. They're tangible. It's new. Why AI PC? Because it's faster, more cost effective and more private and secure. And then for us, is always a third bar. Why HP's AI PC? Because we can deliver it more securely than anyone else. We can deliver it tied into how people work, our assets around audio and video and poly technology, and we can also deliver that with our design and architecture experience around designing it. This is our latest into the slickest device out there. In fact, we can run models on here to get this up to 30 hours of battery life, which traveling around literally just with this past two days, I haven't plugged it in, love that. Love that. And then, by the way, for us, we care about employee productivity. So the fact that we have a services capability that manages PCs, our printers, our rooms and more than just manage the device, we're able to measure and help enable employee digital experience improvement. We think that's kind of the Why HP. So Why AI, Why AI PC, Why HP AI PC.

Ruplu Bhattacharya

No, I think you laid it everything out very well. So let's talk some numbers, right? What do you think like an AI PC ASP is versus a regular PC? And how do you see the penetration of AI PCs this year, next year and beyond?

Alex Cho

Great question. I've heard that question before including earlier in the day. I think it's good to get our arms around it. So first is we see that the value of these devices because they deliver meaningful value. We expect that in three years, 40% to 60% of shipments of PCs will be AI PCs. That's a pretty big penetration rate to your question of these devices. Secondly, we said that the contribution of that will increase ASPs, 5% to 10%. I think it's a good starting point. Remember that we're just in early days on this, but as a good starting point for the entire computing industry of 5% to 10%, and why because you need to configure it more. And why? Because we think from a customer perspective, there's tangible benefits for them, right, overall. What we said is to a market that's deemed to be about single-digit growth, those two factors alone over the long period of time or that planning period can double the growth rate of the market. That's why we think this is as a market, a market raising tailwind for that. At the end of the day, it's about customer wins, better experience, more productive, more creative. And because of that, we think that will drive the numbers that we just talked about.

Ruplu Bhattacharya

Well, I wanted to now talk about margins, and I want to bring it up to the personal systems level. So the long-term target is 5% to 7%. How do you see these type of new devices impacting that? I mean how do you think segment margins will trend over the next couple of years?

Alex Cho

Yeah. So you're right. We've communicated -- we raised our guidance around operating range a couple of years ago to 5% to 7%. And we see us -- we feel confident about our ability to operate within that range. We've factored in the contribution of AI PCs. But we have multiple elements that are enabling that. Number one is we see that we are continuing to shift to a higher value mix of our PC category. We're also, number 2, shifting to a higher mix of the additional higher-value categories, peripherals and services. Again, because we're about the solutions. And third is we made great progress, particularly in the past two years in our fundamental digital transformation and cost initiatives that give us a good foundation for continued structural improvements. Our last earnings, you saw we grew 70 basis points year-over-year, and we plan to operate within that guidance range, with all those factors baked in, in the outer years too.

Ruplu Bhattacharya

I just want to ask you on component price increases, memory price on creases, how do you see that impacting the business? And also, if you can layer in the mix of Intel, AMD and ARM in terms of processors, I mean, how do you see your relationship with those companies? How do you see the mix of the business in terms of processors?

Alex Cho

Okay. Let me take that in two parts. Usually, the questions come in two parts. But, okay, this time, I'll answer in two parts. First is on commodity, it's just shorter term. And then shorter term, we operate an entire basket. I can see a device like this, and you've got headwinds and tailwinds. You see some components like memory increasing, but we've offsets and other types of components. Overall, we've stated that we see some headwinds coming in that space. That's what we see from the market. How we manage in that space? Number one is we will continue to use our balance sheet as appropriate where we see strategic buy opportunities. Number two, we have demonstrated in the past that where there's pricing increases that we're able to, and we pass that along to our customers. Number three, remember, we're actively managing the mix, and we've seen favorability and demonstrate our ability to continue to shift to higher value categories we see doing that. And that's kind of the short term to midterm, how we think about doing that. For us as well, remember, higher-value categories applies not just to the PCs, but also to the growth of those peripherals and services on top of that, where we have more headroom to grow, better for our customers in terms of value and accretive for us. In terms of the mix of silicon, first is I'd say I haven't seen this much innovation in the market in a while, and it's great. I think it's very good for our customers. It's really great for engineering teams. We're doing more engineering than we have in a long time, which is great. We believe that there's a role for the different types of silicon because there's a lot more engineering of the total stack that we're doing. We are really engineering this for specific customer segments. And we see that there is unique benefits from the different silicon that meet the needs of different customer segments. So we believe that we will continue to operate in a multi-silicon environment. We are going to optimize them and really engineer them to deliver a total solution. And third, what that means is customer wins because they're going to get the best performance from the HP solution stack, whether they're a gamer, an engineer, a knowledge worker or whatever the segment is.

Ruplu Bhattacharya

Got it. Let's talk about the peripherals market, the Poly acquisition, I think it was at the Analyst Day where you said something like less than 15% of 90 million meeting rooms don't have the right video equipment. So how do you see -- are you seeing benefits from the acquisition? And how is that progressing?

Alex Cho

Yeah. So what is the big experience that every company employee is dealing with? Hybrid work, right? We don't see that as a short-term thing. That is now the norm and the desire to want to be able to work for multiple locations. That is where Poly fits in. The ability to equip those meeting rooms is important because not only is it for the people in the room, but the people are working from home and want to be able to see what's going on in that room. Very important. There are approximately 90 million rooms that I said, 10% of them are equipped with video conferencing equipment. That's a very significant opportunity for us to go out with them. That's part one. Part two, though, is we can take the same Poly audio/video technologies and build it into this device, which we have done. We call it Poly Studio, the benefits of what we can do in large scale, we can do in smaller scale. Home office is a good example because people need hybrid wherever you're at. Third, the unique value proposition that we as HP have and going to our customers, employee productivity, no one brings a broader set of assets that the employees engage with, a PC, a display, a dock, printing to when you're in the office or at home, a meeting room or your home office, services that deliver the device to the employee's home that enables you to proactively measure the experience of devices. That breadth in the employee environment and experience space is what we believe Poly allows us to do like no one else as really like we think of it as our mission is to be the employee productivity leader in a hybrid world and using AI to deliver a better experience. We're very excited about what that means with end user and companies and HP.

Ruplu Bhattacharya

Got it. You talked about HP Workforce Solutions several times. Can you elaborate on that? And what percent of your customers are using that? And how do you see revenue growth in that business?

Alex Cho

Yes. So we believe that services, we believe that the portfolio of our devices should be enabled as a service, number one. Number two is we see traction from our customers from that space. They want to be able to consume our devices as a service. They want incremental services to help manage, maintain, support these devices. They want services to enable them to do more, whether it's secure the devices also enable things like remote computing. We have focused -- we have created a focused organization so that we can deliver services across the entirety of HP, print, rooms, PCs, that's what we call Workforce Solutions. That is one of our strategic growth areas to your earliest question, is growing faster than our core business. It's a very sticky business because customers have a contractual relationship with us. And we think it adds longer-term more upside for us because the value proposition of managing the entirety of that fleet, securing that fleet, not just measuring that fleet by measuring employee experience and improving it, delivering new capabilities to that employee based on that, like setup from home. It seems basic, but you can't do that very well unless you’re on an HP managed environment. We think that as a part of AI, hybrid enablement is critical for us.

Ruplu Bhattacharya

Great. We're out of time. Alex, thank you so much. We've covered a lot of different topics. Thank you for all the details. It was a pleasure having you.

Alex Cho

Thank you.