HP CEO Lores: Hybrid Work Is ‘Driving Innovation Across Our Portfolio’

HP’s hybrid systems business ‘more than doubled year over year,’ HP President CEO Enrique Lores says on the company’s first-quarter earnings call.

HP CEO Enrique Lores

HP Inc. executives do not expect a “significant economic recovery” in the current fiscal year given corporate budget tightening, moderated large enterprise demand and elevated channel inventory.

However, the Palo Alto, Calif.-based PC and printer vendor did not change its outlook for the fiscal year—a positive for investors—and it continues to view partners as key to bringing in revenue, President and CEO Enrique Lores told CRN Tuesday.

“As we design our new businesses, whether they are transactional- or product-based or service-based, we always do that thinking about how the channel will participate and actually improve and complement our solution,” Lores said. “This is how we think about the business and how we will continue to do it.”

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HP First-Quarter Earnings

Although HP previously saw consumer demand weaken, it finally saw corporate budgets take a hit during the first quarter of its 2023 fiscal year, which ended Jan. 31.

“We have seen weakening demand from the corporate, enterprise space and we have seen—especially large companies—becoming more conscious about how they use their budgets,” Lores said on the earnings call. “And this has had an impact on the PC side.”

HP outlined during its previous quarterly earnings call in November the steps it is taking to reduce expenses—a “future-ready plan,” as HP has called it—as it navigates a tough demand environment.

HP said it would lay off between 4,000 and 6,000 employees, joining other vendors such as Microsoft, Salesforce and Dell Technologies as increased demand for technology during the height of the pandemic returns to normal.

The vendor expects its elevated channel inventory to return to normal by the end of the second fiscal quarter or even early in the third quarter.

“Looking ahead, we are not expecting a significant economic recovery during fiscal year 2023,” Lores said on Wednesday’s earnings call. “We continue to expect our second-half performance to improve relative to the first half, driven by our cost-saving measures and as improved channel inventory levels create a more normalized pricing environment.”

HP is on track to deliver at least 40 percent of its promised $1.4 billion in gross annual run rate structural cost savings over three years by the end of the current fiscal year, Lores said.

“By focusing on what we can control, we believe we are well-positioned to navigate near-term volatility,” he said. “And by maintaining investments in our growth priorities, we are strengthening the company for the future.”

HP Reports Some PC Positives

HP and HP partners stand to benefit as commercial customers commit to hybrid models of working from home and working from an office, “fueling demand for peripherals and other collaboration solutions,” Lores said.

“Hybrid work is a long-term secular trend driving innovation across our portfolio,” Lores said.

HP’s so-called hybrid systems business “more than doubled year over year,” he said, without giving specific numbers.

While HP expects PC unit counts may fall to pre-pandemic levels in the short term, “we expect it will remain at a structurally higher level with more premium and high-value mix,” Lores said.

He went on to elaborate that “the install base is significantly higher than what it was before, and therefore at some point these PCs need to be refreshed.”

The growing configuration requirements for PCs, growing demand for videoconferencing systems, cameras and other hybrid work hardware, and the appetite for subscriptions all have Lores bullish on PCs overall, he said.

On subscriptions, Lores said he will continue to explore offering more of the HP portfolio as a subscription.

HP’s Instant Ink subscription service saw double-digit revenue growth and surpassed 12 million subscribers, he said.

“You will see us making progress in the next quarters,” he said. “We are now including paper. We will be including some of our PCs and printers in the coming quarters. And over time, we will continue to expand the offering.”

HP’s Future-Ready Plan, Investments

Part of HP’s plan to save $1.4 billion in costs over time involves standardizing on fewer platforms for personal systems to reduce component complexity, the company’s CFO, Marie Myers, said on the call.

“We expect these initiatives to reduce duplication and improve our agility and response time to shifting market needs,” she said.

More than 900 HP employees opted into a voluntary early retirement program with enhanced benefits in the U.S. Most of those employees are expected to leave HP during the second quarter.

HP is investing in its “workforce services and solutions” organization created last year and shifting a greater revenue mix to digital services.

And HP invested in more digital customer support, including interactive voice response technology based on artificial intelligence, Myers said.

In the AI space, HP is continuing to work on workstations that meet a “new category of high-performance PCs specifically designed for data science and AI applications,” Lores said.

The company has partnered with chipmaker Nvidia on more production platforms around data science and AI.

Although HP’s industrial graphics and 3-D units saw revenue decrease by an unspecified amount year over year, Lores called this “a short-term situation, and we plan to continue to invest in these areas to drive long-term growth and value creation.”

Key growth businesses, including Poly‚ the collaboration technology vendor HP bought for $3.3 billion last year, grew double digits during the quarter, Lores said.

HP First-Quarter Results

HP brought in $13.8 billion in net revenue for the quarter, down 15 percent year over year ignoring foreign exchange rates.

Its operating margin, using GAAP, was 5.5 percent. For the same period a year ago, it was 8 percent.

The Americas saw the largest decline at 16 percent ignoring foreign exchange. Europe, the Middle East and Africa saw a 15 percent decline. Asia-Pacific and Japan saw a decrease of 13 percent.

The personal systems division saw net revenue of $9.2 billion for the quarter, down 20 percent ignoring foreign exchange rates. Commercial personal systems net revenue decreased 18 percent. Commercial personal systems units decreased 24 percent.

The personal systems division delivered $500 million of operating profit with an operating margin of 5.4 percent, according to HP. That margin was a decline of 2.4 points due in part to currency exchange and more promotional pricing amid “intensified” pricing competition during the quarter, Myers said.

The printing division’s net revenue was $4.6 billion for the quarter, down 2 percent year over year ignoring foreign exchange rates. Commercial printing net revenue increased 2 percent. Supplies net revenue decreased 6 percent ignoring foreign exchange. Commercial printing units decreased 8 percent.

Print operating profit was $870 million, flat year over year. Operating margin was 18.9 percent, up 8 points due in part to promotional pricing and cost improvements.

While hybrid work has helped with the sale of peripherals, uneven returns to the office plus tightening corporate budgets hurt HP’s commercial printing business. A normalizing supply of printers helped, Lores said.

Office hardware revenue grew 13 percent year over year and 5 percent sequentially, he said. Pages per device are in the range of 80 percent of pre-pandemic expected levels.

Total hardware units grew 2 percent “ as component availability and logistics constraints improved sequentially, augmented but better than expected China demand,” Myers said.

The vendor used $16 million in cash for operating activities and saw a negative free cash flow of $200 million.

For the same period a year ago, HP saw $1.7 billion in net cash from operating activities and $1.4 billion in free cash flow.

Accounts receivable ended the quarter at $4.3 billion. Inventory ended the quarter at $7.3 billion.

Accounts payable ended the quarter at $13.5 billion. HP ended the quarter with $1.8 billion in gross cash.

HP’s stock traded at $30.50 a share after hours, up about 3 percent.