HP CEO Enrique Lores joins Yahoo Finance Live to discuss company earnings, consumer spending, macro headwinds, investors, and the outlook for growth.
- Shares of HP are under pressure this morning after the company missed estimates for sales, sales by segment, and earnings. I had a chance to sit down with HP CEO Enrique Lores, and he told me the impact on sales came from the slowdown in consumer PCs. Take a listen.
ENRIQUE LORES: Well, I think the quarter had two parts. One is we clearly saw, as many other companies, an impact on the demand of our products, especially on consumer. But at the same time, we were able to take the necessary actions from a cost side, from an optics side, to deliver on our non-GAAP EPS goals, which is really important for us, and to continue to make progress in our strategic priorities, which is critical for us for the future. So that's my view.
- So let's go through the sales. So the sales were a little light versus estimates. As the quarter progressed, what did you see? Did something in the business surprise you guys?
ENRIQUE LORES: Well what we saw was a deterioration of consumer sales. And that increased as they go through the quarter. So this is something that we were expecting a slowdown in consumer, but clearly the slowdown was bigger than we were expecting. And this had the impact on sales.
But again, on the other side, we continue to make progress and we continue to see some areas of strong demand in premium. Commercial was also a very strong month. So this also helped to balance the performance during the quarter.
- What do you think drove that? Is that just the fact people bought new computers, new PCs during the pandemic and they don't need one?
ENRIQUE LORES: I think the majority of the impact is driven by the new macroeconomic situation. The increase of inflation, the increase of prices of energy in many parts of the world have limited the discretionary budget for consumers. And they clearly are now dedicating it to other things rather than PCs and frames.
But it's really driven by the macro changes that we are seeing today.
- It's hard for, I think, for investors to get a sense of what's happening in the PC market. I talked to Intel CEO Pat Gelsinger. He told me the industry might be near a bottom this quarter. But at the same time, they also shrunk the total addressable market outlook for PCs. How do you see it?
ENRIQUE LORES: Well our projection is that for the rest of the year, the market will be around 300 million units to 90 to 300, which is lower than what we were expecting a quarter ago but is still significantly larger than what it was before the pandemic. And I think what is really important is that the trends that are driving this growth, whether there is hybrid work, people working both from home and from the office, or things like telemedicine or even schooling have not changed.
And they really drive more adoption and more utilization of PCs. So this is why long-term we continue to be very optimistic about the growth of PCs and the rest of the personal systems business, but we also acknowledge that in the short term while this macro situation will continue, we are going to face some short-term headwinds.
- What's your read on how the back-to-school shopping season has started?
ENRIQUE LORES: It has started strong compared to the plans that we had. But as we said today, we are also being very prudent of what our guide is. We see that at the end of last quarter, consumer demand slowed down and we are projecting that this will continue in Q4.
- Is it fair to say that the guidance-- so it looks like it's a little below estimates for the full year now. Taking it down a little bit, is that kitchen sink, is that encompass all the worst case scenario you guys see out there?
ENRIQUE LORES: Well what we have been, as we always are, is very prudent in our guide. We really believe it is important for us to deliver on the commitments that we made. We have done this consistently during the last quarters. We did it this quarter, and this is how we are thinking as we prepare the guide.
- My instinct tells me the market might overlook, or might just focus a lot on the earnings and the sales come in a little bit light. But you did see margin expansion in that printer business, and you did show good cost containment throughout the organization. Where are these cost savings coming from, and what's next on that front?
ENRIQUE LORES: There are two things. One is we have been executing during the last two years the transformation plan that we announced in 2019. Our goal was to remove $1.2 billion of fixed cost structure, and we are on track to exceed that number by the end of this year.
So this clearly help. We are also, during the quarter, very disciplined, managing all our costs as we saw demand slowing down. And this also helped. And as we look forward, we also continue to see opportunities to continue to reduce our cost. We have been investing heavily in IT, and we see opportunities of-- by driving the-- continue to drive the digital transformation to continue to reduce our fixed cost structure.
- Has the economy reached the point, Enrique, where you are saying to the team, you know what, we're going to pull back a little bit on stock buybacks. We're in cash preservation mode.
ENRIQUE LORES: At this point, we are not planning any change in our capital allocation strategy. We continue to believe that HP shares are a good investment. We-- and our strategy has been the same for a few years. We think that we need to continue to be investment grade rating.
To do that, we need to be in a leverage ratio between 1.5 and 2, which is where we are now. And once we are within that range, our plan is to continue to return 100% of free cash flow to investors, unless a better opportunity shows up. And we are very rigorous on how we evaluate them.
So no changes in our capital allocation strategy.
- Lastly, before I let you go, have you seen any easing in getting the components you need to make printers and computers?
ENRIQUE LORES: So if we look at the situation now versus a year ago, the situation is clearly better. The number of components missing is much smaller. And if I look at where we are now versus where we were expecting to be a quarter ago, we are making progress, as we were expecting, both in personal systems and in print.
There are still some areas where some components are missing, but it is much smaller than anything we had in the past and we expect to continue to make progress.
- You know actually, one more. Since we last talked, we got the Chips Act. I mean, that passed. When does that-- when do those benefits start to show up on the top and bottom lines of a company like at HP?
ENRIQUE LORES: I think the Chips Act is important for the country to really gain independence from a technology perspective, and to be able to control our destiny better. From a company like us, the benefit is a medium to long-term benefit. We don't think any material will happen between three, four, five years from now because it takes time to build the factories, to run them up, to have production at the right level.
But this doesn't mean that this is not really important for the country.
- And there you had HP CEO Enrique Lores. And Brad, different tone at HP versus what we heard from Enrique a couple of months ago. But it's not just an HP thing. Over the past month, weak results from Dell, weak results from Intel. Heard a-- saw a growth slow down at AMD.
Nvidia came out and warned, they came out and reported a disappointing quarter, notably in the gaming business. So these old school, I would say, players in tech are also feeling the effects of the economic slowdown.
- Yeah, and a lot of the similar things that those companies you mentioned have discussed in especially just getting the components, whether it's building nano chips or nano millimeter printing that they need to do, or whether it's larger scale printing or selling printers. Just getting the raw materials in order to create the products, produce them, and then in a timely fashion also make sure that you can deploy inventory to the right partners that you've got on the retail front, or even directly to those direct to business buyers.
That is such a critical part of what he was mentioning in the conversation. And so not seeing a persistent headwind is going to be the biggest thing that they have to navigate right now, too.
- And lastly, to disclosure, I think we have HP printers here at the Yahoo Finance Headquarters.
- We do.
- There we go. See, I printed that out. There you go. There you go.