HP INC.
HP Inc Securities Analyst Meeting
October 12, 2017
Ubiqus Reporting, Inc. 2222 Martin Street, Suite 212 – Irvine, CA 92612
Phone: 800-979-5009 Fax: 949-553-1302
HP INC.
HP Inc Securities Analyst Meeting
October 12, 2017 1
HP Inc Securities Analyst Meeting
[START RECORDING]
[background music]
MALE VOICE: Ladies and gentlemen, please welcome Steve Fieler,
Global Head of Treasury.
[background music]
[applause]
MR. STEVE FIELER: Good afternoon. I’m Steve Fieler, Global Head
of Treasury for HP, and welcome to our 2017 Securities
Analysts meeting. It’s great to see so many familiar faces
in the room, some of which have flown in from the east coast
and cities across the globe, so thank you for joining us here
today and thank you for those who are taking the time to join
us via webcast, as well. This is the first time in HP’s
history we’ve actually hosted the meeting on-site here at our
headquarters, and there’s been building momentum and
excitement around this campus, partially driven by the free
lunch today, but we’re thrilled to have everyone here. It’s
going to be an exciting day.
And for those who aren’t here in person, we’ve spent the last
90 minutes or so showcasing some of our newest products, from
very small to very large, some services and technologies,
including some cool detachables and notebooks, along with
gaming and virtual reality demo. A whole line-up of
printers, including our new A3 lineup, some amazing graphics
machines, and yes, even a live, 3D machine. How cool is
that?
Before covering today’s agenda, let me go over a couple
important slides here. 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 this slide about
the use of forward looking statements and the presentations
that involve risks, uncertainties and assumptions. And for
discussion of some of these risks, uncertainties and
assumptions, please refer to HP’s SEC reports, including its
most recent form 10K and for 10Q’s. HP assumes no obligation
and does not intend to update any such forward looking
statements and we also note that financial information
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October 12, 2017 2
discussed in this meeting reflects estimates based on
information available at this time and could differ
materially from the amounts ultimately reported in HP’s
annual reports on form 10K for the fiscal years ending
October 31, 2017 and October 31, 2018. For financial
information expressed on a non-GAAP basis, we have included
reconciliations for the comparable GAAP information, so,
please refer to this slide presentations accompanying today’s
meeting.
Okay. Deep breath. We’re real excited about the agenda
today. We’re going to start with Dion, who’s going to
highlight some of the progress we’re making towards both our
strategic and financial objectives. He’ll then talk about
what’s in store for next year and offer some longer-term
insights and perspectives about HP’s future. We’ll then
shift to a view of the segment and have each of the segment
presidents, from Ron, Enrique to Steve, join us up here and
talk in a bit more detail about their respective businesses.
We’ll start with personal systems and then take a short
break, then print, then 3D and take another short break.
Don’t worry, there will be refreshments at break and I’m
expecting at least two things to happen. First, in front of
you, an HP Sprocket, a really, really cool and amazing
technology and product we released over the last 12 months,
so make some memories happen over break. Use the Sprocket.
And second, in front of you is a 3D printed object, a very
geometrical shaped, interesting object, so I’m hoping to hear
some conversation on how did we actually print that. And
hint, that object can only be printed via 3D.
So, after the break, we’ll come up here and Cathie will talk
about our financial overview and our FY 18 financial
guidance. I’ll ask the executives to come back on stage,
we’ll do a Q&A and then we’ll head back upstairs for a
reception.
So, a couple of final, logistical points before getting
started. First, the IR team, raise your hands, Chris, Kitt,
Hwa, they’re here. Please ask any and all questions to these
three gentlemen and they’ll instruct you and give you the
answers, and also, they’ll escort you back upstairs once the
event is completed down here.
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Second, materials will be made available to download on the
investor relations site. They will be posted just ahead of
the presenters, except for Cathie, who’s slides will be
posted after she presents today. Okay. It’s time to get
started here. I’m so pleased to turn the meeting over here
to our president and CEO, Dion Weisler, but just wait. We
have a short video.
VIDEO MALE VOICE (Jim Cramer): Every now and then, the good guys
actually win. HP Inc. reported a quarter that totally
changed the narrative here.
[background music]
VIDEO MALE VOICE 2 (Dion Weisler): I tell you, I couldn’t be more
proud of this team. I think they just did a phenomenal job.
We set out to really reinvent this company 18 months ago. We
said we kind of have the heart and energy of a startup but
the brains and muscle of a Fortune 100.
[background music]
MALE VOICE: Ladies and gentlemen, please welcome Dion Weisler,
president and Chief Executive Officer.
[applause]
MR. DION WEISLER: Well thank you and welcome. Good afternoon,
everybody.
ALL: Good afternoon.
MR. WEISLER: Antonio, next year, music louder, a bit more bass.
Good afternoon, everybody.
ALL: Good afternoon.
MR. WEISLER: Welcome to our humble home. Actually, this is our
humble cafeteria, which is why we’re serving free lunch to
our team, because we kind of took over their lunch space, but
it’s a special place for us because we actually launched our
company here back in, November of two years ago. We invited
all our founding partners, those that represent almost 80
percent of our revenue, were in this room celebrating the
opening of this new company, and so, for those of you who are
on the web, thank you for tuning in, wherever you may be.
And for those of you here in the room, thank you for joining
us at our headquarters in Palo Alto, California.
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As you saw earlier today, we’re literally just steps away
from Bill and Dave’s offices. Every time I walk in, I’m
reminded of the power, pride and responsibility that we have
leading one of the largest technology companies in the world.
It’s amazing to reflect on all that has come before us, how
our company has changed industries, changed communities and
lives all around the world. Our aim is to continue to
reinvent this iconic company that’s been entrusted to us.
This has been a tremendous year for HP, and the best part is,
we’re just getting started. Most importantly, we’ve
continued to prove that we can consistently execute and win
in the marketplace and deliver returns for our shareholders.
We’ve also proven that we can convert ideas into real
businesses, as we set ourselves up to accelerate our growth
and capture the future.
Today, we’ll talk about how we’re delivering results aligned
with our strategy and what you can continue to expect from us
into fiscal year ‘18 and beyond. As part of this, I’ll also
spend some time discussing the trends that are changing the
world around us because with change, we create opportunity.
Nearly two years ago, we set out to create a company with the
heart and the energy of a start-up but the brains and muscle
of a Fortune 100 corporation. We set out to reinvent a new
kind of technology company with a mission to engineer
experiences that amaze for everyone everywhere. In the past
year alone, I met with tens of thousands of employees,
partners, customers and investors. I’ve experienced the
great products and services that we’re creating for our
diverse customer needs and seeing how our reinvention
strategy is paying off, and I’ve got to tell you, I’m humbled
by our success and I’m really optimistic about our future.
For our shareholders, we are doing what we said we would do,
delivering operational excellence, predictable shareholder
returns and building a business for the long-term. When we
became a standalone company, we had to prove that we could
deliver reliable earnings and cash flow, take profitable
share, drive productivity, stabilize our core businesses and
importantly, establish growth, and we’ve been doing exactly
that, and I’m very proud of what our accomplishments have
been since last year’s Security Analyst Meeting.
We delivered three-quarters of non-GAAP earnings, EPS, within
or at the high end of our guidance. We have grown total
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company revenue for four consecutive quarters with broad-
based growth and share gains across all three regions. In
the third fiscal quarter alone, we grew revenue ten percent
year-over-year. And we stabilized supplies revenue one
quarter earlier than expected.
These results give us the confidence in our business
fundamentals, including our ability to generate cash flow.
And we remain committed to our return of capital strategy,
and we’re on track to deliver at the high end of our 50 to 75
percent return target in FY ‘17. With an emphasis on
operational excellence, we remained focused on managing costs
and are on track to deliver our productivity initiatives.
This gives us the capacity to invest in research and
development, in sales and in marketing to fuel our core,
growth and future opportunities. Our investments in areas
like security and design are translating into growth across
both personal systems and print. Additionally, earlier this
year, we began shipping our first 3D printers, as well as our
new A3 product lineup. In each, the operating principle is
exactly the same, segment the opportunities, create
efficiencies to invest in differentiated technologies and
bring unique and compelling value propositions to market in
order to gain long-term profitable share.
We have never been as well positioned to execute on our core,
expand into growth opportunities and to capture the future.
Now, let me take a moment to highlight our business unit
performance and how we’re setting ourselves up for years to
come. In personal systems, we’re executing and innovating
like never before. Revenue has grown year-over-year by 12
percent and operating profit by eight percent year to date,
and we are seeing growth across all reported product
categories driven by the most innovative product portfolio in
our history. We rose to become the number one PC
manufacturer worldwide and have consistently outgrown the
market for 14 consecutive quarters, including our most recent
calendar quarter two, where we outgrew the entire PC market
by nine points.
When we last met at SAM one year ago, one out of every five
PCs globally had an HP brand on it. Now, we’re well on our
way to nearly one out of every four. While this is
tremendous progress, there is still room to expand and
profitable share to take.
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But, remember, share is not our goal. It’s rather an
outcome, and I’ve been very consistent on that point. The
teams are doing an outstanding job of stitching the seams to
deliver growth. Ron, together with the regional presidents
and the supply chain teams are in lock-step identifying
pockets of growth, targeting our investments and remaining
disciplined over a multi-year period. This focus has kept us
ahead of our competition and ultimately turned strategic
intent into positive return on investment.
A great example is in the premium segment and specifically
with the Omen gaming platform. Two years ago, we barely had
a gaming presence, but we saw opportunity and invested.
Gaming is one of the fastest growing market segments and most
high margin opportunities, as gamers play a premium for
performance, as well as style. Today, Ron will provide
additional color on our strategy in personal systems, as well
as how we’re positioning ourselves to capture the future.
And in printing, the pundits said printing was destined to
decline. But we’re providing them wrong. Some of you said
we couldn’t do it, but we are. We have grown revenue for the
past two consecutive quarters, including growth in both
hardware and supplies. Supplies revenue stabilized during
our third fiscal quarter, a quarter earlier than we said it
would. The team did an excellent job managing the
transitions in our supply sales model and our focus on the 4
box model drivers is really working for us.
Stabilizing our core business sets us up for growth
opportunities, and the print business has a strong track
record of making targeted investments and generating positive
returns. Take, for instance, the success of the Sprocket.
You all have one. It’s our new, pocket sized printer that’s
making print relevant for an entirely new generation of
customers, and our sustained performance in graphics, where
we’ve achieved 16 consecutive quarters of growth in constant
currency.
Similarly, our aggressive push to disrupt the A3 copier
market is supported by targeted investments and a very
disciplined focus. We see a large 55 billion dollar
opportunity where we can leverage existing capabilities and
know-how, including IP, distribution channels and service
based business models to accelerate or entry into a natural,
under penetrated adjacency. We are accelerating this
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opportunity with the announced acquisition of Samsung’s
printing business, and we look forward to welcoming them to
our printing family, once the deal is closed.
You’ll hear more from Enrique on the exciting initiatives the
print team are planning that will generate sustainable, long-
term returns in home, office and graphics printing.
Okay, go and have a little bit of a stretch. It’s about to
get really interesting, because we’re not only advancing our
innovation and security. We’re also shifting business from
contractual, from transactional to contractual offerings.
We’re leveraging decades of HP printing technology to offer
new products and enter new categories, and in the first of
three SAM exclusive announcements, we’re entering into a new
and exciting, do I get a drumroll? Anybody? New and
exciting, wait for it? We’re entering a new category of
textiles within our graphics business. This is an incredibly
new application of our technology, and Enrique will explain
more about the new market in his section.
Speaking of leveraging HP printing technology, one of the
most exciting elements of our strategy is 3D printing.
Momentum is building for the next industrial revolution as
the 12 trillion dollar manufacturing industry is digitally
transformed. This isn’t a one or two-year play. This is a
multi-year journey that should be a growth engine for this
company for decades to come. The disruption of manufacturing
is a massive opportunity because little has changed since the
assembly line transformed manufacturing more than a century
ago. Our strategy is not just to be a platform player, no,
no, not just to be a hardware provider, we want to work with
our partners in developing an open materials eco-system. Our
business is built on top of HP’s multi-jet fusion technology,
which delivers 3D printing at breakthrough speed, quality and
cost, making digital manufacturing at scale a reality. And
it’s incredibly encouraging to be hitting key business
metrics and key milestones. In only three short quarters,
we’ve turned our 3D initiative into a business with global
scale, repeat customer orders and expanding partners in our
material ecosystem, and yes, real revenue. While our
revenues today are small relative to our roughly 50 billion
dollars of annual revenue, our progress would make any
venture capitalist captivated with the future potential.
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You see, there’s three important things that matter most.
First, a significantly large and untapped market opportunity.
Second, a highly differentiated value proposition that’s
grounded in unique IP and really complex science, and the
third is a highly skilled team, capable of delivering success
while continuing to define the future. Well, we have all of
those in spades and more.
In the second of three SAM exclusives, are you ready, another
drumroll? You’re not playing much with me here. Good, I’m
glad, see, my team does that. When I get the rest of you,
that’ll be fantastic. But, we’re going to continue to expand
this business, introducing a new, lower cost, more accessible
3D printing platform that prints in full color. Multi-jet
fusion will be the one and only 3D printing technology in the
industry that can make mechanically robust and fully
functional full-color parts, and the lower price point will
open new market segments, making it easier for designers and
creators to access the technology.
Now, take a look at a couple of these parts. Beautiful full
color parts, vibrant color parts and you can just start to
let your imagination run wild when you can add infinite color
to part creation. I particularly like this part. This is
created as a bracket and often, for visualization, for a
designer, we’re able to change the color of high-stress areas
and so that the designer can zoom in on the high stress areas
and see where they might modify the design, but interesting
shapes like this in full color are only able to be produced
with 3D printing, which brings me to our third SAM
announcement.
Not yet. I’m excited to announce we’re doubling down on our
3D printing business and entering into a new market segment.
When we first came to market, we said we would be leaders in
polymers, in plastics. And now, we’re going to disrupt,
we’re going to disrupt metals. Our 3D printing metals
technology is unique and includes extensive HP intellectual
property. In fact, we’re already producing metal parts in
our labs. I have a few of them here and we’ll make them
available to show you a little later on, but what you’ll
notice is we’re not producing very large parts. We’re
producing small, detail parts. These are parts that are
produced in the millions, because, of course, where we’re
taking our technology is not just for small prototyping.
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This is for mass manufacturing, to disrupt a very large,
traditional industry.
So with a combination of both plastics and metals, we
continue to move beyond prototyping and focus on mass
production and digital manufacturing. Later, Steve will
share a few more details on both the new low-cost color
platform and our exciting metals technology platform that we
expect to introduce in 2018. You’re the first to hear this
news and we’re thrilled to share it with you here at our
Securities Analyst Meeting.
And finally, as I like to say, it’s not always about what you
do, but how you do it. Success if built on strong corporate
values, and two of our core principles are reinventing for a
better and more sustainable world and secondly, to be a
beacon for diversity and inclusion. These are not just the
right things to do. These are business imperatives. And
we’re not just making a difference in our company. We’re
challenging our suppliers and the entire industry to do the
right thing.
As industry leaders, we will continue to represent the
diverse communities that we serve and ensure environmental
sustainability for future generations.
Now, I want to take some time and shift gears a little bit
from talking about HP to painting a vision of the future with
three large trends transforming the world.
The first of these is rapid urbanization. The second is a
changing workforce and the third is the accelerating pace of
innovation. It’s clear there is an accelerating and
disruptive change all around us, every single day and by
understanding the digital transformations that are shaping
our future world, we can determine where to invest today. So
first, let’s look at rapid urbanization, which is driven by a
massive migration to urban areas. In only 12 years, there
will be 8.6 billion people on our planet, putting a huge
strain on all resources. By 2025, 42 percent of the world’s
population will live in very large mega-cities, driving 50
percent of global GDP growth. Urbanization is not only
driving population density, especially with millennials, but
it’s changing what we buy, how we buy it and how we consume
products and services. People and businesses will be in
smaller spaces with greater efficiency needs and drastically
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shifting from owning things to on-demand, service driven
economies.
So why is this important? Why is rapid urbanization
important to HP? Because contractual led buying is
dramatically accelerating and service led business models,
like HP’s device as a service and managed print services, are
enabling customers to reduce costs, shift cap ex to op ex and
have the flexibility to scale, all customized to the specific
customers’ needs. This enables us to provide managed
services for the device from birth to burial, generate
reoccurring revenue and improve the end user experience.
In addition to rapid urbanization, the second major trend
driving growth is a changing workforce. For generations,
boomers have been the largest group in the workforce, but in
only in a few years, 2.6 billion generation Z-ers will
overtake them. And Generation Z-ers are like no other.
There is no separation between their personal and
professional life. It’s all one life and a single identity.
For them, mobility is essential, connectivity a given,
personalization a priority and design an absolute must. So,
why is this important to HP? Because a changing workforce
requires us to adapt to entirely new buyers and their needs.
A device must be powerful enough to crunch complex
spreadsheets, but also vanquish aliens when they’re gaming,
all done securely with IT manageability. As workforce
demographics and even the meaning of work changes, one life
becomes a reality every single day. Devices and solutions
become more personal and more important. Battery life,
compute power, flexibility, mobility, security and managed
services all increase.
Now, we’ve talked about rapid urbanization and a changing
workforce. The third trend is accelerated innovation. In
this business, the pace of change is exponential. It’s not
linear. In ten years’ time, your phone won’t be ten times
more powerful, but a billion times more powerful than they
are today. The smart phone in your pocket right now is
already a million times more powerful than the Apollo moon
lander computer. The rapid pace of change we’re experiencing
today is only going to accelerate as we move forward. With
this massive, with this, all of this massive amount of data
will be created, which will increase some 50 times to 44
zettabytes or 44 trillion gigabytes by the year 2020. For
those of you who can’t quite contemplate that math, that’s
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equivalent to 352 million years of ultra-high definition
video content. That’s kind of a lot of data. It’s a big
deal. Makes for a serious couch potato, I’ve got to tell
you. And the security threats are going to be far greater
than episodes of Game of Thrones being leaked or email hacks
at the DNC or the recent Equifax breach. I understand there
was another one today. You know, it’s happening all the
time. Organizations are going to spend more than 90 billion
dollars on security protection in 2018 alone, and that starts
with securing devices right at the edge.
I’m confident that I can say, and I have a team of lawyers
that enable me to say this, that HP is the most secure PCs
and printers in the world, and as the amount of data and the
value of it continues to increase, we continue to invest and
differentiate ourselves through security. In fact,
everything we do and experience is being driven by data,
predictive analytics and artificial intelligence. AI will
unlock new business models that will change the world,
creating entirely new business outcomes and valued creation
opportunities. For instance, a combination of AI and 3D
printing enabled generative design, where algorithms create
the best design and 3D printing enables a world where
manufacturing complexity is absolutely free.
Let me give you an example. If you want to drastically
reduce the part weight of an airplane wing while increasing
structural integrity, machines will be able to create
entirely new complex designs that achieve those objectives,
designs and parts that are impossible to make using
traditional manufacturing methods, not to mention the impact
as everything becomes connected at massive scale.
Today, in our labs, the labs that you visited if you were
here, we’re 3D printing sensors directly into the parts so
that same airplane part could be connected and inform the
pilot before a dangerous stress fracture is visible to the
human eye. These are some of the trends that inform our
strategy, which remains consistent heading into fiscal ‘18
and beyond.
Our strategy is brought to life by an incredible range of
products and go-to-market capabilities that set us up for
long-term shareholder value creation. We operate in very
large markets, and while our parts of our core business are
in industry decline, our job is to reduce the glide slope of
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those declining businesses, and as we’ve demonstrated this
year, we remain aggressively focused on capturing the pockets
of growth within our core print and personal systems
businesses.
At the same time, we’ll continue to pursue disruptive growth
in future strategies that take a little time to play out,
including graphics and A3 and commercial transformation,
immersive computing and even longer term in 3D printing, and
our strategy is underpinned by services and solutions based
on those mega-trends.
Overall, we are leading in the core, setting ourselves up for
sustained growth and building momentum to capture the future.
So, how do we execute across our core growth and future
strategy? Well, it all starts with operational excellence.
This is in our DNA, whether it be how we manage our supply
chain to assuring supply or preparing for component shortages
or how we segment and understand our markets in minute
detail, and of course our continued efforts around
productivity improvements. We remain focused every single
day on operational excellence, but we manage the company for
the long term by first investing in design and innovation,
secondly by listening to our customers and building relevant
products, not just technology for technology’s sake, and
solutions that are grounded in quality and security and real
value that our customers are depending on. And finally,
evolving our business models to stay ahead. For instance,
during the past year, you saw us successfully shift our print
supplies model to a healthier demand-based model. We’re also
shifting towards more service and subscription based models
in both print and personal systems.
Now, two years ago, I talked to you about the importance of
building a culture at HP. Our people and sense of purpose is
what drives our reinvention. This is truly a first class,
killer A team, all aligned to a common purpose and strategy.
We’re focused on agility, speed and simplicity, with actions
that are grounded in integrity, transparency and most
importantly, on customer insight.
For our investors, there are a few important drivers on how we
plan to deliver long term profitable growth and shareholder
value. Here’s what you should expect from us. It all starts
with leadership in the core and predictable earnings and cash
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flows that are generated by these incredible franchises and
businesses. Our cash flows are supported by business
fundamentals, including a strong annuity-like print supplies
business, a growing percentage of contractual business and a
focus on shifting our mix to higher margin categories.
We will continue to face risks in challenging markets and
uncertainties. That’s just business. What separates us is
where and when we face these industry specific headwinds, how
we go about and continue to pursue pockets of growth and
innovation in our product line up to outgrow the markets, and
we will never stop, never ever stop optimizing our cost
structure through productivity and efficiency. It’s just
also the nature of this business, and importantly our free
cash flow gives us confidence in a consistent strategy of
shareholder returns. This is an important investor
commitment which Cathie will cover in her section.
You should also expect us to target investments to accelerate
and ultimately deliver sustainable growth over time. We will
continue to be disciplined, but make no mistake, when we
enter a new space or natural adjacency, we have a focused
plan to disrupt, to lead and to provide our customers and our
shareholders with additional value and opportunity. We are
deliberate about our investment choices, using a returns-
based framework, and will accelerate what’s working and we
won’t be shy to kill off projects that are not.
To support our growth, we have many unique advantages and are
pushing a really differentiated strategy. We have a highly
scaled and efficient supply chain. We have the best print
and PC teams in the business, with great talent spanning
physics and chemistry and mechanical engineering, computer
science, microfluidics, informatics and many more. We have
an extensive and very rich patent portfolio. We have an
incredible go-to-market and deep channel partnerships with
more than 250 channel partners around the world. We have a
services infrastructure capable of spanning everything as a
service. Oh, and by the way, we’re very proud of our market-
leading brand. Finally, with predictable earnings and cash
flows as our baseline and growth opportunities near- to mid-
term drive upside, we’re also positioning ourselves to
capture the future. Using 3D printing as an example, we’re
creating large and growing secular tailwinds and we’re
leveraging an existing technology and IP platform where we
have invested billions of dollars over many, many years. In
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fact, the same core technology cuts across our ink, graphics
and 3D portfolio, including our metals and lower cost color
platform that I announced today.
While investments in the future may have a higher risk reward
equation, we are pursuing these opportunities from a position
of strength and where we have the right to play and win big.
The trends, strategies and technologies I discussed today and
our focus on aggressively pursuing core growth and future
strategies will help position HP, welcome to the future.
But it’s not just about vision. It’s about actions. There’s
much more work to be done for our customers, our partners,
employees and our shareholders, and as you’ll hear from Ron,
Enrique, Steve and Cathie, our team is focused. They’re
energized, and they’re optimistic about our path forward.
And best of all, we’re just getting started on our
reinvention journey.
So now, to start deeper business unit conversations, I’d like
to welcome the bad boy of Brooklyn, Ron Coughlin to discuss
more about the strength in personal systems. Come on up,
Ron.
[applause]
MR. RON COUGHLIN: You didn’t finish the Back in Black from ACDC.
I love the fact that we actually have a business in black
that we can use the ACDC Back in Black to start off the
presentation. So, first and foremost, I’d like to second
Dion’s welcome to all of you to Palo Alto and our campus
here. There could not be a more symbolically appropriate
place to talk about the resurgence and reigniting of the
personal systems business. Now, in the last two analysts
meetings, I used two words to describe my view of the
business. They were confident and optimistic. So today, I’m
actually very proud to be adding a third descriptor. We
remain confident. We remain optimistic, but we are growing,
and boy, does that feel good.
[applause]
MR. COUGHLIN: I continue to have deep confidence in our strategy
and our ability to execute. I have optimism that market
dynamics are such that we can generate growth and that is
reinforced by the PC categories return to revenue growth for
the last three quarters. And guess what? HP is growing.
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HP Inc Securities Analyst Meeting
October 12, 2017 15
We’re leading the resurgence and our double-digit growth year
to date is proof that the strategy is working.
[audio cuts out]
MR. COUGHLIN: Now, the last two security analysts’ meetings,
we’ve shared the fact that we participate in a large and
growing addressable market, and now what you’re seeing is us
leveraging that broader market context to generate both
growth and margin. By combining share gains in our core PC
business with expansion into faster growing more profitable
adjacencies, we’re delivering faster top line and protecting
margins in the face of significant commodity headwinds. So,
our reinvention of the PCs is powering growth in our core
while we significantly transition our portfolio to these
higher growth, higher profit segments.
Now, contrary to many pundit predictions, the PC market
continues its recovery and the category revenues are being
lifted by a positive shift towards more premium devices,
gaming devices, and work stations. It is the PC category
that is the hotbed of innovation today, whether it is amazing
detachables, convertibles that defy physics, beastly gaming
devices, operating system improvements from Windows and
Chrome or security enhancements that keep the bad guys at
bay.
In contrast, the tablet category, innovation starved,
declining ten percent and its cannibalization of the PC is,
well, history. Now, we look at 2017, PC revenues will be up
six billion dollars. That provides fertile ground for HP to
source growth and it’s given us confidence in our PC
business. If you look at 2018, analysts predict
stabilization of units with continued positive MIC shift.
Now, we’re going to keep a keen eye on currency and its
impact of competitive pricing, and Cathie will talk about
this more later.
Now, that said, the recovery has not been without its
challenges. The industry faced significant component
headwinds. SSD and D Ram spot prices add up to 31 dollars a
unit. For HP, that translated to a billion dollars, plus, of
headwinds that we had to offset, but our teams have done an
excellent job offsetting those headwinds. Our procurement
teams, and I see my friend Stu Pann there, absolutely
outplayed the majority of their competitors and gave us
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HP Inc Securities Analyst Meeting
October 12, 2017 16
advantage in component supply and pricing that turned into
the topline growth and the profit performance that you’ve
seen.
So, as we sit here today, we see us near the peak of
component costs. We’ve modeled costs for 18, flat to Q4
exit. For Q1 and Q2, that does create an overlap that will
be reflected in the financials that Cathie will share
shortly. But despite these challenges, we have delivered
exceptional results of the past year and we’re mitigating
headwinds through cost reductions in areas like logistics,
where we reduce costs by 11 percent, and a great micro
example of this is our China logistics team. They took our
turnaround time from four days down four to five days and
associated cost down 30 percent. These are savings that
offset those commodity costs. These are savings that dropped
to the bottom line.
We’ve also offset the commodity costs with increases in
average selling prices. Those are though MIC shifts, better
attach, as well as our sales teams partnering with our
customers to reprice against commodities. If there was ever
a year that we saw the strength in our sales teams, it was
this year and how they partnered with customers to drive
repricing.
Now, critically, do you know where we didn’t cut? We did not
cut in quality. We didn’t cut in customer service. We
didn’t cut in customer experience, where HP’s net promoter
score grew significantly. We take an insight’s based
approach, combined with amazing product management,
engineering and design. So, this deep insights-approach
allowed us to close the experience gap with Apple.
So, if you take an Apple premium notebook, today, we are on
par from an experience and net promoter score. If you take a
premium desktop, guess who is number one on net promoter
score now? HP. It’s been many, many years since HP has
pulled ahead of Apple on premium PCs. Amazing, Amazing work
by the end to end PC team.
So, not surprisingly, when you drive more innovation in the
market with a better experience, the market responds, and
demand for our products has been absolutely red hot,
resulting in industry leading revenue and share growth, and
importantly, our innovation is driving a MIC shift to more
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HP Inc Securities Analyst Meeting
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premium devices like premium PCs, like gaming, like
workstations where we’ve outgrown all windows competitors in
premium, including market leader Apple. Now, this positive
MIC shift towards premium is central to our strategy. What’s
not central to our strategy is share for share’s sake. We
have been very clear about that, which is why we’re even more
proud to have our all-time highest share. We’ve been number
one for two quarters and if you look at the prelim from IDC
from three days ago, we’re number one again in the last
quarter. It’s an outcome or innovation execution, never an
objective, but that said, a strong PC core is fundamental to
drive the transformation that we’re in the midst of driving.
So, last year, we talked about driving our strategy across
core growth and future pillars. Today, I’m proud to say
we’re executing across all three. We talked about the
importance of premium and gaming. We grew four share points
in each. We talked about the importance of pockets of
growth. We gained two share points in commercial, one share
point on displays. We talked about scaling growth areas, and
our commercial detachables are up 70 percent. Now, with the
scaling and the mainstreaming of detachables, we’re going to
move those into our core and include them moving forward into
our core business. And we talked about the massive
opportunity of devices, service and retail point of sale.
Both are growing double digits, so yes, we’d like to say
we’re executing against what we said we would do.
Now, a truism of HP since Bill and Dave’s oscillators is that
when we innovate, we win, and boy, is our team innovating
against core, growth and future. We deliver products that
enthuse and excite our customers. The new Elitebook X360, is
this a consumer device or commercial device. The answer is
yes, right, but it happens to have everything that a
commercial customer would look for. It’s the world’s
thinnest business notebook. It’s not only taking share from
Apple and Yoga, but it’s also taking the design man, so I
love the quote up there. The Elite Book X360 is the most
stunning business machine they’ve ever seen. The Z2 mini,
all the muscle of a workstation in one-third of the space,
breaking the paradigm of what a workstation is and an
absolute engineering marvel. This is loved by power hungry,
creative professionals, as well as architects like Daniel
Libeskind, who designed the Freedom Tower, and the new
Specter X2 takes the design of detachables to the next level.
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October 12, 2017 18
And with our VR backpacks, we’re not only redefining gaming,
but also commercial workflows, as well, bringing dreams to
reality.
Innovations like these are redefining the PC, but at the same
time, they’re powering our transformation to PC adjacencies.
Strategically, they’re helping us drive higher ASPs, higher
margins and higher customer loyalty. With that, let me show
you a video that brings the innovations we’ve launched to
life.
[background video music]
MR. COUGHLIN: Now, I hope you want something just like this.
They are available for the holiday for you holiday lists.
So, obviously I’m very proud of these accomplishments, but we
are just getting started, as Dion reminds me, us on an almost
daily basis, we will get neither arrogant, nor complacent,
but these products that we’re launching have us very excited,
as well what we have in the pipeline.
Foundationally, these innovations come from a deep insights
mind in discipline that we believe provides structural
advantage for us going forward, and as we evolve our
portfolio, we’re going to be pivoting off five key trends.
The first was brought to life in the mega trends discussion.
Our work and our personal lives are blending, like it or not.
So, how many of you did work this weekend? Show of hands?
Answer an email inclusive, right? It’s about 80 percent of
the room. Guess what? That’s how many adults say they do
their work in their personal lives. Conversely, 60 percent
say they do personal items in their business life. Of
course, Dion, I’m not one of them. So, these lives are
blending and for millennials, this is even more true. They
expect it and they want the blending. And because HP has
strength in consumer and HP has strength in commercial, we
are best positioned to capture this trend.
Next, people want to be connected, whether they’re in the
offices, whether they’re in Starbucks, whether they’re at a
skate park or a school pickup line, they expect to be
connected, and this will only accelerate with 5G. You’ll see
us launch products with technology to capture this trend.
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HP Inc Securities Analyst Meeting
October 12, 2017 19
Third, between one - Equifax one and I guess Equifax two now,
and other security breaches, the safety of content and data
is paramount, and I’ll share our truly advantaged security
stack shortly. Next, big data is amazing in what it enables
us to do to be more smart and proactive in how we manage
devices and how we create experiences for our customers. We
can now know that your hard drive is about to fail before we
call IT and fix it. We can now know that your battery can’t
make it across the United States before you left New York for
the HP SAM meeting. We can now know that your security
settings are such that you have a major vulnerability and
remotely fix those.
And finally, people want, companies now are trying to buy
products, whether it’s PCs, phones, tablets, RPOS or even VR
as a service with a monthly fee. They’re looking to get more
efficient, yes, but more importantly, they’re looking to free
up their IT resources. For HP this opens up accretive,
stickier business models that because of managed print
service, we believe we uniquely can capture.
So, these are the trends that inform our go forward portfolio
and offerings. Now, more specific to our categories, we have
access to a 334 billion dollar addressable market. That
market is growing 4.6 percent. Now, year-over-year, we’ve
made some adjustments. We’ve reduced consumer accessories
because we’re more focused. We’ve added segments like VR
that are now scaling. About half the market, in orange
there, are PCs which, as I said, are recovering faster than
expected and are predicted to be stable going forward. So,
our job there is to gain profitable share, which we have
done, as Dion said, for 14 straight quarters and we’ve
outgrown every competitor for four quarters in a row while we
MIC shift to more premium segments like premium gaming and
workstations.
The other half of the TAM is what we call PC adjacencies,
which consist of growing segments like displays and
accessories, commercial services, retail point of sale and
now, nascent categories like VR and 3D scanning.
Importantly, these segments are growing double digits and
everything above the orange is profit accretive to our
transactional PC business. So, we’re very focused on
transforming our portfolio by scaling into these PC
adjacencies.
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October 12, 2017 20
So, we take the customer insights and the TAM model and we
use those to inform our go forward strategies. The basic
core growth future framework has guided us for four years.
Going forward, we are focused on reinventing the PC while we
transform our portfolio concurrently to these higher growth,
higher profit segments. In our core, we continue to focus on
delivering what we call the best-price future value. What
that means is lowest possible cost structure, with sprinkles
of magic, like a built-in privacy screen, the world’s first
that makes sure that your company’s next M&A deal isn’t
disclosed from seat 6C on Southwest, as isn’t your penchant
for the Bachelor. We’ll also segment the market and segment
again to find those profitable, I could tell from the smiles
who has that Bachelor penchant, to find those pockets of
growth. In our growth pillar, we’re focused on capturing the
25 billion dollar devices service opportunity and disrupting
retail point of sale, a great example of solving customer’s
work flow needs that I will talk about more later.
And to ensure we grow long into the future, we aim to drive
new category creation in immersive categories of VR and 3D
scanning, as well as defining compute in the offices and
classrooms of the future, and this all built on what is truly
and advantaged foundation, starting with supply chain. We
ship a PC every 1.7 seconds, just incredible. And if ever
there was a year that proved to you that scale matters, it
was 2017. And we’re doing it with world class quality and
now a premium experience on par with Apple. Our combination
of powerful creativity and relentless execution is truly
unique in our industry.
So, let’s now dig into our core business. As we shared, our
core business faced significant commodity headwinds. Did we
roll over? Were we victims? No way. We attacked non-
commodity costs and reduced them by ten percent. We did this
will continue to light our customers with sprinkles of magic,
one of my favorites here. This is the new Envy, all in one.
It has a pop-up camera, where it pops up and pops down, which
eliminates tape for many of you, but more importantly, for
some of us, it eliminates that oh my God, my camera was on
moment.
In gaming and premium, we’re tracking ahead of expectations.
You’ll see us continue to expand our lineup, extend our
design leadership and turn up the volume on marketing. Given
the higher ASPs and higher margins, gaming is now having a
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HP Inc Securities Analyst Meeting
October 12, 2017 21
tangible impact on the overall personal systems business.
Importantly, gaming’s also bringing younger users into the HP
franchise, which bodes well for us from a long-term
standpoint.
And finally, on security, our positioning as the world’s most
secure PCs is resonating. We grew two share points in
commercial and security was a big reason why.
So, in the last two security analysts’ meetings, we told you
we’d scale our premium gaming business. Clearly, we’re
executing against this, and in turn, these businesses are
improving the overall personal systems business. Gaming is
over ten billion dollars, ten billion dollars. We are now a
scale player in gaming, and we have increased our gaming size
10-fold in the last two years, ten billion dollars and we’ve
increased 10-fold in the last two years. The Omen brand went
from almost non-existent two years ago to a powerhouse gaming
brand desired by professionals and enthusiasts alike.
Believe it or not, more people watched the two Omen teams
play in the 2017 League of Legends championship than watched
the NBA Finals Game Seven. Just incredible momentum behind
gaming. And if you ask any retailer, any partner, they’ll
tell you HP’s designers have taken the design leadership
mantle. And the experts, well, they agree. We’ve won over
37 design awards this year, three this week alone. As a
result, we’ve outgrown all Windows competitors in premium and
taken significant share from Apple.
Beyond just being beautiful, it’s common sense. If 83
percent of customers say they prefer touch, we’re going to
give them a full beautiful touch screen, not just a bar of
it. And if convertibles are 40 percent preferred, we’re
going to give them a gorgeous convertible. We don’t have
dogma about laptops. We listen to our customers and that’s
what’s driving our momentum, which, by the way, this would be
a good holiday gift, as well.
Even with that incredible progress, we still have tremendous
headroom to reach our fair share of premium in gaming, and
based upon what we’ve launched and what’s in our pipeline, I
have tremendous confidence that our momentum will continue.
Now, others may have attractive devices, but at HP, we like
to think we have beauty and brains. No one, no one, no one
combines that design with the security features that are
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October 12, 2017 22
inherent in HP commercial PCs. Now, you say why is that
important? It’s important because 80 percent of companies
have had a cyber-attack this year. Guess where those attacks
happened? 71 percent of them happened on end-points. End
points are on the front lines. Our customers are concerned.
We have an advantage stack and security is now becoming a
major win rate driver for us, as well as margin driver. We
protect what matters most and do it in ways that no other PC
company does it, below the operating system, in the operating
system and above the operating system.
So, if your bios gets attacked, only HP, with sure start
technology, gets you up and running in minutes. And if your
PC gets lost like the Secret Service detail for Trump Tower,
with HP’s multi-factor authentication, we make sure your
content and your data and in that case, classified
information, doesn’t get into the wrong hands. And if you
click on a link with malware, HP is the only company that
containerizes your web activity so that malware doesn’t
infect your PC or your company’s. And if you want to do
important work in that boarding area before the flight on
your way home, HP Sure View is the only technology that makes
you sure that you’re not going to have visually hacking leak.
So, we know there is no impenetrable vault, but ours is
hardest to crack. These are the security differentiators that
help us deliver the most secure business PCs in the world,
bar none.
In our growth pillar, we’re continuing to grow double digit
and land major accounts in retail point of sale. We see
weaker competitors and a shift to mobility playing to our
advantage. In the last year, we’ve won a major coffee
company, a major sporting good company, amongst others. We
have significant momentum in this higher-profit space. Now,
workflow transformation is a continuation in our work in
commercial mobility where we mix innovative devices,
accessories, services bundled with software to solve
customer’s workflow needs.
So, a great example is India Customs. A pallet lands on the
dock in Mumbai. What used to happen was the gentlemen or the
woman goes out with a clipboard and a pen and writes what was
on that pallet and somebody else inputted that data. Enter
HP and its partners, we create a ruggedized tablet with
custom software linked in to the custom systems and taxation
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October 12, 2017 23
systems and out went weeks of work and added productivity to
India Customs. A great example of workflow solutions.
And finally, we continue to scale our Device as a Service
business, otherwise known as DaaS. We’ve seen tremendous
excitement from customers and partners alike, and it really
builds off the learnings, the infrastructure and the
capabilities for managed print services. Device as a Service
allows our customers to free up their IT resources, to focus
on their strategic priorities and for us, it creates a
stickier revenue opportunity. Let’s watch a short video that
brings Device as a Service to life.
VIDEO MALE VOICE 3: We tried turning it off them on again, so you
don’t think it’s lost, but you can’t find it.
VIDEO MALE VOICE 4: It happened how?
VIDEO MALE VOICE 3: IOS, Android, Windows? Oh, you don’t know,
so you downloaded and opened the attachment from the unknown
sender. Sound familiar? Well worry no more as all these
issues are about to become problems of the past with HP DaaS.
VIDEO TAMMY: What is DaaS?
VIDEO MALE VOICE 3: Thanks for asking, Tammy. DaaS is device as
a service. Let’s take a walk. We have some explaining to
do. DaaS is a fresh, modern way to manage your computing
solutions with one partner supporting you every step of the
way. It’s all about getting the right IT hardware and the
right support to the right people, helping them work from
anywhere in the world with total confidence. And all these
devices can be managed and secured easily, regardless of
operating system. I know. How does all that sound?
VIDEO TAMMY: Great.
VIDEO MALE VOICE 3: You bet it’s great.
VIDEO FEMALE VOICE: Moving forward, based on the numbers, let’s
keep it running at 138 percent.
VIDEO MALE VOICE 3: It’s all thanks to the DaaS consumption based
pricing model, simplified plans that make your IT spend more
predictable and efficient. And what is that model, I hear
you ask? It’s a one price per device contract scalable up or
down as you need, which makes the finances department very
happy.
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October 12, 2017 24
[background video music]
VIDEO MALE VOICE 3: Uh, okay. But wait, it gets better. HP DaaS
provides unique analytics and actionable reports about your
device’s health. This covers things like battery issues,
hard drive concerns and blue screen errors, so you can take
care of potential problems before they before problems.
Efficiently allocate managed devices with any operating
system, anywhere in the world, with up to date security,
predictive analytics, next business day replacement,
accidental damage coverage and an incredibly flexible
contract, all in one place, from one partner. DaaS from HP.
VIDEO TAMMY: Device as a service.
MR. COUGHLIN: So, hopefully you’re no longer asking, what is
DaaS? I love that video. It shows our device as a service
offering spans operating systems and device types. Our
differentiation is rooted in multi-OS, multi-device, our
ability to manage devices, secure devices, enable our channel
to do device as service and leverage managed print service.
For us, it provides new big data around end points, how
they’re used and expands our customer base and speeds up
refresh rates. All goodness.
From a financial standpoint, we are investing to build this
business, but over time, we see it generating accelerated
recurring revenue and higher margins than our legacy
transactional business, all goodness that reinforces a
strategic import of this to our overall transformation.
So, if you’re wondering whether customers really want this,
the numbers behind me speak for themselves. Customer
acceptance and momentum has been strong and validates the
strategy. We have a strong pipeline that is now scale,
growing 40 percent in this past year. Orders are up double
digits, and these are the result of a strong value
proposition and a very experienced services go-to-market,
thanks to managed print services, experience that our other
competitors do not have. Major customer after major customer
is shifting away from competitors to our devices in a service
contract. Our wins include a major Hollywood studio, a big
four accounting firm, a global airline and a top five
retailer, and that retailer is really interesting.
Not only are we managing their Windows devices, but we’re
managing thousands of iPads, yes, thousands of iPads. Great
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HP Inc Securities Analyst Meeting
October 12, 2017 25
example of the TAM opportunity that our multi-OS services
approach opens up for us.
Now, make no mistake about it. We are extremely proud of our
hardware business. And our product managers, engineers and
designers do a fantastic job, but at the same time, we’re in
the middle of a transformation from a purely hardware
business to a hardware leveraged services and solutions
business enabled by automation. Our strategy is to build on
top of our hardware leadership with must-have devices and new
form factors, bolstered by security, sold as a service,
bundled by software to drive workflow solutions to our
customers. We believe all of this will translate into more
sustainable growth, higher value-add, higher customer
retention and long-term, higher margins.
And to ensure our growth long into the future when I’ll be a
proud AARP member, the future pillar of our strategy is
focused on creating new categories across 3D scanning,
offices and classrooms of the future and virtual reality.
We’re doing breakthrough work in the 3D scanning space, and
we have an exciting effort underway with a company called
Super Feet, who’s the leader in innovation in custom insoles.
We’re creating custom insoles. They’ll be 3D printed on
multi-jet fusion. You’re welcome, Steve. On the slide, you
can see Tim DeBoom, two-time Iron Man winner, getting scanned
for his custom insoles. And this is the official foot
solution endorsed by the NFL and being deployed by teams as
we speak for their athletes, to keep them healthier and
playing better.
This is a fantastic proof point of our blended reality
strategy, combining 3D scanning on the front end and 3D
printing on the back end. Our teams are also designing
experiences that’ll define the future of offices. Many of
you in your offices probably have these small conference
rooms, three to five people. We call them huddle rooms.
What’s a technology that goes in a huddle room? Our product
management engineers are working to make sure it’s HP
technology. A great example of an adjacency in the offices
of the future.
And last, we’ve been very active in the VR space. We
partnered early with HTC Vive. This holiday, we’re launching
Microsoft’s VR solution. Earlier this year, we announced the
world’s first untethered VR backpack for commercial use
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cases, where we’re seeing traction with automotive players,
healthcare players, manufacturing players and entertainment
players. We view this as an important area for HP, a driver
of high end compute, and long-term a growth catalyst.
MR. COUGHLIN: We are very excited to be shaping the future of the
market. But we are thrilled to the, to see the impact that
we’re making today. Our VR system is being used today at
Providence Cancer Center in Portland to help patients, cancer
patients manage their pain. Dave Packard said that a company
exists not just to make a profit, but also to make a
contribution, and this is a contribution that we at HP are
very proud of.
So, if I was sitting in the audience, I’d be trying to figure
out how these strategies, initiatives and fancy innovations
translate to financial performance. So, last year, I shared
an area chart that talked about how we migrate to a higher
growth, higher profit model, and I’m proud to say we are
tracking to create that faster growing, higher margin
business. It starts with a never-ending quest to reinvent
the PC, with focus on higher value, premium gaming,
workstations, spaces. We transform our portfolio by moving
into device as service, retail point of sale, again, both of
which are growing double digits, and we supplement those with
long term building programs in VR and 3D scanning, which are
predicted to be 30 billion dollars by the year 2020 and where
we’re seeing already early traction.
Every day, everyone who works in this business is focused on
making this chart a reality. We’re passionately reinventing
the PC while we concurrently transform the portfolio. It’s
not a concept. It is a reality. In the past two years,
we’ve shifted our mix towards these higher growth segments by
three points, this, despite double digit growth on our core,
which is a good problem to have. It is this reinvention of
the core and portfolio transformation that gives me so much
confidence and optimism. Our future growth will be enabled
by a large and growing addressable market, a consistent core
growth and future strategy. As was the case when Bill and
Dave walked these very halls, our future growth will be
powered by the incredible innovation momentum that we’ve
reignited in this company, and our future growth will be
driven by the execution across supply chain, sales and
marketing that served us so well in this headwind-filled
year. And we’re committed to making sure that our future
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growth drives strong topline, bottom line and cash flow for
the investors that show so much trust in us.
So, I hope you, too, leave these hallowed halls with
confidence in our ability to execute, optimism in our ability
to transform the business and excitement that once again, the
personal systems business is a dynamic growth engine.
With that, we’re going to go to a break and after that the
prince, prince and the architect of an amazing renaissance of
the print business will come and talk to us about print.
Thank you very much.
[applause]
[background music]
[Music Intro]
ANNOUNCER: Ladies and gentlemen, please welcome Enrique Lores,
President, Imaging and Printing.
[Entrance Music]
[Applause]
MR. ENRIQUE LORES: Good afternoon. It’s great to see all of you
again and welcome you to our home. The success in personal
systems is impressive. I think you will all agree with me
that Ron and his team are doing a fantastic job in growing
the business and they’re actually becoming great role models
for all of us as we try to grow ours. Congratulations on.
Let’s talk now—yes.
[Applause]
MR. LORES: Let’s talk now about printing. Fiscal year 2017 has
been a year of great progress for the print business. We did
what we said we were going to do and more. When we met a
year ago I shared that there was one objective was to
stabilize the supplies business. And we did it. And we did
it one quarter ahead of plan. We also have continued to
remove cost from our structure that we have used to deliver
our financial commitments, but also to invest for the future.
And we are executing a winning strategy. The business has
grown since 2011 and we just posted two consecutive quarters
of growth.
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In fact, if we look at the growth year-to-date and we
compensate for the adjustment in the supplies model that we
did a year ago the year-to-date in cost and currency we are
growing 1 percent. More than two points better than the
market. And we change several quarters of unity decline with
year-to-date four percent growth in the units that we are
placing. And on top of that we really believe that we now
are in the right position to be able to grow. And we will be
doing that by executing our three strategies. Re-igniting
the home, disrupting the office, and transforming graphics.
Today I’m going to be talking most of the time about growth
and what are we doing to reinvent the print business to get
to growth. But before that I want to share a few of the
details of what happened in the year with supplies. You may
be asking what did we do to stabilize the supplies business.
It was all about rigorous execution of all the actions that
influenced the four drivers of the supplies business. It is
about improving the install base, increasing usage, improving
the quality of units that we place, that we keep, increase
share and price. This is what we did.
On top of that we re-defined the supplies model, and we moved
to a demand-driven model and we are starting to see the
results of that change in our business. We operate now with
lower channel inventories. We have been able to reduce our
channel discounts and increase our marketing investment. And
we have increased and improved linearity on product ability
within the quarter. And the combination of both the supply
stabilization, the management of the drivers of the model,
and the change in supplies gives us great confidence in our
ability to project and to predict this business in the
future, but also to manage it for growth.
So let’s start talking now about growth and how do we see the
future. We have great confidence in the future of the print
business, because we believe in the power of print to make
life better for everyone everywhere. In our personal lives
print is a great tool for us to share our better memories and
feelings. In our professional lives print helps us to
communicate our ideas with precision and power. I mean, what
we consume digital printing enables friends to connect with
our users, with our consumers in a very different way, in
surprising ways.
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This ability to connect and communicate tells us that there
is a future for print even in the digital age. And to
support that, let me share with all of you a great example.
A few months ago we learned that astronauts in the space
station in the International Space Station print more than
1,000 pages per month. So we were curious to know what were
they printing. They print three things, first they print the
records of all experiments, second they have to print all
emergency procedures, because they have to keep them in a
binder in case something happens. And they update them
regularly. But three, they print photographs that their
family sent to keep them connected to the world. What a
better example of the power of print, because I am sure you
will agree with me that the Space Station is one of the most
advanced offices and homes that we can think of and if they
print up there that means there is a future for print
everywhere else.
[Laughter]
MR. LORES: Now we want to talk about the trends in the industry
and where is this business going. I’m not going to repeat
all what I said, but I think it’s important to really review
what has transpired, because we used them both to define our
product solutions, our future solutions, but also to
differentiate from competition. Lifestyles and work styles
are changing. And Ron explained very eloquently how our
professional and personal lives are blending. Now, Dion, I
have to tell you something. While you and I were working
here hard to set up the stage Ron and Cathie were actually
watching a movie in their office.
[Laughter]
MR. LORES: So we need to talk about that later.
[Laughter]
MR. LORES: We see big changes in our life and how we work driven
by mobility and collaboration. The demand for security and
sustainability keeps growing. And as Dion said, we consume
more things every time as a service, especially young
generations. Personalization is becoming the norm in
everything we consume. We look at these trends to define our
future and to differentiate our offering in the future.
Let’s talk now about how do we see the print market. Print
is a large and stable market. But has significant
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opportunities to grow. The projection that we have here is
very similar to the projection we discussed a year ago.
And we believe that by focusing on the right focus of growth
we will be able to grow this business, despite a flat market.
The home segment is going to continue to decline in the
future as has been declining in the last year. But prints
printed from mobile devices are going to continue to grow,
especially photographs. And this is a great opportunity for
us to grow. The office segment is going to be growing about
one percent in the years to come and with an office there are
two important segments for us to grow, first is A3 which is a
large market where we are under indexed, and second is
managed print services, which is going to continue to grow
between two and three percent in the years to come.
And, finally, graphics, especially the digital portion of it
is going to keep growing in the coming years, giving also
opportunities to grow. How are we going to be driving this
growth? We are going to be achieving that by driving our key
strategies. At a high level, our strategies are very simple.
It is about capturing new pages. It is about creating new
print occasions, because these will be driving the growth of
our supplies business. And you know that our business model
is centered around supplies. We classify our growth
initiatives in core, growth and future. In the core it is
about increasing innovation to capture opportunities in the
home space. And it is also about continuing to grow our
share of profitable units in the office.
We have two growth opportunities, capture pages that today
are printed in copiers from competitors and to grow our
graphic business by driving the transition from analog into
digital in many applications. And our opportunity in the
future is about leveraging years of investment in technology
to create a new opportunity in 3D, and to transform the
manufacturing industry. And Steve is going to be covering
that in the next presentation. These strategies are
supported by five key capabilities. Growth and technology
are one of the broadest IP portfolios in the industry.
A supply chain that is unrivaled in scale and that every year
gets more efficient. The best and most knowledgeable team in
the print industry. One of the world’s most valuable brands.
New capabilities in big data and analytics that help us to
continue to redefine our offering and make our business more
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profitable. And before I talk about the strategies let me
spend some time describing what we are doing around two of
these areas. First of all, there’s marketing. We have
reinvented print marketing. We use now storytelling to
connect our customers with our strategies and we sell our
products.
And we had aligned all of our marketing activities around
five themes, print you, to highlight the power the detail
that printing has to create personalization. Print joy, to
communicate how print can help to establish connections with
consumers. Print securely, to reinforce how important
security is, also when printing. Print anywhere, to
highlight that now it is possible to print from any mobile
device. And finally, print sustainably. Because
sustainability is critical, not only for HP as a company, as
Dion explained before, but also for anything that we do in
the print business, from how do we design our products to how
do we manage our supplies.
The best way to understand the impact of these activities of
the impact of solution telling is really about watching a
video that highlights the power of print. Let’s see the
video.
[Video plays]
[Video ends]
MR. LORES: This is the power of print, and now since all of you
have a Sprocket you can go home and for those of you with
kids you can take a picture and see what happens.
[Laughter]
MR. LORES: Let me talk now about the second capability.
Big data and analytics are becoming very important both in
how do we manage our business, but especially on how do we
improve the profitability going forward, and therefore how
do we improve shareholder value. This is based on the
ability that we have and the capacity we have now to
connect with millions of printers in our install base and
to capture the data from them. And I thought that rather
than explaining it in a very high level it was better to
give three clear examples of things that we are doing today
to leverage and to use this data. The first chart shows
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how are we able to monitor and measure at a country level
what is the usage across different territories.
Dion talked before about the heat in the market, this is
one way for us to look at the heat in market. And we can
use this data to define specific marketing problems in
those areas. The chart in the middle shows how we use this
on a more granular level. We work with some of our
partners to understand what is the connect rate between
supplies and hardware at the store level. And this enables
us to build specific sales programs in those stores to
improve that connect rate. And the third chart shows a
very different view. In the past we had talked about
looking at profitability per printer. Now we can look at
the profitability per printer and per user. And this helps
us to identify opportunities to improve our overall
profitability by defining new types of products and
defining new types of service models. This is really
fundamental for us, it’s going to be fundamental for us to
manage our supplies business in the future.
So let me talk now about supplies. First and foremost we
project a stable or lightly positive revenue growth for
supplied in fiscal year 2018. And this forecast is
supported by the predictions of our 4 box model. As we did
last year, I wanted to share the assumptions that we used
to drive the model. And as you will be going through the
details, you will see that the assumptions this year are
very consistent to what we discussed a year ago. In fact,
there is only one change in the table. Last year we were
projecting a decline in the office install base, now we are
projecting that the install base in the office will be
flat, and this change is driven by our penetration and our
growth in the A3 space. The rest of the assumptions stay
consistent.
We also wanted to share how we continue to improve the
quality of the units that we ship every year. And this is
the similar chart of what we shared a year ago. It shows
how we improve the percent—how we increase the percentage
of units that deliver more value over time and how do we
decrease the number of units that create less value for us?
And the best way to look at this is by looking at the unit
value index. This is a weighted average of the units that
we ship every year. And what this is telling us is that
the units that we will ship in 2018 will be 20 points
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better than the units that we ship in 2015. A very
significant improvement.
And, finally, about supplies, I wanted to confirm another
trend that we discussed a year ago. One of our key
initiatives is to transform our business from a
transactional model into a contractual model. And we are
going to continue driving that over the next few years.
And actually, we see a point in time in the future where
the percentage of our business under contract will probably
be the most important variable of the business. But that
point is not today. So having discussed supplies, let’s
now start talking about our strategies for the different
segments.
We see consumer habits changing, and therefore we need to
change our offering, we need to change our solutions. We
discussed last year what our strategies are. First of all,
it’s about bringing innovation to our core products.
Second is about creating new business and service models to
grow our business. And finally, it’s about creating new
print experiences that will make print relevant again.
This is what we are doing across to reinvent and to ignite
home.
In the core, we have made very good progress this year. We
launched the new HP Smart App. It simplifies what it takes
to print from any mobile device into any HP printer. Since
we launched the application a few months ago, we have had
more than 29 million downloads, and now more than five
million jobs are printed from the application every month.
And that number keeps growing. And we have also introduced
a new portfolio of printers, the new Envy photo printers
that combine great design with great photo quality and that
will enable to reposition us in the high segments of the
consumer space.
When I was talking about supplies I was sharing how are we
using big data to redefine our portfolio. Let me share two
specific examples of how have we done it in the home space.
In developed countries we show that customers with very low
use were barely profitable. They don’t print enough. So
for those customers we have launched a freemium model with
instant ink. And this model incents them to print more.
We also show that customers with heavy use have a lower
profitability than the average.
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And for those customers, we have launched a 500-page model
with instant ink that helps us to keep the loyalty of these
customers to HP supplies. In emerging countries, we saw
that our share and profitability with very heavy use of
customers were very low, because they used clones. And for
those customers, we transformed our portfolio and we
launched the ink tank products, which are helping us to
increase our profitability and improve our business model
in those spaces.
So as we look into the future, we continue to see
opportunities to improve our profitability in the home and
therefore our shareholder value by transforming our
offering, either of products, or of services.
And let me talk now about creating new opportunities. I
mentioned before the opportunity that we see of printing
pages from mobile devices, especially photos. Every year
close to consumers take close to one trillion pages, a
trillion photos. And these photos stay in what we call the
digital prison. Since we launched our photo lifestyle
category and Sprocket, is actually the first product in
that category. We have released close to seven million of
these photos. Customers have printed them.
Sprocket follows a very simple message. We want consumers
to click what they like and to print what they love. And
with this simple message we have seen also that we have
been able to attract a very new type of customers to print.
Consumers that had never printed before. More than 55
percent of the users of Sprocket are younger than 25 years.
We are attracting consumers to print that have never
printed before.
We are planning to continue expanding these categories,
both into new geographies, but also increasing and
expanding our portfolio. In fact, today in New York, we
announced two new products of the photo lifestyle family.
We announced Sprocket Plus, that prints images that are 30
percent larger, and we announced the Sprocket 2-in-1, that
integrates an instant camera into the printer. And we
believe that by driving and increasing the portfolio, we
will continue growing this category.
For those of us that were here when we launched the first
desktop printer, we remember the very clear objective that
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we had. We wanted to sell one printer for every desktop
computer. And now with this category we have a very
simple, but at the same time a very ambitious, goal. We
want to sell one Sprocket for every Smartphone in the
planet. And I know this is ambitious, I know this is bold,
but it is also very inspirational. And tells us about the
opportunity that we have in the years to come in this
category.
Let’s talk now about the office. The office is a very
important segment for us. It is a big part of our core,
but also, we have a great opportunity to grow in the A3
space. And our goal is very simple. To continue placing
A4 and A3 profitable units, while at the same time, we
transition from a transactional into a contractual model.
And we will do that by differentiating through security, by
capturing pages that today are printed in competitor
copiers, and by launching a new portfolio of solutions that
will enable mobility, will enable collaboration, but also
will be connecting the printed page with digital work
flows.
Let me talk about the first of these strategies, which is
security. Both Dion and Ron talk about how critical
security is for any modern business today. Unsecured
printers offer a backdoor for hackers to penetrate in
corporations. And our objective, our plan, is to close
that door. And we are doing that by securing the device,
securing the data, and securing the documents. And we have
built multiple technologies to make that happen. But when
we started to work on these a few months ago, we realized
that the awareness of this problem was low. Even if this
is a critical problem for our customers, many IT decision
makers didn’t realize that the printed world was really an
integral part of the network. And to raise awareness of
this problem, we launched a marketing campaign. The Wolf
has been focused in showing how vulnerable the networks are
and the problems our customers can have. Let’s see the
video of what The Wolf is doing out there.
[Video plays]
[Video ends]
MR. LORES: So since now we have raised awareness, now it’s time
to start talking about how HP is going to be fixing these
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problems. And for that, we have launched a new campaign
called The Fixer, and the Fixer is going to be showing how HP
products and solutions are going to be helping our customers.
Let’s see the video of The Fixer.
[Video plays]
[Video ends]
MR. LORES: Security is now one of our key differentiators both
for our A4, but also for our A3 portfolio. So let’s talk
about A3. A3 is a great growth opportunity for us. It’s a
55 billion dollar market of hardware supplies and services
where we are under indexed. And we have built a very solid
plan to grow, built upon a clear differentiation of our
portfolio. We are the company that we offer the lowest
maintenance costs. Since we announced these products in
September 2016, we have made great progress. We have
onboarded more than 500 partners that have seen the value of
our portfolio. Customer reception has also been very
positive. Customers like the breadth of our portfolio and
the fact that by having the lowest maintenance cost they can
save money, but also, they see a significant increase in the
up time of their devices. Demand has actually exceeded our
expectations, and the shipments are ahead of plan. And we
have had wins all over the world, across many different
vertical industries.
But we are only starting in A3. When we look at the market,
we see two types of companies what we call tier two vendors
that have between five and ten percent share. And we see
tier one vendors, and there are only three or four in the
world that have shares higher than ten percent. Our plan is
first to be the leader of the tier two category, but then to
aspire to lead the tier one category. And what milepost have
we defined to monitor our progress? Our goal is in three
years to at least double our share to 12 percent. We know
that to grow this category we are going to have—we will have-
to continue to invest as we ramp, but also that we will have
to execute with the same rigor that we have been doing in
other parts of the business. And as we will do that, we will
be able to continue to drive the transition from
transactional into contractual models and grow our managed
print service business.
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One of the building blocks of our strategy is the acquisition
of Samsung. A year ago, I shared the strategic rationale of
the acquisition and it has not changed. And today, I
actually want to focus on: what are the strategies that we’re
going to follow to drive integration. Even if acquisition
has not been completed yet, we are going to do three key
things.
First of all, we are going to be fully integrating both
portfolios, eliminating duplications and minimizing overlaps.
And we will do that while integrating the Samsung salesforce
first. The Samsung salesforce for the printing business into
HP sales force.
Second thing we will do is manage the Samsung printing
business with the same rigor and discipline that we have been
managing the HP printing business. Both in placing units,
profitable units, and also managing the supplies business.
And, we will accelerate technology leverage to drive
innovation, but also to drive efficiencies. I’m happy to
report that we are on track to complete the acquisition
during Q4 of 2017.
And now let me talk about graphics, the second key growth
opportunity that we have in this business. The growth will
come by driving the transformation from analog into digital
and we are in the best position to do that because we own the
printing technologies that are going to be required to drive
that change. Graphics today represent about 15 percent of
our total print business and during 2017 we saw a significant
acceleration of the business that we are planning to maintain
in the years to come. We will drive the transformation from
analog to digital and grow this business doing three basic
things.
First of all, increase the range of digital printing
technologies through technology innovation. Second, by
working with brands and showing them the capabilities and
what can they do with digital technologies. And third,
working with print service providers, our direct customers to
help them to improve their operations, make them more
profitable, make them more efficient.
Let me talk now about what are we doing in the different
applications to grow our business. This chart shows all
applications where we are playing today. Applications on
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your left are applications where the penetration of digital
is high today. Our strategy in this space and these ares
applications like publishing, commercial printing, or
signage. Our plan in this space, our goal in this space is
to grow our share of pages printed in our devices. And the
two recent wins that we announce are great proof points of
the progress that we are making.
Two months ago we announced that we are now the preferred
provider of digital presses for Shutterfly. This is the
largest deal that we have ever done with Indigo Digital
Presses and what this means is that if you order a photo book
online, there are very, very, very high chances that this
book will have been printed in a digital press from HP. We
also announce a month ago another big deal, actually, the
largest deal ever in the graphics space: a deal with
Lightning Source. And they are now going to be buying our
page-wide digital presses.
Lightning Source is a publisher. They produce books, but
they are a large producer of books. In fact, they produce
more than 40 percent of the books sold by Amazon. And HP is
now going to be the exclusive provider of digital presses for
Lightning Source. Another great win that shows our progress
in this space.
The applications on your right are applications where the
penetration of digital is low. And our strategy there is to
increase the penetration of digital. And this is what we
will do in the packaging space and I will talk about this
next. But before I do that, I wanted to make a big
announcement. Though the problem of being the third person
to talk is that usually the CEO steals the thunder. So, yes,
we are going to be entering into the textile space, a 12
billion dollar incremental opportunity and in 2018 we will be
launching our first products in this space. We will start by
focusing on the soft signage space, but then later during the
years enter also the garment- going after the garment
opportunities.
Let me talk now about packaging and what are we doing in that
space to grow. Packaging is a great business and a great
opportunity for us to focus. It is a large business, close
to 11 billion dollars. We have digital penetration of five
percent, that is on the digital business will be growing by
20 percent in the years to come. And in packaging we include
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many different applications, flexible packaging, folded
carton, corrugated packaging. Today we are actually the
leaders in flexible packaging space. And we have more than
100 installations already made. And we are in a great
position to also lead the corrugated packaging business. We
are the only vendor that has pre- and post- solutions. The
inks that we use in our page wide presses are the only inks
that have been approved for food packaging. And most of the
largest packaging companies in the world are already using
our products.
The growth of packaging is going to be driven to a big extent
by personalization. Because personalization is something
that you cannot do when you print with analog technologies.
So to understand the value of that let me show a video that
shows what the capabilities that we have to personalize
output. Let’s see the video.
[Video plays]
[Video ends]
MR. LORES: Working with brands has become one of the key
strategies to grow our graphics business because we need to
help them to understand what is the value that digital
printing can have for them, it is about showing them the
value of personalization and how this can help them to
establish different connections with their consumers. But
it’s also about explaining how can they save money by
printing shorter runs, by removing, reducing waste, and by
reducing inventory costs. And we have now a team that is
driving that very actively. To understand the value of what
this is, let me share one of my favorite stories.
Amarula is a famous liquor and we worked with them last year
to create the name them, save them campaign. The Amarula
liquid is actually produced from the Marula fruit, which is
one of the favorite fruits for the African Elephant. And the
African Elephant is a species under extinction and there are
only 400,000 elephants left in the world. So, we worked with
Amarula to design 400,000 different bottles and with this
campaign they were able to reconnect with their users in a
different way and they actually saw a significant increase of
their sales of more than 150 percent in North America.
As we work with companies to drive these campaigns they see
the value that this brings they bring them to other parts of
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their business, but more important their competitors see that
and this creates a snowball effect that drives the
penetration of digital. Last year we did 40 projects like
this and we have another 150 projects in the funnel.
But now it’s time to close. And I hope that having gone
through the opportunities that we have in our three segments:
home, office, and graphics, you will share the optimism that
we have about growing this business. The opportunity is in
front of us and now it’s really about execution. And we have
proven that we can execute. In fact, the chart I’m showing
is a chart that I showed more than a year ago and we are
executing what we said we were going to do. 2016 was the
year for us to establish the foundation of this business. In
2017 we stabilized supplies. And now as we enter into 2018
we are shifting our focus towards profitable growth. And if
all of this is possible it is because at HP we are
reinventing print. Thank you.
[Applause]
MR. LORES: And now before I invite Steve to talk about the work
they are doing around 3D printing, I wanted to share a final
story. Actually, the stories are amazing that when I
explained to Steve the first time he thought I was making it
up. I shared before that we learned recently that astronauts
are printing almost 1,000 pages per print in space. We
learned about that because a few months ago we were
approached by NASA and they had a very interesting request.
They needed a printer that would work in space. And that
which may sound easy is very difficult because for a printer
to work up there it requires that it works in a zero gravity
environment. And today printers work because of gravity.
So, our engineers have to work on the problem. They have
been working on that for the last months. They have solved
that and we will explain more details in a few weeks. But
the only way they were able to solve that problem was because
they used the 3D printing products and printers that Steve
and his team has been designing. And this is a great example
of how there is the power of print helps the astronauts in
the planet, but how the innovation from Steve’s team is also
helping us to create new innovative products. Steve?
[Applause]
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MR. STEPHEN NIGRO: Okay. Thank you, Enrique. Actually, Ron and
Enrique, you guys are fantastic. And one day I hope our 3D
printing business, actually, I know our 3D printing business
will be as big and I’m sure Dion will say larger than those
businesses. Now in 3D printing we are so fortunate to be
able to leverage so much what HP has built over the last 30
years. Earlier this morning I hope you had a chance to go
see the multi-jet fusion printer in action. You guys see it,
making parts? Awesome. Ones and zeros going in and robot
parts coming out. And when you think about it, this is what
it’s about. This is our product. This is, for example, is
an air intake for a high-performance motorcycle. Real stuff.
And what you see is amazing HP engineering and science at
work.
Now, for 3D printing our mission is bold: to change how the
world designs and manufactures, or to say it differently, to
lead the next industrial revolution. Well, let’s start with
the market. The 3D printing market is projected to grow at a
30 percent CAGR over the next five years. With that said,
the big opportunity is to address and transform the 12
trillion dollar manufacturing market. With multi-jet fusion
we are bringing a uniquely differentiated platform to 3D
printing. We’re leveraging over 5,000 patents from our 2D
printing business, and we now have over 600 3D print patents
and patents applications. We are filing new 3D printing
patents at a higher rate than anybody else in the industry.
And in addition to a technology platform, we are building an
open material platform.
This allows HP to work with some of the largest and most
innovative chemical and material companies in the world. Now
I want to set some context. Last year here at SAM we had now
sold a single 3D printer. None of our routes to markets were
established. Now what we have seen is we’re shipping
globally to all regions around the world and we’re seeing
repeat customers. And one of the best indications of our
success is customers, who after a short time of using our
products are returning to order, not just two, not just four,
but six, eight, and in one case ten systems. In 12 months we
have built a global business. And we are just starting.
Now one of the benefits of being part of a company of the
scale of HP, is we have the capacity to innovate while doing
the very heavy lifting of starting a completely new business.
So in 2018 HP plans to deliver a completely new 3D plastic
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system that will expand our portfolio. We’re going to be
introducing it at a much lower price and for the first time
ever we’ll be able to produce mechanically robust full color
parts. And if that’s not enough, as you heard from Dion we
intend to go beyond plastics. And into metals with a brand-
new HP invented 3D metal technology.
Now, the fourth industrial revolution will change every
aspect of our society and the global economy. It’s been one
of the most discussed subjects amongst leaders of the last
two world economic forums. In fact, the World Economic Forum
itself has stated that the total value of digital
transformation across all industries could reach 100 trillion
dollars over the next ten years. When looking back at
history what we see is each major description is typically
based on some key enabling technologies. IT was the enabler.
IT was enabled, in large part, by the invention of the
summer-conducted transistor.
Our digital 2D printing business was enabled, in large part,
by the invention of laser and ink jet printing. The fourth
industrial revolution is no different. Key enabling
technologies include, artificial intelligence, the internet-
of-things, all devices being connected, big data and
analytics, robotics, and of course, 3D printing. The fourth
industrial revolution is all about the digitization of
manufacturing. Ones and zeros controlling all steps of the
creation and manufacturing process. The reason the world
gets so excited about the fourth industrial revolution is
that in a fully digital future innovation will happen faster,
time the market will shorten for a greater variety of
products. Business efficiencies will dramatically improve
with less inventory, new and more efficient supply chain and
increase capital efficiencies.
We say the fourth industrial revolution will democratize both
manufacturing and design. But what will democratization look
like? Now imagine a designer in Brazil has a new idea.
Let’s say creating a new personalized blue tooth speaker
design. She will be able to put this design up on the web,
the speaker will be produced anywhere in the world in a 3D
factory that serves the local market. Ship electrons, not
products. That is why China has Made in China 2025. That’s
why Germany has Industry 4.0. That’s why countries all over
the world are investing in 3D printing. Now 3D printing is a
key to the fourth industrial revolution. It might be
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obviously, but you can’t have a digital transformation
without a digital production process. We expect 3D printing
to grow rapidly and be a large and attractive TAM.
But even in 2021 it will be small relative to the 12 trillion
dollar manufacturing industry. So, what are the keys that
allow 3D to grow? We see six factors. The first three are
critical to unlock growth. Without significant progress in
these foundational factors the industry will not reach its
potential. First product capability. 3D printing needs to
be as reliable and consistent in production as current analog
processes like injection molding. Second, material prices.
The materials used in 3D printing must be similar to the cost
of analog materials. Third, material selection. Today there
are thousands of analog materials and 3D printing must
develop thousands of materials too.
Now the next three factors are keys to accelerating the
growth of 3D printing. First, design for additive. Creating
tools and training designers to take advantage of design
freedom enabled by 3D printing like the example that Enrique
shared with the moon printer. Second, new supply chains.
Creating completely new digital supply chains. Shipping
electrons around the world versus products. Fast, efficient,
more environmentally sustainable. Third, standards and
policies. Develop new standards in key industries and
embracing new policies to support the acceleration of the
fourth industrial revolution.
We are mapping our roadmap and activities against these six
factors to unlock and accelerate the market. Okay. HP is a
company that does what we say. We deliver on our
commitments. Last year we shared a multi-year roadmap on how
we plan to build the 3D business. This roadmap creates
mileposts to measure our progress. The first two things we
said that we would do is we would ship our first product in
2016 and we would establish our business in 2017. So how
have we done? We shipped and sold our first printer before
the end of 2016. So we have our first dollars of revenue.
In less than nine months from shipping our first product with
one product we are now shipping more plastic production 3D
printers than any other company in the world. We define
production as 3D printing systems that cost over 100,000
dollars and produce functional and mechanically robust parts.
But for me the most compelling fact is how many of our
customers are ordering multiple printers with repeat orders.
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Take a look at this picture on this slide. This is an actual
picture from Forecast 3D. They had been in the 3D printing
business for over 20 years. After buying and using the first
HP machines they came back and bought another ten machines.
And we have many customers who have bought a second, third,
fourth, sixth, or eighth machine. We are also seeing
momentum across key verticals. We have deepened the work
with leaders like BMW, Nike, Johnson & Johnson, and JABIL.
We have new engagements with innovators like Jaguar or Land
Rover, the biggest automaker in the UK, and with ETH Zurich,
a leading engineering university. They’re all looking for
multi-jet fusion to change how they design and manufacture
their products.
So, let me share an example of what is possible with 3D
printing. This is an air duct, something you would see in
automotive, aerospace, industrial applications, and even our
own printers. It is completely redesigned to take advantage
of multi-depth fusion. So, what we were able to do is reduce
the part count from six plastic parts, plus 13 screws, that’s
19 skews, plus assembly and testing, to one single part. We
were able to reduce the cost of the part by 5X and deliver
superior quality with superior air tightness. By redesigning
and combining parts today it is possible to improve
performance and reduce cost using multi-jet fusion. It’s a
big reason why 50 percent of the custom plastic parts in our
printer are printed, using multi-jet fusion.
Now as part of the buying process before buying a new 3D
printing system, customers want to produce sample parts to
test their application. This is what in the industry is
called benchmarking. Think of this as a test drive to see if
our technology will meet our customers’ strict application
requirements. What is really exciting is for us that in the
first nine months of shipping our systems, more than 50
percent of our benchmarks are targeting full production
applications. So, the world clearly sees multi-depth fusion
as a path to final parts production. The goal in high-tech
is create a platform. All around here in the valley people
talk, I want to create a platform. Leveraging the world is a
key to speed, innovation, and transforming an industry. We
have now added both Henkel and Sinopec to our open material
platform. And our partners represent more than 400 billion
dollars of revenue. We have had over 50 other companies
express an interest in building materials on our platform.
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We also created the world’s first open 3D material lab.
Scientists from other companies have been working side-by-
side with HP to advance new material systems. We introduced
and sold to the industry first material development kit, or
MDK. The MDK allows companies to speed up their in-house
development, new multi-jet materials by doing the work in
their own labs. Before using the MDK companies would create
3D powders and send it to HP. We would sometimes find that
the powders might not even be in our system. A big waste of
time.
Now after buying and using the MDK or the material
development kit, they can do their initial powder development
and testing in their own lab, so when we get the powders
we’re able to start diffusion optimization process. We will
be expanding these tools like this for our material partners
to help them innovate quicker and to create more materials.
So, our open material platform will be a key part of our
strategy to drive new materials, opening up new applications,
and driving more multi-jet fusion adoption. Expect to see
several new materials coming in 2018 as we expand our
platform.
Now, ultimately, 3D printing, if it’s going to transform that
12 trillion dollar industry must be as compelling
economically as traditional manufacturing. Last year we
talked about breakeven point, a key to shifting from analog
to digital. Now this blue line represents the relationship
between the cost of the part, in this case, that gear, and
the breakeven point. As the cost of the part is reduced, the
number of digital parts that can be made for less than analog
increases in a very non-linier fashion. So let’s go back to
the gear we showed last year. Now to give you a sense of
this, we approximate that there’s roughly 20 billion of these
plastic gears produced every year. Everything from consumer
electronics, industrial equipment, and again, our own
printers. And we noted last year that with the planned
pricing and productivity of our multi-jet fusion 40200 that
if you were going to make 55,000 or fewer of these gears it
would just make sense to print it versus injection molding.
Based on raw economics alone.
With the expansion of our portfolio the increase in our
material selection and the reduction of our material costs
the breakeven of this gear will double to 110,000 in 2018.
And we will continue to drive the breakeven. We will
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continue to drive productivity. We will continue to drive
down material costs to dramatically grow the 3D printing
market. Okay. As I said earlier last year at this time we
hadn’t sold a single system, we didn’t have our go-to-market
in place, one year later, we are now in all three regions.
We have over 65 channel partners. We have over 25 experience
centers where customers can come and see multi-jet fusion in
action. We are expanding to new transformational selling
motions, but most importantly, we are driven to serve our
customer. So let’s see what they have to say about multi-jet
fusion. Please roll the video.
[Video plays]
[Video ends]
[Applause]
MR. NIGRO: Thank you. In that example I visited the person in
Barcelona who is using 3D printing and what he’s doing with
it is he makes equipment that basically paints steel
construction beams. And that’s his products’ equipment. And
he’s using our technology to redesign the equipment he can
make and he is able to basically lighten the structure, he’s
actually routing the paints through this structure using
multi-jet fusion and he’s going to reduce his cost
dramatically of his product and he’s going to improve his
productivity, it was fantastic. A really creative guy. So
the HP 3D business is a great example of what Dion likes to
say about HP. We have the heart and energy of start up with
the brains and muscle of a Fortune 100 company. We have
innovative and new technology. We have delivered a new
product. We’ve scaled up a business at a rate that exceeds
what is possible even here in Silicon Valley. We have
established a business at an incredible speed. We have laid
a solid foundation and we’re hitting our milestones.
This is a great first year. There’s so much more to come.
Well, let’s go back to the roadmap we shared last year. We
said in 2018 we would expand our portfolio and to go-to-
market. So let’s look at what we planned to do in 2018. Now
multi-jet fusion is a voxel level 3D printing technology. A
voxel is a three dimensional pixel and the might HP voxel is
a key building block of our technology. In 2018 as Dion
mentioned, we intend to bring full color to the 3D printing
line up. Color is a great example of building at the voxel
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level. Now multi-jet fusion will be the one and only 3D
printing technology in the industry that can make
mechanically and robust and functional full color parts. We
plan to combine this color capability with a new lower priced
position.
This lower priced position will open up new markets to HP.
Making it easier for designers and creators to access the
technology. Being able to prototype with the same technology
as full-scale production will change the end-to-end design
process. And accelerate the adoption of 3D printing. So let
me share an example. Today a designer might use 3D printing
to build a prototype. But when going to production they will
have to completely change the design to reflect the
production process like injection molding. This additional
step in the development process will slow delivery buy two to
six months. With multi-jet fusion this goes away.
Shortening the time to market. The prototype parts will be
built with the same process that will be used in full
production. And this new lower priced product will be a
great compliment to our existing solution, allowing us to
expand to new market segments, and adding full color.
Also, what Dion talked about is our entry into metals. As we
said before, our aspiration is to disrupt the 12 trillion
dollar manufacturing market. With multi-jet fusion we have a
fundamental advantage of plastics. Now we are expanding
beyond plastics to metals. But why now? Well, pretty much
it’s the same reason we got into 3D plastics with multi-jet
fusion. We have developed a novel 3D metal approach that
leverages key HP assets. We have developed a novel 3D metal
approach that is built around a combination of high quality
and improving the economics of 3D printed metals. Today’s 3D
printing industry—today’s 3D metal industry is focused
primarily on specialized, high-value, and expensive
application. Our invention will transform the 3D metal
industry into a more mainstream high volume production. Or,
to say it differently, we are entering the 3D metal business
because we can have a major impact on the market and we could
make a unique contribution.
As a next step, we will be announcing that HP metal 3D
printing technology platform and our business plan to the
industry in 2018. This is certainly a major break through
and this is a major step for HP’s 3D printing aspiration and
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will be another defining point for the industry. Stay tuned
for more details in 2018.
Now I do love geeking out on technology, and a big reason I
love geeking out on technology, is because I really love
innovation. But innovation is just not about technology and
products, when transforming an industry is about new business
models, it’s about developing new routes to market. Henkel
an 18 billion year old material leaders is a great example.
Henkel initially joined our open material platform to develop
new 3D printing materials. Based on what they saw with
multi-jet fusion they will now be installing multiple systems
around the world, and they will be our first worldwide
reseller. They are also setting up demonstration sites in
Asia, Europe and the Americas. They’ll reach even more
potential customers.
We are also partnering with Delight, the leader in helping
large enterprises digitize and manufacturing and supply chain
processes. This is about two industry leaders coming
together to provide the needed expertise to help large
customers drive the digital business transformation. And we
recently announced the integration of the Siemens NX design
tools with multi-depth fusion to enable designers to take
advantage of our voxel level capability. Siemens’ is a
leading supplier of the design and factory tools and multi-
depth fusion is the first time they are integrating 3D into
their core toolset. Digitization is about data, and in the
future you will see HP providing new data services to
customers. There is so much happening right now I thought it
would be fun to share a video that captures the next step in
our 3D printing journey. Let’s take a look.
[Video plays]
[Video ends]
[Applause]
MR. NIGRO: Just can’t wait. Just can’t wait. We have done so
much in such a short time. We have launched and scaled the
global business. Our customers are scaling their business
with HP. We had expanded key partnerships with major
material providers. We have developed new route to markets
to drive the digital transformation. We are expanding our
technology in plastic portfolio. We are innovating new metal
technology that will change the industry yet again. And we
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are delivering against our mileposts. And the best is yet to
come. But everything we’re doing is driven by our north star
to change how the world designs and manufactures, or to say
it differently, to lead the next industrial revolution.
Thank you.
[Applause]
MR. NIGRO: Okay. We will now have a break and you’ll all, I’m
sure, be back to hear from Cathie.
[Applause]
[Music outro]
[END OF TAPE VT-Z-PIX-4-1-014_audio]
[START RECORDING]
ANNOUNCER: Please take your seats. Our program will begin momentarily.
[“Despacito” plays.]
ANNOUNCER: Ladies and gentlemen, please welcome Cathie Lesjak, Chief
Financial Officer.
[“I Love Rock and Roll” plays.]
CATHIE LESJAK: Okay, that’s it for today. I’m done. Good afternoon,
everyone. Let me echo the warm welcome to our campus. For those of
you that are here in Palo Alto, I hope you’ve had a chance to
glimpse at the incredible technology that’s driving our success
today and will into the future. Working daily in such close
proximity to Bill and Dave’s office is a constant reminder of the
importance of innovation. Product innovations, business-model
innovation, or process innovation. It doesn’t matter. We strive to
live up to their legacy every single day.
It’s been almost two years since separation and in that time, we’ve
worked hard to reinvent HP. By refocusing on our innovation roots,
we have created the greatest product lineup that our customers have
seen in a very long time. I’m proud of what this amazing team has
accomplished and I’m very excited about what lies ahead. This has
been a real breakthrough year for HP. Clear evidence that our
strategy is working. I’m pleased with both our execution in the
short term and our continued investment and focus on the long term.
In personal systems, we’re growing the business and gaining
profitable share. We’ve outperformed our competition and responded
very effectively to some challenging industry-wide, component-cost
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headwinds. Our success here is on the back of operational
excellence. Combined with a deep understanding of what our
customers want, we are able to drive innovation that really matters.
In print, we’ve achieved supplies revenue stabilization a quarter
earlier than expected and we’ve continued to invest in our graphics
initiatives, which has created a lot of energy and passion and
optimism and at times, at least for me, a few tears after watching
Enrique’s videos. And we’re all excited about the launch of our 3D
printing business and how much has been accomplished in just three
short quarters.
Our core, growth and future strategy has helped us sustain our
performance. We’re delivering financial results which are in line
with or better than the commitments that we made to you for FY17 at
last year’s SAM. Dion covered our business momentum earlier today
so I won’t go into great detail but I do want to highlight a few
areas. Last year, at SAM, we set a goal of a one billion dollars in
productivity improvements for FY17. We’re on track to achieve that
goal and just as we said we would, we’re doing it a second year in a
row. These cost cuts are critical to us. They’ve helped us offset
both the currency headwinds and the margin pressure of increasing
commodity costs in personal systems and in print, our improved cost
structure is helping us place more positive NPV units. We know,
that in order to be successful in our very competitive markets, we
need to be focused on costs, day in and day out. Always looking for
ways to operate more effectively and efficiently, cost-management
creates capacity. Capacity to invest in our R&D, in sales, and in
marketing.
The next highlight is earnings. The midpoint of our full year FY17
non-GAAP EPS range is now nearly five cents higher than our original
outlook that we provided to you at last year’s SAM. We’re also
generating very strong free cash flow. Last year, at SAM, we guided
an outlook for the free cash flow was 2.3 to 2.6 billion dollars for
FY17. During our Q3 Earnings Call we have increased our outlook for
the year to be at least three billion dollars in free cash flow.
And finally, we’re keeping our capital commitments to our
shareholders. Through Q3, we have already distributed 1.6 billion
dollars through dividends and share repurchases and we still expect
to end the year towards the higher end of our 50-75 percent range
despite the fact that our free cash flow is coming in significantly
higher than what we had expected. I’m particularly proud that we
have been able to accomplish all of this while remaining committed
to the investments that will drive future results. As Dion said,
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“We’re just getting started.” And innovation is key to everything
we do and ultimately drives HP’s leadership in new categories,
products, and business models.
So, now let’s take a look at our overall business. As you know,
we’re global industry leaders in both personal systems and printing;
delivering over 50 billion dollars in revenue in the last four
reported quarters. That’s five percent growth from where we were at
the same time last year. In PCs we continued to drive profitable
share gains maintaining our number one position worldwide and we’ve
extended our commercial leadership with innovative products like the
Elite Book X360 with SureView and offering the most secure and
manageable PCs in the market. We’re also driving on our commercial
transformation growth initiatives and in printing, we’re number one
in all regions and we’re also number one in brand loyalty and
customer satisfaction in managed print services. And did we mention
we stabilized constant currency supplies revenue? A quarter earlier
than expected? Note that the print OP rate on this chart is 16.2
percent and that is the trailing four quarters results and that
includes the change in supply sales model (say that three times) in
Q416 excluding that change, the print OP margin would be higher.
We continue to have very diverse geographic footprint with 46
percent of our revenue coming from Americas, 34 percent in EMEA, and
20 percent in APJ, and each reach region as grown year-over-year in
the last three consecutive quarters. Through our direct customer
relationship and leveraging our global channel partners, we have
extensive market reach which allows us to sell our products and our
services in over 170 countries. Our strength in the channel and our
culture of working with partners is particularly important as we
look to grow and scale our businesses. We expect that by the end of
this year, over 85 percent of our revenue will come as a result of
strong channel partner relationships. As you’ve often heard us say,
we segment our markets, and then we segment them again in order to
find the heat in the market and the opportunity for profitable
growth. We then drive hard into these pockets of growth utilizing
key customer insights to enable us to outperform in the markets.
In addition, our leadership experience throughout the organization
is a critical factor in how we execute whether in responding to PC
component shortages, successfully implementing the changes to our
supply sales model, or leveraging our IP in 2D for 3D. Capitalizing
on the right strategic moves requires exceptional teamwork to get it
right and we’re focused on driving better business results today and
well into the future. Turning to cash flow: delivering sustainable
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cash flow supports our overall capital strategy and capital
structure.
Three key aspects of our free cash flow generation to keep in mind
are: first, we’re generating strong profits and recurring cash
flows from our annuity revenue supplies business. With supplies
revenue stabilizing and as we shift to more contractual business
over time, those recurring cash flows should only be further
bolstered. Second, we have a negative cash conversion cycle and
I’ll talk a little more about this later. And third, our business
is not capital-intensive. Much of our capital expenditures are to
support the manufacturing of print hardware and the associated
supplies. The Q3 balance sheet shows approximately 0.2 billion
dollars in net cash. When compared to the Q3 balance sheet last
year, cash is increased by more than two billion dollars.
While we ended Q3 in a positive net cash position, we do expect that
to change once we close the Samsung printing acquisition which we
expect to do by the end of this calendar year. Because we operate
in rapidly evolving and increasingly service-based markets we
believe in the importance of maintaining an investment-grade credit
rating. This gives us the flexibility and capacity to make the
right investments at the right time and execute on our strategy. In
addition, as we continue to shift and grow our contractual piece of
our business with longer term customer relationships both in print
and personal systems, what these customers’ value is an investment-
grade credit rating. Our capital structure ultimately sets the
company up for long term success.
We have a consistent approach to capital allocation: one anchored
in a returns-based framework where we allocate capital to
opportunities with the best returns. We design our business plans
around our competitive competencies and then we develop both short
term and long term business and operational plans that align with
the financial objectives that we set. By design, our risk-adjusted
return framework means that we look at all opportunities relative to
one another to ensure that the decisions that we’re making are
maximizing shareholder value. As a result, we deploy capital
testing to the core whether that’s to place NPV positive printer
units, support the innovation necessary to remain leaders in the
markets in which we play, or to improve processes or systems like a
new ERP.
And we also invest capital to support our organic growth and future
initiatives. These investments are critical to laying the
groundwork for sustainable, financial performance. Finally, we
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deploy excess capital to achieve the best risk adjuster return on
investment for our shareholders. This includes return capital to
shareholders through dividends and share repurchases and may also
include inorganic acquisitions such as the Samsung deal. We expect
future acquisition activity to be focused on technologies that are
complementary to our existing portfolio and accelerate our strategy.
Our capital allocation framework is rooted in our commitment to a
robust dividend and repurchase plan intended to drive upside value
for our shareholders and to that end, our capital allocation targets
are return a 50 to 75 percent of free cash flow to shareholders.
With that framework in mind, let’s talk about the specific
objectives for shareholder return in FY18. We expect to continue to
return cash to shareholders in the form of dividends and share
buybacks. The Board approved a five percent increase in the
quarterly dividend which we expect will result in approximately 900
million dollars in FY18.
The combined growth in dividends in FY17 and in FY18 tracks net
earnings growth consistent with our long term financial model. As
part of our capital allocation framework, you can expect the total
return to shareholders to be in the range to 50-75 percent of our
annual free cash flow and given our current view of FY18, we expect
to be towards the higher end of that range. We’ll continue to buy
back shares opportunistically based on our view of intrinsic value.
We have approximately three billion dollars in outstanding
authorizations available for share repurchases and have a share
repurchase program for FY18 that includes buying back shares to at
least offset dilution from employee benefit plans.
With that in mind, let’s talk about some of the strategic elements
and key assumptions that support our FY18 financial outlook. Our
strategy is consistent: lead in the core, accelerate our growth
areas and capture the future. Starting with a global context, we
expect the worldwide markets to remain competitive and potentially
volatile. We will actively monitor global macroeconomic conditions
and policy changes that could impact our business and we’ll provide
updates throughout the year as we learn more.
Now, shifting specifically to print; we’re assuming a flat year-
over-year market with pockets of growth. Continued focus on placing
NPV positive units, flat to slightly up year-over-year supplies
revenue, and continued and incremental investments to expand A3
graphics and 3D. Finally, we expect Samsung to close by the end of
this calendar year and are not including incremental Samsung
financials in today’s outlook except for the integration-related
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GAAP-only charges, which we’ve already communicated. We also expect
that there will be more cost reduction opportunities once we close
the acquisition and we’ll talk more about that once the acquisition
is closed.
For personal systems, we’re assuming the traditional PC unit market
will be down slightly in FY18 but the broader market including all
of those adjacencies that Ron talked about will grow. We’ll
continue to focus on profitable share gains and improving the mix of
margin and creed of products and services over time. We expect
commodity costs will remain elevated but will reach their peak by
the end of Q4 this fiscal year and we’ll make investments in
commercial transformation including our DaaS offering. Finally, we
expect to continue to drive productivity improvements in both print
and personal systems to offset higher commodity costs and certain
market sizing assumptions. With that as a framework, our FY18
outlook for GAAP-diluted net earnings per share from continuing
operations is in the range on 1.69-1.79 dollars and our fiscal 18
non-GAAP diluted net earnings per share outlook is in the range of
1.74 to 1.84 dollars.
Some of the key assumptions to keep in mind are: for revenue, we
expect to gain profitable share and using October FX rates, we’re
expecting a one to two point year-over-year currency tail wind. The
tax rate will remain consistent between 21 and 22 percent and OI&E
should continue to be an expense of approximately 350 million
dollars. Our outstanding share count will be approximately 1.7
billion shares as we exit FY17 and we expect a slight decline in
FY18 as a result of our capital allocation priorities. Totally
GAAP-only charges are approximately 100 million dollars are
comprised of: one, the GAAP-only restructuring of other charges of
approximately 150 million dollars driven by both labor and non-labor
actions including charges related to employee exits, IT and
facilities changes; two, Samsung integration related costs of
approximately 100 million dollars and then three, partially
offsetting these GAAP-only charges are non-operating related, I’m
sorry, retirement-related credits of 150 million dollars.
Remember, that FY18 is the second year, is going to be the second
year of our three-year restructuring program and we remain on track.
For the full three-year plan, we anticipate GAAP-only charges of
approximately 500 million dollars and we expect gross annual run
rate savings of 200 to 300 dollars million in the full year
beginning FY20. Now, let’s take a look at a year-over-year bridge
on our EPS. The current FY17 non-GAAP EPS is outlook is 1.63 to
1.66 dollars. I’m going to bridge from the midpoint of that range.
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First, based on current FX rates we expect about a six-cent tailwind
from currency year-over-year. What’s important to note, is that
benefit is net of hedging and the assumed competitive re-pricing
actions. As we’ve said previously, we have increased prices
throughout FY18 to offset commodity costs and to a lesser extent, FX
headwinds.
Looking forward and depending on the actual currency and market
dynamics, we anticipate that ASP’s may be pressured due to
competitive re-pricing, effectively offsetting a sizable portion of
the gross currency tailwind. Overall, we would expect more of the
FX favorability to be during the second half of the year, as our
hedges are rolling off and that of course, assumes that rates don’t
change from here. The second bridging item is that we expect to
make incremental investments to support growth and future
initiatives that have been described in the earlier presentations.
This equates to about eight cents and I’m going to discuss this in
more detail in a minute. The next bridge item relates to our view
on market sizing, volume, and product mix in what continues to be a
competitive and dynamic market environment. The impact is expected
to range from a minus 4 to minus 8 cents and as both Ron and Enrique
mentioned some parts of the respective markets are in decline
although the year-over-year headwind is significantly lower than in
prior years.
We have also factored in a full-year impact of higher component
costs in the bridge, which would be more of a first-half year-over-
year headwind. To offset market sizing volume and mix headwinds and
continue to fund investments that will drive future growth, we
expect to achieve approximately 18 to 22 cents of productivity
improvements and as we’ve shown over the last two years, we are very
efficient and effective at executing against our cost-reduction
goals. Included in our productivity improvements are the full year
benefit from initiatives that were started in FY17 and incremental
in FY18 some of the key categories that we’re going after is
optimizing costs across supply chain and billing materials,
streamlining operations through a reduction in design and
manufacturing complexity, improving product quality and other
product costs, and better optimizing our non-revenue generating head
count and costs.
Finally, with share buybacks offset by some of the corporate
charges, our FY18 non-GAAP diluted net earnings per share outlook is
estimated in the range of 1.74 to 1.84 dollars.
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Now, let me spend a couple of minutes describing our incremental
investments given how important they are to our long term financial
model. As you heard earlier, our investments this year have been
critical to our recent performance and the execution of our go-
forward strategy. In these past three quarters, we’ve launched 3D,
we’ve launched A3, we’ve invested in new graphics applications,
we’ve expanded our instant ink to new regions in the world, and
we’ve also started to lay the groundwork for more service oriented
business models. In FY18, we expect to make investments to further
ramp and scale growth and future businesses. We expect to continue
our aggressive entrance into the A3 space and ramp that go-to-market
further. Graphics investments will include a product launch into
the corrugated space, as well as an incremental investment for other
applications like textiles. In personal systems, we’ll continue to
invest in our DaaS platform that will bring to market a whole new
business model around manageability of devices and will help
transform our business over time to a stick year contractual model.
And, finally, in 3D, plastics, and now metals: this business is off
to a very fast start. We also expect to increase our go-to-market
and R&D investments to support 3D growth next year and beyond. We
remain very disciplined about where we invest. Wherever possible,
we leverage existing HP strengths, assets, and core technologies
across the portfolio making our investment dollars as impactful as
possible. As mentioned earlier, we are making these investments to
drive sustainable, long term growth and set ourselves up for the
future. We’ll continue to balance current and expected future
market conditions, evaluate the competitive environment, assess
other risks and opportunities in order to make the right decision to
deliver shareholder value.
Given that HP is a long-term cash flow business, let’s now shift to
free cash flow and what we think will happen for next year. Our
free cash flow outlook is expected to be at least three billion
dollars. We’ve modeled a flat cash conversion cycle year-over-year
at approximately minus 29 days as we exit FY18. Non-recurring items
include restructuring cash payments which will be approximately 200
million dollars in FY18 and the cash impact from Samsung integration
costs will be approximately 100 million dollars and therefore not
much of a delta year-over-year. Capital expenditures are expected
to be 500 million dollars. Capex is roughly weighted equally
between growth and maintenance initiatives including certain
implementation costs related to our new ERP which will take roughly
three years to fully implement. With that in mind, I’d like to
provide some further color on how to think about free cash flow.
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I’m often asked by you all how to think about free cash flow at HP
and here are a few things to consider. First, free cash flow
ultimately tracks in line with net earnings. We’ll have quarterly
or annual variances from time to time but long term free cash flow
and earnings move in line with one another. While free cash flow
tracks in line with net earnings over time, working capital changes
can drive material fluctuations.
Let’s start with the cash conversion cycle. In quarters where the
cash conversion cycles improves, which for us means gets more
negative, incremental free cash flow will be generated in the
quarter. The actual cash conversion cycle will be influenced by a
variety of factors including terms with customers, terms with
vendors, intra-quarter linearity and also business mix.
Specifically, when our personal systems business grows sequentially,
it generates cash up front, whereas when our print business grows
sequentially, it uses cash up front.
The other working capital variable is business volume. Assuming the
cash conversion cycle remains constant, free cash flow will move
higher or lower depending on, in a particular quarter, depending on
our volume in the business. For example, a sequential increase in
revenue should result in higher cash flow in that quarter since
receivables are collected well in advance of payables being paid
given the fact that we have an overall negative cash conversion
cycle at the company.
With what I’ve covered so far, I think it’s fairly easy to
understand what our long term financial model is, so I’m going to
briefly summarize. We expect to continue to be market leaders,
outperforming our competition, and gaining profitable share where we
choose to play. We will focus on innovation at our core, enter
attractive new markets and invest in future category creation.
Given the different sizes and the growth dynamics across personal
systems and print is now appropriate to think about business models
and long term operating margins at the segment level. Personal
systems today is largely transactional in nature and operates with a
significant negative cash conversion cycle. Coupled with low
capital intensity, this business yields a very attraction return on
invested capital despite relatively lower operating margins. Longer
term, we expect person systems operating margins to be in the range
of three to five percent, consistent with the portfolio initiatives
that Ron is driving.
Printing has a different dynamic given the annuity nature of high
margin supplies and the low to negative margins on placing core
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hardware units. Therefore, when we invest in placing incremental
NPV positive print units, our short term margins are pressured.
Looking forward, we would expect print to continue focusing on
operational excellence and accelerating its growth initiatives with
operating margin targets of 16-18 percent. And finally, as we
generate cash we expect to continue with our returns based approach
to capital allocation. With a long term target return of capital
between 50 to 75 percent of our annual free cash flow and over time
dividends grow in line with net earnings.
So, let me wrap up and leave you with a few key messages. We’re
competing and leading in our core markets. The combination of our
recurring revenues, our negative cash conversion cycle, and our
efficient operating model drives predictable earnings and cash flows
and in turn, provides the opportunity to invest in the business and
return capital to shareholders. We’re also successfully entering
new and large growth markets where we can leverage HP’s strengths
and deliver sustainable growth over time. We are investing in
future categories where we expect to disrupt with world-class
technology building on our rich legacy of innovation with the goal
of creating shareholder value for many, many years to come.
And finally, our team knows how to deliver. As mentioned at the
start, it is awe-inspiring to continue the work of such great
innovators who started the business building audio oscillators for
Walt Disney out of their garage. Our task is to continue that
legacy, to deliver reliable returns, strong cash flow, and the
opportunity for long term growth. We appreciate your support and
especially your time with us today. Thank you. Now we’ll take a
break and we’ll get everybody up on stage so we can do Q&A.
WAMSI MOHAN: Thank you, Wamsi Mohan Bank of America Merrill Lynch.
Thanks for all the details here today, I appreciate it. My question
is really around when we look at the EPS bridge this year, Cathie,
the productivity improvements relative to the last few years is
quite a bit smaller but you’re also assuming that the commodity
pricing, you’re taking an assumption of exit at roughly peak levels
going into next year? So, isn’t that, sort of, very conservative on
both ends and why is it that you’re taking the exit level to be, I
think you said peak and Ron mentioned that the exit level is what
you’re going to assume for next year. Why is that the right
assumption?
DION WEISLER: Well, I’ll actually happy to start and I’ll have Cathie
chime in. I think what we’ve put together for our plan for FY18 is
a very balanced plan. It’s a prudent plan and I think it’s always
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important that we think about all of the opportunities that we see
in the market as well all of the potential headwinds that we see, as
well. And as a result of that, we put together a plan that we all
very much believe in that strikes the right balance between those
two dynamics. I think if we look at the work that we’ve done in our
core business in our growth initiatives and ability to capture the
future, there’s a couple of things that I think stand out. I think
we’ve really delivered in our core business but we’ve, having the
bridge plan clearly operational improvement and we also have created
the capacity for us to continue to invest in the business so that
you can see long term sustainable growth over time. And I think if
you click one step further into each business, there’s different
dynamics going on in each of the businesses. For Ron’s business he
obviously very significant cost headwinds. This year, we expect
that those will reach a highpoint of the end of quarter four and
remain at elevated levels over the course of next year and we’ll
just have to wait and see how some big things that happened in the
industry pan out. For example, you know, we need to see how mobile
phones from certain companies do; which can have a big material
impact on panels, it can have material impact on D-RAM process, we
have to watch how that evolves. And so, we have a market, at least
in Ron’s business, where the traditional PCs are still expected to
slightly decline and that produces a headwind but that’s offset by
Ron’s strategy really to grow into more profitable areas of the
business but I think it will remain a very competitive, fiercely
competitive environment and we need to be able to compete fairly. I
think in Enrique’s business, the groundwork that we’ve done on
stabilizing supplies was not an easy task but the output of the 4
box model is running according to, or at least a little better than
some of our predictions. And then we see in Enrique’s business the
opportunity in the medium term for growth in A3 and the graphics
portfolio that he’s outlined and you know, offsetting some of that
is as we take the cost out of the business we want to be able to
place those in PV positive units and that puts downward pressure on
the rate. And then of course, in Steve’s business, this is an
incredible business, over the course of nine months going from
nothing to the number one market leader in that product segment that
he articulated with a very broad ecosystem, partners, a channel, a
network, and key core technology that we’re only advancing as we
talked about the two new breakthroughs that we released today.
Shows that we’re taking the investment that we said we would do last
year and it’s manifesting itself in 2018 and so you kind of put all
of those things together and I think we have a very balanced plan.
We’re going to continue to have a fiercely competitive environment,
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but I’m really confident together with the rest of the team that we
will deliver on the FY18 plan.
CATHIE LESJAK: And then specifically around commodities, we’ve talked
about, and Dion been asked before, I think on earnings cost, okay,
what is the cycle in which, you know, more capacity would be brought
on, that ultimately take some of the pressure off of the commodity
because and we just don’t see that manifesting itself in FY18. We
don’t think that they’re going to go a lot higher; we do think that
they will peak out but we don’t expect real reason for them to come
down. On operational costs and operational productivity
improvements, you know, coming out of the separation, we really
believed that A. the separation was great for our company but also
it was going to allow us to streamline operations, tools, and
systems in such a way that we would be a leaner and more nimble
company. And we’re making progress but we’re not done. In the
first two years, we will have taken out one billion dollars of cost
each of those two years and now we’re looking at taking out another
roughly 400-450 million dollars. We feel really good about the work
that we’re doing and I think I said it in my prepared remarks, as
well. Cost is a never-ending for us. We will always be going after
cost and we will be looking at every line item of cost any place
there’s an opportunity, we’re going to kind of tighten the belt and
continue to tighten belt pretty much every year.
WAMSI MOHAN: If I could ask a quick follow-up, in the 4 box model, you
seem to do a little bit better on than your expectations on the
pricing lever and I was wondering is that really a function of the
changes that were made in channel inventory and we’re yet to see the
pricing improvements that you spoke about, about your big data
analysis. Is that the right way to think about it? Thank you.
DION WEISLER: Good one for you prince of print.
ENRIQUE LORES: It’s actually a combination of many different factors. I
explained before we had been able to reduce the discounts that we
offered to channel partners. This is helping. We have also been
able to increase selectively prices in some areas. This is also
helping. Working with lower channel inventories is helping us to
prevent gray marketing around = the globe, this is also helping. So
there is not one factor alone, but the combination of all them drive
the assumptions that we have been sharing.
STEVE MILUNOVICH: All right, Steve Milunovich at UBS. Wanted to
continue on the channel discussion, you said over 85 percent of your
products go through the channel. Can you talk about the, sort of,
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competitive dynamics in the channel; there’s been a lot of changes
the last year, particularly the PC side, you’ve got Dell, maybe you
could talk a little bit about what you’ve seen from them. Lenovo
recently made some changes which I don’t think are being
terrifically well-received and on the printer side, are we through
any breakage? I mean, you made some dramatic changes a year ago you
just alluded to and they seem to have gone very smoothly but maybe
you could talk a little bit more about exactly how the channels
reacted to the changes that you’ve made.
DION WEISLER: Well, I think there’s clearly change all around us a lot
of it being driven by the omni-channel and its implications on how
people consume and produce in the future; in much the same way that
our big industries, the personal systems industry and the print
industries are consolidating. I think there’s some consolidation
going on even at the distribution level with some of our partners
and at the resale level. But the channel remains the most efficient
route to market possible, in my view, I firmly believe it. We do 87
percent with or through the channel because they’re an amplification
of our sales force and they’re able to reach many more people in
more efficient ways than we would be able to do, and add incremental
value to our base platform. So, generally speaking, I think, you
know, when you look at each of the competitors, it varies from
region-to-region. It varies from quarter-to-quarter. We have our,
you know, different competitors deploying different strategies.
Some are very consistent; some seem to move around a lot. What we
need to do is, obviously, keep our finger on the pulse, insure that
we’re playing our own game, not playing anybody else’s game, that we
understand where the end markets are going and where we want
innovate in our product portfolio, how we want to work with our
channel partners to layer value for our customers, and then deal
with our competitors in a very aggressive, but responsible way where
we take profitable share. And so, I don’t expect, and never has
been static over the 30 years I’ve been doing this. Different
players do different things from time to time and we just need to
continue to adapt. As it relates to printing, I would say that the
supply cells model change has been incredibly well-received by
partners. We recently conducted our HP partner forum that we do
every single year. I met with many, many of our partners and I know
the rest of the team did, as well. And I was at Canalys, I think
about a week ago, two weeks ago, the weeks kind of blend at the
moment, I’m not quite sure when it was and I was speaking to another
cohort of channel partners there and I would say the change that we
made to the supplies sales model actually helped their business. It
was short term painful as they went through the withdrawal symptoms
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of how we’ve operated this business over the last 30 years but it’s
made their business more predictable and in this omni-channel world,
it stabilized pricing and that’s good news for their business.
CATHIE LESJAK: I had two channel partners that I met with come out and
thank me for making the changes that we made in the supplies sales
model so it’s a very well received-
ENRIQUE LORES: I think about the implication for them when we say we
operate with lower channel inventory means they need to invest less
capital in managing our business. So, there’s a very clear benefit
from that on top of what Dion was saying about price stabilization.
This really helps their business model.
RON COUGHLIN: Let me just add two pieces of color: first, we’re growing
double digits and we’re mix-shifting to channel which means our
channel’s growing faster. Nobody else in this industry is near that
type of growth rate with the channel. Second, if, with the shift to
DaaS, which clearly our channel partners are seeing, we’re the only
company who has experience doing this because we did it, I think,
six years ago with channel MPS. So, we know how to enable the
channel which is a very, very difficult.
DION WEISLER: By the way, they trust us. They don’t always trust other
people.
AMIT DARYANANI: Thanks. It’s Amit Daryanani RBC Capital. I just two
questions from me, as well. First, in PSG side, you guys have
obviously done a really good job in terms of picking up share over
the last few quarters and you’ve talked about commodities as being a
bit of a headwind for you. I’m wondering, don’t you think
commodities may have had some benefit, as well, on the share side
because the smaller players probably can’t D-RAM and compete with
you. So, as commodities ease up, don’t you think the profit pools
could strain because you have more competition. Is there a way to
think about that scenario, I guess, that would be great. And then
just to follow up, Samsung, I know you reiterated a timeline to
close. Could you just remind us of the accretion, of that still
holding up? And does the 16 to 18 percent IPG margin change when
Samsung is rolled in? Thanks.
DION WEISLER: Okay, I’ll let Ron and Enrique answer most of those
questions but I think it’s incumbent on me to say, because it’s not
very cool when he says that I think, Ron, together with the regional
presidents Christoph, Nick, and Richard, and Stu Pann who leads our
supply chain team, are an incredible example of what I call
stitching the seams. It’s not working individual silos but that
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connection between the business unit, the region, and the supply
chain in understanding the dynamics of commodity costs means that we
turned change into opportunity exactly to your point. So, I think
on the one hand, it was a very, very big headwind, Ron talked about
a one billion dollar headwind in the business, but then Christoph,
and Nick, and Richard went out to our customers and had very
difficult conversations with our customers but did it in an
empathetic way where often we would reengineer a solution or change
a solution out and we had incredible retention with our customers
but our scale, the scale of the supply chain when Stu was able to go
to Asia and have conversations about securing commodities so that we
can continue to ship. It was a very different conversation than
what many of our competitors had because they didn’t have that
scale. So, I think you, we like to take all change whether you
initially think it’s bad and see how we can lean into it and turn it
into an opportunity. I think the success that the entire team’s had
is off the back of doing exactly that.
RON COUGHLIN: Clearly, our ability to get supply at a rational price was
an advantage for us, this year. So, your second part of the
question do we think with more supply coming on, well, the reality
of it is PCs are less of our supplier base than they were two,
three, four, five years ago so the import of scale is only
increasing. So, what you’ll see is that advantage from scale only
growing over time.
ENRIQUE LORES: And in terms of Samsung, I mention it during the
presentation, our goal is to or our plan is to close the acquisition
during Q4. We will do that, we will disclose what are going to be
our financial goals for the first year, but as I said in the
presentation, we are even more bullish today than we were in the
past about the value that Samsung is going to be bringing to HP and
we just need to wait a few more time to be able to work with a new
team.
DION WEISLER: Q4 calendar.
ENRIQUE LORES: Q4 calendar.
CATHIE LESJAK: But let me add just the math of it. Just assume that if
the accretion that we talked about a year ago, or a little over a
year ago is one to two cents and just assume that they have revenue
of over one billion dollars, the 16 to 18 percent has to come down
in the short term; that’s the math.
KATY HUBERTY: Thank you, Katy Huberty, Morgan Stanley. Everything
you’re doing, changing the printers supplies model, reinventing the
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core, investing in growth, really that should lead to increased
visibility and durability of earnings and free cash flow and so, in
that regard, Cathie, should we think about the high single digit
earnings growth guidance that you just gave for fiscal 18 is the
sustainable earnings growth for this company given all the work that
you’ve done? And then I’ll just throw my follow up in there for
Enrique. You talked about the 4 box model only one thing changed,
which is the laser-installed base is now flat versus declining and
so why should we think about a supplies growth that’s better than
the two percent that you’re running at today given the 4 box model
is moving in your favor? Thanks.
CATHIE LESJAK: So, I’ll start. One year at a time. You know, you
should look at the bridge. The bridge certainly has a nice tailwind
from currency of about six cents. You know, so I would try to
normalize a little bit for that; that’s probably the biggest
feedback I’d give you but one year at a time.
ENRIQUE LORES: And in terms of the supplies projection, the comment I
was making about the supplies revenue being flat or slightly
positive is really driven by the projections that the 4 box is
driving and given the experience that we have had in the last
quarters and how predictable the model is, we really believe it’s
giving us good guidance on what is going to happen with the supplies
business next year. As you were saying, there is only one change in
the assumptions which is the assumption of the install base in the
office growing but we still have a balance of headwinds and
tailwinds that we’ll have to manage and this is driving the overall
projection.
STEVE FIELER: Chris, you want?
TONI SACCONAGHI: Toni Sacconaghi from Bernstein, I have one for you,
Cathie and one for you, Enrique. Cathie, I was wondering if you
could just elaborate more on your thinking about capital allocation,
company rating, etc. So, you know, you’ve, were espousing today
this notion that you have very predictable cash flow and the value
proposition to investors arguably should be that you have very
predictable cash flow. And so, the question is why wouldn’t that be
mirrored more in your capital allocation priorities, I mean dividend
at 900 million dollars on a base of maybe two, three being given
back next year, why isn’t that dividend higher? And similarly, when
you think about just the capital structure, why isn’t there some
debt on the capital structure, if there is predictability of cash
flows? You talked about rating agency concerns, why don’t the
rating agencies understand that you have predictability of cash
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flows and that you could take on more debt? And then I think
finally, you mentioned we buy back stock based on when we think it’s
attractive, maybe you can comment on whether you think it’s
attractive now? And Enrique, a shorter one for you, you said that
you want to double share in A3 over the next three years, so from 6
to 12, so 6 points of shares, 3.2 billion dollars which would add 17
percentage points of revenue growth to the printing business over
the next three years. Are you signing up for that? And I presume
it’s back and loaded otherwise we should see a much bigger growth
rate in printing next year.
DION WEISLER: You sound like me, Toni.
ENRIQUE LORES: Let me start from that and then maybe we’ll go into your
question. So, I said that we will be doubling our market share in
units from six percent to 12 percent. When you look at the copier
market, it is 55 billion dollars of hardware, supplies, and
services. And the supplies and services business always lags the
placement of the units. So, to get ten percent of the supplies
business you need to have ten percent of hardware shipment for a
sustained period of time. And this is really what would be driving
the overall size of the revenue that we are going to be generating
in the business.
CATHIE LESJAK: And that’s the story, and he’s sticking to it.
DION WEISLER: It’s a long term math, Toni; I’ve said it on many earnings
calls. I’ve said, this is a 55 billion dollar market, imagine if we
could take ten points a share, that’s 5.5 billion dollars of top
line and that’s how you’re doing the math, as well and the
associated drop. The issue is it takes time for that to run
through. We forget it because we’ve doing this business for 30
years and we’ve built an entire install base and data and everything
else that sits behind it. As we get into this new business, it
takes time to fill up those buckets.
ENRIQUE LORES: It’s the difference between the vision of the CEO and the
reality of the operational manager
[laughter]
CATHIE LESJAK: And, Toni, I’d love to take you with me to the rating
agencies. The rating agencies tend to look at kind of debt to
EBITDA. That’s one of their really big, kind of, metrics that they
really zero in on and so they’re not really looking at the
sustainability of cash flows in the future as much as, kind of, this
year and next year’s debt to EBITDA. And that’s really, it’s
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actually interesting to think about whether or not that their
metrics change, if we have US tax reform that includes a forced
repatriation because as a result of that, our debt, our real debt,
or our gross debt, should, will likely be much lower than what it is
today. Now, our net debt will be about the same but it’s really the
way they look at and so at its core, our belief is that an
investment-grade credit rating is important to our long term success
and so we, we basically target that. And then the mix between share
buybacks and dividends, you know, we look at this on a regular
basis. Our long term model is that dividends grow in line with our
net earnings growth and that’s pretty consistent with now what we’ve
done if you look at the cumulative over the last two years, in terms
of buying back shares? Yes, we’re active in the market buying back
shares.
DION WEISLER: I think the other thing that Cathie and I see very
frequently and hear from our various investors is that there are
some investors that want high dividends. There’s other investors
that want high share repurchase. It’s not a very uniform message
that we get across a very broad investor base.
CATHIE LESJAK: But it’s important that when we do share repurchase that
we believe that it’s, the price that we’re paying is lower than what
we think the intrinsic value is.
SHERRI SCRIBNER: Hi, thank you, Sherri Scribner from Deutsche Bank. I
have two questions, also. First, on the PC side you guys have had
an incredible year on the PC side. It’s driven a lot of the growth
that you’ve seen and you’ve gained a ton of share. I think the
question that I continue to get from investors is, “Is there more
opportunity to gain share in the PC market?” So, I know Dion you’ve
said you’re not focused on gaining share in the PC market but is
there further opportunity or maybe should we think about it as the
other markets, where, which will be driving the revenue growth? And
then, for my second question on the printer side, one of the
questions I get from investors is, the hardware business didn’t
really grow or it’s kind of bouncing around sometimes negative,
sometimes positive this year. Hardware’s really what drives the
long-term sustainability of the supplies business so how should we
think about hardware growth next year or are we going to start to
see some, you know, consistent revenue growth in that, that would
make investors feel more comfortable that the sustainability of the
supplies business is there? Thank you.
DION WEISLER: So, I’ll start and then I’ll let Ron and Enrique chime in.
I just want to clarify what I have said very consistently is that I
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don’t chase shares for shares, for shares’ sake. Not that I’m not
interested in share but I’m only interested in profitable share.
And I kind of, opened with my opening remarks about this time last
year, we were one in five, which meant as I was talking to Ron on
the team, there’s still four out there that don’t have an HP logo on
it, so wouldn’t that be better if we could go get some of that and
through the course of this year, they have done incredible job of
doing that. We’re fast approaching one in four, but that still
means that’s there another, you know, 75 percent market share out
there that we don’t have. And if we can do that in a profitable
way and if we can make shift and change our business and transform
our business that gives us the capacity to take that shared
profitably, then absolutely we’ll go after it.
RON COUGHLIN: Absolutely, so from a macro-view, we still have the prelim
roughly 32 percent in the category that’s in others after the top
four. You’ve seen steady consolidation. We’ve been leading that
consolidation. So, you’re still 32 percent of the market that we
believe, given our scale, that we can take share from. Second, I
talked about premium and gaming, right? We are nowhere near our
fair share of the stake gaming. We’re ten percent of the gaming
market. There’s no reason why we can’t be 22, 23 percent of the
gaming market. So, there’s profitable pockets there. Let’s take
detachable. Obviously, Microsoft and Surface created that category.
We have lots of head room and faces like detachables. And then the
last place I’d go is these PC-adjacencies. We’re going to source a
lot of growth from those PC adjacencies, including DaaS, which has a
double benefit: a recurring revenue. But because we think we can
do it better than anyone else, that should drive hardware share, as
well.
DION WEISLER: Love it when he gets the memo.
ENRIQUE LORES: I’m going to your question about print. We have actually
been growing both unit placement and hardware revenue during the
last quarters. So, we changed the trajectory of the business from
that perspective but even more important than that, is that we
continue improving the quality of the units that we place because
this is really what drives supplies revenue. So, it’s not totally
about how many units we place; it’s the combination of the number of
units and the value of those units. And as I was showing in the
charts, we have been improving that very steadily in the last five
years and this literally is what is driving the growth in this
supply side.
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DION WEISLER: I’m going to thank, hats off to the print team. They’ve
taken what seems to be a fairly simple business; is actually pretty
complicated, used a lot of data and analytics and modeling to really
understand what was driving the business and then built plans that
didn’t just do one or two things did a whole handful of things
across many customers, many geographies around the world to, you
know, not just chase again share for share’s sake but take quality
share, drive print relevance through incredible marketing campaigns
that Antonio and his team do to bring print to life. One of the
things, I love it when Enrique says, you know, “You kind of click
what you like and you print what you love.” And, sort of, exposing
a new generation of customers that have never printed before to the
power of print is very cool. Very carefully managing pricing, very
carefully looking to grow after market share. This business
returned a growth that’s been growing for the last couple of
quarters; it hasn’t done that since, like, 2011. This is off the
back of incredible work, a real, as Ron put it, a real print
renaissance around our, around our divisions all around the world
and I think you just starting to see the beginning and Ron was, sort
of, a couple of years ahead in the transformation of personal
systems. You’re just starting to see what Enrique and the teams are
beginning to deliver.
STEVE FIELER: We have time for either one or two more questions, so-
SHANNON CROSS: I’ll try not to talk too long. So, Dion, I’m not real-,
this is Shannon Cross, Cross Research. I’m not really asking you to
choose among your children, but you’ve covered several new emerging
technologies initiatives and this meeting, you know, A3, 3D print,
DaaS, corrugated textiles, there’s been a lot. So, I’m just trying
to understand when you think about it, how do you think about the
materiality of each one of these, when do you think they’ll really
start to benefit and, sort of, how should we watch? And then
Cathie, my question for you is, as you shift to DaaS, how do we
think about the impacts, earnings, and well, revenue really, and
then cash flow over time especially if Ron is successful in getting
it, you know, 20 percent?
DION WEISLER: So, that’s a great question, Shannon, thank you for it.
You know the word, “materiality,” has different meanings depending
on which lens and which time horizon you look through. Is 3D
printing financially material to our results today? Absolutely not.
Is 3D printing materially important to the strategic direction of
this company? Absolutely, yes, and you know, I think whenever you
have a 12 trillion dollar market that you have the ability to
transform that becomes incredibly transformative for a company like
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HP, much in the same way that the laser printer and the ink jet
printer did for Hewlett-Packard company many years ago. So, I think
the answer really lies in our strategy if it wasn’t abundantly
clear, always, I do things in threes. It’s called growth and
future. We have to be excellent in our core today. We’re operating
in large and very mature categories and we have to ensure that we’re
innovating, we have to insure that we’re delighting customers, we
have to make sure that we’re generating the cash flow that our
shareholders expect today but creating the capacity for us to invest
in new growth areas over the next two to three years which is really
how I think about the growth column. The core is the here and now,
growth is over the next two to three years. There’s only three
things we’re doing in there. Now, they’re big things but they’re
three things. It’s growth in A3, it’s growth in our graphics
business, and it’s growth in, you know, commercial transformations.
And then, we’ve got-
RON COUGHLIN: - which includes DaaS.
DION WEISLER: Which includes DaaS. And then, you’ve got that third
pillar of the strategy which is the future and that’s five, ten
years of, and beyond, of incredible opportunity for the company.
So, I do think across different time horizons and I think the
materiality is linked to those time horizons, not necessarily the
financials in any given quarter.
CATHIE LESJAK: And then with respect to moving more to a contractual set
of business models whether it’s print or personal systems. There’s
kind of two impacts that you think about with respect to the
financial statements. One is, are you putting a lot more assets on
your balance sheet? And we have typically not done that. What
we’ve done is we partnered with financial institutions like HPEFS
that basically take those, kind of, off of our balance sheets so we
don’t have that impact and we have not typically had that impact.
And then the other impact is the fact that depending on rev-rec
rules there are definitely times when you’ve then got to recognize
the revenue over a longer period of time. Our belief is that that
will happen will happen but this shift to contractual is relatively
slow, you know, gradual, and so just, we just don’t anticipate it
being a particularly material impact in the near to mid-term.
STEVE FIELER: Okay, this is the last question.
JIM SUVA: Thank you, it’s Jim Suva from Citigroup and since I’m
basically the last one and before we go to cocktails and receptions
I’ll break from tradition and instead of asking two questions, I’ll
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just ask one. Cathie, I think you’d mentioned printing 16 to 18
percent operating margin goals but I think congratulations, you’re
already there right now. So, what prevents it from going higher
since, you know, 3D printing is now selling at a profit, you’ve done
a lot of investments that are paying off and your channel strategy’s
working so why not higher than the range where you’re currently
right now?
CATHIE LESJAK: So, just to be clear, no one said that the 3D printing
was operating at a profit. Okay, we’re still very much in
investment mode. You saw the increase for the total company of
investments, you know, about 8 cents worth next year, a significant
portion of that is for 3D. It’s very much to Dion’s point, we are
focusing on 3D for the long term and maybe one of our big concerns
about 3D is whether or not you all are going to have the confidence
and patience to wait for the actual results. We’re doing really
well, top line’s going well, we’ve really established this business
this year but it will take time and so it’s still in investment
mode.
DION WEISLER: Great, so, I want to conclude by thanking you all for
spending such a significant portion of your day here with us. Many
of you have been here since 11 o’clock today and I’m Australian
which makes it “beer o’clock” right about now. I’ll close by also
thanking you for your support over the last couple of years; this
has been an incredible ride since separation only, I mean it feels
like, you know, 14 years ago, I always say we operate in dog years,
it’s only been two. But we had a working thesis that separating
these companies would enable us to be more flexible, more nimble,
more in tune with our customers, would enable us to invest in our
business and operate and create shareholder value in the short,
medium, and long term. And I think we’re doing, and we take a lot
of pride in doing what we say we were going to do. I know our team,
all across the world, wakes up every day, thinking about printing
and personal systems. We’re very passionate about it. We’re
thrilled about the re-invention and how it’s making its way into our
financial results but also into the roadmaps, then incredible
roadmaps the team is putting together. So, whether it’s the re-
invention of our core, or re-invention of growth opportunities, or
re-invention of our future, re-invention of marketing and how our
brand is perceived around the world, we’re humbled by the work that
we’re doing and the feedback that we’re getting but we’re absolutely
not complacent, nor are we arrogant about the success that we’re
having. I think that worries me most of all, I’m often asked, what
worries me most of all, I think arrogance and complacency have no
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place in an organization and we wake up every day making sure that
we don’t do that. And, I think what I, I will close with is what
I’m most done with and it only happened today which is the re-
invention of Cathie. Did you see her dance on stage? I mean
Cathie’s been doing this a long time!
Thank you very much and look forward to having some cocktails
outside. Cheers! Sure.
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