While maintaining 5% growth in consumer PC sales — coming in line with HP's own forecasts — Lores holds fast that this "supports the momentum that we start seeing" expected through the beginning of 2024.
HP plans to ship out its AI PC units in the second half of 2024, which Lores previously called "a huge opportunity to really bring energy to the category" in an earnings call back in May.
"There is a difference between launching and penetration," Lores underlines on the eventual market share of its new hardware. "Our projection is that the penetration of the AI PCs will be between 40 and 60% three years after launch."
- HP Inc. out with earnings and well, earnings were in line, revenue down a little bit.
Let's really dig into the outlook for the company here.
Enrique Lores, CEO of HP Inc., always great to see you.
Thanks for giving us some time here on this.
So take us through the quarter a little bit.
In line earnings, I think there were some concerns on the street on how this quarter would pan out.
ENRIQUE LORES: I think it was a good solid quarter.
We over-deliver versus some of the expectations.
We grew EPS 10% year on year and the most important thing is show the progress we have made through the year.
This was a tough year from a demand perspective.
We have managed the business well.
We have managed our cost structure.
We have grown share especially in the categories of PCs where we wanted.
So really, we finished the year in a strong position which gives us confidence for fiscal year 24.
- Let's look at the sales by segment here.
So you look at the personal systems business, PC revenue down 1%, commercial down 11%, is the worst behind HP in terms of PC demand?
ENRIQUE LORES: I think it's important to look at sequential sales and sequential revenue.
We grew PC sales 5%, company 5% sequentially.
We saw growth, sequential growth on consumer PCs, which is what we were expecting.
We also saw stabilization in sales on the commercial side quarter over quarter.
So second half has been stronger than the first half.
And as we said-- shared a few weeks ago, we expect to grow PCs and the overall company in fiscal year 24, and this moment the results in Q4 supports the momentum that we are seeing.
- What's your best approximation on how the holidays might play out?
We're getting a lot of mixed reads.
On one hand, Best Buy, squishy quarter, some weakness on some of those bigger ticket items and Abercrombie and Fitch, good quarter from them on apparel that isn't cheap.
I mean, how do you see it?
ENRIQUE LORES: So what we know is we have based on the shipments we have made and the innovation we have introduced, we have a very strong position in the stores, we have great assortment.
And when we look at the projections of 24, we are expecting the market to grow, and Q1 will be the first in which this will start happening.
So we expect progress between Q4 and Q1, especially in terms of momentum.
- In terms of growth for next year Enrique, is part of that growth these AI powered computers?
ENRIQUE LORES: Some of it we the key drivers of growth for PC next year.
First of all is going to be the replacement and the renewal of the install base driven especially by the transition from Windows 10 to Windows 11, so this will be a major factor.
Second factor is going to be an increase of average selling prices similar to what we have seen during this year.
And finally, especially at the end of the year, the impact that some of the AI PCs will start having in the market.
But AI PCs will be a great driver of growth in '25 and '26, but because of when we are launching it '24, the impact will be more modest.
- So for an investor trying to figure out when these AI PCs launch, because I've heard other some other players some of your competitors talk about them too, do they launch at the end of calendar 2024?
Or is it calendar 2025?
ENRIQUE LORES: They will launch mid in the middle of 2024, let's say in the July, August time frame, which is what we share two, three quarters ago when we started to talk about them, but there is a difference between launching and penetration.
And penetration of new categories always takes time.
Our projection is that the penetration of AI PCs will be between 40% and 60%, three years after launch.
And they will have an impact on average selling prices between 5% and 10%.
And it will happen gradually some in '24 more in '25 and more in '26.
- So this is my consumer mindset or consumer hat sneaking on me here.
How much does an AI PC-- how much is that going to cost?
And then what will it be able to do?
ENRIQUE LORES: So let me start from what will you be able to do.
What you will be able to do is run locally large language models.
Which means that if you want to use private data you don't want to upload to the cloud, you can get the power of the language model using your local data, that will be a big advantage.
Also for applications where speed, latency is critical, you will be able to run those applications locally.
For example in gaming, many of the new games will use generative AI, you will be able to run the game locally and have the advantage of the speed.
And finally for many customers, there will be a big advantage in cost.
Running AI applications in the cloud is fairly expensive, running them locally will be just the cost of the PC.
In terms of pricing, what we have shared is that we expect average selling prices to be between 5% and 10% higher and this gives you an idea of the additional cost that AI PCs will have but let me tell you, the value will be much higher than that.
- But you know the printer business continues to be under pressure from a top line perspective.
Is there any potential boost there or you're just managing this business now taking costs out of this business and acknowledging that sales will be tough for a little while?
ENRIQUE LORES: Within the print business, there are multiple segments.
There are categories that are declining like home printing printers at home.
There are categories where we expect the market to be flat like printing in the office.
And there are categories where we expect to see significant growth like industrial printing.
And we-- when we talk about our strategies, we need to differentiate our strategies for the three segments.
Our expectation is that the pre-market, because of the combination of these three segments, is going to be flattish in the next years.
So and our goal is to grow profitable dollars in the category by managing the different categories in different ways.
- So the sales declines, they're noticeable in the earnings release, but the margins, the operating margins of your business continue to hold up well.
We've talked about this a lot.
Why is that happening and can you continue to do this throughout next year?
ENRIQUE LORES: Well, we launched an aggressive future ready plan to really address our fixed cost structure, and what we are seeing in our margins are the results of this work.
We announced a three year plan we are going to continue to execute that plan.
We increase the target that we have, mostly driven by AI and additional actions in several businesses.
So we just increase the margin expectations in our print business and we expect to be within those ranges in the coming years.
- As a company that really is going to play a key role in this ecosystem, I'm sure you're watching what's happening with the Sam and the Microsoft drama, I mean, as a leader of a company that is going to play in this ecosystem well into the future, do you have concerns on how fast these companies are moving with this technology?
ENRIQUE LORES: I think we are in a time of incredible innovation.
And as a company that believes that technology and innovation are going to create a better world, we welcome the speed at which these things are moving.
And we have been watching what has been happening during the weekend.
We-- our expectation is that it will not have an impact in the delivery of the new solutions that we need for next year.
And again, we are really excited about the opportunities that AI is going to be bringing to us as a company.
- You think the tech industry has put in the proper guardrails for this technology?
A lot of people barely even know what this is but it's coming at them and it seems to be coming at them very quickly.
ENRIQUE LORES: Well, you know that we really position ourselves as a purpose driven company and security and protecting data for our customers is one of our key areas of focus.
And we want to make sure that as AI grows, all this data keeps being protected and this is one of the areas where we are really going to be driving and pushing, because we think it's important that this happens.
- Lastly, Enrique, is, you know, at the end of the year, you know, we're starting to focus on the year ahead.
As a leader, what's the biggest priority for HP looking out into next year?
Is it capitalizing on AI?
Is it finding more ways to improve costs?
Is it improving the supply chain further?
Where is your head at?
ENRIQUE LORES: I mean we need to work on all these fronts but if I have to highlight one, it needs to be about continue to bring innovation to the market.
AI is one of the elements that we are going to be driving but when we look at the growth opportunities that we have, we see opportunities to grow by driving innovation in all of them.
We are going to be continue to innovate in hybrid systems and hybrid work.
Continue to innovate in our service oriented businesses, driving contractual, driving subscriptions, and of course, with AI, we can not only create new categories but improve significantly the experience of our customers in our current businesses.
- I'm really excited about AI PCs, can't wait to get my hands on them.
Enrique Lores, HP Inc. CEO.
Happy Thanksgiving to you and yours and thanks for always giving us some time here at Yahoo Finance, really appreciate it.
ENRIQUE LORES: Happy Thanksgiving to you as well, Brian.
Thank you.
