HP CEO on earnings: It was 'a tough market environment'

HP CEO Enrique Lores joins Yahoo Finance Live to discuss company earnings, cutting 12% of workforce, investor sentiment, and the outlook for profit growth.

Video transcript

[AUDIO LOGO]

BRIAN SOZZI: HP said it will cut close to 12% of its workforce as it looks to offset weak sales of computers and printers. I talk with HP CEO Enrique Lores about the coming changes.

ENRIQUE LORES: We clearly were facing a tough market environment. But I think what is important to say is that we did what we said we were going to do. We delivered on the midpoint of our range for both EPS and free cash flow. Actually, free cash flow was above our guide.

And we really were able to do that through very disciplined pricing and cost management. We continue to see soft demand, both in the consumer side, and also we have started to see it in the commercial side. But again, we did what we said we were going to do.

BRIAN SOZZI: What do you think-- what is making business so challenging right now?

ENRIQUE LORES: I think that is clearly we see the impact on macro. When we look at the situation with inflation, war in Europe, energy prices, also the lockdowns in China, clearly all this is impacting the demand of our products. It started in consumer. Now companies are also starting to be more cautious as they look at the current environment and they need to control costs. So clearly, all this is impacting our businesses.

And this is why we are really focused on those things that we can control. We announced today what we call the "Future Ready" program, which is a program that builds in the work that we have done during the last three years and has one objective, to reduce costs, but the second to continue to position the company for the future. And we really think it's important that we start this new phase of the transformation now to continue to position the company for the future.

BRIAN SOZZI: Yeah, this is very much a large just cost savings plan, Enrique, $1.4 billion estimated to be saved by fiscal year 2025. Where are these savings going to come from?

ENRIQUE LORES: So first of all, it's both a savings program, but this also includes investment in those areas where we think that-- we think are going to be critical for the future of the company. It's really both. In terms of savings, we see savings coming mostly from three areas. Continue to invest in the digitalization of the company. During the last three years, we built a great digital platform that we can use now to digitize many different processes.

We also can simplify complexity and reduce cost structure in many of our core businesses and align them to the new market sizing that we expect to see. And then, also, in a company of our size, there are always opportunities to be more efficient from an operational perspective. So when we look at the opportunities on these three areas, we have line of sight to reduce at least $1.5-- $1.4 billion of cost, as you said.

BRIAN SOZZI: For the average investor out there trying to make sense of a cost savings plan like this, Enrique, would you say half flows to the bottom line over the next few years and you invest the other half in growth initiatives?

ENRIQUE LORES: Well, in this case, both-- we are going to use this to invest, but also to face the tough market environment that we expect to see, for sure, in 2023. This is really where we think the savings are going to go-- are going to go this time. We are not projecting an improvement of the market through '23. We think it's a prudent assumption. And this is really how we have built the plan going forward.

BRIAN SOZZI: That outlook, the outlook you put forth, full fiscal year is below some of the consensus estimates that I've seen out there. Is the situation in the environment, in the macro, do you see that improving at all in the second half-- over the next 12 months?

ENRIQUE LORES: This is not how we have built our plan. We expect that the market will continue to be challenging through the full fiscal year '23. And we are talking fiscal year. We are not talking calendar. We expect our performance to improve in the second half as a consequence of the cost actions we took last quarter and that we will continue to take during the next two quarters that will have a much bigger impact at the end of the year.

BRIAN SOZZI: How much longer do you think this PC correction-- we heard it from one of your competitors when they reported earnings this week as well, but how long does this PC correction continue?

ENRIQUE LORES: If you mean the correction from a channel inventory perspective, we expect that it will last during the next two quarters. But again, we are not expecting a recovery from a demand perspective overall. We are expecting it to last through 2023.

And this is really why we are focused on those areas where we control. And this is why reducing our cost structure and shifting more of our investment to the growth areas is critical because I don't think anybody knows when the rebound will happen. But we want to make sure that the company is ready to take advantage of that rebound.

BRIAN SOZZI: Well, if we did know where they were, Enrique, we wouldn't be sitting here. Both of us, we might be on an Island somewhere, I mean, because we'd be pretty darn good forecasters. But you mentioned growth initiatives. What are growth initiatives? What do they look like inside of HP?

ENRIQUE LORES: Well, we have talked in the last quarters about our five growth initiatives-- gaming, hybrid work, work force services and solutions, consumer services, and industrial printing and 3D. These are the five growth businesses that we have. We had a goal for these businesses to be $10 billion at the end of 2022. Actually, they were more than $11 billion, so we delivered more than a billion dollars than we were expecting. And this is where we see that we need to continue to invest, taking advantage of many of the trends that we see in the market that support the growth in these areas.

BRIAN SOZZI: What are you seeing-- you mentioned some weakness in the commercial side. I haven't heard that from HP in a while. Is that just big corporate accounts just being cautious because of the economy?

ENRIQUE LORES: Yes. We mentioned that also in the last earnings, and this is a trend that we have seen now more pervasive. We are seeing companies, not only large companies, but also small companies, being more cautious before they make investments. What we see is lots of deals being open. We win many deals, but when it is time to go from a deal that has been won to another, many companies have been now more cautious because the environment is uncertain. And all of us are taking cost action, so this is, therefore, having an impact on the commercial business.

BRIAN SOZZI: Before I let you go, Enrique, this might be the last time I actually physically see you before year-end. As you look back at the year that was, what have you learned as a leader?

ENRIQUE LORES: I think they need to be resilient. What clearly happened this year is that the second half was totally different for-- to the first half. So they need to have multiple plans to make sure we can manage the company in different ways depending on what happens with the environment has been a key lesson that we all have learned during 2022.