HP Inc. (NYSE:HPQ) 6th Annual Wells Fargo TMT Summit December 1, 2022 11:40 AM ET
Company Participants
Andy Rhodes – General Manager and Global Head of Commercial Systems
Conference Call Participants
Aaron Rakers – Wells Fargo
Aaron Rakers
All right. So why don’t we get started here. I’m Aaron Rakers. I’m the hardware analyst here at Wells Fargo. I’m pleased to host a discussion with Andy Rhodes, the General Manager of the peripherals business with the HPQ. So Andy, first of all, thanks for joining us. Maybe to start just the conversation, give us a quick overview of kind of your background, your responsibilities. And then we’ll dive right into some questions.
Andy Rhodes
Yes, we’ll use this one, and then we’ll jump in. So yes, great to be here, thanks. And just a quick background on myself. I’ve been at HP around four years. Prior to this role, I was running all of the commercial PC business for HP. Actually, it’s my second rotation into the company. I was with HP from ’97 to 2000 in the U.K., doing sort of actually PCs back then, spent 18 years out of the company at a competitor and then came back to HP really to drive innovation.
I think HP itself is just such a strong company that values innovation, and it’s a great place to work because you can go drive that. So the last six months, I’ve been doing peripherals and then also responsible for the acquisition of Poly that we closed recently, and we’re in the immediate throws of integrating that company as well.
Question-and-Answer Session
Q – Aaron Rakers
And that’s perfect. So we’ll definitely get into the Poly acquisition and the integration. But maybe to start, obviously, a lot of discussion, I’m sure, with investors that you’ve had around just the demand environment. PC demand obviously continues to come under some pressure. Talk about maybe what HP has been seeing in terms of the peripheral side of the business as well as the hybrid workforce solutions growth in a fairly weak PC demand environment.
Andy Rhodes
Yes. So we still see the demand for peripherals relatively strong. And it’s a broad term as well. And so if you think about what we provide now as a portfolio in HP, it’s everything people need around the PC, whether you’re working from home, remote, which is a display, a keyboard, a mouse, a dock, lighting, or as you sort of we get back into this notion of hybrid, and I say this to many, many customers, and we have a lot of debate right now, hybrid is not remote, hybrid is hybrid. It means that you’re working in multiple different environments.
You’re working at home. You’re working on the go again like we are now traveling and you’re working back in the office. And so there is still relatively good demand because people are going in these states. And I’ll give you one example. Let’s talk about audio and headsets. If you’re at home, you might have a very, very different solution than if you’re on the road. So at home, I use a Poly deck headset of Voyager. On the road, though, I use ear buds, and then when you’re in the office, you might use a third solution, that’s number one.
Secondly, what we’re seeing is a lot of debate and discussion about back to office. And as I said, hybrid is not remote, and so people are coming back into offices. And one of the primary reasons that they come and they don’t return is that the technology in the office is not as good as it is now at home. We spent three years developing our at-home setups. And so we see good demand still around the office solutions.
There’s 90 million rooms in the world of only rooms or spaces that people should come to collaborate together. Only around 10% of them have any technology in them today. And it’s one of the biggest inhibitors. You go back into the office, you want a conference room to work. You want to be seen and heard. You want to be able to communicate with people that are remote and a lot of that has not been refreshed over the last three years. And so huge upside potential there for us.
Aaron Rakers
And do you think as the PC market goes through kind of the post-COVID dynamics that customers come back and say, now I’m going to subsequently make that upgrade to the work solutions piece of the equation, like we’ve done the PC upgrade. Is there kind of a lag effect at all in terms of how we think about the pull-through of some of the peripherals business?
Andy Rhodes
What’s interesting on the peripherals, a couple of data points. One is there’s a 5x refresh rate versus a PC on IO as an example, keyboards, mice, headsets. And that’s holding pretty steady. So number one, people are refreshing these devices much, much quicker than they are.
Secondly is this isn’t just about IT spending and IT buying. What we’ve seen is a real shift in buying behavior over the last three or four years and many individuals are now buying these peripherals themselves, whether they get a stipend from their IT department or their company or do they just decide to buy themselves because they know that productivity — their own personal productivity is highly related to the tech that they have, especially around the PC.
Now we haven’t seen a huge amount of shift on PC, bring your own device and things like that. But in the peripheral space, there are these two models, which is one of the reasons, by the way, that we’re bullish about some of the synergies on Poly, is the Poly didn’t have the breadth and depth of penetration in the e-tail/retail space that we do at HP, and we can bring now the Poly products into our channels in e-tail and retail.
So that buying behavior shift is also what we’re seeing is, even if IT aren’t buying these, we’re seeing a good demand still with end users themselves going through an e-tail or retail and buying full work the peripheral set.
Aaron Rakers
And just to kind of go back to what the company has been said — has said in the past, which is, I think you’re talking about very large TAMs, right? You’re talking about, I think it was a $110 billion TAM by 2024 in the peripheral’s piece. And I think with the Workforce Solutions group with Poly another $120 billion TAM. I think the growth was like 8% CAGR. Are those still kind of how you think about the size of the market opportunity that you’re addressing now with the broad portfolio?
Andy Rhodes
Yes. Yes. That hasn’t changed even with the economic environment that we’ve seen. And those are obviously over multiple years. And so we still see that CAGR as is, and it comes down to a number of things, as I said.
Number one, refresh rates are still holding pretty steady. And also, they’re relatively lower AUPs, and so people are still prepared to spend that kind of money because it’s lower. And they really see it as linked with their own personal productivity, and that’s a key driver. So that’s — that definitely is working in our favor.
Second is inside of that TAM of $110 billion is the conference room itself. And as I said that if you want people to go back to the office, and this is a boardroom debate right now, how do we get people back into offices? How do we get them working on things together? I mean, remote is great, but when you have new and difficult problems, putting people inside of rooms is absolutely critical. And as I said, those rooms are just not built out yet in any meaningful way.
So we’re still very, very bullish about the growth of room solutions, which is a much, much video requirements are much, much higher. You need in the future, multi-cameras in that room to get the same experience. No one wants to see the back of someone’s head if you’re remote. And so having multiple cameras in the room, that the market is shifting to much more PC-based solutions in those rooms. We have actually replaced our solution with — from Dell and Lenovo PCs to HP PCs in our room solutions.
So that part of the market, yes, we see it still very, very much the same as we did before and the growth in high single digits over the next couple of years.
Aaron Rakers
That’s perfect. How do we think about or how do we appreciate HP share in kind of the two categories, peripherals and workforce solutions?
Andy Rhodes
Well, I think if you think about keyboard, mouse, bags, docks, hubs and then personal video, we still have a relatively low share in a high-growing market. So there’s a huge amount of upside for us. And we believe that the channels that we have, it’s the same channels that buy the PC. So it’s very, very complementary still, and it’s a good business to be in, and we are underpenetrated there, which allows us to have all of this upside, and that hasn’t changed over the last six months in terms of the opportunity that we see.
Aaron Rakers
And so kind of with that mindset, I mean, how do we think about kind of the expansion of the portfolio from HP from this perspective in terms of peripherals, is there other areas of white space for you to go after? How do we think about the road map within the peripheral strategy, if you will, inclusive of the Poly acquisition?
Andy Rhodes
Yes. So I mean, with the poly acquisition, what we get now at scale, whether it’s in the product portfolio or the go-to-market is three major areas. The first major area is room solutions. And as I said, that those room solutions are absolutely going to grow because if you go into a room today, it’s very monolithic. It’s front-of-room camera.
It’s not how people want to operate. So we see the growth there around multiple cameras, really driving experiences, things like face framing, focusing on the speaker, but also seeing multiple different people in the room almost being able to direct that experience from afar. So there’s just huge upside in the number of rooms that need to be penetrated, but then also upside in what customers want to put in those rooms to gain a better experience. So it’s not simply just a dumb camera anymore that’s projecting what is in the room. It’s really using AI and software technology to provide that amazing experience. So that’s number one.
I think then in commercial headsets, we have relatively high share, but as I said, this is crossover into customer buying behavior shifting and then consumers themselves buying for hybrid work environments, and that’s where I think our strength in e-tail, retail really benefits us, and you’ll start to see us drive that over the next year. And a much more considerate, taking Poly into brick-and-mortar, retailers where we are relatively strong on the PC and in our other peripherals of keyboard and mice. Poly also has IP phones. Interestingly enough, that market, as people come back to the office, people are refreshing phones. And then again, a keyboard and mice and bags and everything was surrounding the PC, our share is relatively low in a stand-alone business.
So we have just a huge amount of upside there. I mean we’re very, very low single digits on share right now. So there’s a huge amount of upside. And customers want to buy from us. They want to buy from one company. It helps them in terms of buying behavior, it helps them in terms of support all of that.
So lots of the customers that I speak to, and I speak to tens of them a week right now. None of them have told me that this is a bad idea. They all think it’s a great idea because they can consolidate their buying now into HP and they know that we can drive a much more integrated road map and get these experiences that they want right. I walk into a conference room with an HP PC, it knows that, that room solution is there and it can almost form part of the mesh network almost in these conference rooms. And so you’ve got great audio, you’ve got great video on your laptop, you can incorporate that into the meetings that you have.
Aaron Rakers
So I think with that said, kind of just getting into some of the details around the Poly acquisition. I think HP when you made the acquisition, I think the outline was like a 15% revenue compounded rate of growth. I think you talked about HP achieving $500 million of, I believe, revenue synergies by fiscal ’25. Can you just unpack that? Or are those still kind of the targets we’re thinking about as far as this acquisition and maybe double-click on some of those revenue synergies. You alluded to a little bit go-to-market, but anything else that we should think about?
Andy Rhodes
Sure. Yes. So the answer is yes, we’re still on track for that. I mean, it’s early days. We’ve just started the integration, but all the signs are very encouraging. I think on the revenue synergy side, just at the higher level, we see a number of areas. One is, we have very complementary channels, and we’re seeing growth of video solutions, especially into the SMB and the S market through the long tail of IT channel partners that we have a very, very good penetration in. So expanding Poly products into those channels is one of those big revenue synergies.
Second is Poly is very strong in what’s called the AV channel, and we can bring more of our other products. We had personal webcams in the HP portfolio. We can bring that into the AV channel. So we still see good traction there and encouraging signs. The third is obviously in accounts.
Poly was strong where maybe HP wasn’t and vice versa, especially where HP had big penetration, but Poly wasn’t. We have very, very robust programs in our go-to-market to capture those synergies and those accounts. And then we’ve got assets like hp.com and really sort of taking this attached motion where if people are buying a PC, they want to buy all the other things at the same time. And so hp.com is a good indicator of that. So you’ll start to see Poly products really be pushed through that channel on hp.com.
And then one other synergy on the revenue side that we have is really around, as I said, replacing some of the Dell and Lenovo PCs that were in the Poly solutions with HP. On the rest of the P&L, HP sells a PC a second. And so leveraging the supply chain even more in terms of ODM consolidation in terms of logistics rates, in terms of driving some of our commodity costs. We’re seeing good signs there. And then lastly, on the cost side of the business, we’re still on track to get the savings we had through consolidation of certain corporate functions.
Aaron Rakers
Yes. And I think with that being said, I mean, the target was to drive, I believe it was 600 basis points of operating margin. I’m guessing the base of that was the 10% to 12% rate. Is that the way to think about the leverage here on the operating margin side?
Andy Rhodes
Correct. Yes.
Aaron Rakers
So I guess one of the questions I tend to get, and we kind of touched on it at the beginning, is that with the PC weakness or basically, the — if you will, demand normalization post COVID, why do I not think that the portfolio of Poly saw some of that demand insertion and normalization is something that we should be thinking about as we look forward now.
Andy Rhodes
My view is, as we sort of see weakness in other areas, people are still trying to drive for productivity of every worker that they have. And if you look at the portfolio we have, that’s exactly what it’s all about. It’s about driving productivity. And so even as companies look to cut costs, they want to drive up productivity. So this is an area we’re still seeing a lot of spending on.
And I talk about this back to office is just a great example. Even in a reduced real estate environment, customers want to change the optics of that real estate, the way it’s used and the office is going to be a place that people come back to work together. And what’s inhibiting that right now is the technology in those conference rooms in those spaces. And so we are still seeing spending happening in those environments. And that’s why we still remain committed to those synergies that we had at the acquisition.
Aaron Rakers
Yes. Perfect. And maybe just to kind of think about the context of the hybrid work environment. How do we think about the dollars spent on the peripheral’s pieces and the Workforce Solution’s pieces relative to the spend that you typically see from a — on a PC side. Do you guys think about how that ratio has changed? Or is there anything you might share there?
Andy Rhodes
Well, as I said, I mean, let’s say, the commercial market as an example. Even as IT spending comes down on that core — on some of the core, like a PC and maybe a display, they’re still spending on the peripherals of IO, of headsets, of audio. This notion have been seen and heard in remote environments is important not just to corporations, but to people themselves. And so two things are happening. One is we’re seeing corporate spending still be very robust in those areas and in the environments where corporate spending is declining, individuals are going out and spending their own money on those elements.
And again, that’s the — and they’re not doing it through the corporate IT department, they’re going to Amazon. They’re going to Best Buy, they going to Belongia, they going to Finnek, they’re going to Harvey Norman around the world and spending some of their own money on those areas.
And as I talked about, that’s one of the great synergies that we had in the Poly deal is, Poly was not in those areas in any significant way, and we are at HP. We have great connections on the PC and some of our other peripherals that we’re leveraging to go do that. So we still see spending on the peripheral space been robust. And it might be a little bit of a shift away from corporate IT spending onto personal spending as well, but that’s definitely happening.
Aaron Rakers
Yes. And then the final thing I just want to touch on, again, kind of double-clicking on the 600 basis points of synergies that you’ve laid out, obviously, an important piece because it would obviously be accretive to the overall, the PSG segment within HP. The couple of key synergies and how we think about the cadence of that 600 basis points, what’s the key things we should be thinking about there from an operating margin perspective?
Andy Rhodes
I mean I think revenue growth is still a key one. So we’re in this, we said it from day 1. This is about growth. This is about growth. And actually, our sales — our general sales force is responding incredibly well to that.
The corporate culture between the two companies, which you know in acquisitions is absolutely critical. I can tell you, I’m really, really happy with the way that the sales forces are engaging. They speak the same language, they understand each other. We’re seeing very, very quick sort of account by account strategies being formed in the field. So the big, big key here is growth, and we continue to go drive that every day.
And then it’s not saying that we’re not going to see the rest of the benefits through the OGM line on all the things I outlined earlier around logistics costs and using the buying power that HP has, but we are ultra-focused on growth, and we’re ultra-focused on those revenue synergies.
Aaron Rakers
That’s perfect. The other quick question I had here, and I apologize I’m going a little bit back and forth is that, can you help us unpack a little bit of the mix of the Poly business? I think one of the areas was obviously the video capabilities in the office side. I think HP outlined an expectation of seeing that market triple over the next several years. What — unpack Poly, what percentage of Poly would do you put in this — in some of those segments?
Andy Rhodes
Sure. I mean we’re not going to break it down, but I’ll give you a rough idea. It’s probably roughly 30% room solutions, 30% headsets and then 30% IP phones and then services that surround all of those. We see the significant growth in room solutions. And so room solutions is the key because the two reasons.
One, it’s where the growth is going to be over the next couple of years? And second is, it’s the one that is most ripe for radically changing the experience for this hybrid work environment.
Second area that we’re focused on moving forward is many of our customers want to buy it as a service. And that dovetails into you talked about Workforce Solutions. Dave Shull, who is the CEO of Poly has stayed on HP, which is fantastic, and he’s leading that workforce solutions business. And so bundling this all together providing superior value for our customers by offering it as a service is going to be another big area that we’re going to focus on in terms of providing that offer and then seeing that grow.
Aaron Rakers
Perfect. Andy, I think we’ve — you’ve answered a lot of the questions I had. Is there anything that we didn’t touch on that I think would be worth maybe highlighting here?
Andy Rhodes
No, I think you covered it very, very well, and we’re excited about the business. I think acquisitions are always relatively hard. I think two things. One is, as I said, culturally, the fit is amazing and had a very, very fast start. Secondly, haven’t yet met a customer that doesn’t think this is a great idea or a channel partner.
And thirdly, as I said, even as spending is reduced in certain areas, this is one that customers want to continue to go spend on because it’s absolutely tied to productivity. And as you go through these environments, that’s what you want, you want to have much more productive workers.
Aaron Rakers
Andy, thank you so much for joining us.
Andy Rhodes
Great. Thank you. Thanks.
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