HP smashes estimates, stock falls

HP Inc. CEO Enrique Lores sat down with Yahoo Finance's Brian to discuss the company's strong earnings report and break down the company's outlook amid the global chip shortage.

Video transcript

BRIAN SOZZI: HP shares are under pressure this morning, despite the computer and printer maker smashing analysts' profit estimates last night. The company continued to experience strong demand for notebook computers while also seeing a rebound in its office printer business.

Now, I talked with HP's president and CEO Enrique Lores about the quarter and outlook.

ENRIQUE LORES: Well, first of all, thank you, Brian, for having me here. It's always great to see you.

As you said, we had an exceptional quarter, double-digit growth. Both in topline and revenue were significantly above market expectations. We also increased guidance for the rest of the year. So I don't think this was a surprise.

I think we just executed and did what we said we were going to do. And I'm really pleased with the progress we have made this quarter.

BRIAN SOZZI: Well, I'll tell you what surprised me. It was the commercial printing side of the business, units up 22%. In the first quarter when we talked, units were down 6%. So why the comeback?

ENRIQUE LORES: Well, we were expecting the office business overall to start recovering as people would be going back to the office and offices would be reopening. And we are starting to see some of it. We still think it will be stronger at the end of the year. But this is what is behind this recovery you are seeing.

BRIAN SOZZI: What are you hearing from those enterprise customers? What are they buying? Are they upgrading their entire office? Are they buying new office supplies for printers? What are they doing?

ENRIQUE LORES: What they are really doing is trying to improve the experience for their employees because they want them to go back to the office. And therefore, they have realized that they need to invest again in the equipment that employees will be using in the office, whether it's printers, whether it's PCs. They really have a big need to do that. And this is what we are seeing, which is also driving the acceleration of the demand that we are starting to see on the commercial side of PCs.

BRIAN SOZZI: Within the consumer side of the business in the personal systems segment, you aren't hurt by the chip shortage? I mean, those sales were up 72%.

ENRIQUE LORES: We, both in consumer PCs and commercial and consumer printers, we are up more than 70%. And I would say that the issue that we are seeing in components is an industry-wide problem. And if I had to choose, I always prefer to have an issue like that, which is driven by how strong the demand for our products is.

What we are demonstrating both with the strong [INAUDIBLE] that we had this quarter but also with increase on guide is that we know how to manage the situation. During the last months, we have made a lot of changes across the company to be able to manage this situation effectively.

We have increased level of inventories in a few areas. We have signed long-term agreements with some key suppliers. We have redesigned our tools and processes. So we have made a lot of changes that are allowing us to manage the situation effectively.

BRIAN SOZZI: So you don't think we're up against seeing laptop shortages any time soon?

ENRIQUE LORES: Well, we continue to see demand stronger than supply. But the fact that we were able to increase the guide for the rest of the year shows that we are confident in our ability to continue to deliver strong results for the foreseeable future.

BRIAN SOZZI: What are you hearing from school districts? We're talking to a lot of executives. This is going to be a different back-to-school season, in large part because there was no back-to-school season last year. How does that impact a company like HP?

ENRIQUE LORES: Well, what we have seen here in the last quarters is very strong demand from the education side for PCs. And we continue this to happening. I think, even if schools reopen, they have realized that with technology, education can be more effective. And we continue to see very strong demand on the education side. And we expect it to continue.

BRIAN SOZZI: Perhaps you can break down how you were able to grow operating margins in both segments. We talk to a lot of folks. And the costs of doing business are going through the roof, logistics, labor, you name it. How are you able to grow margins?

ENRIQUE LORES: Well, if you think about the situation we are facing where demand is not being able to be fulfilled by supply, this is creating a favorable pricing environment for us. We have reduced significantly the amount of promotions that we need to do during the quarter. So even if we are seeing cost increases, we are able to compensate that. And this is what is really driving this thing on the results from a margin perspective.

BRIAN SOZZI: I know HP is really focused on gaming. For investors not familiar with the HP story, do you have any exposure to crypto?

ENRIQUE LORES: We don't have any exposure to crypto. And what we are is very happy with the progress that we are making with our gaming business. It is growing even faster than our overall consumer business. So this tells you about the strength of that business.

We also are expanding into peripherals for gaming. We are about to complete the acquisition of HyperX that we announced a quarter ago. So gaming is a growth story for us that we expect to continue in the future.

BRIAN SOZZI: Do you think crypto is an area of opportunity for HP?

ENRIQUE LORES: At this point, it's not one of the areas where we are focused. What we really see is that the changes in how people work, live, educate are creating a hybrid world. And this is really the focus for the company. How do we continue to deliver product, solutions, and services that will make our customers to really be successful in this new environment?

BRIAN SOZZI: You and I have talked throughout the pandemic. And it's safe to say that we rounding the corner in the pandemic. And you've mentioned a hybrid work model. How does that model impact an HP two, three, four, five years down the line?

ENRIQUE LORES: We think that the pandemic has opened tremendous opportunities for us to continue to grow. When we think about the new ways of working, of learning, of getting access to health care, they're all opportunities for us to continue to grow.

If you think about how companies will have to continue to enable their employees to work from home, even if only part of the time, how kids will have to do work or the homework using computers, using PCs, how we can connect, in a secure way, printing at home with printing in the office, all of them are opportunities for us to create new products, new services.

And if, on top of that, you think about the changes happening in the supply chain space, where companies are looking for more flexible supply chains to produce locally, this is also opening opportunities for us in 3D printing, in industrial printing, all segments where we are starting to see growth again that will be big drivers of growth for the company in the future.

BRIAN SOZZI: That was HP CEO Enrique Lores, upbeat on the back-to-school shopping season and the outlook for computers.