HP's (HPQ) Management on Technology Briefing Graphic Solutions Business Call (Transcript)

| About: HP Inc. (HPQ)

HP Inc. (NYSE:HPQ)

Q4 2015 Earnings Conference Call

March 23, 2016 12:30 PM ET

Executives

Diana Sroka - Director-Investor Relations

Mike Salfity - General Manager and Graphics Solutions Business

Kitt Tanner - Investor Relations

Operator

Good morning. My name is Atheria, and I will be your conference operator. At this time, I’d like to welcome everyone to the Graphic Solutions Business Technology Briefing. Later, we will conduct a question-and-answer session. [Operator Instructions] Thank you. Diana, please go ahead.

Diana Sroka

Hello, this is Diana Sroka, Head of Investor Relations at HP, Inc. On behalf of the team welcome to HP’s first technology briefing. Before we begin, please refer to our forward-looking statements on the first slide.

Now I’d like to introduce Mike Salfity, the General Manager and Global Head of our Graphics Business. Mike will discuss the market size and trends, as well as HP’s key technologies, products, and applications used in our Graphics Business. Following his presentation, Kitt Tanner, from HP’s Investor Relations team will facilitate a Q&A session starting with some questions we receive from you in advance.

And with that, I’ll turn it over to Mike.

Mike Salfity

Thank you, Diana. Hello, good afternoon, morning, evening wherever you are. My name is Mike salfity. And it’s a pleasure for me to be here today, especially to talk about Graphics. It’s a business that I know and love. I’ve been in this business for my entire professional career. And in fact, I grew up in this business to a family print shop – print service provider, which you will hear more about. So this is not only my profession, it’s actually my passion. So it’s great for me to be in a position where I can lead this business one that I feel so strongly about.

So let me tell you what graphics is. The way we look at graphics is that, we break down print into the home print, the office print, and everything else. What is everything else? The chances are pretty good as you were driving today, yesterday walking that you walk by some of that everything else. Everything else are billboards, bus stops, posters in your grocery store, car wraps, all of that if you’ve purchased online a photo book, a wedding album, that’s everything else.

And this is what we do. We deliver products and services to be able to print this content. And all this content really is – helps us drive our business model, which is all about supplies. And the supplies consumables, as you’ll hear in a few slides I’ll talk to is that, it’s a great consumables business, because as we print these billboards or these high coverage photos, the ink consumption is great. And this is something that really drives our business model.

So graphics range is really from large-format products that are under $10,000 products that are used by architectural engineers to generate drawings that, and literally sometimes add a job site to high-quality photo books, all the way up to million dollar presses that are printing, publishing books, or printing corrugated boxes.

So graphics addresses all the content outside the home and office. So how big is this? Well, the total TAM of graphics is $50 billion. I’m only here showing you what we think is addressable to us, which is roughly the $35 billion. Of that $35 billion, you could see the graphics piece is growing at 1.9%. And within that graphics piece, digital is actually growing two to three times that number. And clearly that depends on what part of the digital you’re in, but two to three times.

So you could see from this chart why we’re so excited about the fact that graphics affords us the opportunity to grow our business. So let me just break down a little bit more. Of the $50 billion, the reason that we don’t go after some of it that we don’t feel is addressable is because some of that is in secular decline with books, with magazines, with newspapers, that’s not our sweet spot, although it is in the graphics, it’s just not addressable by us and we don’t intend to play there.

Now, if you take a look at what that means in pages, there are roughly 51 trillion pages a year printed. And of that 51 trillion pages, only 5% to 6% of that is digital. Now, you could see how the pages are broken out, publishing, marketing, packaging, declaration. But the opportunity for us to go after 51 trillion pages were only 5%, 6% is digital and help transition the rest from analog to digital is a great opportunity for us to continue to grow our business.

And I know what you might be thinking well, how is a billboard a page? We actually do the conversion, happy to talk to you about that some day, and how that translates into a page, and that’s how we get the 51 trillion pages.

So what does that all mean? What is the ecosystem look like? Who are our customers? Let me try to break that down for you a little bit. We generally sell to what is called the PSPs or the print service providers. But the print service providers have a customer base that they work with that are generally driven by brand owners. And the brand owners are generally looking for ways to differentiate their brands. Digital today has given a lot of opportunity to do that. The brand owners work with the agencies that help design content for digital.

So you could see, it’s kind of a three-legged stool. We provide equipment and gear, and services to the service providers. They work with the brands that they receive the content, but the content is designed by the agency. Now for all of this to work seamlessly, we actually work very, very closely with the brands, because we need to help the brands understand what is possible in digital.

As the transition between analog to digital happens, it’s not always clear what the opportunity is and what is possible. So we work with the brands to help them understand the opportunities. Then we work with the agencies to help them understand what they need to do in their design processes to be able to submit jobs to digital presses. So this is really the ecosystem that we worked for, I would say, more than a decade, couple of decades as the analog to digital shift happens.

If you now think about the brands, these agencies, and the service providers, you could really break down the markets that they address together and how they design, who they design for in the following categories. You could see everything from photography to the far left all the way to decoration, and our products actually serve all of these categories.

So, as an example, our Indigo presses are used for really high-end quality products and photography, whether it’s wedding albums or photo books, those are done, design is done with our large format, so is sign and display, all the way over to decoration, which is growing very rapidly. So much of the content here is really content that touches our everyday lives.

What I want to do is break down packaging, because what you’ve probably also heard when Dion speaks is that, packaging is one of the large growth opportunities for us and one of our top priorities. We break packaging down into four segments; labels – digital labels, which I’ll talk to in a few slides, flexible packaging. So these are your potato chip bags and things of that nature. Folding carton, pharmaceutical products, if you go to the pharmacy and you pick up a product chances are, this is a folding carton product that was printed either analog or digital and corrugated boxes. And corrugated boxes aren’t the typical stereotypical boxes we think about the brown boxes. They’re becoming very sophisticated, very brand conscious, deep color really messages being sent within these packing boxes. So these are the four areas – the four areas that we focus on and the growth in these areas actually outpaces much of the other growth of digital.

So what’s the graphics business model? What’s really attractive about this business and we are very excited about is that, every piece of this business whether it’s services or supplies or hardware is a positive gross margin business. So when you think about system revenue and you think about system margin with every part of the system being accretive and positive gross margin, that makes this business very attractive.

So you can see that the smaller products that we have utilized ink and print cartridges like what you’ve probably seen at your home or your office, all the way to our large presses, which we actually deliver ink by the barrels. So you go into one of our customer sites, these presses are multimillion dollar presses that are literally barrels of ink sitting next to the machine that are attached to the machine, and these barrels can be changed on regular basis because of the content that’s being printed every day.

So the business model is very attractive. It’s a hardware gross margin, positive services gross margin, clearly the supplies positive gross margin, which allows us to really have a very good business model.

Okay. So how do we do this? How is it that we’re able to actually deliver this kind of a business model? Take a look at this slide here. If you look at the applications that we address and you look at our product portfolio, which is broken down by divisions, what I’d like you to understand is that, we really have a portfolio strategy. All of our new products leverage two technology platforms, the thermal inkjet, which we’ve been a leader in for decades and liquid electrophotography, the LEP.

LEP is used by the Indigo division. And in that division, the portfolio actually addresses everything from the photography market, as I talked about earlier all the way through packaging, flexible packaging, folding carton, as well as labels. And in fact, we’ve been in the label business for over 10 years. And we hold the lion share roughly a 95% share in the digital label business and then the other divisions all use the thermal inkjet.

So we now can actually deliver a great business model to our customers through economies of scale. But we are investing in two technologies. Of those two technologies, we instantiate a portfolio of products literally dozens of products. So the investment only happens twice at a platform level. And now for a very short incremental investment and short time to market, we can instantiate products that address this entire application space. That’s how we do it. This is how we’re able to really deliver the economics that we deliver to our customer.

So I always say, it’s not what we say about our business, it’s what our customers say and what the market says. So now if you take a look at this next slide with respect to how we’re doing in market share, in the areas where unit market share matters in the volume business, you can see we hold a number one position in the low-volume, mid-volume, and design and the large-format businesses. And here unit volume is key, because this is how we measure the business. And clearly, our customers and the market believes that we are number one.

So we – how do we do this? We do this again with the technologies. We do with economies of scale. We deliver great products. The products are actually meeting and exceeding customer requirements. And this enables us to really do what we love to do, which is the next slide is our strategy. And that’s all about driving page growth, because as you know, with the supplies business model that we have, driving page growth is key.

So our strategy has really three pillars to it. I’ve already talked about them. But it’s enabling a set of products off of two technology platforms. It’s delivering a compelling customer economics business model, because of our ability to instantiate products quickly off of a couple of investments. And what that does for our customer is enable them to transform their businesses, allows us to transform selected markets that we participate in. We’re very clear and surgical about where we play and we don’t play. And this is why we’ve chosen certain parts of packaging. This is why we’ve chosen certain parts of the large-format market to be able to really bring the value proposition that we can bring.

So we deliver great customer economics through a technology platform that we have deeply invested in and able to deliver products off of, and this is what’s helping drive the analog to digital transition. So what’s – what is the value proposition? How is this done?

Digital really enables three key attributes. Digital allows you to run jobs that are much shorter in run length. The break-even point for our customer is generally under 10,000 pages, where if the job run length is under 10,000 pages, digital is a great value proposition. And this is primarily, because if you think about analog, the way analog traditionally is paying for plates, burning plates, the time it takes to get the plate, set up the machine. If you’re only going to run a job of less than 10,000 prints, that’s a very large investments in set up before you actually get the job, this is why they need to run tens of thousands. Also with digital, because you can run the short length a short as one, you really eliminate waste.

The last three search I’ve read says 40% of all books that are printed in analog are actually recycled. So imagine the cost structure that you can eliminate when you don’t waste 40% of the output everything from inventory cost, warehousing cost, this is a compelling economic for our customer. So while you can print short run and while you can print on demand, you can personalize it.

So you can actually run the length of 10,000 or 20,000, or more or less and each of those can be different. In fact, we’ve had some customers that have run a job of 1 million with every single page being different and personalized, so imagine that. So imagine what you can do as a marketer. You could actually now segment your customer base by locality within a town, within a demographic in a town. And you could actually now start using big data and analytics to really target your customer. And I’ll talk a little bit more on the next slide about what that means.

So we worked with Coca-Cola, and I mentioned to you earlier about working with the brands. And Coca-Cola had seen a decline in their 20-ounce product. And they wanted to put life back in it. So we worked with Coca-Cola on an initiative that allowed them to start personalizing Coke bottles. And what they were able to do is through data analytics is identify popular names in geographies. So maybe in Washington D.C., you might want to have a Coke with Barack Obama, or another geography it might be someone else. We worked with Coke then we worked with the agencies, as I spoke about earlier, and we help them identify the print service providers that could ingest this campaign and the results were astounding.

Coke’s product of 20-ounce beverages grew sales of 19% in the U.S. alone. So imagine that being able to really target to an audience and being able to walk into a store and share a Coke with the name of the Coke with your sibling, or your family member or best friend is something that was so compelling that they grew the business by 19%.

So this is what I mean about what digital has to offer. This is what I mean about working with the brands and working with the agencies to help design working with the print service providers to be able to tie it all together, because at the end of the day, it’s really an ecosystem that works quite well. And our view of it is that, as we help our customers and help our customers’ customers, everybody wins.

I’ll just share with you one other proof point. Lexus worked with Time Magazine on a campaign. And what Lexus wanted to do was drive more awareness to their customer, so they can drive their customers to their website to increase sales. So they partnered what Time and they personalized the magazine with the customer’s name based on name, hometown, the state, some other demographics, they printed 31,000 additions to subscribers. And after this campaign ran, they raised the subscribers opting to the website from 9% to 17% and ironically, Ford followed shortly after.

So you could see the proof points of why digital is helping our customers and their customers? Why we’re excited about the opportunity? And why we think that we can continue to grow our business, as this industry continues to grow? So what I’d like to do is invite you to a show called Drupa. It happens every four years in Dusseldorf. I’ve been to this show multiple times. So you can tell, I’ve been in this industry for a while. And this is the largest convention, I think in the world, where hundreds of thousands of customers will walk through. This is a unique year for this show, because traditionally this show has been about offset.

However, this is the first time this show is really transition to digital. We will have the largest booth there, a hall in fact. So the show is transitioned to digital, and the largest presence there will be HP, undeniably a leader in this transition. So I invite you to go there, see our products. I’m confident, you’ll walk away impressed with what you see.

So I’d like to thank you for your time today. I hope that this brought some clarity to what our business is? Why we’re so excited about the business model? Why we think we can continue to grow this business? And I’d be happy to take any questions now.

Kitt Tanner

Thanks, Mike. We will now open it up for questions. As the operator mentioned, you can submit questions through the webcast portal. Additionally, as many of you are aware, we received multiple questions in advance from a number of you. We will try to get through as many questions as possible, and if we’re unable to get through all the questions today, we’ll follow-up after the webcast.

Okay, our first question sent in advance is something that we hear frequently from investors. How big is the graphics business relative to HP, relative to the market? How should we think about sizing it relative to the competition?

Mike Salfity

Great. Thank you. I’m happy to answer that. So what I’d like to do is sort of address it in a couple of parts, relative to HP. What I’d like to take you back is to think about the messaging that Dion and Cathie continuously talk about, which is you should – we view our business in core growth and future parts. And you know a lot about the core, I think you hear a lot about the core, and I won’t touch on that. When you think about the growth part of the print business, graphics currently sits in the growth. And then we have the future part when you think about 3D and other things that we’re doing with the rest of the portfolio.

So today graphics is in the growth and one of the key growth initiatives that we have along with some of the other things that has been talked about like A3 and so forth. We don’t share and we don’t report out separately the financial statements of graphics. But Dion and Cathie regularly talk about that being part of the growth business and continue it to grow quarter-over-quarter. And in fact, we’ve had 10 consecutive quarters of constant currency growth in this business, which is something we’re very proud of and continues to show the momentum we have in this business.

Relative to the market what I want to do is so to say context for a minute. When you think about graphics relative to HP print, I think that’s a different comparison, given HP print is one of the world’s largest print enterprises. It’s a different relative sizing than it would be comparing graphics to the market.

And graphics related to the market, I think, it’s easy to speak to, because when you think about the segments that we play in, whether it’s digital labels, whether it’s some of the flexible and folding carton, whether it’s in the latex, we – the fact that we hold a number one share just shows you how big we are, and how much momentum we have and clearly how proud we are of being in a lot of growing parts of print and delivering on our promise to our customers and holding the number one share.

So relative to print inside of HP is a different comparison, but it is one of the growth engines consecutively delivering quarter after quarter of growth. When you compare us to the rest of the market, what you’ll see is that, we – I believe it’s fair to say that, we are one of the biggest players in the digital, especially in the transformation of analog to digital, and I think that’s evident by when you look at what share we hold and percentage of pages printed our page wide press has printed over 100 billion pages imagine that, 100 billion pages. So I hope that gives the context around that question.

Kitt Tanner

Okay, perfect. So our second question somewhat related to the first also sent in advance is, what are some of the key financial metrics? When you think about revenue, gross profit percentage, operating profit percentage, what information can be provided to help us understand the size and scope?

Mike Salfity

Similar, I’ll just build on the last question here. Again, we don’t separate it out, but we continue to talk about the growth – the revenue growth in constant currency and this again being just delivered our 10th consecutive quarter growth. The – what I would like you to think about is, as we deliver these large presses, and I think you heard me talk about it through the slides is that, these large presses are using consumables everything from the traditional print head to literally a barrel of ink, you could see where we’re actually delivering a great business model and services as well as supplies, as well as hardware are all positive gross margin businesses for us, so they are all accretive to our business and that should give you some indication of where we’re going.

The couple of points, we have a very broad portfolio. We have products that range into single thousands of dollars. We have products that range in a multimillion. And at Drupa, we will be showing one of our latest introductions there for corrugated packaging, clearly million – multimillion dollar presses. So while we really subscribe to the razor and blade models, we take that along a spectrum to barrel then I want you to understand, it’s not like a barrel every two weeks.

One of our customers I was just with one of the top five corrugators in the world said to me, Mike, when you get this new press installed, your barrels will not be big enough. You will literally have to drive trucks in to this business and put a pipeline. And this is one of the top five corrugators in the world. And what I told him is, that’s the problem I would love to solve. So it gives the context of what we’re talking about, as we move forward. So, again, it’s really all about the supplies. It’s about the consumables, but we actually do well in all three of our business – businesses, service and supplies, and hardware.

Kitt Tanner

All right. So question number three also submitted in advance is about technology. So how is our technology differentiated and how can it be leveraged into other growth areas?

Mike Salfity

Yes, it’s a great question. So just a bit about my background and if you looked at my LinkedIn, clearly I was a competitor. I grew up as a technologist in a corporate research for the first 10 years of my career, but technology is near and dear to my heart. However, to me, technology is the means to an end. And what I learned from my father is, what they always want to know is, how do you make money. So let me tell you why I say that.

What we are able to do here at HP that I think is unprecedented is bring economies of scale to our products and our portfolio to our customer benefits from the economies of scale. So technology, as I said during the presentation, we’re able to leverage the technology development throughout our entire print business. So we’re leveraging print heads. We’re leveraging technologies and the same platform. So our announcement of the page wide XL products are literally using printed technologies that we develop and leverage down in the office product.

So it gives us the ability, because we have a vertically integrated business unlike some of our competitors who are really system integrator, so they pay the margins every time they’re buying a piece for someone. We’re able to actually take technologies that we’ve developed for the entire business and we actually now leverage that as a platform to instantiate products, and I will take you back to the slide, which I talked about the entire portfolio of the graphics business from the single-digit $1000 products to the multimillion is built off of two technologies that we are investing in two technology platforms, and all of our products are instantiated off of that.

So technology plays a big role. It gives us economies of scale. But it also gives us 30 years of depth and understanding of inkjet and quality, the and putting out hundreds of millions of devices over the last 100 years, that’s something that we bring to the graphics business, as we build these mission critical devices.

Kitt Tanner

All right, great. So our next question will actually come from the room. And what percentage of R&D is targeted to the graphic business? How do you think about R&D? Where is the investment going? And what areas are on the roadmap?

Mike Salfity

Great question. So let me just say a couple of things. Again, my background is R&D and engineering before I transitioned to business a decade and half ago. So I think that R&D investment is a very important metric and I’ll give you some numbers. As a percentage of revenue, I will tell you that R&D and the graphics is higher – higher as a percentage of revenue than most anything else in our portfolio.

Now why is that important? We recognize to continue to be the leader in industries, where we are creating the paradigm shift of analog to digital, it take investment. It takes leading-edge product. And these are very large products and they need to be the mission critical. So a lot of investment goes into the technology, into the quality, reliability, just it does for our lower end as well. But we have a wide breadth – the portfolio is very broad and very deep. And, therefore, we actually have a very heavy investments in R&D.

My personal view and this is probably something I gained throughout my career in this industry and being a technologists. I have a view as, I don’t want to invest R&D in anything that doesn’t give me a sustained differentiation over time. So we’re very, very deliberate and surgical around where we put our R&D investment dollars, and we’re very clear around where we can partner, or where we could acquire. But if it gives us a sustainable advantage, we invest, and that’s how I look at it, this is how I drive the business.

Kitt Tanner

All right, great. So our next question also comes from the room. How many applications offer opportunities for small run batches? Where are the areas for small batches offer compelling value proposition?

Mike Salfity

Yes. So I would tell you that when – let me just characterize a batch to make sure we’re on – we’re talking about the same thing. I view this question a batch as being short run jobs. And I would tell you that the applications we have today and the way we segment the business into the applications, whether it’s photo, or textile, or garment, or signage, all of those with digital can actually be run in small batches. There is no underlying barrier to actually personalizing the job, or creating a job of any run length.

So this is where the compelling value proposition comes in. If you are a supermarket and you go to your print service provider and you say tomorrow I want to run ad on discounting this item, and I want flag. We call them flag, but they’re actually flexible signage. And you go to your print service provider and say, I want to run this tomorrow. And I just – here is the message and this is – I only need. I have 10 stores in the area and I only want 50. We could do that. We could personalize it, and the set up time is negligent. They give us the file or give to print service provider.

So you could see some of the demands of our customers, which is we want to pilot this sale. But we only want to do it in few stores. We only want to do it for one day, or if you get a very large customer like Coke that says, we want to localize a campaign and but we want to run a 1 million, I hope that helps. So think about it, there’s no technological barrier. There’s no impedance in the system that says, it’s harder or more expensive to personalize or run short batches.

Kitt Tanner

Okay, I think that’s helpful. So what about textiles, you brought that up. Is HP involved and will it be involved in textiles in the future?

Mike Salfity

Great question. The answer is, yes, to both. We’re already in textile. One of the thing that’s happening in our Graphics business that continues to give me excited about the business every day is the opportunity that lies ahead of us and the fact that is changing in front of our eyes. And I’ll give you an example of textile. The – a few years ago, I would guess with a very high probability when you went into a store and you saw their signage, their signage was primarily fixed signage printed on PVC material and it wasn’t flexible and it was more stationary.

And what textile has done is allowed us to now move into textiles with going to fall signage. We’re already there. We’re already helping doing that. We’re – some of – depending on how you define textiles, but we’re into decoration already. So the answer is, we’re already moving there, and we’ve created a phenomenal break through technology – our latex technology that really enables us to go much bigger beyond signage. And this is something that, again, if you take a look at our knowledge of – our base of investment across of all the print, number of years back, we started investing in lay tax and lay tax now is a great success story. It does things for the environment that solvents do not do. It is healthy. It is a fast drying. It works on lots of media. So you can see how we’re leveraging investments and how we’re moving into textiles.

Kitt Tanner

Okay great. So as the industry moves to digital, would impact your supply business in the long-term?

Mike Salfity

Yes, I’m excited to tell you, yes and I say that with a smile because, look let me take you back to some of the numbers. 52 trillion pages, 5% of digital, I mean think about that. And there is really no technological barrier to moving a lot of these to digital, the pages. So will it impact? Yes, absolutely. But in a very positive way, in fact we’re seeing it today as we move into the packaging business.

So as – when it moves to digital, this is our – this is our core business. It is actually enabling the entire industry to shift. Look, I’ve been in this industry for – as I said before, my entire career with an exception of – of moving out for a year and doing something different, and then being pulled back in because of my passion for it.

But we started the same thing, this industry did a transitioning analog-to-digital and the commercial graphic, some publishing and as you could see today, book publishers are – are absolutely on the path of – I want to be able to just print the books. I’m going to sell an on-demand and that creates great opportunity. So the supplies business will continue to grow as we move to digital continues to happen.

Kitt Tanner

Alright great, our next question also from the room is who is the biggest competitor in each of these spaces in graphics? Do any of them offer the same breadth of product portfolio?

Mike Salfity

Great question, look I have great respect for our competition, and I can tell you I never sleep full night rest believing that just because we are number one share in majority of our segments and all of that that we can rest. So saying that I think I truly have respect to our competition and I think the competition drives us to be better every day as an industry, and as we transition from analog-to-digital, our competition will help us, raise the water level and all boats will float higher, okay.

[Audio Gap] now are there any competitors that play in everything we do? The answer is, no. So that’s a challenge for us and an opportunity for us. So we’ve got different players that play in different market and I don’t believe you could validate this whether I’m right or wrong, but I don’t believe there is a single competitor play this every market that we’re playing it. And so we don’t have a single competitor. So we have to be good in everything that we choose and this is why we’re very deliberate about where we play.

And as we talked about in my early presentation, if you take a look at the demographics of analog-to-digital and we talk about what’s targeted and not targeted is precisely for that reason. We want to target where we can really win because we know we can’t be everything to everyone, and did I have the same breadth. Look, I don’t believe so.

I think if you take a look at which I talked about earlier, a vertically integrated business, leveraging the scale of the home and office products, the depths we have in technology, the depths we have in R&D investment, sets us apart and makes us unique and I always tell you it’s not what we say about our self, it’s what our customers say about us with respect to – with respect to holding share.

The other thing I’d like to point out is if you think about scale, you cannot think about scale without thinking about supply chain. And our opportunity and our privilege – my privilege in the Graphics business to leverage the supply chain of the entire print and really PC business too, because there are a lot of commodities and there are a lot of value parts that play in both.

Our ability is being one of the world’s largest PC manufacturer, the one of the world’s largest print manufacturers, gives us supply chain scale, it gives us scale on so many levels technology scale, go-to-market scale, all these things that I think truly differentiates us and gives us the ability to really win, it doesn’t entitle us to, because we have to earn that every day.

Kitt Tanner

Okay, great. So what about software? How does software play into customer decisions? Do you need any additional software assets?

Mike Salfity

Great question. So, while I grew up in printing, what I learned as a teenager is, I hated smelling like ink every day when I went home. And it drove me to engineering and I spent a fair amount of my time in software running workflow businesses and so forth. Look, when you think about a solution, you have to think about the entire solution from the content creation, and I would say till you invoice the customer, that is to me the solution. And that actually requires software and other asset and services, but it’s an ecosystem.

So what we’ve done is, we’ve actually built an open framework to allow best-of-breed software partners to participate in the best preflight package, the best in position package, the best color management package. And we don’t dictate to our customers what software they have to use and not have to use. We develop an open ended framework that allows them to plug in what they want. So it’s very important, number one.

Number two, I don’t think I have to own everything. I think we have to be very clear on what we want to own and very clear on where I could be differentiated and where I could drive the value proposition, secondly.

Thirdly, we have to help our customers become more productive. And we just announced print OS, which is a cloud-based platform, and I’m happy to tell you, we’re on track. We will be shown at a Drupa. I have over 40 customers today worldwide, some of the biggest customers in the world that are actually using our own cloud-based platform, which is really designed to help them monitor and manage print.

And what they can do now – imagine this scenario. You are a large print service provider and you have multiple sites and you have multiple equipment on each site. And you want to be able to manage the jobs across multiple sites. You want to manage the jobs across multiple devices. You want to know where your capacity is and what’s your load balancing is. This now is all within the capabilities of print OS. And we’re getting great reviews from our customers.

The other thing I talk about openness, look, this is not about just HP devices, and I’m a strong believer and droves the architectural presets and along with the technologist of being able to play with competitive product. So our customers get the true benefit of what’s in their shop and not pigeonhole them into something that is sub optimized.

Kitt Tanner

All right. So it seems like the business is managed fairly independent from other ITG segment. So why not divest the business? Wouldn’t the business be stronger standalone? Would it provide more of a focus?

Mike Salfity

Yes, it’s an interesting question, and one that, I’m sure a lot of people thought about and I thought about. But I want to take you back to a few things, I said just sort of highlight why we feel strongly, this is great asset within HP. I talked about how we have the platform approach that we had invested in, which is two primary platform approaches for the future LEP an inkjet.

The scale we get off of inkjet from the home and the office is something that actually gives us the economies of scale, and give us the leverage that we bring to our customer. So I think if you take a look at this sort of the high order bit of what are you leveraging off of the rest of HP, there’s a lot and we talked about supply chain, we talked about go-to-market. We – now we can talk about the technology platforms that have been invested in that leveraging page wide in the office as well as in graphics.

So while it may seem on the surface, while you’re addressing a different category and a different set of markets and segments that may be true. But the underlying technology and the foundation of our investment comes from our ability to leverage the scale of HP Inc. across the entire business.

Kitt Tanner

All right, great. So our last question then somewhat related. So it seems like the market is very fragmented. So what opportunities are there for consolidation and what role would M&A play for HP in consolidating?

Mike Salfity

Great question. So, look, Dion and Cathie has been very clear, I think in all of their communications, which is M&A is something they continuously look at is part – it’s a component of a strategy. And that when it makes sense, they will decide will this – I could recommend and they can decide what we do. But M&A has to be really a very thoughtful and disciplined in our approach.

So my point is M&A is never ruled out. Now market fragmentation. What – being in this industry a long time, I’ve seen a lot of consolidation. I can tell you about how many MIS vendors, management information systems for print shop for around 10 years ago. How many web to print vendors they were around 10 years ago just even in the core businesses.

So consolidation happens I think fairly organically with the ability to continue to deliver a value proposition to the customer. And in my mind that organic consolidation comes from two types of innovation, technology innovation and business model innovation. And when you think about what we are doing, we’re working on both of those here.

And we believe the technology innovation that we’re bringing to market with the platforms I’ve talked about. The business model innovation that we bring in some cases, our business model is a click charge. In some case, it’s by ink consumption, different Tier pricing, and so forth. We continue to innovate on the business model. We continue to innovate on technology. I think that’s going to drive the consolidation organically. I think that the strong will survive. And I think that the landscape will continue to evolve, we’ll be very surgical about our M&A opportunity.

We never rule out anything. Partnering is something I truly believe in, because I think that an ecosystem that has best-of-breed partners that come together for a common cause, which is our customer is the right behavior and developing open systems that invite the best-of-breed to play well with each other in the same sandbox benefits our customer, when our customer benefits we all benefit.

Kitt Tanner

Great, thanks, Mike, and thank you, everyone, for joining. We hope that this technology briefing has been helpful and informative. And we look forward to having more of these sorts of briefings in the future.

Mike Salfity

Great. Well, we also hope to see you or some of you at Dusseldorf at Drupa. I’ll tell you it’s a show you won’t forget. And it is something that you walk away really getting a feel for this industry. So look forward and hope to see some of you there as we showcase our leadership in the digital graphics market.

Kitt Tanner

All right, perfect. And the IR team will be sending additional information around shortly related to Drupa with specific investor related activities. We hope that you will please take a moment to complete the surveys, so we can make sure we continue to have – meet purposes of these surveys going forward. So thank you everyone for joining.

Question-and-Answer Session

Q -

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