Orit Keinan-Nahon:

Good afternoon, everyone, and welcome to HP's Second Quarter 2024 Earnings Conference Call. With me today are Enrique Lores, HP's President and Chief Executive Officer; and Tim Brown, HP's Interim Chief Financial Officer. Before handing the call over to Enrique, let me remind you that this call is a webcast and a replay will be available on our website shortly after the call for approximately one year. We posted the earnings release and accompanying slide presentation on our Investor Relations webpage at investor.hp.com. As always, elements of this presentation are forward-looking and are based on our best view of the world and our businesses as we see them today. For more detailed information, please see disclaimers in the earnings materials relating to forward-looking statements that involve risks, uncertainties and assumptions. For a discussion of some of these risks, uncertainties and assumptions, please refer to HP's SEC reports, including our most recent Form 10-K. HP assumes no obligation and does not intend to update any such forward-looking statements. We also note that the financial information discussed on this call reflects estimates based on information available now and could differ materially from the amounts ultimately reported in HP's SEC filings. During this webcast, unless otherwise specifically noted, all comparisons are year-over-year comparisons with the corresponding year-ago period. In addition, unless otherwise noted, references to HP channel inventory refer to Tier 1 channel inventory. For financial information that has been expressed on a non-GAAP basis, we've included reconciliations to the comparable GAAP information. Please refer to the tables and slide presentation accompanying today's earnings release for those reconciliations. With that I'd now like to turn the call over to Enrique.

Tim Brown:

Thank you, and good afternoon, everyone. We delivered solid financial results in Q2, driven by disciplined financial management and focused execution while navigating a dynamic and competitive environment. We are pleased with our continued progress we made in Q2 toward delivering on our financial commitments. Total revenue decline slowed further. Our gross profit dollars and margin, our non-GAAP operating profit dollars and margin, and our non-GAAP EPS, all improved both year-over-year and quarter-over-quarter. In addition, we generated solid free cash flow. We achieved these results while simultaneously reinvesting in our key growth areas and in AI and managing through a mixed market environment characterized by slightly stronger PS commercial performance, balanced against continuing Print market demand challenges. Now let's take a closer look at the details of the quarter. Net revenue was $12.8 billion in the quarter, down 1%, both nominally and in constant currency. In constant currency, Americas increased 2%, EMEA declined 3% and APJ declined 5%. APJ was impacted as soft demand in China continued. Gross margin was 23.6% in the quarter, up one point year-over-year, primarily due to lower commodity and logistics costs and cost savings, partially offset by unfavorable mix and competitive pricing. Non-GAAP operating expenses were $1.9 billion or 14.8% of revenue. The year-over-year increase in operating expenses was driven primarily by continued investments in higher variable compensation partially offset by cost reductions. Non-GAAP operating profit was $1.1 billion, up 2%. Non-GAAP net OI&E was $158 million, down primarily due to lower interest expense driven by a decrease in debt outstanding. Non-GAAP diluted net earnings per share increased $0.03 or 4% to $0.82 with a diluted share count of approximately one billion shares. Non-GAAP diluted net earnings per share excludes a net expense totaling $205 million, primarily related to amortization of intangibles, restructuring and other charges, acquisition and divestiture related charges, non-operating retirement related credits and other tax adjustments. As a result, Q2 GAAP diluted net earnings per share was $0.61. Now let's turn to segment performance. In Q2, Personal Systems revenue was $8.4 billion, up 3% or 2% in constant currency, driven by higher volumes led by commercial, partially offset by a decline in ASPs and continued weakness in China. Total units were up 7% with consumer down 1% and commercial up 12%. Personal Systems revenue returned to growth exceeding our expectations. We are encouraged by the positive momentum exiting Q2 as we head into the seasonally stronger second half of the year. Drilling into the details, consumer revenue was down 3% and commercial revenue was up 6%, representing greater than 70% of Personal Systems revenue. ASPs were flat quarter-over-quarter driven by a favorable mix shift toward commercial and increased consumer pricing, offset largely by an increased mix of lower end devices. While our market share declined in calendar Q1, as competition intensified, we drove share improvements in high value categories, including mobile workstations and commercial premium. We remain focused on driving profitable revenue and share growth in both our consumer and commercial markets. Last week, we announced the launch of our next-gen AI PC, which is part of a series of launches planned for this year that will expand our portfolio of AI PCs as we enable our customers to deploy advanced AI technology at the edge. Personal Systems delivered $508 million of operating profit with operating margins of 6.0%. Our margin increased 0.7 points year-over-year, driven by lower commodity and logistics costs and cost savings, including Future Ready savings, offset partially by competitive pricing and investments. In Print, our results reflected our focus on improving execution and diligently managing cost as we continue to navigate a very competitive Print market. In Q2, total Print revenue was $4.4 billion, down 8% on a reported basis and down 7% in constant currency. The decline was driven by declines in both hardware and supplies. Hardware revenue was down 18% year-over-year, driven by lower volumes attributable primarily to continued weak demand, especially in China and EMEA as well as share loss in both home and office due to aggressive pricing, partially driven by further depreciation of the yen. Total hardware units decreased 17% year-over-year. Industrial Graphics grew revenue for the third consecutive quarter, driven by supplies and service, offsetting softer hardware demand as we believe our customers delayed purchasing decisions in anticipation of Drupa, which started yesterday. By customer segment, commercial revenue decreased 12% with units down 17%. Consumer revenue decreased 16% with units down 17%. In big tank, we increased our volumes and market share sequentially, partially offsetting continued market softness and competitive pricing in the traditional home ink market. In consumer services, we drove revenue and subscriber growth in both our instant ink and all-in plans. Supplies revenue was $2.9 billion, down 5% on a reported basis and down 4% in constant currency. This was in line with our outlook. Print operating profit was $829 million, down 8% year-over-year and operating margin was 19%. Operating margin was flat year-over-year, driven by disciplined cost management, including Future Ready savings and favorable mix offset by competitive hardware pricing. Turning to our Future Ready transformation plan. We are on track to achieve our fiscal year end '24 goal of delivering a cumulative 70% of our year end '25 goal of gross annual run-rate structural cost savings of $1.6 billion. We expect to achieve this by driving efficiencies in our core businesses. We are pleased with our progress in reducing our costs across Print and PS. We continue to see the benefits of initiatives we launched in prior quarters. For example, we continue to optimize our location strategy with plans for additional site actions this year. In our digital transformation initiatives, we are accelerating our generative AI capabilities, including rolling out AI tools such as GitHub Copilot to approximately 60% of our developers as well as implementing HP specific large language models to improve efficiencies across our sales and service organizations. In marketing, we continue to optimize and in house our digital media capabilities and maximize programmatic investments. Specifically, we are delivering savings through AI-enhanced capabilities, scaling content production and working towards translation cost efficiencies, helping us improve our NPI marketing efficiency with lower agency costs and next-gen market insights and measurement. In PS, we are simplifying our portfolio as we announced last week, our brand simplification strategy across our consumer and commercial portfolios. Now let me move to cash flow and capital allocation. Q2 cash flow from operations was approximately $581 million and free cash flow was $481 million, driven by net earnings. The cash conversion cycle was minus 31 days in the quarter. This decreased two days sequentially due to days inventory increasing nine days, days payable increasing 16 days and days receivable increasing five days. The increase in DOI was driven primarily by an increase in strategic buys and sea shipments, both of which drive economic value. The strategic buys continue to allow us to take advantage of attractive economic offerings from suppliers to reduce the near-term financial impact of rising commodity costs. The increase in DPO was driven by an increase in accounts payable due to purchase timing and higher strategic buy inventory. In Q2, we returned approximately $369 million to shareholders, including $100 million in share repurchases and $269 million in cash dividends. We finished the quarter within our target leverage range and expect to return approximately 100% of our free cash flow to shareholders in FY'24 and over time as long as our gross leverage ratio remains below two times and the less higher ROI opportunities arise. Looking forward to the second half of FY'24 keep the following in mind related to our FY'24 and Q3 financial outlook. As Enrique said, we expect performance in the second half of fiscal '24 will be seasonally stronger than the first half. We continue to model multiple scenarios based on several assumptions. For FY'24, we are narrowing our non-GAAP EPS outlook range to $0.30, but we continue to see a range of potential outcomes for H2 '24, which is reflected in our updated outlook. We remain focused on improving our cost structure and our performance while continuing to invest in our growth businesses. Regarding OI&E expense, we now expect it will be approximately $0.6 billion in FY'24. We continue to expect free cash flow to be in the range of $3.1 billion to $3.6 billion for FY'24, improving sequentially in both fiscal Q3 and Q4. As a reminder, our free cash flow outlook includes approximately $300 million of restructuring cash outflows. Turning to Personal Systems, specifically for Q3, we expect Personal Systems revenue will increase sequentially by a high-single-digit, though slightly less than typical seasonality. We expect Personal Systems margins to be towards the high end of our long-term target range of 5% to 7% in Q3, augmented by disciplined cost management actions. For FY'24, we expect Personal Systems margins to be solidly within our long-term target range, driven by improved PC revenue in the back half of the year, continued mix improvements and cost efficiencies. In Print, we expect Print to stabilize in the second half of the year, consistent with the market outlook. For Q3, we expect Print revenue to decrease sequentially by low-single-digit, in line with typical seasonality. We continue to expect supplies revenue in FY'24 to decline by a low to mid-single-digit in constant currency. For Q3, we expect Print margins to be in the upper half of our 16% and 19% range and now expect FY'24 margins to be at the high-end of the range, driven by rigorous cost management. Taking these considerations into account, we are providing the following outlook for Q3 and fiscal year 2024. We expect third quarter non-GAAP diluted net earnings per share to be in the range of $0.78 to $0.92 and third quarter GAAP diluted net earnings per share to be in the range of $0.63 to $0.77. We expect FY'24 non-GAAP diluted net earnings per share to be in the range of $3.30 to $3.60 and FY'24 GAAP diluted net earnings per share to be in the range of $2.60 to $2.90. I'll stop here so we can open the lines for your questions.

Erik Woodring:

Great. Thank you guys very much for taking my questions. Enrique, maybe if I turn to you first. At the start of the year, you had talked about the Print business kind of performing in line with the market at roughly flat this year. Year-to-date, it's declining, let's call it mid-single-digits. You're telling us supplies will continue to decline low to mid-single-digits, but you expect the market to stabilize in the second half of the year. And so maybe my first question is, why do you believe other than easier year-over-year compares, the Print market will stabilize in the second half of the year? Are there any of the underlying factors that have impacted the Print business? Are any of those changing as you look to the second half like yen competition and broader market trends? And then as we think about hardware seasonality in the second half of the year, should we still be thinking about an improving trend sequentially there? How does that translate to year-over-year growth? If you could unpack all of that just for Print, that would be super helpful. And then I have a follow-up. Thank you.

Erik Woodring:

Okay, that's helpful. Thank you. And then maybe if I just -- if I stay on the printing side, again really strong Print operating margin performance. It was down about 90 basis points sequentially. And I think Print -- as a Print supplies as a percentage of Print mix was up sequentially just given the weak Print hardware trends. So, I deduce that would mean supplies margins were lower sequentially. Can you maybe just unpackage, one, if that's the correct way of thinking about it? And then two, what drove that trend and how is it impacting your view on Print operating margins for the second half of the year? Thanks so much.

Enrique Lores:

Margins for the second half?

Erik Woodring:

Great. Thank you so much guys.

Operator:

Your next question comes from Michael Ng with Goldman Sachs. Please go ahead.

Enrique Lores:

Sure. So let me start and maybe Tim wants to make a few comments afterwards. So I think you highlighted the key points. We saw for the first time in eight quarters growth in the PC business. And really commercial is the highlight of the quarter that performed even better than we were expecting. It was fairly consistent between North America and Europe and between enterprise and SMB. So probably the key thing is that was not one segment, was across this segment while we continue to see weakness in Asia, especially in China. Probably some of the underlying factors that we have seen, the drivers of this is the need to refresh the installed base as it has been aging and especially as we look at the second half, when we look at the funnel of opportunities that we see that is significantly bigger than what we had last year. And also the fact that we are starting to see some deals driven by Windows 11 Refresh. This is what we are reflecting in the projections that we have for the second half where we expect this momentum to continue. Also on the -- for the second half, we expect the federal business and this is how US focused comment will also improve because during the first half, the business was impacted by the budget discussions and as some of them have been released, we expect the federal business to also be stronger in the second half.

Tim Brown:

Yeah, sure. This is Tim. I'll take that one. We haven't changed our philosophy or our strategy with respect to strategic buys. We'll continue to kind of evaluate them based on the opportunities that present themselves. And if it makes financial sense for us, we'll take those. I mean, certainly that is something that we try and do and offset from an operational standpoint by making our operational inventory more efficient and utilize that more efficient. So I think that just underscores our commitment to efficient inventory management. And I think as we look forward, we'll continue to do that.

Michael Ng:

Great. Thank you, Enrique. Thank you, Tim.

Operator:

Your next question comes from Amit Daryanani with Evercore ISI. Please go ahead.

Enrique Lores:

Sure. We've seen that the penetration of AI PCs is going to be growing over time. This year, we have products coming both from the first-generation that we announced in January and February and for the next-generation that we just announced a couple of weeks ago. If we look at the total of both, we expect that the -- they will represent around 10% of the shipments for the second half. That's how we are quantifying that. But really, the impact will be more relevant in '25 and in '26. In fact, we expect that AI PCs and at that point will be our new-generation will be between 40% and 60% of our sales three years after launch. That's kind of how we're looking at that. And as we have discussed before, we continue to believe that they will drive an improvement in average selling price of between 5% and 10%.

Enrique Lores:

Thank you.

Wamsi Mohan:

Yes, thank you so much. Enrique, I was wondering if you could expand a little more on the comment on signs of commercial recovery in PS. I think you said partially driven by adoption of Win 11. How much would you characterize? Have you seen any real traction yet on Win 10 end-of-life support driven strength or perhaps if you could characterize it even from a COVID refresh perspective or anything else, any color there would be helpful. And I have a follow-up.

Wamsi Mohan:

Okay. Thanks, Enrique. As a follow-up, I was wondering if you could touch a little bit on the seasonality? I think you said you're expecting in PS revenue up high-single-digit, slightly below typical seasonality and then continuing to grow into Q4. Just wondering maybe if you could put that in perspective of maybe second half versus first half, how that might compare to a typical year seasonality half versus half? And just on the margin side, clearly very impressive margins here and you're on track on your Future Ready program. Would you say that like is there any sense you can give us on how those savings are flowing across PS and Print just so we would understand sort of cost savings and things that you're doing on your Future Ready side versus pricing and mix? Thank you.

Tim Brown:

Yeah. So, hey, as you said, Wamsi, from a Q3 to Q2, excuse me, Q3 perspective, we do expect to grow sequentially high-single-digits, but slightly below normal seasonality. I think your question is really about the full half. I think you could think about the seasonality be slightly stronger than historical for the full half if you think about Q4 in PCs.

Tim Brown:

From a Future Ready savings perspective, we do see the Future Ready across both businesses. I don't know that it's more pronounced in one versus the other. We're definitely focused from a core perspective where we're driving some of those efficiencies. I think the important thing to note about the Future Ready savings is it does help us deliver our margin rates even in a challenging demand environment. It is allowing us to reinvest in some key growth areas in key areas such as AI and our people. I'll leave it at that.

Enrique Lores:

Thank you.

Ananda Baruah:

Hey, yeah. Thanks a lot. Hey guys. Good afternoon. Appreciate you guys taking the question. I guess let's, well, yeah, just sticking with PCs, what's a good way to think, Enrique and Tim about, I guess, kind of margin as you go through the Refresh cycle given that it sounds like you think Gen AI PCs are going to -- and AI PCs are going to be a sort of disproportionate amount of the mix? And then just a quick follow-up also. Thanks.

Ananda Baruah:

Cool. And just a quick follow-up is have you guys, I'm just interested in if you have any thoughts yet, Enrique, on battery -- battery power, battery capacity, battery life over the next, let's say, 36 months. As GenAI PCs start to make their way into the world, the battery drain that comes with the use of GenAI capability, any thoughts there on battery? And that's it for me. Thanks guys.

Ananda Baruah:

That's a lot of great context. Super helpful. Thanks, guys. Thanks, Enrique.

Operator:

The next question comes from Samik Chatterjee with JPMorgan. Please go ahead.

Enrique Lores:

Yeah. So we didn't see an improvement of demand in the second quarter, not for Print, nor for Personal Systems. And then we haven't built any improvement in our projections for the second half. We think that the economic situation will continue to be challenged and this is what we are building in our plan and this applies to China. In other geographies, we are seeing great momentum, great progress, for example, in India, and this has been a very positive market for us in the last quarter.

Enrique Lores:

Yeah, thank you. On the overall hybrid systems business, which is how we call it, we continue to see from one side the demand has been limited. And as you said, enterprises have been limiting their investment. At the same time, quarter-on-quarter, we started to see some momentum and we expect it to continue in the second half. And this was especially true in video conferencing systems. From a long-term perspective, we continue to believe that this is a -- that this is going to be a growth opportunity for us. We think that the flexibility that the hybrid world means brings is important for companies and is important for employees. And therefore, this opportunity is going to continue to be very real in the years to come.

Enrique Lores:

Thank you.

Toni Sacconaghi:

Yes, thank you. I just had a couple of quick clarifications and then a question. Just to clarify, you sound very constructive on the recovery in PCs and some further tailwind from AI PC. So I'm a little surprised you're actually guiding below normal seasonal for Q3. Can you explain why that is? And also just on the buybacks, the buybacks are only $100 million this quarter, quite a bit lower than first quarter. Again, could you just clarify? And I have a follow-up, please.

Toni Sacconaghi:

Okay. Thank you. And just if I could zoom out and just try and level set, like I think revenue this year and last year for HP overall is going to be $53 billion to $54 billion. Pre-COVID, the two years, it was about $58 billion. The PC market is going to be about the same level of units this year. I suppose the printing market is down a little bit. But why do you think -- why do you think revenues are still almost 10% below pre-COVID levels? And do you think like there actually should be some snap-back to pre-COVID levels or do you think there's been some share loss over the last few years? How do I reconcile those data points? Thank you.

Toni Sacconaghi:

Thank you.

Toni Sacconaghi:

Thank you.

Michael Cadiz:

Hey, good afternoon. This is Michael Cadiz for Asiya at Citi. Just one question. I know you've given some good points on commercial versus consumer into second half. But through the lens of AI PCs as they gain traction starting in the back half, can you review those comments on commercial versus consumer and how we should look at them through that AI PC view?

Michael Cadiz:

Excellent. Thank you.

Operator:

The next question comes from the line of Krish Sankar with TD Cowen. Please go ahead.

Enrique Lores:

Sure. We don't disclose the specific numbers of our subscription business, but let me make a few qualitative comments. First of all, in Q2, we continue to see growth both of net subscribers and also of revenue in the consumer services space that integrates all the subscription models. During the last quarter, we have been expanding our portfolio to first paper and then in Q2 to also include the printer in what we call the all-in model and we keep making good progress in the three subscription programs that we have at this point. Our goal is, of course, to continue to grow this business because both enables us to offer a better value proposition to our customers, but also because allows us to capture more value per customer as the value proposition seems stronger and you can approximate that to profit that we get from customers, so we really think this as a way of building a more accretive business.

Tim Brown:

Yeah. First on the subscription comment, no, that doesn't impact the inventory levels that we're taking. From a structural standpoint, we haven't changed our structural inventory meaningfully. Most of what you see is related to strategic buys and sea shipments as we choose to put those on the ocean. And that has -- that will change over time at times. So there's nothing more than those two things. And what I would say is, the only thing I would add is what I said before is, partially offsetting some of those decisions we make, we are continuing to actually improve our operational inventory to help fund those other items.

Enrique Lores:

Thank you, Tim. Let me thank you everybody for joining the call. As you saw, Q2 was a solid quarter that closes a solid first half of the year. And the more relevant thing is the recovery that we saw in PCs, especially in commercial PCs, which makes us being positive about the second half, where we expect a stronger second half than what we have seen in the first half. And the combination of the progress on the execution side and the growth that we continue to experience in the, what we call the growth businesses, gives us confidence in our ability to continue to create value long-term. So thank you again everybody for joining. I'm looking forward to seeing many of you in the coming weeks. Thank you.

Orit Keinan-Nahon:

Good afternoon, everyone. And welcome to HP's first quarter 2024 earnings conference call. With me today are Enrique Lores, HP's President and Chief Executive Officer and Tim Brown, HP's Interim Chief Financial Officer. Before handing the call over to Enrique, let me remind you that this call is a webcast and a replay will be available on our website shortly after the call for approximately one year. We posted the earnings release and accompanying slide presentation on our investor relations webpage at investor.hp.com. As always, elements of this presentation are forward-looking and are based on our best view of the world and our businesses as we see them today. For more detailed information, please see disclaimers in the earnings materials relating to forward-looking statements that involve risks, uncertainties, and assumptions. For a discussion of some of these risks, uncertainties, and assumptions, please refer to HP's SEC reports, including our most recent Form 10-K. HP assumes no obligation and does not intend to update any such forward-looking statements. We also note that the financial information discussed on this call reflects estimates based on information available now and could differ materially from the amounts ultimately reported in HP's SEC filings. During this webcast, unless otherwise specifically noted, all comparisons are year-over-year comparisons with the corresponding year-ago period. In addition, unless otherwise noted, references to HP channel inventory refer to Tier 1 channel inventory. For financial information that has been expressed on a non-GAAP basis, we've included reconciliations to the comparable GAAP information. Please refer to the tables and slide presentation accompanying today's earnings release for those reconciliations. With that, I'd now like to turn the call over to Enrique.

Tim Brown:

Thank you, Enrique, for the kind introduction. It's great to be with you all today. We are pleased with the progress we made during Q1 toward delivering on our financial commitments this year. On a year-on-year basis, our revenue declines continued to slow sequentially, consistent with the stabilizing trends we expected heading into the year. Non-GAAP operating profit dollars grew margins expanded in both Personal Systems and Print and non-GAAP EPS grew double digits. We remain on track with our future-ready plan to achieve our gross annual run rate structural cost savings target for this year and continue to reinvest these savings in our growth areas. We also returned a significant amount of capital to shareholders as we actively repurchased shares during the quarter. Top line results were impacted by lower market TAMs in both Personal Systems and Print. We saw cautious commercial demand as macro challenges persisted and a bit more pronounced slowdown than initially expected in consumer following Q4. As Enrique said, HP remains focused on executing each quarter while also driving long-term shareholder value. Our overall results reflect disciplined financial management and investment for sustainable profitable growth all while navigating a dynamic and competitive environment in the near term. We will continue to manage our business prudently while seizing opportunities to improve our market position as we continue to execute on our plan to deliver our fiscal year commitments. Now let me give you a closer look at the details. Net revenue was $13.2 billion in the quarter, down 4% nominally and 5% in constant currency, driven by declines across each of our regions. In constant currency, Americas declined 7%, EMEA declined 2%, and APJ declined 7%. APJ was impacted as soft demand in China continued. Gross margin was 21.9% in the quarter, up 1.7 points year-on-year primarily due to improved commodity and logistics costs and cost savings, partially offset by competitive pricing. Non-GAAP operating expenses were $1.8 billion or 13.5% of revenue. The year-over-year increase in operating expenses were driven primarily by investments in growth initiatives and higher marketing expenses, partially offset by lower variable compensation and structural cost reductions. Non-GAAP operating profit was $1.1 billion, up 5%. Non-GAAP net OI&E was $144 million, down primarily due to lower interest expense driven by a decrease in debt outstanding. Non-GAAP diluted net earnings per share increased $0.08 or 11% to $0.81 with a diluted share count of approximately 1 billion shares. Non-GAAP diluted net earnings per share excludes a net expense totaling $186 million, primarily related to amortization of intangibles restructuring and other charges, acquisition and divestiture-related charges and other tax adjustments. As a result, Q1 GAAP diluted net earnings per share was $0.62. Now let's turn to segment performance. In Q1, Personal Systems revenue was $8.8 billion, down 4% or 5% in constant currency, driven by soft demand and an unfavorable mix shift partially offset by market share gains in both consumer and commercial, including categories such as premium notebooks and workstations. Total units were up 5% with consumer up 10% and commercial up 2%. Year-over-year growth rates for units and revenue improved sequentially in both consumer and commercial as stabilizing trends continued, consistent with our outlook for a PC market recovery this year. Drilling into the details, commercial revenue was down 5% and consumer down 1%. ASPs were flat quarter-over-quarter, driven by a favorable mix, including improved commercial premium mix offset primarily by an unfavorable mix shift in consumer. We remain focused on driving profitable revenue and share growth in both our consumer and commercial markets. Personal Systems delivered $537 million of operating profit with operating margins of 6.1%. Our margin increased 0.9 points year-over-year, primarily due to lower commodity and logistics costs and cost savings. This was partially offset by pricing and investments in growth areas. Sequentially, our operating margin declined primarily due to higher commodity costs and marketing expenses, offset in part by favorable mix towards our commercial business segment. In Print, we remain focused on improving our execution and driving rigorous cost management as we navigate a challenging and competitive print market. In Q1, total Print revenue was $4.4 billion, down 5%, both nominally and in constant currency. The decline was driven by declines in hardware. Hardware revenue was down 19%, driven by lower volumes attributable primarily to continued weak demand in China and Greater Asia and share loss largely due to aggressive pricing by our Japanese competitors. Total hardware units decreased 17% year-over-year. Industrial Graphics grew revenue again this quarter, driven by hardware, supplies and services. By customer segment, commercial revenue decreased 12% with units down 18%. Consumer revenue decreased 22% with units down 15%. The market for big tank printers continue to increase sequentially, partially offsetting continued soft demand and aggressive pricing in the traditional home ink market. In Consumer Services, Instant Ink revenue and subscribers continued to grow year-over-year. Total subscribers now exceed 13 million, including more than 700,000 subscribers to our Instant paper add-on service. Supplies revenue was $2.9 billion, flat on a reported basis and up 1% in constant currency primarily driven by favorable pricing actions, share gains and an easy compare, partially offset by a lower installed base. Print operating profit was $872 million, essentially flat year-over-year and operating margin of 19.9%. Operating margin increased 1 point driven by lower hardware volumes, cost improvements, including lower variable compensation and supplies pricing, partially offset by hardware pricing headwinds. Regarding our structural cost saving initiatives, we continued the momentum we had exiting FY '23, making progress in Q1 against our year two goals of our three-year plan. We are on track to deliver on our $1.6 billion gross annual run rate structural cost savings goal exiting 2025, including achieving approximately 30% of those savings in FY '24. Recall that we expect to generate these savings across both our cost of sales and OpEx line items, enhancing our margin performance and enabling investments in our key growth areas. Consistent with previous quarters, we continue to benefit from portfolio simplification initiatives in both Personal Systems and Print, digital transformation, automation and process improvements, leveraging our AI capabilities and structural cost reductions across our business. We still expect to incur one-time restructuring cost of approximately $1 billion over the term of our plan, including approximately $0.3 billion of primarily cash charges in the fiscal year '24. Now let me move to cash flow and capital allocation. Q1 cash flow from operations was approximately $120 million and free cash flow was $25 million. Our results were impacted by normal seasonality associated with the timing of variable compensation payments and sequentially lower volumes in Personal Systems. The cash conversion cycle was minus 29 days in the quarter. This increased three days sequentially due to days of inventory increasing four days, days payable decreasing one day and days receivable decreasing two days. The increase in DOI was driven primarily by an increase in strategic buys and C shipments during the quarter partially offset by our progress on optimizing our operational inventory, as we have discussed in the past. In Q1, we returned approximately $775 million to shareholders, including $500 million in share repurchases and $275 million in cash dividends. We continue to prudently manage our leverage ratio and finished the quarter within our target leverage range. We resumed share repurchases in Q1, and we expect to return 100% of our FY '24 free cash flow to shareholders. As we have previously stated, we are committed to returning 100% of our free cash flow to shareholders over time. As long as our gross debt-to-EBITDA ratio remains below 2 times, and unless higher ROI opportunities arise. Looking forward to Q2 and the rest of FY ‘24, we expect the macro and demand environments will remain challenged and that our customer end markets will continue to be very competitive. We remain focused on rigorously managing costs, improving our performance and investing in growth. Specifically, keep the following in mind related to our FY '24 and Q2 financial outlook. Given the challenging macro environment, we are modeling multiple scenarios based on several assumptions. For FY '24, we continue to see a wide range of potential outcomes, which are reflected in our outlook ranges. Consistent with the view we shared in November, we expect the performance in the second-half of fiscal '24 will be seasonally stronger than the first-half. Regarding OI&E expense, we continue to expect it to be approximately $0.7 billion in FY '24. We continue to expect free cash flow to be in the range of $3.1 billion to $3.6 billion in FY '24 with the second-half of the year stronger than the first. Our free cash flow outlook does include approximately $300 million of restructuring cash outflows. Turning to Personal Systems. We continue to expect the overall PC market unit TAM to recover over the course of this year, increasing by a low-single-digit percent. Specifically for Q2, we expect Personal Systems revenue will decline sequentially by a high-single-digit, in line with typical seasonality. We expect Personal Systems margins to be solidly within our long-term target range in Q2 as the PC market continues to recover and has strong cost management and pricing actions helped to offset rising commodity costs. For FY ‘24, we expect margins to be solidly within our long-term target range, driven by improved PC market demand, a seasonally stronger second-half of the year, continued mix improvements partially offset by higher commodity costs. In Print, we expect consumer demand will remain soft and pricing competitive, while market uncertainty continues to impact our commercial print business. Disciplined cost and mix management should help to partially offset these trends, driving flattish revenue sequentially in Q2 below typical seasonality. We expect Q2 supplies revenue to be down mid-single-digit in constant currency, and we still expect Supplies revenue will decline low to mid-single-digits for the year. Quarterly results can vary. For Q2, we expect print margins to be at the high end of our 16% to 19% range and solidly within the range for FY '24. We continue to focus on driving print operating profit dollars through new business models and rigorous cost management, including future-ready transformation savings. Taking these considerations into account, we are providing the following outlook for Q2 and fiscal year 2024. We expect second quarter non-GAAP diluted net earnings per share to be in the range of $0.76 to $0.86 and second quarter GAAP diluted net earnings per share to be in the range of $0.58 to $0.68. We expect FY ‘24 non-GAAP diluted net earnings per share to be in the range of $3.25 to $3.65 and FY '24, GAAP diluted net earnings per share to be in the range of $2.61 and $3.01. In closing, we started off our new fiscal year making solid progress against our strategic objectives and full year commitments while managing through demand and competitive challenges that have persisted in the current dynamic environment. We remain focused on disciplined execution and cost management and are confident that we have the right people, the right assets and the right strategy to deliver for both our customers and our shareholders for the long-term. I'll stop here so we can open the lines for your questions.

Samik Chatterjee:

Hi, thanks for taking my question. And sorry, if I'm having an echo, but sorry, that's coming across at your end as well. Maybe just to talk about the expectations for the year you are outlining seasonally strong second half to be the driver of your full year guidance. Maybe you can match that out on something the geography for market consumer or what's in order to decide where you expect people to be stronger second-half to second-half. Thank you. Thanks for taking the questions.

Operator:

Your next question comes from the line of Wamsi Mohan from Bank of America. Please go ahead.

Enrique Lores:

Sure. There are slightly different, Wamsi. On the big tank side, during the last month, we have completed our portfolio. We have now a very complete lineup of products on the low end to products that will also be working on the home office side. And as we have completed that, as we are launching that into the different markets, we are starting to see the impact of the innovation that we brought to market. On the office side, as we highlighted a few quarters ago, we acknowledged that we have some operational work to do to address and to be able to regain some of the share that we have lost. We have been actively working on that. We have started to make progress. We are starting to see that in the progress that we are making quarter-over-quarter. That has been more relevant in some regions like Europe, China, India. But we will continue to work on that because our goal is to continue to regain share in both categories. Thank you.

Operator:

Your next question comes from the line of Toni Sacconaghi from Bernstein. Please Go ahead.

Tim Brown:

Yes. So let me take that, Toni. First of all, just from a general perspective on print, we do expect to be, as you said, at the high end of the range in Q2 and the -- kind of -- solidly in the range of 16%, 19% for the year. And part of that is driven by what you said where we're trying to drive our mix from a hardware perspective up that does change the rate a little bit. And we aren't changing really what we expect from a supplies perspective where we expect Q2, as I noted in the prepared remarks, to be down mid-single-digits in constant currency and then low to mid-single-digits for the year. So I think that mix is really what's kind of driving the potential for that rate to move back a little bit through the course of the year. From an overall perspective, we expect PS as we said, to be seasonally stronger in the second-half, and that will drive -- and we'll be in the middle point of the range there. And then from a growth perspective, we do expect PS to grow in low single digits, kind of the 2% to 4% range and print will be flattish to down for the course of the year.

Toni Sacconaghi:

Thank you.

Operator:

Your next question comes from the line of Brian Lu from UBS. Please go ahead.

Enrique Lores:

So first of all, let me say that we remain extremely excited about the opportunity that AI PCs will bring in terms of both the customer value that they will deliver in terms of security, in terms of latency, in terms of cost and also the impact it will have over time in the company. I think milestones come from two -- three different angles. First of all, we need to deliver the hardware to be able to support these new models, and we are working on that with the key silicon providers to make sure that we have a wide range of products and a very solid portfolio. Second, we need to make sure that the applications support that and we are working with all the keys of our companies again to make sure they understand the new capabilities and that they build them into their applications. And third is training both in terms of our customers, but also in terms of the sales teams, either HP or the resellers that will be selling that. And we are working on all fronts. Our projections continue to be that three years after launch, the penetration of AI PCs will be somewhere between 40% and 60% of the total sales that we will be making. And that growth is going to be gradual. There will be some impact in '24. But since this will be at the end of the year, fiscal year for us, the impact will be modest. If the impact would be bigger in '25 and the impact will be bigger in '26. But really from both an innovation and customer value is going to be very significant for our portfolio.

Erik Woodring:

Great, thank you so much for taking my question. Enrique, you know, again, nice performance on the supply side, you outperformed expectations for a second consecutive quarter. I'm going to ask you the same question I asked you last quarter, which is just if you can talk about the four-box model and kind of the different factors that are impacting supplies performance? And then if we kind of port that over to the rest of the year, you've been flat to growing over the last quarters on the supply side. What are the factors that are driving the deceleration to low to mid-single-digit declines for the entirety of the year, implying the rest of the year deteriorates from here? Thanks so much.

Operator:

Your next question comes from the line of Amit Daryani from Evercore ISI. Please go ahead.

Enrique Lores:

Thank you. So first of all, I think we -- I would like to start by acknowledging that it's not only our projection, but it's really the projection that we see from industry analysts and also from the rest of the key players in the industry and there are multiple factors. I mentioned before the fact that we expect to see more impact from the Windows refresh cycle that is starting, and this will have a bigger impact on the second-half. We also expect to see a positive impact from pricing and mix, given that we expect component cost to increase, but this will also have a positive impact. And then when we look at what we saw this quarter, we have seen more stability on the SMB space. We have seen also more stability in the education space. We started to see growth in Europe on the PC side that has not happened in a long time. So while we continue to see some areas of weakness like China or, for example, the federal business in the U.S. that we saw softness in January. We continue to believe that the overall market will be improving in the second-half. Thank you.

Operator:

Your next question comes from the line of Asiya Merchant from Citigroup. Please go ahead.

Enrique Lores:

Sure. Thank you, thank you, Asiya. So let's see, in terms of peripherals, as you are indicating, they have been impacted by the cautiousness that we have seen on the commercial side. And as the commercial market will recover, we expect them -- they will be recovering as well. And this is why we have continued to invest in innovation in these categories because we think that long term is a great growth opportunity for us, and this is confirmed both by our customers, our clients and also by resellers. In terms of the growth areas we -- several of them started to grow, which was really a very positive sign. We -- and for example, we -- for me, personally the fact that both services businesses, both our Workforce Solutions business, and our Consumer Services business grew in Q1 is a very important sign of recovery, also because of the strategic importance that this business has for the medium and long-term for the company. And I think something I would like to highlight to close is tomorrow, we are going to be launching on the consumer services side, the first subscription where we will be integrating hardware into the plan is something that we shared at our Investor Day. Finally, we will be releasing that tomorrow. And again, it's an important step because you know that one of the key directions we have for the long term is to offer our full portfolio as a subscription. And this will be the first time we are offering for consumers our hardware as well, and you will see us expanding the line over time.

Mike Ng:

Hey, good afternoon. Thank you very much for the question. I just wanted to follow-up on the commentary around Personal Systems pricing. What drove some of the pricing dynamics in the quarter? I know you guys called out improved commercial mix, but there was also an unfavorable mix shift in consumer. Could you provide a little bit more color there? And maybe just talk a little bit more about your outlook for ASP for the full-year, whether for the industry or for HP. Thank you.

Operator:

Your next question comes from the line of Krish Sankar from TD Cowen. Please go ahead.

Enrique Lores:

Thank you. So far, the pressure that we are seeing is mostly on the consumer side. And this is very similar to the trend that we explained last quarter where we -- given where the exchange rate between dollar and yen and euro and yes. Clearly, this is giving a strong advantage to some of our competitors in that space, and we are seeing that in the prices that they are going after. And this is why in the consumer side, you have seen us especially on the more traditional categories we have decided not to go after certain deals because these will be unprofitable customers that we are not interested in targeting. On the commercial side, we have seen more stability. There might be some risk of stabilization. We have some of that in our modeling, but all of this is built into the guide that we have provided today.

Operator:

Your next question comes from the line of Aaron Rakers from Wells Fargo. Please go ahead. Aaron, your line is open.

Enrique Lores:

Yes. Thank you. So you said it well. We have started to see some momentum in that part of the business. especially in the labels and packaging side, we have seen some good recovery. And we -- you know that we -- in May '24, there is this big show called [Drupal] (ph), which is like the print -- major printing event and happens every 4 years. We are -- we have prepared a lot of new products and services that we will be launching them. And they usually have a fairly positive impact in the quarters after that. So we are expecting to see that happening in '24. But good recovery and very good expectations for '24 as Drupal as we will be launching a new set of products and solutions there.

Enrique Lores:

Perfect. Thank you. So thank you all for joining today. And I'd like to close with 3 messages. First of all, as you saw, Q1 was a solid quarter and a solid way to start the year, where we grew both operating profit and EPS. We remain positive about the outlook that we provided a few quarters, a few months ago about the rest of the year. And as we said, we expect -- continue to expect a stronger second-half than first-half. And we also remain very confident in the long-term, especially driven by the opportunities at both hybrid work and AI are bringing to us as a company and the innovation that we are going to be launching around that. So Again, thank you for joining us today and looking forward to continue to talk in the future. Thank you.

Enrique Lores:

Thank you. Thank you for having me here.

Enrique Lores:

Sure. We, as you said, we reported yesterday, and we defined the quarter as solid. We grew operating profit. We grew earnings per share, non-GAAP both, of course. But probably the most important thing was that we saw a recovery of demand, especially in the PC space, especially in commercial PCs. The PC business grew for the first time in eight quarters. And it was really driven by the performance and the progress that we saw in the commercial side. The Print business performed as we were expecting. We continue to see soft demand on the hardware side. Supplies were in line with our expectations. From a free cash flow perspective, we delivered on our numbers, and we continue to execute our plan to return free cash flow to shareholders, will return close to $400 million, and no changes as to the plan. So a solid quarter, and especially on the commercial PC side, lots of progress. And also, it was a quarter where we did a lot of innovation. We introduced a lot of innovation driven by AI, especially in the PC space, but also in other parts of the company, that we think puts us in a strong position for the coming quarters.

Enrique Lores:

I think there are two things. One is, from a seasonality perspective, the second half in the consumer space is always stronger than the first half just because of back-to-school and the holiday season. So this always drives on the consumer side, which is where we still see softer demand. We see the stronger seasonality in the second half. In the commercial side, beyond the performance that we saw this quarter, we saw also some more qualitative drivers that give us confidence about the performance of the business in the second half. One of them is the size of the funnel, the size of the deals that we see in the enterprise space. This is something that we monitor regularly, of course. And when we look at the funnel we have now versus the funnel that we had a year ago same period, is significantly larger. Second big – second driver is we know is during Q2, Microsoft started to publish pricing and specific timings of Windows 11. And we have started to see some of these deals driven by the Windows 11 refresh, which is also an important sign, something we were expecting to happen that we have seen starting to happen now. And then, and this is more a specific comment for the U.S., sales to the federal business in the first half were impacted by all the budget restrictions that many organizations went through. Some of these budgets have been released. We expect that there will be now an acceleration of deals in the federal space in the second half that will also help the commercial space. So there are not only the performance improvements we have seen, but also there are qualitative drivers that sustain the demand that we expect to see in the second half.

Enrique Lores:

Yes. As we said in the call, we continue to operate under multiple scenarios because we have seen an improvement of demand, especially on commercial, but we continue to see multiple potential synergies in terms of consumer and other factors. And we thought it was just better to keep the guide that we have had because, yes, there are some pluses, but there are also some other minuses. So it was better just to keep the number that we had before.

Enrique Lores:

Yes. We have never shared the size of China, but if you look at the size of the PC business overall, is the second largest PC market. So this will give you an idea of it is a relevant market for us. And we really see market driven. For several quarters, we have been growing share. We didn't this quarter, but we don't see this as the key driver. Both on the consumer side and the commercial side, demand is very soft, is declining. I was in Beijing four, five weeks ago. And this is something you can experience when you talk to the team, when you talk to partners. There is a significant concern about the economy of the country in the country. They have problems with real estate, problems with unemployment of young people. And we think this is really impacting the willingness to invest and the overall situation there. We have operated for many years with significant restrictions on who can we sell, how can we not sell. Things have not changed. So it's not a new factor, but clearly, economy is a key thing that has changed.

Enrique Lores:

Well, we always operate within the same framework of returning 100% of free cash flow over time. We never made a commitment on a specific quarter what we will do. If our leverage ratio stays below two and if we don't find any other opportunities. And this continues to be the plan for the year. We don't look at it quarter-by-quarter. It is an over time plan. And investors should expect that during this year, we will be returning 100% of free cash flow.

Enrique Lores:

I don't think there is really nothing relevant to share if someone forgot. Again, look at it from a long-term perspective, and we will execute the plan we have said.

Enrique Lores:

Yes. Let me – maybe it's worth spending a minute understanding the framework we have for cost. And the thing is very simple. If the revenue of the company is 100 and operating profit is 10, the cost that we need to work is [$90 billion], if this were 90. And this is how we define the goals and how we manage the future-ready plan, going after those [$90 million]. Also, if we find opportunities to improve the gross margin, but at the same time to invest in what we think are growth opportunities, we think this is good for the company for the long-term. And this is how we have been managing the plan and how we will continue to manage the plan. Where can you see the savings? Clearly, in the operating margins of both businesses. Both of them are probably at the highest level they have been. If you look at the gross margin level for both PS and Print, they have significantly improved over the last years even if demand has been soft, which is much harder to do. And this is clearly a consequence of all the cost work that we have been doing. Look at how demand has dropped and the fact that we have been able to improve gross margin, it's a strong signal of the progress that we are making. In terms of framework that we use, we have shared before, we have five growth – what we call growth areas. But investing on those, we think they will be bringing growth to the company. And now with the opportunity that we see in AI and especially in AI PCs, we have been also increasing our investment in that category, because this is an opportunity that we think we can lead and an opportunity that is going to create a lot of value for our shareholders.

Enrique Lores:

I think it's both. We have been doing a lot of cost across any area of the company from supply chain, simplification of portfolio, operational expenses, and across everything we have been driving cost down. But also one of the drivers of the business has been to shift our mix to more premium categories. But in some cases, also requires more investment, and also have better gross margins. So it's a combination of both elements. But there has been a lot of effort on cost. We committed to reduce our structural run rate by $1.6 billion by the end of next year and we are going to be making our call.

Enrique Lores:

We don't have a specific number, but if you think what we have done during the last few years, for both businesses, we have improved our operating margins. So three years ago for PS, we were – I think it was from 3.5% to 5.5%. We increased to 5% to 7%. And in Print, we also went from 18% to 19%. So this is where you'll see these improvements.

Enrique Lores:

Yes. First of all, the main reason why we have been losing share in print is because how aggressive some of our competitors have been able to be because of currency. And when we saw that currency was not changing a couple of quarters ago, we started a specific effort to reduce our cost on the printers – on the print side to be able to be more aggressive. This is something we said a quarter ago we were going to do. We have been working on that. And now we're in a position to be able to do that. That will allow us to grow profit – sorry, to grow share in a profitable way because our goal of profitable growth is very critical for us. So now we are in a position to be able to do that. And you can see that we have started to see that, especially on the office side, where quarter-on-quarter, we have started to grow share. And we expect that this will continue in the second half.

Enrique Lores:

Clearly, the competitive environment has not become easier. But based on the projections that we have today and the cost actions that we have taken, we think we can grow share and this is why we shared it yesterday.

Enrique Lores:

As always, there is not only one answer to the question, there are always multiple factors. If I start from where do we see the company going in the long-term, we think that what we share with – at our Investor Day last year of growing between 2% and 4% revenue continues to be our plan. And we think that demand is being impacted in the short-term, but we are maintaining the goal that we have there. So that's the first thing, thinking about the long-term. When we look backwards, there are multiple factors. One is some markets have become smaller, in other markets we have low share because we declared that we wanted to lose unprofitable share. And this was a big change that we started in print some years ago. Also supplies have been declining in the last five years, and they are relevant in the company. So there are multiple factors that we – that explain what has happened in the past. But when we look forward, we see the opportunity to continue to grow and to grow the company between 2% and 4%.

Enrique Lores:

You also asked me this question in the analyst meeting.

Enrique Lores:

Good. So our assumptions have not drastically changed. So if we look at the Print business, we – as you said, we expect supplies to decline low to mid-single digits, no change, and our models continue to support that. On the hardware side, we are going to be growing our business in the higher ASP segments like big ink and big toner where customers buy the printer and supplies, and this becomes more – and this helps from that perspective. Also, we are growing our services business in print, where we have made very good progress in the last year, really shifting our model and building the subscription model and extending it to other categories. We see opportunities to grow share in the office space, where compared to the overall Print business, we are underrepresented. And especially graphics continue to be a growth opportunity. So there are multiple drivers that make us believe that we will be able to do that. At the same time, at the company level, we are probably now more optimistic on the growth of PCs than we were before. And we haven't done, we published our long-term plans, but just looking at the impact that the AI is going to have on the PC category, we see a more positive impact than we were before. So we continue to see this growth of 2% to 4% as the right growth for the company.

Enrique Lores:

Yes. We think that – our estimate for this year has not changed, is that it's going to be small growth in units, between, let's say, low single digits. And our estimate is very similar to what most of the industry analysts are publishing. So no big deviations there. Really it's more relevant that when we look at what categories in PCs are growing, we see more growth in premium categories, which from a revenue perspective is really helping to drive higher revenue growth than unit growth. And we expect that this trend will continue going forward. We think that the growth – we saw the impact of AI, which we can talk later, is going to be in the low, mid-single digits for PCs going forward, very similar to what we shared in our industry event about a year ago. And this is for PCs – for the PC market. Then if we add accessories or services, of course, the growth will be higher.

Enrique Lores:

Yes. In the model that we have for the second half for PCs, we expect pricing to be flattish. And again, there are ups and downs. You mentioned commercial mix will be – commercial will be growing, which will be driving prices up. We will be repricing for memory every time we will be able to. So this will also help to increase prices up. We expect to see more pressure on the consumer side as we were talking before. Also education we think is going to be bigger, so this will also be driving price – average pricing down. So multiple factors up and down. Our expectation is that pricing will be flattish for the second half versus what we saw now.

Enrique Lores:

Quarter-on-quarter or half on half.

Enrique Lores:

Yes. So we have started to see a pickup of demand of education, and this, especially in the U.S., is a Chromebook opportunity. But as we have said before – and we expect this to continue. Next year, we are starting to see very big deals in many countries driven by education. There is a very public deal, for example, in Japan that will start happening in 2024, in 2025, and is 2025, 2026 that are many, many millions of units. But as we have said before, the overall Chromebook business is really not material at the company level. Not from a revenue perspective, not from a profit perspective. So yes, we are going to see a pickup, but it's not something that will really be impacting our results in a significant way.

Enrique Lores:

Yes. And we are going after these deals because we think it's good, but it's not like impacting the – a huge impact on the company. But yes, of course, they help.

Enrique Lores:

So far, I would say, has been more the aging of the installed base. So I think you call it COVID replacement. But we are starting to see Windows 11 refresh deals. And then it's hard to distinguish because when there is one, we do the refresh, so it's kind of the both. But we have started to see deals that – where companies have really starting the conversation from the need to reduce their support cost if they stay on the old system and the willingness to move to Windows 11.

Enrique Lores:

I think the key driver was the fact that during the pandemic, the competitive dynamics change and was more a supply-driven environment than a demand-driven environment. I think for the big players, demand-driven environments kind of help us more than supply-driven environments. And I think this is the major driver. Another driver that we need to see how it evolves is the fact that the three players are really much more focused now on more premium categories and volume categories. And the metrics you were sharing are more unit-driven than value-driven. I think this is temporary. I think this is going to change. But at the same time, our goal is not to grow share for the sake of gaining share. Our goal is to grow share – profitable share, which drives us more towards premium categories, to services, to accessories. And this is how we are defining the plan for the company.

Enrique Lores:

I think it's going to be both. I think that, clearly, average selling prices are going to increase, as you just said. But also customers will see the benefits that the AI PCs will bring, and applications will be supporting both – will be supporting those. There is going to be an acceleration of sales. For example, with AI PCs, you are able to – you will be able to do in your PC, many of the activities that today you need to do in the cloud. And this from a speed/latency perspective, from a data protection perspective, is a much better – and from a cost perspective, it's a much better model. On top of that, with the new models, and this is something that we only started to share a couple of weeks ago. Something we have done is the PCs now have a model that optimizes the performance of the PC for the specific user. The PC learns how Toni will be using – how you will be using your PC and will be able to optimize power consumption, CPU consumption. So it will really be a PC that is performing optimally for you. And especially for commercial PCs, there's going to be an increase on security. So as customers will start getting familiar with this new functionality and new value, we think this is going to accelerate the replacement cycle.

Enrique Lores:

We think it's going to be very similar. We think the adoption will start in consumer because especially large corporations need to go through a process of testing, making sure the PCs will work in their environments. And this evaluation takes time. But over time, we see penetration in both segments.

Enrique Lores:

I think there are going to be multiple things. One is there is going to be a big push from all the vendors, including Microsoft, the silicon providers, to explain the value that AI PCs are going to bring. Also as applications will start supporting those, they will highlight that these new functionalities will only be supported by AI PCs. And also in the retail shops, there will be training events and communication events to explain that. Something that – and this is both common for both consumer and commercial, something we have seen is we need to do a big effort on training and communication in the coming months. So for example, in the commercial space, our resellers and our own sales teams will be able to explain the benefits. So you will see a lot of work from us. And I'm sure from some of our competitors, in the same direction. It's something – sorry to interrupt. It's something that has not been done in the PC space for a long time. Internally, we have defined this as a category creation moment because we realize that it's a category that needs to be created that requires much more effort than what we have done in many years in this space.

Enrique Lores:

Let me move the conversation a bit higher because I think it's where you are going. I think the – we are about to see one of the biggest changes in terms of industry structure that we have seen in a long time. And this is going to have implications at all levels. It is going to have implications at the semiconductor level. We introduced for the first time, in a relevant way, ARM PCs a couple of weeks ago. And they have very strong performance on the semiconductor side, there are going to be significant changes. But also at the operating level, at the operating system level and the application level, the role of operating systems and applications is going to change. When today you open your PC, you get into the operating system and you have access to multiple applications. When you think about the future, you will not have so many applications open. You will have a prompt that will ask you, what do you want to do? And you will tell your PC, I want to create an application, I want to send an email to Toni and tell him how thankful I am for having been in his presentation. And by the way, the analysis of market blah, blah, blah is different. This is how you will interact with your PC. It's not by going to an application, operating certain applications and creating models. And this is going to be very disruptive. How all this will translate into what business models will be created, what opportunities to participate in where, is going to be different, and a lot of work is being done in this space. But I think is it's a point in time where we are going to see a lot of changes happening in the industry in the next three, five years.

Enrique Lores:

Yes. So probably my answer was too long to say yes. But it's not only at the operating system level, it's not only at the language model level, it's also at the silicon level. Because the more options you have, the more opportunities you have to negotiate and change models.

Enrique Lores:

Surprised me.

Enrique Lores:

So in two different ways. One is – actually, I'll go segment by segment, which I think is – it will be the best way to understand. On the office space, clearly, the amount of pages that is being printed is lower than before the pandemic. And this is really driven by what we call hybrid work. There are less people in the office every day. And this has driven the amount of pages down. And I use pages as a proxy because, depending on what happens with pages, happens eventually with devices. Before the pandemic, our estimates were that we were expecting to see an 80% – a 20% reduction of printing. And actually, we were looking at the numbers this week, and this is more or less where we are. The amount of pages is 80% lower than the pandemic. But as I said, I think it was yesterday on the call, the number has been fairly stable. Before the pandemic, the number of pages per printer was kind of going down. Since the pandemic, it dropped to 80%, and has been stable, which means probably as more people is slowly coming back, is maintaining the number of pages printed. But we are at about 80% of where we were. On the home side, during the pandemic, we saw a spike of pages printed. And since then, the number of pages has been declining, which was – which is what was happening before. But we continue to be above the level where we expect it to be. So that's from the home side, has been a positive impact from a pages perspective. And then on the industrial side, the business has been impacted during the last two or three years by a reduction of capital investments. But during the last 12 months, we started to see recovering. And we think that especially the second half after the big event that is happening these days in Germany, we think that demand is going to come. And from a pages perspective, we have seen, especially on the more industrial side, labels, packaging, very strong growth. That's how the three segments have evolved. Now, we’ll drink fast.

Enrique Lores:

Sure. I think the forces have not changed. And when we look at the projections that we have, we continue to see supply declining low to mid-single digits. So we haven't got from that band. At the end, there are four, five major variables that drive the supplies business going forward. One is the installed base, which we expect to continue to decline. Second is usage, that for both home and office we expect to decline. And then on the positive side, is what do we do with share of supplies and what happens with pricing of consumables, which during last year have been positive forces, and we expect for them to continue to be positive forces. And when we look at the combination of both, we see a positive trend. On the installed base, and this is something new, and we are trying to estimate what will be the impact because so far is only starting to – we are starting to see the impact. Something we are starting to notice is, as hardware sales have been declining, also the life of printers is being extended. And we are trying to quantify exactly how much is this. It's not yet in a big driver in the model, but we think it's also a natural effect, that long-term for supplies is actually positive. So it's something that we need to see in the coming months because we need to look at trends to really understand what is the impact. But it's another force that is starting to have an impact.

Enrique Lores:

Yes. I think we started what we call the business model change, I think it was five years ago now, or almost five years ago now. And we have been making very good progress, both in terms of – if you remember that the change had three major elements. One is shift to HP+ models that have a positive impact on supply share, growing the big ink and big toner categories that have also a positive impact, especially in emerging countries, and then the shift to subscriptions. And we have been making progress in all elements. One metric we have shared is the combination of HP+ plus big ink and big toner is about 50% of our shipments. So it's at a very good level. And we have been growing the number of subscribers and the amount of subscriptions that we offer, and we have now more than 13 million subscribers, so which is also a fairly solid number. And in the case of subscriptions, now we have three programs. We have one for consumables, for ink and toner. We have one for paper, so where you can get paper. And a few months ago, a couple of months ago, we launched all-in where you also have the printer. And really, we expect them to continue to grow in the coming months.

Enrique Lores:

Exactly.

Enrique Lores:

I think the one – the only metric close to this that we have shared is penetration of Instant Ink in shipments is above 25% in the countries where the program has been for the longest. So I think it's the only one that we have shared that will give you a proxy in this space.

Enrique Lores:

Sure. Let me start with B and then I will go to A. So M&A continues to be part of our strategy. It has been for the last years and it will continue to be. We have said that we are going to prioritize opportunities that will help us support our growth businesses. We think that we will be creating more value if we use our capital this way. This is what we have done in the past. And what we have done in the last three, four years is a good proxy for what we could be doing in the next three, four years. We bought Poly, we bought Apogee, we bought HyperX. These are the type of acquisitions that we will be – that we think will help us to accelerate our plans. And always, we are very rigorous looking at the strategy, the acquisition supporting the strategies that we have explained. Is it – do we think we have a strong operational plan to make it happen? And do we see good financial returns? We have a very strong filters that we have applied to everything that we have done in the past. And again, it's always in support of the growth strategies. In terms of consolidation, we continue to think that it is going to happen. There are – there has been some movements from some of our Japanese competitors in the last 12 months that support that. They have not been full mergers, but they have been looking at combining the R&D activities, combining their manufacturing activities, combining both. While they are keeping their brands, they are integrating their back ends, actually, in a fairly similar way to what we have been doing with Canon for a long time. But now we are starting to see these movements happening. And I will – as I have said many times, if I use a different words, doesn't mean that our approach has changed. It's just I'm using different words now, but our approach is the same. We think that, at this point, it's not in our plans. I will never say never that we will drive a consolidation acquisition. But our priority is more focused on the growth areas, the growth businesses where we see an opportunity. And now especially with AI, this can really help us to accelerate some of the conversations we were having on PCs or on peripherals that we think will be more accretive.

Enrique Lores:

I think on the excitement side is the combination – how AI is going to be transforming our business. We have been talking a lot about the AI PC. But as you said, this is opening a lot of opportunities for disruption with our category that we want to be in the leading edge and that we need to really aggressively go after. And the first instantiation is what we are doing in AI PCs, but we see many opportunities to transform and to improve the rest of our businesses with AI. So this is clearly a very exciting thing. And second is all the opportunities we have to not offer just products, but really complete experience that we offer to our customers. And this is how many of our growth businesses have been defined, is about capturing more value per customers, offering them more value, of course. And when we think about opportunities in gaming or in hybrid experiences, all of them are really designed to see how we do that, either transactionally, or even better, as a subscription and as a service. And this is how our business has been built. In terms of concerns, it's probably the volatility that we still see in the world. It's difficult for us to control. But we clearly live in a complicated world from a geopolitical perspective, from an economic perspective, and things change very fast, and we need to make sure we change fast and we are ready to respond to whatever changes can happen. We haven't talked today, but from a – for example, from a supply chain perspective, we realized during COVID that we need to build a more resilient model. We are working on that, shifting where we have our factories, building a stronger model. We are also seeing – we were talking about the challenges in China, but we see opportunities to grow in many other countries where our presence has been smaller. So we are shifting also to respond to that. And responding fast to the changes in the world is both an opportunity but also an area of concern or an area of to really watch carefully.

Enrique Lores:

Thank you.

Orit Keinan-Nahon:

Good afternoon, everyone, and welcome to HP's fourth quarter 2023 earnings conference call. With me today are Enrique Lores, HP's President and Chief Executive Officer; and Marie Myers, HP's Chief Financial Officer. Before handing the call over to Enrique, let me remind you that this call is a webcast, and a replay will be available on our website shortly after the call for approximately one year. We posted the earnings release and accompanying slide presentation on our Investor Relations webpage at investor.hp.com. As always, elements of this presentation are forward-looking and are based on our best view of the world and our businesses as we see them today. For more detailed information, please see disclaimers in the earnings materials relating to forward-looking statements that involve risks, uncertainties and assumptions. For a discussion of some of these risks, uncertainties and assumptions, please refer to HP's SEC reports, including our most recent Form 10-K. HP assumes no obligation and does not intend to update any such forward-looking statements. We also note that the financial information discussed on this call reflects estimates based on information available now and could differ materially from the amounts ultimately reported in HP's SEC filings. During this webcast, unless otherwise specifically noted, all comparisons are year-over-year comparisons with the corresponding year-ago period. In addition, unless otherwise noted, references to HP channel inventory refer to Tier 1 channel inventory. For financial information that has been expressed on a non-GAAP basis, we've included reconciliations to the comparable GAAP information. Please refer to the tables and slide presentation accompanying today's earnings release for those reconciliations. With that, I'd now like to turn the call over to Enrique.

Marie Myers:

Thanks, Enrique, and good afternoon, everyone. It's a pleasure to be here with you all today. We delivered another strong quarter financially, due to outstanding operational execution and good progress in our Future Ready transformation. We generated solid results across revenue, non-GAAP operating margin, non-GAAP EPS and free cash flow, building on our proven track record of meeting or exceeding our goals. Our team is executing well despite the challenging macro environment, delivering Q4 sequential growth in revenue and non-GAAP operating profit dollars in both Personal Systems and Print. Margins were at or above the high-end of our ranges, resulting in a return to year-over-year growth in non-GAAP EPS, while free cash flow more than doubled sequentially, consistent with our outlook. We exceeded our Future Ready transformation cost savings target for fiscal '23 and are on track in '24 to continue reducing our structural costs while investing in our key growth areas. While we continue to monitor economic indicators and geopolitical risks, we're pleased with the momentum and health of our business. We will continue our efforts to drive fundamental improvements to our cost structure longer term, while prudently and aggressively managing near-term expenses. With the savings we generate, we'll continue to focus on prioritizing our investments, so that we are well positioned to deliver on the longer-term financial outlook, we outlined at our Securities Analyst Meeting last month. Now, let me begin by providing some additional color on our results. Starting with the full year, we stayed focused on what we could control, disciplined execution and cost management, and we delivered solid performance despite the macroeconomic and competitive dynamics we faced. Revenue was $53.7 billion, down 15% nominally and down 12% in constant currency. Revenue in our key growth areas grew mid-single digits, constituting approximately 20% of total revenue. Non-GAAP operating profit was $4.6 billion, down 14% or 8.5% of total revenue, flat year-over-year. Non-GAAP net earnings per share was down 18% to $3.28. We generated $3.1 billion of free cash flow, consistent with our full-year guidance. And we returned $1.1 billion to shareholders and raised our dividend by 5%. Now, let's take a closer look at the details of Q4. Net revenue was $13.8 billion in the quarter, down 6% nominally and 5% in constant currency. Year-over-year declines improved sequentially across each of our regions in constant currency

Wamsi Mohan:

Yes, thank you so much. I was wondering maybe you could help us think through the seasonality. Obviously, it's been -- for the first half versus second half, what's implied in your guidance? If we go back a few years, the low 50% of EPS was recognized in the second half versus first half. So, I'm wondering if you could maybe either characterize it that way or second half versus first half on a growth basis on earnings. And maybe within that context you can just give us some sense the commercial PC market continues to be quite weak. I know, Marie, you said that the guidance for fiscal '24 bakes an in-line with market performance. But can you be somewhat explicit about what that performance is in commercial PCs in your fiscal year guide? Thank you so much.

Marie Myers:

Yeah, no, good afternoon. So, let me walk you through how to think about seasonality. If you take the midpoint of that guide, which is what we gave at SAM, which is the $3.45, if you take the midpoint, basically you can assume the macro is stabilizing. And also, we expect the revenue to improve over the course of the year. So, I would just say we're not back yet quite to normal seasonal patterns, but we're definitely expecting the back half to improve over the first half. So, think about a gradual recovery over the year. But I'll just add, as we think about the Q1 guide, particularly for Personal Systems, I would say at this point, we don't expect that normal seasonality yet due to the pace of the market recovery. So, we're going to see that quarter-on-quarter differential relative to the Q4 period that we've just come out of. So, same guide unchanged, but definitely still not quite back to normal seasonality yet throughout the year.

Enrique Lores:

Thank you.

Operator:

Your next question comes from the line of Amit Daryani from Evercore ISI. Please go ahead.

Enrique Lores:

So, let me start on Print. So, not much has changed since we met a few weeks ago. So, we continue to see a competitive environment on the Print side, especially driven by the current situation between yen and dollar. But I have to say, between Q3 and Q4, we didn't see more aggressive pricing. If anything, prices sequentially improved Q3 to Q4. We have not seen an increase in competition from that perspective. When we look at '24 and the actions that we are taking to compensate for a potential more pricing increase, we are going to be executing the plan that we described before. We have an aggressive cost reduction plan that will help us to manage that. We continue to drive the shift toward HP+ units and profit upfront units that will also help from that perspective. And we continue to drive -- and we expect to grow share in the office space, which will be a contributor of margin improvement. And finally, as we shared in our prepared remarks, we have seen an improvement of the performance of the industrial business. We have seen a recovery of the market. And within the market, we have grown both hardware and consumption. And we think this is going to help us also in 2024.

Amit Daryani:

Perfect. Thank you very much.

Krish Sankar:

Yeah, hi. Thanks for taking my question. Enrique, I had a question on the PC side. You said you're expecting modest growth next year. I'm kind of curious, is there a way to quantify it? And how much is AI driving it? And also, when it comes to AI PC, how much kind of an uplift in ASP do you expect versus regular PC? Thank you.

Krish Sankar:

Can you really quantify the ASP uplift?

Krish Sankar:

Thank you.

Toni Sacconaghi:

Yes, thank you. I was wondering if you could comment on supplies growth in the quarter. It was up sequentially. That hasn't happened in -- at any point in the last 10 years on an organic basis. So, what was driving the non-seasonal growth in supplies? Did you change prices and people bought in before? Or was there some channel fill? And then, could you also just comment on -- you talked a lot about Future Ready and the strength. I think you've taken out maybe run rate about $600 million worth of costs. But OpEx is essentially identical to the first quarter of this year. So, when we think about Future Ready, should we actually think about OpEx going down in fiscal '24? Or we won't see the impact of Future Ready on OpEx? Thank you.

Enrique Lores:

Yeah. So, let me complement that. So, I think there are multiple factors that drove the good performance of supplies in Q4. As I have said many times though, when we look at year-on-year compares, it's not the best way to look at the performance in a quarter because there are many adjustments that are done every quarter, and then comparisons can all -- can distort the overall perspective. We are driving many positive actions on supplies. We continue to grow share overall, which is something that we have been doing already for several quarters. We have increased prices to reflect the value that we bring. So, the combination of all these things help us to grow supplies quarter-on-quarter. And again, we are pleased with the performance. But in the long term, we continue to expect the supplies to decline low- to mid-single digits. We are not changing our projections for supplies in the future.

Enrique Lores:

Thank you.

Asiya Merchant:

Great. Thank you for the opportunity. A little bit on inventory. If you could just comment on how you look at the inventory in the channel, both on the PC and the Personal -- on the Print side as well? Specifically, in PCs, I think there was commentary that there was some elevated ones, when you spoke about it last quarter, not for HP but generally for the industry in general. And then, if you can just talk about the cadence of EPS? As you progress, if the second half is going to be stronger, I think, as was commented earlier, you're starting the first year -- first quarter up 10%, if math is correct, and you're ending for the year at 5% for the year. So, if you can just kind of walk through that, that would be great. Thank you.

Asiya Merchant:

Great. And if I can squeeze one more in on components, deflationary expectations, I think there was some commentary previously on how you think about components.

Asiya Merchant:

Great. Thank you.

Unidentified Analyst:

Hi. This is Jake on for Aaron. Thanks for the question. I was hoping you could give some additional color on the amount of promotional pricing for PCs you expect to see heading into the holiday season and maybe how this could compare to prior years.

Unidentified Analyst:

Great. Thanks. And then, I was also wondering if you could talk a little bit more about the growth you're seeing in Poly and maybe some of the momentum you expect with the new as-a-service subscription offering.

Unidentified Analyst:

Great. Thank you.

Operator:

Your next question comes from the line of Erik Woodring from Morgan Stanley. Please go ahead.

Enrique Lores:

Perfect. Thank you, Erik. And thank you because when I was answering to Toni, I missed to mention one of the elements that also helped, which is the easy compare, because last -- Q4 last year was not a strong quarter for supplies. So, this also has an impact on the year-on-year compare. If I -- if we look at the Four Box Model and the different drivers of supplies, clearly, installed base has continued to decline. So, this is a negative factor. Usage continues to go down, which is a negative factor, though I have to say, continues to be above, especially the home, in space, the references and the projections that we were making before the pandemic. And then, two positive factors that have had an impact this quarter; one is pricing, we have increased prices for supplies, and market share. As I mentioned before, we have continued to grow share for supplies, which has a positive impact on the overall supplies growth. Thank you.

Mike Ng:

Hey, good afternoon. Thank you very much for the question. I just have one for Marie and one for Enrique. Marie, you guided to PS and Print margins to be at the high-end of the range for the fiscal first quarter and then solidly in the range for the full year. Can you talk about some of the factors that drive that margin normalization for each of those two segments throughout the year? And then, Enrique, within Commercial Printing, I was just wondering if you could talk a little bit about any differences in outlook for A3 versus A4, or are the competitive dynamics very similar. Thank you very much.

Enrique Lores:

Yeah. And just in your question about the office market in Print, two key comments. One is we have continued to shift change from A3 to A4, especially in Commercial -- in large Commercial customers. We think this is driven by the fact that we expect to see less printing -- people in the office. And therefore, they have reduced the printing volumes that they were expecting and they need less production type of products. So that has been one change. Second, in terms of both A4 and A3, we continue to see an opportunity to grow share. We did it in this quarter in A3, and we have started to grow our share in A4 in several geographies. We did it in North America -- in Americas. We did it in several countries in Europe. We did it in China. And we know we have some work to do, but we expect to continue to drive that during 2024.

Enrique Lores:

Thank you.

Enrique Lores:

Thank you. Well, first of all, thank you, all of you for joining. With the Q4 results, we believe are a signal of the progress that we are making and increase the confidence that we have in the plan that we shared with all of you a few weeks ago. And this reinforces the key message that we shared at SAM, that we believe that HP shares are undervalued and continue to be a good investment. And then last but not least, for those of you in the U.S., let me close the call wishing all of you a very happy Thanksgiving. Thank you.

Orit Keinan-Nahon:

Good afternoon, everyone, and welcome to HP's third quarter 2023 earnings conference call. With me today are Enrique Lores, HP's President and Chief Executive Officer, and Marie Myers, HP's Chief Financial Officer. Before handing the call over to Enrique, let me remind you that this call is a webcast, and a replay will be available on our website shortly after the call for approximately one year. We posted the earnings release and accompanying slide presentation on our Investor Relations web page at investor.hp.com. As always, elements of this presentation are forward-looking and are based on our best view of the world and our businesses as we see them today. For more detailed information, please see disclaimers in the earnings materials relating to forward-looking statements that involve risks, uncertainties and assumptions. For a discussion of some of these risks, uncertainties and assumptions, please refer to HP's SEC reports, including our most recent Form 10-K. HP assumes no obligation and does not intend to update any such forward-looking statements. We also note that the financial information discussed on this call reflects estimates based on information available now and could differ materially from the amounts ultimately reported in HP's SEC filings. During this webcast, unless otherwise specifically noted, all comparisons are year-over-year comparisons with the corresponding year ago period. In addition, unless otherwise noted, references to HP channel inventory refer to Tier 1 channel inventory. For financial information that has been expressed on a non-GAAP basis, we've included reconciliations to the comparable GAAP information. Please refer to the tables and slide presentation accompanying today's earnings release for those reconciliations. With that, I'd now like to turn the call over to Enrique.

Marie Myers:

Thank you, and good afternoon, everyone. We delivered positive results in Q3 and continued to build on the progress we made during the first half of the year despite the challenging macro environment. We have increased our non-GAAP operating profit and non-GAAP EPS sequentially over the course of the year in line with our outlook. In Q3, our Personal Systems business drove high single-digit sequential revenue growth, which in turn helped drive strong free cash flow performance in the quarter. We successfully completed a debt tender exceeding $1.1 billion late in the quarter that reduced our gross leverage ratio as planned. And our Future Ready transformation plan is on track to achieve at least $560 million in gross annual run rate structural cost savings this year. While there are pockets of our business where we are working to improve our execution, we made good progress during the quarter. Now let's take a closer look at the details of the quarter. Net revenue was $13.2 billion in the quarter, down 10% nominally and 7% in constant currency, driven by the declines across each of our regions. In constant currency, Americas declined 8%, EMEA declined 5% and APJ declined 9%, driven by weakened demand in China. Gross margin was 21.4% in the quarter, up 1.7 points year-on-year, primarily due to lower component and logistics costs in Personal Systems and favorable mix, partially offset by currency and competitive pricing across both of our businesses. Non-GAAP operating expenses were $1.7 billion or 12.6% of revenue. The increase in operating expenses was driven primarily by the Poly acquisition and investments in growth initiatives, partially offset by disciplined cost management, including Future Ready structural cost savings. Non-GAAP operating profit was $1.2 billion, down 15.1%. Non-GAAP net OI&E expense was $143 million, down sequentially due to lower short-term financing activity and up year-on-year primarily due to higher interest expense, driven by an increase in both debt outstanding and interest rates as well as higher factoring expenses. Non-GAAP diluted net earnings per share decreased $0.17 or 17% to $0.86 with a diluted share count of approximately 1 billion shares. Non-GAAP diluted net earnings per share excludes a net expense totaling $93 million, primarily related to restructuring and other charges, amortization of intangibles, acquisition and divestiture-related charges and other tax adjustments, offset partially by the debt extinguishment benefit and nonoperating retirement-related credits. As a result, Q3 GAAP diluted net earnings per share was $0.76. Now let's turn to segment performance. In Q3, Personal Systems revenue was $8.9 billion, down 11% or 8% in constant currency. Total units were up 3%. Sequentially, revenue was up 9% and total units were up 21% with Commercial up 17% and Consumer up 28%. Improved sequential demand was driven by seasonal strength with back-to-school demand. We also saw continued commercial enterprise softness driven by cautious spending and delayed purchase decisions. We improved our overall market share in calendar Q2 on both a year-over-year and sequential basis, driven by gains in both Commercial and Consumer markets. We continued to see Commercial representing approximately 70% of our revenue mix for the quarter. Our strategy remains focused on driving profitable share growth. Our channel inventory levels are normalizing. However, our estimate is that the industry-wide channel inventory continues to remain elevated. As a consequence, ASP pressures offset volume growth, accounting for year-over-year revenue decline in Personal Systems in the quarter. Drilling into the details. Consumer revenue was down 12% and Commercial was down 11%. Increased competitive and promotional pricing drove ASPs lower, partially offset by contributions from hybrid systems revenue and higher unit volumes resulting in share gains. We increased our market share in higher-value premium categories, including Commercial Windows and Gaming. Personal Systems delivered almost $600 million of operating profit with operating margins of 6.6%. Our margin declined 0.1 points year-over-year, primarily due to increased pricing competition, mix, currency and higher OpEx due to the Poly acquisition. This was partially offset by lower costs, including commodity costs, structural cost savings and logistics expense. In Print, our results reflect our continued focus on key initiatives as we navigated the challenges of a softer and increasingly competitive print market. In Q3, total Print revenue was $4.3 billion, down 7% nominally or 5% in constant currency. The decline was driven by soft demand in both Consumer and Commercial, market share [Technical Difficulty] currency and lower supplies revenue. Hardware revenue was down $256 million, driven by lower volumes, primarily due to China market softness and aggressive pricing competition as our Japanese competitors have leveraged the weaker yen to their advantage. Total hardware units decreased 19%, driven by softer print demand in both home and commercial. Industrial graphics revenue, particularly hardware, remains pressured by persistent soft enterprise demand with the greatest impact seen in Europe. By customer segment, Commercial revenue decreased 6% or 5% in constant currency with units down 8%. Consumer revenue decreased 28% or down 26% in constant currency with units down 20%. ASPs were down year-over-year, driven by the promotional and competitive pricing and currency, offset partially by a favorable mix in both Consumer and Commercial. Supplies revenue was $2.8 billion, declining 2% nominally and roughly flat at constant currency, in line with expectations. The decline was driven by demand softness, particularly in China, lower usage and a lower installed base. This was offset partially by pricing actions earlier in the year and share gains [internally] (ph). Print operating profit was approximately $800 million, down 12% year-on-year, and operating margin was 18.6%. Operating margin decreased 1.2 points, driven by competitive pricing and unfavorable currency, partially offset by structural cost savings and favorable mix. I would also like to note that we recorded accounting adjustments primarily related to a revenue contract in our Personal Systems segment. This has been reflected in our prior quarter compares which I just covered. It was not material to any of our previously filed financial statements and does not impact our current quarter results. We continue to make strong progress on our Future Ready transformation in Q3, and we expect to deliver at least 40% of our three-year gross annual structural run rate savings target of $1.4 billion for FY '23. As I've mentioned previously, we are working on a range of programs, which should enable us to achieve and potentially exceed key milestones for reducing costs across our business. Given the dynamic in Print, we are building the plan to accelerate cost reductions in that business. Let me update you on our progress in Q3. A key pillar of our transformation plan is focused on simplifying our product portfolio, significantly reducing the number of platforms we support to drive agility and operating leverage. We've made great progress in Personal Systems as the actions we've taken have positively impacted our Q3 operating profit rate performance. Specifically, we continue to make great progress standardizing our Personal Systems platforms. At the end of Q3, we were nearly halfway to our goal of reducing our total number of Personal Systems platforms by approximately one-third by the end of FY '24. In addition, we continue to reduce our commodity complexity, decreasing the number of client SKUs in our Personal Systems portfolio. In addition, we continue to look for new opportunities to reduce our cost structure across the organization. In Q3, for example, we optimized our media spend by consolidating our marketing programs and expanding our in-housing model further. We expect marketing will continue to deliver additional savings in headcount productivity and cost optimization as we unlock new digital solutions. We are aggressively pressing forward with our AI agenda to reinvent various functions inside the company to accelerate both our products and productivity. We are enhancing our software coding practices to accelerate code development to improve speed, efficiencies and quality reviews. We are also leveraging our telemetry data to proactively address customer needs and to provide tailored recommendations and solutions to improve their efficiency and productivity. Shifting to cash flow and capital allocation. Q3 cash flow from operations was solid at $1 billion, and free cash flow was approximately $900 million. The cash conversion cycle was minus 31 days in the quarter. This improved two days year-over-year, primarily due to days of inventory decreasing one day and days payable increasing four days, partially offset by days receivable increasing three days. The sequential growth in Personal Systems has improved the overall cash conversion cycle as expected. Looking ahead to Q4, we expect operational improvements will help drive a sequential increase in free cash flow, including an increase in Personal Systems revenue and an improvement in working capital. In Q3, we returned approximately $216 million to shareholders via cash dividends. In addition, we successfully completed a debt tender during the quarter, retiring greater than $1 billion of debt. Consistent with our outlook, we did not repurchase any shares in the quarter. Looking forward to Q4, we expect the challenging economic climate and continued demand softness will remain headwinds for our business near term. In particular, keep the following in mind related to our overall financial outlook. We still expect operating expenses, excluding Poly, will be down year-over-year for FY '23. We intend to start managing dilution this quarter as we remain committed to our capital allocation strategy over the long term while maintaining our investment-grade credit rating. For Personal Systems, the PC market size for the second half of calendar year '23 is smaller versus prior expectations, driven mainly by demand weakness in China. We expect industry CI levels will normalize by the end of Q4, resulting in improving ASPs as the quarter progresses but by less than initially expected and that enterprise demand will be softer. We expect Personal Systems margins in Q4 to be at the higher end of our 5% to 7% long-term range, driven by sequential revenue growth, lower commodity costs and strong structural and operating cost savings. In Print, we expect overall Print revenue will rebound sequentially due to seasonality. We expect supplies revenue in FY '23 to decline by a low single-digit in constant currency with easier year-on-year compares in Q4. We expect Print enterprise demand softness, including industrial, which will remain under pressure due to elongated sales cycles. We expect Print margins to be above the high end of our 16% to 18% target range for Q4, driven by disciplined pricing in a competitive environment and cost management that will help to offset softened demand. Taking these considerations into account, we are providing the following outlook for Q4 and fiscal year 2023. We are lowering our FY '23 non-GAAP EPS outlook range by $0.11 at the midpoint. The primary factors driving our guidance include our revised outlook for Q4 due to the macro challenges I discussed previously and the effect of the accounting adjustments I referenced earlier, which impacts our H1 '23 non-GAAP EPS by $0.03. We expect fourth quarter non-GAAP diluted net earnings per share to be in the range of $0.85 to $0.97 and fourth quarter GAAP diluted net earnings per share to be in the range of $0.65 to $0.77. We expect FY '23 non-GAAP diluted net earnings per share to be in the range of $3.23 to $3.35, and FY '23 GAAP diluted net earnings per share to be in the range of $2.95 to $3.07. We expect free cash flow to be approximately $3 billion for FY '23, in line with the low end of our prior guidance range of $3 billion to $3.5 billion. And now I would like to hand it back to the operator and open the call for your questions.

Amit Daryanani:

Good afternoon. Thanks for taking my question. I guess, Enrique, you've talked a fair bit about looking to optimize your cost structure. Can you just talk about what sort of cost savings are you expecting from these initiatives? And does that suggest that you expect these revenue headwinds that you're seeing right now persist into fiscal '24 as well?

Amit Daryanani:

That's perfect. I'll wait for the Analyst Day for that one. And I guess, Marie, when I think about free cash flow generation, $1.3 billion, give or take, for the year so far. As you think about what you need in Q4 to hit the $3 billion number, can you just talk about how much of that do you think is working capital improvement versus net income? Because it does seem like a pretty good step-up in Q4 to achieve that. So just the levers that enable you to get that would be helpful. Thank you.

Operator:

Your next question comes from the line of Shannon Cross with Credit Suisse. Your line is open.

Enrique Lores:

Hi, Shannon. Thank you. So no big changes in our thinking. As we have shared, this quarter, we continued to see growth in the number of enrollees, also in the revenue that we get from our subscription program. We have also continued the expansion of our paper program. As we shared a quarter ago, we wanted to expand internationally, and this is what we have done. We are now present in several countries in Europe, and the adoption continues to grow. In terms of churn, no big changes in what we have seen during the last quarter. And then our plan continues to be, as you were outlining, to integrate more and more parts of our portfolio. In the coming months, we will start having the first PC and Print subscription, and we will continue the expansion after that. And important to highlight is going to become, over time, a more important part of our business, mostly because it allows us to deliver a better value proposition to our customers. This is really why not only because of the financial but also because of the return and the NPS is a critical part of our strategy going forward.

Enrique Lores:

Sure. Thank you. So a couple of comments. First of all, of course, some of the macro trends that we have seen in the industry and some of the Poly competitors have shared those details. The Poly business has been impacted in the short term by a reduction in the term of some of the major markets. At the same time, the reaction from our partners, customers, as I have shared in the past, has been extremely positive. And as you are saying, there is a lot of opportunity to innovate in that space and to deliver a much better value proposition and a much better experience. We all know how painful some of the video conferences are when you have people in the room, people outside. And we just launched a solution using AI, I'm sorry to use the AI term, where with AI, we can manage or produce almost the video conference, the who will be talking frame, the different people in the room, and we are seeing really much better experience for both people in the room and people outside the room. And when we will have both Innovation Day and our Investor Day, you will be able to see some of these solutions and see the value that they bring.

Enrique Lores:

Thank you.

Toni Sacconaghi:

Yes, thank you. You talked about printing and the need to really focus on trying to find incremental cost improvement, and you specifically alluded to that for printing. And I'm wondering if that statement is pointing to the fact that you see something structurally more challenged in printing than you did before? And then I have a follow-up, please.

Toni Sacconaghi:

Thank you. And then if I could just follow up, it sounds like the demand environment is pretty challenging, and the pricing environment is pretty challenging. And yet the margins that you're experiencing in both businesses and that you're guiding for in Q4 are actually above what your longer-term targets are. And so I was wondering if you could reconcile that. And are those targets too low for printing and for PCs? Or what -- why in the face of pricing pressure and volume pressure are you not seeing margins go down into the range? And what are the trigger points for margins going back down into the range on Print and more in the middle of the range on PCs?

Enrique Lores:

Not much to add, Marie. You covered it well. Maybe the last comment is, as we have mentioned before, we don't manage the businesses for the rates. We manage them for operating profit dollars. And this is really what we care the most. We provide ranges because we know it's important for all of you to be able to model, but our goal is to grow operating profit dollars for the company.

Enrique Lores:

Thank you.

Samik Chatterjee:

Hi, thanks for taking my question. I guess if I can start off with a question more in relation to the moderation of the sequential improvement into 4Q that you're outlining because of the macro. And maybe if you can flesh out how to think about how much of that impact is volume- or unit-driven versus a more promotional environment in the segments than you anticipated at this time. Just trying to get a sense of how much of this relates to sub-seasonal PC volume growth versus maybe just a more promotional environment than you were anticipating. And I have a quick follow-up. Thank you.

Marie Myers:

Yes, absolutely. So why don't I just give a little bit more context in terms of what Enrique commented on, Samik. I think if you think about the Q4 guide, obviously, the macro is in there and we've talked about that, I think, in our prepared remarks around those headwinds that we've seen, including the sluggish recovery in China. But in addition, just in terms of Personal Systems, it's really -- the way to think about it is the market size and the opportunity. And it's driven by sort of both ASP pressure that we talked about in terms of that CI and then also the softer demand that we've seen in the enterprise. And then finally, there's also some pressure on the Print business just in terms of the enterprise softness, and that's really in industrial where we're seeing today just elongated sales cycles due to that pressure.

Samik Chatterjee:

Good. And for my follow-up, if I can just ask, the India market, they have instituted a ban, I think, or proposed a ban since from October 31 on PC imports. How are you thinking about sort of the implementation of that or what are you assuming in your guide relative to that impact? I know it's not a big market overall, but just in terms of what you're assuming and what are you seeing in terms of how to navigate that situation? Thank you.

Samik Chatterjee:

Thank you. Thanks for taking my questions.

Operator:

Your next question comes from the line of Erik Woodring with Morgan Stanley. Your line is open.

Enrique Lores:

Sure. Lots of questions in the question. I'll try to cover everything. Now in terms of channel inventory, we are really pleased with the progress we have made normalizing our inventory. We are almost there, and I say almost because the area where we still have channel inventory is actually what you mentioned about Chromebooks. As you know, Google is going to be increasing the royalty prices in the coming weeks. And therefore, we saw at the very end of the quarter some increased orders and pull-up demand of customers and partners that wanted to take advantage of lower prices. So we ship those, and this is the area where we still have some high inventory. But for the rest, we are now in a good position. In terms of TAM, we have reduced slightly the TAM for fiscal year ’24 -- for 2023. Most of the reduction is coming from the new TAM in China that is really as the market has not grown as much as we were expecting, this has created some impact on the overall TAM. And then we have seen also a slight change between the mix of Consumer and Commercial where Consumer has been performing better and especially because of more sluggish demand on the enterprise side, we have seen the Commercial projection reducing. Thank you.

Enrique Lores:

So let me start there. So yes, our current assumption is that price -- ASP for PCs will grow Q3 to Q4, but the growth will be more moderate than we were expecting a quarter ago. And again, the major driver of this is the fact that at the market level, we continue to see -- or our estimate is that channel inventory is higher than what it should be. And therefore, we are going to continue to see pressure from a promotional perspective. There is also an element of mix. Hence, I also mentioned that Consumer in Q3 and we expect in Q4 perform better than expected, and we -- the reverse happen on the Commercial side. And as you know, usually, ASPs for Commercial are better than ASPs for Consumer. Now what I think is important to highlight is our PC business grew from Q3 to Q2. We expect it to grow also from Q4 to Q3. So the recovery of the business is happening.

Enrique Lores:

Thank you.

Sidney Ho:

Thank you. I want to ask about the full year EPS guidance. The midpoint is coming down by $0.11, and I assume most of that is coming out of fiscal Q4. Based on your answer to a previous question, is it fair to assume most of that is coming from lower revenue? How big of an impact is lower margin also a factor? And then, are there other offsets that we should be thinking about?

Marie Myers:

Yes. So why don't I just walk you through the full year here, Sidney? So basically, as Enrique said, it's -- Q4 is $0.08 and then we had a $0.03 adjustment for an accounting correction in the first half. So really just in terms of just the drivers, I think the right way to unpack it is it's really the PC market size for the second half of calendar '23 that's smaller than expected and the industry CI comments that Enrique talked about. But I think the key is we're going to see those improving ASPs as the quarter progresses but it's less than we initially expected. So if you look at that plus the enterprise demand in PS and Print, that's really what are the drivers of the $0.08 in Q4.

Marie Myers:

Sure. So to give you some context there, Sidney, as you rightly said, we have seen the benefit of commodity costs in Q3 across both businesses, frankly, both Personal Systems and Print. There are some unique ICs in Print that are still somewhat in an inflationary state. But overall, the costs have been favorable for commodities in both businesses. We do expect that, that will carry forward into Q4. So there will be additional commodity cost declines in Q4 sequentially. And in terms of how we're thinking about strategic buys, I would say -- I think I've said this in prior calls, we do feel it's really important to be operationally excellent. But frankly, we're going to take advantage of opportunities that make financial sense. So if there are strategic buys that make -- that fit that profile and that character, we'll absolutely take advantage of them. But I think the overall environment is we're seeing those positive trends. But I'd just add that the favorable trends in CPUs, we're starting to expect to see those to flatten out.

Operator:

Your next question comes from the line of David Vogt with UBS. Your line is open.

Marie Myers:

So why don't I walk you through Q3 first, what happened, and then through Q4, because I think that paints the context on how to think about Q4? So if you look at the Q3 rate, which was 6.6%, it was really a cost story. Whether we talked about just the way we manage costs, the results of sort of the structural costs that we've driven through the Future Ready program. And then I just spoke about with Sidney about the commodity costs. So we saw that cost benefit clearly in Personal Systems in Q3. Much of that is frankly going to be a rinse and repeat into Q4. And there's just a couple of additional sort of drivers in there that help to sort of buffer the rate into the higher end of the range. And that is I think what Enrique clearly articulated was that gradual improvement in pricing that we expect to happen Q3, Q4, and that's really due to the stabilization of the CI level. So that's sort of like an additional factor over and above what we had in Q3. And that's really sort of, I think, the best way to think about the rates, particularly in Personal Systems as you think about Q4. And then obviously, we still got -- underpinning all of that is the enterprise softness that continues to be out there in the market as well. But that's really what's driving it. I hope that provides you some more context.

Marie Myers:

Well, I'll just say that sort of our strategy remains the same. We intend to manage our leverage under 2. And I'd say we should also look at it over the longer term and not just sort of quarter-to-quarter. Obviously, we're pleased with where we landed Q3 and we're slightly under two times debt to EBITDA. And in terms of then how to think about leverage and share repurchasing, just -- you might have missed the call so let me just clarify. We said in the call that we expect to start to buy back shares to start to manage dilution in Q4. And I think that comment is really important because I'm not sure if you caught the comments on the call, but that's just sort of how we're thinking about it. And obviously, key to us is the commitment we've made around returning 100% of our free cash flow to shareholders. So I'll turn it over to Enrique to probably, I know he's got some thoughts around this as well.

David Vogt:

Great. That’s helpful. Thanks for clarification.

Asiya Merchant:

Great. Thank you for the opportunity. If you could just unpack a little bit of what's going on, on the supply side. Given that the Print hardware unit, I think even on the inkjet side, on the consumer side are guided down, what gives you some confidence that supplies revenue is, I guess, unchanged here, I think down low digits in constant currency terms? Thank you.

Enrique Lores:

Maybe add one. One additional comment. I think if we think about supplies, there are multiple drivers of supplies performance. Once clearly the number of units that is being installed, which as I told, I think it was Toni before, this is going to create some pressure as well as we are saying. On the other side, we also have the levels of price, which is something that has been working for us during the last year and especially share. And as we have said before, we have been growing our share of supply during the last quarter. It continued to happen this quarter and this is also a part of our strategy going forward.

Enrique Lores:

Yes. So we have clearly seen an increase of aggressive pricing from some of our Japanese competitors. Of course, if you look at the currency rate between dollar and yen is at one of the lower level it has been in a long time, and this clearly gives them an advantage. Our strategy has not changed. We think we need to continue to sell positive NPV units, units that will not create unprofitable customers. And this is why in some areas of the segments like in the low end, where really are not very attractive around profitable units, we are losing share because this is not a business that we're going to go after. And based on what we see, we don't think this is going to be changing anytime soon. And this is why we also mentioned that we are going to be accelerating our cost actions in Print, both to be more competitive in the short term but especially also to be able to maintain our profitability going forward. Thank you.

Enrique Lores:

And I think this was the last question, so let me use this opportunity to close. First of all, I think we delivered a solid quarter in Q3 in a clearly tough environment where we continued to improve our sequential performance while also continuing to invest in the future. And we -- this is really at the core of our Future Ready plan that is enabling to do both, savings that we can use to continue to invest and also to respond to short-term challenges. And then to close, I'm really looking forward to see all of you in person or most of you in person on October 10 here in Palo Alto, where we will be talking about our plan for '24, innovation and long-term plans. So thank you for joining the call and looking forward to see all of you in a few weeks from now. Thank you.

Orit Keinan-Nahon:

Good afternoon, everyone, and welcome to HP's Second Quarter 2023 Earnings Conference Call. With me today are Enrique Lores, HP's President and Chief Executive Officer; and Marie Myers, HP's Chief Financial Officer. Before handing the call over to Enrique, let me remind you that this call is a webcast and a replay will be available on our website shortly after the call for approximately one year. We posted the earnings release and accompanying slide presentation on our Investor Relations web page at investor.hp.com. As always, elements of this presentation are forward-looking and are based on our best view of the world and our businesses as we see them today. For more detailed information, please see disclaimers in the earnings materials relating to forward-looking statements that involve risks, uncertainties and assumptions. For a discussion of some of these risks, uncertainties and assumptions, please refer to HP's SEC reports, including our most recent Form 10-K. HP assumes no obligation and does not intend to update any such forward-looking statements. We also note that the financial information discussed on this call reflects estimates based on information available now and could differ materially from the amounts ultimately reported in HP's SEC filings. During this webcast, unless otherwise specifically noted, all comparisons are year-over-year comparisons with the corresponding year ago period. In addition, unless otherwise noted, references to HP channel inventory refer to Tier 1 channel inventory. For financial information that has been expressed on a non-GAAP basis, we've included reconciliations to the comparable GAAP information. Please refer to the tables and slide presentation accompanying today's earnings release for those reconciliations. With that, I'd now like to turn the call over to Enrique.

Marie Myers:

Thank you, and good afternoon, everyone. We delivered solid financial results in Q2 against the backdrop of a tough macroeconomic environment. We generated sequential growth in non-GAAP operating profit and margin, non-GAAP EPS and free cash flow. Non-GAAP EPS was at the high end of our guidance range, while free cash flow was better than we expected. We delivered these results by remaining focused on prudently managing costs and optimizing our cost structure further under our future-ready plan. At the same time, we prioritize strategic investments that will help drive future growth when the macro economy recovers. We remain focused on what we can control in the current environment, which enabled us to deliver on our commitments for Q2. Now let's take a closer look at the details of the quarter. Net revenue was $12.9 billion in the quarter, down 22% nominally and 18% in constant currency driven by the declines across each of our regions. In constant currency, Americas declined 21%, EMEA declined 22% and APJ declined 7%. Gross margin was 22.7% in the quarter, up 2.5 points year-on-year, primarily due to mix shift to Print and lower commodity costs in Personal Systems, partially offset by currency and competitive pricing, particularly in consumer print. Non-GAAP operating expenses were $1.8 billion or 14% of revenue. The decrease in operating expenses was driven primarily by rigorous cost management, including future-ready structural cost savings and lower variable comp partially offset by the Poly acquisition. In addition, recall last year, we provided aid related to the war in Ukraine. Non-GAAP operating profit was $1.1 billion, down 22.4%. Non-GAAP net OI&E expense was $172 million, relatively flat sequentially and up year-over-year primarily due to higher interest expense, driven by an increase in both debt outstanding and interest rates as well as higher factoring expenses. Non-GAAP diluted net earnings per share decreased $0.28 or 26% to $0.80 with a diluted share count of approximately 1 billion shares. Non-GAAP diluted net earnings per share excludes a net benefit totaling $269 million, primarily related to restructuring and other charges amortization of intangibles and acquisition and divestiture-related charges more than offset by other tax adjustments and non-operating retirement-related credits. As a result, Q2 GAAP diluted net earnings per share was $1.07, mostly due to onetime noncash tax benefits related to tax planning. Now let's turn to segment performance. In Q2, Personal Systems revenue was $8.2 billion, down 29% or 25% in constant currency. Total units were down 28% with declines in both consumer and commercial driven by weaker economic activity as customers in both market segments were more cautious with spending. Despite this, we improved our overall market share in calendar Q1 by 1.3 points year-over-year, driven by gains in the commercial market, where we improved our share by 2.5 points. Improved market share contributed to commercial representing greater than 70% of our revenue mix for the quarter, while constituting about 63% of our PC unit mix. We continue to make solid progress on reducing our channel inventory level sequentially, but levels remain slightly elevated for us and across the industry. As a result, we continue to see aggressive pricing in the quarter. We estimate sellout declined less than sell-in during Q2, which means that end-user demand was stronger than sell-in shipments. Drilling into the details. Consumer revenue was down 39% and commercial was down 24%. Lower volumes, FX and increased promotional pricing remained headwinds, partially offset by contributions from hybrid systems revenue. We increased our market share in high-value more profitable segments, including commercial and premium notebooks. Our strategy remains focused on driving profitable share growth. Personal Systems delivered almost $450 million of operating profit with operating margins of 5.4%. Our margin declined 1.5 points year-over-year primarily due to currency increased pricing competition and the higher OpEx due to the Poly acquisition. This was partially offset by lower costs, including commodity costs and structural cost savings and services mix. In Print, our results reflect our focus on key initiatives and improving execution within the context of a softer print market. In Q2, total print revenue was $4.7 billion, down 5% nominally or 2% in constant currency. The decline was driven mostly by lower consumer hardware and lower supplies revenue and currency. Hardware revenue was down about $100 million driven by lower volumes and competitive pricing actions in consumer, partially offset by an increase in commercial hardware revenue. Industrial Graphics revenue declined, reflecting continued demand weakness in the enterprise space. Total hardware units decreased 4%, driven by market share loss and soft home printer demand. By customer segment, commercial revenue increased 5% or 8% in constant currency with units roughly flat. Consumer revenue decreased 19% or down 15% in constant currency with units down 5%. ASPs were mixed. Favorable mix shift towards commercial helped to offset promotional pricing and incremental price reductions in consumer across multiple geographies to remain competitive. Supplies revenue was $3 billion, declining 4% nominally and 3% in constant currency, better than expected. The decline was driven primarily by lower usage as expected as home printing normalizes further a lower installed base and a gradual recovery in commercial. This was partially offset by favorable pricing actions last year and Lunar New Year timing as well as continued market share gains. Print operating profit was approximately $900 million, down 5% year-on-year and operating margin was 19%. Operating margin decreased 0.1 points driven by promotional pricing, higher commodity costs and unfavorable currency, partially offset by cost improvements and pricing actions. The cost improvements were largely due to lower variable comp and transformation plan related savings. Our future-ready transformation continues to build on our strong start through the first half of FY'23 and we remain on track to deliver at least 40% of structural run rate savings of at least $1.4 billion in FY'23. We continue to see significant opportunities to drive further structural construction across our business. Let me update you on our progress in Q2. We further enhanced our digital capabilities, driving additional automation and process improvements. In our Workforce Solutions and Services business, we harvested more proactive data insights from more connected devices with our enhanced diagnostic tools that drove repair cost efficiencies. In our supply chain, we delivered significant improvements in reducing portfolio complexity, improving continuity of supply and increasing our forecast accuracy to facilitate material cost and profit improvements. We saw further opportunities to drive structural cost reductions through headcount reductions and driving efficiencies in our core businesses. In Print, we focused on platform consolidations and road map reductions in our large format business. Looking ahead, we see potentially significant and incremental opportunities to leverage AI and generative AI to positively impact both our products and solutions and how we operate. We are actively exploring opportunities such as expanding our product portfolio to include a new category of high performance PCs, accelerating software development productivity and enhancing the customer service experience to drive higher value offers while optimizing pricing. Shifting to cash flow and capital allocation. Q2 cash flow from operations was solid at $0.6 billion and free cash flow of $0.5 billion was better than expected. Free cash flow results benefited from better purchasing linearity. The cash conversion cycle was minus 26 days in the quarter. This improved four days sequentially, primarily due to days payable increasing 10 days more than offsetting an increase in DOI. While we decreased our inventory by $0.1 billion sequentially in Q2, the upward pressure on days inventory was driven by strategic buys, increased ocean transit mix and a change in business mix. We have more opportunity to improve our core inventory turns and are focused on doing that. But when it is economic to do so, we intend to continue to drive value via strategic buys or more sea transit, both of which would result in carrying more inventory. In Q2, we returned approximately $260 million to shareholders via cash dividends. Given where we finished the quarter on our debt-to-EBITDA ratio, we did not repurchase any shares in the quarter consistent with our outlook. We remain committed to our capital allocation strategy longer term, but near term, we'll continue to manage our leverage profile prudently and maintain an investment-grade credit rating in the current challenging environment. Looking forward to Q3 and the rest of FY'23, we expect the macro environment will remain challenged and we will remain focused on rationalizing our cost structure further while continuing to invest in our growth businesses. In particular, keep the following in mind related to our overall financial outlook. We are narrowing our FY'23 non-GAAP EPS outlook range, reflecting greater visibility into the potential range of outcomes for H2 '23. We still expect operating expenses, excluding Poly, will be down year-over-year for FY'23. For Personal Systems, we expect our and the industry's channel inventory will normalize in Q3 and the back half of the year will be seasonally stronger from an end-user demand perspective. We expect Personal Systems margins in Q3 to be in the mid-range of our 5% to 7% long-term target, driven by increased volumes, the continued progress on normalizing CI levels as well as further cost reductions and efficiencies. For FY'23, we expect margins to be solidly in our target range driven by the gradual improvement in PC revenue in the back half of the year and increasing future-ready transformation savings. In Print, we continue to expect suppliers revenue at FY'23 to decline by a low to mid-single digit in constant currency with easier year-on-year compares in the back half of the year. We expect print margins to be above the high end of our 16% to 18% target range for H2 '23, driven by disciplined pricing and cost management and continued progress on rebalancing our system profitability. Taking these considerations into account, we are providing the following outlook for Q3 and fiscal year 2023. We expect third quarter non-GAAP diluted net earnings per share to be in the range of $0.81 to $0.91 and third quarter GAAP diluted net earnings per share to be in the range of $0.61 to $0.71. We expect FY'23 non-GAAP diluted net earnings per share to be in the range of $3.30 to $3.50, and FY'23 GAAP diluted net earnings per share to be in the range of $2.91 and $3.11. We continue to expect free cash flow to be in the range of $3 billion to $3.5 billion for FY'23. And now I would like to hand it back to the operator and open the call for your questions.

Erik Woodring:

Hey, good afternoon guys. Thank you for taking my questions. Maybe Enrique, if I start with you. Just on some of the PC and Personal Systems commentary you made. Can you help us think how you guys are viewing the PC TAM in 2023. Why you have confidence in the back half recovery if you're seeing any signs of end market demand and specifically why you think the second half of the year could be above seasonal? And then I have a follow-up. Thanks.

Erik Woodring:

Okay. That's helpful. Thank you. And then maybe, Marie, I think you just posted your strongest gross margin and quarterly gross margin ever, I believe. But at the same time, we're seeing declines in PC units, Print units, supplies are declining. They're all declining year-over-year. So maybe one, were there any onetime benefits that you saw in the quarter? But if not, can you maybe help us understand the most important margin factors this quarter by maybe rank ordering. What was the most significant tailwind to margin strength? And maybe help us understand what was the most significant headwind, if you could quantify that, that would be very helpful for us. Thank you.

Enrique Lores:

And let me add a comment because there are always things that we could do better, but we are very pleased with the execution of the teams this quarter, both across Personal Systems and Print and this had a big impact in the results that we have posted.

Enrique Lores:

Thanks, Erik.

Samik Chatterjee:

Hi. Thanks for taking my questions. I guess if I can start on the Print side. You talked about the margin improvement we're seeing there. But I'm just wondering, as you're reporting margins that are above your long-term range, it's hard to imagine that you're still seeing any benefit from supply chain constraints. You've done a lot of sort of -- you've taken a lot of actions around improving the upfront profit recognition subscriptions there. So as we think about these margins, should we think of them as more sustainable going forward relative to sort of how you probably imagine them 12 months ago? Just more curious about you can sustain these margins? And I have a follow-up.

Enrique Lores:

And maybe add one comment from my side. We manage the businesses to drive operating profit dollar growth. This is really what we are focused, and this is where our strategies are designed for. We provide margins because we think it will help all of you modeling the business and understanding where the business is going to go, but growth in operating profit dollars is a key priority that we have as we manage the businesses.

Marie Myers:

Yes. Maybe I'll take that one. So what we expect is that PS Q3 revenue is expected to be in the high single digits sequentially. So we're getting back to what you typically see from a seasonality perspective. And then Q4, obviously, we'll see greater volumes as Enrique pointed out, because that's our typical holiday season as well. So I think the way to think about it is we're starting to see more the normalized seasonality trends return back.

Operator:

Your next question comes from the line of Toni Sacconaghi with Bernstein. Please go ahead.

Marie Myers:

Hey, Toni. Good afternoon. Good to hear from you. So maybe I'll start out with the back half of the year first. So we do expect OpEx to be up in the back half. And that's because it's going to be driving both our contribution to some of the growth and investments that we're doing in our growth areas and also in our people. But in terms of where the savings are going, they're going to both cost of sales and OpEx. And as you look at the sequential OpEx, you asked me both sequential and year-on-year. Sequentially, we did see an increase, and that was primarily due to some external funding that we had in R&D that we received in the quarter plus we had some incremental investments and we had some unfavorable currency and bad debt. And obviously that was offset by future-ready savings and expenses. But on year-on-year, you did see a decline, and that was due to expense management, the work we've done around future-ready. And last year, we did have some onetime contributions for aid relief in the Ukraine. So that's how to think about OpEx. And obviously, future-ready, we're pleased with our performance so far and we're looking at new programs as the program continues to mature. But essentially, it's both cost of sales and OpEx and we are on track to achieve the numbers that we talked about earlier.

Marie Myers:

Yes. Maybe I'll start on free cash flow and then I'll go back and answer your question on OpEx. So in terms of free cash flow, Toni, let me start out by saying that, obviously, you saw results in the quarter and certainly they're better than expected. But as you know, Enrique commented here a moment ago, the sequential growth in Personal Systems is really driven by that negative cash conversion cycle. And that's a very important factor as we think about the second half. And obviously, this is going to drive a material improvement in CCC in terms of the actual business mix. And as Enrique said, just with the second half, PS will have a substantially stronger Q3 and then ensuing Q4, and that will obviously drive the cash flow as well. And I'll just might add, as I said in the last quarter and I think in the prepared remarks, we're also looking at capacity for strategic buys and shipments. So we're going to make sure that if we may not see a material improvement in inventory just due to that. Now in terms of OpEx itself, we do expect to see an increase in the second half. As I mentioned earlier, Toni, some of that's because we're investing in some of the growth initiatives from our future-ready savings and some of it is the investment we're making in people. But just a reminder that year-on-year, we still expect OpEx to be down. But if you think about the back half of last year, we did take some fairly significant actions. So just keep that in mind when you think about the back half compares as well.

Operator:

Your next question comes from the line of Shannon Cross with Credit Suisse. Please go ahead.

Shannon Cross:

I was on mute. I am so sorry. Thank you. Thank you so much for taking my questions. I'm curious the AITC commentary. Can you flesh that out a bit in terms of where you see the opportunity, timing? I guess I'm a little concerned that people right now have x amount of IT dollars to spend. And obviously, there's a big sucking sound coming out of all of the AI initiatives. So how do you see your PC offerings fit in? And when do should we expect to see some benefit? And then I have a follow-up.

Shannon Cross:

Okay. That's helpful. And then -- in terms of the printing business, I know there's been talk about moving more to subscription. And you obviously are doing it for ink, but then just start adding in hardware. So I'm wondering, and maybe you can talk about PCs as a service, too. But I'm just curious how we should think about as you consolidate your SKUs. How you're thinking about new -- more recurring revenue business model.

Shannon Cross:

Thank you.

Michael Ng:

Hey, good afternoon. Thank you very much for the question. It was encouraging to hear about the continued expectation for the normalization of PC channel inventory next quarter. I was just wondering if you could talk a little bit about whether you expect sell-in to also return to growth as we approach the latter part of the fiscal year? And what do you expect to happen from a pricing perspective, both from an industry perspective and then also for HP? Thank you.

Marie Myers:

I think you said it all, Enrique.

Michael Ng:

Great. Excellent. Thank you very much for that, Enrique. And just as a quick follow-up. I was just wondering if you could update us on your industry PC selling expectations for this year. And any comments you can make about the new size of the installed base relative to pre-pandemic labels. Thank you.

Michael Ng:

Excellent. Thank you for all the thoughts, Enrique. Really appreciate it.

Operator:

Your next question comes from the line of Wamsi Mohan with Bank of America. Please go ahead.

Marie Myers:

Yeah, hey, Wamsi, it's Marie. So look, I think as we said last quarter that basically, look, even though we're focused on driving inventory declines operationally, we said we'd take advantage of strategic buys and frankly, lower the ships where it made economic sense. And so we have continued to do so, and we will continue to do that in the back half of the year. And I think then your second part of your question was around commodities and what the outlook is on commodities. And so I just said for PS, we do expect to see declines sequentially into Q3. Q4, slightly different situation because we expect, as Enrique said earlier, there's going to be a bit of a demand recovery. And plus coupled with some of the comments you're seeing from commodity suppliers that's potentially scaling back on production, that's likely to result in some price increases in the basket of commodities. So that's how we're looking at commodities in terms of the back half of the year.

Marie Myers:

And I'll just add to Enrique's comments that all of that is reflected in our guide as well too, Wamsi.

Enrique Lores:

Yes. The impact of pricing that I was mentioning before was mostly in consumer, where we saw the need to drive more promotional activities. As we look at the second half, we expect consumer pricing to slightly improve as the situation will normalize from an inventory perspective and we expect to see stability in prices on the commercial side.

Wamsi Mohan:

Thank you so much.

Amit Daryanani:

Thanks for taking my questions as well. I guess, Enrique, maybe to start with -- it's been a fair bit of talk on PCs, but as you think about the back half performance being better than the first half, can you just touch about -- how do you think about the Print segment stacking up in the back half across both consumer, commercial and supplies. It would be helpful to understand how you think Print ramps up in the back half, given the fact you're talking about a better -- stronger back half versus first half?

Marie Myers:

And I'll just add with respect to the margin ranges that we also expect to see the continued impact of cost management from our transformation costs as well in terms of supporting the margin outlook.

Marie Myers:

No, great question, and thanks for asking. And you're absolutely spot on. We do expect that our leverage should trend down through the back half of the year. And to your point, based on the real strong cash flow that we're going to have, we expect that we will actually have room and actually repurchase shares in Q4. So you're absolutely spot on. Thank you.

Operator:

Your next question comes from the line of Krish Sankar with TD Cowen. Please go ahead

Enrique Lores:

It will happen during Q3. So we expect to exit Q3 with normalized channel inventory levels.

Enrique Lores:

No, no changes in our approach. I think what this shows is the need to look for opportunities to find efficiencies, especially given that the Print market, the office side is going to be smaller than what the projections were before COVID. And this is what we have been doing during the last multiple quarters. The significant part of the $1.4 billion of savings that are part of our future-ready plan will help on the Print space and really our focus is on driving growth organically when we announced last quarter that we were creating the Workforce Solutions and Services business, growing our office business, growing our office business contractually is one of the key priorities for the team and we are making good progress there.

Enrique Lores:

Thank you

David Vogt:

Great. Thank you guys for taking my question and I apologize if this was asked. My line had a bit of a problem. So maybe Marie just a bit of clarification. I think you mentioned that PSG margins would be sort of in the middle of the 5% to 7% range in the third quarter. But Enrique also mentioned. You would see relatively stronger growth sequentially because of consumer, which I think has a lower segment margin. So can you kind of talk through how do we bridge the gap from five, four in the second quarter to something notably better in the third quarter? And then I'll just give you my follow-up while I have you. When I think about the second half of the year, I think about normal seasonality, typically, Q4 is up mid to high single digits versus 3Q as you build into your fiscal fourth quarter. Is that how we should be thinking about it because that would imply that the PC units would be down, I guess, again, year-over-year, high single-digits. Is that kind of how we're thinking about the second half of the year? Thanks.

David Vogt:

Got it. And maybe I can slip one in. So does the buyback -- the high end of the guidance contemplated by the buyback picking up later this year? Is that kind of how we think -- should think about the high end of the full year guide?

David Vogt:

Perfect. Thank you. Marie.

Enrique Lores:

Thank you. And let me now take an opportunity to close the call. I wanted to, first of all, thank everybody for joining today and also share that we are currently planning for our next Analyst Day event. We will provide more industry information as we close the details of the plan and we will do that as soon as we have that. So thank you, everybody, for joining. Looking forward to talk to all of you soon. Thank you.

Orit Keinan-Nahon:

Good afternoon, everyone, and welcome to HP's fourth quarter 2022 earnings conference call. With me today are Enrique Lores, HP's President and Chief Executive Officer; and Marie Myers, HP's Chief Financial Officer. Before handing the call over to Enrique, let me remind you that this call is a webcast, and a replay will be available on our website shortly after the call for approximately one year. We posted the earnings release and accompanying slide presentation on our Investor Relations web page at investor.hp.com. As always, elements of this presentation are forward-looking and are based on our best view of the world and our businesses as we see them today. For more detailed information, please see disclaimers in the earnings materials relating to forward-looking statements that involve risks, uncertainties and assumptions. For a discussion of some of these risks, uncertainties and assumptions, please refer to HP's SEC reports, including our most recent Form 10-K and Form 10-Q. HP assumes no obligation and does not intend to update any such forward-looking statements. We also note that the financial information discussed on this call reflects estimates based on information available now and could differ materially from the amounts ultimately reported in HP's SEC filings for the years ending October 31, 2022 and 2023 and the quarter ending January 31, 2023. During this webcast, unless otherwise specifically noted, all comparisons are year-over-year comparisons with the corresponding year ago period. For financial information that has been expressed on a non-GAAP basis, we've included reconciliations to the comparable GAAP information. Please refer to the tables and slide presentation accompanying today's earnings release for those reconciliations. With that, I'd now like to turn the call over to Enrique.

Marie Myers:

Thank you, and good afternoon, everyone. Our Q4 results were impacted by many of the same macroeconomic challenges we highlighted last quarter, including a significant slowdown in consumer demand, FX and inflation. That said, we are adapted quickly to the current environment and have demonstrated disciplined cost management to deliver solid results to finish out the year. In addition, we returned significant capital to our shareholders while successfully closing our acquisition of Poly. We continue to believe in the long-term opportunities across our business and are confident we have the right strategy and portfolio of assets to drive long-term value creation. Today, I will cover our Q4 results and a recap of FY '22 followed by details about the cost transformation component of Future Ready, building upon the foundation we laid in our previous program and then finish with our outlook for Q1 and FY '23. Turning to our Q4 results. Net revenue was $14.8 billion in the quarter, down 11% nominally and 8% in constant currency. Gross margin was 18.4% in the quarter, down 1.2 points year-on-year driven by FX and increased pricing competition, particularly in PS. Non-GAAP operating expenses were $1.6 billion or 10.7% of revenue, down 18% year-on-year. In Q4, we installed further rigor at our cost management with OpEx down sequentially, excluding Poly. Year-on-year, we reduced our OpEx spend by nearly $350 million by prioritizing our spend and reducing variable compensation, while also capturing additional structural cost savings under our transformation plan. At the same time, we made and expect to continue to make prudent and targeted investments where we anticipate significant opportunity to drive growth, including our key growth areas, which Enrique outlined earlier. Non-GAAP operating profit was $1.1 billion, down 15%. Non-GAAP net OI&E expense was $128 million for the quarter, up sequentially, largely as a result of our acquisition of Poly. Non-GAAP diluted net earnings per share decreased 10% to $0.85 with a diluted share count of approximately 1 billion shares. Non-GAAP diluted net earnings per share excludes net expenses totaling $855 million, primarily related to acquisition-related charges, amortization of intangibles, tax adjustments and restructuring and other charges, partially offset by non-operating retirement-related credits. As a result, Q4 GAAP diluted net earnings per share was zero, mostly due to onetime noncash tax expenses. Now let's turn to segment performance. In Q4, Personal Systems revenue was $10.3 billion, down 13% or 9% in constant currency. This compares to the 3-point headwind we had expected. PS revenue includes just two months of Poly's results following the successful completion of the acquisition in late August. Total units were down 21% on tough compares. We also saw pricing competition increase sequentially due to high-channel inventory across the industry. And while supply availability has improved significantly, constraints persisted in some pockets of the business. Drilling into the details, Commercial revenue was down 6% or 2% in constant currency. Consumer revenue was down 25% or 21% in constant currency, with FX remaining a significant headwind this quarter. As an example, currency was an approximate 6-point headwind to our Personal Systems business in EMEA this quarter, increasing 1 percentage point sequentially. By product category, revenue was down 23% for notebooks, up 1% for desktops and up 9% for workstations. We saw a strong recovery in gaming sequentially with revenue up solid double digits due to better product availability. We have cleared most of our outstanding backlog and finished the quarter at a level consistent with pre-pandemic levels and with most of the remaining backlog reflecting higher value units. Personal Systems delivered $458 million of operating profit with operating margins of 4.5%. We ended the quarter below our long-term range for operating margins, largely as a result of particular weakness in EMEA Consumer revenue. Operating margin declined 2 points year-over-year due to currency and increased promotional activity given elevated industry channel inventory levels, especially in the Consumer business. These headwinds were partially offset by mix, lower commodity costs and variable compensation. We are pleased with the strong execution by the Poly team. They delivered just above breakeven operating profit and exceeded expectations for the quarter. In Print, our results reflect our focus on execution and the breadth of our portfolio as we navigated the highly dynamic environment. In Q4, total Print revenue was $4.5 billion, down 7% nominally or 6% in constant currency, driven by lower Supplies revenue and lower home hardware units combined with increased pricing competition in the home business. This was partially offset by higher office hardware units and ASPs and growth in Industrial Graphics and Instant Ink services. Total hardware units declined 3% driven largely by continued supply constraints for certain IC components and lower Consumer demand. We have taken mitigating actions that are beginning to yield improvements in our supply availability at a pace consistent with our plans. While this has enabled us to make progress on reducing our backlog, we still expect print hardware constraints to extend into FY '23. By customer segment, Commercial revenue increased 1% or 5% in constant currency, with units up 5%. Consumer revenue was down 7% or 4% in constant currency with units down 4%. Office continued with its gradual recovery, while pricing remained disciplined even as supply constraints eased incrementally. Home hardware demand softened further sequentially, particularly in the EMEA and Americas regions impacting ASPs as competitive pricing increased during the quarter. In Q4, Commercial recovery remained slow due to the gradual and uneven pace at which the return to office is progressing. There were pockets of strength with commercial hardware units up 5%. And in graphics, our Indigo business closed its largest deal to date for 50 digital presses with ePAC, a leader in the flexible packaging market. Supplies revenue of $2.7 billion declined just under 10% in constant currency, slightly better than expected as demand weakness appeared to stabilize in the quarter. The decline was driven primarily by continued Consumer weakness, particularly in the EMEA region and the slow recovery in the office, partially offset by favorable pricing actions and continued market share gains in ink and toner. Supplies finished FY '22 down nearly 7% on a constant currency basis. Adjusting for approximate 1-point headwind related to the exit of our Russia business, the year-on-year decline in Supplies came in consistent with our original guidance range of a decline of low to mid-single digits. Print operating profit increased $73 million to $903 million, up 9%, yielding an exceptional operating margin of 19.9%. Operating margin increased 2.9 points year-on-year, driven by favorable overall pricing and OpEx management, including lower variable compensation, partially offset by unfavorable mix and higher commodity costs. Now turning to cash flow and capital allocation in Q4. Q4 cash flow from operations and free cash flow was $1.9 billion and $1.8 billion, respectively, exceeding our guidance for the quarter. The cash conversion cycle was minus 29 days in the quarter, flat sequentially as lower days payable outstanding and higher days sales outstanding was offset by the decrease in days of inventory. In Q4, we returned approximately $1 billion to shareholders. This included $750 million in share repurchases and $249 million in cash dividends. At the end of FY '22, we successfully finished our transformation plan, generating better-than-expected structural cost savings. Our strong performance and our value plan over the past three years, including our capital return and broader capital allocation priorities were made possible in part by the transformation journey we have been on. In 2019, we launched a three-year plan to unlock significant value and become a leaner, simpler and more digitally enabled company. We took decisive actions aligned to the principles of our value creation plan to become closer to our customers by simplifying our operations and replatforming the company. In total, our transformation program delivered growth annualized run rate savings of over $1.3 billion and reduced our headcount by approximately 7,700 as expected. As part of our simplification journey, we changed our operating model, moving to one commercial organization, and created strong centers of excellence to drive efficiency and faster decision-making. In addition, we optimized our real estate footprint, creating efficient digital workspaces as we transitioned to a hybrid work model. We also made significant progress in optimizing our manufacturing footprint and continuing to enhance resiliency while reducing our cost structure. Digital replatforming was another defining enabler of our transformation efforts. We built a new digital backbone for the company with the deployment of one ERP system, creating the ability to deploy additional tools and capabilities. In addition, this new platform provides the foundation upon which we can drive incremental cost savings as well as build new businesses with different business models as we move into FY '23 with the launch of our Future Ready Transformation Plan. We are now launching cost action efforts as part of that Future Ready program, continuing to the next phase of our transformation. We'll continue to take actions to reduce structural costs across COGS and OpEx to drive efficiencies while protecting the investments necessary to accelerate our transformation, ensuring we are well positioned to drive long-term growth. This program is expected to run for three years, and we expect to generate at least $1.4 billion in gross annual run rate structural cost savings by the end of FY '25. We expect at least 40% of the run rate savings or approximately $560 million to be achieved by the end of FY '23. We have line of sight to these savings, and we also have a good funnel of additional cost savings opportunities that we are betting to help us exceed these targets. The total expected restructuring charge is approximately $1 billion, which includes approximately $200 million in noncash charges in FY '23. We anticipate approximately $600 million of the total charges to be in FY '23 with the rest split roughly equally in FY '24 and FY '25. As Enrique mentioned, we take workforce reductions very seriously and with the utmost care, but they remain critical to the long-term health of HP. In total, we expect to reduce headcount by 4,000 to 6,000 over the next three years. In addition to labor-related restructuring charges of roughly $700 million, we expect additional non-labor charges related to IT, real estate and other corporate charges. We anticipate the gross savings from this next phase of transformation will partially offset the challenging macro in the near term and incremental investments in growth opportunities we discussed earlier. In summary, these actions will help enable us to build a stronger HP. Looking forward to our Q1 and FY '23 outlook. We continue to believe in the long-term opportunities and growth in our end markets, including our key growth areas and our strategy to create value for shareholders over time. Given the current macro environment, we do expect near-term volatility, in particular, keep the following in mind related to Q1 and FY '23 financial outlook. Given the challenging macro environment driven by the headwinds I've described, we are modeling multiple scenarios based on several assumptions. For FY '23, we see a wide range of potential outcomes, which are reflected in the outlook ranges we are providing today. Consistent with our Q4 results and ongoing strategy, we will continue to rigorously manage our OpEx spend while continuing to prioritize investments where we see opportunities for growth. This is made possible in part by the decisive cost actions we are announcing today. We expect currency to be about an approximate 5% year-over-year headwind in Q1 and 5% for FY '23 reflecting the current strength of the U.S. dollar. In Personal Systems, we expect the overall PC market to see an approximate 10-point unit decline versus FY '22. Many of the recent challenges we have seen in FY '22 will likely continue into FY '23, including softer demand in both Consumer and Commercial and higher channel inventory levels across the industry. We anticipate these factors will put continued pressure on overall pricing at least through the first half of '23. We expect Personal Systems unit mix to continue to improve as we focus on higher-value categories, including commercial premium and hybrid work solutions. We expect Personal Systems margins to be below the low end of our 5% to 7% target range through at least the first half of FY '23 driven by the high normalization of industry channel inventory levels and then improve into the second half as channel inventory normalizes and our transformation-related cost actions start to more meaningfully impact our cost structure. And regarding Q1 Personal Systems revenue, we expect to be down mid-single digits sequentially. In Print, in terms of the overall print market sizing, we expect it to be down approximately 3% year-on-year driven by the challenging macro environment and slower-than-expected return to the office. In the office market, we continue to expect the market sizing to be approximately 80% of our pre-pandemic projections. In home, we expect the market to be down in '23 versus the exceptional performance during COVID, but still above our pre-pandemic projections. We expect continued softness in Consumer demand and favorable pricing in Commercial units, offsetting some normalization in Consumer pricing, particularly in the first half of '23. In terms of our print hardware supply chain, we expect constraints to continue, particularly in office hardware, at least through first half of FY '23. We expect Print margins for FY '23 to be at the high end of our 16% to 18% range, driven by the resiliency of our portfolio and disciplined pricing and cost management including our transformation efforts to reduce our print fixed cost structure, as Enrique mentioned. And finally, regarding Supplies revenue, we expect to decline low to mid-single digits in FY '23 in constant currency, consistent with our long-term outlook. For FY '23, we expect to be within that range in aggregate. But for the first half of '23, we expect to be at similar levels to Q4 given the macro environment and tough compares. We expect free cash flow to be in the range of $3 billion to $3.5 billion, which includes approximately $400 million of restructuring cash charges. From a seasonality perspective, we expect the second half to be stronger than the first, largely consistent with our net earnings combined with the fact that our first quarter is typically lower given the timing of prior year variable comp. Furthermore, normal, quarterly sequential seasonality does not apply for FY '23, given the dynamic macro environment. But we do expect some improvement in our revenue trajectory in the second half of '23. That said, we expect our key growth businesses collectively will continue to grow double digits organically in FY '23 as we continue to invest in innovation and adjacent market opportunities. With regard to OpEx, we expect to rigorously manage our overall cost structure as part of our transformation, particularly in our core businesses, where we expect OpEx to be down year-on-year. However, including Poly, we do expect total OpEx to be up year-on-year. In addition, for FY '23, we expect OI&E expense will be approximately $0.5 billion, consistent with our Q4 exit run rate. Moving to capital allocation. We are not making any changes to our capital return framework. As we have discussed in the past, we are committed to our strategy of returning 100% of free cash flow to shareholders over time as long as our gross leverage ratio remains under 2x, and there aren't any better return opportunities in order to maintain our credit rating. Given the challenging current environment, consistent with our disciplined financial management, we expect share repurchases will be modest near term based on our FY '23 outlook today. Lastly, we announced today that we are raising our annual dividend by 5% to $1.05 per share, reflecting confidence in our long-term outlook for the business. We have raised our dividend every year since separation in late 2015. Taking these considerations into account, we are providing the following outlook

Amit Daryanani :

I guess, Enrique, I'm hoping you just start off talking a little bit more about the transformation plan. And then what I'd love to understand is what do you think HP looks like after the transformation plan is done, maybe in terms of the growth rates on the operating margin profile versus what you've seen historically? I want to just to understand what would be different about HP post the current transformation plan? And then if you can also just touch on, how do we think about net savings, the gross numbers you're talking about through this transformation? That would be helpful.

Marie Myers :

Amit, maybe I will just add a comment, and good afternoon, regarding the savings. So we do expect at least $1.4 billion of gross run rate structural savings by the end of '25 and approximately $560 million of that by the exit of '23. Just to add, it will be a mix of both COGS and OpEx. And we look at this over time, as Enrique said, and we expect that these savings and investments that we're making are going to provide that significant flow-through over time.

Marie Myers :

Yes. No, thanks very much, Amit. So look, as you said, we're really pleased with the Print margins that were at 19.9% in Q4, which is actually at the high end of our expected range. And that increase, if we look at it from a year-on-year perspective, is a combination of things. Firstly, we've demonstrated disciplined OpEx management that's contributed along with overall pricing durability, as you mentioned. And I think both of these factors combined have really helped to sort of play into our performance. As we look into next year, we do expect once again to be at the high end of the range. And it's really contributed by both the resiliency of the portfolio, our strategy, a combination of that pricing management. I think that we've really mastered along, obviously, with the benefits of the Future Ready Transformation program that we just announced today as well.

Operator:

Your next question comes from the line of Shannon Cross with Credit Suisse.

Enrique Lores :

Sure. So yes, you are right, Shannon. The $11 billion does not include Poly so this will be on top of $11 billion that we explained. And the goal that we had at the beginning of the year was for them to be about $10 billion. So this is almost $1 billion more than what the plan was. I think what we can say at this point is all of them grew double digit during 2022, and we expect collectively to grow again double digit in 2023. And as we share, if we look at the year, the gross margin was above the gross margin of the company. In some of them, we are still in investment mode, and we know we need to continue to invest to continue to accelerate the growth. And this is one of the reasons why we have been working on the transformation for a few months now because we know that we need to both compensate for some of the challenges that we see on the market side given the slowdown in some of the markets, but we also need to continue to invest on the growth initiatives because they will carry the growth of the company and the value of the company in the future.

Marie Myers :

Absolutely. And good afternoon, Shannon. So as you said, the cash flow guide is $3 billion to $3.5 billion. And just a clarification, that actually does include the $400 million of restructuring cash flow. So just take that into account in your model. Now in terms of how to think about free cash flow, as you know, it tracks with net earnings. But in any quarter, as you've seen just in our results, in the last couple of quarters, it's driven very much by the mix of business that we see in the quarter and changes in working capital. And those items include everything from the restructuring, the bonus, et cetera, and also just adjustments that we make to our inventory level. So you're going to expect that there's going to be a level of seasonality around it as well. And then as we're thinking -- specifically about the first quarter that's coming up, we would say it's going to be -- we're going to guide here to a lower number because we expect typically from a seasonality perspective, that's when we pay out the bonus that we accrue in the prior year. And also, we expect specifically in Q1 just due to the fact we've got this combination of both the unfavorable business mix from the top line pressure of Personal Systems, you combine that with the bonus payout and restructuring and with the increase in AR from contract manufacturers, which is partially offset by continued reductions we're taking at inventory level, we expect that our cash flow in Q1 is probably likely to be negative towards breakeven. So I know I've said a lot there is definitely a lot of factors going into driving the linearity in our cash flow. But once again, still very confident in the guide that we've given for the year of $3 billion to $3.5 billion. And then I'll just turn it to Enrique if he wants to comment at all with respect to our repo strategy.

Marie Myers :

Yes. I'll just add, it is important that we're going to ensure that we at least offset dilution from employee benefit plans as well.

Toni Sacconaghi:

Yes. I'm wondering if you could specify how significant the backlog drawdown was in the quarter, just so we can get a sense of what kind of baseline normalized order of revenue growth was. And then you provided some context on your expectation for Q1 revenues for PCs to be down mid-single digits sequentially. I'm wondering if you can comment on your revenue expectations for Q1 overall and for fiscal '23. For the next four quarters, Dell is calling for revenues to be down in the teens. I'm wondering if you see a more optimistic outlook than that? And I have a follow-up, please.

Marie Myers :

So just on the revenue per PS, we do expect it to be down mid-single digits sequentially. And obviously, that's driven by all the conditions we've talked about earlier today. And as you know, we normally don't guide revenue, but we do expect that normal seasonality won't apply in '23. So we'll see some improvements in the overall revenue trajectory in the back half. But overall, we do expect to see PS revenue down here in Q1.

Toni Sacconaghi:

Okay. I still don't feel like we have a pretty good sense of what your range of outcomes is for revenue growth for 2023. But -- maybe you can address that. But just following up with the second question, you said Supplies would be back to your traditional model of down kind of low to mid-single digits. But you pointed to minus 10% growth in the first half. So that means you're expecting Supplies to grow in the second half. That's pretty well the simple math. And why did we have this big perturbation from model the last couple of quarters and maybe the next couple of quarters. Is this just channel inventory correction? Or why do we have a sudden reset off of model that is minus 3% to minus 5% and minus 10% and then it kind of bounces back.

Operator:

Your next question comes from the line of Aaron Rakers with Wells Fargo.

Enrique Lores :

Sure. Let me start with the print side, and then Marie will talk about PC. On the print side, the minus 3% is the expected decline in the overall market for print between fiscal year '23 and fiscal year '22, and there are different dynamics behind that number. We are expecting the Consumer number to -- the Consumer market to go down year-on-year, the office market to go slightly up and the industrial market to continue to grow like it has been growing during 2022. The net effect of all these three is a minus 3% growth year-on-year. Marie?

Aaron Rakers :

Yes, that's very helpful. And then I guess the follow-up was on the channel inventory discussion. I guess, do you see that channel inventory is the assumption right now that channel inventory normalizes as we get towards the mid part of calendar '23. Any context of how you would currently characterize your own channel inventory in that?

Operator:

Your next question comes from the line of Erik Woodring with Morgan Stanley.

Enrique Lores :

Sure. Thank you, Erik. I would say there are two things. First is the world is in a very different position now than when it was three years ago, but also the company is in a very different position. In fact, a significant part of the savings that we are going to be able to achieve now are really driven by the investments that we have made during the last 3 years that really are enabling a significant part of it. For example, when we talk about continuing to work on the digital transformation, we can do it now because of all the investments that we have made during the last three years. Additionally to that, when we look at the return on this investment, it really brings -- has very good results. We are going to be investing $1 billion, and we will get, as Mario was saying, $1.4 billion of run rate savings at the end of '25. So really very solid return. And on top of that, this will also help us to continue to invest in our growth businesses. We think that it is important that as we go through a challenging marketing conditions during the next quarter, we continue to invest in the future businesses of the company, and this transformation is going to enable us to do that going forward.

Marie Myers :

Yes. No worries. No, we're very much committed to the strategy. I think we've articulated of staying inside our range. So absolutely, we'll continue to execute against our strategy.

Operator:

Your next question comes from the line of Wamsi Mohan with Bank of America.

Enrique Lores :

Sure. As we have explained in the past, our strategy and our goal is profitable growth is not to gain share for the sake of gaining share. And therefore, we are very judicious and very careful as we look at deals in different geographies, different segments to make sure that the deals make financial sense for us. This quarter, we saw very aggressive pricing in many countries in the world, especially in the Consumer segment, especially EMEA. And in many cases, we decided not to participate. But we also know that to maintain a strong leadership position in this market, we need to regain share. And this is -- and we think that the cost reduction activities that we have been working on for some time are going to be part of the Future Ready plan, are going to help us to be more competitive and help us to win share during 2023, which is our goal. And that's really the key -- this will be the key driver of the share growth that we expect to have.

Enrique Lores :

Sure. From a margin perspective, similar to what happens on the transactional side, the home, Instant Ink program is more profitable than the Managed Print Service program. That’s driven by the fact that we own almost all the technology stack. From a growth perspective, though, they are not related. We have a lot of opportunity to grow the consumer subscription business and to grow as well the Managed Print Service business, especially as we start seeing some slow but some recovery on the office side.

Operator:

Your final question today comes from the line of Krish Sankar with Cowen & Company.

Enrique Lores :

Yes. So our portfolio optimization have many different elements. Let me highlight a couple of them. First, we are going to maintain, and in some cases, increase our investment in the growth businesses. As I said before, we expect to get double-digit growth in 2023. And going forward, they will continue to become a more relevant part of the company. On the other side, we also know we have opportunities to optimize some of the businesses in the core side. For example, during 2021 and '22 because of the component shortages, we have to duplicate many SKUs. We had to duplicate investments in boards, in many different parts to compensate for component shortages. This is clearly now an opportunity to simplify, to rationalize and to reduce investment and cost in the cost side. And there are many other things, but these are two good examples of the things you will see us doing.

Enrique Lores :

Sure. So let me start with a minus 10%. The minus 10% is what we expect the unit decline to be during our fiscal year that goes from November '22 to November '23. We are using that number because we think it's more relevant to understand the guide that we provided today. Marie?

Enrique Lores :

Thank you, everybody, for joining the call today. But you can see that we are taking the actions under our control to manage the situation and to improve the situation. Clearly, we know that we need to both continue to reduce our cost structure, but also to invest for the future of the company because I don't think anybody can predict when the rebound of the economy will happen. But what we want to make sure is that we have a stronger HP when this happened, so we can take advantage of that. So really thank you, everybody, for joining. And Happy Thanksgiving for those of you in the U.S. Thank you.

Orit Keinan-Nahon:

Good afternoon, everyone, and welcome to HP's first quarter 2022 earnings conference call. With me today are Enrique Lores, HP's President and Chief Executive Officer; and Marie Myers, HP's Chief Financial Officer. Before handing the call over to Enrique, let me remind you that this call is a webcast, and a replay will be available on our website shortly after the call for approximately one year. We posted the earnings release and accompanying slide presentation on our Investor Relations web page at investor.hp.com. As always, elements of this presentation are forward-looking and are based on our best view of the world and our businesses as we see them today. For more detailed information, please see disclaimers in the earnings materials relating to forward-looking statements that involve risks, uncertainties and assumptions. For a discussion of some of these risks, uncertainties and assumptions, please refer to HP's SEC reports, including our most recent Form 10-K and Form 10-Q. HP assumes no obligation and does not intend to update any such forward-looking statements. We also note that the financial information discussed on this call reflects estimates based on information available now and could differ materially from the amounts ultimately reported in HP's Form 10-Q for the fiscal quarter ended July 31, 2022, and HP's other SEC filings. During this webcast, unless otherwise specifically noted, all comparisons are year-over-year comparisons with the corresponding year-ago period. For financial information that has been expressed on a non-GAAP basis, we've included reconciliations to the comparable GAAP information. Please refer to the tables and slide presentation accompanying today's earnings release for those reconciliations. With that, I would like to turn the call over to Enrique.

Marie Myers:

Thank you, and good afternoon, everyone. As Enrique mentioned, our Q3 results were impacted by macroeconomic challenges, including a significant slowdown in consumer demand in our categories

Erik Woodring:

I guess maybe one for you, Enrique, and then one for you, Marie. Just on the pricing side, Enrique, maybe can you just give us a little more detail on the pricing actions you're taking and really in respect to kind of balancing or the challenge of balancing kind of softening demand with U.S. dollar strength and what that means for international sales. And if you could just specify again across Personal Systems and Print, that would be super. And then I have a follow-up.

Erik Woodring:

Super. And then maybe, Marie, just a quick clarification question regarding Poly. Is the low single-digit sequential increase in fiscal 4Q revenue that you're talking about, is that overall revenue? And does that include the two months of Poly? And do we think about including that in Personal Systems for now? Are you thinking about re-segmenting? Just any color that you could provide there would be super helpful.

Enrique Lores:

Let me share kind of the excitement that we have about the announcement we made yesterday. We think that the acquisition of Poly positions us very strongly as a leader in hybrid work. We see tremendous opportunity to add value, to innovate and to differentiate ourselves. So, we're really eager to start working with the Poly/HP team to start bringing new solutions to market and really expand that business.

Toni Sacconaghi:

I'm wondering if you can just comment on the state of your backlog in the Personal Systems group. I think going into the quarter, you had anticipated not being able to reduce backlog because it was elevated. And I'm wondering whether backlog changed over the course of the quarter and whether you expect backlog to be at normal levels by changed over the course of I have a follow-up, please.

Toni Sacconaghi:

And do you expect to be at normal levels at the end of the fourth quarter? And maybe I'll ask my second question with -- at this point as well. Supplies was down 9%. That feels extremely abrupt, change from kind of the minus 3% level that you were at before. Was there any meaningful level of supplies channel inventory change? And I think you said you anticipated supplies being down double digits for the next few quarters. How do we know that there's not something structural akin to what we saw a couple of years ago happening with supplies? And why shouldn't we be worried about a pronounced negative mix shift, given supplies are higher margin than hardware, that once hardware goes back to kind of normalized pricing levels, printing margins could actually be below your trend?

Operator:

Your next question comes from Shannon Cross with Credit Suisse. Your line is open.

Enrique Lores:

Sure. And Shannon, it's great to hear your voice again. So talking about Instant Ink, it continues to grow double digit, both revenue and net new subscribers so all this is doing really well. And really, this is driven by the fact that the value proposition to consumers is better than the traditional model. Cost of printing is lower. It is more convenient because they get consumables at home. And on top of that, it's more sustainable, which is really becoming, every time, more important. We continue to see growth in that space, and you are going to continue to shift the business in that direction. And as we have discussed in the past, we continue to see this as a platform to sell additional subscription programs. And as we shared a few months ago, we have example, the pilot of paper subscription in the U.S., and we are seeing good traction and good progress. So very, very good progress there. In terms of HP+, penetration continues to grow. We announced a new system on the laser side this quarter that had very strong reception. And as we have shared in the script, when we look at the combination of HP+ plus Big Ink and Big Toner, the combination of both is more than 50%, 5-0, of our hardware shipment this quarter. So this talks about the progress that we continue to make in that space; and this is really important, as we have said before, to rebalance profitability between hardware and supplies.

Enrique Lores:

Sure. So for the rest of the year, we have shared that we are going to be exceeding the plan that we explained about three years ago to returning $16 billion of capital, so we will be above that plan. In terms of going forward, we don't foresee any changes in our capital allocation strategy. We are going to continue to execute the model that we have been sharing or the framework that we have been sharing during the last year. First of all, we think that for us, it's important to stay investment-grade credit rating. For us to be there, we need to be in a leverage ratio between 1.5 and 2, which is where we are now. And once we are in that range, our plan is to continue to return 100% of free cash flow to investors, either in dividend or in share buyback unless an M&A opportunity with a better return shows up. This is what we have been doing during the last quarter, and this continues to be the plan going forward.

Sidney Ho:

Last quarter, you had expected strength in the commercial PC for the rest of fiscal '22. Obviously, things have changed. It seems like third quarter commercial revenue did decline but better than consumer. When did you start seeing signs of demand weakness? Any color on how the quarter progress would be great? And do you have a view when you will start seeing some stabilization in that market? Then I have a follow-up.

Sidney Ho:

Okay, that's helpful. My follow-up question is I want to get an update on your growth area initiatives. You kind of talked about the various businesses there. But you already had $5.6 billion of revenue in the first half of fiscal '22, so reaching $10 billion target doesn't seem to be a stretch. But can you talk about what you expect half over half in the second half of the fiscal year? Especially interested in your comments on gaming, given what we've been hearing about the weakness there, but also how does the full year target change with the inclusion of Poly?

Operator:

Your next question comes from Wamsi Mohan with Bank of America. Your line is open.

Enrique Lores:

Sure. So, our current projection is similar to what you were describing. We see the market somewhere in between 290 million to 300 million units. This is what we are using for our plan. This is in June. We continue to see more growth from the premium categories. So from a revenue perspective, the market is proportionally bigger from that perspective. This is still significantly higher than what we -- than where we were pre COVID. And we think that the fundamentals of the business have not changed from the perspective that PCs are way more relevant now than they were three years ago. If you think about hybrid work, for example, which is where we think the majority of the companies are going to be working, if you think how majority of the companies are going to be working. If you think about telehealth, if you think about how students are using PCs today, all these are drivers of growth for PC. We see that the slowdown we are going through in consumer and potentially in commercial is driven by macro, is not driven by preferences for PCs or whether PCs are more useful or not. We continue to believe they are critical. And so, we remain optimistic about the future of PCs even if we think we are going to go through this temporary headwind driven by the macro situation.

Enrique Lores:

So in terms of '23, at this stage, since we think that the major impact is macro, it's really hard to predict what is going to be the evolution on the macro side. And this is why we highlighted that we -- given that macro we cannot control, we are taking all the necessary actions in the Company to manage it through the next quarter because we think the difficult macro situation is going to continue. In terms of guide for fiscal year '23, we will be providing it at the end of -- during our Q4 call, and then this is the plan to share kind of how do we see the different businesses performing. And then in terms of channel, and these were like three follow-ups in the follow-up, we see, as I mentioned, high inventory in the channel. We are going to be managing it down through the different quarters, and we have this built into the guide that Marie shared with all of you.

Operator:

Your next question comes from Samik Chatterjee with JPMorgan. Your line is open.

Enrique Lores:

Yes. Let me share our view on that. What we are seeing in consumer is a shift towards more premium category because we think that the traditional buyer of the premium category is less impacted by the macro situation that we see. As inflation has grown, as energy prices have increased in many parts of the world, as food prices have increased, families with lower income, families with lower budgets have a bigger impact. And they usually or traditionally buy lower price PCs versus families with higher impact. And we think this is really one of the key drivers of the change of mix that we are seeing.

Marie Myers:

Yes. No, we expect our cash flow is largely in line with our net earnings. Obviously, there's some differences quarter-to-quarter on working capital. But just in terms of how to think about cash flow and the guide and what we see as some of the drivers for Q4, firstly, I'd say, look, we've got plans to improve our working capital sequentially. And we're seeing that just in terms of the lower inventory levels. You would have seen that in Q3. We expect operationally to take additional actions going into Q4. I'd say we also, in this last quarter in Q3, we did have some timing impacts around other assets and higher accounts receivable from our contract manufacturers, which caused that AR to be collected in early Q4. This was caused by component receipts and delays to us. So therefore, those month three shipments to our CMs were late. Now we do also continue to expect to see some sequential improvement in PS volumes. As you know, PS is a negative cash conversion cycle so that will be a tailwind. So based on these factors, I'm confident in our free cash flow outlook of 3.5 to 4 for HP for the year.

Ananda Baruah:

Enrique, in your comments, you talked about sort of ASP declines becoming a bit stronger as you move through the quarter. And it also sounds like the commercial order slowing or sort of protracting is just on the front end. And so I guess the question is, should we anticipate the fundamentals become a bit more challenging post the [indiscernible] over quarter, if even just in the near term. And then I have a quick follow-up as well.

Marie Myers:

And another, just to add in the -- I'm just going to add that our chrome shipments fall off, so in terms of the compares, so that was a tailwind obviously for Q3, which won't be repeated in Q4.

Enrique Lores:

Yes. I think what, in any case, no matter what the macro is, we need to continue to improve the efficiency of the Company. And the investments that we have done during the last years in IT and in digital systems will allow us to continue to do going forward. So what you will see from us is this plan that will show what are the investments that we are going to be making, what are the returns that we expect to see over time, but a big part of it is be driven by digital, leveraging from the work that has been done during the last years.

Jim Suva:

Thank you. Enrique and Marie, when you mentioned about pricing and margins to kind of -- I'm sorry, margins to come down a little bit lower, I remember pre COVID, it was 3.5% to 5.5% operating margins for PS, and I think you took it from 5% to 7%. Are you kind of saying now we should kind of start to model in getting back to the 3.5% to 5.5% range? Or are you talking about kind of the lower end of the 5% to 7% range? I'm just kind of wondering about have we structurally moved higher or is it actually with more supply, going to go back to the 3.5% to 5.5% range?

Enrique Lores:

And just a reminder, Jim, what we said is we expected to see within the 5% to 7% range. We were already expecting margins for PC to go down as we shared that range. But we also were expecting the new businesses, peripherals and services, to grow in relevance to growing mix to compensate for the decline. These were the model that we had a year ago, continues to be the plan. We just need to see how this manages now as we face this new and unexpected economic headwind. Okay. So I think we are at the end of the time. Thank you all for joining us today and for spending the last hour with us. I would like to make a few comments. Clearly, during the quarter, even if we faced significant economic challenges, we delivered solid EPS growth of 4%, and we continue to return capital to shareholders, in this case, was $1.3 billion. We are taking clear actions to mitigate the near-term macro headwinds that we are facing while we continue to drive progress and execute on our long-term growth strategy. Because as we always say, this, as every other, is an opportunity to further strengthen the Company and to continue to build a stronger HP. Thank you.

Orit Keinan-Nahon:

Good afternoon, everyone, and welcome to HP’s second quarter 2022 earnings conference call. With me today are Enrique Lores, HP’s President and Chief Executive Officer; and Marie Myers, HP’s Chief Financial Officer. Before handing the call over to Enrique, let me remind you that this call is a webcast, and a replay will be made available on our website shortly after the call for approximately one year. We posted the earnings release and accompanying slide presentation on our Investor Relations webpage at investor.hp.com. As always, elements of this presentation are forward-looking and are based on our best view of the world and our businesses as we see them today. For more detailed information, please see disclaimers in the earnings materials relating to forward-looking statements that involve risks, uncertainties and assumptions. For a discussion of some of these risks, uncertainties and assumptions, please refer to HP’s SEC reports, including our most recent Form 10-K and Form 10-Q. HP assumes no obligation and does not intend to update any such forward-looking statements. We also note that the financial information discussed on this call reflects estimates based on information available now and could differ materially from the amounts ultimately reported in HP’s Form 10-Q for the fiscal quarter ended April 30, 2022 and HP’s other SEC filings. During this webcast, unless otherwise specifically noted, all comparisons are year-over-year comparisons with the corresponding year-ago period. For financial information that has been expressed on a non-GAAP basis, we’ve included reconciliations to the comparable GAAP information. Please refer to the tables and slide presentation accompanying today’s earning release for those reconciliations. With that, I’d now like to turn the call over to Enrique.

Marie Myers:

Thank you, and good afternoon, everyone. It's great to connect with you again. As Enrique highlighted, we have continued to build on our progress here in Q2, executing on our strategy, delivering solid results, returning significant capital to shareholders and investing both organically and inorganically to drive long-term value creation. Overall demand remained solid, driven by the strong secular tailwinds we see propelling our businesses forward, and we continue to execute on our objectives despite ongoing supply chain and logistics challenges and new macro impacts from the recent round of COVID-related lockdowns in China and the Russia-Ukraine war. Overall, I am pleased with how our teams are meeting these challenges head on and remain confident in our execution, as we navigate this evolving macro environment. Let's take a closer look at the details of the quarter. Net revenue was $16.5 billion in the quarter, up 4% nominally and 5% in constant currency. Regionally, in constant currency, Americas increased 1%, EMEA increased 7% and APJ increased 10%. Gross margin was 20.2% in the quarter, down 1.5 points year-on-year. The decrease was primarily driven by proportionally higher Personal Systems mix and higher costs, including commodities, partially offset by favorable pricing net of currency. Non-GAAP operating expenses were $1.9 billion or 11.4% of revenue, down 5%. The decrease in operating expenses was primarily driven by lower R&D due to last years ramp-up in investments and lower variable compensation, including sales commission. Non-GAAP operating profit was $1.4 billion, and non-GAAP net OI&E expense was $74 million for the quarter. At the key segment level, operating profit grew 6%. Non-GAAP diluted net earnings per share increased $0.15 or 16% to $1.08 with a diluted share count of approximately 1.1 billion shares. Non-GAAP diluted net earnings per share excludes a net expense totaling $152 million, primarily related to restructuring and other charges, amortization of intangibles, acquisition-related charges and other tax adjustments, partially offset by non-operating retirement-related credits, as a result, Q2 GAAP diluted net earnings per share was $0.94. Now let's turn to segment performance. In Q2, Personal Systems revenue was $11.5 billion, up 9% and up 11% in constant currency. Total units were down 17%, driven by ongoing supply chain challenges, lower per unit and the overall macro environment. Despite this, we grew revenue, reflecting the strength of Windows demand, our mix shift towards higher-value commercial categories like mainstream premium and mobile workstation and favorable pricing. Furthermore, to highlight some of the secular tailwinds we have seen in Personal Systems versus pre-pandemic our commercial notebook mix, excluding Chrome, now represents over 60% of our commercial unit mix, up 15 points versus Q2 2019. And in gaming, revenue has grown by over 140% versus Q2 2019. These are significant structural changes in our business. Drilling into the details, Commercial revenue was up 18% year-on-year and consumer revenue was down 6% year-on-year. By product category, revenue was up 3% for notebooks, 28% for desktops and 21% for workstations. We also continue to see strong performance across our key growth areas; including peripherals, gaming and workforce solutions with even more opportunities to drive growth ahead of us. Personal Systems delivered almost $800 million of operating profit with operating margins of 6.9%. Our Personal Systems business has grown operating profit dollars in 17 of the last 18 quarters. This consistent performance is indicative of our strong portfolio, the strong secular tailwinds we continue to see and our ability to deliver results in very different environments. Operating margin improved 0.2 points, primarily due to product mix, favorable pricing and lower OpEx including lower R&D spend due to last years investments ramp-up, partially offset by higher commodity costs in currency. Sequentially, operating margin declined 0.9 points, driven by higher OpEx due to R&D investment, more competitive pricing in several segments of consumer, partially offset by lower commodity and logistics costs. In print, our results reflected our focus on execution and the strength of our portfolio as we navigate the current environment. In Q2, total print revenue was $5 billion, down 7% and down 6% in constant currency, driven by lower print hardware units and lower supplies revenue. This was partially offset by higher hardware ASPs and growth in industrial graphics and services. Total hardware units declined 23%, largely due to continued component and logistics constraints, which we now expect to extend at least through 2022. By customer segment, Commercial revenue declined 4% on a decrease of 17% in units and Consumer revenue was down 12% with units down 24%. Home Print demand remains solid. However, revenue across both home and office was again constrained by available supply. In Q2, the commercial recovery, particularly in the office segment, continued to be impacted by the slower-than-expected return to the office. We did see, however, solid growth in industrial graphics and 3D as Enrique mentioned. We continue to expect a gradual and uneven recovery in Commercial over time, with the overall office market returning to approximately 80% of its pre-pandemic TAM, as we have discussed previously. Supplies revenue was $3.1 billion, declining 6% in constant currency year-on-year. We continue to expect for FY 2022 and over the long-term, Supplies will decline in the mid- to low single-digit range, consistent with the outlook provided at our Analyst Day. In Q2, the decline was driven primarily by continued normalization in home printing as expected, partially offset by the gradual recovery in both office and industrial print. Supplies revenue was also impacted by the China lockdowns and the Russia-Ukraine war. Adjusting for these impacts, supplies revenue was down approximately 4% in constant currency. As part of our contractual business, our Instant Ink services continued its momentum, once again delivering double-digit increases in both cumulative subscriber growth and revenue, while monthly churn continues to remain low at approximately 1%. Operating profit was approximately $1 billion, up $7 billion and operating margin was strong at 19.3%. Operating margin increased 1.4 points, driven by favorable mix and pricing, combined with lower OpEx as a result of lower variable compensation, including sales commissions, partially offset by lower volumes. Now, let's move to our transformation efforts where we have made strong progress and are on track to deliver $1.2 billion in gross run rate structural cost reductions by year-end. Our transformation continues to create new capabilities and long-term value creation. For our sales teams and partners, we have accelerated the selling cycle by transforming the way we configure price and quote HP Solutions for our customers worldwide. Utilizing advanced analytical pricing capabilities with a cloud-based platform, we have enabled the delivery of competitive quotes for HP Solutions in a quarter of the time, delivering a faster and more efficient customer sales experience. Lastly, we continue to optimize our real estate footprint, including 15 real estate actions in the first half of 2022. We are rebuilding and modernizing our key locations, focusing on collaboration hybrid work for our employees. A great example of this is our accelerated actions in Korea to both consolidate our sites and open a new state-of-the-art office and R&D facility, bringing together most of our employees in Korea. Now, let's move to cash flow and capital allocation. Q2 cash flow from operations and free cash flow was $0.5 billion and $0.4 billion, respectively. The cash conversion cycle was minus 26 days in the quarter, a sequential decline of seven days. So free cash flow and the sequential decline in cash conversion days were driven primarily by the decrease in Personal Systems volume and back-end loaded revenue linearity, driven by supply chain delays. Looking ahead to the second half of 2022, we expect to improve our cash conversion cycle by fiscal year-end. Driving our outlook is our expectations for Personal Systems volumes to recover in Q4, which I will provide more color on in a moment. And other operational improvements in our cash conversion cycle, including reduced inventory. As a result, we remain confident in our ability to deliver on our free cash flow guidance of at least $4.5 billion for 2022. Strong capital returns remain a key part of our capital allocation strategy. In Q2, we returned approximately $1.3 billion to shareholders. This included approximately $1 billion in share repurchases and $262 million in cash dividends, and we remain on track to exceed our $16 billion return of capital target by year-end. Looking forward to Q3 and the rest of FY 2022, we continue to navigate supply availability, logistics constraints, inflation, pricing dynamics and the evolving macro environment, while continuing to deliver on our commitments. In particular, keep the following in mind related to our Q3 and overall financial outlook. We are once again raising our full year non-GAAP outlook for FY 2022 as we navigate through a challenging macro environment. We expect currency to be about a 2% year-over-year headwind in both Q3 and for FY 2022, reflecting the recent strength of the US dollar. With regard to the financial impact of the Russia-Ukraine war and the recent lockdowns in China, we are factoring in our best assumptions at this time, recognizing that conditions remain fluid and highly uncertain, with impacts to our top and bottom line results. Regarding Russia, as Enrique mentioned, we have made the decision to stop our activity there and have begun the process of fully winding down our operations. At FY 2021, Russia accounted for approximately $1 billion in revenue. In China, we expect to see a reopening and easing of restrictions from the recent lockdowns beginning in June. For Personal Systems, we continue to see solid demand and pricing for our PCs in commercial with some softening of demand in consumer, driven in part by the macro factors I mentioned earlier, including currency. We expect year-over-year Personal Systems revenue growth through the second half of 2022 with a continued shift towards higher-value categories, including commercial, premium and peripherals. With regard to our Personal Systems supply chain, while we expect to see a gradual improvement in the supply environment, we did experience a supplier-specific disruption late in Q2. That we expect will resolve by the end of Q3, resulting in a sequential decline in Personal Systems revenue in Q3 and a rebound in Q4, more in keeping with typical seasonality. We expect PS margins to remain near the high end of our 5% to 7% long-term range, particularly in Q3. In Print, we expect solid demand in consumer, favorable pricing, disciplined cost management and further normalization and mix as commercial gradually improves through 2022. With regard to print supply chain, we expect similar to Q2, composed shortages and logistics delays to constrain revenue. We expect these conditions to continue at least through 2022, but with some improvement into the latter part of the year. We expect group margins to be at the high end of our 16% to 18% range for FY 2022. For Q3 specifically, given continued hard work constraints, we expect print margin to be above our 16% to 18% range. Taking these considerations into account, we are providing the following outlook. We expect third quarter non-GAAP diluted net earnings per share to be in the range of $1.03 to $1.08. And third quarter GAAP diluted net earnings per share to be in the range of $0.91 to $0.96, which includes an incremental GAAP-only charge of approximately $0.04 related to the wind down of operations in Russia. We expect FY 2022 non-GAAP diluted net earnings per share to be in the range of $4.24 to $4.38. And FY 2022, GAAP diluted net earnings per share to be in the range of $3.79 to $3.93. For FY 2022, we expect our free cash flow to be at least $4.5 billion. We have made excellent progress against our priorities in the first half of fiscal 2022. And I am confident in our ability to continue to deliver on our second half outlook while investing the long-term sustainable growth. I'll stop here so we can take your questions.

Krish Sankar:

Hi, thanks for taking my question and congrats on the strong results and execution in a tough environment. My first question is for Enrique, and then I have a follow-up for Marie. Enrique, on the PC business, it makes sense, commercial is strong. But it looks like desktop did much better than notebooks, both in terms of revenue and units. Can you just help us understand what's happening in commercial between desktop and notebook? And any view on PC TAM, unit TAM for this year? Your competitors spoke about 330 million units, kind of curious what your view is. And then I have a quick follow-up for Marie on inventory. Thank you.

Krish Sankar:

Got it, Enrique. Follow-up for Marie on inventory. Last quarter, you said you're not planning to decrease inventory, and it's kind of elevated in terms of inventory days. Can you give us some color on how much of it is finished goods or raw materials and components? How much of it is actually buildup of materials versus cost inflation? Any kind of color on inventory would be very helpful. Thank you very much

Enrique Lores:

We have said in the past, our medium-term plan is to continue to reduce own inventory. We think we have an opportunity there. And with the component situation getting better, we really think that this is going to be our plan during the next quarter.

Aaron Rakers:

Yes. Thank you very much for taking the questions and congrats on the good execution in the quarter. Two questions, one and one follow-up. First, I'm just curious, Enrique and Maria, if you could kind of dive a little bit deeper into the commercial backlog in the PC segment. What's your expectations of working that backlog down? Is your guidance assuming that you continue to have an elevated backlog? Any kind of commentary on how we should think about the trajectory of that backlog through the back half of this fiscal year.

Aaron Rakers:

Yes Okay. That's helpful. And then the follow-up question is just looking at the pricing trends you're seeing within PSG. Could you help us appreciate how much of it is being mix driven versus your ability to pass through increased pricing from components and logistics? I'm just curious if you can help us understand the effects of pricing.

Enrique Lores:

And in terms of your comment about mix, mix has also a significant impact on pricing. And really, when we -- you need to think about mix, you need to think about the new use models for PCs. PCs are more-and-more used as communication tools, which means customers need more memory, better cameras, better audio. And this is really driving demand towards the richer categories and the more premium products and is really having a significant impact on the overall price -- on pricing.

Operator:

Your next question comes from the line of Amit Daryanani with Evercore. Your line is open.

Enrique Lores:

Yeah. So the performance of the Print business this quarter was really driven by supply. We continue to see demand significantly above supply. And in supply, we are impacted mostly by component availability. And therefore, our focus was on really profit optimization through pricing, through allocation of units. And this is why profitability this quarter was so strong. As we shared before, we expect the supply situation to improve through the end of the year. And as we -- this will happen we also expect that pricing will be normalized, as Marie just explained.

Amit Daryanani:

Understood. And then, if I could just ask you around the non-GAAP adjustments that are being made for the fiscal 2022 guide. I understand you're raising the non-GAAP numbers, but the GAAP numbers that are coming down. So I think the adjustments are $0.45 this time, 90 days ago, that was $0.31. Maybe I don't understand this enough, but could you just talk about what is resulting or what are the incremental adjustments that are being made? Is it restructuring? Is it Russia? And if you could just break that down, that would be helpful.

Operator:

Your next question comes from the line of Toni Sacconaghi with Bernstein. Your line is open.

Enrique Lores:

Sure. So, as I commented before, Toni, we saw a reduction of backlog Q2 -- Q1 to Q2, visibly driven by the ability to ship some of the units at the -- and increase some of the volumes in some specific areas. As we look out through the end of the year, we expect the supply situation to improve, and therefore, we expect to continue to reduce backlog in the rest of the year. In the case of print, we continue to operate also with a high level of backlog. The reduction there was smaller. And we expect that we will be able to start reducing that more significantly in the Q4 timeframe, which is where we have visibility of some of the actions we have taken in supply chain to take more impact.

Enrique Lores:

Yes. So, the comment about growing backlog is more a second half quarter – a second half comment. Specifically, in Q3 we have identified a very specific problem with one of our PC component supplier that is, having some special issues on yield in one other factory. This is going to be impacting our shipments in Q3 for PC. We have line of sight for this to be recovered in Q4. And this is why from a seasonality perspective, revenue in Personal Systems in PC in Q3 will be below Q2. And again, the backlog coming in a second half comment, not a quarter-over-quarter comment. Thank you.

Erik Woodring:

Awesome. Thank you for the quarter -- excuse me, thank you for the question. Congrats on the quarter. If we take a step back, it's been a pretty unique time in the market, kind of the best PC growth in the decade plus short supply, which has allowed you to hold pricing. And then, at the same time, you've been able to work through a multiyear cost-cutting kind of transformation program, and it's clearly showing up in your margin profile, right, pre-kind of COVID period operating margins were around 7% to 7.5%. Right now, they're running around 9% consistently. So, just curious kind of -- is there a way that you can break down the margin uplift between kind of mix and kind of the permanency of the changes that you've made versus temporary factors like pricing that you expect to potentially normalize in the back half of the year and into next year? And then I have a follow-up. Thanks.

Erik Woodring:

Okay. That's really helpful. Thank you, Enrique. And then maybe a question on Print. Go back to SAM 2019, you laid out this business model pivot for the printing business to collect more profits upfront from the sale of printing hardware, while at the same time introducing programs like HP+ to make supplies stickier in certain situations. So, we're now more than two years away from that announcement. Can you just kind of give us an update on where we are on this pivot? How much is left to do, kind of what inning we're in? And then, really how a normalization and kind of supply and demand and pricing dynamics could change or alter your ability to kind of capture some of these higher hardware prices that you've been able to do over the last, call it, two years and change. Thanks.

Operator:

Your next question comes from the line of Jim Suva with Citigroup. Your line is open.

Enrique Lores:

Yeah. Thank you, Jim. So the exposure -- the size of the overall Chromebook business is relatively small in our Personal Systems business. It lends 10% from a revenue perspective and much smaller from an operating profit or margin perspective. So the exposure that we have is relatively small. Shipments of Chromebook this quarter were also small. So this shows that we can really perform in a very strong way of Personal Systems even in there, we have very small Chromebook market. What we have seen during this year, and we started to see it a few quarters ago, and we have talked about this before is a significant slowdown of the Chromebook business in the US in the education segment, we are starting to see some signs of recovery, but the market has continued to be significantly below where it was a year ago.

Operator:

Your next question comes from the line of Ananda Baruah with Loop Capital. Your line is open.

Enrique Lores:

Thank you, Ananda. So the answer is not yet. We haven't -- we continue to see strong demand on the commercial side. We have a strong funnel. So we don't see any signals of weakening of the demand on the commercial side. And this is one of the key drivers of the guide that we have provided for the rest of the year.

Enrique Lores:

Yeah. So two things. One is, from a unit perspective, we expect this year to see a small decline from where the market was in 2021, but to stay at a very elevated level compared to 2019. In terms of units, we expect the market to be in the 320 million, 330 million units in line with what many of the analysts and other companies have published. From a revenue perspective, though, we expect to see growth. We expect the market to grow in the 3% to 4%, really driven by many of the things we have been discussing today, mix between consumer and commercial and a mixed shift towards more premium units in both segments. And that's really what is driving the growth that we expect to see in Personal Systems through the rest of the year.

David Vogt:

Great. Thank you. I have two quick questions, one for Enrique and then a quick follow-up for Marie. So Enrique, you -- both you and your competitors have noted that you're focused on higher-end PCs, including commercial, gaming and high-end consumer as a reason for sustainable growth and better ASPs and mix going forward. But I guess the question I have is the supply chains have started the typical buying pattern and the pricing backdrop how do we know that there is not risk to incremental buyers of PCs coming online when supply normalizes targeting more low-end devices, lower spec PCs give that there might have been some people lining up early in the queue for more richer configurations? And then I have a follow-up for Marie on margins.

David Vogt:

Great. And then a quick follow up from Marie. Marie, thanks for all the color on the margin. Just to follow-up on margin. So you're well above your 16% to 18% range, not only this quarter but in the prior quarter, and then the guide for the third quarter. But if I just sort of analyze the full year guidance, are you intimating that by Q4 of this fiscal year, print margins return back towards the lower end of your long-term range? I'm doing the math correctly and if so is that sort of the way to think about the profitability of that segment going forward that this is sort of a onetime above the range period and that 16% to 18% is more likely the stable environment that we're going to be operating in for the foreseeable future?

Enrique Lores:

Thank you, Marie, and thank you, everybody, for your questions today and for joining the call. I think the first six months of fiscal year 2022 show that our business continues to perform well and that we are entering the second half from a position of strength. I want to especially highlight the performance that we have had in our growth businesses. As I said at the beginning of the call, they represented $5.6 billion of business, well on track to deliver on the $10 billion goal that we shared with all of you in October. At the same time, we really show this gives us strong confidence as we enter in the second half. This is why we decided to raise our EPS guide for the year to reflect that confidence and we are really well positioned to deliver sustained revenue, operating profit, EPS and free cash flow. So really, thank you for joining today and looking forward to continue to speak to all of you soon. Thank you.

Orit Keinan-Nahon:

Good afternoon, everyone, and welcome to HP’s First Quarter 2022 Earnings Conference Call. With me today are Enrique Lores, HP’s President and Chief Executive Officer; and Marie Myers, HP’s Chief Financial Officer. Before handing the call over to Enrique, let me remind you that this call is a webcast, and a replay will be available on our website shortly after the call for approximately one year. We posted the earnings release and accompanying slide presentation on our Investor Relations web page at investor.hp.com. As always, elements of this presentation are forward-looking and are based on our best view of the world and our businesses as we see them today. For more detailed information, please see disclaimers in the earnings materials relating to forward-looking statements that involve risks, uncertainties and assumptions. For a discussion of some of these risks, uncertainties and assumptions, please refer to HP’s SEC reports, including our most recent Form 10-K. HP assumes no obligation and does not intend to update any such forward-looking statements. We also note that the financial information discussed on this call reflects estimates based on information available now and could differ materially from the amounts ultimately reported in HP’s Form 10-Q for the fiscal quarter ended January 31, 2022, and HP’s other SEC filings. During this webcast, unless otherwise specifically noted, all comparisons are year-over-year comparisons with the corresponding year-ago period. For financial information that has been expressed on a non-GAAP basis, we’ve included reconciliations to the comparable GAAP information. Please refer to the tables and slide presentation accompanying today’s earnings release for those reconciliations. With that, I’d now like to turn the call over to Enrique.

Marie Myers:

Thank you, and good afternoon, everyone. It’s great to connect with all of you again. I want to start where Enrique left off in terms of our performance in the quarter. It was a very strong start to the year. Demand for our technology, favorable trends such as hybrid and powerful innovation across our portfolio are driving long-term value creation. And you see this reflected in our Q1 results as we delivered across all of our key financial metrics, including growing revenue, operating profit and EPS. Let me give you a closer look at the details. Net revenue was $17 billion in the quarter, up 9% nominally and 8% in constant currency. Regionally, in constant currency, Americas declined 1%, EMEA increased 8% and APJ increased 28%. Demand remains strong, creating sustained tailwinds across our businesses. But as Enrique mentioned, supply chain constraints remain a top line headwind for both Personal Systems and Print revenue. These dynamics were particularly impactful to our Print hardware results, which I will talk about in a moment. Gross margin was 19.9% in the quarter, down 1.3 points year-on-year. The decrease was primarily driven by increased Personal Systems mix and higher costs, including commodities and logistics, partially offset by pricing, including currency. Non-GAAP operating expenses were $1.9 billion or 11.1% of revenue. The increase in operating expenses was primarily driven by increased investments in go-to-market, partially offset by lower Personal Systems R&D due to partner funding. Non-GAAP operating profit was $1.5 billion, up 1.5% and non-GAAP net OI&E expense was $66 million for the quarter. Non-GAAP diluted net earnings per share increased $0.18 or 20% to $1.10, with a diluted share count of approximately 1.1 billion shares. Non-GAAP diluted net earnings per share excludes a net expense totaling $117 million, primarily related to

Shannon Cross:

Thank you very much for taking my questions. Given the importance of ASP growth in your revenue, can you help us to understand a little bit more about the dynamics behind what’s driving the increases, both in print and PCs? And what I’m thinking is how much of the growth is related to mix, like in PCs going to commercial from consumer and versus sort of how much are the price increases more on a like-for-like basis and they’re kind of positioned to offset inflation? And then I have a follow-up. Thank you.

Shannon Cross:

Was some of it inflation, though, or…?

Shannon Cross:

Okay. And then the second question is just on free cash flow. Going forward, you had a significant benefit from accounts payable. How should we think about free cash flow dynamics as we look through the year? And how are you thinking about perhaps the ability – I mean, what’s going on now in Europe is sort of throwing this all in the air. But in terms of the ability to maybe manage inventory levels a bit better and bleed through some of the excess component inventory you may have. Thanks.

Operator:

The next question comes from Ananda Baruah with Loop Capital. Please go ahead.

Enrique Lores:

Let me – hi Ananda. I will give you, first, a view of what do we think in the market, and then Marie will give you some comments on the guide. I think market-wise, we continue to see strong demand on the PC side. The market projection for this year is that it will be around $200 billion bigger than what it was before the pandemic. And we don’t expect to see the level of growth that we saw in the past, but we think that the market is going to stay at the level where it is today, which is, again, significantly higher than it was before the pandemic. Now Marie will talk about our guide and what we expect to see in our side.

Ananda Baruah:

That’s helpful. And then just my follow-up is, I know throughout 2021, you guys have been putting in some initiatives to improve your positioning for component allocation. And was just wondering what the state of those are today. And do you think you’ll be successful in procuring, so improving your component allocation share as you go through the year?

Operator:

The next question comes from Jim Suva with Citi. Please go ahead.

Enrique Lores:

So let me talk about the situation first on the hardware and then I will talk about supplies. On – from the hardware perspective, shipments this quarter have been impacted by availability of supply. As we shared both in our Investor Day and during our Q4 earnings call, we have a majority of the factories for printers and of our suppliers in Southeast Asia, and those countries were in full lockdown the majority of the fall until December. And therefore, we are seeing now the impact of that situation. Additionally, in Print, we used several components that are ASICs that have been designed by us, where also we are seeing shortages. So as a consequence of both, we clearly had our sales impacted this quarter, and we expect this to continue through the rest of the year. In the case of supplies, the situation has significantly improved. We don’t have any more limitations in terms of shipment. And the supplies business overall performed in a very positive way, similar to what we shared during our Investor Day, so no big deviation from the plan that we had.

Jim Suva:

Great. And then the follow-up about assumptions of return to the office versus pre-COVID levels for printing, what’s your thoughts on that?

Operator:

The next question comes from Toni Sacconaghi with Bernstein. Please go ahead.

Enrique Lores:

Sure. So let me take that one. As I said in the prepared remarks, in the case of Personal Systems of PCs, we saw a decline of backlog during the quarter. It was driven by two things

Enrique Lores:

Yes. So on PC backlog, I will only be a little bit more specific. It is below one quarter, which is where we were, but continues to be very elevated. Maybe the other color I will provide is similar to what I shared a week last – a quarter ago, we are seeing it more concentrated now in some areas of the portfolio like commercial and premium home. This is where the backlog is elevated. And Marie will take the question on guide.

Operator:

The next question comes from Amit Daryanani with Evercore. Please go ahead.

Enrique Lores:

So, I think on the – in supplies, what the performance is for this quarter is in line to the guide that we provided at some in during the Investor Day, where decline that we said we expected supplies to decline low to mid-single digits. And when we look at the rest of the year, we expect that this will continue and be aligned to that projection, Amit. Again, as I said before, supplies performed as we were expecting. Very small deviations, slight reductions or usage in the office side as offices were closed were probably below expectations, but share and price compensated for that. So overall, in line to what we were expecting.

Marie Myers:

Yes, sure. Good afternoon. It’s Marie here. So look, I think at our guide at Analyst Day, we commented that the operating profit flow-through was really a full fiscal year view. So, I’d just say that we’re confident that we will see the total of Print and PS operating profit dollars, that they will increase year-on-year for the full year 2022, though I would just point out, it’s probably going to vary quarter-by-quarter.

Operator:

The next question comes from Wamsi Mohan with Bank of America. Please go ahead.

Marie Myers:

Yes. So just a couple of comments to help you then on the sequential on PS. So as I mentioned, we do see that single-digit sequential decline on PS revenue driven primarily, as I mentioned, around both the ongoing supply chain challenges and the Russia-Ukraine situation, which we also, I think, commented in my prepared remarks. So that’s what’s guiding the revenue. Then on the op margin, as I mentioned earlier, there were some partner benefits from our Personal Systems partners. They’re onetime in nature. Now if you basically sort of exclude those in Q1, that you would get back to basically the PS margin range being at the high end of the range, which is where we anticipate we will – what the results will look like the Q2.

Enrique Lores:

Well, in the – thank you. In the case of Print, really shipments this quarter are really totally determined by availability of supply. So, I really wouldn’t read anything on declines of volumes because this is really totally driven by how many printers we and the rest of the market has been able to produce because it’s not – has not been an HP situation, it has heavily been an industry situation. In the case of Personal Systems, our view and the rest of the industry is that the size of the market this year will be in the 340 million to 350 million units. This is what it was a few months ago and continues to be. We also said that we expect the demand to shift towards commercial. This is what we have seen this quarter. And actually, if you look at our numbers, we grow significantly in both Windows-based PCs and commercial PCs, in many cases, above 20%. So it’s happening what we told the market it was going to happen. And when we look now at the funnel not only in backlog but at the funnel of opportunities we have for the second half in – for the rest of the year in commercial continues to be very strong.

Erik Woodring:

Hey guys. Thanks for taking the question. I think, I want to just follow up on that question and really just ask about the sustainability of PC ASPs. And I ask because I imagine your ability to leverage pricing gets more difficult as we move later into the year and supply improves plus you obviously face more difficult pricing comps. And so maybe just to dig down a little bit more. So, how should we think about maybe PC pricing versus units in the second half of this year? Any color that you can share there? And then I have a follow-up. Thanks.

Erik Woodring:

Awesome, I appreciate that. And then maybe just as my follow-up, you guys have committed to doing $5 billion of buybacks this year. But if I look back over the last quarters, you’ve done more than $1.5 billion of buybacks on average each quarter. So maybe why shouldn’t we think about buybacks and the rest of this fiscal year being – or for the total of this fiscal year being closer to $5 billion or $6 billion? And if they – if $4 billion is a target, would that imply or should we be thinking about buybacks slowing down into the remainder of the year? Thanks.

Operator:

The next question comes from David Vogt with UBS. Please go ahead.

Enrique Lores:

Let me take those questions. In the case of Print, I think we should differentiate hardware versus supply. In the case of hardware, the current shipments are so limited by supply that it had to read any implication on pricing because really what has been driving the number of units we have shipped is the number of units we have been able to produce. We are shipping everything we build. In the case of supplies where we also drive price increases, I think what is important to highlight is that for both ink and toner, despite the price increases, we were able to grow share, which I think is a very important metric that shows that the – from a volume perspective, we haven’t seen any negative impact on driven by the price increase.

Enrique Lores:

And then your question on Chromebooks, let me – as I did a quarter ago, let me remind that Chromebook is a relatively small part of our business. We already said a quarter ago that the backlog for Chromebooks has been basically totally reduced. We are expecting demand for Chromebooks to start growing as we had seen in previous years, in the Q2, Q3 time frame. But at this point, we have enough availability of components on that side that we – and we don’t expect backlog to grow in that space.

Enrique Lores:

Yes. All of it is built into the guide and into the margin projections that we have, of course.

Samik Chatterjee:

Great. Hi, thanks for taking my question. If I can just start on Print first. In the commercial segment, Enrique, you mentioned the ongoing recovery in the office print business as well as the market share increases. Was really curious because I think even when we talk to one of your smaller competitors in the commercial print market, they talk about share increases. So if you can dive into that a bit more, what’s driving the share increase, particularly as you remain supply constrained, what drives longer-term share increases for HP in the commercial print business? And then I have a follow-up. Thank you.

Samik Chatterjee:

Got it, got it. And for my follow-up, I think this might be more for Marie, but the PS margins, I think, for the quarter, you mentioned you’ll be – once we exclude the partner benefits, you’ll be at the high end of the range that you specified, 5% to 7%. But how do we think about the higher cost of components or supply in that number? I’m just trying to think about, does that moderate as you go through the year or you take some supply actions? Is that going to drive that higher component cost to process for longer? How should I think about it? Thank you.

Enrique Lores:

And I think this was our last question, so let me say thank you all for joining the call. As I said at the beginning of the call, we are really pleased with our start of the year. Clearly, the strategy that we have to modernize our core, expand into adjacencies and creating new businesses is growing, and this is reflected in the results that we posted today. And this, of course, gives us great confidence in our ability to grow revenue, operating profit, EPS and free cash flow in a sustained way. And today, before we leave, I want to invite all of you to join me in wishing Marie a very happy birthday because I am sure there is nothing better to do in her birthday than spending it with us in an earnings call. Marie, happy birthday.

Enrique Lores:

And thank you, everybody, for joining.

Orit Keinan-Nahon:

Good afternoon, everyone, and welcome to HP's Fourth Quarter 2021 Earnings Conference Call. With me today are Enrique Lores, HP's President and Chief Executive Officer, and Marie Myers, HP's Chief Financial Officer. Before handing the call over to Enrique, let me remind you that this call is being webcast. A replay of this webcast will be made available on our website shortly after the call for approximately 1 year. We posted the earnings release and the accompanying slide presentation on our Investor Relations webpage at investor.hp.com. As always, elements of this presentation are forward-looking and are based on our best view of the world and our businesses as we see them today. For more detailed information, please see disclaimers in the earnings materials related to forward-looking statements that involve risks, uncertainties, and assumptions. For a discussion of some of these risks, uncertainties, and assumptions, please refer to HP's SEC reports, including our most recent Form 10-K. HP assumes no obligation and does not intend to update any such forward-looking statements. We also note that the financial information discussed on this call reflects estimates based on information available now and could differ materially from the amounts ultimately reported in HP's Form 10-K for the fiscal quarter ended October 31, 2021, and HP's other SEC filings. During this webcast, unless otherwise specifically noted, all comparisons are year-over-year comparisons with the corresponding year-ago period. For financial information that has been expressed on a non-GAAP basis, we've included reconciliations to the comparable GAAP information. Please refer to the tables and slide presentation accompanying today's earnings release for those reconciliations. With that, I'd now like to turn the call over to Enrique.

Marie Myers:

Thanks, Enrique. And hello, everyone. It's good to be back together. And it was great to connect with so many of you following your Analyst Day. I want to start by building on something Enrique said a moment ago. Q4 was a strong finish to a very strong year. It builds on our proven track record of meeting or exceeding the goals we set. And it underscores our confidence in our FY '22 and long-term financial outlook. Let me begin by providing some additional color on our results, starting with the full year. Revenue was $63.5 billion, up 12%. Non-GAAP operating profit was $5.8 billion, up 42%. We grew non-GAAP EPS even faster, up 66% to $3.79. This continues our trend of growing non-GAAP EPS every year since separation. Our $4.2 billion of free cash flow was consistent with our full year guidance and adjusting for the net Oracle litigation proceeds and we returned a record $7.2 billion to shareholders. That’s a 172% of free cash flow. What’s especially important to note is how well balanced our performance is. We are growing our top and bottom-line. We are returning capital to shareholders and investing in the business. We are accelerating new growth businesses and driving efficiencies. This reflects the company geared towards both short and long-term value creation as we enter a new period of growth for HP. This is supported by our Q4 numbers. Net revenue was $16.7 billion in the quarter, up 9% nominally and 7% in constant currency. Regionally, in constant currency

Amit Daryanani:

Thanks a lot. Good afternoon and congrats on a nice quarter. I guess my first question really is on the personal systems side, a very impressive, I think, reversal on the growth profile versus last quarter ago. It looks like it's heavily driven by ASP's. If my math is right, maybe ASPs are up close to 20%. So I'd love to understand, when I look at the ASP uplift, how much of that is just mix because you perhaps had less Chromebooks versus just apples-to-apples price increases? And then how should we think about the durability of that ASP increase as you go forward into the next fiscal year?

Marie Myers:

Sure. Good afternoon, Amit. So, first of all, just to give you some context around ASP's, they're actually up 24% year-on-year and 17% Q-on-Q and what's driving that is really a combination of favorable pricing including some currency, but as you said there's that favorable mix into higher commercial, as well as even a mix shift inside commercial to both premium and mainstream. So we've got less low-end and that favorable mix shift within consumer. In terms of year-on-year, consumers up 11%, driven predominantly by pricing and commercial is up 31.7%, which is a combination of both mix and pricing. And as we've said earlier and I think in our Security Analyst Meeting, we do expect to see some of that favorable mix shift to continue into the following year as well.

Enrique Lores:

Thank you. And this is really consistent to what we -- the strategy that we started to execute two years ago, when we are driving the change of profitability from supplies more into hardware. And as we shared during Analyst Meeting, we have been making very good progress driving that strategy. We have increased the mix of products that includes supplies when customers buy them, what we call profit up from products. We have also increased the percentage of end-to-end systems, what we call now HP+. And we have also been driving a transition toward subscription and service-oriented businesses. That is also contributing very positively from a profitability perspective. So what you see happening is what we said two years ago we were going to drive. We have been making good progress and this makes us confident in the guide that we provided for fiscal year '22 in our Analyst Day and about the guidance we have provided today for Q1.

Operator:

The next question is from Ananda Baruah with Loop Capital.

Enrique Lores:

What we have seen is, I'm sorry to disappoint you is very consistent to what we discussed in our Analyst Day. We continue to see strong demand, especially from commercial customers and we share their office -- as companies are reopening offices, getting employees back to work, they're investing to improve their experiences and therefore they improve investing in PCs and invest in notebooks and desktops. We also are seeing strong consumer demand as the holiday season comes. We are seeing demand behaving as per plan, so no deviations from what we discussed a few weeks ago.

Ananda Baruah:

Yes. Thanks Marie for that. And then, I guess the follow-up is on the commercial side, any distinction to make what you're seeing between two enterprises small medium business, small medium business has been a good chunk of your business for a while. And so any distinction to make there between the center of demand between those two? Thanks.

Operator:

The next question is from Toni Sacconaghi with Bernstein.

Enrique Lores:

So in terms of PC backlog, it remains at a very elevated level, Toni, very similar to where we were a quarter ago. So, no major changes. It continues to be similar to what you saw despite a quite a strong business that we have created this quarter. And then, in terms of print, you are correct, print hardware is where we have seen the major supply chain limitations, largely because of the factory lockdowns in many Southeast Asia countries, which is what we shared during the last week. So no news here. And part of this also elevated but is lower than what we have on PCs.