Q4 2019 Earnings Call
Good day, everyone and welcome to the fourth quarter 2019, HP Inc. earnings Conference call. My name is Gary and I'll be your conference moderator for today's call. At this time, all participants will be in listen only mode. We will be facilitating a question and answer session toward the end of the car.
Spreads should you need assistance during the call. Please signal a conference specialist by pressing the Starkey followed by zero.
As a reminder, this conference is being recorded for replay purposes.
I would now like to turn the call over to bet, how head of Investor Relations. Please go ahead.
Good afternoon, I'm back how head of Investor Relations for H.B. I like to welcome you to the fiscal 2019 fourth quarter earnings Conference call with Enrique Lord <unk>, President and Chief Executive Officer, and Steve Filer, Hps Chief Financial Officer.
Before handing the call over to Enrique Let me remind you that this call is being webcast.
A replay of the webcast will be made available on our website. Shortly after the call for approximately one year.
We posted the earnings release and the accompanying slide presentation on our Investor Relations website at Investor that HP dotcom.
As always element to 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 and the earnings materials relating to forward looking statements that involve risks uncertainties and assumption.
For a discussion of some of these risks uncertainties and assumptions. Please refer to H.P. FCC reports, including our most recent Form 10-K and Form 10-Q .
H.P. assumes no obligation and does not intend update any such forward looking statement.
We also note that the financial information discussed on this call reflects the estimates based on information available now and could differ materially from the amount ultimately reported an h. piece Form 10-K for the fiscal year ended October 30, Onest 2019, and HP other SEC filings.
During this webcast unless otherwise specifically noted all comparisons are year over year comparisons with a corresponding your though 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 todays earnings release for those reconciliation.
And now I'll turn it over to Enrique.
Thank you Beth I'm, thank you for joining us today.
It's pretty that lever I know, there's strong earnings quarter, reflecting this thing for a full body innovation and execution that brokers were making their games that were strategic priorities on that most people value creation engine are close our company.
In Q4, we grew revenue two person in constant currency, we go non-GAAP operating profit dollars five person.
We the lever non-GAAP EPS of 60 cents.
I think he's well if you live in person and I, both our guy that Brent.
This represents the ninth consecutive quarter, where we have grown revenue non-GAAP opioid dollar a non-GAAP <unk>.
The fourth quarter capped off a very solid year, which we exceeded our targets for non-GAAP EPS grew from free cash flow.
Our strategy is working well we are confident about our business outlook hurting seem to fiscal year 20.
For the full fiscal year nine team, we grew revenue two person in constant currency, our third consecutive year Oak Grove.
We grew nongaap bps, 11% with double digit increases for the last two years.
We generated $4 billion being free cash flow.
Both our full year outlook.
I will return, 85% over that who share holder through share repurchases and dividend.
We continue to lead our core markets, we strong disciplined execution, finishing the year shipping ratably well I mean, everybody for PC unit on two out of every five printer.
These results demonstrate how do we have multiple levers to drive operating profit dollars trying to create shareholder value.
And I want to be very clear our focus remains on creating value for all of our shareholders and delivering for our customers pardon live and employees.
I have great color. If you then seem that strategy that we shared but that was securities finally made in.
These confirmed by the progress we have already started to make into five key strategic moves I laid out.
Let me recap each of them probably share initial examples are the progress we are making.
Well first move to implement him I knew operate the model on driving digital transformation.
Well in November 1st we went live with how about new operating margin and the creation of a single commercial organization to simplify our go to market structure.
We have taken out the regional LNR, although conversation.
These helps us to reduce cost.
Accelerates decision, making on be closer to customers.
We also introduced a new business management system to streamline accountability.
Take on where they leave anything new compute experience.
HP, he's the leaving their best innovation even market.
Recently, we launched our latest commercial notebook they lead Doug I'm sorry.
We saw an old troubled ice cream five minutes P. show to view privacy. These device. He's purpose built for the more their workforce, which the month flexibility to work anywhere.
It is also there was first laptop made you seem osha inbound plastic reflecting our continued commitment for environmental sustainability.
It's I know that example, well how are we continue to set new standards in their PC category.
In addition, we continued to strengthen our commitment to security with acquisition bromine an innovator in main point security.
How about a belief is that every device decision he says security decision.
With Birmingham, we will be able to provide comprehensive protection against their most sophisticated malware and enhance our field, where barrios security layer.
Third we are evolving print business smoking.
I work on third party business continued to grow with MPS and instant ink heat up double digits.
And with over 5 million subscribers they momentum in instant ink continues to build.
Are the same time over a big Inc., some big toner products extensive they roll out launching in Latin America and Central Europe .
Importantly, they knew transactional business nor did we introduced some with office customers are either afflicts people or a full end to end H.P. system is on track to launch new products by the end of fiscal year twin peaks and remember these mother will evolve overtime.
Fourth we are expanding our industrial business.
You can go fix we see steady growth in pay just printed.
In fiscal year nine team.
I'd on digital manufacturing, we more than doubled the number of parts produced with over 80 million final production parts, how close are widening range of applications.
We remain on track to double the number of parts by the end fiscal year 20.
And we just had Oh socgen produced 10000, I'm pretty sure metal parts in just a few weeks to support the launch of that I'd see electric vehicle.
And finally, we.
We are executing on our restructuring.
We have initiated a voluntary early retirement program in the United States.
How does that take rate increases my confidence in our ability to the lever when our savings goals.
Let me know make a few comments on our business segment performance.
In Q4.
I don't know systems delivered another strong performance of revenue operating profit timeshare girls.
Revenue grew 5% in constant currency and operating profit increase.
48%.
These results reinforce the strength of how about innovation and disciplined execution against our started.
We continued to outperform the PC market with broad based growth across all regions on product category.
In calendar Q3, we grew faster than our competitors.
Gaming 1.2 points of share.
Well, we're proud of PV cells shooter game continues to be an outcome not an objective.
We are delivering these resold V sprite <unk> ongoing industry constrained on CP you capacity.
We talked now expected to continue into the first half of 2020 and to be Modine Puxin in Q1.
Turning to print we continue to execute our started.
In Q4 total revenue declined 5% in constant currency.
Why do we had anticipated supplies revenue remained so.
We are executing against both the operational and strategic plans, we laid out in prior quarter.
And as we head into fiscal year 20, we expect our new commercial organization will drive better global best practices and consistency in for place execution.
In fact elements of the design and implementation of the new commercial organization right explicitly focused on addressing some of their operational issues on leadership changes in EMEA.
I always maximizing the value of our installed base <unk> core objectives.
We are driving preference for HP original supplies, we thurgood its marketing campaigns that ensures that customers and this time quality sustainability on security benefit Buffy original supplies compared to the alternate.
We expect the combination of fees actions to show improvement as we get farther into fiscal year 20, and we remain focused on maximizing the value of our installed base.
In graphics.
We recently closed another key when we see Buck flexible packaging for an additional 24 HP indigo digital presses.
They continue that disruption for the global flexible packaging market.
Looking at Citi Fund digital manufacturing, we finished the year strong.
Our business continues to grow on the market acceptance of our new industrial 5200 solution has been positive.
We are expanding.
Our alliance ecosystem I'm building in production applications across key verticals, including automotive industrial consumer and health care.
I am pleased with our progress I look forward to delivering even more disruptive solutions in fiscal year 20.
In closing, we delever another good quarter, demonstrating how our track record of execution.
We usually south of that programs, we are making give me confidence in our strategy and the upside opportunities HP has for even greater value creation.
Our plans to advance these concerns phone provide us we sleep powerful engine of value creation and supports our clear and compelling investment theses.
We believe that they powerful combination of our scale trying to reach an incredible brand combined with our track record of execution and innovation will create significant value for our customers and our share holder.
Now before I turn the call over to Steve. Let me note that we will not be expanding on our previous probably comments with regard to see dogs proposal.
Accordingly, we ask that you. Please keep your questions focused on that business and our resellers to be into Q and a portion of these calls, but who will not be commenting on zito fortys proposal.
No I will turn it over to Steve to go through more detailed and provide our financial problem.
Thanks Enrique.
Q4, it was a solid finished at 49 team, where we once again demonstrated our ability to consistently deliver company results posting growth in revenue non-GAAP operating profit and S.
Before diving further into Q4, let me quickly recap F 119 for the full year.
We grew revenue.
non-GAAP operating profit dollars faster than revenue and we grew non-GAAP EPS even faster.
These results show the strength of our financial model.
For the full year constant currency revenue was up 2%.
non-GAAP operating profit dollars grew 3% with operating margin rate expansion in both print and personal systems.
Print grew margins by 10 basis points to 16% well P.S. grew 120 basis points to 4.9% both within our guided ranges.
We delivered non-GAAP EPS of $2.24, an increase of 11% and above our guided range.
We generated $4 billion, a free cash flow ahead of our full year outlook of at least $3.7 billion.
And we returned $3.4 billion were 85% or free cash flow to shareholders.
Importantly, we delivered these results while investing in our business for future growth and efficiency opportunities.
Our foundation is strong, including our balance sheet.
We have multiple levers to create value for our shareholders.
This is what we said at or security analyst meeting and this is what we intend to do.
Overall, we're pleased with our full year results, despite more challenging industry macroeconomic and geopolitical dynamics.
Now, let's look at the details of the fourth quarter.
Net revenue was $15.4 billion flat year on year are up 2% in constant currency.
Regionally in constant currency CPGA grew 7% Americas grew 1% enemy yet was flat.
Gross margin was 19% up 1.4 percentage points a year on year, driven primarily by disciplined execution and improved rate and personal systems.
As well as improved rate in print supported by higher hardware gross margins.
non-GAAP operating expenses were $1.8 billion up 11%.
Driven by increased investments for both growth and efficiency, including investments to drive future revenue and innovation as well as investment in each piece digital transformation.
non-GAAP net R&D expense was $60 million for the quarter.
We delivered non-GAAP diluted net earnings per share up 60 cents up six cents or 11% the dilutive share count of approximately 1.5 billion shares.
non-GAAP diluted net earnings per share excludes amortization of intangible assets up $21 million.
Acquisition related charges of $21 million restructuring and other charges of $105 million as well as non operating retirement related credits of $14 million.
It also excludes net expense of $378 million for tax adjustments.
Net expense is primarily driven by the termination of our tax matters agreement with Hewlett Packard enterprise, partially offset by other tax adjustments.
As a result in Q4 GAAP diluted net earnings per share was 26 cents.
At the segment level.
In personal systems, we are again very pleased with our results.
Revenue in the fourth quarter was $10.4 billion up 4% were 5% in constant currency.
By customer segments commercial revenue was up 8% and consumer revenue was down 4%.
By product category revenue was up 12% for workstations up 5% for desktops and up 2% for notebooks.
The team continued to successfully manage our overall product mix as commercial demand remains strong on navigating a softer consumer markets.
Personal systems has been consistently delivering profitable growth and share gains overtime.
HP outgrew the market in calendar quarter, three with strong execution.
Each piece specific innovation and a focus on exceptional partner and customer experiences.
In addition, we see opportunities to improve our portfolio mix overtime in areas of premium displays and accessories and services.
For example, this quarter our revenue in retail solutions business and gaming along with our services orders all grew double digits.
Q4 operating margins remain exceptionally strong at 5.3% up 1.6 points year on year.
The large increase was driven mainly by the team's continued execution of our strategy balancing the industry's various puts and takes it remains disciplined and a favorable commodity cost environment.
Operating profit was $556 million up 48% from the prior year.
In print the business performed generally in line with our expectations for the quarter.
We continue to deliver leading customer experiences big progress in or contractual offerings incrementally shift more profit to hardware and address our near term operational challenges in EMEA.
Looking at the details Q4 total print revenue was $5 billion down, 6% nominally and 5% in constant currency.
Our operating margins were down <unk> 0.4 points to 15.6% due to lower supplies revenue.
Commercial hardware revenue was down 2% and consumer hardware revenue was down 10%.
Total hardware units were down 9% driven by declines in consumer units, which were down 10% with commercial units down 1%.
Fourth quarter supplies revenue was $3.2 billion down 7% in constant currency again, driven by declines in EMEA.
We're making progress on our operational improvement plans and we've seen a significant reduction in tier one and monitor tier two channel inventory dollars in EMEA throughout the year.
Overall tier one channel inventory levels remain below the reduced to ceilings.
We continue to make progress under strategic plans to evolve our business models, we're seeing success in contractual as we grew both management service and instant ink this quarter.
Importantly, we remain under indexed in contractual and are pleased that we continue to outgrow the market.
Let me now turn to our transformation efforts and specifically our cost savings opportunities.
At Sam we described our plans to generate approximately $1 billion of gross run rate savings by the end about flight 22.
And that we continue looking for more opportunities.
In Q4, we announced a voluntary early retirement program in the United States.
More than a thousand participants have opted into the plant, which will be effective through the course of the year.
This take rate adds to our confidence in delivering both the f. like 20, it overall plan savings targets.
Turning to cash flow and capital allocation.
Q4 cash flow from operations and free cash flow were $588 million and $392 million respectively.
We generated $4 billion in free cash flow for the full year.
In Q4, the cash conversion cycle was minus 31 days.
Sequentially, the cash conversion cycle declined to five days in line with normal seasonality.
The six day decrease in days payable outstanding a two day increase in days sales outstanding and a three day decrease in days of inventory.
We've returned $461 million to shareholders through share repurchases and $236 million via cash dividends in Q4.
For the full year, we've returned $2.4 billion to shareholders through share repurchases and $1 billion via cash dividends.
Looking forward to Q1, and that's why 20 keep the following in mind related to our overall financial outlook.
We expect that the macroeconomic conditions will remain dynamic as they are today and we expect our end markets remain competitive.
We're expecting currency to have about a 1% year over year negative impact.
Specific to personal systems, we expect commodities to be significantly less of a tailwind and that's why 27.9 team, especially in the second half.
We now expect industrywide CPQ supply constraints to persist through the first half of 2020.
In Q1, specifically, we're anticipating a larger revenue impact then in Q4, However, we expect our mix to shift to more profitable units, which should largely mitigate the profit impact.
In printing, we're assuming a year over year unit market decline driven by the home market.
As a reminder, we're deliberately not chasing share, especially as we raise hardware pricing and focus on profitable growth.
As described at Sam as we progressed through the year, we expect the net benefits of our transformation cost savings and other operational changes to begin to materialize.
In addition for the full year, we expect our non-GAAP tax rate, which is based on our long term non-GAAP financial projection to be 16% in that fly 20.
Consistent to what we communicated in October we expect to return at least 75% or free cash flow to shareholders, an f. why 20.
As we view our shares as significantly undervalued.
Taking these considerations into account we are providing the following outlook.
Q1, 20, non-GAAP diluted net earnings per share to be in the range of 53 to 56 cents.
If you went 20 GAAP diluted earnings per share to be in the range of 39 to 42 cents.
We are raising our full year fiscal 2020, non-GAAP diluted net earnings per share to be in the range of $2 and 24 to $2.32.
And full year fiscal 20, GAAP diluted net earnings per share being the range of $2 to $2.10.
Operator, we can now open the call for questions.
Thank you and we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
If you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then too.
We also asks that you please limit yourself to one question and a single follow up.
And our first question are today will be Amit Daryanani with Evercore. Please go ahead.
Yes, Thanks, guys I have <unk> question and a follow up on the first one I guess on supplies Enrique Yeah, I don't want to use would stabilize but it'll be being down 7% of thing for a couple of quarters in a row now up do you think we're starting to hit a bottom over here and how should we think about the supplies trajectory as we go through fiscal 20, a in any feedback.
But from your customers of suppliers like as broadly in terms of the business model transition on the preference to Javier.
So let me give fifth let me go to frame day program that we are facing mix, what blight and then it will provide some more data about what do we see happening in the future like we have shared in that but we have to each other than just from the supply side. The Wi Fi would we go like that the challenge even by the growth of clones because.
The lower pricing pricing on the taxes are they kind of to the online space.
But we also have an operational challenge in EMEA, even by the let me see ability we had those time even through the end them one of the money to our tenant combined we they agree humans, so that clone competition.
And we're making good progress addressing both problems when they said they get tight we announced how about plan in the security analysts meeting two times hook them up like modem, but it would have been into services accelerating that goes can begin come back to really an emerging Guernsey I'm not being don't make here studies seem to have those oh, what then.
And on model into both front end to end, what afflicted with more than.
Well go but as you know tight we have also made good progress, reducing our inventory accelerating our growth online.
Getting better visibility over they even toadying tier twos and as we said in the prepared remarks, changing a lot of control processes to make sure that we have their business management processes in EMEA.
Okay.
Yes, sure I think just to start as I've said many times our focus remains on operating profit dollars across the entire print ecosystem, but as it relates specifically to supplies up Enrique mentioned operationally, making good progress. We're seeing good indicators are strategically we're taking the right long term steps.
Q1, specifically I guess, what I'd say, we're planning prudently therefore plant in Q1 that can be more in the range of where we were in in Q4, and that's embedded in our outlook and have confidence in the plan I'm through the remainder of 20 and there's things that we view is tailwinds, a we're shifting more of our business country.
Our actual based models and that's across both home and office office and so that's that's stickier higher share revenue for US. We expect continued to grow our industrial businesses across graphics and three D. And is that Rick you mentioned, we're making the right operational changes a in EMEA, but also a globally with the new commercial organization I, obviously, we have some office.
That's a as you're aware we have declines in the installed base in home, we're very well aware of that and obviously need to mitigate those declines and also the challenges we've discussed in prior quarters on the aftermarket sure of supplies. So we've got some pluses and minuses, we had through the rest of the year and I guess kind of that's how we view.
Supply trajectory for F lightweight.
That's really helpful and I guess my follow up Steve for you.
4 billion free cash flow. This you're actually me impressive I think was better than what you guys were targeting up can you just maybe bridge. This to me I never want Hot you know 4 billion in fiscal 19.3 billion in fiscal 20 kind of what are the puts and takes and I'm as you've been really due to understand how much of the delta. We are as transitory in nature was a structural that'd be helpful. Sure.
So I've been a lot of confidence delivering at least $3 billion and that's our outlook for halfway 20. If you just look back over the past four years, we've averaged a little bit over three half billion each year and this year in particular, we do have a headwind primarily as it relates to restructuring of roughly $400 million as emission Sam there's some.
The other onetime favorabilities, we saw enough when 19 that we don't expect to repeat.
That being said given where we ended cash conversion cycle went out why 19.
I would view CCC is actually a help year over year, our outlook for F. Why Twentys is mines three three days and we finished 2019 and minus 31.
Well need to see how the P.S. volume plays out in the second half and I would note that the seasonality this year and P.S., maybe different given some of the industry dynamics.
But all together or get high degree of confidence and delivering the at least $3 billion on it.
The next question is from Shannon Cross with Cross Research. Please go ahead.
Hi, Thank you for taking my question I I know you talked you said you want to talk about Jack someone asked that specifically, but any color conversations you've had back and forth and the letters couple of times, there's been I mentioned that strong balance sheet and share repurchase. So I guess, maybe can you take a minute can you just talk about how you view youre.
Hi capital structure. It uses of cash and you know I don't know your your thoughts on sort of Blair, where investors are Atlanta, where the board. It's what the board just thinking he says.
At the follow up thanks.
And maybe just for starters I do want to repeat that maybe some of my comments at Sam and then truth.
Talking about where we are is you're aware, we did update our long term return of capital targets and our screens, meaning to return approximately 75%. That's her long term target and really this is about a steady return profile for investors and supporting our business strategy.
Perhaps why 20, specifically, we're targeting a at least 75% return and that was he will he said the time given our stock price significantly undervalued the business and we have confidence.
In our outlook.
We also indicated that our board approved an incremental 5 billion share repurchase authorization. So.
We do have the flexibility to be a opportunistic.
Kind of bring it back up to I guess, the <unk> question on capital allocation, which we do view as a extremely critical management responsibility and in our framework will remain disciplined we have evaluated a well continue to evaluate ways with our balance sheet to create.
Additional shareholder value that could include M&A. It could include additional return of capital as always we'll we'll compare the options using return risk adjusted view of each opportunity.
Oh, Yes, let me emphasize a computer and do we have seen our plan. We explained there were 38 doing that he can you give you. Another meeting, we're making progress we already come thing or what our ability to create value for shareholders. We t.. So keep an eye on anything.
Thanks, and then maybe if you talk a bit about the athree market, what you're seeing their competition and how some of your initiatives there going thank him.
So it's a key element of our can talk to other plan and I take hitting the premier prepared remark, we're making very good broken in a flat market. We are growing double digit funny, we focus what I think when it makes me we have grown quite the same where the Americas. He's been flat so very good broken.
And I think these he's really important because we look at their future <unk> when they needed to change their book you need to have to continue to expand unchanged it'd be whose mother go any contactless is critical for us going in Fort worth on these really what our focus here and we really are what focus will continue to be in coming quarters.
Your next question is from Toni Sacconaghi with Bernstein. Please go ahead.
Ah yes. Thank you I have a question on a follow up as well.
I was wondering if you could comment specifically on.
Channel inventory over the course of this year. So specifically if I were to look at just a year ago versus today.
How significant was your drawdown in channel inventory in terms of weeks and what impact did that have.
On supplies revenue growth this quarter.
This year excuse me in fiscal 19, and do you believe that supplies revenue growth will be better in fiscal 2019, and all to my follow up after.
So.
I'm, assuming this is about the supplies a a channel inventory and actually on her broadly slumming something kind of comment on where supplies channel inventory went this year. So throughout 2019, we have reduced our channel inventory dollars by over 100 million. This is more than what we initially estimated.
So we continue to make good progress.
This includes boot tier one and parts of tier two.
Note that we don't have complete visibility into the entire eco system and so things are getting better.
We do know at the same time, the EMEA market has softened a so it's it's hard to bifurcate or specifically quantify.
How much of that channel inventory reduction was a result of starting the year off and high position versus what was happening in the market marketplace, where do you should think about it is at least 100 million dollar a channel inventory reduction on a year over year basis.
As I mentioned, you know as it relates to F. why 20.
We do feel like there's things that are going our way from the contractual models industrial businesses and the operational changes we've made but we also have headwinds and so we have to managed for the headwinds around the home side have to manage the headwinds around ensuring we're protecting our share as much as possible. So I think those are all factored into how.
How we're thinking about a f. why 20, we're taking a very prudent view a and that you prudent view is factored into not just our Q1, but her overall f. why 20 outlook.
Okay. So no explicit comment on whether up or down relative to fiscal 19 in terms of what's baked into your guidance today.
As I said I think we've got some some headwinds and tailwinds on what we're driving is operating profit dollars in our print business.
Obviously supplies is a department that so is the shift more to hardware we saw our hardware gross margins expand in Q4 as an example on adding more services the portfolio. So altogether a is what we're driving to focus I hope he dollars versus just supply specifically.
And then just a follow up you you've stated repeatedly on the call that you believe your shares are undervalued and that you outlined a highly credible.
Strategy at Sam, but prior to the Xerox announcement, the stock has traded at $17 or or last since the securities analyst meeting.
And so I guess my question to you as what is it that you think you see that investors are missing a given where the stock at traded at following Sam.
And if you really were.
So confident that the stock has been structurally undervalued throughout the year why did your Sam plan not.
Include Youre deciding to take on.
And much more aggressively repurchasing shares.
Well, let me start than do here I think they would come from and I think they keeping that we see Tony a gap between the quota in value of this took a bit net present value for their cash flow projection that we have you know our plan.
And this is what would I owe a comment then think about being undervalued.
What do we have proven discourse that and we've proven that but he said we have.
Yes, I believe he to execute and that we deliver on our commitment I know what expectation is that by executing every quarter on meeting their work island, we wouldn't be seen that got to be reduced.
Maybe just to add to that.
Well, we did say at Sam we did have a change in terms of our fiscal year 20 return of capital, where we communicated that we expected return at least 75% and also announced an incremental authorization of share repurchase from the board of $5 billion to give us the flexibility.
An opportunity to repurchase more shares to know in in Q4, we did have additional material nonpublic information I think that's that's obvious now and so we were not is active in the market as we wouldn't like to them.
Your next question is from Katy Huberty with Morgan Stanley . Please go ahead.
Thank you. Good afternoon, how are you thinking about first quarter 20 revenue performance first as normal seasonality given a intel comments about component constraints 10 in your comments about not expecting an improvement in supplies rate of decline and then I've a follow up.
Yeah. So we are assuming that the CPQ supply I will constrain our revenue in Q1, and if you think about it on sequential basis sort of in personal systems business. We would expect to have declined from Q4 to Q1 above the normal normal seasonal patterns that being said.
Well this is more of a revenue impact that's been profit impact for the quarter is we'd expect our mix should be better.
Okay, then just thinking more broadly over the course of fiscal 20, Steve you had mentioned that.
You see that potential for a different seasonality than in the past.
How long are you expecting that that's PC market strength essentially flat.
With that when 10 upgrade glasses that said that continue well into the first half of the era.
And how do you see seasonality falling off in the in the back half as as customer is complete does that phrase.
Yeah, caveat I seem to the seasonality photonic here, he's going to be impacted by the availability of CP use what we know now he that availability is going to be constrained for the fifth pool huh.
And therefore do would be having an impact on the seasonality, we do they say going into effect.
So this is something that you really should Harvey mine, but you'll be their projections for it makes here.
And as it relates then to the though wins have been when 10 refresh it could be that these current supply constraints actually indeed help prolong the win 10 refresh and so there's a lot of dynamics going on and that's why I think seasonal patterns are likely be affected both from a supply but also on.
The potential extension of the win 10 refresh.
The next question is from another borough with loop capital. Please go ahead.
Hi, good afternoon. Thanks for taking taking my question has a question follow up as well just just sticking there's needs some of the distributors actually believe with regards to withstand the PT pp Ellington refreshed that there's actually a long way to go for a small and medium business customers, which the meaningful part of your customer base.
Not just shipped seven related but related to did they said just kind of put off put up larger purchases as long as they possibly can you you have enough visibility 18 to agree with that he would disagree with that you and then add the follow up as well. Thanks.
I think in general we would agree with a view I mean, there's a large installed base with P.P.C.S more than four years old.
And our assessment.
You know were little over third about a third of which are still on when seven so so there's an opportunity for upgrades, there's an opportunity for upgrades, we're seeing and Alex described to set at our analyst meeting that you know Pcs are being used by this generation versus a prior generations and they're also using them for.
Specific experience has been so we see the Tam and our ability to gain share is a good opportunity not dimension and our ability to continue improving our mix, but the short of it is is we still think that there's some life here on that when seven to win 10 free ship when seven a winton reflects that will extend.
I don't I know that Havent Fotis, clearly I think they can be new uniformity innovation.
Ability to execute proving that have allowed us to go faster than the market.
He's wasn't aspect to continue to do going forward.
That's really helpful guys and just as a quick follow up you mentioned new <unk>.
Sure I'll check printing, a new miles out by the end of Bob Yes, but I think you think you actually had 20.
So at could you clarify that that's physical plenty of calendar 20, new models for the job, but for the new printer model and the print out new harvesting in front of model.
Can you do five that there's still plenty of Cowen there and then it just how does that fit in I guess the broader question how does that they didn't you guys being able to really.
Making impact that go with the business model shift waiting for those new models. Thanks. So let me start from the second question and then I wouldn't go back to that details for the fifth.
But we said we'd set doing some that change of business motherly bring even by three different victors first he this shift into services both into managed print services and instant ink.
These office I better value proposition to customers and if he's got a change that we thought being diving for sometime in the past and where do we have going though but they did.
That's one element of the change he's that go in emerging countries, well, they're big Inc. beak Tunica equity.
Begins I'd be any money there bucket for sometime we are growing and we are the only company that over a big stone is solution and we kind of continue their love. These solution doing the last month.
I'm only the last part that they change he needs even by the new model for transactional customers.
These new model as you said, we'd be available in that market or they have a year duty my wife cutting the Q4.
Your next question is from Matt Cabral with Credit Suisse. Please go ahead.
Thank you.
Enrique maybe to pick up on your last answer.
You mentioned the initial rollout is began can big toner another emerging markets just wondering you're talking about what the initial customer and competitive response has been so far and just how you're thinking about the geographic rollout of that model more broadly across your portfolio.
Sure. So they have reception has been positive, but as I said before beginning has been in that market for sometime and we've had been growing our share big going are you talk I think what he said we are creating and we started that they launch a few months ago and as we go into more countries. We continue to see that growth reception is very positive because he endoscope.
He is usually consumption east hi, we've have lower share or did you know supply and therefore for us, it's a better modem, but any sort of sub it they're more than four for our customers.
Thanks, and then Steve on personal systems margins are once again above 5% in the quarter. Just wondering if you could bridge how much of the year over year improvement was the tailwinds from component pricing versus just other underlying improvement and just how we should think about that impacts from component pricing as we move through fiscal 2000.
Yeah, It's it's fair to assume that some level of the profit margin rate and dollars did come from that but it really is on the backs of how we execute or a strategy and overall pricing discipline. There's a lot of puts and takes time to pricing, obviously commodities have been favorable for us.
Overall, a currency has been a headwind for us and so as you take that on consideration in addition to the competitive dynamics.
It's hard to specifically quantify how much of that sort of exceptional performance was was due to the commodities.
As we sort of think about F. Why 20, and certainly even from Q4 Q1, we'd expect the commodity costs to be a bit more stable and therefore I don't expect as much tailwind in Q1, and certainly as we entered into second half as we saw this year that being said.
We continue to have a more structural opportunity to improve our mix and again the team deserves a lot of credit for many disciplined on the overall pricing strategy.
The next question is from Aaron Rakers with Wells Fargo. Please go ahead.
Yeah. Thanks, just kind of building on that last question I've, a follow up as well you know thinking about you know setting component pricing to the side and thinking about the mix shifts as a business. It does look like Youre. Your ASP erosion on particularly your notebooks, that's kind of accelerated here a little bit I'm, just kind of wanted to understand how.
I would think about the mix shift dynamic underneath of that any metrics you can share of how successful you then in terms of mix shifting within the PC portfolio, and where you think that the biggest incremental levers are to continue to see that mix shift going forward as as component pricing starts to stabilize and potentially whether or not we should think about asps on a blue.
On a basis moving higher going forward on PC.
On a full year basis mix has definitely been a tailwind for us in Q4, specifically and as you point out a notebooks, but we did see an ASP decline that's driven by FX. So that's a certain part of it.
At the total principal comes from P.S. equivalent to about two points and then rate was two points. When we when we look at the rate specifically and I touched on this my prior comments, but the overall industry <unk> pricing adjustments in the market due to the commodity cost dynamics.
In certain product categories like notebooks.
Pricing is also dependent upon the supply a availability that you got and so all that together is is really what drove the S.P. are down year over year in Q4 in terms of upside potential I'd say, we view and a significant overtime.
And when we think about mix the good news for each P is we're under indexed and such a favorable parts of the PC marketplace. We think about displacing sat accessories, you think about premium categories in gaming, which we grew double digits. This past quarter, you think about services.
And so all that we view is more structural long term tailwind for us what are the near term yeah. We're facing so many dynamics Intel being another one example in and the overall supply that we got so but when we think long term a lot a lot of potential upside on on.
Our our mix as we can continue to drive these growth initiatives.
Yeah, Okay, that's perfect and a as a follow up kind of that Intel comment you know that the CP you shortage situation kinda persisted for much longer than what I think anybody would have expected I'm I'm. Just curious if you know how you guys have kind of thought about you know mitigating that impact in the portfolio. You know there there are seemingly more compare.
Much of alternatives out there in the CP you market today I'm, just curious of how how you see or what you think the explanation is for the CP, you shortage and whether or not there's other ways to potentially you know bridge the impact of revenue here, which seemingly looks like it's going to persist here as you say through the first half 2020 at this point.
Yes, you're right that that we have been do situation with what about a year now and as I said before we expected to continue for probably at least two other important but seemed a question about their wives plenty of other question to ask to into them don't want what I can tell you, though he says we continue to be committed to.
Those multiples GPU providers, we're working with other vendors, we have been going to me so for the accordingly, but didn't really still over the last part of our portfolio and that's what would it does show do we need to navigate through those on and manage our business that way and just one other mitigation factored I'm repeating my earlier comment, but it's important.
To reiterate that is Oh, we do expect to better mix of units, which should help mitigate the profit impact of this while it may be revenue I'm less so on the bottom line.
He we are running out of thing, though so I want to think everyone for joining us today on taking the time to be here and they like to <unk>.
<unk> for high they compete instead, we have you know where study on that moved people live instead, we have to create value.
We are we have been then we will be we live in managing costs under investing to create long fair value.
And we know how to manage through the Korean dynamic, which is what exactly what do we have been doing doing that ideas.
We will continue to execute our strategy with LIBOR and we will keep our focus today for long term creates a lump and value creation, what I was here because if I think you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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