Q2 2022 HP Inc Earnings Call
In our hearth, how do we think communities who are bidding unimaginable loss right now.
But at the same time.
So thinking about the people of Ukraine.
More than three months into the award with Russia, The devastation and Saturday night clubs, Ukraine is difficult to comprehend.
So to ease the situation facing the 6 million new clean and refugees.
We continue to mobilize resources to support them.
The HP Foundation has provided additional funding to support humanitarian relief across Central Europe .
And we are donating a significant number of tcs to help refugees and their families.
Consistent with our global efforts to promote digital equity in education.
Times like these are painful reminder of how much work is still needed to create a more just future.
And I believe it's incumbent upon companies to lead with purpose.
These values have long been cooler to HP brand and they will continue to guide us.
Let me now turn to our results.
When we held our Investor Day last October I discussed our plans to continue our push to advance our leadership in our core markets, while creating a more growth oriented portfolio by expanding into adjacencies and creating new businesses.
I also highlighted the long term secular trends, we see propelling us forward.
Actually the rise of hybrid work and the exciting opportunities it creates a clearance our broad portfolio.
Our second quarter results show strong momentum in each of these areas.
In the face of a volatile and dynamic macro environment, we executed well and grew our revenue and non-GAAP EPS.
Returning capital to our shareholders.
We are delivering on our commitments and our business is well positioned for sustainable long term growth.
For the quarter revenue grew 4% year over year to $16 $5 billion as we continue to see strong demand for HP technology and services.
non-GAAP EPS grew 16% year over year to $1.08.
That's at the high end of our previously provided outlook.
We generated <unk> $4 billion of free cash flow.
We returned $1 $3 billion to shareholders through share repurchases and dividends.
We remain committed to building a more growth oriented portfolio.
Our key growth businesses, which includes gaming peripherals instant ink or cloud solutions and in Brazil. The graphics on C. D. Collectively grew double digits and delivered total revenue of $5 $6 billion in the first half of fiscal 'twenty two and we.
We are well on track to deliver on our $10 billion full year revenue target that we announced last October .
We feel very good about these results.
We mitigated the impact of higher commodity costs by implementing effective pricing strategies in both print and personal systems, while maintaining strong demand.
And as we navigate the macro environment, we are making consistent progress on our strategic priorities I'm, bringing innovation to market.
This is reflected in our business unit performance.
In personal systems revenue grew 9% to $11 5 billion.
This was our highest Q2 revenue ever reflecting the durability of PC demand.
We also delivered operating profit margin of six 9% at the high end of our target range.
We are managing our peers portfolio with great discipline focused on driving profitable revenue growth more than units.
Our continued mix shift toward commercial and premium combined with our pricing strategy allowed us to more than offset fewer unit shipments in the quarter.
Increased spending on hybrid work solutions is driving strong commercial PC demand.
Commercial revenue grew 18% driven by double digit growth in windows based notebooks desktops and workstations.
And commercial was trending up to 65% of our revenue mix in the quarter.
In consumer while the market has seen some signs of softening demand, it's still exceeded pre pandemic levels.
Our pockets of growth in areas like premium and gaming that we're most focused on.
And we are driving continued growth in pretty firm, which grew more than 40% this quarter.
Our supply chain actions also continue to have a positive impact.
We've reduced our backlog quarter over quarter.
While the backlog remained elevated particularly in commercial we believe the actions, we're taking will drive continued improvement.
And as we prioritize operational execution, we are equally focused on strengthening our portfolio.
During the quarter, we entered into an agreement to acquire <unk>.
Once completed we expect this transaction will strengthen our position in hybrid work solutions and accelerate our growth in peripheral and workforce solutions.
Since the announcement was made we have received very positive feedback from reseller and partner and commercial customers about the opportunity ahead.
Our integration planning efforts are well underway.
And we are working closely with a poorly team to prepare for a smooth transition upon deal close.
We look forward to welcoming the polythene to HP later this year.
Turning to print we continue to operate in our components and logistics constrain environment and performance was also impacted by the macro events this quarter.
As a result clean revenue declined 7% in the quarter and our order backlog remained elevated in Q2.
We expect supply chain dynamics to improve but continued shortages, especially in application specific integrated circuit will impact print for the remainder of the year.
We are actively working with our partners to mitigate the risks by executing on dual sourcing whenever possible and redesigning circuit boards and components in our printers.
We are also managing prices with great discipline, and we delivered another quarter of solid profitability.
Our print operating profit margin was 19, 3% our second consecutive quarter above our target range.
Print consumer demand remains solid despite some softening in Europe .
And we made important progress on two strategic objectives rebalancing system profitability and growing our subscription business.
We have seen strong acceleration with HB plant and increased adoption in developed markets since launching last spring.
In addition, we see strong growth on our profit upfront unit, including our big tank model, especially in emerging markets.
Victor revenue and units grew double digits year over year.
We plan to continue expanding the big Tam portfolio with new product launches of high end platforms in the rest of our markets.
Overall, HP plant and big tank printers have become a larger portion of our portfolio mix, representing 48% of printer shipments in the quarter.
In consumer subscriptions instant ink delivered another quarter of double digit growth in revenue on cumulative subscribers.
In commercial print the office segment continued to be impacted by supply availability as well as uncertainty around the timing of officer reopening.
This was partially offset by our industrial our graphics and CD businesses growth.
In industrial graphics, we deliver solid revenue growth and build a strong funnel continuing the positive trajectory we have seen in recent quarters.
We have significant new installations of our latest indigo digital presence.
I am, particularly proud of the team's work for our customer Hershey, how do we create a customized packaging to support their international women's month campaign.
We also delivered double digit revenue growth and three D printing.
This quarter, we announced a partnership with legal group a leader in metal <unk> production for the luxury jewelry and fashion accessories market.
This is an important milestone as we prepare to make metal yet more broadly available later this year.
The progress we've made in our first half of 2022 gives us confidence to raise our full year non-GAAP EPS outlook.
And as we enter the second half we will remain focused on disciplined execution in today's challenging and volatile macro environment.
From a demand perspective, we expect to continue to see strong commercial demand with some softening of the consumer businesses.
From a supply perspective, we see two quota of constraints.
First is the industry wide component shortages that we expect will continue through fiscal 'twenty two.
Second are the Covid related disruptions in China, which we expect will primarily impact fiscal Q3.
We will also see an impact from the Russia, Ukraine War last February we suspended shipments to Russia, and Belarus across our portfolio.
Our marketing and advertising activities.
Considering the current environment and long term outlook for Russia, we have decided to stop our rush activity and have begun the process of fully winding down our operations.
Business there are accounted for approximately $1 billion in revenue in fiscal year 2021.
Marie will talk more about the financial aspects of our Russia plant.
We remain committed to taking structural cost out of the business and we are on track to meet our transformation cost targets.
These actions combined with top line growth and effective working capital management give us confidence in achieving our free cash flow target.
And we remain committed to our share repurchase plan of at least $4 billion in fiscal year 2022.
Yeah.
The final point I'd like to make is that we are delivering on our financial commitments, while making progress against our sustainable impact strategy.
Later this week, we released our annual sustainable impact report outlining progress against climate action human rights and digital equity goals.
Let me give you a few examples.
2019 to 2021, we achieved a 9% absolute reduction in our greenhouse gas emissions across hp's value chain.
I am proud that we continue to decrease absolute emissions.
Net revenue increased by 8% during the same period.
We have reduced single use plastic packaging by 44% compared to 2018, and we have enabled better learning outcomes for over 74 million people globally since 2015 by providing curriculum training and technology.
I am inspired by the progress we are making towards becoming the world's most sustainable and guest technology company.
Not only are these are right things to do there also differentiating our brand and helping to drive our business.
To sum up this quarter caps off a strong first half of 2022.
We are building a more growth oriented portfolio, while also operating with great discipline and agility in the face of macro challenges.
The environment will remain dynamic in the second half we.
We are not immune to these challenges, but our strong performance and momentum through the first two quarters gives us confidence to increase our full year non-GAAP EPS outlook.
We are equally confident in our free cash flow outlook for the year.
We remain committed to our capital allocation strategy and continuing to return capital to shareholders.
Investing in the business to build a stronger HP.
I will stop here and let Maria provide a closer look into our financials and outlook.
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 remains solid driven by the strong secular tailwind, we see propelling our business 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 Russia, Ukraine wall.
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.
5% in constant currency.
Regionally in constant currency Americas increased 1% EMEA increased 7% and eight P J increased 10%.
Gross margin was 22% in the quarter down one five points year on year.
Greece was primarily driven by proportionately 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, all 11, 4% of bedding down 5%.
A decrease in operating expenses was primarily driven by lower R&D due to last years ramp up in investments.
Variable compensation, including sales Commission.
non-GAAP operating profit was $1 $4 billion.
non-GAAP net <unk> expense was $74 million for the quarter.
The key segment level operating profit grew 6% non.
non-GAAP diluted net earnings per share increased 15, or 16% to $1 eight but the 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 with 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 permits and the overall macro environment.
Despite this we grew revenue, reflecting the strength of windows demand a mix shift towards higher value commercial categories like mainstream premium and mobile workstation and favorable pricing.
To highlight some of the secular headwinds we have seen in personal systems versus pre pandemic, our commercial notebook mix. Excluding currency now represents 60% of our commercial unit mix up 15 points. This is key key 2019 earnings.
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 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 continued 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 six 9% our personal systems business has good operating profit dollars in 17 of the last 18 quarters. This consistent performance is indicative of our strong portfolio the strong secular tailwind we.
To see and our ability to deliver results.
Very different environments.
Operating margin improved two points, primarily due to product mix favorable pricing and lower Opex included lower R&D spend due to last year's investments ramped up partially offset by higher commodity costs and currency sequentially.
Sequentially operating margin declined <unk> nine 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 hardware units and lower supplies revenue.
This was partially offset by higher hardware ASP.
The industrial graphics and services.
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% and a decrease of 17% in units and consumer revenue was down 12% with units down 24%.
Demand remained solid however revenue across both home and office with a gain 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.
C. However, solid growth in industrial graphics and treaty as Enrique mentioned.
We continue to expect a gradual.
Even recovery in commercial.
But the overall office market returning to approximately 80% of its pre pandemic plan 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 'twenty, two and over the long term suppliers 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.
<unk> 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 delivered 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 million operating margin was strong at 19, 3%.
Operating margin increased one four points driven by favorable mix and pricing combined with lower Opex as a result of lower variable compensation, including sales commission, 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 one $2 billion.
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 our cloud based platform. We have enabled the delivery of competitive quotes the HP solution and 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 opened a new state of the art office and R&D facility.
Bringing together most about employees in Korea.
Now, let's move to cash flow and capital allocation.
Q2 cash flow from operations and free cash flow was $5 billion and.
$4 billion respectively.
The cash conversion cycle was minus 26 days in the quarter, a sequential decline of seven days, so its free cash flow and the sequential decline in cash conversion days were driven primarily by the decrease in personal systems volume and backend 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.
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 of return of capital target by year end.
Looking forward to Q3, and the rest of FY 'twenty, two 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 line related to our Q3 and overall financial outlook.
We are once again, raising our full year non-GAAP outlook for FY 'twenty, two 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 'twenty two reflecting the recent strength of the U S dollar.
With regard to the potential impact of the Russia, Ukraine wall 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 in FY 'twenty, one Russia accounted for approximately $1 billion in revenue.
In China, we expect to see a reopening an easing of restrictions from the recent lockdowns beginning in June .
To personal systems, we continue to see solid demand and pricing for our Pcs and 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 peripheral.
With regard to our personal systems supply chain, while we expect to see a gradual improvement to 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 then we.
Bound in Q4 more in keeping with typical seasonality.
We expect <unk> margins to remain near the high end about 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 in mix as commercial gradually improve through 2022.
With regard to print supply chain, we expect similar to Q2 component shortages and logistics delays to constrained revenue. We expect these conditions to continue at least through 2022, but with some improvement into the latter part of the year.
We expect margins to be at the high end of our 16% to 18% range for FY 'twenty two.
For Q3, specifically given your continued hard work and strengths, we expect margin to be above 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 <unk> to $1 at <unk>.
Third quarter GAAP diluted net earnings per share to be in the range of 91.
To 96.
Which includes an incremental GAAP only charge of approximately <unk> <unk> related to the wind down of operations in Russia.
We expect FY 'twenty, two non-GAAP diluted net earnings per share to be in the range of $4 24 to.
<unk> to $4 38.
And FY 'twenty, two GAAP diluted net earnings per share to be in the range of $3 79 to $3 93.
For FY 'twenty, two 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 for long term sustainable growth.
I'll stop here, so we can take your questions.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on you touched on.
If youre using a speakerphone please pick up your handset before pressing the keys.
We also ask that you please limit yourself to one question and a single follow up.
And our first question today will be from Krish Shankar with Cowen <unk> Company. Your line is open.
Yeah, 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 a follow up on Murray and Vicki on the PC business. It makes sense commercial is strong but it is.
Looks like a desk.
Desktop did much better than notebooks, both in terms of revenue and units.
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 competitor spoke about three 3 million units kind of curious what your view is and I had a quick follow up for Maria inventory. Thank you.
Sure. Thank you.
Let me start with a focus on virtually the same happens with workstations vehicle growth. This quarter. It really helps from an easy compare last year. If you remember last year not many companies were investing in equipment for the office.
Drove the sales of their thoughts and workstation pound and now we're seeing the opposite effect. Some of this investment is coming back I think on the overall PC market. The important thing to have in mind is the strength of the demand on the commercial side. We are seeing this across the board across all geography.
And this is especially true on high configuration, given their new used models that.
We're going to have.
And this is why even if for the year going out to the second part of your question. We expect the overall PC market in terms of units to decline slightly.
Very similar to the other analysts and other companies have captured from a revenue perspective, we see growth really driven by mix.
Moshe will become bigger.
<unk> categories within commercial will be bigger and also us premium consumer and gaming will become a more relevant part of the market.
Got it.
Thank you.
Follow up for Murray on inventory.
You know last quarter, you said youre not buying to decrease inventory and its kind of elevated in terms of inventory days can you give us some color on how much of that is finished goods or raw materials and components. How much of it is actually buildup of material cost inflation any kind of color on inventory would be very helpful. Thank you very much.
Sure and good afternoon Christian and thanks for your question so.
Gretchen perspective, our inventory actually declined and that was due to in transit offset by higher commodity costs due to supply constraints now in terms of both print and P. S. A couple of different dynamics. So let me give you some color. So on the print side, it's really driven by the.
The assurance of supply given the ongoing supply constraints that we're seeing on the print side and also just the longer lead and transit times and then in P. S.
Going on there is really the shift in mode of transport.
As you might recall I think we made that comment in our last call that we stopped using the train that we have used extensively from China to Europe , and we shifted a lot more of PFS onto the ocean. So we've seen that shift from air to Ocean. So that's what you're seeing and then you'll obviously see shipments.
For economic value and really drive much better posture, a lot better cost for us so that hopefully the perspective on inventory fully.
As a recap.
Our medium term plan is to continue to reduce inventory. We think we have an opportunity there and with our component situation getting better. We really think that this is going to be our plan for the foreseeable during the next quarter.
Your next question comes from the line of Aaron Rakers with Wells Fargo. Your line is open.
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.
I'm just curious Enrique on Marie if you can kind of dive in a little bit deeper into the commercial backlog in the PC segment.
Whats your expectation.
Working that backlog down as your 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, yes.
Yes.
Thank you so as we said in the prepared remarks commercial backlog commercial PC burglar, and especially commercial continues to be.
Very good.
Our plan is to review that in the coming quarters, and we will continue to improve the situation from a supply chain perspective.
By the end of the year or early next year. It should be we should be done with that.
Okay.
It's helpful.
The follow up question is just looking at the pricing trends you're seeing within PSG.
PSG.
Could you help us appreciate how much of it is being mixed driven versus your ability to pass through.
Increased pricing from components and logistics I'm, just curious if you could help us.
Understand the effects of pricing.
Yeah, No I'd say first of all we definitely benefited from favorable pricing and I think we've made those comments over the last couple of quarters and really due to that supply and demand imbalance that we've been experiencing and I'd say, particularly on the PFS side, we've been able to actually pass through a lot of that inflationary price.
<unk> a straight through into our products now I would just add you know if the supply and demand starts to come back into closer alignment will start to see some of that pricing a normalized but right now in terms of just the current outlook, we really expect pricing to remain strong in the second half of the year.
And in terms of your comment about mix mix has gone through a significant impact on on pricing and really when we need to think about mix you need to think about the new used models for PC business are more and more users communication tools between current customers need more memory, you better come at us better.
Audio and this is really driving demand towards richer categories in the more premium products and he really having a significant impact on the overall pricing and pricing that I should add just on the mixed comment actually this quarter around 65% about <unk> portfolio is commercial which obviously as you know.
Higher asps. So it's a combination of both the mix and the rate, which is really driving that favorability in pricing.
Your next question comes from the line of Amit <unk> with Evercore. Your line is open.
Thanks for taking my question and congrats on a good quarter off mine as well I guess I have two as well. The first one is just on the print side and I think your operating margin performance there.
It's really impressive in the April quarter. So maybe you could just talk about what is enabling this really strong 19% plus operating margin performance in April despite the supply as had been that you had.
And then as you think about the back half.
It doesn't seem like mix is getting any different than what you have in April so why would margins dipped down based on what you said on the print side.
So the performance of the printing business this quarter really driven by supply we continue to see demand significantly above supply and supply we are impacted mostly by component availability and therefore, our focus was really profit optimization through pricing through allocation.
<unk> of unit and here's why profitability. This quarter was also 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 prices pricing will be normalized and Marie <unk>.
Yeah, maybe I'll just add some comments then on Q3 on the print right and what we expect to happen as we said we expect for the full year that would be at the high end of that range and in fact actually what we're expecting in Q3, it will actually be slightly above that and really what that's driven by a combination of the supply constraints and weekend spoke about some of it.
The mix that we're starting to see is the office reopens and then given that backdrop, we still seeing the impact of that favorable pricing I just spoke about a moment ago that we'll expect some of that to come through and obviously, we're doing all of that while we're offsetting currency headwinds as well. So overall, we would expect.
Great for print is certainly in the in the year be at the high end of that long term range.
Understood and then if I could just ask you on.
The non-GAAP adjustments that are being made for the fiscal 'twenty guide I understand you're raising the non-GAAP numbers, but the GAAP numbers that they are coming down.
I think the adjustments of 45. This time not 90 days ago that was 31.
Maybe I don't understand but could you just talk about what is resulting in what are the incremental adjustments that are being made is it restructuring has had Russia and if you could just break that down that would be helpful. Sure happy to do so so we actually revised our FY 'twenty two GAAP guidance and we actually have a 11 <unk> just to clarify at the midpoint. So let me walk you through.
There's really four key items that are driving it which you captured a couple in your comments. So first of all yes. It was the acquisition related charges related to polyester you know, we announced that just did a while ago that wasn't included in our prior GAAP guidance.
Lead there are charges with Russia, which we actually I spoke about I think in my prepared remarks, and then we also have the timing acceleration of some real estate actions related to our transformation and then finally, we've got some one time related tax adjustments as well. So that's basically the construct for the revised GAAP guidance.
Yeah.
Your next question comes from the line of Toni <unk> with Bernstein. Your line is open.
Yes. Thank you for taking the question I have two as well.
Just wanted to understand the.
Backlog.
Dynamic.
Dynamics that happened in the quarter and what Youre expecting going forward. So I think you said you drew down backlog and Pcs.
Was book to Bill in revenues positive in the quarter can you give us some sense of how much backlog drive that to draw down there was in Pcs and was there any backlog drawdown in printing and when we think about the remainder of the year, if theres a supplier disruption in Pcs.
Why would you expect to be able to continue to drawdown backlog in Q3, and I have a follow up please.
Sure So Terry.
So you commented before Tony we saw.
Production of backlog Q2, Q1 to Q2.
This is really driven by the ability to ship some of the unit.
And the earn in to some of our volumes in specific area as.
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.
The case of print we continue to innovate to operate also a high level of backlog. The reduction there was who are smaller and we expect that we will be able to start reducing debt 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.
Okay.
Yeah.
Okay. Thank you. Thank you Budd.
I'm still not quite clear why if you have a supplier constraint and you're expecting lower revenues.
In Q3 from Pcs.
Why do you think youll dry down backlog and.
Can I also just get you to clarify.
Typically seasonally printing is down Q2 to Q3, I think youre, saying <unk> will be down Q2 to Q3 is that what we should expect in and again, if we if you're drawing down backlog that that feels a lot lower and typically you are up 4% sequentially from Q2 to Q3, So again I'm just trying to square the circle with.
Youre anticipating the backlog drawdowns and the.
The dynamics of having weaker than seasonal PC revenues in Q3. Thank you.
So the comment about the backlog.
Second quarter second half comment.
Typically in Q3.
We.
However, the amplify the very specific Berlin with one of our PC component supplier.
He is having some special issues for you and one other factory this is going to be impacting our shipments in Q3 for PC.
We have line of sight for these to be recovered in Q4, and this is why from a seasonality perspective revenue in personnel systems and Pcs in Q3 will be below Q2, and again the backlog coming into second half comment not a quarter over quarter comment.
Thank you.
Your next question comes from the line of Eric Woodring with Morgan Stanley . Your line is open.
Awesome. Thank you for the quarter excuse me. Thank you guys questions congrats on the quarter.
If we take a step back.
Been a pretty unique time in the market the best PC growth in a 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 is clearly showing up in your margin profile right.
Pre kind of the Covid period operating margins were around 7% to seven 5% right now theyre running around 9% consistently so just just curious.
Is there a way that you can break down the margin uplift between kind of mix and kind of the.
Permanent C of the changes that you've made versus temporary factors like pricing and 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.
Sure probably the best way to answer it is to go back to the guidance we provided in our Investor day in October when we share our perspective for both businesses.
The case of personal systems, we expect margins to be between five and 7% going forward, we raised debt in.
In October from what we've had before to reflect especially the impact of the cost activities that we have put in place.
Also the focus that we've had in higher margin categories and I like to remind you that several of our growth areas like gaming peripheral and services in the case of PC will help us to sustain these higher margins.
In the case of prime of our margins.
Our prediction is that margins will stay in the 16% to 18% range and again.
Our long term strategy really focused on those categories, where we think we can drive both growth and sustainable margins. While at the same time, we expect that some of that pricing benefit we have experienced in the last few years will fade over time.
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.
So as more profits upfront in the sales printing hardware, while at the same time introducing programs like HP plus 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 hardware higher hardware prices that <unk> been able to do over the last call. It two two years and change. Thanks sure. Thank you.
Very pleased with the program that we are trying to do that we are doing in the pivot the business model. We shared today that today in Q2 around 48% of the unit.
Either what we call profit upfront, so customers get a cleaner and the ink or toner when they get a unit or HP plus unit. So this gives you an idea of the progress that we have made in the last two years and we expect this percentage to continue to increase.
The adoption for <unk> will continue to grow.
Another important element of our strategy is the growth of our subscription model and also we shared today that in Q2 that business both from subscribers and from a revenue perspective, we grew double digits. So this also shows the momentum that we have in that.
In that part of the company.
Your next question comes from the line, Jim Suva with Citigroup. Your line is open.
Thank you I have some pretty easy specific questions one fire in Eureka and.
Once in a while yes, Enrique I believe it was a year ago, you highlighted the strength in chromebooks from HP.
While we sit can you help us kind of quantify how much exposure do you have the piece teachers now the volume of course is opposite of the viewing strengths of chromebooks just wants to be the risk there and for Murray and the reason why we're not increasing free cash flow is that.
Function of those four items that you mentioned kind of that adjustment.
Russia.
Closing costs non-GAAP tax adjustments and things like that thank you.
Thank you Jim so the exposure or the size of the overall combo treatment is relatively small and our personal systems business is Linda 10% from a revenue perspective.
Much smaller from our <unk> operating profit or margin perspective, so the exposure that we have a relatively small shipments of chromebooks. This quarter. We're also as most of this show that we can really perform in a very strong wary of personnel systems, even in there with a very small chromebook market will recap.
And during this year and we started to see it a few quarters ago and we have talked about this before.
Significant slowdown of the chromebook business in the U S. In the education segment, we are starting to see some signs of recovery, but the market curve.
We need to be significantly below where it was a year ago.
Hey, Jim and good afternoon, just on your comments on free cash flow just to clarify so as I mentioned in my prepared remarks, we do expect to generate at least $4 5 billion and free cash flow. This year. So we remain very much on track.
We expect to.
The items that I explained on the GAAP guide.
In terms of their impact on cash flow the impacts that we had in the quarter were really much more related to volumes in the backend loaded revenue linearity as you heard Enrique said earlier, we expect that to course correct in Q4. So at this point.
We expect our cash flow to to remain on track for our guidance.
Your next question comes from the line of Ananda Baruah with loop capital. Your line is open.
Yeah, Hey, good afternoon, guys congrats on the results and strong.
Strong execution in our increasingly challenging environment.
Two if I could.
Have you guys seen any impact.
Any of your commercial business right now for macro.
And are you.
Are you getting any feedback yet if you've not seen any impact yet.
Feedback yet.
From customers about what Paul Okay, and then I have a follow up as well thanks.
Thank you Linda so the answer is no not yet recovered and we continue to see strong demand on the commercial side.
Have a strong funnel. So we don't see any signals of weakening of the demand from the commercial side and this is one of the key drivers of the guide that we have provided for the rest of the year.
And we gave it Paul.
And then Enrique.
Level of PC business quickly.
How much I believe that 90 days ago.
90 days ago.
You guys are thinking that the market PC market would be up kind of flat to slightly up for the year.
Now sounds like slightly down for the year.
Is that accurate my recollection.
In the.
The change how much is supply chain related coming out of China.
With the lockdown and how much of a need for NAND in the label and then.
Second part of that and.
You gave us your view on the market.
Are you expecting HP reporting unit wise this year as well thanks, that's it for me.
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 you need to expect the market to be in the 323 30 million units.
In line with what many of the <unk>.
<unk> 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.
A mix shift towards more premium unit in both segments and that's really what is driving that.
The growth that we expect to see in personal systems through through the rest of the year.
Your next question comes from the line of David <unk> with UBS. Your line is open.
Great. Thank you I have two quick questions one for Enrique and then a quick follow up for Murray.
So when we gave you both you and your competitors have noted that you are 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 I guess the question I have is the supply chain.
Started to typical buying patterns 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 lower end devices lower spec Pcs given that there might have been some people lining up earlier in the queue for more Richard configurations, and then I have a follow up from.
Murray on margins.
Well I think the demand of both is fairly independent.
As already mentioned before because of the use model.
<unk> consumer customers need higher and better configurations because of the growth in gaming, we see growth in that category, which in general has also.
Average selling prices and this is driving the demand of this category. We continue to have a very strong loan portfolio.
We see more demand on that side, we will be okay.
Happy to serve it but at this point, we really see demand on the more premium categories, both in commercial and in consumer.
Great and then a quick follow up for Mary Mary Thanks for all the color on the margin.
Just to follow up on margins you are well above your 16% to 18% range not only this quarter, but in the prior quarter.
And in the guide for the third quarter, but if I just sort of annualize that full year guidance are you intimating that by Q4 of this fiscal year. Thanks margins return back towards the lower end of your long term range I am doing the math correctly and if so is that sort of the right way to think about the profitability.
Profitability of that segment going forward that this is sort of a one time above the range period in that 16 to 18 is more likely the.
A stable environment that we're going to be operating edge unforeseeable future.
Yeah, No David Good afternoon, So I think the way to think about it for the full year is really that we expect to be at the high end as I mentioned earlier, we expect it to be above for Q3 and Q2 the supply chain.
Constraints that are there.
Just to kind of give you a little extra context here.
We've seen that favorable pricing impact and we believe the durability around that is there plus you have seen us very successfully manage through the headwinds in the business whether that was currency, whereas the commodities.
Et cetera, and then we can talk today about the growth businesses and how we're driving that in terms of just the flow through factor for a longer term perspective, that's the right way to think about our margin construct going forward. It's a combination of all of those factors to come in coming together, but for the year I really want you to leave with the thought that we're going to be.
At the high end of 16 to 18.
Thank you Maria and thank you everybody for your questions today and for joining the call.
In the first six months of fiscal year 'twenty to 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.
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.
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're 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.
This concludes today's conference call you may now disconnect.
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