Q3 2022 HP Inc Earnings Call
Particularly in the enterprise helped us to partially offset declines in consumer demand.
Still the fact that we remain supply constrained did not allow us to fully rebalanced.
As a result permit revenue was $14 7 billion in the quarter, that's down 4% nominally and 2% in constant currency year over year.
Despite this we were still able to deliver non-GAAP EPS of $1.04.
In line with our previously provided outlook.
This reflects our very disciplined cost management and pricing strategy as well as our continued ability to shift more of our portfolio to higher growth higher value segments.
And while we cannot control how the economic situation evolves in the coming months.
There are some very clear actions, we can take to mitigate the impact of near term headwinds and drive continued progress against our long term growth strategy.
And we're taking a very measured approach with a focus on five clear priorities.
First we are optimizing our performance by staying disciplined in our pricing and increasing our focus on pockets of profitable growth such as premium peripherals services and solutions.
Second given volatility is becoming the norm.
We are focused on continuously improving the way we respond to it.
We're taking decisive actions to address issues that have surfaced due to the abrupt changes we have seen in the industry.
And we view this as an opportunity to further improve our ability to adapt to quick transitions in the market in the future.
Third we are doubling down on our growth portfolio, while protecting our core business.
Collectively our key growth businesses once again grew double digits in Q3.
And we remain on track to exceed our $10 billion revenue target for the full year.
We expect our key growth businesses will continue to be a critical part of our growth strategy.
Four we are taking actions to reduce our variable spend and further reduce our structural costs by accelerating our digital transformation.
We have already met or exceeded many of our objective in our current transformation plan.
And we're in the process of finalizing the foundation for a new multiyear transformation program that we plan to share with you during our Q4 call.
And finally, we are maintaining our capital allocation strategy in.
In Q3, we returned $1 3 billion to shareholders and we expect to exceed our commitment to return $16 billion to shareholders as part of our value creation plan.
These are the right areas of focus regardless of the macro environment.
In times like these they become even more important.
And the actions we are taking will enable us to continue building a stronger HP.
Let me now spend a few minutes discussing our Q3 business unit performance.
In personal systems revenue declined, 3%, primarily driven by softness in consumer demand for our categories and more price competition.
In constant currency <unk> revenue was flat in the quarter.
We delivered operating profit margin of six 9%.
This is at the high end of our target range driven by disciplined pricing.
And our mix shift to high value segments and robust cost management.
Within commercial our Windows based revenue grew approximately 18% with commercial premium nine workstations up double digits.
And commercial was more than two thirds of our peers revenue mix in Q3.
We are taking actions to optimize consumer performance.
And we are focusing on pockets of growth across our portfolio.
As premium and peripherals, which grew double digits this quarter.
We saw overall higher channel inventory levels in the quarter, and we expect pricing will become more aggressive in Q4 to address this.
While this environment creates some near term market uncertainty our long term view of the PC market and its adjacencies has not changed.
And we have confidence in the trajectory of personal systems overtime.
One source of our confidence is our acquisition of poorly which we closed yesterday we.
We are thrilled to welcome were poorly team to HP.
Poorly accelerates our expansion and scale in two key growth businesses peripheral and workforce solutions.
Polly devices and software combined with Hps leadership across compute device management and security creates a comprehensive portfolio of highly work solutions.
We continue to receive very positive feedback from resellers partners and commercial customers about the opportunity ahead.
We expect the transaction will be accretive to non-GAAP EPS in fiscal year 'twenty three.
With a poly deal completed I am pleased to share that they've shown poorly former CEO will be joining HP to lead our newly created work for services and solutions organization.
This is a big step forward toward our business that will allow us to drive a more integrated and expansive commercial services growth agenda across personal systems and print.
Dave is a terrific executive with extensive global experience and he will be a great addition to our leadership team.
Let me now turn to our pain business like peers consumer softness and supply constraint weighed on our results.
Specifically <unk> revenue declined 6% or 5% in constant currency, we supply revenue declining 9%.
We delivered operating profit margin of 19, 9%, which is well above our target range and reflects our disciplined pricing and cost management in a tough market as well as commercial hardware supply constraints.
We also made progress against our plans to rebalance system profitability and accelerate in key growth areas.
Plans and big tank printers continue to become a larger portion of our portfolio mix, representing more than 50% of printer shipments in the quarter.
And our strong focus on big tank in emerging markets allowed us to gain share.
We delivered another quarter of double digit revenue and cumulative subscriber growth in our consumer subscription business.
This model is proving to be resilient and its value proposition is even more attractive to consumers in this environment.
Industrial graphics impressions also grew year over year, and we built a strong funnel with recovery in all segments.
And we delivered double digit revenue growth in <unk> as customers increase their deployment of our thermal plastic solutions.
Across both personal systems and print we continue to drive an aggressive innovation agenda.
Last week, we kicked off a global road show with our top channel partners.
And I will tell you what I told him we have built our strongest portfolio ever.
We have introduced more than 100, new products and solutions over the past 18 months.
Much of this innovation is being driven by the rise of the hybrid office.
Our devices targets, enabling people to connect create and collaborate across multiple locations.
And do it securely.
Last week, we introduced our HP instant ink for small business and our new laser jet pro with HP plus.
This is an intuitive printing system that is tailor made to meet the unique needs of small businesses by enabling greater productivity effortless device management and advanced security and.
And in personal systems, we just unveiled our next Gen Dragonfly folio, a beautiful BC has been thoughtfully crafted for hybrid work and.
Enhanced by our HP persons videoconferencing solution that Dragon flies advanced camera capabilities.
Adam I think voice leveling and background noise filtering technologies and digital pen.
Our superb remote work experience.
The dragonfly he seltzer made using ocean bound plastic another recycled materials, which supports our overall commitment to sustainable impact.
We continue to advance our efforts in this area.
We announced last week, a significant expansion of our HP amplify impact program, which mobilizes and reward our channel partners as they make progress on their own sustainability and diversity costs.
This work is differentiating our brand motivating our people and strengthening our communities.
Looking ahead, the macroeconomic environment remains challenging.
Consumer softness is likely to continue in the near term.
We also see some companies taking a more measured approach to their spending on new orders showing signs of softening demand in commercial categories.
Although we have made significant progress on supply chain.
Shortages remain.
Given that we do not currently foresee an economic rebound in the short term. We believe the prudent thing to do is to adjust our Q4 outlook, which Marty will discuss in her remarks.
Like all economic downturns, we also believe that the current situation as temporary.
And just as market conditions deteriorated quickly they could also rebound quickly.
We have consistently proven our ability to manage the company through up and down markets.
We are prepared for multiple scenarios and ready to act as needed.
Most importantly, the fundamentals on which our long term strategy is built has.
What changed.
Hybrid work is here to stay.
Gaming will continue to grow in popularity.
The rise of digital services and subscription is unlocking new business model.
Industrial markets are being disrupted by new technologies.
These are long term secular trends.
Each of them plays to Hp's thing.
And we are confident in our long term growth targets, even as we take the actions necessary to mitigate near term headwinds to.
To give you additional insight into our performance and outlook I'm going to pass it over to Marie.
Okay.
Thank you and good afternoon, everyone as Enrique mentioned, our Q3 results were impacted by macroeconomic challenges, including a significant slowdown in consumer demand in our categories inflation currency and geopolitical challenges.
Swift actions across the levers within our control to help address these headwinds focusing on rigorous financial management in both our costs and our investments across our businesses.
In addition, we are executing on our strategy and returning significant amounts of capital to shareholders.
Disciplined financial management, particularly Opex and cost management is core to our DNA at H P.
Confidence in our ability to navigate adeptly up and down market conditions.
The more we continue to realize structural cost savings from our transformation program and see additional opportunities to drive significant cost reductions ahead of us.
Spite these recent challenges we remain confident in both our end markets and strategy to drive the long term value creation opportunities. We see ahead of us.
With that let's take a closer look at the details of the quarter.
Net revenue was $14 $7 billion in the quarter down, 4% nominally and 2% in constant currency.
Simply two points or half of the decline was due to the change in estimated sales and marketing incentives benefit in our prior year results.
Gross margin was 19, 8% in the quarter down two four points year on year, driven by the change in estimated incentive benefit in the prior year and currency.
non-GAAP operating expenses were $1 $5 billion or 10, 3% of revenues down 20% year on year.
In Q3, we instilled further rigor and our cost management, we reduced our opex spend by over 370 million year on year and quarter on quarter by prioritizing our variable spend in R&D and marketing aligned with our growth categories.
Lower variable compensation, given the more challenging business environment was also a key driver.
At the same time, we are making prudent and targeted investments, where we anticipate significant opportunity to drive growth, including our key growth areas, which I will touch upon in a few moments.
non-GAAP operating profit was $1 $4 billion down, 8% and non-GAAP net <unk> expense was $104 million for the quarter.
non-GAAP diluted net earnings per share increased 4% to $1.04, but the diluted share count of approximately 1 billion shares.
non-GAAP diluted net earnings per share excludes a net benefit totaling $40 million primarily related to non operating retirement related credits and other tax adjustments, partially offset by restructuring and other charges amortization of intangibles acquisition related charges and Russia exit charges.
As a result, Q3 GAAP diluted net earnings per share was $1.08.
Now, let's turn to segment performance.
In Q3 personal systems revenue was $10 $1 billion down, 3% and flat in constant currency.
Total units were down 25% as a result of a decline in current demand as well as the rapid deterioration of demand late in the quarter, particularly in our consider business.
In addition, we continue to see ongoing supply chain constraints as expected in some pockets of PFS.
In spite of those challenges there were several bright spots in the quarter.
We saw solid demand in our higher value categories across commercial and consumer consistent with our strategy commercial revenue constituted a two thirds of our personal systems revenue in Q3, and our commercials windows based revenue grew approximately 18% with units up 6%.
Mobile workstation bet. He was up approximately 60% consumer premium revenue was up 10%.
The long term secular tailwind, we continue to see in personal systems, including hybrid work gives us confidence in our long term outlook.
And regarding hybrid work an area of focus I want to give a warm welcome to our policy team.
We anticipate significant opportunity ahead from both a strategic and financial perspective with clear opportunities to capitalize on the secular tailwind and synergies to help drive long term revenue and non-GAAP operating profit and EPS growth.
I'll cover the financial impact of poly shortly.
Let's drill into the details commercial revenue was up 7% year on year and up 11% in constant currency consumer revenue was down 20% year on year and down 18% in constant currency.
FX was clearly a key factor in our results this quarter.
As an example currency was an approximate five point headwind to our personal systems business in EMEA this quarter.
By product category revenue was down 10% for notebooks up 13% for desktops and up 38% for workstations.
We also continued to perform well and many of our key growth areas, including peripherals, and Dez, which was up strong double digits.
Personal systems delivered $695 million of operating profit with operating margins of six 9% flat sequentially as we continue to execute despite the headwinds I mentioned earlier.
Operating margin declined one five points year on year, primarily due to currency and higher costs, particularly in consumer partially offset by lower opex, including lower R&D and variable compensation and improved commercial product mix.
In print our results reflected our focus on execution and the breadth of our portfolio as we navigate the current environment.
In Q3 total print revenue was $4 $6 billion down, 6% nominally and down 5% in constant currency driven by lower supplies revenue and lower print hardware units.
This was partially offset by higher home and office hardware Asp's and gross at industrial graphics and instant ink services.
Hardware units declined 3% driven largely by lower than expected IC component availability and logistics constraints.
While we have qualified additional suppliers at our booth Redesigns are on track for predicts inclusion later this year, we still expect print hardware constraints to extend into FY 'twenty three.
By customer segment commercial revenue declined 3% and down 1% in constant currency on unit declines of 15% consumer revenue was up 1% and 3% in constant currency with units down 1%. However.
However, we saw some softening in home hardware demand sequentially, particularly on low end units impacting asp's driven by the headwinds I described earlier.
In Q3 commercial recovery continued to be impacted by the slow return to the office. In contrast, we did see solid growth in industrial graphics, and three D and graphics, our flexible packaging business had another solid quarter and impressions has more than doubled versus pre pandemic levels.
Overall, we continue to expect a gradual and uneven recovery in commercial with the overall office market returning to approximately 80% of its pre pandemic 10 at the time based on our current outlook.
Supplies revenue of $2 8 billion declined 9% in constant currency. The decline was driven primarily by significant reduction in consumer demand driven by the challenging environment and continued globalization in home printing, partially offset by the gradual recovery in industrial print they.
The estimated impact of our decision to stop and permanently wind down our Russia business was approximately one point headwind to our supplies revenue year on year.
Instant ink services delivered another quarter of double digit increases in both cumulative subscriber growth and revenue continuing to highlight the success of this business model even in a tougher macro.
Operating profit with $911 million up 6%, yielding an operating margin of 19, 9%.
Operating margin increased two three points driven by rate improvement in hardware and Opex management, particularly lower variable compensation, partially offset by unfavorable mix.
Now, let's move to our transformation efforts, where we had another strong quarter of progress and are on track to exceed our $1 2 billion and gross run rate structural cost reductions by fiscal year end.
During Q3, we delivered on numerous fronts driving cost reductions to help drive long term value creation and.
In Q3, we took several actions to drive structural cost reductions across both our manufacturing and real estate footprint. We executed two significant actions intended to optimize our factory footprint driving both efficiency and increased global resiliency across our ink and laser hardware and supplies manufacturing.
In addition, we continue to optimize our real estate footprint with site exits or reductions year to date, we have now executed 23 site optimizations, including eight site exits at our overall plan has now reached 19 site optimizations since the start of our transformation.
Our current efforts have established a strong foundation that we fully intend to build upon going forward.
As Enrique mentioned, we are currently finalizing our next phase of digital transformation focused on further cost efficiency opportunities and plan to provide an update during our Q4 earnings call.
Now, let's move to cash flow and capital allocation Q.
Q3 cash flow from operations and free cash flow was $4 billion and $3 billion, respectively. The cash conversion cycle was minus 29 days in the quarter a sequential improvement of three days.
Free cash flow and the sequential improvement in our cash conversion days came in below expectations, driven primarily by the larger than expected sequential decrease in personal systems volume delays in supply availability and unfavorable manufacturing linearity.
And while we saw a meaningful improvement in our days in inventory and personal systems, driven primarily by a decrease in commodities.
These benefits were more than offset by higher days of inventory largely from assurance of supply and increase lead times.
Looking ahead to Q4, we expect to see further improvement to our cash conversion cycle draw.
Driving our outlook or our expectations for additional operational improvements, including further reductions to inventory levels and we also expect some improvement in personal systems volume sequentially in Q4.
Strong capital returns continue to be a key part of our capital allocation strategy. In Q3, we returned approximately $1 3 billion to shareholders. This included approximately $1 billion in share repurchases and $255 million in cash dividends since the start of a value play we have returned over 50.
$18 6 billion to shareholders and remain on track to exceed our $16 billion return of capital target by fiscal year end, while also maintaining a strong balance sheet and investment grade rating.
In Q4, we expect to continue to be active in our shares.
Forward to Q4 at our fiscal year, and we continue to navigate the challenging macro and demand environment, including inflation logistics constraints and pricing dynamics in particular keep the following in mind related to our Q4 at overall financial outlook.
Given the changing demand environment driven by the headwinds I've described we are modeling several scenarios based on a range of assumptions.
By FY 'twenty, two we now see a wider range of outcomes and as a result, we are lowering our overall outlook for FY 'twenty two.
We expect to vigorously manage our overall cost structure and opex spend while continuing to prioritize investments, where we see opportunities for growth.
We expect currency to be approximately three percentage points year over year headwind in Q4 at about one five percentage points for FY 'twenty two reflecting the continued strengthening of the U S dollar.
Personal systems, we expect many of the trends we saw in Q3 to continue including softer demand in both consumer and commercial we anticipate these factors will put some sequential pressure our overall pricing.
We expect personal systems unit mix to continue to shift towards higher value categories, including commercial premium and peripherals.
With regard to our personal systems supply chain, we expect availability in most of our key components to improve with pockets of semiconductors to remain constrained into FY 'twenty three.
We expect personal systems margins to be in the lower end about 5% to 7% target range in Q4.
And regarding Q4 personal systems revenue, we expect to be up slightly sequentially.
Regarding poly at our results they will only reflect the last two months of the quarter and we expect <unk> to be accretive to non-GAAP EPS in FY 'twenty three.
In print, we expect further softening of demand and consumer similar to what we saw in the latter part of Q3.
Favorable pricing and higher end consumer and commercial units and further normalization of mix as we expect commercial to gradually improve over time.
With regard to print supply chain, we expect similar to Q3 component shortages and logistics delays to constrain hardware revenue in some areas. We expect these conditions to continue into FY 'twenty, three but with some incremental improvement in Q4.
We now expect print margins for Q4, specifically to once again be above the high end of that range given continued hardware constraints and disciplined cost management.
And finally regarding supplies revenue, we are holding to our long term outlook of low to mid single digit annual decline in constant currency.
In the near term over the next few quarters, we expect to see a decline of roughly low double digits, given the challenging environment and as a result, we expect to be above our long term range for FY 'twenty two.
With regard to the impact of Pollyanna financials in the fourth quarter and for FY 'twenty two.
We expect the non-GAAP diluted net earnings per share at approximately five cent headwind from Polly, including debt related expenses and other deal related costs.
GAAP diluted net earnings per share, we expect an incremental approximately 27% GAAP only charge related to the acquisition charges.
And regarding free cash flow, we expected approximately $300 million cash flow headwind related to policy acquisition and integration costs.
Taking these considerations into account we are providing the following outlook, we expect fourth quarter non-GAAP diluted net earnings per share for H P without poly to be in the range of 80% to 90% plus.
HP with poly, we expect fourth quarter non-GAAP diluted net earnings per share to be in the range of 79 to 89.
Fourth quarter GAAP diluted net earnings per share for H P without poly to be in the range of 76 to 86 cents for H P. With poly, we expect fourth quarter GAAP diluted net earnings per share to be in the range of 44 to 54 cents.
We expect FY 'twenty to non-GAAP diluted net earnings per share for H P without poly to be in the range of $4.07 to $4.17.
H P with poly, we expect FY 'twenty two non-GAAP diluted net earnings per share to be in the range of $4 and two to $4 and 12%.
And FY 'twenty two GAAP diluted net earnings per share for H P without poly to be in the range of $3 78 to $3.88 for H P. With poly, we expect FY 'twenty to GAAP diluted net earnings per share to be in the range of $3 and 46 to $3.56.
Slide 22, we now expect free cash flows for H P without poly to be in the range of $3 5 billion to $4 billion for H P. With poly, we now expect free cash flow to be in the range of $3 $2 billion to $3 $7 billion.
We continue to make progress against our priorities as we navigate through a very volatile fiscal 2022.
And we are taking decisive actions with the levers within our control.
Looking forward, we plan to provide guidance for FY 'twenty three as part of our Q4 earnings call.
Typically we would provide guidance as part of our annual analyst day, our security analyst meeting event moving forward. We plan to have these analyst day events by annually or as we have key updates to our strategy.
We continue to be confident in our ability to deliver long term value creation, and we look forward to sharing our progress with you.
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 your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the keys to withdraw your question again Press Star then one.
We also ask that you please limit yourself to one question and a single follow up.
And our first question today will be from Erik Woodring with Morgan Stanley . Your line is open.
Awesome. Thank you guys for taking my question I guess, maybe one for you in retail and then and then one for you Maria just on the on the pricing side. Enrique maybe can you can you just give us a little more detail on the.
The pricing actions you're taking.
And really in respect to kind of balancing of the challenge is balancing kind of softening demand with U S dollar strength and what that means for international sales and if you could just specify again across personal systems and printing that'd be Super and then I have a follow up thank you.
Sure. Thank you Eric So I think overall this quarter similar to what we have done in the previous quarter. The team has done a really nice job managing pricing. If we look at year on year compares will continue to see benefits of pricing, which is really driven by everybody.
We're starting to see some erosion quarter over quarter driven by both the increase in competitiveness that we see but also by the fact that especially in Pcs, who we see as high as from an inventory. So we expect that the pricing situation is going to become more aggressive especially in winter.
For.
From a currency perspective, traditionally we have been very effective managing currency and pricing at <unk>.
Game.
<unk> also on what the competitive situation is and whether it's only been 30 so.
We may not be able to fully prices, but traditionally this has been one of the key themes that we have done over time.
Super Thanks for that detail and then maybe Marie Jos.
A quick clarification question regarding Holly.
Is the you know the low single digit sequential increase in fiscal <unk> revenue that you're talking about is that overall revenue and does that include the two months of poly and do we think about including that in personal systems for now are you thinking about re segmenting just any color that you can provide there would be.
Super helpful. Thank you.
Sure Eric Good afternoon, So maybe I'll just start out by clarifying poly so for now our poly will be in our personal systems external reporting going forward and in terms of poly just a point of clarification. The guide actually just comprehends the last two months of Holly so going.
Four we do expect poly to be accretive to our non-GAAP EPS and in terms of the five set headwind.
Combination of both macro headwinds in there and plus debt related expenses and integration costs, but the net net Eric it's roughly in line with our expectations and just a point to follow up on <unk> comments on currency, we do actually see a three point headwind in Q4 as well.
As I read the news.
Sure it kind of the excitement that we have about the announcement, we made yesterday, we think that the acquisition of poorly positioned.
Very strongly as a leader in <unk> work, we see tremendous opportunity to add value to innovate and to differentiate ourselves. So we're really eager to start working with the poorly flash HP team to start, bringing new solutions to market and really expand that business.
Your next question comes from Toni <unk> with Bernstein. Your line is open.
Yes. Thank you I'm wondering if you can just comment on the state of your backlog and the personal systems group I think going into the quarter, you had anticipated not being able to reduce.
Our backlog.
Because it was elevated and I'm wondering.
Where whether you whether backlog changed over the course of the quarter.
And whether you expect backlog to be at normal levels by the end of the fiscal year and I have a follow up please.
Sure. Thank you Tony I'll take that one so backlog backlog reduced during the quarter or do we have talked before majority of the backlog growth on the commercial side.
Given the supply chain improvements that we had that we were expecting we were able to clear some of it were entered in Q4 still we've more elevated backlogs than normal but it is slower than what we had at the beginning of the quarter.
And do you expect to be at normal levels at the end of the fourth quarter and maybe I'll ask my second question.
Yes.
At this point as well.
Supplies was down 9% that that feels extremely abrupt.
Change from kind of the minus three level that you were at before was there any meaningful level.
Supplies channel inventory change and I think you said you anticipated supplies being down double digits for the next few quarters.
How do we know that theres not something structural akin to what we saw a couple of years ago happening with supplies and why shouldn't we be worried about pronounced negative mix shifts given supply is a higher margin in hardware that once pharma hardware. It goes back to kind of normalized pricing levels printing margins.
Could actually be below you're below your trends. Thank you sure. So let me answer the first question.
The question on backlog.
Current plan is that we should be able to clear that during Q4 of course depends on both demand and supply levels. But this is the plan that we have at this stage.
Really thank you. Thank you about the question on supply because this is really something that I wanted to clarify.
The situation that we see today is radically different from what we saw in 2019. The slowdown that we have seen is driven by a reduction in demand, especially in consumer which is driven by the macroeconomic situation very similar to what we're seeing in consumer Pcs.
If I look at the business fundamentals like sure. They are all they are behaving as expected and even if channel inventories slightly high again, driven by the slowdown we have seen in demand overall channel inventory dollars are down year on year. So therefore, we see this as temporary.
Two other economic slowdowns that we have seen in the past and the speed of decline has been similar by long term, we continue to predict that supplies will declining low to mid single digits.
Based on how we have designed the strategy of the company, we don't need supplies to grow to meet our profit goals.
So maybe one thing we're learning that I would like to share is something that we have seen through this quarter and that has confirmed the importance of our strategy is that subscription models are significantly more resilient than the traditional model.
Really reinforces the need to continue to shift the business towards that product.
Your next question comes from Shannon Cross with Credit Suisse. Your line is open.
Thank you very much I was wondering sort of a follow up to that can you talk a bit about the subscription business and maybe more detail.
I'm just wondering you know percent of revenue or growth. You've seen also anything you can talk about with Trent plus in terms of regaining share from the aftermarket and then I have a follow up. Thank you sure Shannon is great to hear your voice again, so he's talking about instant ink it.
It continues to grow double digit both revenue on net new subscribers. So all this is it is there is doing really well I'm really this is driven by the fact that the value proposition to consumers is better than the traditional model cost of printing is lower it is more convenient because they get consumables had.
Home and on top of that is more sustainable.
He is really becoming every time more important we continued to see growth in that space and you are going to continue to to achieve their business in that direction and as we have discussed in the past we continue to see this as a platform to sell additional subscription program and as we shared a few months ago. We have loan for example.
The pilot of paper subscription in the U S and we're seeing good traction and good progress. So very very good progress there in terms of HP plus penetration continues to grow we announce a new system on the on the laser side this quarter that had very strong.
And as we have shared in the in this clip when we look at the combination of <unk> plus <unk> income Big Toner. The combination of growth is more than 50% five zero of our hardware achievement. This quarter. So this talks about the progress that we continue to making that space and lease.
Really important as we have said before to rebalance profitability between hardware and supplies.
Okay. Thank you and then you're basically at about.
16% I'm, sorry in echoing Wednesday <unk>.
Basically at about $16 billion for your cash.
Cash returned to shareholders.
And I'm curious as to how youre thinking about it given the potential pressure on free cash flow given the PC business slowdown what we should think about in terms of your commitment to share repurchase and.
Obviously dividend growth over the coming year or two thank you sure. So for the rest of the year. We have shared that we are going to be exiting the plan that we.
To explain for about three years ago to returning $16 billion of capital. So we will be above that plan in terms of going forward. We don't foresee any changes in our capital allocation strategy. We are going to continue to execute the model that we have been sharing or the framework that we have been shut in during the last.
Here.
First of all within that for US it's important to say the investment grade credit rating for us to be there we need to be in a leverage ratio between one five and two which is where we are now and once we are in that range. Our plan is to continue to return 100% of free cash flow to investors.
Hey, there in dividends or share buybacks and less for an M&A opportunity with a better return shows hub.
This is what we have been doing during the last quarter and this continues to be the plan going forward.
Yes.
Your next question comes from Sidney Ho with Deutsche Bank. Your line is open.
Okay.
Okay, great. Thanks for taking my question.
Last quarter, you had expected strength in the commercial PC for the rest of fiscal 'twenty. Two obviously things have changed it seems like third quarter commercial revenue did decline, but better than consumer when did you start seeing signs of demand weakness and any color on how the quarter progressed, who would be great and do you have a view when you see we will see.
<unk> seen some stabilization in that market and alcohol.
Sure. Thank you. So let me let me explain what we have seen on the commercial side, which is a little bit more complex than on the consumer side, but I think the influencing factors of the same really how the macro situation has evolved and the implications of especially of inflation in there.
I mean, there's two of them.
Companies in general becoming more crucial as they manage their investment. So what we are seeing is that from.
From one side companies continue to open significant deals because they see the need to improve the experience of our employees as they come to the office feedback that we get constantly from our customers is that the employees have now better systems to work from home to work in the office so they need to invest in the equipment.
In the office to convince them to to come back to the office and this is really creating a lot of opportunities in the funnel of opportunities that we see is very significant significantly above what we need to make our sales targets.
At the same time, what we are seeing is once we win those deals.
Conversion of those deals into order has slowed down.
Clearly reflects the fact that enterprises are being more cautious in how they manage their budgets for many new employees are higher and this is having an impact. This has an impact in Q3 of orders in the commercial space.
Additionally to this we also saw at the end of the quarter.
A reduction in the in sell out, especially in the more transactional commercial categories. Those that are closer to the consumer business.
And this is what we are projecting is going to continue into Q4 and this was one of the elements that Rajiv commented that we're using in our guide because we see have seen the slowdown in the commercial category.
Okay.
Thank you.
Follow up question is what do we get an update on your growth initiatives and you can just talk about that Darius.
There you.
<unk> already had $5 $6 billion of revenue in the first half of fiscal 'twenty, two so reaching $10 billion target does it seem to be too.
To the stretch, but can you talk about what you expect half over half in the second half of this fiscal year, especially interested in your comments on gaming given what we've been hearing about the weakness there, but it also helped us that full year target change what the inclusion Paul Thank you very much.
Okay. So let me start from the end when we talk about being above $10 billion, we are not including the additional revenue coming from <unk>, we were not planning to close the deal in Q4 and the target was without them. So what we have seen for the categories is continue of the overall category.
Visit growth.
Let me rephrase, what these categories heart is of course.
Consumer subscriptions.
Workforce solutions. It is gaming it is industrial print.
They sell to interim pain intensity and is pretty apparent. So all of these categories. Overall are growing double digit of course some of them are growing slower than others. In this quarter. We saw a slower performance of gaming that what we had seen in the past, which was a combination of demand and some supply constraints that we were expecting but we.
I expect it to recover in Q4, so overall very strong performance of the growth businesses.
That is really critical for us because they will continue to contribute to the overall growth of the company even in a more relevant way going forward.
Okay.
Your next question comes from <unk> Mohan with Bank of America. Your line is open.
Hi, yes, thanks for taking my question.
Enrique I was wondering if you might be willing to share some thoughts on the PC industry outlook overall for calendar 'twenty two I think industry analysts are forecasting roughly $300 million. We heard one of your large competitors talk about a number that's lower our royalty showing something even lower than that and any early thoughts into calendar 'twenty.
Three.
Particularly as we stand here because theres a lot of concern about things you're learning to sort of pre COVID-19 levels, given the dynamics that happened during COVID-19 and I'll follow up.
Sure. So our current projection is similar to what you were describing we see the market somewhere in between $2 90 to 300 million units. This is what we're using for for our planned receipts and unit. We continue to see more growth from the premium categories. So, Florida on a revenue perspective.
The market is.
Proportionally bigger for them from that perspective.
This is still significantly higher than what we than where we were pre COVID-19 and we think that the fundamentals of the business have not changed from their perspective that Pcs are way more relevant now than they were three years ago. He would think about hybrid work for example, which is where we think the majority of the company.
So we're going to be working if you think of how majority of the companies are going to be working if you think about telehealth. He will think about how students are using Pcs today. All these are drivers of growth for PC.
See the slowdown we are going through in consumer and potential in commercial is driven by macro even though driven.
Driven by preferences for Pcs or whether pieces are more useful or not we continue to believe there are critical and so we remain optimistic about the future of disease. Even if we think we're going to go through these temporary hit.
Headwinds driven by the macro situation.
Thanks Derek.
Any thoughts on 'twenty, three there and as a follow up can you talk about the state of the channel in terms of inventory generally noted a more aggressive pricing environment.
How worried should investors be about any potential write downs that you might have to take and do you expect the PC trend.
Profit mix to revert back to the 70, 525% as we look over the next few years. Thank you so much.
So in terms of 2000 and see at this stage.
Since we think that the immediate impact of these macro it really hard to predict what is going to be the evolution on the macro side and this is why we highlighted that we given that marker. We cannot control. We are taking all the necessary actions in the company to manage through the next quarter because within this.
Difficult macro situation is going to continue.
In terms of guide for fiscal year 'twenty, three we will be providing it at the end of two in our Q4 call and then this is the plan to share kind of how do we see the different businesses performing.
And then in terms of.
China and these were like three for us in the follow up.
We see I thought you mentioned high inventory in the channel.
We are going to be managing it down through the different quarters and we have this built into the guide that Andy shared with all of you I won't be like.
Mark you said sort of disappointed clarification the inventory. So it's certainly on the PFS side of the house that in print hardware actually we're in good shape given the current supply chain position and also just add a comment to <unk> comments about the PFS profit mix and how to think about the rates et cetera. I mean, we do expect however for P. S. Two to stay in those long term.
So if you think about the acquisition of <unk>. We just did here a poly I think that's a good example of how we see these growth businesses that have higher gross margins really playing into the mix going forward as well.
Thank you Matt.
Your next question comes from SME Chatterji with Jpmorgan. Your line is open.
Great. Thanks for taking my questions I guess, if I can start with the Es segment, you've talked today about Brian Mcgee, the sort of consumer weakness that you're seeing but you still expect the mix to sort of move towards the higher end in terms of high end consumer to premium consumer remaining strong.
Wondering what you're seeing in terms of price elasticity from consumers.
And we sort of be a bit more concerned that maybe the next step is for consumers start to trade down a bit and sort of the mixing to start to move down a bit.
If you can share your thoughts around that and then I have a follow up thank you.
Let me, let me share our view on that.
And in consumer.
Shift toward more premium category, because we think that the traditional buyer of the premium category is less impacted by the macro situation that we see as inflation has grown.
The prices have increased in many parts of the world as food prices have increased.
Families with lower income families with lower budget have a bigger impact than they usually are traditionally by lower.
Sbcs versus families with higher impact and we've seen this is really one of the key driver of the change of mix that we're seeing.
Okay, Okay, and a quick follow up on <unk>.
Just looking at the cash flow update our cash flow guidance and the change.
And the cash flow seems a bit more pronounced than the change in the O&M outlook, particularly as if I walk through sort of EPS changes on the share count. It just looks like the cash flow is coming down.
Walk me through the sort.
Sort of buckets in terms of the cash flow guidance change.
Yeah, No we expect our cash flow is largely in line with al Our net earnings obviously, there are some differences quarter to quarter, our working capital.
But just in terms of how to think about cash flow and the guide and what we see at some of the drivers for Q4, Firstly I'd say look we've got plans to it.
Improve our working capital sequentially and we're seeing that just in terms of the lower inventory levels. You were seeing that in Q3, we expect operationally take additional actions going into Q4 I'd say, we also in this last quarter in Q3, we did have some timing impacts around.
Other assets and higher accounts receivable from our contract manufacturers.
That caused that out to be collected in early Q4.
This was caused by component receipts and delays to us.
Therefore, this month's III shipments to our CMS will light now we do also continue to expect to see some sequential improvement in pes volumes.
As you know P. S has a negative cash conversion cycle, so that'll be a tailwind. So based on these factors I am confident in our free cash flow outlook of three and a half to four for H P for the year.
Your next question comes from Ananda Baruah with loop capital Your line is open.
Hi, Thanks, guys, Hey, thanks for taking the questions appreciate it Enrique.
In your comments, you talked about sort of asps.
ASP declined becoming a bit stronger.
<unk> is unique to the quarter and it also sounds like the commercial order, allowing our or set of attracting.
Just on the Friday I guess.
Yes. The question is is should we anticipate that the fundamentals become a bit more challenging.
Sales in the quarter as EBIT, yes in the near term.
And then I have a quick follow up as well.
So we are not guiding next year, so and we expect that channel inventory will be corrected or will be personally corrected to lose that in Q4, but as we entered in Q4, we expect these more.
Relative pricing dynamics, when we look at the channel inventory of the industry, but this is not an HP particular situation channel inventories are high and therefore, we expect to see competition will be more aggressive on pricing.
We are not going to be the drivers of that we will only respond if we see the need to manage our sell out, but we expect to see prices moderate pricing more aggressive as we entered in Q4.
Keith.
So you could add that our chrome shipments falloff. So in terms of the compare so that was a tailwind obviously for Q3, which won't be repeated in Q4.
Helpful. Paul and then quick follow up is the.
Nation plan that.
Youll get it would be talking to us about 90 days.
Would we be I'm, just trying to get a sense of of how.
How incremental it is and I guess the way I'll ask the question is would we be hearing.
Do you guys in 90 days that you've been describing to you.
Yes, some actions that you'd be taking some plan if you werent seeing incremental macro impact.
And that's it for me thanks.
Yeah, I think we're.
In any case no matter what the macro is we need to continue to improve the efficiency of the company.
On the investments that we have done during the last year.
And in digital system will allow us to continue to do going forward.
So what you will see for Murphy.
This plant that will show what are the investments that we're going to be making what are the returns that we expect to see over time, but a big part of it is really be driven by digital leveraging from the work that has been done during the last years.
Yeah.
Your next question comes from Jim Suva with Citigroup. Your line is open.
Yeah.
Enrique and Maria when you mentioned about pricing and margins.
I'm, sorry margins to come down a little bit lower I remember pre COVID-19. It was three and a half to five 5% operating margins for PFS and then I think you took it from five to seven or you're kind of saying now we should kind of.
Start to model and getting back to that three five to five 5% range are you talking about kind of the lower end of that $5 to 7% range I am just kind of wondering about have we structurally moved the higher origin actually with more supply going to go back to that three five to five 5% range. Thank you.
So G&A, it's Marie and good afternoon. So we absolutely remain committed to our long term ranges for PFS that we gave at our security analyst meeting I think the point of clarification is just what we're expecting to see in Q4, where we do expect to be at the lower end of the range based on a lot of what you've heard on the call.
Today, plus also remember that Q4 is typically a consumer holiday season, where you'll see.
Obviously, a slightly different mix from a pricing perspective, so overall Jim.
Changing our ranges and we're staying on track for our long term range.
A reminder, gameboard, we said is we expected to see within the 5% to 7% range. We were already expecting margins for Pcs two to go down as we share that range, but we also were expecting the new businesses peripherals and services to grow in very balanced relevant to grow it.
To compensate for the decline before the model that we had a.
A year ago continues to be the plan, we just need to see how these moments as narrow as we face these new unnoticed picked that economic headwinds.
Okay.
Okay. So I think we are at the end of the time. Thank you all for joining us today and for spending the last hour with US I would like to make a few comments clearly during the quarter, even if we face significant economic challenges, we delivered solid EPS growth.
Or 4% and we continue to return them.
Our capital to shareholders in this case was $1 3 billion.
We are taking clear actions to mitigate the near term macro headwinds that we're facing while we continue to drive progress and execute on our long term growth strategy, because we always see.
This is an opportunity to further strengthen the company and to continue to build a stronger HP. Thank you.
This concludes today's conference call you may now disconnect.
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