Q3 2019 Earnings Call

Good day, everyone and welcome to the third quarter 2019, HP incorporated earnings Conference call. My name is Sean and I will be your conference moderator for today's call.

At this time, all participants will be in a listen only mode.

We will be facilitating a question and answer session. During the end of the conference.

Should you need assistance during the call. Please signal a conference specialist by pressing the star key followed by zero.

As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the call over to Beth how head of Investor Relations. Please go ahead.

Good afternoon, I'm back her head of Investor Relations for HP, Inc. and I'd like to welcome you to the fiscal 2019 third quarter earnings Conference call with Dion Weisler, Hps, President and Chief Executive Officer.

Steve Filer, Hps, Chief Financial Officer, and Enrique Lord Hps, President imaging in printing.

Before handing the call over to Dion, Let me remind you that this call is being webcast.

A replay of the webcast will be made available on our website. Shortly after the call for approximately one year, we posted the earnings release and the accompanying slide presentation on our Investor Relations Web page investor the HP dotcom.

As always elements of this presentation are forward looking and are based on our best view of the world and our businesses as we see them today.

For more detailed information please see disclaimers in the earnings materials related to forward looking statements that involve risks uncertainties and assumptions.

For a discussion of some of these risks uncertainties and assumptions. Please refer to HPC FCC reports, including our most recent Form 10-K and Form 10-Q .

HP assumes no obligation and does not intend to update any such forward looking statements.

We also note that the financial information discussed on this call reflects the estimates based on information available now and could differ materially from the amounts ultimately reported on Hps Form 10-Q for the fiscal quarter ended July 31, 2018, and H. <unk> other SEC filings. During this webcast unless otherwise specifically noted all comparisons are year over year comparisons with the corresponding year ago period.

For financial information that has been expressed on a non-GAAP basis. We have included reconciliations to the comparable GAAP information.

Please refer to the tables and slide presentation accompanying todays earnings release for those reconciliations.

And now I'll turn it over to Dan.

Thanks Ben.

Good afternoon.

Thank you for joining us.

We have a lot to talk about today I don't want to start with the topic that I'm sure is most on your minds.

As you've seen Oh would be stepping down as president and CEO HP.

This is a decision I made following a great deal of reflection and it's among the hottest choices I've ever had to make.

There is nothing more important to me.

In my family.

And I'm, making a personal decision to return to a stranger to 10 to a family health Meadow.

Serving as CEO of this great company for the past four years and having the opportunity to work alongside a truly incredible team.

As being the owner, but my Korea.

I also feel privileged that we have such an incredibly strong bench of capable leaders and robust succession planning at every level of the organization.

The hedge P. Board has had a rigorous succession planning process since day, one of our company and this process lived the board to exactly the right leader to Usher in the next era.

[laughter] HP.

After a thorough review and careful consideration of a food bench of external and internal candidates I rest easy.

Knowing that the company I love isn't the best of headwinds within recur as the next CEO .

As you spend time with Enrique.

And get to know him as I have you will see why he is uniquely positioned and exactly the right leader he needs to build on the company's progress and capitalize on future opportunities.

Enrique began his Korea 30 years ago isn't the H.P. intent and spent decades, becoming one of the company's most accomplish multifaceted leaders.

From his engineering roots and expertise across the print personal systems and service organizations to leadership roles at a country region and worldwide level Enrique is relentlessly dedicated to serving customers and partners and passionate about next generation innovation.

Since I arrived at HP seven years ago, I've seen what Enrique is made of it combines the strategic acuity and operational rigor and needed to be a great executive with the passion for people and deep sense of purpose needed to be a trusted leader.

I personally benefited immensely from his leadership during the separation of Hewlett Packard company in 2015.

When we spent many long days together sitting hatch p. on its current course.

<unk> incredible vision, two F. separation management office and was a key architect the one of the largest and most complex corporate separations in business history.

He then operationalize the strategy that transformed hedge piece cost structure, while simplifying the organization and creating the capacity to invest in innovation and drive profitable growth.

More recently in Lincoln has led a comprehensive global review of hatred be strategy and business operations working directly with our board to define our future operating model and prioritize initiatives that maximize shareholder value.

Just lockups separation is bring incredible vision and energy to this work and I know will open an exciting new doors for our company.

You will no doubt be spending a lot of time with Enrique.

But I'm proud of him to our call today to say a few brief words before we dig into our Q3 results and recap.

Yeah, Let me start by thanking you for everything you have done for our company.

I have worked for nine Ceos during my career image, Pete and you reflect the values, but how about from the us and our company better than anyone.

Yes leadership has been a source of strength any past position HP well for the future.

I'm good food put all the time, we have spent working together side by side and I look forward to work for our continued partnership over the coming months.

I know I speak for everyone at HP, when I say that we will always keep your advice to keep raising the bar.

You will always be the first CEO of HP, Inc.

I also want to thank each piece board of directors for their confidence they have placed in me.

And I would like to Frank they extend that they should be team for their support and key contributions.

30 years ago, I wish I mean, do you need him student in Spain.

Our group of H.B. Engineers came to my school, who share their passion for our printer.

I have never seen anyone so passionate about our product and ever changing their world through innovation.

It opened my eyes through new and wonderful possibility.

He told me that imagination, no limits I did inspire me to join this company.

Today I continue to be inspired by this company and our unique ability to bring out the best of humanity through that by way of technology.

Each day, our people across the company are constantly creating game changing innovation that pushes the limits of human potential.

Our opportunities to grow digital manufacturing and graphics printing.

Redefine their model of computing and transform grain harvest.

Really the magic of HP I need is why am I, so excited about our future.

Tim said about Asia, we have built on the foundation or things of HP, which include our powerful portfolio operational excellence vigorous cost management on purpose driven culture.

Yes, I suppose we have come I believe we have great opportunities to do more and to continue our reinvention journey.

An important part of our strategy is to focus on delivering short term results and setting the company up for success in the long term.

As part of the review I have been living with the board we focused on growth, but also on simplifying our operating more than they would be in our business model and driving significant improvement in our cost structure.

I would end objective is to create a more digitally enabled customer centric organization. It's critical that we do so because the needs of our customers have rapidly changing and we must become a more ideal organization, but these prime to fully capitalize on their part to me. These [laughter].

I have great confidence in our ability to deliver sustainable returns for our shareholders and I can't wait to share my thinking on vision with you at our Investor update in October .

I would now like to turn the call back over to Deanne and Steve to discuss the third quarter response.

Thanks Enrique.

I'm truly proud of the work we've done to reinvent HP and I have no doubt you'll be successful.

Now, let me turn to the quarter.

We have a solid operating and financial foundation in place, which was on display once again in quarter three.

We delivered revenue of $14.6 billion up 2% in constant currency non-GAAP earnings per share of 58 cents up 12% and we generated free cash flow of $2.2 billion, while returning almost $800 million to shareholders in the form of stock repurchases.

And dividends.

And we've also raised the midpoint of our full year non-GAAP EPS guidance.

A positive performance demonstrates H.P. strong foundation and ability to compete successfully in the global marketplace that continues to be shaped by opportunities and challenges, including macro and geopolitical uncertainties.

These results also reflect the consistent focus on executing our strategy and our leadership in key markets.

We're still in the relatively early days of hedge piece reinvention, and you're going to see Enrique and the team taking actions to build on that progress.

Now, let me provide more detail on our business group performance in quarter three.

It was an exceptional quarter for personal systems with revenue up 6% in constant currency and operating profit increasing 51%.

We are achieving these results with incredible innovation across the personal systems portfolio and Kid in a relentless focus on customer insights.

We launched more than 40 innovations in the quarter.

We also continue to invest in key priorities, including new products services and solutions.

In the commercial business, we are meeting the needs of an increasingly mobile workforce. This quarter, we launched our latest Elitebook X 360 lineup, which includes convertibles with up to 24 hours of battery life.

More broadly we continue to expand our security leadership position across our segments.

This quarter, we rolled out hedge p. she'll sense across our latest ALLETE books, and the books leveraging artificial intelligence to enable real time malware protection.

It's a similar innovation story in our consumer business, where we continue to set new benchmarks in design performance and security our latest H.P.M.B. series features new stunning materials, our integrated privacy screen and the hedge P. webcam kill switch, which enables users to electrically turn off the web cams when not in use no more posted notes will stick is required.

And then gaming El Limon ecosystem continues to thrive at games come this week, we announced a new line up of cutting edge displays and accessories as well as the expansion of our human Command Center software and services to enable players at all levels to enhance their competitiveness.

Across personal systems, we're driving and aggressive forward looking agenda.

It's reinventing the white people work live and play.

And our products supply chain and go to market, a well positioned to capture ongoing demand and navigate industry dynamics.

Turning to print revenue was down 5% driven by supplies. We once again outperformed the market in an increasingly challenging environment H.P. continues to lead the print category with a sharp focus on innovative products and services.

In the contractual market, which includes Athree, we continue making progress in the leveraging our differentiated technology and IP to capture opportunities in the market.

We achieved 10% athree market share in calendar quarter two.

From where we started we have now reached critical mass in this important market segment.

We continued to gain traction and scale driven by the strategic decision, we made to enter the athree market and the smooth integration of Samsung printing into our portfolio.

More broadly our contractual office business and consumer instant ink portfolio.

Both again grew revenue double digits in the quarter.

In graphics, we continue to see adoption of our technology as customers increasingly go digital.

Our new Heights piece stitch portfolio is being positively received by customers and we have had several key wins without HP indigo packaging presses.

We're also launching new products to address customer needs and adapt to the realities of today's marketplace.

In Q3, we introduced Hedgpeth never stop laser the first of its kind in the industry.

Designed for small business owners in emerging markets. It features toner that can be reloaded in 15 seconds with capacity of up to 5000 pages with a very competitive cost per copy.

We also unveiled HP smart tank for home printing, which delivers best in class print quality and inktank experience, allowing for up to 30% faster printing.

Compared with previous generations.

Turning to supplies. This category remains a work in progress, particularly in EMEA.

We have been aggressively addressing supplies and we are making progress relative to the strategic and operational initiatives, we outlined on prior earnings calls.

Strategically we are growing our contractual businesses.

And adapting our business models.

Operationally among other actions, we have made and continue to make improvements in our business management systems.

Strengthen their pricing discipline.

Improve our channel partnerships and lower EMEA channel inventory levels in the tier one and monitored T two ecosystem.

We're also making senior leadership changes in EMEA.

We believe these are all important steps in the right direction and there is still more work to do.

We acknowledge that these changes are having a short term impact on me as results. Both in terms of the immediacy and the extent of the impact in the second half of fiscal 19.

In addition, we are also seeing increasing macro economic softness, particularly in EMEA.

Well, we saw the most significant revenue declines in industry wide signs of market softness. This contributed to Q3 supplies revenue being below our prior expectations.

We are focused on doing the right things structurally and operationally for the business.

But we need to do more.

We are making significant changes in our cost structure and demonstrating market leadership with the scale to navigate a dynamic environment.

Turning to our Threed printing business. This quarter marked another set of important milestones. We opened the doors to 150000 square foot three D printing center of excellence in Barcelona.

This is hedge p. innovation at its best bringing together the strength of herpes resources, along with our partners and customers and what we believe is the largest and most advanced threed printing and digital manufacturing R&D Center.

In the world.

We also continue to drive installations with industrial bright customers and the thing early traction for our multi jet fusion 5200 solution.

We are especially pleased to see customers embracing new data and software capabilities to achieve new levels of industrial manufacturing predictability reliability efficiency and quality.

Lastly, as we grow our business, we continue to do so in ways that serve the needs of our people pilot and communities.

In Q3, we published our annual sustainable impact report documenting the progress we're making.

These are not just the right things to do the right things to do for our business.

For example, as sustainable impact programs contributed to more than $900 million of new revenue in 2018.

And that's a 35% increase versus the prior year.

And we believe this will be a growing source of competitive advantage for HP in the years ahead.

To sum up we continue to deliver strong earnings and free cash flow, reflecting the power of the broad portfolio, we built and the ability of our teams to navigate market opportunities and challenges.

We still have a lot of work ahead, we always will I have enormous confidence in our business strategy and our team.

Including Enrique is our next CEO .

You will see Enrique and the leadership team take actions to make significant changes in our cost structure advance key strategic priorities and position HAGE P for the future.

Let me now pass the call over to Steve for more insight into this quarter's financial results.

Thanks Deanne.

Before I go through the results I just want to thank you for your leadership of HP.

I appreciate your partnership and you know that I won't be removing you from my speed dial just yet.

And then Rick has already been I might be down for a long time to that won't change.

I look forward to a seamless transition and our partnership going forward.

Our third quarter performance reinforces each piece ability to deliver consistent company results profitably grow and effectively manage our broad based portfolio.

In Q3, we grew operating profit dollars generated strong cash flow and delivered double digit non-GAAP EPS growth.

Our financial performance this quarter demonstrates our ability to successfully invest in our business, while delivering strong financial results.

We remain focused on pursuing returns based opportunities ahead of us while also addressing challenges when we have them.

This helps set up the company to deliver in the short term and generate long term value creation.

Let's look at the details of the third quarter.

Net revenue was $14.6 billion flat year on year or up 2% in constant currency regionally in constant currency Americas, and EMEA were flat and he PJ grew 11%.

Gross margin was 19.9% up 1.5 percentage points year on year, driven by disciplined execution and improved rate and personal systems.

non-GAAP operating expenses were $1.8 billion up 9% driven by increased investments for both growth and efficiency, including investments in innovation targeted marketing spend as well as investments in each piece digital infrastructure.

non-GAAP net R&D expense was $68 million for the quarter, we delivered non-GAAP diluted net earnings per share of 58 cents up six cents or 12% with a diluted share count of approximately 1.5 billion shares.

non-GAAP diluted net earnings per share excludes.

Amortization of intangible assets of $23 million.

Acquisition related credits up $12 million.

Restructuring and other charges of $14 million as well as non operating retirement related credits of $19 million.

It also excludes a net gain of $305 million per tax adjustments.

This net gain is primarily driven by the net income tax gains, resulting from several tax settlements across various jurisdictions.

Partially offset by the tax indemnification associated with these gains recorded in Oh, why any which is part of the Hewlett Packard enterprise tax matters agreement.

As a result, Q3 GAAP diluted net earnings per share was 78 cents.

At the segment level.

In personal systems, we are very pleased with our results.

Revenue in the third quarter was $9.7 billion up 3% or 6% in constant currency.

By customer segment, we once again saw a divergence in performance with commercial revenue up 10% and consumer revenue down 11%.

By product category revenue was up 8% for desktop up 4% for workstations and flat for notebooks.

The team continued to successfully manage our overall product mix as commercial demand remains strong while navigating some of the softer consumer markets.

Q3 operating margins were very strong at 5.6% up 1.7 points year on year.

The exceptionally large increase was driven mainly by the team's continued focus on our strategy and disciplined execution and a favorable commodity cost environment.

Operating profit was $547 million up $185 million from the prior year.

Imprint, the business outperformed more difficult market.

That being said the results were mixed.

We grew commercial hardware revenue increased our market share and continue to make progress in our contractual offerings. However, operating margins were down 0.4 points to 15.6% due to lower supplies revenue.

Looking at the details.

Q3, total print revenue was $4.9 billion down 5% nominally and in constant currency.

Commercial hardware revenue was up 3% and consumer hardware revenue was down 10%.

Total hardware units were down 9% with commercial units down, 4% and consumer units down 10%.

In calendar quarter, two HP gained market share to 44% as the overall market declined.

Third quarter supplies revenue was $3.2 billion down 7% in constant currency with EMEA down in the mid teens.

Tier one channel inventory levels remain below the reduced ceilings.

We are making progress on the operational and strategic plans described in prior quarters and remain confident we are taking the right actions.

However, with the increasing softness in the EMEA market, we expect supplies revenue to remain weak in Q4, as we continued to make progress on our plan and thus we expect supplies revenue to decline approximately 4% to 5% for the full fiscal year.

Looking forward, we expect to take significantly more cost out of the business, while also making more financial shifts in our business model across our combined hardware services and supplies profit pools. The combination of these operational.

Market and strategic factors means that we're not planning for supplies revenue to grow in F y 20.

Importantly, having said that at our next Investor update we will share the multiple levers we have that give us confidence in growing non-GAAP EPS in F y 20.

Turning to cash flow and capital allocation Q3 cash flow from operations and free cash flow were very strong at $2.3 billion and $2.2 billion respectively.

In Q3, the cash conversion cycle was minus 36 days.

Sequentially cash conversion cycle improved four days in line with normal seasonality with a three day increase in days payable outstanding a two day decrease in days sales outstanding and a one day increase in days of inventory.

We returned $533 million to shareholders through share repurchases and $240 million via cash dividends in Q3.

Year to date, we have returned 75% of free cash flow to shareholders.

Looking forward to Q4 keep the following in mind related to our overall financial outlook, we continue to expect a headwind from currency.

In personal systems, we expect the pricing environment to be competitive and in print we expect the market to remain soft in the fourth quarter.

In addition for the full year, we continue to expect our non-GAAP tax rate, which is based on our long term non-GAAP financial projection to be 16% in F 119.

Taking these considerations into account we are providing the following outlook Q4, 19, non-GAAP diluted net earnings per share to be in the range of 55 to 59 cents.

Q4, 19, GAAP diluted net earnings per share to be in the range of 51 to 55 cents.

We are raising our full year fiscal 2019, non-GAAP diluted net earnings per share to be in the range of $2 and 18 to $2.22.

And full year fiscal 19, GAAP diluted net earnings per share to be in the range of $2 and 31 to $2.35.

And we continue to expect to return approximately 75% or free cash flow to shareholders through a combination of dividends and share repurchases over the course of the full fiscal year.

Operator, let's open the call for 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 you are using a speakerphone please pick up your handset before pressing the keys.

To withdraw your question. Please press Star then too.

We also ask that you please limit yourself to one question and a single follow up.

Our first question will come from Katy Huberty with Morgan Stanley . Please go ahead.

Thank you good afternoon, Dion I've really enjoyed watching you succeed and see yes, sorry to see you go but best wishes for both you and your family.

Oh in terms of questions the midpoint as fiscal fourth quarter EPS guidance is down a penny.

Versus the fiscal third quarter, if you look at the past two years Aes expanded.

In the fourth quarter can you just talk about some of the incremental headwinds that are driving the worst seasonality. This year and then I have a follow up.

Sure I'll take that one kt, we've been steadily delivering all year on our Es and as you know we did increase the full year outlook on the strength of Q3 I would describe Q4, we will remain prudent and balancing our current view of the risks and opportunities.

Maybe I'll just touch a little bit on what we're thinking and our outlook for personal systems and print Super personal systems.

I will still have a a CPQ constrained environment across certain products, we're assuming that the incremental China tariffs on opex do not happen in Q <unk> Q4. According to the existing plan a record importantly for the guidance, we're expecting a dynamic and competitive pricing environment with some of the supply chain costs and benefits. We had in Q3, a softening as we enter into Q4. So a in essence the headwind we are seeing in FX.

Offset by some of the supply chain, a tailwind that we've had from a cost perspective.

Well steady out in Q4 and print or expect to move all print market to be soft all we'll continue to look for opportunities to place units.

That being said yeah, we do expect that the units could be impacted I assume the tariffs are impacted.

Which could mean, we'd raise prices and could impact units, but less of an issue on operating profit dollars. We are expecting supplies declines closer to Q2 or Q3 results in Q4.

But we do expect to drive overall expense management. So when I take that all into account is sort of a prudent guide a with confidence we can deliver within the range of 55 to 59 cents.

Thank you for that printer supplies as you mentioned down 7% was worse than expected you talked about some of the macro headwinds.

But how did you perform in the inventory drawdown in EMEA. Your partner, Canada suggested that the drawdown is now now over in cross can improve in the back half of the or do you do you share that that view or how much inventory depletion and investment to drive branded supplies marketshare is still left to come into the model in the fourth quarter.

So it should previously you the sizing of the overall inventory is a triangulation given our lack of visibility into the entire channel ecosystem, but I'll start with some of the data to address your point Kt and then I'll provide some additional color.

So in EMEA since Q1, we brought down our channel inventory dollars that we monitor. So this is both the tier one and parsing the tier two where we have visibility. The total channel inventory dollar reduction is nearly the 100 million that we initially estimated suits. We have made good progress. However, it's not possible to to specifically quantify wouldnt impact we've made in the rest of the on monitor downstream eco system.

In addition.

We do know that we have been reducing channel inventory dollars at the same time. The EMEA market is softening, which is the right thing to do and important business discipline.

It does make it more difficult to distinguish the market factors versus operational factors.

It's important that we continue to maintain or tier one channel inventory onto the redo ceilings globally, which we are and we're also improving the monitoring of our tier two.

Our next question will come from Shannon Cross with Cross Research. Please go ahead.

Thank you very much Indiana, what I can echo <unk> comments on we've enjoyed working with you and we want to hope for the best for your family.

My first question is just if we can understand a bit more about what's going on in printing and I don't know if enrique still around but I'd be curious as to how much of this seems to be a secular shift I mean, we we started to hear a lot more concern out of the Japanese and the most recent quarter that they've reported relative to some of their prior commentary not just scanning but others. So I'm I'm curious if you just if there's something really changing here or do you think it's more you know again, the macro pressures and then I have a follow up thank you.

So Shannon. Thank you for the question, maybe bill could come into play and then I will give you an overview of the Korean market. When do you brought on their supplies paid had we discussed in Q1, we see two different type of issue some more British and then some more strategic that these issues are going to be.

We'll have a little or no impact and we think it will be impacting has not only this year, but on some of the years to come and they had those that some of our competitors have also been highlighting during the last years, we have created a really attractive brophy, putting us with light no I've talked to many other companies to tighten the packet capture and I forgot the combination of one of the factors I described you're going to understand many of the comments that many of the Korean companies in the industry have been making during the last quarter.

Thank you and maybe I don't know if you want to take my follow up question, but I'm curious as and I know I'm not trying to to front run what you're what you're gonna say at the analyst day, but you know as you look at some of the top line pressures that you're facing and the fact that Pcs are gonna go probably will be under pressure nextera. Following the end of life for one seven I know when Henry fresh <unk>, how does that impact your thoughts on investment in some of the.

Other areas that the companies looking at like Threed printing and the Athree market you don't will will that shift any idea of where the spend is going thank you.

Oh, maybe address that first and then Enrique if you want to chime in Shannon. So I think the reality is that we expect to continue to do both it's it's about investments in innovation and also productivity and efficiency and as you heard in our prepared remarks from both the on Enrique and myself, we do think that there's an opportunity to take significant cost out of the business, while maintaining our investments for growth I mean, just to give you a little bit of context as you'll see in our PML, but we've got over 50 billion of annual spend so we've got a a rather large addressable spend the opportunity to go after across cost of goods and Opex. So really every percentage point here really matters and so you'll be hearing more about you know the opportunities we see in in the months ahead at the Investor day, but the overall, we can sort of align our cost activities with our growth and investing activities.

I think Jim and you will see that our plan going forward is going to be aligned around three different complimentary backend food, we need to continue to expand into some of the growth opportunities that we have you can't be fighting to buy TV printing contract, where the businesses are there opportunities for us to go at the same time, we need to continue evolving our business model I highlighted that's already like here during the Investor day, and we will share some of that program on that block that we have to go build on these penny.

And third we have a great opportunity to create value by continuing to simplify our company. Good girls to cross promote getting girls had two customers I through I know this will reduce our cost structure, because maybe document gooseneck, who will give us also the opportunity and the capacity to continue to invest in negotiating.

Just to round that out finally, sorry that that's what gives us all of us muscle Stephen Enrique.

The confidence of the multiple levers that we see and gives us that confidence in our ability to grow E. P. S. Again next year.

Our next question will come from Toni Sacconaghi with Bernstein. Please go ahead.

Yes, Thank you and let me reiterate a previous comment Ah Dionne I wish you all the best and for your family going forward and Enrique look forward to working with you more closely I just wanted to follow up on the printing.

So it sounds like things have gotten notably worse.

In the last couple of months because as you noted your guidance originally was soon supplies to be down 3%.

And you were tracking to that through the first half of the year and now you're suggesting its going to be down four or five which would suggest that the second half is going to be down six or 7%, which is you know dramatically worse than you had thought and I think initially you thought through tactical improvement things might actually get a little progressively better over the course of the year and so if I just reflect on the magnitude of that change in outlook.

Are you really suggesting that most of the day it is.

A bigger strategic headwind from.

From cloning and alternatives than you had originally thought or are you, suggesting that the economic weakness in Europe is the principal driver because I guess my observation would be globally. The economy is still pretty healthy and so if we're saying with.

A relatively healthy global economy normalized supply growth this minus six or minus seven.

That's pretty rough to me so perhaps you could clarify that and I have a follow up please.

Why don't you maybe provide some financial context and hand over to Dion for for additional color. So.

In the first half our total supplies revenue was down 3%.

EMEA was down roughly 9% in the same period in Q3 total supplies was down 7% with EMEA down mid teens, I say that because I want to be very clear that our supplies performance continues to be driven by by EMEA.

Yeah, Let me tell you had a bit of context here. These.

Two primary factors here that are occurring simultaneously. The first one is as we look across the macroeconomic environment, particularly in EMEA, we're seeing even more uncertainty in industry wide market softness.

And secondly, as I described in my prepared remarks, we're making progress.

In the plans, we outlined on the priority in schools and that taking the appropriate structural and operational actions and including marketing and brand protection business management system as well as out deal pricing discipline that we've talked about in the past just to name a few.

In addition, a we're making senior management changes in EMEA and all of these are designed to put out a media print business on a stronger footing.

And while we had expected that these changes will create a short term impact in the channel.

We underestimated the immediacy is the reaction and the size of the impact on the back half of the year and it's the combination of these two factors.

That have the larger than anticipated decline in EMEA, but as Steve mentioned in his prepared remarks, we are confident that in spite of all of this we can navigate through these challenges and he now seen your metrics of EPS and free cash flow and finally were confident in the multiple levers that we see and that again gives us confidence in our ability to grow MPS again next year.

Thank you for that just just to change topics as you noted that the PC margins were exceptionally strong this quarter and Steve It sounded like a your guidance for Q4 and your description of a more competitive PC environment was suggesting that margins may not be as strong, but how how do we think about normalized PC margins I think you had or at one point said three to five and then sort of lower that to three to four what do you think is is normalized then and how quickly do you feel that the falling component prices will ultimately be passed along to end customers.

So.

We do view Q3 is an exceptional quarter for us growing operating profit dollars $185 million and personal systems alone and I do want to give kudos to the team they stuck with the strategy. The remain disciplined cannot have been and remain disciplined all year.

I went to your to the performance of 4.7% op margins and over 300 million of profit drop drop in that segment alone but to directly address your question.

We do expect margins to normalize back obviously into the 3% to 5% range Tony our goal of approaching the higher end of that over time.

There aren't will always be more shorter term headwinds and tailwinds, whether it be commodity costs FX other pricing dynamics that tend to move pretty rapidly. We're focused on is the longer term shift of our mix and improvement of our portfolio across our products and services and this is a stickier more structural margin improvement that we expect to get over time again with the goal of getting to the higher end of that 3% to 5% over the years I had and I I think time, you've seen that thing very consistently over multiple years deliver against that strategy and that's what you can expect from us in the future.

Our next question will come from Amit Daryanani with Evercore. Please go ahead.

Yeah. Thanks, a lot for taking my question guys and beyond best wishes to you and your family in the future I guess two questions from me as well you know given the supplies discussion all we've had so far worse than what you guys thought 90 days ago, how much of the shortfall is a macro getting worse worse says execution issues is there a way to split those two buckets up and then Dion or Enrique I'd love to hear your conviction and confidence on why you think these issues not spread beyond the yard to North America EPG as well.

So on the first part of it it it's it's it's really hard to bifurcate the data between what's <unk>. The two actions after the two items that Dion described through the actions were taking in the market and how that's change when it when they will highlight I think it's important to highlight is if you just reflecting the first half of the year and print our supplies were down 3% in Regrew operating profit dollars in that period and I do want acknowledge we did not grow be dollars in print in Q3, given the larger supplies decline, but we do have multiple levers across our print business from more profitability and our hardware services more growth in our growth initiatives as well as cost structure items to address and prints and there are other levers we'd be on supplies.

Oh, Oh, Oh, so from here, then I'll ask Enrique to give us your thoughts, but I've heard this cost in quarter. Two we continue to make progress on the action plans that I laid out in February now supply top schools, because really taking the appropriate and very decisive steps in EMEA that put out supplies business and better fighting shape in lot of the industry wide and macro headwinds that we're seeing a we expected impact from these actions that the size and the timing of the ripples coolers in the back half of this year is something that we underestimated and I'm sure and he can give you sort of a little more color on how progress there as well.

Okay. So let me go through some of the operational improvements that we have made [laughter] as we outlined in Q1, they need to know that burdened the burn type both an operational and strategic.

Yeah, Hi, wonder, but isn't that aside we are aligned for any of the programs. So let me hit some of them.

We made bad we needed to increase our investment in demand innovation in the online side, we have done that and we have seen that broken for example in most of the key European markets. We have seen a tempering improvements in coverage when somebody loop or what's surprising in Google.

We have also double down in our brand put things, but they cannot give you both increasing or whatever efforts to fight controversy, but also in protecting our IP I'm thinking or would I be something that we have done by ourselves, but those will you have seen kind of them, taking very decisive actions in their side of the portfolio, where they own the IP.

We have also continued to improve the visibility that we have into two yet, but I would say about the I phone or a discount policies again to make sure that we manage the business more effectively.

Well, you're going to see you said about the Roes that a broad and deep actions and it will take some time until we see the full effect of all of those.

Our next question will come from another butter, who with loop capital. Please go ahead.

Hi, good afternoon, thanks for taking the questions and again Deanna I'll Echo the sentiments everybody on the call. It's been great working with you I did just a really fantastic job with the company and wish you and your family all that in the future Yeah, well yeah. Good luck good luck.

She looks like clay I guess, just sticking with supply and that went on PC any any sense of how long you think I guess getting getting too soon to call. It critical mass with some of the structural.

Channel dynamics in Europe would take it sounds like you have some sense of what's going on [noise] since you've adjusted the guidance here and I know you're going to give up the guidance at the analyst day, but it would be helpful lead to get some sense of how many quarters. We are how many months. We are you guys kind of getting structural critical mass and then I've a follow up.

So maybe I'll take that one first and as I said in my prepared remarks, and I think Enrique wanting to.

Along detail about F Y 20, and the strategic and operational things. So I would bifurcate the two so on the operational side, what we're driving in EMEA, we are making good progress and yes, the timing extent in sort of the immediacy of the impact was higher than we anticipated, but we are making good progress and would expect to work through these operational changes in you know in relatively short order in the quarters to come as it relates to the more strategic impact that's a more sustainable impact for us in is in is really the primary driver of why we don't expect supplies to grow in that fight 20 that being said as I commented previously we have multiple levers we have demonstrated this through the first half of the year growing operating profit dollars, even with our supplies business declining we've got levers around the growth initiatives that we're driving we got levers around the business model itself the ship to contractual to shift to more profit in hardware and services itself and we got levers around.

Our our cost structure and the significant cost saving opportunities and these things Holistically is why we have confidence in our <unk> S. A plans for next year to grow we've been working on this plan as a team and Riki Dion myself and the leadership team and we're all confident ability to grow your P.S. next year.

That's very that's that's really to either go onto the <unk> program on the supply side will be we are there anything by business mother changes the acceleration of our premium if a business services business is good the color you have seen us introducing premiums we've heard different business model. Both on the ink side I mean, the laser side and actually we have leading though many of these market on those so we wouldn't be looking at their workers torture, we will continue to reduce our cost structure to make sure that we delivered on de beers goes that Steve was mentioning before we look forward to lying all these plans with you at the Investor meeting.

And guys is it possible to return to growth it at any quarter in fiscal year 20.

I'm assuming that question was in relation to surprise I have multiple levers that are company to grow our earnings per share.

Our next question will come from Tim long with Barclays. Please go ahead.

Thank you yeah, just two if I could first could just give us a little color on the personal system side consumer has been tough the last few quarters could you just give us a little insight into what it's going to take to get that that segment going again.

And then second on the on the Athree side, you mentioned I'm getting a 10% and getting some scale there.

What does that scale mean do you know when do when would we start seeing some more supplies pull through what what does that scale gain you.

When it comes to the financial model. Thank you.

Yeah. So we look at a personal systems results actually you know our company results. We did see a softer consumer similar to what we saw last quarter and a stronger commercial I think.

Well I think when we look at the though the results we are seeing softer come or a consumer across the board a with a stronger commercial some of that is driven on the personal systems signed by the supply and availability of supply, how we're getting and demand shaping out as appropriate.

It's important that you understand we've got a very diversified portfolio across consumer and commercial even commercial was SMB enterprise and we sell into the industrials place space. So given the diversity of the geography is we plan and the prime portfolio that we have and customer segments that we plan.

We feel like we can manage through up and down environment, Yeah. As it relates to the second question. We've said all along that we will be very strategic and systematic in how we go. After this 50 billion dollar plus ice free market. I've also said on many occasions that customers don't think about the printing in context of ice where you I flew in fact, many of them don't even know the difference they think about their overall printing solutions and I realize that we said at 12% share target by the end of 2020, but our overall focus has always been on building a contractual business and I think he's a key element of that strategy. It's also being important that we validate our technology and achieve critical mass in a competitive field and we're doing just that we achieved double digit market share at 10%. It and you know we expanded and where are we in partnership that we announced earlier in Q3 with Xerox, which further validates the strength of our strategy and the product portfolio.

So I'm really not fixated on getting to 12% share by any particular period and I'm not saying that we will that we want.

What is important is we build the right distribution and partners to penetrate the contractual office. So from a customer's perspective, which is what guides us what I can say is the overall printing solution is what matters, most and when you combine our why three products and technology, a channel and our overall capabilities and the couple that with our market leading eye full presence, we really have a very compelling and formidable portfolio. So remember our largest strategies to grow and contractual and to evolve our business model into more services and solutions.

Our next question will come from Jeriel Ong with Deutsche Bank. Please go ahead.

Hi, guys. Thanks for letting me ask the question so.

So print print margins have degraded to kind of the lowest point and at least a couple of years I think asking focusing on printing different way is there a scenario where print margins maintain even a supply Jeremy decline and what would be the growth drivers and other businesses, perhaps to to get the margins to stabilize.

I think it's important that.

Communicate our focus is on operating profit dollars. It always has been it'll be dollars are not married to any particular quarter as I alluded to earlier, we have different levers not just applies to drive our profit dollars.

As it relates to the rate specifically, we did deliver a 15.6% op margin in Q3. It is below our target of at least 16% I would expect Q4 margins remain weaker given my supplies commentary I'm probably be more in the range of our Q3 margins as we work through the ammonia supplies challenges in overall print marketing market weakness.

That being said a in the near term our annual op margin target remains and at least 16% but to reiterate our focus is on hope he dollars an opportunity to drive even more operating profit profit dollars outside of supplies or with the items I talked about earlier today.

Look Additionally, ought to have that at the company level, we're really proud of how we manage our total portfolio and we continue to deliver consistently against now senior metrics of earnings per share and free cash flow. The commitments that we make I think you should draw bright comfort from this and these highly experienced team knows how to operate in both up and down markets and how to respond positively to the inevitable business challenges that are just part of business.

Got it appreciate that I I got another one but I'll flip over to the PC side, there's about 130 basis point improvement quarter on quarter in margin. So it seems like while some of your peers might have seen a better margins in their PC businesses, a quarter earlier, probably due to memory components. It seems like you're predominantly seem that the minimum prices better in the latest quarter. I guess is there any way that you guys have thought about breaking down how much of this quarter on quarter increase in margins was due to components versus perhaps better mix for more consumer versus or better mix or more commercial versus consumer I'm, sorry, and anyway, you can break that down for us.

Well, what I'd say is it's all the above I mean, we continue to make progress. The team has been very disciplined with our pricing strategy, but are also our overall personal systems mix on a year over year basis continues to improve I don't think I'm going to break it down specifically, but as you know to the earlier question I believe from Tony you know our operating margin rate target is between 3% to 5% and overtime. Our plans are to drive to the upper end of that that that range.

So unfortunately, we're out of time and I want to thank everyone for joining us today I also want to extend the personal thank you to all of you for your warm wishes and fuel personal support over the years. It's been an honor working with you. We obviously have a lot to talk about today four years ago, many people who dabbled this business we didn't.

Weve reinvigorated this business and reinvented high GP the teams executing against our strategy and investing in innovation, while simultaneously taking cost out of the business and we always have to do both both as a result, we've delivered consistent free cash flow and met or exceeded their non-GAAP EPS outlook for the last 15 out of 15 quarters, a lockup batting average.

Ricky you need to continue that.

We have a strong foundation, a really strong foundation a powerful portfolio. We have world class talent, we have a culture of performance. It's been an honor to serve a C. O. This iconic company in Rick has been a tremendous promise to me is weve reinvented hedge pay and I couldn't be more excited and optimistic for him and for the future of HP under his leadership.

I'm, 100% focused on finishing out Q4, and the fiscal year and to ensuring a smooth transition at the company that I Love and then to look forward to continue to guide the company as a direct them moving forward. Thank you very much.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.