惠普 (HPQ) 2018 Q2 法說會逐字稿

Good day, everyone, and welcome to the Q2 2018 HP Inc.

Earnings Conference Call.

(Operator Instructions) And please note that today's event is being recorded.

I would now like to turn the conference over to Beth Howe, Head of Investor Relations.

Please go ahead.

Good afternoon.

I'm Beth Howe, Head of Investor Relations for HP Inc., and I'd like to welcome you to this Fiscal 2018 Second Quarter Earnings Conference Call with Dion Weisler, HP's President and Chief Executive Officer; and Cathie Lesjak, HP's Chief Financial Officer.

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 shortly after the call for approximately 1 year.

We posted the earnings release and the accompanying slide presentation on our Investor Relations webpage at www.hp.com.

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

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

For a discussion of some of these risks, uncertainties and assumptions, please refer to HP's SEC reports, including our most recent Form 10-K.

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

We also note that the financial information discussed on this call reflects estimates based on information available now and could differ materially from the amounts ultimately reported on HP's Form 10-Q for the fiscal quarter ended April 30, 2018, and HP's other SEC filings.

During this webcast, unless otherwise specifically noted, all our quarterly comparisons are year-over-year comparisons with the corresponding year-ago quarter.

For financial information that has been expressed on a non-GAAP basis, we've included reconciliations to the comparable GAAP information.

Please refer to the tables and slide presentation accompanying today's earnings release for those reconciliations.

And now I will hand it over to Dion.

Thanks, Beth.

Let me start by saying it's great to have you back on the Investor Relations team.

I'm quite pleased with our Q2 performance.

It's yet another quarter of strength, growth and consistent execution of our reinvention.

We're creating opportunities and taking advantage of favorable market dynamics to deliver strong revenue and profitability across our segments and our regions.

This was our 10th quarter since separation and you are seeing a sharp focus on innovation and execution, continued improvement on our business fundamentals and an intense focus on long-term and sustainable growth.

Our winning formula is straightforward.

We are focusing on delivering operational excellence, predictable shareholder returns and prioritizing profitable growth, all aligned to our core growth and future strategy.

Looking at our Q2 fiscal year '18 results, we added $1.6 billion to the top line, growing revenue 13% to $14 billion.

We grew top line and bottom line in both Personal Systems and Print.

We delivered nearly $1 billion of free cash flow in the quarter and repurchased $800 million of stock.

And we delivered non-GAAP EPS of $0.48, an increase of 20% and at the higher end of our range.

The market remains dynamic and competitive, but I'm confident in our strategy and ability to continue to grow faster than the market and out-execute the competition.

We are playing our own game, pursuing the heat in the market, and our strategy is paying off.

Let me review some of the highlights.

Personal Systems delivered another exceptional quarter.

Net revenue was up 14% and that comes on top of 10% growth a year ago in quarter 2. This is now 6 consecutive quarters of double-digit growth.

This performance and the innovation coming out of this team is nothing short of incredible.

HP continued to outperform the PC market with broad-based growth across all segments and product categories.

Not only are we seeing strong growth in Notebooks, this is also the third consecutive quarter of double-digit desktop growth.

In the first calendar quarter, we outgrew the PC market by 4.6 points, achieving 22.7% share.

While we are proud of these results, share gain continues to be an outcome, not an objective.

Profitable growth continues to be our focus.

In quarter 2, operating profit dollars grew double digits, and operating margins expanded 60 basis points to 3.8%.

Our team continues to drive improved productivity and product mix.

One of the ways we drive value and profitable growth is through careful segmentation and aggressively pursuing targeted opportunities.

One example is health care where safety, security and regulatory compliance are critical.

We recently introduced a portfolio of products purpose-built for health care providers by optimizing clinical workflows with RFID readers and improving collaboration capability for telemedicine.

And this is connected to our innovation story and the sprinkles of magic we deliver that continued to be recognized in the market as firsts and bests.

This past quarter, we introduced the world's first Chromebook detachable, the world's widest curved all-in-1 and the world's first detachable in tablet with an integrated privacy screen.

This is how we win with partners and customers.

Much of our success is driven by the strength of our Commercial channel and retail relationships.

For us, the channel is a great competitive advantage.

We are deeply committed to listening to our partners, understanding their customers' needs and delivering innovation that drives growth.

We're coming off 3 of our largest partner events of the year where we met with thousands of partners from all regions.

Their response was tremendous, and we are consistently hearing that our innovation engine and go-to-market programs are setting a new standard in helping them to grow their businesses.

In addition to the core, we remain focused on our strategic growth areas.

In Personal Systems this quarter, we made progress in areas such as retail point-of-sale and Device as a Service where we saw strong double-digit growth.

In fact, we closed a deal with a major global fast-food chain to implement both retail point-of-sale and Device as a Service solution.

Just like Personal Systems, the Print business delivered the trifecta of revenue, profit and share growth in quarter 2. Total Print revenue was up 11% with growth across Commercial hardware, Consumer hardware and Supplies.

We're seeing growth across all regions and broadly across the business.

Print units were up 13%, and Supplies revenue grew 8%, further supporting our confidence in the health of the Print business for the long term.

The overall Print hardware market grew 1.7% in the first calendar quarter, and we grew faster than the market, adding 1 point of share.

With our continued productivity initiatives to improve supply chain efficiency and lower product cost, we remain strongly positioned to place NPV positive units.

We're on a journey to reinvent Print and our focus on this enabled us to achieve several important and innovative milestones.

We launched the HP ENVY ISS Printer to the International Space Station in April, where it is currently in use alongside HP ZBook Workstations.

We are investing in next-generation printing with a focus on mobile lifestyle innovations like the new mobile-optimized HP LaserJet pros and our expanded offering of HP voice-enabled printing.

In A3, we continued to onboard new partners and gain year-over-year share.

This business is strategic to us given the high attach rates of Supplies and Services.

Our A3 solutions provide our partners and customers with cost savings, increased manageability and peace of mind with best-in-class security.

As an example, ImageNet Consulting lowered its service cost by more than 15% using HP's smart device services remote management, and I'm pleased with the progress in S-Print since the acquisition closed this past November.

We continue to rationalize SKUs and streamline processes while we're working on new innovations and adding features and options that our customers and partners truly value.

Finally, in our Graphic Solutions business, we closed our largest packaging deal ever with ePac Flexible Packaging, a leader in web-based digital printing that quadrupled its capacity with HP Indigo presses.

We also unveiled the industry-first hybrid latex printer capable of printing on both rigid and flexible materials for the print service provider community.

As you know, the 3D Printing business is a huge opportunity for us and one where we aim to disrupt the $12 trillion global manufacturing market.

The growth trajectory and momentum behind this business continues.

We're seeing an increase in customers placing repeat orders, upgrading their systems for higher volume manufacturing and scaling with double-digit unit installations.

FORECAST 3D, one of the oldest and largest 3D manufacturers in the U.S., is expanding and upgrading its entire fleet to our 4210 solutions as they respond to growing demand and full-scale production.

They're expecting to produce millions of parts on Multi Jet Fusion in the coming year.

And Jabil, one of the world's largest contract manufacturers, is now deploying Multi Jet Fusion in the U.S. and Asia as part of their distributed manufacturing strategy.

We continue to make incredible progress across key industry verticals and expand into new geographies, including our market entry into Mexico.

Overall, I'm very pleased with our Q2 results and the efforts of our team, but as always, we have more work to do.

We are never satisfied, and we see plenty of room for us to grow, innovate, improve our cost structure and adapt to an ever-changing marketplace.

Now before I turn the call over to Cathie, let me address the other news we announced today.

After 32 incredible years and the last 11 years as Chief Financial Officer, Cathie and I have decided it's the right time to transition CFOs before she retires in early calendar 2019.

Today, I'm thrilled to announce the appointment of Steve Fieler, our Head of Treasury, as HP's new CFO.

Cathie will become our interim Chief Operating Officer, lending her experience and leadership to help define our future of operations.

Both appointments will begin on July 1.

On behalf of all HP employees and shareholders, I want to thank Cathie for her remarkable contributions and commitment to shareholder value.

We have been on an amazing journey together since separation and Cathie deserves tremendous credit for helping drive our performance and reinvention as a company.

She has been my partner for the last 3 years and I could not ask for a better confidant and leader.

Cathie has always cultivated incredible shareholder respect through her integrity, transparency and world-class financial discipline.

She has built a deep and talented finance organization capable of leading us into the future.

Steve is a great example of that bench.

Having worked with him for many years, I'm excited to have him join my executive leadership team, and I'm looking forward to our partnership.

Steve has an impressive background as a leader in finance and operations and has a reputation for operational excellence and accountability.

He is a great addition to the team as we continue to drive long-term profitable growth.

With that, I'm now going to turn the call over to Cathie to provide more details on our performance and financial outlook.

And Cathie, after 46 earnings calls, make this a good one.

Thanks, Dion.

I have been privileged to serve as CFO for the past 11 years, or as you noted, 46 quarters.

But who's counting?

It has been an honor to work as part of a team with so many outstanding, dedicated employees during a time of tremendous change and reinvention.

With Steve taking over as CFO, I'm convinced HP is in excellent hands.

As many of you already know, Steve is an experienced finance and investor relations executive with a deep understanding of HP.

He will be an outstanding CFO and a great successor.

Now looking at the results for Q2.

We continued to deliver consistent results with strong revenue growth and increases in operating profit dollars, free cash flow and earnings per share.

Net revenue was $14 billion, up 13% or up 10% in constant currency.

Our performance remained strong across businesses and geographies.

Regionally, Americas grew 7%, EMEA was up 21% and APJ grew 13%.

Gross margin was 19.3%, up 10 basis points year-over-year.

Sequentially, gross margin was up 150 basis points, higher-than-normal seasonality, primarily driven by favorable rate in Personal Systems and improved mix.

Non-GAAP operating expenses of $1.7 billion were up 16% driven by the addition of S-Print along with incremental R&D and go-to-market investments to support growth.

Non-GAAP net OI&E expense was $84 million for the quarter with a non-GAAP tax rate of 16% and a diluted share count of approximately 1.6 billion shares.

We delivered non-GAAP diluted net earnings per share of $0.48.

Non-GAAP diluted net earnings per share primarily excludes restructuring and other charges of $57 million, acquisition-related charges of $45 million, amortization of intangible assets of $20 million, debt extinguishment costs of $126 million as well as non-operating retirement-related credits of $53 million and the related tax impact on all of these items.

It also excludes a net gain of $424 million for tax adjustments.

The gain was a result of several tax settlements across various jurisdictions, covering a multiyear period.

The gain was partially offset by an additional provisional revaluation of the deferred tax assets due to U.S. tax reform and a $671 million tax indemnification.

The tax indemnification amount is associated with our Tax Matters Agreement with Hewlett Packard Enterprise Company since these tax settlements were based on pre-separation tax years.

As a result, Q2 GAAP diluted net earnings per share was $0.64.

Turning to the segments.

Personal Systems net revenue remained very strong, delivering $8.8 billion, up 14%.

We are encouraged as the results continued to be broad based, reflecting execution against our strategy and an innovative product portfolio.

By customer segment, Consumer revenue was up 10%, and Commercial revenue was up 16%.

By product category, revenue was up 15% for Notebooks, up 16% for Desktops and up 9% for Workstations.

Our disciplined focus on market segmentation enabled profitable share gain.

Personal Systems operating profit dollars grew year-over-year, and operating margin was 3.8%, up 60 basis points, as we lap some of the largest commodity cost increases we saw last year.

We will continue to balance pricing to adjust for the impacts of currency and commodity and logistics costs and other market dynamics.

Turning to Printing.

Revenue was $5.2 billion in the quarter, up 11%.

We are pleased with this growth and are encouraged by the progress we are making integrating S-Print.

Total hardware units were up 13%, with Consumer units up 4% and Commercial units up 88%.

Sequentially, Commercial units were up 10%.

In calendar Q1, overall Print unit share was 42%, up 1 point year-over-year and up 4 points sequentially.

Q2 Supplies revenue of $3.4 billion was up 8% year-over-year or 6% in constant currency.

The Supplies mix of total Print revenue was 65%, and we continue to operate below our ceiling for Supplies channel inventory.

We also had good momentum in our contractual offerings.

We are pleased with the strong growth in Instant Ink where we are growing our global subscriber base.

And in NPS, we continue to grow revenue.

Print operating profit grew $19 million, and operating margin was 16% in the quarter, down 1.3 points year-over-year but up 20 basis points sequentially.

The primary drivers of the year-over-year margin decline were strong unit placements and go-to-market investments largely as a result of adding S-Print.

Additionally, we saw increased raw material costs in the quarter which we expect to continue throughout the year.

Now turning to cash flow and capital allocation.

Q2 cash flow from operations was $1.1 billion, and free cash flow was $937 million.

For the full year, we now expect free cash flow to be at least $3.7 billion.

Cash conversion cycle was minus 30 days, improved 3 days sequentially, driven by a 7-day increase in days payable outstanding, offset by a 3-day increase in days sales outstanding and a 1-day increase in days of inventory.

Increases in days of inventory and days payable outstanding are largely a result of negotiated payment terms and leveraging our balance sheet.

Consistent with the cash priorities described in Q1 in connection with U.S. tax reform, we successfully completed a $1.85 billion debt tender during Q2.

Additionally, we had capital returns of $801 million in share repurchases and $227 million in cash dividends.

For the full year, we still expect to deliver returns toward the higher end of our long-term range of 50% to 75% of free cash flow.

Before turning to guidance, I want to reiterate the importance of focusing on our cost structure.

Because of the synergies we see in Print, including the result of the acquisition combined with other cost efficiency opportunities, we will be expanding our current restructuring program.

Compared to the high end of our prior restructuring outlook, we expect the restructuring costs to increase by $150 million to $200 million.

This includes both labor and non-labor-related action.

We still expect to complete the plan by the end of fiscal 2019, including these incremental actions.

We expect that the total gross annual run rate savings before reinvestments to increase by at least $75 million over the higher end of the previously communicated range beginning in fiscal '20.

Looking forward, keep the following in mind related to our financial outlook.

In Personal Systems, we expect that logistics and overall component costs will continue to increase throughout FY '18.

This headwind and any net impact on repricing will ultimately depend upon actual market demand, competitive dynamics and any impact from currency.

In Printing, we have begun to see increases in raw material costs in Q2 and expect that pressure to continue during the second half.

In addition, we expect to continue to have strong positive NPV unit placements, which should continue to push the hardware revenue mix higher.

We'll also continue to leverage our balance sheet if we see attractive economic opportunities to do so.

For the full year, we expect to deliver our productivity initiatives as guided at SAM.

We're also updating the way we estimate our quarterly non-GAAP tax rate in order to provide better visibility across quarterly reporting periods.

Going forward, we'll report our non-GAAP earnings incorporating a 16% tax rate calculated using long-term non-GAAP financial projections.

The non-GAAP tax rate is based on our financial forecast and all currently available information.

It may be subject to change for a variety of impacts, including the company's ongoing analysis of the Tax Act over the measurement period, the rapidly changing global tax environment or other changes to the company's strategy or business operations.

Additionally, we would expect our cash tax rate to be 16% plus or minus 2% for the full year.

With all that in mind, we expect Q3 '18 non-GAAP diluted net earnings per share is in the range of $0.49 to $0.52.

Q3 '18 GAAP diluted net earnings per share is in the range of $0.47 to $0.51.

We are raising our full year fiscal '18 non-GAAP diluted net earnings per share to be in the range of $1.97 to $2.02 and our full year fiscal '18 GAAP diluted net earnings per share to be in the range of $2.75 to $2.82.

With that, let's open up the call for questions.

(Operator Instructions) Our first questioner today will be Steve Milunovich with UBS.

Congratulations to you, Cathie and Steve.

Cathie, do you expect the printer margin to rise sequentially through the next 2 quarters?

Or will that be offset by the higher raw material costs and higher unit placements?

And specifically, what raw material costs are you referring to that are going up?

Sure.

So in terms of the raw material costs, what we're really seeing is increases in resin, plastics as well as DRAM because there's DRAM also in a printer.

Resins and plastics are largely up as a result of oil prices increasing.

So that's where -- what we're seeing there.

In terms of how to think about the OP rate over time, we don't really have an explicit rate for operating profit for Print in any particular period.

We do, long term, expect that the margins will be 16% to 18%, which we talked about at SAM, which is pretty consistent with what we've seen historically.

When you think about the progress in the, I would say, near to midterm, the way to think about it is as we integrate S-Print, ramp the A3 business as well as the 3D business and execute on our productivity initiatives, we do expect that the margins will improve from the 16%.

But that's really kind of a near -- a midterm kind of comment.

Okay.

And could you update us in terms of the buyback?

I'm not sure last quarter, you were at that point ready to talk about the use of repatriated cash and so forth.

So in the first half, we repurchased shares for a total price of about $1.3 billion.

In the second quarter, we did about $800 million of share repurchases, which is higher than what we have typically done.

When we look forward to the rest of the year, we will be active in the market, but the second half will really be consistent with our capital return priorities.

So we've talked about the fact that we are going to be towards the higher end of 50% to 75% of our free cash flow this year, and our buying in the second half will be consistent with that.

And keep in mind that, that towards the higher end of 50% to 75% applies to now the increased free cash flow of at least $3.7 billion for the year.

And our next questioner today will be Paul Coster with JP Morgan.

I'll do the 2 at once, if I may.

Cathie, if you could just give us some sense of what the organic versus the acquired growth rate for the printer business was that would be helpful.

And Dion, I guess, we're seeing some potentially transformative consolidation taking place in the printer industry, arguably part of the endgame.

It must be throwing up opportunities and risks.

So can you just talk to us about what the near-term tactical opportunities might be given some of the strategic uncertainty amongst 2 players, and also, how it's changing your view of what HP will do during this endgame?

So why don't I start?

Paul, as we talked about I think it was last quarter, maybe even the quarter before, we are integrating the S-Print business into the core HP Print business frankly as fast as we can.

And the reason for that is that it's going to drive shareholder value.

So as a result of doing that, there isn't really a way to meaningfully separate what is organic growth versus inorganic growth for the Print segment.

I think the best way to think about it is that Print, by all means, has had a very strong first half in terms of performance.

We're very pleased with the top line growth as well as the unit placements, the margin expansion, and frankly, the Supplies revenue growth as well.

And thanks, Paul, for the question.

The print industry is no different to the personal systems industry.

I think we've seen the personal systems industry consolidating over many years, and it's still consolidating today.

And we're able to continue to grow in the Personal Systems business as you've seen us do double digits for the past 6 quarters by playing our own game, and I think the Print business is no different.

There is not room in an essentially flat market for 14 players, and so I think naturally, over time, that market will consolidate as well.

But I don't subscribe to the fact that it has to be done through acquisition.

I think we made a very strategic acquisition of the Samsung Print business.

That was a technology acquisition as well as an acquisition of some incredibly talented people, but it wasn't a market share play.

As we look at the market today, we feel that from a technology perspective, we're very well positioned in both ink as well as laser, in A4 as well as A3, and we continue to move towards a service-orientated business.

And so by adding the sprinkles of magic that we do across the portfolio, I expect that we can outpace the market.

Having said all of that, I've always said that M&A is an important part of our strategy, that we wouldn't surprise anybody, any of our investors or the industry with what we would do that when we do think about M&A, it would leave somewhere on our strategy page and would need to bolster our strategic intent and accelerate our strategy, that it would be returns based, that it would be weighted against other organic options and alternative uses of cash, that it would come at a reasonable cost and be modest in size, and that we'll remain thoughtful and disciplined and ensure that the opportunities are compelling and will maximize shareholder value.

And our next questioner today will be Sherri Scribner with Deutsche Bank.

Cathie, you mentioned the operating expenses were up a little bit sequentially related to the S-Print acquisition.

Can you maybe help us think about how operating margins will trend now that Samsung is in the business?

Should we see operating expenses at these levels or do you expect to be able to bring operating expenses down somewhat as we move through the year based on the cost-cutting initiatives?

Sure.

So Sherri, what I actually said was the OpEx is up largely as a result of S-Print but not exclusively.

We are also -- we have made incremental investments in R&D and go-to-market as well, and I believe that those will continue.

Now clearly, when you look at either the total company or specifically the Print business, our S-Print business has been in investment mode in the first half.

And as we talked about, at the total company level that it would be accretive by about $0.01 in the full year.

So we do expect it to shift to making some money, which is always good.

But keep in mind that even as it makes some money, it's going to be dilutive to operating margin rates.

I think that that's very important when you think about the trajectory of the Print operating margin rate in fiscal '18.

Okay, great.

And then just looking at the Supplies business, it's trending very strongly, and clearly, you've turned that segment around.

How should we think about growth in Supplies?

I think we've talked about kind of flat maybe slight growth this year.

I know there's some inorganic pieces in there, but it seems like you're trending well ahead of that in Supplies.

So Sherri, what we expect that kind of the sum of Q2, Q3 and Q4 on a year-over-year basis that we would say see 5% to 7% growth in constant currency.

That's what we expect for FY '18.

For FY '19, we expect that Supplies will be flat to slightly up once we have an apples-and-apples comparison with S-Print in both years.

And our next questioner today will be Toni Sacconaghi with Bernstein.

Congratulations, Cathie, on your tenure, and all best wishes for the future.

Thank you.

I have a question and a follow-up please.

First, on PCs, ASPs were up about 7% year-over-year, and we've seen real strength in ASPs for the last several quarters.

Perhaps you can help us understand how much of it you think is coming from DRAM versus changing -- changes in your mix like gaming.

And accordingly, sort of how sustainable -- once DRAM starts declining, how sustainable are ASP increases in PCs going forward?

Or what's sort of the right way to think about ASP changes in a more normalized environment?

Then I have a follow-up, please.

So Toni, we saw good progress, as you mentioned, in ASPs, both year-over-year as well as sequentially.

And in both cases, the positive mix shift that we're driving into premium is having a significant impact on the ASPs.

And we believe that those will continue to be the case.

We also saw -- as you mentioned, we definitely saw some help from DRAM pricing or pricing that we took as a result of commodity cost increases.

And depending on what happens to commodity costs, that piece will obviously go up or down.

And then from a foreign exchange perspective, also with the tougher dollar, we could see some ASPs increase as a result of currency as well.

Okay.

But was the impact from mix greater than the impact from price from DRAM?

And I'll ask my follow-up.

Just on Supplies, back to printer supplies, I think last quarter, you had said that the contribution from S-Print was about 6 points.

And I know it's become more muddied now.

But would it be fair to sort of assume that the contribution from S-Print was sort of in that vicinity this quarter?

And were there any changes to your channel inventory?

I think you said you were under your ceiling, but it's a little bit of a different commentary from prior quarters where I think you said you were within your range, so just a follow-up on the ASPs and then Supplies, please.

Sure.

The impact of mix on ASPs was material and greater than the pricing impact.

In terms of Supplies, I'll go back to what I said earlier.

We really have integrated the business here.

So it's really not -- we're really not able to meaningfully determine what was S-Print's contribution to Supplies versus the core.

Because we are rationalizing SKUs, we are now selling more HP SKUs than S-Print SKUs and, therefore, are those Supplies S-Print Supplies or are they HP Supplies?

So it's just gotten -- it's not just gotten muddy, it's just well integrated, which is exactly what you want us to do because that's what's going to drive the value.

In terms of the channel inventory, I think we changed our commentary, I want to say, 2 or 3 quarters ago, when we really now are managing below a ceiling.

And we have been consistently below the ceiling for Supplies, frankly, since we made the change to our supply sales model.

And Toni, I think we've consistently said, and you and I have talked about it, we have this relentless focus on execution and we have a continued confidence in the predictive value of the four box model.

You can expect us to drive continued improvements across all 4 boxes to maintain supply stabilization in '19.

We anticipate the headwinds that Cathie mentioned earlier.

We've contemplated them.

We've captured them in the expectations, and we've guided that for the rest of '18 as well as '19.

And our next questioner today will be Katy Huberty with Morgan Stanley.

Cathie, my congratulations as well.

I have 2 questions.

I'll just ask them together.

First of all, can you bridge the $0.05 guidance increase on EPS from roughly $1.95 to $2 at the midpoint?

And then secondly, from a free cash flow perspective, if you look at the last couple of years, over half the free cash flow came in the back half of the year, which would suggest that you could do $4 billion-plus this year.

Why is seasonality different this year versus the past couple of years?

So Katy, since it's my last call, I think I'm going to say if I give an inch, you take a mile on the free cash flow.

So when we look at the first half free cash flow, we're very pleased with the performance.

It's really based on the strength primarily of Personal Systems.

To use Dion's term, a double, double and a double, double is pretty significant from a timing perspective to cash flow given the negative cash conversion cycle of Personal Systems.

We expect Personal Systems to do well in the second half, although compares are getting increasingly difficult.

So I think that's one piece.

The other piece is that in the first half, we did have some onetime positive cash flow items that won't repeat themselves.

And then when you think about the bridge for the $0.05 increase that you talked about, it's largely as a result of the share repurchases that we did in Q2 that were in excess of what we had originally expected when we provided the guide.

So you've got the follow-on effect of that as well as obviously the share repurchases that we're going to do in the second half consistent with returning towards the high end of the 50% to 75% of our free cash flow.

And our next questioner today will be Shannon Cross with Cross Research.

I echo the congrats, Cathie; I hope you get to take a nice long vacation sometime in 2019.

Thanks for saying that, Shannon, in 2019.

I was going to say, but not before that.

Exactly

I've got lots to do; I'm not going anywhere.

In terms of the 3D Print business, Dion, maybe you can talk a bit about what you're hearing from customers, how you're seeing the ramp.

I know you have a few new products that will be coming out this year.

So just curious as to how it's progressing in line or ahead of your expectations.

Yes, look, I'm really excited about the leadership position we've taken in 3D Printing and the segment where we operate.

In a very short period of time, we're on the path towards disrupting this $12 trillion global manufacturing industry.

But it's a long path.

I've always said this is a 5- to 10-year journey, and we're making the investments today to really secure shareholder value, both today and for the future.

We're seeing significant sales momentum, including repeat orders from customers as well as service bureaus.

We're expanding our adoption across key verticals.

We're seeing more than 50% of the customer benchmarks.

So these are when a customer is contemplating buying 3D Printing, they'll give us a file and they'll say, "Can you make this part for us?

We want to see and test this part." And we're, of course, checking what that part is for.

And in 50% of the cases, they're for production applications, which is really what differentiates us with this technology.

And some of the recent highlights, FORECAST 3D, one of the oldest and largest 3D manufacturers in the U.S., has expanded its Multi Jet Fusion footprint.

It's upgrading its entire fleet to our 4210 solutions.

And as they respond to the growing demand, they're expecting to produce millions of parts on Multi Jet Fusion in the coming year.

Jabil, one of the largest contract manufacturers, is now deploying Multi Jet Fusion in the U.S. and Asia as part of its distributed manufacturing strategy.

And this quarter, we also continued to grow unit placement across all verticals and geographies, including new customers in the automotive and electronics industry.

And we officially announced our market entry into Mexico as well.

So stay tuned, this is a great business for the long term, and we remain really confident.

And then, Cathie, I had a follow-up on cash flow.

From like -- I know Steve's probably going to kick you if I ask this.

But from a 50,000-foot level, this year, obviously, cash flow has been up year-over-year -- or should be, and so how do we think about it from sort of a recurring going forward?

Obviously, PCs play into it, but when we think about more sort of the recurring level of cash flows that come off the model, maybe you could talk about puts and takes that happened this year that will or will not repeat.

Sure.

Actually, thank you for the question.

I probably should have mentioned this when we were talking about cash flow.

Over time, free cash flow basically grows in line with earnings.

And so we do get a timing benefit when Personal Systems is -- has a particularly strong growth sequentially because, of course, it has a negative cash conversion cycle.

But over time, the cash flow that it generates is going to be largely its profit.

And so there's a pull in for cash.

And so over the long term, you should really think about free cash flow being in line with earnings.

Our next questioner today will be Wamsi Mohan with Bank of America Merrill Lynch.

Congrats to you, Cathie, from me as well.

Your margins have been pretty robust despite these commodity headwinds.

Can you just talk about the commodity environment in terms of memory, both DRAM and NAND?

I think you said that some commodities will be a headwind.

But how have they changed relative to your expectation from last quarter?

Are you seeing any impact from extended lead times in some items like passives?

And I have a follow-up for Dion.

Wamsi, we have seen an increase in commodity costs.

If you think about going back to our Security Analyst Meeting, we actually thought it was going to flatten out in Q4 of last year or towards the end of Q4 of last year.

So we have seen an increase that, at that time, we had not expected.

But as important as commodity costs are as well as, by the way, the logistics costs are also going up a bit, it's really about how you respond.

What are the tools at your disposal to figure out how you mitigate those types of increases?

And this team has just done a tremendous job at mitigating and managing in that environment.

In fact, I put my money on them in a tough commodity environment.

So think about it.

We've used things like pricing.

We've used our supply chain scale.

We've leveraged our balance sheet.

And then to go back to Toni's question, we've done a great job of driving positive mix.

And so those are the types of things that we will continue to use to kind of manage this tough environment.

And I have every confidence that we will continue to be successful.

Okay.

And Dion, as a follow-up to the question on the strategic changes that are happening, can you talk about the opportunity, if you are seeing any, that has been created for HP, particularly in Managed Print Services and in the copier space given some of the events at Xerox?

And can you give us an update on your Ink in the Office initiative as well?

Sure.

Look, I -- the way I think about change in the marketplace is that change equals opportunity.

And so whilst there's competitors that are distracted with structure and -- that generally presents an opportunity in the marketplace.

So what we're doing is doubling down and playing our own game.

If we're out in front of a customer, making a call and our competitors are gathered around the water fountain, then we're out in front of the customer.

And that's really where we want to be spending our time.

I think we have incredible assets inside the organization.

We are very focused on managed print services.

There is no doubt the business model is shifting.

Even in the traditional A4 space, it's moving from transactional to contractual.

And it's happening at a different pace in every country, but it is a megatrend that we certainly want to be out in front of.

Managed Print Services, we've been doing now for many years.

And I think we have really mastered the art of how to manage this for a customer.

And the pipeline not only for Managed Print Services but Device as a Service is really strong, so PC-as-a-Service.

And increasingly, customers are looking to out -- to have everything both at Print and Personal Systems, at Workstations and even 3D Printing in the future as a service.

So we remain focused on that.

With regards to Ink in the Office, it's an important part of our overall strategy.

We have 2 incredible technology platforms.

We have an ink-based platform and we have a laser-based platform.

And as we talk to a customer, we don't sell them a technology.

We understand what their needs are.

And inside a customer, every department, every user has an individual need.

So the marketing department is going to want laser-based quality.

They're going to be wanting really vibrant color when they print proposals, the same with sales inside Cathie, and now, Steve's organization.

They're a little more frugal, and so they want to be able to see red and black.

And green.

We'd like to see some green.

You like seeing green on headlights?

Yes, that's good, too.

But it doesn't require the same high quality.

You get incredible quality with ink, but just not that glossy kind of quality.

And so that represents a really unique solution.

And it means that when we go to a customer, we can provide this mix of hybrid solutions down to a departmental and individual basis that makes our offerings very unique and compelling.

So that's what we're focused on playing our game.

And our next questioner today will be Amit Daryanani with RBC Capital Markets.

Congrats on mine as well to you, Cathie.

I guess 2 questions.

First one, when I think about the commentary you guys have on supplies for next year being, I think, flat to slightly up.

I understand you don't want to break down the delta or can't break down the delta between HP and S-Print, but the supplies commentary would suggest that your installed base is perhaps declining at a faster rate today post-S-Print versus what it was before.

Is that a fair assumption to take away from your commentary for Supplies in fiscal '19?

And if so, when do see the installed base start to normalize as you go forward?

Amit, the core HP installed base, I don't think is declining at a faster rate.

But clearly, the S-Print portfolio will decline at a faster rate, and part of that's because of the nature of the units that S-Print put into the market but also because we've rationalized SKUs.

And that's why it's not meaningful to talk about S-Print separately from HP because they're one and the same.

The better job we do at integrating, the better value for our investors.

And the fact of the matter is, you can't separate the 2.

Got it.

I guess, maybe I'm trying to get a sense of when do you think the combined installed base starts to normalize and have the same trajectory that maybe HP did a year-ago?

And maybe just my follow up, by the way, how do you think about FX within your guidance for the full year given the fact you had some fairly volatile consumables as of late?

So I think I'd take you back to the Security Analyst Meeting, where we talked about kind of what we thought was going to happen at the home, the office and the graphics level in terms of the four box model.

I think that's probably the place to go.

So from a home perspective, we did expect that the installed base would continue to decline; that from an office perspective, we thought the installed base, with the addition of A3, would be flat; and that from a graphics perspective, we thought the installed base would be up.

And that gives you a sense of what's happening from an installed base, our expectations from an install base perspective.

No, I think we continue to successfully execute those growth initiatives, but it takes time, and we had certainly expected it to take time.

As we enter into a new $55 billion business, the A3 business, where we have very low market share, we know that it is going to take time to develop that business, but we remain really confident that we'll achieve the 12% market share that we set out to achieve by 2020.

And I think it's important when we talk about S-Print that you separate the A3 business, which was a very small part of the Samsung Print business.

It was really all about the future technology that they -- the future with their technology.

And it's the A4 piece of the S-Print business that we talk about the installed base coming down pretty significantly, and to Dion's point, as expected.

And you might want to answer the second question on FX.

What was it -- Amit, do you want to repeat the question?

I'm sorry.

Amit, can you remember the -- remind me of the question on FX?

Yes, Cathie.

Just trying to get a sense on how you think about FX or the impact of FX, which has been fairly volatile baked into your July guidance for the full year guide.

Sure.

So FX has been very, very unpredictable.

And when we think about where the dollar is trading today, we think about revenue -- kind of the impact of revenue as a result of FX for the total year would be approximately 2 points.

And obviously, most of that impact, the vast majority of that impact, was happening in the first half.

And the last question for today will be Jim Suva with the Citigroup.

Cathie, you will be missed and the great results and outlook.

My question is Cathie, once again, you mentioned that you've (inaudible) investment into the Print business.

Can you specify was that equal amongst S-Print and your core physical prints were more on the graphics side or the 3D print side, the supply side and maybe allocate -- maybe just talk about where these incremental investments are being allocated?

So Jim, the biggest impact to OpEx was the addition of S-Print in the portfolio from a year-over-year perspective.

But as I mentioned, we did make incremental investments in R&D and go to market.

And those are along the initiatives that, frankly, we've been talking about now for several quarters, and A3 figures prominently in that especially along the go-to-market lines.

In terms of the specifics of how much is in the core, in the A3 space, S-Print, graphics, we don't typically go into that level of detail.

But I would say that you think about the initiatives that we have for growth and that's going to help drive you to where the OpEx investments are being made.

Great.

Well, thank you.

We're at the top of the hour.

I'd like to reiterate that I'm very pleased with the results of the quarter, but as always, there's more work to do.

We never stop.

We remain confident in our strategy and our ability to grow.

Our reinvention is paying off, and I believe our best years are yet to come.

And finally, I again want to thank Cathie for her incredible partnership, and I look forward to having Steve here on the call next quarter, and to speak to you all then.

Thanks so much.

And the conference has now concluded.

Thank you for attending today's presentation.

You may now disconnect your lines.