HP Inc. (HPQ) Q2 2017 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the Second Quarter 2017 HP Inc. Earnings Conference Call. My name is Austin, and I will be your conference moderator for today's call. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Steve Fieler, Head of Treasury. Please proceed.

Good afternoon. I'm Steve Fieler, Head of Treasury for HP Inc., and I'd like to welcome you to the fiscal 2017 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 web page 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 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 at this time and could differ materially from the amounts ultimately reported in HP's Form 10-Q for the fiscal quarter ended April 30, 2017, and HP's other SEC filings. 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. And now I will hand it over to Dion.

Thank you, Steve. Good afternoon, everyone, and thank you for joining us today. I'm very pleased with our quarterly performance. It was a breakthrough quarter where we delivered year-over-year growth in both Personal Systems and Print. As a company, we're performing across our portfolio, our regions and our key financial metrics. Over the last 6 quarters, we've been building momentum, improving our business fundamentals and delivering on what we said we would do. We're taking profitable share, out-executing our competitors and delivering some of the best innovation, design and execution in HP's history. Our goal is to consistently deliver on our financial commitments every quarter, while setting the company up for long-term success. We are strengthening our core business and delivering on milestones in our growth and future initiatives. I'm proud of the results this quarter. Let me talk through a few of the highlights. We delivered non-GAAP diluted net earnings per share of $0.40, at the high end of our outlook range. We grew net revenue by 7% year-over-year to $12.4 billion, driven by growth in Personal Systems and Print, the first time we've delivered growth in both segments during the same quarter since Q4 of 2010. We delivered free cash flow of approximately $400 million for the quarter and $1.1 billion for the first half of the fiscal year. Through the same year-to-date time period, we returned approximately $1.1 billion to shareholders through share repurchases and dividends. Looking at the business segment performance, Personal Systems continued to deliver and demonstrate how playing our game drives strong results. The team, once again, drove revenue growth year-over-year and market share expansion. We saw a small increase in operating profit dollars year-over-year at a time when significant component cost headwinds have been pervasive across the industry. This is a great example of how segmenting market opportunities, innovating and executing can yield amazing results. For the second consecutive quarter, Personal Systems revenue grew by 10% year-over-year. And importantly, once again, this is broad-based growth across all 3 regions, both Consumer and Commercial audiences and in Notebook and Workstation categories. In calendar quarter 1, we beat the year-over-year PC market unit growth by 12 points, once again outperforming all key competitors and the market as a whole. We achieved 21.7% global market share and regained the #1 PC market position globally. Remember that market share leadership is an outcome, not an objective. Our ability to gain profitable share is one of the true measures of success. Today, security is top of mind for consumers and the boardroom alike. Just look at the cybersecurity events over the past couple of weeks. With this backdrop, we continue to deliver the most secure and manageable PCs in the world, with powerful new Commercial Notebooks and Desktops, including the EliteBook x360 with HP Sure View and HP Sure Click. As part of our world-class security stack, Sure View defends customers from visual hacking, with a built-in electronic privacy screen. HP Sure Click protects customers and organizations from web-based security threats including malware and other viruses that we are all seeing daily in the news. We also announced HP Sure Start, the world's only integrated browsing solution which protects our devices from malware. In addition to security, mobility is a top priority for our customers and a differentiator for HP. At Mobile World Congress, we introduced the latest HP Pro x2, with the design, security and productivity features tailored for today's mobile workforce. This discerning audience took notice honoring the Pro x2 with several important awards including a category Best of Show, Top Pick and Top Innovation. While the PC market has been healthier than expected during the past few quarters, the market remains highly competitive and volatile. Regardless of market conditions, I remain confident in our team's ability to deliver consistent results through a relentless focus on innovation, market segmentation and cost management. And whether it's a virtual-reality backpack, an OMEN gaming system, a DreamColor display or a premium PC, we are winning hearts and minds with the sleekest and most desirable products we have ever created. I am truly proud of what we've achieved in Personal Systems and energized by the focus, energy and talent of our people who know how to combine innovation with incredible execution. Shifting to Printing. Enrique and his team had a breakthrough quarter, with strong performance across multiple dimensions: total revenue, supplies revenue, units, market share and operating profit. Printing revenue grew 2% year-over-year with both hardware and supplies revenue growing in the same quarter for the first time since Q2 of 2011. Units also grew year-over-year as did our market share, while delivery operating profit expansion. It's been a long time since we've been able to say that, especially in a single quarter, and we're excited to be igniting a real renaissance in Printing. With solid progress on our productivity initiatives which lowers our overall cost structure, we remain better positioned to competitively price and place more units with a positive NPV. Due in part to our continued operational progress, hardware units were up 4% in Q2, our third consecutive quarter of year-over-year unit growth. The overall Print hardware market was up slightly in calendar quarter 1, a bit better than expected. We continued to grow faster than the market with year-over-year profitable share gains in both our home and office businesses. I'm pleased that our supplies performance strengthened this quarter with revenue up 2% year-over-year. We continued to pull the levers within the Four Box Model, and when combined with our operational progress, both are having a favorable impact on the business. In addition to improvements in our core Printing business, we have also built momentum in strategic growth areas. Our Graphics business delivered another strong performance with year-over-year revenue growth in constant currency for the 15th consecutive quarter. We saw balanced hardware revenue growth across the portfolio as well as in graphic supplies and services. Similarly, we saw growth in contractual printing, with continued increases in new total contract value for Managed Print Services. We also grew Consumer enrollment in Instant Ink and continued to expand into new geographies. At the end of Q2, we began shipping our disruptive portfolio of A3 multifunction printers. In contrast to the established copier players, our new A3 portfolio is expected to transform the copier experience for customers and service professionals. Our differentiation includes a lower total cost of ownership, improved serviceability and the most advanced security and device uptime. Our journey is just beginning, and we are aggressively onboarding new partners and attacking new opportunities in the $55 billion A3 copier market. The acquisition of Samsung's Printing business will further accelerate our A3 portfolio. We expect the transaction to close in the second half of '17, subject to regulatory approval and other customary closing conditions. Turning to 3D Printing. This was our second quarter of product shipments, and the feedback from our customers and partners is very encouraging. Across the board, we're building momentum and advancing the entire ecosystem. This month at Rapid, the largest 3D printing conference in the world, we announced a series of important milestones, including a reseller program with more than 30 partners. More than a dozen 3D reference and experience centers across North America and Europe, a growing roster of manufacturing service bureaus and product development customers implementing HP Jet Fusion 3D Printing systems for production and new applications. And we expanded our open materials platform to include new partners like Henkel, a global leader in high-performance adhesive technologies. Also, just this past weekend at the inaugural 3D Printing Industry Awards, HP's Multi Jet Fusion technology was recognized as the Innovation of the Year. Disrupting the $12 trillion manufacturing sector and transforming industries is a long-term vision, and one that we are making concrete strategic progress on today. This is a multiyear journey, and I'm confident in this team's ability to bring disruptive innovation to market, create and empower an ecosystem and redefine the economics of production manufacturing. To summarize, Q2 was a breakthrough quarter for us, with strong year-over-year performance across our segments and regions. We're executing, meeting our commitments and capitalizing on our momentum. We are also making the right investment decisions for the long term. However, our work never ends. Every single day, we must continue to amaze our customers and partners with the most competitive and disruptive portfolio in our industry, and provide them with meaningful value and opportunity. Change is a constant in our business, and to us, change equals opportunity. We know how to operate in up and down markets that we will continue to face and are prepared to tackle the opportunities and challenges that lie ahead. By embracing change, we have an opportunity to accelerate, to innovate, to improve and ultimately, to reinvent for our customers, partners, employees and shareholders. I will now turn the call over to Cathie to provide more details and our financial outlook.

Thanks, Dion. Overall, I am also very pleased with our performance in the second quarter. We delivered net revenue of $12.4 billion, up 7% year-over-year. Similar to the broad-based performance we delivered last quarter, we saw strong momentum globally, with each region delivering top line growth year-over-year and both EMEA and APJ growing about 10% in constant currency. Gross margin of 19.2% was down 0.2 points year-over-year, driven primarily by strong Personal Systems growth and higher commodity costs in Personal Systems, partially offset by Print margins. Sequentially, gross margin was up 1.5 points, higher than normal seasonality, driven by favorable print margins combined with strong sequential growth in Printing and resulting segment mix. Non-GAAP operating expenses of $1.4 billion were up 7% year-over-year. The expense increase was driven by SG&A, where the year-over-year reported growth was impacted by the gains or offsets to SG&A expense that were recognized in FY '16 for the divestiture of certain marketing optimization assets. In addition, SG&A increased year-over-year as we drove more demand generation and marketing initiatives primarily in Print. We also continue to invest more in research and development year-over-year. These R&D investments are important drivers to fuel future innovation. Net OI&E expense was $69 million for the quarter. As a reminder, in the year-over-year compare, last year, we recorded a onetime gain of about $0.03 in OI&E from a favorable litigation settlement. With a non-GAAP tax rate of 22% and a diluted share count of approximately 1.7 billion shares, we delivered non-GAAP diluted net earnings per share of $0.40. Non-GAAP diluted net earnings per share primarily excludes restructuring and other charges of $140 million and acquisition-related charges of $20 million, partially offset by nonoperating retirement-related credits of $35 million, cash indemnification credits of $5 million and the related tax impact on these charges. In Q2, GAAP diluted net earnings per share from continuing operations was $0.33. Turning to the segments. Personal Systems net revenue was $7.7 billion, up 10% year-over-year. We saw strong performance across both customer segments, with Consumer revenue up 16% and Commercial up 7% year-over-year. While share performance is not our first priority, our disciplined focus on market segmentation and innovation enabled meaningful year-over-year unit and revenue share gains in calendar Q1 across Consumer and Commercial. PC average selling prices were up year-over-year and sequentially, driven by favorable pricing and to a lesser extent, a mix shift to premium, partially offset by currency. As we highlighted last quarter, we took pricing actions globally in response to unfavorable currency and the increased cost of components. However, the potential impact on demand and full benefit of these price increases takes time to play through, especially in Commercial. As such, gross margins were down both year-over-year and sequentially in Q2 driven by the continued component cost headwinds and currency, which weren't fully mitigated by the higher average selling prices. The team delivered a 3.2% operating profit margin, down 0.3 points year-over-year. We continued to make progress beyond the core with a focus on strategic growth category. In Q2, we saw strong growth in premium, Commercial mobility and Commercial services. Turning to Printing. We remain on track to deliver operational improvements in the core business, while making progress on our growth initiatives. Revenue was $4.7 billion in the quarter, up 2% year-over-year. Hardware units were up 4% year-over-year, with growth in our Consumer and Commercial categories, up 3% and 6%, respectively. Our total unit growth includes HP Sprocket, our handheld photo printer, which continued to have strong demand and contributed to our year-over-year metric. In calendar Q1, we gained share year-over-year in both our home and office businesses, with overall print share up 0.5 points. Overall, print hardware revenue was up 7% year-over-year, supported by increased volume and higher average selling prices, driven by both rate and mix improvements. We continue to be focused on improving our cost structure, which will enable us to place more NPV-positive units, driving these positive NPV unit placements is one of the many levers to help ensure ongoing supplies revenue stabilization. In our growth initiatives, graphics had another strong quarter, growing revenue across all regions and nearly in all product categories, with strong performance in Indigo. Managed Print Service's new TCV was again up year-over-year. And as Dion highlighted, we shipped our first new A3 printers at the end of Q2 and look forward to scaling the business in the quarters ahead. In Q2, total supplies revenue was up 2% nominally and in constant currency, the first quarter of year-over-year constant currency growth since Q2 2013. The year-over-year increase associated with the Four Box Model drivers was better than we expected. We have clear line of sight to supply stabilization and expect second half supplies revenue growth to be flat to slightly up year-over-year in constant currency and adjusted for last year's changes to the supplies sales model. Supplies revenue mix was 67%, flat year-over-year, and channel inventory remains below our reduced ceiling. We saw good improvement in Printing operating profit at 17.4%, up 0.1 point year-over-year and 1.4 points sequentially. Margin increases were driven by favorable rate due to a mix shift to the high end of Consumer and ongoing cost structure improvements, partially offset by increased marketing spend and investments in key growth initiatives. Now turning to cash flow and capital allocation. Cash flow from operations was $455 million in Q2 and approximately $1.2 billion year-to-date. Free cash flow was $380 million in the quarter and approximately $1.1 billion year-to-date. As highlighted last quarter, we had expected Q2 free cash flow to be below Q1, primarily due to the sequential changes in revenue, volume and mix from our respective segments. The cash conversion cycle was negative 30 days, flat sequentially. Quarter-to-quarter, we saw a 2-day increase in days sales outstanding, driven by less favorable revenue linearity which is more typical of normal seasonality. Days inventory increased 4 days, primarily driven by strategic buys to help assure component supply. And finally, we saw a 6-day increase in days of payable, driven by purchasing linearity and more normal sequential changes. On a full year basis, we remain confident that the revenue linearity improvements we saw in the first half resulting from changes to our supply sales model are structural improvements. Therefore, we continue to expect that our free cash flow could be at the higher end of our $2.3 billion to $2.6 billion outlook for the year. During the quarter, we had a total capital return of $447 million through share repurchases and cash dividend. Year-to-date, we have returned 95% of free cash flow as compared to our full year target of 50% to 75% so we remain well on track to deliver on this commitment. Looking ahead, keep the following in mind related to our financial outlook: for the full year, we are on track to deliver our productivity initiatives as announced at SAM. We have accelerated the timing of certain restructuring charges from fiscal 2018, where the incremental 2017 GAAP expenses will be offset by lower 2018 GAAP expenses. Many of these restructuring charges are lumpy in nature and the timing is more difficult to predict, which leads to keeping a wider full year GAAP outlook range relative to our narrowed non-GAAP range. In Personal Systems, we have increased pricing globally in response to the increased cost of components and unfavorable currency impacts, which could have a more significant impact on demand and operating margins than we've assumed. For Printing, we expect supplies revenue to be flat to slightly up in the second half in constant currency and adjusted for last year's supply sales model change. We also expect to continue placing units with a positive NPV. With all that in mind, Q3 '17 non-GAAP diluted net earnings per share is in the range of $0.40 to $0.43; Q3 '17 GAAP diluted net earnings per share from continuing operations is in the range of $0.36 to $0.40. We are raising our full year fiscal '17 non-GAAP diluted net earnings per share to be in the range of $1.59 to $1.66. And our full year fiscal '17 GAAP diluted net earnings per share from continuing operations is in the range of $1.42 to $1.52. With that, let's open it up for questions.

[Operator Instructions] And our first question comes from Shannon Cross with Cross Research.

It's nice to see both PCs and Printing growing again. So my first question is on the PC market. I'd like to follow up on the comments regarding price increases. What have you seen initially from the market, and perhaps, on a geographic basis? And then also what are you seeing from your competitors? And then I have a follow-up.

So Shannon, let me start with what we're -- what we did. So we increased prices in both Q1 and Q2. In Q2, what we saw was the Consumer price increase basically take and flow through in the quarter so it has a much quicker impact than on the Commercial side. Commercial, that takes some time to actually work through the system so we didn't see that as much in Q2. We do expect that we will see the price increase flow through in Q3. But the flip side of that is, of course, we didn't see the demand impact either of that price increase. So at this point in time, there's a little bit of uncertainty as to what we will see kind of into Q3 and Q4 from those price increases in Commercial.

And Shannon, the only other thing I would add is that I think we saw this relatively early. I believe, I mentioned it a couple of quarters ago. And as a result of that, the first thing we did was went and shored up supply for the full year because we wanted to make sure that we were able to fulfill the demand that we're seeing flow through the pipeline. With that said, it becomes a constant, daily set of work that the team does to continue to work costs down in other areas of the business, in the complete bill of materials, in the workflow that we drive every single day. So we saw this coming. I think we reacted to it, and we're leveraging our balance sheet to ensure that we have surety of supply.

And then second question is just on the Printing operating margin. Supplies seem to be improving a little bit ahead of schedule which obviously is going to benefit margins. But I'm curious how you think about sort of the balance of flow-through of investment of those dollars into 3D Printing, A3, other growth initiatives versus letting it fall to the bottom line. So how are you balancing that? And how should we think about operating margin as you go through the year?

So I think the way to think about it, and we talked about this before, is that the we expect that the Print operating margin, which have historically been in the mid-teens, will continue to be in the mid-teens. That's kind of 15% to 18%. And that the variability within that range is largely going to be driven by the opportunity to place more units. For '17 specifically, we're very focused on our productivity initiatives and bringing those -- realizing those as we progress through the year. We are also taking some of the savings, a lot of the savings, frankly, that we're getting from lower discount dollars around supplies directly related to the supplies sales model change that we made last year, and we're basically reinvesting those back into marketing. We told you we were going to do that, and that is in fact what is happening. We're doing that in order to drive Print relevancy, drive more Print and also to drive preference for HP-branded supplies. And then finally, we are investing. We're investing in A3, we're investing in graphics and we're investing in 3D.

And our next question comes from Steve Milunovich with UBS.

Cathie, on the supply side, just to clarify, again, you talked about flat to up in the second half including the adjustment for last year. So I take that to mean that the reported number will be something up like 5%. I just want to clarify that. And do you have any view on what the longer-term supplies growth rate is likely to be? Or will there be any growth in supplies?

So to the first part of your question, the second half. Yes, the reported numbers will be higher from a growth perspective in the second half because we had such a significant adjustment to channel inventories in last year's second half. And in terms of kind of the longer-term view of supplies, I think one of the things that we've been saying pretty consistently is that getting to supply stabilization in constant currency and, again, adjusted for these sales model changes, is the first milestone. It's not that in Q1 we then breathe a sigh of relief and we don't have to do it again. So we recognized that we are, at a minimum, maintaining the stabilization in constant currency in supplies over a longer time period. Exactly what that's going to look like, we'll talk more at our Security Analyst Meeting later on in the fall.

Okay. And Dion, I wanted to ask you about the A3 market. I think you've said that you're not really a player unless you're at about a 10% market share. Do you have a sense of when you're going to get there? And are you finding that you're able to develop the channels that you need?

So I will reaffirm that I think to be relevant in any marketplace that you want to have at least a 10% market share. Then you become relevant to channel -- particularly in a channel-driven business, you become relevant to those channel partners and relevant to customers. And so we want to get there as quickly as possible. Having said that, we've only just started to ship our range of A3 products. And we are excited by the reaction to the products that we've already delivered. The pipeline is very healthy. We are onboarding both existing partners and a very new universe of partners that we've never transacted with in the past. The additional benefit of that is as we take on these new channel partners, we're finding additional A4 opportunities within the new -- within the new partner base and within customers that we've never dealt with in the past because they have a blended mix of A3 and A4. So this is ongoing work. It's early days. I'm excited by what I'm seeing across the globe in terms of the commitment to driving our A3 business, and we'll continue to remain focused on it.

Our next question is from Katy Huberty with Morgan Stanley.

Cathie, you beat our free cash flow estimates the past 2 quarters. Why not raise the range for the sort of full year? Is there anything coming in the back half? I mean, certainly, the component environment will [indiscernible], so I imagine inventory remains high. I know there's an SAP upgrade that you're either in the midst of or is upcoming. Are there any dynamics in the back half that keep you conservative on the free cash flow? Then I have a follow-up.

I don't think there's anything that is out of the ordinary that's coming up in the back half that is keeping us conservative, to use your words. I think it's more that we typically don't update our free cash flow guidance in the year. We kind of put out a rate -- a range out there and we kind of stick to it and then we give a little bit of color. And so the color that I've given is that, frankly, I do think we could be at the higher end and we'll see. Now there's also a lot of volatility in free cash flow as a result of kind of what the business does, okay? So if you've got print -- in this quarter, we had print increasing sequentially much more than is kind of their normal pattern. Similarly, we had Personal Systems out of their norm as well. They decreased more than is the norm. And so that can have a pretty big swing or a pretty big impact on free cash flow. So there is a little bit of that, that we're playing through as well. That could mean that if we could me higher, it could mean that we are a bit lower in the range.

Okay, understood. And as a follow up, what percentage of the PC and printer business is now as a service? And are there any implications as it relates to CapEx or timing of payments from customers that could change the free cash flow model longer term?

So the contractual piece of our business is not that significant today to be putting any kind of real pressure on free cash flow or on CapEx in general, so I don't think that that's a concern of ours. It is moving in the direction, it is growing and we like the fact that it's growing but we don't see a significant impact from it in fiscal '17.

Our next question comes from Toni Sacconaghi with Bernstein.

I have one for you, Cathie, and one for Dion. So just you had talked about how we should think about adjusting supplies growth rate for drawdowns in channel inventory. And last year in fiscal Q2, you said that supplies were negatively impacted by 7% from a drawdown in channel inventory, which would point to about a $250 million drawdown in inventory last year in Q2. So if we add that back to last year, it actually looks like, on an inventory-adjusted basis, supplies were down 5% or 6% this quarter in Q2. Is that the right way to think about it? Or were there's some supplies inventory drawdowns this quarter?

So there were also year-on-year inventory drawdowns this quarter. If you think about the fact that we did that pretty significant step-down in channel inventory Q3 and Q4 of last year and then we have continued to keep channel inventory kind of at those levels or even in a little bit lower. I think in Q1 I mentioned that sequentially we were down in terms of [indiscernible], we're down again both year-over-year and sequentially. And so there is a little bit of an add back as a result of those drawdowns in channel inventory.

Okay. We can take it off-line, But I think unless it came down this quarter, it doesn't really matter because I'm comparing 13 weeks of sell-out this quarter versus effectively 12 weeks of sell-out last quarter, and that's where I got the differential. If it came down in the interim, I don't think it really matters but I'm happy to kind of debate that off-line. Dion, on my second question, you've done a great job in PCs in being a sustainable share gain or I think it's been like almost 20 quarters. Your strong growth rate now is benefiting from really good share gains. But the market is still pretty weak and quite frankly, your year-over-year comparison was pretty easy, it was minus 10%. So as we look to the back half of the year, particularly the fourth quarter when the Personal Systems comparison goes to plus 4% and you've expressed some hesitation about price increases and how that might impact demand, is it realistic to think that HP can continue to grow PC revenues in the third and fourth quarters? And how do we think about the trade-off between like a 4% operating margin or revenue growth in your eyes, and how do you think about that?

Thanks for the question, Toni. Let me just say that -- I mean, as you know, we don't guide revenue. But what I will tell you is that we don't broadly disagree with how the industry analysts view the PC market. We look back 18 months ago and we were in double-digit declines. And since that time, the market's been steadily improving to the point where it grew this quarter. And depending on which analyst you speak to, they're sort of in the range of between minus 2 and plus 2. And we don't broadly disagree with that range through the remainder of the year. What I will say is that I'm very confident in our team's ability to out execute the market and out execute our competitors and we do that with a fairly complex formula of segmenting the market, segmenting it again, finding the pockets of growth within the market using fairly sophisticated heat maps and understanding where we believe the heat is going to be in the market. And we know that we can't cut our way to glory, that we need to innovate our way to success. So we spend a lot of time and energy on innovation that matters to our customers. We've spent a lot of -- as a good example, a lot of energy on security, multiple levels of security, below the operating system, at the operating system, above the operating system and we're seeing that really resonate with our customers right now. You have look at the last couple of weeks where there's been a lot of global security concerns and we've got a tremendous answer for that, and we're being rewarded for that innovation that we build into the product. So you can expect to see us continue to innovate. You can expect to see us continue to take cost out of the business. You can expect to see us continue to segment, drive to where the heat is in the market. It's a formula that's been working well for us as you pointed out at the start of your remarks. And I think when we do that, in a market that is sort of minus 2 to plus 2, depending on where you go, I think we can outperform the market.

Our next question comes from Jim Suva with Citigroup.

Cathie, you mentioned that you're raising your full year non-GAAP EPS, which is good to see, but the GAAP has gone lower. And you mentioned something about restructuring. Is that accelerating, pulling them into this year and then you're going to see the benefits sooner than expected? Or how should we think about why there's a disconnect there and about the timing of the benefits of such?

Sure. So yes, we are pulling in restructuring from fiscal 2018 -- or at least some charges. I think the way to think about it is that we're pulling in charges from 2018 into 2017, and that is impacting the GAAP number. But it's also -- we've also got a wider GAAP range. And the reason we've got that is that some of these charges can be -- you determine what quarter you take them in by some very specific accounting rules. And sometimes that tips the scale as to what quarter it fits in. And I'll give you a really good example. This quarter, we closed -- we announced that we are closing Irish manufacturing. And there was this very detailed list of things that you had to check the box on in order to recognize the charge this quarter. It just as easily could have been basically recognized next quarter. If that happens in Q4, then we have something that falls out and we have something that falls in, so we've got a much wider range from a GAAP perspective. But in the big scheme of things, we are pulling in some of the restructuring charges into 2017. In terms of the benefits, really what we've talked about is that this restructuring program is a 3-year program, roughly $300 million to $500 million worth of charges over that time period. We still believe that we will be in that range. And that the savings, on a full year basis, would be $200 million to $300 million a year beginning in FY '20. And that -- that we continue to believe that's the case.

Our next question comes from Kulbinder Garcha with Crédit Suisse.

I have just a couple of clarifications on margins going forward. On the Printing margins, it sounds like the supplies should be higher than the revenue mix. So should we expect Printing margins over the back half of the year to expand from this level or are there other puts and takes we should be aware of? And on the PC margins, is the current run rate reflective of the tightness and the cost -- and the component cost environment? And would you say this is a new base? Or are there cost initiatives that could take that up and ASPs increasing should help going forward? Or how should we think about the direction of those margins in the back half of the year?

Okay. So from a Print perspective, we still expected that Print margins will stay in kind of the mid-teens, 15% to 18%. The offset to what you're talking about in terms of maybe a bit of a tailwind from a supplies' perspective is the fact that we want to place as many NPV-positive units so that we keep the flywheel effect of placing units, getting supplies, placing units and getting supplies going. So that's kind of the optimization of the area under the curve that we talked about at the Security Analyst Meeting. On the Personal Systems, some of the margins -- some of the things you should think about, one is the Commercial price increases really -- haven't really shown up yet in Q2. Expect them to show up more in Q3, but we also are expecting there could be some demand response to that. And then on top of that, the commodity costs increased pretty significantly year-over-year and quarter-on-quarter in Q2. We expect that they're going to continue to increase, albeit at a slower rate, in Q3. So there will be an incremental headwind as a result of those commodity costs going up in Q3. And then we are -- just at a total company level, we've talked a lot about $1 billion in productivity initiatives that we've got going, and they ramp, they are ramping and are more back-end loaded, which we've been talking about most of the year.

And just for additional clarification to Toni's question and your question, we haven't really changed our view on the PC business. We think it's in the range between 3% and 4%.

Our next question comes from Amit Daryanani with RBC Capital Markets.

I guess, a couple of questions for me as well. Cathie, could you just talk about the cash conversion cycle and how you expect that to track in the back half? And I guess, looking at accounts payable getting to 100 days, is that something that's sustainable in your opinion? And on another side, I think inventory days went up as well. So do you think these just normalize each other and offset in the back half? Or is there room for conversion to actually improve, especially the [ DPO ] stay north of 100?

Sure. So I'm very pleased with the progress that we're making from a cash flow perspective. We, over the last probably year-ish, have been really driving cash flow in the company, at just about every level in the company. So employees really understand the importance of free cash flow, they understand what role they play in helping us to drive free cash flow, and I think of those as being really sustainable. Secondly, we did make a change to our supply sales model last year, and that is driving better linearity. Real structural, better linearity. Linearity in the quarter that mirrors the demand that we're seeing. And that has also then provided benefit because we're getting -- we're basically shipping revenues earlier in the quarter, beyond the fact that -- and we also do it at a lower discount level, and so that's real structural improvement. In the outlook that we provided for free cash flow of $2.3 billion to $2.6 billion, and like I said, I think, frankly, we could be at the higher end as a result of the supplies change that we made. It has -- what's assumed in that is that we're -- our cash conversion cycle is flattish, maybe down 1 day or 2 within that range. And so I think that's the way to think about. Is it sustainable? It's probably going to be in the minus 28 to minus 30 kind of range.

Got it. That's really helpful. And I guess, when you talk about these -- the Printing segment margin, and you said 15% to 18% is the target. Is that a reasonable target once the Samsung assets are rolled in and integrated as well? Or does that kind of dilute that a little bit at least in the initial part of it once you get the deal?

So Samsung is in investment mode right now as we talked about when we announced the Samsung deal. And then we also said on the call is that we would expect that the deal would be accretive in the first full year. So it starts out in investment mode and then kind of ramps from there. And that is not included in obviously any of our fiscal '17 outlooks at this point in time.

Our next question comes from Wamsi Mohan with Bank of America Merrill Lynch.

Dion, maybe you could talk about what you're seeing in HP original supplies attach? How has that evolved over the past year or so? How much more room do you see over the next few years in driving increased attach, given that's of relatively high significance to your strategy over the past several years?

Yes, it's a great question. Thank you, Wamsi. And I think about the entire Four Box Model when I think about our supplies business and its stabilization. And so I'll comment a little bit on each of the levers. I mean, the Four Box Model continues to predict supplies revenue will stabilize in constant currency and adjusted for the change in the supplies sales model by the end of '17. It's also performed in line with or better than our expectations that we had at the beginning of each of the 4 prior quarters. And recall that we changed the supplies sales model due to the increased impact of the omnichannel environment and believe that this would be a more efficient model. And it's certainly proving to be a more efficient model, our execution of the demand-driven change has seen improved sell-out linearity. We're holding less weeks of stock in channel inventory, both year-over-year and quarter-over-quarter, as Cathie mentioned. And we're achieving the cost savings that we previously had put towards discount dollars and that's supporting an increase in the marketing to drive the Print relevance. And that's really at the center of your question, the increase in the marketing dollars and the stable environment out there is enabling us to sell the value of original supplies. And as a result of that, that has an impact on that particular box. But we're making improvements in all 4 areas. The installed base continues to improve in terms of size and shape. Usage, we have a lot of focus on usage, obviously, in terms of our marketing spend. And also in the change of the different models that we have Managed Print Services and Instant Ink, of course, impact the box that you're talking about, the original supplies and we sell a Managed Print Service contract on Instant Ink. It comes with increased HP original supplies, and so we're happy about that and obviously, maintaining a uniform price environment is helpful. So I think on many dimensions, the results we're starting to see flow through the Printing business are as a result of the work that the team's been doing across all 4 boxes and the one that you mentioned is obviously a big part of that.

And maybe I'll throw another data point. So graphics continues to grow, both nominally and in constant currency. So the graphics growth in supplies specifically was kind of low to mid-single digits on the back of about a double-digit improvement in pages printed and impressions. And so that is -- that continues to be part of the strategy as well as we've talked about core growth in future in the growth category is graphics, and we're continuing to make good progress there.

Our next question is from Mark Moskowitz with Barclays.

The first question is around the second half of the year. Just trying to understand why the guidance seems a little conservative, given the goodness this quarter and the trend line in Printing? Is there something else that you're being maybe careful with in terms of peaking market share momentum, maybe some channel dynamics that have you a little concerned, where you want to make sure the channel sell-through is better or other, I guess, would be the question?

So Mark, I don't think -- I think we're being prudent in our outlook. I don't think that we see anything specifically looming that is making us be more conservative than we have typically been. There are a lot of different things going on in the market, all of which are not easy to call. The uncertainty in the PC market around commodity pricing, commodity availability, the demand impact of raising prices, those are some of the things that kind of weigh on the market. And therefore, we're trying to take that into consideration, and we're also trying to take into consideration just the uncertainty that exists in the currency market. On a year-over-year basis, currency has not been too big of an impact on the top line, a little bit more on the bottom line. But understanding what the impact is going to be of kind of U.S. policies and even the full impact of Brexit, there's enough uncertainties out there that we think that it's prudent that our outlook is prudent.

Okay, fair enough. The follow-up question is around kind of Katy's question earlier in terms of as-a-service. Can you give us a sense in terms of how investors should think about that business vector being potentially material for both Printing and/or PCs? Is that a 2018 or is that more of a 2020 phenomenon?

So I think it's a longer-term phenomenon. I mean, we are making progress. For sure, we are seeing the move from transactional to contractual. But it is not at a rate that says it's going to be typically -- really material. And we'll talk more about this at the Security Analyst Meeting when we talk a little bit longer term. It's definitely a trend in the market. We think it's good for us over the long term, but it is not going to have a material impact in the short term.

The last data points I've seen on this, and it's going back a little way, not too far back, was there was a 6-point swing from transactional motions to contractual motions. Faster in mature markets than emerging markets. I would say that, again, like most of the areas where we focus on, we're out-executing the industry average on that. And as a result of that, our pipeline is growing steadily for Device-as-a-Service, Mobility-as-a-Service, obviously Managed Print Services, we're sort of 10 years into that journey already, it's quite mature for us. So I expect it is an ongoing customer trend. More and more customers want to have a contractual relationship. And when we provide them the capability to do that across their Personal Systems and Print platforms, it's always a different kind of conversation. So I expect it is a trend that will continue but, as Cathie mentions, it doesn't become absolutely material for some time in the future.

Managed Print Services revenue is going kind of low to mid-single digit. So the trend is there, but it's just not an exponential increase.

And our final question for today will come from Maynard Um with Wells Fargo.

So part of the [ bear ] thesis is that the Print market is in secular decline yet you've still been able to place high-NPV printers now pretty consistently. Is there a point where you think you won't be able to place any more of these printers and we start to see those profits flow down? Or has there been a change in the secular story in the broader Print market? And then I have a follow-up.

I would say that, generally speaking, the answer always lies much more deeply down in the segmentation, that you can't tackle the Print market with a single brush. Obviously, there were areas of clear secular decline in the Consumer market. And we said, we don't think it's likely. We said it back at SAM, we don't think it's likely that we could turn that market back into growth, but our job is to reduce the glide slope of descent. And I think with the new range of Consumer Printing devices we've bought to market, introducing brand-new categories like Sprocket, which is doing incredibly well, and attracting customers that have never printed before, many millennials that have had their photos trapped in their phone are now able to free them by having a Sprocket in their pocket. And that's goodness for the category, and obviously, we remain focused on the high-quality NPV units. We're getting a lot more big data, we're leveraging that big data to understand exactly where we're going to make those investments. And I think that segmentation and pockets of growth and opportunity of growth will continue in the market. And let's not forget, we are very new entrants into the A3 copier market. That's a $55 billion market, and we have less than 4% market share. So that is why we have a strategy that has a core element to it, the vast majority of our revenue and operating profit today, but a very clear growth element to it in terms of graphics and A3 and commercial mobility, and we see that playing out over the next 2 to 3 years. And then out into the future of with blended reality, immersive computing on the one hand and 3D Printing on the other provides us opportunity for long-term growth 3 years to 10 years-plus out.

And if we look across your businesses, you should have an improving mix shift to higher-margin businesses. Some of the ones you mentioned in the past like the accessories, the displays, gaming, commercials, graphics, obviously we know the size of some of these. But are all of these -- the other businesses at a level of scale that can now help you to move the needle for you on margins? And how much runway do you think you have for growth in these businesses?

Well, I think if we take by way of example, the Personal Systems market, it's a $333 billion market but about half of that market is the non-core stuff that most of us think and talk about, Notebooks and Desktops and detachables and convertibles. The other half of the market is thin clients and services and accessories and displays, and in many of those markets we're underpenetrated. And in many of those markets, they come at higher margin. So as we index our way up into that part of the market, it's a very clear strategy of Ron and his team as we execute against our Personal Systems. And that helps offset the higher pressured areas of some parts of the core business and the same is true for Printing as we just highlighted.

And then the other thing that's going on in Personal Systems in kind of what we think of as the core business is there's a positive mix shift going on. And that is -- that leads to kind of units increasing or decreasing at a different rate than what revenue is. And we have been ahead of that positive mix shift. And so if you looked at IDCs kind of revenue growth for PCs in calendar Q1, it was up more than units. So units were up 0.8 points. They expect for the rest of the year that units will be down a bit but that revenue will be flat. And as I said, we are ahead of that trend and so we're benefiting and basically gaining rev share.

So thank you for the questions, and thank you all for taking the time to join us today. I'm -- continue to gain in confidence quarter after quarter as the team embraces change and turns that change into opportunity. I characterize the quarter as a breakthrough quarter for us, delivering growth in both segments, Printing and Personal Systems. Again, that's the first time since FY '10. We're taking profitable share, we're out executing our competitors and we're delivering some of the best innovation, I think, this company has ever seen. But we remain humbled by that. Every day we must continue to amaze customers with the most competitive, disruptive portfolio on the planet. And we're playing offense, and I think that's the right place for us to be. And I think our most innovative days and best days lie ahead of us. Thanks very much for joining us.

The conference has now concluded. We thank you for attending today's presentation, and you may now disconnect your lines.