Good day, everyone, and welcome to the Third Quarter 2018 HP Inc. Earnings Conference Call. My name is William, and I will be your conference moderator for today's call. [Operator Instructions] And 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, 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 the fiscal 2018 third quarter earnings conference call with Dion Weisler, HP's President and Chief Executive Officer; and Steve Fieler, 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 on our website 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 related to forward-looking statements that involve risks, uncertainties and assumptions.

For a discussion 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 in HP's Form 10-Q for the fiscal quarter ended July 31, 2018, and HP's other SEC filings..

During this webcast, unless otherwise specifically noted, all 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'll hand it over to Dion. .

Thanks, Beth. Good afternoon, everyone, and thank you for joining us today. Quarter 3 was another strong quarter of profitable growth with consistent and balanced performance across businesses and regions.

As a company, we're delivering what we said we would do and optimizing the business to consistently deliver long-term sustainable and profitable growth..

Q3 was impressive. Specifically, we delivered 12% revenue growth, adding $1.5 billion to the top line, and we increased non-GAAP earnings per share 21% to $0.52. And we delivered $1.4 billion of free cash flow in the quarter and returned $900 million to shareholders, bringing the total return of cash to shareholders so far this year to $2.6 billion..

Each quarter is an opportunity for us to strike the right balance in how we plan, innovate and deliver operational performance regardless of market conditions, external factors and competitor movements.

We are continuing to grow in our core with profitable share, advance our position in our growth segments and invest in future categories where we can disrupt with innovation and new business models. And just as importantly, we're laser-focused on increasing productivity and taking cost out of the business..

As I've been clear about, our goal is to consistently deliver on our financial commitments while executing our strategic framework. We do this by playing our own game and winning the right way and by delivering products and services that are consistently engineered to amaze our partners and customers..

Now let me take you through what we're seeing across the business. First, let's start with Personal Systems, where profitable growth continues to be our priority. It was another strong quarter with operating profit dollars, margins and revenue each growing sequentially and versus the prior year.

HP continued to outperform the PC market in the second calendar quarter, growing share with broad-based growth across regions and product categories. While we're proud of these results and the team's efforts, share gains continue to be an outcome of our innovation for customers and not an objective of our business.

We are delivering differentiated products and experiences to the market. We continue to reinvent our Personal Systems business and portfolio with the most secure and manageable PCs.

In May, we unveiled a bold new lineup of premium notebooks, desktops and displays across our Elite and ENVY portfolios, including the world's smallest business convertible and the first detachable with integrated privacy screen..

The team is leveraging HP's design and engineering leadership to deliver the ultimate combination of style, performance and versatility, what I like to call our sprinkles of magic. Our premium pipeline remains strong, and we're excited about a range of new products that will be hitting the market as we head into the holiday season.

Similarly, in vertical markets, we continue to drive innovation and growth..

In gaming, we enhanced our OMEN brand with a new portfolio of industry-leading accessories. Our newest OMEN laptop that launched in May at a gaming festival in Beijing sold out in just 20 minutes on JD.com.

And OMEN was front and center at last month's Overwatch League Grand Finals that attracted more than 10 million viewers across streaming platforms..

In retail, we introduced the new HP Engage retail point-of-sale portfolio, providing retailers with a versatile platform with layers of security to enable seamless engagement from the moment consumers enter a store until the time they check out. Our new retail solutions will also be available through the HP Device-as-a-Service offering..

Just like Personal Systems, the Print business continues to make steady progress and deliver profitable growth. Total Print revenue was up an impressive 11% with growth in all regions and across Commercial hardware, Consumer hardware and Supplies.

Print units were up 12%, and the overall print hardware market grew 1% in the second calendar quarter, supporting our confidence in the health of the Printing business for the long term..

The Print team not only continues to execute our strategy and innovate across the portfolio but is making progress in strategically shifting towards contractual business models.

Over the past few quarters, we've expanded upon our acquisition of Samsung's printer business and extended our A3 product portfolio to offer customers affordable color printing while delivering best-in-class performance and security..

We are building on this foundation of strong technology with differentiated solutions to expand Managed Print Services and with the investments in our direct and indirect go-to-market capabilities, including the selective acquisition of office equipment dealers or OEDs, that provide access to increased profit pools from higher-margin services.

Earlier this month, we announced a definitive agreement to acquire Apogee Corporation. Apogee is Europe's largest independent provider of print and document services and has a proven track record and deep capabilities in contractual sales. This is an important next step in our strategy to accelerate growth in the contractual office print market.

Following the announcement of the transaction, I met with a number of our large partners who understand that scaling our contractual business faster benefits both HP and our partners to grow in the industry shift to contractual..

Looking at our other strategic initiatives. In graphics, we again grew revenue and are driving market-leading innovation. This quarter, we unveiled the new DesignJet Z large format photo printers that offer amazing image quality and production efficiency. We also announced that R.R.

Donnelley is adding the new HP Indigo presses to their fleet to help increase their capacity and enhance their ability to deliver high-quality print products to their customers..

Shifting to the 3D Printing business, we are pleased with our progress in accelerating 3D printing for production manufacturing. We drove installations with industrial-grade customers, including the new 3D printing center in China, the world's largest manufacturing market.

We are encouraged by the increasingly wide array of final part applications across sectors, including the industrial, consumer, auto and health care markets. We're seeing north of 50% of the parts produced on our systems are for final production..

This quarter, we also furthered our channel presence and expanded our strategic partnership with Siemens, providing design software support for our full-color platform. Ensuring the world's industrial product engineers have integrated design tools for 3D production is a critical enabler for market expansion.

We are still in the very early stages of this business but remain excited and optimistic with our ability to disrupt the $12 trillion global manufacturing market..

Before I move off 3D Printing, I'd like to share some additional news with you. After 37 years at HP, Stephen Nigro, President of our 3D Printing business, has made the decision to retire in early 2019. During the past 3 decades, Stephen has had a tremendous career from pioneering our first Inkjet printers to leading teams across the U.S.

and Asia to most recently turning a nascent 3D printing opportunity into a business that has become the #1 commercial-grade plastics 3D printing vendor less than 2 years after product launch. Our differentiated 3D printing technology and leadership will help enable HP to accelerate the Fourth Industrial Revolution.

I couldn't be more thankful for Steve's leadership, guidance and commitment to HP..

One of the things we pride ourselves on is the depth and breadth of our bench and our rigorous succession planning. I am super excited that Christoph Schell, our current President of the Americas region, will transition to become President of 3D Printing, where he and the team will focus on the next phase of scaling our 3D Printing business.

Christoph just celebrated his 20th year anniversary at HP, and he's a rigorous and balanced operational leader with outstanding experience transitioning customers and partners into new service-led business models. Under his leadership, our Americas region has delivered impressive and consistent growth.

Christoph has a passion for 3D Printing and has played a key role in our earliest 3D Printing wins and partnerships. I have great confidence in his leadership of this important business. We expect the transition to be seamless and look forward to having you all meet Christoph at our Security Analyst Meeting in New York on October 3.

Christoph's role is effective November 1..

In summary, Q3 was another strong quarter of profitable growth with balanced growth across businesses and regions. We are pleased with the success in the business..

Looking ahead to Q4, we are monitoring several evolving market dynamics, including the global trade environment, currency volatility and industry component availability.

That said, one of the strengths we've consistently demonstrated is our ability to navigate the impact of these challenges and leverage our innovation and scale to create advantage and drive sustained performance. We are executing and meeting our commitments, and I'm confident in the team's ability to continue doing exactly this..

With that, I'll hand it over to Steve to cover our financial results in more detail and share our financial outlook. .

Thanks, Dion. Q3 was another quarter where we delivered strong results consistent with our strategy and furthering our goal of creating long-term shareholder value.

Having met recently with a large number of employees, customers and partners, it's clear that this company remains focused on executing each quarter while also positioning the company for the future.

And our results demonstrate this balance of delivering in the near term while investing in growth and leading through an increasingly dynamic environment..

first, the P&L, including the segments; then the balance sheet; cash flow and capital return; and finally, guidance..

Starting at the top line, net revenue was $14.6 billion, up 12% or up 9% in constant currency. Our performance remained strong across businesses and geographies. Regionally, in constant currency, Americas grew 6%. EMEA was up 10%, and APJ grew 13%.

Gross margin was 18.4%, down 20 basis points year-over-year, primarily resulting from the addition of S-Print. Sequentially, gross margin was down 90 basis points, driven by seasonal mix..

Non-GAAP operating expenses of $1.6 billion were up 15%. This increase, which is similar to the growth in prior periods, was driven by the addition of S-Print along with incremental R&D and go-to-market investments to support growth. Sequentially, operating expenses declined 2%. Non-GAAP net OI&E expense was $59 million for the quarter.

We delivered non-GAAP diluted net earnings per share of $0.52, up $0.09 or 21% year-over-year with a diluted share count of approximately 1.6 billion shares..

Non-GAAP diluted net earnings per share primarily excludes amortization and tangible assets of $20 million, acquisition-related charges of $10 million and other GAAP-only charges totaling $11 million, offset by nonoperating retirement-related credits of $56 million and related tax impact on all of these items.

As a result, Q3 GAAP diluted net earnings per share was $0.54. .

At the segment level, Personal Systems net revenue remained strong, delivering $9.4 billion, up 12%. Results continue to be broad-based across customer segments, geographies and products, reflecting the strength of our supply chain, go to market and innovative product portfolio..

By customer segment, Consumer revenue was up 10% and Commercial revenue was up 13%. By product category, revenue was up 13% for Notebooks, up 12% for Desktops and up 11% for Workstations..

In calendar Quarter 2, we saw opportunity for profitable growth and we took advantage. We outgrew the market by 5.4 points and earned market share of 24%, doing so while managing cost headwinds and investing in innovation..

Personal Systems continue to grow operating profit, up $52 million versus last year. We also improved operating margin to 3.9%, up 20 basis points year-over-year and 10 basis points sequentially. The increase was primarily driven by higher ASPs due to both favorable currency and improved mix, partially offset by higher commodity and logistics costs..

In Printing, revenue was $5.2 billion in the quarter, up 11%. We have made steady progress in the performance of the business and remain focused on managing the portfolio across the core growth and future product categories.

Total hardware units were up 12%, with Consumer units up 2% and Commercial units up 91%, including S-Print, and up 3% sequentially. In calendar Quarter 2, overall Print unit share was 43%, up 1 point year-over-year. We continue to take advantage of opportunities to place units when we see them..

Q3 Supplies revenue of $3.4 billion was up 8% or 6% in constant currency. The Supplies mix of total Print revenue was 66%, down year-over-year and nearly flat sequentially. And we continue to operate below our ceilings for Supplies channel inventory..

Print operating profit grew $25 million year-over-year, and operating margin was 16%, down 1.3 points year-over-year and flat sequentially. The primary drivers of the year-over-year margin decline were the addition of S-Print and the strong unit placements and investments in growth and future initiatives, including A3 and 3D printing.

Additionally, as expected, we experienced increased raw material cost in the quarter, which should remain elevated in Q4..

We continue to see momentum in our contractual offerings. Our recent announcement to acquire Apogee builds on our long-term contractual strategy by expanding our ability to deliver value-added services and accelerates the deployment of our technology into the growing contractual market.

We expect the transaction to close by the end of the calendar year 2018 pending regulatory review and other customary closing conditions. We expect the deal to be accretive by approximately $0.01 on a non-GAAP basis in the first full year after close..

Turning to cash flow and capital allocation. Q3 cash flow from operations was $1.5 billion and free cash flow was $1.4 billion. Cash conversion cycle improved 4 days sequentially to minus 34 days, driven by a 4-day increase in days payable outstanding, a 2-day decrease in days sales outstanding offset by a 2-day increase in days of inventory.

Increases in days of inventory and days payable outstanding are largely a result of leveraging our balance sheet and normal seasonality..

We had capital returns of $696 million in share repurchases and $223 million in cash dividends in Q3. For the full year, it is now more likely that we will deliver returns above the high end of our FY '18 outlook of 50% to 75% of free cash flow..

Looking forward to Q4, keep the following in mind related to our financial outlook. In Personal Systems, we expect that the overall basket of components and logistics costs will remain stable to Q3 levels. In Printing, we expect strong unit placements, which should continue to push the hardware revenue mix higher.

We've recently seen increased currency volatility, and we'll work to mitigate the impact via prior hedges and potential pricing actions, considering the full spectrum of market and demand dynamics..

For the full year, we expect to deliver our productivity initiatives. We'll also continue to leverage our balance sheet if we see attractive economic opportunities to do so. Finally, we expect our non-GAAP tax rate, which is based on our long-term non-GAAP financial projection, to be 16% in Q4..

With all that in mind, we expect Q4 '18 non-GAAP diluted net earnings per share is in the range of $0.52 to $0.55. Q4 '18 GAAP diluted net earnings per share is in the range of $0.48 to $0.51.

We are raising our full year fiscal 2018 non-GAAP diluted net earnings per share to be in the range of $2 to $2.03 and our full year fiscal '18 GAAP diluted net earnings per share to be in the range of $2.82 to $2.85.

I look forward to engaging directly with many of you at the upcoming conferences and meetings as well as at our upcoming Security Analyst Meeting on October 3..

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

[Operator Instructions] And the first questioner today will be Katy Huberty with Morgan Stanley. .

What was your market share in A3 during the quarter? And how are you thinking about the acquisition of Apogee and potentially other acquisitions in the distribution space in terms of what that could add to your A3 market share over time? And then I have a follow up on inventory. .

Thanks, Katy, and thanks for the question. Specifically, we grew share 2 points in the quarter to 9.1% in calendar Quarter 2., and we remain excited about our future opportunities. While I'm pleased with that performance and I'm encouraged by our progress that our team is making around our A3 business, we don't expect that kind of growth each quarter.

We're -- as I'd like to always remind everybody, we're building a business for the long term. We're playing our own game. Our focus, as in all our areas of our business, is on profitable gains over time. We remain on track to achieve the 12% market share by the end of calendar 2020, and that guidance remains intact.

As it relates to Apogee, our goal of 12% worldwide market share by the end of calendar 2020 is not materially impacted by this acquisition given its size relative to the worldwide total available market of A3.

That being said, the Apogee transaction is all about giving access to new profit pools by expanding our ability to deliver value-added services and the acceleration of the deployment of our -- of what we assure is superior technology into the growing contractual spaces, especially amongst SMBs. .

And then... .

Katy, could I have the opportunity even... .

Yes, sure. .

In my prior role as Treasurer to be part of the -- leading the initial negotiation with Apogee, it really is about services capabilities. They've got a great leadership team and winning in their market.

We definitely took a disciplined approach for that particular deal as we would for any other deal in that space and believe we've got a great opportunity to create shareholder value. In my prepared remarks, I talked about the $0.01 accretion, but we also like the margin profile.

There have been double-digit EBITDA margins for some time, and they play in a fast kind of growing part of the contractual TAM. So we think we've got the opportunity to generate synergies over time with this deal.

They've been very successful both organically and inorganically and really give us the opportunity to place more units over time as well as to leverage the platform [ they ] build for Device as a Service and other services capabilities we're building internally. .

And Steve, maybe a follow up for you. I was surprised to see inventory up as much as it was sequentially just given that you made some pretty big pre-buys over the last couple of years to deal with the tighter memory environment. That's now loosening.

And so what's driving the inventory higher at the moment?.

Our inventory was up $500 million quarter-to-quarter, up 2 days. We feel comfortable what we're doing in inventory. We are leveraging our balance sheet. We're seeing higher sea and in-transit shipments. And it's generally in support of the growth in our Personal Systems business and to a less extent, in Print. .

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

I guess, my first question is for Dion. During the commentary, you mentioned the contractual market several times around the acquisition and then in some of the other areas in Print, but you've been offering Managed Print Services for many years.

So I'm kind of curious if something has changed there in terms of how you're looking at it or if it's just the inclusion of A3. And then within contractual, sort of recurring revenue models, I'm also wondering what you're seeing in terms of DaaS for PCs. And I have a follow-up. .

Thanks, Shannon. Indeed, we're seeing increased demand from customers in their quest to move from a transactional relationship to a much deeper contractual relationship.

And of course, the acquisition of the Samsung S-Print business was designed to give us access to a complete range of A3 products, which largely play in that they're almost exclusively contractual in nature. And that provides us an opportunity to tap into the $55 billion A3 market, which is, again, largely contractual.

What, I guess, I'm alluding to in my prepared remarks is it's not just A3 that is contractual. It's also A4 that's moving into contractual, and a customer often has a mix of both A3 and A4. So largely, we're starting to think about the business and our customers through the lens of transactional and contractual.

The Apogee acquisition was obviously designed, and the strategic rationale was to tap into this growing trend towards contractual. For those of you who are not familiar with Apogee, they are the largest independent print and document service provider in Europe.

And they've got a really proven track record, as Steve alluded to, for growth and a deep set of capabilities in the contractual space.

So with Apogee, we're going to gain access to new profit pools by expanding our ability to deliver value-added services and accelerate the deployment of our technology into this growing contractual office printing market, especially amongst SMBs.

And it really augments the 3 existing go-to-market motions that we have, the direct motion, the traditional IT channels motion that we've had for the longest time. And now with us getting into A3s, we're more and more working with these office equipment dealers or OEDs. And we were underrepresented in OEDs, and Apogee is squarely in the space.

And they enhance our ability to deliver the solutions and services necessary to win in this market. .

Okay, great. And then, Steve, can you talk a bit about cash flow? Clearly, it's strong, continues to -- you continue to overachieve in terms of cash flow and [ helped deliver] [indiscernible] billion at least.

And so I'm curious when you look at cash flow this year -- and I know you're not going to give guidance for next year, but just how should we sort of think about recurring versus nonrecurring and whether there may be some puts and takes in the model both for the next quarter or so and then looking forward?.

Sure. Thanks, Shannon. I think at the simplest level, we do expect that our free cash flow will grow in line with earnings over time. And so when I do reflect upon our performance year-to-date at $3.3 billion, we are growing free cash flow ahead of earnings.

And that is on the strength of our Personal Systems volume and the negative cash conversion cycle that it drives. In Q3 specifically, which helped the year-to-date performance, we did have an improvement in our cash conversion cycle to minus 34 days, and so that was a benefit to our cash flow.

When I think about the full year, similar to last year, we would expect that our cash conversion cycle would align more closely to what we described at SAM, which was a minus 29 to minus 30 days. And that's why the at least $3.7 billion, we think, is a prudent guide.

But to sort of get to the meat of the question, when you're thinking about our cash flow, I would think about it very consistent to our earnings and earnings growth over time. .

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

I'm wondering why you didn't see more operating profit leverage in the quarter. You did have higher volume and revenues. You have a cost takeout program in place, and particularly with Samsung, you were expecting to have more cost takeout as the year progressed.

And yes, you were aggressive in placing units, but your printer unit growth was pretty similar to the last 2 quarters. So why do you feel you didn't see more operating profit leverage this quarter? And then I have a follow-up, please. .

Yes. I'll take that one, Toni. So I would say our results and performance are really in line with the strategy and in essence, what we said we would do. We are delivering today and building for the future across our core growth and future categories. We are driving incremental operating profit dollars and earnings per share up $0.09 year-over-year.

To specifically address your question, when I look at the year-over-year performance, our Personal Systems business did add about $1 billion of revenue and they did have op margin expansion year-over-year. So I really think the gist of it is around the Print business.

Our Print business did add about $0.5 billion of revenue and did grow operating profit dollars as well year-over-year, but it did come out a lower rate. Last year, we had 17.3% op margin. This year is 16% op margin. Really, the primary driver, and this is similar to the prior couple quarters, was the addition of S-Print.

At the beginning of the year, we outlined that we had expected S-Print added on top of existing business to add another $1.4 billion and to be $0.01 accretive for the year. The simple math on that is a 1% op margin, albeit back-end loaded. That's really the primary driver of why we didn't see as much drop and had a lower margin.

We also do continue to invest in our growth in future categories, A3 and 3D Printing specifically. We see opportunities to disrupt the big markets there. We did place more units as you said, and our Supplies mix is down year-over-year. To a lesser extent, we saw some incremental raw material costs on the Print side.

But the net of it is, is when you add it all up, I think we're operating closer to 16% range and driving incremental operating profit dollars year-over-year. .

I think that was really well articulated, Steve. The only add I would make is that when I refer to us playing our own game, this is exactly what I was talking about. It's about us executing against our strategy that has the 3 pillars of core, growth and future, some of that, which is still in investment mode.

So I believe, consistently, our performance demonstrates our ability to drive improved operating profit dollars year-over-year whilst also investing for the long term. And that's something that I've committed to since we separated almost 3 years ago. .

And to follow up, as you noted, your cash return to shareholders has been year-to-date slightly above your 75% high end of your range. But 75% of that return has been through buybacks and 25% through dividends.

So I guess, the question that I have is why is not a north of 75% cash return to shareholders something that's -- why is that not sustainable? And then as we think about a total return to shareholders, initially post the split, it was more balanced between dividends and buybacks.

Is there a incremental bias to buybacks and we should expect this kind of ratio on a go-forward basis?.

Yes. So our capital allocation strategy is in support of our business strategy. It does give us ability to invest in our business to drive long-term returns across the core, growth and future.

It does give us the ability to support our shift to contractual to maintain investment-grade credit rating for our customers and also the flexibility to accelerate our strategy when we have opportunities to do so. And I think the Apogee transaction that we referred to earlier is a good example.

So we think we've got a capital allocation strategy that is working. As you point out, we have returned roughly 80% year-to-date, and we were active in buying back shares. We saw an attractive opportunity to do so, and so we took advantage of it. As it relates to dividends themselves, our board does consider a dividend policy periodically.

If we have any updated changes, we'll certainly communicate that to you. .

And the next questioner today, we have Amit Daryanani with RBC Capital Markets. .

This is Irvin Liu dialing in for Amit. From a commodity perspective, I think NAND pricing and to some extent, DRAM pricing has been more favorable versus 90 days ago.

In the event that you're able to benefit from component price declines, should we expect a near-term margin lift for the Personal Systems segment? Or do you anticipate having to share some of this benefit with your customers and also to maintain your share in the PC market?.

Well, we look at the overall basket of commodities, you mentioned a couple, but the overall basket of commodities and logistics cost. Our perspective is that sequentially from Q3 to Q4 it is stable, so it is, in essence, a neutral impact. We are also though seeing much more currency volatility and specifically more recently, the dollar strengthening.

So as we think about the drop rate or op margin in the Personal Systems business and the impact on pricing, we have to think holistically about all the various factors and market dynamics from commodities to FX, and that certainly will be factored into how we show up in Q4. .

And I also had a question about your broader contractual and services business, which is inclusive of Device as a Service, Managed Print Services and Instant Ink among others.

Given the growth in these businesses and the acquisition of Apogee, how should we think about your longer-term target mix of services or contractual revenue? And what are some of the milestones and metrics we can use to help us better track the performance of your services portfolio?.

Yes. I think in many of the examples you described, certainly Device as a Service as an example, it isn't material to our overall results today, but it is material to our long-term strategy. And I think as these businesses continue to evolve and continue to grow and accelerate, we will be able to provide more visibility and metrics in the future.

But right now I think the metrics we're sharing around our core business are more material, but I think we can evolve that over time. .

And I think specifically as it relates to Personal Systems, we've said that we believe the business over the long term is in the range of 3% to 5%. We delivered 3.9% this quarter. Over the long term, we expect that services is a more margin-rich opportunity for us.

So in addition to the mixing up that we have been doing, services will enable that window above the 4% that we traditionally had to now the 3% to 5%. .

And our next questioner today will be Jim Suva with Citi. .

On your Printing business, looking at the operating margins, it looks like year-over-year -- and when we look at it that way, that way we [ don't have ] seasonality. But year-over-year, it's been declining for about the past 3 quarters. Sounds like a lot of investments.

But when will these investments really start to pay out? When we think about the ink consumption that I do at home or things like that, I would think that people would be replacing their toner and ink more than once every year or so.

So when are these investments really going to pay dividends and how should we think about that? Or is there something else like the Samsung integration or the recent acquisition that is maybe not making it as comparable?.

Yes. And so to follow up on to the remarks earlier in the strategy we are driving in Print. It includes integrating S-Print, placing units, investing in the growth in future, but also driving productivity. And when I look at our rate now it is more driven by the addition of S-Print than any of those other factors.

That's why I'd expect in the short to midterm to be closer to the bottom end of our long-term range around 16% because it is the strategy we're executing. We're driving operating profit dollar expansion. You've seen OP dollar improvement in Print for the past 4 quarters.

And yes, we are investing in our growth categories, and we do think there's a long-term opportunity there. But you first have to build your installed base, place those units, and you're going to get the supplies attached later on. .

Later on, like when does that later on come?.

In the years ahead. Just like we have built the rest of our business in Print, it takes time to build your installed base and have supplies attached. And so when we look out to the -- certainly the years ahead, we do expect that we continue to drop the OP dollars but also get the margin expansion from a rate perspective. .

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

You've seen very robust growth in the printer business over the past 2 years. In the past couple of quarters, a lot of that robustness has come from ASP improvements. ASPs are up somewhere around 600 to 700 basis points more than units for you guys.

As we think about the next couple of quarters and stabilizing of some of the component costs, how much of a benefit do you think ASP increases will be for the business? I guess, another way to ask it would be do you think you'll continue to be able to mix up to higher ASP products.

Or should we see some stabilization where revenue and units grow at similar rates?.

Sherri, [ confirm ] [indiscernible].

Were you talking about Print there or PCs?.

I'm sorry, PCs. .

Okay, great. Maybe I'll comment, first, Dion, just on that ASP environment. So Sherri, in Q3, let me use that as sort of an example, which can set up sort of a comment on the prospectively. But in Q3, we did see, once again, positive ASPs.

That was driven -- like other quarters, really bifurcated between 2 factors, the first of which is we continue to drive a better product mix. I'd say that's roughly 1/3 of the benefit we saw in the quarter, and the remaining 2/3 was just overall pricing.

And again, that sort of takes in the multiple factors from rising component logistics cost, which lends to increase in pricing but also takes into account what's happening to FX and overall competitive environment. And so looking forward, certainly an important part of our strategy is to drive and continue to drive product mix.

In many of those categories, we are under indexed today, so we do feel like we've got opportunity. That being said, as commodities begin to stabilize here, that is less of a year-over-year tailwind on ASPs.

But I think most importantly, we're going to focus on continuing to great -- develop great products to the market, and that's really what's going to drive, as much as anything, the improvement on the revenue side. I don't know if, Dion, you have any other comments you'd make on the PC. .

I think the only other comment, Steve, would be our increased focus as a business on Everything as a Service. And as we drive that strategy, it's roughly half the market, roughly half of the $334 billion TAM. That's a new opportunity for us as an organization where we're under-indexed. It's certainly a market trend.

Our customers are looking to have that kind of contractual relationship with us. And I think that also drives growth in the future. .

Okay, great. And then switching gears to the Printing business. The margins related -- margins for that business are at the low end of your range, and you've made it quite clear that, that's related to the acquisition of Samsung. As we move into the fourth quarter, your commentary, Steve, seemed to suggest that margins would actually soften.

So I guess, I'm trying to understand, should we think about 4Q margins falling below your long-term target and then possibly improving as we move into fiscal '19?.

I was not trying to imply that we would go below our 16% to 18% range. I was just trying to suggest that in the near to midterm, we'd be closer to the bottom end of that range. And so I think that reflects both Q4. I'm not going to comment any more specifically on the outlook.

We have SAM coming up where we can kind of give the details about '19 and beyond. But for Q4, we would expect to still stay within our range. .

Next questioner today will be Aaron Rakers with Wells Fargo. .

Just as a follow-up to the last question, just trying to think about how you guys -- as we possibly see some normalization on the ASP benefits in the PC market, how you think about the growth dynamics of the PC market overall from a shipment perspective.

Any kind of metrics you can share in terms of aged installed base and an opinion on what you think really kind of opens up the opportunities for the Everything as a Service to really start to drive the business model? Is there something that you're looking at specifically that starts to engage the customer base, the installed base on those opportunities that you see?.

Yes. Look, I think we've certainly been engaging that customer base, which is why we're outperforming the market. We outperformed the market again by 5.4 points this quarter. That resulted in us growing our revenue 12% on top of last year's 12% growth.

So it wasn't against the -- an easy compare because we continue to play our own game of profitable growth of segmenting the market, of finding areas of growth that our engineering team and our people believe that we can engineer experiences that amaze them and encourage them to buy our products.

And that's why we have had continuous share gain for the past 18 consecutive quarters we've outgrown the market. We broadly agree with the analysts that still predict the overall market will decline slightly in units in traditional PCs with relatively flattish revenue. Would suggest that ASPs will go up slightly.

And in our business, we are taking change and turning it to opportunity. We have a consistent track record of doing that, whether that's a tougher currency environment or trade situations or other fluctuating market forces. What we are also obviously cognizant of is a Windows 7 sunset that will happen and the migration of customers to Windows 10.

We think that's a little less spiky than it has been in the past. And the glide slope is a little smoother up and to the right because companies much like ours that have already fully deployed on Windows 10 have deployed Windows 10 earlier in the transition cycle than they have in previous cycles. So we think that's a positive stimulus in the market.

So with all of that, we're poised to continue to gain profitable shares and move forward. .

Okay. And then as a quick follow-up, just curious since you brought it up, the trade situation.

How does -- how do you guys see that? Any effect at this point? Any concerns that you might have looking forward?.

Well, I don't think it has had a material impact on our business to date. We, like all companies, are monitoring the evolving market dynamics and the situation very closely. I can tell you that we don't speculate or comment on the situation until we know all the facts and things become more definitive.

We continue to assess the actions that are announced and we go to work on making the best outcomes for our customers and our shareholders. And we work with the U.S. administration, make sure they understand our point of view on suggested changes.

But our supply chain team and our go-to-market team and all areas of our business, including our board ecosystem of suppliers, customers and partners, work together to take any change and turn it to opportunity. And just we'll monitor the situation and evolve it as necessary. .

Just to be clear, our guidance does include the impact of tariffs in place, which, as Dion said, are not material to us. We have not included any potential impact from new tariffs being contemplated. .

And the final questioner today will be Rod Hall with Goldman Sachs. .

So I had a couple of questions. I guess, one is with regard to the Supplies growth rate. I know that S-Print's in there and driving some of that year-over-year growth, but just curious if you guys would comment on what the underlying kind of organic growth there is.

And if you don't want to comment on that, maybe just give us an update on whether you're still thinking flat next year as a possible outcome or a probable outcome. And then I have a follow-up. .

So we have been pretty predictive with what we call the 4-box model. And at the beginning of this year, Cathie outlined that we had expected from Q2 to Q4 that our Supplies would grow between 5% to 7% in constant currency, and that's actually exactly what we've been delivering.

Within that 5% to 7% growth, that does incorporate legacy S-Print as well as HP Supplies. Given the fact that these businesses are integrated, our sales teams are selling SKUs and making trade-offs in the field, we do not have the ability to accurately break out what's inorganic versus organic, and that's why we put them together in our outlook.

So we think forward to FY '19, we do have some headwinds. We do have some tailwinds, but we reflect on the 4-box model and what it's predicting. We have confidence that we will be flat to slightly up next year. .

And I think what you should expect from us is that we will continue to focus on executing against our strategy, both in our core as well as our growth initiatives in this area, which take time to fully play out into the P&L as Steve's alluded to throughout the call.

We'll be relentless in our focus on optimizing all levers we have to impact Supplies with the right balance to ensure predictive value over the long term. I, like Steve, also have a lot of confidence in the predictive value of our 4-box model, which is the basis for what we guided for the rest of FY '18 and '19. .

No follow-up. .

Okay. .

All right. .

So with that, I'd like to thank you all for taking the time to join us today. I'm really pleased with our Q3 performance. This quarter's another example of how we're delivering against our results by combining innovation with operational excellence. That said, we're never satisfied. Profitable growth will continue to be our priority as we move forward.

Our strategy is working. The team is incredibly focused. And our commitment to our customers, partners, employees and investors has never been stronger. So overall, I think we're in a very strong position with our business and our reinvention journey remains confident in our strategy and our ability to grow.

With that, I look forward to seeing you all at our Security Analyst Meeting on October 3 at the New York Stock Exchange in New York City. Thank you all. .

Ladies and gentlemen, this concludes our call for today. Thank you for joining, and you may now disconnect..