HP Inc.

Good day, everyone, and welcome to the Q4 2018 HP, Inc. Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. And please note that today's event is being recorded. And I would now like to turn the conference over to Beth Howe, Head of Investor Relations. Please go ahead.

Good afternoon. I'm Beth Howe, Head of Investor Relations for HP, Inc., and I'd like to welcome you to the Fiscal 2018 Fourth Quarter Earnings Conference Call with Dion Weissler, HP's President and Chief Executive Officer, and Steve Feiler, 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 one year. We posted the earnings release and the accompanying slide presentation on our investor relations website 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 the forward-looking statements that involve risks, uncertainties, and assumptions. For 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 the information available now and could differ materially from the amounts ultimately reported on HP's Form 10-K for the fiscal year ended October 31, 2018, and other HP SEC filings. During this webcast, unless otherwise specifically noted, all comparisons are year-over-year comparisons with the corresponding year-ago period. For financial information that has been expressed on a non-GAAP basis, we've included reconciliations to the comparable GAAP information. Please refer to the tables and slide presentation accompanying today's earnings release for those reconciliations. And now I will hand it over to Dion.

Good afternoon. Thanks for joining us. It was great to see so many of you in New York for our security analyst meeting. As we close fiscal 2018, I'm proud of the results we delivered. It was a strong quarter and an exceptional year for HP. Our results demonstrate sustained operational performance, a disciplined investment framework, and prudent cost management. Our core growth and future strategy is working, and we are well positioned for continued success across our categories and our regions. For quarter four, we delivered revenue of $15.4 billion, up 10% with strong performance across regions and businesses, non-GAAP earnings per share of $0.54, an increase of 23%, and strong free cash flow of approximately $800 million. For the full year, we grew 12%, adding over $6.4 billion of revenue. We grew non-GAAP earnings per share 22% to $2.02. We returned over $3.5 billion to shareholders through share repurchases and dividends, and we generated these results while continuing to invest in our strategic initiatives that are helping to strengthen our long-term competitiveness. We are consistently executing and winning with customers and partners, while simultaneously fulfilling the commitments we made to our shareholders. With our winning portfolio and strong financials, we entered 2019 well-positioned to compete across personal systems, printing, and 3D. Let's look at each of our segments. Personal systems continue to deliver impressive profitable growth both in the fourth quarter and for the full year. In quarter four, revenue and operating profit grew 11%. For the full year, revenue grew 13% and operating profit grew even faster at 17%, adding more than $200 million to the bottom line. These results reinforce the strength of our market position as we focus on segmentation and delivering differentiated hardware, services, and solutions. HP continues to be a leader in product design. At our analyst meeting, we introduce you to the stunning leather Spectre Folio. The product is now hitting the market, receiving high praise for design, versatility, and performance, and driving renewed excitement in the PC category. We also recently launched two new Spectre x360s, The Spectre X360-13 delivers the world's longest battery life in a quad-core convertible, while the Spectre X360-15 is the most powerful convertible we've ever created. In commercial, we unveiled the latest Elitebook, the world's smallest and lightest 14-inch business convertible, and the first with gigabit class 4G LTE. In gaming, our OMEN PCs and displays powered the Overwatch World Cup, where 24 countries battled for domination in front of nearly 10 million viewers. We also launched our latest OMEN desktop and a remote service called GameStream that turns the OMEN PC into a cloud-based gaming server to enable experiences on the go. And at Adobe MAX, we unveiled the new Z by HP Workstation Portfolio, and announced a subscription-based hardware and services bundle specifically designed for elite creative professionals that combines powerful PCs, pro-grade displays, printers, and accessories. As we innovate across our core, we are also continuing to accelerate our growth pillar with device as a service. 60% of IT organizations tell us their resources are increasingly taxed by device management and 80% of their costs are coming after the PC is purchased. HP DAS uses data and analytics to reduce costs and optimize the experience for IT and for end users. This quarter, the Technology Services Industry Association recognized HP DAS with its Star Award for Innovation in a Standard Managed Service Offering. This is one of the highest honors in the technology services industry. Like personal systems, printing continues to drive profitable growth. Total print revenue was up 9% in quarter four and 11% for the full year with growth in all regions and across hardware and supplies. Operating profit grew in both periods, adding $177 million to the bottom line for the full year. This consistent growth is yet another proof point of customer adoption of HP's innovative portfolio. Similar to the PC market, design is increasingly important for printers. Earlier in the quarter, we introduced the world's first smart home printer, HP Tango. Tango combines voice-activated and app-based printing with stunning design and convenience through our Instant Ink subscription program. We believe that Tango reinvents expectations for home printing, setting a new standard for print to fit seamlessly into consumers' lifestyles. We are also strengthening our leadership in the office space to drive new contractual and A3 growth opportunities. As we mark the anniversary of the S print acquisition, I am pleased with the progress we have made. We are one team focused on accelerating our penetration of this large addressable market. Earlier this month, We further accelerated our penetration of the copier market by completing the acquisition of Apigee, providing us with deep solutions and services expertise and a faster means to scale this business and tap into the profit pools that they offer. Lastly, we are focused on growing our graphic solutions business. Our strategy is to provide market leading products and solutions that enable customization and personalization while reducing both inventory and turnaround time for print service providers. A key win that showcases the power of digital is EPAC Flexible Packaging, an all-digital flexible packaging converter who purchased 20 additional HP Indigo digital presses to expand operations across the US. In 3D printing, this quarter we announced our new MetalJet platform, bringing 3D mass production to the metals manufacturing industry for the first time. We're excited by the potential of this business and are working closely with automotive and industrial leaders like GKN, Volkswagen, Parmatech and many more. We're especially encouraged by the volume of final part applications we are delivering across verticals including the transportation, industrial and medical markets. At Formnext earlier this month, Together with customers and partners, we showcase many of the new applications that have developed over the last year. One of these, BMW, is now manufacturing production parts for their cars on HP's multi-jet fusion. And Forecast 3D now has two dozen multi-jet fusions deployed, operating around the clock to produce millions of final parts as their business grows. Looking at the year in total, we made great strides in 3D printing. We expanded our portfolio, increased the number of customer applications tenfold, signed numerous strategic partnerships, and generated multi-unit customer orders. MultiJet Fusion is now the most used industrial 3D printer in the world. Overall, I'm pleased with our company's 2018 results. We've done what we said we would do. We're growing the business, top line and bottom line, and generating strong cash flow. We're delivering returns for our shareholders and investing in the future to create long-term value. Looking ahead to 2019, as we said at the recent security analyst meeting, we're monitoring several evolving market dynamics, including the global trade environment and currency volatility. In addition, Our caution related to industry-wide CPU availability is now playing out and is constraining our growth. We're working diligently with our vendors and partners to reduce the short-term impacts on our customers in light of our ongoing strong demand. Against this backdrop, we are focused on the things that made us successful in 2018, including innovation, execution, and cost management. Short-term category headwinds do not diminish our excitement about this business and will not derail our long-term strategy. We will continue to play our own game, execute our strategy with rigor and aim for sustainable growth for the long term. And we will do so with the same sense of urgency and passion that has propelled our business forward since separation. With that, let me turn the call over to Steve to go through additional details. Thanks, Dionne.

We finished FY18 with a strong Q4. Our results demonstrate the consistency of our strategy and focus on creating shareholder value for the long term. We delivered against our objectives with a focus on day-to-day execution while also investing in our strategic growth initiatives across personal systems, printing, and 3D to position the company for the future. For the full year, we grew revenue and operating profit dollars across both printing and personal systems. We also delivered strong earnings per share growth, generated $4.2 billion in free cash flow, and returned 83% of that free cash flow to shareholders, above the high end of our long-term range of 50% to 75%. Now let's look further into the results for the fourth quarter. Starting with the top line, net revenue was $15.4 billion, up 10% or up 9% in constant currency. Just as we've seen throughout the year, our performance remains strong across businesses and geographies. Regionally, in constant currency, Americas grew 6%, EMEA was up 9%, and APJ grew 17%. Gross margin was 17.6%. down 0.5 points, primarily resulting from the addition of S print. Sequentially, gross margin was down 0.8 points, driven by seasonal business mix and currency. Non-GAAP operating expenses of $1.6 billion were up 7%. This increase was driven by the addition of S print, along with the incremental R&D and go-to-market investments to support growth. Non-GAAP net O&E expense was $54 million for the quarter. We delivered non-GAAP diluted net earnings per share of 54 cents, up 10 cents or 23% year over year, with a diluted share count of approximately 1.6 billion shares. Non-GAAP diluted net earnings per share excludes amortization of intangible assets of $20 million. acquisition-related charges of $26 million, and restructuring and other GAAP-only charges totaling $45 million, offset by non-operating retirement-related credits of $54 million and the related tax impact on all these items. It also excludes a net gain of $597 million related to tax adjustments. The non-cash gain was primarily related to a change in our ability to utilize certain deferred tax assets. As a result, Q4 GAAP diluted net earnings per share was 91 cents. At the segment level, personal systems net revenue remained strong, delivering $10.1 billion, up 11%. Results were again broad-based across customer segments, geographies, and products. reflecting the strength of our product portfolio, go-to-market, and supply chain. By customer segment, consumer and commercial revenue were both up 11%. By product category, revenue was up 14% for notebooks, up 6% for desktops, and up 10% for workstations. In calendar quarter three, our market share was 22.5% as we continued to execute our strategy and focus on profitable growth. Our performance was driven by strong execution as we managed a dynamic market environment and the initial signs of CPU shortages, which we expect will constrain our growth in the first half of 2019. Personal systems continued to grow operating profit, up $37 million versus last year. This increase was primarily driven by higher volume and better ASPs and partially offset by higher commodities and logistics costs and the initial impact of tariffs in the U.S. Operating margin was 3.8%, flat year over year. In printing, revenue was $5.3 billion in the quarter, up 9%. We have made steady progress in the performance of the business and remain focused on managing our core businesses, while building for the future across our strategic growth initiatives. Total hardware units were up 11%, with consumer units up 3% and commercial units up 85%, including S-Print. We continue to take advantage of opportunities to place NPV-positive units when we see them. In calendar quarter three, overall print unit share was 42%. Q4 supplies revenue of $3.4 billion was up 7%. The supplies mix of total print revenue was 64%, down year-over-year and sequentially. We continue to operate below our ceilings for supplies channel inventory. For the full year, supplies revenue grew in line with our outlook, inclusive of the acquired S-Print supply stream and install base, which increased As we described at SAM, we expect to continue to decline. Printing operating profit grew $46 million versus last year, and operating margin was 16.1%, down 0.5 points year-over-year, up 0.1 points sequentially. The primary drivers of the year-over-year margin decline, with the addition of S print and the strong unit placements, as well as investments in growth and future initiatives, including A3 and 3D printing, partially offset by favorable currency. Turning to cash flow and capital allocation, Q4 cash flow from operations was $968 million, and free cash flow was $843 million. For the full year, we delivered free cash flow of $4.2 billion above our previously provided guidance of at least $3.7 billion. Q4 free cash flow includes both the timing benefit of higher personal systems volume and a better year-end cash conversion cycle of minus 32 days. This was an improvement versus our prior outlook of minus 29 to minus 30 days driven by lower days of inventory. Sequentially, cash conversion cycle weakened two days in line with typical seasonality with a three-day decrease in days payable outstanding, a two-day increase in days sales outstanding driven by revenue linearity, and a three-day decrease in days of inventory, largely a result of a decrease in strategic purchases. We returned $598 million to shareholders, through share repurchases and $219 million via cash dividends in Q4. For the full year, we returned $3.5 billion to shareholders through share repurchases and dividends, or 83% of free cash flow. Looking forward to FY19, keep the following in mind related to our overall financial outlook. Based on recent moves in the U.S. dollar, we are expecting an increased headwind from currency compared to the end of September rates we used in the outlook we provided at SAM. Our plans to mitigate previously announced and implemented China-U.S. tariffs are on track. As described at SAM, we expect the headwind to be larger in the short term and reduced throughout the year. We have not considered any impact from unannounced tariffs or any significant demand changes that may result from an increase in geopolitical uncertainties. Specific to personal systems, we expect CPU supply constraints through the first half of 2019. Regarding the overall basket of components and logistics, we expect the cost to improve compared to Q4 levels. This should offset some of the increased currency headwind assuming the market is not incrementally more competitive. In printing, we continue to expect overall supplies revenue to be flat to slightly up for the full year. And we are including the full year expected impact from the Apogee acquisition. In addition, for the full year, we expect our non-GAAP tax rate, which is based on our long-term non-GAAP financial projection, to be 16% in FY19. Taking these considerations into account, we are providing the following outlook. Q119 non-GAAP diluted net earnings per share to be in the range of 50 to 53 cents. Q119 GAAP diluted net earnings per share to be in the range of 46 to 49 cents. We are maintaining our full year fiscal 2019 non-GAAP diluted net earnings per share to be in the range of $2.12 to $2.22. And full year fiscal 19 GAAP diluted net earnings per share to be in the range of $2.04 to $2.14. And we expect to return approximately 75% of free cash flow to shareholders through a combination of dividends and share repurchases over the course of the full year. And now, let's open up the call for questions.

Thank you. And we will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. And we also ask that you please limit yourself to one question and a single follow-up. And our first questioner today will be Amit Daryanani with RBC Capital Markets. Please go ahead.

Thanks a lot, guys. Two questions for me, I guess. The first one, Dion, you mentioned about CPU shortages impacting your growth in the quarter you were in. Can you just touch on how much revenues do you think you left on the table because of these issues? And as you think about the first half, is the impact sort of starts to diminish in Q1 and Q2, or does it actually magnify versus what you saw in Q4?

Okay. Thanks, Amit. So you will recall at the security analyst meeting that we said we were cautious for the first half of 2019 with regards to CPU shortages, and that's exactly what's playing out. Intel stated again this week that shortages are constraining their customers' growth across their ecosystem, and we're seeing that impact across multiple core families of processors and chipsets that have an effect and impact both the high-end and the low-end of the range. We also said at SAM that we expect a bigger impact in the first half of 2019 with more variability around revenue depending on the ability to secure supply in order to meet our robust demand. The demand signal for our products is and remains really strong even through the market supply constraints that we're seeing. And while the shortages are expected to put a strain on the industry and the ecosystem, this is just something that we have to work through with our suppliers, our partners, and our customers in the short term.

The only thing I'd add there, as Dion said, our caution is definitely playing out, and it's really not dramatically different than our views at the security analyst meeting in totality. probably expected more of an impact in Q4, and so would see a larger impact in Q1 than we saw in Q4.

Got it. Thank you. And Steve, let me just follow up. You had very impressive free cash flow in fiscal 2018 at $4.2 billion. As I think about the fiscal 2019 guide of $3.7 billion, and I think you had assumed, at least at the end of the day, that cash conversion cycle would improve by a couple of days in 2019 versus 2018. Maybe just help me understand, what are the couple of levers or headwinds you have that drags down fiscal, free cash flow down in fiscal 19 or are we just being conservative over here?

Yeah, so maybe I'll just sort of describe some of the assumptions. We did have a strong finish to fiscal 18 in Q4 specifically. And as a reminder, we do expect that our free cash flow to grow in line with earnings over time. But as we saw for the full year and again in Q4, we had stronger personal systems volume and we did have an improving cash conversion cycle. Persistence volume, for example, grew 7% sequentially from Q3 to Q4, and our cash conversion cycle was minus 32 days. That was better than our outlook for the year. And how that then bridges to 2019, I do remain confident in delivering at least $3.7 billion for the full year. However, taking into account our strong FY18 results did pull in some upside from 2019. And also, given some of the comments we just made on the constraints on CPUs, I would expect that in the first half, some of the softening of the personal systems revenue and constraints, we'd expect a weaker first half pre-cash flow just given the negative working capital in the personal systems business. So, you know, the assumptions I discussed that Sam hold, I'd just add, you know, we have factored in all the respective segment level kind of business volume. including the implied slower growth in personal systems. We've also seen additional opportunities to improve cash conversion cycle beyond the minus 32 days, primarily around DPO. And finally, we do expect now to have other cash flow favorability in 2019, including timing of certain tax and other cash items. So altogether, our bottoms-up outlook gives us confidence in maintaining at least $3.7 billion for the full year.

And our next questioner today will be Wamsi Mohan with Bank of America. Merrill Lynch, please go ahead.

Yes, thank you. Dion, just a clarification on your answer to the prior question. You said you're seeing constraints, CPU constraints, both at the high end and the low end of the range. I was wondering if you could maybe give us some color that could help us triangulate, like either in terms of units or in terms of revenue impact in the first half of the year. that you would be seeing from these CPU shortages that can help us think through the quantification of that and have a follow-up?

Yeah, I would say it actually affects both units as well as revenue and I believe that the shortage is certainly what we're seeing today exists both at the low end of the range as well as the high end of the range. So there is a mix and the mix is still moving around as Intel is working furiously to get capacity up to support demand. So it's moving around, but I expect that we will see it both in terms of units and in revenue.

Okay. And as a follow-up, are you seeing any evidence of the channel behaving differently in terms of maybe building some inventory ahead of these tariffs? And what are you thinking about from a broader supply chain standpoint, if there are incremental tariffs that are not included in your guidance, if those get put on, what are some of the levers that you can use? Are you thinking about moving production and working with your ODM partners to do incrementally more outside of China? If you could give some color there, that'd be great.

Sure. So in terms of... So the first part of your question there was around... Inventory levels and partner behaviour and customer behaviour. What I would say is our demand signal is really strong. It's not perfectly measurable exactly how much of that is because of a well understood reality of there are shortages. We're looking at our sell-out data very closely, and that gives us the signals what are actually going into end customers' hands, and that remains broadly strong. And so I think whilst generally when this happens in the industry, there is a tendency for a lot of order load to come into the system. We're certainly seeing that. But I would say generally speaking, as you've seen through the course of 2018, demand's been strong for our products off the back of really strong innovation. Steve, you might tackle the first part of the tariff question, and I'm happy to comment on that as well.

Yeah, somewhat kind of what I commented earlier. At this point, we have factored into our guidance all of the known tariffs. This includes the tariffs that were announced implemented in the September period. We have not included any incremental unannounced tariffs into our guide, and we have multiple levers that we're implementing to mitigate the tariffs. There's a variety of strategies in place, but at this point there's no reason for us to put into any sort of guidance what is an unknown. So we're just sticking with what we know and the certainties around that.

I think we've been pretty consistent about that. We said we'd continue to monitor the evolving tariff situation, just as all of you are doing as well, I'm sure. We've said it before, we don't speculate or chase ghosts. We have, as Steve mentioned, a number of levers available to us should additional tariffs come into place. The tariffs that we know about, the first tranche and the second tranche, have been fully factored into the guide that Steve provided, the security analyst meeting. And we'll continue to work to optimize all of our operations to deal with the industry dynamics that are just part of operating this business.

And the next question or two will be Tony Sakanagi with Bernstein. Please go ahead with your question.

Yes, I just wanted to follow up on some of the previous commentary. I was at the securities analyst meeting, and my sense was that the message around CPU availability was much softer than it was on this call. I think the notion was, you know, we face these, we can manage around it, there will be some impact, but we can manage it. it feels like incrementally that's become a bigger issue than you had thought. And, you know, kudos to you that you can still manage around it and uphold your guidance. But I just wanted to be clear about whether this is incrementally tougher than you thought a month ago. And ultimately, what has driven it? Is it stronger than expected demand or is you know, the relative availability to you as one of the biggest players is not as strong as you thought. And I have a follow-up, please.

Yeah, I think, Tony, I think part of your question sort of answers it, which is we are maintaining our full-year guidance, and in our Q1 outlook of 50, 53 cents, it does incorporate all of the known risks and opportunities, including the risks around the CPU constraints. At SAM, we did talk about the caution, and that caution is clearly playing out. But again, it is all factored into our guidance, and I'd say sort of directionally speaking, it's not dramatically different than what we provided from caution. It is just now real and playing out.

And that demand still remains strong as it has been all throughout 2018. Okay.

And then just on... On the tariff question, you have had some tariffs impact, you know, principally your desktop machines and your workstations. I think in response to that there's been selective price increases. I did notice your desktop growth rate was a little bit lower in the quarter than your notebook growth rate. So I'm wondering if you can comment on whether you've seen any elasticity associated with price changes from tariffs. And then secondly, if we were to see the $200 billion in tariffs, would that not apply to essentially all of your notebook business and the vast majority of your printing business? Or am I misguided in that assertion? Thank you.

Taking a step back on Q4, The overall tariffs that have been announced implemented through September, I'd say, didn't have a material impact on the company. But to your question, they did have an impact on our personal assistance business and desktop. And you saw that really as a margin headwind that we helped mitigate through other factors. And we are working through a variety of mitigation items on the tariffs. Pricing could indeed be one of the ways we mitigate mitigation. but there's other ways to do it as well. Maybe, Dion, if you want to talk about the broader unknowns, but there's not a whole lot to say.

Yeah, so I think, Tony, it's important to understand how we think about pricing in all of our markets. We have a pretty definitive process and strategy that looks at our product's performance adjusted based on the various differences from one SKU to another SKU, what we call PFV. And we set a strategy market by market, and we need to ensure that we remain competitive. So I would say that we're obviously watching our pricing very carefully. We're looking at our competitors' pricing very carefully. We tend not to... lead the market down on price and sometimes, in many cases, we're the first to take up pricing. But having said that, I think Steve's quite right. We've got many levers available to us and we're exercising all of them as it sort of relates to the second part of the question, which was around pricing. Any unknowns. Any unknowns. We just don't chase ghosts, Tony. We don't know what the rates would be if there were tariffs. We don't know to what extent it would include listed items. Would it be everything? Would it be partial? So rather than speculating on that, when they become announced, we put our mitigation plans into place.

And the next questioner today will be Shannon Cross with Cross Research. Please go ahead.

Thank you very much. I was hoping you could provide some more insight into the competitive environment within printing. Xerox and Lexmark have both had some pretty significant changes in senior leadership. You know, Ricoh I think is a little more focused on profit. So I'm curious how you're seeing, you know, some of your competitors react to the industry.

Yeah, look, I would say the printing market is still – there's many players. There's upwards of over a dozen players in the printing market. And in an overall market that's relatively flat, generally what happens in that environment is – where you don't have the scale, it becomes more difficult to compete. Some of our competitors are a little distracted, others are focused. We look at all of our competitors, but ultimately we're playing our game. We have an incredible portfolio of products, a very clear strategy, both transactionally as well as the work we're doing in our contractual space. Our security message is really resonating with our It's on every C-level executive's mind, and we have the most secure printers on the planet. Our managed print services business continues to be an area of focus for us. The integration of Samsung's business has just gone through its first year anniversary, and I'm really pleased with how we've integrated that company and how we're making progress against our goals in the A3 contractual space circle. All in all, we're playing our game. We're very focused on that, and we'll continue to be competitive in the marketplace.

Thank you. And then with regard to 3D printing, you had a successful show, I think, at Formnext. Clearly, there have been some product launches during the past year and then coming up in calendar 2019. What are you hearing from end markets? Do you feel like you're getting to a point where there's an inflection in demand within 3D printing? Where are the areas that you're seeing, you know, the most growth and the most interest and sort of as you look to next year? Thank you.

Yeah, look, I'm really excited by the 3D printing business. This is an incredible business. And as we talked about at the security analyst meeting, it sits on our third time horizon of the future. And it's not something that we expect will have a material impact for us in 2019. But over time, in my mind, it's incredibly clear. It's not a question of if the fourth industrial revolution will happen. It's when. And we are certainly positioning ourselves to be in pole position when that happens. We've had a great three years since we announced the creation of the business and we introduced our first technology. We've done exactly what we said we would do. We said we would lay markers for all of you because we don't talk about the financials specifically. but there would be very specific markers and milestones by which you could hold us accountable to, and I think we've delivered on all of those. The introduction of the 3D printer for the plastics market, we've become the number one player for production in a very short period of time. We've expanded our portfolio in line with our expectations. We have inside the first product that we released, the follow-on product, the 4210, which really improves productivity of core plastics. We introduced colour with the 3 and 500 series, which will begin generating revenue in 2019. We introduced metals. Last quarter, customers will begin using our metal production service with our partners in 2019. We've added new materials. We started with PA-12 plastic. We then went to glass beads. We've got PA-11 and TPU coming very soon. and metal powders with GKN, which is really focused in the automotive industry. So with the partnerships that we've created and the ecosystem we're building, we're right on track to how we think we maintain this market leadership as the industry is set to disrupt this $12 trillion industry.

And the next questioner today will be Jim Suva with Citi Investment Research. Please go ahead.

Thank you very much. Kind of a housekeeping question, then more of a strategy question. The housekeeping question is, on your EPS guidance that you gave last month, am I correct that that included like a penny or two from Apogee, and is that still intact, or is that incrementally changing at all? That's the housekeeping item. Then strategically, when we think about if memory prices come lower – Because the past, say, 12 to 18 months, you've been adjusting prices higher. Are you going to be adjusting prices actively lower? Are you looking to harvest some of that profitability or give some of it back? Because it looks like you've been gaining share still while increasing pricing. So I'm just kind of wondering about the strategy of how we should think about those component costs in your go-to-market strategy. Thank you.

So, Jim, on the housekeeping topic, the guide provided today does include Apogee, and at the security analyst meeting it did not. So we have, you know, just getting started with the year and have, you know, the range captures kind of all the known risks and opportunities, but I have included Apogee in the guide today.

And as it relates to the sort of second part of the question, You know, whilst it's true memory is certainly trending lower overall, some of that is offset with currency headwinds with a stronger US dollar that we're seeing. But again, we use this mechanism of price function value as we look at all of our competitors. We don't lead the market down on price. We want to ensure that we remain competitive in the marketplace. We are vigilant always on cost management across the ecosystem. And we're just looking to segment the markets, find the profitable areas of growth in the business, and target profitable growth. We don't chase share for share's sake.

And the next questioner today will be John Roy with UBS. Please go ahead.

Great. Thank you very much. So you were able to pretty much hit your print margin number for the quarter. Can you give us the puts and takes that would make that move around for the rest of fiscal 2019? And what are you thinking essentially all in when you sum it all together where you might come out for 19?

Well, we're pleased with the profit we drove in print in Q4. We've been focused on driving incremental operating profit dollars consistent with our strategy, and we grew $46 million year over year. And for the full year, $177 million. And so we're going to continue to focus on our strategy. That includes investing in our business and A3 and the opportunities to disrupt that market and also 3D printing. We're also going to continue to place units where we see NPP positive opportunities to do so. So as we're shifting the business over time to more services and contractual, we're going to operate that business with an operating margin target in the next three years of at least 16%. and will continue to drive supplies to flat to slightly up this year.

Great, thank you. And the next questioner today will be Paul Koster with JP Morgan. Please go ahead.

Yeah, thanks for taking my question. I'm just wondering if the trade conflict that seems to be happening with China, whether that has any impact on your ability to go into the PC end market there, which I know in the past you've described as being an area where you're under-indexed at the moment, so a growth opportunity?

Look, China has been and continues to be a very strategically important market for us. We have a very strong brand in the country. We've been present for a very long time. We obviously continue to assess the situation. and the potential impact on our business and our plans that we may or may not need to make as a result of it. Again, we're not chasing ghosts, but we're also not sticking our heads in the sand either. It's an important market and will remain so.

One quick follow-up. The printer market share seems to bounce around a little bit. It's up year on year, but only 200 basis points, which is a little less market share gain than the prior quarter. probably doesn't mean much is my guess, but I'm just wondering if you can give us a little bit of color and whether there's any segments in which you think you're outperforming strongly or struggling a little bit.

Yeah, I mean, we concur. I mean, I think the market in the long term has some ups and downs and pockets of growth, and in any particular quarter, you know, share ships will occur. For us, we're going to remain very disciplined on pursuing profitable share. It's what we did in the last quarter. and you see it in the calendar quarter three, where there's some pockets of the overall market where we're choosing not to compete, and we see that primarily on the low-end consumer. But overall, pleased with the performance, growing E3 and on the office more broadly. But I think to your question, I mean, there will be puts and takes every quarter, but we're going to be very disciplined on ensuring we go after the profitable growth.

And our next questioner today will be Rod Hall with Goldman Sachs. Please go ahead.

Yeah, hi, guys. Thanks for the question. So I guess my first question is on the 0.8% move in gross margins. You said it was seasonality and FX. I just wonder if you might be able to quantify how much of that was FX on the sequential move. And then I also wanted to see if you could update us on A3 market share. You gave the last quarter, I believe, and you've got this targeted 12%, so just curious how that progressed in the quarter. Thanks.

So I'll take the first one. I mean, the largest driver really was due to seasonality and a higher personal systems mix. Personal systems, again, sequentially grew 7%. Print sequentially grew 2%. So that's the largest driver. Incremental to that, to your question, we did have some FX headwinds quarter to quarter. We did also have the initial impact of the tariffs on the personal system side. But I would say the short response is the primary driver is really on the personal systems mix quarter to quarter.

As it relates to A3 share, Rod, we grew share year over year, calendar quarter three, by eight-tenths of a point. And I remain really excited about the future opportunities and really encouraged by the progress of our A3 business since we started. We continue to introduce new products and solutions to complement an already very robust portfolio. We continue to sign up premier partners around the world which is critical to scaling the business. We continue to focus on differentiators that really matter for our customers in areas like security and print quality. And as a reminder, and as we've said in the past, we don't expect the sequential growth to happen every single quarter. We remain on track to achieve our 12% market share by the end of calendar 2020. That's the marker, the longer-term marker we put in the ground. And that's what you can expect to see from us.

And the next questioner today will be Aaron Rakers with Wells Fargo. Please go ahead.

Yeah, thank you for taking the questions. I want to go back on the pricing discussion on the PC category. You know, you guys have had several quarters now where pricing has been up solidly, and given the variables at play, I guess the first question on that is, you know, oftentimes in the past, HP's had the advantage of gaining share in the face of component supply constraints such as the CPU situation. I'm curious of how you plan to react and potentially if you see opportunity to take incremental share on that. And then second to that, on the component pricing dynamic, I'm curious of how much of the past couple of quarters in terms of pricing has been driven by mix versus, say, the pass-through of component pricing.

So I'll take a crack at it. So on the last piece first, so what we saw in Q4 – roughly speaking, about a five-point ASP increase when you look at the revenue versus units. Just under a quarter of that is the structural improvements we're making in mix, and the remainder was sort of the broader pricing categories where we're factoring in the competitive situation, currency, commodities, et cetera. On the first part, our strategy continues to be to kind of profitably grow share. And, you know, we see the current situation no different than we see it at any market situation where we like our product portfolio, we like our lineup, we like our ability to compete and win in the marketplace. And so just like we do in any market situation, you know, our goals are to go out there and to gain profitable share.

The other thing I would add to that is you were – You should expect to continue to see us focus on mix shift towards more profitable parts of the market as we do our segmentation. We've mentioned on previous calls premium and gaming. The specter folio that we showed at the security analyst meeting is an incredible piece of art and innovation, the intersection between the two, and it's been really well received by our customers. So customers are looking for premium devices. Our gaming... franchise continues to grow. We remain excited about that. And we're focused on other more profitable areas of the personal systems category. And you heard Alex say at the security analyst meeting, there's displays and accessories and services where traditionally we've been under index, where we have a lot of focus, as well as new growth opportunities with devices of service.

And the next questioner today will be Steve Milanovich with Wolf Research. Please go ahead.

Thank you. I believe that you're the largest user of AMD processors among the PC vendors. Is that the case, and does that relationship help you offset the Intel issues?

So that's probably a better question for AMD to ask them if we're the largest or not, but I would say that we have had a very long partnership and a very good partnership with AMD for many years. They're part of our multi-source strategy, and we have a variety of tremendous AMD offerings in our portfolios. You know, customers make decisions. They weigh price and performance and functionality when making purchasing decisions. And there are definitely segments and geographies where AMD offerings are an attractive alternative.

And on the A3 business, you've talked about this past year was a placement year of hardware, and then down the road you would begin to benefit from the associated supplies and services. Do we get much of that benefit in fiscal 19, or do you need the installed base to get larger so it's more of a fiscal 20 occurrence?

We start to get some benefit, clearly, in 19, but it does take time to get that installed base built. So we certainly see the greater upside in FY20 and years beyond.

With that, I think we are out of time. Let me close by thanking you all for all of your attendance over the course of this year. It's been a very strong year for us this year in 2018. We've done what we said we would do. I'm very proud of that. As we look into and look ahead to 2019, we remain very focused on the things that have made us successful since separation. We're focused on innovation. We're focused on execution. We're focused on relentless cost management. We have very strong financials, the best portfolio I think we've ever had. We have solid opportunities across personal systems, printing and 3D in core growth and future. We'll continue to play our own game, execute against our strategy with rigour and aim for sustainable growth for the long term. With that, I wish you all happy holidays. Thanks very much for joining us.

And the conference has now concluded. Thank you for attending today's presentation, and you may now disconnect your lines.