Good day, everyone, and welcome to the Second Quarter 2019 HP Inc. Earnings Conference Call. My name is William, and I'll be your conference moderator for today's call. [Operator Instructions] And as a reminder, this conference is being recorded for replay purposes. And now I'd now like to turn the call 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 2019 second 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 web page at investor.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 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 and Form 10-Q. HP assumes no obligation and does not intend to update any such forward-looking statements. We also note that the financial information discussed on this call reflects estimates based on information available now and could differ materially in the amounts ultimately reported in HP's Form 10-Q for the fiscal quarter ended April 30, 2019, and HP's other SEC filings. During the 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'll turn it over to Dion.

Thanks, Beth. Good afternoon, and thank you for joining us. In Q2, as you can see from our results, we are delivering on our plans, demonstrating strong execution and progress on our priorities. Our strategy remains consistent: to engineer experiences that amaze while driving profitable growth. We are striking the right balance between driving results for today and investing for the long term. We're leading in our core PC and print markets while extending our portfolio of services and solutions in our growth and future categories. In the second quarter, revenue was $14 billion, up 2% in constant currency. Non-GAAP diluted EPS was $0.53, up 10% and at the high end of our outlook range. Free cash flow was strong at $747 million, and we returned $936 million to shareholders in the form of stock repurchases and dividends. We continue to operate in a dynamic environment that includes ongoing industry component and strength as well as macroeconomic, geopolitical and tariff uncertainties. But we have a highly experienced team that know how to navigate through complex market conditions. Despite industry-wide issues, we will stay laser-focused on our strategy to drive long-term, sustainable performance, build trust in our brand and create shareholder value. Let me provide a few highlights and color on each of our businesses. We continue to execute well in Personal Systems. Revenue grew 5% in constant currency with strong operating margins of 4.3%. Innovation and design are setting our product mix apart, and we're making disciplined investments in solutions and demand generation. We continue to drive profitable growth through a relentless focus on customer insights and by aggressively pursuing targeted opportunities to go after the heat in the market. While PC growth across the industry was more subdued this quarter, HP continued to outperform the market and gain profitable share. Our Commercial portfolio remains strong, with growth in both commercial desktops and notebooks. As IT decision-makers look to create the office of the future, they are turning to HP to support their requirements for both manageability and security. For small and medium-sized businesses, we expanded our AMD portfolio with the launch of HP ProBooks, incorporating premium design and versatility. We also expanded on our premium offerings with the new Intel-based EliteBook 800, bringing robust security to mainstream business users. This includes HP Sure Sense, our new software that harnesses AI to detect and prevent malware threats. We also continued to raise the bar for gamers with new OMEN devices, software, displays and accessories. As any gamer will tell you, gaming is all about immersion, experience and competition. We are growing our ecosystem and setting new benchmarks for e-sports, including last week's launch of the OMEN X 2S, the world's first dual-screen gaming laptop. What makes this system special is that it enables multitasking for gamers to message, watch a Twitch stream or run other apps without ever having to take their eyes off the game. While we're growing our core, we're continuing to gain momentum in strategic growth areas, including Device as a Service and retail solutions. This quarter, we announced HP DaaS Proactive Security, a significant extension to HP's award-winning DaaS solution, providing the world's most advanced Windows 10 security service for files and browsing. And in our retail solutions business, HP Engage, our retail point-of-sale solution, was selected to power roughly 2,000 stores for one of the world's largest office product retailers. Shifting to Printing, we again outperformed the market in a challenging environment. Total revenue declined 2%, and as expected, Supplies declined 3%. In Supplies, we are taking decisive action. We have made and continued to make improvements in our business management systems and to enhance our measurements of the market and our performance. We are simplifying and strengthening our pricing discipline to achieve consistency of our value proposition. Also in Q2, we increased both our brand protection activities and our online marketing with a focus on search and demand generation. Finally, growing our contractual businesses and evolving our business models remain key strategic initiatives. In hardware, revenue growth in Commercial was offset by weaker consumer demand. Not all hardware is created equal, and we are focused on shifting the installed base to more productive and profitable units. In Q2, we saw Commercial revenue growth in A3 and A4 enterprise. We also introduced a new generation of OfficeJet Pro products and reimagined the print experience for the way small and medium-size businesses and employees are printing. Our design team connected with thousands of small business owners across the globe to create a product that meets their unique needs. Built with sustainability in mind, it incorporates best-in-class security and a new smart task workflow solution into a printer that is 39% smaller than the previous generation. This was the insight required to fit into today's smaller and more versatile workspaces. Turning towards the contractual marketing, including A3, we continue to make progress and are leveraging our differentiated technology and IP to capture opportunities. In Q2, we won several large Managed Print Service contracts, including a multimillion-dollar deal with Petrobras to provide a comprehensive portfolio of solutions and services, including our A3, DesignJet and PageWide products. And in graphics printing, we extended the business into a natural adjacency, opening an entirely new market for us with the launch of the HP Stitch portfolio. These digital textile printers are specifically designed for sportswear, interior decor and soft signage applications. HP Stitch builds on HP's leadership in inkjet technology with precise color matching and cost-efficient, streamlined production capabilities. Turning to 3D Printing. This month, we expanded our portfolio with the introduction of our most advanced Multi Jet Fusion systems to date, the Jet Fusion 5200. By bringing together innovations in systems, data intelligence, software and material science, we are able to deliver new levels of manufacturing predictability and applications potential. And we are excited that companies like Jaguar Land Rover are early users of this new system. Of course, transformation of large manufacturing industries doesn't happen in isolation. Our customers are looking for complete solutions that integrate into their long-term manufacturing road maps and existing processes. This month, we announced industrial alliances with Siemens and BASF. We will deliver an end-to-end digital manufacturing solution that integrates HP's 3D Printing portfolio with Siemens' digital industry's offering from 3D design to simulation, production, factory planning and analytics. Together, we will be working with automotive and industrial companies to transform their manufacturing with existing customers, including Volkswagen. Finally, I want to spend a moment on an exciting announcement we made just this week. HP and SmileDirectClub, the leader in teledentistry, announced a milestone partnership to reinvent the orthodontics industry. To keep up with demand and accelerate their growth, SmileDirectClub will be deploying a fleet of 49 HP 3D Printing systems to produce more than 50,000 unique molds per day, one of the largest 3D printing projects in the United States. This is truly industrial-scale 3D production. Together, these are all significant steps for our 3D Printing business. Our expanded portfolio, materials and industrial alliances enable us to serve a growing range of customers with a diverse range of manufacturing needs. We are well positioned within the digital manufacturing industry and are helping to ignite the Fourth Industrial Revolution. Overall, I'm pleased with our Q2 results. We remain focused on driving great innovation, disciplined execution and prudent cost management. We remain agile and adaptable in the face of volatility in an ever-changing landscape. We will continue to execute today while we invest in our growth and future businesses. With that context, I'm going to turn it over to Steve for a closer look at the numbers.

Thanks, Dion. In Q2, we demonstrated resilience and overall delivered a solid quarter. We grew revenue in constant currency. We grew operating profit dollars, and non-GAAP EPS grew double digits. We see opportunities ahead as well as ongoing uncertainties and remain focused on executing our long-term strategy as we navigate in a dynamic environment. In the second quarter, net revenue was $14 billion, flat or up 2% in constant currency. Regionally, in constant currency, Americas declined 1%, EMEA was up 2%, and APJ grew 11%. Gross margin was 19.4%, up 10 basis points year-over-year. Sequentially, gross margin was up 1.6 percentage points, in line with normal seasonality, driven by both rate and mix improvement. Non-GAAP operating expenses were $1.7 billion, up 1%, driven by an increase in SG&A. Non-GAAP net OI&E expense was $60 million for the quarter. We delivered non-GAAP diluted net earnings per share of $0.53, up $0.05 or 10% with a diluted share count of approximately 1.5 billion shares. Non-GAAP diluted net earnings per share excludes amortization of intangible assets of $29 million, acquisition-related charges of $11 million, restructuring and other charges of $69 million, nonoperating retirement-related credits of $10 million, tax adjustments resulting in a benefit of $43 million, and a tax-related impact on all of these items. As a result, Q2 GAAP diluted net earnings per share was $0.51. At the segment level, in Personal Systems, we are executing well and delivering a consistent, profitable growth. I am pleased with the team's ability to remain focused on our long-term strategy while navigating each quarter in a highly dynamic market environment. Total Personal Systems revenue in the second quarter was $8.9 billion, up 2% and up 5% in constant currency. Operating margins improved 50 basis points to 4.3%, driven by improved mix, which we view as more structural as well as better rates, largely a result of supply chain cost favorability, partially offset by unfavorable currency. Our Q2 results reflect our ability to manage through a constrained CPU environment, segment our markets, identify areas of profitable growth and make trade-offs as appropriate. By customer segment, Commercial revenue was up 7%. Consumer revenue declined 9%, driven by overall market softness. By product category, revenue was up 7% for Desktops, up 6% for Workstations and down 1% for Notebooks. Overall, in calendar quarter 1, our market share was 23.2%, up 0.5 point year-over-year, and demand for our products remain strong. Turning to Printing. Our reinvention journey continues as we outperform our respective markets, continue to target growth opportunities and make progress addressing challenges in our core. Revenue was $5.1 billion in the quarter, down 2% year-over-year nominally and in constant currency. Commercial hardware revenue growth was more than offset by declines in Consumer hardware and Supplies. Hardware units were down 4%, with Consumer and Commercial categories down 4% and 3%, respectively. Having said that, we outperformed the market, gaining share in the calendar first quarter in both our home and office businesses and in key segments, including A3. We continue to make progress in our contractual offering. This includes strong growth in Instant Ink, where we're growing revenue in our global subscriber base, and in MPS, where we continue to grow revenue as well. In Q2, Supplies revenue was down 3% nominally and in constant currency. We continue to operate below our Tier 1 channel inventory ceiling. As Dion just described, we are taking several actions in this business. As part of our business management system, we are implementing programs to enhance our visibility in the downstream channel. We have made initial progress lowering Tier 1 channel inventory, but there's still more progress to be made over the next 2 quarters, particularly in Tier 2 in the downstream ecosystem. We still anticipate Supplies revenue will decline approximately 3% in constant currency for the full year. In print, operating margins expanded 40 basis points to 16.4%, driven by spend favorability as we balance tight expense management with continued strategic investments in key growth initiatives, including 3D. Turning to cash flow and capital allocation. Q2 cash flow from operations was $861 million, and free cash flow was $747 million. In Q2, the cash conversion cycle was minus 32 days. Sequentially, the cash conversion cycle weakened 3 days. The change was primarily driven by a 4-day increase in accounts receivables, which was impacted by revenue linearity. We saw a 1-day increase of days of inventory and a 2-day increase in accounts payable. We returned over 100% of free cash flow to shareholders in the quarter. This included $691 million for share repurchases and $245 million via cash dividends. For the full year, we still expect to return approximately 75% of free cash flow to shareholders. Looking forward to the second half of FY '19. Keep the following in mind related to our overall financial outlook: We expect an increased headwind from currency. We have incorporated the impacts from tariffs currently in place, including the increase from 10% to 25% implemented earlier this month, but we have not included the impact for any future tariffs. In Personal Systems, we expect CPU supply constraints to continue through the third calendar quarter. Also, as I have said before, we remain committed to driving productivity and investing for growth at the same time. Effective cost management remains a critical element of our success in very competitive markets. And we'll continue looking for ways to operate more efficiently and effectively. 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 FY '19. Taking these considerations into account, we are providing the following outlook: Q3 '19 non-GAAP diluted net earnings per share to be in the range of $0.53 to $0.56; Q3 '19 GAAP diluted net earnings per share to be in the range of $0.49 to $0.52. We are updating our full year fiscal 2019 non-GAAP diluted net earnings per share to be in the range of $2.14 to $2.21, and full year fiscal '19 GAAP diluted net earnings per share to be in the range of $2.04 to $2.11. So now let's open up the call for questions.

[Operator Instructions] And our first questioner today will be Jim Suva with Citigroup.

And I'll ask both my questions at the same time, and you can do them in any order. And they're pretty simple. While you updated your EPS guidance, I don't believe in the slides or your prepared comments you mentioned free cash flow changes. Just help us bridge that. And then more importantly, now that we've driven past the hiccups of the 4-box model and the ink supplies that you've had challenges with, can you give us a backward looking -- as we progress through that, what exactly, looking back, happened? What you've learned? And have fully overcome those speed bumps? And how should we think about the 4-box model? Like did you have to put in a couple of variable -- new variables or adjustments now that it looks like you've made progress? How should we think about what you've learned from that as we all learned in life all the time?

Jim, let me address the free cash flow question first. So we have not always updated our free cash flow guide on particular earnings calls, but I will confirm that we are still expecting to achieve $3.7 billion or greater for the full year in cash flow. And the assumptions are pretty straightforward similar to prior quarters. First of all, just to remind everyone, we do expect over time that free cash flow to grow in line with earnings, and we're taking into account our earnings for the year, our cash conversion cycle and volume. And when I look at first half of the year, we did deliver $1.4 billion of free cash flow and that would leave $2.3 billion in the back half of this year. We actually achieved $2.3 billion in FY '18 and $2.2 billion in FY '17. So this is very consistent to where we've been in prior years. And really, the assumption is around I would expect that there would be some upside favorability to the cash conversion cycle, which ends at minus 32 days in Q2, and also that we would expect to see the normal Personal Systems volume in the second half, which is higher than the first half. So that's on the free cash flow. Dion, do you want to comment on where we're on Supplies? I can add to it if you need.

Yes, absolutely. And Jim, thanks for the question. I can assure you that we are all over this, as you can imagine. We're taking very decisive actions on the plans that we outlined last quarter. I think we were very detailed in how we thought about last quarter and how we explained really 6 themes, 4 operational themes and 2 strategic initiatives that we needed to drive. Since then, I've put a Supplies task force as well as a global program office in place with a primary focus on EMEA and then to ensure consistency across all of the regions. We've identified and began implementing several changes already. I'll walk you through where we are on the 4 operational issues and the 2 strategic areas, the focus that I outlined on quarter 1 and then I'll have Steve chime in as well. So first, let me start with the operational actions. We're making changes in our marketing and go-to-market to address our supply share and you'll recall that was really where we primarily deviated from a 4-box model last quarter. We've increased our investment in search significantly versus last year in all regions. And we've improved our search coverage in the main markets within EMEA. We've also changed our marketing mix with key online marketplaces to improve the prioritization of HP original supplies. Secondly, we're upping our game in terms of brand protection. We're going to defend our brand as well as our intellectual properties to ensure that our customers receive the quality, the benefits, the sustainability and environmental advantages that original HP Supplies provide. Thirdly, we're working with our Tier 2 channel partners to gain more visibility into the overall the overall Tier 2 channel inventory and to reduce the overall level of inventory. And fourthly, we're bolstering our business management systems. For example, we're improving our pricing discipline, and we are continuing to enhance our data management. We're leveraging the big data on the telemetry information that we're now collecting, and we're doing that across the installed base of printers that we outlined in Q1 to provide more accurate and timely reporting and insight. Regarding the 2 strategic areas of focus. Firstly, as we actually discussed at SAM and on prior calls, we're evolving in print to focus on driving growth in our contractual business, certainly where our customers are really interested in transacting with us through those contractual motions. And then finally, we're adopting new business models to continue to drive long-term value in print. And Steve, with that, it's probably a good idea to provide some additional color on the progress in channel inventory and in other areas.

Yes. Maybe -- I guess I'll add to that. And Jim, just to kind of remind us that what we identified in Q1 kind of relative to the assumptions we had in our model, where we had inaccurate assumptions were primarily around share, I think, which Dion just addressed in his remarks; and then to a lesser extent, pricing. And so there are a lot of, let's call them, sort of forecast changes we're making to better analyze share from the telemetry that Dion mentioned, also online and other customer analytics. And then from a channel inventory perspective, we are making good progress bringing on the channel inventory, as we mentioned on the last call.

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

We've spoke with companies that aren't even halfway through their required refresher upgrade to Windows 10. And so how significant could the commercial PC demand be in the back half of the year? And should we think about that as a more protected IT project versus some of the areas where we're hearing about pushouts? Then I have a follow-up.

Yes. So I won't make any specific kind of revenue guide counter, but I will say in general that what we're seeing in the market -- and I think it's generally in line with what the industry analysts are saying as well is that we have a more favorable Commercial market and a softer Consumer one. And we have seen strength in Commercial and are expecting a bit of a tailwind and lift from the Win 10 refresh in the second half of the year and even directionally beyond this year. The Win 10 migration has been executed, let's call it, I guess, a bit more smoothly than the prior rollover period. So do not expect a significant trough in 2020. So it is a driver of some of the Commercial demand we're seeing.

And Steve, I assume that, that also plays into the confidence around the cash conversion cycle?

It does. I mean the -- again, a big assumption is, you can call it normal seasonality with better second half, and Personal Systems will be higher than the first half. And that is driven by some strength we see in Commercial, which is partially offset by some of the Consumer softness.

And what I've been really impressed with, Katy, is being this relentless focus on customer insight and turning that insight into innovation. I think the Personal Systems team and Alex and together with the regions have really listened to our customers. The -- we continue to launch incredible products. We know there is an incredible area of concern around cyber, and it's front and center within the portfolio. And as a result of that, we're seeing really strong demand for our products, particularly in the Commercial space.

And then what is the impact from tariffs that you've baked into the full year guide? And what mitigating actions are you taking around the manufacturing footprint and any new pass-through pricing?

It's a great question, Katy, and if you're watching CNBC today, you would have seen that they were asking that question relentlessly. So let me kind of bifurcate my answer on tariffs into 2 portions. The first is the current tariffs that we know about. Our guidance includes the impact of the tariffs that are currently in place, including the increase from 10% to 25% that went into effect earlier this month. So here, I'm referring to that roughly $200 billion trade tariff list. Regarding the new list that was published earlier this month, clearly, it's an industry-wide situation in the U.S. that has continued to be very dynamic, and so we don't speculate or comment on potential impacts until we know all the facts. And we're still hopeful an agreement will be reached. And the reason I say that is because it's really highly uncertain. First of all, we don't know if the additional tariffs will happen at all. Secondly, if they do happen, we don't know when that would be -- when that would happen, and the timing on that really does make a big difference. And thirdly, we don't know what the final list of products will be, what will be included, what may be excluded. And finally, we don't know how much or what the tariff rates would be. So I know that's quite a few variables, and all of those variables can change the calculus quite significantly. And we've seen that in the past as we've worked through the first $200 billion list of tariffs. We've seen those variables in play. There have been multiple phases. They've been products that have been on the list and excluded from the list, and there have been changes to the tariff rates over time. So we continue to assess the potential impact to the business, and we're very active. We are not sitting idly by. We're looking at multiple scenarios. And we're working with the U.S. administration, we're working with others in the industry, and we're working with our supply chain on mitigations to ensure the best outcome for our ecosystem of customers and partners as well as our shareholders. So clearly, the implementation of incremental tariffs on the complete list of products imported from China would have industry-wide impacts. The impact would likely be more felt in the near term. And Steve, you might have some additional comment.

Yes. In terms of the levers, we do have a number of levers that we would expect to use to mitigate the growth exposure from these tariffs down to a net exposure. This does include optimizing our manufacturing facilities around the world, adjustments to pricing and other items. We would plan to use these mitigations to drive down, again, to a net impact. I do want to emphasize -- or reemphasize what Dion said, because the specifics are absolutely essential around any assumptions or any quantification of what the net impact could be. We are assuming, however -- and these were the scenarios we're working through, that we would experience more of a shorter-term impact that would diminish over time. And to be clear, again, our guidance, both the EPS and free cash flow, does include impacts of the tariffs currently in place but not any contemplation of the additional tariffs under consideration.

And the next questioner will be Toni Sacconaghi with Bernstein.

You talked a lot on the last earnings call about this increased reception to purchasing remanufactured supplies online particularly in Europe. And I think a widespread investor concern is, do you believe that that's a structural issue now that you've had 90 more days to think and look and gather data on it? So specifically, are you seeing any evidence that -- of that occurring in other geographies? And you talked about some new inputs into the 4-box model around price and share. So given those inputs and given whether you consider a remand -- increased remand to be structural or cyclical, what is your belief for what normalized Supplies growth should be going forward? And do you actually reach that in 2020?

Right. Thanks, Toni. Thanks for the question. I'll take the first one, and Steve, you might want to take the second. So if I catch you correctly, your -- to paraphrase it, the Supplies online issues spreading into other regions, i.e., Americas or APJ. As we said in the last call, the underlying factors around the shift to online and contractual are absolutely global in nature. And we live in a very connected world. Both Americas and APJ both begun addressing these trends earlier than EMEA did. Therefore, our primary focus remains EMEA. That said, the competition doesn't stand still and neither will we. We're sharing the learnings from the global task force with the other regions to ensure a consistent approach. As we will continue to monitor these trends in every single region, we'll fine-tune, we'll adjust as the market conditions will inevitably evolve. That's why I have a global program management office around this and we are looking at this from a global perspective, but the real primary focus remains in EMEA because Americas and APJ got started earlier.

Toni, the specific -- I'm going to give you numbers. So maybe starting with Q2, our Q2 result of minus 3% was something that's in line with our expectations. And a similar trend is Q1. The decline was driven primarily from EMEA. I would say broadly speaking, our forecast assumptions are holding as we look into the remainder of '19. There is no change to our full year outlook. We're still expecting approximately minus 3% in constant currency. This would include the remaining takedown of the channel inventory and also the revised share and pricing assumptions described on the last call. It is difficult to pinpoint the precise timing of all the reduction between Q3 and Q4, so it could be some slight quarterly growth rate variability along with other natural business movements. It's all too dependent on the timing of the actions and how they play through the ecosystem. In regards to -- I guess beyond FY '19, it's going to depend on multiple factors and multiple variables and the progress we're making around installed base and the type of units we're placing, usage, the share and pricing as well as any evolution in our business model. And so I'm not going to comment any more specifically on FY '20 or beyond at this point.

But just a follow-up, Steve, I mean if you're explicitly saying that you made a change in share and price assumption in your 4-box model, I presume both of those were not positive. They were negative. And so if that's the case, then why wouldn't the structural longer-term Supplies growth rate be lower than what you had thought before? And why -- if you're taking down all the inventory, why wouldn't we be at that normalized rate in 2020?

Well, you're correct that the assumptions -- change in assumptions were to the negative. We did bring down our share assumptions for the remainder of this year as well as pricing. That's not to suggest that the actions that Dion described can't move those in either direction. And ideally, we're working to move those up and to have share, win back programs as well as to drive more consistent pricing across the ecosystem, including the omnichannel. And so those are the actions we're working clearly to make sure we're addressing the Supplies headwinds we're facing this year.

And that's really, Toni, why I break the actions down into operational issues, which we do expect to have an impact on those levers as well as the longer-term strategic focus areas, evolving our print focus, driving more towards contractual business and adopting new business models within the print business unit.

And the next questioner today will be Steve Milunovich with Wolfe Research.

Hewlett Packard Enterprise just indicated that they've been seeing fairly recently, I guess maybe over the last 4 to 6 weeks, a slowdown in business, maybe a shifting out of business into the next quarter. Are you seeing anything like that? It doesn't look like you're seeing it on the PC side, but I would think on the commercial printer side, you might have some sense of that. So are you sensing that larger accounts are taking longer to close?

We saw strength in Commercial. So I wouldn't highlight anything beyond that strength in Commercial.

Okay. And Steve, you talked about trying to front-end-load printer revenue a little bit more. Beyond contractual, are there other things that you're thinking you can do? And how significant could that be and how long might it take?

So when I sort of made the comment on new business model evolution, there are sort of multiple dimensions to that. I think the primary one we've been focused on, what you alluded to, is the shift to contractual. And so we've been at that for some time and continue to make progress around our management services revenue as well as shifting more to Instant Ink, which continues to grow for the company. So I think that's been our primary driver. In terms of the sort of -- where the profit and the lifetime value of our hardware unit is, we already are operating in certain geographies where we do have printers that generate more profit of the lifetime upfront. And so I think we'll continue to work on different areas and different models in the future, but there's really not a whole lot more to describe at this point.

And the next questioner today will be Paul Coster with JPMorgan.

Two questions in view of the tariffs. I'm wondering if you've identified any vulnerabilities or risks in your supply chain and whether there's any major sort of reconfigurations that you anticipate. How, if at all, that should mitigate the risk there? And the second one, just quick update on the metals printing and 3D Printing, if you can give us some sense of the time line again.

Look, we have manufacturing facilities, as you can imagine, all over the world, and we're always working to optimize our manufacturing footprint. So this is just an ongoing part of our business so that we are not single-point sensitive. So that's how I think you should think about our manufacturing footprint and our facilities. As it relates to metals, look, I'm really happy with the progress of the 3D Printing business unit on multiple dimensions, not just the metals dimension for which they've made really good progress. We have some several companies like GKN that we're working with to serve the auto industry. We have similar efforts underway in the health care industry. But we continue to perform well in the 3D Printing business. We recently announced that over 10 million parts were produced using our 3D Printing technology last year, with half of the parts manufactured for end-user products. In -- quarter 2 was a busy quarter. We launched our new HP Jet Fusion 5200 series, which is a printing platform that delivers improved economics and performance and part quality, really designed for manufacturing. We also launched a new TPU material. And for those of you that want to geek out with me here, it really enables new classes of applications ideal for flexible and elastic parts. We also expanded our alliances with BASF, Materialise and Siemens, a very important announcement with Siemens just last week. And really, they're at the epicenter of all manufacturing. If you want to get into manufacturing processes, you need to be doing that with companies that have been doing it for decades, and Siemens is an industry leader. We also announced last week a major, incredible partnership between HP and SmileDirectClub, who's the leader in teledentistry, and they're really set to disrupt the orthodontics industry. SmileDirectClub will be deploying a fleet of 49 HP 3D Printing systems, produce more than 50,000 unique and highly personalized molds a day. And that's one of the largest 3D Printing manufacturing projects in the United States, and that's a true example of an industrial-scale 3D production.

And our next questioner today will be Matt Cabral with Credit Suisse.

On Personal Systems, just wondering if you could talk a little bit about the impact of component costs particularly given some of the renewed declines in DRAM and just if you happen to pass that through versus the ability to drop some of that down to the bottom line.

Yes. Yes. I think broadly speaking, we have seen some easing around the overall supply chain cost in the basket of kind of commodities and logistics. That being said, given the current currency environment and volatility we're seeing in the strengthening of the dollar, we've seen much of that offset. And kind of even looking forward, likely, the increased headwinds will continue to be an offset of some of the changes we've seen in the overall supply chain costs. So exactly how this is going to play out in the next quarter or quarters to come will really depend upon overall market and competitive dynamics as we've got some puts and takes as it relates to the overall cost on the Personal Systems side.

Got it. And then on Printing, just wondering if you could provide an update on how the Apogee acquisition is playing out so far and just what the learnings from that mean for your wider distribution strategy as you push more towards A3 over time.

Look. Let me start out by mentioning it's now been several quarters since the acquisition of Apogee. And while we're running it as a stand-alone business from a go-to-market perspective, it's very much aggregated into our overall OPS business unit. I'll also remind you that Apogee enables HP to gain access to new profit pools by expanding our ability to deliver value-added services, and then it accelerates the deployment of what we know is superior technology into the growing contractual office printing market, especially among SMBs. The transaction augments our existing go-to-market channels, and it enhances our ability to deliver solutions and services that are necessary to win in the contractual market. This is all on point and on strategy, and more and more customers are shifting to contractual. So we feel, as we did when we made the acquisition, that this is absolutely leading us in the right direction.

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

I also have 2. I guess the first is, can you talk a little bit -- you mentioned uncertainty in the environment, which just makes sense these days. But can you provide some more details on what you're seeing geographically in terms of demand and specifically maybe what you're seeing in China with regard to U.S. brands? And then I have a follow-up.

Look, I'll give a first stab. So what we saw in our results in constant currency was Americas was down 1%, EMEA up 2%, and APJ up 11%. In Americas, I think we saw -- the driver there was primarily on the Personal Systems business. And candidly, I think that was driven by the industry-wide supply constraints we had and how we ultimately allocated a product. And I think that was the largest driver in the Americas. I think we're seeing different geographic pockets of strength in those that are softening and maybe Dion with a comment on China specifically.

Yes. Look -- yes, I think we've experienced some recent slowing in our China business. And having said that, I think it's important to mention that we can't conclude that, that slowdown that we are seeing is solely related to any of the discussions that are currently underway. China has been and continues to be a strategically important market for us. We have a really strong brand in the country, and we've been there for decades. The geopolitical environment remains, let's call it, dynamic, and we'll continue to assess and respond to the situation and the potential impact to our business. That said, we continue to drive insight-driven innovation to our portfolio. That's one of the ways in which we go about running our business. It's through local insights and local product development. For example, in China, gaming has been a great success for us, including the most recent launch of our dual-screen OMEN gaming laptop, which we launched globally out of China. It's also worth noting our APJ region, just as Steve mentioned, as a whole, grew 11% in constant currency in quarter 2 against that backdrop of a slowing business in China. So we're seeing, for example, other areas within APJ, like Japan, being particularly strong.

And then maybe Dion, if you can talk a little bit about the relationship with Canon. I'm just curious, do you feel like you're working more closely with them given some of the pressures on toner and the need to reposition against the aftermarket? And do you think they're reacting as aggressively as you'd like from a litigation standpoint? Because I know they have started talking about it a bit more than they had historically.

Yes. Look, Shannon, as you know -- you've been following us a long time, we have an incredibly close, 35-year partnership with Canon, and I think it is stronger now than it has ever been. I just came back from Japan a couple of weeks ago and met with Mitarai-san. Clearly, aftermarket alternatives is not what we would want, either of us. And we're working very closely together to really think through the multidimensional levers that we have available to us. And I think both companies are being appropriately aggressive.

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

I just wanted to drill into the consumer PC deterioration, net revenue down 9%. It was up by 1% last quarter. And I just wondered if maybe you can comment on, regionally, where you saw that. And maybe we can tie it back to your other comments but I'd love it if you would give us some color. And also, just comment on whether you think that in those regions, you're seeing -- I heard you talk about Asia and China in particular, Dion, but just kind of what you're seeing from a consumer demand point of view across the globe?

Look, I'll take a first stab. Steve might want to chime in. I guess on a macro level, there's been volatility in the market, and that causes uncertainty around the world. And in this type of environment, consumers tend to react more quickly to market conditions both on the positive side and on the negative side versus commercial customers, which has less sensitivity to the short term. The current environment has seen some slowing in Consumer in varying levels by country, and it will take us a long time to go through every single country. But it does vary country by country. We continue to innovate. That's the most important point. We need to continue to innovate with our products, like the Tango X in the Printing side of the business and the Spectre Folio in the Personal Systems, just to name 2 examples. And when we do that, we're giving consumers a reason to purchase, because they only do that when they have great innovation. So while we broadly agree with the industry views that both PCs and print are flattish markets over the mid- to long term, we'll continue to play our own game. We'll segment the market then we'll segment it again. We'll find the heat in the market, and we'll focus on outperforming the market. That's exactly what we've been doing and what you can expect us to do.

Maybe one other small comment to add is our Consumer performance is really in line with the market.

And our next questioner today will be Ananda Baruah with Loop Capital.

Just 2, if I could, real quick, and they're sort of partial clarification. Just going back to the supply dynamics, do you feel that you've fully identified the problem areas such that you have your arms completely around the dynamics that manifested last quarter? And if not yet, what remains to be done? How long until you think you'd do? I just want to make sure I'm fully understanding where you are with it. And then I have a quick follow-up as well.

So the short answer is yes. We -- as Dion said, we put a task force of our most talented individuals. Both Dion and I have spent time in EMEA, and I think Dion described some of the actions we're doing. We would expect that these actions and in particular the impact on the overall channel inventory levels, which I sized at approximately $100 million, including the downstream, that those channel inventories would be reduced through this year.

Okay. Great. That's really helpful. And then a quick follow-up. I believe your comment around chipset constraints was into 3Q. Does that imply that you think after 3Q, you'll actually start to get some relief? And any context there in addition would be helpful with that.

Look, I guess you are referring to the fairly well-known Intel shortage, which has come along with chipsets that go with it. I'd start by saying it's probably not fair or appropriate for me to second-guess the supply updates that Intel has provided over the past several weeks. Based on the most recent update from Intel, we continue to expect supply constraints through calendar quarter 3 just as we had through calendar quarter 2 and calendar quarter 1. I think you've seen us optimize as best we can on behalf of our customers and partners. The demand is really strong for our products, particularly in Commercial. And we'll continue to work closely with Intel to ensure that we drive the best outcomes. So thank you all for taking the time to be with us. We're at the bottom of the hour. Let me end the call where I began. We're delivering on our plan, and we're striking the right balance between driving performance for today as well as investing for the long term. While we will always have more work to do, we're making good progress against our priorities. We'll continue to put our customers at the center of everything we do and we will remain consistent and true to our strategy to engineer experiences that amaze while driving profitable growth. And I have a high degree of confidence that we'll continue to execute on that strategy with rigor and focus. So thank you very much for joining us today.

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