HP Inc

NYSE:HPQ

Earnings Call Analysis

HP Inc. Reports Revenue Decline, Cost Discipline

HP Inc. presented a quarter marked by resilience in the face of market softness. Net revenue for the company slipped to $53.7 billion, a decrease of 15% year-over-year, while the non-GAAP operating profit dipped 14% to $4.6 billion. Despite this, non-GAAP EPS showed an uptick, rising by 10% to $0.90, highlighting a sequential rise of 5%. A robust free cash flow of $1.9 billion was reported, aligning with the fiscal target of around $3 billion. The company navigates an unchanged external environment, even with signals of stabilization, particularly in their Personal Systems segment, where despite a year-over-year revenue drop of 8%, sequential growth of 5% was achieved and operating margin strengthened to 6.7%.

Overview of HP's Financial Performance in Q4 2023

In the final earnings call of 2023, HP unveiled its Q4 results, marked by a steady pursuit of its strategic initiatives amid a challenging economic landscape. The company reported a revenue dip to $53.7 billion, which was a 15% decrease compared to the previous year—a reflection of constrained demand throughout the industry. However, they witnessed a 6% sequential growth to $13.8 billion in Q4. Notably, HP's non-GAAP operating profit stood at $4.6 billion, down by 14% year-over-year.

Earnings and Cash Flow Highlights

HP demonstrated resilience with a non-GAAP EPS of $0.90, indicating a 5% sequential increase and a 10% rise from the previous year, alongside a robust free cash flow of $1.9 billion in Q4. Remarkably consistent with forecasts, the company's free cash flow reached approximately $3 billion for the fiscal year, with $1.1 billion given back to shareholders, complimented by a dividend hike of 5%.

Sector Insights: Personal Systems and Print

Personal Systems segment reported $9.4 billion in revenue, down 8% year-over-year but with a 5% quarter-over-quarter increase. They managed to elevate the operating margin to 6.7% due to disciplined execution. Print revenue came in at $4.4 billion, with a 3% dip from the previous year but a 4% sequential uptick. HP highlighted strong Print operating margins at 18.9%, a testament to their focus on cost management and efficient execution.

Forward Thinking: Innovations and Market Positioning

Looking ahead, HP is banking on the AI PC market surge expected in 2024 to energize the PC category. In addition, their refreshed A3 and A4 print portfolios aim to augment the ease of device management and security. HP's strategic initiatives have enabled the company to recover Print market share in various regions and secure significant growth in the industrial graphics segment.

Commitment to Shareholders

HP conveyed its steadfast commitment to returning value to its shareholders with at least 100% of free cash flow allocation unless investment opportunities with higher returns beckon. This reflects an underlying confidence in its financial strategy and the promise of continued revenue and profit growth.

Operational Highlights and Projections

The company has successfully navigated a myriad of economic challenges to deliver impressive year-over-year growth in non-GAAP EPS. With strategic investments in key growth areas and savings from its Future Ready transformation plan—now expecting to achieve $1.6 billion in structural cost savings—HP is poised to not only withstand current market dynamics but also emerge with robust growth in core markets and strategic segments.

Earnings Call Transcript 2023-Q4

[Operator]

Good day, everyone, and welcome to the Fourth Quarter 2023 HP Inc. Earnings Conference Call. My name is Krista, and I'll be your conference moderator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Orit Keinan-Nahon, Head of Investor Relations. Please go ahead.

[Orit Keinan-Nahon, executive]

Good afternoon, everyone. And welcome to HP's Fourth Quarter 2023 Earnings Conference Call. With me today are Enrique Lores, HP's President and Chief Executive Officer; and Marie Myers, HP's Chief Financial Officer.

Before handing the call over to Enrique, let me remind you that this call is a webcast, and a replay will be available on our website shortly after the call for approximately 1 year. We posted the earnings release and 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 to forward-looking statements, that involve risks, uncertainties and assumptions. For a discussion of some of these risks, uncertainties and assumptions, please refer to HP's SEC reports, including our most recent Form 10-K.

HP assumes no obligation and does not intend to update any such forward-looking statements. We also note that the financial information discussed on this call reflects estimates based on information available now and could differ materially from the amounts ultimately reported in HP's SEC filings.

During this webcast, unless otherwise specifically noted, all comparisons are year-over-year comparisons with the corresponding year ago period. In addition, unless otherwise noted, references to HP channel inventory refer to Tier 1 channel inventory. 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. With that, I'd now like to turn the call over to Enrique.

[Enrique Lores, executive]

Thank you, Orit, and thank you, everyone, for joining our final earnings call of 2023. It was great to host many of you for our Securities Analyst Meeting last month. As I said at the time, we have made significant progress against our strategic priorities, and we see attractive opportunities ahead.

Our Future Ready Plan, combined with our relentless focus on the things we can control, enable us to make steady progress against our plan in fiscal year '23. We are very pleased with our Q4 results, and we have finished the year in a much stronger position than we began. We knew from the start that it would be a tough year. A challenging external environment constrained demand across the industry, and this is reflected in our full year results. Net revenue was $53.7 billion, down 15% year-over-year. And non-GAAP operating profit was $4.6 billion, down 14%. We executed well in the face of these market dynamics, growing non-GAAP operating profit and non-GAAP EPS sequentially throughout the year.

And our second half results were significantly stronger than the first. We also made good progress in our key growth areas, which grew mid-single digits and drove approximately 20% of our total company revenue for the year. Our plan is designed to grow these businesses to at least $15 billion in revenue by the end of fiscal year '26. And we over-delivered on our gross annualized structural cost savings plan, putting us well on track to achieve our recently increased 3-year target of $1.6 billion.

Our results reinforce our confidence in the financial outlook we shared with you in October. And I want to say a big thank you to our entire HP team for paving the way toward our next phase of growth. I am going to use my time today to summarize our Q4 performance, provide insight into each of our segments and reiterate some of the thoughts I shared last month about the market in 2024. Let me start with Q4. Net revenue was $13.8 billion. That was down 6% year-over-year due to the expected market dynamics we discussed last quarter. Revenue grew 5% sequentially, reflecting our progress.

I want to mention our key growth areas. Collectively, they grew 10% sequentially or 2x faster than our total company growth. We delivered non-GAAP EPS of $0.90, up 5% sequentially and 10% year-over-year. And free cash flow was strong at $1.9 billion, enabling us to meet our full year target of approximately $3 billion. I'm particularly pleased with the strength of our innovation. This was on display at our HP imaging event last month, where we gathered media and industry analysts from around the globe to showcase more than 20 new products and services.

This included the expected fall a device that reflects HP's culture of innovation at its best. Seamlessly transforming from laptop to tablet to desktop. It has widespread recognition as one of the most innovative form factors the industry has seen. And it recently received a red design award, one of the highest owners in industrial design. We also continue to build momentum in AI.

We are the first company to offer a dedicated workstation solutions with NVIDIA's AI enterprise software. And more broadly, we're advancing our work to create the IPC category. We have built the widest range of client products based on Intel's next generation of processors, Intel core alter, giving us a strong foundation on which to build as we co-engineer and commercialize new AI architectures next year. And I am very encouraged by the work underway with all of our silicon and software partners. The emergence of the IPC in 2024 will start a new cycle of market expansion and refresh. As I shared last month, we believe this can double the overall PC category growth rate over the next 3 years.

In Print, we have refreshed our entire A3 and A4 portfolio, making devices smaller, more modular and easier to manage and secure. We also continue to leverage our IP to create new categories. This includes our site print construction solution, which has already laid out more than 1 million square feet at construction sites in North America and the U.K. and is launching in new geographies.

We expanded our poly solutions for large conference rooms and small hidden spaces. We also launched a new conference room as a Service subscription to help customers optimize usage and create better employee experiences. And we launched HP workforce Center, which integrates data for more than 60 service tools across PCs, printers and poly devices into a single platform. This will drive simplicity, productivity and security for IT departments. We're in beta with over 2,000 customers and will be rolling it out to all managed solution accounts. As we innovate across our portfolio, we remain equally focused on our sustainable impact priorities.

A great example is our recently announced HP free new solutions. By enhancing our refurbishment capabilities, we are now able to extend the life of devices and drive secularity at scale. In addition to supporting our sustainability goals, this reduces total cost of ownership and creates an accretive business. We have launched in India and will be expanding to other markets during fiscal year '24.

We're also playing an active role to support our communities. Right now, we are particularly focused on the needs of those an Israel and gas. Since the attacks of October 7, our #1 priority has been the safety and well-being of our employees in the region. I want to take a moment to recognize the incredible work our team is doing to keep our business in usual fully operational in the phase of an extremely difficult situation.

HP Foundation has committed $1 million to human Italian release partners in the region. We will continue doing everything we can to support our local teams. Let me now turn to our business unit performance. external environment remains consistent with what we discussed at our at our Securities Analyst Meeting.

Our baseline scenario of market stabilization across fiscal year '24 has not changed, and our markets largely behaved, as we expected in Q4. Consumer showed a more typical seasonal uptick. Commercial customers remain cautious, but we saw some signs of stabilization, especially in Personal Systems. And we continue to see demand weakness in China due to challenging economic conditions.

Personal Systems net revenue was $9.4 billion in the quarter, that's down 8% year-over-year or 7% in constant currency. But what's most important is we continue to drive significant sequential improvement in the business, with PS revenue up 5% quarter-over-quarter. Our disciplined execution delivered strong peers operating margin of 6.7%. We once again gained share in Commercial and Consumer year-over-year.

We saw a continued recovery in Consumer and Gaming, both of which grew double digits sequentially. And through our stepped-up focus on Workforce Solutions, we grew our peer service TCV double digits, including new wins with several large global customers spanning multiple industries. Hybrid systems grew sequentially, largely driven by seasonality in consumer peripherals.

This market is currently impacted by enterprise spending, but we remain bullish on the long-term growth opportunity and the breadth of our offering across hardware peripherals and services is a huge advantage.

Turning to Print. Net revenue was $4.4 billion. That's down 3% year-over-year or 2% in constant currency. Print revenue grew 4% sequentially. While units were flat. Supplies revenue was up in constant currency in Q4 on an easier compare and finished the year down 1% in constant currency, in line with our long-term outlook.

We drove strong print operating margins of 18.9%, reflecting disciplined execution and cost management. HP Plus enabled and big tank printers, once again comprise approximately 60% of our shipments. In standing delivered another quarter of revenue and subscriber growth year-over-year, and we drove strong momentum in Workforce Solutions with double-digit TCV growth and significant new NPS wins.

We remain focused on regaining profitable print share and improving our performance in office, and we are starting to see the impact of our efforts, with solid share recovery in Americas, parts of Europe and China quarter-over-quarter. As well as strong share gains in A3. Our industrial graphics business returned to growth year-over-year and was up double digits sequentially, including continued recovery in labels and packaging.

And while 3D is impacted by the current environment, we continue to build momentum in the market. At FormNext earlier this month, we showcased our work with partners and customers like BMW, Decathlon and Siemens, to scale our 3D solution.

Overall, Q4 was a solid quarter. We are showing the resilience, agility and operational rigor, needed to win in the market, while advancing our long-term growth priorities. And we feel good about the outlook we shared with you in October. We also remain committed to returning at least 100% of free cash flow, over time. Unless opportunities with a higher return on investment arise, and as long as our gross leverage ratio remains under 2x EBITDA. We expect to resume share repurchases in Q1.

Let me close by reiterating something I said at our Securities Analyst Meeting. HP is a compelling investment. We have market-leading portfolios in the PC and print categories, and we are well positioned to drive profitable growth in our core markets going forward. We have significant opportunities to accelerate in our key growth areas.

We have world-class operational capabilities, to deliver on our targets and reduce our structural costs. And we have a shareholder-friendly capital return strategy. These are core strengths of HP. Our Q4 and fiscal year '23 results reflect the consistent progress we are making. And we are confident in our plan to deliver sustained revenue, non-GAAP operating profit, non-GAAP EPS and free cash flow growth. Let me now turn the call over to Marie for a deeper dive into the numbers.

[Marie Myers, executive]

Thanks, Enrique, and good afternoon, everyone. It's a pleasure to be here with you all today. We delivered another strong quarter financially, due to outstanding operational execution and good progress in our future ready transformation.

We generated solid results across revenue, non-GAAP operating margin, non-GAAP EPS and free cash flow, building on our proven track record of meeting or exceeding our goals. Our team is executing well despite the challenging macro environment, delivering Q4 sequential growth in revenue and non-GAAP operating profit dollars in both Personal Systems and Print.

Margins were at or above the high end of our ranges, resulting in a return to year-over-year growth in non-GAAP EPS. While free cash flow more than doubled sequentially, consistent with our outlook. We exceeded our future-ready transformation cost savings target for fiscal '23 and are on track in '24, to continue reducing our structural costs, while investing in our key growth areas.

While we continue to monitor economic indicators and geopolitical risks, we're pleased with the momentum and health of our business. We will continue our efforts to drive fundamental improvements to our cost structure longer term, while prudently and aggressively managing near-term expenses. With the savings we generate, we'll continue to focus on prioritizing our investments, so that we are well positioned to deliver on the longer-term financial outlook, we outlined at our Securities Analyst Meeting last month.

Now let me begin by providing some additional color on our results. Starting with the full year, we stayed focused on what we could control, disciplined execution and cost management, and we delivered solid performance despite the macroeconomic and competitive dynamics we faced. Revenue was $53.7 billion, down 15% nominally and down 12% in constant currency. Revenue in our key growth areas grew mid-single digits, constituting approximately 20% of total revenue.

Non-GAAP operating profit was $4.6 billion, down 14% or 8.5% of total revenue, flat year-over-year. Non-GAAP net earnings per share was down 18% to $3.28. We generated $3.1 billion of free cash flow consistent with our full year guidance. And we returned $1.1 billion to shareholders and raised our dividend by 5%.

Now, let's take a closer look at the details of Q4. Net revenue was $13.8 billion in the quarter, down 6% normally and 5% in constant currency. Year-over-year declines improved sequentially across each of our regions in constant currency, Americas declined 6%, EMEA declined 2%, and APJ declined 8%, as demand remained soft in China. Gross margin was 21.6% in the quarter, up 3.4 points year-on-year, primarily due to lower component and logistics costs and a favorable mix, partially offset by currency and competitive pricing in Personal Systems.

Non-GAAP operating expenses were $1.7 billion, the year-over-year increase in operating expenses was driven primarily by reinvestment of some future-ready savings in growth initiatives, investment in people and 1 extra month of Poly, offset in part by structural and other cost reductions.

Non-GAAP operating profit was $1.2 billion, up 11.5%. Non-GAAP net OI&E expense was $173 million, up sequentially due largely to higher currency losses and up year-on-year due to higher currency losses and factor costs. Non-GAAP diluted net earnings per share, increased $0.08 or 10% to $0.90, with a diluted share count of approximately 1 billion shares.

Non-GAAP diluted net earnings per share excludes a net benefit totaling $72 million, primarily related to tax adjustment related credits and pension and post-retirement benefit, partially offset by restructuring and other charges, amortization of intangibles and acquisition and divestiture-related charges. As a result, Q4 GAAP diluted net earnings per share was $0.97.

Now let's turn to segment performance. In Q4, Personal Systems revenue was $9.4 billion, down 8% or 7% in constant currency, but up 5% sequentially, reflecting seasonal strength ahead of the holiday season. Total units were flat on a net basis with Commercial down 6% and a Consumer up 9%.

Nevertheless, we improved our overall market share in calendar Q3, on a year-over-year basis for the third consecutive quarter. And year-over-year Commercial revenue declines stabilized sequentially even as Commercial customers remain cautious.

Drilling into the details, Consumer revenue was down 1% and Commercial was down 11%, driven by lower TAM, increased competitive pricing and unfavorable mix, offset in part by market share gains in both Consumer and Commercial. Strong profit and margin results in both customer segments were driven by our emphasis on profitable growth and effective cost management.

Competitive pricing pressures eased somewhat in Q4, resulting in increased ASPs, contributing to the sequential improvement in Personal Systems revenue this quarter, consistent with our outlook. Our channel inventory is back to normalized levels.

Personal Systems delivered $631 million of operating profit with operating margins of 6.7%. Our margin increased 2.5 points year-over-year, primarily due to lower commodity and logistics costs and structural cost savings. This was partially offset by mix, currency and investment in people. Sequentially, our operating margin held firm towards the high end of our target range, driven by strong profitability in both our Consumer and Commercial business segments.

In Print, our results reflect our continued focus on execution and disciplined cost management, as we navigate a weak and competitive Print market. In Q4, total Print revenue was $4.4 billion, down 3% nominally or 2% in constant currency. The decline was driven by soft demand in both Consumer and Commercial, market share loss and currency. Offset partially by supplies revenue growth.

Hardware revenue was down $188 million, driven by lower volumes attributable largely to continued soft demand in Greater Asia and China and share loss as our Japanese competitors continued to price aggressively. Total hardware units decreased 19% year-over-year. Industrial Graphics finished the year positively with revenue returned to growth in Q4, driven by hardware and services with performance improvements across all major geographical regions.

By Customer segment, Commercial revenue decreased 4% on a reported basis and in constant currency with units down 24%. And Consumer revenue decreased 21% or down 19% in constant currency with units down 18%. Demand for traditional home ink printers remain soft but was offset partially by increased demand for big tank printers.

In office hardware, ASPs were up double-digit year-over-year as favorable mix, offset competitive pricing and currency headwinds driven by improved contractual A3 demand across multiple markets. Supplies revenue was $2.8 billion, increasing 3% nominally and 4% in constant currency.

For FY '23, supplies revenue declined 1% on a constant currency basis in line with our long-term outlook of down low to mid-single digits. Print operating profit was approximately $836 million, down 6% year-over-year, and our operating margin was 18.9%, Operating margin decreased 0.8 points driven by investments in people, competitive pricing and unfavorable currency, partially offset by favorable mix and cost reductions.

Turning to our Future Ready Transformation plan. We successfully completed the first year of our 3-year program and delivered better-than-expected performance, against our goals for fiscal year '23. Given the strong progress, we made during the year and confidence we have to drive additional structural cost savings, we recently raised our cumulative program target to $1.6 billion.

In FY '23, we generated gross annual run rate structural cost savings across COGS and OpEx, exceeding our revised target. Let me briefly recap some key accomplishments across each of the 3 core pillars of our program that we achieved during fiscal '23. Under our operational excellence pillar, we continue to optimize and reduce structural costs across our businesses, particularly in corporate.

We embraced hybrid work, enabling us to rationalize our real estate portfolio, executing 13 site consolidations or exits during the year. We also simplified our go-to-market organization, including streamlining our management structure. We made solid progress on our digital transformation efforts by driving additional automation and process improvements. We modernized our data infrastructure to leverage AI machine learning to deliver richer, data-driven insights from business decisions.

Looking ahead, we are accelerating a generative AI capabilities, including rolling out AI tools like GitHub Copal to approximately half of our developers as well as implementing HP-specific large language models to improve efficiencies through a chatbot for our sales and service representatives.

Further, there are significant opportunities ahead, across many additional use cases. Our third pillar is focused on simplifying our product portfolio. Significantly reducing the number of platforms we support to drive agility and operating leverage. In FY '23, the actions we took in Personal Systems continued to impact our overall performance.

At the end of FY '23, we were approximately halfway to our year-end FY '24 goal of reducing our total number of Personal Systems platforms by approximately 1/3. In addition, we made great progress reducing our commodity complexity by decreasing the number of client SKUs at our Personal Systems portfolio. We expect these initiatives will optimize our overall supplier ecosystem increase our supply chain efficiency and drive better forecast capabilities.

And in Print, by rationalizing our investments, we plan to simplify our Print portfolio to drive a 40% reduction in ink hardware platforms shipped by FY '25. As we discussed at our Securities Analyst Meeting, we see significant opportunities ahead of us to focus on our Future Ready Plan and position the company to optimize our cost structure and enhance our margin performance.

Shifting to cash flow and capital allocation. Q4 cash flow from operations was strong at $2 billion, and free cash flow was $1.9 billion, on the strength of the sequential growth in Personal Systems. Free cash flow for fiscal year '23 was approximately $3.1 billion, consistent with our outlook. The cash conversion cycle was minus 32 days in the quarter. This improved 3 days year-over-year, driven exclusively by an increase in days payable.

In Q4, we returned approximately $260 million to shareholders via cash dividends. We did not repurchase any shares in the quarter, given that we were in possession of material nonpublic information, but we expect to resume repurchases in Q1 and and be active throughout FY '24. For fiscal year '23, we returned greater than $1.1 billion to shareholders and retired $1.6 billion of debt.

Regarding FY '24, we are reiterating our outlook provided at our Securities Analyst Meeting last month. We intend to return approximately 100% of our free cash flow to shareholders, next year, as long as our debt-to-EBITDA ratio remains under 2x and unless higher ROI opportunities arise, such as strategic acquisitions.

Looking forward to FY '24, consistent with what we said at our October Securities Analyst Meeting, we assume the market will stabilize in our base case scenario, underlying that outlook for Personal Systems is for revenues to grow in line with the Personal Systems market and for Print revenue to be in line with the Print market. We expect operating margins for both Personal Systems and Print to be solidly within their respective target ranges, as we continue to manage costs and pricing in this dynamic and uncertain environment.

Regarding our non-GAAP FY '24 EPS outlook, consistent with historical seasonality, we expect second half performance will be greater than the first half. As we said at our Security Analyst Meeting, we expect corporate other expense for fiscal '24, to be relatively flat year-over-year at approximately $1 billion.

Keep in mind that due to the timing of compensation expense, we expect approximately 1/3 of FY '24's corporate other expense in Q1. And in Q1, we expect the economic and demand environment to remain challenging but stable. As we continue to manage cost aggressively to help offset some of these pressures, we expect our operating profit margins for both Personal System and Print to be toward the high end of their respective target ranges for the quarter.

Taking these considerations into account, we are providing the following outlook for Q1 and fiscal year 2024. We expect first quarter non-GAAP diluted net earnings per share to be in the range of $0.76 to $0.86. And first quarter GAAP diluted net earnings per share to be in the range of $0.60 to $0.70. We expect FY '24 non-GAAP diluted net earnings per share to be in the range of $3.25 to $3.65. And FY '24, GAAP diluted net earnings per share to be in the range of $2.68 to $3.08.

In summary, we are pleased with our Q4 results, as we delivered on our commitments, even in light of the continued challenging macro environment. Our longer-term financial framework that we outlined at our Security Analyst Meeting last month, remains unchanged, and we have good momentum to execute on our near-term FY '24 objectives.

Our focus remains on profitable growth in the higher value segments of the market and structural cost savings across our P&L, while returning 100% of our free cash flow to our shareholders. And now I would like to hand it back to the operator and open the call for your questions.

[Operator]

[Operator Instructions] And our first questioner today is Wamsi Mohan from Bank of America.

[Wamsi Mohan, analyst]

Yes. I was wondering maybe you could help us think through the seasonality. Obviously, it's been for the first half versus second half. What's implied in your guidance? If we go back a few years, in the low 50% of EPS was recognized in the second half versus first half. So I'm wondering if you could maybe either characterize it that way or second half versus first half on a growth basis. On earnings?

And maybe within that context, you can just give us some sense the Commercial PC market continues to be quite weak. I know Marie you said that the guidance for fiscal '24 makes in in line with market performance. But can you be somewhat explicit about what that performance is in Commercial PCs in your fiscal year guide?

[Enrique Lores, executive]

Yes. So Enrique. Let me provide the view on macro and then Marie will be more specific about seasonality on EPS because I think it will help to understand it better. So from a macro perspective, what we saw in Q4, is an increase in seasonality, especially for PC between Q3 and Q4. And also, on the Commercial side, we saw stability of sales, market continues to remain soft.

But especially when we look at real end-user demand, we saw demand being stable. And somehow, this helps us in the projection that we have for next year. As we discussed before, we expect the PC market to be slightly growing from 2024 to 2023, and the premarket to be slight -- about flattish, slightly decline between '24 and -- '24 and '25, and we expect both segments to improve gradually through the year. So having said that context, Marie will address the EPS question.

[Marie Myers, executive]

Yes. So let me walk you through how to think about seasonality. If you take the midpoint of our guide, which is what we gave at SAM, which is the $45 million, if you take the midpoint, basically, you can assume the macro is stabilizing. And also we expect the revenue to improve over the course of the year. So I would just say we're not back yet quite to normal seasonal patterns, but we're definitely expecting the back half to improve over the first half.

So think about a gradual recovery over the year. But I'd just add, as we think about the Q1 guide, particularly for Personal Systems, I would say at this point, we don't expect that normal seasonality yet due to the pace of the market recovery. So we're going to see that quarter-on-quarter differential relative to the Q4 period, that we've just come out of. So same guide unchanged. But definitely still not quite back to normal seasonality yet throughout the year.

[Operator]

Your next question comes from the line of Amit Daryanani from Evercore ISI.

[Amit Daryanani, analyst]

I guess -- my question is just on the Print side. Enrique, I'm hoping you just touch on what are you seeing from a competitive perspective given a lot of your peers in Japan, we'll probably leveraging the weaker currency, I think, on the pricing side. I'd like to understand how your reaction to that? And then really, how do you maintain operating margin in this run rate, given that pricing head-competitive headwind that you have. Maybe you can just touch on that. And then maybe could you maybe flush out free cash flow. Is there any seasonality we should be cognizant about in Q1 versus rest of the year, that would be helpful.

[Enrique Lores, executive]

So let me start on Print. So, not much has changed since we met a few weeks ago. So we continue to see a competitive environment on the Print side, especially driven by the current situation between yen and dollar. But I have to say between Q3 and Q4, we didn't see more aggressive pricing in anything prices sequentially improved Q3 to Q4. We have not seen an increase in competition from that perspective. When we look at '24 and the actions that we are taking to compensate for a potential more pricing increase, we are going to be executing the plan that we described before. We have an aggressive cost reduction plan that will help us to manage that.

We continue to drive the shift to our HP Plus units and profit upfront units, that will also help from that perspective. And we continue to drive -- and we expect to grow share in the office space, which will be a contributor of margin improvement. And finally, as we shared in our prepared remarks, we have seen an improvement of the performance of the Industrial business. We have seen a recovery of the market. And within the market, we have grown both hardware and consumption, and we think this is going to help us also in 2024.

[Marie Myers, executive]

Yes. And just a couple of points on the Print rate. So as we guided in SAM, we're still very confident in the outlook we gave around the revised range on Print. And as a result of that, we do expect in Q1 to still be at the high end of that range. And then in '24, we expect to be solidly in the range.

So just keep that in mind as you're sort of working through your model. And then with respect to cash flow and the comments on seasonality, reiterating our guide that we had a SAM of 3.1% to 3.6%, and I just add from a seasonality perspective, just always bear in mind that Q1, we do expect cash flow to be lower, and that's due to the fact that we always accrue for our bonus in the prior period, and we typically pay that out in Q1 of the current year. So expect that Q1 free cash flow will, therefore, be somewhat lower. But similarly, as I said in SAM, we expect it to be in line with net earnings and continue to see those fluctuations around working capital throughout the remaining quarters.

[Operator]

Your next question comes from the line of Krish Sankar from Cowen.

[Sreekrishnan Sankarnarayanan, analyst]

Enrique, I had a question on the PC side. You said you're expecting modest growth next year. I'm kind of curious, is there a way to quantify it? And how much is AI driving it? And also, when it comes to AI PC, how much kind of an uplift in ASP do you expect versus regular PC?

[Enrique Lores, executive]

So let me start by saying that we are really excited about the impact that AI PCs are going to have in the overall PC category. As we have shared before, we think that they will drive -- they will double the expected growth from '24 to '26. So it's really going to have significant impact. If we talk about '24, we think the impact will be smaller just because of first timing. The first IPC will be introduced in the second half. And second, because of penetration. When we launch a new category, we know also it takes time for the category to penetrate. Our expectation is that in 3 years, 40% to 60% of the PCs will be ITC, but it's going to be a gradual penetration of the category. But again, we are really excited, not only because of the impact that it will have on the business, but also because of the value -- additional value, this is going to bring to our customers.

[Sreekrishnan Sankarnarayanan, analyst]

And quantify the ASP uplift?

[Enrique Lores, executive]

Thank you. Yes. So what we had said before, and we haven't changed our projection is -- average selling price for PCs will increase between 5% and 10%, as a consequence of the penetration of IPC.

[Operator]

Your next question comes from the line of Tony Saone from Bernstein.

[Toni Sacconaghi, analyst]

I was wondering if you could comment on supplies growth in the quarter. It was up sequentially. That hasn't happened any -- at any point in the last 10 years on an organic basis. So what was driving the nonseasonal growth in supplies? Did you change prices and people bought in before? Or was there some channel fill? And then could you also just comment on -- you talked a lot about Future Ready and the strength, I think you've taken out maybe run rate about $600 million, worth of costs. But OpEx is essentially identical to the first quarter of this year. So when we think about Future Ready, should we actually think about OpEx going down in fiscal '24? Or we won't see the impact of Future Ready on OpEx?

[Marie Myers, executive]

So let me just start out with the question on Future Ready. So first of all, obviously, really pleased with the performance. I think, as I mentioned in my prepared remarks, for '23. And then going into '24, as you know, we raised our target to $1.6 million in SAMs very much on track. And I think as we've discussed at SAM, Future Ready is a combination of both OpEx and cost of sales. So some of those savings, we're reinvesting back in growth and in people to help us manage through some of the volatility. But we do also drop that through to the bottom line.

And frankly, Tony, you can see that in the rates that we even delivered in this last quarter and also in terms of how we're guiding the rates going forward in terms of solidly in the range for the year and really at the high end of the range for both businesses in Q1. Now OpEx will be up year-on-year, and it's driven by exactly those factors I mentioned earlier, the investments in our growth, the investments in our people.

And I would just sort of add as a sort of closing comment around this is, if you look at the geography of the P&L, you could see in our gross margins that we're shifting out now to higher gross margins, and that's been partially offset by operating expenses.

So hopefully, that gives you a little bit more context around how to think about Future Ready. And I'll turn it back to Enrique on supplies. I'll just add on the supplies ecosystem. We're in good shape, Tony. From a multi-tier perspective, we ended the quarter in good shape.

[Enrique Lores, executive]

Yes. So let me complement that. So I think there are multiple factors that drove the good performance of supplies in Q4. As I have said many times, though, when we look at year-on-year compares, it's not the best way to look at the performance in the quarter because -- there are many adjustments that are done every quarter, and then comparisons at oil can distort the overall perspective.

We are driving many positive actions on supplies. We continue to grow share overall, which is something that we have been doing already for several quarters. We have increased prices to reflect the value that we bring to the combination of all these things help us to grow to price quarter-on-quarter. And again, we are pleased with the performance. But in the long term, we continue to expect the supplies to decline low to mid-single digits. We are not changing our projections for supplies in the future.

[Operator]

Your next question comes from the line of Aga Merchant from Citigroup.

[Unknown Analyst]

A little bit on inventory. If you could just comment on how you look at the inventory in the channel, both on the PC and the Personal -- on the Print side as well. Specifically PCs, I think there was commentary that there was some elevated ones, when you spoke about it last quarter, not for HP but generally for the industry in general.

And then if you can just talk about the cadence of EPS. As you progress it, the second half is going to be stronger, I think, as was commented earlier, you're starting the first year -- first quarter up 10%, that's correct, and you're ending for the year at 5% for the year. So if you can just kind of walk through that, that would be great.

[Marie Myers, executive]

So why don't I just start out on the EPS, sort of seasonality and how to think about it. So in terms of Q1, just to sort of give you some context there. 1/3 -- we usually have corporate other expense that hits in -- from a seasonality perspective, 1/3 of that hits in Q1. So if you look at our Q1 guide, just bear that in mind because that's typically the stock comp expense period. So as a result of that, you're going to see that seasonality adjustment in our Q1 EPS.

And as you correctly said, we're actually up, I think, 11% on the midpoint year-on-year in our Q1. But we're, SAM guide, I'll just reiterate, of $325 million to $365 million, hasn't changed. And just to close Q1 is just really typical seasonality. And then if you think about channel inventory, both Personal Systems and Print were in really healthy shape, and we're pleased with where we landed in terms of the progress we made this quarter.

I would add on Personal Systems, that we've seen declines sequentially and that we are really now back to much more normalized levels. And in fact, the industry levels themselves are also normalizing. And you can see that in terms of the quality of our pricing in the last quarter as well. So I think looking back, we've seen CI really return back to more normalized levels, particularly in Personal Systems and in Print as well.

[Unknown Analyst]

Great. And one more on components, deflationary expectations, I think there was some commentary previously on how you think about components?

[Marie Myers, executive]

Yes. It's very much in line with our SAM guide in terms of forward-looking. We expect both Print and PS to be headwinds for the year. And as we look into Q1, we do expect a headwind in PS, but a slight tailwind on Print. And then in terms of just what you've seen in the quarter, we've seen tailwinds -- sorry, tailwinds and favorability on Print as well, but definitely headwinds for both businesses for the year.

[Operator]

Your next question comes from the line of Aaron Rakers from Wells Fargo.

[Unknown Analyst]

This is Jake on for Aaron. I was hoping you could give some additional color on the amount of promotional pricing for PCs. Do you expect to see heading into the holiday season and maybe how this could compare to prior years?

[Enrique Lores, executive]

We expect to see a similar level of aggressiveness that we were seeing before channel inventory was high. And at this point, what we know about the holiday season is that based on the telling the shipments, we have been making the strength of our portfolio, we have very good assortment on the stores. We have just introduced significant innovation across our full portfolio. So we are optimistic about the holiday season in the coming weeks.

[Unknown Analyst]

Great. And then I was also wondering if you could talk a little bit more about the growth you're seeing in Poly and maybe some of the momentum you expect with the new as-a-service subscription offering?

[Enrique Lores, executive]

Sure. We continue to be very bullish about the opportunities that we have with the Poly business. Of course, during the last week, it has been impacted during the last quarter. It has been impacted by macro. But feedback we get from our channel, from our customers continues to be very positive.

As you said, we just introduced both new technology in the systems and the new, as a service model, which we think will help us to drive growth in 2024. And really the opportunity to grow and to innovate continues to be there. From a process perspective, we are now finishing the IT integration based on the plan that we shared a few quarters ago. We have been driving the process as per plan. And again, we are happy with the progress we have made. I'm really optimistic about the opportunities this business is going to bring to us.

[Operator]

Your next question comes from the line of Erik Woodring from Morgan Stanley.

[Erik Woodring, analyst]

I just wanted to circle back to Tony's question on Print supplies. You obviously outperformed Print supplies this quarter. So I just wanted to make sure I understood specifically, what drove the upside in the quarter. And given hard -- Print hardware units are declining 20% year-over-year, should what are the offsets to that, as we think about supplies in the 4-box model? I think you mentioned share gains in pricing. But if you could just go through kind of all the 4 different factors just to make sure we understand the different drivers, that would be helpful for '24.

[Enrique Lores, executive]

Perfect. Thank you, Eric. And thank you because when I was answering to Tony, I missed to mention one of the elements that also helped, which is the easy compare because last Q4 last year was not a strong quarter for supply. So this also has an impact on the year-on-year compare. If I -- if we look at the 4-box model and the different drivers of supplies, clearly, installed base has continued to decline. So this is a negative factor. Usage continues to go down, which is a negative factor.

But I have to say, continues to be above, especially the home in space, the references and the projections that we were making before the pandemic and then 2 positive factors that have had an impact this quarter. One is pricing. We have increased prices for supplies and market share.

As I mentioned before, we have continued to grow share for supplies, which has a positive impact on the overall supplies growth. Thank you.

[Operator]

Your next question comes from the line of Mike Ng from Goldman Sachs.

[Michael Ng, analyst]

I just have one for Marie and one for Enrique. Marie, you guided to PSM print margins to be at the high end of the range for the fiscal first quarter and then solidly in the range for the full year. Can you talk about some of the factors that drive that margin normalization for each of those 2 segments throughout the year? And then Enrique, within Commercial Printing, I was just wondering if you could talk a little bit about any differences in outlook for A3 versus A4? Or are the competitive dynamics very similar?

[Marie Myers, executive]

Yes, sure, Mike. Why don't I start out and give you some context on the ranges and how we're thinking about them. So on PS, as we mentioned, we'd be at the high end for Q1. and really what's driving that is just a combination of the mix. I think you heard Enrique talked to that in his prepared remarks, in terms of the higher value and also the improved pricing on -- as channel inventory is normalized.

As I mentioned earlier, we saw a sequential improvement, and we expect, as a result, to see less promotional pricing. And then obviously, we've got the benefits of the Future Ready program that I talked about a moment ago with Tony. Obviously, also working against that are the headwinds that we've got with commodity costs and -- some of that is really what's influencing the sort of seasonality of the rates that we see in terms of being more solidly in the range, as the year progresses. So that's sort of Personal Systems.

And if you think about Print -- similar drivers in terms of just being at the high end of the range for Q1, and it's really driven by the profitability that we talked about, the shift in the model with Supplies. Some of the new business models. Also, frankly, the impact of growth is having an impact on both businesses.

Similarly, the impact of the Future Ready. And once again, we also see pricing normalization and we see Supplies, there is no change to the Supplies outlook to, in terms of low to mid-single digits. So all those factors together is what really drives us to see both businesses be solidly in the range for the year, but at the high end of the range for Q1. I'll turn it to Erique.

[Enrique Lores, executive]

Yes. And just in your question about the office market in Print, and 2 key comments. One is we have continued to shift change from A3 to A4, especially in Commercial -- in large Commercial Customers. We think this is driven by the fact that we expect to see less people in the office. And therefore, they have reduced the printing volumes that they were expecting that they need less production type of products. So that has been one unchanged.

Second, in terms of both A4 and A3, we continue to see an opportunity to grow share. We did it in this quarter in A3, and we have started to grow our share in A4, in several geographies. We did it in the -- in North America. In Americas, we did it in several countries in Europe. We did it in China, and we know we have some work to do, but we expect to continue to drive that during 2024.

[Operator]

We have no further questions at this time. I will now turn the call over to Enrique Lores for closing remarks.

[Enrique Lores, executive]

Thank you. Well, first of all, thank you, all of you for joining. With the Q4 results are -- we believe are a signal of the progress that we are making and increase the confidence that we have in the plan that we shared with all of you a few weeks ago. And this reinforces the key message that we shared at SAM, that we believe that HP shares are undervalued and continue to be a good investment. And then last but not least, for those of you in the U.S., let me close the call. Wishing all of you a very happy Thanksgiving. Thank you.

[Operator]

This concludes today's conference call. Thank you for your participation, and you may now disconnect.