Tim Brown
Interim Chief Financial Officer at HP
Thank you, Enrique, for the kind introduction. It's great to be with you all today.
We are pleased with the progress we made during Q1 toward delivering on our financial commitments this year. On a year-on-year basis, our revenue declines continued to slow sequentially, consistent with the stabilizing trends we expected heading into the year. Non-GAAP operating profit dollars grew, margins expanded in both Personal Systems and Print and non-GAAP EPS grew double digits. We remain on track with our future-ready plan to achieve our gross annual run rate structural cost savings target for this year and continue to reinvest these savings in our growth areas. We also returned a significant amount of capital to shareholders as we actively repurchased shares during the quarter.
Top line results were impacted by lower market TAMs in both Personal Systems and Print. We saw cautious commercial demand as macro challenges persisted and a bit more pronounced slowdown than initially expected in consumer following Q4. As Enrique said, HP remains focused on executing each quarter while also driving long-term shareholder value. Our overall results reflect disciplined financial management and investment for sustainable profitable, growth all while navigating a dynamic and competitive environment in the near term. We will continue to manage our business prudently while seizing opportunities to improve our market position as we continue to execute on our plan to deliver our fiscal year commitments.
Now let me give you a closer look at the details. Net revenue was $13.2 billion in the quarter, down 4% normally and 5% in constant currency, driven by declines across each of our regions. In constant currency, Americas declined 7%, EMEA declined 2%, and APJ declined 7%. APJ was impacted as soft demand in China continued. Gross margin was 21.9% in the quarter, up 1.7 points year-on-year primarily due to improved commodity and logistics costs and cost savings, partially offset by competitive pricing.
Non-GAAP operating expenses were $1.8 billion or 13.5% of revenue. The year-over-year increase in operating expenses were driven primarily by investments in growth initiatives and higher marketing expenses, partially offset by lower variable compensation and structural cost reductions. Non-GAAP operating profit was $1.1 billion, up 5%. Non-GAAP net OI&E was $144 million, down primarily due to lower interest expense driven by a decrease in debt outstanding.
Non-GAAP diluted net earnings per share increased $0.08 or 11% to $0.81 with a diluted share count of approximately 1 billion shares. Non-GAAP diluted net earnings per share excludes a net expense totaling $186 million, primarily related to amortization of intangibles, restructuring and other charges, acquisition and divestiture-related charges and other tax adjustments. As a result, Q1 GAAP diluted net earnings per share was $0.62.
Now let's turn to segment performance. In Q1, Personal Systems revenue was $8.8 billion, down 4% or 5% in constant currency, driven by soft demand and an unfavorable mix shift partially offset by market share gains in both consumer and commercial, including categories such as premium notebooks and workstations. Total units were up 5% with consumer up 10% and commercial up 2%. Year-over-year growth rates for units and revenue improved sequentially in both consumer and commercial as stabilizing trends continued, consistent with our outlook for a PC market recovery this year.
Drilling into the details, commercial revenue was down 5% and consumer down 1%. ASPs were flat quarter-over-quarter, driven by a favorable mix, including improved commercial premium mix offset primarily by an unfavorable mix shift in consumer. We remain focused on driving profitable revenue and share growth in both our consumer and commercial markets.
Personal Systems delivered $537 million of operating profit, with operating margins of 6.1%. Our margin increased 0.9 points year-over-year primarily due to lower commodity and logistics costs and cost savings. This was partially offset by pricing and investments in growth areas. Sequentially, our operating margin declined primarily due to higher commodity costs and marketing expenses, offset in part by favorable mix towards our commercial business segment.
In Print, we remain focused on improving our execution and driving rigorous cost management as we navigate a challenging and competitive print market. In Q1, total Print revenue was $4.4 billion, down 5%, both nominally and in constant currency. The decline was driven by declines in hardware. Hardware revenue was down 19%, driven by lower volumes attributable primarily to continued weak demand in China and Greater Asia and share loss largely due to aggressive pricing by our Japanese competitors. Total hardware units decreased 17% year-over-year. Industrial Graphics grew revenue again this quarter, driven by hardware, supplies and services.
By customer segment, commercial revenue decreased 12% with units down 18%. Consumer revenue decreased 22% with units down 15%. The market for big tank printers continue to increase sequentially, partially offsetting continued soft demand and aggressive pricing in the traditional home ink market. In Consumer Services, Instant Ink revenue and subscribers continued to grow year-over-year. Total subscribers now exceed 13 million, including more than 700,000 subscribers to our Instant paper add-on service. Supplies revenue was $2.9 billion, flat on a reported basis and up 1% in constant currency primarily driven by favorable pricing actions, share gains and an easy compare, partially offset by a lower installed base.
Print operating profit was $872 million, essentially flat year-over-year and operating margin was 19.9%. Operating margin increased 1 point driven by lower hardware volumes, cost improvements, including lower variable compensation and supplies pricing, partially offset by hardware pricing headwinds.
Regarding our structural cost savings initiatives, we continued the momentum we had exiting FY '23, making progress in Q1 against our year 2 goals of our 3-year plan. We are on track to deliver on our $1.6 billion gross annual run rate structural cost savings goal, exiting 2025, including achieving approximately 30% of those savings in FY '24. Recall that we expect to generate these savings across both our cost of sales and opex line items, enhancing our margin performance and enabling investments in our key growth areas.
Consistent with previous quarters, we continue to benefit from portfolio simplification initiatives in both Personal Systems and Print, digital transformation, automation and process improvements, leveraging our AI capabilities and structural cost reductions across our business. We still expect to incur one-time restructuring cost of approximately $1 billion over the term of our plan, including approximately $0.3 billion of primarily cash charges in the fiscal year '24.
Now let me move to cash flow and capital allocation. Q1 cash flow from operations was approximately $120 million and free cash flow was $25 million. Our results were impacted by normal seasonality associated with the timing of variable compensation payments and sequentially lower volumes in Personal Systems. The cash conversion cycle was minus 29 days in the quarter. This increased 3 days sequentially due to days of inventory increasing 4 days, days payable decreasing 1 day and days receivable decreasing 2 days. The increase in DOI was driven primarily by an increase in strategic buys and C shipments during the quarter partially offset by our progress on optimizing our operational inventory, as we have discussed in the past.
In Q1, we returned approximately $775 million to shareholders, including $500 million in share repurchases and $275 million in cash dividends. We continue to prudently manage our leverage ratio and finished the quarter within our target leverage range. We resumed share repurchases in Q1, and we expect to return 100% of our FY '24 free cash flow to shareholders. As we have previously stated, we are committed to returning 100% of our free cash flow to shareholders over time. As long as our gross debt-to-EBITDA ratio remains below 2 times, and unless higher ROI opportunities arise.
Looking forward to Q2 and the rest of FY '24, we expect the macro and demand environments will remain challenged and that our customer end markets will continue to be very competitive. We remain focused on rigorously managing costs, improving our performance, and investing in growth. Specifically, keep the following in mind related to our FY '24 and Q2 financial outlook. Given the challenging macro environment, we are modeling multiple scenarios based on several assumptions. For FY '24, we continue to see a wide range of potential outcomes, which are reflected in our outlook ranges. Consistent with the view we shared in November, we expect performance in the second half of fiscal '24 will be seasonally stronger than the first half. Regarding OI&E expense, we continue to expect it to be approximately $0.7 billion in FY '24. We continue to expect free cash flow to be in the range of $3.1 billion to $3.6 billion in FY '24, with the second half of the year stronger than the first. Our free cash flow outlook does include approximately $300 million of restructuring cash outflows.
Turning to Personal Systems, we continue to expect the overall PC market unit TAM to recover over the course of this year, increasing by a low single-digit percent. Specifically for Q2, we expect Personal Systems revenue will decline sequentially by a high single-digit in line with typical seasonality. We expect Personal Systems margins to be solidly within our long term target range in Q2, as the PC market continues to recover and a strong cost management and pricing actions help to offset rising commodity costs. For FY '24, we expect margins to be solidly within our long term target range, driven by improved PC market demand, a seasonally stronger second half of the year, continued mix improvements partially offset by higher commodity costs.
In Print, we expect consumer demand will remain soft and pricing competitive, while market uncertainty continues to impact our Commercial Print business. Disciplined cost and mix management should help to partially offset these trends, driving flattish revenue sequentially in Q2 below typical seasonality. We expect Q2 supplies revenue to be down mid single-digit in constant currency, and we still expect supplies revenue will decline low to mid single digits for the year. Quarterly results can vary. For Q2, we expect Print margins to be at the high end of our 16% to 19% range and solidly within the range for FY '24. We continue to focus on driving Print operating profit dollars through new business models and rigorous cost management, including future-ready transformation savings.
Taking these considerations into account, we are providing the following look for Q2 and fiscal year 2024. We expect second quarter non-GAAP diluted net earnings per share to be in the range of $0.76 to $0.86, and second quarter GAAP diluted net earnings per share to be in the range of $0.58 to $0.68. 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 $2.61 and $3.01.
In closing, we started off our new fiscal year making solid progress against our strategic objectives and full year commitments, while managing through demand and competitive challenges that have persisted in the current dynamic environment. We remain focused on disciplined execution and cost management and are confident that we have the right people, the right assets and the right strategy to deliver for both our customers and our shareholders for the long term.
I'll stop here, so we can open the lines for your questions.
