Tim Brown
Interim Chief Financial Officer at HP
Thank you, and good afternoon, everyone. We delivered solid financial results in Q2, driven by disciplined financial management and focused execution while navigating a dynamic and competitive environment. We are pleased with our continued progress we made in Q2 toward delivering on our financial commitments. Total revenue decline slowed further. Our gross profit dollars and margin, our non-GAAP operating profit dollars and margin, and our non-GAAP EPS, all improved both year-over-year and quarter-over-quarter. In addition, we generated solid free-cash flow.
We achieved these results while simultaneously reinvesting in our key growth areas and in AI and managing through a mixed market environment characterized by slightly stronger PS commercial performance, balanced against continuing print market demand challenges. Now let's take a closer look at the details of the quarter.
Net revenue was $12.8 billion in the quarter, down 1% both nominally and in constant currency. In constant currency, Americas increased 2%, EMEA declined 3% and APJ declined 5%. APJ was impacted as soft demand in China continued. Gross margin was 23.6% in the quarter, up 1 point year-over-year, primarily due to lower commodity and logistics costs and cost savings, partially offset by unfavorable mix and competitive pricing. Non-GAAP operating expenses were $1.9 billion or 14.8% of revenue. The year-over-year increase in operating expenses was driven primarily by continued investments in higher variable compensation, partially offset by cost reductions.
Non-GAAP operating profit is $1.1 billion, up 2%. Non-GAAP net OI&E was $158 million, down primarily due to lower interest expense driven by a decrease in debt outstanding. Non-GAAP diluted net earnings per share increased $0.03 or 4% to $0.82 with a diluted share count of approximately 1 billion shares. Non-GAAP diluted net earnings per share excludes a net expense totaling $205 million, primarily related to amortization of intangibles, restructuring and other charges, acquisition and divestiture-related charges, non-operating retirement-related credits and other tax adjustments. As a result, Q2 GAAP diluted net earnings per share was $0.61.
Now let's turn to segment performance. In Q2, Personal Systems revenue was $8.4 billion, up 3%, or 2% in constant currency, driven by higher volumes led by commercial, partially offset by a decline in ASPs and continued weakness in China. Total units were up 7% with consumer down 1% and commercial up 12%. Personal Systems revenue returned to growth, exceeding our expectations. We are encouraged by the positive momentum exiting Q2 as we head into the seasonally stronger second half of the year.
Drilling into the details, consumer revenue was down 3% and commercial revenue was up 6%, representing greater than 70% of Personal Systems revenue. ASPs were flat quarter-over-quarter, driven by a favorable mix shift toward commercial and increased consumer pricing, offset largely by an increased mix of lower-end devices. While our market share declined in calendar Q1 as competition intensified, we drove share improvements in high-value categories, including mobile workstations and commercial premium.
We remain focused on driving profitable revenue and share growth in both our consumer and commercial markets. Last week, we announced the launch of our next-gen AI PC, which is part of a series of launches planned for this year that will expand our portfolio of AI PCs as we enable our customers to deploy advanced AI technology at the edge. Personal Systems delivered $508 million of operating profit, with operating margins of 6.0%. Our margin increased 0.7 points year-over-year, driven by lower commodity and logistics costs and cost savings, including Future Ready savings, offset partially by competitive pricing and investments.
In Print, our results reflected our focus on improving execution and diligently managing cost as we continue to navigate a very competitive Print market. In Q2, total Print revenue was $4.4 billion, down 8% on a reported basis and down 7% in constant currency. The decline was driven by declines in both hardware and supplies. Hardware revenue was down 18% year-over-year, driven by lower volumes attributable primarily to continued weak demand, especially in China and EMEA, as well as share loss in both home and office due to aggressive pricing, partially driven by further depreciation of the yen.
Total hardware units decreased 17% year-over-year. Industrial Graphics grew revenue for the third consecutive quarter, driven by supplies and service, offsetting softer hardware demand as we believe our customers delayed purchasing decisions in anticipation of Drupa, which started yesterday.
By customer segment, commercial revenue decreased 12% with units down 17%. Consumer revenue decreased 16% with units down 17%. In big tank, we increased our volumes and market share sequentially, partially offsetting continued market softness and competitive pricing in the traditional home ink market. In consumer services, we drove revenue and subscriber growth in both our instant ink and all-in plans.
Supplies revenue was $2.9 billion, down 5% on a reported basis and down 4% in constant currency. This was in line with our outlook. Print operating profit was $829 million, down 8% year-over-year and operating margin was 19%. Operating margin was flat year-over-year, driven by disciplined cost management, including Future Ready savings and favorable mix offset by competitive hardware pricing.
Turning to our Future Ready transformation plan. We are on track to achieve our fiscal year end '24 goal of delivering a cumulative 70% of our year end '25 goal of gross annual run rate structural cost savings of $1.6 billion. We expect to achieve this by driving efficiencies in our core businesses. We are pleased with our progress in reducing our costs across Print and PS. We continue to see the benefits of initiatives we launched in prior quarters. For example, we continue to optimize our location strategy with plans for additional site actions this year.
In our digital transformation initiatives, we are accelerating our generative AI capabilities, including rolling out AI tools such as GitHub Copilot to approximately 60% of our developers as well as implementing HP-specific large language models to improve efficiencies across our sales and service organizations.
In marketing, we continue to optimize and in-house our digital media capabilities and maximize programmatic investments. Specifically, we are delivering savings through AI-enhanced capabilities, scaling content production, and working towards translation cost efficiencies, helping us improve our NPI marketing efficiency with lower agency costs and next-gen market insights and measurement. In PS, we are simplifying our portfolio. As we announced last week, our brand simplification strategy across our consumer and commercial portfolios.
Now let me move to cash flow and capital allocation. Q2 cash flow from operations was approximately $581 million and free cash flow was $481 million, driven by net earnings. The cash conversion cycle was minus 31 days in the quarter. This decreased two days sequentially due to days inventory increasing nine days, days payable increasing 16 days and days receivable increasing five days.
The increase in DOI was driven primarily by an increase in strategic buys and sea shipments, both of which drive economic value. The strategic buys continue to allow us to take advantage of attractive economic offerings from suppliers to reduce the near-term financial impact of rising commodity costs. The increase in DPO was driven by an increase in accounts payable due to purchase timing and a higher strategic buy inventory.
In Q2, we returned approximately $369 million to shareholders, including $100 million in share repurchases and $269 million in cash dividends. We finished the quarter within our target leverage range and expect to return approximately 100% of our free cash flow to shareholders in FY '24 and over time as long as our gross leverage ratio remains below 2 times and less higher ROI opportunities arise.
Looking forward to the second half of FY '24, keep the following in mind related to our FY '24 and Q3 financial outlook. As Enrique said, we expect performance in the second half of fiscal '24 will be seasonally stronger than the first half. We continue to model multiple scenarios based on several assumptions. For FY '24, we are narrowing our non-GAAP EPS outlook range to $0.30, but we continue to see a range of potential outcomes for H2 '24, which is reflected in our updated outlook.
We remain focused on improving our cost structure and our performance while continuing to invest in our growth businesses. Regarding OI&E expense, we now expect it will be approximately $0.6 billion in FY '24. We continue to expect free cash flow to be in the range of $3.1 billion to $3.6 billion for FY '24, improving sequentially in both fiscal Q3 and Q4. As a reminder, our free cash flow outlook includes approximately $300 million of restructuring cash outflows.
Turning to Personal Systems, specifically for Q3, we expect Personal Systems revenue will increase sequentially by a high-single digit, though slightly less than typical seasonality. We expect Personal Systems margins to be towards the high end of our long-term target range of 5% to 7% in Q3 augmented by disciplined cost management actions. For FY '24, we expect Personal Systems margins to be solidly within our long-term target range, driven by improved PC revenue in the back half of the year, continued mix improvements and cost efficiencies.
In Print, we expect print to stabilize in the second half of the year, consistent with the market outlook. For Q3, we expect Print revenue to decrease sequentially by low-single digit, in line with typical seasonality. We continue to expect supplies revenue in FY '24 to decline by a low to mid-single digit in constant currency. For Q3, we expect print margins to be in the upper half of our 16% and 19% range and now expect FY '24 margins to be at the high end of the range, driven by rigorous cost management.
Taking these considerations into account, we are providing the following outlook for Q3 and fiscal year 2024. We expect third quarter non-GAAP diluted net earnings per share to be in the range of $0.78 to $0.92. And third quarter GAAP diluted net earnings per share to be in the range of $0.63 to $0.77. We expect FY '24 non-GAAP diluted net earnings per share to be in the range of $3.30 to $3.60, and FY '24 GAAP diluted net earnings per share to be in the range of $2.60 to $2.90.
I'll stop here so we can open the lines for your questions.
