Karen Parkhill
Senior Vice President and Chief Financial Officer at HP
Thank you, Enrique, for the warm welcome. I'm thrilled to join HP, and I'm eager to meet you, our analysts and investors in the months ahead. Though I've been here just a few weeks, I'm incredibly impressed by the innovation all around me. HP is an iconic company and I'm excited to work with Enrique and our leadership team to create an even stronger future ahead, building upon our market-leading portfolio, attractive growth businesses and culture keenly focused on delivering value for our shareholders.
Now on to the quarter. Starting high-level, we are building on the progress we made in the first half. And as Enrique said, are pleased with our return to revenue growth for the first time in nine quarters. Solid performance in Personal Systems, which grew for the second-quarter in a row and in our key growth areas, drove our Q3 revenue growth. And double-digit sequential growth in Personal Systems drove strong free cash flow in the quarter. We also returned nearly $870 million to our shareholders through repurchases and dividends and remain focused on returning approximately 100% of our free cash flow this fiscal year.
Looking across the company, the print market was softer than we expected at the beginning of the quarter. And both print and PS saw a dynamic pricing environment that put some pressure on our margins as did our focus on continuing to invest for long-term sustainable growth. As a result and as Enrique mentioned, we are accelerating our Future Ready plan and intend to deliver savings sooner than expected. As a reminder, our plan incorporated our goal to deliver gross annualized structural cost savings of $1.6 billion by the end of fiscal year '25, with approximately 70% or $1.1 billion achieved by the time we exit the fiscal year. Given our focus to mitigate near-term market challenges and just as importantly, maintain investments to drive longer-term growth, we have accelerated our efforts and now expect our cumulative savings target exiting the fiscal year to be approximately $1.3 billion or 80% of the planned target.
Now let's take a closer look at the details of the quarter. Net revenue was up 2% nominally and up 3% in constant-currency. In constant currency, revenue increased in all regions with Americas, EMEA and APJ each growing 3%. Gross margin at 21.5% in the quarter was up slightly year-over-year. Our cost-saving efforts offset both competitive pricing in the face of rising commodity costs and a mix shift given the strong PS performance. Non-GAAP operating expenses were up year-over-year from continued investment in key initiatives and our people. And of course, we continue to drive cost reductions, including the Future Ready cost-savings. All-in, non-GAAP operating profit was $1.1 billion, down 7% year-over-year. Below the OP profit line, non-GAAP net OI&E was down year-over-year, benefiting from less short-term financing activity and lower interest expense from the debt tender we completed last year.
Finally, with a diluted share count of roughly 1 billion shares, our non-GAAP diluted net earnings per share was $0.83, a year-over-year decrease of $0.03 and GAAP diluted net earnings per share was $0.65.
Now let's turn to segment performance. Personal Systems revenue was up 5%, both nominally and in constant currency, with higher commercial volumes and increased ASPs as we worked to adjust pricing where possible to mitigate increased commodity costs. Total units were up 1% year-over-year with strength in commercial. And sequentially, revenue was up 11% and units were up 14% with seasonal strength and overall share gains. Of note, hybrid systems revenue grew in the double-digits year-over-year, including strong growth in video collaboration.
Drilling more into the details, consumer revenue was down 1% with units down 6% and commercial revenue was up 8% on 6% unit growth. Improved pricing in consumer, along with favorable commercial mix and a shift to premium consistent with our strategy drove higher overall ASPs. In fact, we continue to see commercial representing greater than 70% of personal systems revenue. And while calendar Q2 market share was flat year-over-year, we gained share sequentially, driving improvements in high-value categories. And of course, we remain focused on driving profitable revenue and share growth in both our consumer and commercial markets.
Personal Systems operating margin of 6.4% was down slightly year-over-year. We had higher commodity costs and purposely continued our strategic investment, offset in part by Future Ready savings. In Print, our results reflected the slower pace of market recovery and an incrementally aggressive pricing environment as our Japanese competitors continued to benefit from the weaker yen. Overall, the market came in below expectations, particularly in China. Total Print revenue was down 3% on a reported basis and 2% in constant currency. And while hardware units declined 2% year-over-year, total Print market-share increased both year-over-year and sequentially. And momentum in industrial graphics continued with supplies and services driving the fourth straight quarter of year-over-year revenue growth.
By customer segment, commercial revenue decreased 5% with units down 4%. And as mentioned, we felt the impact of market declines, most notably in China and competitive pricing. Consumer revenue returned to growth, increasing 2% on flat units with favorable mix offsetting pricing. Of note, hardware units grew 5% sequentially, driven by strength in consumer and supplies revenue was down 2% nominally and 1% in constant currency, in line with our outlook.
Print operating margin of 17.3% was down year-over-year with headwinds from pricing and increased investments, not fully offset by savings from our Future Ready actions.
On our Future Ready transformation plan, we continue to drive greater effectiveness and efficiency across the company. For example, we're using generative AI capabilities to reduce customer call times and workforce solutions. And in our commercial organization, our move to more end-to-end processes is enabling much faster deal quotes for contractual customers and allowing customers to more easily buy and renew on hp.com. There is more to come as we accelerate and complete this program, particularly in Print, where we are driving further reductions across the core, including business consolidation, supply chain optimization and reductions in platforms.
Now let me move to cash-flow and capital allocation. We generated more than $1.4 billion in cash from operations and $1.3 billion in free cash flow. We continued to improve our cash conversion cycle this quarter, driving inventory days down with seasonally higher volumes in Personal Systems, offset in part by an increase in strategic buys as we focused on reducing the near-term impact of rising commodity costs.
Lastly, we returned close to $870 million to shareholders through both share repurchase and dividends and finished the quarter within our target leverage range. Just as a reminder, unless higher ROI opportunities arise and as long as our gross leverage ratio remains below two times, we expect to return approximately 100% of our free cash flow to our shareholders over time.
Looking forward to the fourth quarter and our fiscal year end, we will continue to navigate a dynamic environment and have therefore modeled multiple scenarios based on several assumptions. In Personal Systems, we expect Q4 revenue to increase sequentially low to mid single digits. We are expecting continued strength in commercial, but given the lingering softness in the consumer market, we are expecting less seasonal growth than we have seen historically. We anticipate Personal Systems operating margin to remain in the upper half of our long-term target range of 5% to 7% in Q4, as we work to offset increased commodity costs through pricing and disciplined cost management, while continuing to invest in strategic priorities.
In Print, we see improving trends in the market, but the pace of recovery is slower than we expected with continued competitive pricing pressure. For Q4, we expect Print revenue to increase low to mid single digits sequentially, driven by typical seasonal strengths as well as strong momentum in our industrial business coming out of DRUPA. We expect supplies revenue in FY'24 to decline low-single digits. And we anticipate Q4 Print margins to be near the top of our 16% to 19% range, given seasonal strength and acceleration of Future Ready cost savings. Taking all of these considerations into account, we are moderating our guide for Q4 and fiscal year 2024 and we are narrowing our non-GAAP EPS outlook range to $0.10, which is reflected in our updated outlook. We expect fourth quarter non-GAAP diluted net earnings per share to be in the range of $0.89 to $0.99 and fourth quarter GAAP-diluted net earnings per share to be in the range of $0.74 to $0.84. For the full year, we now expect non-GAAP diluted net earnings per share to be in the range of $3.35 to $3.45. And FY'24 GAAP-diluted net earnings per share to be in the range of $2.62 to $2.72.
Lastly, we continue to expect free cash flow to be in the range of $3.1 billion to $3.6 billion for FY'24. As a reminder, our free cash flow outlook includes approximately $300 million of restructuring cash outflows. At this point, we want to open the lines for your questions. But before we do, I want to express my gratitude to my HP colleagues for their help in making my onboarding as smooth as possible. And in particular, I want to thank Tim Brown for his leadership in the interim and his continued help these past few weeks with me. Tim is also on the call with Enrique and me to help answer your questions.
