Marie Myers
Chief Financial Officer at HP
Thank you, and good afternoon, everyone. We delivered positive results in Q3 and continued to build on the progress we made during the first half of the year despite the challenging macro environment. We have increased our non-GAAP operating profit and non-GAAP EPS sequentially over the course of the year in line with our outlook. In Q3, our personal systems business drove high-single-digit sequential revenue growth, which in turn helped drive strong free cash flow performance in the quarter. We successfully completed a debt tender exceeding $1.1 billion later in the quarter that reduced our gross leverage ratio as planned. And our future-ready transformation plan is on track to achieve at least $560 million in gross annual run rate structural cost savings this year. While there are pockets of our business where we are working to improve our execution, we made good progress during the quarter.
Now, let's take a closer look at the details of the quarter. Net revenue was $13.2 billion in the quarter, down 10% nominally and 7% in constant currency, driven by the declines across each of our regions. In constant currency, Americas declined 8%, EMEA declined 5%,and APJ declined 9%, driven by weakened demand in China. Gross margin was 21.4% in the quarter, up 1.7 points year-on-year, primarily due to the lower component and logistics costs in personal systems and favorable mix, partially offset by currency and competitive pricing across both of our businesses. Non-GAAP operating expenses were $1.7 billion, or 12.6% of revenue. The increase in operating expenses was driven primarily by the Poly acquisition and investments in growth initiatives, partially offset by disciplined cost management, including future-ready structural cost savings.
NonGAAP operating profit was $1.2 billion, down 15.1%. Non-GAAP net OI&E expense was $143 million, down sequentially due to lower short-term financing activities and up year-on-year primarily due to higher interest expense, driven by an increase in both debt outstanding and interest rates as well as higher factoring expenses. Non-GAAP diluted net earnings per share decreased $0.17, or 17%, to $0.86 with a diluted share count of approximately 1 billion shares. Non-GAAP diluted net earnings per share excludes a net expense totaling $93 million, primarily related to restructuring and other charges, amortization of intangibles, acquisition, and divestiture-related charges, and other tax adjustments, offset partially by the debt extinguishment benefit and non-operating retirement-related credits. As a result, Q3 GAAP-diluted net earnings per share was $0.76.
Now, let's turn to segment performance. In Q3, personal systems revenue was $8.9 billion, down 11%, or 8% in constant currency. Total units were up 3%. Sequentially, revenue was up 9% and total units were up 21% with commercial up 17% and consumer up 28%. Improved sequential demand was driven by seasonal strength with back-to-school demand. We also saw continued commercial enterprise softness driven by cautious spending and delayed purchase decisions. We improved our overall market share in calendar Q2 on both a year-over-year and sequential basis, driven by gains in both commercial and consumer markets. We continued to see commercial representing approximately 70% of our revenue mix for the quarter. Our strategy remains focused on driving profitable share growth.
Our channel inventory levels are normalizing. However, our estimate is that the industry-wide channel inventory continues to remain elevated. As a consequence, ASP pressures offset volume growth accounting for year-over-year revenue decline in personal systems this quarter. Drilling into the details, consumer revenue was down 12% and commercial was down 11%. Increased competitive and promotional pricing drove ASPs lower partially offset by contributions from hybrid systems revenue and higher unit volumes, resulting in share gains. We increased our market share and higher-value premium categories, including commercial windows and gaming. Personal systems delivered almost $600 million of operating profit with operating margins of 6.6%. Our margin declined 0.1 points year-over-year, primarily due to increased pricing competition, mixed currency, and higher opex due to the Poly acquisition. This was partially offset by lower costs, including commodity costs, structural cost savings, and logistics expense.
In print, our results reflect our continued focus on key initiatives as we navigated the challenges of a softer and increasingly competitive print market. In Q3, total print revenue was $4.3 billion, down 7% nominally, or 5% in constant currency. The decline was driven by soft demand in both consumer and commercial, market share loss [Phonetic] currency and lower supplies revenue. Hardware revenue was down $256 million, driven by lower volumes, primarily due to China market softness and aggressive pricing competition as our Japanese competitors have leveraged the weaker yen to their advantage. Total hardware units decreased 19% driven by softer print demand in both home and commercial. Industrial graphics revenue, particularly hardware, remains pressured by persistent soft enterprise demand with the greatest impact seen in Europe.
By customer segment, commercial revenue decreased 6%, or 5% in constant currency, with units down 8%. Consumer revenue decreased 28%, or down 26% in constant currency, with units down 20%. ASPs year-over-year, driven by the promotional and competitive pricing and currency, offset partially by a favorable mix in both consumer and commercial. Supplies revenue was $2.8 billion, declining 2% nominally and roughly flat in constant currency, in line with expectations. The decline was driven by the demand softness, particularly in China, low usage, and a lower install base. This was offset partially by pricing actions earlier in the year and share gains in turn. The operating profit was approximately $800 million, down 12% year-on-year and operating margin was 18.6%. Operating margin decreased 1.2 points driven by competitive pricing and unfavorable currency partially offset by structural cost savings and favorable mix.
I would also like to note that we recorded accounting adjustment primarily related to a revenue contract in our personal systems segment. This has been reflected in our prior quarter compares, which I just covered. It was not material to any of our previously filed financial statements and does not impact our current quarter results. We continued to make strong progress on our future-ready transformation in Q3 and we expect to deliver at least 40% of our three-year gross annual structural run rate savings target of $1.4 billion CAD for FY '23. As I've mentioned previously, we are working on a range of programs, which should enable us to achieve and potentially exceed key milestones for reducing costs across our business. Given the dynamic in print, we are building the plan to accelerate cost reductions in that business.
Let me update you on our progress in Q3. A key pillar of our transformation plan is focused on simplifying our product portfolio, significantly reducing the number of platforms we support to drive agility and operating leverage. We've made great progress in personal systems as the actions we've taken have positively impacted our Q3 operating profit rate performance. Specifically, we continue to make great progress in standardizing our personal systems platforms. At the end of Q3, we were nearly halfway to our goal of reducing our total number of personal systems platforms by approximately one-third by the end of FY '24. In addition, we continue to reduce our commodity complexity, decreasing the number of clients use in personal systems portfolio.
In addition, we continue to look for new opportunities to reduce our cost structure across the organization. In Q3 for example, we optimized our media spend by consolidating our marketing programs and expanding our in housing model further. We expect marketing will continue to deliver additional savings and headcount productivity, and cost optimization as we unlock new digital solutions. We are aggressively pressing forward with our AI agenda to reinvent various functions inside the company to accelerate both our products and productivity. We are enhancing our software coding practices to accelerate co-development to improve speed, efficiencies, and quality reviews. We're also leveraging our telemetry data to proactively address customer needs and to provide tailored recommendations and solutions to improve their efficiency and productivity.
Shifting to cash flow and capital allocation. Q3 cash flow from operations was solid at $1 billion dollars and free cash flow was approximately $900 million. The cash conversion cycle was minus 31 days in the quarter. This improved two days year-over-year, primarily due to days of inventory decreasing one day and days payable increasing four days, partially offset by days receivable increasing three days. The sequential growth in personal systems has improved the overall cash conversion cycle as expected.
Looking ahead to Q4, we expect operational improvements will help drive a sequential increase in free cash flow, including an increase in personal systems revenue and an improvement in working capital. In Q3, we returned approximately $216 million to shareholders via cash dividends. In addition, we successfully completed a debt tender during the quarter, retiring greater than $1 billion dollars of debt. Consistent with our outlook, we did not repurchase any shares in the quarter. Looking forward to Q4, we expect the challenging economic climate and continued demand softness will remain headwinds for our business near-term. In particular, keep the following in mind related to our overall financial outlook. We still expect operating expenses, excluding Poly, will be down year-over-year for FY '23. We intend to start managing dilution this quarter as we remain committed to our capital allocation strategy over the long term while maintaining our investment-grade credit ratings. The personal systems, the PC market size for the second half of calendar year '23 is smaller versus prior expectations, driven mainly by demand weakness in China. We expect industry CI levels will normalize by the end of Q4, resulting in improving ASPs as the quarter progresses, but by less than initially expected, and that enterprise demand will be softer. We expect personal systems margins in Q4 to be at the higher end of our 5% to 7% long-term range driven by sequential revenue growth, lower commodity costs, and strong structural and operating cost savings.
In print, we expect overall print revenue will rebound sequentially due to seasonality. We expect suppliers revenue at FY '23 to decline by a low-single-digit in constant currency with easier year-on-year compares in Q4. We expect print enterprise demand softness, including industrial, which will remain under pressure due to elongated sales cycles. We expect print margins to be above the high end of our 16% to 18% target range for Q4, driven by disciplined pricing in a competitive environment and cost management that will help to offset softened demand.
Taking these considerations into account, we are providing the following outlook for Q4 and fiscal year 2023. We are lowering our FY '23 non-GAAP EPS outlook range by $0.11 at the midpoint. The primary factors driving our guidance include our revised outlook for Q4 due to the macro challenges I discussed previously and the effect of the accounting adjustments I referenced earlier which impacts our H1 '23 non-GAAP EPS by $0.03. We expect fourth quarter non-GAAP diluted net earnings per share to be in the range of $0.85 to $0.97 and fourth quarter GAAP diluted net earnings per share to be in the range of $0.65 to $0.77. We expect FY '23 non-GAAP diluted net earnings per share to be in the range of $3.23 to $3.35, and FY '23 GAAP diluted net earnings per share to be in the range of $2.95 to $3.07. We expect free cash flow to be approximately $3 billion for FY '23, in line with the low-end of our prior guidance range of $3 billion to $3.5 billion.
And now, I would like to hand it back to the operator and open the call for your questions.