Chief Financial Officer at HP
Thank you, and good afternoon, everyone. It's great to connect with you again. As Enrique highlighted, we have continued to build on our progress here in Q2, executing on our strategy, delivering solid results, returning significant capital to shareholders and investing both organically and inorganically to drive long-term value creation.
Overall demand remained solid, driven by the strong secular tailwinds we see propelling our businesses forward, and we continue to execute on our objectives despite ongoing supply chain and logistics challenges and new macro impacts from the recent round of COVID-related lockdowns in China and the Russia-Ukraine war. Overall, I am pleased with how our teams are meeting these challenges head on and remain confident in our execution, as we navigate this evolving macro environment.
Let's take a closer look at the details of the quarter. Net revenue was $16.5 billion in the quarter, up 4% nominally and 5% in constant currency. Regionally, in constant currency, Americas increased 1%, EMEA increased 7% and APJ increased 10%. Gross margin was 20.2% in the quarter, down 1.5 points year-on-year. The decrease was primarily driven by proportionally higher personal systems mix and higher costs including commodities, partially offset by favorable pricing net of currency.
Non-GAAP operating expenses were $1.9 billion or 11.4% of revenue, down 5%. The decrease in operating expenses was primarily driven by lower R&D due to last year's ramp-up in investments and lower variable compensation including sales commission. Non-GAAP operating profit was $1.4 billion, and non-GAAP net OI&E expense was $74 million for the quarter. At the key segment level, operating profit grew 6%.
Non-GAAP diluted net earnings per share increased $0.15 or 16% to $1.08 with a diluted share count of approximately 1.1 billion shares. Non-GAAP diluted net earnings per share excludes a net expense totaling $152 million, primarily related to restructuring and other charges, amortization of intangibles, acquisition-related charges and other tax adjustments, partially offset by non-operating retirement-related credits, as a result, Q2 GAAP diluted net earnings per share was $0.94.
Now let's turn to segment performance. In Q2, Personal Systems revenue was $11.5 billion, up 9% and up 11% in constant currency. Total units were down 17%, driven by ongoing supply chain challenges, lower per unit and the overall macro environment. Despite this, we grew revenue, reflecting the strength of Windows demand, our mix shift towards higher-value commercial categories like mainstream premium and mobile workstation and favorable pricing.
Furthermore, to highlight some of the secular tailwinds we have seen in personal systems versus pre-pandemic our commercial notebook mix excluding Chrome now represents over 60% of our commercial unit mix, up 15 points versus Q2 2019. And in gaming, revenue has grown by over 140% versus Q2 2019. These are significant structural changes in our business.
Drilling into the details, commercial revenue was up 18% year-on-year and consumer revenue was down 6% year-on-year. By product category, revenue was up 3% for notebooks, 28% for desktops and 21% for workstations. We also continue to see strong performance across our key growth areas including peripherals, gaming and workforce solutions with even more opportunities to drive growth ahead of us.
Personal systems delivered almost $800 million of operating profit with operating margins of 6.9%. Our personal systems business has grown operating profit dollars in 17 of the last 18 quarters. This consistent performance is indicative of our strong portfolio, the strong secular tailwinds we continue to see and our ability to deliver results in very different environments.
Operating margin improved 0.2 points, primarily due to product mix, favorable pricing and lower opex including lower R&D spend due to last year's investments ramp-up, partially offset by higher commodity costs in currency. Sequentially, operating margin declined 0.9 points, driven by higher opex due to R&D investment, more competitive pricing in several segments of consumer, partially offset by lower commodity and logistics costs.
In print, our results reflected our focus on execution and the strength of our portfolio as we navigate the current environment.
In Q2, total print revenue was $5 billion, down 7% and down 6% in constant currency, driven by lower print hardware units and lower supplies revenue. This was partially offset by higher hardware ASPs and growth in industrial graphics and services. Total hardware units declined 23%, largely due to continued component and logistics constraints, which we now expect to extend at least through 2022. By customer segment, commercial revenue declined 4% on a decrease of 17% in units and consumer revenue was down 12% with units down 24%.
Home printer demand remains solid. However, revenue across both home and office was again constrained by available supply. In Q2, the commercial recovery, particularly in the office segment, continued to be impacted by the slower-than-expected return to the office. We did see, however, solid growth in industrial graphics and 3D as Enrique mentioned. We continue to expect a gradual and uneven recovery in commercial over time, with the overall office market returning to approximately 80% of its pre-pandemic TAM, as we have discussed previously.
Supplies revenue was $3.1 billion, declining 6% in constant currency year-on-year. We continue to expect for FY '22 and over the long-term, supplies will decline in the mid-to-low single-digit range, consistent with the outlook provided at our Analyst Day.
In Q2, the decline was driven primarily by continued normalization in home printing as expected, partially offset by the gradual recovery in both office and industrial print. Supplies revenue was also impacted by the China lockdowns and the Russia-Ukraine war. Adjusting for these impacts, supplies revenue was down approximately 4% in constant currency.
As part of our contractual business, our Instant Ink services continued its momentum, once again delivering double-digit increases in both cumulative subscriber growth and revenue, while monthly churn continues to remain low at approximately 1%.
Print operating profit was approximately $1 billion, up $7 million [Phonetic] and operating margin was strong at 19.3%. Operating margin increased 1.4 points, driven by favorable mix and pricing, combined with lower opex as a result of lower variable compensation including sales commissions partially offset by lower volumes.
Now, let's move to our transformation efforts where we have made strong progress and are on track to deliver $1.2 billion in gross run rate structural cost reductions by year-end.
Our transformation continues to create new capabilities and long-term value creation. For our sales teams and partners, we have accelerated the selling cycle by transforming the way we configure price and quote HP Solutions for our customers worldwide. Utilizing advanced analytical pricing capabilities with a cloud-based platform, we have enabled the delivery of competitive quotes for HP Solutions in a quarter of the time, delivering a faster and more efficient customer sales experience.
Lastly, we continue to optimize our real estate footprint, including 15 real estate actions in the first half of 2022. We are rebuilding and modernizing our key locations, focusing on collaboration hybrid work for our employees. A great example of this is our accelerated actions in Korea to both consolidate our sites and open a new state-of-the-art office and R&D facility, bringing together most of our employees in Korea.
Now, let's move to cash flow and capital allocation. Q2 cash flow from operations and free cash flow was $0.5 billion and $0.4 billion respectively. The cash conversion cycle was minus 26 days in the quarter, a sequential decline of seven days. So, its free cash flow and the sequential decline in cash conversion days were driven primarily by the decrease in personal systems volume and back-end loaded revenue linearity driven by supply chain delays.
Looking ahead to the second half of 2022, we expect to improve our cash conversion cycle by fiscal year-end. Driving our outlook is our expectations for personal systems volumes to recover in Q4, which I will provide more color on in a moment. And other operational improvements in our cash conversion cycle, including reduced inventory. As a result, we remain confident in our ability to deliver on our free cash flow guidance of at least $4.5 billion for 2022.
Strong capital returns remain a key part of our capital allocation strategy. In Q2, we returned approximately $1.3 billion to shareholders. This included approximately $1 billion in share repurchases and $262 million in cash dividends, and we remain on track to exceed our $16 billion return of capital target by year-end.
Looking forward to Q3 and the rest of FY '22, we continue to navigate supply availability, logistics constraints, inflation, pricing dynamics and the evolving macro environment, while continuing to deliver on our commitments. In particular, keep the following in mind related to our Q3 and overall financial outlook. We are once again raising our full year non-GAAP outlook for FY '22 as we navigate through a challenging macro environment. We expect currency to be about a 2% year-over-year headwind in both Q3 and for FY '22, reflecting the recent strength of the U.S. dollar.
With regard to the financial impact of the Russia-Ukraine war and the recent lockdowns in China, we are factoring in our best assumptions at this time, recognizing that conditions remain fluid and highly uncertain with impacts to our top and bottom line results.
Regarding Russia, as Enrique mentioned, we have made the decision to stop our activity there and have begun the process of fully winding down our operations. At FY '21, Russia accounted for approximately $1 billion in revenue. In China, we expect to see a reopening and easing of restrictions from the recent lockdowns beginning in June.
For personal systems, we continue to see solid demand and pricing for our PCs in commercial with some softening of demand in consumer, driven in part by the macro factors I mentioned earlier, including currency. We expect year-over-year personal systems revenue growth through the second half of 2022 with a continued shift towards higher-value categories, including commercial, premium and peripherals.
With regard to our personal systems supply chain, while we expect to see a gradual improvement in the supply environment, we did experience a supplier-specific disruption late in Q2. That we expect will resolve by the end of Q3, resulting in a sequential decline in personal systems revenue in Q3 and a rebound in Q4, more in keeping with typical seasonality. We expect PS margins to remain near the high end of our 5% to 7% long-term range, particularly in Q3.
In print, we expect solid demand in consumer, favorable pricing, disciplined cost management and further normalization in mix as commercial gradually improves through 2022. With regard to print supply chain, we expect similar to Q2, component shortages and logistics delays to constrain revenue. We expect these conditions to continue at least through 2022, but with some improvement into the latter part of the year. We expect print margins to be at the high end of our 16% to 18% range for FY '22. For Q3 specifically, given continued hardware constraints, we expect print margin to be above our 16% to 18% range.
Taking these considerations into account, we are providing the following outlook. We expect third quarter non-GAAP diluted net earnings per share to be in the range of $1.03 to $1.08. And third quarter GAAP diluted net earnings per share to be in the range of $0.91 to $0.96, which includes an incremental GAAP-only charge of approximately $0.04 related to the wind down of operations in Russia.
We expect FY '22 non-GAAP diluted net earnings per share to be in the range of $4.24 to $4.38. And FY '22, GAAP diluted net earnings per share to be in the range of $3.79 to $3.93. For FY '22, we expect our free cash flow to be at least $4.5 billion. We have made excellent progress against our priorities in the first half of fiscal 2022. And I am confident in our ability to continue to deliver on our second half outlook while investing the long-term sustainable growth.
I'll stop here so we can take your questions.