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HP Inc. (NYSE:HPQ)
Q2 2018 Earnings Conference Call
May 29, 2018, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, everyone, and welcome to the Q2 2018 HP Inc. earnings conference call. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing the * key followed by zero. As for today's presentation, there will be an opportunity to ask questions. To ask a question, you may press * then 1 on your telephone keypad. To withdraw your question, please press * then 2. And please note that this event is being recorded.

I would now like to turn the conference over to Beth Howe, Head of Investor Relations. Please go ahead.

Beth Howe -- Head of Investor Relations 

Good afternoon. I'm Beth Howe, Head of Investor Relations for HP Inc. and I'd like to welcome you to this Fiscal 2018 second quarter earnings conference call with Dion Weisler, HP's President and Chief Executive Officer, and Cathie Lesjak, HP's Chief Financial Officer. Before handing the call over to Dion, let me remind you that this call is being webcast. A replay of the webcast will be made available shortly after the call for approximately one year. We posted the earnings release and the accompany slide presentation on our investor relations webpage at www.hp.com.

As always, elements of this presentation are forward-looking and are based on our best view of the world and our businesses as we see them today. For more detailed information, please see disclaimers in the earnings materials related to the forward-looking statements that involve risks, uncertainties, and assumptions.

For a discussion of some of these risks, uncertainties, and assumptions, please refer to HP's SEC report, including our most recent Form 10-K. HP assumes no obligation and does not intend to update any such forward-looking statements. We also note that the financial information discussed on this call reflects estimates based on information available now and could differ materially from the amounts ultimately reported on HP's form 10-Q for the fiscal quarter ended April 30th, 2018, and HP's other SEC filings.

During this webcast, unless otherwise specifically noted, all quarterly comparisons are year over year comparisons with the corresponding year over quarter. For financial information that is expressed on a non-GAAP basis, we've included reconciliations to the comparable GAAP information. Please refer to the tables and slide presentation accompanying today's earnings release for those reconciliations. And now, I will hand it over to Dion.

Dion Weisler -- President and Chief Executive Officer

Thanks, Beth. Let me start by saying it's great to have you back on the investor relations team. I'm quite pleased with our Q2 performance. It's yet another quarter of strength, growth, and consistent execution of our reinvention. We're creating opportunities and taking advantage of favorable market dynamics to deliver strong revenue and profitability across our segments and our regions.

This was our tenth quarter since separation and you are seeing a sharp focus on innovation and execution, continued improvement on our business fundamentals and an intense focus on long-term sustainable growth. Our winning formula is straightforward. We are focusing on delivering occupational excellence, predictable shareholder returns and prioritizing profitable growth, all aligned to our core growth and future strategy.

Looking at our Q2 Fiscal Year 18 results, we added $1.6 billion to the top line, growing revenue 13% to $14 billion. We grew top line and bottom line in both personal systems and print. We delivered nearly $1 billion of free cash flow in the quarter and repurchased $800 million of stock and we delivered non-GAAP EPS of $0.48, an increase of 20% and at the higher end of our range. The market remains dynamic and competitive, but I'm confident in our strategy and ability to continue to grow faster in the market and out-execute the competition. We are playing our own game, pursuing the heat in the market and our strategy is paying off.

Let me review some of the highlights. Personal systems delivered another exceptional quarter. Net revenue was up 14% and that comes on top of 10% growth a year ago in quarter two. This is now six consecutive quarters of double-digit growth. This performance and the innovation coming out of this team is nothing short of incredible. HP continued to outperform the PC market with broad-based growth across all segments and product categories.

Not only are we seeing strong growth in notebooks. This is also the third consecutive quarter of double-digit desktop growth. In the first calendar quarter, we outgrew the PC market by 4.6 points, achieving 32.7% share. While we are proud of these results, share gain continues to be an outcome, not an objective. Profitable growth continues to be our focus. In quarter two, operating profit dollars grew double digits and operating margins expanded 50 basis points to 3.8%. Our team continues to drive improved productivity and product mix.

One of the ways we drive value and profitable growth is through careful segmentation and aggressively pursuing targeted opportunities. One example is healthcare, where safety, security, and regulatory compliance are critical. We recently introduced a portfolio of products purpose built for healthcare providers by optimizing clinical workflows with RFID readers and improving collaboration capability for telemedicine.

This is connected to our innovation story and the sprinkles of magic we continue to deliver that continue to be recognized in the market. This past quarter, we introduced the world's first Chromebook detachable, the world's widest curved all-in-one, and the world's first detachable and tablet with an integrated privacy screen. This is how we win with partners and customers.

Much of our success is driven by the strength of our commercial channel and retail relationships. For us, the channel is a great competitive advantage. We are deeply committed to listening to our partners, understanding their customers' needs and delivering innovation that drives growth. We're coming off three of our largest partner events for the year, where we met with thousands of partners from all regions. Their response was tremendous and we are consistently hearing that our innovation engine and go to market programs are setting a new standard and helping the to grow their businesses.

In addition to the core, we remain focused on our strategic growth areas. In personal systems this quarter, we made progress in areas such as retail point of sale and device as a service, where we saw strong double-digit growth. In fact, we closed a deal with a major global fast food change to implement both retail point of sale and device as a service solutions.

Just like personal systems, the print business delivered the trifecta of revenue, profit, and share growth in quarter two. Total print revenue was up 11%, with growth across commercial hardware, consumer hardware, and supplies. We'll seeing growth across all regions and broadly across the business. Print units were up 13% and supplies revenue grew 8%, further supporting our confidence in the health of the print business for the long-term.

The overall print hardware market grew 1.7% in the first calendar quarter and we grew faster than the market, adding one point of share. With our continued productivity initiatives to improve supply chain efficiency and lower product cost, we remain strongly positioned to place MPV positive units.

We're on a journey to reinvent print and our focus on this enabled us to achieve several important and innovative milestones. We launched the HP Envy ISS printer to the International Space Station in April, where it is currently in use alongside HP ZBook workstations. We are investing in next generation printing, with a focus on modern lifestyle innovations, like the new mobile optimized HP Laser Jet Pros and our expanded offering of HP voice-enabled printing.

In A3, we continued to onboard new partners and gain year over year share. This business is strategic to us given the higher tax rates for supplies. As an example, Image Net Consulting lowered its service cost by more than 15% using HP smart device services remote management and I'm pleased with the progress in S Print since the acquisition closed this past November. We continue to rationalize SKUs and streamline processes while we're adding new innovations and adding features and options that our customers and partners truly value.

Finally, in our graphic solutions business, we closed our largest packaging deal with ePac Flexible Packaging, a leader in web-based digital printing that quadrupled its capacity with HP Indigo Presses. We also unveiled the industry first hybrid latex printer capable of printing on both rigid and flexible materials for the print service provider community.

As you know, the 3D printing business is a huge opportunity for us and one where we aim to disrupt the $12 trillion global manufacturing market. The growth trajectory and momentum behind this business continues. We're seeing an increase in customers placing repeat orders, upgrading their systems for higher volume manufacturing and scaling with double-digit unit installations.

Forecast 3D, one of the oldest and largest 3D manufacturers in the US, is expanding and upgrading it entire fleet to our 4210 solutions as they respond to growing demand and full-scale production. They're expecting to produce millions of parts on multi-jet fusion in the coming year.

And Jabil, one of the world's largest contract manufacturers is now deploying multi-jet fusion in the US and Asia as part of their distributed manufacturer strategy. We continue to make incredible progress across key industry verticals and expand into new geographies, including our market entry into Mexico.

Overall, I'm very pleased with our Q2 results and the efforts of our team, but as always, we have more work to do. We are never satisfied and see plenty of room for us to grow, innovate, improve our cost structure and adapt to an ever-changing marketplace.

Now, before I turn the call over to Cathie, let me address the other news we announced today. After 32 incredible years and the last 11 years as Chief Financial Officer, Cathie and I have decided it's the right time to transition CFOs before she retires in early calendar 2019.

On behalf of all HP employees and shareholders, I want to think Cathie for her remarkable contributions and commitment to shareholder value. We have been on an amazing journey together since separation and Cathie deserves tremendous credit for helping drive our performance and reinvention as a company. She has been my partner for the last three years and I could not ask for a better confidante and leader.

Cathie has also cultivated incredible shareholder respect through her integrity, transparency, and world class financial discipline. She has built a deep and talented finance organization capable of leading us into the future. Steve is a great example of that bench. Having worked with him for many years, I'm excited to have him join my executive leadership team and I'm looking forward to our partnership.

Steve has an impressive background as a leader in finance and operations and has a reputation for operational excellence and accountability. He is a great edition to the team as we continue to drive long-erm profitable growth. With that, I'm now going to turn the call over to Cathie to provide more details on our performance and financial outlook. Cathie, after 46 earnings calls, make this a good one.

Cathie Lesjak -- Chief Financial Officer

Thanks, Dion. I've been privileged to serve as CFO for the past 11 years, or as you noted, 46 quarters -- but who's counting? It has been an honor to work as part of a team with so many outstanding dedicated employees during a time of tremendous change and reinvention. With Steve taking over as CFO, I'm convinced HP is in excellent hands. As many of you already know, Steve is an experienced finance and investor relations executive with a deep understanding of HP. He will be an outstanding CFO and a great successor.

Now looking at the results for Q2, we continue to deliver consistent results with strong revenue growth with increases in operating profit dollars, free cash flow, and earnings per share. Net revenue was $14 billion, up 13% or 10% in constant currency. Our performance remains strong across businesses and geographies. Regionally, Americas grew 7%, EMEA was up 21%, and APJ grew 13%.

Gross margin was 19.3%, up 10 basis points year over year. Sequentially, gross margin was up 150 basis points, higher than normal seasonality, primarily driven by favorable rate in personal systems and improved mix. Non-GAAP operating expenses of $1.7 billion were up 16%, driven by the addition of S Print, along with incremental R&D and go to market investments to support growth.

Non-GAAP net OINE expense was $84 million for the quarter with a non-GAAP tax rate of 16% and a diluted share count of approximately 1.6 billion shares. We delivered non-GAAP diluted net earnings per share of $0.48. Non-GAAP diluted net earnings per share primarily excludes restructuring and other charges of $57 million, acquisition-related charges of $45 million, amortization of intangible assets of $20 million, debt extinguishment costs of $126 million as well as non-operating retirement-related credit and the related tax impact on all of these items.

It also excludes a net gain of $424 million for tax adjustment. The gain was a result of several tax settlements across various jurisdictions covering a multi-year period. The gain was partially offset by an additional provisional revaluation of the deferred tax assets due to US tax reform and a $671 million tax indemnification.

The tax indemnification amount is associated with our tax matters agreement with Hewlett-Packard Enterprise Company, since these tax settlements were based on pre-separation tax years. As a result, Q2 GAAP diluted net earnings per share was $0.64.

Turning to the segments, personal systems net revenue remained very strong, delivering $8.8 billion up 14%. We are encouraged as the results continue to be broad-based, reflecting execution against our strategy and an innovative product portfolio.

By customer segment, consumer revenue was up 10% and commercial revenue was up 16%. By product category, revenue was up 15% for notebooks, up 16% for desktops, and up 9% for workstations. Our disciplined focus on market segmentation enabled profitable share gain. Personal systems operating profit dollars grew year over year and operating margin was 3.8%, up 60 basis points as we lapped some of the largest commodity cost increases we saw last year.

We will continue to balance pricing to adjust for the impacts of currency and commodity and logistics costs and other market dynamics. Turning to printing, revenue was $5.2 billion in the quarter, up 11%. We are pleased with this growth and are encouraged by the progress we are making integrating S Print.

Total hardware units were up 13%, with consumer units up 4% and commercial units up 88%. Sequentially, commercial units were up 10%. Calendar Q1, overall print unit share was 42%, up 1 point year over year and up 4 points sequentially.

Q2 supplies revenue of $3.4 billion was up 8% year over year or 6% in constant currency. The supplies mix of total print revenue was 65% and we continue to operate below our ceilings for supplies channel inventory. We also had good momentum in our contractual offerings. We are pleased with the strong growth in Instant Ink, where we are growing our global subscriber base. And in NPS, we continue to grow revenue.

Print operating profit grew $19 million and operating margin was 16% in the quarter, down 1.3 points year over year, but up 20 basis points sequentially. The primary drivers of the year over year margin decline were strong unit placements and go to market investments largely as a result of adding S-print. Additionally, we saw increased raw material costs throughout the quarter, which we expect to continue throughout the year.

Now, turning to cashflow and capital allocation -- Q2 cashflow from operations was $1.1 billion and free cashflow was $937 million. For the full year, we now expect free cashflow to be at least $3.7 billion. Cash conversion cycle was minus 30 days, improved three days sequentially driven by a seven-day increase in days payable outstanding, offset by a three-day increase in day sales outstanding a one-day increase in days of inventory. Increases in days of inventory and days payable outstanding are largely a result of negotiated payment terms and leveraging our balance sheet.

Consistent with the cash priorities described in Q1 in connection with US tax reform, we successfully completed a $1.85 billion debt tender during Q2. Additionally, we had capital returns of $801 million in share repurchases and $227 million in cash dividends. For the full year, we still expect to deliver returns toward the higher end of our long-term range of 50% to 75% of free cashflow.

Before turning to guidance, I want to reiterate the importance of focusing on our cost structure -- because of the synergies we see in print, including the result of the acquisition combined with other cost efficiency opportunities, we will be expanding our current restructuring program. Compared to the high end of our prior restructuring outlook, we expect the restructuring cost to increase by $150 million to $200 million. This includes both labor and non-labor-related action.

We still expect to complete the plan by the end of Fiscal 2019 including these incremental actions. We expect the total gross annual run rate savings to increase by at least $75 million over the higher end of the previously communicated range beginning in Fiscal 20.

Looking forward, keep the following in mind related to our financial outlook -- in personal systems, expect that logistics and overall component costs will continue to increase throughout FY18. This headwind and any net impact on repricing will ultimately depend upon actual market demand, competitive dynamics and any impact from currency. In printing, we begin to see increases in raw material costs in Q2 and expect that pressure to continue during the second half. In addition, we continue to have strong positive MPV unit placements which should continue to push the hardware revenue mix higher.

We will also continue to leverage our balance sheet if we see attractive economic opportunities to do so. For the full year, we expect to deliver our productivity initiatives as guided. We're also updating the way we estimate our quarterly non-GAAP tax rate in order to provide better visibility across quarterly reporting periods. Going forward, we'll report our non-GAAP earnings, incorporating a 16% tax rate calculated using long-term non-GAAP financial projections.

The non-GAAP tax rate is based on our financial forecasts and all currently available information. It may be subject to change for a variety of impacts, including the company's ongoing analysis of the tax act over the measurement period, the rapidly changing global tax environment or other changes to the company's strategy or business operations.

Additionally, we would expect our cash tax rate to be 16% plus or minus 2% for the full year. With all that in mind, we expect Q3 18 non-GAAP diluted net earnings per share is in the range of $0.49 to $0.52. Q3 18 GAAP diluted net earnings per share is in the range of $0.47 to $0.51. We are raising our full year Fiscal 18 non-GAAP diluted net earnings per share to be in the range of $1.97 to $2.02 and our full year Fiscal 18 GAAP diluted net earnings per share to be in the range of $0.57.

With that, let's open up the call for questions.

Questions and Answers:

Operator

Thank you. We will now begin the question and answer session. To ask a question, you may press * then 1 on your touchstone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press * then 2. We also ask that you please limit yourself to one question and a single follow-up. We will now pause momentarily to assemble our roster.

Our first question today will be from Steve Milunovich with UBS. Please go ahead.

Steve Milunovich -- UBS -- Managing Director

Thank you. Congratulations to you, Cathie and Steve. Cathie, do you expect the printer margin to rise sequentially through the next two question or twill that be offset by the higher raw material costs and unit placements. Specifically, what material costs are you referring?

Cathie Lesjak -- Chief Financial Officer

Resins, plastics, as well s DRAM. There's DRAM also in a printer. Resins and plastics are largely up as a result of oil prices increasing. That's what we're seeing there.

In terms of how to think about the OP rate over time, we don't really have an explicit rate for operating profit for print in any particular period. We do long-term expect that the margins will be 16% to 18%, which we talked about, which is pretty consistent to what we've seen historically.

When we think about the progress in the near to midterm, the way to think about it is as we integrate S Print, ramp the A3 business as well as the 3D business and execute on our productivity initiatives, we do expect the margins will improve from the 16%. That's really a midterm kind of comment.

Steve Milunovich -- UBS -- Managing Director

Okay. Could you update us on the buyback? I'm not sure at that point you were ready to talk about the use of repatriated cash.

Cathie Lesjak -- Chief Financial Officer

So, in the first half, we repurchased shares for a total price of about $1.3 billion. In the second quarter, we did about $800 million of share repurchases, which is higher than what we have done. When we look forward to the rest of the year, we will be active in the market, but the second half will really be consistent with our capital return priorities. So, we've talked about the fact that we are going to be toward the higher end of 50% to 75% of our free cashflow this year and our buying in the second half will be consistent with that. Keep in mind that toward the higher end of 50% to 75% applies to the increased free cashflow of $3.7 billion for the year.

Operator

And our next questioner today will be Paul Coster with J.P. Morgan. Please go ahead.

Paul Coster -- J.P. Morgan -- Analyst

Yes, thanks for taking my question. I'll bundle the two at once, if I may. Cathie, if you can give us a sense of the acquired versus organic growth rate for the printer business, that would be helpful. It must be throwing up opportunities and risks. Can you talk to us about what the near term tactical opportunities might be given some of the strategic uncertainty among two players and also how it's changing your view about what HP will do during this endgame?

Cathie Lesjak -- Chief Financial Officer

Why don't I start? Paul, as we talked about last quarter or maybe the quarter before, we are integrating the S Print business into the core HP Print business, frankly, as fast as we can. The reason for that is that it's going to drive shareholder value. As a result of doing that, there isn't really a way to meaningfully separate what is organic growth versus inorganic growth for the print segment. I think the best way to think about it is that print by all means has had a very strong first half in terms of performance. We're very pleased with the topline growth as well as the unit placement, the margin expansion and the supplies revenue growth as well.

Dion Weisler -- President and Chief Executive Officer

Thanks, Paul, for the question. The print industry is no different to the personal systems industry. We've seen the personal systems over many years and it's still consolidating today and we're able to continue to grow in the personal systems business as you've seen us do in the past six quarters by playing our own game. I think the print business is no different. There is no room in an essentially flat market for 14 players.

So, I think naturally, over time, that market will consolidate as well. I don't subscribe to the fact that it has to be done through acquisition. We made a very strategic acquisition of the Samsung print business. That was a technology acquisition as well as an acquisition of some incredibly talented people, but it wasn't a market share play.

As we look at the market today, we feel that from a technology perspective, we're very well positioned in ink as well as laser, in A4 as well as A3 and we continue to move toward a service-oriented business.

So, by adding the sprinkles of magic we do across the portfolio, I expect that we can outpace the market. Having said all of that, I've always said that M&A is an important part of our strategy. We wouldn't surprise anybody, any of our investors or the industry. When we do think about M&A it would live somewhere on our strategy page and would need to bolster our strategic intent and accelerate our strategy.

But it would be returns and it would be weighed against other organic options and alternative uses of cash. It would come at a reasonable cost and be modest in size and will remain thoughtful and disciplined and ensure that the opportunities are compelling and will maximize shareholder value.

Operator

And our next questioner today will be Sherri Scribner with Deutsche Bank. Go ahead.

Sherri Scribner -- Deutsche Bank -- Analyst

Hi, thank you. Cathie, you mentioned the operating expenses were up a little bit sequentially related to the S Print acquisition. Can you maybe help us think about how operating margins will trend now that Samsung is in the business? Should we see operating expenses at these levels or do you expect to bring operating expenses down through the year based on cost cutting initiatives?

Cathie Lesjak -- Chief Financial Officer

Sure. So, Sherri, what I actually said is the OpEx is up largely as a result of S Print but not exclusively. We have made incremental investments in R&D and go to market as well. I believe that those will continue. Now, clearly, when you look at the total company or specifically the print business, our S Print business has been investment mode in the first half. As we talked about at the total company level, it will be accretive by about a penny in the full year. So, we do expect it to shift to making some money, which is always good.

But keep in mind, even as it makes some money, it's going to be dilutive to operating margin rate. I think that's very important when you think about the trajectory of the print operating margin rate in Fiscal 18.

Sherri Scribner -- Deutsche Bank -- Analyst

Okay. Great. Thank you. Then just looking at the supplies business, it's trending very strongly and clearly, you've turned that segment around. How should we think about growth and supplies? I think we've talked about flat maybe slight growth this year. I know there are some inorganic pieces in there, but it seems like you're trending well ahead of that in supplies.

Cathie Lesjak -- Chief Financial Officer

So, Sherri, what we expect is that kind of the sum of Q2, Q3, and Q4 on a year over year basis that we would see 5% to 7% growth in constant currency. That's what we expect for FY18. For FY19, we expect that supplies will be flat to slightly up once we have an apples and apples comparison with S Print in both years.

Operator

And our next questioner today will be Toni Sacconaghi with Bernstein. Please go ahead.

Toni Sacconaghi -- Sanford C. Bernstein -- Analyst

Yes, thank you. Congratulations, Cathie, on your tenure and all the best wishes for the future.

Cathie Lesjak -- Chief Financial Officer

Thank you.

Toni Sacconaghi -- Sanford C. Bernstein -- Analyst

 I have a question and a follow-up, please. First on PCs, ASPs were up about 7% year over year and we've seen real strength in ASPs for the last several quarters. Perhaps you can help us understand how much of your think is coming from DRAM versus changing changes in your mix like gaming. Accordingly, how sustainable, once, DRAM starts declining, how sustainable in ASP increases in PCs going forward or what's the right way to think about ASP changes in a more normalized environment? Then I have a follow-up, please.

Cathie Lesjak -- Chief Financial Officer

So, Toni, we saw good progress as you mentioned in ASPs, both year over year as well as sequentially. In both cases, the positive mix shift that we're driving into premium is having a significant impact on the ASPs. We believe that those will continue to be the case. We also saw, as you mentioned, we definitely saw some help from DRAM pricing or pricing that we took as a result of commodity cost increases. Depending on what happens to commodity costs, that piece will go up or down. Then from a foreign exchange perspective, also with the tougher dollar, we could see some ASPs increase as a result of currency as well.

Toni Sacconaghi -- Sanford C. Bernstein -- Analyst

Was the impact from mix greater than the impact from price from DRAM? I'll ask my follow up just on supplies, back to printer supplies, I think last quarter you had said the contribution for mass print was about 6 points. I know it's become more muddied now, but would it be fair to sort of assume that the contribution from S Print was in that vicinity this quarter? Were there any changes to your channel inventory? I think you said you were under your ceiling, but it's a little bit of a different commentary from prior quarters, where I think you said you were within your range. So, just to follow up on ASPs and then supplies, please. Thank you.

Cathie Lesjak -- Chief Financial Officer

Sure. The impact of mix on ASPs was material and greater than the pricing impact. In terms of supplies, I'll go back to what I said earlier -- we really have integrated the business here. So, it's really not -- we're really not able to meaningfully determine what was S Print's contribution to supplies versus the core because we are rationalizing SKUs. We are now selling more HP SKUs than S Print SKUs and therefore, are those supplies S Print supplies or are they HP supplies. It's not just gotten muddy it's well-integrated, which is exactly what you want us to do because that's what's going to drive the value.

In terms of the channel inventory, I think we changed our commentary I want to say two or three quarters ago when we really now are managing below a ceiling. We have been consistently below the ceiling for supplies, frankly, since we made the change to our supply sales model.

Dion Weisler -- President and Chief Executive Officer

Toni, I think we've consistently said -- you and I have talked about it -- we have this relentless focus on execution. We have a continued confidence in the predict value of the four-box model. You can expect us to drive continued improvements across all four boxes to maintain supply stabilization in '19. We anticipate the headwinds that Cathie mentioned earlier. We've contemplated them. We've captured them in the expectations and we've guided that for the rest of '18 as well as '19.

Operator

And our next questioner today will be Katy Huberty with Morgan Stanley. Please go ahead.

Katy Huberty -- Morgan Stanley -- Managing Director

Thank you. Cathie, my congratulations as well. I have two questions. I'll just ask them together. First of all, can you bridge the $0.05 guidance increase on EPS from roughly $1.95 to $2.00 at the midpoint? Then secondly, from a free cashflow perspective, if you look at the last couple of years, over half of free cashflow came in the back half of the year, which would suggest that you can do $4+ billion this year. Why is seasonality different this year versus the past couple of years?

Cathie Lesjak -- Chief Financial Officer

Katy, since it's my last call, I think I'm going to say if I give an inch, you take a mile on the free cashflow. When we look at the first half free cashflow, we're very pleased with the performance. It's really based on the strength primarily of personal systems. To use Dion's term, a double-double and a double-double is pretty significant from a timing perspective given the negative cash conversion cycle of personal systems. We expect personal systems to do well in the second half, although compares are getting increasingly difficult. I think that's one piece. The other piece is that in the first half, we did have some one-time positive cashflow items that won't repeat themselves.

And then when you think about the bridge for the $0.05 increase that you talked about, it's largely as a result of the share repurchases that we did in Q2 that were in excess of what we had originally expected when we provided the guide. We've got the follow on effect of that as well as the share repurchases that we're going to do in the second half, consistent with returning toward the high end of the 50% to 75% of our free cashflow.

Operator

And our next questioner today will be Shannon Cross with Cross Research. Go ahead.

Shannon Cross -- Cross Research -- Analyst

Thank you very much. Congrats, Cathie, I hope you can take a nice long vacation sometime in 2019.

Dion Weisler -- President and Chief Executive Officer

Thanks for saying that, Shannon, in 2019.

Shannon Cross -- Cross Research -- Analyst

I was going to say not before that.

Dion Weisler -- President and Chief Executive Officer

Exactly.

Cathie Lesjak -- Chief Financial Officer

I've got lots to do. I'm not going anywhere.

Shannon Cross -- Cross Research -- Analyst

In terms of the 3D print business, maybe you can talk a little bit about what you're seeing with customers, how you're seeing the ramp. I know you have a few new products that will be coming out this year. So, just curious as to how it's progressing in line as to your expectations.

Dion Weisler -- President and Chief Executive Officer

I'm really excited about the leadership position we've taken in 3D printing in the segment that we operate. In a very short period of time, we're on a path toward disrupting this $12 trillion manufacturing industry. But it's a long path. I've always said this is a five to 10-year journey and we're making the investments today to really secure shareholder value, both today and for the future. We're seeing significant sales momentum, including repeat orders from customers as well as service bureaus.

We're expanding our adoption across key verticals. We're seeing 50% of the customer benchmarks. So, these are when a customer is contemplating buying 3D printing, they'll give us a file and they'll say, "Can you make this part for us? We want to see and test this part." We're, of course, checking what that part is for and in 50% of the cases, they're for production applications, which is really what differentiates us with this technology.

Some of the recent highlights, Forecast 3D, one of the oldest and largest 3D manufacturers in the US has expanded its multijet fusion footprint. It's upgrading its entire fleet to our 4210 solutions. As they respond to the growing demand, they're expected to produce millions of parts on multijet fusion in the coming year.

Jabil, one of the largest contractor manufacturers is now deploying multijet fusion in the US and Asia as part of its distributed manufacturing strategy. This quarter, we also continued to grow unit placement across all verticals and geographies including new customers in the automotive and electronics industry. We officially announced market entry into Mexico as well. Stay tuned. This is a great business for the long-term and we remain really confident.

Shannon Cross -- Cross Research -- Analyst

Thank you. Then Cathie, I had a follow-up on cashflow. I know Steve is going to probably kick you if I ask this, but from a 50,000-foot level, this year, obviously, cashflow has been up year over year or should be, so how do we think about it from a recurring going forward. Obviously, PCs play into it, but when we think about more the recurring level of cashflow that should come off the model, maybe you can talk about puts and takes that happened this year that will or will not repeat.

Cathie Lesjak -- Chief Financial Officer

Sure. Thank you for the question. I probably should have mentioned this when we were talking about cashflow. Over time, cashflow basically grows in line with earnings. So, we do get a timing benefit when personal systems has a particularly strong growth sequentially because, of course, it has a negative cash conversion cycle. But over time, the cashflow that it generates is going to be largely its profit. So, there's a pull in for cash. So, over the long-term, you should really think about free cashflow being in line with earnings.

Operator

Our next questioner today will be Wamsi Mohan with Bank of America Merrill Lynch. Please go ahead.

Wamsi Mohan -- Bank of America Merrill Lynch -- Analyst

Yes, thank you. Congrats to you, Cathie, from me as well. Your margins remain pretty robust despite these commodity headwinds. Can you talk about the commodity environment in terms of memory, both DRAM and NAND? I think you said some commodities will be a headwind. How have they changed relative to your expectation from last quarter? Are you seeing any impact from extended lead times and some items like passives? I have a follow-up for Dion.

Cathie Lesjak -- Chief Financial Officer

Wamsi, we have seen an increase in commodity costs. If you think about going back to our security analysts, meaning we actually thought it was going to flatten out in Q4 of last year or toward the end of Q4 last year. So, we have seen an increase that at that time, we had not expected. But as important as commodity costs are -- by the way, the logistics costs are going up a bit -- it's really about how you respond. What are the tools at your disposal to figure out how you mitigate those types of increases? This team has just done a tremendous job at mitigating and managing in that environment.

In fact, I put my money on them in a tough commodity environment. So, think about it, we've used things like pricing. We've used our supply chain scale. We've leveraged our balance sheet. Then to go back to Tony's question. We've done a great job of driving positive mix. So, those are the types of things that we will continue to use to manage this tough environment and I have every confidence that we will continue to be successful.

Wamsi Mohan -- Bank of America Merrill Lynch -- Analyst

Okay. Thanks, Cathie. Dion, as a follow-up the question on the strategic changes that are happening, can you talk about the opportunity if you are seeing any that has been created for HP, particularly in managed print services and the copier space, given some of the events at Xerox and can you give us an update on your ink in the office initiative as well? Thank you.

Dion Weisler -- President and Chief Executive Officer

Sure. The way I think about change in the marketplace is that change equals opportunity. While there are competitors that are distracted with structure, that generally presents an opportunity in the marketplace. What we're doing is doubling down and playing our own game. If we're out in front of a customer making a call and our competitors are gathered around the water fountain, then we're out in front of the customer and that's really where we want to be spending our time.

I think we have incredible assets within the organization. We are very focused on managed print services. There is no doubt the business model is shifting, even in the traditional A4 space, it's moving from transactional to contractional. It's happening at a different pace in every country, but it is a mega trend that we certainly want to be out in front of.

Managed print services we've been doing now for many years and I think we have really mastered the art of how to manage this for a customer, the pipeline for managed print services, but device as a service is really strong. So, PC is a service and increasingly, customers are looking to have everything, their print and personal systems, their workstations, and even 3D printing in the future as a service. So, we remain focused on that.

With regards to ink in the office, it's an important part of our overall strategy. We have two incredible technology platforms. We have an ink-based platform and we have a laser-based platform. As we talk to a customer, we don't sell them a technology. We understand what their needs are and every department, every user has an individual need. The marketing department is going to want laser-based quality. They're going to be wanting really vibrant color when they print proposals, the same with sales. Inside Cathie and now Steve's organization, they're a little more frugal. They want to see more red and black.

Cathie Lesjak -- Chief Financial Officer

And green. We'd like to see some green.

Dion Weisler -- President and Chief Executive Officer

You'd like some green on headlines. That's good too. It doesn't require the same high-quality. You get incredibly quality with ink, but just not that glossy quality. That represents a really unique solution. It means that when we go to a customer, we can provide this mix of hybrid solutions down to a departmental and individual basis that makes our offerings very unique and compelling. That's' what we're focused on, playing our gam.

Operator

And our next questioner today will be Amit Dayanani with RBC Capital Markets. Please go ahead.

Amit Daryanani -- RBC Capital Markets -- Analyst

Thank you. Congrats on my end as well to you, Cathie. Two questions -- when I think about the commentary you guys have on supplies for next year being slightly up, I understand you don't want to break down the delta from HP and S Print. But the supplies commentary would suggest that your install base is declining at a faster rate today post-S Print versus what it was before. Is that a fair assumption to take away from your commentary for supplies on Fiscal 19? If so, when do you see the install base starting to normalize as you go forward?

Cathie Lesjak -- Chief Financial Officer

Amit, the core HP install base I don't think is declining at a faster rate, but clearly, the S Print portfolio will decline at a faster rate. Part of that is because of the nature of the units that S Print put into the market, but also because we rationalized SKUs. That's why it's not meaningful to talk about S Print separately from HP because they're one and the same. The better job we do at integrating, the better value for our investors and the fact of the matter is you can't separate the two.

Amit Daryanani -- RBC Capital Markets -- Analyst

Got it. I'm trying to get a sense, when do you think the combined install base starts to normalize and has the same trajectory that HP did a year ago? Maybe just my follow up -- how do you think FX within your guidance for the full year given the fact that you've had some fairly volatile currency moments of late?

Cathie Lesjak -- Chief Financial Officer

I think I take you back to the security analyst meeting, where we talked about what we thought was going to happen at the home, the office, and the graphics level in terms of the four-box model. So, from a home perspective, we did expect that the install base would continue to decline. From an office perspective, we thought the install base with the addition of A3 would be flat and that from a graphics perspective, we thought the install base would be up. That gives you a sense of what's happening from an install base, our expectations from an install base perspective.

Dion Weisler -- President and Chief Executive Officer

I think we continue to successfully execute those growth initiatives. It takes time. We had certainly expected it to take time. We entered into a new $55 billion business, the A3 business, where we have very low market share, we know that it is going to take time to develop that business, but we remain really confident that we'll achieve the 12% market share that we set out to achieve by 2020.

Cathie Lesjak -- Chief Financial Officer

I think it's important when we talk about S Print that we separate the A3 business, which was a very small part of the Samsung Print business. It was really all about the future with their technology. It's the A4 piece of the S Print business the install base coming down pretty significantly and to Dion's point, as expected.

Dion Weisler -- President and Chief Executive Officer

I want to answer the second question on FX. Amit, do you want to repeat the question?

Cathie Lesjak -- Chief Financial Officer

Amit, can you remind me of the question on FX?

Amit Daryanani -- RBC Capital Markets -- Analyst

Yeah, Cathie. I was trying to get a sense of how you think about FX or the impact of FX, which has been fairly volatile with your July guidance or full year guidance.

Cathie Lesjak -- Chief Financial Officer

Sure. FX has been very unpredictable. When we think about where the dollar is trading today, we think about the impact of revenue as a result of FX for the total year would be approximately two points. Obviously, most of that impact, the vast majority of that impact was happening in the first half.

Operator

And the last questioner for today will be Jim Suva with Citigroup. Please go ahead.

Jim Suva -- Citigroup -- Analyst

Thank you very much. Cathie, great results and outlook. My question is Cathie, can you specify is that equal among S Print and your core typical print or more on the graphics side or the 3D print side, the supplies side? Can you allocate where those incremental investments are being allocated? Thank you.

Cathie Lesjak -- Chief Financial Officer

So, Jim, the biggest impact to FX was the addition of S Print in the portfolio from a year over year perspective. But as I mentioned, we did make incremental investments in R&D and go to market. Those are along the initiatives that frankly, we've been talking about now for several quarters and A3 figures prominently in that, especially along the go to market line. In terms of the specifics of how much is in the core in the A3, S Print, graphics, we don't typically go into that level of detail. But I would say that you think about the initiatives you have for growth and that's going to drive where the OpEx investments are being made.

Jim Suva -- Citigroup -- Analyst

Thanks so much for the clarification and detail.

Dion Weisler -- President and Chief Executive Officer

Great. Thank you. We're at the top of the hour. I'd like to reiterate that I'm very pleased with the results of the quarter, but as always, there's more work to do. We remain confident in our strategy. Our reinvention is paying off. I believe our best years are yet to come and finally, I, again, want to thank Cathie for her incredible partner and I look forward to having Steve here on the call next quarter and to speak to you all then. Thanks so much.

Operator

And the conversation has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.

Duration: 55 minutes

Call participants:

Beth Howe -- Head of Investor Relations 

Dion Weisler -- President and Chief Executive Officer

Cathie Lesjak -- Chief Financial Officer

Steve Milunovich -- UBS -- Managing Director

Paul Coster -- J.P. Morgan -- Analyst

Sherri Scribner -- Deutsche Bank -- Analyst

Toni Sacconaghi -- Sanford C. Bernstein -- Analyst

Katy Huberty -- Morgan Stanley -- Managing Director

Shannon Cross -- Cross Research -- Analyst

Wamsi Mohan -- Bank of America Merrill Lynch -- Analyst

Amit Daryanani -- RBC Capital Markets -- Analyst

Jim Suva -- Citigroup -- Analyst

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