HP Inc. (HPQ) Earnings Call Transcript & Summary

Thank you, and welcome, everyone. I'm Toni Sacconaghi, Bernstein's IT hardware analyst. And we're very pleased to have HP Inc.'s CEO, Enrique Lores, join us today. Before we start, I have a few housekeeping items. First, HP has asked me to put forth the statement on forward-looking statements. And that there may be forward-looking statements in this conversation. More details can be found on HP Inc.'s website. Secondly, I wanted to remind people that we do have an ability to have interactive Q&A. It's a technology called Pigeonhole, which some of you may have used in the conference. There is a link on the left-hand side of your screen, and you can access that link now, and you can not only submit questions, but you can also vote on -- there are some questions in there now. You can vote on which questions you think are more appropriate. So feel free and go ahead to click on that link right now or at any point during our conversation. Secondly, we are working with Procensus, who's a partner of Bernstein's, exclusive partner to do live polling of inventer views on each company at the SDC. There's also a link on the left-hand side of your screen where you can do that. At the end of the conversation, please take a minute. You can enter your views on HPQ. And at the time, it will also give you aggregate results for other people who have participated in the survey. So I just wanted to remind you of that. So without further ado, why don't we plunge in? Enrique has probably had the most eventful 6-month -- first 6 months as CEO of almost anyone I can think of. And I -- it was actually incredulous to me as I was going through the history. So -- and correct me, Enrique, if I'm getting in this wrong. It was last August that you were announced to be CEO. You officially became CEO in November. That was right after the Analyst Day where supplies have been disappointing last year and HP announced a large restructuring and a business model change. So welcome to being CEO. And then shortly after, Xerox launched hostile takeover for HP. And then just to -- and HP put forth its own value creation plan. And then to top things off, there's a global pandemic. So how's that for your first 6 months on the job? The fact that you have a smile on your face and are taking time with us is much appreciated, Enrique, and welcome.

Yes. What I can say is I'm incredibly proud of having the opportunity of leading this iconic company. I strongly believe we have an opportunity of continuing to create value for our customers. And actually, as we'll be talking today, some of the trends that we have seen in the last week have just confirmed that. And if we create value for customers, we will be creating value for shareholders. So very proud to be here. And yes, has been an intense, 6 months. But I'm still smiling, and I will continue smiling in the future.

Great. Well, welcome. You reported fiscal Q2 results last night. And maybe we can just chat a little bit about those. Revenues were down 11%. EPS was down 4% year-over-year. And you highlighted relatively strong PC demand. But PC revenues fell 6% at constant currency. And so I'm wondering if you can comment on that demand profile. Like, what did orders look like? How should investors think about the fact that -- about either your backlog or unfulfilled demand in the quarter. So maybe we can start there.

Sure. Actually, let me say that given the environment, we are very proud of the results that we posted because, yes, profit went down but was aligned to our expectations and also actually above where market consensus were. And revenues was impacted by -- we saw both disruptions on supply chain and also on the demand side. But let me go to your questions on PCs. What we saw during the quarter is actually very strong demand on the PC business. As companies send employees to work from home, kids started to study from home, all this drove very strong demand for the category. If revenues were down, it was not because demand was not there. It's because of the supply chain problems that we had that we outlined in our call in February. But for the first weeks of the quarter, factories in China were down, were not -- were closed. This had a significant impact in our ability to ship product during the quarter. And as we said yesterday, we finished the quarter with significant backlog. What we mean by that is we finished the quarter with a large number of orders that we were not able to fulfill during the quarter. So customers that wanted product that we were not able to ship during the quarter that we will be shipping during Q3. So actually, from a Q3 perspective, are good news because our units that we know we have demand, that units that we will be fulfilling but impacted our ability -- of revenues in Q2 and also is the reason why inventories at the end of the quarter were higher than they usually are.

And Enrique, just when you said very strong demand, should investors be taking away that orders for PCs in the quarter grew double digits? So I mean, is that -- when I hear very strong demand, and I realize you couldn't fulfill it. But is that sort of the kind of message that we should be thinking about in terms of the demand profile?

We will not -- we have not shared what the number is. I wouldn't say double digit, but significant demand that we will not fulfill in. And again, comes from a variety of reasons. As companies had employees working from home, they wanted to enable them. They activated many of their BCPs. We have also seen very strong demand in the education space, both, let's call it, consumer-driven by also funded by government. And this is something that we are continuing to see in Q3.

And just from a demand perspective, obviously, the supply perspective changed. Was there sort of pretty steady linearity for PCs throughout the quarter? From February, March, April? Or did that accelerate at all as a result of the pandemic?

We saw an acceleration as a consequence of the pandemic as, again, as companies started to shut down and enable employees to work from home, this started to drive demand at the beginning. And then, through the rest of the quarter, we saw also the increase on the education categories.

Right. So -- but it was like -- it sounded like April was better than February from a demand or order perspective because the pandemic was there, but was it linearly growing throughout the quarter? Or did you see this huge spike when businesses shut down in March and then -- so you went February, then big spike in March and still strong in April, but not as dramatic.

I think that, first, we saw the spike driven by businesses. And then we saw it driven by education. So I wouldn't say both of them were simultaneous. So it was more and more gradual.

Okay. Now on printing, you commented that, particularly in April with businesses shut down, that print volumes in corporate clients were down dramatically 40% in the month of April. And I think that's intuitive, very intuitive to me. I think the biggest question I had coming out of the call was that IPG margins fell a lot. They fell 300 basis points sequentially. And the reason why it surprised me was twofold. One, there was a mix shift to supplies. Supplies were 68% of printing revenues. Last quarter, they were 64%. Supplies obviously have much better margins. So there was a positive mix shift on supplies. And when I went back to 2009 and the same phenomenon happened, printing was down 19% in 2009. Supplies were down less, hardware was down more. Printing operating margins went up 250 basis points. And so both of those led me to think, boy, this is a surprise. So why did printing IPG margins decline so much sequentially in year-over-year despite the mix shift and despite what we had seen historically in '09?

Yes. I think the key driver is the customer behavior that we saw during the quarter. As companies shut down, what we saw is demand for both supplies in the office category, but also for products in the office category, was significantly impacted. And we actually show the same thing in the graphics page. Both hardware and supplies were significantly impacted. And different from what happens in the consumer world, hardware margins in office and in graphics are positive. So when these businesses are so impacted, as we saw, this has an overall impact in the overall -- in the margins of the overall print category, which is different from what we saw in 2008 where the impact was more consistent across different categories. This really -- it's fact that companies started to send employees to work from home, which meant not many pages were printed in the office. But also, they reduced their investments for equipment in the office. They reduced -- we couldn't install many of the units that we had orders for. We couldn't -- and the same thing happened on the graphics space where installations were stopped, companies stopped all capital investments. This had a major impact in margins. And this is why since we expect this to continue in Q3, we shared yesterday that our expectation is that Q3 will be worse than Q2. Because in Q2, we had 1 month, 1.5 months of significant impact in the side of the company. In Q3, we expect 2 months to 2.5 months, 3 months, depending on how fast the recovery goes. This is the key driver.

Right. But Enrique, I understand that corporate hardware can make money. But inkjet supplies are much more profitable than corporate supplies because you share profits with Canon. And so not only did you have more supplies, and supplies are always more profitable than hardware, but you even had a favorable mix shift within supplies, to inkjet supplies, right? And so the mix dynamics like running the math are actually like pretty significant in terms of the upward pressure on margins. And so I noticed that ASPs were down 8%, I think, on the corporate side for printing. So was there a negative mix shift? Or was there incremental pricing pressure in an effort to place units that also impacted margins? Because I hear you on the hardware side. But I feel like I raise you on the mix side, in terms of inkjet supplies having better margins than laser supplies and those has held up better, I would imagine, given your commentary. So was there pricing pressure in the quarter and was that a contributor to margins?

There was not significant pricing pressure during the quarter. And what really the key driver is what I was mentioning before. On the supply side, yes, the overall mix of supplies grew, but we were extremely disciplined on how we manage inventories for the total category, and we actually managed that very, very tightly through the last parts of the quarter. So this is really the key reason of the margin impact.

Is there much fixed cost in the printing business? So was there a lot of operating deleveraging? Or clearly, on the laser side, you have a relationship with Canon and they basically give you the products. So I would imagine that's very variable cost in inkjet hardware, very variable cost that you do make some of your own print heads. And so I would imagine there's a little bit of fixed cost there. But generally speaking, how do you characterize the fixed versus variable cost nature of IPG?

I think you highlighted it well. On the office side, mostly on our traditional business, it's very variable because the key investments, factories and rest of investments, are done from Canon. On the inside, clearly, the ink factories are the key fixed cost that we have. We have more fixed cost on the graphics side, where we both produce supplies and the printers, which also had an impact on the gross margin. But again, the impact of the fixed cost in the overall margin erosion is smaller than the driver of the impact of demand that I mentioned before, Toni.

Okay. Now if we just think about -- we kind of step back and think about IT budgets for this year. How do you think IT budgets this year are going to look? IT is -- spending is typically correlated with corporate earnings. We saw IT spend fall dramatically during the great financial crisis. Do you expect, in aggregate, that, that would be the case this year as well?

Actually, something else we did yesterday is we withdraw our forecast for the full year because we see clearly that the situation is going to be fairly unstable. It's very hard to predict what is going to be happening in -- especially in Q4, given all the different things that could happen from finding a vaccine, not finding a vaccine, entering a recession, not entering a recession. So this is why we withdraw. And I think part of it is what is going to be our ability to predict what the overall IT investments are going to be. What we know is that demand for some of our categories has clearly been positively impacted. We have talked about business. This clearly has become more -- they have become more essential, both for companies, but also for consumers. And what we know is that what we are doing is building different scenarios that will help us to navigate in this changing environment. More than having a specific number, we really try to understand what are the potential combinations so we are ready to respond. And we have proven in the past that we know how to navigate in these situations.

How do we think about sort of the longer term? So I get that people need to work from home and they want to upgrade their PCs or they need a PC. But is there a risk that you're having sort of this powerful cycle now and you're pulling forward demand? If I think I'm a company, my IT budget is probably going to get cut relative to what it was at the beginning of the year because my company is making less money. And I already spent more on PCs than I thought I would. I mean, is there a risk, especially since you're lapping the corporate upgrade cycle in PCs, is there a risk that the demand strength you're seeing now in the second half of the year or early next year goes the other way and you actually have a material fall off as this recent demand kind of gets absorbed? And how do you think about that?

Let me talk about the medium-term, long-term opportunity that we see. Of course, what is harder is to project exactly what will happen every quarter because there are ups and downs and compares might be more difficult. On the medium term, what we see is that the opportunity -- we are very optimistic about the opportunity with PCs. What -- if you think about PC category a few years ago, the objective when it started was to have 1 PC per home. What we think now is that we need to move into a model where there is a PC per person. What this crisis has shown is that if you want to be productive, working from home. If you want your kids to be productive learning from home, you need to have access to a PC. It's how you learn better, how you are more productive, how you work better. And this is going to be changing the amount of PCs per household. And this is something that we have seen both on the corporate side, but also on the consumer side. And this is opening a medium-, long-term opportunity for PCs. And when I talk about PCs, it's actually not only PCs, but it's the overall category; applies to monitors; applies to mice; apply to keyboards. The whole category is going to get a significant tailwind driven by the need of people to be productive, learning, working and actually, also playing. Productive is probably not the right word. But we have also seen an increase in demand on the gaming space. And if there is anything that we are confident about this, about the business going forward compared to where we were in February, it's about the opportunity on the personal systems business.

So in PCs, you think there actually may be a structural positive improvement near term. Yes, good, maybe it'll lap some tough comps and it will be tough. But you think structurally, this is a shift. Now how about printing, structurally? So my observation is, I've been working at home probably like everyone for 3 months now. And we have a virtual desktop enterprise, VDI, which means I can't print. When I'm on my work, if I try to print something, it would go to my office printer, which wouldn't really help me. So for me to print something, I have to forward it to my personal e-mail account, which isn't legal in the financial industry. So I've just gotten used to work working off of 2 pretty big monitors. And so I guess the question is, sure, people aren't going to the office, they're not printing. But isn't there a risk that behaviorally, much like you're saying in PCs, behaviorally, people are meeting a productivity tool for school, for home, PC is more valuable. Behaviorally, isn't there a risk that there could be an incremental pressure, not only from people not going into the office and your sister company has said, they think maybe only 50% of the people will ever come back to work? But also just people like me who used to print a lot and have been forced out of necessity not to print. How do you respond to that?

So 2 things. First is, we think that this is a trend that is going to happen that more and more people will be working from home. But the fact that we have a strong office printing and a strong home printing is actually a significant competitive advantage for us. Conversations we are having with many corporations now is we want our employees to be able to work from home. We need PCs, we need monitors and also, we need printers, because employees want to be able to bring from home. And in this conversation, 2 critical things are always on the table. First, is how do we connect those printers to the managed print service contract that we have. Because in most cases, we are managing the printer fleet for these customers. And now they want to extend that to their employees working from home. And the fact that we have a strong subscription business and we have built those connections makes it easier. So again, it's a competitive advantage. Second question is as you just said, we want to do it in a secure way. Our employees are having access to information. We don't want this to be available without all the security restrictions, help us to do that. So -- and as you know, security has been one of the areas where we have been investing for a significant time. So again, we think the trend is going to change. We think that we need to help customers to drive this transition. And we think that having a strong home printing business is actually an important asset as we go through this environment, through these changes.

Right. And I can see some of that shift in printing volumes. I just wonder if, a, either behaviorally, I'll print less because I've accessorized with large monitors, which are HP monitors, by the way. And -- but -- or -- I think printing is a function in part of the speed of your printer, right? So I no longer have the MF multifunction device, 10 feet outside my office that can print 100-page document in 2 minutes. I have a portable printer which prints -- might take 6 or 7 minutes. And so I get that there will be some migration in pages printing and you're well positioned to capture that migration. But isn't it fair to -- or are you not worried that aggregate pages may incrementally be impacted?

So as we had discussed before, we -- the trend of, especially in developed countries, the trend for fewer number of pages printed is a trend that has been happening and was built in our plans until now. Could this accelerate is, again, hard to predict. But by helping customers to drive this transition, we think we can capture a bigger part of -- portion of those pages. It's going to be an advantage. What you are describing is part of the conversations that we are having now, what is the right portfolio that we need to build for people working from home. And we -- this gives us an opportunity, both on the printing space and on the PC space, to change how some of our products are built and designed. And you also mentioned something very important before. Our margins in the ink side are better than in the toner side. So also, long term, this is part of the opportunity that we see.

Well, maybe we can use that as a segue to talk about some of the new printing model changes that you articulated at SAM in the fall. And I think as context, last year, supplies were disappointing. I think you would hope that they would grow and then they declined mid-single digit. So maybe you can speak to what happened, which I would say was more prevalence of cloning and ongoing pressures in developed countries to print less. But I'd like to hear it in your words. And then maybe you can talk about the new printing model that you talked about and the plan for sort of changing the business going forward?

Sure. So we -- I mean, we have explained what happened last year, so nothing new to add. We were facing 2 -- we faced 2 different issues, an operational issue in EMEA that we addressed, and also a strategic issue driven by share losses, especially on the toner category that we decided to address through the evolution of the business model that you were mentioning, and also by being more focused on protecting our share and taking additional actions on protecting toner share. Specifically in terms of the evolution of the print business model, if the changes we have seen in the last week have actually -- are actually helping us to accelerate and to drive that change. If you recall what we explained, the change of business model is driven in 3 different ways. First is with a shift of the businesses into as-a-service model. And Instant Ink is the model that we have in the consumer side, and we have seen a significant increase in the adoption of Instant Ink during the last weeks as people have gone to work from home, learn from home and the printing volumes have increased. And we mentioned yesterday that we have now more than 7 million subscribers in the Instant Ink program, which is a significant acceleration of the growth from where we were only a few months ago. Second change is by evolving our business model into what we call an end-to-end model where customers will be able to buy the printer at a similar price that they do it today, but that printer will only work with HP Supplies. We are going to be launching this model late this year. And we have been testing the concept, both with end users and with retailers in several countries of the world, and the feedback we are getting is very positive. So we are on track to start the launch of this new model in the -- later this year. Feedback we are getting is very positive. But let me remind you that this is a change that will take several quarters because we are going to be changing the full transactional category. And then the third change is for emerging countries, where we are building these new concepts where printers come with toner or with ink. We launched this category 18 months ago, 12 months ago, and we continue to see strong demand for these categories in emerging countries. So nothing has changed versus what we explained in October and in February. We are making good progress. If anything, is this acceleration of Instant Ink is going to be very positive because we really want to drive as much business as possible into a subscription model.

And how do you think about -- or how should this concept of, you will only be able to use the printer with HP Supplies, right? I guess the snarky question is, well, if you could do that, why haven't you been doing that for the last 10 years. And the remanufacturers and the clone makers have been very ingenious in finding ways around various programs that you've put into place. So what ensures that this is a locked model? And secondly, how much of your business -- what percentage of your SKUs do you envision offering in this? And what is the time frame? I think originally, you had said years. So how do we think about this?

Sure. Several things. One is we can do that because we are going to be offering customer choice. We will be offering the end-to-end model where customers will pay for the printer at similar price when they pay today, and then it will work with -- only with HP Supplies. But we will also offer a model where the printer will be at a higher price, but it will work with supplies from other vendors, which means that, that unit will be more profitable. So it will help us in the rebalancing of profit between hardware and supplies, which is a very important part of our strategy. In terms of mix, the mix is going to be different country by country. There will be countries where the majority of the products will be towards the end-to-end model. Other countries where the majority of the mix will go into the model where products will be sold at a higher price, but will work with others for consumables. We have shared before that in China, we already have that model where our printers are priced as a premium versus competition, and we have very high share in China. And within this model, for countries like Brazil, countries like Russia, is the right model and this is what we will be driving. So we will -- you will not see from us the same mix per market. It's going to be driven by the specific situation in every country. Why we can do that, why we can do it now also is because of the technology that we have. Behind the end-to-end model is a system to connect online cartridges and printers. Actually, what we do is we are going to be leveraging the technology that we have built for Instant Ink. This same concept that we have now where printers detect where the cartridge is, recognize the cartridge and then the printer works is behind the new models that we are going to be building.

And just as we kind of roll this through, I recognize that when people buy the higher-priced printer, you'll make money on hardware. But the total system economics can't be as attractive as they are when someone buys a hardware and then buys supplies. So I appreciate that that will help hardware margins. But overall, profitability, I imagine, would be lower. So how do we reconcile that you've been kind of at 16% operating margin for the last couple of years, your target is higher than that, 16% to 18%. Even though I would think if, let's say, 20% or 30% of your business went to China-type model where it was an open model, system profitability would invariably be lower.

Actually, we expect system profitability to be higher because an important factor or driver of the change is the fact that today, we lose money with about 25% of our customers. Meaning, these customers buy a printer at where we lose money when they buy, and then they never use HP Supplies. And therefore, we never recover the investment that we made when these customers bought the printer. With the new model, either those customers will have to use HP Supplies. Either they will buy the printer at a higher price, which means we will make money. Or if they decide that this offering is not attractive for them, they will buy a printer from the competition, which means we may lose some share, but it's a share we are happy to lose because these are our customers that we are losing money with. So we are actually happy if they buy a printer from the competition because then someone else will be losing that money. So that's an important part of the change because this is going to have an impact on the revenue -- on revenue and share. And we said in October, and we said it again in February, that we expect to lose some hardware share because of this change. But overall, profitability will be higher because we will have better customers that will be more loyal to HP Supplies or profitable because they will have bought a unit where we make money.

So is your profitability for IPG in China today higher than it is than the rest of the world?

Is -- we don't disclose it country by country, but it's -- we have very good profitability in China.

Okay. So I'm just looking at my Pigeonhole questions here. What's the steady state? How do we think about the steady-state growth rate for supplies? What if it turned out to be minus 5%? You put forward a plan of 3.25% to 3.65%, so something is clearly embedded, COVID aside. I think the math that we've done is, over the last 6 or 7 years supplies have gone down about 3%, 4% per year compounded. So I guess the question would be, if it's been 3% or 4%, why isn't 5% a year down, particularly if you might lose some hardware share as kind of a working assumption? Is that the right way to think about it?

Actually, Toni, what we have said is that we are not going to be providing a range of what supplies -- what the evolution of supplies is going to be. But the whole concept is really based on the fact that going forward, the profitability of the overall business is not going to be driven by the profitability of supplies. This is why rebalancing the model is important for us. This is why also as we look forward, what we confirm is what is going to be the margin -- the operating margin of the business, which will be between 16% and 18%. In these models, we are assuming supply will not be growing. So we don't need supplies to grow to deliver the goals that we shared in February. And nothing has changed from that in this account.

But can you get to the longer-term targets prior to this business model change occurring? And it sounds like this could be several years for the business model because you're rolling it out by geography, by model. You yourselves have said, well, we're not exactly sure how competitive response is going to be. And so it's not a definitive launch or playbook. But it sounds like it's kind of necessary for that to be in place for you to have better printing margins. Is that fair?

Well, let me go back to -- I realize I didn't answer your question about time. So the business model evolution has already started. If you think about the shift into subscription, it's something that has happened and is accelerating. The shift into management services has been going on for some time. The shift into printers, where you have the ink or toner included in the printer, we started last year. Only the change to end-to-end systems is the one that we will start this fall. But the change has already started. And as we shared yesterday, it actually -- the pace is accelerating because of this trend. In terms of the end-to-end, it's going to be taken between 18 and 24 months to change, to evolve the full portfolio. We will be going family by family. Every 6 months, there will be new parts of the portfolio in the new model. But given the breadth of our portfolio, it's something that is going to take time for us to change. And all this is built into the assumptions that we have explained.

Okay. I was wondering if we can talk about the value creation plan that you outlined in February. And a really central part of that plan was to accelerate buybacks beyond the pace that you had done before. And I feel like, at least based on investor questions today, there's still some confusion on how -- whether that -- whether there's any change to that plan other than timing and magnitude because of debt? Or are you committed to the kind of capital return, both ongoing and by taking on debt to your target levels that you're committed to doing that?

Yes. So let me -- I think that's a great question, Toni, and it's one of the areas I wanted to make sure we covered. I think when we talk about the value plan, there are 2 themes to discuss. One is -- first is, how do we see the financial targets that we shared in February? And second is, what is going to be our capital return approach. In terms of the financial targets, we are fully committed to the targets that we share. We have some questions on timing. During the last months, we have seen both upsides and downsides. At this point, it's very early to say if the plan is -- if we are going to be delaying or we will have to delay the plan. And if we do, by how much. But we maintain that as the goals that we have. And we see upsides like accelerating some of the cost activities that we had put in place because of the crisis. We see downsides driven by demand in other areas. But we have not changed the commitment to these targets with the exception of timing.

And just to be clear though. So the operating margin targets of -- for print of 16% to 18% and 3.5% to 5.5% in IPG. That's what you're referring to though?

Yes, I refer to that. And also the operating profit growth year-on-year that was supporting also the EPS expansion that we shared in the plan. The second part is, how do we -- how will we be managing our capital structure and how fast we will be returning capital to shareholders. What we shared yesterday is that we stayed committed to the principles that we shared. Principle number one, we think it's important for the company to be investment grade. And we have seen during the last weeks how important really this can be. We also acknowledge that we see an opportunity of increasing debt because we think we can manage the company with a leverage ratio between 1.5 and 2, and we are not changing that. And we also shared that we will be returning to shareholders 100% of free cash flows and any excess cash that we will get as a consequence of increasing debt to stay within this -- within the leverage ratio that I mentioned before. No changes there. What we need to see is how aggressive we want to execute that plan given the environment where we are. There are many uncertainties in terms of economic recovery. We don't know what is going to happen in Q4, Q1, Q2 and it's not so much concerns about our business. Our really concerns are about the overall economic environment. And this is why we said, at this point, we're going to be taking a more prudent approach. We want to see what happens with the overall economy before we launch the more aggressive plan. What we are going to do, and this is something else that -- from questions after the call, it's clear that we want to clarify. We are going to be active in the market starting now. And Steve said yesterday, we are going to be net -- we are going to be creating positive free cash flow in the second half. It's not marginal. We will be free cash flow positive in the second half. And you should expect that starting in Q3, the amount of share buybacks will be very similar in magnitude to what we were doing before COVID. So in Q1, we bought between 600 million and 700 million of shares -- sorry, 600 million or 700 million of shares. You should expect something similar in Q3. And we are going to be starting to be active as soon as the window opens.

Okay. Now why would you not borrow money now so you can be ready? I realize that your EBITDA will be lower so maybe the amount that you could borrow -- but rates are really low. Many companies have borrowed money now. Why wouldn't you sort of get that dry powder ready so that you could do it? So you're basically saying, look, the operating side of the buybacks, there's no change. And the only thing is how much debt we take on and how much cash we need to keep on our balance sheet. But the rest, we're going to buy back shares. Why wouldn't you take on the debt right now?

Yes. We are not going to disclose when we will be raising debt. Again, I said that we see an opportunity of going between 1.5 and 2. We are being prudent given the environment. But again, we are going to be staying to the principles, and we will execute on them as soon as we think the environment will advise us to do it.

And there's no limit in terms of -- your share price is obviously quite a bit lower than when you announced the plan, right, which means you could buy back a lot more shares if you ultimately committed the same dollars. Is that the right way to think about it? If the average price, which, by my analyst math, you were assuming, on average, was like high 20s in your original plan to take out 400 million shares, which was what it was implied, $13 billion. So it was kind of a high 20s number. That number ends up being $20 average price. And you can buy back 500 million shares instead of 400 million, you'll do it? There's no limit or gate in terms of how much you'll repurchase?

I think more than the number of shares, what will guide us are the principles and the belief that the shares will be undervalued. We think that the shares are undervalued today, and it makes sense to buy back. If a year from now, 2 years from now, this is different, we will look for other ways of returning capital to shareholders. But while the share will be undervalued, we will be applying the principles and buying back shares, not limited by the number.

Right. Okay. We just have a few minutes left. So you've been great about giving short answers. Maybe we'll make them even shorter so we can get through a few on the Pigeonhole. 3D printing has been HP's next big thing for more than 5 years. What's the likelihood that 3D printing will contribute material revenue in the next 5 years? And I would qualify material being account for 10% or more of IPG.

So I would say that what we have learned in the last weeks is how important this technology can be. We mentioned yesterday the number of medical parts that we have produced. We -- when I say we, I mean us and our partners and our customers, which has helped to show the value that this technology has because of flexibility, speed. So clearly, this crisis has helped to show the impact that this technology can have. At the same time, any changes in manufacturing processes take time. We are working with car vendors for cars that will be introduced 5, 10 years from now. So the change will take time. But if anything, this environment has helped to show the value that this technology has. Will this business be 10% of the company in the next -- of the printing company in the next 5 years? I don't think this will be there. But we'll see how fast change happens after the crisis because many companies are going to be looking at ways to make their supply chain more resilient now, and this will be part of this conversation.

Right. And then just on -- another question, the Xerox deal is dead. But do you believe in long-term consolidation of the printing market and under what conditions?

Yes. Let me maybe expand the question to overall M&A, I think, is important. So we have shared before, we have a very rigorous process to evaluate M&A opportunities. They need to fit in our strategy. They need to have strong returns because we will be evaluating any opportunity in our returns-based framework against other things, versus other things we can do with our capital. And third, we need to be convinced about the executability of the plan. It cannot be a nice idea; need to have a very solid plan behind that. We had shared before that consolidation in the office space, we thought it was an opportunity of creating value. We -- I haven't changed my opinion and think it is still there. But I think that this at this point in time, where we to focus is on executing our plan, especially given where the environment is today. And also to -- as we look at what is happening in the world, we think that there might be many opportunities both to support our core businesses, also to accelerate some of our growth businesses that will be driven by this crisis, and we are going to be monitoring them very closely. And one of the reasons to be prudent on how we use capital is to make sure in case an opportunity with high returns shows up, to be able to execute.

Right. You listed the 3 criteria for an acquisition more broadly. You were opposed initially to the Xerox acquisition. Which of the criteria did it not fulfill?

Actually, I was proposed to the deal that was put on the table. I thought and I keep my opinion. Strategically, it made sense. But the exchange rate between -- the exchange value between the 2 companies were wrong for our shareholders. And if you look at what has been the evolution of the shares of the 2 companies kind of proves that. And I also had very strong concerns about the leverage ratio that the deal was creating. It was about 4, close to 5, even higher given what has happened now. And if I think about that deal in the current environment, made my belief about how value distractive that deal was going to have been for HP shareholders. So our position was not against the concept. It was about the deal that was on the table.

Okay. Well, let me ask you a final question that we're asking all CEOs, which is, as you think through and beyond the pandemic, how do you expect your priorities to shift, especially as they relate to cutting costs or increasing levels of investment? So again, kind of beyond the pandemic, how do your priorities change?

I think that we look at pandemic as an opportunity for us to accelerate some of the changes that we were driving. We -- both on the portfolio side and also on the transformation side. On the portfolio side, we clearly see opportunities on PCs. on accessories. As we were talking before, our new goal is going to be have a PC per person, which creates a significant opportunity for PCs but also for accessories and for services around PCs. We see an opportunity of accelerating the business model transformation in print. We have seen an increase in subscriptions. We want to drive this even stronger. The fact that we have a home printing business and an office printing business and the need to connect them in a secure way and connect them financially for our customers is a very significant opportunity if the trends that we see now continue. And on the disruption side, both with 3D printing, the opportunity we see there with helping customers, helping companies to have more resilient supply chain are all areas where this crisis have opened opportunities for us to drive stronger. On the transformation side, we see opportunities to reduce -- to accelerate the cost reduction plans that we have, for example, in real estate. As you mentioned, many of our employees have been working from home for the last weeks. It has worked very effectively. We had a plan to close some of our sites. This plan is going to be accelerated because we see the opportunity of doing that. We are going to be reducing the amount of spend that we do in travel. We are going to increase the number of customer -- the amount of customer support that we do digitally through robots, through AI, all opportunities that we have outlined, where we see now the opportunity to accelerate. So the key, key message is we really are not standing still. And when -- and the crisis is giving us -- providing us an opportunity to accelerate, shift our portfolio into the areas where we see more opportunity and accelerate the transformation to reduce our cost and to be more digitally driven.

Okay. Great. Well, thank you so much for joining us today. I really appreciate your candor and your time, and it's great to see the HP garage behind you.

One day, I will invite you to join us there, Toni.

That would be great. Just to our participants, thank you for joining and for your questions. Just a reminder that we do have the Procensus poll on the left side of your screen. If you want to fill that in now, that would be great. Enrique, thank you, again. Have a terrific day. Really appreciate it.

Thank you. Thank you.