HP Inc. (HPQ) Earnings Call Transcript & Summary

Okay. Folks, I think we're going to go and get started. Thanks, everyone, for attending our session today. It's great to see you in person. My name is Ruplu Bhattacharya, and I'm with the IT hardware equity research team at Bank of America, which is headed by Wamsi Mohan. Today, we're honored to have Marie Myers here. As you know, she is the CFO of HP. But what you may not know is that she's had an extensive career at HP. She's been there since 1997. And apart from being CFO, she's also headed the transition department as well as the IT department at HP. So she's worn many different hats. She has lots of experience, and we're really looking forward to a very constructive and productive discussion today. So Marie, thank you so much for attending today.

Thanks very much, Ruplu. I appreciate it.

So before we get started, what I'm going to do is I'm going to pretend that I'm with HP IR, and I'm going to give you the safe harbor statement. So today's discussion includes forward-looking statements that involve risks, uncertainties and assumptions, which are further described in HP's SEC filings, including HP Form 10-K and 10-Q. HP assumes no obligation and does not intend to update any such forward-looking statements. For more information, please visit HP's Investor Relations web page at investorhp.com.

So with that, I think we're in the clear from a safe harbor standpoint, so let's get started with the discussion. Marie, you're in the CFO role now, but you've also -- you're leading the transition department. Can you give us your priorities for the medium term? And any changes that you would like to bring about over the next couple of quarters?

Sure. And thanks very much. Actually, it's the transformation organization. So -- but yes, no, in terms of our strategy and what we're doing going forward, I'd say, first of all, we've just come off the back of earnings, had a really strong earnings announcement. We actually had a beat and a raise, despite a really tough macro environment. I know there's been quite a lot of discussion at the conference just around some of the elements and what's driving that macro. But I'd say, in terms of our strategy and what we're focused on, first of all, as many of you know, we operate in 2 large markets, both from a PS perspective. We're in a market, which is growing from a revenue TAM perspective year-on-year. We're seeing units decline probably single digit, but we're participating in a very large market that's actually fundamentally much larger than it was pre-COVID. And then on the Print side of the house, Print is a very large TAM as well. And in the Print side, we expect that to be flattish, but we'll grow in line with market. What I'm really excited about are the growth vectors. We announced those at our Security Analyst Meeting last year. We've got key growth areas that are driving double-digit CAGR. They've got attractive gross margins. We expect to be more than $10 billion in revenue from those growth vectors at the end of this year. And moreover, we're investing in those areas, both organically and inorganically. And I know we're going to talk a little bit about some of the acquisitions we've done, so I'll save that for later. But then finally, in my role as Transformation Officer, we're taking out about $1.2 billion worth of cost. So I think we'll roll that program through the back half of this year. And then finally, as a company, we've been incredibly committed to returning capital to our shareholders. So this year, we expect to return $5 billion. We expect to complete our value plan of $16 billion return. And at the same time, we are a strong generator of free cash flow as well, and we expect to take in our target of at least $4.5 billion. So a lot to get excited about, despite a tough macro environment, Ruplu.

Yes. No, that's a great overview, and I want to touch on as many of these different segments as we can. So maybe just to start off with demand, can you talk about, both for the PC side as well as from the Print side, what are you seeing from a geographic standpoint in the 3 regions? You had talked about some weakness in Europe. How is that trending? And can you segment the discussion into both the consumer side as well as the commercial side?

Sure. A lot in that question, so let me unpack just revenue geographically. So obviously, as we mentioned at the outset, the macro is definitely impacting revenue in different pockets of the world. We've seen our Asia business definitely impacted from China. But moreover, both the U.S. and Europe became a bigger contribution rate in terms of just top line revenue. Now I would say we -- from a Russia perspective, we've seen the impact of Russia-Ukraine war on consumer, particularly in Europe. We've started to see a slowdown in consumer. And then in China, as you could imagine with the lockdowns, that's played into commercial. So there hasn't been as many people in the office due to the lockdown, so that's obviously impacted lockdowns as well. So I would say net-net, in terms of Consumer, Commercial, we've seen a slowing down on Consumer, but Commercial still remains strong and solid at this stage.

Got it. And I mean, would you say that on the PC side, the Commercial demand, do you expect that to continue through the rest of the year? I mean, what are some of the drivers for that?

Yes, absolutely. And in fact, we announced in earnings we see Commercial now driving around 65% of our revenue mix, which is, I think, a really good trend, and I would call it a trend because it's actually increasing, and there are some really important drivers of that trend. The first is just the Commercial refresh cycle that's going on. We have -- I don't know if you know, we've got about $400 million Win 10 PCs that are more than 4 years old. So obviously, there's a significant refresh opportunity for Commercial there. And secondly, we've got Win 11, which has started to gather momentum. So we expect that all of that is going to drive the Commercial. And then on top of that, I think what's most exciting is, really, the hybrid secular trend. That's clearly here to stay. I mean, I think we're all generally landing on the fact that people are in the office about 2 to 3 days a week. And so the need for commercial equipment and the need for commercial refresh is going to get compounded through hybrid. And we see that -- as I said, we see that as a secular trend. That's not going to go away. That's going to become just the way of working and the norm of the future.

Got it. You talked about the impact from the China lockdown. So is there a way to quantify that both from the situation in China as well as from Ukraine? How is that impacting supply and demand?

Yes. Let me start on Ukraine, Russia. So last -- the quarter before actually, when the war first broke out, we announced we'd expect to see about $0.02 to $0.03 of impact, which we did. And then in the guide we just gave out, actually, we raised the guide in the back half. What we literally did, Ruplu, is we absorbed the impact. So we are in the midst right now of winding down our Russia business. It's about $1 billion on the top line. 75% of that is PS, really low-end PS, so you can do the math on that. But essentially, we're able to navigate that macro headwind and, at the same time, still pass a raise through in the back half. So -- and there's no doubt that the sort of -- there's a broader halo impact from Russia-Ukraine, as I mentioned, on the consumer side of the house. With respect to China, for us, we weren't directly impacted geographically in terms of Shanghai and lockdowns in terms of our factories. For us, the factories sit, for the most part, a little bit outside of Shanghai. So it was a lesser, lesser impact in terms of China. So not as much there. But like I said, net-net, at the highest level, I think we've been able to demonstrate that we're able to really navigate these macro headwinds and, at the same time, still deliver on our commitments, and, in fact, do better, even.

Got it. You also talked about the key growth businesses, and you said that there will be $10 billion in revenue this year. So maybe talk to us what are those businesses. How are they trending? And how should we think about growth in those businesses going forward?

Sure. So we have really given, I think, much more disclosure to our investors around these growth areas, and they range from gaming, peripherals, Workforce Solutions, Consumer Solutions and industrial. And what we find really attractive about these businesses is both the CAGR. Most of these businesses are growing at double-digit CAGR, and they play really well in our broader ecosystem in terms of if you think about our Personal Systems business and our Print, then they're really natural adjacencies in many cases. And then moreover, they've got attractive gross margins as well. And in fact, just in this last quarter, we saw 40% growth in the gaming space. We saw 40% growth in peripherals. And so we really see just incredible momentum, which is why I personally as a CFO, really excited about our M&A activity because it really helps to accelerate growth in these areas. And recently, we just announced Poly, and that's coming up here in June. We've got the boat going out to Poly shareholders. So obviously, the Poly acquisition allows us to really double down on 2 areas that, I think, are just so important in terms of hybrid, both in peripherals and in conference rooms where people are struggling to really make the most of those connections right now. So I think a lot of opportunity in growth. And clearly, they're right where those hybrid trends are playing today.

Got it. I want to talk about the Poly acquisition, and I want to talk about many -- several different things you mentioned. But let's start with margins. I mean, margins in both of these segments have been trending towards the high end of the long-term ranges. What do you tell an investor who says that, look, HP has benefited from COVID? You've seen some pull forward of the demand, and now margins are at peak margins. So I mean, how would you respond to that investor?

First of all, I'd say, Ruplu, we actually guided in our Analyst Day, we actually increased the range on our PS business. So I think that just articulates the confidence that we have in our long-term ranges. To have that sort of brash confidence, I think you have to have a very good strategy underlying. That's how I'll start with the PS. We raised our range. And the reason for that really is twofold. Firstly, the mix shift that we're seeing, which is driving, obviously, ASPs. And so if you look and unpack what's happened on PS, literally, 60% of the improvement in pricing has come from the mix shift. We're shifting the mix up to commercial. And even inside commercial, we're moving up the stack into premium. So I think that should give confidence. And then secondly, as I mentioned, these growth areas, and you think about peripherals. I mean, today, it's not just good enough to -- if you're a CIO, you're not just fitting out your department and your employees with a laptop. You've got to think about the cameras, the mouse, the keyboards. So -- and they have attractive margins. And also the refresh rates are much faster. So you're able to really give confidence to the long-term range on PS. And then from the print side of the house, we're shifting the mix. And so if you look at what's going on print, we're shifting the business model. More of the profit we're taking upfront, and we're really building subscription into that business as well. So both of those vectors, really, I think, provide support for the margin structure. I will add, I think it's natural over time as supply and demand sort of come into balance, there will be some normalization. But we expect them to -- we expect both businesses will normalize back into those ranges. So that should really provide investors with that confidence.

So let's delve into this a little bit more. So you talked about 2 factors, pricing and mix. So let's talk about pricing. I mean, how should we think about your pricing strategy in PCs and print? Are you able to raise prices anymore and then as we think about that over the next couple of quarters?

So I'd say we've had a pretty strong track record. If you look at our results and look at our numbers, I'd say we've -- and I've commented on several times at earnings announcements, I think we have seen, no doubt, the benefits of favorable pricing. And also, in fact, I'd say that during the pandemic, we actually built much better digital instrumentation around pricing. So today, our ability to understand pricing, manage pricing at a global level with a much finer level of precision is so much more advanced. So we have that ability as well. So first of all, yes, both businesses have clearly benefited from favorable pricing, and plus I think we have much more capability to manage that pricing going forward. And then from a mix perspective, I think I talked about just the fact that the mix has clearly helped with ASPs. So we've seen ASPs in PS literally up 30% year-on-year. We're seeing that come down here in the last couple of quarters. But clearly, very strong ASP performance.

So let's talk about that ASP mix. And so, like you said, the Personal Systems business has seen a mix shift to higher configurations. But I was reading the other day, the World Bank and Janet Yellen are talking about stagflation, right, so a period of consistent inflation, low growth. This year, your PC revenues are growing year-on-year, but it's primarily because of the ASPs. I mean, the units are down. But is that a sustainable model? Like if units are constantly flat or down, can you consistently raise ASPs in an inflationary environment? Like why would the consumer mix up to higher configurations and, for that matter, even for corporations? Like what is driving them to mix up to higher configurations?

Well, I think it's -- you said the word there for me, which is mix. And if you're in an enterprise today, the configuration that you need with hybrid is just so much more crucial than pre-pandemic. For example, you need to be able to run a video, you need great camera, you need great audio. That experience today is so critical for employees to be productive. And hybrid is here to stay. Folks, in many cases, I know myself, I have multiple laptops because I'm in and out of the office. I'm working at home, I'm on the road, I need to have that capability. So as a CIO, and I ran IT at HP for a short period of time, but I became very familiar with the sort of means that you have, and you have to satisfy much greater demand for your employees today. So they need a richer configuration. So I think that mix shift that I talked about is certainly going to help. The other piece I just keep coming back to is the peripherals and all the adjacencies that we've invested in are certainly going to grow that through, and all of that will play into the margin rate of the whole business overall.

Okay. And just focusing on margins, maybe I'd like to talk a little bit about the guidance that you've given for the rest of the year. Let's start with print. I think you've guided for print margins to be at the high end of the range for the full year. And in fiscal 3Q, I think there's expected to be even higher than the high end. So doesn't that mean that, just mathematically, there will be a material step down in margins in the fourth quarter? Am I thinking about this correctly? And what is driving that?

Yes. Let me give you a couple of nuggets there to think about. So first of all, it's really about economics. We've been constrained. Supply has been severely constrained, and we've had high demand. And in fact, in print, we have quite an elevated backlog. We expect that to continue through Q3 as a result because of that backlog and the fact that we just don't have the units in the market right now to satisfy demand. We're going to see the print margins slightly above the range, as I mentioned, going into Q3. Now a couple of things are driving Q4, which is why you see that dynamic shift. First of all, we have been busy requalifying our platforms and actually requalifying ASIC. It's taken us a few quarters. It's quite a convoluted long process, but we expect to see the benefit of that in Q4. So that will allow us then to ship more units. And as a result of that, we will expect some more normalization in pricing as we start to bleed through the print backlog and ship those units into Q4. Another thing to remember about Q4, it's our holiday season. So you're going to see a stronger mix of consumer in that Q4 mix. And obviously, consumer margins are somewhat lower than commercial. So that's what will dilute that margin profile. However, we will end the year at the high end of the long-term range. So overall, just, I think, that shows the strength of the business in print. But clearly, what's been aiding and helping us in terms of margins has been the elevated backlog that we have been carrying in the print business. And frankly, I expect it's going to take time to bleed that off. It's going to extend into '23 as well.

So let's just take the discussion then beyond the fourth quarter, beyond fiscal '22 into '23. You've guided the long-term range for margins for print to be 16% to 18%. Why is that the right range? I mean what's the confidence? What is driving your confidence that the print margins can stay in there if you're having -- like there's a down shift in 4Q. And going forward, you expect like it won't be at the high end of the range, but why does it remain in the range?

Sure. No, look, in our print business, as I mentioned earlier, we've been, particularly in the pandemic, have made very good inroads to shifting our business model. We -- I think we commented a couple of years ago that we were trying to shift a lot more of the profit upfront. I think most folks are familiar with our model in terms of the printer and the supplies attached and the type of impact that, that has. What we're trying to do is actually shift more of the profit upfront into the hardware itself. And so we call that our PUF model, profit upfront, very, very dynamic acronym there. But essentially, we've also been able to now shift the number of printers that we're shipping. We've got HP Plus, which we announced several months ago. We're shifting that mix to now 50%. So 50% of the printers that we're shipping will be HP Plus enabled. What that means is that we're actually hooking the printer, and we're hooking in subscription. So we're going to allow our customers to -- and get that telemetry in the print and also into ink subscription. So we're making a massive shift in the model, both in terms of Instant Ink, enabling ink subscription with our printers and also big tanks for that printer. So all of these dynamics together are really helping us to sort of ensure that those long-term margin rates stay high. And then I would just add on the subscription business, we have a very sizable business today in ink subscription. It's called Instant Ink. It's around -- we disclosed, it's about $0.5 billion business. We have more than 11.4 million subscribers today, and we're getting lifetime value now for those customers as they sign into Instant Ink. And we don't think that model stops there. We see that as a much more like a sort of consumer services platform. Once we sell a customer Instant Ink, we have the opportunity to interact with that customer directly and sell more services. So whether it's paper, which is coming up here in the fall, we're going to be adding paper services, and then we see the opportunity to add a broader suite of services.

So I want to go deeper into each of the 2 segments, Personal Systems and Print. But before I do that, maybe I'll ask you one more higher-level question. Some investors are concerned about the possibility of a recession in the U.S. and slowdown in Europe. When -- you've been with the company for a long time. When you look at the business today versus what HP was in 2008 and 2009, obviously, it was a different business then. It was a larger business. But how has the business changed to the point where do you think the business now is more resilient to a recession? And what would be your playbook if we were to go into a recession?

Yes. Thanks. And backtrack in story, remember 2008, I was the CFO of the PC business in the Americas back then, and it was just a very scary time. I remember watching all the currencies just flutter and, yes, watching the forecast drop literally. It was probably one of the most -- certainly, as early-stage CFO, it wasn't really an experience you are hoping for. But nevertheless, I think you learn a lot from that. I'd say we're very -- it was all a very different company. We've obviously -- as most of you know, we've split the company since then. And so we don't have that breadth of the portfolio. But even today, as a company, I would say we're more resilient. We have a much more balanced mix of contribution between the businesses. So it's ironic, but PS and Print are almost 50-50 in terms of the sort of contribution rate. So that in itself, I believe, provides some level of insulation. Plus inside the portfolio, it's just such a broad portfolio, and we've seen that through the pandemic. At the early stages of the pandemic, we took the benefit. We were able to play to the benefit of the consumer strength. Now we're seeing the commercial strength, and we can really manage through that portfolio, I think, very effectively. So that's one level of resilience that I don't think we had. The second piece is our ability to take cost down. We have been at this for 3 years in transformation. We've been consistent in delivering on our results. We've taken out -- we will take out by the end of this year approximately $1.2 billion of cost. That's a playbook that we can literally lift and shift. And frankly, you're never done on costs. There's always opportunities to take cost out. So I believe between the portfolio, the contribution of the businesses and then, finally, the sort of ability that we have to navigate cost structure, all providers, I think, with at least good platforms and certainly a playbook about how to manage through a recession.

Great. So that's a great overview. Let's delve deeper into each of the segments now. So let's start with Personal Systems. One question that we get from investors is on the backlog. I think exiting fiscal '21, your backlog was about a quarter's worth of backlog. What would you say is a normal level of backlog? And how should we think about the cadence of how we get there?

Sure. No, I think at our most recent earnings announcement, we commented we still have elevated backlog on PS. Now we do have a specific issue that we gave us some visibility to here in Q3. We have a specific component at ASIC actually with one supplier that is causing an impact to lower our revenue for PS in Q3. As a result of that, we do expect to have to carry more backlog through Q3 into Q4, and then we expect that backlog to continue to bleed off as we get into '23. But we'll probably still have backlog into '23. Now I would add, in terms of your comments about where we came from, where we're at now, we're starting to consume some of that backlog. And I think we -- frankly, we expected that. It certainly not -- I should say, from a customer satisfaction perspective, it's not a good situation to be in where you have customers that are waiting on your product for a long time. So it is our intention to continue to burn down that backlog, and we will do so over the coming quarters. I would add a couple of points. I know it's an area that folks are very interested in understanding. I would add that we don't see cancellations in our backlog. We monitor our backlog very carefully. We pay close attention to the shape of that backlog. And then secondly, I would add, we see the backlog having a very strong commercial flavor as well. So I think that gives us confidence in just the quality of the backlog, what it looks like and how we expect to see it evolve over time, Ruplu.

Got it. So you talked about the supplier issue that's having a yield problem with the component that I think is used in commercial notebooks. So what is giving you the confidence that that's a one quarter issue? Why wouldn't that bleed into the fiscal fourth quarter?

Well, it's really in one factory. So it's a yield issue in a specific factory. It's a specific item, so we are confident that it will be resolved here in the back half of Q3. So -- and it is impacting our commercial line, which is why we said we expected to see a dip in revenue. We also expect to carry that backlog then as a result of that. We want to see the revenue then come back in Q4. So it should be resolved at the end of Q3, Ruplu.

So just like you said, you expect the PC volumes to be lower in 3Q and higher in 4Q. But I was looking at your margin guidance. So you still expect the margins in the PC segment -- in the Personal Systems segment to be at the high end in the fiscal third quarter. What is leading to that? And then if volumes come back in the fourth quarter, why wouldn't margins be even higher in the fiscal fourth quarter?

Yes. No. So maybe I'll tackle your fourth quarter first. Similar to Print, Q4 is our holiday season, so we typically see a much richer consumer mix in the holiday season in Q4. So that's why we'll see our margins sit more at the high end of the long-term range, but come down somewhat from Q3 to Q4. Overall though for the year, they'll still be at the high end of the long-term range. In terms of Q3, we don't expect to see a significant change in the sort of pricing environment that we've seen in Q2 given the constraints and the constraint of this one specific supplier. We expect that the pricing environment will remain somewhat similar to what we've seen in Q2, and that will bleed into Q3. And then that commercial mix will obviously be there in Q3. And then we'll see that mix shift as we get into the holiday season into Q4.

One thing I noticed during the earnings call is that the desktop units were up really strong. I mean, do you think that sustains? Or do you think as we go through the next couple of quarters, the desktops and the notebooks become more harmonized in terms of the sales?

Yes, I'd say the desktops, the way to think about that is if you subdue it year-on-year, you will get a dazzling sort of increment, and that was really driven by the fact that it was a really easy comp a year ago. The desktop shipment numbers were really low just due to the stage we're at in the pandemic. So I would expect that desktops will start to evolve from here. But we are -- I would just add, we're seeing the move to notebooks is really, I think, the key theme to sort of hook on here in terms of just the mix around commercial notebooks going forward.

Okay. And then HP has been levered to Chromebooks. But in steady state, how dependent really is HP to Chromebooks? And when should we expect to refresh, if at all, in the Chromebook space?

Yes. Now on Chromebooks, we certainly had a lot of benefit in our prior fiscal period back in '21 around Chromebook mix. And at that time, it clearly was a lot of demand, particularly driven by the school systems as the early stages of the pandemic were evolving. As we've seen through the last sort of few quarters, there has been inventory in the market that's slowly sort of bled off. I'd say Chromebook levels in the channel have pretty much corrected themselves over the last quarters. I would also add that not all units are created equal. Chromebooks are pretty low calorie units. They're not as margin-rich as our commercial units. So clearly, we want to move the mix to the commercial. I would say, though, that from a Chrome perspective, we are starting to see some green shoots out there in terms of school districts. There's going to be some level of refresh on Chromebooks coming here into the fiscal '23 season. But for now, I'd say Chromebooks are definitely a lighter part of the mix, and we'll wait for that sort of refresh cycle that will be driven by the school season.

Got it. I want to move the discussion now to the Print segment. You've talked about your expectation that commercial trend recovers to about 80% of pre-COVID levels. Why 80%? Like what's driving that as the percent that you think will recover? I mean, what's...

So magic about that. I think it's pretty simple. It's really how many days people are back in the office. And I think what the world is starting to settle on is we're seeing 2 to 3 days is becoming the sort of norm out there around the world. People are not going back 5 days a week. They're going back 2 to 3 days. They're going back to do collaborative work. They're going back to meet. And so it's a whole different style of working. And we're picking that up, and we're able to confirm that because, today, we have much better telemetry from our printers. So the printers that we have in the market actually give us a lot of data and insight into usage. So we can clearly model usage rates in the office and in the home. So we can see these trends playing out both in our Personal Systems and in our Print business. And that's what really gives us confidence. And I would add that from a print perspective, we feel that we're -- it really plays to our strengths because A4 works really nicely in that environment in terms of distributed print.

And you talked about telemetry data from printers. So something that reminds me that in the past, HP has had some issues with visibility into the channel with respect to supplies inventory. I think this was more specific to Europe where there are Tier 2, Tier 3 distributors. I mean, how has your visibility improved? Can you talk about what you're seeing in terms of supplies inventory in the channel? And if it's lean, do you think you can get a benefit of them pulling more supplies inventory in the second half? Or if it's high, then is there a danger of any inventory correction that we might see?

Yes. I'd start up by saying that supplies inventory, I'd say, we're really comfortable with the level that it's at today. We've gone -- I'd say, the period of channel replenishment is over. Certainly, at the early stage of the pandemic where the factories were shut down, there was a depletion of the inventory. So we had to replenish that channel. The channel has now been replenished, and I'd say we're comfortable with the levels that supplies inventory is at worldwide. I would add to your comments around Europe. We do have a multi-tiered supplies ecosystem. So we have a Tier 1 and a Tier 2. Now in the past, we didn't always have very good visibility to Tier 2. Since then, we've built the telemetry, so we actively monitor both Tier 1 and Tier 2 inventory. We have visibility to approximately about 75% of Tier 2. But what we do today is we have a very strong monitoring and telemetry around that, so we can really understand the movement of that inventory through that whole ecosystem. So we're not just focused on Tier 1. We're focused on the movement between Tier 1 and Tier 2 as well. And clearly, the fact that we invested so heavily in the telemetry of our printers also helps us understand whether people keep products at home. And during the pandemic, actually, what we saw was that people had more in their pantry. Because people were worried about, if you remember, toilet paper and all that kind of stuff at the early stage, people were hoarding. And they even might have thought about hoarding office products. So that's all passed. As I mentioned, the channel replenishment cycle has gone. But I'd say, today, what gives me confidence as a CFO is the ability to sort of have that visibility through telemetry data and through our monitoring data.

Got it. Maybe one more question on print, and then we'll move forward. In the past, you've had some issues with third-party ink, and this was more on the consumer side. So now that you have the Instant Ink business, which is a subscription business, and you've got HP Plus in the developed markets, and you've also changed the printer types, I mean, there are some printers that use more ink upfront, and the REF printers that cost more upfront, so how has all of this mix of subscription businesses and printer types helped alleviate this issue of third-party ink?

Yes. No, it's made a tremendous difference, Ruplu. I'd say, look, if you're on a subscription, clearly, you're going to be very loyal from a customer perspective to that model. So it's a great way to build customer loyalty and to mitigate third-party products and third-party ink. And in fact, we're seeing confirmation of that in terms of the share results of our product and of our supplies. And in fact, if you look at the contribution over the past few quarters, we've been gaining share, and that's just affirmation of the fact that this model that we have is really working. So I think that gives us great confidence around being able to mitigate the impact of third-party ink. Plus, I'd say, look, we've always got brand protection capabilities as well. We continue to do that. That's just good hygiene that we practice out in the market. But clearly, the best way to attack the third-party ink is to shift the model, which we've done very successfully. And I'd say we're seeing the results in terms of our share.

Got it. You talked about the Polycom acquisition. So with respect to that, I mean, what level of integration is expected? What level of investment do you need to get to your 3-year targets that you've said? And how do you think the -- how are you going to approach the go-to-market for that?

Yes. No, very excited about Poly, and I'd start out by saying we're still very much on track to close the deal at the end of the year. And if we can go faster, we absolutely will. As I mentioned earlier, the shareholders for Poly are going to be voting here in the month of June. So very optimistic about that close and looking forward to closing the transaction. I think the Poly transaction is just really exciting from a couple of vectors, both in terms of the contribution that we believe it's going to make to peripherals. But really, I think it fundamentally solves one of the biggest problems at hybrid, which is connectivity between AV in the conference room and connecting folks, whether they're using Zoom, whether they're using Teams, et cetera, and being able to make that experience a really seamless experience. The great thing about Poly and from a go-to-market perspective,is that our channel partners, we can literally integrate the product between our partners. There's not a lot of overlap there, but there's an opportunity for our partners to sell Poly and to really take advantage of those specific channels that Poly has in AV. But I think from a deal perspective, as we said at the beginning of the transaction, we do expect this transaction to be accretive. So we expect to see that flow through in '23. We expect there's going to be both cost synergies that will drive and revenue synergies. But moreover, we see just very attractive gross margins and flow-through from Poly. So very excited about that transaction. A lot of work to do, I might add. I mean, certainly, it's going to keep us busy, I would say. But I think overall, the benefits of that transaction are going to be terrific. And I think it's the right transaction at the right time and, frankly, at the right price.

Let me ask you about free cash flow. I think your guidance for fiscal '22 free cash flow is at least $4.5 billion. But to get to that, I mean, isn't it that you need to reduce some of the inventory and see volumes in Personal Systems pick up in the fourth quarter? So does that introduce any element of risk? What if PCs don't come back or if you have a longer supplier issue? So just your confidence on the free cash flow.

Yes. Look, I'd start up by saying I'm really confident in our ability to guide -- to hit at least $4.5 billion in free cash flow. As you've seen from an inventory perspective, clearly, we've carried inventory for assurance of supply and also in terms of just mode of transport. We do expect to bleed that inventory down. So that's an opportunity there in terms of cash flow. And then second, what I'd add to that is that from a PS volume perspective, obviously, we get tremendous benefit from sequential growth in PS volumes, and we do expect PS volumes to come back in Q4. So I think we've got both operational levers that we can pull to drive that cash flow, along with both the business performance as well from a PS perspective. So I remain confident in our outlook of at least $4.5 billion.

Can you talk about the capital allocation priorities? I know you just did a notes offering. I guess, that's related to Polycom. But then how should we like think about buybacks versus dividend versus now that you're doing the $3 billion acquisition of Polycom about future M&A? I mean, what is management's thought on the size or areas of interest or timing of such future inorganic growth?

Yes. And look, I'd say our capital allocation strategy pretty much remains the same. I don't want to sound like a broken record, but, first of all, it's really around driving incremental growth in our business. And so we'll look for those opportunities. Clearly, I mentioned quite a few today from a growth perspective. And then secondly, we're looking for opportunities where there's value accretive M&A. And I think we've demonstrated that through the number of tuck-ins we've done over the last 12 months. And then finally, we absolutely remain committed to returning capital to our shareholders. And we have the value plan we started almost 3 years ago. We're about to wrap that up. So we'll return almost 16 -- more than $16 billion to our shareholders by the end of the year. And then finally, we remain on track to repurchase at least $4 billion this year. So no changes, Ruplu, at this point in time in terms of capital allocation and remain confident in our outlook.

We're almost out of time. Maybe the last question that I'm going to ask you is that on the transformation plan, I think you had a target of taking out $1.2 billion in costs. How is that going? And as we think about the next couple of years, is it reasonable to expect some restructuring costs going forward? I mean, what's your thought on that?

I'd say you're never done with cost takeout. There's always plenty of opportunity, as what I've learned. Certainly, we're absolutely on track for the $1.2 billion, and I'd say at least $1.2 billion in terms of when we wrap the program up. We expect to wrap that at the end of the year. I think at that point in time, we'll revisit and see what scenario of the world we're in. I think we talked a lot about the macro. Clearly, that will help to weigh in on our decisions going forward. But I'd just add that I think there's always opportunity to take cost out. The work is never done. So I anticipate there will always be opportunity in the future there, Ruplu.

Great. So we've covered a lot of topics. Thanks, Marie, for joining us today. Thanks for everybody in the audience. So really appreciate your time. Thank you so much.

No worries. Thanks very much, Ruplu.

Thank you.

Thank you.