HP Inc. (HPQ) Earnings Call Transcript & Summary

Good morning, everyone. My name is David Vogt, I'm the Enterprise, Hardware and Networking Analyst here at UBS. And we're excited and really, really proud to be here in New York [indiscernible] conference back in New York. So thanks for coming, and those of you [indiscernible], we expect to see you here next year. So I'm happy to have Enrique Lores, the President and CEO of HP Inc. with us this morning. I think this is your first conference with us in person [ since COVID ] as well, so thank you again for coming.

Well, thank you for having me here.

Before we get started, HP has asked me to read a statement. My best here. Before -- today's discussion includes forward-looking statements that involves 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 investor.hp.com. Great. Now with that out of the way, again...

Very well done.

Thank you. Thank you for joining.

So before we go into the individual segments, I thought it would be useful to maybe take a step back and talk about your Future Ready program that you just announced a couple of weeks ago. I get a lot of calls from investors in the last 2 weeks that are trying to kind of decipher what this plan means, how was it different than the plan from 3 years ago, and better understand sort of the run rate trajectory of this $1.4 billion of gross run rate savings. So maybe, in my view, I think that was the most [ incremental ] piece used from the report. I think we could start there. So if you can kind of provide an overview on how you're thinking about it, why now, and what do you hope to achieve from it?

Sure. So first of all, again, thank you for having me here. So we put in place a Future Ready program with 2 different objectives. Objective number 1 is to continue to position the company for the future, making sure that we have the right portfolio, we have the right operations, and we have the right team executing that. And also to respond to the pressures that we see from a profit perspective [indiscernible] macro environment, where we saw an opportunity to continue to reduce our cost structure, taking especially advantage of a lot of investments that we have made during the last 3 years. So why now? First of all, because during the last 3 years, we have built and we have created a very strong digital infrastructure. And now, we can really drive cost down, leveraging from that and applying digital tools to many parts of the company, but also because this is a very good investment. If you think about $1.5 billion yearly return after you have invested $1 billion, it's a great return. And I think we -- something that we need to do in the company is to constantly continue to invest for the future and continue to drive for growth. But at the same time, look for every opportunity we have that takes money, and we need to do both, and we have done both in the past, and we'll continue to do both in the future.

So I guess maybe a follow-up to that is when I think about the program from 3 years ago, it was incredibly successful. Some of -- I guess, some of the improvements, some [indiscernible] are masked by what happened during COVID. The growth was much stronger than I think people had anticipated. It was a little bit challenging to understand maybe on a like-for-like basis what the program has actually achieved. And if we sit here today, obviously, it feels like we're closer to ending sort of these disruptions, whether it's [indiscernible] COVID. How do we think about these cost [ saves ] in the context of maybe what you talked about at your analyst briefing not too long ago, right? So I think you set out targets for both [indiscernible] and Printing, and it was my view at that time that you had set yourself up well to hit those targets from the last restructuring. So what is that -- what does this restructuring mean in the context of your longer-term goals, whether it's revenue growth and margin? And how do we think about that?

I think this restructuring is going to help us to continue to deliver the profitability that we shared a year ago in a more constrained and in a more difficult environment, while at the same time, we will be able to continue to invest in the growth businesses. And the ability to -- the need to do both is really what will be [indiscernible] by the program within the next year.

Does that mean -- obviously, the economic conditions today are demonstrably slower than they were a year ago. I think we can all agree on that. So if -- I mean, without this restructuring, maybe those ranges would be a little bit -- they wouldn't revert back to maybe your prior ranges prior to last year. I think what this basically ensures that you have a better shot of hitting, I don't want to say the high end of the range or the middle end of the range, but actually delivering what you set out to deliver a year ago.

I think they do both in a much more constrained environment that we were expecting a year ago because if you think about when we guided last year for the [indiscernible], we didn't know that there was going to be [indiscernible]. We didn't expect the current economic environment with inflation. We didn't expect energy prices to be where they are. We didn't expect China lockdowns to continue. So clearly, the environment today is much more difficult than we would expect a year ago. In the short term, this program will allow us to continue to deliver within the ranges for both businesses. And long term, depending on what the economic environment would be, it will help us to increase flow through and deliver better numbers or stay within those, again, depending on what macro environment we see.

That's helpful. And so I think by your -- the points that you just made, so economic cycles are just that, right? They're cycles. Hopefully, the currency is no longer an impediment to reporting stronger growth or growth that you think you can hit. Was the decision to do this plan reflective of the fact that maybe this economic cycle is going to be a little bit longer than maybe we had anticipated collectively from a downturn perspective and it's more prospective, effectively? Or is it just the right thing to do at this point? And if the economy gets better sooner or it doesn't go into maybe a deep recession or shallow recession, that puts you in a much stronger competitive position than maybe not over the next 4 quarters, but 5, 6 and [ 8 ] quarters out?

I think, again, it's both -- clearly, it's the right thing to do now given the environment that we are facing. But also, I don't think any of us can predict when the economy will [ rebound ], but we have been in business for long enough to know that it will [ rebound ], and it will clearly help us to be positioned in a much stronger position when the rebound will happen to really capitalize on that. And this is why it has the [indiscernible] objective to reduce costs, but really help us to continue to invest to be positioned for whenever the rebound will happen to really capitalize on that.

Got it. Okay. So maybe on [indiscernible] using the economy as the backdrop, we posted a report, post [indiscernible], UBS collectively, we revised our forecast for PCs [indiscernible] next year, given the economic considerations. We had one of your peers here yesterday, Lenovo, talking about how they're seeing relatively decent demand. Things are slowing, but it's not as negative as maybe we all might have thought, and they're probably taking a little bit of share. I know you haven't given an outlook for next year, but can you kind of help us think through kind of the puts and takes for next calendar year versus today? I know obviously, we can talk about the quarter shortly, but just kind of get your sense on -- you mentioned the war, economy. Just kind of puts and takes on how you're thinking about that [indiscernible] business next year?

Sure. So first of all, what we shared in our call is that we expect the market to decline around 10% in units during our fiscal year, which is really what we used to [indiscernible] guide. And what this means is we don't expect a significant recovery of the market during 2023. We clearly have seen a [indiscernible] Consumer business. We started to see that in May last year. We also have seen that the Commercial side has been weakening because all companies have become much more cautious in terms of planning their investments, hiring people, and this has an impact in our business, and we don't expect this to drastically change during the next 4 quarters. Something that will help though is today, we have a large inventory, especially on the Consumer side, which is driving very aggressive pricing because all of us are trying to reduce those inventories. But we expect that this in the second half of the year will be better because by our Q2 -- end of our Q2 within the inventory, situation will be normalized. And what will help us in our case is the fact that a lot of [indiscernible] we are taking out will be more visible at the end of the year when some of the impacts will be visible in our P&L, and therefore, the second half of the year will be better. That's how we think about next year. I think on your point about demand being better or worse than expected, what is true is during the last quarter, we have been reducing inventory in the channel, which means customers have been buying more than we have been shipping. So from that perspective, customer demand is better than what we reflected in our numbers because inventories are being reduced. And I think this is what Lenovo was explaining this way.

Okay. I won't go back to inventory and where we are in that, but maybe just in the context of your comment about down double-digit units in your fiscal year. If I interpret that data that you said, I think you said that on the call [indiscernible] and I take kind of our numbers, it would imply that, let's say, your next fiscal year, calendar '23 would be one of the softest years for PC units in probably a decade, if not longer. So what does that mean -- come back to inventory for a second, what does that mean for the replacement cycle, right? So we had a compression, 2, 2.5-year period of very strong demand for a variety of reasons. What does that mean for the normalized replacement cycle as we come out the other side of this?

What this really means is that there is a lot of demand that is being created. And whenever we will be in the other side of the cycle, it will drive significant upside. This is really what this means because if we think about enterprises slowing down the [ replacement ] cycle, these are the [indiscernible] that we will have to [ replaced ]. We think about [indiscernible] of PCs as communication tool, and they require [indiscernible] that, in many cases, is [indiscernible] in the PCs today. So that demand is there, and whenever we will be on the other side of the cycle, companies will be buying again.

Can we maybe frame it, my numbers? Maybe you can agree or disagree. If the PC market is 60%, 65% Commercial today, roughly, and most of those are notebook-driven devices. They break sooner, batteries wear out, you crack your screen. Does that mean in your mind, the replacement cycle, when we come out the other side, is faster or tighter than -- or shorter than maybe pre-COVID or unchanged at this point?

At the average level, yes, because we have seen a shift, as you mentioned, from desktops to notebooks, and notebooks have [ replacement ] cycle. And also the fact that many of these [ PCs ] are going to get old also will mean that they will have to be replaced faster. I think what -- probably 2 more comments. We continue to believe that the PC market will be bigger than what we were expecting before [indiscernible]. I think if we think about penetration in household, the opportunity in the Commercial side that we were just talking about, but also driven by the use model of PC's, the [ seasonal ] have become essential as a communication tool, essential [indiscernible] to help the adoption in schools across the world is now bigger than what it was before. So this is going to continue to drive PC demand for many years, and this is why we think that the market will continue to get bigger. Now we are going to go through a slowdown driven by macro. But when the situation will improve, the market will continue to...

So I just want to make sure I'm clear here. So when we say the market is going to be bigger than pre-COVID, so pre-COVID, round numbers, PC units were 270 million, 275 million units per year. Is that a reasonable...

It all depends on whether you include detachables for note and tablets, but rough [indiscernible] numbers.

And if I go back 12, 18 months ago, I think not you, but maybe your competitors across the globe were talking about, there's been a structural shift in PC units, which I think is probably true. At the time, the expectation was it would be -- PC units might be flat [indiscernible] PC units, but at an elevated level above prior. Do you still think that that's the case? Because you can [indiscernible] being bigger than 270 million, 275 million is 280 million, 285 million, 290 million. But if I take a step back, maybe the more optimistic case a year ago was over 300 million units per year. Do you think that's still a possibility?

We haven't guided for the latter. But if we talk about possibilities, yes, it is possible that the market will be in the 300 million. Once we are out of the cycle, I think it's possible.

Okay. So just [indiscernible] then. If units are -- UBS units for next year, we're at 248 million units. So there is a path for substantial unit growth over the next several years. I'm not -- even time frame. I'm not going to hold your feet to the fire, but that's maybe the right way to think about it. Okay. Got it. And then just coming back to inventory. So your, obviously, business model is a little bit different than maybe one of your peers. How long -- I know you talked about it on the call. But as we sit here today, how long do you think it takes to kind of normalize all the different components of the issues from an inventory perspective to get to where demand equals produce and ship?

We think it's going to take about 2 or more quarters. So by the end of Q2, we should be in a normalized situation. Of course, there are many factors that could impact that, but this is our current [indiscernible].

And against that sort of framework, are you seeing any -- we haven't seen the data yet that we track, but any sort of pricing dynamic changes to help facilitate that inventory reduction? Are you seeing that from your partners at this point?

We have seen that already for 2 quarters. So especially in Europe and in Consumer, which is where the inventory [indiscernible], we have seen very aggressive prices across the board. This is one of the reasons why this quarter, our margins were below the range because the impact of this price aggressiveness was having in our profitability.

And is that contemplated -- that's contemplated in your [indiscernible] guidance, your margin guidance, which is a little bit softer in the...

Exactly. This is one of the key ideas of why the guide for [indiscernible] margin was lower in the next 2 quarters. It's because of the impact that we think this is...

In your Consumer [indiscernible]. Great. And then when we come out the other side, I know demand is -- demand will be different than it was pre-COVID. How do you think about what's the right level of backlog or inventory vis-a-vis how you maybe ran the business 2.5, 3 years ago? Has that changed given supply chain has been an issue, right, where consumers would go in, maybe Commercial customers would look to purchase a PC, and it just wasn't available. Does that mean you and your partners have to carry more product, more inventory, do you think? Or is it going to revert back to 2019, 2018 level?

In general terms, we will go back to similar levels than where we were before COVID, with some exceptions maybe driven by logistics because it's going to depend a lot on what is the work situation and whether we can use boats, trains and planes to ship and to move PCs around the globe. For example, a big part of our shipments to Europe used to go by train from China, to Russia, to Europe. That train is not working. If whenever it works again and -- see if it is not working, then we need to ship them by boat across India through the Suez Canal. We have around 10 days of inventory. Depending on what is the geopolitical situation, the train will be open again or it will be closed, this has an impact. So we will always look for what are the opportunities to really manage our inventory in the most [indiscernible] way. But also, we always make balance sheet [indiscernible] when we see opportunities to use our balance sheet to reduce cost. So that's [indiscernible] depending on the specific situation every year, the balance between air shipments and shipments by boat might be different to really make the right decision from a financial perspective.

Do you think during COVID, supply chain altered consumer purchase behaviors? What I mean by that is, so to your point about maybe having to ship through the Suez Canal rather than train, it gave consumers maybe some pause. If you were stocked out or one of your competitors were stocked out, it maybe decreased brand loyalty. Is there any evidence of that among your consumers where, look, I just need this, right? COVID, I need this device. I don't care if it's Acer, HP or Dell or Lenovo. And is that a risk for the industry, in that consumers have maybe become a little bit less brand loyal and just continue to purchase what's available in stock?

Obviously. COVID has forced all of us to be much more conservative as we design our products and our -- as we design our companies. For example, we learned painfully that we need to [indiscernible] to have single source components because we have been impacted from a supply chain perspective. Our customers are following a similar project, which means in some accounts where we were the only supplier, now one of our [ competitors ] could be. But also, it has been an opportunity for us to gain accounts where we were not present before and that now, we are present. What we also have seen is that customers, especially large companies, tend to have now larger inventories of PCs owned by them already in case they need to start giving it to their employees, which helps us or there's really been a positive [indiscernible]. But clearly, this has changed across the levels of the industry.

And maybe I should have asked this earlier. When I think about your Future Ready brand, does that contemplate maybe a slight change in how you think about supply chain going forward, given all of the issues that we've all just -- besides what you just mentioned, dual sourcing and multi-sourcing because there's an order book today, I know it doesn't directly apply to you, but there's, I guess, discussion [indiscernible] you might add another fab in Arizona, where I think Apple might be a neighbor tenant. Just how do you think about that over the next 3 to 5 even longer period of time in terms of your own supply chain in Asia, Southeast Asia specifically?

Sure. Two things. Future Ready [indiscernible] impacting supply chain. One is, as I mentioned before, a big part of the plan is driven by leveraging better digital tools. And clearly, this will help us to build an even more efficient supply chain than what we have today, so that's a big part of the plan. And this is why a lot of the savings in the plan will not only come from [ OpEx ], will also come from [indiscernible]. We think we are going to have an opportunity to be more efficient there. Another part of the plan is how do we build a more resilient supply chain, which is the direction you were going. And I think we all have learned that the balance between cost and resilient needs to change. We have designed our supply chain to be the low -- to get the lowest possible cost over the last 30 years. And clearly, this balance is going to be changing. We think that the Future model is going to be much more distributed. We'll have to have factories closer to customers, and this is going to drive significant changes in the footprint. Now it's not a change that it will happen in 1 year or 2 years, [indiscernible] 3, 5, 10, 20 years. But clearly, this is the direction that the whole industry is going to be moving to.

What -- I know it's a multiyear, even decade potentially, [indiscernible] change. What are the gaining factors? Is it labor? Is it an educated workforce? Is it resources, transportation hubs, logistics? A little bit of everything?

It's a little bit of everything. It starts from building and assembly factories, which mostly will be labeled, but then to be able to be cost competitive with areas of the world, where labor cost is lower, we need to increase significantly operations, and there is work to do to be there. And then probably the most important thing is to build a suppliers network. It took 10, 16 years to build a network of suppliers. We have now in China and in Asia. It will take less, but it will take several years to build the network of suppliers in other parts of the world.

Got it. I've got plenty more questions. [Operator Instructions] Maybe just one final question on...

I think honestly on supply chain, I think [indiscernible] big change. It's also going to be important as we think of the type of business models that will be built in the future as more -- a bigger percentage of our business goes to as-a-service model, as subscription models. Also, having the factories more distributed will help refurbish products and to do that in a cost-effective way. So there is a part of the design driven by resiliency, part of the change driven by what will be the business model of the future.

Understood. And just maybe one final thing on PCs before we move on. Components, pricing, you talked about inventory in Europe, consumer being a headwind. I know we have a ton of volatility in components over years. When you think about supply chain and component pricing, how should investors think about the margins in PCs over the, let's say, 4 quarters? I know you talked about the first couple of quarters of this fiscal year being a little bit under pressure, and then improving as we move through the year. Is that driven by a combination of some of the pressures that you're seeing in inventories from Europe in consumer and components? Or is there a way to frame kind of the impact?

Mostly driven by pricing and the [indiscernible] of the inventory. Our expectation is that component prices will go down. Demand has gone down, prices are starting to go down, and we think this is what we will see to [indiscernible].

And that's what's underpinning your...

And this is what -- all of this is, of course, built into the...

Got it. Okay. Maybe just on Printing, your other incredibly important business. You talked about, on the last call, seeing some softening demand in supplies. Can you kind of give us a sense for what are the key drivers there? And how do we -- I think you even talked about it getting back to like a low single digit to mid-single-digit declines from down high single to double digits. What do you have to see to gain more confidence in that trajectory recovering as we move through your next fiscal year?

Sure. So what we're seeing in supply is a slowdown of demand, very similar to what we're seeing in the rest of the Consumer business. What this really means is when someone runs out of a [indiscernible] going immediately to buy a next one. Many customers have significant [indiscernible], and therefore, they will use the [indiscernible] whereas to going and buying new ones. It's [indiscernible] the purchase cycle. What we have not seen is any change in [ usage ], so the number of pages printed at home continues to be similar and aligned to the plans that we had, and we have been growing share. So the share of our HP-branded supplies has been steadily growing during the last years and continue to grow last quarter. What -- in terms of what will give us confidence. First, this is what our [indiscernible], but if we continue to see usage and change in share growing. We know it's a matter of time as customers will have to buy again. And we are seeing inventories in the channel being reduced, and we are also controlling shipments [indiscernible] going forward.

So maybe I can ask you a little differently. So you have 2 different inventory dynamics, right. Channel inventory, and you're controlling that by shipping into channel. And consumers are somewhat -- have stockpiled supplies. So if utilization -- I know it's a difficult way to maybe frame this, the utilization is unchanged. Why has consumer behavior changed so much that the stockpile supplies over the last 6 to 9 months? Was it fear of stock-outs, fear of -- I think ink and toner prices have moved up. I think you pushed price increase earlier this year, maybe another one. Was it people [indiscernible] lack of availability of product, and so they stockpiled? I'm just trying to get a sense for what...

Yes. I don't think [indiscernible] something that has changed. There has been always a significant stock of supply, have taken [indiscernible]. And when people go to the store, they don't buy one cartridge. Many times, they buy multiple and because they know at some point, they will need that. So this has [indiscernible] even if increased a little bit to COVID, yes, because everybody was concerned about availability of goods in general and also supplied through the supplies. I think what we are seeing now is customers are more concerned about putting money on the table in general, for any type of consumer goods. If you think about the [indiscernible], for example, in Europe is very significant. I was recently meeting some of our distributors there, and they were sharing that for a normal family in Germany, the cost of energy has increased between EUR 700 and EUR 900. If you put in the context of income for that family is $3,000, $4,000, this have [indiscernible] increase, but is having a big impact on what type of investments or consider goods they buy. I think this is what really in the business.

So against that backdrop, though, is -- yes. If the macro is a little bit uncertain and utilization is unchanged, is there a risk that utilization maybe declines from where we are? Because consumers are concerned, to your point about discretionary income, inflation, although all the data points suggest that inflation is coming down, maybe not the energy crisis in Europe. But how -- I mean, in your experience, how long does it take for the consumer to react to changes in underlying information that being effectively [indiscernible]?

If you think about what people are printing at home, which is [indiscernible] homework for kids, photographs, I think it's fairly resilient. We haven't seen big changes. Now people working from home that is Printing [indiscernible] their work. I think has been resilient, and if we look at the curves by usage, they have very, very slow change. So I don't -- I mean, everything can change, but this is not one of the areas where we are especially...

And then we were talking about this earlier. In-office Print, it doesn't appear that most people are going to be back full time. I think you said in the past you think utilization gets back to, what, 80% of prior peaks and prior levels. Anything there that you see that maybe would suggest otherwise, even better or worse?

No. We -- this continues to be our projection. Our projection is that the office market will be 80% of what we were projecting before COVID. And we think this continues to be the most [indiscernible]. We believe that the way of working in the future is going to be hybrid. This case, it has a negative impact in the amount of office space for the business, but has had many other positive impacts in the pages printed at home, in the number of PCs that people will be using, the opportunity that we have [indiscernible] company. It's a good way, but has a specific negative impact on our Printing business.

Right. And do you have a sense for where you are today, relative to where it was prior...

Between 75% and 80%, we are still not there, but we are getting closer.

Getting closer. Okay. And then maybe just on Print margins. Obviously, you've done a great job keeping margins 18-plus percent despite the weakness in supplies. Can you kind of walk through some of the drivers there? I mean, some of that I would imagine is strengthening dollar versus the yen I think helps a little bit, right, on maybe your relationship [indiscernible]. Okay. Good. Maybe just in pricing, it's been a tailwind, so that's been a big contributor. If supply, if you -- to your point earlier, supply becomes more available and you start to maybe stock the channel a little bit more, does that have a negative impact on price and margins in Print? How do we think about that going forward?

Yes. There are 2 major drivers of the improvement in Print profitability. One is overall prices for hardware are higher because of the supply issue, but the second is the model change, which we started more than 3 years ago. We said that we needed to -- we wanted to rebalance profitability between the hardware and supply. And we shared 3 years ago that we are going to do that by -- in different ways. One way [indiscernible] the HP Plus model, which are premiums, but price of hardware is higher and the consumers commit to use HP supplies. We also -- for emerging countries, we launched a line of -- we call it Big Ink and Big Toner printers, where when consumers buy the printers, they come with a lot of ink and a lot of toner, and those printers are profitable from the first day. And second and third because we will now be shifting the business model from transaction [indiscernible] subscription. And we have been making a lot of progress on the 3 fronts. We shared in the call that in Q4, 55% of the units were either HP Plus for Big Ink, Big Toner, which means units that are profitable. We also shared that Instant Ink continues to grow double digit. We have now more than 11 million subscribers, which is a fairly good number and the penetration of it continue to grow in the future. So yes, some of it is driven by pricing, but a big part of it is driven by all the changes we have been guiding.

So I guess it is the question. So the model shift should be ongoing, right? So more Instant Ink customers, more devices [indiscernible], no longer giving away the hardware for free or negative margins. As you continue to move along this road map, what could compress margins, right? Because my view has been if that continues over the next couple of fiscal years, why would margins dip below 17%, 18% to the low end range? I would imagine that this mix that we're talking about is a tailwind for the foreseeable future, or am I missing anything?

This is definitely a tailwind for the foreseeable future. But at the same time, we are still in a supply chain constrained situation, right. And therefore, prices we expect will become more effective. And therefore, this will have the [indiscernible]. So this is why we continue to believe that Print, the business, will be in the 16% to 18% range. We are now significantly above because if we see an opportunity obtainable, of course, we will be. But at some point, we will have to go down as prices will become more or less [indiscernible].

Okay. Right. That's helpful. And then maybe one final point on Print. So supplies, are they still the highest margin at least within the Print segment?

Overall, yes.

Yes. So as supplies -- the decline in supply has improved from the high single digits to low double digits. Again, that should be sort of a mitigating tailwind, again, to margin, right? The margin should be [indiscernible] better. Is that fair?

It is fair. But this is where -- I mean, there are tailwinds and [indiscernible] tailwind. All of them will balance towards...

Right. I'm just trying to help investors think about the different moving pieces, where you're going to get the low end, where you could get the high end. Got it. Okay. Again, if you have any questions, please let me know. I've got a couple here, but I'm going to...

Another important tailwind over time will become our services businesses. And probably it's going to become more relevant in our portfolio both for B2B with [indiscernible] solutions. But especially also in the case of Print, we [indiscernible]. We continue to make more money with our customers that, for Instant Ink, running our traditional model. And as the penetration of it continues to grow, it becomes more relevant. And also, as we shared last year, we are going to be increasing the portfolio of services that customers can get from Instant Ink. And therefore, we will also improve the margin at which [indiscernible].

So I'm going to ask a question from the audience that I got first, because then it dovetails into my question later. It's about the Poly deal. It's only been 2 months within...

Almost 3 now.

Almost 3 now. I guess with perfect hindsight, what have you learned? What's been different, right? The economy is a lot different than when you guys originally announced the deal. And when you think about sort of the synergy targets or the metrics that you put out there growing -- accelerating the growth and expanding the margins. Obviously, any kind of color that you can share on the Poly deal at this point?

So we continue to believe that Poly is a great addition to our portfolio. As we were discussing before, we think the way of working in the future is going to be hybrid. And we fully we know we have built a full portfolio that customers need to work from home, to work from the office. You're seeing headset, micros, videoconferencing systems. It's a great addition to our portfolio, and maybe where we expect to continue to see growth. From an integration perspective, it has gone well. It's only 3 months, so I need to be realistic, but it's so far so good. No big surprises. As we review -- continue to review the business case, the business case continues to be aligned to what we had when we made the decision to acquire the company. Now that we [indiscernible] resellers, customers about the feedback, it's extremely positive. They all see the synergies with our business. They see both from a seller perspective, but also from an end user perspective. It fits very well in the conversations we're having with our customers, so we really believe that [indiscernible] good.

So I'm going to go back to the Commercial PC market and [indiscernible] Poly. Is that going to be the sales or the go-to-market motion, so it's Commercial PC sales channel dragging along Poly and all their great products that they're going to bring to it? And so I guess my question is, if that's the [indiscernible], does that mean maybe Poly is a little bit softer than -- not through any fault of your own, but because the market is a little bit softer. So when you go in to talk to an enterprise customer, they may not be ready to buy a PC right now. So therefore, they may not be ready to take a new [indiscernible].

I mean, of course, the slowdown on the Commercial side will have an impact. But this is why when we review the case, we have levers to play. So we are still within the financial game. We have -- the Poly portfolio is going to be sold in 2 different ways. We leverage our Commercial PC channel and Commercial PC sales force, and we'll be part of it. But also, they have a strong AV channel, audiovisual channel, that we plan to maintain and that we plan to continue to grow. Now we are integrating those with sellers into our channel programs because we didn't have presence in that space, and the plan is to continue to do both. A very significant opportunity with Poly now is the fact that almost every company, even in within the current environment, continues to invest in improving their videoconferencing capability. Most companies are going to see their employees working in a hybrid way, and I think we all have learned how painful it is to have a videoconference, with some people in the office, some people in the room, and this is a thing that all companies want to [indiscernible], and also the penetration of videoconferencing systems in meeting rooms is relatively low. Our estimate is that there are 90 million meeting rooms in the world, and around 10% have videoconferencing capabilities. And as you think about how you work, how [indiscernible] work, how most of us work, having videoconferencing in almost any room is -- has become that. And most companies are investing on that, and that's an opportunity for the next 12, 24, 36 months.

Great. We're almost out of time, but I just want to do this last one in. Leverage, right? Poly Com deal, given where we are operationally, you have 2 tranche of gross leverage target. Depending on the numbers for this year on a given quarter, you could be closer at that level. Any thoughts on why that's a hard and fast rule right now, given your business is still generating significant free cash flow? You've demonstrated it despite these challenges. Your outlook for free cash flow despite the challenges is fairly robust. Any thoughts on capital structure and leverage?

Yes. Our planning is to stay below 2. We think for our business, it's important to stay investment-grade rating and to be very financially responsible. And we think below 2 is the right place to be, specifically when we think that the environment continues to be very volatile. And I think we were talking before about everything that we didn't predict a year ago, we think it's important to be careful and to be prudent in how we manage our capital. And this is why we are staying below 2, now is going to be important. And this is what I will share in the call that in the short term, we are going to slow down our share buybacks, not because we have changed our approach, which we have not. We -- our plan is to continue to return 100% of free cash flow to investors, will be below 2. But we know that in the next quarters, we will be in the 2 range, so it's important for us to be below 2. That's the plan, and that's the [indiscernible].

Great. So it looks like we're out of time. Thank you, everyone, for joining. Thank you, Enrique, for your time.

Thank you.

Very generous. And if you have any questions, please feel to reach out and enjoy the rest of your day.

Thank you. Thank you, everybody.

Thank you, everyone.