HP Inc. (HPQ) Earnings Call Transcript & Summary

Welcome, and thank you for standing by for today's CEO Spotlight Series HP Inc. I would like to inform all participants that this conference call as well as any Q&A may be recorded and made available to clients of JPMorgan. Where a company is presenting any recording may also be posted on their website. Views and opinions expressed by any external speakers on this call are those of the speakers and not of JPMorgan. Parts of this conference call may also be reproduced in JPMorgan Research. And if you have any objections, you may disconnect at this time. This call is intended for JPMorgan clients only. Press participants are not permitted on this call and should disconnect now. Unless otherwise permitted by internal JPMorgan policy, members of JPMorgan Investment and Corporate Banking are not permitted on this call and should disconnect now. I'd now like to turn the call over to Samik Chatterjee to start. Please go ahead when you're ready.

Thank you, and thank you, everyone, for joining. I'm Samik Chatterjee, and I have the pleasure of hosting for CEO Spotlight series today, Enrique Lores, who is the CEO of HP Inc. And Enrique, as most of you know, took over the CEO role in 2019, but has a more than 30-year career at HP at this point. It is our pleasure to host him today. We will go through a set of preset questions and topics with him. But for the audience members who have a question, please feel free to put it in the Q&A chat box. And if you have time in the end, we would definitely take your questions as well at that point. So with that, let me get started here, Enrique. Thanks a lot for taking the time to do this. And maybe I'll start you off with some long-term questions in the industry and then sort of more focus about the macro dynamics that are going on more near term. You took over the role -- CEO role in 2019, and you've been with the company for more than 30 years. Just your unique perspective, just walk us through what has evolved? How have you seen the evolution of the PC and the print industry? What's changed? How have the dynamics of these 2 industries changed relative to when you probably looked at -- at its -- starting your career versus when -- now you're the CEO of the company?

Sure. And thank you for having me here, Samik. I think since I started my career a long, long time ago, I will probably try to refer to what has happened in the last years because if not, we are going to go close to the middle ages. So I think we can start and make it shorter. I think if we look at the 2 businesses, they have performed in -- probably very differently between themselves. If we look at PCs, and computing overall. This is a market that despite being a cyclical market, continues to grow. And especially during COVID had some years of extremely high growth. That has had an impact on the years after that. But clearly, the trend is that there are going to be -- and continue to be more computers in the planet 5 years from now than there are today than there were a few years ago. And really, this has really been a big part of what we have been -- how we have been managing the business. Second is the relevance of adjacencies to the business. We identified what we call peripherals a few years ago as an interesting adjacency to grow into, and we did it both organically and inorganically. We also have seen and continue to see a transition from transactional sales into service-oriented sales where customers buy a subscription, via service, they don't have the computer. And recently, clearly, with the invention of AI, we see that now AI is going to open another area of growth, both to drive refresh, but also to improve to increase average selling price because of the added value these products are going to have. So that will be my summary on the PC side. On the print side, there have been different dynamics per segment. In print, there are segments that have been in secular decline for the last years, consumer print. Our goal there and the trend has been to try to capture more value per customer by offering more value, acknowledging that the number of pages is going to decline. And this is why our transition to subscriptions and to offer additional services has been so critical. Another segment in print is what we call office print. That has been a segment that especially through COVID was impacted by the change in working habits and the fact that people are spending less time in the office and therefore, printing less than what they did before COVID. And the last segment in print is what we call industrial print, that is a segment that is in secular growth, driven by the adoption of digital technologies, the value that digital technologies bring to shorten times to be able to do shorter runs. This is a segment that has been in steady growth during the last 5 years and that we expect to continue to grow. This will be my summary of the 2 segments.

No, great. And we'll get into AI much -- very early in the discussion here. You mentioned AI and sort of how that impacts the PC business. But maybe if I ask it across both of these broad verticals, PCs and printers that you're looking at, how do you see AI impacting the value proposition to a customer or a consumer in terms of the PC and the printer product categories? And how are you envisioning this plays out over the next 5 years?

We think AI is going to have a very strong impact in our business. And actually, it's going to be a very positive contributor to growth. And the strategy that we have defined that we call future of work, it really centered around that. And we have now identified 4 areas that are going to be helping us to accelerate our growth and to help to move the business forward. And I draw it like a stair. So I'm going to be explaining the stair starting from the bottom going to the top. On the bottom is the opportunity that we see to integrate AI into our portfolio by making all of our devices, let's call them smart, because they will be able to run language models locally. So customers will be able to do what they do today with ChatGPT in the cloud. They will be able to do that for their businesses locally, which means it will be cheaper. It will be faster. And also it will be more secure or more private because they don't need to upload all their data. We have started to do that with PCs but investors should expect us to bring this type of functionality across all of our portfolio. So this will be the base. All the devices will be smart and they will bring AI capabilities to the edge. Second layer is once these devices are smart, they can communicate among themselves. And by communicating among themselves, they can offer a much simpler experience to our customers. And the example that we use that we will be releasing in the next quarter is PCs and video conferencing rooms by having the video conferencing room and the PC Smart and being able to connect, they will really simplify our experience in connecting with rooms. You will get to the room video PC. The room will know you are in the room. So the meeting will be open because the room will be checking with your PC, what do you have in your agenda? The PC in the room will decide what cameras to use, what microphones to use. So the experience in the room and outside the room will be better. And all this is going to dramatically simplify how we interact with technology. You can think about similar experiences between headsets and PCs or printers and PCs by them connecting and being smart the overall experience is going to be much, much simpler. Third layer is when you have all these devices, especially in a commercial environment, you need to make it easy for CIOs to manage them and also to make sure they are to measure that they are delivering the experience to their employees, to their customers that they need. And we just launched a software management platform called workforce experience platform that does exactly that. It connects the CIO system to all the devices that they use in their enterprise, rooms, PCs, printers and monitors and make sure that these devices are delivering the experience they want. This is very useful, for example, in many areas, but let me give an example on the PC space. Companies today buy -- tend to buy 1 or 2 PC models for all their employees. In some cases, they are paying too much. In some cases, they are not giving enough computing power to their to their employees. By measuring the experience per employee, they will be able to fine-tune what they offer and both increase productivity and improve experience. And the last opportunity that we see kind of the fourth player in the stair is by having AI running at the edge, we can really simplify and transform experiences for vertical businesses. Today, we have a fairly large business in retail point of sale. We're integrating AI into that, the experience and the value we can provide to our customers will increase significantly. This means that we need to help to build models based on their customer data that will run in the terminal. And we have built tools in our workstation space to do that. This means that we may need new form factors to help them to bring AI to the workers in the shops. All this is another opportunity that we are starting now that we are piloting that over the years will become more relevant. So that's how we think about AI and the impact that AI is contributing -- having in our portfolio.

Thank you for that on a very detailed strategy. So thanks for that. Maybe before I dive into some of the segment related questions itself. As you mentioned, like there is volatility and sort of cyclicality around some of the hardware product end markets that you're in. So when you think about what investors should be judging the company on, on a more longer-term basis because there's also the willingness to look beyond the sort of short-term cycles. What are the metrics you want investors to focus on to look at HPQ and, say, HP Inc say, okay, the company is making progress on the right metrics and their re-volatility in the end markets, that's always there, but the longer-term progress continues to be in the right direction.

Yes. This is why we defined a few years ago what we define our key growth areas. These are businesses that either because they have their adjacencies where we see growth opportunities or because it will help us to transform our core business, we think are the areas where that really will help us to grow the company in the long term -- to grow the profit of the company in the long term. So that's because at the end, this is what we want. So measuring the progress on the key growth areas, is kind of what investors should be looking at. And within growth areas, we have a portfolio -- portfolio of multiple things. Of course, we have AI PCs and workstations that are going to be taking advantage of the transition to AI. We have adjacencies like hybrid systems and industrial print where are close to our core businesses, but are areas -- that either because the market will grow or we can grow our share. We have significant opportunity to grow. And finally, we have workforce solutions and consumer services that talk about the transformation we are doing from transactional sales into service sales. These are the 3 type of businesses that we have -- 3 type of businesses that we have in the growth areas, monitoring the progress and assuring the progress of them is what will help us to drive the company into the future.

Okay. Got it. So maybe now diving into AI PCs and getting more specific here. From an investor standpoint, when I look -- sort of looking in from outside the investor perception is that we haven't really seen that much of a pickup in adoption of AI PCs just yet relative to what maybe expectations were when we sort of imagine the concept of AI PCs initially. What do you think are -- if that's true, what do you think are the barriers that you're seeing? Or maybe on the flip side, what are the leading use cases that you're seeing customers use the AI PCs for and maybe just outline sort of -- from your perspective, how do you think adoption is tracking?

Yes. From our perspective, adoption is tracking well versus the goal that we had. We said that we expected by the end of this year, more than 25% of our sales to be AI PCs, and we are on track to meet or beat that goal. So adoption is going well. And what we see is more and more software companies taking advantage of the capabilities that AI PCs bring, and starting to do that. And what is more important, they will continue to do that in the coming years. To our message to customers, especially enterprise customers, which is where we expect the adoption to be -- to grow faster is very simple. If you want your employees to take advantage of all the new capabilities that software companies are going to have, once you -- when you upgrade your PC fleet, start buying PC -- AI PCs now, this is, for example, what we are doing in -- what we are doing in HP. And it's probably important. I explained also what is the value, not also for customers, but also for software companies. Many of our companies now sell their AI solutions as a service. When they do that, the cost of running the application is a significant cost for them. When they start taking advantage of AI capabilities in the front in the -- at the edge and the user capabilities of AI PCs, they reduced significantly the cost in the cloud. And the cost in the cloud for these applications as they start using AI is going to grow significantly because as customer interacts with AI, the cost in the cloud increases by an order of magnitude. So for all software companies, it's very important to start taking advantage of the AI capabilities at the edge. This is what we are starting to see, and this is what more and more companies are going to be doing in the coming quarters. And this is why it's important that when customers buy PCs now, they buy AI PCs.

And then when you think about it over the next few years, if you -- I know you're tracking to your target for adoption that you had laid out, but do you see inflection coming or drivers to drive an inflection relative to the trajectory you are on for adoption right now? And how does AI PC also fit into the broader strategy of hybrid work for you?

Yes. So clearly, we expect adoption to continue. The metric we defined a year ago was -- or the goal we defined a year ago is about 50% of PCs being AI PCs 2 years from now. And we maintain that forecast, and we are on track to make that number. So that's kind of the vision that we define. How AI PC's fit in the strategy is what I explained before. All of our devices are going to be smart. They will be able to run language models at the edge. This will allow customers to reduce cost, to respond faster and to manage their data in a more private and secure way, and that's the value proposition that they are delivering today, and they will continue to deliver in the coming years.

Let me sort of pivot here to talking about the software offering. So when we look at [indiscernible] developing in-house, you have solutions like AI companions, SmartSense, I think security as well. Firstly, what is driving this level of in-house software development and then how do you think about where -- how the opportunity is to monetize this software development?

Yes. We do this type of software development for 2 reasons. One is because we think it's an opportunity to differentiate and of selling more hardware or selling hardware at a higher selling price. And for example, this is the case and security. We have the most secure PCs and printers in the market. We do that because of investments that we do both in hardware and in software and HP Wolf Security is kind of brand that we use to commercialize this offering. But as you said, this is also an opportunity to monetize these investments in a different way. And this is the case of the workforce experience platform that I mentioned before. We just released it a couple of months ago. We see a lot of demand from customers in terms of helping them to manage their fleet, and with this as an opportunity to improve the overall margins of the PC business by monetizing the subscription that we will be -- that customers will have to use to be able to take to use this software.

Interesting Okay. You did acquire Humane, and I hope I'm pronouncing it right. So correct me if I'm wrong, but maybe share what -- how this sort of fits into the strategy overall? And how will it enable your AI strategy?

Yes. So we bought Humane and what we were really interested were 2 things. Some of the technology assets that they have built during the last few years and also the team and the capabilities that the team has to work on AI solutions. And when I go back to the 4-layer strategy that I explained, we -- they are going to be instrumental in 2 areas. One, in the better experience to get -- a better experience across the full portfolio that I explained before. They have a lot of software that we can leverage to drive that experience. And they will also help in making -- in improving the performance of all of our AI-based products, starting with AI PCs. AI PCs will use models locally, but they will also use some models in the cloud and they have built [ server ] that allows customers -- their product to choose what models to use, that is going to be very important in an AI-driven world.

Got it. Okay. Let me then move to something that's a bit more near term of a discussion in this current macro, the enterprise PC refresh cycle. And what's driving your confidence that the continuing sort of tailwinds relative to this cycle. And particularly given the strength we've seen in the first half, there was continuing into the back half of the year -- as you can -- I'm sure you're getting questions on this is as you can see there's investor concern about how much of this is sustainable during the back half. So maybe address what's giving you the confidence relative to where we see for investors in their perception?

Yes. I mean for customers, it's important to transition because of the significant increase in cost that they will experience if they don't do it next year. So that's -- that's the reason why customers are transitioning. What we have seen is the transition started slow compared to transitions in the past, but it started to pick up a pace in Q1 and Q2, and this is something that we track very rigorously. We know how many customers have transitioned, the opportunities that we see and especially we track also the funnel of deals that are driven by the window refresh. We saw an increase in Q1. We saw a significant bigger increase in Q2. The final at the end of Q2 was significantly bigger than what we had a year ago. So this gives us confidence that this will continue in the second half and probably in the first part of next year, for those customers that will not have completed the transition by October.

Okay. Let me switch over to print. And -- just starting off your -- I know you mentioned the secular decline in the print business. So maybe just talk about when you put that as sort of the -- put that secular decline in that business as the starting point how do you envision when you look at steady declines in like supplies, for example, how do you think about the offsets to that in the business? How do you grow or maintain the revenue footprint for the business as you navigate that secular decline?

Yes. So I think we should go to the different segments and what is our strategy per segment. When I think about consumer, we are doing basically 2 things. One is driving or improving -- increasing the value of hardware and the transition to Big Ink or Big Tank continues to be very important for the business has been important during the last years. We have been growing the business. We have been growing share, and we expect it to continue in the coming years. And second is the transition to subscription and services. We have grown the number of subscribers to 30 million subscribers in the last few years, we have also -- which is also very important, expanded the portfolio of services that we offer. We offer paper as a service, where we have now 1 million subscribers. And a few quarters ago, we started to offer the full printer, including supplies as a service, which we call all-in. And this system has been growing, and we expect it to continue to grow. That's what we are doing in the consumer space, more value in hardware and transition to services. And of course, we continue to manage our supplies business very rigorously, increasing share and which has been something that over the last 5 years, we have been able to maintain, which for the company is very critical. In the office side, our goal is to continue to grow our business -- our share in the business. We are doing -- we are focused on the most profitable categories and also similar to consumer, driving a transition to -- in this case, is to contractual business, where customers don't buy the printer, they buy the full printing service for us. The goal behind both is to capture more value per customer. We think customers will be printing less by increasing services, increasing the full package, we can capture more value from them. And finally, last strategy in print is to continue to grow in industrial print. It's a segment where I said before, we expect to continue to grow. We are the leaders in the category and we want to continue to lead and to grow in that space.

Enrique, just a follow-up there. For industrial print, maybe if you can give us any ballpark numbers of how big the industrial print business is related to your overall print? And what are the kind of growth rates that investors should expect there?

Sure. I don't think we have shared the specific size. It's something that we know we need to do in the next analyst review. The last number we shared is this combined with our large format business was around 15% of the print business. And that's kind of the key metric we have shared about the business. Something I forgot to mention when we talk about print that I think is very relevant for investors. A big part of our print strategy is also the reduction of cost structure. We know that this is a business that is not going to have accelerated growth, managing cost aggressively is important. We have been doing that over the last 5 years, and we will continue to do that in the coming years. And there are -- in a business of that size, when we look at not only OpEx, but we look at cost of goods sold and the infrastructure necessary to manage the business we continue to see a lot of opportunities to reduce cost and especially with AI and the adoption of AI internally, we see opportunities to continue to do that in the coming years.

And I had the next question for you on the margins itself and the sustainability of the print margins. But maybe -- let me rephrase that, since you're talking about cost, your -- is cost reduction the only way to drive margins to be sustainable? Or do you see cost reduction as being on top of what you can already do with the business to maintain profit margins?

It is both. I think cost reduction is important, and we will continue to do that. But for example, as we transition customers from buying a printer and cartridges to buying a subscription, those customers are more profitable for us. They are happier because they get more value and the Net Promoter Score of these customers is the highest that we have. But on top of that, we can capture more value per customer that improves also from -- helps us from a profit perspective. So we need to do both, reduce cost, but also continue to focus on the areas where we can capture more value and do that aggressively.

And maybe then moving to the competitive dynamics. One, like what are you seeing in the competitive dynamics right now? Has that changed over the years, just as the market has been shrinking from a secular decline perspective? And do you still -- or do you see a need -- let me rephrase, do you see a need for industry consolidation to then improve returns for industry participants in this market?

Let me answer the 2 questions separately. From a competitive perspective, especially during the last 2 years, we have seen an increase in competitive pressure because many of our key competitors are Japanese companies, and they have got a lot of support from having a very weak yen. And this has been the key dynamic over the last 24 or 36 months. Recently, because of the changes in tariffs, we have seen that some of our competitors -- actually the majority of our competitors have announced price increases. So that puts to lower prices is probably starting to change, probably driven partially by tariffs. Going to your second question, and I'm going to be careful on how I answer, because I don't want to -- I want to be extremely -- the message is nothing has changed. And sometimes I use a different word and then this is interpreted in different ways. We continue to think that in print there will be consolidation. But at this point, it's not a key priority for us when we look at the other opportunities we have to create value. But if I think about this business in the long run, at some point, there needs to be consolidation. And we have started to see some movements in some of the Japanese companies that are combining sales forces or combining manufacturing, combining R&D. This is -- I would consider this a leading indicator of potential consolidations in the industry.

Okay. Maybe let's go back to the 2023 Investor Day, and you've talked about some of these topics already. So I'm going to sort of rephrase and make it [indiscernible]. You talked about the growth drivers or levers for print to be rebalancing value to hardware, accelerating subscriptions of Instant Ink expanding services. So maybe from the standpoint of like how do we again understand the progress from the 2023 Investor Day? Anything that you can share in terms of these 3 drivers or these 3 levers of how much progress you've made on those 3 fronts from the 2023 Investor Day, but again, investors to judge that the long-term dynamics are continue to move in the right direction?

Yes. And I'm going to group both. We have seen very steady progress and good progress in our growth in being -- in kind of rebalancing profit between hardware and supplies, and we have a lot of room to continue to grow in that space. And you -- investors should expect us to continue to do that. And similar on subscription. As I mentioned before, we have now 30 million subscribers probably the most relevant thing is we have both increased penetration, but also during the last years, we have offered and launched new services to the market that we have proven that there is good customer acceptance and now we're in the phase of expanding both in terms of penetration and also geographically, because some of the programs we launched only in the U.S. and now we are expanding into other countries in the world.

Got it. Maybe just one follow-up there. And this question I get often when we refer to the rebalancing of the value of the hardware that you've done over time, which has been pretty successful. Is there anything here outside of price increases to think of like how do you go about it on a product SKU basis? Is this primarily going to the customer base and looking to take pricing on the equipment sale or -- is there more to it in the go-to-market approach than sort of simplistically thinking about it as a price increase?

I think it's a combination of multiple things. And if I think backwards and in the last 5 years, we launched a program we call HP+ that was driving this rebalancing. Then we accelerated our growth in Big Ink and Big Tank, and it's really about trying to offer customers are -- a solid reason to pay more for hardware versus staying with the traditional model. When for example, when they buy a Big Tank printer. They buy the printer, they buy the consumables, they pay more upfront than the cost per copy will be lower. And this model in many countries has resonated and in many customers -- with many customers has really worked. For example, for us, is relevant in emerging countries where our share of supply was relatively low. This has helped us to improve our business there. So it's something that has helped. And again, especially now with begin of Big Tank -- and the Big Tank and the opportunities that we have to expand and to grow -- this is going to continue to be a very relevant part of our strategy going forward.

Got it. Enrique, I have a few more questions for you on the manufacturing footprint and growth. But before I do, I have a question here that I think is interesting to bring up just because we are more discussing the businesses and the products at this point. The question reads, would HPQ look to leapfrog phones and introduce smart devices such as smart glasses or AI assistance in pocket?

Yes. I mentioned before, we are looking at how AI is going to have an impact transforming some vertical industries, and I mentioned retail. We are going to be exploring if it makes sense to adopt, what we call new form factors. At this point, it is an exploration. We haven't made any significant decision to rent in this space. And if we do, it will be in support of a solution strategy. It will not be to grow a specific category. So it will be a much broader approach than just offering a new portfolio of products.

Interesting. Okay. So let's move to the questions on the supply or manufacturing side. You've talked about a diversified supply chain. You've talked about moving PC production outside of China. Just maybe talk about how do you foresee the challenges to the supply chain if some of the less tariffed countries right now like India, Vietnam and others would experience changes in the tariff rates. I mean we saw some weeks overnight as well. And how are you planning for flexibility in the supply chain to address such a change?

Yes. So multiple things. One is, we started this process after COVID, when we realize that for resiliency, it was important to have a more diversified supply chain. And what we have done is accelerated this process as the tariff conversation started to get traction a few -- a couple or 3 quarters ago. So that's kind of how we have responded. And now we have a fairly diversified supply chain covering the countries that you mentioned. Of course, China continues to be relevant for the non-U.S. business. And then we have factories in India, Thailand, Vietnam, for supplies we have in Malaysia or we have in Mexico and some in the U.S. And this gives us a lot of flexibility depending on what tariffs we experienced. I don't want to speculate on what is going to be the tariffs and what we will do. We will continue to respond in a similar way. Part of our response is also priced. There are certain things that we can do with cost and with flexibility, but also price is a significant part of how we will respond to tariffs because if there is a global 10% tariff is no matter what flexibility you have you can drive cost down, but eventually, prices will have to go up. And this is true for us. It's also true for the industry.

And maybe on the same discussion, but on the print side, just talk about your -- how sort of you manage your supply footprint there? And how do you see that comparing to some of your peers, particularly the Japanese competitors?

In print, we started with a more diversified supply chain, the presence that we have in China for print was lower. And therefore, the changes that we have had to make have been relatively smaller. I think compared to our Japanese competitors, we are in a fairly similar position. We probably have a slightly lower -- smaller presence in China than they do, but I'm sure they are reacting and they will be looking for ways to make it more flexible.

Got it. Last one from my side before we start taking some of the questions that have come in. When I look at the last 10-year revenue CAGR for HPQ, that's been about 1%, if I'm calculating it right. And so when you think about what drives the change to that long-term growth rate for HPQ maybe share your thoughts on that front, because I know on the -- at the Analyst Day, you had outlined more of a 2% to 4% growth rate. So how do we think about sort of the change from that 1% to -- going into that 2% to 4% range? What needs to changed from where we are today?

Yes. I think our strategy, what we explained at the Investor Day is, we are going to be leading at the same or faster rate at the markets where we are, and this will continue to be the strategy going forward. When I think about how to get to 2% to 4% is both by growing our share in the core market, but it's also by growing share in the new markets. And this is why what we call the growth areas are so relevant because -- either because there are adjacencies where we can increase or because they will drive an improvement in the core businesses or because by driving into services, they will help reducing the cyclicality of the business. I think for the 2 reasons, these are kind of -- these are going to continue to be the strategies that we will push going forward.

Let's take some of the questions that have come in. So the first one is on the print segment. It reads within the print sector, you covered consolidation. But do you see further consolidation in the channel? And how will HP encouraging loyalty with their partners?

Yes. So the answer is yes. We have seen consolidation in the channel, and we expect it to continue to be the case. And actually, we support this when partners come asking whether we will support consolidation, we always say, yes, because for us, it's more efficient to play with fewer players than we have -- we can have a more stronger programs with more players. And I would say that channel and channel management [indiscernible] it has been and will continue to be one of the key strengths that we have as a company. We are a channel company. A very significant part of our sales growth through channel more than 80%, 85%. This has been the case for many, many years. And the strength of our relationships, the strength of our programs, the strength of our tools really make our channel business one of the key differentiators for us in the industry.

Taking the next question. How will the future strategy around AI PCs and then cost reduction in printing, both of those together impact HPQ's cash conversion cycle and free cash flow profile.

I think in both cases, should be positive. And AI PCs are going to drive growth in the PC space that will generate cash and reducing cost in print will improve earnings that will also drive cash. None of them should be contradictory with the need to grow -- to maintain or grow our free cash flow projections for the coming years.

Yes. Okay. Good. Let me take the next couple of questions and I'll rephrase a bit for the benefit here. The question is more about the PC supply footprint relative to your competitors. And if you see a meaningful difference in your supply footprint to your competitors in the PC landscape and if there is a reason why there is a difference in that. And as you address that, and we sort of navigate the tariffs, how are you thinking about balancing, taking price versus prioritizing market share?

So 2 things. I think in terms of changes in supply chain based on the visibility that we have, there have been slight differences in what countries to go. But I think that the industry has diversified significantly over the last 2 quarters. We -- I think we were faster in moving, but based on the changes in tariffs, I think other companies have responded as well. So I think it's the situation competitively is fairly similar. In terms of price versus share, our goal is profitable growth. And we look at tariffs as an increase of cost, and it could be components cost or something else. And our goal of driving profitable growth is not going to change. If in some areas, we see that by -- be more aggressive on price as we can drive more profitable growth, we will. And if in others, we need to be more conservative from a pricing perspective and drive profitable growth, we will as well. So it is -- I don't differentiate tariffs from any other cost drivers that we have to manage.

Last 2 questions that I see here from investors before we wrap it up. But these are -- I'll give you both of them together because I don't know how much you could comment on that. One is -- how do you think about risk from Section 232 semiconductor tariffs? And the other one is, can you touch on working capital dynamics and when does this become a tailwind to cash flow? I know you discussed this already. So I'm going to just give you those 2 and see what you want to share on those 2?

I mean. On 2 it's -- it's difficult to comment. We -- the investigation from the administration is open. We are engaged in providing our feedback in explaining what we think will be positive and negative. And I think we need to wait until the investigation finishes and the President makes a decision. I think what is important is we know that with the combination again of flexibility and price will allow us to respond to whatever changes we are put in place. In some cases, there might be a delay between tariffs and when we can reflect everything in price. But eventually, this will happen, and we will respond as we have responded before. So no changes there. In terms of working capital, we mentioned in the call that working capital in the second half was being impacted negatively by 2 things: the earnings, the impact on earnings because of cost and demand, but also because as we were increasing the capacity in multiple factories, there was going to be an increase in working capital. The second driver is temporary as the efficiency of the new factories will increase, we will be able to reduce that. And this specific part should become a tailwind in '26 as we will increase the efficiency on how do we manage a more complex factory system.

Enrique one more question has come in. So please bear with me. I'll give you that last question here, which is -- and I'm rephrasing it as well. Maybe talk about what are you seeing in terms of either inflation -- outside of tariffs, inflationary or deflationary drivers to the PC segment. And the question is more about the understanding that a big compute partner on the chipset side is more aggressive on price. Does that provide you some deflationary drivers that help you navigate the tariff headwind?

So 2 things. From a -- I guess the question is about component cost and what do we see from a cost perspective. Component costs year-on-year continues to be a headwind, but we have started to see quarter-by-quarter improvement. So -- and this is what is reflected in the guide that we have provided. I think in terms of processors, which I think is the second part of the question, the fact that there are more companies competing in that space is positive for us. The fact that we have 2 alternatives on the x86 side, and we see now or -- as a viable solution for both consumer and commercial customers gives -- provides more customer choice, provides us more ability to negotiate and to get the right solution for the right customer. And this is something that we started to do some years ago between AMD and Intel and that we will continue to do going forward.

Great. I think that's all the questions I see from investors here. So I will wrap it up there. And thank you again for taking the time to do this, and thank you to the audience as well for joining.

Thank you for the opportunity of talking to your investors. And again, let me close with the confidence we have and the ability to manage the short-term headwinds that we have, and the opportunity to continue to grow profitably in the company in the coming years. Thank you.

Thank you.

That concludes today's call. You may now disconnect your lines.