Hewlett-Packard Company (HPQ)

F1Q2011 Earnings Call

February 22, 2011 5:00 p.m. ET

Executives

Steve Fieler – VP of IR

Leo Apotheker – CEO and President

Cathie Lesjak – EVP, CFO

Analysts

Ben Reitzes – Barclays Capital

Mark Moskowitz – JP Morgan

Richard Gardner - Citigroup

Katy Huberty – Morgan Stanley

Tony Sacconaghi – Sanford Bernstein

Shannon Cross – Cross Research

Keith Bachman – Bank of Montreal

Brian Alexander – Raymond James

Maynard Um – UBS

Kaushik Roy – Wedbush

Aaron Rakers – Stifel Nicolaus

Presentation

Operator

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Good day ladies and gentleman, and welcome to the First Quarter 2010 Hewlett-Packard Earnings conference call. My name is Michael and I will be your conference moderator for today’s call. At this time, all participates are in an listen-only mode. We will be facilitating a question-and-answer session towards the end of the conference. (Operator Instructions).

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Steve Fieler, Vice President of Investor Relations. Please proceed.

Steve Fieler

Good afternoon. Welcome to our first quarter earnings conference call with Leo Apotheker, HP’s CEO and Cathie Lesjak, HP’s CFO.

This call is being webcast. A replay of the webcast will be available shortly after the call for approximately one year.

Some information provided during this call may include forward-looking statements that are based on certain assumptions and are subject to a number of risks and uncertainties, and actual future results may vary materially. Please refer to the risks described in HP's SEC reports, including our most recent Form 10-K.

The financial information discussed in connection with this call, including tax-related items, reflects estimates based on information available at this time and could differ materially from the amounts ultimately reported in HP's Q1 Form 10-Q. Earnings, operating margins and similar items at the company level are sometimes expressed on a non-GAAP basis and have been adjusted to exclude certain items including amortization of purchase and intangibles, restructuring charges and acquisition-related charges.

The comparable GAAP financial information and a reconciliation of non-GAAP amounts to GAAP are included in the tables and in the slide presentation accompanying today's earnings release, both of which are available on the HP Investor Relations webpage at www.hp.com.

I'll now turn the call over to Leo.

Leo Apotheker

Thank you, Steve. When I come to see you, one of the most commonly asked questions has been what does HP do well, and where does HP need to improve. With one full quarter under my belt, I now have an insider’s perspective on the answer.

For starters, I’m convinced that we have the core strength to deliver for our customers, partners, employees, and shareholders. When you look where the market is heading with cloud and connectivity converging, HP is well positioned to win.

I’m confident in our future and our ability to execute effectively. I’m also confident that our business model can sustain our earnings power.

Our Q1 results demonstrate the powerful operating leverage and diversity of our portfolio. We grew revenue 4%, gross profit 10%, operating profit 14%, and cash flow from operations and EPS were both up over 20%.

We have a business model that benefits from scale and leadership in our core businesses. And we have an evolving portfolio mix with higher-margin businesses such as networking, helping to extend company gross margins.

As we discussed during our last earnings call, gross margin expansion allows us to invest for future growth. If you want operating profitability, it was in dollars and percentage, what’s strong and demonstrated sound financial discipline. But, our Q1 results also show that there are opportunities to improve our growth in a few isolated areas.

Despite strong profitability and cash flow in the quarter, we did not meet our top-line growth expectations, and I’ll provide some specific color on PSG and services.

Let me start with PSG which declined 1% year over year. Going into the year, we made a few assumptions about the PC market in our business. First, we assumed that we would enhance our number-one share position. Indeed, in the most recently reported calendar quarter, HP grew it’s worldwide sequential share in every category; consumer, commercial, desktop, notebook. HP holds the number-one share in both desktops and notebooks.

Second, we assumed that we would capitalize on the growth in the commercial markets. Again in Q1, we grew commercial PC planned revenue by 11% year over year showing good growth in each region. We also assumed that they would execute a recovery plan in China. In Q1, we grew our PSG China revenue 25% sequentially. We’re showing good progress but there still has work to do.

Finally, we assumed that we deliver growth in consumers. Unfortunately, this did not play out in Q1 due to softness and the overall consumer PC market. Our consumer PC client revenue went down 12% year over year. PSG continues to demonstrate solid execution, leveraging its portfolio breadth, geographical reach and customer diversity.

Despite a soft consumer market in PCs, PSG’s operating profits increased 27% year over year delivering 6.4% operating margins.

And most importantly, I am very pleased with our February 9, WebOS announcement. We are all excited about our WebOS platform, the devices and that we announced and the incremental opportunity that WebOS provides. The enthusiasm and the anticipation for WebOS exceeds even our most optimistic expectations. We look forward to providing a differentiated seamless experience across our tablets, Smartphones, printers, PC’s and future phones.

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