Analyst Conference Summary


conference date: February 20, 2007
for quarter ending: January 31, 2007 (1st quarter fiscal 2007)

Forward-looking statements

Overview: Moderate growth, but beating sell-side analyst consensus and raised Q2 guidance slightly.

Basic data:

Revenues were $25.1 billion, up 11% from $22.7 billion year-earlier.

Operating profit (net income) was $1.8 billion. Non-GAAP operating profit was reported as $2.2 billion.

Earnings per share were $0.55, up 31% from $0.42 in the year-earlier quarter. Non-GAAP EPS was also reported at $0.65.

Cash and equivalents ended at $10.4 billion. Cash flow and free cash flow were negative. Spent $4.5 billion for acquisitions.


Q2 fiscal 2007 revenue estimated at $24.5 billion. GAAP EPS $0.57 to $0.58. 20% non-GAAP tax rate. Will continue to repurchase shares.

Full fiscal 2007 revenue $98 to $99 billion and GAAP EPS from $2.35 to $2.40. Capital expenditures to trend above 2006.

Conference Highlights:

Revenue results were inflated by currency exchange effects; would have been up 7% in the year on a comparable basis.

Non-GAAP figures exclude $279 million in adjustments for amortization and in-process R&D charges from acquisitions. Both GAAP and non-GAAP figures include stock-based compensation expense.

23.7% gross margin, declining from 24.3%. GAAP operating margin was 7%.

By geography, revenue grew: Americas 6% to $10.4 billion; EMEA (Europe ... Africa) 14% to $10.7 billion; Asia-Pacific 15% to $4.0 billion.

Notebook revenue grew 40% year-over-year, but desktop revenue declined 1%. Workstation revenue up 23%. Personal Systems group revenue on the whole had operating profit of $414 million or 4.7% of revenue, which grew 17% to $8.7 billion. Unit shipments up 19% overall. Reducing price structure to win enterprise accounts. Gained market share.

Image and Printing group grew 7% year-over-year to $7.0 billion. Units up 18%. Confident gained market share. $1.1 billion operating profit.

Enterprise Storage and Servers had revenues of $4.5 billion, up 5% from Q1 fiscal 2006. Industry standard servers up 10%. Blade servers did particularly well. Storage grew only 3%. Tape and high end were particularly weak. Can do better.

HP Services had revenues of $3.9 billion, up 5%.

HP Software had revenues of $550 million, up 81%, mostly due to the Mercury acquisition, which closed November 6. Revenue grew 7% year-over-year excluding Mercury.

HP Financial Services had revenues of $547 million, up 10%. Operating margin 5.9%.

Inventory ended at $8.4 billion, up $0.63 billion sequentially and $1.6 billion year-over-year. Accounts receivable decreased $0.47 billion to $10.4 billion. Accounts payable decreased $0.74 sequentially and reached $11.4 billion.

$2.3 billion was used to repurchase shares. Dividend payments took $218 million.

The company is changing its pension plans, which will result in a one-time curtailment gain of $500 million. This will be used to encourage participation in an early retirement program.

$3.8 billion operating expense, up 1% sequentially. Cost of sales was $19.1 billion. R&D $877 million. SG&A $2.9 billion. $579 million capital expense.


Inventory mix issues? Across the board. Some due to putting more inventory on boats from China. Feels good about freshness of inventory.

Vista impact? Some impact in Q2, not enough data to give color yet.

Q2 guidance? Believes robust holiday sales means will see greater than normal downward seasonality in Q2.

Cost of components? Seeing memory free up, but may go up and down. Processors and hard drives were stabile in quarter. Expect some modest price erosion in (LCD) panels.

Curtailment gain? It is important to not assume that the early-retirment jobs will be eliminated. Replacements may have cost savings. Some improved cost structure, but more shifting spending from G&A to sales.

Printer margins? We are above target margins, but believes range is right. Unit growth is a key in consumer segment.

Gross margins down 1.5% over last 2 quarters? Driver is increased mix of PSG segment. No segment change of consequence so far or going forward that they can see. Would expect some increase in gross margin in Q2 due to seasonality.

$1.5 billion in Other cash flow? Bonus payments, back payables, rebates, VAT receivables. Hard to predict going forward.

Tech demand color? Overall is steady. Feel European situation is better than before. Continues to watch US consumer.

Storage? EDA flagship line grew 18%. Tape performed poorly. Business critical was just weak, no specific reason.

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Disclaimer: Our analyst summaries may include both our condensations of statements made by company representatives and our own analysis. They are not covered by any warranty. We cannot guarantee anything said by company representatives is true. We try not to make errors, but it is possible. Before making or terminating an investment you should always verify any factual basis of your decision.

Copyright 2007 William P. Meyers