Analyst Conference Summary


conference date: May 16, 2007 @ 2:00 PM Pacific Time
for quarter ending: April 30, 2007 (2nd quarter fiscal 2007)

Forward-looking statements

Overview: About as expected: solid revenue growth year-over-year, but earnings declined and weak guidance for Q3.

Basic data:

Net revenues of $25.5 billion, up 1.6% sequentially from $25.1 billion and up 13% from $22.6 million year-earlier.

Net income was $1.8 billion, sequentially flat but down 7% from $1.9 billion year-earlier. Earnings per diluted share were $0.65, down from 0.66 a year earlier.

Non-GAAP net income was $1.9 billion, down 4% from year earlier. Non-GAAP EPS was $0.70, up $0.01 per share from year-earlier.

Cash and equivalents ended at $12.3 billion.


Revenues in fiscal Q3 will range between $23.7 billion and $23.9 billion (8 to 9% up year-over-year). GAAP EPS $0.60 to $0.61; non-GAAP EPS $0.64 to $0.65.

Full fiscal 2007 revenues estimated between $100.5 billion and $100.9 billion. 2007 GAAP EPS $2.51 to $2.53; non-GAAP $2.75 to $2.77.

Guidance is for a sequential decline greater than seasonally normal.

Conference Highlights:

Non-GAAP EPS would be up 30% year-over-year if the year-earlier tax settlement gain were excluded.

Q2 non-GAAP numbers exclude $145 million from restructuring and amortization offset by a gain from changing the pension plan. Both GAAP and non-GAAP numbers include all stock-based compensation.

Revenues by region: the Americas, $10.7 billion, up 11% year-over-year; Europe, Middle East, Africa, $10.3 billion, up 14%; Asia Pacific, $4.5 billion, up 16%.

Personal Systems Group revenue was $8.7 billion, up 24% on a 30% growth in unit shipments. Notebooks grew 45%; desktops 9%. Commerical client revenue grew 13%; consumer client grew 41%. HP grew units at 2.5 times the market rate of growth.

Imaging and Printing group revenues were $7.2 billion, up 6% year-over-year.

Enterprise Storage and Servers grew 8% to $4.6 billion. Storage revenue grew only 1% due to weakness in high end and in tape. Blade revenue was up 58%.

Services revenue was $4.1 billion, up 7% year-over-year. Software revenue was $523 million, up 58%, helped by Mercury acquisition. Financial services revenue was $550 million, up 6%.

Cash flow from operations was $4.2 billion. $3.6 billion free cash flow. $372 million cash was used for acquisitions. Inventory ended at $7.3 billion, down $1.1 billion sequentially. Accounts receivable increased $1.2 billion sequentially. Accounts payable increased $0.145 billion sequentially.

$213 million was paid out in dividends. $4.2 billion was used for buy backs of about 100 million shares. $7 billion remains authorized for buy backs.

Continuing to invest in strategic initiatives including acquisitions.

24.5% gross margin.

$3.9 billion operating expenses, down 2% year-over-year on an adjusted basis. Up 4% sequentially.

Non-GAAP tax rate was 20%.

Expects capital expenditures ($597 million in quarter) to continue to trend above 2006.


Gross margin color? Gross margin year-over-year change was all about mix. Mostly due to faster growth of consumer computers.

Printer growth slow? 11% is actually quite strong, we think we are still taking market share. Supply sales are not always directly related to printer sales due to mix issues. Normally Q2 is seasonally best for printing segment; Q3 is typically the worst.

Mercury place in software results? Actually, Mercury had double digit growth. OpenView growth was 6%. OpenCall was down 13%.

Dell rumored to go into retail? Many competitors vie for shelf space today. Will be best partner to retailers we can be.

April pick up? U.S. enterprise behaved as expected, it was not a surprising acceleration?

Pricing environment? Memory declined in past several months, believes current prices are unsustainable. Upward pressure on panel prices.

Guidance to slower pace of revenue growth? Mainly consumer growth pace cannot continue as fast as recently. Going back to normal.

Vista impact? Roughly what we expected. Built inventory at end of Q1 for Vista, now inventory is back to normal. Some corporations are planning on trading entire fleet of PCs up to Vista, others will be slow. Clearly Vista was a benefit to us.

Data Warehousing? Acquisitions are not that interesting here unless they add value above the core stack.

Enterprise sales going forward? Looks steady.

Cost reduction? Will continue to work for long term cost reductions so we can have a competitive advantage.

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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