Analyst Conference Summary

conference date: August 16, 2007 @ 2:00 PM PT
for quarter ending: July 31, 2007 (3rd quarter fiscal 2007)

Forward-looking statements

Overview: Continued solid revenue and earnings growth on year-over-year basis. Increased guidance.

Basic data:

Revenues were $25.4 billion, down slightly sequentially from $25.5 billion but up 16% from $21.9 billion year-earlier.

Net income was $1.8 billion, sequentially flat but up 28.4% from $1.4 billion in Q3 fiscal 2006.

EPS (earnings per share) were $0.66, up sequentially from $0.65 and up 38% from $0.48 year-earlier.

Guidance:

Fiscal Q4 revenues estimated between $27.0 and $27.2 billion. GAAP EPS $0.75 to $0.76. Full Fiscal 2007 revenues $103.0 to $103.2 billion. Non-GAAP EPS $0.80 to $0.81.

Conference Highlights:

Non-GAAP operating margin was 9% (up from 7.6% year-earlier), net earnings were $1.9 billion, and diluted EPS were $0.71. Non-GAAP data excludes $134 million mainly fro amortization of purchased intangibles. Both GAAP and non-GAAP figures include stock-based compensation expense.

By geography, Americas revenues were $11.1 billion, up 14% y/y, EMEA were $9.7 billion, up 16%, and Asia Pacific was $4.6 billion, up 22%.

PSG (Personal Systems Group) revenue had $8.9 billion in revenue, up 29% y/y. Notebook revenue grew 54% y/y, desktop 12%. Workstations up 30%. Commercial revenue grew 19% y/y, consumer 46%. Market share gains and double-digit unit growth in every region. Experienced benefit from lower component prices; believes that is not sustainable.

IPG (Imaging and Printing) revenue was $6.8 billion, up 8% y/y. Supplies revenue was up 9%, commercial hardware 6%, consumer hardware 10%. Printer-based multi-function device revenue was up 76%. Unit growth topped revenue growth.

ESS (Enterprise Storage and Server) revenue was $4.5 billion, up 10% y/y. Standard server revenue grew 16%, blade revenue 81%, storage 6% (including a decline in tape business). Business critical sector declined 3% y/y. PA-RISC and Alpha revenue continued declines.

HPS (HP Services) revenue was $4.2 billion, up 8% y/y. HP Software revenue was $554 million, up 74% led by Mercury Interactive acquisition. OpenView grew 14% y/y excluding Mercury. HPFS (HP Financial Services) had $582 million revenue, up 12% y/y.

$1.9 billion cash flow from operations. $1.3 billion in free-cash flow. Inventory increased $728 million sequentially to $8.0 billion. $548 million in capital expense. $208 million was used for dividend payments. $2.5 billion was used to repurchase shares. Cash and equivalents ended at $12.5 billion.

Cost of sales was $19.2 billion, R&D $0.9 billion, SG&A $3.0 billion, $183 million for amortization. Operating earnings $2.1 billion, interest $165 million, tax provision $508 million.

Operating expenses grew only one-third as fast as revenues. Will continue to invest in new areas to drive growth.

22.4% Non-GAAP tax rate. Expect it to drop to 20% in Q4, but then back up to 21% in 2008.

Believes current inventory levels are appropriate heading into seasonally strongest quarter. Increased receivables partly due to strong acceleration at end of quarter.

Memory prices are already beginning to go up.

Q&A:

Change in demand due to financial market turmoil? Saw steady growth; have no data indicating any material change in demand in any segment or any market.

Back to school inventories? Very comfortable with channel inventories.

ESS margin upside drivers? Had good component prices, but that is not all. We have been disciplined on our own pricing. Quality has been good, so warranty costs have been low.

Margins? Operating margin expansion was broad based. A lot of operating expense discipline goes into it. Do not expect component pricing tail wind in Q4, but will continue expense discipline. Will revisit model on next analyst day.

Tightness of components? Does not apply to us. We feel good about our supply; we locked in a lot of supply before the quarter started. Display panels are a bit in short supply. Only problem would be if demand is more than we modeled for.

Day Sale Oustanding increases? In addition to strong finish to quarter, acquisition effects, and terms we are offering to customers. Range going forward should be 40 to 42 days.

IPG unit growth going forward? Saw good unit growth, particularly in inkjet. Believe we are pricing rationally, but competitors may have problems meeting prices. Investing in enterprise sales force. ASP actually increased because of shift from single function printers.

Why are printer supplies growing slower than hardware? Model is roughly right; supplies is a trailing metric. You have to look at movement of installed base, because that does not grow at same rate as quarterly sales.

Data center issues? Feel we are doing well, but we have more to do with management, security, automation. OpsWare is world leader. But there are a lot of these tools and a lot of competitors. Spending substantial R&D in this area, in addition to acquisitions.

Increase PC attach issues? Getting better at it, not great at it. We are doing better at hardware attach than software attach and services attach.

Verticals that stuck out? Government did well. Nothing else stands out.

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