Analyst Conference Summary

conference date: February 19, 2008 @ 2:00 PM Pacific Time
for quarter ending: January 31, 2008 (1st quarter fiscal 2008)

Forward-looking statements

Overview: Nearly flat sequentially but revenues up 13% from year-earlier.

Basic data:

Revenues of $28.5 billion, up 1% sequentially from $28.3 billion and up 13% from $25.1 billion year-earlier.

Net income was $2.1 billion, down 5% sequentially from $2.2 billion, but up 38% from $1.5 billion year-earlier.

EPS (earnings per share) were $0.80, down 1% sequentially from $0.81, but up 45% from $0.55 year-earlier.

Guidance:

Q2 fiscal 2008 revenue expected between $27.7 and $27.9 billion. GAAP EPS of $0.77 to $0.78.

Full fiscal 2008 revenue of $113.5 to $114.0 billion. GAAP EPS $3.26 to $3.30.

Conference Highlights:

Raising guidance in anticipation of cost reductions and market share gains. Employed more sales resources to capture more sales. Emerging economies are the engines of PC unit growth.

Revenues were up 8% y/y in constant currency.

Non-GAAP net earnings was $2.3 billion; Non-GAAP EPS $0.86; operating margin 9.9%, up 2.5% from year-earlier. 24.5% gross margin.

GAAP operating margin 9.2%.

Americas revenue grew 8% y/y to $11.2 billion. Europe, Middle East, Africa (EMEA) grew 22% to $12.3 billion. Asia Pacifica grw 22% to $4.9 billion. Non-US revenue was 69% of total. Brazil, Russia, India and China grew 35% y/y for 9% of total revenue.

Personal Systems Group (PSG) revenue grew 24% y/y to $10.8 billion. Notebook revenue up 37% y/y on 49% increase in units; desktop 15%. Commercial client up 22%. Consumer client up 29% with notebooks selling particularly well.

Imaging and Printing Group (IPG) grew 4% y/y to $7.3 billion. Supply revenue grew 6%. Consumer hardware revenue declined 5% y/y. But graphic arts and color laser businesses had rapid growth. Ink jet market is mature.

Enterprise Storage and Servers (ESS) revenue grew 9% y/y to $4.8 billion. Industry standard server revenue was up 11% y/y. ESS blades grew 81%. Storage up 10%. Business-critical revenue grew only 1%.

HP Services (HPS) revenue up 11% y/y to $5.4 billion.

Software revenue up 11% to $666 million; now includes Business Intelligence (BI). Financial services revenue up 17% y/y to $642 million.

Cash flow from operations was $3.2 billion. Free cash flow was $2.7 billion. This despite bonus paid in quarter. Dividend payments used $206 million. $3.3 billion was spent on share repurchases. Cash and equivalents ended at $9.9 billion. $7.4 billion remains in share repurchase authorization.

Cost of sales was $21.5 billion. Research and development $0.9 billion. Selling, general and administrative $3.2 billion. Amortization $206 million. Restructuring $10 million. Leaving $2.61 earnings from operations. Interest income was $72 million. Tax provision was $552 million.

Reiterated intent to acquire Extreme Software.

Q&A:

Macroeconomic environment? Good linearity in quarter, no one month was better than another. Solid growth across all businesses and regions. We saw a little bit more caution in the U.S. consumer segment at the end of the quarter. We have built capacity for 2008, but can adjust if the demand is not there.

Printer supplies growth? We have the benefit of a large installed base. Growth opportunities are in graphics and high-end enterprise printing.

Should Q2 seasonality be up instead of down? PC side of business is not likely to grow as fast as in the past. We think Q1 to Q2 seasonality is typically flat. You also have to adjust for currency.

PC ASP (price) trend guidance? Prices have been tame; we are seeing the normal competitive pricing environement.

We expect to have a run rate savings in IT at $1 billion in 2008. We are re-aligning cost structure in Printing (IPG) segment, but want to grow high-end of business too. Looking to optimize long-term margin.

Reduction in inventory in late January? It was not purposeful. We are continuing work on our inventory management.

We are trying hard to beef up our sales force including partners, especially in emerging markets.

Component pricing? In Q1 it was better than we expected, which helped with margins. The outlook is for a stabilizing memory environment.

Datacenter consolidation? We have very strong demand for people to see how we've done our datacenters. It is a major market opportunity.

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