Analyst Conference Summary

conference date: May 20, 2008 @ 2:00 PM Pacific Time
for quarter ending: April 30, 2008 (2nd quarter fiscal 2008)

Forward-looking statements

Overview: The low dollar helps HP make gains on its global business.

Basic data (GAAP) :

Revenues were $28.3 billion, down 1% sequentially from $28.5 billion, but up 11% from $25.5 billion year-earlier.

Net income was $2.06 billion, down 3% sequentially from $2.13 billion, but up 16% from $1.8 billion year-earlier.

EPS (earnings per share) were $0.80, flat sequentially, and up 23% from $0.65 year-earlier.

Guidance:

Guidance excludes EDS impact. Typical seasonality expected. A modest decline in outstanding shares is expected during the year.

Fiscal Q3 2008 revenues of $27.3 to $27.4 billion. GAAP EPS $0.76 to $0.77; non-GAAP $0.82 to $0.83.

Full fiscal 2008 revenue between $114.2 and $114.4 billion (increased). GAAP EPS $3.30 to $3.34, non-GAAP EPS $3.54 to $3.58.

Conference Highlights:

"With 70% of revenue now coming from outside the U.S., we benefited from robust demand in emerging economies." Performance driven by three factors: cost initiatives, sales focus, and diversity of clients. EDS will excellerate our reach in enterprise accounts in U.S. This will also create a platform for new growth. Combined businesses will be able to reduce costs.

Revenue was up 5% in constant currency.

Non-GAAP numbers: operating profit $2.8 billion, up 22% y/y. Operating margin 10.0%. Net income $2.2 billion. EPS $0.87. 24.8% gross margin. 21% tax rate.

Revenue by geography: Americas $11.1 billion, up 4% y/y. Europe, Middle East, Africa (EMEA) $11.9 billion, up 16%. Asia Pacific $5.2 billion up 16%.

PSG (Personal Systems Group) revenue was $10.1 billion, up 16% y/y on a 21% increase in unit shipments. Desktop revenue flat, but notebook revenue up 31% on a 46% increase in units shipped.

IPG (Imaging and Printing Group) revenue was $7.6 billion, up 6% y/y. Supply revenue grew 8%, commercial hardware 6%, and consumer hardware (including cameras) declined 3%.

ESS (Enterprise Storage and Servers) revenue was $4.8 billion, up 4% y/y. ESS blades grew 68%. Storage grew 14%. Industry Standard Server revenue was flat. Business Critixal Systems revenue was up 7%. India and China markets showed strong growth.

HP Services revenue was $4.6 billion, up 12%.

HP Software revenue was $727 million, up 28%.

HPFS (HP Financial Services) revenue was $685 million, up 25%.

Cash flow from operations was $4.8 billion. Free flash flow $4.2 billion. $197 million used for dividends. $2.8 billion used to repurchase stock ($4.5 billion remains authorized). $1 billion for acquisitions. Ended with $11.8 billion in cash and equivalents.

Cost of sales was $21.3 billion. R&D expense $0.9 billion. Selling, general and administrative expense $3.3 billion. Amortiztion of intangibles was $211 million. Leaving earnings from operations of $2.6 billion. Tax provision was $536 million.

Inventory was down compared to year-earlier.

Q&A:

Industry Standard Servers down? We missed a couple of deals, it was an execution issue, but mainly just a tough y/y comparison.

Price competition in ISS? There was some spotty price competition.

Virtualization in X86 business? No material impact in quarter. Industry Standard Servers can benefit from virtualization compared to non-standard installed base.

Europe? Was strong and broad for us. Normal linearity, maybe even stronger in April than traditional linearity.

PC market? We did better than we expected.

Macro economic environment? Our position is good, as shown by having a flatish U.S. quarter but still showing great growth overall. U.S. was spotty, with some segments with good numbers.

Cash flow from operations? We are ahead of plan due to earnings and working capital improvements.

Ink jet printers in U.S.? We saw no material change in ink jet printers in U.S. Spottiness in U.S. is a mixed bag by products, business types, and even geography. We feel good about our market share position. The IPG group executed better that we expected.

Constant currency Asia-Pacific growth down? We felt good about Asia. Did not agree was down constant currency y/y because of method of currency calculation. Thought demand was good.

Datacenter consolidation color? 2500 applications at end of quarter. 65% of datacenters closed. This is about operating efficiency, productivity and ability to expand. Will have to do this with EDS as well. This is internal IT for both HP and EDS, not trade datacenters.

Storage color? Optimistic about sales, especially given new product introductions.

India EDS? We feel very good about India, but it is not the only country where we have important operations to leverage. EDS is largely working with Indian government.

IPG margin weekness? 16.2% is not weak. We are investing both to grow and to save in expenses long run. Graphics segment is important to growth.

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