Hewlett-Packard Company (
HPQ)
Q3 2008 Earnings Call
August 19, 2008 5:00 pm ET
Executives
Jim Burns - Vice President, Investor Relations
Mark V. Hurd - Chairman of the Board, Chief Executive Officer and President
Catherine A. Lesjak - HP Executive Vice President and Chief Financial Officer
Analysts
William Shope - Credit Suisse
Richard Gardner - Citigroup
Katie Huberty - Morgan Stanley
Benjamin Reitzes - Lehman Brothers
Shannon Cross - Cross Research
Toni Sacconaghi. - Sanford C. Bernstein
David Bailey - Goldman Sachs
Jeff Fidacaro - Merrill Lynch
Brian Alexander - Raymond James
Keith Bachman - BMO Capital Markets
William Fearnley - FTN Midwest Securities
Maynard Um - UBS
Louis Miscioscia - Cowen & Company
Jayson Noland - Robert W. Baird
Presentation
Operator
Good day, ladies and gentlemen and welcome to the third quarter 2008 Hewlett-Packard earnings conference call. (Operator Instructions) My name is Nikita and it will be my pleasure to assist you today. At this time all participants are in a listen-only mode. We’ll be facilitating a question-and-answer session towards the end of today’s conference at which tine you may press *1 to participate. If at any time during the call you need assistance please key *0 and a coordinator will be happy to assist you. As a reminder this conference is being recorded for replay purposes. I would now like to introduce your host for today’s call, Mr. Jim Burns, Vice President of Investor Relations. Please proceed sir.
Jim Burns – Vice President, Investor Relations
Thanks, Nikita. Good afternoon and welcome to our third quarter earnings conference call with Chairman and CEO Mark Hurd and CFO Cathie Lesjak. This call is being webcast live. A replay of the webcast will be available shortly after the call for approximately one year. Some information provided during this call may include forward-looking statements that are based on certain assumptions and are subject to a number of risks and uncertainties and actual future results may vary materially. Please refer to the risks described in HP''s SEC reports, including our Form 10-Q for the fiscal quarter ended April 30, 2008. The financial information discussed in connection with this call, including tax related items, reflects estimates based on information available at this time and could differ materially from the amount ultimately reported in HP''s Form 10-Q for the fiscal quarter ended July 31, 2008.
Earnings, operating margins, and similar items at the company level are sometimes expressed on a non-GAAP basis and have been adjusted to exclude certain items, including amortization of purchased intangibles and restructuring charges. The comparable GAAP financial information and a reconciliation of non-GAAP amounts to GAAP are included in the tables and in the third quarter earnings slide presentation accompanying today’s earnings release, both of which are available on the HP investor relations webpage at www.hp.com.
Before I hand the call over to Mark, I wanted to make a few comments regarding the pending acquisition of EDS. We anticipate that the acquisition of EDS will close later this month. Under this assumption, HP plans to hold a securities analyst meeting on September 15th where Mark Hurd, Cathie Lesjak, and other executives from TSG and EDS will discuss HP’s opportunities in the enterprise market, including the actions we will take and the expected financial impact to HP of the EDS acquisition in Q4 and upcoming periods. The meeting will be webcast live and available on the HP investor relations webpage at www.hp.com.
I will now turn the call over to Mark, with a final reminder to please refrain from asking multi-part questions or clarifications during the Q&A.
Mark V. Hurd – Chairman and Chief Executive Officer
Good afternoon and thank you for joining us. Hewlett-Packard delivered another strong quarter. These results further demonstrate the benefits of our global reach, diverse customer base, and broad portfolio of products and services. In addition, as I have said many times before, our numerous cost initiatives continue to provide us with the opportunity to invest for long-term market leadership while also generating near-term operating leverage. HP is unique in the variety of IT customers it serves. In emerging markets, new customers are coming online every day to create, view, and print content and are helping enterprises scale and modernize their infrastructure to process and to store this data. In developed markets, CIOs are investing to cope with the explosive growth in digital content and seeking projects which improve their cost structure, such as virtualization, data center automation, and outsourcing.
Companies are reexamining their IT needs and increasingly moving toward open systems and standards based technologies. We believe that we are well-positioned to capitalize on these trends as reflected in our strong results this quarter. Our cost savings programs allow us to invest in strategic areas such as sales force hiring, software, and graphic arts, while expanding our margins at the same time. As I mentioned to you last quarter, while we’ve become more efficient, our cost initiatives are significant and ongoing and we expect them to create additional leverage in our operating model. In fact, we expect that our overhead costs, which includes IT, real estate, and corporate support functions, will decline more in dollars year-over-year in 2009 than they have in either 2008 or 2007. Now while we primarily want to focus this call on our quarterly results and fourth quarter outlook, let me comment briefly on EDS.
The plan is going well and we are confident in the benefits this business combination will bring to customers, partners, and to shareholders. We have over 500 HP and EDS people, dedicated full time to the integration team. The feedback from the vast majority of the customers that I talk to continues to be extremely positive as they contemplate the power of HP’s innovation coupled with EDS’ scaled services business. I look forward to sharing more details with you at our September 15th meeting. In summary, I am very pleased with our results. As is true with every quarter, some numbers are strong, and other indicate where we have more work to do. In the end, our diverse business model, disciplined execution, and significant cost saving opportunities have enabled us to consistently produce strong business performance.
With that, I will turn it over to Cathie who will review the numbers for the quarter.
Catherine A. Lesjak – Chief Financial Officer
Thanks, Mark and good afternoon, everyone. Revenue for the third quarter totaled $28 billion, up 10% year-over-year or up 5% in constant currency. Looking at revenue by geography, the Americas increased 4%, EMEA was up 16%, and Asia-Pacific increased 14%. We generated 68% of our total revenue from outside of the United States. Third quarter gross margin was 24.2%, down 30 basis points compared to a year ago. This decrease in gross margin was driven by both a more normalized commodity pricing environment and increased mix of personal systems, which were partially offset by strength in services and software. Non-GAAP operating expenses for the quarter were $4 billion, or 14.4% of revenue, down a 110 basis points from 15.5% a year ago. Adjusting for currency, total expenses declined year-over-year as we continue to maintain expense discipline, even while investing in sales and Go-To-Market resources and absorbing acquisitions.
