Hewlett-Packard Company (HPQ)
Q2 2009 Earnings Call Transcript
May 19, 2009 5:00 p.m. ET

Executives

Jim Burns – Vice President, Investor Relations
Mark V. Hurd – Chairman, President and Chief Executive Officer
Catherine A. Lesjak – Executive Vice President & Chief Financial Officer

Analysts

Toni Sacconaghi - Sanford C. Bernstein & Co.
Brian Alexander - Raymond James
Ben Reitzes - Barclays Capital
Mark Moskowitz - JPMorgan
Richard Gardner - Citigroup
Scott Craig – Bank of America/Merrill Lynch
David Bailey – Goldman Sachs
Kathryn Huberty - Morgan Stanley
Bill Shope - Credit Suisse
Maynard Um - UBS
Shannon Cross - Cross Research

Operator

Good day, ladies and gentlemen, and welcome to the second quarter 2009 Hewlett-Packard earnings conference call. My name is Stacey and I''ll be your conference moderator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of the conference. If, any time during the call you require audio assistance, please press “*: followed by “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 turn the presentation over to your host for today''s call, Mr. Jim Burns, Vice President of Investor Relations. Please proceed.

Jim Burns

Thank you. Good afternoon. Welcome to our second quarter earnings conference call, with Chairman and CEO, Mark Hurd, and CFO, Cathie Lesjak. This call is being webcast and 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 January 31, 2009. 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 amounts ultimately reported in HP''s Form 10-Q for the fiscal quarter ended April 30, 2009.

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, restructuring charges, and acquisition-related charges. The comparable GAAP financial information and a reconciliation of non-GAAP amounts to GAAP are included in the tables and in the slide presentation accompanying today''s earnings release, both of which are available on the HP Investor Relations webpage at www.HP.com.

I''ll now turn the call over to Mark.

Mark V. Hurd

Good afternoon and thank you for joining us. In the second quarter Hewlett-Packard executed well in a tough market environment. We delivered revenue of $27.4 billion and non-GAAP EPS of $0.86. We effectively managed our inventory and generated a record $5 billion of cash flow from operations.

The technology solutions group which now represents more than half of HP’s profits had a solid quarter highlighted by strength in services.

The services business more than doubled profits to $1.2 billion and is now our largest segment. In technology services we are benefiting from advances in HP product quality and a more productive work force resulting in improved customer satisfaction. That said, we have more work to do to optimize our delivery model and that opportunity is good news for customers and shareholders.

The integration of EDS is going well and customers are responding favorably. We had a number of large signings this quarter and the pipeline has grown double digits since the deal closed. And during the integration customer satisfaction has gone up. At the same time, we are building a competitive cost structure and have now removed roughly half of the 25,000 headcount outlined in our September 2008 restructuring plan. Despite this progress, we have the vast majority of EDS-related savings ahead of us.

And across HP, we are making good progress on our cost structure with transformations across virtually every function and business group. For example, we have significant opportunities as we bring EDS into our ongoing real estate transformation. By increasing utilization and leveraging a mobile work force we have identified additional annual savings of approximately $500 million beginning in 2012. These savings are incremental to the plan we announced last September. This is one of many examples where we are dramatically changing the expense profile of the company and making steady progress towards our goal of having the industry’s best cost structure. We set this objective not only because of the benefit to our margins but also because our improved efficiency provides the platform from which we can invest and innovate for market success.

For example, this quarter PSG extended its share leadership by two points and captured the number one position in the U.S. and Asia Pacific. IPG which generates approximately one-third of our profits made good progress optimizing its owned and channel inventory and aligning them to the reduced demand environment. Despite the cyclical pressures impacting its growth, IPG continues to generate solid profits and cash flow demonstrating the strength of the business model.