Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2012 Hewlett-Packard Earnings Conference Call. My name is John, and I'll be your conference moderator for today's call. [Operator Instructions] 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. Rob Binns, Vice President of Investor Relations. Please proceed.

Good morning. Welcome to our Fourth Quarter and 2012 Earnings Conference Call, with Meg Whitman, HP's Chief Executive Officer; and Cathie Lesjak, HP's Chief Financial Officer. Before handing the call over to Meg, let me remind you that this call is being webcast. A replay of the webcast will be made available shortly after the call for approximately 1 year. Some information provided during this call may include forward-looking statements that involve risks, uncertainties and assumptions. If the risks or uncertainties ever materialize or the assumptions prove incorrect, the results of HP may differ materially from those expressed or implied by such forward-looking statements and assumptions. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including but not limited to, any projections of revenue, margins, expenses, earnings, earnings per share, tax provisions, cash flow, share repurchases, currency exchange rates, the impact of acquisitions or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements concerning the expected development, performance, market share or competitive performance relating to products and services; and any statements of assumptions underlying any of the foregoing. A discussion of some of these risks, uncertainties and assumptions is set forth in more detail in HP's SEC reports, including its most recent Form 10-Q. HP assumes no obligation and does not intend to update any such forward-looking statements. The financial information discussed in connection with this call, including any tax-related items, reflect estimates based on information available at this time and could differ materially from the amounts ultimately reported in HP's 2012 Form 10-K. Revenue, 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, amongst other things, amortization of purchased intangible assets, 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 web-page at www.hp.com. And now I'll turn the call over to Meg.

Thank you, Rob, and thanks to all of you for joining us today. As we discussed during our Security Analyst Meeting last month, fiscal 2012 was the first year in a multiyear journey to turn HP around. We know where we need to go. We have a plan to get there, and we have already made significant progress towards our goal. In our first year of the turnaround, we focused on 4 things: our customers, our people, our products and our performance. We've put a strong leadership team in place, and we are investing in systems and tools that are making it easier for us to manage our business, allocate resources and prioritize investment dollars. This has included the largest and fastest implementation of Salesforce.com, with more than 16,000 users already online. On May 23, we announced a multiyear restructuring program to streamline the organization and create the capacity to invest in innovation. At the end of fiscal 2012, we are on track to realize the savings that we laid out. We have taken steps to refocus our R&D efforts to extend HP's technology leadership in our core markets. Our product and service development teams have moved aggressively to better understand customer needs, to align our portfolio and speed our time-to-market. We recently announced Martin Fink as our new head of HP Labs, and he is focused on driving better connections with the business groups' product roadmaps and speeding the commercialization of our innovations. We are already seeing tangible proof that the actions we've taken in 2012 are working. This is a landmark quarter for new product announcements, including our first new line of multifunction printers in 7 years, an impressive new line of Windows 8 PCs and the launch of the world's first tablet optimized for the enterprise. We…

Thank you, Meg. I'll review the fourth quarter performance and then close with our outlook. In the fourth quarter, revenue was $30 billion, down 7% year-over-year as reported and down 4% in constant currency. We continue to see macroeconomic challenges in each of our regions. In the Americas, revenue was $13.5 billion, down 6% year-over-year as reported and down 5% in constant currency. Revenue in EMEA was $10.7 billion, down 8% year-over-year and down 4% in constant currency, and revenue in Asia Pacific was $5.7 billion, down 4% year-over-year and down 3% in constant currency. The U.S. fared relatively better than some of the other countries across the Americas, while in EMEA we experienced unrelenting pressure in Western Europe. Within APJ, we saw constant currency growth in China, Japan and India. These are positive signs given the investments we have recently made to improve our market position in the region. Non-GAAP gross margin of 24.2% was up 90 basis points year-over-year as favorable software mix and the increases in Printing margins more than covered the competitive pricing environment for PCs and servers. The 80-basis-point sequential improvement in gross margins was driven by improved services margins combined with favorable software mix, partially offset by continued competitive pricing for PCs and servers. Non-GAAP operating expenses were $4.1 billion, down 5% year-over-year and down 2% sequentially. The restructuring program announced in May provided savings this quarter, in line with our expectations, and some of these savings are helping drive down our SG&A expenses. Non-GAAP operating margin was 10.4%, up 70 basis points year-over-year, and the company delivered $3.1 billion in operating profit. The bridge from non-GAAP operating profit to non-GAAP earnings per share includes the following: other income and expense of $188 million in expense; a tax rate of 22%, a 2% reduction…

Operator, if you could open the line for questions, that'd be great.

;[Operator Instructions] Our first question comes from Ben Reitzes from Barclays.

Meg, with regard to the Autonomy situation, we understand what you're doing in terms of going after the folks that you feel misled you, but what about internally? What do you -- who's responsible internally for the acquisition? How are you analyzing yourself internally? The board -- I think everybody at the board was there when the Autonomy decision was made, except for Mr. Whitworth. So what's the introspective? What are you doing internally to make sure that you have the right processes? And who are you holding accountable internally, if anyone, to make sure this doesn't happen again and that maybe even there are some folks internally that need to be held responsible and we could see repercussions of this in the near future? How are you looking at it internally?

Yes, well, first of all, the CEO at the time and the head of strategy who led this deal are both gone, Léo Apotheker and Shane Robison. With regard to the board, you're right. Most of the board was here and voted for this deal, and we feel terribly about that. What I will say is the board relied on audited financials, audited by Deloitte, not brand x accounting firm but Deloitte. And by the way, during our very extensive due diligence process, we hired KPMG to audit Deloitte, and neither of them saw what we now see after someone came forward to point us in the right direction. That said, obviously, we have not done any big acquisitions, and we will review the acquisition process. What I will say is due diligence now reports to our Chief Financial Officer. At the time, when I came to the company, I was surprised to find that due diligence and M&A reported to strategy as opposed to the Chief Financial Officer. I've never seen that before in my career, and that's a decision I made right away before I knew any of this. So I understand your point of view, and we have made a few changes in that regard. But in the end, you have to rely on audited financials and we did, and we will now carry on. And as you know, we've reported this to the SEC, as well as to the Serious Fraud Office, and we will take it from here.

And in terms of internal personnel, though, based on what you see right now, the organization is -- can remain stable based on this occurrence?

Yes, it can. I mean, really, the 2 people that should have been held responsible are gone, and that's the way I see it right now. So I feel good about the sort of the stability of leadership.

Our next question comes from Bill Shope from Goldman Sachs.

Can you give us a bit more color on what levels of restructuring savings you were able to capture this quarter? And in particular, which segments did the savings benefit most? As I imagine, you didn't have much ability to reinvest yet. And how should we think about the reinvestment plans, in particular, as we go into the first quarter and then as we get through fiscal 2013?

So in terms of kind of which businesses benefited most, I think all of our businesses benefited to some extent in fiscal '12 from the restructuring efforts. Clearly, services, that is such a -- has a heavy component to labor to it, probably had the absolute dollar biggest savings from the restructuring efforts. In terms of kind of the total magnitude, I think we laid it out in our earnings call last quarter. We basically talked about kind of $0.05 to $0.10 worth of savings in fiscal '12.

I'd add one thing to that. I think one thing we've been very pleased with is the merger, if you will, between our printing business and our Personal Systems Group. This has simplified our go to market. We now have one decision maker in many countries for both our printing and our PC business. The customers are the same. The channel partners are the same, and we have received a lot of savings and a lot more effective go to market here, and we continue to see that go forward. In terms of investments, we are very focused on product, product, product. Great companies return to greatness on the basis of product, and we're excited about our overall product lineup, whether that be our Gen8 servers and our Moonshot servers or our new securities portfolio or our new line of PCs or printers or services. And so the majority of incremental investment will go into making those products great and into R&D.

And then the other piece of the investment is really setting us up for some of the non-labor savings that I laid out in my prepared remarks around SKU reduction, business process reengineering, real estate and supply chain. And so some of that is more in investment mode at the early part of fiscal '13 but does ramp in the latter half of '13.

Our next question comes from Toni Sacconaghi from Sanford Bernstein.

I have a question and a clarification, please. On the question, I was wondering, if I look at your guidance, you're guiding for sequential decline in EPS of 40% for fiscal Q1. Historically, in the last 15 years, you've only been down more than 10% once and you've never been down more than 23% sequentially. So you don't -- typically, you're kind of flattish sequentially on a revenue basis or slightly down. So I'm wondering, given that your savings actually should be ramping from your restructuring, I understand some of the competitive headwinds that -- and headwinds you outlined, the financial headwinds in terms of both supplies and ISS, but it's really hard to get the math there. So maybe you can shed a little bit more color on why the dramatic erosion in profitability for Q1 and what else underpins that.

Yes, Tony, let me take a crack at that, and I'll turn it over to Cathie. So the way I look at 2013 is we have a probably weaker-than-normal seasonality in the first half and stronger in the second half. Obviously, the second half is always stronger, but you're going to see the restructuring kick in, in the second half in terms of both labor and non-labor savings. Enterprise Services, the biggest runoff in these accounts, is actually in the first and second quarter, so you're going to see a disproportionate effect there. In terms of our new products, many of those products are introduced -- being introduced now, so you'll see them really start to hit in Q3 and Q4. And some major hedging gains came off in the first quarter, so that's why you see some of the bigger difference than you referenced. So you obviously do see a second half that's going to be gaining strength. Listen, we've looked into this very carefully. I still feel very comfortable about our full year guidance, but we've got some headwinds in the first quarter, some of which are out of our control like the hedging gains coming off.

Let me add just a couple of more comments to that. So in terms of the quarter-on-quarter decline in revenue, we've got the normal seasonality that brings it down, but then we had some extraordinary items such as the ES runoff that Meg referenced. But also, if you look at kind of what we experienced in the macroeconomic environment over the course of Q4, it actually came down over the course of Q4. So our guidance basically says it stays roughly at where it exited Q4, which is driving quarter-on-quarter declines in revenue. We're continuing to see a very competitive pricing environment, and we're continuing to see lower-than-normal revenue from our Itanium situation. In addition, I mentioned in my prepared remarks the fact that we had a very significant software deal from General Motors and Software that just simply is not going to repeat at nearly that level. And then finally, I'll mention that we do have to reset our incentive compensation plans given our new plan, and that puts upward pressure on costs from Q4 to Q1.

Okay. If I could just follow up on the workforce restructuring question from before, so you said that there would be up to 29,000 jobs expected to be eliminated. 11,500 would be gone by the end of fiscal '12, implying almost 8,000 in fiscal Q4. Can you confirm that you received that? Are you still expecting 26,000 employees to depart by the end of fiscal '13? And I guess if statements are true, 11 -- 8,000 people coming out in Q4 should have a significant sequential benefit in the first half of the year and why is that not being mentioned? And you also said that you'd be getting about 50% incremental non-labor savings. I think your gross savings that you had outlined were $0.80, so -- in savings, so are you assuming another $0.40? We should be thinking about another $0.40 in non-labor savings going forward?

So Toni, there are a lot of questions in there, and I could answer yes, yes, non-labor's back-end loaded, but let me be a little bit more helpful in that. So yes, we did get the headcount reductions that we were expecting exiting fiscal '12 of roughly 11,500. Yes, we are still expecting 29,000. Yes, we expect that by the end of fiscal '13, we will go down 26,000 people. Now one of the things you have to keep in mind is that when you -- we execute programs for labor reductions outside the United States, they take significantly longer time to complete, and that's why a lot of the additional savings in labor is back-end loaded for us. And then from a non-labor perspective, what we're really seeing is that we've got to make these -- some of these are making investments in the front end of '13. We call them enabling investments that then pay off or start to pay off towards the end of '13.

Our next question comes from Kathryn Huberty from Morgan Stanley.

In the fiscal '13 EPS bridge, you had highlighted an assumption of roughly flat PC earnings and growing IPG earnings, so question is in light of the low PC operating margin, operating profit dollars were down almost 50% year-on-year in the fourth quarter and the over earning from the ink supplies in the back half of fiscal '12, which will be tough comp next year, if you're still comfortable in flat to growing earnings in those 2 businesses? And if there ends up being risk on that front, what factors can you use to offset that as you move through fiscal '13?

Yes, let me take that. So as we look at this, we're still comfortable with those estimates. Although I will say the PC situation is pretty challenging right now. And of course, the way we're managing this business is -- the good news about the PC business, it is almost at 80% variable cost, so it is not a high fixed cost business. So if there are discontinuities in the revenue, we can recover from that to quite a large degree. But we also will look across the portfolio between our printing business as well as our PC business, which is now all run as one business under Todd Bradley called PPS, to make sure that we deliver the operating income as we look across the whole portfolio. So listen, we're conscious of the pressure on the PC business. We're optimistic in that we have some great new products coming. We're optimistic about Windows 8. We're very optimistic about our ElitePad 900 which is the first tablet designed for the enterprise, but also conscious that we may have to manage that business as a whole to deliver the operating income that we expect.

And then the other thing I'd add is that a significant portion of the non-labor savings, when you think about SKU simplification and supply chain optimization, benefits both PCs as well as printers. So I think that we do have some levers, additional levers to manage our cost. And in the PC business as well as in the printing business, it really is about managing your operational cost day in and day out.

Our next question comes from Brian Alexander from Raymond James.

Yes, Cathie, could you talk about what specifically drove the 25% sequential decline in enterprise hardware profitability. Looked like revenue was flat. I don't think I can remember a quarter with such a dramatic decline in enterprise margins, and your product mix actually looked slightly favorable on a sequential basis. So was all of this pricing? And why wouldn't your enterprise assumptions for your FY '13 waterfall be at risk given these results?

So a lot of the softness in the operating margins really came from lower top line growth, driven by soft macro demand, as well as a very aggressive pricing environment, especially in Europe. But also, what's putting pressure on margins is the continued decline in Business Critical Systems related to Itanium and the fact that our hyperscale business is growing very well. But as we talked about, I think, on the last call, hyperscale margins are materially different than the industry standard average. So when you -- I think one of the things we need to think about is how we look at this business on a longer-term basis because we're really investing in the large growing and more profitable market segments like storage and networking, and that's helping to offset, over time, the Business Critical Systems decline and really getting then the mix effects from that and also the fact that we're coming out with what we consider pretty disruptive products in the hyperscale space, specifically related to our Moonshot product, which really helps us change the economics for ourselves, as well as the value proposition for our customers for hyperscale. And so over the long term, we do expect these dynamics to help bring margins back up.

The only other thing I'd add to that Brian -- this is Meg -- is that one of the things we got to focus on is our mainstream Industry Standard Server business, which is the weak spot here, and we are doing a whole host of work around our channel relationships in that business, around supply chain improvements, reconfiguring some of the products to be more affordable to certain segments of the market. And I think Dave Donatelli has got an excellent plan in place, and he and his organization are going to execute against that in the first half. And I think you'll see some improvements in the second half.

And I think the only other thing I'd add to that is that from an investment perspective, in terms of R&D, this is one of the key areas where we are putting real dollars into R&D and are sustaining that. And so this kind of goes back to Meg's comment in her prepared remarks around the fact that this is not necessarily going to be a linear year, and we are going to sustain the right level of investment to set HP up for the long term, and part of that really shows up in the ESSN group.

Our next question comes from Brian Marshall from ISI Group.

If you look -- I guess a question with respect to guidance, if you take the guidance, the midpoint for the quarter about $0.70, you take that as a percent of the fiscal year total, $3.50 at midpoint, that's 20% Q1 represents for the entire fiscal year. When you look at a previous 3 fiscal years, Q1 as a percent of the fiscal year is averaging about 25%. So what gives you the confidence for the following 3 quarters of the fiscal year that, that'll actually come up? And if you can get a little bit more granular with respect to the segments, that would be helpful as well. I guess the question is, why aren't we lowering the fiscal year guidance with Q1 coming down there?

It really all comes down to our view of the second half. So we definitely see that the second half per normal seasonal trends is higher than the first half, and we're seeing that is skewed even more as a result of the restructuring programs that we've talked about and the fact that, again, the non-U.S. programs ramp later in fiscal '13, the non-labor components around SKU reduction, the supply chain simplification, business process reengineering and real estate also have the investments on the front end and are starting to pay off in the second half of '13. And then you really got to take into consideration the key contract runoff, which is exceptional in Enterprise Services in the first half, the fact that we believe Autonomy will ramp more in the second half, that we're making adjustments to channel inventory in the first half. And then finally, it's really about all of our new products that are coming in, and the fact of the matter is that they don't really get significant traction until the second half of the year. And we've got a number of new products, whether that's the different form factors that we've got leveraging Win 8, the new lineup of multifunction printers, the ink in the office, taking ink in the office higher into the office with our new Officejet Pro X product, that doesn't ship until February. So all of these are really contributing to a very different profile in the year from a revenue and profit perspective.

And let me just add, obviously, when we gave guidance for Q1, we knew this was going to be a question, so we went through in quite some detail looking quarter-by-quarter, product by product, business by business, channel partner by channel partner, top 250 customer by 250 customer and feel comfortable around the $3.40 to $3.60. So I guess would add that is we understand what your concern is, but we feel good about our $3.40 to $3.60 estimate.

Our next question comes from Steve Milunovich from UBS.

Could you talk a bit more about the printer business? And specifically last quarter, the margins were somewhat surprisingly high, I think, because you had more Inkjet sell-in than sell-through. So we sort of expected they might come down this quarter, and obviously, they did the opposite. So maybe you can talk a bit more about what were the contributors to that and how much maybe the hedging thing was and so forth. And also, are you concerned with the reduction in the hardware units, at this kind of a pace that it's going to have a lag effect on supplies? And how long does that lag typically take?

So let me start with kind of the specifics around the year-on-year and quarter-on-quarter improvements in the operating margins, and then maybe Meg can take on the question around the hardware units and where we're focusing. So from a year-on-year and sequential perspective, the margin improvement really came from higher supplies mix, and the mix within supplies is shifted a bit more to ink. We also have a lower mix of low-value hardware, so we really are focusing on higher-value hardware, which is driving ASPs up. And then finally, we're really -- we're benefiting from disciplined cost management, and part of that is just a maniacal focus on cost and the restructuring benefits. And then the other piece is just bringing the IPG and PSG groups together. It really has given us the kind of leverage that we had hoped for when Meg made the decision to bring the 2 groups together.

With regard to hardware -- so let me take the ink hardware first -- one of the things that we discovered in the last 12 months is that there's a very distinct segmentation between high-end hardware and low-end hardware. When you sell high-end hardware in ink, typically, those purchasers buy enough ink to offset the revenue loss, the operating loss, if you will, every time we sell a hardware unit. At the low end, oftentimes, you put our hardware unit into the marketplace at a loss, and the customer never buys enough ink to overcome that hardware loss. So we've been very disciplined about where we're gaining share, and we gained share in the high-end hardware units and inks that we wanted to. Now by the way, we're also looking at is there a low-end ink hardware unit that we can develop, that we can make more money on than we do today. So we're working on that, but we feel really good about our strategy. I'll also say we expect our multifunction lineup of printers, 16 new printers, to really kick in, in the second half of 2013. We've gotten great market response to that, and we're feeling really good about that. And you saw we gained share in multifunction printers. We expect that to continue. And then the last thing is, as Cathie mentioned in her remarks, Indigo had a record quarter, and this is taking advantage of the move from analog to digital, which I know that the printing group has talked about for many years at HP. I actually think we're seeing some of that, particularly in the Indigo space.

Our next question comes from Kulbinder Garcha from Credit Suisse.

Just a clarification and question. On the cost savings, maybe to ask a question a different way, can you just maybe answer, of the $3 billion to $3.5 billion of savings that you were targeting to the end of '14, how many -- how much of that benefited HP in the last fiscal year? And then for Cathie, given the strong free cash flow, $7.5 billion last year and $3.5 billion in the quarter, are you still guiding for $5 billion of free cash flow only in fiscal year '13?

So let me start with the cash flow question. So we're not updating our guidance or our outlook for cash flow in -- for fiscal '13, but I think what is important to kind of take away from the results that we had in Q4 is that when we focus, we achieve results. And we are focused on driving free cash flow for this company, and that means making our earnings, generating cash earnings out of that, focusing on our working capital and driving our cash conversion cycle and finally, really focusing on CapEx and making sure that every dollar of CapEx is returning, is appropriate cost of capital or better. And so that is a renewed focus, I would say, in fiscal '13.

With regard to the cost savings, listen, the cost savings focus in 2 areas: labor, which we've talked about and that's the benefits of the restructuring charge; and then non-labor, and Cathie give you some additional color on the non-labor. And these savings, as Cathie mentioned, are nonlinear, particularly in the labor side as we've said. As you know, making changes to your labor force in Western Europe is a real challenge and sometimes takes as long as 12 to 18 months to actually execute that change, but that's what we are doing. So we achieved the savings we thought we would in 2012, and we are on track for 2013. But I will say that labor savings in Western Europe is a real challenge, but we're committed to it.

And that question comes from Shannon Cross from Cross Research.

I just wanted to return to Autonomy. Could you provide some details on the steps and timing of your pursuit of remedies from Autonomy and other parties? Just sort of what should we expect? What have your lawyers told you? And how is this process sort of going to work itself through?

Well, as I mentioned, we have turned the investigation over. Our internal investigation is ongoing, and we've got more work to do there, but we have turned over the investigation to the SEC enforcement division in the United States and the security -- the Serious Fraud Office in the U.K. And that will -- that process is underway. It will take some time. Listen, I think we all know that the legal system in both countries, this will take a long time to work through, but we are committed to seeking redress for the benefit of our shareholders. And it will take some time, Shannon. I mean, I suspect this is a multi-year journey through the courts in both countries.

And just so to be clear, you wait to get whatever they do and then you pursue civil charges?

Basically, yes. I mean, as I understand this, and I'm relatively new to this, is that the SEC and the securities -- the Serious Fraud Office will make a determination as to whether to pursue this case, and then they will come and look at what we have and what the other parties say and we'll carry that on. Great. Well, thank you very much for listening this morning. Thank you for coming on in the beginning of the day as opposed to the end of the day, and we look forward to talking with you all more. Thank you very much.

Ladies and gentlemen, this concludes our call for today. Thank you.