Good day, ladies and gentlemen, and welcome to the First Quarter 2013 Hewlett-Packard Earnings Conference Call. My name is Anthony, 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 call over to your host for today's call, Mr. Rob Binns, Vice President of Investor Relations. Please proceed.

Good afternoon. Welcome to our First Quarter 2013 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, results of HP may differ materially from those expressed or implied by such forward-looking statements. 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 flows, share repurchases, currency, exchange rates or other financial items. Any statements of the plans, strategies and objectives of management for future operations and any statements concerning the expected development, performance, market share or competitive performance relating to products or services; 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-K. 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 first quarter Form 10-Q. 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 webpage at www.hp.com. I'll now 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 in October, fiscal 2013 is the second year in a multiyear journey to turn HP around. You will recall that I referred to fiscal 2013 as a "fix and rebuild year" that would set HP up for recovery and expansion in 2014. Since announcing our turnaround plan, we've done what we said we would do. We've defined a clear strategy for the business, we've made significant progress in bringing our costs in line with revenues and most importantly, we've exceeded the financial performance we said we would deliver. With the first quarter of 2013 behind us, we're starting to see some traction on our performance as a result of the actions we took in 2012 to lay the foundation for HP's future. While the results in the first quarter were not where we want them to be, we did better than we expected. But let me repeat what I've said so many times before. HP's turnaround will not be linear, and our primary focus is to deliver on our outlook for the full year. That means continuing to implement critical programs to strengthen our balance sheet, optimize our supply chain, speed innovation into commercialization and demonstrate our products leadership across our markets. In the first quarter, HP delivered $0.82 in diluted non-GAAP earnings per share, exceeding our financial outlook of $0.68 to $0.71 per share. This is tangible proof that we have the right plan in place and that we're successfully delivering on it. Performance in the quarter was driven by improved execution, as well as improvement in our channel and go-to-market effort. Additionally, the restructuring program we announced in May continues to deliver results. The restructuring program had…

Thanks, Meg. As you heard, we continue to make the difficult yet necessary improvements to set HP up for long-term success. We are creating new products and services that matter to our customers. We are improving our sales performance in channel relationships and we are recalibrating the expense profile to align with the market and business dynamics we face. At the highest level, I would characterize this quarter's financial results as one constructive data point on the steady, albeit not always linear, progress we expect to make in our turnaround journey. Before I dig into the financials, let me explain some segment reporting changes that we have made this fiscal year. Beginning this quarter, we are reporting 2 new business segments, the Enterprise Group and Enterprise Services. The Enterprise Group mostly combines the previously reported Enterprise Server, Storage and Networking segments with the Technology Services business that was previously reported within the services segment. Enterprise Services then is largely the remaining pieces of the previously reported Services segment, including infrastructure technology outsourcing and application and business services. You should note that there were other transfers to appropriately align all of the TS support and maintenance functionality with the appropriate product and services group, and these have been disclosed in detail in an 8-K we published this morning. In that filing, we have reported fiscal '11 and fiscal '12 revenue and operating profit by segment under the new reporting structure to help you understand the historical performances of these businesses under that structure. Now turning to the results. Revenue was $28.4 billion, down 6% year-over-year as reported and down 4% in constant currency. From a global macroeconomic perspective, there are still a number of headwinds, but we are seeing pockets of progress on a regional basis. In Americas, revenue was $12.8…

[Operator Instructions] Our first question comes from Bill Shope of Goldman Sachs.

There's been an increase in press and speculation regarding the potential benefits of a breakup or more significant restructuring of the company. Can you review how you think about the long-term benefits of HP's current structure? And are you still committed to turning around HP while keeping the core divisions together?

Yes. I'll take that question. So we have no plans to break up the company. And I've said many times, I feel quite strongly that we are better and stronger together. HP, over the last 10 years, I think has put together the most valuable franchise in IT, particularly as we look forward to the most significant change in how IT is bought, paid for, consumed, how applications are going to have to be made more agile. We have a terrific set of assets, and we're going to drive that to I think really great business performance. I mean, over time, the business performance has to underscore the value of better-together. And when you think about our brand, our scale, our distribution, our go-to-market, collaboration on R&D and supply chain, I think we've got a great set of assets. And importantly, customers want this company to be together. And we heard that loud and clear in August 18, 2011. So we really feel strongly that this is better together.

Our next question comes from Katy Huberty of Morgan Stanley.

The better first quarter results and better-than-expected second quarter guidance adjusted earnings in the back half of the year will come down. So just curious, what has changed in your mind? You mentioned greater PC weakness, back-end loaded impact from the run-off of services deals. What else makes you more cautious on the back half of the year?

Katy, I think you captured the main reasons for the comments about the back half. I mean, it really is about the fact that ES didn't have the run-off that we had expected in the first quarter, and that has pushed out. It's also true that, I would say, in the first quarter, the signings in ES were not quite what we wanted them to be or had expected them to be. And as you know, signings earlier in the year mean revenue later -- late in the year. And if the signings come in later in the year, then that means revenue for 2014. So that's a little bit of a challenge that we've got to overcome. And that's about the making the right investments, and they're looking at putting that in place. It's about getting the right sales leader in place. So we've got Larry Stack, who's joined us. And so I think there is some cautious optimism there, but the first quarter signings were a little bit weaker than we thought. Personal Systems business, the market was weaker than we had expected. And we really saw that in EMEA and across notebooks. And so we're really not expecting that the market improves in fiscal '13 at this point. And as I mentioned in my prepared remarks, we do expect that the Personal Systems revenue will decline year-over-year at a faster rate than it did in the first quarter. So we're going to have to watch that very carefully. And then finally, we did delay some enabling investments. And I would say that was probably due to our cautious nature of wanting to see the savings before we go and make some of these investments. And now, we're starting to ramp some of those investments that we had decide to -- decided to delay. And those were investments mostly in enabling, savings over the long term. Things like some of the IT stuff, some of the site consolidation in the Real Estate area. And so we're basically laying those out going forward.

Our next question comes from Toni Sacconaghi of Sanford Bernstein.

I'm wondering if you can update us where you are in your cost savings initiatives. I think you had outlined previously that you expected labor savings to amount to about $2.2 billion in growth savings and non-labor savings to be about half of that amount, so a total of $3.3 billion. Can you tell us -- and I realize there's some reinvestment there, but can you tell us on a gross basis what you think you captured on a run-rate basis in fiscal Q1 and where you think you are in that process?

Yes. Toni, this is Meg. Let me give you sort of a high-level comment on this, and then I'll ask Cathie to be more detailed. I mean this restructuring program is an incredibly important part of our strategy because we have to create the financial capacity to invest and then to grow. And I would say the restructuring program remains very much on track, a further 3,500 people left the company in Q1 of this year and the FY '12 headcount reduction was 11,800. So we've now asked 15,300 people to leave the company. And while that is a very tough thing to do, we can actually see savings from that and we can actually see a more streamlined and focused organization. And we expect the savings to ramp through the remainder of '13 and into '14. And this is the financial capacity that we're going to need to hit our numbers and also create the financial capacity to invest.

I think the only thing that I would add is on the non-labor savings, the bulk of those things are really coming in, in the second half of the year. In fact, in some cases, we've needed to make enabling investments early in the year in order to realize them. And we believe that we're still on track to make those savings.

Our next question comes from Ben Reitzes of Barclays.

Meg and Cathie, I understand why you want to keep the guidance for EPS because PC just could get worse and the Europe uncertainty. But why not raise the free cash flow target of $5 billion, given the first quarter was better than expected on the free cash flow front? And what are the puts and takes there of that number? What are the chances that could be actually $6 billion or higher and -- as it goes [ph] throughout the year?

Thanks, Ben. So I'm glad you pointed out the operating cash flow. We're very pleased with the progress that we made with respect to operating cash flow, up 115% year-over-year. And then the other key piece is that we've really gotten the discipline around capital expenditures, and that enabled us to grow our free cash flow over 400% year-over-year to $2.1 billion. Now, we don't typically update our cash flow outlook midyear. And so I'm not going to update it, but I think the best way to think about the first quarter was it was a very big deposit on the year. And there is also the fact that the DRI deposit that we had originally expected was -- could be up to $400 million, came in lighter. And I think this also gives us a bit of a tailwind.

Our next question comes from Shannon Cross of Cross Research.

I was curious how you're going to be judging the success of the Officejet Pro X platform. Sort of what benchmark should we look at and how should we think about the potential margin contribution? And then also, how are you thinking about this launch vis-a-vis your Laser line, which you obviously get from Canon?

Yes, so we're excited about the Officejet Pro X. And I'm sure you've read, it's gotten terrific reviews from the industry trade magazines, as well as customers who've had some early units. And this an exciting opportunity because basically what this does is allow ink to move up into small to medium-sized, even to some pretty big businesses. Because effectively, it prints exactly the same speed and quality as Laser at half the cost. So this is the kind of disruptive innovation that we do at HP. And this has been worked on for a number of years at HP. This page-wide array technology is breakthrough. And we're going to drive it as hard as we can. And we're going to measure ourselves by the number of units installed over the next 12 months and what niche -- what kind of customers adopt it. And with regard to Laser, listen, we've got a great Laser lineup. But to the extent that there is cannibalization, that's the natural order of things. And I've said for many years, when there's disruptive technology innovation in a business, better to do it ourselves than have someone do it to us. And of course, ink is margin-accretive to us because we obviously own all of that IP. Cathie, do you want to add anything to that?

I think the only thing else I'll add is and take you back to the Security Analyst Meeting, I mean we believe that even with our Ink in the Office products kind of encroaching a bit on the low end of the laser, that we still have an opportunity to grow the laser business from a revenue perspective.

And to take share.

And to take share. So I think that, that -- it's not -- for us, it's not one or the other. We are basically executing in both business domains.

Our next question comes from Brian Alexander of Raymond James.

Just on the Personal Systems business. I think your original outlook for the year assumed flat profits. We just saw revenue down 8%, profits down 50%. Obviously, it's a tough market. But, Meg, you sound very committed to staying in the business, and you sound pretty excited about the new products that you're launching. So how are you thinking about the financial profile of this business going forward, given your comments about balancing growth and profitability and given where margins are versus where they've been historically?

Yes, so we are committed to this business. And as I said, we're going to compete on differentiation, whether that is form factors, an increased focus on mobility, a multi-OS strategy, multichip strategy. Frankly, relevant to various industries. We've got great response to our ElitePad 900 that can be customized by industry, and then Services. So the way we've got to handle this is that we have to reallocate resources from the core PC business to mobile to other OS and to services. So while we have to make some investments, it can't be incremental investments. It's got to be moving resources from one part of the business to the other, and we got to continue to focus on operational excellence. And we've made progress there, whether it's fee reduction, platform reduction, supply chain, quality. And this, by the way, has actually been pretty helpful in terms of when we've combined our Printing business with our PC business because we've been able to leverage nodes, logistics, transportation. So I think -- listen, we anticipate that pricing is going to be problematic and quite competitive in the next bit of time here, but we think we can manage that. And I think it -- I think we see quite clearly what this is going to look like.

Let me also add that if you look at the year-over-year operating margin declines, that was really driven by currency, the weak demand environment combined with aggressive pricing. And as we look out over the rest of the year, our expectation is the weak demand environment and the aggressive pricing stays with us. So it's really facing a tough and shrinking PC market. Broad softness in the PC market, but especially in notebooks and in EMEA. It's more challenging than we had expected. So I do -- we do expect now that on a year-over-year basis, margins will erode. So a little bit different expectation than what we said at the Security Analyst Meeting. We expect weak consumer demand and aggressive price competition to remain a headwind throughout most of '13. And then finally, I think it's really important to understand the impact or lack of impact this business can have on HP's P&L. Just to remind you that the $223 million of operating profit from PSG is just 10% of the company's operating profit.

Our next question comes from Keith Bachman of Bank of Montreal.

I'd like to ask about Enterprise Systems' profitability, please. The profit level of these, even under the new reporting format, has been down for 9 straight quarters. Why do those margins stabilize? Or if you can give us some update on why the business may stabilize in terms of the margin profile, and particularly address, if you can, where you think mix actually starts to stabilize or improve?

Yes, so there's a number of different factors going on in EG, Brian. And the negative ones are...

I'm Keith, not Brian.

Oh, Keith, sorry about that. Sorry, Keith. The negative factors, of course, is the continued decline of BCS. It was a big and profitable business. You saw it decline by 24% year-over-year. Traditional storage is declining. EMEA, we have an overdeveloped share, not overdeveloped but a very robust share in EMEA. And when the market is weak, it disproportionately affects Hewlett-Packard. But the good news is we are -- got, I think, the best product lineup we've had in a very long time here, and we are making investments behind that product lineup. R&D is the lifeblood of this business. And as we migrate from traditional storage to converged storage, as we continue to gain share in networking and SDN, as cloud system continues to lead the way in terms of private clouds, we have nearly 1,000 private clouds up now in installation. And as we continue to focus on excellence and operations and TS attach, I think over time, we will see those margins start to turn. But we have to make the necessary investments because this business is now a big chunk of the profitability of Hewlett-Packard. It's a big strategy going forward for us. So we want to make sure that we lay the groundwork for profitable growth in 2014.

Meg, just to push you, sorry. Can they hold at these levels for the next couple of quarters, or do you think there's more downside?

I don’t -- we're not really calling for more downside. We definitely need to get the growth areas of this business storage -- I'm sorry, Networking and Storage growing again, and that's clearly the Converged Storage solutions growing 18% year-over-year. Those need to grow faster than the declines in the traditional. And we're getting close to the point where those will cross over, and that's going to help us on the storage side. Networking did very well this quarter. Gain -- we expected to gain share. It was up 4% year-over-year. When you normalize for the divestiture that we did a year ago, it's up 6%. So we're very pleased with the Networking performance and believe that this -- for Enterprise Group, it's going to be all about differentiation. We're not conceding commoditization anywhere. We're investing to differentiate kind of value proposition for our customers, and that's Moonshot. That's software-defined networking. That's the mid-range 3PAR product combined with some Autonomy Software. I mean, there's just some real opportunities here for a differentiated experience.

And I'd say one last thing, Keith, is a big chunk of our go-to-market is with the channel. And we have made a big investment in righting the relationship that EG has with the channel. And we just came back from our Global Partner Conference in Las Vegas, and I can tell you firsthand we're making really good progress here. So if revenues grows, obviously we leverage the fixed cost of the business and that'll help margins too.

Our next question comes from Mark Moskowitz of JPMorgan.

Meg or Cathie, clearly it's still early, but your net debt position is improving nicely. Free cash flow, as you talked about earlier, had a really big improvement. I just want to get a sense in terms of an update in terms of how you're thinking about either investment internally from an R&D perspective and/or maybe a renewed appetite for some bolt-on acquisitions? Has your acquisition strategy changed in light of your improving business model?

I'd say for 2013, our capital allocation strategy isn't going to change. We're still focused on rebuilding the balance sheet, offsetting dilution, maintaining our dividend policy and really focused on fixing what we have. The leverage in fixing and rebuilding the assets this company has put together over the last 10 years is simply enormous. Now, you never say never. Maybe there's a tuck-in acquisition that we absolutely have to have to further converge cloud, but it's not in the plans. And then with regard to R&D, we've got a plan for R&D. One of the things we have to stop doing at HP is increasing R&D and then pulling it back. Increasing R&D and pulling it back, so we've got an R&D plan, we're sticking to it. And the initiatives are pretty well laid out for the next 12 months.

Our next question comes from Brian Marshall of the ISI Group.

Question with respect to software. Obviously, it's a real key component to increasing the company's competitiveness going forward and it -- only down 2% year-over-year was your best performing major segment. But if you delve a little deeper and just make the simple assumption that Autonomy perhaps was down 25% from where you guys acquired it, that would imply that your core software business is probably running something like single-digit, mid-single-digit growth year-over-year. That's a pretty marked deceleration from what we've seen recently. So I guess question is, do you think that deceleration of growth is going to continue in your core software business? And if not, why -- should we anticipate that turns around?

Yes, thanks, Brian. So our software business is a bright spot there, as I mentioned in my prepared remarks, our Vertica and Security. These are very robust businesses. We've got a great pipe, and things are going very well. Absent [indiscernible], our license revenue was not where we wanted it to be. And my belief is that that's a couple of things: One is execution, two is sales leadership and three is some changes that we need to make to the product. So I think we will actually turn that revenue trajectory around as we go through 2013 and enter into 2014. But we've got some basic blocking and tackling work that needs to be done in that part of the business.

Our next question comes from Steve Milunovich of UBS.

Cathie, you mentioned a bit about the inventory situation with printer supplies. Could you talk about PCs and any other products that you track in terms of weeks of inventory?

Sure. So overall, our channel inventory across EG, printers and PCs were all within acceptable ranges. I mean, we feel very comfortable with where we ended on channel inventory. Specifically, with respect to PCs, overall it's good. I would say that on the consumer side, despite the fact that we gained share in consumer, we ended channel inventory a bit higher than we would like. So we are clearly focused on bringing that down a bit in Q2. But I think the real star here is the channel inventory performance in IPG. We have been dogged by ink supplies channel inventory being higher than we would like now for several quarters, and it is now well within the range. I think it's something like -- from the peak, something like 27% down year-over-year, so it's just -- I'm sorry, 27% down since the peak. So I think that, that's really strong. We've had dollar declines over the last 6 quarters, so it's all in good shape at this point.

And I would just add, this is Meg, one of the things we have asked the business groups to do is to limit the discounting to get product into the channel. Because in the end, we have to discount to get the product out. And so we have turned our sales force compensation to sell-through as opposed to sell-in. And this is healthier for us. It's better for the channel, and it's -- I think it's put us in a much better position. It also allows us to continue to differentiate our ink and toner product by substituting what we call contra revenue or discounts to marketing where we can actually differentiate our product as opposed to sort of be on the road to commoditization that I think we were on about 18 months ago.

And frankly, that's helping to drive some of the average selling price increases across PCs and printers.

Our next question comes from Amit Daryanani of RBC Capital Markets.

Just a question on the Enterprise side. One on the Storage side. Can you just maybe talk about when you look at the converged, storage revenue is up 18% year-over-year. How much do you think was from cannibalization of kind of the legacy EVA solutions, if you may, versus the new customer acquisitions? I don't know if you can break that down, but that would be helpful. And then just on Moonshot as well, when do you start to see that becoming a material contributor to the ISS revenue stream?

Great. On the Converged Storage, we have put a real emphasis on Converged Storage. We want to sell the new stuff, the stuff that is disruptive in the marketplace. So our sales executives are all about 3PAR, high-tier, mid-tier, StoreOnce, what used to be called left hand network and IBRIX. So I don't know how much is cannibalization versus a real focus, because my belief is sales teams can sell only so many things and we have told them we really want to be in the product that's disruptive. Moonshot grows through the year. We're just taking our first orders now for the first phase of Moonshot, and we're excited about it because of the characteristics of that technology. And you might not be surprised to know that our first Moonshot order came from Japan. And the reason, of course, is that they lost a big chunk of their grid in the Tsunami. And so space, energy savings and compute value at cost levels that are unprecedented, we're excited about this, so it will build through the year. But frankly, it won't hit its real, I think, sort of full potential till 2014.

Our final question comes from Kulbinder Garcha of Crédit Suisse.

A question for Meg and Cathie, just going back to free cash flow. I understand you don't want to update this year's guidance, but given the improvement you would expect in free cash flow for the year, it looks like you're going to pay down most of your debt, probably inside of 12 months. If that's the case in HP [indiscernible] situation you're generating $6 billion, $7 billion of free cash flow a year, can you remind us as to how committed you are to increasing dividends and buybacks?

So I think you're right. I think we've made a good deposit on bringing our net debt at the operating company level down to zero. So I would expect that while originally we thought it might take us to until the end of '14, that it probably won't take us quite that long. And then we will be back and looking at our capital allocation priorities that we laid out, how we think about capital at the Security Analyst Meeting. And then it's really about what kinds of returns do we get for what different types of investment, and basically going to the highest and best return. We do -- we are committed to returning cash to shareholders, and we do think that, that takes the form of both share repurchases and dividends. Kind of our view around dividends is that over the long term, as our operating results scale, our payout ratio should probably scale as well. Obviously, we stay in touch with our board because ultimately, that's their decision. But we are aligned and working with them to determine kind of what will be the right set, the right mix of returning cash to shareholders over the long term.

Good. I think that's -- it's the last time that we have for the last question. I thought I might just make a couple of closing remarks, if I could leave you with 3 thoughts: First is the turnaround is on track, and we did better than we expected that we would. And so I think that's a good sign. And I said it in my prepared remarks, the patient showed some signs of improvement, and I think we should be encouraged by that. But we have 3 more quarters to go in this year. We feel very confident about delivering the full year results. But we have to deliver and we have to continue to execute as an organization. So thank you very much, and I think we'll end the call now.

Yes. Thanks very much. That concludes the call. Thank you, everybody.

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