Good day, ladies and gentlemen, and welcome to the First Quarter 2014 Hewlett-Packard Earnings Conference Call. My name is Ellen, 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 afternoon. Welcome to our first quarter 2014 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. All statements, other than statements of historical facts, are statements that could be deemed forward-looking statements, including, but not limited to, any projections of revenue, margins, expenses, earnings, earnings per share, HP's effective tax rate, cash flow, 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 and 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 margin 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. I'll now turn the call over to Meg.

Thank you, Rob, and thanks to all of you for joining us today. With the first quarter of fiscal 2014 closed, HP is in a stronger position than we have been in quite some time. Since laying out our 5-year strategic roadmap for turning the company around, we've made significant progress. We have reignited innovation of HP, and the first quarter was no exception as we introduced industry-leading technologies across our portfolio. Our focus on rebuilding our balance sheet has resulted in an improvement of our operating company net cash position by more than $6 billion since the first quarter of 2013. We strengthened our relationship with customers and channel partners, something I see every day in my interactions with them. And our global workforce is fully aligned behind the common vision for the company, delivering solutions for the New Style of IT. And we are seeing acceleration in the industry's movement towards that New Style of IT. These changes create tremendous pressure in the marketplace. As technologies and business models evolve, customer needs change and incumbents look to respond. Many of our competitors are now confronting these new realities by making major strategic shifts and exiting significant parts of their business. At the same time, HP is more than 2 years into its work to reposition the company to meet these challenges. We believe this is a competitive advantage. With the steps we've taken, I think we're well positioned to seize on opportunities that will arise in the marketplace. We still have a long way to go, but I am more convinced than ever that we are making the right moves to set HP up for the long term. Rest assured, we are not taking our foot off the pedal. Over the next few quarters, we will introduce significant…

Thanks, Meg. Overall, Q1 was a good start to fiscal '14 as some of the fundamental improvements we've been driving are beginning to take hold. But as Meg noted, we still are not satisfied with the consistency of our performance or the profitability across some of our businesses. So we remain very focused on improving our go-to-market and cost structure. Total revenue for the quarter was $28.2 billion, down 0.7% year-over-year and up 0.3% in constant currency. By region, Americas revenue was $12.5 billion, down 2% year-over-year or down 1% in constant currency. The decline was primarily due to key account runoffs in Enterprise Services in the U.S., partially offset by our previously announced sale of IP. EMEA revenue was $10.4 billion, up 1% year-over-year but down 1% in constant currency. While our EMEA outlook remains cautious, we are seeing some signs of stabilization in more mature markets such as Germany and France. APJ revenue was $5.2 billion, down 1% year-over-year but up 5% in constant currency. We saw particular strength in India again this quarter, and China was flat. Relative to overall market challenges in the region, we are pleased with this performance. Gross margin for the quarter was 22.8%, up 0.5 points year-over-year and down 0.2 points sequentially. The year-over-year improvement included some benefits from the IP sale. We continue to experience an aggressive pricing environment across our hardware businesses, which we are offsetting through productivity improvements and greater service delivery efficiencies. Total non-GAAP operating expenses for the quarter were $4 billion, down 1.8% year-over-year and down 1.4% sequentially. R&D expense was up over the prior-year period, as we continue to invest in innovation in our strategic focus areas, such as cloud, and across many of our business segments. SG&A was down over the prior-year period, primarily due…

[Operator Instructions] Our first question is from Katy Huberty with Morgan Stanley.

Cathie, as you noted, you continue to beat the cash cycle target of 20 to 21 days. So can you just give us a little more detailed view as to what's the right, realistic, near-term cash cycle target is? And then assuming you still think that the company will drift back to the 20- to 21-day range, are there offsets to that longer-term opportunities in CapEx or cash tax payments or other items, such that you can offset an increasing cash cycle longer term?

Thanks, Katy. So as I mentioned in my prepared remarks, we do expect a moderate improvement on -- in the cash conversion cycle off of the guidance that we previously provided around the low 20s, and we're very pleased with the progress that we made in Q1, to drive 16 days on cash conversion cycle, which is, just so everyone thinks through this, is actually down a day sequentially and normal sequential performance is up anywhere from a couple of days to 3 days. Now we did have some help in that, in the sense that we had some nice favorable revenue linearity, and we also benefited from the IP sale, as well as the mix of PCs. Because if you'll recall, the PC cash conversion cycle is negative. And so as the PSG business increases its relative mix, it puts some nice downward pressure on the cash conversion cycle. Over the longer term, though, we do expect that, that mix from PSG will in fact decrease on a relative basis. And so that will put some upward pressure on the cash conversion cycle. So we do, as I say, overall expect moderate improvements off of the low 20s that we provided before. We are also very much focused on our capital expenditures and making sure that we are spending everything that we need to spend, but nothing more, and everything that we spend is driving the appropriate return. And we'll continue to be focused on that.

And Katy, I'd just add one more thing. It's Meg. The next chapter in improving our cash generation capability is around SKUs and platform rationalization. Because if you think about it, the more SKUs and the more platforms you have, the more inventory you have, the more parts you have, and the chances that you have the right inventory in the right place at the right time decrease. So there's more leverage over the long term, not necessarily in 2014, but there's more leverage in the long term around making sure we have the right product for the right market segment and don't over-SKU.

We have Toni Sacconaghi with Sanford Bernstein.

I have a question and a follow-up, please. Cathie, I was hoping that you could just provide a little bit more detail on the sale of the mobile computing IP that you alluded to, as well as the real estate sale. I think you also mentioned in your summary remarks that there had been some litigation as well, which was a benefit. So perhaps you could just dimension the size of each of those. And are they all captured in your Corporate Investments reporting segment or are they somewhere else in your segment reporting? And then I have a follow-up.

Sure. Toni, thanks for the question. So I think what's important to understand is that a number of these items are what I would consider normal operating transactions for the business. Now what's different in this quarter and the reason why we're calling them out is that they're larger than they typically are in a quarter. And so, we think it's important to provide that kind of color. And what it is, is that we've got sales of IP that the vast majority of those sales do show up in the Corporate Investments segment, but there is a small piece of that shows up in PSG as well. And then we've got gains on sales of real estate, partially offset by increased litigation expenses, as well as some other smaller items.

So Toni, the litigation expense was not a good thing. It was a negative.

That's right. It offset the gains from the sale of IP and real estate.

Okay. But -- and where are those occurring? Are those also being captured in the Corporate Investments line or are they somewhere else in the reported segments?

Right. So the increase in litigation expenses shows up in the Corporate -- other Corporate Investments segment to a large extent that there is a small piece that is also showing up in the Enterprise Services Group.

And the real estate gain?

Real estate gain shows up in the Corporate Investments or Corporate Other segment as well.

And then if I could just follow up on the Services side, you talked about some -- it was largely in line with your expectations for Q1, but you expected the drag to continue. Are you still confident in your full year outlook of 3.5% to 4.5% operating margin for that business and a 4% to 6% decline in revenues for that business for this year? Or are you recalibrating it in light of weak signings and other issues?

So we are not recalibrating. We still expect 3.5% to 4.5% from an operating margin perspective and the 4% to 6% decline in revenue.

Jim Suva with Citi.

You've done a lot of work and it's really showing, which is fabulous. Of course, there's always areas for improvement, and one area for improvement is, I think, the operating margins or profitability within your Services segment. Can you talk a little bit about that? I mean, year-over-year, you definitely have some trailing off of revenues, which we understand. But given all the restructuring HP has been doing, it's kind of a bit surprising to see that year-over-year, operating margins in that segment actually declined year-over-year. We understand the seasonal nature but the year-over-year decline, and it sounds like you're sticking to your goal of it. Is it just truly you're investing a lot more, and at some point, you foresee turning the corner to positive sales growth in that area? And would that be this year? Or help us understand how to bridge the gap of the restructuring with the year-over-year operating profit decline.

So we are at the beginning of, as I said, a multi-year turnaround in our Enterprise Services business. And this is -- has -- unlike our PC business or even our Industry Standard Servers businesses, this has nothing to do with the transactional business. These are long-term contracts, and so it takes a little bit longer to turn this ship around. And we've got work to do on labor, not only the number of delivery centers or labor pyramid, and we have more work to do in terms of our labor force in Europe and that is well under way. We also are doing a lot of investments in our systems and technology. This business really didn't have the visibility and the instrumentation that we needed to run a very labor-intensive business. We've made those investments, and they're starting to bear fruit. And I think you'll see those bear fruit through the rest of the year. And then ultimately, we have to turn the revenue corner here. We had, as we said for a couple of years now, key account runoff, and we've got to turn the revenue trajectory. And we've restructured our sales organization. We've got 7 new practice areas that are designed to meet the needs, very specifically, of customers, what they want from our Services business. So over the long term, we're optimistic. This is playing out in 2014 almost exactly, I think, the way Cathie and I thought it would. Do you want to add anything to that?

Yes. And maybe I can provide just a little bit more specifics on the decline year-over-year in the operating margin. What we saw was progress on productivity initiatives, as well as improvements in some of our underperforming accounts on a year-over-year basis. Now this was offset by the fact that this key account runoff is higher-margin runoff. We continue to have contractual price concessions that we have to make on certain contracts, and then we did increase our investment in some of our OpEx items.

We have Keith Bachman with Bank of Montreal.

I wanted to ask about Enterprise Group and PCs. On Enterprise Group, revenues were up 1% and ISS actually had another good quarter. And the question is, Meg or Cathie, as you look at 2014, is a positive revenue number sustainable for this division? And the corollary question is, on the PC side, you mentioned you feel better about corporates. And what's your confidence level on that, in terms of sustainability? Because it sounds like there is some pull-in for XP. But just -- when you talk about you feel like corporate is better -- corporate buying is better, is that sustainable through the year? Or does that fall off here as Microsoft goes through its transition?

Sure, let me take a crack at that. It's Meg, and then I'll get Cathie to weigh in. On the Enterprise Group side, we do think revenue growth is possible through the remainder of the year. We saw good traction in ISS. Listen, we still have a BCS drag on the portfolio, and that's going to continue for the foreseeable future. We're optimistic about Storage, particularly 3PAR, and Networking got off to a good start. So we've got to continue to execute. We've got to get our sales motion exactly right, and we have to get our innovation into the market and sold in a way that customers can understand and appreciate. So I think -- feel good about Enterprise Group. PSG, I think what most people will be surprised about in this earnings call is how well PSG did. And I'd do a shout-out to Dion Weisler and his team as they continue to execute. Our multi-OS, multi-architectural, multi-form factor strategy is working well. Market segmentation and leveraging our strengths in commercial and go-to-market capability is working well. And there was a bit of a tailwind on the migration from XP to Windows, but I wouldn't say that was an overwhelming factor. It was important but not overwhelming. I do think there's also some momentum in the long term, a long overdue PC refresh. And what I think commercial customers are understanding from their employees is while employees may want a tablet, they actually also need more traditional compute devices to do their real work in the everyday environment in their company.

So Meg, could this be a positive number for the year too, as you think about PSG?

Hard to call it. This is a pretty -- this has been, over the last 2 years, a pretty volatile market. My experience over many years in business is you always underestimate on the way down or you underestimate on the way down about how bad it's going to be. And then you -- on the way up, sometimes it's better than you think it's going to be. But I think it's too early to call. I think we should be relatively cautious here, given the volatile nature of the business.

I think it's what's important -- it's -- what's really important with respect to the PC business is that we've got to focus on profitable growth. And if that means that there is less top line growth, that's okay because we're focused on profitable growth.

We have Mark Moskowitz with JPMorgan.

Two questions, if I could. With the Storage business continuing to improve, are you starting to see some cross-pollination or cross-selling as a result of that pull into your Networking or other parts of your business? And then a second question is more philosophically, Meg, with the continued improvement in the balance sheet, the business model, cash flow, is there any change there in terms of organic versus inorganic investment? Could you start to maybe look outside to make some acquisitions, maybe bolt-on acquisitions first before you get a little more courageous?

Okay, let me start with Storage. Listen, we're making a big push towards Converged Infrastructure. We rolled out new Converged Infrastructure offerings, which we call Sharks, at Discover in Barcelona. It's a perfect channel product, easy to sell, very specifically focused on certain workloads. And so we're bullish on Storage, and we think that as we embed Storage into Converged Infrastructure, that there is some pull-through. At least, that's the bet we're making. With regard to acquisitions, we stand by where we were at our industry -- our Security Analyst Meeting last October that we will return at least 50% of our free cash flow to shareholders in terms of repurchase of shares and dividends. But I do think we will be now considering acquisitions. As this market changes very dramatically, you can see that we may need acquisitions in security, Big Data, mobility and cloud. We will be very judicious. It will be returns based, and I'd say it'd be small to medium-sized acquisitions. So that's where we're headed. But the capital allocation strategy that we laid out at SAM, exactly the same.

Ben Reitzes with Barclays.

Can you talk about Services just a little more, the 1% operating margin, then you got to get to 3.5% to 4.5% for the year? So how do you get there? It sounds like you kept all your targets. So how do we improve as we go throughout each quarter? And what are you working on specifically to get there?

So Ben, one of the things to -- if you go back to some of the commentary in the first half of last year, you'll recall that we talked about the delayed key account runoff, but you might also recall that we talked about the fact that we were selling more project-based business into those accounts to help them make the transitions that they were focused on. And that increased profitability and revenue, but increased profitability in the first half of the year. And so we are now working through that. Because now that account runoff is, in fact, coming through and the project to up-sell is not happening in those accounts. And so we expected that the first half of the year would always be under more pressure and that we would see more of an uptick -- we'll see an uptick quarter-to-quarter but more of an uptick in the second half versus the first half. We are also making this pivot. We're making investments into our sales force to move from less reactive renewal base to more proactive sales, and that starts to have a bit more of a help in the second half of the year.

Okay. And obviously, more leverage from the restructuring, I assume.

Absolutely. We're continuing to restructure as well. And actually, at the total company level, we had another roughly 3,700 employees that leave -- that left under the program. And so now we're running program today, that's 28,300.

Aaron Rakers with Stifel.

I want to go back and build on Keith's questions with regards to the Enterprise Group. Understanding the revenue growth and possibly the expectation that, that can be sustained throughout this year, how are we thinking about, particularly the hardware operating margin trend? It looks like, given your commentary with Technology Services operating margin improving, it looks like we're still seeing a bit of a deceleration in the traditional hardware operating margin. So is that really product cycle driven? I think last quarter, you also had implemented some go-to-market strategies. So any update there would be helpful.

Well, let me weigh in, and then I'll let Cathie chime in as well. Listen, we are turning the Enterprise Group around, and you can see it in the revenues and the success in ISS revenues, as well as Networking and Storage. We still got more do -- more work to do on the margin. And the margin, Aaron, can improve in 2 ways. One is within the product line because we decide what deals we're going to go after and with what product, we manage our cost structure aggressively. But there's also a mixed thing going on here as well because every time we sell storage and networking, that is margin-accretive to HP versus our classic ISS business. So those are the 2 levers that we have to pull, and I think we have not demonstrated yet our best efforts in doing this. We're -- these things take a while to turn but we're on it. We've got the right people on it, and I think you'll see margin improvement over the course of the year if we can -- if the market holds up and we can continue to execute.

And I'd add maybe a couple more points. First, it's not just Storage and Networking, although that is a big piece of the mix. It's also our new products. Our new products have better margins as well. And then just as you think about kind of the profitability of EG for the year and you go back to what we said at the Security Analyst Meeting where we said that EG's contribution to the year-over-year improvement in EPS at the company level would be anywhere from $0.01 dilutive to a couple cents accretive, and this was before the basically $0.12 at that time that we were investing back into the business and now we're adding an additional $0.02. And so we still believe that, that's what the result will be in EG.

Brian Alexander with Raymond James.

If I could go back to the cash flow, Cathie, you mentioned that the cash conversion cycle should be moderately better than you expected. I think everyday improvement is a few hundred million dollars a quarter in cash flow. So is your operating cash flow target for the year rising by $1 billion to $2 billion? Or are there offsets to that? I didn't hear a specific number relative to your original goal of 9 to 9.5, so I was just hoping you could be a little bit more specific.

So I didn't provide a very specific number because we don't typically update our cash flow guidance on a quarterly basis. But you should read through that if the cash conversion cycle is moderately better than the low 20s, we're not seeing the same level of degradation in the cash conversion cycle in '14 as we had originally expected that, that would give us a bit of an uplift to the cash flow for the year.

And I think if I heard you right, Brian, you said that the cash flow guidance had been 9 to 9.5? It's actually 6 to 6.5.

That's free cash flow.

Oh, okay.

He was talking about cash flow from ops.

Okay, okay. But there should be a bit of upside to both of them.

Steve Milunovich with UBS.

Obviously, your execution is much better. But Meg, you talked about better repositioning of the company, kind of relative to your competitors. And I'm just going to challenge you a little bit on that. IBM, obviously, is getting out of servers, you've kind of alluded to that, out of x86 servers. But that's because they see it as a very low-margin business. Your software exposure is still quite low relative to your competitors. And you've actually become somewhat more dependent on Printing over the last 12 to 18 months. So I know I'm picking on the negatives, but can you talk about what you mean by improved repositioning, particularly from a competitive standpoint?

Yes, sure. So 2.5 years ago, we embarked on some pretty significant changes to this company around the cost structure, around our pivot to the New Style of IT, around investment in innovation. We totally understood what was happening in this market 2 years ago, and we began to take actions. And I think what you see is our competitors now having to take some of those same actions around cost reduction. You're starting to see some weakness in their results, which we saw 2.5 years ago. So my point is that I think we've been hard at work on doing a lot of things that are going to position us, as this industry continues to go through some very challenging changes. I mean, the pace of change and the magnitude of the change here is as great as I've seen in my career, and I think we're reasonably well positioned to take advantage of those changes. We have businesses that are declining businesses. We understand where they are. We understand what we need to do with them. We've got businesses that are holding in terms of revenue and then we've got growth businesses. And we have pivoted investment. We've pivoted people. We've pivoted go-to-market to those growth areas of the company. And by the way, it started 2 years ago. So I just would say we have a running start. We'd never underestimate the competition. But I think because we were in such a tough situation 2.5 years ago, we got a head start.

That's fair. And what are you hearing from your customers? Are they, in fact, making architectural decisions that are deferring some of their purchases right now or not?

So I'd say I'm hearing 2 things from our customers. One is tremendous increase in confidence in HP. We look like the paragon of stability right now, which is very different than it was 2 years ago. And they have a lot of confidence in where we're headed from a product roadmap perspective. They are making decisions -- architectural decisions. We don't see them holding off on that. There's movement around cloud. There's movement around which -- are they going to make a bet on HP's hybrid cloud? Are they going to make a bet on someone else's cloud? So there is a battle going on for architectural control in the enterprise, and we feel good about where we are in that. It's early stages. There's still a lot of proof of concept. There's still a lot of trying to decide what workloads people want to move to the cloud, what kind of cloud they want to move those workloads to. But I would say, particularly within cloud and then Big Data, we've got a very compelling offering. This hybrid cloud offering that we crafted well over 1.5 year ago, it's the right answer. I can tell you every single day, customers say this is exactly what I want. And then in Big Data, the response to HAVEn is tremendous because everyone's looking for a Big Data analytics platform that is based on Hadoop, that can combine structured data plus unstructured data with enterprise-grade security, with the ability for them to write apps, us to write apps and the ecosystem to write apps. And so, the response to that is another really, really good thing in the marketplace. So it's a battle. It's a knife fight every single day out there, but we feel like we've got the right ammunition.

Shannon Cross with Cross Research.

Can you talk a bit about what you're seeing in the toner business? Specifically, you talked about, I guess, year-over-year declines in terms of revenue this quarter. How you think that plays out through the year? And you noted, I think, the channel inventory is up a little bit. Just any color you can give, and then I have a follow-up.

Sure. Thanks, Shannon. So what we're seeing on the toner side is definitely softness. And just to be clear, on the ink side, we saw growth in ink supplies. And it was really toner that took supplies down, the 2.5% that we saw. As -- and that was also -- currency also contributed to that. But I would say that the toner softness was due to 2 big things. One is we're seeing incrementally much more aggressive price competition from some of the Japanese competitors who, of course, have the benefit of the weaker yen. And then we are starting to see increasing competition from clones and remanufacturers as well.

Okay, great. And then, can you -- oh, sorry.

I'm sorry, I'm just going to say, the other thing is we've got to continue to place laser units with positive lifetime value. And we've -- I think what we said, the third consecutive quarter of incremental placement in laser, our portfolio of multi-function colored printers is actually now hitting its real stride. We just introduced many of them at the end of last year or even the beginning of this year. We're gaining share in a category that HP had been underrepresented. But if we were underrepresented in that market share, it means we didn't have the toner trailing that market share. Now we have a product, and so the units we're placing today pay dividends next year and the year after. And so, I think you should feel good about the share gains we're making. And then lastly is the Managed Print Services. This is where -- the benefit of Managed Print Services is we get 100% of the aftermarket. And so, that's an important thing as well. And what, 4 or 5 years ago, Cathie, we didn't really even have a business there. And now, that's a successful business for us and we're growing it.

Yes, and our TCV in that business this quarter was up strong double digits, so continuing to make good progress in Managed Print Services.

Okay, great. And then if you can just talk a little bit about the Server business? And specifically, I'm curious as to what you're seeing in terms of the IBM sales. Any opportunities that could gain share there and how you're looking at targeting some of that business?

Yes. So as everyone on the call knows, Lenovo announced they're buying IBM's x86 server business from top to bottom. And that good news is it does create, I think, an opportunity for us. Because what I have learned about this business is instability and for the questions about the future, make it very difficult because people want to bet on the roadmap, and they're worried that, as a change of ownership occurs, is the roadmap the same? Is the investment the same? Is the go-to-market going to be the same? Is the service going to be the same? So I think we have a near-term opportunity here to gain share in our Enterprise Services or in our Server business. So we're all over it. We're all over it with our channel partners, and I think there's a good near-term opportunity. In the long term, obviously, Lenovo's going to be a powerful competitor, and we aim to be well set up by the time the deal is done to compete really aggressively.

Bill Shope from Goldman Sachs.

Can you give us a bit more color on the traction you're seeing with the new portfolio offerings for the Technology Services business? And I guess, over time, how should we think about when an increased attach rate here can fully counter some of the hardware installed base erosion you mentioned, given that's somewhat of a moving target?

Yes. I -- there's a couple of things going on here. First of all, part of the decrease is that we have taken a grow only profitable revenue in Technology Services Consulting. This was a business a couple of years ago that was actually not very profitable or maybe even losing money. So part of the decline is a conscious decision to be in the consulting business only that makes money. But you're right. There was a very high attach rate to BCS, and if BCS declines, you're going to see some natural degradation. I think the TS team deserves a huge amount of credit for product innovation that has mitigated that decline. Proactive data center care is -- the bookings, Cathie, right, are in triple digits. I mean, this a very well-received product in the marketplace, and then Flexible Capacity Services, which really capitalizes on the trend of Infrastructure-as-a-Service. So what Flexible Capacity Services is, is we can roll in a unit of compute into a customer's data center. They control it. It's on premise, and yet they can pay for it on a, if you will, as a service basis. There's a minimum that they have to consume. There's obviously a maximum unit of compute can deliver, but they have ability to flex up and down. And it turns out, that actually works for us economically because of HP Financial Services. So we don't have a balance sheet problem that you might imagine on an as-a-service infrastructure of product. So we're excited about both of those. There's a big pipeline. This product, by the way, Flexibile Capacity Services, was pioneered in Europe. We've got a big pipeline there and Proactive data center care, off to a really, really strong start. And so, shout-out to the team because they've really -- they saw what was happening and they responded with product, which is what HP has to do. We have to keep innovating because as some businesses start to fall away, we need to have new businesses that can take their place with higher margins.

I think it's also important in the TS business to understand that roughly half of the decline is as a result of currency. And if you actually had modeled what the decline in hardware over the last year would do to support, it would be materially more than what we're seeing. And that's the result of all these new product innovations that Meg was talking about. Specifically, in terms of penetration rates, we are seeing growth in both Storage and Networking penetration rates and that is going to help offset some of the pressure that we're seeing from BCS declines.

We have Maynard Um with Wells Fargo.

Meg, so you've been in CEO position now, I think, for 3.5 years, presumably of a better feel for areas that are non-core. So I'm wondering if we might see more divestitures coming this year. And then I was also hoping if you could just elaborate on the account runoffs and, in particular, the Navy contract, which was extended from June to September. So I'm just wondering what the dynamics there are and if that helps this fiscal year in terms of the revenues and the profits for the Services segment.

Sure. So actually, I've been here 2.5 years. Sometimes it feels like 3.5, but I've been here 2.5. And obviously, I have a much better feel of the product portfolio and the capabilities of the organization. And now, we're in the position of really looking at the portfolio within the portfolio within the portfolio. Right now, I don't see a major move of the big 4 businesses, but this is a vast portfolio and there are product lines and smaller businesses within these big operating divisions that could be candidates for divestiture. We haven't made any decisions, but we are now getting to the natural course of, okay, do we have the optimized portfolio? With regard to the Navy contract, this was actually not really a key account runoff because the Navy contract was rebid and we won for 10 years. So we're excited about that contract. It was a lower-margin contract, as you might imagine, but we are in a very good position with the Navy. But there was profit pressure from a decreased profitability as we rebid that Navy contract. But it's not a runoff. It's just another 10 years at slightly lower margins.

Super. All right. Thanks very much and that concludes the questions. And with that, we'll wrap up the call. So thank you, everybody, for participating and we'll talk soon. Thanks very much.

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