Good day, ladies and gentlemen, and welcome to the Fourth 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. Jim Bergkamp, Vice President of Investor Relations. Please proceed.

Good afternoon. Welcome to our Fourth Quarter 2014 Earnings Conference Call with Meg Whitman, HP's Chairman, President and 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 fact are statements that could be deemed forward-looking statements, including but not limited to the execution of restructuring plans and any resulting cost savings or revenue or profitability improvements; any projections of revenue, margins, expense, earnings, earnings per share, HP 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 including the separation transaction; and any statements concerning the expected development, performance, market share or competitive performance related 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-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 the tax-related items, reflect estimates based on information available at this time and could differ materially from the amounts ultimately reported in HP's annual report on Form 10-K for the fiscal year ended October 31, 2014. Revenue, operating profit, operating margin, net earnings, diluted net earnings per share, income tax rate, cash and cash equivalents, operating cash flows, total company debt, capital expenditures 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 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 the slide presentation accompanying today's earnings release, both of which are available at the HP investor relations webpage at www.hp.com. I'll now turn the call over to Meg.

Thank you, Jim, and thanks to all of you for joining us today. As we exit the third year of our 5-year turnaround effort, I have to say that fiscal 2014 overall was a very strong year. Our performance came in right where it should be and we've delivered on our promises. We've reignited innovation across HP, strengthened our leadership, delivered cash flow above expectations, fortified our balance sheet and grown our non-GAAP earnings per share. And we finally stabilized our revenue trajectory, delivering flat top line revenue for the company on a constant currency basis for the full year. We've also made significant operational improvements across each of our businesses that are paying off in our improved profitability, customer and partner engagement and employee experience. In fact, we saw year-over-year operating margin expansion in every one of our businesses in the fourth quarter for the first time in many years. In addition, we once again delivered very strong cash flow in the quarter, generating $2.7 billion in cash flow from operations and free cash flow of $1.9 billion. For the full year, we delivered $9.3 billion in free cash flow, while returning $3.9 billion to shareholders through dividends and share repurchases. As a result, our balance sheet now stands at an operating company net cash position of $5.9 billion, a significant improvement from the $11.8 billion of operating company net debt in the first quarter of fiscal 2012. And we once again achieved earnings per share at the high end of our previously provided outlook, delivering non-GAAP earnings per share of $1.06 for fiscal Q4, up 5% over the prior year, and $3.74 of non-GAAP earnings per share for the full year, also up 5%. We were able to deliver this performance while continuing to invest in the critical…

Thanks, Meg. Overall, I'm pleased with the performance this quarter. Revenue was as expected across most of the portfolio, especially considering 2 major deals in the fourth quarter of last year that makes the tough compares. Profitability was strong with year-over-year rate increases in each of our business segments, in large part due to the operational improvements we've implemented over the last few years. We expect these improvements to continue into fiscal 2015, and cash flow for Q4 topped off what was already a strong year. Total net revenue for the quarter was $28.4 billion, down 2% year-over-year or 3% in constant currency. Fiscal 2014 net revenue was $111.5 billion, down 1% year-over-year or flat in constant currency. Gross margin for the quarter was 24.6%, up 1.6 points year-over-year and 0.6 points sequentially. Over the prior-year period, we experienced rate improvements across all of our major business segments partially offset by competitive pricing in hardware and an unfavorable mix impact on the strength of Personal Systems. Total non-GAAP operating expenses for the quarter were $4.2 billion, up 4% year-over-year, driven by investments in R&D and go-to-market. Sequentially, OpEx was down 1%, in line with normal seasonality. Non-GAAP operating profit was $2.7 billion or 9.6% of revenue, up 0.6 points year-over-year and 1.1 points sequentially. We recorded $146 million of expense on the other income and expense line, with the 22.4% non-GAAP tax rate and a weighted average diluted share count of 1.9 billion shares. We delivered fourth quarter non-GAAP diluted net earnings per share of $1.06. Full year non-GAAP diluted net earnings per share was $3.74, up 5% year-over-year and at the high end of our outlook range. Fourth quarter non-GAAP net earnings primarily excludes pretax charges of $604 million for restructuring and $226 million for the amortization of intangible…

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

First, a question for Cathie. Now that you're back to target inventory levels in printer supplies, how should we think about growth going forward and also your ability to keep the margins at 18% in light of supplies mix perhaps improving?

So Katy, good question. I think Meg will give maybe a little bit of a view on supplies on a go-forward basis, but I would say that overall, we expect that the ink supplies will really start to stabilize and maybe grow a little bit, and that toner supplies will begin or continue stabilizing into '15, but probably not grow until '16.

So Katy, let me give you a -- maybe pull the lens back all the way and talk about our Printing business. As you know, we have really 3 businesses: we've got Inkjet, laser jet and then our graphics business. And the good news is graphics is performing very well, high single-digit growth for much of the year, middle single-digit growth for Q4. Inkjet is performing largely as expected. While we've experienced some decline in the home computer market -- or the home consumer printer market, basically we're growing SMB and Ink in the Office and a number of our initiatives are doing quite well in the ink business. The challenges are the greatest on the laser side of the business, and there's 2 things going on here. One is we made the same hardware decision as in ink to place those high-value units, which lead to greater attach long term, which I think is a smart move. On the toner side, I think the declines can be attributed to the clones and the remands attacking on our aging installed base, which we've been fixing over time but we still have an aging installed base. I think the good news is we are all over this challenge. And we're focusing on our high-value MFPs, where we outperform the market. We've got a great Managed Print Services business, where we're now #2 in the market from #4 a couple of years ago, and we're launching a new R series of products with new technology to combat the clones. So ink, good; graphics, great; and toner is our challenge in laser but we are all over it.

And specifically around your comment around margins in '15, very much the same as margins in '14, and so we're very focused on our cost initiatives and driving the appropriate productivity. We have seen favorable currency obviously in '14 that was very significant. In '15, that favorable currency position from yen weakening does mute a bit because we are anniversary-ing it. But we do continue to expect to see some incremental gains from yen in fiscal '15.

Okay. And then just as a follow-up, Meg, in the press release, you mentioned the potential to accelerate the progress of the turnaround in fiscal '15 and beyond. Can you just talk about, is that referencing accelerated revenue performance, accelerated cost performance? And how much of that is dependent on getting the spin done in the second half versus a foundation that's already been laid?

Yes. So, Katy, let me give you a perspective here. We have made a lot of progress over the last 3 years on a couple of dimensions. One is we have firmly stabilized the revenue in this business. We were flat year-over-year, which is not what we aspire to, but from whence we came with high single-digit revenue growth, we're feeling pretty good about that. We have also done a good job on the cost side. You saw that we expanded margins in every single business in the fourth quarter, which has not happened since May of 2012. So we need to keep doing what we're doing. We need to continue to accelerate the pockets of growth that we have. We need to mitigate the declines in some of our businesses, legacy products, whether it be tape or others, and we need to continue to double down on the innovation engine. I'm really proud that we increased R&D by 10% year-over-year. We haven't done that in a very long time. So I think we're poised to do well in 2015. We expect flat revenue in 2015 in constant currency. If it were not for the 2-point currency headwind that Cathie described, we'd actually grow a bit. But every major U.S. company is going to be facing a pretty significant currency headwind, and we are no exception to that. And then we feel good about the margin expansion. So right where we thought we'd be on the turnaround, and obviously the point of the separation is that we will accelerate that going into 2016.

The next question is from Sherri Scribner with Deutsche Bank.

I just wanted to follow up and ask Cathie if you still feel comfortable with your cash flow guidance for fiscal '15. And along with that, if you still expect to deliver 50% of that back to shareholders. And as part of that, what type of share count should we expect in the first quarter, given a lot of the buybacks happened later in the quarter?

So thanks, Sherri. Yes, I still expect that our cash conversion cycle is going to be in the 10- to 12-day range for fiscal '15. And part of that is the result of things that happened in the fourth quarter that are not sustainable. For example, we did have a currency benefit to the cash conversion cycle in the fourth quarter that actually isn't real cash. And I'm sure most of you just said, "What is she talking about?" But what happens is that we actually hedge our balance sheet around the world. We hedge them at a net monetary asset basis and we book it through OI&E. We don't hedge accounts receivable separate from accounts payable, and so we're getting what looks like an artificial cash flow impact from DSO. So really, if you really think about the fourth quarter, it's really at about 6 days. We've got some linearity in there from purchasing and sales that is not sustainable going into '14 -- I'm sorry, into '15, and then we also have business mix impacts. Because as you guys know, the Personal Systems Group generates a very negative cash conversion cycle, which is great. But as that business becomes less mix for us and the EG and Enterprise Services becomes more, which has a higher cash conversion cycle, there's upward pressure. And then finally, I think one of the really important things is that we've done a great job of getting our balance sheet in good shape and our working capital in great shape. And now the opportunity is there for us to take advantage of cash discounts when it makes economic sense, put inventory on both when it makes economic sense and frankly make some strategic buys when it makes sense. And that will put upward pressure for all the right reasons on the cash conversion cycle in '15.

And with regard to returning 50% of cash flow to investors in the form of dividends and share repurchase, that stands, that is our objective for 2015. And given where the share price is, you'll see us weight that towards share purchase.

And therefore, you should expect a moderate decline in shares outstanding over the course of '15.

Okay. And just to follow-up, you're still comfortable with the $6.5 billion to $7 billion free cash flow guidance for fiscal '15?

Yes, we are.

And the next question is from Toni Sacconaghi with Sanford Bernstein.

I have one for Cathie and I think one for Meg. Cathie, I just was wondering if you could help us frame the cost savings opportunity in fiscal '15 versus fiscal '14. My sense is that the gross cost savings opportunity is actually several hundred dollars bigger -- several hundred million dollars bigger in fiscal '15 than in fiscal '14. And I was wondering if you could comment on if fiscal '14 was, let's say, $1.4 billion in gross savings, whether you could comment on how much of that you reinvested versus fell to the bottom line? And how we should be thinking about that on a relative basis for fiscal '15? How are you thinking about reinvestment versus savings capture relative to this year?

Sure. So Toni, let me start with just a restructuring update so that everybody is on the same page. So from a restructuring perspective, we did end fiscal '14 as we expected. We had about 41,000 employees leave under the program in fiscal '14. We took a GAAP-only charge in '14 of about $1.6 billion, and we had a cash outflow of about $1.5 billion. That generated gross savings in the year of $3.5 billion. And then if you look at -- or you go back to the announcement we made at the beginning of October, we increased the number of employees impacted from 45,000 to 50,000. And the savings from that, the net savings from that increase, we are investing back into R&D and go-to-market. For fiscal '15, we do expect that we will have that full amount of 55,000 employees leave under the program, that the GAAP charge will be down significantly to about $600 million, and that the cash outflow [ph] impact will also be down by about $500 million and the gross savings will be up to $5.3 billion. Now to your point, a fairly large chunk of that gets reinvested back in -- frankly, in work that gets migrated as we adjust our global footprint. Some obviously goes back into investing into R&D and sales and some will drop to the bottom line.

And Cathie, can you help qualitatively about how we should think about that relative reinvestment rate for '15 versus '14, or is that discretionary depending on how the year goes?

I think it's a little discretionary. But we put a significant amount of that back in -- when you think about those incremental 10,000 folks and the savings that we're going to get in the year, on a net basis, that is going back into R&D and sales.

Okay. And then Meg, you sound consistently confident about the stabilization in revenue and -- in the opportunity for -- or expectation for flattish revenue growth at constant currency in '15. And I was just wondering what dynamic you see changing? So I look at '14, and you had quite easy comparisons on the revenue side. And then in Q4, your comparison was about minus 3 and revenues grew about minus 3 at constant currency. When we look to fiscal '15, your comparison at constant currency is about 0, so it's actually tougher and you're expecting much better growth than you saw in Q4. So I was wondering if you can comment on whether you actually think the environment will improve in fiscal '15 relative to what we saw in fiscal '14, or whether there were unique performance challenges in '14 that you don't think will repeat. Or if we just try and think of a more analogous, tougher compare, which is Q4, it doesn't necessarily follow that getting to flat revenue growth in a similar spending environment necessarily happens. So maybe you can help me with your view on what drives that.

Yes. Sure, Toni. So first, I would say, from a macroeconomic point of view, we don't expect much change across the globe, with the exception of the United States, which does seem to be strengthening in a way that is different from the last 3 years. Second, I would say much of this performance that we expect from a revenue perspective in 2015 is driven by the fact that we are stronger. Every business is stronger. Every market position that we are in is a bit stronger. Our innovation roadmap is the strongest we have had really across the board, whether that is our PC lineup, our new range of R series printers, our next generation of servers, our Mission Critical x86 servers, all-flash array in our storage business, SDN in networking, across the board. We've got 2 new great products in our IT management suite in Software. So feel great about that part of the business. Everyone -- every business is stronger. ES, we are planning to have a slower decline in revenue in 2016 -- in 2015 than we did in 2014 or 2013. So while we still anticipate ES will shrink in 2015, it will be at a slower rate. And probably the biggest swing factor to growing the company will be what happens in ES revenue. And I'm encouraged on 2 points. One is our new logo performance is the best it's been in a number of years. Our win rates are up. We're being invited to RFPs and to opportunities much more frequently than we were in the past, and we have a higher win rate. We have to continue to sell our in-year sell and build to our existing customers. So Cathie, I don't know if you would agree with me, but I'd say probably ES is the biggest swing factor in terms of the growth projection that we've put out for 2015.

So I think that ES -- I also think EG has just an incredible amount of innovation that's coming to market. We've got our Gen 9 ProLiant server that launched in August. We've got our Apollo series platform that's launched. And we have just an incredible lineup for the year that I think is -- it gives us some real upside in EG as well.

And the Windows Server 2003 refresh.

Exactly, for the server space there, too.

The next question is from Ben Reitzes with Barclays.

Meg, can you comment on what your appetite for M&A is during the transition process now that we -- I mean, you've been buying back stock the whole quarter, so it looks like your plans might have changed over the last 90 days, if you could just update us there. And then also, did you detect any disruption at all in any of your business due to the announced transition and breakup, particularly in the Enterprise Group? And how are you managing that and making sure that everything goes smoothly?

Yes. So with regard to M&A, we still remain interested in acquiring assets that are the right thing for either what will become Hewlett-Packard Inc. or HP Inc. and what will become Hewlett-Packard Enterprise. But as always, and we've been consistent on this, this is returns-based, we remain disciplined and we won't do things that are not in the best interest of shareholders. So I wouldn't say that it's changed dramatically, but we remain on the same sort of philosophy of M&A. With regard to disruption, I'm actually happy to report that I don't think we saw any disruption in the fourth quarter. And we are approaching the separation, I think, in a very good way. First is we have some of our most talented executives running the separation, and that is what they are doing full time. And at its peak, that will probably be between 400 and 500 people. The rest of HP, all 275,000 of the rest, will be, in fact, focused on running the business. And so I have a lot of confidence that we'll be able to deliver FY '15, which is critical because the most important thing we can do to get these 2 companies off on their own is deliver this year while we execute the separation. This is a big and complicated separation. It is the biggest separation that's ever been done. And it's not a typical spinoff where you've got one big company spinning off a little part of the company. These are 2 Fortune 50 companies that, as I've said, at separation both have about $57 billion of revenue. So it's big and it's complex, but we've got the right people on it. And I'm really heartened by how we have approached this. This is HP at its best, execution machine on the separation.

And the other thing that I would say is that as we were entering into the fourth quarter, we obviously had some expectations about what we thought revenue would do. And this was before we announced the separation. And the revenue actually came in a bit better. So top line was better. And that's even in an environment in which currency moved against us to the tune of several hundred million dollars. So continuing to feel very confident that we can execute in fiscal '15, while we are separating the company.

And let me just give you a little color of customers and partners. So we communicated with 38,000 customers and 69,000 partners in the first 18 hours after the announcement. It's kind of amazing, but we were in a military style of communication. And then post that, all the senior executives have met with hundreds of customers and partners. And I would have to say that almost universally, they're enthusiastic about this. They think it's going to be good for them, good for their business because we'll have 2 more focused companies that have an ability to react faster to the marketplace and meet their customer needs more -- in a more focused way. And that, of course, because the customers have reacted well, that has actually sort of encouraged our employees. They're now kind of excited saying, "Wow, this is going to give us a chance to be more nimble and to win more in the marketplace." So I think this has gone as well as it could have gone. I'm really pleased with the communications, pleased with the reaction and pleased with the rallying of our employees across the globe.

The next question is from Maynard Um with Wells Fargo.

So you've now put senior leadership in place to manage the separation of the 2 companies. Can you just talk about what the immediate mandates are, what the next steps are? And then also, whether you have any thoughts on potential incremental synergies, where that might be coming from and if there's any way how we might be able to frame the magnitude today.

Yes. So the intermediate -- the immediate mandate, and I'll go into a little bit of detail here, is there is a corporate separation management office who is tasked with creating 3 years of historic financials for each of the different businesses which, of course, we do not have because we've been together. Second is very detailed analysis of tax and legal separation. We have over 786 legal entities at this company, all of which have to be looked at and rationalized. Then we have a separation management office for each of the businesses, Hewlett-Packard Enterprise and HP Inc., and their job is to make sure that we got the right strategy with the right cost structure as we head into being 2 separate companies. And there is also, obviously, the separation of IT that needs to take place. And that will give us an opportunity to create an IT infrastructure for each company that isn't based on our legacy IT system and isn't based on a manufacturing system which, for so many years, it has been. So those are the immediate mandates. And it seems to be going well. We've got deadlines every month on things that have to be decided, decisions that have to be made and operations that have to be changed. With regard to incremental synergies, I'll let Cathie take a crack at that. What I will say is the separation was totally the right thing to do for this company. It will, as I said, make us more customer-focused, but it also gives us a chance to clean sheet 2 new Fortune 50 companies. And it is remarkable how it focuses the mind around overhead, around do we need exactly what we have today? Because what we are not doing is separating the company into 2 pieces exactly as it is today. We are using this opportunity to really think through how we start -- knowing what we know now, and if you had a chance to restart these 2 Fortune 50 companies, how will you organize? And that has been a really interesting and I think going to be really good for both these companies.

So I don't have a specific number for you, we're still working through this. We're working through, frankly, also the cost of the separation, which we will give an update on our earnings call in Q1. But I'll reiterate something Meg said, maybe a little bit differently. This is an opportunity to do 0-based budgeting, as close as you can get to 0-based budgeting for 2 Fortune 50 companies because every line item needs to be reviewed, every balance sheet item needs to be reviewed in order to do this split. And so it's a huge opportunity for us to really take a different perspective with our cost structure.

And the ability to rethink go-to-market, supply chain, customer support, warranty, I mean, we're just going through every single thing. And by the way, we've been doing that for 3 years. There is a huge amount more opportunity, which I think is also exciting to people because in this day and age and, what I'd call, the new style of business, your cost structure is an absolutely necessary part of being able to compete in a global environment.

The next question is from Kulbinder Garcha with Crédit Suisse.

I have questions for Meg and for Cathie, both really around the next year's revenue outlook. For you, Meg, first of all, going back about 2 years, you published a slide which talked about sustained growth from fiscal year '15 onwards for the business. Obviously, a lot has changed in the last 2 years, and I acknowledge that. But are we at the point whereby -- I know you've talked about some moderate level of growth this year, but it doesn't sound you're that convinced it's going to be sizable. Are we at the point whereby just going forward, you are confident it can be a growth company even if it's low single digits? And what are the key product areas that we should be tracking to monitor that progress, do you think? And just for Cathie, on the -- one thing you said earlier on, on the free cash flow question was that you implied that PSG may actually decline or may be able to go down in the mix. But I thought a few weeks ago, at the analyst meeting, you implied the PC industry may contract, but HP's PC business wouldn't contract because you've gained share. Does that not stand anymore? Or have I misunderstood? I just want some clarification there.

So let me talk about FY '15. As I said, we would grow this year, in my view, if we didn't have the currency headwind. But listen, there's puts and takes in every business. I think the revenue will be about flat in constant currency this year. And again, we have made a huge amount of progress. There's been tremendous changes in the marketplace over the last 3 years, but I feel good about having stabilized the revenue. Now I think the question you're asking is, do we think 2 separate companies will grow in 2016? And it is too early to give you that guidance. As we come closer to the end of this year, we will give a lot more detail about HP Inc. and about Hewlett-Packard Enterprise. And we will be out with investors, much like an IPO roadshow, as we get closer to the separation. But at the highest level, one of the principles, one of the philosophies behind this separation is both companies will actually do better separately than they would have combined. And that's because cost structure, focus, real attunement to customer needs and the marketplace changes. So the thesis very much is to go from year 3 to year 5 of this turnaround, we're going to make progress as separate companies than we would have had we kept this together.

And Kulbinder, my comment was really around the long-term sustainability of the cash conversion cycle at 4 days. And so we do -- would expect that had we kept together, that over time, the PC business would -- mix would decline, and that the Enterprise Services and EG mix would increase.

The final question comes from Amit Daryanani with RBC Capital Markets.

A couple of questions. One on the Services side, I just want to make sure I heard this right, did you say book-to-bill was 0.9 this quarter, because I think it was 1 the quarter prior. And could you just talk about what your operating margin expectation for Services through fiscal '15, given you've had pretty good expansion in '14?

Sure. Yes, I did say that the book-to-bill was 0.9. We had hoped to exit the year at 1. We did have a rather large deal slip into next year; if it weren't for that, we would have gotten to 1, but we did end at 0.9. In terms of the Enterprise Services margins, what we laid out for you, I think it was on the October call, was that the margins in fiscal '15 would expand from the 3.6% that we did in '14 to between 4% and 6%.

With long-term margin expansion, as we've said for a couple years, between 7% and 9%.

Right. With top line growth of 3% to 5% long term.

Yes. And if I could just maybe follow up on China, a couple of weeks ago, Meg, you made some comments about China being potentially soft, especially in the Networking side. Can you just talk about what are you seeing there? Is it very much isolated in networking or is it a broader issue you're seeing that it's tougher to do business in China across HP versus just Networking?

So in China in the fourth quarter, we saw growth in Enterprise Group, in Services and in Printing, but we also saw an increase in a very aggressive pricing, especially in Networking. And overall, in China, HP was flat year-over-year. And we continue to run China with a single business leader, Bob Mao, who reports directly to me, and he's driving really an overall united strategy and go-to-market approach across what will become Hewlett-Packard Enterprise. So it's a little different than the way we run the rest of the world and I think that's working for us. That said, it is a very competitive environment and it is competitive with Chinese players as well as other global players. It is probably our most competitive market in the world, so we have to be on our toes there. And we are very focused on in China, for China. What we've learned, and I've learned in my previous career is you've got to have products that are right for the Chinese market with the distribution model that is right for the Chinese market. And if you did not do these 2 things, you will end up not performing as well as you might have in China. So I think we've got the right approach to China, it is a very competitive market, but I think we're doing as well as any other major global competitor at the moment in China. Great. Okay. Thank you very much for listening, and thank you for joining us this afternoon.

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