By Ann Levine May 30th, 2003 - Last week, Hewlett Packard (NYSE: HPQ) Palo Alto, CA announced second quarter revenues of $18 billion, virtually unchanged from the $17.9 billion in the previous quarter. Non-GAAP diluted earnings per share were $0.29. GAAP diluted earnings per share was $0.22. Non-GAAP operating profit and EPS include a $128 million after tax adjustment. It excludes a non-recurring tax benefit of $131 million. GAAP operating profit was $643 million for the quarter or a 3.6% increase in revenue. Topics of this summary: * Quarter Overview * Cost Saving Measures * Outlook * Q & A Quarter Overview HP's solid performance in the second quarter was driven by the strength of Enterprise Systems and HP Services. One year after the merger with Compaq; the integration of the two companies is essentially complete. HP has reduced structural costs by $3.5 billion on an annualized basis, has doubled non-GAAP earnings per share since the third quarter of fiscal 2002, and has improved the balance between revenue and profitability across the business. HP is pleased with revenue performance on an absolute basis and relative to competitors; HP reported growth when all major competitors have shown revenue declines. On a non-GAAP basis, the second quarter represented the strongest operating performance since the merger. Enterprise Systems realized revenue of $3.9 billion and grew 3% from the first quarter. Gross margin improvement resulted from product mix, effective pricing and discount management, and continued management of operating expenses. Personal Systems revenue for the quarter was $5.1 billion. HP Services Group remains weak with revenues of $3.0 billion, up 2% from the first quarter and additional workforce reductions are planned. Managed Services revenues declined slightly from the first quarter. Growth in the sales of products was offset by seasonal weaknesses. Imaging and Printing (IPG) realized growth in all areas and every region with revenues of $5.5 billion with growth of 13% over last year. Financial Services showed a decline in revenues of 3% or to $501 million due to the soft hardware market. Cost Savings Measures HP reported cost savings of 140% of the original planned and they are one year ahead of their cost saving schedule. A $1.1 billion in savings has been realized in both direct and indirect procurement. A $1.5 billion in annualized savings is from workforce reductions and $226 million is from IT operations. HP reports being well on its way of eliminating 17,900 of the 153,500 original positions worldwide and have currently eliminated 16,600 jobs. At the end of the first quarter, headcount was 141,000 people. There have also been 6,800 additional jobs in growth areas such as IPG, Managed Services, and in India to support global growth. There were an additional 2,300 reductions in the first quarter and there will be an incremental reduction of headcount of 3,500 by year-end. Outlook HP expects the IT environment to remain a challenge in the upcoming quarters and sees no near term catalyst for IT demand. Europe is showing signs of market weakness and the impact of SARS on Asia/Pacific operations are currently unknown. The company's plans going forward are to focus on key market segments such as Enterprise Systems, small to medium sized businesses, and consumers to better leverage the power of their portfolio. Guidance for the second half of 2003 affirmed $0.62 in non-GAAP earnings per share. Q & A 1. Currency is difficult to predict year over year, as are expectations for the upcoming quarter. For the past quarter, HP indicated currency was 5-6 basis points year over year. 2. Even with the $1.1 billion captured in supply chain savings, the company states there is another billion that has yet been realized as part of the on-going operation of the business. 3. Typical revenue pattern due to seasonality has shown a 2% decline. HP anticipates a return to normality in the third quarter. 4. HP reports that margin pressure is due to pricing and pension and not as a result of start-up costs. Their expectation is to improve future margins. 5. There was a decline in UNIX sales this past quarter due to the weakness in low to mid-range products, and a growth in industry standard servers. The UNIX strength is in the high-end products and was driven this past quarter by Superdome shipments. 6. The Alpha transitions have been accelerated to the third quarter which is one quarter ahead of what was previously announced. 7. Total cash on the company's balance sheet, including long-term investments and other assets are $400 million. 8. US IT spending is expected to stabilize as there are no catalysts for the near term, Europe IT spending is expected to weaken, and Asia will move forward as long as there is no impact from SARS. 9. Enterprise Systems returns are seasonally down in the third quarter and losses predicted with a return to profitability in the fourth quarter. 10. Although managed services deferrals were expected to improve profitability in the second quarter, intense pricing and the pension and benefits payments had a large impact. 11. The Enterprise Systems Group is slated for downsizing of approximately 1,200 people and the size of the cut is appropriate given HP's new focus; account penetration with large accounts, and; broadening account coverage in the small and medium size business segment. The effort is to improve productivity where there was overlap in sales. 12. Approximately 6,000 people have already been taken out of the EPS group to date. Analysts were reminded that EPS country managers represent HP in total with regards to human resources issues, tax issues and relationships with country governments. They carry out duties that are HP functions as opposed to enterprise functions. With the downsizing to date, HP stated it is doing enough to bring this business group back to profitability. 13. Recent Managed Service deals that have been won will have a lower level of profit in the first years, but all are profitable. HP comes at Managed Services differently than competitors in that they are viewed as a technology business where competitors view them as a people business. HP believes this results in longer-term contract for HP and with fewer people to run the business. 14. Although market share numbers with Dell continue to shift, HP's goal is not to hold the number one position in worldwide PC's on a quarterly basis. Rather the company is focused on growing and making money in the fastest growing and most profitable markets. The strategy is to grow faster than key competitors in markets where there is opportunity, such as Asia. 15. Comparatively, Dell secured a gain in market share in desktop units; however, HP outperformed Dell in Notebooks worldwide; via performance in Europe and growth in Asia.