By Susan Kelly February 23, 2004 -- Hewlett Packard (NYSE :HPQ) announced first quarter revenue of $19.5 billion, a 9% year over year increase. Non-GAAP diluted earnings per share were $0.35 up 21% from the same period last year. Non-GAAP operating profits were $1.4 billion for the quarter up 23% from the same quarter last year. GAAP operating profits were $1.1 billion with GAAP earnings per share of $0.30 for the quarter, up 25% year over year. Topics of this summary: Quarter Overview Outlook Q & A Ms. Carly Fiorina, HP's Chairman and CEO, initiated the call with strong introductory statements: "Our goal on these earnings calls is to tell you what were going to do and to do it. What is traditionally is a down quarter, HP outperformed on the five business segments." Quarter Overview HP reported profitability in all business segments for the quarter. By region, revenue in the Americas grew 3% to $8.2 billion. Europe grew 17% year over year to $8.2 billion. Asia-Pacific grew 9% with revenues of $2.1 billion. Japan showed a 4% year over year growth to $780 million. Enterprise systems showed continued profitability with revenue of $3.9 billion; a 5% year over year increase. Operating profit for the quarter totaled $108 million. The improvement in operating profit is due to supply chain and manufacturing cost improvement, operating expense discipline, and head count reductions. HP hit record EVA systems and software sales for this quarter. HP Services realized revenues of $3.1 billion; a 6% increase. Operating profit was down to $258 million, a decrease of 24% from last year. Managed services, and customer support showed increases in this segment, while consulting and integration revenue declined10% where the business environment remains challenging. Personal Systems revenue grew 20% year over year totaling $6.2 billion for the quarter. This segment has been profitable in three out of the last four quarters. The consumer business was profitable, while the commercial business experienced challenges and eroding gross margins. HP grew sales on desktops and notebooks twice as fast as their competitor. Imaging and Printing posted revenues of $5.9 billion a 6% year over year increase. The operating profit was $968 million, up 6% from the same period last year. The company said it shipped over 14 million printers during the first quarter, and over 1 million per week, up 12% year over year. HP has passed their milestone of over 300 million printers shipped to date. Business inkjet systems were up 28% in sales, all-in-one hardware grew 84%, digital imaging revenue grew 5%, and supplies grew 8%. HP now has over 45% of the world inkjet market. This quarter HP unveiled a new digital camera lineup and multi-function printers. Financial Services posted a revenue decline of 15% to $384 million yet operating margins were up 6.6% to $29 million, the highest level since the merger. Outlook The second quarter outlook is for revenues in the $19.2 - $19.6 billion range. EPS is expected to be $0.34 on a non-GAAP basis. For the full fiscal year or 2004, EPS is estimated at $1.43. Lower seasonal volumes, PSG pressure and bonus payouts will all have an impact on earnings in 2004. Q & A Carly Fiorina opened the Q&A session and stated that HP is "Expecting 2004 to be a steady market for IT spending with GDP expectations of 4%." They are confident in their ability to meet their goals and they are seeing momentum in the market. "Customers have gotten more discriminating about what they spend, how they spend and when they spend their money." Analysts kept asking about IPG or the printing margins and should they expect to see 15-17% going forward? The CFO responded that HP does not think the business can support 16%+ margins in the future. Pricing is coming down both in mono and color. One analyst commented that Lexmark looks like they are doing better on the hardware growth so should HP be more aggressive on price? The executives responded that since a year ago HP is doing well with the Big Bang introduction. HP's fiscal quarter is different than their competitor and if you compare calendar quarters accordingly, HP looks better. HP is not blindly going after every sale so they are making trade-offs for profitability. HP held share in the UNIX market year over year. UNIX as a segment is growing more slowly as compared to Linux but HP does see this as a viable market for them and have major market share. Superdome product has great momentum in the market and it is a competitive product to IBM mainframes. Flat panels comprised a significant portion of their strategic inventory with some disk drives. Gross margins in ESG were flat sequentially and up year over year. HP has been systematically been reducing the cost base of this business and know that UNIX would grow less than other parts of the market. In 2004, they will be supporting fewer platforms so this will reduce their spend on R&D which will deliver substantial savings and help the company balance their overall product mix. Additional headcount reductions are planned primarily in the ESG group but they are not anticipating any more at this time than those already announced. PC gross margins are double digit. HP is comfortable with their channel inventory and claims it is managed very carefully. There is no program to change this at this time. Competitive capability is more important in direct and channel. For example, consumers want to go into a store to look at the product before buying so they are going to make sure they satisfy demand as customers want it. At this time, HP has 48% direct sales in the current quarter. HP is consolidating facilities in the US and they are bringing some of their own US manufacturers closer to HP to reduce inventories even further, however would not give specifics at this time. Consulting and Integration has reduced headcount and there is still too much capacity. HP is still looking at how to get their cost structure down. This continues to be a "drag on the business" with too much capacity and prices that customers are unwilling to pay. HP has seen an increase of ASP's on the desktop side of the business. Dell has been driving unit growth by reducing ASP's. HP is able to make their strategy work and the pricing pressure is intense. HP has seen an increase of ASP's of 3% on desktops and 9% on notebooks. Asian suppliers are boasting growth numbers that HP would not comment on. Dell moving into the printer market does not worry HP. They cited that Dell has sold 2 million printers to date and introduced the product line 12 months ago versus HP's run rate of 1 million per week and growing. Apple iPOD agreement was made because they had the most successful music devices and downloading processes which different tack for HP from using their traditional partnerships (i.e. Microsoft). Carly Fiorina also commented that this program helps them make progress in the interoperability between Mac and PC platforms.