PALO ALTO, Calif.---Feb. 13, 2002--Hewlett-Packard reported strong financial results for the first quarter of its 2002 fiscal year ended Jan. 31, 2002. Sequentially, on a pro forma basis, HP achieved revenue growth of 5% and an increase in gross margins from 25.7% to 26.9%, while expense growth was held to less than 1%. Pro forma earnings per share (EPS) was 29 cents. Operating cash flow was approximately $1.6 billion. The company reported first quarter revenue of $11.4 billion compared to $10.9 billion in the fourth quarter and $12.4 billion in last year's first quarter. Revenue was down 8% year-over-year and 7% excluding currency effects. Operating expenses on a pro forma basis were 20.6% of net revenue, compared to 21.4% last quarter and 19.3% in the year-ago quarter. Carly Fiorina, HP chairman and chief executive officer, said, "We are facing the dual challenges of a weak global economy and rapid industry transformation, driven by advances in technology, changing customer requirements and increased competition. Our first quarter results demonstrate HP's continued ability to stay focused on customers and effectively execute our business plan regardless of market conditions. "Within this tough environment, we generated a meaningful increase in overall revenue versus last quarter based on strong sales in consumer and commercial PCs and digital imaging products, as well as exceptional growth in outsourcing. By maintaining an intense focus on expense management and continuing to tune our cost structure, we saw solid gross margin improvement. Profitability improved significantly in our imaging and printing, embedded and personal systems and IT services businesses, driving EPS above expectations. "We managed assets aggressively and we reduced inventory by $746 million. Net cash flow from operations was $1.6 billion for the quarter, and we exited the period with more than $7 billion in cash and short-term investments on the balance sheet. "Over the past two and a half years, our Board and management have looked at a broad range of strategic alternatives. Merging with Compaq is the single best way to simultaneously achieve market leadership, serve our customers, improve our profitability, create exciting opportunities for employees and deliver value for our shareowners. "With Compaq's complementary capabilities, we will materially strengthen many key HP businesses -- including servers, storage, PCs, and IT services and support. These businesses are becoming increasingly interrelated with our imaging and printing franchise and must be sufficiently profitable in their own right. "The hard work of restructuring and refocusing HP during these past two and a half years has laid the foundation for market leadership. While the integration risks of any merger are real -- they can be managed. The risks of doing nothing are far greater. And our execution these past two quarters demonstrates that we're ready to take this decisive step. We must take it now to lead the transformation and consolidation of our industry.'' Business Segment Results With this first quarter of the 2002 fiscal year, HP has broken out two additional reporting segments: Embedded and Personal Systems, which includes PCs, notebook PCs (previously reported in Computing Systems) and personal appliances; and Financing (previously reported in IT Services). HP will continue to report Imaging and Printing Systems, Computing Systems and IT Services as separate segments. Imaging and Printing Systems The imaging and printing systems segment includes printer hardware, digital imaging devices and associated supplies. Revenue in this segment increased 2% sequentially and declined 2% year-over-year. Operating margin was 14.6%, compared to 9.8% last quarter and 12.9% in the first quarter of last year. The sequential operating margin increase reflects a favorable product mix, good inventory management, solid expense control and beneficial movements in the yen. Digital camera and photo printer revenue grew 30% sequentially and 34% year-over-year. HP digital cameras continue to experience strong demand and photo printers extended their market leadership in the United States. Scanner revenue increased 21% sequentially but decreased 17% year-over-year. Business printer (personal and shared LaserJets, shared inkjets and commercial printing) revenue increased 2% sequentially and declined 4% year-over-year. Home printer (personal inkjet printers, Deskjet, Apollo and all-in-one devices) revenue declined 2% sequentially and 23% year-over-year, reflecting the market's continued movement to the low end, partially offset by strong unit growth, particularly in all-in-ones. HP maintained its leading market share position in low-end printers and launched several new products during the quarter. During the first quarter, supplies revenue grew 1% sequentially and 9% year-over-year. Computing Systems The computing systems segment includes workstations and a broad range of Internet infrastructure systems and solutions for business, including UNIX and IA-32 servers, storage and software solutions. Revenue in this segment declined 4% sequentially and 21% year-over-year. Operating margin was a negative 8.0%, compared to a negative 6.7% last quarter and positive 2.3% a year ago, reflecting a highly competitive market and weak global demand. In servers, UNIX server revenue was down 7% sequentially and 21% year-over-year. Amid difficult market conditions, HP Superdome servers continued to gain acceptance among customers. With the fourth quarter introduction of the 16-way rp8400 server and the pending refresh of its 8-way mid-range UNIX server, HP solidified its market leading position in mid-range while maintaining its position in the entry-level UNIX server market. IA-32 server revenue was flat sequentially and down 21% year-over-year. Storage revenue declined 4% sequentially and 13% year-over-year amid extremely difficult pricing conditions. Software revenue declined 3% sequentially and 18% year-over-year. Embedded and Personal Systems The embedded and personal systems segment includes commercial desktop PCs, home PCs, notebook PCs and personal appliances (smart handhelds and DVD+RW drives). Revenue in this segment increased 22% sequentially but declined 13% year-over-year. Operating margin was essentially breakeven, compared to a negative 5.2% last quarter and negative 2.3% a year ago. Commercial desktop revenue increased 11% sequentially and declined 15% year-over-year. Consumer PC revenue increased 53% sequentially and declined 10% year-over-year. Notebook PCs experienced sequential revenue growth of 4% and year-over-year growth of 7% and continued to gain market share worldwide. Driven by continued improvements in its cost structure and operating model and its profitable consumer PC business, HP's overall PC business generated profits on a global basis. In personal appliances, revenue was down 23% sequentially and 54% year-over-year, primarily as a result of HP's exit from the CD-writer business. Smart handhelds continued to post good growth with a 31% sequential increase and a 27% increase in revenue versus last year. Worldwide unit handheld shipments were up 35% sequentially and 101% year-over-year. IT Services The IT services segment includes support, outsourcing and consulting services. Revenue for the segment grew 1% sequentially and 2% year-over-year (4% in local currency). Support revenue was flat sequentially and grew 5% year-over year (7% in local currency). Outsourcing revenue was up 16% sequentially and 31% year-over-year (32% in local currency), reflecting increased interest among corporate clients in pursuing cost-effective outsourcing capabilities in the midst of declining IT budgets. Consulting revenue declined 2% sequentially and 13% year-over-year (an 11% decline in local currency). Operating margin was 13.0%, compared to 10.9% for the last quarter and 10.2% for the same period last year. Financing Revenue was down 6% both sequentially and year-over-year, reflecting tighter credit controls and sluggish enterprise sales. Including charges related to the Argentina peso devaluation, the financing business experienced a 2.0% operating loss this quarter, compared to an operating loss of 14.0% last quarter and a loss of 4.7% in the same period a year ago. Asset Management Net cash generated from operations for the quarter was $1.6 billion. Inventory declined by $746 million and was 10.1% of revenue, down from 11.5% last quarter and 13.0% a year ago. Trade receivables were 9.4% of revenue compared to 9.9% in the previous quarter and 11.0% a year ago. Net property, plant and equipment was 9.9% of revenue compared to 9.7% last quarter and 9.2% a year ago. Outlook Overall market conditions continue to be somewhat unpredictable. We are uncertain as to whether the consumer technology spending uptick will continue. Enterprise IT spending continues to be slow. We continue to be conservative and so, therefore, are expecting revenue in our second fiscal quarter of 2002 to be down modestly on a sequential basis, and gross margins and expenses to be approximately flat with the first quarter.