PALO ALTO, Calif.----May 14, 2002--Hewlett-Packard Co. * Revenue Declines 7% Sequentially * Pro Forma Gross Margin Increases 1.8 PPT Sequentially * Pro Forma EPS of $0.25 * Cash from Operations of $2.1 Billion HP today reported its financial results for its second fiscal quarter ended April 30, 2002, the company's last pre-merger earnings report. The company reported second quarter revenue of $10.6 billion compared to $11.4 billion in its first fiscal quarter. Sequentially, pro forma revenue declined 7%, while gross margin increased from 26.9% to 28.7%. The company generated cash from operations of $2.1 billion for the quarter. Pro forma operating expenses were essentially flat on a sequential basis and were 22.2% of net revenue. Pro forma earnings per share (EPS) for the quarter was 25 cents, in line with current consensus analyst estimates, compared to 29 cents in the first quarter and 17 cents in the year-ago period, excluding acquisition-related charges, in-process research and development charges, amortization of goodwill and purchased intangibles, restructuring charges and investment losses. Including these items, reported GAAP EPS before an extraordinary item was 12 cents per diluted share, compared to 25 cents last quarter and 2 cents in the year-ago quarter. U.S. revenue for the second quarter was down 11% sequentially and 16% year-over-year. Revenue from outside the U.S. was down 4% both sequentially and year-over-year. In Europe, revenue was down 6% sequentially, but up 2% year-over-year, the only region of the world to show year-over-year improvement. Asia Pacific was down 2% sequentially and down 13% year-over-year. Latin America was up 3% sequentially and down 12% year-over-year. "We stayed focused and executed well during a difficult quarter," said Carly Fiorina, HP chairman and chief executive officer. "The IT spending environment remains tough around the world. On top of this, in the final weeks of the quarter, 400 senior managers were named to their assignments in the new HP, and we were involved in a highly visible lawsuit. While there was real potential for distraction, HP delivered. "Weakness in our computing systems business, embedded and personal systems business and our consulting services business persisted in the second quarter, but was offset by solid performance in our imaging and printing and IT outsourcing and support businesses. "Despite the tough enterprise spending environment, during the quarter HP held its own relative to our competitors in key segments of the enterprise market, including UNIX servers, storage and printing. While revenues in our consumer business were down slightly, operating profit for the business was strong with all regions of the world posting profitable results. "Continued focus on cost structure and expense management resulted in significant gross margin improvement led by our imaging and printing business. "Meanwhile, our ongoing efforts to aggressively manage the balance sheet are paying off. We again reduced inventory by almost $500 million in the quarter. Cash flow from operations was a healthy $2.1 billion for the quarter, and we exit the period with nearly $9 billion in cash and short-term investments. "Today, we announced HP employees will receive a Company Performance Bonus for the first time in 18 months. Looking back at our performance during the first-half of our fiscal year, there is a lot to be proud of. Nevertheless, we are realistic about the hard work ahead of us," said Fiorina. Business Segment Results Imaging and Printing Systems Revenue in HP's imaging and printing systems segment, which includes printer hardware, digital imaging devices and associated supplies, decreased 4% sequentially reflecting normal seasonal patterns. Demand continued to be strong in the second quarter for All-in-one devices (AIOs), Photosmart printers and low-end LaserJet printers resulting in supply constraints in these product categories. Supplies revenue grew 5% sequentially and 10% year-over-year driven by the continuing increase in HP's installed base and growth in ink-intensive digital imaging solutions and applications. Operating margin for the segment was 15.7%, compared to 14.6% last quarter and 7.4% in the second quarter of last year. The sequential operating margin increase reflects a higher mix of supplies revenue, a favorable Yen and strong market demand for home and digital imaging products. Embedded and Personal Systems The embedded and personal systems segment includes commercial desktop PCs, home PCs, notebooks and personal appliances (smart handhelds and DVD+RW drives). While revenue in this segment declined 13% sequentially overall, sequential commercial and consumer notebook revenue was up 17% and 10%, respectively, and HP's consumer PC business posted another profitable quarter. Operating margin was negative 4.9%, compared to breakeven last quarter and negative 3.4% a year ago, reflecting tough competition, lower volumes and rising component costs. 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 based servers, storage and software solutions. Revenue in this segment declined 6% sequentially. Operating margin was negative 12.7%, compared to negative 8.0% last quarter and negative 5.2% a year ago, continuing to reflect a highly competitive market and weak global demand. During the quarter, HP gained share in UNIX servers, even as revenue was down 4% sequentially. The company lost share in industry standard servers, where revenue declined 13% sequentially in anticipation of changes to HP's industry standard server product line-up going forward. IT Services The IT services segment includes support, outsourcing and consulting services. Revenue for the segment declined 6% sequentially. Support revenue was down 3% sequentially. Even so, support continues to generate its strong, historic levels of operating profit for the IT services segment. Outsourcing revenue was flat sequentially and up 19% year-over-year, outpacing market growth. Outsourcing continues to be the fastest growing category in IT Services. Consulting was down 15% sequentially and continues to be impacted by a slowdown in IT project spending as customers focus on integrating and optimizing existing IT investments rather than embarking on new initiatives. Operating margin for the IT Services segment was 11.1%, compared to 13.0% for the last quarter and 11.3% for the same period last year. Financing Revenue was down 7% sequentially, reflecting lower hardware sales and conservative financing policies. The financing business posted a negative 2.5% operating margin this quarter, compared to negative 2.0% last quarter and negative 7.4% in the same period a year ago. Asset Management Cash generated from operations for the quarter was $2.1 billion. Inventory declined by almost $500 million during the quarter and was 9.3% of revenue, down from 10.1% last quarter and down from 12.3% a year ago. Trade receivables were 9.1% of revenue compared to 9.4% in the previous quarter and 10.4% a year ago. Net property, plant and equipment was 10.0% of revenue compared to 9.9% last quarter and 9.3% a year ago. Outlook "While a muted recovery in the second half is still possible, we are not counting on meaningful improvement in IT spending until 2003," said Fiorina. Guidance for the combined company will be provided at HP's Security Analyst Meeting on Tuesday, June 4, 2002.