Hewlett-Packard Co Earnings Call Nuggets: Full Year Guidance and Channel Inventory

Hewlett-Packard Co (NYSE:HPQ) reported its first quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Full Year Guidance

Benjamin Reitzes – Barclays Capital: My question for Meg is it seems like a real tone change for IPG. Last call you said that you thought it was economic and not secular, but it sounded like you said that there is some secular pressures impacting that, so I was wondering if you could comment and talk about that? Then I got to ask a follow-up already is that if you could just talk about how you get to the full year guidance because you are in almost $1.80 in the first half and you to earn $2.20 in the second half to hate your guidance. So if you could just kind of talk about how you get there theoretically as well. That’s my follow-up, so I don’t have to talk twice?

Meg Whitman – President and CEO: I will take the IPG question and Cathie will talk a little bit about the perspective we have on guidance for the remainder of the year. There is no question in IPG. We faced a number of challenges and the printing market is more mature and more mature markets tend to be governed more by macroeconomic forces. I am convinced that a number of our challenges do relate to the macroeconomic challenges, weak consumer demand, weak small office, home office demand. The sell-through of ink in particular is at pretty low levels and it’s not just our ink, its industry ink. That said I think we have got to really hard and say, okay, we may not see an overall secular decline, but we do see pockets of decline. What we know is that consumers at home are doing less photo printing for example. That said over time, I think that the analog to digital movement of print is actually going to advantage us. So we are steady as she goes here. We are going think hard about how we accelerate the growth of some of our new businesses to compensate for the loss of ink. We are going to work hard against, we have headwinds from the yen, no question about it and that is not a good thing, but fundamentally that we’re going to have to live with that. I mean, that doesn’t really change quarter-to-quarter. So I think we have got a very realistic view of the challenges we face. It’s a terrific business that has been as I said in my opening remarks, the lifeblood of HP, but we have got some work to do to address ourselves to some of the secular trends and capitalize on this analog to digital print?

Cathie Lesjak – EVP and CFO: Then let me address the second question around our guidance and it’s really I think a question about our second half and why we will have confidence in the second half. The first thing you’ve got to look at is the normal seasonal pattern basically the second half over the first half because that is obviously a situation where the second half is typically better than the first half and then as we’ve talked about, we expect to work through two big impacts and the largely through them by the time we enter the second half. The first one is the hard disk drive shortage. We believe that we will be impacted again in Q2, but to a lesser extent than in 1 and that will be heavily due to ESSN and that we’ll be largely through that when we enter the second half. Similarly on the supply channel inventory, given the current demand that we see, we expect to be through the correction in channel inventory supplies by the time we end Q2. So those obviously if you take the fact that those have depressed the first half and we get to a more normal steady-state in the second half that gives you a pretty abnormal increase pass-through over half one. The other things you’ve really got to take into consideration is we launched new product. We announced the Gen8 server, ProLiant serve that will ramp through the course of the year and then take Autonomy. Our plans in Autonomy is in the first half it’s really around getting Autonomy connected into HP lead generation, lead qualification and it not until you start into the second half that you start to see some of the synergies that we expect from the Autonomy acquisition that both help obviously from a revenue perspective and the margin perspective and then we continue to make progress on our execution, this basic blocking and tackling, looking in our cost structure and realigning it for the business realities that we see today and that helps us as well in the second half.

Channel Inventory Correction

Bill Shope – Goldman Sachs: Cathie, I just wanted to follow-up on that last part of your answer there. When you said you expected to return to sort of a normal steady-state for IPG, I mean, how do we think about that steady-state after this channel inventory correction given some of the secular commentary mentioned before, I mean, how should we think about steady-state growth particularly in the Supplies segment going into the second half?

Cathie Lesjak – EVP and CFO: So, I think that there are kind of three big impact to IPG from a margin perspective and that’s really what I was talking about in terms of getting more back to a more steady-state. You’ve got to take into consideration the fact that we do continue to expect and see a weak consumer demand environment and that is a headwind for our ink supplies revenue and we expect some of that will continue obviously in the second half. We also have the strength of the Japanese yen which is, on a year-over-year basis, continuing to impact our laser business and put pressure on that business set of margins, and then as we work through this channel inventory correction, we do get back to basically growth in Supplies more aligned with the demand that we see as opposed to the adjustments that we’re making and so we do expect that there will continue to be a challenging demand environment with continued competitive pricing, but we don’t have the same headwinds that we had in the first half.

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