Hewlett-Packard Earnings Call NUGGETS: IPG Margins, Channel Inventory
Benjamin Reitzes – Barclays Capital: Wanted to ask about printing, and you mentioned the channel inventory was really high. Obviously it would seem that you over earned in the segment in the quarter. The street consensus was looking for about 13.7 in terms of operating margin and so, maybe it over earned by $0.05 if the consensus would have been right without the extra inventory and sales of those supplies. I was wondering if that analysis makes any sense and what the earnings hit will be in the future, when you do finally pull back that inventory and how shall we look at it?
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Meg Whitman – President and CEO: So Ben, let me talk first a little bit more broadly about our margins in IPG, while we continue to face headwinds of lower volumes and the impact form t he Japanese yen on our cost structure. The year-over-year increase in margins was really driven by three things. The first is that in Q3 ’11 we were dealing with the tragic impact of the tsunami and as a result of trying to get parts and product out the door we incurred significant additional costs. That we talked about at the time, obviously that didn’t happen in Q3 ’12. We also had improved hardware margins generally due to the higher mix of higher value units and also a lower mix of inkjet hardware. For those who contributed the year-over-year from a sequential perspective what you saw was again a higher mix of higher value units, as well as higher margins on toner. When you think about kind of going forward and thinking about margins you have to take into consideration the challenging demand environment that we expect will continue, as well as competitive pricing the yen will remain quite strong year-over-year basis and then in Q3 kind of to your point we did end with higher channel inventories than the underlying demand would suggest and that was especially true for ink supplies. What we need to do in that space is continue to focus on channel inventory. The sellout in the last couple of weeks of July, fell off a bit more than what we had expected and we ended up with more than we intended. In terms of the actual math and the sense that you came up with, my math would suggest a lower delta as a result of the channel inventory.
Bill Shope – Goldman Sachs: Given the comments you made about being aggressive in PCs the channel inventory issues you have there now. And some of the promotional programs you talked about in the coming quarter, how should we think about the near term trajectory for operating margins and ASPs and PSG, obviously we saw some pressure this quarter on the operating margin line, but my sense is that your commentary is telling us that things could get a lot worse in that respect?
Meg Whitman – President and CEO: Again maybe perspective on what drove the margins this quarter will help inform kind of how you think about it going forward. The operating margins for PSG this quarter was 4.7%. So, while it was down year-on-year it is still very much in the range that we have been targeting for some time. The bridge on a year-over-year basis includes items like the volume, currency and to some extent obviously commodity prices were also unfavorable. Now, this was partially offset by favorable warranty and logistics costs. When we look out at commodity prices into Q4 we would say that LCD’s and DRAM prices are going to be up slightly quarter-on-quarter, so there will be additional prices from a quarter-on-quarter perspective. We do expect the demand environment to remain challenging and the pricing to remain competitive. Let me just give you a little perspective on our strategy for our PC business, because I think that can help shape your thinking about where margins will go. So first is we’re focused on profitable growth and continuing to deliver a very strong return on invested capital in this business, but we are under attack by very strong competitive pressures and we’re going to respond and what we’re – how we’re responding is really three parts, one is product lineup. I think we have among the best product lineup we’ve had in the PC business for a long time. A host of thin and light ultrabooks, a Windows 8 tablet for the Enterprise. Two, sort of tablets, if you will tablet combined with laptops for the consumer space and we have also done a lot of work on our cost structure. One of the benefits of putting IPG and PSG together is we have a much more seamless go to market. We see very good opportunities for freight, logistics, supply chain and we have got to make sure that your cost structure allows us to compete effectively because we’re going to defend our number one position in this business.
Bill Shope – Goldman Sachs: Printing side and how that changed sequentially and similarly on the IPG side where are inventory – on the PC side, where is inventory and given the launch of Windows 8 at the very end of year calend of your fiscal Q4, how should we be thinking about inventory changes in both PCs and IPG quite frankly over the next one to two quarters.
Meg Whitman – President and CEO: Thanks Tony, let me start. In terms of channel inventory for IPG on an absolute dollar basis, they’re down, what we have – the impact that we have is really a denominator effect and that’s why I talked a little bit about the fact that sell through softened in the second half of July, because that is what ended up driving weeks of supply higher than our acceptable ranges but the dollars were down on an absolute basis and really where we saw weak demand was predominantly in Euro and Asia and that impacted the sell through in Q3 and obviously hampered our efforts to reduce the channel inventory. The channel inventory is more problematic than the supplies area and not in the hardware area, for IPG, for PSG the channel inventory challenge is, overall the channel inventory is within our acceptable ranges, but where we saw a pop up was in the consumer space and so we’ve got some work to do on that end.
Bill Shope – Goldman Sachs: If I could just follow-up if your IPG absolute inventory is down, seasonally IPG is always up in Q4 so that would suggest on a look-forward basis unless you were expecting a dramatic decline in IPG revenues, you actually should be in better shape. So perhaps you can help us understand how supplies inventory particularly on the consumer side changed sequentially in terms of number of weeks because from the information you’ve given us it actually sounds like your weeks of forward-looking inventory should be better unless you’re expecting something cataclysmic on the demand side. Similarly on the PSG side maybe you can help us understand where — in number of weeks consumer inventory line?
Meg Whitman – President and CEO: Tony we are not expecting anything cataclysmic on the demand side in Q4 and we will continue to work on bringing down our channel inventory levels for supplies in the fourth quarter as well as we are focused on bringing down the consumer channel inventory in PSG.