Good day, ladies and gentlemen, and welcome to the First Quarter 2012 Hewlett-Packard Earnings Conference Call. My name is Jeff, and I'll be your conference moderator for today's call. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Steve Fieler, Vice President of Investor Relations. Please proceed.

Good afternoon. Welcome to our first quarter 2012 earnings conference call with Meg Whitman, HP's Chief Executive Officer; and Cathie Lesjak, Chief Financial Officer. Before handing the call over to Meg, let me remind you that this call is being webcast. A replay of the webcast will be available shortly after the call for approximately one year. Some information provided during this call may include forward-looking statements that are based on certain assumptions and are subject to a number of risks and uncertainties, and actual future results may vary materially. Please refer to the risks described in HP's SEC reports, including our most recent Form 10-K. The financial information discussed in connection with this call, including tax-related items, reflects estimates based on information available at this time and could differ materially from the amounts ultimately reported in HP's first quarter Form 10-Q. Revenue, earnings, operating margins and similar items at the company level are sometimes expressed on a non-GAAP basis and have been adjusted to exclude certain items, including, among other things, amortization of purchased intangibles, restructuring charges and acquisition-related charges. Comparable GAAP financial information and a reconciliation of non-GAAP amounts to GAAP are included in tables in the slide presentation accompanying today's earnings release, both of which are available on the HP Investor Relations web page at www.hp.com. Before I turn it over to Meg, I just wanted to briefly touch upon a financial reporting item. Each year, as part of our first quarter annual financial review, we review all reported segments and make any necessary changes to reflect any organizational shifts among our businesses. This year, these re-alignments resulted in the transfer of revenue and operating profit the Services, Imaging and Printing Group, Enterprise Servers, Storage and Networking, Software and Corporate Investments segment and a transfer of revenue among the business units within the Services segments. In addition, we have reclassified certain costs previously reported as cost of sales as selling, general and administrative expenses to better align these costs with the functional areas that benefit from those expenditures. This reclassification of costs did not impact segment reporting and relates only to the line item within the P&L in which the costs are booked. A detailed reconciliation of the changes, including historical data, is available on our Investor Relations website as well as furnished on our Form 8-K filed with the SEC. I want to be clear that the changes do not impact HP's previously reported consolidated net revenue, earnings from operations, net earnings or EPS. I'll now turn the call over to Meg.

Thank you, Steve, and thanks to all of you for joining the call. Since I spoke to you last, I spent a great deal of time with our employees, our customers, partners and investors. Given some of the challenges of the last year, we've been working hard to set the right tone, calm the waters and reassure our stakeholders that HP is the same reliable company that they've known and admired for decades. I visited HP offices, hosting roundtables and employee meetings in Palo Alto, Cupertino, London, Vienna, Chicago, Houston, London and Alpharetta, Georgia. I spent some time with the sales force, communicated regularly with our senior leadership and worked very closely across the executive team. And I've been out with our customers. At HP DISCOVER in Vienna, we brought together more than 7,000 of our top enterprise customers in the biggest event in HP's history. And I participated in more than 80 customer visits, meetings and conversations. I've engaged with the channel through partner meetings, roundtables, interviews and, just last week, at the first-ever HP Global Partner Conference. So what have I found? Certainly, I found some skepticism. But I have also found that we have incredible support. People who believe in HP, people who want us to win, people who want to work with us and build for the future. And every day, I learn something new about our technology and innovation, our solutions, often just a story about the role HP has played in someone's life or a customer's success. It's inspiring. The more time I spend listening and learning, the more committed and passionate I've become. I've also gotten to know many of you, our investors. And just as I have with our other stakeholders, I'm working hard to strengthen our clarity and transparency. I want…

Thank you, Meg. Let me review the details of the quarter, and then I'll provide some color on our outlook for Q2. Revenue of $30 billion was down 7% as reported or 8% in constant currency year-over-year. We estimated that more than 1/2 of the revenue decline was due to the hard disk drive shortage that impacted both PSG and ESSN. As you know, due to the flooding in Thailand that began last fall, the industry's supply of hard disk drives was about 30% below the expected demand in calendar Q4. Faced with this shortage, we made the decision to prioritize profitability, product performance and quality over shipment volume and market share. We expect the supply of hard disk drives will remain constrained for HP in Q2. In terms of our revenue performance by geography, revenue as reported was down 9% in Americas, 4% in EMEA and 10% in Asia Pacific year-over-year. All regions were impacted by the hard disk drive shortage. In addition, EMEA revenue was impacted by the macro challenges, and APJ's revenue decline was driven by the weakness in China. On a constant-currency basis, Americas, EMEA and APJ revenues were down 8%, 5% and 12%, respectively, year-over-year. Non-GAAP gross margin of 22.4% was down 210 basis points year-over-year and down 90 basis points sequentially. Non-GAAP gross margins continue to be impacted by the strong yen, a lower mix of ink supplies, competitive pricing in our hardware businesses and continued margin pressure in Services. Non-GAAP operating expenses were $4.2 billion, up 6% year-over-year. If we exclude the impact of the real estate gains that drove our operating expenses down in Q1 last year, operating expenses were essentially flat year-over-year. Non-GAAP operating margin of 8.6% was down 380 basis points year-over-year, and the company delivered $2.6 billion in operating…

So to wrap up before going to Q&A, I'd really like all of you to take away these 3 messages. One, we're committed to clarity and transparency. We want you to understand the challenges and opportunities we have in front of us. Two, we are getting back to basics, driving execution, focusing on profitability through mix and costs and investing in our business with a disciplined capital allocation strategy. Three, we are building HP to last. We are not managing for short-term objectives. We are taking advantage of this opportunity to position HP for success, not for the next quarter, but for decades to come. And with that, I'll open it up for Q&A.

[Operator Instructions] Our first question comes from the line of Ben Reitzes with 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 are some secular pressures impacting that. So I was wondering if you could comment and talk about that. And 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 -- you're in -- almost $1.80 in the first half, and you got to earn $2.20 in the second half to hit 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.

Okay. Thank you, Ben. I appreciate that. I'll take the IPG question and Cathie will talk a little bit about the perspective we have on guidance for the remainder of the year. I mean, there's no question in IPG we face a number of challenges. And the printing market is more mature, and more mature markets tend to be governed with -- more by macroeconomic forces. And I'm 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, it's industry ink. That said, I think we've got to really look 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're steady as she goes here. We're going to think hard about how we accelerate the growth of some of our new businesses to compensate for the loss of ink. And 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've 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've got some work to do to address ourselves to some of the secular trends and capitalize on this analog-to-digital growth.

And let me address the second question around our guidance. And it's really, I think, a question about our second half and why we would have confidence in the second half. And the first thing you got to look at is the normal seasonal patterns, 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 2 big impacts and be 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 Q1, and that, that will be heavily skewed to ESSN and that we will be largely through that when we enter the second half. And 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 half 2 over half 1. And then the other things you really got to take into consideration is we launched new products. We announced the Gen8 server, ProLiant server, 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's 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 a margin perspective. And then we continue to make progress on our execution, just basic blocking and tackling, just looking at our cost structure and realigning it to the business realities that we see today. And that helped us as well in the second half.

Our next question comes from the line of Bill Shope with 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? And how should we think about steady state growth, particularly in the supply segment going into the second half?

So I think that there are kind of 3 big impacts 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 while we expect it, 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'll continue to be a challenging demand environment with continued competitive pricing, but we don't have the same headwinds that we have in the first half.

Our next question comes from the line of Toni Sacconaghi with Sanford Bernstein.

I have one question and one follow-up. Meg, for you, I think if you look at market data and what competitors have reported, there's evidence of pretty significant share loss across all of your businesses. And your gross margins have also declined year-over-year and sequentially despite a favorable mix shift. So it really doesn't appear to be that you're ceding share to improve profitability because the numbers don't really support to that -- support that. So I guess my question is, this data appears to point to a widespread lack of competitiveness, and I'd like to get your assessment on whether you believe that. And if not, what might I be missing? And I know you've talked about stabilizing the business. What exactly does that mean? How do you measure that? And how long do you get there?

Okay, good. So I'll -- I think you have to look at share loss by business. There is no question, with a shortage of hard disk drives in Q1, we prioritized profitability versus share in both Industry Standard Servers as well as our PSG business. And what you can see is we reported 5.2% operating income, which is actually at the high end of what we report normally. And we made a decision to prioritize profitable customers, profitable products and customers in profitable regions for us. And we think, by the way, we will be largely through the hard disk drive shortage for PSG as we enter into the second quarter, and we aim to gain share there. If you look at Industry Standard Servers, we didn't have the perfect match between the disk drives we needed and, therefore, we couldn't shape demand as fast as we needed to. In addition, we did prioritize profitability there as well. So those 2 businesses I'm not worried about an endemic share loss. I think that was, to some degree, driven by the decisions we made, which, by the way, I think were the right ones. If you look at some of our other businesses, we are experiencing share loss in printers and in ink. And I think that takes me to this notion of we've got really 3 big challenges at this company. And I don't know that I would say it's widespread lack of competitiveness. I'd say it falls in 3 buckets. It's our own execution. And whether that is things like turning orders into products faster than our competitors, I don't think we do that as well. Whether that is our supply chain, that if you back the supply chain all the way up to how we design our products,…

Okay, let me just -- I think Meg did a great job of commenting on the operating profit for PSG, which I think is a really strong result given the kind of volume changes and declines that we saw year-over-year. From an ESSN perspective, we were also heavily impacted by volumes as well as soft demand. But the other thing that you've got to take into consideration is that we had hard disk drive price increases that obviously hurt a bit. And then also, the fact of the matter is because we didn't have the hard disk drives that we needed to meet all the demand, we actually were shipping server configurations that were less richly configured. And so it doesn't just impact the top line, it also impacts the bottom line. And then as we've been talking about now for the last couple of quarters, we have been seeing a lower mix of Business Critical Systems revenue, and we do expect that, that will be a headwind going forward.

And then -- I appreciate that color. So when you both mentioned this concept of stabilizing the business, what do you mean? Does that mean you are holding or gaining share in your businesses? Does that mean you are growing faster than what you believe your addressable markets are in revenue terms? Does that mean you're growing in absolute terms? What specific -- well, how will investors know that you have stabilized the business? And what is the time frame that you think for getting there?

Let me take a crack at that, Toni, and then I'll let Cathie also answer. So the first thing we have to do is stop the revenue decline. A formula for success here is not having revenue declines of negative 7% to 8% in constant currency. So the first step with stabilization is stop the decline. The second is then we have to start growing revenues again, and the only way that we know how to do that is you've actually got to gain share in virtually every single market. And you've got to gain share because a lot of these markets is in technology, right? The unit cost or the unit price is going down, so you have to sell more units to maintain your revenues and grow your operating margins. So from a time perspective, Cathie will comment on this, I would hope that as we get through 2012 and enter 2013, you'll start to see the revenue decline flatten out. And then hopefully, as we get into 2013, by the end, you'll start to see us grow revenue. It's very hard to predict. I think it depends on how fast we can get after some of these challenges in the business. It depends, obviously, on what the market does. It depends on the macroeconomic environment. But a lot of this is in our own hands. And so we've got to move fast, quickly and decisively to get after some of the execution challenges that I described.

I think the only thing I would also add in terms of evidence of us stabilizing is the fact that we let you know what our outlook is, and then we deliver to it. And the more consistent we -- consistently we do that, it's -- implied underneath that is a much stable business environment.

The other thing I'd say, Toni, is if you look at business history and you look at companies that have gone through the kind of turnaround that we're leading HP through right now, these things are not quick. It took us a while to get into this situation in which we find ourselves. It's going to take us a little while to get out. And if you look at history, these turnarounds are not done in less than 2 years, and often they take 3 or 4 or 5 years. So I think you've got to -- and by the way, you'll see, obviously, forward progress before 5 years, of course. But we've got a journey ahead of us. And as I said, it took us a while to get into this, it's going to take us a while to get out. But I can tell you how good I feel about our strategy. We know what to do. We've got a plan to do it, and now we have to execute.

Our next question comes from the line of Katy Huberty with Morgan Stanley.

Speaking of stabilizing revenue growth, how are you assuming that Windows 8, Romley and Ultrabooks might impact your ability to stabilize your business and see better seasonality in the back half of this year? Are any of these significant enough in fiscal '12 to impact the business?

Yes. Listen, we feel good about Windows 8. As you know, we have a product line lined up in PSG on Windows 8, on x86. We've gotten great reviews to our first ultrathin product. And we believe Windows 8 -- we're going to be well positioned for holiday on Windows 8 x86. And so I think that will certainly help PSG. Listen, the better Windows 8 is, the better off we are. So we're rooting for a fantastic Windows 8 product that's delivered on time that we can get to the market before the holiday season. So I think it's a help. You have to remember that PSG is only a part of our entire portfolio. So it will help PSG. It doesn't have an impact on a number of our other biz.

Our next question comes from the line of Brian Alexander with Raymond James.

Yes, could you help us understand why the HDD disruptions seem to have a disproportionate impact on your business relative to your competitors? I think, Cathie, you called out 1/2 the revenue decline due to the HDD constraints. That's $1 billion in revenue. I think it's 7% of your PC and enterprise hardware. So I understand your PC margins at 5.2% were decent, but profits were still down 30%, and your x86 performance was worse than your competitor's. So I guess what is it about the supply chain, which is the biggest in the world, that has put HP at a disadvantage seemingly? And what are you doing to address it?

Yes. So the hard disk drive shortage had a significant impact on our revenue in Q1, as Cathie described. And the industry supply of hard disk drives was about 30% below the expected demand. So this had an impact on everyone. And we chose -- as I said, with the supply challenges, we focused on profitability rather than share. And ultimately, I think we were not as advantaged as I might have anticipated given the scale of our supply chain. I will say it was a remarkably fluid situation. The shortage impacted different suppliers, different drives. Trying to match the drives that you've got with -- versus the drives you ordered with demand matching in the marketplace was really tough. But we were not as effective as we needed to be in matching that supply with our demand. And so I think it showed us, it certainly showed me, that we have some challenges in our overall supply chain. And I would say the other thing is, we've got to get better at taking an order and turning it into a product in our factories and getting it to customers. We can shrink that total elapsed time, and we were not benefited by having a slightly longer time frame of order from factory floor to customer as we could have been. So you're right, we were not as advantaged as I anticipated, and I think there were some ahas there for us in terms of things that we need to do to our broadly defined supply chain. And as I said at the beginning, I think we're world class at buying products. But if you look at supply chain all the way from design to delivery, I think there are some opportunities [indiscernible].

Our next question comes from the line of Shannon Cross with Cross Research.

Meg, can you talk a bit about how you're interacting with your direct reports and what changes you've made in terms of how they interact with each other as perhaps you try to break down the silos or how the various leaders fix their specific businesses?

Yes. So I think one of the things that the team has done very well since I arrived is we now actually are a team. We have a cadence and a rhythm around how we meet, about what we talk about. It is everyone is involved. Every single business unit leader and major functional head is involved in the strategy going forward, what we're going to execute on. We have very lively discussions about things we need to focus on. And then decisions are made, and we work together to get those done. So I couldn't be more pleased with how the team is working together. And then I built very strong relationships with each of the BU heads, and we, I think, have good alignment about what needs to be done in each of those business units. So I think it's been -- if you were to ask the senior team, I think you would hear that it was a pretty big change from previous management in terms of the amount of time that we work together, the decisions we make collectively and how we are working as one HP. And one particular area that I'm focused on is how do we bring this product portfolio, which is among the very best in the industry, to customers as one HP. And as I said, we've run this business in a quite siloed way, which had some really good benefits. I mean, we built huge world-class businesses, but particularly the top customers now, they want to buy from one HP. We've got to get really good at bringing those products, getting the pricing right in a way that we have not done in the past as well as we might have. So we're on a great path, and I think the EC members, if they were on this call, would tell you it's about as good as it's been for a number of years.

So I would definitely weigh in and say that. And I think there's been a lot written about us moving out of our offices into cubes. And I think that makes -- just made a huge difference. I can tell you that I've spoken more frequently with all of the different folks on Meg's staff more frequently in the last 2 months than I probably did in a whole year because you're just so much more visible, you know who's in their office and available and you do a lot more casual kind of over-the-cube wall quick discussion.

Our next question comes from the line of Keith Bachman with Bank of Montreal.

I have questions. I want to return to printers for a second. And the first one is Cathie, can you go back to inventory for a second? In the previous call, there were comments that supplies inventory was too heavy, so to speak, and yet sequential growth was actually up in the January quarter by 1%. In the last 2 years, it's been down 7% to 8% sequentially. So supplies actually went up, and I want to try to understand. Can you give us some perspective on what is the status of the extra inventory? Why was it up? And when does it run out? And the second related question is, the mix of supplies to total revenue in printers was about 65%, which is consistent to what it was in the January 2011 quarter and the January 2010 quarter. Yet, each of those past quarters, operating margins were in the mid-16s. So I'm curious as to why profits wasn't better in this quarter given the mix that I just described.

So in terms of the channel inventory level, there were -- there are a couple of different dimensions that are going on and they're different, whether you're talking about ink supplies versus toner supplies. And so we did make progress on reducing ink supplies, channel inventory, basically from Q4 to Q1. And that's one of the impacts on the margins, why margins are down a bit on a sequential basis. On the toner side, we actually had a price increase. So we had a little bit -- not a massive but a little bit buy-in. And so we did not get the reduction in channel inventory in Q1 that we had expected. We do still expect that the channel inventory levels will exit Q2 in acceptable ranges for supplies. And that is fully included in our guidance. And then just to go back again to the margins, if you look at supplies mix, you arrive at the 65%, up a little on -- sequentially and up a little year-on-year. But it's really important what that mix is. And it is -- the mix is skewed much heavier to toner, which has significantly different gross margins than it is to ink jet or ink. And that's driving a fairly large impact on margins, both year-over-year and sequentially.

I'd add one comment to this, is that, as I said, this is one of the great all-time businesses and has been the lifeblood, as I said, of HP for many years. But there are definitely some market shifts occurring, and we've got to create the capacity financially to improve profits in this business, but also create the capacity to invest in innovation more aggressively than we have. This is all -- IPG was always the go-to place for more money at HP. And so we've got to create capacity to sustainably invest in innovation and, frankly, to market again because if we don't continue to invest in marketing, we are going to end up in a situation where our business is being more commoditized than I would like. And then lastly, from a profitability point of view, the yen is a real problem. And you know how this is. Basically all of our supply of LaserJets is denominated in yen. So when the yen moves against us, it has actually a pretty big effect. And I don't know if you want to say anything more about that, Cathie.

Well, just -- I will just add that if you look at the yen increase year-over-year, it's like 7% Q1 2012 versus Q1 2011. And during -- it's been increasing over the last couple of years, and we've actually been able to absorb much of that cost -- those cost increase until, I think it was 2 or 3 quarters ago, when it just became increasingly difficult that we couldn't take the costs out fast enough to offset the appreciation in the yen.

All right, our next question comes from the line of Richard Gardner with Citigroup.

I was just hoping, Meg and Cathie, to get an update on the progress for Services investments and just get a sense for why the margins continue to trend lower in this business? And why -- and where is the bottom in Services margins? So what do you think is the level where you can invest sufficiently to turn this business around and not see further degradation?

So Cathie, why don't you talk about the margins and then I'll follow back with sort of the more holistic view of where we are with this business?

Sure. So the performance that we delivered was in line with the expectations that we set last quarter, and I think that, that's an important point. So I -- there shouldn't be any surprises here on that. Revenues in Services did grow 1%. It was flat on a reported basis, it was flat in constant currency, while the cost structure increased due to the necessary investments that we've been talking about in service delivery and basically building out our bench and in investing to build out our strategic enterprise services. And I put -- the services that we put in that category are services around cloud, analytics and security as well as apps modernization. And those are the higher-growth, higher-margin services that we need to invest into and convert this business from being less ITO heavy, where the margins are not as good and in some service lines within ITO, the margins are very unattractive and we're deemphasizing some of the revenue in that space. So we are on a long-term turnaround. We are making progress. And for this specific quarter, combined with the investments that we're making with sales and delivery, we did see margin compression from contract renewals. I think that the Services people will probably tell me that 100% of the contracts that are renewed come in at a lower price, but I'll say almost all. And the goal, obviously, is to be able to be nimble enough to take costs out quickly enough to offset that price compression that you get on renewals and/or sell a bigger basket of services. And we're making investments in both processes as well as IT in order to increase our ability to take costs out quickly, especially in the resource management space. So we expect -- if you look at the outlook for '12, we do expect that year-on-year, margins will continue to be down.

I think Cathie actually said it well. I don't have much to add. I just think at the highest level, the way you have to think about our Services business is we are going through a multiyear turnaround with a focus on rebuilding the business and dramatically changing the mix of our business. And this takes time. And we have also got some investments that we have to make there. We've got to have some new IT systems and processes to better manage the business, we've got to improve the performance and satisfaction in many of our existing accounts and we've got to enhance the sales specialists and service delivery personnel to support future revenue growth and operating income growth. So we're on a path. Again, I think in some ways, Services, we know what the problem is, we've got a plan and now we've got have to deliver on that plan. But I'll be very honest with you, this is a multiyear journey. This is not a quick fix. And frankly, this dates back, in my view, to the assets that we acquired back in 2008 and then ran right into the 2008, 2009 global slowdown and we took a lot of costs out of this business. And we're paying the price for that in many ways in terms of some of the capability that needs to be built back into the organization. That said, I think it's a very important strategic asset for the company. Many of the roles that Services needs to play in terms of the wrapper around our infrastructure products, our software products, this has to be our solution selling arm. And so we're committed to rebuilding this, but we've got a multiyear journey ahead of us.

Our next question comes from the line of Maynard Um with UBS.

Just a couple of questions. Can you just talk about any particular verticals where there was strength or weakness, both from a demand and pricing pressure perspective? And then the second question is it sounds like in some areas, HP is making more of a shift to focus on services and solutions inside the channel, which has been primarily accustomed to being more transactional. Can you just talk about the feedback from the channel and if there are any sort of significant changes that have to happen for them to find success in this new model?

Yes, let me talk about the channel. I just got back, as I said in my opening remarks, from our global channel conference in Las Vegas. And boy, this is one great group of small- to medium-size businesses who have, for many years, made their living betting on HP. And boy, do they want us to win. And what they need more than anyone -- anything else is stability, steady hand on the tiller and some predictability around what we're going to do. So much of 2011 was not an uplifting experience for them. And so I think we went a long way towards explaining the product road map, explaining where we were headed as a company and how they fit in and how much, in particular, I respect the channel. Because they are looking -- does the CEO actually love the channel or are they indifferent? And I told them I was an enormous booster of the channel. First and foremost, they sell products. They still sell products. But increasingly, they -- as they told me, they're looking to sell solutions as well, and we need to help them get there. And whether that's cloud, whether that's security, ultimately information management, they're -- we're going to try to help them sell more services. But I will -- and sell more services and solutions. But they still, first and foremost, want to know that we have the very best server product, that we've got great networking, great storage and that they can, with confidence, go to their customers and sell that product. By the way, the PSG uncertainty last year disproportionately affected this channel. They were terribly worried. What did that mean for them? What did it mean for HP? What did it mean for hardware? So I think we've gone a long way towards calming the waters and explaining that in fact, we're really proud to be an infrastructure and hardware company. That doesn't mean we're not going to sell solutions, but I think we went a long way towards restoring their confidence. And I can tell you that, that business is all about the confidence they have in us.

Operator, we have time for just one more question.

We had a question about vertical. I don't think there was really anything notable, Cathie, about whether we did particularly well in airlines versus pharmaceuticals versus travel. I don't think there was anything particular that drove our results in that regard.

No, I don't think we have anything specific to call out there.

All right, our final question comes from the line of Kulbinder Garcha with Credit Suisse.

I just have a couple of questions, one, I guess, for Meg on the whole -- I have seen a number of comments that you've made today and also in the past about underinvestment. On the other hand, you speak about streamlining processes. I'm just trying to think. What does that -- all that mean for the levels of OpEx that HP are at today? And do you actually think you can go to this transition and keep this OpEx level over the next couple of years? Or you have to build higher? And then a question for Cathie just on the free cash flow. The conversion itself was very poor as well this quarter. I think it was about 20% of your net income got converted to free cash flow. Was there any onetime items in there that won't be there recurring going forward? So I'm trying to think the speed at which your balance sheet was -- will rebuild as you actually start doing more distribution to shareholders over the next 12 to 24 months.

Well, we have a strategy here that I've seen work many times before. In fact, I've led changes like this, which is -- and let me sort of say succinctly, we have to save so we can invest. What we cannot do is keep our current level of costs and just layer investments up on top of that. We've got to streamline our processes, we've got to optimize our supply chain, we've got to reduce SKUs, we've got to rationalize our go-to-market so that we can save money in the OpEx line so that we can then reinvest in the -- growing product lines, we can invest in our fast-growth businesses and we can invest in innovation. So what never works in business is, "Let's keep our cost structure the same and just layer investment on top of that when we're in a situation in which we find ourselves." So my view is save to invest, save to grow. And we're very mindful that as we operate more efficiently and effectively, some of that money needs to drop to the bottom line, and some of that money needs to really reinforce the strategic initiatives that we have to grow the business. And I think, as Toni asked me earlier in the call, stabilize declining revenues and begin to gain share in the categories in which we compete. And listen, I've done this a number of times in my career. It's what great business leaders do, is figure out how to run things more efficiently so that they can make the investments. It's not as easy as hey, let's just make more investments.

And then from a cash flow perspective, as you may recall, we pay our annual bonuses in Q1. So we accrue the expense for that bonus in the previous year, and then the first quarter of the next year, we basically pay the bonus. So it is typical that Q1 is a low-cash-flow quarter for us.

Great, I think that was the last question. So listen, thank you for joining us today. I remain incredibly optimistic about the long-term future of HP. We've got a lot of work to do, but we've got a great team and a great, I think, really the best understanding of the situation in which we find ourself and how we're going to lead through it. So thanks very much for being on the call.

Ladies and gentlemen, this concludes our call for today. Thank you for your participation. You may now disconnect. Have a wonderful day.