Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2013 Hewlett-Packard Earnings Conference Call. My name is John, 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. Rob Binns, Vice President of Investor Relations. Please proceed.

Good afternoon. Welcome to our fourth quarter 2013 earnings conference call with Meg Whitman, HP's Chief Executive Officer; and Cathie Lesjak, HP's 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 made available shortly after the call for approximately 1 year. Some information provided during this call may include forward-looking statements that involve risks, uncertainties and assumptions. If the risks or uncertainties ever materialize, or the assumptions prove incorrect, the results of HP may differ materially from those expressed or implied by such forward-looking statements. All statements, other than statements of historical fact, are statements that could be deemed forward-looking statements, including, but not limited to, any projections of revenue, margins, expenses, earnings, earnings per share, HP's effective tax rate, cash flow, share repurchases, currency exchange rates or other financial items; any statements of the plans, strategies and objectives of management for future operations and any statements concerning the expected development, performance, market share or competitive performance relating to products or services. A discussion of some of these risks, uncertainties and assumptions is set forth in more detail in HP's SEC reports, including its most recent Form 10-Q. HP assumes no obligation and does not intend to update any such forward-looking statements. The financial information discussed in connection with this call, including any tax-related items, reflect estimates based on information available at this time and could differ materially from the amounts ultimately reported in HP's FY '13 Form 10-K. Revenue, earnings, operating margin and similar items at the company level are sometimes expressed on a non-GAAP basis and have been adjusted to exclude certain items including, amongst other things, amortization of purchased intangible assets, restructuring charges and acquisition-related charges. The comparable GAAP financial information and a reconciliation of non-GAAP amounts to GAAP are included in the tables and in the slide presentation accompanying today's earnings release, both of which are available on HP Investor Relations web page at www.hp.com. I'll now turn the call over to Meg.

Thank you, Rob, and thanks to all of you for joining us today. With the final quarter of our fix-and-rebuild year now behind us, I'm pleased with our progress in fiscal 2013. As we said when we laid out our 5-year plan, we expected that our turnaround would not be linear, and we saw that during the year. However, as I reflect on the key priorities we outlined at the beginning of 2013: driving innovation across HP, improving operations, aligning our cost structure and rebuilding our balance sheet, we made great progress. We also saw some positive momentum in our execution, leading to pockets of revenue growth in key areas in Q4. The fourth quarter capped a year of significant innovation at HP. We launched OneView, a revolutionary, consumer-inspired infrastructure management platform that allows customers to dramatically improve data center operations while reducing cost. We introduced the new StoreVirtual storage appliance, bundled with our industry-leading ProLiant servers, underscoring our leadership in the software-defined storage market. We also launched version 7 of the HP Vertica Analytics Platform, which dramatically simplifies analysis of semistructured data. And just last week, we announced a partnership with Salesforce.com to create the HP-Salesforce Superpod, a dedicated instance of Salesforce running exclusively on HP's Converged Infrastructure. In addition to the product innovation happening across HP, we are driving significant business model innovation as well. In printing, we are seeing success with our Ink Advantage program and our newly launched Instant Ink offering. In Software-defined Networking, we launched a new App Store that, coupled with our network developer kit, will create the industry's first enterprise-class open ecosystem. As you all know, in fiscal 2013, we focused on improving our operations, driving better cash flow and rebuilding our balance sheet. These foundational improvements were critical early steps in our…

Thanks, Meg. Good afternoon, everyone. In the fourth quarter of fiscal 2013, we generated revenue of $29.1 billion, down 3% year-over-year and down only 1% in constant currency. Total FY '13 revenue was $112.3 billion, down 7% year-over-year, or down 5% in constant currency. We saw year-over-year revenue growth this quarter in Industry Standard Servers, Networking, Storage and constant currency revenue growth in Printing. Personal Systems' performance was better than expected, and sales outpaced the market. Enterprise Services was broadly in line, and Software had a tough year-over-year compare but continued to drive growth in key areas while expanding operating profit. On a regional basis, Americas fourth quarter revenue was $13.3 billion, down 2% year-over-year, or down 1% in constant currency. U.S. revenue was down slightly, with declines also in Brazil and Canada, and Americas' full year revenue declined 6%. EMEA fourth quarter revenue of $10.3 billion was down 4% year-over-year, or down 5% in constant currency. The Q4 EMEA environment remained tough, although sales declined less year-over-year than in Q3, and we saw growth in Germany and other pockets of Western Europe. Full year EMEA revenue declined 9%. APJ fourth quarter revenue was $5.6 billion, down 1% year-over-year but up 4% in constant currency. In Q4, we saw strong growth in India, mostly due to our recent educational PC win in the state of Uttar Pradesh. This offset weaker China performance across many of our businesses, although Networking continued to perform well in China. APJ full year revenue declined 5%. Overall, we're pleased with our fourth quarter results. Revenue declines moderated, demonstrating the quality and the competitiveness of our portfolio. At the same time, we recognize we have more work to do on continuing to align our cost structure to support profitable long-term growth. Our Q4 gross margin was…

[Operator Instructions] Our first question comes from Katy Huberty from Morgan Stanley.

What do you attribute the improved unit performance in PCs, printers and servers, if you can just walk through those 3 segments? And more importantly, does the fiscal fourth quarter revenue performance give you any confidence that there is at least an opportunity to actually perform better on the revenue line than you had originally planned for fiscal '14?

Katie, it's Meg. Let me take that, and I'll let Cathie chime in as well. So let me answer your last question first. I think the characterization of the business that we laid out at the security analyst meeting just 6 weeks ago remains the same. Obviously, there was real acceptance by our products and services in Q4, so we're encouraged by that, but we've got macroeconomic headwinds, I think, almost across the board. And we still have a lot of work to do in our go to market. So I think it's prudent to characterize the business the exact same way we did at the security analyst meeting. In terms of units in our Printing business, you'll recall, we have to look at the total lifetime value of a unit that we place in the market. And we, over the last couple of quarters, have been aggressive now at placing units that have a positive lifetime value, and we're going to continue to do that because that's an investment in the future of that business. In the server business, listen, we strengthened our go to market. In just the last 6 weeks of the quarter, I think we were more focused on market segmentation. We did a better job with the channel. Of course, we would have liked to see more margin drop than we did in EG. But listen, I'm encouraged by the fact that we got more aggressive, we had good quality, and I think our products were very well accepted. And I know we can do better in terms of managing the margin. We're capable of more, and we recognize that we've got more work to do. And whether that's around customer segmentation, optimizing our cost structure, more bundles to get a better blended margin, we know what to do and actually are, sort of, in progress with that as we head into Q1. Cathie, do you want to add anything to that?

I think the only thing that I would add is that in the PSG space, it was heavily skewed to commercial units, which is really where we're seeing more of the mix to shift, and that's been going on now for probably the last couple of years, but certainly, a pretty strong shift in fiscal '13, and we expect that to continue into '14. And then in IPG, it's really Ink in the Office that helped really drive unit placements. Those are good-quality units, high-usage units. Multifunction printers, the fact that we've got a pretty, almost entirely new product line up, is also helping us there. And then graphics, we had a very strong quarter in graphics, especially when you look at Indigo. And so I would say that in IPG, from a unit placement perspective, we're really hitting on almost all cylinders here.

Our next question comes from Ben Reitzes from Barclays.

I just wanted to talk a little bit about the margin sustainability in Printing and how it foots to your guidance for next quarter and the year. There seems like there's a major yen benefit in the quarter. And while the operating margin year-over-year was only a little better, I think it was much better than people expected. So I wanted to foot the margins in Printing to the first quarter and the year and see if you can keep up this level of outperformance and what you're going to do about pricing and hardware. Why not get more aggressive?

Thanks, Ben, let me start with that. As we shared at the security analyst meeting, we are expecting a positive year from an EPS contribution perspective from IPG. As we laid out there, we expect somewhere between $0.07 and $0.11 of incremental EPS before they get their share of the $0.12 of investment. And our strategies in the segment are paying off. We're really focused on driving print relevance. We're focused on driving high-usage units, whether that's Ink in the Office, Ink Advantage for the emerging markets, ink subscription for the developed markets, and then obviously the multifunction printers and managed print services. And so we feel really good about the progress that we're making under those initiatives, and we think that, that, combined with a disciplined approach to profitability, really looking at opportunities across the portfolio where we can simplify, unify our go to market, really make sure that the contra dollars are as effective as they can be, ultimately, that allows us to then focus on the cost side as well and ultimately allows to contribute this incremental EPS of $0.07 to $0.11 on a year-over-year basis.

Our next question comes from Mark Moskowitz from JP Morgan.

I wanted to touch base here on margin as well but more from an OpEx perspective at a consolidated level. SG&A seemed to be a little higher than what I expected. Is there some sort of accelerated comps that's being revived in the company model? And then R&D seemed a lot lighter than I would have thought. Is that a one-off? Or is that a sign that maybe PCs and Printing are a lot less R&D-intensive going forward and so we could see that line item in terms of R&D, that run rate start to really continue to drift lower? I'm Just trying to get a sense of how we should think about those 2 line items as we go into fiscal '14?

So let me address the R&D question first. So as you look at the year-over-year declines in R&D, that was really driven by 2 primary things: One is the rationalization of R&D, specifically in EG for Business Critical Systems, so that we really align the R&D investment in that space with the long-term business realities of the UNIX market. And then also, we did get some, what we call, the R&D value added tax subsidy credits that come through, and those basically offset some of the R&D expense. And when I step back and say, "Okay, what should you take away from what we're doing in R&D," the first is innovation is still at the core of Hewlett-Packard, that ultimately, and I think I said this in my prepared remarks, our number of engineers, which are at the core of what's going to drive innovation, are actually up year-over-year. And then finally, if I go back to the security analyst meeting, we expect that R&D will be up across most of our segments, major segments next year and, in total, at the HP level. So we're still very much committed to driving the right R&D at the right time in the right place. And then from an OpEx perspective, there's a little bit of volatility in the OpEx, specifically if you look in SG&A. We had, I guess you'd say, a tough compare to last year this quarter because we did have some gains from property sales that obviously don't repeat themselves or didn't repeat themselves in Q4 of this year. And then also, we are making investments for improving operational efficiency, and some of that shows up in SG&A as well, and it's showing up a little bit in obviously quicker turnaround times from a quote perspective, and that's leading to better win rates. So we believe that we're making the right set of investments in that space as well.

Our next question comes from Toni Sacconaghi from Sanford Bernstein.

I was wondering if you could provide us with an update on your cost savings, mainly in terms of number of positions that have been produced. Cathie, you mentioned that there are incremental opportunities possible in cost cutting as you look into 2014. Are those in labor or non-labor? And can you give us any sense on how big they are? And then finally, on cash conversion, you're at 17 days, you think sustainable is low 20s? How -- if that's really the case, how does cash flow equal or be better than net income next year.

So Toni, let's start with the restructuring program. Our restructuring program is really on track. At the end of fiscal '13, on a program-to-date basis, roughly 24,600 people exited under the program, so that's just under 13,000 in fiscal '13. As we talked about at the security analyst meeting, our current plan is to end at the end of '14 at the high end of our range, so 29,000 plus 15%, so somewhere between 33,000 and 34,000 people. We expect incremental labor savings in '14 of $1.1 billion. That's on top of the little bit over $2 billion that we delivered in '13. And as you mentioned and I mentioned is that we are continuing to aggressively look at whether or not there are incremental opportunities. And we've got some work still to do to really vet those, but we do think that there may well be some additional opportunities. One of the things that is a lot more difficult now than it was a year ago is that we're looking at business process reengineering and really going after cost that is what I would consider not low-hanging fruit. And so it takes us a little longer to really vet through exactly what going to look like over the course of the year. But we will update you as we finalize that. Cash conversion cycle, 17 days, very pleased with that performance, but we do still believe that the long-term sustainable is in the low 20s. So 20 to 21 days. And in terms of free cash flow, I don't have a change to the outlook that I provided for '14 at the security analyst meeting. We still expect it to be in the $6 billion to $6.5 billion range.

Our next question comes from Jim Suva from Citi.

A clarification item is your outlook reiterated, which is fabulous next year for earnings, and you mentioned since your security analyst meeting in October, which was 6 weeks ago, much of it's remained the same and challenging. But as those investors and analyst take a look at it, it actually appears as if China has actually slowed a little bit more via the outlook as a result of IBM and Cisco and many other companies. But again, you're reiterating. So the question is this, is something kind of causing you to outperform a little bit stronger and offset that more challenging environment in China? Or back in October 6 weeks ago, did you already foresee what Cisco and IBM were seeing? Or simply does China just not impact you quite as much?

So Jim, we flagged weakness in China last quarter, and China does remain soft across many of our businesses, although we saw growth in Enterprise Group led by very strong performance in Networking in China. You also probably read that we recently appointed a new executive to run China for us, a fellow by the name of Robert Mao, and he's in the newly created role of Chairman of the China region. We've actually created a fourth region, and China now reports directly to me. And I think that is going to help energize our overall efforts in China and drive a uniformed strategy and a quite differentiated approach. So listen, we have a big business in China. So if China is soft, we're going to feel the effects. But we've been flagging this for some time, and I feel like we've got the right outlook on China for 2014.

Our next question comes from Steve Milunovich from UBS.

Yes. I was curious about your improvement in storage. How much of that is related to selling storage as part of Converged Infrastructure? I'm assuming you still sell quite a bit of storage in sort of a best-of-breed mode where it might be hooked up to somebody else's server or whatever. But I think Bill had said at the analyst meeting that in general, Converged Infrastructure was something like 10% to 15% of your compute sales, if you will, and I'm just wondering how much of the storage success is because it's being sold in a single box, if you will?

Thanks for the question. So most of the success that we're seeing in storage is in our Converged Storage solutions, but that's not -- a heavy piece of it is not from selling Converged Infrastructure. It really is a best-of-breed, and it's really in the mid-range, the 3PAR mid-range solution. And this quarter, we also saw really nice growth in the 3PAR high-end solutions as well. And you might note that at some point soon, we're going to -- our storage business, our Converged Storage solutions are actually going to cross lines and they're going to become a bigger piece of the storage business. As I mentioned in my prepared remarks, as of Q4, we were at 43%. Sometime in the first half of fiscal '14, we will -- converged solutions will be more than 50% of storage, and that will allow us to continue to accelerate growth in the storage space.

And Steve, it's Meg. With regard to Converged Infrastructure, you will recall, this our term, or definition and our vision for the market, and we are going to continue to aggressively pursue that. I think Bill was right. It's probably 10% to 15% of the total components are sold in the Converged Infrastructure format, but I think it's changing pretty fast because Converged Infrastructure is the backbone of the cloud. So we're coming to market with HP OneView, I talked about that in my opening comments which is a new management plane, that links our server storage and networking together in a very consumer-friendly way. It's almost a consumer UI designed for the enterprise. And then of course, we're working very hard on improving our bundles and our go-to-market around Converged Infrastructure. So I think actually that move in the market is going to accelerate it. We're going to actually try to drive that even harder than we have.

Our next question comes from Bill Shope from Goldman Sachs.

Could you give us a bit more color on how we should think about the steady-state for profitability versus revenue growth in the Enterprise Group, particularly in servers? Obviously, you're able to gain quite a bit of share in Industry Standard Servers this quarter, but you did have a fairly hefty margin hit year-over-year. So can you walk through whether or not we should view this as a trend over the next few quarters? Or is this more of a one-time issue given the Hyperscale performance you discussed earlier?

So Bill, we've thought a lot about this. And in my view, market share and profitability are not mutually exclusive, as we believe we can grow both concurrently over the long term. And managed -- margins will be managed a lot more effectively, I think, by refining our customer and market segmentation to focus on those segments that we can grow profitably. We still have work to optimize our end-to-end cost structure that is all the way from design to logistics and, obviously, offering more bundled solutions. So I think, listen, we have to be very careful about transaction-only business because it's generally not sticky. So we don't want to trade profit for market share that isn't sticky over time. So listen, I think we've improved our ability to see what's actually going on to manage it, and now there's clear direction to the sales team about how we want to manage this. So my belief is that this is not a trend. We ought to be able to reverse this trend to some degree. That said, obviously, a very competitive pricing environment, but I feel good about our ability to do a better job in managing margin in ISS.

Let me just add that our view of margins and EPS contribution from EG has not changed since our security analyst meeting. And at that time, we talked about the fact that EG would be somewhere between $0.01 dilutive to $0.02 accretive to EPS before kind of their share of the $0.12 of incremental investment, and that's really made up, if you look at the kind of the BU level, it's -- you've got BCS is obviously continuing to come down. You've got both TS and ISS that we think of as being relatively neutral. And then HP Networking and storage growth and the profit margins that we see there then basically bring us up to basically this $0.01 dilutive to $0.02 accretive, and that has not changed since the security analyst meeting.

Our next question comes from Kulbinder Garcha from Crédit Suisse.

A question on free cash flow, I think for both of you. Cathie, you mentioned that your free cash flow targets remain the same. So does guidance for this year of $6 billion to $6.5 billion, which should be down about 28%, even though income probably isn't going to be down anywhere near that, I understand the working capital headwind potentially as it is may change. But what are the other drivers? That's my first question. And the second one, kind of linked to that for both of you, if you have another year like you have had over the past 12 months, where you are able to operate at these very good levels of cash conversion, where does that incremental cash flow go? Does it still get split 50-50 between distribution and in acquisitions? Or do you actually do more in terms of buybacks?

So let me start with kind of the year-on-year, what's going on with free cash flow. And really, the big impact in free cash flow from an FY '14 perspective is the working capital pressure, the fact that at some level, we actually pulled cash into fiscal '13 by delivering a 17-day cash conversion cycle, and we will give some of that back when you back to the kind of the 20- to 21-day range. We also will see on a year-over-year basis CapEx pressure. Part of that CapEx pressure is due to better volumes in HP Financial Services. And then the other broad volume comment is there as well, and finally, restructuring. The restructuring cash payouts are significantly higher in fiscal '14 than in fiscal '13, and they are also more front-end loaded in '14 than they are -- than they were in '13. So that leads me to something that I think is important to talk about, and that's Q1 cash flow. Q1 cash flow, as you know, Q1 is typically our seasonally weakest cash flow quarter. It's going to be impacted by the working capital backup a bit and the fact that we've got these restructuring charges, cash outflows that are bit front-end loaded, and then as is typical, it is also impacted by our annual cash bonus.

I'm sorry, what would be cash restructuring this fiscal year than cash restructuring?

So the cash outflow over this year is $1.4 billion in fiscal '14. And then in terms of your question, okay, now that you've generated -- you've gotten back to a net debt position, the opco optical level that is actually in that cash position, does that fundamentally change your capital allocation strategy, I think is ultimately what your question is. And the short answer is it doesn't. Because at the end of the day, our strategy is a returns-based framework with a long-term goal of a mid-single A. That still remains the same. Now it does give us a bit more flexibility because we had anticipated needing to reduce our net debt position further in the first half of fiscal '14, and now we don't need to do that. But it still remains that we're returns-based, and we'll look at the opportunities, whether they're share repurchase opportunities or M&A opportunities, and determine what is the best move for Hewlett-Packard and adding shareholder value.

Our next question comes from Amit Daryanani from RBC Capital Markets.

Just had a question on the Enterprise Group operating margin. It was down about 20 basis points sequentially. Maybe just touch on it, how much of that was really driven due to the mix headwinds that you guys have talked about versus the pricing dynamics that you have alluded to? And on the pricing side, do you think that issue becomes less severe, now that one of your largest competitor in the ISS and PC side, Dell, is a private entity?

So the declines in margin year-over-year in EG were a combination of both a very competitive pricing environment and the unfavorable mix, and that's really what drove a lot of the declines on a year-over-year basis. In terms of will the competitive environment continue to be competitive with Dell going private, our expectation and the way we're planning and modeling is that this environment continues to be very competitive. We are not expecting any change in any of our competitor's stance from a pricing perspective.

And this is Meg. I mean, the way we have to win in our Industry Standard Server group is obviously, we have to be a competitive cost -- we have to have a competitive cost structure, but we have to win through innovation. And whether that's Moonshot or our next-generation of ProLiant servers or HP OneView or the way we bundle together for the benefit of our channel partners, that's the way we're headed here. And so we're really focused on go to market and innovation, at the same time, making sure that we, from a server perspective, we look at end-to-end cost. How we design, how we source, how we ship and how much of it is config to order versus built to order, is also an important driver of cost; and then of course focusing on SKUs. More SKUs means more inventory means more logistics, and we've done a good job of actually focusing as we head into 2014.

Our next question comes from Shannon Cross from Cross Research.

I actually had a question on the commercial PC market with revenue up 4% year-over-year. I was curious as to -- I mean, that included the India units, I believe. But what are you seeing in terms of demand for convertibles, tablets in the market? How much of this is sort of end-of-life for XP? And how much of this, do you think, is repeatable?

Well, I think -- listen, we have focused a lot on the commercial business. We like our product lineup for 2014. I think it's too early to tell how the demand for convertibles is going, whether it's in the commercial space or the consumer space. The Christmas season, we've got a lot of convertibles in the market, so do our competitors, and we're advertising behind us because we think it's a really innovative form factor, but it's the best of the tablet and the best of the PC. So I think we'll know more after we get through the Christmas season and on the consumer side. And then on the enterprise side, I think this is all about price and lineup, as what we see in the enterprise is CIOs are trying to match the device to the worker group and what they need. So maybe, a certain group of workers just needs BDI. There are some who need workstations, some who needs laptops. And whether they're backwards compatible to Windows or whether they're Chromebooks depends on what kind of work that team is doing. So that underscores our multi-OS, multi-architecture, multiform factor strategy that is frankly irrelevant to the commercial space as it is in the consumer space. So we are cautiously optimistic, although we're not in the business of really forecasting the PC, the core PC business growth. I mean, we've been wrong over a couple of quarters on this, and listen, IDC and others are forecasting 4% to 5% down next year, and I think that's probably a good assumption going into next year.

And Shannon, let me just clarify, because it is a bit confusing. The PC win that we had in the state of Uttar Pradesh in India, in our numbers, is in consumer. It is not what's driving our commercial revenue increase. Now it's confusing because IDC puts it in commercial, so it's in the commercial share.

Okay. That's very helpful. Just really quickly, on end of life or XP, how are you thinking of that?

So we're leading actually the migration off of XP. And we actually -- I think Microsoft would probably tell you we're among the leaders in terms of spearheading that migration. We've been on this for well over a year, and it's actually going pretty well.

Our next question comes from Peter Misek from Jefferies. Our next question comes from Maynard Um from Wells Fargo.

Meg, you talked about -- in terms of looking for a permanent Chairman of the Board, you've talked about having a lot more interest given sort of the recovery of HP. I'm just curious where HP is [ph] in terms of finding a new permanent Chairman of the Board and following that, any indication of whether or not Ralph Whitworth would still continue to sit on the board.

Yes. So Ralph, as you know, is Chairman of the Board on an interim basis, and he has stepped up to the plate beautifully. And we really are very grateful to his service. He's done a great job. And he said the other day, he'll continue to serve until we find someone else. So you should assume he's in place for the foreseeable future, and we're just delighted with his working relationship with management team, with the board. He's made an outstanding contribution, so he'll be in place until we find someone else.

Our final question comes from Brian Alexander from Raymond James.

I want to ask a question about the 3D printing opportunity. Meg, you've highlighted this as an opportunity, and you seem genuinely interested in the market. So what are your aspirations in terms of market position relative to your leading position in the traditional printing market? And do you think you can reach that organically? Or do you think you have to acquire an established player?

So we intend to play in the 3D printing market because it is an adjacency. It's obviously different than paper printing, but the sum of the technology is the same. And at least as we sit here today, we anticipate entering this organically. And what we're doing is focusing on what's the value proposition by market segment, whether that be consumer or industrial, what's the competitive differentiation, and we've got some very interesting things coming. So stay tuned in 2014. But this is an acorn, right? You've heard me say we got to plant acorns and they will eventually become oak trees. But you should think in 2014 and 2015, this is an acorn that maybe has very good long potential, but the market is at its earlier stages and there are a lot of technology work that needs to be done to be able to print in the kind of timeframe that most consumers and most industries would actually find acceptable.

Great. Super. Thanks for that, and thanks, everyone. And I think with that, we'll conclude the questions. Thank you.

Ladies and gentlemen, this concludes our call for today. Thank you.