惠普 (HPQ) 2003 Q1 法說會逐字稿

Good afternoon.

Welcome to Hewlett-Packard's first quarter earnings release.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer period.

If you would like to ask a question during this time, simply press star, then the number 1 on your telephone keypad.

If you would like to withdraw your question, press star, then the number 2.

Before we begin, let me introduce Mr. Steve Pavlowevich, Vice President of Investor Relations, who has a brief message for you.

Mr. Pavlowevich?

Thank you, Corey.

Good afternoon, everyone.

I would like to welcome all of you to our first quarter conference call.

Joining me today is our chairman and CEO, Carly Fiorina, and Bob Wayman, our Chief Financial Officer.

Before we get started I would like to remind you that this call is being web cast on hp.com.

For the first time, we will have visuals supporting our formal remarks.

The slide deck can be viewed by clicking on company information, then investor relations, and then listen to live audio web cast; or it can be downloaded from our quarterly results page.

Replay will also be available shortly after the conclusion of the call through March 4th.

Next, it's my duty to inform you that the purpose of this call is to provide you with information regarding the quarter just ended.

However, some of our comments and responses to your questions may include forward-looking statements.

These forward-looking statements are based on certain assumptions and are subject to a number of risks and uncertainties, and actual future results may vary materially.

I encourage you to read the risk factors described in the company's annual report on Form 10-K for the year ended October 31st, 2002, and our other SEC filings for an understanding of the factors that may affect the company's business's end result.

Also, please note that the results of and comparisons to the prior year period are stated on a combined company basis for first and second quarters of FY '02 and reflect Compaq results as if combined with HP at the start of HP's fiscal quarters.

Third and fourth quarters are straightforward, as they were reported after the merger had closed.

I would also like to point out that earnings, gross margins and similar items discussed at the company level are generally expressed on a non-GAAP basis, formerly referred to by us as pro forma, and therefore, have been adjusted to exclude certain acquisition-related charges and inventory write downs, end-process R&D charges, amortization of goodwill and purchased intangibles, restructuring charges, and net investment losses.

The term "Pro forma" has been changed to non-GAAP in anticipation of new SEC rules coming into effect next quarter.

A presentation of GAAP financial information and a reconciliation of non-GAAP amounts to GAAP are included in the financial statements accompanying today's earnings release, which is also available on hp.com in the investor relations section.

Now, before I turn things over to Carly and Bob, I would like to point out a number of accounting and reporting changes that we've made for FY '03 starting this quarter.

First of all, we will be reporting bad debt expense related to our financing business in cost of sales as opposed to SG&A, as we have done in the past.

This methodology is more typical for stand-alone captive finance operations.

In addition, our segment reporting has changed as follows: First, in the past our bonus compensation expense has been reported at target at the segment level, and any adjustments based on actual performance were made at the corporate level.

Starting this quarter, actuals will be fully reflected in segment results.

Second, the cost and revenues associated with the office of strategy and technology, which is primarily HP labs, will no longer be reported in the business segment and, as such, will be included in the eliminations and other line.

Third, certain corporate governance functions such as internal audit, government affairs, and the office of the corporate secretary will no longer be allocated to the businesses and will also be included in eliminations and other.

Finally, just so you are aware, all the historical results that we have provided today have been restated for these accounting changes, so you have apples-and-apples comparisons.

So with that long preamble, I'll turn things over to Carly.

Thanks, Steve, and good afternoon to all of you, and thank you for joining us today.

As our first quarter results demonstrate, HP is making good progress against the backdrop of a challenging environment, and we continue to execute well.

The first quarter was our best overall profit performance since the merger, demonstrating that there is significant leverage in our operating model.

We made good progress on cost structures, achieved sequential market share gains in each of our businesses, and continued to improve gross margins.

Our revenue shortfalls were largely confined to the U.S. market, as weak commercial spending continued.

Outside the U.S., revenues improved 3% sequentially, with strong performance in Europe and Asia-Pacific.

Personal Systems posted a profit for the quarter, and Enterprise Systems improved operating results by 36% sequentially.

For the quarter, non-GAAP earnings, or what we previously referred to as pro forma earnings, were 29 cents per share, 2 cents above consensus estimates.

That is up from 24 cents in the fourth quarter of 2002, a 21% improvement sequentially.

Today's world is full of uncertainty and predictions are difficult.

We're staying focused on what we can control: maximizing our operating model leverage, delivering the best possible products and services, accelerating market share gains, and staying on the offense, and investing in growth.

Therefore we're comfortable affirming analyst consensus estimates of 27 cents for Q2.

In the Americas, revenue declined 7% sequentially because of weakness in the U.S. and Latin America.

Canada, on the other hand, reported solid sequential revenue growth.

The strongest performance was in Europe, Middle East, and Africa where revenue was up more than 6% from the previous quarter.

In Asia-Pacific, excluding Japan, revenue was up 3%.

Economic weakness in Japan continued to negatively affect our business with revenue down 6% sequentially.

It is difficult at this point to declare a trend in IT spending for 2003, up or down.

If you look at market surveys, you'll find they are widely divergent on this point, with estimates ranging from a decline of 5% to an increase of 6%.

In this environment, we're going to stay focused on improving our profitability and executing in the marketplace.

Now I would like to walk you through some of the factors behind our improving profitability.

Gross margin increased sequentially to 26.5% from 25.9% in the previous quarter, building on continued improvement in procurement and other supply chain efficiencies.

Non-GAAP operating expenses were down more than $150 million from the previous quarter.

Expenses represented 20.3% of revenue, down from 21% in the fourth quarter.

We continued to meet or exceed our cost reduction targets from the integration.

Synergy of more than $700 million in the first quarter represented incremental savings of $250 million over the prior quarter.

I'll cover that subject in more detail in a moment.

Non-GAAP operating profit for the quarter was $1.1 billion, or 6.2% of revenue.

That compares to 4.9% of revenue in the fourth quarter.

From gross margin to expenses to operating margin, this performance reinforces my confidence in our ability to continue to improve earnings and share owner value, even in a revenue challenged IT environment.

If you look at the key trends, you can see how much earnings leverage we have, and you can understand what that will mean as we begin to increase revenues.

Let's take margins first.

Since we launched the company last May, we have seen steady sequential progress across gross margin, operating expenses, and operating margin.

Non-GAAP gross margin increased a full point from the third fiscal quarter of 2002 to the first quarter of 2003.

Non-GAAP operating expenses have declined nearly 2 points during the same period.

As a result, non-GAAP operating margin has nearly doubled from 3.2% in Q3 to 6.2% in Q1.

We've also seen steady sequential improvement in non-GAAP operating profit, which has more than doubled from the third quarter of 2002.

As you would expect, we have seen similar improvement in earnings per share.

Non-GAAP EPS has more than doubled in the last three quarters, from 14 cents per share in Q3 to 29 cents per share in Q1.

On a GAAP basis, we have seen a huge improvement from Q3, when we took a large restructuring charge.

One of the big factors in our improving profitability, of course, is the success we're having in capturing savings from the integration.

Of the approximately $250 million in incremental savings that we achieved during the first quarter, about half came from workforce reductions.

And the rest from direct and indirect procurement savings, reduced logistics costs, facilities closures and other savings.

On the procurement side, we saved an incremental $31 million during the first quarter through our requalification and redesign efforts.

On an annualized basis we have already exceeded our 2003 target for direct procurement savings by 35%.

Overall, we have reduced direct and indirect procurement costs by nearly $1 billion on an annualized basis, and we see an opportunity to drive these costs even lower as we focus on achieving a world class cost structure.

As we focus on profitability and growth, we're building on a strong foundation of market share leadership.

Third-party reports continue to demonstrate HP's broad revenue and unit share leadership across key segments of the IT market.

What's particularly important is that we're seeing solid sequential share gains.

At this point, year-over-year compares aren't particularly meaningful, since HP and Compaq had different product lines a year ago.

Sequential share numbers tell us how well our integrated product lines are doing against our top competitors, and overall we like what we're seeing.

According to Gartner Dataquest, HP grew its number 1 share of overall server shipments worldwide to 30% during the fourth calendar quarter.

We also increased our market share growth sequentially in UNIX, Linux, and industry standard server revenue.

Specifically, HP increased its share of worldwide UNIX revenue by 2.2 points, displacing Sun as the number one UNIX vendor in the calendar fourth quarter.

And in industry standard servers, we grew twice as fast as the nearest competitor worldwide.

In storage, IDC's most recent report, which is for the third calendar quarter of 2002, shows that HP leads in worldwide disk storage revenue with 27% share.

We achieved sequential growth in external RAID storage software and SAN units shipped.

In Personal Systems, HP regained the number one position in worldwide PC shipments during the fourth calendar quarter and grew faster than the market sequentially for the second consecutive quarter, according to IDC.

We also had sequential market share gains in overall desktop and notebook shipments and in home PC clients.

In imaging and printing, HP held 59% of the overall U.S. printer market in the fourth quarter of calendar 2002, maintaining our number 1 position and extending our market share growth for the third consecutive quarter, according to IDC.

We have significantly strengthened our share in Inkjet printers, where we have 58% share in the U.S., up 7 points sequentially.

In color laser jets where we have 61% of the U.S. market, a sequential improvement of 7 points, and 41% of the worldwide market.

And in laser mono printers where we have 72% share in the U.S. market and 52% worldwide.

According to NPD Intellect, HPD had a 70% share of the U.S. market for Inkjet all-in-one printers in December, up 2 points sequentially.

We also have a 48 share point lead over Lexmark.

And in HP services, our outsourcing business was ranked number 1 in customer satisfaction in a recent Information Week survey of 700 IT professionals, and growth in our managed service business is outpacing all of our major competitors, including IBM, EDS and CSC who are showing single digit or negative growth in managed services.

Bob will provide more detail around our overall financial performance in the balance sheet.

Let me turn now to our individual business segments.

I want to begin with PSG because of the significant improvements we saw in this business during the first quarter.

This is clearly a business model story.

Although revenue was up only modestly from the previous quarter, we saw the bottom line impact of cost reductions, supply chain and manufacturing savings, and increased efficiencies in our distribution system.

We were able to deliver innovative products, price them competitively, increase market share, and increase profit margins.

As a result, Personal Systems Group delivered an operating profit of $33 million for the quarter, an improvement of $101 million from the fourth quarter.

Revenue of $5.1 billion was up about 2% sequentially.

Operating margin improved 2 points sequentially, largely due to integration-related cost savings.

This performance is all the more impressive when you consider that it came amid a weak holiday buying season, persistent softness in corporate IT spending, and stiff competition.

Sales of consumer desktop PCs and hand helds increased significantly over the fourth quarter.

Aggressive advertising in new products, including wireless-ready notebooks and HP's popular Media Center PC, helped increase holiday demand.

NPD Intellect reported that HP was number 1 in U.S. retail desktop share, with 66% of the market in calendar Q4.

Further evidence that our strategy for maintaining both the HP and Compaq brands at retail is working and working well.

Commercial desktop PC revenues were down 3% from the fourth quarter, although unit shipments of commercial desktops showed solid improvement.

Notebook and workstation revenues were also down from the previous quarter.

We also continued to manage channel inventories effectively.

Worldwide commercial channel inventories remained low at 3.1 weeks, while consumer channel inventories reached 4.9 weeks, down from 6.3 weeks at the beginning of the quarter.

Personal Systems Group story is still being written, and we have more work to do, but we are pleased with the momentum we're building in this business.

Now I want to turn to the Enterprise Systems group.

Revenue was down -- was 3.7 billion, down 6% from the previous quarter.

Despite a sequential revenue decline of $259 million, we reduced our operating loss for $83 million for the quarter, an improvement of 36%, or $46 million from Q4, and $239 million from Q3.

We remain on the right path to restore profitability in the second half of fiscal 2003.

Our operating loss was 2.2% of revenue, a sequential improvement of 1 point.

Costs continued to decline as we delivered on integration synergy.

ESG has now achieved approximately $1 billion in annualized cost savings, and we're committed to driving further efficiencies in the quarters ahead.

Revenue in business-critical servers was down 12% from the previous quarter, reflecting soft demand on the UNIX market and a challenging quarter for our nonstop business.

Nonstop revenue was down significantly due to continued weakness in telecom and financial services.

We had another record quarter for Superdome shipments, and Alpha revenues grew sequentially thanks to continued execution of our product road map and customer retention programs.

In industry standard servers, we set a quarterly record for worldwide unit shipments of ProLiant servers, demonstrating customer demand for these industry-leading products.

At the same time, revenue was down 5% sequentially.

Soft demand in the U.S. was partially offset by solid performances across the other regions.

During the quarter we introduced new ProLiant two-way and four-way blade servers, well ahead of all major competitors.

According to Gartner Dataquest statistics for calendar Q4, HP has 53% of the U.S. market for blade servers.

Storage revenue declined 5% sequentially but we continue to have solid market momentum.

Our network storage and software segments did well, while tape and automation products were soft.

During the quarter we introduced our storage StorageWorks enterprise virtual array on HP-UX, as well as 33 new storage products, and we announced the industry's first network storage virtualization framework.

Although revenue in our software business was flat sequentially, OpenView license revenue increased 15% from the fourth quarter, indicating strong acceptance in the market.

This was offset by continuing revenue declines in OpenCall, which is dependent upon the health of the telecom sector.

We're making significant investments in our utility data center and management fabric products.

During the quarter we announced our new adaptive management software platform strategy and introduced more than 30 new OpenView and OpenCall products, including software that addresses the important emerging market for web services management.

We're leveraging OpenView as the most advanced management solution for the discovery and automation of hardware, software, and IT application services.

In a recent report, Forester ranked HP in the visionary category for next generation infrastructure management, the only large vendor in that category.

This brings me to HP Services.

The IT services market continues to be weak, reflecting lower customer demand and overcapacity on the supply side of consulting.

Customers are not accepting or signing up for any new IT projects that don't deliver a fast return on investment.

Revenue in HP services was $3 billion, down 3% sequentially.

Declines in customer support and consulting and integration were partially offset by strong growth in our managed services business.

Operating profit was $341 million, which represented $11.5% of revenue.

That was down 6% from Q4.

The impact of lower revenue was partially offset by continued reductions in structural costs.

The 3% sequential decline in customer support revenue was largely the result of the lengthening of renewal cycles.

Q1 is by far our largest renewal period in the support business, but the U.S. economy is slowing down the customer renewal process.

As a result some of the renewals we expected in Q1 won't be complete until Q2.

At the same time we're seeing good demand for package services attached to product sales, as well as for implementation services for storage area networks, and multivendor services that support our customers' overall IT environments.

Revenue in consulting and integration was down 12% sequentially, reflecting weak hardware sales in the UNIX systems business, in addition to the continued slowdown in spending on IT consulting.

The strongest parts of our portfolio are IT consolidation services, enterprise Microsoft services, and ERP supply chain optimization.

Revenue in managed services, what the industry would call outsourcing, was up 11% sequentially, reflecting large comprehensive outsourcing deals signed in fiscal 2002, as well as significant help desk and desktop contracts signed in Q1, and our managed services business was profitable for the second quarter in a row.

Customer demand is particularly high for help desk desktop services and for data center infrastructure management.

Clients are telling us that HP can run these services more efficiently and cost-effectively than they can on their own.

Recent managed services wins include a five-year $240 million contract with Telecom Italia for help desk, on-site services and management of the overall IT environment, and a five-year agreement to manage DirecTV's 7 by 24 billing environment in North America.

Now I want to turn to our Imaging and Printing business, which delivered strong Q1 revenue and profit in the face of tough economic and market conditions.

Revenue of $5.6 billion was flat sequentially, following a seasonally strong fourth quarter and represented solid year-over-year growth.

Holiday sales of digital cameras, all-in-ones, inkjet printers and photo printers were strong.

Channel inventory ended the quarter at 4.6 weeks, down slightly from the previous quarter.

Operating profit of $907 million was down 4% sequentially.

As a percent of revenue, operating profit was 16.2%, compared to 16.8% last quarter.

Normal seasonal declines in gross margins were partially offset by continued operational efficiencies.

Home hardware revenue declined 3% sequentially, in line with normal seasonality.

We continue to see a mixed shift from single-function printers to all-in-one and photo printers which carry higher IRUs and generally have higher usage rates.

All-in-one unit shipments increased more than 19% sequentially, translating into strong share gains worldwide.

Despite weak business IT spending, revenue and business hardware increased about 1% sequentially, fueled by demand for HP's color and personal laserjet printers and gains in digital publishing.

We demonstrated further progress in digital publishing, despite tough market conditions.

Two key business indicators, the active installed base and the total number of printed digital pages. continued to grow quarter-on-quarter.

The total number of printed digital pages from our indigo presses was up 11% sequentially.

Digital imaging showed continued strength with revenue increasing 7% sequentially.

Unit shipments of photosmart photo printers increased 12% from last quarter, reflecting strong market acceptance for our new product lineup.

According to NPD, we maintained our number 1 photo printer position in U.S. retail with 75% share, up 6 points from November to December.

Unit shipments of digital cameras were up 20% year-over-year, reflecting strong holiday sales and a stronger competitive position in the higher price bands.

According to NPD, our share of U.S. retail digital camera sales nearly doubled from October to December.

Supplies revenue decreased 2% sequentially but was up 14% year-over-year.

Ink sales continued to benefit from our momentum in digital imaging and the market shift to all-in-one and photo printers.

And we improved our market position in media, particularly the photo category.

On the strength of our innovative products, we now have 41% share of the U.S. retail market for photo media

We don't take any of our competitors lightly in the printing and imaging market, but we are well positioned against our major competitors from the standpoint of technology, capacity, and cost structure.

We plan to use these advantages to extend our market leadership.

With that, I would like to turn it over to Bob and then I'll come back for a few closing comments before we take your questions.

Bob?

Thanks, Carly, and good afternoon, everyone.

Carly gave you a pretty broad overview of our Q1 performance.

I'll spend the next few minutes providing a little more detail on the P&L, followed by my usual review of the balance sheet and cash flow, as well as a few comments about our outlook for Q2.

First, though, let me make a quick comment about the segment reporting changes that Steve discussed at the beginning of today's call.

Each year as part of our business review process, we evaluate our business segment definitions and cost drivers to improve the financial visibility and understanding of the businesses.

This year we decided that the preacquisition Compaq practice of separating certain corporate expenses without allocating them to the segments represented an improvement over our prior practice.

This, plus the other changes Steve mentioned, modestly altered the restated historical profit levels for all of our segments.

We believe our new reporting definitions improved management accountability by better reflecting segment business performance.

These changes do not impact our overall business objectives or long-term company operating model expectations.

Obviously we're managing a portfolio of businesses, and the performance of the total portfolio continues to be our objective.

Now before I get into the details of the numbers, let me quickly review the only segment that Carly did not cover, HP Financial Services.

For the quarter, HP Financial Services had revenue of $517 million, down 4% from Q4, a reasonable result given the difficult year it's been for hardware sales.

More positively, for the first time in several quarters, this business was able to achieve profitability.

Operating margin of 2.7% showed good sequential improvement from Q4's negative 18.8%.

These results were achieved primarily through better management of our bad debt exposure, primarily in Latin America and Europe.

While the worldwide economic environment continues to be challenging for this business, it's nice to see our hard work beginning to show results.

Now to the P&L.

Let me begin with a quick reconciliation of our Q1 diluted GAAP EPS result of 24 cents and our non-GAAP performance of 29 cents.

On a pretax basis, our non-GAAP result excluded $138 million in amortization of purchased intangibles, primarily associated with the Compaq acquisition, $76 million in planned retention payment accruals, $10 million of incremental integration expense, and a $5 million net investment loss.

All in all, the adjustments this quarter are pretty straightforward.

Next, a couple of comments on our revenue performance, starting with the effects of currency.

While the dollar clearly weakened late in the quarter, particularly against the Euro, it was simply too late to have a material impact on our results.

As a result, our sequential revenue decline of 1% reflected little currency impact.

Also impacting revenue this quarter was the effect of conforming preacquisition Compaq sales agreement terms and conditions.

As I told you last quarter, it's difficult to forecast exactly how these kinds of changes will impact the numbers.

In assessing our Q1 results, the change and its associated delay in revenue recognition adversely impacted revenue by approximately $200 million during the quarter.

The good news is that this effect was one time in nature and we now have it behind us.

Looking at gross margin performance, Q1 was another solid quarter.

Gross margin improved to 26.5%, up from Q4's 25.9.

Leading this improvement was PSG, where a 1.4 point gross margin was achieved through continued progress against procurement value capture goals and a reengineer channel.

ESG also produced a gross margin improvement of about 1 point, primarily due to procurement savings and a more efficient supply chain, as well as the effects of a better product mix.

Offsetting these improvements were gross margin declines in both IPG and HP services.

In IPG, the typical seasonal pattern of higher holiday hardware sales in the mix pushed gross margins lower by 1 point, and within HP services, longer renewal cycles on service contracts during the busiest renewal period of the year pushed overall HPS gross margins down about a half a point.

In total, we made improvements where we needed to most, and we're now operating in the high end of our long-term operating goal of 25% to 27%.

So I'm pleased with the overall result here.

Now operating expenses.

Non-GAAP operating expense for the quarter was 20.3% of revenue, down from 21.0 last quarter.

At the beginning of the quarter, I indicated that the expected expense pressure from our planned increase in brand spending and from incremental pension expense.

In the context of these increases, the sequential improvement was a good result.

Overall, SG&A for the company was down 3% sequentially, driven primarily by a 9% decline in admin costs.

As expected, more than 60% of our overall sequential expense savings came in ESG, where solid management and the effects of our restructuring efforts pushed virtually every expense category lower.

And while R&D remains a key priority for the company, elimination of redundant activities allowed us to cut R&D spending by 7% from Q4.

Finally, sequential expense performance across all of our businesses reflected the benefits of lower bonus accruals during the quarter.

Summing up, despite a tough revenue quarter, improvements in gross margin, and reduced operating expenses allowed us to achieve a non-GAAP operating margin of 6.2%, with non-GAAP operating profit dollars of 25% sequentially.

We're making good progress towards our long-term profit objectives even in a difficult IT spending environment.

Interest and other net was $51 million for the quarter, slightly below Q4, but a bit higher than I expected when I guided you to $100 million for the full year at our December analyst meeting.

This is, as usual, a tough number to forecast, but Q1's result was primarily due to higher than planned net currency gain during the quarter.

Finally, our non-GAAP tax rate of 24% was unchanged from last quarter.

As I indicated in December, we expected our tax rate to trend higher early in the year before returning to these levels.

However, solid tax planning and a favorable business mix allowed us to hold our tax rate constant.

That wraps up my comments on the P&L.

Now on to the balance sheet.

Inventory was up $294 million from Q4 levels.

About half of this increase was due to the delay in revenue recognition that I mentioned earlier, with the remaining amount due to revenue weakness.

In the context of sequentially lower revenue, inventory now stands at 8.6% of combined company revenue, up from last quarter's 8.0%.

Inventory increases were predominantly in our commercial PC and industry standard server businesses.

However as noted earlier, channel inventory is in good shape across the board.

Even so, a 5% sequential rise in owned inventory in the context of down revenues is not appropriate.

We understand this issue and are taking steps to better align our inventory with business levels.

Our trade receivables performance was excellent this quarter.

Solid execution on collections pushed trade receivables down $590 million, or roughly 7% from Q4 levels.

As a percent of revenue, trade receivables fell to 11.1%, down from Q4's 11.7%.

DSO improved by nearly three days sequentially to 40 days, our lowest level for any of our reported three quarters since the merger.

So I'm pleased with our continued progress here.

Net PP&E on the balance sheet declined slightly from Q4 levels, as gross capital expenditures of roughly $600 million were more than offset by depreciation and dispositions.

As a percentage of revenues, PP&E ended the quarter at 9.7.

The only other notable change on the balance sheet was an increase in short-term notes payable, which rose by approximately $1.2 billion from Q4.

The primary driver of the sequential increase was a need to fund general corporate activities, primarily in the U.S.

Let me conclude my balance sheet remarks with an overview of cash and cash management.

We exited the quarter with $12.6 billion of cash and cash equivalents on the balance sheet, up more than $1.4 billion from Q4.

Total gross cash, including short-term and certain long-term investments ended the quarter at $13.2 billion, up from Q4's $11.8 billion.

However as I mentioned a moment ago, our short-term borrowings increased during the quarter.

So our net cash position, net of short- and long-term debt. increased just slightly from last quarter.

Cash from operations during the quarter was only $791 million despite a reasonably strong GAAP net profit performance of $721 million.

Driving this result was depreciation and amortization of $600 million, offset by $370 million in planned restructuring payments, approximately $150 million in second half bonus payments, a draw-down in AP of almost $700 million, and the higher inventory levels I just mentioned.

Our investment activities included PP&E expenditures net of dispositions of $427 million during the quarter.

And finally, we paid an 8 cent dividend during the quarter totaling $245 million and repurchased 155 million of stock.

New short and long-term borrowings during the quarter resulted in an increase in cash of $1.3 billion.

So now let me end my remarks with some comments about our outlook.

As Carly mentioned, the economic environment remains challenging, both on the enterprise side where customers continue to delay capital spending decisions, and on the consumer side, where an unstable geopolitical environment weighs heavily on consumer confidence and spending.

Normal seasonality would suggest Q2 revenue down somewhat from Q1, but keep in mind Q1 revenue was somewhat depressed from the revenue timing effects of our conformance in sales agreement terms and conditions.

In addition, provided currency rates remain where they are now, currency should help revenue a bit in Q2.

Summing all of these effects, we now expect sequential revenue to be flat to down slightly from Q1.

As for gross margins, we expect mild improvement in Q2 from Q1.

Q2 is typically a better gross margin quarter for IPG due to the effects of higher consumable sales and a resulting better mix.

HP services also has seasonally higher gross margins due primarily to better labor utilization.

And finally, despite continued margin pressure from aggressive industry pricing, we expect supply chain improvements across our computer hardware businesses to allow gross margins to remain relatively stable in those businesses.

Expenses will be more challenging in Q2.

Typical seasonality pushes expenses higher by 3% to 4% from Q1 levels.

In addition, the currency impact of a weakening dollar will push expenses higher, and we will continue to increase our branding investment from Q1 levels.

Finally, recall that Q2 will be the first full quarter in which premerger Compaq employees are included in HP's pension plan.

Offsetting these pressures will be the continued benefit of our integration efforts.

Netting these effects, I expect expenses to be slightly higher in Q2 than they were in Q1.

Given all of these dynamics, combined with more normal other income and a relatively unchanged tax rate, we are currently comfortable with street consensus for Q2 non-GAAP EPS of 27 cents.

So to close, despite the revenue outcome, I'm pleased with our execution and business performance this quarter.

We have stayed focused on customers, even while continuing with our integration efforts, and we are emerging with better cost structures and improving profitability.

While we have much work ahead of us, I'm encouraged by our progress and believe we are well positioned for the future.

With that, back to you, Carly.

Okay.

Thanks, Bob.

Before we open up to your questions, I just want to take one minute to summarize.

More than anything else, our first quarter results demonstrate the earnings leverage we have as we reduce our structural costs and become much more efficient across the company.

Only a handful of companies can both promise and deliver earnings growth in good times and bad.

HP is becoming one of those companies.

Our strength lies in our scale, our global reach, and our diverse portfolio.

As I said earlier, today's world is full of uncertainty and predictions are difficult.

We are staying focused on what we can control, maximizing the leverage of our operating model, delivering the best possible products and services, accelerating market share gains, staying on the offense, and investing in growth.

And now we would be happy to take your questions.

Ladies and gentlemen, we will now begin the question-and-answer portion of today's call.

If you have a question, please press "star," "1" on your touch-tone phone.

You will be announced prior to asking your question.

If you would like to withdraw your question, please star 2.

One moment, please, for the first question.

We'll take our first question from Richard Gardner with Salomon Smith Barney.

Okay.

Thank you.

The question is, I was wondering if you could help us out on the impact of the Partner ONE changes that you made at the beginning of November on Personal Systems group profitability.

I presume it was a big positive benefit in the quarter.

And then in addition to that, maybe if you could give us a sense of what you think happened to your sales in the distribution channel as a result of those changes.

Our sense is that the distributors are pushing competing products pretty hard because of the loss of some of those back-end dollars.

And then as a follow-up, I know that you said that revenue was a bit weak in the United States on into January.

The channel is telling us that things have recovered a bit in December and January.

I'm once again wondering if you believe that any of that is due to Partner ONE.

Thank you.

Okay.

So Rich, a couple of things.

First, the changes that we announced in November in Partner ONE had a insignificant impact on PSG profitability.

PSG profitability improvements are really driven by our own cost structure and supply chain efficiencies.

And one of the principle reasons for that is because Partner ONE, while we have simplified the number of programs that we have, we used to have about 40-plus programs.

Now we've consolidated all that down to one.

There really isn't that much change in administrative cost.

And importantly, what Partner ONE does is really reward channel partners for demand generation.

So it's not a big profit impact.

Secondly, I think if you look at our calendar quarter revenue increases in PSG, for example, as opposed to fiscal quarter, what you'll see is a growth that's fairly consistent with the industry.

If you look at our quarter-over-quarter sequential market share gains in PCs and handhelds, as well as industry standard servers -- and by the way, all of that information is obviously available at this point, but if you look at those sequential quarter-over-quarter gains, I think what you'll see is positive momentum and indeed in some cases market share gains that are ahead of the gains of our competitors, in some cases significantly ahead.

And finally, I guess we would characterize the U.S. market right now as not improving and not deteriorating.

I think there are some who expected an improvement as we went into January.

We didn't see that.

So it's kind of continuing in the same pattern we've seen for some time.

Thank you.

Our next question comes from Tony Sacconaghi with Bernstein.

Thank you, operator.

Carly and Bob, could you comment on whether the revenue shortfall in the quarter in Q1 relative to your original expectations was somewhat back-end loaded?

Carly, your comments in response to the last question suggest that you don't think things are getting worse and so it doesn't appear that there was kind of a unique, meaningful shortfall in January relative to your expectations.

Can you just clarify that and, if anything, maybe talk a little bit about what you've seen so far in February that makes you believe that you are still in this not-improving, not-deteriorating state .

Tony, let me start.

I'm sure we're not going to comment on February in any specific way at this point, but I took a look at our two month to date and three month to date performance in terms of trying to get a sense of whether, compared to plan, that January had any significantly different deviation from plan, and the answer is no.

The deviations from our plan that we saw in the quarter are geographic in nature.

The U.S., in all of our product businesses, U.S. was differentially below plan, and Europe was differentially above plan, in all three of the product businesses, but that is the only pattern that I could pick up in all of this in trying to prepare our understanding and convey it to you.

And then just in follow-up to that, looking forward, Bob, I think we've discussed explicitly that the new HPQ in terms of seasonality probably doesn't look all that different from the old stand-alone HP.

I think historically over the last seven years, your average sequential decline has only been about 1% from Q1 to Q2.

In addition to that, you mentioned a number of fairly positive forces in terms of the push-out of a couple of hundred million dollars in revenue this quarter, positive currency.

Are you being conservative about revenue guidance for next quarter because of the hesitancy that demand could weaken, or is that linear thinking around trying to come up with something relative to history and correct?

Yeah, I'll just repoint you to the words that I gave here.

You know, we normally see some revenue decline in Q2.

It's usually around 2%.

You can look at some of our competitors who are on similar fiscal quarters and you'll see similar kinds of numbers, and then we have these incremental revenue effects and possible currency effects, but we're just trying to lay out what we understand and at the same time acknowledge there's things going on out there that we don't understand.

I think, Tony, if I could just add, building on Bob's last point, really what we're trying to do in terms of how we operate the business, as well as in terms of how we provide information to you is to focus on the things we can control.

We can't control the environment.

Loads of folks have been reasonably unsuccessful at predicting IT spending, as representing by the widely divergent views that I quoted earlier, but what we can control is how we execute in the marketplace.

That's why we focus very much on our market share gains quarter over quarter; and we can focus on how we operate the business and so those are really the things, the guideposts that we're using right now as opposed to trying to predict the economy and the direction of the economy.

I would just reinforce the nature of a guidance in one other way.

If you looked at consensus revenue for Q2 to Q1, you guys had it coming down about 2% quarter to quarter as your starting point, and all I tried to do was, again, clarify currency and the incremental revenue effect to modify that slightly, but that's all we know.

Next question, please.

Next we have Steve Milunvich of Merrill Lynch.

Two things.

First of all, a little confused on the revenue side.

You are saying that U.S. is well below plan and yet you claim you have generally gained share and that the U.S. has not deteriorated.

It seems like something there has to be wrong.

I'm wondering if all these IDC and Gartner numbers aren't really capturing what's really going on in terms of market share.

And also on the PC side, given that you have a little too much inventory on your own books, what does that mean for pricing for the next quarter, how would you characterize the pricing environment, vis-a-vis Dell, and would you expect the PSG profit to improve the next quarter?

So let me comment first on the U.S.

I think it's fair to say that we and others were expecting the signs of improvement in the U.S. environment as we exited 2002 and we simply didn't see that.

I think that we're -- this isn't a question of claiming market share.

What all of the data that I'm quoting today is third-party data.

It's up on their website, it's up on our website.

We're just reporting what others have concluded and I think based on what we've seen to date, over many years, this is pretty accurate market share data.

I think we made a -- with regard to inventory, we made a very conscious decision not to push inventory into the channel because we want to continue to manage that channel inventory in a very productive way, and clearly as Bob suggested, we know we now have to watch that carefully.

I would not say that we are seeing the pricing environment intensify, but I don't think it's improving.

I think it continues to be a pretty intense environment and, as you know, we want to continue to price in a competitive way.

That's one of the reasons why improving -- continuing to improve our cost structure is important.

And with regard to your last question in terms of deteriorating or improving profitability in PSG, I think clearly our objective here is to hold our performance.

Steve, let me remind you as well that half of that inventory increase is an accounting entry.

It doesn't change the economics at all of the days of inventory, et cetera.

It's just a matter of we account for it.

It didn't recognize the revenue yet.

So I don't think there's going to be much impact at all from where we are in inventory positioning point of view on the next quarter.

Our goals remain unchanged.

We expect to see this business achieve a profitability, you know, 3-plus percent.

There of course will be variation quarter by quarter, but as Carly said, you know, we've got some good momentum here and we hope to follow up on that in subsequent quarters.

Next question.

We'll take our next question from Rebecca Runkle with Morgan Stanley.

You may proceed with your question.

All right.

Thank you very much.

Just looking at inventories once again, some people are speculating that as we look at channel inventories, they look as they are unsustainably low at this point and there will need to be a replenishment in the second quarter as the inventory levels reach a more normalized statement.

I was wondering if you could comment on that from your vantage point, and specifically do you think you can maintain the low levels of inventory that are in the channel today or do you think there will be a replenishment that takes place?

Rebecca, it's a mixed picture.

I think there is one area in commercial PCs where channel inventory is pretty darn low, and we may see a little bit replenishment, but we believe we are well served by, you know, improving our cycle time into the channel and are continuing to look for ways to tighten up the whole supply chain.

So I don't think it's anything significant that I would want you to think about in your modeling.

And then as a follow-up to that, can you comment a little bit more specifically in terms of the percentage of product that went through the direct distribution in the quarter and then how that's ramping over the near term, where our expectations should be from that front?

Yeah.

Rebecca, it's Steve.

What we've quoted in the past are commercial-only direct numbers, and it turns out that in the U.S., commercial direct was up, like, one point to 47% from the total from last quarter's 46.

Worldwide we're looking at about 20% of our commercial business going direct.

At this point in time, our expectation is to, as we've said, is to create a balance, continue to create a between our channel programs and our direct programs, and I do not think you should look to see a major move up in the direct percentage moving forward.

It will be more gradual.

And then lastly just a quick point of clarification on the services.

The delay and the renewals that you saw in the first quarter, how strong is your visibility that those renewals will hit in the second quarter?

It's quite strong.

Great.

Thank you very much.

We'll take our next question from Laura Conigliaro with Goldman Sachs.

Yeah, just a clarification on the currency. [INAUDIBLE] Explain again why is it that you didn't see any currency.

You said it came too late in the quarter, but I don't understand how that fits with the mix of your businesses, particularly since there has really not been in the past much of a difference between the kinds of currency impact that you saw and the kinds that we saw from companies with a similar distribution internationally.

Laura, we're getting feedback on this.

Can you turn the speakerphone off ?

Thank you.

Nothing has changed in the way that we calculate our currency effect.

If you look at the major contributor, the Euro is certainly it.

It moved up during the quarter, but frankly after two months of the quarter, given our hedging strategy, the impact on revenue was virtually zero.

January itself, we started to see some impact favorable, but it was not enough to round up to 1% for the full quarter.

I can't say anything more than that.

That's the way the numbers fall out.

The same is true on expenses.

We had relatively little impact on expenses at this point in time.

We expect more in Q2 on both revenue and expenses.

Next question, please.

We'll take our next question from Andrew Neff with Bear Stearns.

Thank you.

Until December you laid out guidance of about 2% to 4% over the course of the year.

That's probably going to be challenging at this point.

Do you have a sense of where you think it could be for the year?

Second question is, when you recharacterize some of the expenses and things like that, how much of that impact is ESG and PSG and could you just restate what the bonuses were this quarter and how much is left on that?

And finally, you usually give a percent of sales direct.

Can you give that number as well?

Thanks.

Andy, I'm sorry.

We're having a little bit of difficulty hearing you.

We discussed the percent of sales direct a couple of questions ago, and I think the total that we gave in the U.S. for commercial was 47%, which is the way we've been tracking it.

It's up about a percentage point quarter over quarter.

Okay.

And I'm sorry.

We're having a lot of trouble hearing you.

In terms of your first question, that was a multipoint zinger.

In terms of your first question, 2% to 4%, certainly we're not at this point updating our annual picture.

The environment remains very challenging, and as I said, we're really focused on what we can control, which is our own execution and our performance in the marketplace as measured by market share gains.

I think it's fair to say that 2% to 4% is not beyond the realm of possibility based on what we see today.

On the other hand, it's very difficult.

You look at the experts who are, as I mentioned earlier, everywhere from -5 to plus 6.

That's a pretty wide divergence.

So we're not trying to predict the environment at this point.

We're focused on things we can control.

And just a few questions on bonuses, what that was on the --

-- so let me start with the impact of these reporting changes on segments.

First, we have provided completely restated four quarters of data for all five segments.

So you can look up those numbers and see what the changes are.

Everything that we have included in our commentary today was based upon those restated numbers.

So Personal Systems group profit improved $101 million on an apples-to-apples basis.

ESG profit improved around 40, 30 to 40 on an apples-to-apples basis.

So you can go back and do all the compares.

There is a variety of differences.

I'm not going to take your time to read through all the quarters here.

Okay.

On bonuses, we're not going to give you the exact number on that.

It was a modest change down from the prior quarter.

As you may recall, two, Q3 bonuses were low, Q4 was high.

It's kind of back down in between the two.

Okay.

Thanks very much.

You bet.

Next question, please.

Our next question is from Bill Shope of J.P. Morgan.

Thanks a lot.

Could you give us an update on the pricing environment and the printing hardware state?

And then also if you could give us an idea of where channel inventory levels lie for the supplies products?

And we've heard from some of the competitors that pricing would get more aggressive on the printer hardware side and I was wondering if you're seeing that at all.

Yes, we are seeing -- in the quarter we are seeing a competitive response to I think the very strong product lineup that we put out during '02.

In talking to the IPG people, they feel that they are seeing some response.

We think we are in good position to deal with that and it's not any kind of a response than what we would expect, but that's what happens.

You get a jump on folks with new products, all kinds of price points and innovation that we put out there.

It's kind of the way things go in this business.

So no news.

Okay, great.

One more final question.

Given the changes in your reporting segments, are we to assume there is no changes in your targets, your profitability targets by the full year for each segment that we received from the December analyst meeting?

Yes, that's a reasonable assumption.

Okay.

Great.

Thanks a lot.

Next question?

Our next question is from Richard Chu with SG Cowen.

Actually, thank you.

I wanted to just follow-up on those questions.

You did not answer the question on channel inventories for supplies, media, et cetera.

That's the best you could do, Richard, follow-up?

Come on.

Could you also discuss the extent of structural cost reduction that you may yet be able to achieve in the Enterprise Systems group from current levels?

Well, I don't know if I want to be too quantitative on this at this point in time.

We still have a long way to go on cost structure, both gross margin and operating expense in Enterprise Systems.

They lost a couple of percent operating margin.

Our goals, you know, remain the same.

We want to get that in, you know, mid to high single digits.

So there is a lot of work to do.

It is not, I hope, all going to have to be done with cost reduction.

I hope some of it is achieved through some top line improvement that allows us to get our OPEX in the kind of state that we want it to be in.

We still have substantial opportunity, given the goals that we have already outlined with regard to our restructuring efforts, we still have not made progress in some major countries in Europe.

So there is significant head count yet to come out.

ESG is a significant participant in that European head count.

We've got a lot more to do here on the plan that we outlined for you.

I think we are well ahead of plan from a timing point of view, but there's still more to work.

Just to clarify, Richard.

Bob's comments around France and Germany, those, the delay in taking our restructuring and head count reductions in France and Germany are because of legal issues, and workers councils requirements, and in essence that head count in ESG has not yet come out.

And as Bob mentioned, ESG carries a lot of head count in those two major countries.

And finally, Richard, your supplies, weeks of supply question is somewhere around four and a half weeks.

Do you consider that low or short?

No, that's about right.

I think we -- yeah, that's a little short.

I think we said five is perhaps okay.

So somewhere in the four and a half to five range.

Terrific.

Thank you.

Next question.

Next we have Joel Wagonfeld with Banc of America Securities.

Thanks.

Question for Bob.

I was wondering, with respect to the changes you made relative to Compaq's recognition of revenues and the recategorizations.

With respect to the revenues I think last quarter you had said that it was going to be pretty minimal this quarter and it was already in your guidance.

So I'm wondering how the $200 million that you mentioned today compares to that and then with respect to the recategorizations, just what changed incrementally now that you have decided to make the change now versus, you know, in a previous quarter?

Thanks.

Okay.

So the $200 million is within the range of what we had estimated at the time.

Again, we had never done this before.

So it was a bit of a mottled exercise but it was within the same range.

And again, I am not use that 200 as a reason for deviation from our quarter plan, but it is a reason to understand how Q2 might behave relative to Q1.

So keep that in mind.

Second question, remind me?

Just why the change in the recognition.

Yes.

The reclassification.

You know, it's a pretty practical answer.

We could only get so much accomplished when we began reporting together as one company.

We talked about whether we could and should do this and all the relevant restatements at the same time and felt that we could not do it.

We wanted to get to a more stable, integrated reporting state, which we got to in Q4, so that we could effectively model the restatements that we gave you here.

There was no grand theory.

It was just a matter of what we were able to do.

Next question, please.

Our next question is from Ben Wright with UBS Warburg.

Yeah, good afternoon.

Thanks.

I was wondering with regard to Imaging and Printing, a couple of things.

Where are you with the big bang?

Where do you think the products are right now and as you look out into future quarters?

And as a follow-up to one of the previous questions, you talked about pricing that you are seeing now.

And then vis-a-vis your cost structure, how are you prepared for that?

Thanks.

So with regard to your "big bang" questions, the vast majority of the "big bang" products in the consumer market were rolled out in 2002, if I'm understanding your question appropriately.

So there was a fairly big launch in the May-June time frame and then another big launch getting ready for the Christmas season.

So most of those are out.

In this quarter we did have the introduction of some commercial "big bang" products.

We used the Sub 1,000 color laser jet in the commercial market.

That's a big deal to get a color laserjet at that price point, but with the exception of some of those products in the commercial market, most of the big bang products are now out in the marketplace, if I -- did I understand your question correctly?

Yeah, it was trying get a feel for how many more were to come.

By the way, we're going to continue to launch new products, but the big bang plan is coming to a conclusion now.

And then with regard to pricing?

I'm sorry.

Would you repeat the pricing question?

Yeah.

You mentioned that you are seeing some competitive response right now.

How do you see that playing out, you know, a little longer term?

And vis-a-vis your cost structure as well?

How are you prepared for that?

Well, one of the things that we have spent a lot of time achieving over the last two and a half years is, in fact, the world class cost structure in the printing and imaging business.

We have achieved that.

And so it's one of the reasons that we could go into the low end in the consumer space, for example, and improve our profit margins and gain 20-plus points of market share.

It's one of the reasons why we can introduce a Sub 1,000 commercial color laserjet printer and continue to perform well in terms of profitability.

So we think from a cost structure point of view, we're the best positioned company.

We think from a technology and a capacity point of view, we're the best positioned company.

So we're prepared for competitive pricing.

We think frankly we have the cost structure everyone else is trying to beat.

Okay.

Thanks a lot.

We'll take our next question from Walter Winnitzki with First Albany.

Yes.

I actually have just one question.

I wanted to focus my question on the Enterprise Systems group.

Carly, in your opening marks you discussed your fact that you were pleased with the market share gains that you had seen, but if you look at the revenue performance in Enterprise Systems group sequentially was down 6% when most of your major competitors showed sequential improvement, and I think in most of our models, that will probably be the area that came up on the short end the most.

Maybe you can do discuss a little bit about, you know, where you see the issues and kind of what you are going to do to get momentum back in that area.

Thanks.

So a couple of things.

First, remember with the exception of Dell, our other enterprise competitors have calendar quarters and we have a fiscal quarter, and so you will see, on that basis, different patterns.

This isn't new but certainly it's the case this year as well.

And in fact, if you -- as we do, if you look at our quarter calendar quarter performance, you would see sequential growth in our Enterprise Systems business, point one.

Point two, the ESG story was consistent with the geography story we were describing for HP as a whole.

That is, the U.S.

Enterprise Systems group performance was below, saw seasonal declines whereas -- sequential declines, I'm sorry, whereas regions outside the U.S., specifically Europe and Asia-Pacific, with the exception of Japan, were up.

So geographically in Enterprise Systems, the U.S. was down sequentially, Japan was down sequentially.

The rest of our geographies, with the exception of Latin America, were up sequentially.

I think the third thing I would point to is the UNIX market continues to be very soft.

That's clear across the board.

High-end UNIX, although we gained share and took the number one position, high-end UNIX continues to be soft and low and mid-range UNIX also continues now to be replaced by Linux and Windows.

And then the last category I would point to which I think I mentioned briefly is our nonstop, servers nonstop is a platform that is used primarily in the telecom and the financial services base, and those industries continue to be quite challenged.

So all in all, obviously the overall spending environment in the U.S., we would like it to improve, but all in all, we feel very good about our market momentum in storage, we feel very good about our market momentum in industry standard servers, both Linux and Windows.

We're gaining share sequentially faster than any of our competitors.

We feel good about the UNIX leadership that we have.

We've got to continue to stay focused on those market share gains and work nonstop and the UNIX market generally.

And the U.S. is the issue there.

Just a quick follow-up.

Is the European mix in ESG greater or below the corporate average?

I would have suspected it was it was a little greater, but if I'm wrong.

I believe it is greater.

When you say mix, what do you mean?

Mix is greater.

Europe is a larger share of their revenue?

That's exactly what I was asking, yes.

That would have been helpful to you.

Yes.

So just to say a couple of other things.

When you do competitive compares, two things to keep in mind.

When you look at an ESG, it includes none of the related services that the other competitors will have in their corporate level results, and I don't know if you are adjusting for that or not, but it is a significant -- sometimes it's a significant difference.

The other thing I will say is that I have taken all of our segment numbers and restated them on a calendar basis, and it was a surprisingly significant difference.

You substitute an October, an HP October, the last month of our fiscal year for a January and you get a very different outcome.

And again, keep in mind that a number of the competitors that you are referencing, it's the end of their fiscal year, which often has an extra kick in terms of these sorts of things.

So just sort of the analytical background to all of these numbers.

Put another way, when Bob says you get a very significant difference, if you substitute an October for January, in essence what you get is sequential growth across the board.

Yeah.

And the change in terms and conditions, the deferred revenue also impacted enterprise to a degree.

So next question, please.

We'll take our next question from George Elling with Deutsche Bank.

Thanks.

One of the keys to the future is going to be the ability to transition your large install base to Newark textures.

Could you give us an -- new architectures.

Could you give us a sense of your customers' intentions on that matter.

And secondly, I think this is the last year that you are supporting the old HP 3,000 MPE Machines and I think there is still a large base of those.

What is your sense as to what they are planning to do?

Let me start with -- you are absolutely right.

Our transition plans are very important.

It's one of the reasons that I mentioned Alpha because obviously Alpha is a set of platforms and product lines where our transition and our intentions to migrate away from that platform have been very well understood by our customers.

We're pleased to see sequential growth in this quarter, which means that our customer retention programs are working and we're executing the product road map.

We are continuing to execute well transitioning customers in the industry standard server space from net server to ProLiant.

There does continue to be some net server revenue decline in these results, and you are going to see that, you know, tail off, continue to tail off, but we're feeling quite good about the customer retention there.

Itanium transition continues to go well.

I think I mentioned that we have -- continue to ship literally thousands of one- and two-way Itanium servers.

So I think all in all we're feeling pretty good about our customer retention programs.

Now, bear in mind that customers have had visibility to these transition programs now for a couple of quarters.

So they are well understood.

We have account teams who have been working actively with them through this period, and, you know, we continue to feel good about that.

With regard to your last question around HP 3,000, you are right.

That platform is really moving exclusively into customer support revenue, which is quite profitable for us as we no longer support that platform.

The tail on that business as you know, George, is close to 10 years now, and I think that's instructive because it demonstrates that we can transition customers in a time frame that makes sense to them.

We don't have to transition customers with a gun to our head or theirs, and as these transition plans tail, there is a nice customer support revenue stream associated with the planning.

Did I answer your question?

You sure did.

Thank you very much.

Next question.

We'll take our next question from John Jones with Soundview Technology.

Great.

Can you hear me?

Yes, John.

Oh, good.

We had me in on two different lines.

Sorry.

Carly, would you -- you talked about basically taking some market share in UNIX.

Would you talk about what your year-over-year growth was and expand upon the comments in UNIX to more than your high end superdome, question number one.

Bob, your hedging discussion earlier, you are talking sequentially.

If we talked year over year, might the number go to three to four points of impact?

And lastly, I may have missed it, but could you talk also about how many more heads you think have to go out of the business to get to your target?

So let -- let me start, John.

You are absolutely right on the hedging issue.

My answer was to the sequential revenue effect.

Our year-over-year revenue effect is about 3%.

That's very definitely the case.

We are not going to give any updated information with regard to head count reductions.

As I said earlier, we are still operating on the plan that we outlined for you a quarter ago.

We have no change, no update at this point in time and we've made a lot of progress against that.

We, as I said, still are not able to act yet in a number of countries in Europe.

So we will still see further head count reductions.

But you are choosing not to talk about how many more there are to go in your plan; is that correct?

At this point in time, that's correct.

Okay.

That's fine.

And then lastly, Carly, would you be willing to expand your comment about how your UNIX business is doing?

Yeah, so let me describe -- and these are again -- I'm using publicly available data here.

If you look at market share for UNIX across all platforms, what you will see is worldwide quarter-over-quarter Delta 2.2% share gain year-over year, 3.9% share gain.

If you look at the U.S., what you'll see is quarter-over-quarter share gain of 7.2%, year-over-year share gain of 12.4%.

And that, again that's data that's out from Dataquest as of Friday, I think.

Okay.

And that's 12/31 -- that's fourth quarter you are referencing?

That is fourth calendar quarter.

That's how they do all their data.

Can you qualitative or quantifiably talk about your high and midrange, how you are doing there?

Let me -- let's see.

They don't have -- hold on one second.

I'm looking at the market share data here.

Okay.

Again this is their data.

Midrange HP quarter-over-quarter Delta, .8% share gain.

Year-over-year, 3.9% share gain.

Entry level -- sorry.

I'm looking at this.

Entry level is -1% quarter-over-quarter share loss, and year-over-year, 11.7.

11.7 gain or loss?

Sorry.

Loss.

And total -- I'm sorry, high.

Did I give you high end?

No.

High end was quarter-over-quarter gain, 15.8%.

Year-over-year, 6 points of market share gain.

Great.

Nice numbers.

Thanks.

Okay?

Thank you.

We've got time for one more question, if there's one out there, Corey.

Our final question comes from Mona Arriba of the Rosetta Group.

I have no further questions.

Thank you.

Okay.

That concludes our first quarter conference call.

Thank you-all for joining us and we will talk to you soon.

Bye now.

This does conclude today's conference call.

We appreciate your participation.

You may disconnect at this time.