HP CFO Cathy Lesjak wouldn’t comment in detail on Dell’s announcement this morning that IT spending worldwide is weak, but said that the company isn’t changing its EPS guidance.
Lesjak did talk extensively about the cost saving measures that HP is undertaking in printing and shared service, and how they would be able to integrate EDS into their current cost cutting initiatives. And the kind of savings the company would see after the massive restructuring is over.
1:00: Music playing, conference about to start.
1:01: Conference starts. Standard Disclosures.
1:02: EDS: We announced on a long-term basis that the savings would be $1.8B annually. After reinvesting some of the headcount savings. That’s run-rate longer term. We didn’t put a specific time frame but not in the first 2 or 3 years but not very long either. In Q408, the accretive impact of EDS is a penny dilutive to neutral.
1:04: We’re feeling very positive about this transaction.
1:04: Q: Are you being conservative from EDS standpoint? A: Yes, by definition we are conservative, and you definitely will see that in just about everything we put out there. I think that’s true, but there’s risks that cause us to be even more cautious. This is a big company and we feel really good about our planning but now we’re kicking into execution.
1:06: Dell: We don’t comment on the current quarter. The best way to answer that question, at our analyst meeting yesterday, while we said there was still downward pressure on revenue, we’re still very confident in our EPS guidance.
1:07: Q: EDS — how do you get comfortable with the customers, and how much of the cost savings do oyu have to give back to the customers? A: The early cuts are in the folks that support the front-line folks that face the customers. The impact on the front-line folks is pretty minor. It’s where there is a clear overlap. In terms of the pressure on margins, we factored that into our analysis and have captured what we think will happen — with a bit of a hedge.
1:09: IPG Group: It’s a very tough market in the printing group, and even though we had negative unit growth, we gained share. What we’re seeing which is actually long-term positive for profits is that we’re seeing folks hold on to printers for longer. You place them in the market at a very low or negative gross margin so it’s good for folks to hold on to printers longer.
1:10: The move to wireless printers in the home is huge for Hewlett Packard because we don’t have to place as many units. The final point, we’re growing significantly in the graphic arts market.
1:11: How much does the dollar change affect your profits?: In PCs when the dollar moves, pricing reacts quickly, and the impact on profits isn’t that significant. Servers, they don’t reprice as quickly, so it’s more of a two to three quarter lag so they will have an impact on profit. But impact is marginal at best.
1:14: Operating profit in the PC business? Target has been 5-5.5% roughly, you’ve had component costs help over the past, will they continue to help? The way I view the benefit of the component price last quarter, which normalized last quarter, is that benign commodity pricing environment is what accelerated us getting to the 5-5.5%. What was always going to get us there is the cost cutting that we were doing. It just allowed us to get there faster.
1:15: Core HP Business, where are the cost cutting opportunities?: There’s no reason why HP can’t focus on getting it’s core HP right and do EDS at the same time. We’ve got a number of different initiatives. The ones we talk about the most are shared services — HR, IT, Finance, Legal. IT is the biggest, we’ve gone from 85 data centres to three pairs. Applications — we’ve gone from 6,000 applications that run the company, to just under 2,000. Real estate is also on plan. It’s material but not as large. The full-year run-rate savings in real estate is in 2010. No new news in shared services. Also intiatives in our business lines. The EDS acquisition — we’re now pulling EDS into those exact same cost initiatives.
1:20: In IPG, the good news is that IPG has been very profitable for HP for a very long time, but that’s the bad news too. It never got any management attention. We’re focusing much more on IPG. The more quickly we can get the costs down, it will allow us to go after units that are just not profitable enough and don’t make snese for us to go after today.
1:20: EDS 2% IT as a percenatage of revenue still realistic?: No. Outsourced services business is significantly different business, and internal IT has a different goal.
1:22: How is IPG going to be a focus from a cost perspective?: Biggest area is in cost of sales. Number of different things — some of it’s around the actual printers, and some of it’s around the ink. There’s real opportunity there. In 08 we are roughly 20% of the savings opportunity we realised over the course of 08. I will say that what we’d like to be able to do is take those savings and invest them into the franchise and expand the ecosystem. If the opportunities are not there there will be upward pressure on operating margins.
1:23: How important is share repurchase growth to get EPS growth?: I don’t think it will be necessary. Over the next 12-18 months we will temper back our share buyback. You won’t see us spend $11B on share repurchase in the next 12 months.
1:25: How do you think about the software business from an acquisition perspective?: We’ve made a bunch of significant acquisitions in the software space and we will continue to build on that. We’ll invest heavily in R&D. From a strategy perspective, the big picture software is really around owning management.
1:26: Keynote ends.
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