FOOL CONFERENCE CALL SYNOPSIS*
By Debora Tidwell (MF Debit)

Hewlett-Packard Company <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HWP)") else Response.Write("(NYSE: HWP)") end if %>
3000 Hanover Street
Palo Alto, CA 94304
(415) 857-1501
http://www.hp.com/

UNION CITY, CA (February 19, 1997)/FOOLWIRE/ --- Hewlett-Packard released first quarter 1997 results February 18th. The company had excellent financial results, particularly when taken in the context of tough year-over-year comparisons and a strong dollar. They were especially gratified to produce these results in a quarter where topline growth was a challenge. Solid operational and financial management, clearly an HP core competency, is paying off.

HIGHLIGHTS OF ACCOMPLISHMENTS. Overall they are quite pleased with most aspects of their results. Their 15% earnings growth was strong and was achieved in comparison with their best quarter of 1996 when earnings rose 31%. Their operating and net profit margins were terrific and the balance of profitability across the company was reasonably good. In addition, cost of sales behaved extremely well. They did a decent job on operating expenses. Asset management was excellent, driven in part by their great progress on inventory, and they had a superb quarter for cash generation. The one area where the news is not as strong is orders. But, when they look at the quarter as a whole, their ability to achieve these levels of profitability and profit growth in a less-than-robust demand environment is notable. It is quite unusual to achieve strong profitability when growth is slowing.

COST OF SALES. This quarter's cost of sales, 65% of revenue, is a really great outcome. Almost all of their businesses had lower cost of sales in Q1 than in Q4, in some cases much lower. A few contributing factors follow. In PCs, the pricing environment is better than it was 6-9 months ago, perhaps due to the slower rate of decline in memory and microprocessor prices. In Laserjets, the weakening yen is helping cost of sales. In inkjets, a higher proportion of revenue coming from supplies helps gross margins. They are very happy with this cost of sales result, but they are not suggesting that there has been a fundamental change in this area. They are seeing and expect to see in the months ahead, aggressive pricing in many markets. They will not only respond vigorously, but they will also take steps proactively to build market share and remain a price leader.

EXPENSES. On the expense side, a 10% increase is a good outcome, but not where they feel they need to be when revenue is growing 11%. Currency helped, while some small acquisitions and other factors hurt the expense line. As is often the case, the largest expense growth was in R&D. Once again, people expenses were the main driver of these costs. During the quarter they added about 800 people, most of these in the expense categories, with printers and PCs accounting for many of these new hires. This hiring is substantially less than their rate of hiring in the first half of 1996 and is well within their plan. Their use of temporary workers continues to decline and they are continuing to emphasize control of expenses for non-essential travel, meetings, and the like. So, this was a decent expense outcome, but not good enough given their rate of revenue growth.

MARGINS OVERVIEW. On the bottom line, net earnings were $912 million or $0.87 per share. This compares quite well with the strong $0.75 per share (split adjusted) they reported a year ago. They are very happy with operating margins of 12.4%, which is below the 12.9% of a year ago, but is a very healthy sequential increase over the 8.7% in Q4. They are also extremely pleased with the net profit at 8.9%. This is their highest net margin in over 8 years. They believe that net margins above 8% are in the upper range of what is reasonable for them to do. This quarter's 8.9% surpasses their year-ago figure of 8.5% and is a big step up from 6.4% net in Q4. Net margins in printers and their service and support businesses were especially healthy.

BALANCE SHEET HIGHLIGHTS. Regarding the balance sheet, they were especially happy with inventory. A year ago in Q1 they had inventory growth of 54% and revenue growth of 27%. Clearly they were not happy with inventory growing twice as fast as revenue. Today they are reporting a decline of 8% in inventory on 11% revenue growth. As a percent of revenue, inventory is down from over 20% a year ago to 15.8% today.

WHAT THEY SEE GOING FORWARD. The first quarter was characterized by slower growth but outstanding profitability. As they start Q2, they are in a strong position in many markets. They have broad channel presence, ambitious new product programs in a number of markets with lots of opportunities including hardcopy, PCs, servers, services, and others. In addition, they have a customer-centered computing strategy that enables them to help customers integrate mixed environments.

TURNAROUND IN SLUGGISH SEGMENTS. They are seeing some encouraging signs in some markets where growth has been sluggish such as semiconductor test, chemical analysis, and components. Financially, they are well-positioned to compete with lean, responsive expense structures and strong asset management. They can and will invest and price aggressively in the growth markets that they are pursuing.

CHALLENGES AHEAD. There are some reasons for caution looking ahead. They have another tough compare against last year's strong Q2 when orders increased 24% and revenue grew 33%. It's not clear when they will see a return to growth in some key non-US markets, especially Germany and Japan. Furthermore, the dollar has strengthened dramatically against the yen and the d-mark in just the last two months. This can translate into slowing dollar growth rates and importantly more intense pressure from their international competitors. The first quarter net profit of 8.9% is wonderful, but the competitive environment will not allow such profitability for very long. A 2-point increase in gross margin is unprecedented and is not indicative of what they can expect going forward. In this business, increased gross margins can be a precursor to more aggressive competition in the pursuit of more growth. The only real question is when and at what rate pressure on gross margins will arise.

ORDER GROWTH DETAILS BY GEOGRAPHY. Total orders grew 9% and were $11 billion. Sequential growth was 10%. US orders were $4.2 billion, an increase of 7% over the same period last year. Orders from outside the US totalled $6.8 billion, up 9% from a year ago and 27% from last quarter. They consider a 9% dollar order growth to be an acceptable outcome when compared to last year when orders grew 29%. Helped by favorable currency impact of 6% in Europe, they not only have a very tough compare, but they have an approximately negative 2% currency impact this year hurting them in Europe and in Asia/Pacific. Asia/Pacific produced their strongest order growth, with stronger growth in Northeast Asia, Korea, and Austral/Asia. Japan was down in dollars and up in local currency. Overall in Asia/Pacific currency impacts hurt them, particularly in Japan, Korea, Indonesia, and the Philippines. The currency impact in Europe was unfavorable, with orders growing 7% in dollars and 10% in local currency. Their major markets were at about the same rate, except Germany which was below the European average except for strong growth in PCs. Orders were down by a few points in Germany, which is their largest market in Europe. The story was similar in Japan which comprises about 40% of their market in Asia/Pacific. Eastern Europe, the Middle East, Africa, Austria, and Israel showed very strong growth. Growth in the Americas was good with Canada leading. But, their consumer businesses in the US were somewhat below plan. As industry data has shown, the holiday selling season was not as strong as many had hoped.

CLEANING UP THE CHANNEL. In addition, they have continued to work with their channel partners, particularly in PCs, to manage sell-in to the channel in ways that will help keep the channel inventory in better balance. These efforts led them to delay and in some cases even cancel orders and this affected their growth rate during the quarter. This is in contrast to the first quarter last year when the channel was aggressively placing orders and building inventory, which of course contributed to HP's second half slowdown in 1996.

MANY FACTORS IMPACTED ORDER GROWTH. There were many factors at work behind their 9% order growth. It is difficult to say with any precision how much each factor affected their reported growth. But, in taking currency, disks, and the channel effects described into account, their normalized growth would have been somewhere around 13%. They certainly would have liked a little better order growth, but given the factors mentioned, 9% is reasonably good.

ORDER AND REVENUE GROWTH OVERVIEW. Orders in computer products, services, and support grew by 10% and 10% sequentially. Revenue growth, for the most part, tracked order growth, with both close to plan. The sentiment at HP is that if they can get through Q2 as well as they got through Q1, they should be in a good position to produce a fine overall result for the year.

LASERJET. Growth in their HP Laserjet business was moderate compared to a strong Q1 last year, with growth rates consistent across all the major geographies. Orders for business Laserjets were somewhat soft, reflecting weak end-user sell-through in December, and corresponding channel adjustments in the month of January. Laserjet revenue growth was moderate. The top performers were the Color Laserjet, the newly introduced Scanjet 5P, the Laserjet 6P, and the Laserjet supplies business. The Laserjet 5 and 5si showed moderate growth against very tough comparisons.

LASERJET 5 FAMILY. Moderate unit growth for their Laserjet 5 family of workgroup printers was more than offset by price reductions. The 5si category met expectations but was below last year's outstanding introduction quarter. Marketshare for business Laserjets was maintained.

PERSONAL LASERJETS. Personal Laserjets showed nice growth with strong market acceptance for their recently introduced HP Laserjet 6P, especially in the US. They believe they have gained market share in the category.

COLOR LASERJETS. Another strong area of growth came from their HP Color Laserjet 5 with orders tripling versus Q1 of last year. Consequently, they have gained about 10 marketshare points.

SUPPLIES. With increased unit shipments, growth in supplies was quite healthy. Their computer business grew 12% versus Q1 1996 and increased 3% sequentially.

SCANNERS. Orders for scanners were up dramatically in terms of units. However, a shift to the lower-priced models and a price decrease in the higher-end flatbed platform resulted in only moderate dollar growth.

INKJETS. Inkjet order growth slowed from the very strong year-ago period, although unit growth continued at good rates. Two factors had much to do with the slower order growth. First, the timing of orders -- they had very strong inkjet orders in October 1996 as retailers stocked up earlier for the Christmas selling season. Q1 1996 orders were strong due to product introductions that did not occur this quarter. These timing shifts make comparison with last year's Q1 more difficult. They believe that these timing factors have a significant impact on this year's order growth rate.

SHIFT TO LOW-END PRODUCTS. Second, there was an industry-wide shift to the low end starting Q2 1996. This eroded average selling prices across the board for all vendors and also affected their comparison to Q1 1996. Taking these factors into consideration, inkjet unit growth this quarter was within the range of growth they have seen in the past. And, actual unit demand up, they believe they are gaining overall market share. They also saw slowness in the US and Japan.

REBOUND IN DEMAND IN ASIA/PACIFIC. On the bright side, they saw a rebound in orders from other countries in the Asia/Pacific region, especially in Korea, where they have successfully introduced products as that market enters its peak selling season. Also, their inkjet supplies business continues to grow at very high historical levels.

NEW APPLICATIONS FOR INKJET TECHNOLOGY. They remain enthusiastic about the opportunities in the inkjet market as new applications such as Internet printing and PC photography develop. Low cost color inkjet copiers, large format printing, and the continued growth of office color use all present themselves as growth opportunities for HP's inkjet business.

INKJET REVENUE GROWTH. Revenue growth was down from extremely high levels in Q1 last year. Their Deskjet line had solid growth in units but somewhat disappointing growth in dollars due to a less-than-robust Christmas season, intense price competition, and heavier than expected low-end sales. In spite of this, HP increased its market share in December so relative to their competitors they performed well. Although printer hardware revenues were below plan, the supplies business did extremely well. They usually don't talk about profits by business, but despite slowing revenue growth the overall inkjet business continues to produce healthy profits which are above plan and above the corporate average.

SERVERS AND PCs. As they have said in the past, HP is uniquely positioned in the computer platform arena by their strategy of embracing both NT and UNIX and of helping their customers integrate these two environments. They believe this is a much more customer-centric approach than many of their competitors who either boast about being a pure play in one operating system, or have weak relationships with Microsoft, or simply no expertise in UNIX. To reflect a more customer-centric approach to operating systems, they have changed how they discuss orders. Instead of dividing the discussion along the line of operating systems, they will discuss servers and desktop systems. PC revenue growth was strong, well ahead of the overall market growth and that of their top PC competitors. HP finished in the top 5 for 1996 in PCs. The top performers were servers, desktops, and home PCs. Mobile growth was slow -- they still have a lot of work to do here. Getting the business on track is a high priority for this year. But, overall, the PC business is in good shape. Computer systems posted modest revenue growth compared to Q1 1996. Enterprise systems which includes UNIX servers and the mass storage business performed well. Revenues from the consulting business showed modest growth. Workstation revenues, on the other hand, declined versus the same quarter last year. Workstation revenues are being driven by order slowness, frankly as they struggle to regain momentum in this changing business.

SERVERS. Servers enjoyed strong growth this quarter. Their HP Netserver family achieved exceptional growth across all platforms and geographies. This product line won more than 15 different top honors from computer industry magazines last year, more than Compaq and IBM combined. Their order growth rates lead them to believe that customers concur with these accolades. UNIX-based servers also did well and they saw a rebound in demand from US telecommunications customers. Products based on their new PA-8000 chip led growth.

DESKTOP SYSTEMS. On the client side, the news is mixed. Demand for commercial desktop systems, the Vectra line, was moderate primarily because they delayed the launch of their VL5 product to Q2 and are seeing weak orders for the older VL4 in anticipation of the new product. Additionally, European demand for desktops has been quite weak. Nonetheless, audits and surveys worldwide cited HP Vectra PCs as the best-selling Pentium Pro PCs in the 1996 reseller channel. Personal workstations, that is what they call performance desktop machines, based on the Pentium Pro chip and running NT grew nicely. This is good news and demonstrates the appropriateness of their mixed UNIX/NT strategy. They have yet to see a turnaround in the contracting UNIX workstation market. January's price reductions achieved leadership application price performance.

INFORMATION STORAGE. Orders in this business declined across all geographies compared with the first quarter last year because of the previous closure of their disk mechanism business which had orders last year of $54 million in this quarter. Order growth in storage solutions and high-end tape products, however, was very good. Sequentially, the group showed a strong rebound in the Americas and in Europe, offset by slight decline in Asia/Pacific. Finally, information storage revenues were down compared to Q1 1996, but up sequentially. With the disk mechanism closure complete, ISG returned to profitability this quarter. The strongest performer here was digital audio tape product line.

WORLDWIDE CUSTOMER SUPPORT ORGANIZATION. Their worldwide service and support organization has shown strong order growth in all geographies. Key growth areas were in software on-site support and hardware support activities. January traditionally produces a strong quarter in this business due to contract renewals and this year is no exception.

TEST AND MEASUREMENT. TMO booked its second billion dollar quarter with orders up 5% over Q1 1996, which had been a previous all-time record. They have seen somewhat of a rebound in the communications arena where they had double-digit order increases both year-over-year and sequentially. The wireless communications product areas are driving growth, with increased demand for RF component test products and PCS based station installations. Orders for their Access SS7 product, which helps telecommunications customers detect fraud in real time were outstanding. Orders for general purpose test products were also strong. Last year they entered the market for communications synchronization products and these are taking off. Demand for fiber optic test products is up dramatically. Semiconductor test equipment was down when compared to last year, but showed strong sequential growth. Automated test system, for testing digital ICs and flash memory devices continues to be significantly affected by the slowdown in capital expenditures in that industry. Test and measurement revenues were up 6% over Q1 1996 when they reported growth of 22%. Sequentially revenues were down 6%. Consistent with orders, wireless communications showed strength. Also contributing to growth were microwave test instruments for satellite construction, deployment, and repair. The one area that is still slow is semiconductor test, but there appears to be reason for optimism that the semiconductor market may be turning around. Revenue for their medical products business increased 9% over Q1 1996 and decreased 5% sequentially.

COMPONENTS. Orders declined 12% compared with the previous year. However, orders increased by 52% sequentially which leads them to believe that their distribution pipelines are gradually stabilizing. New infrared and fiber optic products are driving some growth. The acceptance of CDMA as a standard by the telecommunications industry has fueled orders for their microwave products and infrastructure hardware. Components revenue was down 4% compared to last year and down 6% from last quarter.

CHEMICAL ANALYSIS. This business showed 12% growth over last year. Worldwide orders for their mass spectroscopy division grew very strongly as several new products continued to be well received. Gas chromatography showed modest growth over last year. Liquid chromatography product orders continued to perform well over all geographies especially in Asia/Pacific. Chemical analysis revenue increased 5% over Q1 last year, but decreased 5% sequentially.

MEDICAL. Orders grew 6% over Q1 1996 with growth in all 3 geographies. The customer services division led the way with very good growth from international orders and in value-added services. Imagepoint, their imaging business' first entry into the radiology market achieved strong growth. Omnicare 24C, their color compact patient monitor has also been well received by the market.

ORDERS LOOKING FORWARD. This was a quarter in which they had extremely tough compares to the year-ago quarter, one of the strongest in their history, one in which they had 32% international growth. As they look to the next quarter, they are probably facing more of the same. In Q2 last year, they had order growth of 24%, with US orders up 33% and international orders up 18%. In addition, they will probably have more of an adverse currency effect than they are having this quarter. Despite these impacts, they are very encouraged by achievements this quarter such as Test and Measurement hitting another billion dollar quarter, continued strength in the server businesses, their rollover of the VL5 desktop PC, strong unit demand in their printer business, and components showing sequential growth.

INCOME STATEMENT. Revenues for the quarter were $10.3 billion, an increase of 11% over Q1 1996, up 1% sequentially, and just slightly below HP's internal plan, a very respectable result considering the difficult comparison in Q1 1996 when revenue grew 27%. Currency also worked against them. Their backlog increased during the quarter by $679 million compared to an $814 million increase in Q1 of 1996. Ship-to-order ratio was 94% which is in the normal range for Q1. To some degree their revenue result was affected by the same things that have affected others, such as a somewhat disappointing Christmas season and weakness in key economies such as Germany and Japan. Revenue growth was also held back by negative currency effects and the fact that there were DMD revenues last Q1 and not this year. So, normalized, revenue growth would have been a few points higher than the reported 11% were it not for these two factors. Also, the tough compare issue was substantial. If revenue growth had been in the low 20s in Q1 last year, still a strong result, as opposed to the high 20s actually reported, this quarter's revenues would have represented growth within their stated goal of 15-20%. They're not satisfied with 11% growth, but there are some mitigating factors that have to be considered when evaluating this result. All-in-all, it was a decent showing.

REVENUES BY GEOGRAPHY. US revenue grew by 14% while international grew 9% over Q1 1996. Revenue breakdown this quarter was 41% from the US and 59% international. The country detail provided in the order comments applies to revenues as well.

COST OF SALES. The last time they had operating profits north of 12%, Q1 1996, they had 27% revenue growth to work with. To achieve 12.4% on 11% revenue growth is quite an achievement. One of the big contributors to this result was cost of sales. Cost of sales as a percentage of revenue was 65% for the quarter compared to 64.5% in Q1 1996, up only 0.5%, the lowest year-over-year increase in recent memory. Sequentially, the cost of sales ratio was down 2.2 points from 67.2%, which included DMD losses. Excluding these losses, the sequential decrease was 1.8 points. This result was achieved despite the highly competitive markets in which they operate and substantially lower revenue growth. On the other hand, Laserjet component costs were helped by the strong dollar against the Japanese yen. They are working very hard to improve their overall supply chain management, the objective being to lower their exposure to inventory writedowns, returns, and price protection, all of which affect the cost of sales ratio.

CHANNEL INVENTORIES. Channel inventories are in good shape right now. They still expect competitive pressures to squeeze gross margins, it's just a question of when and by how much. Competition remains fierce in all of their businesses and, recently they have been seeing a mix shift to lower end products in their inkjet line which will put pressure on the cost of sales ratio. They advised analysts to not assume, when updating their models, that gross margin pressures will abate based on one quarter's result.

OPERATING EXPENSES. As a percentage of revenue, operating expenses were flat compared to Q1 last year, but down 1.5% sequentially. This combined with the sequential increase in gross margin resulted in a substantial improvement in operating margin for Q4. Overall expenses grew 10% over Q1 1996 and decreased 5% from Q4. Year-over-year, R&D spending was up 14% while SG&A expense grew 9%. Currency had about a 2 point positive effect this time, so the underlying expense growth was in the 12% range, higher than they would like with slower revenue growth, but certainly under control.

PROFITS. As a result of all this, operating profits were up 7% from a very strong Q1 1996 and operating margin was 12.4% versus 12.9% in Q1 last year. Just when they had decided to narrow their operating profit goal from 10-12% to 10-11% to better reflect competitive realities, they produced 12.4%. In spite of this, they still believe that 10-11% is more realistic.

INTEREST INCOME AND OTHER. The interest income and other category was up $39 million versus Q1 1996, but down $31 million sequentially. First of all, keep in mind the interest income and other category includes both other income and other expense. With that in mind, the year-over-year increase was driven by abnormally high expense in Q1 last year related to buying out their Brazilian partner, dissolving the Taligent joint venture, and other miscellaneous one-time expenses which together amounted to about $35 million. They did not have a comparable level of expense this year. The sequential decline was driven mainly by lower interest income due to decreased cash balances in Puerto Rico as compared to Q4. Due to changes in the tax law, they have been bringing short-term cash back from Puerto Rico and paying down US borrowings. Lower debt levels also explain why interest expense was down by $16 million over Q1 1996 and down $46 million sequentially.

BOTTOM LINE. The provision for taxes as a percentage of earnings before taxes was 30%. As of now, this is also their best estimate for the balance of the year. Net earnings were up 15% over Q1 1996 and up 41% compared to last quarter. Net margin was 8.9% compared to 8.5% last year and 6.4% last quarter when they still had DMD effects. Return on assets was 10% this quarter versus 10.2% last year and 9.3% last quarter. This is a four-quarter rolling calculation, so this improvement is more significant than it appears at first glance. Return on equity was 20.6% this quarter compared to 23.1% in Q1 1996 and 20.3% last quarter. Earnings per share was $0.87, up 16% from last year's $0.75 per share as restated on a post-split basis. Average shares outstanding on a fully diluted basis which includes the common stock equivalent effect of employee stock options was 1.05 billion for both this quarter and Q1 1996, as restated.

BALANCE SHEET. Asset management and related cash flow went extremely well this quarter. Their initiatives in supply chain management are producing great results, particularly in the inventory area, both on their books and in the channel. Net cash increased by $1.3 billion during the quarter, ending at a positive $1.1 billion. Again, they define net cash as cash, marketable securities, and long-term cash included in the other assets category less total debt. The amount of cash in Puerto Rico which is reported as other assets was $1.2 billion, unchanged from last quarter. Even though they were bringing short term cash back from Puerto Rico due to the tax law changes, it is still to their advantage to maintain a certain long-term fixed income investment there which is reported in other assets. Net cash increased during the quarter as cash generated from earnings, decreases in accounts receivable and inventory, depreciation and amortization, and stock issuances exceeded cash used for PP&E (property, plant & equipment expenses), share repurchases, and dividends. The major sources of cash during the quarter were net earnings of $912 million, decreases in accounts receivable and inventory of $285 million and $169 million respectively, depreciation and amortization of $337 million, stock issuances of $178 million, and decreases in other balance sheet items of $54 million. Major uses of cash were a net increase in PP&E of $367 million, stock repurchases of $172 million, and $122 million in dividends.

ACCOUNTS RECEIVABLE. Accounts receivable grew by 6% from the first quarter of last year on revenue growth of 11%. Sequentially, A/R decreased by $285 million or 4% while revenues increased by 1%. Accounts receivable to sales ratio was 17.4% compared to 19.3% last year and 18.5% last quarter. This ratio typically drops from Q4 to Q1, so the more meaningful comparison is to Q1 last year. Obviously slower revenue growth makes A/R management easier, but this is still an excellent result.

* A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. Note: Statements made by a company other than historical information may constitute forward-looking statements for which the company can claim protection under the Safe Harbor Act. Please consult the company's filings with the SEC for information on risk factors which might cause actual results to differ materially from the information contained in these forward-looking statements.