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

Hewlett-Packard Corporation
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3000 Hanover Street
Palo Alto, CA 94304
(415) 857-1501
http://www.hp.com/

UNION CITY, CA (May 17, 1997)/FOOLWIRE/ --- Hewlett-Packard released their second quarter 1997 results after the market close on May 15th. The company noted that as of now, they are no longer comparison challenged compared to the year-ago periods which is nice for the upcoming quarters. Gross margin was quite good and expenses were under reasonable control, but earnings per share fell short of expectations mainly due to a revenue shortfall. Operational and financial management initiatives such as supply-chain management continue to produce positive effects on gross margins. But, topline growth was below expectations, even when taken in the context of the tough comparison and the strong dollar. There has definitely been some underlying slowing over and above these extenuating circumstances and they explained where, why, and what they are doing about it.

OVERVIEW OF Q2 RESULTS. Overall, the good news from their perspective is that they achieved modest profit improvement despite much slower growth. Decent management of expenses and costs was the key to profit growth. Order and revenue growth were soft and they saw further slowing in growth rates from what they had achieved in the last few quarters. This topline slowing was certainly the main driver of the shortfall in their performance. Addressing the factors behind the slowdown is the key issue they face going forward. Fortunately, many other dimensions of their results were quite good. On the positive side, earnings growth outpaced revenue growth and they achieved good profitability. Earnings were up 8%, comparing against a strong quarter last year where earnings rose 25%. In addition, their operating and net profit margins were quite strong, especially considering the environment. Cost of sales behaved very well, and they slowed the growth of operating expenses from 10% in Q1 to 7% growth this quarter. They think they did a fairly good job in responding to the slowdown in demand and they will take further actions if conditions require. It was another very good quarter for asset management including inventories. Cash generation was very strong.

ORDERS AND REVENUE OVERVIEW. All in all, it was a very good performance on many fronts, but the order and revenue growth numbers raise questions and the company offered some context for those numbers. First, it is undeniable that order growth of 3% and revenue growth of 5% was below expectations. These are the lowest growth rates they have reported in a long time. There is no simple explanation. Some factors like currency and weakness in parts of Europe affected many businesses. Other factors were specific to different businesses. They knew for the last 12 months that this would be a difficult order comparison so it is great to have it behind them. They had a tough hill to climb, given a 33% USA growth last year when the channel became over supplied.

ORDER GROWTH. As a result, the order picture by business was mixed. In addition, forces they talked about in recent quarters were still at work across their businesses. The strong dollar reduced order and revenue growth by about 3%. They are comparing to Q2 1996 when orders grew 24% and revenue increased 33%. They are also comparing to a quarter in which they took in about $53 million in disk drive orders. Total orders grew 3% year-over-year and were $10.4 billion. Sequentially, orders declined by 5% or by $580 million.

ORDER GROWTH BY BUSINESS UNIT. Last year at this time, they reported 24% order growth. However, order softness was apparent in many businesses including printers, UNIX servers, and parts of their PC business. They believe that several factors were at work -- slower overall market growth in some businesses, flat markets in the US, continued softness in Europe, and competitive pressures affected different parts of the company to varying degrees. Customer support, Test and Measurement and their other Measurement businesses did pretty well as did some parts of the PC business, Components, and Medical. Orders in computer products, services, and support rose 1% over Q2 last year, but declined 6% sequentially. Their channel programs are in much better shape now than last year when they had to adjust Q3 orders downward in PCs and printers. Fortunately, their tough compares in the semiconductor and wireless test business also seem to be behind them and they think these markets are picking up.

ORDER GROWTH BY GEOGRAPHY. US orders were $4.6 billion, down 2% compared with the year ago period when they grew domestic orders 33%. International orders totalled $5.8 billion and were up 7% despite unfavorable currency impacts. International orders were 56% of this quarter's total. In Europe they had a mixed situation where orders were down 1% in dollars and up 3% in local currency. Good growth in Italy, the Nordic, their multi-country regions, and Pan-European activities were offset by weakness in Germany, France, and Iberia. As for Asia/Pacific, order growth rates grew 16% in dollars and 24% in local currency versus last year and also grew sequentially. Orders from Japan were down 6% in dollars and up 5% in yen. Orders in the Americas rose 3%. Latin America had an outstanding quarter versus last year and had strong sequential growth. Brazil, Mexico, and Argentina did especially well. They are not ready to predict a turnaround in many of their key European countries and Japan, but they are encouraged by the strength they have seen in several areas.

BREAKDOWN BY BUSINESS UNITS

SERVER PRODUCTS. UNIX workstations were very soft again this quarter and HP's high-end UNIX server business was weak. They are not in a strong part of their product cycle in these areas and they are working hard to get them on track. They have an announcement scheduled for May 22nd pertaining to high-end UNIX servers.

UNIX Servers. For their UNIX server business, overall performance had a slight increase with strength at the low end and mid-range and weakness at the high end. They achieved excellent growth at the low end and good growth in the midrange. The reason for the success of these families is low price points, ease of upgrade, and excellent price performance measured in both transactions per minute and by the Spec Web '96 benchmark which is the standard for Internet performance. They see weakness in the high end of their commercial UNIX servers, with good response to the introduction of their new SPP2000 Technical Server from Convex division. They recently installed a 256-CPU (upgradeable to 512 CPUs) version of it at the Jet Propulsion Laboratory. They are leveraging the kind of performance that this architecture provides to develop their next generation of high-end commercial servers which they will introduce the week of May 19th. This will provide the growth path to higher performance that their customers have been looking for and will enable Hewlett-Packard to aggressively pursue new business opportunities. To further capitalize upon these synergies between their technical and commercial UNIX servers, HP has consolidated them into a single organization.

PC Servers. PC server growth was very strong, especially in the US and Asia/Pacific. Europe was slow for them. The midrange of this family, the HP Netserver LH departmental servers, has been especially strong. Their focus on delivering manageability, availability, and performance is spurring demand for their HP Netserver family.

CLIENT PRODUCTS. This category includes desktop systems, mobile/handheld products, and home PCs. PC revenue growth was modest by recent HP PC growth standards and compared to what they described as exceptional growth last year in Q2. Desktop revenues were flat but unit growth was quite good. PC server revenue was very strong with particular strength in the midrange. Order growth in the PC business was also slow this quarter. PCs had an especially tough compare with last year and weakness in Europe was pronounced. Concerning both PCs and printers, it is important to remember that a year ago, orders from the channel and HP's shipments into the channel exceeded resellers real needs. Comparing this quarter with a year ago, this translates into lower growth rates.

Corporate Desktop PCs. Corporate desktop PC orders showed solid growth in units but a slight decline in dollars. Average selling prices declined, in part driven by mix and in part due to declining memory prices. Growth in Latin America and Asia/Pacific was offset by weakness in North America and Europe -- particularly Germany, France, and Iberia. They may not have been as aggressive as they should have been in the commercial desktop market this quarter.

Performance Desktop PCs. UNIX workstation revenues were again weak. PC workstations, which they call the performance desktop PC, showed excellent order growth. These are Pentium Pro systems with Windows NT. They are working to achieve a balance between the growing acceptance of NT and the slowdown in the UNIX workstation market. Additionally, their continued weakness in UNIX workstation orders reflect both the growing role of NT in technical markets, and a slower than expected migration to their UNIX 10.2 operating system. They are, however, happy to see 10.2-based units increased to 50% of April orders, a positive trend. They are also seeing strength in the C180 midrange and they just introduced a new model J282 dual processor machine. Looking at the future of the technical desktop, they see a 3-tier segmentation of customer needs with commodity PCs using shrink-wrapped software performing roles like PCB design, UNIX and NT sharing roles in activities like design of small ASIC and assembly modeling, and high-end UNIX performing complex tasks such as crash analysis. With this in mind, they have combined their performance desktops and workstation activities to achieve PC scale economies for UNIX and NT and to leverage their UNIX graphics expertise across the two operating systems. They have a new graphic offering in the works that they think technical users will find very exciting. In fact, one announcement was made introducing Direct Model, a 3-D visualization technology available for multiple UNIX systems and Microsoft Windows-based environments.

Notebook PCs. Mobile PCs had strong sales, on a small base, led by new product offerings. Efforts to get their act together in this business seem to be paying off although they still have a way to go. Orders for notebook PCs rose strongly thanks to more competitive pricing and some recent additions to a product line they have been giving special attention. These include the HP Omnibook 800 MMX, a 3.9 pound notebook that includes Intel MMX technology; the new high-end Omnibook 5700, which is a full-featured system designed to be a true desktop alternative; and the Omnibook 2000 which is value-priced somewhere between $2000-3000.

Handheld Products. Handheld product orders declined slightly but they saw excellent acceptance of their new 300LX and 320 LX products with the Windows CE operating system.

Home PC Products. Home PC revenue declined versus a huge Q2 1996. Home PCs are still a fairly small percentage of their total business and overall PC profits were strong and well ahead of plan. Home PC orders declined versus Q2 last year, as planned, but the decrease was not as large as expected. Last year they launched their new products in February, resulting in strong second quarter growth. This year they moved the introduction to January which pulled orders into the first quarter.

HARDCOPY PRODUCTS. Printer orders slowed significantly compared with a year ago. Slower growth in the overall printer market as well as competitive pressures affected HP's results. They believe they are maintaining their market share in most printer categories.

Laserjets. Their Laserjet revenues were actually down a few points from Q2 last year even though they have maintained market share. Laserjet profits have been at unsustainably high levels for quite some time. Because of this situation and the volumes they are running, they were recently able to take aggressive pricing action in an effort to stimulate demand in this slow market. Although these lower prices weren't announced until May, they still had to recognize a significant amount of price protection for inventory already in the channel. This had a negative affect on LSG's revenue growth this quarter as price protection is booked as a reduction to revenue. Overall, the HP Laserjet business didn't grow due to slowness in the US and Europe compared to the solid growth they saw in Q2 last year when they introduced the well-received Laserjet 5 and launched aggressive rollover pricing and promotions. The decline in the US is due to managing backlog and channel inventory. Sell-through was flat compared to last year. Europe was slow due to weak economies and currency effects. Other geographies were mixed. They had extremely good growth in Latin America, especially in Mexico and they had good growth in Asia/Pacific. Currency continued to affect their orders in Japan. Quarter-over-quarter order growth for Personal Laserjets was strong but was mitigated by a decline in business Laserjets. Color Laserjet orders were impacted by aggressive price reductions. Although they have maintained market share, they recently announced significant price reductions on their entire line of network Laserjet printers. The move follows a recent announcement of a strategy to reduce total cost of ownership for their customers. The favorable yen impact on engine procurement and their sheer volumes make it easier to absorb these price reductions.

Printer Supplies. Printer hardware sales were flat while supplies turned in strong growth. Supplies orders grew, but more slowly this quarter due to the Laserjet 5si toner coming off allocation in the USA and due to European currency impact. Inkjet supplies achieved very good growth this quarter.

Scanners. Scanners grew slightly as the market took a dramatic shift to the lower-end models, but unit growth was very high.

Inkjet Printers. On the inkjet side, revenue growth was up moderately from extremely high levels in Q2 last year. Unit growth was faster than revenue growth. As a result, they managed to maintain market share in the US which validates their product program. In spite of this period of slow market growth they are very excited about their inkjet business prospects. The inkjet business continues to produce healthy profits which are above the corporate average. Inkjet order growth was below the stellar growth of Q2 1996. This softening reflects the slowing in the worldwide inkjet market, currency impacts, and some availability issues. The US grew solidly quarter-over-quarter with better sequential growth, while Canada showed a decline. Latin America posted superb order growth quarter over quarter while Europe posted a moderate decline. Asia/Pacific had good growth quarter over quarter even with the continuing decline in Japan. In inkjets they are facing an extremely tough compare this quarter as Q2 1996 were not only excellent in both printer unit and dollar growth, but at historical highs in supplies. This quarter, they are facing not only currency impacts and availability issues, but some continued price erosion although this has slowed in recent quarters.

New Inkjet Categories. They also expanded into a number of new inkjet categories. The Officejet Pro 1150C Color all-in-one product is doing extremely well worldwide. Other introductions included HP's first large format printer designed specifically for non-technical applications, a digital camera, and photo-quality color desktop printers. All of these new introductions should benefit from users' growing interest in color printing from the Internet. Next quarter offers an array of new products in many categories -- all-in-ones, copiers, and new Deskjets. In addition, the new PhotoSmart photo printer and scanner will ship. They feel they are well positioned for the Back-to-School and Christmas buying season. They believe that they are maintaining marketshare in the US inkjet printer market. They also believe they are maintaining share in Europe.

INFORMATION STORAGE PRODUCTS. Information storage revenues were up compared to Q2 1996 and sequentially and reported good profitability with the disk mechanism closure behind them. Again, their strongest performer was the digital audio tape product line. Overall, orders have continued to decline due to the disk mechanism closure which accounted for $53 million in orders in Q2 last year. High-end tapes and storage solutions are doing quite well. Both the Americas and Europe posted declines, but Asia/Pacific had strong growth and they believe that Asia/Pacific will continue to be a good growth area in this business.

SERVICES & SUPPORT. Revenues from the consulting business showed modest growth although the strong PSO order performance this quarter is very encouraging. HP's worldwide Services & Support organization showed strong order growth. All major geographic regions experienced double digit growth over Q2 1996. Hardware support activities and software on-site support showed equal strength. Their computer professional consulting service organization, Consulting and Systems Integration, experienced strong broad-based growth across all geographies. Telecommunications and Internet-based consulting activities were particularly strong.

TEST & MEASUREMENT. Test and Measurement revenues were up 3% over Q2 1996 when they reported growth of 22%, so a tough compare here. Sequentially, revenues were up 11%. Revenue comparisons get a lot easier for TMO in the second half. Wireless communications again showed strength in RF component test associated with PCS base station installations. Semiconductor test revenues were slow, but orders came in strong which is an encouraging sign. TMO reported very strong profits. Their Test & Measurement businesses achieved a second consecutive billion-dollar quarter with 14% order growth over the same quarter last year. The growth was broad based across all product groups and most geographies. Their big customers are again driving growth after last year's slowing caused by the weakness in semiconductor and telecom industries. The US grew slightly over Q2 1996 and moderately over Q1 1997. Latin America posted excellent order growth and Europe was strong. The strongest increases came from Asia, without Japan, where they saw excellent growth in Taiwan and very strong growth in Korea. They showed excellent results in wireless communication driven by base station and mobile station test. Their Access SS7 product which helps detect fraud in real-time also showed very strong growth. Semiconductor test equipment showed excellent growth, driven by the recovery in the industry as well as several competitive wins.

COMPONENTS. Components revenue was down 3% compared to last year and increase 8% last quarter. Orders grew by 12% over Q2 1996 and increased slightly sequentially. As they said last quarter, their distribution pipelines do seem to be gradually stabilizing. This improving trend in the pipeline was driven by new products in fiber, infrared, and motion control which is used for industrial applications and office automation equipment. Automotive exterior LEDs are also experiencing good sequential growth.

CHEMICAL ANALYSIS. This business showed a 2% increase in orders over Q2 1996 with the strongest order performance coming from their mass spectrometry product line driven by strong acceptance of its new MS detector. Overall, the business grew slightly in the US, Latin America, and Canada. Europe showed moderate growth over last year. The strongest growth was in Asia/Pacific without Japan. Japan reported a decline due to currency impact.

MEDICAL. Revenue from the medical products business decreased 4% over Q2 1996 and was flat sequentially. Chemical analysis revenue increased 7% over Q2 last year and increased 5% sequentially. Orders in this business grew 10% over last year. The growth was broad-based coming from all divisions. The Americas led order performance over last year and was up substantially over last quarter. There was good growth in Asia/Pacific and modest growth in Europe.

INCOME STATEMENT

REVENUE GROWTH. Revenues for the quarter were $10.3 billion, an increase of 5% over Q2 1996 and flat sequentially. This is against an extremely difficult comparison to Q2 1996 when revenue grew 33%. Currency also worked against them by approximately 3 points. In a few parts of the business where orders were strong, Test and Measurement and Inkjet Supplies, they fell short of their production and shipment plans. However, even taking the tough compare and other mitigating factors into account, it is clear that there was real slowing in several parts of the company this quarter. Backlog increased during the quarter by $54 million compared to a $230 million increase in Q2 1996. To a large degree, revenue trends paralleled orders.

REVENUE GROWTH BY GEOGRAPHY. They saw sluggishness in the US along with continued weakness in Japan, Germany, and France. The tough comparison was a greater factor in the US than overseas as domestic revenues increased a whopping 39% in Q2 last year, an incredibly high hurdle. Obviously currency contributes to the weakness in Japan, Germany, and France, but there was still underlying slowness even in local currency revenues. Also, the fact that there were disk mechanism revenues last year and not this year held down growth. Normalized, revenue growth would have been a few points higher than the reported 5% were it not for currency and the disk business. US revenue grew by 1% while international grew 7% over Q2 1996. Revenue breakdown was 43% from the US and 57% international. International revenues were $5.92 billion and US revenues were $4.42 billion for a total of $10.34 billion for the quarter.

REVENUE GROWTH BY BUSINESS UNIT. Their computer business revenues grew 5% versus Q2 last year and decreased 1% sequentially. In the hardcopy business, the broad printer market has been sluggish of late. Computer systems revenues were up slightly compared to Q2 last year. UNIX servers had strong growth in the low and midrange but experienced weakness in the high end. They just began volume shipments of the new P600 server based on the PA-8000 chip this month. And they are announcing their new top-of-the-line V-Series next week. They have been behind on the high end but are very optimistic that these new products will put them back into a leadership position. Revenue growth for the most part tracked slower order growth and both were under plan. These results were disappointing but they knew that this type of growth was a possibility going into the quarter in view of the comparison, currency, and macroeconomic challenges that they faced this quarter. One thing they do know is that they won't be talking about tough comparisons in the second half.

COST OF SALES. The story in other elements of their performance is quite good. Cost of sales was 65.2% of revenue. This is up slightly from 65% last quarter but down nicely from 65.8% a year ago. This year-over-year decline in cost of sales percentage is something that HP hasn't seen for a very long time. As usual many forces were at work here. Some increased cost of sales, for example they booked higher than normal amounts of price protection for printers and PCs. Several other factors helped cost of sales -- a somewhat better pricing environment in PCs, a higher proportion of printer supplies and PC servers in the shipment mix, the stronger dollar in relation to the yen in the Laserjet business, and relatively better growth in their Measurement businesses. They are not assuming that cost of sales will behave well indefinitely. Some of the portions that are moving in a positive direction could shift. But they feel good for now about what they are seeing in cost of sales in many parts of the company.

GROSS MARGINS. Progress on supply chain management continued to help gross margins. This lowers their exposure to inventory writedowns, returns, and price protection, all of which affect the cost of sales ratio and gross margins. They did have higher than normal price protection this quarter related to pricing actions in laser printers and PCs, but it was less than it would have been if they hadn't made such great progress in channel inventories. They continue to work on managing channel inventory levels both in the US and now in their overseas markets as well. In fact, they did a fair amount of work in this area in Europe and it definitely held orders and revenues back this quarter. It is nice to see these efforts providing some help in offsetting the competitive pressures that have become the norm in their marketplaces. Finally, mix shift to higher margin products like supplies helped the cost of sales ratio.

OPERATING EXPENSES. As a percentage of revenue, operating expenses were up 0.4% compared to Q2 last year, but up 1.5% sequentially. This sequential expense ratio increase was, to a large degree, driven by less than expected revenue growth, but was still higher than what they would have liked. Expenses increased 7% during a quarter when revenue rose 5%. That is not the relationship they want between revenue and expense growth. On the plus side, 7% is a nice decline from last quarter's 10% growth rate for these expenses. Currency had a 3 point positive effect this time. But there were some factors this quarter that made the underlying rate of expense growth higher than 7% -- their revised profit-sharing formula and currency were the main factors. On the other hand, they had some one-time events including the acquisition of Symantec and some expenses associated with restructuring one of their marketing and sales operations in Asia. These amounted to about $30 million and put upward pressure on expenses. The net of all these forces was an underlying expense growth of around 10%.

SPECIFIC EXPENSE CATEGORIES. They added about 1800 employees this quarter. A little more than half of these hires were in Cost of Sales and the biggest net increases were in Customer Support, Inkjet, and Test and Measurement. R&D spending was up 8% year over year and 6% sequentially. SG&A expense grew 6% over Q2 1996 but 8% sequentially.

REVIEWING SPENDING PLANS. They are reviewing all of their spending plans and will make adjustments as they see fit. They will give priority to activities that contribute directly to winning new business and supporting their installed base. They are limiting hiring. They are tightening down in businesses where they don't have the revenue and momentum even more than in the past. Some businesses like Test and Measurement and the Support business are in a growth situation and they are trying to make sure that they don't stifle that growth. Short term expense management gets tricky when you need to spend money on marketing and advertising to stimulate sales in future periods. They want to manage expenses, but they don't want to mortgage their future doing it.

OPERATING RESULTS. Operating profits were up 6% from a very strong Q2 1996. With operating expenses at 24.1% of revenue they have an operating profit margin of 10.7% and a net margin of 7.6%. These are quite satisfactory levels of profitability. 10.7% is on the high side of HP's 10-11% goal. They had solid profit contributions from many businesses. PCs for example achieved good profitability despite slower growth. The last few years HP has been working to strike the right balance between their rapid growth in this business and their need to make a good profit. Their decision to defer expansion of their European presence in home PCs is an example of this attempt to reach the right balance. They made progress toward better balance this quarter. Their service and support business as well as some of their measurement areas also achieved nice profit levels. So, they are pleased with their overall profitability and with the makeup of that profitability.

INTEREST INCOME AND EXPENSE. The interest income and other category was up $7 million versus Q2 1996 and down $7 million sequentially. These changes were driven by numerous items, none of which merit specific comments. Interest expense was down $22 million over Q2 1996 and down $3 million sequentially due to the lower debt levels.

TAXES. The provision for taxes as a percentage of earnings before taxes was 30%, unchanged from last quarter. As of now this is their best estimate for the balance of the year.

EARNINGS. Net earnings were up 8% over Q2 1996 and down 14% sequentially. Net margin was 7.6% compared to 7.3% last year and 8.9% last quarter. Return on assets was 9.9% versus 10.3% in Q2 last year and 10% last quarter. Return on equity was 20.3% compared to 23.3% in Q2 1996 and 20.6% last quarter. These calculations are based on a 4-quarter rolling average. Earnings per share of $0.75 puts them $0.06 below the average of analyst estimates and is 9% higher than last year's split-adjusted figure of $0.69 per share.

SUMMARY. Clearly, topline growth is their issue. HP has seen slowdowns like this in the past and certainly they have said for some time they could not sustain 20% growth indefinitely. They just didn't know when or to what degree the slowdown would occur. Now it has happened and their growth rates are well below 20%. However, they are responding aggressively to the changing environment and so far are generally pleased with how HP's people and organizations are adapting. This quarter's profit margin is one example of this ability to adapt. They have a lot more work to do in expense management and revenue generation and these are the highest priorities.

BALANCE SHEET

HIGHLIGHTS. Hewlett-Packard is quite pleased with how they ended the quarter. Accounts receivable roughly tracked order and revenue growth, net PP&E remained pretty much where it has been for several quarters, and they continued to make some progress on inventory.

INVENTORY. Compared to Q2 1996, inventories were down 7% on 5% revenue growth. Sequentially, both inventories and revenues were flat. Inventory to sales ratio was 15.7%, down from 18.7% last year and essentially unchanged from Q1. Month's supply of inventory was 2.93 versus 3.26 in Q2 1996 and unchanged from last quarter. They have continued to work on their sourcing methods, HP internal inventory levels, and channel inventory levels. Inventory is one area where the comparison with last year helps them out. Last year they were building inventory to meet demand that had not yet started to slow. Over the last year, they have been making progress on their efforts to achieve more realistic, manageable inventory levels. That progress continued this quarter. Inventory was $6.3 billion at the end of Q2, essentially the same as Q1. They think this outcome shows that they responded pretty well as demand slowed. They also benefitted from the work they have been doing with their channel partners to keep inventories in better alignment with demand.

CASH FLOW. Cash flow went extremely well this quarter. Better performance on inventory and good earnings were key drivers of their excellent cash outcome. They ended the quarter with net cash at $1.7 billion, an improvement of about $588 million over where they ended Q1, which was also very strong for cash. $1.7 billion also represents an increase in net cash of more than $2 billion since Q2 last year. 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 have brought short-term cash back from Puerto Rico due to tax law changes, it is still to their advantage to maintain certain long-term fixed income investments there which are reported in other assets.

CAPITAL SPENDING. Depreciation and amortization amounted to $367 million for the quarter while capital expenditures were $527 million. Through the first half they were behind on their original capital spending plan of $2.6 billion for the year. As soon as they have a revised estimate, they will make it available.

MAJOR SOURCES/USES OF CASH. The major sources of cash this quarter were net earnings of $784 million, depreciation and amortization of $367 million, stock issuances of $157 million, and a decrease in other balance sheet items of $217 million. The major uses of cash were increases in A/R and inventory of $34 million and $23 million respectively, a net increase in PP&E of $490 million, stock repurchases of $268 million, and $122 million in dividends.

ACCOUNTS RECEIVABLE. Accounts receivable were down 2% compared to last year on revenue growth of 5%. Sequentially, A/R increased by $34 million as both A/R and revenues were essentially unchanged compared to Q1. Accounts receivable to sales ratio was 17.2% compared to 19.5% last year and 17.4% last quarter. Slower revenue growth makes A/R management easier, but even so this is still an excellent outcome.

PROPERTY, PLANT & EQUIPMENT. As a percentage of revenues, net PP&E was 14.6%, up from 14% last year and 14.3% last quarter. After years of steady decline due to outsourcing of manufacturing and sales activities, the net PP&E ratio has stabilized over the past few quarters.

COMMON STOCK. The number of shares outstanding at the end of the quarter was 1.02 billion, virtually unchanged from last quarter. During the quarter approximately 4 million shares were issues while about 5 million shares were repurchased. They continue to purchase shares based on an algorithm which considers a number of factors including share price. Their objective is to buy opportunistically with a goal of achieving zero dilution over time.

SOME THOUGHTS ON THE FUTURE

OVERVIEW. With improving asset management performance, very acceptable levels of A/R and net PP&E and a strong cash position, their balance sheet remains in great shape. This puts them in a good position to be aggressive in adapting to the changing conditions in their business. In fact, that is really the message they want to convey regarding the future. From 1994 through the first half of 1996 they showed they can turn in good results when growth is strong. Their last two quarters show that HP can grow profits and earn healthy returns in a less robust environment. At mid-year FY 1997 HP is in far better shape than they were a year ago to succeed in a slower growth market. That does not mean they are assuming that the growth levels they saw this quarter will persist. As always, they can see good reasons for both caution and optimism when they look out over the next few quarters.

THE CAUTIOUS SIDE. They clearly are not where they want to be in some parts of their product lines and they are working hard to correct this situation. They have important new products and services in the pipeline and they are going to be very focused on executing these introductions smoothly. Their May 22nd announcement will shed more light on their position in high-end UNIX servers. They have significant introductions planned for printers and PCs and their measurement businesses will also have important new products in the second half. Also, they are facing intense price competition and slowing overall markets in printers. They have taken some pricing steps in recent weeks in printers and they will continue to be aggressive in their efforts as they maintain price performance leadership. Finally, economic conditions in parts of Europe and Japan remain uncertain and they don't believe a rapid turnaround is in the offing. They are assuming that overall demand in Europe will be lower than they'd like.

THE OPTIMISTIC SIDE. They have already mentioned the new products. New products have often made the difference in past slowdowns at HP. Also, they are pleased with the demand trend in some smaller businesses such as Test and Measurement, Components, and Medical where growth has picked up and where they see many opportunities. They are encouraged by their growth in Latin America and parts of Europe and Asia/Pacific. In fact, these areas have posted strong growth all year and they are optimistic about prospects going forward. In addition, the comparisons they are facing in the second half are significantly easier than what they faced this quarter. On orders, as an example, let's suppose that Q3 orders are within their historical range compared to Q2 -- that is flat to down about 5% compared to Q2. That would translate into year-over-year order growth of somewhere between 14% and 20% in Q3. They're not suggesting this as a model figure and this example disregards the mitigating factors described last year when they reported Q3 orders. This is just a hypothetical example to show how dramatically their comparisons ease.

SUMMARY. There are many factors to consider to assess HP's future prospects. Some of the factors such as market conditions and macroeconomic forces are external to HP and beyond their control. Other factors are within their ability to influence and they will be working to make sure that their strategies, execution and spending plans strike a good balance between being aggressive and being prudent. HP feels they are in good shape to succeed in whatever scenario materializes over the next few quarters. Their challenge is to stimulate better growth while keeping the lid on spending.

* 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.