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Hewlett-Packard Company (NYSE:HPQ)

Company Conference Presentation

March 3, 2014 3:00 p.m. ET

Executives

Meg Whitman - Chief Executive Officer

Analysts

Katy Huberty - Morgan Stanley

Katy Huberty

Good afternoon. Welcome to the HP keynote. I am incredibly honored to welcome Meg Whitman to the conference again this year. She has proven through cost realignment, incremental R&D and refocusing on channel and sales that HP can and will regain its leadership position in technology. We're now coming up on about the midpoint of the company's five-year turnaround plan. And I think I seek to the room in saying that we're very impressed with what Meg has accomplished thus far, and are very much looking forward to what's next. So, Meg, welcome.

Meg Whitman

Thank you. Thank you.

Katy Huberty

We're going to make sure to leave about 10 minutes at the end. So, have your questions ready. We have mic runners; just raise your hand when we get to that point.

Meg, we kicked off last year talking about some very quick decisions you needed to make when you joined HP and a lot about the cost realignment in order to sort of acknowledge the revenue reality that HP faced, but a lot of that is now behind you. And the success going forward will be can HP sustainably grow revenue profitably? And you talked about this on the call, and you expressed confidence. So, I want to start out the conversation just asking you what are the sources of that confidence, what R&D project at HP are you most excited about that can pretty quickly thrown into incremental revenue?

Meg Whitman

Well, good, but first of all, thank you for having me, delighted to be back. I'd say a couple of things. One is we're very focused on revenue growth, and I'll talk about where I think that revenue growth will come from. But there is more cost work to be done at HP. This is a vast company, five major lines of business, 150,000 (buyers), we operate in 166 countries. It is a product of acquisition, so there is lots more work that we can do to make ourselves more lean and efficient than we have run in the past. So, don't forget that as you think about what we're going to do with HP.

With that said, in the end, obviously we want to grow revenue of this company. And I'd say there is a couple of business model things you should be thinking about as well as technology innovation. And the first is the strength of the channel for Hewlett-Packard. The channel represents about 70% to 75% of our hardware businesses. So, if the channel is not healthy and we don't have a great relationship with innovative products that they can sell and make money on, we're not going to grow the company. And I think one of things that we've worked on very hard over the last two years, which is bearing fruit, is our relationship with the channel. They have trust and confidence in us. They like the innovative products that they make money on. Remember, the channel is all about, "They eat what they kill." They want to know what you have that will allow them to serve their customers and make money.

So, things like 3PAR, HP networking, our converged infrastructure, our Gen 8 servers, obviously our commercial PCs and printing makes money for the channel, and we have restored trust and confidence. So, if we're going to grow, the channel has to represent HP, and they have to grow their business with their customers. So that's the first thing.

The second thing is what about innovation? And in the near-term, much of the growth that we hope will happen towards the end of this year and next year is in products that we already have or products that were recently introduced. So, for example, mid Tier 3PAR, our new lineup of commercial PCs and tablets, our HP networking and our converged infrastructure, these are products that are innovative that the channel (loves). Our new converged system for example, which we call Sharks, we just introduced in December, we have a lot of hope that that's going to be a pretty big opportunity for us and the channel.

Moonshot, of course, lots of POCs going on with our customers, a lot of excitement about Moonshot, I don't expect a big contributor to revenue in 2014 for Moonshot, but 2015 we do. And then, of course we have our software business, which has all kinds of market trends, the trends toward open source and the trends towards SaaS. There is all kinds of opportunities here, but as you know, when you move to SaaS you have an economic dislocation on your P&L, but we're quite comfortable with that. And then of course is our services business, which has been a declining business due to some key account runoff, but ultimately we need to grow our strategic enterprise services and we need to get back to a growth trajectory there, which is going to take a little longer in my view, because unlike the transaction business that you can flip pretty quickly, that is a long-term business that moves more slowly from both our revenue and a profit trajectory than some of our other businesses.

Katy Huberty

Okay, great. So, let's peel the onions on some of that. The enterprise group is almost a quarter of revenue, almost 40% of HP process, you mentioned Moonshot, HP has really lead the market investing in ARM-based servers. Tell us a little bit about what type of customers are showing interest in Moonshot? What the feedback is from proof-of-concept? And you said it will take a while to hit revenue, is it next year or will it take longer than that?

Meg Whitman

No, we're creating an entirely new category here of Atom-based and ARM-based servers. And so, whenever you're in the business of category creation, this takes some time. And listen, I know from a lot of experience that you go along, you get some traction and then it hits the knee of the curve. And so, that's what we are hoping for on Moonshot.

Listen, we have a lot of people who are interested in Moonshot, and typically they have one big workload, that is a scale-out workload that they would like to take advantage of Leap 1 and Leap 2 (cordages) on Moonshoot that allow 90% less power, 90% less space and 77% less costs. So, as we target the right workload with the right customers, the results are remarkable. And so, mostly at this time they are service provider Tier 1, Tier 2 service providers as well as probably 30 to 40 members of the Fortune 100 -- Fortune 250 customers around the globe, who are trying to figure out how do they fundamentally change the game in their need to constantly expand datacenters and constantly add servers, because as you know, if the need for servers just continues to grow as the way it has, there will be a need for 10 million more servers over the next few years. In terms of (powerful) cloud is the number -- if cloud was alone was a country, it would be the fifth largest consumer of energy compared against other countries like Japan, the U.S., China etcetera.

So, something has to change here, and everyone who is running big workloads and big computer centers are looking for a game-changer. So lot of interest, and they are -- I mean, I was just talking to the CIO of a very big media and entertainment company the other day, who is thrilled with their original proof-of-concept and they're pretty excited about this. So, it will take time to build, but I'd say we're on track as to where we thought we'd be here.

Katy Huberty

Good. We look forward to watching this traction. Even without Moonshoot industry standard server grew over the last couple of quarters, but that growth income at acceptable margin, can you talk about what will allow you to grow that business profitably?

Meg Whitman

Yes. So that is our objective, how do we grow all of our businesses profitably? And there is no question that industry standard servers are under margin pressure in the industry, and you see this all the time with competitors of ours. So the secret here is how do you bring innovation to the market that no one else has? And then, how do you segment the market in such a way that you figure out how you can grow profitably? It's a decision about where you want to play and how you want to win, and then, of course getting your cost structure in line, so that you can win those deals that you aim to compete for us. And so I think we've made some progress here. We have a lot more work to do. And as I said on our earnings call a couple of weeks ago, I said, "Listen, I know we can do better on our margin in the industry standard servers. We got into a little bit of a trap of lower sales, lower margins. The good news is now we have accelerating revenues, now we've got to bring the margin along with it."

So, lots of work ahead of us here, but I feel pretty confident that we have a road to improved margins in that business over time.

Katy Huberty

Good. You saw the impact on HP's business when the company was deciding whether to keep or sell the -- or extend the PC business; your competitors are now going through many of those similar do's and don'ts. So, IBM is selling it's server business, x86 server business to Lenovo, Dell has recently gone private, does that disruption create opportunity for HP to take share in the near-term?

Meg Whitman

I think it does in the near-term. Listen, what I have learned about this business through our own tough experience in August of 2007 is, instability is not our friend, because think about that channel is making investments in continuity, in roadmap, in consistency because they are getting their business. And what we saw when we said we might be getting out of the PC business back in August of 2011 that shook the confidence of the channel. So any disruption is not a good thing. And so if you talk to our channel partners who are big IBM players or others, there is concern what will it be like uncertainty. And so, we think there is a real near-term opportunity for HP to actually gain share among some of our competitors who appear to be a little less stable than we do right now. I've to say we look like the paradigm of stability in the industry right now, and so we'd aim to capitalize on that.

With that said, my view is Lenovo will be a very strong competitor over the long-term, and obviously we see IBM all the time in some of our services business and cloud business. But I do think there is a near-term opportunity for us to gain share given that we have consistency on our side. I think there is something also quite interesting is, remember, two and a half years ago we started -- because things were in a bit of a challenge at HP because we have to align our cost structure to revenue as you pointed out. We had to decide what the strategy of the company was. We had to embrace what I call the new style of IT, whether that's to move into the cloud or Big Data or security or our next-generation compute. And we did it not because the industry was changing as much as it is today; we did it because we have to. And so in a funny way, we have a two and a half year head start, and we've done a lot of the things for different reasons, by the way, but we've done a lot other things that I think our competitors now have to face up to because of the situation in which we found ourselves. So I think we have a bit of a head start in terms of what needs to be done.

Katy Huberty

Yes, that's right way to think about it. Our conversations with HP partners suggested three parts.

They grow in double-digits and starting to not just replace the traditional EBA HP source that win deals against EMC and net app. Talk a little bit about that and when you think converges -- the words will become big enough, you can grow the overall storage business at HP.

Meg Whitman

So you are right, the channel is very excited about our 3PAR business. They are also excited about our networking business. And they are actually now really excited about our industry standard server business with our converged infrastructure Gen 8, Gen 9 coming around the corner and some of the work we are doing there. So I'll tell you overall the relationship and the confidence of the channel is dramatically different than it was a year and a half ago. But 3PAR is a real brave thought because it's growing very rapidly and is an opportunity for the channels to make real money. So that's a good thing.

We expect that some time this year or early next, the converged storage, which is next-generation of storage will actually be bigger than our old storage business, and therefore storage will start to show growth when reported on an overall segment level. And on this quarter, I think it was 1% overall growth rate. That is a Tale of Two Cities, that is our tape business and some of our older storage businesses declining quite dramatically, while 3PAR and others growing quite rapidly.

By the way Store Once is a really interesting opportunity for us. We are hiring (NYSE:VR) specialists; we are investing in that business, and that's an area of growth as well. So, as we get a beachhead in 3PAR, what can come along with that is backup and recovery through Store Once.

Katy Huberty

Sure. So, we everything we talked about sounds great in the enterprise group, your reigniting growth in a number of areas. But the biggest concern that investors have is the support piece of the business. BCS declined double-digit, the legacy storage business is declining, and there is a concern that HP may face this tough function reduction in maintenance revenue.

Meg Whitman

Right.

Katy Huberty

Why is that not the case?

Meg Whitman

Yes. Well, you have actually seen us demonstrate that it's not the case, because BCS has been declining roughly 20% to 25% a year for now almost two and a half years. And yet our TS revenue has not declined nearly at that rate and the decline has largely been driven by our desire to get out of some unprofitable TS consulting revenue. So, I have to give a big (shout at) to our TS organization. They have increased the attached on our existing product. They have gone to market more aggressively. They have created new products like proactive care, datacenter care, flexible capacity services, but actually has not narrowed the decline in BCS and old storage like you would have anticipated.

So, this is a very well run business at HP. By the way, the margins are more than impacting that business, and now beautifully working together with their counterparts in servers, storage and networking all of which report now to (inaudible). So it's one team, one go-to-market and one set of common objective.

So, I understand the concern, we watched it like a hawk. But I feel confident that we have a formula in TS that will not lead to the drop-off that would lead to a 25% decline in revenues or even anything remotely like that. We feel pretty good about that part of the business.

Katy Huberty

Good. So, let's focus (inaudible) 20% of revenue, a little over a third of profits. And generally speaking, printers are the (inaudible) industry of the technology market. You have actually run the business over the past three quarters, the hardware business over the past three quarters, despite already having significant market share. Talk about what's driving the growth in hardware replacement. And when can we expect to see the supplies growth (inaudible)?

Meg Whitman

Yes. So, printing is a great business for Hewlett-Packard. And I remember when I first came to HP, you might remember the narrative on the company was PCs are dead, printers are dead, you are dead. And that didn't turn out to be the case.

So, printing is a slow growth business, but is a Tale of Two Cities. The emerging markets are actually growing quite rapidly, and then the ability to print from your mobile, when people understand they can print from their smartphone or their tablet, it's remarkable what printing acceleration that we see. So, this is going to be a slow to low growth business, but a business where we are the market leader, we have all the IP, it's a great business for us.

Now, a key to the printing business is you have to gain share or hold share in your hardware business, because it is a system business. You place the printer and then what follows is an annuity of ink supplies or toner supplies. A number of years ago, probably five or six years ago, HP made a decision not to invest in the next-generation of multifunction printers. And it turns out that multifunction printers is now a big market segment and a growing market segment of laser. Good news is even before I arrived there was a change in decision there, and in the last eight to nine months we have introduced 16 new multifunction printers, which we are now gaining share in an important business. And those printers will pull with them an annuity of toner. And so you can see our ink business is growing. Our inkjet placements are growing, our laserjet placements are growing. And the view is that the toner will follow as we gain share and by the way some of the highest toner usage segment, so single function printers use a lot less toner than multifunction color printers, as you might imagine.

So, this is a well articulated strategy. This is a business we know very well. This is a business within HP that was relatively untouched by the churn at the top and the drama that's surrounding the company. It is in some ways the very best part of HP. And so, we focus that strategy, we've made the appropriate investments, we've taken costs out. The merger of our PC business and our printing business in terms of go-to-market has played out very well. So, I think you can look forward to really quite strong performance from our printer business. And well, people say it's not too sexy, it depends on your definition, I suppose. I happened to really like the 18% operating margins on the cash flow. I think that's a pretty attractive part of the business. But it is actually the digital on and off (rim), and so I do think that's something that holds a lot of interesting promise (inaudible).

Katy Huberty

PCs are 28% of revenue, only 9% of profit, and some of the shift that you've driven over the past years from the notebook to the tablet and from Wintel to Chromebook. Do you think the company is moving fast enough? Have you achieved enough in terms of getting HP at the center of what consumers and corporate want about?

Meg Whitman

Yes. So, the bright spot in the business of course is our commercial business. You saw that the commercial business grew 8%, and our Q1 earnings commercial notebooks grew even faster than that. And this is our right win. This is where we have the engineering, we have the distribution, we have the (inaudible), we have the containerization, the security, the ability to manage a fleet of devices at a corporate or enterprise customer. And we are, I'd say in the early stages of our multi-operating system, multi-form factor, multi-architecture transition. And I'd say it's right on track. It's going well.

You can look and say, boy. By the way our Chromebook, I think we are now number three in the market really close to Samsung, it's again with the channel; this is a product that the channel can't seek on the shelf, so very exciting there. But more work to do, more work to do around how we make sure whether we've got the right operating system with the right architecture meaning what chipset we choose to put in the machine at exactly the right customer segmentation. This is where our customer segmentation is absolutely critical, because the segments are very narrow and vary quite differently by geography. So what you decide to do in the United States is quite different than what we decide to do in India or what we decide to do in Brazil. And so we have to manage this at a very detailed level.

And again, hats off to Dionne and his team because they turned in really pretty good results in Q1. And we are moving into that commercial space in tablets, which I think will bode well. The commercial environment is slower to move the tablets than the personal market. But I do think that (inaudible) that's going to be a big market segment. And then, you noticed that we launched our little tablet in India.

Katy Huberty

What's your view on Chromebooks and tablets? Is that a niche market for certain segments or do you feel like those are real volume or --

Meg Whitman

So, Chromebooks have surprised us in the breadth of their field. It is not just education, it is small business. It's student. It's a broader appeal than I originally anticipated or we anticipated that it would be. So, we are going to follow that market there, and provide customers what they are looking for. And it does appear there is a real life to Chromebook in the small the -medium sized business and even in enterprise. I mean a trend that we see in the enterprise is CIOs are trying to figure out, "All right, what device do I want to marry to my worker group?" There are some people who need our very high powered workstations, best-in-class high powered workstations. There are groups in a company that need desktops. There are some groups that actually only need VDI, some of them need laptops, but some will do not need Windows backward compatibility in their laptop, some of them need tablets, and again some needs backwards compatibility Windows, some don't. And if you can marry the right device to the workgroup, you end up with a cost of capital or a capital expenditure that is optimized for your organization.

So I'm convinced this multi-OS, multi-architecture, multi-form factor strategy is the right one for us and we are going to follow the market in terms of where they want to go and try to be the leading provider there on the commercial side.

Katy Huberty

Okay. Shifting to software, 3% of revenue, 8% of profits and the shift from old sale to new sale of IT couldn't be better represented than what's going on in software companies are trying to increase time to market with apps, they are buying software and service. When you think about and look at HP's business, what percentage of the HP software needs this new style of IT? What can you do to accelerate that transition?

Meg Whitman

Yes. Well, you are right. This is a true symbol of the new style of IT. I mean everything is changing in software, it maybe the sort of the leader here in terms of change. So, the key businesses that are right in the sweet spot of this next-generation software is Vertica and Autonomy, and then our security products.

So, Vertica and Autonomy are doing very well. Vertica is just on the cutting edge. My belief there is some very exciting next step in their business development. And of course, what we have done is we have created a big data analytics platform that we call HAVEn. There is still to time to do, the A stands for Autonomy, the V stands for Vertica, the E stands for our enterprise security products, and N is N applications, meaning we write applications, our customers write applications and the ecosystem writes applications on this Big Data analytics platform. I think this is the sweet spot of the next-generation of IT.

And then, of course our security products on a standalone basis within there is almost unlimited budgets now in IT organization for security, every board of directors, every CIO is deeply focused on how do I secure the network, how do I secure the apps, how do I secure my infrastructure against an ever increasing external press? So, those two, I would say are right in the sweet spot.

Our IT operations management portfolio, this is the orchestration and management, the management claim that governs our hardware with much more of a licensed business and is moving quite quickly is a fact. And there is a lot of new players and folks who are disrupting that business. So, our objective there is we have to move fast. And I have said to the team we should move too fast as fast as the market wants us to go there, and while that will have a disruptive effect on our P&L, it's the right thing to do.

And one of the things we are really focused on at HP is we have to jump to then next thing, the next new style of IT, because even if it cannibalizes some of our business, because if we do not do it to ourselves, someone else will do it to us. So, there is a lot of competitors there, but we are quickly modernizing our user interface to more of a consumer (inaudible). In the old days, your sys admins or DBAs were in a knockout side of the datacenter tethered, and they didn't demand very much. Today, this next-generation of IT professional wants a consumer (inaudible), they want to be mobile, they want to be all over the place, and they have a very different set of expectations, and we have to meet those expectations.

And then on our application lifecycle management portfolio, some of the similar challenges, but we are making real road ahead -- roads into mobile testing and other things like that. So, those two businesses have to move from the old style of IT to new style of IT. And then we have two businesses that are firmly where they need to be.

Katy Huberty

Okay. And then service is the remaining 6% of profits. The EDS business historically was managing on premise legacy datacenter. So also an evolution in that business more proactively selling the new style of IT, talk about the investments you're making and how quickly you think that can happen?

Meg Whitman

Yes. Well, the good news is what we call our strategic enterprise services around cloud, Big Data, mobility and security are growing double-digits. But they are relatively small versus a $28 billion primarily IPO, business process outsourcing and apps modernization business. So, again, small fast growing businesses against state legacy businesses. What's interesting about the IPO business is I think it will take a different form, but by the way, we are still getting calls every single day, every single week on what part of my infrastructure can I outsource to HP or one of our competitors?

So, the challenge here is we've got to get that business growing. And we've got to accelerate our cost take out as some of our older legacy contracts expired. And we've said before, I think a couple of years now, we think the steady state margin in that business is in the 7% to 9% range that is still our target. And obviously based on Q1 results, we've got ways to go there. We were not entirely surprised by Q1 results because this is a seasonal business like Q4 is always better than Q1 and there were some revenue runoff that we knew was going to happen. We originally thought it was going to happen last year, it happened this year. So, on track, but we've to head faster towards the 7% to 9% operating margin.

Katy Huberty

Okay, good. So, we talked about a number of areas of growth in all the businesses, but you are still left with some markets that are not willing and may never grow again, inkjet is an area investors worry about, consumer PCs longer term, we talked about the IPO business, traditional infrastructure management software business, do you think HP can slow declines in those segments, or is growth fully determined by the payoff from all these new R&D projects?

Meg Whitman

So, listen, we manage a portfolio of businesses. We've got declining businesses. We've got businesses that are staying about flat, and then we've got growing businesses. And our return to growth obviously is accelerating those growing business, making sure we don't loose ground in maintainers. And then, we have to be careful about how much time we spend trying to stop an industry trend. And my view is we are better off making the investments in the growth as opposed to try to slow the decline in some of thee businesses that are inevitably going to slow. For example, tape storage, that is a business that is going to slowly decline, and we should really be focused on 3PAR and Store 1 and converged systems in terms of our go-to-market and our R&D energies.

Ink is different. Ink actually, because of our ink in the office technology, we now have the ability to go up from small to medium size, the enterprise stays with ink; that is lower cost per page and the same speed as laser and the same quality. So there is a big value proposition around moving ink up into the office. So that's actually probably not a declining business, that's probably a growing business. But we have to be clear, what are the best we want to make on the businesses we want to grow and what's going to happen to these declining businesses, and it is the nature of these big cap technology companies, we've got declining businesses. Many customers have invested in those declining businesses. So we have a portfolio to manage. And so we try to be very judicious about where the selling resources go, where the R&D resources go, and what we want to do about those businesses with a very keen eye on customers who have made big investments in those platforms over many, many years.

Katy Huberty

You talked upfront about not just R&D, but re-igniting channel sales force, the go-to-market is important for driving growth. HP has a channel conference later this month. What should we expect from HP?

Meg Whitman

Yes. So we have what's called a Global Partner Conference in Las Vegas, the last weekend in March. And we anticipate that we will have very robust attendance at this conference. And I'll say the channel is pretty excited about HP, to the innovation that we are bringing to the solutions that we are offering to our new partner program, which we call Partner 1. We've got a lot of exciting things for the channel, and we've been rolling hem out quite consistently over the last year and a half. We've got a new leadership team in our channel business. And I think they will be pretty excited by the things that they see, because remember the lens they look at all of these big cap technology providers is how do I make money with you? Is it easy to do business with HP? Are programs rewarding me? Am I going to make the investment? They decide everyday, do they want to take their inside sales rep and pivot to HP versus someone else? Or do they want to add incremental inside sales rep to actually grow heir business with HP? And so, we have to win the economic battle here, and we have to win hearts and minds, which is we're here to say, we've got an innovation roadmap that will make you money, we have a customer support and service organization that will make it easy for you to do business with us. And we are making progress on all of those. And that is, and it is consistency, consistency, consistency that wins the battle here. Of course, if you have the innovative product, which I feel like we do.

Katy Huberty

Now, you are back to a net cash position on the balance sheet, which puts you in the position to decide what's returned to shareholders, what's investing in M&A or internally how are you thinking about the potential need to make big investments because of this new style of IT with the track record HP has from before your time as CEO, and sort of the skepticism around whether HP could be successful at that big M&A?

Meg Whitman

Well, first of all, we're really proud of the work that we've done on the balance sheet at HP. When I came, we had $12.5 billion of debt on the operating company. To your point, Katy, we are now at 1.7 billion positive on the operating company. And you can see what we have done with the cash generation capability of this company.

And so, now we're in a happy position of really thinking through our capital allocation strategy, which will obviously include what we said at our analyst meeting, is that up to 50% of our free cash flow will be returned to shareholders in the form of dividends or share repurchase. And then, we'll make decisions about what we want to do in the acquisition space. I do think it is part of our future, but it needs to be returned (inaudible). I believe there needs to be a crawl, walk, run here, because we did probably make a misstep with the Autonomy acquisition in terms of not the technology by the way, but technology is magical, you're seeing it built into our storage product, all kinds of things. But obviously the price we paid was too high. And so, we have to sort of re-earn our stripes, if you will.

With that said, I'd say 3PAR and 3COM were excellent acquisitions for this company. So, it's easy to sort of remember or to forget that HP actually knows how to do acquisitions, and we've done some very good ones. So, think about this as acquisitions that would further our cloud strategy, our big data strategy, our security strategy, return to base, and deeply understanding how this will propel HP's growth areas. And obviously we'll be incredibly disciplined about it, especially given the recent history.

Katy Huberty

Okay. I'm going to ask one more question, and we will open it up for the audience. I often get asked about Ralph Whitworth, (inaudible) he is now Acting Chairman, he took the position of the stock around the time you joined HP. And the question I get is, is Ralph happy that things are moving faster now since -- would he ever step up to try to push you to return more cash to potentially look at fitting or selling assets breaking up the company? Obviously, it's hard for you to comment for Ralph, but to the extent that (activists) were to get involved, what's your argument for keeping on track with the current plan versus looking at something little more disruptive?

Meg Whitman

Yes. So, Ralph has been on the board, I think almost two years now. And he has been excellent board member, and he has done a very good job as Interim Chairman. And his view -- he is deeply aligned with our strategy, and I think he has been pleased by the cash generation capability of the company. He has been onboard with the capital allocation strategy of largely paying down debt, while offsetting dilution in terms of returning cash to shareholders. And understands the strategy that we are embarked on is that we're better together as these four different business units. And if you think about the enterprise side, we're the only company now that can still do infrastructure, software and services. And if you look for example, at our hybrid cloud strategy, that is a central to our overall strategy, because we can deliver one click workload portability across a hybrid environment, from private cloud to virtual private cloud to public cloud, all knit together with HP's cloud service -- cloud system automation.

So, that is what we are embarked on. And of course, over the next couple of years, we have to prove out that thesis. So, I think we all are aligned around the strategy. I think we have leveraged HP strength and combined it with where the market is going for a winning strategy, but like everything else unless we have to prove it out.

Katy Huberty

Good. So, let me see if there are any questions in the audience. We have about five minutes left. Down in the front here?

Question-and-Answer Session

Unidentified Analyst

In early conversations with customers on Moonshot, I mean, you seem to be fairly agnostic whether it's ARM, or our Intel Atom base, do the customers appear to be expressing any preference toward one versus the other and if so, why? Thank you.

Meg Whitman

Yes. So, it depends on the customer. And in some cases, we have POCs that have both an Atom chip in it and then another one that has an ARM. So, I think they are actually trying to understand the performance differential, the cost differentials and which is going to work best for their workload.

What we have learned about our server business and also Moonshot is its very workload specific. And so, I can't give you a thumbs up or a thumbs down, I think it's a little early to tell.

Katy Huberty

Any other questions?

Unidentified Analyst

This question is also about Moonshot. I'm a little confused about the technology strategy for Moonshot. Originally, it seem like you're inviting all comers to provide the processor and the networking card for Moonshot, and Moonshot itself seem like just a sheet, metal box. And the first supplier of the ARM chip went under. But the change in -- have you taken control over all the processors and all the cards that go into Moonshot?

Meg Whitman

So, the way we have (inaudible) Moonshot right now is we have an architecture that we think is the best architecture to run these different cartridges that drop in. The ecosystem is actually around the cartridges, not so much on the hardware per se. And the cartridges are designed to run specific workloads, whether it is a search workload or VDI workload or whatever. So, the ecosystem will be built around the cartridges, not so much as the hardware.

Katy Huberty

Any other question?

Unidentified Analyst

Meg, on your -- on the recent conference call, you talked about SKU rationalization as another area of possible cash flow generation, but you talked a lot about areas of investment today, phablets, tablets, Chromebooks. Can you just expand upon what areas you can further rationalize your SKU base?

Meg Whitman

Yes. So, I think everyone's familiar with the cash generation capability that we've been able to demonstrate. It has to do with short and cash convergent cycle. And the next big opportunity we have and we -- some of the first flow through our cash flow is SKU rationalization and productivity, because -- think about it, when you have a large number of SKUs and platforms, it has a downstream effect around inventory, logistics, warehousing, parts. All derive from the number of SKUs that you have. So, there is a big focus on the company of how do we have the right product for the right customer and where do we decide we want to play. And we have absolutely an objective of shrinking down SKUs and platforms.

On the PC side, you might say, wow, because you got a multi-OS, multi-architecture, multiform factor, isn't that an increase in the number of SKUs? The answer to that is probably the SKU rationalization will not be as great there, but we have to rationalize our core laptops or core notebooks or core desktops in a way that allows us to make investments in these new OS and new architectures.

So, I don't think it is actually mutually exclusive; we've got to get better at having a smaller number of SKUs that meet customer needs. I know we have to be quite disciplined about customer segments we may choose not to play, because they drive SKU rationalization that is adverse to profitability and adverse to cash flow.

On the server side, this is actually a bit more easy in terms of both server storage and networking and part, because we have legacy systems that need to be sunset. And then we have to be very thoughtful about how many versions of a single platform we got to market with.

So, it's a big leverage point for us. And again, in terms of cash flow, the single biggest thing that we can now do going forward, is continue to maintain this cash conversion cycle, but also look very carefully at inventory, which is driven to a large extent as you all know by SKU proliferation and platform proliferation. And by the way, every big company is doing this. I don't care what business you're in, the days of just creating SKUs like crazy, so that you can hit every market segment, no matter how small, so that you can hit every market segment, no matter how small, how big or how profitable; is over. This does not make any sense from an overall financial architecture.

So, we've reduced on the printing side of this that has probably 10% to 15% of SKUs or a little bit less than that on our server side. And so we've got more work to do. I think before we have hit that sort of perfect point where you have sort of a right balance between SKUs and customer segments.

Katy Huberty

Okay, perfect timing. Thank you very much.

Meg Whitman

Yes. Thank you very much.

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Source: Hewlett-Packard's CEO Presents at Morgan Stanley Technology, Media & Telecom Conference (Transcript)

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