Full Transcript of Hewlett-Packard’s 4Q05 Conference Call — Q&A (HPQ)

Here’s the entire text of the Q&A from Hewlett-Packard’s (ticker: HPQ) Q4 2005 conference call. The prepared remarks are here. We recognize that this transcript may contain inaccuracies - if you find any, please post a comment below and we’ll incorporate your corrections. And please note: this conference call transcript is a Seeking Alpha product, so feel free to link to it but reproduction is not permitted without the explicit permission of Seeking Alpha.

Questions and Answers

Operator

Thank you, sir. Operator Instructions Our first question today comes from the line of Laura Conigliaro with Goldman Sachs.

Q - Laura Conigliaro

Yes. Just, considering where we're seeing printer margins right now, how should we think about printer margins as targets going forward? That is, with margins near the low end of your 13 to 15% operating margin target range, should we, in fact, be thinking that they will shift down a little bit?

A - Mark Hurd

Laura, this is Mark. Thanks for the question. I think we're sticking with our 13 to 15 range. In the 13.2 that we reported, there is some effect for Company-wide bonus that Bob described in some detail. So we think that's the range to continue to stick to.

Brian Humphries

Next question, please.

Operator

Thank you. Our next question comes from the line of Bill Shope with JPMorgan.

Q - Bill Shope

Okay. Great. Thanks. Looking at the enterprise profit, that was certainly far above what I was expecting for the quarter. Looking here, I mean, is this, how persistent, or how sustainable is this margin level, obviously, factoring in seasonal issues? And where there any events in the quarter that helped you that you may not see again going forward? And, I guess, how much restructuring was factored into that number this quarter?

A - Mark Hurd

Bill, thanks. This is Mark. I'll let Bob add color. No specific, unique one-time events that were in the numbers that would cause it to be different in a forward-looking period. I do agree with your point about seasonality effects that definitely affect the performance of the business, so I wouldn't extrapolate you'd see the same result in a Q1. But no unique event that occurred in the fourth quarter that artificially pumped up results.

A - Bob Wayman

And the profit performance was pretty balanced within the various elements of the segments, as well. As you know, we had seen, certainly, some weakness in our storage business, and as that product line has been refreshed, we saw, as Mark mentioned, nice growth, but with that, improved profitability. Been a lot of hard work in these segments, and it paid off in Q4. But due to, reinforce what Mark said, Q4 is always a very strong quarter for this highly-leveraged business. So don't extrapolate that level going forward.

Brian Humphries

Thank you, Bill. Next question, please.

Operator

Thank you. Our next comes from the line of Tony Sacconaghi with Sanford Bernstein.

Q - Tony Sacconaghi

Yes, thank you. Can you comment on gross margin expectations? They were down year-over-year for the full year for the third straight year. Can you provide any sense on where you expect those to be? And, then, also, you have repeatedly alluded to significant employee bonuses being a drag on various segment profitability and overall profitability. I think the implication is that you feel that those bonuses can be a smaller hit to profitability next year. If that's the case, can you define or dimension the size of the employee bonus impact in '05 and what you're expecting for '06? And if it is dramatically lower, what kind of impact will that have on morale of the employees?

A - Bob Wayman

Tony, I'll start with the gross margin. We, of course, are not going to give you any quantitative guidance on gross margin. You rightfully note the trend in gross margin, and some of that is just out there. We need to continue to take costs out, which we have planed to do, but we also believe that we're going to have to reinvest some of that improved competitiveness in lower prices, and that's going to continue to keep pressure on margin. Furthermore, we've seen, and may continue to see, strong growth in those elements of the product line that are a bit lower margin, be it PCs or industry-standard servers, whatever. So, we expect continuing pressures. We'll leave it open as to how much of that can offset by our efforts to take costs out.

A - Mark Hurd

Yes, and, Tony, just one other piece of commentary on gross margins. I mean, there's nary a business in HP that has the gross margin that we report as a Company. So it's really a mix. So as much depends for us on where we get our growth and the mix of that growth by product line to determine what happens in overall HP gross margin. So it gets back into our discussion about our performance in storage and many of our other businesses, Software, that really can have a positive effect on gross margin over time. So that mix is a critical component. As it relates to bonus, I think what we're just trying to do is illuminate the fact that there is a bonus number in the results. Part of what we're doing is, there hasn't been a significant bonus here for a while. So I think that, back to your question on morale, it's probably a good-news thing. And I think the Company has worked very hard over the past several months to earn that. So that's point one. Point two, in the future, though, we're going to continue to index the bonus to improve performance of the Company. And so to the degree that we'll have a bonus, it will be based on the fact that we perform in a way that earns that bonus as it relates to our overall results. So I can't predict that for you at this point in time, other than to say we hope to pay a bonus. We like to expect to pay a bonus. But based on the fact that we, as a Company, perform on an ever-improving basis.

Brian Humphries

Thanks, Tony. Next question, please.

Operator

Thank you. Our next question comes from the line of Richard Farmer with Merrill Lynch.

Q - Richard Farmer

Thank you. Mark, if I could ask a question on the printer pricing environment, and I guess related issue that I think you could argue is caused by the aggressive pricing that we've seen, and that would be install base churn. So in the first sense, we've seen Lexmark lower prices again. Is that something that you think you need to respond to? And then on the churn part of the question, given the lower prices that we've seen and, arguably, that printers are more disposable now, do you think that the average life of the printers in the install base is shrinking, which would imply a shorter duration of the annuity stream of supplies per unit of hardware investment?

A - Mark Hurd

Hi, Richard, thanks. You had a little buzzing on the line as you were talking, but I'm pretty sure I got it. So, first, on the pricing, I will say, I do hear a lot of commentary about pricing, but we're not trying to be the “price leader