Ladies and gentlemen, please welcome Rob Binns.
All right, good morning, everybody, and many thanks for coming. Welcome to our Security Analyst Meeting. I'm going to kick off the event and then we'll run through the agenda here. Meg is going to come up and lead out, followed by Cathie Lesjak. After Cathie, we will start beginning an overview of each of the segments. Mike Nefkens and JJ Charhon will come up and talk about the Enterprise Services business. After a short break, Todd Bradley and his team will come up and talk about the Printing and Personal Systems business, followed by Dave Donatelli who will talk to you about the Enterprise Group. We'll take about a 30-minute break for lunch, and then after that, George Kadifa will come up and discuss the HP Software franchise, and Bill Veghte will highlight what HP is doing around security and the Converged Cloud. Following Bill's presentation, we're going to do a Q&A session and we aim to conclude the meeting around about 2:00 this afternoon, after which there'll be refreshments available outside and you'll have the opportunity to walk around the technology showcase as some of you would have seen with some of the products this morning, and some of the HP executives will also be around and available for some informal discussion.
One specific note with regards to Cathie Lesjak's presentation. As part of Cathy's presentation, we will be presenting the fiscal 2013 outlook. Those slides are not in the initial packages that you've received and are on your tables this morning, but we will distribute them during Cathie's presentation. The slides will be available for you to see, but we'll be distributing the hard copy during the course of that presentation.
I think it's also a good time to remind everybody that this is being webcast and the copy of the webcast will be available for about a year or so after the event.
Please be also aware that this presentation includes forward-looking statements and involve risks, uncertainties and assumptions. If the risks, uncertainties ever materialize or the assumptions' proven incorrect, the results of HP may differ materially from those expressed or implied by such forward-looking statements and assumptions. All statements other than statements of historical fact could be deemed forward-looking statements, including, but not limited to, projections of revenue, margins, expenses, earnings, earnings per share, tax provisions, cash flow, share repurchases, currency exchange rates or other financial items; projections of the amount, timing or impact of cost savings, restructuring charges and similar items; statements of the plans, strategies and objectives; expectations of management for future operations; any statements concerning the expected development, performance, market share or competitive performance relating to products or services; and any statements of assumption underlying any of the foregoing.
A discussion of some of these risks, uncertainties and assumptions are set forth in more detail in HP's SEC filings, including the most recent Form 10-Q. HP assumes no obligation and does not intend to update any such forward-looking statements.
In addition, revenue, earnings, operating margins and similar items at the company level are sometimes expressed on a non-GAAP basis and have been adjusted to exclude certain items. The comparable GAAP financial information and a reconciliation of all the items back to non-GAAP -- sorry, non-GAAP to GAAP are included in the supplemental slides that are accompanying today's presentation.
So with that, I'm pleased to welcome HP's President and Chief Executive Officer, Meg Whitman, up on the stage. Thank you.
Margaret C. Whitman
Great. Good. Well, good morning and thank you for coming to HP's Analyst Day. I think we have an informative day planned for you, and our goal today is to be pretty straightforward. First, we want you to understand the journey that we're on to turn around one of the great technology franchises. We want you to understand how that journey may express itself in our financials. And we want to share with you our overall corporate strategy and give you an update on our 3 pan-HP initiatives.
I also want to give you a sense of the role that each of our businesses plays in the HP portfolio and the strategy behind each of the operating units. But perhaps most important, we want to spend plenty of time answering your questions about our business, our strategy, what the journey of the turnaround looks like, so we're going to leave a lot of time for Q&A at the end.
So let's get started. As most of you know, I have been at HP now for just over a year. And when I became CEO of this company, it was a pretty turbulent time for HP. But I will say that over the past 12 months, I have seen many of the remarkable strengths of this storied company. And first and foremost among those strengths are our customers and partners. We have an incredibly loyal group of customers and partners who want this company to win. Over the years, they have made enormous investments in HP's technology, and they need us to continue to bring them solutions that solve their problems and helps them win in their markets. They also deeply appreciate the benefit that they get from a strong, innovative company like HP in an industry that is increasingly characterized by consolidation.
Another HP strength is our unparalleled scale and distribution. I promise you, we can reach customers and partners in any corner of the globe, a capability that is more and more valued by customers, even those customers that are not in the Fortune 100.
Now one of the things that I had heard at HP was, we were short on innovation. What I can tell you is, that innovation is actually alive and well at HP. We have a fantastic culture of great engineering and innovation, and it is a tremendous asset. My conclusion is not, in fact, that we don't have enough ideas or enough innovation, it's that we need to work a lot harder on getting those ideas productized and commercialized and into the market faster than we do today.
As I've studied this innovation and the approach behind it, there are a couple of things that I think are quite remarkable about how HP approaches the market. First is our focus on open architecture and standards. The second is our ability to partner effectively to give customers the solutions they need as opposed to driving an agenda that is not in their best interest. As you all recognized, we're in a period of immense change in the IT industry and companies that can effectively deliver an open, extensible set of solutions that effectively bridge the gaps created by the vertical stacks of other players should enjoy tremendous advantages.
Now additionally, during the last decade, HP has made a remarkable transformation from a printing company to a diversified technology company with a very set -- very powerful set of assets and IP. We now have a balanced portfolio of businesses that each meaningfully contribute to our operating profit and cash flow, and they play an important role in solving many of our customers' most critical problems. The good news is, we are #1 or #2 in each of the major markets and we can leverage that scale in R&D and supply chain. And as you'll hear today, we're also well positioned in important strategic growth areas like cloud, security and information optimization.
And finally and most importantly, HP has a tremendous set of foundational assets, including a very well-known and trusted brand, trusted by CIOs, trusted by consumers across the globe. We also have a talented, committed and, I will say, resilient workforce of employees who will do anything for customers. One of the great things about HP that is built into the DNA of this company is that we will do anything for customers. They are at the heart of this company and they have been for the last 75 years.
Now as you listen to our presentation today and evaluate our plans to turn around this company, I think it's important to remember the transition that has occurred at HP over the last decade. In 2002, as you can see from this chart, HP was essentially a printing company, with about 40% of our revenues, but more than 95% of our profit produced in printing. Today, HP is a global, diversified IT company, but still comprised of a very strong printing franchise, but only represents about 20% of our revenues and about 30% of our profits. Carly Fiorina and Mark Hurd assembled a very powerful set of businesses. If we can run them well, these businesses can provide terrific customer solutions and excellent shareholder value.
However, as you all know, the recent financial performance of HP has not been good. From the peak in the fourth quarter of 2010, HP has seen a multi-quarter decline in revenues and operating margins. There's been a lot of talk about why this has occurred. So let me give you my perspective, having been here a year, because it should explain our path forward and I think it will give you some perspective around the time that it's going to take to turn things around.
My belief is that the single biggest challenge facing Hewlett-Packard has been the changes in CEOs and leaders -- and executive leadership, which has caused multiple inconsistent strategic choices and, frankly, some significant executional miscues. This is important because, as a result, it's going to take longer to right this ship than any of us would like. I'll give you a few examples. In just 1 year, in 2011, HP went all the way to the right, adding over $1 billion in field selling costs to our cost structure. While field selling costs went up, our revenues came down. In 2011 and 2012, revenues came down in total of about $5 billion despite the fact that we added $1 billion in field selling costs. The company faces the classic challenge of having cost misaligned with the revenue trajectory.
EDS provides another example. The acquisition of EDS was integrated into HP over the course of a number of CEOs, resulting in a change of strategy, lack of focus on fundamental execution and reliance on short-term fixes with -- short-term unsustainable fixes that did not, in fact, help the business, and EDS has also had a significant change in leadership, 4 different leaders, in just about as many years. And there are many other examples. Now I believe that all of this is fixable, but it's going to take some time.
In terms of basic business blocking and tackling, what I call execution, HP has a number of challenges. First is, we do not have the sharp, competitive focus that we're going to need to thrive in the coming years. In addition, another challenge is that HP has too many areas of focus, whether it's products or services or geographies. When Todd Bradley took over the Printing and Personal Systems business, he was surprised to find that we made more than 2,100 laser printers. In every business, we're going to benefit from focusing on a smaller number of offerings that we can invest in and really make matter. By the way, we have plans to cut those laser printer SKUs by about -- by nearly 50% in 2013.
As I just mentioned, when I came to HP, I discovered that our cost structure was not aligned to our revenue trajectory. The problem went beyond field selling costs to include many other areas of the company. Marketing was one area. HP had a completely decentralized marketing function. Over 1,500 decision-makers around the world bought media. Just think about that for a moment. We got no leverage from a coherent HP message that all of our businesses could tuck under. We didn't focus on key countries and products that could actually move the needle in terms of revenue growth, and we didn't plan into the future to maximize media-buying discounts and line up our partners and retailers behind those products consistently.
Another challenge HP faces is that the link between accountability and compensation was not what it needed to be. The direct line between what our executives are responsible for, the decisions they can make and how they need -- and how they get paid needs to be a lot tighter than it is.
Additionally, the company was not well instrumented. And by that, I mean there aren't the kind of metrics and scorecards that one would expect at a company of our size, scale and diversity. As a result, we have trouble tying compensation to our most important metrics and our early warning systems are not where they should be. I've learned at HP that you do not get what you expect, you get what you inspect.
I've also found that HP has suffered from underinvestment in the lifeblood of technology companies: R&D and IT systems. We have some product gaps that we simply should not have. For example, it's been over 7 years since we had a new lineup of Multifunction Printers. We do now for late 2012 and 2013, but we have a much smaller share than we should in this very fast-growing market, that, by the way, drives a lot of supplies purchasing.
We are simply not as competitive as we need to be in how we go to market, how we service customers and how we run ourselves because of our IT systems. For example, we haven't been using a compelling sales management system, or CRM system, for years. Just this past year, we've made the decision to move to Salesforce.com, which we believe will yield real tangible results in improving our go-to-market. And in fact, Salesforce will tell you we are the fastest rollout of Salesforce.com of a company of our scale ever.
We're not nearly as internally efficient and effective as we could be also because of poor systems. Our Services business, for example, has been running without an effective labor management system, and the whole company has been on ineffective HR systems for years. So we're now investing in COMPASS for our Enterprise Services business and moving to Workday for all of HP. Again, we anticipate seeing measurable benefits from these changes.
Finally, our direct and partner selling motions need renewed focus. We need to move our direct sales force to a value and solution selling focus. This will require time and it will require training. We also need to reconnect with the channel. I love the channel, and we need to deliver consistent, simple and competitive programs that the channel can count on every single day.
Now in addition to our own executional challenges, HP faces dynamic market trends that we must address faster. The growth of mobility, the advent of Big Data, the move to Hyperscale, software-as-a-service and cloud, all of these require that HP assemble our powerful set of assets and move faster to develop products and services that position us to win in the marketplace. And we also face very aggressive competitors and we have to demonstrate a will to win.
And last, but certainly not least, we face a series of very real macroeconomic headwinds. SMB and enterprise demand in Europe is very weak. The consumer globally is uncertain and spending less, and there is no question in our mind that China is beginning to slow down.
So having given you the landscape of our challenges, I want to now turn to the journey that we're on to restore HP and its financial performance. Remember, I have said from the beginning that this is a 4- to 5-year journey. I would characterize fiscal year '12 as one of diagnosing the problems and laying the foundation to fix them. On the heels of August 18 last year, when we announced that we were potentially spinning off the PC business, shutting down webOS and acquiring Autonomy, the #1 job facing me and our management team was to stabilize the company, and I think we've done a good job of that. We provided a steady hand on the tiller with employees, with partners, with customers, and we reminded people that HP is still the great company that it has always been. We have more work to do, but I think we've made good progress.
We have spent a lot of time understanding the situation in each business unit and each market. Peeling the onion has taken some time, but I'm a firm believer that if you cannot name the problem crisply and concisely, you have no chance to turn it around. I've made several organization and leadership changes that we all believe will help HP navigate the competitive landscape better and the market trends better. I also think they will improve our ability to execute. We now have crisp, agreed-upon business unit strategies in place that are funded appropriately in 2013, and you'll hear more about those strategies from our BU leaders and our Chief Operating Officer a little bit later this morning. We've also importantly renewed HP's historic focus on products and services. I believe that the only way a company like HP comes roaring back is if we have the right products and the right services targeted at the right customers, well packaged and sold in well.
As I mentioned, we have a cost structure that is not fully aligned with our near-term view of revenue. We began our cost management program in 2012 and it will continue right through. This needs to become a way of life at HP. We've also put a full-court press on operational excellence. We go into 2013 much better prepared with focused scorecards, key metrics and key leaders who are empowered to make changes and an acknowledgment that this is a crucial area that we have to get better in.
And finally, in 2012, we demonstrated a disciplined approach to capital allocation in 2012. Cathie will give you more details, but in short, we made no significant acquisitions, we returned cash to shareholders and we paid down debt.
So we've just completed Year 1 on our journey, and as we head into 2013, here's how I think about 2013: it is a fix and rebuild year. And by the way, I believe we're going to be doing this against a worsening macroeconomic environment.
In 2013, we're going to be working through the anticipated disruptions that came from the very necessary changes that we made in 2012. For example, as you know, we made quite significant changes to the sales force to improve our go-to-market selling motions and also reduce cost. These were absolutely the right things to do. They were incredibly necessary, but as everyone in this room knows, when you disrupt the sales force configuration, it takes a little time to settle in.
I believe we're going to continue to also see broad-based -- a broad-based profit decline across most businesses in 2013 as each BU fights to accelerate the new offerings that will win in the marketplace, get their costs under control and improve operations. However, the good news in 2013 is that the bulk of the profit decline should be contained in Enterprise Services. We will continue to demonstrate a disciplined capital allocation approach in 2013, and we will continue to make the necessary investments in each BU to set ourselves up for 2014 and beyond.
Now I believe that 2014 will, in fact, be the year you'll see real recovery and expansion at HP. We should see every business unit recover and grow. This is because the new products and services that we've been working on, and many of which will be launched in 2013, will be kicking in big time in 2014. Our investment in R&D and IT will begin to pay off. We'll have yet another year of cost management under our belt, and we will have demonstrated our ability to manage costs in line with revenues. Our Services business will have stabilized and I believe will have begun to grow again and our capital structure will continue to be improved as we pay down debt.
And then FY '15 should be the year of acceleration. I believe we'll see sustained growth from our business units, revenues should be growing faster than costs and operational excellence will have become a way of life. We should see a vastly reduced number of SKUs and platforms, which will drive benefits in things like supply chain, quality, warranty and service costs. And we should have automated many aspects of our business, which will save us time and money. And we'll also have much better tools like Salesforce and Workday to manage ourselves. And compensation will be tightly aligned to very specific business outcomes and metrics.
And by 2016, we should have achieved clear industry leadership in many areas, including cloud, security and information. We also should be demonstrating product and service leadership in all our core businesses, and I believe that will manifest itself in financials where we should be growing revenue at about the rate of GDP and we should be growing profit faster than revenue and we'll have proven, again, over a 5-year timeframe, that we know how to allocate capital in a shareholder-friendly manner.
Now we all hope that we can accelerate the timing of this journey, but I now see, up close and personal, the nature of the challenges that we face internally in the market and from the macroeconomic environment. There are no silver bullets to solve our challenges. We will solve our challenges through consistency of leadership, focus, good blocking and tackling and, most importantly, great products and services delivered in the way that customers want to buy them, and that's precisely what we intend to do.
So if you step back, our path forward is to have in place clear strategies at the company level and the BU level, a real operational focus and a capital allocation strategy that is investor-friendly. Now I'll spend the next few minutes on our corporate strategy and the role that each BU plays in HP's portfolio. I'll also give you a very quick summary of the reasons that these businesses can win in their market and a very high-level summary of each approach.
Now I get asked all the time, what is HP? And what I say all the time is, that HP is the world's largest provider of information technology infrastructure, software, services and solutions to individuals and organizations of all sizes. Our strategy has been clear for some time now. The core of this company is infrastructure and hardware. This includes our very powerful hardware franchise in terms of servers and storage and networking, and we have leading positions in Personal Systems and Printing. Infrastructure and hardware represent about 70% of this company's revenue. It is something that we do better than anyone else, and it is the essence, it is the DNA of this company. And I think we need to stand up and be proud of that business. People say to me all the time, "Well, wouldn't that -- isn't that going to be a commodity business?" Not if we can help it. If we do the right R&D and stay ahead of the curve, there is no reason that we cannot continue to revolutionize many of these categories.
Now we're in the software business, not to transform HP into the software company, but to help solve our customers' toughest problems. Our software provides confidence, insight and agility. Our Services business wraps our infrastructure and software together and is essential to making sure customers get the most value from Hewlett-Packard. By the way, we are 100% committed to the Services business. Whether it'd be outsourcing, consulting, Application Services or Technology Services, these position HP to do what we do best, act as a strategic partner. And as it turns out, we have a much greater share of wallet with the services-led engagement with a much better opportunity to bring our full portfolio to bear. And our focus on solutions will make it all work by combining our technologies to advance our customers' business objectives in a holistic and compelling way.
We know that for HP to deliver the most value to customers, we have to be more than the sum of our parts. We have to be a great partner. And to do that, we've got to aggregate our powerful capabilities in infrastructure, software, services to deliver those leading solutions. And the solutions our customers want today and that we are incredibly well positioned to provide is around cloud, security and information optimization.
So let's start with cloud. Customers are looking for speed and innovation with enhanced agility and lower costs. Our Converged Cloud portfolio helps clients build, manage and secure their cloud environment. It extends the power of cloud across infrastructure, applications and information. We have built our Converged Cloud on HP's leading intellectual property, our partners' capabilities, as well as OpenStack technology.
The second area is security. With mobility in cloud, the access points are infinite and the threats have become more sophisticated and unpredictable. We know customers need a new approach. Not only do they need a lock on the door, they need a security camera in the room, and our Security portfolio lets you see events across heterogeneous distributed environments from the infrastructure to the network to the applications. And with Autonomy and Vertica, we can help our customers analyze and understand the context of these events, which brings us to information optimization.
To us, information optimization is about taking 100% of the information a customer has and turning it into valuable insights and decision-making excellence. Think about the possibilities here, think about the insights that you can get from today's world of information. Whether it'd be tweets, texts, videos, blogs, e-mails, the backbone of today's human interactions, that is something that every customer I've talked to is incredibly excited about because they think that actually helps their business grow.
Now let me turn to our portfolio of businesses and the role that they each play at HP. Let's start with Enterprise Services. This is a $25 billion business for HP. And as I have said many times, services is a turnaround. The good news is, that it is now a turnaround with a detailed and extremely well-reasoned plan. While in 2013, we expect that Enterprise Services will see a decline in revenue and operating profit, over time, we expect this to become a moderate growth business with actually expanding margins. Enterprise Services has a strong share position. We're the #2 IT services provider worldwide and we have a new leadership team that is up to the task. You'll meet Mike Nefkens and JJ Charhon a little later this morning.
Our Printing and Personal Systems business is a $65 billion business, which would be a Fortune 50 company in its own right. I would characterize this business as a relatively slow growth business with clear opportunities to improve cash generation over time. PPS has very significant share leadership positions across the board, rich IP in printing and unmatched scale and distribution, especially when you think about the combination of our printing business and our Personal Systems Group. It also has a very experienced leadership team and a leader in the form of Todd Bradley.
Todd, as you will recall, took our PC business from roughly $20 billion in revenue to nearly $40 billion in revenue and from a money-losing franchise to the most profitable PC business in the world. He's now surrounded by top talent like Tony Prophet in supply chain; Steve Nigro in our ink business, Ron Coughlin in our laser business; Lihua Zhao [ph], James Mouton and Dion Weisler in our Personal Systems businesses around the world.
Next up is our Enterprise Group. This is a $32 billion business comprised of servers, storage, networking and, now, Technology Services. Today, it's a moderate growth business, but with a real opportunity to become a fast growth business with margin expansion over time. Our new fast-growing products, as our new fast-growing products become bigger than our declining older products, we believe will see that rate of growth accelerate. This business has an excellent set of assets, incredible R&D and engineering capabilities and, unmatched in the industry, leadership and experience. Led overall by Dave Donatelli, he's accompanied by David Scott in storage, Bethany Mayer in networking and Mark Potter and Martin Fink in servers. Taken together, there is no better qualified team in this business. And 2013 will be the year that Technology Services, led by Antonio Neri, becomes fully integrated, both operationally, as well as financially into the Enterprise Group.
Now last, but certainly not least, is our $4 billion Software business. Today, Software is a moderate growth business that we believe has the ability to grow much faster and achieve meaningful margin expansion. The business is well positioned to capitalize on market trends to SaaS, with strong products and a very seasoned management team. George Kadifa recently arrived to help us lead this important business. He's been joined by Robert Youngjohns to lead Autonomy, Art Gilliland to lead security, and they come together with Ajei Gopal and Hans Peter Klaey to round out this tremendously talented team.
Now let me give you a few highlights on the strategies for each of these businesses and why I'm excited about their future. For Services, you'll see, when Mike and JJ present, that we have an entirely different operating model in place for 2013. For some time, the responsibility for revenue and cost has been disconnected from the people who own them in each account. They -- that contributed to the deterioration of cost and revenue performance over the last several years. For 2013, we are restoring revenue, cost and profit accountability to the account executive in charge of our top 200 accounts. We'll also be innovating and growing our core portfolio and we are making the necessary investments on an accelerated timeline. All of this will make the business far easier to manage than it has been over the last couple of years.
For PPS, we're fast closing the product gaps that have hurt both our Personal Systems Group and our printing businesses. We are doing this with a real eye to design and a target customer in mind for each and every new product. And we're also innovating and betting big on our ink business. We have done this before and I'm confident we can execute against these plans.
In the Enterprise Group, the bet is all around more and even better product innovation, and the innovation will extend to the software-defined world and the cloud. The R&D investment is there and will be protected for our journey to the cloud.
And finally, Software is all about getting our strong portfolio of products to the new consumption models that underlie the shift to the cloud. Overall, we are simplifying the operating model to make it easier to buy from HP, easier to sell HP and easier to work at HP.
Now I told you that HP's journey will be predicated upon the strength of our products and service lineups and what they do for customers. And in a moment, I would like to tell you about the products that I'm most excited about as we head into 2013. But first, let me tell you what I hear from CEOs and CIOs every day. First is, technology is fundamental; it needs to be as available as electricity. And there is frustration out there about unlocking information, plus that information is growing exponentially and these CIOs and CEOs know they have to capture this.
Security and compliance are now board-level topics in a world where your data is the most critical company asset that you have. And most importantly, businesses want to reinvent themselves by using technology to disrupt traditional business models. Customers turn to HP because we can help them solve the toughest business challenges that they have with our technology products and services.
Now you might imagine that I'm quite familiar with these challenges from my time as the CEO of eBay. eBay was at the forefront of the Internet revolution, and we pushed the envelope of technology to deliver scalable -- a scalable and reliable experience. The company needed tremendous storage and networking bandwidth to deliver a great customer experience. And like many enterprises, I was a big EMC and Cisco customer and I paid a huge premium for their products. However, today, the architectural advances that have been brought over the last 10 years, those price premiums are now very hard to justify, and that is why I am so excited about HP's networking and storage assets. HP has created products that are built for today's enterprise challenges.
For example, our 3PAR Storage is more efficient, faster to provision and simpler to manage than the competition, and that's what our customers want, data that's always accessible and always on. Our StoreOnce software, created by HP Labs, addresses that age-old problem of the amount of data duplication that invariably occurs in storage. StoreOnce is 3x faster in backup and 5x faster in recovery than competition.
Today, there's a new way of managing your network called software-defined networking. SDN allows you to manage your network based on the real-time priorities of your business, and it is a step function improvement in innovation and efficiency. We have the most comprehensive SDN offering in the marketplace.
And on the server side, our Gen8 server line is off to a great start, and Moonshot, our new high-density hyperscale product, I believe, will revolutionize the server market much as we did with Blade a number of years ago.
On the printing side, we have a lineup of great new products. I'm excited about our deep intellectual property on ink and creating our new OfficeJet products. Also known as Ink in the Office, this will reduce the cost of printing while meeting the tough requirements of business as our ink products move into small business, medium-size business and even the enterprise.
I'm also excited about a complete refresh of our Multifunction Printer lineup and new customer workflow solutions that are integrated with our devices. Our new multifunction color printer with document workflow powered by Autonomy is just such a product. And we believe -- I know, from having talked to CIOs and procurement heads that these products, I think, will enable HP to grow quite dramatically in the printing business.
We also have our ePrint cloud application, which makes it easier for our customers to print from smartphones and tablets. So think about the number of times that you have looked at something on your smartphone or something on your tablet and wished you could print it. We aim to make that happen.
Now on the software side, you're going to hear from George Kadifa on how our software business is going to deliver the Big Data promise of tomorrow today. HP Software uniquely enables our customers to manage, mine and secure their information. Vertica delivers search queries 100x to 1,000x faster than the traditional database technologies, and our Autonomy meeting-based compute products integrate information feeds from every form of data, be it tweets, video streams, unstructured data and structured information.
Only HP has the tools that enable you to predict future behavior and be ready for any possibilities. And plus, in Services, I'm excited about helping customers on their journey to the cloud. This is an enormous opportunity for our Services business because our enterprise customers, there is not going to be one way, one journey to the cloud and we have the capability to help every customer figure out what way to the cloud is going to be right for their business and for their customers. So we're constantly innovating, creating new solutions that can drive our customers' businesses.
And then finally, in Personal Systems, we have products that look great and appeal to customers likely the ENVY x2 for consumers and the ElitePad, the first tablet that is designed uniquely for business. I'm also excited about our Spectre XT, which is our thin and light notebooks. These products are uniquely HP and are designed with specific customers in mind.
Now let me spend a bit of time on our drive to operational excellence. We are organizing ourselves around 4 major thrusts: First, as I mentioned, is focus; second is go-to-market; third is cost leverage; and fourth is operations. In my view, operational excellence has got to start with focus. We've got to focus on a smaller number of products to develop, sell, market and ultimately support. The cost impact that too many products, SKUs and platforms has on our supply chain, on our ability to forecast, our ability to have the right amount of inventory on hand, quality, service, support, training and marketing is incalculable. Even on our Services and Software business, trying to develop and support too many offerings has implications for delivery, training and support.
We also need to sharpen our focus on key geographies. Like most companies our size, 14 countries account for 80% of our revenues, and we operate in 166 countries. Those 14 countries are the countries we need to pay a lot of attention to in the near term, making sure we execute with excellence and determination. And we also need to improve our competitive focus. We live in a changing world, and every day, we've got to ask ourselves, what differentiates HP? Why is this product or service better than the competitors'? How do we win in the market? How do we better gain a competitive advantage? And what's our specific win-loss ratio against each and every competitor in each and every category and how do we improve that win-loss revenue over time? Everything we need to do, everything we need must be measured against our competition, and we have to demonstrate our will to win.
With regard to go-to-market, more than anything else, we need a consistent sales model. We need to capitalize on the enormous strengths of our partner network with world-class programs that don't change very often. And we need to nurture our deep connection with customers and partners as we go through this journey and we need to communicate even better than we have. We also have to get it right in China. A lot of work is underway and we need to stick with it. This is an incredibly important market for HP and we have to be successful there.
With regard to cost leverage, we've got to optimize our business processes, deploy the right IT and continue to manage our costs. As I mentioned earlier, supply chain and quality represent real opportunities. But so does purchasing, real estate consolidation, call center efficiencies and pricing, just to name a few.
And finally, with regard to operations, we're deeply focused on creating a metrics-driven model that links compensation tightly to accountability and results. We've centralized marketing to sell more products and services while inspiring confidence in HP. And by the way, cash flow is getting a lot of attention, too. We're driving sustainable improvements in the cash conversion cycle and the capital expenditure approval process.
And last, but not least, our culture and our people are essential to driving HP's turnaround. We have to make sure that we have the right people in the right job, at the right time, with the right attitude. And our people need clear and consistent direction. We've got to lead HP by redefining the HP way for today. And we have to lead with authenticity and transparency. And in the end, we have to function like a team. I believe with every single bone in my body that if we do this right, we can set up HP to be a world-class technology leader, delivering unrivaled integrated solutions for our customers for the next 75 years. And we will also deliver improved financial performance and increase shareholder value. Don't bet against our people, our industry position, our portfolio or our resolve. We are here to win and we're going to deliver. Thank you.
And now I'm going to bring up Cathie Lesjak, our Chief Financial Officer.
Catherine A. Lesjak
Great job. Thanks, Meg. Good morning, everyone. Welcome to our Security Analyst meeting. As you can probably tell from Meg's words and tone, that fiscal '13 is going to be another challenging year for HP. Meg's laid out the journey that we're going to be on and the situation that lies ahead of us.
As Meg shared in fiscal '12, we had seen the deteriorating macro condition, markets under pressure and execution at HP that, frankly, is not up to our standards. And that's despite the fact that we had very valuable IT franchises across our businesses. Our top line has declined 5%, our operating margins have contracted, and compounded with this, we've had working capital deterioration which put pressure on our cash flow performance. Though, in the first quarter, we saw the dip in cash flow, on a quarter-over-quarter basis, we are starting to see some improvement in cash flow.
We have begun to address these broad challenges with leadership changes and restructuring actions, but frankly, there's a lot more work we need to do. At the same time, we've had discipline in our capital allocation process and we've seen progress in rebuilding our balance sheet. We generated $90 billion in revenue and $8 billion of operating profit year-to-date through Q3.
You can see on this chart that we're providing more transparency than we have in the past with respect to our Services business, and I think that's really important given where we are in Enterprise Services. Technology Services, which, in the past, has been reported in the Services segment, is now going to be moving in to the Enterprise Group segment with ESSN. And that's going to begin in fiscal '13. We are doing this to more appropriately align how we're managing these businesses going forward.
If you now look at what EG, the new reporting unit, would've looked like in fiscal '12, through Q3, EG would've contributed 43% of our operating profit on 25% of our revenue in fiscal '12. And you're going to hear more about this business, as well as all of our businesses as the day progresses.
As you can see on the chart on the right, we have generated $4 billion in free cash flow this year. And we've been able to rebuild the balance sheet while continuing to distribute capital to shareholders. At an operating company level, our net debt position has improved over $2.5 billion so far this fiscal year. At the same time, we kept our intention to grow our dividend payout with a 10% increase in Q3 and we bought back shares, $1.5 billion worth of shares, in the open market as of the end of Q3. Note on this chart, though, when we look at share repurchase, we've included net share repurchase, so this is the cash that we paid for the shares that we bought back in the open market, as well as net of what we received from employees when they exercised their stock options.
Now let me bring this back to the value creation framework that Meg shared with you. I want to take the opportunity to discuss first, cost leverage, across our businesses; and then second, our capital strategy. I know that capital allocation is a top-of-mind question and issue for you all, so I want to walk you through how we make decisions about how we're investing your money.
Since all costs are not equal, let me first share some insight on the cost models across our different businesses. You should use this visual directionally to understand our segments. In terms of operating leverage, as you can see, different businesses have different degrees of variability in their cost structure. At one end of the spectrum, you can see that PSG has substantial amount of variability in their cost structure. This allows them to roughly maintain operating margins even with revenue declines. And you've seen this manifest itself in our historical performance where you've seen us be able to maintain margins in PSG above 4% despite very significant revenue declines.
At the other end of the spectrum is our Services business. And in that business, we have to be -- move much more proactively on cost when revenues come under pressure. And I think that is probably a good lead-in into giving you an update on our restructuring efforts. In May this year, we adopted a multiyear restructuring plan designed to deliver simplified business processes, accelerate innovation and deliver better results for our customers, our employees and our stockholders. Accelerating innovation is an important point that I want to highlight because you should note that in our fiscal '13 outlook, we are increasing R&D. And we're continuing to focus on making sure that we are doing the right things for the long term health of the Hewlett-Packard Company.
We announced after Q3 earnings, an increase in the expected charges and headcount reductions that we plan to see through fiscal '14. In fiscal '13, the expected GAAP-only expense is $1.5 billion with respect to this restructuring program. Cumulatively, we expect roughly 26,000 employees to leave the company by the end of fiscal '13 under this 2012 restructuring plan.
While we mentioned that the total expected P&L charge through 2014 is $3.7 billion at the high end, I want to highlight again that the cash impact of the restructuring is roughly $2.7 billion, approximately $1.3 billion of which will occur in fiscal '13. The cash impact is lower than the cumulative charge given the fact that this U.S. early retirement program is largely funded out of our U.S. pension plan.
Finally, you heard from us that we expected the majority of our savings from the restructuring plans to be reinvested back into the business. We now expect that much of the savings is needed to offset the headwinds in our business. I will give you more specifics about this when I lay -- get to the outlook.
Now let's move on to the capital strategy. In the past, we've not shared with you this comprehensive view of how we think about our capital framework. So let me spend a few minutes really walking you through how we look at this. Our main objective is to source and deploy capital to generate the highest risk-adjusted returns for our shareholders. To do this effectively, we have to first determine the business plans that align the capital -- the company strategy and then formalize the return targets that become the hurdle rates against which we measure our investment alternatives. This requires a long-term view of where the company is headed and its target capital structure.
In our industry, disruptive technologies are constantly challenging the market players. In fact, Meg talked about how we are in the midst right now of a once-in-a-generation set of tectonic plate shifts that are changing the landscape of how technology is used and deployed across the globe. Given this, stable access to the capital markets is absolutely critical, maybe now more than ever, given the global macroeconomic backdrop.
We need to make the right business decisions and get the capital in the right place at the right time to enable our success. In this context, we also need to the flexibility to take advantage of opportunities when they arrive. For these reasons, we believe that getting back to a mid-single A credit rating is a top priority for us.
Second, we must fund those capital uses that are needed to achieve base business objectives. I think you should think about this kind of capital as required or maintenance capital that must be funded. We include here staying committed to our communicated dividends strategy and also rebuilding the balance sheet towards our target capital structure. Said more specifically with respect to the balance sheet, we need to reduce our operating company net debt position to roughly 0 to put us on the path to our desired target credit rating.
The final step is to take any excess capital and prioritize our investments based on the highest economic profit opportunities. Again, we look at this on a risk-adjusted basis and include returning capital to shareholders in our list of alternatives.
Many of you have asked, why don't we buy back more stock? At what price will we buy back more stock? Is it a compelling opportunity? So let me double-click into how we think about returning capital to shareholders. Here on the chart, you can see our philosophy. For share repurchases, we buy back our stock when 3 conditions hold. First, we have ample funds. I just laid out for you why having a strong financial profile that provides steady capital markets access is important to us. And we consider that a key priority for the long term health of this company. Second, we only create value for shareholders if we buy stock when it's undervalued. Like any use of capital, we want to buy attractively priced assets, and we don't look at this use of capital any differently. And as you all know better than any of us, it is truly a very challenging exercise to accurately assess the true intrinsic value of any enterprise. So we look at a number of different dimensions when we think about what is the value of Hewlett-Packard. First, we do a full discounted cash flow analysis based on our latest internal forecast. We look at relative value analysis based on how the markets view our peers. And we look at a multiples analysis based on what we think are the key measurements that drive the value of Hewlett-Packard. We also pay close attention to what you all tell us, both our buy side and our sell side analysts, and how you view the value of the firm. Finally, if we meet conditions 1 and 2, we measure the opportunity against alternative investments to make sure we're not missing out on any other better opportunities than share repurchase.
Turning to dividends, we pay dividends to provide a consistent and predictable income string for our investors, particularly our long-term investors, while concurrently showing our commitment to sustained return of capital.
Now I've highlighted the importance of rebuilding the balance sheet, let's look at the progress we've made. You can see that over the last several years, we've utilized our free cash flow largely for M&A and share repurchases. This has driven our net debt position down below where a mid-single A credit rated company would be. As I've mentioned, we have made progress this year by reducing operating company net debt position by over $2.5 billion. But we have more work to do and we expect it to take a couple of more years before we are where we need to be.
Now let me turn to our outlook. Let's wait just a minute while you guys -- we pass these out. Okay, these are the key assumptions that we have for our fiscal '13 outlook. We expect continued and increasing weakness in the macroeconomic environment, especially in EMEA and globally in consumer. We expect year-over-year declines in revenue in all of our segments, except for Software. There will generally be slight to modest declines in those segments, except for Enterprise Services where we're assuming a decline in revenue of 11% to 13%. In ES, the heavy revenue pressure will be skewed to the first half of fiscal '13. You're going to hear in a lot more detail from Mike Nefkens and JJ Charhon about the specific challenges in the ES business in the next few minutes. We expect currency to be a headwind of approximately 2 points and operating margins to contract year-over-year. From an eliminations perspective, you should model roughly flat eliminations year-over-year.
On restructuring, we expect the total savings in fiscal '13 from our restructuring efforts to be approximately $2.2 billion, up roughly $1.9 billion year-over-year. OI&E is expected to be an expense of about a $1 billion, tax rate 22%, assuming there aren't any material changes to the current tax legislation. We expect weighted average shares outstanding to be roughly flat with the exit of Q4 '12. And as a result, we expect our non-GAAP EPS to be between $3.40 and $3.60, and our GAAP EPS to be between $2.10 and $2.30.
As you can see at the bottom of the slide, we've provided some specific Enterprise Services information, again, to provide that incremental transparency, so you all know how to track this business and track our progress. I mentioned the revenue decline year-over-year of 11% to 13%, and we expect operating margins of 0% to 3%.
Let me walk you through a bridge from our fiscal '12 guidance that we provided in our earnings call at the end of Q3 to the fiscal '13 outlook. I wanted to give you more clarity, so we did this bridge by major HP segments. I just mentioned to you the assumptions around the significant top line and margin challenges in Enterprise Services, and again, Mike Nefkens and JJ Charhon will add additional color shortly, but overall, we're seeing meaningful key large account runoffs, and that's putting pressure on margins despite plans for significant cost reductions in that business. The expected impact from Enterprise Services on our year-over-year outlook and operating profit is an operating profit decline of $0.29 to $0.35. The new Enterprise Group, which includes Enterprise Servers, Storage, Networking and Technology Services, is expected to drive an additional $0.05 to $0.12 headwind in operating profit next year.
Dave Donatelli will share what he's seeing later on in the morning, but generally speaking, the revenue underlying this outlook is expected to at least hold rev share across Industry Standard Servers, HP Networking and HP Storage. But we continue to expect significant weakness in Business Critical Systems relative to the market and on an absolute basis. Software and PSG in aggregate are expected to have relatively minor impacts in the year-over-year story, while IPG is a tailwind for us with approximately $0.05 to $0.08 of favorability for that business.
Within the other bucket falls our Corporate Investments, eliminations and onetime items. There is an expected increase -- or decrease in that category of about $0.08. It's related to onetime favorable items in fiscal '12 that need to get normalized into fiscal '13.
Finally, let me talk about the investments bucket. We've broken this out, pulled it out of the segments so you can specifically see what we view as the investments that come out of the restructuring. Broadly speaking, these investments are -- what we've decided -- the investments we've decided to make across the segments to position us better for success over the long term. Example of these include investments in R&D to strengthen our portfolio in areas such as software-defined networking, Converged Cloud and Ink in the Office to name a few.
But in addition, we are investing in business process reengineering, Enterprise Services tools to better run that business and sales force productivity solutions. Overall, you should expect to see R&D up in fiscal '13 as a result of the investments, net of some portfolio rationalization and focus [ph] exercises that we went through. This bridges you to the $3.40 to $3.60 in our non-GAAP outlook for fiscal '13.
Let me now turn to cash flow and give you some color on the cash flow that we've modeled for fiscal '13. With our EPS outlook, we expect operating cash flow to be approximately $8.5 billion in fiscal '13. This includes an assumption around cash conversion cycles with the cash conversion cycle between 24 and 26 days. As I've stated before, we are focused on improving working capital, and it's clear that we have much work still to do. We expect net CapEx to be approximately $3.5 billion, and roughly 2/3 of our CapEx spending is truly revenue-generating at its core, and it's really from our financing business operating lease activity, as well as our Enterprise Services contracts. So as that revenue goes up and down, so will CapEx. This gets us to approximately $5 billion in free cash flow in fiscal '13. But I think it's important to call out a couple of significant year-over-year changes in cash flow because it gives you a better sense of maybe what the run rate cash flow could be.
First, the restructuring cash flow expected for fiscal '13 from all of our restructuring plans is currently estimated at $1.6 billion. That represents a $700 million increase year-over-year. Second, as we've discussed in our most recent 10Q, HP is appealing a finding that HP has underpaid certain customs duties on imports of products and spare parts for services in India. A deposit of the claim duties plus penalties and interest is typically required to proceed with an appeal. And so although HP has requested a waiver of the deposit, we have assumed in this cash flow forecast, a $400 million cash deposit in fiscal '13. This amount is near the upper end of a wide range of potential deposit amounts, and we currently expect a decision on our request to waiver in Q1. After you net out all of the incremental items, as we consider it and think about kind of a run rate free cash flow, we think it's in the $6 billion range.
Before I conclude today, let me just take a minute to look beyond fiscal '13. Long term, from a financial perspective, here's how you should think about the HP opportunity. We expect to be a GDP-like growth company, with key pockets of higher growth. We'll be the disruptor in key technology segments like Networking and Storage. And that, combined with Software growth, will positively impact our top line. In addition, we expect that same dynamic to impact operating margins favorably over the long term, given our growth rates -- these growth areas have higher margins than the current weighted average margins in our portfolio. We expect the businesses with more variable cost structures to maintain and even slightly increase their margins over the long term. You'll hear more today about the opportunities we see in both PCs and printing when Todd comes up and speaks. But there are also pockets of, in our portfolio, facing long-term margin pressures and, in some cases, top line compression that will partly offset the favorable margin mix that I've just talked about. Netting all of these, we expect operating margins in the 10% to 11% range over the long term. Our operating and free cash flow should track with long-term movements in our non- GAAP earnings.
We're committed to returning cash to shareholders, and we believe that share repurchases and dividends are both effective means of doing that. We expect to continue to share the profits generated by our operations and, over the long term, scale the dividend payout. Of course, our board reviews our policies and practices on a regular basis to ensure that we are determining what is the right distribution policy to have at HP.
In conclusion, our financial philosophy is return-based. We will continue to be disciplined in our capital allocation and we will build the right financial strength that becomes the support that allows us to make the investments that we need to make to realize Hewlett-Packard's full potential.
With that, I think I'll turn it back over to Rob and I look forward to talking to you in Q&A. Thank you.
Thank you. All right, thank you very much, Cathie. Next up, we have Mike Nefkens who's the acting global leader for our Enterprise Services business; and JJ Charhon, who is the Senior Vice President and Chief Operating Officer for the Services businesses. So guys, if you'd like to come up and join us. Thank you.
Thank you, and good morning. I'm delighted to be here with you today. I'm Mike Nefkens and lead our Enterprise Services group, and I'm joined by my COO, JJ Charhon. Since this is our first time speaking with this group, I thought we'd start with a quick introduction of each of us, so I'll start. I've been with the company 12 years. I joined through the EDS acquisition, have run multiple businesses as General Manager around the globe and turning them around over the past 12 years, and before, and just recently, spent 3 years running our business in Europe, Africa and the Middle East for Services. Before joining EDS HP, I spent 10 years in the energy sector, where I actually was able to buy services from both EDS and other partners in the industry. I currently live in London and I'll turn it over to JJ.
Hi, my name is JJ Charhon. I've been with HP 2.5 years. I joined HP as the CFO of the Personal Systems Group. I was then appointed CFO of Enterprise Services in April of this year and then in my current position in August. Before that, I've had about 25 years of professional experience with General Electric, Novartis and Quaker Oats.
Great. Okay, so what I thought we'd do today, I'm going to focus on providing an overview of our Services business, our issues and our turnaround plan. And I've asked JJ to be here with me today on stage to focus on our financials and specifically on the fix we're going to be driving in operations and our cost structure.
So now that I've been at the helm for almost 2 months and working with Meg and team, what have we learned? First is, we have locked in our plan, as Meg alluded to, and we are executing on the turnaround plan. The second is, we spent a lot of time focusing on reenergizing our team for the journey ahead. Not just our internal team, also speaking with our clients and getting them excited about HP services again. As Meg and Cathie alluded to, FY '13 will be a fix and build year for services. However, we believe and are confident that we're going to be able to get this business back to moderate growth with real margin improvement over time.
So what I thought I'd begin is just providing a quick overview of our business and we'll break that down into 3 categories. We'll talk first about who we are, what we face and, in particular, the issues, and then what you can expect in FY '13 and beyond for Services. So let me provide a few highlights on who we are. The first is what you'll hear, global scale, across geographies and industries, and industry-leading portfolio of services that's unsurmatched in the market and a unique position for us to take our marquee clients on a journey from the traditional IT services to the cloud. We are positioned to win in this market.
Now despite these strengths, we do have our share of challenges. Let me highlight a few of those: Macroeconomic pressures in our traditional outsourcing business. We do, as Meg alluded to earlier, have several, 4 key clients that are running off in FY '13 which are causing real headwinds on our revenue, and as Cathy alluded to, we will be seeing a revenue deterioration of 10% to 13% in FY '13.
Our erosion in financials, in particular, margin over the year, have been caused by multiple execution issues: insufficient tools and processes, a number of declining productivity and a number of low-performing contracts that we're currently fixing. Also, Meg alluded to the lack of leadership continuity over the years. So what do we see for margin? In 2010, our margins were at 10%. They're now close to 3%, and we see a range of 0% to 3% in FY '13. Over the long term, we see ourselves getting back to 7% to 9%.
So our plan of attack, multiyear turnaround, FY '13 will be a fix and build year. We're focusing on fixing these execution issues that we talk to and we are already seeing progress. And we expect, as I just mentioned, our long-term growth to be back in our 3% to 5% range and our long-term profit margins to be back in the 7% to 9% range.
As you can see, we're being very candid today about our financial performance and about the issues we face and what you can expect from us over time as we execute this turnaround. This is more than just a plan for a plan. As mentioned, we're already executing and seeing progress. So let me begin and talk a bit about who we are. We have a very strong position in a large and growing IT services market. We're widely acknowledged by many industry analysts as a clear leader across multiple categories. We are #1 or #2 in almost every category we serve. Contrary to opinion, IT services is a growing market in both the traditional space and in the emerging services space. As you can see from the chart, the traditional space is about a $430 billion market growing at about 2%. The emerging services space, these are cloud services, security services, mobility, is about $120 billion market and growing at about 12%. So as we talk to our strategy going forward, we believe we have a fundamental position, strong position in the traditional space to help our clients, and we'll help drive them into the emerging space and cloud services, et cetera.
One of our key advantages, we have true global scale and market presence like no other on every continent. We don't need to build it like some of our competitors do. We have it today. If you take a look at our diverse customers, they are large -- these are large companies that come to us because they expect us to have operations in all parts of the world, they can't wait for us to build. So on the next slide, I'm going to talk to you a bit about the range of industries that we serve.
Most parts of HP, we go to market by horizontal, very product-oriented. In Services, we actually go to market in 8 industries with world-class capability. We handle mission-critical work, and we can do it anywhere and everywhere in the world for our customers. We are the trusted advisor for our clients every day. What this means is when we actually sell a Services contract, we don't just walk away. At that point in time, we sit side-by-side with our client for a period of months, years or even we recently had a contract that was a 20-year contract. Our clients rely on us day-in and day-out to provide mission-critical services.
Let me give you some examples. We perform over 2.4 billion healthcare transactions annually. Our systems help the airlines board over 500 million passengers per year. We process over $13 billion credit card transactions every year. In our Public Sector business in the U.K., we process over GBP 1 billion in benefits per night. Without us, the poor, the elderly and the job seekers don't receive their benefits.
Looking at the energy sector, where I came from, we provide specific services to rigs out in the North Sea, to countries like Nigeria where no one else has the scale and reach that we do. So we have true differentiated assets and capabilities in these areas and are delivering business outcomes that matter every day. This industry expertise and footprint provides us with the right foundation to return to growth which will be a key theme as you'll hear throughout the rest of the presentation.
At this point in time, what I'd like to do is turn it over to JJ, and he's going to speak specifically about our historical performance and some of the challenges we're facing.
Thanks. As a reminder, Enterprise Services was combined with Technology Services, which will now be included in the Enterprise Services group. This is the first time we are disclosing Enterprise Services margin, which peaked at 10% in 2010 and have gradually been eroding to 3% on flat revenues. Our recent financial performance was clearly not good and well below expectations and, in our mind, does not reflect an accurate representation of our potential to compete successfully in the IT services industry.
Although the root cause is beyond our performance [ph] are mostly execution-related, let's start with some market context. Traditional offerings in the IT services space are clearly under margin pressure. Customers are looking for productivity in the traditional infrastructure phase to fund their need for new capabilities in mobility, security and cloud. For IT infrastructure service providers, this means 2 things: the necessity to balance growth between the traditional space and the emerging segments; second, the imperative to be more selective when chasing new opportunities or renewals. In that context, as Meg alluded to, the separation of accountability across organization between revenue generation and cost management has created a number of issues: adverse mix of revenue with an increased share of third party hardware sales; second, contract renewals at conditions which disproportionately impacted our margin.
The margin pressure in our core segments really accelerated the need to rebalance our growth focus towards the emerging segments. That was clearly the right strategy. That transition, however, was not well managed. It was too quick and not paced with our ability to address our go-to-market capabilities like sales training, sales deployment and offerings. The consequences were increased cost and declining sales productivity. Last but not least, we have been working through some low-performing contracts that were signed both pre- and post-EDS acquisition.
Our performance degradation is planned to continue in FY '13. As Meg said, our revenue will contract anywhere between 11% and 13% in 2012, mostly as a result of exceptional events in our revenue profile. There are really 2 main drivers for that. First of all, 4 of our major accounts have decided to reduce their footprints with Enterprise Services as a result of renegotiations and decisions to in-source some of their service lines. That accounts for about 5 points of revenue degradation.
The second driver is, as you know, we've been more selective in signing deals. And although this was the right strategy, it was poorly executed. The impact on our signings in FY '12 was a lot larger than we had originally anticipated. The carryover impact of our lower signings in FY '12 into FY '13 represents about another 3 points of degradation, and of course, there is another 2 points of currency that we're anticipating. In light of that revised revenue outlook that, obviously, we've been seeing now for a few months, we've actually been working actively on a fairly significant productivity agenda and other profit protection measures.
Let me walk you through in more detail as to what we've been doing. The good news is that half of the cost reduction plan for FY '13 really do not carry any risk of execution as it is either associated with client transfers or actions we've already executed in FY '12. For the balance of the cost reduction plan, we have a robust set of initiatives lined up in FY '13 to contain our operating margin decline. They actually span across 3 major buckets. First, productivity across our delivery cost engine, mostly consolidation of our labor pool and physical footprint. And I'll talk little bit more about that in a second. Improved revenue mix thanks to stronger service offerings and align incentives across our go-to-market organizations. The stronger accounting model and linkage between pay and margin, I think, will allow us to reverse the recent trend. And last, but not least, remediation of our low performing contracts through renegotiations or exits. Given the headwind that we face, as we've already communicated, we expect our margins to be anywhere between 0% and 3% next year.
Realistically, FY '12 and FY '13 are mostly about stabilization. We believe a sustainable turnaround is a multi-year journey with the initiative spanning across portfolio, go-to-market capabilities, cost and operation.
Mike and I will now walk you in more detail through the initiatives we have started implementing in FY '12 across these 4 categories.
Okay. So a summary of our turnaround strategy and as JJ highlighted, we've done a lot of work over the last months to already get ahead of 2013 by taking the cost actions we've done, but we still have a lot of work to do. So our turnaround strategy is really predicated on 4 different buckets of work. The first is going to be around our portfolio focus. And the word, portfolio and services, really is the same as R&D and product, so we have got to innovate around our core portfolio and ensure that we sell into that.
As JJ mentioned earlier, we swung a little bit too hard in '12 into some of the new emerging services and didn't really focus on up-selling and driving our core portfolio. We do have to, however, invest and expand into cloud, security and information management analytics, and at the same time, we have to make sure that as we pursue new business, that we're looking at pursuing lower-risk, higher-value deals.
At the same time, we've got to get our go-to-market right. What do I mean by go-to-market? It means getting the growth engine cranked up again. This is a business for us that's primed to grow. And we've been way too reactive the past 3 or 4 years, and it's time now to become proactive in the market again.
Our clients want us to provide them with high-value services, so we're going to focus on empowering our account executives, strengthening our accountability model and really making sure we optimize the sales engine so it's fit for purpose for the journey ahead.
Then as JJ mentioned, we have to focus on cost leverage. We have to make sure that we're focusing on all of our different accounts, we're focusing on driving improved performance, we have to make sure we're optimizing and getting that resource management right as it's so critical to the services businesses, and we've got to continue to improve our asset utilization.
On the operations side, we have to standardize and automate with tools and processes. This is not a good business if you don't automate and take out costs, so we've got to continue to focus on that. And as JJ mentioned as well, we're going to formalize and improve an operating cadence to ensure that our teams are accountable, empowered, yet we're supporting them and driving things on a day-to-day basis.
So we see, with this turnaround plan, we do see that these actions, many of them are already underway, and we see significant long-term financial impact of these actions. You can see on the bottom of the chart the relative margin impact of each of these actions for the areas that we've posted here.
So let me begin by talking a bit more about our ES portfolio strategy and the focus. In the center of this slide is where we're going to focus. This is the innovate and grow. The type of client who comes to HP Enterprise Services is not the typical startup that's wanting to host an app in the cloud. These are multinational companies with sprawling operations around the globe. They look to HP for our expertise, our broad service portfolio and our footprint.
So our core is around the data center, apps development management, industry services and business process outsourcing. This is where we have real distinct advantage and capability. But this puts us in an ideal situation to help these customers take advantage of our cloud-based offerings and migrate to the new services, what you see on the right side of the chart, which are cloud services, application modernization, information management and analytics and doing that in a secure manner.
Now one of the things that, historically, we've done not as good as we could have is that we were too selective in the networking and workplace deals that we took on in 2011 and 2012. And what happened with that was, we weren't able to drive the sales that we needed to do to sustain our revenue.
So to support this approach, we're now concentrating our portfolio and investment areas in a couple of areas. We're going to make sure that we drive in our entry point where their clients is going to be in the center area here, and we're going to drive to the right, but we are still going to do networking, workplace deals that are good for the company and have low risk and allow us to drive to the right in regards to the future services that we want to offer.
Now while this future mix of portfolio is great, we've got to make sure that 2 things happen: one is that our clients are ready for this pace of change in adoption; and number two, that we have our go-to-market capability ready to support.
So that's the next area. And again, what do I mean by go-to-market capability, it's our growth engine. This is actually a -- services is actually a very, very difficult businesses if you're not growing because you just can't get the cost out quick enough, and in the past 2 to 3 years, we've not been focused on growth. So jump-starting this go-to-market engine is going to be one of the key hallmarks that we've got right now in the last part of '12 and in 2013.
So what are we doing? We're empowering our account executives and making them growth-oriented again. We're strengthening our accountability model. We're optimizing our sales force and our sales model. And let me give you some examples of what we mean by that. Our account executives are now being measured and held accountable for both revenue and costs and sales. That's different than what we did the last 3 or 4 years. We're strengthening our pay-per-performance model so that their linkages for our account executives around client satisfaction, around engagement gross margin and around revenue and sales.
We're rolling out new systems and tools that will make it easier for our teams in the field to streamline, to sell and to drive deals through governance quicker.
Also on the selling side, we're making major investments in specializing our sales teams. We need to have sales teams that are detailed and have very strong knowledge in cloud, in security and in analytics, also in data center migration and application modernization and in business process outsourcing. We've had too many sales generalists in the field the last couple of years. We now are going to retrain and make sure that we're able to put the right people in front of our customers to solve these tough business problems.
So with that, we've talked a bit about growth. And again, we've got to make sure that our operations and our cost leverage is there to support. So JJ will talk to the next 2 of our turnaround plan.
Retooling our growth engine is one of our top priorities, but building an operating model that can deliver contracts profitably while maintaining service levels and customer satisfaction is really the ultimate goal. This is why an ongoing productivity mindset has to be part of our DNA. Here again, we believe there are short and long-term opportunities within our control. Our largest short-term opportunity is to improve account performance and fix our low-performing contracts. In our mind, a long-term relationship has to be good for both sides. We're putting in place a new, dedicated, independent management structure to really accelerate for our top 20 low-performing contracts, our path to steady state. We also strongly believe that tightening deal governance will allow us to reduce the number of troubled accounts and also the level of performance shortfall.
Over the next few years, we will be improving our resource management. The longer theme here is really the consolidation of our delivery engine for both variable labor and our physical footprint. As you may remember, ES and EDS really acquired operating environment through their various customer contracts. That led to a highly fragmented footprint. We started consolidating that footprint a couple of years ago, but we will be accelerating that initiative as we still have too many data centers, location for offices or labor pools.
We are also working on improving asset utilization. In our operating model, operating margin rate is as important as asset utilization and asset turn. We believe that procurement is under-leveraged for third party labor, software and hardware utilization.
As you can see, our priorities for growth and productivity improvement is all very clear. In all honesty, they have not changed dramatically over the last couple of years. What will make a significant difference is our ability to execute.
In our mind, it starts with a clear and simple accountability model. We believe regions are responsible for in-year resource trade-offs and financial execution within the year, while service lines are responsible for innovation and productivity initiatives. To make this work, we require tools and processes to be aligned to that accountability model.
This was not the case in this past, and let me provide you with a couple of examples. As you may already know, Enterprise Services and EDS was really a collection of highly customized contracts with limited replicability and leverage costs across the portfolio. Now EDS recognized that before it was acquired by HP, and really introduced service line or product organizations that really were supposed to standardize the offering and drive reputable innovation. They also strengthened the functions like leverage delivery for accelerating productivity. All of that made a ton of sense, but was not followed with adjustments to processes and tools to facilitate the alignment of planning and execution activities across the organization.
Let me give you a specific example. More than 50% of our resources associated with IT or delivery are centralized, but there is no labor management tool. There is no process for making sure that the delivery organization is up-to-date on labor demand signals that are coming from the regions and the account teams. The implications are that resources that are released don't get reported as quickly, which obviously impacts utilization, or that new accounts that come on really don't have resources, which triggers lost revenue and increased costs. This led to significant challenges in resource management.
We also believe that standardization and automation are huge levers for improving our execution. This is why we are committing more than $100 million in IT investments in FY '13 and are ramping up our capabilities in lean.
In short, we believe in the simplicity of our standardized integrated model where roles are clear, processes and tools are aligned to the allocation of accountabilities and system facilitate the sharing of information realtime.
While all those initiatives across portfolio, go-to-market, cost and operation excellence will span across multiple years, we remain extremely clear on our immediate priorities: Restore our sales engine, consolidate our delivery capabilities and improve our operation execution. We believe Enterprise Services on a stand-alone basis should deliver a return on invested capital in excess of 15% through a combination of improvement in operating margin rate and asset turn.
At this time, I'd like to hand it over back to Mike for some closing comments.
Very good. So I think we've mentioned at the beginning of the conversation that we would be very transparent, and hopefully, you've seen that. So a few closing comments. We wanted to demonstrate a couple of things for you today. One was a corporate commitment to services. I can tell you that this is absolutely critical to getting our services business stable. And it's been something over the past several years that really hasn't had what we needed. And now with Meg and the team talking about how services is core to the company, we have that base to really be able to go and fix and rebuild this business.
The second is, we have a real turnaround plan that's not just a plan for a plan. We're already executing. You heard us talk about the cost takeout that we've already done in '12 in preparation for '13. You've heard us talk about the automization [ph] and tools that we're investing in. We have a real plan, and we are executing to and seeing the benefit.
Thirdly, we have a team on the ground that knows how to execute and solve these business issues that we've talked about. And frankly, we're very excited to have the chance to go and do this now. We would like to have seen it 2 or 3 years ago, but we know we can get it done in 2013 and set us up for growth.
Lastly, we are taking a very pragmatic approach to getting this business growing again. As mentioned, services is not a good business if you're not growing, and we do believe over the next 12 to 24 months, we will get it there. And we will get back to growth rates of 3% to 5%, and we will get our margins back up to the 7% to 9% range. So hopefully, you can see the renewed energy that we have in services. We are ready for the mission and the journey, and I'd like to thank you for your attention this morning. And I will turn it back over to Rob for questions.
Thank you, guys.
And hey listen, before I let you go, I think everyone would agree that there was a lot of information in the slides there. And one of the lines you called out was the detailing the margin history of the business. You highlighted the margin at 10%. And do you think it's possible for the business to get back to those kind of levels or do think it was artificially inflated when you showed those kind of 10% margins?
Yes. So the 10% that we had back in '09 and '10 were a bit artificially inflated. There was not a lot of investment in the portfolio. We had made a lot of cuts that frankly, were hurting the long-term foundation of the business, but we do believe that we could -- can get this business 7% or 9%.
Yes, I totally agree. And our focus is equally on also asset utilization. I think really the focus is getting an excess of 15% on return on invested capital. We believe we've got a ton of opportunities to really improve our asset turns. So that, combined with the 7% to 9% range, is exactly what we need to deliver.
Okay, great. Listen, thanks, guys. Thanks very much.
We're going to take a short break now. Coffee and refreshments are at the back. Please feel free to take advantage of some of the products that we have at the back there. And we'll have you back in 15, 20 minutes. Thanks very much.
R. Todd Bradley
Well, good morning. I'm Todd Bradley. I'm the Executive Vice President of the Printing and Personal Systems Group, so I'd like to welcome you all here. I thought that was a great video to introduce this segment of the presentation. I'm going to take a few minutes, talk to you about PPS. I'm going to introduce Steve Nigro and Stacy Wolff, who are on our team, been very, very inclusive in all that we've accomplished this year.
On the past few months, we've made a lot of strategic moves, and we've completed a lot of work. And while it's clear we have more work to do, I think it's also clear that we have tremendous opportunities in front of us and that opportunity really starts today.
Today, in Printing and Personal Systems, we have more innovation in our product line than I think we've had in the past 5 years, from the Z1 all-in-one workstation to the Indigo 10000 Digital Press, our new multi-function printers, our OfficeJet Pro, a full line of Ultrabooks, and frankly, a new tablet, specifically focused on the Enterprise.
Today, I'm going to tell you how we plan to deliver innovation in a way that matters, a way that matters to our customers, to our partners and to our stakeholders.
In March, we saw an opportunity. We saw an opportunity to bring PSG and IPG together. Both organizations had the same customers, the same partners, the same retailers, and yet, each organization had separate sales teams, different processes from how we went to market, to how we manufactured, frankly, too much discounting and not enough marketing. And our focus -- what we wanted to do was to leverage our commonalities. We wanted to cross-pollinate the best practices, the operational leadership of PSG and the legendary innovation of IPG. And by doing that, we believe, and frankly, are confident we can deliver tremendous value to our stakeholders. We've made a lot of progress since March when Meg announced this alignment or this consolidation. And today, I'm going to share that progress with you.
But first, I want to share the 5 key strategic initiatives we've established for PPS. We're enhancing our customer and partner intimacy. We're doing things like designing products in China, for China and 3 of those are already shipping very successfully, how we strengthen our relationship with partners and renew their confidence in HP. We're selling -- accelerating both product and business model innovation with new business models to deliver ink more affordably and implementing a common design language across our PC and printer portfolios. We're differentiating with services and solutions, selling more than just a set of boxes, although we do ship and sell 4 boxes a second, and we're offering a total HP solution.
We're investing and reinvesting in mobility, in tablets, mobile printing and much, much more that's yet to come.
And finally, we're infusing all of this with operational leadership and discipline that we use to build PPS: Consolidating our supply chain functions; aligning 2 sales teams; shrinking our corporate functions from 12 to 7; reducing printer SKUs by more than 30% by the end of 2014, at the same time, simplifying our PC platform by as much as 25% in the same timeframe, and of course, aggressively executing and implementing Salesforce.com to improve lead conversion and improve the productivity of our sales force.
In that context, let's look at our 2 businesses: Our IPG business and our PSG business. But first, I want to show you what we're doing in Personal Systems, and then I'll transition and tell you about Printing.
Here's our view of the Personal Systems business today. The big picture is we are the largest, most profitable PC company in the world and we have become the perennial market leader. And the same team that grew this business from $24 billion, 7 years ago, to where it is today is largely intact and largely focused on executing to the challenge that we have.
Clearly this past year, we've been impacted by both internal and external factors. The announcements of August 18 impacted us on multiple levels. On top of that, we faced challenges that ranged from macroeconomic headwinds to how we continue to improve the execution in our channel, both retail and commercial. But we see tremendous opportunity because this is a time of unbelievable innovation for personal devices.
We are in the Renaissance of a new era in personal computing, an era of new categories and new form factors. And while people are embracing new devices, one thing clearly has not changed, the need to compute, the need to communicate.
In fact, we see increased consumer demand -- customer demand for a variety of operating systems and chipsets like we've never seen before, all of which giving us confidence in that Renaissance that's in front of us, so we are very focused on how we retool for that growth. And here's what you can expect. First, you can expect innovation that results in better products, leadership and brand new categories and shared growth in commercial tablets. Second, you can expect operational leadership that will result in an improved channel, a more productive workforce and a continued very disciplined approach to profitability.
This is our view of the market opportunity in front of us. As I've said, personal devices are still an exciting business with growth opportunities in spite of what you may read.
Here's what we see. Yes, the core PC market is expected to stay flat, potentially through 2015, but the market for workstations, for all-in-one devices are expected to draw -- to grow. So to our PCs in emerging markets, meanwhile, we're excited, invigorated about our ability to define a whole new category in hybrids, which we'll talk to you about later today.
And while we hear a lot about consumer tablets, there's another story, and it's around commercial tablets, tablets focused on the enterprise users that meet their needs, allow them to use their applications that they've developed over many years, and we expect this category to grow 3x at the rate of the Consumer Tablet business.
So this is how we see our position today. We are #1 in all of our core categories, and I think frankly, we have nothing but upside in the others. We see opportunities to drive advantage through the massive size of our supply chain, to leverage our go-to-market network covering 170 countries and to grow the -- to grow in the tablet category, lastly, to capture that share in all-in-ones, growing especially aggressively in China and 4% globally.
We also understand that consumerization of IT is real. We understand that people care about beauty and elegance and function, regardless if they're at work, at home or on-the-go. And with this in mind, we've invested heavily and more than doubled the size of our design staff.
So I'm going to take a second, I want to bring up our Chief Designer, Stacy Wolff, who is going to tell you, and more importantly. show you some of the traction we're achieving in this area. Stacy?
Thank you, Todd. Hello, everyone. This is a great honor for me and a privilege, and I'm taking great pleasure in speaking to you today. It's a great time for HP. There's a lot of good things going on. And one of the most exciting things for me as an HP employee is the investment that Meg and Todd have made in innovation. From a design perspective, the design team is more energized, and you're going to see evidence of that today. I'm confident you're going to see changes through the end of this year into next year that are going to be remarkably different than what we've done in the past. From a design perspective, we are going to be taking true leadership.
So a couple of things that Todd mentioned, and I think it's important to kind of recognize, from our customer insights, is there are some things that are changing in the business today; consumerization of IT and how do we rationalize that. Well, I can tell you that part of the design organization change, we centralize design. So what does that mean? It means that they've taken the designers from the commercial side and the designers from the consumer side and brought them together. This is -- this cross-pollination allows us now to look at consumerization of IT in a completely different way. This is amazing. This is a great opportunity to bring life and excitement into what we own in the IT sector, okay?
The cloud. It's one of those things from a cloud standpoint and especially from a design standpoint, this is a great opportunity. As HP invests in the cloud infrastructure and invests in service opportunities, it now means new opportunities for the design team to bring on new hardware that takes advantage of that connectivity. Always connected, always on. This is a new opportunity where we can shed the legacy or old hardware mindset. We now are free to go lighter and thinner with these products. And then a most important thing is really the design perspective. So we think about design, design is more than just a hardware, it's more than just the device. As we've scaled up our design team, we brought on designers from BMW, from Nokia. We've gone outside of our industry to bring on new talent to think in a different way as we think about design. This is very important. We are taking a key leadership in design here.
So with that said, I'm going to take you through a little bit of the products that we have here and show you the significant changes that we've made.
So the first one is SpectreONE. SpectreONE is one of my most favorite products, it is one of the first products that I actually in my new role, took over. SpectreONE is a kind of completely different way of thinking about the all-in-one. You've heard about Ultrabooks and that whole massive change in the notebook space, but what does it mean in the all-in-one space?
So if I can draw your attention over here, I think it's very, very significant. And I think they're going to actually -- oh, the video is up. If I turn just this just slightly, look at that. Is that amazing? I mean we have taken all of the mass, all of the thickness that you've seen in the past in the all-in-ones and transformed it, we now have an 11-millimeter bezel, okay?
I talked to you about the Ultrabook space. We're bringing that here. We've completely redesigned the architecture, the mechanical architecture. No longer is the processor here. We've actually moved it into the support structure.
This is part of the innovation strategy, and it isn't just about moving the hardware, it's making the hardware better. If the user wants to access this, they can actually pull this whole piece off. It's completely serviceable like a desktop would be. We revolutionized the all-in-one space. Just amazing. And along with it, we've redesigned the peripherals.
So let me go on to Spectre XT. Spectre XT is a amazing Ultrabook. It is not just an Ultrabook for the consumer, it's an Ultrabook for business. Remember, Meg and Todd talked about this transformation. No longer is a product just for one sector. We're designing across both, okay? And I'm going to actually close this up because I want you guys to see how significant HP is making in this notebook category. Look at how thin we've taken this form factor. The materials to it. It's a brushed aluminum. It's diamond cut. We actually put the detailing to the edges to give it almost the sparkle of jewelry. But it's more than just hardware, it's more than just metal. We've actually complement it by actually making some of the surfaces rubberized. So it has that sensory aspects so that when I pull out of my bag and I hold it, it has that precious quality. But one of the things in the notebook space that we've had for a number of years is our relationship with Beats Audio, and even in Ultrabook space, we've brought audio to the forefront. It has amazing sound in an Ultrabook form factor. This is truly, truly amazing. We've really have pushed the boundaries in the Ultrabook space.
Now I'm going to go on to one of my most favorite products, and we spent a lot of hours in the lab trying to come up with what is the ultimate transformer. The transformer, ENVY x2 -- they're going to bring up the slide here. I think it's so significant. You can see the quote on the screen and we won Best of Berlin in the IFA. This is amazing. This product hasn't shipped yet, and we're getting recognition.
So let me take you through a quick tour of this product. And again, I have to close this one to show you the significance of what we've done. So they're going to show you the video, and hopefully, you guys get to see that. Is it just amazing. Look at what we've done. This notebook, slender, sleek and I said notebook. We've put all this technology into the hinge. Why? Because it has to go from notebook to a tablet. We talk to end users. We sought their insight. They said, "You know what, I really want something that transforms effortlessly." We saw a lot of competitors out there. They took a tablet. They took a keyboard and they clamp it together. And even out here, I see some of you taking a tablet and you brought a home dock and you brought another keyboard. All that for mobility? This is all captured in one platform. And what's significant about this, not unlike a jeweler, we've reengineered this entire hinge so if I go ahead and open this up -- I just what you guys to see how significant it is. It lifts it up, it presents the display. But what is really killer here is that just that simple, just that quick, there you go. Well, it's just a detaching display. Mind you, it has no clamps, it has no extra pieces to it. This thing is just beautiful in its design, but functionally, it is one of the most remarkable pieces out there. Just that simple, just that quick. I've now joined these 2 pieces, it's back to a PC, it's back to a laptop. And again, sexy and clean.
So kind of traditional pieces, right? We talked about it an all-in-one. We talked about a notebook And we talk about this transformer, which is still kind of in-between. But what we haven't talked about it as a tablet. In the tablet, we have spent a number of hours trying to think through what is the opportunity that we have in the business space. Now a couple of things. We talked a lot with corporate accounts and end users and corporations. And it's so funny when you talk to corporate accounts. They go, "I want desktop connectivity." Okay. "I want serviceability." Okay. "I want scalability." Well, those are all great checklist from a corporate standpoint. But let's keep in mind, when I add all those pieces together from a design standpoint, it becomes big. It becomes heavy. It becomes ugly. We don't want to do ugly, right?
So the key thing about this is we had to be smarter. And I'm going to do little bit of pun here, but it's one of those things that when we designed this -- now, let me take this off because I want you guys see it may be a view -- a little bit of the video here because it's so significant when you look at the hardware. Look at how we've sculpted the sides. Why? Because this is how you hold it. You notice, the bottom's a little bit thicker. That's where we've put audio. We didn't scrimp on audio. If you noticed the top, we've actually put not just one antenna, many antennas. NFC, all into this little form factor, and we're thinner than the other guys. It's amazing what we've put into this, and it's fully serviceable. So it's just amazing. But when I said we had to work smarter, what I'm referring to is smart jackets. The ability to scale and transform the tablet for every customer, every industry. We have come up with an ingenious way -- if I just take this apart, and I want to show it to you because it's so ingenious. Just that simple. I slid that together. Let me put the top on. And what I love about this is that just that quick, I've gone from just a simple tablet to a full bank of I/O, okay? You name it, I can customize it, whatever your needs are. But what's really amazing here is not so much the tablet, but what you can go and do.
So I've talk to you about the tablet, I've talked about the smart sleeves. But what about productivity? I want a full-size keyboard. Well, some of those guys put the magnets and they stick together. Well, we wanted to be more genius than that.
I'm showing you a transformer with our tablet. but it's not just a cradle that I put the tablet in. What's amazing here is because of the way we designed the tablet, the dock, the smart jackets, I actually have a full PC. All my I/O's out the back. I'm using one battery. What is beautiful about this is I've created the true PC. I've created the ultimate business tablet.
So if we go to the next slide, I'll end with a couple of themes that I want you guys to kind of note. I couldn't you show you the future. They won't let me show you the future, but what I can show you is kind of the themes of the future. We're going to be thinner. The products have to have a gesture. They need to be iconic. They need to stand out, and one of the things that I started with -- and I want to remind you, it's more than just hardware. We can't just keep selling hardware. We have to be better than that. We have to have better experiences.
So with that said, I'm going to turn it back over to Todd, and let him continue. Thank you very much.
R. Todd Bradley
So thanks, Stacy. Look, I think it's also important to note that we're going to apply the same focus and discipline around elegance, around the iconic and intuitive design to our printers and well -- as well.
So let's take a look at Printing. Here's our view of the Printing business today. As in PCs, we're the category and world leader in Printing. We pioneered the Personal Printing business 28 years ago. Now it's fair to say that today, we face macroeconomic headwinds coupled with some secular shifts. To address this and to defend and expand our supplies territory, we have to innovate on new business models. We have to drive preference by simplifying the printing experience. There are 5 times a day, I wish I could print something from my phone, that my phone would just find the nearest printer and allow me to print. And we must offer that kind of innovation to our customers. So here's what you can expect. You can expect innovation around the printing experience. You can expect momentum in MFPs, Managed Print Services, and in cloud printing. We expect an expansion, or we will execute an expansion of our Ink in the Office and Ink Advantage initiatives. We know that we'll improve our brand preference by shifting that spend from discounting to marketing. We'll rationalize our spend, and we'll increase our cash generation.
Looking at the market, you could really say that this is a tale of 2 cities. While the consumer printing market is expected to decline, we have an opportunity. Frankly, as the category leader, we have the ability to impact the overall trajectory of this industry. We see opportunities in commercial printing, emerging markets and Managed Print Services, and frankly, in expanding the reach of ink.
Clearly, we've been an innovation machine in our printing franchise. We've been the leader for nearly 3 decades with that ability to innovate, coupled with global reach and unprecedented distribution. We clearly see upside in Managed Print Services, and we see major opportunities to accelerate several new business models around ink.
Now to tell you more, I'd like to introduce Steve Nigro, our Senior Vice President of Inkjet and Printing Solutions. Thanks, Steve.
Thanks, Todd. All right, I want to get you as excited about ink as Stacy got you excited about design. So I'm going to talk about the Ink business. And Ink -- the Ink business, of course, is a valuable business to HP. It's valuable for 2 reasons, right, the high margins that we generate, but also the IT that we have in the business. Now Todd just went over some of the market dynamics. And so what are we going to do to address the growth that are in the printing market.
I'm going to talk about 3 initiatives. First, growth in the emerging markets. We're going to be introducing or expanding our new business models in emerging markets, and this is going to allow us to take advantage of that growth and go after that valuable customer.
Second, commercial printing growth. Now most people think of inkjet as a consumer printing solution. And that is certainly true from a historical perspective. But actually, as commercial goes to color and as we innovate with our technology, we can offer the customer a compelling value proposition of saving money, which is foundational in the technology. And we believe that's going to allow us to really grow our Ink business.
And finally, acting like the market leader we are, going after in creating new printing opportunities. And I'm going to talk specifically about mobility. And it's very similar to things we've done in the past when we created a digital photography industry. We need to continue to go at those new printing opportunities.
So let me talk about the emerging markets first. A key strategy for us is our Ink Advantage program. Now this is a new business model for us. Now let me explain it real briefly. What we do is number one, we slightly increased the price of the hardware including the entry-level products. We increased it about $20, approximately.
Second, we decreased the cost of supplies. We decreased the cost per page of the running cost by 2x, we cut it in half, and we lowered the purchase price of the pop of the supplies to less than $10.
Third, we have to go tell customers about it. We have to go tell them that they can save money when they buy these HP printers in emerging markets. And our message is pretty simple: Print more, pay less, no risk. And what you find in the emerging market customer dynamics is they are very sensitive to their running costs. They actually will go to an extreme and compromise their quality to save money. So now what we can do is we can give them a no compromise, no-risk solution, let them save money. And we really believe this is going to allow us to continue to go capture those valuable customers in the emerging markets.
So let me give you some facts about it. This is not something we're just -- are starting today. It's something we've been scaling over time because it's such a big change. We want to get the facts to confirm that we have to model that work. And so what you can see last year, we shipped over 1 million Ink Advantage printers in 10 countries. And what we saw was an increase in usage of greater than 30%. And in some cases, much more than 30%. Second, aftermarket share gain. We saw 15 points and greater share gain as we've lowered the price of supply and lower the running costs. The other thing we saw was a significant improvement in customer satisfaction.
And finally, from an HP perspective, compared to our traditional emerging market Ink business model it's accretive. It's a better business for us. So it works for the customer, it works for us. So what are we doing? This year in July, we expanded our Ink Advantage program to over 80 countries, and we also are giving and using our investment dollars to go out and tell people about this innovation, about the savings. And we think this is a key piece of our strategy to go after with our new model, that valuable customer in emerging markets.
Second, Todd talk about the growth in the commercial market. Now again, people think about ink in consumers, but we've actually haven't what we call our Ink in the Office initiative. Now what that is, is basically to put it in terms of the product, our OfficeJet Premium positions, just the OfficeJet Premium, the top position of our OfficeJet lineup and all our OfficeJet Pro products. That defines our Ink in the Office portfolio. And we have, again, a simple message to the customer, 50% -- actually our messages is 50-50: 50% lower cost of printing, 50% less energy.
Back in March of '09, we introduced the OfficeJet Pro 8500. It was really the first time we came out with a inkjet printer that was business-worthy: have the reliability, the robustness, the intervention rate.
And at the same time, we started talking about the savings. And so what we've seen is on a system basis from 10% to 12%, we've seen a CAGR of that business of -- on a system basis of 17%. And we expect going in next year that we'll continue that double-digit system growth.
The other thing we saw is an improved margin. This business actually has better margins than our standard worldwide Inkjet business. And to give you a sense of where we are in this transition, if you look at the pages printed, this year, using Inkjet, HP Inkjet cartridges, 1/3 of our pages come from our Ink in the Office portfolio.
Now I really wish this event was about a month ago, a month from now because 1 month from now, I could be telling you more details about our next generation inkjet platform. And this is going to be a significant event in where Inkjet can go. And all I can say is these things don't happen very often in terms of when you actually change, where a technology can go and where to introduce a new platform and a new product that will allow us to go after new pages with our inkjet portfolio, expanding from our OfficeJet Pro lineup and still delivering that same fundamental 50% saving message. Because when it comes to printing those color pages, it is fundamentally lower cost with inkjet.
Now when you look at this growth in the MFP sector, we had a great lineup with LaserJet. We have an emerging and really emerging lineup with our inkjet portfolio, OfficeJet Pro portfolio. And we believe with our new introductions of our MFPs, on LaserJet and our Inkjet lineup, we're going to actually be able to grow share and have both those businesses grow as HP even becomes stronger in this growth segment of the printing market.
Finally, it's about creating those new printing occasions. One of the opportunities we have is mobile printing. Todd talked about it today, it's a very fragmented set of solutions. In some cases, there's some good solutions out there. Other cases, it's very difficult to use your mobile device and print.
So what are we going to do? We need to make it simple for the customer. And the customer wants us to do this. Two examples: Apple developed, right, their solution with HP to print for from a tablet, and that was done because of the customer demand. And recently, we did some research, and we study customers who had print-enabled tablets. And what we found in their environment, they actually increase their printing 1.4x versus those who do not have print-enabled tablets.
So clearly, printing is changing, and we need to go where the new devices are, and we're doing that with mobility. So what are we going to do? We're going to make it simple. We need to play to when you have the intention of printing. When you want to print, you're going to say, "Print." It will auto-discover your devices. And then when you print, it will send a print job. Now it may go through a WiFi network, it may go through the cloud, but that's going to be transparent to you, it's just going to work.
And to give you an example of some facts of how we can drive this, as you know, we have our Web-connected printers. In the last year, we've actually doubled the number of printers that have connected to our cloud service. More importantly, we've seen an increase of 3x in the number of pages that are coming through our cloud service. Now it's not material yet, but it's an example of creating new solutions to drive new printing experiences and driving pages.
So I hope that I got you excited about the Inkjet Printing in the future. It's a valuable business. We are going after the emerging markets, and we believe we can go on and grab those valuable customers with our new business model around Ink Advantage. Second, commercial and commercial growth. As we go and innovate, we have a strong fundamental value proposition of saving you money, which is intrinsic to the technology. And then finally, we're going to continue to create those new printing opportunities to create our future.
Thank you very much, and I'll hand it back over to Todd.
R. Todd Bradley
Thanks, Steve. Awesome, awesome, awesome work by Steve and his team. So he gave you a good sense of some of our plans around ink and a little teaser out there about what we have coming. At the same time, over the next few weeks, we'll also be telling you about some very exciting, very new LaserJet, both products and solutions, that will drive an entire new level of efficiency in the office and further differentiate HP in the marketplace.
Now let's just talk about this, and let me tell you why I'm equally as excited about the new line of multi-function printers Ron Coughlin and his team have made. The point here is that we, frankly, not won our fair share of color -- of the color MFP market. We have small share in a growing, high-margin piece of the business, high-margin piece of the industry. In fact, if we can get our traditional share, just half of our traditional share, that will equal about $2 billion in revenue. And our ability to generate products and services to do that, I think, will be self-evident.
So we're retooling to grow our Laser business, and we'll be powered by a new line of multi-function printers including 16 new products by the end of 2013, and we'll move forward from a position of strength. We've just received an industry report noting our MFPs are already leaders according to third party reports from Gartner and will further pull away from that pack in 2013.
In Managed Print Services, we're growing faster than the market, and we still has an opportunity to capture more share, and we'll do it by utilizing our scale and our coverage. We'll differentiate with ePrint solutions and document flow. We still have the opportunity to show the world that Managed Print Services can bring the entire HP value proposition to life. And I think, this customer testimonial will show this extremely well. So can you guys can roll the video, please?
R. Todd Bradley
So I think that was a great example of what our products, our services and our solution is capable of providing to the enterprise. So the bottom line is we are retooling to win with new levels of innovation, new momentum and mobility, new business models to leverage our strengths and our assets and more formidable go-to-market framework than we've ever had. A continued focus on optimizing our business and ability to do it with new levels of operational leadership. The bottom line here is we are making real intangible products -- progress. And our opportunity is real, and we're going to attack it with vigor.
With that, I thank you for your time. Look forward to talking to you about our products. It's my pleasure to introduce Dave Donatelli.
Thank you. Thanks very much, Todd. Actually as Dave comes up onto stage here, we're just going to run a very short video that will help share with you some of the feedback from customers on how they think about the full range of the portfolio in the Enterprise Group and what customers think about it. So if we could roll the video, and then after that, Dave, will take you through the Enterprise Group. Thanks very much.
David A. Donatelli
Well, thanks to our customers for doing that. And it gives you, I think, some insight to the advantages that they're seeing from all the innovations we've been bringing into the infrastructure market. So I thought I'd start today by talking about framework. How do we see the business? How do we see the market? Where do we see it going in HP's place in there? So simply put, we believe, in the Enterprise Group, we're at the forefront of all the major trends you see happening in infrastructure. And that is great for our customers, and it's also great for the company's long-term health. Because if you look at these trends and you look at the marketplaces we're addressing, they all have certain things in common. They're large markets that are going. We're addressing them with HP-unique IP. And as we sell more of these products into these markets, we're driving margins that are higher than what we make elsewhere in the business and elsewhere traditionally.
Now as we do this like all of our businesses, we do face challenges, and we're very clear about those challenges and we're very clear about how we're addressing them. So if you look at across our portfolio, we're in the middle streamlining multiple products sets. And again, the idea here is that over time, we have been selling more other people's technology and not enough of our own, or we've been selling markets into -- selling technology in the markets that really weren't going to be growth markets going forward.
So we've made those difficult decisions. We've, again, moved to more of our own IP. In UNIX business, we face multiple issues. We see a-- basically, a decline in the market overall. That's a secular decline in UNIX, and we've also had our issues, as you know, with the Oracle situation that we'll address a little bit later.
In ISS, after great growth years in 2010 and 2011, we've seen not a good growth year this year, and we're taking steps to address that. Part of that happens to do with the engagement of our channel partners, as well as the sales force reorganization that you heard Meg talked about earlier. We're addressing the fact that we've got these re-orgs done. Now we have to get people focused again on selling and driving the products we want.
And then finally, as you heard, we do have challenges in the macroeconomic environment out there. We see this particularly in EMEA, where we have a very large market share, as well as coming out of China. But what should you expect from us in the future, and how should you measure us? Well, I tell you, what we expect is this to drive continued revenue and share growth in the key categories that we're driving towards, that being networking, that being storage with 3PAR and StoreOnce, that being HP's cloud. You'll see us go back to increasing our x86 server revenue, and you'll see us drive increased revenue out of our channel. So that's the business framework.
Let's talk about the market. In infrastructure, we really see our 3 major trends out there drive in the marketplace. The first trend is Converged Infrastructure. The second one is Cloud and the third one is one that you're really just starting to hear about out of the general marketplace, which we call the Software Defined Data Center. And again, as I'm happy to say, HP has the leading position in all 3 of these. So we're extremely well-positioned for where the market is going and its future.
At this meeting about 3 years ago, we introduced the idea of convergence. And the way you want to think about convergence is this; it's really the third major wave of infrastructure in the data center. If you go back to the 1960s, and I'll start with the mainframe, and the mainframe wave lasted a very long time. In fact, it lasted all the way up to the 1980s. And in the 1980s, that wave started to get replaced with client server, and what many of you know as best-of-breed computing, where people decompose the stack and bought individual pieces. And that's the predominant way that infrastructure computation happens in the data center today. But we saw a change happening. And the change was happening for a couple of big reasons. One, customers want to start to buy from fewer, larger suppliers who can handle more of their needs, and then secondly, the underlying technologies were starting to change and that client server and best-of-breed got too complicated, too inefficient, and there needed to be a better more efficient way to deliver IT services.
And that's where convergence came in; the idea of consolidating Server, Network, Storage, and management into one consolidated infrastructure.
And HP's incredibly well-positioned here because we're the only company that plays in all of those elements. And since they're all of our own elements that we design, we could design it right from the ground up.
Now I'm proud to say that since we've announced this, every single competitor we have has followed. And literally, you can look on any web page in the industry or any press release and see them start to talk about convergence. But while they were following, we have continued to evolve the technology. So today, if you look at our cloud products, they incorporate our HP Software products as well as our Server, Network and Storage products. If you look at our backup products, they can -- are made up of all these same technology: Server, Network, Storage, as well as our HP Software products.
Through convergence, we're changing the relationship and the hierarchy of memory and cache management between servers and storage. And you seen us completely consolidate the network connectivity between Server, Network and Storage in a way not thought about a very short time ago.
So the products are real, they're here today and we continue to drive success and growth where we've let these products out to market where we've shipped them.
So how are we doing it? Well, we really have an incredibly ambitious agenda. And that is around infrastructure to really rethink and redefine each piece of it; rethink the way servers are made, rethink the way Server -- Storage has been done for the last 20 years and completely change the way networking has been done. And again, they're just not thoughts, they're actual products we are now delivering or will deliver soon.
So I thought why don't I just kind of take you through each piece of this and see how uniquely we're approaching the marketplace. So first off, let's talk about servers. Servers are undergoing a big, big evolutionary cycle now. And it's been driven by the things you know, the things you do every day. It's been driven by the Internet, it's been driven by cloud, it's been driven by the needs that all these increased computing around big data are driving. So if you look at the server market as we mentioned before, it started with the mainframe, kind of the next generation after that isn't even on the chart anymore because it no longer exists. That was called the Mini-computer server, a business HP used to be in. That then moved into the UNIX market, one of the markets we helped pioneer, and then into the x86 market, which is a marketplace we started. x86, as it's matured, has really broken into 3 different branches. We have Rackmount where it started, Blade, and what is now called density optimize, and you want to think of those as specific servers built for clouds.
Then finally, HP has introduced an entire new category of servers, and these are servers built from ARM and Atom chips. What you see there in the graphics is a picture of a cellphone, and the reason why that's there is those are the chips, the chips we're using to build this new generation of servers is, it's built from the same chips that are in your smartphones today, and it's nothing short of a revolution.
In the cloud today, we have customers who are running 0.5 million servers heading to 1 million. This compares to enterprises who are used to running thousands, maybe hundreds, if you're an SMB, but nowhere near 250,000 servers. So things had to change. That picture you see there, that small picture has more than 70 servers in it. So really a whole revolution based on the needs of the market, based on our own innovation.
So if you walk through the server market, as I mentioned, we pioneered the x86 market, still a very big market for us and one that we have great share in. Our Blade share is over 50%, if you look at the latest numbers that just came out from Q3, and our Rackmount share or overall share continues be the high 30s.
The way we've maintained that for so long is through innovation. Although they're called Industry Standard Servers, we have pioneered tons of innovation in this industry, and we continue to do to this day. Fact, if you look at New York Times last Sunday, you saw pictures of our EcoPODs you see there, which is a whole different way to run industry-standard infrastructure.
Our latest generation of x86 servers is called our Generation 8. And here, again, is some place where we've added tremendous innovation compared to what had happening in the marketplace. For years, Industry Standard Servers really focused on speeds and feeds, how I make a faster, denser server. And we've certainly done that with Generation 8. If you look there on the bottom of the chart, you'll see, with all the industry-standard benchmarks, we're ranked #1.
Think about that for a second. Supposedly, we're all using the same chips, supposedly, they're industry-standard, but on every single benchmark, we beat every competitor. That's done through innovation. In addition to that, what we found is that as enterprises adopted more x86 computers, the market needs changed. It's one thing at around a dozen of these or hundreds of these, but when you start to run thousands of these, the way in which you manage them and support them becomes an ever-increasing part of your cost structure.
And the theme you'll see throughout the infrastructure today is how do you take that complexity and simplify it. And that's what we've done with Gen8. We, in essence, have made servers that, as I said, run faster, but they're also proactive and they're simple. Our whole idea was invent a technology that basically managed itself, and we did that by talking to our customers. We added what we like to call, "150 customer-based innovations." Meaning, we sat with them, and said, "Where do you spend your time? What you don't like? What can we automate?" And with Gen8, that's exactly what we did.
So now literally, servers can start up with a touch of a button, we can update thousands of servers with one click, and we fully automated the service of all those servers. So again, x86 is driven by innovation. We continue to lead, and we'll continue to drive innovation at even faster rate here going forward.
Now one of the big questions I get from everybody in this room is about white box. Everybody likes to write about white box, everybody talks about white box. I think this data here is the going to surprise you.
So if you look back in 2009, we bought out a new line of servers call the SL series. And these were targeted specifically where the white box market targets, which generally speaking, had been large cloud environments. Since that time, 2 things have happened: we gained 8 points of market share, and our margins in this space have grown significantly. Why? Again, because of the differentiation. And is this very market in the ARM-based and Atom-based servers will play. We are pioneering that type of technology. We've done it because with our innovation here, we solve the customers problems.
In essence, at the size we're talking, 0.5 million servers, 1 million servers, traditional x86 will not work over the long term. You'll literally have to pave over a state to fit everything in the data centers. It's not going to work.
With the new base that we call Moonshot, and again, comparing to our own x86 server, which is what those comps are on the bottom, we can now take a single rack and put thousands of servers. From a power perspective, to get the same exact computing power, we reduced power required by 89%. From a cost perspective, we reduced cost by over 60%. And I can tell you the margins on this are pretty good.
So again, servers, big changes, whole new revolution of servers driven by Moonshot, driven by innovation.
You heard Cathy earlier talk about the connection between our Support Organization and our Enterprise Group. So we put these organizations together back in June of 2011, and what they principally do is provide support as well as professional services around our Server, Network, Storage and cloud. But it's not just the fact that we have the organizations together, we are also integrating the technologies. So as you heard in that customer video, one of the brief snippets there, was a customer talking about new technology we bought out with those Gen8 servers. The idea that have technology chips on those servers that enable us to automate how we service that environment for our customer. We can do it all for them, from the cloud, customer doesn't have to touch anything.
By doing that, we provide the customer a better experience, and very importantly, we give the customer more reason to buy more of our services. So since we've done this combination, we've seen our best bookings in TS in 5 years. And as you know, those bookings will revenue out over time. Also since we've done this combination, we've seen increasing, what we call penetration rates, of each service sale, and that measurement is how much revenue do we get per sale based on how many services the customer buys.
So on average, if you look at it, we're up about 300 basis points with our penetration rate both in Storage and Networking since the combination of these 2 groups. So very, very powerful for our customers and very, very powerful for our business model going forward. So that's just servers.
Now how we are changing the Storage market? Again, here, we have a very bold vision and it's not just a vision, we're making a lot of progress in terms of actual revenue results with customers in the marketplace. So let me share some of that with you.
What our goal here was, from the business perspective, was again to move to more HP-owned IP that enable us to have differentiation that we control going forward. And so just to show you some of the progress we've made today, our portfolio of what we call our Lead with our Future Products, so far this year is up 39% year-to-date. Our external disk revenue, so far this year, is up 2%. In Europe, we've now achieved the second position in terms of market share with our external disk revenue this year.
So if you look at our acquisition of 3PAR, it's been a fabulously successful acquisition. Revenue, so far this year, is up 80% year-to-date -- fiscal year-to-date. And the question I get all the time is that if you combine 3PAR with EVA, how does that look? And if you combine that revenue together, you'll see that we've grown at 14% combined year-to-date. 3PAR has gained 2.6 points of market share in the high-end space since we bought it. And so far this year, we've signed over 850 new 3PAR customers.
So the point is we're seeing tremendous traction with the technology. And I could tell you, by the end of this year, we have a very exciting product announcement coming out that is going to greatly expand the market opportunity for 3PAR.
The same thing is true in Backup. Backup is an area that we're also concentrating on. And since the introduction of our StoreOnce technology, we've gained over 2.1 points of share. So we have the vision, we have the products, we're showing real world results in terms of their adoption.
So why is it so different? Well, again, going back to our theme of simplicity in the data center, storage had gotten incredibly complex. I know most of you in this room follow all the other companies in the marketplace. And you know when there's other companies presents storage solutions to customers, they have multiple products with multiple different operating systems in order to meet the customers' needs. And frankly, what that does is that puts the burden on the customer to go figure it all out. They got to train their people in all these different operating systems. They can't inter-operate data arrays. They can't move data around very easily, very, very complex. And the same exact thing is true for Backup.
So these systems themselves are basically software operating systems. That's where their value comes from, that's where their IP comes from. And what HP has done that's very unique here is that we have new architect and operating systems that span a great deal of the customers' needs. So in essence, with one architecture, we can take care of more of their problems than anybody else. Greatly simplifies what customers do, greatly simplifies their implementation, gives us huge leverage in terms of R&D and go-to-market.
So why do customers love it? I could go on for hours about each product. Let me just give you some simple points. We can walk into any legacy storage infrastructure in the world. We make 2 written guarantees: we'll take the storage you have and we'll reduce it in half. So if you have 100 petabytes of storage, we'll take it down to 50, guaranteed. We'll enable you to run twice the amount of virtual machines on our stores than everybody else, guaranteed. And we'll tell you, due to our modern architecture, our storage is about 90% easier to manage. Great news is a lot of customers are taking advantage of. The even better news is, I've never had to pay the guarantee.
If you look at a Backup with StoreOnce, we're doing the same thing here. Now StoreOnce was a technology that was actually invented in HP Labs, and is a net new technology written from the ground up that we transfer from HP Labs into our product group. And what it really does is, as we say, is it store data once. And we do this through deduplication. So deduplication has become incredibly popular in the industry. Customers love it because it helps them deal with the explosion of data out there, so they can still meet their Backup windows. But what they've found is that across their environment, they need to do all kinds of different deduplication. They need to do client side deduplication, which is where they dedupe at the server. They want to do inline deduplication with a dedupe as data comes over a network. And prior to StoreOnce and still today, the only way to do that was to buy, again, multiple products, make it complex, make the customer figure it out.
StoreOnce is the only product on earth that does all those types of dedupe in one single product, one single architecture. And it spans from the low end of the market all the way up to the high end of the market.
Better still, once that data is deduplicated, you can move it anywhere you want in the enterprise in its deduplicated form. No one else on earth does that. Everybody else makes you take that data and re-dup it, or if you will, rehydrate it back to its large state before you can move it.
It's based on our own software as well as our Industry Standard Servers and Storage. So it takes advantage of our convergence, gives you great technology at a very cost-effective price. And from a performance point of view, we offer performance that's never been seen before. So we can backup data to 100 terabytes an hour, and we can restore data at 40 terabytes an hour. So let me give you an idea how that kind of translates to what people see.
Well, versus our nearest competitor in the marketplace which is Data Domain, we backup data 3x faster and we restore data 5x faster. So again in a world in which data is always growing, CIOs have a constant challenge of how do they back it up fast enough to remain compliant when every year their data doubles. So when you have a performance advantage in rate of backup, and if you ever have to restore something, rate advantage in ability to restore, very, very important. And that's what StoreOnce offers. So again, very unique architectures, leveraging Converged Infrastructure that offers simplicity in a very unique value proposition to customers that we've already seen very strong market success in.
In Networking, the third leg of our stool here, you see another very unique approach. So we announced at this event, a few years back in this event, that HP want to be major player in networking. And I can tell you today, where we play, which is in Enterprise Network, there's only 2 of us in the world with double-digit share, and HP is one of those 2 companies.
If you look specifically of how we're doing, in the regular switching space, we have about, globally, an 11.5% revenue share and over 18% port share. If you look at China, which is obviously a high-growth country, we have more than 30% revenue share, and then we're the #1 player in the market. We have significant share as well in wireless and significant share in WAN, where we're the #2 player in the world as well. We've added over 1,000 new customers in the last 18 months to our networking products.
So again, here is a combination of where we had our own IP, as well as an acquisition of 3Com. And we could tell you, the combination of our IP with 3Com has gone extremely well, and you see that in our numbers, and we believe the opportunity here is great, going forward. And the reason why that opportunity is so great is because this is an industry, itself, that's seen market change and new architectures emerging.
So this is a quick shot of our family. You can see it's comprehensive. We play in everything from the data center, all the way up to the campus and everything in between, wired and wireless. You also see a common theme here, which is reintroducing -- changing infrastructure for more simplistic approach because today, the way networks work is, they're application-indifferent, meaning the network doesn't care whether the app is on it. It's very rigid and hard to change, and it's got to be managed manually. So customers literally can have 250,000 CLI commands, how they manually manage the network. It's very hard, it's very complex and it's very inflexible. They can't keep up with where their business is taking them.
Our vision here is really simple. We want people to focus less on managing the wires or the infrastructure of the network, and make it easier for them to connect users to the applications so that IT can be a hero to their users because they're able to keep up with what their users want.
The primary way that this is happening is where the term that I know has really gotten a lot of publicity lately, but one we've been working on for a long period of time and that's called Software Defined Networking. So since it's such a new term, I'll just take a moment trying to take you through our definition of it, and then explain why this is such a sea change [ph] for what's been happening in the network marketplace.
First, open layer of this is that you have open access to your infrastructure. So in essence, an open operating system where you can you actually access the hardware of the layer network itself.
The second part of a Software Defined Network is you separate, for the first time, the control plane and the data plane. Now this is something that's been done in technology, in different types of technology for a long period of time. It all simply means is that you have the network and its wires moving data, and you'll separate that from a centralized location where you can actually control what that data does.
Then the third piece on top of that is, as I mentioned before, traditionally, networks had not really understood what applications were running over them. And that really hurt people around SLAs because they might want to give in one application, more networking bandwidth than others and they want to be able to really manage that application specifically. So the third layer of this is delivering an open APIs that allow you to orchestrate those applications in an automated fashion.
So as I mentioned, we’ve already been at this a long time, and we have, by far, the most comprehensive SDN available in the marketplace today. At the base level, the infrastructure layer, we have been supporting OpenFlow, which is the standard that allows that open access. We've enabled that already on 25 of our switch products, and we have over 15 million ports installed already that are OpenFlow-enabled.
Just yesterday, in New York City, we announced our SDN Controller. And this is the controller that gives you the centralized management that separates the control from the data movement on the network. And then on top of that, we already enable open access to the application layer. And 2 folks you see there, HBO and CERN are our beta test partners who are doing distributed security on their network using our SDN in one case, and doing distributed load balancing in the other using our SDN. So we have real customers using real applications on SDN today.
Here's the quick look at our Controller. I won't take you through all of it. But just so you know, you can buy it as an appliance. Obviously, we can make appliances based on our industry-standard hardware, or you can buy the software only. As I mentioned, we used the OpenFlow standard to help drive it and has the open APIs that enable access to it.
Now let me give you some context around this. It's probably about 3 different major models you hear about SDN out there: one, let's call it the legacy network supplier; two, we can call the upstart overlay software provider; and then three, is ours. And what you'll see across is dramatic differentiation. HP's approach goes end to end from the data center to the campus to the branch. It allows access and openness at all 3 layers. It enables you not only just to optimize the software itself but the hardware layer as well, and you need to do both in order to have an optimized network.
On the overlay side, you really can only touch the data center, and you really can't touch any of those other pieces there. And the legacy folks want to defend the legacy and I don't think are too excited to see SDN take over. But I'll tell you what every customer tells me; it's not if, it's when. They're already talking about it now. Like any new major change, it will roll out over time. But the key thing is we're incredibly well-positioned for it today.
And it's not just me saying these things. So if you look how Gartner Group evaluates our infrastructure and what you see here, these are their latest charts. So you can see the date in which they came out. Obviously, in our servers, we've been upper right for a very long period of time. Storage, as you see, there's a lot of players there. But what I'll point out to you is in the last time they did this, which is way back in November of '11, we moved significantly on that chart, and they do this based on execution and vision. We moved over as the most visionary storage company by their analysis, and I expect when you see this chart again in November that we will move up significantly on the execution side. Then in networking, as you see, that there's only 2 of us upper right. As I said, we have separated ourselves from the pack in networking. If you look at it from a share perspective, the next nearest enterprise networking competitor, we have about 5x their share. So it's clearly now a 2-horse race in the networking marketplace.
So that was infrastructure. Let me briefly now touch on cloud. So Bill Veghte is going to come up and talk all about the HP cloud going forward. I'm just going to cover a little bit about Converged Infrastructure and how it works in the private cloud as well as the hybrid cloud.
So what Bill will tell you uniquely about HP is that we have one architecture across all the various implementations of cloud, whether it's public cloud, managed cloud or private cloud. And at the last Analyst Day, we introduced a product to you called CloudSystem. And this product was built upon a combination of HP Software assets and HP's Converged Infrastructure. And unique to other clouds in the marketplace, this system was built openly. So we manage both our hardware and competitors' hardware. And also unique to everybody else out there, we don't just manage hardware in a cloud-like manner. We orchestrate all the way up through the major applications.
So what you see on the slide there is many of the folks where we have predefined their applications for the cloud. And this has met tremendous customer success out there. So, since we introduced CloudSystem, we have over 775 cloud customers. And as you saw earlier, if you look at our cloud business overall at HP, it's a multibillion dollar business for the company, this as well as all the hardware we sell into all the other clouds around the world. So cloud is very big for HP. It's a big piece of infrastructure, and we're seeing very strong customer adoption with our offering.
So now the final big trend. It's one that everybody is starting to talk about, which is really the software-defined data center. And here, again, we find ourselves at the forefront of this trend and leading our customers to this position. One of the neat things about this trend is that we are building on our strength in the data center. So we can help customers with their migration from where they are today to where they want to go. And one place for sure they want to go over time is to more of a software-defined data center.
So if you look at that, we again play across the board. The Moonshot product I have mentioned to you enables us to make a significant change in servers. You hear me talk about the power, the cooling, the density. But also, it really allows us to customize servers for applications. So we really call it a software-defined server. So if you think about a x86 server, it is a general purpose server. The server is what it is. The customer puts their software on top. What we're able to do with these servers, as I mentioned, there's more than 70 servers you see there, is customize the performance of the server itself, the I/O, the memory, specifically for the customer's application. And in thinking clouds, there's going to be applications that they're going to need tons of compute for that they need to optimize perfectly. And that's what we call software-defined server, and Moonshot is a technology that, for the first time, enables that.
In the storage space in a software-defined data center, we're going to see the same thing. And you may recall that several years ago, HP bought a company called Lefthand Networks. Lefthand Networks pioneered the ability to run storage and base it on industry-standard hardware. In fact, we have over 150,000 sold licenses for that technology that we call StoreVirtual VSA. So we have a bigger footprint than anybody else on Earth and lots of experience in doing this.
And then finally, you just heard us talk about software-defined networking, which is the way networking has kind of evolved in the software-defined data center. All of these technologies will run on our Converged Infrastructure, and all of these technologies will run under our converged management. So again, greatly simplifying the data center, greatly simplifying their infrastructure. And this is the advantage of having HP's scale and HP's presence in all of these markets because as infrastructure is evolving, we can lead it because we have the technology to innovate within our 4 walls ourselves.
So what are we going to do to win? Well, you heard me talk about the 3 trends in infrastructure that we see. Our goal is to continue to lead them. And you saw me give you some interim reports on the fact that we're not just talking about this, then the markets and the products we have targeted are growing significantly and making a significant impact in the marketplace. And we'll continue to build upon that.
We're also in the middle of this portfolio simplification. This means from a revenue perspective, we're getting out of products that either are not strategic or not good for our bottom line. But while we do that, that's why you see some of the revenue choppiness that you see in the business overall. On the go-to-market side, we have consolidated our go-to-market; in essence, eliminating layers of management to speed decision-making, make it easier for our folks to sell and easier for us to get better service for our customers. We have launched many new channel improvement programs in order to reengage our channel after the effects of what we call the August 18 announcement, and we expect to see healthy results from those.
Due to our scale, we always have great opportunities around cost leverage. In our Enterprise Group supply chain, we kicked off our latest effort to bring out significant savings in our supply chain over time. And as I mentioned, by going to more modern architectures based on software, we also have tremendous R&D leverage where we can develop once and attack many markets, where others have to develop multiple times to attack the same market. Operationally, we have a lot of work going on as well. You heard us talk about things like mode to [ph] cache, Salesforce.com to help our sales force become more efficient. And we've made tremendous progress on quality, and we always will continue to because the better your products work, the better your quality is, the less inventory you have to have, the greater customer satisfaction you have, the easier it is on our service and the more our sales reps can spend their time selling.
So hopefully, what you see here is we have a vision. We've been consistently executing it for the last 3 years. We are making progress through that vision, and we're aimed squarely at the future of where this market is headed. So thank you.
And Dave, just before I let you go, I think it might be helpful for this audience if you could provide an update on the Oracle Itanium situation and how people should think about the BCS business.
David A. Donatelli
Sure. So 2 things about BCS. So if you look at the UNIX business itself, we see that business in secular decline. And if you look at last quarter's results as an example, every major company in UNIX saw a revenue decline year-over-year, and I think that trend is going to continue, again, as it's supplemented by these other new trends.
The second thing that's hit HP specifically, as many of you are aware, was Oracle's decision to stop porting their software onto our UNIX systems, and that happened back in March of 2011. It's had a significant impact on our business, both in terms of our primary sales of those systems as well as our support of those systems. We are pleased that we won the first round of the lawsuit. Many of you probably saw that, and the judge agreed with us. Oracle has now started porting their software again. But it's early days, and we'll see how customers react to that because that's just happened.
Okay. Great. Super. Thanks very much, Dave. So we're going to take a break now. After we come back, we'll have George Kadifa walking through the Software business. And as Dave talked about, Bill will talk about security and converged cloud.
The lunch arrangements are at the back and off to the right as you walk out there. We'll have about 30 minutes or so. A number of the people that you heard presenting this morning will be around at lunch to connect with, as well as many of the executives that Meg has referred to. Some of the other leaders and members of the management team are around and sprinkled about. So feel free to connect and engage and see you guys back here in about 30 minutes. Thank you.
All right. If I could ask everybody to return to your seats, please, and we'll get started again.
All right. Super. Thank you very much. So we're moving into the last part of the session before we get to Q&A. So I'd like to welcome on stage George Kadifa, who is our Executive Vice President for HP Software and George will talk to you about the Software business. So George.
Thank you, Rob. Good afternoon. I'm George Kadifa. I'm Executive Vice President of HP Software. I joined HP about 100 days ago or so, and let me give you a quick introduction of myself.
I joined HP from Silver Lake Partners where I was there for about 5 years and where I was an Operations Executive working with our portfolio of companies for value creation improvement. Prior to that, I spent the last 30 years in Silicon Valley, and I've seen it all. I've worked in small businesses and startups. I've seen Oracle grow from $1 billion to $10 billion. I've worked at IBM, and I also did some management consulting work at Booz-Allen. I'm very excited to be part of Meg's team and the executive committee, and I look forward to continue the dialogue with you.
Today, in terms of our HP Software, let me give you kind of the broad view that I've collected over the last -- since June, since I joined here. The first thing in terms of who we are is a tremendous asset for HP, that is we have, first and foremost, we have an upscale business. We have an excellent customer base who loves us continuously. Three is we are operating in growth markets. Four, we have leadership in a lot of the product lines that we have. And five, we also have disruptive technologies. And so you assemble all this portfolio and the challenges we're facing right now are challenges related to integration, leverage and growth.
And in integration, we're trying to make sure that all these components are put together in a streamlined fashion. In leverage, it's how to take those components and that solution set and create significant growth opportunities, and finally, on the growth side, we need to try to enable some of the drivers of growth in terms of sales productivity, web selling, SaaS and the areas of this sort. So hopefully in that journey that we're starting is what you'll expect from us is an integrated business model that will grow at 2 to 3x GDP with very profitable bottom line results.
Just to show you at least some statistics about the assets in that -- in this business. We're today the sixth largest software company in the world, totaling $4 billion in revenues. We've practically serve every Fortune 100 company. We have about 50,000 customers, and we have delivered innovation over and over again with leading products be it grown in-house or we've been acquiring some of these products. And what you see in these concentric circles is really kind of the journey that HP Software went through from working with a core application set or solution set developed at HP. Some of the people who've been with us for a long time or have been in this industry for a long time remember the great brand that HP built around OpenView. And from there on, through a series of acquisitions and in-house growth, we developed ourselves into a leader on the IT management space that we're expanding to the cloud. And we're also getting into the security area which is a business that is about $800 million or so right now for us. And then into Big Data analytics and finally, with meaning-based computing with Autonomy.
From a revenue profile point of view, just to give you more on the numbers, from a product line and product segment, we're quite diversified right now. We have our core IT cloud management, which is about less than 2/3 of our overall revenue. However, security is a big element of what we do now, and meaning-based computing is also a big share of what we're doing. And clearly, with the Big Data analytics, this is a new area that we are building, and it's actually doubling, if not tripling, on an ongoing basis, so it's a great opportunity for us.
We have disruptive technologies both in cloud, Big Data and security. And from a revenue type point of view, it's actually a great story for us because today between SaaS and support and maintenance, more than half of our revenue, close to 60% of our revenue, is long-term recurring revenue with very high operating margins in the 20% or so. So that's kind of the cushion, the basis for everything we do.
And the other piece is if you look at our SaaS and license offering, about 25% of our new revenue is actually recurring revenue, SaaS revenue, which is making us a very significant player in the SaaS space. And if you look at us as comparison to companies even like Salesforce.com, we're $1 billion bigger than Salesforce.com. We make more money than DMC Software. We have more SaaS revenue than the largest SaaS companies. And it's all here for us to integrate, leverage and grow, and that's what we're trying to do. And the last piece, from a geographic point of view, is we have the scale and we have the reach. We have HP behind us from a brand. So it's all the ingredients out there for our success.
Now to go a little bit into our products. We have assembled these solutions into 4 product suites. We call them performance systems. And what we do is we partner with our customers and we try to see how best we can leverage these systems to enable the confidence, the insight and the agility that these customers are looking for. And I'll give you some examples later on specifically to what we've done for several of our customers in terms of business value we generated.
And these performances systems, there are 4 of them right now, we have the IT Performance Suite that is centered around the IT buyer. We have the Security Performance Suite centered around the Chief Information Security Officer and the security community. We also have the Legal and Compliance Performance Suite centered around legal, compliance, governance areas within the enterprise. And the last but not least, we also have the Marketing Performance Suite that is focused on the Chief Marketing Officer and his or her staff. And the reason we've expanded these suites is our believe that the IT spending is not going to be confined only for the IT organization, but is going to be spread across all these different lines of business. And there are some statistics or some bets that the CMO in the future, in the near future, will have more IT dollars to spend than the CIO.
Underneath all of this, underneath these 4 suites that we have, there are actually 4 core technology engines that are extremely disruptive. And this is really the secret sauce of HP Software. The first one is the IDOL engine, and that's the Autonomy engine, that enables us to do meaning-based computing. And what we're going to do next is we're going to show you very soon what this engine is capable of doing to give you an example of the power of that technology that is available to us today.
Next to it is Vertica, which is a columnar database that enables Big Data analytics. And when Meg mentioned that we have technologies that are 100x to 1,000x faster than traditional relational technology, Vertica is actually that engine. And we can prove it today, and we have great, great outcomes with that. We also have logger technology and correlation technologies. What this allows us to do is to assemble streams of data, and we're talking millions and billions of data sets and assemble these and correlate them and create meanings out of them. And that's also as part of our IT operations side as well as part of our ArcSight security event management. And we also have dynamic dependency maps that bring all these pieces together. So again, it's a closed loop system of innovative technologies, enabling, empowering our 4 performance suites.
From a market point of view, as I mentioned before, we're operating in markets that are growing in the 12% to 15% CAGR level be it in enterprise security, which is we're expected to grow between 6% to 9%, Big Data analytics is a big growth market for us. On the IT cloud management side, that's another growth market for us and then meaning-based computing, that's an area where we're actually creating the market and this is an area where we feel very bullish about.
So overall, on an overall software market point of view, our target -- our available market for us is we estimate it to be $54 billion and with significant growth. That's why we feel confident that eventually, this business should be growing at 2 to 3x GDP. And in terms of these markets, our products are second to none be it in automation software or in distributor systems management software. We can go one by one into all these areas, and we have great and tremendous products and technologies to it. And our core focus, again, is to maintain that R&D organization and to expand it to keep remaining the leader in those areas.
So to go back a little bit and talk about our customers, when we engage with the customers, we start with a business idea. We basically try to -- we ask them the question, "What are you trying to do, and how best can we go and deliver on that business value that you're trying to do?" And what I did here is I brought 3 examples of customers that are referenceable for us: McKesson, Avis and the U.S. Army.
As you all know, McKesson is the largest provider of healthcare products. And what they wanted -- the business idea that they had is how to institute confidence in their provider network, that's 200,000 doctors and providers, how to have that availability at the highest level possible and with the 100% confidence while at the same time lowering the cost of delivery. So good, great quality, low-cost. At Avis, what they were struggling with, what they are trying to understand is how can they increase the safety of their drivers through GPS technology without having to take that as a cost of service. Can they make money on that or not? And for the U.S. Army, clearly, their mission was to protect the soldiers while they were carrying all these munitions that they have with them. Clearly, this was a very secured environment that they needed to maintain, otherwise bad things happen to the troops.
And what we did at HP Software is for McKesson, we deployed our IT and cloud operations software, and we're able to reduce their Tier 1 service level breaches by 86%, while at the same time, they consolidated their data centers from 30 down to 2 cloud sites and they delivered on $61 million of cost improvements.
For Avis, what they did was we help them through our software to simulate 20,000 different ways that customers will go and buy different configurations of their services. And we came to the conclusion that actually offering GPS and pricing for it would be something that could create more revenue. But importantly, they generated $5 million of profits out of that exercise. And for the U.S. Army, we allow them to do 350,000 monthly transactions of the munitions systems in a very, very secured way and delivered on that promise.
So with that, what I'm going to do next is I'm going to do something that in the software industry, we never do, which is deliver a live demo. And I would like to invite Brian Weiss here. And the demo we're going to show you, to give you the context, is a live system that the London Metropolitan Police used a couple of months ago in the London Olympics. And what they were trying to do was to understand within the perimeter of the capital itself if people -- what people were thinking so that they could predict if there was any hostile action that would take place, they would be ready for it so that they can eliminate before it happens. And Brian...
Yes, so we call this the tight wire now. So we're going to come up here and do a live demo. But I mean to your point, right, I mean the reason why we won that business is because the Metropolitan Police were struggling with an incredibly difficult problem, which is how do you make sense, right, how do you make sense out of all of the human information that has been generated and is being generated every single day? And what I mean by human information is the Twitter messages, right. That's a very simple 28-character piece. But if there's 60 million of them, how do I know and understand what's happening in a humanlike way, right?
Everything, from as simple as that to the complexity of, say, a video feed or YouTube or something like that. Inside the enterprise, you're talking about things like email. You're talking about blog posts. You're looking at information coming off of your call centers. All of this human information is complex. It's diverse, and the really, really challenging thing about this is that it changes all of the time, right? So if I say, hey, Michael Phelps is a bum, what are you going to do? Scramble the jets? You can't do that, right? I mean -- so I'm going to -- just watch -- the demonstration you're looking at right now is how Autonomy technology is used to drive that insight out of the information that most computing systems understand as noise, can't see it at all.
And just a little context about what's happening here. The Autonomy technology looks at this information and it reads it, watches it, listens to it and makes sense of it and forms an understanding of that information in humanlike terms. And then it surfaces that information to you and I, right. In this context, it's telling me what's happening in the real time in the news. In the context of an enterprise, it might tell me what's an important document or not a document with relevance or something that might be a security breach.
And here's what I love about this demo, right. What you're seeing here just sort of quickly is -- and by the way, this changes all the time. So I'm sort of doing this...
This is live.
Yes, this is live. This is live data. And what happens is we're taking every single piece of news, news broadcast, we're also looking at every single Twitter post that's coming across and also broadcast news and radio channels and we're listening to those. And you get a very interesting view, a nuanced view, when you couple those 2 things together, right. The first thing is, what are the main ideas that are breaking in the news? So if told you read every one of these documents, read every single news article, summarize it for me, tell me what the key ideas are, surface it for me and then in real time, tell me and sort it out the way people are thinking and feeling about it. That's what you would see here.
So what are we seeing here? What's happening right now? Okay. Already a riot, Police clash with demonstrators. If it's red by the way, it indicates that there's some negative response and sentiment to it coming on. Apparently, Jerry Seinfeld has surfaced. In some way, people are not -- either there's a little bit of ambivalence about that. There's floods that bring dangerous animals into home, privates, obviously a lot of activity about the presidential debate.
Does this mean people are looking forward for that presentation?
Clearly. It must be. Here's another one. So apparently, shaved heads have greater leadership. So I've got [indiscernible] in the back. Look what he say, let's go take it [ph] . But the point here of this exercise is there's no search box, okay. I'm not asking the computer to tell me what I want to know. I'm asking the data to tell me what's happening, and that's a radically different proposition...
So we're better than Google then?
Oh, it's completely different. Google tells you what people are searching for. I'm telling you what people are talking about, very different. So when you look at all these various topics, right, we've got presidential debate, we've got the head shaving that George and I are going to do, positive and negative. We're also doing statistics on all of that. So we can see who the most common people are moving that data. Of course we do stats. And then at the same time, what we're looking at is broadcast channels.
Now Autonomy is capable of watching TV and telling you what it's about, literally. I'm going to summarize -- oh, I'm going to sit there and watch hours and hours of TV and then summarize what the main ideas are. I'm going to put them together into channels and threads that make sense. These are all about the presidential debates, okay. And if I hub [ph] -- this about 1.5 hours ago that this came through, here's a bunch of new stories. In this case, the debates are mentioned. And if I ask it, I can -- I mean, these are the key ideas that are in that particular news broadcast. Now I don't have to watch it, so hours and hours and hours of time saved. There's no way to do this unless you put an army of people in the room and tell them to keep up.
So it's jobs, healthcare...
Jobs, healthcare, payroll, creation allied. So it's summarizing what the person on TV is telling and talking about. This particular clip also mentioned, same thing, right. So I can take the one I care about, I can post it, I can look at it later. So you imagine the amount of manpower you need to do that, and that's the future of computing: to understand in real time human information in a way which is valuable to us as humans.
Now I'll do it again -- I'll take another exercise on the same front. What if I want to direct this machine a little bit more, and let's say we go into -- we'll just put this in terms of the same kind of exercise, right. If I ask you to take all the news feeds and all the Twitter posts and everything that's ever been written in the last couple of days or last day, pile it up on the table, summarize all the information that's about them, put them into the nearness of ideas because remember, ideas don't match. They have proximity, right, same way. And they also change in real time. So show me all of that and by the way then, I'm going to ask you to summarize things for me in realtime. So let's take something, I don't know, let's take something a board-neutral like the NFL Sports.
Unless you're a Raiders fan, which of course is not very neutral for any of us. So the machine has already done that work that I just described. So if I interrogate it now, what it tells me, amongst all of the news feeds that are out, so the most common concepts are about referees, Commissioner Gordon (sic) [Goodell] and Steve Sabol. Now maybe I don't know a lot about the NFL, and if I ask it to tell me within the ones about the referees, where do all these things fit? And I see there's a couple of key ideas, reaching agreement, the replacement officials. And of course, I can look at the stories that are related to that. Notice, ending the lockout which is about the referees and reaching an agreement and replacing -- are kind of next to the Green Bay Packers because the Green Bay Packers are the ones that kind of got the most posts about the whole referee thing. Now the Cleveland Browns, a little bit further away from all these stories about officials, that's probably about the fact that -- yes. So if you look at these it's because -- so you're seeing the distance of how the ideas are related to each other in this map itself.
Maybe I don't know about who Steve Sabol is. I have no idea. But I can say summarize everything that's being said about him and very quickly, I know that he ran NFL Films. He recently died from brain cancer. People consider him a genius, and there's an awful lot of sentiment about it. Obviously, it's a sad story. Again, same thing for Commissioner Goodell, what is he doing and what's he saying. So these things are all related to the NFL, but it's done the work of thousands and thousands of executive assistants in realtime looking at that information, telling what's happening.
So last interesting point here. These are just news. So this is the editorialized content of the world. What happens if I swing it all the way over to the left and say just tell me what's going on in Twitter, and I'll push the subclusters up a little bit -- oh yes, this is good. So now I'm listening to pure Twitter, right, which is what people are saying on Twitter, what they're saying about the topics, there's -- and this thing. And so I see, apparently, players feel tubby. And if I click on that cluster, it makes me look fat and Nike's new uniforms. So you see, there's no tag on any of these documents, and that's kind of the point here, right. I would never...
Make me feel fat.
So apparently, news to me, but the players are complaining that the new Nike uniforms make them feel fat, and there's some stories out there and people are having a field day with it on Twitter, okay. Time Warner, why is this coming up? Is it about the NFL or not? It didn't show up in my news feed, but I also noticed that if I click on these Twitter posts, I see, wow, great, because apparently, the NFL Network has finally, I've been waiting for this forever, Christmas because I'm early, yay. So that commentary real time, the hopes and wants and desires are being layered over it. And what becomes really -- and because everybody is really happy about the NFL referees coming back. I can do a really nice thing now and split the difference.
So I can say -- this is now telling me not only everything that's in the news but also an overlay of that in real time and it changes. I mean, 1 hour ago, this was different, okay, about what's happening and where it's happening. And you could never ever do that with traditional computing. And as we look to move this engine and move this intelligence around, I mean, that's the future of IT for us and that's what we're going to take it to.
Well, Brian, thank you very much. Again, this is one -- let's clap for him.
Thank you. Thank you.
Sure thing, George.
This is literally -- this is the future of Big Data. This is available today. It's available at HP and only from HP.
So let me conclude. First, we feel that HP Software is very well-positioned for future growth, and we're doing it along 3 vectors and that's the plan going forward. That's the strategy we're following. The first one is we're going after new buyers. We're going after where the money is going in terms of spending on technology. So we're going after the CIO but also, again, after the security officer. And like in this case, we're going to go after the Chief Legal Officer, the Chief Marketing Officer or in some cases, the Chief Communications Officer. So there is incremental value for us and incremental markets for us.
The second piece we're doing is we're giving these buyers new consumption models. We're not going to them and saying, "You've got to buy just a license and it's a perpetual license." We're going to them and say, "Tell us how we would like to buy our technologies and we'll give you an adaptable model to deliver that for you." And the third piece also is we're doing that while at the same time augmenting and expanding our portfolio of products. And as you've seen here with our 4 performance suites supported by 4 engines that are disruptive from the technology point of view, we have a lot to offer to the marketplace.
The other area that is significant for us in our strategy is how to leverage all of this within HP and within the core HP hardware infrastructure solutions, be it in cloud management with the work we're doing with Dave on CloudSystems, or be it in security or in terms of end-user security points we might do with Personal Systems or also using meaning-based computing in printers. There are a lot of opportunities and additional capabilities we're exploring, and we're finding some solutions for it.
So to summarize, we're very confident about our direction forward. We're going to win based on 4 core components: On our focus, how to get an integrated model in place and how to get our portfolios and leverage them as quickly as possible. The second piece is go-to-market. As we've seen, we're expanding our reach from a market point of view beyond just the CIO, while at the same time having a very strong CIO presence, but we're expanding that. And two, we're offering new consumption models that will also augment our capabilities.
The third piece is operating leverage, and that's an area where we're working a lot on it because we need to build further scale in what we have. We need to increase productivity, and we need to also build SaaS delivery. We have a lot going on right now, but there's a lot to be done also. And finally, on the operational excellence side, again, integration, leverage and growth. And what you'll see us working more and more is an integrated portfolio not just integrating companies from a back office point of view but more importantly, how do you put security and Autonomy together. There's a demo outside also that can show you more about it. How to use meaning-based computing to track what ArcSight delivers in terms of insight to secure transactions.
The second area on Autonomy. Autonomy is going to be a long-term project for us. We're going to be taking Autonomy from what is today a startup from an operational maturity point of view. Although the technology is great, the operational framework is still non-scalable. So we're going to go and build on that and turn it into a very scalable and grown up organization. The third piece is keep improving on pipeline and on sales productivity. And the last but not least is to leverage the Web for our own benefits, which is to create more demand generation for us. Again, it's been 100 days. A lot of busy days during these 100 days. I feel very, very comfortable with where we're at from HP Software, looking forward to giving you an update anytime in the future. Thank you.
Thanks a lot, George. I think one of the things that would be very helpful for the audience here to understand is you talked about it being 100 days in. Your perspective on the portfolio and specifically, if you could give everybody an update on the operational performance at Autonomy because I know that's been a big area of focus for you.
Sure, sure. First on the current portfolio, we have a lot of products. We have about 200 products roughly, and we need to summarize them, as I mentioned to you, into these 4 suites. And under these 4 suites, we're going to have between 2 or 3 product lines per suite. So that approach, that rationalization exercise, we started, and that's going to take us this year to complete and accomplished. And that's the first piece. And then when we accomplish that is, how do we go to market with the maximum aperture. Because a lot of these products have so much potential that we need to realize that full potential in terms of direct, in terms of SaaS, in terms of web and as well as in terms of channels.
And on Autonomy, if you got a brief update on to what the team has been doing on the operational performance of Autonomy?
Sure. Right, right. As we indicated, Autonomy moved to HP Software about 30 days ago or so. And the first thing we did is we hired a General Manager to manage Autonomy, and we have Robert Youngjohns already very busy working on the business unit. Autonomy has, as we showed you here, this was an Autonomy technology. It has tremendous technology, second to none, and has a lot potential to it. Where we're struggling with right now, and I'll use that word even, is the sales model was very non-scalable. We -- it did not adapt to a company like HP. With the strength that HP had, we totally overwhelmed that sales model. So we're rebuilding that model into a more coverage-based scalable model, and 2 of the back end operational processes where startup like. They were not mature the way we want them to be, and we're working on that element too. It will take a while. This is not a 1- to 2-month exercise. This is more like a 1- to 2-year exercise. And hopefully, we can show you on a quarterly basis some improvements in that. However, it's not going to be always linear. We might occasionally do much better and sometimes much worse, but it will get there. That's -- we're quite confident on that.
Great. Super. Thanks a lot.
Great. With that, I'd like to introduce Bill Veghte, Chief Operating Officer for HP, and Bill is going to talk a bit about the Security and Converged Cloud solutions we have for HP. So Bill?
William L. Veghte
Great. Thanks, Rob.
All right. So you're into the final chapter of our journey together today, and what I want to do is walk you through some of the great opportunities that we have across hardware, software and services. As you recall, when Meg started this morning, one of our hypotheses and beliefs is that if you take the innovative hardware that you saw from Dave and Todd, if you combine it with the services offerings that Mike Nefkens talked about and the software assets that George just talked about, that positions us to deliver differentiated solutions for customers in high-margin, high-growth areas. Two great examples of this are in security and in Converged Cloud, and I'm going to walk you through -- I want to give you a sense of how we see the market evolving, the customer needs that we're intersecting and then what that means in terms of revenue and margin opportunities for HP.
So let me start with security. As you think about the IT industry in front of us, I think the largest single risk to the information technology industry is security. If you think about the evolution that's happened over the last decade, we've moved from the Code Red and Nimda-type viruses that were motivated -- that were done by teenagers motivated by fame, to hackers that wanted $10,000, to a fundamentally different motivation and nature of attack. Whether that be in a terrorist agenda or a nationalist agenda, this has the potential to disrupt how business and information technology is done.
Now against that backdrop of change in motivation, you have a much more complex environment to secure, whether you think about it in the myriad of delivery vehicles that the cloud represents or the different consumption models from desktop to tablets to smartphone. Now of course, with this, there is a lot of government regulation designed to protect not only the business but also the individual. Now in that, as you think about the margins and the growth, remember, businesses do not have a choice. They have to be compliant. And as they do, as they work to be compliant, that represents costs and it also represents risk in the form of fines or reputational damage. So it is moved from being an agenda that's sort of buried in the back room of IT to a business group to a CEO to a board level agenda.
So what is our approach? What we've been doing is we've been quietly assembling a set of assets that build off of the security practices and approaches that have marked the last decade. The last decade, these approaches have been about locking your device, locking the data center, locking the IP address, locking user through access control lists and privileges. Our approach is about providing the visibility so that enterprises can see and as they see, then they have the opportunity to understand and take action around it. And so as we do this, that gives businesses the opportunity to improve their risk management to proactively take action and harden the attack surface.
Let's talk a little bit about the market. This is a large market. If I size it just on the security side of things and I'm not including compliance, you've got a $43 billion market growing double digit. And the way that I shaped it here is I did it just in what I'll call the products and the services. And I think as we look ahead, you're going to see a very interesting shift and blend between products and services because many of these will be offered as a managed service.
Now when you think about HP's opportunities and you look at the portfolio that we've got, whether it be the market-leading application security testing solutions or our market-leading security and event monitoring or what you just saw on Autonomy, very good assets in their own right. But we see a great opportunity from synergy not only in these individual products, but how we offer them as a managed service and how they can differentiate our own products. So our security offerings can differentiate our printers, our PCs, our servers, our storage and our networking.
So we start with good IP and a great customer installed base. Over 2.5 billion lines of code have been scanned and secured through the SaaS offerings in HP Software. We have 4 magic quadrant leadership positions in the Gartner quadrants. We have over 900 customers that rely on us today for security services. We have 9 of the 10 largest banks, 9 of the 10 largest software companies, 10 of the 10 telcos and all branches of the U.S. Military rely on us to help secure and ensure the compliance of their infrastructure. As we push ahead, this is about a $1.2 billion business, and the opportunity that we see in these segments is to do a much better job of integrating them and a much more efficient job in going to market, both the SaaS offerings and as managed services to accelerate and differentiate through the combination of hardware, software and services.
Let me now switch gears and I want to talk about the converged cloud. So those of you that have spent a lot of time in the IT industry understand this dichotomy well. What IT needs to do is constantly take cost out and more agiley serve the businesses. And by serving the business, it is about helping that person on the right, the end user, the customer, who wants greater simplicity, better experiences and anywhere, anytime access. And in an industry that loves hyperbole, we hear like terms like cloud or Big Data or consumerization of IT or Social Band-Aid about. What does that all mean? What that means is we at HP believe that a new style of IT is emerging, a new style that offers the potential for customers to lower their cost, increase their agility and fundamentally better serve their employees and their customers better.
As we look ahead, we see 4 delivery models emerging to leverage this opportunity. We start with the traditional data centers, and this will obviously continue and persist as a large and sizable and an important market to service. But as that build out in the traditional data centers occur, it's got a factor on what is happening in these other delivery models, all the way to the right in public cloud and then in managed and private cloud, where each one of these delivery vehicles is differentiated by the Service Level Agreements. The Service Level Agreements, of course, are performance, availability, security, cost and compliance.
What does that mean as we think about our portfolio and how we intersect it? We're going to participate both in the build because there is -- any time there's a new style of IT emerging, there's a natural buildout that occurs. Buildout means additional buys of components and solutions. But at the same time, we have the opportunity to intersect on the consumption side as well because we believe that businesses will not only build out themselves, but they will be very aggressive consumers of these services.
And the journey is going to be a hybrid one. While we're in the early stages of this definition of the market and how it take shapes, we at HP believe that it is not simply going to be a cloud world or simply a traditional data center world. Three years ago, we started talking about this concept of a hybrid world. A hybrid world means that customers can leverage the investments that they've already made but take advantage of these new delivery options as they drive greater agility and lower cost.
To do this, businesses have got a choice. There are variety of different approaches. They can say, "All right. I'm going to take a little bit of this, a little bit of that, a little bit of that," and try and integrate them themselves, particularly early in a market adoption that's incredibly challenging, risky and expensive. They could take a different approach which says, "I'm going to bet on a single vendor. I'm going to, for example, assume that Windows will be everywhere, whether it be on the phone, the cloud or the PC and I associate there." The downside is, a, I might pick the wrong vendor. B, I might have a lock in, in a relationship that doesn't deliver the best experience for me. I could say this is altogether too hard, and I'm going to rely on somebody else to integrate it or, and this is what our belief is, is that as the market matures, there will be a set of open standards and services and solutions that are integrated by design.
And as you think about our converged cloud strategy and as you reflect on the words that Dave Donatelli, Mike Nefkens, JJ and George Kadifa talked about today, our approach is fundamentally about offering customers choice, choice in platform, choice in delivery model. It's about consistency and confidence. Consistency in architecture regardless of whether you use all of our hardware or just some of our Converged Infrastructure, whether you use all of our software components or pieces of it. Consistency but with confidence. Confidence because these CIOs, they're not off the hook. They're not off the hook on security. They're not off the hook on the performance and experience that they have to deliver for their businesses and their end users.
So what does that mean in terms of the business opportunity? A couple of headlines as you look at this slide. Look across the top row. First thing that's important is that the traditional IT infrastructure market, as you know, is large and it will stay large for a long, long time. Second headline is that as you model these markets, there is a lot of noise about the right-hand side in public cloud. We love public cloud. We're an essential supplier for it. We're delivering a set of solutions there. But the numbers in the middle around manage and private cloud, there's a lot of buildout that we believe and we're seeing happening within businesses.
So how do we intersect and provide the best solutions for all of these segments? Think about what we do at HP as we provide best-of-breed components, whether it be the orchestration on automation and monitoring capabilities that George touched on in the IT Performance Suite, providing best-of-breed software components that let customers manage and monitor and orchestrate in that hybrid world. Best-of-breed hardware, whether it be the servers, the storage and the networking and the management layers that enable agile and simple provisioning. These are the building blocks for that cloud buildout. Now what we hear from customers is they want best-of-breed building blocks, but assuming that we are open and extensible in our architecture, which we are, they'd like integrated solutions. Integrated solutions so that they don't have to do that integration themselves, and that's what we're doing with the CloudSystem enterprise and the CloudSystem service provider offerings.
Now as we go below -- down, there are set of consumption capabilities that we offer as well. Some of you have seen us announced and deliver this year our HP public cloud offerings around content delivery and compute and later this year, storage. The premise here is that enterprises want a Service Level Agreement for their cloud, public cloud offerings. They need to have a guarantee around performance, around availability in a way that is not offered broadly in the marketplace today.
The other piece that I think is really important as you model and think about the opportunity that is in front of us at HP is what we can do in the services space. Mike Nefkens and Meg touched on this briefly this morning, but enterprises have a huge journey in front of them to modernize the millions of enterprise applications and Web services that have been built up over the last decade. And we have tens of thousands of professionals that do just that every single day. They transform and they modernize the application in the web services portfolio of an enterprise. The second piece of it is that they have a relationship with us in the infrastructure outsourcing world. The reality is that cloud is another form of outsourcing and helping customers on that journey so that they can think about when they want to do private versus public versus managed. The existing relationships and expertise that we have position us very, very well.
So let's talk a little bit about the competition and how that then -- how we compare and compete so that we get our larger than fair share in this market. I picked a couple. We could go on and on here. But I wanted -- we'll just take Cisco as an example. Now when we compete with Cisco, generally, Cisco only competes at the component level and they compete effectively only in one component. We believe, and as we compete and succeed, we believe that it is not just about the network. It is about the network plus storage, plus servers, plus the software that manages, orchestrates and secures that around. We also believe that to solve this problem is going to take not 5 different architectures that were architected and built through acquisition 15 years ago, but it's going to take a modern architecture designed and delivered for the needs of the 21st century. And the final piece is we believe that it is going to take somebody that's willing to go after the margin pool that they have historically had, and that is exactly what we do as we compete and succeed against them.
Let's talk a little bit about VMware. VMware is an interesting one because we are, of course, their largest route to market for their Hypervisor, and they've done a very nice job in the Hypervisor space. But they've got to try and extend up not only in the traditional space, but go across to the cloud. And the course and choice that they're taking is one that is very, very proprietary and doesn't represent choice for the customer, and they've got a lot of buildout to do to build out and deliver the capabilities across the whole hybrid world.
IBM. IBM, when we compete against IBM, we don't actually see them that much in the enterprise. We see them in the service provider space more, and the approach that they're taking, of course, is a service-led one. This is really, really hard, but we have the expertise, and you're going to pay us a very large sum of money to deliver the services to integrate that.
So how are we doing? Our Converged Cloud business across all the different businesses, it's a $3.9 billion business today, growing 39% year-over-year. We are the #1 cloud infrastructure vendor as measured by revenue in 2011. Our solutions, our CloudSystem solutions, 100% year-over-year growth, actually a little over 100% year-over-year growth. But I think as we think about the buildout, it's not only about the revenue results, but it's the innovation and the partner ecosystem that we're building. 400 -- 40 CloudAgile partners. These are partners who are saying, "We want to take advantage of your platforms, your extensibility and certify and help deliver that value to customers."
And it's also about the expertise. The expertise that we have in enterprise services, the expertise that we have in our digital safe offerings where over 10,000 customers are storing over 50 petabytes of information with us to ensure that they have the right redundancy and compliance and retrieval rates. This is a big business for us and it is a business that we continue to see accelerating in the future, based on our innovation, our integration and our go-to-market capabilities.
So with that, thank you very, very much. I think I'll turn it back over to Rob Binns, and we're going to open it up for Q&A.
Great. Thanks, Bill. Okay. So we're going to move to the Q&A part of the agenda here. So if you just give us one moment while we assemble. I'd like to ask Meg and the team to come forward. We'll just get some logistics here with some stools set up.
While we do this, just a couple of points. You will see there are 3 or 4 people with microphones who will be running up and down the aisles. If you guys could raise your hands, I'll do my best to spot you from here, and then we'll navigate with questions and everything. And I would ask if we could kind of keep it to one question. Try and avoid a multiple parts, lots of follow-ups because I'm sure that there's a lot of interest. We want to get through as many people as we can in this session.
And so with that, could I ask actually, can we have the house lights up a little bit as well because it makes it a little easier to see. Yes, sure. Here next to Meg. Let me just make sure, Bill, if you want the end here. George, you can go the other end.
Margaret C. Whitman
Okay. So can we get the lights up. Is that possible? It just makes it a little easier to see from back here.
Okay. So I'll work out what I can see. Can we start with Katy first?
Kathryn L. Huberty - Morgan Stanley, Research Division
Katy Huberty, Morgan Stanley. Meg, you talked about too many areas of focus for HP that impacted execution in the recent past across products, services and geographies. And so my question for you is whether you considered or reconsidered the idea of divesting some of the noncore businesses so that you can really focus on a cloud and information management and security and not take your eye off the ball because you're dealing with some of the businesses that aren't performing.
Margaret C. Whitman
Yes. So we are convinced that HP is better together with these 4 major lines of business that we now have, and I'll tell you why. We are the only competitor, if we can get it right, we're the only competitor that can go from the desktop to the data center from hardware to software to solutions in a way that no one else can. I'll also tell you, when we talk to customers, you might recall last summer when we announced that we were potentially spinning the PC business. The customers were really unhappy with that. Our partners were unhappy. Even our big enterprise customers were unhappy because their view is that if we can do this right, we offer a competitive solution that no one else can. Now the way you have to think about HP is we are a portfolio within a portfolio within a portfolio. So within each of these guys' operating units, they are looking at different product lines and saying, "Does every product line within software have to stay?" Are there lines of products in storage that we could actually phase out faster to sort of put more wood behind the arrow? But you might talk about storage and what you're trying to think about there or even in networking.
David A. Donatelli
Sure. So as you saw in the presentation, we made earlier, we talked about the 2 primary architectures. And really, what's behind that is the elimination of certain products. We're sunsetting products that are going to go away, so that we'll focus more of our resources on fewer products. Again, we think it's got great benefit to customers because we simplify what they buy, and it's got huge operational benefits to us. Our sales force has less to learn. There's less training for our TS organization, and we put all our R&D behind one arrow. So you see us doing that in storage. In networking, when we did the acquisition, we eliminated a lot of overlap products as well. We begin the idea of selling fewer products in greater volume and simplifying them.
Margaret C. Whitman
So in the near term, it puts some revenue pressure on the businesses, but it's completely the right thing to do if we're going to simplify. I mean, George, you want to say a word? You said you got 200 products in software.
Right, right, exactly. That is, I look at time, and it was also an aggregation of products and additional products and additional acquisitions. And that's what we're going through right now, try to understand from a product point of view which one we should bet on, which one we shouldn't. I don't have the issue of supply chain in the sense that my supply chain is very simple.
However, back to this point, we have to train the sales people, we have to train our professional service people, we have to train our partners, and that's a significant investment if the portfolio doesn't get more focused.
And we've also done the same thing within PPS as we looked at both our printing and PC portfolios. So you've seen us move out of things that were not core to our printing business.
David A. Donatelli
And I would say in services the exact same thing. We are selectively engaging, as we talked earlier, in areas like workplace and network, and we're training all of our sales teams to focus on more of the higher value areas, and less on those selective areas.
Okay, super thanks. Ben?
Benjamin A. Reitzes - Barclays Capital, Research Division
Ben Reitzes, Barclays. I've got a question just about the FY '13 guidance. You did a really good just talking about services and how that would be hit year-over-year, but PCs are supposed to be flat earnings, and printing is supposed to be up $0.05 to $0.08. And I just think most people in this room might feel that that's actually aggressive, given what we're seeing in the PC market with the declines and some of the trends in printing. And I was wondering if you could go into a little more detail, maybe Todd and Cathy, how you get there with those 2 segments, because we all know about services, now, you did a good bridge there.
R. Todd Bradley
Look, I think the clear thing in printing is, a, filling some of the product holes that we've historically had. When we look at the execution that we're bringing to market in the multifunction printers, where we basically haven't competed for -- or haven't competed aggressively for 7 years from a product perspective, that will drive both hardware and toner growth. The expansion of Ink in the Office, as well as Ink Advantage, to 82 countries, our history of the 10 countries we've been in, has shown a good uplift -- a good uplift in the sales supplies, a good uplift in the sale of the renewal, if you will, of supplies. As far as PCs, I think a flat number is appropriate for us as we look at the trends. Again, for the whole PPS portfolio, not just PC, so that includes workstations, it includes the new all in ones that aren't part of that number, also includes, from a PPS perspective, the enterprise tablets that we've talked about. So I wouldn't tell you there's certainly in what the market will do next year. The market, overall, I think as we look at how we utilize the expanded sales force we have, the compression in the number of SKUs that we're planning to offer, and very, very aggressive execution, I think we're there. I will tell you, I'm not...
Catherine A. Lesjak
I can add to that, if you'd like.
R. Todd Bradley
Sure. I just want to make one market comment. I mean, we see lots of variation. We track about 10 different indicators or predictors, I suppose, of market size from some of you, as well as the industry analysts, as well as our key component suppliers like Intel and Microsoft. So I can tell you, that's a very, very broad range when you look at projections for the industry next year.
Catherine A. Lesjak
So what I was going to say is, that in addition to a great, or despite the fact that we have a great product line up, the great new products in the PSG group and the IPG group, we still -- the underlying revenue for the fiscal '13 outlook is down year-over-year. So it's not as if we're expecting that this great product lineup is going to allow us to leap over, worsening macroeconomic conditions or the weakness that we've been seeing in consumer, we don't expect that to change dramatically. And then I would say then in terms of well, then how, Cathy, does that help us with the bottom line? It helps us with the bottom line because obviously, we have restructuring efforts that were done in PPS as well, but even more important for the PPS organization was the non-labor actions that we've been taking, and the basic blocking and tackling around achieving operational excellence. PPS is the poster child, and so that's helping us a lot in those segments.
A.M. Sacconaghi - Sanford C. Bernstein & Co., LLC., Research Division
Toni Sacconaghi from Bernstein. I have a follow-up to that question but from a different angle. So I appreciate the waterfall. I think one of the things that wasn't explicit in there is what the net cost savings are. So if I take your comments about what you said you would save from your restructuring actions, it's about $0.80 in EPS. Your waterfall said that you'd reinvest $0.15 of that. So you have a net savings of $0.65. So if you didn't have the savings, your guidance EPS would be about $2.90, would be down about 30%. The question is, how do I get there? That kind of implies a 10-plus percent revenue decline in order to get there, which is considerable deceleration from this year. So I'd like to understand that, please.
Catherine A. Lesjak
So I'll start and you can add on. So Toni, there's really 3 big things that are going on in our P&L, one of them obviously is the investments of $0.15, but the other 2 are really around Enterprise Services. I mean, it's not just a margin -- I'm sorry, it's not just a revenue down 11% to 13% in the Enterprise Services business. I mean, there are significant margin pressure as well. I mean, when you think about taking that business from making roughly 3% in fiscal '12 to 0 to 3%, and obviously, there's a range that we've provided in that waterfall. I mean, that's a huge hill to climb over. And then the second one is in the EG group. The Business Critical Systems, revenue is expected to continue to decline materially year-over-year, and then we're starting to have the bigger knock-on effect in the Technology Services space. Other than that in the EG group, I will tell you that it's not about losing share, or hold -- we believe we're holding share. We're declining a little bit of revenue in industry standards server side, because we think the macroeconomic conditions are going to be tough. And that then, obviously, the top line puts pressure on the bottom line.
Margaret C. Whitman
I'd just add one last thing to that, which is, we have will also tried to factor in here, from a topline perspective, macroeconomics. And what we have seen in Europe is a continued degradation from the beginning of the year, and everyone that we talked to, our customers, our partners, are not bullish on what's going to happen in Europe next year. So I have to say, we're quite sensitive to that because it impacts our Consumer business and it impacts our Enterprise business. So that would be only thing I'd add.
Okay there's a few this side. Kulbinder?
Kulbinder Garcha - Crédit Suisse AG, Research Division
It's Kulbinder from Credit Suisse. A question for Cathy, it looks like your cash restructuring will be, maybe, $1 billion higher, or even more next year, and your earnings are coming down at least 15%, so what else gets you to that free cash flow number of $5 billion? Is there some sort of working capital initiatives are going to eat a lot of cash? Because it seems like a stretch to get to, just given the headwind that cash restructuring would cost you?
Catherine A. Lesjak
So the cash flow from ops, we expect to be approximately $8.5 billion. And then you've got CapEx that we are expecting to be $3.5 billion, and that gets you to approximately $5 billion year-over-year. And that's pretty consistent with the kind of cash conversion cycle from a working capital perspective that we've been seeing most of this year, with 24 to 26 days. Now I'll tell you that I'm not particularly happy with 24 to 26 days, I think we've got to do better than that, but that's what's built into the model.
Okay. Let's stay that side, Mark?
Mark A Moskowitz - JP Morgan Chase & Co, Research Division
Mark Moscowitz, JPMorgan. A two-part question, the first part for Todd, and then the second part for Meg. It comes back to the PC business, just in terms of the kind of the backstop that does provide for the bridge for 2013 EPS guidance. Todd, I just want to understand if you can help us figure out what your assumptions are behind the PC growth in terms of, what are you assuming for smartphone and tablet refresh rates? Are folks going to refresh their tablets and smartphones 2x or 3x, 4x, 1x before they refresh their PC? I just want to figure out what the impact going to be on the PC and the printing market. And then bear with me, Meg, the other question is around smartphones. Do you think that HP needs to have a smartphone offering to remain relevant in the digital age as far as PC tablet and smartphone?
Margaret C. Whitman
R. Todd Bradley
So our focus in 2013 has been the introduction of tablets. Clearly, with the actions taken August 18, that's been a huge product hole for us. The introduction of the tablet products you saw here today are what are incorporated into our growth numbers. As far as smartphones, we haven't looked a lot -- we haven't looked at all at smartphone growth rates in this plan. We've looked at growth for our tablets, for our tablets broadly across the world. And frankly, we see good growth with our ultra mobile products, ultrathin products.
Margaret C. Whitman
I'll just say -- I'll answer your question about smartphones because I did create quite a stir on that I guess on whatever program it was the other day. I would say the other thing that we're very excited about is the consumer market, I would argue, today, is quite well served by the tablets than it is in the marketplace today from Apple. I mean, the tablet market is largely an Apple market. So when we designed our tablets for consumers, we said what is something that's uniquely HP, and you saw the convertible that Stacy and Jim showed earlier. But then when you talk about the enterprise and business market, this is largely white space. Yes, in the C-suite, there are Apple devices that are there, but every CIO I talked to wants to have a Windows device, backward compatibility, the ability to control those devices from a security perspective. And I think it was on your slide, Todd, I mean the growth rate of the enterprise and business tablets is in the high -- in the double digits, 30, 27, I can't remember the number, but it's relatively fast. Now this is going to take a little time, because as we learned last summer, you get these tablets into the enterprise, they play with them for a while, it's a relatively long sales cycle. But when it hits, I think it should hit pretty big, which is why I think that will contribute to the '14 financials, perhaps, even more than it does in '13. Now with regard to smartphones, what I believe is that we don't call our business the PC business. Even before I got here, we called it the Personal Systems Group. Think about it as personal compute devices. We've got to be able to go from the workstation to the desktop to all-in-one to laptops to hybrids, to tablets, ultimately in my view, to smartphones. Because in many countries, the smartphone is the compute device for individuals. Now we've got to crawl, walk, run at HP, and we don't have any plans to introduce a smartphone in 2013, but we've got to start thinking about what is our unique play? How do we capture this element of the personal compute market in a way that will allow us to span that full spectrum in the future? Because I believe that 5 years from now, we don't have a smartphone or whatever the next generation of the device is, we're going to be locked out of huge segment of the population in many, many countries of the world, and our franchise will suffer and our financials will suffer.
Can we do Bill?
Bill C. Shope - Goldman Sachs Group Inc., Research Division
Bill Shope, Goldman Sachs. I have an extension of Ben's question earlier, specifically on the printing segment for Todd. Looking at the Inkjet strategy here, what gives you confidence that some of the secular pressures you guys have talked about are contained, if indeed you do believe that? And then secondarily on your strategy going forward, things like moving into business inkjets, shifting the discounting mechanism away from hardware and towards supplies, frankly, what gives you the confidence that, that's going to work now? Because I think most of us in this room have heard about business inkjets for roughly 1 decade, and then shifting of discounting from hardware to supplies. We saw that with Epson first, saw that with Lexmark, and these things just haven't worked. So I understand how they could certainly help the business if they did work, but if you could give us some color on why you think the environment's changed and will allow for that to counter some of the other secular pressures?
R. Todd Bradley
Well, first and foremost, I think you have to look at where we have been successful with Ink Advantage to date. We're not saying that we are going to do it everywhere in the world. I think, clearly, in the mature markets, the ability to execute that is limited to not going to happen. Steve's point and the point of the strategy is to execute in those 82 markets globally that are less-developed, where we're not going to replace share that we already have, but we're focus on new customers, a new price point and the ability to grow consumption in those markets. So I'm basing it on 1 year's worth of actuals that we went ahead and expanded this to the markets that we've expanded to. This isn't a -- I guess, you're implying a paper exercise, this is the result of deep research and actual results in 10 of these 82 markets we're already in, including...
Margaret C. Whitman
And in a handful of those countries, we've had a 3-year test market going. And in fact, one of the first things that Todd and I did is we looked at this 3-year test market, and we said, pull the trigger on that thing. I mean, we're done, we see it, we got it. So I would be shocked, actually, if Ink Advantage, either didn't pan out the way we've seen in those original 10 countries.
R. Todd Bradley
The second piece, as far as Ink in the Office, I think Steve and his team have a suite of new products that have also been tested and deployed in some smaller deployments, smaller locations, that have the same capabilities, the same speed, lower price. So I think we have some -- we're cautiously optimistic on the success that we'll have, especially when you layer those products into our sales force, into our managed print service capabilities, and put some of the document flow Autonomy software that you're seeing.
Where do we go, Shannon?
Shannon S. Cross - Weeden & Co., LP, Research Division
Shannon Cross, Cross Research. Question for Meg and Cathy with regard to reinvestment, you made the decision to reinvest majority of the savings back into the business. So given that, how are you determining where the investments are going, and how are you tracking their success? And then finally, if business deteriorates further, are you willing to cut back on the reinvestment to make sure we don't have another earnings reset? How are you sort of balancing that?
Margaret C. Whitman
I'll take it and then turnover to Cathy, and then I might ask you, how you're thinking about rack and stacking your investments in EG. But first of all, we are very conscious of what has been happening over the last couple of years, which is we have had a misalignment between revenue trajectory and costs, and we are working to get that back in the line, at the same time, trying to position HP for the future without the quick fixes, without the blunt instrument that has been used at this company for a number of years. But each of the business units has a contingency plan that if revenues do not come in the way we anticipate, we have to react. So the short answer is, yes, we will react to this, because we understand what's at stake here. So my view is, if you think about 2013, as I said, as a fixed and rebuild year, if we hit roughly, these revenue numbers that we have laid out for you, and we may do better in some businesses, slightly weaker in others, then we will hit our plan for this year. But if something happens macroeconomically, Europe completely melts down or there some other issue, we will take action because we understand we've got to get cost in line with revenues.
Catherine A. Lesjak
And I would just add, on a specific question at the beginning, around will we forego the $0.15 of investment, we are doing everything we can to protect that. Because it is -- those investments were chosen as the critical few, in an environment in which we knew we were going to end up having to guide $3.40 [ph] to $3.60 [ph], so those are the ones that we absolutely positively have to do for the future of Hewlett-Packard. So I don't see us as cutting those investments, I see us as finding cost reductions in other places to keep our cost in line with our revenue.
Margaret C. Whitman
Yes. I mean, I'd ask each business unit to think through, what are the critical few investments they have that can be game changers for their businesses, and you might just talk a little bit about Moonshot, and some of the other things.
David A. Donatelli
Sure. We had a very rigorous process, where we on and said, where are we going to make money from 3 years from now, what are the attractive markets, what does HP have an advantage, where is our IP going to differentiate ourselves versus everybody else, and then we worked backwards from there. So we have a rank ordered priority list -- this is our #1 investment, this is the revenue return and profit return we seen on it, and if all else fails, that's the one we fund above all else. And we did that in order all the way down across the business unit. So that's the process we use. We always, of course, reevaluate it to make sure that the priorities stay the same, which they -- in the enterprise, they're fairly consistent. And then we funded the budget according to make that happen. So not only does it help us in '13, but in '13, we're doing all the real important work to make sure we have the right products for '14 and '15, that again, drives more consistent success for the company.
Margaret C. Whitman
And this is where I'll underscore consistency of leadership. The problem that's happened to HP over the last 3 years, is new CEO would come in, tumble the investments, revenues wouldn't come in the way they thought, there would be different decisions made. And we're now joined at the hip, we have a point of view about how we want to run this company. We, by the way, will certainly make adjustments if things don't pan out the way we have, but we, we are on a path, and we're going to stick with this path. Because what doesn't work in the enterprise space, not even sure it works in the consumer space, is this sort of, put in the R&D money, take it out. Make this bet add, just kidding, we're going to make this bet. You've got to make -- these are long term investments, our customers make long-term investments here, and this start-stop over the last 3 years, you can't run the railroad that way. You don't end up with the products that are ahead of the markets. You end up, either not delivering the products, or someone else gets there first. And as you all know, the benefit of first mover advantage in these market segments is absolutely enormous.
R. Todd Bradley
Look, I think, the other piece, well, it's not R&D/product-related, is the reallocation of demand-generation dollars away from a counter [ph] spend, which is in essence, a funded discount to demand-generation activities. And I think that's going to represent a very material change for us as we go into a -- we're starting to do it now. You've seen the push on both value and quality, especially in our ink and toner products, and you'll continue to see that throughout the year.
Margaret C. Whitman
And fundamental to that is the fact that when you put it into this counter [ph] and discount, you're basically competing on price. When you get it into marketing and you drive your differentiated value, you get it back in prices.
Great. Super. Keith?
Keith F. Bachman - BMO Capital Markets U.S.
Keith Bachman from Bank of Montréal. I want to ask about services and revenues and costs. On the revenues, it seems like there's been a pretty material degradation from recent comments from H&P if we look back over a couple of quarters, as well as your competitors. CSC is going through restructuring with significant Defense Department exposure and yet is guiding down revenues roughly modestly; Capgemini with the significant European exposure is talking about revenues growing 1% to 2%; Accenture 6% to 7%. So there's an enormous delta between what you're talking about your revenue growth rate and the competitors. And as part of that, I appreciate the run off on the accounts. But runoff accounts happens to every company, every year, every quarter. Is there something in there that should be an additional flag of concern for investors as we look to your revenue growth rates? In other words, is that another red flag, the execution, something along those lines, so could you just speak to why there's been such a significant degradation between recent comments and your competitors? And then secondly, what's the cadence of the growth of operating margins that gets you from 0% to 3% to 7-plus percent, how long does that take?
R. Todd Bradley
Good so I'll all start on that. Absolutely, on the revenue side, we are, as we described in our presentation, seeing some extraordinary events where we have 4, or 5 contracts that were signed in the '08, or '09 term that are all coming up. And for various reasons, those contracts will be, either going back to the customer in-sourced, or what? So that is a significant activity that's happening that's causing, I think the number was 5% to 6% of the degradation. The other item that hit us was, the last 2 or 3 years, we were overly selective in trying to push certain offerings, and our book-to-bill ratio was well below 1%, which we obviously need to be a 1% or 1%-plus in order to hold the revenues. So the combination of those 2 items have put us in a situation we're in for 2013, and that is causing that 10% to 13%. We don't see this as an ongoing trend. Again, these are just 2 things that hit us right at the same time, and we do believe that in a 12- to 24-month period, that we can get this business back to growth rates of 3% to 5%.
Margaret C. Whitman
Do you want to add anything to that?
Catherine A. Lesjak
No. I think he answered it very well, actually. Are you going to address this, how to get to...
Margaret C. Whitman
The only thing I would add to that is, that as you know, in-year revenues are largely sold to existing accounts by the account executive who is in charge, whether it be at client x or client y. And when we disaggregated the responsibility from the account executive, and I don't know exactly when this happened, but probably 3 or 4 years ago, we took the revenue accountability out of the account executive's hands, and oh, by the way, we took the cost accountability out of that account exec's hands. And if those account execs, with our top 200 customers, are not selling in the normal course of events -- by the way, those add-on projects are longer margin, typically, and that is how you get your book-to-bill ratio above 1%. And when we took that away from the AEs, you saw as you might expect, less interest in selling those in-quarter, in-year contracts. So we are changing the entire compensation system for the AEs, we are going to re-empower them, and have a significant outreach to those top 200 customers, through those AEs, and through our executive team.
One down to the front here.
Cindy Shaw - DISCERN Investment Analytics, Inc
Cindy Shaw with DISCERN. Meg, you spoke about needing to have metrics in place so that you could manage the business. I remember that being an issue when I worked at HP many, many years ago. It doesn't seem to have gotten fixed in the interim. And my question is twofold: What sort of metrics do you have in place that you're watching now across the different businesses? And what metrics are you working to get into place that you feel are critical? When will they be in place?
Margaret C. Whitman
Yes, yes. So I will say that I've worked at probably, I don't know, 8 major companies in my career, and I've never seen a business that is less instrumental. I sort of thought I would come into HP and I'd have my trading dashboard, where I could see what was happening in servers in EMEA or PCs in China, we don't have that in a way that allows us to pinpoint the channel -- the problems that we have in the business and work at [ph] , the early warning system. So Bill, you might talk about that dashboards and scorecards that we're putting in place. By the way, they are to some degree in place in the business units but not in a uniform way. And so you might just talk about some of the work we're doing -- that you've been doing with each of the business groups.
You bet. I think as you reflect on the strategy you heard from each one of the business groups, there's clarity of strategy in what they need to accomplish, and then we'll just use Dave's business as example. He pivots by product line, by geo, by route-to-market. So within, we'll just take -- within servers, there are multiple types of servers. Then he's looking at it by the geo, and then by direct versus channel. And that gives him a very quick heat map of where he's tracking and where he's not and where he's got issues. We'll look at it -- in George's business, we'll just use software as an example, he's looking at it has pipeline, his linearity, and then what that means in closed rate. And he'll look at it by product line, again by geo, and again by route-to-market. So working across each one of the business groups, and then with John Hinshaw in our IT organization to provide the right visibility and dashboards effectively to measure it, whether it be on revenue, market share. We've got a set of scorecards as well on our innovation agenda. One of the things that Meg opened today on was, "Boy, we've got a lot of great innovation, we need to bring it to market." So giving, at the company level, and then at the business group level, clarity on those roadmaps.
Margaret C. Whitman
And I also think, as we introduce new products, okay, so say the ENVY x2 or the ElitePad that you saw, or Moonshot. What do we think year 1 volume is going to look like, and then what was actual versus reality? And how do we get better at that over time? We've got to get to a 3-year planning cadence, where each year, we can say, "All right, so what we planned out to 2014 this year, next year, what are we saying about 2014, and what's the difference between what we said this year and what we said last year?" At least, since I've been here, that process -- and I think, again, if you go to the CEO churn, every CEO has a different point of view about how they want to do this. They come in, situations are different, and so I think we've got to get a cadence here that is befitting of a company of our size and scale.
Aaron C. Rakers - Stifel, Nicolaus & Co., Inc., Research Division
Aaron Rakers of Stifel, Nicolaus. I want to go back to the fiscal '13 bridge a little bit. I know it's been beat up here, but the enterprise side of the house, the Enterprise Group, you talked about $0.05 to $0.12 of impact. I'd like to understand that in the context of what you're assuming from a revenue perspective, considering that it seems like you're going through that cadence of a product refresh cycle in the industry standard servers, you've got some good things going on in storage, relative to what you're assuming on the margin side, and how that bridges itself out?
Margaret C. Whitman
Do you want to start or do you want me to start?
David A. Donatelli
I'll start. Yes. I think the big thing you see there, you heard us mention before, is the impact we're seeing in BCS. So significant decline, we had a significant decline this year in '12, we anticipate that decline is not going to get better in '13, and that impacts us both on the product sales side, as well as on the TS side, and then ultimately, on the margin side. So that's a big impact there. And the rest of the businesses we spoke about, our plan is to maintain our gain share depending on the product. And the whole call there is, what various analysts groups are calling for market growth next year. We still see headwinds in Europe, we still see headwinds in China and we're living with those now, and there isn't a big prediction that, that's going to turn around quickly.
Margaret C. Whitman
The other thing I'd say is, we're doing -- Dave's leading a great charge in Hyperscale, but this is a very rapidly growing part of the business, and we're getting better every single bid on Hyperscale. But Hyperscale has margin pressure. And so we've got -- we are working to sort of recreate a business model there and be remarkably competitive but that's going to be a little bit of a journey through 2013 in my view.
Okay. Super. Thank you. Any at the back?
Margaret C. Whitman
Brian Marshall - ISI Group Inc., Research Division
Brian Marshall with ISI. A question for Dave, I was wondering if I can get your views on what you think, from a qualitative perspective obviously, the impact of sort of the incumbent switching vendors, if SDN actually gets some traction and success over the next, say, 3 to 5 years?
David A. Donatelli
Sure. I think the big impact is that it's opening up people's architectures for the first time in a while. So as you heard me mention before, in the networking business, particularly around enterprises, which is where we focus, we think we have turned it into a 2-horse race if you look at market share. And the reason behind it is, not only our products, but our scale and our brand enables us to do that. And that's led to the success you've seen so far. But I think the big opportunity now going forward, is that we have that success within kind of the current model. And with SDN now, customers for the first time, are looking to change their model. And as you know, generally speaking, when people change their model, they are then are much more open than they otherwise would be to look at new and different ways to do things and new different suppliers that they might not have considered in the past. So I think it opens up a big opportunity. Again, most customers are telling me, it's not if, it's when. So it's not going to happen like next quarter, but it will happen over the next several years. And we're pleased that we have such a comprehensive offering already, that I think is going to open up again new opportunities that we wouldn't have otherwise seen under the old framework.
And I think, the other thing I'd add on that is you evaluate, there's the customer pressure that Dave highlighted, then there is the pressure from the people that are writing those application and Web services. Historically, they've had great programmatic access to the server, but they have not been able to do anything on the network. So as Dave and the assets, for example, that we announced yesterday in New York, boy, the ability to be able to put that to program and have access to it in a richer way, it's so compelling, and so people are going to grab on to that in a way that, that will put more pressure on the incumbents.
Right, super. Anymore? There's one down the front here.
Robert Cihra - Evercore Partners Inc., Research Division
Rob Cihra from Evercore. With the focus on rebuilding the balance sheet, Cathy, I think you gave a target of getting back to 0 net debt...
Catherine A. Lesjak
At the operating company level without the HP Financial Services.
Robert Cihra - Evercore Partners Inc., Research Division
Okay, so that was one question. And then I guess, beyond that, I mean, have you put anything -- has there been any consideration of actually cutting the dividend, or is that absolutely off-limits? I'm just trying to get sense of how important it is to fix the balance sheet relative to dividend. And I guess, lastly, why buy back any stock at all until you got to that target?
Catherine A. Lesjak
So our focus is on rebuilding the balance sheet with the assumptions and all the modeling that's been with the assumption that we continue to pay our dividend. And we do minimal share repurchase to offset dilution from employee benefit plans. That is -- those 2 pieces aren't going to change materially how quickly we get to a roughly 0 net debt position at the operating company level. So all the modeling has been done with both of those in.
Okay. I think -- anymore? I think Steve had one at some stage. Amit, yes.
Amit Daryanani - RBC Capital Markets, LLC, Research Division
Amit Daryanani, RBC Capital. Some question, when you look at the restructuring program you guys are undergoing today, when you announced it a few months ago, did you guys expect the revenue -- level of revenue decline as you were talking about it in fiscal '13, or was that a much lower number? And does that mean you have to actually, potentially, announce another run of restructuring down the road?
Margaret C. Whitman
You want to take that?
Catherine A. Lesjak
So at the time that we announced the restructuring, we did think things were going to be a bit better than they are. We had expected to be able to invest a significant portion of that -- those restructuring savings back into the business, incrementally, to what we're doing in the outlook that we provided today. And part of that is just the continued deterioration from a macro perspective has definitely put pressure on our businesses, as well as some of the changes that are going on in ES, and some of the run off that we hadn't fully expected at that point in time.
Margaret C. Whitman
Yes. I mean, I think what Cathy said is exactly right. And at the same time, the journey of my last year here has been, I think, I called it in my talk, the peeling of the onion. And as I dug into each and every business with all of these executives, some of them were new, some of them here a long time, as we understood some of the fundamental under-investments in IT, I mean, when I came here, both Bill and Todd and Dave said, let me tell you about quote to cash. Let we tell you about our CRM system. Let me tell you about our HR systems. But until you see it up close and personal, you don't actually realize the knock-on effects of a quote to cash system that puts us at a fundamental competitive disadvantage in turning quotes for customers. So I thought that we might be able to stretch those IT investments over a longer period of time. I came to the conclusion that we absolutely cannot do that. That this is just continuing to put us behind the 8 ball, and we have to make these decisions because we have to get better faster. In our ES business, I mean they've been struggling for 4 years without a labor demand system. Okay, I do not know how you run the Services business without a robust labor demand system, meaning, where are your people, what are their expertise, and how do you match people to customers, and customer assignments? Because that key is, as customers are running off, or assignments are winding down, then where do you redeploy your people? This is not the automated process that you would imagine that it is at Hewlett-Packard, and until we fix that, it's going to be a very hard to manage the business. So we have actually accelerated the IT investment to get the results in 2013, because we can't continue to live like this. So that might be just one example of where we just decided some of these investments you couldn't just do a 3-year build on these things, we have to get them done. And so that's part of my -- I think, as we saw some deteriorated business results, we didn't take the pedal off the gas in terms of some of these investments, because it's a self-fulfilling prophecy.
Okay. We have time for a handful more. Steve?
Steven Milunovich - UBS Investment Bank, Research Division
Steve Milunovich, UBS. So I don't understand why, if, a couple of months ago, making all these reinvestments was the right thing to do, even with the business deteriorating, why you pulled back now? Does it make that much difference if you're earning $3.00 [ph] or $3.50 [ph] at this point? Did you decide some of those investments don't need to be made, because you're refocusing a bit more? Particularly, since you've kind of given up on the short term and you're making, I think, the right decisions about the long term, why not stick with that initial plan, just say, to help earnings in the short term?
Margaret C. Whitman
Yes. I'll let you answer that as well. I mean, this is always a balance, right? I mean, this is what business leaders do, is they try to make the right trade-offs. And so we're making the trade-offs of, what are the absolutely critical investments, where do we think we are seeing product run-off, versus where can these products that we're investing in today fill the hole this year and next year? So in the end, we do all that analysis, and then it's a judgment call about what we think the right thing to do is in terms of how our employees feel about the company, how our customers feel about the company, and making a sort of a balanced trade-off of what we think the right thing to do is. So I think we've struck the right balance. Obviously, the proof will be in the pudding at the end of this year, but the real proof will be in 2014 and 2015, if we follow that journey that I outlined at the beginning.
Catherine A. Lesjak
I don't think I have anything else, it would have been exactly what I said. It's all about balance, and there you go.
Margaret C. Whitman
Making sure that you're making the right set of trade-offs.
Right. Super. Thank you. Anymore? Yes, on the left.
Nigel Walter [ph], [indiscernible] Partners. I just wanted to ask a question about printing again and your chart about 0 growth in hardware. When you look back, clearly, there's a very large cyclical element to the top line in printing. And if you look back at '08, '09, you saw very, very large declines across the industry in that business. You're seeing a slightly smaller impact decline to the current situation, yet, the sell-side is absolutely obsessed with the fact that it's all structural. Could you give us some more insight, please, into how much you think is structural and how much you think is cyclical?
R. Todd Bradley
Well. I think we've covered this pretty deeply. I think clearly, there are shifts in what people are printing. In our consumers space, clearly, we see less things like home photo printing, that was a big driver in that timeframe. I think our own failures to execute in things like the multifunction category that we've talked about, our ability to now balance ink and laser, and aggressively, if necessary, compete in different markets in different ways, I think are all opportunities. As I said earlier to somebody's question about Ink Advantage, I think that the test that we -- I won't say test, but the countries we've been executing this model in have executed extraordinarily well. I think it's incumbent on us as industry leaders to look at those categories that are going to provide growth and execute to those. I don't know, Meg do you want to...
Margaret C. Whitman
Yes, I'll just add one last thing, because I've been deep in printing since -- almost since I came into HP, because I looked at the situation in which we found ourselves. I said, 30% of the operating profit of this company is in printing, I think I'll go there and try to figure out what's actually happening here. And I think it's a combination of cyclical and secular. So on the consumer side, I think Todd's slide showed we anticipate roughly a 3% decline each year in consumer printing, unless, we as the industry leader, do something about that. And by the way, that's what industry leaders do, we try to figure out how to make printing more relevant to each and every one of our customer segments. And I do think this ability to print anywhere, anytime, could actually, and from mobile devices, could make a meaningful difference. But I do think the consumer segment is printing a little bit less every single year. On the commercial side, you see actually a 4% growth in printing, and we need to run after that business. But it's true that our ink sell-through and our toner sell-through is weaker in Europe than it is in other parts of the world. And that is the part that I think is tied to cyclical, where when the economy is not good, consumers print a little less, and enterprise just try to clamp down on their folks' printing. So I think it's a combination. It's a little hard for me to say, listen, it's 75% cyclical and 25% secular. I think it varies by region, and it varies by customer type. But there's certainly no question in EMEA that we are seeing the same sort of sluggish sell-through of both ink and toner that we've really seen since the beginning of this year. And we keep working down channel inventory, and then it works itself up again. So I think we're going to -- that's part of the reason that we're not forecasting robust growth in supplies in EMEA next year, because I don't think the economy is going to get any better. I hope it does, because we could use a tailwind here on that business but my view is the conservative way to plan this is EMEA continues to struggle for most of next year.
R. Todd Bradley
Regarding the other thing with the breadth of our -- the breadth and scale of our products, the ability to make printing easier, to facilitate that, the 5 things you want to print from your cell phone today, to have your device walk into a building and auto discover the Web-enabled printer to connect to, I think are all things that we need to do and we need to aggressively deploy in our own hardware as well as that of the ecosystem.
Margaret C. Whitman
Yes. I'll say one last thing about printing, because I'm pretty bullish on this business over the long haul for following reasons: We are the big leader in this business. We have an IP stack in ink that is second to none. And by the way, others are dropping out of this business. You see competitors dropping out of ink. And so we have the opportunity to sort of consolidate the market and then act like an industry leader. And many of you know, I started my career in the consumer businesses, and what industry leaders do is they figure out how to grow this category. They don't just sit back and sort of say, "Well, woe is me, it's not happening." You actually figure out what you're going to do to grow these categories, and that is incumbent on us as the industry leader. And we have a great opportunity to really consolidate here as we watch some of our weaker competitors fall by the wayside in what's a pretty tough market. So I think we're really well-positioned in our printing business. It's been a tough 1 or 2 years, but listen, I feel really good about the plans that Todd and his team have in place, the product pipeline, the marketing, these ought to make a real difference.
R. Todd Bradley
I guess Meg and I are playing ping pong and is switching, but that's okay because it's an important question. The other segment that we will attack very aggressively are the refillers. Be that refilling gun had a retailer, or all the way to the extreme of the counterfeiting that we stopped in the Middle East this week. So the messaging, the go-to-market efforts, the aggression, around both the quality and value, value being price, price for what you get of our products, is unprecedented and unmatched. And I'm sure we will take some grief from some retailers as we, in essence, go and compete with them aggressively in the marketplace, as we move those counter [ph] dollars to HP demand-generating dollars, but so be it. We'll let the customer decide and we'll make sure they have the right information to select their products.
Margaret C. Whitman
And let me just pull the lens back here a little bit. One of the reasons that I talked about in one of my earlier slides this morning was the transition that HP has made from a printing company to a diversified IT technology company. I mean, that is a remarkable transition over a 10-year period. And in the end, I think that's a huge advantage. Because let's say there is ink softness in Europe. Okay, when we are at full strength, when you have a portfolio like this, some things are doing well, while there are others, we have geographic balance, business unit balance, customer versus enterprise balance, this ought to be a very balanced portfolio that works extremely well in good times and in bad. And one of the things I think we've got to do, how many times have you seen articles written about HP that says," "HP, the world's largest PC maker, said something, something, something." We've got to start to change that opinion. We love our PC and our printing business. But as I said, in what role does each of these businesses play? The 2 growth engines of our company are going to be the Software business and the Enterprise Group business, especially as Dave takes over both the financial accountability, as well as the operational accountability for TS. I mean, this is such the right thing to do. It required more transparency than we've done in the past, but the conclusion you and I came to was, so be it, because these are -- it is the right thing for Dave to be managing TS and putting these products together as we go to market. So I think we've gotten some benefit. Boy, I'm looking forward to real benefit next year as Dave takes over to financial management of TS as well.
David A. Donatelli
The other benefit of TS is the fact that as we've made this transition, the TS assets that supported PCs and printers to some degree, have now moved into PPS. So the cost control and the focus on that, not that there wasn't good control before, but a much more tactical, almost instrumental approach to this, as it relates directly to a purchase or a support call, that transparency, I think, is going to be very, very beneficial.
Great. We have time for 1 or 2 more. Brian?
Brian G. Alexander - Raymond James & Associates, Inc., Research Division
Just a quick balance sheet follow-up for Cathy, why is 0 net debt the goal for the company? Why shouldn't the business have some debt, especially with rates so low and your EBITDA likely to stay above $10 billion for the next few years?
Catherine A. Lesjak
So I think that's the kind of a shorthand way for saying that our target credit rating is a mid-single A and that getting the operating company net debt position back to what it was right before we bought Autonomy, when we were a mid-single A credit, is where -- is just shorthand. I said roughly, net 0. So I think it's plus or minus a bit.
One way at the back, and then maybe one more after that, and then we'll...
I have a question on Windows 8. How do you see this product cycle playing out? Is it going to be led by tablets, Ultrabooks and/or convertibles? And also, how does Microsoft's own participation factor into your thinking?
R. Todd Bradley
I guess that's mine. I'm not sure what you mean by Microsoft's own. Oh, yes, you must be talking about Surface. Look, Surface doesn't really enter into our thinking a great deal at all. It's a very limited product with limited distribution. I think it was an attempt to showcase what Windows 8 will do on a tablet. I think the whole product refresh cycle is going to enable new capabilities in our PC environment, new capabilities driven by touch, driven by even greater tools around security. I do think at the same time, when we look at products like the enterprise tablet we showcased, that tablet will be focused on the enterprise. The aspect ratio doesn't make Windows 8 real effective on there, but the focus was the customer. The focus was the ability to view a PDF file or a document without having to scroll. The focus was on the fact that the snap feature on Windows 8 doesn't work yet with Outlook. So I think the resources Microsoft will bring to bear around marketing Windows 8, should lift the industry. I think it has very unique sets of capabilities and innovation in it that will help lift the consumer -- lift the industry, but I think is going to be predominantly, in the short term, a consumer lift as opposed to a broad industry lift.
Yes, I think that's right. Just sort of building on that is, those of you that have followed the PC industry for many years now, I mean it is a pretty darn exciting time, because whether it be the board layout and chipset changes that Intel has made, the delivery of Windows 8, the fact that you've now got meaningful competitive architectures with ARM and with Android on the software platform side, boy, I mean -- the question earlier about how to think about PC growth rates, is that convertible, is it a PC, or is it a tablet? Traditionally, if you're a Windows PC user, and some of you in this room here, you made a pretty significant trade-off in the accessibility of the device to have the compatibility of those applications. What Todd and Stacy showed earlier was effectively diminishing that compromise in a huge way. And so as we think about -- as we think about the rollout of Windows 8, we think it's an important milestone in the industry because we need Windows to have touch. We think it unlocks a set of innovations and showcases a set of hardware and software integrations that HP has historically, uniquely done and continue to uniquely do in that product line up, whether it be the all-in-one, just think about the curved bezel and what that means to do in hardware to get that curvature, or in the convertible, where you're effectively putting the whole board and compute in the display surface and then very easily snapping in the keyboard. Great opportunities for HP to differentiate and provide a higher quality experience. But we need Microsoft, we need Intel, we need ARM, we need Google pushing the envelope on those innovations, so that we can do our thing.
R. Todd Bradley
But the other thing with the tablet, and Bill made a good point, I should have stressed more when we talked about the enterprise tablet. But what we've focused on is how we broadly support the enterprise, the backward compatibility of applications, the accessibility. So if there is a requirement to access the board, the chipset, in that tablet, the enterprise can open it and access it as opposed to many of the models, where you have to send it back in or you carry the inventory to provide support. So we've taken -- our guys have done a phenomenal job of not just taking customer input but turning that input into a product.
All right, great. Super thanks. Meg, you want to make a few closing remarks?
Margaret C. Whitman
Yes. Let me make a couple of wrap-up comments here. So if there were a couple of takeaways from today, first, I would like you to appreciate that we, I think, have a real handle on what the challenges are in front of this company. And I think we have a very clear-eyed view of what those challenges are and we have a plan in place to take on those challenges. And whether it's instrumentation or the Services business, or our forecasting tools, or our focus on cash conversion cycles, we've got the problem nailed and we have a plan in place. The second takeaway I'd like you to remember is, in the end, this company comes back because of the great products and services that we deliver. And we are making those investments in R&D, we have accelerated the focus on products and services, and whether it's StoreOnce or 3PAR, or SDN, or our new products in the PC space, or our enterprise plays, or some of the software products that George showed, we are really focused on products and services. And second of all, we are working very hard to get our go-to-market selling motion in a way that allows us to sell these products in a cost-effective way, the way customers want to buy them. And then last but not least, we understand the necessity over time to align revenues with costs on a consistent basis, and that operational excellence needs to be a part of the DNA of this company. We need to get better every single year, it is a never-ending journey. And we are completely committed to it. And then lastly, where I ended my talk this morning, the right people, in the right job, at the right time, with the right attitude, with a team focused and consistency of leadership, that is what we are committed to. Because as I said, you know what, there's a lot of ways to skin a cat in business, but what you've got to do is you've got to have a clear-eyed strategy for the company, for the business as a whole, you have to have the underlying financial strategy and investor-friendly capital allocation strategy, and then you've got to stick with it. You can make adjustments as things happen in the marketplace, but you have got to have a focus where you see things through, and that's what we aim to do. And as I said, I wouldn't bet against HP people, I wouldn't bet against our innovation and product engineering DNA that is so much part of this company, and I wouldn't bet against our ability to take those products to market. So thank you very much for coming. It's been a real pleasure and I look forward to updating you on our progress. Thank you.
So just for everybody's benefit, there are refreshments available at the back. You'll have the chance to see some of the products that you saw earlier, the demo that George referred to. Many of the executives will be available for informal discussion in those sessions. I would just ask if you could give them all just a couple of minutes to get de-microphoned and all the logistic issues that we had to do. But feel free to make your way to the showcase and look forward to connecting with everybody. Thank you, thanks for your day and safe travels.
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