Hewlett-Packard Company (HPQ) Sanford C Bernstein Strategic Decisions Conference May 28, 2014 2:00 PM ET

Executives

Meg Whitman - President, Chief Executive Officer, Director

Analysts

Toni Sacconaghi - Sanford C. Bernstein & Co., LLC.

Toni Sacconaghi - Sanford C. Bernstein & Co., LLC.

Welcome, everyone. I am Toni Sacconaghi, Bernstein's U.S. IT Hardware Analyst, and I am very excited about HP's President and Chief Executive Officer, Meg Whitman, joining us today.

Meg has been President and CEO of HP since September 2011, and a board member of HP since January 2011. Prior to working at HP, Meg was a strategic advisor to Kleiner Perkins, was President and CEO of eBay from 1998 to 2008, and before eBay, held Executive level positions at Hasbro, FTD, Inc., The Stride Rite Corporation, Walt Disney and Bain & Company.

Meg has kindly agreed to do a fireside chat for the entirety of our time, so I'll be leading with questions. Please fill out your question cards and pass them to the middle and we will get to as many as we can.

Meg, welcome, and thank you again for joining us today.

Meg Whitman

Thank you. Happy to be here.

Toni Sacconaghi - Sanford C. Bernstein & Co., LLC.

Maybe we can start. You have been CEO for about two-and-a-half years. What has changed most about HP during that timeframe?

Meg Whitman

Obviously, I came to HP at a very difficult time for the company. The third CEO in as many years, and there was a fair amount of, I would say unsteadiness and angst around the company. I think probably the thing that has changed the most is first of all, we have laid out a very clear strategic direction. I would say that virtually everyone at HP understands that strategic direction. It hasn't changed into two-and-a-half years, which is a plus given the history. Then for the financial community, we have said what we are going to do, and then we have delivered those results in a consistent manner, so I think the upside of that is that we have done I think a good job of capturing hearts and minds of HP people. We have gone a long way towards restoring confidence in HP. With our customer base and our partner base, I can see the reaction from our customers is entirely different and our people show up more confident more ready to take on the challenges of our customers and partners.

Then the other thing as you have seen instead of declining revenues, we've had three quarters of basically stable revenues, down just a bit, and so that may not be our aspiration. We want this company to grow, but relative to negative 9, negative 6, negative 7, as you well know we went through a number of quarters of pretty significant revenue drop. That has ended and we are now on a stable revenue, which is actually a huge turning point for the company. One last thing, we have reignited the innovation engine and I suspect you will have some questions about innovation.

Toni Sacconaghi - Sanford C. Bernstein & Co., LLC.

You talked a little bit about the revenue growth in the stabilization that's occurred over the last three quarters. How important is it for HP to grow revenues longer term.

Meg Whitman

It's important for the company and we are managing a portfolio of declining businesses. Businesses are basically flat and then we have got some pockets of really great growth engines and whether that would be storage or networking, converged infrastructure, commercial notebooks now, our printing business, some parts of our software business like Vertica and Autonomy, so we have got to make sure that we grow those growth engines and manage the decline of some of our older businesses, so it's a portfolio that we are managing. Obviously because we are so enormous and operate in virtually every major country in the world, there is an impact on what the economy and the exchange rates also do.

Toni Sacconaghi - Sanford C. Bernstein & Co., LLC.

I think, I asked the question of the importance revenue growth, because you know up here in the technology space, IBM, has had a very low revenue growth model.

Meg Whitman

Yes.

Toni Sacconaghi - Sanford C. Bernstein & Co., LLC.

Actually have been reasonably successful over the last 10 or 15 years, so I am trying to get a sense from you about how imperative you think revenue growth is. If you think about HP going forward, to drive earnings there are several levers, there is clearly revenue growth, there is cost-cutting and there's share repurchases, so how important is revenue growth and how do you think about those three levers in terms of sort of a model going forward?

Meg Whitman

Listen, our objective is to grow at the rate of the markets in which we play or grow faster in some of those particularly attractive areas. I think, when you and I first met, I said listen we think we can be a low single-digit grower, GDP grower, basically across the globe and that will end up as a GDP grower in total and we ought to be able to do what great companies do which is grow earnings per share twice the rate of revenue growth. That's, you know, what sort of a best iconic American companies do.

Certainly on the EPS side of things, certainly share repurchase can be a part of that EPS growth, but I am really focused on having organic EPS growth that is a result of higher earnings and better execution. It can be complemented by a share buyback program, but everyone in this room is pretty sophisticated on how EPS grows. You know whether it's growing by share repurchase or you know whether it's growing by dropping bottom line dollars and I think those are - I mean, I want the company to be healthy and growing net income as opposed to just boosting EPS through share repurchase.

Toni Sacconaghi - Sanford C. Bernstein & Co., LLC.

Meg, the same model of that model that you first shared with me and articulated is that still the aspiration?

Meg Whitman

Yes. I think it still stands. As our market has changed in just last two and half years, I think there's a real growth around our converged infrastructure business, networking, and storage. Storage had a pause in this quarter, I am still very bullish about that business still very bullish about our software business as well as - Listen, PCs is having a nice run. I think in some ways that's on the back of XP and a delayed refresh cycle.

Printing, this is the other thing, remember when you and I first met, you were much nicer. You didn't quite say it this way, because you said PCs are dead, printing is dead, and therefore you are dead. You were nicer than that, but actually neither of those two things turned out to be true. We have done a good job with those businesses, the innovation engine is alive and well and now we are taking those other which should be faster growth businesses to next level.

As we think about you know the revenue question, because I think it's an important one among your shareholder base. You have made really nice progression as you said the last three quarters have essentially been flat at constant currency. You had originally aspired to grow revenue this year. Then you said, we will decelerate a little bit, we will decelerate less than last year, but will still be negative, but actually you are doing better. You are about flat for the first half.

Meg Whitman

Yes.

Toni Sacconaghi - Sanford C. Bernstein & Co., LLC.

Is it realistic to expect that HP could grow revenue in 2015? On one hand, you have started to see the stabilization.

Meg Whitman

Yes.

Toni Sacconaghi - Sanford C. Bernstein & Co., LLC.

On the other hand, the comparisons are much tougher.

Meg Whitman

Yes.

Toni Sacconaghi - Sanford C. Bernstein & Co., LLC.

…so your revenue might be close to flat this year, last year were down 7%. You know, realistically, can HP grow revenue in 2015 and what are the circumstances for doing so?

Meg Whitman

It's too early for us to give revenue guidance for 2015. We will do that little closer to the end of our fiscal year at our Security Analyst Meeting. Remember what I said, we are managing a portfolio of businesses. We have got declining businesses, we have got maintaining businesses and we have growing businesses. Frankly, the biggest probably influence around whether we grow next year will be how fast these businesses decline and you know which ones they are right?

BCS, our Business Critical Systems businesses has been on a very significant - it declined less this quarter than it has. Obviously, there are some elements of our software businesses that are legacy software assets. If you think about businesses like tape in our storage business, so to the extent that we can mitigate the decline of those businesses will help the company grow overall.

Then of course another big driver has been Enterprise Services, which has had the run off three or four major accounts, much of which we thought was going to happen last year, but it happened this year which was good for the P&L last year and not as positive this year, so whether we can growing Enterprise Services next year will also be a big driver of overall company growth.

Toni Sacconaghi - Sanford C. Bernstein & Co., LLC.

Against that backdrop, how are you thinking of IT spending this year and do you have an assumption for next year, because I would have expected the caveat would have also been the health of overall IT spending?

Meg Whitman

Yes. I think that's true. Although my view is, because we are such a big company that the market growth matters to us, but I think there is still enough execution improvement at HP that we ought to do better than market in many areas that we play.

I would say from a macroeconomic perspective Europe is doing better than we had anticipated. Europe seems to be growing firm and stabilizing. What we have learned is that can change at any moment, but that seems to be growing well.

China is, actually we had a decent quarter in China. We have got a new leader in China who is making a big difference. Japan, obviously we had some opaque perspective particularly in our PC business. The yen was very helpful there, but Japanese economy feels like it's coming back.

Our problems is some of the countries in Latin America, Brazil was very tough for most major countries, and Brazil was a pretty big country for us. Russia was a decent quarter. We worry about what's going to happen in terms of IT spending in Russia given everything that's going on in Russia and Crimea, but I would say we are still at that spot where there is improvement that we can make to our own operations, our own go-to-market, our own cost structure that I think our destiny is more in our hands and just simply being a derivative of what happens in the macroeconomic environment.

Toni Sacconaghi - Sanford C. Bernstein & Co., LLC.

If we think about IT spending, you know our estimates are that it grew about 2.5% last year for corporate IT spend and consensus seems to be thinking about a similar level of growth for this year, so let's take it in that range of 2% to 3%. HP is growing about zero, so you know you would mention the aspiration to try and do as well as the market are better. What explains the delta today and how ultimately does that change over time?

Meg Whitman

Yes. I think the only two things I would add in addition to what you said about corporate IT spend, we have a good-sized chunk of our business with governments, with federal government, the E.U. the U.K. public sector and that business is variable by country, but all the governments now are trying to be more cost-effective and spending less.

Then of course a big chunk of our business to the channel is through SMB, which I wouldn't say is corporate. It's a bit of a different thing, so I would say a couple of things. One is, I think, we still have some of the challenges that were derived from the change in the last leadership team. On August 18 th , we announced a lot of changes, which gave corporate customers a bit of a pause and our partners a bit of a pause. We had rebuilt that relationship, but particularly enterprise relationships and enterprise confident doesn't snapback as fast as consumer confidence does. At least in my experience, so we have we been on an two-and-a-half year rebuilding program, so I think part why we have been a little slower is we are still recovering from what was a series of very dislocating steps by HP.

You might think, okay, if you mentioned that you're getting out of the PC business, why would that affect your server business. What happened is that many people assumed, well, if they are getting out of PCs, they are getting out of hardware entirely, which we never said, but you know how the news cycle goes, so that's the first thing.

The second thing is, we have work to do on our go-to-market. You have heard me talk about the core DNA of Hewlett-Packard. What this company does really well, innovation, customer service and customer support. We are a very channel-centric company and that's the core of who this company is.

Go-to-market, I think, has never been a huge strength of the company, so we are rebuilding and making that solution selling go-to-market transition. Because remember on our product businesses, much of the selling was speeds and feeds.

My thing does it 10 times faster than your thing. Now, we have to move to business outcomes, because increasingly even small business they are looking for business outcomes solutions as opposed to a point product and that's an evolution that we have to take our own sales force through everything from the product management, the new product introductions as well as how we got to market and we are making real progress there, but we have got more work to do, and if there is a complicating factor it is that increasingly the solutions span business unit, so our cloud offering Helion, which you probably read about last week or the week before, this takes software, CSA, our cloud System automation from software, our virtual private cloud from enterprise services or private cloud from EG with our OpenStack underneath. I have got to get all three businesses dancing information around a solutions outcome and that's a challenge for a company with our heritage.

Toni Sacconaghi - Sanford C. Bernstein & Co., LLC.

If we think about the businesses, and I'll try not to be as careless as I was when we first met.

Meg Whitman

Why change now?

Toni Sacconaghi - Sanford C. Bernstein & Co., LLC.

…and think about each of them, I think investor concerns are that there is a question mark about the market growth of each of these businesses. PCs for obvious reasons, I think, you yourself has said it's unclear that the PCs will grow longer term. I think in the enterprise market, we are clearly seeing change from cloud and we are seeing [Lenovo] getting the business who has been a formal player in commodity businesses or seeing the emergence of white box, so let's start maybe with those two or if you want at a high level maybe think about your four businesses, printing, enterprise PCs and services. Which of these markets do you feel confident actually grows on and an end market basis over the next three to five years and then maybe we can start talking a little bit about PCs and servers.

Meg Whitman

Sure. Let's start with our Enterprise Group, which is server storage, networking, converged infrastructure and our technology services organization. The demand for compute is increasing, not decreasing, but form in which it comes, is changing. and whether that is dedicated infrastructure in a data center that is designed to run only one app, that is giving way to what I call a hybrid cloud environment where our customers are trying to figure out what workloads they want to run in their data center lock down, what ones they want to run on a virtual private cloud, what ones they want to run on a private cloud and what applications they want to run in a public cloud to optimize their capital expenditure spend, and get the speed and agility that their lines of businesses are requiring from them.

I think that there is huge growth coming here, but there will be cannibalization of the old way of doing things and so our objective is to make sure that we are on the right side of that trend that we are ahead of that trend, so there is the technology innovation. Then I would say there is a business model change as well, Toni, that whether it's SaaS, or PCs, the demand for as a service is really quite surprising to me. We get demand all the time for print as a service, for PCs as a service, forget compute as a service or infrastructure as a service, so we are thinking how we do business model innovation that doesn't simply move capes from [Bernstein's] balance sheet to our balance sheet, because that of course destroys our return on invested capital and that would be of course in your company's best interest in some way, so this is where HP Financial Services comes in, which is that we then can finance those purchases and make sure that they don't live on our balance sheet, so that our return on invested capital doesn't drop precipitously, but I think we are seeing a lot of changes around how people want to buy technology on a consumable basis, on a ratable basis, on a subscription basis. Forget the underlying technology for a moment. Then of course there's real technology change around SaaS and obviously hybrid cloud.

Toni Sacconaghi - Sanford C. Bernstein & Co., LLC.

You know if I were to push you on this.

Meg Whitman

Yes.

Toni Sacconaghi - Sanford C. Bernstein & Co., LLC.

The core of what drives the EG group has historically been servers, a lot of it historical was UNIX servers, in last 10 years it's been x86 servers.

Meg Whitman

Yes.

Toni Sacconaghi - Sanford C. Bernstein & Co., LLC.

If we look at the market over the last 15 years for servers has actually declined in revenue terms, so compute has gone up exponentially, but that's really been a Morris Law function and much of the rest of the EG Group is dictated by a servers and account control, so you sell the servers and the people you have a better chance of giving the storage, you have a better chance of attaching software. You obviously have TS that follows from that, so you know I think of the market that has not grown in 15 years collectively and I think of a market that is having disruption with cloud as you alluded to. Then I think of a market that will likely have more formidable players going forward particularly Lenovo and Insulate, I get that conceptual notion of compute being important. I get the notion that people are going to do things differently, but when I trying to operationalize that and say well, our server is really going to grow, I struggle to see how that actually takes place, so back over to you.

Meg Whitman

Well, I think there is a couple of things. One is, if this becomes just a commoditized business, then I think the dynamics change. Then part of the reason that we are so focused on our cost structure is we have to be able to compete in what part of that business may become a commoditized business, but our innovation has to continue at a pace. In fact it has to pick up.

If you think about it, our next-generation of blades, which comes out sometime next year, our next-generation of high-performance compute, high-performance compute is a big, quite profitable business for us. Think about Moonshot, there is over 60 POCs. Moonshot has the chance to completely disrupt the server business as we know it. If you think about water-cooled servers, there's all kinds of innovation in the pipeline. I would say, we have our strongest innovation pipeline in servers that we have had in many years, so we have got to continue to innovate as companies want not just commodity servers, but they need servers that take up less power, less space, more versatile and frankly are configured to individual workloads.

You saw the deal we did with Foxconn. Hyperscale is a growing part of this business, not at the same margins that we were used to in the old days, but a profitable business that we want to be in. We had to change the business model of how we competed in that market, so we combined forces with Foxconn to use their manufacturing, scale manufacturing and engineering capability in China, with our innovation engineering, our brand, our go-to-market. My view is, we just have to be able to think about new ways of doing things where we at least maintain market growth, which I actually don't believe will be a shrinking market forever and then even make sure that we are in it in a way that we can make money.

Toni Sacconaghi - Sanford C. Bernstein & Co., LLC.

You talked about cloud and the new ways the people are going to consume compute. Again pushback on me, but I think typically in some of our CIO surveys, when we asked people's impressions of cloud providers, HP is not at the top of the list. It's usually Amazon or Google or Microsoft or IBM or VMware and typically HP, would not be in the first unaided awareness names that are listed. Is that fair and is it because HP is behind and is making investments to catch up or are there really jewels that are unappreciated by the marketplace?

Meg Whitman

I think it's a little bit of both. I mean, I think one of the reasons that we launched Helion a couple of weeks ago is that we didn't feel that enough people were talking about the real progress that we had made in cloud and didn't understand our point of difference versus the other cloud providers, so that's one of the reasons that we did that, but as you know we are the leader in private cloud.

Most people and the press is very much in this, when you say cloud what they're really thinking is public cloud and they're really thinking of Amazon Web services, maybe a little bit of Google, maybe a little bit of Azure, but cloud for the enterprise customer is far more complicated than what apps you want to put up in AWS, or do you want to put up in Google. They are really thinking about as I said before, what is the right environment for the right workload and they're not going to at least in the near-term put everything that they had into a public cloud environment whether it's Amazon or anyone else's.

I think that, we, in the CIO circle that I talk to, they all now know about HP's hybrid cloud offering. They understand our point of difference, which is that it is one-click workload portability, you can deploy some of your workloads in a public cloud and then move them to a private cloud or a VPC, they understand the economic benefits of that and they understand that our point of difference in many ways is the whole architecture built on OpenStack, which in the near-term people say, well, maybe that won't be as profitable as if you ran proprietary stack, right? but I think we are skating to where the puck is going to be and if there is one change of that HP that I'm really focused on is how do we skate to where the puck is going as opposed to chase the puck or to behind the puck and we have got to be a visionary company about, okay, where are things going and then how do we position ourselves even though there might be a little less money in the near-term, there is a lot more money in the long-term and this comes back to how we are running the company.

Then I said when we first met, listen, I am not trying to fix this company for this quarter of this year. I am trying to set this company up for another several decades of greatness here, so that's why we are doing this in quite a deliberate way. You saw our R&D spending go up this quarter. You will see it go up again. Part of the reason we are doing this next phase of that restructuring we started in 2012, is so that we can create even more financial capacity to invest in the future of this company and you got to play to your strength.

I would tell you strength of this company are engineering and innovation. That is who this company is and it's amazing what we do with a relatively small amount of money relative to our competitors in terms of computing.

Toni Sacconaghi - Sanford C. Bernstein & Co., LLC.

We talked a little bit about enterprise. Other businesses we touched upon was PC.

Meg Whitman

Yes.

Toni Sacconaghi - Sanford C. Bernstein & Co., LLC.

I think, last year at your Analyst Meeting, I think, the belief was that PCs might be a low single-digit decline on a steady-state basis going forward. Obviously, you alluded to some positive bounce from XP.

Meg Whitman

Sure.

Toni Sacconaghi - Sanford C. Bernstein & Co., LLC.

Are you thinking about the longer-term PC market any differently than you were a year ago and how should investors think about that?

Meg Whitman

The way we are thinking about, I still think that PC market is in a secular decline. Not a freefall, but it's a slowly shrinking market over time. Unless there's something that we don't see, so what we have to do is, we have to decide where to play and how we are going to win. What you saw from our results is that we did extremely well in commercial PC. Commercial PCs grew 12% for us year-over-year. We were again in number one position in number of the categories and I have to give a lot of credit to Dion and his team, because they are doing very detailed market segmentation and they are deciding whether they want to play where we can have profitable growth.

We are not in this for share-for-share sake, we are very disciplined about this. The reason that this business is helpful to our overall portfolio is this was a big cash generation engine. We have actually a negative conversion cycle on our PC business, so the cash conversion cycle is very attractive from a cash perspective and we had almost an infinite return on invested capital in this business, so it plays a real role in the overall portfolio and I think we are among the very best performers in a difficult long-term secular market that's going to have its ups and downs.

Toni Sacconaghi - Sanford C. Bernstein & Co., LLC.

When we think about printing…

Meg Whitman

Yes.

Toni Sacconaghi - Sanford C. Bernstein & Co., LLC.

Switching to the remaining two businesses at HP, again, I think the layman would say aren't people - and I don't mean that as if they are wrong, but I think the average person would say well with tablets and with smartphones is there really need to print the same level. Again, if we go back to that basic questions, do you think printing as an market is a growth market? I think, the belief was a year ago that consumer may not be given some of the headwinds on supplies. Commercial would be. Do you still believe that?

Meg Whitman

I think, there is pressure on the consumer space. Commercial continues to grow relatively nicely for the company and this is where innovation makes a big difference, so think about the enterprise. The enterprise has historically been in most countries a laser market. I bet Bernstein probably has laser printers all over the place. I hope there are. In any case, what we have now is invented a technology which we call ink in the office's, whose first instantiation is Officejet Pro X that is ink at twice the speed of laser, half the cost per page. That is a very important value proposition and it maybe that that's only for certain departments in the office, but I will tell you small businesses, medium-sized businesses, this is an incredible economic proposition and we are the only people that have it. We can manage those kind of units into our management print services deals, we can actually start to begin to sell up market and then you might say well, aren't you cannibalizing our laser business?

Well, first we are going to eat other peoples' laser business and there is more market share for us to gain with this product that can be a substitute for laser. Then if over time we end up cannibalizing our laser business, it's actually okay from HP, because the profitability of ink is higher than laser, so there's a lot of innovation here.

Our Graphics business, but we never ever talk about was a low double-digit grower the last quarter. We are kind of excited about that. Think about what's happening in large format printing. Basically, we are moving from analog to digital so the presses that used to run huge runs made - the only way the book publishing was economic is you ran huge runs.

Now with this kind of word press Indigo printers, you can do much smaller runs, packaging runs that are real adjacencies to our printing business, so listen this is one of the great businesses of all time, one of the historic businesses a HP. We are investing in the business and we are making sure that we remain the leader and I believe at this market continues to consolidate there is going to be opportunity for us to gain share here. Lexmark dropped out of the inkjet business not too long ago. Okay. That was a huge opportunity for HP.

Toni Sacconaghi - Sanford C. Bernstein & Co., LLC.

Finally on your Services business, that business is very much a turnaround you've articulated it will be multiple years. It's a shrink to get more profitable stage right now your signings have continued to I would say on the disappointing side by your admission, so how do we think about this business? Is this sort of a couple of more years of shrinking to get more profitable and is there sort of a microcosm of the whole turnaround, but maybe two years behind everything else where they shrink to get more profitable for a couple more years. Is that how we should be thinking about that business?

Meg Whitman

Here is the way you should think about this business, the sales cycle in enterprise services is much different than our product and software businesses. In our product business, we got volume business and value businesses, but basically the sales cycles are multiple sales cycle within a quarter.

Enterprise Services, because this s such enormous step by very, very big companies, whether it's business process outsourcing, IT outsourcing or apps modernization. These are sale cycle with a much longer turnaround time, so this requires the rebuilding I talked about in terms of our customers.

We are now closing deals that we first met those customer 18 months ago or two years ago that the turnaround of this business Tony is going to take. That said we are also pivoting our sales to be proactive prohibiting our sales engine to be proactive. In that business, you all noticed that your renewal rates when you're the incumbent is often at high of 80% or 90%, your win rates on new logos is much lower, so we got into really a renewal focused sales motion, we have got the pivot to a new logo different kind of selling.

Yes. We still do big IT outsourcing deals, but we are also doing a lot more shorter-term projects that are around strategic enterprise services helping customers understand your journey to the cloud. What's the Big Data strategy for your company, what's your car or mobility collateral mobility strategy, so the news was strategic enterprise services bookings were up doing very well, so we just got to complete this transformation and don't think I understood when I got here that there was a that much of a different turnaround time and selling cycle embedded enterprise services versus our product and software businesses.

Toni Sacconaghi - Sanford C. Bernstein & Co., LLC.

Okay.

Meg Whitman

Listen, I have got a lot of confidence in the management team and they are doing the right thing to turn this business around and we still believe as we said at SAM last year that the long-term this is a 79% operating margin business with reasonably attractive return on invested capital, not as attractive as our PC business or some of our other businesses, but our return on invested capital, that is higher than our cost of capital.

Toni Sacconaghi - Sanford C. Bernstein & Co., LLC.

If you stand back and think about your portfolio, you have now grown your cash balance. You have almost $3 billion in net cash excluding your financing receivables it is the portfolio where you needed to be, so maybe let's start on the acquisition side. Should we expect HP to be more acquisitive going forward.

Meg Whitman

Yes.

Toni Sacconaghi - Sanford C. Bernstein & Co., LLC.

Okay.

Meg Whitman

But let me caveat that, because it makes our investors nervous. We will be very returns focused on this. There will be only in areas of strategic importance where we cannot do that organically on timeframe that we feel like we must given how fast the world is moving. My focus over the last two-and-a-half year is on the and the management team focus has first been repaired the balance sheet as you pointed out, improve our cash generation capability, be very disciplined about capital allocation, but also fix what we have.

My predecessors actually acquired a lot of very good assets, Vertica. I would actually say, we pay too much for Autonomy, but the idle engine that ingest the unstructured data is actually magical you think about a lot of the software assets they are elements of enterprise services. I would go all the way to Compaq. I believe it was the right thing to do, so we have a the set of assets that happens to be dead on to where the trends are going, so our job over the last couple. How do we fix what we have before we go add to the stable of opportunities, I think we have come a long way. We have more work to do on optimizing some of the things that have been bought by my predecessors, but I do think you will see us now given that we prepared our balance sheet, how do we go pick up assets that will speed our cloud our initiative, speed our Big Data initiative that again I said these will be return space very focused in those small to medium sized kind of acquisition.

Toni Sacconaghi - Sanford C. Bernstein & Co., LLC.

When we think about the small to medium size, Meg, should we - is a $5 billion or larger acquisition possibility in the next year?

Meg Whitman

Well, I don't know about the next year, but if you are talking about size sort of four, five, six, probably be the upper limit. Now, listen, if I find something that is tremendous, I may come back, but that's sort of what I am thinking at this juncture, but probably most of what we would do will be significantly smaller than that. What we said and what we mean is, what we said at our Security Analyst Meeting last year is that we would return at least half of cash to shareholders in the form of dividends and share repurchase and I think we are about 51% of cash that we have generated thus far we have returned to shareholders, so we are right on that right track.

Toni Sacconaghi - Sanford C. Bernstein & Co., LLC.

Is that a 2014 statement only, Meg, or is that really your envision longer-term model for the company in terms of capital return.

Meg Whitman

At our last SAM, we said it was a 2014 thing. We'll, obviously update that in -September timeframe, but I don't think it would change materially. That seems about right to me and with our cash generation potential that gives us, you know a - you can only acquire so many things at once. You have got to integrate them, you have got to integrate your sales force, you have to take real advantage of these acquisitions, so that feels about right to me as I sit here today.

Toni Sacconaghi - Sanford C. Bernstein & Co., LLC.

In terms of the portfolio, how about potential divestitures, you talked about some legacy assets certainly some of the software business. There were some in parts of the enterprise business. Are there parts of the portfolio that should and ultimately will be divested going forward?

Meg Whitman

Not in the big chunks of business that we are in, printing, PCs, Enterprise Group, software yet, but within those portfolios you know as well we have the portfolio within the portfolio, within the portfolio and we are now in the phase of the turnaround where I am sitting with each of the business group saying where do we want to play. Are there businesses that may be profitable businesses, but aren't dead on to the mission of PCs or personal systems, are their businesses that are not dead on to the mission of Big Data or security or are there pieces of the icon portfolio or the ADM portfolio that aren't central to the mission.

If that's true even if they are profitable we will benefit from focus and so some of the businesses may be opportunities. Within ES there's a number of different businesses. What was surprising to me when I came to HP, is that debt of the portfolio within each of these big groups and I think we would be well served by getting a slightly smaller number of things with more effort and more focus so I think there is you will see giant dispositions, but I think you will see some.

Toni Sacconaghi - Sanford C. Bernstein & Co., LLC.

Speaking of portfolios, I think, I have been of the opinion. I think you have been somewhat in agreement that HP would attempt to work as an integrated company that was your belief that it was better together than apart.

Meg Whitman

Yes.

Toni Sacconaghi - Sanford C. Bernstein & Co., LLC.

If it proved not to be the case, then you would consider alternatives, so where do you stand on the notion of keeping the four parts of the business today? Are you unequivocal in your belief that they are best altogether at this point?

Meg Whitman

That is our strategy that we are executing again. Our belief is that we are differentiated by providing solutions for the enterprise infrastructure needs across the board and we recognize that we are halfway through that turnaround and we have to prove that thesis. I would say we are in a process of proving that thesis. I feel good about where we are, but we understand that that is bet we are making. We have to be able to provide solutions to the enterprise and small and medium-sized customers across the broad spectrum of their enterprise needs, but we have to continue to prove that thesis.

I would say we are making a bit of progress on this in terms of getting our businesses to cross-sell and up-sell as we go to our biggest account showing up as one HP as opposed to a number of different silo of businesses which is the way we kind of used to show up and we are and we are also - it comes back to what I said, we have got to turn ourselves into a solution selling machine that the days of speeds and feeds, the days of point products are numbered and then if we don't go in and sell a solution to okay you want to run SAP HANA, you want to run exchange, want to run VDI system, you want to run whenever it is your but work with your currently have that converged infrastructure solution with software that is designed to meet your business needs. That's a big change for this company, but I'm proud of the team and how fast they had embraced this. You have to remember we have 27,000 sales executives across the world focused on this is you know doesn't happen overnight, but what I've learnt is you got to do things thoughtfully and deliberately at this scale and it takes a while to take hold.

You know I am liking it too. You are driving a big supertanker and you turn left and nothing happens and then all of a sudden, the ship turns fast and now you have momentum, real momentum in a certain direction so you have to make sure you haven't over steered, because you have to cross course correct. It takes time course correct, so we are quite thoughtful and deliberate about how we need these changes. If you make them thoughtfully and deliberately they stick and then you get 275,000 people behind the direction and we are unstoppable.

Earnings Call Part 2:

• Q&A with Hewlett-Packard Co. CEO