Shares of HP rose by more than 13 percent to $24.09 as of 10:15 am ET. The catalyst was yesterday’s quarterly earnings report that contained better-than-expected profits amid sales that fell short of consensus forecasts by more than half a billion dollars. Analysts this morning are questioning whether or not the company can maintain the veneer of progress toward a turnaround in the quarters ahead.

“Shrinking your way to profitability buys time but doesn’t equal a turnaround,” was the headline on a research note from Chris Whitmore of Deutsche Bank Securities this morning. With revenue down by 10 percent year on year, and sales in major business segments declining between 1 percent (printing) and 20 percent (personal computers), HP’s success this quarter and last appears to have been more about minding its cash flow and costs carefully, and less about selling more of the goods and services that make it money.

“HP is sacrificing market share, delaying research and development investment and the financial benefit of past restructuring actions to support near-term profitability which in our view is not sustainable,” Whitmore wrote.

Whitman explained yesterday, both in a conference call with analysts and in an interview with AllThingsD, that HP walked away from deals to sell PCs and servers that didn’t contain enough profit. It had the result of yielding some of its market share ground — HP leads the world in both PC and server sales — to Dell.

“Unsustainable,” appeared to be the word of the day among analysts covering HP. It also appeared in a note from Goldman Sachs analyst Bill Shope, who reiterated his “sell” rating on HP shares. HP’s exposure to “distressed end markets” will eventually overwhelm whatever actions it may take in the short- to medium term. Brian White of Topeka Capital Markets also maintained a “sell,” advising shareholders that yesterday’s 13 percent after-hours surge on HP’s share price represented an opportunity to do just that.

Hoped-for growth from sales of new products like Project Moonshot and new networking products are good, but even that success may not be enough replace the revenue that’s being lost, worries Evercore analyst Rob Cihra. “Low-power Moonshot servers, higher-end printing and software-defined networking all help but much more seems needed to move such a massive needle,” he wrote in a note to clients today. “Hopes for FY13 stability otherwise just appear to flow from deep restructuring cuts.”

Brian Marshall of ISI presented a similar view in a note to clients: “As global economic growth softens and PCs and printers face secular decline, it will be challenging for large technology vendors such as HP to find significant sources of new growth that can move the needle on approximately $110 billion of annual revenue.”

When surveying analysts on the subject of HP, it doesn’t take long to return to the notion of a breakup. HP is worth more in pieces, the argument goes, than as a unified company. That’s what will happen if HP isn’t able to turn the corner soon enough, argues Toni Sacconaghi of Sanford Bernstein, in a note today. While Sacconaghi has an “outperform” rating on HP shares, based on its prospects for improvement over the next six to nine months — an opinion he explained in detail on CNBC yesterday — he remains convinced that, after that, HP will either fix what’s broken or break itself up.

A conference call with analysts concluded just a little while ago. On it, CEO Meg Whitman and CFO Cathie Lesjak reiterated that the turnaround roadmap they outlined at a meeting last year is still going about as expected, and that it is and will remain a multi-year plan. They’ve focused a lot of energy on paying down HP’s debt and improving its operations while making the investments to inject new life into its products lines.

There were also questions about HP’s decision to avoid fighting Dell in the PC business over pricing. Dell has recently said it was getting aggressive in order to take share, while HP has apparently decided to hold on to its profit margins at the expense of sales volume.

It will also be worth listening for hints of and adjustments in the strategy and timing of the turnaround plan put in place by CEO Meg Whitman and outlined at last year’s analyst’s meeting.

Also, HP earlier today released a video with Whitman summarizing the highlights of the quarter’s results.

Here’s a partial transcript of the conference call.

2:06 pm: Joining the conference call in progress. Meg Whitman is speaking. She just said that Europe will continue to be challenging and that China is starting to slow down.

Meg says revenue run-off in Enterprise Services will be slower than expected and will affect overall revenue in 2014.

In the Enterprise Group: Converged infrastructure is the future. Also, the two server groups are being merged into one. Project Moonshot lost during the quarter, but it will “take time to ramp.” But she’s confident that it will work to HP’s advantage without cannibalizing the existing server business.

In networking, HP is a strong number two after Cisco Systems, and its switching revenue is as much as the next five competitors combined, she says.

In software, Autonomy is stabilizing, and Vertica is looking good. The business is “well positioned.” Autonomy landed All Nippon Airways as a customer.

Now she’s speaking about areas where HP’s performance needs to improve. PCs is an area where it needs to fight harder. In mainstream servers, HP suffered from the conditions of the market and was tripped up “by our own execution.”

In PCs, “We stepped away from many deals to protect our bottom line.”

One key difference between the first half of this year and the first half of last year was that the PC industry roared back to life after hard drive supplies were disrupted by the flooding in Thailand.

2:16 pm: Whitman: “Overall our turnaround made progress in the second quarter.”

Now CFO Cathie Lesjak is speaking, and she’s running through the numbers again.

“IT spending softened and the macro-environment clearly did not improve.”

Revenue in most geographic regions was all down.

Software was down some as the industry is shifting to SAAS, Lesjak says.

2:29 pm: Revenue was down in financial services.

Lesjak is now talking about capital allocation and the balance sheet: We delivered more than $5 billion in the first half of the year, which is ahead of our previous guidance. But we do not expect this pace to continue.

Outlook: We remain confident in our ability to manage our cost structure. We are still on track to achieve the savings we’ve planned, but some business units are using these savings.

Moonshot launch was very successful, but we are not pleased with performance of x86 server sales. Printing continues to perform well.

Generally Lesjak expects lower restructuring expenses. “We now expect 2013 free cash flow to be about $7.5 billion.”

2:35 pm: Now time for Q&A. First question is from Katy Huberty of Morgan Stanley. Do you still think you can get to revenue neutral in services?

Whitman: We are rebuilding ourselves amid some of the most profound changes to hit the technology industry in a generation. The slower run-off in revenue will hurt us, but if 3Par and other business units perform as we expect, we expect to grow in 2014, but there will still be headwinds.

Whitman talked about some options for capital allocations. She says it’s mostly going to be “returns based,” meaning a bias toward share buybacks and dividends, and not M&A activity.

Question from J.P. Morgan. Again about services. What is your confidence in the planned services leakage events happening in 2014? Can you still unwind these planned attrition events? Basically he’s asking if some ineffective service contracts will get fixed.

Whitman: There is some predictability coming that was not there in 2012. “The control of this business is feeling better than it did before.”

Whitman: “We are fixing a lot of the problems that are keeping HP from being great. … This takes time. This is an enormous organization.”

Question from Sanford Bernstein: Could you clarify your plan for balancing profitability vs. growth? What is the near to medium term focus on share or profitability?

Whitman: We’re here to set this company up for the long term. In ISS (industry standard servers) we did walk away from some deals that weren’t profitable. In terms of Technology Services, one big headwind was the attach rate of support to sales of Business Critical Services (BCS, a.k.a. the Itanium server business).

Lesjak: We may well be more aggressive in pricing on an industry standard server if we’re getting attached to TS. We’ll take a lower margin based on the complete picture, and the long-term outlook on the account.

Question from Shannon Cross. More color on currency effects. Also pricing on the printer front from the Japanese companies.

Lesjak: Currency is about a point to revenue. It had been two points. “HP is exposed to a whole basket of currencies, and we have different hedging strategies.”

2:49 pm: Lesjak: We think our cost savings in the second half are creating a war chest for our Japanese competitors.

Whitman: We’re going to use that opportunity to fight back. Our competitors are more cost competitive because of what has happened to the yen.

Whitman: “The days of ever-escalating IT budgets in government are over.”

3:03 pm: That’s it. Thanks for tuning in.

Per-share earnings were 87 cents, down 4.4 percent from a year ago on sales of $27.6 billion, which amounts to a decline of 11 percent from last year.

The results are better than the consensus view of analysts, which had called for EPS of 81 cents on revenue of $28.12 billion.

The company said it expects to earn between 84 cents and 87 cents per share in the current quarter and to earn between $3.50 and $3.60 per share for the full year.

As expected, PC sales were pretty bad, with sales down 20 percent and a decrease in volume of 21 percent, which was much worse than Dell’s results reported last week. The PC unit generated a 3.2 percent operating margin.

Printing revenue declined by 1 percent, though operating margins were up to nearly 16 percent. Sales of commercial units fell 5 percent year over year (I think that’s unit sales basis) and consumer units fell 13 percent.

Revenue in the enterprise group declined 10 percent. Networking grew 1 percent. Server sales were down 12 percent in the industry standard group, while business critical servers — the ones using Intel Itanium chips once so crucial to HP’s profit profile — were down 37 percent. Storage revenue fell 13 percent.

Enterprise Services fell 8 percent. Software sales were down 3 percent.

HP said it finished the quarter with $13.6 billion in cash, and had $3.6 billion in operating cash flow. It paid a dividend of 14.52 cents per share, up 10 percent from a year ago.

HP shares are rising in after-hours trading. As of 4:17 pm ET, they were at $23.78, up 12 percent from the close of today’s regular trading session.

Here’s HP’s original announcement.

PALO ALTO, CA–(Marketwired – May 22, 2013) – HP (NYSE: HPQ)
Second quarter non-GAAP diluted earnings per share of $0.87, down 11% from the prior year, above previously provided outlook of $0.80 to $0.82 per share
Second quarter GAAP diluted earnings per share of $0.55, down 31% from the prior year, above previously provided outlook of $0.38 to $0.40 per share
Second quarter net revenue of $27.6 billion, down 10% from the prior year and down 9% when adjusted for the effects of currency
Cash flow from operations of $3.6 billion, up 44% from the prior year
Returned $1.1 billion in cash to shareholders in the form of dividends and share repurchases
Improved operating company net debt position by $1.8 billion, the fifth consecutive quarterly reduction of over $1 billion
Declared a regular quarterly cash dividend of 14.52 cents per share on the company’s common stock

Information about HP’s use of non-GAAP financial information is provided under “Use of non-GAAP financial information” below.

HP today announced financial results for its second fiscal quarter ended April 30, 2013. Second quarter GAAP diluted earnings per share (EPS) was $0.55, down from $0.80 in the prior-year period and above its previously provided outlook of $0.38 to $0.40 per share. Second quarter non-GAAP diluted EPS was $0.87, down from $0.98 in the prior-year period and above its previously provided outlook of $0.80 to $0.82 per share.

Second quarter non-GAAP earnings information excludes after-tax costs of $621 million, or $0.32 per diluted share, related to restructuring charges, amortization of purchased intangible assets and acquisition-related charges.

For the second quarter, net revenue of $27.6 billion was down 10% year over year and down 9% when adjusted for the effects of currency.

“We beat the upper end of our non-GAAP diluted EPS outlook for the quarter by $0.05 per share, driven by better than expected performance in Enterprise Services and Printing, coupled with the accelerated capture of restructuring savings and improvement in our operations,” said Meg Whitman, HP president and chief executive officer.

Outlook

For the third quarter of fiscal 2013, HP estimates non-GAAP diluted EPS to be in the range of $0.84 to $0.87 and GAAP diluted EPS to be in the range of $0.56 to $0.59. Third quarter fiscal 2013 non-GAAP diluted EPS estimates exclude after-tax costs of approximately $0.28 per share, related primarily to the amortization of purchased intangible assets, restructuring charges and acquisition-related charges.

For the full year fiscal 2013, HP estimates non-GAAP diluted EPS to be in the range of $3.50 to $3.60 and GAAP diluted EPS to be in the range of $2.50 to $2.60, in line with HP’s previously communicated outlook. Full year fiscal 2013 non-GAAP diluted EPS estimates exclude after-tax costs of approximately $1.00 per share, related primarily to the amortization of purchased intangible assets, restructuring charges and acquisition-related charges.

“I am encouraged by our performance in the second quarter, and I feel good about the rest of the year,” added Whitman. “As I have said many times before, this is a multi-year journey. We have a long way to go, but we are on track to deliver on our fiscal 2013 non-GAAP diluted earnings per share outlook.”

Asset Management

HP generated $3.6 billion in cash flow from operations in the second quarter, up 44% from the prior-year period. Inventory ended the quarter at $6.0 billion, down 2 days year over year to 26 days. Accounts receivable of $14.6 billion, down 1 day year over year to 48 days. Accounts payable ended the quarter at $12.3 billion, up 4 days year over year to 53 days. HP’s dividend payment of $0.132 per share in the second quarter resulted in cash usage of $283 million. HP also utilized $797 million of cash during the quarter to repurchase approximately 36.3 million shares of common stock in the open market. HP exited the quarter with $13.6 billion in gross cash.

“After returning more than a billion dollars to shareholders through share repurchases and dividends in the quarter, we improved our operating company net debt position for the fifth successive quarter,” said Whitman. “By the end of fiscal 2013, we expect our operating company net debt to be below pre-Autonomy levels and approaching our goal of approximately zero.”

Declaration of Dividend

HP also today announced that the HP board of directors has declared a regular cash dividend of 14.52 cents per share on the company’s common stock, which, as previously announced, reflects a 10% increase in amount compared to the previous quarterly dividend amount. The dividend, the third in HP’s fiscal year 2013, is payable on July 3, 2013, to stockholders of record as of the close of business on June 12, 2013.

Second Quarter Fiscal 2013 Segment Results

Personal Systems revenue was down 20% year over year with a 3.2% operating margin. Commercial revenue decreased 14%, and Consumer revenue declined 29%. Total units were down 21% with Desktops units down 18% and Notebooks units down 24%.

Printing revenue declined 1% year over year with a strong operating margin of 15.8%. Total hardware units were down 11% year over year. Commercial hardware units were down 5% year over year, and Consumer hardware units were down 13% year over year.

Enterprise Group revenue declined 10% year over year with a 15.9% operating margin. Networking revenue was up 1%, Industry Standard Servers revenue was down 12%, Business Critical Systems revenue was down 37%, Storage revenue was down 13% and Technology Services revenue was down 3% year over year.

Enterprise Services revenue declined 8% year over year with a 2.6% operating margin. Application and Business Services revenue was down 10% year over year, and IT Outsourcing revenue declined 6% year over year.

Software revenue was down 3% year over year with a 19.1% operating margin. Support revenue was up 12% while license revenue was down 23% and services revenue was down 5% year over year.

HP Financial Services revenue was down 9% year over year with a 3% decrease in net portfolio assets and a 24% decrease in financing volume. The business delivered an operating margin of 11.0%.

More information on HP’s earnings, including additional financial analysis and an earnings overview presentation, is available on HP’s Investor Relations website at www.hp.com/investor/home.

HP’s Q2 FY13 earnings conference call is accessible via an audio webcast at www.hp.com/investor/2013Q2webcast.

At the outset, it seems a tall order. Name a significant line of HP’s business and it’s probably in the middle of one sort of fundamental slowdown or another. Whether it’s the historical decline in PC sales, a weak environment for server sales, a lousy market for printers or ongoing difficulties with its enterprise services business, HP has troubles in all four. Together, these troubled units accounted for about 92 percent of HP’s sales last quarter. Add to the mix a significant exposure to Europe, where the economy remains weak, and it becomes incredibly difficult to feel hopeful for a pleasant surprise in HP’s results today.

Whitman and CFO Cathie Lesjak have been clear in past public statements that there are no quick fixes for HP. And its rivals are taking advantage. Dell unleashed a bit of a price war on the PC front, cutting prices aggressively in order to take some market share ahead of its anticipated $24.4 billion go-private transaction.

While Dell is willing to sacrifice profitability, HP doesn’t seem to have responded, and so may have missed some sales. As Chris Whitmore of Deutsche Bank Securities wrote in a note to clients yesterday, “It appears HP is sacrificing share to protect near-term margins.”

Dell has also been bragging about its ability to take market share away from HP on the server front.

What HP has got going for it: Aggressive cost management. Remember that HP surprised the Street with better-than-expected cash flow in the first quarter of the year, giving the appearance that the promised turnaround had begun in earnest. But much of that surprise came from a one-time tax benefit that added a half-billion dollars to operating cash flow. That is unlikely this quarter, so Whitmore is worried that cash flow may come up short: “The combination of cash restructuring payments, headwinds from revenue declines in PCs impacting working capital and cash cycle and the absence of favorable factors in Q1 (tax deferrals, bonus payments, etc) may result in worse than expected cash flow,” he wrote.

Analysts expect HP to report 81 cents per share on sales of $28.12 billion. A miss on either the top or bottom line will probably freak out shareholders impatient to see some tangible sign that, despite having survived the worst year in its history, HP can yet be salvaged, and that Whitman is the one to get the job done. HP shares opened up slightly this morning at $21.21 a share.

I talked about all this a little this morning on CNBC. The video is below:

Earnings per share were at 21 cents, a whopping 14 cents below the consensus view, while revenue, at $14.07 billion, was above the forecast by about a half-billion dollars.

During a conference call with analysts that wrapped up just a little while ago, Dell management struck a tone of sticking to its strategic guns. With the PC market contracting fast, it has gotten selectively aggressive on pricing in order to try and take share away from rivals like Hewlett-Packard and Lenovo. At the same time, the results show growth in expenses like research and development spending that aren’t exactly helping gross margins.

In short, Dell is starting to act a lot more like the privately held company it expects to be before the summer is over, accountable only to its owners.

In their questions, analysts sought to tease out what details they could about the effect of the proposed go-private transaction on things like employee retention and relationships with key customers. CFO Brian Gladden and head of investor relations Rob Williams shot those questions down.

Here’s a summary of the substance of the conference call (all times are Pacific):

1:46 pm: On hold waiting for the conference call to begin with what sounds like some Vivaldi playing in the background.

And now things are getting under way.

Standard conference call boilerplate from head of investor relations Rob Williams.

Brian Gladden is speaking. “We continue to invest in strategic capabilities.” He’s talking about the acquisition of Entratius, which closed last week.

Gross margin was down 40 basis points sequentially.

“We continue to face a competitive pricing environment … and this has affected our profitability.”

Selling and general costs were up 4 percent.

R&D spending is up 33 percent.

Gladden: There were almost $90 million worth of expenses related to the go-private transaction that were excluded from the non-GAAP figures.

1:54 pm: Tom Sweet is talking about business segments. Here comes the news on server sales that Michael Dell said was going so well.

Servers, Networking and Peripherals saw sales grow by about 10 percent, but sales of storage fell about 10 percent.

Sweet: “Dell powers four out of the top five search engines and 75 percent of the top social media sites worldwide.”

Sweet is covering a few customer wins. And now he’s on to software. Revenue was $295 million and had an operating loss of $85 million. “We remain confident that the Quest acquisition (which was $2.4 billion) will be accretive by FY 2015.

Sweet is talking about End User Computing, a.k.a. the PC segment, and says the environment continues to be competitive. The plan is to try and cut $1 billion out of operating costs by 2015. But customers are “diverting spending to alternative mobile solutions.” Does he mean iPads? Yup.

2:01 pm: Sweet is talking about a big PC win with Marsh and McClennan that has 55,000 seats. “We won despite a key competitor that was a longtime incumbent.” Who? HP maybe?

Question and Answer session is getting underway. First is Katy Huberty from Morgan Stanley. “Can you step back and say if the margin decline is what you expected when you rolled out the more aggressive pricing strategy?”

Gladden: We’ve been talking about this for a few quarters, the need to adjust pricing. There are parts of the business where we are beginning to see some elasticity. Demand has been weaker than expected. These are accounts that we’re gaining that we feel good about their profitability. We feel for the long term we think it’s the right thing to do. If you look at the share dynamics, we did improve our share position in a market that is pretty tough.

A question from Tony Sacconaghi of Sanford Bernstein: Is there a minimum level of profitability that you are willing to sustain in an effort to hold or gain share? Also a question about cost-cutting.

Gladden: Without providing details of specific initiatives, we have continued to take cost out of the business. We are choosing to reinvest those dollars in sales and R&D. I think those things are going on concurrently. (Essentially what he’s saying is that Dell is acting like it’s a private company already.)

As Gladden is speaking I’m looking at the slide presentation. The worst geographically was Asia-Pacific, where sales fell 12 percent year on year. Ouch. Sales in the Americas were up slightly. The BRIC countries fell 17 percent, led by China which fell 24 percent. Super ouch.

Maynard Um: Are customers holding out given the go-private transaction?

Gladden: The customer base has been very supportive of the company. For the conversations I have been a part of they have resulted in many opportunities for the company.

FYI Dell share price update: In after-hours, Dell is trading at $13.37, which is 28 cents below the $13.65 that Michael Dell and Silver Lake have offered shareholders to take it private.

2:11 pm: Question from Steve Milunovich from UBS. He’s asking about changes in sales model on PCs that’s expected as Dell goes private.

Gladden: I wouldn’t say our strategy has changed at all. We’ve adjusted our pricing accordingly and expanded our offerings across the portfolio. This is not a new strategy or business model for us. It’s adjusting tactics given where the market is going.

Question from Credit Suisse: In terms of pursuit of new PC customers, have you put the investments in that you need to or is there more effort to come through?

Gladden: Basically says the strategy hasn’t changed.

Question from Deutsche Bank, asking about servers and the storage business. Servers are good but he says storage doesn’t seem to be getting good attach rates.

Gladden: With servers, we’re winning in the marketing. And when you look at density-optimized servers, we’re winning. We feel good about the server business. You don’t see us trading price for growth there.

About storage. We feel like that business is growing with the market. It’s shrinking with the market. That is not what we’d like to see, obviously. We’re working on it. We’ve added commercial resources over the the last 18 months. We feel positioned to out perform the market.

Question from Keith Bachmann at BMO: How might the M&A strategy differ if the go-private transaction happens? Also about employee retention during the transaction.

Rob Williams: No answer to the first question.

Gladden: Attrition has been about normal for us.

Another question: Does the PC market get softer or better over the next four to six quarters?

Gladden: There are multiple dynamics playing out. There’s a lot driving a refresh cycle. We see improvements in corporate and SMB segments. But we see consumer and government, not so good. Windows 8 has not been the catalyst to growth that we hoped it would be. (That’s a big admission.) You look at recent external data, and we would expect to see over the next few quarters declines in PC demand. We’re trying to run the business based on that.

2:22 pm: Can you update us on the peformance of Quest in the quarter?

Gladden: It’s progressing as expected. We expect it to be accretive in the first fiscal quarter of next year. (Or a year from now.)

Question from Bill Shope of Goldman Sachs, about the PC pricing reductions: Which accounts are the ones that get the discounts? Where do you draw the line on profit vs. market share?

Gladden: We know where long-term strategic accounts are. In many cases those are accounts we’ve had before and have walked away from. I think we’ve been selective. There are clearly some unit volume opportunities where we can sell a lot of units, but they don’t create any profit benefits.

2:29 pm: One last question, this one on support and deployment revenue, which was up.

Tom Sweet: We’re happy with the attach rate there. The team has seen some good things with support products. We’ve been able to keep the attach rate relatively high. Despite downward pressure, it will be a good business.

Gladden: We think that’s a good business on the enterprise side, too.

And that ends the call. Thanks for tuning in!

Earnings on a per-share basis were 21 cents on sales of $14.07 billion. That’s versus a pre-leak consensus of 35 cents on sales of $13.5 billion. Sales were obviously better than expected, but profits were substantially lower.

On a year-over-year basis, sales fell 2 percent. Profits on a non-GAAP basis fell 51 percent. The fall was led by end-user-computing, Dell’s mainstream PC business. Sales there fell 9 percent, and the unit’s operating margin fell 65 percent. That’s where the pain point is.

Enterprise sales grew by about 10 percent to $3.1 billion. Services revenue grew to about 2 percent. Software sales were $295 million but that unit ran at an operating loss.

Here’s Dell’s original announcement:

Dell Reports Fiscal Year 2014 First Quarter Financial Results

Revenue of $14.1 billion
Enterprise Solutions, Services and Software revenue up 12 percent
GAAP earnings of $0.07 per share; non-GAAP earnings of $0.21 per share

ROUND ROCK, Texas–(BUSINESS WIRE)–

Dell today announced fiscal 2014 first quarter results, with revenue of $14.1 billion, as the company grew revenue from Enterprise Solutions, Services and Software 12 percent year over year to $5.5 billion, or 8 percent growth, excluding the acquisition of Quest Software. Pricing adjustments that affected gross margins and continued acquisition-related costs in the quarter resulted in GAAP earnings of $0.07 per share and non-GAAP earnings of $0.21 per share.

“We made progress in building our enterprise solutions capabilities in the first quarter and are confident in our strategy to be the leading provider of end-to-end scalable solutions,” said Brian Gladden, Dell chief financial officer. “In addition, we have taken actions to improve our competitive position in key areas of the business, especially in end-user computing, and it has affected profitability. We’ll also continue to make important investments to support our strategy and drive long-term profitability.”

Results

Revenue in the quarter was $14.1 billion, a 2 percent decrease from the previous year.

GAAP operating income for the quarter was $226 million, or 1.6 percent of revenue. Non-GAAP operating income was $590 million, or 4.2 percent of revenue.

GAAP earnings per share in the quarter was 7 cents, down 81 percent from the previous year; non-GAAP EPS was 21 cents, down 51 percent.

Cash used in operations in the quarter was $39 million. On a trailing, 12-month basis, Dell has generated $3.4 billion in cash flow. Dell ended the quarter with $13.2 billion in cash and investments.

 
Information about Dell’s use of non-GAAP financial information is provided under “Non-GAAP Financial Measures” below. Non-GAAP financial information excludes amortization of purchased intangibles, severance and facility-actions, acquisition-related charges, costs incurred in Fiscal 2014 related to Dell’s proposed merger, and other items. All comparisons in this press release are year over year unless otherwise noted.

Operating Segments Summary:
As previously announced, Dell has realigned its global operating segments to its end-to-end solutions portfolio in the Enterprise Solutions Group, Dell Services, Dell Software Group, and End User Computing Group.

Enterprise Solutions Group revenue was $3.1 billion, a 10 percent increase. Operating income for the quarter was $136 million, a 71 percent increase. Dell server and networking revenue increased 16 percent as the company gained share in the calendar first quarter. Dell networking continued to deliver strong growth, with a 24 percent revenue increase, including a 46 percent growth in the company’s Force10 business. Dell storage revenue declined 10 percent.

Dell Services revenue grew 2 percent to $2.1 billion driven by an 11 percent increase in revenue for infrastructure, cloud and security services. Support and deployment revenue increased 2 percent and applications and business process services declined 15 percent. Operating income was $370 million, a 10 percent increase.

Dell Software revenue was $295 million, resulting in an operating loss. Dell enhanced its software capabilities during the quarter, investing in additional sales capability and research and development. Consistent with the company’s business strategy when it acquired Quest Software, this business is on track to be accretive to earnings in the first quarter of fiscal year 2015.

End User Computing revenue was $8.9 billion in the quarter, a 9 percent decrease. Operating income for the quarter was $224 million, a 65 percent decrease. Dell desktop and thin-client revenue declined 2 percent, mobility revenue declined 16 percent, and software from third parties and peripherals revenue declined 6 percent.

Company Outlook:
Given the company’s announcement on Feb. 5 of a definitive merger agreement to take Dell private, the company is not providing an outlook for the fiscal 2014 second quarter.

First off, Dell has moved up the date of its report. Originally set for May 21, the results will come after markets close in New York today and a conference call with analysts will start at 1:45 pm PT.

The reason for the change likely has a lot to do with the fact that Dell is probably going to report another miss on its consensus numbers. Analysts polled by Thomson Financial expect Dell to report a 35 cent per-share profit on sales of $13.5 billion. But as The Wall Street Journal reported Monday, Dell expects to announce profits of about 20 cents on $14 billion in sales, a huge bottom-line miss.

It’s difficult to expect much else. Despite all the efforts made in recent years to nudge Dell in the direction of becoming a more enterprise-focused company via acquisitions in the areas of cloud computing, software and services, Dell still derives about 70 percent of its sales, give or take, from consumer or commercial PCs or PC-related accessories like monitors. And as we all know, PC sales are plummeting at a historic rate.

That’s not to say there aren’t potential bright spots. CEO Michael Dell has been crowing about the company’s success in server sales and has described market share losses by rival Hewlett-Packard as “staggering.”

Then, of course, there’s the ongoing saga of Dell’s quest to go private in a $24.4 billion buyout transaction with Silver Lake Partners. Carl Icahn and Southeastern Management, which between them control about 13 percent of Dell shares, are opposed and this week made their own counter-offer, and then nominated a slate of directors to replace Dell’s current board. Icahn has made no secret that he’d like to send Michael Dell packing. The special committee of Dell’s board overseeing the buyout process has asked the Icahn camp for more information.

Certainly there will be questions for management about all of it, though the answers from Dell management will probably be some variation of “no comment.”

Taking to CNBC’s airwaves in another one of his candid phoned-in afternoon rants (the last was an epic 28-minute on-air slugfest with hedge fund investor Bill Ackman in January) with host Scott Wapner during the closing half hour or so of the network’s “Fast Money Halftime Report” show, Icahn revealed that on Monday he will nominate a slate of 12 new directors and, if successful, he’ll see to it that Michael Dell doesn’t remain CEO. “He will not be running the company,” Icahn said.

“It’s not that I have anything against [Michael] Dell. I’m sure he’s a very nice guy,” Icahn said. “But it’s a new world out there.”

Icahn has had a busy day on the Dell front. First he reported in a filing with the U.S. Securities and Exchange Commission that his stake in Dell amounts to 4.52 percent. He also joined Southeastern Asset Management, Dell’s largest outside shareholder, in making a joint bid for the company. (The Wall Street Journal’s Moneybeat has the full text of the joint Icahn-Southeastern letter to Dell’s board here.)

The special committee of Dell’s board has in the last several minutes issued a statement saying it is “carefully reviewing” the Icahn-Southeastern offer.

“Mr. Icahn and Southeastern have outlined a potential leveraged recapitalization transaction that they want the Dell Board either to recommend at this time or to consider if the existing going-private transaction is rejected by Dell shareholders. They have also proposed replacing the Board with a slate of new directors who they say would approve such a transaction. Consistent with the Special Committee’s goal of achieving the best possible outcome for all shareholders, we and our advisors are carefully reviewing the potential transaction to assess the potential risks and rewards to the public shareholders.”

In his televised jeremiad, Icahn blasted Dell’s board and said that Dell shareholders will “literally get screwed” by the $24.4 billion Michael Dell/Silver Lake offer to take the company private in a leveraged buyout. His offer, he said, would leave existing shareholders with a publicly traded stub that would allow them to make more money than the $13.65 per share Dell and Silver Lake have offered.

Below, two video highlights. The second one focuses more on Wapner’s fascination with Icahn’s opinion of the legendary Wall Street short-seller Jim Chanos, who has previously publicly stated that he has been shorting Dell shares. “I’ve made a lot of money going against Chanos,” Icahn said.

Of course it goes without saying that all the attention on Dell caused the shares to trade upward during the half hour or so that Icahn was on CNBC. Ahead of 1 pm ET, Dell shares were trading as high as $13.51, or up more than 1 percent. After Icahn hung up (and apparently called BloombergTV to make a similar on-air speech), its price settled back down. Here’s a screen grab I took of Dell’s share price via Yahoo Finance.

The new details about the decision to name Krzanich as the successor to retiring CEO Paul Otellini emerged in a brief report by CNBC’s Jon Fortt (video below) after he talked with Chairman Andy Bryant, who led the board’s search.

The joint pitch initially threw the board for a bit of a loop if only because it’s a highly unusual — and, one would presume, risky — move, in so delicate a matter as CEO succession at one of the world’s most influential tech companies. While the conclusion, at least as far as Krzanich goes, certainly appears to have been a predictable one — every Intel CEO since Andy Grove has been COO first — outsiders were still in the running until the very end.

Also a key selling point, though there are as yet no particulars about this, was Krzanich and James’ vision for pursuing the mobile market where Intel is as yet not participating significantly. Expect more noise on that subject once the pair starts their new jobs after May 16.

But even so, for all the talk about cyberwar, it didn’t come close to eclipsing the amount of financially motivated crime that took place in the digital realm, a new study by telecom giant Verizon has found.

In its ninth annual survey of data breach investigations, which will be formally released tomorrow, Verizon found that old-fashioned financial motivations accounted for 75 percent of computer security incidents. State-sponsored attacks accounted for 20 percent. And, as you might expect, the victims are the organizations that move or hold a lot of money: Financial organizations were targets 37 percent of the time, followed by retailers (24 percent) and manufacturing, transportation and utilities (20 percent).

The study’s sample size included 621 confirmed data breaches and more than 47,000 reported computer security incidents in 27 countries and territories. Verizon has been gathering the data for nine years, and now has records encompassing 2,500 data breaches and 1.2 billion compromised records.

Attacks by outside entities accounted for the majority of breaches, while only 14 percent were attributed to insiders and 1 percent to business partners; 71 percent of breaches targeted user devices and 54 percent were aimed at servers. Perhaps most troubling: Two thirds of the breaches reported required a month or more to discover.

The benefit of a study like this is that it happens at all. Since most large companies and organizations aren’t usually willing to disclose when they’ve been attacked — most have — and suffered a breach that actually cost them some money, it’s rare to see this sort of trend data gathered up in one place.

One interesting thing I noted as I scanned the report. For all the security-related anxiety that seems to have arisen during the two years or so around the “bring your own device” trend in the enterprise — where employers let workers use their personal smartphones or tablets or notebooks to access corporate networks — there seem to have been practically no BYOD-related security incidents. As one sidebar in the report put it:

“The Bring Your Own Device (BYOD) trend is a current topic of debate and planning in many organizations. Unfortunately, we don’t have much hard evidence to offer from our breach data. We saw only one breach involving personally-owned devices in 2011 and a couple more in 2012. We’ll keep watching.”

Intel shares have traded lower since last Thursday, when the market research firms IDC and Gartner said they had tracked one of the largest year-on-year declines in sales of personal computers since records have been kept. Intel is the largest supplier of microprocessors to PC manufacturers like Hewlett-Packard, Dell and Apple, and it’s hard to see how much good news it can possibly bring to the table today.

Analysts are expecting Intel to report a profit of 41 cents per share on sales of $12.6 billion, and missing either would be seen as more or less proving that the PC market is in a state of permanent decline. So would a weak outlook for the current quarter, for which analysts currently expect earnings of 40 cents on $12.9 billion in sales.

There are other aspects to Intel’s business. It has a healthy data center business selling chips for use in servers, but out of more than $53 billion in sales last year, $34 billion, or more than 61 percent, was in its “client,” or PC, unit, while the data center group accounted for about $10.7 billion.

In the past, Intel executives have quarreled with the analyst firms, and said it was seeing more promising conditions in emerging markets. Indeed, in prior years there has been a disconnect between the dour pronouncements of Gartner and IDC and the peppier market conditions that Intel would later describe in its financial results in places like Brazil, Indonesia and Russia. In more recent quarters, the differences between their views have narrowed.

Aside from PCs, Intel has some new ideas that it hopes will kick its data center business into a higher gear. And it certainly has higher hopes about selling more chips for use in phones and tablets, but as yet they’re only hopes. It also plans to launch a TV product later this year.

Aside from the numbers, expect some questions — and maybe even some answers, but probably nothing conclusive yet — about the search for a replacement for CEO Paul Otellini. The smart money says the choice will be an internal one (here’s a rundown on the contenders), though there’s a slim chance that Intel’s board might be in the mood to surprise everyone and name an outsider. But don’t bet any money you can’t afford to lose on that.

As it happens, the report came a week before chipmaker Intel is due to report quarterly earnings on April 16. In a research note today, Stacy Rasgon of Sanford Bernstein sized up its prospects for the quarter and the rest of the year.

There’s a chance that the actual on-the-ground results may yet be worse than what the research firms detected. Relying on data from Taiwanese notebook manufacturers including Compal, Quanta and Wistron, sales were down in the first quarter by more than 18 percent, worse than the 11 percent to 13 percent drop reported by Gartner and IDC.

So what does that mean for Intel, the world’s largest supplier of computer chips and long considered an important bellwether of the overall tech economy? Nothing good, Rasgon argues. He expects Intel to report revenue of $12.43 billion, nearly $200 million below the consensus expectation of $12.6 billion. He expects earnings on a per-share basis to be 41 cents.

“Given the recent atrocious PC numbers, we believe investors may not be hugely surprised by weak outlook at this point (at least, they certainly shouldn’t be now),” he wrote.

Other key questions for Intel: Who will be the next CEO? And will Intel say anything about it on the conference call after earnings are announced? If you haven’t been keeping track, here’s a good rundown on who’s likely to be in the race, both internal and external. (Here’s a hint: It’s going to be an internal contender; Intel has never hired an outside CEO.)

“It is rapidly approaching high time for the company to provide color on a replacement,” Rasgon wrote. “While it appears they are actively vetting both internal and external candidates, we do not expect significant strategic changes regardless of the eventual choice as they have started the ball rolling on several initiatives that would be difficult to stop. … We would hope (but do not necessarily expect) that the company could provide additional information on the succession plan.”

Microsoft has yet to formally define the software project. But Windows Blue is expected to mark a major change in the company’s development methodology, replacing major launches of products every several years with frequent updates of features in operating software and applications such as Office.

Read the rest of this post on the original site »

The world’s third-largest maker of PCs is looking to less-developed markets even as it faces buyout offers from founder Michael Dell and potential rival bidders. The efforts to take the technology giant private have cast uncertainty over its future direction, but a buyout shouldn’t affect the company’s plans to increase investment in Asia and other developing economies, said Peter Marrs, Dell’s executive director for Asia Pacific end-user computing sales.

Read the rest of this post on the original site »

Worldwide PC shipments came in at 76.3 million units in the first quarter of the year, amounting to a decline of nearly 14 percent. That’s much worse than the firm’s forecast, which called for a decline of 7.7 percent.

The findings also amount to the fourth consecutive quarter in which sales declined compared to the previous quarter. Neither new versions of Windows from Microsoft nor faster chips from Intel spurred new interest among consumers or businesses. Meanwhile, mini-notebook sales hurt the low end of the market.

Acer experienced the largest sales drop in the period, showing a contraction of shipments by nearly 32 percent year on year. Hewlett-Packard, the world’s market leader, saw its shipments fall by nearly 24 percent. Asus, ranked No. 5, saw shipments fall by more than 19 percent. Dell’s shipments fell by nearly 11 percent. The only vendor that didn’t see a contraction in shipments was China’s Lenovo, where shipments were flat year on year.

Even Apple, which ranks among “other” in IDC’s global rankings, saw declines in its leading market, North America, where sales of Macs dropped by 7.5 percent. At this time, however, it has be said that much of the blame for the damage being done to the PC businesses of all the companies around the world can be laid at Apple’s feet: Sales of the iPad, the world’s leading tablet brand, have a lot to do with the collapse in PC sales. While Apple hasn’t yet released sales results for the first calendar quarter of 2013 — its first fiscal quarter is the fourth quarter on the calendar — when it last reported iPad sales, they had swelled by more than 48 percent to nearly 23 million units from 15 million and change the prior year.

Research firm Gartner also chimed in with its findings: They’re bad, too. It was the first quarter in which shipments fell below 80 million units since 2009. By Gartner’s reckoning, Europe led the declines geographically.

Here’s Gartner’s look at the top five:

HP fell nearly 2 percent to $21.91 in after-hours trading. Dell shares ticked up by a penny after hours. Apple shares fell 40 cents. Intel shares fell 36 cents, or more than 1.6 percent. Microsoft fell by more than 1 percent.

In an open letter to the special committee of Dell’s board of directors overseeing the go-private process, Southeastern argued that the company failed to make an adequate case that shareholders should accept the $13.65-per-share offer made in February. The firm also said that the go-shop process managed by the committee resulted in what it calls “an inadequate outcome.”

It’s no surprise that Southeastern is arguing against the buyout proposal. It’s somewhere in the neighborhood of $800 million to $1 billion underwater on Dell shares, having made a long bet starting in 2005 at a time when the stock was trading mostly between $30 and $40 a share. It has no choice but to argue against a buyout that would force it to take a bath.

But, as the proxy statement released last month clearly shows, it was Southeastern that first lobbied Michael Dell to consider going private in the first place.

Southeastern makes one clear point: The buyout offer is taking advantage of a moment when Dell shares are trading at a pretty low point relative to its history, and the board had authorized share buybacks at an average of $15.25, much higher than the $13.65 buyout offer:

“The same Board that was confident with Dell buying its shares for $15.25 is now attempting to convince all shareholders that Dell’s business is in such dire straits that they should take $13.65 and exit their investments. We believe the Board’s sudden rush to sell is triggered by one thing: Mr. Dell’s desire to buy.”

Southeastern also appeared to throw its weight behind two competing proposals from the private equity firm Blackstone and the activist investor Carl Icahn.

It also questioned the wisdom of going private at all. “The proxy statement does not contain any sound reasoning for why, at this stage in the transformation, the company needs to be taken private,” the firm said.

Here’s the original letter:

MEMPHIS, Tenn., April 9, 2013 /PRNewswire via COMTEX/ — Southeastern Asset Management, Inc., the largest outside shareholder of Dell Inc. DELL +0.07% , today released an open letter to the Special Committee of the Dell Board of Directors and addressed Dell’s preliminary proxy statement.

The question now is whether Southeastern casts its lot with Blackstone, the private equity firm that has expressed an interest in offering $14.25 a share for at least part of the company, or Carl Icahn, the activist investor who wants to buy as much as 58 percent of it.

The full text of the letter is as follows:

April 9, 2013 Special Committee of the Board of Directors Dell Inc. One Dell Way Round Rock, TX 78682 Attention: Alexander Mandl

RE: Dell Inc. Proxy Statement

Dear Members of the Special Committee:

As the beneficial owner of 8.4% of Dell Inc.’s outstanding shares, we are writing today to express our views regarding the Company’s proxy statement. It is our position that the proxy statement fails to make a case for shareholders to accept the $13.65 per share Michael Dell / Silver Lake buyout offer. In addition, we believe that the Special Committee conducted a process that resulted in an inadequate outcome.

According to the proxy statement, Mr. Dell notified the Board of his intention to take the Company private in August 2012. The proxy statement clearly shows that, in their review, the Special Committee and Board of Directors reached conclusions that stand in stark contrast to views held by the Board prior to August 2012. While the Special Committee may have worked diligently and was assisted by credible and reliable professionals, even a good process — without the exercise of proper business judgment — can result in a bad transaction.

The Proxy Reveals a Robust Process Leading to an Inadequate Result

Over the last two years, under a Board authorized program, the Company has repurchased 224,000,000 shares for $3.4 billion at an average price of over $15.25 per share. The same Board that was confident with Dell buying its shares for $15.25 is now attempting to convince all shareholders that Dell’s business is in such dire straits that they should take $13.65 and exit their investments. We believe the Board’s sudden rush to sell is triggered by one thing: Mr. Dell’s desire to buy.

Furthermore, the proxy statement and the analysis performed by the Special Committee focus disproportionately on the End User Computing (EUC) business while giving little attention to the Enterprise Storage and Services (ESS) business. Southeastern’s in-depth analysis indicates that at the completion of the Company’s transformation to ESS, Dell’s future owners should realize valuation multiples significantly higher than those reflected in the current offer price.

It is not about the PC. It is not about the PC. It is not about the PC …

Management has repeatedly highlighted the ESS business on previous earnings calls and provided estimates that show that ESS will account for 35% of the Company’s fiscal 2014 estimated revenue and 58% of its fiscal 2014 estimated Non-GAAP operating income (OI). Because the 58% of Dell’s 2014 estimated Non-GAAP OI attributable to ESS is worth a much higher multiple than the 42% of Company profits tied to the EUC segment, the ESS business, Dell’s cash and Dell Financial Services (DFS) are worth far more than half of total corporate value (see Table 1).

Yet, in all the analytical work and the voluminous proxy statement, EUC and PC are referenced hundreds of times more frequently than ESS. This is a stark contrast to the Company’s prior emphasis on the emerging value of ESS. Given this change in public positioning, Dell’s shareholders should question why the Board is suddenly focused on EUC, and not on ESS — which was previously believed to be the future of the business.

In addition, the Board’s approach of initially limiting the potential acquirers to private equity firms that would allow Mr. Dell to have majority ownership of the Company and remain as CEO narrowed the potential bidders materially and contributed to the Board’s approval of a transaction at a price that undervalues the Company.

In fact, within the proxy statement, virtually every justification of the $13.65 per share price is based on a premium to market at the time of the analysis. Such an approach is misleading when it is based on a price at the low end of the trading range over the last 15 years. Instead, any valuation analyses should have compared the $13.65 offer price to the net asset value of the Company. Additionally, the valuation analysis should have focused on an appropriate multiple of the Company’s free cash flow per share, more than half of which is from the growing ESS business, plus the net cash on the balance sheet and the value of DFS.

The Special Committee Gave Limited Consideration to Shareholder Friendly Alternatives

In our February 8, 2013, letter to the Board, we stated that we would have been prepared to support a leveraged recapitalization and suggested it could have been done in the form of a $12 per share special dividend, a Dutch auction or another structure that would have allowed shareholders an opportunity to participate in Dell’s future. Despite the viability of such a transaction, the proxy statement shows that the Board and Special Committee spent little time researching a leveraged recapitalization. The lengthy proxy statement only discusses the “pros” and “cons” of a leveraged recapitalization on a handful of pages and in only a cursory manner. The proxy statement also does not provide any real analysis or give any attention to solutions that would have either allowed shareholders to receive a large special dividend or to remain shareholders of a company with a smaller share base. It appears that neither the Board nor the Special Committee aggressively pursued the leveraged recapitalization idea because senior management preferred a go-private transaction.

In addition, as widely reported, management spent over $13 billion on acquisitions of non-PC businesses which benefit from the very same cloud and mobility trends that are negatively impacting the PC business. Long-term owners such as Southeastern have supported Dell in its transformation into an enterprise solutions company, but are not being given the opportunity to participate in the return on that $13 billion investment.

On January 29, 2013, Southeastern sought a meeting with the Special Committee in response to market leaks regarding a reported go-private transaction. In that meeting, we asked the Special Committee why giving shareholders a choice, through some form of cash/stock election, would not be preferable, and in fact fairer, for those shareholders who want to participate in the Company’s upside. Dell’s proxy statement answers that question: quoting from page 38, “Mr. Dell and Silver Lake were not interested in pursuing a transaction such as the one proposed by Southeastern in which public stockholders would retain an interest in the Company.”

The Proxy Statement Contains No Justification to Take Dell Private

The proxy statement does not contain any sound reasoning for why, at this stage in the transformation, the Company needs to be taken private. In the entire proxy statement, we found only one page (page 82) devoted to Mr. Dell’s plans for the Company following the transaction. That single page is consistent with the Company’s prior public statements, and nothing about these plans requires that the Company be private.

In fact, in an interview with ZDNet two weeks ago, John Swainson, head of Dell’s software unit, essentially confirmed that it doesn’t matter whether Dell is public or private. He said, “the corporate structure of Dell doesn’t make a difference on how customers interact with our products or how we develop or sell them.” We note that many companies, including IBM, were able to successfully transform their businesses as public companies. In addition, BCG, an advisor to the Special Committee stated that “many of the ‘take-private’ value levers could (in principle) be applicable to [Dell] as a public company.”

The proxy statement reveals that the Board had become increasingly frustrated with management’s execution of the transition, and rather than try to solve the problem, it chose to give Mr. Dell the opportunity to purchase the Company from shareholders at an inadequate price. Mr. Dell would not be participating in the proposed go-private transaction if he did not believe in the Company’s future upside and his ability to execute the transformation of the business.

The Special Committee Has the Power to Act in the Best Interests of All Dell Shareholders

As we noted above, we believe the proxy statement fails to make a case for shareholders to accept the $13.65 per share Michael Dell / Silver Lake buyout. For shareholders trying to decide whether to support the transaction, the Company’s suspension of earnings guidance and extremely limited discussion of the Company’s future plans will make it difficult to make an informed choice. In the next draft of the proxy, the Special Committee should provide sufficient detail about Mr. Dell’s future plans so that public shareholders can properly evaluate their options.

The Special Committee has obtained two preliminary alternative proposals, both of which we view as superior to the Michael Dell / Silver Lake buyout. We view these proposals as superior primarily because each offers shareholders the opportunity to remain owners of Dell while also offering a higher cash price to owners who choose to exit their investment.

Southeastern urges the Special Committee to negotiate and evaluate these alternatives in good faith, and to recognize that offering shareholders a choice is a win / win outcome for all parties. We call upon the Special Committee to work hard to make this possibility a reality.

Sincerely,

O. Mason Hawkins G. Staley CatesChairman & CEO President & CIO

ABOUT SOUTHEASTERN ASSET MANAGEMENT

Southeastern Asset Management, Inc., headquartered in Memphis, Tenn., is an investment management firm with $34 billion in assets under management acting as investment advisor to institutional investors and the four Longleaf Partners Funds: Longleaf Partners Fund, Longleaf Partners Small-Cap Fund, Longleaf Partners Global Fund and Longleaf Partners International Fund, as well as two Irish domiciled UCITS Funds: Longleaf Partners Global UCITS Fund and Longleaf Partners US UCITS Fund. Southeastern was established in 1975, and the first of the Longleaf Partners Funds was launched in 1987.

As you might expect, there’s good news for any company in the business of building tablets and mobile phones, and lousy news for those building PCs. Worldwide sales of “devices,” a category that combines PCs, tablets, mobile phones and ultramobiles (tiny notebooks, presumably), will approach a combined three billion units by 2017, representing growth of 34 percent from 2012.

Growth will be led by tablets, which are expected to grow by 70 percent, to 467 million units. Phones will break the two-billion-unit mark in 2017, Gartner says. Traditional PCs, on the other hand, will decline by fewer than 300 million units by that year. Obviously, this is bad news for the PC players, including Hewlett-Packard and Dell, who are both struggling to get their PC divisions back on track, while at the same time trying to kick-start mobile device plays. (Click the chart below to make it bigger.)

Another nugget in the Gartner report: Google’s Android devices will dominate, accounting for nearly a billion and a half unit sales by 2017. Its nearest competition will be Microsoft’s Windows, and Apple’s combined portfolio of Mac and iOS devices, which will split about a billion devices between them.

Director Marc Andreessen got a 69.77 percent yes vote. John Hammergren had the smallest margin, receiving a vote of 53.91 percent in favor of his remaining on the board. Chairman Ray Lane got 58.88 percent of yes votes. G. Kennedy Thompson received a 55.15 percent vote in favor of his remaining on the board.

As proxy votes go this is about as close as you can come without actually removing a director. If nothing else, it’s hard for HP’s board not to have received the message loud and clear that shareholders were sending about the Autonomy deal and other difficulties the company has faced.

Here are some highlights from the day’s events.

1:59 pm: So it’s nearly 2 pm here in Mountain View, Calif., and we’re waiting for HP’s shareholder meeting to get under way.

Still waiting. The light FM jazz just stopped playing and now the audience is quiet. Aaaand just like that, onstage there’s Meg Whitman, Ray Lane, CFO Cathie Lesjak, chief legal counsel John Schultz and I think Rajiv Gupta from the board of directors.

Actually it’s not Rajiv Gupta, but a deputy general counsel whose name I don’t know.

John Schultz is speaking and is asking shareholders to observe meeting rules. He’s talking about the three shareholder proposals. Those who wish to speak in support or against the proposals can do so for only about five minutes.

More formalities to get the meeting going. A quorum is declared present. And the meeting can officially get started.

Now the slate of directors is up. All 11 directors are up for reelection to the board.

The second order of business is to re-appoint Ernst and Young as HP’s auditor. There are some proxy firms and other shareholder groups that are advising against that, in part because they blame Ernst and Young for failing to foresee some of the mess that was the Autonomy acquisition.

Other items of business is the say on pay proposal, a stock compensation plan and the formation of a human rights committee.

A shareholder is now speaking in favor of the human rights proposal. It deals with how HP does business in China and other countries with oppressive political regimes.

Schultz is speaking, and says that the creation of another committee to oversee human rights issues isn’t in the business of shareholders.

Another human rights proposal is up, submitted by a set of religious groups. A reverence whose name I didn’t quite catch is now speaking about it. “We have noted HP’s policies to human rights and related to supply chain and equal opportunity.”

2:20 pm: I’m paraphrasing what he says: He’s speaking on behalf of a proposal that would require HP to report in more detail on supply chain issues, making sure that workers employed by suppliers are protected. HP reports on a lot of this stuff already, but he’s pushing for a lot more detail.

Often, he says, confidentiality rules prevent HP from disclosing exactly how it evaluates its human rights policies with suppliers.

Schultz is speaking again and says the company opposes the proposal.

Now another shareholder proposal, this one about retirement plans.

Schultz is speaking again, opposing the latest proposal. And getting the voting under way.

2:32 pm: Okay, CEO Meg Whitman is speaking. Her remarks are starting with a video.

Meg again: “Most of you know that I’ve been CEO for 18 months. I’ve come to love this company.”

“I’ve now met with 300 or 400 customers around the globe, and they tell me they want HP to win.”

“Some of our customers have operations in 150 or 160 countries, and they want a partner that can match them every step of the way.”

Now on to innovation. “Did you know that HP was the top of the list for patents obtained in 2012 in Silicon Valley, and No. 50 worldwide.”

“But we have to do more, better, faster.”

“Third, I’ve found that HP has tremendous foundational assets, and talented and committed employees. And lastly despite what you may have read, we’re on a solid financial footing.”

“The biggest thing I’ve learned in the last year, is that together we truly make it matter.”

“There is still room for improvement. Fiscal 2012 results were not where they needed to be.”

Whitman: Partners are crucial to our future and we need to embrace them like never before.

Whitman is now revisiting the plan she laid out at the analysts meeting last year.

Whitman: The good news is, we said what we said we would do in 2012. We took action, and took our medicine, and met our guidance.

2:40 pm: Whitman: We expect 2014 will be characterized by recovery and expansion.

2:41 pm: In 2015 we expect you’ll see a rapid acceleration of growth and innovation.

Whitman is now reiterating the financial results.

Whitman: Net debt position has improved to $4.7 billion. But we’re not done. We have a long way to go.

First is creating solid product roadmaps that change how IT is designed and built.

We are reigniting the powerhouse of HP, which is the channel.

Whitman: Why I’m so confident about our strategy: We are living in a period of enormous change. Big shifts in how technology is consumed, used and paid for.

Whitman: It feels like a bigger change than what I saw at eBay.

Whitman: We will succeed because only HP can provide the solutions for the new style of IT. We are the only company that can bring our customers devices, services, software all at once.

2:48 pm: Whitman is closing her remarks.

It has essentially been a repeat of the same speech she’s been giving since HP reported its most recent quarter.

Whitman is closing with some nice praise of HP employees, who “continue to innovate through thick and thin.” She’s now wrapped up.

Time for a Q and A with the shareholders. I see about seven people queuing up to the mics from where I’m sitting.

A question about the data center business. Now about 15 people lining up for questions.

The questioner opines: Over the last two or three years I’ve lost lost half the value of my HP shares.

Whitman: One of the question you’re asking is if you’re better off with a vertical stack versus a commitment to open standards. One of the strengths of this company is the hardware business and the commitment to open standards and open architecture.

Whitman: Now she’s talking about Moonshot, the tiny servers using Atom or ARM chips and which use less power, and take up a lot less space. It’s disruptive innovation, she says.

Whitman is now talking about the 3Par storage business, which tends to simplify enterprise storage.

Whitman: We are actually sold out of our mid-tier storage product. We haven’t been sold out of a product in quite a long time.

Whitman: We are also the leader in software defined networking.

Question: What is the board’s thinking with regard to nominating an independent chairman?

Whitman: I came to HP at a difficult time. My view about the board is that they are helping to turn HP around.

Whitman: This group is helping me lead the transition. Once you decide how you’re going to run your company, you have to get everyone marching in the same direction.

Another question: Change to Win is up. Bill Patterson is speaking. “A strong opposition vote will be delivered to several directors who were involved in overseeing the Autonomy acquisition. In the event that some directors don’t receive a majority vote, the board should comment on that and what it intends to do going forward.”

3:02 pm: Patterson is still speaking. These shareholder rights are of limited value that the company can demonstrate that it has active independent directors. Will the board comment in the event of a strong opposition vote?

Meg just called on director Ralph Whitworth, the activist investor, who owns a lot of shares. He says that he bought the shares and approached the company. He offered himself as a director and Meg and Chairman Ray Lane were up for it. “You can expect some evolution of the board in the coming weeks or months.”

3:06 pm: Whitworth: I hope you will respect the results today and work with us to make this company stronger and more valuable.

More questions. SEIU union trust, a pension fund. Can you confirm that Whitworth has been appointed to a special committee to investigate the Autonomy acquisition. There’s a concern that directors who were involved with that deal not be on that committee.

John Schultz confirms a special committee has been formed. Whitworth, Gary Reiner and G. Kennedy Thompson are on it.

Schultz: The independence of this committee is passed on by a court of law. We believe the committee has the right scope of charter, and the members are the right ones in place consistent with the law.

The questioner is expressing “grave concern” that Thompson should not be on the committee.

A former HP employee, one who dates back to what he calls “the good old days,” would like HP to celebrate its 75 anniversary. Lots of applause.

Whitman: We have an employee committee on that.

Another question. Seven more people in the line. Latest questioner asking about human rights, surveillance in less developed countries. “Never ever admit that David Packard is most admired for cutting 10 percent off expenses, and cutting his own compensation.”

The questioner is suggesting the elimination of health insurance brokers somewhere in the employee benefit process.

Now 10 more people waiting in line to ask questions.

The “question” is more or less turning into a political diatribe about health care policy. Whitman is cutting her off and asking her to get to the point.

3:15 pm: She’s basically trying to get Whitman to support a single payer health insurance scheme.

Another question from a Presbyterian Minister. Something about never voting against the State of Israel. However, he says, HP is selling its products in a way that support the “occupation” of Palestine. He’s asking for transparency, which he says is lacking in the Proxy statement on how products are being used.

Whitman is pointing out an HP exec who is responsible for responses to questions like this, to address his concerns.

Another question from a shareholder and retiree. “My portfolio has taken a dramatic fall. Regardless of this, I marked a ballot to support everything the board recommends.” He’d now like to read something published in 1976.

He’s asking Whitman to stand up for the old HP Way. “It turns out its really hard to kill founder DNA. … We are at our core an engineering company.”

Question from a representative for the AFL-CIO fund. Can you address how the board expects the biggest vote against an S&P auditor in a long time? It’s a question about the proposal to dump Ernst and Young as an auditor.

Whitman: When we do an outside enterprise deal, we have to have someone certify the financials. To have someone other than our auditor do it, it’s not a good use of your money. It would be duplicative to have someone else do it.

Question: What other boards does Whitman serve on? How do you justify the time spent on other boards.

Whitman: After I lost the governor’s race [in California] I was asked to go on a lot of boards and I did. I have been reducing my committments to other boards. She used to be on the board of ZipCar and is now off that as the company has been sold. The remaining corporate board I sit on is Proctor and Gamble and that is good for HP. It’s good to see another big company struggling.

The same questioner is a fan of his HP 20S calculator. “It’s an example of the HP Way. I’d like to see that return.”

Whitman: I came to set this company up for the next 75 years. This company is an icon of American business. We are important around the globe.

One last question and then it’s time to announce the results of the vote.

Last question is from a guy who lived across the street from David Packard. Apparently,he’d like to sell a company to HP. Whitman is laughing.

Whitman is referring him to CFO Cathie Lesjak.

Proxy vote time.

This is the moment of truth. A few stragglers are still voting.

3:29 pm: Polls are closed.

Chairman Ray Lane is announcing the results based on the preliminary tally. Directors first. All have received at least 50 percent. All 11 directors have survived.

3:31 pm: And Ernst and Young has been renominated as HP’s auditor.

The directors and Ernst and Young were the two big items. We don’t yet know what the percentages were on the various directors who had been targeted by ISS, Glass Lewis, Calpers and others.

What’s left is the proposals on human rights committees. Less than 4 percent voted in favor.

It’s pretty much going as the company recommended. Patterson from Change to Win is asking for the percentages on the director votes.

Lane is declaring the business of the meeting concluded. That ends the meeting.

And we’re done!

That in turn triggered speculation that HP might be planning something special. Persistent rumors that HP is reconsidering the breakup option refuse to die, fanned in no small part by a sketchier-than-an-art-class report from Quartz. Word that Faber was on the scene as the earnings report crossed the wires led some traders to wonder if a breakup announcement was imminent.

Nothing could be further from the truth. The interview with Whitman happened early this morning, and she batted those rumors away once again: “I am convinced that we should not break up this company.” In the end, though, it’s going to come down to the turnaround strategy in place and the financial results that it yields. If it doesn’t work out, then naturally all options are on the table.

It’s also worth noting that HP shares are up by more than 15 percent today, and rose above the $19 mark for the first time since August. If nothing else, yesterday’s results have given shareholders hope that there is a light, however faint, far, far at the end of HP’s tunnel.

Anyway, it’s worth watching the interview, which lasts about 11 minutes:

HP shares are rising after hours on word that the company rather handily beat its own expectations and those of the Street. The consensus view called for it to report 71 cents a share in per-share earnings. HP came in at 82 cents. Sales were also ahead of the consensus, despite the fact that revenue fell in nearly every significant business segment.

Still, don’t harsh HP’s buzz with too many details. There’s more to crow about: Net debt of the operating company came down by $1 billion to $4.7 billion, and it’s looking like HP will be close to zero debt for the operating company this year.

The results if nothing else buy Meg Whitman and her team some time to quiet the critics who say HP should be split into two or more companies in order to unlock value. That buzz was prominent late in the trading session as rumors flew that a breakup announcement might accompany earnings. As careful AllThingsD readers might have already guessed, a breakup isn’t in the cards, at least not for the time being.

The conference call with analysts is about to get under way momentarily and I’m listening in. Expect lots of questions about the balance sheet, and probably more chatter about the breakup idea.

One bit of housekeeping: Since I’m in New York, the time stamps are set to Eastern Standard Time.

Earlier:
5:05 pm: Joining the call in progress. CEO Meg Whitman is speaking. She says the restructuring program put in place last year is having the desired effect.

Whitman: We improved operating company net debt position for the fourth consecutive quarter.

Whitman: Revenue from converged storage products was up 18 percent.

Whitman: In servers, business stabilized. We expect to grow market share by 1 percentage point this year.

Whitman: Networking showed continued growth, up 6 percent. I was also pleased with performance improvements in printing. New business models and new printers helped boost operating margins.

One thing that changed in developing markets is that the price of hardware has increased while the price of ink has dropped. That’s the Ink Advantage program she’s talking about.

Whitman: PCs gained 1.4 percentage points of share world wide, and 4 points in the U.S.

Whitman: Total enterprise services exceeded expectations. There is still a long way to go, but I believe that ES (the former EDS) will deliver on the recovery plan put in place last year.

Whitman: We are making significant investments to improve our channel partner programs.

Whitman: If we can mobilize HPs 300,000+ employees there is nothing we can’t do.

Whitman: Turnarounds happen when old and new customers believe. In HP’s case customers are really starting to believe. We saw a number of big wins including one with the U.S. Department of Veterans Affairs. Another is eyewear company Luxottica (sorry if I misspelled that), which hired HP to run its data centers.

Whitman: We clearly still face a long road ahead. I don’t like that we saw revenue declines in all our business lines. Restoring growth is a priority and we’re on it.

Whitman: It will be toward the end of the year before the recovery plan starts showing up on the top line.

5:14 pm: Whitman: There are a lot of reasons we are in the PC market. She’s addressing again why there won’t be a spinoff of the PC business.

Whitman: Pricing continues to be very competitive.

In Enterprise Group, we are seeing a tepid market in Europe for servers.

Whitman: We will now be breaking out converged storage from traditional storage to better show the growth there.

5:17 pm: Now Whitman is talking about the hiring of Larry Stack to reignite sales in the Enterprise Services group. (Wonder where you read about that first? You got it: AllThingsD.)

Whitman: Now talking about HP Labs under its new head Martin Fink.

Whitman: Talking about Project Moonshot. We expect this to truly revolutionize the economics of the data center.

Whitman: If just 10 large web services switched to Moonshot servers, they could save $120 million a year, and 100 million (?) metric tons of CO2 released into the atmosphere, because it consumes so much less power than prior models.

Whitman: I’m pleased about Q1 and feel good about the rest of the year.

Now CFO Cathie Lesjak is speaking.

Lesjak: At the highest level, I would characterize this quarter as one more data point in our consistent, but not linear, recovery plan.

Lesjak: Now she’s talking about some new reporting information disclosures.

Lesjak: (Going through the numbers again.) From a global economic perspective, we are still seeing headwinds, but some healthier pockets.

5:23 pm: R&D spending declined, though it was because of some tax credits and some contract accelerations in Q4.

Lesjak: Europe was a challenge, but we continue to see good signs in Asia-Pacific and Japan.

Lesjak: Decline in printer revenue is partially due to a shift toward higher-end printers and away from lower-priced ones.

Lesjak: Again, solid growth in server sales in Asia, especially in China.

Lesjak: Talking more about the storage business. Q1 was the fourth consecutive quarter where margins expanded. Now Business Critical Servers. Phase two of the trial with Oracle is expected in Q2, which will address Oracle’s breach of contract and damages.

(Though Oracle lost the first phase of the trial, it has promised to appeal the decision.)

Lesjak: In services, we have moved away from unprofitable contracts.

Lesjak: We saw strong growth in security and big data software offerings.

Now talking about cash and capital allocation. $253 million went back to shareholders through share repurchases, and $258 million via the dividend. Net debt is now $4.7 billion at the operating company level.

Lesjak: As we’ve said, 2013 is a fix-and-rebuild year. There are market and macro pressure and some of the ES changes are being delayed.

And now we’re heading into Q&A.

Question from Bill Shope of Goldman Sachs; he’s asking about the breakup idea.

Whitman: We have no plans to break up the company. (Heard that??) HP is better and stronger together.

Whitman: We have a terrific set of assets. When you think about our brand, our scale, our distribution, and importantly the customers want this company to be together. We feel strongly it’s better together.

Katy Huberty of Morgan Stanley: Earnings on the back half of the year look like they may come down. What else makes you cautious about the back half of the year?

Lesjak: It’s really about Enterprise Services not having the runoff in Q1 that we expected.

There’s also some challenges about the timing of signings.

Lesjak: There’s some cautious optimism there.

5:44 pm: Toni Sacconaghi of Bernstein: Where are you in your cost savings?

Lesjak: The non-labor savings are coming in later this year.

Question from Ben Reitzes of Barclays: I understand why you want to keep guidance in place, but why not raise the free cash flow target above $5 billion?

Lesjak: Glad you pointed out the operating cash flow. We’re happy with it, up 115 percent. We’ve really gotten a lot of discipline. We don’t typically update our cash flow mid year. Best way to think about it is that it was a very big deposit on the year.

Question from Shannon Cross: How will you judge the success of the OfficeJet ProX printer platform? How do you think about this versus your laser platform?

Whitman: This is an exciting opportunity because it prints at the speed and quality of a laster. We’re going to drive it as hard as we can. We’re going to measure the units installed. With regard to laser we have a great laser lineup, but if there is cannibalization; that’s the way business goes. If there’s going to be cannibalization, better we do it to ourselves than someone do it to us.

Missed a question there. Sorry about that.

5:53 pm: Question about Enterprise systems sales.

Whitman reminds us that BCS sales got whacked again. But there’s a good product lineup coming. Waiting for another mention of Moonshot.

Whitman: We have to make the right investments because it’s a big piece of HP’s profitability. (Lesjak just mentioned in the answer to the previous question that PSG accounts for only 10 percent of HP’s operating profitability.)

Another question, this one from Mark Moskowitz of J.P. Morgan. Clearly your net debt position is improving nicely. How are you thinking about investment internally from R&D and acquisitions?

Whitman: For 2013, we’re still focused on rebuilding the balance sheet and offsetting dilution. We’re going to stay focused on fixing what we have. You never say never, maybe there’s a tuck-in acquisition we have to have, but there’s nothing in the plan. Also, one thing we have to stop doing at HP is increase R&D and then pulling it back, and then repeating that. We’re going to stay on the plan that we have.

Question from Brian Marshall at ISI about the software business, where he’s seeing some deceleration of growth.

Whitman: The bright spots in software are Vertica and security. Apps and ops are not where we want them to be. We need to make some changes that will kick in by 2014. We have some basic blocking and tackling there.

Steve Milunovich asking about PC supplies and inventory.

Lesjak: Channel inventory on PCs, overall it’s good. On the consumer side, despite the fact we gained share in consumer we ended a bit higher than we would like. The real star is the channel inventory in printing. We have been dogged by ink supplies inventory being too high for several quarters. Now its down 27 percent since the peak. We’ve had dollar declines over the last six quarters.

Whitman: One of the things we’ve asked the business groups to do is limit discounting to get products out the door. It’s healthier for us and better for the channel. It also allows us to differentiate our ink and toner product and get away from the commoditization we were expecting about 18 months ago.

Final question from Credit Suisse: About free cash flow. Given the improvement, it looks like you will pay down most of your debt. If you are generating $6 billion to $7 billion in free cash flow each year, how dedicated are you to increasing dividends and buybacks?

Lesjak: At the end of the year we’ll be thinking about how we allocate capital around the time of the next analyst meeting. We are committed to returning cash to shareholders. Our view around dividends is that over the long term, our payout ratio should improve as well. We are aligned and working with the board to determine the mix.

6:05 pm: Closing remarks from Whitman: The turnaround is on track and we did better than we expected we would. We have to deliver and continue to execute as an organization.

And we’re done. See you next quarter!

Today’s earnings report, which is expected after the markets close for trading in New York, will be the first since the end of HP’s worst year ever. The list of its woes is well known. There was the Autonomy acquisition, which contributed more than $5 billion of an $8.8 billion write-down that shocked shareholders. That write-down came on top of another write-down, this one worth about $8 billion, on the 2008 acquisition of the IT services firm EDS. During 2012, HP’s shares traded at levels not seen since 2002, going back to the days immediately following its mammoth acquisition of Compaq Computer.

That acquisition made HP the world’s biggest vendor of personal computers, a market that is now in decline, but which affords HP a certain amount of scale that helps it in other businesses. Combined, PCs and printers, another declining market, amount to about half of HP’s revenue, and more often than not get most of the attention from shareholders. And for that reason it’s not exactly difficult to find Wall Street analysts who have rated HP shares with a “sell” or equivalent. Though likely untrue, persistent rumors that say a breakup or sale of a significant business unit is coming continue to goad HP shares higher. “Talking to investors, the biggest story on HP these days isn’t about its business fundamentals but whether the company will split itself in two or more pieces,” analyst Shaw Wu of Sterne-Agee wrote in a research note today.

The consensus of analysts polled by Thomson Reuters calls for HP to report a per-share profit of 71 cents on sales of $27.8 billion. The bar, however, is relatively low: A year ago, HP reported per-share earnings of 92 cents.

CEO Meg Whitman has made a persistent case that, despite all its recent troubles — and calling them “troubles” feels like describing World War I as a case of bad vibes — HP will not only be saved, but will remain whole. She has also characterized 2013 as the year during which the arduous work of repairing and rebuilding will begin in earnest.

Whitman has been hinting publicly that signs of the turnaround are coming, though they’re not yet visible. The narrative at HP lags reality, she said at The Wall Street Journal’s CIO Network conference last month.

For the moment, Whitman seems to have earned the trust of HP shareholders impatient for more positive results. She has been on the job 17 months, and on her watch, HP shares are down about 25 percent, while the S&P 500 has risen by 32 percent. By that benchmark, Whitman compares favorably with former CEO Carly Fiorina, who, at the 17-month mark, presided over a 46 percent drop in HP shares, while the S&P 500 was down only 6 percent. But at the same point in the Mark Hurd era, HP shares were up by 66 percent, well ahead of the S&P 500, which was up only 11 percent. (Whitman’s immediate predecessor, Léo Apotheker, never made it to 17 months.)

If that’s true, then there’s a good reason to expect that the turnaround she anticipates will be visible first in HP’s enterprise-facing businesses. In this, HP has a new weapon upon which rests a great deal of hope. It’s called Project Moonshot. Announced late in 2011, it is a fundamental rethinking of a server.

I saw an example of one during a meeting last month with Dave Donatelli, HP’s executive vice president and head of its enterprise business, during a recent visit to the company’s headquarters in Palo Alto, Calif.

It’s about the size of a trade-paperback book — and not a very thick one, either — yet it’s a full-blown server. It comes in flavors running Intel’s low-power Atom chip, but also ARM-based chips, and can be outfitted with many of them. For storage, it can be configured with a conventional spinning hard drive, or a flash-memory-based solid-state drive. It can also be tricked out with a lot of system memory, and with a graphical processor unit (GPU) like those from Nvidia, which are increasingly being used to give computers some extra oomph on certain kinds of computing jobs.

The case Donatelli makes is simple, and can’t help but resonate with customers, especially with those building large data centers: When compared to a mainstream HP server currently on the market, one built using the Moonshot approach consumes 89 percent less power, and requires 94 percent less physical space. “We imagine a world where you can fit thousands of these servers in a single rack,” he says. “It really is a fundamental revolution in how servers work.” And no one, Donatelli says — not Dell, not IBM, not Oracle — makes anything quite like it. And it will begin shipping soon.

Moonshot will be an important piece of HP’s strategy, especially as many big companies seek to build massive data centers running hundreds of thousands of servers at once. Large companies increasingly want to get the same economies of scale that smaller ones get by farming out their IT infrastructure to cloud companies like Amazon Web Services and Rackspace, but they don’t always want to let go of their IT infrastructure entirely. And then there are the cloud service providers themselves. “Many of the large cloud providers run 250,000 or maybe even a half a million servers. Within three to five years we’ll be talking many times that amount,” Donatelli says. “Those data centers will get very expensive, and they won’t be very environmentally friendly.”

And there are other important pieces on HP’s chessboard. HP’s cloud services business — which will presumably be a big consumer of Moonshot hardware, Donatelli says — is already a multibillion-dollar business. And its 3Par enterprise storage business — a company HP acquired in 2010 after a bitter bidding war with Dell — reported record sales in its most recent quarter. Then there’s enterprise networking, a business built primarily out of 3Com, a company HP acquired in 2009. Only Cisco Systems is bigger in that business, Donatelli says, and, yes, it’s a lot bigger, comprising about two-thirds of the addressable market, leaving HP and everyone else to fight over the remaining third. But that’s a fight that HP is winning, beating out, in the reckoning of research firm IDC, players like Alcatel-Lucent, Juniper and Huawei.

And what of Business Critical Servers, the unique HP business built on Intel’s exotic Itanium chip? Long a source of beefy profits derived from services supporting Itanium’s finicky customers, HP’s BCS business suffered from an injection of doubt about its future, whipped up in no small part by Oracle, which insisted that HP intended to kill the platform. Oracle said it would stop making software that supported it. That prompted a lawsuit from HP, which argued that Oracle had agreed to continue supporting Itanium, and was bound by that agreement. HP won, but it hasn’t helped HP sell more Itanium servers. That’s because, Donatelli says, Unix-based servers are fundamentally a business in decline. “That marketplace is in secular decline,” he says. “Although you and I will be here five years from now, and will still be talking about it, it is a shrinking market. We will drive as much revenue as we can from it and, over time, it will disappear.”

HP recently updated its line of Itanium servers with a machine that’s three times faster than its predecessor. But there’s also a solid business capturing recovering Unix customers and helping them move to more mainstream platforms running Linux and traditional Intel chips. HP does offer a “mission critical” server that contains a mainstream Intel Xeon processor. Expect more like that.

And what of those declining service revenues related to BCS? The good news is that they will decline slowly. Itanium customers aren’t exactly known for moving fast or swapping out their machines that often. The better news is that HP’s 3Par storage line carries with it an interesting service profile that’s kind of similar to what has been the norm with Itanium. “There is a backfill coming to replace what is being lost,” Donatelli says.

And while he couldn’t get specific — HP will be more specific when it reports its results later today — Donatelli said 2013 looks like it may be an important transitional year for HP customers, and thus for HP itself. “We see more and more customers starting to rethink how they run their operations, and how they can change them significantly,” he said. “We think that’s a big opportunity. The enterprise doesn’t move like a light switch. It moves gradually. But when it starts to move, it really moves.”

Basically it shows that every line of business at Dell continues to be in decline — except one, and that’s the combined server and networking businesses.

Here’s the slide, and it may constitute something of a last look at the state of Dell before it completes its leveraged buyout.

As you can see, servers and networking grew 18 percent, versus everything else, which declined year over year. Separate them out and server revenue grew 5 percent, while networking grew 42 percent. While the growth seems healthy, it’s not enough to offset everything else. Servers and networking combined amounted to less than 19 percent of sales. Dell’s business shrank in the remaining 81 percent.

It’s hard to make shareholders happy when the trend lines look like that. So now you see, in one place, why Dell is going private.