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Carly's ‘new HP’ memo leak – Q staff miss the bonus

And here's an exciting voluntary retirement package...

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A memo from new hp boss Carly Fiorina has found its way into our inbox. Written in her usual touchy-feely style, the memo nonetheless carries unwelcome news for former Compaq employees - they won't get a share of a pre-merger company performance bonus.

Ouch.

Anther point to note is the belief in the top echelons of new hp that IT spending won't recover until next year.

There's also a sting in the tail of the memo. Carly writes: "one basic but absolute tenet of the new HP is that every business in this company needs to be healthy and pull its own weight. All of our businesses must be profitable."

To: hp Employees
From: Carly Fiorina

Hello, everyone. What an exciting week it's been since I last spoke with all of you. One week ago, we launched the new HP and already we're off to a fast and effective start in building our new company. And I want to thank all of you for your hard work in making our launch a success.

A few minutes ago, we issued the results for HP as a standalone company for the final time. From this day forward, we will report on how we perform in the marketplace on a quarterly basis as the new HP. And for those of you who are still getting acquainted, our fiscal year runs from November 1 through October 31. So our third quarter began on May 1 and will end July 31.

Now, as has been our practice, I'd like to spend a few minutes putting pre-merger HP results for the quarter into perspective. I'll talk briefly about the business overall where we've done well, where we need to improve, and where we need to focus our energy over the next three months and beyond.

Pleased with performance

Despite continued weakness in enterprise IT spending worldwide, management changes in preparation for the new company and the prolonged uncertainty surrounding our merger during most of the second quarter, I'm very pleased with our overall performance. We reported pro forma earnings per share of 25 cents, in line with the current analyst consensus estimates. Although our revenue declined 7 percent sequentially on a pro forma basis, our gross margins increased from 26.9 percent to 28.7 percent. Expenses for the quarter were essentially flat -- and we generated cash from operations of $2.1 billion for the quarter, improving our already healthy cash position.

Last quarter's performance proves we can focus and execute even under the most difficult conditions. Despite the tough enterprise spending environment, we held our own in key segments of the enterprise market -- UNIX servers, storage and printing, relative to our competitors. While revenues in our consumer business were down slightly, operating profit for the business was strong with all regions of the world posting profitable results.

Our Imaging and Printing business had a very healthy quarter. IT Services performed well, despite slow downs in customer spending, particularly in consulting.

Meanwhile, Computing Systems and Embedded and Personal Systems continue to lose money. And the merger gives us an opportunity to improve both our cost structures in these businesses, and advance our market position at the same time.

Our efforts to aggressively manage the balance sheet continue to pay off. We again reduced inventory by almost $500 million in the quarter. Our accounts receivable are in great shape. Cash flow from operations -- as I mentioned -- was a healthy $2.1 billion for the quarter, and we exit the period with nearly $9 billion in cash and short term investments. The new HP, therefore, begins with $13 billion in cash, an important source of strength in tough times.

Sluggish conditions to remain

There's a lot to be proud of when looking back at our performance during recent quarters, but we're also clear-eyed and clear-headed about the hard work ahead of us.

We expect market conditions to remain difficult worldwide. It appears that the sluggish corporate IT spending will continue for a while, which means our discipline in managing expenses and assets is critical.

Cost structure improvements and rigorous expense management have kept us in the game while we fight through this difficult economic environment. Frankly, while we were cautiously optimistic that we would begin seeing a muted recovery in the second half, we currently do not expect IT spending as a whole to show meaningful improvement until 2003.

So when revenue growth is slow or declining, it's even more important to show discipline in taking costs out of the system. We're in the process of transforming our cost structure to a world-class, highly competitive level -- and we're trying to do this in a dignified way that shows a respect for people. This is one reason why we just announced a voluntary enhanced early retirement program in the United States. As I've said before, we will do everything we can to achieve our cost structure requirements through voluntary efforts and natural attrition, leaving layoffs as a last resort.

Three things to remember

And so, the results of our second quarter of fiscal-02, I think, illustrate three things. First, your hard work and sacrifices are paying off, and are reflected in the continuing improvement in our cost structure and gross margins and earnings per share.

Second, you have stayed focused on customers and delivering results during a difficult period. In fact, despite potential distractions and the demands of a comprehensive integration planning effort, we still managed to perform better than some of our toughest rivals, including IBM, Sun, Xerox and Lexmark.

And third, some very important businesses are still losing money. Our merger is all about fixing the businesses that need fixing, while giving us more capability than any other IT company in the world.

One basic but absolute tenet of the new HP is that every business in this company needs to be healthy and pull its own weight. All of our businesses must be profitable. The leverage in our combination of businesses is huge, but the underlying foundation must be solid.

Although you have all shown incredible resolve, the real test lies ahead of us - because we do not intend to be a company that continually cuts costs to achieve market success. Our costs need to be competitive -- no doubt about it. But the real opportunity -- the real fun -- will be in growing our business. In improving our market share, point by point. By taking advantage of the next wave of the Internet - providing digitized content everywhere and anywhere. And by transforming or creating new markets by developing and launching the next breakthrough products -- this is where the challenge lies. And this is where the fun begins.

Company Performance Bonus

Because of so many people's hard work, I'd like to announce our pre-merger HP Company Performance Bonus. But first, I have to apologize. This is one of the few times that some of the information I share won't apply to all employees in the new HP. The first-half Company Performance Bonus will be paid to pre-merger HP employees. For our second half of FY02, we have a similar program in which all employees of the new HP are eligible for performance-related bonuses.

For those of you who aren't currently eligible, please bear with me. I think the philosophy behind the bonus holds meaning for all of us. The new HP is a company that focuses externally -- on our customers, on our competitors, on the marketplace and on our shareowners. And the Company Performance Bonus is a measure that takes that external focus into account and rewards employees for meeting customer needs, solving customer problems and winning in the marketplace. As our president, Michael Capellas, likes to say, "It's a beautiful thing."

The pre-merger HP Company Performance Bonus is, thanks to lots of hard work, paying out for the first time in 18 months. I am delighted to announce that, as a team, we met or exceeded our target performance goals, resulting in a Company Performance Bonus of 7.61 percent. The bonus will be paid in the U.S. on or about May 23, and soon after in the rest of the world. Congratulations. Well done. And thank you.

Off and running

Last week, at launch events around the world, Michael and I and the Executive Council were overwhelmed by the energy, enthusiasm and excitement of the employees of the new HP. Let's focus this energy on quickly working through any and all integration issues, serving customers and beating the competition with a renewed sense of passion and pride.

Look what we have already accomplished in one week:

* More than 100,000 employees participated in a live global broadcast event;

* Outreach to our customers continues and we're laying out the detailed three-year product roadmaps and migration plans we've put in place;

* hp.com, our company website and online store, was integrated and open for business on Day One;

* A single employee portal was universally available on Day One;

* Our two networks were integrated and secure on Day One;

* Our e-mail addresses are now all converted to "@hp.com";

* Employees of the new HP can plug into the company network at any site in any country;

* IT Integration plans exist for every system inevery business in every region;

* Our financial systems are integrated and we are ready for our first financial close;

* We set up an integration escalation hotline for managers and employees around the world and nobody called;

* Last week we began the next round of management announcements and they continue this week -- 1,000 managers are now in their assigned positions in the new HP; and

* Yesterday, we began rolling out our voluntary enhanced early retirement plans for qualified US employees. Voluntary retirement packages were sent to 9,000 employees. And, we also began notifying individuals who will be participating in the global workforce reduction program -- which will be rolled out around the world as appropriate.

While we've done a lot, a lot more needs to be done. We know we have a lot to prove. The race ahead will be tough and competitive, but we are off and running. Be proud of how well we came out of the gates.

Thanks everyone for the great work. Let's keep up the pace.

--Carly

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