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JANUARY 21, 2003

© Copyright 2003 Hewlett-Packard Development Company, L.P
All rights reserved. Do not use without written permission from HP.

Good morning, and thanks to all of you for attending this conference.

It is remarkable for me to look out into this audience today and think about how far this conference has come in just a short time. This conference began in a much smaller meeting room with about 100 people in Nice in 1998, and now we have a conference of almost 4,000 people—representing locations from Rotterdam to South Africa. In fact, this conference is more than twice the size of last year's conference in Lisbon, making this the biggest, most successful ENSA@WORK conference ever.

I think in many ways, this is the perfect place to meet. You may not be aware, but for more than two centuries, Amsterdam has been known as the "learned city" and that is because over the past century, it has given the world more Nobel Prize winners for science per capita than practically any other country in the world. Today, it is one of the world's leaders in technology innovation—and I think therefore it is a perfect reflection of the audience that we have here today.

I am here today for a lot of different reasons, but first and foremost, I came here today to say thank you.

It's not a fact lost on any of us that one of the largest, most successful IT conferences in the world is a conference of HP customers and channel partners. I believe that great organizations are defined not just by the company they are, but by the company they keep, and everything we are about and everything we do starts with our customers. We know that nothing happens unless you want to buy from us, and unless you are willing to do it again and again. We never forget who keeps us in business.

We meet today at an uncertain time for our world, and an equally uncertain time for our industry. And I think many of us come to Amsterdam with more on our minds this year than in the past. We have war, and recession, and terror, and corporate scandal on our minds, but also perhaps, we have on our minds the fear that the wheels of innovation in our industry have slowed in response to this less certain world. But despite all these uncertainties, I actually come to this conference more hopeful and more optimistic about our future than I have ever been.

While the market for technology for technology's sake may be slow, we believe the market for technology that solves real human and business needs is stronger than it has ever been. We believe many of those innovations today are coming from the very people in this room. So, I'm actually not here today to talk about our view of the world; I'm here today to talk about you. I'm here to talk about what I think is the real agenda in IT, and that is, the customer's agenda. Because I think where we are now, and where you as customers want us to be, is recognizing that the value proposition for IT has to change. Yes, we all know that this is a tough IT market, and in fact, I think a lot of the commentary around this industry has been focused on a cyclical economic environment. And we all know that the cyclical economic environment means that there have been substantial declines in growth rates; that smaller start-up players have been struggling to survive; and that in fact, consolidation in the IT industry is happening.

This all seems pretty obvious today, although it wasn't obvious to many in 2001. What I think people still misunderstand is this: the market trends that we are seeing today are not being driven by cyclical economics, although clearly that's going on. I believe what we're really seeing in the IT industry today is being driven as much by changes in customer requirements, and that means we are talking about long-lasting structural changes in our industry, not simply cyclical changes.

These long running cyclical changes are being driven because customer requirements are no longer simply about the fastest, hottest box. Customer requirements are no longer simply about the latest killer app. They are no longer about what's the next big thing, or the next coolest piece of technology. Customers are focused on something much more fundamental and much more practical, and that is: How do I get a better return on my technology investment? How do I get real value? How do I make sure that I can live with, not only the initial costs, but the ongoing costs of owning and operating technology?

This focus on value is more than a cyclical economic issue. This focus on value is long-lasting and permanent, because let's face it, as customers of technology you have concluded that you actually can't make any progress by throwing everything out that you've already invested in. You can't make progress by creating lots of separate, stand-alone islands of technology. You can't make progress unless there is a way to reduce the amount of complexity you have in your IT systems.

In other words, you can only make real progress if you can truly rationalize and leverage the investments you have already made. You can only make real progress if you can evolve, step-by-step, your IT and not throw everything out and start over.

You can only make progress if the level of complexity is reduced. And, you can only make progress if your total return on the investments you make in technology improve over time. Make no mistake about it; we think this is a permanent change, and we think these changes will be with all of us, even when the economy comes back.

I think it's also true that despite the slowdown in the economy and in technology over the last couple of years, technology actually is becoming even more deeply woven into the fabric of our businesses and our lives. I think there is a clearer understanding today that no matter what business you are in, technology is the business—and that the smart application of technology increasingly will determine winners from losers.

What you as customers want to know are some pretty basic things, actually; how do I lower the cost of acquiring technology? How do I lower the cost of operating my environment? How do I make sure that the investments I make in technology flex with my business requirements? Because, let's face it, the requirements of business agility and business adaptability are accelerating.

And just as important, you want to know: do I as a customer, have freedom? Can I choose the pieces I want? Can I make sure that I stay in control of my environment and in control of my investment? How do I stay in control of what is core to my business, because in fact the last thing I want to do as a customer is to hand the keys of the kingdom over to someone else? How do I make sure I have freedom of choice?

So, in the midst of all this change, and in the face of those fundamental, practical, and profound requirements, what is it that HP is focused on?

Our strategy—our investment—our commitment, are focused around four fundamental principles; first, that we will be the company that provides the best return on information technology (RoIT). And by the best return on information technology, we deliver on that commitment through our products, our people, our services, and importantly, our partners. And by return on information technology, what we mean is lowest total cost of ownership, improved productivity, better manageability, better interoperability, reduced complexity, improved reliability, and security.

And we think we come to the table with a portfolio that differentiates us from our competitors and uniquely positions us to meet those goals. Today, we come to this conference as the number one company in supercomputing; number one in network management capability through our OpenView platform and professional services; number one in servers—in Windows and Linux and UNIX; number one in storage; number one in imaging and printing at a time when imaging and printing are critical to your infrastructure as you digitize your processes; number one in laptops; in PCs, a leader in IT services.

Our portfolio today runs from desktop to print shop; from palmtop to Nonstop computing systems; from printers that sell for $49.99—and by the way, those $49.99 printers have 100 patents associated with them and drop 18 million drops of ink a second, proving that hi-tech and low cost can go together—everything from $49.99 printers to multimillion dollar commercial publishing systems.

That portfolio has helped us become the number one consumer IT company in the world; the number one small- and medium-business technology company in the world; and the number one or two enterprise IT technology company in the world—depending on how you count. And so, when you add all that up together, we believe it is factually accurate to say that we are the leading technology company in the world.

For a company that does 60 percent of its business outside the United States, much of it here in Europe—we believe it is an advantage for our partners and for our customers that we have capabilities in 160 countries, that we do business in 43 currencies and 15 languages around the world. Just as an example of what that means: the new HP powers more than 100 stock and commodity exchanges, including 14 of the world's largest. We support 95 percent of the world's securities transactions. We help process two out of every three credit card transactions worldwide and three out of every four electronic funds transfers. We handle 80 percent of the mobile billing and customer care traffic in Europe and Africa. We help control 65 percent of the world's energy infrastructure. And in fact, today, more than one billion people around the world use HP technology every day. If you made a country of all of our customers, it would be the third largest country on earth.

All of that is evidence to say that we as a company have to think both about our largest, most sophisticated enterprise customers, and also about our individual, one-at-a-time customers.

For our consumer customers, as our second principle, we're focused on providing what we would call simple, rewarding experiences—technology and solutions that are simple to own, simple to buy, simple to operate, and provide rewarding experiences that make consumers' lives more productive, more communicative, more fun, and more valuable. We build, we deliver, and we invest in the best return on information technology and simple and rewarding consumer experiences.

Our third principle is to deliver world-class cost structures and world-class capabilities. We believe we are the company that provides the best technology at the lowest cost with the best total customer experience.

And finally, we have a discipline that focuses our innovations, our people, our assets, and our R&D dollars on the places where we believe we can make a unique contribution and lead, and partner for the rest.

Now, despite the challenges of a very tough economy and the merger, we greatly accelerated our rate of innovation in 2002. In the last six months of 2002, we introduced more than one hundred new products and added 1,400 patents, bringing our patent portfolio to over 17,000 worldwide. This happens to be the fastest rate of innovation as measured by product introduction and patent generation in HP history.

We have increased our new patents by 350 percent in the last three years alone. This accelerated rate of innovation shows that in 2001, we ranked 15th in the world in terms of patents. In 2002 we moved up to 9th, and we are not done yet. These patents that I am talking about represent $4 billion in annual R&D investment, and we believe it is vitally important to maintain this level of R&D and a commitment to keep the wheels of innovation and invention in motion.

I mentioned that we focus on innovation where we can make a unique contribution and lead, and we will partner for the rest. Put another way, our partnerships are central to our strategy. They are not things we do off to the side—they are central to our strategy first because we believe they make the best use of our assets.

That's one of the reasons we come to this conference today as the number one partner for Microsoft, Brocade, Intel, Accenture, PeopleSoft, BEA, Oracle, Siebel, CGEY, and BearingPoint. But we also invest in our partnerships because we believe they give customers what customers want—flexibility, freedom, and the choices that you require. Our partnerships help us fulfill what we believe is a really important role for HP, and that is to galvanize all these partners on behalf of our customers.

So, having talked about what our strategic objectives are, I'd like to talk next about how we lower your acquisition costs, because a big piece of the return on information technology starts with what does it take to acquire technology?

We believe that open, standards-based modular building blocks are the surest way to lower acquisition costs. And that is why you have seen us—and will continue to see us—invest heavily to make sure that our product line is the most modular, the most standards-based in the industry, because we think modularity and openness gives you flexibility and choice.

You'll also see us stick to an engineering paradigm that bets on heterogeneity and a diverse technology environment. This bet on heterogeneity is a long-standing commitment of HP—it isn't something that we've just come up with recently to try and get you to buy proprietary technology. And this bet on heterogeneity is why you are going to see us continue to invest in being the leading platform provider for NT, for UNIX and Linux platforms. Because we think all three are critical in building out an IT infrastructure.

It's why you'll see us continue to extend our leadership in modular architectures like blades and extend our offering in storage with Enterprise Virtual Array. It's why you will see us lead in both .Net and J2EE, because we have heard from customers like you over and over again that both are important for your environment, and that you want and need to create an infrastructure that deals with both.

It's also why you're going to see us continue to invest very heavily in virtualization—virtualization in storage, virtualization in servers, virtualization across the entire data center, because virtualization is what ensures that you get maximum utility as well as flexibility and adaptability out of the resources, and the investments, and the systems that you have made, and will make.

Now, when we talk about return on information technology, we're not talking simply about the infrastructure, although we are clearly talking about that. We are also extending this thinking to our entire portfolio—to PCs, to handhelds, to wireless devices, to printing infrastructures as well, because we believe that your entire information technology infrastructure has to truly be adaptive.

We believe that you are focused increasingly on everything from the desktop to the print shop, from the data center to the copy center. When you think about technology, when you think about information, you are thinking about information across your entire enterprise in all of its forms, whether that is paper or digital, and you are thinking about how to mesh all those systems and all that information together into one seamless digital adaptive infrastructure. We also have a standards-based building block approach to systems design in engineering—again, in everything from computing to storage.

We're focused on providing the best price/performance curve—hi-tech, low cost.

We think that standards-based modular approaches win every time with flexibility and efficiency. And that is why, for example, at the high end of our server line, you'll see us moving both Himalaya and HP-UX to Itanium. We think our commitment to Itanium is smart, and both HP and Intel remain committed to continuing to develop the ecosystem so that we continue to accelerate the adoption of Itanium.

At the low end of our product line, we are already the leader in IA32-based servers. Our blade servers at the low end are great examples of leadership in modular architectures, and I'm just going to pause for a moment and talk about blades because I think they are a really interesting example of modularity. The real advantage to blades for customers is lower acquisition cost. In fact, we are the first vendor to ship 1,800 blades per month.

We also hold the number one position with 55 percent market share in the high end of storage—including 60 percent here in Western Europe. Many of you use our Enterprise Virtual Array product line. Analysts, just to give you a sense, are estimating that our modular storage solutions offer a 20 to 30 percent price/performance improvement over comparable monolithic systems—and that's 20 to 30 percent price/performance improvement in the 2003 timeframe.

Now, I also want to take a couple of minutes and talk about Linux. I know you've heard a lot about Linux from some other players, so let me just put some facts on the table.

HP ships more Linux servers than anyone else in the world. Our Linux business is now a $2 billion business annually inside HP. We partner with Oracle as well as SAP on Linux. And we think we have a lead in Linux for sure in the high-performance technical computing realm. Importantly, we have the most comprehensive set of service offerings in Linux, and frankly, we think it is the service offerings as well as our technology that set us apart when we are competing on Linux opportunities. We don't see a company like Dell for example, in the competition really at all because of the importance of the service and support offerings.

Now, a commitment to standards, which is what this company has been committed to for over two decades, also means that you have to participate in standards bodies. And so, we have been a leader in standards for many, many years, and have about 700 people who work in about 300 different standards organizations around the world, and we think we clearly have one of the largest and most effective standards programs in the industry. We are really focusing our standards efforts and the participation in these standards bodies in areas like improved compatibility and interoperability, because it is compatibility and interoperability that is critical to giving you the flexibility and adaptability and economic benefit that you're looking for.

So, I've talked a lot about lowering acquisition costs and that's really important, but it is not enough. In addition, if we are going to deliver the best return on information technology, we also have to lower your operating costs. In fact, we know that a great deal of the cost envelope in today's IT shop—whether it is a large business or a medium or small business—the cost is actually in the management and operations of the entire infrastructure. Our surveys tell us that up to 70 percent of the total IT budget is spent on management and operations of the infrastructure, and a lot of the IT investments that have already been made are underutilized.

We've heard from many of our customers that they are really focused on things like storage utilization improvement projects. What a lot of our customers tell us is that they are trying to take the aggregate utilization of all of their storage assets from 20 percent today, up to 80 percent—20 to 80. But on the other hand, they tell us that once they get their utilization rates up to 80 percent, they believe their storage requirements will grow at 20 to 30 percent going forward. And that makes sense to us, because as you perhaps know, there will be more data created in the next three years—data that has to be stored and managed and used and mined for insight—than has been created in the history of mankind up to this point.

Now, in the area of improving manageability, we are also betting that next-generation infrastructure management will become one of the most important criteria that you use when you select IT systems and IT partners. We are the leader in manageability in OpenView and we intend to expand that lead.

In using OpenView's services management capability, our customers have been able to—I am going to throw a lot of numbers at you but gives you a sense of how real this is—customers have been able to increase their IT staff productivity by 53 percent; increase their IT staff efficiency by more than 26 percent; reduce their downtime by over 31 percent; and realize an average savings for every 100 users of $250,000.

Manageability, we think, is not limited to servers and storage. We are also making significant investments in the manageability of everything from PCs to printing, because again, we think you're focused on the desktop and the copy center.

Now, in the area of better utilization, we are investing in a range of virtualization products at the server, storage and data center level. And virtualization—what we mean by that is both flexibility as well as capacity utilization.

In the server environment, we have the leading virtualization capability from the low end to the high end, from industry standard servers, to our OpenView software, to HP-UX's award-winning partitioning continuum. In the storage environment, we have everything from the appliance-based approach, to storage virtualization that customers can use to get started very quickly, to very ultra-scalable, feature-rich environments and implementations. We've achieved network and data center-level virtualization through our utility data center—what we call our UDC offering, which is the leading data center-level virtualization set of capabilities. This isn't us talking by the way, this is others talking. Gartner, for example, has estimated that we are 18 months ahead—at least—of both IBM's autonomic computing and Sun's N1.

We are using the UDC in our own business—we run our development environment in HP Labs on the UDC, and just to give you some real numbers of what we and our customers have been able to do: deployment costs using UDC have been reduced anywhere from 30 to 80 percent; capacity planning costs reduced anywhere from 5 to 40 percent; operational costs—things like system repair and security configuration—reduced by 80 to 100 percent, and 20 to 30 percent respectively; usage metering costs from 5 to 30 percent; costs associated with upgrading and migrating systems from 20 to 40 percent. Now, I give you all those numbers to indicate that these are real, substantial savings that are realizable today from the application of this kind of technology.

All this that I've talked about—return on information technology, lower acquisition costs, lower operating costs, whether that comes from the way we design our products, to the way we manage our environments, to our professional services capabilities—fundamentally, all of this is focused on making sure that your investments in IT flex and adapt to the requirements of your business, because fundamentally, this next era of technology is not about the hottest box or the killer app. It is about creating a technology foundation that is adaptive, productive and evolves with your business.

So, we are investing in the core capabilities of adaptability into every single one of our infrastructure products—servers, storage, software, networking, management, security. These investments include, among others, dynamic resource optimization, so that you can flexibly share and assign and deploy existing or new technology resources, depending on what your operational requirements are. It includes automated and intelligent management, so that you can control and sense and initiate responses to changing demands. And these responses can be based upon established service level agreements or rules.

Our investments include management capabilities and features that are built into all levels of the infrastructure—whether that's at the element level, the system level, application services, or business practice monitoring continuous and secure operations, so that you can maintain and monitor the required availability and security of all levels of the infrastructure. And that means self-healing technologies, it means fault-tolerant systems, it means high availability architectures that aren't just some future things that we're investing in. These are things we are delivering today.

What you see is the set of capabilities in the products and services that have already been engineered with these principles that I'm talking about in keeping with the theme of ENSA@WORK. You are seeing things that work today—standards-based, modular, with a focus on manageability, and a focus on virtualization.

Now, you don't have to just take my word for it. Ask BMW.

BMW is a great example. They were expecting that their storage capacity would grow to 250 terabytes by the year 2006. And so, BMW decided to use infrastructure instead of operating it, and they pioneered with HP to create one of the first storage-on-demand solutions, and by doing so, they reduced by 20 percent the total costs of their storage capacity.

Or ask the Williams Formula One Racing Team.

At the Williams Formula One factory, HP systems run the latest computer-aided engineering software for race car chassis, suspension, and engine design. And not only does HP technology help build the car—HP technology helps make adjustments to the car while it is racing. We are really delighted that Sir Frank Williams himself is here this week to show you the new 2003 HP Racing livery before the 2003 car is officially unveiled. And I actually think I saw driver Ralf Schumacher driving around here a little while ago. That's a hint.

Or ask Schering of Germany.

Schering needed to double its storage capacity every year, which meant going from 80 to 300 servers in three years and adding 15 more IT people to manage all that infrastructure. But thanks to innovative consolidation solutions with HP, Schering consolidated their servers to eight, installed XP storage systems, and kept their costs down dramatically.

Or ask Carrefour of France.

Carrefour easily migrated from EMC Symmetrix to HP storage achieving 25 percent performance and availability gain, and they reduced their back-up by three.

Or ask one of our newest customers, Telenor of Norway, who consolidated UNIX and Intel servers and storage with HP.

We salute all of our customers who are proving that even in this tough market, when you combine HP technology and HP people with your vision and your people, everything is possible.

Today, I'm proud to make three announcements that will take our products and services to the next level. First, we are unveiling our new four-way ProLiant p-Class Blade Servers. In doing so, we become the very first vendor to introduce a four-processor blade server and the industry's only three-tiered blade architecture solution for the data center.

We are also announcing that HP's two-way and four-way blades now offer SAN connectivity for more effective utilization of storage resources and reduced management costs. We think this will help customers realize the benefits of large-scale storage consolidation much more quickly.

I am also proud to announce today that we are introducing our newest and most powerful generation of AlphaServer systems to date. Based on the new EV7 Alpha processor, these servers represent the most technically advanced Marvel family yet, and we believe this new family will help drive standards at the high end, and position Marvel as the natural stepping stone to Itanium. Marvel also demonstrates that Itanium is ready for our customers in 2004—2005 with OpenVMS, Tru64, and application support.

Of course, supporting these new servers is the new HP Alpha RetainTrust program, which underscores HP's commitment to provide long-term operational continuity for all our customers. The vast majority of HP's Alpha Server independent software vendors have committed to support Tru64 UNIX and OpenVMS environments for the long term.

And finally, I am also pleased to announce that today we are doing something more challenging than has ever been done at a conference like this one. Today, we are unveiling a massive new 1,000-port heterogeneous storage area network with more than 30 switches, more than 20 different storage arrays and more than 50 servers running on 10 different operating systems which enables advanced management and functionality beyond what any company actually has to deal with today.

Now why are we doing this?

We're doing it because we wanted to tackle some of the most difficult technical challenges to demonstrate to you, our customers, and to the world that heterogeneous storage is controllable, resilient, and extensible with ENSAextended. This demonstration was developed not only with our technology but also with some of our strategic partners, such as Brocade. And I am so pleased that Greg Reyes, the Chairman and CEO of Brocade, has agreed to be here to go into more detail on this later today.

With this showcase, HP becomes the first vendor to demonstrate application integration with Microsoft Windows Server 2003 Volume Shadow Copy Service in a NAS/SAN fusion environment. And so, highlighting our close partnership with Microsoft, I am also extremely pleased that Bob Muglia, the Senior Vice President of Microsoft's Enterprise Storage Division, has accepted our invitation to speak at this conference and he will be with you tomorrow.

We at HP are very excited about where we are today. Fundamentally, we think we have a very different set of investments and approaches to the marketplace than our competitors, and we believe that freedom of choice, adaptability, and the best return on information technology is what you want and where we have an advantage.

Tomorrow, Peter Blackmore will be here to discuss in more detail how the HP Adaptive Infrastructure tightens the links between technology and business objectives so that you as customers can anticipate and rapidly respond to new market requirements.

And next, we're going to hear from Howard Elias, who will talk to you about ENSA, and how our adaptive infrastructure puts you in control of your storage environment.

And as you listen to them and participate throughout the rest of this conference, remember we are putting the "utility" in utility computing every single day, in everything we do. We have been preparing for this future for a very long time, and I think among many things that have changed in the last several years, the most important thing is this: customers now realize that it is not the glamour of technology that is most important; what is most important is the return on technology.

I don't think the path to the future requires magical binoculars or time machines or anything else you may have seen on television lately. We actually are not at a crossroads—we are continuing on a path that we have been on for some time.

And that path to the future simply requires taking one step at a time.

Again, for us, we believe it is all around helping lower your acquisition costs, helping lower your operating costs, helping improve your business agility and your business productivity, and making sure that you have the freedom and the opportunity to incorporate the best technologies, the best partners, and the best solutions into your infrastructure over time.

We want to be the company that gives you the best technology, at the lowest cost with the best total customer experience. That is the strategy that HP is focused on. That is the value we are delivering today in the marketplace.

We hope to be, we aim to be, we are investing to be, the company that helps you get more out your IT investments.

Thank you very much for your attendance and enjoy the conference.

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