HP 2007 Annual Report Download - page 61

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
commercial clients, respectively. IPG net revenue growth in fiscal 2006 was due mainly to increased shipment volumes of
printer supplies resulting from the continued expansion of printer hardware placements and the strong performance of
color-related products. ESS net revenue growth was the result primarily of strong unit growth in our industry standard servers
business, blade revenue growth, increased option attach rates in our ProLiant server line, continued strong performance in
mid-range EVA products within our Storage business and revenue increases from our Integrity servers. The ESS growth was
moderated by revenue declines in our tape business and PA-RISC and Alpha Server product lines. The net revenue growth in
HP Software for fiscal 2006 was due primarily to growth in our OpenView business as a result of the Peregrine acquisition
and an increase in support and service contracts. HPS net revenue increased in fiscal 2006 due primarily to revenue increases
in management services driven by new business and existing account growth, which were offset by declines in the
technology services business resulting from competitive pricing pressures and changes in the mix of platforms being
serviced. The HPFS net revenue decline in fiscal 2006 was due primarily to lower used equipment sales.
Stock-Based Compensation Expense
See Note 2 to the Consolidated Financial Statements in Item 8, which is incorporated herein by reference.
Gross Margin
The weighted-average components of the change in gross margin as compared to prior-year periods were as follows for
the following fiscal years ended October 31:
2007 2006
Percentage points
HP Software.......................................................................................................................................... 0.6 0.2
HP Services........................................................................................................................................... 0.1 0.2
Enterprise Storage and Servers............................................................................................................. (0.1) 0.4
HP Financial Services........................................................................................................................... (0.1) (0.1)
Personal Systems Group....................................................................................................................... (0.2) 0.1
Imaging and Printing Group ................................................................................................................. (0.2) 0.2
Corporate Investments/Other ................................................................................................................ — (0.1)
Total HP................................................................................................................................................ 0.1 0.9
Total company gross margin increased slightly in fiscal 2007 from fiscal 2006. The improvement in HP Software gross
margin in fiscal 2007 was due primarily to a favorable change in revenue mix driven by the inclusion of revenue from
Mercury licenses and support, which typically have a higher gross margin than the other offerings within the segment. HPS
gross margin increased during fiscal 2007 from fiscal 2006 due primarily to continued focus on cost structure improvements
from delivery efficiencies and cost controls. This gross margin increase was partially offset by the impact from the continued
competitive pricing environment. During fiscal 2007, ESS contributed unfavorably to our total company’ s weighted-average
change in gross margin while the ESS gross margin remained stable. This stability was due primarily to improved cost
management, which was offset by an ongoing mix shift to lower-margin Integrity products within business critical systems
and a continued mix shift towards industry standard servers. HPFS gross margin decline during fiscal 2007 was caused
primarily by increased bad debt expenses and lower bad debt recoveries, as well as lower margins on leases and
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