HP 2007 Annual Report Download - page 67

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
the storage area networks offerings while the tape business decline moderated the overall storage growth. Business critical
systems net revenue decreased 4% in fiscal 2006 compared to fiscal 2005. This decrease was due primarily to revenue
declines in the PA-RISC product line and to the planned phase out of our Alpha server product line. The declines were
partially offset by net revenue growth in our Integrity servers which posted strong net revenue growth, reaching 37% of the
business critical systems revenue mix in fiscal 2006 up from 20% in the prior fiscal year. Revenue mix from Integrity servers
continued to grow as customers migrated from PA-RISC and Alpha products. Integrity server revenue in fiscal 2006 also
included revenue from Montecito-based Integrity servers that were first shipped in the fourth quarter of fiscal 2006. NonStop
server net revenue decreased 2% in fiscal 2006 from the prior year due primarily to the revenue decrease on the discontinued
product line, which was partially offset by NonStop Integrity product revenue growth.
In fiscal 2006, ESS earnings from operations as a percentage of net revenue increased by 3.6 percentage points compared
to fiscal 2005, due primarily to an increase in gross margin combined with a decrease in operating expenses as a percentage
of net revenue. The improvement in gross margin was due primarily to a favorable unit mix, improved discount management,
and lower component costs. The increase was partially offset by a continued mix shift towards industry standard servers
within the segment and the ongoing mix shift to lower-margin Integrity products within business critical systems. The
decrease in operating expense as a percentage of net revenue in fiscal 2006 was due primarily to efficient expense
management.
HP Services
For the fiscal years ended October 31
2007 2006 2005
In millions
Net revenue........................................................................................................................... $16,646 $15,617 $15,536
Earnings from operations...................................................................................................... $1,829 $1,507 $1,151
Earnings from operations as a % of net revenue................................................................... 11.0% 9.6% 7.4%
The components of weighted-average net revenue growth as compared to prior-year periods by business unit were as
follows for the following fiscal years ended October 31:
2007 2006
Percentage points
Technology services .............................................................................................................2.1 (1.6)
Outsourcing services ‘(1) ........................................................................................................ 2.8 1.8
Consulting and integration.................................................................................................... 1.7 0.3
Total HPS ............................................................................................................................. 6.6 0.5
‘(1) Reflects the name change from managed services to outsourcing services effective in fiscal 2007.
On a constant currency basis, HPS net revenue increased 3% in fiscal 2007 from fiscal 2006. In fiscal 2007, the
favorable currency impact was due primarily to the movement of the dollar against the euro. Net revenue in technology
services increased 4% in fiscal 2007 from the prior year due primarily to favorable currency impacts, growth in the IT
solution support services and extended warranty revenue, the impact of which was partially offset by competitive pricing
pressures and revenue erosion from installed base contracts. Net revenue in outsourcing services increased 10% in fiscal 2007
from the prior year. The increase was driven mainly by favorable currency impacts, existing account growth and
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