HP 2008 Annual Report Download - page 58

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
HPFS gross margin declined slightly in fiscal 2008 due primarily to higher bad debt expenses, the
effect of which was partially offset by increased margins on end-of-lease activity.
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.
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.
During fiscal 2007, PSG contributed unfavorably to our total company’s weighted-average change
in gross margin as a result of higher growth than the other segments. However, PSG gross margin
increased primarily as a result of component cost declines and improvements in supply chain costs per
unit, which were partially offset by ASP declines.
During fiscal 2007, IPG gross margin decreased due primarily to unfavorable hardware margins,
increased costs associated with new product introductions and a change in product mix.
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.
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 used equipment sales.
Operating Expenses
Research and Development
Total research and development (‘‘R&D’’) decreased in fiscal 2008 as compared to fiscal 2007, due
primarily to effective cost controls, the effect of which was partially offset by the unfavorable currency
impacts related to the movement of the dollar against the euro. Each of our major segments
experienced a year-over-year decrease in R&D expense as a percentage of net revenue in fiscal 2008.
Total R&D expense increased in fiscal 2007 due primarily to additional R&D expense as a result
of the Mercury acquisition in the first quarter of fiscal 2007. As a percentage of net revenue, each of
our major segments experienced a year-over-year decrease in R&D expense in fiscal 2007.
Selling, General and Administrative
Total selling, general and administrative (‘‘SG&A’’) expense increased in fiscal 2008 due primarily
to higher field selling costs as a result of our investments in sales resources, unfavorable currency
impacts related to the movement of the dollar against the euro, and additional expenses related to the
EDS acquisition. Each of our major segments experienced a year-over-year decrease in SG&A expense
as a percentage of net revenue during fiscal 2008.
Total SG&A expense increased during fiscal 2007 due primarily to additional expense as a result of
the acquisition of Mercury in the first quarter of fiscal 2007, unfavorable currency impacts related to
the movement of the dollar against the euro and additional investments in our sales forces. The ESS,
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