HP 2008 Annual Report Download - page 62

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
performance in mid-range EVA, entry MSA, tape media and storage software. Industry standard servers
net revenue grew 2% in fiscal 2008 compared to fiscal 2007 as a result of growth in blade revenue and
unit volumes. Revenue growth in the industry standard servers business was partially offset by the
decline in average unit prices driven by market movement to low-end product lines and component cost
declines. Business critical systems net revenue growth was flat in fiscal 2008 compared to fiscal 2007.
Integrity servers net revenue grew 22% in fiscal 2008 and represents 79% of the business critical
systems revenue mix, up from 64% in fiscal 2007. The increase was offset by revenue declines in the
PA-RISC product line and the planned phase-out of our Alpha Server product line. The contribution of
Integrity server revenue to the business critical systems revenue mix is currently within the range
expected in future periods. Integrity servers revenue in fiscal 2008 also included revenue from
Montvale-based Integrity servers.
In fiscal 2008, ESS earnings from operations as a percentage of net revenue increased by
1.8 percentage points compared to fiscal 2007, due primarily to a decrease in operating expenses as a
percentage of net revenue. Gross margin increased slightly in fiscal 2008 compared to fiscal 2007 due
primarily to cost management and improved attach rates in industry standard servers, the effect of
which was mostly offset by competitive pricing in storage and industry standard servers and a mix shift
to entry level integrity servers. The decrease in operating expense as a percentage of net revenue in
fiscal 2008 was due primarily to continued cost structure improvements.
ESS net revenue increased 8.3% (4.8% when adjusted for currency) in fiscal 2007 from fiscal 2006.
Industry standard servers revenue grew 14% in fiscal 2007 compared to fiscal 2006 as a result of strong
growth in blade revenue and units, as well as increased option attach rates in the ProLiant server line.
Storage net revenue increased 4% in fiscal 2007 compared to fiscal 2006, with the increase driven
primarily by mid-range EVA products and commercial products within the storage area networks
offerings, as well as improved revenue growth in storage software. This increase was partially
moderated by the revenue declines in our tape business and high-end arrays. Business critical systems
net revenue decreased 3% in fiscal 2007 compared to fiscal 2006. The decrease was due primarily to
revenue declines in the PA-RISC product line and the planned phase out of our Alpha server product
line. The declines were partially offset by strong net revenue growth in our Integrity servers, which
represented 64% of the business critical systems revenue mix in fiscal 2007, up from 37% in fiscal 2006.
We expect revenue mix from Integrity servers to continue to grow as customers migrate from PA-RISC
and Alpha products.
In fiscal 2007, ESS earnings from operations as a percentage of net revenue increased by
2.5 percentage points compared to fiscal 2006, due primarily to a decrease in operating expenses as a
percentage of net revenue. Gross margin remained stable in fiscal 2007 compared to fiscal 2006 due
primarily to improved cost management. The improved cost management 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. The decrease in operating expense as a percentage of net revenue in
fiscal 2007 was due primarily to cost structure improvements.
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