HP 2005 Annual Report Download - page 57

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
PSG net revenue increased 9% in fiscal 2005 from fiscal 2004. On a constant currency basis, PSG’s
net revenue increased 7% in fiscal 2005. The favorable currency impact was due primarily to the
weakening of the dollar against the euro and the yen for the first three quarters of fiscal 2005 and to a
lesser extent in the fourth fiscal quarter as the dollar strengthened against the euro and the yen during
that period. For fiscal 2005, net revenue increased across all regions as a result of a 13% volume
increase, particularly in consumer and commercial clients. Double digit unit growth in Asia Pacific and
EMEA drove the revenue increase. For fiscal 2005, net revenue increases in notebook and desktop PCs
were 16% and 2%, respectively, while consumer clients and commercial clients increased 10% and 7%,
respectively, from the prior year. The revenue increases in consumer and commercial clients were offset
partially by a decline in handhelds revenue. The performance of digital entertainment products, such as
the Apple iPod from HP, added to the growth in net revenue for the fiscal year. In the fourth quarter
of fiscal 2005, we discontinued reselling the Apple iPod, which will have an impact on revenue growth
rates of digital entertainment products in future periods.
The PSG volume increase was moderated by a decline of 4% in ASPs, with consumer clients and
commercial clients declining 8% and 5%, respectively, for fiscal 2005. The declines in notebook and
desktop ASPs were offset slightly by the digital entertainment mix and an increase in handheld and
workstation ASPs. The decline in ASPs was due mainly to changes in the notebook product line-up that
leveraged declines in component costs and competitive pressures in consumer PCs.
PSG earnings from operations as a percentage of net revenue increased 1.7 percentage points for
fiscal 2005 from fiscal 2004. The increase was the result of gross margin improvement combined with
flat operating expenses as a percentage of revenue. The gross margin improvement was due primarily
to component cost declines, a product mix shift toward higher margin notebook PCs, reduced warranty
costs and favorable currency impacts. Operating expense as a percentage of revenue was flat, as the
impact of the employee bonuses recorded in the second half of the year was offset by continued cost
control measures.
PSG net revenue increased 16% in fiscal 2004 from fiscal 2003. On a constant currency basis, the
increase was 10%. The favorable currency impact was due primarily to the weakening of the dollar
against the euro. In fiscal 2004, the net revenue increase across all businesses was the result primarily
of an overall 17% volume increase. Volume increases were the result of strong market growth in both
consumer and commercial clients, our re-entry into the China market and the introduction of new
products such as the media center PCs, widescreen notebook PCs, converged devices and a broader
product line offering in pen-based iPAQs.
In fiscal 2004, consumer and commercial desktop PC volumes increased 15% and 11%,
respectively, while notebook PC volume increased 22%. The volume increase was moderated by a slight
decline in ASPs. The ASP decline was due to a mix shift toward lower-end personal workstations and
iPAQ handhelds, as well as component cost declines, and was offset partially by a strong monitor attach
rate in business PCs. Year-over-year net revenue increases in consumer and commercial desktop PCs
were 15% and 12%, respectively, while notebook PC net revenue increased 22%.
PSG earnings from operations as a percent of net revenue were 0.8% in fiscal 2004 compared to
0.1% in fiscal 2003. The increase was the result of volume increases and a decline in operating
expenses of 1.3 percentage points, which was offset by a decline in gross margin of 0.5 percentage
points. The operating expense decline was due to headcount reductions, tightening of administrative
costs, lower research and development spending and scale efficiencies in selling and marketing costs.
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