HP 2005 Annual Report Download - page 60

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
losses and a reduction of reserves resulting from a stronger portfolio risk profile also contributed to the
decrease in bad debt expense.
The slight increase in operating expense as a percentage of net revenue was the result mainly of a
$62 million net reduction in revenue resulting from the reclassification of certain leases from operating
leases to capital leases. This reclassification was the result of a review of the leasing portfolio for
appropriate lease classification that HP completed in the fourth quarter.
HPFS net revenue decreased 1% in fiscal 2004 compared to fiscal 2003. The decrease resulted
primarily from lower average levels of revenue-generating assets and lower used equipment sales. The
decrease in average assets was due to portfolio amortization and asset sales exceeding new lease
originations throughout most of the fiscal year. Lower interest rates also contributed to the net revenue
decrease.
In fiscal 2004, the 2.5 percentage point increase in earnings from operations as a percentage of net
revenue consisted of a 1.3 percentage point increase in gross margin and a 1.2 percentage point
decrease in operating expense. The gross margin improvement was the result of higher portfolio
profitability resulting primarily from end of lease transactions and, to a lesser extent, lower interest
costs as a percentage of net revenue. The gross margin increase was offset in part by higher reserves
related to certain aged receivables, particularly in EMEA, in the fourth quarter of fiscal 2004. Cost
savings achieved through continued cost controls, offset in part by an unfavorable currency impact,
caused the decline in operating expenses as a percentage of net revenue.
Financing Originations
For the fiscal years ended October 31
2005 2004 2003
In millions
Total financing originations .............................. $4,136 $3,852 $3,784
New financing originations, which include intercompany activity, increased 7% in fiscal 2005 from
fiscal 2004. The increase resulted from improved integration and engagement with HP’s sales and
marketing efforts and a favorable currency impact. Originations increased 2% in fiscal 2004 from fiscal
2003 due to higher levels of financing in Asia Pacific and a favorable currency impact, which were
offset in part by a lower penetration rate of HP sales.
Portfolio Assets and Ratios
HPFS maintains a strategy to generate a competitive return on equity by effectively leveraging its
portfolio against the risks associated with interest rates and credit. The HPFS business model is asset-
intensive and uses certain internal metrics to measure its performance against other financial services
companies, including a segment balance sheet that is derived from HP’s internal management reporting
system. The accounting policies used to derive these amounts are substantially the same as those used
by HP on a consolidated basis. However, certain intercompany loans and accounts that are reflected in
the segment balances are eliminated in HP’s Consolidated Financial Statements.
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