HP 2006 Annual Report Download - page 55

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
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 will
continue 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 which 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
resulted primarily from increased revenue and decreased operating expenses in fiscal 2006. The
decreased operating expenses reflected the benefits of our expense controls, which were partially offset
by higher bonus accruals in fiscal 2006.
ESS net revenue increased 11% in fiscal 2005 from fiscal 2004. On a constant currency basis, ESS
net revenue increased 9% in fiscal 2005 from fiscal 2004. 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.
In fiscal 2005, ESS net revenue growth was due primarily to volume increases and improved
average selling prices ASPs in industry standard servers, as a result of both unit growth and increased
option attach rates in the ProLiant server line. The fiscal 2005 net revenue growth rate in industry
standard servers benefited from certain internal execution problems that unfavorably impacted the
business in the second half of fiscal 2004.
Storage net revenue increased 5% in fiscal 2005 compared to fiscal 2004 due to new product
introductions that contributed to the strong performance of mid-range EVA products and improved
storage sales specialist coverage. In fiscal 2005, storage area networks (‘‘SANs’’) net revenue improved
while revenue growth in the tape and supplies businesses remained flat. Fiscal 2005 storage net revenue
growth rates, in comparison with growth rates in the prior year, benefited from the business challenges
that unfavorably impacted the storage business in the second half of the prior year.
Business critical systems net revenue increased 1% in fiscal 2005 compared to fiscal 2004. Integrity
server net revenue growth for the period was offset partially by revenue decline in the RISC product
line and the planned revenue decline in the Alpha Server product line. The Integrity server product
line posted net revenue growth for the year, representing 20% of the total business critical systems
revenue mix, up from 11% in the prior year. In fiscal 2005, HP-UX server net revenue increased 5%
from the prior year, and NonStop server net revenue declined due to a mature installed base.
In fiscal 2005, ESS earnings from operations as a percentage of net revenue increased by
3.8 percentage points compared to fiscal 2004, due primarily to a combination of a decrease in
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