HP 2006 Annual Report Download - page 57

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
In fiscal 2006, the 6% growth in managed services net revenue from the prior year was driven
mainly by new business and existing account growth, with continued focus on making more strategic
portfolio decisions to improve profitability.
Net revenue in consulting and integration increased 2% in fiscal 2006 from the prior year due
primarily to improved performance in Asia Pacific and Europe, Middle East and Africa (‘‘EMEA’’).
HPS earnings from operations as a percentage of net revenue in fiscal 2006 increased by
2.2 percentage points. The operating margin increase was the result of a combination of an increase in
gross margin and a decrease in operating expenses as a percentage of net revenue. The gross margin
increase in HPS was due primarily to the continued focus on cost structure improvement from delivery
efficiencies and cost controls, which were partially offset by the continued competitive environment in
solutions and services business and higher fiscal 2006 bonus accruals. In fiscal year 2006, improved
efficiencies in our operating expense structure contributed to the decline in operating expenses as a
percentage of net revenue compared to fiscal year 2005 despite the impact of higher bonus accruals in
fiscal 2006. Technology services operating margin in fiscal 2006 continued to benefit from improved
delivery efficiencies and cost controls as well as portfolio decisions made to improve profitability, all of
which were offset in part by the impact of the ongoing portfolio mix shift from higher margin
proprietary support to lower margin areas such as multi-vendor integrated support and solution
services. Managed services operating margin increased in fiscal 2006 due to delivery efficiencies,
reduced operating expenses and more strategic portfolio decisions made to improve profitability.
Consulting and integration operating margin improved in fiscal 2006 due to more efficient utilization of
our consultants and reduced operating expenses.
HPS net revenue increased 12% in fiscal 2005 from fiscal 2004. On a constant currency basis, HPS
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. Excluding acquisitions made since the first quarter of fiscal 2004, HPS
net revenue growth for fiscal 2005 was 8%. Net revenue in technology services increased 9% in fiscal
2005. Excluding acquisitions made since the first quarter of fiscal 2004, technology services net revenue
growth for fiscal 2005 was 4%.
In fiscal 2005, managed services net revenue increased 24% from the prior-year as a result of an
increase in new contracts, as well as additional revenue from our installed base of large customer
contracts, the full year contribution of the Triaton acquisition (which we completed in April 2004) and
favorable currency impacts. Excluding Triaton, managed services net revenue growth was 22% for fiscal
2005 compared to the prior fiscal year.
Net revenue in consulting and integration increased 13% in fiscal 2005 from the prior year due to
strong order growth in EMEA and Asia Pacific, as well as the favorable impact of currency.
Additionally, the Triaton acquisition added to the revenue growth.
HPS earnings from operations as a percentage of net revenue in fiscal 2005 declined
1.9 percentage points. The operating margin decline was the result of the combination of a decline in
gross margin offset partially by a decrease in operating expense as a percentage of net revenue. The
gross margin decline in HPS reflected primarily competitive pricing pressures and portfolio mix shifts
within technology services, as well as the cost of higher employee bonuses recorded in the second half
of the fiscal year, and the absorption of workforce reduction costs in the first half of the year that
amounted to $89 million. The technology services portfolio continues to evolve from higher margin
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