HP 2007 Annual Report Download - page 62

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
used equipment sales. During fiscal 2007, PSG contributed unfavorably to our total company’ s weighted-average change in
gross margin as a result of higher growth than the other segments. However, PSG gross margin increased primarily as a result
of component cost declines and improvements in supply chain costs per unit, which were partially offset by ASP declines.
During fiscal 2007, IPG gross margin decreased due primarily to unfavorable hardware margins, increased costs associated
with new product introductions and a change in product mix.
Total company gross margin increased in fiscal 2006 as compared to fiscal 2005. The improvement in ESS gross margin
in fiscal 2006 was due primarily to a favorable unit mix, improved discount management, and lower component costs. HPS
gross margin increase was driven mainly by the continued focus on cost structure improvement from delivery efficiencies
and cost controls, the impact of which was partially offset by the continued competitive environment in the solutions and
services business and higher fiscal 2006 bonus accruals. For IPG, gross margin increased in fiscal 2006 due primarily to
improved supplies margins and a favorable portfolio mix shift from hardware to supplies, which were partially offset by
unfavorable consumer hardware margins. The improvement in HP Software gross margin in fiscal 2006 was due primarily to
an increase in revenue and more effective management of the support and services costs for OpenView and OpenCall. The
gross margin improvement in PSG resulted primarily from reduced warranty expense and supply chain costs as a percentage
of revenue and component cost declines. HPFS gross margin was impacted unfavorably in fiscal 2006 due primarily to
competitor pricing pressures, a higher mix of lower margin operating lease assets and lower recoveries for bad debts, which
were partially offset by lower credit losses in fiscal 2006.
Operating Expenses
Research and Development
Total research and development (“R&D”) expense increased in fiscal 2007 due primarily to additional R&D expense as a
result of the Mercury acquisition in the first quarter of fiscal 2007. As a percentage of net revenue, each of our major
segments experienced a year-over-year decrease in R&D expense in fiscal 2007.
Total R&D expense increased in fiscal 2006 due primarily to higher bonus accruals and stock-based compensation
expense, the impact of which was partially offset by expense controls and cost savings from restructuring actions. As a
percentage of net revenue, each of our major segments experienced a year-over-year decrease in R&D expense in fiscal 2006.
Selling, General and Administrative
Total SG&A expense increased during fiscal 2007 due primarily to additional expense as a result of the acquisition of
Mercury in the first quarter of fiscal 2007, unfavorable currency impacts related to the movement of the dollar against the
euro and additional investments in our sales forces. As a percentage of net revenue, the ESS, HPS, PSG and IPG segments
experienced a year-over-year decrease in SG&A expense during fiscal 2007, while HP Software experienced a year-over-
year increase in SG&A expense.
Total SG&A expense increased slightly during fiscal 2006 as higher bonus accruals and stock-based compensation
expenses as well as increased marketing spending were offset in part by savings from expense controls and restructuring
actions and favorable currency impacts due to movement of the
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