HP 2007 Annual Report Download - page 66

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Enterprise Storage and Servers
For the fiscal years ended October 31
2007 2006 2005
In millions
Net revenue........................................................................................................................... $18,769 $17,308 $16,717
Earnings from operations...................................................................................................... $1,980 $1,446 $800
Earnings from operations as a % of net revenue................................................................... 10.5% 8.4% 4.8%
The components of weighted-average net revenue growth as compared to prior-year periods by business unit were as
follows for the following fiscal years ended October 31:
2007 2006
Percentage points
Industry standard servers ...................................................................................................... 8.0 3.5
Storage.................................................................................................................................. 0.9 0.9
Business critical systems ...................................................................................................... (0.5) (0.9)
Total ESS.............................................................................................................................. 8.4 3.5
On a constant currency basis, ESS net revenue increased 5% in fiscal 2007 from fiscal 2006. The favorable currency
impact in fiscal 2007 was due primarily to the movement of the dollar against the euro. Industry standard servers revenue
grew 14% in fiscal 2007 compared to fiscal 2006 as a result of strong growth in blade revenue and units, as well as increased
option attach rates in the ProLiant server line. Storage net revenue increased 4% in fiscal 2007 compared to fiscal 2006, with
the increase driven primarily by mid-range EVA products and commercial products within the storage area networks
offerings, as well as improved revenue growth in storage software. This increase was partially moderated by the revenue
declines in our tape business and high-end arrays. Business critical systems net revenue decreased 3% in fiscal 2007
compared to fiscal 2006. The decrease was due primarily to revenue declines in the PA-RISC product line and the planned
phase out of our Alpha server product line. The declines were partially offset by strong net revenue growth in our Integrity
servers, which represented 64% of the business critical systems revenue mix in fiscal 2007, up from 37% in fiscal 2006. We
expect revenue mix from Integrity servers to continue to grow as customers migrate from PA-RISC and Alpha products.
In fiscal 2007, ESS earnings from operations as a percentage of net revenue increased by 2.1 percentage points compared
to fiscal 2006, due primarily to a decrease in operating expenses as a percentage of net revenue. Gross margin remained
stable in fiscal 2007 compared to fiscal 2006 due primarily to improved cost management. The improved cost management
was offset by an ongoing mix shift to lower-margin integrity products within business critical systems and a continued mix
shift towards industry standard servers. The decrease in operating expense as a percentage of net revenue in fiscal 2007 was
due primarily to cost structure improvements.
On a constant currency basis, ESS net revenue increased 5% in fiscal 2006 from fiscal 2005. The unfavorable currency
impact for fiscal 2006 was due primarily to the movement of the dollar against the euro and the yen. The net revenue growth
in industry standard servers of 6% in fiscal 2006 compared to fiscal 2005 was driven by strong unit growth and the growth in
blade revenue as well as increased option attach rates in the ProLiant server line. Storage net revenue increased 4% in fiscal
2006 compared to fiscal 2005 due to continued strong performance in mid-range EVA products within
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