HP 2007 Annual Report Download - page 73

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
a decrease in operating expense as a percentage of net revenue. The gross margin decrease was driven primarily by increased
bad debt expenses and lower bad debt recoveries, as well as lower margins on leases and used equipment sales. The decline
in operating expenses as a percentage of net revenue was due to continued cost controls.
HPFS net revenue decreased by 1% in fiscal 2006 from fiscal 2005. The net revenue decrease was due primarily to lower
used equipment sales and other end-of-lease revenue, which were largely offset by a higher mix of leases classified as
operating leases.
In fiscal 2006, the 3.0 percentage point decrease in earnings from operations as a percentage of net revenue consisted of
a decrease in gross margin, which was partially offset by a decrease in operating expense as a percentage of net revenue. The
gross margin decline was due primarily to competitor pricing pressures, a higher mix of lower margin operating lease assets
and lower recoveries for bad debts, the impact of which was partially offset by lower credit losses. The decrease in operating
expenses as a percentage of net revenue was the result of cost savings achieved through continued cost controls.
Financing Originations
For the fiscal years ended October 31
2007 2006 2005
In millions
Total financing originations................................................................................................ $4,441 $3,994 $4,136
New financing originations, which represent the amounts of financing provided to customers for equipment and related
software and services, and include intercompany activity, increased 11% in fiscal 2007 from fiscal 2006. The increase
reflects higher financing associated with HP product sales resulting from improved integration and engagement with HP’ s
sales efforts and a favorable currency impact. Financing originations decreased 3% in fiscal 2006 from fiscal 2005 with the
decrease reflecting lower financing associated with HP product 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
our internal management reporting system. The accounting policies used to derive these amounts are substantially the same
as those used by the consolidated company. However, certain intercompany loans and accounts that are reflected in the
segment balances are eliminated in our Consolidated Financial Statements.
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