HP 2012 Annual Report Download - page 61

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Gross Margin
Fiscal 2012
In fiscal 2012, total HP gross margin decreased by 0.2 percentage points. Gross margins were
impacted by continued margin pressure in Services and competitive pricing in our hardware businesses,
along with an unfavorable mix of lower-margin revenue in ESSN and unfavorable currency impacts.
Personal Systems gross margin decreased in fiscal 2012. The decrease was driven by higher
component costs combined with an unfavorable currency impact. These negative impacts to gross
margin were partially offset by lower warranty and logistics costs, benefits from insurance proceeds
related to flooding in Thailand in July 2011 and an increased level of component vendor rebates.
Printing gross margin declined in fiscal 2012 due to an unfavorable currency impact driven by the
strength of the Japanese yen and from lower ink supplies volumes as a result of demand declines in all
regions. These effects were partially offset by our focus on higher-end inkjet printers combined with a
higher mix of supplies.
Services gross margin decreased in fiscal 2012 due primarily to lower than expected revenue,
contractual rate declines on ongoing contracts, a lower than expected resource utilization rate and
additional costs associated with certain contract deliverable delays. These effects were partially offset by
a continued focus on operating improvements and cost initiatives that favorably impacted the cost
structure of all business units.
ESSN gross margin decreased in fiscal 2012 due primarily to competitive pricing pressures,
particularly in Industry Standard Servers (‘‘ISS’’) and, to a lesser extent, in Networking.
Software gross margin decreased in fiscal 2012 due primarily to a lower mix of license revenue, the
effect of which was partially offset by a highly profitable software deal entered into in the fourth
quarter of fiscal 2012.
HPFS gross margin increased in fiscal 2012 due primarily to lower bad debt expense, the effect of
which was partially offset by lower margins on end-of-term activities, including buyouts and lease
extensions.
Fiscal 2011
In fiscal 2011, total HP gross margin decreased by 0.5 percentage points. The decline was driven
by a lower gross margin in the Services, Printing and Corporate Investments segments, the effect of
which was partially offset by a favorable commodity pricing environment in the Personal Systems and
ESSN segments, and a favorable mix from higher Software and Networking revenue.
Personal Systems gross margin increased in fiscal 2011 primarily as a result of a favorable
commodity pricing environment, combined with lower warranty costs.
Printing gross margin declined in fiscal 2011 due primarily to increased logistics costs and supply
chain constraints in LaserJet printer engines and toner as a result of the earthquake and tsunami in
Japan, and an unfavorable currency impact driven primarily by the strength of the yen. In addition,
Printing gross margin declined due to a continuing mix shift in Consumer Hardware and Commercial
Hardware toward lower price point products, coupled with a lower mix of supplies revenue. These
effects were partially offset by reductions in Printing’s cost structure as a result of continued efforts to
optimize our supply chain.
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