HP 2014 Annual Report Download - page 75

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
contractual price declines in ongoing contracts and unfavorable currency impacts, the effects of which
were partially offset by net revenue growth in security and cloud offerings. ABS net revenue declined
10% in fiscal 2013. The net revenue decline was due primarily to net service revenue runoff and
unfavorable currency impacts, the effects of which were partially offset by revenue growth in cloud and
information and analytics offerings. Revenue in ABS was also negatively impacted by weakness in
public-sector spending.
ES earnings from operations as a percentage of net revenue decreased 1.2 percentage points in
fiscal 2013. The decrease was due to a decline in gross margin combined with an increase in operating
expenses as a percentage of net revenue. Gross margin declined due primarily to net service revenue
runoff and contractual price declines. These unfavorable impacts to gross margin were partially offset
by our continued focus on improving resource management and profit improvements on under-
performing contracts. Operating expenses as a percentage of net revenue increased due to higher
administrative, marketing and R&D costs. These effects were partially offset by reduced field selling
costs due to lower headcount-related costs during the year and other savings from our ongoing
restructuring efforts.
Software
For the fiscal years ended October 31
2014 2013 2012
Dollars in millions
Net revenue ......................................... $3,933 $4,021 $4,171
Earnings from operations ............................... $ 872 $ 868 $ 836
Earnings from operations as a % of net revenue ............... 22.2% 21.6% 20.0%
Fiscal 2014 compared with Fiscal 2013
Software net revenue decreased 2.2% (decreased 2.1% on a constant currency basis) in fiscal 2014.
Revenue growth in Software is being challenged by the overall market and customer shift to SaaS
solutions, which is impacting growth in license and support revenue. In fiscal 2014, net revenue from
licenses, support and professional services decreased by 3%, 2% and 5% respectively, while SaaS net
revenue increased by 5%.
The decline in license net revenue was due to the market and customer shift to SaaS solutions,
which resulted in lower revenue from IT/cloud management and information management products,
partially offset by strength in some of our key focus areas of big data analytics and security. The
decrease in support net revenue was due to past declines in license revenue. Professional services net
revenue decreased as we continue our focus on higher-margin engagements. These declines were
partially offset by higher SaaS revenue due to improving demand for our SaaS solutions in IT/cloud
management products and security products.
In fiscal 2014, Software earnings from operations as a percentage of net revenue increased by
0.6 percentage points due to an increase in gross margin, the effect of which was partially offset by an
increase in operating expenses as a percentage of net revenue. The increase in gross margin was due to
the shift to more profitable contracts and improved workforce utilization in professional services. The
increase in operating expenses as a percentage of net revenue was due primarily to investments in
R&D partially offset by lower SG&A expenses due to cost savings associated with our ongoing
restructuring efforts and improved operational expense management.
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