Hewlett-Packard (HPQ)

Historical Results

        The components of the weighted net revenue growth as compared to the prior-year periods by business unit were as follows for the following fiscal years ended October 31:

        Services net revenue increased 65.4% (71.6% when adjusted for currency) for fiscal 2009, as compared to fiscal 2008. The increase in revenues is due primarily to the acquisition of EDS on August 26, 2008. Services net revenue for fiscal 2009 includes revenue from infrastructure technology outsourcing, technology services, application services and business process outsourcing, which accounted for approximately 46%, 28%, 17% and 9% of revenues, respectively. Net revenue in infrastructure technology outsourcing, application services and business process outsourcing increased due to the EDS acquisition. The net revenue increase in infrastructure technology outsourcing, application services, and business process outsourcing was partially offset by unfavorable currency impacts and a decline in spending from existing customers not being offset with new growth due to slowing demand in the current economic environment. Application services and business process outsourcing were impacted to a greater degree than infrastructure technology outsourcing. Net revenue in technology services declined due primarily to unfavorable currency impacts and weak economic conditions, the effect of which was partially offset by growth in extended warranty.

        Services earnings from operations as a percentage of net revenue increased by 2.5 percentage points for fiscal 2009, as compared to fiscal 2008. The operating margin increased due primarily to a decrease in operating expenses as a percentage of revenue. There was also an increase in gross margin for fiscal 2009. Operating expense declined as a result of a continued focus on cost structure improvements from overall cost controls. The gross margin in our Services segment increased for fiscal 2009 from fiscal 2008 due primarily to the continued focus on cost structure improvements, including delivery efficiencies and cost controls in our technology services business, and EDS-related acquisition synergies. This was partially offset by the mix effect from the acquisition of the EDS business, which has lower gross margins.

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Table of Contents

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)

        Services net revenue (including EDS results from August 26, 2008) increased 36.8% (30.0% when adjusted for currency) for fiscal 2008, as compared to fiscal 2007. Net revenue increased from the prior year primarily due to the acquisition of EDS. Services net revenue (excluding EDS results from August 26, 2008) increased 11.7% (4.8% when adjusted for currency) for fiscal 2008, as compared to fiscal 2007. Services net revenue (including EDS results from August 26, 2008) for fiscal 2008 includes revenue from technology services, infrastructure technology outsourcing, application services and business process outsourcing, which accounted for approximately 49%, 36%, 12% and 3% of revenues, respectively. Net revenue in technology services increased in fiscal 2008 from the prior year due primarily to growth in IT solution support services, extended warranty revenue and favorable currency impacts, the impact of which was partially offset by competitive pricing pressures. Net revenue in infrastructure technology outsourcing, application services and business process outsourcing increased driven mainly by the EDS acquisition, an increase in volume, favorable currency impacts and new business.

        Services earnings from operations as a percentage of net revenue (including EDS results from August 26, 2008) increased by 0.4 percentage points for fiscal 2008, as compared to fiscal 2007. The operating margin increase was the result of a decrease in operating expenses as a percentage of net revenue, partially offset by a slight decrease in gross margin. The gross margin decrease in fiscal 2008 was due primarily to the impact of the continued competitive pricing environment, which was partially offset by the continued focus on cost structure improvements generated by delivery efficiencies and cost controls. In fiscal 2008, continued efficiency improvements in our operating expense structure contributed to the decline in operating expenses as a percentage of net revenue compared to the prior year.

Historical Results

        Services net revenue increased 99.2% (108.7% when adjusted for currency) and increased 107.3% (114.9% when adjusted for currency) for the three and six months ended April 30, 2009, respectively, as compared to the same periods in fiscal 2008 due primarily to the EDS acquisition. Services net revenue for the six months ended April 30, 2009 includes revenue from infrastructure technology outsourcing, technology services, application services and business process outsourcing, which accounted for approximately 45%, 28%, 18% and 9% of revenues, respectively.

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        The components of the weighted net revenue growth as compared to the prior-year periods by business unit were as follows:

        Net revenue in infrastructure technology outsourcing, application services and business process outsourcing for both periods increased due primarily to the EDS acquisition. Further, net revenue in infrastructure technology outsourcing for both periods increased due to new contract signings, the effect of which was partially offset by unfavorable currency impacts. Net revenue in application services and business process outsourcing for both periods was partially offset by unfavorable currency impacts and slowing demand in the current economic environment. Net revenue in technology services for both periods declined due primarily to unfavorable currency impacts, the effect of which was partially offset by growth in extended warranty.

        Services earnings from operations as a percentage of net revenue increased by 1.9 percentage points and 1.2 percentage points for the three and six months ended April 30, 2009, respectively. The operating margin for both periods increased due primarily to a decrease in operating expenses as a percentage of revenue. There was also a slight increase in gross margin for the three months ended April 30, 2009. The increase in operating margin for the six months ended April 30, 2009 was partially offset by a slight decrease in gross margin that period. The operating expense for both periods declined as a result of continued focus on cost structure improvements from overall cost controls. The increase in gross margin for the three months ended April 30, 2009 was due to improved cost management, the effect of which was partially offset by the mix effect from the acquisition of the EDS business, which has lower gross margins. The decline in gross margin for the six months ended April 30, 2009 was attributable to the mix effect from the acquisition of EDS, the effect of which was partially offset by second quarter cost improvements.

Historical Results

        Services net revenue increased 115.8% (121.4% when adjusted for currency) for the three months ended January 31, 2009, as compared to the same periods in fiscal 2008 due primarily to the EDS acquisition. Services net revenue for the three months ended January 31, 2009 includes revenue from infrastructure technology outsourcing, technology services, application services and business process outsourcing, which accounted for approximately 46%, 28%, 18% and 8% of revenues, respectively.

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        The components of weighted net revenue growth as compared to the prior-year periods by business unit were as follows:

        Net revenue in infrastructure technology outsourcing increased due primarily to the EDS acquisition, partially offset by unfavorable currency impacts and contractual pricing adjustments. Net revenue in application services increased due primarily to the EDS acquisition, partially offset by unfavorable currency impacts and slowing demand in the current economic environment. Net revenue in business process outsourcing increased due primarily to the EDS acquisition. Net revenue in technology services was flat due primarily to unfavorable currency impacts, offset by growth in extended warranty and IT solution support services revenue.

        Services earnings from operations as a percentage of net revenue increased by 0.5 percentage points for the three months ended January 31, 2009. The operating margin increase was due primarily to the decrease in operating expenses as a percentage of revenue, partially offset by a decrease in gross margin. The operating expense decline was a result of continued focus on cost structure improvements from overall cost controls. The decline in gross margin was due primarily to the mix effect from the acquisition of EDS.