Annual Report 2008 CEO letter Dear Fellow Stockholders, Fiscal 2008 was a strong year with some notable HP gained share in key segments, while continuing accomplishments. We have prepared HP to perform to show discipline in our pricing and promotions. well and are building a company that can deliver Software, services, notebooks, blades and storage meaningful value to our customers and stockholders each posted double­digit revenue growth, for the long term. Looking ahead, it is important to highlighting both our market­leading technology and separate 2008 from 2009, and acknowledge the improved execution. Technology Services showed difficult economic landscape. While we have made particular strength with double­digit growth in much progress, there is still much work to do. revenue for the year and improved profitability. 2008—Solid Progress and Performance in a Tough The EDS Acquisition—Disciplined Execution of a Environment Multi­year Strategy With the acquisition of Electronic Data Systems In August, HP completed its acquisition of EDS, a Corporation (EDS), we continued implementing a global technology services, outsourcing and multi­year strategy to create the world’s leading consulting leader, for a purchase price of $13 technology company. Additionally, we made solid billion. The EDS integration is at or ahead of the progress on a number of core initiatives, including operational plans we announced in September, and the substantial completion of phase one of HP’s customer response to the acquisition remains very information technology transformation. positive. Fiscal 2008 was also a difficult year, during which The addition of EDS further expands HP’s economic conditions deteriorated. HP proved our comprehensive, strategically assembled portfolio that ability to execute in a tough environment. provides unparalleled capabilities for delivering end­ to­end solutions. Over the course of several years, In 2008, HP delivered: HP has established a track record of making • Net revenue growth of 13 percent, or 8 percent in acquisitions, integrating them, supporting them with constant currency, to $118.4 billion R&D and turning them into market leaders with enhanced profitability. HP is following the same • GAAP operating profit of $10.5 billion game plan with EDS, which is an excellent fit both • GAAP diluted EPS of $3.25, up from $2.68 in the financially and operationally. EDS provides a strong prior year base of recurring revenues and a meaningful • Non­GAAP operating profit of $11.8 billion* opportunity to capture synergies and expand earnings per share. More importantly, EDS adds a • Non­GAAP diluted EPS of $3.62, up from $2.93 in the prior year* world-class, globally scaled services capability to The benefits of the IT transformation are expected to HP’s established leadership in hardware and include: management software. This is a powerful • Consolidation of more than 85 internal data combination that puts HP in a distinct position to centers to six next-generation data centers lead the industry and deliver for our customers and stockholders. • Consolidation of 6,000 applications to 1,500 standardized applications Solid Progress on our Core Initiatives—A Milestone in the IT Transformation • Reduction of annual energy consumption in data Even as we have undertaken the integration of EDS, centers by 60 percent multiple transformations of corporate functions, • Increase in processing power of 250 percent business groups and business processes are For all that we have accomplished in creating a underway across HP. In fiscal 2008, we made good more efficient company, there is still a great deal of progress, removing more than twice the costs from work left to do and several more years of cost cutting corporate shared services than we did in fiscal 2007. for HP to reach the benchmarks we have set. We Perhaps no single initiative has been as important as expect to reduce our cost structure in fiscal 2009 by our information technology transformation. Begun in more than $1 billion in constant currency over fiscal 2005, phase one of this effort—the complete rebuild 2008 levels through previously announced initiatives of HP’s IT infrastructure and processes—achieved in our corporate functions and the EDS business. substantial completion by the end of 2008. Additionally, we have significant cost savings to The transformation of HP’s IT reduces costs, provides realize within our segments to improve their more reliable information, establishes a simplified competitiveness. Our goal: to have the best and dependable IT infrastructure, improves business operations of any company in the world. continuity and supports the company’s growth. We also expect to flip the ratio of our IT spend from 75 percent on maintenance and 25 percent on innovation to 75 percent on innovation and 25 percent on maintenance. This was all done primarily with HP hardware, software and services, and the capabilities of our closest partners. Looking Ahead: Long­term Opportunity; Near­term These advantages will be put to good use by our Challenges outstanding executive leadership team. We will In the long term, we see extraordinary opportunities continue to make strategic investments for the future for HP. The amount of information on the planet is in sales coverage, opportunistic acquisitions, exploding. It has been estimated that the digital research and development, and customer service and data­set doubles every 18 months. All of that support. Our plan is to get through this period information needs to be captured, stored, processed, without losing any muscle in the organization or shared, printed and viewed. Consumers need changing our swing in the marketplace. always on, always connected access to the data that Great companies rise to the top in tough times, and I is increasingly central to their lives. Enterprises are believe HP is one of the best. We expect that HP’s straining to meet ever­growing demand with aging, ability to execute in a challenging marketplace will complex, proprietary and inefficient IT infrastructures. differentiate us from our competitors and enable HP These dynamics are creating a massive disruption in to emerge from the current environment as a stronger the IT marketplace and a massive opportunity for HP. force in the industry. With a comprehensive portfolio of hardware, software and services, HP is well positioned to help Thank you for your investment in HP. customers manage and transform their IT environments. In the near term, we expect that economic conditions Sincerely, in 2009 will be extremely challenging. It will take continued discipline and tough decision making to stay the course and continue executing our strategy in the coming months. Mark V. Hurd However, our company has significant competitive Chairman, Chief Executive Officer and President advantages: • A strong balance sheet • Diversified revenues with one­third of our revenue and well over half of our profits from recurring *Fiscal year 2008 non­GAAP financial information excludes $973 million sources such as services and supplies of adjustments on an after­tax basis, or $0.37 per diluted share, related primarily to the amortization of purchased intangible assets, in­process • A lean, variable cost structure and commitment to research and development charges, restructuring charges and acquisition­ continue to eliminate all costs that are not core to related charges. Fiscal year 2007 non­GAAP diluted EPS excludes $0.25 per share of adjustments on an after­tax basis related primarily to the the company’s success amortization of purchased intangible assets, in­process research and • Proven financial and operational discipline development charges, restructuring charges and a net pension curtailment gain. HP’s management uses non­GAAP operating profit and non­GAAP diluted EPS to evaluate and forecast HP’s performance before gains, losses or other charges that are considered by HP’s management to be outside of HP’s core business segment operating results. HP believes that presenting non­GAAP operating profit and non­GAAP diluted EPS in addition to GAAP operating profit and GAAP diluted EPS provides investors with greater transparency to the information used by HP’s management in its financial and operational decision making. HP further believes that providing this additional non­GAAP information helps investors understand HP’s operating performance and evaluate the efficacy of the methodology and information used by management to evaluate and measure such performance. This additional non­GAAP information is not intended to be considered in isolation or as a substitute for GAAP operating profit and GAAP diluted EPS. HP members of the board Lawrence T. Babbio, Jr. Richard A. Hackborn Joel Z. Hyatt Robert L. Ryan Director since 2002 Director since 1992 Director since 2007 Director since 2004 Mr. Babbio has served as a Mr. Hackborn served as Mr. Hyatt has served as Mr. Ryan has served as HP’s Senior Advisor to Warburg HP’s Lead Independent the Chief Executive Officer Lead Independent Director Pincus, a private equity firm, Director from September of Current Media, LLC, a since September 2008. since June 2007. Previously, 2006 until September 2008. cable and satellite television He served as Senior Vice he served as Vice Chairman He served as Chairman of company, since September President and Chief Financial and President of Verizon HP from January 2000 to 2002. He also began serving Officer of Medtronic, Inc., a Communications, Inc. September 2000. Previously, as a lecturer at Stanford Law medical technology company, (formerly Bell Atlantic Mr. Hackborn was HP’s School in January 2009. from 1993 until his retirement Corporation), a telecom­ Executive Vice President, From September 1998 to in May 2005. Mr. Ryan also munications company, from Computer Products June 2003, he was a lecturer is a director of General 2000 until his retirement in Organization from 1990 until in entrepreneurship at the Mills, Inc.; The Black and April 2007. his retirement in 1993 after a Stanford University Graduate Decker Corporation; and 33­year career with HP.