Annual Report 2007 Forward-looking Statements This document contains forward-looking statements that involve risks, uncertainties and assumptions. If such risks or uncertainties materialize or such assumptions prove incorrect, the results of HP and its consolidated subsidiaries could differ materially from those expressed or implied by such forward-looking statements and assumptions. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including but not limited to any statements of the plans, strategies and objectives of management for future operations; any statements concerning expected development, performance, market share or demand relating to HP’s products and services; any statements regarding anticipated operational and financial results, including the execution of cost reduction programs; any statements including estimates regarding market size or growth; any statements regarding future economic conditions or performance; any statements of expectation or belief; and any statements of assumptions underlying any of the foregoing. Risks, uncertainties and assumptions include the execution and performance of contracts by HP and its customers, suppliers and partners; the achievement of expected results; expectations and assumptions relating to the execution and timing of cost reduction programs; and other risks that are described in HP’s filings with the Securities and Exchange Commission, including but not limited to HP’s Annual Report on Form 10­ K for the fiscal year ended October 31, 2007, which is included as part of this document. HP assumes no obligation and does not intend to update these forward-looking statements. CEO Letter Dear Fellow Stockholders: If one word can best describe HP’s performance in fiscal 2007, it is growth. For the year, we added more than $12 billion of new revenue, grew non-GAAP operating profit dollars 30 percent¹ and returned more than $12 billion to stockholders through share repurchases and dividends. We grew revenues across all of our business segments and in each of our regions. Overall, it was an impressive performance by HP’s employees and partners around the world. 1 CEO Letter Many factors contributed to that growth, but three Customers will need systems, software and services to stand out because of the major impact we expect them to create, store and analyze content; PCs and handheld have in the years ahead: the explosion of digital informa­ devices to access and share it; and monitors, TVs and tion and content; the growing need for technology that printers to view and print it. Many companies can do enables people to create, store, share and print that some of these things, but we believe that HP is the only content; and the rapidly growing demand for information company with the portfolio and partnerships to do technology (IT) in emerging markets around the world. them all. The volume of data today is growing faster than our It adds up to an enormous addressable market for ability to capture and use it. According to Forrester HP—a $1.2 trillion global market . ³ Today HP has about Research, the world’s data doubles approximately every 9 percent of this market, so we have a lot of room to three years,² which is expected to lead to a more than grow. We are working hard to expand our market sixfold increase in data between 2003 and 2010. coverage and to profitably increase our market share. Feeding the worldwide demand for information and To capitalize on these opportunities, we continue to rich digital content is the enormous expansion of search align the company around an operating framework engines, blogs, social networks, e-mail, text messages with three key elements: targeted growth, efficiency and online video and images. and capital strategy. To complicate matters, this content often lacks authenti­ cation and proper security, and it is increasingly global Targeted Growth and mobile. Potentially hundreds of millions of new users in emerging markets are coming online—from HP’s businesses are targeting the most promising, small business owners in China to farmers in Brazil to high-growth markets and positioning themselves to consumers in Eastern Europe. take advantage of the explosion of digital content. At the same time, the expectations of consumers have In our Technology Solutions Group, we are helping changed. People want instantaneous access to content. customers manage and transform their IT environments. They expect this accessibility regardless of what kind We had a particularly strong performance in blade of device they are using or where they happen to be. servers during fiscal 2007. Our innovative c-Class And their tolerance for complexity is low. blade systems helped drive year-over-year blade revenue growth of 67 percent, and we increased our industry-leading market share. Opportunities In our Personal Systems Group, we continue to benefit Dealing with all this data—and rising consumer expec­ as demand shifts toward mobility, consumers and tations—is a huge and disruptive challenge for our emerging markets. For example, our sales of notebook customers and their IT environments and a major opportu­ computers increased 47 percent during fiscal 2007. nity for HP. It puts pressure on businesses to rebuild, And our PC business in China nearly doubled, making retool and deploy a flexible infrastructure so they can get it our third largest market for personal systems. the right information to the right people at the right time. 2 FY07 Revenue by Segment • HP Financial Services and Other 2% • HP Software 2% HP Services 16% Enterprise Storage Imaging & & Servers Printing Group 27% 18% Personal Systems Group 35% FY07 Revenue by Segment 3 CEO Letter In our Imaging and Printing Group, we are extending Between acquisitions and organic growth, revenue in our leadership in our core printing business while also our software business nearly doubled in fiscal 2007— taking advantage of new, high-growth opportunities making HP the sixth largest software company in the in supplies, graphic arts and enterprise printing. We world. Software is a critical differentiator for HP—not are expanding our sales coverage to accelerate growth only in our standalone software business but in each in the enterprise business, which we expect to be a of our businesses as well. $121 billion market by 2010. In each of these businesses, we are using our scale to Efficiency become even more competitive. We have more than double the scale of each of our printer competitors We have made great progress in reducing costs, and all but one of our PC and server competitors. We which allows us to compete more aggressively and win are leveraging this scale to consolidate share and in the market. But we have an opportunity to further improve profits while continuing to reinvest to maintain improve our efficiency. our technology leadership. We look at everything between revenue and non-GAAP We expect continued growth in developed countries operating profit as a cost. From that perspective, HP but much higher growth in what are commonly had almost $95 billion in costs in fiscal 2007. That is known as the BRIC countries—Brazil, Russia, India too much. Even with all the work we have done, we and China—and in other emerging economies. Our must become more efficient, further reduce costs and revenue in the BRIC countries grew 33 percent in invest the savings to create more stockholder value. fiscal 2007 and now represents 8 percent of HP’s total revenue. We assess our costs in three areas. As we reduce costs, we are shifting our investments to The first is corporate overhead, including IT, real estate capitalize on these market opportunities. While it and other corporate expenses. We are reducing our IT is important that we grow, it’s also important that we costs by consolidating and modernizing our data grow the right way with the right mix. For example, centers and operations. We also are becoming more HP hired 1,000 sales professionals in fiscal 2007 to efficient in our use of real estate, which is a significant expand our coverage in key accounts and markets, expense for a company of HP’s size. During the next and the company added more than 1,000 salespeople two years, we plan to reduce our number of sites through acquisitions. worldwide by almost 25 percent. We also are investing in higher-margin categories such Second are our product costs. HP is the largest customer as software and services. We spent more than $6 billion for most of our suppliers, and we are continually across our businesses in fiscal 2007 to acquire 10 working with them to make sure we get the best terms, software, technology and service companies. We including the best price. expect that each one will add significant capabilities and technology to our portfolio, as well as new oppor­ Third are the costs owned by each of HP’s businesses. tunities for growth. The businesses have detailed plans to reduce their costs, and we have launched new efforts to identify more savings. 4 We continue to align the company around an operating framework with three key elements: targeted growth, efficiency and capital strategy. 5 CEO Letter Capital Strategy program in 1992, and we have been investing in energy-efficiency programs for more than a decade. We align our capital strategy with our operations to Innovations such as our Dynamic Smart Cooling and maximize stockholder value. Thermal Logic technologies offer advanced, energy- efficient solutions for customers. We expect these The first priority is to continue to invest in our businesses. technologies to contribute to a 60 percent reduction in We do that in two ways. One is to invest to grow, which energy consumption in our new data centers. We also shows up in research and development, demand are expanding our use of renewable energy, including generation and mergers and acquisitions.