2009 ANNUAL REPORT CEO letter Dear Fellow Stockholders, In 2009, the global economy experienced the Perhaps nowhere has this agility been more evident worst recession in a generation. At HP, all of our than in our Personal Systems Group (PSG). In the work to reduce our cost base and to make it more first quarter, PSG revenue declined 19 percent from variable proved immensely valuable. Beginning the prior year, but the business was able to adjust in our first fiscal quarter, we had to address a quickly to the new environment, rationalizing an rapidly deteriorating demand environment across operating model that encompasses the industry’s our product portfolio. We set a goal of controlling largest PC supply chain and tens of thousands discretionary spending, while keeping the muscle of resellers and retailers around the world. of the organization intact and maintaining forward PSG delivered solid margins and continued to progress on our core strategy. At the same time, we drive innovation into the market with a steady focused on executing the integration of the services rollout of high-performing, well-designed, and businesses acquired from Electronic Data Systems well-received products. Over the course of the Corporation (EDS) in August 2008, ultimately year, PSG not only reaffirmed its position as the rebranding the business HP Enterprise Services worldwide leader in PC market share, but also within the HP Enterprise Business. Although there captured the #1 position in the U.S. enterprise is still much work to do, we enter fiscal 2010 in a market with double-digit share gains. stronger competitive position. In the Imaging and Printing Group (IPG), the decline All of our efforts resulted in a solid performance in demand hit especially hard early in the year. IPG relative to the industry and the economic has made significant progress in its cost structure, environment: inventory management, and overall operational • Net revenue of $114.6 billion rigor. Operationally, it is in much better shape as it enters fiscal 2010. IPG is gaining traction in retail • GAAP operating profit of $10.1 billion photo kiosks, which is an exciting opportunity. The • GAAP diluted earnings per share of $3.14 kiosks generally stay installed for many years and • Non-GAAP operating profit of $12.6 billion* generate significant supplies usage. Managed Print Services is another important area that is getting a • Non-GAAP diluted earnings per share of $3.85* lot of focus. The revenues from services contracts A solid performance by a more agile company are longer-term as well as more stable, and over the Over the last five years, HP has become a much last five years we’ve grown this into a multi-billion more agile company, able to adapt and benefit dollar business. In commercial printing, the analog- from changing market conditions. In fiscal 2009, to-digital shift is occurring at the rate of roughly we gained share in key markets and continued to 200 billion pages a year, and we are leveraging invest for growth in research and development, our technology to accelerate and profit from the acquisitions, and sales coverage. transition. In the HP Enterprise Business (EB), our product Since 2004, we have invested more than businesses also had to adapt to the market $17 billion in research and development environment across the portfolio of software, and $20 billion in acquisitions to build the best, servers, and storage, while continuing to deliver for most comprehensive portfolio in the industry. our customers. Our industry-standard x86 servers The recent announcement of our intent to acquire performed particularly well. We gained market 3Com Corporation exemplifies HP’s forward- share and enjoyed a strong rollout of our new G6 looking focus. 3Com has outstanding technology server, which offers improved performance, a very that complements our existing offerings, and, attractive return on investment, and meaningful when completed, the acquisition will expand HP’s innovations in heating, cooling, and energy use. presence in the important networking segment. The biggest story in EB, however, was in Services. A future of converged infrastructure Throughout fiscal 2009, we benefited from the more Increasingly, we expect that traditional technology stable revenues associated with Services, which silos such as servers, storage, networking, and has now become our most profitable segment. software will begin to converge into infrastructure We worked hard on the integration of EDS, that is optimized to meet customer needs. The retained 199 of the 200 largest EDS accounts, converged infrastructure will be differentiated and increased customer satisfaction. Today, we with value-added software and delivered through face the marketplace as one company with a more services any way the customer wants it—in-house, competitive cost structure and a significant number outsourced, cloud-based, or through a hybrid of new customers. Services is well positioned to environment that balances cost, security, and compete, win, and grow. performance across multiple models. A disciplined multi-year strategy No other company is as well positioned as HP to At HP, we’ve been executing a disciplined, multi- drive this evolution in the marketplace or deliver year strategy, building the company through on its potential. HP’s supply chain is the largest careful analysis of our operations and portfolio, the in the industry and provides tremendous leverage competitive landscape, and the long-term forces across our hardware portfolio. For example, the shaping our industry and the world. This process supply base shared between our industry standard began with the build-out of our industry-standard servers and PCs has helped HP to change the server hardware offerings into scaled, market-leading marketplace, introducing better performance at a positions from the desktop to the data center. lower cost. Industry standard servers are now the We then pioneered the area of automation and fastest-growing server segment, and HP leads the management software to optimize and differentiate category. We expect to replicate that success in our hardware in the marketplace. And then, with other data center adjacencies such as storage and EDS, we acquired a best-in-class, globally scaled networking. In addition, HP can use its software service provider to meet customer needs more competencies to develop innovative solutions on top effectively as technology is increasingly delivered of industry-standard hardware, deploy them broadly, through a services model. and use the power of our supply chain to capture share in higher-margin categories. The power of information delivered as a service and transmitted to interactive, This transition towards a converged infrastructure always-connected devices in real time. Getting the is exciting for our future. However, the greater right information to the right place at the right time opportunity lies in our ability to project the is a powerful way to drive better decision-making, intelligence of this computing capability from the better resource utilization, and extreme efficiencies. data center out into the world to help meet the HP is working with customers in areas such as demands of a rapidly evolving global community. education, healthcare, and energy to meet the By 2025, worldwide population is expected to changing needs of the global community today. And increase by 20 percent. The population in the in HP Labs, we’re working on the future. Innovations world’s cities will grow by more than 1 billion like nano-scale sensors, breakthrough software people—the equivalent of adding a Beijing every for analytics and knowledge discovery, and data other month. The “global middle class” is expected centers with zero net environmental impact will to grow from 440 million to 1.3 billion people be the building blocks of tomorrow’s sustainable over the next few decades, as wireless and Internet society. We are using our technology to find a better connectivity continue to level the playing field. In answer for how we meet the needs of a world with the background of all of this, we are witnessing growing demands and limited resources. an explosion in information. The total amount of Building a better world information is estimated to double every four years, We are also helping build a better world through and digital content doubles every 18 months. social investment and environmental innovation. Throughout history, every few centuries, we HP’s Office of Global Social Innovation is working harness a new source of power. First it was fire, to transform teaching and learning to foster the next later electricity and oil. Today, it is information. generation of entrepreneurs and innovators. We’re At HP, we’ve helped lead a revolution in the way integrating technology into the learning experience information is created, captured, stored, processed, and providing professional development. From and shared. Open, industry-standard computing technology grants in East Palo Alto to building a has helped free data from complex, proprietary university e-infrastructure in sub-Saharan Africa, mainframes, and it has democratized information we’re helping level the playing field for participation technology in a way that is more affordable, in the global economy. Around the world, our efforts powerful, and flexible. Software transforms the vast are supported by tens of thousands of employees sea of digital content into usable information that is who volunteer in their local communities and donate, in conjunction with matching grants, to the causes they care about most. Another important priority is doing our part to In closing preserve and protect the environment. Our strategic Even as HP successfully managed through a framework includes reducing the carbon footprint challenging fiscal 2009, we have continued to of HP-owned operations and of our supply chain, build for the future and prepare our company for reducing the environmental impact of our products growth. Today, our market leadership extends and services, developing solutions and services that across the industry’s broadest portfolio of hardware, will reduce the footprint of the rest of the economy, software, and services.