Description
Hewlett Packard. Executive Chairman Raymond J. Lane bought 179,900 shares on 6-01-2012 at $ 22.17
BUSINESS OVERVIEW
HP Products and Services; Segment Information
Our operations are organized into seven business segments: the Personal Systems Group ("PSG"), Services, the Imaging and Printing Group ("IPG"), Enterprise Servers, Storage and Networking ("ESSN"), HP Software, HP Financial Services ("HPFS") and Corporate Investments. In each of the past three fiscal years, notebooks, desktops and printing supplies each accounted for more than 10% of our consolidated net revenue. In fiscal 2010 and 2011, infrastructure technology outsourcing services also accounted for more than 10% of our consolidated net revenue. Industry standard servers accounted for more than 10% of our consolidated net revenue in fiscal 2011.
A summary of our net revenue, earnings from operations and assets for our segments and business units is found in Note 19 to the Consolidated Financial Statements in Item 8, which is incorporated herein by reference. A discussion of factors potentially affecting our operations is set forth in "Risk Factors" in Item 1A, which is incorporated herein by reference.
Personal Systems Group
PSG provides commercial personal computers ("PCs"), consumer PCs, workstations, calculators and other related accessories, software and services for the commercial and consumer markets. We group commercial notebooks, commercial desktops and workstations into commercial clients and consumer notebooks and consumer desktops into consumer clients when describing our performance in these markets. Like the broader PC market, PSG continues to experience a shift toward mobile products such as notebooks. Both commercial and consumer PCs are based predominately on the Windows operating system and use Intel Corporation ("Intel") and Advanced Micro Devices ("AMD") processors.
Commercial PCs. Commercial PCs are optimized for commercial uses, including enterprise and SMB customers, and for connectivity and manageability in networked environments. Commercial PCs include the HP ProBook and the HP EliteBook lines of notebooks and the Compaq Pro, Compaq Elite, HP Pro and HP Elite lines of business desktops, as well as the All in One TouchSmart and Omni PCs, HP Mini-Note PCs, retail POS systems, HP Thin Clients and HP Slate Tablet PCs.
Consumer PCs. Consumer PCs include the HP and Compaq series of multi-media consumer notebooks, desktops and mini notebooks, including the TouchSmart line of touch-enabled all-in-one notebooks and desktops.
Workstations. Workstations are individual computing products designed for users demanding enhanced performance, such as computer animation, engineering design and other programs requiring high-resolution graphics. PSG provides workstations that run on both Windows and Linux-based operating systems.
Services
Services provides consulting, outsourcing and technology services across infrastructure, applications and business process domains. Services delivers to its clients by leveraging investments in consulting and support professionals, infrastructure technology, applications, standardized methodologies, and global supply and delivery. Our services businesses also create opportunities for us to sell additional hardware and software by offering solutions that encompass both products and services. Services is divided into four main business units: infrastructure technology outsourcing, technology services, applications services and business process outsourcing.
Infrastructure Technology Outsourcing. Infrastructure Technology Outsourcing delivers comprehensive services that streamline and optimize our clients' infrastructure to efficiently enhance performance, reduce costs, mitigate risk and enable business change. These services encompass the data center and the workplace (desktop); network and communications; and security, compliance and business continuity. We also offer a set of managed services, providing a cross-section of our broader infrastructure services for smaller discrete engagements.
Technology Services. Technology Services provides support and consulting services, as well as warranty support across HP's product lines. HP specializes in keeping technology running with mission critical services, converged infrastructure services, networking services, data center transformation services and infrastructure services for storage, server and unified communication environments. HP's technology services offerings are available in the form of service contracts, pre-packaged offerings (HP Care Pack services) or on an individual basis.
Application Services. Applications Services helps clients revitalize and manage their applications assets through flexible, project-based, consulting services and longer-term outsourcing contracts. These full life cycle services encompass application development, testing, modernization, system integration, maintenance and management. Applications Services also provides industry-focused technology consulting and systems integration solutions and services that use cloud computing, hybrid delivery, enterprise mobility, information management and real-time analytics. Applications projects open doors to new infrastructure technology outsourcing and business process outsourcing opportunities and represent attractive cross-selling opportunities to current HP clients.
Business Process Outsourcing. Business Process Outsourcing is powered by a platform of underlying infrastructure technology, applications and standardized methodologies and is supplemented by IT experience and in-depth, industry-specific knowledge. These services encompass both industry-specific and cross-industry solutions. Our cross-industry solutions include a broad array of enterprise shared services, customer relationship management services, financial process management services and administrative services.
Imaging and Printing Group
IPG provides consumer and commercial printer hardware, supplies, media and scanning devices. IPG is also focused on imaging solutions in the commercial markets. These solutions range from managed print services to capturing high-value pages in areas such as industrial applications, outdoor signage, and the graphic arts business.
Inkjet and Web Solutions. Inkjet and Web Solutions delivers HP's consumer and SMB inkjet solutions (hardware, supplies, media, web-connected hardware and services) and develops HP's retail publishing and web businesses. It includes single function and all-in-one inkjet printers targeted toward consumers and SMBs, as well as retail publishing solutions, Snapfish and ePrintCenter.
LaserJet and Enterprise Solutions. LaserJet and Enterprise Solutions delivers products, services and solutions to the medium-sized business and enterprise segments, including LaserJet printers and supplies, multi-function devices, scanners, web-connected hardware and services and enterprise software solutions, such as Exstream Software and Web Jetadmin.
Managed Enterprise Solutions. Managed Enterprise Solutions provides managed print services products and solutions delivered to enterprise customers partnering with third-party software providers to offer workflow solutions in the enterprise environment.
Graphics Solutions. Graphics Solutions provides large format printing (Designjet and Scitex), large format supplies, WebPress supplies, Indigo printing, specialty printing systems and inkjet high-speed production solutions. Graphic Solutions targets print service providers, architects, engineers, designers and industrial solution providers.
Printer Supplies. Our printer supplies offerings include LaserJet toner and inkjet printer cartridges, graphic solutions ink products and other printing-related media.
Enterprise Servers, Storage and Networking
ESSN provides server, storage and networking products in a number of categories. Our Converged Infrastructure portfolio of servers, storage and networking combined with HP Software's Cloud Service Automation software suite creates HP's CloudSystem. This integrated solution enables enterprise and service provider clients to deliver infrastructure, platform and software as a service in a private, public or hybrid cloud environment. By providing a broad portfolio of server, storage and networking solutions, ESSN aims to optimize the combined product solutions required by different customers and provide solutions for a wide range of operating environments, spanning both the enterprise and the SMB markets.
Industry Standard Servers. Industry Standard Servers offers primarily entry-level and mid-range ProLiant servers, which run primarily Windows, Linux and Novell operating systems and leverage Intel and AMD processors. The business spans a range of product lines that include pedestal-tower servers, density-optimized rack servers and HP's BladeSystem family of server blades.
Business Critical Systems. Business Critical Systems delivers mission-critical Converged Infrastructure with a portfolio of HP Integrity servers based on the Intel Itanium processor that run the HP-UX and OpenVMS operating systems, as well as HP Integrity NonStop solutions. Our Integrity servers feature scalable blades built on a blade infrastructure with HP's unique Blade Link technology and the Superdome 2 server solution. Business Critical Systems also offers HP's scale-up x86 ProLiant servers for scalability of systems with more than four industry standard processors. In addition, HP continues to support the HP9000 servers and HP AlphaServers by offering customers the opportunity to upgrade these legacy systems to current HP Integrity systems.
Storage. Our storage offerings include storage platforms for high-end, mid-range and small business environments. Our flagship product is the HP 3PAR Utility Storage Platform, which is designed for virtualization, cloud and IT-as-a-service. The Storage business has a broad range of products including storage area networks, network attached storage, storage management software and virtualization technologies, StoreOnce data deduplication solutions, tape drives and tape libraries. These offerings enable customers to optimize their existing storage systems, build new virtualization solutions and plan their transition to cloud computing.
Networking. Our switch, router, wireless LAN and TippingPoint network security products deliver open, scalable, secure, agile and consistent solutions for the data center, campus and branch networks. Our networking solutions are based on HP's FlexNetwork architecture, which is designed to enable simplified server virtualization, unified communications and multi-media application delivery for the enterprise.
HP Software
HP Software provides enterprise IT management software, information management solutions and security intelligence/risk management solutions. Solutions are delivered in the form of traditional software licenses or as software-as-a-service. Augmented by support and professional services, HP Software solutions allow large IT organizations to manage infrastructure, operations, application life cycles, application quality and security, IT services, business processes, and structured and unstructured data. In addition, these solutions help businesses proactively safeguard digital assets, comply with corporate and regulatory policies, and control internal and external security risks.
HP Financial Services
HPFS supports and enhances HP's global product and service solutions, providing a broad range of value-added financial life cycle management services. HPFS enables our worldwide customers to acquire complete IT solutions, including hardware, software and services. The group offers leasing, financing, utility programs and asset recovery services, as well as financial asset management services for large global and enterprise customers. HPFS also provides an array of specialized financial services to SMBs and educational and governmental entities. HPFS offers innovative, customized and flexible alternatives to balance unique customer cash flow, technology obsolescence and capacity needs.
Corporate Investments
Corporate Investments includes business intelligence solutions, HP Labs, webOS software and certain business incubation projects. Business intelligence solutions enable businesses to standardize on consistent data management schemes, connect and share data across the enterprise and apply analytics. This segment also derives revenue from licensing specific HP technology to third parties. In addition, revenue from the sale of webOS devices was reported as part of this segment prior to the wind down of the webOS device business in the fourth quarter of fiscal 2011, which negatively impacted segment net revenue, gross margin and loss from operations as a result of contra revenue associated with sales incentive programs and expenses related to supplier-related obligations and inventory write downs.
Sales, Marketing and Distribution
We manage our business and report our financial results based on the principal business segments described above. Our customers are organized by consumer and commercial customer groups, and distribution is organized by direct and channel. Within the channel, we have various types of partners that we utilize for various customer groups. The partners include:
• retailers that sell our products to the public through their own physical or Internet stores;
• resellers that sell our products and services, frequently with their own value-added products or services, to targeted customer groups;
• distribution partners that supply our solutions to smaller resellers with which we do not have direct relationships;
• independent distributors that sell our products into geographies or customer segments in which we have little or no presence;
• original equipment manufacturers ("OEMs") that integrate our products with their own hardware or software and sell the integrated products;
• independent software vendors ("ISVs") that provide their clients with specialized software products, and often assist us in selling our products and services to clients purchasing their products;
• systems integrators that provide various levels and kinds of expertise in designing and implementing custom IT solutions and often partner with our services business to extend their expertise or influence the sale of our products and services; and
• advisory firms that provide various levels of management and IT consulting, including some systems integration work, and that typically partner with our services business on client solutions that require our unique products and services.
The mix of HP's business by channel or direct sales differs substantially by business and region. We believe that customer buying patterns and different regional market conditions necessitate sales, marketing and distribution to be tailored accordingly. HP is focused on driving the depth and breadth of its coverage in addition to efficiencies and productivity gains in both the direct and indirect business.
HP's Enterprise Sales and Marketing organization ("Enterprise Sales") manages most of our enterprise and public sector customer relationships and also has primary responsibility for simplifying sales processes across our segments to improve speed and effectiveness of customer delivery. In this capacity, Enterprise Sales also works closely with HP's enterprise businesses (Services, ESSN and HP Software), which manage specialty resources focused on their specific products, including UNIX, servers, storage, networking, software and support offerings. Enterprise Sales manages our direct distribution activities for commercial products and go-to-market activities with systems integrators and ISVs. Enterprise Sales also is responsible for driving HP's horizontal and vertical solutions with both HP's enterprise services business and the partners listed above. In addition, Enterprise Sales drives HP's vertical sales and marketing approach in the communication, media and entertainment, financial services, manufacturing and distribution and public sector industries.
PSG manages SMB customer relationships and commercial reseller channels relationships, due largely to the significant volume of commercial PCs that HP sells through these channels. PSG also leads the Volume Direct organization, which is charged with the processing of direct sales for volume products. In addition, PSG manages direct online sales through the Consumer Exchange and the Small Business Exchange.
IPG manages HP's overall consumer-related sales and marketing relationships. IPG also manages consumer channel relationships with third-party retail locations for imaging and printing products, as well as other consumer products, including consumer PCs, which provides for a bundled sale opportunity between PCs and IPG products.
Manufacturing and Materials
We utilize a significant number of outsourced manufacturers ("OMs") around the world to manufacture HP-designed products. The use of OMs is intended to generate cost efficiencies and reduce time to market for HP-designed products. We use multiple OMs to maintain flexibility in our supply chain and manufacturing processes. In some circumstances, third-party OEMs manufacture products that we purchase and resell under the HP brand. In addition to our use of OMs, we currently manufacture a limited number of finished products from components and sub-assemblies that we acquire from a wide range of vendors.
We utilize two primary methods of fulfilling demand for products: building products to order and configuring products to order. We build products to order to maximize manufacturing and logistics efficiencies by producing high volumes of basic product configurations. Configuring products to order permits configuration of units to the particular hardware and software customization requirements of customers. Our inventory management and distribution practices in both building products to order and configuring products to order seek to minimize inventory holding periods by taking delivery of the inventory and manufacturing immediately prior to the sale or distribution of products to our customers.
We purchase materials, supplies and product subassemblies from a substantial number of vendors. For most of our products, we have existing alternate sources of supply, or such sources are readily available. However, we do rely on sole sources for laser printer engines, LaserJet supplies and parts for products with short life cycles (although some of these sources have operations in multiple locations in the event of a disruption). We are dependent upon Intel as a supplier of processors and Microsoft Corporation ("Microsoft") for various software products. However, we believe that disruptions with these suppliers would result in industry-wide dislocations and therefore would not disproportionately disadvantage us relative to our competitors. For processors, we also have a relationship with AMD, and we have continued to see solid acceptance of AMD processors in the market.
Like other participants in the high technology industry, we ordinarily acquire materials and components through a combination of blanket and scheduled purchase orders to support our requirements for periods averaging 90 to 120 days. From time to time, we experience significant price volatility and supply constraints for certain components that are not available from multiple sources. Frequently, we are able to obtain scarce components for somewhat higher prices on the open market, which may have an impact on gross margin but does not disrupt production. We also acquire component inventory in anticipation of supply constraints or enter into longer-term pricing commitments with vendors to improve the priority, price and availability of supply. See "Risk Factors—We depend on third-party suppliers, and our revenue and gross margin could suffer if we fail to manage suppliers properly," in Item 1A, which is incorporated herein by reference.
International
Our products and services are available worldwide. We believe this geographic diversity allows us to meet demand on a worldwide basis for both consumer and enterprise customers, draws on business and technical expertise from a worldwide workforce, provides stability to our operations, allows us to drive economies of scale, provides revenue streams to offset geographic economic trends and offers us an opportunity to access new markets for maturing products. In addition, we believe that future growth is dependent in part on our ability to develop products and sales models that target developing countries. In this regard, we believe that our broad geographic presence gives us a solid base upon which to build such future growth.
A summary of our domestic and international net revenue and net property, plant and equipment is set forth in Note 19 to the Consolidated Financial Statements in Item 8, which is incorporated herein by reference. Approximately 65% of our overall net revenue in fiscal 2011 came from outside the United States. The substantial majority of our net revenue originating outside the United States was from customers other than foreign governments.
For a discussion of risks attendant to HP's foreign operations, see "Risk Factors—Due to the international nature of our business, political or economic changes or other factors could harm our future revenue, costs and expenses and financial condition," in Item 1A, "Quantitative and Qualitative Disclosure about Market Risk" in Item 7A and Note 10 to the Consolidated Financial Statements in Item 8, which are incorporated herein by reference.
Research and Development
We remain committed to innovation as a key element of HP's culture. Our development efforts are focused on designing and developing products, services and solutions that anticipate customers' changing needs and desires and emerging technological trends. Our efforts also are focused on identifying the areas where we believe we can make a unique contribution and the areas where partnering with other leading technology companies will leverage our cost structure and maximize our customers' experiences.
HP Labs, together with the various research and development groups within the five principal business segments, are responsible for our research and development efforts. HP Labs is part of our Corporate Investments segment.
Expenditures for research and development were $3.3 billion in fiscal 2011, $3.0 billion in fiscal 2010 and $2.8 billion in fiscal 2009. We anticipate that we will continue to have significant research and development expenditures in the future to provide a continuing flow of innovative, high-quality products and services to maintain and enhance our competitive position.
For a discussion of risks attendant to our research and development activities, see "Risk Factors—If we cannot successfully execute on our strategy and continue to develop, manufacture and market products, services and solutions that meet customer requirements for innovation and quality, our revenue and gross margin may suffer," in Item 1A, which is incorporated herein by reference.
Patents
Our general policy has been to seek patent protection for those inventions and improvements likely to be incorporated into our products and services or where proprietary rights will improve our competitive position. At October 31, 2011, our worldwide patent portfolio included over 36,000 patents, which represents a slight decrease over the number of patents in our patent portfolio at the end of fiscal 2010 but an increase over the number of patents in our patent portfolio at the end of fiscal 2009.
Patents generally have a term of twenty years from the time they are filed. As our patent portfolio has been built over time, the remaining terms on the individual patents vary. We believe that our patents and applications are important for maintaining the competitive differentiation of our products and services, enhancing our ability to access technology of third parties, and maximizing our return on research and development investments. No single patent is in itself essential to us as a whole or any of our principal business segments.
In addition to developing our patents, we license intellectual property from third parties as we deem appropriate. We have also granted and continue to grant to others licenses under patents owned by us when we consider these arrangements to be in our interest. These license arrangements include a number of cross-licenses with third parties.
For a discussion of risks attendant to intellectual property rights, see "Risk Factors—Our revenue, cost of sales, and expenses may suffer if we cannot continue to license or enforce the intellectual property rights on which our businesses depend or if third parties assert that we violate their intellectual property rights," in Item 1A, which is incorporated herein by reference.
Backlog
We believe that backlog is not a meaningful indicator of future business prospects due to the diversity of our products and services portfolio, including the large volume of products delivered from shelf or channel partner inventories and the shortening of product life cycles. Therefore, we believe that backlog information is not material to an understanding of our overall business.
Seasonality
General economic conditions have an impact on our business and financial results. From time to time, the markets in which we sell our products experience weak economic conditions that may negatively affect sales. We experience some seasonal trends in the sale of our products and services. For example, European sales often are weaker in the summer months and consumer sales often are stronger in the fourth calendar quarter. Demand during the spring and early summer months also may be adversely impacted by market anticipation of seasonal trends. See "Risk Factors—Our sales cycle makes planning and inventory management difficult and future financial results less predictable," in Item 1A, which is incorporated herein by reference.
Competition
We encounter aggressive competition in all areas of our business activity. We compete primarily on the basis of technology, performance, price, quality, reliability, brand, reputation, distribution, range of products and services, ease of use of our products, account relationships, customer training, service and support, and security.
The markets for each of our business segments are characterized by vigorous competition among major corporations with long-established positions and a large number of new and rapidly growing firms. Product life cycles are short, and to remain competitive we must develop new products and services, periodically enhance our existing products and services and compete effectively on the basis of the factors listed above. In addition, we compete with many of our current and potential partners, including OEMs that design, manufacture and often market their products under their own brand names. Our successful management of these competitive partner relationships will continue to be critical to our future success. Moreover, we anticipate that we will have to continue to adjust prices on many of our products and services to stay competitive.
CEO BACKGROUND
Marc L. Andreessen
Director since 2009
Age 40 Mr. Andreessen is a co-founder of AH Capital Management, LLC, doing business as Andreessen Horowitz, a venture capital firm founded in July 2009. From 1999 to July 2007, Mr. Andreessen served as Chairman of Opsware, Inc., a software company that he co-founded. From March 1999 to September 1999, Mr. Andreessen served as Chief Technology Officer of America Online, Inc., a software company. Mr. Andreessen co-founded Netscape Communications Corporation, a software company, and served in various positions, including Chief Technology Officer and Executive Vice President of Products from 1994 to 1999. Mr. Andreessen also is a director of eBay Inc. and several private companies.
Mr. Andreessen brings to the Board extensive experience as an Internet entrepreneur. Mr. Andreessen also is a recognized industry expert and visionary in the IT industry. In addition, he has extensive leadership, consumer industry and technical expertise through his positions at Netscape, America Online and Opsware and his service on the boards of public and private technology companies. He has also gained valuable experience serving on the boards of both public and private companies.
Shumeet Banerji
Director since 2011
Age 52
Mr. Banerji has served as Chief Executive Officer of Booz & Company, a consulting company, since July 2008. Previously, Mr. Banerji served in multiple roles at Booz Allen Hamilton, a consulting company and predecessor to Booz & Company, while based in offices in North America, Asia and Europe, including President of the Worldwide Commercial Business from February 2008 to July 2008, Managing Director, Europe from February 2007 to February 2008 and Managing Director, United Kingdom from 2003 to March 2007. Earlier in his career, Mr. Banerji was a member of the faculty at the University of Chicago Graduate School of Business.
Mr. Banerji brings to the Board a robust understanding of the issues facing companies and governments in both mature and emerging markets around the world through his nearly two decades of work with Booz & Company. In particular, Mr. Banerji brings valuable experience in addressing issues ranging from corporate strategy, organizational structure, governance, transformational change, operational performance improvement and merger integration.
Rajiv L. Gupta
Director since 2009
Age 66 Mr. Gupta has served as Lead Independent Director of the Board since November 2011. Mr. Gupta has served as Chairman of Avantor Performance Materials, a manufacturer of chemistries and materials, since August 2011 and as Senior Advisor to New Mountain Capital, LLC, a private equity firm, since July 2009. Previously, Mr. Gupta served as Chairman and Chief Executive Officer of Rohm and Haas Company, a worldwide producer of specialty materials, from 1999 to April 2009. Mr. Gupta occupied various other positions at Rohm and Haas since joining the company in 1971, including Vice Chairman from 1998 to 1999, Director of the Electronic Materials business from 1996 to 1999, and Vice President and Regional Director of the Asia-Pacific Region from 1993 to 1998. Mr. Gupta also is a director of Delphi Automotive PLC, Tyco International Ltd., The Vanguard Group and several private companies.
Mr. Gupta brings to the Board extensive experience in executive leadership at a large global company, international management experience, and venture capital investment experience. From his nearly ten years as Chairman and Chief Executive Officer of Rohm and Haas, Mr. Gupta has a strong operational and strategic background with significant experience in manufacturing and sales. He also brings public company governance experience as a member or chair of boards and board committees of other public and private companies.
John H. Hammergren
Director since 2005
Age 52
Mr. Hammergren has served as Chairman of McKesson Corporation, a healthcare services and information technology company, since 2002. Mr. Hammergren joined McKesson in 1996 and held a number of management positions before becoming President and Chief Executive Officer in 2001. Mr. Hammergren also is a former director of Nadro, S.A. de C.V. (Mexico).
Mr. Hammergren brings to the Board nearly 30 years of business and leadership experience in the healthcare industry. As a Chairman and Chief Executive Officer of a large global company, Mr. Hammergren brings a wealth of complex management, worldwide operational and financial expertise. He also brings in-depth knowledge of the opportunities and challenges facing global companies.
Raymond J. Lane
Director since 2010
Age 65
Mr. Lane was appointed executive Chairman in September 2011 after having served as HP's non-executive Chairman since November 2010. Mr. Lane has served as Managing Partner of Kleiner Perkins Caufield & Byers, a private equity firm, since 2000. Prior to joining Kleiner Perkins, Mr. Lane was President and Chief Operating Officer and a director of Oracle Corporation, a software company. Before joining Oracle in 1992, Mr. Lane was a senior partner of Booz Allen Hamilton, a consulting company. Prior to Booz Allen Hamilton, Mr. Lane served as a division vice president with Electronic Data Systems Corporation, an IT services company that HP acquired in August 2008. Mr. Lane is a director of several private companies and is a former director of Quest Software, Inc.
Mr. Lane brings to the Board significant experience as an early-stage venture capital investor, principally in the information technology industry, through his position as Managing Partner of Kleiner Perkins. In addition, having served as President and Chief Operating Officer of Oracle, Mr. Lane has experience in worldwide operations, management and the development of corporate strategy. He has also gained valuable experience serving in board leadership roles for many public and private companies.
Ann M. Livermore
Director since 2011
Age 53
Ms. Livermore served as Executive Vice President of the former HP Enterprise Business from 2004 until June 2011 and has served in a transitional role since then. Prior to that, Ms. Livermore served in various other positions with HP in marketing, sales, research and development, and business management since joining the company in 1982. Ms. Livermore also is a director of United Parcel Service, Inc.
Ms. Livermore brings to the Board extensive experience in senior leadership positions at HP. In addition, through her nearly 30 years at HP, Ms. Livermore has vast knowledge and experience in the areas of technology, marketing, sales, research and development and business management, as well as extensive knowledge of enterprise customers and their IT needs. Ms. Livermore also brings public company governance experience from her service on another public company board.
Gary M. Reiner
Director since 2011
Age 57
Mr. Reiner has served as Special Advisor at General Atlantic, a private equity firm, since September 2010. Previously, Mr. Reiner served as Senior Vice President and Chief Information Officer at General Electric Company, a technology, media and financial services company, from 1996 until March 2010. Mr. Reiner previously held other executive positions with GE since joining the company in 1991. Earlier in his career, Mr. Reiner was a partner at Boston Consulting Group where he focused on strategic and process issues for technology businesses. Mr. Reiner also is a director of Genpact Limited.
Mr. Reiner brings to the Board deep insight into how IT can help global companies succeed through his many years of experience as Chief Information Officer at GE. From his other positions at GE and his prior experience with Boston Consulting Group, he also brings decades of experience driving corporate strategy, information technology and best practices across complex organizations. In addition, Mr. Reiner brings recent experience in private equity investing focusing on the IT industry.
Patricia F. Russo
Director since 2011
Age 59 Ms. Russo served as Chief Executive Officer of Alcatel-Lucent, a communications company, from December 2006 to September 2008. Previously, she served as Chairman of Lucent Technologies Inc., a communications company, from 2003 to November 2006 and Chief Executive Officer and President of Lucent from 2002 to November 2006. Ms. Russo also is a director of Alcoa, Inc., General Motors Company, KKR Management LLC (the managing partner of KKR & Co., L.P.) and Merck & Co., Inc. Ms. Russo served as a director of Schering-Plough Corporation from 1995 until its merger with Merck in 2009.
Ms. Russo brings to the Board extensive global business experience, a broad understanding of the technology industry, strong management skills and operational expertise through her positions with Alcatel-Lucent and Lucent Technologies. In those positions, she dealt with a wide range of issues including mergers and acquisitions and business restructurings as she led Lucent's recovery through a severe industry downturn and later a merger with Alcatel. Ms. Russo also brings public company governance experience as a member of boards and board committees of other public companies.
G. Kennedy Thompson
Director since 2006
Age 61
Mr. Thompson has been a principal of Aquiline Capital Partners LLC, a private equity firm, since November 2011 after having served as Senior Advisor to Aquiline from May 2009 until November 2011. Previously, Mr. Thompson served as Chairman of Wachovia Corporation, a financial services company, from 2003 until June 2008. Mr. Thompson also served as Chief Executive Officer of Wachovia, formerly First Union Corporation, from 2000 until June 2008 and as President from 1999 until June 2008. Previously, Mr. Thompson served as Chairman of First Union for a portion of 2001, Vice Chairman of First Union from 1998 to 1999, and Executive Vice President of First Union from 1996 to 1998. Mr. Thompson also is a director of BNC Bancorp.
Mr. Thompson brings to the Board broad business skills and experience, executive leadership expertise, organizational and operational management skills, and knowledge of complex global business and financial matters, having served as Chairman, Chief Executive Officer and President of a global financial services company. Mr. Thompson also brings to the Board recent experience in private equity capital investing focusing on the financial services industry.
Margaret C. Whitman
Director since 2011
Age 55 Ms. Whitman has served as President and Chief Executive Officer of HP since September 2011 and as a member of the Board since January 2011. From March 2011 to September 2011, Ms. Whitman served as a part-time strategic advisor to Kleiner Perkins Caulfield & Byers, a private equity firm. Previously, Ms. Whitman served as President and Chief Executive Officer of eBay Inc. from 1998 to March 2008. Prior to joining eBay, Ms. Whitman held executive-level positions at Hasbro Inc., a toy company, FTD, Inc., a floral products company, The Stride Rite Corporation, a footwear company, The Walt Disney Company, an entertainment company, and Bain & Company, a consulting company. Ms. Whitman also serves as a director of The Procter & Gamble Company and Zipcar, Inc. and is a former director of DreamWorks Animation SKG, Inc.
Ms. Whitman brings to the Board unique experience in developing transformative business models, building global brands and driving sustained growth and expansion through her ten years as President and Chief Executive Officer of eBay. From her previous executive positions with other large public companies, she also brings strong operational and strategic expertise. In addition, Ms. Whitman brings public company governance experience having previously served as a member of boards and board committees of other public companies.
Ralph V. Whitworth
Director since 2011
Age 56
Mr. Whitworth has been a principal of Relational Investors LLC, a registered investment advisor, since 1996. He also is a former director of Genzyme Corporation, Sovereign Bancorp, Inc., Sprint Nextel Corporation and seven other public companies.
Mr. Whitworth brings to the Board expertise in corporate governance and extensive experience having previously served as a director of ten public companies. His various governance-related activities include presenting his views before the United States Congress, the SEC, the New York Stock Exchange Board and the New York Federal Reserve on corporate governance and stockholder rights matters. Mr. Whitworth also has experience in finance, investments and acquisitions from his twenty years of corporate board activities.
MANAGEMENT DISCUSSION FROM LATEST 10K
OVERVIEW
We are a leading global provider of products, technologies, software, solutions and services to individual consumers, small- and medium-sized businesses, and large enterprises, including customers in the government, health and education sectors. Our offerings span:
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personal computing and other access devices;
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multi-vendor customer services, including infrastructure technology and business process outsourcing, technology support and maintenance, application development and support services and consulting and integration services;
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imaging and printing-related products and services; and
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enterprise information technology infrastructure, including enterprise storage and server technology, networking products and solutions, IT management software, information management solutions and security intelligence/risk management solutions.
We have seven business segments for financial reporting purposes: the Personal Systems Group ("PSG"), Services, the Imaging and Printing Group ("IPG"), Enterprise Servers, Storage and Networking ("ESSN"), HP Software, HP Financial Services ("HPFS") and Corporate Investments.
Our strategy and operations are currently focused on the following initiatives:
Strategic Focus
The core of our business is our hardware products, which include our PC, server, storage, networking, and imaging and printing products. Our software business provides enterprise IT management software, information management solutions and security intelligence/risk management solutions delivered in the form of traditional software licenses or as software-as-a-service that allow us to differentiate our hardware products and deploy them in a manner that helps our customers solve problems and meets our customers' needs to manage their infrastructure, operations, application life cycles, application quality and security, business processes, and structured and unstructured data. Our Converged Infrastructure portfolio of servers, storage and networking combined with our Cloud Service Automation software suite enables enterprise and service provider clients to deliver infrastructure, platform and software-as-a-service in a private, public or hybrid cloud environment. Layered on top of our hardware and software businesses is our services business, which provides opportunities to drive usage of HP products and solutions, enables us to implement and manage all the technologies upon which our customers rely, and gives us a platform to be more solution-oriented and a better strategic partner with our customers.
Leveraging our Portfolio and Scale
We offer one of the IT industry's broadest portfolios of products and services, and we leverage that portfolio to our strategic advantage. For example, we are able to provide servers, storage and networking products packaged with services that can be delivered to customers in the manner of their choosing, be it in-house, outsourced as a service via the Internet or via a hybrid environment. Our portfolio of management software completes the package by allowing our customers to manage their IT operations in an efficient and cost-effective manner. In addition, we are working to optimize our supply chain by eliminating complexity, reducing fixed costs, and leveraging our scale to ensure the availability of components at favorable prices even during shortages. We are also expanding our use of industry standard components in our enterprise products to further leverage our scale.
Investing in our Business
We are investing in our business to strengthen our position in our core markets and accelerate growth in adjacent markets in anticipation of market trends, such as cloud computing, unstructured data, data center consolidation and automation, digitization, analytics and IT security. We are also creating innovative new products and developing new channels to connect with our customers. In addition, we have been making focused investments to strengthen our portfolio of products and services that we can offer to our customers, both through organic investments as well as through acquisitions. These investments will allow us to expand in higher margin and higher growth industry segments and further strengthen our portfolio of hardware, software and services.
Driving Operational Effectiveness
We are continuing to work to optimize operational effectiveness across the company. Operational effectiveness remains critical to the success of HP, and we are implementing efficiency, productivity and quality initiatives throughout the company. For example, we are continuing to execute our ongoing initiatives to transform our supply chain and leverage our corporate infrastructure. We have also adopted an initiative to implement better tools, standardize key processes, integrate critical IT systems, minimize redundant or legacy systems and take other actions to improve our productivity, sales, forecasting and business decisions. In addition, we are continuing to implement the multi-year restructuring plan announced in June 2010 relating to our enterprise services business. See Note 8 to the Consolidated Financial Statements in Item 8 for further discussion of this restructuring plan and the associated restructuring charges.
Cash and cash equivalents at October 31, 2011 totaled $8.0 billion, a decrease of $2.9 billion from the October 31, 2010 balance of $10.9 billion. The decrease for fiscal 2011 was due primarily to $10.5 billion of net cash paid for business acquisitions, $10.1 billion of cash used to repurchase common stock and $3.5 billion net investment in property, plant and equipment, the effect of which was partially offset by $12.6 billion of cash provided from operations and $8.3 billion from the net issuance of debt.
We intend the discussion of our financial condition and results of operations that follows to provide information that will assist in understanding our Consolidated Financial Statements, the changes in certain key items in those financial statements from year to year, and the primary factors that accounted for those changes, as well as how certain accounting principles, policies and estimates affect our Consolidated Financial Statements.
The discussion of results of operations at the consolidated level is followed by a more detailed discussion of results of operations by segment.
For a further discussion of trends, uncertainties and other factors that could impact our operating results, see the section entitled "Risk Factors" in Item 1A, which is incorporated herein by reference.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
General
The Consolidated Financial Statements of HP are prepared in accordance with U.S. generally accepted accounting principles ("GAAP"), which require management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, net revenue and expenses, and the disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Senior management has discussed the development, selection and disclosure of these estimates with the Audit Committee of HP's Board of Directors. Management believes that the accounting estimates employed and the resulting balances are reasonable; however, actual results may differ from these estimates under different assumptions or conditions.
The summary of significant accounting policies is included in Note 1 to the Consolidated Financial Statements in Item 8, which is incorporated herein by reference. An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate that are reasonably possible could materially impact the financial statements. Management believes the following critical accounting policies reflect the significant estimates and assumptions used in the preparation of the Consolidated Financial Statements.
Revenue Recognition
We enter into contracts to sell our products and services, and, while the majority of our sales agreements contain standard terms and conditions, there are agreements that contain multiple elements or non-standard terms and conditions. As a result, significant contract interpretation is sometimes required to determine the appropriate accounting, including whether the deliverables specified in a multiple element arrangement should be treated as separate units of accounting for revenue recognition purposes, and, if so, how the price should be allocated among the elements and when to recognize revenue for each element. We recognize revenue for delivered elements as separate units of accounting only when the delivered elements have standalone value, uncertainties regarding customer acceptance are resolved and there are no customer-negotiated refund or return rights for the delivered elements. For elements with no standalone value, we recognize revenue consistent with the pattern of the associated deliverables. If the arrangement includes a customer-negotiated refund or return right relative to the delivered item and the delivery and performance of the undelivered item is considered probable and substantially in our control, the delivered element constitutes a separate unit of accounting. Changes in the allocation of the sales price between elements may impact the timing of revenue recognition but will not change the total revenue recognized on the contract.
We recognize revenue as work progresses on certain fixed-price contracts, such as consulting arrangements. Using a proportional performance method, we estimate the total expected labor costs in order to determine the amount of revenue earned to date. We follow this basis because reasonably dependable estimates of the labor costs applicable to various stages of a contract can be made. Total contract profit is subject to revisions throughout the life of the contract. We record changes in revenue to income, as a result of revisions to cost estimates, in the period in which the facts that give rise to the revision become known.
We recognize revenue on certain design and build (design, development and/or constructions of software and/or systems) projects using the percentage-of-completion method. We use the cost-to-cost method of measurement towards completion as determined by the percentage of cost incurred to date to the total estimated costs of the project. In circumstances when reasonable and reliable cost estimates for a project cannot be made, we recognize revenue using the completed contract method.
We record estimated reductions to revenue for customer and distributor programs and incentive offerings, including price protection, promotions, other volume-based incentives and expected returns. Future market conditions and product transitions may require us to take actions to increase customer incentive offerings, possibly resulting in an incremental reduction of revenue at the time the incentive is offered. Additionally, certain incentive programs require us to estimate, based on historical experience and the specific terms and conditions of the incentive, the number of customers who will actually redeem the incentive.
Under our revenue recognition policies, we establish the selling prices used for each deliverable based on the vendor-specific objective evidence ("VSOE"), if available, third-party evidence, if VSOE is not available, or estimated selling price if neither VSOE nor third-party evidence is available. We establish VSOE of selling price using the price charged for a deliverable when sold separately and, in rare instances, using the price established by management having the relevant authority. Third-party evidence of selling price is established by evaluating largely similar and interchangeable competitor products or services in standalone sales to similarly situated customers. The best estimate of selling price ("ESP") is established considering internal factors such as margin objectives, pricing practices and controls, customer segment pricing strategies and the product life cycle. Consideration is also given to market conditions such as competitor pricing strategies and industry technology life cycles. When determining ESP, we apply management judgment to establish margin objectives and pricing strategies and to evaluate market conditions and product life cycles. We may modify or develop new go-to-market practices in the future. As these go-to-market strategies evolve, we may modify our pricing practices in the future, which may result in changes in selling prices, impacting both VSOE and ESP. The aforementioned factors may result in a different allocation of revenue to the deliverables in multiple element arrangements from the current fiscal year, which may change the pattern and timing of revenue recognition for these elements but will not change the total revenue recognized for the arrangement.
Warranty Provision
We provide for the estimated cost of product warranties at the time we recognize revenue. We evaluate our warranty obligations on a product group basis. Our standard product warranty terms generally include post-sales support and repairs or replacement of a product at no additional charge for a specified period of time. While we engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of our component suppliers, we base our estimated warranty obligation upon warranty terms, ongoing product failure rates, repair costs, product call rates, average cost per call, and current period product shipments. If actual product failure rates, repair rates or any other post sales support costs were to differ from our estimates, we would be required to make revisions to the estimated warranty liability. Warranty terms generally range from 90 days to three years for parts and labor, depending upon the product. Over the last three fiscal years, the annual warranty provision has averaged approximately 3.3% of annual net product revenue, while actual annual warranty costs have experienced favorable trends and averaged approximately 3.2% of annual net product revenue.
Business Combinations
We allocate the fair value of purchase consideration to the tangible assets acquired, liabilities assumed and intangible assets acquired, including in-process research and development ("IPR&D"), based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. We engage independent third-party appraisal firms to assist us in determining the fair values of assets acquired and liabilities assumed. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets.
Critical estimates in valuing certain intangible assets include but are not limited to future expected cash flows from customer contracts, customer lists, distribution agreements, and acquired developed technologies and patents; expected costs to develop IPR&D into commercially viable products and estimating cash flows from projects when completed; brand awareness and market position, as well as assumptions about the period of time the brand will continue to be used in our product portfolio; and discount rates. Management's estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates.
Other estimates associated with the accounting for acquisitions may change as additional information becomes available regarding the assets acquired and liabilities assumed, as more fully discussed in Note 6 to the Consolidated Financial Statements in Item 8, which is incorporated herein by reference.
Valuation of Goodwill and Purchased Intangible Assets
We review goodwill and purchased intangible assets with indefinite lives for impairment annually and whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. The provisions of the accounting standard for goodwill and other intangibles require that we perform a two-step impairment test on goodwill. In the first step, we compare the fair value of each reporting unit to its carrying value. In general, our reporting units are consistent with the reportable segments identified in Note 19 to the Consolidated Financial Statements in Item 8, which is incorporated herein by reference. However, for the webOS business within Corporate Investments, the reporting unit is one step below the segment level. We determine the fair value of our reporting units based on a weighting of income and market approaches. Under the income approach, we calculate the fair value of a reporting unit based on the present value of estimated future cash flows. Under the market approach, we estimate the fair value based on market multiples of revenue or earnings for comparable companies. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is not impaired and we are not required to perform further testing. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then we must perform the second step of the impairment test in order to determine the implied fair value of the reporting unit's goodwill. If the carrying value of a reporting unit's goodwill exceeds its implied fair value, then we record an impairment loss equal to the difference. We also compare the fair value of purchased intangible assets with indefinite lives to their carrying value. We estimate the fair value of these intangible assets using an income approach. We recognize an impairment loss when the estimated fair value of the intangible asset is less than the carrying value.
Determining the fair value of a reporting unit or an indefinite-lived purchased intangible asset is judgmental in nature and involves the use of significant estimates and assumptions. These estimates and assumptions include revenue growth rates and operating margins used to calculate projected future cash flows, risk-adjusted discount rates, assumed royalty rates, future economic and market conditions and determination of appropriate market comparables. We base our fair value estimates on assumptions we believe to be reasonable but that are unpredictable and inherently uncertain. Actual future results may differ from those estimates. In addition, we make certain judgments and assumptions in allocating shared assets and liabilities to determine the carrying values for each of our reporting units.
Our annual goodwill impairment analysis, which we performed during the fourth quarter of fiscal 2011, resulted in an impairment charge for the webOS business as discussed in Note 7 to the Consolidated Financial Statements in Item 8, which is incorporated herein by reference. There was no impairment for HP's remaining reporting units. The excess of fair value over carrying value for each of HP's reporting units as of August 1, 2011, the annual testing date, ranged from approximately $0.4 billion to approximately $25.6 billion. In order to evaluate the sensitivity of the fair value calculations on the goodwill impairment test, we applied a hypothetical 10% decrease to the fair values of each reporting unit. This hypothetical 10% decrease would result in excess fair value over carrying value ranging from approximately $0.2 billion to approximately $22.7 billion for each of HP's reporting units.
We also performed our annual impairment analysis of the indefinite-lived intangible asset valued at $1.4 billion. There was no impairment of the indefinite-lived intangible as a result of the analysis. The excess of fair value over carrying value of the Compaq trade name in the PSG business is approximately $144 million as of August 1, 2011, the annual testing date. In order to evaluate the sensitivity of the fair value calculation, we applied a hypothetical 10% decrease to the fair value of the intangible which resulted in an excess of fair value over carrying value of approximately $13 million. In addition, if a future change in HP's branding strategy resulted in the reclassification of the Compaq trade name from an indefinite-lived intangible to a definite-lived intangible, there would be a significant decrease in the fair value of the asset.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
OVERVIEW
We are a leading global provider of products, technologies, software, solutions and services to individual consumers, small- and medium-sized businesses, and large enterprises, including customers in the government, health and education sectors. Our offerings span:
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personal computing and other access devices;
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multi-vendor customer services, including infrastructure technology and business process outsourcing, technology support and maintenance, application development and support services and consulting and integration services;
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imaging and printing-related products and services; and
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enterprise information technology infrastructure, including enterprise storage and server technology, networking products and solutions, IT management software, information management solutions and security intelligence/risk management solutions.
We have seven business segments for financial reporting purposes: the Personal Systems Group ("PSG"), Services, the Imaging and Printing Group ("IPG"), Enterprise Servers, Storage and Networking ("ESSN"), Software, HP Financial Services ("HPFS") and Corporate Investments.
Our strategy and operations are currently focused on the following initiatives:
Strategic Focus
The core of our business is our hardware products, which include our PC, server, storage, networking, and imaging and printing products. Our software business provides enterprise IT management software, information management solutions and security intelligence/risk management solutions delivered in the form of traditional software licenses or as software-as-a-service that allow us to differentiate our hardware products and deploy them in a manner that helps our customers solve problems and meets our customers' needs to manage their infrastructure, operations, application life cycles, application quality and security, business processes, and structured and unstructured data. Our Converged Infrastructure portfolio of servers, storage and networking combined with our Cloud Service Automation software suite enables enterprise and service provider clients to deliver infrastructure, platform and software-as-a-service in a private, public or hybrid cloud environment. Layered on top of our hardware and software businesses is our services business, which provides opportunities to drive usage of HP products and solutions, enables us to implement and manage all the technologies upon which our customers rely, and gives us a platform to be more solution-oriented, particularly in our focus areas of cloud, security and analytics, and a better strategic partner with our customers.
Leveraging our Portfolio and Scale
We offer one of the IT industry's broadest portfolios of products and services, and we leverage that portfolio to our strategic advantage. For example, we are able to provide servers, storage and networking products packaged with services that can be delivered to customers in the manner of their choosing, be it in-house, outsourced as a service via the Internet or via a hybrid environment. Our portfolio of management software completes the package by allowing our customers to manage their IT operations in an efficient and cost-effective manner. In addition, we are working to optimize our supply chain by eliminating complexity, reducing fixed costs, and leveraging our scale to ensure the availability of components at favorable prices even during shortages. We are also expanding our use of industry standard components in our enterprise products to further leverage our scale.
Investing in our Business
We are working to improve our execution and financial performance and align our cost structure to facilitate increased investment in our business to respond to industry shifts, strengthen our position in our core markets and accelerate growth in adjacent markets in anticipation of market trends, such as cloud computing, unstructured data, data center consolidation and automation, digitization, analytics and IT security. As part of these efforts, we are evaluating all of our businesses and looking for specific areas to improve our performance and effectiveness and rationalize costs. We are also creating innovative new products and developing new channels to connect with our customers. In addition, we have been making focused investments to strengthen our portfolio of products and services that we can offer to our customers, both through organic investments as well as through acquisitions. These investments will allow us to expand in higher margin and higher growth industry segments and further strengthen our portfolio of hardware, software and services to solve customer problems.
Aligning our Cost Structure
We are working to align our cost structure to our current revenue and margin profile and continuing to work to optimize operational effectiveness across the company. As part of those efforts, we are streamlining operations, optimizing and reducing complexity in our supply chain, removing unnecessary complexity from the way we design, manufacture, and deliver products, upgrading, standardizing and automating our sales tools and other key systems and processes, and taking other actions. In addition, we are continuing to implement the multi-year restructuring plan announced in June 2010 relating to our enterprise services business. See Note 6 to the Consolidated Condensed Financial Statements in Item 1 for further discussion of this restructuring plan and the associated restructuring charges.
the changes in certain key items in those financial statements from year to year, and the primary factors that accounted for those changes, as well as how certain accounting principles, policies and estimates affect our Consolidated Condensed Financial Statements.
The discussion of results of operations at the consolidated level is followed by a more detailed discussion of results of operations by segment.
For a further discussion of trends, uncertainties and other factors that could impact our operating results, see the section entitled "Factors That Could Affect Future Results."
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results of Operations is based upon our Consolidated Condensed Financial Statements, which we have prepared in accordance with U.S. generally accepted accounting principles ("GAAP"). The preparation of these financial statements requires management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, net revenue and expenses, and disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Senior management has discussed the development, selection and disclosure of these estimates with the Audit Committee of our Board of Directors. Management believes that the accounting estimates employed and the resulting balances are reasonable; however, actual results may differ from these estimates under different assumptions or conditions.
An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate that are reasonably possible could materially impact the financial statements. Management believes that there have been no significant changes during the three months ended January 31, 2012 to the items that we disclosed as our critical accounting policies and estimates in Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended October 31, 2011.
CONSTANT CURRENCY PRESENTATION
Revenue from our international operations has historically represented, and we expect will continue to represent, a majority of our overall net revenue. As a result, our revenue growth has been impacted, and we expect will continue to be impacted, by fluctuations in foreign currency exchange rates. In order to provide a framework for assessing how each of our business segments performed excluding the impact of foreign currency fluctuations, we present the year-over-year percentage change in revenue performance on a constant currency basis, which assumes no change in the exchange rate from the prior-year period. This constant currency disclosure is provided in addition to, and not as a substitute for, the year-over-year percentage change in revenue on an as-reported basis.
macroeconomic uncertainty adversely impacted revenue from our hardware businesses. The Software segment contributed favorably to the total HP net revenue change primarily as a result of the acquisition of Autonomy Corporation plc ("Autonomy"). An analysis of the change in net revenue for each business segment is included under "Segment Information" below.
Gross Margin
Total HP gross margin decreased by 2.1 percentage points for the three months ended January 31, 2012. Gross margins were impacted by an unfavorable currency impact driven primarily by the strength of the yen, a lower mix of ink supplies volume, competitive pricing in our hardware businesses and continued margin pressure in Services.
PSG gross margin decreased primarily as a result of a volume decline driven by HDD supply constraints and higher logistics costs, the effect of which was partially offset by a favorable commodity pricing environment, combined with a favorable currency impact and lower warranty costs.
Services gross margin decreased due primarily to rate concessions arising from contract renewals, investments in service delivery headcount and additional costs associated with contract deliverable delays.
IPG gross margin declined due primarily to an unfavorable currency impact driven by the strength of the yen and from lower ink supplies volume as a result of actions taken to reduce channel inventory coupled with soft demand in all regions.
ESSN gross margin decreased due primarily to lower selling prices as a result of competitive pressures and an unfavorable product mix and a volume decline driven in part by HDD supply constraints, the effect of which was partially offset by lower component costs.
Software gross margin decreased due primarily to a lower mix of license revenue and higher acquisition-related deferred revenue write-downs, the effect of which was partially offset by rate increases in services.
HPFS gross margin decreased due primarily to lower portfolio margins from a higher mix of revenue from operating leases.
Corporate Investments gross margin increased primarily as a result of a lower impact from the mobile device business associated with the Palm acquisition.
Operating Expenses
Research and Development
Total research and development ("R&D") expense decreased in the three months ended January 31, 2012 due primarily to elimination of R&D expense associated with the webOS device business, the effect of which was partially offset by additional expense from the acquisition of Autonomy. R&D expense increased for Software, Services and IPG and decreased for Corporate Investments, ESSN and PSG.
Selling, General and Administrative
Excluding the net gains on sale of real estate reported in the first quarter of fiscal 2011, selling, general and administrative ("SG&A") expense was flat for the three months ended January 31, 2012. SG&A expense as a percentage of net revenue increased for PSG, Services and ESSN and decreased for Corporate Investments, Software, IPG and HPFS.
Amortization of Purchased Intangible Assets
The increase in amortization expense for the three months ended January 31, 2012 was due primarily to amortization expenses related to the intangible assets purchased as part of the Autonomy acquisition. This increase was partially offset by decreased amortization expenses related to certain intangible assets associated with prior acquisitions reaching the end of their amortization periods.
Restructuring
Restructuring charges for the three months ended January 31, 2012 were $40 million. These charges included $29 million of severance and facility costs related to our fiscal 2008 restructuring plan, $7 million of severance costs related to our fiscal 2009 restructuring plan and $4 million of severance and facility costs related to our fiscal 2010 enterprise services restructuring plan.
Restructuring charges for the three months ended January 31, 2011 were $158 million. These charges included $97 million of severance and facility costs related to our fiscal 2010 enterprise services restructuring plan and $61 million of severance and facility costs related to our fiscal 2008 restructuring plan.
As part of our ongoing business operations, we incurred workforce rebalancing charges for severance and related costs within certain business segments during the first three months of fiscal 2012. Workforce rebalancing activities are considered part of normal operations as we continue to optimize our cost structure. Workforce rebalancing costs are included in our business segment results, and we expect to incur additional workforce rebalancing costs in the future.
Acquisition-related Charges
For the three months ended January 31, 2012, we recorded acquisition-related charges of $22 million primarily for retention bonuses associated with acquisitions completed in fiscal 2010 and 2011.
For the three months ended January 31, 2011, we recorded acquisition-related charges of $29 million primarily for consulting and integration costs, acquisition costs and retention bonuses associated with the acquisition of Electronic Data Systems Corporation and acquisitions completed in fiscal 2010.
Interest and Other, Net
Interest and other, net expense increased by $124 million for the three months ended January 31, 2012. The increase was driven primarily by higher average debt balances and higher currency transaction losses.
Provision for Taxes
Our effective tax rate was 19.4% and 21.0% for the three months ended January 31, 2012 and January 31, 2011, respectively. Our effective tax rate decreased due to an increase in the percentage of total earnings earned in lower-tax jurisdictions. Our effective tax rate generally differs from the U.S. federal statutory rate of 35% due to favorable tax rates associated with certain earnings from our operations in lower-tax jurisdictions throughout the world. We have not provided U.S. taxes for all of such earnings because we plan to reinvest some of those earnings indefinitely outside the United States.
In the three months ended January 31, 2012, we recorded discrete items with a net tax benefit of $49 million, decreasing the effective tax rate. These amounts included net tax benefits of $28 million from restructuring and acquisition charges, and $23 million from reversals of accrued interest expense and penalties on uncertain tax positions, net of tax.
LIQUIDITY AND CAPITAL RESOURCES
Our cash balances are held in numerous locations throughout the world, with substantially all of those amounts held outside of the United States. A majority of the amounts held outside of the United States are generally utilized to support non-U.S. liquidity needs. Most of the amounts held outside of the United States could be repatriated to the United States but, under current law, would be subject to United States federal income taxes, less applicable foreign tax credits. Repatriation of some foreign balances is restricted by local laws. We have provided for the U.S. federal tax liability on these amounts for financial statement purposes, except for foreign earnings that are considered indefinitely reinvested outside of the United States. Repatriation could result in additional U.S. federal income tax payments in future years. Where local restrictions prevent an efficient intercompany transfer of funds, our intent is that cash balances would remain outside of the United States and we would meet U.S. liquidity needs through ongoing cash flows, external borrowings, or both. We utilize a variety of tax planning and financing strategies in an effort to ensure that our worldwide cash is available in the locations in which it is needed. We do not expect restrictions or potential taxes on repatriation of amounts held outside of the United States to have a material effect on HP's overall liquidity, financial condition or results of operations.
CONF CALL
Rob Binns
Good afternoon. Welcome to our second quarter 2012 earnings conference call with Meg Whitman, HP's Chief Executive Officer; and Cathie Lesjak, HP's Chief Financial Officer. Before handing the call over to Meg, may I remind you that this call is being webcast. A replay of the webcast will be made available shortly after the call for approximately 1 year. Some information provided during this call may include forward-looking statements that involve risks, uncertainties and assumptions. If the risks or uncertainties ever materialize or the assumptions prove incorrect, the results of HP may differ materially from those expressed or implied by such forward-looking statements and assumptions. All statements, other than statements of historical facts, are statements that could be deemed forward-looking statements, including, but not limited to, any projections of revenue, margin, expenses, earnings, earnings per share, tax provisions, cash flows, share repurchases, currency exchange rates, the impact of acquisitions or other financial item; any projections of the amount, timing or impact of cost savings, restructuring charges, early retirement programs, workforce reductions or impairment charges; any statements of the plans, strategies and objectives of management for future operations; and any statements concerning the expected development, performance, market share or competitive performance relating to products or services; and any statements or assumptions underlying any of the foregoing.
A discussion of some of these risks, uncertainties and assumptions is set forth in more detail in HP's SEC report, including its most recent Form 10-Q. HP assumes no obligation and does not intend to update any such forward-looking statement. The financial information discussed in connection with this call, including any tax-related items, reflects estimates based on information available at this time and could differ materially from amounts ultimately reported in HP's second quarter Form 10-Q.
Revenue, earnings, operating margins and similar items at the company level are sometimes expressed on a non-GAAP basis and have been adjusted to exclude certain items, including amongst other things, amortization of purchased intangibles, restructuring charges and acquisition-related charges. The comparable GAAP financial information and a reconciliation of non-GAAP amounts to GAAP are included in the tables and in the slide presentation accompanying today's earnings release, both of which are available on HP's Investor Relations webpage at www.hp.com. I'll now turn the call over to Meg.
Margaret C. Whitman
Thank you, Rob, and thanks to all of you for joining us today. The second quarter marks my first 6 months at HP, and I continue to learn about the company every day. It's inspiring. You're surrounded by incredible technology, tremendous innovation, and the people are just terrific. For example, since we last spoke, I participated in TechCon, which is HP's annual internal innovation show. Think of it as the world's greatest science fair for adults, and I was just blown away. The excitement, the enthusiasm, the commitment of HP's technical and innovation community is amazing. From nanoscale-sensing technologies to the memristor, to software that can actually learn, we have an array of forward-looking technologies that are revolutionary. Without question, our innovation engine is alive and well. Now we just need to do a better job of aligning that engine with our businesses in developing a better, faster path to market.
I also recently attended the Drupa conference, which is a show held every 4 years in DĂĽsseldorf, Germany, to showcase the very latest in commercial graphics and printing. And again, I was deeply impressed. It's a chance to see our Color Inkjet Web Press and Indigo portfolio in context. You can see customers and potential customers gravitating towards our innovation. And you clearly can see the shift from analog to digital commercial print happening right before your eyes. The market is being disrupted, and we're leading the charge. I left Drupa with a deeper appreciation for the opportunity HP has to transform that industry.
So now let's talk about HP's performance. Overall, I feel cautiously optimistic coming out of Q2. Our results appear to be stabilizing. While I wouldn't say we turned the corner, we are making progress. For starters, we once again did what we said we were going to do. Our guidance for second quarter non-GAAP diluted EPS was $0.88 to $0.91, and we delivered $0.98, beating the high end of our outlook by $0.07 a share on revenues of $30.7 billion. While earnings and revenues were both down over the prior-year period, the trajectory of the decline began to flatten in Q2, which is encouraging.
Cathie will dig deeper into the numbers and the segment performance in just a few minutes, but let me share a few top-level observations. In PSG, we delivered a solid performance. PSG held margins steady, and an uptick in the commercial business helped offset continued weakness on the consumer side. This contributed to a sequential 6.5% increase in revenue and revenue that was also up slightly year-over-year. With much less impact from the HDD shortage, we executed well and achieved a 2-point sequential gain in worldwide PC market share in calendar Q1. In the process, we reclaimed the #1 share position for commercial globally and we also took the #1 position for commercial in the U.S. from a competitor who’s held the top rank for more than 1 decade. We're absolutely committed to outstanding product design, engineering and quality, attributes that defined HP for decades. You can see that commitment in the big refresh of the PC and printing portfolio we announced in Shanghai a couple of weeks ago. The launch gave us a boost in China, where I think we're starting to regain some momentum. And speaking with customers and partners, I've heard a lot of excitement about the products we introduced, like the Spectre XT, and our new multifunction Color LaserJet Printer. Consumers love the new products and CIOs trust them in a secure work environment. They strike the perfect balance between beautiful design and the workhorse characteristics that businesses and governments require.
In IPG, we improved channel inventory to within an acceptable range. However, we continue to face a weak demand environment, and year-over-year, IPG revenues declined by 10%. Over the last few quarters, IPG has been challenged by external factors such as weak consumer demand and natural disasters, but we're also getting clarity on some of the key actions necessary to continue building on IPG's leadership. We started marketing the quality and innovation of our hardware and supplies, and we're working on new pricing models, services and solutions to further differentiate our offerings.
As you know, in Q2, we announced a strategic realignment that included having the PC and printing businesses join forces under the leadership of Todd Bradley. So far, this is going very well and we see tremendous potential for accelerated growth and efficiencies through common branding, improved marketing, better retail positioning, more attractive product bundles and seamless, best-in-class interoperability.
Turning to Services. Revenues was essentially flat year-over-year in constant currency and we stabilized margins. While margin may fluctuate quarter-to-quarter, we believe that a 10% to 12% range is the right sustainable profit margin profile for Services through the remainder of FY '12. We're focused on building out strategic practice areas in Cloud, security, Information Management and Application Transformation. And we're strengthening the industry alignment of our Services business to help us better solve customer challenges, create more customer value and deepen customer relationships. We're excited about growing these higher-margin categories, but this is a business that continues to be challenged. It's a journey and we have a lot of work ahead of us in this turnaround.
In Enterprise Servers, Storage and Networking, full year revenue declined 6% over the prior-year period. Within that, our Storage and Networking businesses held steady, logging slight annual growth. Storage was a tale of 2 cities. Our 3PAR solutions continued to gain strong traction in the marketplace, growing more than 100% year-over-year, while revenue in our StoreOnce products almost doubled. At the same time, tape and EVA are declining. This is an anticipated product transition and we're effectively managing the shift to our next-generation storage arrays. In Networking, we have a great value proposition and innovation. In one recent development, we worked with AMD on implementing their cloud data center. HP Networking and Server technologies helped reduce the data center footprint by more than 50%, while increasing network capacity and improving performance. And with new solutions like our recently launched virtual application networks, we plan to continue being the disruptor.
In Industry Standard Servers, the HDD shortage was still a factor and we had a tough quarter. However, there's strong promise here. We have some outstanding solutions in the market that we expect to restore the momentum in the category. For example, the launch order ramp for our Gen8 ProLiant server is outpacing that of the Gen7 server. Business Critical Systems, not surprisingly, is still facing challenges from the Oracle Itanium issue, but more important is how we're moving forward. Our Odyssey solution is an innovative, mission-critical x86 platform that will offer customers a transition to open, standards-based architectures.
As part of the Q2 strategic alignment, the global account sales organization joined Enterprise Servers, Storage and Networking under the leadership of Dave Donatelli. This is also going well. The new model sharpens the focus of our sales teams, moves decision making closer to the deal and provides a simplified customer experience. The outcome is a more responsive HP that will make it easier for us to sell effectively and bring more of our portfolio to more of our accounts. In conversations with customers and partners, it's clear that they understand and appreciate the direction we've taken.
In Software, we grew 22% year-over-year, with growth in licenses, support and Services. We had some good wins. For example, in security, we signed a SaaS testing services agreement in Europe that's the biggest deal ever for HP/Fortify. However, we're also facing some challenges. Autonomy had a very disappointing license revenue quarter, with a significant decline year-over-year resulting in a shortfall to our expectations. To help improve Autonomy's performance, Bill Veghte, HP's Chief Strategy Officer and Executive Vice President of HP Software, will step in to lead Autonomy. Mike Lynch, Autonomy's Founder and Executive Vice President for Information Management, will leave HP after a transition period. The market and competitive position for Autonomy remains strong, particularly in Cloud offering, and we have been flooded with a number of big deal leads. Bill is an experienced software leader who will develop the right processes and discipline to scale Autonomy and fulfill its promise, although it will take a few quarters to see tangible improvements.
So big picture, I'd say, that our performance began to stabilize. We saw some bright spots. There's still an awful lot of work to be done and we're looking at every option to accelerate the pace. As discussed during our Q1 call, we are working very hard to better align HP's cost structure with its revenue profile. We're streamlining and removing complexity at every turn, and in the process, we're creating the capacity to invest in innovation and quality. And over time, we're, of course, thinking about how we can drop some of our savings to the bottom line. The strategic realignment we announced last quarter was a good first step, and today, we're taking the next step with the announcement of a multiyear restructuring that will touch every part of HP and create a more streamlined business. We expect to take a pretax charge of approximately $1.7 billion to be included in our FY '12 GAAP results, as well as an additional pretax charge of $1.8 billion to be included in our FY '13 and FY '14 GAAP results. As part of the restructuring, we expect to reduce the workforce by 27,000 positions by the end of 2014, which we'll achieve through a combination of layoffs and a voluntary early retirement program. This restructuring is expected to generate run rate cost savings of approximately $3 billion to $3.5 billion exiting fiscal year 2014. Workforce reductions are never easy. They adversely impact people's lives, but in this case, they're absolutely critical for the long-term health of the company. Our goal is simple: a better outcome for the customers at reduced costs for HP. And while optimizing the workforce is one area that we absolutely need to get right, we see a lot of opportunity in a number of additional areas as well. I know that you're well aware of the cost-reduction efforts that were undertaken in years past. There's been some great work on things like data center consolidation, reducing the number of applications and in horizontal functions such as HR, legal and finance. What we're doing now is very different. We're going after the big cost buckets and fundamental business process re-engineering in our core businesses. This includes optimizing the supply chain, reducing the number of SKUs and platforms, continuing to hone our real estate strategies, simplifying our go-to-market, improving business processes and implementing consistent pricing and promotions to drive end-user demand profitably. It's harder work, but we believe that we'll have a significant payoff over the long term.
Over time, some of the savings will drop to the bottom line, but the majority will be reinvested using a disciplined, data-driven process to prioritize organic opportunities across the business. Return on investment will be evaluated on an ongoing basis and the investments will be calibrated accordingly. We'll be investing to drive leadership in the 3 strategic pillars of Cloud, security and Information Management. And in each of our businesses, we’ll make investments to stay ahead of customer expectations and market trends.
In our PC and printing businesses, we'll be focused on design, engineering, quality and generating demand and desire with our customers. In Services, we're improving processes and building out capabilities in Cloud, security and information. We'll also be strengthening our industry practices, as well as our service quality and innovation. In Software, we'll be investing to speed development across security, information and management infrastructure for both on-premise IT and in the Cloud, with a key focus on Software-as-a-Service offering. This will include the extension of Vertica and Autonomy across our entire portfolio. For example, deploying them in our document workflow solutions and in building out our Information Management practice and services. And in ESSN, we'll invest to drive R&D and innovation in our core businesses of Server, Storage and Networking.
Together, they create a Converged Infrastructure that is the foundation for top customer initiatives, such as Cloud, Big Data analytics and social media. And we'll also invest in our people, in better training and better career development. There's a lot we have to do and we are moving quickly, but we are not taking our eye off the ball when it comes to executing against our ongoing priorities. I'll share just a few examples. In the last quarter, we continued to improve our sales tools with the first wave rollout of our new CRM system and enhancements to hp.com. And in the PC space, a major Mac reseller has taken on the Z1 Workstation, which offers a combination of accelerated performance and design that's not available in any other product on the market today. We also continued to drive our strategy with the announcement of the HP Converged Cloud, the industry's first hybrid delivery approach and portfolio based on a common architecture, spanning traditional IT, private, managed and public clouds.
We announced 10 new products and services to our already extensive Cloud portfolio, and customers are embracing the accelerated innovation, enhanced agility and lower costs that our solutions provide. At HP DISCOVER, we'll be sharing a lot more about our strategy, our portfolio and how we're helping customers succeed. So stay tuned.
I covered a lot today, so let me leave you with a few final thoughts. During our second quarter, we did what we said we were going to do. HP showed some positive, early signs of stabilizing performance. We made progress in a number of areas and delivered on our outlook. We remain confident and expect to achieve non-GAAP earnings per share of at least $4 for FY '12, even before any savings from the restructuring. While the restructuring should improve EPS over time, the pace at which we're able to realize savings and reinvest them is likely to vary quarter-to-quarter, so we don't expect the progress to be completely linear. Things like normal seasonality may not play out exactly the way you're used to seeing it, so our guidance is going to be important. But what matters most, I believe, is that HP is now taking aggressive steps to rebuild and strengthen the company for the long term. I am more confident than ever in our path and in our future. By removing complexity, we're making it easier to do business with HP, easier to sell HP products and easier to work at HP. We're building HP into a more efficient and effective organization that can survive the test of time. And we're creating the capacity to invest, to drive innovation against our strategic pillars of Cloud, security and Information Management, to advance each of our businesses and to ultimately deliver better return for our shareholders. Turning HP around is going to be a lot of hard work. It's going to take time, but we know what needs to be done. And with the actions we've announced today, we're fast-advancing the process. With that, I'd like to turn it over to Cathie to provide more details on the quarter. Cathie?
Catherine A. Lesjak
Thank you, Meg. I'll start with a quick review of the quarterly performance and then give some more details about the restructuring efforts, including expectations for cost savings, headcount reductions, reinvestment and GAAP charges. I'll close with our guidance for Q3 and the second half of fiscal '12.
For the Q2 results. Revenue was $30.7 billion, down 3% year-over-year, both as reported and in constant currency. PSG revenue was flat year-over-year and gained 2 points a share worldwide, quarter-over-quarter, as the business recovered from the hard disk drive shortage triggered by last year's Thailand flooding. ESSN and IPG revenues declined generally as we expected due to the impact of the hard disk drive shortage on ESSN and IPG's continued focus on reducing excess channel inventory.
In terms of our revenue performance by geography, in the Americas, revenue was $13.8 billion, flat year-over-year, both as reported and in constant currency. Revenue in EMEA was down 7% to $10.9 billion and revenue in Asia Pacific was down 1% year-over-year to $6 billion. On a constant-currency basis, EMEA and APJ revenues were down 6% and 3%, respectively, year-over-year. These results reflect the continued macroeconomic challenges in EMEA and some sequential improvement in China.
Non-GAAP gross margin of 23.2% was down 150 basis points year-over-year and up 80 basis points sequentially. Non-GAAP gross margins continue to be impacted by the strong yen, a lower mix of supply, continued margin pressure in services and competitive pricing in our hardware businesses. Non-GAAP operating expenses were $4.4 billion, up 4% year-over-year, driven by acquisitions and our annual salary increases. Non-GAAP operating margin of 8.9% was down 240 basis points year-over-year and the company delivered $1.9 billion in operating profit.
The bridge from operating profit to earnings per share includes the following. Other income and expense yielded a net expense of $243 million, our tax rate was approximately 22% and we used $350 million in the quarter to repurchase 13 million shares, bringing our weighted average share count to 1,987,000,000 shares, which is down 9% year-over-year. As a result, we exceeded our guidance in the quarter, delivering non-GAAP diluted earnings per share of $0.98 and GAAP diluted earnings per share of $0.80. The majority of the difference between GAAP and non-GAAP earnings in Q2 was amortization of purchased intangible assets.
Now turning to our business segments. As Meg highlighted, the Personal Systems Group had strong sequential growth. It delivered revenue of $9.5 billion in the quarter, flat year-over-year, with a 5.5% operating margin. We saw a recovery in desktops and the commercial segment, but consumer notebook demand remained soft. Total units shipped were down 1% year-over-year, but this decline was offset by an increase in the average selling price.
By category, commercial revenue increased 3% and consumer revenue declined 4% year-over-year. Workstation revenue was down 1% year-over-year. Notebook revenue declined 3% year-over-year on a 6% decline in units. And desktop revenue and units were up 5% year-over-year.
Moving on to Services. Services delivered revenue of $8.8 billion, down 1% from the prior-year quarter and flat in constant currency. Operating profit of $997 million was 11.3% of revenue, down 4.1 points from the prior year, primarily due to the impact of resource management and investments in sales and service delivery. In the second quarter, IT Outsourcing revenue of $3.7 billion was down 3% year-over-year, as we are being more selective in the deals we pursue. New deals need to be a good strategic fit and have attractive margins. Application and Business Services revenue was up 1% year-over-year to $2.5 billion, reflecting the progress we're making in the strategic Enterprise services, including Cloud, Application Modernization and Information Management and analytics. Technology Services revenue was flat year-over-year at $2.6 billion, and up 3% sequentially.
Turning to Imaging and Printing. Net revenue for IPG of $6.1 billion was down 10% year-over-year, with supplies revenue declining 12% as we reduced our channel inventory. We are now within our acceptable ranges for channel inventory on a consolidated basis, but the demand environment remains a headwind. Operating profit was $808 million or 13.2% of revenue, which is down 3.4 points year-over-year. These margins were impacted by the channel corrections, the supplies mix and the strong yen. Drupa, the international print media conference, was a successful event for us in March. We announced 10 new digital printing solutions that demonstrated our leadership in graphics.
By business unit, commercial printer revenue was down 4% year-over-year, with commercial hardware units down 7%. Consumer printer revenue was down 15% year-over-year, with hardware units down 13% and total printer unit shipment volumes was down 11% year-over-year.
Turning to the Enterprise Servers, Storage and Networking business. Revenue of $5.2 billion was down 6% year-over-year, with the majority of the declines due to the hard disk drive shortage. Operating profit was $585 million and the operating margin of 11.2% was 260 basis points lower than the prior-year period. This was due to competitive pricing pressure in Industry Standard Servers and the lower mix of BCS, somewhat offset by the higher mix of Storage and Networking.
Now let's dive into the ESSN performance by business. Storage revenue was up 1% year-over-year, with external disk revenue up 8%. StoreOnce revenue was up almost 100% and 3PAR revenue grew by more than 100%, surpassing EVA in size and making it our largest array business. In fact, combined, EVA and 3PAR grew 19% year-over-year. This growth was somewhat offset by declines in the non-disk businesses, including Tape. Overall, Business Critical Systems revenue declined 23% year-over-year and grew 4% sequentially. Within BCS, our mission-critical x86 revenue grew double digits, but BCS performance continued to be impacted by Itanium revenue decline.
Industry Standard Server revenue declined 6% year-over-year, with almost all of the decline due to the hard disk drive shortage. Again, hard disk drive availability was uneven during the quarter. As supply availability improved, we had less of a mismatch between supply and demand than in Q1, and were able to deliver 4% growth sequentially. Going forward, ESSN should see minimal impact from the hard disk drive shortage.
Networking revenue was up 2% year-over-year at $614 million, or up 4% when normalized for a divestiture in Q1. We continued to expand our presence in the data center segment and sustained double-digit growth year-over-year in Wireless LAN and security. We're confident that we have the right product portfolio, including our recently announced HP Virtual Application Network.
Software delivered revenue growth of 22% year-over-year to $970 million. In the quarter, we saw 7% license growth, 17% support revenue growth and 72% growth in Services. Overall, second quarter operating profit for Software was $172 million or 17.7% of revenue, unfavorably impacted by acquisition-related integration costs and accounting adjustments, as well as a lower mix of license revenue in the quarter. The market and the competitive position for Autonomy remains strong, particularly in Cloud offering and the level of lead generation we are seeing across HP for Autonomy's Software and Services is compelling. But as Meg mentioned, license revenue this quarter was disappointing. Sales execution was a challenge and big deals are taking longer to close.
HP Financial Services continues to deliver strong, consistent results. In the second quarter, financing revenue grew 9% to $968 million. Financing volume was up 5% year-over-year and net portfolio assets increased 4% year-over-year. Operating profit of $96 million was up 16% year-over-year to 9.9% of revenue.
Now onto capital allocation in the balance sheet. Our focus is on rebuilding our balance sheet this year. HP's long-term strategy is to allocate capital where it will generate the best return on that investment. During the quarter, we returned $350 million in cash to shareholders via share repurchases, leaving roughly $9.7 billion remaining in the share repurchase authorization. We also paid $251 million to shareholders in the form of dividends. HP generated $2.5 billion in operating cash flow in the quarter and free cash flow of $1.5 billion.
Our total gross cash at the end of the quarter was $8.7 billion. In terms of working capital, our cash conversion cycle for the second quarter was 28 days, flat sequentially and up 3 days from the prior year. The longer cash to cash cycle from the prior year was due to an increase in inventory by 2 days and a 5-day decrease in days payable outstanding, somewhat offset by a 4-day reduction in days sales outstanding. We have work to do on bringing down our cash conversion cycle and are increasing our focus here.
Now I'll get into the details of our restructuring. Our restructuring efforts will help build the long-term future of HP and is part of the multiyear effort to make HP a simpler, more effective company. We are addressing the trends in our businesses and the market by reducing our cost structure and realigning our workforce to create investment capacity, support growth initiatives and innovation, and enable more effective operations around the world. As part of the restructuring, we expect 9,000 employees to exit the company in fiscal '12 and cumulatively, approximately 27,000 employees to exit the company by the end of fiscal year '14. We are offering an early retirement program in the United States, so the level of nonvoluntary workforce reductions may be impacted by the number of employees that participate in that program. Although notifications will begin shortly, we expect minimal savings impacting Q3, with the majority of the fiscal '12 savings impact in Q4. We expect the restructuring actions associated with the charge to generate annualized savings in the range of $3 billion to $3.5 billion exiting fiscal year '14. To achieve the efficiencies, we will be investing in technology and business processes, as well as doing replacement and enablement hiring for new skill sets, in some cases, in lower cost locations. On top of the cost savings from headcount reductions, we expect further nonlabor savings from SKU rationalization, supply-chain efficiencies and price and promotion strategies. We expect to reinvest the majority of the savings from headcount and non-headcount related actions into our business to foster innovation, particularly in Cloud, Big Data analytics, Information Management and security.
And now onto our earnings outlook. From a macro perspective, we remain cautious about the environment globally for both consumer and commercial spending. Second, we expect the pricing environment to remain competitive. Third, Services margins are expected to remain in the 10% to 12% range for the remainder of fiscal year '12. Fourth, we expect continued decline in Business Critical Systems revenue and the resulting pressure on ESSN margins. Finally, we expect OI&E to be at the low end of the previous guidance, an expense of $1 billion to $1.3 billion for the full year.
With that context, we expect third quarter non-GAAP earnings per share to be between $0.94 and $0.97. If we were to exclude any impact of the restructuring plan we announced today, there would be no change to our previously provided non-GAAP EPS fiscal '12 outlook of at least $4. However, because the restructuring efforts are expected to create savings in Q4 faster than we can reinvest in strategic initiatives, we are increasing our fiscal year outlook to reflect the anticipated benefit in Q4. We now expect non-GAAP fiscal year '12 EPS to be in the range of $4.05 to $4.10.
For GAAP guidance, in fiscal year '12, we expect to take a pretax charge of approximately $1.7 billion for the restructuring effort, of which roughly $1 billion will be in Q3. Through fiscal year '14, we expect to take additional pretax charges totaling approximately $1.8 billion. We expect the cash impact of the restructuring to be approximately $400 million in fiscal '12. Note that we expect to fund much of the cash payments associated with the early retirement program in the U.S. out of the pension plan. In addition, we are evaluating the carrying value of the Compaq trade name, which we acquired 10 years ago. Due to our plan for a more targeted use of the Compaq brand going forward, we expect to record a GAAP-only, noncash impairment charge of up to approximately $1.2 billion in the third fiscal quarter for the write-down in the value of the trade name. Thus, we expect third quarter GAAP earnings per share to be between 0 and $0.03 and full year GAAP earnings per share to be in the range of $2.25 to $2.30.
Now I'll turn it over to the operator for Q&A.
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