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Abdul-hadi Hamid
Dan Dan Liu
David Ng
Lisa Berladyn
Maya Rajani
The U.S. The U.S. Personal Personal Computer Computer Industry Industry
AgendaAgenda
Industry Analysis Dell Inc. Apple Computer, Inc. Hewlett-Packard Company Summary
Industry Analysis IIndustry Analysis I
OverviewOverview
1980’s1990’sAfter the Tech Boom
Nasdaq Computer Index:Nasdaq Computer Index:
Dow Jones Computer IndexDow Jones Computer Index
S&P500 v.s. Computer IndustryS&P500 v.s. Computer Industry
World Wide PC Sales World Wide PC Sales ( in millions)( in millions)
0
20
40
60
80
100
120
2000 2001 2002 2003* 2004*
Consumer
Commercial
US PC Unit Sales US PC Unit Sales ( in millions)( in millions)
0
5
10
15
20
25
30
35
40
2000 2001 2002 2003* 2004*
Consumer
Commercial
Geographic PC Sales Geographic PC Sales ( in thousands)( in thousands)
0
10000
20000
30000
40000
50000
60000
70000
1990 1995 2000 2002 2004* 2007*
USA
Europe
Asia Pacific
South/CentralAmerica
Middle East/Africa
2002 PC Sales 2002 PC Sales
33%
30%
27%
6%4%
USA
Europe
Asia Pacific
South/Central America
Middle East/Africa
World Wide Industry GrowthWorld Wide Industry Growth
-15%
-10%
-5%
0%
5%
10%
15%
2001 2002 2003* 2004*
Consumer
Commercial
US GrowthUS Growth
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
2001 2002 2003* 2004* Consumer
Commercial
Business ModelsBusiness Models
Big Box Stores vs. J.I.T. delivery
– Continuous Innovation – Cost Leadership– Differentiation
Own Brand Retail storesConsultingStripped Service – White Boxes
Industry Analysis IIIndustry Analysis II
PC Life CyclePC Life Cycle
Computer industry is mature – customers want convenience and value for their money
The need for speed has tapered off Software is at a much higher level than it
was 5 years ago Market for second hand machines (Ebay) Replacement cycle changed from every 2-3
years to every 5 years Machines upgradeable
Market CompetitionMarket Competition
Transfer in demand drivers for PC componentsFrom To- Microprocessor - Wireless- OS - Mobile Entertainment- Memory
Inventory Risks Product life cycle Narrowing price gap
2003 Worldwide Market Share2003 Worldwide Market Share
17%
17%
6%
4%
3%
53%
Dell
HP
IBM
Fujitsu Siemens
Toshiba
Others
2003 US Market Share2003 US Market Share
31%
22%5%
3%
39%
Dell
HP
IBM
Apple
Others
Key Success FactorsKey Success Factors
Innovation – scientific researchOperating efficiency across supply
chainAfter sales serviceReputation, brand name, designCompetitive pricingExtensive product and service lines
Future Considerations –Future Considerations –ThreatsThreats
Longer replacement cycleDecline in desktopsSaturated first time buyer marketDecline in average selling price =>
lower profit marginsCommodity like market
Future Considerations – Future Considerations – Growing TrendsGrowing Trends
Notebook growth– Lower prices, better performance,
longer battery life, demand for mobility
Demand for wireless productsBundling and compatible products Elimination of intermediariesAlliances and Mergers
Future Considerations Con’tFuture Considerations Con’t
Diversification into Servers Consulting Consumer electronics
– MP3’s (iPod), Online Music (iTunes), TV’s, PDA’s
Server US Market ShareServer US Market ShareJUNE 2003JUNE 2003
29%
28%
20%
16%
5% 2%
Dell
HP
IBM
Sun
Fujitsu
Others
Handheld PDA US Market ShareHandheld PDA US Market Share JUNE 2003JUNE 2003
38%
15%11%
5%
31%Palm
HP
Sony
Dell
Other
Dell Inc.Dell Inc.
Company OverviewCompany Overview
Product– Desktops– Notebooks– Servers and Workstations – Consumer Products
Market share No. 1 World wide 17.4%– No. 1 position in US with 30.90%– Number one in all Major Computer product lines
Major competitor– HP, IBM, Sun Microsystems
Revenues By RegionRevenues By RegionPercentage Terms
Revenues By Region 1998 1999 2000 2001 2002Americas 68% 71% 72% 70% 71%Europe 26% 22% 20% 21% 19%Asia-Pacific 6% 7% 8% 9% 10%
100% 100% 100% 100% 100%
Dollar TermsRevenues By Region 1998 1999 2000 2001 2002Americas 12,405.24$ 17,938.15$ 22,959.36$ 21,817.60$ 25,136.84$ Europe 4,743.18$ 5,558.30$ 6,377.60$ 6,545.28$ 6,726.76$ Asia-Pacific 1,094.58$ 1,768.55$ 2,551.04$ 2,805.12$ 3,540.40$
18,243.00$ 25,265.00$ 31,888.00$ 31,168.00$ 35,404.00$
Company OverviewCompany Overview
Direct Sales ModelFlexibility
• “Able to change prices like an airline changes airfares”
Industry Cost LeaderNumber #3 Brand Name in America
Direct Sales Model Direct Sales Model
Nearly all sales done by telephone or online– Online Sales of $40 million a day
JIT inventory system – Number of suppliers have dropped from approx.
1000 to approx. 100 Experimenting with
– Partnerships with VAR’s and solutions providers– Dell Direct Stores
RevenueRevenue
revenue$35,404.00
$31,888.00
$-
$5,000.00
$10,000.00
$15,000.00
$20,000.00
$25,000.00
$30,000.00
$35,000.00
$40,000.00
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Revenue by Product LineRevenue by Product Line
1998 1999 2000 2001 2002Desktops 64% 58% 53% 53% 53%Enterprise 13% 17% 18% 19% 20%Notebooks 23% 25% 29% 28% 27%
100% 100% 100% 100% 100%
Where to Grow?Where to Grow?
Number One PC maker– Commoditized PC industry
PC sales depend on replacement cycle
Only spends 1.5% of Revenue on R&D
Attempting EverythingAttempting Everything
Consumer Products?Computer Peripherals?Online Music?Computing Services?
Expanding too much too fast???
Company Symbol DELLExchange NASDAQPrice (11/16/03) 35.2452 Week High 37.1852 Week Low 22.59Volume 22.73Market Cap 90.35
P/E 39.2ROE 43.50%Earning/Share 0.91Price/Book Value 16.28Share Outstanding 2.6Bil
Current FinancialsCurrent Financials
Price to EarningsPrice to Earnings
33.2000
70.8000
01020304050607080
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Years
2003
Industry – 50.1
Dell – 39.2
Price to Book Price to Book
12.6200
54.9500
0
10
20
30
40
50
60
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Years
2003
Industry – 9.7
Dell – 16.59
Return on EquityReturn on Equity
43.50%
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
70.00%
80.00%
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
2003
Industry – 19.5%
Dell – 43.30%
Earnings per ShareEarnings per Share
$0.80
$(0.20)
$-
$0.20
$0.40
$0.60
$0.80
$1.00
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Years
Income StatementIncome Statement
Income Statement (Annual)31-Jan-03 1-Feb-02 2-Feb-0135,404 31,168 31,888
28,877 25,422 25,205
6,560 5,746 6,683
2,122 1,246 2,236
2,122 1,246 2,177
0.82 0.48 0.87
0.80 0.46 0.84 Basic net earning / share
Diluted net earning / share
Cost of Sales
Gross Operating Profit
Operation income or loss
Net Income
PERIOD ENDING
Total Revenue
Net IncomeNet Income
Net Income$2,122.00
$(500.00)
$-
$500.00
$1,000.00
$1,500.00
$2,000.00
$2,500.00
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Balance SheetBalance Sheet
Balance Sheet (Annual)31-Jan-03 1-Feb-02
15,470 13,535
8,933 7,519
506 520
10,597 8,841
4,873 4,694
15,470 13,535
PERIOD ENDING
Total Assets
Total Current Liabilities
Long Term Debt
Total Liabilities
Common Stock
Total Stockholder Equity
Financial Statement Financial Statement AnalysisAnalysisCash Flow Statement (annual)31-Jan-03 1-Feb-02 2-Feb-01
3,538 3,797 4,195
-1,381 -2,260 -757
-2,025 -2,702 -695
$591 -1,269 $1,1013,233 3,494 3,713Free Cash Flow
PERIOD ENDING
Net Cash Flow From Operating Activities
Net Cash Flows From Investing Activities
Net Cash Flows From Financing Activities
Change In Cash and Cash Equivalents
10 year Price Graph10 year Price Graph
10 years stock price chart
1 year Price Graph1 year Price Graph
1 year stock price chart
RecommendationRecommendation
Expensive Stock but…Market TimerA head of the Game in Online Sales
BUY
Apple Computer, Inc.Think Different.
History
Invented low-cost PCs – Apple I Ignited the modern PC industry Financial crisis in 1996/1997
Business Strategy
Continuous innovation Pushing towards “Digital Lifestyle” Upscale computing niche Target education, creative, consumer, and
business customers Retail Initiative
74 stores by end of this year
Products
iMac, Power Mac, iBook, PowerBook 72% of revenue in 2003
Software Music: iPod and iTunes
10 year Sales/Income
-$2
$0
$2
$4
$6
$8
$10
$12
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Bill
ions Net Sales
NetIncome
Sales Breakdown
2003 2002 2001 2000
Percentage of non-PC sales 28% 21% 18% 14%
Percentage of international sales 42% 43% 45% 48%
Regional percentage of total sales
Americas 51% 54% 56% 54%
Europe 21% 22% 23% 23%
Japan 11% 12% 13% 17%
Retail 10% 5% 0% -
Other 6% 7% 7% 7%
Management
Major upheaval in management in 1981, 1985, 1990, 1993, and 1997
Internal promotion proved disastrous Michael Spindler
Stock Summary
Ticker AAPLExchange NASDAQLast 21.54Avg Daily Volume 4.721 million52 Week High 25.0152 Week Low 12.72
P/E 113.4ROE 1.60%Earnings/Share 0.19Dividend/Share NAInstitional Ownership 62.40%Book Value 11.45Market Capitalization 7.899 Bil# Shares Outstanding 366.7 Mil
Fundamental Data
Apple Computer, Inc.
Balance Sheet2003 2002 2001
Cash 3,396$ 2,252$ 2,310$ Short-term Investments 1,170$ 2,085$ 2,026$ A/R 766$ 565$ 466$ Total Current Assets 5,388$ 5,388$ 5,143$ PP&E 669$ 621$ 564$ Total Assets 6,057$ 6,298$ 6,021$
A/P 1,154$ 911$ 801$ Accrued Expenses 899$ 747$ 717$ Current Debt 304$ -$ -$ Long-term Debt -$ 316$ 317$
Common Stock 1,926$ 1,826$ 1,693$ Retained Earnings 2,394$ 2,325$ 2,260$ Acquisition related Unearned Stock Compensation (62)$ (7)$ (11)$ Total Shareholders' Equity 4,223$ 4,095$ 3,920$
Income Statement
2003 2002 2001 2000Net Sales 6,207$ 5,742$ 5,363$ 7,983$ COGS 4,499$ 4,139$ 4,128$ 5,817$ Gross Margin 1,708$ 1,603$ 1,235$ 2,166$ R&D 471$ 446$ 430$ 380$ Selling, General & Administrative 1,212$ 1,111$ 1,138$ 1,166$ Operating Income (1)$ 17$ (344)$ 522$ Interest and other Income 93$ 70$ 292$ 570$ Net Income 69$ 65$ (25)$ 786$
Cash Flow Statement
2002 2001 2000Net Income 65$ (25)$ 786$ Depreciation 118$ 102$ 84$ Operating (Gains) Losses 43$ (103)$ (364)$ Net Cash from Operating Activities 89$ 185$ 826$
Sales of Short-term Investments 4,125$ 5,429$ 3,703$ Purchase of Short-term Investments (4,144)$ (4,269)$ (4,499)$ Net Cash from Investing Activities (252)$ 892$ (930)$
Issuance of Stock 105$ 42$ 85$ Stock Repurchase -$ -$ (116)$ Net Cash from Financing Activities 105$ 42$ (31)$
Free Cash Flow (137)$ (47)$ 719$
EPS
-$5.00
-$4.00
-$3.00
-$2.00
-$1.00
$0.00
$1.00
$2.00
$3.00
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
ROE
-80%
-60%
-40%
-20%
0%
20%
40%
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
2003
Industry – 19.5%
Apple – 1.6%
Price to Book
0
0.5
1
1.5
2
2.5
3
3.5
4
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
2003
Industry – 9.7
Apple – 1.9
P/E
0
20
40
60
80
100
120
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
2003
Industry – 50.1
Apple – 94.8
Recommendation
Options 109 mil outstanding @ $28.17 57 mil exercisable @ $30.85
High costs!! High management turnover Supplier dependent Music service will face increased
competition
Sell
© 2003 Hewlett-Packard Development Company, L.P.The information contained herein is subject to change without notice
Hewlett-Packard Company
Company Overview
• Product– IT infrastructure,– Personal computing and access devices,– Imaging and printing solutions – Information technology services
• Market Position– No. 1 position in Europe, Middle East, and Asia– Market leader in PCs, servers, storage system,
management software, printing and imaging• Major competitor
– IBM, DELL, Sun
Company Overview
Inkjet, all-in-one and single-function printers, mono and color laser printers,large-format printing, scanners, print servers, and ink and laser supplies 1
Total server revenue and shipments 1Total disk storage systems, total external disk storage systems and openstorage area networks 1
Network and system management software 1Notebook PCs 1Pocket PCs 1PC shipments 2PC revenues 2Handhelds 2IT services 3
WorldRank
Product
HP & Compaq Merger
• May 7, 2002 the largest merger in the history of computer industry
• Value of the deal at $25 billion
• 1 Compaq share = 0.6325 HP share
• The new company after merge– HP shareholders own 64%– Compaq shareholders own 36%
HP & Compaq Merger(cont’)
• Reactions– Hostile -- Walter Hewlett
(son of Bill Hewlett)
– Stock price dive 19% in a massive sell-off (before the actual merge)
– Other IT hardware & service companies are happy• Hard to bring the cost down
• Too preoccupied with integration
After the Merger
– Change ticker symbol from HWP to HPQ
– HP Chairwoman & CEO Carly Fiorina holds same position
– Compaq Chairman & CEO Michael Capellas is president (left the company later)
– Headquarters: Palo Alto (California)
– Compaq brand essentially disappear
Company Financial Summary
Company Symbol HPQ
Exchange NYSE
Price (11/10/03) 22.2
52 Week High 23.9
52 Week Low 14.18
Volume 6269200
Market Cap 67.9bil
P/E 29.9
ROE 5.60%
Earning/Share 0.76
Div Yield 1.4
Price/Book Value 1.8
Share Outstanding 3.049bil
Diviend/Share 0.32
Ratio Analysis
• P/E
0
10
20
30
40
50
60
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Industry = 23.8
S&P = 22.8
HP = 29.9
Ratio Analysis
• Price to Book
0
1
2
3
4
5
6
7
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Industry = 5.8
S&P = 3.6
HP = 1.8
Ratio Analysis
• EPS
- 0. 5
0
0. 5
1
1. 5
2
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Ratio Analysis
• ROE
- 0. 05
0
0. 05
0. 1
0. 15
0. 2
0. 25
0. 3
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Financial Statement Analysis
• Income Statement (Annual)
31-Oct-02 31-Oct-01 31-Oct-0056,588 45,226 48,870
41,579 33,474 34,864
15,009 11,752 13,918
-1,012 1,439 3,889
-903 408 3,697
-0.36 0.21 1.87
-0.36 0.21 1.80Basic net earning / share
Diluted net earning / share
Cost of Revenue
Gross Profit
Operation income or loss
Net Income
PERIOD ENDING
Total Revenue
Financial Statement Analysis
• Income Statement (Quarterly)
31-Jul-03 30-Apr-03 31-Jan-03 31-Oct-0217,348 17,983 17,877 18,049
12,918 13,051 13,084 13,260
4,430 4,932 4,793 4,789
192 695 936 425
297 659 721 390Net Income
Gross Profit
Operation income or loss
PERIOD ENDING
Total Revenue
Cost of Revenue
Financial Statement Analysis
• Revenue
0
10000
20000
30000
40000
50000
60000
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Financial Statement Analysis
• Net Income
- 2000
- 1000
0
1000
2000
3000
4000
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Financial Statement Analysis
• Balance Sheet (Annual)
31-Oct-02 31-Oct-01 31-Oct-00
70,710 32,584 34,009
24,310 13,964 15,197
10,138 4,667 4,603
34,448 18,631 19,800
30 19 19
36,262 13,953 14,209
PERIOD ENDING
Total Assets
Total Current Liabilities
Total Stockholder Equity
Long Term Debt
Total Liabilities
Common Stock
Financial Statement Analysis
• Cash Flow Statement (annual)
31-Oct-02 31-Oct-01 31-Oct-00
5,444 2,561 4,425
3,118 -549 -1,126
-1,567 -1,230 -5,295
$6,995 $782 -$1,9963,734 1,034 1,723
PERIOD ENDING
Total Cash Flow From Operating Activities
Total Cash Flows From Investing Activities
Total Cash Flows From Financing Activities
Change In Cash and Cash Equivalents Free Cash Flow
Price Chart Analysis
• 1 year stock price chart
Recommendation
• Earnings growth in the past year has accelerated rapidly compared to earnings growth in the past three years(+)
• Positive Free cash flow (+)• The P/E ratio is higher than the
industry average (-)• ROE is low (-)• The future of the merger is still
uncertain (?)
•HOLD
Thank YouThank You