Abdul-hadi Hamid Dan Dan Liu David Ng Lisa Berladyn Maya Rajani The U.S. Personal Computer Industry

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

• 10 years stock price chart

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