Abdul-hadi Hamid

1
The U.S. Personal Computer Industry

• Abdul-hadi Hamid
• Dan Dan Liu
• David Ng
• Lisa Berladyn
• Maya Rajani

2
Agenda

• Industry Analysis
• Dell Inc.
• Apple Computer, Inc.
• Hewlett-Packard Company
• Summary

3
Industry Analysis I
4
Overview

• 1980s
• 1990s
• After the Tech Boom

5
Nasdaq Computer Index
6
Dow Jones Computer Index
7
SP500 v.s. Computer Industry
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World Wide PC Sales ( in millions)
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US PC Unit Sales ( in millions)
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Geographic PC Sales ( in thousands)
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2002 PC Sales
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World Wide Industry Growth
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US Growth
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Business Models

• Big Box Stores vs. J.I.T. delivery
• Continuous Innovation
• Cost Leadership
• Differentiation
• Own Brand Retail stores
• Consulting
• Stripped Service White Boxes

15
Industry Analysis II
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PC 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

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Market Competition

• Transfer in demand drivers for PC components
• From To
• Microprocessor - Wireless
• OS - Mobile Entertainment
• Memory
• Inventory Risks
• Product life cycle
• Narrowing price gap

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2003 Worldwide Market Share
19
2003 US Market Share
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Key Success Factors

• Innovation scientific research
• Operating efficiency across supply chain
• After sales service
• Reputation, brand name, design
• Competitive pricing
• Extensive product and service lines

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Future Considerations Threats

• Longer replacement cycle
• Decline in desktops
• Saturated first time buyer market
• Decline in average selling price gt lower profit
  margins
• Commodity like market

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Future Considerations Growing Trends

• Notebook growth
• Lower prices, better performance, longer battery
  life, demand for mobility
• Demand for wireless products
• Bundling and compatible products
• Elimination of intermediaries
• Alliances and Mergers

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Future Considerations Cont

• Diversification into
• Servers
• Consulting
• Consumer electronics
• MP3s (iPod), Online Music (iTunes), TVs, PDAs

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Server US Market ShareJUNE 2003
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Handheld PDA US Market Share JUNE 2003
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Dell Inc.
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Company 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

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Revenues By Region
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Company Overview

• Direct Sales Model
• Flexibility
• Able to change prices like an airline changes
  airfares
• Industry Cost Leader
• Number 3 Brand Name in America

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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 VARs and solutions providers
• Dell Direct Stores

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Revenue

• revenue

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Revenue by Product Line
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Where to Grow?

• Number One PC maker
• Commoditized PC industry
• PC sales depend on replacement cycle
• Only spends 1.5 of Revenue on RD

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Attempting Everything

• Consumer Products?
• Computer Peripherals?
• Online Music?
• Computing Services?
• Expanding too much too fast???

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Current Financials
36
Price to Earnings
2003 Industry 50.1 Dell 39.2
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Price to Book
2003 Industry 9.7 Dell 16.59
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Return on Equity
2003 Industry 19.5 Dell 43.30
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Earnings per Share
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Income Statement

• Income Statement (Annual)

41
Net Income

• Net Income

42
Balance Sheet

• Balance Sheet (Annual)

43
Financial Statement Analysis

• Cash Flow Statement (annual)

44
10 year Price Graph

• 10 years stock price chart

45
1 year Price Graph

• 1 year stock price chart

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Recommendation

• Expensive Stock but
• Market Timer
• A head of the Game in Online Sales
• BUY

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Apple Computer, Inc.
Think Different.
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History

• Invented low-cost PCs Apple I
• Ignited the modern PC industry
• Financial crisis in 1996/1997

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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

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Products

• iMac, Power Mac, iBook, PowerBook
• 72 of revenue in 2003
• Software
• Music iPod and iTunes

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10 year Sales/Income
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Sales Breakdown
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Management

• Major upheaval in management in 1981, 1985, 1990,
  1993, and 1997
• Internal promotion proved disastrous
• Michael Spindler

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Stock Summary
55
Balance Sheet
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Income Statement
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Cash Flow Statement
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EPS
59
ROE
2003 Industry 19.5 Apple 1.6
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Price to Book
2003 Industry 9.7 Apple 1.9
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P/E
2003 Industry 50.1 Apple 94.8
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Recommendation

• Options
• 109 mil outstanding _at_ 28.17
• 57 mil exercisable _at_ 30.85
• High costs!!
• High management turnover
• Supplier dependent
• Music service will face increased competition
• Sell

65
Hewlett-Packard Company

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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

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Company Overview
68
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

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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

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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

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Company Financial Summary
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Ratio Analysis

• P/E

Industry 23.8 SP 22.8 HP 29.9
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Ratio Analysis

• Price to Book

Industry 5.8 SP 3.6 HP 1.8
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Ratio Analysis

• EPS

75
Ratio Analysis

• ROE

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Financial Statement Analysis

• Income Statement (Annual)

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Financial Statement Analysis

• Income Statement (Quarterly)

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Financial Statement Analysis

• Revenue

79
Financial Statement Analysis

• Net Income

80
Financial Statement Analysis

• Balance Sheet (Annual)

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Financial Statement Analysis

• Cash Flow Statement (annual)

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Price Chart Analysis

• 10 years stock price chart

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Price Chart Analysis

• 1 year stock price chart

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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

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Thank You