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

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

Industry Analysis I Industry Analysis I

Overview l 1980’s l 1990’s l After the Tech Boom Overview l 1980’s l 1990’s l After the Tech Boom

Nasdaq Computer Index: Nasdaq Computer Index:

Dow Jones Computer Index Dow Jones Computer Index

S&P 500 v. s. Computer Industry S&P 500 v. s. Computer Industry

World Wide PC Sales ( in millions) World Wide PC Sales ( in millions)

US PC Unit Sales ( in millions) US PC Unit Sales ( in millions)

Geographic PC Sales ( in thousands) Geographic PC Sales ( in thousands)

2002 PC Sales 2002 PC Sales

World Wide Industry Growth World Wide Industry Growth

US Growth US Growth

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

Industry Analysis II Industry Analysis II

PC Life Cycle l l l Computer industry is mature – customers want convenience PC Life Cycle l l l 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 23 years to every 5 years Machines upgradeable

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

2003 Worldwide Market Share 2003 Worldwide Market Share

2003 US Market Share 2003 US Market Share

Key Success Factors l Innovation – scientific research l Operating efficiency across supply chain Key Success Factors l Innovation – scientific research l Operating efficiency across supply chain l After sales service l Reputation, brand name, design l Competitive pricing l Extensive product and service lines

Future Considerations – Threats l Longer replacement cycle l Decline in desktops l Saturated Future Considerations – Threats l Longer replacement cycle l Decline in desktops l Saturated first time buyer market l Decline in average selling price => lower profit margins l Commodity like market

Future Considerations – Growing Trends l Notebook growth – Lower prices, better performance, longer Future Considerations – Growing Trends l Notebook growth – Lower prices, better performance, longer battery life, demand for mobility l Demand for wireless products l Bundling and compatible products l Elimination of intermediaries l Alliances and Mergers

Future Considerations Con’t Diversification into Servers l Consulting l Consumer electronics l – MP Future Considerations Con’t Diversification into Servers l Consulting l Consumer electronics l – MP 3’s (i. Pod), Online Music (i. Tunes), TV’s, PDA’s

Server US Market Share JUNE 2003 Server US Market Share JUNE 2003

Handheld PDA US Market Share JUNE 2003 Handheld PDA US Market Share JUNE 2003

Dell Inc. Dell Inc.

Company Overview l Product – – l Desktops Notebooks Servers and Workstations Consumer Products Company Overview l Product – – l 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 l Major competitor – HP, IBM, Sun Microsystems

Revenues By Region Revenues By Region

Company Overview l Direct Sales Model l Flexibility • “Able to change prices like Company Overview l Direct Sales Model l Flexibility • “Able to change prices like an airline changes airfares” l Industry Cost Leader l Number #3 Brand Name in America

Direct Sales Model l Nearly all sales done by telephone or online – Online Direct Sales Model l Nearly all sales done by telephone or online – Online Sales of $40 million a day l JIT inventory system – Number of suppliers have dropped from approx. 1000 to approx. 100 l Experimenting with – Partnerships with VAR’s and solutions providers – Dell Direct Stores

Revenue l revenue Revenue l revenue

Revenue by Product Line Revenue by Product Line

Where to Grow? l Number One PC maker – Commoditized PC industry l PC Where to Grow? l Number One PC maker – Commoditized PC industry l PC sales depend on replacement cycle l Only R&D spends 1. 5% of Revenue on

Attempting Everything l Consumer Products? l Computer Peripherals? l Online Music? l Computing Services? Attempting Everything l Consumer Products? l Computer Peripherals? l Online Music? l Computing Services? l Expanding too much too fast? ? ?

Current Financials Current Financials

Price to Earnings 2003 Industry – 50. 1 Dell – 39. 2 Price to Earnings 2003 Industry – 50. 1 Dell – 39. 2

Price to Book 2003 Industry – 9. 7 Dell – 16. 59 Price to Book 2003 Industry – 9. 7 Dell – 16. 59

Return on Equity 2003 Industry – 19. 5% Dell – 43. 30% Return on Equity 2003 Industry – 19. 5% Dell – 43. 30%

Earnings per Share Earnings per Share

Income Statement l Income Statement (Annual) Income Statement l Income Statement (Annual)

Net Income l Net Income Net Income l Net Income

Balance Sheet l Balance Sheet (Annual) Balance Sheet l Balance Sheet (Annual)

Financial Statement Analysis l Cash Flow Statement (annual) Financial Statement Analysis l Cash Flow Statement (annual)

10 year Price Graph l 10 years stock price chart 10 year Price Graph l 10 years stock price chart

1 year Price Graph l 1 year stock price chart 1 year Price Graph l 1 year stock price chart

Recommendation l Expensive Stock but… l Market Timer l A head of the Game Recommendation l Expensive Stock but… l Market Timer l A head of the Game in Online Sales BUY

Apple Computer, Inc. Think Different. Apple Computer, Inc. Think Different.

History ¢ ¢ ¢ Invented low-cost PCs – Apple I Ignited the modern PC 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 Business Strategy ¢ ¢ ¢ Continuous innovation Pushing towards “Digital Lifestyle” Upscale computing niche Target education, creative, consumer, and business customers Retail Initiative l 74 stores by end of this year

Products ¢ i. Mac, Power Mac, i. Book, Power. Book l ¢ ¢ 72% Products ¢ i. Mac, Power Mac, i. Book, Power. Book l ¢ ¢ 72% of revenue in 2003 Software Music: i. Pod and i. Tunes

10 year Sales/Income 10 year Sales/Income

Sales Breakdown Sales Breakdown

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

Stock Summary Stock Summary

Balance Sheet Balance Sheet

Income Statement Income Statement

Cash Flow Statement Cash Flow Statement

EPS EPS

ROE 2003 Industry – 19. 5% Apple – 1. 6% ROE 2003 Industry – 19. 5% Apple – 1. 6%

Price to Book 2003 Industry – 9. 7 Apple – 1. 9 Price to Book 2003 Industry – 9. 7 Apple – 1. 9

P/E 2003 Industry – 50. 1 Apple – 94. 8 P/E 2003 Industry – 50. 1 Apple – 94. 8

Recommendation ¢ Options l l ¢ ¢ 109 mil outstanding @ $28. 17 57 Recommendation ¢ Options l l ¢ ¢ 109 mil outstanding @ $28. 17 57 mil exercisable @ $30. 85 High costs!! High management turnover Supplier dependent Music service will face increased competition Sell

Hewlett-Packard Company © 2003 Hewlett-Packard Development Company, L. P. The information contained herein is Hewlett-Packard Company © 2003 Hewlett-Packard Development Company, L. P. The information contained herein is subject to change without

Company Overview • Product IT infrastructure, – Personal computing and access devices, – Imaging 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 Company Overview

HP & Compaq Merger • May 7, 2002 the largest merger in the history 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 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 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 Financial Summary

Ratio Analysis • P/E Industry = 23. 8 S&P = 22. 8 HP = Ratio Analysis • P/E Industry = 23. 8 S&P = 22. 8 HP = 29. 9

Ratio Analysis • Price to Book Industry = 5. 8 S&P = 3. 6 Ratio Analysis • Price to Book Industry = 5. 8 S&P = 3. 6 HP = 1. 8

Ratio Analysis • EPS Ratio Analysis • EPS

Ratio Analysis • ROE Ratio Analysis • ROE

Financial Statement Analysis • Income Statement (Annual) Financial Statement Analysis • Income Statement (Annual)

Financial Statement Analysis • Income Statement (Quarterly) Financial Statement Analysis • Income Statement (Quarterly)

Financial Statement Analysis • Revenue Financial Statement Analysis • Revenue

Financial Statement Analysis • Net Income Financial Statement Analysis • Net Income

Financial Statement Analysis • Balance Sheet (Annual) Financial Statement Analysis • Balance Sheet (Annual)

Financial Statement Analysis • Cash Flow Statement (annual) Financial Statement Analysis • Cash Flow Statement (annual)

Price Chart Analysis • 10 years stock price chart Price Chart Analysis • 10 years stock price chart

Price Chart Analysis • 1 year stock price chart Price Chart Analysis • 1 year stock price chart

Recommendation • • • Earnings growth in the past year has accelerated rapidly compared 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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