The U.S.
Personal
Computer
Industry
Abdul-hadi Hamid
Dan Dan Liu
David Ng
Lisa Berladyn
Maya Rajani
Agenda





Industry Analysis
Dell Inc.
Apple Computer, Inc.
Hewlett-Packard Company
Summary
Industry Analysis I
Overview
1980’s
 1990’s
 After the Tech Boom

Nasdaq Computer Index:
Dow Jones Computer Index
S&P500 v.s. Computer Industry
World Wide PC Sales ( in millions)
120
100
80
Consumer
60
Commercial
40
20
0
2000
2001
2002
2003*
2004*
US PC Unit Sales ( in millions)
40
35
30
25
Consum er
20
Com m ercial
15
10
5
0
2000
2001
2002
2003*
2004*
Geographic PC Sales ( in thousands)
70000
USA
60000
Europe
50000
40000
Asia Pacific
30000
20000
South/Central
Am erica
10000
Middle East/Africa
0
1990
1995
2000
2002
2004*
2007*
2002 PC Sales
4%
6%
USA
33%
Europe
27%
Asia Pacific
South/Central America
Middle East/Africa
30%
World Wide Industry Growth
15%
10%
5%
Consumer
0%
-5%
-10%
-15%
Commercial
2001
2002
2003*
2004*
US Growth
15%
10%
5%
0%
-5%
-10%
-15%
-20%
-25%
2001
2002
2003*
2004*
Consumer
Commercial
Business Models

Big Box Stores vs. J.I.T. delivery
– Continuous Innovation
– Cost Leadership
– Differentiation
Own Brand Retail stores
 Consulting
 Stripped Service – White Boxes

Industry Analysis II
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 23 years to every 5 years
Machines upgradeable
Market Competition

Transfer in demand drivers for PC
components
From
- Microprocessor
- OS
- Memory

Inventory Risks
 Product life cycle
 Narrowing price gap
To
- Wireless
- Mobile Entertainment
2003 Worldwide Market Share
17%
Dell
HP
IBM
17%
53%
Fujitsu Siem ens
Toshiba
6%
4%
3%
Others
2003 US Market Share
31%
Dell
HP
39%
IBM
Apple
Others
3%
5%
22%
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

Future Considerations –
Threats
Longer replacement cycle
 Decline in desktops
 Saturated first time buyer market
 Decline in average selling price =>
lower profit margins
 Commodity like market

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

Future Considerations Con’t
Diversification into



Servers
Consulting
Consumer electronics
– MP3’s (iPod), Online Music (iTunes),
TV’s, PDA’s
Server US Market Share
JUNE 2003
5% 2%
Dell
29%
16%
HP
IBM
Sun
Fujitsu
20%
Others
28%
Handheld PDA US Market Share
JUNE 2003
31%
38%
Palm
HP
Sony
Dell
Other
5%
11%
15%
Dell Inc.
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
Revenues By Region
Percentage Terms
Revenues By Region
1998
Americas
68%
Europe
26%
Asia-Pacific
6%
100%
Dollar Terms
Revenues By Region
1998
Americas
$ 12,405.24
Europe
$ 4,743.18
Asia-Pacific
$ 1,094.58
$ 18,243.00
1999
71%
22%
7%
100%
2000
72%
20%
8%
100%
2001
70%
21%
9%
100%
2002
71%
19%
10%
100%
1999
$ 17,938.15
$ 5,558.30
$ 1,768.55
$ 25,265.00
2000
$ 22,959.36
$ 6,377.60
$ 2,551.04
$ 31,888.00
2001
$ 21,817.60
$ 6,545.28
$ 2,805.12
$ 31,168.00
2002
$ 25,136.84
$ 6,726.76
$ 3,540.40
$ 35,404.00
Company Overview
Direct Sales Model
 Flexibility

• “Able to change prices like an airline
changes airfares”
Industry Cost Leader
 Number #3 Brand Name in America

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
Revenue

revenue
$40,000.00
$35,000.00
$35,404.00
$31,888.00
$30,000.00
$25,000.00
$20,000.00
$15,000.00
$10,000.00
$5,000.00
$1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Revenue by Product Line
Desktops
Enterprise
Notebooks
1998
64%
13%
23%
100%
1999
58%
17%
25%
100%
2000
53%
18%
29%
100%
2001
53%
19%
28%
100%
2002
53%
20%
27%
100%
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 Everything
 Consumer
Products?
 Computer Peripherals?
 Online Music?
 Computing Services?
 Expanding
too much too fast???
Current Financials
Company Symbol
Exchange
Price (11/16/03)
52 Week High
52 Week Low
Volume
Market Cap
DELL
NASDAQ
35.24
37.18
22.59
22.73
90.35
P/E
ROE
Earning/Share
Price/Book Value
Share Outstanding
39.2
43.50%
0.91
16.28
2.6Bil
Price to Earnings
2003
80
70
60
50
40
30
20
10
0
70.8000
Industry – 50.1
Dell – 39.2
33.2000
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Years
Price to Book
2003
54.9500
60
Industry – 9.7
Dell – 16.59
50
40
30
20
12.6200
10
0
1993
1994
1995
1996
1997
1998
Years
1999
2000
2001
2002
Return on Equity
2003
80.00%
70.00%
60.00%
50.00%
Industry – 19.5%
Dell – 43.30%
43.50%
40.00%
30.00%
20.00%
10.00%
0.00%
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Earnings per Share
$1.00
$0.80
$0.80
$0.60
$0.40
$0.20
$$(0.20)
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Years
Income Statement
 Income
PERIOD
ENDING
Statement31-Jan-03
(Annual)
1-Feb-02
Total Revenue
35,404
31,168
2-Feb-01
31,888
Cost of Sales
28,877
25,422
25,205
Gross Operating Profit
6,560
5,746
6,683
Operation income or loss
2,122
1,246
2,236
Net Income
2,122
1,246
2,177
Basic net earning / share
Diluted net earning / share
0.82
0.48
0.87
0.80
0.46
0.84
Net Income

Net Income
$2,500.00
$2,122.00
$2,000.00
$1,500.00
$1,000.00
$500.00
$$(500.00)
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Balance Sheet
PERIOD ENDING
 Balance Sheet
Total Assets
31-Jan-03
(Annual)
1-Feb-02
15,470
13,535
8,933
7,519
Long Term Debt
506
520
Total Liabilities
10,597
8,841
Common Stock
4,873
4,694
Total Stockholder Equity
15,470
13,535
Total Current Liabilities
Financial Statement
Analysis
 Cash
PERIOD
ENDINGFlow Statement (annual)
31-Jan-03 1-Feb-02 2-Feb-01
Net Cash Flow From Operating Activities
3,538
3,797
4,195
Net Cash Flows From Investing Activities
-1,381
-2,260
-757
Net Cash Flows From Financing Activities
Change In Cash and Cash Equivalents
Free Cash Flow
-2,025
$591
3,233
-2,702
-1,269
3,494
-695
$1,101
3,713
10 year Price Graph

10 years stock price chart
1 year Price Graph

1 year stock price chart
Recommendation
Expensive Stock but…
 Market Timer
 A 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
Billions
10 year Sales/Income
$12
Net Sales
$10
$8
Net
Income
$6
$4
$2
$0
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
-$2
Sales Breakdown
Percentage of non-PC sales
Percentage of international sales
Regional percentage of total sales
Americas
Europe
Japan
Retail
Other
2003 2002 2001 2000
28% 21% 18% 14%
42% 43% 45% 48%
51% 54% 56% 54%
21% 22% 23% 23%
11% 12% 13% 17%
10%
5%
0%
6%
7%
7%
7%
Management


Major upheaval in management in 1981,
1985, 1990, 1993, and 1997
Internal promotion proved disastrous

Michael Spindler
Stock Summary
Apple Computer, Inc.
Ticker
Exchange
Last
Avg Daily Volume
52 Week High
52 Week Low
Fundamental Data
P/E
ROE
Earnings/Share
Dividend/Share
Institional Ownership
Book Value
Market Capitalization
# Shares Outstanding
AAPL
NASDAQ
21.54
4.721 million
25.01
12.72
113.4
1.60%
0.19
NA
62.40%
11.45
7.899 Bil
366.7 Mil
Balance Sheet
2003
3,396
1,170
766
5,388
669
6,057
$
$
$
$
$
$
2002
2,252
2,085
565
5,388
621
6,298
$
$
$
$
$
$
2001
2,310
2,026
466
5,143
564
6,021
911
747
316
$
$
$
$
801
717
317
Cash
Short-term Investments
A/R
Total Current Assets
PP&E
Total Assets
$
$
$
$
$
$
A/P
Accrued Expenses
Current Debt
Long-term Debt
$ 1,154
$ 899
$ 304
$ -
$
$
$
$
Common Stock
Retained Earnings
Acquisition related Unearned Stock Compensation
Total Shareholders' Equity
$ 1,926
$ 2,394
$ (62)
$ 4,223
$ 1,826
$ 2,325
$
(7)
$ 4,095
$ 1,693
$ 2,260
$ (11)
$ 3,920
Income Statement
Net Sales
COGS
Gross Margin
R&D
Selling, General & Administrative
Operating Income
Interest and other Income
Net Income
$
$
$
$
$
$
$
$
2003
6,207
4,499
1,708
471
1,212
(1)
93
69
$
$
$
$
$
$
$
$
2002
5,742
4,139
1,603
446
1,111
17
70
65
$
$
$
$
$
$
$
$
2001
5,363
4,128
1,235
430
1,138
(344)
292
(25)
$
$
$
$
$
$
$
$
2000
7,983
5,817
2,166
380
1,166
522
570
786
Cash Flow Statement
2002
65
118
43
89
$
$
$
$
Sales of Short-term Investments
Purchase of Short-term Investments
Net Cash from Investing Activities
$ 4,125 $ 5,429 $ 3,703
$ (4,144) $ (4,269) $ (4,499)
$ (252) $
892 $ (930)
Issuance of Stock
Stock Repurchase
Net Cash from Financing Activities
$
$
$
Free Cash Flow
$
$
$
$
(137) $
42
42
$
$
$
$
2000
786
84
(364)
826
Net Income
Depreciation
Operating (Gains) Losses
Net Cash from Operating Activities
105
105
$
$
$
$
2001
(25)
102
(103)
185
$
$
$
(47) $
85
(116)
(31)
719
EPS
$3.00
$2.00
$1.00
$0.00
-$1.00
-$2.00
-$3.00
-$4.00
-$5.00
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
ROE
40%
20%
0%
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
-20%
-40%
2003
-60%
Industry – 19.5%
-80%
Apple – 1.6%
Price to Book
4
3.5
3
2003
Industry – 9.7
Apple – 1.9
2.5
2
1.5
1
0.5
0
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
P/E
120
2003
100
Industry – 50.1
80
Apple – 94.8
60
40
20
0
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
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
Hewlett-Packard
Company
© 2003 Hewlett-Packard Development Company, L.P.
The information contained herein is subject to change without
Company Overview
•
Product
–
–
–
–
•
Market Position
–
–
•
IT infrastructure,
Personal computing and access devices,
Imaging and printing solutions
Information technology services
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
Product
World
Rank
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
1
Total disk storage systems, total external disk storage systems and open
storage area networks
1
Network and system management software
1
Notebook PCs
1
Pocket PCs
1
PC shipments
2
PC revenues
2
2
3
Handhelds
IT services
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
Industry = 23.8
S&P = 22.8
HP = 29.9
60
50
40
30
20
10
0
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Ratio Analysis
•
Price to Book
Industry = 5.8
S&P = 3.6
HP = 1.8
7
6
5
4
3
2
1
0
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Ratio Analysis
•
EPS
2
1.5
1
0.5
0
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
-0.5
Ratio Analysis
•
ROE
0.3
0.25
0.2
0.15
0.1
0.05
0
-0.05
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Financial Statement Analysis
•
Income Statement (Annual)
PERIOD ENDING
31-Oct-02
56,588
31-Oct-01
45,226
31-Oct-00
48,870
Cost of Revenue
41,579
33,474
34,864
Gross Profit
15,009
11,752
13,918
Operation income or loss
-1,012
1,439
3,889
Net Income
-903
408
3,697
Basic net earning / share
Diluted net earning / share
-0.36
0.21
1.87
-0.36
0.21
1.80
Total Revenue
Financial Statement Analysis
•
Income Statement (Quarterly)
PERIOD ENDING
Total Revenue
31-Jul-03
17,348
30-Apr-03 31-Jan-03 31-Oct-02
17,983
17,877 18,049
Cost of Revenue
12,918
13,051
13,084
13,260
Gross Profit
4,430
4,932
4,793
4,789
Operation income or loss
192
695
936
425
Net Income
297
659
721
390
Financial Statement Analysis
•
Revenue
60000
50000
40000
30000
20000
10000
0
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Financial Statement Analysis
•
Net Income
4000
3000
2000
1000
0
-1000
-2000
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Financial Statement Analysis
•
Balance Sheet (Annual)
PERIOD ENDING
31-Oct-02
31-Oct-01
31-Oct-00
Total Assets
70,710
32,584
34,009
Total Current Liabilities
24,310
13,964
15,197
Long Term Debt
10,138
4,667
4,603
Total Liabilities
34,448
18,631
19,800
30
19
19
36,262
13,953
14,209
Common Stock
Total Stockholder Equity
Financial Statement Analysis
•
Cash Flow Statement (annual)
PERIOD ENDING
31-Oct-02 31-Oct-01 31-Oct-00
Total Cash Flow From Operating Activities
5,444
2,561
4,425
Total Cash Flows From Investing Activities
3,118
-549
-1,126
Total Cash Flows From Financing Activities
Change In Cash and Cash Equivalents
Free Cash Flow
-1,567
$6,995
3,734
-1,230
$782
1,034
-5,295
-$1,996
1,723
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 You