pc makers sean li, susan liu, raymond tao, ray szutu
TRANSCRIPT
PC MakersPC Makers
Sean Li, Susan Liu,Sean Li, Susan Liu,Raymond Tao, Ray SzutuRaymond Tao, Ray Szutu
IntroductionIntroduction
PC makers assemble and sell desktops, PC makers assemble and sell desktops, notebooks, workstations, and other notebooks, workstations, and other peripheralsperipherals
Serves individual and enterprise / business Serves individual and enterprise / business customerscustomers
OutlineOutline
History of the industryHistory of the industry
Nature of the industryNature of the industry
Products and customersProducts and customers
Industry trendsIndustry trends
Key measuresKey measures
Recent developmentsRecent developments
Individual company analysisIndividual company analysis
History of the IndustryHistory of the Industry
First personal computer (PC) released in First personal computer (PC) released in 1975.1975.
Change in competitive landscape.Change in competitive landscape.
Explosive growth over the past 20 years.Explosive growth over the past 20 years.
Industry CompetitionIndustry Competition
Initially, small number of manufacturersInitially, small number of manufacturers– Highly concentratedHighly concentrated
IBM, Commodore, AppleIBM, Commodore, Apple
Different architectures and modelsDifferent architectures and models– IncompatibilityIncompatibility
Shift to IBM architectureShift to IBM architecture– Dominates todayDominates today
Sales Growth since the 80’sSales Growth since the 80’s
World PC Sales
0
20000
40000
60000
80000
100000
120000
140000
160000
180000
200000
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
Year
Un
its
So
ld (
in t
ho
us
an
ds
)
Sales Growth NowSales Growth NowYear over year % sales change
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
70%
80%
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
Year
% u
nit
ch
an
ge
Worldwide SalesWorldwide Sales
* EMEA = Europe, Middle East, and Africa* EMEA = Europe, Middle East, and Africa
2004 Unit Sales by Region
Asia26%
US32%
EMEA29%
Rest of World13%
PC Market Share (2004)PC Market Share (2004)Market Share as of July 2004
Dell18.2%
HP15.7%
IBM6.5%
Other49.1%
Fujitsu3.8%
Acer3.2%
Gateway3.5%
PC Market Share (2002)PC Market Share (2002)Market Share as of 2002
Dell15.1%
HP16.0%
IBM5.9%
Fujitsu4.2%
Toshiba3.2%
Other55.6%
Industry Sales ComponentsIndustry Sales Components
As of Nov 2004:As of Nov 2004:
78% - Desktops, notebooks, and peripherals78% - Desktops, notebooks, and peripherals
20% - Servers and networking20% - Servers and networking
2% - Workstations2% - Workstations
Industry PerformanceIndustry Performance
NASDAQ Computer Index (IXCO)NASDAQ Computer Index (IXCO)
Composite of all companies in computer Composite of all companies in computer hardware industryhardware industry
Performance since 2000Performance since 2000
Long-term performanceLong-term performance
Industry StatisticsIndustry StatisticsValuation Ratios
P/E (ttm) 30.33
P/Sales (ttm) 1.99
P/Book (mrq) 8.28
P/Cash Flow (mrq) 23.17
Profitability (ttm)
Gross Margin % 29.75
Operating Margin % 9.13
Net Profit Margin % 10.07
Financial Strength (mrq)
Quick Ratio 1.20
Current Ratio 1.43
LT Debt/Equity .29
Total Debt/Equity .42
Mgt. Effectiveness (ttm)
Return on Invstmt % 18.16
Return on Assets % 9.14
Return on Equity % 30.56
Nature of IndustryNature of Industry
Supply ChainSupply Chain
PC Business CyclePC Business Cycle
Third quarterThird quarter– Back to school salesBack to school sales
Fourth quarterFourth quarter– Holiday shopping seasonHoliday shopping season
Thus, the 2Thus, the 2ndnd half of calendar year is half of calendar year is strongerstronger
Business ModelsBusiness Models
Big Box Big Box
DirectDirect
White BoxWhite Box
Big Box StrategyBig Box Strategy
Rely on retailersRely on retailers– To purchase assembled products for resaleTo purchase assembled products for resale– Contractual relationshipsContractual relationships
Use own stores to distributeUse own stores to distribute
Most common approachMost common approach
Direct StrategyDirect Strategy
Avoids retail processAvoids retail process– Sell directly to end usersSell directly to end users– Low mark-ups, savings passed to customersLow mark-ups, savings passed to customers
JIT inventory systemJIT inventory system– Counters obsolescenceCounters obsolescence– FlexibilityFlexibility
White Box StrategyWhite Box Strategy
Combination of Big Box and DirectCombination of Big Box and Direct
Have own retail distributionHave own retail distribution
Assembles PCsAssembles PCs
Meets many niche marketsMeets many niche markets– Video gamersVideo gamers– ““Techies”Techies”
Regulatory & LegalRegulatory & Legal
Patents & TrademarksPatents & Trademarks
LicensesLicenses
Restrictions on pollutionRestrictions on pollution
Restricted substances in electronics Restricted substances in electronics productsproducts
ProductsProducts
Networking EquipmentNetworking EquipmentPeripheralsPeripheralsHandhelds & AccessoriesHandhelds & AccessoriesMass Storage SystemsMass Storage SystemsPersonal ComputersPersonal ComputersServers & MainframesServers & MainframesSpecialized SystemsSpecialized SystemsSupercomputersSupercomputersWorkstations & Thin ClientsWorkstations & Thin Clients
CustomersCustomers
Business / InstitutionalBusiness / Institutional
IndividualIndividual
Or, mix of bothOr, mix of both
Also can be categorized by regionAlso can be categorized by region– North America, EMEA, Asia, etcNorth America, EMEA, Asia, etc
Industry TrendsIndustry Trends
TechnologicalTechnological
Price / CostPrice / Cost
International ExpansionInternational Expansion
Technological TrendsTechnological Trends
The InternetThe Internet– Movement to wirelessMovement to wireless– Mobile computingMobile computing– E-commerceE-commerce
Slowing advancementSlowing advancement
Price / CostPrice / CostAverage PC System Price
0200400600800
10001200140016001800
Date
Do
llars
International ExpansionInternational Expansion
Highly saturated US marketHighly saturated US market
Rapidly developing countriesRapidly developing countries– India & ChinaIndia & China
Growth rate outside of the AmericasGrowth rate outside of the Americas
Key MeasuresKey Measures
Profit marginProfit margin– Sustainability to falling PC pricesSustainability to falling PC prices
S&P core earningsS&P core earnings
Sales growth outside of North AmericaSales growth outside of North America– Asia and EuropeAsia and Europe
Business capital spendingBusiness capital spending– Large portion of sales from businessesLarge portion of sales from businesses
Consumer Confidence IndexConsumer Confidence Index
Valuation RatiosValuation Ratios
Recent DevelopmentsRecent Developments
HP & Compaq mergerHP & Compaq mergerDell enters printer and scanner marketDell enters printer and scanner marketGateway purchases E-machinesGateway purchases E-machinesMichael Dell steps down as CEOMichael Dell steps down as CEOHP fires CEO Carly FiorinaHP fires CEO Carly FiorinaApple on fireApple on fire– The iPod phenomenonThe iPod phenomenon
IBM exits PC businessIBM exits PC business
HPHP
HP HistoryHP History
Was founded in 1939 by Bill Hewlett and Was founded in 1939 by Bill Hewlett and Dave Packard.Dave Packard.
First product was an audio oscillator First product was an audio oscillator
First customer was Walt Disney StudioFirst customer was Walt Disney Studio
Executive TeamExecutive TeamCarleton S. Fiorina: Carleton S. Fiorina: Chairman and Chief Executive OfficerChairman and Chief Executive Officer
Robert P. Wayman: Robert P. Wayman: Executive Vice President and Chief Financial OfficerExecutive Vice President and Chief Financial Officer
Ann O. Baskins: Ann O. Baskins: Senior Vice President, General Counsel and SecretarySenior Vice President, General Counsel and Secretary
Gilles Bouchard: Gilles Bouchard: Chief Information Officer and Executive ViceChief Information Officer and Executive Vice President,President,
Debra L. Dunn: Debra L. Dunn: Senior Vice President, Corporate AffairsSenior Vice President, Corporate Affairs
Jon E. Flaxman: Jon E. Flaxman: Senior Vice President and ControllerSenior Vice President and Controller
Brian Humphries: Brian Humphries: Vice President, Investor RelationsVice President, Investor Relations
Allison Johnson: Allison Johnson: Senior Vice President, Global Brand & Communications Senior Vice President, Global Brand & Communications
Vyomesh Joshi: Vyomesh Joshi: Executive Vice President, Imaging and Printing GroupExecutive Vice President, Imaging and Printing Group
Shane V. Robison: Shane V. Robison: Executive Vice President and Chief Strategy and Executive Vice President and Chief Strategy and Technology Officer Technology Officer
Business SegmentsBusiness Segments
Personal Systems Group (PSG)Personal Systems Group (PSG)
Imaging and Printing Group (IPG)Imaging and Printing Group (IPG)
Enterprise Storage and Servers (ESS)Enterprise Storage and Servers (ESS)
HP Financial Services (HPFS)HP Financial Services (HPFS)
HP Services (HPS)HP Services (HPS)
Software and Corporate InvestmentsSoftware and Corporate Investments
Personal Systems Group (PSG)Personal Systems Group (PSG)
Commercial PCsCommercial PCs
Consumer PCsConsumer PCs
WorkstationsWorkstations
Handheld ComputingHandheld Computing
Digital EntertainmentDigital Entertainment
Imaging and Printing Group (IPG)Imaging and Printing Group (IPG)
Printing and Imaging Devices and Printing and Imaging Devices and SystemsSystems
Digital ImagingDigital Imaging
SuppliesSupplies
Enterprise Storage and Servers Enterprise Storage and Servers (ESS)(ESS)
Business Critical ServersBusiness Critical Servers
Industry Standard ServersIndustry Standard Servers
StorageStorage
HP Services (HPS)HP Services (HPS)
Technology ServicesTechnology Services
Consulting and Integration servicesConsulting and Integration services
Managed ServicesManaged Services
HP Financial Services (HPFS)HP Financial Services (HPFS)
Value-added financial life cycle management Value-added financial life cycle management servicesservicesLeasing, financing programs and asset recovery Leasing, financing programs and asset recovery services, as well as financial asset management services, as well as financial asset management services for large global and enterpriseservices for large global and enterprise customers. customers. Specialized financial services to education and Specialized financial services to education and government entities. government entities. Customized alternativesCustomized alternatives
SoftwareSoftware
Provides management software solutionsProvides management software solutions
Delivers comprehensive, carrier-grade Delivers comprehensive, carrier-grade platforms for developing and deploying platforms for developing and deploying next-generation voicenext-generation voice
Services to network and service providers Services to network and service providers
Business StrategiesBusiness Strategies
Provide superior products, services and Provide superior products, services and overall experiencesoverall experiences
Deliver the best return on IT investments Deliver the best return on IT investments in the industry in the industry
Build world class cost structures Build world class cost structures
Provide customers complete IT solutions.Provide customers complete IT solutions.
Revenue Composition Revenue Composition
2004 Revenue Composition
Ess19%
HPS17%
Software1%PSG
31%
IPG30%
HPFS2% Ess
HPS
Software
PSG
IPG
HPFS
Revenue CompositionRevenue Composition
2003 revenue composition
Ess20%
HPS17%
Software1%
PSG29%
IPG30%
HPFS3% Ess
HPS
Software
PSG
IPG
HPFS
Revenue CompositionRevenue Composition
2002 revenue compostion
HPS16%
Software1%PSG
26%
IPG36%
HPFS3%
ESS18%
Ess
HPS
Software
PSG
IPG
HPFS
Operating Profit CompositionOperating Profit Composition2004 segment contribution to earnings from operation
-50
0
50
100
segment
pe
rce
nta
ge
co
ntr
ibu
tio
n
segment contributionto earnings fromoperation
3.267 23.85 -2.74 3.966 72.65 2.361 -3.36
Ess HPSSoftware
PSG IPG HPFSCoporate
Operating Profit CompositionOperating Profit Composition
Year 2003 segment contribution to earnings from operation
-10.00%0.00%
10.00%20.00%30.00%
40.00%50.00%60.00%
70.00%80.00%
Segments
Perc
en
tag
e t
o t
ata
l earn
ing
s
fro
m o
pera
tio
n
Series1
Operating Profit CompositionOperating Profit Composition
2002 segment contribution to earnings from operation
-20.00%
0.00%
20.00%
40.00%
60.00%
80.00%
100.00%
120.00%
Segments
Perc
en
tag
e t
o t
ata
l earn
ing
s
fro
m o
pera
tio
n
Series1
Cost StructureCost Structure
2004 operating expense structure
23%
72%
4% 1%0%0%
R & D
selling genearal andadministrative
Amortization of purchasedintangible assets
Acquisition-related charges
In-process R&D charges
Cost StructureCost Structure
2003 operating expense structure
22%
68%
3% 5% 2%0%
R & D
selling genearal andadministrativeAmortization of purchasedintangible assetsRestructuring charges
Acquisition-related charges
In-process R&D charges
Cost StructureCost Structure
2002 operating expense structure
21%
56%
3%
11%4% 5%
R & D
selling genearal andadministrative
Amortization of purchasedintangible assets
Restructuring charges
Acquisition-related charges
In-process R&D charges
Income Statement AnalysisIncome Statement AnalysisDetails in Transparency!Details in Transparency!
Revenue increased by 9.37% from 2003 to Revenue increased by 9.37% from 2003 to 20042004
Net Income increased by 37.73%Net Income increased by 37.73%
““Restructuring Charges” & “ Acquisition Restructuring Charges” & “ Acquisition Related Charges” drop dramatically Related Charges” drop dramatically
Income Statements AnalysisIncome Statements Analysis
Revenue vs Year
$0
$20,000
$40,000
$60,000
$80,000
$100,000
year
rev
en
ue
(in
mill
ion
do
llars
)
revenue vs year $42,371 $48,870 $45,226 $56,588 $73,061 $79,905
1999 2000 2001 2002 2003 2004
Income Statement AnalysisIncome Statement Analysis
Gross Margin vs Year
$0
$10,000
$20,000
$30,000
2000 2001 2002 2003 2004
Year
Gro
ss
Ma
rgin
Series2
Income Statements AnalysisIncome Statements Analysis
Earnings vs Year
-$2,000
$0
$2,000
$4,000
year
ea
rnin
gs
(in
mill
ion
do
llars
)
earnings vs year $3,491 $3,697 $408 -$903 $2,539 $3,497
1999 2000 2001 2002 2003 2004
Balance Sheet AnalysisBalance Sheet AnalysisDetails in Transparency!Details in Transparency!
Annual Balance Statement ( in million dollars)
Acounting Period 2001 2002 2003 2004
Total Current Assets 21305 36075 40954 42901
Other Assets 11279 34635 33762 33237
Total Assets 32584 70710 74716 76138
Total Current Liabilities 13964 24310 25469 28588
Total Long Term Debt 3729 6035 6494 4623
Other Liabilities 938 4103 5007 5363
Total Liabilities 18631 34448 36970 38574
Total Shareholders' Equity 13953 36262 37746 37564
Total Liabilities and Shareholders' Equity $32,584 $70,710 $74,716 $76,138
Balance Sheet AnalysisBalance Sheet Analysis
Shares Outstanding vs Year
0
1000
2000
3000
4000
year
share
s o
uts
tandin
g
(in m
illio
ns)
sharesoutstanding
2009 1947 1,939 3,044 3,043 2,911
1999 2000 2001 2002 2003 2004
Balance Sheet AnalysisBalance Sheet Analysis
Price to Book Value
0.00
0.50
1.00
1.50
2.00
2.50
3.00
1999 2000 2001 2002 2003 2004
year
pri
ce
/bo
ok
price/book
Balance AnalysisBalance Analysis
market cap vs year
$0.00
$20,000.00
$40,000.00
$60,000.00
$80,000.00
year
mar
ket c
ap (i
n m
illio
n do
llars
)
market cap $41,264.86 $39,991.38 $39,827.06 $52,843.84 $69,897.71 $61,043.67
1999 2000 2001 2002 2003 2004
Balance Sheet AnalysisBalance Sheet Analysis
EPS vs Year
-$0.50$0.00
$0.50$1.00
$1.50$2.00
$2.50
year
EP
S
EPS $1.74 $1.90 $0.21 -$0.30 $0.83 $1.20
1999 2000 2001 2002 2003 2004
Cash Flow Statement AnalysisCash Flow Statement Analysis Details in Transparency!Details in Transparency!
Annual Cash Flow Statement (in million dollars)
Acounting Period 2001 2002 2003 2004
Cash From Operating Activities 2573 5444 6057 5088
Cash From Investing Activities -561 3118 -1512 -2454
Cash From Financing Activities -1230 -1567 -1549 -4159
Net Change in Cash 782 6995 2996 -1525
Free Cash Flow AnalysisFree Cash Flow Analysis
Free Cash Flow (in millions)
Year Operating cash flow Capital Expenditure FCF = CFO -PPE
1999 $3,034 $1,134 $1,900
2000 $4,675 $1,737 $2,938
2001 $2,573 $1,527 $1,046
2002 $5,444 $1,710 $3,734
2003 $6,057 $1,995 $4,062
2004 $5,088 $2,126 $2,962
Free Cash Flow AnalysisFree Cash Flow Analysis
FCF = CFO -CE(in millions)
$0
$1,000
$2,000
$3,000
$4,000
$5,000
1999 2000 2001 2002 2003 2004
Shares Repurchase ProgramShares Repurchase Program
Total number of shares purchased
Average price paid per share
Approximate Dollar value of shares that may yet be purchased under the plans or programs
10,594,700 17.59 1,914,381,036
101,659,945 18.12 3,072,420,529
9,500,000 18.56 2,896,069,320
121,754,645 18.11
Option ActivityOption Activity
note: shares in thouthands
sharesweighted average exercise price shares
weighted average exercise price shares
weighted average exercise price
Outstanding at beginning of year 499858 31 459334 32 217441 35Granted 71894 22 71426 16 66438 21Assumed through acquisitions 2507 14 202028 33Exercised -12869 13 -14873 10 -9208 7Forfeited or cancelled -11522 30 -16029 33 -17365 37Outstanding at end of year 549868 499858 459334exercisable at end of year 377438 326829 286830
2004 2003 2002
Valuation of OptionsValuation of Options
2004 2003 2002 2004 2003 2002Weighted average fair value of grants $6. 72 $5. 15 $8. 64 $4. 95 $5. 92 $5. 81Risk-free interest rate 2. 77 3. 23 4. 84 1. 11 1. 21 1. 94Dividend yield 1. 4% 180. 0% 180. 0% 150. 0% 190. 0% 1. 9%Expected volatility 35% 35% 39% 28% 47% 54%Expected life in months 60 72 84 6 6 6
stock options stock purchase rights
Stock PerformanceStock Performance
5-5-year weekly chart of stock priceyear weekly chart of stock price
Stock PerformanceStock Performance
5-5-year chart of HP vs IXCOyear chart of HP vs IXCO
Technical AnalysisTechnical Analysis5-5-year Weekly Chart of the Dow Jones U.S. DJ US Computer Hardware Indexyear Weekly Chart of the Dow Jones U.S. DJ US Computer Hardware Index
Technical AnalysisTechnical Analysis
1-1-year Daily Chart of the Dow Jones U.S. DJ US Computer Hardware Indexyear Daily Chart of the Dow Jones U.S. DJ US Computer Hardware Index
Technical AnalysisTechnical Analysis
One Year Chart of HP vs IXCOOne Year Chart of HP vs IXCO
Technical AnalysisTechnical Analysis
3-3-month Chart of HP vs IXCOmonth Chart of HP vs IXCO
Technical AnalysisTechnical Analysis
One Year Stock Price trendOne Year Stock Price trend
Value DriverValue Driver
Major operating profit contributor ---- IPG Major operating profit contributor ---- IPG DivisionDivision
Recovery in PSG DivisionRecovery in PSG Division
Value Driver ---- IPGValue Driver ---- IPG
For the fiscal year ended at Oct. 31(in
million dollars)
2002 2003 2004
Net revenue $20,358 $22,569 $24,199
Percentage increased 10.86% 7.22%
Earning from operations $3,365 $3,596 $3,847
Percentage increased 6.86% 6.98%
Value Driver ---- IPGValue Driver ---- IPG
Contributing 30% of total revenue in 2004, rising Contributing 30% of total revenue in 2004, rising by 7.2% from 2003by 7.2% from 2003
Contributing 72.2% of total operating profit of Contributing 72.2% of total operating profit of 2004, increasing 7.0% from 20032004, increasing 7.0% from 2003
Being expected to be the most profitable Being expected to be the most profitable segment in the futuresegment in the future
Value Driver ---- PSGValue Driver ---- PSG
For the fiscal year ended at Oct. 31(in
million dollars)
2002 2003 2004
Net revenue $14,680 $21,210 $24,199
Percentage increased 44.48% 16.09%
Earning from operations ($236) $22 $210
Percentage increased 109.00% 855.00%
Value Driver ---- PSGValue Driver ---- PSG
Revenue improved 10% in 2004.Revenue improved 10% in 2004.
Sales volume 17% increase in 2004Sales volume 17% increase in 2004
But! – Operating profit contributes 4% of But! – Operating profit contributes 4% of total.total.
The merger with Compaq Computer is still The merger with Compaq Computer is still not successful as projected.not successful as projected.
RecommendationRecommendation
New CEO SelectionNew CEO Selection
- Internal- Internal
- External- External
Conclusion ------ Hold !Conclusion ------ Hold !
Founded in 1985Founded in 1985
Third largest PC maker in USThird largest PC maker in US
StrategyStrategy
To profitably grow their PC businessTo profitably grow their PC business
To diversify their revenue and increase To diversify their revenue and increase gross margin with consumer electronics gross margin with consumer electronics products products and related servicesproducts products and related services
To reduce their cost structureTo reduce their cost structure
Products being producedProducts being produced
PCs and serversPCs and servers– Desktop PCsDesktop PCs– Mobile PCsMobile PCs– Tablet PCTablet PC– ServersServers
Consumer Electronics and Other non-PC Consumer Electronics and Other non-PC products and servicesproducts and services
ManagementManagement
Ted WaittTed Waitt, , ChairmanChairman
Wayne InouyeWayne Inouye, CEO, CEO
Stock PerformanceStock Performance
Financial StatementsFinancial StatementsAnnual income statementAnnual income statement
Figures in Millions (US Dollars)rounded to the millionth,Except EPS Data 12/ 31/ 2004 12/ 31/ 2003 12/ 31/ 2002 12/ 31/ 2001 12/ 31/ 2000 12/ 31/ 1999
Sales 3,650 3,402 4,171 6,080 9,601 8,646
Cost of Goods 3,343 2,939 3,605 5,241 7,542 6,746
Gross Profit 307 464 566 838 2,059 1,900Selling, Admin., Depr. &Amort. Expenses - 974 1,077 2,022 1,548 1,304Income After Depreciation& Amortization -602 -511 -511 -1,184 511 596
Non-Operating Income 20 19 35 -106 -103 68
Interest Expense - 0 0 0 0 0
Pretax Income -582 -491 -476 -1,290 409 663
Income Taxes -14 24 -178 -276 155 236Minority Interest - 0 0 0 0 0
Investment Gains / Losses - 0 0 0 0 0
Other Income / Charges - 0 0 0 0 0
Income from Cont.Operations -568 -515 -298 -1,014 253 428
Annual Income Statement For GATEWAY INC (GTW)
Extras & DiscontinuedOperations 0 0 0 -20 -12 428
Net Income -568 -515 -298 -1,034 241 428
Income before Depreciation &Amortization -602 -347 -352 -984 700 730
Depreciation & Amortization(Cash Flow) - 164 159 200 189 134
Income after Depreciation& Amortization -602 -511 -511 -1,184 511 596
Average Shares 364 324 324 323 331 324Diluted EPS Before Non-Recurring Items -0.34 -0.96 -0.76 -0.41 1.36 1.37
Diluted Net EPS -1.31 -1.62 -0.95 -3.2 0.95 1.32
Depreciation Footnote
Earnings Per Share Data
Outstanding sharesOutstanding sharesAverage Shares (in millions)
300
310
320
330
340
350
360
370
Average Shares 364 324 324 323 331 324
2004 2003 2002 2001 2000 1999
Net Income Net Income
Net Income(in million US dollars)
-1500
-1000
-500
0
500
1000
Net Income -568 -515 -298 -1,034 241 428
2004 2003 2002 2001 2000 1999
Profit MarginProfit Margin
Profit margin
-0.20
-0.15
-0.10
-0.05
0.00
0.05
0.10
Profit margin -0.16 -0.15 -0.07 -0.17 0.03 0.05
2004 2003 2002 2001 2000 1999
Earnings Per ShareEarnings Per Share
Diluted Net EPS(in dollars)
-4
-3
-2
-1
0
1
2
Diluted Net EPS -1.31 -1.62 -0.95 -3.2 0.95 1.32
2004 2003 2002 2001 2000 1999
Balance sheetBalance sheetFigures in Millions (USDollars) rounded tothe millionth, ExceptBook Value Per Share 12/ 31/ 2004 12/ 31/ 2003 12/ 31/ 2002 12/ 31/ 2001 12/ 31/ 2000 12/ 31/ 1999
Cash & Equivalents 644 1,089 1,067 1,166 614 1,337Receivables 342 210 198 220 545 646Notes Receivables - 0 0 0 0 0Inventories 196 114 89 120 315 192
Other Current Assets 218 250 602 617 793 522
Total Current Assets 1,400 1,663 1,955 2,123 2,267 2,697Net Property &Equipment 103 331 481 608 897 746Investments &Advances - 0 0 0 0 0Other Non-CurrentAssets - 0 0 0 0 0Deferred Charges - 0 0 0 0 0Intangibles 251 14 23 36 166 52Deposits & OtherAssets 18 20 50 219 822 460
Total Assets 1,772 2,028 2,509 2,987 4,153 3,955
Annual Balance Sheet For GATEWAY INC (GTW)
Notes Payable 50 0 0 0 0 0
Accounts Payable 532 416 279 341 785 898Current Portion LongTerm Debt - 0 0 0 0 5Current PortionCapital Leases - 0 0 0 0 0Accrued Expenses 314 326 421 604 695 763Income TaxesPayable - 0 0 0 0 0Other CurrentLiabilities 227 257 240 201 151 143
Total CurrentLiabilities 1,123 999 940 1,146 1,631 1,810
Mortages - 0 0 0 0 0DeferredTaxes/Income - 0 0 0 0 0Convertible Debt - 0 0 0 0 0Long Term Debt 300 0 0 0 0 3Non-Current CapitalLeases - 0 0 0 0 0Other Non-CurrentLiabilities 104 110 127 83 141 125Minority Interest(Liabilities) - 0 0 0 0 0
Total Liabilities 1,527 1,109 1,067 1,229 1,772 1,938
Preferred Stock - 398 395 393 0 0Common Stock (Par) - 3 3 3 3 3Capital Surplus - 735 733 732 742 657Retained Earnings - -219 307 616 1,650 1,409Other Equity - 3 3 14 7 0
Treasury Stock - 0 0 0 22 52Total Shareholders' 245 920 1,442 1,758 2,380 2,017Total Liabilities &Shareholders'Equity 1,772 2,028 2,509 2,987 4,153 3,955
Total Common Equity 245 522 1,047 1,365 2,380 2,017Average Shares 364 324 324 323 331 324Book Value PerShare 0.66 2.84 4.45 5.43 7.37 6.36
Liabilities & Shareholders' Equities
Shareholders' Equity
Price to book valuePrice to book value
Price to book value
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
Price to book value 1.23 0.73 0.41 0.87 1.43 5.90
2004 2003 2002 2001 2000 1999
Price/SalesPrice/Sales
Price/sales
0.00
0.50
1.00
1.50
2.00
2.50
3.00
2004 2003 2002 2001 2000 1999
Price/EarningsPrice/Earnings
Price/Earnings
-10.00
0.00
10.00
20.00
30.00
40.00
50.00
60.00
Price/Earnings -4.59 -2.84 -3.31 -2.51 18.94 54.59
2004 2003 2002 2001 2000 1999
Return on AssetsReturn on Assets
Return on Assets
-0.40
-0.30
-0.20
-0.10
0.00
0.10
0.20
Return on Assets -0.32 -0.25 -0.12 -0.35 0.06 0.11
2004 2003 2002 2001 2000 1999
Return on EquityReturn on Equity
Return on Equity
-2.50
-2.00
-1.50
-1.00
-0.50
0.00
0.50
Return on Equity -2.32 -0.56 -0.21 -0.59 0.10 0.21
2004 2003 2002 2001 2000 1999
Cash Flow StatementsCash Flow StatementsFigures in Millions (US
Dollars), Except EPS Data 12/31/04 12/31/03 12/31/02 12/31/01 12/31/00 12/31/99
Net Income (Loss) - -514.81 -297.71 -1,033.91 241.48 427.94
Depreciation / Amortization & Depletion - 163.97 159.45 199.97 189.08 134.1
Net Change From Assets / Liabilities - 331.03 -222.26 -52.57 -278.51 141.16
Net Cash From Discontinued Operations - 0 0 19.51 0 0
Other Operating Activities - 92.49 335.84 596.66 136.72 27.83
Net Cash From Operating Activities - 72.69 -24.67 -270.33 288.77 731.05
Property & Equipment - -72.97 -78.49 -199.49 -314.8 -338.21
Aquisition / Disposition Of Subsidiaries - 0 0 0 0 0
Investments - -129.21 -166.6 -282.79 -167.91 -176.48
Other Investing Acitivities - 20.04 9.89 591.29 -470.56 -316.59
Net Cash From Investing Activities - -182.14 -235.2 109 -953.28 -831.28
Free Cash FlowsFree Cash Flows
FCF
-800
-600
-400
-200
0
200
400
600
800
FCF 56.382 -56.52 -191.27 -553.12 120.86 554.57
2004 2003 2002 2001 2000 1999
Major Events in 2004Major Events in 2004
Acquisition of eMachines in March 2004Acquisition of eMachines in March 2004
Closed 188 retail stores in April 2004Closed 188 retail stores in April 2004
Expanded distribution PCs at major Expanded distribution PCs at major retailers in North America retailers in North America
eMachineseMachines
The second-largest vendor of desktop PCs The second-largest vendor of desktop PCs sold through U.S. retailerssold through U.S. retailers
$1.1 billion in 2003 sales$1.1 billion in 2003 sales
Since its launch in 1998, sold more than Since its launch in 1998, sold more than five million PCsfive million PCs
International market in Japan and the UKInternational market in Japan and the UK
eMachineseMachines
StrategyStrategy– provider of value-end PCs with already provider of value-end PCs with already
established retail channelsestablished retail channels
Key benefitKey benefit
A key benefit of the Gateway-eMachines A key benefit of the Gateway-eMachines merger is the opportunity to modify merger is the opportunity to modify Gateway's channel strategy for more cost-Gateway's channel strategy for more cost-effective distribution and marketing effective distribution and marketing
Change of Distribution ChannelChange of Distribution Channel
BeforeBefore– Retail stores, internet and telephone saleRetail stores, internet and telephone sale
AfterAfter– Retail (major retail stores, BestBuy, Retail (major retail stores, BestBuy,
CompUSA, Circuit CityCompUSA, Circuit City ))– Professional (severs)Professional (severs)– Direct sale ( Telephone, internet)Direct sale ( Telephone, internet)
Segment PerformanceSegment Performance
4Q 3Q 2Q 1Q
Retail segment 604 408 306 168
Professional segment 237 325 318 382
Direct sale segment 188 182 214 465
Quarterly PerformanceQuarterly Performance
4th Q 3rd Q 2nd Q 1st Q
Revenue 1029 915 838 868
SG&A 106 154 354 296
restructuring, transformation and integration costs 22 53 228 93
Net income 94 -59 -336 -167
Gross margin 8.80% 10.10% 1.90% 13.20%
Analysis of acquistionAnalysis of acquistion
-600
-400
-200
0
200
400
600
800
1,000
1,200
4th Q 3rd Q 2nd Q 1st Q
Revenue
SG&A
restructuring,transformation andintegration costs
Net income
Cost reductionCost reduction
Simplification and cost savings– closed its 188 retail stores
Simplifying products and processesSimplifying products and processes– simplify its product line simplify its product line – Simplify business processSimplify business process
StaffingStaffing
Consumer Electronics and non-Consumer Electronics and non-PC PerformancePC Performance
CE and non-PC of total revenue
0%
10%
20%
30%
40%
CE and non-PC of totalrevenue
18% 20% 22% 30%
4Q 3Q 2Q 1Q
ForecastingForecasting
Factors could act to undermine the forecastsFactors could act to undermine the forecasts– Risks of eMachines acquisitionRisks of eMachines acquisition– Competitive market conditionsCompetitive market conditions– General economic and business conditions General economic and business conditions
and current political uncertaintyand current political uncertainty– Declining net salesDeclining net sales– Product mixProduct mix
Interesting newsInteresting news
Chairman Ted Waitt plans to sell as much Chairman Ted Waitt plans to sell as much as 21 million Gateway shares this year, as 21 million Gateway shares this year, under a plan to diversify his assets. under a plan to diversify his assets.
Additional Stock InfoAdditional Stock Info
A net loss of $1.31 a share in 2004A net loss of $1.31 a share in 2004
The estimated 12-month Target Price is The estimated 12-month Target Price is $6.00$6.00
RecommendationRecommendation
Benefit from the great participate in retail Benefit from the great participate in retail storesstoreseMachines contribute to revenue growtheMachines contribute to revenue growthGateway’s sales have been pressured by Gateway’s sales have been pressured by price competition in PCsprice competition in PCsGTW has struggled to position itself GTW has struggled to position itself profitably as a niche vendor in PC industryprofitably as a niche vendor in PC industryHOLD! Do not buy!HOLD! Do not buy!
Dell IncDell Inc
About Dell IncAbout Dell Inc
Founded in 1984Founded in 1984Shares trade on NASDAQ (DELL)Shares trade on NASDAQ (DELL)Industry leader todayIndustry leader todayDirect business modelDirect business model6 manufacturing plants worldwide6 manufacturing plants worldwide46,000 employees46,000 employeesFiscal year end is January 30Fiscal year end is January 30M. Dell steps down as CEOM. Dell steps down as CEO
Dell StockDell Stock
Last: US$ 40.200 Net Change: US$ -0.010 % Change: -0.02%
Open 40.130 Bid 38.200
High 40.330 Ask 42.210
Low 39.880 EPS 1.41
Volume 10,765,200 P/E 28.50
52-Week High 42.570 IndicatedAnnual Div.
0.00
52-Week Low 31.140 Yield 0.00
1 year performance1 year performance
Performance since 1984Performance since 1984
Price / EarningsPrice / Earnings
Price/Earnings
-10.0020.0030.0040.0050.0060.0070.0080.0090.00
100.00
1997 1998 1999 2000 2001 2002 2003 2004
Year
P/E
Basic # of shares outstandingBasic # of shares outstanding
Shares Outstanding
2,350
2,400
2,450
2,500
2,550
2,600
2,650
2,700
2,750
2,800
2,850
2,900
1997 1998 1999 2000 2001 2002 2003 2004
Year
# o
f sh
ares
(in
mil
lio
ns)
Dell’s ManagementDell’s Management
Name Age Title
Michael S. Dell 39 Founder & Chairman of the Board
Kevin B. Rollins 51 President, CEO, COO
William J. Amelio 46 Sr VP, Asia Pacific-Japan
Paul D. Bell 43 Sr VP, EMEA
Jeffrey W. Clarke 41 Sr VP, Product Group
Thomas B. Green 49 Sr VP, Law & Admin and Secretary
John S. Hamlin 38 Sr VP, US Consumer Business
Joseph A. Marengi 50 Sr VP, Americas
John K. Medica 45 Sr VP, Product Group
Rosendo G. Parra 44 Sr VP, Americas
James M. Schneider 51 Sr VP and CFO
StrategyStrategy
Direct modelDirect model
Highly efficient manufacturing and supply Highly efficient manufacturing and supply managementmanagement
Standards-based technologyStandards-based technology
5 Tenants of Dell’s Strategy5 Tenants of Dell’s Strategy
Create a strong direct relationship with the Create a strong direct relationship with the customer.customer.
Allow customers to customize products.Allow customers to customize products.
Be a low-cost leader.Be a low-cost leader.
Overcome continual technological Overcome continual technological challenges.challenges.
Focus on standards to keep the quality of Focus on standards to keep the quality of Dell products high.Dell products high.
ProductsProducts
ServersServers
Storage devicesStorage devices
Networking productsNetworking products
WorkstationsWorkstations
NotebooksNotebooks
DesktopsDesktops
Print and imaging systemsPrint and imaging systems
Software & peripheral productsSoftware & peripheral products
Financial servicesFinancial services
Dell CustomersDell Customers
Fiscal Year Ended
(Revenue in millions $ US) January 30, 2004 % Change January 31, 2003 % Change February 1, 2002
Americas:
Business 21,888 13% 19,394 12% 17,275
U.S. Consumer 6,715 19% 5,653 26% 4,485
Total Americas 28,603 14% 25,047 15% 21,760
Europe 8,495 23% 6,912 8% 6,429
Asia Pacific-Japan 4,346 26% 3,445 16% 2,979
Total net revenue 41,444 17% 35,404 14% 31,168
Dell Market Share BreakdownDell Market Share Breakdown
Fiscal Year Ended
Annual Market Share: January 30, 2004 % Change January 31, 2003 % Change February 1, 2002
Americas:
Business 30.2% 2.4% 27.8% 3.0% 24.8%
U.S. Consumer 23.4% 3.9% 19.5% 7.6% 11.9%
Total Americas 27.6% 2.8% 24.8% 4.5% 20.3%
Europe 10.5% 0.9% 9.6% 0.6% 9.0%
Asia Pacific-Japan 7.4% 1.5% 5.9% 0.9% 5.0%
Worldwide 16.7% 1.8% 14.9% 2.2% 12.7%
Financial StatementsFinancial Statements
Income StatementIncome Statement– ProfitabilityProfitability
Balance SheetBalance Sheet– Asset allocationAsset allocation
Cash Flow StatementCash Flow Statement
Last quarter’s resultsLast quarter’s results
Growth and valuationGrowth and valuation
Income StatementIncome Statement
Earnings GrowthEarnings GrowthEarnings Growth
0
500
1000
1500
2000
2500
3000
1997 1998 1999 2000 2001 2002 2003 2004
Year
Net
In
com
e (i
n m
illi
on
s $)
ProfitabilityProfitabilityCompany Profitability
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
9.00%
1997 1998 1999 2000 2001 2002 2003 2004
Year
Pro
fit
Mar
gin
Revenue GrowthRevenue GrowthRevenue Growth
-
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
1997 1998 1999 2000 2001 2002 2003 2004
Year
Rev
enu
e (i
n m
illi
on
s $)
Revenue CompositionRevenue CompositionFiscal Year Ended
January 30, 2004 % January 31, 2003 % February 1, 2002 %
(in millions $ US)
Product group
Desktop computer systems 21,026 51%
18,865 53% 16,516 53%
Notebook computer systems 11,380 27%
9,638 27% 8,829 28%
Enterprise systems 9,038 22%
6,901 19% 5,823 19%
Total net revenue 41,444 100%
35,404 100% 31,168 100%
Firm Cost StructureFirm Cost StructureFiscal Year Ended
January 30, 2004 % January 31, 2003 %February 1,
2002 %
(in millions $ US)
Revenue
41,444
35,404 31,168
Cost of Sales
33,892 81.8%
29,055 82.0% 25,661 82.3%
Operating Expenses:
Selling, general and administrative
3,544 8.6%
3,050 8.6% 2,784 8.9%
Research, development and engineering
464 1.1% 455 1.3% 452 1.5%
Special charges - 0.0% -
0.0% 482 1.6%
Total operating expenses
4,008 9.6%
3,505 9.9% 3,718 11.9%
Balance Sheet (Assets)Balance Sheet (Assets)Fiscal Year Ended
(Figures in millions $ US) January 30, 2004 January 31, 2003 February 1, 2002
Assets
Cash & Equivalents 5,152 4,638 3,914
Receivables 3,635 2,586 2,269
Notes Receivables - - -
Inventories 327 306 278
Other Current Assets 1,519 1,394 1,416
Total Current Assets 10,633 8,924 7,877
Net property & equipment 1,517 913 826
Investments & advances 6,770 5,267 4,373
Other non-current assets - - -
Deferred charges - - -
Intangibles - - -
Deposits & other assets 391 366 459
Total Assets 19,311 15,470 13,535
InvestmentsInvestmentsAs of January 30, 2004
(figures in millions $) Fair Market Value Cost Unrealized Gain % Gain
Debt Securities:
US gov't and agencies 5,115 5,108 7 0.14%
US corporate 2,175 2,169 6 0.28%
International corporate 159 159 - 0.00%
State and municipal gov't 5 5 - 0.00%
Total debt securities 7,454 7,441 13 0.17%
Equity securities 151 138 13 9.42%
Total investments 7,605 7,579 26 0.34%
Short-term 835 835 - 0.00%
Long-term 6,770 6,744 26 0.39%
7,605 7,579 26 0.34%
Asset Management SystemAsset Management System
Fiscal Year Ended
January 30, 2004 January 31, 2003 February 1, 2002
Days of sales outstanding 31 28 29
Days of supply in inventory 3 3 4
Days in accounts payable 70 68 69
Cash conversion cycle -36 -37 -36
Balance Sheet (Liabilities & S/E)Balance Sheet (Liabilities & S/E)Liabilities and Shareholders' Equities
Accounts payable 7,316 5,989 5,075
Accrued and other 3,580 2,944 2,444
Total current liabilities 10,896 8,933 7,519
Long-term debt 505 506 520
Deferred Taxes/Income - - -
Other non-current liabilities 1,630 1,158 802
Commitments and contingencies - - -
Total liabilities 13,031 10,597 8,841
Preferred stock - - -
Common stock (par) 6,823 6,018 5,605
Capital Surplus - - -
Retained earnings 6,131 3,486 1,364
Other equity
(135) (92)
(26)
Treasury stock 6,539 4,539 2,249
Total shareholders' equity 6,280 4,873 4,694
Total liabilities and Shareholders' equity 19,311 15,470 13,535
Return on AssetsReturn on Assets
Return on Assets
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
1997 1998 1999 2000 2001 2002 2003 2004
Year
RO
A
Return on EquityReturn on Equity
Return on Equity
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
70.00%
80.00%
1997 1998 1999 2000 2001 2002 2003 2004
Year
RO
E
Cash Flow StatementCash Flow Statement
Last Quarter’s ResultsLast Quarter’s Results
Value Drivers of Stock PriceValue Drivers of Stock Price
Sales growthSales growth
Earnings growthEarnings growth– Regular earningsRegular earnings– S&P core earningsS&P core earnings
Valuation measuresValuation measures– P/EP/E– PEGPEG– Price / Book valuePrice / Book value
Key Dell StatsKey Dell Stats
Estimated annual sales growth of 15%Estimated annual sales growth of 15%
Actual earnings of $2.65 B vs S&P core Actual earnings of $2.65 B vs S&P core earnings of $1.8 B.earnings of $1.8 B.
Estimated annual earnings growth rate of Estimated annual earnings growth rate of 19.5%.19.5%.
P/E (ttm) = 33.92, PEG = 1.10, P/BV = P/E (ttm) = 33.92, PEG = 1.10, P/BV = 15.4115.41
RecommendationRecommendation
Good growth prospects worldwideGood growth prospects worldwide
High amount of cash and investmentsHigh amount of cash and investments
#1 in world PC market share#1 in world PC market share
CompetitionCompetition
S&P fair value calculation of $53.50S&P fair value calculation of $53.50
BUY recommendationBUY recommendation