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1Presented by: Doey Au-Yeung Pierrick Chamois Liang Min Huy Le PC MakersPresented by:Doey Au-YeungPierrick ChamoisLiang MinHuy Le
2Overview Industry Analysis Company Analysis HP Apple Dell Multipurpose computer systemAssembled from standardized componentsComponents perform identical functionsMinimal compatibility issuesCan assemble PC with X power source, Y motherboard, and Z CPU>90% use Intel based CPUsHard drives, graphics cards function similarlyEasy to assembleAll PCs consists of a similar set of components
3What is a PC Multipurpose computer system Assembled from standardized componentsComponents perform identical functionsMinimal compatibility issues>90% use Intel based CPUsHard drives, graphics cards function similarlyEasy to assembleAll PCs consists of a similar set of components
4A Modern PC Display Motherboard CPU (Microprocessor) Primary storage (RAM)Expansion cardsPower supplyOptical disc driveSecondary storage (Hard disk)MouseKeyboard
5Industry Development 1975: Industry start First viable PC: MITS Altair 8800Functional, affordable and widely acceptedNot really first PC, but commonly regarded as start of industryPrior to the MITS Altair 8080, there were several other PCs that did not reach commercial viability, including the French designed Micral. Technically, the Altair was not the first PC ever built, but it was certainly the first to reach commercial viability (cost effective and affordable) and widespread acceptance, if only by computer hobbyists.
6Industry Development 1981: IBM PC Late entry Time constraintsThird party hardware and software componentsOnly ROM BIOS proprietaryReverse engineeringEasy to mimic (clone)Clones would perform functions of the originalLower costPC Makers began as clone makersCompaq first 100% compatible cloneBy 1980, numerous products were in the booming PC market—Apple II, Commodore PET, TRS-80. IBM felt that they were missing out on a lucrative market, and thus ordered the development of the IBM PC. The time to market was an unprecedented (for IBM) one year, made possible by the foregoing of proprietary parts. Only the ROM BIOS was proprietary to IBM, with everything else made from off the shelf products. IBM essentially slapped the IBM brand on a hastily cobbled together product.The downside to using generic components was that once the ROM BIOS was reverse engineered, anyone could assemble a machine with functions identical to that of the IBM PC. Thus the clone market was born. Compaq was the first to successfully clone the IBM PC, producing a 100% compatible clone. Most PC Makers of yesterday and today began as clone makers.
7Industry Development Mid 1980s: Early 1990s: IBM PC and clones dominantStandardization of platformOne common hardware and software baseSoftware: MicrosoftEarly 1990s:IBM and Co held 84% of market by 1990Non clones forced out of marketCommodore, Atari, TandyApple sole survivorIBM PC and clones progressively increased their market share, reaching over 50% by This is mostly due to the much lower cost and 100% compatible nature of the clones.The standardization of the platform led to the rise of Microsoft, from MS-DOS to the Windows line of OSs.By the early 1990s, IBM and company held so much of the market that software developers ceased to develop software for other platforms. This led to the decline and eventual demise of other non IBM PC makers, including Commodore, Atari, and Tandy. Apple was able to survive due to the niche market it had carved out, mainly in the educational, desktop publishing, and professional graphics markets.
8Industry Development Late 1990s: 2000 to present: Dotcom mania: small real effect on PC industryMostly networking equipment manufacturers (Cisco, Nortel)Y2k: increased PC spending due to compatibility fears2000 to present:Steady decline in PC pricesComponent life cycle criticalDecline in PC prices mainly due to decline in component pricesPC industry homogeneous from day oneThe dotcom mania had no real effect on the PC industry, as most of the associated spending was in telecommunications infrastructure upgrades. Networking equipment companies like Cisco and Nortel benefited the most from the dotcom boom. On another note, the Y2k crisis led to increased spending on new software and hardware due to the fear of Y2k issues.From 2000 onwards, the market has increasingly become mature. Even IBM could no longer maintain its margins despite its extremely strong brand reputation. There has been a rise in branding and product differentiation efforts.An interesting note is that the PC maker industry has essentially been a mature market from day one, with a highly homogeneous product, simply by design. PCs perform the same functions and is assembled from off the shelf, third party, generic parts that are readily available. Thus, for all sense and purposes, there is no real intrinsic difference between most of the PC products available. The only difference between different PC products was the speed and the storage/processing capacity. Furthermore, it is necessary to recognize that a great portion of the recent decline in PC prices, and the subsequent decline in PC maker profit margins, is directly attributable to the life cycle of the components themselves.
9Key Success Factors R&D Branding Competitive cost structure Apple: iPod % market shareCompetitive cost structureDell – direct sales modelProduct differentiationAncillary services: one stop shoppingSoftware and hardware sales, not simply PC salesTechnology solutionsAfter sales serviceExtensive product linesGlobal expansionGrowth outside of North American marketR&D and Branding, aka marketing, is critical. Apple is an excellent example, with the iPod and the iMac. Apple was in dire straits in 1997, and would in all likelihood exist only in the history books were it not for Steve Jobs. His introduction of the iMac, and subsequently the iPod, has brought Apple back into the black. Thus far, Apple seems unstoppable in the MP3 player market that the iPod dominates in.Since the products are homogeneous, cost structures, and in turn prices, must be kept competitive as sales are very price sensitive.There is a shift in focus towards providing solutions, rather than simply PCs (hardware). IBM exited the hardware only PC market to concentrate on the more lucrative full service enterprise class solutions business.The North American market is essentially mature and so growth will be found elsewhere.
20Business Models Direct Sales Sell directly via phone or internet JIT Inventory systemAdvantage: Lower cost structureReduced inventory → lower storage and financing costsIncreased product quality → products use non “stale” componentsAbility to customize → increased customer satisfactionLess middlemen → lower prices thus increasing salesReduced overhead → no brick and mortar retail outlets to maintainDisadvantage: customers cannot preview productLower inventory results in reduced overhead, from finance and administration costs to warehouse size savings. Products use non “stale” components, which is important given the rate of obsolescence. Savings are passed to customers thus reducing prices and increasing sales
21Business Models Traditional Retail Sell via retail distribution chain Big Box storesMain methodology usedAdvantage: Customers preview product prior to purchaseIncreased efficiency: economies of scale realized from mass producing one productDisadvantage: inventory issues – either shortage or excessMore middlemen → lower marginsIncreased overhead → if it operates own brand storesAssuming equal selling prices, more middlemen would naturally lead to lower profits relative to a direct seller.
22Business Models White box Niche markets Local computer reseller Localized, more personal serviceSells PCs, hardware, software, and services“nonbranded” – local retailer brandBTO (build-to-order)Other services providedNetworkingInstallationReduced after sales serviceMost PC Makers run a combination of the above two models. Apple, Gateway have their own distribution channels via own brand stores and/or Big Box retailers, along with direct sales via telephone or internet.The White Box model is centered around nonbranded, customizable built-to-order PCs. Usually lower cost, and fills a specific niche, be it geographic proximity, more personal service, etc. White Box firms sell software, hardware, and services. Increasingly, distributors of components offer assembly services and sometimes even sell directly to the customer. White Box companies usually provide reduced services, especially in the area of after sales support. In particular, software issues are generally not supported.
24Issues Change in competitive focus: Speed and capacity not as importantUseful featuresLengthening replacement cycle periodIncreasingly powerful PCs delay practical obsolescenceSecond hand machine market (small but growing)Estimated to reach 110 million units by 2009Mobile computingPreviously, PC makers vied for speed and capacity—the race was on to see who could bring the fastest and largest capacity PCs to market first. More recently, he focus has shifted to features, especially those involving digital home theatres. The PC is finding acceptance as a media (movies, TV, music) and web surfing station.Although PC technology continues to reach new heights, the fact remains that modern PCs today are more than adequate for most needs, excluding video games and professional graphics. So while PCs are obsolete the moment you purchase them (and perhaps even prior to that), from a practical standpoint, the real replacement cycle is lengthening because people are realizing that there is no need to mindlessly keep up with technology.The second hand market is growing at a prodigious rate, and is expected to reach 110 million units shipped by 2009.Mobile computing has really picked up with portable computers recently reaching commodity status. For the first time ever, notebooks from major PC makers dipped below the $1000 mark during the 2005 Christmas season. This increase in affordability has led to the increased adoption of portable PCs, with a great many individuals owning both a desktop PC and a notebook PC. The lack of wireless Internet access points still inhibits growth somewhat.
25Issues Consumer appliances Outsourcing of: Seasonal nature Easy to use, performs specific functionsOutsourcing of:ProductionAfter sales serviceDecreased qualitySeasonal natureStronger in second half of yearSummer: Back to SchoolWinter: ChristmasThe PC is expected to stay for quiet some time due to its versatility. Despite this, for a great many people consumer appliances—easy to use, performs specific functions—will be attractive. It is difficult to say if consumer appliances will ever supplant PCs.The prevailing price war atmosphere has driven PC makers to find innovative ways of reducing costs. Outsourcing is one such method, and enjoys widespread use. Toshiba was one of the last to outsource production. The primary issue with outsourcing is that there is an inherent loss of control and quality of both products and service. Dell experienced complaints regarding the quality of customer support after opening several call centers in India.
26Issues Environmental Issues Hazardous substances (HS) Heavy metals (lead, mercury, cadmium, chromium)Recent legislationEuropean Union introduced directive to reduce usageAlberta introduced recycling levy on electronic equipment (Feb 1, 2005)California considering bill to completely eliminate HSEnvironmental issues are becoming more of a concern. There are various pieces of legislation that have been passed or are under consideration regarding the disposal of electronic equipment. Heavy metals, lead, mercury, cadmium, chromium, are found in most electronic equipment, and represent a serious environmental disposal headache. Some jurisdictions, such as Alberta, have introduced a recycling levy on computer equipment sales, much like a tire levy or environmental levy for the disposal of tires or motor oil. California is even proposing legislation to ban hazardous substances in electronics. The bottom line implications of this are that costs will go up, and those costs will either be borne by the PC makers, the customers, or some combination thereof.
27Recent Developments Apple New HP CEO Dell acquires Alienware iPod nano and shuffleExpansion into flash-based marketsSwitch to Intel CPUsNew HP CEONew strategy: technology solutionsDell acquires AlienwareHigh-end gaming marketNot really a PC, but it does signify an expansion into other product lines.
29Snapshot (as of 03-25-06) Source: Nasdaq.com HP Analysis as of March 2006
30Agenda Presentation of the Company Business Analysis Financial AnalysisStock AnalysisRecommendationHP Analysis as of March 2006
31The Company11Source: HP website#1 globally in the 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 globally in x86, Windows®, Linux and UNIX servers#1 in total disk and storage systems#2 globally in notebook PCs, Pocket PCs, workstations and blade serversAwarded Outstanding Customer Service for Consumers#1 position in server brand loyalty for ProLiant serversHP Analysis as of March 2006
32Background 1939: Bill Hewlett and David Packard founded the company First product: the resistance-capacitance audio oscillatorFirst Client: Walt Disney Studio1947: HP is incorporated1957: The company goes public ($16 per share)1961: The company is listed on the NYSE1962: HP appears in the Fortune 5001989: HP is listed on Tokyo stock Exchange1997: HP becomes one of the 30 stocks that comprise the DJIA1998: Compaq acquires DEC2001: HP and Compaq announce their merger (effective in May 2002)HP Analysis as of March 2006
33The CEOMark HURD (2005) – is chief executive officer and president of HP and also a member of the company's board of directors.Hurd previously spent 25 years at NCR Corp., culminating in his two-year tenure as chief executive officer and president.Hurd was named president of NCR in 2001 and was given additional responsibilities as chief operating officer in Prior to that, he spent three years as head of the company's Teradata data-warehousing division. Earlier, he held a variety of general management, operations, and sales and marketing roles. Hurd began his career at NCR as a field salesman in 1980.Hurd is a member of the Technology CEO Council, a coalition of chairmen and chief executive officers of IT companies, which develops and advocates public policy positions on technology and trade issues.He earned a bachelor's degree in business administration in 1979 from Baylor University.HP Analysis as of March 2006
34Executive Team: A Mix between insiders and outsiders Ann O. BASKINS (1982) - Senior Vice President, General Counsel and Secretary (1999)Gilles BOUCHARD (1989) - Executive Vice President, Global Operations (2001)Todd Bradley - Executive Vice President, Personal Systems GroupVyomesh (VJ) Joshi (1980) - Executive Vice President, Imaging and Printing Group (1999)Ann Livermore (1982) - Executive Vice President, Technology Solutions Group (1995)Cathy Lyons - Executive Vice President and Chief Marketing OfficerRandall (Randy) D. Mott - Executive Vice President and Chief Information OfficerMarcela Perez de Alonso (2004) - Executive Vice President, Human Resources (2004)Shane Robison (Ex-Compaq) - Executive Vice President and Chief Strategy and Technology OfficerRobert P. Wayman (1969) - Executive Vice President and Chief Financial Officer (1984)HP Analysis as of March 2006
35Business analysis Outlook 7 different business segments High level of competitionCost reduction issueSales Channels issueHP Analysis as of March 2006
36Business Segments Enterprise Storage and Servers (ESS) HP Services (HPS)SoftwareThe Personal System Group (PSG)The Imaging and Printing Group (IPG)HP Financial Services (HPFS)Corporate InvestmentTechnologySolutionGroup(TSG)HP Analysis as of March 2006
37Segments Description: TSG Mission: to coordinate the Enterprise offerings across organizations to allow customers to manage and transform their business and IT environmentsConsists of:ESSHPS: provides a portfolio of multi-vendor IT services, including technology services, consulting and integration and managed services.Software: provide management software solutionsHP Analysis as of March 2006
38Segments Description: PSG Mission: to provide commercial PCs, consumer PCs, workstations, handheld computing devices, digital entertainment systems, calculators and other related accessories, software and services for the commercial and consumer marketsCompaq was acquired to strengthen this segment and compete against DellSource: Wall Street JournalHP Analysis as of March 2006
39Segments Description: IPG Mission: to provide imaging and printing systems for printer hardware, printing supplies and scanning devices, providing solutions across customer segments for individual consumers to small and medium businesses to large enterprisesHP Analysis as of March 2006
40Segments Description: HPFS Mission: to support and enhance HP’s global product and service solutions, providing a broad range of value-added financial life cycle management servicesHP Analysis as of March 2006
41Segments Description: Corporate Investments This segment is managed by the Office of Strategy and Technology and includes HP labs and certain business incubation projects.Revenue is attributable to the sale of certain network infrastructure products and to the licensing of HP Technologies to third partiesHP Analysis as of March 2006
42Business Segments: figures HP Analysis as of March 2006
43Business Segments Trends Evolution of Revenue per Segment Over a Three Year Period in m$Relative Evolution of Revenues per Segment in %HP Analysis as of March 2006
44Segment Revenue Trends HP Analysis as of March 2006
45Segment Revenue Trends (Cont’d) HP Analysis as of March 2006
46Segment Operating Profit Trends HP Analysis as of March 2006
47Competitors ESS: IBM, EMC, DELL HPS: IBM (Global Services), Accenture Software: BMC, Computer Associate Int. Inc., IBM TrivoliPSG: Dell, Toshiba, Apple, Lenovo, Gateway, FujitsuIPG: Lexmark Int., Xerox, Epson, Canon USA, DellHPFS: IBM (Global financing), financial institutions=> HP is leader or among the leaders in each segment, the harsh competition is therefore a key issue for the firmHP Analysis as of March 2006
48Compaq Acquisition: HP’s answer to the Dell Threat Dell has literally eaten the market shares of HP, Compaq and IBMIBM sold its computer business to LenovoHP acquired CompaqHP Analysis as of March 2006
49Compaq AcquisitionDescription: HP buys Compaq with a $24,17b deal that was effective in May 2002 (in an exchange of shares of HP common stock for each outstanding share of Compaq common stock)Objective: C. Fiorina, CEO who led the acquisition, wanted to reinforce the distribution channels of HP, counter the Dell upsurge that forced IBM to quit the market and give HP some scale effects to cut the costs in PSG and HPSConsequencesHP is selling worldwide and enjoy an impressive sales forceIn three years HP financials are strong despite the importance of the mergerBut the marriage is painful and the integration leads to several restructuring plans, layoffs and to a complex organization not efficient enough for the market standards (expected scope effects – between IPG and PSG – and scale effects – cost synergies in PSG and HPS – didn’t occur)HP Analysis as of March 2006
50Current ChallengesComplex IT organization with a matrix-based infrastructureOpacity in the accountancySlow decision-makingCost competitionRetirement programWorkforce reductionDissolution of CSG=> HP needs to be more competitiveHP Analysis as of March 2006
51New TrendsNext generation data center architecture: emergence of a 24*7 automated, lights-out data center. An environment that will need to be highly secure, highly automated and remotely accessed and managedAlways on mobile computing: convergence of voice and data services, people will be more mobile and the bandwidth will increase. Driving this revolution requires advanced devices, but also infrastructure, services and solid go-to-market partnershipsUbiquitous printing and imaging: color-use is increasing, multifunction printer and copier markets are converging… HP is investing worldwide in this sectorGo-to-market model: HP tries to improve its ability to cross sell, up sell and drive solution salesHP Analysis as of March 2006
52Risk Factors That Can Affect The Financials Harsh competitionCompetitive pricing of products needs low costsThreat of substitutes is highSensitivity of the sales to customer requirements: HP is short-sighted and must develop, manufacture and market products on uncertain marketsNeed to know the new technological trendsQuality issue with new productsManaging the technology transitions is cumbersomeShort product life cyclesDifficulty to have the good timing of product and servicesHP Analysis as of March 2006
53Risk Factors That Can Affect The Financials (Cont’d) IP issueR&D is the core business of HPThe firm is global and weather difficulties to protect its Intellectual Rights in some regionsProduct distribution managementPotential conflict btw direct and indirect sales channelsSales cycle makes the planning and inventory management difficultHigh depreciation rate of inventoriesHP Analysis as of March 2006
54HP Strategy Restructuring Plans R&D Global Firm 15,300 employees left or are expected to leave within 2007As of October 31, 2005, the total cost was $5.74bnR&D$3.5bnHP patent portfolio includes over 30,000 patentsGlobal FirmOver than 60% of the net revenue in fiscal 2005 came from outside the USHP Analysis as of March 2006
55HP Financials Analysis Statements of OperationsBalance SheetStatements of Cash FlowsStandard RatiosHP Analysis as of March 2006
58Major Captions Cash & Cash Equivalent Goodwill Debt HP is a “Cash Cow” (cf. CF statements)Jobs Act October, 2004: $7.5b repatriated in the USStrong Cash Position to cover the significant cash outlays expected in fiscal 2006 associated with the restructuring actions and company bonus paymentsGoodwillNo impairment of Goodwill existed as of August 1, 2005 or August 2, 2004The substantial amount of Goodwill is due to Compaq Acquisition as of May 2, 2002DebtExcluding the debt associated with the leasing business there is virtually no operational debt. Conservative structure due to the risky core business of HP (R&D)HP Analysis as of March 2006
64Multiple Analysis HP Analysis as of March 2006 HP IBM Dell HPIBMDellTrailing P/E (ttm, intraday)35.8617.120.6Forward P/E (fye 31-Oct-07)14.9413.1915.74PEG Ratio (5 yr expected)1.361.06Price/Sales (ttm)1.431.25Price/Book (mrq)2.63.9617.12Enterprise Value/Revenue (ttm)0.991.531.09Enterprise Value/EBITDA (ttm)11.3718.0812.55HP and Dell carry an insignificant amount of debt and therefore we can consider their ratios to be unleveraged (and therefore comparable)HP Analysis as of March 2006
65Upgrades and Downgrades History DateResearch FirmActionFromTo16-Feb-06Credit SuisseUpgradeNeutralOutperform13-Jan-06Goldman SachsIn-Line11-Jan-06PrudentialOverweight18-Nov-05Caris & CompanyAbove AverageBuy14-Nov-05BernsteinDowngradeMkt Perform1-Nov-05Am Tech/JSA ResearchHold22-Sep-05Robert W. BairdInitiated7-Sep-05UBS17-Aug-05First AlbanyBear StearnsPeer PerformBanc of America SecUnderweight13-Jul-0522-Jun-05Moors & Cabot10-Jun-05FTN Midwest15-Apr-05Raymond James5-Apr-05AverageHP Analysis as of March 2006
66Recommendation: Weak BUY WhyThe Company is recovering from the Compaq AcquisitionNew Management Team, Restructuring Plans, Costs Cutting Strategy that simplifies the business…Conservative Financial structure that provides good dividends: cash reserves, no debt.BUT2005 has not come up to the market expectationsThe core Businesses (IPG and PSG) are growing because of the weakness of the dollar. HP is still struggling to keeps its leadershipThe ROE is still low and volatileThe Company still fights to change its image of “old HP”HP Analysis as of March 2006
68History January 3,1977 incorporated by Steven Wozniak and Steven Jobs. 1984, introduction of Macintosh computer series1985, Steven Job left Apple1990, contracted with Microsoft on licensing MS Windows I OP system., Apple fell into financial stress1997 Steven Job back the company, the company started to recoverApple’s original logo
69Current BusinessPC: The Apple is the only company in computer industry that is capable of designing and developing entire PC system including microprocessor and operation system.Diversification: The Apple is world leading manufacturer and marketer of digital music playersDigital Hub: The Apple believes that computer system is the integration of all advanced digital devices including MP3 players, PDAs, cellular phones, digital camcorders, digital cameras, CD/DVD players, and other electronic consumer devices
70Current Business Key Customer Groups: Education Creative Professionals StudentsGovernment AgenciesDistributionApple Sales Consultant programOnline SalesRetail StoreReporting SegmentsAmerican ( North and South American)Europe( Europe, Africa and Middle East)JapanOther ( Asia-Pacific except Japan)ManufacturingCompany owned manufacturing facility in Cork, Ireland.External vendors in Fremont, California, Fullerton, California, Taiwan, Korea, China, and the Czech RepublicAssembling line in China
71“I'm looking for a fixer-upper with a solid foundation “I'm looking for a fixer-upper with a solid foundation. Am willing to tear down walls, build bridges, and light fires. I have great experience, lots of energy, a bit of that "vision thing" and I'm not afraid to start from the beginning. ”----Steven P. Jobs
72Executive Team Steven P. Jobs Co-founder of Apple Computer, Inc. Occupation: Chief Executive Officer (1997); Chairman, Board of Directors ( )Others Activities:Co-founder of NeXT Software, Inc.Chairman and CEO of NeXT ( )Chairman and CEO of Pixar Animation Studios ( )Board Member of Walt Disney Company (2006)Key Skill: Vision
73Executive TeamPeter Oppenheimer: Chief Financial Officer, Executive Vice President( since 2004)Timothy D Cook: Executive Vice President, Worldwide Sales and Operations (since 1998)Nancy R. Heinen: Senior Vice President, General Counsel and secretary (since 1997)Ronald B. Johnson: Senior Vice President , RetailingJonathan Rubinstein: Senior Vice President, iPod Dividsion (since 1997)Philip W. Schiller: Senior Vice President, Worldwide Product Marketing( since 1997)Bertrand Serlet: Senior Vice President, Software Engineering( since 2003Sina Tamaddo: Senior Vice President, Applications( since 1997)Dr. Avadis Tevanian: Chief Software Technology Officer (since 1997)
75Product Lines Desktops iMac, eMac, Mac mini, Power Mac and Xserver PortablesiBook and PwerbookiPodiPod, iPod mini, iPod shuffle and iPod nanoPeripherals and other hardwareApple-Branded and third party displays , wirless connectivity and networking solutions and other hardware accessoriesSoftware, service and other salesBranded operating syste, application software, third-party software,AppleCare and internet services
79Sales by Products Total net sales increased by 68% in fiscal year 2005 Sales of iPod increased of 248% compare to that of 2004Demand was driven by the introduction of iPod NanoDemand of iPod subjects to internal conflict among different iPod productsiPod price decreased by 32% in 2005Net Sales of Macintosh system increased by 27%Sales were stimulated by the introduction of Power G5 microprocessor and Mac mini series of desktopProfessional notebook( PowerBook series ) still have strong demand on the marketLow sales on low price MacExpansion of Retail segment contributes to overall sales increase.
81Segment SalesAmerican segment sales raised about 64% in fiscal year 2005American segment represent approximately 47%-49% of total sales of the company.11% of sales growth can attribute to growth of professional notebook30% of growth can attribute to the introduction of new Mac systems (G5 based Mac) and iPodJapan’s net sales went up by 36%iPod, G5 and Mac mini contribute to the sales increase in Japan.38 new retail store were opened in 2005 and total number of retail store were 124 at September 2005
82Financial Statement Consolidated Balance Sheet Consolidated Statement of OperationConsolidated Statement of Cash Flows
89Financial summary Mar. 24, 2006 Market Last Sale$ 59.96 Change Net / % %Today’s High/Low Price :$ 60.94 / $ 59.03Share Volume:38,293,61650 Day Ave. Daily Volume: 35,990,619Previous Close: $ Wk High / low: $ 86.40 / $ 33.11Shares Outstanding: 848,612,000Market Value: $ 50,882,775,520P/E Ratio :32.24Forward P/E (1yr) :22.92Earning per Share :$ 1.86Beta: 1.3NSDAQ Official Open Price :$ 60.27Date of NASDAQ Official Open Price: Mar. 24, 2006NASDAQ Official Close Price: $ 59.96Date of NASDAQ Official Close Price: Mar. 24, , 2006September,2005 (in million dollars)Total Net Sales: $12,931Total Net Income: $1,335Total Asset: $11,551Total Liability: $4,085Source :
91Stock Information Stock Exchange NASDAQ and Frankfurt Stock Exchange (Germany)Symbol TicketAPPL (NASDAQ) and APCD (Germany)Time of IPODecember 12, 1980 (NASDAQ)Stock Split HistoryMay 15, 1987(2-for-1)June 21, 2000 (2-for-1)February 18, 2005(2-for-1)Dividend HistoryNo dividend for last five yearsStock RepurchaseAuthorized repurchase up to $283 millions of common stock as of February 18,2005
92Strength Strong Functional skill Untraditional Product Lines: iPod, PowerBookIncreasing R&D investmentSuperior Financing Positions: high cash reserveMarketing: high brand recognitionHuman recourseSteven Job and his NeXT team
93Challenging Supplier power Single or limited source of supply for key componentIntel became one of the microprocessor supplierUncertain DemandUS educational marketOverall demand for IT products is decreasingSelf Cannibalization of iPod productsLawsuitThe company currently involves in 26 lawsuits in North American and EuropeClaims includes patent infringement, false advertising and unfair business practicesThe financial effect is still unknown
96Dell Inc. StockDETAILSDell, a Delaware corporation, was founded in 1984 by Michael DellDividendsDell has never declared or paid any cash dividends on shares of its common stock and currently does not anticipate paying any cash dividends in the immediate future.
99History 1984: Michael Dell founds Dell Computer Corporation 1987: International expansion begins with opening of subsidiary in United Kingdom1988: Dell conducts initial public offering of company stock (3.5 million shares at $8.5 each)1993: Enters into Asia-Pacific region with subsidiaries in Australia and Japan1996: Company begins major push into the server market2000: Company sales via Internet reach $50 million per day2001: For the first time, Dell ranks No. 1 in global market share2004: Kevin Rollins becomes Dell's next chief executive officer. Michael Dell moves to Chairman of the Board2005:Dell tops list of "America's Most Admired Companies" in Fortune Magazine. Opens third major U.S. manufacturing location in Winston- Salem, North Carolina
105Share Repurchase Program As of February 3, 2006, Dell’s share repurchase program authorized the purchase of up to 1.5 billion shares of common stock at an aggregate cost not to exceed $30 billion. As of February 3, 2006, 123 million shares of common stock at an aggregate cost of $4.4 billion were available for future purchases under the share repurchase program. The following are details of repurchases under this program for the fourth quarter of fiscal 2006:Dell’s share repurchase program was announced on February 20, 1996; up to 1.5 billion shares of common stock at an aggregate cost not to exceed $30 billion are currently authorized to be purchased.As of February 3, 2006, 123 million shares of common stock at an aggregate cost of $4.4 billion were available for future purchases under the share repurchase program.
106Business StrategyCustomers can purchase custom-built products and custom-tailored services.Allows customers to customize products.Strong sales representatives to deal with large businesses and government institutions.Dell is a low-cost leader.Direct-Sales Model:Sells products both to consumers and corporate customers via the Internet and the telephone network.Takes orders directly from customers.Eliminates wholesale and retail dealers that add unnecessary time and cost.Dell maintains a negative cash conversion cycle through use of this model.
107Business StrategyCash conversion cycle: The cash conversion cycle is the number of days between paying for raw materials and receiving the cash from the sale of the goods made from that raw material.Dell has a negative cash conversion cycle because it receives payment from customers before it has to pay suppliers.
108Cash conversion cycle Direct business model allows Dell to minimizing inventory risk while collecting amounts due from customers before paying vendors. This enables the company to generate annual cash flows from operating activities that typically exceed net income.Dell’s direct business model allows it to maintain a leading asset management system in comparison to its major competitors. Dell is capable of minimizing inventory risk while collecting amounts due from customers before paying vendors, thus allowing us to generate annual cash flows from operating activities that typically exceed net income.
109Dell Position Diagram Target Value Segments PropositionHow: Choices / Activity System / Value ChainClose integration w/ suppliersCustomizedCorporate CustomersBuild-to-OrderDesign for Quick ConfigurationMinimal InventoryLarge Outside Sales ForceReliableTransact directly with customers / Bypass Channel (i.e. Wholesalers and retailers)No channel marketing / logistics costsDell.comLow PriceNo channel markupTelephoneMinimal Pre-sales costsCourtesy of Andrew von Nordenflycht
110Value chain for Dell Technology Design Development Manufacturing ProcurementAssemblyDistributionTransportInventoryMarketingRetailingAdvertisingServicePartsLaborDesign for ease of manufactureClose integration w/ suppliersJITCo-locationBuild-to-OrderShip directly to customers from factory – or even from suppliersvia 3rd party shipperDirect interaction with customers / No intermediaryOnline / 800 for corporate & SOHOSales force for corporateLow-cost Supportonline/800Outsource on-site support
111Dell Americas Headquarters: Round Rock, Texas Manufacturing facilities: Austin, Texas, Nashville, Tennessee, Winston-Salem, North Carolina, Eldorado do Sul, BrazilRevenue (last four quarters): $36.4 billionQ4 Y/Y revenue growth: 10 percent Market position: No. 1 in United States* Number of employees: 31,100Regional offices in: Argentina Brazil Canada Chile Colombia El Salvador Mexico Panama Puerto Rico
112Dell Asia Pacific - Japan Headquarters: Singapore Manufacturing facilities: Penang, Malaysia; Xiamen, China Revenue (last four quarters): $6.6 billion Q4 Y/Y revenue growth: 21 percent Market position: No. 3 A/P*; No. 3 Japan* Number of employees: A/P 19,400; Japan 1,100Regional offices in: Australia, China, Hong KongIndia, Indonesia, JapanKorea, Malaysia, PhilippinesSingapore, Taiwan, Thailand
113Dell Europe, Middle East and Africa Headquarters: Bracknell, U.K. Manufacturing facilities: Limerick, Ireland Revenue (last four quarters): $12.9 billion Q4 Y/Y revenue growth: 18 percent Market position: No. 2 in Europe* Number of employees: 13,600Regional offices in: Austria, Bahrain, Belgium, Czech Republic Denmark, Finland, France, Germany Greece, Hungary, Ireland, Israel, Italy Morocco, Netherlands, Norway, Poland Romania, Russia, Portugal, Scotland Slovakia, South Africa, Spain, Sweden Switzerland, Turkey, United Arab Emirates
114Revenues by SegmentAmericas: Revenue declined from 69% in 04 to 67% and 65% in 05 & 06 respectively.EMEA: Increased of 1% every year since 2004.Asia-Pacific-Japan: Increased of 1% every year since 2004.
115product groups Financial Services: Dell Financial Services L.P. (“DFS”), a joint venture between Dell and CIT Group, Inc. (“CIT”).Dell offers various financing alternatives, asset management services, and other customer financial services for its business and consumer customers in the U.S. through Dell Financial Services L.P. (“DFS”), a joint venture between Dell and CIT Group, Inc. (“CIT”).
116Risks Loss of government contracts and big businesses Reliance on suppliersInternational competitions (i.e. Acer, and Japanese PC makers)
117Financial Statements Balance Sheet Income Statement Cash Flow Statement
123Liquidity, Capital Commitments, and Contractual Cash Obligations In fiscal 2006, we continued to maintain strong liquidity with cash flow from operations of $4.8 billion, compared to $5.3 billion in fiscal We ended fiscal 2006 with $11.7 billion in cash and investments, a decrease of $2.4 billion over the prior fiscal year end. The following table summarizes our ending cash, cash equivalents, and investments and the results of our consolidated statements of cash flows for the past three fiscal years
125InvestmentsAs of February 3, 2006, Dell had approximately 385 debt investment positions that had fair values below their carrying values for a period of less than 12 months. The fair value and unrealized losses on these investment positions totaled $2 billion and $27 million, respectively, as of February 3, As of February 3, 2006, Dell had approximately 660 investment positions that had fair values below their carrying values for a period of more than 12 months. The fair value and unrealized losses on these investment positions totaled $2 billion and $45 million, respectively, as of February 3, 2006.