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

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

3. Industry Analysis I

4. Overview 1980’s 1990’s After the Tech Boom

5. Nasdaq Computer Index:

6. Dow Jones Computer Index

7. S&P500 v.s. Computer Industry

8. World Wide PC Sales ( in millions)

9. US PC Unit Sales ( in millions)

10. Geographic PC Sales ( in thousands)

11. 2002 PC Sales

12. World Wide Industry Growth

13. US Growth

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

15. Industry Analysis II Industry Analysis II

16. PC Life Cycle Computer industry is mature – customers want convenience and value for their money The need for speed has tapered off Software is at a much higher level than it was 5 years ago Market for second hand machines (Ebay) Replacement cycle changed from every 2- 3 years to every 5 years Machines upgradeable

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

18. 2003 Worldwide Market Share

19. 2003 US Market Share

20. 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

21. 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

22. 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

23. Future Considerations Con’t Diversification into Servers Consulting Consumer electronics –MP3’s (iPod), Online Music (iTunes), TV’s, PDA’s

24. Server US Market Share JUNE 2003

25. Handheld PDA US Market Share JUNE 2003

26. Dell Inc.

27. 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

28. Revenues By Region

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

30. 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

31. Revenue revenue

32. Revenue by Product Line

33. 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

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

35. Current Financials

36. Price to Earnings 2003 Industry – 50.1 Dell – 39.2

37. Price to Book 2003 Industry – 9.7 Dell – 16.59

38. Return on Equity 2003 Industry – 19.5% Dell – 43.30%

39. Earnings per Share

40. Income Statement Income Statement (Annual)

41. Net Income

42. Balance Sheet Balance Sheet (Annual)

43. Financial Statement Analysis Cash Flow Statement (annual)

44. 10 year Price Graph 10 years stock price chart

45. 1 year Price Graph 1 year stock price chart

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

47. Apple Computer, Inc. Think Different.

48. History Invented low-cost PCs – Apple I Ignited the modern PC industry Financial crisis in 1996/1997

49. 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

50. Products iMac, Power Mac, iBook, PowerBook 72% of revenue in 2003 Software Music: iPod and iTunes

51. 10 year Sales/Income

52. Sales Breakdown

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

54. Stock Summary

55. Balance Sheet

56. Income Statement

57. Cash Flow Statement

58. EPS

59. ROE 2003 Industry – 19.5% Apple – 1.6%

60. Price to Book 2003 Industry – 9.7 Apple – 1.9

61. P/E 2003 Industry – 50.1 Apple – 94.8

64. 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

65. © 2003 Hewlett-Packard Development Company, L.P. The information contained herein is subject to change without notice Hewlett-Packard Company

66. 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

67. Company Overview

68. HP & Compaq Merger May 7, 2002 the largest merger in the history of computer industry Value of the deal at $25 billion 1 Compaq share = 0.6325 HP share The new company after merge – HP shareholders own 64% – Compaq shareholders own 36%

69. 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

70. 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

71. Company Financial Summary

72. Ratio Analysis P/E Industry = 23.8 S&P = 22.8 HP = 29.9

73. Ratio Analysis Price to Book Industry = 5.8 S&P = 3.6 HP = 1.8

74. Ratio Analysis EPS

75. Ratio Analysis ROE

76. Financial Statement Analysis Income Statement (Annual)

77. Financial Statement Analysis Income Statement (Quarterly)

78. Financial Statement Analysis Revenue

79. Financial Statement Analysis Net Income

80. Financial Statement Analysis Balance Sheet (Annual)

81. Financial Statement Analysis Cash Flow Statement (annual)

82. Price Chart Analysis 10 years stock price chart

83. Price Chart Analysis 1 year stock price chart

84. 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

85. Thank You