Transcript PC Makers - SFU Home Page - SFU

PC Makers
Sean Li, Susan Liu,
Raymond Tao, Ray Szutu
Introduction
PC makers assemble and sell desktops,
notebooks, workstations, and other
peripherals
Serves individual and enterprise / business
customers
Outline
History of the industry
Nature of the industry
Products and customers
Industry trends
Key measures
Recent developments
Individual company analysis
History of the Industry
First personal computer (PC) released in
1975.
Change in competitive landscape.
Explosive growth over the past 20 years.
Industry Competition
Initially, small number of manufacturers
– Highly concentrated
IBM, Commodore, Apple
Different architectures and models
– Incompatibility
Shift to IBM architecture
– Dominates today
Sales Growth since the 80’s
200000
180000
160000
140000
120000
100000
80000
60000
40000
20000
Year
03
20
01
20
99
19
97
19
95
19
93
19
91
19
89
19
87
19
85
19
83
19
81
19
79
19
77
19
75
0
19
Units Sold (in thousands)
World PC Sales
-10%
-20%
Year
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
% unit change
Sales Growth Now
Year over year % sales change
80%
70%
60%
50%
40%
30%
20%
10%
0%
Worldwide Sales
2004 Unit Sales by Region
Rest of World
13%
Asia
26%
EMEA
29%
US
32%
* EMEA = Europe, Middle East, and Africa
PC Market Share (2004)
Market Share as of July 2004
Dell
18.2%
Other
49.1%
HP
15.7%
IBM
6.5%
Gateway
3.5%
Acer
3.2%
Fujitsu
3.8%
PC Market Share (2002)
Market Share as of 2002
Dell
15.1%
HP
16.0%
Other
55.6%
IBM
5.9%
Fujitsu
4.2%
Toshiba
3.2%
Industry Sales Components
As of Nov 2004:
78% - Desktops, notebooks, and peripherals
20% - Servers and networking
2% - Workstations
Industry Performance
NASDAQ Computer Index (IXCO)
Composite of all companies in computer
hardware industry
Performance since 2000
Long-term performance
Industry Statistics
Valuation Ratios
P/E (ttm)
Financial Strength (mrq)
30.33
Quick Ratio
1.20
1.43
P/Sales (ttm)
1.99
Current Ratio
P/Book (mrq)
8.28
LT Debt/Equity
.29
Total Debt/Equity
.42
P/Cash Flow (mrq)
23.17
Mgt. Effectiveness (ttm)
Profitability (ttm)
Gross Margin %
Operating Margin %
Net Profit Margin %
29.75
Return on Invstmt %
18.16
Return on Assets %
9.14
Return on Equity %
30.56
9.13
10.07
Nature of Industry
Supply Chain
PC Business Cycle
Third quarter
– Back to school sales
Fourth quarter
– Holiday shopping season
Thus, the 2nd half of calendar year is
stronger
Business Models
Big Box
Direct
White Box
Big Box Strategy
Rely on retailers
– To purchase assembled products for resale
– Contractual relationships
Use own stores to distribute
Most common approach
Direct Strategy
Avoids retail process
– Sell directly to end users
– Low mark-ups, savings passed to customers
JIT inventory system
– Counters obsolescence
– Flexibility
White Box Strategy
Combination of Big Box and Direct
Have own retail distribution
Assembles PCs
Meets many niche markets
– Video gamers
– “Techies”
Regulatory & Legal
Patents & Trademarks
Licenses
Restrictions on pollution
Restricted substances in electronics
products
Products
Networking Equipment
Peripherals
Handhelds & Accessories
Mass Storage Systems
Personal Computers
Servers & Mainframes
Specialized Systems
Supercomputers
Workstations & Thin Clients
Customers
Business / Institutional
Individual
Or, mix of both
Also can be categorized by region
– North America, EMEA, Asia, etc
Industry Trends
Technological
Price / Cost
International Expansion
Technological Trends
The Internet
– Movement to wireless
– Mobile computing
– E-commerce
Slowing advancement
Price / Cost
Date
E2
00
7
E2
00
5
20
03
20
01
1800
1600
1400
1200
1000
800
600
400
200
0
19
99
Dollars
Average PC System Price
International Expansion
Highly saturated US market
Rapidly developing countries
– India & China
Growth rate outside of the Americas
Key Measures
Profit margin
– Sustainability to falling PC prices
S&P core earnings
Sales growth outside of North America
– Asia and Europe
Business capital spending
– Large portion of sales from businesses
Consumer Confidence Index
Valuation Ratios
Recent Developments
HP & Compaq merger
Dell enters printer and scanner market
Gateway purchases E-machines
Michael Dell steps down as CEO
HP fires CEO Carly Fiorina
Apple on fire
– The iPod phenomenon
IBM exits PC business
HP
HP History
Was founded in 1939 by Bill Hewlett and
Dave Packard.
First product was an audio oscillator
First customer was Walt Disney Studio
Executive Team
Carleton S. Fiorina: Chairman and Chief Executive Officer
Robert P. Wayman: Executive Vice President and Chief Financial Officer
Ann O. Baskins: Senior Vice President, General Counsel and Secretary
Gilles Bouchard: Chief Information Officer and Executive Vice President,
Debra L. Dunn: Senior Vice President, Corporate Affairs
Jon E. Flaxman: Senior Vice President and Controller
Brian Humphries: Vice President, Investor Relations
Allison Johnson: Senior Vice President, Global Brand & Communications
Vyomesh Joshi: Executive Vice President, Imaging and Printing Group
Shane V. Robison: Executive Vice President and Chief Strategy and
Technology Officer
Business Segments
Personal Systems Group (PSG)
Imaging and Printing Group (IPG)
Enterprise Storage and Servers (ESS)
HP Financial Services (HPFS)
HP Services (HPS)
Software and Corporate Investments
Personal Systems Group (PSG)
Commercial PCs
Consumer PCs
Workstations
Handheld Computing
Digital Entertainment
Imaging and Printing Group (IPG)
Printing and Imaging Devices and
Systems
Digital Imaging
Supplies
Enterprise Storage and Servers
(ESS)
Business Critical Servers
Industry Standard Servers
Storage
HP Services (HPS)
Technology Services
Consulting and Integration services
Managed Services
HP Financial Services (HPFS)
Value-added financial life cycle management
services
Leasing, financing programs and asset recovery
services, as well as financial asset management
services for large global and enterprise
customers.
Specialized financial services to education and
government entities.
Customized alternatives
Software
Provides management software solutions
Delivers comprehensive, carrier-grade
platforms for developing and deploying
next-generation voice
Services to network and service providers
Business Strategies
Provide superior products, services and
overall experiences
Deliver the best return on IT investments
in the industry
Build world class cost structures
Provide customers complete IT solutions.
Revenue Composition
2004 Revenue Composition
IPG
30%
HPFS
2%
Ess
19%
Ess
HPS
Software
PSG
31%
HPS
17%
Software
1%
PSG
IPG
HPFS
Revenue Composition
2003 revenue composition
IPG
30%
HPFS
3%
Ess
20%
Ess
HPS
Software
PSG
29%
HPS
17%
Software
1%
PSG
IPG
HPFS
Revenue Composition
2002 revenue compostion
HPFS
3%
ESS
18%
Ess
HPS
IPG
36%
Software
PSG
26%
HPS
16%
Software
1%
PSG
IPG
HPFS
Operating Profit Composition
percentage contribution
2004 segment contribution to earnings from operation
100
50
0
-50
Ess
HPS
Softw
PSG
are
IPG
HPFS
Copo
rate
segment contribution 3.267 23.85 -2.74 3.966 72.65 2.361 -3.36
to earnings from
operation
segment
Operating Profit Composition
Segments
en
t
In
ve
st
m
FS
H
P
IP
G
SG
P
of
tw
S
H
P
S
ar
e
Series1
SS
80.00%
70.00%
60.00%
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%
-10.00%
E
Percentage to tatal earnings
from operation
Year 2003 segment contribution to earnings from operation
Operating Profit Composition
120.00%
100.00%
80.00%
60.00%
Series1
40.00%
20.00%
Segments
en
t
In
ve
st
m
FS
H
P
IP
G
SG
P
ar
e
S
of
tw
S
H
P
-20.00%
SS
0.00%
E
Percentage to tatal earnings
from operation
2002 segment contribution to earnings from operation
Cost Structure
2004 operating expense structure
R&D
0%
0%
4% 1%
23%
selling genearal and
administrative
Amortization of purchased
intangible assets
72%
Acquisition-related
charges
In-process R&D charges
Cost Structure
2003 operating expense structure
R&D
3% 5%
68%
2%
0%
22%
selling genearal and
administrative
Amortization of purchased
intangible assets
Restructuring charges
Acquisition-related charges
In-process R&D charges
Cost Structure
2002 operating expense structure
R&D
4%
selling genearal and
administrative
5%
21%
11%
3%
Amortization of purchased
intangible assets
Restructuring charges
Acquisition-related charges
56%
In-process R&D charges
Income Statement Analysis
Details in Transparency!
Revenue increased by 9.37% from 2003 to
2004
Net Income increased by 37.73%
“Restructuring Charges” & “ Acquisition
Related Charges” drop dramatically
Income Statements Analysis
revenue(in million dollars)
Revenue vs Year
$100,000
$80,000
$60,000
$40,000
$20,000
$0
1999
2000
2001
2002
2003
2004
revenue vs year $42,371 $48,870 $45,226 $56,588 $73,061 $79,905
year
Income Statement Analysis
Gross Margin
Gross Margin vs Year
$30,000
$20,000
Series2
$10,000
$0
2000
2001
2002
Year
2003
2004
Income Statements Analysis
earnings(in million
dollars)
Earnings vs Year
$4,000
$2,000
$0
-$2,000
1999
2000
earnings vs year $3,491 $3,697
2001
2002
$408
-$903 $2,539 $3,497
year
2003
2004
Balance Sheet Analysis
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 Analysis
shares outstanding
(in millions)
Shares Outstanding vs Year
4000
3000
2000
1000
0
shares
outstanding
1999
2000
2001
2002
2003
2004
2009
1947
1,939
3,044
3,043
2,911
year
Balance Sheet Analysis
Price to Book Value
3.00
price/book
2.50
2.00
price/book
1.50
1.00
0.50
0.00
1999 2000 2001 2002 2003 2004
year
Balance Analysis
market cap (in million
dollars)
market cap vs year
$80,000.00
$60,000.00
$40,000.00
$20,000.00
$0.00
1999
2000
2001
2002
2003
2004
market cap $41,264.86 $39,991.38 $39,827.06 $52,843.84 $69,897.71 $61,043.67
year
Balance Sheet Analysis
EPS
EPS vs Year
$2.50
$2.00
$1.50
$1.00
$0.50
$0.00
-$0.50
EPS
1999
2000
2001
2002
2003
2004
$1.74
$1.90
$0.21
-$0.30
$0.83
$1.20
year
Cash Flow Statement Analysis
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 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 Analysis
FCF = CFO -CE
(in millions)
$5,000
$4,000
$3,000
$2,000
$1,000
$0
1999
2000
2001
2002
2003
2004
Shares Repurchase Program
Total number
of shares
purchased
Approximate Dollar
value of shares that
Average
may yet be purchased
price paid
under the plans or
per share
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 Activity
note: shares in thouthands
2004
2003
2002
weighted average
weighted average
weighted average
shares exercise price shares exercise price shares exercise price
Outstanding at beginning of year 499858
31 459334
32 217441
35
Granted
71894
22 71426
16 66438
21
Assumed through acquisitions
2507
14
202028
33
Exercised
-12869
13 -14873
10 -9208
7
Forfeited or cancelled
-11522
30 -16029
33 -17365
37
Outstanding at end of year
549868
499858
459334
exercisable at end of year
377438
326829
286830
Valuation of Options
Weighted average fair value of grants
Risk-free interest rate
Dividend yield
Expected volatility
Expected life in months
stock options
stock purchase rights
2004 2003 2002 2004 2003 2002
$6.72 $5.15 $8.64 $4.95 $5.92 $5.81
2.77 3.23 4.84 1.11 1.21 1.94
1.4% 180.0% 180.0% 150.0% 190.0% 1.9%
35% 35% 39% 28% 47% 54%
60
72
84
6
6
6
Stock Performance
5-year weekly chart of stock price
Stock Performance
5-year chart of HP vs IXCO
Technical Analysis
5-year Weekly Chart of the Dow Jones U.S. DJ US Computer Hardware Index
Technical Analysis
1-year Daily Chart of the Dow Jones U.S. DJ US Computer Hardware Index
Technical Analysis
One Year Chart of HP vs IXCO
Technical Analysis
3-month Chart of HP vs IXCO
Technical Analysis
One Year Stock Price trend
Value Driver
Major operating profit contributor ---- IPG
Division
Recovery in PSG Division
Value Driver ---- IPG
For the fiscal year ended at Oct. 31(in
million dollars)
Net revenue
2002
2003
2004
$20,358
$22,569
$24,199
10.86%
7.22%
$3,596
$3,847
6.86%
6.98%
Percentage
increased
Earning from
operations
Percentage
increased
$3,365
Value Driver ---- IPG
Contributing 30% of total revenue in 2004, rising
by 7.2% from 2003
Contributing 72.2% of total operating profit of
2004, increasing 7.0% from 2003
Being expected to be the most profitable
segment in the future
Value Driver ---- PSG
For the fiscal year ended at Oct. 31(in
million dollars)
Net revenue
2002
2003
2004
$14,680
$21,210
$24,199
44.48%
16.09%
$22
$210
109.00%
855.00%
Percentage
increased
Earning from
operations
Percentage
increased
($236)
Value Driver ---- PSG
Revenue improved 10% in 2004.
Sales volume 17% increase in 2004
But! – Operating profit contributes 4% of
total.
The merger with Compaq Computer is still
not successful as projected.
Recommendation
New CEO Selection
- Internal
- External
Conclusion ------ Hold !
Founded in 1985
Third largest PC maker in US
Strategy
To profitably grow their PC business
To diversify their revenue and increase
gross margin with consumer electronics
products products and related services
To reduce their cost structure
Products being produced
PCs and servers
– Desktop PCs
– Mobile PCs
– Tablet PC
– Servers
Consumer Electronics and Other non-PC
products and services
Management
Ted Waitt, Chairman
Wayne Inouye, CEO
Stock Performance
Financial Statements
Annual income statement
Annual Income Statement For GATEWAY INC (GTW)
Figure s in Millions (US Dollars)
rounde d to the m illionth,
Ex ce pt EPS Data
Sales
Cost of Goods
12/31/2004 12/31/2003 12/31/2002 12/31/2001 12/31/2000 12/31/1999
3,650
3,343
3,402
2,939
4,171
3,605
6,080
5,241
9,601
7,542
8,646
6,746
307
464
566
838
2,059
1,900
-
974
1,077
2,022
1,548
1,304
-602
-511
-511
-1,184
511
596
20
19
0
35
0
-106
0
-103
0
68
0
Pretax Income
-582
-491
-476
-1,290
409
663
Income Taxes
Minority Interest
-14
-
24
0
-178
0
-276
0
155
0
236
0
Investment Gains / Losses
-
0
0
0
0
0
Other Income / Charges
Income from Cont.
Operations
Extras & Discontinued
Operations
-
0
0
0
0
0
-515
-298
-1,014
253
428
Gross Profit
Selling, Admin., Depr. &
Amort. Expenses
Income After Depreciation
& Amortization
Non-Operating Income
Interest Expense
-
-568
Net Income
0
0
0
-20
-12
428
-568
-515
-298
-1,034
241
428
-602
-347
-352
-984
700
730
164
159
200
189
134
-602
-511
-511
-1,184
511
596
Depreciation Footnote
Income before Depreciation &
Amortization
Depreciation & Amortization
(Cash Flow)
Income after Depreciation
& Amortization
-
Earnings Per Share Data
Average Shares
Diluted EPS Before NonRecurring Items
364
324
324
323
331
324
-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
Outstanding shares
Average Shares (in millions)
370
360
350
340
330
320
310
300
Average Shares
2004
2003
2002
2001
2000
1999
364
324
324
323
331
324
Net Income
Net Income(in million US dollars)
1000
500
0
-500
-1000
-1500
Net Income
2004
2003
2002
2001
2000
1999
-568
-515
-298
-1,034
241
428
Profit Margin
Profit margin
0.10
0.05
0.00
-0.05
-0.10
-0.15
-0.20
Profit margin
2004
2003
2002
2001
2000
1999
-0.16
-0.15
-0.07
-0.17
0.03
0.05
Earnings Per Share
Diluted Net EPS(in dollars)
2
1
0
-1
-2
-3
-4
Diluted Net EPS
2004
2003
2002
2001
2000
1999
-1.31
-1.62
-0.95
-3.2
0.95
1.32
Balance sheet
Annual Balance Sheet For GATEWAY INC (GTW)
Figure s in Millio ns (US
Do lla rs) ro unde d to
the m illio nth, Ex ce pt
Bo o k Va lue P e r Sha re
Cash & Equivalents
Receivables
Notes Receivables
Inventories
Other Current Assets
Total Current Assets
Net Property &
Equipment
Investments &
Advances
Other Non-Current
Assets
Deferred Charges
Intangibles
Deposits & Other
Assets
Total Assets
12/31/2004 12/31/2003 12/31/2002 12/31/2001 12/31/2000 12/31/1999
644
342
196
218
1,400
1,089
210
0
114
250
1,663
1,067
198
0
89
602
1,955
1,166
220
0
120
617
2,123
614
545
0
315
793
2,267
1,337
646
0
192
522
2,697
103
331
481
608
897
746
-
0
0
0
0
0
251
0
0
14
0
0
23
0
0
36
0
0
166
0
0
52
18
1,772
20
2,028
50
2,509
219
2,987
822
4,153
460
3,955
-
Lia bilitie s & Sha re holde rs' Equitie s
Notes Payable
Accounts Payable
Current Portion Long
Term Debt
Current Portion
Capital Leases
Accrued Expenses
Income Taxes
Payable
Other Current
Liabilities
Tota l Curre nt
Lia bilitie s
Mortages
Deferred
Taxes/Income
Convertible Debt
Long Term Debt
Non-Current Capital
Leases
Other Non-Current
Liabilities
Minority Interest
(Liabilities)
Tota l Lia bilitie s
Sha re holde rs' Equity
Preferred Stock
Common Stock (Par)
Capital Surplus
Retained Earnings
Other Equity
Treasury Stock
Total Shareholders'
Tota l Lia bilitie s &
Sha re holde rs'
Equity
Total Common Equity
Average Shares
Book Value Per
Share
50
0
0
0
0
0
532
416
279
341
785
898
-
0
0
0
0
5
314
0
326
0
421
0
604
0
695
0
763
0
0
0
0
0
227
257
240
201
151
143
1,123
-
999
940
1,146
1,631
1,810
-
0
0
0
0
0
300
0
0
0
0
0
0
0
0
0
0
0
0
0
0
3
0
0
0
0
0
104
110
127
83
141
125
0
0
0
0
0
1,527
1,109
1,067
1,229
1,772
1,938
245
398
3
735
-219
3
0
920
395
3
733
307
3
0
1,442
393
3
732
616
14
0
1,758
0
3
742
1,650
7
22
2,380
0
3
657
1,409
0
52
2,017
1,772
245
364
2,028
522
324
2,509
1,047
324
2,987
1,365
323
4,153
2,380
331
3,955
2,017
324
0.66
2.84
4.45
5.43
7.37
6.36
-
-
-
Price to book value
Price to book value
7.00
6.00
5.00
4.00
3.00
2.00
1.00
0.00
Price to book value
2004
2003
2002
2001
2000
1999
1.23
0.73
0.41
0.87
1.43
5.90
Price/Sales
Price/sales
3.00
2.50
2.00
1.50
1.00
0.50
0.00
2004
2003
2002
2001
2000
1999
Price/Earnings
Price/Earnings
60.00
50.00
40.00
30.00
20.00
10.00
0.00
-10.00
Price/Earnings
2004
2003
2002
2001
2000
1999
-4.59
-2.84
-3.31
-2.51
18.94
54.59
Return on Assets
Return on Assets
0.20
0.10
0.00
-0.10
-0.20
-0.30
-0.40
Return on Assets
2004
2003
2002
2001
2000
1999
-0.32
-0.25
-0.12
-0.35
0.06
0.11
Return on Equity
Return on Equity
0.50
0.00
-0.50
-1.00
-1.50
-2.00
-2.50
Return on Equity
2004
2003
2002
2001
2000
1999
-2.32
-0.56
-0.21
-0.59
0.10
0.21
Cash Flow Statements
Figures 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 Flows
FCF
800
600
400
200
0
-200
-400
-600
-800
FCF
2004
2003
2002
2001
2000
1999
56.382
-56.52
-191.27
-553.12
120.86
554.57
Major Events in 2004
Acquisition of eMachines in March 2004
Closed 188 retail stores in April 2004
Expanded distribution PCs at major
retailers in North America
eMachines
The second-largest vendor of desktop PCs
sold through U.S. retailers
$1.1 billion in 2003 sales
Since its launch in 1998, sold more than
five million PCs
International market in Japan and the UK
eMachines
Strategy
– provider of value-end PCs with already
established retail channels
Key benefit
A key benefit of the Gateway-eMachines
merger is the opportunity to modify
Gateway's channel strategy for more costeffective distribution and marketing
Change of Distribution Channel
Before
– Retail stores, internet and telephone sale
After
– Retail (major retail stores, BestBuy,
CompUSA, Circuit City )
– Professional (severs)
– Direct sale ( Telephone, internet)
Segment 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 Performance
4th Q
Revenue
3rd Q
2nd Q
1st Q
1029
915
838
868
106
154
354
296
restructuring, transformation
and integration costs
22
53
228
93
Net income
94
-59
-336
-167
8.80%
10.10%
1.90%
13.20%
SG&A
Gross margin
Analysis of acquistion
1,200
1,000
Revenue
800
600
SG&A
400
restructuring,
transformation and
integration costs
200
0
-200
-400
-600
4th Q
3rd Q
2nd Q
1st Q
Net income
Cost reduction
Simplification and cost savings
– closed its 188 retail stores
Simplifying products and processes
– simplify its product line
– Simplify business process
Staffing
Consumer Electronics and nonPC Performance
CE and non-PC of total revenue
40%
30%
20%
10%
0%
CE and non-PC of total
revenue
4Q
3Q
2Q
1Q
18%
20%
22%
30%
Forecasting
Factors could act to undermine the forecasts
– Risks of eMachines acquisition
– Competitive market conditions
– General economic and business conditions
and current political uncertainty
– Declining net sales
– Product mix
Interesting news
Chairman Ted Waitt plans to sell as much
as 21 million Gateway shares this year,
under a plan to diversify his assets.
Additional Stock Info
A net loss of $1.31 a share in 2004
The estimated 12-month Target Price is
$6.00
Recommendation
Benefit from the great participate in retail
stores
eMachines contribute to revenue growth
Gateway’s sales have been pressured by
price competition in PCs
GTW has struggled to position itself
profitably as a niche vendor in PC industry
HOLD! Do not buy!
Dell Inc
About Dell Inc
Founded in 1984
Shares trade on NASDAQ (DELL)
Industry leader today
Direct business model
6 manufacturing plants worldwide
46,000 employees
Fiscal year end is January 30
M. Dell steps down as CEO
Dell Stock
Last: US$ 40.200
Net Change: US$ -0.010
Open
40.130
Bid
38.200
High
40.330
Ask
42.210
Low
39.880
EPS
1.41
P/E
28.50
Volume
10,765,200
52-Week High
42.570
Indicated
Annual Div.
0.00
52-Week Low
31.140
Yield
0.00
% Change: -0.02%
1 year performance
Performance since 1984
Price / Earnings
P/E
Price/Earnings
100.00
90.00
80.00
70.00
60.00
50.00
40.00
30.00
20.00
10.00
1997
1998
1999
2000
2001
Year
2002
2003
2004
Basic # of shares outstanding
Shares Outstanding
2,900
# of shares (in millions)
2,850
2,800
2,750
2,700
2,650
2,600
2,550
2,500
2,450
2,400
2,350
1997
1998
1999
2000
2001
Year
2002
2003
2004
Dell’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
Strategy
Direct model
Highly efficient manufacturing and supply
management
Standards-based technology
5 Tenants of Dell’s Strategy
Create a strong direct relationship with the
customer.
Allow customers to customize products.
Be a low-cost leader.
Overcome continual technological
challenges.
Focus on standards to keep the quality of
Dell products high.
Products
Servers
Storage devices
Networking products
Workstations
Notebooks
Desktops
Print and imaging systems
Software & peripheral products
Financial services
Dell 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
41,444
17%
35,404
14%
31,168
Total net revenue
Dell Market Share Breakdown
Fiscal Year Ended
Annual Market Share:
January 30, 2004
% Change
January 31, 2003
% Change
February 1, 2002
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%
10.5%
0.9%
9.6%
0.6%
9.0%
7.4%
1.5%
5.9%
0.9%
5.0%
16.7%
1.8%
14.9%
2.2%
12.7%
Americas:
Europe
Asia Pacific-Japan
Worldwide
Financial Statements
Income Statement
– Profitability
Balance Sheet
– Asset allocation
Cash Flow Statement
Last quarter’s results
Growth and valuation
Income Statement
Earnings Growth
Earnings Growth
Net Income (in millions $)
3000
2500
2000
1500
1000
500
0
1997
1998
1999
2000
2001
Year
2002
2003
2004
Profitability
Profit Margin
Company Profitability
9.00%
8.00%
7.00%
6.00%
5.00%
4.00%
3.00%
2.00%
1.00%
0.00%
1997
1998
1999
2000
2001
Year
2002
2003
2004
Revenue Growth
Revenue (in millions $)
Revenue Growth
45,000
40,000
35,000
30,000
25,000
20,000
15,000
10,000
5,000
1997
1998
1999
2000
2001
Year
2002
2003
2004
Revenue Composition
Fiscal 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 Structure
Fiscal 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%
3,544
8.6%
3,050
8.6%
2,784
8.9%
464
1.1%
455
1.3%
452
1.5%
-
0.0%
-
0.0%
482
1.6%
4,008
9.6%
3,505
9.9%
3,718
11.9%
Operating Expenses:
Selling, general and administrative
Research, development and
engineering
Special charges
Total operating expenses
Balance Sheet (Assets)
Fiscal Year Ended
(Figures in millions $ US)
January 30, 2004
January 31, 2003
February 1, 2002
Cash & Equivalents
5,152
4,638
3,914
Receivables
3,635
2,586
2,269
Assets
Notes Receivables
-
-
-
327
306
278
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
Inventories
Other Current Assets
Other non-current assets
-
-
-
Deferred charges
-
-
-
Intangibles
-
-
-
391
366
459
19,311
15,470
13,535
Deposits & other assets
Total Assets
Investments
As 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%
159
159
-
0.00%
5
5
-
0.00%
7,454
7,441
13
0.17%
151
138
13
9.42%
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%
International corporate
State and municipal gov't
Total debt securities
Equity securities
Total investments
Asset 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)
Liabilities and Shareholders' Equities
Accounts payable
7,316
5,989
5,075
Accrued and other
3,580
2,944
2,444
10,896
8,933
7,519
505
506
520
-
-
-
Total current liabilities
Long-term debt
Deferred Taxes/Income
Other non-current liabilities
Commitments and contingencies
Total liabilities
Preferred stock
Common stock (par)
Capital Surplus
Retained earnings
Other equity
Treasury stock
Total shareholders' equity
Total liabilities and Shareholders' equity
1,630
13,031
6,823
6,131
(135)
1,158
10,597
6,018
3,486
(92)
802
8,841
5,605
1,364
(26)
6,539
4,539
2,249
6,280
4,873
4,694
19,311
15,470
13,535
Return on Assets
Return on Assets
25.00%
ROA
20.00%
15.00%
10.00%
5.00%
0.00%
1997
1998
1999
2000
2001
Year
2002
2003
2004
Return on Equity
Return on Equity
80.00%
70.00%
ROE
60.00%
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%
1997
1998
1999
2000
2001
Year
2002
2003
2004
Cash Flow Statement
Last Quarter’s Results
Value Drivers of Stock Price
Sales growth
Earnings growth
– Regular earnings
– S&P core earnings
Valuation measures
– P/E
– PEG
– Price / Book value
Key Dell Stats
Estimated annual sales growth of 15%
Actual earnings of $2.65 B vs S&P core
earnings of $1.8 B.
Estimated annual earnings growth rate of
19.5%.
P/E (ttm) = 33.92, PEG = 1.10, P/BV =
15.41
Recommendation
Good growth prospects worldwide
High amount of cash and investments
#1 in world PC market share
Competition
S&P fair value calculation of $53.50
BUY recommendation