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Hewlett-Packard Company
Hewlett-Packard Company (HP or the Company) is a leading technology company Recent stock price: $18.81(1) Ticker: HPQ Serves individual consumers, small- and medium-sized businesses and large enterprises Comprised of five business units: PCs Services Printers Servers Software Market Capitalization of ~$37.2 billion(1) Enterprise Value of ~$59.4 billion(1)
(1)
Investment Highlights
A World Class Company
73 year old brand that is globally recognized #1 market position in almost every business segment
Activist investor Ralph Whitworth recently appointed to Board after accumulating a stake of ~1.5%
8 out of 11 board members are Independent Meg Whitman, CEO of HP, received performance-contingent stock options that vest only if HPs share price appreciates over a specified threshold
Investment Highlights
Shareholder Friendly Capital Allocation
Since 2005, $60 billion returned to shareholders through stock buybacks and dividends(1) $9.7 billion remaining for future share repurchases, representing 26% of HPs market capitalization(2)
Attractive Valuation
Trades at 4.3x 2013 estimated EPS(2)(3) After deducting the value of ESSN and Services, investors receive the PC, printer, and software businesses for free Free optionality on webOS Paid to wait dividend yield of 2.81%(2)
Note: Represents diluted EPS excluding extra items (1) Net of issuance of common stock under employee stock plans (2) As of July 16, 2012 (3) Source: Capital IQ
#1
#2
#1
#1
N/A
N/A 6
(1)
A long and winding road may keep valuations compressedHPQ will likely have its ups and downs - Wells Fargo (June 27, 2012)
8
Hewlett-Packard Company Dow Jones Index 2011 Proxy Peer Group(1) Hewlett-Packard relative to: Dow Jones Index 2011 Proxy Peer Group(1)
As of July 16, 2012 YTD 1 Year 2 Year -28.6% -45.2% -58.1% 2.7% 6.5% -31.2% -35.1% 2.8% 13.8% -47.9% -59.0% 26.0% 50.4% -84.1% -108.5%
Feb-12 HPQ
Mar-12
Apr-12
May-12
Jun-12
Jul-12
-60% Jul-11
Sep-11 HPQ
Nov-11
Jan-12
Mar-12
May-12
Note: Total returns for all periods exclude dividends (1) HP 2011 Proxy Peer Group: CVX, GE, F, T, AAPL, VZ, IBM, PG, MSFT, BA, JNJ, DELL, UTX, INTC, CSCO, ORCL, GOOG, EMC
Business Overview
10
Financials
FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 LTM $29,166 $36,409 $42,295 $35,305 $40,741 $39,574 $38,035 24.8% 16.2% -16.5% 15.4% -2.9% -3.9% $1,152 $1,661 $2,375 $1,661 $2,032 $2,350 $2,133 3.9% 4.6% 5.6% 4.7% 5.0% 5.9% 5.6% 32% 14% 35% 16% 36% 19% 31% 12% 32% 13% 31% 17% 31% 18%
Windows 8 upgrade cycle, back-to-school, rebalancing of HDD supply, and holiday shopping provide significant tailwinds in 2H12 and beyond
11
5.6% 4.8%
2.1%
-1.8%
Source: Capital IQ, Company Filings (1) Represents as reported Client segment revenue and operating margin for FY 2012 (2) Represents as reported net sales by product for desktops and portables (3) Represents as reported Personal Computer segment revenue and operating margin
-22.6%
12
Services
Commentary
Provides consulting, outsourcing and technology services #2 in services Cross-selling opportunities to market hardware and software Competitors:
$ in millions Services Revenue % Growth EBIT % Margin % of HP Revenues % of HP pre-corp EBIT
Financials
FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 LTM $15,578 $15,329 $20,977 $35,380 $35,529 $35,954 $35,966 -1.6% 36.8% 68.7% 0.4% 1.2% 0.0% $1,557 $1,782 $2,518 $5,102 $5,661 $5,149 $4,298 10.0% 11.6% 12.0% 14.4% 15.9% 14.3% 12.0% 17% 19% 15% 17% 18% 20% 31% 38% 28% 36% 28% 37% 29% 36%
13
Services (Contd)
Services segment drives favorable recurring revenue stream as HPs typical average outsourcing contract life is approximately 5 years(1) EDS integration still in early innings Phase one of integration focused on streamlining costs through headcount reduction Only 30 of EDSs top 300 accounts had overlapped with HPs top 100 accounts at the time of acquisition (1) Significant opportunity for HP to close the margin gap by focusing on higher margin contracts and realize revenue synergies from EDS acquisition Achieved 15.9% margins in FY 2010
$62.2
$36.0 $27.7
8.5%
$15.9
$8.3 0.1%
2 3 3
1.3% 0.0%
2
2
-1.0%
Source: Capital IQ, Company Filings (1) Source: Sitfel, August 7, 2009 (2) Represents as reported Global Services segment revenue and operating margin (3) Represents as reported Services segment revenue for FY 2012
14
Financials
FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 LTM $26,786 $28,609 $29,614 $24,011 $25,764 $25,783 $24,599 6.8% 3.5% -18.9% 7.3% 0.1% -4.6% $3,978 $4,293 $4,559 $4,310 $4,412 $3,973 $3,287 14.9% 15.0% 15.4% 18.0% 17.1% 15.4% 13.4% 29% 48% 27% 42% 25% 36% 21% 32% 20% 28% 20% 29% 20% 27%
15
$24.6
13.4% $24.1
-0.9%
3
-1.4%
-1.5%
2
-1.8%
1
6.5%
$10.1
$4.1
$4.1
-4.6%
1 2 3 1 2 3
Source: Capital IQ, Company Filings (1) Represents as reported Office segment revenue and operating margin (2) Represents as reported Technology segment revenue and operating margin (3) Represents as reported Printing and Solutions segment revenue and operating margin
16
Financials
FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 LTM $17,211 $18,639 $19,400 $16,121 $20,356 $22,241 $21,355 8.3% 4.1% -16.9% 26.3% 9.3% -4.0% $1,557 $2,148 $2,577 $1,657 $2,825 $3,026 $2,583 9.0% 11.5% 13.3% 10.3% 13.9% 13.6% 12.1% 19% 19% 18% 21% 16% 20% 14% 12% 16% 18% 17% 22% 17% 21%
17
$21.4
$20.5 $19.5
21.7%
12.1%
12.1%
-1.8%
1
-4.0%
Source: Capital IQ, Company Filings (1) Represents as reported Systems and Technology segment revenue and operating margin (2) Represents as reported Servers and Networking segment revenue for FY 2011
18
Software
Commentary
Provides enterprise IT management software, information management solutions and security intelligence/risk management solutions Potential to leverage enterprise customer base and provide software services Higher margin relative to product-oriented business segments
$ in millions HP Software Revenue % Growth EBIT % Margin % of HP Revenues % of HP pre-corp EBIT
Financials
FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 $1,437 $3,628 $4,220 $2,655 $2,729 $3,217 152.5% 16.3% -37.1% 2.8% 17.9% ($17) $248 $499 $731 $782 $698 -1.2% 6.8% 11.8% 27.5% 28.7% 21.7% 5% 0% 10% 2% 10% 4% 8% 5% 7% 5% 8% 5% LTM $3,611 12.2% $754 20.9% 9% 6%
19
Software (Contd)
Acquisition accounting requires Autonomys deferred revenue balance to be written-off over the first two quarters of ownership In 2H12, operating margins expected to improve significantly as deferred revenue write-down overhang ends HP can increase margins by at least 800 bps Achieved 28.7% margins in FY 2010
LTM REVENUE GROWTH
$28.5
12.2%
35.7%
30.1%
25.0% 20.9% 17.0%
8.7%
8.7%
5.2%
Source: Capital IQ, Company Filings (1) Represents as reported Software segment revenue and operating margin
20
HP Financial Services
Commentary
HP Financial Services offers leasing, financing, utility programs and asset recovery services Competitors: Banks and competitors with financing companies
$ in millions HP Fin. Services Revenue % Growth EBIT % Margin % of HP Revenues % of HP pre-corp EBIT
Financials
FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 $2,078 $2,336 $2,698 $2,673 $3,047 $3,596 12.4% 15.5% -0.9% 14.0% 18.0% $147 $155 $192 $206 $281 $348 7.1% 6.6% 7.1% 7.7% 9.2% 9.7% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 3% 2% LTM $3,802 5.7% $373 9.8% 3% 3%
21
Corporate Investments
Commentary
HP Corporate Investments includes intelligence solutions, HP Labs, webOS software and certain business incubation software Also derives revenue from licensing specific HP technology to third parties
$ in millions Corp. Investments Revenue % Growth EBIT % Margin % of HP Revenues % of HP pre-corp EBIT
Financials
FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 LTM $566 $762 $965 $191 $346 $322 $294 34.6% 26.6% -80.2% 81.2% -6.9% -8.7% ($151) ($57) $49 ($300) ($366) ($1,616) ($1,336) -26.7% -7.5% 5.1% -157.1% -105.8% -501.9% -454.4% 1% -2% 1% -1% 1% 0% 0% -2% 0% -2% 0% -12% 0% -11%
22
Competitors Relative To HP
The breadth and product diversity offered by HP is unrivaled by any of its competitors. While continuous innovation is required to stay competitive, HPs financial resources and dominant market share make the Company well positioned relative to competitors. Most competitors have:
Lower sales and margins Weak market share Limited product diversity
23
24
25
The Resurrection
Whitman decides to keep webOS alive by making it open source. By contributing webOS to the open source community, HP can accelerate the platforms development
26
With Nokia abandoning its Symbian OS, there are currently four operating systems in the marketplace: RIMMs Blackberry, Apples iOS, Googles Android, and Microsofts recently released Windows 8 Only Apple and Research In Motion are involved in software and hardware with respect to their products But bigger players are entering the hardware space to replicate Apples success, and posing significant challenges to the historical software and OEM relationship Googles acquisition of Motorola Mobility Microsofts preview of the Surface tablet
Fortunately for HP, the Palm acquisition addresses its software needs and provides it with a formidable operating system for its existing products
27
We didn't buy Palm to be in the smartphone business. And I tell people that, but it doesn't seem to resonate well. We bought it for the IP. The WebOS is one of the two ground-up pieces of software that is built as a web operating environment...We have tens of millions of HP small form factor web-connected devices...Now imagine that being a web-connected environment where now you can get a common look and feel and a common set of services laid against that environment. That is a very valuable proposition. Mark Hurd
28
Type
Kernel
Multitasking
Source Type
29
Source: gdgt
30
Source: gdgt
The key differentiator with webOS is that the apps keep running in the background, true multitasking. To this day iOS, Android, and Windows Phone still do not have true multitasking at the application levelTo this day, I and many others believe that webOS has the best and least unobtrusive notification system (looking at you iOS) and at the same time it has to feel alive The Verge (June 15, 2012) Likely one of the best features of webOS is Just Type, a universal search system... its actually rather similar to Spotlight on iOSThough, the similarities stop there. It is much powerful than that. The Verge (June 15, 2012) around the web all of the people stating that webOS is the best mobile operating system ZDNet (August 22, 2011) We hadn't considered that there might be an intuitive yet un-Apple way to use a smartphone. Using it felt natural in ways that Android never would, and full-featured in ways that the iPhone didn't, at the time--multitasking made sense, notifications made sense, gestures made sense. POPSCI (August 18, 2011) Apples iOS 5 notifications are great, but webOS is still better BGR (June 8, 2011) This isnt just a good OS, its a great OS - Engadget (October 19, 2010)
webOS provides the best user experience and is a superior operating system relative to current market offerings. If HP can leverage webOS successfully, the opportunity is tremendous
31
32
Chronic Mismanagement
33
-60%
-80% -100% 1999
2000
2001
2002
2003
2004
Source: Capital IQ, Yahoo Finance Note: Total shareholder return excludes dividends
34
35
Fortunately, the departure of Hurd and HPs recent poor stewardship of capital under Apothekers watch are temporary and solvable setbacks
-10%
-20% -30% -40%
-50%
-60% Nov-10
Source: Yahoo Finance Note: Total shareholder return excludes dividends
Feb-11 HP
May-11
Aug-11
36
40% 30%
20%
10% 0%
3.7%
-10%
-20% -30%
-40% Mar-07
Sep-07
Mar-08
Sep-08
SAP
Mar-09
Sep-09
-7.8%
Source: Yahoo Finance, Capital IQ Note: Total shareholder return excludes dividends
37
$30
$20
$10
$1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
CEO:
Fiorina
Hurd
Leo
38
39
40
41
42
BOARD EXPERIENCE
Raymond Lane
Marimba Quest Software Elance Enigma Visible Path Corporation Virsa Systems Xsigo Systems Vertica Systems MEVIO GreatPoint Energy Luca Technologies AREVA Solar Fisker Automotive Hara Software Next Autoworks Company Aquion Energy Kenandy United Parcel Service Genpact Appirio
Meg Whitman
eBay Foundation Procter & Gamble DreamWorks Rosewood Capital Zipcar ArcSight Zaarly
Electronic Arts Sovereign Bank ArcSight Apira Healthcare Group Genzyme Corporation Mattel Sirius Satellite Radio Sprint Nextel Corporation Tektronix Waste Management Wilshire Technologies
Ralph Whitworth
Rajiv Gupta
John Hammergren
Patricia Russo
43
PC Industry Overview
44
we think computers are here to stay and will play a big important role, along with the tablet, along with the cell phone. - Ronald Sargent, CEO of Staples (May 16, 2012)
Source: Google Thoughts on Mobile (February 7, 2012)
45
46
Recession
27.6%
Recession
50 0 2000 2001 2002 2003 2004 2005 PC Units (MM) 2006 2007 YOY Growth 2008 2009 2010 2011
Source: Gartner
47
Source: Intel Morgan Stanley Technology, Media & Telecom Conference 2012 (February 17, 2012)
48
Source: IDC
49
50
$68
$56 $53 $51 $50 $52 $48 $49 $51 $47 $46 $47 $45 $44 $46
Q1 FY09
Q2 FY09
Q3 FY09
Q4 FY09
Q1 FY10
Q2 FY10
Q3 FY10
Q4 FY10
Q1 FY11
Q2 FY11
Q3 FY11
Q4 FY11
Q1 FY12
Q2 FY12
Q3 FY12
51
100.0%
80.0%
55.4% 51.2% 49.0%
47.4%
47.5%
48.3%
60.0%
40.0%
8.9% 7.4%
11.1% 7.2%
13.0% 8.1%
12.0%
11.2% 11.2%
9.7%
20.0%
15.9%
18.2%
18.4%
19.3%
17.9%
17.2%
14.3%
14.3%
12.2%
12.9%
12.1%
0.0%
2006
2007
2008
2009
2010
2011
Dell
HP
Lenovo
Acer
All Others
Source: Gartner
52
53
(1) (2)
IDC Diverse and Exploding Digital Universe, HP internal analysis HP internal analysis
54
(1) (2)
IDC Diverse and Exploding Digital Universe, HP internal analysis HP internal analysis
55
(1)
IDC The Diverse and Exploding Digital Universe (March 2008), HP internal analysis
56
Analog Pages Will Increasingly Tip to Digital Over The Next Decade
(1)
HP internal analysis
57
60%
43% 41%
43%
41%
43%
40%
20%
0%
2006 2007 2008 2009 2010
58
59
60
HP is the #1 vendor in worldwide server revenue with a 29.3% total revenue share In terms of total revenue share, HP is 2.0 percentage points ahead of #2 IBM and 13.7 percentage points ahead of #3, Dell
HP has a commanding lead in the total blade server market, with a 46.1% revenue share. HP has led the blade server market for 22 consecutive quarters, 5 1/2 years HP shipped 2.3 times as many blades as IBM, 4.2 times as many as Dell and 4.4 times as many as Cisco
For 16 consecutive years, 64 quarters, HP ProLiant is the x86 server market share leader in both factory revenue and units HPs x86 revenue share, 35.3%, was 13.5 percentage points higher than its nearest competitor, Dell, 20.1 percentage points higher than IBM and 31.3 percentage points higher than Cisco
61
HP is #1 in Windows revenue and units worldwide HP has a commanding 38.3% revenue share of the Windows market and leads over the nearest competitor, Dell, by 14.7 percentage points
HP is #1 in Linux revenue, 28.4%, and units, 30.7% In terms of Linux revenue share, HP leads over IBM by 10.8 percentage points and Dell by 10.3 points
For the three major operating environments UNIX, Windows and Linux combined (representing 99.9% of all servers shipped worldwide), HP is number one worldwide in server unit shipments
HP holds a 34.6% unit market share worldwide, which is 9.1 percentage points higher than #2 Dell
62
Valuation
63
20.1x 18.1x 17.4x 17.0x 15.0x 14.8x 14.0x 13.8x 13.5x 12.0x
Average = 13.2x
8.5x
EMC
NTAP
FJTSY
BMC
ACN
AAPL
CAJ
IBM
CA
CSCO
SYMC
XRX
HPQ
DELL
LXK
64
40.0x
35.0x
30.0x
25.0x
20.0x
Average = 16.5x
15.0x
10.0x
5.0x
7.3x
0.0x Jan-05
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
Jul-12
65
What is HP Worth?
The mid case valuation is $52.99/share, which is up 282% from the recent share price of $18.81. If revenues grow at 1.0% CAGR for the next several years, year end 2015 value per share is $36, driven largely by cost savings and share repurchases
Base
HP EPS Build LTM Revenue % - CAGR 2015 Revenue EBIT Margin Pro Forma EBIT Interest Expense and Other, net Taxes(1) Net Income Common Shares Outstanding(2) Pro Forma EPS Multiple Price @ Multiple % Return 3 Year IRR 4 Year IRR 5 Year IRR $124,040 1.0% $127,799 7.4% $9,138 ($986) ($2,038) $6,114 1,682 $3.64 10.00x $36.36 93% 25% 18% 14%
Mid
$124,040 1.3% $128,750 8.8% $10,887 ($986) ($2,475) $7,426 1,682 $4.42 12.00x $52.99 182% 41% 30% 23%
High
$124,040 1.5% $129,706 10.2% $12,636 ($986) ($2,913) $8,738 1,682 $5.20 14.00x $72.75 287% 57% 40% 31%
(1) (2)
Assumes 25% tax rate Assumes HP repurchases 298.5 million shares under authorized share repurchase program at an average price of $32.50
66
ESSN
IPG
Services
($ in millions)
Comparables
9.2x 7.9x
$60.00
$7.33(1) $20.95 +
($13.19)
$50.00
+ = $44.81
$40.00
+ $16.81
$30.00
$20.00
> + $12.92
$18.81(2)
$10.00
$0.00 ESSN IPG Services Margin Improvement Net Debt + Minority HPQ Value excl. PC & Interest Software HPQ Stock Price
Note: Assumes HP repurchases 298.5 million shares under authorized share repurchase program at an average price of $32.50 and excludes allocation of corporate overhead (1) Assumes ESSN, IPG, and Services segment operating margins improve by 89 bps, 229 bps, and 199 bps, respectively (2) As of July 16, 2012
68
Conclusion
HP is in good businesses with attractive characteristics However, sentiment is poor because PC and printer industries are misunderstood HPs defensible market position in nearly every business segment is tough to question The current stock price is not factoring in cost savings from the announced restructuring plan and potential earnings accretion from future share repurchases Share price underperformance has been a result of poor corporate governance which is being addressed Even if no margin expansion occurs beyond cost savings from announced restructuring, downside is limited Investors receive PC, printer, and software businesses for free Minimal financial leverage Cheap stock Upside potential is enormous through multiple expansion largely due to improvement in: Margins Corporate Governance Perception
69