July 16, 2012
Sarabjit Cheema, BS 2011, NYU Stern
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Disclaimer THE INFORMATION CONTAINED IN THIS PRESENTATION IS FOR INFORMATIONAL AND EDUCATIONAL PURPOSES AND DOES NOT CONSTITUTUE A SOLICITATION, RECOMMENDATION OR OFFER TO BUY OR SELL ANY SECURITIES. THE VIEWS EXPRESSED HEREIN REPRESENT THE OPINION OF SARABJIT CHEEMA. SARABJIT CHEEMA MAY HAVE PERSONAL INVESTEMENTS IN THE COMPANIES DISCUSSED HEREIN. THE INFORMATION CONTAINED HEREIN IS BASED ON PUBLICLY AVAILABLE INFORMATION. THE COMPANIES INCLUDED IN THIS PRESENTATION MAY HAVE MATERIAL NON-PUBLIC INFORMATION IN THEIR POSSESSION AND CONSEQUENTLY, MAY DISAGREE WITH THE CONCLUSIONS SET FORTH BY SARABJIT CHEEMA. THIS PRESENTATION CONTAINS HISTORICAL AND ANTICIPATED OPERATING PERFORMANCE OF THE COMPANIES DISCUSSED IN THIS PRESENTATION, ACCESS TO CAPITAL MARKETS, MARKET CONDITIONS AND THE VALUES OF ASSETS AND LIABILITIES. ACTUAL RESULTS MAY VARY MATERIALLY FROM THE ESTIMATES AND PROJECTED RESULTS CONTAINED HEREIN. THIS PRESENTATION CONTAINS FORWARD-LOOKING STATEMENTS. THESE FORWARD-LOOKING STATEMENTS ARE BASED ON CURRENT EXPECTATIONS AND ASSUMPTIONS THAT ARE SUBJECT TO RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY. ACCORDINGLY, YOU SHOULD NOT RELY UPON FORWARD-LOOKING STATEMENTS AS A PREDICTION OF ACTUAL RESULTS. SARABJIT CHEEMA MAKES NO REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY OR COMPLETENESS OF THE INFORMATION CONTAINED HEREIN. SARABJIT CHEEMA DISCLAIMS ANY DUTY TO PROVIDE ANY UPDATES OR CHANGES TO THE ANLAYSES CONTAINED HEREIN INCLUDING, WITHOUT LIMITATION, THE MANNER OR TYPE OF ANY INVESTMENT MADE BY SARABJIT CHEEMA.
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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: PC’s Services Printers Servers Software Market Capitalization of ~$37.2 billion(1) Enterprise Value of ~$59.4 billion(1)
(1)
As of July 16, 2012
3
Investment Highlights A World Class Company
73 year old brand that is globally recognized
#1 market position in almost every business segment
Improved Corporate Governance
Average tenure of board members is approximately 2.5 years
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 HP’s share price appreciates over a specified threshold
Favorable Industry Dynamics
Low PC penetration rates in emerging markets support long-term secular demand
Shift from analog to digital printing will result in significant growth in printable content
Cloud computing presents tremendous growth opportunity
4
Investment Highlights Shareholder Friendly Capital Allocation
Since 2005, $60 billion returned to shareholders through stock buybacks and dividends(1)
$9.7 billion remaining for future share repurchases, representing 26% of HP’s market capitalization(2)
Attractive Valuation
Trades at 4.3x 2013 estimated EPS(2)(3)
After deducting the value of ESSN and Services, investors receive the PC, printer, and software businesses for free
Free optionality on webOS
Paid to wait – dividend yield of 2.81%(2)
Note: Represents diluted EPS excluding extra items (1) Net of issuance of common stock under employee stock plans (2) As of July 16, 2012 (3) Source: Capital IQ
5
Snapshot of HP: More Than Just a PC Company HP has leading market positions in all of its segments. The breadth and product diversity offered by HP is unrivaled by any of its competitors FY 2011 Revenue By Segment
Market Share
FY 2011 Revenue By Region
#1
#2
#1
#1
N/A
N/A 6
Snapshot of HP: More Than Just a PC Company (Cont’d) The market has been overly concerned with HP’s PC business, which represents only 16.9% of pre-corp EBIT. Despite its low margins, the PC business provides HP with considerable economies of scale across its businesses FY 2011 Operating Performance (1)
($ in millions) Revenue
EBIT
EBIT Margin
PSG Services IPG ESSN HP Software HP Financial Services Corporate Investments
$39,574 $35,954 $25,783 $22,241 $3,217 $3,596 $322
$2,350 $5,149 $3,973 $3,026 $698 $348 ($1,616)
5.9% 14.3% 15.4% 13.6% 21.7% 9.7% -501.9%
16.9% 37.0% 28.5% 21.7% 5.0% 2.5% -11.6%
Total
$130,687
$13,928
10.7%
100%
(1)
FY 2011 financials exclude corporate overhead
% Pre-Corp EBIT
7
Third Party Observations Wall Street is significantly pessimistic on HP and has set very low expectations. “No matter how bad the outlook is for an asset, when little or no optimism is incorporated in its price, it can easily be a bargain capable of providing outsized returns with limited risk” - Howard Marks ―..sustained weak or negative growth in printers, challenges in HP’s high-end server business, and challenges in consumer PC growth due to competition from tablets and phones. Net, three of HP’s businesses face growth challenges—printers, PCs, and enterprise, while HP services business, which has high exposure to hardware support and outsourcing will likely grow at or lower than global GDP…‖ - BMO Capital Markets (February 23, 2012) ―Tough road ahead as turnaround continues‖ - Bank of America Merrill Lynch (February 22, 2012) ―Major Road Work Ahead: HP Stumbles on a Low Bar, and Turnaround Likely Involves More Bumps…..company, secular, and macroeconomic-related risks stand to defer any measurable progress on the turnaround story.‖ - JP Morgan (February 23, 2012) ―…revenue shortfall in PCs and significant Q/Q margin deterioration in every business raise questions about the competitiveness, cost structure, and secular pressures in HP’s business segments‖ - Morgan Stanley (February 22, 2012)
“A long and winding road may keep valuations compressed—HPQ will likely have its ups and downs‖ - Wells Fargo (June 27, 2012) 8
HP’s Material Stock Price Underperformance Since Mark Hurd resigned, HP’s stock price has declined 52% and has materially underperformed the broader equity markets and its Peer Group Summary Returns
YTD HP Stock Price Performance 30%
As of July 16, 2012 YTD 1 Year 2 Year -28.6% -45.2% -58.1%
Hewlett-Packard Company
15% 0%
Dow Jones Index
2.7%
2.8%
26.0%
2011 Proxy Peer Group(1)
6.5%
13.8%
50.4%
-15%
Hewlett-Packard relative to: Dow Jones Index
-31.2%
-47.9%
-84.1%
2011 Proxy Peer Group(1)
-30% Jan-12
-35.1%
-59.0%
-108.5%
Feb-12 HPQ
Two-Year HP Stock Price Performance
Mar-12
Apr-12
Dow Jones Index
May-12
Jun-12
Jul-12
2011 Proxy Peer Group
One-Year HP Stock Price Performance
100%
30% 15%
50% 0% 0%
-15% -30%
-50% -45% -100% Jul-10
Nov-10 HPQ
Mar-11
Jul-11
Dow Jones Index
Nov-11
Mar-12
2011 Proxy Peer Group
Jul-12
-60% Jul-11
Sep-11 HPQ
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
Nov-11
Jan-12
Dow Jones Index
Mar-12
May-12
2011 Proxy Peer Group
9
Business Overview
10
Personal Systems Group Commentary
Provides commercial/consumer PC’s, workstations, calculators and other related accessories, software, and services
#1 PC brand globally
Product life cycle tied to Windows, Intel/AMD, and design updates
Commodity product where brand, service, and features are key differentiators
Competitors:
Windows 8 upgrade cycle, back-to-school, rebalancing of HDD supply, and holiday shopping provide significant tailwinds in 2H12 and beyond
Financials $ in millions PSG Revenue % Growth EBIT % Margin % of HP Revenues % of HP pre-corp EBIT
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 $2,133 3.9% 4.6% 5.6% 4.7% 5.0% 5.9% 5.6% 32% 14%
35% 16%
36% 19%
31% 12%
32% 13%
31% 17%
31% 18%
11
Personal Systems Group (Cont’d)
HP has the largest revenue base and has successfully leveraged its scale to produce industry leading margins
Many competitors undercutting on price to drive market share and volume gains (i.e. Lenovo) Usually an unsustainable model especially when larger rivals have greater financial resources (i.e. HP and Dell)
By taking advantage of its size, producing innovative products, and reducing SKU’s, HP can increase margins by at least 40 bps Achieved 5.9% margins in FY 2011 LTM REVENUE GROWTH
RELATIVE SIZE - LTM REVENUES
RELATIVE EBIT MARGINS
($ in billions)
$38.0
5.6% $33.2
4.8% $29.5
37.0% $23.0 3.2% $15.6
2.1%
$13.5 14.0%
$10.4
5.8%
1
2
3
0.6%
1
2 -0.4% -1.2% 3 -3.9%
3
-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:
Financials $ in millions Services Revenue % Growth EBIT % Margin % of HP Revenues % of HP pre-corp EBIT
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 $4,298 10.0% 11.6% 12.0% 14.4% 15.9% 14.3% 12.0% 17% 19%
15% 17%
18% 20%
31% 38%
28% 36%
28% 37%
29% 36%
13
Services (Cont’d)
Services segment drives favorable recurring revenue stream as HP’s typical average outsourcing contract life is approximately 5 years(1)
EDS integration still in early innings Phase one of integration focused on streamlining costs through headcount reduction
Only 30 of EDS’s top 300 accounts had overlapped with HP’s top 100 accounts at the time of acquisition (1)
Significant opportunity for HP to close the margin gap by focusing on higher margin contracts and realize revenue synergies from EDS acquisition Achieved 15.9% margins in FY 2010
LTM REVENUE GROWTH
RELATIVE SIZE - LTM REVENUES
RELATIVE EBIT MARGINS
($ in billions)
15.2%
14.3%
$62.2
13.9% 12.0%
8.5%
$36.0 $27.7
$15.9
$8.3
1.3%
0.1% 2
3
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
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Imaging and Printing Group Commentary
Provides consumer and commercial printer hardware, supplies, media and scanning devices
#1 in imaging and printing globally
Supply revenue provides stable, recurring revenue base
Medium to high switching costs depending on lease structure and size of capital investment by customers Results in high customer attachment rate
Competitors:
Financials $ in millions IPG Revenue % Growth EBIT % Margin % of HP Revenues % of HP pre-corp EBIT
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 $3,287 14.9% 15.0% 15.4% 18.0% 17.1% 15.4% 13.4% 29% 48%
27% 42%
25% 36%
21% 32%
20% 28%
20% 29%
20% 27%
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Imaging and Printing Group (Cont’d)
The preferred choice of small and medium size businesses
Yen appreciation pressuring margins
Recently merged with the PSG group, providing further opportunity to increase installed base through cross-selling
Significant opportunity for HP to close the margin gap by eliminating costs and redundancies through merger with PSG group Achieved 18.0% margins in FY 2009 LTM REVENUE GROWTH
RELATIVE SIZE - LTM REVENUES
RELATIVE EBIT MARGINS
($ in billions)
$24.6
13.4% $24.1
13.3% 11.2%
11.1%
-0.9% 3
-1.4%
-1.5% 2
-1.8% 6.5%
1
$10.1
$4.1
$4.1
-4.6% 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
1
2
3
16
Enterprise Servers, Storage and Networking Commentary
Provides server, storage and networking products
#1 in industry-standard servers
Converged infrastructure and cloud computing key areas of growth
Oracle’s decision to discontinue software development for HP’s Itanium-based servers has contributed to revenue decline Creating undue uncertainty amongst HP customers
Competitors:
Financials $ in millions ESSN Revenue % Growth EBIT % Margin % of HP Revenues % of HP pre-corp EBIT
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 $2,583 9.0% 11.5% 13.3% 10.3% 13.9% 13.6% 12.1% 19% 19%
18% 21%
16% 20%
14% 12%
16% 18%
17% 22%
17% 21%
17
Enterprise Servers, Storage and Networking (Cont’d)
HP is the leader in industry standard servers
3Par, a subsidiary of HP, is growing at over 100%
Converged infrastructure and average refresh cycle of 3.5 years to propel future growth
LTM REVENUE GROWTH
RELATIVE SIZE - LTM REVENUES
RELATIVE EBIT MARGINS
($ in billions)
18.4% $21.4
$20.5 $19.5
21.7%
12.1%
12.1%
15.6% $10.3
7.2% $6.2 3.8%
1
2
2
1
-1.8% 1
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
-4.0%
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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
Predictable, recurring revenue
Competitors:
Financials $ in millions HP Software Revenue % Growth EBIT % Margin % of HP Revenues % of HP pre-corp EBIT
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% $754 20.9% 9% 6%
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Software (Cont’d)
Acquisition accounting requires Autonomy’s deferred revenue balance to be written-off over the first two quarters of ownership
In 2H12, operating margins expected to improve significantly as deferred revenue write-down overhang ends
HP can increase margins by at least 800 bps Achieved 28.7% margins in FY 2010 LTM REVENUE GROWTH
RELATIVE SIZE - LTM REVENUES
RELATIVE EBIT MARGINS
($ in billions)
35.7%
12.2%
$28.5
30.1%
8.7%
25.0%
8.7%
20.9% 17.0%
5.2%
$6.7 $4.8 $3.6 $2.2
1
Source: Capital IQ, Company Filings (1) Represents as reported Software segment revenue and operating margin
1.1%
1
1
20
HP Financial Services Commentary
HP Financial Services offers leasing, financing, utility programs and asset recovery services
Competitors: Banks and competitors with financing companies
Financials $ in millions HP Fin. Services Revenue % Growth EBIT % Margin % of HP Revenues % of HP pre-corp EBIT
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%
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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
Financials $ in millions Corp. Investments Revenue % Growth EBIT % Margin % of HP Revenues % of HP pre-corp EBIT
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, HP’s 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
HP webOS: Overlooked and Underappreciated
24
The Beginnings of webOS
Source: The Verge (June 5, 2012)
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
Source: The Verge (June 5, 2012)
26
webOS Can Become a Key Differentiator for HP Google
Microsoft
Apple
Research In Motion
With Nokia abandoning its Symbian OS, there are currently four operating systems in the marketplace: RIMM’s Blackberry, Apple’s iOS, Google’s Android, and Microsoft’s 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 Apple’s success, and posing significant challenges to the historical software and OEM relationship Google’s acquisition of Motorola Mobility Microsoft’s 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
webOS: A Significant Value Proposition
“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
webOS Versus Other Platforms
Type
Kernel
Multitasking
Source Type
Source: gdgt
29
webOS Versus Other Platforms (Cont’d) Ease of Use:
30 Source: gdgt
Third Party Observations on webOS
―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 level…To 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... it’s actually rather similar to Spotlight on iOS…Though, 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) ―Apple’s iOS 5 notifications are great, but webOS is still better‖ – BGR (June 8, 2011) ―This isn’t just a good OS, it’s 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
A Preview of What to Expect
32
Chronic Mismanagement
33
Early 2000s: HP Begins to Decline During Carly Fiorina’s tenure at HP, total shareholder return was -49%
Under Fiorina (1999-2005), HP pursued a growth at all costs strategy
Between 2000 and 2005, EBIT margins declined 260 bps while sales increased by 1.8x
The company’s leverage and financial profile weakened following the acquisition of Compaq HP SHARE PRICE PERFORMANCE 60% 40% 20% 0% -20% -40%
-60% -80% -100% 1999
2000
Source: Capital IQ, Yahoo Finance Note: Total shareholder return excludes dividends
2001
2002
2003
2004
34
Late 2000s: Saved From Financial Distress During Mark Hurd’s tenure at HP, total shareholder return was 145%
Fiorina was forced out; Mark Hurd was hired in 2005
Performance under Hurd improved considerably as cost-cutting initiatives made HP leaner Consolidated 85 data centers into 6 Consolidated 6,000 company used software applications into 1,500
EBIT increased by 2.2x while revenue increased 1.5x HP SHARE PRICE PERFORMANCE 200% 180% 160% 140% 120% 100% 80% 60% 40% 20% 0% 2005
2006
Source: Yahoo Finance Note: Total shareholder return excludes dividends
2007
2008
2009
2010
35
Late 2000s: Sex Scandal Forces Hurd Out During Leo Apotheker’s tenure at HP, total shareholder return was -46.3%
Leo Apotheker replaced Hurd as CEO in 2010 and failed to deliver at HP
Poor Decision Making Despite being the world’s top personal computer maker, Apotheker contemplated spinoff of PC business HP spent $1.2 billion to acquire Palm and its highly praised webOS, which was nearly shutdown and discontinued during the end of Apotheker’s tenure as CEO
Poor Capital Stewardship Autonomy transaction valued at 25.2x LTM EBITDA
Poor Execution Slashed sales outlook three times Nearly every business segment suffered either a decline in sales or margin contraction
Fortunately, the departure of Hurd and HP’s recent poor stewardship of capital under Apotheker’s watch are temporary and solvable setbacks
HP SHARE PRICE PERFORMANCE 20% 10% 0%
-10% -20% -30% -40%
-50% -60% Nov-10 Source: Yahoo Finance Note: Total shareholder return excludes dividends
Feb-11
May-11 HP
Aug-11
36
Why Hiring of Leo Apotheker Was a Poor Decision During Leo Apotheker’s tenure as CEO of SAP, total shareholder return was only 0.9%
Competitor Oracle outperformed SAP by growing revenue 3.7% in FY 2009 while SAP’s revenue declined 7.8%
First revenue decline posted by SAP since 2003
Apotheker’s 2 year tenure as CEO of SAP comes to end after dismal performance SAP SHARE PRICE PERFORMANCE
FY 2009 REVENUE COMPARISON
40% 30%
3.7%
20% 10% 0%
-10% -20% -30%
-40% Mar-07
Sep-07
Mar-08
Sep-08
Mar-09
Sep-09
-7.8%
SAP
Source: Yahoo Finance, Capital IQ Note: Total shareholder return excludes dividends
37
HP Has Been Chronically Mismanaged Over the past 13 years, HP has failed to create value for shareholders $70 $60 $50 $40
$30 $20
$10 $1999
2000
2001
CEO:
Source: Yahoo Finance Note: Total shareholder return excludes dividends
2002
Fiorina
2003
2004
2005
2006
2007
Hurd
2008
2009
2010
2011
Leo
38
Improved Corporate Governance
39
Whitman Hired as Apotheker’s Replacement During Meg Whitman’s tenure at EBAY, total shareholder return was 1662% or 34.4% compounded annually
MBA, Harvard Business School
Has held management positions at The Walt Disney Company, FTD, Inc., The Procter & Gamble Company, The Stride Rite Corporation, Bain & Company, and Hasbro, Inc.
Joined EBAY in 1998, which had revenue of $4 million and only 30 employees
By 2008, EBAY had revenue of $8 billion and 15,000 employees
Source: Google Finance Note: Total shareholder return excludes dividends
40
…And Incentivized to Create Shareholder Value
Meg Whitman will receive $1.00 in base salary and 1,900,000 options at an exercise price of $23.59 which will have an eight-year term
For the options to vest in full, the following criteria must be met:
100,000 shares will vest, if at all, on each of the first three anniversaries of the option grant date, subject to Ms. Whitman’s continued employment;
800,000 shares will vest, if at all, upon the satisfaction of both of the following criteria prior to the expiration of the option: (i) Ms. Whitman’s continued employment on the first anniversary of the option grant date, and (ii) subject to Ms. Whitman’s continued employment on such date, the first date that the closing price of HP common stock on the New York Stock Exchange has met or exceeded 120% of the exercise price of the option for at least 20 consecutive trading days; and
800,000 shares will vest, if at all, upon the satisfaction of both of the following criteria prior to the expiration of the option: (i) Ms. Whitman’s continued employment on the second anniversary of the option grant date, and (ii) subject to Ms. Whitman’s continued employment on such date, the first date that the closing price of HP common stock on the New York Stock Exchange has met or exceeded 140% of the exercise price of the option for at least 20 consecutive trading days.
Meg Whitman has a strong interest in seeing HP’s stock recover
Source: Company Filings
41
Improved Corporate Governance HP’s significant underperformance was primarily due to poor corporate governance. The appointment of activist investor Ralph Whitworth, who has accumulated a 1.5% stake in HP, highlights that the new Board is receptive to engaging with shareholders to create value Marc Andreessen Independent Director Shumeet Banerji Independent Director Rajiv Gupta Independent Director
HP Board: 3 Years Co-Founder of AH Capital Management, LLC
Ann Livermore
HP Board: 1 Year CEO of Booz & Company
Gary Reiner
HP Board: 3 Years Chairman, Avantor Performance Materials Senior Advisor to New Mountain Capital, LLC Former Chairman and CEO of Rohm and Haas Company
John Hammergren Independent Director
HP Board: 7 Years Chairman, President, and CEO of McKesson Corporation
HP Board: 2 Years Chairman of HP Managing Partner at Kleiner Perkins Caufield & Byers Former President and COO of Oracle Corporation Former Senior Partner at Booz Allen Hamilton Former division VP at EDS
Non-Independent Director
Independent Director
Patricia Russo Independent Director G. Kennedy Thompson Independent Director
Margaret Whitman Raymond Lane Non-Independent Director
Source: Company Filings
Non-Independent Director
Ralph Whitworth Independent Director
HP Board: 1 Year Former Executive VP of Enterprise Business at HP
HP Board: 1 Year Special advisor to General Atlantic Former Senior VP and CIO of General Electric Company
HP Board: 1 Year Former CEO of Alcatel-Lucent
HP Board: 6 Years Principal of Aquiline Capital Partners LLC Former Chairman, President and CEO of Wachovia Corporation
HP Board: 1 Year President and CEO of HP Former advisor to Kleiner, Perkins, Caulfield & Byers Former President and CEO of EBAY
HP Board: 1 Year Principal of Relational Investors LLC
42
Most Board Members Have Extensive Board Experience Most HP Board members have experience on other company boards BOARD EXPERIENCE Marc Andreessen
Rajiv Gupta
John Hammergren
Source: Company Filings
Ning Facebook eBay Kno, Bump Technologies CollabNet Opsware Octopus Albridge Solutions Kontiki Aliph Glam Media Quadrangle Capital Partners Skype Global Mixed Media Labs TinyCo
Tyco International Symphony IRI Group Delphi Automotive The Vanguard Group The Conference Board Stroz Friedberg Affle
McKesson Corporation NADRO Verispan
BOARD EXPERIENCE
BOARD EXPERIENCE
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
Ann Livermore
United Parcel Service
Gary Reiner
Genpact Appirio
Patricia Russo
General Motors Lucent Technologies Avaya Merck & Co. Alcoa
Raymond Lane
G. Thompson
BNC Bancorp The Clearing House The CharlotteMecklenburg Hospital Authority Strategic Growth Bancorp
Meg Whitman
eBay Foundation Procter & Gamble DreamWorks Rosewood Capital Zipcar ArcSight Zaarly
Ralph Whitworth
Electronic Arts Sovereign Bank ArcSight Apira Healthcare Group Genzyme Corporation Mattel Sirius Satellite Radio Sprint Nextel Corporation Tektronix Waste Management Wilshire Technologies
43
PC Industry Overview
44
PC’s Can Coexist With Tablets and Smartphones Different devices for different situations. Tablets and smartphones provide greater mobility, but cannot replace the functionality and power of a PC
―…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
Daily Search Usage Trend By Platform Desktop usage peaks during the work hours and declines steadily in the evening. Highly unlikely that tablets or smartphones will supplant desktop usage
Source: Google “Thoughts on Mobile” (February 7, 2012)
46
Historical PC Unit Sales In the past 12 years, PC unit sales have declined only once. During the 2001-2002 U.S. recession, PC sales took one year to return to strong growth. During the 2008-2009 global recession, PC unit sales did not decline despite global growth concerns Recession
400
Recession
27.6%
30.0%
350 300
25.0% 18.7%
20.0% 15.6%
14.7% 13.3%
250
11.9%
15.0% 11.4%
9.6%
200
10.0%
3.4%
150
5.0% 1.2%
0.5%
100
0.0% -4.9%
50
-5.0%
0
-10.0% 2000
2001
2002
2003
2004
2005 PC Units (MM)
Source: Gartner
2006
2007
2008
2009
2010
2011
YOY Growth
47
Emerging Markets to Drive Future Demand PC penetration in emerging markets is significantly lower than developed economies, providing the PC industry with strong growth fundamentals
Source: Intel “Morgan Stanley Technology, Media & Telecom Conference 2012” (February 17, 2012)
48
Emerging Markets to Drive Future Demand (Cont’d) PC sales are expected to grow in the high single digits as first time buyers in emerging markets drive demand
Source: IDC
49
Notebooks Are Not Dying Notebook’s will be primary driver of PC growth as consumers favor mobility
Source: NPD DisplaySearch “Quarterly Mobile PC Shipment and Forecast Report”
50
PC Margins to Expand in 2H12 Thailand floods caused a shortage of hard drives which contributed to a shortfall in PC shipments. Average selling price for hard drives expected to decline in 2H12 as supply shortage eases ASP (HDD) $80 $69
$68
Q2 FY12
Q3 FY12
$70 $60
$56 $53
$51
$50
$50
$52 $48
$49
$51 $47
$46
$47
Q1 FY11
Q2 FY11
$45
$44
Q3 FY11
Q4 FY11
$46
$40 $30 $20 $10 $0 Q4 FY08 Source: Western Digital
Q1 FY09
Q2 FY09
Q3 FY09
Q4 FY09
Q1 FY10
Q2 FY10
Q3 FY10
Q4 FY10
Q1 FY12
51
Global PC Market Share By Units HP has dominated the PC market for the past six years and has 42% more market share than its nearest competitor
100.0%
80.0% 51.2%
49.0%
47.4%
47.5%
48.3%
8.9%
11.1%
13.0%
12.0%
11.2%
7.0%
7.4%
7.2%
8.1%
9.7%
11.2%
15.9%
18.2%
18.4%
19.3%
17.9%
17.2%
15.9%
14.3%
14.3%
12.2%
12.9%
12.1%
2006
2007
2008
2009
2010
2011
55.4%
60.0%
40.0%
5.8%
20.0%
0.0%
Dell
Source: Gartner
HP
Lenovo
Acer
All Others
52
Printer Industry Overview
53
Key Market Trends
(1) (2)
IDC Diverse and Exploding Digital Universe, HP internal analysis HP internal analysis
54
Key Market Trends (Cont’d)
(1) (2)
IDC Diverse and Exploding Digital Universe, HP internal analysis HP internal analysis
55
Digital Printable Content Exploding
(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
HP Global Printer Market Share By Units HP has dominated the printer market and maintained the #1 market share for half a decade
60%
43% 41%
43%
43% 41%
40%
20%
0% 2006
Source: Credit Suisse (March 16, 2011)
2007
2008
2009
2010
58
Server Industry Overview
59
Public Cloud Expected to Reach Nearly $160 Billion By 2020 Cloud computing provides the biggest opportunity for growth and will drive increased server demand
Source: Forrester Research
60
So Lets Check Who’s Best Posed to Benefit 1
2
For 10 consecutive years, 40 straight quarters, HP is the #1 vendor in worldwide server shipments with a 34.6% total unit shipment share
HP shipped more than 684,000 servers in 1Q12 which was 180,000 more servers than Dell, 2.6 times as many servers as IBM, 7.9 times as Fujitsu, 16.8 times as many as Cisco and 24.0 times as many as Oracle
HP shipped a server every 11 seconds and shipped more than 1 in every 3 servers customers purchased worldwide
HP is the #1 vendor in worldwide server revenue with a 29.3% total revenue share
3
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
4
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 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
HP’s 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
Source: Hewlett-Packard Company
61
So Lets Check Who’s Best Posed to Benefit (Cont’d) 5
HP is the number one supplier of Itanium (EPIC) based systems based on worldwide unit volume and worldwide factory revenue
6
HP is #1 in Windows revenue and units worldwide
7
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%
8
HP Integrity blades maintained the #1 position in revenue for the RISC+EPIC blade segment with 59.0% worldwide share
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
Source: Hewlett-Packard Company
62
Valuation
63
Technology Comparison – Current Trading Multiple Despite being among the leaders in its respective industry, HP’s trading multiple is at a steep discount to most technology companies P/E MULTIPLE
20.1x 18.1x 17.4x
17.0x 15.0x
14.8x 14.0x
13.8x
Average = 13.2x 13.5x 12.0x
8.5x
8.1x 7.3x
7.0x 5.2x
EMC
NTAP
Note: As of 07/16/2012 Source: Google Finance
FJTSY
BMC
ACN
AAPL
CAJ
IBM
CA
CSCO
SYMC
XRX
HPQ
DELL
LXK
64
Opportunity For Multiple Expansion HP is trading at historical lows despite being significantly larger as measured by revenues coupled with improved operating performance HISTORICAL P/E MULTIPLE 45.0x
40.0x
35.0x
30.0x
25.0x
Average = 16.5x
20.0x
15.0x
10.0x
5.0x
0.0x Jan-05
7.3x
Jul-05
Note: As of 07/16/2012 Source: Capital IQ
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
HP EPS Build LTM Revenue % - CAGR 2015 Revenue EBIT Margin Pro Forma EBIT
Mid
High
$124,040 1.0% $127,799
$124,040 1.3% $128,750
$124,040 1.5% $129,706
7.4% $9,138
8.8% $10,887
10.2% $12,636
Interest Expense and Other, net
($986)
($986)
($986)
Taxes(1) Net Income Common Shares Outstanding(2) Pro Forma EPS Multiple
($2,038) $6,114
($2,475) $7,426
($2,913) $8,738
1,682 $3.64 10.00x
1,682 $4.42 12.00x
1,682 $5.20 14.00x
Price @ Multiple % Return
$36.36 93%
$52.99 182%
$72.75 287%
25% 18% 14%
41% 30% 23%
57% 40% 31%
3 Year IRR 4 Year IRR 5 Year IRR
(1) (2)
Base
Assumes 25% tax rate Assumes HP repurchases 298.5 million shares under authorized share repurchase program at an average price of $32.50
66
Sum of the Parts Valuation
ESSN
IPG
Services
($ in millions)
Comparables
Segment LTM EBIT
Multiple Total Value Note: Comparable multiples as of July 15, 2012 Source: Capital IQ, Company Filings (1) Average multiple of IPG comparables group
10.0x
10.0x
10.0x
9.2x
8.4x
7.9x
8.2x
8.0x
8.0x
8.0x
6.0x
6.0x
6.0x
4.0x
4.0x
4.0x
2.0x
2.0x
2.0x
0.0x
0.0x
0.0x
$2,583
$3,287
$4,298
8.4x
8.6x(1)
8.2x
$21,723
$28,268
$35,244 67
Buy 2, Get 3 Free The combined value of ESSN and Services after deducting net debt and minority interest is $20.68, implying significant margin of safety as investors receive the PC, printer, and software businesses for free $70.00
($13.19)
$7.33(1)
$60.00
$20.95 $50.00
+
+ =
$44.81
$40.00
+ $16.81 $30.00
>
$20.00
$18.81(2)
+ $12.92
$10.00
$0.00 ESSN
IPG
Services
Margin Improvement Net Debt + Minority HPQ Value excl. PC & Interest Software
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
HPQ Stock Price
68
Conclusion
HP is in good businesses with attractive characteristics However, sentiment is poor because PC and printer industries are misunderstood
HP’s 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
