HP
ANALYSIS for NYSE : HPQ NOVEMBER 21, 2012
$16.10$31.8 B MKT CAP
Trefis Estimate
$12.02$23.6 B MKT CAP
Market Price
See the Full Analysis for HP on Trefis
— CORPORATE SNAPSHOT —
HP is known by consumers primarily for its PCs and printing products.
However, the single largest driver of HP's value is its services businesses that
is focused on business customers and alone constitutes about 39% of the firm
value. HP Services provides outsourcing and consulting services primarily to
Fortune 500 clients. Through outsourcing services provided by EDS (a part
of HP), clients can reduce their IT cost structure by contracting out the
maintenance of IT hardware and software. Similarly, HP assists customers in
reducing costs in other business support areas such as human resources,
accounting and procurement.
— VALUATION HIGHLIGHTS —
HP Services (Application Outsourcing, Technology Services,
Infrastructure Outsourcing, Business Process Outsourcing) constitute
43% of the Trefis price estimate for HP's stock.
1.
Printers & Ink Cartridges constitute 16% of the Trefis price estimate for
HP's stock.
2.
Servers & Storage (Industry Servers, High-end Servers, Storage)
constitutes 15% of the Trefis price estimate for HP's stock.
3.
See the Interactive Valuation Breakdown on Trefis
Our share price estimate and the overall company value is derived by
summing-up the values of individual divisions/businesses in a sum-of-the-
parts analysis. The value of each division is calculated using a discounted cash
flow (DCF) methodology.
We forecast fundamental drivers like pricing, market share, and profit
INFRASTRUCTUREOUTSOURCING
4
Infrastructure Outsourcing
Revenues
5
Infrastructure Outsourcing EBITDA
Margin
PRINTERS & INK CARTRIDGES
6
Printer Ink & Toner Supplies
Pricing
7HP Market Share
8Worldwide Printer Market
9HP Printer Pricing
10
Printer & Cartridges EBITDA
Margin
TECHNOLOGY SERVICES 11Tech Services Revenues
12
Technology Services EBITDA
Margin
INDUSTRY SERVERS 14Ind. Server Pricing
15Ind. Server shipments
15Ind. Server EBITDA Margin
APPLICATION OUTSOURCING 17Application Outsourcing Revenues
18
Application Outsourcing EBITDA
Margin
NOTEBOOKS & NETBOOKS 20HP Notebooks & Netbooks Pricing
21
HP Market Share in Notebooks &
Netbooks Sold
22
Global Notebooks & Netbooks
Sold
23
Notebooks & Netbooks EBITDA
Margin
HP SOFTWARE 25License Revenues
26Annual Renewal Rate
27Software EBITDA Margin
FINANCIAL SERVICES
29
Return on HP's Financial Services
Assets
30HP Financial Services Assets
30HPFS EBTDA Margin
DESKTOPS 32HP Desktops Pricing
33HP Market Share in Desktops Sold
33Global Desktops Sold
34Desktops EBITDA Margin
BUSINESS PROCESS
margins for different businesses in estimating the division’s value within the
DCF framework. The analysis below primarily focuses on those important
forecasts that drive our share price and value estimate.
Our complete analysis, including sources of historical data, underlying
equations and additional discussion are available on www.trefis.com.
— POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE —
Below are key drivers of HP's value that present opportunities for upside or
downside to the current Trefis price estimate for HP:
HP Services
Infrastructure Outsourcing Revenues: We currently forecast the
revenues from HP's infrastructure outsourcing business will stay flat at
about $15 billion in 2011 till the end of the Trefis forecast period. There
could be however be a 5% upside to the Trefis price estimate if
infrastructure outsourcing revenues were to increase to $18 billion during
our forecast period.
•
Infrastructure Outsourcing EBITDA Margin: We currently forecast
infrastructure outsourcing EBITDA margin to remain stable at 2011 level
of about 17% till the end of the Trefis forecast period. There could be
5%-6% upside to the Trefis price estimate if margin were to increase
going forward, reaching the 20% mark achieved in 2009. On the other
hand, there could be 4%-5% downside to the Trefis price estimate if
margins continued falling, reaching pre-crisis level of under 15% by the
end of the Trefis forecast period.
•
PCs, Workstations & Others
HP Market Share in Notebooks & Netbooks Sold: We currently
forecast HP's market share in the global notebooks & netbooks market
will remain flat going forward at around 16.5%. There could be however
be a 2% downside to the Trefis price estimate if HP's market share
continued falling at current rate in the future reaching 10% by the end of
Trefis forecast period.
•
— SOURCES OF VALUE —
EDS a Large Driver of ValueEDS is a complete outsourcing unit with outsourcing services ranging from
information technology outsourcing to application outsourcing and business
process outsourcing. HP acquired EDS in 2008 to enhance its outsourcing
business, and we believe the step has helped HP move in the right direction
as outsourcing has gained traction in an increasingly competitive and open
business environment since.
Huge Printing Business
OUTSOURCING
36
Business Process Outsourcing
Revenues
37
Business Process Outsourcing EBITDA
Margin
HP NETWORKING 38HP Procurve Market Share
39
Worldwide Router and Switching
Market
39HP Networking EBITDA Margin
STORAGE 41Storage revenue
41Storage EBITDA Margin
WORKSTATIONS & OTHERS 43Other Revenues
43Other EBITDA Margin
HIGH-END SERVERS 45Biz. systems Pricing
45Biz. systems shipments
46Biz. systems EBITDA Margin
APPENDICES 49Summary P&L for HP
51
Detailed Infrastructure Outsourcing
P&L
52
Detailed Printers & Ink Cartridges
P&L
53Detailed Technology Services P&L
54Detailed Industry Servers P&L
55
Detailed Application Outsourcing
P&L
56
Detailed Notebooks & Netbooks
P&L
57Detailed HP Software P&L
58Detailed Financial Services P&L
59Detailed Desktops P&L
60
Detailed Business Process Outsourcing
P&L
61Detailed HP Networking P&L
62Detailed Storage P&L
63
Detailed Workstations & Others
P&L
64Detailed High-end Servers P&L
TREFIS ANALYSIS for HP [email protected] + 1 617 394 8763 •2
HP is the global leader in the printer market with over 41% share in printer
units sold globally as of 2011. We expect the firm to maintain its leadership
position in the printer market in the future and estimate that the firm derives
as much as ~19% of its value from the printing business
HP is the global leader in the PC marketHP is by far the largest PC vendor in the world with over 16% market share
in 2011. The company derives nearly 15% of its value from the PC business
(the Personal Systems Group or PSG). With HP now committed to revive
its PC business, we expect the company will hold on to its leading market
share going forward by investing into R&D and coming up with innovative
products.
— KEY TRENDS —
Rising Popularity of tablets and HP's renewed focus on PCsWith the launch of Apple's iPad in 2010, the demand for tablet PCs has
increased at a rapid rate. We believe that this trend will continue as both
phone and PC manufacturers like RIM, Motorola Mobility, Samsung, HP
and Dell enter into the tablet market in a big way.
While the HP's plan to enter the market in a big way in 2011 with tablet
devices based on its WebOS platform have been laid to rest, the firm is not
giving up on the market yet. With renewed focus on its Personal Systems
Group (PSG) under CEO Meg Whitman, HP will be launching fresh line of
tablets based on the Windows 8 operating system in late 2012 and will be
targeting both consumers as well as enterprises.
If HP manages to capture mind and market share this time with its
Windows 8 based tablets, there could be a tremendous upside potential to the
firm.
Consulting has High Exposure to Discretionary IT Spend Consulting is the most discretionary part of a company's IT spending budget,
and hence the most likely to suffer among all services divisions in a
slowdown. HP Consulting and SI business provides solutions in the areas of
IT architecture and infrastructure, custom applications and packaged
applications, security, IT services management and information management.
However, as the economy recovers, HP's consulting is expected to pick
up.
Outsourcing is a Defensive BusinessIn a recessionary environment cost triumphs over value as firms look to do
the bare minimum to sustain their business. Outsourcing helps companies
keep costs low. HP's outsourcing business did well during the the economic
recession of 2008-09 and will continue to do so as its clients now face
increasing competition and pressure in an uncertain economic environment.
See the Full Analysis for HP on Trefis
TREFIS ANALYSIS for HP [email protected] + 1 617 394 8763 •3
•
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1.
2.
Infrastructure Outsourcing The Infrastructure Outsourcing division constitutes 17.5% of our $16.10 price estimate for this stock, based on our sum of
the parts analysis.The most important drivers for the Infrastructure Outsourcing business are:
Infrastructure Outsourcing Revenues
Infrastructure Outsourcing EBITDA Margin
— INFRASTRUCTURE OUTSOURCING REVENUES —
Infrastructure Outsourcing revenues essentially comprise all of HP Outsourcing revenues and EDS Infrastructure
Outsourcing revenues.
Historically, HP Outsourcing has grown at a rapid pace, owing to a smaller base, growing from $4.7 billion revenues in
2007 to $15.2 billion revenues in 2011 with bulk of the growth resulting from HP's acquisition of outsourcing firm EDS in
2008.
2008 onwards Infrastructure Outsourcing Revenues has included EDS Infrastructure Outsourcing which has
continued to grow at a healthy pace owing to strong industry demand and EDS' expertise.
Going forward, we expect a decline in the next few years before showing growth.
Forecast Rationale
DEMAND FOR INFRASTRUCTURE OUTSOURCING IS INCREASING – Pressure to reduce IT expenses in times when
companies are trying to cut IT budgets is forcing firms to outsource these services.
EDS IS A MARKET LEADER IN OUTSOURCING – HP acquired EDS is a market leader along with Accenture and IBM in
the infrastructure Outsourcing field and can expected to see a jump in revenue as the infrastructure outsourcing
demand grows on the whole. More specifically EDS will be able to grow as the market grows. Industry Expertise -
EDS, being an outsourcing specialist, has extensive industry knowledge in this field. Scope - EDS offers a breadth of
services across the IT Infrastructure. Bundling - EDS is able to bundle its Infrastructure Outsourcing services along
Infrastructure Outsourcing Revenues ($ Bil)
2008 0 9 1 0 1 1 1 2 1 3 1 4 1 5 1 6 1 7 1 8 1 90.0
2.5
5.0
7.5
10.0
12.5
15.0
TREFIS ANALYSIS for HP [email protected] + 1 617 394 8763 •4
with its BPO and Application Outsourcing services, thereby offering a complete IT solution to its clients.
Sources for historical data and explanations can be found on the Trefis.com website (link)
— INFRASTRUCTURE OUTSOURCING EBITDA MARGIN —
Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) are profits after factoring in typical expenses
such as Cost of Goods and Services Sold, SG&A Expense and R&D Expense. EBITDA Margin represents divisional
EBITDA as a percentage of divisional revenues. We adjust EBITDA figures to exclude non-recurring charges and non-
cash charges such as Stock-Based Compensation Expense.
Historically, Outsourcing has been a high margin business growing steadily from 2005 to 2008 as HP focussed on cutting
costs by improving service delivery as well utilizing synergies from EDS acquisition. Margins spiked in 2009 driven by a
substantial drop in the employee costs.
In 2010 Infrastructure Outsourcing EBITDA Margin increased further to 19.8% with the improvement in the
business environment. The Infrastructure Outsourcing EBITDA Margin dipped in 2011 to 16.9% due primarily to lower
than expected revenue, rate concessions arising from recent contract renewals and a lower than expected resource
utilization rate.
Going forward we expect Infrastructure Outsourcing EBITDA Margin to remain at current low levels by the end of
the Trefis forecast period.
Forecast RationaleHP has shifted focus for its services business to create sustainable growth for the long term and will be implementing a
number of strategic changes like creating greater go-to-market leverage with products and embedding more technology
into products to further automate services, accelerating portfolio investments in higher value-add services enhancing
services offerings in emerging areas, such as cloud services and consulting, application modernization, business analytics
and mobility. Hp will also enhance its delivery and sales capabilities.
We believe that while this will enable better top line growth for HP services in the long run, the firm will have to
sacrifice on margins which will most likely remain at low levels of 2011.
Infrastructure Outsourcing EBITDA Margin (%)
2008 0 9 1 0 1 1 1 2 1 3 1 4 1 5 1 6 1 7 1 8 1 90.0
2.5
5.0
7.5
10.0
12.5
15.0
17.5
20.0
TREFIS ANALYSIS for HP [email protected] + 1 617 394 8763 •5
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•
•
•
•
Sources for historical data and explanations can be found on the Trefis.com website (link)
Note that HP reports financial information for fiscal year ended October 31st. For the purposes of our analysis, we have treated HP's fiscal year figures as equivalentto calendar year ended December 31st figures.
In addition, you can see the detailed P&L for the Infrastructure Outsourcing business in the Appendix (link)
Printers & Ink Cartridges The most important drivers for the Printers & Ink Cartridges business are:
Printer Ink & Toner Supplies Pricing
HP Market Share
Worldwide Printer Market
HP Printer Pricing
Printer & Cartridges EBITDA Margin
— PRINTER INK & TONER SUPPLIES PRICING —
Printer Ink & Toner Supplies Pricing is the average price of an ink cartridge for an HP printer.
CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15 CY16 CY17 CY18 CY19
Total Revenue (Bil $) 10.4 14.4 14.9 15.2 14.3 13.2 11.9 10.7 11.2 11.8 12.7 13.7
Direct Expense (Bil $) 8.77 11.6 12.0 12.7 11.9 10.9 9.85 8.86 9.31 9.77 10.6 11.4
Indirect Expense (Bil $) 0.46 0.70 1.52 1.69 3.69 1.54 1.57 1.37 1.40 1.50 1.67 1.85
Adjusted EBITDA (Bil $) 1.60 2.75 2.95 2.58 2.43 2.23 2.01 1.81 1.90 1.99 2.15 2.32
Free Cash Flow (Bil $) n/a n/a n/a n/a -1.26 0.69 0.44 0.43 0.50 0.49 0.48 0.48
Printer Ink & Toner Supplies Pricing ($)
2008 0 9 1 0 1 1 1 2 1 3 1 4 1 5 1 6 1 7 1 8 1 90
1 0
2 0
3 0
4 0
5 0
TREFIS ANALYSIS for HP [email protected] + 1 617 394 8763 •6
1.
2.
3.
1.
2.
The average price of an HP ink cartridge has increased from $40 in 2005 to $47 in 2011. We estimate a gradual decline in
average pricing for ink cartridges due to declining demand and cheaper alternatives to branded ink cartridges.
Forecast Rationale
CHEAP ALTERNATIVES HURT SALES – Cheaper toners from local manufacturers as well as counterfeit toners hurt HP
cartridge sales. As HP printing business derives much of its value from the sale of ink and toner supplies, the
company will continue to closely monitor the pricing and alter it on a regular basis to keep the demand going.
PASSING ON COST CUTS – Manufacturing costs are coming down each year and should partly result in the decline in
average price of toner
DECREASING DEMAND – As demand for inkjets printers and print volume as a whole decline with the rise and wide
scale adoption of digital alternatives, prices of inks and toners will fall.
Sources for historical data and explanations can be found on the Trefis.com website (link)
— HP MARKET SHARE —
HP Market Share implies HP's market share in the worldwide printer market in terms of shipments, i.e. printers sold.
HP's market share grew from ~33% in 2004 to over 41% in 2011 as the firm strengthened its No.1 position in the market.
HP is the undisputed king of the worldwide printer market and we expect its market share to hover around a dominant
40% in the time to come.
Forecast Rationale
STRONG CLIENT RELATIONSHIPS – HP's biggest strength lies in its long term relationships with its clients and its wide
network. Having been in the industry as a hardware, software and services vendor, covering the entire IT spectrum, it
has built extensive relationships with all its clients
HP IS THE GLOBAL LEADER IN THE PC MARKET – Being the biggest PC maker in the world only helps its printer
business as they can often bundle the two and sell together, driving printer sales
HP Market Share (%)
2008 0 9 1 0 1 1 1 2 1 3 1 4 1 5 1 6 1 7 1 8 1 90
1 0
2 0
3 0
4 0
TREFIS ANALYSIS for HP [email protected] + 1 617 394 8763 •7
3.
4.
5.
EXTENSIVE DISTRIBUTION – With worldwide geographic presence for a long time, HP has an extensive distribution
network, thus managing to reach to more consumers and businesses
INNOVATION – HP's R&D labs constantly keep coming up with the latest technologies that help it drive new
technologies and scale up to new types of printers in the market at a rapid pace
MARKET LEADERS RULE IN TOUGH TIMES – In times of economic slowdown and a shrinking market, the smaller
players often falter, allowing market leaders to gain even greater footage in the industry.
Sources for historical data and explanations can be found on the Trefis.com website (link)
— WORLDWIDE PRINTER MARKET —
Worldwide Printer Market implies the total number of printers (Laser as well as inkjet) sold globally by all printer
companies in a year.
Historically, the worldwide printer market grew at a steady pace until 2008 when it shrank to 127 million units, driven by
the decline in the inkjet printer sales.
The worldwide printer market declined further down in 2009 to reach 111 million units before increasing to 125
million units in 2011.
We estimate the Worldwide Printer Market to remain constant at current level of 125 million units during our
forecast period.
Forecast RationaleWe expect the printer market to remain stable in size as laser printers continue to grow while the traditional inkjet
printers get replaced.
The growth in laser printer will however be slower than historical pace as printing devices (as a whole) take a hit with
rapid rise in digital documentation and always-connected, handheld devices.
But the death of the printed page, while widely perceived, is not near. According to a press release by research firm
IDC, print volume will remain relatively flat between 2010 and 2015 (at 0.1% annual growth rate) in the US. We expect
this trend to be universal in nature.
Worldwide Printer Market (Mil)
2008 0 9 1 0 1 1 1 2 1 3 1 4 1 5 1 6 1 7 1 8 1 90
2 5
5 0
7 5
100
125
TREFIS ANALYSIS for HP [email protected] + 1 617 394 8763 •8
1.
2.
3.
Withing the printer market, the laser printers will dominate in the long run, almost shutting the doors on inkjet printers.
We expect to see inkjets at home as laser printers still cannot compete with inkjet prices, but that market will be quite less
with the advent of wireless networks reducing the demand for the total number of printers as a whole.
The demand for laser printers has outpaced that for inkjet printers in the last few years as:
COST PER PAGE FOR A LASER PRINTER IS LOWER THAN AN INKJET PRINTER DESPITE THE INITIAL COST OF THE
PRINTER BEING HIGH – To give an example, to print 5000 pages, one will need to change an ink cartridge 25 times as
against only twice for laser cartridges. Hence, even though the laser cartridges are more expensive than ink cartridges,
cost per page still comes out lower
PAGES PRINTED PER MINUTE ARE ALSO FASTER FOR A LASER PRINTER COMPARED TO AN INKJET PRINTER – To give an
example, an average monochrome laser printer can print 12 pages a minute versus an inkjet's 7 pages a minute.
Further, inkjets can hold a maximum of 150 sheets at a time in their paper tray, whereas laser printers can hold
anything from 150 to 700 sheets. Laser printers also have the inbuilt mechanism to queue multiple print jobs at a
single time
COLOR LASER MFPS ARE THE FASTEST GROWING SEGMENT IN THE MARKET – MFPs are gaining increasing
prominence in the printer market with the multiple facilities they provide and are now the dominant segment in the
market. Within the segment, color laser MFPs are gaining share at a rapid pace.
Given the above advantages and with laser printer costs coming down (although still not comparable to inkjets and hence
tough to find their way into homes), lasers should continue to grow even as printer market faces strong headwinds.
Sources for historical data and explanations can be found on the Trefis.com website (link)
— HP PRINTER PRICING —
HP Printer Pricing is the average price of an HP printer.
Prices have come down sharply over the last 4 years at a rate close to 10% each year with increasing competition and
commoditzation of the printer market. A slowing economy and an intense competitive environment led to a sharp decline
in prices in 2009. In 2010 HP Printer Pricing remained steady despite intense competition primarily due to improved
HP Printer Pricing ($)
2008 0 9 1 0 1 1 1 2 1 3 1 4 1 5 1 6 1 7 1 8 1 90
2 5
5 0
7 5
100
125
150
175
TREFIS ANALYSIS for HP [email protected] + 1 617 394 8763 •9
1.
1.
2.
product mix. We estimate that the average price of a printer sold was ~$160 in 2011. Going forward, we expect, HP Printer
Pricingwill continue to decline as has been the case historically.
Forecast Rationale
PRICES HAVE DECLINED HISTORICALLY AT A SHARP RATE, PARTLY DRIVEN BY INTENSE COMPETITION IN THE MARKET
AND PARTLY AS THE PRODUCT HAS BECOME MORE AND MORE COMMODITIZED OVER THE YEARS
Sources for historical data and explanations can be found on the Trefis.com website (link)
— PRINTER & CARTRIDGES EBITDA MARGIN —
Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) are profits after factoring in typical expenses
such as Cost of Goods and Services Sold, SG&A Expense and R&D Expense. EBITDA Margin represents divisional
EBITDA as a percentage of divisional revenues. We adjust EBITDA figures to exclude non-recurring charges and non-
cash charges such as Stock-Based Compensation Expense.
Historically, the margin has grown from around 16.5% in 2005 to around 21% in 2010 with only a slight decline 0.7%
during 2010. It further declined in 2011 to 18%. Despite this, we expect significant margin compression going forward
driven by a steep fall in hardware revenue (more than software and services) caused by reduced consumer and business
spending on hardware as cloud based services gain increasing popularity.
Forecast Rationale
HARDWARE INDUSTRY MOST PRONE TO SPENDING CUTS – As economic uncertainty continues and companies face
budget crunch and look to reduce IT spending, the hardware industry is most likely to be worst hit as companies
simply stop buying hardware. As sales go down, margins will be negatively impacted.
WE EXPECT A CONTINUED MARGIN COMPRESSION IN THE PRINTER AND CARTRIDGES BUSINESS FOR THE FOLLOWING
REASONS – Decline in revenues due to reduced demand. Greater fixed and operational costs. Further, these costs
cannot be eliminated as it requires huge Capex to have the whole manufacturing set up again
Printer & Cartridges EBITDA Margin (%)
2008 0 9 1 0 1 1 1 2 1 3 1 4 1 5 1 6 1 7 1 8 1 90
5
1 0
1 5
2 0
TREFIS ANALYSIS for HP [email protected] + 1 617 394 8763 •10
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1.
2.
Sources for historical data and explanations can be found on the Trefis.com website (link)
Note that HP reports financial information for fiscal year ended October 31st. For the purposes of our analysis, we have treated HP's fiscal year figures as equivalentto calendar year ended December 31st figures.
In addition, you can see the detailed P&L for the Printers & Ink Cartridges business in the Appendix (link)
Technology Services The Technology Services division is part of the HP Services business, and constitutes 14.2% of our $16.10 price estimate for
the stock, based on our sum of the parts analysis.The most important drivers for the Technology Services business are:
Tech Services Revenues
Technology Services EBITDA Margin
— TECH SERVICES REVENUES —
Tech Services Revenues as the name implies are the revenues of HP's Technology Services division.
Examples of Technology Services Contracts:
HP Awarded Infrastructure Services Contract from Sara Lee – HP announced it has been awarded a seven-year
infrastructure services contract from Sara Lee Corporation to manage its global technology environment. The deal is
part of Sara Lee's global transformation to increase operational efficiencies and reduce costs across its businesses
around the world. HP will extend its current agreement to 2015 and add the management of Sara Lee's North
American infrastructure technology to make this a fully global contract. HP also will transition Sara Lee's
infrastructure technology to its next-generation datacenter in Atlanta. This automated environment will provide the
latest infrastructure management and automation delivered as a service for Sara Lee.
Hewlett-Packard has extended a services and maintenance contract with America Online – Under the three-year
deal, HP will manage nearly 15,000 servers and workstations located in the northern Virginia, Ohio and California
offices of the online company. HP will supervise call management services and oversee proactive support tools and
processes, and it will maintain an onsite support team and an inventory of spare parts.
CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15 CY16 CY17 CY18 CY19
Total Revenue (Bil $) 28.2 24.2 26.2 25.1 23.8 22.4 21.0 19.5 18.0 16.5 15.1 13.6
Printer Revenues (% of total) 35.7 31.7 33.1 32.9 33.7 33.7 33.9 34.4 34.9 35.5 36.2 36.9
Printer Ink & Toner Supplies
Revenues (% of total)64.3 68.3 66.9 67.1 66.3 66.3 66.1 65.6 65.1 64.5 63.8 63.1
Direct Expense (Bil $) 22.8 19.0 20.7 20.6 19.6 18.6 17.5 16.4 15.4 14.3 13.3 12.2
Indirect Expense (Bil $) 1.57 1.34 2.83 3.00 6.35 2.64 2.71 2.30 1.93 1.68 1.41 1.14
Adjusted EBITDA (Bil $) 5.43 5.23 5.48 4.54 4.18 3.82 3.47 3.02 2.62 2.23 1.81 1.44
Free Cash Flow (Bil $) n/a n/a n/a n/a -2.17 1.19 0.76 0.73 0.69 0.55 0.41 0.29
TREFIS ANALYSIS for HP [email protected] + 1 617 394 8763 •11
Technology Services grew from $9.5 billion in 2007 to $10.8 billion in 2009 before declining in 2010 to ~$10.6 billion in
2010 as the business was hurt by a slow economic environment. The decline was attributable to the erstwhile division of
Consulting and SI, 30% of which was integrated under the Technology Services as Consulting normally suffers in a
slowdown.
Tech Services Revenues increased back in 2011 to $10.8 billion driven by a general increase in IT spending as
economic conditions improved.
We expect the business to continue to shrink in the near term before it starts to improve and grow again as the
business environment improves and we expect growth in the long run.
Sources for historical data and explanations can be found on the Trefis.com website (link)
— TECHNOLOGY SERVICES EBITDA MARGIN —
Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) are profits after factoring in typical
expenses such as Cost of Goods and Services Sold, SG&A Expense and R&D Expense. EBITDA Margin represents
divisional EBITDA as a percentage of divisional revenues. We adjust EBITDA figures to exclude non-recurring charges
and non-cash charges such as Stock-Based Compensation Expense.
Tech Services Revenues ($ Bil)
2008 0 9 1 0 1 1 1 2 1 3 1 4 1 5 1 6 1 7 1 8 1 90.0
2.5
5.0
7.5
10.0
TREFIS ANALYSIS for HP [email protected] + 1 617 394 8763 •12
Historically, Outsourcing has been a high margin business growing steadily from 2005 to 2008 as HP focussed on cutting
costs by improving service delivery as well utilizing synergies from EDS acquisition. Margins spiked in 2009 driven by a
substantial drop in the employee costs.
In 2010 Technology Services EBITDA Margin increased further to 19.8% with the improvement in the business
environment. The Technology Services EBITDA Margin dipped in 2011 to 16.9% due primarily to lower than expected
revenue, rate concessions arising from recent contract renewals and a lower than expected resource utilization rate.
Going forward we expect Technology Services EBITDA Margin to remain at current low levels by the end of the
Trefis forecast period.
Forecast RationaleHP has shifted focus for its services business to create sustainable growth for the long term and will be implementing a
number of strategic changes like creating greater go-to-market leverage with products and embedding more technology
into products to further automate services, accelerating portfolio investments in higher value-add services enhancing
services offerings in emerging areas, such as cloud services and consulting, application modernization, business analytics
and mobility. Hp will also enhance its delivery and sales capabilities.
We believe that while this will enable better top line growth for HP services in the long run, the firm will have to
sacrifice on margins which will most likely remain at low levels of 2011.
Sources for historical data and explanations can be found on the Trefis.com website (link)
Note that HP reports financial information for fiscal year ended October 31st. For the purposes of our analysis, we have treated HP's fiscal year figures as equivalentto calendar year ended December 31st figures.
Technology Services EBITDA Margin (%)
2008 0 9 1 0 1 1 1 2 1 3 1 4 1 5 1 6 1 7 1 8 1 90.0
2.5
5.0
7.5
10.0
12.5
15.0
17.5
20.0
CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15 CY16 CY17 CY18 CY19
Total Revenue (Bil $) 10.0 10.8 10.6 10.8 10.3 9.78 9.49 9.49 9.68 10.1 10.6 11.1
Direct Expense (Bil $) 8.46 8.77 8.50 9.00 8.55 8.13 7.88 7.88 8.04 8.36 8.78 9.22
Indirect Expense (Bil $) 0.45 0.53 1.08 1.20 2.65 1.14 1.26 1.22 1.21 1.28 1.39 1.49
Adjusted EBITDA (Bil $) 1.55 2.07 2.10 1.84 1.74 1.66 1.61 1.61 1.64 1.71 1.79 1.88
TREFIS ANALYSIS for HP [email protected] + 1 617 394 8763 •13
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1.
In addition, you can see the detailed P&L for the Technology Services business in the Appendix (link)
Industry Servers The Industry Servers division is part of the Servers & Storage business, and constitutes 11.0% of our $16.10 price estimate
for the stock, based on our sum of the parts analysis.The most important drivers for the Industry Servers business are:
Ind. Server Pricing
Ind. Server shipments
Ind. Server EBITDA Margin
— IND. SERVER PRICING —
Ind. Server Pricing is the average price of a HP Server.
The average price has been slowly coming down in the last few years as is expected in a commoditized business. The
average price declined steeply in 2009 as a result of decreased demand during the slowdown. It increased in 2010 as
economic environment improved and firms increased their IT spend. Going forward we expect a 6*-8% decline every year
in Ind. Server Pricing, a pace faster than historical years.
Forecast Rationale
COMPETITIVE PRICING IN A COMMODITIZED MARKET – System x86 servers fall in the volume segment of the server
market with average prices ranging between $2000 and $6000. The price competition is intense in volume markets
where servers are like commodities and there are a lot of players
CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15 CY16 CY17 CY18 CY19
Free Cash Flow (Mil $) n/a n/a n/a n/a -905 514 352 385 434 420 400 385
Ind. Server Pricing (K $)
2008 0 9 1 0 1 1 1 2 1 3 1 4 1 5 1 6 1 7 1 8 1 90
1
2
3
4
TREFIS ANALYSIS for HP [email protected] + 1 617 394 8763 •14
1.
Sources for historical data and explanations can be found on the Trefis.com website (link)
— IND. SERVER SHIPMENTS —
Ind. Server shipments implies the total number of server units that HP ships/sells in a year.
Historically, the market leader HP has witnessed very healthy growth, growing by almost 50% from 2004 to 2008. Ind.
Server shipments declined by 6% in 2009 primarily due to cut down in IT spending and then increased significantly in
2010 to 2.8 million units as economic conditions improved resulting in a refresh cycle. In 2011, Ind. Server shipments
increased further to over 2.9 million units. Going forward we expect a slow decline as the company goes through its
restructuring efforts before showing a moderate growth in Ind. Server shipments by the end of the forecast period.
Forecast Rationale
SLOWING DEMAND – As the demand for x86 servers slows down we estimate a slow growth in Ind. Server shipments--
much slower than the growth witnessed in historical years.
Sources for historical data and explanations can be found on the Trefis.com website (link)
— IND. SERVER EBITDA MARGIN —
Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) are profits after factoring in typical expenses
such as Cost of Goods and Services Sold, SG&A Expense and R&D Expense. EBITDA Margin represents divisional
EBITDA as a percentage of divisional revenues. We adjust EBITDA figures to exclude non-recurring charges and non-
cash charges such as Stock-Based Compensation Expense.
Ind. Server shipments (Mil)
2008 0 9 1 0 1 1 1 2 1 3 1 4 1 5 1 6 1 7 1 8 1 90.0
0.5
1.0
1.5
2.0
2.5
3.0
TREFIS ANALYSIS for HP [email protected] + 1 617 394 8763 •15
1.
2.
Ind. Server EBITDA Margin increased from 14.5% in 2007 to 18.0% in 2010 largely driven by healthy growth in revenue
over the period. In 2009, in particular, the margin growth stagnated as the server revenue declined during the slowdown.
Ind. Server EBITDA Margin increased significantly in 2010 as economic conditions improved and IT spending increased
resulting in higher revenue for industry servers thus de-leveraging the fixed costs and improving margin for the business.
However, in 2011, Ind. Server EBITDA Margin decreased even as industry server revenue remained flat due primarily to
additional expenses associated with acquisitions and investments in R&D and sales coverage. Going forward, we expect
Ind. Server EBITDA Margin will remain almost constant.
Forecast Rationale
HARDWARE INDUSTRY MOST PRONE TO SPENDING CUTS – As economic uncertainty continues and companies face
budget crunch and look to reduce IT spending, the hardware industry is most likely to be worst hit as companies
simply stop buying hardware. As sales are hurt, margins will be negatively impacted.
COMPETITION TO WEIGH DOWN ON MARGINS – As HP continues to compete fiercely with IBM in the server market,
we do not expect any improvement in Ind. Server EBITDA Margin in the future.
Sources for historical data and explanations can be found on the Trefis.com website (link)
Note that HP reports financial information for fiscal year ended October 31st. For the purposes of our analysis, we have treated HP's fiscal year figures as equivalentto calendar year ended December 31st figures.
Ind. Server EBITDA Margin (%)
2008 0 9 1 0 1 1 1 2 1 3 1 4 1 5 1 6 1 7 1 8 1 90.0
2.5
5.0
7.5
10.0
12.5
15.0
17.5
CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15 CY16 CY17 CY18 CY19
Total Revenue (Bil $) 11.0 9.92 13.1 13.1 12.6 10.8 9.53 8.86 8.31 7.97 7.64 7.33
Direct Expense (Bil $) 9.34 8.41 10.7 10.9 10.5 9.10 8.06 7.51 7.06 6.78 6.50 6.23
Indirect Expense (Bil $) 0.48 0.39 1.22 1.44 3.12 1.18 1.16 1.03 0.91 0.88 0.85 0.82
Adjusted EBITDA (Bil $) 1.65 1.51 2.36 2.20 2.05 1.70 1.47 1.34 1.25 1.19 1.14 1.10
Free Cash Flow (Bil $) n/a n/a n/a n/a -1.07 0.52 0.32 0.32 0.34 0.32 0.29 0.28
TREFIS ANALYSIS for HP [email protected] + 1 617 394 8763 •16
•
•
In addition, you can see the detailed P&L for the Industry Servers business in the Appendix (link)
Application Outsourcing The Application Outsourcing division is part of the HP Services business, and constitutes 7.52% of our $16.10 price
estimate for the stock, based on our sum of the parts analysis.The most important drivers for the Application Outsourcing
business are:
Application Outsourcing Revenues
Application Outsourcing EBITDA Margin
— APPLICATION OUTSOURCING REVENUES —
Application Outsourcing helps corporate clients reduce IT costs by outsourcing the steps of developing and maintaining
software applications used in their business.
Application Outsourcing essentially entails outsourcing processes such as:
1. Software application development
2. Software application testing
3. Software upgrades, enhancements and maintenance
Application Outsourcing Revenues increased from $1.1 billion in 2007 to $7.0 billion in 2009 primarily as a result of EDS
acquisition in 2008 whose application outsourcing business witnessed a healthy growth during the period. Application
Outsourcing Revenues were down in 2010 as the business was hurt by a slow economic environment. In 2011, the revenues
increase back marginally driven by a general increase in IT spending as economic conditions improved. In the short run,
due to its restructuring efforts, we can expect a moderate decline in revenues to ~$6.5 billion, before recovering to its 2009
highs. We expect EDS' Application Outsourcing to grow at a steady rate in the long run because of the following two
reasons:
Application Outsourcing Revenues ($ Bil)
2008 0 9 1 0 1 1 1 2 1 3 1 4 1 5 1 6 1 7 1 8 1 90
1
2
3
4
5
6
7
TREFIS ANALYSIS for HP [email protected] + 1 617 394 8763 •17
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2.
1.
2.
Growing demand for Application Outsourcing across industries
EDS' leadership in the field.
Forecast Rationale
DEMAND FOR APPLICATION OUTSOURCING IS INCREASING – Pressure to reduce IT expenses in times when companies
are trying to cut IT budgets is forcing firms to outsource these services. Firms are realizing that the cost of application
ownership is high and are therefore resorting to Software as a Service (SaaS) model. As software development and
maintenance is easier to outsource as against outsourcing complete processes or IT infrastructure (given the increased
complexity), Application Outsourcing is growing faster than BPO and Infrastructure Outsourcing.
EDS IS A MARKET LEADER – HP acquired EDS is a market leader along with Accenture and IBM in the Application
Outsourcing business and can expected to see a jump in revenue as industry demand grows. More specifically EDS
will be able to capture the market growth for the following reasons:. Industry Expertise - EDS, being an outsourcing
specialist, has extensive industry knowledge in this field. Scope - EDS offers a breadth of services from management
of a single application to application portfolios, and covers the entire application lifecycle - from development to
testing to maintenance to enhancements and upgrades. Bundling - EDS is able to bundle its Application
Outsourcing services along with its BPO and Infrastructure Outsourcing services, thereby offering a complete IT
solution to its clients.
Sources for historical data and explanations can be found on the Trefis.com website (link)
— APPLICATION OUTSOURCING EBITDA MARGIN —
Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) are profits after factoring in typical expenses
such as Cost of Goods and Services Sold, SG&A Expense and R&D Expense. EBITDA Margin represents divisional
EBITDA as a percentage of divisional revenues. We adjust EBITDA figures to exclude non-recurring charges and non-
cash charges such as Stock-Based Compensation Expense.
Historically, Outsourcing has been a high margin business growing steadily from 2005 to 2008 as HP focussed on cutting
costs by improving service delivery as well utilizing synergies from EDS acquisition. Margins spiked in 2009 driven by a
Application Outsourcing EBITDA Margin (%)
2008 0 9 1 0 1 1 1 2 1 3 1 4 1 5 1 6 1 7 1 8 1 90.0
2.5
5.0
7.5
10.0
12.5
15.0
17.5
20.0
TREFIS ANALYSIS for HP [email protected] + 1 617 394 8763 •18
substantial drop in the employee costs. In 2010 Application Outsourcing EBITDA Margin increased further to 19.8%
with the improvement in the business environment. The Application Outsourcing EBITDA Margin dipped in 2011 to
16.9% due primarily to lower than expected revenue, rate concessions arising from recent contract renewals and a lower
than expected resource utilization rate. Going forward we expect Application Outsourcing EBITDA Margin to reduce
slowly to 14% by the end of the Trefis forecast period.
Forecast RationaleHP has shifted focus for its services business to create sustainable growth for the long term and will be implementing a
number of strategic changes like creating greater go-to-market leverage with products and embedding more technology
into products to further automate services, accelerating portfolio investments in higher value-add services enhancing
services offerings in emerging areas, such as cloud services and consulting, application modernization, business analytics
and mobility. Hp will also enhance its delivery and sales capabilities.
We believe that while this will enable better top line growth for HP services in the long run, the firm will have to
sacrifice on margins which will most likely remain at low levels of 2011.
Sources for historical data and explanations can be found on the Trefis.com website (link)
Note that HP reports financial information for fiscal year ended October 31st. For the purposes of our analysis, we have treated HP's fiscal year figures as equivalentto calendar year ended December 31st figures.
In addition, you can see the detailed P&L for the Application Outsourcing business in the Appendix (link)
CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15 CY16 CY17 CY18 CY19
Total Revenue (Bil $) 3.74 6.98 6.74 6.84 6.50 6.17 5.99 5.99 6.11 6.29 6.48 6.74
Direct Expense (Bil $) 3.16 5.64 5.41 5.68 5.42 5.18 5.04 5.07 5.19 5.36 5.54 5.78
Indirect Expense (Bil $) 0.17 0.34 0.69 0.76 1.63 0.69 0.74 0.70 0.68 0.70 0.73 0.76
Adjusted EBITDA (Bil $) 0.58 1.33 1.34 1.16 1.07 1.00 0.94 0.92 0.92 0.93 0.94 0.95
Free Cash Flow (Mil $) n/a n/a n/a n/a -557 309 206 220 243 228 209 195
TREFIS ANALYSIS for HP [email protected] + 1 617 394 8763 •19
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1.
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3.
4.
Notebooks & Netbooks The Notebooks & Netbooks division is part of the PCs, Workstations & Others business, and constitutes 6.89% of our
$16.10 price estimate for the stock, based on our sum of the parts analysis.The most important drivers for the Notebooks &
Netbooks business are:
HP Notebooks & Netbooks Pricing
HP Market Share in Notebooks & Netbooks Sold
Global Notebooks & Netbooks Sold
Notebooks & Netbooks EBITDA Margin
— HP NOTEBOOKS & NETBOOKS PRICING —
HP Notebooks & Netbooks Pricing is the average price of a HP Notebook.
Historically, HP Notebook prices have been declining at a steady rate from $922 in 2005 to $650 in 2011.
We forecast notebook prices to continue declining in line with historical trend.
Forecast Rationale
TABLETS GAIN POPULARITY – With tablets gaining increasing popularity as computing devices with increase in their
capabilities, we believe, they will soon become a threat to notebook and desktop PCs and give manufacturers a run for
their money. As a result PCs, specially notebooks, will compete with tablets by cutting down on prices.
ONGOING COMMODITIZATION OF NOTEBOOKS LEADING TO LOWER PRICES – The reducing costs of components in a
soon-becoming commoditized market resulting in intense competition is leading to price erosion
EMERGENCE OF INEXPENSIVE NETBOOKS AND MINI NOTEBOOKS – Netbooks and mini notebooks at prices starting at
$200 are gradually increasing their share in the notebook market and are resulting in the overall average pricing of
notebooks going down
PRICE DECLINE SLOWER THAN DESKTOPS DUE TO HIGHER DEMAND – However, the prices should not decline as fast as
desktops due to increasing demand of notebooks by the consumers (evidenced by Q3 08 which was the first quarter
HP Notebooks & Netbooks Pricing ($)
2008 0 9 1 0 1 1 1 2 1 3 1 4 1 5 1 6 1 7 1 8 1 90
100
200
300
400
500
600
700
800
TREFIS ANALYSIS for HP [email protected] + 1 617 394 8763 •20
1.
2.
3.
that saw notebook shipments overtake desktop shipments).
Sources for historical data and explanations can be found on the Trefis.com website (link)
— HP MARKET SHARE IN NOTEBOOKS & NETBOOKS SOLD —
HP Market Share in Notebooks & Netbooks Sold is HP's market share of the global notebook market.
HP Market Share in Notebooks & Netbooks Sold has decreased from 21.5% in 2008 to 16.5% in 2011 driven by increased
competition primarily from Apple's Mac notebooks and better performance by competitors in the market, coupled with
the lack of focus and innovation in the business on HP's part. HP's market share dipped sharply in 2011 after ex-CEO Leo
Apotheker announced the spin off of the PC business which resulted in a massive plunge in HP's PC shipments in the
fourth quarter of 2011 allowing competitors like Lenovo to capitalize on the opportunity and gain significant market share.
However, we expect HP to hold onto its market share going forward.
Forecast RationaleSupporting:
HP IS THE MARKET LEADER AND FAR AHEAD OF ITS COMPETITORS – HP has emerged as the worldwide market leader
in both the desktop and the notebook market by winning market share from Dell, which was a leading player in the
market at the beginning of the millennium
RENEWED FOCUS ON PC – The first thing HP CEO Meg Whitman did after being elected was to take back the
decision to spin-off the PC business realizing the importance of the division to the firm. Not only the PC business is
huge for HP, it generate massive synergies for the companies other operating segments like printers and services.
With HP now focused to make the most of its leadership position in the PC market and invest its resources into
innovation, we believe the firm will be able to hold on to its market share going forward at the least.
Mitigating:
APPLE'S MAC GAINING MARKET SHARE – Apple's Mac notebooks have gained significant share in the notebook market
over the last couple of years and have been the main driver of growth in a slowing notebook market primarily as
HP Market Share in Notebooks & Netbooks Sold (%)
2008 0 9 1 0 1 1 1 2 1 3 1 4 1 5 1 6 1 7 1 8 1 90.0
2.5
5.0
7.5
10.0
12.5
15.0
17.5
20.0
TREFIS ANALYSIS for HP [email protected] + 1 617 394 8763 •21
4.
1.
2.
3.
Apple brand gained visibility due to its successful iPhone. As Apple's Mac notebooks gain further share with more
people going for the aspirational Mac brand there could be a downside to HP Market Share in Notebooks &
Netbooks Sold
LENOVO DOING EXTREMELY WELL – While major PC vendors like HP and Dell struggled to make a mark into newer
product segments like smartphones and tablets, Lenovo focused on its PC business and was able to gain market as
well as mind share across geographies. Already the second largest player in the market, overtaking Dell in 2011,
Lenovo has become a serious threat to HP's leadership.
Sources for historical data and explanations can be found on the Trefis.com website (link)
— GLOBAL NOTEBOOKS & NETBOOKS SOLD —
Global Notebooks & Netbooks Sold implies the worldwide global market of notebooks in terms of units sold, i.e. sum
total of all notebooks sold by all manufacturers across the globe.
Global Notebooks & Netbooks Sold have increased more than three folds during 2005-10 reaching 211 million in 2011.
The growth in notebook shipments has been driven by:
Increasing shift from desktops to notebooks – There has been a significant shift from desktops to notebooks in the
last few years, with Q3 08 seen as the inflection point when notebook shipments outpaced desktop shipments
heralding the advent of notebooks in a big way . Desktop shipments decreased by 10% in the last 5 years while
notebooks & netbooks shipments witnessed about 100% growth in the same period.
Notebooks – Smaller and more convenient – One of the reasons notebooks are gaining increasing popularity over
desktops is because of their size which allows consumers the convenience and flexibility to have a moving computer
with them as against a desktop
Advent of Netbooks – cheaper and smaller notebooks – The advent of netbooks and mini notebooks at prices
starting at $200 gave consumers a very economical and convenient option, and further spurred the growth in Global
Notebooks & Netbooks Sold post 2009.
Global Notebooks & Netbooks Sold (Mil)
2008 0 9 1 0 1 1 1 2 1 3 1 4 1 5 1 6 1 7 1 8 1 90
5 0
100
150
200
TREFIS ANALYSIS for HP [email protected] + 1 617 394 8763 •22
1.
2.
Going forward we expect Global Notebooks & Netbooks Sold to increase though at much slower than historical rate.
Forecast RationaleSupporting:
RISING POPULARITY OF THE TABLET DEVICES – With the launch of Apple's iPad, a tablet computing device, in April
2010 a number of firms around the world have come up with their own tablet device with increased features and
functionality. As the companies around the world strive hard to capture a share in the potentially huge tablet market,
we believe, the tablet devices will soon be competing notebooks & netbooks in functionality and given their ultra
portable nature giving notebooks & netbooks a run for their money. Thus while we estimate Global Notebooks &
Netbooks Sold to grow going forward as PC penetration increases globally, increasing competition from tablet
devices will severely slow down the grow in Global Notebooks & Netbooks Sold
Mitigating:
COMING OF THE ULTRABOOKS – All the major PC vendors as well as component suppliers like Intel are making a push
for the ultra thin and light weight notebooks, called Ultrabooks, as the computing devices of the tomorrow. As these
ultrabooks will include costlier components like solid state drive (SSD) storage, smaller and more powerful
processors, and most probably sport the latest operating systems from Microsoft, the Windows 8, they will be sold on
a premium price point. A good response by consumers and businesses alike to the ultrabooks would mean a revival for
the PC business. This would mean a massive refresh cycle starting 2013, resulting in high revenues and margins for
PC makers like HP. Our estimates for Global Notebooks & Netbooks Sold may prove to be on the lower side in such
a scenario.
Sources for historical data and explanations can be found on the Trefis.com website (link)
— NOTEBOOKS & NETBOOKS EBITDA MARGIN —
Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) are profits after factoring in typical expenses
such as Cost of Goods and Services Sold, SG&A Expense and R&D Expense. EBITDA Margin represents divisional
EBITDA as a percentage of divisional revenues. We adjust EBITDA figures to exclude non-recurring charges and non-
cash charges such as Stock-Based Compensation Expense.
TREFIS ANALYSIS for HP [email protected] + 1 617 394 8763 •23
1.
2.
3.
4.
5.
6.
7.
Historically, Notebooks & Netbooks EBITDA Margin increased from 8.2% in 2007 to 9.6% in 2011 primarily driven
increase in sales. However, we expect Notebooks & Netbooks EBITDA Margin to take a hit in 2012 before improving
back going forward.
Forecast RationaleSupporting:
INCREASE IN HARD DISK DRIVE PRICES IN 2012 – As the PC industry suffers from the ongoing hard disk drives
(HDD) shortage, which arised from the flooding in Thailand in 2011, the Notebooks & Netbooks EBITDA Margin
is likely to go down in 2012. As HDD prices going up and sales decline, all the major PC vendors will see their
margins shrink in 2012.
TABLETS GAINING POPULARITY – With tablets gaining increasing popularity as computing devices with increase in
their capabilities, we believe, they will soon become a threat to notebook and desktop PCs and give manufacturers a
run for their money. As a result PCs, specially notebooks, will compete with tablets by cutting down on prices thereby
eroding their margins.
INCREASED PRESSURE FROM COMPETITIVE PRICING – As PC manufacturers face increasing competition from Apple's
Mac notebooks they increasing compete on price basis and as such are prone to margin compression in the future.
UNCERTAIN ECONOMIC ENVIRONMENT – As economic uncertainty continues and companies face budget crunch and
look to reduce IT spending, the hardware industry is most likely to be worst hit as companies simply stop buying
hardware. As sales go down, margins will be negatively impacted.
WE EXPECT A HIGHER MARGIN COMPRESSION IN THE HARDWARE BUSINESS COMPARED TO SERVICES AND SOFTWARE
BUSINESS, BECAUSE OF – Greater revenue decline . Greater fixed and operational costs. Further, these costs cannot be
eliminated as it requires huge Capex to have the whole manufacturing set up again
DECREASE IN COMPONENT COSTS BEYOND 2012 – As the HDD market will recover in the later half of 2012, the
component costs will go down and Notebooks & Netbooks EBITDA Margin will be positively impacted. However
the full impact of HDD market recovery and improvement in Notebooks & Netbooks EBITDA Margin will only be
visible starting 2013.
COMING OF THE ULTRABOOKS – All the major PC vendors as well as component suppliers like Intel are making a push
for the ultra thin and light weight notebooks, called Ultrabooks, as the computing devices of the tomorrow. As these
Notebooks & Netbooks EBITDA Margin (%)
2008 0 9 1 0 1 1 1 2 1 3 1 4 1 5 1 6 1 7 1 8 1 90.0
2.5
5.0
7.5
10.0
TREFIS ANALYSIS for HP [email protected] + 1 617 394 8763 •24
8.
•
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•
ultrabooks will include costlier components like solid state drive (SSD) storage, smaller and more powerful
processors, and most probably sport the latest operating systems from Microsoft, the Windows 8, they will be sold on
a premium price point. A good response by consumers and businesses alike to the ultrabooks would mean a revival for
the PC business. This would mean a massive refresh cycle starting 2013, resulting in high revenues and margins for
PC makers like HP.
Mitigating:
GREATER COMMODITIZATION – As notebooks & netbooks penetration increases globally, the prices will continue to
decline thereby hurting the margins in the future.
Sources for historical data and explanations can be found on the Trefis.com website (link)
Note that HP reports financial information for fiscal year ended October 31st. For the purposes of our analysis, we have treated HP's fiscal year figures as equivalentto calendar year ended December 31st figures.
In addition, you can see the detailed P&L for the Notebooks & Netbooks business in the Appendix (link)
HP Software The most important drivers for the HP Software business are:
License Revenues
Annual Renewal Rate
Software EBITDA Margin
— LICENSE REVENUES —
Software revenues typically split into License, Maintenance and Services Revenues. License revenues are sales of licenses
of software to clients for a specific period of time.
Typically, for mature companies like HP and IBM, the software revenues split up as
CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15 CY16 CY17 CY18 CY19
Total Revenue (Bil $) 21.9 21.5 22.3 20.5 17.5 15.6 14.2 13.0 11.9 10.9 9.96 9.05
Direct Expense (Bil $) 20.0 19.6 20.2 18.5 15.9 14.2 13.0 11.9 10.9 10.0 9.15 8.33
Indirect Expense (Bil $) 0.55 0.48 1.05 1.28 2.41 0.95 0.96 0.84 0.72 0.67 0.62 0.57
Adjusted EBITDA (Bil $) 1.89 1.88 2.04 1.96 1.58 1.38 1.23 1.10 0.98 0.89 0.80 0.72
Free Cash Flow (Mil $) n/a n/a n/a n/a -822 428 270 264 260 219 179 147
TREFIS ANALYSIS for HP [email protected] + 1 617 394 8763 •25
License Revenues increased from $1.2 billion in 2007 to $1.25 billion in 2008 fueled by the acquisition of Opsware Inc., a
datacenter automation software company at the end of 2007
However, License Revenues declined sharply in 2009-10, partly due to the decline in consulting business in a
deteriorating environment and partly due to the fact that HP's software offerings were not business critical.
HP offers IT management software solutions, including support and professional services, that allow clients to
manage their IT infrastructure and applications. Its other offerings include information management and open call
solutions that allow clients to develop and deploy voice and data network services. These solutions optimize but not
necessarily drive a business as they revolve around IT infrastructure management and technology optimization.
Thus, as businesses faced a spending crunch in 2009-10, they put the purchase of these software licenses on hold.
License Revenues jumped back in 2011 due to revenues from acquired companies as well as growth in the organic
business. The revenue growth was particularly driven by good performance of HP Software's security and management
suite offerings.
Going forward, we expect License Revenues to grow steadily till the end end of our forecast period.
Sources for historical data and explanations can be found on the Trefis.com website (link)
— ANNUAL RENEWAL RATE —
At the time of a sale of license for a software, the vendor and the client sign a maintenance contract for the software
for a duration. These contracts are renewed once close to expiry.
Annual Renewal Rate implies the percentage of such contracts that are renewed.
License Revenues ($ Bil)
2008 0 9 1 0 1 1 1 2 1 3 1 4 1 5 1 6 1 7 1 8 1 90.00
0.25
0.50
0.75
1.00
1.25
TREFIS ANALYSIS for HP [email protected] + 1 617 394 8763 •26
The Annual Renewal Rate for HP software's maintenance contracts has decreased from around 95% in 2007 to 82% in
2011 primarily as companies worldwide cut down their IT spend in an uncertain economic environment and fewer than
normal companies renewed their maintenance contracts.
Going forward, we forecast Annual Renewal Rate to remain the same.
Sources for historical data and explanations can be found on the Trefis.com website (link)
— SOFTWARE EBITDA MARGIN —
Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) are profits after factoring in typical
expenses such as Cost of Goods and Services Sold, SG&A Expense and R&D Expense. EBITDA Margin represents
divisional EBITDA as a percentage of divisional revenues. We adjust EBITDA figures to exclude non-recurring charges
and non-cash charges such as Stock-Based Compensation Expense.
Annual Renewal Rate (%)
2008 0 9 1 0 1 1 1 2 1 3 1 4 1 5 1 6 1 7 1 8 1 90
2 5
5 0
7 5
TREFIS ANALYSIS for HP [email protected] + 1 617 394 8763 •27
Software EBITDA Margin increased from a low of 9.6% in 2007 to a staggering 35.3% in 2009 driven by the coupled
effect of increase in gross margins and decrease in operating expenses for two consecutive years.
The increase in gross margins resulted from a favorable support and services revenue mix and improved services
margins in 2009 and cost structure improvements in 2008. The decrease in operating expenses was primarily due to
continued cost controls.
However, Software EBITDA Margin has dropped by over 10% since 2009, reaching 25.2% in 2011 primarily due to
the impact of rate declines in licenses and services as well as deferred revenue write-downs, integration costs associated
with acquisitions and investments in sales coverage and R&D during 2011.
Going forward, we expect Software EBITDA Margin to improve slowly as the recurring revenue stream and
continued cost controls should help HP regain margins in the Software business.
Forecast RationaleSources for historical data and explanations can be found on the Trefis.com website (link)
Note that HP reports financial information for fiscal year ended October 31st. For the purposes of our analysis, we have treated HP's fiscal year figures as equivalentto calendar year ended December 31st figures.
Software EBITDA Margin (%)
2008 0 9 1 0 1 1 1 2 1 3 1 4 1 5 1 6 1 7 1 8 1 90
5
1 0
1 5
2 0
2 5
3 0
3 5
CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15 CY16 CY17 CY18 CY19
Total Revenue (Bil $) 4.15 3.62 3.32 3.47 3.35 3.17 3.02 2.91 2.83 2.77 2.75 2.75
Services Revenues (% of total) 25.0 20.6 18.2 17.3 17.9 18.2 18.5 18.8 19.1 19.5 19.9 20.3
Maintenance Revenues (% of total) 45.0 51.9 54.7 48.1 46.3 45.5 44.6 43.6 42.6 41.5 40.3 39.1
License Revenues (% of total) 30.0 27.5 27.0 34.6 35.8 36.3 36.9 37.6 38.3 39.0 39.8 40.6
Direct Expense (Bil $) 3.43 1.58 1.93 2.59 2.50 2.35 2.23 2.13 2.07 2.03 2.01 2.01
Indirect Expense (Bil $) 0.21 0.22 0.43 0.57 1.28 0.56 0.62 0.59 0.56 0.56 0.58 0.59
Adjusted EBITDA (Bil $) 0.72 2.04 1.39 0.87 0.84 0.81 0.79 0.78 0.76 0.75 0.74 0.74
Free Cash Flow (Mil $) n/a n/a n/a n/a -437 252 173 186 201 184 166 152
TREFIS ANALYSIS for HP [email protected] + 1 617 394 8763 •28
•
•
•
In addition, you can see the detailed P&L for the HP Software business in the Appendix (link)
Financial Services The most important drivers for the Financial Services business are:
Return on HP's Financial Services Assets
HP Financial Services Assets
HPFS EBTDA Margin
— RETURN ON HP'S FINANCIAL SERVICES ASSETS —
Return on HP's Financial Services Assets represents revenues earned by HP financial services (HPFS) segment as a
percentage of the segment's assets.
HPFS segment earns revenue by providing services like leasing, financing, utility programs and asset recovery
services, as well as financial asset management services.
2007:
2008:
2009:
2010:
2011:
We forecast that Return on HP's Financial Services Assets for HPFS will increase gradually over the Trefis forecast
period and trend towards its pre-recessionary levels.
Return on HP's Financial Services Assets (%)
2008 0 9 1 0 1 1 1 2 1 3 1 4 1 5 1 6 1 7 1 8 1 90
5
1 0
1 5
2 0
2 5
3 0
TREFIS ANALYSIS for HP [email protected] + 1 617 394 8763 •29
Forecast RationaleSources for historical data and explanations can be found on the Trefis.com website (link)
— HP FINANCIAL SERVICES ASSETS —
HP allocates its assets to its business segments based on the primary segments benefiting from the assets. HP Financial
Services Assets represents the portion of company's assets allocated to financial services segment.
Major contributor to HP financial services segment assets is the total interest earning assets, or portfolio assets. The
portfolio comprises gross finance receivables, equipment on operating leases, capitalized profit on intercompany
equipment transactions, and intercompany leases.
HP Financial Services Assets increased from $9.0 billion in 2007 to $13.5 billion in 2011 driven by continued growth in
portfolio assets which resulted from higher levels of financing originations year after year. New financing originations
represent the amounts of financing provided to customers for equipment and related software and services and include
intercompany activity.
Every year since 2007, the financing originations have increased reflecting the higher financing associated with HP
product sales and services offerings resulting from improved integration and engagement with HP's sales efforts.
Forecast RationaleSources for historical data and explanations can be found on the Trefis.com website (link)
— HPFS EBTDA MARGIN —
Earnings Before Taxes, Depreciation and Amortization (EBTDA) represents the profit after eliminating expenses such as
interest expense, cost of service and SG&A expense from the financing division's revenue. HPFS EBTDA Margin
represents the divisional EBTDA as a percentage of division's revenues. We adjust EBTDA figures to exclude non-
recurring charges and non-cash charges such as Stock-Based Compensation Expense.
HP Financial Services Assets ($ Bil)
2008 0 9 1 0 1 1 1 2 1 3 1 4 1 5 1 6 1 7 1 8 1 90.0
2.5
5.0
7.5
10.0
12.5
15.0
17.5
TREFIS ANALYSIS for HP [email protected] + 1 617 394 8763 •30
HPFS EBTDA Margin has increased consistently from 9.4% in 2007 to 13.6% in 2011. The increase each year was driven
by:
2008:
2009:
2010:
2011:
We forecast HPFS EBTDA Margin to increase steadily going forward.
Forecast RationaleDespite the annual variations in gross margin, HP has been successfully able to increase its financial services operating
margin and consequently EBTDA margin every year since 2007. This is because the firm has been able to cut down on
operating expenses by exercising efficient cost controls.
We expect HPFS to continue to efficiently maintain its costs in the future and thus forecast a steady but low growth in
HPFS EBTDA Margin going forward (as achieving incremental growth in EBTDA margin will become harder and harder).
Sources for historical data and explanations can be found on the Trefis.com website (link)
Note that HP reports financial information for fiscal year ended October 31st. For the purposes of our analysis, we have treated HP's fiscal year figures as equivalentto calendar year ended December 31st figures.
HPFS EBTDA Margin (%)
2008 0 9 1 0 1 1 1 2 1 3 1 4 1 5 1 6 1 7 1 8 1 90.0
2.5
5.0
7.5
10.0
12.5
CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15 CY16 CY17 CY18 CY19
Total Revenue (Bil $) 2.69 2.76 3.16 3.72 3.77 3.94 4.12 4.37 4.59 4.82 5.11 5.41
Direct Expense (Bil $) 2.42 2.41 2.74 3.21 3.28 3.44 3.60 3.81 4.00 4.19 4.44 4.70
Indirect Expense (Mil $) 79.9 87.6 213 330 751 342 405 422 432 468 515 564
TREFIS ANALYSIS for HP [email protected] + 1 617 394 8763 •31
•
•
•
•
In addition, you can see the detailed P&L for the Financial Services business in the Appendix (link)
Desktops The Desktops division is part of the PCs, Workstations & Others business, and constitutes 4.33% of our $16.10 price
estimate for the stock, based on our sum of the parts analysis.The most important drivers for the Desktops business are:
HP Desktops Pricing
HP Market Share in Desktops Sold
Global Desktops Sold
Desktops EBITDA Margin
— HP DESKTOPS PRICING —
HP Desktops Pricing is the average price of a HP desktop.
Historically, the desktop prices have fallen at a rate of 5% on average from $630 in 2007 to $510 in 2011, with a slight
increase in 2010 being the only exception. Going forward, we expect desktop prices to decline faster than those of
notebooks as their extinction from homes seems inevitable (courtesy the growing popularity of notebooks and now tablet
devices). Desktops are trying hard to stay afloat in firms competing solely on price basis.
Forecast Rationale
CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15 CY16 CY17 CY18 CY19
Adjusted EBITDA (Mil $) 276 341 412 506 494 497 519 555 588 622 664 709
Free Cash Flow (Mil $) n/a n/a n/a n/a -256 154 113 133 155 153 148 145
HP Desktops Pricing ($)
2008 0 9 1 0 1 1 1 2 1 3 1 4 1 5 1 6 1 7 1 8 1 90
100
200
300
400
500
TREFIS ANALYSIS for HP [email protected] + 1 617 394 8763 •32
Sources for historical data and explanations can be found on the Trefis.com website (link)
— HP MARKET SHARE IN DESKTOPS SOLD —
HP Market Share in Desktops Sold is HP's market share in the global desktop market.
HP share in desktop PC market increased from 17.3% in 2007 to 20.8% in 2010 before falling to 19.6% in 2011.
HP Market Share in Desktops Sold fell in 2011 after ex-CEO Leo Apotheker announced the spin off of the PC
business which resulted in a massive plunge in HP's PC shipments in the fourth quarter of 2011 allowing competitors like
Lenovo to capitalize on the opportunity and gain significant market share.
However, we expect HP market share to hold onto its market share going forward.
Forecast RationaleSupporting:
Mitigating:
Sources for historical data and explanations can be found on the Trefis.com website (link)
— GLOBAL DESKTOPS SOLD —
Global Desktops Sold implies the worldwide global market of desktops in terms of units sold (i.e. the sum all desktops
sold by all manufacturers across the globe).
HP Market Share in Desktops Sold (%)
2008 0 9 1 0 1 1 1 2 1 3 1 4 1 5 1 6 1 7 1 8 1 90
5
1 0
1 5
2 0
TREFIS ANALYSIS for HP [email protected] + 1 617 394 8763 •33
Global Desktops Sold figure has dropped from over 150 million units in 2007 to around 140 million units in 2011 as the
notebooks became the preferred computing device among consumers and business globally. However, desktops shipments
still managed to clock hundreds of millions primarily due to increase in penetration of PCs globally.
In 2009, Global Desktops Sold declined by as much as 10% as economic slowdown resulted in decline in consumer
spending and desktop sales plunged. Desktop sales picked up slightly in 2010-11 as economic conditions improved
resulting in a PC refresh cycle.
We forecast Global Desktops Sold to continue growing at a very slow rate as PC penetration continues to increase at
rapid rate while gradually desktop lose their relevance with the coming to newer advanced devices.
Forecast RationaleSources for historical data and explanations can be found on the Trefis.com website (link)
— DESKTOPS EBITDA MARGIN —
Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) are profits after factoring in typical expenses
such as Cost of Goods and Services Sold, SG&A Expense and R&D Expense. EBITDA Margin represents divisional
EBITDA as a percentage of divisional revenues. We adjust EBITDA figures to exclude non-recurring charges and non-
cash charges such as Stock-Based Compensation Expense.
Global Desktops Sold (Mil)
2008 0 9 1 0 1 1 1 2 1 3 1 4 1 5 1 6 1 7 1 8 1 90
2 5
5 0
7 5
100
125
150
TREFIS ANALYSIS for HP [email protected] + 1 617 394 8763 •34
Historically, Desktops EBITDA Margin increased from 8.2% in 2007 to 9.6% in 2011 primarily driven increase in sales.
However, we expect Desktops EBITDA Margin to take a hit in 2012 before improving back going forward.
Forecast RationaleSupporting:
Sources for historical data and explanations can be found on the Trefis.com website (link)
Note that HP reports financial information for fiscal year ended October 31st. For the purposes of our analysis, we have treated HP's fiscal year figures as equivalentto calendar year ended December 31st figures.
In addition, you can see the detailed P&L for the Desktops business in the Appendix (link)
Desktops EBITDA Margin (%)
2008 0 9 1 0 1 1 1 2 1 3 1 4 1 5 1 6 1 7 1 8 1 90.0
2.5
5.0
7.5
10.0
CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15 CY16 CY17 CY18 CY19
Total Revenue (Bil $) 15.5 13.4 15.6 14.6 14.0 12.5 11.0 9.72 8.44 7.26 6.23 5.35
Direct Expense (Bil $) 14.2 12.3 14.1 13.2 12.7 11.4 10.1 8.90 7.75 6.66 5.73 4.92
Indirect Expense (Bil $) 0.39 0.30 0.74 0.91 1.93 0.76 0.75 0.63 0.51 0.45 0.39 0.34
Adjusted EBITDA (Bil $) 1.34 1.17 1.42 1.39 1.27 1.11 0.95 0.82 0.70 0.59 0.50 0.43
Free Cash Flow (Mil $) n/a n/a n/a n/a -659 343 209 197 184 146 112 87.3
TREFIS ANALYSIS for HP [email protected] + 1 617 394 8763 •35
•
•
Business Process Outsourcing The Business Process Outsourcing division is part of the HP Services business, and constitutes 3.88% of our $16.10 price
estimate for the stock, based on our sum of the parts analysis.The most important drivers for the Business Process
Outsourcing business are:
Business Process Outsourcing Revenues
Business Process Outsourcing EBITDA Margin
— BUSINESS PROCESS OUTSOURCING REVENUES —
Business Process Outsourcing Revenues is the revenues for HP from the Business Process Outsourcing Division. Prior to
the EDS Acquisition, BPO offerings from HP were almost negilgible with 5% of the HP Outsourcing revenues
attributable to BPO.
Owing to a very small base and the increasing demand of BPO Services, the services growth has been quite strong and
only accentuated by the EDS acquisition in 2008.
Business Process Outsourcing Revenues increased from a mere $115 million in 2007 to $1.6 billion in 2008 and then to
$3.2 billion in 2009.
Business Process Outsourcing Revenues has dropped since reaching $3.0 billion in 2011. In the short term, we can
expect revenue growth to be negative as the company transitions and goes through a restructuring and we can expect
revenues to drop to $2.8 billion, before recovering.
Owing to the strong demand for BPO and weak economic outlook, we expect the division to exhibit healthy growth
as companies look to cut costs.
Forecast RationaleSources for historical data and explanations can be found on the Trefis.com website (link)
Business Process Outsourcing Revenues ($ Bil)
2008 0 9 1 0 1 1 1 2 1 3 1 4 1 5 1 6 1 7 1 8 1 90.0
0.5
1.0
1.5
2.0
2.5
3.0
TREFIS ANALYSIS for HP [email protected] + 1 617 394 8763 •36
— BUSINESS PROCESS OUTSOURCING EBITDA MARGIN —
Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) are profits after factoring in typical expenses
such as Cost of Goods and Services Sold, SG&A Expense and R&D Expense. EBITDA Margin represents divisional
EBITDA as a percentage of divisional revenues. We adjust EBITDA figures to exclude non-recurring charges and non-
cash charges such as Stock-Based Compensation Expense.
Historically, Outsourcing has been a high margin business growing steadily from 2005 to 2008 as HP focussed on cutting
costs by improving service delivery as well utilizing synergies from EDS acquisition. Margins spiked in 2009 driven by a
substantial drop in the employee costs.
In 2010 Business Process Outsourcing EBITDA Margin increased further to 19.8% with the improvement in the
business environment. The Business Process Outsourcing EBITDA Margin dipped in 2011 to 16.9% due primarily to
lower than expected revenue, rate concessions arising from recent contract renewals and a lower than expected resource
utilization rate.
Going forward we expect Business Process Outsourcing EBITDA Margin to remain at current low levels by the end
of the Trefis forecast period.
Forecast RationaleHP has shifted focus for its services business to create sustainable growth for the long term and will be implementing a
number of strategic changes like creating greater go-to-market leverage with products and embedding more technology
into products to further automate services, accelerating portfolio investments in higher value-add services enhancing
services offerings in emerging areas, such as cloud services and consulting, application modernization, business analytics
and mobility. Hp will also enhance its delivery and sales capabilities.
We believe that while this will enable better top line growth for HP services in the long run, the firm will have to
sacrifice on margins which will most likely remain at low levels of 2011.
Sources for historical data and explanations can be found on the Trefis.com website (link)
Note that HP reports financial information for fiscal year ended October 31st. For the purposes of our analysis, we have treated HP's fiscal year figures as equivalentto calendar year ended December 31st figures.
Business Process Outsourcing EBITDA Margin (%)
2008 0 9 1 0 1 1 1 2 1 3 1 4 1 5 1 6 1 7 1 8 1 90.0
2.5
5.0
7.5
10.0
12.5
15.0
17.5
20.0
TREFIS ANALYSIS for HP [email protected] + 1 617 394 8763 •37
•
•
•
In addition, you can see the detailed P&L for the Business Process Outsourcing business in the Appendix (link)
HP Networking The most important drivers for the HP Networking business are:
HP Procurve Market Share
Worldwide Router and Switching Market
HP Networking EBITDA Margin
— HP PROCURVE MARKET SHARE —
HP Procurve Market Share is the market share that HP's Procurve offering has in the Networking industry globally.
Compared to Cisco, HP has a very small share in the Networking market. Historically, the share has grown slowly but in
2009 when the hardware spending was slowing down, HP lost market share while Cisco drove the market.
In 2010, HP's market share increased primarily as the firm expanded its product portfolio and expanded capabilities
through acquisition of 3Com. In 2011, market share dropped to 3.5%
However, going forward, we expect the market share to increase gradually before steading out in the long run, driven
by improving business environment and cross-selling using the 3Com Network post the acquisition.
CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15 CY16 CY17 CY18 CY19
Total Revenue (Bil $) 1.56 3.21 3.10 3.04 2.89 2.75 2.66 2.66 2.72 2.80 2.88 3.00
Direct Expense (Bil $) 1.32 2.60 2.49 2.53 2.40 2.28 2.21 2.21 2.26 2.32 2.39 2.49
Indirect Expense (Mil $) 69.6 157 317 336 743 320 352 342 338 357 378 403
Adjusted EBITDA (Mil $) 241 613 614 515 489 465 451 451 460 473 488 507
Free Cash Flow (Mil $) n/a n/a n/a n/a -254 144 98.9 108 121 116 109 104
HP Procurve Market Share (%)
2008 0 9 1 0 1 1 1 2 1 3 1 4 1 5 1 6 1 7 1 8 1 90.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
TREFIS ANALYSIS for HP [email protected] + 1 617 394 8763 •38
Sources for historical data and explanations can be found on the Trefis.com website (link)
— WORLDWIDE ROUTER AND SWITCHING MARKET —
Worldwide Router and Switching Marketrepresents the annual revenues from the global router and switching sales.
The global market size saw very rapid growth in the early part of the decade. It ranged between 10-12% from 2002 to late
2006. However, since then, the growth has tapered down a bit and saw a dip in 2009 as the economy went into recession
and enterprises cut down on their capital expenditure. In 2010, Worldwide Router and Switching Market increased back
again growing ~11% primarily as economic conditions improved. It grew to $40 billion in 2011 We expect the market to
grow at a slower rate in the longer run, reaching $50 billion by the end of our forecast period.
Forecast RationaleOur forecast is based on the following factors:
Sources for historical data and explanations can be found on the Trefis.com website (link)
— HP NETWORKING EBITDA MARGIN —
Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) are profits after factoring in typical expenses
such as Cost of Goods and Services Sold, SG&A Expense and R&D Expense. EBITDA Margin represents divisional
EBITDA as a percentage of divisional revenues. We adjust EBITDA figures to exclude non-recurring charges and non-
cash charges such as Stock-Based Compensation Expense.
Worldwide Router and Switching Market ($ Bil)
2008 0 9 1 0 1 1 1 2 1 3 1 4 1 5 1 6 1 7 1 8 1 90
1 0
2 0
3 0
4 0
5 0
TREFIS ANALYSIS for HP [email protected] + 1 617 394 8763 •39
In 2011, however, HP incorporated its networking business within its Enterprise Servers, Storage and Networking (ESSN)
operating segment. As such we now report the ESSN's reported margin across our servers, storage and networking
divisions for HP.
HP Networking EBITDA Margin increased from 14.5% in 2007 to 18.0% in 2010 before falling to 16.8% in 2011.
Going forward, we expect, HP Networking EBITDA Margin to remain almost constant.
Sources for historical data and explanations can be found on the Trefis.com website (link)
Note that HP reports financial information for fiscal year ended October 31st. For the purposes of our analysis, we have treated HP's fiscal year figures as equivalentto calendar year ended December 31st figures.
In addition, you can see the detailed P&L for the HP Networking business in the Appendix (link)
HP Networking EBITDA Margin (%)
2008 0 9 1 0 1 1 1 2 1 3 1 4 1 5 1 6 1 7 1 8 1 90.0
2.5
5.0
7.5
10.0
12.5
15.0
17.5
CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15 CY16 CY17 CY18 CY19
Total Revenue (Bil $) 2.27 2.05 2.66 2.54 2.66 2.22 1.93 1.99 2.06 2.14 2.21 2.29
3Com (% of total) 57.5 63.7 52.2 53.1 52.3 48.2 37.2 36.5 36.1 35.6 35.2 34.8
HP Procurve Networking (% of total) 42.5 36.3 47.8 46.9 47.7 51.8 62.8 63.5 63.9 64.4 64.8 65.2
Direct Expense (Bil $) 0.82 0.63 1.73 2.11 2.22 1.85 1.60 1.66 1.72 1.78 1.84 1.91
Indirect Expense (Mil $) 42.0 29.0 196 277 678 256 252 253 254 270 288 305
Adjusted EBITDA (Bil $) 1.45 1.42 0.94 0.43 0.45 0.37 0.32 0.33 0.35 0.36 0.37 0.38
Free Cash Flow (Mil $) n/a n/a n/a n/a -231 115 70.8 80.1 91.6 88.4 83.2 78.9
TREFIS ANALYSIS for HP [email protected] + 1 617 394 8763 •40
•
•
Storage The Storage division is part of the Servers & Storage business, and constitutes 2.68% of our $16.10 price estimate for the
stock, based on our sum of the parts analysis.The most important drivers for the Storage business are:
Storage revenue
Storage EBITDA Margin
— STORAGE REVENUE —
HP Storage business implies the sale of storage hardware devices such as disks and tapes to firms for their storage
needs.
HP's Storage revenue has varied significantly over the past year ranging from $4.1 billion in 2008 to $3.4 billion in 2011.
While in 2009 storage revenues saw significant decline as HP lost share in storage market during the economic downturn,
Storage revenue increased by 13% in 2010 driven primarily by significant growth in the storage market as a whole. Going
forward, we expect, Storage revenue to decrease in the short term as the company completes its restructuring and then
increase though at a slower rate than the storage market as HP faces increasing competition from other storage giants like
EMC, NetApp etc.
Forecast RationaleSupporting:
Sources for historical data and explanations can be found on the Trefis.com website (link)
— STORAGE EBITDA MARGIN —
Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) are profits after factoring in typical expenses
such as Cost of Goods and Services Sold, SG&A Expense and R&D Expense. EBITDA Margin represents divisional
Storage revenue ($ Bil)
2008 0 9 1 0 1 1 1 2 1 3 1 4 1 5 1 6 1 7 1 8 1 90
1
2
3
4
TREFIS ANALYSIS for HP [email protected] + 1 617 394 8763 •41
EBITDA as a percentage of divisional revenues. We adjust EBITDA figures to exclude non-recurring charges and non-
cash charges such as Stock-Based Compensation Expense.
Storage EBITDA Margin increased from 14.5% in 2007 to 18.0% in 2010 before falling to 16.8% in 2011. Going forward,
we expect, Storage EBITDA Margin to remain almost constant.
Forecast RationaleMitigating
Supporting
Sources for historical data and explanations can be found on the Trefis.com website (link)
Note that HP reports financial information for fiscal year ended October 31st. For the purposes of our analysis, we have treated HP's fiscal year figures as equivalentto calendar year ended December 31st figures.
In addition, you can see the detailed P&L for the Storage business in the Appendix (link)
Storage EBITDA Margin (%)
2008 0 9 1 0 1 1 1 2 1 3 1 4 1 5 1 6 1 7 1 8 1 90.0
2.5
5.0
7.5
10.0
12.5
15.0
17.5
CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15 CY16 CY17 CY18 CY19
Total Revenue (Bil $) 4.14 3.45 3.91 3.40 3.03 2.78 2.64 2.67 2.72 2.78 2.81 2.83
Direct Expense (Bil $) 3.52 2.92 3.20 2.83 2.53 2.34 2.24 2.28 2.35 2.42 2.48 2.53
Indirect Expense (Mil $) 180 134 364 372 747 302 315 299 275 267 256 242
Adjusted EBITDA (Mil $) 623 524 705 570 492 439 403 394 375 354 330 305
Free Cash Flow (Mil $) n/a n/a n/a n/a -255 136 88.5 94.6 99.3 87.5 74.0 62.6
TREFIS ANALYSIS for HP [email protected] + 1 617 394 8763 •42
•
•
Workstations & Others The Workstations & Others division is part of the PCs, Workstations & Others business, and constitutes 1.46% of our
$16.10 price estimate for the stock, based on our sum of the parts analysis.The most important drivers for the Workstations
& Others business are:
Other Revenues
Other EBITDA Margin
— OTHER REVENUES —
Other Revenues implies the sales of HP's other products which include PDAs, digital entertainment products (HD
DVD, CD/DVD RW drives, etc.) and workstations (individual computing products for animation, engineering design,
etc.)
The segment revenue declined by 23% from $2.8 billion in 2008 to $2.2 billion in 2009 as the segment was hit hard by the
economic downturn. In 2010, Other Revenues grew back by 25% reaching $2.8 billion primarily as the economic
environment improved. In 2011, Other Revenues increased by 8% reaching $3 billion. Going forward, we expect a decline
in Other Revenues as HP's workstations, digital entertainment products and PDAs gradually become obsolete and get
replaced by newer advanced devices, the kind where HP is lacking presence right now.
Forecast RationaleSources for historical data and explanations can be found on the Trefis.com website (link)
— OTHER EBITDA MARGIN —
Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) are profits after factoring in typical expenses
such as Cost of Goods and Services Sold, SG&A Expense and R&D Expense. EBITDA Margin represents divisional
Other Revenues ($ Bil)
2008 0 9 1 0 1 1 1 2 1 3 1 4 1 5 1 6 1 7 1 8 1 90.0
0.5
1.0
1.5
2.0
2.5
3.0
TREFIS ANALYSIS for HP [email protected] + 1 617 394 8763 •43
EBITDA as a percentage of divisional revenues. We adjust EBITDA figures to exclude non-recurring charges and non-
cash charges such as Stock-Based Compensation Expense.
Historically, Other EBITDA Margin has increased from ~8.0% in 2007 to 9.5% in 2011.
However, we expect it to decline in 2012 as the business conditions deteriorate before improving back in 2013 and
beyond.
Forecast RationaleSources for historical data and explanations can be found on the Trefis.com website (link)
Note that HP reports financial information for fiscal year ended October 31st. For the purposes of our analysis, we have treated HP's fiscal year figures as equivalentto calendar year ended December 31st figures.
In addition, you can see the detailed P&L for the Workstations & Others business in the Appendix (link)
Other EBITDA Margin (%)
2008 0 9 1 0 1 1 1 2 1 3 1 4 1 5 1 6 1 7 1 8 1 90.0
2.5
5.0
7.5
10.0
CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15 CY16 CY17 CY18 CY19
Total Revenue (Bil $) 2.85 2.21 2.77 2.98 2.83 2.68 2.55 2.42 2.30 2.07 1.86 1.68
Direct Expense (Bil $) 2.61 2.01 2.52 2.69 2.57 2.44 2.31 2.19 2.08 1.88 1.69 1.52
Indirect Expense (Mil $) 71.1 49.3 131 185 389 171 188 174 160 147 136 126
Adjusted EBITDA (Mil $) 245 192 253 284 256 248 241 229 217 196 176 158
Free Cash Flow (Mil $) n/a n/a n/a n/a -132 77.2 52.9 55.0 57.7 48.4 39.5 32.6
TREFIS ANALYSIS for HP [email protected] + 1 617 394 8763 •44
•
•
•
High-end Servers The High-end Servers division is part of the Servers & Storage business, and constitutes 1.34% of our $16.10 price estimate
for the stock, based on our sum of the parts analysis.The most important drivers for the High-end Servers business are:
Biz. systems Pricing
Biz. systems shipments
Biz. systems EBITDA Margin
— BIZ. SYSTEMS PRICING —
Biz. systems Pricing is the average price of a high-end/mainframe HP Server.
Biz. systems Pricing has decreased from around $8k in 2007 to $6.4k in 2011 driven primarily by decrease in manufacturing
costs. We expect a gradual decline in the average price of the high-end business critical server going forward as
manufacturing costs continue to decline.
Forecast RationaleSources for historical data and explanations can be found on the Trefis.com website (link)
— BIZ. SYSTEMS SHIPMENTS —
Biz. systems shipments implies the total number of high-end/mainframe server units that HP ships/sells in a year.
Biz. systems Pricing (K $)
2008 0 9 1 0 1 1 1 2 1 3 1 4 1 5 1 6 1 7 1 8 1 90
1
2
3
4
5
6
7
TREFIS ANALYSIS for HP [email protected] + 1 617 394 8763 •45
Biz. systems shipments increased from around 450k units in 2007 to over 470k units in 2008 before taking a nose dive to
360k units in 2009 primarily as the hardware industry was hit hard by the economic downturn. In 2010, Biz. systems
shipments remained almost constant as IT spending was weak.
In 2011, Biz. systems shipments increased to over 380k units as IT spending went up. In the short term, we expect
shipments to fall due to the restructuring plans by HPQ, but it will grow in the long term.
Going forward, we expect steady growth as the business environment improves and IT spending increases.
Sources for historical data and explanations can be found on the Trefis.com website (link)
— BIZ. SYSTEMS EBITDA MARGIN —
Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) are profits after factoring in typical
expenses such as Cost of Goods and Services Sold, SG&A Expense and R&D Expense. EBITDA Margin represents
divisional EBITDA as a percentage of divisional revenues. We adjust EBITDA figures to exclude non-recurring charges
and non-cash charges such as Stock-Based Compensation Expense.
Biz. systems shipments (K)
2008 0 9 1 0 1 1 1 2 1 3 1 4 1 5 1 6 1 7 1 8 1 90
100
200
300
400
TREFIS ANALYSIS for HP [email protected] + 1 617 394 8763 •46
Biz. systems EBITDA Margin increased from 14.5% in 2007 to 18.0% in 2010 and then decreased to 16.8% in 2011.
Going forward, we expect Biz. systems EBITDA Margin will remain almost constant.
Forecast RationaleSources for historical data and explanations can be found on the Trefis.com website (link)
Note that HP reports financial information for fiscal year ended October 31st. For the purposes of our analysis, we have treated HP's fiscal year figures as equivalentto calendar year ended December 31st figures.
In addition, you can see the detailed P&L for the High-end Servers business in the Appendix (link)
Biz. systems EBITDA Margin (%)
2008 0 9 1 0 1 1 1 2 1 3 1 4 1 5 1 6 1 7 1 8 1 90.0
2.5
5.0
7.5
10.0
12.5
15.0
17.5
CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15 CY16 CY17 CY18 CY19
Total Revenue (Bil $) 3.40 2.43 2.29 2.45 1.46 1.30 1.16 1.10 1.06 1.01 0.97 0.93
Direct Expense (Bil $) 2.89 2.06 1.88 2.04 1.21 1.08 0.97 0.92 0.88 0.84 0.81 0.78
Indirect Expense (Mil $) 147 94.8 213 268 371 150 152 140 130 128 126 124
Adjusted EBITDA (Mil $) 511 370 413 411 244 218 194 184 177 170 163 156
Free Cash Flow (Mil $) n/a n/a n/a n/a -126 67.8 42.7 44.3 47.0 41.9 36.5 32.0
TREFIS ANALYSIS for HP [email protected] + 1 617 394 8763 •47
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TREFIS ANALYSIS for HP [email protected] + 1 617 394 8763 •48
Appendix
Summary P&L for HP Note that HP reports financial information for fiscal year ended October 31st. For the purposes of our analysis, we have treated HP's fiscal year figures as equivalentto calendar year ended December 31st figures.
Summary P&L for HP
CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15 CY16 CY17 CY18 CY19
Total Revenues (Bil $) 121 120 130 127 118 109 101 95.4 91.9 89.1 87.2 85.8
Infrastructure Outsourcing (% oftotal)
8.51 11.9 11.4 11.9 12.0 12.1 11.7 11.2 12.2 13.2 14.6 16.0
Printers & Ink Cartridges (% of total) 23.2 20.0 20.1 19.7 20.0 20.5 20.7 20.4 19.6 18.5 17.3 15.9
Technology Services (% of total) 8.21 8.96 8.12 8.48 8.65 8.95 9.38 9.95 10.5 11.3 12.1 12.9
Industry Servers (% of total) 9.02 8.20 10.0 10.3 10.6 9.89 9.42 9.29 9.04 8.94 8.76 8.54
Application Outsourcing (% of total) 3.07 5.77 5.17 5.35 5.46 5.65 5.92 6.28 6.64 7.06 7.43 7.85
Notebooks & Netbooks (% of total) 18.0 17.7 17.1 16.0 14.7 14.2 14.1 13.7 12.9 12.2 11.4 10.5
HP Software (% of total) 3.41 3.00 2.54 2.71 2.81 2.90 2.99 3.05 3.08 3.11 3.15 3.20
Financial Services (% of total) 2.21 2.28 2.42 2.91 3.17 3.61 4.07 4.58 4.99 5.40 5.85 6.31
Desktops (% of total) 12.8 11.1 11.9 11.4 11.8 11.4 10.9 10.2 9.18 8.14 7.14 6.23
Business Process Outsourcing (% oftotal)
1.28 2.65 2.38 2.38 2.43 2.51 2.63 2.79 2.95 3.14 3.30 3.49
HP Networking (% of total) 1.86 1.70 2.04 1.98 2.24 2.03 1.90 2.09 2.24 2.40 2.54 2.67
Storage (% of total) 3.40 2.85 2.99 2.66 2.54 2.55 2.61 2.80 2.96 3.12 3.22 3.30
Workstations & Others (% of total) 2.34 1.82 2.12 2.33 2.38 2.46 2.52 2.54 2.50 2.32 2.14 1.96
High-end Servers (% of total) 2.79 2.01 1.75 1.92 1.23 1.19 1.15 1.16 1.15 1.14 1.11 1.09
Direct Expenses (Bil $) 103 99.5 108 108 101 93.3 86.6 81.8 79.0 76.7 75.2 74.0
Infrastructure Outsourcing (% oftotal)
8.85 12.8 13.2 13.4 13.8 14.0 13.7 13.3 14.7 16.0 17.8 19.7
Printers & Ink Cartridges (% of total) 30.0 24.4 24.5 23.6 23.8 24.0 23.7 22.3 20.3 17.9 15.0 12.2
Technology Services (% of total) 8.53 9.66 9.37 9.54 9.92 10.4 11.0 11.9 12.7 13.7 14.8 15.9
Industry Servers (% of total) 9.14 7.04 10.5 11.4 11.6 10.7 10.1 9.91 9.69 9.58 9.47 9.30
Application Outsourcing (% of total) 3.19 6.21 5.96 6.02 6.11 6.24 6.45 6.77 7.10 7.44 7.75 8.07
Notebooks & Netbooks (% of total) 10.4 8.74 9.08 10.2 9.01 8.64 8.45 8.14 7.60 7.15 6.65 6.10
HP Software (% of total) 3.99 9.53 6.21 4.54 4.79 5.10 5.42 5.73 5.88 6.01 6.14 6.29
Financial Services (% of total) 1.53 1.59 1.84 2.63 2.81 3.12 3.56 4.10 4.55 4.99 5.50 6.02
Desktops (% of total) 7.40 5.48 6.35 7.24 7.22 6.94 6.53 6.07 5.39 4.75 4.16 3.61
Business Process Outsourcing (% oftotal)
1.33 2.86 2.74 2.68 2.78 2.92 3.09 3.33 3.56 3.80 4.04 4.30
HP Networking (% of total) 8.01 6.62 4.18 2.21 2.54 2.33 2.21 2.46 2.67 2.88 3.07 3.26
Storage (% of total) 3.44 2.45 3.15 2.96 2.80 2.75 2.76 2.91 2.90 2.85 2.74 2.59
Workstations & Others (% of total) 1.36 0.90 1.13 1.48 1.46 1.56 1.65 1.69 1.68 1.57 1.46 1.35
TREFIS ANALYSIS for HP [email protected] + 1 617 394 8763 •49
Summary P&L for HP continued
CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15 CY16 CY17 CY18 CY19
High-end Servers (% of total) 2.82 1.72 1.84 2.14 1.39 1.37 1.33 1.36 1.37 1.36 1.35 1.32
Adjusted EBITDA (Bil $) 18.1 21.5 22.4 19.2 17.6 16.0 14.6 13.6 12.9 12.5 12.1 11.8
Infrastructure Outsourcing (% oftotal)
8.85 12.8 13.2 13.4 13.8 14.0 13.7 13.3 14.7 16.0 17.8 19.7
Printers & Ink Cartridges (% of total) 30.0 24.4 24.5 23.6 23.8 24.0 23.7 22.3 20.3 17.9 15.0 12.2
Technology Services (% of total) 8.53 9.66 9.37 9.54 9.92 10.4 11.0 11.9 12.7 13.7 14.8 15.9
Industry Servers (% of total) 9.14 7.04 10.5 11.4 11.6 10.7 10.1 9.91 9.69 9.58 9.47 9.30
Application Outsourcing (% of total) 3.19 6.21 5.96 6.02 6.11 6.24 6.45 6.77 7.10 7.44 7.75 8.07
Notebooks & Netbooks (% of total) 10.4 8.74 9.08 10.2 9.01 8.64 8.45 8.14 7.60 7.15 6.65 6.10
HP Software (% of total) 3.99 9.53 6.21 4.54 4.79 5.10 5.42 5.73 5.88 6.01 6.14 6.29
Financial Services (% of total) 1.53 1.59 1.84 2.63 2.81 3.12 3.56 4.10 4.55 4.99 5.50 6.02
Desktops (% of total) 7.40 5.48 6.35 7.24 7.22 6.94 6.53 6.07 5.39 4.75 4.16 3.61
Business Process Outsourcing (% oftotal)
1.33 2.86 2.74 2.68 2.78 2.92 3.09 3.33 3.56 3.80 4.04 4.30
HP Networking (% of total) 8.01 6.62 4.18 2.21 2.54 2.33 2.21 2.46 2.67 2.88 3.07 3.26
Storage (% of total) 3.44 2.45 3.15 2.96 2.80 2.75 2.76 2.91 2.90 2.85 2.74 2.59
Workstations & Others (% of total) 1.36 0.90 1.13 1.48 1.46 1.56 1.65 1.69 1.68 1.57 1.46 1.35
High-end Servers (% of total) 2.82 1.72 1.84 2.14 1.39 1.37 1.33 1.36 1.37 1.36 1.35 1.32
Indirect Expenses (Bil $) 4.86 4.85 11.0 12.6 26.7 11.0 11.4 10.3 9.50 9.37 9.34 9.33
Infrastructure Outsourcing (% oftotal)
9.50 14.5 13.9 13.4 13.8 14.0 13.7 13.3 14.7 16.0 17.9 19.8
Printers & Ink Cartridges (% of total) 32.3 27.6 25.7 23.8 23.8 23.9 23.7 22.3 20.3 18.0 15.1 12.2
Technology Services (% of total) 9.25 10.9 9.85 9.51 9.91 10.4 11.0 11.9 12.7 13.7 14.9 16.0
Industry Servers (% of total) 9.85 7.97 11.1 11.4 11.7 10.7 10.1 9.95 9.60 9.37 9.11 8.77
Application Outsourcing (% of total) 3.42 7.03 6.27 6.00 6.11 6.24 6.44 6.77 7.11 7.46 7.78 8.12
Notebooks & Netbooks (% of total) 11.2 9.87 9.57 10.1 9.01 8.64 8.44 8.14 7.60 7.16 6.67 6.14
HP Software (% of total) 4.30 4.54 3.93 4.52 4.79 5.10 5.42 5.73 5.89 6.02 6.16 6.32
Financial Services (% of total) 1.64 1.80 1.94 2.62 2.81 3.12 3.55 4.10 4.55 5.01 5.53 6.05
Desktops (% of total) 7.98 6.18 6.68 7.22 7.22 6.93 6.53 6.07 5.40 4.76 4.18 3.63
Business Process Outsourcing (% oftotal)
1.43 3.24 2.88 2.67 2.78 2.91 3.09 3.33 3.56 3.81 4.06 4.33
HP Networking (% of total) 0.86 0.60 1.78 2.20 2.54 2.33 2.21 2.46 2.68 2.88 3.09 3.28
Storage (% of total) 3.71 2.77 3.31 2.95 2.80 2.75 2.76 2.91 2.90 2.86 2.75 2.60
Workstations & Others (% of total) 1.46 1.02 1.19 1.47 1.46 1.56 1.65 1.69 1.69 1.58 1.47 1.35
High-end Servers (% of total) 3.04 1.95 1.94 2.13 1.39 1.37 1.33 1.36 1.37 1.37 1.36 1.33
Free Cash Flow (Bil $) n/a n/a n/a n/a -9.14 4.95 3.20 3.25 3.43 3.09 2.74 2.47
Infrastructure Outsourcing (% oftotal)
n/a n/a n/a n/a 13.8 14.0 13.8 13.4 14.6 15.9 17.6 19.3
Printers & Ink Cartridges (% of total) n/a n/a n/a n/a 23.7 24.0 23.8 22.3 20.2 17.8 14.8 11.9
Technology Services (% of total) n/a n/a n/a n/a 9.91 10.4 11.0 11.9 12.6 13.6 14.6 15.6
Industry Servers (% of total) n/a n/a n/a n/a 11.7 10.6 9.94 9.81 9.92 10.2 10.7 11.3
Application Outsourcing (% of total) n/a n/a n/a n/a 6.10 6.25 6.46 6.78 7.08 7.39 7.64 7.90
TREFIS ANALYSIS for HP [email protected] + 1 617 394 8763 •50
Detailed P&L for the InfrastructureOutsourcing business The most important drivers for the Infrastructure Outsourcing business are discussed above, here is the detailed P&L.
Note that HP reports financial information for fiscal year ended October 31st. For the purposes of our analysis, we have treated HP's fiscal year figures as equivalentto calendar year ended December 31st figures.
Summary P&L for HP continued
CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15 CY16 CY17 CY18 CY19
Notebooks & Netbooks (% of total) n/a n/a n/a n/a 9.00 8.65 8.46 8.15 7.58 7.09 6.56 5.97
HP Software (% of total) n/a n/a n/a n/a 4.79 5.11 5.43 5.74 5.87 5.97 6.06 6.15
Financial Services (% of total) n/a n/a n/a n/a 2.81 3.12 3.56 4.10 4.53 4.96 5.43 5.89
Desktops (% of total) n/a n/a n/a n/a 7.21 6.95 6.54 6.08 5.38 4.72 4.10 3.53
Business Process Outsourcing (% oftotal)
n/a n/a n/a n/a 2.78 2.92 3.09 3.33 3.55 3.78 3.99 4.21
HP Networking (% of total) n/a n/a n/a n/a 2.54 2.34 2.22 2.47 2.67 2.86 3.03 3.19
Storage (% of total) n/a n/a n/a n/a 2.80 2.76 2.77 2.91 2.89 2.83 2.70 2.53
Workstations & Others (% of total) n/a n/a n/a n/a 1.45 1.56 1.65 1.69 1.68 1.56 1.44 1.32
High-end Servers (% of total) n/a n/a n/a n/a 1.39 1.37 1.34 1.37 1.37 1.35 1.33 1.30
Infrastructure Outsourcing: Detailed P&L
CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15 CY16 CY17 CY18 CY19
Revenues
Infrastructure Outsourcing
Revenues (Bil $)10.4 14.4 14.9 15.2 14.3 13.2 11.9 10.7 11.2 11.8 12.7 13.7
Infrastructure Outsourcing
Revenues ($ Bil)10.4 14.4 14.9 15.2 14.3 13.2 11.9 10.7 11.2 11.8 12.7 13.7
Total Revenues (Bil $) 10.4 14.4 14.9 15.2 14.3 13.2 11.9 10.7 11.2 11.8 12.7 13.7
Expenses
Direct Expenses (Bil $) 8.77 11.6 12.0 12.7 11.9 10.9 9.85 8.86 9.31 9.77 10.6 11.4
Infrastructure Outsourcing
EBITDA Margin (%)15.5 19.1 19.8 16.9 16.9 16.9 16.9 16.9 16.9 16.9 16.9 16.9
Indirect Expenses (Bil $) 0.46 0.70 1.52 1.69 3.69 1.54 1.57 1.37 1.40 1.50 1.67 1.85
Corporate Costs as % of Sales (%) 2.60 3.29 3.44 3.45 21.1 5.24 5.49 4.99 4.39 4.39 4.39 4.39
Tax rate (%) 19.9 19.1 20.5 18.7 22.7 23.7 23.7 23.7 23.7 23.7 23.7 23.7
Capex as % of Sales (%) 2.24 2.74 2.48 3.09 3.29 3.39 3.49 3.69 3.89 4.09 4.29 4.49
Change in Net Working Capital
as % of Sales (%)0.96 -1.62 1.35 0.42 -1.18 -0.41 0.30 -0.09 -0.15 0.01 0.02 0.02
Change in Net Operating Assets
as % of Sales (%)-3.44 -2.31 -1.02 0.41 0.65 -0.49 -0.03 0.11 0.04 -0.10 -0.00 0.09
Total Expenses (Bil $) 9.23 12.3 13.5 14.3 15.6 12.5 11.4 10.2 10.7 11.3 12.2 13.2
TREFIS ANALYSIS for HP [email protected] + 1 617 394 8763 •51
Detailed P&L for the Printers & InkCartridges business The most important drivers for the Printers & Ink Cartridges business are discussed above, here is the detailed P&L.
Note that HP reports financial information for fiscal year ended October 31st. For the purposes of our analysis, we have treated HP's fiscal year figures as equivalentto calendar year ended December 31st figures.
Infrastructure Outsourcing: Detailed P&L continued
CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15 CY16 CY17 CY18 CY19
Adjusted EBITDA (Bil $) 1.60 2.75 2.95 2.58 2.43 2.23 2.01 1.81 1.90 1.99 2.15 2.32
Free Cash Flow (Bil $) n/a n/a n/a n/a -1.26 0.69 0.44 0.43 0.50 0.49 0.48 0.48
Printers & Ink Cartridges: Detailed P&L
CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15 CY16 CY17 CY18 CY19
Revenues
Printer Revenues (Bil $) 10.1 7.67 8.66 8.27 8.03 7.55 7.11 6.69 6.29 5.86 5.45 5.03
HP Printer Pricing ($) 182 168 164 157 156 149 143 139 135 131 127 123
HP Market Share (%) 43.5 40.8 42.1 42.1 42.1 42.1 42.1 42.1 42.1 42.1 42.1 42.1
Worldwide Printer Market (Mil) 127 111 125 124 122 119 117 113 110 105 101 96.6
Printer Ink & Toner Supplies
Revenues (Bil $)18.2 16.6 17.5 16.9 15.8 14.9 13.9 12.8 11.7 10.6 9.61 8.59
Printer Ink & Toner Supplies
Pricing ($)46.2 51.7 48.8 47.3 46.4 45.4 44.5 43.6 42.8 41.9 41.1 40.2
HP Market Share (%) 43.5 40.8 42.1 42.1 42.1 42.1 42.1 42.1 42.1 42.1 42.1 42.1
Worldwide Printer Market (Mil) 127 111 125 124 122 119 117 113 110 105 101 96.6
Ink & Toner Supplies per Printer 7.10 7.03 6.82 6.77 6.63 6.50 6.30 6.12 5.90 5.70 5.47 5.25
Total Revenues (Bil $) 28.2 24.2 26.2 25.1 23.8 22.4 21.0 19.5 18.0 16.5 15.1 13.6
Expenses
Direct Expenses (Bil $) 22.8 19.0 20.7 20.6 19.6 18.6 17.5 16.4 15.4 14.3 13.3 12.2
Printer & Cartridges EBITDA
Margin (%)19.2 21.6 20.9 18.0 17.5 17.0 16.5 15.5 14.5 13.5 12.0 10.5
Indirect Expenses (Bil $) 1.57 1.34 2.83 3.00 6.35 2.64 2.71 2.30 1.93 1.68 1.41 1.14
Corporate Costs as % of Sales (%) 2.60 3.29 3.44 3.45 21.1 5.24 5.49 4.99 4.39 4.39 4.39 4.39
Tax rate (%) 19.9 19.1 20.5 18.7 22.7 23.7 23.7 23.7 23.7 23.7 23.7 23.7
Capex as % of Sales (%) 2.24 2.74 2.48 3.09 3.29 3.39 3.49 3.69 3.89 4.09 4.29 4.49
Change in Net Working Capital
as % of Sales (%)0.96 -1.62 1.35 0.42 -1.18 -0.41 0.30 -0.09 -0.15 0.01 0.02 0.02
Change in Net Operating Assets
as % of Sales (%)-3.44 -2.31 -1.02 0.41 0.65 -0.49 -0.03 0.11 0.04 -0.10 -0.00 0.09
Total Expenses (Bil $) 24.4 20.3 23.5 23.6 26.0 21.2 20.2 18.7 17.3 15.9 14.7 13.3
TREFIS ANALYSIS for HP [email protected] + 1 617 394 8763 •52
Detailed P&L for the Technology Servicesbusiness The most important drivers for the Technology Services business are discussed above, here is the detailed P&L.
Note that HP reports financial information for fiscal year ended October 31st. For the purposes of our analysis, we have treated HP's fiscal year figures as equivalentto calendar year ended December 31st figures.
Printers & Ink Cartridges: Detailed P&L continued
CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15 CY16 CY17 CY18 CY19
Adjusted EBITDA (Bil $) 5.43 5.23 5.48 4.54 4.18 3.82 3.47 3.02 2.62 2.23 1.81 1.44
Free Cash Flow (Bil $) n/a n/a n/a n/a -2.17 1.19 0.76 0.73 0.69 0.55 0.41 0.29
Technology Services: Detailed P&L
CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15 CY16 CY17 CY18 CY19
Revenues
Tech Services Revenues (Bil $) 10.0 10.8 10.6 10.8 10.3 9.78 9.49 9.49 9.68 10.1 10.6 11.1
Tech Services Revenues ($ Bil) 10.0 10.8 10.6 10.8 10.3 9.78 9.49 9.49 9.68 10.1 10.6 11.1
Total Revenues (Bil $) 10.0 10.8 10.6 10.8 10.3 9.78 9.49 9.49 9.68 10.1 10.6 11.1
Expenses
Direct Expenses (Bil $) 8.46 8.77 8.50 9.00 8.55 8.13 7.88 7.88 8.04 8.36 8.78 9.22
Technology Services EBITDA
Margin (%)15.5 19.1 19.8 16.9 16.9 16.9 16.9 16.9 16.9 16.9 16.9 16.9
Indirect Expenses (Bil $) 0.45 0.53 1.08 1.20 2.65 1.14 1.26 1.22 1.21 1.28 1.39 1.49
Corporate Costs as % of Sales (%) 2.60 3.29 3.44 3.45 21.1 5.24 5.49 4.99 4.39 4.39 4.39 4.39
Tax rate (%) 19.9 19.1 20.5 18.7 22.7 23.7 23.7 23.7 23.7 23.7 23.7 23.7
Capex as % of Sales (%) 2.24 2.74 2.48 3.09 3.29 3.39 3.49 3.69 3.89 4.09 4.29 4.49
Change in Net Working Capital
as % of Sales (%)0.96 -1.62 1.35 0.42 -1.18 -0.41 0.30 -0.09 -0.15 0.01 0.02 0.02
Change in Net Operating Assets
as % of Sales (%)-3.44 -2.31 -1.02 0.41 0.65 -0.49 -0.03 0.11 0.04 -0.10 -0.00 0.09
Total Expenses (Bil $) 8.91 9.30 9.58 10.2 11.2 9.27 9.14 9.10 9.24 9.65 10.2 10.7
Adjusted EBITDA (Bil $) 1.55 2.07 2.10 1.84 1.74 1.66 1.61 1.61 1.64 1.71 1.79 1.88
Free Cash Flow (Mil $) n/a n/a n/a n/a -905 514 352 385 434 420 400 385
TREFIS ANALYSIS for HP [email protected] + 1 617 394 8763 •53
Detailed P&L for the Industry Serversbusiness The most important drivers for the Industry Servers business are discussed above, here is the detailed P&L.
Note that HP reports financial information for fiscal year ended October 31st. For the purposes of our analysis, we have treated HP's fiscal year figures as equivalentto calendar year ended December 31st figures.
Industry Servers: Detailed P&L
CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15 CY16 CY17 CY18 CY19
Revenues
Ind. Server revenue (Bil $) 11.0 9.92 13.1 13.1 12.6 10.8 9.53 8.86 8.31 7.97 7.64 7.33
Ind. Server shipments (Mil) 2.36 2.22 2.78 2.93 2.93 2.80 2.74 2.77 2.82 2.88 2.94 3.00
Ind. Server Pricing (K $) 4.65 4.47 4.71 4.47 4.30 3.87 3.48 3.20 2.95 2.77 2.60 2.45
Total Revenues (Bil $) 11.0 9.92 13.1 13.1 12.6 10.8 9.53 8.86 8.31 7.97 7.64 7.33
Expenses
Direct Expenses (Bil $) 9.34 8.41 10.7 10.9 10.5 9.10 8.06 7.51 7.06 6.78 6.50 6.23
Ind. Server EBITDA Margin (%) 15.1 15.2 18.0 16.8 16.3 15.8 15.5 15.2 15.1 15.0 15.0 15.0
Indirect Expenses (Bil $) 0.48 0.39 1.22 1.44 3.12 1.18 1.16 1.03 0.91 0.88 0.85 0.82
Corporate Costs as % of Sales (%) 2.60 3.29 3.44 3.45 21.1 5.24 5.49 4.99 4.39 4.39 4.39 4.39
Tax rate (%) 19.9 19.1 20.5 18.7 22.7 23.7 23.7 23.7 23.7 23.7 23.7 23.7
Capex as % of Sales (%) 2.24 2.74 2.48 3.09 3.29 3.39 3.49 3.69 3.89 4.09 4.29 4.49
Change in Net Working Capital
as % of Sales (%)0.96 -1.62 1.35 0.42 -1.18 -0.41 0.30 -0.09 -0.15 0.01 0.02 0.02
Change in Net Operating Assets
as % of Sales (%)-3.44 -2.31 -1.02 0.41 0.65 -0.49 -0.03 0.11 0.04 -0.10 -0.00 0.09
Total Expenses (Bil $) 9.81 8.80 11.9 12.3 13.6 10.3 9.22 8.54 7.97 7.65 7.35 7.05
Adjusted EBITDA (Bil $) 1.65 1.51 2.36 2.20 2.05 1.70 1.47 1.34 1.25 1.19 1.14 1.10
Free Cash Flow (Bil $) n/a n/a n/a n/a -1.07 0.52 0.32 0.32 0.34 0.32 0.29 0.28
TREFIS ANALYSIS for HP [email protected] + 1 617 394 8763 •54
Detailed P&L for the ApplicationOutsourcing business The most important drivers for the Application Outsourcing business are discussed above, here is the detailed P&L.
Note that HP reports financial information for fiscal year ended October 31st. For the purposes of our analysis, we have treated HP's fiscal year figures as equivalentto calendar year ended December 31st figures.
Application Outsourcing: Detailed P&L
CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15 CY16 CY17 CY18 CY19
Revenues
Application Outsourcing Revenues
(Bil $)3.74 6.98 6.74 6.84 6.50 6.17 5.99 5.99 6.11 6.29 6.48 6.74
Application Outsourcing
Revenues ($ Bil)3.74 6.98 6.74 6.84 6.50 6.17 5.99 5.99 6.11 6.29 6.48 6.74
Total Revenues (Bil $) 3.74 6.98 6.74 6.84 6.50 6.17 5.99 5.99 6.11 6.29 6.48 6.74
Expenses
Direct Expenses (Bil $) 3.16 5.64 5.41 5.68 5.42 5.18 5.04 5.07 5.19 5.36 5.54 5.78
Application Outsourcing
EBITDA Margin (%)15.5 19.1 19.8 16.9 16.5 16.1 15.7 15.3 15.0 14.7 14.4 14.1
Indirect Expenses (Bil $) 0.17 0.34 0.69 0.76 1.63 0.69 0.74 0.70 0.68 0.70 0.73 0.76
Corporate Costs as % of Sales (%) 2.60 3.29 3.44 3.45 21.1 5.24 5.49 4.99 4.39 4.39 4.39 4.39
Tax rate (%) 19.9 19.1 20.5 18.7 22.7 23.7 23.7 23.7 23.7 23.7 23.7 23.7
Capex as % of Sales (%) 2.24 2.74 2.48 3.09 3.29 3.39 3.49 3.69 3.89 4.09 4.29 4.49
Change in Net Working Capital
as % of Sales (%)0.96 -1.62 1.35 0.42 -1.18 -0.41 0.30 -0.09 -0.15 0.01 0.02 0.02
Change in Net Operating Assets
as % of Sales (%)-3.44 -2.31 -1.02 0.41 0.65 -0.49 -0.03 0.11 0.04 -0.10 -0.00 0.09
Total Expenses (Bil $) 3.33 5.98 6.10 6.44 7.05 5.86 5.78 5.77 5.86 6.06 6.27 6.54
Adjusted EBITDA (Bil $) 0.58 1.33 1.34 1.16 1.07 1.00 0.94 0.92 0.92 0.93 0.94 0.95
Free Cash Flow (Mil $) n/a n/a n/a n/a -557 309 206 220 243 228 209 195
TREFIS ANALYSIS for HP [email protected] + 1 617 394 8763 •55
Detailed P&L for the Notebooks & Netbooksbusiness The most important drivers for the Notebooks & Netbooks business are discussed above, here is the detailed P&L.
Note that HP reports financial information for fiscal year ended October 31st. For the purposes of our analysis, we have treated HP's fiscal year figures as equivalentto calendar year ended December 31st figures.
Notebooks & Netbooks: Detailed P&L
CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15 CY16 CY17 CY18 CY19
Revenues
Notebooks & Netbooks Revenues
(Bil $)21.9 21.5 22.3 20.5 17.5 15.6 14.2 13.0 11.9 10.9 9.96 9.05
HP Notebooks & Netbooks
Pricing ($)768 699 672 648 615 585 555 528 501 476 452 430
HP Market Share in Notebooks
& Netbooks Sold (%)20.0 18.2 16.5 15.0 14.5 14.0 13.5 12.7 12.0 11.2 10.5 9.72
Global Notebooks & Netbooks
Sold (Mil)142 168 201 206 196 190 190 194 197 203 210 216
Total Revenues (Bil $) 21.9 21.5 22.3 20.5 17.5 15.6 14.2 13.0 11.9 10.9 9.96 9.05
Expenses
Direct Expenses (Bil $) 20.0 19.6 20.2 18.5 15.9 14.2 13.0 11.9 10.9 10.0 9.15 8.33
Notebooks & Netbooks EBITDA
Margin (%)8.63 8.74 9.14 9.56 9.06 8.86 8.66 8.46 8.26 8.16 8.06 7.96
Indirect Expenses (Bil $) 0.55 0.48 1.05 1.28 2.41 0.95 0.96 0.84 0.72 0.67 0.62 0.57
Corporate Costs as % of Sales (%) 2.60 3.29 3.44 3.45 21.1 5.24 5.49 4.99 4.39 4.39 4.39 4.39
Tax rate (%) 19.9 19.1 20.5 18.7 22.7 23.7 23.7 23.7 23.7 23.7 23.7 23.7
Capex as % of Sales (%) 2.24 2.74 2.48 3.09 3.29 3.39 3.49 3.69 3.89 4.09 4.29 4.49
Change in Net Working Capital
as % of Sales (%)0.96 -1.62 1.35 0.42 -1.18 -0.41 0.30 -0.09 -0.15 0.01 0.02 0.02
Change in Net Operating Assets
as % of Sales (%)-3.44 -2.31 -1.02 0.41 0.65 -0.49 -0.03 0.11 0.04 -0.10 -0.00 0.09
Total Expenses (Bil $) 20.6 20.1 21.3 19.8 18.3 15.1 14.0 12.8 11.6 10.7 9.78 8.90
Adjusted EBITDA (Bil $) 1.89 1.88 2.04 1.96 1.58 1.38 1.23 1.10 0.98 0.89 0.80 0.72
Free Cash Flow (Mil $) n/a n/a n/a n/a -822 428 270 264 260 219 179 147
TREFIS ANALYSIS for HP [email protected] + 1 617 394 8763 •56
Detailed P&L for the HP Software business The most important drivers for the HP Software business are discussed above, here is the detailed P&L.
Note that HP reports financial information for fiscal year ended October 31st. For the purposes of our analysis, we have treated HP's fiscal year figures as equivalentto calendar year ended December 31st figures.
HP Software: Detailed P&L
CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15 CY16 CY17 CY18 CY19
Revenues
Services Revenues (Bil $) 1.04 0.75 0.61 0.60 0.60 0.58 0.56 0.55 0.54 0.54 0.55 0.56
License Revenues ($ Bil) 1.25 1.00 0.90 1.20 1.20 1.15 1.12 1.09 1.08 1.08 1.09 1.12
License Multiplier 2.50 2.50 2.50 2.50 2.50 2.50 2.50 2.50 2.50 2.50 2.50 2.50
% allocated to HP Software (%) 33.3 30.0 27.0 20.0 20.0 20.0 20.0 20.0 20.0 20.0 20.0 20.0
Maintenance Revenues (Bil $) 1.87 1.88 1.82 1.67 1.55 1.44 1.35 1.27 1.20 1.15 1.11 1.08
License Revenues ($ Bil) 1.25 1.00 0.90 1.20 1.20 1.15 1.12 1.09 1.08 1.08 1.09 1.12
Annual Fee as a % of Licenses (%) 20.0 20.0 20.0 15.0 15.0 15.0 15.0 15.0 15.0 15.0 15.0 15.0
Annual Renewal Rate (%) 95.0 90.0 87.0 82.0 82.0 82.0 82.0 82.0 82.0 82.0 82.0 82.0
License Revenues (Bil $) 1.25 1.00 0.90 1.20 1.20 1.15 1.12 1.09 1.08 1.08 1.09 1.12
License Revenues ($ Bil) 1.25 1.00 0.90 1.20 1.20 1.15 1.12 1.09 1.08 1.08 1.09 1.12
Total Revenues (Bil $) 4.15 3.62 3.32 3.47 3.35 3.17 3.02 2.91 2.83 2.77 2.75 2.75
Expenses
Direct Expenses (Bil $) 3.43 1.58 1.93 2.59 2.50 2.35 2.23 2.13 2.07 2.03 2.01 2.01
Software EBITDA Margin (%) 17.4 35.3 30.3 25.2 25.2 25.7 26.2 26.7 26.9 27.0 27.0 27.0
Indirect Expenses (Bil $) 0.21 0.22 0.43 0.57 1.28 0.56 0.62 0.59 0.56 0.56 0.58 0.59
Corporate Costs as % of Sales (%) 2.60 3.29 3.44 3.45 21.1 5.24 5.49 4.99 4.39 4.39 4.39 4.39
Tax rate (%) 19.9 19.1 20.5 18.7 22.7 23.7 23.7 23.7 23.7 23.7 23.7 23.7
Capex as % of Sales (%) 2.24 2.74 2.48 3.09 3.29 3.39 3.49 3.69 3.89 4.09 4.29 4.49
Change in Net Working Capital
as % of Sales (%)0.96 -1.62 1.35 0.42 -1.18 -0.41 0.30 -0.09 -0.15 0.01 0.02 0.02
Change in Net Operating Assets
as % of Sales (%)-3.44 -2.31 -1.02 0.41 0.65 -0.49 -0.03 0.11 0.04 -0.10 -0.00 0.09
Total Expenses (Bil $) 3.64 1.80 2.36 3.16 3.78 2.91 2.85 2.73 2.63 2.59 2.58 2.60
Adjusted EBITDA (Bil $) 0.72 2.04 1.39 0.87 0.84 0.81 0.79 0.78 0.76 0.75 0.74 0.74
Free Cash Flow (Mil $) n/a n/a n/a n/a -437 252 173 186 201 184 166 152
TREFIS ANALYSIS for HP [email protected] + 1 617 394 8763 •57
Detailed P&L for the Financial Servicesbusiness The most important drivers for the Financial Services business are discussed above, here is the detailed P&L.
Note that HP reports financial information for fiscal year ended October 31st. For the purposes of our analysis, we have treated HP's fiscal year figures as equivalentto calendar year ended December 31st figures.
Financial Services: Detailed P&L
CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15 CY16 CY17 CY18 CY19
Revenues
Financial Services Revenues (Bil $) 2.69 2.76 3.16 3.72 3.77 3.94 4.12 4.37 4.59 4.82 5.11 5.41
HP Financial Services Assets ($Bil)
9.17 10.8 12.1 13.5 13.5 13.9 14.4 15.1 15.8 16.6 17.6 18.7
Return on HP's Financial Services
Assets (%)29.3 25.4 26.0 27.5 27.9 28.3 28.7 29.0 29.0 29.0 29.0 29.0
Total Revenues (Bil $) 2.69 2.76 3.16 3.72 3.77 3.94 4.12 4.37 4.59 4.82 5.11 5.41
Expenses
Direct Expenses (Bil $) 2.42 2.41 2.74 3.21 3.28 3.44 3.60 3.81 4.00 4.19 4.44 4.70
HPFS EBTDA Margin (%) 10.3 12.4 13.1 13.6 13.1 12.6 12.6 12.7 12.8 12.9 13.0 13.1
Indirect Expenses (Mil $) 79.9 87.6 213 330 751 342 405 422 432 468 515 564
Corporate Costs as % of Sales (%) 2.60 3.29 3.44 3.45 21.1 5.24 5.49 4.99 4.39 4.39 4.39 4.39
Tax rate (%) 19.9 19.1 20.5 18.7 22.7 23.7 23.7 23.7 23.7 23.7 23.7 23.7
Capex as % of Sales (%) 2.24 2.74 2.48 3.09 3.29 3.39 3.49 3.69 3.89 4.09 4.29 4.49
Change in Net Working Capital
as % of Sales (%)0.96 -1.62 1.35 0.42 -1.18 -0.41 0.30 -0.09 -0.15 0.01 0.02 0.02
Change in Net Operating Assets
as % of Sales (%)-3.44 -2.31 -1.02 0.41 0.65 -0.49 -0.03 0.11 0.04 -0.10 -0.00 0.09
Total Expenses (Bil $) 2.50 2.50 2.96 3.54 4.03 3.79 4.00 4.24 4.43 4.66 4.96 5.27
Adjusted EBITDA (Mil $) 276 341 412 506 494 497 519 555 588 622 664 709
Free Cash Flow (Mil $) n/a n/a n/a n/a -256 154 113 133 155 153 148 145
TREFIS ANALYSIS for HP [email protected] + 1 617 394 8763 •58
Detailed P&L for the Desktops business The most important drivers for the Desktops business are discussed above, here is the detailed P&L.
Note that HP reports financial information for fiscal year ended October 31st. For the purposes of our analysis, we have treated HP's fiscal year figures as equivalentto calendar year ended December 31st figures.
Desktops: Detailed P&L
CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15 CY16 CY17 CY18 CY19
Revenues
Desktops Revenues (Bil $) 15.5 13.4 15.6 14.6 14.0 12.5 11.0 9.72 8.44 7.26 6.23 5.35
HP Desktops Pricing ($) 565 503 501 476 466 420 378 340 306 275 248 223
HP Market Share in Desktops
Sold (%)19.0 19.6 21.3 20.1 20.6 20.4 20.2 20.0 19.5 19.0 18.5 18.0
Global Desktops Sold (Mil) 144 136 145 145 145 145 144 142 141 138 135 133
Total Revenues (Bil $) 15.5 13.4 15.6 14.6 14.0 12.5 11.0 9.72 8.44 7.26 6.23 5.35
Expenses
Direct Expenses (Bil $) 14.2 12.3 14.1 13.2 12.7 11.4 10.1 8.90 7.75 6.66 5.73 4.92
Desktops EBITDA Margin (%) 8.63 8.74 9.14 9.56 9.06 8.86 8.66 8.46 8.26 8.16 8.06 7.96
Indirect Expenses (Bil $) 0.39 0.30 0.74 0.91 1.93 0.76 0.75 0.63 0.51 0.45 0.39 0.34
Corporate Costs as % of Sales (%) 2.60 3.29 3.44 3.45 21.1 5.24 5.49 4.99 4.39 4.39 4.39 4.39
Tax rate (%) 19.9 19.1 20.5 18.7 22.7 23.7 23.7 23.7 23.7 23.7 23.7 23.7
Capex as % of Sales (%) 2.24 2.74 2.48 3.09 3.29 3.39 3.49 3.69 3.89 4.09 4.29 4.49
Change in Net Working Capital
as % of Sales (%)0.96 -1.62 1.35 0.42 -1.18 -0.41 0.30 -0.09 -0.15 0.01 0.02 0.02
Change in Net Operating Assets
as % of Sales (%)-3.44 -2.31 -1.02 0.41 0.65 -0.49 -0.03 0.11 0.04 -0.10 -0.00 0.09
Total Expenses (Bil $) 14.6 12.6 14.9 14.1 14.7 12.1 10.8 9.52 8.26 7.11 6.12 5.26
Adjusted EBITDA (Bil $) 1.34 1.17 1.42 1.39 1.27 1.11 0.95 0.82 0.70 0.59 0.50 0.43
Free Cash Flow (Mil $) n/a n/a n/a n/a -659 343 209 197 184 146 112 87.3
TREFIS ANALYSIS for HP [email protected] + 1 617 394 8763 •59
Detailed P&L for the Business ProcessOutsourcing business The most important drivers for the Business Process Outsourcing business are discussed above, here is the detailed P&L.
Note that HP reports financial information for fiscal year ended October 31st. For the purposes of our analysis, we have treated HP's fiscal year figures as equivalentto calendar year ended December 31st figures.
Business Process Outsourcing: Detailed P&L
CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15 CY16 CY17 CY18 CY19
Revenues
Business Process Outsourcing
Revenues (Bil $)1.56 3.21 3.10 3.04 2.89 2.75 2.66 2.66 2.72 2.80 2.88 3.00
Business Process Outsourcing
Revenues ($ Bil)1.56 3.21 3.10 3.04 2.89 2.75 2.66 2.66 2.72 2.80 2.88 3.00
Total Revenues (Bil $) 1.56 3.21 3.10 3.04 2.89 2.75 2.66 2.66 2.72 2.80 2.88 3.00
Expenses
Direct Expenses (Bil $) 1.32 2.60 2.49 2.53 2.40 2.28 2.21 2.21 2.26 2.32 2.39 2.49
Business Process Outsourcing
EBITDA Margin (%)15.5 19.1 19.8 16.9 16.9 16.9 16.9 16.9 16.9 16.9 16.9 16.9
Indirect Expenses (Mil $) 69.6 157 317 336 743 320 352 342 338 357 378 403
Corporate Costs as % of Sales (%) 2.60 3.29 3.44 3.45 21.1 5.24 5.49 4.99 4.39 4.39 4.39 4.39
Tax rate (%) 19.9 19.1 20.5 18.7 22.7 23.7 23.7 23.7 23.7 23.7 23.7 23.7
Capex as % of Sales (%) 2.24 2.74 2.48 3.09 3.29 3.39 3.49 3.69 3.89 4.09 4.29 4.49
Change in Net Working Capital
as % of Sales (%)0.96 -1.62 1.35 0.42 -1.18 -0.41 0.30 -0.09 -0.15 0.01 0.02 0.02
Change in Net Operating Assets
as % of Sales (%)-3.44 -2.31 -1.02 0.41 0.65 -0.49 -0.03 0.11 0.04 -0.10 -0.00 0.09
Total Expenses (Bil $) 1.39 2.75 2.81 2.86 3.14 2.60 2.56 2.55 2.59 2.68 2.77 2.89
Adjusted EBITDA (Mil $) 241 613 614 515 489 465 451 451 460 473 488 507
Free Cash Flow (Mil $) n/a n/a n/a n/a -254 144 98.9 108 121 116 109 104
TREFIS ANALYSIS for HP [email protected] + 1 617 394 8763 •60
Detailed P&L for the HP Networkingbusiness The most important drivers for the HP Networking business are discussed above, here is the detailed P&L.
Note that HP reports financial information for fiscal year ended October 31st. For the purposes of our analysis, we have treated HP's fiscal year figures as equivalentto calendar year ended December 31st figures.
HP Networking: Detailed P&L
CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15 CY16 CY17 CY18 CY19
Revenues
3Com (Bil $) 1.31 1.31 1.39 1.35 1.39 1.07 0.72 0.73 0.74 0.76 0.78 0.80
Worldwide Router and Switching
Market ($ Bil)31.1 28.6 31.7 33.9 36.2 38.2 40.2 42.0 43.8 45.7 47.6 49.7
China Router and Switching
Market ($ Bil)1.82 1.90 1.95 1.99 1.99 1.99 2.01 2.03 2.07 2.11 2.16 2.20
3Com Market Share
Internationally (%)1.63 1.63 1.63 1.43 1.43 0.43 -0.57 -0.57 -0.57 -0.57 -0.57 -0.57
3Com Market Share in China (%) 32.0 32.0 32.0 30.0 30.0 30.0 30.0 30.0 30.0 30.0 30.0 30.0
Security Revenues ($ Mil) 148 163 174 183 192 202 212 223 234 246 258 271
Voice and Other Services
Revenues ($ Mil)95.8 100 104 107 110 114 117 121 124 128 132 136
HP Procurve Networking (Bil $) 0.97 0.74 1.27 1.19 1.27 1.15 1.21 1.26 1.32 1.38 1.43 1.50
Worldwide Router and Switching
Market ($ Bil)31.1 28.6 31.7 33.9 36.2 38.2 40.2 42.0 43.8 45.7 47.6 49.7
HP Procurve Market Share (%) 3.10 2.60 4.01 3.51 3.51 3.01 3.01 3.01 3.01 3.01 3.01 3.01
Total Revenues (Bil $) 2.27 2.05 2.66 2.54 2.66 2.22 1.93 1.99 2.06 2.14 2.21 2.29
Expenses
Direct Expenses (Bil $) 0.82 0.63 1.73 2.11 2.22 1.85 1.60 1.66 1.72 1.78 1.84 1.91
HP Networking EBITDA
Margin (%)15.1 15.2 18.0 16.8 16.8 16.8 16.8 16.8 16.8 16.8 16.8 16.8
Indirect Expenses (Mil $) 42.0 29.0 196 277 678 256 252 253 254 270 288 305
Corporate Costs as % of Sales (%) 2.60 3.29 3.44 3.45 21.1 5.24 5.49 4.99 4.39 4.39 4.39 4.39
Tax rate (%) 19.9 19.1 20.5 18.7 22.7 23.7 23.7 23.7 23.7 23.7 23.7 23.7
Capex as % of Sales (%) 2.24 2.74 2.48 3.09 3.29 3.39 3.49 3.69 3.89 4.09 4.29 4.49
Change in Net Working Capital
as % of Sales (%)0.96 -1.62 1.35 0.42 -1.18 -0.41 0.30 -0.09 -0.15 0.01 0.02 0.02
Change in Net Operating Assets
as % of Sales (%)-3.44 -2.31 -1.02 0.41 0.65 -0.49 -0.03 0.11 0.04 -0.10 -0.00 0.09
Total Expenses (Bil $) 0.86 0.66 1.92 2.39 2.89 2.11 1.86 1.91 1.97 2.05 2.13 2.22
Adjusted EBITDA (Bil $) 1.45 1.42 0.94 0.43 0.45 0.37 0.32 0.33 0.35 0.36 0.37 0.38
Free Cash Flow (Mil $) n/a n/a n/a n/a -231 115 70.8 80.1 91.6 88.4 83.2 78.9
TREFIS ANALYSIS for HP [email protected] + 1 617 394 8763 •61
Detailed P&L for the Storage business The most important drivers for the Storage business are discussed above, here is the detailed P&L.
Note that HP reports financial information for fiscal year ended October 31st. For the purposes of our analysis, we have treated HP's fiscal year figures as equivalentto calendar year ended December 31st figures.
Storage: Detailed P&L
CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15 CY16 CY17 CY18 CY19
Revenues
Storage revenue (Bil $) 4.14 3.45 3.91 3.40 3.03 2.78 2.64 2.67 2.72 2.78 2.81 2.83
Storage revenue ($ Bil) 4.14 3.45 3.91 3.40 3.03 2.78 2.64 2.67 2.72 2.78 2.81 2.83
Total Revenues (Bil $) 4.14 3.45 3.91 3.40 3.03 2.78 2.64 2.67 2.72 2.78 2.81 2.83
Expenses
Direct Expenses (Bil $) 3.52 2.92 3.20 2.83 2.53 2.34 2.24 2.28 2.35 2.42 2.48 2.53
Storage EBITDA Margin (%) 15.1 15.2 18.0 16.8 16.3 15.8 15.3 14.8 13.8 12.8 11.8 10.8
Indirect Expenses (Mil $) 180 134 364 372 747 302 315 299 275 267 256 242
Corporate Costs as % of Sales (%) 2.60 3.29 3.44 3.45 21.1 5.24 5.49 4.99 4.39 4.39 4.39 4.39
Tax rate (%) 19.9 19.1 20.5 18.7 22.7 23.7 23.7 23.7 23.7 23.7 23.7 23.7
Capex as % of Sales (%) 2.24 2.74 2.48 3.09 3.29 3.39 3.49 3.69 3.89 4.09 4.29 4.49
Change in Net Working Capital
as % of Sales (%)0.96 -1.62 1.35 0.42 -1.18 -0.41 0.30 -0.09 -0.15 0.01 0.02 0.02
Change in Net Operating Assets
as % of Sales (%)-3.44 -2.31 -1.02 0.41 0.65 -0.49 -0.03 0.11 0.04 -0.10 -0.00 0.09
Total Expenses (Bil $) 3.70 3.06 3.57 3.20 3.28 2.65 2.56 2.58 2.63 2.69 2.73 2.77
Adjusted EBITDA (Mil $) 623 524 705 570 492 439 403 394 375 354 330 305
Free Cash Flow (Mil $) n/a n/a n/a n/a -255 136 88.5 94.6 99.3 87.5 74.0 62.6
TREFIS ANALYSIS for HP [email protected] + 1 617 394 8763 •62
Detailed P&L for the Workstations & Othersbusiness The most important drivers for the Workstations & Others business are discussed above, here is the detailed P&L.
Note that HP reports financial information for fiscal year ended October 31st. For the purposes of our analysis, we have treated HP's fiscal year figures as equivalentto calendar year ended December 31st figures.
Workstations & Others: Detailed P&L
CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15 CY16 CY17 CY18 CY19
Revenues
Other Revenues (Bil $) 2.85 2.21 2.77 2.98 2.83 2.68 2.55 2.42 2.30 2.07 1.86 1.68
Other Revenues ($ Bil) 2.85 2.21 2.77 2.98 2.83 2.68 2.55 2.42 2.30 2.07 1.86 1.68
Total Revenues (Bil $) 2.85 2.21 2.77 2.98 2.83 2.68 2.55 2.42 2.30 2.07 1.86 1.68
Expenses
Direct Expenses (Bil $) 2.61 2.01 2.52 2.69 2.57 2.44 2.31 2.19 2.08 1.88 1.69 1.52
Other EBITDA Margin (%) 8.63 8.74 9.14 9.56 9.06 9.26 9.46 9.46 9.46 9.46 9.46 9.46
Indirect Expenses (Mil $) 71.1 49.3 131 185 389 171 188 174 160 147 136 126
Corporate Costs as % of Sales (%) 2.60 3.29 3.44 3.45 21.1 5.24 5.49 4.99 4.39 4.39 4.39 4.39
Tax rate (%) 19.9 19.1 20.5 18.7 22.7 23.7 23.7 23.7 23.7 23.7 23.7 23.7
Capex as % of Sales (%) 2.24 2.74 2.48 3.09 3.29 3.39 3.49 3.69 3.89 4.09 4.29 4.49
Change in Net Working Capital
as % of Sales (%)0.96 -1.62 1.35 0.42 -1.18 -0.41 0.30 -0.09 -0.15 0.01 0.02 0.02
Change in Net Operating Assets
as % of Sales (%)-3.44 -2.31 -1.02 0.41 0.65 -0.49 -0.03 0.11 0.04 -0.10 -0.00 0.09
Total Expenses (Bil $) 2.68 2.06 2.65 2.88 2.96 2.61 2.50 2.37 2.24 2.02 1.83 1.65
Adjusted EBITDA (Mil $) 245 192 253 284 256 248 241 229 217 196 176 158
Free Cash Flow (Mil $) n/a n/a n/a n/a -132 77.2 52.9 55.0 57.7 48.4 39.5 32.6
TREFIS ANALYSIS for HP [email protected] + 1 617 394 8763 •63
Detailed P&L for the High-end Serversbusiness The most important drivers for the High-end Servers business are discussed above, here is the detailed P&L.
Note that HP reports financial information for fiscal year ended October 31st. For the purposes of our analysis, we have treated HP's fiscal year figures as equivalentto calendar year ended December 31st figures.
High-end Servers: Detailed P&L
CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15 CY16 CY17 CY18 CY19
Revenues
Biz. systems revenue (Bil $) 3.40 2.43 2.29 2.45 1.46 1.30 1.16 1.10 1.06 1.01 0.97 0.93
Biz. systems shipments (K) 472 359 359 384 268 260 253 255 260 265 271 276
Biz. systems Pricing (K $) 7.19 6.77 6.38 6.38 5.42 4.99 4.59 4.31 4.06 3.81 3.58 3.37
Total Revenues (Bil $) 3.40 2.43 2.29 2.45 1.46 1.30 1.16 1.10 1.06 1.01 0.97 0.93
Expenses
Direct Expenses (Bil $) 2.89 2.06 1.88 2.04 1.21 1.08 0.97 0.92 0.88 0.84 0.81 0.78
Biz. systems EBITDA Margin (%) 15.1 15.2 18.0 16.8 16.8 16.8 16.8 16.8 16.8 16.8 16.8 16.8
Indirect Expenses (Mil $) 147 94.8 213 268 371 150 152 140 130 128 126 124
Corporate Costs as % of Sales (%) 2.60 3.29 3.44 3.45 21.1 5.24 5.49 4.99 4.39 4.39 4.39 4.39
Tax rate (%) 19.9 19.1 20.5 18.7 22.7 23.7 23.7 23.7 23.7 23.7 23.7 23.7
Capex as % of Sales (%) 2.24 2.74 2.48 3.09 3.29 3.39 3.49 3.69 3.89 4.09 4.29 4.49
Change in Net Working Capital
as % of Sales (%)0.96 -1.62 1.35 0.42 -1.18 -0.41 0.30 -0.09 -0.15 0.01 0.02 0.02
Change in Net Operating Assets
as % of Sales (%)-3.44 -2.31 -1.02 0.41 0.65 -0.49 -0.03 0.11 0.04 -0.10 -0.00 0.09
Total Expenses (Bil $) 3.03 2.16 2.09 2.31 1.59 1.23 1.12 1.06 1.01 0.97 0.94 0.90
Adjusted EBITDA (Mil $) 511 370 413 411 244 218 194 184 177 170 163 156
Free Cash Flow (Mil $) n/a n/a n/a n/a -126 67.8 42.7 44.3 47.0 41.9 36.5 32.0
TREFIS ANALYSIS for HP [email protected] + 1 617 394 8763 •64