HP_2012-11-21

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

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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

http://www.trefis.com

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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



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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


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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


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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



http://www.google.com


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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.


— 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




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.


— 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




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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.


— 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




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


— PRINTER & CARTRIDGES EBITDA MARGIN —





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




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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.



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


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








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.


— 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







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.










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









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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


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

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— 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.


— IND. SERVER EBITDA MARGIN —





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





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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.



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










•

•

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




1.

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.


— APPLICATION OUTSOURCING EBITDA MARGIN —







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




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.










In addition, you can see the detailed P&L for the Application Outsourcing business in the Appendix (link)










•

•

•

•

1.

2.

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



1.

2.

3.

that saw notebook shipments overtake desktop shipments).


— 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




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.


— 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




1.

2.

Going forward we expect Global Notebooks & Netbooks Sold to increase though at much slower than historical rate.


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.


— NOTEBOOKS & NETBOOKS EBITDA MARGIN —







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.


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



8.

•

•

•

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.



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










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.


— 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




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.


— SOFTWARE EBITDA MARGIN —





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




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)


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



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








•

•

•

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





— 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.


— 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





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).



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




Indirect Expense (Mil $) 79.9 87.6 213 330 751 342 405 422 432 468 515 564




•

•

•

•

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


Adjusted EBITDA (Mil $) 276 341 412 506 494 497 519 555 588 622 664 709


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





— 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.


Mitigating:


— 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





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.


— DESKTOPS EBITDA MARGIN —





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




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.




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






Free Cash Flow (Mil $) n/a n/a n/a n/a -659 343 209 197 184 146 112 87.3





•

•

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.


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




— BUSINESS PROCESS OUTSOURCING EBITDA MARGIN —








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.










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




•

•

•

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.




Indirect Expense (Mil $) 69.6 157 317 336 743 320 352 342 338 357 378 403


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





— 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:


— HP NETWORKING EBITDA MARGIN —





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





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.



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



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




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





•

•

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.



— STORAGE EBITDA MARGIN —



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






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



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




Indirect Expense (Mil $) 180 134 364 372 747 302 315 299 275 267 256 242







•

•

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.


— OTHER EBITDA MARGIN —



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






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.



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






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





•

•

•

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.


— 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




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.


— BIZ. SYSTEMS EBITDA MARGIN —





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




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.



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




Indirect Expense (Mil $) 147 94.8 213 268 371 150 152 140 130 128 126 124







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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


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


8.85 12.8 13.2 13.4 13.8 14.0 13.7 13.3 14.7 16.0 17.8 19.7










1.33 2.86 2.74 2.68 2.78 2.92 3.09 3.33 3.56 3.80 4.04 4.30


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



Summary P&L for HP continued





8.85 12.8 13.2 13.4 13.8 14.0 13.7 13.3 14.7 16.0 17.8 19.7










1.33 2.86 2.74 2.68 2.78 2.92 3.09 3.33 3.56 3.80 4.04 4.30


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



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


9.50 14.5 13.9 13.4 13.8 14.0 13.7 13.3 14.7 16.0 17.9 19.8










1.43 3.24 2.88 2.67 2.78 2.91 3.09 3.33 3.56 3.81 4.06 4.33


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





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


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.


Summary P&L for HP continued


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


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


Revenues


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


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


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


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


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.


Infrastructure Outsourcing: Detailed P&L continued




Printers & Ink Cartridges: Detailed P&L


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


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


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


Expenses


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



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


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


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



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.


Printers & Ink Cartridges: Detailed P&L continued




Technology Services: Detailed P&L


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


Expenses


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



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


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


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





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.


Industry Servers: Detailed P&L


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


Expenses


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



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


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


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





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.


Application Outsourcing: Detailed P&L


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


Expenses


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



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


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


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





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.


Notebooks & Netbooks: Detailed P&L


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


Expenses


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



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


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


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





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.


HP Software: Detailed P&L


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


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



Expenses


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



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


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


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





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.


Financial Services: Detailed P&L


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


Expenses


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


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


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


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





Detailed P&L for the Desktops business The most important drivers for the Desktops business are discussed above, here is the detailed P&L.


Desktops: Detailed P&L


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


Expenses


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



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


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


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



Free Cash Flow (Mil $) n/a n/a n/a n/a -659 343 209 197 184 146 112 87.3


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.


Business Process Outsourcing: Detailed P&L


Revenues


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


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



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


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


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


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



Free Cash Flow (Mil $) n/a n/a n/a n/a -254 144 98.9 108 121 116 109 104


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.


HP Networking: Detailed P&L


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


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


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


Expenses


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



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


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


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





Detailed P&L for the Storage business The most important drivers for the Storage business are discussed above, here is the detailed P&L.


Storage: Detailed P&L


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


Expenses


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


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


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


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





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.


Workstations & Others: Detailed P&L


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


Expenses


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



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


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


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





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.


High-end Servers: Detailed P&L


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


Expenses


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


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


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


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





HP_2012-11-21

Documents

outsourcing services

hp market share

hp networking ebitda

storage ebitda margin

desktops ebitda margin

software ebitda margin

server ebitda margin

systems ebitda margin