Financial Mgmt Assignment 1 - IT

8/2/2019 Financial Mgmt Assignment 1 - IT

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Financial Analysis Assignment 1

IT-Industry

Hewlett Packard (HP) vs. IBM vs. Dell

Presented by:

Bayer, Stefanie

Hermann, Hans-Joachim

Popescu, Christian

Puzo, Edgars

Stoll, Jrgen

Lecturer:Dirk Zimmermann

MBA GM06 (Spring 2010)

Due Date: 23.04.2010


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Financial Management Financial Analysis IT-Industry

Table of contents

Index of Illustrations ......................................................................................................... ii

Index of Tables ................................................................................................................. iii

1. The IT Industry .......................................................................................................... 1

2. Hewlett Packard (HP), IBM and Dell ........................................................................ 4

2.1. Company Profile - HP................................................................................................ 4

2.2. Company Profile IBM ............................................................................................ 4

2.3. Company Profile - Dell .............................................................................................. 5

3. Profit & Loss and financial ratios .............................................................................. 7

4. Other financial ratios ............................................................................................... 12

4.1. Liquidity................................................................................................................... 12

4.2. Leverage................................................................................................................... 14

4.3. Coverage .................................................................................................................. 15

4.4. Activity .................................................................................................................... 16

4.4.1. Operating Cycle and Cash Cycle Analysis ....................................................... 16

4.4.2. Receivables Turnover Analysis ........................................................................ 19

4.4.3. Payables Turnover Analysis ............................................................................. 20

4.4.4. Inventory Turnover Analysis ............................................................................ 21

4.4.5. Total Asset Turnover ........................................................................................ 22

5. Recommendations .................................................................................................... 24

Bibliography .................................................................................................................... 26

Appendix ......................................................................................................................... 28


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Index of Illustrations

Illustration 1: Forecasted IT Sales 2010 ........................................................................... 1

Illustration 2: Fiscal years of HP, IBM and Dell .............................................................. 7

Illustration 3: Comparison of Gross profit margins .......................................................... 9

Illustration 4: Comparison of Net profit margins ............................................................ 10

Illustration 5: Comparison of ROE ................................................................................. 10

Illustration 6: Comparison of number of shares outstanding .......................................... 11

Illustration 7: Comparison of Earnings per share ........................................................... 11

Illustration 8: Current Ratio of HP, IBM and Dell.......................................................... 13

Illustration 9: Quick Ratio of HP, IBM and Dell ............................................................ 13

Illustration 10: Comparison of D/E Ratio ....................................................................... 15

Illustration 11: Comparison of Debt to Total Assets Ratio ............................................. 15

Illustration 12: Comparison of Interest Coverage Ratio ................................................. 16

Illustration 13: Operating Cycle of HP, IBM and Dell ................................................... 17

Illustration 14: Cash cycle of HP, IBM and Dell ............................................................ 18

Illustration 15: Receivables Turnover of HP, IBM and Dell .......................................... 20

Illustration 16: Payables Turnover in days of HP, IBM and Dell ................................... 21

Illustration 17: Payables Turnover of HP, IBM and Dell ............................................... 21

Illustration 18: Inventory Turnover in days of HP, IBM and Dell.................................. 22

Illustration 19: Inventory Turnover of HP, IBM and Dell .............................................. 22

Illustration 20: Total Asset Turnover .............................................................................. 23

Illustration 21: HP Balance Sheet for October 31st 2007, 2008 and 2009 ..................... 29

Illustration 22: HP Income Statement for fiscal years 2007, 2008 and 2009 ................ 30

Illustration 23: HP Income Statement - Additional subtotals ......................................... 30

Illustration 24: IBM Balance Sheet for December 31st 2007, 2008 and 2009 ............... 31

Illustration 25: IBM Income Statement for fiscal years 2007, 2008 and 2009 ............... 32

Illustration 26: IBM Income Statement - Additional subtotals ....................................... 32

Illustration 27: Dell Balance Sheet for Feb 1st 2008, Jan 30th 2009 and Jan 29th 2010 33

Illustration 28: Dell Income Statement for the fiscal years 2008, 2009 and 2010 .......... 34

Illustration 29: Dell Income Statement Details ............................................................ 35


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Index of Tables

Table 1: Sales, Sales Development and CAGR of the three competitors ......................... 8

Table 2: Gross profit, Operating and Net profit margin of the three competitors ............ 8

Table 3: Liquidity Ratios for HP, IBM and Dell ............................................................ 12

Table 4: Financial Leverage (Debt) Ratios for HP, IBM and Dell ................................. 14

Table 5: Interest Coverage Ratio of HP, IBM and Dell over the last three fiscal years . 15

Table 6: Receivables Turnover for HP, IBM and Dell ................................................... 19

Table 7: Total Asset Turnover for HP, IBM and Dell .................................................... 23

Table 8: Financial Ratios HP .......................................................................................... 35

Table 9: Financial Ratios IBM ........................................................................................ 36

Table 10: Financial Ratios Dell....................................................................................... 37

Table 11: Comparison of HP's Financial Strength to Industry, Sector and S&P 500 ..... 37

Table 12: Interest Coverage Ratio of HP compared to Industry and S&P 500............... 37

Table 13: Direct Competitor Comparison HP, IBM, Dell and Industry Averages ......... 38


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1. The IT IndustrySince beginning of 2010, the global IT Industry experienced increasing investment

activities in new IT solutions by many companies around the world, reflecting renewed

optimism and strengthening balance sheets among IT companies. The technology

downturn of 2008 and 2009 is almost over and most pieces are in place for a 2010 tech

spending rebound. Many macro-economic indicators have improved over the past six

months, lending factual support to the positive perceptions of IT executives, said Tim

Herbert, vice president, research at CompTIA (IT Industry Business Confidence Index),

in a statement. The IT market of the industrialized countries will stabilize over 2010,

France and Germany are expected to grow by 1.4% this year, the US market is still

slightly negative and China is growing by 11%, representing the growth engine for the

global IT business (Illustration 1).

Illustration 1: Forecasted IT Sales 2010

According to Forrester Research, global ICT (information and communication

technology) spending of companies will increase more than 8% in 2010 to $1.6 trillion

mainly on the strength of improved hardware and software sales.

Focusing on the global IT industry, the market is divided into the three major categories

Hardware, Software and IT-Services. Sales for the global IT industry will increase by

5.8% to $1.4 trillion in 2010 and the market will continue to grow by 4% in 2011, as


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stated by the European Information Technology Observatory (EITO), an international

market research firm.

Forrester Research predicts an 8.2% improvement in computer equipment sales and a

9.7% jump in new software sales. IT consulting and systems integration services will

grow 6.8%, according to Forrester's latest estimates. We are entering a new six- to

seven-year cycle of IT growth and innovation, Andrew Bartels, a Forrester vice

president and principal analyst, said 2010 marks the beginning of this next phase of

technology advancement. Gartner Inc., the world's leading information technology

research and advisory company, sees the biggest growth opportunity in IT-Services over

the next years.

Most companies within the industrialized countries are investing in modern IT systems

again. Financial management companies, the public sector and energy providers are

expected to spend more on IT. Therefore providers of software and IT-services are

benefiting the most from the recovery. EITO has identified the emerging countries

Brazil, China and India as driving forces for stimulating IT market growth over the next

years. The BRIC countries are not yet as far advanced in IT as the industrial countries

but they are catching up quickly said Prof. August-Wilhelm Scheer, president of the

German EITO partner association BITKOM, during a speech at the CeBIT in Hanover,Germany. In the EU, the market will grow in 2010 by only 0.2%, to $423 billion. In the

U.S., sales in IT hardware, software and IT services will drop slightly in 2010, down

0.8% to $425 billion but for the BRIC countries IT sales will grow by 11% in average in

2010.

New developments in technology have changed the IT environment. Gartner Inc. has

identified the driving trends and market opportunities for the IT goods and services

industry: Cloud Computing (.allows even the smallest organization to access

enterprise-class technology with minimal up-front costs and easy scalability), IT-

Security, Managed IT-Services (e.g. outsourcing services), Mobile Applications (Apple

iPhone, mobile commerce etc.) and Green IT (e.g. use of e-documents, reducing travel

and energy consumption)

Cloud Computing is the biggest market opportunity in Europe assuming growth rates of

20% year over year. The principle of using software applications and computer


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performance as needed will become widely established, said Prof. Scheer from the

BITKOM association.

Taking the potential shift from basic infrastructure investments to IT-solutions that are

more focused on driving revenue and efficiency, technology providers that can leverage

strong relationships and effectively communicate the business value of technology

should continue to see opportunities. More and more customers want technology

partners that truly understand their business needs and are able to provide scalable

solutions. Providers that focus on these core values, while helping customers understand

the potential business impact of IT investments, should see continued success despite

the expected economic challenges in the coming year, as stated by CompTIA.


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2. Hewlett Packard (HP), IBM and Dell2.1. Company Profile - HPHP is an integrated IT provider, which sells products, software and solutions to both

consumers and enterprises. HP has a complex global organizational structure of the

following business segments: Services, Enterprise Storage and Servers, Software,

Personal Systems, Imaging and Printing, Financial Services and Investments.

Despite the diversity in its portfolio, HP in the past years started to shift the portfolio

mix to IT services direction ( the acquisition of Electronic Data Systems Corporation in

August 2008.) by introducing IT outsourcing, Consulting and Technology Services.

HP has a leading position in every key products and services segment. In parallel, HP is

entering new high margin segments like Networks (in November 2009 definitive

agreement to acquire 3Com Corporation). In addition, HP is strengthening regional

presence by investing in emerging markets such as Brazil China and India.

HP is using different selling channels (direct or partners) depending on the business

segment and region. In fact, HP is widely cooperating both with outsourced

manufacturers ("OMs") for products and the broad partners base for developing

software and IT solutions. In addition, HP is cooperating with third-party OEMs in

order to sell some part of their portfolio under HPs brand. The business models for HP

products are based on building products to order and configuring products to order.

HP is facing competition on different aspects, such as, price, technology and quality.

HP has different portfolio elements have different life cycles As well, HP products life

cycle is shorter, in opposite, HP services/projects life cycle is longer. HP is

continuously investing research and development (2.8 USD billion in fiscal year 2009).

Source: (10-K Report HP, 2009)

2.2. Company Profile IBMIBM is one the largest IT companies in the world, having long history of success and

innovations. Through recent years it has been working hard to optimize its portfolio and

improve profit margins. And IBM was successful to move from low-margins product

business to high-margins IT services and outsourcing.


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Despite having the great success and enjoying high profit margins, IBM is continuing

this strategy by divesting the product business and strengthening services along with

investments in growth markets. As well as, IBM is driving global programs like

Business Analytics and Cloud Computing in order to move higher in value chain.

IBM is having a flexible business model with the focus on long-term activities.

This model relies on its global capabilities like services, software, systems, research and

financing. IBM is accordingly structured into following business units Global

Technology Services, Global Business Services, Software, Systems and Technology

and Global Financing. IBM is operating on worldwide base, being a global IT provider

operating in more than 170 countries.

The majority of IBMs revenues come from 6 industries: Financial Services, Public,

Industrial, Distribution, Communications, and General Businesses. IBM is facing fear

competition on the global and local basis, across all its business units and

product/services portfolios. In order to stay competitive, IBM is investing annually

around 6 USD billion in research and development.

Source: (Annual Report 2009 IBM, 2009)

2.3. Company Profile - DellDell Corporation was setup in 1984 by its founder and current CEO Michael Dell.

He brought and realized the new simple concept on the market selling customized

computers directly to customers. And this simple concept made Dell the number two

supplier of computers in the world.

Starting from the narrow range of products Dell was able to expand its portfolio and to

step in into IT services area. As well as, Dell was being capable to find new

distribution channels to customers through retailers, VARs and distributors. In parallel,

Dell was moving from US to new regions and countries around the world. Now Dell is

operating in the following segments: Americas; Europe, Middle East and Africa; Asia

Pacific-Japan and Globally.

The production sites of Dell are setup on the worldwide basis. Nowadays, Dell is more

and more using third-party OEMs. Dell is using standard technologies for producing its


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products at the same time trying to include all features which can attract customers. Dell

currently has the following products categories: mobility products, desktop PCs,

software and peripherals, servers and networking, services, and storage.

Dell is working in highly dynamic and technology-driven industry with continuous

product and price competition. Dell has to manage two crucial aspects: Technological

advance and Cost position. Dell is investing a lot in research and development and holds

2,253 patents in 2009. As well as, Dell has implemented several programs for reducing

overall costs and reshaping the portfolio of the products in order to improve its product

profit margins.

Source: (Form 10-K for Fiscal Year 2009 Dell, 2009)


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3. Profit & Loss and financial ratiosLooking at the P&L Statements of all 3 companies one can observe that the financial

crisis has affected Revenue figures across the board. Costs, generally speaking, have

also been reduced in order to weather the difficult economic environment as well as to

face increased competition in the fight for market share. In the following, we will take

an in-depth look at how HP has been managing their business by looking at its P&L for

the last 3 full fiscal years (2007, 2008 and 2009) compared to its peers IBM and Dell.

Our analysis is based on the official Financial Statements of the companies given for the

fiscal years that overlapped the most.

HP set its fiscal year from November 1st until October 31st. For our analysis we

used the Financial Statements from 2007, 2008 and 2009

IBM uses the calendar year as the fiscal year. Therefore we also used the

Financial Statements from 2007 to 2009.

Dell accounts February 1st until January 31st as their fiscal year. To use the most

recent numbers we decided to take the Financial Statements from 2008, 2009

and 2010 for our analysis.

Below you find a table showing the fiscal years of the three companies and theoverlapping months.

Illustration 2: Fiscal years of HP, IBM and Dell

First, in order to get a better picture of how difficult the environment proved to be,specifically in 2009, we can note that all three companies experienced negative growth

in terms of Sales revenue.

HPs Sales revenue figure dropped by 3.22% compared to 2008. Dells performance

negatively outpaced HP by generating 13.42% less revenue during the same period.

Although IBM did slightly better than Dell, the company wasnt able to match its 2008

figures. Instead, IBM generated 7.6% less Revenue in 2009. This translated into a

CAGR (fiscal years 2007-2009) for HP, Dell and IBM of 4.81%, -1.54% and -6.98%

respectively.


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2007(08) 2008(09) 2009(10)

Sales (in millions), Sales Development from 2007 2008 and 2008 2009

HP $104,286 $118,364 $114,552

13.50% -3.22%

IBM $98,786 $103,630 $95,758

4.90% -7.60%Dell $61,133 $61,101 $52,902

-0.05% -13.42%

CAGR (Compound Annual Growth Rate) 2007 2009

HP 4.81%

IBM -1.54%

Dell -6.98%

Table 1: Sales, Sales Development and CAGR of the three competitors

Based on this underlying information, we begin our in-depth look by looking at thegross profit margin.

2007(08) 2008(09) 2009(10)

Gross profit margin

HP 24.55% 24.22% 23.59%

IBM 42.24% 44.06% 45.72%

Dell 19.09% 17.93% 17.51%

Operating margin

HP 8.36% 8.85% 8.85%IBM 14.65% 16.49% 19.00%

Dell 5.63% 5.22% 4.11%

Net profit margin

HP 6.97% 7.04% 6.69%

IBM 10.55% 11.90% 14.02%

Dell 4.82% 4.06% 2.71%

Table 2: Gross profit, Operating and Net profit margin of the three competitors

HP has managed to keep this key profitability ratio relatively stable at 24.55% (2007),24.22% (2008) and 23.59% (2009). This represents a cumulative 0.95% decrease and a

negative gross profit margin growth of 3.9% over the three year period. Checking the

underlying figures we see that the slight decrease was mainly due to a heavy increase in

Costs of services incurred (+105.2%) over the same period. With regards to managing

operating expenses, HP was able to maintain its operating margin relatively flat at

8.36% (2007), 8.85% (2008), and 8.85% (2009). The effect of this was passed on to its

net profit margin which oscillated from 6.97% (2007), to 7.04% (2008) and finally

down to 6.69% (2009). At the same time, Dell has been struggling with a deteriorating

gross profit margin of 19.09% (2007), 17.93% (2008) and 17.51% (2009) respectively.


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Dells operating margin did not fare any better. During the three year period the

operating margin decreased from 5.63% (2007) and 5.22% (2008) to 4.11% (2009).

Subsequently, its Net profit margin was almost cut in half beginning at 4.82% (2007),

4.06% (2008) and finally reaching 2.71% (2009). IBM, on the other hand, has not only

kept its gross profit margin above an impressive 40%, but has constantly improved from42,24% (2007) to 44.06% (2008) and 45.72% (2009) respectively. At the same time,

IBM was able to reduce its operating expenses by 10.4% (yoy 2009 vs. 2008) which had

a follow-through effect on IBMs net profit margin. Due to this effect, net profit margin

has accelerated from 10.55% (2007) and 11.90% (2008) up to 14.02% (2009). This

translates into an overall growth in net profit margin of 32.9% over the three year

period, clearly making IBM Best-in-class with regards to not only maintaining but

increasing profit margins (see Illustration 3 and Illustration 4) during an entiremacroeconomic contraction.

Illustration 3: Comparison of Gross profit margins

0%

10%

20%

30%

40%

50%

2007 2008 2009

HP 24,55% 24,22% 23,59%

IBM 42,24% 44,06% 45,72%

Dell 19,09% 17,93% 17,51%

Gross profit margin


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Illustration 4: Comparison of Net profit margins

With regards to its stockholders, HP has been able to generate a ROE (Rate of return on

common stockholders equity) of 18.47% (2007), 21.18% (2008) and 19.48% (2009).

Over the same three year period, Dell generated a ROE of 64.78% (2007), 54.47%

(2008), and 31.50% (2009). IBMs ROE increased from 48.40% (2007), 57.30% (2008)

to 62.38% (2009). All three companies (see Illustration 5 and Illustration 6) reached

these respective figures in part by continuously buying back shares in order to reduce

the number of outstanding common stock and thus stabilize or in the case of IBM

increase the ROE by 5.07% yoy 2008/2009. Dells fall in net income of 51.4% since

2007, however, has outweighed the positive effect of buying back its shares and

therefore could not stop the negative ROE trend illustrated above.

Illustration 5: Comparison of ROE

0%

5%

10%

15%

2007 2008 2009

HP 6,97% 7,04% 6,69%

IBM 10,55% 11,90% 14,02%

Dell 4,82% 4,06% 2,71%

Net profit margin

0%

10%

20%

30%

40%

50%

60%70%

2007 2008 2009

HP 18,47% 21,18% 19,48%

IBM 48,40% 57,30% 62,37%

Dell 64,78% 54,47% 31,50%

ROE


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Illustration 6: Comparison of number of shares outstanding

Looking at bottom-line figures, HP has been able to keep 2009 EPS (Earnings per

share) above the 2007 level of $2.76 at $3.21. However, 2009 EPS came in 4.2% lower

than 2008 EPS. Dells 2009 EPS plummeted 41.4% to $0.73 compared to 2008 EPS due

to the numerous follow-through effects stated above. IBM once again topped the list by

generating a 12.6% increase in earnings to $10.01 for 2009 EPS compared to the year

before.

Illustration 7: Comparison of Earnings per share

All in all, HP proves to be on the right track with its current strategy of entering the high

margin service sector. Once, HP is able to get a better grip on cost of services while

continuing to grow its service business it can replicate the profitability margins IBM

enjoys today.

0

500

1.000

1.500

2.000

2.500

3.000

2007 2008 2009

HP 2.630 2.438 2.388

IBM 1457 1388 1341

Dell 2.223 1.980 1.954

No. of shares outstanding (in millions)

0

2

4

6

8

10

12

2007 2008 2009

HP 2,76 3,35 3,21

IBM 7,15 8,89 10,01

Dell 1,33 1,25 0,73

EPS


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4. Other financial ratios4.1. LiquidityLooking at the current ratios of the three companies, we can see that HP is the least

liquid company.

2007(08) 2008(09) 2009(10)

Current Ratio

HP 1.21 0.98 1.22

IBM 1.20 1.15 1.36

Dell 1.07 1.36 1.28

Acid-Test / Quick Ratio

HP 1.00 0.83 1.08

IBM 1.14 1.09 1.29

Dell 1.01 1.30 1.22

Table 3: Liquidity Ratios for HP, IBM and Dell

The Current Ratio over the last two years as well as the Quick Ratio over the last three

years is the lowest one in the group. Especially in the fiscal year 2008 both ratios were

with 0.98 and 0.83 lower than 1 which might indicate that HP had difficulties meeting

its short-term obligations. Even though both ratios improved last year up to 1.22 and

1.08, the liquidity of HP is not as good as IBMs, who is the best-in-class. IBM reacheda Current Ratio of 1.20 in 2007 an improved this ratio up to 1.36 in 2009. In addition,

the IBMs Quick Ratio starting with 1.14 in 2007 and a small downturn in 2008 where it

dropped to 1.09 increased to 1.29 in 2009. Dell on the other hand has almost the same

Current Ratio than HP with 1.28 in 2009. In contrast to HP, Dell had a higher Current

Ratio the year before with 1.36, which was even better than IBMs. Looking at the

Quick Ratio, Dell shows with 1.22 a much higher ratio than HP in 2009.


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Illustration 8: Current Ratio of HP, IBM and Dell

Also in comparison to the industry average of 1.59 and 1.22 for Current and Quick

Ratio (see Table 11), HP has room for improvement of their liquidity. The positive

changes from 2008 to 2009 can be explained by HPs reduction of notes payable and

short-term borrowings; current assets almost stayed the same (see HPs Balance Sheet,

Illustration 21). To further improve liquidity HP could decrease their accounts

receivable by paying back suppliers. The resources to do this could be provided for

example by issuing stock.

Illustration 9: Quick Ratio of HP, IBM and Dell

0,0

0,2

0,4

0,6

0,8

1,0

1,2

1,4

2007 2008 2009

HP 1,21 0,98 1,22

IBM 1,20 1,15 1,36

Dell 1,07 1,36 1,28

Current Ratio

0,0

0,20,4

0,6

0,8

1,0

1,2

1,4

2007 2008 2009

HP 1,00 0,83 1,08

IBM 1,14 1,09 1,29

Dell 1,01 1,30 1,22

Quick Ratio


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4.2. LeverageThe degree to which the companies are financed by debt can be analyzed with the Debt-

to-Equity Ratio.

2007(08) 2008(09) 2009(10)

Debt-to-Equity Ratio

HP 1.30 1.91 1.83

IBM 3.23 7.13 3.82

Dell 6.35 5.20 4.97

Debt-to-Total-Assets Ratio

HP 0.57 0.66 0.65

IBM 0.76 0.88 0.79

Dell 0.86 0.84 0.83

Table 4: Financial Leverage (Debt) Ratios for HP, IBM and Dell

HP has a very good leverage position which outruns those of its competitors. With a

ratio of only 1.3, 1.91 and 1.83 for the fiscal years 2007, 2008 and 2009 HP can be

satisfied; the level of usage of borrowed money to money provided by stockholders

exceeds those of the two competitors. In comparison, IBMs D/E ratio increased from

3.23 to 7.13 in 2008 and decreased again to 3.82 in 2009. Dells position is worse. Even

though the D/E ratio l with 6.35 in 2007, the ratio dropped to 5.20 for 2008 down to

4.97 in 2009, its still the worst of the three competitors.

Subsequently the Debt-to-Total-Assets Ratio also shows HPs good position to finance

its assets with debt. Around 35% of the financing for the firms assets was provided by

shareholders equity in 2009 whereas Dell and IBM could finance only 20% or lower

without using borrowed money. Also the years before, HP outperformed its competitors

in this area as you can see in Table 4.


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Illustration 10: Comparison of D/E Ratio

Illustration 11: Comparison of Debt to Total Assets Ratio

4.3. CoverageThe Interest Coverage Ratio or Times Interest Earned indicates the ability of a company

to cover the interest charges.

2007(08) 2008(09) 2009(10)

Interest Coverage Ratio

HP 16.42 22.43 16.98

IBM 23.69 25.40 45.25

Dell 76.44 34.30 13.58

Table 5: Interest Coverage Ratio of HP, IBM and Dell over the last three fiscal years

0,0

1,0

2,0

3,0

4,05,0

6,0

7,0

8,0

2007 2008 2009

HP 1,30 1,91 1,83

IBM 3,23 7,13 3,82

Dell 6,35 5,20 4,97

Debt to Equity Ratio

0,00,10,2

0,30,40,50,60,70,80,9

2007 2008 2009

HP 0,57 0,66 0,65

IBM 0,76 0,88 0,79

Dell 0,86 0,84 0,83

Debt to Total Assets Ratio


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Based on the earnings before taxes and the interest expense paid over the last year, HP

was able to cover its financial charges 16.42, 22.43 and 16.98 times with its earnings in

the years 2007 to 2009. Compared to IBM, who reached 23.69, 25.40 and exceptional

45.25 over the last three fiscal years, and the industry average with 29.3 (see Table 12)

this number is relatively low. With exception of the last year also Dell performed betterin this category reaching ratios of 76.44, 34.30 and 13.58. Even though this ratio is not

dangerously low, HP should be careful issuing more debt and become obligated to pay

more interest in the following years.

Illustration 12: Comparison of Interest Coverage Ratio

4.4. Activity4.4.1. Operating Cycle and Cash Cycle AnalysisHPs operating cycle is between 89 and 80 days with an average of 82 days.

Comparing with IBMs average 119 days and Dells 43 days operating cycle this ratio is

mainly driven by the firms business model which significantly differs between the

three companies.

IBM is the IT reference company with a very high service share in their revenues.

Consequently, IBM being a giant in the IT service industry is dependent on very large

projects characterized by integrated customer financing terms and deferred cash

collection. On the payable side internal salaries, fixed cost payments, HW/SW

purchases and upfront payments to the supplier base extend the cycle time.

0

10

20

30

40

50

60

70

80

2007 2008 2009

HP 16,42 22,43 16,98

IBM 23,69 25,40 45,25

Dell 76,44 34,30 13,58

Interest Coverage Ratio


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On the receivable side extended customer payment terms of 102 days on average are a

heavy financing burden. As IBM has a lot of financial power more than any

competitor - to offer these terms to customers this is most likely also a differentiating

factor in the acquisition of new customers and new projects in the market and therefore

to some degree part of IBMs business model.

Dell on the other hand is focused on HW sales of custom made products. The products

are computers of various product lines, predominantly made to customer order. All

components, accessories are kept in fast turning warehouses, finished products are

shipping direct to the end customer. Inventory is driven by sophisticated forecasting

models and employs vendor managed inventories, consignment stocks and well

managed own stock for fast turning accessories.

An overall operating cycle time of 43 days is proof of an extremely efficient operating

model.

Illustration 13: Operating Cycle of HP, IBM and Dell

Cash collection is extremely fast with payment in advance, credit card payments on

shipment and cash on delivery (COD). Delivery on invoice is targeted at the business

customers and involves short payment terms as well.

As a consequence Dells cash cycle indicates a negative time interval of 22 to 25 days

which is an outstanding performance. With such a cash model Dell collects payments

0

20

40

60

80

100

120

140

2007 2008 2009

HP 89 78 80

IBM 119 114 124

DELL 41 40 47

Operating Cycle (days)


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from customers on average 23 days before the suppliers are paid. This allows Dell to

keep a high cash amount for investment purposes. As mentioned this is due to a unique

operating model (build-to-order and payment on order, shipment or delivery) which

cannot be easily copied to the compared companies HP and IBM.

HPs revenues have been dominated by HW sales of mainly high-end test- and

measurement equipment (which were the roots of the company), computers and

printers. During the recent decade HP has sold off the test- and measurement equipment

in a spin-off (Agilent), has strengthened their computer product offering due to the

acquisition of Compaq and continued to invest in their printer division. Gradually the

product offering was complemented with a professional service offering, in particular to

support the higher range industrial and server range computer platforms. There is one

more distinction between HP and Dell: HP offers standard products off the shelf and

hold inventory of finished products in their worldwide distribution network. The

financial impact becomes visible in the ratio analysis.

According to the HP operating model the operating cycle and cash cycle are

characterized by larger time intervals than at Dell. HP has an 82 days average operating

cycle vs. Dell 43 days.

Keeping finished goods inventory in order to maintain short delivery intervals for build-

to-stock products has a financial impact.

Illustration 14: Cash cycle of HP, IBM and Dell

-40

-20

0

20

40

60

80

100

2007 2008 2009

HP 40 35 36

IBM 91 88 95

DELL -22 -22 -25

Cash Cycle (days)


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4.4.2. Receivables Turnover AnalysisWe have identified the general differences of the receivable turnover for each firm and

the relation to the operating model employed.

2007(08) 2008(09) 2009(10)

Receivables Turnover / Receivables Turnover in days

HP 6.67 7.57 7.33

55 48 50

IBM 3.56 3.74 3.46

102 98 106

Dell 11.10 11.09 9.60

33 33 38

Table 6: Receivables Turnover for HP, IBM and Dell

Looking at the development over the past three year period HP shows a flat

performance with a 7.5 average turnover rate. The trend line is slightly heading

downward. IBM has increased their receivable interval from 102 to 106 days slightly,

the turnover rate decreased by 0.1 point. A possible explanation is the competitive

situation in the service business and the strategy of the industry heavyweights to use

their financial power to keep competitors at a distance.

Dell, however, lost ground and the industry leading 33 day receivable interval and 11.1

turns have decreased quite significantly in 2009 by 13% or receivables extended by full

5 days (+15%). This could be attributed to Dells venture into a new sales channel using

traditional distribution channels with standard products. As an attempt to increase

revenues and sustain growth rates the consequences are that some of the benefits of a

made-to-order model are given up. Consequently the financial ratios begin to inch

towards those of HP and other competitors in this regard.


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Illustration 15: Receivables Turnover of HP, IBM and Dell

4.4.3. Payables Turnover AnalysisThe main differences impacting the payable turnover rate are:

HPs operating model is based on an outsourced manufacturing model partnering with

EMS companies for material sourcing and product manufacturing. The payables

intervals have been maintained in a small range of 48 to 43 days, trending lower.

Assuming the payment intervals with the EMS companies being in the 30 to 45 day

range and stable, the growing share of services may contribute to a shortened payable

interval. Salaries and other upfront cost in service contracts may explain this trend.

IBM has the shortest payable intervals in the comparison group ranging from 26 to 29

days. This can be attributed to people related cost burden in service and project basis be

it internal or external personnel and the consequential short payment periods.

Dell has succeeded in extending the payment terms to suppliers even further. Dell is

manufacturing computers in their own factories as far as we could find out. Therefore

Dell sources directly from the large component suppliers and can leverage its

purchasing volume to agree on payment terms in the 60 to 90 day range. Improving the

payables terms by 10 days in a 3-year period is a 16% improvement.

0

2

4

6

8

10

12

2007 2008 2009

HP 7,5 7,6 7,3

IBM 1,5 1,5 1,4

DELL 11,1 11,1 9,6

Receivables Turnover


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Illustration 16: Payables Turnover in days of HP, IBM and Dell

Illustration 17: Payables Turnover of HP, IBM and Dell

4.4.4. Inventory Turnover AnalysisHP has managed to reduce inventory from 34 to 31 days which is a very good value for

an IT company generating sales from HW products. A continued outsourced

manufacturing model and thus minimizing component inventory in combination with an

increasing service business with less inventory involved is the explanation for this

positive trend.

IBM has a relatively flat performance on inventory carried and inventory turns. The

service business model employ less inventory compared to its two peers, but does not

provide much room for improvement either.

2007 2008 2009

DELL 62 62 72

IBM 28 26 29

HP 48 43 44

0

10

20

30

40

50

60

70

80

Payables Turnover (days)

0

2

4

6

8

10

2007 2008 2009

HP 7,5 8,6 8,3

IBM 5,6 5,6 5,1

DELL 5,9 5,9 5,1

Payables Turnover


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Dell is setting the benchmark for a fast turning hardware product business. With a mere

8 to 9 days of inventory, ultra high turn rates of 42.3 turns could be achieved. As

mentioned this is a result of a build-to-order model the company is built around. The

loss of 6.3 turns in 2009 can be attributed to the increased share of sales into traditional

computer distribution channels.

Illustration 18: Inventory Turnover in days of HP, IBM and Dell

Illustration 19: Inventory Turnover of HP, IBM and Dell

4.4.5. Total Asset TurnoverThis is a comparison of different operating models rather than individual company

performance. While HP and IBM maintain their overall asset turns in a relatively small

2007 2008 2009

DELL 8 8 9

IBM 17 16 18

HP 34 30 31

0

5

1015

20

25

30

35

40

Inventory Turnover (days)

0

10

20

30

40

50

2007 2008 2009

HP 10,7 12,2 11,9

IBM 21,8 22,1 19,8

DELL 47,9 48,6 42,3

Inventory Turnover


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corridor Dells drop in asset turnover is apparent in a decrease of turn rates from 10.2 in

2007, 8.8 in 2008 and 5.4 in 2009.

Illustration 20: Total Asset Turnover

2007(08) 2008(09) 2009(10)

Total Asset Turnover

HP 0.074 0.083 0.078

IBM 0.098 0.115 0.122

Dell 0.102 0.088 0.054

Table 7: Total Asset Turnover for HP, IBM and Dell

Total asset turnover 2007 - 2009

HP

IBM

DELL


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5. RecommendationsFrom the preceding financial ratio analysis following key findings can be summarized:

HP needs to significantly increase the gross margin

HP 24% (2009) IBM 45% (2009)

HP needs to significantly increase the net profit margin

HP -4% (2007 2009) IBM +33%

HP should shorten the operating cycle

HPs operating cycle is 82 days on average HP is not as customer oriented as service-heavyweight IBM (119d) HP is not as efficient as Dell (43d)

HPs inventory turnover needs improvement

HP 31 days Dell 9 days

Bottom line: comparing HP to the IT industry benchmarks HP is performing lower on

profitability when compared to the #1 IT service provider (IBM) and performing lower

on operational excellence compared to the leader in the IT hardware industry (Dell).

Trying to become the recognized #1 leading company in one or both segments HP

might consider following scenarios:

Option 1: Focus on consumer business (B2C) and sell off the professional

business (B2B)

Option 2: Focus on B2B and sell off the B2C business

Option 3: Spin-off professional and consumer business in 2 units, focus and

grow each unit in their market to become best-in-class.

Option 3 is our preference. Main reasons are that the goals for each of the

two units to become market leaders are achievable faster as synergies in

form of technological resources can be leveraged while the risk of timely

delays and legal risks are reduced.


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HPprofessional: ( increase margins, grow profits)

Strengthen service business, acquire LCC based service resources (WIPRO)

HPconsumer: ( increase revenues, margins, turns)

Tailor products to consumer market (cool products, services, marketing)

Address mobile IT market; consider partnership with SonyEricsson and Google;

leverage dominant printer position


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Bibliography

10-K Report HP. (2008, 12 18). Retrieved from HP:

http://ccbn.10kwizard.com/xml/download.php?repo=tenk&ipage=6033650&for

mat=PDF

Annual Report 2008 IBM. (2008). Retrieved from IBM:

ftp://ftp.software.ibm.com/annualreport/2008/2008_ibm_annual.pdf

10-K Report HP. (2009, 12 17). Retrieved from HP:

http://ccbn.10kwizard.com/xml/download.php?repo=tenk&ipage=6658291&for

mat=PDF

Annual Report 2009 IBM. (2009). Retrieved from IBM:

http://www.ibm.com/annualreport/2009/2009_ibm_annual.pdf

Form 10-K for Fiscal Year 2009 Dell. (2009, March 26). Retrieved from Dell:

http://content.dell.com/us/en/corp/d/corporate~secure~en/Documents~FY09_SE

CForm10K.pdf.aspx

Form 10-K for Fiscal Year 2010 Dell. (2010, March 18). Retrieved from Dell:

http://content.dell.com/us/en/corp/d/corporate~secure~en/Documents~Form 10-

K for Fiscal Year 2010.pdf.aspx

CIO Update Staff. (2010, January 26). 2010 IT Industry Economic Outlook Looking Up.

Retrieved from http://www.cioupdate.com/budgets/article.php/3860826

European Information Technology Obsevatory (EITO). (2010, March 3). Global high-

tech market is growing again. Retrieved from

http://www.eito.com/pressinformation_20100303.htm

Federal Association for Information Technology, Telecommunications and New Media

in Germany (BITKOM). (2010).Annual press conference 2010 of BITKOM.

Hanover.

MSN Money Central. (n.d.). Retrieved April 5, 2010, from

http://moneycentral.msn.com/investor/invsub/results/compare.asp?Page=Financi

alCondition&Symbol=HPQ


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OECD. (2009). The OECD Information Technology Outlook 2008. Organization for

Economic Co-Operation and Development (OECD).

Reuters. (n.d.). Retrieved April 5, 2010, from

http://www.reuters.com/finance/stocks/financialHighlights?symbol=HPQ.N

Thibodeaux, T. (2010, March 23). Special Report-CompTIAs five Industry Trends to

Watch in 2010. Retrieved from CIO Update: www.cioupdate.com

Yahoo!Finance. (n.d.). Retrieved April 5, 2010, from

http://finance.yahoo.com/q/co?s=HPQ


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Appendix


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Illustration 21: HP Balance Sheet for October 31st 2007, 2008 and 2009

Source: (10-K Report HP, 2008) and (10-K Report HP, 2009)


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Illustration 22: HP Income Statement for fiscal years 2007, 2008 and 2009

Source: (10-K Report HP, 2008) and (10-K Report HP, 2009)

Illustration 23: HP Income Statement - Additional subtotals

Own calculations based on (10-K Report HP, 2008) and (10-K Report HP, 2009)


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Illustration 24: IBM Balance Sheet for December 31st 2007, 2008 and 2009

Source: (Annual Report 2008 IBM, 2008) and (Annual Report 2009 IBM, 2009)


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Illustration 25: IBM Income Statement for fiscal years 2007, 2008 and 2009

Source: (Annual Report 2008 IBM, 2008) and (Annual Report 2009 IBM, 2009)

Illustration 26: IBM Income Statement - Additional subtotals

Own calculations based on (Annual Report 2008 IBM, 2008) and (Annual Report 2009

IBM, 2009)

2007 2008 2009

Operating Expenses (SG&A, R&D, Int. Property) 27.255 28.570 25.595

Operating Income 14.474 17.091 18.190


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Illustration 27: Dell Balance Sheet for Feb 1st 2008, Jan 30th 2009 and Jan 29th 2010

Source: (Form 10-K for Fiscal Year 2009 Dell, 2009) and (Form 10-K for Fiscal Year

2010 Dell, 2010)


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Illustration 28: Dell Income Statement for the fiscal years 2008, 2009 and 2010

Source: (Form 10-K for Fiscal Year 2009 Dell, 2009) and (Form 10-K for Fiscal Year

2010 Dell, 2010)


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Illustration 29: Dell Income Statement Details

Own calculations based on (Form 10-K for Fiscal Year 2009 Dell, 2009) and (Form 10-

K for Fiscal Year 2010 Dell, 2010)

Table 8: Financial Ratios HP

Own calculations based on (10-K Report HP, 2008) and (10-K Report HP, 2009)


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Table 9: Financial Ratios IBM

Own calculations based on (Annual Report 2008 IBM, 2008) and (Annual Report 2009

IBM, 2009)


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Table 10: Financial Ratios Dell

Own calculations based on (Form 10-K for Fiscal Year 2009 Dell, 2009) and (Form 10-

K for Fiscal Year 2010 Dell, 2010)

Table 11: Comparison of HP's Financial Strength to Industry, Sector and S&P 500

Source: (Reuters)

Table 12: Interest Coverage Ratio of HP compared to Industry and S&P 500

Source: (MSN Money Central)


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Table 13: Direct Competitor Comparison HP, IBM, Dell and Industry Averages

Source: (Yahoo!Finance)