Playing to Win

Transcription

1 Global Research 14 July 2014 Hewlett-Packard "Playing to Win" the Secret to HP's Turnaround Financial results a lagged reflection of strategy and execution In the first of our series of "Strat Talk" calls, we hosted Mohamad Ali, HP's Chief Strategy Officer. We believe that understanding how companies' think and whether they have a differentiating strategy is critical to anticipating their financial results. We are impressed with HP's strategic rigor and may have underestimated management. The new strategy is the driver behind Meg Whitman's five-year turnaround road map. Equities Americas Computers 12-month rating 12m price target Price RIC: HPQ.N BBG: HPQ US Neutral US$34.00 US$33.97 HP has implemented the Playing to Win approach The revelation from the call is that HP uses a strategic framework called "Playing to Win" developed by consultant Roger Martin and successfully used by P&G CEO A.G. Lafly. Meg Whitman became familiar with it as a director of the consumer giant. The five elements of Playing to Win including setting an aspirational goal and choosing where to play and how to win have been implemented at every level across HP over the last 18 months and appear to be critical to the company's turnaround. The strategy: A New Style of IT HP's strategy is to provide solutions for a New Style of IT to CIOs based on the shift to cloud, social, mobile, and Big Data. Management argues that HP's expertise and breadth provides advantages over IBM and Cisco, which remains to be seen. For example, Playing to Win has improved PC results with a greater focus on segmentation, which is being applied to the Enterprise and other businesses. Certainly HP is making more focused investments (where to play), such as Ink in the Office and 75% of HP Labs' budget going to The Machine. The internal use of Big Data tools like HAVEn have enabled deeper market analysis and Playing to Win. Valuation: Strategic discipline could support stock Our price target of $34 is based on a P/E of 8.5x our F15 estimate, a discount to the group for profit quality. Still, we prefer HP to IBM given HP's increased discipline and focus on differentiation. If the stock outperforms, it largely can be credited to adoption of Playing to Win and Whitman's ability to get the troops on board. Trading data and key metrics 52-wk range US$ Market cap. US$64.8bn Shares o/s 1,907m (COM) Free float 99% Avg. daily volume ('000) 2,358 Avg. daily value (m) US$78.2 Common s/h equity (10/14E) US$26.6bn P/BV (10/14E) 2.4x Net debt / EBITDA (10/14E) 0.5x EPS (UBS, diluted) (US$) 10/14E UBS Cons. Q Q Q3E Q4E /14E /15E /16E Steven Milunovich, CFA Analyst steven.milunovich@ubs.com John Roy, Ph.D. Associate Analyst john.roy@ubs.com Peter Christiansen, CFA, CMT Analyst peter.christiansen@ubs.com Highlights (US$m) 10/11 10/12 10/13 10/14E 10/15E 10/16E 10/17E 10/18E Revenues 127, , , , , , , ,036 EBIT (UBS) 13,751 11,145 9,516 9,831 10,064 10,363 9,982 10,043 Net earnings (UBS) 10,379 8,035 6,938 7,134 7,307 7,540 7,243 7,291 EPS (UBS, diluted) (US$) DPS (US$) Net (debt) / cash (22,591) (17,135) (10,424) (7,095) (4,245) (745) 2,610 5,216 Profitability/valuation 10/11 10/12 10/13 10/14E 10/15E 10/16E 10/17E 10/18E EBIT margin % ROIC (EBIT) % EV/EBITDA (core) x P/E (UBS, diluted) x Equity FCF (UBS) yield % 10.2 (13.5) Net dividend yield % Source: Company accounts, Thomson Reuters, UBS estimates. Metrics marked as (UBS) have had analyst adjustments applied. Valuations: based on an average share price that year, (E): based on a share price of US$33.97 on 11 Jul :38 EDT This report has been prepared by UBS Securities LLC. ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 12. UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

2 Steve Milunovich: Welcome to the first in our series of strategy discussions with high-level company executives we plan to host under the title "Strat Talk." We are joined today by Mohamad Ali, Chief Strategy Officer of Hewlett Packard. Before joining HP in 2012, Mohamad served as CEO of the Workforce Optimization Division of Aspect, a leading global provider of customer contacts and workforce optimization solutions. Prior to Aspect, he served as President of Avaya's Global Services business and was responsible for the firm's strategy, corporate development, and research labs. Mohamad also has held senior positions at IBM, including Vice President of Strategy and Business Development in the Information Management Division. He holds a bachelor's and master's degree in electrical engineering from Stanford University. So why are we focusing on strategy in this series of calls? First, we think while strategy and execution are both important, strategy is paramount. Peter Drucker admonished that "Doing the right things is more important than doing things right." Similarly, marketing strategist Al Ries opines that "Good strategy can be poorly executed with descent results, but it's impossible to expertly implement a poor strategy with success." Second, we believe that financial results lag the creation and implementation of strategy, which are not always easy to see from an outsider's perspective. These Strat Talk conference calls series are designed to shed light on the process of strategy development and help investors anticipate the success of vendors. Mohamad, welcome and thank you for joining us today to share your thoughts on HP's strategy. Mohamad Ali: Sure, Steve. Thank you for having me. Steve Milunovich: I talked a bit about your background. Can describe what in your background is applicable to your current strategy position at HP and why you decided to join HP in the first place? Mohamad Ali: Yes, absolutely. I've been involved in a number of turnaround situations the whole IBM as well as multiple divisions that we worked to turnaround at Avaya. And I've had the opportunity to lead businesses in several technology categories: semiconductor, hardware systems, software, and services. I've also had the experience of developing and implementing strategies that use both organic and inorganic techniques. So based on seeing a variety of different situations and implementing a variety of techniques, I trust some of this can be applicable to HP. To say there are specific things that you would do over and over may not hit the mark because every situation is different and it needs to be thought out. But you leverage the experience that you have had from seeing these things before. In terms of why I decided to join HP, I would say that there are two key elements: the people and the technology. On the people front, Meg is just an incredible leader. At the time that I was considering joining, the company was in the process of assembling a very strong team that understood that our industry and company was at an inflection point with cloud, big data, security and mobility. This eventually formed the anchor point for our strategy, which we now call "The New Style of IT." Hewlett-Packard 14 July

3 These inflection points were in fact real opportunities to catapult HP once again to the forefront of our industry. It was really important to have a set of people who understood our needs and were going to drive the company in that direction. Technology was also important. It's pretty clear that HP was sitting on substantial set of innovation that was hidden and just waiting to be unleashed. For example, our new ink technology for the office market is truly a technology marvel from the physics of it to the chemical engineering to the mechanical engineering to the software engineering to the product design. It was an incredible idea. Two years ago my thought was that if we could get this thing off the ground, it really could change the trajectory of the printing business. We did, and it's been very successful. If you look at memristor, an idea in the lab two years ago, it is a new ultra-dense memory technology that holds the promise of transforming the computer industry in a very fundamental way. Almost as fundamental as the way the transistor transformed the electronics industry. We recently announced a new compute architecture called The Machine to leverage memristor technology along with some other ground breaking technologies. So I would say back two years ago I realized that HP held these critical ingredients, the primordial cells to build this new world, and it was really exciting. I wanted to at least be a small part of this to help take HP in a direction where we can bring these innovations to the world. Just to give you a sense of the commitment to R&D that Meg has put in place since I joined: if you go back to F2010, our R&D spend as a percentage of revenue was 2.5%. In the most recent quarter it was 3.2%. So it's not just a desire to do this, we're actually doing it and it's really been great being at HP. I think joining HP was one of the best decisions I could have made. Steve Milunovich: What is HP's process for setting strategy? What are some of the influences on how you approach strategy? Mohamad Ali: That's a great question and it's something I've been heavily focused on since I got here. At HP we use a strategy framework that we call, "Playing to Win." It was developed by a Roger Martin when he was at Monitor Company. This process has been implemented at scale at numerous companies, but is quite well known for its implementation at Procter & Gamble during the 2000s, leading to a doubling of sales at the company over that decade. We implemented "Playing to Win" shortly after Meg arrived and I was hired into my current role. Prior to Meg being here, the company's strategic process had lost focus and it needed not just to be rebooted but to be replaced with a modern strategic planning process. In less than two years we've deployed the Playing to Win approach at multiple levels of the company, from the top HP level strategies that we showed to the board of directors to deep within the organization at the team levels. I wouldn't even be surprised if our investor relations team has the Playing to Win strategy. I haven't asked them, but it's very likely. I know the Singapore country team has one. The various elements of the IT organization have their own Playing to Win strategies. Our HR team has a Playing to Win strategy, and of course our business units have Playing to Win strategies. Hewlett-Packard 14 July

4 So I'll tell you a little bit about Playing to Win. It encompasses five major elements that I'll tell you about because they are core to the approach. There are five questions: What is our winning aspiration? Where will we play? How will we win? What capabilities must be in place? What management systems are required? Figure 1: The five elements of Playing to Win Source: HP The first thing we had to do was to anchor on a strategic framework. But in addition to deploying this Playing to Win framework, we also had to establish a consistent calendar and a set of common planning tools and fact bases so that we're all on the same page. So from a calendar point of view, we kick off the strategic planning process in January with the business units and global functions. We will deliver a strategy to the board of directors in July, which is coming up pretty soon and we're all working feverishly on it. That drives the budgeting process, which concludes in September. During the July to December period, we update a set of common tools. I'll give you a few examples. One example is a market fact pack, a document with a common HP view of market size, growth, and trends to assist everybody in the company in using the same data. A second example is a detailed market and technology trends document so everyone has a common vocabulary and understanding as to where our industry is going. And third, we actually do a Playing to Win assessment of our top competitors to understand their Playing to Win strategies. These are just some of the common tools and fact bases that we use to anchor the company on this common approach to strategic planning and thinking. So hopefully that gives you in a nutshell the framework and the approach that we've taken to strategic planning in the company. Hewlett-Packard 14 July

5 Steve Milunovich: That's fascinating. So investors, there's a book called Playing to Win: How Strategy Really Works by A.G. Lafley, who is the former and current CEO of Procter & Gamble, and Roger Martin, who worked at Monitor and was Dean of the Rotman School of Management at the University of Toronto. It lays out the five steps and how they were applied at P&G. Now, Mohamad, did HP do this because Meg was a director at Procter & Gamble, because the book talks about how the board was very involved in the process? Mohamad Ali: Yes. The fact that Meg is a director at Procter & Gamble certainly was a factor in us picking this approach. It's something that she had seen work extremely well, and we were looking to pick an approach that was easy to communicate and highly effective. Meg's experience with this approach was a key factor in determining which of these frameworks we should use. And I have to say she was absolutely right about the simplicity of the framework. It's really great to have a framework. I've seen some of them that are so complicated and sophisticated that strategy planning experts are the only ones who can figure them out. One of the nice things about Playing to Win is you can truly cascade it throughout the organization. Everyone can understand it. Everyone can develop a Playing to Win strategy all the way down to the individual level. So our ability to get this thing absorbed in the company fast was pretty important. That's one of the characteristics of the Playing to Win framework that we really liked. Steve Milunovich: You mentioned that this applies to different levels of the company. If we apply it to the highest level, to the company overall, you mentioned that a New Style of IT is the way to phrase the strategy. Could you talk about HP's winning aspiration as well as where HP decided to play and how you plan to win where you do play? Mohamad Ali: Yes. I'll talk a little bit more about the New Style of IT strategy in a bit. In terms of our winning aspirations, I'll be more specific about the process. As you can imagine, we are getting ready to go see the board of directors, and at a company level we've laid out our Playing to Win strategy. So I'll take you through our winning aspirations. Our winning aspiration is to be the best technology partner on the planet. And one of the things about a winning aspiration is you have to have some metrics to know when you know you've won. We will have won when (1) revenues are growing faster than the market in segments in which we choose to compete; (2) earnings are growing faster than revenue; (3) our portfolio is strongly aligned to market trends; (4) we have a leading or vastly improved market share position across the portfolio; and (5) we are acknowledged as thought leaders in our segments. So at the top level these are our aspirations and they cascade throughout the company. We also go through a detailed assessment as to where to play, which geographies to invest more or less in, and which elements of the portfolio to invest more or less in. Take HP Labs, for example. We've talked about 75% of HP Labs budget going towards The Machine now. So there is a decision at the HP Labs level of where to play. Hewlett-Packard 14 July

6 In terms of how to win, what we do as far as the strategic planning process is to come up with a list of cost and revenue initiatives that are very mechanical, but are the execution elements of how we're going to implement our how to win piece of the strategy. With respect to capabilities required, there may be things like having one common CRM system as opposed to a whole bunch. We've actually done that already. The last two years we rationalized all our CRM systems to a single cloudbased CRM system. And then there are management systems. How do we govern all of that? So I talked to you a little bit about the cost leverage and revenue leverage in the how we will win. Well, we have to put a management system around those levers. So we actually deployed a corporate level Project Management Office to ensure that these how to win levers are executed. So these are a scattering of examples, but hopefully you can see how at a top level we have this cascade of the five core elements of Playing to Win. You can imagine each business unit, each global function, then playing into that. Steve Milunovich: And to help us imagine, could you address one of the units, perhaps the PC business. How has that been applied there? Mohamad Ali: Yes. The PC business is a great success story, right? As you know, this is a very soft market, it's a declining market, yet we are now growing in this market and we're gaining share. Applying in particular the two core questions there where to play and how to win has been very important. Obviously we're a global company, and we operate in a large number of segments and subsegments in multiple geographies and products. When you do a where to play, you really have to understand the segments that you participate in. And so we have taken that to a deep level. We understand this to the level of Switzerland, even beyond that to the Geneva market for laptops from $ This is the where to play. Are we participating effectively in these segments? What do we need to do differently to participate effectively? We then develop a how to win within each sub-segment. Now, you could ask why we didn't do this before. A big part of the answer is the availability of the tools and the data to do this. In this new era of Big Data, we have developed a platform that we sell to our customer called HAVEn. It includes Vertica and Autonomy, these Big Data tools. We're applying those tools to ourselves, and in the case of the PC business we have a giant cube that is based on Vertica that has all the segment information. It allows us to do a deep analysis of where to play and how to win in each one of those specific sub-segments. Applying those tools didn't really exist before and is allowing us to truly apply the Playing to Win framework to the PC business. Dion Weisler, who is the EVP of that business, is just a tremendous student of the segmentation approach, the Playing to Win approach. He has really done an excellent job at applying this technique. As I said in the beginning, it's a business that is in a very soft market and he is growing and gaining market share. Steven Milunovich: How might the Playing to Win approach apply to the Enterprise business, which has endured margin pressure recently? Mohamad Ali: In a very similar way, and we are applying the technique there as well. But I would like to point out that the Enterprise business is an attractive Hewlett-Packard 14 July

7 business. It is a growing business. There are segments that have tremendous margin and upside opportunities. Having said that, we also realize that one of the important where to plays is the cloud. In the Enterprise segment we're in the compute business, and the cloud is an important delivery mechanism for compute. Two years ago when we decided that cloud was a critical element, we put a lot of energy behind it. And I have to say that at the time a lot of people doubted that we could get very far. But today if you look at the Forrester Wave, we are in the far upper right-hand corner, we have the #1 position in private cloud. We've come from nowhere to #1. And I will continue to push that very hard. You may have seen the announcement around HP Helion. HP Helion isn't just a cloud instance, it is a whole architecture. It's a partner network, a developer ecosystem. Enterprise computing is in deep transition, so we are heavily focused on where to play and where the market is going with cloud, virtualization, software-defined networking and storage. There are tremendous opportunities in flash storage to not only innovate but innovate in a way that is substantially different than competitors. That's what HP has really been great at over the last 75 years innovating in ways substantially better than our competitors. Steve Milunovich: You mentioned differentiation, which is really the core of strategy. What do you view going forward as HP's major competitive differentiations? And can you talk about how you assess your major competitors? Mohamad Ali: I'll talk about our differentiation, and I think it will become pretty obvious how this is different than the IBMs and Ciscos. The one thing I would urge your investors to look at is our performance over the last two years versus IBM and Cisco. I feel that in the last two years we've come to a very strong position relative in particular to those two companies. But let me talk about differentiation for a little bit. CIOs, who are our primary customers, are really facing this incredibly daunting task. The task is two-fold. First, they need solutions that integrate the very best components in this increasingly complex landscape. They can go buy all the piece parts and figure out how to put them together or they can rely on a company like HP to do that. Second, they also need to realize the full promise of this New Style of IT: cloud, Big Data, mobility, security. CIOs value a vendor that can deliver both. HP is one of the few companies that can deliver across the full spectrum. We are able to integrate from devices to data center including infrastructure, software, and services while offering the new technologies securely. And we're applying all of this to ourselves. I mentioned that in the PC business we're applying Big Data technologies in order to make it more successful. If we can make these technologies work for HP, chances are we can make them work for our customers. Steve Milunovich: Did you want to take us in more depth through your New Style of IT strategy? Mohamad Ali: Yes. So hopefully all the folks on the line have heard of this New Style of IT strategy. I'm going to spend time talking about it, because this is core to everything that we're doing here at HP. Hewlett-Packard 14 July

8 First I want to talk about the genesis of how we got there. As you all know, we're in one of the most dynamic periods in the technology sector's history with numerous inflection points. Every years there have been major shifts in the industry, such as from mainframe to client-server and then to the Internet. Along the way new companies and business models have disrupted the legacy companies, and really it's the companies that have embraced the change and innovated accordingly that have succeeded. We're in the early stages of this newest wave compromised of four key things: cloud, mobile, Big Data, and social with security a crucial underpinning. As with most major shifts, these new dynamics really put significant pressure on existing IT systems for both HP and our customers. CIOs are under this continuous pressure to simplify the architecture, to innovate at rapid speeds, and to manage risk while they're doing this. They can't stand still, they have to move forward. And in order to move forward, they need a partner that can help them with new solutions as well as bridge them from the past to the future. They need a vendor who can provide the hardware, software, and solutions with integration across these platforms. Figure 2: The New Style of IT Source: HP That's the backdrop for us creating this strategy. In a single sentence, the HP strategy is to provide solutions for the New Style of IT. What that means is to take customers from where their technology is today to where it must be to compete in the new world. It's not a terribly complicated strategy, but it's important in that there is recognition that this is where we have to go. I've seen companies where there's not even recognition as to where the company has to go. Here we've clearly recognized where we have to go. We also are putting wood behind the arrow. A great example of that is the success that we've had in cloud. We've decided where we're going, where we're investing to get there, and we're seeing progress against that. Steven Milunovich: How do you get employee buy-in, particularly at a time when you're reducing headcount? And maybe you can mention the airplane anecdote that you told me earlier. Hewlett-Packard 14 July

9 Mohamad Ali: This is an important question because if you have an organization that understands where you're going and see it as a better place, they will want to take you there. I took you through the strategy already and I also took you through the Playing to Win process. One of the things that we've done is we've communicated this heavily. By the employee base understanding where we're taking the company and how we're pivoting our existing business to these new realities driven by the New Style of IT around cloud, big data, mobility, and security, the employee base really become an integral part of our transformation. They know where the puck is heading. It's not a surprise and not a secret. Meg has been incredibly transparent and consistent coupled with just great focus on communications at all levels. She's been very good at being transparent and communicating. By understanding the vision, the strategy, the execution elements, it's clear there will be change. The employees understand that there will be change. But that change is taking us to a better and more exciting place. And the employees understand how they can contribute. So I would say that by people understanding, by us communicating clearly, we get a lot of enthusiasm in transforming the company even though sometimes that transformation is hard. In terms of the story that I was telling you previously about the plane, we had a session down in San Diego with maybe over 1,000 senior executives. The objectives of the sessions included a variety of things, but one of them was to galvanize the leadership around this Playing to Win approach. We communicated to the leadership team that everybody had to read Playing to Win. As we got closer to the event, people realized that this was not a suggestion, this was a requirement because Meg was going to quiz them on the book and we were going to use the book and the strategic framework as the anchor point going forward. There was a flight down from San Jose to San Diego with a tremendous number of HP executives on the flight. Every single one them had the book. They were all reading the book to make sure that they got it done before they showed up. I wasn't on the flight, but one of my colleagues was and he said that the flight attendant came up to him and said, "Hey, what is this new book? Is it like the next best seller? Is it the next Fifty Shades of Grey? Should I get a copy of it?" It was just entertaining to see the enthusiasm around this common approach after everybody had read the book. It has really galvanized our approach and our vocabulary in talking about strategy and where we're taking the company. Steve Milunovich: There's no reason flight attendants can't play to win as well. Mohamad Ali: That's right, yes. Investor question: I was just wondering how you balance what you've been talking about with some of the shorter-term pressures from people like us in the financial community. How do you find the balance between the short-term and the more medium- and long-term things that you need to do? Mohamad Ali: I would say that a key element in our plan and how we balance the short term and the long term has to do with establishing our strategy in terms of where we want to take the company. Meg had laid out a tactical set of Hewlett-Packard 14 July

10 milestones in a five-year roadmap. We've communicated that very clearly, not only to the investor community but to the employee base. And we're working against that road map. How does the strategy fold into that road map? The strategy is how you're going to accomplish that road map. That road map has a set of short-term things on it and it has a set of long-term things on it. By being transparent with the investor community, we're able to invest in long-term things like the cloud, like The Machine. By being transparent with the investor community and employees, we also focus on short-term things, such as restructuring and increasing the profitability of our services business, which has tremendous upside still. Meg laid out the five-year road map at the security analysts meeting in 2012 along with the New Style of IT strategy. We're sticking to that. We're executing against it. It has both long-term and short-term components. By being up front about what we want to do, I think we're able to then do both those short-term and long-terms things and not surprise anyone. I think Meg has done a great job with the balance. Investor question: How do you share your vision and strategy with the channel and VARs and get buy in? How has that changed since you've arrived?" Mohamad Ali: Yes, that's a great question because the channel and VARs are a big part of our ecosystem. They're a big part of HP, very important and critical element of our company. We have completely revamped our Partner Relationship Program. We've launched a new program called PartnerOne. It's been very, very successful. We've launched a whole new set of tools to make the channel more efficient. For example, to be able to quote faster than they've ever quoted before. Our relationship with our channel partners being so critical and so important, this has been one of the core focus items over the last two years. In terms of how that fits into our Playing to Win strategy, that's actually an important element of how we will win. We have actually used a Playing to Win strategy to define how we're going to re-engineer our relations with our partners. It's pretty amazing to see that happen in under two years. I have seen partner programs reengineer at other companies, and it takes much longer to get to success. As part of the rollout of this new program, we have had the opportunity to share the vision of where we're going. It's important that not only the employees and our investors understand our strategy, it's absolutely critical that the partners do that as well. Meg has spent a tremendous amount of time with our partners in sharing where we're taking the company. Without our channel partners, we would not have been as successful the last year or so. Hewlett-Packard 14 July

11 Forecast returns Forecast price appreciation +0.1% Forecast dividend yield 2.1% Forecast stock return +2.2% Market return assumption 5.5% Forecast excess return -3.3% Statement of Risk Key risks to our neutral HP thesis include (1) a slump in IT spending linked to weakened GDP growth, (2) a stronger dollar, (3) accelerating declines in PC revenue combined with a poor uptake in Windows tablets, (4) weaker-thanexpected printer profits led by a shrinking mix of ink-based supplies growth, (5) a slowdown in enterprise cloud computing adoption, storage growth, and (6) a tepid recovery in HP software. Hewlett-Packard 14 July

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13 UBS Securities LLC: Steven Milunovich, CFA; John Roy, Ph.D.; Peter Christiansen, CFA, CMT. Company Disclosures Company Name Reuters 12-month rating Short-term rating Price Price date Hewlett-Packard 4, 5, 6a, 6b, 6c, 7, 12, 16 HPQ.N Neutral N/A US$ Jul 2014 International Business Machines Corp. 6a, 6b, 6c, 7, 12, 16 IBM.N Neutral N/A US$ Jul 2014 Source: UBS. All prices as of local market close. Ratings in this table are the most current published ratings prior to this report. They may be more recent than the stock pricing date 4. Within the past 12 months, UBS AG, its affiliates or subsidiaries has received compensation for investment banking services from this company/entity. 5. UBS AG, its affiliates or subsidiaries expect to receive or intend to seek compensation for investment banking services from this company/entity within the next three months. 6a. This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and investment banking services are being, or have been, provided. 6b. This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and non-investment banking securities-related services are being, or have been, provided. 6c. This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and non-securities services are being, or have been, provided. 7. Within the past 12 months, UBS Securities LLC has received compensation for products and services other than investment banking services from this company/entity. 12. An employee of UBS AG is an officer, director, or advisory board member of this company. 16. UBS Securities LLC makes a market in the securities and/or ADRs of this company. Unless otherwise indicated, please refer to the Valuation and Risk sections within the body of this report. Hewlett-Packard (US$) Price Target (US$) Stock Price (US$) Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul-14 Bu y Neu tral Sell No Rating Short-term Bu y Source: UBS; as of 11 Jul 2014 Hewlett-Packard 14 July

14 International Business Machines Corp. (US$) Price Target (US$) Stock Price (US$) Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul-14 Bu y Neu tral No Rating Source: UBS; as of 11 Jul 2014 Hewlett-Packard 14 July

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