Dell Inc. still a growth company

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Dell Inc.- still a growth company?

• Stefan EisnerDecember 1, 2005

2
Outline

• Company Facts
• Portfolio Position
• Business Strategy key tenets
• Segmentation by product geographical
• Industry current developments
• Stock Facts
• Valuation
• Recommendation

3
History

• Michael Dell founds Dell Computer
  Corporation simple concept selling computer
  systems directly to customers
• 1987 International expansion - opening of
  subsidary in UK
• 1988 IPO (3.5m shares at 8,50 each)
• 1989 Company introduces first notebook computer
• Opened manufacturing center in Limerick,
  Irland - serve European, Middle Eastern and
  African Markets
• 1993 Joins ranks of the top-5 computer system
  makers worldwide
• 1997 Dell introduces its first workstation
  systems
• 1998 Dell introduces its PowerVault storage
  products
• 2000 Company sales via Internet reach 50 million
  per day
• 2001 For the first time, Dell ranks No. 1 in
  global market share
• 2003 Dell enters consumer electronics

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Company Facts

• Headquarter Round Rock, Texas
• Chairman of the Board Michael Dell
• CEO, President Kevin B. Rollins
• Revenues last four quarters 54,182m
• Net Income last four quarters 3,565m
• Broad range of products services
• Enterprise systems (servers, storage,
  workstations, networking products)
• Client systems (notebook, desktop computer
  systems)
• Printing and imaging systems, software and
  peripherals and global services
• Employees 63,700
• Financial Year End January

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Portfolio Position

• Bought 500 shares at 41.75 on 12/10/99
• Cost of position 20,875.00
• Closing price 11/30/05 30.151
• Value of position 15,075.50
• Change -5,799.50 (-27.78)
• Reviewed on December 2002 and November 2004
  (Hold)
• of Portfolio 5.31
• Jack Henry and Macrovision are also in the
  Technology Sector

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Business Strategy key tenets (I)

• Direct relationship is the most efficent way to
  the customer
• Dells direct business model eliminates
  wholesale and retail dealers
• No expenditures associated with the retail
  channel
• constant flow of information about customers
  plans and requirements
• enable Dell to continually refine its product
  offerings
• Custom-built products and custom-tailored
  services
• Build-to-order manufacturing process
• Turn over inventory every 4 days on average and
  reduce inventory levels
• Rapidly introduce the latest relevant technology
• Rapidly pass on component cost savings directly
  to customers

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Business Strategy key tenets (II)

• Low-cost leader
• Efficient supply chain management and
  manufacturing organization
• Concentration on standards-based technologies
• Direct business model
• Pass those savings to its customers
• A single point of accountability for its
  customers
• Offers an array of services
• Standards-based technologies deliver the best
  value to customers
• Provide customers with flexibility and choice
• Benefit of extensive research and development

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Sales Marketing

• Channels of Distribution
• Sales representatives
• Telephone-based sales
• Online sales through www.dell.com
• Marketing programs for specific customer groups
• Large business institutional customers
• Field sales force, account teams (system
  engineers and consultants)
• Small-to-medium business consumers
• Advertising on television, Internet, print media
  and by mailing publications
• Dell Direct Stores view Dell products in person
  and purchase with assistance
• Goverment, healthcare and education market
• Specific sales and marketing programs

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Manufacturing, Materials Supply RD

• Manufacturing
• Build-to-order manufacturing process
• Process consists of assembly, software
  installation, functional testing and quality
  control
• Locations US(3), Brazil, Ireland, Malaysia,
  China
• Materials Supply
• Large number of suppliers
• BUT Intel Corporation as a sole source supplier
  of processors and Microsoft sole source supplier
  for various operating systems and application
  software products
• RD
• Very low expenses 464m for fiscal 2005 (0.94
  of Revenue)
• HP (4.3), IBM (5.9), Sun (16.3)
• Company uses partners (e.g. Intel, Microsoft,
  EMC, Lexmark) to develop technology

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Segmentation by product services categories

• Beginning Q1-FY06 supplemental revenue reporting
  by product services
• Q3-FY 06 (total revenue 13.9 billion)

• Desktop PCs still most important, but
  decreasing

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Segmentation by product services categories

• Beginning Q1-FY06 supplemental revenue reporting
  by product services
• Q3-FY 06 (total revenue 13.9 billion)

• Desktop PCs still most important, but
  decreasing

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Geographical Segmentation
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Geographical Segmentation
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Dells Market Share PCs
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Industry current developments (source report
Mintel cooperation)

• Demand for Mobility
• First time in April 2005 laptop sales surpassed
  desktop sales
• Increasing broadbrand penetration
• Consumer use their computer more and more for
  multimedia activities
• Declining Prices
• Increasing number of units shipped, but declining
  overall revenues
• Average computer prices fell nearly 35 between
  2000 and 2005
• Prices have continued to fall, especially laptop
  prices
• Low Cost defining aspect of competition
• Most important advertising in newspapers
  circulars
• Chinese imports continue to grow
• leading computer equipment importer to the U.S.
• From 11.9 billion (2002) to 29.5 billion (2004)
  147.9
• Lenovo, a chinese company, bought IBMs PC
  division in early 2005
• Municipal wireless infrastructure drives notebook
  sales
• 100 cities implementing wireless infrastructure
• 1000/- cities working on plans for wireless
  Internet networks

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Industry US Home Computer market forecast
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Share Buyback

• YTD have repurchased 138 million shares
• More than 3x the stock options Dell expect
  to grant for the full year
• Plan to spend at least 1.7 billion in Q4
• Will continue in the future, because Dell
  has a high Free Cash Flow, but very few
  investment opportunities
• OR Dell will start to pay dividends

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SWOT a overview
S
W

• Leading market position
• Notable clientele (large companies, state
  goverments)
• Superior business model
• Strong operating performance
• Cash Cow
• No traditional pension plans
• Partnership with Microsoft (creating single tool
  managing hardware and software)

• Single source suppliers
• Low RD spending
• Poor customer service
• Problems in China

• INDUSTRY
• Growth in the digital color printer maket
• Sale of IBMs PC Business to Lenovo (Europe/US)
• Trend to more modular, standard products and
  clusters of less expensive machines
  (serverstorage)
• COMPANY
• Printer Replacement business
• Expansion of product portfolio (consumer
  electronics)
• International Expansion
• Entering new markets through partnership

• INDUSTRY
• Decreasing PC prices
• Desktops revenues will decrease heaviley until
  2010
• Porters five forces - High Industry Rivalry
  - High Bargaining Power of Buyer
• New CEO at HP - cost reducing
• Sale of IBMs PC Business to Lenovo (Asia)
• Asian No-Name producer
• Increasing component prices

O
T
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Competitors
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Stock Facts

• Share price 30.15 (52-Week range 28.62-42.57)
• Market cap 72.29B
• Trailing P/E 23.32
• Forward P/E (fye 28-Jan-07)16.94
• Dell has never paid a dividend
• Sector Technology
• Industry Personal Computers
• held by Insiders 9.85
• held by Institutions 65.5
• Ticker DELL

Source Yahoo!Finance 11/30/05
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Stock Performance last 5 years
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Stock Performance last 2 years vs Competitors
Vs Hewlett Packard, IBM, Gateway
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Valuation - Beta
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Valuation 3 Scenarios

• Verification of Forecast and Assumptions of
  Segments by
• Calculating ratios
• Computing Implied Growth rates of Geographical
  segments
• Reviewing sales development

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Valuation sensitivity analysis (normal)
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RECOMMENDATION - Considerations
Source Yahoo!Finance 11/30/05
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RECOMMENDATION - SELL

• SELL the entire position of Dell shares (500)
• DCF only slightly above actual share price
• High level of uncertainty about Dell futures
• Diversification of product portfolio and further
  expansion outside the US CAN be successful, but
  it MUST be successful to maintain high growth
  rates
• No guidance of the company for next year
• Still a growing company, but the high growth
  rates of the past are improbable
• If we follow our investment approach, there are
  better companies to own

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Question Comments
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Desktop Products

• Desktop Computers
• Optiplex line corporate, institutional and small
  business customers
• Dimension line small businesses and home users
• Desktop Workstation
• Precision Line professional users demand
  exceptional performance
• Cash-cow/ mature business (especially in the US)
• No. 1 DesktopsWorldwide market share 18,7
  (Q2-CY05)

Q2 Growth-Rate 2 Unit Growth-Rate 17
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Mobility

• Notebook Computers (majority of revenues in this
  segment)
• Latitude line addresses business
  organizational needs
• Inspiron line small-medium sized businesses,
  individuals
• No. 1 worldwide Market share 18,5 (Q2-CY05)
• Mobile Workstation
• Precision Line professional users demand
  exceptional performance
• MP3-Player (DJs) PDA (Axims)
• MP3-Player
• Notebooks selling much faster than desktops

Q2 Growth-Rate 20 Unit Growth-Rate 47
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Software Peripherals

• Dell Branded
• Printers, monitors, plasma and LCD television,
  projectors
• Third party
• Printers, software, digital camera and other
  products
• Printing Imaging Systems
• Dell started selling Printers in 2003
• Majority of Printers are based on Lexmark
  Technology
• Extremly aggresive prics for printers
• build market share in the higher-margin toner
  replacement business (2/3 of HPs operating
  profit)
• All printers feature Dell Ink/Toner management
  system software
• Unit growth Year-over-year second quarter 77
  (No. 2 in the US)
• Digital Home Entertainment Market
• Diversification of Dell traditional markets
• Sucess important for growth

Q2 Growth-Rate 35
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Servers Networking

• Servers (majority of revenues in this segment)
• PowerEdge line industry standard servers (x86
  architecture)
• No. 2 worldwide Market share 27.8 (Q2-CY05)
• Networking Products
• PowerConnect switches
• Competitive prices to create additional sales of
• storage products
• Higher margin enhanced services

Q2 Growth-Rate 9 Unit Growth-Rate 25
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Enhanced Services

• Managed Services
• IT management services
• Professional Services
• Help business utilize emerging technology
• Deployment Services
• Configure and deploy Dell systems and products
  intoIT environment
• Support Services
• Varietey of customized services and support
  programse.g. warranty upgrades and services
• Training and Certification Services
• Online training programs and IT certification

Q2 Growth-Rate 41
34
Storage

• Strategic allicance with EMC
• Dell/EMC storage products
• 2001 5-year alliance 2003 extended for
  additional 2 years
• Own line
• Dell PowerVault
• Products
• External storage, tape backup products, network
  attached storage, fibre channel array, storage
  area networks and rack solutions

Q2 Growth-Rate 26