Dell Inc.

- still a growth company?

Stefan Eisner
December 1, 2005

Stefan Eisner
December 1, 2005

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

Stefan Eisner
December 1, 2005

History
1984

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

1990

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

Stefan Eisner
December 1, 2005

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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Stefan Eisner
December 1, 2005

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

Stefan Eisner
December 1, 2005

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

Stefan Eisner
December 1, 2005

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

Stefan Eisner
December 1, 2005

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

Stefan Eisner
December 1, 2005

Manufacturing, Materials Supply & R&D

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

R&D
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

Stefan Eisner
December 1, 2005

Segmentation by product & services categories

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

percentage change to Q3-FY05

3%
2%
1%
0%
-1%

2%

2%

Enhanced
Services

Software &
Peripherals

1%
0%
Desktop PC s

M obility

Servers

0%
Storage

-2%
-3%
-4%
-5%
-6%

-5%

Desktop PCs still most important, but decreasing

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Stefan Eisner
December 1, 2005

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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Stefan Eisner
December 1, 2005

Geographical Segmentation

Operating margin last 6 Quarters

Revenue Grow th Rates

12.0%
30.0%

11.0%

last 2.75years

last year

25.0%

23.4%
19.3%

20.0%
15.0%

24.7%

10.0%
19.8%

9.0%
8.0%

13.8%

12.9%

7.0%

10.2%

10.0%

6.0%

5.0%

US Consumer
Europe
Asia Pacific - Japan
total

5.0%

-1.9%

4.0%

0.0%
-5.0%

US Business

US Business

US Consumer

Europe

Asia Pacific - Japan

Q2-FY05 Q3-FY05 Q4-FY05 Q1-FY06

Q2Q3-FY06
**
FY06***

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Stefan Eisner
December 1, 2005

Geographical Segmentation

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Stefan Eisner
December 1, 2005

Dells Market Share PCs*

Based upon IDC Worldwide Quarterly PC Tracker

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Stefan Eisner
December 1, 2005

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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Stefan Eisner
December 1, 2005

Industry US Home Computer market forecast

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Stefan Eisner
December 1, 2005

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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Stefan Eisner
December 1, 2005

SWOT a overview

Leading market position

Leading market position
Notable clientele (large companies, state goverments)
Single source suppliers
Notable clientele (large companies, state goverments)
Single source suppliers
Superior business model
Low R&D spending
Superior business model
Low R&D spending
Strong operating performance
Strong operating performance
Cash Cow
Cash Cow

Poor customer service

Poor customer service
Problems in China
Problems in China

No traditional pension plans

No traditional pension plans
Partnership
Partnershipwith
withMicrosoft
Microsoft

(creating single tool managing hardware and software)

(creating single tool managing hardware and software)

INDUSTRY
Growth in the digital color printer maket

INDUSTRY
Decreasing PC prices

Sale of IBMs PC Business to Lenovo (Europe/US)

Desktops revenues will decrease heaviley until 2010

Trend to more modular, standard products and clusters

of less expensive machines (server&storage)

Porters five forces: - High Industry Rivalry

- High Bargaining Power of Buyer

COMPANY

New CEO at HP -> cost reducing

Printer Replacement business

Sale of IBMs PC Business to Lenovo (Asia)

Expansion of product portfolio (consumer electronics)

Asian No-Name producer

International Expansion
Entering new markets through partnership

Increasing component prices

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Stefan Eisner
December 1, 2005

Competitors

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Stefan Eisner
December 1, 2005

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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Stefan Eisner
December 1, 2005

Stock Performance last 5 years

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Stefan Eisner
December 1, 2005

Stock Performance last 2 years vs Competitors

Vs: Hewlett Packard, IBM, Gateway

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Stefan Eisner
December 1, 2005

Valuation - Beta

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Stefan Eisner
December 1, 2005

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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Stefan Eisner
December 1, 2005

Valuation sensitivity analysis (normal)

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Stefan Eisner
December 1, 2005

RECOMMENDATION - Considerations
HOLD

SELL

largest geographical segment (American Business

Units) growing and operating margin increases

Other geographical segments only flat or negative

Operating income growth

Growth opportunities outside the US

Problems in China, UK

Still superior business strategy

Increasing rivalry by Asian companies

Expansion to higher margin products (printer

replacement, storage&servers, business
customer)

pricewar desktops and mobility products, which are

almost two thirds of the revenue

Share buyback
Almost no debt
After the decrease in the stock price, lower growth
rates are partially contained in the price

no further investment opportunities

No long term-guidance of the company
historic high double digit growth rates are
improbable

Source: Yahoo!Finance 11/30/05

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Stefan Eisner
December 1, 2005

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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Stefan Eisner
December 1, 2005

Question & Comments

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