Dell Inc. - still a growth company?

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Dell Inc.- still a growth company?

Stefan EisnerDecember 1, 2005

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Outline

Company Facts

Portfolio Position

Business Strategy – key tenets

Segmentation by product & geographical

Industry – current developments

Stock Facts

Valuation

Recommendation

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History

1984 Michael Dell founds Dell Computer Corporationsimple 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

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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 Dell‘s „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 & 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

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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 PC‘s still most important, but decreasing

percentage change to Q3-FY05

-5%

1%

0% 0%

2% 2%

-6%

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

Desktop PCs Mobility Servers Storage EnhancedServices

Software &Peripherals

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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 PC‘s still most important, but decreasing

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Segment - Revenues (million $)

19,394

5,6536,912

21,888

6,7158,4957,896

12,312

6,322

3,4454,346

27,652

-

5,000

10,000

15,000

20,000

25,000

30,000

US Business US Consumer Europe Asia Pacif ic - Japan

FY03 FY04 last 4Q

Geographical Segmentation

Operating margin last 6 Quarters

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

12.0%

Q3-FY06Q2-FY06***

Q1-FY06Q4-FY05**

Q3-FY05Q2-FY05

US Business

US Consumer

Europe

Asia Pacific - Japan

total

Revenue Growth Rates

13.8% 12.9%

23.4%

10.2%

24.7%

-1.9%

19.3% 19.8%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

US Business US Consumer Europe Asia Pacif ic - Japan

last 2.75years last year

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Geographical Segmentation

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Dell‘s Market Share PC‘s*

Q2 CY05Rank Q2-CY05 Q1-CY05 Q4-CY04 Q3-CY04 Q2-CY04

Worldwide share: 1 18.9% 18.5% 16.8% 17.9% 18.1% United States 1 34.4% 33.9% 32.9% 32.9% 33.3% EMEA 2 13.4% 13.3% 10.1% 11.6% 12.5% Asia Pacific 3 8.8% 7.5% 7.2% 7.0% 6.9% Japan 3 13.7% 11.6% 11.8% 10.9% 12.0%

US Segment share: 1 34.4% 33.9% 32.9% 32.9% 33.3% Education 1 43.9% 41.9% 39.9% 46.0% 45.5% Government 1 34.3% 33.9% 34.5% 34.8% 32.3% Home 1 28.8% 30.8% 30.5% 29.0% 28.2% Large Business 1 1 46.7% 44.5% 44.7% 43.8% 44.6% SMB 2 1 31.0% 31.2% 28.7% 26.6% 28.5%

Trailing 5 Quarter Share

* PC's includes desktops, portables, and x86 servers, data as of August 20051 Large Business includes sites with more than 500 employees2 Small and Medium Business includes sites with less than 500 employees

Based upon IDC Worldwide Quarterly PC Tracker

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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 IBM‘s 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

Year Sales at current prices$million Index % change

2005 (est.) 5,883 100 -2006 4,954 84 -15.82007 4,029 68 -18.72008 3,108 53 -22.92009 2,191 37 -29.52010 1,265 22 -42.3

DesktopYear Sales at current prices

$million Index % change2005 (est.) 7,488 100 -

2006 8,031 107 7.32007 8,613 115 7.22008 9,236 123 7.22009 9,904 132 7.22010 10,620 142 7.2

Laptop

Desktop - Sales at current prices (million $)

5,883

4,954

4,029

3,108

2,191

1,265

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2005 (est.) 2006 2007 2008 2009 2010

Laptop - Sales at current prices (million $)

7,4888,031

8,6139,236

9,90410,620

0

2,000

4,000

6,000

8,000

10,000

12,000

2005 (est.) 2006 2007 2008 2009 2010

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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

•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)

•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 R&D spending

• Poor customer service

• Problems in China

• Single source suppliers

• Low R&D spending

• Poor customer service

• Problems in China

INDUSTRY

• Growth in the digital color printer maket

• Sale of IBM‘s PC Business to Lenovo (Europe/US)

• Trend to more modular, standard products and clusters of less expensive machines (server&storage)

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

• Porter‘s five forces: - High Industry Rivalry - High Bargaining Power of

Buyer

• New CEO at HP -> cost reducing

• Sale of IBM‘s PC Business to Lenovo (Asia)

• Asian „No-Name“ producer

• Increasing component prices

SS

OO TT

WW

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Competitors

DELL HPQ IBM SUNW Industry

Market Cap: 72.29B 85.00B 140.42B 12.87B 1.13BEmploy ees: 55,200 N/A 348,052 31,000 1.90KQtrly Rev Growth (yoy): 11.30% 7.10% -7.80% 3.70% 7.30%Revenue (ttm): 54.18B 86.70B 94.38B 11.17B 3.76BGross Margin (ttm): 17.97% 23.36% 39.17% 42.25% 17.97%EBITDA (ttm): 4.77B 7.30B 18.48B 588.00M 90.66MOper Margins (ttm): 8.11% 5.72% 14.14% -1.50% 1.98%Net Income (ttm): 3.23B 2.40B 8.57B -97.00M -415.22KEPS (ttm): 1.293 0.824 5.16 -0.029 N/AP/E (ttm): 23.32 36.01 17.23 N/A 23.53PEG (5 yr expected): 1.12 1.32 1.57 N/A 1.99P/S (ttm): 1.35 0.99 1.49 1.19 1.13

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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

Stock Facts

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

bad normal goodDesktop decrease flat slow growthMobility "pricewar" normal growth rates still higher growth ratesOther slow down normal level high level

cost of revenue increase constant decreaseS,G & Adm slightly increase average 05 and 06 decreasingDCF-Price 23.39 31.40 35.98

+10% 25.73 34.55 39.57-10% 21.06 28.26 32.38

P/E based on EPS06 14.41 19.35 22.16

Scenario

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Valuation – sensitivity analysis (normal)

beta 4.70% 4.80% 4.90% 5.00% 5.10% 5.20% 5.30%0.69 36.78 37.37 37.98 38.62 39.28 39.97 40.69 0.74 34.88 35.41 35.95 36.51 37.10 37.71 38.34 0.79 33.18 33.65 34.13 34.63 35.15 35.69 36.25 0.84 31.63 32.06 32.49 32.94 33.40 33.89 34.38 0.89 30.23 30.61 31.00 31.40 31.82 32.25 32.70 0.94 28.95 29.29 29.65 30.01 30.39 30.78 31.18 0.99 27.77 28.08 28.41 28.74 29.08 29.43 29.79 1.04 26.69 26.97 27.27 27.57 27.88 28.20 28.53 1.00 27.55 27.85 28.17 28.49 28.83 29.17 29.53

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RECOMMENDATION - Considerations

Source: Yahoo!Finance 11/30/05

HOLD largest geographical segment (American Business

Units) growing and operating margin increases

Growth opportunities outside the US

Still superior business strategy

Expansion to higher margin products (printer replacement, storage&servers, business customer…)

Share buyback

Almost no debt

After the decrease in the stock price, lower growth rates are partially contained in the price

SELLOther geographical segments only flat or negative Operating income growth

Problems in China, UK…

Increasing rivalry by Asian companies

pricewar desktops and mobility products, which are almost two thirds of the revenue

no further investment opportunities

No long term-guidance of the company

historic high double digit growth rates are improbable

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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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Dell Inc. - still a growth company?