Dell Inc — still a growth company Stefan

Dell Inc. - still a growth company? Stefan Eisner December 1, 2005 1

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 2

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. 5 m 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 Power. Vault 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 3

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, 182 m § Net Income last four quarters: $3, 565 m § 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 4

Stefan Eisner December 1, 2005 Portfolio Position § Bought 500 shares at 41. 75 on 12/10/99 ØCost of position: $20, 875. 00 § Closing price 11/30/05: $30. 151 Ø Value of position: $15, 075. 50 Ø 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 5

Stefan Eisner December 1, 2005 Business Strategy – key tenets (I) § Direct relationship is the most efficent way to the customer Ø Dell‘s „direct business model“ eliminates wholesale and retail dealers Ø No expenditures associated with the retail channel Ø constant flow of information about customers’ plans and requirements Ø enable Dell to continually refine its product offerings § Custom-built products and custom-tailored services Ø Build-to-order manufacturing process Ø Turn over inventory every 4 days on average and reduce inventory levels Ø Rapidly introduce the latest relevant technology Ø Rapidly pass on component cost savings directly to customers 6

Stefan Eisner December 1, 2005 Business Strategy – key tenets (II) § Low-cost leader Ø Efficient supply chain management and manufacturing organization Ø Concentration on standards-based technologies Ø Direct business model Þ Pass those savings to its customers § A single point of accountability for its customers Ø Offers an array of services § Standards-based technologies deliver the best value to customers Ø Provide customers with flexibility and choice Ø Benefit of extensive research and development 7

Stefan Eisner December 1, 2005 Sales & Marketing Channels of Distribution Ø Sales representatives Ø Telephone-based sales Ø Online sales through www. dell. com Marketing programs for specific customer groups § Large business & institutional customers Ø Field sales force, account teams (system engineers and consultants) § Small-to-medium business & consumers Ø Advertising on television, Internet, print media and by mailing publications Ø Dell Direct Stores: view Dell products in person and purchase with assistance § Goverment, healthcare and education market Ø Specific sales and marketing programs 8

Stefan Eisner December 1, 2005 Manufacturing, Materials Supply & R&D Manufacturing Ø Build-to-order manufacturing process Ø Process consists of assembly, software installation, functional testing and quality control Ø Locations: US(3), Brazil, Ireland, Malaysia, China Materials Supply Ø Large number of suppliers Ø 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 Ø Very low expenses: $464 m for fiscal 2005 (0. 94% of Revenue) Ø HP (4. 3%), IBM (5. 9%), Sun (16. 3%) Ø Company uses partners (e. g. Intel, Microsoft, EMC, Lexmark) to develop technology 9

Stefan Eisner December 1, 2005 Segmentation by product & services categories Beginning Q 1 -FY 06 supplemental revenue reporting by product & services Q 3 -FY 06 (total revenue: $13. 9 billion) Ø Desktop PC‘s still most important, but decreasing 10

Stefan Eisner December 1, 2005 Segmentation by product & services categories Beginning Q 1 -FY 06 supplemental revenue reporting by product & services Q 3 -FY 06 (total revenue: $13. 9 billion) Ø Desktop PC‘s still most important, but decreasing 11

Stefan Eisner December 1, 2005 Geographical Segmentation 12

Stefan Eisner December 1, 2005 Geographical Segmentation 13

Stefan Eisner December 1, 2005 Dell‘s Market Share PC‘s* Based upon IDC Worldwide Quarterly PC Tracker 14

Stefan Eisner December 1, 2005 Industry – current developments (source: report Mintel cooperation) Demand for Mobility Ø First time in April 2005 laptop sales surpassed desktop sales Increasing broadbrand penetration Ø Consumer use their computer more and more for multimedia activities Declining Prices Ø Increasing number of units shipped, but declining overall revenues Ø Average computer prices fell nearly 35% between 2000 and 2005 Ø Prices have continued to fall, especially laptop prices Low Cost – defining aspect of competition Ø Most important advertising in newspapers circulars Chinese imports continue to grow Ø leading computer equipment importer to the U. S. Ø From $11. 9 billion (2002) to 29. 5 billion (2004) +147. 9% Ø Lenovo, a chinese company, bought IBM‘s PC division in early 2005 Municipal wireless infrastructure drives notebook sales Ø 100+ cities implementing wireless infrastructure Ø 1000+/- cities working on plans for wireless Internet networks 15

Stefan Eisner December 1, 2005 Industry – US Home Computer market forecast 16

Stefan Eisner December 1, 2005 Share Buyback • YTD have repurchased 138 million shares Ø More than 3 x the stock options Dell expect to grant for the full year • Plan to spend at least $1. 7 billion in Q 4 ÞWill continue in the future, because Dell has a high Free Cash Flow, but very few investment opportunities OR Dell will start to pay dividends 17

Stefan Eisner December 1, 2005 SWOT – a overview • Leading market position S W • Notable clientele (large companies, state goverments) • Single source suppliers • Superior business model • Low R&D spending • Strong operating performance • Poor customer service • Cash Cow • Problems in China • No traditional pension plans • Partnership with Microsoft (creating single tool managing hardware and software) INDUSTRY O INDUSTRY T • Growth in the digital color printer maket • Decreasing PC prices • Sale of IBM‘s PC Business to Lenovo (Europe/US) • Desktops revenues will decrease heaviley until 2010 • Trend to more modular, standard products and clusters • Porter‘s five forces: - High Industry Rivalry of less expensive machines (server&storage) - High Bargaining Power of Buyer COMPANY • New CEO at HP -> cost reducing • • Printer Replacement business • Sale of IBM‘s 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 18

Stefan Eisner December 1, 2005 Competitors 19

Stefan Eisner December 1, 2005 Stock Facts § Share price: $30. 15 (52 -Week range $28. 62 -$42. 57) § Market cap: $72. 29 B § 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 20

Stefan Eisner December 1, 2005 Stock Performance last 5 years 21

Stefan Eisner December 1, 2005 Stock Performance last 2 years vs Competitors Vs: Hewlett Packard, IBM, Gateway 22

Stefan Eisner December 1, 2005 Valuation - Beta 23

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 24

Stefan Eisner December 1, 2005 Valuation – sensitivity analysis (normal) 25

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 § no further investment opportunities § Almost no debt §No long term-guidance of the company § After the decrease in the stock price, lower growth rates are partially contained in the price § historic high double digit growth rates are improbable Source: Yahoo!Finance 11/30/05 26

Stefan Eisner December 1, 2005 RECOMMENDATION - 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 27

Stefan Eisner December 1, 2005 Question & Comments 28