Creating Value at Dell Computers
Meeting with Treasurer
March 2nd, 2001
Jennifer Murray, Project Manager
Jing Wang, Industry Expert
Moin Kazi, Strategic Planner
Roberto Angulo, Performance Analyst
Ricardo Moretti, Financial Analyst
Creating Value - Overview

Environmental Context
– Stock slide of Dell (currently < 50% of value one year ago)
– The economic, competitive, and industry picture

Key Diagnostics
– Financial Indicators
– Strategic Analysis

Conclusions
–
Is slide in stock performance unique to Dell or industry wide?
Creating Value at Dell – Past Stock
Performance
Creating Value – Context

The fast-growing computer industry is slowing;

The projected growth rate was less than 17% compared with 20% over
the previous decade (2000).

Two main Factors
1.
2.
Macroeconomic shocks
Changing market
Creating Value – Economic

Macroeconomic shocks:
–
Global equity markets had begun to pull back in March of
2000;
–
U.S. GDP growth rate in 2001 is estimated to be less than
in 1999 and 2000;
–
Economists anticipate a recession in the next year;
Consumer confidence and overall spending expected to drop
substantially.
Creating Value – Industry

Changing Market
–
More household’s purchasing PCs
–
Continuing broadening applications in internet, auto-office, etc.
–
Overcapacity & competition – global computer industry projected to
face continued price pressure
–
Computer manufacturers moving to new segments: servers,
storage devices, hand-hold computers, MP3 players etc; projected
to grow more than 30% percent in 2001.
Creating Value – Competition
Rough Picture of Competitors
Dell
PCs and related
products and
services
Compaq
Hardware;
Software;
Solutions;
Services.
Gateway
PCs and related
products and
services
IBM
Technologies;
Systems;
Products;
Services;
Software;
Financing
Distributors and
resellers; Retail;
HP
Imaging and
printing
systems;
Computing
systems;
Information
services for
business and
home.
Distributors and
resellers; Retail;
Direct
Direct
Distributors and
resellers; Retail;
1.Small &
Midsize
business;
2.Large
business;
3.Home & small
office.
1.Small &
Midsize
business;
2. Home &
small office;
3. Large
business.
1.Home & small
office
2.Small &
Midsize
business;
3.Large
business.
1.Home & small
office
2.Small &
Midsize
business.
1.Small &
Midsize
business;
2.Large
business;
3.Home & small
office.
Products
Major
Distribution
Channels
Major Customer
Group (by units)
Creating Value – Strategic Analysis

Dell’s Competitive Advantages
–
Worlds largest “Direct Computer Systems Company”
–
Flexible, built-to-order manufacturing process
•
•
•
–
Virtual Integration process use of “Kanban System”
Non-existing inventory costs
Mitigated risk of obsolescence - changing technological market
Maintaining, monitoring and updating a customer database
•
•
Comprehensive customer relationships
Service and support programs tailored to customer needs
Creating Value –Strategic Analysis

Dell’s Competitive Advantages (Cont’d)
–
Low Cost - price leadership

–
Efficient procurement, manufacturing and distribution processes
Effective use of Internet www.dell.com

Dedicated website portals (60,000 Premier Pages™ worldwide)
Creating Value – Strategic Analysis

Performance

39% unit-shipment growth in servers – fastest among the industry’s
ten largest companies

Last December www.dell.com was the third most visited web site in
the U.S.

Ranked number one in U.S. desktop shipments and number two in
worldwide desktop shipments
Creating Value – Financial Analysis
Cash Conversion Cycle: number of days between purchasing raw material and
receiving the cash from the sale.
CASH CONVERSION CYCLE
DELL
COMPAQ
HP
IBM
GATEWAY
Days of sales in accounts receivable
33
72
64
127
34
Days of supply in inventory
6
24
60
31
15
Days in accounts payable
58
48
53
53
38
(19)
48
71
105
11
Fiscal Year Ended 2000
(Number of Days)
Cash conversion cycle
Negetive number: Dell turns product into cash before it pays suppliers for raw material
Creating Value – Financial Analysis

Inventory Turnover: Dell direct business model operates on just six
days of inventory (if any) average for competitors is about 32 days. Dell
does not start ordering components and building computers until an
order is booked.

Return on Assets: (2000) Dell = 16.20%; competitor’s average = 7.03%.
Dell optimizes its Assets to generate profits

Profitability: for every one-cent the industry makes, Dell makes .018
cents more
Creating Value – Financial Analysis

Debt Ratio: Dell has the lowest debt burden in the entire industry
FINANCIAL LEVERAGE
DELL
COMPAQ
HP
IBM
GATEWAY
Debt to Total Assets
0.04
0.05
0.15
0.32
-
Debt to Common Equity
0.09
0.11
0.35
1.40
-
Total Debt to EBITDA
0.17x
0.33 x
0.94x
1.72x
-
EBITDA/Interest Expense
62.77x
14.45x
20.46x
23.19x
-
Fiscal Year Ended 2000
Creating Value – Financial Analysis
Compaq
HP
Gateway
IBM
Dell
3
2
5
1
4
3
4
2
5
1
Aggressiveness
Gross Margin
3
2
4
1
5
High vs low margins
Inventory TO
3
5
2
4
1
High Volume
Inventory to WC
3
5
2
4
1
Least invested
Receivables TO
4
3
2
5
1
A/R source of cash
Payables TO
4
3
5
2
1
Dell’s Fin. leverage
Debt/total assets
3
4
1
5
2
Low financing need
Asset TO
3
4
2
5
1
Asset management
Return on asset
5
2
4
3
1
Asset management
Profit margin
5
2
4
1
3
After expense
Net income / CE
5
3
4
1
2
PER $ INVESTED
RANKING
Sales
Sales growth
Creating Value – Financial Analysis
GROWTH
Dell Computers
Competition
Industry
Revenue
26.21%
6.63%
9.07%
(Cost of goods sold)
26.93%
6.98%
9.79%
Gross Profit
23.48%
5.85%
7.37%
(Selling, General & Administrative Expenses)
33.77%
6.30%
8.51%
Operating Income, before depreciation
20.26%
4.03%
5.45%
Operating Income
17.98%
15.59%
15.89%
(Interest Expense)
38.24%
9.39%
10.22%
Pretax Income
27.91%
-2.20%
1.42%
Net Income
30.67%
3.29%
6.59%
Earnings per Common Share
27.27%
Creating Value – Financial Analysis

Improved cost structure as Dell’s Net Income
outgrows Revenue

Dell has outgrown its competitors in all aspects

Net income growth for Dell 30.67% compared with
3.29% of its competitors
Creating Value at Dell - Conclusions

Is slide in stock performance unique to Dell
or Industry wide?
1/2/2003
10/2/2002
7/2/2002
4/2/2002
1/2/2002
10/2/2001
7/2/2001
4/2/2001
1/2/2001
10/2/2000
7/2/2000
IBM
Linear (Dell)
4/2/2000
1/2/2000
10/2/1999
7/2/1999
Gateway
Linear (HP)
4/2/1999
1/2/1999
10/2/1998
7/2/1998
4/2/1998
1/2/1998
10/2/1997
7/2/1997
4/2/1997
1/2/1997
Dell
Linear (Gateway)
HP
Linear (IBM)
$250.00
$200.00
$150.00
$100.00
$50.00
$-
Creating Value at Dell

Performance vs. expectations
–
Investor expectation of the industry has declined
–
Dell has been a strong performer in the industry




–
Sales Growth (26%)
Net Income Growth (31%)
Return on Assets (16%)
Return on Equity (31%)
Strong Competitive Advantage – clear strategy
Creating Value at Dell

What can be done to increase stock price?
–
Focus Strategy on Core Competency

–
Continue to focus on the high-end direct supply
market
Continue to increase market share



Promoting new diversified product line
Increasing target market – small office / home office
Increased marketing on internet
Creating Value at Dell

What can be done to increase stock price?
–
Work on improving cost structure


–
Reduce Inventory Turnover – explore drop-ship
potential (ex. Direct mail, direct internet) of peripheral
products
Operating expenses – administrative costs and
interest expenses have been increasing. These must
be managed.
Increase gross margin

Selling new products that bring a higher margin
Creating Value at Dell
Questions ??
&
Comments…