Creating Value at Dell Computers Meeting with Treasurer March 2 nd, 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. Macroeconomic shocks 2. Changing market

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 – Economic

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

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 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 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 Fiscal Year Ended 2000 DELLCOMPAQHPIBMGATEWAY (Number of Days) Days of sales in accounts receivable Days of supply in inventory Days in accounts payable Cash conversion cycle (19) 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 Fiscal Year Ended 2000 DELLCOMPAQHPIBMGATEWAY Debt to Total Assets Debt to Common Equity Total Debt to EBITDA 0.17x0.33 x0.94x1.72x- EBITDA/Interest Expense 62.77x14.45x20.46x23.19x-

Creating Value – Financial Analysis RANKING CompaqHPGatewayIBMDell Sales32514 Sales growth34251Aggressiveness Gross Margin32415High vs low margins Inventory TO35241 High Volume Inventory to WC35241Least invested Receivables TO43251A/R source of cash Payables TO43521Dell’s Fin. leverage Debt/total assets34152Low financing need Asset TO34251Asset management Return on asset52431Asset management Profit margin52413After expense Net income / CE53412PER $ INVESTED

Creating Value – Financial Analysis GROWTHDell ComputersCompetitionIndustry Revenue26.21%6.63%9.07% (Cost of goods sold)26.93%6.98%9.79% Gross Profit23.48%5.85%7.37% (Selling, General & Administrative Expenses)33.77%6.30%8.51% Operating Income, before depreciation20.26%4.03%5.45% Operating Income17.98%15.59%15.89% (Interest Expense)38.24%9.39%10.22% Pretax Income27.91%-2.20%1.42% Net Income30.67%3.29%6.59% Earnings per Common Share27.27%

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?

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…