FOOL CONFERENCE CALL SYNOPSIS*
By Debora Tidwell (MF Debit)

Dell Computer Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: DELL)") else Response.Write("(NASDAQ: DELL)") end if %>
2214 West Braker Lane, Suite D
Austin, TX 78758-4053
(512) 338-4400
http://www.dell.com/

UNION CITY, Ca., November 13, 1996/FOOLWIRE/ --- Dell Computer reported their third quarter results for fiscal 1997. Revenues increased to a record $2.019 billion which was above the consensus estimate of $1.875 billion. Earnings per share were a record $1.56, well above the consensus estimate of $1.15. These results are before the extraordinary charge of $0.04 per share associated with the repurchase of additional outstanding senior notes.

By virtually any measure they had an outstanding quarter and delivered on their goal of sustained solid performance. Their continued focus on the three priorities of liquidity, profitability and growth allowed them to set numerous records.

Strong earnings growth and solid capital management during the quarter contributed to an 111% return on invested capital, an industry record. Cash and marketable securities reached $1.183 billion. This is a company record and a 107% increase over the third quarter last year. They achieved this increase despite spending $137 million to buy back 2.8 million shares of stock this quarter and they have repurchased a total now of 8 million shares this year or 9% of their outstanding stock in just 9 months. Their performance clearly illustrates the fundamental advantages of the Dell model. Their direct relationships with end users and their fast turns distribution model allowed them to achieve one of the highest unit growth rates while delivering the strongest balance sheet in the industry. They have also seen consistent execution and strong performance across all geographies, products, and customer segments. This was a key factor in their bullish decision to declare a 2-for-1 stock split announced simultaneously with their earnings release. The split is payable to shareholders of record on November 25, 1996.

TOPLINE MOMENTUM. Revenue was up 43% versus the third quarter last year and up 19% sequentially. This marks the 11th consecutive quarter of sequential revenue growth. Revenue for the Americas region grew 42% versus the third quarter a year ago and was up 24% on a sequential basis. Large corporate, federal government and education sales were particularly strong. In this segment they continue to win new accounts while further penetrating existing accounts. These wins helped them more than double their federal government business versus the second quarter. This growth is consistent with seasonal patterns. The transactional business contributed to the strength of the range in growing 72% versus the third quarter last year and 32% sequentially. Recall that their SOHO and medium sized businesses are found within this segment. In addition, they are continuing to see good growth from second-time individual buyers as more and more enter the market.

Canada was also strong growing 110% versus the third quarter last year and 31% sequentially. They continued their global expansion with solid growth in Europe and Asia/Pacific. European revenue grew 41% versus the third quarter a year ago and 10% sequentially. In the UK, their most mature market in Europe, they continued to grow at more than twice the overall industry rate and they are strengthening their #2 position in that market. While many of their competitors saw continued softness in the European market, they bucked the trend with solid performance overall and superior growth in both Germany and France. Each of these countries was up more than 60% versus the third quarter last year. While they are concerned about reports of softness in the overall European market, they believe that their consistent execution focused on the direct model and emphasis on large and medium accounts offer opportunities going forward.

Asia/Pacific, including Japan, grew 60% versus a year ago and 13% sequentially. Sales to this region exceeded $340 million for the first nine months of the year. While Asia/Pacific continues to be a region where they are making significant investments they are pleased with the momentum they see. They now have a direct business model established in 8 markets in the Asia/Pacific region including 3 of the top 5 markets. And despite aggressive pricing activity by local players in Japan, they continued to profitably grow the business.

Backlog was up in dollar terms to $239 million and the second quarter level was at $161 million. This represents an increase from roughly 9 days of sales in the second quarter to approximately 11 days in the third.

PRODUCTS. They continued the momentum they established earlier in the year in servers and their notebooks continued to be strong. Server revenue grew 70% versus the third quarter last year and are now 4% of systems revenues. Unit growth continues to be impressive, up 137% versus the third quarter last year. This growth was driven by their existing midrange products and their new entry level 2100 servers. It is interesting to note that midrange sales were approximately 60% of total server revenue even though they are not shipping their mid-range Pentium Pro until this week. Their introduction and leadership pricing in the Pentium Pro space enabled them to remain as much as 30% below their leading competitors. As a point of fact, 85% of the industry-wide server unit sales are concentrated in the entry level and midrange categories. With the introduction of the 2100 entry-level server on September 9th and the 4100 mid-range server on November 7th they now have Pentium Pro server solutions that are capable of addressing the computing needs of the vast majority of their customers.

NOTEBOOKS. Despite tight supplies of high resolution FPD screens this quarter, notebook sales increased 69% versus the third quarter last year and 36% sequentially. This strong growth helped push notebooks to 19% of systems revenue. During the quarter they introduced their new Latitude XPICD and they saw strong demand for their Latitude XPI and multimedia notebooks. While lead times have improved, industry-wide shortages of high-end flat panel displays remain a concern that could restrict their growth next year in related configurations.

DESKTOPS. Desktop products grew in line with the overall business. They are particularly pleased with the reception they have received for their new OptiFlex Pentium and Pentium Pro systems with the OptiFrame chassis. These systems are priced to lead the transition to Pentium Pro and 32-bit operating systems. The OptiFrame chassis is completely recyclable and incorporates a design that makes it easier to service and upgrade. The most recent edition of PC Magazine recognized their Pentium Pro 200 product in both the Dimension and OptiFlex line with Editor's Choice awards.

GENERAL PRODUCT STATS. For the quarter, nearly 8% of their systems revenue was generated by sales of systems with processor speeds of 132mHz or above as the Pentium Pro transition appears to be going very well. For the quarter, Pentium Pro represented 12% of systems revenue. This is comparable to where Pentium revenue was at this stage in its transition. The decline in average revenue per unit stabilized this quarter following a sharp decline in the first half related to memory costs. Average revenue per unit decreased by 2% sequentially and 9% versus the third quarter last year to approximately $2560. Total unit shipments were up 57% versus the third quarter last year and 22% sequentially.

PROFITABILITY. Gross margin was 22.3% in the third quarter, a slight improvement from 22.1% in the second quarter. As they discussed last quarter, component costs declined dramatically in the first half of the year and their model enabled them to capture those costs faster than their competitors. They cautioned that as component costs return to more normal decline curves their competitors caught up on the first-hand savings and Dell's margins could fall back to prior levels. However, they also said that the margin impact would depend on two factors -- how quickly component costs return to normal and what competitors do as they capture the first half cost decline. What they have seen is a more gentle pricing transition than most of them had expected. This did have a negative effect on gross margins in Q3 but less than expected. They also saw a positive shift in their product mix to higher end desktop, notebook and servers. The net effect of all this is a slight rise in gross margins this quarter. Operating expenses were well managed and declined sequentially from 13.2% of sales in the second quarter to 12.2% of sales in the third quarter. They added more than 650 people to the Dell team this quarter including several at the senior management level, but their strong slaes growth enabled them to scale operating expense as a percent of revenue.

LIQUIDITY. They have increased their focus on asset management as a lever for extending the advantages of the direct model. They are pleased with their progress here. Days sales in inventories fell to an industry leading 12 days or 30 turns in the third quarter. This is 25 days or 68% lower than the third quarter level of a year ago, and yet another company record. They saw solid execution at Dell business units around the globe. On a sequential basis days accounts receivable decreased from 44 days to 41 days and days accounts payable increased from 48 to 52. For the quarter they generated $407 million in cash flow from operations.

STOCK REPURCHASE PROGRAM. The program was announced in late February and amended in May. Under the program they may buy up to 16 million shares of their common stock. In the third quarter they exercised options purchasing an additional 2.8 million shares of common stock. In aggregate they now have purchased 8 million shares at an average price of $42.05. This represents 9% of their outstanding shares at the beginning of the year. They have outstanding option agreements covering an additional 4.7 million shares and the average price of their call writes under these arrangements is $53.15 and the options are exercisable at various times throuh next August.

SENIOR NOTES. They successfully retired $27 million of the remaining $32 million of notes that were outstanding at the beginning of the third quarter. An extraordinary charge of $3.6 million after tax was recorded in the quarter.

LOOKING AHEAD. DEMAND OUTLOOK. As they have been saying since the beginning of this year, they believe 1996 will prove to be a good year. Customers continue to transition to Pentium Pro and Microsoft 32-bit operating systems. Pentium Pro accounted for 12% of their system revenue in the third quarter which again is comparable to where the Pentium revenue was at this point in its transition. Pentium Pro and NT will probably not hit full stride until next year, but they are pleased with the pace they have seen to date and they feel they are leading the transitions. The biggest stimulus in demand near term will probably be the dropping we've seen in systems prices. The big drop in component costs in the first nine months of the year have flowed through to systems prices. As a result, end users are now seeing a much better price today than anyone anticipated at the beginning of the year.

GROWTH OPPORTUNITIES & Q4 OUTLOOK. For Dell they see 3 major growth opportunities for the balance of this year and next -- further penetration of the server and notebook markets, continued growth in the European and Asian markets, and continuing to ship in the fast growing direct channel. However they want to move at a healthy, sustainable pace and they will have some tough comparisons in the fourth quarter and next year. Their fourth quarter is typically a good quarter for the consumer and small business sectors and a good quarter for Europe as a whole. On the other hand they typically see a fall-off in US government business by as much as 50% following its September year end. Over the last four years the net effect of these two factors has been an average sequential rise of 8% from the third quarter to the fourth. They don't give projections, but they encourage people to incorporate these historical patterns into their thinking.

PROFITABILITY LOOKING FORWARD. On the profit front, they want to continue delivering superior earnings growth and they believe they have a model that may let them do that as long as they execute. They have begun the transition to a more normal component cost decline environment. That creates the opportunity for competitors to catch up from earlier cost declines which can negatively affect their gross margins. Dell saw some of that in the third quarter and it could continue into the fourth. The question is what will their competitors do with the cost benefits. If they pass them on to end users, industry margins could return to levels they saw a year ago. And, of course, there are several other factors to consider. Among the positive drivers, they will push for manufacturing efficiencies.

STRATEGY. There are several areas where they can reduce costs. And they will work to improve their mix of notebooks and servers. On the negative side there are 3 key points. First, they will continue to push their penetration in new and emerging markets. This could take the form of aggressive prices where they will be driving for rapid penetration, not near-term margins. Second, the fourth quarter is typically more negative from a product and customer mix standpoint. Dimension sales in the small business/consumer sector peak in the fourth quarter. Thirdly, their product transitions are always a risk. In addition to their new Pentium Pro server line, they will be transitioning the vast majority of their corporate desktop line in the fourth quarter. While they are comfortable with the progress they have made in managing these transitions, they are the biggest internal risk Dell faces. These factors leave them cautious about gross margins here. At the operating expense line, they are still driving spending up in absolute terms as they build infrastructure. On a percent of sales basis, however, their goal is to gain scale advantages against their base operations. If they do that, they can invest in systems and people without driving operating expenses up as a percent of sales.

SUMMARY. Overall they are very bullish on the direct model and their prospects going forward. They believe the first nine months of this year illustrated the core virtues of the direct model and those virtues apply to a variety of market conditions. Consistent execution and strong performance across all geographies, products, and customer segments, allowed them to capture several important distinctions this quarter.

* A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. Note: Statements made by a company other than historical information may constitute forward-looking statements for which the company can claim protection under the Safe Harbor Act. Please consult the company's filings with the SEC for information on risk factors which might cause actual results to differ materially from the information contained in these forward-looking statements.