FOOL CONFERENCE CALL SYNOPSIS*
By Dale Wettlaufer (TMF Ralegh)

Dell Computer
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One Dell Way
Round Rock, TX 78682
512-338-4400
http://www.dell.com

ALEXANDRIA, VA., (May 21, 1997) /FOOLWIRE/ -- Dell Computer reported first quarter 1998 earnings on May 20, 1997. On a conference call to discuss the quarter's results were Michael Dell, Chairman and Chief Executive Officer; Morton L. Topfer, Vice Chairman; and Thomas J. Meredith, Chief Financial Officer.

REVIEW OF QUARTER. We had another very solid quarter consistent with the performance that we've seen over the last three years. While we have had a lot of very strong numbers to share with you, it is consistency of performance that I find most exciting. We hit new records this quarter in liquidity, profitability, and growth, the three priorities we have managed ourselves against for many years.

Revenues increased to a record $2.588 billion, above the consensus estimate of $2.471 billion. Earnings per share rose to a record $1.08, well above the consensus estimate of $0.94. Strong earnings growth and solid asset management contributed to 168% return on invested capital, an industry record. Cash and marketable securities increased $90 million, to just over $1.4 billion, and we achieved this despite spending approximately $200 million buying back an addition 6.6 million shares this quarter. We have now repurchased 26.8 million shares of our stock since announcing our buyback program 15 months ago.

Our momentum continues from an operational, technology, and financial perspective. Operationally, we saw consistent execution and strong performance across all geographies, products, and customer segments. As a result, we moved into the number three market position worldwide, according to International Data Corp.. We have risen steadily in these rankings from the number eight position just three years ago. From a technology standpoint, Dell-produced products received over 60 performance and value awards this quarter, including PC Magazine's Editor's Choice award for both our PowerEdge 4100 servers and our Dimension XPS desktop. We also won several service and support awards. We were the only company to receive a full 5-star best ranking in PC World's reliability and service survey.

FINANCIALS AND REVENUE BREAKDOWN. Financially, we again delivered solid overall performance largely driven by our operational and technology achievements. The Dell direct model continues to be advantaged on all three fronts. Revenue was up 58% versus the first quarter last year and 7% sequentially. This marks the 13th consecutive quarter of sequential revenue growth. Revenue for the Americas region grew 64% versus the first quarter a year ago and was up 5% on a sequential basis. This performance was reflected in our relationship business, which contains large corporate accounts, federal agencies, and education, state, and local governments. Large corporate accounts continued to show strong momentum, growing 59% over last year. Our education, state, and local group grew 84% over the prior year. The question in education accounts is no longer whether to undertake Wintel. It now seems to be which Wintel vendor to choose. We are winning a lot of this business.

Our transactional business, which is comprised of consumers and small to medium-size businesses, continued its momentum. This segment of the Americas region grew 65% over last year and our medium business sector grew 85%. We continued our global expansion with solid growth in Europe and Asia/Pacific. European revenue grew 38% versus the first quarter a year ago and 4% sequentially. In the United Kingdom, our most mature market in Europe, we again grew substantially faster than the market in both units and revenues. In France and Germany, we continued to significantly grow our market share position. In Germany, we have now grown over 50% per year for over two years and in France, we now hold the number five market position.

Asia/Pacific including Japan grew 90% versus the year-ago quarter, up from 60% the past two quarters. Sales to this region reached nearly $200 million during the quarter. We now have a direct business model established in 11 markets in Asia/Pacific, including four of the top five markets. We were recently awarded the top ranking in the Nikkei computer survey for customer service. We were ranked number one not only for price but quality, as well. This is very important in Japan, and our nearest US competitor was ranked number five. Worldwide backlog was down in dollar terms to $194 million from $222 million in the fourth quarter. That represents a decrease of roughly nine days of sales in the fourth quarter to approximately seven days in the first quarter.

PRODUCTS. We continue the momentum we established last year in servers. Server revenue grew 247% versus the first quarter of last year and 18% sequentially. Servers are now just over 6% of systems revenue. Units grew 349% over Q1 1997 and 13% sequentially. We have a full range of server products from entry-level uniprocessor systems to high-end four-way systems. In April, we expanded our entry-level products with the PowerEdge 2200, a dual-processor-based system priced from $3,000. According to IDC, we passed IBM this quarter to become the number three server supplier in the US. We were just 85 units behind Hewlett-Packard, which occupies the number two position. During the first quarter, we also announced the formation of a business unit dedicated to the workstation market. While we have sold high-end desktops into this market in the past, we have not until now focused on it as a separate business. We recently demonstrated product at Intel's Pentium II launch and we are establishing partnerships with software vendors so we can offer complete solutions appropriate to this market. This is a rapidly growing market that offers a lot of opportunity if we execute over the next two to three years.

Notebook revenue increased 91% versus the first quarter of last year and 7% sequentially. Notebooks remain 20% of systems revenue this quarter. Our market share position fell, though, from number seven to number eight worldwide, according to IDC. Notebooks remain a challenging area going forward. This is a very competitive sector of the market with a lot of new product transitions on the horizon. At the same time, it is one of the most volatile sectors in terms of component supplies. These are issues facing all of us in the industry, and you should bear them in mind as you model the year ahead.

Desktop products continued to perform well with revenue growing 46% versus Q1 1997 and 6% sequentially. Dell continues to transition rapidly to the newest technologies across all products. For the quarter, 65% of our systems revenues were generated by sales of systems with processor speeds of 166 MHz or above. 23% of sales were Pentium Pro and 20% were MMX Pentiums. The 32-bit operating system transition appears to be going well. For the quarter, 82% of our shipments went out with NT or Windows 95. Average revenue per unit remained stable this quarter at $2,715, essentially flat with the previous quarter, but remains about 4% below last year's level. Total unit shipments were up 65% versus Q1 97 and 8% sequentially.

PROFITABILITY. Gross margin was 21.6% in the first quarter, a slight decline from 21.7% in the previous quarter. Operating expenses were up sequentially but down as a percent of sales from 11.3% last quarter to 10.9% in the first quarter. As we indicated going into the quarter, we began increasing spending levels in a number of areas, but much of that didn't hit until very late in the quarter. As an example, we increased Dell's workforce by 1,400 people, a 13% sequential lift, twice the level of the previous quarter. The majority of these compensation expenses did not hit until very late in the quarter. We also saw higher revenue than we expected, giving us a scaling benefit in the quarter. We continue to believe operating expense spending could bring pressure to operating margins going forward.

LIQUIDITY. I am again pleased with our performance in asset management. Inventory was at 12 days of sales in the first quarter, down 1 day from the previous quarter and very much in-line with our range over the past several quarters. We saw a three day decline in payable days, but that was offset by a three day drop in receivables to 34 days. This performance allowed us to reduce our cash conversion cycle to a negative five days, continuing our leadership in asset management. For the quarter, we generated $318 million in cash flow from operations, which allowed us to continue our stock buyback while further adding to our cash position. Under the stock repurchase program, we may buy back up to 50 million shares of common stock. We have no purchased over half that authorization and we also have outstanding option agreements covering another 9.3 million shares. Those options are exercisable at various times through December of 1997. We also announced today a 2-for-1 stock split, payable on July 25. This marks our fourth stock split in a little over five years.

DEMAND OUTLOOK. As we have been saying throughout the past year, we believe overall industry demand is very healthy. Customer continue to transition to Pentium with MMX and to the new Pentium II. We are also seeing a strong transition to 32-bit operating systems, notably NT and related applications like Office 97. Regarding the quarter ahead, our second quarter is typically one of the weaker quarters seasonally. Many non-US governments are coming off their peak buying in the first quarter, driven by their March 31 fiscal year end. As a result, the industry is often down sequentially in the second quarter, and our own sequential growth has averaged only 4% over the past three years and only 3% last year. We don't give projections and you shouldn't read my comments as a forecast of what will happen this year, but you may want to incorporate these historical patterns into your thinking.

PROFIT OUTLOOK. On the profits front, we want to continue delivering superior earnings growth and we believe we have a model that will enable us to do that as long as we execute. On the gross margin line, there are factors running both ways. Among the positive drivers, we will push for manufacturing efficiencies. New manufacturing plants, like the one we recently opened in Austin, incorporate more efficient layouts and inventory flows. Initially, they require increased investment, but as they ramp production, we get the enhanced efficiencies. We will also work on improving the product mix with servers and other high-end systems. While we are leading the market with our server pricing, these products carry superior margins. On the negative side, first we will continue to push our penetration in new and emerging markets. This push takes the form of aggressive prices, where we are driving for rapid penetration, not near-term margins. We are currently doing that in a number of geographic markets.

Second, product transitions are always a risk. In all years, we will be in continuous motion transitioning our four product lines. The next several months will be very busy in this regard. Bear in mind that there is no such thing as a flawless transition, and that continues to be a big risk across the industry. Finally, we have the overall risk of building our infrastructure fast enough to support our growth. Today, we are hiring people at the fastest rate in our company's history. The challenge we face is making sure we are hiring qualified people and getting them oriented to Dell before internal processes have a chance to deteriorate. This is a big challenge for any high-growth company. In the operating expense line, we have a number of areas where we are stepping up our investment. We have to keep pace with our own growth. Our first priority is to invest in people. Our headcount has grown 36% from a year ago and 13% in the first quarter alone.

The second area I would highlight is systems. We will continue to invest to strengthen our information systems across the company. Finally, we will be investing in the model itself, as we discussed last quarter. I would caution you that we will see an increase in spending and pressure on operating margins from the levels seen in first quarter. We cautioned you about this last quarter and we are now beginning to see spending plans materialize that could make that happen.

KEY INITIATIVES TO IMPROVE DELL MODEL. As we indicated during our recent analyst meeting, we are entering one of the most exciting phases we have seen for the direct model. We continued to benefit form a model that is competitive advantaged, and we are now investing in three key areas that are designed to take our model to the next level. These three areas are the internet, value-added services, and our global enterprise program. Our internet initiative is already well underway. Sales over the net exceeded $1 million per day in the first quarter. These visits are both an efficiency gain, because they involve little manpower, and the sales volume benefits to us. We also have over 4,000 customers who have personalized a Dell web page so we can provide them with tailored updates and they can efficiently go right to the information they want from Dell. For large customers, these pages streamline the procurement process and lower the customer's cost of owning a Dell system. We have also launched internet sites in Europe, the Far East, and for the US federal government. In Japan, where we recently launched our Dimension desktop brand, approximately one-third of all Dimension sales in the first quarter came over the internet.

We also took steps in the first quarter to expand the value-added services we offer across our customer base. In April, we announced a new joint venture, Dell Financial Services, with Newcourt Credit Group Inc.. Through this joint venture, we will provide a wide range of leasing and asset management services to customers of all sizes. We are also broadening the services we provide to global companies through our global enterprise program. We provide centralized contracting and order processing, global delivery, and support for customer products, and many other services. Customer in this program already count for over $800 million in annual revenues, and we have the opportunity to grow significantly this business if we execute.

QUESTION & ANSWER SESSION.

We continue to see a fairly rational pricing environment across geographies and in that vein, we don't see any abrupt changes in the near term. On component pricing, we think the memory market is softening a little bit in Dell's favor and I we would also put disk drives in the same category.

We continue to see some tightness in the availability in large screen displays for the notebooks, but that has not been a significantly inhibiting factor. We don't see the availability loosening up dramatically until the second half of the year when lots of capacity comes onstream. I would not suggest that we are significantly limited by those availabilities.

One of the strongest advantages of a manufacturer leasing assets is in assisting the manufacturer's efforts in marketing the off-lease equipment. There will be opportunities for Dell to use the customer relationship to stay in contact as to where customers are in terms of the upgrade cycle. We would expect, then, to see a more regular upgrade cycle as opposed to the spurts that occur today.

Dell will have all of its Platinum accounts set up with websites by the end of the second quarter. We're going to be introducing a lot of those customers to the concept of support services and electronic commerce through the internet, and this is a great way for us to improve the efficiency of all interactions. It's also important to remember that a direct relationship, when it comes to leasing, is much easier for us to capture the value that exists than trying to work that lease opportunity through a re-seller channel.

The majority of hires in the quarter were in sales and sales support. We had quite a few people in both the information technology group and also in manufacturing both here and abroad.

Dell is broadening its service offerings to cut off opportunities that competitors might have had to create competitive advantages. We've seen instances where there have been dramatic overcharging, if you will, for some of these services. We're trying to earn a reasonable profit on it, but doing it more as a way of completing the offering to our customers as opposed to losing money or making a tremendous amount on it.

We don't have any plans for Windows CE-based products. We're looking at the 2.0 CE specification and how that might impact the notebook market, but we're still very focused on the core of the notebook market, which we think is a much more important opportunity for us.

NT is continuing to take off and we are seeing a lot of NT-motivated transitions at the desktop and server levels that are helping us, and we believe we have the highest NT rate of competitors out there at the desktop level are continuing to drive that. Our new factory is completely Dell-on-Dell NT systems. We're rapidly moving a number of systems onto our own environment, but that will take a little bit of time to complete that transition.

It is not evident that Compaq has been successful in clearing inventory at their factories and distribution points and through the channel, certainly relative to the inventory position that Dell has. The bigger issue they face is the dealer mark-up, unless they eliminate the re-seller. All of the discussion that has occurred in the industry around this issue is causing a faster transition of customers from the indirect channel to the direct channel, of which Dell is the largest beneficiary. Dell continues to win outstanding awards and services in almost every country in the world. The reasons for the price different between Compaq and Dell are becoming less and less apparent, but Dell's intention is not necessarily to maintain a set difference in price, but to price products based on Dell's structural capabilities and to grow share consistent with objectives of maintaining a balance between growth and profitability.

Overall, we were pleased with the linearity in demand we saw over the course of the quarter, but we have not achieved nirvana in terms of linearity across all customer segments, geographies, and product segments. Momentum did accelerate as the quarter progressed and that has continued into the current quarter.

We're very excited about the efforts of the elective companies on the Intel and Microsoft platforms to drive servers higher up the enterprise. We see ourselves as a full participant in that and we are able to take advantage of a number of things that are occurring in the industry very promptly. We have demonstrated clustering and scalability and are working closely with Microsoft. The industry is moving away from a proprietary systems management or software tool architecture and more to an open structure, which clearly favors Dell. While some of our competitors may have been early pioneers in breaking the ice that existed in these new markets, we're clearly following very rapidly behind them and gaining share at a huge rate. You can see that we have surpassed a number of competitors in share and don't see that our momentum is slowing in servers. We do see opportunities where we will be leading the industry with new features and function and the setting of key standards. We will participate in the places and times that we feel compelled to and in the ways that we believe will deliver the highest return on our investment.

* 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.