FOOL CONFERENCE CALL SYNOPSIS*
By Deborah Tidwell (TMF Debit)

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

ALEXANDRIA, VA (August 20, 1997)/FOOLWIRE/ --- Dell Computer released their second quarter 1997 results after the market close on August 19th. They continued to expand the superiority of their direct model but were most pleased with the consistency of their performance over the last three years. They hit new records this quarter in liquidity, profitability, and growth -- the three priorities they have matched themselves against over the past three years.

Revenues increased to a record $2.814 billion, up 67% versus the same quarter last year and 9% sequentially. That marks the 14th consecutive quarter of sequential revenue growth. Earnings per share rose to a record $0.59 per share reflecting their July 2-for-1 stock split. Strong earnings growth and asset management fueled a 167% return on invested capital. With regard to ROIC, they have consistently exceeded the strongest companies in their industry by almost 3x.

CASH & CASH FLOW. At quarter end, cash and marketable securities totaled $1.515 billion. They generated $289 million in cash flow from operations while growing 67%. This allowed them to increase their cash balance by $73 million during the quarter despite spending about $200 million buying back an additional 5.7 million shares of stock during the quarter.

SHARE REPURCHASE & USE OF CASH. Since they announced their share repurchase program they have purchased 59.3 million shares and have contractual arrangements covering another 27 million shares bringing the total commitment to 86% of the program. They intend to continue to repurchase shares as long as they feel the shares are undervalued. After they complete the current program, the directors will evaluate the best use of cash from there.

DIRECT MODEL HIGHLIGHTS. The next level of direct is underway from an operational, technology, and financial perspective. Operationally, they demonstrated consistent performance and execution across all geographies, products, and customer segments. They ranked fourth overall in unit marketshare, were the fastest growing among the top five and gained 1.4 share points over the past year. From a technology standpoint, Dell introduced the Dell Workstation 400 family during the quarter. The workstation market is projected to exceed $26 billion by the year 2000 and they are now positioned to get their share of this market. During the quarter, Dell products received over 100 performance and value awards including two Reader's Choice awards in PC Magazine's Service and Reliability survey. Financially they again saw strong performance in asset management, delivering what they believe is the strongest balance sheet in the industry.

US GROWTH. Revenues in the Americas region grew 74% versus the same quarter a year ago and were up 14% sequentially. Large corporate and institutional customers grew 68% versus last year, highlighting the strength of their relationship and services model. In the experienced consumer space, their year-over- year growth was 94%. They haven't prioritized this segment in the past, but this is an attractive and profitable business for Dell and they will accelerate their push into this market.

GLOBAL EXPANSION. Global expansion continues with solid growth in both Europe and Asia/Pacific. European revenues grew 42% versus the second quarter last year and were down 4% sequentially, a typical seasonal pattern. In the UK, the second largest PC market in Europe, revenues increased 37% over the year-ago period. During the quarter they closed the gap with the number one competitor, increasing their Euro market share nearly 3% to approximately 12%. In France and Germany, they continued to take market share, increasing revenues by 46% in each country. Asia/Pacific including Japan grew 89% versus a year ago. For the first time, quarterly sales in this region exceeded $200 million.

SALES THROUGH THE INTERNET. In Japan, their Internet site now ranks among the top 15 web sites in terms of traffic and facilitates 35% of their individual consumer sales. In total, worldwide they are getting about 300,000 visitors per week to their web site and about 150,000 of those are going into the Dell store. Over 30% of the sales now to consumers are occuring over the Internet in the US and the numbers are similar for Japan and some of the other markets. In Canada it is about 50% in the consumer space which is higher than the corporate average. They would like to think that the consumer business is a leading indicator of trends because they tend to have a lower barrier to accept some of these new technologies. They aren't comfortable predicting where it will go in terms of numbers, but are investing heavily in it which indicates their confidence and enthusiasm.

SERVERS. Server products continued to build momentum, setting a new quarterly record. Server revenue grew 299% versus the second quarter last year and increased 37% sequentially. This strong performance helped servers grow to 8% of revenue. Overall, units grew 269% versus Q2 last year and increased 29% sequentially. According to preliminary IDC data, they retained their number 3 US ranking and their number 4 worldwide ranking, increasing their market share by 1.2% in the quarter. Sales of midrange and high-end servers continued to rise strongly accounting for 60% of their revenue mix. Last month they extended their PowerEdge family with the introduction of the PowerEdge 4200. This dual-processor-capable Pentium II server has a starting price of $4739 and runs at clock speeds of 233, 266, and 300 MHz.

HIGH-END TECHNICAL APPLICATIONS MARKET. In July, they launched the Dell Workstation 400 featuring Intel's Pentium II processors running at either 266 or 300 MHz. They have formed alliances with leading hardware and software vendors to support mechanical CAD, financial services, and software development markets. They are very excited about this market and the opportunity to bring the Dell model to the high-end technical applications market.

NOTEBOOK & DESKTOP. Notebook revenues increased 93% versus the same quarter last year and grew 8% sequentially. Notebooks represented 19% of systems revenue this quarter. This remains a very competitive sector of the market and one they think will be very active this year. Desktop products continue to perform well.

SALES BREAKDOWN BY TECHNOLOGY. Dell continues to rapidly transition to the newest technologies across all products. For the quarter, 84% of their systems revenues were generated by sales of systems with processor speeds of 166 MHz or above. 20% of sales were Pentium Pro or Pentium II and 47% were Pentium MMX.

REVENUE PER UNIT. Average revenue per unit remains stable this quarter at approximately $2700. In contrast to the industry, Dell's average revenue per unit has been consistently strong, averaging more than $2750 the last 3 years. While many of their competitors saw declines in the same quarter, Dell's average revenue per unit was up 4% versus the prior year. Two factors drive this performance. First, their product mix is getting richer as they move into the enterprise. Second, they work with end users to sell them up to higher configurations. Both factors highlight the strength of their model. Total unit shipments were up 61% versus the same quarter last year and 9% seqentially.

GROSS MARGIN AND OPERATING EXPENSES. Gross margin was 22.2%, a 60 basis-point increase from 21.6% in the prior quarter. Operating expenses were up sequentially at 11.6% versus 10.9% in the first quarter. As they indicated last quarter, they are increasing their spending levels in a number of areas to further build the team and infrastructure to support their growth. They added 1600 people in the second quarter on the back of a 1400-person increase in the first quarter. This represents sequential increases of 14% and 13% respectively.

LIQUIDITY. Turning to liquidity, they are pleased with their performance in asset management. Inventory finished at 11 days of sales in the second quarter and this is a one-day drop from the previous quarter and in the range over the past several quarters. They saw a 3-day increase of receivables to 37 days but that was partially offset by a two-day increase in payables to 53 days. This combined performance allowed them to hold their cash conversion cycle at a negative five days, continuing their leadership in asset management.

OUTLOOK FOR Q3 AND Q4. Looking ahead, Dell believes overall industry demand is very healthy. Processor and product transitions, coupled with cost reductions have positioned the industry for a strong finish to the year. Their third quarter is the peak quarter for their US federal government sector and a good quarter for the US in state and local government business. Other sectors including markets outside the US are generally weaker in the third quarter. In the fourth quarter the patterns are reversed. For Dell, these patterns have driven sequential growth in the low teens in the third quarter and around 10% in the fourth. On a year-over-year basis, Dell's sequential growth was very strong last year, giving them tough comparisons for the second half of the year.

PROFIT OUTLOOK. On the profit front they want to continue delivering superior earnings growth. They believe they can evolve the operational and financial advantages of the direct model as long as they execute. At the gross margin line, there are factors running both ways. Among the positive drivers, they continue to push for manufacturing efficiencies and their new manufacturing facilities incorporate more efficient layouts and inventory flow. Initially they require increased investment, but as they ramp production Dell gets the enhanced efficiencies. Dell will also work for continued improvement in their product mix with servers and workstations especially. Both lines are priced to accelerate the transition to the Wintel standard, yet these products carry superior margins. On the negative side, product transitions are a real risk. During the second half, they will be in continuous motion, transitioning both their notebook and desktop lines and the next couple of months will be the busiest. There is no such thing as flawless transition. This continues to be a big risk across the entire industry. Second, they continue to push their penetrations into new and emerging markets. This push takes the form of aggressive prices where they are driving for rapid penetration, not near-term margins. They are currently doing that in a number of geographic markets. Finally, they have the overall risk of building their infrastructure fast enough to support their growth. The challenge they face is making sure they are hiring qualified people and getting them oriented to Dell before internal processes deteriorate. This is a big challenge for any high-growth company.

OUTLOOK ON OPERATING EXPENSES. At the operating expense line, Dell is stepping up investments to keep pace with their growth. Their first priority is to invest in people. They have significantly stepped up their hiring rate and their headcount has grown 46% from a year ago, and 14% in the second quarter alone. They are still adding as they find qualified people. The second area is information systems and infrastructure. They continue to invest and strengthen their information systems around the world. These investments are driven not by the growth they have seen alone, but also by new businesses they are launching in new geographic regions, by new markets and products, and by expansion of the model itself as they expand into the Internet and services.

INVESTMENT IN THE INTERNET. They continue to benefit from a model that is competitively advantaged and they continue to invest in two key areas that are designed to take their model to the next level. These areas are the Internet and value-added services. Their Internet initiative is well underway. Sales generated by the Internet exceeded $2 million per day in the second quarter and they are extending the advantages of the Internet around the globe. They now support 35 country-specific sites in the Americas, Europe, and the Far East that provide sales, service, and technical support. They also have more than 9000 customers who have personalized a Dell web page. These pages provide them with updates and allow them to efficiently go right to the information they want from Dell. For large customers Dell has finished the first phase of their premier page rollout and almost 100 of their largest customers around the globe can now access their own premier pages that streamline the procurement process, and lower the customer's cost of owning a Dell system. They continue to invest in the Internet. Today, much of the efficiency gains or activities have occured by streamlining their customers' procurement activities and by improving the overall Dell value proposition.

VALUE-ADDED SERVICES. They also took steps in the quarter to expand their value-added services offered across their entire customer base. During the quarter they expanded their program of factory-integrating customer software and hardware requirements. In the Americas, their new manufacturing facility dramatically increased their integration capacity. As they have broadened the availability of this program to all customer segments, they have seen a rapid rise in usage. The number of integration projects increased 38% sequentially in the same quarter and was up over 200% versus the prior-year quarter. They are also broadening the services they offer to global companies. Through their Global Enterprise Program (GEP), they provide centralized contracting and order processing, global delivery and support for custom products, worldwide reporting, single and multiple-currency pricing, and many other services. The GEP is a strategic initiative for Dell and a real differentiator as they transition the model to the next level of direct.

COMPETITIVE ENVIRONMENT. They were asked if they are seeing any real change in the environment with the moves that Compaq and HP have been making. They responded that they don't feel any incremental pressure in terms of pricing and most of what has been covered in the press lately has been about "price wars." What Dell has noticed is that the pricing actions have actually been less aggressive in the last quarter than in Q1 and Q4 of last fiscal year. That is not to say that competitiveness won't increase in coming months as various companies become more direct-like, but Dell hasn't seen any irrational moves. As regards the operating environment, the dramatic component cost of occurence of last year has not been replicated this year so there is somewhat of a different operating environment which have positioned components and new pricing actions to be less aggressive over time. Clearly they have a healthy dose of price/performance with Intel's moves and that is going to key up a favorable second half in terms of overall industry demand, but these reductions tend to shift from one part of the cost equation to another. They feel they are entering a more normal period of reductions as opposed to, in the second quarter last year, they had some pretty anomalous reductions in DRAMs.

BACKLOG. With regard to backlog, they ended the quarter at 8 days or $249 million of backlog which compares to the first quarter of 7 days and $149 million and in the comparable quarter a year ago it was 9 days and $161 million. They are comfortable they are staying within target ranges of availability of products in terms of backlog.

MANUFACTURING AND PP&E. They were asked how they plan to handle manufacturing as they pursue a broader worldwide strategy for European and Asian activities. They responded that they have divided the globe into three regions and they are supported regionally by as much local sourcing as possible as well as by local manufacturing. They are in Limerick Ireland, Austin Texas, and Penang Malaysia and each of those facilities have capacity in excess of their current run rates. When they bought Penang Malaysia they indicated that it had the practical capacity to essentially supply a market as large as they anticipated Europe to be the following year which was roughly a $3 billion capacity. They were shipping at roughly $200 million for the first time this quarter. They just announced last quarter a new domestic plant coming online that has doubled their capacity in the US and they doubled their capacity in Ireland last year. In terms of property, plant, and equipment, they grew gross assets roughly 50% year-over-year and their PP&E as a percent of assets actually declined from 9% to 8%. That means all of their risk is in their cash and investments and their receivables which are rated higher than Dell's credit rating, and their inventory was 11 days.

THE SUB-$1000 MARKET. They were asked about the sub-$1000 market and responded that they haven't really focused on it but have rather focused on the knowledgeable, experienced buyer. The consumer business did grow in excess of 90% and met their profit objectives and we are going to see a more aggressive rollout and expansion of that business. As far as lower price points on the corporate side, they are not focused on that area either and, in fact, are seeing more and more companies going towards the full-feature approach. They also have an advantage here in that they are able to capture all the revenue opportunities that exist as a function of their direct business and adding services and the full component of memory, drives, communications, and networking products that go along. They suggested that their revenue growth is the strongest testimony they can give to the fact that they are not focused on the low-end of the market and haven't seen a compelling call for those products from their customers.

EUROPEAN SALES ENVIRONMENT. They were asked about Europe. They responded that their business in Europe grew 42% which is pretty good considering the market growth there. Business there remains healthy and Dell is focused on how they can continue to exploit the opportunity to gain share in France and Germany while strengthening their position in the UK. They are also going to be looking at more fully penetrating the notebook, server, workstation, and consumer markets there.

PROCESSOR MIX. They were asked about the mixes of processors. They responded that they have been on record saying that they are driving towards 15% or more in revenues from servers, 25% from notebooks, and the remainder from desktops. As far as processors, a year ago they were at 73 desktop and notebook systems for every server. With the Q2 performance, it takes them to 37 and their information suggests that industry benchmarks would be about 17, so they are about halfway to the industry benchmark of leading server-to-desktop/notebook ratio. Clearly they are going to drive for strong growth in the server business. They had 299% this past quarter. On mix, about 60% of their sales were midrange and high-end and 40% were the entry-level Pentium II product in terms of revenues.

CORPORATE PURCHASING TRENDS. They were asked about corporate purchasing trends. They responded that the large account corporate business continues to grow at a healthy rate and is broad-based across their desktop, notebook, and server businesses. Windows NT is clearly a factor. Dell has yet to introduce the OptiPlex Pentium II system. So, if there is demand for that, it is something they have yet to see. The server business continues to grow and they are seeing nice opportunities there. The year 2000 is an issue for all of their customers and for them. They have a broad-based program internally to deal with it across all of their operations including their suppliers. As far as the impact on customers, they are seeing some customers preoccupied by this and are seeing an equal number of them realizing they need to replace all of their old Windows 3.1 based systems. It is not clear to them that this is having a negative effect on their business. In a number of their government and government related customer segments, the customer's only option is to upgrade to new hardware to be able to run the new generations of software. It could serve as a catalyst to upgrade in fact. Looking at Sun Microsystems in the workstation business, over the course of the last two years over half of their revenue growth has been attributable to storage, memory, and servers. Servers can be a compelling source of growth. In the first half and last quarter for Compaq, about 31% of their revenues were server-based. For Dell, the average system configuration today is a 17-inch monitor, 3 gigabyte disk drive, about 38 megabytes of memory or a little higher, and a 200 MHz processor.

* 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.