ALEXANDRIA, Va., August 14, 1996/FOOLWIRE/ --- DELL COMPUTER CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: DELL)") else Response.Write("(NASDAQ: DELL)") end if %>, the world's leading direct marketer of computer systems, reported record-breaking results for its second fiscal quarter ended July 28, 1996. Revenues for the quarter were $1.69 billion, slightly below the consensus estimates of $1.709 billion, a 40-percent increase over the second quarter last year; net income grew 58 percent over the same period to $103 million and primary earnings per share increased 59 percent to $1.05, well above the consensus estimates of $0.86 EPS. Primary earnings per share includes an extraordinary charge of $0.10 to retire a portion of the company's senior notes.

Cash and marketable securities reached $956 million, a company record and a 68% increase over the second quarter of last year. They achieve this increase despite spending $98 million to buy back an additional 1.9 million shares of the company's common stock and $75 million to retire a portion of their senior notes.

These results allow them to capture several important distinctions, according to DataQuest. They are now the number four systems supplier in Europe and in are in a dead-heat for the number four position in the U.S. The strength in their corporate business was a major factor in this result. IDT announced they were the number two supplier of desktop systems to large and medium businesses in the U.S. in calendar 1995. Computer Intelligence announced that Dell has the highest consumer loyalty of any Wintel manufacturer.

Dell has focused on liquidity, profitability and growth and has set continued records, particularly in asset management. The Dell model continues to be validated. Their financial results are possible because of their inventory management, their direct relationship with customers and their fast-turn distribution model allowed them to achieve one of the highest unit growth rates in the industry. The company did record operating profits and has one of the strongest balance sheets in the industry.

OVERALL REVENUES

Revenue was up 30% versus last year and up 3% sequentially. This markets the tenth consecutive quarter of sequential revenue growth. Revenues in the Americas was up 46% over last year and up 7% sequentially. Large account business in this region grew 40% over last year and a robust 15% over last quarter. In this segment, they continue to win new accounts while further penetrating existing accounts. These wins helped them grow their education, state and local government business by more than 70% over last year. Sales to small and medium businesses were up 51% over last year and seasonally down 8% versus the first quarter. Backlog was up in dollar terms to $161 million. The first quarter was $118 million. This represents an increase from seven days of sales to nine days sales.

REVENUES BY GEOGRAPHICAL REGION

The continued their global expansion with strong growth in Europe and Asia-Pacific. European revenues grew 35% over last year and fell 6% sequentially. Dell saw solid performance overall in Europe and superior growth in France and Germany. These countries were up more than 55% versus the second quarter last year. In the United Kingdom, their most mature market in Europe, they grew at twice the rate of the industry, strengthening their number two position in this market. While they are concerned about softness in Europe, they think the direct model with particular emphasis on large and medium accounts offers particularly opportunity.

Asia-Pacific, including Japan, grew 11% over last year and 6% versus the first quarter. Sales exceeded $200 million for the first half. They continue to make significant investments and are pleased with the momentum. They have transitioned out of retail in Japan. In the second quarter, direct sales grew 39% in local currency. They have direct models established in nine markets in the region, including three of the top five markets.

REVENUES BY PRODUCT

On the products side, this was the quarter their server business began to really accelerate. Server units were up 115% versus the second quarter of last and 57% sequentially. Server revenue grew 71% versus last year and 19% over the first. Unit growth was driven by particularly strong sales of their new entry level EL server. They priced for leadership in the second quarter, lowering prices every four weeks. Giving the large memory requirements for servers and the huge drop in memory prices, this all allowed them to lower server prices by more than 30% and still exceed internal margin targets. Leadership pricing allowed them to be as much as 30% below their leading competitors. They are beginning the roll-out of a refresh of their server product line.

Despite tight supplies of high resolution screens throughout the quarter, notebook sales increased 56% over last year and 6% sequentially. During the quarter, they introduced new products and continued to see strong demand for their primary corporate configurations. Lead times on the corporate configurations have been approximately three to seven weeks through the quarter. Going forward, they hope to get lead times down to more normal levels as supply improves, but don't expect significant improvement until late in the third quarter or early in the fourth. Lithium ion battery supplies are back to normal.

Desktop products were in line with the overall business. They are particularly pleased with the success they have received on their new Pentium Pro line. These systems are priced to lead the transitions to Pentium Pro and 32 bit operating systems. The chassis are recyclable and are designed to be easier to service and operate. Later this year, they will introduce mainstream Pentiums using this chassis.

Dell continues to lead the industry in transition to the newest technology across all products. During the quarter, nearly 60% of revenues were generated by systems with processor speeds of 133 megahertz or above. Unit sales were up 53% over last year and 12% sequentially. As a result of the decline in component cost, average revenues per unit decreased 8% sequentially. This decline may be difficult to recover given the new prices for memory.

PROFITABILITY

Gross margin was 22.1% in the second quarter, a significant improvement from 19.5% in the first. They felt some benefit from a shift in mix, but the key issue was the steep decline in component costs. Component costs fell by more than twice the pace of a normal quarter. Memory alone dropped more than 50%. Their model which has them operating with two weeks worth of inventory enabled them to capture these cost declines faster than anyone else in the industry. This contributed to gross margins while they lead in pricing. In some product categories, like servers, the declines were even greater. This is the way the direct model works. In an industry that produces systematic declines in component costs, the inherent inventory efficiency enables them to lead prices and drive high growth as long as they execute.

Operating expenses were well-managed in the quarter. They rose sequentially from 12.6% of sales in the first quarter to 13.2% of sales in the second quarter. They did take advantage of rising gross margins to invest in people and structures. On liquidity, the company believes it needs to continue to do a good job in asset management and to focus on capital management as a lever to extend the advantages of the direct model. Days sales in inventories fell to 14 days, 22 days (61%) lower than last year and another company record. Their performance was assisted by solid component supply. On a sequential basis, days in accounts receivable increased from 43 days to 44 days and days in accounts payable increased from 42 days to 48 days. This performance allowed them to reduce the cash conversion cycle to ten days, yet another company record. For the quarter, they generated $282 million in cash flow from operations. They will continue to focus on working capital management.

STOCK REPURCHASE & DEBT RETIREMENT

Under the current program, they will buy up to 16 million shares of common stock. In the second quarter, they puchased 1.9 shares. In aggregate, they have purchased 5.2 million shares at an average price of $38. They have also entered into a series of options agreements totally another 5.3 million shares. The average exercise price of the call rights is $36 and change and the options are excercisable at various times next year. With regards to their senior notes, they have recently initiated a tender offer for the $32 million in notes that remain. If they are successful, this will cost them $4 million next quarter. They fully expect people to covert prior to redemption, which will cause half a million shares to be issued.

FORWARD LOOKING STATEMENTS

Dell believes that 1996 will be a good year for the industry and the second half is a big part of that story. Customers are transitioning to Pentium Pros and 32 bit operating systems. The big drop in component costs have allowed prices to go down and unit sales to grow. Dell sees three opportunities: further penetration of the server and notebook market, continued expansion of Europe and Asia and continued growth of the direct channel. They want to move at a healthy, sustainable pace and they have some tougher comparisons in the second half. They prefer to see steady, sustained growth on the revenue side.

On the profit side, they want to provide steady growth as well. In the short term, they could see some adjustment to their margins that analysts should consider. Their indirect competitors could catch-up in the third quarter. Assuming their maintain price leadership, gross margins could decline. Whether they will decline to the level they saw a year ago remains to be seen.

Dell continues to drive for efficiency in manufacturing spending and they will try to leverage their inventory advantage on further component cost declines. Dell will continue to push penetration in new and emerging markets. This push takes the form of aggressive prices where they drive for rapid penetration, not near-term margins. The third and fourth quarters are typically more negative from a product and customer mix standpoint. Government sales peak in the third quarter and the small business and consumer sectors tend be larger in the fourth. Product transitions are always a risk. They are transitioning a large majority of their desktop line.

The biggest issue to gross margins is their competitor's catching up to the component cost decline that Dell has already enjoyed. This alone points to a downward move in margins in the third quarter. Whether they will decline to last year's levels remains to be seen. As the operating expense line, they are still driving spending up as they build infrastructure. On a percent of net, they want to gain scale advantage so they can invest in people and infrastructure without driving expenses up as a percent of sales. They did not give a specific target because it demands on the pace of topline growth and a number of other factors. In general, they would like to see operating expense decline as a percentage of sales.

Overall, they are very bullish on the direct model and their prospects for their year and next. They believe they have demonstrated the core virtues of their model and those virtues are applicable to a variety of market conditions.

* 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.

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