Dell's DSI about half the level of its competitors.

leading to huge savings in working capital

Jan-95 Dell Inventory to cover 32 days of Sales

Compaq 73 days of Sales

Addnl. Inventory reqd. by Dell at Compaq's DSI of 73:

1995
Dell's COS 2,737 7.60 311.71

Addnl. Inventory 312 M 20 M increase in PBT

leading to Conservation of Capital

Low component inventory reduces obsolescence risk and lowers inventory cost.
Value of inventory reduces 30% p.a.

Lower inventory losses imply higher profits.

Compaq had to market both new & older systems.
Older systems were discounted, leading to cannibalization of sales of new systems.
Dell able to grow sales by offering faster systems at prices of competitors' slower machines.

Component shortages had order backlogs, leading to cancellation of some orders.

Overall, rapid technological changes in industry made advantages of Dell's approach outweigh the disadvantages.
 Dell Compaq
10.71% 20.30% Inventory as % of COS
3.212% 6.090% Inventory loss as % of COS
Addnl.
Contribution
to Profit for
Dell due to
lower
component
inventory &
effect of
price
78.8 reductions

ower machines.

approach outweigh the disadvantages.

 In USD M 5296
Incremental Sales in 1996 1,821 52%
Addnl. Operating Assets (32%) 582 4.29%
(Total Assets - ST Invest.) 227

Forecasted 1996 Balance Sheet (In USD M)

1995 Actual
Y.E. Jan 29, 1995 % 0f 1995 Sales
Current Assets:
Cash 43 1.24%
ST Investments 484 13.93%
A/R, net 538 15.48%
Inventories 293 8.43%
Other 112 3.22%
Total Current Assets 1,470 42.30%
P, P & E, net 117 3.37%
Other 7 0.20%
Total Assets 1,594 45.87%
Addnl. Funding Needed 31.94%

Current Liabilities:
A/P 403 11.60%
Accrued & Other Liabilities 349 10.04%
Total Current Liabilities 752 21.64%
Long Term Debt 113 3.25%
Other Liabilities 77 2.22%
Total Liabilities 942 27.11%

Stockholders' Equity:
Preferred Stock 120
Common Stock 242
Retained Earnings 311
Other -21
Total Stockholders' Equity 652 18.76%
1,594 45.87%

As of 1995, Dell would be projected to be able to grow at 52% without increasing its leverage and

Actual 1996 Balance Sheet Compared to Projections

Y.E. Jan 28, 1996 Forecast for 1996
Fixed Liabilities
Current Assets:
Cash 55 66
ST Investments 591 484
A/R, net 726 820
Inventories 429 447
Other 156 171
Total Current Assets 1,957 1,987
P, P & E, net 179 178
Other 12 11
29% Total Assets 2,148 2,176
 Addnl. Funding Needed 354

Current Liabilities:
A/P 466 403
Accrued & Other Liabilities 473 349
Total Current Liabilities 939 752
Long Term Debt 113 113
Other Liabilities 123 77
Total Liabilities 1,175 942

Stockholders' Equity:
Preferred Stock 6
Common Stock 430
Retained Earnings 570
Other -33
49 Total Stockholders' Equity 973 879
Common stock to employees 2,148 2,176
5.10% 45 227
Dell internally funded a 52% growth in sales largely by increasing its asset efficiency and profitab

of Sales in 1996, as compare

924
additional equity issued 49
 4.29% 1995 Actual Net Profit Margin
Growth in 1996 sales 227 Projected Net Profit for 1996
Actual net profit margin in 1995 227

2,176
Forecast for 1996 with Actual 1996 Sales
Fixed Liabilities Prop. Liabilities

66 66
484 484
820 820
447 447
171 171
1,987 1,987
178 178
1,692 11 11
582 2,176 2,176 582
354 (80) (80)

403 614 211

349 532
752 1,146
113 113 -
77 117
942 1,376

879 879
2,176 2,176

ithout increasing its leverage and issuing further equity shares.

Variance Y.E. Jan 28, 1996 Forecast for 1996 Variance

Proportional Liabilities

-11 55 66 -11
107 542 484 58 -135
-94 726 820 -94
-18 429 447 -18
-15 156 171 -15
(30) 1,957 1,987 -30
1 179 178 1
1 12 11 1
(28) 2,148 2,176 -28
 (80)

63 466 614 -148

124 473 532 -59
187 939 1146 -207 17.7%
- 113 113 0
46 123 117 6
233 1175 1376 -201

6
430
570
-33
94 973 879 94 973
(28) 2148 2,176 (28)

ng its asset efficiency and profitability.

Total Operating assets at 29% 5.1% vs. 4.3% 5.14% NP Margin 1996
of Sales in 1996, as compared to projected 32% 20.15% GP Margin 1996
21.24% GP Margin 1995
107

582
135 447 58 Extra Actual Funding in 1996
forecast vs. actuals
-67 63 505 Total Increase in Funding in 1996 over 1995
124

46

272 Increase in Equity w/o 49

45 -22
 Addnl. Sales 2,648
Addnl. Operating assets 779
Forecasted 1997 Balance Sheet (In USD M)
1996 Actual

Y.E. Jan 28, 1996 % 0f 1996 Sales

Current Assets:
Total Assets 2,148 41%
Addnl. Funding Needed 29.40%

Current Liabilities:
2,148 41%

To fund the shortfall of 984 M 44 days of sales

through increased asset efficiency, Dell needs
56 days of COGS

Current CCC 40 days

CCC has to become negative to fund the shortfall of 984 M
HOW?

Savings from Hypothetical WC improvements

DSI DSO
1997 Projected 14 27

Hypothetical improvements 17 15
* Daily Savings 17.6 22.1
Annual Savings 299.55 331.00
Total Savings in USD M 983 904

Improvement in Profitability in 1997 can also eliminate the shortfall of 984 M - 1% increase in margin will inc
Margin improvements reduce the required working capital improvements as above - A combination of both
seems to be the only reasonable alternative to fund the shortfall.

Repurchase of Stock indicates under valuation in the market and leads to increase in value.

Actual profit margin 1997 6.68%

ST Inv. Increased to 1237 M from 5
LT debt reduced to 18 M from 113 M
Common stock reduced from 430 M
Inventories 251 M
903 M A/C Rec., 1040 M A/c payab

Actual 1997 CCC 13 37

 408 Projected 1997 Net Profit 5.1%
Daily COGS 17.6 56
Forecast for 1997 with a 50% Sales Increase
Debt repaid &
$500 Equity
Fixed Liabilities Prop. Liabilities Buyback

779 2,927 2,927 2,927

371 (161) 984

2,927 2,927 2,927

DPO CCC
53 -12

20
17.6
352.42

% increase in margin will increase net income by 79 M.

ove - A combination of both profitability & WC improvements

ase in value.

7759 M sales, 518 M

v. Increased to 1237 M from 591 M
bt reduced to 18 M from 113 M
mon stock reduced from 430 M to 195 M
tories 251 M
A/C Rec., 1040 M A/c payable

54 (4)