Montgomery Conference: Dell's CFO Says Computer Giant Is Just Getting Started

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SAN FRANCISCO -- This is what


(DELL) - Get Report

Chief Financial Officer Thomas J. Meredith could have told a standing-room-only crowd of money managers that greeted him at the

Montgomery Securities

Conference on Wednesday: "People, I have given you a 240% gain this year," he might have said. "I have given it to you in size; I have given it to you in volume. I have given it to you dependably. I have not made mistakes. You have not been disappointed by me in any conceivable way. I have made you -- every single one of you -- I have made you miserable wretches more money than you could possibly deserve. You should get down on your knees -- right now -- put your hands together and thank God almighty that I have given you all of this. And you should thank me and never ask anything of me ever again."

He could have said that. He had every right to say that.

He did not say that.

Instead, Meredith made the boldest predictions that any company has made here at this show of bold predictions. He predicted, widely and clearly and repeatedly, that the Dell miracle has only just begun. "Every year I come to this conference," says Meredith. "And every year people ask me: 'Tom, surely you can't expect to keep growing like this.' But I'm here to tell you that we will keep growing like this and that we are growing faster, with better margins and better market share at an accelerated pace. This year Dell became the number one market share leader in the corporate desktop space, not just in the U.S., but globally. We are the premier player."

Meredith boasted that the entire marketplace has come to recognize that Dell's method of selling directly to the consumer was a superior model, and cited nascent attempts by competitors to establish their own direct models. "There is no more debate," he says. "The direct model is superior to the indirect model. Ask the indirect players." And Dell doesn't expect anyone to beat them at Dell's game.

Among the engines of growth that Meredith delineated was the Internet. "The Internet is the ultimate extension of the direct model," he says. "We are selling more than $2.5 million of product on the Internet per day. We have premier customers set up inside of our firewalls and we're inside of their firewalls. This makes it even


for the corporate customer to make Dell purchases."

Dell is also making strong headway into the business of selling services along with their computers. "There's a myth that Dell only sells boxes, that we don't provide services," says Meredith. "One of Dell's growth possibilities is product, but services and consulting is one of our biggest growth opportunities for the future. Eventually, in the not-too-distant future, you'll have the capability to log in to our Internet site and get artificial intelligence for your customer services. So that our customer is more knowledgeable about our product, whereas our customer services costs go down and our margins keep going up."

Meredith also says Dell's forecasting is more dependable than anyone else in the marketplace. "We have over contacts with over 300,000 customers every week," he says. "We started off the year saying growth would be 18% to 20% this year and we see no slowdown in anyway. And we expect that to continue over the next decade."

Most bullish yet, Meredith doesn't actually expects margins to grow exponentially with the companies over all growth. "Our compound annual growth rate over the last year has been 58%, in the first quarter of this year it was 58%, and in the second quarter it was 68%. So it's clear -- we're actually growing faster as a bigger company."

And the books? Couldn't be better. "We have $1.5 billion in cash," he says. "So we've been able to use that to buy back a couple hundred million dollars of shares in the second quarter. Our profitability increased to 108%. Our

return on invested capital was 167%. Compare that to our nearest competitor, which has 48%." On all cylinders, Dell is firing.

In the quarter ended June 30, Dell reported revenue of $2.8 billion, up from $1.7 billion one year earlier. Net income rose to $214 million, or 59 cents a share, from $103 million, or 26 cents a share, in the year-earlier period. The year-ago numbers included a one-time charge of $9 million, or 2 cents a share. Share value, of course, has grown incredibly. The stock was trading on Thursday just under 98 and just below its split-adjusted all-time high of 99, reached on Tuesday.

Meredith's story of unmitigated growth coming from the direct channel didn't bowl over everyone.

David Rocker

, the belovedly dyspeptic hedge fund manager, says he confronted the company in the breakout session (which was closed to the press). "If everyone else is seeing the appeal of direct channel sales because direct channel sales have better margins," asks Rocker, "how come Dell says they don't feel any margin pressure? Everyone else is dropping prices, it's got to affect them. I asked

Micron Electronics


about this trend and they say it has a direct impact on margins. But Dell won't answer that question."

But Rocker sure felt lonely. The room loved it. "I think analysts are going to raise estimates," says Elizabeth Bramwell of

Bramwell Capital Management

. "Their story was so unequivocal and strong. They seem to continue to make headway, and that's really saying something when you're talking about Dell."