Motley Fool Radio Interview
With Dell Chief Financial Officer
Tom Meredith

Part 1

On the August 21st Motley Fool Radio Show, Fool co-founder Tom Gardner talked to Tom Meredith, Chief Financial Officer of Dell Computer (Nasdaq: DELL). During the interview, they talked about Dell's outstanding recent quarter, the free PC concept, and the Internet. The complete transcript is below.

"I actually think the greatest opportunity and the greatest threat is the Internet as a technology."
TMF: Congratulations on a great quarter, Tom. Second quarter for Dell, $6 billion in sales, margins are up, $4.7 billion in cash on the balance sheet. What stands out for you as a few of the highlights for Dell this quarter that might not pop up immediately on someone's radar?

Meredith: I think perhaps the most compelling is the consistent performance, frankly, over the entire decade on our topline growth, on our market share gains, and our continuous focus on being the low-cost provider and therefore best value proposition while growing profitably. And secondly, I would call out the Internet and Dell's "netness" -- 1) enabling itself, and 2) equally important, enabling both our suppliers as well as our customers, and 3) the return on invested capital -- 260%, a company record.

TMF: And the level of efficiency, as you said, has been growing and has been outstanding among competition for the last decade. I'm wondering what the underlying meaning of that $30 million in sales per day online for Dell, looking forward over the next five years, what the Internet will really mean to this company over that period?

Meredith: Well, at least by inference, Tom, you'd have to look at our operating expense structure and how we have been able to drive efficiencies through our company and throughout the world to where we were able to essentially withstand declining ASPs [average selling prices]. In fact, as part of that you have to understand we're the ones passing the declining component cost through faster than any other single competitor and what the Internet does is 1) allow us to continue to enhance our customer touch, and 2) at the same time bring our suppliers into contact more directly with our customer so they can feel the pulse of real demand -- as opposed to third party interpretations of demand. And finally, it can fundamentally assist us in taking our operating expense structure down. So, 40% of all service issues are now being handled over the Internet -- 70% of all order status. We have 95% of our bill of materials hooked through our top 50 suppliers now online sharing real information, from product design to quality to demand. I think it's massive.

TMF: It has been massive and impressive and gaining in efficiency, and obviously, as you pointed out, the Internet really allows companies like Dell to lead the way in improving customer service and efficiency of delivery and the variety of products -- being able to lay them out on the site. One of the issues that has come up in discussion on our site and that seems to be bandied about by critics of the PC industry and particular of Dell and its valuation today is the ascent or the potential threat of the free PC. What does the free PC mean to you? Is it being overstated? How does it change Dell's perspective on the markets it's operating in?

Meredith: Well, I think the free PC concept is an oxymoron. Certainly from my perspective it's a contradiction in terms, and while it's received a fair amount of press if not even pre-public funding, the economic model has yet to be proven, and so while we pay very close attention to what the free PC players are offering in the way of rebate structures and just trying to understand their models, I frankly, having studied these very closely, still don't get it.

And maybe I'm missing something and I'll be proven wrong over time, but at the moment, while ad revenues, to pick on one of the economic subsidy models, continue to go up fairly exponentially, the number of players competing for those revenues is going up even faster and cpms and ad rates are coming down even faster still so yesterday on the [conference] call you may have heard me say that look, Yahoo! made in last year's terms $7 to $10 a customer for the year. The cost to provide access, which is primarily one of the hooks being used to essentially establish the PC as free, costs a company somewhere around that per month. And so, I still don't get the model. So maybe you can help me understand.

TMF: It could be a continuously break-even model into eternity.

Meredith: That's at best case (laughing).

TMF: Tom, probably a lot of our listeners aren't really familiar with what a server is, but I know that Dell has been pursuing aggressively what would be considered a higher-end portion of the market. A lot of people think Dell is just a PC company, but I know you have a push into servers as well. It's been incredibly successful over the last couple of years. Can you define just very generally what a server is and why it matters to Dell?

Meredith: A server is essentially a product that allows either a department or a work group or a company to have reliability around the computing performance of the piece of equipment. So, whether it's a file print server or running an ERP [enterprise resource plan] application, it is intended to provide more real time capabilities from a lay perspective with better fault tolerance and redundancy and better, if you will, overall speed to solution than, for example, a desktop. Now what you have to keep in mind, Tom, is that -- and I've been in this space roughly 25 years now -- the cost of what is on your desktop today whether it's a sub-$1000 computer or a $3000 really high-end personal system is providing literally more computing performance and therefore power than what was being sold for over $2 million as a mainframe in 1978. It's pretty staggering actually.

TMF: It is stunning what has happened both with the cost of linking computers together and providing that power and that solution, and also the availability of it.

Meredith: To that end, you talked about our push into the space. Let's be mindful of the fact that now we're number two from roughly a standing start three and a half years ago in the server space, which is really an enterprise space, and over half of our product revenues are from the mid to high end of the server range. So it's not just Dell feeding off the bottom, it's Dell playing across the broad sweep of products, and actually bringing leadership to the product market. And that also pertains in the workstation arena and the storage arenas and those are the three categories that we have dubbed as enterprise.

TMF: Peter Eidson, a Fool in Denver, Colorado who's out in our discussion groups on Fool.com has posted the following question: "What would you consider to be Dell's greatest opportunity right now, looking out over the next couple of years, and the greatest threat to Dell's business today?"

Meredith: I actually think the greatest opportunity and the greatest threat is the Internet as a technology. In terms of the opportunity, we already used the word massive in terms of the transformational changes that are being wrought across virtually every industry and within a lot of companies. I think Dell is a leader in bringing Internet infrastructure to itself, to its customers, its suppliers, and affiliates. I think the biggest threat is that same technology can enable a new entrant to come up and chew at us from underneath and it would be potentially very disruptive. So we have to be mindful that this is a sword that cuts on both sides.

On to Part 2 of the Interview