Digital Equipment Corp posted vastly improved second-quarter net income, just edging out Wall Street estimates. DEC saw its bottom line surge 134.6% to $74.8m on revenue that dipped 1% to $3.32bn. Product revenue for the quarter was $1.82bn, compared with $1.84bn last year. Service revenue was flat at $1.51bn. Earnings per share rose 193.3% to $0.44 beating the First Call consensus by $0.01. With regard to the revenue, which fell about $200m short of most analysts expectations, DEC is blaming Asian sales (which account for just under 20% of its total) that saw a low double-digit decline after enjoying double-digit growth for the past five years. The Intel business was hit particularly hard in Asia, but DEC says it has taken appropriate actions to forestall any further damage in the region by reducing inventories and expenses there. DEC also took a beating of seven points year- over-year in foreign currency exchange. Of all the major systems companies, DEC is the most exposed to currency fluctuations because two-thirds of its revenue comes from international markets. Asia aside, revenue grew just 7% in North America and declined 2% in Europe. The only bright spot was Latin America, where revenues grew 22%. In constant currency, overall revenues were up 6%. DEC also says revenues suffered from a longer sales cycle in the quarter, due to customer concerns over its legal settlement with Intel Corp and related questions about future Alpha production. Earnings were boosted in part by an increase in gross margins – 34.9% percent from 32.9% a year ago – with product margins up to 37.6% from 34.5% and services margins up to 31.7% from 30.9%. Operating expenses were relatively flat. Two of DEC’s strengths continue to be sales in the telecom and internet service provider sectors, which have grown 20% and 75%, respectively, since July. DEC says its NT business doubled year- over-year, mostly fueled by Intel products. In the Alpha business, servers saw 2% growth, while workstations saw a 27% decline. Six-month net income was $99.9m, or $0.55 per share, on revenue that was essentially flat at $6.28bn, compared to a loss of $34m last year. The company ended the quarter with $2bn in cash and short-term investments. Looking ahead, analyst Bret Rekas at BancAmerica Robertson Stephens sees the hardware businesses continuing to struggle as Alpha languishes in the market and the PC business continues to lose market share. He points out that the flagging fortunes of DEC’s systems business have adversely affected the service business, and says Digital’s strategic position remains tenuous and we would continue to avoid the stock. Regardless of what may lie ahead, DEC shares responded to the earnings increase by climbing $1.875 to close at $39.375 on Thursday.
