Digital Equipment Corp donned sackcloth and ashes again yesterday to lament the close of another bad quarter, its shares tumbling $5.50 to $41.37 on the day. This time the company’s number two Enrico Pesatori, head of the chief trouble spot, DEC’s PC operation, was made a living sacrifice, forced to resign effective immediately after three years with the company. However he’s not going alone. DEC said it would dismiss another 7,000 people over the next 12 months, a solution that will immediately cost it $475 million in charges. This 7,000 figure comes on top of the 8,000 jobs DEC now admits it quietly cut in the year just ended, 6,000 of them in the June quarter alone.
Combining the 6,000 and 7,000 figures indicates that recent speculation of the 10,000 jobs being lost reported by our sister publication ClieNT Server News was in fact conservative. It is believed DEC will normalize its employee roster at around 50,000, down from a high of over 120,000 some time back. Half the across-the-board layoffs are expected to come from sales and technical support, with DEC reasoning that trimming will be easier since it has been collapsing units in on each other and they can share support. As we went to press there were also rumors of UK and Irish PC operations being sold. Final results of the June quarter, DEC’s fiscal fourth, just closed last week, won’t be available until July 30 but the company described early tabulations as well below expectations.
Dragging down the corporation
PC losses specifically were called considerably worse than in March when DEC hid its much of its dirty linen and said only that PC sales were down 10% year-over-year. The PC unit is dragging down the entire corporation with earnings for the fourth quarter again expected to be well below March which were $124m or 74 cents a share. Wall Street analysts believe all this rigmarole means the company will be 35 to 45 cents in the black in the fourth quarter, with PCs losing roughly $80m and costing it 50 to 70 cents a share. However, they say the first quarter, the September quarter, a notoriously weak time for DEC, will also suffer, with the corporation losing perhaps 5 cents a share and only picking up again in the December quarter. Besides the PC crisis, DEC’s also suffering from business turning sour for it in Europe where it’s used to getting a whopping 43% of its revenues more than most of its competitors, and where obviously a severe miss is critical. It’s anticipating a revenue shortfall there of $150 million, half of it due to poor sales; 40%-50% of it perhaps related to currency. Germany, a known problem, was described as most disappointing, followed by France and Switzerland. The three countries represent a third of DEC’s business. The stock market reacted immediately to the overall news and trimmed $4.00 off DEC stock to about $41.00 within a half-hour of DEC’s early morning call to trading houses. DEC CEO Bob Palmer blamed the company’s European showing in part on its failure to understand local distribution. There is no pan-European distribution vehicle yet it cut its direct sales effort too deeply without recruiting enough third parties to pick up the slack, losing it customers. It will now double the number of European accounts it handles directly and attempt to improve channels. It also said its printer and memory interests were unprofitable and that it would exit the $125m memory business. Printers, responsible for some $200m in revenues, could go by the same route. DEC is now apparently willing to consider that its PC business, which it has been selectively collapsing in the face of continued losses, may now not be large enough to justify that the company make its own boxes, though design and manufacture isn’t its problem. According to Palmer, forecasts and distribution are.
Claflin to the rescue?
PCBU general manager Bruce Claflin, the PC guru DEC brought in from IBM at the end of last year, is supposed to come up with risk averse recommendations on what to do imminently. DEC may find it best to retreat, as NCR Corp has done, to an OEM PC model. Pundits are kicking three names around – Dell, Compaq and AST Research, whose financial backer Samsung recently cut an Alpha alliance with DEC. Wall Street has given every indication that it would look favorably on such a move. However, DEC obviously has to move with some trepidation in this direction so as not to upset its strategic Windows NT interests which depend heavily on it being able to field differentiated Intel Corp boxes. Palmer yesterday seemed inclined to retain servers internally and said he wants to continue supplying desktops and mobile units to its enterprise customers as part of the client/server paradigm. The best that DEC currently expects from its PC unit is that it be back on track in the company’s second quarter, December. It hopes that by then it will at least break even, it said. To do so it needs to continue reducing inventory in the channel. It is now nine weeks out and needs to be at six weeks. Six months ago it had been at 12-14 weeks. It also needs to lower its cost structure and increase its revenue. It’s simply not selling enough into the channel. DEC said yesterday it was two months behind in achieving these goals which were set up at the end of the March quarter when DEC had the rug pulled out from under it by deep competitive price cuts that it didn’t anticipate. DEC claimed that its Alpha, Unix, NT, storage and networking interests were strong in the fourth quarter. Alpha, for example, could show as much as 30% growth. Such growth, however, has to be spurred a lot more to simply cover its PC losses, meaning that it may be on a downward spiral from which it never recovers. With that in mind, perhaps, and to capitalize on the growing NT wave, DEC’s Unix operation is supposed to announce in mid-July an NT-Unix affinity program along the lines of what the company put in place for its VMS operation. (The name affinity is now lower case at DEC, sources say, because Unisys Corp has dibs on it.) Palmer, who is now going to pinch hit for the disgraced Pesatori for the next few months to size up the situation and the talent in the PC unit, admitted to taking his eye off the hardware ball. Still, he said, when asked, that he would remain with the company as long as it continues to make progress and claimed to have a recent endorsement from DEC’s board. DEC said severance would be responsible for 70% for the $475 million charge (10% of it from the PC unit). The rest would stem from facilities which wasn’t defined further. Without saying so directly, DEC obviously believes the 7,000-man cut will be the last of the big layoffs, describing it as completing the task and being a clean up necessary to
get to levels of return equal to 7% on net income and 20% on equity.
