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October 25, 1995

DEC BEATS THE CONSENSUS ON WALL STREET, BUT SERVICES FADE WITH THE VAX BUSINESS

By CBR Staff Writer

First quarter results from Digital Equipment Corp came in a little above Wall Street’s consensus estimate of $0.23 a share, hitting 26 cents for the period, but some superbulls had been looking for a lot more than that, especially now that the company is clearly being run for cash, with everything that can either command a reasonable price or requires investment to preserve its value being sold. The company says gross operating margins were 32.2% in the quarter, up from 30.2% a year ago – but within that, product gross margins climbed to 30.9% from 25.5% a year ago, although service margins fell to 33.8% from 35.5% as the profitable business declined while DEC had to fight in the really competitive part of the market where all the mainframers reckon they can take on the likes of Electronic Data Systems Corp and Computer Sciences Corp. Revenues were up in all geographies, after adjustments for divestments, it added. Total operating revenues for the quarter were $3,270m, up 5% from the year ago figure, but up 11% if you factor out the businesses that were sold in the interim. Product sales rose 10% in the quarter to $1,810m, but product revenue from ongoing businesses was up 22%. Personal computer sales grew 32% and DEC reckons it is successfully transitioning the business into the next phase, where it plans to capture market share in new channels, such as large retailers like Circuit City Stores Inc and OfficeMax Inc. Alpha systems sales grew about 40% compared with this time last year, driven by strong demand for AlphaServer systems. VAX revenues continued to decline, and VAX systems now represent only 5% of product revenues. Service revenues were $1,450m, down from $1,470m, despite this being an area that it wants to grow – although presumably it includes costly maintenance on VAX systems and as more and more VAX sites go dark, that business will decline rapidly. The new multivendor customer services business continues to show significant growth, it says. The company ended the quarter with $1,500m of cash on hand, up $620hm, but it ended fiscal 1995 with $1,600m cash. The period was adversely affected by shortages in components supplies that caused some manufacturing delays and resulted in higher than planned inventories. Staff fell 12,300 to 61,500.

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