With second quarter product revenues soaring 26% to a record $2,347m, it looks as if Digital Equipment Corp might this year finally get its annual turnover up out of the $14,000ms where it has been stuck for some five years. The company is optimistic we will experience continued growth in the second half of the fiscal year to June. DEC says 64-bit Alpha systems sales rose 50% over a year earlier, driven by strong market demand for AlphaServer systems, while the AlphaStation line saw particularly strong growth in workstations shipping with Windows NT. Total Alpha-generated revenue now exceeds $7,000m, which still looks a lot less than it ought to be at this stage in the game. Service revenues were $1,604m for the second quarter, essentially unchanged from the same period last year. While VAX maintenance revenues were down slightly, the decline was offset by the growth in the company’s new multivendor services, network integration services and Alpha systems maintenance and support, DEC said. The implication is that the services business is not taking off quite like DEC intended. DEC is particularly pleased with its forthcoming FX!32 software translation and emulation technology, which, as reported, is designed to enable iAPX-86 applications to run at high speed on Alpha systems.

Poor quality of earnings

The FX!32 software, expected in mid-1996, the company said. DEC also said it recorded strong revenue growth in its personal computer business during the quarter, although margins here are unlikely to be anything to write home about. Revenue from the company’s components product businesses, including storage subsystems – it still integrates the disk drives now made by Quantum Corp into disk subsystems and arrays – and network products, grew more than 30% over last year, with the storage business unit seeing strong revenue growth in its StorageWorks products. The network products business unit also saw significant revenue growth in its switching and hub products, DEC said. Product gross margin was an improving 32.5%, compared with 30.5% in the second quarter of a year ago. Service gross margin slumped to 32.7% compared with 36.1% in the comparable period last year, reflecting an expected shift in mix towards new high growth but somewhat lower margin multivendor service and support offerings; the problem here is that margins in this segment will continue to deteriorate as the new business, with its poor quality of earnings, progressively becomes a higher and higher proportion of the whole. DEC ended the quarter with about $1,50m in cash, essentially unchanged from the first quarter and an increase of $362m compared with last year, but still a very low figure for a company that was once one of the most fiscally prudent in the industry, and once had about twice as much cash as well as no debt, far from the situation now. DEC ended the quarter with about 61,100 employees, down 4,500 from a year ago and down 400 from the first quarter of the current fiscal year. Overall, DEC said it saw significant revenue growth in all of product businesses and in new service offerings during the second quarter, and recorded good revenue growth in all geographies. Its priority over the next two years, it says, will be to concentrate on improving operations to bring profit levels in line with the computer industry’s leading financial performers.