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  1. Technology
July 27, 1994


By CBR Staff Writer

The fourth quarter operating loss at Digital Equipment Corp came to $160.4m, at the high end of estimates, and the company also took a whacking $1,200m hit to cover redundancy costs and closures, and non-cash reductions and deferred tax assets of $380m, bringing the net loss for the quarter to a whopping $1,700m – on turnover of $3,900m, up 0.23%. The most concern was focussed on the slump in the company’s gross margins on hardware. The operating loss comes to $1.22 a share – $12.64 including all the charges, compared with a Wall Street consensus average of a $0.85 a share loss before charges. Product gross margins fell to 25% of revenues in the fourth quarter, compared with 38.7% a year ago which was blamed on pricing and product mix – IBM Corp by contrast is on the 38% mark for the whole company. Trying to find something to cheer about, DEC said the fundamentals of its business are showing some encouraging signs, and that the company is making substantial progress in key product areas. DEC says it experienced order rate growth year-over-year for the second consecutive quarter, and that fourth quarter revenues from its Alpha-based systems grew 54% from the third quarter, 164% compared with the year-ago quarter, and Alpha-based systems now represent 31% of systems revenues and surpassed the VAX in the quarter – but that should have happened earlier and the proportion of Alpha systems should be much higher: Apple Computer Inc is only into its fifth month of selling Power Macs, and is already ahead of DEC in terms of the proportion of the desktop machines it is selling that have RISCs rather than 68000s in them – it hasn’t tried to sell any PowerPC notebooks yet. DEC also said it has now shipped over $1,000m in Alpha AXP systems. The personal computer business, where margins are desperately thin, nearly doubled in the fourth quarter and now represents 39% of DEC’s systems revenues. In Europe, which has been a black hole for DEC, not least because of a couple of rather unwise acquisitions that ultimately simply left it with a gang of stroppy people it is now finding it difficult to fire, the company says business is showing signs of stabilising; this was the second consecutive quarter of improvement in its business in North and South America, led by significant growth in Canada and Latin America. Asia Pacific continues to show strong growth. Despite the signs of optimism, DEC concludes that given the continued pressure on product gross margins and services revenues and margins, it remains cautious in its outlook for fiscal 1995. The restructuring charge will be used to reduce its workforce by 20,000 and eliminate about 10m square feet of space; the company ended the year with $1,180m in cash, and it generated cash from operations in the fourth quarter, but the write-offs mean that money will remain very tight. This performance, coupled with the announced sale of a portion of our Storage business further increases our confidence in our plans to fund restructuring activities from operations and asset management efforts, said Vincent Mallarkey, DEC’s chief financial officer. Within the year, the result will be a leaner and more agile company sharply focused on meeting the needs of customers, the demands of the marketplace and the challenge of competitors, chief executive Robert Palmer said. This is a Darwinian industry, where only the most adaptable survive, he added.

Service business off

The $1,200m restructuring charge is to cover the cost of cutting 20,000 jobs by next July 1, to get the headcount down to 65,000, and brings accumulated losses for the past three years to over $3,000m. The loss for the year was $2,160m and turnover for the year fell 6% to $13,450m.For the full fiscal 1994, some 45% of product revenues moved through indirect channels, up from 33% in fiscal 1993. Service business in the quarter was off 7% at $1,698m, and for the full year, product sales were off 5.2% at $7,191m, service and other revenues were off 7.7% at $6,259m, which appears to be down to VAX sites going dark and maintenance ending.

The problems DEC still faces is that it has opted for the least fancied Unix, OSF/1, an ill-favoured server operating system in NT, and a VMS not seen as fully compatible with VAX/VMS.

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