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March 21, 1996

DEC WARNING SENDS TECHNOLOGY STOCKS INTO TAILSPIN

By CBR Staff Writer

After slow but steady recovery over the past couple of years, Digital Equipment Corp is heading back in the wrong direction again. It warned yesterday that it revenues from sales of personal computers this quarter will be lower than expected, and that profits will likely to be below the current range of analysts’ estimates for the quarter, although the results should still reflect continued profit improvement year-over-year. The problem for DEC is that the troubles in the $2,500m-a-year personal come at a time when the company has still not succeeded in bringing the business into profit, and simply puts it further away from that goal. The company has also made such searing cuts and divestments that the scope for more is limited. Earlier, president Robert Palmer had told PC Week that the company was frustrated by tight margins in the personal computer market, and planned to focus its investments and concentrate on areas where it can dominate. He admitted that the company has never made a profit from its $2,500m personal computer operations, and said the division will need another two to three quarters before becoming firmly profitable. In the second quarter to December 30, the business was near break-even, but after yesterday’s warning, that is history. Personal computer chief Bruce Claflin said that the company had been experiencing significantly reduced demand and increased price pressure, principally in North America, and that contributing factors included a general slow-down in the commercial personal computer market, and distribution channels overstocked with products from many vendors. As a result, everyone has been cutting prices more than had been intended. DEC shares took the news very badly, plunging $10.875 to $56.25 in very active trading on the New York Stock Exchange, and it took other computer counters with it – IBM Corp lost $6.25 to $115.50 and Compaq Computer Corp was off $1.75 at $38.25. Prior to the announcement, the consensus of 16 brokers had DEC earning $1.01 per share in the quarter, but in a conference call following the announcement, the company indicated that earnings for the quarter will be lower than the $0.91 per share for the second quarter, and warned that the current consensus of analysts for the fourth quarter was also somewhat aggressive.

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