| From: NWD002::MRGATE::"WROMTS::MROMTS::SALES::A1::NOTIFICATION" 20-MAY-1992 14:14:24.35
To: DENVER::ROY
CC:
Subj: FINANCIAL COMPARISON OF DIGITAL AND COMPETITORS 1
From: NAME: SALES COMMUNICATIONS
FUNC: NOTIFICATION
TEL: 297-2318 <NOTIFICATION AT A1 at SALES at MRO>
To: See Below
Management Notification #197 - From DAN MARTIN, DTN-422-7415, @PTO
===========================================================================
The computer industry, or any industry for that matter, can get sick just like
you and I. Sometimes it is only a cold and it goes away in a short period of
time, other times the cold is persistent, hangs around for a long time and
turns into an pneumonia. That's when it gets serious, we see a doctor(s) and
maybe even go into the hospital.
As luck would have it, we all (HP/DEC/IBM/Wang/Unisys/Apollo/ETC.) visited the
doctor about the same time and we all got admitted to the hospital, in the
same room no less.
When the doctor checks us out the item that is most important to them is the
health of the individual (company balance sheet) before they got sick, did the
stay in pretty good shape, ie, did they put on too much weight (too much
debt), did they exercise (turn those inventories) and did they have a low fat
diet (long term debt to equity) among a host of other considerations.
I have attached the doctors report comparing a few of the patients but I'm
saddened to say there is now an empty bed in the room as one of the patients
has passed on, Apollo, and two others have been moved into intensive care,
Unisys and Wang.
There has been unsubstantiated rumors circulated by some of the other patients
(competitors) that DEC is very sick, the following information supports a
healthy patient ready to be released when sales and revenue picks up while we
will need to go on a leaner diet (cut more expenses) and improve our margins
which a leaner diet will help with.
There are a host of numbers on the attached report, let me try to decipher
them for you, I will focus mostly on DEC/IBM/HP.
The numbers are broken into three sections, results that are arrived at by
comparing Balance Sheet items to other Balance Sheet items, the second section
is comparing Income Statement (P&L's) items to other Income Statement items,
and the third comparing Income Statement items to Balance Sheet Items. There
will be one exception, long term debt is part of section one but I will have
the long term debt to equity figure with it, it would normally be in the third
section.
Cash, we have alot of it, 1.547 billion to be exact, in excess of 500 million
more than HP. We have 36% of our current debt covered by cash alone, HP 24%
and IBM 15%.
We also have more working capital (current assets less current liabilities)
than HP.
Current Ratio and Quick Ratio, these are two key indicators lenders look at to
determine the solvency of a company and the ability of a company to meet
current obligations. The current ratio is current assets divided by current
liabilities and the quick ratio, sometimes referred to as the acid-test ratio
is cash and A/R (liquid assets) divided by current liabilities.
We are nearly 2 to 1 on current ratio and better than 1 to 1 on the quick
ratio, both are good results for this industry. We are even with HP on the
current ratio and better on the quick ratio and in both cases better than IBM.
Inventory turns, once again, out performing both HP and IBM, we are turning
our inventory one time more than both IBM and HP and when you're carrying 9.8
billion in inventory like IBM, that extra turn a year is significant. We are
also carrying less inventory than HP, HP is at 2.4 billion and we're at 1.8
billion. We can therefore do other things with the 600 million delta than
have it sit as inventory.
Total liabilities to total assets, this is getting old but I have to say it
again, we're the best and very well positioned also at 37%, HP 38% and IBM a
whooping 60%. IBM has some problems they will need to address here and it is
tied to the next paragraph, long term debt.
Long term debt, we're outshining the pack again with just a mere 44 million
representing just 6 tenths of one percent of our equity, I'm sure our
stockholders are happy to hear that. IBM has ballooned to 36% (13.2 billion)
while HP is also well positioned at 4.5%
If we paid off our long term debt, we would still have 1.5 billion in cash, HP
slightly more than 600K and IBM couldn't do it.
That's a review of the balance sheet, rather impressive I might add. We are
equal to or better than either of them in any comparisons. Sounds like a
healthy patient to me.
In section 2 and 3, the following items, return on assets, return on sales and
return on equity, use profit as part of the equation. Given that we have lost
money, all of our number are negative. So, while they are important
indicators, interest, use of assets, etc., the balance sheet become a better
indicator in negative or loss situations.
In section two there is interesting comparisons, particularly in the interest
paid section. While it's obvious that IBM has 4 1/2 times more revenue than
us they paid out an astounding 1.4 billion in interest alone in the last four
quarters compared to our 38 million. Much of that is likely tied to their
long term debt. HP also paid out 80 million more than us in interest. I can
think of alot better ways to use my cash.
We're losing money so it shouldn't be a surprise that our margins are poor.
In section 3, we're all comparable. In case you're wondering why our ratio of
sales to cash is so much lower than the other two it's because we have so much
of it compared to them. That one is an easy one to live with.
So, now that you've see the doctors report I think you'll agree, we're busting
at the seems to get out of the hospital and utilize the advantages we have
both on products and services along with an outstanding financial position.
Dan Martin
PS - For those interested, I have historical information back to 1989.
Comparative Analysis
IBM DEC HP SUN DG
FYE QE QE QE QE
12/91 3/92 1/92 12/91 12/91
Last Four Qtr Revenue 64,792M 13,970M 14,949M 3,355M 1,229M(1)
Cash 5,151M 1,547M 973M 766M 249M
Current Assets 40,969M 7,355M 6,862M 1,810M 742M
Current Liabilities 33,624M 4,279M 3,910M 670M 325M
Working Capital 7,345M 3,076M 2,952M 1,140M 417M
Current Ratio 1.22% 1.72% 1.75% 2.70% 2.28%
Quick Ratio .88% 1.10% 1.03% 1.94% 1.70%
Inventory Turns 6.6T 7.7T 6.2T 13.1T 8.7T
Days Inventory 54.7 47.0 58.1 27.5 41.4
TTL Liab. To TTL Assets 60.0% 37.6% 38.2% 43.4% 49.2%
Long Term Debt To Equity 35.7% .6% 4.5% 26.0% 32.4%
Long Term Debt 13,231M 44M 338M 345M N/A
Interest Paid 1,423M 38M 117M 47M 3.6M
Gross Margin 49.9% 39.2% 46.9% 44.7% 43.6%
Operating Margin 7.5% (8.8%) 11.8% 8.2% 1.7%
Sales To Current Assets 1.9T 1.9T 2.2T 1.9T 1.7T
Sales To Assets .7T 1.2T 1.2T 1.5T 1.2T
Sales To Cash 12.6T 9.0T 15.4T 5.1T 5.0T
Sales To Working Capital 8.8T 4.5T 5.1T 3.0T 3.0T
Sales To P.P.&E. 2.4T 3.9T 4.4T 10.0T 6.1T
Return On Assets (3.1%) (3.9%) 7.0% 8.5% N/A
Return On Sales (4.4%) (7.3%) 5.7% 5.8% N/A
Return On Equity (7.6%) (5.6%) 11.3% 15.0% N/A
(1) DG Revenue Number Is For Last Four Quarters as of 9/91.
The 'T' on the numbers represents times, ie., for DEC, Sales is 1.9 times larger
than current assets.
Q&A
Question:
One point. I saw an analysis done for 1989 which showed we needed more
working capital to generate sales than either IBM or HP (Digital 35 cents per
dollar of revenue, IBM 23 cents per dollar of revenue and HP a low 17 cents
per dollar of revenue). When one took into account the fact that we also then
had the lowest revenue per person employed (Digital $102,886, HP $125,563 and
IBM $163,724) it seemed to indicate to me that we were inefficient at using
people and capital.
Am I correct in deducing from your analysis that we are now better than our
competitors in using capital if not in using people?
Response:
The figures I have for the return on working capital or how much revenue is
generated for every dollar of working capital is:
IBM DEC HP
12/91 12/89 3/92 6/90 1/92 10/89
.11 .23 .22 .33 .20 .17
By looking at these numbers alone, one would venture to say that IBM is
generating much more revenue for the amount of working capital they have.
That is a true statement but as I caution people, the financial picture of a
company is made up very much like a puzzle (some would say it is a puzzle!).
It takes alot of pieces of information to draw an accurate conclusion.
Add the following pieces of information to the picture:
IBM DEC HP
12/91 12/89 3/92 6/90 1/92 10/89
Revenue 64.8 62.7 14.0 12.9 14.9 11.9
Current assets 41.0 35.9 7.4 7.6 6.9 5.7
Current liab. 33.6 21.7 4.3 3.3 3.9 3.7
Working capit. 7.4 14.2 3.1 4.3 3.0 2.0
Amt of working .11 .23 .22 .33 .20 .17
capital to revenue
IBM's 'improvement' from .23 to .11 was not a result of a dramatic increase in
revenue, is was a result of their working capital decreasing by almost 50% and
that decrease was not a result of a significant increase in current assets, it
was as a result of a 50% increase in current liabilities, ie., that 7 billion
dollar fluctuation in working capital only generated 2.1 billion in revenue.
The same can be said about us but to a smaller degree while HP has continued
to demonstrate improvement with working capital increasing along with revenue.
So, to answer your question:
It is difficult to say that IBM is using it's working capital better than DEC
or HP because of how it achieved those results (is it worth spending 7 billion
to make 2 billion and what is the long term return for the 7 billion) and
while we also demonstrated "an improvement" it was based on a similar but
smaller trend.
Question:
You mentioned that usually in a negative or a loss situations, the balance
sheet becomes a better indicator. This sounds a bit weak to me. Can you
help give me some more ammunition regarding this. Our competition is using
the P/L numbers against us!!!!
In the field we are facing tremendous competition from HP. From your
numbers it looks like they are really the company to Beat!!!! They also
are $1B ahead of us in sales. It seems like that almost in every category
we are quite close with HP.
One thing that would help me is a better understanding of some of the
labels that you have chosen to highlight. Such as "sales to working
capital"; what does it mean to have a lower number than your
competition???? Who looks at this figure and what deductions can I make
about the company??
Also .. It seems that our operating margins are negative compared to the
rest. SO what???
Response:
Maybe a better choice of words would have been "an important indicator".
We are losing money which is no surprise to anyone, including our customers.
That doesn't make it OK though. The reason the balance sheet becomes
important in those situations is that most companies need profit and positive
cash flow to operate amd grow on and we're no exception. When a company is
losing money for an extended period of time or is anticipated to do so the
only way they can survive during that period is off it's assets and the
balance sheet is where they are, or borrowing. Something that can hinder them
from doing that is the debt that they have acquired over time that requires
them to use the assets or some portion of them, usually cash to satisfy the
debt, or resort to borrowing. (They can also be forced into selling other
assets ( such as land, buildings, acquisitions, etc.) if cash and borrowing is
a problem, remember, we're losing money so the operation of the company is
eating away at cash flow).
Since we are virtually debt free we are not handcuffed with funding our debt
along with the interest tied to it while also funding our losses and negative
cash flow. Two good examples are Wang and Unisys, they got themselves into
enormous trouble because of their debt.
Put another way, your assets and working capital become your source of food
during the period of recovery. If you look over a period of time you can see
that we have been using some of ours but we are still in good shape, while it
is obvious we can't do it forever, thus programs to reduce expenses and
increase revenue are instituted.
There are many other examples but this should give you a flavor of what I was
alluding to.
Regarding HP as the prime competitor, financially they are doing very well and
I wouldn't even attempt to suggest anything else.
Having just said that statement, we are equal to them on every balance sheet
comparison, what would that suggest?
We are losing money though and they are not so our equal position is in
jeopardy. Our balance sheet will continue to erode until we turn the profit
picture around.
Some of the other comparisons I believe you asked about are they ratio's of
sales to items such as working capital. They are indicators of the ability of
a company to maximize items, like working capital, ie., what type of return
are we getting for them. They are all fairly even and no one of them can make
a statement in of themselves. They are part of a story if you will and the
balance sheet and P&L's are they other part of the story.
Who looks at these numbers? For the most part investors and lenders from
outside the company and just about every senior manager at DEC. Each on of
those categories are assets of DEC, with the exception of equity, and those
both inside and outside of DEC want to know if we are getting the best return
(profit) and highest efficiency (number of times) of those items.
Regarding your question on the margins, there are two that are looked at,
gross (profit) margin and operating (profit) margin. Gross (profit) margin is
revenue less cost of sales and the second is operating (profit) margin which
gross margin less all the other costs it takes to run the company excluding a
few items, the reserves we have posted are good examples of items that are
excluded.
An operating loss indicates that during the normal course of business, more
money is being expended then being brought in as revenue. You may remember
that when we posted our first loss at the end of Q4 it was noted that it was
not an operating loss, that at the operating margin level we showed a profit
but the reserve was more than the profit so we posted a net loss.
An operating (profit) margin loss simply means we are spending more money than
revenue coming in, not a healthly long term situation. That is what you
mentioned your customers are focusing on.
"In general" they story is good. We are healthy financially but like anyone
who is sick, you have to get well as quickly as possible, an extended illness
tends to make you weak and the recovery longer. We are positioned to sustain
a losing period for quite some time without having a significant impact to the
company, obviously we don't care to do that.
============================================================================
Distribution: U.S. Account Team Members. To update your Personalized
Communications Profile, send your name and badge number to SEGMENTATION @MRO
or SALES::NSP.
============================================================================
To Distribution List:
<deleted>
|