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Digital reports six percent revenue growth
and improved operating results for third quarter
Digital today reported results for its third quarter, which ended
March 27, 1993.
For the quarter, the company reported total operating revenues of
$3,453,676,000, up 6 percent from the $3,252,514,000 of the comparable
quarter a year ago. The company reported a net loss for the quarter of
$30,121,000, compared with a net loss of $311,306,000 for the comparable
quarter a year ago. Per share results for the quarter were a loss of $.23
versus a loss of $2.50 for the third quarter of fiscal 1992.
For the nine months ended March 27, 1993, the company reported total
operating revenues of $10,457,418,000, up 4 percent from the $10,025,088,000
of the comparable period a year ago. Net loss for the first nine months of
fiscal 1993 was $364,526,000, versus a loss for the similar period a year ago
of $940,375,000, which includes a $485,495,000 charge for a change in
accounting principles related to postretirement health benefits. Per share
results were a loss of $2.81 versus a loss of $7.55 for the first nine months
of fiscal 1992.
"We are meeting the goals we have set for ourselves in returning Digital to
profitability and growth," said President and CEO Bob Palmer. "Our overall
operating results continue to show improvement, quarter to quarter. For the
first time in six quarters, we generated positive cash flow from operations
and investments, even with restructuring activities and the loss. While
maintaining our focus on costs we must continue the changes underway both in
our organization and our product offerings, which are designed to restore
revenue growth."
"We are encouraged by our transformation to a market driven, customer focused
company. We are confident that our strategy -- to provide customers with the
best solutions and to provide the best technology in core areas of competence
-- is the right strategy for our customers, partners, shareholders, and
employees," Bob continued.
"The rollout of our Alpha AXP program continues on schedule. This is a major
program that will take several quarters to fully implement, but this past
quarter we passed several significant milestones. We launched our unified
UNIX operating system program, including commercial availability of OSF/1 on
the AXP platform. We announced availability of mixed cluster capability nine
months ahead of our schedule. Mitsubishi Electronics announced that they
will be a second source for Alpha AXP chips, and Novell announced that its
network operating system, NetWare, will run in native mode on Alpha AXP
systems in the future. In addition, five major database vendors have
announced availability of their databases under UNIX on the Alpha AXP
architecture. More than 500 Alpha AXP applications from partners and 50
layered software products from Digital are available today. In total, more
than 1000 vendors are moving more than 2000 applications to this next
generation, 64-bit computing environment," Bob concluded.
"Total revenues were up 6 percent from the comparable quarter last year,"
said Bill Steul, vice president and chief financial officer. "Without
the favorable impact of foreign exchange rate movements our revenues would
have been essentially flat. Our PC business doubled year over year, as we
expanded our presence at the desktop. Our service revenues grew 12 percent
driven by strength in our systems integration business around the world.
Customers increasingly rely on us for consulting expertise in helping them
apply technology solutions to their business problems. Even with the
competitive environment we were able to ship substantially more units,
keeping our product revenues essentially flat."
"Our strong cost control efforts continue to be reflected in our operating
results. Research and engineering spending declined by 19 percent from the
comparable quarter a year ago and sales, general and administrative spending
declined 8 percent from the comparable period as we continue to move to a
competitive business model. In addition, total worldwide population
declined by 4,000 to 98,100 at the end of the third quarter. Total
population has declined by nearly 16,000 since the beginning of this fiscal
year. Our balance sheet remains strong with a low debt ratio, substantial
cash balance of $1.6 billion and total asset turns continuing to improve,"
Bill concluded.
After the end of the quarter, the company issued $250M in 30 year debentures
at 7 3/4%, priced to yield 7.88% to maturity. This debt offering represented
the remaining unissued amount under the company's $1 billion shelf
registration filed last August. The debt was rated A2 by Moody's Investor
Services and A+ by Standard & Poors.
THREE MONTHS ENDED
MARCH 27, 1993 MARCH 28, 1992
PRODUCT SALES $1,767,372,000 $1,750,448,000
SERVICE & OTHER REVENUES 1,686,304,000 1,502,066,000
TOTAL OPERATING REVENUES 3,453,676,000 3,252,514,000
COST OF PRODUCT SALES 1,049,969,000 1,022,790,000
SERVICE EXPENSE 1,030,728,000 961,272,000
TOTAL COST OF SALES 2,080,697,000 1,984,062,000
GROSS MARGIN 39.8% 39.0%
RESEARCH & ENGINEERING 350,423,000 432,701,000
SELLING, GENERAL & ADMINISTRATIVE 1,050,600,000 1,138,603,000
OPERATING LOSS (28,044,000) (302,852,000)
OPERATING MARGIN (.8)% (9.3)%
INTEREST INCOME 16,325,000 16,846,000
INTEREST EXPENSE 16,402,000 5,300,000
LOSS BEFORE INCOME TAXES (28,121,000) (291,306,000)
PRE-TAX MARGIN (.8)% (9.0)%
PROVISION FOR INCOME TAXES 2,000,000 20,000,000
NET LOSS $(30,121,000) $(311,306,000)
WEIGHTED AVERAGE SHARES
OUTSTANDING 131,553,881 124,671,305
NET LOSS PER SHARE $ (.23) $ (2.50)
NINE MONTHS ENDED
MARCH 27, 1993 MARCH 28,1992
PRODUCT SALES $5,502,427,000 $5,552,684,000
SERVICE & OTHER REVENUES 4,954,991,000 4,472,404,000
TOTAL OPERATING REVENUES 10,457,418,000 10,025,088,000
COST OF PRODUCT SALES 3,186,464,000 3,028,059,000
SERVICE EXPENSE 3,106,648,000 2,798,286,000
TOTAL COST OF SALES 6,293,112,000 5,826,345,000
GROSS MARGIN 39.8% 41.9%
RESEARCH & ENGINEERING 1,160,743,000 1,268,657,000
SELLING, GENERAL & ADMINISTRATIVE 3,359,093,000 3,377,688,000
OPERATING LOSS (355,530,000) (447,602,000)
OPERATING MARGIN (3.4)% (4.5)%
INTEREST INCOME 43,750,000 71,729,000
INTEREST EXPENSE 32,746,000 27,853,000
LOSS BEFORE INCOME TAXES &
CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE (344,526,000) (403,726,000)
PRE-TAX MARGIN (3.3)% (4.0)%
PROVISION FOR INCOME TAXES 20,000,000 51,154,000
LOSS BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE (364,526,000) (454,880,000)
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE,NET OF TAX --- 485,495,000
NET LOSS $(364,526,000) $(940,375,000)
WEIGHTED AVERAGE SHARES OUTSTANDING 129,570,101 124,588,374
LOSS PER SHARE AFTER TAXES
BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE $ (2.81) $(3.65)
LOSS PER SHARE ON CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE --- (3.90)
NET LOSS PER SHARE $ (2.81) $(7.55)
BALANCE SHEET - Q3 FY93
CASH & CASH EQUIVALENTS.................. DLRS 1,552,087,000
ACCOUNTS RECEIVABLE, NET................. 3,009,314,000
A.R. DAYS SALES OUTSTANDING 78 DAYS
INVENTORIES: RAW MATERIALS......... 358,128,000
WORK IN PROCESS....... 569,258,000
FINISHED GOODS........ 887,490,000
TOTAL............. DLRS 1,814,876,000
PREPAID EXPENSES......................... 368,514,000
DEFERRED INCOME TAX CHARGES, NET......... 222,794,000
TOTAL CURRENT ASSETS..................... 6,967,585,000
NET PROPERTY, PLANT & EQUIPMENT.......... 3,239,999,000
TOTAL ASSETS............................. 10,944,959,000
BANK LOANS & CURRENT PORTION OF LTD...... 40,164,000
TOTAL CURRENT LIABILITIES................ 4,215,514,000
DEFERRED TAX CREDITS, NET................ 23,033,000
LONG-TERM DEBT........................... 777,326,000
POSTRETIREMENT BENEFITS.................. 1,223,046,000
TOTAL LIABILITIES........................ 6,238,919,000
STOCKHOLDERS' EQUITY..................... 4,706,040,000
BOOK VALUE PER SHARE..................... 35.75
CAPITAL SPENDING (INVESTMENT IN PP&E)- Q3 101,956,000
DEPRECIATION & AMORTIZATION......... - Q3 215,070,000
CAPITAL SPENDING (INVESTMENT IN PP&E)-YTD 358,419,000
DEPRECIATION & AMORTIZATION......... -YTD 629,233,000
NON U.S. REVENUES - QTR.................. 2,241,096,000
or 65%
NON U.S. REVENUES - YTD.................. 6,714,782,000
or 64%
TOTAL EMPLOYEE POPULATION APPROXIMATELY.. 98,100
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NetWare is a registered trademark of Novell, Inc.
OSF/1 is a registered trademark of Open Software Foundation, Inc.
UNIX is a registered trademark of UNIX System Laboratories,Inc.
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| The following article appeared in The Economist, April 17th, 1993,
in the Business section, pp. 67--70. All typos mine. Copied without
permission.
Digital Equipment Corporation
Finger out
A year ago, he was vowing to be around for ages. Six months later, Ken
Olsen, the 67-year-old president and founder of Digital Equipment
Corporation -- America's third-biggest computer company -- was out on
his ear. After recording a $617m net loss in the year to June 1991,
Digital plunged $2.8 billion into the red in 1992. As protective as ever
about the minicomputer firm he founded 36 years ago in an old wooden
mill west of Boston, Mr Olsen could not bring himself to fire 25,000
employees and colleagues as critics were demanding. So Mr Olsen was
fired instead.
The new management at Digital has wasted no time. Factories have been
shut, workers axed and overheads trimmed. The company's head-count, some
126,000 at its recent high, was down to 98,000 by December [sic]. A
further 13,000 workers will have gone by June. Two weeks ago Robert
Palmer, Digital's new president and chief executive, announced that even
the old mill at Maynard, Massachusetts, would close. ``The idiosyncratic
structure around Ken Olsen is being vaporised,'' notes William Bluestein
of Forrester Research, a consultancy in Cambridge, Massachusetts.
Like mainframe-computer makers such as IBM, minicomputer firms have seen
networks of cheap little personal computers and workstations steal their
market. Yet Hewlett-Packard, founded at much the same time as Digital,
saw the writing on the wall in the mid-1980s and changed direction
smartly. The Californian firm hurried out a range of minicomputers based
on a stripped-down RISC (reduced-instruction-set computing) design,
snapped up a major workstation supplier and launched a laser printer
business that has become the envy of the PC world. Where Digital has
been losing billions, Hewlett-Packard has been posting heady profits.
The bloated years under Mr Olsen were Digital's undoing. In the year to
the end of June 1992, the firm's operating expenses gobbled up 44% of
revenues, compared with less than 20% a decade ago (see chart). This has
changed dramatically under the new management. The firm's third-quarter
results, published on April 14th, confirm that Digital has now turned
the corner. Net losses have declined steadily during the current fiscal
year: from $261m in the first quarter to $74m in the second and now $30m
in the third. Sales have picked up, while overheads should have been
pared by $1.4 billion during this financial year. Digital is still
likely to lose $350m in the year to June, but 1994 should see a strong
recovery.
Two things, one managerial, the other technical, give cause for
optimism. On taking over, Mr Palmer warned everyone that the high-margin
years at Digital had gone for good; customers were now firmly in charge.
Henceforth, Digital would be putting greater emphasis on services,
software and networks -- and less on churning out minicomputers. More
important, the firm has now restructured itself into nine business units
that concentrate either on selling to specific industries or on clearly
defined product areas. From next July, these units will become
independent profit centres.
The second reason for expecting Digital to bounce back strongly is
Alpha, its new 64-bit RISC microprocessor. The company bungled badly
when it announced this scorching new microprocessor a year before it was
ready to ship Alpha-based products. Sales of its bread-and-butter range
of VAX minicomputers stalled as customers shelved plans for new machines
until hearing how the Alpha chip would be used.
The wait is over. The first Alpha-based computers, which will range from
$15,000 workstations to $316,000 machines of mainframe class began
trickling out of Digital's factories late last year -- along with news
that recent VAXes can be upgraded to full-blooded Alpha machines.
Reassured that they were not buying soon-to-be-obsolete computers,
customers have started buying VAXes again while waiting for the bigger
Alphas to arrive. As a result, Digital's sales rose to $3.4 billion in
the latest quarter, 6% more than a year earlier.
None of this will slow the worldwide trend among computer users to
``open systems'' and networks of lowly PCs. Fed-up with being locked
into a single supplier's proprietary (read expensive) computer system,
customers have begun stringing together lots of different makes of
machines all sharing the same software and data. Mr Olsen took the first
reluctant steps towards making Digital's proprietary VMS operating
system (the internal software that runs a computer) more open to other
makers' machines. More significantly, Digital has now backed OSF/1, the
widely accepted version of the popular Unix operating system and has
even promised to embrace the new Windows NT operating system that
Microsoft is preparing to launch for networked PCs.
Alpha may be Digital's trump card in the open systems game. ``Alpha's
single greatest promise is not its speed, but its chameleon-like
behaviour that allows it to run equally well with any operating
system,'' says Chris Christiansen of International Data Corporation, a
market-research firm in Framingham, Massachusetts. The only proviso,
says Mr Christiansen, is that ``religion doesn't get in the way''. By
which he means that, for all the change, the towering genius of Ken
Olsen still casts a long, proprietary shadow over the way Digital
thinks.
Charts: sales, costs and net profit/loss from 1983 to 1993.
Pictures: The Mill and its clock (Caption: Troubled mill).
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