Conference 7.286::digital

Just attended "Don Zereski's Quarterly Cafeteria Talk" and feel like I've
been to another planet.  My impression was in MARKED contrast to the very
negative vibes I've been having about the company's future, which peaked 
with the Q3 earnings report.  The enthusiasm & optimism (IMHO) could not
have been faked.  

Ken Olsen DOMINATED the meeting in a way that made me believe that he is
still very much in charge.  Despite the presence of others who could have
fielded questions, he fielded most of them in a way that might be expected
of a leader half his age.  With each question, he (almost) ran from his seat
to the podium.  I was also impressed by Don Zereski and Jay Atlas.

One point that caught my attention was Don Zereski's statement that almost
$200 million of revenue came in during the last 48 hours of the quarter that
could not be posted in time (thereby making the Q3 loss about $200 million
bigger than it might have been).  Seems like a good start for Q3.

Ken made the point that ALPHA was to be sold in the future and not now, that
it would provide customers with a no-risk migration path in the future.  The
details will be announced on Friday of this week.

Ken stated that Jack Smith was probably mis-quoted with regard to the 10,000
people layoff numbers and that the numbers would be a function of revenue and
the company's needs.

I'm sure others witnessed the session and they might want to add their own
impressions.  And, if you missed it, you might want to see the tape.

george   

    Re .1
    200 mio $ of Revenue doesn't necessarily generate 200 mio $ profit
    and in any case I thought we did our accounting on an accruals basis
    i.e. if the only hold-up is not being able to cut the invoice it gets
    in.
    
    If the costs relative to the 200 mio $ were in and not the Revenue
    we've still got a problem because they should have been deferred.
    
                                       Max

    
    Re: .1
    
    I find it hard to believe that $200M came in during the last 48
    hours and they didn't move heaven and earth to show it on the books.
    
    Steve
    

    An "order" doesn't constitute revenue.  That's Accounting 101.

    Under the uniform commercial code, one can only be "invoiced" when
    goods are received or services are rendered unless there's some sort of
    pre-payment agreement.  Delivery of products or services and the
    invoice for them creates  "sales revenue" on the income statement and
    an "account receivable" on the balance sheet.

    There's some question regarding whether Digital records revenue when
    products are passed from Digital's control to a non-affiliated shipper
    or when customers acknowledge receipt of the goods.  Typically these
    are only a few days apart in any event.
    
    Unfilled orders are called "backlog", and are not reported to SEC or
    IRS and are regarded, at least in Digital, as a trade secret.

The impression I got was that the some percentage of the orders got booked
but some went into backlog. Z. later said something about trying to more
evenly distribute the orders throughout a quarter.

Of course I may have heard wrong...(-8

-Terry

    The outsourcing win over EDS was interesting news.

    I missed most of the Q & A - can anyone briefly recap some of the most
    important questions and their answers please?  
    
    Thank you
    KB
    

    re .8 and the outsourcing win over EDS:
    
    I didn't get to see the broadcast.  Could anybody tell us a little more
    about his one?
    
    Thanks,
    
    Larry
    

    
    
    re. OUTSOURCING WIN
    
    
    American Multi Cinnema aka AMC has just signed a multi year contract
    with us.  We will be completely moving and taking over their computer
    operations.
    
    This is all I know, maybe some of the folks involved could fill in
    better.
    
    Jon

    Every understands that a sales rep doesn't create "revenue" that
    impacts revenue or income reported to the shareholders at the end of
    the quarter by submitting orders at the end of the quarter, right?
    
    "Revenue" is created by shipping products or delivering services
    (except in the rare case of pre-payment).
    
    The end of the quarter crunch from a sales perspective is an entirely
    internal concern that likely affects next quarter's revenue.
    
    The end of the quarter crunch from a externally reported reveune and
    income perspective is based on the ability (or inability) to ship
    products to  customers and to deliver services to them and therefore
    invoice them.

    That 'last 48 hours' is called POM weekend, and we pull the same 
    thing every month, and every quarter (and every fiscal year) -
    pull in orders due to ship a couple weeks into the next period, 
    rush to ship them out, and inflate results for the current period.
    
    This a) increases revenue b) costs us $$ in overtime and c) causes
    us to be rather idle for the two weeks following the EOM, or EOQ.
    
    It's all just a game, bub.

    The end-of-the-quarter game has been in existence since at least the
    late 1960s.  When all of shipping used to be in Westminster, there was
    a line painted on the floor.  At the end of the quarter, everything
    that had been pushed over that line was counted into the sales figures.

    I left the meeting due to a previous commitment at 6:30.  What time did
    the meeting end?  I was impressed by the answers given in the majority
    of the questions.  My major concern was with the hiring of or plans to
    hire 400 college grads and then put them thru a 12 week training
    schedule, ship them to where they are needed (Systems Intergration,
    Consulting....) while we are "Right sizing".  I only hope that if 
    Right sizing raises it ugly head real soon that folks that are
    currently trained in Mis, SI, Consulting...... etc, get the same 
    opportunity as the 400.   I remember COD real well and feel sorry for
    the folks that volunteered and are no longer with us!
    
    Alan

    re line on the floor.
    
    Reminds of the Govt departments, that hit the last week of Q4 and find
    that they have capital budget left. They don't care that what lands on
    their shipping Dock is Crates full of hot air, so long as they are
    billed for it, in time, and it arrives sometime soon...
    
    q
    

Re: a few back

I think we count something as revenue when it leaves our shipping dock. Last 
fiscal year we shipped a VAX 9000 on sunday afternoon (the last day of the 
FY91) so that it could be counted as revenue.

Jim    

    Can anyone briefly recap what Jay Atlas had to say? I thought he was
    supposed to talk about a special employee PC purchase program. Also,
    what were some of the Q&A after the formal speeches were completed?
    
    Thanks,
    KB
    

    Jay Atlas....

    clearly it would be best if you could watch a tape of the
    presentation.

    He talked about how he had been given 45 days to get the new
    Desktop Direct business started.  It took a little longer but
    he and his team had worked very hard and it was up very fast.
    They fairly quickly had their first $1M month, then week, then day.
    Now Ken is asking when they will be selling at greater than
    $1M per hour....

    He mentioned that in May they will be announcing a new EPP
    program including interest free payroll deduction.

    Many of the questions were about ALPHA, some about company
    morale.  None were about the DCU (surprised me).  In Don Z's
    speech he had said 'they are no plans for layoffs in Q3 and Q4'.
    Someone asked about Q1'93, and all he said was it would depend
    on how Q4 goes.  He said more people are taking SERP than
    expected.

    I just ordered the tape yesterday and today i received a mail message
    saying that my order was canceled because the tape was sent to Legal
    for editing.
    

Did anyone tape the broadcast at their site?

Would be interesting to compare the live broadcast compared to the edited tape.

Lee

    I can't find this in AVCATALOG at all.  How did you attempt to order
    it at all.. through VTX AVCATALOG?
    
    Gotta see this one...
    
    -j
    

    Well, I can guess one thing.

    In the future there will be local taping of these DVN's as they are
    broadcast live in order to insure that what was said is accurately and
    completely recorded.

    re:.25
    I ordered the tape through vtx avcatalog. They pulled it off until
    it is edited. The mail message said it should appear again during the
    next two weeks.
    mm
    

    I think this concept of editing the tape 'stinks'. It is symptomatic of
    EXACTLY what is wrong with this company. I can only think of 'Animal
    Farm'. Not only is the company run like a Soviet Central Planning
    Ministry information now seems to be being 'sanitized'.
    
    Does anybody know what is being edited off?
    
    Dave

    I to, for reasons beyond my control, was not able to view the original
    tape. Therefore, I have refrained from comment on some issues, such as
    the hiring of 400 college kids for the field when I have friends we
    layed of months ago still looking for a job that most certainly could
    fit the bill. If there are legal reasons for not distributing the
    original fine!!! Just advertise the date/time and re-run the original
    again. I DON'T want to see a 'sanitized' version either.
    
    Gene. (a stockholder too!)

	... "400 college kids...", since it can also be interpreted as:

	"We intend to hire a group of people discriminating by age, although 
it doesn't really matter how old they are."

			????????????????????????

I watched the dvn, and I thought Don said the April 22 issue of "Digital Today"
would include all the answers the the thousands of questions asked from
the 'Town Meetings'.  I didn't see any reference to the Town Meetings in the
issue.  Does anyone have any information related when and if those answers will 
be released.

Mark

    Cost of sales increase was addressed.  I forget all the reasons, but
    one was salary increases.

Remember that "cost of sales" is basically everything other than
R&D and manufacturing.  When you consider the vast overhead structure
sitting in GMA it's no wonder they're going up.

    Actually "cost of sales" is the expense associated with acquiring
    materials, manufacturing, and other value-added up to the point it is
    considered inventory.  The more traditional, more accurate term is
    "cost of goods sold".

    "Selling, general, and administrative" expense covers the costs of
    sales reps, etc.

    For example, if we change channels, "cost of sales" is constant, and
    SGA goes down.

    For example, if we introduce efficiency into manufacturing, "cost of
    sales" goes down, and SGA is constant.

    I really wish someone would clear the air on what "cost of sales" is. I
    grow weary as a field level person being held accountable for the cost
    of sales. I need to know what the corporate cost factor is in the cost
    of sales as Pat's note .35 indicates.
    
    I hear cost of sales bandied about but  no real good definitions as of
    yet as to what our actual cost of sales consists of.
    
    Ed
    
    I will post this reply in the USSales service notes conference to get
    an official response.

If cost of sales includes manufacturing costs, then the change in the product
mix to lower-margin items (partially) explains its increase.

   Re:     <<< Note 1851.36 by DRLSGT::JENNINGS "Pray for those in Harms Way" >>>

Pat Sweeney has defined it well, and every time the subject
comes up.  The difficulty is that you (and we) have to listen to
people who haven't read Pat's notes.  :-)

Any mistakes in the following are my own, not Pat's:

   1) "Cost of sales" is a financial term which means the cost
      of putting the material on the shelf so that the Sales
      organization can sell it.  It includes the manufacturing,
      distribution, and storage costs for all products made,
      whether they are sold or stay in inventory.
      
   2) "Cost of goods sold" is a financial term which includes
      the "Cost of sales" for just the products sold and
      includes all the overhead (General and Administrative)
      costs involved in selling the product.
      
Example:

   Company makes 1000 X's at a manufacturing cost of $10 each.
   The cost of the distribution and storage is $500.
   This gives a "Cost of sales" of $10500 = 1000*10+500.
   
   800 X's are sold at $25.  The revenue generated is $20000.
   We pay the sales force a commission of $1 for each X.
   We pay the central administrative staff a total of $5000.
   The "Cost of goods sold" is $8800 (cost of 800 units and
   commission) + $5000 which yields $13800.  
   
But, my original point stands.  If the person that uses the
terminology doesn't understand it, you haven't a prayer except
to poke at him/her with questions until s/he threatens to fire
you.  :-)

My experience is that managers only half-way understand the
language they use.  But maybe VP's are better than that.  

fwiw,

Dick

    re .38 Beldin
    
    Hi, Dick!  I met you once up in AKO4 before you transferred to Puerto
    Rico.  I will miss your input after you SERP out.
    
    Delving into my CPA memory banks I recall that for "Financial
    Accounting" purposes, cost of sales and cost of goods sold are the
    same, as described by Pat Sweeney, while for "Management Accounting"
    purposes, cost of goods sold may take on a broader meaning, such as you
    suggest in .38.
    
    Management accounting tries to segregate fixed and variable costs so
    that rational pricing and production volume decisions can be made. 
    Only variable costs are included in cost of goods sold in management
    accounting.
    
    Financial accounting requires that cost of sales include the portion of
    fixed overhead cost required to produce the product.
    
    Sales less cost of sales in financial accounting is usually called
    "Gross Margin."  Sales less cost of goods sold in management accounting
    is called "Variable Contribution Margin."
    
    I'm talking theory here, not how Digital does management accounting.
    
    The hidden kicker, in my view, as to why Selling, General, and Admin.
    expenses continues to rise in spite of TFSOs, is R&D.  R&D for
    financial accounting purposes is required to be expensed currently, for
    the most part (trying not to get too technical)...and R&D is expensed
    on the Selling, General and Administrative line, not cost of sales.
    
    Has anyone tracked the "hidden" R&D expense trends (usually disclosed
    in the fiancial statement footnotes)?
    
    Carter
    
     
    
    
    

   Re:                   <<< Note 1851.40 by WR1FOR::BOYNTON_CA >>>

Hello Carter,

   How long ago was this, when we met in AKO?  I ask because I
   came back to PR in 1978, but my son "Rick Beldin" transferred
   to Atlanta in 1989.   Even if you've confused one with the
   other, your CPA credentials beat mine.  I remembered that
   there was a difference between financial accounting and
   management accounting but I would never have believed that
   the same term is defined in two different ways.  Seems like
   an easier way to keep people out of the CPA ranks than a
   grandfather clause, though. :-)
   
Thanks for the clarification,

   Dick

    I appreciate the explanation as to what the" cost of sales "is.
    
    I hope that is how Digital is interpreting it on their balance sheet.
    
    I feel relieved that field level sales is a small % of the cost of
    sales.
    
    Now I can push back on corporate types trying to make me feel guilty.
    
    Yes, I should read and comprehend better first before placing a note
    but hey accounting was a bad course for me.
    
    Ed
    

	Being a consultant who is the "product" that is sold as a value-added
	service, and is re-useable, I would be interested to see how my 
	shelf-life and manufacture cost is calculated.

	Should I ask my mum?
	
	Heather   :-)    

    ... which is another reason why Digital needs to reformed as a holding
    company with a systems subsidiary, a software subsidiary, and a
    services and system integration subsidiary.